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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
DIRECTRIX, INC.
(Name of small business issuer in its charter)
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DELAWARE 7819 13-4015248
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(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification
incorporation or Classification Code Number)
organization) Number)
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536 BROADWAY, 6TH FLOOR, NEW YORK, NEW YORK 10012
(Address and telephone number of principal executive offices)
--------------------------
J. ROGER FAHERTY
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
536 BROADWAY, 10TH FLOOR
NEW YORK, NEW YORK 10012
(212) 941-1434
(Name, address and telephone number of agent for service)
--------------------------
COPIES TO:
PETER S. KOLEVZON, ESQ.
KRAMER, LEVIN, NAFTALIS & FRANKEL
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 715-9100
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE(1)
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Common Stock, par value $.01 per
share............................... 2,074,785 $10.00 $20,747,850 $6,120.62
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 29, 1998
PROSPECTUS
2,074,785 SHARES
DIRECTRIX, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
This Prospectus is being furnished to the stockholders of Spice
Entertainment Companies, Inc. ("Spice") in connection with the transfer (the
"Share Transfer") by Spice to its stockholders of the capital stock of
Directrix, Inc. (the "Company") as part of the consideration for the Merger, as
defined below. Directrix, Inc. is a Delaware corporation formed by Spice that
will own all of the assets of, and will be responsible for certain liabilities
associated with, Spice's Operations Facility (as defined herein), an option to
acquire Emerald Media, Inc., a provider of explicit adult programming, and
certain rights to Spice's library of adult films. Pursuant to the Share
Transfer, all of the issued and outstanding shares of the common stock, par
value $.01 per share, of the Company (the "Company Common Stock") will be
transferred to holders of record of the Common Stock, par value $.01 per share,
of Spice (the "Spice Common Stock"), the Convertible Preferred Stock Series
1997-A, par value $.01 per share, of Spice (the "Spice Preferred Stock," and
together with the Spice Common Stock, the "Spice Capital Stock") and the
outstanding stock options and warrants of Spice as of the Closing Date. The
Closing Date shall be the date of consummation of the Merger (as defined below).
Each holder of Spice Capital Stock will receive 0.125 of one share of Company
Common Stock in partial exchange for each share of Spice Common Stock (and Spice
Preferred Stock as if such Spice Preferred Stock had been converted into Spice
Common Stock immediately prior to the Share Transfer) held on the Closing Date.
Each holder of stock options or warrants of Spice will be entitled to receive
0.125 of one share of Company Common Stock for each share of Spice Common Stock
for which a stock option or warrant was exercisable, upon payment of the
exercise price for such stock option or warrant. Fractional shares of Company
Common Stock will not be issued. Any fractional share of Company Common Stock
will be rounded up to one whole share. See "The Contribution and the Share
Transfer."
There currently is no public market for the Company Common Stock. The
Company has applied to designate the Company Common Stock on the National
Association of Securities Dealers Automated Quotation System ("Nasdaq")
Small-Cap Market (the "Nasdaq Small-Cap Market") under the symbol "DRTX" but
there is no assurance that such designation will be obtained.
The Share Transfer is a condition to, and part of the consideration for, the
merger of Spice and Playboy Enterprises, Inc. ("Playboy"). Pursuant to an
Agreement and Plan of Merger dated as of May 29, 1998, on the Closing Date, (i)
Spice Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
New Playboy, Inc. ("New Playboy"), a Delaware corporation which will become the
parent of Playboy, will be merged with and into Spice and Spice will become a
wholly-owned subsidiary of New Playboy (the "Merger"); (ii) in the Merger, (a)
each stockholder of Spice will receive, in exchange for each share of Spice
Common Stock held by such stockholder, a fractional equity interest in New
Playboy, $3.60 in cash and 0.125 of one share of Company Common Stock or, in
exchange for each share of Spice Preferred Stock held by such stockholder, the
consideration that such stockholder would have received had such stockholder
converted such shares of Spice Preferred Stock into shares of Spice Common Stock
immediately prior to the Merger and (b) each holder of stock options or warrants
of Spice shall be entitled to receive such merger consideration (less the
exercise price of the stock option or warrant) for each share of Spice Common
Stock for which a stock option or warrant is exercisable; (iii) prior to the
consummation of the Merger, Spice and its subsidiaries will contribute (the
"Contribution") certain assets to the Company, including all of the assets of,
and certain liabilities relating to, its Operations Facility, its option to
acquire an ownership interest in Emerald Media, Inc. and certain rights to
Spice's library of adult films; and (iv) in connection with the Merger, the
Share Transfer will be consummated. See "The Contribution and the Share
Transfer--The Merger." Following the Merger, the business of New Playboy will be
comprised of the businesses currently conducted by Spice and Playboy, other than
the portion of Spice's business to be contributed to the Company and the Spice
Hot network which will be sold to Califa Entertainment Group, Inc. under the
terms and conditions of a separate agreement. Consummation of the Merger is
subject to various conditions, including the approval and adoption of the Merger
Agreement and the Merger by the holders of a majority of the outstanding shares
of Spice Common Stock. If the Merger is not consummated, neither the
Contribution nor the Share Transfer will be consummated. In connection with the
Merger, New Playboy has filed a registration statement on Form S-4 which
includes a Proxy Statement/Prospectus (the "Proxy Statement/Prospectus")
prepared by Spice, Playboy and New Playboy regarding the Merger and the
transactions contemplated thereby. A copy of the Proxy Statement/Prospectus is
being provided by Spice with this Prospectus. The information provided or
incorporated by reference in such Proxy Statement/Prospectus is solely the
responsibility of Spice, Playboy and New Playboy and the Company takes no
responsibility therefor.
IN REVIEWING THIS PROSPECTUS, STOCKHOLDERS SHOULD CAREFULLY CONSIDER THE
MATTERS DESCRIBED UNDER THE HEADING "RISK FACTORS" BEGINNING ON PAGE 7.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
ANY
OFFER TO BUY ANY SECURITIES.
The date of this Prospectus is , 1998
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. STOCKHOLDERS SHOULD READ
THIS PROSPECTUS IN ITS ENTIRETY. THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION
WITH THE PROXY STATEMENT/PROSPECTUS DELIVERED CONCURRENTLY. UNLESS THE CONTEXT
REQUIRES OTHERWISE, REFERENCES HEREIN TO (I) SPICE AND THE COMPANY SHALL INCLUDE
THEIR RESPECTIVE SUBSIDIARIES AND (II) THE COMPANY PRIOR TO THE DATE OF THE
SHARE TRANSFER SHALL REFER TO THE OPERATIONS FACILITY. PORTIONS OF THIS
PROSPECTUS MAY CONSTITUTE FORWARD-LOOKING STATEMENTS FOR PURPOSES OF THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SEE "RISK
FACTORS--FORWARD-LOOKING STATEMENTS."
THE COMPANY
Directrix, Inc. (the "Company") is a Delaware corporation formed by Spice
that will own all the assets of, and will be responsible for certain liabilities
associated with, Spice's master control and digital playback center (the
"Operations Facility"), and will also own an option (the "Emerald Media Option")
to acquire all of the assets or all of the capital stock of Emerald Media, Inc.
and certain rights to Spice's library of adult films. The Company is a provider
of television production and delivery and Internet hosting services. If the
Company exercises the Emerald Media Option, the Company will also be a provider
of explicit adult television entertainment. See "Risk Factors--Risks Associated
with Exercise of the Emerald Media Option." The Company currently has no intent
to exercise the Emerald Media Option.
The Company is a provider of technical and creative services for television
and Internet programming. The Company provides services which integrate and
apply a variety of systems and processes to enhance the creation and
distribution of such content through various channels, including cable, fiber,
satellite delivery and file server systems and the Internet. The Company edits
and assembles television and Internet programming into various formats, creates
interstitial and promotional graphics, animation and other material to support
the brand identity of such programming, provides automated systems to originate
such programming via its state-of-the-art playback facilities and also provides
library storage and media archival and duplication services.
Emerald Media, Inc. ("EMI") owns and operates four of the leading C-Band
explicit adult programming television networks and an explicit adult content
Internet site. The Company provides post-production, playback, transponder and
Internet hosting services for EMI.
The Company was formed on July 20, 1998 in contemplation of the
Contribution, the Share Transfer and the Merger. The Company is operated under
the direction of J. Roger Faherty, Chairman of the Board and Chief Executive
Officer, Donald McDonald, President, and Richard Kirby, Executive Vice
President. Mr. Faherty has been Chairman of the Board, Chief Executive Officer
and President of Spice; Mr. McDonald has been President of Spice Direct, Inc., a
subsidiary of Spice; and Mr. Kirby has been Senior Vice President, Network
Operations, and Chief Technology Officer of Spice. See "Management." Messrs.
Faherty, McDonald and Kirby have a combined 36 years experience in the
programming industry.
BUSINESS STRATEGY
The key elements of the Company's business strategy are to:
(i) expand delivery of individual television production and delivery
services to other television networks. After the Merger, the Company will
provide playback services to EMI, Playboy Entertainment Group, Inc. ("PEGI")
and Califa Entertainment Group, Inc. ("Califa"). In addition, the Company
will provide transponder services to EMI and Black Entertainment Television,
Inc. The Company will rely on the business contacts and experience of
Messrs. Faherty, McDonald and Kirby to attempt to attract additional
customers and market the Company's services.
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(ii) leverage its strengths and capabilities in playback services and
its available transponder capacity to develop a market for television
production and delivery services. As a result of its experience in providing
playback, production and transponder services for Spice and EMI, the Company
can deliver programming via cable, satellite, fiber optics, regionally
deployed video file servers and the Internet. By offering a comprehensive
range of creative, technical and transmission services ("network-in-a-box
services"), the Company intends to become a "one-stop-shop" for the creation
and distribution of television networks.
(iii) leverage its experience in developing Spice's and EMI's Internet
sites into providing web hosting and Internet broadcasting services to other
Internet sites. The Company currently can host a website that averages
access by 650,000 subscribers daily and provide web authoring, web-based
database publishing, creation of graphics and animation. In addition, the
Company can simultaneously "web-cast" programming on a pay-per-view or
monthly subscription basis by way of its hybrid digital/ analog switching
center. The Company will rely on the business contacts and experience of
Messrs. Faherty, McDonald and Kirby to attempt to attract customers and
market the Company's Internet services.
(iv) invest in or acquire additional businesses in which management of
the Company has experience or can add value. The Company has not identified
a specific industry or business on which it initially intends to focus and
has no present plans, proposals, arrangements or understandings with respect
to the acquisition of, or investment in, any specific business. Any such
investment or acquisition by the Company would present certain risks to
stockholders. See "Risk Factors--Risks Related to Investment and Acquisition
Strategy." In connection with this strategy and with the intent to maximize
the value of the Company to stockholders, the Company may deem it necessary
or in its best interests to sell some or all of its assets or the assets
relating to EMI. The Company currently has no intent to divest any portion
of its business. The Company is prohibited by the Playboy Non-Competition
Agreement (as defined herein) from entering into certain areas of adult
entertainment and will not be able to invest in or acquire businesses which
operate in such areas of the adult entertainment industry. See "Arrangements
After the Merger--Relationship with New Playboy-- Terms of the Playboy
Non-Competition Agreement."
(v) assess whether to exercise the Emerald Media Option, including
analyzing the ability to increase subscriptions to its adult programming
networks.
The Company's principal corporate headquarters are located at 536 Broadway,
10th Floor, New York, New York 10036. The Company's telephone number currently
is (212) 941-1434; after the Share Transfer and the Merger, the telephone number
will be (212) 941-7750.
THE CONTRIBUTION AND THE SHARE TRANSFER
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The Share Transfer........... Shares of common stock, par value $.01 per share, of the
Company (the "Company Common Stock") will, subject to
certain conditions, be transferred (the "Share Transfer") to
the stockholders of record of Spice Entertainment Companies,
Inc. ("Spice") on the date of consummation of the Merger
(the "Closing Date") in partial exchange for their shares of
Spice Common Stock and Spice Preferred Stock. The Share
Transfer is a condition to, and part of the consideration
for, the merger of Spice and Playboy Enterprises, Inc.
("Playboy") pursuant to the terms of the Agreement and Plan
of Merger dated as of May 29, 1998 (the "Merger Agreement")
among Spice, Playboy, New Playboy, Inc. ("New Playboy"),
Playboy Acquisition Corp. and Spice Acquisition Corp.
Pursuant to the terms of the Merger Agreement, on the
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Closing Date (i) Spice Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of New Playboy,
will be merged with and into Spice and Spice will become a
wholly-owned subsidiary of New Playboy (the "Merger"); (ii)
in the Merger, (a) each stockholder of Spice will receive,
in exchange for each share of Spice Common Stock held by
such stockholder, a fractional equity interest in New
Playboy, $3.60 in cash and a number of shares of Company
Common Stock in accordance with the Exchange Ratio (as
defined below) or, in exchange for each share of Spice
Preferred Stock held by such stockholder, the consideration
such stockholder would have received had such stockholder
converted such shares of Spice Preferred Stock into shares
of Spice Common Stock immediately prior to the Merger and
(b) each holder of stock options or warrants of Spice shall
be entitled to receive such merger consideration (less the
exercise price of the stock option or warrant) for each
share of Spice Common Stock for which a stock option or
warrant is exercisable; (iii) prior to the consummation of
the Merger, Spice will contribute to the Company (the
"Contribution") all of the assets of, and certain
liabilities relating to, its Operations Facility, the
Emerald Media Option and certain rights to Spice's library
of adult films; and (iv) in connection with the Merger, the
Share Transfer will be consummated. See " The Contribution
and the Share Transfer--The Merger" and the Proxy Statement/
Prospectus. Following the Merger, the business of New
Playboy will be comprised of the businesses currently
conducted by Spice and Playboy, other than the portion of
Spice's business to be contributed to the Company and the
Spice Hot network which will be sold to Califa.
Reasons for the Contribution
and the Share Transfer....... Because New Playboy wants to acquire only certain assets of
Spice, Spice intends to transfer the assets described above
to its stockholders, by means of the Contribution and the
Share Transfer, in connection with the Merger. Consummation
of the Merger is subject to various conditions, including
the approval and adoption of the Merger Agreement and the
Merger by the holders of a majority of the outstanding
shares of Spice Common Stock. If the Merger is not
consummated, the Contribution and Share Transfer will not be
consummated. See "The Contribution and the Share Transfer."
Shares to be Transferred..... Based on the number of shares of Spice Common Stock and
Spice Preferred Stock and the number of stock options and
warrants of Spice outstanding on August 31, 1998 and the
Exchange Ratio set forth below, approximately 2,074,785
shares of Company Common Stock will be transferred to
stockholders of Spice in the Share Transfer.
Exchange Ratio............... Each holder of shares of Spice Common Stock will be entitled
to receive 0.125 of one share of Company Common Stock in
partial exchange for each share of Spice Common Stock held
on the Record Date. Each holder of shares of Spice Preferred
Stock will be entitled to receive the number of shares of
Company Common Stock that such holder would have been
entitled to receive had such holder converted such shares of
Spice Preferred Stock into shares of Spice Common
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4
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Stock immediately prior to the Share Transfer. Each holder
of stock options or warrants of Spice will be entitled to
receive 0.125 of one share of Company Common Stock for each
share of Spice Common Stock for which a stock option or
warrant was exercisable, upon payment of the exercise price
for such stock option or warrant.
Fractional Shares............ No fractional shares of Company Common Stock will be issued
pursuant to the Share Transfer. Any fractional share of
Company Common Stock will be rounded up to one whole share.
Closing Date................. The date of consummation of the Merger.
Distribution Date............ Certificates representing the Company Common Stock will be
distributed with the Playboy Consideration (as defined
herein) upon surrender of certificates representing Spice
Capital Stock. See "The Contribution and the Share
Transfer--The Merger." Holders of stock options or warrants
will receive their shares of Company Common Stock upon
exercise of such stock options or warrants.
Exchange Agent............... Harris Trust and Savings Bank
Tax Consequences............. For U.S. federal income tax purposes, the Share Transfer
should be treated as a taxable transaction to Spice and its
stockholders. See "The Contribution and the Share
Transfer--U.S. Federal Income Tax Consequences of the Share
Transfer."
The Contribution............. On or prior to the date of the Share Transfer, Spice and the
Company will enter into an agreement (the "Transfer and
Redemption Agreement") pursuant to which, among other
things, (i) Spice will transfer all of the assets of its
Operations Facility, the Emerald Media Option and certain
rights to Spice's library of adult films to the Company,
(ii) certain liabilities will be allocated between Spice and
the Company, and (iii) Spice and the Company will indemnify
each other for liabilities allocated pursuant to the
Transfer and Redemption Agreement.
Spice and the Company will also enter into a series of
agreements (the "Explicit Rights Agreements") pursuant to
which the Company will receive a portion of Spice's rights
to, and assume a portion of Spice's obligations under,
certain of its adult motion picture license agreements,
subject to the consent of the applicable licensors. The Com-
pany will be granted the right to broadcast via C-Band
satellite transmission in certain defined territories and
via the Internet the explicit version of the adult films
which Spice currently licenses. Spice Productions, Inc., a
wholly owned subsidiary of Spice ("Spice Productions"), and
the Company will enter into a similar agreement (the "Owned
Rights Agreement") with respect to the adult motion pic-
tures owned by Spice Productions. See "The Contribution and
the Share Transfer" and "Business."
Arrangements after
the Merger................... Playboy Entertainment Group, Inc., a wholly owned subsidiary
of New Playboy ("PEGI"), and the Company will enter into an
agreement (the "Playboy Mandatory Services Agreement")
pursuant to which the Company will provide complete
transmission service for at least two
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5
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of New Playboy's networks. In addition, New Playboy and the
Company will enter into an agreement (the "Playboy
Non-Competition Agreement") pursuant to which New Playboy
will agree not to engage in the business of providing
explicit adult programming via C-Band satellite and the
Company will agree not to engage in the Playboy Business (as
defined in "Arrangements after the Merger--Relationship with
New Playboy--Terms of the Non-Competition Agreement"),
except that the Company may provide explicit adult
programming via C-Band satellite in certain defined
territories and via the Internet, may engage in the Playback
and Uplink Business (as defined in "Arrangements after the
Merger--Relationship with New Playboy-- Terms of the
Non-Competition Agreement"), and may engage in certain other
activities. See "Arrangements after the Merger--Rela-
tionship with New Playboy" and "Business."
Califa and the Company will enter into a non-competition
agreement for the benefit of the Company similar to the
Playboy Non-Competition Agreement and a services agreement
for one network similar to the Playboy Mandatory Services
Agreement. See "Arrangements after the Merger--Relationship
with Califa."
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE
MATERIAL RISKS AND UNCERTAINTIES. SEE "--FORWARD-LOOKING STATEMENTS." THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK
FACTORS AND ELSEWHERE IN THIS PROSPECTUS.
ABSENCE OF HISTORY AS A STAND-ALONE COMPANY
The Company was formed on July 20, 1998 in contemplation of the
Contribution, the Share Transfer and the Merger. The Company's future
performance will depend on its ability to function as a stand-alone entity and
to finance and expand its operations. There is no assurance that the Company's
intended activities will be successful or result in significant revenue or
generate profits for the Company. The Company faces all risks which are
associated with any new business, such as under-capitalization, cash flow
problems and personnel, financial and resource limitations. The likelihood of
the success of the Company must be considered in light of the expenses,
complications and delays frequently encountered in connection with the formation
of a new business. The Company has limited resources and assets. See "Business,"
"Selected Historical Financial Information" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
LIMITED OPERATING HISTORY; UNCERTAINTY OF FUTURE PROFITABILITY
The Operations Facility was operated by Spice as a separate internal
department and a substantial portion of its revenues were derived from Spice.
The Company's principal customers immediately after the Merger will be EMI, PEGI
and Califa. See "--Reliance on Limited Number of Customers." There can be no
assurance that the Company will be able to generate sufficient revenue to
achieve profitability in the future. See "--History of Net Operating Losses."
The Company's ability to achieve and maintain profitability depends on its
ability to retain its existing customers and to attract and maintain new
customers for its services. There can be no assurance that it will be able to do
so. The Company currently intends to rely on the business contacts and
experience of its management to develop new business. There can be no assurance
that management will be successful in developing new business. See "--Dependence
on Senior Management and Other Key Employees."
HISTORY OF NET OPERATING LOSSES
The Company incurred a net loss of $1,444,000 in the six months ended June
30, 1998 and a net loss of $859,000 in the year ended December 31, 1997. As of
June 30, 1998, the Company had an accumulated deficit of $6,979,000. See
"--Limited Operating History; Uncertainty of Future Profitability," and the
Company's financial statements included elsewhere in this Prospectus.
LIMITED FINANCIAL RESOURCES; CAPITAL NEEDS
The Company's capital requirements will depend on many factors, including
the cost of operations and marketing activities, its ability to market its
services successfully, the length of time required to collect accounts
receivable and competing technological and market developments. Changes in the
Company's business or business plan could materially increase the Company's
capital requirements. There can be no assurance that the Company will perform
according to its business plan. Three directors have committed to provide a
revolving line of credit of $1.5 million to the Company. See "Certain
Transactions." The Company has no other capital resources or working capital.
There can be no assurance that this financing will be sufficient to meet the
Company's operating needs. If the Company requires additional funds and cannot
obtain such financing, it may be required to cease its operations.
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CONTRACTUAL LIMITATIONS ON MARKETS AND EXPANSION
Pursuant to the Playboy Non-Competition Agreement, the Company cannot
provide its playback services for certain types of programming unless certain
conditions are satisfied. The Company cannot provide playback and uplink
services for any adult programming unless the arrangements with the cable
program service providing such adult programming were negotiated on an arm's
length basis, provide for the payment for such services in cash and provide for
service rates no more favorable than the payment terms offered by the Company to
Playboy for similiar services; provided that the Company cannot provide playback
and uplink services for any adult programming other than (a) via satellite
delivery or (b) if the adult programming is for Playboy or Califa, via file
servers. In addition, the Playboy Non-Competition Agreement prohibits the
Company from entering into certain areas of the adult entertainment industry.
See "--Risks Associated with Exercise of Emerald Media Option--Contractual
Limitation on Markets and Expansion" and "Arrangements After the
Merger--Relationship with New Playboy--Terms of the Playboy Non-Competition
Agreement." The restrictions contained in the Playboy Non-Competition Agreement
could prevent the Company from expanding its business, revenues and customers
and could have a material and adverse effect on the results of operations and
financial condition of the Company. See "Arrangements After the
Merger--Relationship with New Playboy."
RELIANCE ON LIMITED NUMBER OF CUSTOMERS
The Company will provide post-production, facilities and playback services
for the four EMI networks, Eurotica, XXXcite, The X! Channel and Rogue TV, and
will provide transponder services for three of the four EMI networks.
Historically, EMI has operated at a loss; there can be no assurance that EMI
will be able to pay for the services provided by the Company. See "--Risks
Associated with Exercise of the Emerald Media Option--Limited Operating History;
Uncertainty of Future Profitability." Based on discussions with EMI's
management, the Company believes that certain operating improvements implemented
by EMI in the first six months of 1998 will provide EMI with sufficient
liquidity and capital resources to meet EMI's anticipated cash obligations to
the Company; however, there can be no assurance that this will be the case. See
"Management's Discussion and Analysis of Financial Conditon and Results of
Operations--Results of Operations." The total balance due to the Company from
EMI at June 30, 1998 was appproximately $3.3 million; the Company has reserved
$2.5 million against this receivable. To the extent the Company cannot obtain
payment from EMI, the results of operations and financial condition of the
Company could be materially and adversely affected.
In connection with the Contribution, the Share Transfer and the Merger, the
Company and PEGI will enter into the Playboy Mandatory Services Agreement and
may negotiate an agreement for additional services. If PEGI elects to engage a
third party to provide additional services, including (i) traffic, library and
quality control services, (ii) satellite security, (iii) network integration and
scheduling, (iv) creative services or (v) duplication, editing and encoding,
PEGI shall retain the Company to provide such services; provided that the
Company can provide such services at the same price and quality as such third
party. PEGI and the Company are currently in negotiation for the provision of
closed captioning services but have not yet reached definitive agreement. In
addition, the Company and Califa will enter into the Califa Mandatory Services
Agreement (as defined herein) and may negotiate an agreement for additional
services. If Califa elects to engage a third party to provide additional
services, including (i) traffic, library and quality control services, (ii)
satellite security, (iii) network integration and scheduling, (iv) creative
services or (v) duplication, editing and encoding, Califa shall retain the
Company to provide such services; provided that the Company can provide such
services at the same price and quality as such third party. Califa and the
Company are currently in negotiation for the provision of closed captioning
services but have not yet reached definitive agreement. Pursuant to the Playboy
Mandatory Services Agreement, the Company will provide playback, uplink and
compressed transponder services for a minimum of two of New Playboy's networks.
Pursuant to the Califa Mandatory Services Agreement, the Company will provide
playback, uplink and compressed transponder services for one network. If PEGI or
Califa terminates or fails to renew such services agreements, the results of
operations and financial condition of the Company
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could be materially and adversely affected. If PEGI and the Company, or Califa
and the Company, fail to enter into an agreement for additional services on
terms satisfactory to the Company, the results of operations and financial
condition of the Company could be adversely affected. See "Arrangements After
the Merger--Relationship with New Playboy" and "Arrangements After the
Merger--Relationship with Califa."
DEPENDENCE ON TECHNOLOGY
The Company is dependent upon the successful operation and maintenance of
its own technological infrastructure, including its Operations Facility, as well
as technological operations provided by third parties, such as terrestrial
connectivity to the uplink facility, uplink services and the transponder
services. While the Company has not experienced any material disruption of these
operations in the past, its business and operations could be adversely affected
by the extended failure of any of these operations.
RISK OF TECHNOLOGICAL OBSOLESCENCE
Technology in the entertainment and programming industry is continuously
changing as new technologies and developments continue to be introduced. There
can be no assurance that future technological advances will not result in
improved equipment or software systems that could adversely affect the Company's
competitive position. In order to remain competitive, the Company must maintain
the programming enhancements, engineering and technical capability and
flexibility to respond to customer demands for new or improved versions of its
systems and new technological developments. There can be no assurance that the
Company will have the financial or technological resources to be able to do so.
PROVISION OF SERVICES FOR ADULT PROGRAMMING
The Company will provide playback and uplink services to EMI, Califa and
PEGI, providers of adult programming. In addition, the Company will license its
rights to Spice's library of adult films to EMI. Many people may regard the
adult entertainment business as unwholesome, and the Company's involvement with
such businesses may negatively taint the Company and the Company's attempts to
enter into new businesses. Certain investors, investment banking entities,
market makers, lenders, and others in the investment community may refuse to
participate in the Company's public market, finance or other activities due to
the nature of any of its businesses or the business of its customers. Such
refusal may negatively impact the value of the securities of the Company, and
the Company's opportunities to attract market support.
RISKS RELATED TO INVESTMENT AND ACQUISITION STRATEGY
One of the Company's strategies is to invest in or acquire other businesses
in which management of the Company has experience or can add value. The Company
has not identified a specific industry or business on which it initially intends
to focus and has no present plans, proposals, arrangements or understandings
with respect to the acquisition of, or investment in, any specific business.
There can be no assurance that the Company can expand into other businesses. The
Company may not be successful in identifying, attracting or acquiring desirable
acquisition or investment candidates. Even if the Company is successful in
identifying and acquiring another business, there can be no assurance that the
Company will successfully integrate such candidates into the Company or will
realize profits from any acquisition or investment. The Company is prohibited by
the Playboy Non-Competition Agreement from entering into certain areas of adult
entertainment and will not be able to invest in or acquire businesses which
operate in such areas of the adult entertainment industry. See "--Contractual
Limitations on Markets and Expansion" and "Arrangements After the
Merger--Relationship with New Playboy--Terms of the Playboy Non-Competition
Agreement."
The Company may acquire a business through acquisition, merger,
consolidation or reorganization. Such transaction could result in the incurrence
by the Company of substantial indebtedness which could materially and adversely
change the capital structure and the financial condition of the Company. Any
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acquisition, merger, consolidation or reorganization could also involve the
issuance of additional securities of the Company, which would result in
immediate, and possibly substantial, dilution to the Company's then current
stockholders.
The failure to complete acquisitions or investments or to operate the
acquired companies profitably could materially and adversely affect the Company.
TAX MATTERS
Although not free from doubt, the Share Transfer is intended to qualify as a
partial redemption of Spice Capital Stock and holders of Spice Capital Stock on
the Record Date receiving Company Common Stock should generally recognize
capital gain or loss equal to the difference between the fair market value of
the Company Common Stock received and the tax basis in the portion of the shares
of Spice Capital Stock redeemed thereby. It is possible that the Internal
Revenue Service could treat the Share Transfer as a dividend which would be
taxable to the holders of Spice Capital Stock at ordinary income tax rates to
the extent of Spice's current or accumulated earnings and profits. None of
Spice, New Playboy, Playboy or the Company will be obligated to indemnify Spice
stockholders for any such tax. See "The Contribution and the Share
Transfer--U.S. Federal Income Tax Consequences of the Share Transfer."
DEPENDENCE ON SENIOR MANAGEMENT AND OTHER KEY EMPLOYEES
The Company's success depends to a significant extent upon its senior
management and certain other key employees of the Company. The Company has
entered into employment agreements with J. Roger Faherty, Donald J. McDonald,
Richard Kirby and John Sharpe. The employment agreements with Messrs. McDonald
and Kirby terminate on December 31, 2001. The employment agreement with Mr.
Sharpe terminates on December 31, 2000. The employment agreement with Mr.
Faherty has a six-year term; in each year that such agreement is not terminated,
the term is extended for five years from such anniversary date. However,
notwithstanding such agreements, the loss of the service of any of these
individuals, other members of senior management or other key employees could
have a material adverse effect on the Company. Also, there can be no assurance
that this management team will be successful in managing the operations of the
Company or be able to effectively implement the Company's business strategy.
Furthermore, the Company believes that its future success will depend to a
significant extent upon its ability to attract, train and retain highly skilled
technical and management personnel. Competition for such personnel is intense,
and the Company expects that such competition will continue for the foreseeable
future. There can be no assurance that the Company will be successful in
attracting or retaining such personnel; the failure to attract or retain such
personnel could have a material adverse effect on the Company's results of
operations and financial condition. See "Management."
YEAR 2000 COMPLIANCE
The Company is implementing a Year 2000 program to ensure that the Company's
computer systems and applications will function properly beyond 1999. The
Company believes that adequate resources have been allocated for this purpose
and expects its Year 2000 date conversion program to be completed on a timely
basis. The Company does not believe that the cost of implementing its Year 2000
program will have a material effect on the Company's financial condition or
results of operations. However, there can be no assurance that the Company will
identify all Year 2000 problems in its computer systems in advance of their
occurrence or that the Company will be able to successfully remedy any problems
that are discovered. The expenses of the Company's efforts to address such
problems, or the expenses or liabilities to which the Company may become subject
as a result of such problems, could have a material adverse effect on the
Company's results of operations and financial condition. In addition, the
revenue stream and financial ability of existing suppliers, service providers or
customers may be adversely impacted by Year 2000 problems, which could cause
fluctuations in the Company's revenues and operating profitability. None of the
Company's existing suppliers, service providers or customers have indicated to
the Company that
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Year 2000 issues will have a material effect on their operations; however, there
can be no assurance that this will be the case.
NO PRIOR PUBLIC TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Share Transfer, there has been no public market for the Company
Common Stock, and there can be no assurance that an active trading market will
develop or, if one does develop, that it will continue. Until an orderly market
in Company Common Stock develops, the price at which such stock trades may
fluctuate significantly and may be higher or lower than the price that would be
expected for a fully distributed issue. The price of Company Common Stock will
be determined in the marketplace and may be influenced by many factors,
including (i) the depth and liquidity of the market for the Company Common
Stock; (ii) developments affecting the Company's business generally; (iii) the
Company's dividend policy; (iv) investor perception of the Company's business
and the adult programming industry generally; and (v) general economic and
market conditions.
The Company has applied for the Company Common Stock to be quoted on the
Nasdaq Small-Cap Market upon issuance; however, the Company cannot ensure that
approval for such quotation will be obtained. If such approval is granted, the
Company cannot ensure that it will continue to meet the requirements for
quotation of the Company Common Stock on the Nasdaq Small-Cap Market. There can
be no assurance that a trading market for the Company Common Stock will develop,
or, if one develops, that it will be maintained.
RISKS ASSOCIATED WITH EXERCISE OF THE EMERALD MEDIA OPTION
The Company currently has no intent to exercise the Emerald Media Option.
If, however, the Company were to exercise such option, the following are certain
material risks associated with EMI.
LIMITED OPERATING HISTORY; UNCERTAINTY OF FUTURE PROFITABILITY
EMI has a limited operating history and is in the early stage of marketing
its channels. As of June 30, 1998, EMI had incurred cumulative net losses of
approximately $5,500,000. The losses resulted principally from the deferral, for
accounting purposes, of the unearned portion of subscription revenues and
expenses of operations while building a subscriber base during the initial
phases of EMI's operations.
EMI's ability to achieve and maintain profitability depends in part on its
ability to successfully market and sell its services. There can be no assurance
when, or if, any of EMI's current or future services will be commercially
successful.
LOSS OF MARKET SHARE TO DIRECT BROADCAST SATELLITE
In the past several years, the market for C-Band systems has been
contracting, primarily as a result of the introduction and rapid proliferation
of DBS systems, such as DirecTV, Dish Network and PrimeStar. The Company
believes that the number of C-band system owners decreased 3.7% in 1996 and 7.2%
in 1997. All of EMI's revenues are generated in the C-band market. Consequently,
it will be difficult to develop additional sales revenue growth from this
business, and the growth of DBS systems may reduce future sales revenue from the
C-Band market, which could have a material adverse effect on the results of
operations and financial condition of EMI.
NEED TO DEVELOP INTERNET BUSINESS
EMI is beginning to provide its programming via the Internet. Currently, EMI
receives no revenues from its Internet services. There can be no assurance that
EMI will develop a subscriber Internet site and that, if implemented, such
Internet site will be profitable. If EMI cannot develop a subscriber Internet
site, the results of operations and financial condition of EMI could be
materially and adversely affected. If the C-Band market continues to decline and
Internet services are not expanded, EMI could be required to cease its
operations.
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CONTRACTUAL LIMITATIONS ON MARKETS AND EXPANSION
Pursuant to the Playboy Non-Competition Agreement, the Company is limited to
providing explicit adult programming via C-Band "big dish" satellite in certain
defined territories or via the Internet. The Company is prohibited from
expanding the current EMI programming base into cable television or the Ku-Band
(small dish) direct broadcast satellite ("DBS") system. Although the Company
would not be prohibited from expanding the current EMI programming base into the
Internet, there can be no assurance that the Company would be successful in such
expansion. The restrictions contained in the Playboy Non-Competition Agreement
could prevent the Company from expanding its business, revenues and customers
and could have a material and adverse effect on the results of operations and
financial condition of the Company. If the Company were to exercise the Emerald
Media Option, EMI would be subject to the restrictions in the Playboy
Non-Competition Agreement. Such restrictions could prevent EMI from expanding
its business, revenues and customers and could have a material and adverse
effect on the results of operations and financial condition of EMI. See
"Arrangements After the Merger-- Relationship with New Playboy."
COMPETITION
There is currently no explicit adult programming in the cable television or
the Ku-Band markets. EMI's principal competitor recently attempted to provide
explicit adult programming to the Ku-Band market, but was not successful. The
Extasy network, an explicit adult television network distributed by New Frontier
Media, Inc. ("New Frontier"), was launched on EchoStar, a DBS system, in August,
1998, but carriage of the network was discontinued soon thereafter. To the
extent New Frontier or a new competitor can succeed in providing explicit adult
programming via Ku-Band satellite or cable television, the C-Band market could
erode, which would have a material adverse effect on EMI.
PROVISION OF SEXUALLY EXPLICIT CONTENT
If the Company were to exercise the Emerald Media Option, it would engage in
the business of providing sexually explicit programming to adult television
subscribers in the C-Band market and via the Internet. Many people may regard
EMI's business as unwholesome. The nature of EMI may negatively taint the
Company and the Company's attempts to enter into new businesses. Certain
investors, investment banking entities, market makers, lenders, and others in
the investment community may refuse to participate in the Company's public
market, finance or other activities due to the nature of EMI's business. Such
refusal may negatively impact the value of the Company's stock, and its
opportunities to attract market support.
Various advocacy groups may file lawsuits against providers of adult
entertainment, encourage boycotts against such providers and mount negative
publicity campaigns against companies whose businesses involve adult
entertainment. The Company may be subjected to such adverse publicity and
litigation. The Company may incur substantial costs defending itself against
such actions, which may negatively impact the Company's financial condition and
results of operations. Negative publicity, boycotts and litigation could also
discourage institutional and other investors from investing in the Company, to
the detriment of the Company's stockholders. Because of this risk, the Company
may not be able to attract as large a base of investors as a similarly situated
company in a business not involving "adult entertainment."
SATELLITE SERVICES AGREEMENTS; REFUSAL OF SERVICE OR TERMINATION OF
AGREEMENTS
EMI currently provides some of its adult satellite programming to
subscribers via a subleasing arrangement with Logix Development Corporation,
which leases three transponders from Network Teleports, Inc. and B&P The
SpaceConnection, Inc.
These transponder agreements contain provisions that allow the service
providers to refuse to provide the service (defined as service on pre-emptible
transponders on Telstar 402R) or terminate the agreements under certain
circumstances, including (i) if the programming being transmitted by EMI does
not, in the
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service provider's sole judgment, adhere to generally accepted community
broadcast standards in the United States, including the encryption of "sexually
explicit conduct" or (ii) if EMI is indicted or is otherwise charged as a
defendant in a criminal proceeding, or is convicted under any obscenity law, or
has been found by any governmental authority to have violated such law. EMI has
operated its adult networks under these terms since its inception without
disruption or refusal of service; nonetheless, EMI will be subject to arbitrary
refusal of service by the service providers if a service provider determines
that the content being transmitted by EMI is harmful to the service provider's
name or business. Any such service disruption would have a material adverse
effect on the results of operations and financial condition of EMI.
GOVERNMENT REGULATION
If the Company were to exercise the Emerald Media Option, it could become a
leading provider of explicit adult programming via direct-to-home C-Band
satellite. Federal and state governments, along with various advocacy groups,
consistently propose and support legislation aimed at restricting the provision
of, access to, and content of adult entertainment. The Company could be
subjected to such adverse legislation.
Recently, federal and state government officials have targeted "sin
industries," such as tobacco, alcohol and adult entertainment for special tax
treatment and legislation. In 1996, Congress passed the Communications Decency
Act (the "CDA"), a subsection of the Telecommunications Act of 1996. Recently,
the U.S. Supreme Court, in ACLU V. RENO, held certain substantive provisions of
the CDA unconstitutional. Businesses in the adult entertainment and programming
industries expended millions of dollars in legal and other fees in overturning
such provisions of the CDA. The adult entertainment industry may continue to be
a target for legislation. In the event the Company must defend itself and/or
join with other companies in the adult programming business to defend against
such legislation, the Company may incur significant expenses that could have a
material adverse effect on the Company's results of operations and financial
condition.
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation requires that any action required
or permitted to be taken by the stockholders of the Company must be effected at
a duly called annual or special meeting of stockholders and may not be effected
by any consent in writing. Pursuant to the Company's By-Laws, special meetings
of stockholders may be called only by the Chairman of the Board, the Chief
Executive Officer or the President of the Company or upon the written request of
a majority of the Board of Directors. The Certificate of Incorporation provides
for a classified Board of Directors, and members of the Board of Directors may
be removed only for cause upon the affirmative vote of holders of at least two-
thirds of the shares of capital stock of the Company entitled to vote. In
addition, shares of the Company's preferred stock may be issued in the future
without further stockholder approval and upon such terms and conditions, at a
price and having such rights, privileges and preferences, as the Board of
Directors may determine. The rights of the holders of Company Common Stock will
be subject to, and may be adversely affected by, the rights of the holders of
any preferred stock that may be issued in the future. The issuance of shares of
preferred stock, while potentially providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. The Company has no present intent to
issue any shares of preferred stock. The Company is also subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law,
which could have the effect of delaying or preventing a change of control of the
Company. The foregoing provisions, and other provisions of the Certificate of
Incorporation, may have the effect of deterring hostile takeovers or delaying or
preventing changes in control or management of the Company, including
transactions in which stockholders might otherwise receive a premium for their
shares over then current market prices. In addition, these provisions may limit
the ability of stockholders to approve transactions that they may deem to be in
their best interests. See "Description of Securities--Delaware Law and Certain
Provisions of the Company's
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Certificate of Incorporation and By-Laws." The employment agreements between the
Company and each of J. Roger Faherty, Donald J. McDonald, Richard Kirby and John
Sharpe provide that each executive will be entitled to a severance payment if
the Company terminates his employment within 18 months following a change in
control of the Company. These provisions could have the effect of preventing a
change in control of the Company.
SHARES ELIGIBLE FOR FUTURE SALE
Immediately following the Separation Date, approximately 2,075,000 shares of
Company Common Stock will be freely tradeable, except for shares received by any
persons who may be deemed to be "affiliates" of the Company as that term is
defined in Rule 144 promulgated under the Securities Act. See "The Contribution
and the Share Transfer--Restrictions on Transfer." The sale of substantial
amounts of Company Common Stock could have an adverse effect on the price of the
Company Common Stock prevailing from time to time.
FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this Prospectus may constitute
forward-looking statements for purposes of the Securities Act and the Exchange
Act, and as such involve risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company to be materially
different from future results, performance or achievements expressed or implied
by such forward-looking statements. Forward-looking statements include those
preceded by, followed by or that include, the words "believes," "expects,"
"anticipates" or similar expressions. Important factors that could cause the
actual results, performance or achievements of the Company to differ materially
from the Company's expectations are disclosed in this Prospectus ("Cautionary
Statements"), including, without limitation, in this "Risk Factors" section. All
written forward-looking statements attributable to the Company are expressly
qualified in their entirety by the Cautionary Statements.
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THE CONTRIBUTION AND THE SHARE TRANSFER
This section of the Prospectus describes the material terms of the proposed
Contribution and Share Transfer. The following descriptions do not purport to be
complete and are qualified in their entirety by reference to the Transfer and
Redemption Agreement or the applicable related agreement, as the case may be.
Copies of the Transfer and Redemption Agreement and the related agreements have
been filed as exhibits to the Registration Statement. All Spice stockholders are
urged to read the Transfer and Redemption Agreement and the related agreements
in their entirety.
BACKGROUND OF AND REASONS FOR THE CONTRIBUTION AND THE SHARE TRANSFER
Because Playboy wants to acquire only certain assets of Spice, Spice intends
to transfer certain of its assets to its stockholders, by means of the
Contribution and the Share Transfer, as part of the consideration for the
Merger. Playboy already has access to playback and uplink facilities and Playboy
is not, and chooses not to be, in the business of producing or distributing the
explicit versions of adult films. Playboy and Spice agreed that these assets
would be transferred to a new subsidiary of Spice and that, upon consummation of
the Merger, the capital stock of such subsidiary would be distributed to Spice's
stockholders. As a result, the stockholders of Spice will continue after the
Merger to hold a direct or indirect interest in all of Spice's current assets,
other than those to be sold to Califa, as described under "--Related
Transactions." The combination of the Contribution, the Share Transfer and the
Merger will allow Spice's stockholders to receive consideration with a value in
excess of the market price of Spice Common Stock prior to the announcement of
the Merger. In addition, the Contribution and the Share Transfer will allow the
Company to adopt strategies and pursue objectives that are more appropriate to
its markets.
THE TRANSACTIONS
Prior to consummation of the Merger, Spice and the Company will enter into
the Transfer and Redemption Agreement, pursuant to which the following
transactions will be effected:
1. Spice will contribute certain assets, including the Operations
Facility and the Emerald Media Option, to the Company in exchange for the
Company Common Stock and the assumption by the Company of certain
liabilities related to the contributed assets. The Company and Spice will
also enter into the Explicit Rights Agreements and the Owned Rights
Agreement, which will grant the Company certain rights to Spice's library of
adult films. See "--Terms of the Transfer and Redemption Agreement."
2. Spice will transfer the Company Common Stock to the Exchange Agent to
be distributed to Spice stockholders, as described below, as part of the
consideration for the Merger.
3. In connection with the Contribution, the Share Transfer and the
Merger, the Company and New Playboy will enter into the Playboy
Non-Competition Agreement and the Company and PEGI will enter into the
Playboy Mandatory Services Agreement. See "Arrangements After the Merger."
Each holder of shares of Spice Common Stock of record as of the date of
consummation of the Merger (the "Record Date") will be entitled to receive 0.125
of one share of Company Common Stock in partial exchange for each share of Spice
Common Stock held on the Record Date. Each holder of shares of Spice Preferred
Stock as of the Record Date will be entitled to receive the number of shares of
Company Common Stock that such holder would have been entitled to receive had
such holder converted such shares of Spice Preferred Stock into shares of Spice
Common Stock immediately prior to the Share Transfer. Each holder of stock
options or warrants of Spice as of the Record Date will be entitled to receive
0.125 of one share of Company Common Stock for each share of Spice Common Stock
for which a stock option or warrant was exercisable upon payment of the
applicable exercise price. No certificates or scrip representing fractional
shares of Company Common Stock will be issued. Any fractional share of Company
Common Stock will be rounded up to one whole share. The Company Common Stock to
be
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received by the Spice stockholders in the Share Transfer will also constitute
part of the Merger Consideration (as defined in "--The Merger"). Certificates
representing the Company Common Stock will be distributed with the Playboy
Consideration (as defined in "--The Merger") upon surrender of certificates
representing Spice Common Stock or Spice Preferred Stock.
