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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 1998
REGISTRATION NO. 333-64485
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
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)
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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 LLP
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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--------------------------
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.
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SUBJECT TO COMPLETION, DATED NOVEMBER 20, 1998
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PROSPECTUS 2,074,785 SHARES
DIRECTRIX, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE) [LOGO]
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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 expects that the Company Common Stock will be traded on the National
Association of Securities Dealers, Inc. OTC Bulletin Board (the "OTC Bulletin
Board") under the symbol "DRTX."
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, as amended, 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, subject to increase,
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, as amended (the "Merger
Agreement"), among Spice, Playboy, New Playboy, Inc. ("New
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Playboy"), Playboy Acquisition Corp. and Spice Acquisition
Corp. Pursuant to the terms of the Merger Agreement, on the
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, subject to increase, 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 consider-
ation (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 busi-
ness 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 October 31, 1998 and the
Exchange Ratio set forth below, approximately 2,075,000
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
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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
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
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(the "Playboy Mandatory Services Agreement") pursuant to
which the Company will provide complete transmission service
for at least two 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--Relationship 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 $2,094,000 in the nine months ended
September 30, 1998 and a net loss of $859,000 in the year ended December 31,
1997. As of September 30, 1998, the Company had an accumulated deficit of
$7,629,000. 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, playback and
transponder services for the four EMI networks, Eurotica, XXXcite, The X!
Channel and Rogue TV. 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 nine 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 Condition and
Results of Operations--Results of Operations." The total balance due to the
Company from EMI at September 30, 1998 was appproximately $3.4 million; the
Company has reserved $2.7 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, (v) duplication, editing and encoding or
(vi) all services relating to the distribution of the Spice networks (other than
the Spice Hot network) or other adult programming via regionally deployed video
file servers linked to cable systems or multichannel video programming
providers, 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, (v) duplication, editing and encoding or (vi) all services relating to
the distribution of the Spice Hot network or other adult programming via
regionally deployed video file servers linked to cable systems or multichannel
video programming providers, 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
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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 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
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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
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
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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.
The Company has investigated Year 2000 compatibility with its major
customers and service providers. Logix Development Corp., which operates the
call center for EMI's networks, has analyzed its software and believes that its
systems are Year 2000 compliant. Playboy is addressing its Year 2000 issues
through a combination of modifications to existing programs and conversions to
Year 2000 compliant software. See "Risk Factors--Year 2000" in the Proxy
Statement/Prospectus. The Company has not been able to adequately assess
Califa's compliance with Year 2000 issues because Califa has only recently been
organized and is in the process of establishing its computer systems and
applications; however, the Company intends to work with Califa to address any
Year 2000 issues that may arise.
Except as described above, the Company has not developed a contingency plan
for the reasonably likely worst case scenario concerning the Year 2000. If a
Year 2000 problem were to occur that the Company could not successfully resolve,
it could have a material adverse effect on the results of operations and
financial condition of the Company.
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 expects that the Company Common Stock will be traded on the OTC
Bulletin Board. Risks associated with trading on the OTC Bulletin Board include
limited release of market prices of the Company Common Stock and limited news
coverage of the Company. Unless and until there is a more established trading
market for the Company Common Stock, holders of Company Common Stock could find
it difficult to dispose of, or to obtain accurate quotations as to the price of,
the Company Common Stock.
In addition to these risks, stocks which have very low prices are subject to
the risks of additional federal and state regulatory requirements. Brokers or
dealers who sell "penny stocks" are subject to additional sales practice
requirements, including delivery of a disclosure schedule regarding the penny
stock market, making a suitability determination with respect to the purchaser,
receipt from the purchaser of written consent to the transaction and disclosure
of commissions payable to the broker or dealer and the registered
representative. A penny stock is defined as any equity security with a market
price of less than $5 per share, subject to certain exceptions. Penny stocks do
not include, among other exceptions, (i) securities of a company with net
tangible assets in excess of $5 million, if the company has been in continuous
operation for less than three years, or $2 million, if the company has been in
continuous operation for at least three years, or (ii) securities of a company
with average annual revenues of $6 million for the last three years. If the
Company Common Stock were to be deemed a penny stock, the additional regulatory
requirements could severely limit the liquidity of the Company Common Stock and
the ability of investors to sell Company Common Stock in the secondary market.
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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 September 30, 1998, EMI had incurred cumulative net losses
of approximately $6,100,000. 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.
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."
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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 one transponder from each of Network Teleports, Inc. and B&P The
SpaceConnection, Inc. The transponder lease with B&P The SpaceConnection, Inc.
expires November 30, 1998 and will not be replaced.
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 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
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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 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
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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 Closing 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 Closing Date.
Each holder of shares of Spice Preferred Stock as of the Closing 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
Closing 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 received by the Spice stockholders in the
Share Transfer will
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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 October 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 2,075,000 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 Closing 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 and an amendment to the Merger Agreement on
November 16, 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, as amended, 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, subject to increase if the Average Closing Price
of New Playboy Class B Common Stock is less than $13.00, 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 $20.488 or less
than $16.042. If the Average Closing Price of New Playboy Class B Common Stock
is greater than $20.488, each share of Spice Common Stock will be converted into
a floating number of shares of New Playboy Class B Common Stock equal to $2.81
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. If the Average Closing
Price of New Playboy Class B Common Stock is less than $13.00, New Playboy may
elect to deliver the value of any shares of New Playboy Class B Common Stock in
excess of those it would have had to deliver had the Average Closing Price been
equal to $13.00 in either cash, New Playboy Class B Common Stock or a
combination thereof. 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
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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 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, subject to increase, (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
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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 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.
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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 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; or if the
Closing Date occurs after December 31, 1998, then the Average Closing Price of
New Playboy Class B Common Stock being equal to or greater than $11.00, (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.
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").
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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.
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
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dividend, however, certain corporate holders could be eligible for a dividends
received deduction with respect to such dividend.
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 $2.4 million in fees and expenses in connection
therewith, the costs and expenses in excess of $2.4 million shall be borne by
the Company. Playboy has also agreed to pay an additional $500,000 in fees and
expenses on behalf of Spice and 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
26
<PAGE>
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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<PAGE>
(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, (v) duplication, editing and encoding for the networks
or (vi) all services relating to the distribution of the Spice networks (other
than the Spice Hot network) or other adult programming via regionally deployed
video file servers linked to cable systems or multichannel video programming
providers, 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
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Programming or Explicit Still Images during the Califa Restricted Period via
C-Band satellite in certain defined territories.
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, (v)
duplication, editing and encoding for the network or (vi) all services relating
to the distribution of the network or other adult programming via regionally
deployed video file servers linked to cable systems or multichannel video
programming providers, 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 September 30, 1997
and 1998 and for the nine-month periods ended September 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 nine-month period ended
September 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 NINE MONTHS ENDED
DECEMBER 31, SEPTEMEBR 30,
-------------------------- -------------------------
<S> <C> <C> <C> <C>
1996 1997 1997 1998
------------ ------------ ----------- ------------
STATEMENT OF OPERATIONS DATA:
Revenues: $ 10,329,000 $ 10,658,000 $ 8,028,000 $ 7,489,000
------------ ------------ ----------- ------------
Operating expenses:
Salaries, wages and benefits.......................... 1,356,000 2,198,000 1,562,000 1,971,000
Library amortization.................................. 296,000 378,000 290,000 247,000
Satellite costs....................................... 901,000 4,834,000 3,454,000 4,929,000
Selling, general and administrative expenses.......... 1,517,000 3,459,000 3,225,000 1,592,000
Depreciation of fixed assets.......................... 5,956,000 1,906,000 1,600,000 746,000
------------ ------------ ----------- ------------
Total operating expenses................................ 10,026,000 12,775,000 10,131,000 9,485,000
------------ ------------ ----------- ------------
Total income (loss) from operations................. 303,000 (2,117,000) (2,103,000) (1,996,000)
Interest expense........................................ 4,979,000 1,090,000 1,058,000 98,000
Gain from transponder lease amendment................... -- (2,348,000) (2,348,000) --
------------ ------------ ----------- ------------
Net income (loss)................................... $ (4,676,000) $ (859,000) $ (813,000) $ (2,094,000)
------------ ------------ ----------- ------------
------------ ------------ ----------- ------------
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets............................................ $ 58,615,000 $ 5,839,000 $ 5,742,000 $ 5,948,000
Current portion of obligations under capital leases..... $ 4,549,000 $ 522,000 $ 489,000 $ 541,000
Obligations under capital leases less current portion... $ 53,126,000 $ 552,000 $ 681,000 $ 141,000
Stockholder's equity.................................... $ (403,000) $ 4,324,000 $ 3,886,000 $ 4,938,000
</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 first quarter of 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 September 30, 1998 was
approximately $3.4 million; the Company has reserved $2.7 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 nine 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 nine 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.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
NET INCOME (LOSS). The Company reported a net loss of $2.1 million for the
nine months ended September 30, 1998 as compared to a net loss of $0.8 million
for the nine months ended September 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 nine months ended September 30, 1997.
Offsetting this decline was a reduction in bad debt expense relating to the EMI
Receivable in the nine months ended September 30, 1998 as compared to the nine
months ended September 30, 1997.
REVENUES. The Company reported total revenue of $7.5 million for the nine
months ended September 30, 1998 as compared to total revenue of $8.0 million for
the nine months ended September 30, 1997. The decline in total revenue was
primarily attributable to a decrease in sales of transponder capacity.
SALARIES, WAGES AND BENEFITS. The Company reported salaries, wages and
benefits of $2.0 million for the nine months ended September 30, 1998 as
compared to $1.6 million for the nine months ended
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<PAGE>
September 30, 1997. Approximately $0.2 million of this increase was attributable
to the commencement of playback services from the Operations Facility and
expansions in the post-production department.
LIBRARY AMORTIZATION. The Company reported library amortization for the
nine months ended September 30, 1998 of approximately $0.2 million, which was
substantially the same for the nine months ended September 30, 1997.
SATELLITE, PLAYBACK AND UPLINK EXPENSES. The Company reported satellite,
playback and uplink expenses of $4.9 million for the nine months ended September
30, 1998 as compared to $3.5 million for the nine months ended September 30,
1997. Approximately $1.6 million of this increase was primarily attributable to
the Reclassification. Offsetting this increase was a decline of $0.2 million in
playback expenses which resulted from lower third party costs associated with
the Company's providing playback services internally.
In the nine months ended September 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 nine months ended September 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 $1.6 million for the nine months ended
September 30, 1998 as compared to $3.2 million for the nine months ended
September 30, 1997. The decrease was primarily attributable to a decline of $1.2
million in bad debt expense associated with the EMI Receivable. The remainder of
the decrease was primarily attributable to reductions in post-production
expenses.
DEPRECIATION OF FIXED ASSETS. The Company reported depreciation of fixed
assets of $0.7 million for the nine months ended September 30, 1998 as compared
to $1.6 million for the nine months ended September 30, 1997. The decline in
depreciation expense was primarily attributable to the Reclassification.
INTEREST EXPENSE. The Company reported interest expense of $98,000 for the
nine months ended September 30, 1998 as compared to $1.1 million for the nine
months ended September 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. Approximately $0.6 million of
this increase was attributable to the costs of hiring additional employees to
operate the Operations Facility and 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 of $0.9 million 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 an increase of $1.3 million in bad debt
expense associated with the EMI Receivable in 1997 and an increase of $0.3
million 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 the payment in 1997 of
$1.9 million relating to certain transponder lease payments that had been due in
1996. Also contributing to the Company's cash
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requirements in the years ended December 31, 1996 and 1997 were net losses
adjusted for non-cash gain associated with the Reclassification of $2.7 million
and $2.9 million, respectively, investments of $0.3 million and $0.5 million,
respectively, in a film library, and investments of $0.8 million in each period
in property and equipment. For the nine months ended September 30, 1997 and
1998, Spice provided funding of $5.1 million and $2.7 million, respectively, to
the Company. The decline in funding provided by Spice was primarily attributable
to the payment of $1.9 million relating to deferred transponder lease
obligations in the nine months ended September 30, 1997, as compared to the
payment of $0.5 million relating to deferred transponder lease obligations in
the nine months ended September 30, 1998. Also contributing to the Company's
cash requirements in the nine months ended September 30, 1997 and 1998 were net
losses adjusted for non-cash gain associated with the Reclassification of $2.8
million and $2.1 million, respectively, investments of $0.3 million and $0.3
million, respectively, in a film library, and investments of $0.5 million and
$0.3 million, respectively, in property and equipment. In addition, an increase
of $0.5 million in the EMI Receivable contributed to the Company's cash
requirements in the nine months ended September 30, 1997. Offsetting these cash
requirements were non-cash expenses associated with depreciation and
amortization of $0.9 million and $1.0 million in the nine months ended September
30, 1997 and 1998, respectively.
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
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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.
The Company has investigated Year 2000 compatibility with its major
customers and service providers. Logix Development Corp., which operates the
call center for EMI's networks, has analyzed its software and believes that its
systems are Year 2000 compliant. Playboy is addressing its Year 2000 issues
through a combination of modifications to existing programs and conversions to
Year 2000 compliant software. See "Risk Factors--Year 2000" in the Proxy
Statement/Prospectus. The Company has not been able to adequately assess
Califa's compliance with Year 2000 issues because Califa has only recently been
organized and is in the process of establishing its computer systems and
applications; however, the Company intends to work with Califa to address any
Year 2000 issues that may arise.
Except as described above, the Company has not developed a contingency plan
for the reasonably likely worst case scenario concerning the Year 2000. If a
Year 2000 problem were to occur that the Company could not successfully resolve,
it could have a material adverse effect on the results of operations and
financial condition of the Company.
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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. After the Closing Date, the Company will have entered
into two new agreements with Loral pursuant to which the Company will lease four
"bronze" transponders, directly from Loral. One agreement with Loral for one
transponder will expire at the end of 1999; the other agreement with Loral for
three transponders will expire in 2004. 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 non-preemptible 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 $180,000 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 EMI's transponder
(and any replacement 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 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
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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
400,000 Internet users access SXTV.com per month. 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, engineering and transponder services for the four 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, (v)
duplication, editing and encoding for the networks or (vi) all services relating
to the distribution of the Spice networks (other than the Spice Hot network) or
other adult programming via regionally deployed video file servers linked to
cable systems or multichannel video programming providers, 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. See
42
<PAGE>
"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, (v) duplication, editing and encoding for the network or (vi) all
services relating to the distribution of the network or other adult programming
via regionally deployed video file servers linked to cable systems or
multichannel video programming providers, 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
43
<PAGE>
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 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 September 30, 1998, EMI had approximately 179,000
subscriptions for the EMI Networks. For the nine months ended September 30,
1998, EMI had net subscription revenue of approximately $12.0 million. In
addition, EMI has a free Internet site, SXTV.com, which provides promotional
materials and adult movie clips for the EMI Networks. Approximately 400,000
Internet users access SXTV.com per month.
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
The Company currently occupies a portion of the premises leased by Spice at
536 Broadway, New York, New York. The Company is negotiating with the landlord
of the building to split up Spice's office lease so that, commencing on the
consummation of the Merger, the Company will lease approximately 8,250 square
feet of space, comprising the 10th floor, directly from the landlord. The
Company does not expect its annual rent to exceed $25 per square foot or
approximately $206,000, subject to standard escalations, plus $30,000 for use of
the roof of the building. The landlord has proposed that the Company's new lease
expire May 31, 2003.
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."
44
<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...................... 34 Vice President, Chief Financial Officer and Treasurer
Richard Kirby....................... 38 Executive Vice President and Secretary
Richard Cohen....................... 47 Director
Rudy R. Miller...................... 51 Director
Leland H. Nolan..................... 52 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. See"--CERTAIN PROCEEDINGS."
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.
45
<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.
CERTAIN PROCEEDINGS
Recently, the National Adjudicatory Council of the National Association of
Securities Dealers, Inc. (the "NASD") (the self-regulatory organization for
broker-dealers) reversed in part and affirmed in part a decision of the NASD
Market Surveillance Committee regarding Mr. Faherty's activities as a consultant
to a now defunct brokerage firm by dismissing two of three remaining causes of
action against Mr. Faherty and rejecting findings that he had violated NASD
Conduct Rules 2110, 2120 and 2440, as well as Section 10(b) of the Exchange Act
and Rule 10b-5 promulgated thereunder. These activities occurred prior to his
becoming the Chief Executive Officer and Chairman of Spice in 1991 and were
unrelated to Spice. The decision of the National Adjudicatory Council (the
"Decision") did, however, hold that Mr. Faherty's association with the brokerage
firm gave rise to aider-and-abettor liability for such firm's violation of
Section 15(c) of the Exchange Act and Rule 15c1-2 promulgated thereunder. The
Decision affirmed the imposition on Mr. Faherty of a censure and a bar from
association with any member firm of the NASD, but reduced the fine assessed to
$150,000. Mr. Faherty has appealed the Decision to the Securities and Exchange
Commission. As a result of the appeal, enforcement of the sanctions has been
stayed.
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. In
addition, at the end of each fiscal year, each non-employee director will
receive options to purchase 1,250 shares of Company Common Stock. See "--Benefit
Plans--1998 Stock Incentive Plan for Outside Directors."
46
<PAGE>
EXECUTIVE COMPENSATION
No executive officer of the Company was paid any compensation by the Company
during 1997 or in the nine months ended September 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 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 other than Mr.
Faherty's 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.
47
<PAGE>
1998 STOCK INCENTIVE PLAN.
On July 25, 1998, the Board of Directors adopted the Directrix, Inc. Stock
Incentive Plan (the "Plan"). The Plan is designed to promote the interests of
the Company and its stockholders by providing the Company's key employees with
appropriate incentives and rewards to encourage them to continue in the employ
of the Company and to maximize their performance. The following is a summary of
the material features of the Plan.
GENERAL. The Plan provides for the issuance of a total of up to 200,000
authorized and unissued shares of Company Common Stock or treasury shares of
Company Common Stock, at the discretion of the Compensation Committee or such
other committee of the Board of Directors as the Board of Directors appoints to
administer the Plan.
The Plan specifically provides for the grant of (i) non-qualified stock
options, (ii) incentive stock options ("ISOs"), (iii) limited stock appreciation
rights, (iv) tandem stock appreciation rights, (v) dividend equivalent rights,
(vi) stand-alone stock appreciation rights, (vii) shares of restricted stock,
(viii) shares of phantom stock, (ix) stock bonuses and (x) cash bonuses
(collectively, "Incentive Awards"). The Plan also provides that the Compensation
Committee may grant other types of stock-based awards in such amounts and
subject to such terms and conditions as the Compensation Committee, in its
discretion, determines.
The exercise price per share of each ISO granted under the Plan must be the
fair market value of a share of Company Common Stock on the date on which such
ISO is granted. An ISO granted to any holder of stock representing more than ten
percent of the total combined voting power of all classes of stock of the
Company is subject to the following additional limitations: (i) the exercise
price per share of the ISO must be at least 110% of the fair market value of a
share of Company Common Stock at the time any such ISO is granted and (ii) the
ISO cannot be exercisable after the expiration of five years after the grant
date. The aggregate fair market value of shares of Company Common Stock for
which ISOs are exercisable (as determined on the grant date) by a participant
during any calendar year under the Plan, or any other plan of the Company or its
subsidiaries, may not exceed $100,000.
In general, no Incentive Award is transferable other than by will or the
laws of descent and distribution (except to the extent an agreement evidencing
an Incentive Award permits certain transfers to certain members of a
participant's family or to certain trusts).
GRANTS UNDER THE PLAN. Key employees, including officers of the Company and
its affiliates, will be eligible to receive grants of Incentive Awards. The
Compensation Committee will determine which key employees receive grants of
Incentive Awards, the type of Incentive Awards granted and the number of shares
subject to each Incentive Award. Subject to the terms of the Plan, the
Compensation Committee also will determine the prices, expiration dates and
other material features of Incentive Awards granted under the Plan. The maximum
number of shares of Company Common Stock with respect to which any individual
may be granted Incentive Awards during any one year is 20,000 shares. No
Incentive Award may be granted under the Plan after July 25, 2008. The Company
expects that at the Closing Date approximately 50,000 options will be granted to
officers and other key employees.
ADMINISTRATION. The Compensation Committee will administer the Plan and has
the authority to interpret and construe any provision of the Plan and to adopt
such rules and regulations for administering the Plan as it deems necessary or
appropriate. All decisions and determinations of the Compensation Committee are
final and binding on all parties.
The Compensation Committee may, in its absolute discretion, without
amendment to the Plan, (i) accelerate the date on which any option or stock
appreciation right granted under the Plan becomes exercisable or otherwise
adjust any of the terms of such option or stock appreciation right, (ii)
accelerate the date on which any Incentive Award vests, (iii) waive any
condition imposed under the Plan with respect to any Incentive Award or (iv)
otherwise adjust any of the terms of any Incentive Award.
48
<PAGE>
The Board of Directors may, at any time, suspend, discontinue, revise or
amend the Plan; PROVIDED, HOWEVER, that stockholder approval shall be obtained
for any amendment for which such approval is required under Section 422 of the
Code (related to the grant of ISOs) or required to treat some or all of the
Incentive Awards as "performance-based compensation" within the meaning of
Section 162(m) of the Code. No amendment or modification may, without the
consent of a participant, reduce the participant's rights under any previously
granted and outstanding Incentive Award except to the extent that the Board of
Directors determines that such amendment is necessary or appropriate to prevent
such Incentive Awards from constituting "applicable employee remuneration"
within the meaning of Section 162(m) of the Code.
OTHER FEATURES OF THE PLAN. Incentive Awards granted under the Plan and
shares acquired pursuant thereto will be subject to a number of rights and
restrictions, including provisions relating to a change in control of the
Company and the termination of employment or service of the grantee.
1998 STOCK INCENTIVE PLAN FOR OUTSIDE DIRECTORS.
On November 6, 1998, the Board of Directors adopted the Directrix, Inc.
Stock Incentive Plan for Outside Directors (the "Directors Plan"). The Directors
Plan is designed to promote the interests of the Company and its stockholders by
providing the Company's non-employee directors with appropriate incentives and
rewards to encourage them to take a long-term outlook when formulating Company
policy and to encourage such individuals to remain on the Board of Directors.
The following is a summary of the material features of the Directors Plan.
GENERAL. The Directors Plan provides for the issuance of a total of up to
20,000 authorized and unissued shares of Company Common Stock or treasury shares
of Company Common Stock, at the discretion of the Compensation Committee or such
other committee of the Board of Directors as the Board of Directors appoints to
administer the Directors Plan. The Directors Plan specifically provides for the
grant of non-qualified stock options and limited stock appreciation rights
(together, "Directors Incentive Awards").
In general, no Directors Incentive Award is transferable other than by will
or the laws of descent and distribution (except to the extent an agreement
evidencing a Directors Incentive Award permits certain transfers to certain
members of a participant's family or to certain trusts).
GRANTS UNDER THE DIRECTORS PLAN. Only members of the Board of Directors who
are not employees of the Company or its affiliates will be eligible to receive
grants of Directors Incentive Awards. There are currently three non-employee
directors of the Company. Directors Incentive Awards under the Directors Plan
are granted automatically on the last trading day of each fiscal year of the
Company to each director who is, on such date, eligible to participate in the
Directors Plan. The Directors Incentive Awards will be in the form of
non-qualified stock options to purchase 1,250 shares of Company Common Stock and
may include limited stock appreciation rights with respect to the same number of
shares. Subject to the terms of the Directors Plan, the Compensation Committee
will determine the expiration dates and other material features of Directors
Incentive Awards granted under the Directors Plan. No Directors Incentive Award
may be granted under the Directors Plan after November 6, 2003.
ADMINISTRATION. The Compensation Committee will administer the Directors
Plan and has the authority to interpret and construe any provision of the
Directors Plan and to adopt such rules and regulations for administering the
Directors Plan as it deems necessary or appropriate. All decisions and
determinations of the Compensation Committee are final and binding on all
parties.
The Compensation Committee may, in its absolute discretion, without
amendment to the Directors Plan, (i) accelerate the date on which any option or
stock appreciation right granted under the Directors Plan becomes exercisable or
otherwise adjust any of the terms of such option or stock appreciation right,
(ii) accelerate the date on which any Directors Incentive Award vests, (iii)
waive any condition imposed
49
<PAGE>
under the Directors Plan with respect to any Directors Incentive Award or (iv)
otherwise adjust any of the terms of any Directors Incentive Award.
The Board of Directors may, at any time, suspend, discontinue, revise or
amend the Directors Plan; PROVIDED, HOWEVER, that stockholder approval shall be
obtained for any amendment for which such approval is required under Rule 16b-3
promulgated under the Exchange Act. No amendment or modification may, without
the consent of a participant, reduce the participant's rights under any
previously granted and outstanding Directors Incentive Award except to the
extent that the Board of Directors determines that such amendment is necessary
or appropriate to prevent such Directors Incentive Awards from constituting
"applicable employee remuneration" within the meaning of Section 162 (m) of the
Code.
OTHER FEATURES OF THE DIRECTORS PLAN. Directors Incentive Awards granted
under the Directors Plan and shares acquired pursuant thereto will be subject to
a number of rights and restrictions, including provisions relating to a change
in control of the Company and the termination of service of a grantee.
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.
50
<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 the tenth anniversary of the Closing Date, 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 October 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>
52
<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 1,657 shares owned by his wife or 1,350
shares owned by his children. Mr. Faherty does not have or share voting or
investment power over the shares owned by his wife or 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.
53
<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
54
<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.
55
<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 LLP, 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.
56
<PAGE>
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 September 30, 1998 (unaudited).................................. F-3
Statements of Operations for the years ended December 31, 1996 and 1997 and the nine months ended September
30, 1997 and 1998 (unaudited)............................................................................ F-4
Statement of Stockholder's Equity for the years ended December 31, 1996 and 1997 and the nine months ended
September 30, 1998 (unaudited)........................................................................... F-5
Statements of Cash Flows for the years ended December 31, 1996 and 1997 and the nine months ended September
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, 6 and
10, as to which the date is July 25, 1998)
F-2
<PAGE>
DIRECTRIX, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 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 $ 755,000
Prepaid expenses and other current assets......................................... 73,000 577,000
------------- -------------
Total current assets............................................................ 845,000 1,332,000
Property and equipment............................................................ 4,134,000 3,668,000
Library of movies, net............................................................ 809,000 897,000
Other assets...................................................................... 51,000 51,000
------------- -------------
$ 5,839,000 $ 5,948,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current liabilities:
Current portion of obligations under capital leases............................... $ 522,000 $ 541,000
Accounts payable.................................................................. 252,000 220,000
Accrued expenses and other current liabilities.................................... 80,000 108,000
Deferred income................................................................... 109,000 --
------------- -------------
Total current liabilities....................................................... 963,000 869,000
Obligations under capital leases.................................................. 552,000 141,000
------------- -------------
Total liabilities............................................................... 1,515,000 1,010,000
Commitments and contingencies
Stockholder's equity
Contributed equity................................................................ 9,859,000 12,567,000
Accumulated deficit............................................................... (5,535,000) (7,629,000)
------------- -------------
Total stockholder's equity...................................................... 4,324,000 4,938,000
------------- -------------
$ 5,839,000 $ 5,948,000
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
DIRECTRIX, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------ -----------------------------
<S> <C> <C> <C> <C>
1996 1997 1997 1998
-------------- -------------- -------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:......................................... $ 10,329,000 $ 10,658,000 $ 8,028,000 $ 7,489,000
-------------- -------------- -------------- -------------
Operating expenses:
Salaries, wages and benefits.................... 1,356,000 2,198,000 1,562,000 1,971,000
Library amortization............................ 296,000 378,000 290,000 247,000
Satellite costs................................. 901,000 4,834,000 3,454,000 4,929,000
Selling, general and administrative expenses.... 1,517,000 3,459,000 3,225,000 1,592,000
Depreciation of fixed assets.................... 5,956,000 1,906,000 1,600,000 746,000
-------------- -------------- -------------- -------------
Total operating expenses.......................... 10,026,000 12,775,000 10,131,000 9,485,000
-------------- -------------- -------------- -------------
Total income (loss) from operations......... 303,000 (2,117,000) (2,103,000) (1,996,000)
Interest expense.................................. 4,979,000 1,090,000 1,058,000 98,000
Gain from transponder lease amendment............. -- (2,348,000) (2,348,000) --
-------------- -------------- -------------- -------------
Net income (loss)........................... $ (4,676,000) $ (859,000) $ (813,000) $ (2,094,000)
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
UNAUDITED PRO FORMA
NET INCOME (LOSS) PER COMMON
SHARE (Note 2).................................. $ (2.25) $ (0.41) $ (0.39) $ (1.01)
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
</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).................................. (2,094,000) (2,094,000)
Net transfers from Spice (unaudited)................................. 2,708,000 2,708,000
------------- ------------- -------------
Balance at September 30, 1998 (unaudited)............................ $ 12,567,000 $ (7,629,000) $ 4,938,000
------------- ------------- -------------
------------- ------------- -------------
</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 NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 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) $ (813,000) $ (2,094,000)
-------------- -------------- -------------- --------------
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 1,600,000 746,000
Gain on transponder lease amendment............ -- (2,348,000) (2,348,000) --
Amortization of library of movies.............. 296,000 378,000 290,000 247,000
Provision for bad debts........................ 300,000 1,453,000 1,453,000 --
Changes in assets and liabilities:
Increase in accounts receivable.............. (576,000) (1,949,000) (1,932,000) 17,000
Increase in prepaid expenses and other
current assets............................. (11,000) (52,000) (74,000) (504,000)
Decrease (increase) in other assets.......... 2,000 (3,000) -- --
Increase (decrease) in accounts payable and
accrued expenses........................... 1,193,000 (1,011,000) (875,000) (4,000)
Increase (decrease) in deferred income....... -- 109,000 218,000 (109,000)
-------------- -------------- -------------- --------------
Total adjustments.......................... 7,160,000 (1,517,000) (1,668,000) 393,000
-------------- -------------- -------------- --------------
Net cash provided by (used in) operating
activities............................... 2,484,000 (2,376,000) (2,481,000) (1,701,000)
-------------- -------------- -------------- --------------
Cash flows from investment activities:
Purchase of property and equipment............. (793,000) (750,000) (462,000) (280,000)
Purchase of rights to movies................... (289,000) (549,000) (344,000) (335,000)
-------------- -------------- -------------- --------------
Net cash used in investing activities...... (1,082,000) (1,299,000) (806,000) (615,000)
-------------- -------------- -------------- --------------
Cash flows from financing activities:
Repayment of long-term debt and capital lease
obligations.................................. (2,699,000) (1,911,000) (1,815,000) (392,000)
Net transfers from Spice....................... 1,297,000 5,586,000 5,102,000 2,708,000
-------------- -------------- -------------- --------------
Net cash (used in) provided by financing
activities............................... (1,402,000) 3,675,000 3,287,000 2,316,000
-------------- -------------- -------------- --------------
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 $ 2,172,000 $ 92,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
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 SEPTEMBER 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 nine months ended September 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 SEPTEMBER 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 SEPTEMBER 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 September 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 SEPTEMBER 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 nine months ended September 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 September 30, 1998 and the results of operations and cash
flows for the nine months ended September 30, 1997 and 1998.
3. PROPERTY AND EQUIPMENT.
Property and equipment consists of the following:
<TABLE>
<CAPTION>
USEFUL LIVES DECEMBER 31, SEPTEMBER 30,
IN YEARS 1997 1998
--------------- ------------ -------------
<S> <C> <C> <C>
Equipment...................................... 5 $6,519,000 $ 6,923,000
Furniture and Fixtures......................... 7 163,000 165,000
Life of lease
Leasehold Improvements......................... or shorter 1,114,000 1,122,000
--------------- ------------ -------------
7,796,000 8,210,000
Less Accumulated Depreciation and
Amortization................................. 3,662,000 4,542,000
------------ -------------
$4,134,000 $ 3,668,000
------------ -------------
------------ -------------
</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 September 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 SEPTEMBER 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
September 30, 1998 was $256,000 and $151,000, 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 adopted an employee stock option plan covering 200,000 shares of
Common Stock on July 25, 1998. The Company's Board of Directors is expected to
grant options covering 50,000 shares of Common Stock at the time of the Closing.
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 SEPTEMBER 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 $4,869,000 for the nine months ended September 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 SEPTEMBER 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
$3.4 million and $2.9 million for the nine months ended September 30, 1997 and
1998, respectively. At December 31, 1997 and September 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 $4.3 million and $4.0 million for the nine months ended
September 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 SEPTEMBER 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 SEPTEMBER 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........ 16
Arrangements After the Merger.................. 26
Dividend Policy................................ 29
Selected Historical Financial Information...... 30
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 31
Business....................................... 37
Management..................................... 45
Certain Transactions........................... 51
Principal Stockholders of the Company.......... 52
Description of Securities...................... 54
Legal Matters.................................. 56
Experts........................................ 56
Additional Information......................... 56
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.
[LOGO]
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
Printing and engraving expenses.................................... 61,500
Legal fees and expenses............................................ 500,000
Accounting fees and expenses....................................... 350,000
Blue Sky fees and expenses (including legal fees).................. 15,000
Transfer agent and registrar fees and expenses..................... 5,000
Miscellaneous...................................................... 22,379
---------
Total.......................................................... 960,000
---------
---------
</TABLE>
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 LLP 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 Stock Incentive Plan of the Registrant.
10.12 -- 1998 Stock Incentive Plan for Outside Directors of the Registrant.
10.13 -- Commitment Letter Agreement dated July 20, 1998 among the Registrant, J. Roger Faherty, Leland Nolan
and Donald McDonald.*
10.14 -- Form of Loan and Security Agreement 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 LLP (included in Exhibit 5.1).
24.1 -- Power of Attorney (see page II-5).*
27.1 -- Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed.
II-2
<PAGE>
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 November 20, 1998.
<TABLE>
<S> <C> <C>
DIRECTRIX, INC.
By: /s/ J. ROGER FAHERTY
-----------------------------------------
J. Roger Faherty
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
</TABLE>
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 November 20, 1998
J. Roger Faherty Executive Officer)
*
------------------------------------------- President and Director November 20, 1998
Donald J. McDonald
Vice President, Chief Financial
* Officer and Treasurer
------------------------------------------- (Principal Financial and November 20, 1998
John R. Sharpe Accounting Officer)
*
------------------------------------------- Director November 20, 1998
Richard Cohen
*
------------------------------------------- Director November 20, 1998
Rudy R. Miller
*
------------------------------------------- Director November 20, 1998
Leland H. Nolan
</TABLE>
* Executed by J. Roger Faherty by power of attorney
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 LLP 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 Stock Incentive Plan of the Registrant.
10.12 -- 1998 Stock Incentive Plan for Outside Directors of the Registrant.
10.13 -- Commitment Letter Agreement dated July 20, 1998 among the Registrant, J. Roger Faherty, Leland
Nolan and Donald McDonald.*
10.14 -- Form of Loan and Security Agreement 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 LLP (included in Exhibit 5.1).
24.1 -- Power of Attorney (see page II-5).*
27.1 -- Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed.
<PAGE>
Exhibit 4.1
<TABLE>
<S> <C> <C>
[LOGO TO COME]
DX DIRECTRIX, INC.
CUSIP 25459A 10 D
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF DELAWARE CERTAIN DEFINITIONS
THIS CERTIFIES THAT
___________________________________________________________________________________________________
___________________________________________________________________________________________________
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF THE PAR VALUE OF $.01 PER SHARE OF
DIRECTRIX, INC.
transferable on the books of the Corporation by the holder hereof in person or by duly authorized
attorney, upon surrender of this certificate properly endorsed. This certificate is not valid
until countersigned by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the
facsimile signatures of its duly authorized officers.
Dated
/s/ILLEGIBLE DIRECTRIX, INC. /s/ILLEGIBLE
- ------------------------- CORPORATE ------------------------
EXECUTIVE VICE PRESIDENT SEAL CHIEF EXECUTIVE OFFICER
AND CHIEF OPERATING OFFICER 1998
DELAWARE
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, N.Y.) TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED OFFICER
</TABLE>
<PAGE>
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND
THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR
RIGHTS.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
<TABLE>
<S> <C>
TEN COM -as tenants in common UNIF GIFT MIN ACT -_________Custodian_______________
TEN ENT -as tenants by the entireties (Cust) (Minor)
JT TEN -as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as tenants Act___________________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received,__________________________hereby sell, assign and
transfer untog
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
---------------------------------------
/ /
---------------------------------------
<TABLE>
<S> <C>
_______________________________________________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
_______________________________________________________________________________________________________________________
_______________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________Shares
of the capital stock represented by the within Certificate, and do hereby irrevocably constitute
and appoint
________________________________________________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Company with full power of substitution in
the premises.
Dated_________________________________
__________________________________________________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF
THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
</TABLE>
<PAGE>
Exhibit 5.1
Kramer Levin Naftalis & Frankel LLP
[Letterhead]
November 18, 1998
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Directrix, Inc.