After the Contribution and immediately prior to the Share Transfer, Spice
will hold all the issued and outstanding shares of Company Common Stock. Based
on the number of shares of Spice Capital Stock and the number of stock options
and warrants of Spice outstanding on August 31, 1998 and on an Exchange Ratio of
0.125 of one share of Company Common Stock transferred in partial exchange for
each share of Spice Common Stock (and Spice Preferred Stock as if such Spice
Preferred Stock had been converted into Spice Common Stock immediately prior to
the Share Transfer), approximately 2,074,785 shares of Company Common Stock will
be transferred to stockholders of Spice in the Share Transfer. As a result of
the Share Transfer, the stockholders of record of Spice on the Record Date will
own all of the outstanding capital stock of the Company and Spice will retain no
ownership interest in the Company.
TERMS OF THE TRANSFER AND REDEMPTION AGREEMENT
Pursuant to the terms of the Transfer and Redemption Agreement, immediately
prior to the Share Transfer, Spice will contribute certain assets to the
Company, including (a) all of the equipment and facilities relating to Spice's
master control and digital playback center (the "Operations Facility"), (b) an
option (the "Emerald Media Option") to acquire all of the assets or all of the
stock of EMI, a provider of subscriber-based and pay-per-view explicit adult
content premium programming via direct to home C-Band satellite and the
Internet, and (c) certain rights to Spice's library of adult films to be granted
to the Company under the Explicit Rights Agreements and the Owned Rights
Agreement. The Company currently has no intent to exercise the Emerald Media
Option.
Pursuant to the Transfer and Redemption Agreement, Spice and the Company
will divide up certain existing agreements of Spice. Spice's transponder
services agreement will be replaced by separate agreements, one of which will
provide for Spice to continue to lease one transponder and the other of which
will provide for the Company to lease the remaining three transponders. Spice
will assign to the Company an agreement to provide transponder services to Black
Entertainment Television, Inc. ("BET"), and will make space available to the
Company on its retained transponder without charge so that the Company can
perform the obligations under such agreement. One of Spice's equipment leases
will be replaced by separate agreements, one of which will provide for Spice to
retain certain decoding equipment and the other of which will provide for the
Company to lease an encoding system. The leases for Spice's corporate
headquarters will be divided between Spice and the Company. The lease for the
floor on which the Operations Facility is located will be assigned to the
Company.
In connection with the Contribution, the Company will issue to Spice the
Company Common Stock and will assume the Assumed Liabilities, subject to the
indemnification obligations of Spice described below. The "Assumed Liabilities"
include (a) all of the liabilities relating to the Playback and Uplink Business,
but only to the extent they arise after the Closing Date, (b) those liabilities
and obligations arising out of the assets being contributed to the Company and
(c) all of the liabilities relating to EMI, the Explicit C-Band Business and the
Explicit Internet Business. The Company will not assume any of EMI's liabilities
unless and until it exercises the Emerald Media Option. Prior to the exercise of
the Emerald Media Option, the Company will be responsible for any claims against
Spice for liabilities relating to EMI. For definitions of "Playback and Uplink
Business," "Explicit C-Band Business," and "Explicit Internet Business," see
"Arrangements After the Merger--Relationship with New Playboy--Terms of the
Playboy Non-Competition Agreement."
After the Contribution, Spice will deliver the Company Common Stock to the
Exchange Agent and will instruct the Exchange Agent to transfer the Company
Common Stock to the stockholders in accordance with the Exchange Ratio, as
described above, as part of the Merger Consideration. Upon
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consummation of the Share Transfer, any shares of Company Common Stock owned by
Spice shall be canceled.
Pursuant to the Transfer and Redemption Agreement, the Company will offer
employment to certain employees of Spice. The Company intends to do so on
substantially the same terms and conditions of their employment by Spice and
intends to establish new employee benefit plans substantially similar to the
benefit plans maintained by Spice prior to the Closing Date.
In the Transfer and Redemption Agreement, the Company will make certain
representations and warranties to Spice with respect to (a) its due organization
and good standing, (b) its corporate power to execute the Transfer and
Redemption Agreement, the Explicit Rights Agreements, the Owned Rights
Agreement, the Playboy Non-Competition Agreement and the Playboy Mandatory
Services Agreement (collectively, the "Transaction Agreements"), (c) the
enforceability of the Transfer and Redemption Agreement and the related
agreements to which it will be a party and (d) the noncontravention of
agreements, laws and the Company's organizational documents.
Conditions to the consummation of the Contribution and the Share Transfer
include the execution and delivery of the Explicit Rights Agreements, the Owned
Rights Agreement and the Mandatory Services Agreement, the execution of new
transponder agreements and new equipment lease agreements, the assignment and
amendment of Spice's office leases, the execution of the Califa Non-Competition
Agreement and the Califa Mandatory Services Agreement, obtaining all necessary
third party consents and waivers and other customary closing conditions. If the
Merger Agreement is terminated and the Merger is not consummated, the
Contribution and Share Transfer will not be consummated.
Pursuant to the Transfer and Redemption Agreement, Spice and the Company
will indemnify each other for losses, claims, damages, expenses or other
liabilities or obligations (including, without limitation, interest, penalties
and reasonable fees and expenses of attorneys, experts and consultants)
(collectively, "Losses") arising from certain matters. The indemnification will
also apply to the indemnified parties' respective directors, representatives,
officers, employees, affiliates, subsidiaries and assigns.
Specifically, Spice will agree to indemnify the Company for Losses arising
from (a) any breach by Spice of any covenant or agreement in the Transfer and
Redemption Agreement and the other Transaction Agreements to be performed by it
after the Closing Date, (b) any liability not to be assumed by the Company and
(c) any misstatement of a material fact in the Proxy Statement/Prospectus, the
registration statement that includes the Proxy Statement/Prospectus or the
Registration Statement (as defined under "Additional Information") or any
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, but only in each case with respect to
information provided by or on behalf of Playboy relating to Playboy and
contained in or omitted from the Proxy Statement/Prospectus, the registration
statement that includes the Proxy Statement/Prospectus or the Registration
Statement. In addition, Spice will indemnify the Company for liability for taxes
imposed on (x) Spice that the Company pays or otherwise satisfies and (y) the
Company on or prior to the Closing Date, including any taxes arising as a result
of the transactions contemplated by the Transfer and Redemption Agreement, the
other Transaction Agreements and the Merger Agreement.
The Company will agree to indemnify Spice for Losses arising from (a) any
breach by the Company of any representation, warranty, certificate, covenant or
agreement in the Transfer and Redemption Agreement, the other Transaction
Agreements and any document delivered pursuant thereto, (b) any breach by Spice
of any covenant or agreement in the Transfer and Redemption Agreement and the
other Transaction Agreements to be performed by it prior to the Closing Date,
(c) any Assumed Liabilities, and (d) any misstatement of a material fact in the
Proxy Statement/Prospectus, the registration statement that includes the Proxy
Statement/Prospectus and the Registration Statement or any omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, but only in each case with respect to information provided by
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or on behalf of the Company or Spice relating to the Company and contained in or
omitted from the Proxy Statement/Prospectus, the registration statement that
includes the Proxy Statement/Prospectus and the Registration Statement. In
addition, the Company will indemnify Spice for liability for all taxes of the
Company for which Spice is not required to indemnify the Company.
TERMS OF THE EXPLICIT RIGHTS AGREEMENTS
An Explicit Rights Agreement will be entered into as of the Closing Date by
and between the Company and Spice with respect to each licensor which licenses
adult films to Spice (the "Licensed Pictures") pursuant to license agreements
(the "Licensed Agreements"), and which has consented, as necessary, to the
transactions contemplated by such Explicit Rights Agreement. Pursuant to each
Explicit Rights Agreement, Spice will assign to the Company all of its C-Band
Defined Rights and Internet Defined Rights in and to the Licensed Pictures. The
Company will grant Spice a non-exclusive royalty-free sublicense in and to the
Internet Defined Rights in and to the Licensed Pictures. The Company will assume
all of Spice's obligations and liabilities other than license fees relating to
the C-Band Defined Rights and the Internet Defined Rights in and to the Licensed
Pictures. Spice will remain responsible for the payment of license fees. The
Company will not receive any rights in and to any adult films licensed to
Spice's international subsidiary.
For purposes of the Explicit Rights Agreements, the term "C-Band Defined
Rights" means the right to transmit, and to sublicense and distribute for
transmission, via C-Band satellite in certain defined territories the Explicit
Version of a Licensed Picture and the Explicit Still Images with respect to such
Explicit Version, including the right to edit, reproduce, advertise, promote and
market such Explicit Version or Explicit Still Images, and to engage in such
other incidental activities reasonably necessary to exploit such rights. The
term "Internet Defined Rights" means the right to transmit, and to sublicense
and distribute for transmission, worldwide via the Internet the Explicit Version
of a Licensed Picture and the Explicit Still Images with respect to such
Explicit Version, including the right to edit, reproduce, advertise, promote and
market such Explicit Version or Explicit Still Images, and to engage in such
other incidental activities reasonably necessary to exploit such rights. The
term "Explicit Version" means the version of a Licensed Picture, the content of
which would generally be considered in the adult industry to be that of
"explicit" adult motion pictures and more explicit than the "hot cable" or
"cable" version of such Licensed Picture, and which is otherwise substantially
similar in content and degree of explicitness to the programming currently
featured by EMI. The term "Explicit Still Images" means all of the still images
included with or within the Explicit Version, the content of which would
generally be considered in the adult industry to be that of "adult" still images
and equally as explicit as, or more explicit than, "hot cable" still images, and
which are otherwise substantially similar in content and degree of explicitness
to the still images currently featured on the Internet sites maintained by EMI.
Pursuant to each Explicit Rights Agreement, the Company will not be entitled
to any rights in and to any motion pictures licensed to Spice pursuant to any
renewals, extensions, amendments or other modifications of any License Agreement
made after the Closing Date. However, prior to the execution of each Explicit
Rights Agreement, Spice will solicit from each licensor a consent to such
Explicit Rights Agreement, which consent will provide that in consideration of
the license fee to be paid by Spice in connection with any renewal, extension,
amendment or other modification of any License Agreement, the licensor will
grant to the Company a royalty-free license of and to the C-Band Defined Rights
and a royalty-free, non-exclusive license of and to the Internet Defined Rights
in and to the motion pictures otherwise licensed to Spice under such renewal,
extension, amendment or other modification of the License Agreement. In
addition, Spice will agree that it will not acquire C-Band Defined Rights to any
Explicit Programming or Explicit Still Images (as such terms are defined in the
Playboy Non-Competition Agreement) and will not acquire an exclusive license to
any Internet Defined Rights for seven years following the Closing Date.
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TERMS OF THE OWNED RIGHTS AGREEMENT
The Owned Rights Agreement will be entered into as of the Closing Date by
and between the Company and Spice Productions. Pursuant to the Owned Rights
Agreement, Spice Productions will assign to the Company all of its right, title
and interest in and to the C-Band Defined Rights and the Internet Defined Rights
in and to Spice Productions's existing library of owned adult films (the "Owned
Pictures"). The Company will grant Spice Productions a non-exclusive
royalty-free sublicense in and to the Internet Defined Rights in and to the
Owned Pictures. The terms "C-Band Defined Rights," "Internet Defined Rights,"
"Explicit Version" and "Explicit Still Images" will have the same meanings as
such terms have in the Explicit Rights Agreements except that such terms will
refer to the Owned Pictures.
THE MERGER
The Contribution and the Share Transfer will occur in connection with the
Merger. If the Merger is not consummated, the Contribution and the Share
Transfer will not be consummated.
The Merger Agreement, the Merger and all transactions related thereto were
approved by the Board of Directors of Spice on May 29, 1998. Spice, Playboy, New
Playboy, Playboy Acquisition Corp. and Spice Acquisition Corp. entered into the
Merger Agreement on May 29, 1998. The Merger and the Merger Agreement are
subject to approval and adoption by the stockholders of Spice at a special
meeting of the stockholders. A copy of the Proxy Statement/Prospectus relating
to such special meeting is being provided by Spice with this Prospectus.
Pursuant to the Merger Agreement, and subject to its terms and conditions,
Spice Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of
New Playboy, will be merged with and into Spice and Spice will become a
wholly-owned subsidiary of New Playboy. Upon the consummation of the Merger,
each stockholder of Spice will receive, in exchange for each share of Spice
Common Stock held by such stockholder, the Spice Consideration and the Playboy
Consideration (together with the Spice Consideration, the "Merger
Consideration"). The "Spice Consideration" will consist of 0.125 of one share of
Company Common Stock, in accordance with the Share Transfer, in partial
redemption of one share of Spice Common Stock. The "Playboy Consideration" will
consist of (x) $3.60 in cash and (y) 0.1371 of one share of Class B Common
Stock, par value $.01 per share of New Playboy (the "New Playboy Class B Common
Stock"), subject to adjustment if the Average Closing Price of New Playboy Class
B Common Stock is either greater than $20.988 or less than $16.042. If the
Average Closing Price of New Playboy Class B Common Stock is greater than
$20.988, each share of Spice Common Stock will be converted into a floating
number of shares of New Playboy Class B Common Stock equal to $2.88 per share of
Spice Common Stock. If the Average Closing Price of New Playboy Class B Common
Stock is less than $16.042, each share of Spice Common Stock will be converted
into a floating number of shares of New Playboy Class B Common Stock equal to
$2.20 per share of Spice Common Stock. The "Average Closing Price" of New
Playboy Class B Common Stock is defined as the average of the reported closing
price per share of the Class B Common Stock, par value $.01 per share, of
Playboy on the New York Stock Exchange for the twenty consecutive trading days
immediately preceding the fifth business day prior to the consummation of the
Merger.
Upon consummation of the Merger, each share of Spice Preferred Stock, other
than shares held in the treasury of Spice or shares as to which dissenters'
rights are exercised and perfected, will be converted into the right to receive
the amount of Merger Consideration that the holder of such share would have been
entitled to receive had such share been converted into shares of Spice Common
Stock. Upon consummation of the Merger, each outstanding stock option and
warrant of Spice will be deemed to have been exercised by its holder, subject to
the agreement of its holder, and will be converted into the right to receive the
Merger Consideration; provided that the exercise price of the stock option or
warrant shall be offset first against the cash portion of the Merger
Consideration and then against the New Playboy Class B Common Stock portion of
the Merger Consideration. If the exercise price of any stock options or warrants
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is greater than the aggregate cash portion of the Merger Consideration payable
to the holder of such stock options or warrants (such excess being referred to
as the "Excess Amount"), then such holder may elect to pay to Spice an amount
equal to the Excess Amount in cash in order to receive the full amount of the
stock portion of the Merger Consideration to which such holder is entitled
without any reduction of such stock portion.
Harris Trust and Savings Bank will act as Exchange Agent for the Merger.
Immediately prior to consummation of the Merger, Spice will deposit with the
Exchange Agent the Spice Consideration and New Playboy will deposit with the
Exchange Agent the Playboy Consideration. New Playboy will also make available
to the Exchange Agent from time to time as needed cash sufficient to pay cash in
lieu of fractional shares of New Playboy Class B Common Stock and any dividends
and other distributions pursuant to the Merger Agreement. As soon as reasonably
practicable after the effective time of the Merger (the "Effective Time"), the
Exchange Agent shall mail to each holder of Spice Common Stock or Spice
Preferred Stock (other than those holders who have exercised appraisal rights
pursuant to Section 262 of the Delaware General Corporation Law) a letter of
transmittal and instructions to effect the surrender of the certificates
representing Spice Common Stock or Spice Preferred Stock in exchange for the
Merger Consideration. Upon surrender of a certificate representing Spice Common
Stock for cancellation to the Exchange Agent together with such letter of
transmittal, duly executed, and such other customary documents as may be
required pursuant to such instructions, the holder of such certificate will be
entitled to receive in exchange (i) $3.60 in cash, (ii) certificates evidencing
that number of whole New Playboy Class B Common Stock which such holder has the
right to receive in the Merger, (iii) any dividends or other distributions on
the New Playboy Class B Common Stock declared or made after the Effective Time,
(iv) cash in respect of fractional shares of New Playboy Class B Common Stock
and (v) certificates evidencing that number of whole shares of Company Common
Stock which such holder has the right to receive in the Share Transfer and the
Merger. The certificate so surrendered will be canceled. Upon surrender of a
certificate representing Spice Preferred Stock for cancellation to the Exchange
Agent together with the letter of transmittal, duly executed, and other
customary documents as may be required by the instructions, the holder of such
certificate will be entitled to receive in exchange the Merger Consideration
that such holder would have been entitled to receive had such holder converted
its shares of Spice Preferred Stock into shares of Spice Common Stock
immediately prior to the Merger. The certificate so surrendered will be
canceled.
In the event of a transfer of ownership of Spice Common Stock or Spice
Preferred Stock which is not registered in the transfer records of Spice as of
the Effective Time, cash, New Playboy Class B Common Stock, dividends and other
distributions and Company Common Stock may be issued and paid to a transferee if
the certificate evidencing such shares is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer and
by evidence that any applicable stock transfer taxes have been paid. No
dividends or other distributions declared or made after the Effective Time with
respect to New Playboy Class B Common Stock will be paid to the holder of an
unsurrendered certificate representing shares of Spice Common Stock or Spice
Preferred Stock. Subject to applicable law, following surrender of any
certificate formerly representing shares of Spice Common Stock or Spice
Preferred Stock, there will be paid to the record holder of the certificates
representing New Playboy Class B Common Stock issued in exchange, without
interest, at the time of surrender, the amount of dividends or other
distributions with a record date after the Effective Time previously paid with
respect to such New Playboy Class B Common Stock.
If any certificates for New Playboy Class B Common Stock and Company Common
Stock are to be issued in a name other than that in which the certificate
representing shares of Spice Common Stock or Spice Preferred Stock surrendered
in exchange is registered, it will be a condition of issuance that the
certificate surrendered be properly endorsed and otherwise in proper form for
transfer and that the person requesting such exchange have paid to New Playboy
or any designated agent any transfer or other taxes required by reason of the
issuance of certificates for New Playboy Class B Common Stock, cash and
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Company Common Stock in any name other than that of the registered holder of the
certificate surrendered, or established to the satisfaction of New Playboy or
any designated agent that such tax has been paid or is not payable.
In the event any certificates representing shares of Spice Common Stock or
Spice Preferred Stock have been lost, stolen or destroyed, the Exchange Agent
will issue New Playboy Class B Common Stock, cash and Company Common Stock in
exchange for such lost, stolen or destroyed certificates upon the making of an
affidavit of that fact by the owner of such certificates; provided, however,
that New Playboy may, in its discretion, require the holder of such lost, stolen
or destroyed certificates to deliver a bond in a reasonable sum as indemnity
against any claim that may be made against New Playboy or the Exchange Agent
with respect to the certificates alleged to have been lost, stolen or destroyed.
Neither New Playboy nor Spice will be liable to any holder of Spice Common
Stock or Spice Preferred Stock for any Merger Consideration delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law. New Playboy or the Exchange Agent will be entitled to deduct and
withhold from the Merger Consideration paid to any Spice stockholder such
amounts as New Playboy or the Exchange Agent is required to deduct and withhold
with respect to the making of such payment under any provision of federal,
state, local or foreign tax law.
The obligations of Playboy and Spice to consummate the Merger are subject to
certain conditions, including the following: (i) the approval of the Merger
Agreement and the other agreements contemplated thereby by the stockholders of
Spice, (ii) no temporary restraining order, preliminary or permanent injunction
or other order issued by any court of competent jurisdiction or other legal
restraint order with respect to the Merger Agreement or the transactions
contemplated thereby being in effect, (iii) all waiting periods applicable to
the consummation of the Spice Merger under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, shall have expired or terminated, (iv) the
effectiveness of the Registration Statement of which this Prospectus is a part
and the effectiveness of the registration statement of which the Proxy
Statement/Prospectus is a part, (v) the filing or receipt of all governmental or
regulatory notices or approvals required with respect to the Merger, the
Contribution, the Share Transfer and the transactions contemplated thereby and
(vi) the execution and delivery of the Transaction Agreements and the
consummation of the Contribution and the Share Transfer.
The obligation of Spice to consummate the Merger is also subject to
additional conditions, including the following: (i) the accuracy of the
representations and warranties of Playboy set forth in the Merger Agreement,
(ii) the receipt by Playboy of all necessary consents, approvals or waivers
required by Playboy in order for it to consummate the Merger and the
transactions related thereto, (iii) the performance in all material respects by
Playboy of all obligations required to be performed by it under the Merger
Agreement, (iv) the receipt by Spice of a satisfactory opinion of its tax
counsel to the effect that the Merger will be treated for federal income tax
purposes as an exchange governed by the provisions of Section 351 of the
Internal Revenue Code of 1986, as amended (the "Code"), (v) the receipt by Spice
of a secretary's certificate of Playboy certifying the due authorization and
approval of the Merger Agreement and the Transaction Agreements, (vi) the
listing of the New Playboy Class B Common Stock on the New York Stock Exchange,
(vii) the receipt by Spice of an opinion of a nationally recognized solvency
firm as to the solvency of the Company after consummation of the Contribution,
the Share Transfer and the Merger, (viii) the repayment of all indebtedness of
Spice under its existing credit facility, and (ix) the absence of any change or
event which has had or could reasonably be expected to have a material adverse
effect on Playboy.
The obligation of Playboy to consummate the Merger is also subject to
certain additional conditions, including the following: (i) the accuracy of the
representations and warranties of Spice set forth in the Merger Agreement, (ii)
the performance in all material respects by Spice of all obligations required to
be performed by it under the Merger Agreement and the Transaction Agreements,
(iii) the receipt by Playboy of a satisfactory opinion of its tax counsel to the
effect that the reorganization of Playboy, effected at the
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same time as the Merger, will be treated for federal income tax purposes as an
exchange governed by the provisions of Section 351 of the Code, (iv) the receipt
by Spice of all necessary consents, approvals or waivers required by Spice in
order for it to consummate the Merger and the transactions related thereto, (v)
the receipt by Playboy of a secretary's certificate of Spice certifying the due
authorization and approval of the Merger Agreement and the Transaction
Agreements, (vi) the absence of any change or event which has had or could
reasonably be expected to have a material adverse effect on Spice, (vii) the
Average Closing Price of New Playboy Class B Common Stock being equal to or
greater than $13.00, (viii) the receipt of certain agreements from Spice
affiliates, (ix)(A) the execution of the Transaction Agreements in a form
satisfactory to Playboy, (B) the waiver by Playboy or satisfaction of all of the
conditions to closing of the transactions contemplated by the Transfer and
Redemption Agreement and (C) the consummation to Playboy's satisfaction of the
transactions contemplated by the Transaction Agreements, (x) the amendment of
Spice's stock option plans to permit the cancellation or acceleration of Spice
stock options, (xi) the holders of no more than 5% of the outstanding shares of
Spice Common Stock having asserted dissenters' rights with respect to the Merger
and (xii) the receipt by Spice of certain agreements from the holders of options
and warrants to purchase Spice Common Stock.
The Merger Agreement contemplates that the Contribution and the Share
Transfer will occur in connection with the Merger. The date of consummation of
the Contribution, the Share Transfer and the Merger is referred to herein as the
"Closing Date."
The approval of the Merger Agreement and the Merger by the stockholders of
Spice is required in order to consummate the Merger. Neither the Contribution
nor the Share Transfer is subject to separate stockholder approval. However, the
Contribution and the Share Transfer will not be effected unless the Merger is
approved.
Additional information regarding the Merger and the Merger Agreement is
contained in the Proxy Statement/Prospectus. The information provided or
incorporated by reference in the Proxy Statement/ Prospectus is solely the
responsibility of Spice, Playboy and New Playboy and the Company takes no
responsibility therefor.
After consummation of the transactions contemplated by the Merger Agreement,
the business of New Playboy will be comprised of the businesses currently
conducted by Playboy and Spice, other than those portions of Spice's business to
be contributed prior to the Merger to the Company in the Contribution and to be
sold to Califa.
RELATED TRANSACTIONS
Because New Playboy wants to acquire only certain assets of Spice,
contemporaneously with the execution of the Merger Agreement, Spice and Califa
entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") with
respect to the sale by Spice and the purchase by Califa of the Spice Hot network
(the "Spice Hot Transaction"). Califa is a newly formed corporation which is
owned by two individuals, each of whom is a principal of Vivid Video, Inc., a
producer of adult movies and related programming.
Pursuant to the Asset Purchase Agreement, immediately prior to the Merger,
Spice will sell certain assets relating to the Spice Hot network to Califa and
Califa will assume certain related liabilities. The obligations of Spice and
Califa to consummate the Spice Hot Transaction are subject to certain
conditions, including the execution of a Non-Competition Agreement with the
Company (the "Califa Non-Competition Agreement") and a services agreement for
one of Califa's networks substantially similar to the Playboy Mandatory Services
Agreement with the Company (the "Califa Mandatory Services Agreement").
Consummation of the Spice Hot Transaction is not a condition to consummation
of the Contribution, the Share Transfer or the Merger. However, if the Merger is
not consummated, the Spice Hot Transaction will not be consummated.
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U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE SHARE TRANSFER
The following discussion describes the material U.S. federal income tax
consequences of the Share Transfer by Spice to holders of Spice Capital Stock on
the Closing Date. This discussion is based on the Code and applicable Treasury
regulations, current administrative rulings, and judicial decisions as of the
date hereof, all of which may be repealed, revoked, or modified so as to result
in U.S. federal income tax consequences different from those described below.
Such changes could be applied retroactively in a manner that could adversely
affect a holder of Spice Capital Stock. In addition, the authorities on which
this summary is based are subject to various interpretations. It is therefore
possible that the U.S. federal income tax treatment of the Share Transfer and of
the holding and disposition of the Company Common Stock may differ from the
treatment described below.
This discussion assumes that the Spice Capital Stock will be held as a
capital asset at the time of the Share Transfer. This discussion does not
address all aspects of federal income taxation that may be important to
particular taxpayers in light of their personal investment circumstances or to
taxpayers subject to special treatment under the federal income tax laws,
including dealers in securities or currencies, financial institutions, insurance
companies, foreign persons, tax-exempt entities and holders who acquired their
Spice Capital Stock upon exercise of employee stock options or otherwise as
compensation.
This discussion does not address all aspects of U.S. federal income taxation
that may be relevant to holders of Spice Capital Stock in light of their
particular circumstances, nor does it address any tax consequences arising under
the laws of any state, local, or foreign taxing jurisdiction. Holders of Spice
Common Stock should consult their tax advisors about the particular U.S. federal
income tax consequences to them of the Share Transfer, or the holding and
disposition of the Company Common Stock, as well as any tax consequences arising
under the laws of any state, local or foreign taxing jurisdiction.
TREATMENT OF SPICE. Spice will recognize gain on the Share Transfer in an
amount equal to the difference between the fair market value of the Company
Common Stock and Spice's tax basis in the assets contributed to the Company in
the Contribution (net of the Assumed Liabilities). Other than such gain
recognized by Spice, no gain or loss will be recognized by Spice as a result of
the Merger.
RECEIPT OF COMPANY COMMON STOCK PURSUANT TO THE SHARE TRANSFER. Although
the matter is not free from doubt and there is no authority directly on point,
the Share Transfer should be treated as a partial redemption of the Spice
Capital Stock. Accordingly, a holder should be treated as having received
Company Common Stock in exchange for a portion of such holder's Spice Capital
Stock (the "Redeemed Shares") in a taxable transaction. The portion of the Spice
Capital Stock treated as so exchanged should bear the same proportion to such
holder's total Spice Capital Stock as the fair market value of the Company
Common Stock received bears to the total fair market value of the Merger
Consideration received by such holder in the Share Transfer and the Merger. Any
gain or loss recognized with respect to such partial redemption should generally
be capital gain or loss. The amount of the gain or loss should be equal to the
difference between the ratable portion of the tax basis of the Spice Capital
Stock that is allocable to the Redeemed Shares and the fair market value of the
Company Common Stock received. Any capital gain or loss will constitute
long-term capital gain or loss if the Spice Capital Stock has been held by the
holder for more than one year at the time of the consummation of the Share
Transfer. For holders who are individuals, net long-term capital gain is
generally taxed at lower rates than ordinary income.
It is possible that the Internal Revenue Service could treat the Share
Transfer as a dividend which would be taxable to the holders of Spice Capital
Stock at ordinary income tax rates to the extent of Spice's current or
accumulated earnings and profits. None of Spice, New Playboy, Playboy or the
Company will be obligated to indemnify Spice stockholders for any such tax. If
the Share Transfer were treated as a dividend, however, certain corporate
holders could be eligible for a dividends received deduction with respect to
such dividend.
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The tax basis of the Company Common Stock received will equal their fair
market value. The holding period of the Company Common Stock will begin on the
day after the Closing Date.
THE FOREGOING DISCUSSION OF THE ANTICIPATED MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES TO HOLDERS OF SPICE CAPITAL STOCK DOES NOT PURPORT TO COVER ALL
U.S. FEDERAL INCOME TAX CONSEQUENCES THAT MIGHT APPLY TO EVERY HOLDER OF SPICE
CAPITAL STOCK. ALL HOLDERS OF SPICE CAPITAL STOCK SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE PARTICULAR U.S. FEDERAL, FOREIGN, STATE AND LOCAL TAX
CONSEQUENCES OF THE SHARE TRANSFER TO THEM.
RESTRICTIONS ON TRANSFER
The Company Common Stock distributed to the Spice stockholders pursuant to
the Share Transfer and the Merger will be freely transferable under the
Securities Act, except for Company Common Stock received by any persons who may
be deemed to be "affiliates" of Spice prior to the Merger as that term is
defined in Rule 144 promulgated under the Securities Act. The Company Common
Stock received by persons who are deemed to be affiliates of Spice prior to the
Merger may be sold by them only in transactions permitted by the resale
provisions of Rule 145 under the Securities Act, or as otherwise permitted under
the Securities Act. Persons who may be deemed to be affiliates of Spice
generally include individuals or entities that control, are controlled by, or
are under common control with, Spice and may include certain officers and
directors of Spice as well as principal stockholders of Spice.
In general, under Rule 145, for one year following the Closing Date, an
affiliate of Spice (together with certain related persons) would be entitled to
sell Company Common Stock acquired in connection with the Merger only through
unsolicited "broker transactions" or in transactions directly with a "market
maker," as such terms are defined in Rule 144. Additionally, the number of
shares to be sold by an affiliate (together with certain related persons and
certain persons acting in concert) within any three-month period for purposes of
Rule 145 may not exceed the greater of 1% of the outstanding Company Common
Stock or the average weekly trading volume of such stock during the four
calendar weeks preceding such sale. Rule 145 would only be available, however,
if the Company remained current with its informational filings with the
Commission under the Exchange Act. After the end of one year from the Closing
Date, an affiliate of Spice would be able to sell Company Common Stock received
in the Merger without such manner-of-sale or volume limitations, provided that
the Company was current with its Exchange Act informational filings and such
person was not then an affiliate of the Company. Two years after the Closing
Date, an affiliate of Spice would be able to sell such Company Common Stock
without any restrictions so long as such person had not been an affiliate of the
Company for at least three months prior thereto.
Persons who are affiliates of the Company will be permitted to sell their
shares of Company Common Stock only pursuant to an effective registration
statement under the Securities Act or an exemption from the registration
requirements of the Securities Act, such as the exemptions provided for private
transactions or Rule 144 under the Securities Act.
EXPENSES OF THE CONTRIBUTION, THE SHARE TRANSFER AND THE MERGER
Except for expenses of printing and filing the Proxy Statement/Prospectus
and this Prospectus, which will be shared equally by Playboy and Spice, Playboy
and Spice will pay their own costs and expenses relating to the Contribution,
the Share Transfer and the Merger and the transactions related thereto; provided
that if Spice incurs more than $2.5 million in fees and expenses in connection
therewith, the costs and expenses in excess of $2.5 million shall be borne by
the Company. Upon request, Spice will pay the reasonable expenses of brokerage
firms, custodians, nominees and fiduciaries who are record holders of Spice
Common Stock for forwarding this Prospectus to the beneficial owners of such
shares.
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ARRANGEMENTS AFTER THE MERGER
This section of the Prospectus describes certain transactions related to the
proposed Contribution and Share Transfer. The following descriptions do not
purport to be complete and are qualified in their entirety by reference to the
applicable agreements. Copies of the agreements described below have been filed
as exhibits to the Registration Statement. All Spice stockholders are urged to
read the following agreements in their entirety.
RELATIONSHIP WITH SPICE
Immediately following the Merger, Spice will be a subsidiary of New Playboy.
Spice and the Company will operate independently, and neither will have any
stock ownership, beneficial or otherwise, in the other.
RELATIONSHIP WITH NEW PLAYBOY
Immediately following the Share Transfer and the Merger, New Playboy and the
Company will operate independently, and neither will have any stock ownership,
beneficial or otherwise, in the other. For the purposes of governing certain of
the ongoing relationships between New Playboy and the Company after the Merger,
on or before the Closing Date, New Playboy and the Company will enter into the
Playboy Non-Competition Agreement and PEGI and the Company will enter into the
Playboy Mandatory Services Agreement.
TERMS OF THE PLAYBOY NON-COMPETITION AGREEMENT
On the Closing Date, New Playboy and the Company will enter into a Playboy
Non-Competition Agreement, which will have a term of seven years from the
Closing Date (the "Playboy Restricted Period"). Pursuant to the Playboy
Non-Competition Agreement, during the Playboy Restricted Period New Playboy will
not, directly or indirectly, engage in the Explicit C-Band Business and will not
engage in certain other activities which would involve New Playboy in the
Explicit C-Band Business in certain defined territories. The Company will not
directly or indirectly, engage in the Playboy Business and will not engage in
certain other activities which would involve the Company in the Playboy
Business; provided that the Company will be able to engage in the Explicit
C-Band Business, the Explicit Internet Business, the Playback and Uplink
Business and the Additional Permitted Activities, subject to certain
geographical restrictions and restrictions on modes of transmission detailed in
the Playboy Non-Competition Agreement. If the Company were to exercise the
Emerald Media Option, the Company would cause EMI to comply with these
restrictions.
For purposes of the Playboy Non-Competition Agreement, the term "Playboy
Business" means the business of (i) producing, licensing, distributing,
marketing and otherwise acquiring any rights or conducting any other activity
with respect to any kind of adult programming (which includes Explicit
Programming, Explicit Still Images, non-Explicit Programming and non-Explicit
Still Images), (ii) providing transmission of adult programming to all
destinations, (iii) creating and distributing multimedia products which feature
non-Explicit Programming and non-Explicit Still Images, and (iv) publishing and
distributing adult magazines, books, calendars and similar materials which
feature non-Explicit Still Images.
The term "Explicit C-Band Business" means the business of providing
transmission of Explicit Programming and/or Explicit Still Images via C-Band
satellite and licensing and distributing Explicit Programming and Explicit Still
Images for transmission via C-Band satellite, including editing, reproducing,
advertising, promoting and marketing Explicit Programming and/or Explicit Still
Images, and engaging in such other incidental activities reasonably necessary to
exploit such business. The term "Explicit Programming" means any movies and
other programming, the content of which would generally be considered in the
adult industry to be that of "explicit" adult movies or programming and more
explicit than "hot cable" or "cable" programming and which are otherwise
substantially similar in content and
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degree of explicitness to the movies and programming currently featured by EMI.
The term "Explicit Still Images" means any still images, the content of which
would generally be considered in the adult industry to be that of "adult" still
images and equally as explicit as, or more explicit than "hot cable" still
images, and which are otherwise substantially similar in content and degree of
explicitness to the still images currently featured on the Internet sites
maintained by EMI.
The term "Explicit Internet Business" means the business of providing
transmission worldwide of Explicit Programming and Explicit Still Images via the
Internet and licensing and distributing Explicit Programming and Explicit Still
Images for transmission worldwide via the Internet, including editing,
reproducing, advertising, promoting and marketing such Explicit Programming and
Explicit Still Images, and engaging in such other incidental activities
reasonably necessary to exploit such business. The term "Playback and Uplink
Business" means the business of providing playback and uplink services (as such
terms are generally understood in the cable television business) to any cable
program service in any medium used by such cable program service; provided that
the Company cannot provide playback and uplink services for any adult
programming unless the arrangements with the cable program service providing
such adult programming were negotiated on an arm's length basis, provide for the
payment for such services in cash and provide for service rates no more
favorable than the payment terms offered by the Company to Playboy for similar
services; provided further that the Company cannot provide playback and uplink
services for any adult programming other than (a) via satellite delivery or (b)
if the adult programming is for Playboy or Califa, via file servers linked to
cable systems or multi-channel video programming providers. The term "Additional
Permitted Activities" means (i) creating and distributing interactive adult
multimedia products, (ii) maintaining adult 900-number audiotext and similar
telephone services, (iii) creating and marketing adult industry-related
merchandise, and (iv) publishing and distributing adult magazines, books,
calendars and similar materials which feature Explicit Still Images.
The Playboy Non-Competition Agreement has the effect of limiting the
Company's participation in the adult television industry to the distribution of
explicit television networks (such as the EMI networks, if the Company were to
exercise the Emerald Media Option) solely in the C-Band market in the United
States, Canada and the Caribbean (the "Permitted Territory"). If the Company
were to exercise the Emerald Media Option and own and operate the EMI networks,
the Company could not (i) expand its distribution to include the cable or DBS
markets, (ii) expand distribution outside the Permitted Territory or (iii)
change the programming format of such networks to a less explicit network.
Pursuant to the Playboy Non-Competition Agreement, for the five years after
the Closing Date, neither Playboy nor the Company will interfere with the other
party's employee relationships and neither party will solicit the other party's
employees. In addition, Playboy will not directly or indirectly enter into any
agreement or other arrangement to acquire any licensing, distribution or
transmission rights with respect to Explicit Programming or Explicit Still
Images for transmission during the Playboy Restricted Period via C-Band
satellite in certain defined territories and the Company will not directly or
indirectly enter into any agreement or other arrangement to acquire any
licensing, distribution or transmission rights with respect to Explicit
Programming or Explicit Still Images for transmission during the Playboy
Restricted Period other than via C-Band satellite in certain defined
territories, via the Internet or for Additional Permitted Activities. If the
Company were to exercise the Emerald Media Option, the Company would cause EMI
to comply with these restrictions.
TERMS OF THE PLAYBOY MANDATORY SERVICES AGREEMENT
On the Closing Date, PEGI and the Company will enter into the Playboy
Mandatory Services Agreement, which will have a term of two years from the
Closing Date. Pursuant to the Playboy Mandatory Services Agreement, the Company
will provide complete transmission service for at least two of New Playboy's
networks, including (i) compression and encryption of the networks' signals,
(ii) playback of the networks 24 hours per day, seven days per week, (iii) fiber
optic terrestrial connectivity from the Operations Facility to an uplink
facility, (iv) uplink services 24 hours per day, seven days per week, and
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(v) subject to earlier termination by PEGI, authorization and deauthorization
for the transmission of the networks to cable head ends, direct to home
platforms and any other users designated by PEGI. PEGI may increase the number
of networks subject to this agreement for which the Company will provide
services. In addition, if PEGI elects to engage a third party to provide
additional services, including (i) traffic, library and quality control
services, (ii) satellite security, (iii) network integration and scheduling,
(iv) creative services or (v) duplication, editing and encoding for the
networks, PEGI shall retain the Company to provide such services; provided that
the Company can provide such services at the same price and quality as such
third party.
The Playboy Mandatory Services Agreement specifies the fees that PEGI will
pay the Company for uplink, playback, compression and encryption and
authorization services. The fee to be paid by PEGI for encryption services will
equal the amount of the Company's lease payments for the encoding system
described in the Transfer and Redemption Agreement. PEGI will also be obligated
to pay the Company an amount equal to the Company's costs of obtaining
terrestrial connectivity for the networks. In the event PEGI retains the Company
for additional services, a separate agreement will specify the fees for such
services.
In the Playboy Mandatory Services Agreement, each of the Company and PEGI
will make certain representations and warranties to the other party with respect
to its corporate power to execute such agreement and the enforceability of such
agreement. In addition, PEGI will represent and warrant to the Company that PEGI
will use its best efforts to ensure that the networks will not contain libelous
or slanderous material and will not violate any third party intellectual
property right.
In the event the Company transfers all or a substantial portion of the
assets relating to the Playback and Uplink Business (as defined in the Playboy
Non-Competition Agreement), the Playboy Mandatory Services Agreement may not be
assigned by the Company without the prior written consent of PEGI, which shall
not be unreasonably withheld. If PEGI does not consent to such assignment and
transfer, PEGI may terminate the Playboy Mandatory Services Agreement. In
addition, either party may terminate the Playboy Mandatory Services Agreement in
the event the other party materially breaches any of its obligations thereunder
and does not cure such breach within 10 days of notification of such breach. In
the event PEGI terminates the Playboy Mandatory Services Agreement for any
reason other than the Company's breach or assignment, PEGI will be required to
pay the Company the fees under the Playboy Mandatory Services Agreement on a
monthly basis for the remainder of the term thereof.
RELATIONSHIP WITH CALIFA
Immediately following the Merger, Califa and the Company will operate
independently, and neither will have any stock ownership, beneficial or
otherwise, in the other. For the purposes of governing certain of the ongoing
relationships between Califa and the Company after the Spice Hot Transaction and
the Share Transfer, on or before the Closing Date, Califa and the Company will
enter into the Califa Non-Competition Agreement and the Califa Mandatory
Services Agreement.
TERMS OF THE CALIFA NON-COMPETITION AGREEMENT
On the Closing Date, the Company and Califa will enter into the Califa
Non-Competition Agreement, which will have a term of seven years from the
Closing Date (the "Califa Restricted Period"). Pursuant to the Califa
Non-Competition Agreement, during the Califa Restricted Period Califa will not
engage in the Explicit C-Band Business in certain defined territories and will
not engage in certain other activities which would involve Califa in the
Explicit C-Band Business. For the five years after the Closing Date, Califa will
not interfere with the Company's relationships with its employees and will not
solicit any of the Company's employees. In addition, Califa will not acquire any
rights with respect to the transmission of Explicit Programming or Explicit
Still Images during the Califa Restricted Period via C-Band satellite in certain
defined territories.
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For purposes of the Califa Non-Competition Agreement, the terms "Explicit
C-Band Business," "Explicit Programming" and "Explicit Still Images" will have
the same meanings as such terms have in the Playboy Non-Competition Agreement.
TERMS OF THE CALIFA MANDATORY SERVICES AGREEMENT
On the Closing Date, the Company and Califa will enter into the Califa
Mandatory Services Agreement, which will have a term of two years from the
Closing Date. Pursuant to the Califa Mandatory Services Agreement, the Company
will provide complete transmission service for one network, including (i)
compression and encryption of the network's signal, (ii) playback of the network
24 hours per day, seven days per week, (iii) fiber optic terrestrial
connectivity from the Operations Facility to an uplink facility, (iv) uplink
services 24 hours per day, seven days per week, and (v) authorization and
deauthorization for the transmission of the network to cable head ends, direct
to home platforms and any other users designated by Califa. In addition, if
Califa elects to engage a third party to provide additional services, including
(i) traffic, library and quality control services, (ii) satellite security,
(iii) network integration and scheduling, (iv) creative services or (v)
duplication, editing and encoding for the network, Califa shall retain the
Company to provide such services; provided that the Company can provide such
services at the same price and quality as such third party.
The Califa Mandatory Services Agreement specifies the fees that Califa will
pay the Company for uplink, playback, compression and encryption and
authorization services. Califa will also be obligated to pay the Company an
amount equal to the Company's costs of obtaining terrestrial connectivity for
the networks. In the event Califa retains the Company for additional services, a
separate agreement will specify the fees for such services.
In the Califa Mandatory Services Agreement, each of the Company and Califa
will make certain representations and warranties to the other party with respect
to its corporate power to execute such agreement and the enforceability of such
agreement. In addition, Califa will represent and warrant to the Company that
Califa will use its best efforts to ensure that the network will not contain
libelous or slanderous material and will not violate any third party
intellectual property right.
In the event the Company transfers all or a substantial portion of the
assets relating to the Playback and Uplink Business (as defined in the Playboy
Non-Competition Agreement), the Califa Mandatory Services Agreement may not be
assigned by the Company without the prior written consent of Califa, which shall
not be unreasonably withheld. If Califa does not consent to such assignment and
transfer, Califa may terminate the Califa Mandatory Services Agreement. In
addiion, either party may terminate the Califa Mandatory Services Agreement in
the event the other party materially breaches any of its obligations thereunder
and does not cure such breach within 10 days of notification of such breach. In
the event Califa terminates the Califa Mandatory Services Agreement for any
reason other than the Company's breach or assignment, Califa will be required to
pay the Company the fees under the Califa Mandatory Services Agreement for the
remainder of the term thereof.
DIVIDEND POLICY
The Company does not anticipate paying any cash dividends in the foreseeable
future. The Company currently intends to retain future earnings to fund the
development and growth of its business. Payment of future dividends, if any,
will be at the discretion of the Company's Board of Directors after taking into
account various factors, including the Company's results of operations,
financial condition, current and anticipated cash needs and plans for expansion.
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SELECTED HISTORICAL FINANCIAL INFORMATION
The following table sets forth selected historical financial information for
the Company. The historical financial information of the Company as of and for
the years ended December 31, 1996 and 1997 have been derived from the financial
statements of the Company which are included elsewhere in this Prospectus. The
interim historical financial information set forth below at June 30, 1997 and
1998 and for the six-month periods ended June 30, 1997 and 1998 have been
derived from the unaudited financial statements included elsewhere in this
Prospectus. The unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of the financial position and results of
operations for those periods. Operating results for the six-month period ended
June 30, 1998 are not necessarily indicative of the results that may be expected
for the entire fiscal year ending December 31, 1998. The following historical
financial information should be read in conjunction with the Financial
Statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus.
The financial statements of the Company reflect the results of operations,
financial position and cash flows of the business to be contributed to the
Company by Spice. As a result, the financial statements of the Company have been
carved out from the financial statements of Spice using the historical results
of operations and historical basis of the assets and liabilities of such
business. Additionally, the financial statements of the Company include certain
assets, liabilities, revenues and expenses which were not historically recorded
at the level of, but are primarily associated with, such business. The Company
believes the assumptions underlying its financial statements to be reasonable.
The historical financial information may not be indicative of the Company's
future performance and does not necessarily reflect what the financial position
and results of operations of the Company would have been had the Company
operated as a separate stand-alone entity during the periods covered. Per share
data for net income/(loss) and dividends have not been presented because the
Company's business was operated through various divisions and subsidiaries of
Spice for the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- -------------------------
<S> <C> <C> <C> <C>
1996 1997 1997 1998
------------ ------------ ----------- ------------
STATEMENT OF OPERATIONS DATA:
Revenues: $ 10,329,000 $ 10,658,000 $ 6,002,000 $ 4,975,000
------------ ------------ ----------- ------------
Operating expenses:
Salaries, wages and benefits.......................... 1,356,000 2,198,000 982,000 1,367,000
Library amortization.................................. 296,000 378,000 189,000 158,000
Satellite costs....................................... 901,000 4,834,000 1,855,000 3,288,000
Selling, general and administrative expenses.......... 1,517,000 3,459,000 2,394,000 984,000
Depreciation of fixed assets.......................... 5,956,000 1,906,000 1,515,000 550,000
------------ ------------ ----------- ------------
Total operating expenses................................ 10,026,000 12,775,000 6,935,000 6,347,000
------------ ------------ ----------- ------------
Total income (loss) from operations................. 303,000 (2,117,000) (933,000) (1,372,000)
Interest expense........................................ 4,979,000 1,090,000 1,008,000 72,000
Gain from transponder lease amendment................... -- (2,348,000) (2,348,000) --
------------ ------------ ----------- ------------
Net income (loss)................................... $ (4,676,000) $ (859,000) $ 407,000 $ (1,444,000)
------------ ------------ ----------- ------------
------------ ------------ ----------- ------------
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets............................................ $ 58,615,000 $ 5,839,000 $ 5,971,000 $ 6,155,000
Current portion of obligations under capital leases..... $ 4,549,000 $ 522,000 $ 306,000 $ 560,000
Obligations under capital leases less current portion... $ 53,126,000 $ 552,000 $ 966,000 $ 242,000
Stockholder's equity.................................... $ (403,000) $ 4,324,000 $ 3,317,000 $ 5,102,000
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Financial Statements and notes thereto, and the other financial information
included elsewhere in this Prospectus. The Company's actual results or future
events could differ materially from those discussed in the forward-looking
statements contained in this Prospectus as a result of a number of factors,
including, without limitation, those discussed under "Risk Factors" above.
OVERVIEW
The Company is a subsidiary of Spice that, following the Closing Date, will
own all the assets of, and will be responsible for certain liabilities
associated with, the Operations Facility, the Emerald Media Option and certain
rights to Spice's library of adult films. The Company is a provider of technical
and creative services for television and Internet programming.
The Company was formed on July 20, 1998 in contemplation of the
Contribution, the Share Transfer and the Merger and as such has no operating
history. The Company's future performance will depend on its ability to function
as a stand-alone entity and to finance and manage expanding operations. There
can be no assurance that the Company's intended activities will be successful or
result in significant revenue or generate profits for the Company. See "Risk
Factors--Absence of History as a Stand-Alone Company," "Risk Factors--Limited
Operating History; Uncertainty of Future Profitability" and "Risk Factors--
History of Net Operating Losses."
After the Merger, the Company's customers will initially be EMI, PEGI,
Califa and BET. See "Risk Factors--Reliance on Limited Number of Customers." The
Company's ability to achieve and maintain profitability depends on its ability
to retain its existing customers and to attract and maintain new customers for
its services. There can be no assurance that it will be able to do so. The
Company currently intends to rely on the business contacts and experience of its
management to develop new business. There can be no assurance that management
will be successful in developing new business. See "Risk Factors-- Dependence on
Senior Management and Other Key Employees."
The Company utilized satellite transponder services pursuant to a
Transponder Services Agreement (the "Transponder Agreement") dated February 7,
1995 between Spice and AT&T Corp. ("AT&T"). On March 31, 1997, Spice and Loral
SpaceCom Corporation d/b/a Loral Skynet ("Loral"), as successor to AT&T, amended
the Transponder Agreement by changing the expiration date to October 31, 2004,
reducing the term by approximately four years. As a result of this amendment,
the Transponder Agreement was reclassified for accounting purposes (the
"Reclassification") as an operating lease rather than a capital lease commencing
on March 31, 1997. As a result of the Reclassification, the Company recorded a
one-time gain of approximately $2.3 million in the year ended December 31, 1997.
On the Closing Date, the Company will enter into a new agreement with Loral for
satellite transponder services, which will replace a portion of the Transponder
Agreement. See "The Contribution and the Share Transfer--Terms of the Transfer
and Redemption Agreement."
RESULTS OF OPERATIONS
The financial statements of the Company reflect the results of operations,
financial position and cash flows of the business to be contributed to the
Company by Spice. As a result, the financial statements of the Company have been
carved out from the financial statements of Spice using the historical results
of operations and historical basis of the assets and liabilities of such
business. Additionally, the financial statements of the Company include certain
assets, liabilities, revenues and expenses which were not historically recorded
at the level of, but are primarily associated with, such business. The Company
believes the assumptions underlying its financial statements to be reasonable.
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<PAGE>
The financial information included herein, however, may not necessarily
reflect the results of operations, financial position and cash flows of the
Company in the future or what the results of operations, financial position and
cash flows would have been had the Company been a separate stand-alone entity
during the periods presented. The financial information included herein does not
reflect the many changes that will occur in the funding and operations of the
Company as a result of the Contribution, the Share Transfer and the Merger.
Revenues were earned principally from services provided to two customers,
EMI and Spice. Revenues attributable to EMI were recorded based upon contractual
amounts for playback and transponder services. Revenues attributable to Spice
relate to network operations, post-production and technical services provided
internally. These revenues have been recorded based on either (i) services
provided to unrelated third party customers or (ii) costs associated with an
applicable service plus an appropriate markup based on a reasonable assessment
of a market-based charge. Management believes that the methods used to record
revenues are reasonable.
THE EMERALD MEDIA RECEIVABLE. The Company established a reserve against the
receivable from EMI to the Company (the "EMI Receivable") at the end of the
fourth quarter of 1996, the first quarter in which the Company provided services
to EMI, because of the uncertainty of EMI's ability to meet its obligations to
the Company on a timely basis. Since establishing the reserve, the Company has
adjusted its reserve against the EMI Receivable each quarter so that the net
realizable value of the EMI Receivable equals the exercise price of the Emerald
Media Option. The Company has determined that the minimum net realizable value
of the EMI Receivable is equal to the exercise price of the Emerald Media Option
because the Company could exercise the Emerald Media Option and acquire EMI by
forgiving an amount of the EMI Receivable equal to such exercise price. The
Company continues to assess the collectibility of the EMI Receivable on a
quarterly basis.
The aggregate amount of the EMI Receivable at June 30, 1998 was
approximately $3.3 million; the Company has reserved $2.5 million against the
EMI Receivable.
The Company carefully monitors EMI's financial position to determine EMI's
ability to pay its current obligations to the Company and to pay down the EMI
Receivable. Based on the Company's discussions with EMI's management, EMI
instituted a series of operating adjustments during the first six months of 1998
to improve its results, including changes in the programming, promotion and
branding of its networks and improvements in the call center which processes
orders for the EMI networks. Cash received from EMI in the first six months of
1998 has increased from the cash received from EMI in the corresponding period
of 1997. Based on discussions with EMI's management, the Company believes that
these operating improvements will provide EMI with sufficient liquidity and
capital resources to meet EMI's anticipated cash obligations to the Company.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
NET INCOME (LOSS). The Company reported a net loss of $1.4 million for the
six months ended June 30, 1998 as compared to net income of $0.4 million for the
six months ended June 30, 1997. The decline in net income was primarily
attributable to the Reclassification which resulted in a gain of approximately
$2.3 million in the six months ended June 30, 1997. Had the Company classified
the Transponder Agreement as an operating lease for the entire six months ended
June 30, 1997, the Company would have reported a net loss of $1.6 million for
such period.
REVENUES. The Company reported total revenue of $5.0 million for the six
months ended June 30, 1998 as compared to total revenue of $6.0 million for the
six months ended June 30, 1997. The decline in total revenue was primarily
attributable to a decrease in sales of transponder capacity and a decline in
revenue associated with post-production activities.
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SALARIES, WAGES AND BENEFITS. The Company reported salaries, wages and
benefits of $1.4 million for the six months ended June 30, 1998 as compared to
$1.0 million for the six months ended June 30, 1997. The increase was primarily
attributable to the commencement of playback services from the Operations
Facility as well as expansions in the post-production department.
LIBRARY AMORTIZATION. The Company reported library amortization for the six
months ended June 30, 1998 of approximately $0.2 million, which was
substantially the same for the six months ended June 30, 1997.
SATELLITE, PLAYBACK AND UPLINK EXPENSES. The Company reported satellite,
playback and uplink expenses of $3.3 million for the six months ended June 30,
1998 as compared to $1.9 million for the six months ended June 30, 1997. The
increase was primarily attributable to the Reclassification. Offsetting this
increase was a decline in playback expenses which resulted from lower third
party costs associated with the Company's providing playback services
internally.
In the six months ended June 30, 1997, the Company treated $1.6 million of
transponder lease payments as principal and interest payments under a capital
lease obligation. Had the Transponder Agreement been classified as an operating
lease for the entire six months ended June 30, 1997 the Company would have
reported additional satellite expense of $1.6 million and a decrease in
depreciation and interest expense of $1.0 million and $0.9 million,
respectively, for such period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company reported selling,
general and administrative expenses of $1.0 million for the six months ended
June 30, 1998 as compared to $2.4 million for the six months ended June 30,
1997. The decrease was primarily attributable to a decline in bad debt expense
associated with the EMI Receivable and a reduction of post-production expenses.
DEPRECIATION OF FIXED ASSETS. The Company reported depreciation of fixed
assets of $0.6 million for the six months ended June 30, 1998 as compared to
$1.5 million for the six months ended June 30, 1997. The decline in depreciation
expense was primarily attributable to the Reclassification.
INTEREST EXPENSE. The Company reported interest expense of $72,000 for the
six months ended June 30, 1998 as compared to $1.0 million for the six months
ended June 30, 1997. The decline in interest expense was primarily due to the
Reclassification.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET INCOME (LOSS). The Company reported a net loss of $0.9 million for the
year ended December 31, 1997 as compared to a net loss of $4.7 million for the
year ended December 31, 1996. The reduction in net loss was primarily
attributable to the Reclassification. Had the Transponder Agreement been
classified as an operating lease in both 1997 and 1996 the Company would have
reported net losses in those years of $2.9 million and $2.7 million,
respectively.
REVENUES. The Company reported total revenue of $10.7 million for the year
ended December 31, 1997, as compared to total revenue of $10.3 million for the
year ended December 31, 1996. The increase in total revenue was primarily due to
additional revenue of $4.4 million from EMI for the sale of excess transponder
capacity (which resulted from the digital compression of Spice's domestic
networks onto one transponder) bundled with playback and other related services
and additional revenue of $0.4 million from Internet hosting services and other
sales of transponder capacity. Partially offsetting this increase was a decline
in revenues of $4.5 million from the sale of transponder capacity to Spice due
to the digital compression.
On February 1, 1997, the Company began providing to Spice playback and
uplink services originating from the Operations Facility for Spice's domestic
networks. Prior to February 1997, the Company acquired playback and uplink
services for Spice from a third party. The Company reported a decline in revenue
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from its provision of playback and uplink services to Spice of $0.7 million for
the year ended December 31, 1997 as compared with the year ended December 31,
1996 as a result of lower costs from the use of the Operations Facility to
provide playback services. Offsetting the decline in revenues from playback and
uplink services was an increase in post-production revenue from Spice totaling
$0.6 million.
SALARIES, WAGES AND BENEFITS. The Company reported salaries, wages and
benefits of $2.2 million for the year ended December 31, 1997 as compared to
$1.4 million for the year ended December 31, 1996. The increase was primarily
attributable to the costs of hiring additional employees to operate the
Operations Facility as well as the expansion of the post-production department.
LIBRARY AMORTIZATION. The Company reported library amortization of $0.4
million for the year ended December 31, 1997, which was comparable to library
amortization of $0.3 million for the year ended December 31, 1996.
SATELLITE, PLAYBACK AND UPLINK EXPENSES. The Company reported satellite,
playback and uplink expenses of $4.8 million for the year ended December 31,
1997 as compared to $0.9 million for the year ended December 31, 1996. The
increase was primarily attributable to the Reclassification. Offsetting this
increase was a decline in playback expenses which resulted from the decision to
provide playback services internally.
In 1997, the Company included $4.4 million of transponder lease payments as
satellite expense. In 1996 the Company included $7.6 million of transponder
lease payments as principal and interest expenses on the Transponder Agreement
which was treated at that time as a capital lease. Had the Transponder Agreement
been classified as an operating lease from its inception, the Company would have
reported additional satellite expense of approximately $1.6 million and $7.6
million in 1997 and 1996, respectively. In addition, the Company would have
reported a decrease in depreciation of $1.0 million and $5.3 million, as well as
a decrease in interest expense of $0.9 million and $5.0 million, in 1997 and
1996, respectively.
On January 11, 1997, AT&T permanently pre-empted one of Spice's unprotected
transponders. This resulted in the reduction of the Company's satellite
transponder costs from $635,000 to $520,000 per month.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company reported selling,
general and administrative expenses of $3.5 million for the year ended December
31, 1997 as compared to $1.5 million for the year ended December 31, 1996. The
increase was primarily attributable to the bad debt expense associated with the
EMI Receivable in 1997 and an increase in expenses associated with the expansion
of the post-production department and the Operations Facility. See "--Results of
Operations--The Emerald Media Receivable."
DEPRECIATION OF FIXED ASSETS. The Company reported depreciation of fixed
assets of $1.9 million for the year ended December 31, 1997 as compared to $6.0
million for the year ended December 31, 1996. The decline in depreciation
expense was primarily attributable to the Reclassification.
INTEREST EXPENSE. The Company reported interest expense of $1.1 million for
the year ended December 31, 1997 as compared to $5.0 million for the year ended
December 31, 1996. The decline in interest expense was primarily attributable to
the Reclassification.
LIQUIDITY AND CAPITAL RESOURCES
Spice uses a centralized approach to cash management and the financing of
its operations. As a result, Spice funded all of the Company's activities. For
the years ended December 31, 1996 and 1997, Spice provided funding of $1.3
million and $5.6 million, respectively, to the Company. The increase in funding
provided by Spice in 1997 was primarily attributable to net losses adjusted for
the non-cash gain associated with the Reclassification and the payment in 1997
of certain transponder lease payments that had been due
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in 1996. Also contributing to the Company's cash requirements in the years ended
December 31, 1997 and 1996 were the Company's investment in a film library and
property, plant and equipment. For the six months ended June 30, 1997 and 1998,
Spice provided funding of $3.3 million and $2.2 million, respectively, to the
Company. The decline in funding provided by Spice was primarily attributable to
the payment of deferred transponder lease obligations in the six months ended
June 30, 1997, as compared to the fact that no excess payments were made during
the six months ended June 30, 1998, and the increase in the EMI receivable. Also
contributing to the Company's cash requirements in the six months ended June 30,
1998 and 1997 were the Company's repayment of capital lease obligations and
additional investment in a library of movies and property, plant and equipment.
The Company's primary source of liquidity following the Closing Date will be
a $1.5 million revolving credit facility (the "Credit Facility") that will be
provided by certain officers and directors of the Company (the "Lenders").
Advances under the Credit Facility will bear interest at 11% per annum and the
Credit Facility will mature on the second anniversary of the Closing Date. In
consideration of the Lenders providing the Credit Facility, the Company will
grant the Lenders an aggregate of 45,000 warrants. See "Certain Transactions."
The Company anticipates increased payments from EMI under its service agreements
with the Company as a result of EMI's modification of its agreements with one of
its major service providers and other reductions in its cost structure. The
Company also hopes to realize revenues from the marketing of network operations,
technical and creative services and sales of its excess transponder capacity.
The Company believes it can provide the playback and transponder services with
minimal incremental costs. There can be no assurances that the Company will be
successful in marketing these services or that, if successful, it can do so at a
profit.
The Company believes that cash generated by operations for fiscal 1999 will
be in excess of $1.0 million. The Company believes that the increase in cash
generated by operations will result from the following: (i) improvements in
EMI's operations which would enable EMI to pay fees when due for transponder,
playback and other services on a timely basis and (ii) the sale of playback and
transponder services by the Company to new customers. If the Company requires
additional cash to fund its operations, the Credit Facility will be available.
The Company believes that the combination of cash generated by operations and
the Credit Facility will be sufficient to meet the Company's operating cash flow
needs, planned capital expenditures and debt service requirements for the next
12 months.
YEAR 2000 COMPLIANCE
The Company is implementing a Year 2000 program to ensure that its computer
systems and applications will function properly beyond the year 1999. The
Company believes that adequate resources have been allocated for this purpose
and expects its Year 2000 date conversion program to be completed on a timely
basis. The Company does not believe that the cost of implementing its Year 2000
program will have a material effect on the Company's financial condition or
results of operations. However, there can be no assurance that the Company has
or will identify all Year 2000 problems in its computer systems in advance of
their occurrence or that the Company will be able to successfully remedy any
problems that are discovered. The expenses of the Company's efforts to address
such problems, or the expenses or liabilities to which the Company may become
subject as a result of such problems, could have a material adverse affect on
the Company's results of operations and financial condition. In addition, the
revenue stream and financial ability of existing suppliers, service providers or
customers may be adversely impacted by Year 2000 problems, which could cause
fluctuations in the Company's revenues and operating profitability. None of the
Company's existing suppliers, service providers or customers have indicated to
the Company that Year 2000 issues will have a material effect on their
operations; however, there can be no assurance that this will be the case.
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BUSINESS
Directrix, Inc. (the "Company") is a Delaware corporation formed by Spice
that will own all of the assets of, and will be responsible for certain
liabilities associated with, the Operations Facility and will also own the
Emerald Media Option and certain rights to Spice's library of adult films. The
Company is a provider of television production and delivery and Internet hosting
services. If the Company exercises the Emerald Media Option, the Company will
also be a provider of explicit adult television entertainment. The Company
currently has no intent to exercise the Emerald Media Option.
The Company is a provider of technical and creative services for television
and Internet programming. The Company provides services which integrate and
apply a variety of systems and processes to enhance the creation and
distribution of such content through various channels, including cable, fiber,
satellite delivery and file server systems and the Internet. The Company edits
and assembles television and Internet programming into various formats, creates
interstitial and promotional graphics, animation and other material to support
the brand identity of such programming, provides automated systems to originate
such programming via its state-of-the-art playback facilities and also provides
library storage and media archival and duplication services.
EMI owns and operates four of the leading C-Band explicit adult programming
television networks and an explicit adult content Internet site. The Company
provides post-production, playback, transponder and Internet hosting services
for EMI.
The Company was formed on July 20, 1998 in contemplation of the
Contribution, the Share Transfer and the Merger. The Company is operated under
the direction of J. Roger Faherty, Chairman of the Board and Chief Executive
Officer, Donald McDonald, President, and Richard Kirby, Executive Vice
President. Mr. Faherty has been Chairman of the Board, Chief Executive Officer
and President of Spice; Mr. McDonald has been President of Spice Direct, Inc., a
subsidiary of Spice; and Mr. Kirby has been Senior Vice President, Network
Operations, and Chief Technology Officer of Spice. See "Management." Messrs.
Faherty, McDonald and Kirby have a combined 36 years experience in the
programming industry.
BUSINESS STRATEGY
The key elements of the Company's business strategy are to:
(i) expand delivery of individual television production and delivery
services to other television networks. After the Merger, the Company will
provide playback services to EMI, PEGI and Califa. In addition, the Company
will provide transponder services to EMI and BET. The Company will rely on
the business contacts and experience of Messrs. Faherty, McDonald and Kirby
to attempt to attract additional customers and market the Company's
services.
(ii) leverage its strengths and capabilities in playback services and
its available transponder capacity to develop a market for television
production and delivery services. As a result of its experience in providing
playback, production and transponder services for Spice and EMI, the Company
can deliver programming via cable, satellite, fiber optics, regionally
deployed video file servers and the Internet. By offering a comprehensive
range of creative, technical and transmission services ("network-in-a-box
services"), the Company intends to become a "one-stop-shop" for the creation
and distribution of television networks.
(iii) leverage its experience in developing Spice's and EMI's Internet
sites into providing web hosting and Internet broadcasting services to other
Internet sites. The Company currently can host a website that averages
access by 650,000 subscribers daily and provide web authoring, web-based
database publishing, creation of graphics and animation. In addition, the
Company can simultaneously "web-cast" programming on a pay-per-view or
monthly subscription basis by way of its hybrid digital/ analog switching
center. The Company will rely on the business contacts and experience of
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Messrs. Faherty, McDonald and Kirby to attempt to attract customers and
market the Company's Internet services.
(iv) invest in or acquire additional businesses in which management of
the Company has experience or can add value. The Company has not identified
a specific industry or business on which it initially intends to focus and
has no present plans, proposals, arrangements or understandings with respect
to the acquisition of, or investment in, any specific business. Any such
investment or acquisition by the Company would present certain risks to
stockholders. See "Risk Factors--Risks Related to Investment and Acquisition
Strategy." In connection with this strategy and with the intent to maximize
the value of the Company to stockholders, the Company may deem it necessary
or in its best interests to sell some or all of its assets or the assets
relating to EMI. The Company currently has no intent to divest any portion
of its business. The Company is prohibited by the Playboy Non-Competition
Agreement from entering into certain areas of adult entertainment and will
not be able to invest in or acquire businesses which operate in such areas
of the adult entertainment industry. See "Arrangements After the
Merger--Relationship with New Playboy--Terms of the Playboy Non-Competition
Agreement."
(v) assess whether to exercise the Emerald Media Option, including
analyzing the ability to increase subscriptions to its adult programming
networks. See "--Emerald Media Option."
GENERAL
The Company is a provider of technical and creative services to owners,
producers and distributors of television and Internet programming. The Company
provides post-production, facilities, network operations and engineering
services, all of which are necessary to create, assemble and distribute
television programming via satellite or the Internet. Post-production and
facility services include video editing, library storage and media duplication.
Network operations and engineering services include assembling television
programming provided by the customer into a 24-hour "network" format, creating
interstitial and promotional graphics, animation and other material that support
the brand identity of the television programming, and providing automated
systems to deliver the programming to air via playback facilities. The Company
believes that it operates one of the larger digital technology playback systems
in the United States.
OVERVIEW OF PROGRAMMING
In North America, television programming is delivered to the viewer via
over-the-air broadcast, cable television and satellite delivery systems. The
demand for entertainment content has increased significantly as a result of the
introduction of new broadcast networks, direct broadcast satellite systems, pay
television, increased cable penetration and the growth of home video. The number
of television networks continues to increase primarily as a result of the
increase in the channel capacity of cable television and direct broadcast
satellite systems due to the ability to deliver digitally compressed television
channels to the home. Digital compression expands a cable television system's
channel capacity by a factor of 10 to 16 times that achievable in an
uncompressed analog environment. In addition, digital compression has
dramatically reduced transponder costs, the largest cost component of operating
a satellite-delivered television network, since a single transponder can
transmit up to 16 digitally compressed television channels. The new television
networks have created a need for more hours of programming, which should
increase demand for network services, such as those provided by the Company. The
Company's services support the delivery of television programming through
various channels of distribution, including cable, fiber, satellite delivery and
file server systems and the Internet.
Satellite delivery of video programming is accomplished as follows: The
video programming is assembled and played back at a playback facility. The
program signal is then encoded so that the signal is unintelligible unless it is
passed through the proper decoding devices and is transmitted from the playback
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facility over fiber optic lines to an uplink facility for delivery via
satellite. The signal may be transmitted to the satellite as an analog signal or
digitally compressed and combined with other signals and transmitted (uplinked)
from an earth station to a designated transponder on a communications satellite.
The transponder receives the analog or digitally compressed program signal
uplinked by the earth station, amplifies the signal and broadcasts (downlinks)
it to satellite dishes located within the satellite's area of signal coverage.
Each transponder can retransmit up to sixteen complete digitally compressed
color television signals or one analog color television signal. For cable
systems, the encrypted digitally compressed signal received by the cable
system's satellite dish is then decoded and decompressed. The cable system then
rescrambles the signal using scrambling technology compatible with the
addressable set top boxes deployed in its system and then distributes the signal
throughout its cable system. For direct-to-home subscribers, their satellite
receivers contain the descrambling equipment to decode and decompress the
encrypted, digitally compressed signal. To offer premium or pay-per-view
services, the set top boxes and satellite receivers must have an electronic
"address" and the cable system or satellite service provider must be able to
remotely control each customer's set top box or satellite receiver and cause it
to descramble the television signal for a specific period of time after the
customer has made a purchase of a premium service or pay-per-view feature. The
ability to control the scrambling and descrambling of a signal is essential for
marketing and delivery of premium and pay-per-view services.
TECHNOLOGY
Spice began construction of the Operations Facility in the second quarter of
1995. Approximately $1.5 million of the Operations Facility was financed by a
capital lease with IBM Credit Corporation ("ICC"), which was later renegotiated.
Under the terms of the revised capital lease, ICC provided additional financing,
which Spice used to acquire video file servers and tape archives, and ICC agreed
to reduce the monthly lease payments. The Operations Facility went into service
in the first quarter of 1997.
Although the Operations Facility integrates both analog (videotape) and
digital (data files) technologies to accomplish the objectives of its customers,
the Company primarily uses its digital infrastructure. Digital information is
easier to store, easier to manipulate and provides higher quality transmissions.
In addition, videotape can wear out, in contrast to digitized information. The
Company believes that the television programming industry is moving toward an
entirely digital platform and that, due to its advanced digital equipment, it is
well positioned to provide efficient and effective playback services.
Utilizing the Operations Facility, the Company can offer network-in-a-box
services to multiple programming networks. The Company believes that it can
increase the number of channels for which it provides playback services at
little extra cost in order to meet any increased demand. However, there can be
no assurance that this will be the case.
The Company believes that its Operations Facility is state-of-the-art. In
addition, as new and upgraded technologies develop, the Company believes it can
easily adapt to such changes, and can increase the capacity of the Operations
Facility, at little extra cost; however, there can be no assurance that this
will be the case.
SERVICES
The Company will be able to provide all or a portion of the technical and
creative services necessary to create and distribute a television network over
any one of the several available delivery methods including cable, DBS, the
Internet and video-on-demand regional file servers.
POST-PRODUCTION AND FACILITIES
The Company operates two large analog linear edit facilities. One edit room
performs the majority of the "creative" or higher-end post production, utilizing
switchers, editors, character generators and Beta SP
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and digital beta equipment, as well as a voice-over booth. The second edit room
is used to perform most of the long-form feature airmastering and promotional
reel compilation. In addition, the Company has a third editing facility for
digital non-linear editing and two graphic suites used to produce
three-dimensional graphics, animation and various forms of content encoding and
decoding. The Company also supplies music from its production music libraries.
Interstitial pre-compilation is performed in the Company's editing facilities,
using software which permits the efficient assembly of high production value
visual effects.
The Company also maintains duplication facilities for both analog and
digital tape. An average of 110 75-minute features and 120 minutes of
interstitial material is digitized monthly. The Company utilizes primarily two
MPEG-2 encoders (the industry standard for the digital encoding of programming),
which are capable of taking source material from either analog or digital tape
and creating digitized files for video file servers. At the same time, the
Company can generate such material in RealVideo and Microsoft NetShow formats
(currently the most popular methods of encoding Internet video streams) for
full-motion video transmission via the Internet. The duplication facilities are
equipped to digitize materials in digital-video-disc format and in alternative
formats such as AVI, MPEG-1 and QuickTime. In addition, the Company currently
provides one-to-one analog tape dubbing. The analog tape duplication facilities
can be expanded to accommodate mass simultaneous tape duplication in various
tape formats, including Beta SP, DigiBeta, VHS and SVHS.
The Company provides library services for storage and traffic of broadcast
master tapes. Approximately 15,000 tapes, consisting of studio masters, air
tapes and edit materials, are housed in storage. The Company's high-density
storage facility can expand its capacity to include an additional 21,700
betacam-sized tapes or an equivalent number of digital linear tapes and CD-ROMs.
The Company also maintains a library of still images on slides and photo CDs.
The Company offers trafficking services to keep track of analog and digital
content by maintaining a traffic database which monitors the location and format
of all programming within its facilities. Trafficking information is available
to customers 24 hours per day, seven days per week. The Company's barcode system
loads and stores both analog tape and digitized programming in the memory of its
video file servers.
Approximately 74 hours per month are spent on mastering (rendering suitable
as to format and quality for playback or streaming (as defined herein))
materials for the two Spice networks: 50 hours for features and 24 hours for
interstitial programming. In addition, the Company provides full post-production
services for two originally-produced Spice movies per month, including editing,
graphics, titling, music and duplication. In addition, approximately sixty
explicit movies are mastered each month for the four EMI networks, encompassing
80 hours per month.
NETWORK OPERATIONS AND ENGINEERING
The Company also provides videotape playback and origination services. Prior
to broadcast, program and interstitial material are checked for quality control
and may be pre-compiled into final broadcast form prior to on-air playback.
Control procedures are used to ensure on-air reliability. A variety of movie and
show formatting and time compression services are available to prepare
programming for distribution. Commercial, promotional, billboard, warning, logo
and other integration, as well as source identification encoding, is performed.
The Company also provides program log and traffic support to programmers and
affiliate relations and station coordination to aid their ordering and billing
services. The Company accepts daily program schedules, programs, promotions and
advertising, and delivers 24 hours of seamless daily programming to home
satellite subscribers. The Company uses automated robotics systems for broadcast
playback. Playback systems are both videotape (analog) and video file
server-based (digital), and subtitling and "local avail" (commercial
advertisement insertion) are supported.
The Company currently uses its facilities to service seven channels, the
four EMI Networks, the Spice network, the Adam & Eve network and the Spice Hot
network. Three channels are digital, originating
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from MPEG-2 video file servers, and four channels are from analog tape. The
Company protects all channels with at least one layer of analog tape back-up.
The Company's playback capacity can be expanded to accommodate up to sixteen
channels.
The Company operates industry-standard encryption and/or compression systems
as needed for customer satellite distribution. The Company owns one Digicipher
II digital encryption and encoding system and three VideoCipher II analog
systems, and leases an additional three VideoCipher systems as a back-up. The
Company uses a customized approach to satisfy each customer's timeliness,
flexibility and reliability requirements. Utilizing automated software control,
the programming is then "streamed" from the video file servers and transmitted
either to an Internet site or over fiber optic lines to an uplink facility for
delivery via satellite. The Company has a contract with Atlantic Satellite
Communications, Inc. ("ASC") for uplink services for the Spice Hot network and
the other Spice networks. ASC provides an uplink facility which receives
programming signals from the Company via fiber optic cable and sends such
signals to the transponders leased by the Company. ASC is equipped with the
necessary satellite equipment, power supplies and other equipment necessary to
provide 24-hour transmission of programming. ASC is currently the Company's sole
uplink source; however, there are other providers of uplink facilities. If the
Company's agreement with ASC were canceled or terminated, the Company believes
that it could replace such services without a material interruption or adverse
effect on its results of operations or business, although no assurance can be
given with respect thereto. The Company will secure additional uplink services
from ASC for new customers; alternatively, customers may arrange to have their
signal delivered directly to ASC or another uplink facility, affording customers
greater flexibility.
The Company utilizes satellite transponder services pursuant to the
Transponder Agreement. On the Closing Date, the Company will enter into a new
agreement with Loral pursuant to which the Company will lease three
transponders, one "platinum" transponder and two "bronze" transponders, directly
from Loral. The new agreement with Loral will expire in 2004. Platinum service
refers to protected, non-pre-emptible transponder services. With "platinum"
service, the transponder service provider is required to broadcast a signal on
the requisite number of transponders, regardless of problems with any specific
transponder or satellite. Bronze service refers to non-protected pre-emptible
transponder services. With "bronze" service, the transponder service provider is
not required to continue to broadcast a signal (although it will do so if there
is an available transponder) if there is trouble with the specific transponder
or satellite, and may pre-empt such signal in order to provide platinum service
to another party.
The Company believes it can expand its broadcasting services by taking
advantage of this transponder capacity. As a result of new technology, up to
sixteen digitally compressed signals or two digitally compressed signals plus
one analog signal can be broadcast from a single transponder. By expanding and
subleasing the excess transponder capacity for ad hoc or other occasional use
and bundling this transponder capacity with its other broadcast services, the
Company can offer a complete broadcast package at a fixed price. The Company
intends to acquire Scientific Atlanta's PowerVu digital compression system,
which will allow it to add two digitally compressed signals to each analog
signal, at a cost of approximately $200,000 per system. At current market prices
for digitally compressed transponder services, the Company believes it can
recover this investment in approximately six months. In addition, the Company is
negotiating an agreement with EMI whereby EMI will grant the Company the right
to insert two digitally compressed television channels onto each of EMI's two
transponders (and any replacements thereof). As a result, using the Company's
transponders and the capacity to be provided by EMI, the Company will be able to
provide digitally compressed transponder services for an additional ten
television channels. The Company plans to monitor the marketplace for
transponder services with a view to putting its transponder capacity to the most
profitable use.
Using the Operations Facility as a hub for the distribution of digitized
video content, Spice pioneered the use of regionally deployed video file servers
to deliver video programming. Video file servers are computers which store and
distribute compressed digitized programming. Regionally deployed video file
servers allow a distributor to tailor the programming distributed to the local
demographic audience and
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provide near-video-on-demand and video-on-demand which cannot be effected by
traditional satellite distribution. The Company believes it can leverage the
experience of its personnel and management to provide services in connection
with the use of video file servers including digitization of content, turnkey
refresh of file servers (the ability to replace the video content of the file
server) and remote file server management (maintenance of the replacement of
video, scheduling of the delivery of content and distribution of content).
Because the use of video file servers is in an early developmental stage, the
Company cannot accurately assess the market for these services.
INTERNET HOSTING
The Company will offer Internet hosting services on a 24 hours per day,
seven days per week basis. The Company currently is capable of hosting a website
averaging access by 650,000 subscribers daily and can provide web authoring,
web-based database publishing, creation of graphics and animation. The Company
can "stream" (originating a live video/audio feed) live video or play back upon
demand pre-recorded or digitized video over the Internet. In addition, live
web-casting of programming can be generated simultaneously with its distribution
via satellite.
The Company currently hosts EMI's free Internet site, SXTV.com, providing
promotional materials and adult movie clips for the EMI networks. Approximately
100,000 Internet users access SXTV.com per day. The Company is currently testing
for EMI a simultaneous "web-cast" of the EMI networks (broadcasting which can be
viewed by a subscriber over the Internet) and in the future plans to make
web-casts available to the Internet visitors on a pay-per-view or monthly
subscription basis. The Company is also developing for EMI a database accessible
library of video clips, which can be selected and downloaded by subscribers for
a fee. Once the web-casting and library have been fully developed, the Company
may convert parts of SXTV.com to pay sites for EMI.
SALES AND MARKETING
The Company plans to position itself as a video service firm that in one
location can store, catalog and distribute video content in any medium,
including analog video, digital video, internet streaming video and digital
video disc. By offering network-in-a-box services, the Company intends to become
a "one-stop-shop" for the creation and distribution of television networks and
Internet programming. The Company will rely on the business contacts and
experience of Messrs. Faherty, McDonald and Kirby to attract customers and
market the Company's business. There can be no assurance that the Company will
be able to attract and maintain additional customers. In the event the Company
does not acquire new customers, it will be materially and adversely affected.
Once the Company has developed additional clients, the Company intends to hire
sales personnel.
CUSTOMERS
The Company's customers are currently comprised of Spice, EMI and BET. After
the Merger, the Company's customers will be comprised of EMI, PEGI, Califa and
BET. The Company will provide complete post-production, facilities, network
operations and engineering services for the four EMI networks and transponder
services for three EMI networks for a monthly fee. In addition, the Company will
provide Internet hosting services for EMI and will license its rights to Spice's
library of adult films to EMI. Pursuant to the Playboy Mandatory Services
Agreement, the Company will provide network operations and engineering services
for a minimum of two networks for two years, which period may be extended at
PEGI's request, subject to negotiation of services and prices. At PEGI's
request, the Company may also provide playback and uplink services for
additional Playboy channels. In addition, if PEGI elects to engage a third party
to provide additional services, including (i) traffic, library and quality
control services, (ii) satellite security, (iii) network integration and
scheduling, (iv) creative services or (v) duplication, editing and encoding for
the networks, PEGI shall retain the Company to provide such services; provided
that the Company can provide such services at the same price and quality as such
third
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party. See "Arrangements After the Merger--Relationship with New Playboy."
Pursuant to the Califa Mandatory Services Agreement, the Company will provide
network operations and engineering services for one network for two years, which
period may be extended at Califa's request, subject to negotiation of services
and prices. In addition, if Califa elects to engage a third party to provide
additional services, including (i) traffic, library and quality control
services, (ii) satellite security, (iii) network integration and scheduling,
(iv) creative services or (v) duplication, editing and encoding for the network,
Califa shall retain the Company to provide such services; provided that the
Company can provide such services at the same price and quality as such third
party. See "Arrangements After the Merger--Relationship with Califa." In
addition, the Company provides digitally compressed transponder services to BET
using a channel on the transponder to be retained by Spice. Spice will permit
the Company to continue to use this channel at no charge, subject to Spice's
right to recapture the channel upon prior notice to the Company. See "The
Contribution and the Share Transfer--Terms of the Transfer and Redemption
Agreement."
The Company believes it can build a customer base for its playback services
by providing state-of-the-art equipment and technology and superior customer
service at competitive prices. The Company will offer its services in a single
package, for one price, or on an a la carte basis, with the price per service
determined pursuant to a rate card. The Company believes that a la carte
services will be attractive to potential customers who would use the Company to
provide basic network operational services.
Potential customers of the Company may include television and Internet
programmers, producers of original programming, owners of television and film
libraries, creators of visual effects and television and film studios. As
reported by the National Cable Television Association, more than 50 new channels
are expected to be launched in 1998, many of which will be unaffiliated with
existing networks. These new networks will be the Company's principal target
customers. See "--Sales and Marketing."
COMPETITION
The broadcast services segment of the entertainment services industry is
highly fragmented with no single participant having a dominant share.
Competitors include independent service providers, such as Four Media Company
and Speer Communications, Ltd., and television programmers who perform such
services in-house. The Company's current and potential competitors are likely to
have substantially greater financial, technical, marketing or other resources
than the Company.
EMERALD MEDIA OPTION
In an effort to productively utilize available transponder capacity, Spice
began providing transponder services to EMI in the fourth quarter of 1996. As
part of these arrangements, EMI granted Spice the Emerald Media Option. Prior to
consummation of the Merger, Spice will contribute the Emerald Media Option to
the Company. See "The Contribution and the Share Transfer." The Emerald Media
Option currently provides that the Company may acquire all of the assets or
capital stock of EMI for $755,000. The Emerald Media Option has no expiration
date and the Company plans to hold the Emerald Media Option indefinitely.
The Company currently has no intent to exercise the Emerald Media Option. In
assessing whether to exercise the Emerald Media Option, the Company will review
the results of EMI's operations and whether combining EMI's results with the
Company's results of operations will positively impact the Company's net income.
The Company will weigh against any positive effect on net income the risks
associated with operating the EMI networks and any potential adverse impact on
the Company's other businesses. See "Risk Factors--Risks Associated with
Exercise of the Emerald Media Option."
EMI is a leading provider of explicit adult programming via "direct to the
home" service to households with large satellite dishes receiving a C-Band low
power analog signal and owns and operates the three leading C-Band adult
programming networks: Eurotica, XXXcite and The X! Channel. In addition, EMI has
recently launched a fourth C-Band adult programming network, Rogue TV (the four
41
<PAGE>
networks being referred to herein as the "EMI Networks"). EMI sells its network
programming on a subscription basis and on a pay-per-view basis. Customers of
EMI purchase a block of programming for a period of time--one day, one month,
three months, six months, one year, etc.--for a fixed fee. As of July 31, 1998,
EMI had approximately 185,000 subscriptions for the EMI Networks. For the six
months ended June 30, 1998, EMI had net subscription revenue of approximately
$8.0 million. In addition, EMI has a free Internet site, SXTV.com, which
provides promotional materials and adult movie clips for the EMI Networks.
Approximately 100,000 Internet users access SXTV.com per day.
The Company provides playback and other broadcasting services for the EMI
Networks. For a description of such playback services, see "--Services."
EMPLOYEES
Upon consummation of the Merger, the Company expects to employ approximately
34 persons, all of whom are expected to be full-time employees. None of the
Company's employees will be covered by collective bargaining agreements. The
Company believes that its relationship with its employees will be satisfactory.
PROPERTY
Commencing on the consummation of the Merger, the Company will lease
approximately square feet of space for the Operations Facility in New York,
New York. The lease provides for annual rent of $ , subject to standard
escalations, and expires in , .
LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceedings. From time to
time, the Company may become a party to legal actions in the normal course of
its business. See "Risk Factors--Risks Associated with Exercise of the Emerald
Media Option--Provision of Sexually Explicit Content" and "Risk Factors-- Risks
Associated with Exercise of the Emerald Media Option--Government Regulation."
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
J. Roger Faherty.................... 59 Chairman of the Board of Directors and
Chief Executive Officer
Donald J. McDonald, Jr. ............ 46 President and Director
John R. Sharpe...................... 33 Vice President, Chief Financial Officer and Treasurer
Richard Kirby....................... 37 Executive Vice President and Secretary
Richard Cohen....................... 47 Director
Rudy R. Miller...................... 50 Director
Leland H. Nolan..................... 51 Director
</TABLE>
J. ROGER FAHERTY has been Chairman of the Board and Chief Executive Officer
of the Company since its incorporation. Mr. Faherty has been Chairman of the
Board and a director of Spice since December 1991. In 1991 he was elected as the
Chief Executive Officer of Spice and became President of Spice in 1996. At the
Closing Date, Mr. Faherty will resign from Spice and from the Spice board of
directors.
DONALD J. MCDONALD, JR. has been President and a director of the Company
since its incorporation. Mr. McDonald has been president of Spice Direct, Inc.
since 1996. Spice Direct, Inc. is a wholly-owned subsidiary of Spice and is
principally engaged in marketing Spice's products and services directly to
consumers. From 1990 to 1995, Mr. McDonald was President of Summit Corporate
Group, a venture capital fund involved in the video production and television
programming industries. At the Closing Date, Mr. McDonald will resign from Spice
Direct, Inc.
JOHN R. SHARPE has been Vice President, Chief Financial Officer and
Treasurer of the Company since its incorporation. Mr. Sharpe has been an
employee of Spice since 1995. In 1997, he was appointed Vice President,
Controller and Chief Accounting Officer of Spice. From 1991 through 1994, Mr.
Sharpe was a Divisional Controller for U.S. Services, Inc., a publicly traded
software development company. At the Closing Date, Mr. Sharpe will resign from
Spice.
RICHARD KIRBY has been Executive Vice President and Secretary of the Company
since its incorporation. Mr. Kirby has been an executive officer of Spice since
1988 and is currently Senior Vice President, Network Operations, and Chief
Technology Officer of Spice. At the Closing Date, Mr. Kirby will resign from
Spice.
RICHARD COHEN has been a director of the Company since its incorporation.
Since 1996, he has been President of Richard M. Cohen Consultants, Inc. From
1993 through 1995, Mr. Cohen was President of General Media, Inc., an adult
media company. From 1988 through 1993, Mr. Cohen was Director of Investment
Banking at Furman Selz, Inc.
RUDY R. MILLER has been a director of the Company since its incorporation.
He has served as Chairman, President and Chief Executive Officer of Miller
Management Corp., a financial consulting firm, since 1972 and of Miller Capital
Corp., a venture capital, financial services and investor relations firm, since
1993. Mr. Miller has been a Director of Spice since July 1996. Mr. Miller was
also a member of the board of directors of America West Airlines from 1982 to
1986 and a member of the board of directors of Jacor Communications Inc., one of
the largest radio broadcasting groups in the United States, from 1979 to 1989.
At the Closing Date, Mr. Miller will resign from the Spice board of directors.
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<PAGE>
LELAND H. NOLAN has been a director of the Company since its incorporation.
Mr. Nolan has been a director of Spice since 1988 and from that time until the
end of 1995, held various executive positions with Spice, most recently as Vice
Chairman, International Initiatives. From 1996 to 1998, Mr. Nolan was a
consultant to Infoglobal, S.A., a telecommunications, engineering and consulting
firm based in Madrid, Spain. Mr. Nolan is currently pursuing international
opportunities in businesses which provide high speed internet access and
interactive services. At the Closing Date, Mr. Nolan will resign from the Spice
board of directors.
The Company's Board of Directors is divided into three classes. Mr. Cohen
serves in the class whose term expires in 1999; Messrs. Miller and Nolan serve
in the class whose term expires in 2000; and Messrs. Faherty and McDonald serve
in the class whose term expires in 2001. Upon the expiration of the term of a
class of directors, directors within such class will be elected for a three-year
term at the annual meeting of stockholders in the year in which such term
expires. Directors will hold office until the expiration of their term and until
that director's successor has been duly elected and qualified.
Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve until the next annual meeting of the Board of
Directors and until their successors have been duly elected and qualified. There
are no family relationships among any of the executive officers or directors of
the Company.
BOARD COMMITTEES
The Company's Board of Directors has an Audit Committee and a Compensation
Committee. The Audit Committee is responsible for selecting the Company's
independent accountants for approval by the Board of Directors; reviewing the
scope, results and costs of the audit with the Company's independent
accountants; and reviewing the financial statements and accounting and control
practices of the Company. The Compensation Committee is responsible for
recommending compensation and benefits for the executive officers of the Company
to the Board of Directors and for administering the Company's 1998 Stock
Incentive Plan.