Registration Statement on Form SB-2
Ladies and Gentlemen:
We have acted as counsel to Directrix, Inc., a Delaware corporation
(the "Company"), in connection with the preparation and filing of the
above-captioned Registration Statement on Form SB-2 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), relating to the transfer by Spice Entertainment Companies, Inc., a
Delaware corporation and the parent of the Company, to its stockholders of up
to 2,073,638 shares (the "Shares") of the Company's common stock, par value
$.01 per share (the "Common Stock").
As such counsel, we have examined such corporate records, certificates
and other documents and such questions of law as we have considered necessary or
appropriate for the purposes of this opinion. In rendering this opinion, we have
(a) assumed (i) the genuineness of all signatures on all documents examined by
us, (ii) the authenticity of all documents submitted to us as originals, and
(iii) the conformity to original documents of all
<PAGE>
KRAMER LEVIN NAFTALIS & FRANKEL LLP
Securities and Exchange Commission
November 18, 1998
Page 2
documents submitted to us as photostatic or conformed copies and the
authenticity of the originals of such copies; and (b) relied on (i) certificates
of public officials and (ii) as to matters of fact, statements and certificates
of officers of the Company.
We are attorneys admitted to the Bar of the State of New York, and we
express no opinion as to the laws of any other jurisdiction other than the laws
of the United States of America, the laws of the State of New York and the
General Corporation Law of the State of Delaware.
Based upon the foregoing, we are of the opinion that the Shares
have been duly authorized by all required corporate action and when issued in
accordance with the terms described in the Registration Statement, will be
validly issued, fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the heading "Legal
Matters" in the prospectus forming a part of the Registration Statement. In
giving such consent we do not thereby concede that we are within the category of
persons whose consent is required under Section 7 of the Securities Act or the
rules and regulations promulgated thereunder.
Very truly yours,
/s/ Kramer Levin Naftalis & Frankel LLP
<PAGE>
Exhibit 10.1
SATELLITE SERVICES AGREEMENT
This Agreement made as of the _____ day of ________, 1998 is by and
between Playboy Entertainment Group, Inc., with offices at 9242 Beverly
Boulevard, Beverly Hills, CA 90210 ("Playboy") and Directrix, Inc., a
Delaware corporation with offices at 536 Broadway, 10th Floor, New York, New
York 10012 ("Directrix").
Whereas, Playboy Enterprises, Inc. ("PEI") and Spice Entertainment
Companies, Inc. ("Spice") have entered into an Agreement and Plan of Merger
("Merger Agreement") dated as of May 29, 1998 that provides, among other
things, for PEI to acquire all of the outstanding common stock of Spice, and
the Merger Agreement and the Transfer and Redemption Agreement (the "Transfer
Agreement") between Spice and Directrix and dated the same date as the Merger
Agreement, provide that Spice will transfer, to Directrix among other assets,
Spice's digital operations and playback center (the "Operations Facility")
and a General Instruments Digicipher II Integrated Encoder System (exclusive
to Playboy unless otherwise approved by Playboy in writing) capable of
compressing at least four (4) MPEG 2 channels (the "Encoder System"). The
Merger Agreement requires as a condition precedent to the closing ("Closing")
thereunder, that Spice distribute, as part of the merger consideration, the
Directrix stock to its stockholders in partial redemption of their shares of
Spice common stock. Directrix will operate the Operations Facility after the
Closing.
Whereas, prior to the Closing, Spice handled playback for its three
television networks known prior to the Closing as Spice, the Adam & Eve Channel
and Spice Hot (the "Spice Networks") from its Operations Facility. The Spice
Networks signal was terrestrially transported to the Atlantic Communications,
Inc. ("Atlantic") Northvale, New Jersey uplink facility (the "Uplink Facility")
over diverse redundant fiber optic paths pursuant to an Agreement between
Atlantic and Spice dated as of February 24, 1997 (the "Atlantic Agreement"). The
Spice Networks signal was encrypted and digitally compressed using the Encoder
System which is leased from Vendor Capital Group under an equipment lease dated
July 24, 1996 ("Equipment Lease Agreement") and is maintained by General
Instruments ("GI") under a maintenance agreement (the "Encoder System
Maintenance Agreement"). Atlantic also provided uplink of the digitally
compressed Spice Networks signal under the Atlantic Agreement to Transponder 7
on a satellite commonly known as T4 and owned and operated by Loral SKYNET.
Whereas, Directrix and Playboy mutually desire for Directrix to provide a
complete transmission service for a minimum of two (2) networks (the
"Networks"), plus additional networks at Playboy's sole discretion (the
"Additional Networks"), including playback, encryption, compression,
terrestrial connectivity and uplink services;
Now, therefore, it is mutually agreed as follows:
1. SATELLITE SERVICES: Playboy hereby grants to Directrix, and Directrix
hereby accepts the right, and the obligation in consideration for the
Satellite Services Fee (hereafter defined), to provide Playback, Compression
and Encryption, Terrestrial Connectivity, Authorization (possibly only
temporarily), and to Uplink the Networks for distribution of the Networks
(collectively the "Satellite Services"). All Satellite Services provided
hereunder by Directrix or Directrix's subcontractors shall be under Playboy's
sole direction and control, and Playboy shall be entitled to have a Playboy
representative at the Operations Facility at any time. Directrix shall
provide the Satellite Services hereunder on a twenty-four (24) hour per day,
seven (7) day per week basis in a timely and efficient manner that rises at
least to the level of, in all material respects, the past practices and
procedures of Spice for the Spice Networks prior to the Closing. Directrix
shall consult with Playboy as problems regarding the Satellite Services
arise. Additionally, Directrix shall provide a twenty-four (24) hour a day,
seven (7) day a week toll-free telephone number for both routine and
emergency service calls, and regularly provide Playboy with a log of such
calls. In the event that Playboy elects not to utilize Directrix to provide
Authorization services, such telephone number shall be for Playboy's use only.
1
<PAGE>
2. DEFINITIONS:
a. Compression and Encryption: Directrix's compression and encryption
of the Networks by means of a Directrix-provided Encoder System and
authorization computer configured as part of the Encoder System.
Directrix shall provide, through GI or another Playboy-approved
subcontractor, maintenance and repair of the Encoder System in
accordance with terms of the Encoder System Maintenance Agreement.
Directrix shall be responsible for all software license fees and
maintenance costs in connection with the Encoder System and
authorization computer. In the event that Playboy desires
Compression and Encryption for more than two (2) Networks, then
Directrix and Playboy shall negotiate in good faith to agree upon a
fee for such additional Compression and Encryption. In the event
Directrix and Playboy are unable to agree upon such a fee, Playboy
shall have the right to independently purchase such additional
Compression and Encryption equipment as would be necessary to
increase the number of networks the Encoder System can compress,
which Compression and Encryption equipment shall be exclusively
owned by Playboy.
b. Playback: Playback of the Networks from the Operations Facility
twenty-four (24) hours per day and seven (7) days per week, from an
MPEG 2 video file server and redundant real time Betacam SP
playback for the movies and an emergency continuity reel, updated
monthly, for the interstitial programming elements, using the
programming elements for the Networks provided by Playboy as
described hereinbelow. The Operations Facility shall be manned by
on-site technicians during all operating hours. The Networks shall
be monitored to maintain playback, uplink and downlink continuity
and quality. Redundant equipment, an uninterruptable power supply,
generator back-up and standard broadcast operating controls and
procedures shall be used to ensure program continuity. Telephone
access and a technical contact shall be available on a twenty-four
(24) hour basis.
c. Terrestrial Connectivity: Directrix shall provide fiber optic
terrestrial connectivity for the Networks from the Operations
Facility to the Atlantic Uplink Facility, pursuant to the
Terrestrial Agreements (hereafter defined).
d. Authorization: Authorizations and deauthorizations for the
Networks' transmission to cable head ends, direct to home platforms
and any other users authorized and designated by Playboy shall be
immediately implemented by Directrix upon Playboy's instruction
from a Playboy supplied list of Playboy personnel authorized to
provide such instructions. Playboy may, upon notice to Directrix,
modify the list from time to time. Directrix shall be responsible
for including the authorization/deauthorization data into the
signal to be uplinked to Transponder 7 and for access control to
General Instrument or any subsequent operator of the control center
for the Networks. Playboy shall have the right upon forty-five (45)
days prior written notice to Directrix to discontinue receiving the
Authorization services from Directrix, and to instead either secure
another provider or provide this service itself via modem to the
Digicipher II compression hardware provided by Directrix hereunder,
which modemed service shall be done in a manner acceptable to
Directrix. Playboy shall be responsible for any errors in
Authorization services and for any damage to the Encoder System or
the authorization computer if such errors or damages are directly
caused by Playboy accessing the authorization computer as provided
for in the preceding sentence.
e. Uplink: Directrix shall provide the Networks with twenty-four (24)
hour per day, seven (7) days per week uplink services to
Transponder 7 or its replacement to be designated by Playboy
pursuant to the Atlantic Agreement, or an agreement with another
subcontractor subject to Playboy's prior written approval.
3. RELATED AGREEMENTS: As provided for in the Merger Agreement and the Transfer
Agreement and with respect to the Atlantic Agreement, the Encoder System
Maintenance Agreement, the Equipment Lease Agreement (as it relates to the
Encoder System only) and any other agreements that Spice had entered into
2
<PAGE>
with third parties for the provision of services which comprise the Satellite
Services (collectively the "Existing Service Agreements") Spice shall: (i)
terminate one or more of the Existing Service Agreements or (ii) cause one or
more of the Existing Service Agreements to be assigned to Directrix so that,
in either case, Spice shall have no further obligations or liability under
any of the Existing Service Agreements following the Closing. Prior to
Closing Directrix and Playboy shall review the Existing Service Agreements
and for those which Playboy deems acceptable, Spice and Directrix shall use
their commercially reasonable efforts to have such agreements assigned to
Directrix with such changes as Playboy shall reasonably request. For the
balance of the Existing Service Agreements, Directrix shall enter into new
service agreements containing such terms and conditions as Playboy shall
reasonably require, including that the term of such new service agreements
must extend to the expiration of the Term hereunder. If a new agreement
requires monthly charges in excess of those contained in the Existing Service
Agreements as a result of additional redundancy or other terms or conditions
requested by Playboy, the Satellite Service Fees shall be increased by such
differential.
a. Atlantic Agreement: Directrix shall enter into an agreement with
Atlantic, or an agreement with another subcontractor subject to
Playboy's prior written approval, before the Closing pursuant to
which Atlantic shall provide Uplink services twenty-four (24) hours
per day, seven (7) days per week from the Atlantic Uplink Facility.
A signed copy of the Atlantic Agreement shall be attached hereto as
Exhibit "A".
b. Encoder System Lease: Pursuant to the terms of the Transfer and
Redemption Agreement, Directrix shall enter into a lease agreement
before the Closing pursuant to which Directrix shall lease the
Encoder System for the Networks for the duration of the Term. A
signed copy of the Encoder System Lease shall be attached hereto as
Exhibit "B".
c. Encoder System Maintenance Agreement: Directrix shall enter into an
agreement with GI, or an agreement with another subcontractor
subject to Playboy's prior written approval, for GI to provide
twenty-four (24) hour per day, seven (7) day per week maintenance
of the Encoder System for the duration of the Term. A copy of the
Encoder System Maintenance Agreement shall be attached hereto as
Exhibit "C".
d. Terrestrial Agreements: Directrix shall enter into agreements for
redundant, diverse path fiber optic terrestrial connectivity from
the Operations Facility to the Atlantic Facility for the duration
of the Term. Copies of the Terrestrial Agreements shall be attached
hereto collectively as Exhibit "D".
Directrix agrees that in the event Directrix is notified that it is in
breach or default of any of the above agreements, or any other
agreements related to the Satellite Services, Directrix shall
immediately notify Playboy of such notice. Directrix's failure to comply
with the foregoing shall be deemed a material breach of this Agreement.
4. SUB-CONTRACTORS: Directrix agrees to provide Playboy with a list of all of
its subcontractors prior to the Closing, which list of subcontractors shall
be deemed approved and attached hereto as Exhibit "E". Directrix shall not
have the right to engage any other subcontractors than those on the approved
list, nor shall Directrix permit its subcontractors to further subcontract
their responsibilities. In the event that Directrix wishes to change
subcontractors or engage a new subcontractor, then Directrix shall seek
Playboy's prior written approval, not to be unreasonably withheld. Subject to
any rights for default Playboy may have under this Agreement, in the event
that a Directrix subcontractor directly causes Directrix to be in default of
Paragraph 11 [Uptime], then Directrix shall have the right to change such
subcontractor once without seeking Playboy's prior written approval.
Furthermore, Directrix shall provide in its agreements with its
subcontractors that in the event of any default by Directrix that affects the
Networks, Playboy shall receive notice of such default as provided in the
paragraph [Notices], and an opportunity to cure Directrix's default. Playboy
and Directrix agree that, notwithstanding Playboy's right to cure Directrix's
default, Playboy shall not cure such default until Directrix has had a
reasonable opportunity to cure such default following the subcontractor's
written notice of Directrix's default, and such cure has not been effected.
If Playboy does cure such a Directrix default, Playboy shall have the right
to offset any out-of-pocket costs incurred by Playboy in effecting such cure
against any future payments to Directrix.
3
<PAGE>
5. TERM: The initial term of this Agreement shall commence simultaneously
with the Closing and shall end twenty-four (24) months thereafter at 12
p.m.(the "Term"). In addition to any other remedies it may have under this
Agreement, in law or in equity, Playboy may terminate this Agreement, in the
event that Directrix has materially breached any of its obligations hereunder
and such breach (which shall be specified in such notice) is not cured by
Directrix within ten (10) days of such notice.
6. CONTENT OF THE SERVICE: Playboy shall, in its sole discretion, include
such programming in the Networks as it deems appropriate. Directrix shall
have no right to alter, substitute, delete or otherwise modify the content of
the Networks as provided by Playboy. Playboy shall have the exclusive right
to extend, reduce or otherwise change the hours during which the Networks are
distributed to end users of the Networks. Playboy shall have the right to
store any air masters and materials at the Operations Facility that have an
active air date and Playboy shall remove the air masters and materials from
the Operations Facility within thirty (30) days of Playboy's reasonable
determination that such tapes no longer have an active air date. Directrix
shall not exhibit or transmit any Networks programming at any time other than
as scheduled by Playboy, without express written permission by Playboy.
Directrix hereby acknowledges that from time to time Playboy may modify the
programming to be supplied as part of the Networks without prior notice, and
Playboy shall not be held liable in any way by Directrix for such changes.
Directrix shall not be responsible for pre-screening any of the videotapes
delivered by Playboy to Directrix pursuant to Paragraph 7
[Delivery to Directrix].
7. DELIVERY TO DIRECTRIX: Playboy shall create and provide Directrix with
fully-edited, ready-for-air Beta SP videotapes of all Networks programming
elements with a slate at the start of the tape reasonably prior to any
scheduled air date. Playboy shall notify Directrix which audio standards are
utilized on the air masters. The Networks may include all films, shows,
interstitial materials, music, graphics, programming and any other elements
necessary for Directrix to assemble and playback the Networks as a complete
twenty-four (24) hour-per-day, seven (7) day-a-week adult channel that meets
the industry accepted RS250(b) standard. Directrix shall meet or exceed the
RS250(b) standard in the transmission of the Networks to Transponder 7.
Playboy shall retain sole ownership of all videotapes, equipment and
other material provided to Directrix, including all copyrights therein, and
Playboy shall have access at no charge to and the right to the return of all
such videotapes, equipment and materials promptly following Playboy's request.
8. INSURANCE: During the Term, Directrix shall secure and maintain the
following insurance:
a. Insurance naming Playboy as an additional insured and loss payee with
respect to Playboy's interest covering the risk of loss of, or damage
to all videotapes for the replacement value of the tape stock and the
cost to redub the videotapes as well as for the cost of the equipment
and materials furnished by Playboy, equipment and material furnished
by Playboy; and
b. General liability insurance naming Playboy as an additional insured
covering personal injury and other accidents or liability that might
occur during the course of Directrix's performance of this Agreement.
Such insurance policies shall have liability limits of at least one
million dollars ($1,000,000) and Directrix shall be responsible for all
deductibles thereunder. On or before the Closing, Directrix shall provide
Playboy with copies of certificates of such insurance reasonably acceptable
to Playboy. Furthermore, Directrix shall provide Playboy with certificates of
insurance evidencing that Directrix's subdistributors have liability policies
with a minimum limit of one million dollars ($1,000,000).
9. PAYMENTS: In consideration of the Satellite Services rendered herein,
Playboy shall remit to Directrix the following amounts on or before the first
day of each month for the Satellite Services are to be provided by Directrix
during that month (individually and collectively, the "Satellite Services
Fee"):
a. In consideration of Directrix providing the Uplink services for the
Networks and up to two (2) Additional Networks, Playboy shall remit to
Directrix the sum of Twelve Thousand Dollars ($12,000.00) per month;
4
<PAGE>
b. In consideration of Directrix providing the Playback services for the
Networks and the Additional Networks, if any, Playboy shall remit to
Directrix the sum of Ten Thousand Dollars ($10,000) per month per
network;
c. In consideration of Directrix providing the Terrestrial
Connectivity services for the Networks and the Additional Networks,
if any, Playboy shall remit an amount equal to Directrix's
out-of-pocket cost of obtaining such services in accordance with
the Terrestrial Connectivity Agreement;
d. In consideration of Directrix providing the Compression and
Encryption services for up to two (2) Networks and up to two (2)
Additional Networks, Playboy shall remit to Directrix the sum of
Thirteen Thousand, Seventy-One Dollars and Fifty-Two Cents
($13,071.52) each month up to and including the Satellite Services
Fee due on or before July 1, 1999, except that Playboy shall not be
obligated to remit the above amount for the Satellite Services Fees
payable on or before September 1, 1998. Additionally, on or before
September 30, 1999, Playboy shall remit the sum of Seventy-Two
Thousand, Six Hundred and Twenty-Two Dollars and Eighty Cents
($78,622.80), plus tax, if any, to Directrix.
e. In consideration of Directrix providing Authorization services for
the Networks and the Additional Networks, if any, Playboy shall
remit the sum of One Thousand and Five Hundred Dollars ($1,500) per
month per network, which sum shall only be paid for months during
which Directrix actually provides such service, and prorated in the
event such service is provided for less than a full month.
The above amounts are predicated upon all of the Networks being uplinked to
Transponder 7, or its successor. If Directrix is required to uplink one (1)
or more of the Networks to a separate transponder from the other Networks,
the parties shall mutually agree upon a different fee structure.
In addition to any remedies that Directrix may have at law, in the event
that Playboy should fail to remit payment as provided above, Directrix
shall provide Playboy with written and telephonic notice of such failure
as provided herein, in which case Playboy shall have ten (10) days
within which to cure such failure. If Playboy does not cure such failure
within ten (10) days, Directrix may, in addition to any other remedies
it may have, either terminate this Agreement, or, as a condition
precedent to continuing to provide the services herein, require payment
of 1) the overdue payment and 2) a security deposit equal to one (1)
month of the current Satellite Services Fee. In addition to Playboy's
right to terminate this Agreement prior to the completion of the Term
for Directrix's assignment or breach, with no payment liability,
including as provided in Paragraph 11 [Uptime], or an event of force
majeure, Playboy may terminate for any other reason provided that if
such termination is not due to Directrix's breach or assignment or an
event of force majeure, Playboy shall remit the Satellite Services Fee
balance of the Term to Directrix on a monthly basis as provided herein.
If Playboy terminates for reasons of breach or assignment as provided
herein, Playboy shall be entitled to a pro rata refund, including any
security deposit, of the Satellite Services Fee.
At the conclusion of the Term, the parties shall negotiate in good faith
regarding the Satellite Services Fee in the event that Playboy, in its
sole discretion, elects to continue receiving the Satellite Services
from Directrix.
10. REPORTS: Directrix shall provide Playboy with a discrepancy report on a
daily basis relating to any of the Satellite Services. All of Directrix's
records and accounts relating to the Networks shall be available for
inspection and copying and for audit by Playboy and its representatives
during normal business hours, at any time, during the term of this Agreement
and for three (3) year thereafter. In addition to the foregoing, Directrix
will supply to Playboy such additional information relating to the Networks
as Playboy may reasonably request from time to time and as Directrix may
reasonably obtain. It is expressly understood that Directrix's obligation to
provide reports to Playboy in a timely manner in accordance with this
Paragraph 10 is a material obligation of Directrix hereunder.
5
<PAGE>
11. UPTIME: The Satellite Services described herein shall be provided for
each Network on a uninterrupted basis 99.999% of each twelve (12) month
period during the Term, commencing on the first day the Satellite Services
are provided to Playboy, except for interruptions or other problems in such
services due in whole or in part to Playboy failing to provide the air
masters, or because of the quality or content of the Air Masters or because
of downtime or other interruption of facilities or services not provided by
Directrix or its subcontractors beyond their reasonable control. In the event
that, for reasons other than those described above, Directrix fails to
provide the Satellite Services, Playboy shall be entitled to discount the
total monthly Satellite Services Fee for all Satellite Services rendered by
Directrix payable on the first day of the next calendar month by an amount
equal to the total Satellite Services Fee divided by the number of
hours/minutes in that month, and multiplied by the number of hours/minutes
for which Directrix failed to provide any of the Satellite Services for any
of the Networks. Notwithstanding the forgoing, in the event that Directrix
fails to provide the Satellite Services for any of the Networks for an
aggregate amount of time exceeding .001% on a cumulative basis per twelve
(12) month period of the Term, such failure shall be deemed a material breach
of this agreement and Playboy shall be entitled to immediately terminate this
Agreement with regard to all of the Networks and be entitled to any remedies
available to it pursuant to this agreement or by law, with two exceptions: a)
Playboy shall not have the right to terminate the Agreement for Directrix's
first failure to provide Satellite Services so long as such first failure
does not exceed two (2) continuous hours; and b) in the event that
Directrix's failure to provide the Satellite Services for greater than .001%
on a cumulative basis per twelve (12) month period of the Term is directly
caused by one of Directrix's subcontractors, then Directrix shall have the
one-time right to replace the defaulting contractor without Playboy's prior
approval and, so long as the total failure to provide the Satellite Services
after going into default does not exceed two (2) hours (i.e. the total down
time is no more than .001% of the twelve (12) month period plus two (2)
hours), then Playboy shall not have the right to terminate the Agreement.
12. OPTIONAL SERVICES: In the event that Playboy shall elect to engage a
third party to provide 1) traffic library and quality control services; 2)
satellite security; 3) network integration and scheduling; 4) creative
services; 5) duplication, editing and encoding for the Networks or 6) all
services relating to the distribution of the Spice Networks (other than the
Spice Hot Network) or other adult programming via regionally deployed video
file servers linked to cable systems or multichannel video programming
providers, Playboy agrees it shall engage Directrix to provide such services,
provided that Directrix can provide such services at effectively the same
level of quality and effectively at or below the price that such third party
would provide such services when such quality and prices are evaluated taking
into account all circumstances that would affect such quality and price. Such
evaluation shall be made by Playboy in its sole reasonable discretion.
13. FORCE MAJEURE: Neither party shall be liable to the other party for damages
of any kind which are due to causes beyond the party's reasonable control,
including, without limitation, acts of god; natural disasters, governmental acts
or omissions, national emergencies, insurrections, riots, or wars; strikes,
lock-outs or other labor difficulties or because of the negligent or intentional
acts or omissions of the other party, provided, however, that in the case of
such other party's acts or omissions, each party shall use its reasonable best
efforts to continue to comply with all of its respective obligations hereunder.
The Term of this Agreement shall be suspended during the period when a party is
unable to fulfill its obligations hereunder by reason of the occurrence of force
majeure event. Should the force majeure event continue for a minimum of fifteen
(15) days in the aggregate and either party is unable to perform its obligations
hereunder during such time, then the other party, in its sole discretion, may
terminate this Agreement.
14. TRADEMARK APPROVAL: Directrix has not and will not acquire any
proprietary rights in any of the trade names, trademarks, service marks or
logos associated with Playboy, PEI and/or Spice by reason of this Agreement
or otherwise. Directrix further acknowledges the great value of the goodwill
associated with the marks, and that any additional goodwill in the marks
which may be created through the use of the marks by Directrix shall inure to
the sole benefit of Playboy and/or its parent as the case may be.
15. REPRESENTATIONS AND WARRANTIES: Playboy and Directrix each represent and
warrant to the other that each has the requisite power and authority to enter
into this Agreement and to perform fully its respective obligations
hereunder, and that this Agreement has been duly executed by it and
constitutes a valid obligation enforceable against it in accordance with the
terms hereof.
Playboy represents and warrants to Directrix that it will exercise
its best efforts to ensure that the Networks as supplied to Directrix
pursuant to this Agreement, if and when presented by Directrix in the manner
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and at the times permitted herein, will contain no libelous or slanderous
material and will not violate any copyright, right of privacy or literary or
dramatic right of any person.
16. INDEMNIFICATION:
a. Directrix and Playboy shall each indemnify, defend and forever hold
the other, its affiliated corporations and other entities,
partners, officers, directors, employees and agents (collectively
the "Indemnitees") harmless from all liabilities, claims, costs,
damages and expenses (including without limitation, reasonable
counsel fees of counsel of Playboy's choice) (collectively
"Claims") of third parties arising from the performance of each
party, or its subcontractors hereunder, provided that in each case
where such indemnification is sought:
i. the Indemnitee promptly notifies the other of the Claim to which
the indemnification relates;
ii. the party giving indemnification rights to the other shall
control fully any litigation, compromise, settlement or other
resolution or disposition of such Claim; and
iii. the Indemnitee fully cooperates with the reasonable requests of
the other party in its defense of such claim.
b. Notwithstanding the above, Playboy's indemnification of Directrix
will be valid in the event of a prosecution or claim involving an
allegation of violation of the laws insofar as the content of the
Service is concerned, provided that:
i. Prompt telephone contact be made with the General Counsel's
office of Playboy in Chicago at (312) 751-8000 or Playboy's
President in Beverly Hills at (310) 246-4000, or other numbers
hereafter specified by Playboy. Such telephone notification
should be immediately followed with a letter containing copies of
all papers that have been served and giving complete information
then available regarding the incident.
ii. Playboy will not be responsible in cases where there is any
admission of guilt by anyone charged with violation of the law as
to the content of the Networks except with Playboy's prior
written consent. Settlement or dismissal of any case will not be
allowed, except with Playboy's prior written consent.
iii. Actual or prospective parties involved in such prosecution shall
make no voluntary disclosure regarding support or lack thereof by
Playboy under this policy.
c. In no event shall either Party be liable in contract, tort, or
otherwise for any special, incidental or consequential damages
(including, but not limited to, lost profits), whether foreseeable or
not, occasioned by any defect or delay in delivery of the services or
any other cause whatsoever unless such damages arise in connection
with such party's gross negligence, willful misconduct, or bad faith.
17. GOVERNING LAWS, OBLIGATIONS, ETC.: This Agreement shall be governed by and
interpreted under the laws of the State of New York.
18. ASSIGNMENT: Neither party may assign this Agreement without the express
written consent of the other, such consent not to be unreasonably withheld.
Additionally, if Directrix directly or indirectly transfers a substantial
portion of the assets or business relating to Directrix's provision of the
Satellite Services, Directrix's rights and obligations under this Agreement
may not be assigned to the acquirer thereof without Playboy's prior consent,
such consent shall not be unreasonably withheld. In determining whether to
consent or withhold consent to such a transfer, Playboy may take into account
factors in addition to the identity of the acquirer including, but not
limited to, its desire to have the Satellite Services provided for in the Los
Angeles Metropolitan area. In the event Playboy does not consent to such
transfer, Playboy shall have the right to
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terminate this Agreement upon thirty (30) days prior written notice to
Directrix. Playboy may not assign this Agreement or any portion of its rights
or obligations without Directrix's consent, not to be unreasonably withheld.
Notwithstanding the foregoing, if a proposed assignee of Playboy's rights and
obligations hereunder agrees to be bound by the terms and provisions of this
Agreement and Playboy remain secondarily liable for the obligations of the
assignee, Directrix shall not be entitled to withhold its consent to such
assignment.
19. NOTICES: All notices, requests, demands, consents, directions and other
communications provided for hereunder shall be in writing, delivered by means
of U.S. certified mail, return receipt requested or personal delivery or
facsimile verified with a confirmation of receipt. All notices to either
party must also be made telephonically to the first individual for each party
listed below, provided that if such individual is unavailable to receive such
telephonic notice, such unavailability shall not negate the effectiveness of
the written notice.
a. Playboy
Playboy Entertainment Group, Inc.,
9242 Beverly Boulevard 3rd Floor
Beverly Hills, CA 90210
Attention: President
(310) 246-4000 : Tony Lynn, Jim English and Bill Asher
With a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, NY 10019-3990
Attention: James Dubin, Esq.
(212) 373-3000: James Dubin, Esq.
b. Directrix, Inc.
536 Broadway 10th Floor
New York, NY 10012
Attention: Chairman,
(212) 219-6200: Roger Faherty
With a copy to:
Kramer, Levin, Natfalis & Frankel
919 Third Avenue
New York, NY 10022,
ATTN: Howard Rothman, Esq.,
(212) 715-9100: Howard Rothman, Esq.
or, as to each party, at such other address as shall be designated by such
party in a written notice to the other party. All notices shall, when
mailed or faxed, be deemed effective on the date deposited in the mail or
on the date receipt of such fax is so confirmed.
20. CONFIDENTIALITY: Neither Playboy nor Directrix shall disclose to any
third party (other than its respective employees, in their capacity as such),
without the other party's written approval, any information with respect to
the terms and provisions of this Agreement except: (i) to the extent
necessary to comply with law or the valid order of a court of competent
jurisdiction, in which event the party making such disclosure shall so notify
the other and shall seek confidential treatment of such information, (ii) as
part of its normal reporting or review procedure to its parent company, its
auditors and its attorneys, provided, however, that such parent company,
auditors and attorneys agree to be bound by the provisions of this paragraph
and (iii) in order to enforce its rights pursuant to this Agreement.
21. MISCELLANEOUS: This Agreement constitutes the entire agreement between
the parties hereto, and may not be modified or changed except in a writing
executed by all parties hereto. This Agreement supersedes any prior written
or oral understanding between the parties. Each party acknowledges that it is
entering into this Agreement in reliance only upon the provisions herein set
forth, and not upon any
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covenants, representations, warranties or other considerations not set forth
herein. The headings, captions and arrangements used in this Agreement are,
unless specified otherwise, for convenience of reference only and shall not
be deemed to limit, amplify or modify the terms of this Agreement nor affect
the meaning thereof. This Agreement describes a contractual, independent
contractor/distributor relationship and nothing contained herein shall be
deemed to create any partnership, joint venture, employment or similar
relationship between the parties. This Agreement may be executed in one or
more counterpart copies, including by facsimile, and each counterpart
together with all other counterparts shall constitute a fully-executed
Agreement.
DIRECTRIX, INC. PLAYBOY ENTERTAINMENT GROUP, INC.
By: By:
- --------------------------------- ---------------------------------
Title: Title:
- --------------------------------- ---------------------------------
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EXHIBIT "E"
Subco's Subcontractors
<TABLE>
<CAPTION>
Subcontractor Name Subcontractor Address Telephone/Fax No. Contact Name
- ------------------ --------------------- ----------------- -------------
<S> <C> <C> <C>
1.
2.
3.
4.
</TABLE>
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Exhibit 10.5
SATELLITE SERVICES AGREEMENT
This Agreement made as of the _____ day of ________, 1998 is by and
between Califa Entertainment Group, Inc., with offices at 15500 Erwin Street,
Suite 247, Van Nuys, CA 91411 ("Califa") and Directrix, Inc., a Delaware
corporation with offices at 536 Broadway, 10th Floor, New York, New York
10012 ("Directrix").
Whereas, Playboy Enterprises, Inc. ("PEI") and Spice Entertainment
Companies, Inc. ("Spice") have entered into an Agreement and Plan of Merger
("Merger Agreement") dated as of May 29, 1998 that provides, among other
things, for PEI to acquire all of the outstanding common stock of Spice, and
the Merger Agreement and the Transfer and Redemption Agreement (the "Transfer
Agreement") between Spice and Directrix and dated the same date as the Merger
Agreement, provide that Spice will transfer, to Directrix among other assets,
Spice's digital operations and playback center (the "Operations Facility")
and a General Instruments Digicipher II Integrated Encoder System (exclusive
to Califa unless otherwise approved by Califa in writing) capable of
compressing at least four (4) MPEG 2 channels (the "Encoder System"). The
Merger Agreement requires as a condition precedent to the closing ("Closing")
thereunder, that Spice distribute, as part of the merger consideration, the
Directrix stock to its stockholders in partial redemption of their shares of
Spice common stock. Directrix will operate the Operations Facility after the
Closing.
Whereas, prior to the Closing, Spice handled playback for its three
television Network known prior to the Closing as Spice, the Adam & Eve
Channel and Spice Hot (the "Spice Networks") from its Operations Facility.
The Spice Networks signal was terrestrially transported to the Atlantic
Communications, Inc. ("Atlantic") Northvale, New Jersey uplink facility (the
"Uplink Facility") over diverse redundant fiber optic paths pursuant to an
Agreement between Atlantic and Spice dated as of February 24, 1997 (the
"Atlantic Agreement"). The Spice Networks signal was encrypted and digitally
compressed using the Encoder System which is leased from Vendor Capital Group
under an equipment lease dated July 24, 1996 ("Equipment Lease Agreement")
and is maintained by General Instruments ("GI") under a maintenance agreement
(the "Encoder System Maintenance Agreement"). Atlantic also provided uplink
of the digitally compressed Spice Networks signal under the Atlantic
Agreement to Transponder 7 on a satellite commonly known as T4 and owned and
operated by Loral SKYNET.
Whereas, PEI is currently unwilling to acquire the Spice Hot network (the
"Network") pursuant to the Merger Agreement and to induce Playboy to enter
into the Merger Agreement, Spice has agreed to enter into an Asset Purchase
Agreement dated as of May 29, 1998 pursuant to which Califa will acquire the
assets of the Network prior to the Closing;
Whereas, Directrix and Califa mutually desire for Directrix to provide a
complete transmission service for the Network, including playback,
encryption, compression, terrestrial connectivity and uplink services;
Now, therefore, it is mutually agreed as follows:
1. SATELLITE SERVICES: Califa hereby grants to Directrix, and Directrix
hereby accepts the right, and the obligation in consideration for the
Satellite Services Fee (hereafter defined), to provide Playback, Compression
and Encryption, Terrestrial Connectivity, Authorization (possibly only
temporarily), and to Uplink the Network (collectively the "Satellite
Services"). All Satellite Services provided hereunder by Directrix or
Directrix's subcontractors shall be under Califa's sole direction and
control, and Califa shall be entitled to have a Califa representative at the
Operations Facility at any time. Directrix shall provide the Satellite
Services hereunder on a twenty-four (24) hour per day, seven (7) days per
week basis in a timely and efficient manner that rises at least to the level
of, in all material respects, the past practices and procedures of Spice for
the Spice Network prior to the Closing. Directrix shall consult with Califa
as problems regarding the Satellite Services arise. Additionally, Directrix
shall provide a 24 hour a day, 7 day a week toll-free telephone number for
both routine and emergency service calls, and regularly provide Califa with a
log of such calls. In the event that Califa elects not to utilize Directrix
to provide Authorization services, such telephone number shall be for
Califa's use only.
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2. DEFINITIONS:
a. Compression and Encryption: Directrix's compression and encryption
of the Network by means of a Directrix-provided Encoder System and
authorization computer configured as part of the Encoder System.
Directrix shall provide, through GI or another Califa-approved
subcontractor, maintenance and repair of the Encoder System in
accordance with terms of the Encoder System Maintenance Agreement.
Directrix shall be responsible for all software license fees and
maintenance costs in connection with the Encoder System and
authorization computer.
b. Playback: Playback of the Network from the Operations Facility
twenty-four (24) hours per day and seven (7) days per week, from an
MPEG 2 video file server and redundant real time Betacam SP playback
for the movies and an emergency continuity reel, updated monthly,
for the interstitial programming elements, using the programming
elements for the Network provided by Califa as described
hereinbelow. The Operations Facility shall be manned by on-site
technicians during all operating hours. The Network shall be
monitored to maintain playback, uplink and downlink continuity and
quality. Redundant equipment, an uninterruptable power supply,
generator back-up and standard broadcast operating controls and
procedures shall be used to ensure program continuity. Telephone
access and a technical contact shall be available on a twenty-four
(24) hour basis.
c. Terrestrial Connectivity: Directrix shall provide fiber optic
terrestrial connectivity for the Network from the Operations
Facility to the Atlantic Uplink Facility, pursuant to the
Terrestrial Agreements (hereafter defined).
d. Authorization: Authorizations and deauthorizations for the Network's
transmission to cable head ends, direct to home platforms and any
other users authorized and designated by Califa shall be immediately
implemented by Directrix upon Califa's instruction from a Califa
supplied list of Califa personnel authorized to provide such
instructions. Califa may, upon notice to Directrix, modify the list
from time to time. Directrix shall be responsible for including the
authorization/deauthorization data into the signal to be uplinked to
Transponder 7 and for access control to General Instrument or any
subsequent operator of the control center for the Network. Califa
shall have the right upon forty-five (45) days prior written notice
to Directrix to discontinue receiving the Authorization services
from Directrix, and to instead either secure another provider or
provide this service itself via modem to the Digicipher II
compression hardware provided by Directrix hereunder, which modemed
service shall be done in a manner acceptable to Directrix. Califa
shall be responsible for any errors in Authorization services and
for any damage to the Encoder System or the authorization computer
if such errors or damages are directly caused by Califa accessing
the authorization computer as provided for in the preceding sentence.
e. Uplink: Directrix shall provide the Network with twenty-four (24)
hour per day, seven (7) days per week uplink services to Transponder
7 or its replacement to be designated by Califa pursuant to the
Atlantic Agreement, or an agreement with another subcontractor
subject to Califa's prior written approval.