DIRECTOR COMPENSATION
The Company pays $1,000 per meeting, plus expenses, and $250 per telephone
conference to non-officer directors serving on the Board of Directors.
EXECUTIVE COMPENSATION
No executive officer of the Company was paid any compensation by the Company
during 1997 or in the six months ended June 30, 1998. None of the executive
officers of the Company is expected to earn more than $100,000 in total
compensation in 1998. The annual salary for the executive officers is described
below under "--Employment Agreements." Executive officers of the Company may be
granted stock options and other benefits as described below under "--Benefit
Plans."
EMPLOYMENT AGREEMENTS
On or before the Closing Date, the Company will enter into an employment
agreement with Mr. Faherty providing for his employment as Chairman of the Board
and Chief Executive Officer of the Company. The agreement provides for a
six-year term; in each year that the agreement is not terminated, the term is
extended for five years from that anniversary date. The agreement provides for
an annual base salary of $367,500 to be adjusted annually as determined by the
Company. In addition, pursuant to the agreement, the Company will reimburse Mr.
Faherty for automobile costs.
On or before the Closing Date, the Company will enter into employment
agreements with each of Messrs. McDonald, Kirby and Sharpe providing for the
employment of Mr. McDonald as President of the
44
<PAGE>
Company, Mr. Kirby as Executive Vice President of the Company and Mr. Sharpe as
Vice President and Chief Financial Officer of the Company. The employment
agreements of Messrs. McDonald and Kirby provide for a term ending on December
31, 2001. The employment agreement of Mr. Sharpe provides for a term ending on
December 31, 2000. The agreements provide for an annual base salary of $185,000,
$183,750 and $115,000 for Messrs. McDonald, Kirby and Sharpe, respectively, to
be adjusted annually as determined by the Company in its sole discretion. Each
agreement also contains a non-competition covenant pursuant to which the
executive is prohibited from competing with the Company during his employment by
the Company and for one year thereafter. The agreements further provide that in
the event that employment is terminated by the Company without cause (as defined
therein) or by the executive for good reason (as defined therein), the executive
is entitled to receive an amount equal to base salary, payable in monthly
installments through the longer of (i) the applicable termination date or (ii)
nine months. In the event of the disability or death of the executive, the
Company will continue to make base salary payments to the executive or his
estate for twelve months following such death or disability. In addition, the
agreements provide that the executive will be entitled to a severance payment if
the Company terminates the executive's employment within 18 months following a
change in control of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee of the Company will serve as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers or directors serving as a member of the
Company's Board of Directors or Compensation Committee.
BENEFIT PLANS
401(K) PLAN. On or before the Closing Date, the Company will establish a
401(k) retirement savings plan (the "401(k) Plan"), in which all qualified
employees, including executive officers, are eligible to participate. The 401(k)
Plan provides that each participant may contribute up to 15% of his or her
pre-tax salary (up to a statutorily prescribed annual limit, $10,000 in 1998) to
the 401(k) Plan, although the percentage elected by certain highly compensated
participants may be required to be lower. All amounts contributed to the 401(k)
Plan by employee participants and earnings on these contributions are fully
vested at all times. The Company at the discretion of the Board of Directors,
may match employee contributions. Contributions to the 401(k) Plan shall be
invested as determined by the 401(k) Plan trustees, Messrs. Faherty and Sharpe.
The trustees intend to retain Morgan Stanley Dean Witter Discover to invest and
administer the 401(k) Plan.
1998 EMPLOYEE STOCK OPTION PLAN.
On or before the Closing Date, the Board of Directors of the Company will
approve and adopt the Company's 1998 Employee Stock Option Plan (the "1998
Plan"), the terms of which are summarized below.
GENERAL. The 1998 Plan will provide for the issuance of options for a total
of up to 400,000 authorized and unissued shares of Common Stock. Awards may be
made to such directors, officers, employees and consultants of the Company and
its subsidiaries as the Board of Directors shall in its discretion select
(collectively, "key persons"). Awards under the 1998 Plan may be made in the
form of incentive stock options ("ISOs") or nonqualified stock options. ISOs may
not have an exercise price of less than 100% of fair market value of the
Company's Common Stock on the grant date. In the case of options granted to
holders of 10% or more of the voting power of the Company's stock on the date of
the grant, no option may have an exercise price of less than 100% of fair market
value on the grant date. The aggregate fair market value, as determined on the
grant date, of ISOs that may become exercisable in any one year cannot exceed
$100,000.
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<PAGE>
ADMINISTRATION. The 1998 Plan will be administered by the Compensation
Committee. The Compensation Committee is authorized to construe, interpret and
implement the provisions of the 1998 Plan, to select the persons to whom awards
will be granted, to determine the terms and provisions of such awards and to
amend outstanding awards. The determinations of the Compensation Committee are
made in its sole discretion and are binding and conclusive.
GRANTS UNDER THE 1998 PLAN. The number of options, the purchase price per
share payable upon the exercise of an option (the "option exercise price") and
vesting schedule will be established by the Compensation Committee. Each option,
unless sooner terminated, expires no later than 10 years (five years in the case
of ISOs granted to holders of 10% of the voting power of the Company's Common
Stock) from the date of grant, as the Committee may determine. Options that
terminate without being exercised are available for re-issuance as determined by
the Compensation Committee. As of the Closing Date, no options will be granted
under the 1998 Plan.
OTHER FEATURES OF THE 1998 PLAN. Awards granted under the 1998 Plan and
shares acquired pursuant thereto will be subject to a number of rights and
restrictions, including provisions relating to the termination of employment or
service of the grantee.
The Compensation Committee may, without stockholder approval, suspend,
discontinue, revise or amend the 1998 Plan at any time, or from time to time;
provided, however, that stockholder approval shall be obtained for any amendment
for which such approval is required under the Exchange Act, by Section 422 of
the Code or by other provisions of applicable law.
OTHER PLANS. The Company is currently considering the implementation of a
cash incentive plan for executive officers and key employees pursuant to which
bonuses will be granted based upon the Company's performance.
46
<PAGE>
CERTAIN TRANSACTIONS
J. Roger Faherty, Leland H. Nolan and Donald J. McDonald have agreed to
provide the Company a revolving line of credit of up to an aggregate of $1.5
million at the Closing Date (the "Credit Facility"). Messrs. Faherty, Nolan and
McDonald will provide 60.0%, 26.67% and 13.33%, respectively, of each extension
of credit under the Credit Facility. Interest will be payable monthly in arrears
at a rate of 11% per annum. Total borrowings under the Credit Facility will have
a final maturity date of the second anniversary of the Closing Date. The Credit
Facility will be secured by accounts receivable, equipment, intellectual
property, certain intangibles and the proceeds from the sale of accounts
receivable and equipment.
In consideration of providing the Credit Facility, on the Closing Date,
Messrs. Faherty, Nolan and McDonald will receive 27,000, 12,000 and 6,000
warrants to purchase Company Common Stock (collectively, the "Lenders
Warrants"), respectively. The Company has reserved the right to replace the
Credit Facility with financing from an alternative source. If the Company
replaces the Credit Facility with alternative financing prior to borrowing any
amount under the Credit Facility, Messrs. Faherty, Nolan and McDonald will
receive only half of the number of Lenders Warrants they would have otherwise
received. Each Lenders Warrant will entitle the holder thereof to purchase, at
any time until , 2008, one share of Company Common Stock at an exercise
price of $.01. In addition, Messrs. Faherty, Nolan and McDonald will have the
right to (a) request the Company to register their Lenders Warrants and the
Company Common Stock for which such Lenders Warrants are exercisable and (b)
include their Lenders Warrants and the Company Common Stock for which such
Lenders Warrants are exercisable in certain registration statements filed by the
Company.
The Company believes that the terms of the Credit Facility are no less
favorable than those that could be negotiated with an independent third party on
an arm's length basis.
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<PAGE>
PRINCIPAL STOCKHOLDERS OF THE COMPANY
Based on ownership of Spice Common Stock as of August 31, 1998 (see the
Proxy Statement/ Prospectus) and assuming an Exchange Ratio of 0.125 for one,
the following table sets forth the number and percentage of outstanding shares
of the Company Common Stock that are expected to be beneficially owned,
following the Share Transfer, by (i) each person who, to the knowledge of the
Company, will own beneficially more than 5% of the outstanding shares of Company
Common Stock, (ii) each director and executive officer of the Company and (iii)
all directors and executive officers of the Company as a group. Using the
Exchange Ratio of 0.125 for one, the number of shares of Company Common Stock
beneficially owned by the following stockholders on the Closing Date will be
equal to 12.5% of the number of shares of Spice Common Stock owned by them on
the Closing Date. Unless otherwise indicated below, to the knowledge of the
Company, all persons listed below will have sole voting and investment power
with respect to their shares of Company Common Stock, except to the extent
authority is shared by spouses under applicable law.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES BENEFICIALLY SHARES
NAME AND ADDRESS OWNED(1) OUTSTANDING(2)
- ---------------------------------------------------------------- -------------------------- -------------------
<S> <C> <C>
J. Roger Faherty(3)(4).......................................... 192,365 9.16%
536 Broadway, 10th Floor
New York, New York 10012
Donald J. McDonald, Jr. (4)..................................... 17,250 0.83%
536 Broadway, 10th Floor
New York, New York 10012
Richard Kirby................................................... 22,125 1.07%
536 Broadway, 10th Floor
New York, New York 10012
John Sharpe..................................................... 2,225 0.11%
536 Broadway, 10th Floor
New York, New York 10012
Richard Cohen................................................... 11,250 0.54%
630 Fifth Avenue, Suite 601
New York, New York 10111
Rudy R. Miller.................................................. 8,750 0.42%
4909 East McDowell Road
Phoenix, Arizona 85008
Leland H. Nolan (4)............................................. 138,899 6.66%
17 Thompson Street
New York, New York 10012
Lindemann Capital Advisors LLC (5).............................. 209,752 10.12%
767 Fifth Avenue
New York, New York 10153
T. Rowe Price New Horizons Fund Inc. (6)........................ 81,250 3.92%
P.O. Box 17218
Baltimore, Maryland 21202
All directors and executive officers as a group
(7 persons)................................................... 392,864 18.54%
</TABLE>
48
<PAGE>
- ------------------------
(1) Assumes exercise of all Spice options and warrants held by such persons
immediately prior to the Merger and the distribution of the shares of the
Company Common Stock issuable upon exercise of such options and warrants as
part of the Merger Consideration.
(2) Assumes exercise of all outstanding options and warrants of Spice.
(3) Mr. Faherty's shares do not include 1,350 shares owned by his children. Mr.
Faherty does not have or share voting or investment power over the shares
owned by his children and disclaims beneficial ownership of such shares.
(4) Includes the shares of Company Common Stock issuable upon exercise of the
Lenders Warrants.
(5) The information concerning beneficial ownership of Spice Common Stock by
Lindemann Capital Advisors, LLC was obtained from a Schedule 13G and a Form
3 and Form 4 filed with the Commission by such stockholder. Pursuant to such
Form 3 and Form 4, the stockholder reported that the securities are held in
accounts managed by Lindemann Capital Advisors, LLC. Adam M. Lindemann, as
Managing Member of the Lindemann Capital Advisors, LLC, may be deemed to
have a pecuniary interest in all or portion of such securities.
(6) The information concerning beneficial ownership of Spice Common Stock by T.
Rowe Price New Horizons Fund, Inc. ("New Horizons Fund") was obtained from a
Schedule 13G filed with the Commission by such stockholder. Pursuant to such
Schedule 13G, the securities are owned by various individual and
institutional investors including New Horizons Fund. T. Rowe Price
Associates, Inc. serves as investment advisor to New Horizons Fund and has
the power to direct investments and/or sole power to vote the securities.
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<PAGE>
DESCRIPTION OF SECURITIES
At the Closing Date, the authorized capital stock of the Company will
consist of 25,000,000 shares of Company Common Stock and 2,000,000 shares of
preferred stock, $.01 par value per share (the "Preferred Stock"). At the
Closing Date, the Company is expected to have outstanding approximately
2,074,785 shares of Company Common Stock and no shares of Preferred Stock. Set
forth below is a description of the Company's capital stock.
COMMON STOCK
Holders of Company Common Stock are entitled to one vote for each share held
on all matters submitted to a vote of stockholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the shares of Company
Common Stock entitled to vote in any election of directors may elect all of the
directors standing for election (other than those directors, if any, who are to
be elected by the holders of any series of preferred stock, if any). Holders of
Company Common Stock are entitled to receive ratably such dividends, if any, as
may be declared by the Board of Directors out of funds legally available
therefor, subject to any preferential dividend rights of outstanding Preferred
Stock. See "Dividend Policy." Upon the liquidation, dissolution or winding up of
the Company, the holders of Company Common Stock are entitled to receive ratably
the net assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding Preferred Stock.
Holders of the Company Common Stock have no preemptive, subscription, redemption
or conversion rights. All of the shares of Company Common Stock to be
distributed pursuant to the Share Transfer will be fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, without further stockholder approval,
subject to certain limitations prescribed by law, to issue from time to time up
to an aggregate of 2,000,000 shares of Preferred Stock in one or more series and
to fix or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each such series thereof, including
the dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices,
liquidation preferences and the number of shares of Preferred Stock constituting
any series of Preferred Stock. The Company has no present plans to issue any
shares of Preferred Stock.
The purpose of authorizing the Board of Directors to issue Preferred Stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding voting stock of the Company. The rights, preferences
and privileges of holders of Company Common Stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
Preferred Stock which the Company may designate and issue in the future. At the
Closing Date, there will be no shares of Preferred Stock outstanding. See "Risk
Factors--Anti-Takeover Provisions."
WARRANTS
For a description of the Lenders Warrants, see "Certain Transactions."
DELAWARE LAW AND CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BY-LAWS
The Company is a Delaware corporation and subject to Section 203 of the
Delaware General Corporation Law (the "Delaware Law"), an anti-takeover law. In
general, Section 203 of the Delaware Law prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A
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<PAGE>
"business combination" includes mergers, asset sales and certain other
transactions. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within three years
did own, 15% or more of the corporation's voting stock. The existence of this
provision would be expected to have an anti-takeover effect, including attempts
that might result in a premium over the market price for the shares of Company
Common Stock held by stockholders. A corporation may, at its option, exclude
itself from the coverage of Section 203 of the Delaware Law by amending its
certificate of incorporation or bylaws, by action of its stockholders, to exempt
itself from coverage; provided that such bylaws or certificate of incorporation
amendment shall not become effective until 12 months after the date it is
adopted. The Company has not adopted such an amendment to its Certificate of
Incorporation or By-laws.
The Certificate of Incorporation provides for the division of the Board of
Directors into three classes as nearly equal in size as possible with staggered
three-year terms. See "Management." In addition, the Certificate of
Incorporation provides that directors may be removed only for cause by the
affirmative vote of the holders of two-thirds of the shares of capital stock of
the corporation entitled to vote. Under the Company's By-Laws, any vacancy on
the Board of Directors, however occurring, including a vacancy resulting from an
enlargement of the Board, may be filled by vote of a majority of the directors
then in office, although less than a quorum, or by a sole remaining director.
The classification of the Board of Directors and the limitations on the removal
of directors and filing of vacancies could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of the Company.
The Certificate of Incorporation also provides that any action required or
permitted to be taken by the stockholders of the Company at an annual meeting or
special meeting of stockholders may only be taken if it is properly brought
before such meeting and may not be taken by written action in lieu of a meeting.
The By-Laws provide that a special meeting of the stockholders may only be
called by the Chairman of the Board of Directors or by the Board of Directors
pursuant to a resolution adopted by 75% of the members of the Board of Directors
then in office. Under the By-Laws, in order for any matter to be considered
"properly brought" before a meeting of stockholders, a stockholder must comply
with certain requirements regarding advance notice to the Company. The foregoing
provisions could have the effect of delaying until the next stockholders meeting
stockholders actions which are favored by the holders of a majority of the
outstanding voting securities of the Company. These provisions may also
discourage another person or entity from making a tender offer for the Company
Common Stock, because such person or entity, even if it acquired a majority of
the outstanding voting securities of the Company, would be able to take action
as a stockholder (such as electing new directors or approving a merger) only at
a duly called stockholders' meeting, and not by written consent.
The Certificate of Incorporation contains certain provisions permitted under
the Delaware Law relating to the liability of directors. The Company believes
that these provisions will assist the Company in attracting and retaining
qualified individuals to serve as directors. The Certificate of Incorporation
includes a provision eliminating a director's liability for monetary damages for
a breach of fiduciary duty, except for the breach of a directory's duty of
loyalty to the Company or its stockholders, for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law, for
any transaction from which the director derived any improper personal benefit
and for certain other actions. In addition, the Certificate of Incorporation
provides for the indemnification of directors, officers, employees and agents of
the Company to the fullest extent permitted by the Delaware Law. This
indemnification shall not be exclusive of any other rights by which a director,
officer, employee or agent may be entitled to under any by-law, arrangement, or
vote of stockholders or disinterested directors.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
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<PAGE>
TRANSFER AGENT AND REGISTRAR
Harris Trust and Savings Bank will act as transfer agent for the Company
Common Stock in connection with the Share Transfer and the Merger. The transfer
agent and registrar for the Company Common Stock will be the American Stock
Transfer & Trust Company.
LEGAL MATTERS
The validity of the shares of Company Common Stock will be passed upon for
the Company by Kramer, Levin, Naftalis & Frankel, New York, New York.
EXPERTS
The financial statements of the Company as of December 31, 1997 and for the
years ended December 31, 1996 and December 31, 1997 have been included herein
and in the registration statement in reliance upon the report of Grant Thornton
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 (including all amendments thereto, the "Registration Statement") under the
Securities Act with respect to the Company Common Stock offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus omits
certain information contained in the Registration Statement. For further
information with respect to the Company and the Company Common Stock offered
hereby, reference is hereby made to the Registration Statement and to the
exhibits and schedules filed therewith. Statements contained in this Prospectus
regarding the contents of any agreement or other document filed as an exhibit to
the Registration Statement are not necessarily complete, and in each instance
reference is made to the copy of such agreement filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
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DIRECTRIX, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Certified Public Accountants......................................................... F-2
Balance Sheets as of December 31, 1997 and June 30, 1998 (unaudited)....................................... F-3
Statements of Operations for the years ended December 31, 1996 and 1997 and the six months ended June 30,
1997 and 1998 (unaudited)................................................................................ F-4
Statement of Stockholder's Equity for the years ended December 31, 1996 and 1997 and the six months ended
June 30, 1998 (unaudited)................................................................................ F-5
Statements of Cash Flows for the years ended December 31, 1996 and 1997 and the six months ended June 30,
1997 and 1998 (unaudited)................................................................................ F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
Directrix, Inc.
We have audited the accompanying balance sheet of Directrix, Inc. (a
Delaware corporation) as of December 31, 1997, and the related statements of
operations, stockholder's equity and cash flows for the years ended December 31,
1996 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Directrix, Inc. as of
December 31, 1997, and the results of its operations and cash flows for the
years ended December 31, 1996 and 1997, in conformity with generally accepted
accounting principles.
Grant Thornton LLP
New York, New York
July 10, 1998 (except for Notes 1, 5, and
10, as to which the date is July 21, 1998)
F-2
<PAGE>
DIRECTRIX, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------- -------------
<S> <C> <C>
(UNAUDITED)
ASSETS:
Current assets:
Accounts receivable, less allowance for doubtful accounts of $1,753,000 in 1997
and $1,753,000 in 1998.......................................................... $ 772,000 $ 780,000
Prepaid expenses and other current assets......................................... 73,000 589,000
------------- -------------
Total current assets............................................................ 845,000 1,369,000
Property and equipment............................................................ 4,134,000 3,850,000
Library of movies, net............................................................ 809,000 885,000
Other assets...................................................................... 51,000 51,000
------------- -------------
$ 5,839,000 $ 6,155,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current liabilities:
Current portion of obligations under capital leases............................... $ 522,000 $ 560,000
Accounts payable.................................................................. 252,000 130,000
Accrued expenses and other current liabilities.................................... 80,000 121,000
Deferred income................................................................... 109,000 --
------------- -------------
Total current liabilities....................................................... 963,000 811,000
Obligations under capital leases.................................................. 552,000 242,000
------------- -------------
Total liabilities............................................................... 1,515,000 1,053,000
Commitments and contingencies
Stockholder's equity
Contributed equity................................................................ 9,859,000 12,081,000
Accumulated deficit............................................................... (5,535,000) (6,979,000)
------------- -------------
Total stockholder's equity...................................................... 4,324,000 5,102,000
------------- -------------
$ 5,839,000 $ 6,155,000
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
DIRECTRIX, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------ ----------------------------
<S> <C> <C> <C> <C>
1996 1997 1997 1998
-------------- -------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:.......................................... $ 10,329,000 $ 10,658,000 $ 6,002,000 $ 4,975,000
-------------- -------------- ------------- -------------
Operating expenses:
Salaries, wages and benefits..................... 1,356,000 2,198,000 982,000 1,367,000
Library amortization............................. 296,000 378,000 189,000 158,000
Satellite costs.................................. 901,000 4,834,000 1,855,000 3,288,000
Selling, general and administrative expenses..... 1,517,000 3,459,000 2,394,000 984,000
Depreciation of fixed assets..................... 5,956,000 1,906,000 1,515,000 550,000
-------------- -------------- ------------- -------------
Total operating expenses........................... 10,026,000 12,775,000 6,935,000 6,347,000
-------------- -------------- ------------- -------------
Total income (loss) from operations.......... 303,000 (2,117,000) (933,000) (1,372,000)
Interest expense................................... 4,979,000 1,090,000 1,008,000 72,000
Gain from transponder lease amendment.............. -- (2,348,000) (2,348,000) --
-------------- -------------- ------------- -------------
Net income (loss)............................ $ (4,676,000) $ (859,000) $ 407,000 $ (1,444,000)
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
UNAUDITED PRO FORMA
NET INCOME (LOSS) PER COMMON
SHARE (Note 2)................................... $ (2.25) $ (0.41) $ 0.20 $ (0.70)
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DIRECTRIX, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
CONTRIBUTED ACCUMULATED
EQUITY DEFICIT TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
Balance at January 1, 1996........................................... $ 2,976,000 $ 0 $ 2,976,000
Net loss for the year................................................ (4,676,000) (4,676,000)
Net transfers from Spice............................................. 1,297,000 1,297,000
------------- ------------- -------------
Balance at December 31, 1996......................................... 4,273,000 (4,676,000) (403,000)
Net loss for the year................................................ (859,000) (859,000)
Net transfers from Spice............................................. 5,586,000 5,586,000
------------- ------------- -------------
Balance at December 31, 1997......................................... 9,859,000 (5,535,000) 4,324,000
Net loss for the period (unaudited).................................. (1,444,000) (1,444,000)
Net transfers from Spice (unaudited)................................. 2,222,000 2,222,000
------------- ------------- -------------
Balance at June 30, 1998 (unaudited)................................. $ 12,081,000 $ (6,979,000) $ 5,102,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-5
<PAGE>
DIRECTRIX, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
1996 1997 1997 1998
-------------- -------------- -------------- --------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ (4,676,000) $ (859,000) $ 407,000 $ (1,444,000)
-------------- -------------- -------------- --------------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization of fixed
assets....................................... 5,956,000 1,906,000 1,515,000 550,000
Gain on transponder lease amendment............ -- (2,348,000) (2,348,000) --
Amortization of library of movies.............. 296,000 378,000 189,000 158,000
Provision for bad debts........................ 300,000 1,453,000 910,000 --
Changes in assets and liabilities:
Increase in accounts receivable.............. (576,000) (1,949,000) (1,426,000) (8,000)
Increase in prepaid expenses and other
current assets............................. (11,000) (52,000) (99,000) (516,000)
Decrease (increase) in other assets.......... 2,000 (3,000) -- --
Increase (decrease) in accounts payable and
accrued expenses........................... 1,193,000 (1,011,000) (287,000) (81,000)
Increase (decrease) in deferred income....... -- 109,000 326,000 (109,000)
-------------- -------------- -------------- --------------
Total adjustments.......................... 7,160,000 (1,517,000) (1,220,000) (6,000)
-------------- -------------- -------------- --------------
Net cash provided by (used in) operating
activities............................... 2,484,000 (2,376,000) (813,000) (1,450,000)
-------------- -------------- -------------- --------------
Cash flows from investment activities:
Purchase of property and equipment............. (793,000) (750,000) (427,000) (266,000)
Purchase of rights to movies................... (289,000) (549,000) (360,000) (234,000)
-------------- -------------- -------------- --------------
Net cash used in investing activities...... (1,082,000) (1,299,000) (787,000) (500,000)
-------------- -------------- -------------- --------------
Cash flows from financing activities:
Repayment of long-term debt and capital lease
obligations.................................. (2,699,000) (1,911,000) (1,713,000) (272,000)
Net transfers from Spice....................... 1,297,000 5,586,000 3,313,000 2,222,000
-------------- -------------- -------------- --------------
Net cash (used in) provided by financing
activities............................... (1,402,000) 3,675,000 1,600,000 1,950,000
-------------- -------------- -------------- --------------
Net decrease in cash and cash
equivalents.............................. -- -- -- --
Cash and cash equivalents, beginning of period... -- -- -- --
-------------- -------------- -------------- --------------
Cash and cash equivalents, end of the
period................................... $ -- $ -- $ -- $ --
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest................................... $ 3,470,000 $ 2,216,000 $ 2,126,000 $ 72,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Income taxes............................... $ -- $ -- $ -- $ --
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Supplemental schedule of non-cash investing and
financing activities:
Capital lease obligations...................... $ 498,000 $ (52,342,000) $ (52,342,000) $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
DIRECTRIX, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION RELATING TO JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. BACKGROUND AND BASIS OF PRESENTATION.
BACKGROUND. Directrix, Inc. (the "Company") is a Delaware corporation
formed by Spice Entertainment Companies, Inc. ("Spice") in contemplation of the
merger ("Merger") of Spice with a wholly-owned subsidiary of Playboy
Enterprises, Inc. ("Playboy"). Prior to the closing ("Closing") of the Merger,
Spice and the Company will enter into a Transfer and Redemption Agreement (the
"Transfer Agreement") pursuant to which Spice will contribute to the Company,
among other things, all of the assets and liabilities associated with Spice's
master control and digital playback center (the "Operations Facility"), an
option (the "EMI Option") to acquire all of the assets or capital stock of
Emerald Media, Inc. ("EMI") and the rights to distribute the explicit version of
certain of Spice's adult films in the domestic C-Band direct to home market
("DTH") and the Internet ("Library Rights").
Spice will also assign other agreements and assets to the Company. (See Note
10.) Pursuant to the Transfer Agreement, the Company intends to enter into a
separate transponder services agreement with Loral SpaceCom Corporation
("Loral") for services on three transponders which will replace a portion of
Spice's agreement with Loral.
BUSINESS. Management plans to use the Operations Facility and its
transponder capacity to provide a complete range of technical and creative
services required to create and distribute a television network over a variety
of delivery methods including cable, direct broadcast satellite system ("DBS")
and the Internet. The Company plans to offer uplink services through a third
party vendor, playback services through its Operations Facility and transponder
services, both analog and digitally compressed, through its agreement with
Loral. The Company also plans to offer post-production services, including
creation of interstitial and promotional segments, animation and graphics,
quality control, library services for masters tapes and facilities, network
operations and engineering services. There can be no assurances that the Company
will be successful in marketing some or all of these services.
Under the Transfer Agreement, Spice will assign to the Company its
agreements with EMI. The Company will provide programming, playback and
transponder services to EMI. EMI provides subscriber based and pay-per-view
explicit adult programming distributed in the DTH market, operating four
explicit DTH television networks.
The Company has no operating history on a stand-alone basis. The Company has
incurred significant losses for the years ended December 31, 1996 and 1997 and
for the six months ended June 30, 1998 on the basis of the presentation
described below. The Company's ability to achieve and maintain profitability
depends on its ability to attract and maintain customers for its services. The
Company currently intends to rely on the business contacts and expertise of its
management to develop new business.
On July 21, 1998, the Company secured a $1.5 million revolving line of
credit facility ("Credit Facility") to be provided by three directors of the
Company. The Credit Facility will be used for general corporate purposes. (See
Note 10.) Management believes the Credit Facility and cash generated by
operations will provide sufficient working capital to implement management's
plans for the next 12 months. There can be no assurance, however, that the
Company will successfully implement its plans.
BASIS OF PRESENTATION.
The financial statements reflect the results of operations, financial
position, changes in stockholder's equity and cash flows that were directly
related to the Operations Facility, to the Emerald Media Option and the Library
Rights that will be contributed to the Company by Spice as if the Company were a
separate entity for all periods presented. The financial statements have been
prepared using the historical basis in
F-7
<PAGE>
DIRECTRIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. BACKGROUND AND BASIS OF PRESENTATION. (CONTINUED)
the assets and liabilities and historical results of operations related to the
Company's business. Changes in stockholder's equity represents the net income
(loss) of the Company plus net cash transfers from Spice.
The financial statements include allocations of certain Spice corporate
headquarters assets, liabilities, revenues and expenses relating to the business
that Spice will transfer to the Company. In addition, Spice will transfer the
Library Rights to the Company, the value of which has been allocated based on
the relative value of the rights to distribute the explicit versions of the
adult films to the domestic DTH and Internet market to the value of all rights
to the adult films held by Spice prior to the contribution of the Library
Rights. Management believes this method of allocation is reasonable.
Revenues were earned principally from services provided to two customers,
EMI and Spice. (See Note 8.) EMI revenues were recorded based upon contractual
amounts for playback and transponder services. Spice revenues relate to network
operations, post-production services and technical services. These revenues have
been recorded based on either (i) services provided to other non-related
customers or (ii) the costs associated with the service plus an appropriate
markup based on a reasonable assessment of a market-based charge. Management
believes that the methods used to record revenues are reasonable.
The liabilities of the Company include capital lease obligations and the
amounts of debt and related interest expense associated with these liabilities
assumed by the Company pursuant to the Merger Agreement.
General corporate overhead related to Spice's corporate headquarters and
common support divisions has been allocated to the Company based on the ratio of
the Company's direct labor costs and expenses to Spice's direct labor costs and
expenses. Management believes that these allocations are reasonable and are not
materially different from the costs that the Company would have incurred for
these services if the Company were a stand-alone entity. Subsequent to the
Closing, the Company will perform these functions using its own resources or
purchased services and will be responsible for the costs and expenses associated
with the management of a public corporation.
The financial information included herein may not necessarily reflect the
results of operations, financial position, changes in stockholder's equity and
cash flows of the Company in the future or what they would have been had it been
a separate, stand-alone entity during the periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts of accounts
receivable, accounts payable and accrued expenses reflected in the financial
statements approximate fair value because of the short maturity of these items.
See Note 4 for a discussion of the fair value of the Company's capitalized lease
obligations.
CONCENTRATION OF CREDIT RISK. Financial instruments which subject the
Company to concentrations of risk consist primarily of trade accounts
receivables. Receivables arising from sales to customers are not
F-8
<PAGE>
DIRECTRIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO JUNE 30, 1997 AND 1998 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (CONTINUED)
collateralized and, as a result, management continuously monitors the financial
condition of its customers to reduce the risk of loss. See Note 8.
VALUATION OF LONG-TERM ASSETS. The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," during the year
ended December 31, 1996. The statement requires that the Company recognize and
measure impairment losses of long-lived assets, such as equipment and certain
identifiable intangibles. The Company periodically assesses the possible
impairment of its long-lived assets. The Company determined that no provision
was necessary for the impairment of long-lived assets at December 31, 1996 and
1997 and at June 30, 1998.
PROPERTY AND EQUIPMENT. Property and equipment, including major capital
improvements, are recorded at cost. The cost of maintenance and repairs is
charged against results of operations as incurred. Depreciation is charged
against results of operations using the straight-line method over the estimated
useful lives of the related assets. Equipment leased under capital leases and
leasehold improvements are amortized over the shorter of the estimated useful
life or the lease term. Sales and retirements of depreciable property and
equipment are recorded by removing the related cost and accumulated depreciation
from the accounts. Gains or losses on sales and retirements of property and
equipment are reflected in results of operations.
REVENUE RECOGNITION. Revenues from the sale of transponder, playback and
other related services are recognized in the period the service is performed.
AMORTIZATION OF LIBRARY OF MOVIES. The Company capitalizes the acquisition
costs for the rights to movie titles purchased or licensed. The acquisition
costs are amortized on a straight-line basis over the shorter of the useful life
or the license period, ranging from one to five years. Amortization of library
of movies was allocated to the Company using the same ratio used to allocate
library of movies, as described in Note 1.
UNAUDITED PRO FORMA INCOME (LOSS) PER SHARE. Historical earnings per share
have not been presented because they would not be meaningful. Pro forma income
(loss) per share is calculated after giving effect to the distribution of the
Company's Common Stock as described in Note 5. Net income (loss) per share is
calculated in accordance with SFAS No. 128, "Earnings Per Share." Basic earnings
per share excludes dilution and is computed by dividing income attributable to
common shareholders by the weighted-average common shares outstanding for the
period. Diluted earnings per share reflects the weighted-average common shares
outstanding plus the potential dilutive effect of securities or contracts which
are convertible to common shares, such as options and warrants. The warrants
described in Notes 5 and 10 were excluded from the calculation of diluted
earnings per share because their effect was anti-dilutive.
INCOME TAXES. Since the Company was a division of Spice, it did not file
separate income tax returns. The Company's operations were included in the
income tax returns filed by Spice and its subsidiaries. For purposes of the
financial statements, the Company was not allocated any income tax provision or
benefit associated with the net losses based on the Company's past earnings
history and use of NOL carryforwards.
The Company uses the liability method of accounting for income taxes, as set
forth in SFAS No. 109, "Accounting for Income Taxes". Under this method,
deferred income taxes, when required, are provided on the basis of the
difference between the financial reporting and income tax bases of assets and
liabilities at the statutory rates enacted for future periods.
F-9
<PAGE>
DIRECTRIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO JUNE 30, 1997 AND 1998 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (CONTINUED)
INTERIM REPORTING. The accompanying financial information as of March 31,
1998 and the six months ended June 30, 1997 and 1998, including such information
in the notes to financial statements, is unaudited. In the opinion of
Management, the Company has made all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the financial condition
of the Company as of June 30, 1998 and the results of operations and cash flows
for the six months ended June 30, 1997 and 1998.
3. PROPERTY AND EQUIPMENT.
Property and equipment consists of the following:
<TABLE>
<CAPTION>
USEFUL LIVES DECEMBER 31, JUNE 30,
IN YEARS 1997 1998
--------------- ------------ ------------
<S> <C> <C> <C>
Equipment....................................... 5 $6,519,000 $ 6,806,000
Furniture and Fixtures.......................... 7 163,000 165,000
Life of lease
Leasehold Improvements.......................... or shorter 1,114,000 1,122,000
--------------- ------------ ------------
7,796,000 8,093,000
Less Accumulated Depreciation and
Amortization.................................. 3,662,000 4,243,000
------------ ------------
$4,134,000 $ 3,850,000
------------ ------------
------------ ------------
</TABLE>
A portion of the aforementioned equipment having a net book value of $1.3
million and $1.1 million is collateral for the equipment loans and capital
leases at December 31, 1997 and June 30, 1998, respectively.
4. OBLIGATION UNDER CAPITAL LEASES.
Minimum annual rentals under capital leases, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1998............................................................................ $ 638,000
1999............................................................................ 563,000
2000............................................................................ 37,000
------------
Net minimum lease payments...................................................... 1,238,000
Less amount representing interest............................................... 164,000
------------
Present value of minimum lease obligations...................................... 1,074,000
Current portion of lease obligations............................................ 522,000
------------
Long-term portion of lease obligations.......................................... $ 552,000
------------
------------
</TABLE>
a. In 1995, Spice entered into a equipment lease agreement with IBM
Credit Corporation ("ICC") which provided financing of $2,078,00 which the
Company used to construct the Operations Facility. The equipment lease was
accounted for as a capital lease. As a result of certain delays, changes in
equipment requirements and other factors, the original lease agreement was
superseded in the fourth quarter of 1996 by a new lease which requires 36
payments of approximately $37,000, commencing on February 1, 1997. The lease
obligation at December 31, 1997 and 1996 was $794,000
F-10
<PAGE>
DIRECTRIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO JUNE 30, 1997 AND 1998 IS UNAUDITED)
4. OBLIGATION UNDER CAPITAL LEASES. (CONTINUED)
and $1,083,000, respectively. Prior to the Closing, the Company will assume
Spice's obligations under the equipment lease agreement and will operate the
Operations Facility.
b. On August 14, 1996, Spice entered into an equipment lease agreement
with Vendor Capital Group ("VCG") for equipment with a cost of approximately
$1.8 million: $0.5 million was attributable to Digicipher encoding equipment
and approximately $1.3 million was attributable to 1,300 decoders. This
lease was accounted for as a capital lease. This equipment enabled Spice to
digitally compress its domestic television networks onto one transponder.
Prior to the Closing, the equipment lease will be replaced with two leases:
one between the Company and VCG, relating to the encoder which the Company
will retain and another between VCG and Playboy, relating to the decoders.
The lease obligation attributable to the encoder at December 31, 1997 and
June 30, 1998 was $256,000 and $180,000, respectively.
5. CAPITAL STRUCTURE.
The Company was incorporated on July 20, 1998 and has authorized capital of
25 million shares of common stock, $.01 par value per share (the "Common
Stock"), and 2 million shares of preferred stock, $.01 par value per share.
Spice will be the Company's sole stockholder prior to the Closing.
In connection with the Merger, Spice will transfer approximately 2,075,000
shares of Common Stock to the Spice stockholders on the basis of 0.125 of one
share of Common Stock in partial exchange for each share of Spice common stock
owned prior to the Merger. Fractional shares will not be issued; any fractional
share of Common Stock will be rounded up to one whole share.
All Spice employee stock options outstanding on the Closing will be deemed
to be exercised on that date. Holders of Spice employee stock options will be
entitled to receive (in addition to the other consideration for the Merger less
the exercise price) Common Stock on the basis of 0.125 of one share of Common
Stock for each share of Spice common stock into which the Spice employee stock
options were exercised on the Closing.
Upon Closing, Spice will retain no interest in the Company and the
stockholders of Spice will own all of the capital stock and other ownership
interests of the Company.
6. EMPLOYEE STOCK OPTION PLAN.
The Company will adopt an employee stock option plan at approximately the
time of the Closing. The Company's Board of Directors is expected to grant
options covering 400,000 shares of Common Stock. It is anticipated that options
granted under the plan will have an exercise price per share equal to the market
price on the date of grant, with other terms to be determined by the Company's
Board of Directors. The Company will be required to disclose in the footnotes of
the financial statements the impact of the compensation expenses associated with
options to be granted on a pro forma basis in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation."
Prior to Closing, certain employees of the Company participated in Spice's
Employee Stock Option Plans. Spice granted 886,500 and 1,235,918 options to
Company employees under the various plans during fiscal 1997 and 1996,
respectively. Spice accounted for these options in accordance with APB Opinion
No. 25. Accordingly, because the exercise prices of the options equaled the
market price on the date of grant, no compensation expense was recognized for
the options granted. Had compensation expense been recognized by Spice based
upon the fair value of the stock options on the grant date under the
F-11
<PAGE>
DIRECTRIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO JUNE 30, 1997 AND 1998 IS UNAUDITED)
6. EMPLOYEE STOCK OPTION PLAN. (CONTINUED)
methodology prescribed by SFAS No. 123, and allocated to the Company based on
its proportionate share of total compensation, the Company's net loss for the
year ended December 31, 1996 and 1997 would have been increased by $0.3 million
and $0.2 million, respectively. See Note 5 for a discussion of the exercise of
Spice employee stock options outstanding on the Closing.
7. COMMITMENTS AND CONTINGENCIES.
LITIGATION. Spice was, from time to time, a party to litigation arising in
the normal course of its business. The Company will not assume any liability for
litigation to which Spice is currently a party. The Company may be, from time to
time, a party to litigation arising in the normal course of business.
EMPLOYMENT AGREEMENTS. The Company will enter into employment agreements
with its Chief Executive Officer, President, Executive Vice President and Chief
Financial Officer. The employment agreements will have terms and provisions
substantially similar to the employment agreements between Spice and each of
these officers.
LEASES AND SERVICE CONTRACTS. The Company leases its office facilities,
satellite transponders and uplink, and certain equipment. As of December 31,
1997, the aggregate minimum rental commitments under non-cancelable operating
leases were approximately as follows:
<TABLE>
<CAPTION>
OFFICE SATELLITE
FACILITIES TRANSPONDER
YEARS ENDING DECEMBER 31, TOTAL AND EQUIPMENT AND UPLINK
- ----------------------------- ------------- -------------- -------------
<S> <C> <C> <C>
1998......................... $ 6,700,000 $ 160,000 $ 6,540,000
1999......................... 6,680,000 140,000 6,540,000
2000......................... 6,410,000 145,000 6,265,000
2001......................... 6,389,000 149,000 6,240,000
2002......................... 6,385,000 145,000 6,240,000
Thereafter................... 11,502,000 62,000 11,440,000
------------- -------------- -------------
Total.................. $ 44,066,000 $ 801,000 $ 43,265,000
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
Total expense under operating leases amounted to $5,108,000 for the year
ended December 31, 1997 and $3,238,000 for the six months ended June 30, 1998.
Effective December 1995, Spice entered into a Skynet Transponder Services
Agreement (the "Transponder Agreement") with AT&T Corp. ("AT&T"). The
Transponder Agreement provides for services on five transponders on the AT&T
satellite Telstar 402R for a monthly payment of $635,000. Two of the
transponders were protected and three were pre-emptible. (Transponder services
on a protected transponder will not be interrupted in the event of a transponder
or satellite failure.) The original term of the Transponder Agreement was for
the useful life of the satellite's geo-stationary orbit, estimated to be twelve
years.
On January 11, 1997, as a result of AT&T losing contact with and declaring
Telstar 401 permanently out of service, AT&T pre-empted one of Spice's
pre-emptible transponders and transferred it to another AT&T customer. On March
31, 1997, Spice and Loral (which acquired AT&T's satellite business) amended the
Transponder Agreement and shortened the term by approximately four years. In
consideration of the amendment, Spice granted Loral the right to pre-empt one of
the Company's transponders after
F-12
<PAGE>
DIRECTRIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO JUNE 30, 1997 AND 1998 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES. (CONTINUED)
September 1, 1997. As a result of the amendment, the Transponder Agreement has
been classified as an operating lease commencing on March 31, 1997. As a result
of the two events described above, a non-recurring gain of approximately $2.3
million was realized in 1997.
As a result of the Transponder Agreement being classified as a capital lease
until March 31, 1997, the transponder payments totaling approximately $1.6
million and $7.6 million for 1997 and 1996, were reported as a reduction of
capital lease obligations. Had the Transponder Agreement been classified as an
operating lease from its inception, the Company would have reported additional
satellite expenses of approximately $1.6 million and $7.6 million in 1997 and
1996. In addition, the Company would have reported a decrease in depreciation of
$1.0 million and $5.3 million and a decrease in interest expense of $0.9 million
and $5.0 million for the years ended December 31, 1997 and 1996, respectively.
Prior to the Closing, the Transponder Agreement will be replaced with two
agreements: the Company will enter into an agreement with Loral for services on
three transponders, one protected and two pre-emptible, and Spice will enter
into an agreement for one protected transponder.
8. SIGNIFICANT CUSTOMERS.
EMI. On September 1, 1996, pursuant to short-term agreements, the Company
began providing transponder services bundled with playback, programming and
other related services to EMI. EMI currently owns and operates four premium
television networks featuring explicit version adult movies which are
distributed to the domestic DTH market. EMI also granted the Company an option
to acquire its stock or business for $755,000 ("EMI Option"). The Company
currently provides transponder services for three of EMI's networks and playback
and other services for four of EMI's networks from the Operations Facility. The
agreements with EMI expire on December 31, 1998. Prior to the expiration of the
agreements, either party may request a one year renewal subject to the other
party's right to require termination at the end of the then current term.
The Company recognized revenues from EMI of approximately $0.3 million and
$4.7 million for the years ended December 31, 1996 and 1997, respectively, and
$2.2 million and $1.8 million for the six months ended June 30, 1997 and 1998,
respectively. At December 31, 1997 and June 30, 1998, the Company has a net
trade receivable from EMI of $755,000.
SPICE. The Company recognized revenue from Spice of approximately $9.9
million and $5.4 million for the years ended December 31, 1996 and 1997,
respectively, and $3.6 million and $2.7 million for the six months ended June
30, 1997 and 1998, respectively. Revenues were related to the playback of the
Spice networks from the Company's Operations Facility commencing in February
1997 as well as the transmission to and use of the Company's transponders.
The Company expects that a significant portion of its future revenues will
continue to be generated by a limited number of customers. The loss of any of
these customers or any substantial reduction in orders by any of these customers
could materially adversely affect the Company's operating results.
9. RETIREMENT PLAN.
Prior to the Closing, certain of the Company's employees participated in
Spice's 401(k) retirement plan. The Company plans to adopt a 401(k) retirement
plan on the Closing which will be substantially the same as the 401(k) plan
maintained by Spice prior to the Merger. The plan will allow employee
contributions in accordance with Section 401(k) of the Internal Revenue Code.
The plan will provide for
F-13
<PAGE>
DIRECTRIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO JUNE 30, 1997 AND 1998 IS UNAUDITED)
9. RETIREMENT PLAN. (CONTINUED)
discretionary matching of employee contributions by the Company. On the Closing,
Company employees who were participants in the Spice 401(k) retirement plan will
have the option of rolling over their account balances to the Company's 401(k)
retirement plan.
10. SUBSEQUENT EVENTS.
REVOLVING LOAN COMMITMENT. On July 21, 1998, the Chairman of the Board and
Chief Executive Officer, the President and a Director of the Company (the
"Lenders") agreed to provide the Company a revolving credit facility ("Credit
Facility") to be used for general corporate purposes. The Credit Facility will
be in the maximum principal amount of $1.5 million and will terminate two years
after the date of the Closing. The initial advance will be available on the
Closing. Advances under the Credit Facility will accrue interest daily at the
rate of 11% per annum and interest will be payable monthly. In consideration of
the Lenders providing the Credit Facility, the Company will grant the Lenders an
aggregate of 45,000 warrants which will have an exercise price of $.01 per share
and will be exercisable for 10 years following the date of the Closing. The fair
value of the warrants will be treated as additional interest expense over the
term of the Credit Facility.
TRANSFER AND REDEMPTION AGREEMENT. As a condition to the Merger, Spice and
the Company will enter into a Transfer Agreement and certain related agreements,
pursuant to which Spice will contribute certain assets to the Company in
exchange for the assumption of certain related liabilities and the issuance of
Common Stock. In connection with the Merger, Spice will transfer the Common
Stock to the stockholders of Spice as part of the consideration for the Merger.
The Transfer Agreement, certain agreements related to or contemplated by the
Transfer Agreement, and other agreements to be entered into in connection with
the Merger are summarized below.
Pursuant to the terms of the Transfer Agreement, immediately prior to the
Share Transfer, Spice will contribute certain assets to the Company, including
(a) all of the equipment and facilities relating to the Operations Facility, (b)
the EMI Option and (c) certain rights to Spice's library of adult films to be
granted to the Company under the Explicit Rights Agreements and the Owned Rights
Agreement. The Company currently has no intent to exercise the EMI Option.
In connection with the contribution, the Company will issue to Spice the
Common Stock and will assume certain liabilities (the "Assumed Liabilities"),
subject to the indemnification obligations of Spice described below. The Assumed
Liabilities include (a) all of the liabilities relating to EMI, (b) all of the
liabilities relating to or arising from the Operations Facility, but only to the
extent they arise after consummation of the Merger, and (c) those liabilities
and obligations arising out of the assets being transferred to the Company. The
Transfer Agreement provides, among other things, that the Company will indemnify
Spice for the Assumed Liabilities.
The Company and Spice will enter into an Explicit Rights Agreement with each
licensor which licenses adult films to Spice, excluding the films licensed by
Spice's international subsidiaries, subject to the consent of such licensor.
Pursuant to each Explicit Rights Agreement, Spice will assign to the Company
certain broadcast and transmission rights in and to the films licensed by each
such licensor. Spice will remain responsible for the payment of license fees. In
addition, the Company and Spice will enter into the Owned Rights Agreement
pursuant to which Spice will assign to the Company certain broadcast and
transmission rights in and to Spice's existing library of owned adult films.
F-14
<PAGE>
DIRECTRIX, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO JUNE 30, 1997 AND 1998 IS UNAUDITED)
10. SUBSEQUENT EVENTS. (CONTINUED)
In connection with the Merger, Playboy and the Company will enter into a
Satellite Services Agreement, pursuant to which the Company will provide
playback, uplink and compressed transponder services for at least two networks.
In addition, the Company and Califa Entertainment Group, Inc. will enter into a
Satellite Services Agreement, pursuant to which the Company will provide
playback, uplink and compressed transponder services for one network.
F-15
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE DISTRIBUTION OF COMMON STOCK COVERED BY THIS
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES, OR AN OFFER IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 2
Risk Factors................................... 7
The Contribution and the Share Transfer........ 15
Arrangements After the Merger.................. 25
Dividend Policy................................ 28
Selected Historical Financial Information...... 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 30
Business....................................... 35
Management..................................... 43
Certain Transactions........................... 47
Principal Stockholders of the Company.......... 48
Description of Securities...................... 50
Legal Matters.................................. 52
Experts........................................ 52
Additional Information......................... 52
Index to Financial Statements.................. F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,074,785 SHARES
DIRECTRIX, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
---------------------
PROSPECTUS
---------------------
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article ELEVENTH of the Registrant's Certificate of Incorporation (the
"Certificate of Incorporation") provides that no director of the Registrant
shall be personally liable for any monetary damages for any breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit.
Article TENTH of the Registrant's Certificate of Incorporation provides that
the Registrant shall to the fullest extent permitted by the Delaware General
Corporation Law, as the same may be amended and supplemented, or by any
successor thereto, indemnify any and all persons whom it shall have power to
indemnify under such law. Such right to indemnification shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
Article TENTH of the Registrant's Certificate of Incorporation also provides
that the Corporation shall advance expenses to the fullest extent permitted by
the Delaware General Corporation Law.
Article TENTH of the Registrant's Certificate of Incorporation further
provides that the indemnification and advancement of expenses provided for
therein shall not be deemed exclusive of any other rights of which those seeking
indemnification may be entitled under any By-Law, arrangement, vote of
stockholders or disinterested directors or otherwise.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made by a party by reason of such position, if such person shall have acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and, in any criminal proceeding, if such
person had no reasonable cause to believe his conduct was unlawful; provided
that, in the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
As of the Closing Date, the Company will have obtained directors and
officers liability insurance for the benefit of its directors and certain of its
officers.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses payable in connection
with the Share Transfer. All the amounts shown are estimates except the
Securities and Exchange Commission registration fee.
<TABLE>
<S> <C>
SEC Registration fee............................................... $ 6,121
Nasdaq Small-Cap Market fee........................................ 8,000
Printing and engraving expenses.................................... *
Legal fees and expenses............................................ *
Accounting fees and expenses....................................... *
Blue Sky fees and expenses (including legal fees).................. 15,000
Transfer agent, Warrant Agent and registrar fees and expenses...... *
Miscellaneous...................................................... *
---------
Total.......................................................... *
---------
---------
</TABLE>
- ------------------------
* To be filed by amendment.
The Registrant will bear all expenses shown above.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <C> <S>
2.1 -- Form of Transfer and Redemption Agreement between Directrix, Inc. (the "Registrant") and Spice
Entertainment Companies, Inc. ("Spice").
3.1 -- Certificate of Incorporation of the Registrant.
3.2 -- By-Laws of the Registrant.
4.1 -- Form of certificate representing shares of the Registrant's Common Stock.*
5.1 -- Opinion of Kramer, Levin, Naftalis & Frankel as to legality of securities being offered.*
10.1 -- Form of Satellite Services Agreement between the Registrant and Playboy Entertainment Group, Inc.*
10.2 -- Form of Explicit Rights Agreement between the Registrant and Spice.
10.3 -- Form of Owned Rights Agreement between the Registrant and Spice.
10.4 -- Form of Non-Competition Agreement between the Registrant and New Playboy, Inc.
10.5 -- Form of Satellite Services Agreement between the Registrant and Califa Entertainment Group, Inc.*
10.6 -- Form of Non-Competition Agreement between the Registrant and Califa Entertainment Group, Inc.
10.7 -- Form of Employment Agreement between the Registrant and J. Roger Faherty.*
10.8 -- Form of Employment Agreement between the Registrant and Donald McDonald.*
10.9 -- Form of Employment Agreement between the Registrant and John Sharpe.*
10.10 -- Form of Employment Agreement between the Registrant and Richard Kirby.*
10.11 -- 1998 Employee Stock Option Plan of the Registrant.*
10.12 -- Form of Exchange Agent Agreement.*
10.13 -- Commitment Letter Agreement dated July 20, 1998 among the Registrant, J. Roger Faherty, Leland Nolan
and Donald McDonald.
23.1 -- Consent of Grant Thornton LLP.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <C> <S>
23.2 -- Consent of Kramer, Levin, Naftalis & Frankel (included in Exhibit 5.1).*
24.1 -- Power of Attorney (see page II-5).
27.1 -- Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment
ITEM 28. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to provisions described in Item 24 above, or otherwise, the
small business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the small
business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned in the City of New York,
State of New York, on September 29, 1998.
<TABLE>
<S> <C> <C>
DIRECTRIX, INC.
By: /s/ J. ROGER FAHERTY
-----------------------------------------
J. Roger Faherty
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Directrix, Inc., hereby
severally constitute and appoint J. Roger Faherty and Donald J. McDonald and
each of them singly, our true and lawful attorneys, with full power to them and
each of them singly, to sign for us in our names in the capacities indicated
below, all pre-effective and post-effective amendments to this registration
statement and generally to do all things in our names and on our behalf in such
capacities to enable Directrix, Inc. to comply with the provisions of the
Securities Act of 1933, as amended, and all requirements of the Securities and
Exchange Commission.
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons in
the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURES TITLE(S) DATE
- ------------------------------------------------------ --------------------------------- ----------------------
<C> <S> <C>
/s/ J. ROGER FAHERTY Chairman of the Board and Chief
------------------------------------------- Executive Officer (Principal September 29, 1998
J. Roger Faherty Executive Officer)
/s/ DONALD J. MCDONALD
------------------------------------------- President and Director September 29, 1998
Donald J. McDonald
Vice President, Chief Financial
/s/ JOHN R. SHARPE Officer and Treasurer
------------------------------------------- (Principal Financial and September 29, 1998
John R. Sharpe Accounting Officer)
/s/ RICHARD COHEN
------------------------------------------- Director September 29, 1998
Richard Cohen
/s/ RUDY R. MILLER
------------------------------------------- Director September 29, 1998
Rudy R. Miller
/s/ LELAND H. NOLAN
------------------------------------------- Director September 29, 1998
Leland H. Nolan
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -------------------------------------------------------------------------------------------------
<C> <C> <S>
2.1 -- Form of Transfer and Redemption Agreement between Directrix, Inc. (the "Registrant") and Spice
Entertainment Companies, Inc. ("Spice").
3.1 -- Certificate of Incorporation of the Registrant.
3.2 -- By-Laws of the Registrant.
4.1 -- Form of certificate representing shares of the Registrant's Common Stock.*
5.1 -- Opinion of Kramer, Levin, Naftalis & Frankel as to legality of securities being offered.*
10.1 -- Form of Satellite Services Agreement between the Registrant and Playboy Entertainment Group,
Inc.*
10.2 -- Form of Explicit Rights Agreement between the Registrant and Spice.
10.3 -- Form of Owned Rights Agreement between the Registrant and Spice
10.4 -- Form of Non-Competition Agreement between the Registrant and New Playboy, Inc.
10.5 -- Form of Satellite Services Agreement between the Registrant and Califa Entertainment Group, Inc.*
10.6 -- Form of Non-Competition Agreement between the Registrant and Califa Entertainment Group, Inc.
10.7 -- Form of Employment Agreement between the Registrant and J. Roger Faherty.*
10.8 -- Form of Employment Agreement between the Registrant and Donald McDonald.*
10.9 -- Form of Employment Agreement between the Registrant and John Sharpe.*
10.10 -- Form of Employment Agreement between the Registrant and Richard Kirby.*
10.11 -- 1998 Employee Stock Option Plan of the Registrant.*
10.12 -- Form of Exchange Agent Agreement.*
10.13 -- Commitment Letter Agreement dated July 20, 1998 among the Registrant, J. Roger Faherty, Leland
Nolan and Donald McDonald.
23.1 -- Consent of Grant Thornton LLP.
23.2 -- Consent of Kramer, Levin, Naftalis & Frankel (included in Exhibit 5.1).*
24.1 -- Power of Attorney (see page II-5).
27.1 -- Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
<PAGE>
FORM OF TRANSFER AND REDEMPTION AGREEMENT
TRANSFER AND REDEMPTION AGREEMENT, dated as of ____________
__, 1998 (this "Agreement"), between Spice Entertainment Companies, Inc., a
Delaware corporation ("Spice", and, collectively with all subsidiaries of Spice
other than Subco, "Transferor"), and Directrix, Inc., a Delaware corporation and
wholly owned subsidiary of Transferor as of the date hereof ("Subco").
WHEREAS, Playboy Enterprises, Inc., a Delaware corporation
("Playboy"), and Spice have entered into an Agreement and Plan of Merger, dated
as of May 29, 1998 (the "Merger Agreement"), wherein, among other things, they
have agreed to merge in accordance with the terms and conditions contained
therein.
WHEREAS, all capitalized terms used but not otherwise defined
herein shall have the meanings ascribed to them in the Merger Agreement, or, if
not defined therein, in the Non-Competition Agreement.
WHEREAS, the Merger Agreement provides that at the Effective
Time of the Mergers, (i) the holders of shares of common stock, par value $.01
per share, of Spice (the "Spice Common Stock"), (ii) the holders of shares of
Convertible Preferred Stock Series 1997-A of Spice (the "Convertible
Preferred"), as if such shares of Convertible Preferred had been converted into
shares of Spice Common Stock immediately prior to the Effective Time of the
Mergers, and (iii) the holders of stock options or warrants of Spice, for each
share of Spice Common Stock for which a stock option or warrant is exercisable,
shall be entitled to receive, as part of the Merger Consideration and in partial
exchange therefor, the outstanding common stock, par value $.01 per share, of
Subco (the "Subco Common Stock") and, if any, warrants to purchase shares of
Subco Common Stock (the "Subco Warrants") as part of the consideration to be
given in connection with the Mergers (the "Redemption").
WHEREAS, for Federal income tax purposes it is intended that
the Mergers qualify as exchanges under Section 351 of the Internal Revenue Code
of 1986, as amended (the "Code"), and as a redemption under Section 302(b) of
the Code.
WHEREAS, it is further contemplated by the Merger Agreement
that, prior to the Redemption, Transferor shall transfer certain assets and
liabilities to Subco in accordance with the terms of this Agreement and the
other Related Agreements.
WHEREAS, accordingly, the Boards of Directors of Spice and
Subco have approved this Agreement.
<PAGE>
2
NOW, THEREFORE, in consideration of the premises, and of the
respective representations, warranties, covenants and agreements set forth in
this Agreement, the parties hereto hereby agree as follows:
1. Transfer and Assignment of Transferred Assets.
(a) (i) On the Closing Date immediately prior to the
Redemption, subject to the conditions of this Agreement, Transferor shall
transfer, assign, convey and deliver to, and vest in (collectively, "transfer"),
Subco, its successors and assigns, all of Transferor's right, title and interest
with respect to the items listed on Schedule 1(a)(1) hereto, all as the same
shall exist on the Closing Date, subject to the disposition of any such right,
title or interest by Transferor prior to the Closing Date in accordance with the
terms of the Merger Agreement (collectively, the "Transferred Assets"). For
purposes of this Agreement, the term "Transferred Assets" shall also include the
items listed on Schedule 1(a)(2) hereto, which items shall be transferred to
Subco separately from this Agreement in accordance with the terms of the
documents referenced in such Schedule.
(ii) Notwithstanding anything herein to the
contrary, no Transferred Asset (which is a contract or agreement or any part
thereof or any rights or interests thereunder, other than the Explicit Rights
Agreements or the License Agreements in connection therewith (as such terms are
defined in Section 6(a))) which pursuant to its terms or otherwise by law may
not be transferred without the consent of any party thereto shall be deemed
transferred pursuant to this Agreement unless and until such consent or a waiver
therefrom is given. If any such consent or waiver is not reasonably likely to be
obtained before the Closing Date, each of Transferor and Subco agrees (subject
to its continuing obligation to attempt to obtain such consents or waivers prior
to Closing in accordance with the terms of the Merger Agreement and the Related
Agreements) to use its reasonable commercial efforts to enter into any
reasonable arrangement (such as subcontracting, sublicensing or subleasing)
designed to provide for Subco as of the Closing Date, on terms at least as
favorable as those Subco would have been entitled to receive had such consents
or waivers been obtained, the benefits under the applicable Transferred Asset
(such rights, title and interests of Subco under such arrangement with respect
to such Transferred Asset, the "Replacement Asset"), including, without
limitation, enforcement, at the cost and for the benefit of Subco, of any and
all rights of Transferor against any other party thereto arising out of the
breach or cancellation thereof by such party; provided that Subco agrees to
assume all liabilities and obligations relating to, or arising out of, such
Replacement Asset ("Replacement Liabilities") (provided, however, that Subco
will not assume any liabilities or obligations in excess of the liabilities or
obligations that would have been assumed had the applicable Transferred Asset
actually been transferred) and to indemnify and hold harmless Transferor (and
any Indemnitees covered by Section 10(b)) for all Losses (as defined in Section
10(a)) arising out of such Replacement Liabilities to the same extent as if such
Replacement Liabilities were included on Schedule 2 as Assumed Liabilities and
were duly assumed by Subco in accordance with the terms hereof (other than for
the costs and expenses incurred by
<PAGE>
3
Transferor in order to obtain such consent or waiver or negotiate such
arrangements), including, without limitation, for any loss or other liability of
Transferor arising out of the direct or indirect use or other exploitation of
such Replacement Asset by Subco.
(b) Notwithstanding anything in Section 1(a) to the
contrary, there shall be excluded from the Transferred Assets all of
Transferor's right, title or interest with respect to the items listed on
Schedule 1(b) hereto and all other items not expressly set forth on Schedule
1(a)(1) or Schedule 1(a)(2), which right, title and interest shall not be
transferred to Subco hereunder.
(c) Subco acknowledges that all of the Transferred
Assets shall be transferred to and accepted by Subco in accordance with this
Agreement and the other Related Agreements on the Closing Date in an "as is"
condition, free of any and all warranties or representations by Transferor,
express or implied, and subject to any liens of the Vendor Capital Group (with
respect to the portion of Vendor Capital Lease Agreement included in the
Transferred Assets), IBM Credit Corporation (with respect to the IBM related
contracts and agreements included in the Transferred Assets), or any other
liens, encumbrances or agreements (including sublicenses) in existence on the
Closing Date, with respect thereto, other than the liens of Darla L.L.C. which
shall be released in accordance with Section 6.2 of the Merger Agreement by the
Closing Date.
(d) Each of Spice and Subco shall use its reasonable
commercial efforts to cause a Licensor Consent (as defined in the Explicit
Rights Agreement) to be duly executed, prior to Closing, in connection with the
Explicit Rights Agreements for each License Agreement.
1A. Consideration. In consideration of the transfer of the
Transferred Assets, Subco will (a) assume certain liabilities as described in
Section 2 below and (b) issue to Spice, in an amount and on such terms as shall
be determined by Spice, shares of Subco Common Stock, and, if so determined by
Spice, Subco Warrants.
2. Assumption of Liabilities. In connection with the transfer
of the Transferred Assets, on the Closing Date immediately prior to the
Redemption, Subco shall unconditionally assume and undertake to pay, perform and
satisfy, when due, all of the debts, liabilities, commitments and obligations of
Transferor, whether fixed, absolute or contingent, direct or indirect, accrued
or not accrued, monetary or non-monetary, known or unknown, matured or
unmatured, whenever or however arising and whether or not the same would be
required by generally accepted accounting principles to be reflected in
financial statements or disclosed in the notes thereto (each a "Liability" and,
collectively, "Liabilities"), set forth on Schedule 2 hereto (collectively, the
"Assumed Liabilities"). Other than the Assumed Liabilities and subject to
Section 1(c) and the indemnification provisions contained in Section 1(a)(ii)
and Section 10, Subco shall have no obligation to pay, perform or satisfy any
Liability of Transferor.
<PAGE>
4
3. Employees and Employee Benefit Plans.
(a) Employment. Subco will, as of the Closing Date,
offer employment to the employees of Transferor set forth on Schedule 3(a)
hereto (the "Subco Employees"). Subco shall be entitled to offer employment to
any other Person at any time, subject to certain restrictions set forth in
Section 1(d) of the Non-Competition Agreement.
(b) 401(k) Plans. Effective as of the Closing Date,
Transferor will take steps necessary to initiate termination of Transferor's
401(k) Plan.
(c) Bonuses. Effective as of the Closing Date, Subco
shall assume all liability for the pro rata portion of the 1998 bonuses payable
to Subco Employees attributable to the period commencing immediately after the
Closing Date and continuing through the end of such year pursuant to the
Transferor's bonus plan.
(d) Worker's Compensation. Effective as of the
Closing Date, Subco shall assume all liability for workers' compensation claims
by Subco Employees arising out of events occurring after the Closing Date.
Transferor shall continue to be responsible for all liability for (i) workers'
compensation claims by Subco employees arising out of events occurring on or
prior to the Closing Date and (ii) all workers' compensation claims by all
Non-Subco Employees without regard to the date on which such claims arise.
(e) Preservation of Employee Plans. No provision of
this Agreement shall be construed as a limitation on the right of Transferor or
Subco to amend or terminate any employee plan which Transferor or Subco would
otherwise have under the terms of such employee plan or otherwise.
(f) Severance Payments. Transferor shall retain
liability for all (i) non-contractual severance obligations (other than with
respect to former Transferor employees who are employed by Subco (or EM) at any
time within six months following the Closing) arising in connection with or as a
result of the Mergers and (ii) the other severance obligations set forth on
Schedule 3(g) hereto.
3A. Special Provisions Regarding BET and Vendor
Capital Group.
(a) BET. On the Closing Date and as part of the
Transferred Assets, Transferor shall assign to Subco the Agreement for
Compressed Transponder Services effective as of January 1, 1998 between Black
Entertainment Television, Inc. ("BET") and Transferor, as renewed pursuant to a
letter dated May 26, 1998 (as extended, the "BET Agreement"), subject to BET's
consent to such assignment. Transferor shall provide one compressed digital
stream for the BET service in accordance with the BET Agreement for the balance
of the term of the BET Agreement at no charge to Subco, provided, Subco shall be
responsible for any out-of-pocket costs
<PAGE>
5
incurred by Transferor in connection with such assignment, including any costs
Transferor may incur for compression of an additional channel, if any. The BET
Agreement expires on November 30, 1998, subject to BET's rights to extend the
term for an additional six months. Notwithstanding the foregoing, should
Transferor wish to use the compressed transponder stream used by BET for any
other purpose, Transferor shall send Subco no less than 60 days prior written
notice of its desired use of the compressed transponder stream. Subco shall
cause BET to terminate its use of Transferor's compressed transponder services
on the termination date in accordance with the prior written notice and Subco
shall provide BET with a compressed transponder stream for BET's use. Subco
shall indemnify Transferor for any Losses (as defined in Section 10(a)) incurred
in connection with the BET Agreement in accordance with the indemnification
provision of this Agreement.
(b) Vendor Capital Lease Group Equipment Lease. On
the Closing Date and as part of the Transferred Assets, Transferor shall
transfer to Subco the General Instruments Digicipher II Integrated Encoder
System ("Encoder System") leased from Vendor Capital Group ("VCG") under an
equipment lease dated June 24, 1996 ("Vendor Capital Lease Agreement"). The
Vendor Capital Lease Agreement shall be replaced with two lease agreements, one
for the Encoder System and one for the decoders, with the lease payments
prorated based on the relative original costs of the Encoder System and the
decoders. Transferor shall retain the entire benefit of the advance lease
payments under the Vendor Capital Lease Agreement and the C/D assigned to VCG as
additional security thereunder. As provided for in the Mandatory Services
Agreement, Transferor shall make service payments for Compression and Encryption
Services (as those terms are defined in the Mandatory Services Agreement) in an
amount equal to the lease payments otherwise payable by Subco for the Encoder
System in accordance with the Vendor Capital Lease Agreement, as modified as
provided for herein. At Subco's election, Subco may exercise the purchase option
for the Encoder System as provided for in the Vendor Capital Lease Agreement in
which event Transferor shall pay Subco an amount equal to the amount which Subco
shall pay to VCG pursuant to the purchase option, and upon exercise of such
purchase option and payment thereunder Subco shall own all right, title and
interest in and to the Encoder System. From the date of Subco's purchase of such
Encoder System until the expiration of the initial term under the Mandatory
Services Agreement, Subco shall continue to provide Compression and Encryption
Services to Transferor, and Transferor shall not be obligated to make any
payments for such Compression and Encryption Services. If Transferor desires to
have Subco provide Compression and Encryption Services after the initial term of
the Mandatory Services Agreement, Subco shall provide such services for a fair
market value service fee to be mutually agreed to by the parties.
4. Closing.
(a) Closing and Closing Date. Subject to Section 6,
the closing of the transactions contemplated in this Agreement (the "Closing")
shall take
<PAGE>
6
place in New York City at the offices of Paul, Weiss, Rifkind, Wharton &
Garrison on the Closing Date, on or prior to the Effective Time of the Mergers.
(b) Spice Deliveries. At the Closing, Spice shall
execute and deliver to Subco the following:
(i) one or more bills of sale and instruments of
assignment with respect to the Transferred Assets in form and substance
reasonably satisfactory to the parties hereto, duly executed by Transferor;
(ii) an assignment and assumption of the Tenth
Floor Lease (as defined below) in form and substance reasonably satisfactory to
the parties hereto, duly executed by Transferor; and
(iii) all such other conveyances, assignments,
confirmations, powers of attorney, and other instruments, duly executed by
Transferor, as the parties hereto shall reasonably determine are necessary,
expedient or proper in order to effectuate the transfer and assignment of the
Transferred Assets as contemplated hereby.
(c) Subco Deliveries. At the Closing, Subco shall
execute and deliver to Spice the following:
(i) an instrument of assumption with respect to
the Assumed Liabilities in form and substance reasonably satisfactory to the
parties hereto, duly executed by Subco;
(ii) an assignment and assumption of the Tenth
Floor Lease (as defined below) in form and substance reasonably satisfactory to
the parties hereto, duly executed by Subco;
(iii) a certificate or certificates representing
shares of common stock of Subco and warrants, if any, to purchase shares of
common stock of Subco, in the number determined in accordance with Section
5(b)(v), for delivery to the Exchange Agent; and
(iv) all such other instruments of assumptions,
duly executed by Subco, as the parties hereto shall reasonably determine are
necessary, expedient or proper in order to effectuate the assumption of the
Assumed Liabilities as contemplated hereby.
5. The Redemption.
(a) Cooperation Prior to the Redemption. As promptly
as practicable after the date hereof, Spice and Subco shall take all such action
as may be necessary or appropriate to fulfill all of the conditions set forth in
Section 6 and to
<PAGE>
7
effect the Redemption, including without limitation the specific actions set
forth in clauses (b) and (c) of this Section 5, as applicable.
(b) The Redemption
(i) Spice and Subco shall prepare and Subco shall
file with the SEC a registration statement on Form S-1 or any other appropriate
form (the "S-1") to effect the registration of the Subco Common Stock and Subco
Warrants, if any, pursuant to the Securities Act and they shall use their best
efforts to cause such registration statement to be declared effective under the
Securities Act.
(ii) Spice and Subco shall cooperate in
preparing, filing with the SEC and causing to become effective any registration
statements or amendments thereto which are appropriate to reflect the
establishment of, or amendments to, any employee benefit and other plans
contemplated in this Agreement to be in effect for Subco.
(iii) Spice and Subco shall take all such action
as may be necessary or appropriate under any applicable state securities or blue
sky laws or other applicable laws in connection with the transactions
contemplated in this sub section (b).
(iv) Spice and Subco shall prepare, and Subco
shall file and seek to make effective, an application to permit listing or
quotation of the Subco Common Stock and Subco Warrants, if any, on the Nasdaq
Small Cap Market.
(v) Subject to Section 6, on the Closing Date,
Spice shall deliver to the Exchange Agent one or more share certificates
representing the shares of Subco Common Stock (and Subco Warrants, if any) to be
distributed as part of the Merger Consideration in the Mergers and shall
instruct the Exchange Agent, in accordance with the terms of the Merger
Agreement, to distribute to each holder of Spice Common Stock (other than those
whose shares shall be canceled pursuant to Section 2.2(g) of the Merger
Agreement or those who have exercised and perfected dissenters' rights under
Section 262 of the DGCL and Section 2.3(j) of the Merger Agreement), as of the
Effective Time of the Mergers, and for each share of Spice Common Stock held,
the number of shares of Subco Common Stock equal to the Redemption Ratio and the
number of Subco Warrants, if any, to be delivered pursuant to Section 2.2 of the
Merger Agreement with respect to each such share of Spice Common Stock. Spice
shall also deliver to the Exchange Agent the number of shares of Subco Common
Stock (and Subco Warrants, if any) that each holder of Convertible Preferred
would be entitled to receive if the shares of Convertible Preferred were
converted into Spice Common Stock immediately prior to the Effective Time of the
Mergers. Spice shall also deliver to the Exchange Agent the number of shares of
Subco Common Stock and Subco Warrants, if any, that each holder of stock options
or warrants of Spice would be entitled to receive if the stock options or
warrants were exercised for Spice Common Stock, and the exercise price for such
stock options or
<PAGE>
8
warrants were paid, immediately prior to the Effective Time of the Mergers.
Subco agrees to provide all share certificates that the Exchange Agent shall
require in order to effect such Redemption. All shares of Subco Common Stock
issued in the Mergers shall be duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights. Such distribution of Subco Common
Stock (and Subco Warrants, if any) in the Mergers shall be in partial exchange
for such shares of Spice Common Stock and Convertible Preferred, shall
constitute part of the Merger Consideration under the Merger Agreement, and
shall be considered a redemption of such Spice Common Stock and Convertible
Preferred for tax purposes.
(vi) Immediately upon consummation of the
Redemption, each share of Subco Common Stock owned by Spice shall automatically
and without any action on the part of Spice, be canceled and retired and cease
to exist, so that Spice shall not hold or beneficially own directly or
indirectly any shares of Subco Common Stock or any other capital stock or
securities of Subco.
(c) Spice Approval of Certain Subco Actions. Unless
otherwise provided in this Agreement, Spice shall cooperate with Subco in
effecting, and, if so requested by Subco, Spice shall, as the sole stockholder
of Subco, ratify any actions that are reasonably necessary or desirable to be
taken by Subco to effectuate, prior to the Closing Date, the transactions
contemplated in this Agreement in a manner consistent with the terms of this
Agreement, including, without limitation, the following: (i) the preparation and
approval of the Certificate of Incorporation and By-laws of Subco to be in
effect at the Closing Date; (ii) the election or appointment of directors and
officers of Subco to serve in such capacities commencing on the Closing Date;
and (iii) the registration under applicable securities laws of any securities of
Subco issued or distributed pursuant to subsection (b) above.
6. Conditions.
(a) General Conditions. The respective obligations of
the parties hereto to consummate the Redemption and to perform all other
obligations set forth herein are subject to the satisfaction or waiver of the
following conditions:
(i) an Explicit Rights Agreement, substantially
in the form of Exhibit 6(a)(i) hereto (an "Explicit Rights Agreement"), with
respect to the license agreements listed on Schedule 6(a)(i) hereto (the
"License Agreements"), other than such License Agreements for which a Licensor
Consent has not been duly executed, shall have been duly executed by all of the
parties thereto;
(ii) the Owned Rights Agreement, substantially in
the form of Exhibit 6(a)(ii) hereto (the "Owned Rights Agreement") shall have
been duly executed by all of the parties thereto; and
(iii) if the Newco Transactions shall have been
consummated, the Mandatory Services Agreement shall have been duly executed by
the
<PAGE>
9
parties thereto, and if the Newco Transactions shall not have been consummated,
the Mandatory Services Agreement, as modified to provide that Subco shall
provide the Satellite Services (as defined in the Mandatory Services Agreement)
for a minimum of three (3), rather than two (2), networks, shall have been duly
executed by the parties thereto.
(b) Conditions to the Obligations of Spice. The
obligations of Spice to consummate the Redemption and to perform all other
obligations set forth herein are subject to the satisfaction or waiver of the
following conditions:
(i) Subco shall have effected its assumption of
the Assumed Liabilities, as contemplated in Section 2;
(ii) Playboy shall have received a certificate in
form and substance reasonably satisfactory to Playboy, executed as of the
Effective Time of the Mergers by the President of Subco on behalf of Subco,
certifying that all of the conditions to be performed by Subco or Transferor
contained in this Section 6 and all of the covenants and agreements to be
performed prior to or at Closing by Subco or Transferor, shall have been duly
satisfied, performed or waived in accordance with the terms of this Agreement,
and that the covenants and agreements contained in Section 5.15(b) of the Merger
Agreement shall have been duly performed in accordance with the terms of such
Section;
(iii) effective as of the Closing Date,
Transferor shall have received all reasonably necessary or desirable releases
(including, without limitation, releases of any liens or other encumbrances on
the assets to be retained by Transferor under the Related Agreements) in
connection with any debt, financing or other similar obligations to be
transferred to Subco pursuant to the Related Agreements, a complete and accurate
list of which is set forth by Subco on Schedule 6(b)(iii) hereto, including,
without limitation, such releases duly executed and delivered by IBM Credit
Corporation and the Vendor Capital Group;
(iv) [intentionally omitted];
(v) effective as of the Closing Date, Transferor
shall have been removed as guarantor of or obligor for any indebtedness or other
obligations for which Subco would be primarily liable after giving effect to the
transactions contemplated hereby, a complete and accurate list of all such
guaranties or other obligations being set forth by Subco on Schedule 6(b)(v)
hereto;
(vi) (A) effective as of the Closing Date, all of
the contracts and agreements made solely between Transferor and EM (or any of
its subsidiaries or affiliates), a complete and accurate list of which is set
forth by Subco on Schedule 6(b)(vi)(A) hereto, shall have been terminated or
assigned in their entirety (including all rights, interests and obligations
thereunder) from Transferor to Subco;
<PAGE>
10
(B) effective as of the Closing Date, all of the
contracts and agreements among EM (or any of its subsidiaries or affiliates),
Transferor and any third party, a complete and accurate list of which is set
forth by Subco on Schedule 6(b)(vi)(B) hereto, shall have been terminated or
assigned in their entirety (including all rights, interests and obligations
thereunder) from Transferor to Subco; and
(C) effective as of the Closing Date, all of the
contracts and agreements solely among EM and third parties and all other
contracts and agreements of EM referred to in clauses (A) and (B) of this
Section 6(b)(vi) which would violate the Non-Competition Agreement (including
through the performance of any obligation thereunder), a complete and accurate
list of which is set forth by Subco on Schedule 6(b)(vi)(C) hereto, shall have
been terminated (including all rights, interests and obligations thereunder) or
amended to the extent necessary so that such contracts or agreements would no
longer be in violation of the Non-Competition Agreement;
(vii) effective as of the Closing Date, all
contracts and agreements which obligate Transferor to provide any programming,
services or other obligations, the content of which would generally be
considered "explicit" in the adult industry (including, without limitation, any
obligations to provide any programming which is similar in content and degree of
explicitness to the movies and related programming currently featured on the
C-Band channels maintained by EM) (collectively, "Explicit Obligations"), a
complete and accurate list of which is set forth by Subco on Schedule 6(b)(vii)
hereto, shall have been (x) terminated or assigned in their entirety (including
all rights, interests and obligations thereunder) to Subco pursuant to the
Related Agreements, or (y) terminated or assigned (including all rights,
interests and obligations thereunder) insofar as they relate to the provision of
such Explicit Obligations to Subco pursuant to the Related Agreements;
(viii) effective as of the Closing Date, the
Transponder Services Agreement, dated as of February 7, 1995 (including any
amendments thereto), between Loral Skynet (as successor in interest to AT&T) and
Transferor (the "Transponder Services Agreement") shall have been terminated and
replaced by two new similar and separate agreements between Loral Skynet and
Spice (or, if the Newco Transactions shall have been consummated, Newco), on the
one hand, with respect to the "platinum" transponder 7 which had been covered by
the Transponder Services Agreement (the "Newco Transponder"), and Loral Skynet
and Subco, on the other hand, with respect to the remaining transponders which
had been covered by the Transponder Services Agreement, in each case in a manner
satisfactory to Spice, so that, among other things, following the Closing Date
Transferor (or if the Newco Transactions shall have been consummated, Transferor
and Newco) shall have no liabilities or other obligations with respect to such
remaining transponders and Subco shall have no liabilities or other obligations
with respect to the Newco Transponder;
<PAGE>
11
(ix) effective as of the Closing Date, the Vendor
Capital Lease, shall have been terminated and replaced by two new similar and
separate agreements between Vendor Capital Group and Transferor, on the one
hand, with respect to the "decoders" which had been covered by the Vendor
Capital Lease Agreement, and Vendor Capital Group and Subco, on the other hand,
with respect to the Encoder System in accordance with Section 3A(b) hereof;
(x) effective as of the Closing Date, (a) the
Lease, dated February 13, 1995 (including any amendments thereto), between
Transferor, as tenant, and Schack & Schack Real Estate Co., as landlord,
covering the Tenth (10th) Floor of the building known as 536 Broadway, New York,
New York (the "Tenth Floor Lease") shall have been amended, so that Paragraph 75
of the Tenth Floor Lease (which provides for a cross-default between the Tenth
Floor Lease and any other lease between Transferor and the landlord under the
Tenth Floor Lease) shall be deleted in its entirety, and (b) all other leases of
space by Transferor, as tenant, in the buildings known as 532 Broadway and 536
Broadway, shall have been amended so that the cross default provision which is
set forth in Paragraph 75 of the Tenth Floor Lease and which is deemed included
in any other lease previously signed by Transferor and the landlord under the
Tenth Floor Lease, shall be deleted from such other leases, in each case, in a
manner satisfactory to Spice;
(xi) all other consents, approvals and other
items referenced in Section 7(c) shall have been duly obtained, including those
listed on Schedule 7(c) hereto, and all waiting periods shall have expired or
otherwise terminated without any adverse effect upon any of the parties hereto;
(xii) the representations and warranties of Subco
set forth in this Agreement shall be true and correct as of the date of this
Agreement and as of the Closing Date, as though made on and as of the Closing
Date; and
(xiii) Subco shall have delivered to Transferor a
certificate (in form and substance reasonably satisfactory to Transferor), dated
the Closing Date and signed by the Secretary of Subco, certifying (A) that full
and complete copies of the following documents are attached thereto: (x) the
Certificate of Incorporation and By-laws of Subco as in effect on the Closing
Date and (y) resolutions of the Board of Directors of Subco authorizing and
approving this Agreement, the Related Agreements and the transaction
contemplated thereby; and (B) as to the incumbency and specimen signature of
each officer of Subco signing this Agreement and the Related Agreements.
(c) Conditions to the Obligations of Subco. The
obligations of Subco to consummate the transactions contemplated herein and to
perform all other obligations set forth herein are subject to the satisfaction
or waiver of the following conditions:
<PAGE>
12
(i) that Transferor shall have transferred to
Subco the Transferred Assets, as contemplated in Sections 1(a)(i), (b) and (c);
(ii) that any failures to obtain any consents or
waivers, or to make any arrangements, in each case, which were contemplated in
Section 1(a)(ii), by the Closing Date is not reasonably likely to have,
individually or in the aggregate, an effect in, on or relating to the business
of Subco that is, or is reasonably likely to be, materially adverse to the
business, assets (including intangible assets), liabilities (contingent or
otherwise), condition (financial or otherwise), prospects or results of
operations of Subco, other than (A) any effect arising out of general economic
conditions in the United States or (B) a change in the market price of Subco
Common Stock not accompanied by one or more other effects of the type described
above in this clause (ii) (a "Subco Material Adverse Effect");
(iii) that any failure to obtain any Licensor
Consents is not reasonably likely to have, individually or in the aggregate, a
Subco Material Adverse Effect;
(iv) that all liens imposed in connection with
the Darla L.L.C. credit facility of Transferor shall have been released in
connection with the satisfaction of such facility contemplated by Section 6.2 of
the Merger Agreement; and
(v) if the Newco Transactions shall have been
consummated, the Non-Competition Agreement (as defined in the Asset Purchase
Agreement included in the Newco Agreements) shall have been duly executed and
delivered by the parties thereto.
7. Representations and Warranties of Subco. Subco represents
and warrants as follows:
(a) Corporate Existence and Power. Subco is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, and it has the requisite corporate power and authority
to execute, deliver and perform its obligations under this Agreement and each
Related Agreement to which it is or will be a party. Subco was organized on July
20, 1998, and since such date has engaged in no business other than activities
relating to its organization and the transactions contemplated by this Agreement
and the other Related Agreements.
(b) Authorization; No Contravention. The execution,
delivery and performance by Subco of this Agreement, the other Related
Agreements to which it is or will be a party and the transactions contemplated
hereby and thereby (x) have been duly authorized by all necessary corporate
action of Subco, (y) do not contravene the terms of the certificate of
incorporation or by-laws of Subco or any note, bond, lease, license, contract,
agreement or other instrument or obligation to which Subco is a party or by
which it or any of its respective properties or assets may be bound, and (z) do
not violate any judgment, injunction, writ, award, decree or order
<PAGE>
13
of any nature of any Governmental Entity against, or binding upon, Subco or any
law or regulation applicable to Subco.
(c) Governmental Authorization; Third Party Consents.
Schedule 7(c) sets forth each approval, consent, compliance, exemption, permit,
license, authorization or other action by, or notice to, or filing with, any
Governmental Entity or any other Person, and each waiting period under any
applicable law or otherwise, which is necessary or required in connection with
the execution, delivery and performance by Transferor or Subco of this
Agreement, the other Related Agreements and the transactions contemplated hereby
and thereby.
(d) Binding Effect. This Agreement has been, and each
other Related Agreement to which Subco is or will be a party will be, duly
executed and delivered by Subco; and this Agreement constitutes, and each other
Related Agreement to which Subco is or will be a party will constitute, the
legal, valid and binding obliga tion of Subco enforceable against Subco in
accordance with its terms.
8. Litigation.
(a) With respect to any action, suit, arbitration,
inquiry, proceeding or investigation by or before any court, any governmental or
other regulatory or administrative agency or commission or any arbitration
tribunal (collectively, any "Action") now pending or which may hereafter be
commenced or threatened relating to or arising from the Assumed Liabilities
which may result in liability for Transferor (and/or its successors in interest,
affiliates and employees, as the case may be), Transferor and Subco shall each
use its best efforts to have Subco or a Subco subsidiary substituted as parties
to such Action in the place of and for Transferor (and/or such other parties, as
the case may be) and to have Transferor (and/or such other parties, as the case
may be) removed as parties to such Action following the Closing Date.
(b) With respect to all Actions now pending or which
may hereafter be commenced or threatened relating to or arising from any
liabilities or obligations of Transferor not assumed by Subco pursuant to
Section 2 hereof which may result in liability for Subco (and/or its successors
in interest, affiliates and employees, as the case may be), Transferor and Subco
shall each use its best efforts to have Transferor substituted as a party to
such Action in the place of and for Subco (and/or such other parties, as the
case may be) and to have Subco (and/or such other parties, as the case may be)
removed as parties to such Action following the Closing Date.
(c) At all times from and after the Closing Date,
each of the parties hereto shall use reasonable efforts to make available to the
other upon written request its and its subsidiaries' officers, directors,
employees and agents as witnesses to the extent that such persons may reasonably
be required in connection with any Actions in which the requesting party may
from time to time be involved without
<PAGE>
14
reimbursement for such persons' salaries (but with reimbursement for such
persons' reasonable travel and other similar expenses incurred pursuant to this
Section 8(c)), and which relate to the business of Transferor as it existed
prior to the Closing.
9. Administrative Matters.
(a) Provision of Corporate Records. Each of the
parties hereto shall use its best efforts to arrange, as soon as practicable
following the Closing Date, for the delivery to the other party of the
Transferor Documents or Subco Documents (each, as defined in the Schedules
hereto), as the case may be. Except as otherwise required by law or agreed to in
writing, each of Transferor and Subco shall retain all information relating to
the business, assets or liabilities of Transferor or Subco as they existed prior
to the Closing in its possession or under its control until such information is
at least five years old except that if, prior to the expiration of such period,
any of them wishes to destroy or dispose of any such information that is at
least three years old, prior to destroying or disposing of any of such
information, (i) Transferor or Subco shall provide no less than 30 days prior
written notice to the other party, specifying the information proposed to be
destroyed or disposed of, and (ii) if, prior to the scheduled date for such
destruction or disposal, the other party requests in writing that any of the
information proposed to be destroyed or disposed of be delivered to such other
party, such party promptly shall arrange for the delivery of the requested
information to a location specified by, and at the expense of, the requesting
party. For purposes of this Section 9, "information" shall mean all records,
books, subscriptions, contracts, instruments, computer data and other data and
information.
(b) Access to Information. From and after the Closing
Date, each of the parties hereto shall afford to the other and its authorized
accountants, counsel and other designated representatives reasonable access and
duplication rights (at the requesting party's expense) during normal business
hours and upon reasonable advance notice, subject to appropriate restrictions
for classified information, to all information within the possession or control
of such party and its subsidiaries, to the extent relating to the business,
assets or liabilities of Transferor or Subco as it existed prior to the Closing,
insofar as such access is reasonably required by the other party. Without
limiting the foregoing, information may be requested under this Section 9(b) for
audit, accounting, claims, litigation and tax purposes, as well as for purpose
of fulfilling disclosure and reporting obligations.
(c) Cooperation with Respect to Government Filings
and Reports. Each of the parties hereto agrees to provide the other party with
such cooperation and information as may be reasonably requested by the other in
connection with the preparation or filing of any government report or other
government filing, or in conducting any other government proceeding, relating to
events prior to the Closing Date. Such cooperation and information shall
include, without limitation, promptly forwarding copies of appropriate notices
and forms or other communications received from or sent to any government
authority to the appropriate party. Each party shall make its employees and
facilities available during normal business hours and on
<PAGE>
15
reasonable prior notice to provide explanation of any documents or information
provided hereunder.
(d) Correspondence. Spice hereby authorizes Subco, on
and after the Closing Date, to receive and open mail addressed to Transferor and
to deal with the contents thereof in a responsible manner, provided that such
mail relates (or reasonably appears to relate) to the Subco Business, the
Transferred Assets or the Assumed Liabilities. Subco shall deliver to Spice any
mail which relates to any other matter addressed to Transferor which is
delivered to and received by Subco. Subco hereby authorizes Transferor, on and
after the Closing Date, to receive and open mail addressed to Subco and to deal
with the contents thereof in a responsible manner, provided that such mail
relates (or reasonably appears to relate) to such other matters. Transferor
shall deliver to Subco any mail which relates to the Subco Business, the
Transferred Assets or the Assumed Liabilities addressed to Subco which is
delivered to and received by Transferor.