3. RELATED AGREEMENTS: As provided for in the Merger Agreement and the
Transfer Agreement and with respect to the Atlantic Agreement, the Encoder
System Maintenance Agreement, the Equipment Lease Agreement (as it relates to
the Encoder System only) and any other agreements that Spice had entered into
with third parties for the provision of services which comprise the Satellite
Services (collectively the "Existing Service Agreements") Spice shall: (i)
terminate one or more of the Existing Service Agreements or (ii) cause one or
more of the Existing Service Agreements to be assigned to Directrix so that,
in either case, Spice shall have no further obligations or liability under
any of the Existing Service Agreements following the Closing.
a. Atlantic Agreement: Directrix shall enter into an agreement with
Atlantic (or an agreement with another subcontractor subject to
prior written approval from Playboy
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Entertainment Group, Inc. ("Playboy") who is contracting separately
with Directrix to provide Satellite Services for the existing Spice
network and a new Spice network) before the Closing pursuant to
which Atlantic shall provide Uplink services twenty-four (24) hours
per day, seven (7) days per week from the Atlantic Uplink Facility.
A signed copy of the Atlantic Agreement shall be attached hereto as
Exhibit "A".
b. Encoder System Lease: Pursuant to the terms of the Transfer and
Redemption Agreement, Directrix shall enter into a lease agreement
before the Closing pursuant to which Directrix shall lease the
Encoder System for the Network for the duration of the Term. A
signed copy of the Encoder System Lease shall be attached hereto as
Exhibit "B".
c. Encoder System Maintenance Agreement: Directrix shall enter into an
agreement with GI, or an agreement with another subcontractor
subject to Playboy's prior written approval, for GI to provide
twenty-four (24) hour per day, seven (7) day per week maintenance of
the Encoder System for the duration of the Term. A copy of the
Encoder System Maintenance Agreement shall be attached hereto as
Exhibit "C".
d. Terrestrial Agreements: Directrix shall enter into agreements for
redundant, diverse path fiber optic terrestrial connectivity from the
Operations Facility to the Atlantic Facility for the duration of the
Term. Copies of the Terrestrial Agreements shall be attached hereto
collectively as Exhibit "D".
Directrix agrees that in the event Directrix is notified that it is in
breach or default of any of the above agreements, or any other agreements
related to the Satellite Services, Directrix shall immediately notify
Califa of such notice. Directrix's failure to comply with the foregoing
shall be deemed a material breach of this Agreement.
4. SUB-CONTRACTORS: Directrix agrees to provide Califa with a list of all of
its subcontractors prior to the Closing, which list of subcontractors shall
be deemed approved and attached hereto as Exhibit "E". Directrix shall not
have the right to engage any other subcontractors than those on the approved
list, nor shall Directrix permit its subcontractors to further subcontract
their responsibilities. In the event that Directrix wishes to change
subcontractors or engage a new subcontractor, then Directrix shall seek
Califa's prior written approval, not to be unreasonably withheld. Subject to
any rights for default Califa may have under this Agreement, in the event
that a Directrix subcontractor directly causes Directrix to be in default of
Paragraph 11 [Uptime], then Directrix shall have the right to change such
subcontractor once without seeking Califa's prior written approval.
Furthermore, Directrix shall provide in its agreements with its
subcontractors that in the event of any default by Directrix that affects the
Network, Califa shall receive notice of such default as provided in the
paragraph [Notices], and an opportunity to cure Directrix's default. Califa
and Directrix agree that, notwithstanding Califa's right to cure Directrix's
default, Califa shall not cure such default until Directrix has had a
reasonable opportunity to cure such default following the subcontractor's
written notice of Directrix's default, and such cure has not been effected.
If Califa does cure such a Directrix default, Califa shall have the right to
offset any out-of-pocket costs incurred by Califa in effecting such cure
against any future payments to Directrix.
5. TERM: The initial term of this Agreement shall commence simultaneously
with the Closing and shall end twenty-four (24) months thereafter at 12
p.m.(the "Term"). In addition to any other remedies it may have under this
Agreement, in law or in equity, Califa may terminate this Agreement, in the
event that Directrix has materially breached any of its obligations hereunder
and such breach (which shall be specified in such notice) is not cured by
Directrix within ten (10) days of such notice.
6. CONTENT OF THE SERVICE: Califa shall, in its sole discretion, include
such programming in the Network as it deems appropriate. Directrix shall have
no right to alter, substitute, delete or otherwise modify the content of the
Network as provided by Califa. Califa shall have the exclusive right to
extend, reduce or otherwise change the hours during which the Network are
distributed to end users of the Network. Califa shall have the right to store
any air masters and materials at the Operations Facility that have an active
air date and Califa shall remove the air masters and materials from the
Operations Facility within thirty (30) days of Califa's reasonable
determination that such tapes no longer have an active air date. Directrix
shall not exhibit
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or transmit any Network programming at any time other than as scheduled by
Califa, without express written permission by Califa. Directrix hereby
acknowledges that from time to time Califa may modify the programming to be
supplied as part of the Network without prior notice, and Califa shall not be
held liable in any way by Directrix for such changes. Directrix shall not be
responsible for pre-screening any of the videotapes delivered by Califa to
Directrix pursuant to Paragraph 7 [Delivery to Directrix].
7. DELIVERY TO DIRECTRIX: Califa shall create and provide Directrix with
fully-edited, ready-for-air Beta SP videotapes of all Network programming
elements with a slate at the start of the tape reasonably prior to any
scheduled air date. Califa shall notify Directrix which audio standards are
utilized on the air masters. The Network may include all films, shows,
interstitial materials, music, graphics, programming and any other elements
necessary for Directrix to assemble and playback the Network as a complete
twenty-four (24) hour per day, seven (7) day per week adult channel that meets
the industry accepted RS250(b) standard. Directrix shall meet or exceed the
RS250(b) standard in the transmission of the Network to Transponder 7.
Califa shall retain sole ownership of all videotapes, equipment and other
material provided to Directrix, including all copyrights therein, and Califa
shall have access at no charge to and the right to the return of all such
videotapes, equipment and materials promptly following Califa's request.
8. INSURANCE: During the Term, Directrix shall secure and maintain the
following insurance:
a. Insurance naming Califa as an additional insured and loss payee with
respect to Califa's interest covering the risk of loss of or damage to
all videotapes for the replacement value of the tape stock and the cost
to redub the videotapes as well as for the cost of the equipment and
materials furnished by Califa, equipment and material furnished by
Califa; and
b. General liability insurance naming Califa as an additional insured
covering personal injury and other accidents or liability that might
occur during the course of Directrix's performance of this Agreement.
Such insurance policies shall have liability limits of at least one
million dollars ($1,000,000) and Directrix shall be responsible for all
deductibles thereunder. On or before the Closing, Directrix shall provide
Califa with copies of certificates of such insurance reasonably acceptable to
Califa. Furthermore, Directrix shall provide Califa with certificates of
insurance evidencing that Directrix's subdistributors have liability policies
with a minimum limit of one million dollars ($1,000,000).
9. PAYMENTS: In consideration of the Satellite Services rendered herein,
Califa shall remit to Directrix the following amounts on or before the first
day of each month for the Satellite Services are to be provided by Directrix
during that month (individually and collectively, the "Satellite Services
Fee"):
a. In consideration of Directrix providing the Uplink services for the
Network, Califa shall remit to Directrix the sum of Five Thousand
Dollars ($5,000.00) per month;
b. In consideration of Directrix providing the Playback services for the
Network, Califa shall remit to Directrix the sum of Ten Thousand
Dollars ($10,000) per month;
c. In consideration of Directrix providing the Terrestrial Connectivity
services for the Network, Califa shall remit an amount equal to
Directrix's out-of-pocket cost of obtaining such services in
accordance with the Terrestrial Connectivity Agreement;
d. In consideration of Directrix providing the Compression and
Encryption services for the Network, Califa shall remit to Directrix
the sum of Five Thousand Dollars ($5,000) per month up to and
including the Satellite Services Fee due on or before July 1, 1999,
except that Playboy shall not be obligated to remit the above amount
for the Satellite Services Fees payable on or before September 1,
1998;
e. In consideration of Directrix providing Authorization services for the
Network, Califa shall remit
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the sum of One Thousand and Five Hundred Dollars ($1,500) per month,
which sum shall only be paid for months during which Directrix actually
provides such service, and prorated in the event such service is
provided for less than a full month.
The above amounts are predicated upon all of the Network being uplinked to
Transponder 7, or its successor. If Directrix is required to uplink one (1)
or more of the Network to a separate transponder from the other Network, the
parties shall mutually agree upon a different fee structure.
In addition to any remedies that Directrix may have at law, in the event
that Califa should fail to remit payment as provided above, Directrix
shall provide Califa with written and telephonic notice of such failure
as provided herein, in which case Califa shall have ten (10) days within
which to cure such failure. If Califa does not cure such failure within
ten (10) days, Directrix may, in addition to any other remedies it may
have, either terminate this Agreement, or, as a condition precedent to
continuing to provide the services herein, require payment of 1) the
overdue payment and 2) a security deposit equal to one (1) month of the
current Satellite Services Fee. In addition to Califa's right to
terminate this Agreement prior to the completion of the Term for
Directrix's assignment or breach, with no payment liability, including as
provided in Paragraph 11 [Uptime], or an event of force majeure, Califa
may terminate for any other reason provided that if such termination is
not due to Directrix's breach or assignment or an event of force majeure,
Califa shall remit the Satellite Services Fee balance of the Term to
Directrix on a monthly basis as provided herein. If Califa terminates for
reasons of breach or assignment as provided herein, Califa shall be
entitled to a pro rata refund, including any security deposit, of the
Satellite Services Fee.
At the conclusion of the Term, the parties shall negotiate in good faith
regarding the Satellite Services Fee in the event that Califa, in its
sole discretion, elects to continue receiving the Satellite Services from
Directrix.
10. REPORTS: Directrix shall provide Califa with a discrepancy report on a
daily basis relating to any of the Satellite Services. All of Directrix's
records and accounts relating to the Network shall be available for
inspection and copying and for audit by Califa and its representatives during
normal business hours, at any time, during the term of this Agreement and for
three (3) year thereafter. In addition to the foregoing, Directrix will
supply to Califa such additional information relating to the Network as
Califa may reasonably request from time to time and as Directrix may
reasonably obtain. It is expressly understood that Directrix's obligation to
provide reports to Califa in a timely manner in accordance with this
Paragraph 10 is a material obligation of Directrix hereunder.
11. UPTIME: The Satellite Services described herein shall be provided for
each Network on a uninterrupted basis 99.999% of each twelve (12) month
period during the Term, commencing on the first day the Satellite Services
are provided to Califa, except for interruptions or other problems in such
services due in whole or in part to Califa failing to provide the air
masters, or because of the quality or content of the Air Masters or because
of downtime or other interruption of facilities or services not provided by
Directrix or its subcontractors beyond their reasonable control. In the event
that, for reasons other than those described above, Directrix fails to
provide the Satellite Services, Califa shall be entitled to discount the
total monthly Satellite Services Fee for all Satellite Services rendered by
Directrix payable on the first day of the next calendar month by an amount
equal to the total Satellite Services Fee divided by the number of
hours/minutes in that month, and multiplied by the number of hours/minutes
for which Directrix failed to provide any of the Satellite Services for the
Network. Notwithstanding the forgoing, in the event that Directrix fails to
provide the Satellite Services for the Network for an aggregate amount of
time exceeding .001% on a cumulative basis per twelve (12) month period of
the Term, such failure shall be deemed a material breach of this agreement
and Califa shall be entitled to immediately terminate this Agreement and be
entitled to any remedies available to it pursuant to this agreement or by
law, with two exceptions: a) Califa shall not have the right to terminate the
Agreement for Directrix's first failure to provide Satellite Services so long
as such first failure does not exceed two (2) continuous hours; and b) in the
event that Directrix's failure to provide the Satellite Services for greater
than .001% on a cumulative basis per twelve (12) month period of the Term is
directly caused by one of Directrix's subcontractors, then Directrix shall
have the one-time right to replace the defaulting contractor without Califa's
prior approval and, so long as the total failure to provide the Satellite
Services after going into default does
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not exceed two (2) hours (i.e. the total down time is no more than .001% of
the twelve (12) month period plus two (2) hours), then Califa shall not have
the right to terminate the Agreement.
12. OPTIONAL SERVICES: In the event that Califa shall elect to engage a third
to provide 1) traffic library and quality control services; 2) satellite
security; 3) network integration and scheduling; 4) creative services; 5)
duplication, editing and encoding for the Network or 6) all services relating
to the distribution of the Network or other adult programming via regionally
deployed video file servers linked to cable systems or multichannel video
programming providers, Califa agrees it shall engage Directrix to provide
such services, provided that Directrix can provide such services at
effectively the same level of quality and effectively at or below the price
that such third party would provide such services when such quality and
prices are evaluated taking into account all circumstances that would affect
such quality and price. Such evaluation shall be made by Califa in its sole
reasonable discretion.
13. FORCE MAJEURE: Neither party shall be liable to the other party for
damages of any kind which are due to causes beyond the party's reasonable
control, including, without limitation, acts of god; natural disasters,
governmental acts or omissions, national emergencies, insurrections, riots,
or wars; strikes, lock-outs or other labor difficulties or because of the
negligent or intentional acts or omissions of the other party, provided,
however, that in the case of such other party's acts or omissions, each party
shall use its reasonable best efforts to continue to comply with all of its
respective obligations hereunder. The Term of this Agreement shall be
suspended during the period when a party is unable to fulfill its obligations
hereunder by reason of the occurrence of force majeure event. Should the
force majeure event continue for a minimum of fifteen (15) days in the
aggregate and either party is unable to perform its obligations hereunder
during such time, then the other party, in its sole discretion, may terminate
this Agreement.
14. TRADEMARK APPROVAL: Directrix has not and will not acquire any
proprietary rights in any of the trade names, trademarks, service marks or
logos associated with Califa by reason of this Agreement or otherwise.
Directrix further acknowledges the great value of the goodwill associated
with the marks, and that any additional goodwill in the marks which may be
created through the use of the marks by Directrix shall inure to the sole
benefit of Califa and/or its parent as the case may be.
15. REPRESENTATIONS AND WARRANTIES: Califa and Directrix each represent and
warrant to the other that each has the requisite power and authority to enter
into this Agreement and to perform fully its respective obligations
hereunder, and that this Agreement has been duly executed by it and
constitutes a valid obligation enforceable against it in accordance with the
terms hereof.
Califa represents and warrants to Directrix that it will exercise its
best efforts to ensure that the Network as supplied to Directrix pursuant to
this Agreement, if and when presented by Directrix in the manner and at the
times permitted herein, will contain no libelous or slanderous material and
will not violate any copyright, right of privacy or literary or dramatic
right of any person.
16. INDEMNIFICATION:
a. Directrix and Califa shall each indemnify, defend and forever hold the
other, its affiliated corporations and other entities, partners,
officers, directors, employees and agents (collectively the
"Indemnitees") harmless from all liabilities, claims, costs, damages
and expenses (including without limitation, reasonable counsel fees of
counsel of Califa's choice) (collectively "Claims") of third parties
arising from the performance of each party, or its subcontractors
hereunder, provided that in each case where such indemnification is
sought:
i. the Indemnitee promptly notifies the other of the Claim to which
the indemnification relates;
ii. the party giving indemnification rights to the other shall control
fully any litigation, compromise, settlement or other resolution
or disposition of such Claim; and
iii. the Indemnitee fully cooperates with the reasonable requests of
the other party in its defense of such claim.
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b. Notwithstanding the above, Califa's indemnification of Directrix
will be valid in the event of a prosecution or claim involving an
allegation of violation of the laws insofar as the content of the
Service is concerned, provided that:
i. Prompt telephone contact be made with Califa's President at (818)
908-0481, or other numbers hereafter specified by Califa. Such
telephone notification should be immediately followed with a
letter containing copies of all papers that have been served and
giving complete information then available regarding the incident.
ii. Califa will not be responsible in cases where there is any
admission of guilt by anyone charged with violation of the law as
to the content of the Network except with Califa's prior written
consent. Settlement or dismissal of any case will not be allowed,
except with Califa's prior written consent.
iii. Actual or prospective parties involved in such prosecution shall
make no voluntary disclosure regarding support or lack thereof by
Califa under this policy.
c. In no event shall either Party be liable in contract, tort, or
otherwise for any special, incidental or consequential damages
(including, but not limited to, lost profits), whether foreseeable or
not, occasioned by any defect or delay in delivery of the services or
any other cause whatsoever unless such damages arise in connection with
such party's gross negligence, willful misconduct, or bad faith.
17. GOVERNING LAWS, OBLIGATIONS, ETC.: This Agreement shall be governed by and
interpreted under the laws of the State of New York.
18. ASSIGNMENT: Neither party may assign this Agreement without the express
written consent of the other, such consent not to be unreasonably withheld.
Additionally, if Directrix directly or indirectly transfers a substantial
portion of the assets or business relating to Directrix's provision of the
Satellite Services, Directrix's rights and obligations under this Agreement
may not be assigned to the acquirer thereof without Califa's prior consent,
such consent shall not be unreasonably withheld. In determining whether to
consent or withhold consent to such a transfer, Califa may take into account
factors in addition to the identity of the acquirer including, but not
limited to, its desire to have the Satellite Services provided for in the Los
Angeles Metropolitan area. In the event Califa does not consent to such
transfer, Califa shall have the right to terminate this Agreement upon thirty
(30) days prior written notice to Directrix. Califa may not assign this
Agreement or any portion of its rights or obligations without Directrix's
consent, not to be unreasonably withheld. Notwithstanding the foregoing, if a
proposed assignee of Califa's rights and obligations hereunder agrees to be
bound by the terms and provisions of this Agreement and Califa remain
secondarily liable for the obligations of the assignee, Directrix shall not
be entitled to withhold its consent to such assignment.
19. NOTICES: All notices, requests, demands, consents, directions and other
communications provided for hereunder shall be in writing, delivered by means
of U.S. certified mail, return receipt requested or personal delivery or
facsimile verified with a confirmation of receipt. All notices to either
party must also be made telephonically to the first individual for each party
listed below, provided that if such individual is unavailable to receive such
telephonic notice, such unavailability shall not negate the effectiveness of
the written notice.
a. Califa Entertainment Group, Inc.
15500 Ermin St. Suite 247
Van Nuys, CA 91411
Attention: President
818-908-0481: Steve Hirsch
With a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, NY 10019-3990
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Attention: James Dubin, Esq.
(212) 373-3000: James Dubin, Esq.
and
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
b. Directrix, Inc.
536 Broadway 10th Floor
New York, NY 10012
Attention: Chairman,
(212) 219-6200: Roger Faherty
With a copy to:
Kramer, Levin, Natfalis & Frankel
919 Third Avenue
New York, NY 10022,
ATTN: Howard Rothman, Esq.,
(212) 715-9100: Howard Rothman, Esq.
or, as to each party, at such other address as shall be designated by such
party in a written notice to the other party. All notices shall, when mailed
or faxed, be deemed effective on the date deposited in the mail or on the
date receipt of such fax is so confirmed.
20. CONFIDENTIALITY: Neither Califa nor Directrix shall disclose to any third
party (other than its respective employees, in their capacity as such),
without the other party's written approval, any information with respect to
the terms and provisions of this Agreement except: (i) to the extent
necessary to comply with law or the valid order of a court of competent
jurisdiction, in which event the party making such disclosure shall so notify
the other and shall seek confidential treatment of such information, (ii) as
part of its normal reporting or review procedure to its parent company, its
auditors and its attorneys, provided, however, that such parent company,
auditors and attorneys agree to be bound by the provisions of this paragraph
and (iii) in order to enforce its rights pursuant to this Agreement.
21. MISCELLANEOUS: This Agreement constitutes the entire agreement between
the parties hereto, and may not be modified or changed except in a writing
executed by all parties hereto. This Agreement supersedes any prior written
or oral understanding between the parties. Each party acknowledges that it is
entering into this Agreement in reliance only upon the provisions herein set
forth, and not upon any covenants, representations, warranties or other
considerations not set forth herein. The headings, captions and arrangements
used in this Agreement are, unless specified otherwise, for convenience of
reference only and shall not be deemed to limit, amplify or modify the terms
of this Agreement nor affect the meaning thereof. This Agreement describes a
contractual, independent contractor/distributor relationship and nothing
contained herein shall be deemed to create any partnership, joint venture,
employment or similar relationship between the parties. This Agreement may be
executed in one or more counterpart copies, including by facsimile, and each
counterpart together with all other counterparts shall constitute a
fully-executed Agreement.
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DIRECTRIX, INC. CALIFA ENTERTAINMENT GROUP, INC.
By: By:
--------------------------------- --------------------------------
Title: Title:
------------------------------ -----------------------------
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EXHIBIT "E"
Subco's Subcontractors
<TABLE>
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Subcontractor Name Subcontractor Address Telephone/Fax No. Contact Name
- ------------------ --------------------- ----------------- ------------
<S> <C> <C> <C>
1.
2.
3.
4.
</TABLE>
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Exhibit 10.7
EMPLOYMENT AGREEMENT
Employment Agreement ("Agreement") effected as of this day of
, 1998, by and between Directrix, Inc. (the "Company" or "Employer"),
a Delaware corporation, and J. Roger Faherty (the "Executive") (collectively
the Company and the Executive are referred to as the "Parties").
INTRODUCTION
WHEREAS, the Parties desire to enter into an Agreement and to set forth
herein the terms and conditions of the Executive's employment by the Company.
Accordingly, in consideration of the mutual covenants and agreement set forth
herein and the mutual benefits to be derived herefrom, and intending to be
legally bound hereby, the Company and the Executive agree as follows:
1. Employment
1.1 Duties. The Company shall employ the Executive on the terms
and conditions set forth in this Agreement, as Chairman of the Board and Chief
Executive Officer. The Executive accepts such employment with the Company and
shall perform and fulfill such duties as are assigned to him hereunder
consistent with his status as a senior executive of the Company, devoting his
best efforts and all of his professional time and attention, to the performance
and fulfillment of his duties and to the advancement of the best interests of
the Company, subject only to the specific directives of the Board of Directors
of the Company. In addition, and without any additional consideration, the
Executive is and/or may be requested to serve as a director or as an employee
and officer of any or all subsidiaries of the Company. Unless otherwise
indicated by the context, the "Company" shall include the Company and all its
subsidiaries.
1.2 Place of Performance. In connection with his employment by
the Company, the Executive shall be based in the New York, New York metropolitan
area, except for required travel on Company business. The Executive may be
required to relocate on a permanent or temporary basis consistent with business
necessity.
2. Term.
The Executive's employment under this Agreement shall commence as
of ,1998 (the "Commencement Date") and shall continue uninterrupted up
to and including the hour of midnight of December 31, 2004 (the "Term"), unless
otherwise terminated as provided for in Sections 7.1 or 7.3. Unless prior to the
end of any calendar year, notice of non-renewal is given by either party, the
term of this Agreement shall automatically be extended for an additional period
of one year upon completion of each year. Therefore, upon each January 1 of a
year,
<PAGE>
this Agreement shall be effective for a six-year term unless prior thereto such
notice of non-renewal has been given.
3. Compensation.
3.1 Base Salary. During the Term the Executive shall receive a
minimum annual salary (the "Base Salary") payable in installments at such times
as the Company customarily pays its other senior executive employees (but in any
event no less often than bi-monthly), and calculated as follows:
3.1.1 The Base Salary to be paid to the Executive during
the Term shall be $367,500; and
3.1.2 For each Year beginning after December 31, 1999,
the Company shall increase the Base Salary by an amount equal to five percent
(5%) of the prior year's Base Salary. Each such increase shall be cumulative so
that the Base Salary for each succeeding year shall include the prior year's
increase.
3.2 Health Insurance and Other Benefits. During the Term the
Executive shall be provided all employee benefits provided by the Company to its
management and all other Company salaried employees, including without
limitation, all medical insurance and life insurance plans or arrangements and
shall be entitled to participate in all pension, profit sharing, stock option
and any other employee benefit plan or arrangement established and maintained by
the Company for similarly situated employees, all subject, however, to the
Company rules and policies then in effect regarding participation therein.
During the Term, the benefits provided to the Executive, as described in the
preceding sentence, shall not be reduced except in accordance with the general
reduction of such benefits applicable to similarly situated employees generally,
but then only to the extent that such benefits are reduced for such other
similarly situated employees.
3.3 Automobile Allowance. During the Term, the Company shall
reimburse the Executive for lease payments or purchase installments for one
automobile comparable to the automobile currently used by the Executive as well
as automobile insurance with respect thereto.
3.4 Health Club Membership. During the Term, the Company shall
pay the costs of one health club membership for the Executive in each of the
Executive's two principal places of residence.
3.5 Life Insurance.
3.5.1 Purchase. Provided that the Executive is insurable
at rates that are comparable to those obtainable on other persons of similar age
and position in good health (if the Executive is classified in a higher risk
category he may elect to pay the excess premium cost
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to obtain the coverage), during the Term the Company shall procure and maintain
life insurance on the life of the Executive in the face amount of $1,000,000.
The Executive shall be the owner of such life insurance policy and shall have
the absolute right to designate the beneficiaries thereunder. The type of policy
(whether term, whole life, etc., or combination of types) shall be in the sole
discretion of the Company.
3.5.2 Payment of Premiums. The Company shall pay all
premiums for such life insurance.
3.5.3 Medical Examination. The Executive agrees to submit
to all medical examinations, supply all information and execute all documents
required by the insurance company in connection with the issuance of a policy
for such insurance as well as for any key man insurance the Company may desire
to maintain on the Executive's life.
4. Reimbursement of Expenses.
The Executive shall be reimbursed for all items of travel,
entertainment and miscellaneous expenses which the Executive reasonably incurs
in connection with the performance of his duties hereunder, provided that the
Executive submits to the Company on proper forms provided by the Company, such
statements and other evidence supporting such expenses as the Company may
require and provided such expenses meet the Company's policy concerning such
matters.
5. Stock Options.
The Executive may be entitled to participate in all Company employee
stock option programs as determined by the Compensation Committee of the
Company's Board of Directors and approved by the Company's shareholders.
6. Vacations.
The Executive shall be entitled to not less than four (4) weeks of paid
vacation in any calendar year (prorated in any Year during which the Executive
is employed hereunder for less than the entire Year). Such vacation shall be
taken at such times as are consistent with the reasonable business needs of the
Company. Any vacation not taken during the year may not be taken by the
Executive in subsequent years except to the extent approved by the Company. Upon
termination of the Executive's employment for any reason, any vacation earned by
the Executive but not taken shall be forfeited.
7. Termination of Employment.
7.1 Death or Disability. If the Executive dies during the Term,
the Term shall terminate as of the date of the Executive's death. If the
Executive becomes Totally
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Disabled (as that term is defined below) for one hundred eighty (180) days in
the aggregate during any consecutive twelve-month period during the Term, the
Company shall have the right to terminate the Term by giving the Executive
thirty (30) days' prior written notice thereof, and upon the expiration of such
thirty-day period, the Executive's employment under this Agreement shall
terminate. If the Executive resumes his duties within thirty (30) days after
receipt of a notice of termination and continues to perform such duties for four
(4) consecutive weeks thereafter, the Term shall continue and the notice of
termination shall be considered null and void and of no effect. Upon termination
of the Term under this Section 7.1, the Company shall have no further
obligations or liabilities under this Agreement, except to pay to the
Executive's estate or the Executive, as the case may be: (i) the portion, if
any, that remains unpaid of the Base Salary for periods worked by the Executive
plus the excess of one year's Base Salary over the amount payable to the
Executive under the Company's long-term disability plan during such time
(payable as if the Executive remained an employee of the Company); and (ii) the
amount of any expenses reimbursable in accordance with Section 4 above; and
(iii) any amounts due under any Company benefit, welfare or pension plan.
7.2 "Totally Disabled," as used herein, shall mean a mental or
physical condition which, in the reasonable opinion of an independent medical
doctor selected by the Company in its discretion, renders the Executive unable
or incompetent to carry out the material duties and responsibilities of the
Executive under this Agreement.
7.3 Discharge for Cause. The Company may discharge the Executive
for "Cause" upon written notice (as defined in Section 11.1), and thereby
immediately terminate his employment under this Agreement. For purposes of this
Agreement, the Company shall have "Cause" to terminate the Executive's
employment if the Executive, in the reasonable good faith judgment of the
Company, (i) materially breaches any of his agreements, duties or obligations
under this Agreement and has not cured such breach within ten (10) days after
Company's written notice, including, without limitation, the Executive's failure
to perform his duties hereunder, other than a failure resulting from his illness
or sickness; (ii) willfully fails to carry out a material lawful directive of
the Board of Directors; (iii) embezzles or converts to his own use any funds of
the Company or any client or customer of the Company; (iv) converts to his own
use or destroys any property of the Company having a significant value; (v) is
in material violation of any of the Company policies and/or procedures as
identified in the Company's Employee Manual; or (vi) is habitually drunk or
intoxicated. If the Executive is discharged for Cause, he shall receive only
those amounts earned but not distributed under the relevant plan, program or
practice of the Company. The Company and the Executive acknowledge that if the
Company engages in the Adult Business (as defined in Section 9), such business
could be considered controversial in some localities and could result in civil
or criminal litigation against the Company based upon obscenity and similar
laws. The Parties agree that, notwithstanding the other provisions of this
Section, the naming of the Executive in any such suit, and any conviction of the
Executive or plea bargain, settlement or other disposition of such litigation
relating to the Executive, shall not be considered Cause for the termination of
the Executive's employment, so long as the conduct of the Executive upon which
such claim was based consisted
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of the Executive carrying out his duties in good faith and in accordance with
directions of management of the Company.
7.4 Termination by Executive. The Executive may terminate the
Term of his employment:
7.4.1 upon failure by the Company to comply with the
material provisions of this Agreement, which failure is not cured within ten
(10) days after written notice (referred to herein as "Good Reason"); or
7.4.2 upon a "Change in Control of the Company" (as
defined in Section 7.6.1 below) upon thirty (30) days' prior written notice
given at any time within eighteen (18) months after a Change in Control; or
7.4.3 for any reason other than Good Reason or following
a Change in Control of the Company, which termination shall be considered a
"Voluntary Termination" by Executive.
7.5 Severance upon Termination. If, during the Term, the
Executive's employment is terminated by the Company without Cause, or the
Executive shall terminate employment for Good Reason prior to a Change in
Control of the Company (the date of termination is referred to as the
"Termination Date"), then the Company shall pay the Executive in lieu of other
damages, an amount (the "Severance Payments") equal to his then current Base
Salary payable in installments at the same time the Company pays salary to its
other senior executive employees payable over two years (the period over which
the Severance Payments are made is referred to as the "Severance Period"). The
Company shall have no liability to make any Severance Payments as provided for
in this paragraph unless (i) the Executive executes a General Release in a form
substantially as set forth in Exhibit A attached hereto and (ii) the Executive
complies with all provisions in Section 8 (Restrictive Covenants). Such amount
shall reduce the amount of any other severance payment that otherwise would have
been payable to the Executive under any other Company plan, program or
arrangement. In addition, the Company shall maintain during the lesser of the
balance of the Term immediately prior to such termination or the Severance
Period all employee benefit plans and programs which the Executive participated
in immediately prior to such termination other than bonus, incentive
compensation and similar plans based on performance, provided the Executive's
participation is permissible under the general terms and provisions of such
plans and applicable law. In the event of a Voluntary Termination, the Executive
shall receive only his earned but unpaid Base Salary as of the date of his
termination.
7.6 Change in Control.
7.6.1 Definitions. For purposes of this Section 7.6, a
"Change in Control" shall mean a change in control of a nature that would be
required to be reported in
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response to Item 6(e) of Schedule 14A of Regulation 14A, as in effect on the
date of this Agreement, promulgated under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"); provided, that whether or not required to be
reported under such Item 6(e), without limitation, such a Change in Control
shall be deemed to have occurred if (i) any "person" or "group" (as such terms
are used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 25% or more of the
combined voting power of the Company's then outstanding securities; (ii) during
any period of two consecutive years, individuals who, at the beginning of such
period, constitute the Board cease for any reason to constitute at least a
majority thereof unless the election, or the nomination for election by the
Company's stockholders, of each new director was approved by a vote of at least
three-fourths of the directors then still in office who were directors at the
beginning of the period; (iii) the Company's stockholders approve an agreement
to merge or consolidate the Company with another corporation (other than a
corporation 50% or more of which is controlled by, or is under common control
with, the Company); or (iv) any individual who is nominated by the Board of
Directors for election of the Board on any date fails to be so elected as a
direct or indirect result of any proxy fight or contested election for positions
on the Board of Directors; provided, however, that notwithstanding the
foregoing, no Change of Control shall be deemed to have occurred pursuant to
either clause (i) or (ii) above in the event of (and notwithstanding any
resultant change in the membership of the Board) an acquisition by any group
comprised of senior officers of the Company, including the Executive, of 25% or
more of the combined voting power of the Company's then outstanding securities.
7.6.2 Termination Payment. Notwithstanding any provision
of this Agreement, if, within eighteen (18) months following a Change in Control
of the Company, (a) the Executive's employment by the Company shall be
terminated by the Company other than as a result of the Executive becoming
Totally Disabled or for Cause or (b) the Executive terminates the Term pursuant
to Section 7.4.1, then the Executive shall be entitled to the benefits provided
below:
(1) The Company shall pay the Executive full Base
Salary through the Termination Date at the rate in effect at that time, and
shall pay the Executive for any vacation earned but not taken and the amount, if
any, of any bonus for a past Company fiscal year which has not yet been awarded
or paid;
(2) In lieu of any further salary payments to the
Executive for periods subsequent to the Termination Date, the Company, subject
to the limitation described below, shall pay to the Executive on the 60th day
following the Termination Date a lump sum amount equal to four times the sum of
(i) the Base Salary and (ii) cash bonuses and other cash compensation paid to
the Executive during the 12 months preceding the Termination Date ("Termination
Payment"); and
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(3) All stock options held by the Executive shall
be fully vested and remain outstanding for their full original term unless
sooner exercised.
7.6.3 Certain Additional Payments by the Company.
(1) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any payment or
distribution to or for the benefit of the Executive (whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise, but determined without regard to any additional payments required
under this Section 7.6.3 (a "Payment") would be subject to the excise tax
imposed by Section 4999 of the Code or any interest or penalties are incurred by
the Executive with respect to such excise tax (such excise tax, together with
any such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by the
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including, without limitation, any income taxes (and any
interest and penalties imposed with respect thereto) and Excise Tax imposed upon
the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments.
(2) Subject to the provisions of Section 7.6.3(3),
all determinations required to be made under this Section 7.6.3, including
whether and when Gross-Up Payment is required and the amount of such Gross-Up
Payment and the assumptions to be utilized in arriving at such determination,
shall be made by Deloitte & Touche LLP (the "Accounting Firm"); provided,
however, that the Accounting Firm shall not determine that no Excise Tax is
payable by the Executive unless it delivers to the Executive a written opinion
(the "Accounting Opinion") that failure to report the Excise Tax on the
Executive's applicable federal income tax return would not result in the
imposition of a negligence or similar penalty. In the event that Deloitte &
Touche LLP has served, at any time during the two years immediately preceding a
Change in Control Date, as accountant or auditor for the individual, entity or
group that is involved in effecting or has any material interest in the Change
in Control, the Executive shall appoint another nationally recognized accounting
firm to make the determinations and perform the other functions specified in
this Section 7.6.3 (which accounting firm shall then be referred to as the
Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall
be borne solely by the Company. Within fifteen (15) business days of the receipt
of notice from the Executive that there has been a Payment, or such earlier time
as is requested by the Company, the Accounting Firm shall make all
determinations required under this Section 7.6.3, shall provide to the Company
and the Executive a written report setting forth such determinations, together
with detailed supporting calculations, and, if the Accounting Firm determines
that no Excise Tax is payable, shall deliver the Accounting Opinion to the
Executive. Any Gross-Up Payment, as determined pursuant to this Section 7.6.3,
shall be paid by the Company to the Executive within five (5) days of the
receipt of the Accounting Firm's determination. Subject to the remainder of this
Section 7.6.3, any determination by the Accounting Firm shall be binding upon
the Company and the Executive. As a result of the
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uncertainty in the application of Section 4999 of the Code at the time of the
initial determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by the Company should have been
made ("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that it is ultimately determined in accordance with the
procedures set forth in Section 7.6.3(3) that the Executive is required to make
a payment of any Excise Tax, the Accounting Firm shall determine the amount of
the Underpayment that has occurred and any such Underpayment shall be promptly
paid by the Company to or for the benefit of the Executive.