(e) Settlement for Cash Collections and
Disbursements. For each calendar month, commencing with the month in which the
Closing occurs and continuing until determined by the parties no longer to be
necessary, each of Subco and Spice shall cause all cash collections and cash
disbursements received by Subco for the benefit of Transferor, or by Transferor
for the benefit of Subco, as the case may be, during the relevant month to be
remitted to the party entitled to the benefit thereof as promptly as reasonably
possible after the receipt thereof. Subject to the foregoing sentence, each of
Transferor and Subco shall pay to the other, if and when received, any amounts
which shall be received after the Closing Date for the benefit of such other
party.
10. Indemnification.
(a) Obligation of Spice to Indemnify. Spice shall
indemnify, defend and hold harmless Subco (and any of its directors,
representatives, officers, employees, affiliates, subsidiaries, successors and
assigns) from and against any losses, claims (including, without limitation, any
third party claims), damages, expenses or other liabilities or obligations
("Losses") (including, without limitation, interest, penalties and reasonable
fees and expenses (including costs of investigation and preparation) of
attorneys, experts and consultants incurred by any such indemnified party in any
action or proceeding between such indemnified party and such indemnifying party
or between such indemnified party and any third party) arising out of or in
connection with (i) a breach by Spice of any covenant or agreement to be
performed by it after Closing contained in this Agreement, any other Related
Agreement to which it is a party or in any document or other writing delivered
pursuant hereto or thereto, (ii) any Liability of Transferor not intended to be
assumed by Subco pursuant to Section 2, and (iii) any untrue statement or
alleged untrue statement of a material fact contained in the S-1, S-4 or in the
Proxy Statement, or any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which
<PAGE>
16
they were made, not misleading, but only in each case with respect to
information provided by or on behalf of Playboy relating to Playboy and
contained in or omitted from the S-1, S-4 or the Proxy Statement.
(b) Obligation of Subco to Indemnify. Subco shall
indemnify, defend and hold harmless Spice (and any of its directors,
representatives, officers, employees, affiliates, successors (including the S
Surviving Corporation), subsidiaries and assigns) from and against any Losses
(including, without limitation, interest, penalties and reasonable fees and
expenses (including costs of investigation and preparation) of attorneys,
experts and consultants incurred by any such indemnified party in any action or
proceeding between such indemnified party and such indemnifying party or between
such indemnified party and any third party) arising out of or in connection with
(i) a breach by Subco of any representation, warranty, certification, covenant
or agreement contained in this Agreement, any other Related Agreement to which
it is a party, or in any document or other writing delivered pursuant hereto or
thereto (including, without limitation, any certificate delivered pursuant to
this Agreement or any other Related Agreement), (ii) a breach by Spice of any
covenant or agreement to be performed by it at or prior to Closing contained in
this Agreement, any other Related Agreement to which it is a party, or in any
document or other writing delivered pursuant hereto or thereto, (iii) any
Assumed Liabilities, and (iv) any untrue statement or alleged untrue statement
of a material fact contained in the S-1, S-4 or in the Proxy Statement, or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, but only in each case
with respect to information provided by or on behalf of Subco or Transferor
relating to Subco and contained in or omitted from the S-1, S-4 or the Proxy
Statement.
(c) Notice to Indemnifying Party. If any Person
entitled to indemnification hereunder (the "Indemnitee") receives written notice
of any third party claim or potential claim or the commencement of any action or
proceeding that could give rise to an obligation on the part of any other Person
(the "Indemnifying Party") pursuant to Section 10(a) or 10(b), the Indemnitee
shall promptly give the Indemnifying Party notice thereof (the "Indemnification
Notice"); provided, however, that the failure to give the Indemnification Notice
promptly shall not impair the Indemnitee's right to indemnification in respect
of such claim, action or proceeding unless, and only to the extent that, the
lack of prompt notice results in the Indemnifying Party's forfeiture of
substantive rights or defenses. The Indemnification Notice shall contain factual
information describing the asserted claim, action or proceeding in reasonable
detail (to the extent known to the Indemnitee) and shall include copies of any
notice or other document received from any third party in respect of any such
asserted claim, action or proceeding. The Indemnifying Party shall have the
right to assume the defense of a third party claim, action or proceeding
described in this Section 10(c) at its own cost and expense and with counsel of
its own choosing; provided, however, that the Indemnifying Party acknowledges in
writing (at the time it elects to assume the defense of such claim, action or
proceeding, which shall be not later than thirty (30) days after the date of the
Indemnification Notice) its obligation
<PAGE>
17
under this Section 10(c) to indemnify the Indemnitee with respect to such claim,
action or proceeding; such counsel is reasonably satisfactory to the Indemnitee;
the Indemnitee is kept reasonably informed of all developments and is furnished
copies of all papers; the Indemnitee is given the opportunity, at its option, to
participate in, but not control, at its own cost and expense and with counsel of
its own choosing the defense of such claim, action or proceeding; and the
Indemnifying Party diligently prosecutes the defense of such claim, action or
proceeding. In the event that all of the conditions of the foregoing provision
are not satisfied, the Indemnitee shall have the right, without impairing any of
its rights to indemnification as provided herein, to assume and control the
defense of such claim, action or proceeding and to settle such claim, action or
proceeding. No settlement of any such third party claim, action or proceeding
shall be made by the Indemnifying Party without the prior written consent of the
Indemnitee (which shall not be unreasonably withheld or delayed). No settlement
of any such third party claim, action or proceeding shall be made by the
Indemnitee if the Indemnifying Party shall have assumed the defense thereof and
shall be in compliance with its obligations with respect thereto as set forth
above in this Section 10(c). If the Indemnifying Party chooses to defend any
claim, the Indemnitee shall make available to the Indemnifying Party any books,
records or other documents within its control that are necessary or appropriate
for such defense. Notwithstanding the foregoing, the Indemnitee shall have the
right to employ separate counsel at the Indemnifying Party's expense and to
control its own defense of such asserted liability if in the opinion of counsel
to such Indemnitee a conflict or potential conflict exists between the
Indemnifying Party and such Indemnitee that would make such separate
representation advisable.
(d) Certain Limitations. The amount of any Losses for
which indemnification is provided under this Agreement shall be net of any
amounts actually recovered by the Indemnitee from third parties (including,
without limitation, amounts actually recovered under insurance policies other
than pursuant to retrospective or other self-insurance type policies) with
respect to such Losses. Any Indemnifying Party hereunder shall be subrogated to
the rights of the Indemnitee upon payment in full of the amount of the relevant
Loss. An insurer who would otherwise be obligated to pay any claim shall not be
relieved of the responsibility with respect thereto or, solely by virtue of the
indemnification provisions hereof, have any subrogation rights with respect
thereto. If any Indemnitee recovers an amount from a third party in respect of
any Loss for which indemnification is provided under this Agreement after the
full amount of such Loss has been paid by an Indemnifying Party or after an
Indemnifying Party has made a partial payment of such Loss and the amount
received from the third party exceeds the remaining unpaid balance of such Loss,
then the Indemnitee shall promptly remit to the Indemnifying Party the excess
(if any) of (i) the sum of the amount theretofore paid by the Indemnifying Party
in respect of such Loss plus the amount received from the third party in respect
thereof, less (ii) the full amount of such Loss.
11. Tax Matters.
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18
(a) Except as may otherwise be agreed by the parties,
Transferor shall be liable for, and shall indemnify and hold Subco harmless from
and against, all liability for Taxes imposed by any governmental authority (i)
on Transferor that Subco pays, otherwise satisfies in whole or in part, or
results in liens or encumbrances on any assets of Subco, and (ii) on Subco in
respect of its income, business, property or operations or for which Subco may
otherwise be liable, for taxable years ending on or prior to the Closing Date,
including without limitation any Taxes arising as a result of the transactions
contemplated hereby and under the Merger Agreement and other Related Agreements.
All Taxes of Subco for which Transferor is not required to indemnify Subco
pursuant to the foregoing sentence shall be the obligation of Subco, and Subco
shall be liable for, and shall indemnify and hold Transferor and its
subsidiaries harmless from and against, all such liabilities. The parties hereto
agree to take all actions necessary to ensure that there are no taxable years of
Subco that include, but do not end on, the Closing Date. As used herein, the
term "Taxes" means all federal, state, local and foreign taxes, including,
without limitation, income, profits, franchise, employment, transfer,
withholding, property, excise, sales and use taxes (including interest and
penalties thereon and additions thereto).
(b) Any refunds of taxes or any credit against Taxes
of Subco with respect to any taxable years or portions thereof ending on or
prior to the Closing Date shall be for the account of Transferor. Subco shall
promptly forward to, or reimburse Transferor for, any such refunds or credits
and interest due Transferor after receipt thereof. Each party hereto shall
cooperate with the other party as reasonably requested in making such filings as
may be necessary and appropriate to seek any such refunds or credits.
(c) Transferor shall prepare any returns relating to
Taxes to be filed by or with respect to Subco which relates to any period ending
on or prior to the Closing Date. Subco shall promptly respond to all reasonable
requests by Transferor for information necessary to prepare and file any such
Tax returns.
(d) Transferor shall have the right, at its own
expense, to negotiate, settle or contest any asserted Tax liability or refund
claim of Subco to the extent that Transferor is required to indemnify against
such asserted Tax liability pursuant to Section 11(a) or is entitled to such
refund or credit pursuant to Section 11(b).
(e) If Subco receives any written communication from
a taxing authority regarding any actual or proposed assessment, official inquiry
or proceeding that could give rise to an official determination with respect to
any Tax liability or Tax refund claim for any period for which Transferor may be
liable (in the case of a liability) or may be entitled (in the case of a refund
claim) pursuant to this Agreement, Subco (i) shall within 15 days of receipt of
such written communication so notify Transferor in writing, and (ii) shall,
prior to and for at least 30 days after so notifying Transferor (or, if less,
within a period ending 5 days prior to the date,
<PAGE>
19
including extensions, on which Subco is required to take action pursuant to such
written communication), refrain from making any payment of any Tax claimed and
forbear from any settlement negotiations or compromises with respect to such
proposed adjustment. Transferor agrees to notify Subco in writing within such 30
(or shorter) day period if it intends to exercise its contest rights hereunder
with respect to the asserted Tax liabilities or the refund claim. The parties
hereto agree to cooperate with each other in connection with any examination
process with respect to any asserted Tax liability or refund claim and shall
make available on a reasonable basis to each other any personnel, books, records
or other documents necessary or appropriate for participation in such process.
12. Certain Transaction Costs and Expenses. The parties hereto
hereby agree that all of the costs and expenses of Subco and Transferor incurred
in connection with the development, negotiation, preparation and execution of
this Agreement, the other Related Agreements and all documents contemplated
hereby or thereby, and otherwise in connection with the consummation of the
transactions contemplated hereby and thereby, shall be paid in accordance with
the terms of Section 7.5 of the Merger Agreement.
13. Mutual Release. Effective as of the Closing, each of
Transferor, on the one hand, and Subco, on the other hand, releases and forever
discharges the other and its affiliates, and its directors, officers, employees
and agents of and from all debts, demands, actions, causes of action, suits,
accounts, covenants, contracts, agreements, damages, and any and all claims,
demands and liabilities whatsoever of every name and nature, both in law and in
equity, against such other party or any of its assigns, which the releasing
party has or ever had, which arise out of or relate to events, circumstances or
actions taken by such other party prior to the Closing; provided, however, that
the foregoing general release shall not apply to this Agreement, the Merger
Agreement, the other Related Agreements or the transactions contemplated hereby
or thereby and shall not affect either party's right to enforce this Agreement,
the other Related Agreements or any other agreement contemplated hereby or
thereby in accordance with its terms.
14. Termination. The Agreement (a) may be terminated at any
time prior to the Closing Date by mutual written consent of Spice and Playboy,
or (b) shall terminate upon termination of the Merger Agreement and abandonment
of the transactions therein contemplated prior to the Effective Time of the
Mergers.
15. Further Assurances. Transferor and Subco shall cooperate
with one another and shall execute and deliver, or cause to be executed and
delivered, such documents and other papers, and take such further actions, as
may be reasonably requested or desirable to carry out the provisions hereof and
to consummate the transactions contemplated hereby.
16. Waiver and Amendments; Remedies; Third Party
Beneficiaries. This Agreement may be amended, superseded, canceled, renewed or
extended, and the
<PAGE>
20
terms hereof may be waived, only by a written instrument signed by each of the
parties hereto, or, in the case of a waiver, by the party waiving compliance. No
delay on the part of any party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof, nor shall any waiver on the part of
any party of any such right, power or privilege, nor any single or partial
exercise of any such right, power or privilege, preclude any further exercise
thereof or the exercise of any other such right, power or privilege. The rights
and remedies herein provided are cumulative and are not exclusive of any rights
or remedies that any party may otherwise have at law or in equity. The parties
hereby agree that Playboy (and each of its subsidiaries and affiliates) shall be
a third-party beneficiary of this Agreement. Nothing expressed or mentioned in
this Agreement is intended or shall be construed to give any Person other than
the parties hereto, any Indemnitee under Section 10 and Playboy (and each of its
subsidiaries and affiliates) and their respective successors and assigns any
legal or equitable right, remedy or claim under or in or in respect of this
Agreement or any provision herein contained.
17. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE WITHOUT REGARD TO
CONFLICTS OF LAW PRINCIPLES THEREOF.
18. WAIVER OF JURY TRIAL. EACH OF THE PARTIES TO THIS
AGREEMENT IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ALL RIGHTS
TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED UPON
CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE
OTHER RELATED AGREEMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR
THEREBY.
19. Binding Effect; No Assignment. This Agreement shall be
binding upon and shall inure to the benefit of the parties and their respective
successors, assigns and legal representatives. This Agreement shall not be
assigned by either party hereto, except that either party may assign this
Agreement with the prior written consent of Playboy.
20. Entire Agreement. This Agreement, the other Related
Agreements, the Merger Agreement and all other documents in connection with the
foregoing (including the exhibits and schedules hereto and thereto) contain the
entire agreement among the parties with respect to the transactions contemplated
hereby and thereby and supersede all prior agreements, written or oral, with
respect thereto.
21. Severability. If any provision of this Agreement shall be
declared to be invalid, illegal or unenforceable, such provision shall survive
to the extent it is not so declared, and the validity, legality and
enforceability of the other provisions hereof shall not in any way be affected
or impaired thereby, unless such action would
<PAGE>
21
substantially impair the benefits to either party of the remaining provisions of
this Agreement.
22. Table of Contents and Headings. The table of contents and
headings in this Agreement are solely for convenience of reference and shall not
affect the interpretation or construction of any of the provisions hereof.
23. Notices. All notices, requests, demands and other
communications required or permitted hereunder shall be in writing and shall be
deemed given on the date delivered if delivered personally (including by
courier), on the date transmitted if sent by telecopy (which is confirmed) or
mailed by registered or certified mail (return receipt requested) to the parties
at the following addresses:
If to Transferor prior to the Closing Date:
Spice Entertainment Companies, Inc.
536 Broadway
New York, New York 10012
Attention: Daniel Barsky, Esq.
General Counsel
Facsimile: (212) 226-6354
with a copy to: Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
Attention: Paul S. Pearlman, Esq.
Facsimile: (212) 715-8000
If to Transferor on or after the Closing Date or to Playboy:
Playboy Enterprises, Inc.
680 North Lake Shore Drive
Chicago, IL 60611
Attention: Howard Shapiro, Esq.
General Counsel
Facsimile:(312) 266-2042
with a copy to: Paul, Weiss, Rifkind, Wharton &
Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Attention: James M. Dubin, Esq.
Facsimile: (212) 757-3990
or to such other Person or address (or facsimile number) as Playboy shall
furnish to Subco in writing.
<PAGE>
22
If to Subco to: Directrix, Inc.
536 Broadway, 10th Floor
New York, New York 10012
Attention: J. Roger Faherty
Facsimile: [ ]
with a copy to: Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
Attention: Paul S. Pearlman, Esq.
Facsimile: (212) 715-8000
or to such other Person or address (or facsimile number) as Subco shall furnish
to Transferor in writing.
Prior to the Effective Time of the Mergers, Playboy shall
receive copies of all notices or other communications given hereunder by any
party at the address set forth above.
24. Counterparts. This Agreement may be executed in two
counterparts, each of which shall be deemed an original, but both of which
together shall constitute one and the same original.
<PAGE>
23
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
SPICE ENTERTAINMENT COMPANIES, INC.
By:
----------------------------------------
Name:
Title:
DIRECTRIX, INC.
By:
----------------------------------------
Name:
Title:
<PAGE>
Exhibit 3.1
CERTIFICATE OF INCORPORATION
OF
DIRECTRIX, INC.
The undersigned, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of the
State of Delaware (particularly Chapter 1, Title of the Delaware Code and the
acts amendatory thereof and supplemental thereto, and known, identified and
referred to as the "General Corporation Law of the State of Delaware") hereby
certifies that:
FIRST: The name of this corporation (hereinafter called the
"Corporation") is DIRECTRIX, INC.
SECOND: The address, including street, number, city and county of
the registered office of the Corporation in the State of Delaware is 1013 Centre
Road, City of Wilmington, County of New Castle, 19805 and the name of the
registered agent of the corporation in the State of Delaware at such address is
Corporation Service Company.
THIRD: The nature of the business and of the purposes to be
conducted and promoted by the Corporation are to conduct any lawful business, to
promote any lawful purpose, and to engage in any lawful act or activity for
which corporations may be organized under the General Corporation Law of the
State of Delaware.
FOURTH: The total number of shares of all classes of stock that the
Corporation shall have authority to issue is 27,000,000 of which 2,000,000 shall
be Preferred Stock, par value $.01 per share ("Preferred Stock"), and 25,000,000
shall be Common Stock, par value $.01 per share ("Common Stock"), and the voting
powers, designations, preferences and relative, participating, optional or other
special qualifications, limitations or restrictions thereof are as follows:
1. COMMON STOCK. The holders of Common Stock shall be entitled
to one vote for each Share so held and shall be entitled to notice of any
stockholders meeting and to vote upon any such matters as provided in the
by-laws of the Corporation or as may be provided by law. Except for and subject
to those rights expressly granted to holders of Preferred Stock or, except as
may be provided by the laws of the State of Delaware, the
<PAGE>
holders of Common Stock shall have exclusively all other rights of stockholders,
including, without limitation, (i) the right to receive dividends, when and as
declared by the Board of Directors of the Corporation, out of assets lawfully
available therefor, and (ii) in the event of any distribution of assets upon a
liquidation or otherwise, the right to receive all the assets and funds of the
Corporation remaining after the payment to the holders of the Preferred Stock,
if any, of the specific amounts which they are entitled to receive upon such
distribution.
2. PREFERRED STOCK
(a) The Preferred Stock may be issued from time to time in
one or more series, each of which shall be distinctively designated, shall rank
equally and shall be identical in all respects, except as otherwise provided in
subsection 1(b) of this Article FOURTH.
(b) Authority is hereby vested in the Board of Directors to
issue from time to time the Preferred Stock of any series and to state in the
resolution or resolutions providing for the issue of shares of any series the
voting powers, if any, designations, preferences and relative, participating,
optional or other special rights, and the qualifications, limitations or
restrictions of such series to the full extent now or hereafter permitted by the
law of the State of Delaware in respect of the matters set forth in the
following clauses (i) to (viii) inclusive:
(i) the number of shares to constitute such
series, and the distinctive designations thereof;
(ii) the voting powers, full or limited, if any, of
such series;
(iii) The rate of dividends payable on shares of such
series, the conditions on which and the times when such dividends are
payable, the preferences to, or the relation to, the payment of the
dividends payable on any other class, classes or series of stock whether
cumulative or non-cumulative and, if cumulative, the date from which
dividends on shares of such series shall be cumulative;
(iv) the redemption price or prices, if any, and
the terms and conditions on which shares of such series shall be
redeemable;
(v) the requirement of any sinking fund or funds
to be applied to the purchase or redemption of shares of such series and,
if so, the amount of such fund or
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<PAGE>
funds and the manner of application;
(vi) the rights of shares of such series upon the
liquidation, dissolution or winding up of, or upon any distribution of the
assets of, the Corporation;
(vii) the rights, if any, of the holders of
shares of such series to convert such shares into, or to exchange such
shares for, shares of any other class, classes or series of stock and
the price or prices or the rates of exchange and the adjustments at
which such shares shall be convertible or exchangeable, and any other
terms and conditions of such conversion or exchange;
(viii) any other preferences and relative,
participating, optional or other special rights of shares of such series,
and qualifications, limitations or restrictions including, without
limitation, any restriction on an increase in the number of shares of any
series theretofore authorized and any qualifications, limitations, or
restrictions of rights or powers to which shares of any future series shall
be subject.
(c) The number of authorized shares of Preferred Stock may
be increased or decreased by the affirmative vote of the owners of a majority of
the stock of the Corporation that is entitled to vote, without a class vote of
the Preferred Stock, or any series thereof, except as otherwise provided in the
resolution or resolutions fixing the voting rights of any series of the
Preferred Stock.
FIFTH: (a) The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors except as otherwise
provided herein or required by law.
(b) Election of Directors need not be by written ballot
unless the Bylaws of the Corporation shall so provide.
(c) The number of Directors of the Corporation shall be
that number stated in the Bylaws of the Corporation. The Directors, other than
those who may be elected by the holders of any series of Preferred Stock, shall
be classified, with respect to the term for which they severally hold office,
into three classes, as nearly equal in number as possible. The term of one
class of Directors shall expire at the annual meeting of stockholders to be held
in 1999, the term of another class shall expire at the annual meeting of
stockholders to be held in 2000, and the term of another class shall expire at
the annual meeting of stockholders to be held in 2001. Members
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<PAGE>
of each class shall hold office until their successors are duly elected and
qualified or until their earlier resignation or removal. At each succeeding
annual meeting of the stockholders of the Corporation, the successors of the
class of Directors whose term expires at that meeting shall be elected by a
plurality vote of all votes cast at such meeting to hold office for a term
expiring at the annual meeting of stockholders held in the third year following
the year of their election. The persons serving as Directors in classes whose
terms expire in 1999, 2000 and 2001 shall be determined by resolution of the
Board of Directors.
Notwithstanding the foregoing, whenever pursuant to the provisions of
Article FOURTH of this Certificate of Incorporation, the holders of any one or
more series of Preferred Stock shall have the right, voting separately as a
series or together with holders of other such series, to elect directors at an
annual or special meeting of stockholders, the election, term of office, filling
of vacancies and other features of such directorships shall be governed by the
terms of this Certificate of Incorporation and any certificate of designations
applicable thereto, and such directors so elected shall not be divided into
classes pursuant to this Article FIFTH unless so provided by such terms.
During any period when the holders of any series of Preferred Stock
have the right to elect additional directors as provided for or fixed pursuant
to the provisions of Article FOURTH hereof, then upon commencement and for the
duration of the period during which such right continues: (i) the then
otherwise total authorized number of Directors of the Corporation shall
automatically be increased by such specified number of Directors, and the
holders of such Preferred Stock shall be entitled to elect the additional
Directors so provided for or fixed pursuant to said provisions, and (ii) each
such additional Director shall serve until such Director's successor shall have
been duly elected and qualified, or until such Director's right to hold such
office terminates pursuant to said provisions, whichever occurs earlier, subject
to such Director's earlier death, disqualification, resignation or removal.
Except as otherwise provided by the Board in the resolution or resolutions
establishing such series, whenever the holders of any series of Preferred Stock
having such right to elect additional Directors are divested of such right
pursuant to the provisions of such stock, the terms of office of all such
additional Directors elected by the holders of such stock, or elected to fill
any vacancies resulting from the death, resignation, disqualification or removal
of such additional Directors, shall forthwith terminate and the total and
authorized number of Directors of the Corporation shall be reduced accordingly.
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<PAGE>
(d) Subject to the rights, if any, of the holders of any
series of Preferred Stock to elect Directors and to remove any Director whom
such holders have the right to elect, and notwithstanding the provisions of this
Article FIFTH providing for the classification of the Board of Directors, any
Director or the entire Board of Directors (including persons elected by
Directors to fill vacancies in the Board of Directors) may be removed, for cause
only, by the holders of 67% of the shares then entitled to vote at an election
of Directors.
(e) Notwithstanding any other provision of this Certificate
of Incorporation, the Bylaws of the Corporation or any provision at law, the
provisions of this Article FIFTH shall not be deleted, amended or repealed
except by holders of 67% of the shares then entitled to vote at an election of
Directors.
SIXTH: The name and mailing address of the incorporator is as
follows:
Sharon Makower
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
SEVENTH: (a) Subject to the rights of the holders of any one or more
series of Preferred Stock, no action relating to the business or affairs of the
Corporation may be taken by the stockholders, in writing or otherwise, except
such actions as are taken at an annual or special meeting of stockholders.
Special meetings of stockholders may only be called by the Chairman of the
Board, the Chief Executive Officer, the President or the Executive Vice
President of the Corporation or by the Secretary upon the written request,
stating the purpose of such meeting, of two-thirds of the Board of Directors.
(b) No action required to be taken or which may be taken at
any annual or special meeting of stockholders of the Corporation may be taken
without a meeting, and the power of stockholders to consent in writing, without
a meeting, to the taking of any action, is specifically denied.
EIGHTH: Whenever a compromise or arrangement is proposed between
this Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
Section 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver
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or receivers appointed for this Corporation under Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
NINTH: The Board of Directors shall have the power to make, alter,
or repeal the By-laws of the Corporation, subject to the power of the
stockholders entitled to vote thereon to alter or repeal By-laws made by the
Board of Directors.
TENTH: The Corporation shall, to the fullest extent permitted by
the General Corporation Law of the State of Delaware, as in effect from time to
time (but, in the case of any amendment of the General Corporation Law of the
State of Delaware, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment), indemnify, and upon request
shall advance expenses to, any and all persons whom it shall have power to
indemnify under such law to the extent that such indemnification and advancement
of expenses is permitted under such law, as such law may from time to time be in
effect; provided, however, that the foregoing shall not require the Corporation
to indemnify or advance expenses to any person in connection with any action,
suit, proceeding, claim or counterclaim initiated by or on behalf of such
person. The indemnification and advancement of expenses provided for herein
shall not be deemed exclusive of any other rights of which those seeking
indemnification may be entitled under any By-Law, arrangement, vote of
stockholders or directors or otherwise, both as to action in official capacity
and as to action in another capacity while holding such office. Such right to
indemnification shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person. To the extent permitted by
applicable law, any person seeking indemnification under this Article TENTH
shall be deemed to have met the standard of conduct required for such
indemnification unless the contrary shall be established. Any repeal or
modification of the foregoing provisions of this
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Article TENTH shall not adversely affect any right or protection of a person
with respect to any acts or omissions of such person occurring prior to such
repeal or modification.
ELEVENTH: A director shall not be personally liable to the Corporation
or its stockholders for any monetary damages for breach of fiduciary duty as a
director; provided, however, that subject to the immediately following sentence,
this Article ELEVENTH shall not eliminate or limit the liability of a director
to the extent provided by applicable law (i) for any breach of such director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the General Corporation Law of the
State of Delaware, or (iv) for any transaction from which such director derived
an improper personal benefit. If the General Corporation Law of the State of
Delaware is amended after this Certificate of Incorporation becomes effective to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the General
Corporation Law of the State of Delaware, as so amended. Neither the amendment
or repeal of this Article, nor the adoption of any provision of this Certificate
of Incorporation inconsistent with this Article shall adversely affect any right
or protection existing under this Article at the time of such amendment or
repeal.
I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, do make this certificate, hereby declaring and certifying
that this is my act and deed and the facts herein stated are true, and
accordingly have hereunto set my hand this 20th day of July, 1998.
/s/
--------------------------------
Sharon Makower, Incorporator
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Exhibit 3.2
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BYLAWS
OF
DIRECTRIX, INC.
(A DELAWARE CORPORATION)
AS ADOPTED JULY 20, 1998
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<PAGE>
DIRECTRIX, INC.
(Hereinafter, the "Corporation")
A DELAWARE CORPORATION
BYLAWS
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ARTICLE 1
STOCKHOLDERS
Section 1.1 ANNUAL MEETING.
An Annual Meeting of stockholders shall be held each year at such
date, time, and place, either within or without the State of Delaware, as may be
specified by the Board of Directors in the notice of meeting At each annual
meeting the stockholders shall elect directors, as provided in the Certificate
of Incorporation, by plurality vote and shall transact such other business as
may be properly brought before the meeting.
Section 1.2 SPECIAL MEETINGS.
Except as otherwise provided in the terms of any class or series of
preferred stock or unless otherwise provided by law or by the Certificate of
Incorporation, Special Meetings of stockholders of the Corporation, for any
purpose or purposes, may be called only by the Chairman of the Board or by the
Board of Directors pursuant to a resolution adopted by 75% of the members of the
Board of Directors then in office. No business except that which is designated
in the notice of meeting shall be considered at any Special Meeting of
stockholders. The notice of meeting for any meeting at which the Certificate of
Incorporation or these Bylaws are proposed to be amended shall describe
generally the proposed amendment. Special meetings of holders of any
outstanding class or series of preferred stock may be called in the manner and
for the purposes provided in the Certificate of Incorporation of the Corporation
or in the resolutions of the Board of Directors providing for the issuance of
such class or series of preferred stock.
Section 1.3 NOTICE OF MEETINGS.
Written notice of stockholders meetings, stating the place, date, and
hour thereof, and, in the case of a Special Meeting, the purpose or purposes for
which the meeting is called, shall be given by the Chairman of the Board, the
President, any Vice President, the Secretary, or an Assistant Secretary, to each
stockholder entitled to vote thereat at least ten (10) days but not more than
sixty (60) days before the date of the meeting, unless a different period is
prescribed by law. Such notices shall be signed by the Secretary or other
person or persons calling the meeting.
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Section 1.4 NOTICE OF NOMINATIONS FOR THE ELECTION OF DIRECTORS.
(a) Subject to the rights of any class or series of preferred stock,
nominations for the election of directors may be made by the Board of Directors
or a committee appointed by the Board of Directors or by any stockholder
entitled to vote in the election of directors generally; PROVIDED, HOWEVER, that
any stockholder entitled to vote generally in the election of directors may
nominate one or more persons for election as directors only if written notice of
such stockholder's intent to make such nomination or nominations has been
received by the Secretary of the Corporation at the Corporation's principal
executive office (i) with respect to any election to be held at an Annual
Meeting of stockholders, not more than one hundred twenty (120) days nor less
than ninety (90) days in advance of such meeting, and (ii) with respect to an
election to be held at a Special Meeting of stockholders to elect directors, not
more than sixty (60) days prior to such Special Meeting nor later than the close
of business seven (7) days after the day on which notice of the Special Meeting
is given to stockholders.
Such notice must contain:
(1) the name and address of the stockholder who intends to make
the nomination and of the person or persons to be nominated;
(2) a representation that the stockholder intending to make such
nomination(s) is the holder of record of the shares of common stock and/or any
class or series of capital stock entitled to vote with the holders of common
stock generally upon matters which may be submitted to a vote of stockholders at
such meeting ("Voting Securities") and intends to appear in person or by proxy
at the meeting to nominate the person(s) specified in the notice;
(3) a description of all arrangements or understandings relating
to such election of directors between such stockholder, each person proposed to
be nominated and any other person or persons (naming such person or persons);
(4) such other information regarding the person(s) proposed to
be nominated for election that is required to be disclosed in solicitations of
proxies for election of directors in an election contest or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder; and
(5) the consent of each person proposed to be nominated to serve
as a director of the Corporation if so elected.
(b) If a person is validly designated as a nominee in accordance with
paragraph (a) above and thereafter becomes unable or unwilling to stand for
election to the Board of Directors, the stockholder proposing to nominate such
person may designate a substitute nominee
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by delivering, not fewer than thirty (30) days prior to the date of the meeting
for the election of directors, a written notice to the Secretary proposing a
substitute nominee and setting forth such information regarding such substitute
nominee as would have been required to be delivered to the Secretary pursuant to
paragraph (a) above had such substitute nominee been initially proposed as a
nominee. Such notice shall include a signed consent to serve as a director of
the Corporation, if elected, of such substitute nominee.
(c) If the chairman of any meeting of stockholders for the election
of directors determines that the nomination of any candidate for election as a
director at such meeting was not made in accordance with the applicable
provisions of this Section 1.4, such nomination shall be void.
(d) The provisions of this Section 1.4 shall not apply to the
nomination or election of any directors to be elected by the holders of any
class or series of preferred stock.
Section 1.5 STOCKHOLDER PROPOSALS REGARDING AMENDMENTS TO CERTIFICATE
OF INCORPORATION.
Notwithstanding anything to the contrary set forth in these Bylaws, no
proposal by a stockholder to amend or supplement the Certificate of
Incorporation of the Corporation shall be voted upon at any meeting of
stockholders unless such stockholder shall have delivered, not less than ten
(10) days nor more than sixty (60) days before the date specified for such
meeting of stockholders, to the Secretary of the Corporation (i) written notice
of such proposal and the text of such amendment or supplement, (ii) a
representation that the stockholder proposing such amendment or supplement is
the holder of record of shares of Voting Securities and the number of shares of
each class of the capital stock of the Corporation beneficially owned by such
stockholder, (iii) a list of the names of other beneficial owners of shares of
the capital stock of the Corporation, if any, with whom such stockholder is
acting in concert or with whom such stockholder otherwise has any understanding
or agreement and the number of shares of each class of the capital stock of the
Corporation beneficially owned by each such beneficial owner, and (iv) an
opinion of counsel (such counsel and opinion to be reasonably satisfactory to
the Board of Directors of the Corporation), to the effect that the Certificate
of Incorporation of the Corporation, as proposed to be so amended or
supplemented, would not be in conflict with the laws of the State of Delaware.
After such stockholder shall have delivered the aforesaid items to the Secretary
of the Corporation, the Secretary of the Corporation shall determine whether
such items are reasonably satisfactory and shall notify such stockholder in
writing of its determination, which notice shall be delivered to such
stockholder prior to the meeting. If such stockholder fails to submit a
required item in the form or within the time indicated, or if the Secretary of
the Corporation determines that the items submitted are not reasonably
satisfactory, then such proposal by such stockholder shall not be presented and
shall not be voted upon by the stockholders of the Corporation at such meeting
of stockholders.
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Section 1.6 QUORUM PRESENT TO CONDUCT BUSINESS AT STOCKHOLDERS'
MEETINGS.
Subject to the rights of the holders of any class or series of
preferred stock and except as otherwise provided by law or in the Certificate of
Incorporation or these Bylaws, at any meeting of stockholders the holders of a
majority in total voting power of the total number of outstanding shares of
stock entitled to vote at the meeting shall be present or represented by proxy
in order to constitute a quorum for the transaction of any business at any
meeting of stockholders. In the absence of a quorum, the holders of a majority
in total voting power of the shares that are present in person or by proxy or
the chairman of the meeting may adjourn the meeting from time to time in the
manner provided in Section 1.6 of these Bylaws until a quorum shall attend.
Section 1.7 ADJOURNMENT OF STOCKHOLDERS' MEETINGS.
Any meeting of stockholders, annual or special, may be adjourned from
time to time to reconvene at the same or some other place, and, except as
provided below, notice need not be given of any such adjourned meeting if the
time and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting, the Corporation may transact any business
which might have been transacted at the original meeting. If the adjournment is
for more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
Section 1.8 ORGANIZATION OF STOCKHOLDERS' MEETINGS.
The Chairman of the Board, or in his absence the President, or in
their absence, any Vice President, shall call to order meetings of stockholders
and shall act as chairman of such meetings (the "Presiding Person"). The Board
of Directors or, if the Board fails to act, the stockholders, may appoint any
stockholder, director, or officer of the Corporation to act as the Presiding
Person of any meeting of stockholders in the absence of the Chairman of the
Board, the President and all Vice Presidents.
The Secretary of the Corporation shall act as secretary of all
meetings of stockholders and shall keep the minutes thereof, but, in the absence
of the Secretary, the chairman of the meeting may appoint any other person to
act as secretary of the meeting.
Section 1.9 CONDUCT OF MEETINGS BY PRESIDING PERSON.
All determinations of the Presiding Person at each meeting of
stockholders shall be conclusive unless a matter is determined otherwise upon
motion duly adopted by the affirmative vote of the holders of at least 80% of
the voting power of the Voting Securities held by stockholders present in person
or represented by proxy at such meeting. Accordingly, in any meeting of
stockholders or part thereof, the presiding person shall have the sole power to
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determine appropriate rules or to dispense with theretofore prevailing rules.
Without limiting the foregoing, the following rules shall apply:
(a) The Presiding Person may ask or require that anyone not a bona
fide stockholder or proxy leave the meeting.
(b) If disorder shall arise which prevents continuation of the
legitimate business of the meeting, the Presiding Person may announce the
adjournment of the meeting, and upon his so doing, the meeting shall be deemed
immediately adjourned.
(c) A resolution or motion shall be considered for vote only if
proposed by a stockholder or duly authorized proxy, and seconded by an
individual who is a stockholder or a duly authorized proxy, other than the
individual who proposed the resolution or motion, subject to compliance with any
other requirements concerning such a proposed resolution or motion contained in
these Bylaws. The Presiding Person may propose any motion for vote. The order
of business at all meetings of stockholders shall be determined by the Presiding
Person.
(d) The Presiding Person may impose any reasonable limits with
respect to participation in the meeting by stockholders, including, but not
limited to, limits on the amount of time at the meeting taken up by the remarks
or questions of any stockholder, limits on the numbers of questions per
stockholder, and limits as to the subject matter and timing of questions and
remarks by stockholders.
(e) Before any meeting of stockholders, the Board of Directors may
appoint one or more persons other than nominees for office to act as inspectors
of election at the meeting or its adjournment. If no inspectors of election are
so appointed, the Presiding Person may, and on the request of any stockholder or
a stockholder's proxy shall, appoint inspector(s) of election at the meeting of
stockholders. If any person appointed as inspector fails to appear or fails or
refuses to act, the Presiding Person may, and upon the request of any
stockholder or a stockholder's proxy shall, appoint a person to fill such
vacancy.
The duties of these inspectors shall be as follows:
(i) Determine the number of shares outstanding and the voting
power of each, the shares represented at the meeting, the existence of
a quorum, and the authenticity, validity and effect of proxies;
(ii) Receive votes or ballots;
(iii) Hear and determine all challenges and questions in any
way arising in connection with the right to vote;
(iv) Count and tabulate all votes;
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(v) Report to the Board of Directors the results based on the
information assembled by the inspectors; and
(vi) Do any other acts that may be proper to conduct the
election or vote with fairness to all stockholders.
Notwithstanding the foregoing, the final certification of the results of any
election or other matter acted upon at a meeting of stockholders shall be made
by the Board of Directors.
Section 1.10 VOTING AT STOCKHOLDERS' MEETINGS.
Subject to the rights of the holders of any class or series of
preferred stock and except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, and except in respect of the election of
directors, at any meeting duly called and held at which a quorum is present the
affirmative vote of a majority of the voting power of the Voting Securities held
by stockholders present in person or represented by proxy at the meeting and
entitled to vote on the subject matter shall be the act of the stockholders
unless the laws of the state of Delaware or the Certificate of Incorporation
require a different vote, in which case such provision shall govern and control
the decision of such question.
Section 1.11 VOTING LIST.
(a) A complete list of the stockholders of the Corporation entitled
to vote at the ensuing meeting, arranged in alphabetical order, and showing the
address of and number and class of shares owned by each stockholder shall be
prepared by the Secretary or other officer of the Corporation or by an officer
of the transfer agent of the Corporation having charge of the stock transfer
books.
(b) The original stock transfer books shall be prima facie evidence
as to who are the stockholders entitled to examine such list or to vote at any
meeting of the stockholders.
ARTICLE 2
BOARD OF DIRECTORS
Section 2.1 NUMBER AND TERM OF OFFICE.
The governing body of this Corporation shall be a Board of Directors.
Subject to any rights of the holders of any class or series of preferred stock
to elect additional directors, the initial number of directors on the Board of
Directors at the time of the adoption of these Bylaws shall be at least three
(3) but not more than nine (9); provided, however, that the number of directors
of the Corporation may be increased or decreased from time to time by resolution
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adopted by 80% of the members of the Board of Directors then in office, but no
decrease in the number of members of the Board of Directors shall have the
effect of shortening the term of any incumbent director, except as may be
provided in the terms of any class or series of preferred stock with respect to
any additional director elected by the holders of such class or series of
preferred stock. As provided in the Certificate of Incorporation, the Directors
shall be divided into three (3) classes as nearly equal in number as possible.
At each annual meeting directors to re-elect those whose terms expire at such
annual meeting shall be elected to hold office until the third succeeding annual
meeting and their successors are duly elected and qualified, or until their
earlier resignation or removal. If the number of directors is changed, any
newly created directorship or decrease in directorships shall be so apportioned
among the classes as to make all classes as nearly equal in number as possible.
If the number of directors is increased by the Board of Directors and any newly
created directorships are filled by the Board, there shall be no classification
of the additional directors until the next annual meeting of stockholders.
Except as provided in Section 2.3 of this Article 2, directors shall be elected
by a plurality of the votes cast at the Annual Meeting of stockholders.
Directors shall be of legal age. A director need not be a stockholder, a
citizen of the United States or a resident of the State of Delaware.
Section 2.2 RESIGNATIONS.
Any director or officer of the Corporation, or any member of any
committee, may resign at any time by giving written notice to the Board of
Directors, the Chairman of the Board, the President or the Secretary of the
Corporation. Any such resignation shall take effect at the time specified
therein or, if the time be not specified therein, then upon receipt thereof.
The acceptance of such resignation shall not be necessary to make it effective.
Section 2.3 NEWLY CREATED DIRECTORSHIPS AND VACANCIES.
Subject to the rights of the holders of any class or series of
preferred stock, vacancies on the Board of Directors resulting from death,
resignation, removal, disqualification or other cause, and newly created
directorships resulting from any increase in the number of directors on the
Board of Directors, shall be filled by the affirmative vote of a majority of the
remaining directors then in office (even though less than a quorum) or by the
sole remaining director. Any director elected in accordance with the preceding
sentence shall be classified at the next Annual Meeting of stockholders and
shall hold office until the third succeeding Annual Meeting of stockholders
following the date of such classification and until such director's successor
shall have been duly elected and qualified. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
Section 2.4 CHAIRMAN OF THE BOARD.
The directors shall elect one of their members to be Chairman of the
Board of Directors in accordance with Section 3.1 of these Bylaws. The Chairman
may be removed as Chairman prior to the conclusion of his term of office by a
vote of 80% of the other members
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of the Board of Directors. He shall perform such duties as may from time to
time be assigned to him by the Board of Directors.
Section 2.5 MEETINGS OF THE BOARD.
The Board of Directors shall meet for the purpose of the election of
officers and the transaction of such other business as may properly come before
the meeting immediately following the Annual Meeting of the stockholders.
Meetings (regular or special) of the Board of Directors shall be held not less
often than four (4) times a year.
Notice of each regular meeting shall be furnished in writing to each
member of the Board of Directors not less than ten (10) days in advance of said
meeting, unless such notice requirement is waived in writing by each member.
Attendance of a director at a regular or special meeting of the Board shall
constitute a waiver of notice of such meeting, except when the director attends
a meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. No notice need be given of the meeting following an Annual Meeting of
stockholders.
Special Meetings of the Board of Directors shall be held at such time
and place as shall be designated in the notice of the meeting. Special Meetings
of the Board of Directors may be called by the Chairman of the Board, and shall
be called by the Secretary of the Corporation upon the written request of not
less than 75% of the members of the Board of Directors then in office. Unless
otherwise stated in the notice thereof, any and all business may be transacted
at any meeting without specification of such business in the notice.
Section 2.6 NOTICE OF SPECIAL MEETINGS OF THE BOARD.
Notice of any Special Meeting shall be given to each director at his
business or residence in writing, by mail or by facsimile transmission, or by
telephone communication. If mailed, such notice shall be deemed adequately
delivered when deposited in the United States mails so addressed, with postage
thereon prepaid, at least five (5) days before such meeting. If by facsimile
transmission, such notice shall be transmitted at least twenty-four (24) hours
before such meeting. If by telephone, the notice shall be given at least twelve
(12) hours prior to the time set for the meeting. Neither the business to be
transacted at, nor the purpose of, any Special Meeting of the Board of Directors
need be specified in the notice of such meeting, except for amendments to these
Bylaws. A meeting may be held at any time without notice if all the directors
are present (except as otherwise provided by law) or if those not present waive
notice of the meeting in writing, either before or after such meeting.
Section 2.7 QUORUM AND ORGANIZATION OF MEETINGS.
A majority of the total number of members of the Board of Directors as
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constituted from time to time shall constitute a quorum for the transaction of
business, but, if at any meeting of the Board of Directors there shall be less
than a quorum present, a majority of those present may adjourn the meeting to
another time and place, and the meeting may be held as adjourned without further
notice or waiver. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, a majority of the directors present at any
meeting at which a quorum is present may decide any question brought before such
meeting. Notwithstanding the foregoing, the following actions shall be
submitted to a vote of stockholders only pursuant to a resolution adopted by 75%
of the members of the Board of Directors then in office: merger or consolidation
of the Corporation, a sale or lease of all or substantially all of the assets of
the Corporation, or a reorganization or recapitalization of the Corporation,
provided such transaction requires stockholder approval. Meetings shall be
presided over by the Chairman of the Board or in his absence by the Vice
Chairman, if any, or by such other person as the directors may select. The
Board of Directors shall keep written minutes of its meetings. The Secretary of
the Corporation shall act as secretary of the meeting, but in his absence the
chairman of the meeting may appoint any person to act as secretary of the
meeting.
Section 2.8 EXECUTIVE COMMITTEE OF THE BOARD.
The Board of Directors, by the affirmative vote of not less than 80%
of the members of the Board of Directors then in office, may designate an
Executive Committee, all of whose members shall be directors, to manage and
operate the affairs of the Corporation or particular properties or enterprises
of the Corporation. Subject to the limitations of the law of the State of
Delaware and the Certificate of Incorporation, such Executive Committee shall
exercise all powers and authority of the Board of Directors in the management of
the business and affairs of the Corporation. The Executive Committee shall keep
minutes of its meetings and report to the Board of Directors not less often than
quarterly on its activities and shall be responsible to the Board of Directors
for the conduct of the enterprises and affairs entrusted to it.
Section 2.9 OTHER COMMITTEES OF THE BOARD.
The Board of Directors may by resolution establish committees other
than an Executive Committee and shall specify with particularity the powers and
duties of any such committee, subject to any limitations of the laws of the
State of Delaware or the Certificate of Incorporation. Such committees shall
serve at the pleasure of the Board; keep minutes of their meetings; and have
such names as the Board of Directors by resolution may determine and shall be
responsible to the Board of Directors for the conduct of the enterprises and
affairs entrusted to them.
Section 2.10 COMMITTEES GENERALLY.
The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of such
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committee. In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in place of any
such absent or disqualified member. Each committee which may be established by
the Board of Directors pursuant to these Bylaws may fix its own rules and
procedures. In the absence of such rules and procedures, any such committee
shall conduct its business in the same manner as the Board of Directors conducts
its business pursuant to these Bylaws. Notice of meetings of committees, other
than of regular meetings provided for by such rules, shall be given to committee
members.
Section 2.11 DIRECTORS' COMPENSATION.
Directors shall receive such compensation for attendance at any
meetings of the Board and any expenses incidental to the performance of their
duties as the Board of Directors shall determine by resolution. Such
compensation may be in addition to any compensation received by the members of
the Board of Directors in any other capacity.
Section 2.12 ACTION WITHOUT MEETING OF THE BOARD.
Nothing contained in these Bylaws shall be deemed to restrict the
power of members of the Board of Directors or any committee designated by the
Board to take any action required or permitted to be taken by them without a
meeting if a consent in writing describing the action so taken is signed by all
the directors or members of the committee entitled to vote with respect to the
subject matter thereof and filed with the minutes of the proceedings of the
Board of Directors.
Section 2.13 TELEPHONE MEETINGS OF THE BOARD.
Nothing contained in these Bylaws shall be deemed to restrict the
power of members of the Board of Directors, or any committee designated by the
Board of Directors, to participate in a meeting of the Board of Directors, or
committee, by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other.
ARTICLE 3
OFFICERS
Section 3.1 EXECUTIVE OFFICERS.
The Board of Directors shall elect or appoint from its own number, at
its first meeting after each Annual Meeting of stockholders, a Chairman of the
Board. The Board of
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Directors shall also elect or appoint a President and such Vice Presidents as in
the opinion of the Board of Directors the business of the Corporation requires,
a Treasurer and a Secretary, any of whom may or may not be directors. The Board
of Directors may also elect or appoint, from time to time, such other or
additional officers as in its opinion are desirable for the conduct of business
of the Corporation. Each officer shall hold office until the first meeting of
the Board of Directors following the next Annual Meeting of stockholders. Any
person may hold at one time two or more offices; PROVIDED, HOWEVER, that the
President shall not hold the office of Secretary or Assistant Secretary.
Section 3.2 POWERS AND DUTIES OF OFFICERS.
The Chairman of the Board shall have overall responsibility for the
management and direction of the business and affairs of the Corporation and
shall exercise such duties as customarily pertain to the office of Chairman of
the Board and such other duties as may be prescribed from time to time by the
Board of Directors. He shall be the senior officer of the Corporation and in
case of the inability or failure of the President to perform his duties, he
shall perform the duties of the President. He may appoint and terminate the
appointment or election of officers, agents, or employees other than those
appointed or elected by the Board of Directors. He may sign, execute and
deliver, in the name of the Corporation, powers of attorney, contracts, bonds
and other obligations which implement policies established by the Board of
Directors. The Chairman shall preside at all meetings of stockholders and of
the Board of Directors, and shall perform such other duties as may be prescribed
from time to time by the Board of Directors or these Bylaws.
The President of the Corporation shall be responsible for the active
direction of the daily business of the Corporation and shall exercise such
duties as customarily pertain to the office of President and such other duties
as may be prescribed from time to time by the Board of Directors. The President
may sign, execute and deliver, in the name of the Corporation, powers of
attorney, contracts, bonds and other obligations which implement policies
established by the Board of Directors. In the absence or disability of the
Chairman of the Board, the President shall perform the duties and exercise the
powers of the Chairman of the Board.
Vice Presidents shall have such powers and perform such duties as may
be assigned to them by the Chairman of the Board, the President, the Executive
Committee, if any, or the Board of Directors. A Vice President may sign and
execute contracts and other obligations pertaining to the regular course of his
duties which implement policies established by the Board of Directors.
The Treasurer shall be the chief financial officer of the Corporation.
Unless the Board of Directors otherwise declares by resolution, the Treasurer
shall have general custody of all the funds and securities of the Corporation
and general supervision of the collection and disbursement of funds of the
Corporation. He shall endorse for collection on behalf of the Corporation
checks, notes and other obligations, and shall deposit the same to the credit of
the
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Corporation in such bank or banks or depository as the Board of Directors may
designate. He may sign, with the Chairman of the Board, President, or such
other person or persons as may be designated for the purpose by the Board of
Directors, all bills of exchange or promissory notes of the Corporation. He
shall enter or cause to be entered regularly in the books of the Corporation a
full and accurate account of all moneys received and paid by him on account of
the Corporation; shall at all reasonable times exhibit his books and accounts to
any director of the Corporation upon application at the office of the
Corporation during business hours; and, whenever required by the Board of
Directors or the President, shall render a statement of his accounts. He shall
perform such other duties as may be prescribed from time to time by the Board of
Directors or by these Bylaws. He may be required to give bond for the faithful
performance of his duties in such sum and with such surety as shall be approved
by the Board of Directors. Any Assistant Treasurer shall, in the absence or
disability of the Treasurer, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
The Secretary shall keep the minutes of all meetings of the
stockholders and of the Board of Directors. The Secretary shall cause notice to
be given of meetings of stockholders, of the Board of Directors, and of any
committee appointed by the Board of Directors. He shall have custody of the
corporate seal, minutes and records relating to the conduct and acts of the
stockholders and Board of Directors, which shall, at all reasonable times, be
open to the examination of any director. The Secretary or any Assistant
Secretary may certify the record of proceedings of the meetings of the
stockholders or of the Board of Directors or resolutions adopted at such
meetings; may sign or attest certificates, statements or reports required to be
filed with governmental bodies or officials; may sign acknowledgments of
instruments; may give notices of meetings; and shall perform such other duties
and have such other powers as the Board of Directors may from time to time
prescribe.
Section 3.3 BANK ACCOUNTS.
In addition to such bank accounts as may be authorized in the usual
manner by resolution of the Board of Directors, the Treasurer, with approval of
the Chairman of the Board or the President, may authorize such bank accounts to
be opened or maintained in the name and on behalf of the Corporation as he may
deem necessary or appropriate, provided payments from such bank accounts are to
be made upon and according to the check of the Corporation, which may be signed
jointly or singularly by either the manual or facsimile signature or signatures
of such officers or bonded employees of the Corporation as shall be specified in
the written instructions of the Treasurer or Assistant Treasurer of the
Corporation with the approval of the Chairman of the Board or the President of
the Corporation.
Section 3.4 PROXIES.
Unless otherwise provided in the Certificate of Incorporation or
directed by the Board of Directors, the Chairman of the Board or the President
or their designees shall have full
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power and authority on behalf of the Corporation to attend and to vote all
shares of stock held by this Corporation upon all matters and resolutions at any
meeting of stockholders of any corporation in which this Corporation may hold
stock, and may exercise on behalf of this Corporation any and all of the rights
and powers incident to the ownership of such stock at any such meeting, whether
regular or special, and at all adjournments thereof, and shall have power and
authority to execute and deliver proxies and consents on behalf of this
Corporation in connection with the exercise by this Corporation of the rights
and powers incident to the ownership of such stock, with full power of
substitution or revocation.
ARTICLE 4
CAPITAL STOCK
Section 4.1 STOCK CERTIFICATES.
The interest of each stockholder of the Corporation shall be evidenced
by certificates for shares of stock, certifying the class and number of shares
represented thereby and in such form, not inconsistent with the law of the State
of Delaware or the Certificate of Incorporation of the Corporation, as the Board
of Directors may from time to time prescribe.
The certificates of stock shall be signed by the Chairman or
Vice-Chairman of the Board of Directors, if any, or the President and by the
Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer
of the Corporation, and sealed with the seal of the Corporation. Such seal may
be a facsimile, engraved or printed. Where any certificate is manually signed
by a transfer agent or by a registrar, the signatures of any officers upon such
certificate may be facsimiles, engraved or printed. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon any certificate shall have ceased to be such before the certificate
is issued, it may be issued by the Corporation with the same effect as if such
officer, transfer agent or registrar had not ceased to be such at the time of
its issue.
Section 4.2 TRANSFER OF SHARES.
(a) Shares of the capital stock of the Corporation may be transferred
on the books of the Corporation only by the holder of such shares or by his duly
authorized attorney, upon the surrender to the Corporation or its transfer agent
of the certificate representing such stock properly endorsed.
(b) The person in whose name shares of stock stand on the books of
the Corporation shall be deemed by the Corporation to be the owner thereof for
all purposes, and the Corporation shall not be bound to recognize any equitable
or other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or
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other notice thereof, except as otherwise provided by the laws of the state of
Delaware.
Section 4.3 FIXING RECORD DATE.
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which, unless
otherwise provided by law, shall not be more than sixty (60) nor less than ten
(10) days before the date of such meeting, nor more than sixty (60) days prior
to any other action.
Section 4.4 LOST CERTIFICATES.
The Board of Directors or any transfer agent of the Corporation may
direct a new certificate or certificates representing stock of the Corporation
to be issued in place of any certificate or certificates theretofore issued by
the Corporation, alleged to have been lost, stolen, or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate to be
lost, stolen, or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors (or any transfer agent of the Corporation
authorized to do so by a resolution of the Board of Directors) may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen, or destroyed certificate or certificates, or his
legal representative, to give the Corporation a bond in such sum as the Board of
Directors (or any transfer agent so authorized) shall direct to indemnify the
Corporation against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen, or destroyed or
the issuance of such new certificates, and such requirement may be general or
confined to specific instances.
Section 4.5 TRANSFER AGENT AND REGISTRAR.
The Board of Directors may appoint one or more transfer agents and one
or more registrars, and may require all certificates for shares to bear the
manual or facsimile signature or signatures of any of them.
Section 4.6 REGULATIONS.
The Board of Directors shall have power and authority to make all such
rules and regulations as it may deem expedient concerning the issue, transfer,
registration, cancellation, and replacement of certificates representing stock
of the Corporation.
ARTICLE 5
INDEMNIFICATION
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Section 5.1 RIGHT TO INDEMNIFICATION.
The Corporation shall indemnify and hold harmless, to the fullest
extent permitted by applicable law as it presently exists or may hereafter be
amended, any person (an "Indemnitee") who was or is made or is threatened to be
made a party or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (a "proceeding"), by reason of
the fact that such person, or a person for whom such person is the legal
representative, is or was a director or officer of the Corporation or, while a
director or officer of the Corporation, is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust, enterprise or nonprofit entity,
including service with respect to employee benefit plans, against all liability
and loss suffered and expenses (including attorneys' fees) reasonably incurred
by such Indemnitee. Notwithstanding the preceding sentence, except as otherwise
provided in Section 5.3, the Corporation shall be required to indemnify an
Indemnitee in connection with a proceeding (or part thereof) commenced by such
Indemnitee only if the commencement of such proceeding (or part thereof) by the
Indemnitee was authorized by the Board of Directors of the Corporation.
Section 5.2 PREPAYMENT OF EXPENSES.
The Corporation shall pay the expenses (including attorneys' fees)
incurred by an Indemnitee in defending any proceeding in advance of its final
disposition, PROVIDED, HOWEVER, that, to the extent required by law, such
payment of expenses in advance of the final disposition of the proceeding shall
be made only upon receipt of an undertaking by the Indemnitee to repay all
amounts advanced if it should be ultimately determined that the Indemnitee is
not entitled to be indemnified under this Article 5 or otherwise.
Section 5.3 CLAIMS.
If a claim for indemnification or payment of expenses under this
Article 5 is not paid in full within sixty (60) days after a written claim
therefor by the Indemnitee has been received by the Corporation, the Indemnitee
may file suit to recover the unpaid amount of such claim and, if successful in
whole or in part, shall be entitled to be paid the expense of prosecuting such
claim. In any such action the Corporation shall have the burden of proving that
the Indemnitee is not entitled to the requested indemnification or payment of
expenses under applicable law.
Section 5.4 NONEXCLUSIVITY OF RIGHTS.
The rights conferred on any Indemnitee by this Article 5 shall not be
exclusive of any other rights which such Indemnitee may have or hereafter
acquire under any statute, provision of the Certificate of Incorporation, these
Bylaws, agreement, vote of stockholders or
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disinterested directors or otherwise.
Section 5.5 OTHER SOURCES.
The Corporation's obligation, if any, to indemnify or to advance
expenses to any Indemnitee who was or is serving at its request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, enterprise or nonprofit entity shall be reduced by any amount such
Indemnitee may collect as indemnification or advancement of expenses from such
other corporation, partnership, joint venture, trust, enterprise or nonprofit
enterprise.
Section 5.6 AMENDMENT OR REPEAL.
Any repeal or modification of the foregoing provisions of this Article
5 shall not adversely affect any right or protection hereunder of any Indemnitee
in respect of any act or omission occurring prior to the time of such repeal or
modification.
Section 5.7 OTHER INDEMNIFICATION AND PREPAYMENT OF EXPENSES.
This Article 5 shall not limit the right of the Corporation, to the
extent and in the manner permitted by law, to indemnify and to advance expenses
to persons other than Indemnitees when and as authorized by appropriate
corporate action.
ARTICLE 6
AMENDMENT OF BYLAWS
Section 6.1 VOTE REQUIREMENTS.
In furtherance and not in limitation of the powers conferred by the
laws of the State of Delaware, the Board of Directors shall have the power to
alter, amend or repeal these Bylaws and to adopt new bylaws pursuant to action
taken by the affirmative vote of not less than 80% of all directors then in
office at any regular or special meeting of the Board of Directors called for
that purpose, subject to the power of the stockholders to alter or repeal the
bylaws made or altered by the Board of Directors.
Section 6.2 STOCKHOLDER PROPOSALS SECTION.
Notwithstanding anything to the contrary set forth in these Bylaws, no
proposal by a stockholder to alter, amend or repeal these Bylaws or to adopt new
bylaws may be voted upon at a meeting of stockholders unless such stockholder
shall have delivered or mailed in a timely manner (as set forth in this Section
6.2) and in writing to the Secretary of the Corporation at the Corporation's
principal executive office (i) notice of such proposal and the text of the
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proposed alteration, amendment, repeal or addition, (ii) a representation that
the stockholder proposing such amendment, repeal or addition is the holder of
record of shares of Voting Securities and the number of shares of each class of
capital stock of the Corporation of which such stockholder is the beneficial
owner, (iii) a list of the names and addresses of other beneficial owners of
shares of the capital stock of the Corporation, if any, with whom such
stockholder is acting in concert or with whom such stockholder otherwise has an
understanding or agreement, and the number of shares of each class of capital
stock of the Corporation beneficially owned by each such beneficial owner and
(iv) an opinion of counsel (such counsel and opinion to be reasonably
satisfactory to the Board of Directors of the Corporation) to the effect that
the bylaws resulting from the adoption of such proposal would not be in conflict
with the Certificate of Incorporation or the laws of the State of Delaware. To
be timely in connection with any meeting of stockholders, a stockholder's notice
and the other aforesaid items shall be delivered to the Secretary of the
Corporation not less than ten (10) nor more than sixty (60) days before the date
specified for such meeting of stockholders. After such stockholder shall have
submitted the aforesaid items, the Secretary of the Corporation shall determine
whether such items are reasonably satisfactory and shall notify such stockholder
in writing of the Secretary's determination, which notice shall be delivered to
such stockholder prior to the meeting. If such stockholder fails to submit a
required item in the form or within the time indicated, or if the Secretary of
the Corporation determines that the items to be ruled upon are not reasonably
satisfactory, then such proposal by such stockholder shall not be presented and
shall not be voted upon by the stockholders of the Corporation at such meeting
of stockholders. The Presiding Person at each meeting of stockholders shall, if
the facts warrant, determine and declare to the meeting that the proposal made
pursuant to this Section 6.1 was not in accordance with the procedure prescribed
by these Bylaws and the defective proposal shall be disregarded.
ARTICLE 7
GENERAL PROVISIONS
Section 7.1 OFFICES.
The Corporation shall maintain a registered office in the State of
Delaware as required by law. The Corporation may also have offices in such
other places, either within or without the State of Delaware, as the Board of
Directors may from time to time designate or as the business of the Corporation
may require.
Section 7.2 CORPORATE SEAL.
The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization, and the words "Corporate Seal" and
"Delaware."
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Section 7.3 FISCAL YEAR.
The fiscal year of the Corporation shall be determined by resolution
of the Board of Directors.
Section 7.4 NOTICES AND WAIVERS THEREOF.
Whenever any notice is required by law, the Certificate of
Incorporation or these Bylaws to be given to any stockholder, director or
officer, such notice, except as otherwise provided by law, may be given
personally, or by mail, or, in the case of directors or officers, by telegram,
cable or facsimile transmission, addressed to such address as appears on the
books of the Corporation. Any notice given by telegram, cable or facsimile
transmission shall be deemed to have been given when it shall have been
delivered for transmission and any notice given by mail shall be deemed to have
been given three (3) business days after it shall have been deposited in the
United States mail with postage thereon prepaid.
Whenever any notice is required to be given by law, the Certificate of
Incorporation, or these Bylaws, a written waiver thereof, signed by the person
entitled to such notice, whether before or after the meeting or the time stated
therein, shall be deemed equivalent in all respects to such notice to the full
extent permitted by law.
Section 7.5 SAVING CLAUSE.
These Bylaws are subject to the provisions of the Certificate of
Incorporation and applicable law. In the event any provision of these Bylaws is
inconsistent with the Certificate of Incorporation or the corporate laws of the
State of Delaware, such provision shall be invalid to the extent only of such
conflict, and such conflict shall not affect the validity of all other
provisions of these Bylaws.
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Exhibit 10.2
FORM OF EXPLICIT RIGHTS AGREEMENT
EXPLICIT RIGHTS AGREEMENT, dated as of __________, 1998 (this
"Agreement"), by and among Spice Entertainment Companies, Inc., a Delaware
corporation ("Spice Entertainment"), [and any other Spice Entertainment
affiliated entity that is a party to the relevant License Agreement(s) (as
defined below)] (collectively, "Spice"), and Directrix, Inc., a Delaware
corporation and a wholly owned subsidiary of Spice Entertainment as of the
date hereof ("Subco").
WHEREAS, Spice and the licensor listed on Schedule A hereto (the
"Licensor") have entered into the agreement(s) listed on Schedule A hereto (as
currently in effect on the date hereof, the "License Agreement(s)"), pursuant to
which the Licensor has licensed, has agreed to license in the future, or may
license from time to time, to Spice certain rights in connection with certain
adult motion pictures produced, co-produced or otherwise distributed by the
Licensor.
WHEREAS, listed on Schedule A are the titles of the motion pictures
which have been licensed to Spice under the License Agreement(s) as of the date
hereof, and such Schedule shall be revised from time to time to include the
titles of any motion pictures which the Licensor is required to license to Spice
under the License Agreement(s) after the date hereof (all such motion pictures
collectively, the "Licensed Pictures").
WHEREAS, Playboy Enterprises, Inc., a Delaware corporation ("Playboy"),
and Spice Entertainment have entered into an Agreement and Plan of Merger, dated
as of May 29, 1998 (the "Merger Agreement"), wherein they have agreed to merge
(the "Merger") in accordance with the terms and conditions contained therein.
WHEREAS, pursuant to the Merger Agreement, Spice Entertainment will
cause certain assets and liabilities of Spice to be transferred to Subco in
accordance with the terms of this Agreement and the other Related Agreements (as
defined in the Merger Agreement).
WHEREAS, Spice desires to cause Subco to receive certain rights in and
to the Licensed Pictures in accordance with the terms of this Agreement, and the
Licensor has separately consented to all of the terms of this Agreement and the
transactions contemplated hereby by executing a Licensor consent, substantially
in the form of Exhibit A hereto (the "Licensor Consent").
NOW, THEREFORE, in consideration of the premises, and of the respective
covenants and agreements set forth in this Agreement and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, each of the
<PAGE>
parties hereto hereby agrees and otherwise consents to
the following and, to the extent necessary, hereby agrees to amend, waive or
otherwise modify the License Agreement(s) in order to permit and otherwise
effect the same:
1. C-Band Defined Rights. Effective as of the closing of the Merger
(the "Closing Date"), Spice hereby assigns to Subco all of its right, title and
interest in, to and under the License Agreement(s) insofar as such License
Agreement(s) relate to the C-Band Defined Rights in and to the Licensed
Pictures, subject to any liens or other encumbrances (including sublicenses), if
any, with respect thereto. Effective as of the Closing Date, Subco hereby
unconditionally assumes and undertakes to pay, perform and satisfy, when due,
all of Spice's obligations and liabilities under the License Agreement(s)
insofar as such obligations and liabilities relate to the C-Band Defined Rights
in and to the Licensed Pictures.
2. Internet Defined Rights.
(a) Effective as of the Closing Date, Spice hereby assigns to
Subco all of its right, title and interest in, to and under the License
Agreement(s) insofar as such License Agreement(s) relate to the Internet Defined
Rights in and to the Licensed Pictures, subject to any liens or other
encumbrances (including sublicenses), if any, with respect thereto. Effective as
of the Closing Date, Subco hereby unconditionally assumes and undertakes to pay,
perform and satisfy, when due, all of Spice's obligations and liabilities under
the License Agreement(s) insofar as such obligations and liabilities relate to
the Internet Defined Rights in and to the Licensed Pictures.
(b) Effective as of the Closing Date, Subco hereby grants to
Spice an irrevocable and royalty free non-exclusive sublicense in and to the
Internet Defined Rights in and to the Licensed Pictures.
3. License Fees. Notwithstanding anything contained herein, Subco shall
not be liable to pay to the Licensor or Spice any license fee under the License
Agreement(s). Spice shall remain responsible, to the extent provided under the
License Agreement(s), for all license fees payable to the Licensor thereunder.
4. Definition of Certain Terms. As used in this Agreement, the
following terms shall have the following meanings:
(a) "C-Band Defined Rights" shall mean, in and to any Licensed
Picture, as, and solely to the extent that, such rights have been granted to
Spice in connection with such Licensed Picture under the applicable License
Agreement, the right to transmit via C-Band and sublicense and distribute for
transmission via C-Band, the Explicit Version of such Licensed Picture and the
Explicit Still Images with respect to such Explicit Version, including the right
to edit, reproduce and to make dubbed and/or translated variations of, such
Explicit Version or Explicit Still Images, as the case may be (provided that any
motion picture or still
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image so edited or varied continues to constitute an "Explicit Version" or an
"Explicit Still Image" as defined herein, as the case may be), to advertise,
promote and market such Explicit Version or Explicit Still Images (provided that
no advertising may disparage Playboy), to cause the production of trailers of
such Explicit Version and to perform, disseminate and exhibit such trailers in
accordance with such License Agreement, and to engage in such other incidental
activities consistent with the foregoing to the extent reasonably necessary to
exploit the right to transmit via C-Band and to sublicense and distribute for
transmission via C-Band such Explicit Version or Explicit Still Images, as the
case may be.
(b) "Explicit Still Images," with respect to the Explicit
Version of any Licensed Picture, shall mean all of the still images included
within such Explicit Version or included with such Explicit Version by the
Licensor, the content of which would generally be considered in the adult
industry to be that of "adult" still images and equally as explicit as, or more
explicit than, "hot cable" still images and which are otherwise substantially
similar in content and degree of explicitness to the still images currently
featured on the Internet sites maintained by Emerald Media, Inc.
(c) "Explicit Version," with respect to any Licensed Picture,
shall mean the version of such Licensed Picture, if any, which is designated as
the "Explicit Version" (or the analogous description) of such Licensed Picture
under the terms of the applicable License Agreement, the content of which would
generally be considered in the adult industry to be that of "explicit" adult
motion pictures and more explicit than the "hot cable" or "cable" version of
such Licenced Picture, and which is otherwise substantially similar in content
and degree of explicitness to the movies and related programming currently
featured on the C-Band channels maintained by Emerald Media, Inc.
(d) "Internet Defined Rights" shall mean, in and to any
Licensed Picture, as, and solely to the extent that, such rights have been
granted to Spice in connection with such Licensed Picture under the applicable
License Agreement, the right to transmit worldwide via the Internet and
sublicense and distribute for transmission worldwide via the Internet the
Explicit Version of such Licensed Picture and the Explicit Still Images with
respect to such Explicit Version, including the right to edit, reproduce and to
make dubbed and/or translated variations of, such Explicit Version or Explicit
Still Images, as the case may be (provided that any motion picture or still
image so edited or varied continues to constitute an "Explicit Version" or an
"Explicit Still Image" as defined herein, as the case may be), to advertise,
promote and market such Explicit Version or Explicit Still Images (provided that
no advertising may disparage Playboy), to cause the production of trailers of
such Explicit Version and to perform, disseminate and exhibit such trailers in
accordance with such License Agreement, and to engage in such other incidental
activities consistent with the foregoing to the extent reasonably necessary to
exploit the right to transmit via the Internet and to sublicense and distribute
for transmission via the Internet such Explicit Version or Explicit Still
Images, as the case may be.
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(e) "Territory" shall mean the United States and Canada
(including all of the territories and possessions of the foregoing) and the
islands of the Caribbean.
(f) "via C-Band" shall mean via C-Band satellite, in either
the analog or digital format, intended and otherwise authorized solely for
reception by C-Band subscribers located solely within the Territory.
5. Access to Explicit Versions. Each of Spice and Subco hereby
reaffirms that after the Closing Date Spice shall remain the sole and exclusive
owner, to the extent otherwise provided under the License Agreement(s), of the
master tapes, videotape dubs or other tapes of all versions of the Licensed
Pictures, including the Explicit Version (the "Tapes"). Subco shall be permitted
reasonable access to such Tapes to the extent necessary to exploit the rights
assigned to it hereunder. Subco shall be permitted to make copies of any of the
Tapes and to remain the sole and exclusive owner of such copies to the extent
otherwise permitted under the License Agreement(s) and subject to the terms of
this Agreement. All costs and expenses incurred by Spice or Subco in connection
with any access or other exploitation of the Tapes by Subco, including, without
limitation, all duplication expenses, shall be borne by Subco.
6. Other Rights Under the License Agreement(s); Licensed Pictures.
Spice shall retain all rights, title and interests under the License
Agreement(s) not expressly assigned to Subco in Section 1 or Section 2 hereof,
including, without limitation, all rights relating to the Explicit Versions of
the Licensed Pictures that are not C-Band Defined Rights or Internet Defined
Rights. All terms of the License Agreement(s) not amended or otherwise modified
by this Agreement shall remain in full force and effect as currently provided
under the License Agreement(s). Notwithstanding anything contained herein, the
Licensed Pictures shall not include any motion pictures licensed to Spice
pursuant to any renewals, extensions, amendments or other modifications of the
License Agreement(s) (including the Schedules thereto) made after the Closing
Date. Spice hereby agrees that, in connection with any motion pictures licensed
to Spice pursuant to any renewals, extensions, amendments or other modifications
of the License Agreement(s) (including the Schedules thereto) made after the
Closing Date, Spice will acquire (with respect to Internet Defined Rights) only
a non-exclusive license in and to the Internet Defined Rights in and to such
motion pictures. Spice hereby agrees that it will not directly or indirectly,
enter into any agreement or other arrangement to acquire any licensing,
distribution or transmission rights with respect to any Explicit Programming or
Explicit Still Images (as such terms are defined in the Non-Competition
Agreement between Playboy and Subco) for transmission during the Restricted
Period (as defined in such Non-Competition Agreement) via C-Band. Each of Spice
and Subco hereby consents to the terms contained in the Licensor Consent,
including, without limitation Section 3 thereof. Furthermore, Spice agrees that
the terms of Section 5 of this Agreement shall apply in a substantially similar
manner to any motion pictures licensed by the Licensor to Subco under Section 3
of the Licensor Consent.
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7. No Cross-Default. The parties hereto are independent entities and
nothing herein shall be construed to constitute any parties hereto as partners
or as joint venturers, or as agent of any one or more of the other parties. To
the extent any part of the License Agreement(s) are assigned to Subco in
accordance with Section 1 or Section 2 hereof, such assigned parts shall be
understood to constitute agreements between the Licensor and Subco which are
entirely separate agreements from the portion of the License Agreement(s)
between the Licensor and Spice which is not so assigned. Accordingly, no party
hereto shall be responsible, or otherwise bear any liability or obligation, for
any default or breach of the terms of the License Agreement(s) or this Agreement
by any other party hereto.
8. Further Assurances. The parties hereto shall cooperate with one
another and shall execute and deliver, or cause to be executed and delivered,
such documents and other papers, and take such further actions, as may be
reasonably requested or desirable to carry out the provisions hereof and to
consummate the transactions contemplated hereby.
9. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
10. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the state of New York applicable to agreements made
and to be performed entirely within such state without regard to conflicts of
law principles thereof.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
duly executed on its behalf as of the day and year first above-written.
SPICE ENTERTAINMENT COMPANIES, INC.
By:
--------------------------------------
Name:
Title:
[OTHER SPICE ENTITIES]
By:
--------------------------------------
Name:
Title:
DIRECTRIX, INC.
By:
-------------------------------------
Name:
Title:
<PAGE>
SCHEDULE A
Licensor License Agreement(s) Licensed Picture(s)
- -------- -------------------- -------------------
<PAGE>
Exhibit 10.3
FORM OF OWNED RIGHTS AGREEMENT
OWNED RIGHTS AGREEMENT, dated as of __________, 1998 (this
"Agreement"), by and among Spice Productions, Inc., a Delaware corporation
("Spice"), and Directrix, Inc., a Delaware corporation ("Subco"), each a
wholly owned subsidiary of Spice Entertainment Companies, Inc., a Delaware
corporation ("Spice Entertainment").
WHEREAS, Playboy Enterprises, Inc., a Delaware corporation ("Playboy"),
and Spice Entertainment have entered into an Agreement and Plan of Merger, dated
as of May 29, 1998 (the "Merger Agreement"), wherein they have agreed to merge
(the "Merger") in accordance with the terms and conditions contained therein.
WHEREAS, pursuant to the Merger Agreement, Spice Entertainment will
cause certain assets and liabilities of Spice to be transferred to Subco in
accordance with the terms of this Agreement and the other Related Agreements (as
defined in the Merger Agreement).
WHEREAS, Spice owns the motion pictures set forth on Schedule A hereto
(the "Owned Pictures") and Spice desires to cause Subco to receive certain
rights in and to the Owned Pictures in accordance with the terms of this
Agreement.
NOW, THEREFORE, in consideration of the premises, and of the respective
covenants and agreements set forth in this Agreement and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
1. C-Band Defined Rights. Effective as of the closing of the Merger
(the "Closing Date"), Spice hereby assigns to Subco all of its right, title and
interest in and to the C-Band Defined Rights in and to the Owned Pictures,
subject to any liens or other encumbrances (including sublicenses), if any, with
respect thereto.
2. Internet Defined Rights.
(a) Effective as of the Closing Date, Spice hereby assigns to
Subco all of its right, title and interest in and to the Internet Defined Rights
in and to the Owned Pictures, subject to any liens or other encumbrances
(including sublicenses), if any, with respect thereto.
(b) Effective as of the Closing Date, Subco hereby grants to
Spice an irrevocable, perpetual and royalty free non-exclusive sublicense in and
to the Internet Defined Rights in and to the Owned Pictures.
<PAGE>
3. Definition of Certain Terms. As used in this Agreement, the
following terms shall have the following meanings:
(a) "C-Band Defined Rights" shall mean, in and to any Owned
Picture, the right to transmit via C-Band and sublicense and distribute for
transmission via C-Band, the Explicit Version of such Owned Picture and the
Explicit Still Images with respect to such Explicit Version, including the right
to edit, reproduce and to make dubbed and/or translated variations of, such
Explicit Version or Explicit Still Images, as the case may be (provided that any
motion picture or still image so edited or varied continues to constitute an
"Explicit Version" or an "Explicit Still Image" as defined herein, as the case
may be), to advertise, promote and market such Explicit Version or Explicit
Still Images (provided that no advertising may disparage Playboy), to cause the
production of trailers of such Explicit Version and to perform, disseminate and
exhibit such trailers, and to engage in such other incidental activities
consistent with the foregoing to the extent reasonably necessary to exploit the
right to transmit via C-Band and to sublicense and distribute for transmission
via C-Band such Explicit Version or Explicit Still Images, as the case may be.
(b) "Explicit Still Images," with respect to the Explicit
Version of any Owned Picture, shall mean all of the still images included within
such Explicit Version and included with such Explicit Version by Spice, the
content of which would generally be considered in the adult industry to be that
of "adult" still images and equally as explicit as, or more explicit than, "hot
cable" still images and which are otherwise substantially similar in content and
degree of explicitness to the still images currently featured on the Internet
sites maintained by Emerald Media, Inc.
(c) "Explicit Version," with respect to any Owned Picture,
shall mean the version of such Owned Picture, if any, which is designated as the
"Explicit Version" (or the analogous description) of such Owned Picture by
Spice, the content of which would generally be considered in the adult industry
to be that of "explicit" adult motion pictures and more explicit than the "hot
cable" or "cable" version of such Owned Picture, and which is otherwise
substantially similar in content and degree of explicitness to the movies and
related programming currently featured on the C-Band channels maintained by
Emerald Media, Inc.
(d) "Internet Defined Rights" shall mean, in and to any Owned
Picture, the right to transmit worldwide via the Internet and sublicense and
distribute for transmission worldwide via the Internet the Explicit Version of
such Owned Picture and the Explicit Still Images with respect to such Explicit
Version, including the right to edit, reproduce and to make dubbed and/or
translated variations of, such Explicit Version or Explicit Still Images, as the
case may be (provided that any motion picture or still image so edited or varied
continues to constitute an "Explicit Version" or an "Explicit Still Image" as
defined herein, as the case may be), to advertise, promote and market such
Explicit Version or Explicit Still Images (provided that no advertising may
disparage Playboy), to cause the production of trailers of such Explicit Version
and to perform, disseminate and exhibit such
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<PAGE>
trailers, and to engage in such other incidental activities consistent with the
foregoing to the extent reasonably necessary to exploit the right to transmit
via the Internet and to sublicense and distribute for transmission via the
Internet such Explicit Version or Explicit Still Images, as the case may be.
(e) "Territory" shall mean the United States and Canada
(including all of the territories and possessions of the foregoing) and the
islands of the Caribbean.
(f) "via C-Band" shall mean via C-Band satellite, in either
the analog or digital format, intended and otherwise authorized solely for
reception by C-Band subscribers located solely within the Territory.
4. Access to Explicit Versions. Each of Spice and Subco hereby
reaffirms that after the Closing Date Spice shall remain the sole and exclusive
owner of the master tapes, videotape dubs or other tapes of all versions of the
Owned Pictures, including the Explicit Version (the "Tapes"). Subco shall be
permitted reasonable access to such Tapes to the extent necessary to exploit the
rights assigned to it hereunder. Subco shall be permitted to make copies of any
of the Tapes and to remain the sole and exclusive owner of such copies, subject
to the terms of the Agreement. All costs and expenses incurred by Spice or Subco
in connection with any access or other exploitation of the Tapes by Subco,
including, without limitation, all duplication expenses, shall be borne by
Subco.
5. Other Rights; Independent Entities. Spice shall retain all rights,
title and interests in and to the Owned Pictures not expressly assigned to Subco
in Section 1 or Section 2 hereof, including, without limitation, all rights
relating to the Explicit Versions of the Owned Pictures that are not C-Band
Defined Rights or Internet Defined Rights. The parties hereto are independent
entities and nothing herein shall be construed to constitute any parties hereto
as partners or as joint venturers, or as agent of any one or more of the other
parties.
6. Further Assurances. The parties hereto shall cooperate with one
another and shall execute and deliver, or cause to be executed and delivered,
such documents and other papers, and take such further actions, as may be
reasonably requested or desirable to carry out the provisions hereof and to
consummate the transactions contemplated hereby.
7. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
8. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the state of New York applicable to agreements made
and to be performed entirely within such state without regard to conflicts of
law principles thereof.
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<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
duly executed on its behalf as of the day and year first above-written.
SPICE PRODUCTIONS, INC.
By:
-----------------------------------
Name:
Title:
DIRECTRIX, INC.
By:
-----------------------------------
Name:
Title:
<PAGE>
SCHEDULE A
----------
Owned Pictures
--------------
Consenting Adults
Love and Romance
English Passion
Sexual Escape
Steal My Heart
Stiff as a Board
Rebecca Got Married
The Romance Writer
Boys Night Out
Women on Top
Rosa's Lover
Hot Salsa
Latin Passion
<PAGE>
STATE OF NEW YORK )
: SS.:
COUNTY OF NEW YORK )
On the ___ day of __________, 1998, before me personally came
_________________________, the ______________ of Spice Productions, Inc. to me
known, and known to me to be the individual who executed the foregoing
instrument on behalf of and as the ____________ of Spice Productions, Inc. and
he acknowledges to me that he executed the same.
----------------------------
Notary Public
6
<PAGE>
Exhibit 10.4
FORM OF NON-COMPETITION AGREEMENT
NON-COMPETITION AGREEMENT, dated as of ______________, 1998 (this
"Agreement"), between New Playboy, Inc., a Delaware corporation ("Playboy"),
and Directrix, Inc., a Delaware corporation ("Subco").
WHEREAS, Playboy Enterprises, Inc., a Delaware corporation and a
subsidiary of Playboy, and Spice Entertainment Companies, Inc., a Delaware
corporation and the parent of Subco as of the time prior to the Redemption
described below ("Spice"), have entered into an Agreement and Plan of Merger,
dated as of May 29, 1998 (the "Merger Agreement"), wherein, among other things,
they have agreed to merge in accordance with the terms and conditions contained
therein.
WHEREAS, all capitalized terms used but not otherwise defined herein
shall have the meanings ascribed to them in the Merger Agreement.
WHEREAS, in accordance with the terms contained in the Merger
Agreement, the Transfer and Redemption Agreement and the other Related
Agreements, Spice has transferred certain assets and liabilities to Subco and
has distributed the outstanding shares of common stock of Subco (and warrants to
purchase shares of common stock of Subco) to the stockholders of Spice, so that
Spice no longer owns any shares of capital stock of Subco (the "Redemption").
WHEREAS, in order to obtain the intended benefits of the foregoing
transactions, Playboy and Subco wish to provide for the protections contained in
this Agreement, and each of them acknowledges that, but for the protections
provided in this Agreement, the transactions contemplated by the Merger
Agreement would not have been entered into.
WHEREAS, accordingly, it is a condition precedent to the closing of the
transactions contemplated by the Merger Agreement that the parties enter into
this Agreement.
WHEREAS, the Board of Directors of each of the parties hereto have
approved this Agreement.
NOW, THEREFORE, in consideration of the premises, and of the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties hereto hereby agree as follows:
<PAGE>
1. Non-Competition.
(a) Playboy. Through the Restricted Period, Playboy will not
directly or indirectly, (i) engage in the Explicit C-Band Business for its own
account, (ii) enter the employ of, or render or provide any material goods or
services, to any Person engaged in the Explicit C-Band Business, which
employment, goods or services are directly related to the Explicit C-Band
Business, (iii) interfere in any material respect with the business
relationships between Subco and customers or suppliers of Subco, which
interference shall be known, or should reasonably have been known, by Playboy,
or (iv) (A) acquire more than a 5% financial interest in any Person engaged
primarily in the Explicit C-Band Business, or (B) otherwise become involved in
any material respect with any Person engaged in the Explicit C-Band Business,
directly or indirectly, as an individual entity, partner, shareholder,
principal, agent, trustee, consultant or otherwise, except, in the case of
clause (B) above, to the extent that such involvement relates to a business or
activity other than the Explicit C-Band Business.
(b) Subco. Through the Restricted Period, Subco will not (and
will cause Emerald Media, Inc. ("EM") not to), directly or indirectly, (i)
engage in the Playboy Business for its own account (provided, that this clause
(i) shall not prohibit Subco (including EM) from engaging in the Explicit C-Band
Business, the Explicit Internet Business, the Playback and Uplink Business and
the Additional Permitted Activities), (ii) enter the employ of, or render or
provide any material goods or services, to any Person engaged in the Playboy
Business, which employment, goods or services are directly related to businesses
or activities in which Subco (including EM) is otherwise prohibited from
engaging under the terms of this Agreement, (iii) (A) acquire more than a 5%
financial interest in, or (B) otherwise become involved in any material respect
with, any Person engaged in the Playboy Business, directly or indirectly, as an
individual entity, partner, shareholder, principal, agent, trustee, consultant
or otherwise, except, in the case of clause (B) above, to the extent that such
involvement relates to a business or activity which Subco is not otherwise
prohibited from engaging in under the terms of this Agreement, or (iv) interfere
in any material respect with the business relationships between Playboy and
customers or suppliers of Playboy, which interference shall be known, or should
reasonably have been known, by Subco (or EM).
(c) Public Investments. Notwithstanding anything to the
contrary in this Agreement, each of the parties hereto may, directly or
indirectly own, solely as an investment, securities of any Person which are
publicly traded on a national or regional stock exchange or on the
over-the-counter market if such party (i) is not a controlling Person of, or a
member of a group which controls, such Person and (ii) does not, directly or
indirectly, own 2% or more of any class of securities of such Person.
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<PAGE>
(d) Employee and Related Matters.
(i) During the five year period commencing on the
date hereof, neither party hereto (including, in the case of Subco, EM) will,
directly or indirectly, (w) interfere in any material respect with the
relationships of such other party with any of its employees, agents or similar
representatives, (x) interfere in any material respect with the relationship of
such other party with any of its consultants under contract, joint venturers or
other partners, which interference shall be known, or should reasonably have
been known, by such party (including, in the case of Subco, EM), (y) solicit or
encourage any employee of such other party to leave the employment of such other
party, or otherwise hire, retain, employ or engage in any business with any
employee of such other party, or (z) hire any employee who has left the
employment of such other party (other than as a result of the termination of
such employment by such other party, including, without limitation, as a result
of any termination of former Spice employees by Playboy in connection with the
Mergers) within one year after the termination of such employee's employment
with such other party.
(ii) Playboy hereby agrees to consent to an
amendment, which shall be in form and substance reasonably satisfactory to
Playboy, of the non-competition provision contained in any employment agreement
between Spice (or any of its subsidiaries) and any employee of Spice as of the
Closing Date (other than an employee who shall have been hired or otherwise
retained, as a consultant or in any similar capacity, by Playboy unless the
employment or other retention of any such employee by Playboy shall have been
terminated within 60 days after the Closing Date and Subco shall have hired or
otherwise retained such employee as an employee or consultant of Subco after
such termination by Playboy) to the extent necessary to permit such employees to
engage in the businesses and activities in which Subco is permitted to engage
under the terms of this Agreement; provided that any such engagement is
conducted by any such employee in his or her capacity as an employee or
consultant of Subco for the benefit of Subco.
(e) Additional Covenants. Notwithstanding the generality of
the foregoing provisions contained in this Section 1 (including the definitions
of all terms contained therein as set forth in Section 4), the parties further
agree as follows:
(i) Playboy hereby agrees that it will not directly
or indirectly, enter into any agreement or other arrangement to acquire any
licensing, distribution or transmission rights with respect to any Explicit
Programming or Explicit Still Images for transmission during the Restricted
Period via C-Band.
(ii) Subco hereby agrees that it will not (and it
shall cause EM not to), directly or indirectly, enter into any agreement or
other arrangement to
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<PAGE>
acquire any licensing, distribution or transmission rights with respect to any
Explicit Programming or Explicit Still Images for transmission during the
Restricted Period other than via C-Band or via the Internet, or for the purpose
and effect of conducting any Additional Permitted Activities.
(iii) Subco hereby agrees that, in connection with
the Explicit Internet Business, it will not (and it shall cause EM not to) enter
into any contract, agreement or other arrangement with any cable or DTH operator
or provider (including, without limitation, in connection with Direct TV, Echo
TV or similar services) for the distribution or transmission of any Adult
Programming via cable or DTH.
(iv) Subco hereby agrees not to (and to cause EM not
to), directly or indirectly, use any trade names, trademarks or other
proprietary business designations used or owned in connection with the business
of Spice or its subsidiaries (other than the names "SXTV" and "Eurotica") at any
time through the date hereof, including, without limitation, the name "Spice"
and "Adam and Eve" alone, in combination with other words, or in any stylistic
or other variation thereof.
(v) Subco hereby agrees not to (and to cause EM not
to), directly or indirectly, sell, license, distribute, advertise, promote or
market any adult industry related merchandise other than via C-Band, via the
Internet or via magazines, newspapers or other similar printed medium.
(f) Subsidiaries. The parties hereto agree that for purposes
of Sections 1, 2 and 7(c), all references to each of Playboy, Subco, EM or any
party hereto shall also include a reference to all of its Subsidiaries and the
entities of which it is a direct or indirect Subsidiary and the other direct and
indirect Subsidiaries of such entities.