(3) The Executive shall notify the Company in
writing of any claims by the Internal Revenue Service that, if successful, would
require the payment by the Company of the Gross-Up Payment. Such notification
shall be given as soon as practicable but no later than thirty (30) days after
the Executive actually receives notice in writing of such claim and shall
apprise the Company of the nature of such claim and the date on which such claim
is requested to be paid; provided, however, that the failure of the Executive to
notify the Company of such claim (or to provide any required information with
respect thereto) shall not affect any rights granted to the Executive under this
Section 7.6.3 except to the extent that the Company is materially prejudiced in
the defense of such claim as a direct result of such failure. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which he gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
(i) give the Company any information
reasonably requested by the Company relating to such claim;
(ii) take such action in connection with
contesting such claim as the Company shall reasonably request in
writing from time to time, including, without limitation,
accepting legal representation with respect to such claim by an
attorney selected by the Company and reasonably acceptable to the
Executive;
(iii) cooperate with the Company in good faith
in order effectively to contest such claim; and
(iv) if the Company elects not to assume and
control the defense of such claim, permit the Company to
participate in any proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold
the Executive harmless, on an after-tax basis, for any Excise Tax or
income tax (including interest and penalties with respect thereto)
imposed as a
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result of such representation and payment of costs and expenses.
Without limitation on the foregoing provisions of this Section 7.6.3,
the Company shall have the right, at its sole option, to assume the
defense of and control all proceedings in connection with such contest,
in which case it may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim, and may either direct the Executive
to pay the tax claimed and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such contest
to a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided, however, that if the Company directs
the Executive to pay such claim and sue for a refund, the Company shall
advance the amount of such payment to the Executive, on an
interest-free basis, and shall indemnify and hold the Executive
harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with
respect to such advance or with respect to any imputed income with
respect to such advance; and further provided, that any extension of
the statute of limitations relating to payment of taxes for the taxable
year of the Executive with respect to which such contested amount is
claimed to be due is limited solely to such contested amount.
Furthermore, the Company's right to assume the defense of and control
the contest shall be limited to issues with respect to which a Gross-Up
Payment would be payable hereunder and the Executive shall be entitled
to settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
(4) If, after the receipt by the Executive of
an amount advanced by the Company pursuant to Section 7.6.3(3) the Executive
becomes entitled to receive any refund with respect to such claim, the Executive
shall (subject to the Company's complying with the requirements of Section
7.6.3(3)) promptly pay to the Company the amount of such refund (together with
any interest paid or credited thereon after taxes applicable thereto). If, after
the receipt by the Executive of an amount advanced by the Company pursuant to
Section 7.6.3(3) a determination is made that the Executive shall not be
entitled to any refund with respect to such claim, and the Company does not
notify the Executive in writing of its intent to contest such denial of refund
prior to the expiration of thirty (30) days after such determination, then such
advance shall be forgiven and shall not be required to be repaid and the amount
of such advance shall offset, to the extent thereof, the amount of Gross-Up
Payment required to be paid.
8. Restrictive Covenants.
8.1 Non-Disclosure of Information. The Executive shall:
8.1.1 Never, directly or indirectly, disclose to any
person or entity for any reason, or use for his own personal benefit, any
"Confidential Information" as hereinafter defined; and
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8.1.2 At all times take all reasonable precautions
necessary to protect from loss or disclosure by Executive or his subordinates
any and all documents or other information containing, referring, or relating to
such Confidential Information. Upon termination of employment with the Company
for any reason, the Executive shall promptly return to the Company any and all
documents or other tangible property containing, referring, or relating to such
Confidential Information, whether prepared by him or others.
8.1.3 Notwithstanding any provision to the contrary in
Section 8, this paragraph shall not apply to information which the Executive is
called upon by legal process (including, without limitation, by subpoena or
discovery requirement) to disclose or any information which has become part of
the public domain or is otherwise publicly disclosed through no fault or action
of the Executive.
8.1.4 For purposes of this Agreement, "Confidential
Information" shall mean any information relating in any way to the business of
the Company disclosed to or known to the Executive as a consequence of, result
of, or through the Executive's employment by the Company which may consist of,
but not be limited to, technical and non-technical information about the
Company's proprietary products, processes, programs, concepts, forms, business
methods, data, any and all financial and accounting data, employees, marketing,
customers, customer lists, and services and information corresponding thereto
acquired by the Executive during the term of the Executive's employment by the
Company. Confidential Information shall not include any of such items which arc
published or are otherwise part of the public domain, or freely available from
trade sources or otherwise.
8.1.5 Upon termination of this Agreement for any reason,
the Executive shall return to a designated officer of the Company all equipment
and/or tangible property then in the Executive's possession or custody which
belongs or relates to the Company, including, without limitation, copies or
reproductions of correspondence, memoranda, reports, notebooks, drawings,
photographs, data base, or any other documents or electronically stored
information which constitutes Confidential Information.
8.2 Trade Secrets - Intellectual Property Rights. The Executive
shall provide the Company with any copyrightable work, trade secrets and other
protectable intellectual property developed or produced by the Executive while
in the employ of the Company pursuant to this Agreement (collectively, "Work
Product").
8.2.1 All Work Product shall be considered works made for
hire and shall be the exclusive property of the Company and the Company shall be
considered the author and/or creator of such work for worldwide copyright
purposes and renewals and extensions thereof. The Company may request, at its
own cost and expense, that the Executive assist the Company in obtaining
worldwide patent, copyright and other property rights for the Work Product.
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8.2.2 If the Executive's rights in the Work Product
cannot be assigned to the Company, the Executive waives enforcement of all such
rights against the Company. The Executive further agrees to join in any action,
at the Company's sole cost and expense, to enforce or to procure a waiver of
such rights.
8.2.3 If the rights of the Work Product cannot be waived
or the Work Product is not deemed a "work for hire", the Executive hereby grants
the Company and its assigns a worldwide royalty-free license to reproduce,
distribute, modify, publicly display, sublicense and assign such rights in all
media or distribution technologies now known and hereinafter developed or
devised.
8.2.4 The Executive hereby appoints the Company as his
attorney in fact to execute and file any patent, copyright or other lawful
application with respect to the Work Product.
8.3 Non-Solicitation. During the Term and during the Severance
Period, the Executive will not, directly or indirectly, individually or on
behalf of other persons, solicit, aid or induce (i) any employee of the Company
or any of its affiliates to leave their employment with the Company or its
affiliates to accept employment with or render services to or with any person,
firm, corporation or other entity or assist or aid any other person, firm,
corporation or other entity in identifying or hiring away such employee, (ii)
any customer or vendor of the Company to alter its business relationship with
the Company or to purchase products or services then sold by the Company or its
affiliates from another person, firm, corporation or other entity or assist or
aid any other person or entity in identifying or soliciting any such customer or
vendor or (iii) any other remaining employee of the Company or its affiliates to
leave such employee's employment with the Company or its affiliates.
8.4 Conflict of Interest. The Executive shall exercise good
judgment and maintain high ethical standards in the course of his dealings so as
to preclude the possibility of a conflict between the interest of the Company
and his own personal interest. The Executive, therefore, has an obligation to
avoid any activity, agreement, personal interest, or other relationship or
situation which: (i) conflicts with the Company's best interest; (ii) interferes
with the Executive's responsibility to serve the Company to the best of the
Executive's ability; or (iii) gives the appearance of self dealing.
8.4.1 This policy requires that the Executive shall
not have any relationship, nor engage in any activity that might impair the
independence or judgment in the execution of the Executive's duties. The
Executive shall not have any direct or direct personal financial interests in
suppliers of property, goods or services that would affect his decisions or
actions on the Company's behalf. The Executive shall not accept gifts, benefits,
or unusual hospitality that would be reasonably likely to influence the
Executive in the performance of his duties.
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8.4.2 If any possible conflict of interest situation
arises, the Executive is responsible to immediately disclose the facts to the
Board of Directors of the Company so that an evaluation may determine whether a
problem exists and, if so, to eliminate it.
8.5 Injunctive Relief/Legal Remedies. The Parties agree that the
remedy at law for any breach by the Executive of this Agreement and specifically
the provisions of Section 8 ("Restrictive Covenants"), will be inadequate and
that the Company or any of its subsidiaries or other successors or assigns shall
be entitled to injunctive relief without bond. Such injunctive relief shall not
be exclusive, but shall be in addition to any other rights and remedies Company
or any of its subsidiaries or their successors or assigns might have for such
breach.
8.5.1 The Executive acknowledges: (i) that compliance
with the restrictive provisions contained in Section 8 is necessary to protect
the business and goodwill of the Company and its subsidiaries, and (ii) that a
breach of this Agreement will result in irreparable and continuing damage to the
Company, for which monetary damages may not provide adequate relief.
Consequently, the Executive agrees that in the event of a breach or threatened
breach of any of the restrictive covenants described herein, the Company, at its
discretion, shall be entitled to seek both: (i) a preliminary and/or permanent
injunction in order to prevent such damage, or continuation of such damage, and
(ii) monetary damages as determinable. Nothing herein, however, shall be
construed to restrict and/or prohibit the Company from pursuing any and all
other remedies; the Executive acknowledges that all remedies are cumulative. The
Executive specifically acknowledges that the Executive shall account for and pay
over to the Company any profits, monies, accruals or other benefits derived or
received by the Executive as a result of any transaction constituting a breach
of the Restrictive Covenants in Section 8.
8.5.2 If any legal action arises to enforce the Company's
trade secrets, the prevailing party shall be entitled to recover any and all
damages, as well as all costs and expenses, including reasonable attorney's fees
incurred in enforcing or attempting to enforce the Company's trade secrets.
9. Nature of Company Business.
The Executive acknowledges that the Company, through one or more of its
affiliated companies, is currently involved in providing technical and creative
services to companies which produce and distribute television networks which
feature explicit and cable version adult movies and features and other
programming depicting sexual situations and/or nudity (the "Adult Business"). In
addition, the Executive acknowledges that the Company, through one or more of
its affiliated companies, may become involved in the Adult Business. The
Executive acknowledges that he will likely be exposed, from time to time, to one
or more aspects of the Adult Business during the course of his employment by the
Company. Furthermore, the
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Executive confirms that he is currently comfortable working in an environment
where some or all aspects of the Adult Business are present and would be
comfortable working for a company engaged in the Adult Business. If, at any
time, the Executive's view on the foregoing changes or the Executive otherwise
become uncomfortable with the nature of the Company's business, the Executive
agrees to promptly inform the Board of Directors of the Company. The Company
will work with the Executive to explore mutually acceptable means of
accommodating the Executive's concerns which, both parties acknowledge, may
result in the termination of the Executive's employment. Termination of the
Executive's employment occasioned by the Executive's desire not to be associated
with the Company as a result of the nature of its business shall be treated as a
Voluntary Termination by the Executive without Good Reason.
10. Arbitration.
10.1 Any and all disputes, controversies and claims arising out
of, or relating to, this Agreement, or with respect to the interpretation of
this Agreement, or the rights or obligations of the Parties and their successors
and permitted assigns, whether by operation of law or otherwise, shall be
settled and determined by arbitration in New York City, New York, pursuant to
the then existing rules of the American Arbitration Association ("AAA"), for
commercial arbitration. Each party shall pay their own legal fees. The losing
party shall pay the fees and costs imposed by the AAA; if neither party clearly
prevails in the arbitration, the parties shall request that the AAA appointed
arbitrator apportion the AAA's fees and costs between the parties.
10.2 The Parties covenant and agree that the decision of the AAA
shall be final and binding and hereby waive their right to appeal therefrom.
11. Miscellaneous.
11.1 Notices. Any notice, demand or communication required or
permitted under this Agreement shall be in writing and shall either be
hand-delivered to the other party or mailed to the addresses set forth below by
registered or certified mail, return receipt requested, or sent by overnight
express mail or courier or facsimile to such address, if a party has a facsimile
machine. Notice shall be deemed to have been given and received (i) when
hand-delivered or after three (3) business days when deposited in the U.S. Mail,
(ii) when transmitted and received by facsimile or sent by express mail properly
addressed to the other party. The addresses are:
To the Company:
Directrix, Inc.
536 Broadway, 10th Floor
New York, New York 10012
Facsimile: (212)
Attn: Board of Directors
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To the Executive:
J. Roger Faherty
1035 Fifth Avenue
New York, New York 10022
The foregoing addresses may be changed at any time by either party by
notice given in the manner herein provided.
11.2 Integration; Modification. This Agreement, the
Indemnification Agreement executed contemporaneously herewith in the form
attached hereto as Exhibit B and the Company's Employee Manual constitute the
entire understanding and agreement between the Company and the Executive
regarding its subject matter, and supersede all prior negotiations and
agreements or interpretations, whether oral or written. This Agreement may not
be modified except by written agreement signed by the Executive and a duly
authorized officer of the Company.
11.3 Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the parties, including their respective heirs,
executors, successors and assigns, except that this Agreement may not be
assigned by the Executive.
11.4 Waiver of Breach. No waiver by either party of any condition
or of the breach by the other of any term or covenant contained in this
Agreement, whether conduct or otherwise, in any one (1) or more instances shall
be deemed or construed as a further or continuing waiver of any such condition
or breach or a waiver of any other condition, or the breach of any other term or
covenant set forth in this Agreement. Moreover, the failure of either party to
exercise any right hereunder shall not bar the later exercise thereof with
respect to other future breaches.
11.5 Governing Law. This Agreement shall be governed by the
internal laws of the State of New York, except that Section 10 shall be governed
by the Federal Arbitration Act, Title 9, U.S. Code.
11.6 Headings. The headings of the various sections and paragraphs
have been included herein for convenience only and shall not be considered in
interpreting this Agreement.
11.7 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one (1) and the same instrument.
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11.8 Due Authorization. The Company represents that all corporate
action required to authorize the execution, delivery and performance of this
Agreement has been duly taken.
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IN WITNESS WHEREOF, this Agreement has been executed by the Executive
and on behalf of the Company by its duly authorized officer on the day and year
first above written.
DIRECTRIX, INC.
By:
-----------------------------------
(Signature)
--------------------------------------
Date
EXECUTIVE:
--------------------------------------
J. Roger Faherty
--------------------------------------
Social Security No.
--------------------------------------
Date
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Exhibit 10.8
EMPLOYMENT AGREEMENT
Employment Agreement ("Agreement") effected as of this day of ,
1998,by and between Directrix, Inc. (the "Company" or "Employer"), a Delaware
corporation, and Donald J. McDonald, Jr. (the "Executive") (collectively the
Company and the Executive are referred to as the "Parties").
INTRODUCTION
WHEREAS, the Parties desire to enter into an Agreement and to set forth
herein the terms and conditions of the Executive's employment by the Company.
Accordingly, in consideration of the mutual covenants and agreement set forth
herein and the mutual benefits to be derived herefrom, and intending to be
legally bound hereby, the Company and the Executive agree as follows:
1. Employment
1.1 Duties. The Company shall employ the Executive on the terms
and conditions set forth in this Agreement, as President. The Executive accepts
such employment with the Company and shall perform and fulfill such duties as
are assigned to him hereunder consistent with his status as a senior executive
of the Company, devoting his best efforts and all of his professional time and
attention, to the performance and fulfillment of his duties and to the
advancement of the best interests of the Company, subject only to the direction,
approval, and control of the Company's Chief Executive Officer, and specific
directives of the Board of Directors of the Company (collectively, "Senior
Management"). In addition, and without any additional consideration, the
Executive is and/or may be requested to serve as a director or as an employee
and officer of any or all subsidiaries of the Company. Unless otherwise
indicated by the context, the "Company" shall include the Company and all its
subsidiaries.
1.2 Place of Performance. In connection with his employment by
the Company, the Executive shall be based in the New York, New York metropolitan
area, except for required travel on Company business. The Executive may be
required to relocate on a permanent or temporary basis consistent with business
necessity.
2. Term.
The Executive's employment under this Agreement shall commence as
of ,1998 (the "Commencement Date") and shall continue uninterrupted
up to and including the hour of midnight of December 31, 2001 (the "Term"),
unless otherwise terminated as provided for in Sections 7.1 or 7.3. The Term
shall be extended for successive one-year periods beginning ______, ____ and
each one-year anniversary thereafter on the terms in effect on the date of such
<PAGE>
renewal, unless a written notice not to extend is given by either party to the
other at least 90 days prior to the date the Terms otherwise would have expired.
3. Compensation.
3.1 Base Salary. During the Term the Executive shall receive a
minimum annual salary (the "Base Salary") payable in installments at such times
as the Company customarily pays its other senior executive employees (but in any
event no less often than bi-monthly), and calculated as follows:
3.1.1 The Base Salary to be paid to the Executive during
the Term shall be $185,000; and
3.1.2 For each Year beginning after December 31, 1999,
the Company shall increase the Base Salary by an amount equal to five percent
(5%) of the prior year's Base Salary. Each such increase shall be cumulative so
that the Base Salary for each succeeding year shall include the prior year's
increase.
3.2 Health Insurance and Other Benefits. During the Term the
Executive shall be provided all employee benefits provided by the Company to its
management and all other Company salaried employees, including without
limitation, all medical insurance and life insurance plans or arrangements and
shall be entitled to participate in all pension, profit sharing, stock option
and any other employee benefit plan or arrangement established and maintained by
the Company for similarly situated employees, all subject, however, to the
Company rules and policies then in effect regarding participation therein.
During the Term, the benefits provided to the Executive, as described in the
preceding sentence, shall not be reduced except in accordance with the general
reduction of such benefits applicable to similarly situated employees generally,
but then only to the extent that such benefits are reduced for such other
similarly situated employees.
3.3 Automobile Allowance. During the Term, the Company shall pay
the Executive the sum of $1,000 per month as reimbursement for the costs of
owning, operating and parking of an automobile.
3.4 Health Club Membership. During the Term, the Company shall
pay the costs of one health club membership in each of the Executive's two
principal places of residence.
4. Reimbursement of Expenses.
The Executive shall be reimbursed for all items of travel,
entertainment and miscellaneous expenses which the Executive reasonably incurs
in connection with the performance of his duties hereunder, provided that the
Executive submits to the Company on proper forms provided by the Company, such
statements and other evidence supporting such
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expenses as the Company may require and provided such expenses meet the
Company's policy concerning such matters.
5. Stock Options.
The Executive may be entitled to participate in all Company employee
stock option programs as determined by the Compensation Committee of the
Company's Board of Directors and approved by the Company's shareholders.
6. Vacations.
The Executive shall be entitled to not less than three (3) weeks of
paid vacation in any calendar year (prorated in any Year during which the
Executive is employed hereunder for less than the entire Year). Such vacation
shall be taken at such times as are consistent with the reasonable business
needs of the Company. Any vacation not taken during the year may not be taken by
the Executive in subsequent years except to the extent approved by the Company.
Upon termination of the Executive's employment for any reason, any vacation
earned by the Executive but not taken shall be forfeited.
7. Termination of Employment.
7.1 Death or Disability. If the Executive dies during the Term,
the Term shall terminate as of the date of the Executive's death. If the
Executive becomes Totally Disabled (as that term is defined below) for one
hundred eighty (180) days in the aggregate during any consecutive twelve-month
period during the Term, the Company shall have the right to terminate the Term
by giving the Executive thirty (30) days' prior written notice thereof, and upon
the expiration of such thirty-day period, the Executive's employment under this
Agreement shall terminate. If the Executive resumes his duties within thirty
(30) days after receipt of a notice of termination and continues to perform such
duties for four (4) consecutive weeks thereafter, the Term shall continue and
the notice of termination shall be considered null and void and of no effect.
Upon termination of the Term under this Section 7.1, the Company shall have no
further obligations or liabilities under this Agreement, except to pay to the
Executive's estate or the Executive, as the case may be: (i) the portion, if
any, that remains unpaid of the Base Salary for periods worked by the Executive
plus the excess of the Base Salary for the Severance Period over the amount
payable to the Executive under the Company's long-term disability plan during
such time (payable as if the Executive remained an employee of the Company); and
(ii) the amount of any expenses reimbursable in accordance with Section 4 above;
and (iii) any amounts due under any Company benefit, welfare or pension plan.
7.2 "Totally Disabled," as used herein, shall mean a mental or
physical condition which, in the reasonable opinion of an independent medical
doctor selected by the Company in its discretion, renders the Executive unable
or incompetent to carry out the material duties and responsibilities of the
Executive under this Agreement.
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7.3 Discharge for Cause. The Company may discharge the Executive
for "Cause" upon written notice (as defined in Section 11.1), and thereby
immediately terminate his employment under this Agreement. For purposes of this
Agreement, the Company shall have "Cause" to terminate the Executive's
employment if the Executive, in the reasonable good faith judgment of the
Company, (i) materially breaches any of his agreements, duties or obligations
under this Agreement and has not cured such breach within ten (10) days after
Company's written notice, including, without limitation, the Executive's failure
to perform his duties hereunder, other than a failure resulting from his illness
or sickness; (ii) willfully fails to carry out a material lawful directive of
the Board of Directors, the Chairman of the Board, and the President of the
Company; (iii) embezzles or converts to his own use any funds of the Company or
any client or customer of the Company; (iv) converts to his own use or destroys
any property of the Company having a significant value; (v) is in material
violation of any of the Company policies and/or procedures as identified in the
Company's Employee Manual; or (vi) is habitually drunk or intoxicated. If the
Executive is discharged for Cause, he shall receive only those amounts earned
but not distributed under the relevant plan, program or practice of the Company.
The Company and the Executive acknowledge that if the Company engages in the
Adult Business (as defined in Section 9), such business could be considered
controversial in some localities and could result in civil or criminal
litigation against the Company based upon obscenity and similar laws. The
Parties agree that, notwithstanding the other provisions of this Section, the
naming of the Executive in any such suit, and any conviction of the Executive or
plea bargain, settlement or other disposition of such litigation relating to the
Executive, shall not be considered Cause for the termination of the Executive's
employment, so long as the conduct of the Executive upon which such claim was
based consisted of the Executive carrying out his duties in good faith and in
accordance with directions of management of the Company.
7.4 Termination by Executive. The Executive may terminate the
Term of his employment:
7.4.1 upon failure by the Company to comply with the
material provisions of this Agreement, which failure is not cured within ten
(10) days after written notice (referred to herein as "Good Reason"); or
7.4.2 upon a "Change in Control of the Company" (as
defined in Section 7.6.1 below) upon thirty (30) days' prior written notice
given at any time within eighteen (18) months after a Change in Control; or
7.4.3 for any reason other than Good Reason or following
a Change in Control of the Company, which termination shall be considered a
"Voluntary Termination" by Executive.
7.5 Severance upon Termination. If, during the Term, the
Executive's employment is terminated by the Company without Cause, or the
Executive shall terminate employment for Good Reason prior to a Change in
Control of the Company (the date of
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termination is referred to as the "Termination Date"), then the Company shall
pay the Executive in lieu of other damages, an amount (the "Severance Payments")
equal to his then current Base Salary payable in installments at the same time
the Company pays salary to its other senior executive employees payable over the
longer of (i) the balance of the Term or (ii) one year (the period over which
the Severance Payments are made is referred to as the "Severance Period"). The
Company shall have no liability to make any Severance Payments as provided for
in this paragraph unless (i) the Executive executes a General Release in a form
substantially as set forth in Exhibit A attached hereto and (ii) the Executive
complies with all provisions in Section 8 (Restrictive Covenants). Such amount
shall reduce the amount of any other severance payment that otherwise would have
been payable to the Executive under any other Company plan, program or
arrangement. In addition, the Company shall maintain during the lesser of the
balance of the Term immediately prior to such termination or the Severance
Period all employee benefit plans and programs which the Executive participated
in immediately prior to such termination other than bonus, incentive
compensation and similar plans based on performance, provided the Executive's
participation is permissible under the general terms and provisions of such
plans and applicable law. In the event of a Voluntary Termination, the Executive
shall receive only his earned but unpaid Base Salary as of the date of his
termination.
7.6 Change in Control.
7.6.1 Definitions. For purposes of this Section 7.6, a
"Change in Control" shall mean a change in control of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of Regulation
14A, as in effect on the date of this Agreement, promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); provided, that
whether or not required to be reported under such Item 6(e), without limitation,
such a Change in Control shall be deemed to have occurred if (i) any "person" or
"group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing
25% or more of the combined voting power of the Company's then outstanding
securities; (ii) during any period of two consecutive years, individuals who, at
the beginning of such period, constitute the Board cease for any reason to
constitute at least a majority thereof unless the election, or the nomination
for election by the Company's stockholders, of each new director was approved by
a vote of at least three-fourths of the directors then still in office who were
directors at the beginning of the period; (iii) the Company's stockholders
approve an agreement to merge or consolidate the Company with another
corporation (other than a corporation 50% or more of which is controlled by, or
is under common control with, the Company); or (iv) any individual who is
nominated by the Board of Directors for election of the Board on any date fails
to be so elected as a direct or indirect result of any proxy fight or contested
election for positions on the Board of Directors; provided, however, that
notwithstanding the foregoing, no Change of Control shall be deemed to have
occurred pursuant to either clause (i) or (ii) above in the event of (and
notwithstanding any resultant change in the membership of the Board) an
acquisition by any group comprised of
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senior officers of the Company, including the Executive, of 25% or more of the
combined voting power of the Company's then outstanding securities.
7.6.2 Termination Payment. Notwithstanding any provision
of this Agreement, if, within eighteen (18) months following a Change in Control
of the Company, (a) the Executive's employment by the Company shall be
terminated by the Company other than as a result of the Executive becoming
Totally Disabled or for Cause or (b) the Executive terminates the Term pursuant
to Section 7.4.1, then the Executive shall be entitled to the benefits provided
below:
(1) The Company shall pay the Executive full Base
Salary through the Termination Date at the rate in effect at that time, and
shall pay the Executive for any vacation earned but not taken and the amount, if
any, of any bonus for a past Company fiscal year which has not yet been awarded
or paid;
(2) In lieu of any further salary payments to the
Executive for periods subsequent to the Termination Date, the Company, subject
to the limitation described below, shall pay to the Executive on the 60th day
following the Termination Date a lump sum amount equal to 2.99 times the sum of
(i) the Base Salary and (ii) cash bonuses and other cash compensation paid to
the Executive during the 12 months preceding the Termination Date
("Termination Payment"); and
(3) All stock options held by the Executive shall
be fully vested and remain outstanding for their full original term unless
sooner exercised.
7.6.3 Certain Additional Payments by the Company.
(1) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any payment or
distribution to or for the benefit of the Executive (whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise, but determined without regard to any additional payments required
under this Section 7.6.3 (a "Payment") would be subject to the excise tax
imposed by Section 4999 of the Code or any interest or penalties are incurred by
the Executive with respect to such excise tax (such excise tax, together with
any such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by the
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including, without limitation, any income taxes (and any
interest and penalties imposed with respect thereto) and Excise Tax imposed upon
the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments.
(2) Subject to the provisions of Section 7.6.3(3),
all determinations required to be made under this Section 7.6.3, including
whether and when
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Gross-Up Payment is required and the amount of such Gross-Up Payment and the
assumptions to be utilized in arriving at such determination, shall be made by
Deloitte & Touche LLP (the "Accounting Firm"); provided, however, that the
Accounting Firm shall not determine that no Excise Tax is payable by the
Executive unless it delivers to the Executive a written opinion (the "Accounting
Opinion") that failure to report the Excise Tax on the Executive's applicable
federal income tax return would not result in the imposition of a negligence or
similar penalty. In the event that Deloitte & Touche LLP has served, at any time
during the two years immediately preceding a Change in Control Date, as
accountant or auditor for the individual, entity or group that is involved in
effecting or has any material interest in the Change in Control, the Executive
shall appoint another nationally recognized accounting firm to make the
determinations and perform the other functions specified in this Section 7.6.3
(which accounting firm shall then be referred to as the Accounting Firm
hereunder). All fees and expenses of the Accounting Firm shall be borne solely
by the Company. Within fifteen (15) business days of the receipt of notice from
the Executive that there has been a Payment, or such earlier time as is
requested by the Company, the Accounting Firm shall make all determinations
required under this Section 7.6.3, shall provide to the Company and the
Executive a written report setting forth such determinations, together with
detailed supporting calculations, and, if the Accounting Firm determines that no
Excise Tax is payable, shall deliver the Accounting Opinion to the Executive.
Any Gross-Up Payment, as determined pursuant to this Section 7.6.3, shall be
paid by the Company to the Executive within five (5) days of the receipt of the
Accounting Firm's determination. Subject to the remainder of this Section 7.6.3,
any determination by the Accounting Firm shall be binding upon the Company and
the Executive. As a result of the uncertainty in the application of Section 4999
of the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments which will not have been made
by the Company should have been made ("Underpayment"), consistent with the
calculations required to be made hereunder. In the event that it is ultimately
determined in accordance with the procedures set forth in Section 7.6.3(3) that
the Executive is required to make a payment of any Excise Tax, the Accounting
Firm shall determine the amount of the Underpayment that has occurred and any
such Underpayment shall be promptly paid by the Company to or for the benefit of
the Executive.
(3) The Executive shall notify the Company in
writing of any claims by the Internal Revenue Service that, if successful, would
require the payment by the Company of the Gross-Up Payment. Such notification
shall be given as soon as practicable but no later than thirty (30) days after
the Executive actually receives notice in writing of such claim and shall
apprise the Company of the nature of such claim and the date on which such claim
is requested to be paid; provided, however, that the failure of the Executive to
notify the Company of such claim (or to provide any required information with
respect thereto) shall not affect any rights granted to the Executive under this
Section 7.6.3 except to the extent that the Company is materially prejudiced in
the defense of such claim as a direct result of such failure. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which he gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the
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Executive in writing prior to the expiration of such period that it desires to
contest such claim, the Executive shall:
(i) give the Company any information
reasonably requested by the Company relating to such claim;
(ii) take such action in connection with
contesting such claim as the Company shall reasonably request in
writing from time to time, including, without limitation,
accepting legal representation with respect to such claim by an
attorney selected by the Company and reasonably acceptable to the
Executive;
(iii) cooperate with the Company in good faith
in order effectively to contest such claim; and
(iv) if the Company elects not to assume and
control the defense of such claim, permit the Company to
participate in any proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold
the Executive harmless, on an after-tax basis, for any Excise Tax or
income tax (including interest and penalties with respect thereto)
imposed as a result of such representation and payment of costs and
expenses. Without limitation on the foregoing provisions of this
Section 7.6.3, the Company shall have the right, at its sole option, to
assume the defense of and control all proceedings in connection with
such contest, in which case it may pursue or forego any and all
administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim, and may either direct the
Executive to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and the Executive agrees to prosecute
such contest to a determination before any administrative tribunal, in
a court of initial jurisdiction and in one or more appellate courts, as
the Company shall determine; provided, however, that if the Company
directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on
an interest-free basis, and shall indemnify and hold the Executive
harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with
respect to such advance or with respect to any imputed income with
respect to such advance; and further provided, that any extension of
the statute of limitations relating to payment of taxes for the taxable
year of the Executive with respect to which such contested amount is
claimed to be due is limited solely to such contested amount.
Furthermore, the Company's right to assume the defense of and control
the contest shall be limited to issues with respect to which a Gross-Up
Payment would be payable hereunder and the Executive shall be entitled
to settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
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(4) If, after the receipt by the Executive of an
amount advanced by the Company pursuant to Section 7.6.3(3) the Executive
becomes entitled to receive any refund with respect to such claim, the Executive
shall (subject to the Company's complying with the requirements of Section
7.6.3(3)) promptly pay to the Company the amount of such refund (together with
any interest paid or credited thereon after taxes applicable thereto). If, after
the receipt by the Executive of an amount advanced by the Company pursuant to
Section 7.6.3(3) a determination is made that the Executive shall not be
entitled to any refund with respect to such claim, and the Company does not
notify the Executive in writing of its intent to contest such denial of refund
prior to the expiration of thirty (30) days after such determination, then such
advance shall be forgiven and shall not be required to be repaid and the amount
of such advance shall offset, to the extent thereof, the amount of Gross-Up
Payment required to be paid.
8. Restrictive Covenants.
8.1 Covenant Not to Compete. The Executive recognizes that in
each of the highly competitive businesses in which the Company is engaged,
personal contact is of primary importance in securing new customers and in
retaining the accounts and goodwill of present customers and protecting the
business of the Company. The Executive, therefore, agrees that during the
Employment Period and, if the Executive's employment is terminated for Cause,
for one year following the Termination Date, or for any other reason other than
the Executive becoming Totally Disabled or the Executive terminating his
employment for Good Reason, during the Severance Period, he will not, with
respect to the television programming services industry or the adult television
entertainment industries, in the United States, Canada and Europe (the "Relevant
Geographic Area"), (i) accept employment or render service to any Person that is
engaged in a business directly competitive with the business then engaged in by
the Company or any of its affiliated companies or (ii) enter into or take part
in or lend his name, counsel or assistance to any business, either as
proprietor, principal, investor, partner, director, officer, executive,
consultant, advisor, agent, independent contractor, or in any other capacity
whatsoever, for any purpose that would be competitive with the business of the
Company or any of its affiliated companies (all of the foregoing activities are
collectively referred to as the "Prohibited Activity"). For these purposes, the
adult television entertainment industries shall refer to television channels,
networks or programming services which distribute explicit adult entertainment
via C-Band satellite or via the Internet and which are or would be if operated
in the United States subject to regulation under Section 505 of the
Telecommunications Act of 1996, regardless of the basis on which such
programming is sold.
8.2 Non-Disclosure of Information. The Executive shall:
8.2.1 Never, directly or indirectly, disclose to any
person or entity for any reason, or use for his own personal benefit, any
"Confidential Information" as hereinafter defined; and
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8.2.2 At all times take all reasonable precautions
necessary to protect from loss or disclosure by Executive or his subordinates
any and all documents or other information containing, referring, or relating to
such Confidential Information. Upon termination of employment with the Company
for any reason, the Executive shall promptly return to the Company any and all
documents or other tangible property containing, referring, or relating to such
Confidential Information, whether prepared by him or others.
8.2.3 Notwithstanding any provision to the contrary in
Section 8, this paragraph shall not apply to information which the Executive is
called upon by legal process (including, without limitation, by subpoena or
discovery requirement) to disclose or any information which has become part of
the public domain or is otherwise publicly disclosed through no fault or action
of the Executive.
8.2.4 For purposes of this Agreement, "Confidential
Information" shall mean any information relating in any way to the business of
the Company disclosed to or known to the Executive as a consequence of, result
of, or through the Executive's employment by the Company which may consist of,
but not be limited to, technical and non-technical information about the
Company's proprietary products, processes, programs, concepts, forms, business
methods, data, any and all financial and accounting data, employees, marketing,
customers, customer lists, and services and information corresponding thereto
acquired by the Executive during the term of the Executive's employment by the
Company. Confidential Information shall not include any of such items which arc
published or are otherwise part of the public domain, or freely available from
trade sources or otherwise.
8.2.5 Upon termination of this Agreement for any reason,
the Executive shall return to a designated officer of the Company all equipment
and/or tangible property then in the Executive's possession or custody which
belongs or relates to the Company, including, without limitation, copies or
reproductions of correspondence, memoranda, reports, notebooks, drawings,
photographs, data base, or any other documents or electronically stored
information which constitutes Confidential Information.
8.3 Trade Secrets - Intellectual Property Rights. The Executive
shall provide the Company with any copyrightable work, trade secrets and other
protectable intellectual property developed or produced by the Executive while
in the employ of the Company pursuant to this Agreement (collectively, "Work
Product").
8.3.1 All Work Product shall be considered works made for
hire and shall be the exclusive property of the Company and the Company shall be
considered the author and/or creator of such work for worldwide copyright
purposes and renewals and extensions thereof. The Company may request, at its
own cost and expense, that the Executive assist the Company in obtaining
worldwide patent, copyright and other property rights for the Work Product.
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8.3.2 If the Executive's rights in the Work Product
cannot be assigned to the Company, the Executive waives enforcement of all such
rights against the Company. The Executive further agrees to join in any action,
at the Company's sole cost and expense, to enforce or to procure a waiver of
such rights.
8.3.3 If the rights of the Work Product cannot be waived
or the Work Product is not deemed a "work for hire", the Executive hereby grants
the Company and its assigns a worldwide royalty-free license to reproduce,
distribute, modify, publicly display, sublicense and assign such rights in all
media or distribution technologies now known and hereinafter developed or
devised.
8.3.4 The Executive hereby appoints the Company as his
attorney in fact to execute and file any patent, copyright or other lawful
application with respect to the Work Product.
8.4 Non-Solicitation. During the Term and during the Severance
Period, the Executive will not, directly or indirectly, individually or on
behalf of other persons, solicit, aid or induce (i) any employee of the Company
or any of its affiliates to leave their employment with the Company or its
affiliates to accept employment with or render services to or with any person,
firm, corporation or other entity or assist or aid any other person, firm,
corporation or other entity in identifying or hiring away such employee, (ii)
any customer or vendor of the Company to alter its business relationship with
the Company or to purchase products or services then sold by the Company or its
affiliates from another person, firm, corporation or other entity or assist or
aid any other person or entity in identifying or soliciting any such customer or
vendor or (iii) any other remaining employee of the Company or its affiliates to
leave such employee's employment with the Company or its affiliates.