2. Confidentiality. Each of the parties hereto shall hold, and shall
cause its respective subsidiaries, affiliates (including, in the case of Subco,
EM), employees, agents, consultants and advisors to hold, in strict confidence,
all confidential or proprietary information concerning the business of such
other party in its possession (except to the extent that such information has
been (i) in the public domain or becomes publicly known through no wrongful act
of such party or its employees, agents, consultants or advisors, (ii) received
from a party under no confidentiality or secrecy obligation with respect
thereto, or (iii) disclosed pursuant to governmental, judicial or other legal
requirements; provided, that, in the case of clause (iii) above, such party
shall provide such other party, to the extent practicable, with adequate prior
notice to allow such other party to seek an appropriate protective order and
such party shall cooperate therein).
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<PAGE>
3. (a) Acknowledgments. Each of the parties hereto acknowledges that
(i) it has throughly reviewed the terms of this Agreement; (ii) it has been
represented by and had ample opportunity to consult with legal counsel in
connection with the negotiation and execution of this Agreement; and (iii) it
believes the provisions contained in Sections 1, 2 and 7(c) herein (each, a
"Restrictive Covenant") to be reasonable (in geographical and temporal scope
and in all other respects) and enforceable by all applicable law.
(b) Blue-Pencilling. It is expressly understood and agreed
that if a final judicial determination is made by a court of competent
jurisdiction that the time or territory or any other restriction contained in
this Agreement is an unenforceable restriction against either such party, the
provisions of this Agreement shall not be rendered void but shall be deemed
amended to apply as to such maximum time and territory and to such maximum
extent as such court may judicially determine or indicate to be enforceable.
Alternatively, if any court of competent jurisdiction finds that any restriction
contained in this Agreement is unenforceable, and such restriction cannot be
amended so as to make it enforceable, such finding shall not affect the
enforceability of any of the other restrictions contained herein.
(c) Enforceability in Jurisdictions. The parties hereto intend
to and hereby confer jurisdiction to enforce each Restrictive Covenant upon the
courts of any jurisdiction within the geographical scope of such Restrictive
Covenant for breaches occurring within such jurisdiction. If the courts of any
one or more of such jurisdictions hold any Restrictive Covenant unenforceable by
reason of the breadth of such scope or otherwise, it is the intention of the
parties hereto that such determination not bar or in any way affect the right of
any such party to the relief provided in the courts of any other jurisdiction
within the geographical scope of such Restrictive Covenant, as to breaches of
such Restrictive Covenant in such other respective jurisdictions, each
Restrictive Covenant as it relates to each jurisdiction being, for this purpose,
severable into diverse and independent covenants.
(d) Additional Covenants; Waiver. Notwithstanding anything
contained herein, each of the parties hereto (i) hereby covenants that it will
not argue or otherwise claim in any jurisdiction or under any applicable law
that the terms hereof are not enforceable for any reason and (ii) hereby waives
to the fullest extent permissible by applicable law any right it may have under
such law to void or otherwise modify any of the terms of this Agreement.
(e) Specific Performance. Each party hereto acknowledges and
agrees that such other party's remedies at law for a breach or threatened breach
of any of the provisions of Sections 1, 2 or 7(c) would be inadequate and, in
recognition of this fact, such party agrees that, in the event of such a breach
or threatened breach, in addition to any remedies at law, such other party,
without posting any bond, shall be
5
<PAGE>
entitled to obtain equitable relief in the form of specific performance,
temporary restraining order, temporary or permanent injunction or any other
equitable remedy which may then be available.
4. Definitions. For purposes of this Agreement, the following terms
shall have the following meanings:
"Additional Permitted Activities" means the activities of: (i)
creating and/or distributing interactive adult multimedia products, including
CD-ROM products, which products, in each case in this clause (i), feature
Explicit Programming and/or Explicit Still Images (provided that nothing in this
clause (i) shall be read to include any businesses or other activities with
respect to linear videogram rights, including, without limitation, the sale,
distribution, licensing or other exploitation of video cassettes, laser discs,
digital video discs, analog or digital linear playback and storage devices or
any similar devices or products, whether now or hereinafter developed), (ii)
maintaining or otherwise exploiting adult 900-number audio text and other
similar telephone services, (iii) creating and/or marketing adult industry
related merchandise via the Internet or any other media and (iv) publishing
and/or distributing adult magazines, books, calendars and other similar printed
media, which, in each case in this clause (iv), features Explicit Still Images.
"Adult Programming" means Explicit Programming, Non-Explicit
Programming, Explicit Still Images and Non-Explicit Still Images.
"C-Band Ancillary Activities" includes, only editing,
reproducing and making dubbed and/or translated variations of Explicit
Programming or Explicit Still Images, as the case may be (provided that any
programming or still image so edited or varied continues to constitute "Explicit
Programming" or an "Explicit Still Image" (as defined herein), as the case may
be), advertising, promoting and marketing the Explicit C-Band Business (provided
that such advertisement does not disparage Playboy), and engaging in such other
incidental activities consistent with the foregoing to the extent reasonably
necessary to exploit the business of providing transmission of Explicit
Programming or Explicit Still Images, as the case may be, via C-Band.
"Explicit C-Band Business" means the business of (i) providing
transmission of Explicit Programming and/or Explicit Still Images via C-Band and
(ii) licensing and distributing Explicit Programming and/or Explicit Still
Images for transmission via C-Band, including, in connection with the foregoing,
all C-Band Ancillary Activities.
"Explicit Internet Business" means the business of (i)
providing transmission worldwide of Explicit Programming and/or Explicit Still
Images via the Internet through the Media, (ii) licensing and distributing
Explicit Programming and/or
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<PAGE>
Explicit Still Images for transmission worldwide via the Internet through the
Media, including, in connection with the foregoing, all Internet Ancillary
Activities.
"Explicit Programming" means any movies and other programming
the content of which would generally be considered in the adult industry to be
that of "explicit" adult movies or programming and more explicit than "hot
cable" or "cable" programming and which are otherwise substantially similar in
content and degree of explicitness to the movies and related programming
currently featured on the C-Band channels maintained by EM.
"Explicit Still Images" means any still images the content of
which would generally be considered in the adult industry to be that of "adult"
still images and equally as explicit as, or more explicit than, "hot cable"
still images and which are otherwise substantially similar in content and degree
of explicitness to the still images currently featured on the Internet sites
maintained by EM.
"Internet Ancillary Activities" includes, only editing,
reproducing and making dubbed and/or translated variations of Explicit
Programming or Explicit Still Images, as the case may be (provided that any
programming or still image so edited or varied continues to constitute "Explicit
Programming" or an "Explicit Still Image" (as defined herein), as the case may
be), advertising, promoting and marketing the Explicit Internet Business
(provided that such advertisement does not disparage Playboy), and engaging in
such other incidental activities consistent with the foregoing to the extent
reasonably necessary to exploit the business of providing transmission of
Explicit Programming or Explicit Still Images, as the case may be, via the
Internet.
"Media" means telephone lines, coaxial cable (including,
without limitation, in connection with the services provided by "Web TV," "At
Home" and similar services), satellite (including, without limitation, DTH),
MDS, MMDS, SMATV, low power TV, pay-per-view services, feature films, video
cassettes, laser discs, digital video discs, the Internet and all other media
(including, without limitation, hybrid systems) now or hereinafter developed.
"Non-Explicit Programming" means any movies and other
programming (other than Explicit Programming) the content of which would
generally be considered in the adult industry to be that of "adult" movies or
programming and which is not Rated Programming, including, without limitation,
movies or programming the content of which would generally be considered in the
adult industry to be equally as explicit as, or less explicit than, "hot cable"
or "cable" programming or which are otherwise substantially similar in content
and degree of explicitness to the movies and related programming currently
featured on the Spice and Spice Hot channels.
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<PAGE>
"Non-Explicit Still Images" means any still images the content
of which would generally be considered in the adult industry to be "adult" still
images (other than Explicit Still Images), including, without limitation, any
still images the content of which would generally be considered in the adult
industry to be less explicit than "hot cable" still images or equally as
explicit as "cable" still images.
"Playback and Uplink Business" means the business of
providing playback and uplink services (as such terms are generally
understood in the cable television business) to any cable program service in
any medium used by such cable program service; provided that Subco cannot
(and it shall cause EM not to), directly or indirectly, provide any playback
and uplink services for any Adult Programming unless the arrangements with
the cable program service providing such Adult Programming (i) were
negotiated on an arm's length basis, (ii) provide for the payment for such
playback and uplink services in cash and (iii) provide for service rates no
more favorable than the payment terms offered by Subco to Playboy for similar
services; provided further, that Subco cannot (and it shall cause EM not to),
directly or indirectly provide any playback and uplink services for any Adult
Programming other than in connection with the distribution of such Adult
Programming (a) through satellite delivery systems or (b) if, and only if,
the content of such distribution consists solely of Playboy Adult Programming
or Newco Adult Programming, through file servers linked to cable systems or
multi-channel video programming providers.
"Playboy Business" means the business of (i) producing,
licensing, distributing, marketing and otherwise acquiring any rights or
conducting any other activity with respect to any kind of Adult Programming for
transmission via the Media, (ii) providing transmission of Adult Programming via
the Media to all destinations, including personal and other computers,
television, and all other media now or hereinafter developed; (iii) creating
and/or distributing and otherwise exploiting multimedia products, including
CD-ROM products, which products, in each case in this clause (iii), feature
Non-Explicit Programming and/or Non-Explicit Still Images; and (iv) publishing
and/or distributing and otherwise exploiting adult magazines, books, calendars
and other similar printed media now or hereinafter developed, which in each case
in this clause (iv), feature Non-Explicit Still Images.
"Rated Programming" means any movies or other programming
which (a) is included in an advertiser supported basic cable service, (b) is
rated by a generally recognized and accepted ratings authority and bears an "R"
rating or any rating less restrictive, (c) is rated "NC-17," so long as such
rating is not based primarily on sexual content, nudity or similarly explicit
content, or (d) is substantially similar in content and degree of explicitness
to programming which is covered by clause (a), (b) or (c) above.
"Restricted Period" means the period of time commencing
immediately following the Closing and continuing through __________, 2005.
"Subsidiary" means, as to any Person, a corporation,
partnership or other entity of which shares of stock or other ownership
interests having ordinary voting power (other than stock or such other ownership
interests having such power only by reason of the happening of a contingency) to
elect a majority of the board of
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<PAGE>
directors or other managers of such corporation, partnership or other entity are
at the time owned, or the management of which is otherwise controlled, directly
or indirectly through one or more intermediaries, or both, by such Person.
"Territory" means the United States and Canada (including all
territories and possessions of the foregoing) and the islands of the Caribbean.
"via C-Band" means via C-Band satellite, in either the analog
or digital format, intended and otherwise authorized solely for reception by
C-Band subscribers, located solely within the Territory.
5. Representations and Warranties of Subco. Subco represents and
warrants to Playboy as follows:
(a) Corporate Existence; Power. Subco is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware, and it has the requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement and each
other Related Agreement to which it is a party. Subco was organized on July
20, 1998, and since such date has engaged in no business other than
activities relating to its organization and the transactions contemplated by
this Agreement and the other Related Agreements.
(b) Authorization; Binding Effect. The execution, delivery and
performance by Subco of this Agreement, the other Related Agreements to which it
is a party and the transactions contemplated hereby and thereby have been duly
authorized by all necessary corporate action of Subco. Each of this Agreement
and the other Related Agreements to which Subco is a party has been duly
executed and delivered by Subco, and constitutes the legal, valid and binding
obligation of Subco enforceable against Subco in accordance with its terms.
6. Representations and Warranties of Playboy. Playboy represents and
warrants to Subco as follows:
(a) Corporate Existence; Power. Playboy is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and it has the requisite corporate power and authority to execute,
deliver and perform its obligations under this Agreement and each other Related
Agreement to which it is a party.
(b) Authorization; Binding Effect. The execution, delivery and
performance by Playboy of this Agreement, the other Related Agreements to which
it is a party and the transactions contemplated hereby and thereby have been
duly authorized by all necessary corporate action of Playboy. Each of this
Agreement and the
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<PAGE>
other Related Agreements to which Playboy is a party has been duly executed and
delivered by Playboy, and constitutes the legal, valid and binding obligation of
Playboy enforceable against Playboy in accordance with its terms.
7. Miscellaneous.
(a) Waiver and Amendments; Remedies; No Third Party
Beneficiaries. This Agreement may be amended, superseded, canceled, renewed or
extended, and the terms hereof may be waived, only by a written instrument
signed by the parties, or in the case of a waiver, by the party waiving
compliance. No delay on the part of any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any waiver on
the part of any party of any such right, power or privilege, nor any single or
partial exercise of any such right, power or privilege, preclude any further
exercise thereof or the exercise of any other such right, power or privilege.
The rights and remedies herein provided are cumulative and are not exclusive of
any rights or remedies that any party may otherwise have at law or in equity.
Nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any Person other than the parties hereto and their respective
successors and assigns any legal or equitable right, remedy or claim under or in
or in respect of this Agreement or any provision herein contained.
(b) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE WITHOUT REGARD TO
CONFLICTS OF LAW PRINCIPLES THEREOF.
(c) Binding Effect; No Assignment. This Agreement shall be
binding upon and shall inure to the benefit of the parties and their respective
successors, assigns and legal representatives. Neither party hereto may assign
this Agreement without the prior written consent of the other party, except that
either party may assign this Agreement to any successor to all or substantially
all of its assets or business. No party hereto may, directly or indirectly,
transfer any substantial asset or business relating to the Explicit C-Band
Business or the Explicit Internet Business to another Person, unless such Person
agrees in writing to be bound by the terms of this Agreement to the same extent
that such party is so bound.
(d) Entire Agreement. This Agreement, the Merger Agreement,
the other Related Agreements (including the exhibits and schedules hereto and
thereto) and any collateral documents executed in connection with the
transactions contemplated thereby contain the entire agreement among the parties
with respect to the transactions contemplated hereby and thereby and supersede
all prior agreements, written or oral, with respect thereto.
10
<PAGE>
(e) Severability. If any provision of this Agreement shall be
declared to be invalid, illegal or unenforceable, such provision shall survive
to the extent it is not so declared, and the validity, legality and
enforceability of the other provisions hereof shall not in any way be affected
or impaired thereby, unless such action would substantially impair the benefits
to either party of the remaining provisions of this Agreement.
(f) Table of Contents; Headings. The table of contents and
headings in this Agreement are solely for convenience of reference and shall not
affect the interpretation or construction of any of the provisions hereof.
(g) Notices. All notices, requests, demands and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given if delivered by hand or mailed, certified or
registered mail, with postage prepaid as follows:
If to Playboy: Playboy Enterprises, Inc.
680 North Lake Shore Drive
Chicago, IL 60611
Attention: Howard Shapiro, Esq.
General Counsel
Facsimile: (312) 266-2042
with a copy to: Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Attention: James M. Dubin, Esq.
Facsimile: (212) 757-3990
or to such other Person or address as Playboy shall furnish to Subco in writing.
If to Subco to: Directrix, Inc.
536 Broadway, 10th Floor
New York, New York 10012
Attention: J. Roger Faherty
Facsimile: [ ]
with a copy to: Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
Attention: Paul S. Pearlman, Esq.
Facsimile: (212) 715-8000
11
<PAGE>
or to such other Person or address as Subco shall furnish to Playboy in writing.
(h) Counterparts. This Agreement may be executed in two
counterparts, each of which shall be deemed an original, but both of which
together shall constitute one and the same original.
12
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
NEW PLAYBOY, INC.
By:
-----------------------------------
Name:
Title:
DIRECTRIX, INC.
By:
-----------------------------------
Name:
Title:
<PAGE>
Exhibit 10.6
FORM OF NON-COMPETITION AGREEMENT
NON-COMPETITION AGREEMENT, dated as of ______________, 1998 (this
"Agreement"), between Califa Entertainment Group, Inc., a California
corporation ("Newco"), and Directrix, Inc., a Delaware corporation ("Subco").
WHEREAS, Newco and Spice Entertainment Companies, Inc., a Delaware
corporation and the parent of Subco as of the date hereof ("Spice"), have
entered into an Asset Purchase Agreement, dated as of May 29, 1998 (the "Asset
Purchase Agreement"), wherein, among other things, Spice has agreed to transfer
certain assets and related liabilities to Newco in accordance with the terms and
conditions thereof.
WHEREAS, all capitalized terms used but not otherwise defined herein
shall have the meanings ascribed to them in the Asset Purchase Agreement.
WHEREAS, Spice and Subco have entered into a Transfer and Redemption
Agreement, dated as of _____________, 1998 (the "Transfer and Redemption
Agreement"), wherein, among other things, Spice has agreed to transfer certain
assets and related liabilities to Subco in accordance with the terms and
conditions thereof.
WHEREAS, in order to obtain the intended benefits of the transactions
contemplated by the Transfer and Redemption Agreement, Subco wishes to obtain
the protections contained in this Agreement, and each party acknowledges that,
but for the protections provided in this Agreement, the transactions
contemplated by the Transfer and Redemption Agreement would not have been
entered into by Subco.
WHEREAS, accordingly, it is a condition precedent to the closing of the
transactions contemplated by the Transfer and Redemption Agreement that the
parties enter into this Agreement.
WHEREAS, the Board of Directors of each of the parties hereto have
approved this Agreement.
NOW, THEREFORE, in consideration of the premises, and of the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties hereto hereby agree as follows:
<PAGE>
1. Non-Competition.
(a) Newco. Through the Restricted Period, Newco will not
directly or indirectly, (i) engage in the Explicit C-Band Business for its own
account, (ii) enter the employ of, or render or provide any material goods or
services, to any Person engaged in the Explicit C-Band Business, which
employment, goods or services are directly related to the Explicit C-Band
Business, (iii) interfere in any material respect with the business
relationships between Subco and customers or suppliers of Subco, which
interference shall be known, or should reasonably have been known, by Newco, or
(iv) (A) acquire more than a 5% financial interest in any Person engaged
primarily in the Explicit C-Band Business, or (B) otherwise become involved in
any material respect with any Person engaged in the Explicit C-Band Business,
directly or indirectly, as an individual entity, partner, shareholder,
principal, agent, trustee, consultant or otherwise, except, in the case of
clause (B) above, to the extent that such involvement relates to a business or
activity other than the Explicit C-Band Business.
(b) Public Investments. Notwithstanding anything to the
contrary in this Agreement, Newco may, directly or indirectly own, solely as an
investment, securities of any Person which are publicly traded on a national or
regional stock exchange or on the over-the-counter market if Newco (i) is not a
controlling Person of, or a member of a group which controls, such Person and
(ii) does not, directly or indirectly, own 2% or more of any class of securities
of such Person.
(c) Employee and Related Matters. During the five year
period commencing on the date hereof, Newco will not, directly or indirectly,
(w) interfere in any material respect with the relationships of Subco with any
of its employees, agents or similar representatives, (x) interfere in any
material respect with the relationship of Subco with any of its consultants
under contract, joint venturers or other partners, which interference shall be
known, or should reasonably have been known, by Newco, (y) solicit or encourage
any employee of Subco to leave the employment of Subco, or otherwise hire,
retain, employ or engage in any business with any employee of Subco, or (z) hire
any employee who has left the employment of Subco within one year after the
termination of such employee's employment with Subco.
(d) Additional Covenants. Notwithstanding the generality of
the foregoing provisions contained in this Section 1 (including the definitions
of all terms contained therein as set forth in Section 4), Newco hereby agrees
that it will not directly or indirectly, enter into any agreement or other
arrangement to acquire any licensing, distribution or transmission rights with
respect to any Explicit Programming or Explicit Still Images for transmission
during the Restricted Period via C-Band.
2
<PAGE>
(e) Subsidiaries. The parties hereto agree that for purposes
of Sections 1, 2 and 7(c), all references to Newco shall also include a
reference to all of its Subsidiaries and the entities of which it is a direct or
indirect Subsidiary and the other direct and indirect Subsidiaries of such
entities.
(f) Vivid. Notwithstanding anything to the contrary
contained herein, nothing in Sections 1 or 2 shall be read to restrict any
businesses or activities of Vivid Video, Inc. or its Subsidiaries or affiliates;
provided that the foregoing part of this Section 1(f) shall not be read to
include Newco or any new Subsidiary of Newco.
2. Confidentiality. Newco shall hold, and shall cause its respective
subsidiaries, affiliates, employees, agents, consultants and advisors to hold,
in strict confidence, all confidential or proprietary information concerning the
business of Subco in its possession (except to the extent that such information
has been (i) in the public domain or becomes publicly known through no wrongful
act of Newco or its employees, agents, consultants or advisors, (ii) received
from a party under no confidentiality or secrecy obligation with respect
thereto, or (iii) disclosed pursuant to governmental, judicial or other legal
requirements; provided, that, in the case of clause (iii) above, Newco shall
provide Subco, to the extent practicable, with adequate prior notice to allow
Subco to seek an appropriate protective order and Newco shall cooperate
therein).
3. (a) Acknowledgments. Newco acknowledges that (i) it has
throughly reviewed the terms of this Agreement; (ii) it has been represented
by and had ample opportunity to consult with legal counsel in connection with
the negotiation and execution of this Agreement; and (iii) it believes the
provisions contained in Sections 1, 2 and 7(c) herein (each, a "Restrictive
Covenant") to be reasonable (in geographical and temporal scope and in all
other respects) and enforceable by all applicable law.
(b) Blue-Pencilling. It is expressly understood and agreed
that if a final judicial determination is made by a court of competent
jurisdiction that the time or territory or any other restriction contained in
this Agreement is an unenforceable restriction against Newco, the provisions of
this Agreement shall not be rendered void but shall be deemed amended to apply
as to such maximum time and territory and to such maximum extent as such court
may judicially determine or indicate to be enforceable. Alternatively, if any
court of competent jurisdiction finds that any restriction contained in this
Agreement is unenforceable, and such restriction cannot be amended so as to make
it enforceable, such finding shall not affect the enforceability of any of the
other restrictions contained herein.
(c) Enforceability in Jurisdictions. The parties hereto intend
to and hereby confer jurisdiction to enforce each Restrictive Covenant upon the
courts
3
<PAGE>
of any jurisdiction within the geographical scope of such Restrictive Covenant
for breaches occurring within such jurisdiction. If the courts of any one or
more of such jurisdictions hold any Restrictive Covenant unenforceable by reason
of the breadth of such scope or otherwise, it is the intention of the parties
hereto that such determination not bar or in any way affect the right of any
such party to the relief provided in the courts of any other jurisdiction within
the geographical scope of such Restrictive Covenant, as to breaches of such
Restrictive Covenant in such other respective jurisdictions, each Restrictive
Covenant as it relates to each jurisdiction being, for this purpose, severable
into diverse and independent covenants.
(d) Additional Covenants; Waiver. Notwithstanding anything
contained herein, Newco (i) hereby covenants that it will not argue or otherwise
claim in any jurisdiction or under any applicable law that the terms hereof are
not enforceable for any reason and (ii) hereby waives to the fullest extent
permissible by applicable law any right it may have under such law to void or
otherwise modify any of the terms of this Agreement.
(e) Specific Performance. Newco hereto acknowledges and
agrees that Subco's remedies at law for a breach or threatened breach of any of
the provisions of Sections 1, 2 or 7(c) would be inadequate and, in recognition
of this fact, Newco agrees that, in the event of such a breach or threatened
breach, in addition to any remedies at law, Subco, without posting any bond,
shall be entitled to obtain equitable relief in the form of specific
performance, temporary restraining order, temporary or permanent injunction or
any other equitable remedy which may then be available.
4. Definitions. For purposes of this Agreement, the following terms
shall have the following meanings:
"Adult Programming" means Explicit Programming, Non-Explicit
Programming, Explicit Still Images and Non-Explicit Still Images.
"C-Band Ancillary Activities" includes, only editing, reproducing
and making dubbed and/or translated variations of Explicit Programming or
Explicit Still Images, as the case may be (provided that any programming or
still image so edited or varied continues to constitute "Explicit Programming"
or an "Explicit Still Image" (as defined herein), as the case may be),
advertising, promoting and marketing the Explicit C-Band Business (provided that
such advertisement does not disparage Newco), and engaging in such other
incidental activities consistent with the foregoing to the extent reasonably
necessary to exploit the business of providing transmission of Explicit
Programming or Explicit Still Images, as the case may be, via C-Band.
"EM" means Emerald Media, Inc.
4
<PAGE>
"Explicit C-Band Business" means the business of (i) providing
transmission of Explicit Programming and/or Explicit Still Images via C-Band and
(ii) licensing and distributing Explicit Programming and/or Explicit Still
Images for transmission via C-Band, including, in connection with the foregoing,
all C-Band Ancillary Activities.
"Explicit Programming" means any movies and other programming the
content of which would generally be considered in the adult industry to be that
of "explicit" adult movies or programming and more explicit than "hot cable" or
"cable" programming and which are otherwise substantially similar in content and
degree of explicitness to the movies and related programming currently featured
on the C-Band channels maintained by EM.
"Explicit Still Images" means any still images the content of which
would generally be considered in the adult industry to be that of "adult" still
images and equally as explicit as, or more explicit than, "hot cable" still
images and which are otherwise substantially similar in content and degree of
explicitness to the still images currently featured on the Internet sites
maintained by EM.
"Non-Explicit Programming" means any movies and other programming
(other than Explicit Programming) the content of which would generally be
considered in the adult industry to be that of "adult" movies or programming and
which is not Rated Programming, including, without limitation, movies or
programming the content of which would generally be considered in the adult
industry to be equally as explicit as, or less explicit than, "hot cable" or
"cable" programming or which are otherwise substantially similar in content and
degree of explicitness to the movies and related programming currently featured
on the Spice and Spice Hot channels.
"Non-Explicit Still Images" means any still images the content of
which would generally be considered in the adult industry to be "adult" still
images (other than Explicit Still Images), including, without limitation, any
still images the content of which would generally be considered in the adult
industry to be less explicit than "hot cable" still images or equally as
explicit as "cable" still images.
"Rated Programming" means any movies or other programming which (a)
is included in an advertiser supported basic cable service, (b) is rated by a
generally recognized and accepted ratings authority and bears an "R" rating or
any rating less restrictive, (c) is rated "NC-17," so long as such rating is not
based primarily on sexual content, nudity or similarly explicit content, or (d)
is substantially similar in content and degree of explicitness to programming
which is covered by clause (a), (b) or (c) above.
5
<PAGE>
"Restricted Period" means the period of time commencing immediately
following the Closing and continuing through __________, 2005.
"Subsidiary" means, as to any Person, a corporation, partnership
or other entity of which shares of stock or other ownership interests having
ordinary voting power (other than stock or such other ownership interests having
such power only by reason of the happening of a contingency) to elect a majority
of the board of directors or other managers of such corporation, partnership or
other entity are at the time owned, or the management of which is otherwise
controlled, directly or indirectly through one or more intermediaries, or both,
by such Person.
"Territory" means the United States and Canada (including all
territories and possessions of the foregoing) and the islands of the Caribbean.
"via C-Band" means via C-Band satellite, in either the analog or
digital format, intended and otherwise authorized solely for reception by C-Band
subscribers, located solely within the Territory.
5. [Intentionally omitted.]
6. Representations and Warranties of Newco. Newco represents and
warrants to Subco as follows:
(a) Corporate Existence; Power. Newco is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California, and it has the requisite corporate power and authority to execute,
deliver and perform its obligations under this Agreement and each other Related
Document to which it is a party.
(b) Authorization; Binding Effect. The execution, delivery
and performance by Newco of this Agreement, the other Related Documents to which
it is a party and the transactions contemplated hereby and thereby have been
duly autho rized by all necessary corporate action of Newco. Each of this
Agreement and the other Related Documents to which Newco is a party has been
duly executed and delivered by Newco, and constitutes the legal, valid and
binding obligation of Newco enforceable against Newco in accordance with its
terms.
7. Miscellaneous.
(a) Waiver and Amendments; Remedies; No Third Party
Beneficiaries. This Agreement may be amended, superseded, canceled, renewed or
extended, and the terms hereof may be waived, only by a written instrument
signed by the parties, or in the case of a waiver, by the party waiving
compliance. No delay on
6
<PAGE>
the part of any party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof, nor shall any waiver on the part of any party
of any such right, power or privilege, nor any single or partial exercise of any
such right, power or privilege, preclude any further exercise thereof or the
exercise of any other such right, power or privilege. The rights and remedies
herein provided are cumulative and are not exclusive of any rights or remedies
that any party may otherwise have at law or in equity. Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any Person
other than the parties hereto and their respective successors and assigns any
legal or equitable right, remedy or claim under or in or in respect of this
Agreement or any provision herein contained.
(b) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE WITHOUT REGARD TO
CONFLICTS OF LAW PRINCIPLES THEREOF.
(c) Binding Effect; No Assignment. This Agreement shall be
binding upon and shall inure to the benefit of the parties and their respective
successors, assigns and legal representatives. Neither party hereto may assign
this Agreement without the prior written consent of the other party, except that
either party may assign this Agreement to any successor to all or substantially
all of its assets or business. Newco may not directly or indirectly, transfer
any substantial asset or business relating to the Explicit C-Band Business or
the Newco Network to another Person, unless such Person agrees in writing to be
bound by the terms of this Agreement to the same extent that Newco is so bound.
(d) Entire Agreement. This Agreement, the Asset Purchase
Agreement, the other Related Documents (including the exhibits and schedules
hereto and thereto) and any collateral documents executed in connection with the
transactions contemplated thereby contain the entire agreement among the parties
with respect to the transactions contemplated hereby and thereby and supersede
all prior agreements, written or oral, with respect thereto.
(e) Severability. If any provision of this Agreement shall be
declared to be invalid, illegal or unenforceable, such provision shall survive
to the extent it is not so declared, and the validity, legality and
enforceability of the other provisions hereof shall not in any way be affected
or impaired thereby, unless such action would substantially impair the benefits
to either party of the remaining provisions of this Agreement.
7
<PAGE>
(f) Table of Contents; Headings. The table of contents and
headings in this Agreement are solely for convenience of reference and shall not
affect the interpretation or construction of any of the provisions hereof.
(g) Notices. All notices, requests, demands and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given if delivered by hand or mailed, certified or
registered mail, with postage prepaid as follows:
If to Newco: Califa Entertainment Group, Inc.
Attention: [ ]
Facsimile: [ ]
with a copy to: Lipsitz, Green, Fahringer, Roll, Salisbury
& Cambria LLP
42 Delaware Avenue, Suite 300
Buffalo, New York 14202
Attention: Paul J. Cambria, Jr.
Facsimile: (716) 855-1580
or to such other Person or address as Newco shall furnish to Subco in writing.
If to Subco to: Directrix, Inc.
536 Broadway, 10th Floor
New York, New York 10012
Attention: J. Roger Faherty
Facsimile: [ ]
with a copy to: Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
Attention: Paul S. Pearlman, Esq.
Facsimile: (212) 715-8000
or to such other Person or address as Subco shall furnish to Newco in writing.
(h) Counterparts. This Agreement may be executed in two
counterparts, each of which shall be deemed an original, but both of which
together shall constitute one and the same original.
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
CALIFA ENTERTAINMENT GROUP, INC.
By:
------------------------------------
Name:
Title:
DIRECTRIX, INC.
By:
------------------------------------
Name:
Title:
9
<PAGE>
Exhibit 10.13
J. ROGER FAHERTY
LELAND H. NOLAN
DONALD MCDONALD
C/O DIRECTRIX, INC.
536 BROADWAY, 6TH FLOOR
NEW YORK, NEW YORK 10012
July 21, 1998
DIRECTRIX, INC.
536 Broadway
New York, New York 10012
RE: REVOLVING LOAN COMMITMENT
-------------------------
Ladies and Gentlemen:
We are pleased to advise you that J. Roger Faherty, Leland H. Nolan and Donald
McDonald (the "Lenders") have agreed to provide the following committed
revolving line of credit for general corporate purposes ("Credit Facility") for
Directrix, Inc., a to-be-formed Delaware corporation ("Borrower"). The Lenders'
commitment shall be deemed effective on the Closing Date (as that term is
defined in the Agreement and Plan of Merger ("Merger Agreement") between Playboy
Enterprises, Inc. ("PEI"), Spice Entertainment Companies, Inc. ("Spice"), New
Playboy, Inc., Playboy Acquisition Corp., and Spice Acquisition Corp.), is
specifically subject to the terms and conditions provided for herein and shall
terminate on the Maturity Date (as defined below). This Agreement, together
with the Loan Agreement, Revolving Credit Note, each Facility Document (as such
terms are defined below) and any other agreements, instruments and documents
related to any of the foregoing are collectively referred to as the "Facility
Documents."
1. LOAN COMMITMENT. The Credit Facility will be in the maximum principal
amount of $1.5 million (the "Committed Amount"). The Borrower may use any
borrowed amount under the Credit Facility (each an "Extension of Credit" and
collectively, the Extensions of Credit") for general corporate purposes and may
borrow, repay, reborrow or reutilize Extensions of Credit while the Credit
Facility is available and prior to the Maturity Date, as it may see fit.
1.1 This Credit Facility shall terminate and each Extension of
Credit shall be due and payable, together with any accrued interest on the date
that is the second anniversary of the Closing Date (the "Maturity Date") or
earlier as provided for in Section 9 below. The first Extension of Credit will
be available on the Closing Date.
1.2 Interest on each Extension of Credit shall accrue daily at the
rate of 11% per annum ("Base Rate") determined on the basis of the actual
calendar days elapsed and a 365 day year. Any amounts that have become due and
payable in accordance with this Agreement, any Facility Document or otherwise
and remain unpaid shall accrue interest thereafter until
<PAGE>
payment in full is made at an interest rate per annum equal to 2% above the Base
Rate ("Default Rate"), shall be determined on the basis of the actual calendar
days elapsed and a 365 day year, and shall be payable upon the Lenders' demand
therefor.
1.3 When the Borrower desires to obtain an Extension of Credit, a
duly authorized officer of the Borrower shall so advise the Lenders in writing.
Each request shall specify the amount of the proposed Extension of Credit and
the Borrower's account to which the proceeds shall be paid. Once all of the
conditions precedent set forth in Sections 7 and/or 8 have been satisfied, the
Lenders shall credit the specified Borrower account with the amount of the
Extension of Credit.
1.4 The Borrower and Lenders shall execute a Loan and Security
Agreement ("Loan Agreement") to reflect the terms of the Credit Facility. A
note (the "Revolving Credit Note") shall evidence the Extensions of Credit. The
Borrower shall expressly authorize the Lenders to record, from time to time,
each Extension of Credit under this Agreement on schedules attached to the
Revolving Credit Note.
2. PREPAYMENTS. Borrower shall have the right at any time to prepay all
or a portion of the Extensions of Credit without penalty or premium. Borrower
shall be required to make mandatory prepayments of the Credit Facility in an
amount equal to (a) the net cash proceeds if Borrower or one of its subsidiaries
disposes of any material portion of its property or assets, (b) the net cash
proceeds received from any merger, recapitalizations or joint venture
transaction, or any debt or equity issuance, or (c) the aggregate amount of
Extensions of Credit outstanding upon a change in control of the Borrower.
3. COLLATERAL. Borrower shall grant the Lenders a first priority
perfected security interest in all of Borrower's and its subsidiaries' assets,
including, accounts receivable, equipment, intellectual property, general
intangibles, and including all proceeds and replacements of, accessions to, and
substitutions for the foregoing assets and interests in property, subject only
to any existing liens on such assets in favor of Vendor Capital Group and IBM
Credit Corporation.
4. GUARANTEES. Each of Borrower's subsidiaries, as deemed appropriate by
Lenders, shall guarantee the Credit Facility ("Guaranty Document"). Borrower
shall pledge the stock of each such subsidiary to Lenders.
5. FINANCIAL COVENANTS. Lender and Borrower agree to negotiate in good
faith certain affirmative and negative covenants (including net revenues,
EBITDA, net worth and working capital) consistent with an asset-based loan
facility of this type and based on Borrower's results of operations for its
first fiscal year to be included in the Loan Agreement. Borrower will become
subject to the financial covenants commencing one year after the Closing Date.
6. GRANT OF WARRANTS. In consideration of the Lenders' commitment to
provide the Credit Facility, Borrower will grant to the Lenders an aggregate of
45,000 warrants ("Lender Warrants") to acquire Borrower Common Stock, to be
apportioned among the Lenders in accordance with the percentages set forth in
Section 10 or as the Lenders shall mutually agree. The Lender Warrants shall
entitle the holder thereof to purchase at any time prior to 10 years
<PAGE>
Directrix, Inc.
July 21, 1998
Page 3
after the Closing Date Borrower Common Stock at an exercise price of $.01 per
share. In addition each of the Lenders will have the right to one demand and
piggyback rights to register the Lender Warrants and the Borrower Common Stock
issuable upon exercise of the Lender Warrants
7. CONDITIONS PRECEDENT. Prior to making the initial Extension of Credit
to the Borrower and on or prior to the Closing Date, the Lenders shall have
received each of the following agreements, instruments and other documents
executed by Borrower and in form and substance reasonably satisfactory to the
Lenders and/or the following actions shall have occurred:
7.1 The Loan Agreement and Revolving Credit Note;
7.2 Such security agreements, financing statements, stock pledge
agreements, guaranty agreements and other agreements and/or documentation to
reflect the liens and security interests in the collateral as contemplated by
Section 3 and the subsidiary guarantees as contemplated by Section 4;
7.3 The Lender Warrants;
7.4 Certified copies of the Borrower's articles of incorporation,
bylaws, other organizational documents and a certified copy of resolutions of
the Borrower's board of directors authorizing the entering into the Credit
Facility;
7.5 A certified copy of an incumbency certificate of the Borrower
certifying that the officers executing and delivering the Facility Documents on
behalf of the Borrower are duly elected Borrower officers with authority to bind
the Borrower with respect to such Facility Documents and the transactions
contemplated thereby and authorizing those Borrower officers authorized to
request Extensions of Credits;
7.6 Payment of all of the Lenders' legal and other professional
fees in connection with the transactions contemplated by this Agreement; and
7.7 All other resolutions, authorizations, approvals, powers,
consents, licenses and documents as may be necessary or otherwise required by
the Lenders.
8. CONDITIONS PRECEDENT TO EACH EXTENSION OF CREDIT. In addition to the
conditions precedent specified in Section 7 with respect to the initial
Extension of Credit hereunder, prior
<PAGE>
Directrix, Inc.
July 21, 1998
Page 4
to making any Extension of Credit to the Borrower hereunder, the Lenders shall
be satisfied that each of the following conditions are met:
8.1 The amount of the requested Extension of Credit, together with
all other Extensions of Credit outstanding, shall not exceed the Committed
Amount; and
8.2 When Lenders make an Extension of Credit and after giving
effect thereto, no Event of Default (as defined in Section 9) or any event or
circumstance which, with the giving of notice or the lapse of time or both,
would constitute an Event of Default has occurred or is continuing under any of
the Facility Documents.
9. EVENTS OF DEFAULT AND REMEDIES. The occurrence of any of the
following events or conditions shall constitute an event of default (an "Event
of Default") with respect to Borrower under this Agreement:
9.1 Any amounts due under the Credit Facility are not paid within 5
days after the due date thereof;
9.2 Any event of default occurs and is continuing with respect to
any of the Facility Documents or (ii) the failure or refusal of the Borrower to
properly perform, observe or comply with any condition, obligation, covenant or
agreement (other than an obligation specified in Section 9.1) to be performed,
observed or complied with by the Borrower in any of the Facility Documents, and
such failure or refusal continues for a period of 30 days, or for such lesser
period as provided for in any of Facility Documents, after written notice
thereof from the Lenders;
9.3 The Borrower or any subsidiary party to the Guaranty Documents
(i) is dissolved (other than pursuant to a consolidation, amalgamation or
merger); (ii) becomes insolvent or is unable to pay its debts or fails or admits
in writing its inability generally to pay its debts as they become due; (iii)
makes a general assignment, arrangement or composition with or for the benefit
of its creditors; (iv) institutes or has instituted against it a proceeding
seeking a judgment of insolvency or bankruptcy or any other relief under any
bankruptcy or insolvency law or other similar law affecting creditors' rights,
or a petition is presented for its winding-up or liquidation which is not
dismissed, discharged, stayed or restrained within 30 days of the institution or
presentation thereof; (v) has a resolution passed for its winding-up, official
management or liquidation (other than pursuant to a consolidation, amalgamation
or merger); (vi) seeks or becomes subject to the appointment of an
administrator, provisional liquidator, conservator, receiver, trustee, custodian
or other similar official for it or for all or substantially all its assets;
(vii) has a distress, execution, attachment, sequestration or other legal
process
<PAGE>
Directrix, Inc.
July 21, 1998
Page 5
levied, enforced or sued on or against all or substantially all its assets and
such process is not dismissed, discharged, stayed or restrained, in each case
within 30 days thereafter; (viii) causes or is subject to any event with respect
to it which, under the applicable laws of any jurisdiction, has an analogous
effect to any of the events specified in clauses (i) to (vii) (inclusive); or
(ix) takes any action in furtherance of, or indicating its consent to, approval
of, or acquiescence in, any of the foregoing acts.
Upon the occurrence and during the continuance of an Event of Default, the
Lenders will have the option, upon notice to the Borrower, of taking one or more
of the following actions: (i) declaring any or all unpaid Extensions of Credit,
together with unpaid accrued interest thereon, and any or all other amounts
payable to the Lenders under the Facility Documents or otherwise to be
immediately due and payable and/or (ii) terminating immediately any unutilized
Committed Amount and/or terminating the Lenders' obligation to provide any
additional Extensions of Credit and/or (iii) exercising its rights and remedies
against any collateral or any other person or entity pursuant to any Facility
Documents; provided, however, that if an Event of Default specified in clause
(iii) shall occur, no such notice need be given by the Lenders to the Borrower.
10. APPORTIONMENT OF LOAN COMMITMENT; APPOINTMENT OF LEAD LENDER. Each of
the Lenders aggress to provide the following percentages of each Extension of
Credit made under the Credit Facility:
Faherty 60.00%
Nolan 26.67%
McDonald 13.33%.
10.1 The Lenders hereby appoint Roger Faherty to act as the lead
Lender ("Lead Lender"). In his capacity as the Lead Lender, Mr. Faherty is
hereby authorized to act on behalf of all of the Lenders and receive all notices
and communications addressed to the Lenders. The Lenders may replace Mr.
Faherty as Lead Lender. If they do, the Lenders shall provide Borrower with
written notice of the new Lead Lender.
11. POSSIBLE REPLACEMENT OF CREDIT FACILITY. The parties acknowledge that
Borrower may attempt to secure alternate financing prior to the Closing Date.
If Borrower is successful in obtaining alternate financing and does not utilize
the Credit Facility provided for herein, Borrower shall give Lenders written
notice thereof and shall be obligated to grant to the Lenders on the Closing
Date one-half of the number of Lender Warrants provided for in Section 6.
<PAGE>
Directrix, Inc.
July 21, 1998
Page 6
12. GENERAL PROVISIONS.
12.1 COUNTERPARTS. This Agreement may be executed in one or more
counterpart copies. Each counterpart copy shall constitute an agreement and all
of the counterpart copies shall constitute one fully executed agreement. This
Agreement may be executed on facsimile counterparts. The signature of any party
to any counterpart shall be deemed a signature to, and may be appended to, any
other counterpart.
12.2 ASSIGNMENT. This Agreement may not be assigned without the
other parties' prior written consent, such consent not to be unreasonably
withheld. The Lenders shall have the right to assign their rights and
obligations hereunder provided (I) such assignee is owned by the assigning
Lender, (ii) the assignee agrees to assume the assigning Lender's obligations
hereunder and (iii) the assigning Lender unconditionally guarantees the
assignee's obligations hereunder.
12.3 GOVERNING LAW. New York State law shall govern this Agreement
and all of the Facility Documents. All parties agree that any litigation,
action or proceeding relating to this Loan Commitment shall be heard only in the
US District Court for the Southern District of New York or in a New York State
Court in New York City.
12.4 WAIVER OF JURY TRIAL. The Borrower hereby irrevocably waives
all right to trial by jury in any suit, action or proceeding arising out of or
relating to this Agreement or any of the other Facility Documents.
12.5 NOTICES. All notices or other formal communications under this
Loan Commitment must be in writing. They may be sent by personal delivery,
facsimile, prepaid recognized overnight air express delivery or prepaid
certified mail, return receipt requested . The parties' current addresses are
as stated on the first page of this Loan Commitment. The notices and other
formal communications should be sent to the attention of the following persons:
(a) DIRECTRIX: Attention: Chairman,
Facsimile number 212-941-7846; and
(b) LENDERS: J. Roger Faherty
Facsimile No. 212-941-7846.
12.6 HEADINGS, ETC. Paragraph headings are for convenience only.
If any provision of this Loan Commitment is prohibited or unenforceable in any
jurisdiction, the
<PAGE>
Directrix, Inc.
July 21, 1998
Page 7
provision shall, as to that jurisdiction only, be ineffective to the extent of
the prohibition or unenforcability without invalidating the remaining
provisions.
12.7 ENTIRE AGREEMENT. This Agreement and the other Facility
Documents constitute the entire agreement and understanding of the parties with
respect to the subject matter hereof and thereof and supersedes all oral
communication and prior writings with respect thereto.
If the foregoing correctly reflects your understanding of the matters described
herein, please sign below and return a fully executed copy to us.
DIRECTRIX, INC.
By: /s/
-------------------------
John Sharpe,
Vice President & Chief Financial Officer
LENDERS
/s/
- ----------------------------
J. Roger Faherty
/s/
- ----------------------------
Leland H. Nolan
/s/
- ----------------------------
Donald J. McDonald
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued of our report dated July 10, 1998, (except for to Notes 1,
5 and 10, as to which the date is July 21, 1998) accompanying the
financial statements of Directrix, Inc. contained in the Form SB-2
Registration Statement and Prospectus. We consent to the use of the
aforementioned report in the Form SB-2 Registration Statement.
/s/ Grant Thornton LLP
New York, New York
September 28, 1998
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