8.5 Conflict of Interest. The Executive shall exercise good
judgment and maintain high ethical standards in the course of his dealings so as
to preclude the possibility of a conflict between the interest of the Company
and his own personal interest. The Executive, therefore, has an obligation to
avoid any activity, agreement, personal interest, or other relationship or
situation which: (i) conflicts with the Company's best interest; (ii) interferes
with the Executive's responsibility to serve the Company to the best of the
Executive's ability; or (iii) gives the appearance of self dealing.
8.5.1 This policy requires that the Executive shall not
have any relationship, nor engage in any activity that might impair the
independence or judgment in the execution of the Executive's duties. The
Executive shall not have any direct or direct personal financial interests in
suppliers of property, goods or services that would affect his decisions or
actions on the Company's behalf. The Executive shall not accept gifts, benefits,
or unusual hospitality that would be reasonably likely to influence the
Executive in the performance of his duties.
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8.5.2 If any possible conflict of interest situation
arises, the Executive is responsible to immediately disclose the facts to the
President or Chief Executive Officer of the Company so that an evaluation may
determine whether a problem exists and, if so, to eliminate it.
8.6 Injunctive Relief/Legal Remedies. The Parties agree that the
remedy at law for any breach by the Executive of this Agreement and specifically
the provisions of Section 8 ("Restrictive Covenants"), will be inadequate and
that the Company or any of its subsidiaries or other successors or assigns shall
be entitled to injunctive relief without bond. Such injunctive relief shall not
be exclusive, but shall be in addition to any other rights and remedies Company
or any of its subsidiaries or their successors or assigns might have for such
breach.
8.6.1 The Executive acknowledges: (i) that compliance
with the restrictive provisions contained in Section 8 is necessary to protect
the business and goodwill of the Company and its subsidiaries, and (ii) that a
breach of this Agreement will result in irreparable and continuing damage to the
Company, for which monetary damages may not provide adequate relief.
Consequently, the Executive agrees that in the event of a breach or threatened
breach of any of the restrictive covenants described herein, the Company, at its
discretion, shall be entitled to seek both: (i) a preliminary and/or permanent
injunction in order to prevent such damage, or continuation of such damage, and
(ii) monetary damages as determinable. Nothing herein, however, shall be
construed to restrict and/or prohibit the Company from pursuing any and all
other remedies; the Executive acknowledges that all remedies are cumulative. The
Executive specifically acknowledges that the Executive shall account for and pay
over to the Company any profits, monies, accruals or other benefits derived or
received by the Executive as a result of any transaction constituting a breach
of the Restrictive Covenants in Section 8.
8.6.2 If any legal action arises to enforce the Company's
trade secrets, the prevailing party shall be entitled to recover any and all
damages, as well as all costs and expenses, including reasonable attorney's fees
incurred in enforcing or attempting to enforce the Company's trade secrets.
9. Nature of Company Business.
The Executive acknowledges that the Company, through one or more of its
affiliated companies, is currently involved in providing technical and creative
services to companies which produce and distribute television networks which
feature explicit and cable version adult movies and features and other
programming depicting sexual situations and/or nudity (the "Adult Business"). In
addition, the Executive acknowledges that the Company, through one or more of
its affiliated companies, may become involved in the Adult Business. The
Executive acknowledges that he will likely be exposed, from time to time, to one
or more aspects of the Adult Business during the course of his employment by the
Company. Furthermore, the
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Executive confirms that he is currently comfortable working in an environment
where some or all aspects of the Adult Business are present and would be
comfortable working for a company engaged in the Adult Business. If, at any
time, the Executive's view on the foregoing changes or the Executive otherwise
become uncomfortable with the nature of the Company's business, the Executive
agrees to promptly inform Senior Management. The Company will work with the
Executive to explore mutually acceptable means of accommodating the Executive's
concerns which, both parties acknowledge, may result in the termination of the
Executive's employment. Termination of the Executive's employment occasioned by
the Executive's desire not to be associated with the Company as a result of the
nature of its business shall be treated as a Voluntary Termination by the
Executive without Good Reason.
10. Arbitration.
10.1 Any and all disputes, controversies and claims arising out
of, or relating to, this Agreement, or with respect to the interpretation of
this Agreement, or the rights or obligations of the Parties and their successors
and permitted assigns, whether by operation of law or otherwise, shall be
settled and determined by arbitration in New York City, New York, pursuant to
the then existing rules of the American Arbitration Association ("AAA"), for
commercial arbitration. Each party shall pay their own legal fees. The losing
party shall pay the fees and costs imposed by the AAA; if neither party clearly
prevails in the arbitration, the parties shall request that the AAA appointed
arbitrator apportion the AAA's fees and costs between the parties.
10.2 The Parties covenant and agree that the decision of the AAA
shall be final and binding and hereby waive their right to appeal therefrom.
11. Miscellaneous.
11.1 Notices. Any notice, demand or communication required or
permitted under this Agreement shall be in writing and shall either be
hand-delivered to the other party or mailed to the addresses set forth below by
registered or certified mail, return receipt requested, or sent by overnight
express mail or courier or facsimile to such address, if a party has a facsimile
machine. Notice shall be deemed to have been given and received (i) when
hand-delivered or after three (3) business days when deposited in the U.S. Mail,
(ii) when transmitted and received by facsimile or sent by express mail properly
addressed to the other party. The addresses are:
To the Company:
Directrix, Inc.
536 Broadway, 10th Floor
New York, New York 10012
Facsimile: (212)
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Attn: Chief Executive Officer
To the Executive:
Donald J. McDonald, Jr.
(HomeStreet)
(HomeCity), (HomeState) (HomeZip)
The foregoing addresses may be changed at any time by either party by
notice given in the manner herein provided.
11.2 Integration; Modification. This Agreement, the
Indemnification Agreement executed contemporaneously herewith in the form
attached hereto as Exhibit B and the Company's Employee Manual constitutes the
entire understanding and agreement between the Company and the Executive
regarding its subject matter, and supersedes all prior negotiations and
agreements or interpretations, whether oral or written. This Agreement may not
be modified except by written agreement signed by the Executive and a duly
authorized officer of the Company.
11.3 Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the parties, including their respective heirs,
executors, successors and assigns, except that this Agreement may not be
assigned by the Executive.
11.4 Waiver of Breach. No waiver by either party of any condition
or of the breach by the other of any term or covenant contained in this
Agreement, whether conduct or otherwise, in any one (1) or more instances shall
be deemed or construed as a further or continuing waiver of any such condition
or breach or a waiver of any other condition, or the breach of any other term or
covenant set forth in this Agreement. Moreover, the failure of either party to
exercise any right hereunder shall not bar the later exercise thereof with
respect to other future breaches.
11.5 Governing Law. This Agreement shall be governed by the
internal laws of the State of New York, except that Section 10 shall be governed
by the Federal Arbitration Act, Title 9, U.S. Code.
11.6 Headings. The headings of the various sections and paragraphs
have been included herein for convenience only and shall not be considered in
interpreting this Agreement.
11.7 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one (1) and the same instrument.
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11.8 Due Authorization. The Company represents that all corporate
action required to authorize the execution, delivery and performance of this
Agreement has been duly taken.
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IN WITNESS WHEREOF, this Agreement has been executed by the Executive
and on behalf of the Company by its duly authorized officer on the day and year
first above written.
DIRECTRIX, INC.
By:
------------------------------
(Signature)
--------------------------------
Date
EXECUTIVE:
--------------------------------
Donald J. McDonald, Jr.
--------------------------------
Social Security No.
--------------------------------
Date
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Exhibit 10.9
EMPLOYMENT AGREEMENT
Employment Agreement ("Agreement") effected as of this day of ,
1998, by and between Directrix, Inc. (the "Company" or "Employer"), a Delaware
corporation, and John R. Sharpe (the "Executive") (collectively the Company and
the Executive are referred to as the "Parties").
INTRODUCTION
WHEREAS, the Parties desire to enter into an Agreement and to set forth
herein the terms and conditions of the Executive's employment by the Company.
Accordingly, in consideration of the mutual covenants and agreement set forth
herein and the mutual benefits to be derived herefrom, and intending to be
legally bound hereby, the Company and the Executive agree as follows:
1. Employment
1.1 Duties. The Company shall employ the Executive on the terms
and conditions set forth in this Agreement, as Vice President and Chief
Financial Officer. The Executive accepts such employment with the Company and
shall perform and fulfill such duties as are assigned to him hereunder
consistent with his status as a senior executive of the Company, devoting his
best efforts and all of his professional time and attention, to the performance
and fulfillment of his duties and to the advancement of the best interests of
the Company, subject only to the direction, approval, and control of the
Company's President and/or Chief Executive Officer, and specific directives of
the Board of Directors of the Company (collectively, "Senior Management"). In
addition, and without any additional consideration, the Executive is and/or may
be requested to serve as a director or as an employee and officer of any or all
subsidiaries of the Company. Unless otherwise indicated by the context, the
"Company" shall include the Company and all its subsidiaries.
1.2 Place of Performance. In connection with his employment by
the Company, the Executive shall be based in the New York, New York metropolitan
area, except for required travel on Company business. The Executive may be
required to relocate on a permanent or temporary basis consistent with business
necessity.
2. Term.
The Executive's employment under this Agreement shall commence as
of , 1998 (the "Commencement Date") and shall continue uninterrupted
up to and including the hour of midnight of December 31, 2000 (the "Term"),
unless otherwise terminated as provided for in Sections 7.1 or 7.3. The Term
shall be extended for successive one-year periods beginning ______, ____ and
each one-year anniversary thereafter on the terms in effect on the date of such
<PAGE>
renewal, unless a written notice not to extend is given by either party to the
other at least 90 days prior to the date the Terms otherwise would have expired.
3. Compensation.
3.1 Base Salary. During the Term the Executive shall receive a
minimum annual salary (the "Base Salary") payable in installments at such times
as the Company customarily pays its other senior executive employees (but in any
event no less often than bi-monthly), and calculated as follows:
3.1.1 The Base Salary to be paid to the Executive during
the Term shall be $115,000; and
3.1.2 For each Year beginning after December 31, 1999,
the Company shall increase the Base Salary by an amount equal to five percent
(5%) of the prior year's Base Salary. Each such increase shall be cumulative so
that the Base Salary for each succeeding year shall include the prior year's
increase.
3.2 Health Insurance and Other Benefits. During the Term the
Executive shall be provided all employee benefits provided by the Company to its
management and all other Company salaried employees, including without
limitation, all medical insurance and life insurance plans or arrangements and
shall be entitled to participate in all pension, profit sharing, stock option
and any other employee benefit plan or arrangement established and maintained by
the Company for similarly situated employees, all subject, however, to the
Company rules and policies then in effect regarding participation therein.
During the Term, the benefits provided to the Executive, as described in the
preceding sentence, shall not be reduced except in accordance with the general
reduction of such benefits applicable to similarly situated employees generally,
but then only to the extent that such benefits are reduced for such other
similarly situated employees.
3.3 Automobile Allowance. During the Term, the Company shall pay
the Executive the sum of $500 per month as reimbursement for the costs of
owning, operating and parking of an automobile.
3.4 Health Club Membership. During the Term, the Company shall
pay the costs of one health club membership for the Executive.
4. Reimbursement of Expenses.
The Executive shall be reimbursed for all items of travel,
entertainment and miscellaneous expenses which the Executive reasonably incurs
in connection with the performance of his duties hereunder, provided that the
Executive submits to the Company on proper forms provided by the Company, such
statements and other evidence supporting such
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expenses as the Company may require and provided such expenses meet the
Company's policy concerning such matters.
5. Stock Options.
The Executive may be entitled to participate in all Company employee
stock option programs as determined by the Compensation Committee of the
Company's Board of Directors and approved by the Company's shareholders.
6. Vacations.
The Executive shall be entitled to not less than three (3) weeks of
paid vacation in any calendar year (prorated in any Year during which the
Executive is employed hereunder for less than the entire Year). Such vacation
shall be taken at such times as are consistent with the reasonable business
needs of the Company. Any vacation not taken during the year may not be taken by
the Executive in subsequent years except to the extent approved by the Company.
Upon termination of the Executive's employment for any reason, any vacation
earned by the Executive but not taken shall be forfeited.
7. Termination of Employment.
7.1 Death or Disability. If the Executive dies during the Term,
the Term shall terminate as of the date of the Executive's death. If the
Executive becomes Totally Disabled (as that term is defined below) for one
hundred eighty (180) days in the aggregate during any consecutive twelve-month
period during the Term, the Company shall have the right to terminate the Term
by giving the Executive thirty (30) days' prior written notice thereof, and upon
the expiration of such thirty-day period, the Executive's employment under this
Agreement shall terminate. If the Executive resumes his duties within thirty
(30) days after receipt of a notice of termination and continues to perform such
duties for four (4) consecutive weeks thereafter, the Term shall continue and
the notice of termination shall be considered null and void and of no effect.
Upon termination of the Term under this Section 7.1, the Company shall have no
further obligations or liabilities under this Agreement, except to pay to the
Executive's estate or the Executive, as the case may be: (i) the portion, if
any, that remains unpaid of the Base Salary for periods worked by the Executive
plus the excess of the Base Salary for the Severance Period over the amount
payable to the Executive under the Company's long-term disability plan during
such time (payable as if the Executive remained an employee of the Company); and
(ii) the amount of any expenses reimbursable in accordance with Section 4 above;
and (iii) any amounts due under any Company benefit, welfare or pension plan.
7.2 "Totally Disabled," as used herein, shall mean a mental or
physical condition which, in the reasonable opinion of an independent medical
doctor selected by the Company in its discretion, renders the Executive unable
or incompetent to carry out the material duties and responsibilities of the
Executive under this Agreement.
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7.3 Discharge for Cause. The Company may discharge the Executive
for "Cause" upon written notice (as defined in Section 11.1), and thereby
immediately terminate his employment under this Agreement. For purposes of this
Agreement, the Company shall have "Cause" to terminate the Executive's
employment if the Executive, in the reasonable good faith judgment of the
Company, (i) materially breaches any of his agreements, duties or obligations
under this Agreement and has not cured such breach within ten (10) days after
Company's written notice, including, without limitation, the Executive's failure
to perform his duties hereunder, other than a failure resulting from his illness
or sickness; (ii) willfully fails to carry out a material lawful directive of
the Board of Directors, the Chairman of the Board, and the President of the
Company; (iii) embezzles or converts to his own use any funds of the Company or
any client or customer of the Company; (iv) converts to his own use or destroys
any property of the Company having a significant value; (v) is in material
violation of any of the Company policies and/or procedures as identified in the
Company's Employee Manual; or (vi) is habitually drunk or intoxicated. If the
Executive is discharged for Cause, he shall receive only those amounts earned
but not distributed under the relevant plan, program or practice of the Company.
The Company and the Executive acknowledge that if the Company engages in the
Adult Business (as defined in Section 9), such business could be considered
controversial in some localities and could result in civil or criminal
litigation against the Company based upon obscenity and similar laws. The
Parties agree that, notwithstanding the other provisions of this Section, the
naming of the Executive in any such suit, and any conviction of the Executive or
plea bargain, settlement or other disposition of such litigation relating to the
Executive, shall not be considered Cause for the termination of the Executive's
employment, so long as the conduct of the Executive upon which such claim was
based consisted of the Executive carrying out his duties in good faith and in
accordance with directions of management of the Company.
7.4 Termination by Executive. The Executive may terminate the
Term of his employment:
7.4.1 upon failure by the Company to comply with the
material provisions of this Agreement, which failure is not cured within ten
(10) days after written notice (referred to herein as "Good Reason"); or
7.4.2 upon a "Change in Control of the Company" (as
defined in Section 7.6.1 below) upon thirty (30) days' prior written notice
given at any time within eighteen (18) months after a Change in Control; or
7.4.3 for any reason other than Good Reason or following
a Change in Control of the Company, which termination shall be considered a
"Voluntary Termination" by Executive.
7.5 Severance upon Termination. If, during the Term, the
Executive's employment is terminated by the Company without Cause, or the
Executive shall terminate employment for Good Reason prior to a Change in
Control of the Company (the date of
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termination is referred to as the "Termination Date"), then the Company shall
pay the Executive in lieu of other damages, an amount (the "Severance Payments")
equal to his then current Base Salary payable in installments at the same time
the Company pays salary to its other senior executive employees payable over the
longer of (i) the balance of the Term or (ii) eight months (the period over
which the Severance Payments are made is referred to as the "Severance Period").
The Company shall have no liability to make any Severance Payments as provided
for in this paragraph unless (i) the Executive executes a General Release in a
form substantially as set forth in Exhibit A attached hereto and (ii) the
Executive complies with all provisions in Section 8 (Restrictive Covenants).
Such amount shall reduce the amount of any other severance payment that
otherwise would have been payable to the Executive under any other Company plan,
program or arrangement. In addition, the Company shall maintain during the
lesser of the balance of the Term immediately prior to such termination or the
Severance Period all employee benefit plans and programs which the Executive
participated in immediately prior to such termination other than bonus,
incentive compensation and similar plans based on performance, provided the
Executive's participation is permissible under the general terms and provisions
of such plans and applicable law. In the event of a Voluntary Termination, the
Executive shall receive only his earned but unpaid Base Salary as of the date of
his termination.
7.6 Change in Control.
7.6.1 Definitions. For purposes of this Section 7.6, a
"Change in Control" shall mean a change in control of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of Regulation
14A, as in effect on the date of this Agreement, promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); provided, that
whether or not required to be reported under such Item 6(e), without limitation,
such a Change in Control shall be deemed to have occurred if (i) any "person" or
"group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing
25% or more of the combined voting power of the Company's then outstanding
securities; (ii) during any period of two consecutive years, individuals who, at
the beginning of such period, constitute the Board cease for any reason to
constitute at least a majority thereof unless the election, or the nomination
for election by the Company's stockholders, of each new director was approved by
a vote of at least three-fourths of the directors then still in office who were
directors at the beginning of the period; (iii) the Company's stockholders
approve an agreement to merge or consolidate the Company with another
corporation (other than a corporation 50% or more of which is controlled by, or
is under common control with, the Company); or (iv) any individual who is
nominated by the Board of Directors for election of the Board on any date fails
to be so elected as a direct or indirect result of any proxy fight or contested
election for positions on the Board of Directors; provided, however, that
notwithstanding the foregoing, no Change of Control shall be deemed to have
occurred pursuant to either clause (i) or (ii) above in the event of (and
notwithstanding any resultant change in the membership of the Board) an
acquisition by any group comprised of
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senior officers of the Company, including the Executive, of 25% or more of the
combined voting power of the Company's then outstanding securities.
7.6.2 Termination Payment. Notwithstanding any provision
of this Agreement, if, within eighteen (18) months following a Change in Control
of the Company, (a) the Executive's employment by the Company shall be
terminated by the Company other than as a result of the Executive becoming
Totally Disabled or for Cause or (b) the Executive terminates the Term pursuant
to Section 7.4.1, then the Executive shall be entitled to the benefits provided
below:
(1) The Company shall pay the Executive full Base
Salary through the Termination Date at the rate in effect at that time, and
shall pay the Executive for any vacation earned but not taken and the amount, if
any, of any bonus for a past Company fiscal year which has not yet been awarded
or paid;
(2) In lieu of any further salary payments to the
Executive for periods subsequent to the Termination Date, the Company, subject
to the limitation described below, shall pay to the Executive on the 60th day
following the Termination Date a lump sum amount equal to 2.99 times the sum of
(i) the Base Salary and (ii) cash bonuses and other cash compensation paid to
the Executive during the 12 months preceding the Termination Date
("Termination Payment"); and
(3) All stock options held by the Executive shall
be fully vested and remain outstanding for their full original term unless
sooner exercised.
7.6.3 Certain Additional Payments by the Company.
(1) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any payment or
distribution to or for the benefit of the Executive (whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise, but determined without regard to any additional payments required
under this Section 7.6.3 (a "Payment") would be subject to the excise tax
imposed by Section 4999 of the Code or any interest or penalties are incurred by
the Executive with respect to such excise tax (such excise tax, together with
any such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by the
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including, without limitation, any income taxes (and any
interest and penalties imposed with respect thereto) and Excise Tax imposed upon
the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments.
(2) Subject to the provisions of Section 7.6.3(3),
all determinations required to be made under this Section 7.6.3, including
whether and when
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Gross-Up Payment is required and the amount of such Gross-Up Payment and the
assumptions to be utilized in arriving at such determination, shall be made by
Deloitte & Touche LLP (the "Accounting Firm"); provided, however, that the
Accounting Firm shall not determine that no Excise Tax is payable by the
Executive unless it delivers to the Executive a written opinion (the "Accounting
Opinion") that failure to report the Excise Tax on the Executive's applicable
federal income tax return would not result in the imposition of a negligence or
similar penalty. In the event that Deloitte & Touche LLP has served, at any time
during the two years immediately preceding a Change in Control Date, as
accountant or auditor for the individual, entity or group that is involved in
effecting or has any material interest in the Change in Control, the Executive
shall appoint another nationally recognized accounting firm to make the
determinations and perform the other functions specified in this Section 7.6.3
(which accounting firm shall then be referred to as the Accounting Firm
hereunder). All fees and expenses of the Accounting Firm shall be borne solely
by the Company. Within fifteen (15) business days of the receipt of notice from
the Executive that there has been a Payment, or such earlier time as is
requested by the Company, the Accounting Firm shall make all determinations
required under this Section 7.6.3, shall provide to the Company and the
Executive a written report setting forth such determinations, together with
detailed supporting calculations, and, if the Accounting Firm determines that no
Excise Tax is payable, shall deliver the Accounting Opinion to the Executive.
Any Gross-Up Payment, as determined pursuant to this Section 7.6.3, shall be
paid by the Company to the Executive within five (5) days of the receipt of the
Accounting Firm's determination. Subject to the remainder of this Section 7.6.3,
any determination by the Accounting Firm shall be binding upon the Company and
the Executive. As a result of the uncertainty in the application of Section 4999
of the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments which will not have been made
by the Company should have been made ("Underpayment"), consistent with the
calculations required to be made hereunder. In the event that it is ultimately
determined in accordance with the procedures set forth in Section 7.6.3(3) that
the Executive is required to make a payment of any Excise Tax, the Accounting
Firm shall determine the amount of the Underpayment that has occurred and any
such Underpayment shall be promptly paid by the Company to or for the benefit of
the Executive.
(3) The Executive shall notify the Company in
writing of any claims by the Internal Revenue Service that, if successful, would
require the payment by the Company of the Gross-Up Payment. Such notification
shall be given as soon as practicable but no later than thirty (30) days after
the Executive actually receives notice in writing of such claim and shall
apprise the Company of the nature of such claim and the date on which such claim
is requested to be paid; provided, however, that the failure of the Executive to
notify the Company of such claim (or to provide any required information with
respect thereto) shall not affect any rights granted to the Executive under this
Section 7.6.3 except to the extent that the Company is materially prejudiced in
the defense of such claim as a direct result of such failure. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which he gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the
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Executive in writing prior to the expiration of such period that it desires to
contest such claim, the Executive shall:
(i) give the Company any information
reasonably requested by the Company relating to such claim;
(ii) take such action in connection with
contesting such claim as the Company shall reasonably request in
writing from time to time, including, without limitation,
accepting legal representation with respect to such claim by an
attorney selected by the Company and reasonably acceptable to the
Executive;
(iii) cooperate with the Company in good faith
in order effectively to contest such claim; and
(iv) if the Company elects not to assume and
control the defense of such claim, permit the Company to
participate in any proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold
the Executive harmless, on an after-tax basis, for any Excise Tax or
income tax (including interest and penalties with respect thereto)
imposed as a result of such representation and payment of costs and
expenses. Without limitation on the foregoing provisions of this
Section 7.6.3, the Company shall have the right, at its sole option, to
assume the defense of and control all proceedings in connection with
such contest, in which case it may pursue or forego any and all
administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim, and may either direct the
Executive to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and the Executive agrees to prosecute
such contest to a determination before any administrative tribunal, in
a court of initial jurisdiction and in one or more appellate courts, as
the Company shall determine; provided, however, that if the Company
directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on
an interest-free basis, and shall indemnify and hold the Executive
harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with
respect to such advance or with respect to any imputed income with
respect to such advance; and further provided, that any extension of
the statute of limitations relating to payment of taxes for the taxable
year of the Executive with respect to which such contested amount is
claimed to be due is limited solely to such contested amount.
Furthermore, the Company's right to assume the defense of and control
the contest shall be limited to issues with respect to which a Gross-Up
Payment would be payable hereunder and the Executive shall be entitled
to settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
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(4) If, after the receipt by the Executive of an
amount advanced by the Company pursuant to Section 7.6.3(3) the Executive
becomes entitled to receive any refund with respect to such claim, the Executive
shall (subject to the Company's complying with the requirements of Section
7.6.3(3)) promptly pay to the Company the amount of such refund (together with
any interest paid or credited thereon after taxes applicable thereto). If, after
the receipt by the Executive of an amount advanced by the Company pursuant to
Section 7.6.3(3) a determination is made that the Executive shall not be
entitled to any refund with respect to such claim, and the Company does not
notify the Executive in writing of its intent to contest such denial of refund
prior to the expiration of thirty (30) days after such determination, then such
advance shall be forgiven and shall not be required to be repaid and the amount
of such advance shall offset, to the extent thereof, the amount of Gross-Up
Payment required to be paid.
8. Restrictive Covenants.
8.1 Covenant Not to Compete. The Executive recognizes that in
each of the highly competitive businesses in which the Company is engaged,
personal contact is of primary importance in securing new customers and in
retaining the accounts and goodwill of present customers and protecting the
business of the Company. The Executive, therefore, agrees that during the
Employment Period and, if the Executive's employment is terminated for Cause,
for eight months following the Termination Date, or for any other reason other
than the Executive becoming Totally Disabled or the Executive terminating his
employment for Good Reason, during the Severance Period, he will not, with
respect to the television programming services industry or the adult television
entertainment industries, in the United States, Canada and Europe (the "Relevant
Geographic Area"), (i) accept employment or render service to any Person that is
engaged in a business directly competitive with the business then engaged in by
the Company or any of its affiliated companies or (ii) enter into or take part
in or lend his name, counsel or assistance to any business, either as
proprietor, principal, investor, partner, director, officer, executive,
consultant, advisor, agent, independent contractor, or in any other capacity
whatsoever, for any purpose that would be competitive with the business of the
Company or any of its affiliated companies (all of the foregoing activities are
collectively referred to as the "Prohibited Activity"). For these purposes, the
adult television entertainment industries shall refer to television channels,
networks or programming services which distribute explicit adult entertainment
via C-Band satellite or via the Internet and which are or would be if operated
in the United States subject to regulation under Section 505 of the
Telecommunications Act of 1996, regardless of the basis on which such
programming is sold.
8.2 Non-Disclosure of Information. The Executive shall:
8.2.1 Never, directly or indirectly, disclose to any
person or entity for any reason, or use for his own personal benefit, any
"Confidential Information" as hereinafter defined; and
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8.2.2 At all times take all reasonable precautions
necessary to protect from loss or disclosure by Executive or his subordinates
any and all documents or other information containing, referring, or relating to
such Confidential Information. Upon termination of employment with the Company
for any reason, the Executive shall promptly return to the Company any and all
documents or other tangible property containing, referring, or relating to such
Confidential Information, whether prepared by him or others.
8.2.3 Notwithstanding any provision to the contrary in
Section 8, this paragraph shall not apply to information which the Executive is
called upon by legal process (including, without limitation, by subpoena or
discovery requirement) to disclose or any information which has become part of
the public domain or is otherwise publicly disclosed through no fault or action
of the Executive.
8.2.4 For purposes of this Agreement, "Confidential
Information" shall mean any information relating in any way to the business of
the Company disclosed to or known to the Executive as a consequence of, result
of, or through the Executive's employment by the Company which may consist of,
but not be limited to, technical and non-technical information about the
Company's proprietary products, processes, programs, concepts, forms, business
methods, data, any and all financial and accounting data, employees, marketing,
customers, customer lists, and services and information corresponding thereto
acquired by the Executive during the term of the Executive's employment by the
Company. Confidential Information shall not include any of such items which arc
published or are otherwise part of the public domain, or freely available from
trade sources or otherwise.
8.2.5 Upon termination of this Agreement for any reason,
the Executive shall return to a designated officer of the Company all equipment
and/or tangible property then in the Executive's possession or custody which
belongs or relates to the Company, including, without limitation, copies or
reproductions of correspondence, memoranda, reports, notebooks, drawings,
photographs, data base, or any other documents or electronically stored
information which constitutes Confidential Information.
8.3 Trade Secrets - Intellectual Property Rights. The Executive
shall provide the Company with any copyrightable work, trade secrets and other
protectable intellectual property developed or produced by the Executive while
in the employ of the Company pursuant to this Agreement (collectively, "Work
Product").
8.3.1 All Work Product shall be considered works made for
hire and shall be the exclusive property of the Company and the Company shall be
considered the author and/or creator of such work for worldwide copyright
purposes and renewals and extensions thereof. The Company may request, at its
own cost and expense, that the Executive assist the Company in obtaining
worldwide patent, copyright and other property rights for the Work Product.
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8.3.2 If the Executive's rights in the Work Product
cannot be assigned to the Company, the Executive waives enforcement of all such
rights against the Company. The Executive further agrees to join in any action,
at the Company's sole cost and expense, to enforce or to procure a waiver of
such rights.
8.3.3 If the rights of the Work Product cannot be waived
or the Work Product is not deemed a "work for hire", the Executive hereby grants
the Company and its assigns a worldwide royalty-free license to reproduce,
distribute, modify, publicly display, sublicense and assign such rights in all
media or distribution technologies now known and hereinafter developed or
devised.
8.3.4 The Executive hereby appoints the Company as his
attorney in fact to execute and file any patent, copyright or other lawful
application with respect to the Work Product.
8.4 Non-Solicitation. During the Term and during the Severance
Period, the Executive will not, directly or indirectly, individually or on
behalf of other persons, solicit, aid or induce (i) any employee of the Company
or any of its affiliates to leave their employment with the Company or its
affiliates to accept employment with or render services to or with any person,
firm, corporation or other entity or assist or aid any other person, firm,
corporation or other entity in identifying or hiring away such employee, (ii)
any customer or vendor of the Company to alter its business relationship with
the Company or to purchase products or services then sold by the Company or its
affiliates from another person, firm, corporation or other entity or assist or
aid any other person or entity in identifying or soliciting any such customer or
vendor or (iii) any other remaining employee of the Company or its affiliates to
leave such employee's employment with the Company or its affiliates.
8.5 Conflict of Interest. The Executive shall exercise good
judgment and maintain high ethical standards in the course of his dealings so as
to preclude the possibility of a conflict between the interest of the Company
and his own personal interest. The Executive, therefore, has an obligation to
avoid any activity, agreement, personal interest, or other relationship or
situation which: (i) conflicts with the Company's best interest; (ii) interferes
with the Executive's responsibility to serve the Company to the best of the
Executive's ability; or (iii) gives the appearance of self dealing.
8.5.1 This policy requires that the Executive shall not
have any relationship, nor engage in any activity that might impair the
independence or judgment in the execution of the Executive's duties. The
Executive shall not have any direct or direct personal financial interests in
suppliers of property, goods or services that would affect his decisions or
actions on the Company's behalf. The Executive shall not accept gifts, benefits,
or unusual hospitality that would be reasonably likely to influence the
Executive in the performance of his duties.
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8.5.2 If any possible conflict of interest situation
arises, the Executive is responsible to immediately disclose the facts to the
President or Chief Executive Officer of the Company so that an evaluation may
determine whether a problem exists and, if so, to eliminate it.
8.6 Injunctive Relief/Legal Remedies. The Parties agree that the
remedy at law for any breach by the Executive of this Agreement and specifically
the provisions of Section 8 ("Restrictive Covenants"), will be inadequate and
that the Company or any of its subsidiaries or other successors or assigns shall
be entitled to injunctive relief without bond. Such injunctive relief shall not
be exclusive, but shall be in addition to any other rights and remedies Company
or any of its subsidiaries or their successors or assigns might have for such
breach.
8.6.1 The Executive acknowledges: (i) that compliance
with the restrictive provisions contained in Section 8 is necessary to protect
the business and goodwill of the Company and its subsidiaries, and (ii) that a
breach of this Agreement will result in irreparable and continuing damage to the
Company, for which monetary damages may not provide adequate relief.
Consequently, the Executive agrees that in the event of a breach or threatened
breach of any of the restrictive covenants described herein, the Company, at its
discretion, shall be entitled to seek both: (i) a preliminary and/or permanent
injunction in order to prevent such damage, or continuation of such damage, and
(ii) monetary damages as determinable. Nothing herein, however, shall be
construed to restrict and/or prohibit the Company from pursuing any and all
other remedies; the Executive acknowledges that all remedies are cumulative. The
Executive specifically acknowledges that the Executive shall account for and pay
over to the Company any profits, monies, accruals or other benefits derived or
received by the Executive as a result of any transaction constituting a breach
of the Restrictive Covenants in Section 8.
8.6.2 If any legal action arises to enforce the Company's
trade secrets, the prevailing party shall be entitled to recover any and all
damages, as well as all costs and expenses, including reasonable attorney's fees
incurred in enforcing or attempting to enforce the Company's trade secrets.
9. Nature of Company Business.
The Executive acknowledges that the Company, through one or more of its
affiliated companies, is currently involved in providing technical and creative
services to companies which produce and distribute television networks which
feature explicit and cable version adult movies and features and other
programming depicting sexual situations and/or nudity (the "Adult Business"). In
addition, the Executive acknowledges that the Company, through one or more of
its affiliated companies, may become involved in the Adult Business. The
Executive acknowledges that he will likely be exposed, from time to time, to one
or more aspects of the Adult Business during the course of his employment by the
Company. Furthermore, the
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Executive confirms that he is currently comfortable working in an environment
where some or all aspects of the Adult Business are present and would be
comfortable working for a company engaged in the Adult Business. If, at any
time, the Executive's view on the foregoing changes or the Executive otherwise
become uncomfortable with the nature of the Company's business, the Executive
agrees to promptly inform Senior Management. The Company will work with the
Executive to explore mutually acceptable means of accommodating the Executive's
concerns which, both parties acknowledge, may result in the termination of the
Executive's employment. Termination of the Executive's employment occasioned by
the Executive's desire not to be associated with the Company as a result of the
nature of its business shall be treated as a Voluntary Termination by the
Executive without Good Reason.
10. Arbitration.
10.1 Any and all disputes, controversies and claims arising out
of, or relating to, this Agreement, or with respect to the interpretation of
this Agreement, or the rights or obligations of the Parties and their successors
and permitted assigns, whether by operation of law or otherwise, shall be
settled and determined by arbitration in New York City, New York, pursuant to
the then existing rules of the American Arbitration Association ("AAA"), for
commercial arbitration. Each party shall pay their own legal fees. The losing
party shall pay the fees and costs imposed by the AAA; if neither party clearly
prevails in the arbitration, the parties shall request that the AAA appointed
arbitrator apportion the AAA's fees and costs between the parties.
10.2 The Parties covenant and agree that the decision of the AAA
shall be final and binding and hereby waive their right to appeal therefrom.
11. Miscellaneous.
11.1 Notices. Any notice, demand or communication required or
permitted under this Agreement shall be in writing and shall either be
hand-delivered to the other party or mailed to the addresses set forth below by
registered or certified mail, return receipt requested, or sent by overnight
express mail or courier or facsimile to such address, if a party has a facsimile
machine. Notice shall be deemed to have been given and received (i) when
hand-delivered or after three (3) business days when deposited in the U.S. Mail,
(ii) when transmitted and received by facsimile or sent by express mail properly
addressed to the other party. The addresses are:
To the Company:
Directrix, Inc.
536 Broadway, 10th Floor
New York, New York 10012
Facsimile: (212)
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Attn: Chief Executive Officer
To the Executive:
John R. Sharpe
(HomeStreet)
(HomeCity), (HomeState) (HomeZip)
The foregoing addresses may be changed at any time by either party by
notice given in the manner herein provided.
11.2 Integration; Modification. This Agreement, the
Indemnification Agreement executed contemporaneously herewith in the form
attached hereto as Exhibit B and the Company's Employee Manual constitutes the
entire understanding and agreement between the Company and the Executive
regarding its subject matter, and supersedes all prior negotiations and
agreements or interpretations, whether oral or written. This Agreement may not
be modified except by written agreement signed by the Executive and a duly
authorized officer of the Company.
11.3 Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the parties, including their respective heirs,
executors, successors and assigns, except that this Agreement may not be
assigned by the Executive.
11.4 Waiver of Breach. No waiver by either party of any condition
or of the breach by the other of any term or covenant contained in this
Agreement, whether conduct or otherwise, in any one (1) or more instances shall
be deemed or construed as a further or continuing waiver of any such condition
or breach or a waiver of any other condition, or the breach of any other term or
covenant set forth in this Agreement. Moreover, the failure of either party to
exercise any right hereunder shall not bar the later exercise thereof with
respect to other future breaches.
11.5 Governing Law. This Agreement shall be governed by the
internal laws of the State of New York, except that Section 10 shall be governed
by the Federal Arbitration Act, Title 9, U.S. Code.
11.6 Headings. The headings of the various sections and paragraphs
have been included herein for convenience only and shall not be considered in
interpreting this Agreement.
11.7 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one (1) and the same instrument.
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11.8 Due Authorization. The Company represents that all corporate
action required to authorize the execution, delivery and performance of this
Agreement has been duly taken.
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IN WITNESS WHEREOF, this Agreement has been executed by the Executive
and on behalf of the Company by its duly authorized officer on the day and year
first above written.
DIRECTRIX, INC.
By:
----------------------------------
(Signature)
-------------------------------------
Date
EXECUTIVE:
-------------------------------------
John R. Sharpe
-------------------------------------
Social Security No.
-------------------------------------
Date
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Exhibit 10.10
EMPLOYMENT AGREEMENT
Employment Agreement ("Agreement") effected as of this day
of , 1998, by and between Directrix, Inc. (the "Company" or
"Employer"), a Delaware corporation, and Rich Kirby (the "Executive")
(collectively the Company and the Executive are referred to as the "Parties").
INTRODUCTION
WHEREAS, the Parties desire to enter into an Agreement and to set forth
herein the terms and conditions of the Executive's employment by the Company.
Accordingly, in consideration of the mutual covenants and agreement set forth
herein and the mutual benefits to be derived herefrom, and intending to be
legally bound hereby, the Company and the Executive agree as follows:
1. Employment
1.1 Duties. The Company shall employ the Executive on the
terms and conditions set forth in this Agreement, as Executive Vice President
and Secretary. The Executive accepts such employment with the Company and shall
perform and fulfill such duties as are assigned to him hereunder consistent with
his status as a senior executive of the Company, devoting his best efforts and
all of his professional time and attention, to the performance and fulfillment
of his duties and to the advancement of the best interests of the Company,
subject only to the direction, approval, and control of the Company's President
and/or Chief Executive Officer, and specific directives of the Board of
Directors of the Company (collectively, "Senior Management"). In addition, and
without any additional consideration, the Executive is and/or may be requested
to serve as a director or as an employee and officer of any or all subsidiaries
of the Company. Unless otherwise indicated by the context, the "Company" shall
include the Company and all its subsidiaries.
1.2 Place of Performance. In connection with his employment
by the Company, the Executive shall be based in the New York, New York
metropolitan area, except for required travel on Company business. The Executive
may be required to relocate on a permanent or temporary basis consistent with
business necessity.
2. Term.
The Executive's employment under this Agreement shall commence as
of ,1998 (the "Commencement Date") and shall continue uninterrupted
up to and including the hour of midnight of December 31, 2001 (the "Term"),
unless otherwise terminated as provided for in Sections 7.1 or 7.3. The Term
shall be extended for successive one-year periods beginning ______, ____ and
each one-year anniversary thereafter on the terms in effect on the date of such
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renewal, unless a written notice not to extend is given by either party to the
other at least 90 days prior to the date the Terms otherwise would have expired.
3. Compensation.
3.1 Base Salary. During the Term the Executive shall receive
a minimum annual salary (the "Base Salary") payable in installments at such
times as the Company customarily pays its other senior executive employees (but
in any event no less often than bi-monthly), and calculated as follows:
3.1.1 The Base Salary to be paid to the Executive
during the Term shall be $183,750; and
3.1.2 For each Year beginning after December 31,
1999, the Company shall increase the Base Salary by an amount equal to five
percent (5%) of the prior year's Base Salary. Each such increase shall be
cumulative so that the Base Salary for each succeeding year shall include the
prior year's increase.
3.2 Health Insurance and Other Benefits. During the Term the
Executive shall be provided all employee benefits provided by the Company to its
management and all other Company salaried employees, including without
limitation, all medical insurance and life insurance plans or arrangements and
shall be entitled to participate in all pension, profit sharing, stock option
and any other employee benefit plan or arrangement established and maintained by
the Company for similarly situated employees, all subject, however, to the
Company rules and policies then in effect regarding participation therein.
During the Term, the benefits provided to the Executive, as described in the
preceding sentence, shall not be reduced except in accordance with the general
reduction of such benefits applicable to similarly situated employees generally,
but then only to the extent that such benefits are reduced for such other
similarly situated employees.
3.3 Automobile Allowance. During the Term, the Company shall
pay the Executive the sum of $850 per month as reimbursement for the costs of
owning, operating and parking of an automobile.
3.4 Health Club Membership. During the Term, the Company
shall pay the costs of one health club membership for the Executive.
4. Reimbursement of Expenses.
The Executive shall be reimbursed for all items of travel,
entertainment and miscellaneous expenses which the Executive reasonably incurs
in connection with the performance of his duties hereunder, provided that the
Executive submits to the Company on proper forms provided by the Company, such
statements and other evidence supporting such
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expenses as the Company may require and provided such expenses meet the
Company's policy concerning such matters.
5. Stock Options.
The Executive may be entitled to participate in all Company employee
stock option programs as determined by the Compensation Committee of the
Company's Board of Directors and approved by the Company's shareholders.
6. Vacations.
The Executive shall be entitled to not less than three (3) weeks of
paid vacation in any calendar year (prorated in any Year during which the
Executive is employed hereunder for less than the entire Year). Such vacation
shall be taken at such times as are consistent with the reasonable business
needs of the Company. Any vacation not taken during the year may not be taken by
the Executive in subsequent years except to the extent approved by the Company.
Upon termination of the Executive's employment for any reason, any vacation
earned by the Executive but not taken shall be forfeited.
7. Termination of Employment.
7.1 Death or Disability. If the Executive dies during the
Term, the Term shall terminate as of the date of the Executive's death. If the
Executive becomes Totally Disabled (as that term is defined below) for one
hundred eighty (180) days in the aggregate during any consecutive twelve-month
period during the Term, the Company shall have the right to terminate the Term
by giving the Executive thirty (30) days' prior written notice thereof, and upon
the expiration of such thirty-day period, the Executive's employment under this
Agreement shall terminate. If the Executive resumes his duties within thirty
(30) days after receipt of a notice of termination and continues to perform such
duties for four (4) consecutive weeks thereafter, the Term shall continue and
the notice of termination shall be considered null and void and of no effect.
Upon termination of the Term under this Section 7.1, the Company shall have no
further obligations or liabilities under this Agreement, except to pay to the
Executive's estate or the Executive, as the case may be: (i) the portion, if
any, that remains unpaid of the Base Salary for periods worked by the Executive
plus the excess of the Base Salary for the Severance Period over the amount
payable to the Executive under the Company's long-term disability plan during
such time (payable as if the Executive remained an employee of the Company); and
(ii) the amount of any expenses reimbursable in accordance with Section 4 above;
and (iii) any amounts due under any Company benefit, welfare or pension plan.
7.2 "Totally Disabled," as used herein, shall mean a mental
or physical condition which, in the reasonable opinion of an independent medical
doctor selected by the Company in its discretion, renders the Executive unable
or incompetent to carry out the material duties and responsibilities of the
Executive under this Agreement.
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7.3 Discharge for Cause. The Company may discharge the
Executive for "Cause" upon written notice (as defined in Section 11.1), and
thereby immediately terminate his employment under this Agreement. For purposes
of this Agreement, the Company shall have "Cause" to terminate the Executive's
employment if the Executive, in the reasonable good faith judgment of the
Company, (i) materially breaches any of his agreements, duties or obligations
under this Agreement and has not cured such breach within ten (10) days after
Company's written notice, including, without limitation, the Executive's failure
to perform his duties hereunder, other than a failure resulting from his illness
or sickness; (ii) willfully fails to carry out a material lawful directive of
the Board of Directors, the Chairman of the Board, and the President of the
Company; (iii) embezzles or converts to his own use any funds of the Company or
any client or customer of the Company; (iv) converts to his own use or destroys
any property of the Company having a significant value; (v) is in material
violation of any of the Company policies and/or procedures as identified in the
Company's Employee Manual; or (vi) is habitually drunk or intoxicated. If the
Executive is discharged for Cause, he shall receive only those amounts earned
but not distributed under the relevant plan, program or practice of the Company.
The Company and the Executive acknowledge that if the Company engages in the
Adult Business (as defined in Section 9), such business could be considered
controversial in some localities and could result in civil or criminal
litigation against the Company based upon obscenity and similar laws. The
Parties agree that, notwithstanding the other provisions of this Section, the
naming of the Executive in any such suit, and any conviction of the Executive or
plea bargain, settlement or other disposition of such litigation relating to the
Executive, shall not be considered Cause for the termination of the Executive's
employment, so long as the conduct of the Executive upon which such claim was
based consisted of the Executive carrying out his duties in good faith and in
accordance with directions of management of the Company.
7.4 Termination by Executive. The Executive may terminate
the Term of his employment:
7.4.1 upon failure by the Company to comply with the
material provisions of this Agreement, which failure is not cured within ten
(10) days after written notice (referred to herein as "Good Reason"); or
7.4.2 upon a "Change in Control of the Company" (as
defined in Section 7.6.1 below) upon thirty (30) days' prior written notice
given at any time within eighteen (18) months after a Change in Control; or
7.4.3 for any reason other than Good Reason or
following a Change in Control of the Company, which termination shall be
considered a "Voluntary Termination" by Executive.
7.5 Severance upon Termination. If, during the Term, the
Executive's employment is terminated by the Company without Cause, or the
Executive shall terminate employment for Good Reason prior to a Change in
Control of the Company (the date of
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termination is referred to as the "Termination Date"), then the Company shall
pay the Executive in lieu of other damages, an amount (the "Severance Payments")
equal to his then current Base Salary payable in installments at the same time
the Company pays salary to its other senior executive employees payable over the
longer of (i) the balance of the Term or (ii) one year (the period over which
the Severance Payments are made is referred to as the "Severance Period"). The
Company shall have no liability to make any Severance Payments as provided for
in this paragraph unless (i) the Executive executes a General Release in a form
substantially as set forth in Exhibit A attached hereto and (ii) the Executive
complies with all provisions in Section 8 (Restrictive Covenants). Such amount
shall reduce the amount of any other severance payment that otherwise would have
been payable to the Executive under any other Company plan, program or
arrangement. In addition, the Company shall maintain during the lesser of the
balance of the Term immediately prior to such termination or the Severance
Period all employee benefit plans and programs which the Executive participated
in immediately prior to such termination other than bonus, incentive
compensation and similar plans based on performance, provided the Executive's
participation is permissible under the general terms and provisions of such
plans and applicable law. In the event of a Voluntary Termination, the Executive
shall receive only his earned but unpaid Base Salary as of the date of his
termination.
7.6 Change in Control.
7.6.1 Definitions. For purposes of this Section 7.6,
a "Change in Control" shall mean a change in control of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of Regulation
14A, as in effect on the date of this Agreement, promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); provided, that
whether or not required to be reported under such Item 6(e), without limitation,
such a Change in Control shall be deemed to have occurred if (i) any "person" or
"group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing
25% or more of the combined voting power of the Company's then outstanding
securities; (ii) during any period of two consecutive years, individuals who, at
the beginning of such period, constitute the Board cease for any reason to
constitute at least a majority thereof unless the election, or the nomination
for election by the Company's stockholders, of each new director was approved by
a vote of at least three-fourths of the directors then still in office who were
directors at the beginning of the period; (iii) the Company's stockholders
approve an agreement to merge or consolidate the Company with another
corporation (other than a corporation 50% or more of which is controlled by, or
is under common control with, the Company); or (iv) any individual who is
nominated by the Board of Directors for election of the Board on any date fails
to be so elected as a direct or indirect result of any proxy fight or contested
election for positions on the Board of Directors; provided, however, that
notwithstanding the foregoing, no Change of Control shall be deemed to have
occurred pursuant to either clause (i) or (ii) above in the event of (and
notwithstanding any resultant change in the membership of the Board) an
acquisition by any group comprised of
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senior officers of the Company, including the Executive, of 25% or more of the
combined voting power of the Company's then outstanding securities.
7.6.2 Termination Payment. Notwithstanding any
provision of this Agreement, if, within eighteen (18) months following a Change
in Control of the Company, (a) the Executive's employment by the Company shall
be terminated by the Company other than as a result of the Executive becoming
Totally Disabled or for Cause or (b) the Executive terminates the Term pursuant
to Section 7.4.1, then the Executive shall be entitled to the benefits provided
below:
(1) The Company shall pay the Executive
full Base Salary through the Termination Date at the rate in effect at that
time, and shall pay the Executive for any vacation earned but not taken and the
amount, if any, of any bonus for a past Company fiscal year which has not yet
been awarded or paid;
(2) In lieu of any further salary
payments to the Executive for periods subsequent to the Termination Date, the
Company, subject to the limitation described below, shall pay to the Executive
on the 60th day following the Termination Date a lump sum amount equal to 2.99
times the sum of (i) the Base Salary and (ii) cash bonuses and other cash
compensation paid to the Executive during the 12 months preceding the
Termination Date ("Termination Payment"); and
(3) All stock options held by the
Executive shall be fully vested and remain outstanding for their full original
term unless sooner exercised.
7.6.3 Certain Additional Payments by the Company.
(1) Anything in this Agreement to the
contrary notwithstanding, in the event it shall be determined that any payment
or distribution to or for the benefit of the Executive (whether paid or payable
or distributed or distributable pursuant to the terms of this Agreement or
otherwise, but determined without regard to any additional payments required
under this Section 7.6.3 (a "Payment") would be subject to the excise tax
imposed by Section 4999 of the Code or any interest or penalties are incurred by
the Executive with respect to such excise tax (such excise tax, together with
any such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by the
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including, without limitation, any income taxes (and any
interest and penalties imposed with respect thereto) and Excise Tax imposed upon
the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments.
(2) Subject to the provisions of Section
7.6.3(3), all determinations required to be made under this Section 7.6.3,
including whether and when
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Gross-Up Payment is required and the amount of such Gross-Up Payment and the
assumptions to be utilized in arriving at such determination, shall be made by
Deloitte & Touche LLP (the "Accounting Firm"); provided, however, that the
Accounting Firm shall not determine that no Excise Tax is payable by the
Executive unless it delivers to the Executive a written opinion (the "Accounting
Opinion") that failure to report the Excise Tax on the Executive's applicable
federal income tax return would not result in the imposition of a negligence or
similar penalty. In the event that Deloitte & Touche LLP has served, at any time
during the two years immediately preceding a Change in Control Date, as
accountant or auditor for the individual, entity or group that is involved in
effecting or has any material interest in the Change in Control, the Executive
shall appoint another nationally recognized accounting firm to make the
determinations and perform the other functions specified in this Section 7.6.3
(which accounting firm shall then be referred to as the Accounting Firm
hereunder). All fees and expenses of the Accounting Firm shall be borne solely
by the Company. Within fifteen (15) business days of the receipt of notice from
the Executive that there has been a Payment, or such earlier time as is
requested by the Company, the Accounting Firm shall make all determinations
required under this Section 7.6.3, shall provide to the Company and the
Executive a written report setting forth such determinations, together with
detailed supporting calculations, and, if the Accounting Firm determines that no
Excise Tax is payable, shall deliver the Accounting Opinion to the Executive.
Any Gross-Up Payment, as determined pursuant to this Section 7.6.3, shall be
paid by the Company to the Executive within five (5) days of the receipt of the
Accounting Firm's determination. Subject to the remainder of this Section 7.6.3,
any determination by the Accounting Firm shall be binding upon the Company and
the Executive. As a result of the uncertainty in the application of Section 4999
of the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments which will not have been made
by the Company should have been made ("Underpayment"), consistent with the
calculations required to be made hereunder. In the event that it is ultimately
determined in accordance with the procedures set forth in Section 7.6.3(3) that
the Executive is required to make a payment of any Excise Tax, the Accounting
Firm shall determine the amount of the Underpayment that has occurred and any
such Underpayment shall be promptly paid by the Company to or for the benefit of
the Executive.
(3) The Executive shall notify the
Company in writing of any claims by the Internal Revenue Service that, if
successful, would require the payment by the Company of the Gross-Up Payment.
Such notification shall be given as soon as practicable but no later than thirty
(30) days after the Executive actually receives notice in writing of such claim
and shall apprise the Company of the nature of such claim and the date on which
such claim is requested to be paid; provided, however, that the failure of the
Executive to notify the Company of such claim (or to provide any required
information with respect thereto) shall not affect any rights granted to the
Executive under this Section 7.6.3 except to the extent that the Company is
materially prejudiced in the defense of such claim as a direct result of such
failure. The Executive shall not pay such claim prior to the expiration of the
30-day period following the date on which he gives such notice to the Company
(or such shorter period ending on the date that any payment of taxes with
respect to such claim is due). If the Company notifies the
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Executive in writing prior to the expiration of such period that it desires to
contest such claim, the Executive shall:
(i) give the Company any information
reasonably requested by the Company relating to such claim;
(ii) take such action in connection
with contesting such claim as the Company shall reasonably request
in writing from time to time, including, without limitation,
accepting legal representation with respect to such claim by an
attorney selected by the Company and reasonably acceptable to the
Executive;
(iii) cooperate with the Company in
good faith in order effectively to contest such claim; and
(iv) if the Company elects not to
assume and control the defense of such claim, permit the Company
to participate in any proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold
the Executive harmless, on an after-tax basis, for any Excise Tax or
income tax (including interest and penalties with respect thereto)
imposed as a result of such representation and payment of costs and
expenses. Without limitation on the foregoing provisions of this
Section 7.6.3, the Company shall have the right, at its sole option, to
assume the defense of and control all proceedings in connection with
such contest, in which case it may pursue or forego any and all
administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim, and may either direct the
Executive to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and the Executive agrees to prosecute
such contest to a determination before any administrative tribunal, in
a court of initial jurisdiction and in one or more appellate courts, as
the Company shall determine; provided, however, that if the Company
directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on
an interest-free basis, and shall indemnify and hold the Executive
harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with
respect to such advance or with respect to any imputed income with
respect to such advance; and further provided, that any extension of
the statute of limitations relating to payment of taxes for the taxable
year of the Executive with respect to which such contested amount is
claimed to be due is limited solely to such contested amount.
Furthermore, the Company's right to assume the defense of and control
the contest shall be limited to issues with respect to which a Gross-Up
Payment would be payable hereunder and the Executive shall be entitled
to settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
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(4) If, after the receipt by the
Executive of an amount advanced by the Company pursuant to Section 7.6.3(3) the
Executive becomes entitled to receive any refund with respect to such claim, the
Executive shall (subject to the Company's complying with the requirements of
Section 7.6.3(3)) promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 7.6.3(3) a determination is made that the Executive
shall not be entitled to any refund with respect to such claim, and the Company
does not notify the Executive in writing of its intent to contest such denial of
refund prior to the expiration of thirty (30) days after such determination,
then such advance shall be forgiven and shall not be required to be repaid and
the amount of such advance shall offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid.
8. Restrictive Covenants.
8.1 Covenant Not to Compete. The Executive recognizes that
in each of the highly competitive businesses in which the Company is engaged,
personal contact is of primary importance in securing new customers and in
retaining the accounts and goodwill of present customers and protecting the
business of the Company. The Executive, therefore, agrees that during the
Employment Period and, if the Executive's employment is terminated for Cause,
for one year following the Termination Date, or for any other reason other than
the Executive becoming Totally Disabled or the Executive terminating his
employment for Good Reason, during the Severance Period, he will not, with
respect to the television programming services industry or the adult television
entertainment industries, in the United States, Canada and Europe (the "Relevant
Geographic Area"), (i) accept employment or render service to any Person that is
engaged in a business directly competitive with the business then engaged in by
the Company or any of its affiliated companies or (ii) enter into or take part
in or lend his name, counsel or assistance to any business, either as
proprietor, principal, investor, partner, director, officer, executive,
consultant, advisor, agent, independent contractor, or in any other capacity
whatsoever, for any purpose that would be competitive with the business of the
Company or any of its affiliated companies (all of the foregoing activities are
collectively referred to as the "Prohibited Activity"). For these purposes, the
adult television entertainment industries shall refer to television channels,
networks or programming services which distribute explicit adult entertainment
via C-Band satellite or via the Internet and which are or would be if operated
in the United States subject to regulation under Section 505 of the
Telecommunications Act of 1996, regardless of the basis on which such
programming is sold.
8.2 Non-Disclosure of Information. The Executive shall:
8.2.1 Never, directly or indirectly, disclose to any
person or entity for any reason, or use for his own personal benefit, any
"Confidential Information" as hereinafter defined; and
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8.2.2 At all times take all reasonable precautions
necessary to protect from loss or disclosure by Executive or his subordinates
any and all documents or other information containing, referring, or relating to
such Confidential Information. Upon termination of employment with the Company
for any reason, the Executive shall promptly return to the Company any and all
documents or other tangible property containing, referring, or relating to such
Confidential Information, whether prepared by him or others.
8.2.3 Notwithstanding any provision to the contrary
in Section 8, this paragraph shall not apply to information which the Executive
is called upon by legal process (including, without limitation, by subpoena or
discovery requirement) to disclose or any information which has become part of
the public domain or is otherwise publicly disclosed through no fault or action
of the Executive.
8.2.4 For purposes of this Agreement, "Confidential
Information" shall mean any information relating in any way to the business of
the Company disclosed to or known to the Executive as a consequence of, result
of, or through the Executive's employment by the Company which may consist of,
but not be limited to, technical and non-technical information about the
Company's proprietary products, processes, programs, concepts, forms, business
methods, data, any and all financial and accounting data, employees, marketing,
customers, customer lists, and services and information corresponding thereto
acquired by the Executive during the term of the Executive's employment by the
Company. Confidential Information shall not include any of such items which arc
published or are otherwise part of the public domain, or freely available from
trade sources or otherwise.
8.2.5 Upon termination of this Agreement for any
reason, the Executive shall return to a designated officer of the Company all
equipment and/or tangible property then in the Executive's possession or custody
which belongs or relates to the Company, including, without limitation, copies
or reproductions of correspondence, memoranda, reports, notebooks, drawings,
photographs, data base, or any other documents or electronically stored
information which constitutes Confidential Information.
8.3 Trade Secrets - Intellectual Property Rights. The
Executive shall provide the Company with any copyrightable work, trade secrets
and other protectable intellectual property developed or produced by the
Executive while in the employ of the Company pursuant to this Agreement
(collectively, "Work Product").
8.3.1 All Work Product shall be considered works
made for hire and shall be the exclusive property of the Company and the Company
shall be considered the author and/or creator of such work for worldwide
copyright purposes and renewals and extensions thereof. The Company may request,
at its own cost and expense, that the Executive assist the Company in obtaining
worldwide patent, copyright and other property rights for the Work Product.
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8.3.2 If the Executive's rights in the Work Product
cannot be assigned to the Company, the Executive waives enforcement of all such
rights against the Company. The Executive further agrees to join in any action,
at the Company's sole cost and expense, to enforce or to procure a waiver of
such rights.
8.3.3 If the rights of the Work Product cannot be
waived or the Work Product is not deemed a "work for hire", the Executive hereby
grants the Company and its assigns a worldwide royalty-free license to
reproduce, distribute, modify, publicly display, sublicense and assign such
rights in all media or distribution technologies now known and hereinafter
developed or devised.
8.3.4 The Executive hereby appoints the Company as
his attorney in fact to execute and file any patent, copyright or other lawful
application with respect to the Work Product.
8.4 Non-Solicitation. During the Term and during the
Severance Period, the Executive will not, directly or indirectly, individually
or on behalf of other persons, solicit, aid or induce (i) any employee of the
Company or any of its affiliates to leave their employment with the Company or
its affiliates to accept employment with or render services to or with any
person, firm, corporation or other entity or assist or aid any other person,
firm, corporation or other entity in identifying or hiring away such employee,
(ii) any customer or vendor of the Company to alter its business relationship
with the Company or to purchase products or services then sold by the Company or
its affiliates from another person, firm, corporation or other entity or assist
or aid any other person or entity in identifying or soliciting any such customer
or vendor or (iii) any other remaining employee of the Company or its affiliates
to leave such employee's employment with the Company or its affiliates.
8.5 Conflict of Interest. The Executive shall exercise good
judgment and maintain high ethical standards in the course of his dealings so as
to preclude the possibility of a conflict between the interest of the Company
and his own personal interest. The Executive, therefore, has an obligation to
avoid any activity, agreement, personal interest, or other relationship or
situation which: (i) conflicts with the Company's best interest; (ii) interferes
with the Executive's responsibility to serve the Company to the best of the
Executive's ability; or (iii) gives the appearance of self dealing.
8.5.1 This policy requires that the Executive shall
not have any relationship, nor engage in any activity that might impair the
independence or judgment in the execution of the Executive's duties. The
Executive shall not have any direct or direct personal financial interests in
suppliers of property, goods or services that would affect his decisions or
actions on the Company's behalf. The Executive shall not accept gifts, benefits,
or unusual hospitality that would be reasonably likely to influence the
Executive in the performance of his duties.
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8.5.2 If any possible conflict of interest situation
arises, the Executive is responsible to immediately disclose the facts to the
President or Chief Executive Officer of the Company so that an evaluation may
determine whether a problem exists and, if so, to eliminate it.
8.6 Injunctive Relief/Legal Remedies. The Parties agree that
the remedy at law for any breach by the Executive of this Agreement and
specifically the provisions of Section 8 ("Restrictive Covenants"), will be
inadequate and that the Company or any of its subsidiaries or other successors
or assigns shall be entitled to injunctive relief without bond. Such injunctive
relief shall not be exclusive, but shall be in addition to any other rights and
remedies Company or any of its subsidiaries or their successors or assigns might
have for such breach.
8.6.1 The Executive acknowledges: (i) that
compliance with the restrictive provisions contained in Section 8 is necessary
to protect the business and goodwill of the Company and its subsidiaries, and
(ii) that a breach of this Agreement will result in irreparable and continuing
damage to the Company, for which monetary damages may not provide adequate
relief. Consequently, the Executive agrees that in the event of a breach or
threatened breach of any of the restrictive covenants described herein, the
Company, at its discretion, shall be entitled to seek both: (i) a preliminary
and/or permanent injunction in order to prevent such damage, or continuation of
such damage, and (ii) monetary damages as determinable. Nothing herein, however,
shall be construed to restrict and/or prohibit the Company from pursuing any and
all other remedies; the Executive acknowledges that all remedies are cumulative.
The Executive specifically acknowledges that the Executive shall account for and
pay over to the Company any profits, monies, accruals or other benefits derived
or received by the Executive as a result of any transaction constituting a
breach of the Restrictive Covenants in Section 8.
8.6.2 If any legal action arises to enforce the
Company's trade secrets, the prevailing party shall be entitled to recover any
and all damages, as well as all costs and expenses, including reasonable
attorney's fees incurred in enforcing or attempting to enforce the Company's
trade secrets.
9. Nature of Company Business.
The Executive acknowledges that the Company, through one or more of its
affiliated companies, is currently involved in providing technical and creative
services to companies which produce and distribute television networks which
feature explicit and cable version adult movies and features and other
programming depicting sexual situations and/or nudity (the "Adult Business"). In
addition, the Executive acknowledges that the Company, through one or more of
its affiliated companies, may become involved in the Adult Business. The
Executive acknowledges that he will likely be exposed, from time to time, to one
or more aspects of the Adult Business during the course of his employment by the
Company. Furthermore, the
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Executive confirms that he is currently comfortable working in an environment
where some or all aspects of the Adult Business are present and would be
comfortable working for a company engaged in the Adult Business. If, at any
time, the Executive's view on the foregoing changes or the Executive otherwise
become uncomfortable with the nature of the Company's business, the Executive
agrees to promptly inform Senior Management. The Company will work with the
Executive to explore mutually acceptable means of accommodating the Executive's
concerns which, both parties acknowledge, may result in the termination of the
Executive's employment. Termination of the Executive's employment occasioned by
the Executive's desire not to be associated with the Company as a result of the
nature of its business shall be treated as a Voluntary Termination by the
Executive without Good Reason.
10. Arbitration.
10.1 Any and all disputes, controversies and claims arising
out of, or relating to, this Agreement, or with respect to the interpretation of
this Agreement, or the rights or obligations of the Parties and their successors
and permitted assigns, whether by operation of law or otherwise, shall be
settled and determined by arbitration in New York City, New York, pursuant to
the then existing rules of the American Arbitration Association ("AAA"), for
commercial arbitration. Each party shall pay their own legal fees. The losing
party shall pay the fees and costs imposed by the AAA; if neither party clearly
prevails in the arbitration, the parties shall request that the AAA appointed
arbitrator apportion the AAA's fees and costs between the parties.
10.2 The Parties covenant and agree that the decision of the
AAA shall be final and binding and hereby waive their right to appeal therefrom.
11. Miscellaneous.
11.1 Notices. Any notice, demand or communication required or
permitted under this Agreement shall be in writing and shall either be
hand-delivered to the other party or mailed to the addresses set forth below by
registered or certified mail, return receipt requested, or sent by overnight
express mail or courier or facsimile to such address, if a party has a facsimile
machine. Notice shall be deemed to have been given and received (i) when
hand-delivered or after three (3) business days when deposited in the U.S. Mail,
(ii) when transmitted and received by facsimile or sent by express mail properly
addressed to the other party. The addresses are:
To the Company:
Directrix, Inc.
536 Broadway, 10th Floor
New York, New York 10012
Facsimile: (212)
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Attn: Chief Executive Officer
To the Executive:
Rich Kirby
80 Kent Drive
Cortlandt, New York 10566
The foregoing addresses may be changed at any time by either party by
notice given in the manner herein provided.
11.2 Integration; Modification. This Agreement, the
Indemnification Agreement executed contemporaneously herewith in the form
attached hereto as Exhibit B and the Company's Employee Manual constitutes the
entire understanding and agreement between the Company and the Executive
regarding its subject matter, and supersedes all prior negotiations and
agreements or interpretations, whether oral or written. This Agreement may not
be modified except by written agreement signed by the Executive and a duly
authorized officer of the Company.
11.3 Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the parties, including their respective heirs,
executors, successors and assigns, except that this Agreement may not be
assigned by the Executive.
11.4 Waiver of Breach. No waiver by either party of any
condition or of the breach by the other of any term or covenant contained in
this Agreement, whether conduct or otherwise, in any one (1) or more instances
shall be deemed or construed as a further or continuing waiver of any such
condition or breach or a waiver of any other condition, or the breach of any
other term or covenant set forth in this Agreement. Moreover, the failure of
either party to exercise any right hereunder shall not bar the later exercise
thereof with respect to other future breaches.
11.5 Governing Law. This Agreement shall be governed by the
internal laws of the State of New York, except that Section 10 shall be governed
by the Federal Arbitration Act, Title 9, U.S. Code.
11.6 Headings. The headings of the various sections and
paragraphs have been included herein for convenience only and shall not be
considered in interpreting this Agreement.
11.7 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one (1) and the same instrument.
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11.8 Due Authorization. The Company represents that all
corporate action required to authorize the execution, delivery and performance
of this Agreement has been duly taken.
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IN WITNESS WHEREOF, this Agreement has been executed by the Executive
and on behalf of the Company by its duly authorized officer on the day and year
first above written.
DIRECTRIX, INC.
By:
-----------------------------------
(Signature)
--------------------------------------
Date
EXECUTIVE:
--------------------------------------
Rich Kirby
--------------------------------------
Social Security No.
--------------------------------------
Date
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Exhibit 10.11
DIRECTRIX, INC.
STOCK INCENTIVE PLAN
(as adopted July 25, 1998)
1. Purpose of the Plan
This Directrix, Inc. Stock Incentive Plan is intended to promote the
interests of the Company and its stockholders by providing the Company's key
employees and certain consultants to the Company, on whose judgment, initiative
and efforts the successful conduct of the business of the Company largely
depends, and who are largely responsible for the management, growth and
protection of the business of the Company, with appropriate incentives and
rewards to encourage them to continue their Employment with the Company and to
maximize their performance and to provide certain "performance-based
compensation" within the meaning of Section 162(m)(4)(C) of the Code.
2. Definitions
As used in the Plan, the following definitions apply to the terms
indicated below:
(a) "Affiliate" shall mean any entity (whether or not incorporated)
controlling, controlled by or under common control with the Company.
(b) "Board of Directors" shall mean the Board of Directors of the
Company.
(c) "Cash Bonus" shall mean an award of a bonus payable in cash
pursuant to Section 13 hereof.
(d) "Cause" shall mean, when used in connection with a Participant's
Termination of Employment:
(i) to the extent that there is an employment, severance or other
agreement governing the relationship between the Participant and the
Company, which agreement contains a definition of "cause", Cause will
consist of those acts or omissions that would constitute "cause" under
such agreement; and otherwise
(ii) the Participant's Termination of Employment by the Company or
an Affiliate on account of any one or more of the following:
(A) any failure by the Participant substantially to perform
the Participant's employment duties;
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(B) any excessive unauthorized absenteeism by the
Participant;
(C) any refusal by the Participant to obey the lawful orders
of the Board of Directors or any other person or committee to whom
the Participant reports;
(D) any act or omission by the Participant that is or may be
injurious to the Company, monetarily or otherwise;
(E) any act by the Participant that is competitive with the
best interests of the Company;
(F) the Participant's material violation of any of the
Company's policies, including, without limitation, those policies
relating to discrimination or sexual harassment;
(G) the Participant's unauthorized (a) removal from the
premises of the Company or Affiliate of any document (in any
medium or form) relating to the Company or an Affiliate or the
customers of the Company or an Affiliate or (b) disclosure to any
person or entity of any of the Company's confidential or
proprietary information;
(H) the Participant's commission of any felony, or any other
crime involving moral turpitude; and
(I) the Participant's commission of any act involving
dishonesty or fraud.
Any rights the Company may have hereunder in respect of the events
giving rise to Cause shall be in addition to the rights the Company may have
under any other agreement with a Participant or at law or in equity. Any
determination of whether a Participant's Employment is (or is deemed to have
been) terminated for Cause shall be made by the Committee in its discretion,
which determination shall be final and binding on all parties. If, subsequent to
a Participant's voluntary Termination of Employment or involuntary Termination
of Employment without Cause, it is discovered that the Participant's Employment
could have been terminated for Cause, such Participant's Employment shall be
deemed to have been terminated for Cause. A Participant's Termination of
Employment for Cause shall be effective as of the date of the occurrence of the
event giving rise to Cause, regardless of when the determination of Cause is
made.
(e) "Change in Control" shall mean the occurrence of any of the
following:
(i) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act) other than an employee benefit plan sponsored or
maintained by the Company (or any trustee of such plan acting as
trustee) (an "Acquiring Person") becomes the "beneficial owner" (as
such term is defined in Rule 13d-3 promulgated under the
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Exchange Act), directly or indirectly, of securities of the Company
representing 25% or more of the combined voting power of the Company's
then outstanding securities;
(ii) A change in the composition of the Board of Directors during
any period of two consecutive years beginning on or after July 25, 1998
such that individuals who, at the beginning of such period, constitute
the Board of Directors cease for any reason to constitute at least a
majority thereof unless the election, or the nomination for election by
the Company's stockholders, of each new director was approved by a vote
of at least three-fourths of the directors then still in office who
were directors at the beginning of the period.
(iii) the Company's stockholders approve an agreement to merge or
consolidate the Company with another corporation (other than a
corporation 50% or more of which is controlled by, or is under common
control with, the Company);
(iv) any individual who is nominated by the Board of Directors for
election of the Board on any date fails to be so elected as a direct or
indirect result of any proxy fight or contested election for positions
on the Board of Directors;
(v) a "change in control" of the Company of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Exchange Act; or
(vi) a majority of the Board of Directors determines in its sole
and absolute discretion that there has been a Change in Control of the
Company or that there will be a Change in Control of the Company upon
the occurrence of certain specified events and such events occur.
Provided, however, that notwithstanding the foregoing, no Change of
Control shall be deemed to have occurred pursuant to either clause (i) or (ii)
above in the event any group comprised of senior officers of the Company
acquires 25% or more of the combined voting power of the Company's then
outstanding securities (notwithstanding any resultant change in the membership
of the Board).
(f) "Code" shall mean the Internal Revenue Code of 1986.
(g) "Committee" shall mean the Compensation Committee of the Board of
Directors or such other committee as the Board of Directors shall appoint from
time to time to administer the Plan; provided, however, that the Committee shall
at all times consist of two or more persons. The Committee shall consist solely
of individuals who are (or grants shall be made by a subcommittee of two or more
persons, each of whom shall be) a "non-employee director" within the meaning of
Rule 16b-3. Each member of the Committee shall be an "outside director" within
the meaning of Section 162(m) of the Code.
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(h) "Company" shall mean Directrix, Inc. or any successor thereto.
(i) "Company Stock" shall mean the common stock of the Company.
(j) "Disability" shall mean, except in connection with an Incentive
Stock Option, any physical or mental condition that would qualify a Participant
for a disability benefit under the long-term disability plan maintained by the
Company or, if there is no such plan, a physical or mental condition that
prevents the Participant from performing the essential functions of the
Participant's position (with or without reasonable accommodation) for a period
of six consecutive months or, in connection with an Incentive Stock Option, a
disability described in Section 422(c)(6) of the Code. The existence of a
Disability shall be determined by the Committee in its absolute discretion.
(k) "Dividend Equivalent Right" shall mean an Incentive Award granted
pursuant to Section 14 hereof of a right to receive an amount equivalent to the
ordinary cash dividends paid in respect to some or all of the shares of Company
Stock underlying an Incentive Award.
(l) "Employment" shall mean, in the case of a Participant who is not an
employee of the Company, the Participant's association with the Company or an
Affiliate as a consultant.
(m) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
(n) "Fair Market Value" shall mean, with respect to a share of Company
Stock on an applicable date:
(i) If Company Stock is traded on a national securities exchange,
(A) the average of the high and low reported sales price regular way
per share of Company Stock on the principal national securities
exchange on which Company Stock is traded or (B) if no reported sales
take place on the applicable date, the average of the highest bid and
lowest asked price of Company Stock on such exchange or (C) if no such
quotation is made on such date, on the next preceding day (not more
than 10 business days prior to the applicable date) on which there were
reported sales or such quotations.
(ii) If Company Stock is not traded on a national securities
exchange but quotations are available for Company Stock on the
over-the-counter market, (A) the mean between the highest bid and
lowest asked quotation on the over-the-counter market as reported by
the National Quotations Bureau, or any similar organization, on the
applicable date or (B) if no such quotation is made on such date on the
next preceding day (not more than 10 business days prior to the
applicable date) on which there were such quotations.
(iii) If Company Stock is neither traded on a national securities
exchange nor are quotations therefor available on the over-the-counter
market or if there are no sales or
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quotations in the 10 business days immediately prior to the applicable
date, as determined in good faith by the Committee in a manner
consistently applied.
(o) "Incentive Award" shall mean an Option, LSAR, Tandem SAR,
Stand-Alone SAR, Dividend Equivalent Right, share of Restricted Stock, share of
Phantom Stock, Stock Bonus, Cash Bonus or other equity-based award granted
pursuant to the terms of the Plan.
(p) "Incentive Stock Option" shall mean an Option that is an "incentive
stock option" within the meaning of Section 422 of the Code and that is
identified as an Incentive Stock Option in the agreement by which it is
evidenced.
(q) "Issue Date" shall mean the date established by the Committee on
which certificates representing shares of Restricted Stock shall be issued by
the Company pursuant to the terms of Section 10(d) hereof.
(r) "LSAR" shall mean a limited stock appreciation right that is
granted pursuant to the provisions of Section 7 hereof and that relates to an
Option. Each LSAR shall be exercisable only upon the occurrence of a Change in
Control and only in the alternative to the exercise of its related Option.
(s) "Non-Qualified Stock Option" shall mean an Option that is not an
Incentive Stock Option.
(t) "Option" shall mean an option to purchase shares of Company Stock
granted pursuant to Section 6 hereof. Each Option shall be identified as either
an Incentive Stock Option or a Non-Qualified Stock Option in the agreement by
which it is evidenced.
(u) "Participant" shall mean an employee of, or consultant to, the
Company or an Affiliate who is eligible to participate in the Plan and to whom
an Incentive Award is granted pursuant to the Plan, and, upon his death, the
employee's successors, heirs, executors and administrators, as the case may be.
(v) "Person" shall mean a "person," as such term is used in Sections
13(d) and 14(d) of the Exchange Act.
(w) "Phantom Stock" shall mean the right to receive in cash the Fair
Market Value of a share of Company Stock, which right is granted pursuant to
Section 11 hereof and subject to the terms and conditions contained therein.
(x) "Plan" shall mean this Directrix, Inc. Stock Incentive Plan, as it
may be amended from time to time.
(y) "Reload Option" shall mean an Option granted to a Participant in
accordance with Section 6 hereof upon the exercise of an Option.
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(z) "Restricted Stock" shall mean a share of Company Stock that is
granted pursuant to the terms of Section 10 hereof and that is subject to the
restrictions set forth in Section 10(c) hereof for so long as such restrictions
continue to apply to such share.
(aa) "SAR shall mean a Tandem SAR, Stand-Alone SAR or LSAR.
(bb) "Securities Act" shall mean the Securities Act of 1933, as amended
from time to time.
(cc) "Stand-Alone SAR" shall mean a stock appreciation right granted
pursuant to Section 9 hereof that is not related to any Option.
(dd) "Stock Bonus" shall mean a grant of a bonus payable in shares of
Company Stock pursuant to Section 12 hereof.
(ee) "Tandem SAR" shall mean a stock appreciation right granted
pursuant to Section 8 hereof that is related to an Option. Each Tandem SAR shall
be exercisable only to the extent its related Option is exercisable and only in
the alternative to the exercise of its related Option.
(ff) "Termination of Employment" shall mean a Participant's ceasing to
be employed by the Company and any Affiliates or by a corporation assuming
Incentive Awards in a transaction to which section 424(a) of the Code applies.
The Committee may determine, in its absolute discretion (i) whether any leave of
absence or absence in military or government service constitutes a Termination
of Employment for purposes of the Plan, subject to applicable law, (ii) the
effect, if any, of any such leave of absence on Incentive Awards granted under
the Plan, and (iii) when a change in a non-employee's association with the
Company constitutes a Termination of Employment for purposes of the Plan.
(gg) "Vesting Date" shall mean the date established by the Committee on
which a share of Restricted Stock or Phantom Stock may vest.
3. Stock Subject to the Plan
(a) Plan Limit
Subject to adjustment as provided in Section 16 hereof, the Committee
may grant Incentive Awards hereunder with respect to a number of shares of
Company Stock that in the aggregate does not exceed 200,000 shares. The grant of
an LSAR, Tandem SAR or Dividend Equivalent Right shall not reduce the number of
shares of Company Stock with respect to which Incentive Awards may be granted
pursuant to the Plan. Incentive Awards granted under the Plan shall count
against the foregoing limits at the time they are granted but shall again become
available for grant under the Plan as follows:
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(i) To the extent that any Options, together with any related
rights granted under the Plan, terminate, expire or are canceled
without having been exercised (including a cancellation resulting from
the exercise of a related LSAR or a Tandem SAR) the shares covered by
such Options shall again be available for grant under the Plan.
(ii) To the extent that any Stand-Alone SARs terminate, expire or
are canceled without having been exercised, the shares covered by such
Stand-Alone SARs shall again be available for grant under the Plan.
(iii) To the extent any shares of Restricted Stock or Phantom
Stock, or any shares of Company Stock granted as a Stock Bonus are
forfeited or canceled for any reason, such shares (together with any
related Cash Bonuses) shall again be available for grant under the
Plan.
Shares of Company Stock issued under the Plan may be either newly
issued shares or treasury shares, at the discretion of the Committee.
(b) Individual Limit
Subject to adjustment as provided in Section 14 hereof, the Committee
shall not, during any calendar year, grant any one Participant Incentive Awards
hereunder with respect to more than 20,000 shares of Company Stock. Such
Incentive Awards may be made up entirely of any one type of Incentive Award or
any combination of types of Incentive Awards available under the Plan, in the
Committee's sole discretion. Once granted to a Participant, Incentive Awards
shall not again be available for grant to that Participant. The grant of an
LSAR, Tandem SAR or Dividend Equivalent Right shall not reduce the number of
shares of Company Stock with respect to which Incentive Awards may be granted to
any Participant pursuant to the Plan.
4. Administration of the Plan
The Plan shall be administered by the Committee. The Committee shall
from time to time designate the key employees of the Company and its Affiliates
who shall be granted Incentive Awards and the amount and type of such Incentive
Awards.
The Committee shall have full authority to administer the Plan,
including authority to interpret and construe any provision of the Plan and the
terms of any Incentive Award issued under it, and to adopt such rules and
regulations for administering the Plan as it may deem necessary or appropriate.
Decisions of the Committee shall be final and binding on all parties. The
Committee's determinations under the Plan may, but need not, be uniform and may
be made on a Participant-by-Participant basis (whether or not two or more
Participants are similarly situated).
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The Committee may, in its absolute discretion, without amendment to the
Plan, (i) accelerate the date on which any Option or Stand-Alone SAR granted
under the Plan becomes exercisable or otherwise adjust any of the terms of such
Option or Stand-Alone SAR (except that no such adjustment shall, without the
consent of a Participant, reduce the Participant's rights under any previously
granted and outstanding Incentive Award unless the Committee determines that
such adjustment is necessary or appropriate to prevent such Incentive Award from
constituting "applicable employee remuneration" within the meaning of Section
162(m) of the Code), (ii) accelerate the Vesting Date or Issue Date, or waive
any condition imposed hereunder, with respect to any share of Restricted Stock
granted under the Plan or otherwise adjust any of the terms of such Restricted
Stock and (iii) accelerate the Vesting Date or waive any condition imposed
hereunder, with respect to any share of Phantom Stock granted under the Plan or
otherwise adjust any of the terms of such Phantom Stock.
In addition, the Committee may, in its absolute discretion and without
amendment to the Plan, grant Incentive Awards of any type to Participants on the
condition that such Participants surrender to the Committee for cancellation
such other Incentive Awards of the same or any other type (including, without
limitation, Incentive Awards with higher exercise prices or values) as the
Committee specifies. Notwithstanding Section 3(a) hereof, prior to the surrender
of such other Incentive Awards, Incentive Awards granted pursuant to the
preceding sentence of this Section 4 shall not count against the limits set
forth in such Section 3(a).
No member of the Committee shall be liable for any action, omission, or
determination relating to the Plan, and the Company shall indemnify and hold
harmless each member of the Committee and each other director or employee of the
Company to whom any duty or power relating to the administration or
interpretation of the Plan has been delegated against any cost or expense
(including counsel fees) or liability (including any sum paid in settlement of a
claim with the approval of the Committee) arising out of any action, omission or
determination relating to the Plan, unless, in either case, such action,
omission or determination was taken or made by such member, director or employee
in bad faith and without reasonable belief that it was in the best interests of
the Company.
Notwithstanding anything in the Plan to the contrary, until the Board
of Directors shall have appointed the members of the Committee, the Board of
Directors shall administer the Plan. In addition, the Board of Directors may, in
its sole discretion, at any time and from time to time, grant Incentive Awards
or resolve to administer the Plan in which case, to the extent provided in such
resolutions, the Board of Directors shall have the powers of the Committee.
5. Eligibility
The persons who shall be eligible to receive Incentive Awards pursuant
to the Plan shall be those key employees of the Company and its Affiliates
(including prospective employees, which Incentive Awards shall be conditioned on
the prospective employees actually becoming employees) and certain consultants
to the Company and its Affiliates who are largely responsible for the
management, growth and protection of the business of the Company and its
Affiliates
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(including officers of the Company, whether or not they are directors of the
Company) as the Committee shall select from time to time. Except with respect to
certain consultants to the Company and its Affiliates as noted immediately
above, individuals who are not (or are not expected to be) classified as
employees of the Company or an Affiliate for purposes of the Company's or an
Affiliate's payroll shall not be eligible to receive Incentive Awards under the
Plan.
6. Options
The Committee may grant Options pursuant to the Plan. Such Options
shall be evidenced by agreements in such form as the Committee shall from time
to time approve. Options shall comply with and be subject to the following terms
and conditions:
(a) Identification of Options
All Options granted under the Plan shall be clearly identified in the
agreement evidencing such Options as either Incentive Stock Options or as
Non-Qualified Stock Options.
(b) Conditions to Issuance and Excercisability
At the time of the grant of any Options under the Plan, the Committee
may impose such restrictions or conditions, not inconsistent with the provisions
hereof, to the issuance or excercisability of the Options, as the Committee, in
its absolute discretion, deems appropriate. By way of example and not by way of
limitation, the Committee may require, as a condition to the issuance or
exercisability of any Options, that the Participant or the Company achieve such
performance criteria as the Committee may specify at the time of the grant of
such shares.
(c) Exercise Price
The exercise price of any Non-Qualified Stock Option granted under the
Plan shall be such price as the Committee shall determine (which may be equal
to, less than or greater than the Fair Market Value of a share of Company Stock
on the date such Non-Qualified Stock Option is granted) on the date on which
such Non-Qualified Stock Option is granted; provided, that such price may not be
less than the minimum price required by law. Subject to Paragraph (d) of this
Section 6, the exercise price-per-share of any Incentive Stock Option granted
under the Plan shall be not less than 100% of the Fair Market Value of a share
of Company Stock on the date on which such Incentive Stock Option is granted
(except as permitted in connection with the assumption or issuance of Options in
a transaction to which Section 424(a) of the Code applies) and, the exercise
price-per-share of such Option shall be not less than 100% of the Fair Market
Value of a share of Company Stock on the date on which such Option is granted.
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(d) Term and Exercise of Options
(i) Each Option shall be exercisable on such date or dates, during
such period and for such number of shares of Company Stock as shall be
determined by the Committee on the day on which such Option is granted
and set forth in the agreement evidencing such Option; provided,
however, that no Option shall be exercisable after the expiration of
ten years from the date such Option was granted; and, provided,
further, that each Option shall be subject to earlier termination,
expiration or cancellation as provided in the Plan.
(ii) Each Option shall be exercisable in whole or in part;
provided, that no partial exercise of an Option shall be for an
aggregate exercise price of less than $1,000. The partial exercise of
an Option shall not cause the expiration, termination or cancellation
of the remaining portion thereof. Upon the partial exercise of an
Option, the agreement evidencing such Option and any related LSARs and
Tandem SARs shall be returned to the Participant exercising such Option
together with the delivery of the certificates described in Section
6(d)(v) hereof.
(iii) An Option shall be exercised by delivering notice to the
Company's principal office, to the attention of its Secretary, no less
than five business days in advance of the effective date of the
proposed exercise. Such notice shall be accompanied by the agreement or
agreements evidencing the Option and any related LSARs and Tandem SARs,
shall specify the number of shares of Company Stock with respect to
which the Option is being exercised and the effective date of the
proposed exercise and shall be signed by the Participant. The
Participant may withdraw such notice at any time prior to the close of
business on the business day immediately preceding the effective date
of the proposed exercise, in which case such agreement or agreements
shall be returned to him. Payment for shares of Company Stock purchased
upon the exercise of an Option shall be made on the effective date of
such exercise either:
(A) in cash, by certified check, bank cashier's check or wire
transfer; or
(B) subject to the approval of the Committee, in shares of
Company Stock owned by the Participant and valued at their Fair
Market Value on the effective date of such exercise, or partly in
shares of Company Stock with the balance in cash, by certified
check, bank cashier's check or wire transfer; or
(C) subject to the approval of the Committee, pursuant to a
"cashless exercise" pursuant to procedures adopted by the
Committee whereby the Participant, by a properly written notice,
directing (A) an immediate market sale or margin loan respecting
all or a part of the shares of Company Stock to which the
Participant is entitled upon exercise pursuant to an extension of
credit by the Company to the Participant of the exercise price,
(B) the delivery of the shares of Company Stock from the Company
directly to the brokerage firm, and (C) the
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delivery of the exercise price from the sale or margin loan
proceeds from the brokerage firm directly to the Company.
Any payment in shares of Company Stock shall be effected by the
delivery of such shares to the Secretary of the Company, duly endorsed in blank
or accompanied by stock powers duly executed in blank, together with any other
documents and evidences as the Secretary of the Company shall require from time
to time.
(iv) Except as otherwise provided in an applicable agreement
evidencing an Option, during the lifetime of a Participant, each Option
granted to a Participant shall be exercisable only by the Participant
and no Option shall be assignable or transferable otherwise than by
will or by the laws of descent and distribution. The Committee may, in
any applicable agreement evidencing an Option (other than an Incentive
Stock Option to the extent inconsistent with the requirements of
Section 422 of the Code applicable to incentive stock options), permit
a Participant to transfer all or some of the Options to (A) the
Participant's spouse, children or grandchildren ("Immediate Family
Members"), (B) a trust or trusts for the exclusive benefit of such
Immediate Family Members, or (C) other parties approved by the
Committee in its absolute discretion. Following any such transfer, any
transferred Options shall continue to be subject to the same terms and
conditions as were applicable immediately prior to the transfer.
(v) Certificates for shares of Company Stock purchased upon the
exercise of an Option shall be issued in the name of the Participant or
his beneficiary (or permitted transferee), as the case may be, and
delivered to the Participant or his beneficiary (or permitted
transferee), as the case may be, as soon as practicable following the
effective date on which the Option is exercised.
(e) Limitations on Grant of Incentive Stock Options
(i) The aggregate Fair Market Value of shares of Company Stock
with respect to which Incentive Stock Options granted hereunder are
exercisable for the first time by a Participant during any calendar
year under the Plan and any other stock option plan of the Company (or
any "subsidiary corporation" of the Company within the meaning of
Section 424 of the Code) shall not exceed $100,000. Such Fair Market
Value shall be determined as of the date on which each such Incentive
Stock Option is granted. In the event that the aggregate Fair Market
Value of shares of Company Stock with respect to such Incentive Stock
Options exceeds $100,000, then Incentive Stock Options granted
hereunder to such Participant shall, to the extent and in the order in
which they were granted, automatically be deemed to be Non-Qualified
Stock Options, but all other terms and provisions of such Incentive
Stock Options shall remain unchanged.
(ii) No Incentive Stock Option may be granted to an individual if,
at the time of the proposed grant: (i) such individual was not an
employee of the company, a parent or subsidiary corporation of the
Company, or a coporation or a parent or subsidiary
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corporation of such corporation issuing or assuming a stock option in a
transaction to which Section 424(a) of the Code applies or (ii) such
individual owns stock possessing more than ten percent of the total
combined voting power of all classes of stock of the Company or any of
its "subsidiary corporations" (within the meaning of Section 424 of the
Code), unless (A) the exercise price of such Incentive Stock Option is
at least one hundred ten percent (110%) of the Fair Market Value of a
share of Company Stock at the time such Incentive Stock Option is
granted and (B) such Incentive Stock Option is not exercisable after
the expiration of five years from the date such Incentive Stock Option
is granted.
(f) Grants of Reload Options
The Committee may, in its discretion, include in any agreement
evidencing an Option (the "Original Option") a provision that a Reload Option
shall be granted to any Participant who, pursuant to Section 6(d)(iii), delivers
shares of Company Stock in partial or full payment of the exercise price of the
Original Option. The Reload Option shall relate to a number of shares of Company
Stock equal to the number of shares of Company Stock delivered, and shall have
an exercise price-per-share equal to the Fair Market Value of a share of Company
Stock on the date of the exercise of the Original Option. In the event that an
agreement evidencing an Original Option provides for the grant of a Reload
Option, such agreement shall also provide that the exercise price-per-share of
the Original Option shall be no less that the Fair Market Value of a share of
Company Stock on its date of grant, and that any shares that are delivered
pursuant to Section 6(d)(iii) in payment of such exercise price shall have been
held for at least six months.
(g) Effect of Termination of Employment
(i) Unless otherwise provided in any agreement evidencing an
Option, in the event that the Employment of a Participant with the
Company and its Affiliates shall terminate for any reason other than
Cause, Disability or death (A) Options granted to such Participant, to
the extent that they were exercisable at the time of such Termination
of Employment, shall remain exercisable until the expiration of three
months after such Termination of Employment, on which date they shall
expire, and (B) Options granted to such Participant, to the extent that
they were not exercisable at the time of such Termination of
Employment, shall expire at the close of business on the date of such
Termination of Employment; provided, however, that no Option shall be
exercisable after the expiration of its term.
(ii) Unless otherwise provided in any agreement evidencing an
Option, in the event that the Employment of a Participant with the
Company shall terminate on account of the Disability or death of the
Participant (A) Options granted to such Participant, to the extent that
they were exercisable at the time of such Termination of Employment,
shall remain exercisable until the expiration of one year after such
Termination of Employment, on which date they shall expire, and (B)
Options granted to such
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Participant, to the extent that they were not exercisable at the time
of such Termination of Employment, shall expire at the close of
business on the date of such Termination of Employment; provided,
however, that no Option shall be exercisable after the expiration of
its term.
(iii) In the event of a Participant's Termination of Employment
for Cause, all outstanding Options granted to such Participant shall
expire at the commencement of business on the effective date of such
Termination of Employment.
(h) Acceleration of Exercise Date Upon Change in Control
Upon the occurrence of a Change in Control, each Option granted under
the Plan and outstanding at such time shall become fully and immediately
exercisable and shall remain exercisable until its expiration, termination or
cancellation pursuant to the terms of the Plan.
7. LSARs
The Committee may grant in connection with any Option granted hereunder
one or more LSARs relating to a number of shares of Company Stock less than or
equal to the number of shares of Company Stock subject to the related Option. An
LSAR may be granted at the same time as, or, in the case of a Non-Qualified
Stock Option, subsequent to the time that, its related Option is granted. Each
LSAR shall be evidenced by an agreement in such form as the Committee shall from
time to time approve. Each LSAR granted hereunder shall be subject to the
following terms and conditions:
(a) Benefit Upon Exercise
(i) The exercise of an LSAR relating to a Non-Qualified Stock
Option with respect to any number of shares of Company Stock shall
entitle the Participant to a cash payment, for each such share, equal
to the excess of (A) the greater of (x) the highest price-per-share of
Company Stock paid in the Change in Control in connection with which
such LSAR became exercisable and (y) the Fair Market Value of a share
of Company Stock on the date of such Change in Control over (B) the
exercise price of the related Option. Such payment shall be made as
soon as practicable, but in no event later than the expiration of five
business days after the effective date of such exercise.
(ii) The exercise of an LSAR relating to an Incentive Stock Option
with respect to any number of shares of Company Stock shall entitle the
Participant to a cash payment, for each such share, equal to the excess
of (A) the Fair Market Value of a share of Company Stock on the
effective date of such exercise over (B) the exercise price of the
related Option. Such payment shall be made as soon as practicable, but
in no event later than the expiration of five business days, after the
effective date of such exercise.
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(b) Term and Exercise of LSARs
(i) An LSAR shall be exercisable only during the period commencing
on the first day following the occurrence of a Change in Control and
terminating on the expiration of sixty days after such date.
Notwithstanding anything else herein, an LSAR relating to an Incentive
Stock Option may be exercised with respect to a share of Company Stock
only if the Fair Market Value of such share on the effective date of
such exercise exceeds the exercise price relating to such share.
Notwithstanding anything else herein, an LSAR may be exercised only if
and to the extent that the Option to which it relates is exercisable.
(ii) The exercise of an LSAR with respect to a number of shares of
Company Stock shall cause the immediate and automatic cancellation of
the Option to which it relates with respect to an equal number of
shares. The exercise of an Option, or the cancellation, termination or
expiration of an Option (other than pursuant to this Paragraph (ii)),
with respect to a number of shares of Company Stock, shall cause the
cancellation of the LSAR related to it with respect to an equal number
of shares.
(iii) Each LSAR shall be exercisable in whole or in part;
provided, that no partial exercise of an LSAR shall be for an aggregate
exercise price of less than $1,000. The partial exercise of an LSAR
shall not cause the expiration, termination or cancellation of the
remaining portion thereof. Upon the partial exercise of an LSAR, the
agreement evidencing the LSAR, the related Option and any Tandem SARs
related to such Option, marked with such notations as the Committee may
deem appropriate to evidence such partial exercise, shall be returned
to the Participant exercising such LSAR together with the payment
described in Paragraph 7(a)(i) or (ii) hereof, as applicable.
(iv) Except as otherwise provided in an applicable agreement
evidencing an LSAR, during the lifetime of a Participant, each LSAR
granted to a Participant shall be exercisable only by the Participant
and no LSAR shall be assignable or transferable otherwise than by will
or by the laws of descent and distribution and otherwise than together
with its related Option. The Committee may, in any applicable agreement
evidencing an LSAR, permit a Participant to transfer all or some of the
LSAR to (A) the Participant's Immediate Family Members, (B) a trust or
trusts for the exclusive benefit of such Immediate Family Members, or
(C) other parties approved by the Committee in its absolute discretion.
Following any such transfer, any transferred LSARs shall continue to be
subject to the same terms and conditions as were applicable immediately
prior to the transfer.
(v) An LSAR shall be exercised by delivering notice to the
Company's principal office, to the attention of its Secretary, no less
than five business days in advance of the effective date of the
proposed exercise. Such notice shall be accompanied by the applicable
agreement evidencing the LSAR, the related Option and any Tandem SARs
relating to such Option, shall specify the number of shares of Company
Stock with
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respect to which the LSAR is being exercised and the effective date of
the proposed exercise and shall be signed by the Participant. The
Participant may withdraw such notice at any time prior to the close of
business on the business day immediately preceding the effective date
of the proposed exercise, in which case such agreement shall be
returned to him.
8. Tandem SARs
The Committee may grant in connection with any Option granted hereunder
one or more Tandem SARs relating to a number of shares of Company Stock less
than or equal to the number of shares of Company Stock subject to the related
Option. A Tandem SAR may be granted at the same time as, or subsequent to the
time that, its related Option is granted. Each Tandem SAR shall be evidenced by
an agreement in such form as the Committee shall from time to time approve.
Tandem SARs shall comply with and be subject to the following terms and
conditions:
(a) Benefit Upon Exercise
The exercise of a Tandem SAR with respect to any number of shares of
Company Stock shall entitle a Participant to a cash payment, for each such
share, equal to the excess of (i) the Fair Market Value of a share of Company
Stock on the effective date of such exercise over (ii) the exercise price of the
related Option. Such payment shall be made as soon as practicable, but in no
event later than the expiration of five business days, after the effective date
of such exercise.
(b) Term and Exercise of Tandem SAR
(i) A Tandem SAR shall be exercisable at the same time and to the
same extent (on a proportional basis, with any fractional amount being
rounded down to the immediately preceding whole number) as its related
Option. Notwithstanding the first sentence of this Section 8(b)(i), (A)
a Tandem SAR shall not be exercisable at any time that an LSAR related
to the Option to which the Tandem SAR is related is exercisable and (B)
a Tandem SAR relating to an Incentive Stock Option may be exercised
with respect to a share of Company Stock only if the Fair Market Value
of such share on the effective date of such exercise exceeds the
exercise price relating to such share.
(ii) The exercise of a Tandem SAR with respect to a number of
shares of Company Stock shall cause the immediate and automatic
cancellation of its related Option with respect to an equal number of
shares. The exercise of an Option, or the cancellation, termination or
expiration of an Option (other than pursuant to this Paragraph (ii)),
with respect to a number of shares of Company Stock shall cause the
automatic and immediate cancellation of its related Tandem SARs to the
extent that the number of shares of Company Stock subject to such
Option after such exercise, cancellation, termination or expiration is
less than the number of shares subject to such
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<PAGE>
Tandem SARs. Such Tandem SARs shall be canceled in the order in which
they became exercisable.
(iii) Each Tandem SAR shall be exercisable in whole or in part;
provided, that no partial exercise of a Tandem SAR shall be for an
aggregate exercise price of less than $1,000. The partial exercise of a
Tandem SAR shall not cause the expiration, termination or cancellation
of the remaining portion thereof. Upon the partial exercise of a Tandem
SAR, the agreement evidencing such Tandem SAR, its related Option and
LSARs relating to such Option shall be returned to the Participant
exercising such Tandem SAR together with the payment described in
Section 8(a) hereof.
(iv) Except as otherwise provided in an applicable agreement
evidencing a Tandem SAR, during the lifetime of a Participant, each
Tandem SAR granted to a Participant shall be exercisable only by the
Participant and no Tandem SAR shall be assignable or transferable
otherwise than by will or by the laws of descent and distribution. The
Committee may, in any applicable agreement evidencing a Tandem SAR,
permit a Participant to transfer all or some of the Tandem SAR to (A)
the Participant's Immediate Family Members, (B) a trust or trusts for
the exclusive benefit of such Immediate Family Members, or (C) other
parties approved by the Committee in its absolute discretion. Following
any such transfer, any transferred Tandem SARs shall continue to be
subject to the same terms and conditions as were applicable immediately
prior to the transfer.
(v) A Tandem SAR shall be exercised by delivering notice to the
Company's principal office, to the attention of its Secretary, no less
than five business days in advance of the effective date of the
proposed exercise. Such notice shall be accompanied by the applicable
agreement evidencing the Tandem SAR, its related Option and any LSARs
related to such Option, shall specify the number of shares of Company
Stock with respect to which the Tandem SAR is being exercised and the
effective date of the proposed exercise and shall be signed by the
Participant. The Participant may withdraw such notice at any time prior
to the close of business on the business day immediately preceding the
effective date of the proposed exercise, in which case such agreement
shall be returned to him.
9. Stand-Alone SARs
The Committee may grant Stand-Alone SARs pursuant to the Plan, which
Stand-Alone SARs shall be evidenced by agreements in such form as the Committee
shall from time to time approve. Stand-Alone SARs shall comply with and be
subject to the following terms and conditions:
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(a) Exercise Price
The exercise price of any Stand-Alone SAR granted under the Plan shall
be determined by the Committee at the time of the grant of such Stand-Alone SAR.
(b) Benefit Upon Exercise
(i) The exercise of a Stand-Alone SAR with respect to any number
of shares of Company Stock prior to the occurrence of a Change in
Control shall entitle a Participant to a cash payment, for each such
share, equal to the excess of (A) the Fair Market Value of a share of
Company Stock on the exercise date over (B) the exercise price of the
Stand-Alone SAR.
(ii) The exercise of a Stand-Alone SAR with respect to any number
of shares of Company Stock on or after the occurrence of a Change in
Control shall entitle a Participant to a cash payment, for each such
share, equal to the excess of (A) the greater of (x) the highest
price-per-share of Company Stock paid in connection with such Change in
Control and (y) the Fair Market Value of a share of Company Stock on
the date of such Change in Control over (B) the exercise price of the
Stand-Alone SAR.
(iii) All payments under this Section 9(b) shall be made as soon
as practicable, but in no event later than five business days, after
the effective date of the exercise.
(c) Term and Exercise of Stand-Alone SARs
(i) Each Stand-Alone SAR shall be exercisable on such date or
dates, during such period and for such number of shares of Company
Stock as shall be determined by the Committee and set forth in the
agreement evidencing such Stand-Alone SAR; provided, however, that no
Stand-Alone SAR shall be exercisable after the expiration of ten years
from the date such Stand-Alone SAR was granted; and, provided, further,
that each Stand-Alone SAR shall be subject to earlier termination,
expiration or cancellation as provided in the Plan.
(ii) Each Stand-Alone SAR may be exercised in whole or in part;
provided, that no partial exercise of a Stand-Alone SAR shall be for an
aggregate exercise price of less than $1,000. The partial exercise of a
Stand-Alone SAR shall not cause the expiration, termination or
cancellation of the remaining portion thereof. Upon the partial
exercise of a Stand-Alone SAR, the agreement evidencing such
Stand-Alone SAR, marked with such notations as the Committee may deem
appropriate to evidence such partial exercise, shall be returned to the
Participant exercising such Stand-Alone SAR, together with the payment
described in Section 9(b)(i) or 9(b)(ii) hereof.
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(iii) A Stand-Alone SAR shall be exercised by delivering notice to
the Company's principal office, to the attention of its Secretary, no
less than five business days in advance of the effective date of the
proposed exercise. Such notice shall be accompanied by the applicable
agreement evidencing the Stand-Alone SAR, shall specify the number of
shares of Company Stock with respect to which the Stand-Alone SAR is
being exercised and the effective date of the proposed exercise, and
shall be signed by the Participant. The Participant may withdraw such
notice at any time prior to the close of business on the business day
immediately preceding the effective date of the proposed exercise, in
which case the agreement evidencing the Stand-Alone SAR shall be
returned to him.
(iv) Except as otherwise provided in an applicable agreement
evidencing a Stand-Alone SAR, during the lifetime of a Participant,
each Stand-Alone SAR granted to a Participant shall be exercisable only
by the Participant and no Stand-Alone SAR shall be assignable or
transferable otherwise than by will or by the laws of descent and
distribution. The Committee may, in any applicable agreement evidencing
a Stand-Alone SAR, permit a Participant to transfer all or some of the
Stand-Alone SAR to (A) the Participant's Immediate Family Members, (B)
a trust or trusts for the exclusive benefit of such Immediate Family
Members, or (C) other parties approved by the Committee in its absolute
discretion. Following any such transfer, any transferred Stand-Alone
SARs shall continue to be subject to the same terms and conditions as
were applicable immediately prior to the transfer.
(d) Effect of Termination of Employment
(i) Unless otherwise provided in any agreement evidencing a
Stand-Alone SAR, in the event that the Employment of a Participant with
the Company and its Affiliates shall terminate for any reason other
than Cause, Disability or death (A) Stand-Alone SARs granted to such
Participant, to the extent that they were exercisable at the time of
such Termination of Employment, shall remain exercisable until the
expiration of three months after such Termination of Employment, on
which date they shall expire, and (B) Stand-Alone SARs granted to such
Participant, to the extent that they were not exercisable at the time
of such Termination of Employment, shall expire at the close of
business on the date of such Termination of Employment; provided,
however, that no Stand-Alone SAR shall be exercisable after the
expiration of its term.
(ii) Unless otherwise provided in any agreement evidencing a
Stand-Alone SAR, in the event that the Employment of a Participant with
the Company and its Affiliates shall terminate on account of the
Disability or death of the Participant (A) Stand-Alone SARs granted to
such Participant, to the extent that they were exercisable at the time
of such Termination of Employment, shall remain exercisable until the
expiration of one year after such Termination of Employment, on which
date they shall expire, and (B) Stand-Alone SARs granted to such
Participant, to the extent that they were not exercisable at the time
of such Termination of Employment, shall expire at the close
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of business on the date of such Termination of Employment; provided,
however, that no Stand-Alone SAR shall be exercisable after the
expiration of its term.
(iii) In the event of a Participant's Termination of Employment
for Cause, all outstanding Stand-Alone SARs granted to such Participant
shall expire at the commencement of business on the effective date of
such Termination of Employment.
(e) Acceleration of Exercise Date Upon Change in Control
Upon the occurrence of a Change in Control, any Stand-Alone SAR granted
under the Plan and outstanding at such time shall become fully and immediately
exercisable and shall remain exercisable until its expiration, termination or
cancellation pursuant to the terms of the Plan.
10. Restricted Stock
The Committee may grant shares of Restricted Stock pursuant to the
Plan. Each grant of shares of Restricted Stock shall be evidenced by an
agreement in such form and containing such terms and conditions and subject to
such agreements or understandings as the Committee shall from time to time
approve. Each grant of shares of Restricted Stock shall comply with and be
subject to the following terms and conditions:
(a) Issue Date and Vesting Date
At the time of the grant of shares of Restricted Stock, the Committee
shall establish an Issue Date or Issue Dates and a Vesting Date or Vesting Dates
with respect to such shares. The Committee may divide such shares into classes
and assign a different Issue Date and/or Vesting Date for each class. Except as
provided in Sections 10(c) and 10(f) hereof, upon the occurrence of the Issue
Date with respect to a share of Restricted Stock, a share of Restricted Stock
shall be issued in accordance with the provisions of Section 10(d) hereof.
Provided that all conditions to the vesting of a share of Restricted Stock
imposed pursuant to Section 10(b) hereof are satisfied, and except as provided
in Sections 10(c) and 10(f) hereof, upon the occurrence of the Vesting Date with
respect to a share of Restricted Stock, such share shall vest and the
restrictions of Section 10(c) hereof shall cease to apply to such share.
(b) Conditions to Vesting
At the time of the grant of shares of Restricted Stock, the Committee
may impose such restrictions or conditions, not inconsistent with the provisions
hereof, to the vesting of such shares as it, in its absolute discretion, deems
appropriate. By way of example and not by way of limitation, the Committee may
require, as a condition to the vesting of any class or classes of shares of
Restricted Stock, that the Participant or the Company achieve such performance
criteria as the Committee may specify at the time of the grant of such shares.
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(c) Restrictions on Transfer Prior to Vesting
Prior to the vesting of a share of Restricted Stock, no transfer of a
Participant's rights with respect to such share, whether voluntary or
involuntary, by operation of law or otherwise, shall vest the transferee with
any interest or right in or with respect to such share, but immediately upon any
attempt to transfer such rights, such share, and all of the rights related
thereto, shall be forfeited by the Participant and the transfer shall be of no
force or effect.
(d) Issuance of Certificates
(i) Except as provided in Sections 10(c) or 10(f) hereof,
reasonably promptly after the Issue Date with respect to shares of
Restricted Stock, the Company shall cause to be issued a stock
certificate, registered in the name of the Participant to whom such
shares were granted, evidencing such shares; provided, that the Company
shall not cause to be issued such a stock certificate unless it has
received a stock power duly endorsed in blank with respect to such
shares. Each such stock certificate shall bear the following legend:
The transferability of this certificate and the shares of stock
represented hereby are subject to the restrictions, terms and
conditions (including forfeiture provisions and restrictions
against transfer) contained in the Directrix, Inc. Stock Incentive
Plan and an Agreement entered into between the registered owner of
such shares and Directrix, Inc. A copy of the Plan and Agreement
is on file in the office of the Secretary of Directrix, Inc., 536
Broadway, 6th Floor, New York, New York 10012.
Such legend shall not be removed from the certificate evidencing such shares
until such shares vest pursuant to the terms hereof.
(ii) Each certificate issued pursuant to Section 10(d)(i) hereof,
together with the stock powers relating to the shares of Restricted
Stock evidenced by such certificate, shall be deposited by the Company
with a custodian designated by the Company (which custodian may be the
Company). The Company shall cause such custodian to issue to the
Participant a receipt evidencing the certificates held by it which are
registered in the name of the Participant.
(e) Consequences Upon Vesting
Upon the vesting of a share of Restricted Stock pursuant to the terms
hereof, the restrictions of Section 10(c) hereof shall cease to apply to such
share. Reasonably promptly after a share of Restricted Stock vests pursuant to
the terms hereof, the Company shall cause to be issued and delivered to the
Participant to whom such shares were granted, a certificate evidencing such
share, free of the legend set forth in Section 10(d)(i) hereof, together with
any other property of the Participant held by the custodian pursuant to Section
16(b) hereof.
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(f) Effect of Termination of Employment
(i) In the event that the Employment of a Participant with the
Company shall terminate for any reason (other than a termination that
is, or is deemed to have been, for Cause) prior to the vesting of
shares of Restricted Stock granted to such Participant, a proportion of
such shares, to the extent not forfeited or canceled on or prior to
such Termination of Employment pursuant to any provision hereof, shall
vest on the date of such Termination of Employment. The proportion
referred to in the preceding sentence shall initially be determined by
the Committee at the time of the grant of such shares of Restricted
Stock and may be based on the achievement of any conditions imposed by
the Committee with respect to such shares pursuant to Section 10(b).
Such proportion may be equal to zero. In the absence of any such
provision in an agreement evidencing an award of Restricted Stock, a
Participant's Termination of Employment with the Company and its
Affiliates for any reason (including death or Disability) shall cause
the immediate forfeiture of all shares of Restricted Stock that have
not vested as of the date of such Termination of Employment.
(ii) In the event a Participant's Employment is or is deemed to
have been terminated for Cause, all shares of Restricted Stock granted
to such Participant that have not vested as of the effective date of
such Termination of Employment immediately shall be forfeited.
(g) Effect of Change in Control
Upon the occurrence of a Change in Control, all shares of Restricted
Stock which have not theretofore vested (including those with respect to which
the Issue Date has not yet occurred), or been canceled or forfeited pursuant to
any provision hereof, immediately shall vest.
11. Phantom Stock
The Committee may grant shares of Phantom Stock pursuant to the Plan.
Each grant of shares of Phantom Stock shall be evidenced by an agreement in such
form as the Committee shall from time to time approve. Each grant of shares of
Phantom Stock shall comply with and be subject to the following terms and
conditions:
(a) Vesting Date
At the time of the grant of shares of Phantom Stock, the Committee
shall establish a Vesting Date or Vesting Dates with respect to such shares. The
Committee may divide such shares into classes and assign a different Vesting
Date for each class. Provided that all conditions to the vesting of a share of
Phantom Stock imposed pursuant to Section 11(c) hereof are satisfied, and except
as provided in Section 11(d) hereof, upon the occurrence of the Vesting Date
with respect to a share of Phantom Stock, such share shall vest.
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(b) Benefit Upon Vesting
Upon the vesting of a share of Phantom Stock, a Participant shall be
entitled to receive, within 30 days after the date on which such share vests, an
amount in cash in a lump sum equal to the sum of (i) the Fair Market Value of a
share of Company Stock on the date on which such share of Phantom Stock vests
and (ii) the aggregate amount of cash dividends paid with respect to a share of
Company Stock the record date for which occurs during the period commencing on
the date on which the share of Phantom Stock was granted and terminating on the
date on which such share vests.
(c) Conditions to Vesting
At the time of the grant of shares of Phantom Stock, the Committee may
impose such restrictions or conditions, not inconsistent with the provisions
hereof, to the vesting of such shares as it, in its absolute discretion, deems
appropriate. By way of example and not by way of limitation, the Committee may
require, as a condition to the vesting of any class or classes of shares of
Phantom Stock, that the Participant or the Company achieve such performance
criteria as the Committee may specify at the time of the grant of such shares of
Phantom Stock.
(d) Effect of Termination of Employment
(i) In the event that the Employment of a Participant with the
Company and its Affiliates shall terminate for any reason (other than a
termination that is, or is deemed to have been, for Cause) prior to the
vesting of shares of Phantom Stock granted to such Participant, a
proportion of such shares, to the extent not forfeited or canceled on
or prior to such Termination of Employment pursuant to any provision
hereof, shall vest on the date of such Termination of Employment. The
proportion referred to in the preceding sentence initially shall be
determined by the Committee at the time of the grant of such shares of
Phantom Stock and may be based on the achievement of any conditions
imposed by the Committee with respect to such shares pursuant to
Section 11(c). Such proportion may be equal to zero. In the absence of
any such provision in an agreement evidencing an award of Phantom
Stock, a Participant's Termination of Employment with the Company and
its Affiliates for any reason (including death or Disability) shall
cause the immediate forfeiture of all shares of Phantom Stock that have
not vested as of the date of such Termination of Employment.
(ii) In the event a Participant's Employment is or is deemed to
have been terminated for Cause, all shares of Phantom Stock granted to
such Participant which have not vested as of the date of such
Termination of Employment immediately shall be forfeited.
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(e) Effect of Change in Control
Upon the occurrence of a Change in Control, all shares of Phantom Stock
which have not theretofore vested, or been canceled or forfeited pursuant to any
provision hereof, immediately shall vest.
12. Stock Bonuses
The Committee may grant Stock Bonuses in such amounts as it shall
determine from time to time. A Stock Bonus shall be paid at such time (including
a future date selected by the Committee at the time of grant) and subject to
such conditions as the Committee shall determine at the time of the grant of
such Stock Bonus. Certificates for shares of Company Stock granted as a Stock
Bonus shall be issued in the name of the Participant to whom such grant was made
and delivered to such Participant as soon as practicable after the date on which
such Stock Bonus is required to be paid. Prior to the date on which a Stock
Bonus awarded hereunder is required to be paid, such award shall constitute an
unfunded, unsecured promise by the Company to distribute Company Stock in the
future.
13. Cash Bonuses
The Committee may, in its absolute discretion, in connection with any
grant of Restricted Stock or Stock Bonus or at any time thereafter, grant a cash
bonus, payable promptly after the date on which the Participant is required to
recognize income for federal income tax purposes in connection with such grant
of Restricted Stock or Stock Bonus, in such amounts as the Committee shall
determine from time to time; provided, however, that in no event shall the
amount of a Cash Bonus exceed the Fair Market Value of the related shares of
Restricted Stock or Stock Bonus on such date. A Cash Bonus shall be subject to
such conditions as the Committee shall determine at the time of the grant of
such Cash Bonus.
14. Grant of Dividend Equivalent Rights
The Committee may, in its absolute discretion, in connection with any
Incentive Award (other than an award of shares of Phantom Stock), grant a
Dividend Equivalent Right entitling the Participant to receive amounts equal to
the ordinary dividends that would be paid on the shares of Company Stock covered
by such Incentive Award if such shares then were outstanding, during the time
such Incentive Award is outstanding and (a) in the case of Options and SARs,
during the time such Options or SARs are unexercised or (b) in the case of
Restricted Stock and Stock Bonuses, prior to the issue date for the related
shares of Company Stock. The Committee shall determine whether any Dividend
Equivalent Rights shall be payable in cash, in shares of Company Stock or in
another form, the time or times at which they shall be made, and such other
terms and conditions as the Committee shall deem appropriate. No Dividend
Equivalent Right shall be conditioned on the exercise of any Option or SAR.
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15. Other Equity-Based Awards
The Committee may grant other types of equity-based awards in such
amounts and subject to such terms and conditions, as the Committee shall in its
discretion determine, subject to the provisions of the Plan. Such Incentive
Awards may entail the transfer of actual shares of Company Stock to
Participants, or payment in cash or otherwise of amounts based on the value of
shares of Company Stock.
16. Adjustment Upon Changes in Company Stock
(a) Shares Available for Grants
In the event of any change in the number of shares of Company Stock
outstanding by reason of any stock dividend or split, reverse stock split,
recapitalization, merger, consolidation, combination or exchange of shares or
similar corporate change, the maximum number of shares of Company Stock with
respect to which the Committee may grant Incentive Awards under Section 3 hereof
shall be appropriately adjusted by the Committee. In the event of any change in
the number of shares of Company Stock outstanding by reason of any other event
or transaction, the Committee may, but need not, make such adjustments in the
number and class of shares of Company Stock with respect to which Incentive
Awards may be granted under Section 3 hereof as the Committee may deem
appropriate.
(b) Outstanding Restricted Stock and Phantom Stock
Unless the Committee in its absolute discretion otherwise determines,
any securities or other property (including dividends paid in cash) received by
a Participant with respect to a share of Restricted Stock, the Issue Date with
respect to which occurs prior to such event, but which has not vested as of the
date of such event, as a result of any dividend, stock split, reverse stock
split, recapitalization, merger, consolidation, combination, exchange of shares
or otherwise will not vest until such share of Restricted Stock vests, and shall
be promptly deposited with the custodian designated pursuant to Paragraph
10(d)(ii) hereof.
The Committee may, in its absolute discretion, adjust any grant of
shares of Restricted Stock, the Issue Date with respect to which has not
occurred as of the date of the occurrence of any of the following events, or any
grant of shares of Phantom Stock, to reflect any dividend, stock split, reverse
stock split, recapitalization, merger, consolidation, combination, exchange of
shares or similar corporate change as the Committee may deem appropriate to
prevent the enlargement or dilution of rights of Participants under the grant.
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(c) Outstanding Options, LSARs, Tandem SARs, Stand-Alone SARs and
Dividend Equivalent Rights -- Increase or Decrease in Issued
Shares Without Consideration
Subject to any required action by the stockholders of the Company, in
the event of any increase or decrease in the number of issued shares of Company
Stock resulting from a subdivision or consolidation of shares of Company Stock
or the payment of a stock dividend (but only on the shares of Company Stock), or
any other increase or decrease in the number of such shares effected without
receipt of consideration by the Company, the Committee shall proportionally
adjust the number of shares of Company Stock subject to each outstanding Option,
LSAR, Tandem SAR and Stand-Alone SAR, and the exercise price-per-share of
Company Stock of each such Option, LSAR, Tandem SAR and Stand-Alone SAR and the
number of any related Dividend Equivalent Rights.
(d) Outstanding Options, LSARs, Tandem SARs, Stand-Alone SARs and
Dividend Equivalent Rights -- Certain Mergers
Subject to any required action by the stockholders of the Company, in
the event that the Company shall be the surviving corporation in any merger or
consolidation (except a merger or consolidation as a result of which the holders
of shares of Company Stock receive securities of another corporation), each
Option, LSAR, Tandem SAR, Stand-Alone SAR and Dividend Equivalent Right
outstanding on the date of such merger or consolidation shall pertain to and
apply to the securities which a holder of the number of shares of Company Stock
subject to such Option, LSAR, Tandem SAR, Stand-Alone SAR or Dividend Equivalent
Right would have received in such merger or consolidatation
(e) Outstanding Options, LSARs, Tandem SARs, Stand-Alone SARs and
Dividend Equivalent Rights -- Certain Other Transactions
In the event of (i) a dissolution or liquidation of the Company, (ii) a
sale of all or substantially all of the Company's assets, (iii) a merger or
consolidation involving the Company in which the Company is not the surviving
corporation or (iv) a merger or consolidation involving the Company in which the
Company is the surviving corporation but the holders of shares of Company Stock
receive securities of another corporation and/or other property, including cash,
the Committee shall, in its absolute discretion, have the power to:
(A) cancel, effective immediately prior to the occurrence of such
event, each Option (including each LSAR, Tandem-SAR or Dividend
Equivalent Right related thereto) and Stand-Alone SAR (including each
Dividend Equivalent Right related thereto) outstanding immediately
prior to such event (whether or not then exercisable), and, in full
consideration of such cancellation, pay to the Participant to whom such
Option or Stand-Alone SAR was granted an amount in cash, for each share
of Company Stock subject to such Option or Stand-Alone SAR,
respectively, equal to the excess of (x) the value, as determined by
the Committee in its absolute discretion, of the property
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(including cash) received by the holder of a share of Company Stock as
a result of such event over (y) the exercise price of such Option or
Stand-Alone SAR; or
(B) provide for the exchange of each Option (including any related
LSAR, Tandem SAR or Dividend Equivalent Right) and Stand-Alone SAR
(including any related Dividend Equivalent Right) outstanding
immediately prior to such event (whether or not then exercisable) for
an option on or stock appreciation right and dividend equivalent right
with respect to, as appropriate, some or all of the property for which
such Option or Stand-Alone SAR is exchanged and, incident thereto, make
an equitable adjustment as determined by the Committee in its absolute
discretion in the exercise price of the option or stock appreciation
right, or the number of shares or amount of property subject to the
option, stock appreciation right or dividend equivalent right or, if
appropriate, provide for a cash payment to the Participant to whom such
Option or Stand-Alone SAR was granted in partial consideration for the
exchange of the Option or Stand-Alone SAR.
(f) Outstanding Options, LSARs, Tandem SARs, Stand-Alone SARs and
Dividend Equivalent Rights -- Other Changes
In the event of any change in the capitalization of the Company or a
corporate change other than those specifically referred to in Sections 16(c),
(d) or (e) hereof, the Committee may, in its absolute discretion, make such
adjustments in the number and class of shares subject to Options, LSARs, Tandem
SARs, Stand-Alone SARs and Dividend Equivalent Rights outstanding on the date on
which such change occurs and in the per-share exercise price of each such
Option, LSAR, Tandem SAR and Stand-Alone SAR as the Committee may consider
appropriate to prevent dilution or enlargement of rights. In addition, if and to
the extent the Committee determines it is appropriate, the Committee may elect
to cancel each Option (including each LSAR, Tandem-SAR or Dividend Equivalent
Right related thereto) and Stand-Alone SAR (including each Dividend Equivalent
Right related thereto) outstanding immediately prior to such event (whether or
not then exercisable), and, in full consideration of such cancellation, pay to
the Participant to whom such Option or Stand-Alone SAR was granted an amount in
cash, for each share of Company Stock subject to such Option or Stand-Alone SAR,
respectively, equal to the excess of (i) the Fair Market Value of Company Stock
on the date of such cancellation over (ii) the exercise price of such Option or
Stand-Alone SAR
(g) No Other Rights
Except as expressly provided in the Plan, no Participant shall have any
rights by reason of any subdivision or consolidation of shares of stock of any
class, the payment of any dividend, any increase or decrease in the number of
shares of stock of any class or any dissolution, liquidation, merger or
consolidation of the Company or any other corporation. Except as expressly
provided in the Plan, no issuance by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number of shares of Company Stock subject
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to an Incentive Award or the exercise price of any Option, LSAR, Tandem SAR or
Stand-Alone SAR.
17. Rights as a Stockholder
No person shall have any rights as a stockholder with respect to any
shares of Company Stock covered by or relating to any Incentive Award granted
pursuant to this Plan until the date the Participant becomes the registered
owner of such shares. Except as otherwise expressly provided in Section 16
hereof, no adjustment to any Incentive Award shall be made for dividends or
other rights for which the record date occurs prior to the date such stock
certificate is issued.
18. No Special Employment Rights; No Right to Incentive Award
Nothing contained in the Plan or any Incentive Award shall confer upon
any Participant any right with respect to the continuation of his Employment by
the Company or interfere in any way with the right of the Company or an
Affiliate, subject to the terms of any separate employment agreement to the
contrary, at any time to terminate such Employment or to increase or decrease
the compensation of the Participant from the rate in existence at the time of
the grant of an Incentive Award.
No person shall have any claim or right to receive an Incentive Award
hereunder. The Committee's granting of an Incentive Award to a Participant at
any time shall neither require the Committee to grant an Incentive Award to such
Participant or any other Participant or other person at any time nor preclude
the Committee from making subsequent grants to such Participant or any other
Participant or other person.
19. Securities Matters
(a) The Company shall be under no obligation to effect the registration
pursuant to the Securities Act of any interests in the Plan or any shares of
Company Stock to be issued hereunder or to effect similar compliance under any
state laws. Notwithstanding anything herein to the contrary, the Company shall
not be obligated to cause to be issued or delivered any certificates evidencing
shares of Company Stock pursuant to the Plan unless and until the Company is
advised by its counsel that the issuance and delivery of such certificates is in
compliance with all applicable laws, regulations of governmental authority and
the requirements of any securities exchange on which shares of Company Stock are
traded. The Committee may require, as a condition of the issuance and delivery
of certificates evidencing shares of Company Stock pursuant to the terms hereof,
that the recipient of such shares make such covenants, agreements and
representations, and that such certificates bear such legends, as the Committee,
in its sole discretion, deems necessary or desirable.
(b) The exercise of any Option granted hereunder shall be effective
only at such time as counsel to the Company shall have determined that the
issuance and delivery of shares of
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Company Stock pursuant to such exercise is in compliance with all applicable
laws, regulations of governmental authority and the requirements of any
securities exchange on which shares of Company Stock are traded. The Committee
may, in its sole discretion, defer the effectiveness of any exercise of an
Option granted hereunder in order to allow the issuance of shares of Company
Stock pursuant thereto to be made pursuant to registration or an exemption from
registration or other methods for compliance available under federal or state
securities laws. The Committee shall inform the Participant in writing of its
decision to defer the effectiveness of the exercise of an Option granted
hereunder. During the period that the effectiveness of the exercise of an Option
has been deferred, the Participant may, by written notice, withdraw such
exercise and obtain a refund of any amount paid with respect thereto.
20. Withholding Taxes
(a) Cash Remittance
Whenever shares of Company Stock are to be issued upon the exercise of
an Option, the occurrence of the Issue Date or Vesting Date with respect to a
share of Restricted Stock or the payment of a Stock Bonus, or in connection with
a Dividend Equivalent Right, the Company shall have the right to require the
Participant to remit to the Company, in cash, an amount sufficient to satisfy
the federal, state and local withholding tax requirements, if any, attributable
to such exercise, occurrence or payment prior to the delivery of any certificate
or certificates for such shares. In addition, upon the exercise of an LSAR,
Tandem SAR or Stand-Alone SAR, the grant of a Cash Bonus or the making of a
payment with respect to a share of Phantom Stock or a Dividend Equivalent Right,
the Company shall have the right to withhold from any cash payment required to
be made pursuant thereto an amount sufficient to satisfy the federal, state and
local withholding tax requirements, if any, attributable to such exercise or
grant.
(b) Stock Remittance
At the election of the Participant, subject to the approval of the
Committee, when shares of Company Stock are to be issued upon the exercise of an
Option, the occurrence of the Issue Date or the Vesting Date with respect to a
share of Restricted Stock or the grant of a Stock Bonus, or a payment in
connection with a Dividend Equivalent Right, in lieu of the remittance required
by Section 20(a) hereof, the Participant may tender to the Company a number of
shares of Company Stock, the Fair Market Value of which at the tender date the
Committee determines to be sufficient to satisfy the federal, state and local
withholding tax requirements, if any, attributable to such exercise, occurrence,
grant or payment and not greater than the Participant's estimated total federal,
state and local tax obligations associated with such exercise, occurrence, grant
or payment.
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(c) Stock Withholding
The Company shall have the right, when shares of Company Stock are to
be issued upon the exercise of an Option, the occurrence of the Issue Date or
the Vesting Date with respect to a share of Restricted Stock or the grant of a
Stock Bonus or a payment in connection with a Dividend Equivalent Right, in lieu
of requiring the remittance required by Section 20(a) hereof, to withhold a
number of such shares, the Fair Market Value of which at the exercise date the
Committee determines to be sufficient to satisfy the federal, state and local
withholding tax requirements, if any, attributable to such exercise, occurrence,
grant or payment and is not greater than the Participant's estimated total
federal, state and local tax obligations associated with such exercise,
occurrence, grant or payment.
21. Amendment or Termination of the Plan
The Board of Directors may, at any time, suspend or discontinue the
Plan or revise or amend it in any respect whatsoever; provided, however, that if
and to the extent required under Section 422 of the Code (if and to the extent
that the Board of Directors deems it appropriate to comply with Section 422) and
if and to the extent required to treat some or all of the Incentive Awards as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, (if and to the extent that the Board of Directors deems it appropriate to
meet such requirements), no amendment shall be effective without the approval of
the stockholders of the Company, that (a) except as provided in Section 16
hereof, increases the number of shares of Company Stock with respect to which
Incentive Awards may be issued under the Plan, (b) modifies the class of
individuals eligible to participate in the Plan or (c) materially increases the
benefits accruing to individuals pursuant to the Plan. Nothing herein shall
restrict the Committee's ability to exercise its discretionary authority
hereunder pursuant to Section 4 hereof, which discretion may be exercised
without amendment to the Plan. No action under this Section 21 may, without the
consent of a Participant, reduce the Participant's rights under any previously
granted and outstanding Incentive Award except to the extent that the Board of
Directors determines that such amendment is necessary or appropriate to prevent
such Incentive Awards from constituting "applicable employee remuneration"
within the meaning of Section 162(m) of the Code.
22. No Obligation to Exercise
The grant to a Participant of an Option, LSAR, Tandem SAR or
Stand-Alone SAR shall impose no obligation upon such Participant to exercise
such Option, LSAR, Tandem SAR or Stand-Alone SAR.
23. Transfers Upon Death
Upon the death of a Participant, outstanding Incentive Awards granted
to such Participant may be exercised only by the executors or administrators of
the Participant's estate or by any person or persons who shall have acquired
such right to exercise by will or by the
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laws of descent and distribution. No transfer by will or the laws of descent and
distribution of any Incentive Award, or the right to exercise any Incentive
Award, shall be effective to bind the Company unless the Committee shall have
been furnished with (a) written notice thereof and with a copy of the will
and/or such evidence as the Committee may deem necessary to establish the
validity of the transfer and (b) an agreement by the transferee to comply with
all the terms and conditions of the Incentive Award that are or would have been
applicable to the Participant and to be bound by the acknowledgments made by the
Participant in connection with the grant of the Incentive Award. Except as
provided in this Section 23, or in any applicable agreement pusuant to Sections
6(d)(iv), 7(b)(iv), 8(b)(iv), or 9(c)(iv) of the Plan, no Incentive Award shall
be transferable, and Incentive Awards shall be exercisable only by a Participant
during the Participant's lifetime.
24. Expenses and Receipts
The expenses of the Plan shall be paid by the Company. Any proceeds
received by the Company in connection with any Incentive Award will be used for
general corporate purposes.
25. Limitations Imposed by Section 162(m)
Notwithstanding any other provision hereunder, prior to a Change in
Control, if and to the extent that the Committee determines the Company's
federal tax deduction in respect of an Incentive Award may be limited as a
result of Section 162(m) of the Code, the Committee may take the following
actions:
(a) With respect to Options, Tandem SARs, Stand-Alone SARs or Dividend
Equivalent Rights, the Committee may delay the payment in respect of such
Options, Tandem SARs, Stand-Alone SARs or Dividend Equivalent Rights until a
date that is within 30 days after the earlier to occur of (i) the date that
compensation paid to the Participant no longer is subject to the deduction
limitation under Section 162(m) of the Code and (ii) the occurrence of a Change
in Control. In the event that a Participant exercises an Option, Tandem SAR or
Stand-Alone SAR or would receive a payment in respect of a Dividend Equivalent
Right at a time when the Participant is a "covered employee," and the Committee
determines to delay the payment in respect of any such Incentive Award, the
Committee shall credit cash or, in the case of an amount payable in Company
Stock, the Fair Market Value of the Company Stock, payable to the Participant to
a book account. The Participant shall have no rights in respect of such book
account and the amount credited thereto shall not be transferable by the
Participant other than by will or laws of descent and distribution. The
Committee may credit additional amounts to such book account as it may determine
in its sole discretion. Any book account created hereunder shall represent only
an unfunded unsecured promise by the Company to pay the amount credited thereto
to the Participant in the future.
(b) With respect to Restricted Stock, Phantom Stock and Stock Bonuses,
the Committee may require the Participant to surrender to the Committee any
certificates with respect to Restricted Stock and Stock Bonuses and agreements
with respect to Phantom Stock, in order to
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cancel the awards of such Restricted Stock, Phantom Stock and Stock Bonuses (and
any related Cash Bonuses or Dividend Equivalent Rights). In exchange for such
cancellation, the Committee shall credit to a book account a cash amount equal
to the Fair Market Value of the shares of Company Stock subject to such awards.
The amount credited to the book account shall be paid to the Participant within
30 days after the earlier to occur of (i) the date that compensation paid to the
Participant no longer is subject to the deduction limitation under Section
162(m) of the Code and (ii) the occurrence of a Change in Control. The
Participant shall have no rights in respect of such book account and the amount
credited thereto shall not be transferable by the Participant other than by will
or laws of descent and distribution. The Committee may credit additional amounts
to such book account as it may determine in its sole discretion. Any book
account created hereunder shall represent only an unfunded unsecured promise by
the Company to pay the amount credited thereto to the Participant in the future.
26. Failure to Comply
In addition to the remedies of the Company elsewhere provided for
herein, a failure by a Participant (or beneficiary or permitted transferee) to
comply with any of the terms and conditions of the Plan or the agreement
executed by such Participant (or beneficiary or permitted transferee) evidencing
an Incentive Award, unless such failure is remedied by such Participant (or
beneficiary or permitted transferee) within ten days after having been notified
of such failure by the Committee, shall be grounds for the cancellation and
forfeiture of such Incentive Award, in whole or in part, as the Committee, in
its absolute discretion, may determine.
27. Effective Date of Plan
The Plan was adopted by the Board of Directors on July 25, 1998,
subject to approval by the stockholders of the Company. Incentive Awards may be
granted under the Plan at any time prior to the receipt of such stockholder
approval; provided, however, that each such grant shall be subject to such
approval. Without limitation on the foregoing, no Option, LSAR, Tandem SAR or
Stand-Alone SAR may be exercised prior to the receipt of such approval, no share
certificate shall be issued pursuant to a grant of Restricted Stock or Stock
Bonus prior to the receipt of such approval and no Cash Bonus or payment with
respect to a Dividend Equivalent Right or share of Phantom Stock shall be paid
prior to the receipt of such approval. If the Plan is not so approved on or
before July 24, 1999 then the Plan and all Incentive Awards then outstanding
under the Plan shall forthwith automatically terminate and be of no force or
effect.
28. Term of the Plan
The right to grant Incentive Awards under the Plan will terminate upon
the expiration of 10 years after the date the Plan was adopted.
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29. Applicable Law
Except to the extent preempted by any applicable federal law, the Plan
will be construed and administered in accordance with the laws of the State of
New York, without reference to the principles of conflicts of law.
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Exhibit 10.12
DIRECTRIX, INC.
STOCK INCENTIVE PLAN FOR OUTSIDE DIRECTORS
(as adopted November 6, 1998)
1. Purpose of the Plan
This Directrix, Inc. Stock Incentive Plan for Outside
Directors is intended to promote the interests of the Company and its
shareholders by providing the Company's non-employee directors with appropriate
incentives and rewards to encourage them to take a long-term outlook when
formulating Company policy, to encourage such individuals to remain on the Board
of Directors and to provide them with an equity interest in the Company.
2. Definitions
As used in the Plan, the following definitions apply to the
terms indicated below:
(a) "Affiliate" shall mean any entity (whether or not incorporated)
controlling, controlled by or under common control with the Company.
(b) "Board of Directors" shall mean the Board of Directors of the
Company.
(c) "Cause," when used in connection with the termination of a
Participant's service as a member of the Board of Directors, shall mean the
Company's termination of such service on account of (i) the willful and
continued failure by the Participant substantially to perform his duties and
obligations to the Company (other than any such failure resulting from his
incapacity due to physical or mental illness) or (ii) the willful engaging by
the Participant in misconduct which is materially injurious to the Company. For
purposes of this Section 2(b), no act, or failure to act, on a Participant's
part shall be considered "willful" unless done, or omitted to be done, by the
Participant in bad faith and without reasonable belief that his action or
omission was in the best interests of the Company.
(d) "Change in Control" shall mean the occurrence of any of the
following:
(i) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) other than an employee benefit plan
sponsored or maintained by the Company (or any trustee of such plan
acting as trustee) (an "Acquiring Person") becomes the "beneficial
owner" (as such term is defined in Rule 13d-3 promulgated under the
Exchange Act), directly or indirectly, of securities of the Company
representing 25% or more of the combined voting power of the Company's
then outstanding securities;
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(ii) A change in the composition of the Board of Directors
during any period of two consecutive years beginning on or after
November 6, 1998 such that individuals who, at the beginning of such
period, constitute the Board of Directors, cease for any reason to
constitute at least a majority thereof unless the election, or the
nomination for election by the Company's stockholders, of each new
director was approved by a vote of at least three-fourths of the
directors then still in office who were directors at the beginning
of the period.
(iii) the Company's stockholders approve an agreement to merge
or consolidate the Company with another corporation (other than a
corporation 50% or more of which is controlled by, or is under common
control with, the Company);
(iv) any individual who is nominated by the Board of Directors
for election of the Board on any date fails to be so elected as a
direct or indirect result of any proxy fight or contested election for
positions on the Board of Directors;
(v) a "change in control" of the Company of a nature that
would be required to be reported in response to Item 6(e) of Schedule
14A of Regulation 14A promulgated under the Exchange Act.
Notwithstanding the foregoing, no Change of Control shall be
deemed to have occurred pursuant to either clause (i) or (ii) above in the event
any group comprised of senior officers of the Company acquires 25% or more of
the combined voting power of the Company's then outstanding securities
(notwithstanding any resultant change in the membership of the Board).
(e) "Code" shall mean the Internal Revenue Code of 1986.
(f) "Committee" shall mean such committee as the Board of Directors
shall appoint from time to time to administer the Plan; provided, however, that
no individual eligible to participate in the Plan be a member of the Committee.
In the event no committee is so appointed, the full Board of Directors shall
serve as the Committee, provided, however, that any member of the Board of
Directors who is eligible to participate in the Plan will abstain from any
action taken by the Board of Directors with respect to the Plan.
(g) "Company" shall mean Directrix, Inc. or any successor thereto.
(h) "Company Stock" shall mean the common stock of the Company.
(i) "Disability" shall mean any physical or mental condition that
prevents a Participant from being able to perform the Participant's duties as a
director for a period of twelve consecutive months.
(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
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(k) "Fair Market Value" shall mean, with respect to a share of Company
Stock on an applicable date:
(i) If Company Stock is traded on a national securities
exchange, (A) the average of the high and low reported sales price
regular way per share of Company Stock on the principal national
securities exchange on which Company Stock is traded or (B) if no
reported sales take place on the applicable date, the average of the
highest bid and lowest asked price of Company Stock on such exchange
or (C) if no such quotation is made on such date, on the next preceding
day (not more than 10 business days prior to the applicable date) on
which there were reported sales or such quotations.
(ii) If Company Stock is not traded on a national securities
exchange but quotations are available for Company Stock on the
over-the-counter market, (A) the mean between the highest bid and
lowest asked quotation on the over-the-counter market as reported by
the National Quotations Bureau, or any similar organization, on the
applicable date or (B) if no such quotation is made on such date on the
next preceding day (not more than 10 business days prior to the
applicable date) on which there were such quotations.
(iii) If Company Stock is neither traded on a national
securities exchange nor are quotations therefor available on the
over-the-counter market or if there are no sales or quotations in the
10 business days immediately prior to the applicable date, as
determined in good faith by the Committee in a manner consistently
applied.
(l) "Incentive Award" shall mean an Option or LSAR granted pursuant to
the terms of the Plan.
(m) "LSAR" shall mean a limited stock appreciation right that is
granted pursuant to the provisions of Section 7 hereof and which relates to an
Option. Each LSAR shall be exercisable only upon the occurrence of a Change in
Control and only in the alternative to the exercise of its related Option.
(n) "Option" shall mean an option to purchase shares of Company Stock
granted pursuant to Section 6 hereof.
(o) "Participant" shall mean a member of the Board of Directors who is
not at the time of reference an employee of the Company or any of its Affiliates
and to whom an Incentive Award is granted pursuant to the Plan, and, upon his
death, his successors, heirs, executors and administrators, as the case may be.
(p) "Person" shall mean a "person," as such term is used in Sections
13(d) and 14(d) of the Exchange Act.
(q) "Plan" shall mean the Directrix, Inc. Stock Incentive Plan For
Outside Directors, as it may be amended from time to time.
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(r) "Securities Act" shall mean the Securities Act of 1933, as amended.
3. Stock Subject to the Plan
Options shall be granted under the Plan with respect to a
number of shares of Company Stock as set forth in Section 6 that in the
aggregate does not exceed 20,000 shares. The grant of an LSAR shall not reduce
the number of shares of Company Stock with respect to which Options may be
granted pursuant to the Plan.
To the extent Incentive Awards granted under the Plan are
exercised, the shares covered will be unavailable for future grants under the
Plan. To the extent that Options together with any related rights granted under
the Plan terminate, expire or are canceled without having been exercised, or, in
the case of LSARs, exercised for cash, new Incentive Awards may be made with
respect to the shares covered thereby.
Shares of Common Stock issued under the Plan may be either
newly issued shares or treasury shares, at the discretion of the Committee.
4. Administration of the Plan
The Plan shall be administered by the Committee, which shall
have full authority to administer the Plan, including authority to interpret and
construe any provision of the Plan and the terms of any Incentive Award issued
under it and to adopt such rules and regulations for administering the Plan as
it may deem necessary or appropriate. Decisions of the Committee shall be final
and binding on all parties.
No member of the Committee shall be liable for any action,
omission, or determination relating to the Plan, and the Company shall indemnify
and hold harmless each member of the Committee and each other director or
employee of the Company to whom any duty or power relating to the administration
or interpretation of the Plan has been delegated against any cost or expense
(including counsel fees) or liability (including any sum paid in settlement of a
claim with the approval of the Committee) arising out of any action, omission or
determination relating to the Plan, unless, in either case, such action,
omission or determination was taken or made by such member, director or employee
in bad faith and without reasonable belief that it was in the best interests of
the Company.
5. Eligibility
The persons who shall be eligible to receive Incentive Awards
pursuant to the Plan shall be members of the Board of Directors who are not, at
the time of any grant hereunder, employees of the Company or its Affiliates.
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6. Formula Grant of Options
On the last trading day of each fiscal year of the Company,
each director who is, on such date, eligible to participate in the Plan, shall
be granted an Option with respect to 1,250 shares of Company Stock.
(a) Identification of Options
All Options granted under the Plan shall be clearly identified
in the agreement evidencing such Options as "non-qualified stock options."
(b) Exercise Price
The exercise price of any Option granted under the Plan shall
be 100% of the Fair Market Value of a share of Company Stock on the date on
which such Option is granted.
(c) Term and Exercise of Options
(i) Each Option shall become exercisable in two installments:
50% on the first anniversary of the date on which the Option was
granted and the remaining 50% on the second such anniversary.
(ii) Each Option shall be exercisable during such period as
shall be determined by the Committee on the day on which such Option is
granted and set forth in the agreement evidencing such Option;
provided, however, that no Option shall be exercisable after the
expiration of ten years from the date such Option was granted; and,
provided, further, that each Option shall be subject to earlier
termination, expiration or cancellation as provided in the Plan.
(iii) Each Option shall be exercisable in whole or in part;
provided, however, that no partial exercise of an Option shall be for
an aggregate exercise price of less than $1,000. The partial exercise
of an Option shall not cause the expiration, termination or
cancellation of the remaining portion thereof. Upon the partial
exercise of an Option, the agreement evidencing such Option and any
related LSARs shall be returned to the Participant exercising such
Option together with the delivery of the certificates described in
Section 6(c)(vi) hereof.
(iv) An Option shall be exercised by delivering notice to the
Company's principal office, to the attention of its Secretary, no less
than one business day in advance of the effective date of the proposed
exercise. Such notice shall be accompanied by the agreements evidencing
the Option and any related LSARs, shall specify the number of shares of
Company Stock with respect to which the Option is being exercised and
the effective date of the
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proposed exercise and shall be signed by the Participant. The
Participant may withdraw such notice at any time prior to the close of
business on the business day immediately preceding the effective date
of the proposed exercise, in which case such agreements shall be
returned to him. Payment for shares of Company Stock purchased upon the
exercise of an Option shall be made on the effective date of such
exercise either (A) in cash, by certified check, bank cashier's check
or wire transfer or (B) subject to the approval of the Board of
Directors, in shares of Company Stock owned by the Participant and
valued at their Fair Market Value on the effective date of such
exercise, or partly in shares of Company Stock with the balance in
cash, by certified check, bank cashier's check or wire transfer. Any
payment in shares of Company Stock shall be effected by the delivery of
such shares to the Secretary of the Company, duly endorsed in blank or
accompanied by stock powers duly executed in blank, together with any
other documents and evidences as the Secretary of the Company shall
require from time to time.
(v) Except as otherwise provided in an applicable agreement
evidencing an Option, during the lifetime of a Participant, each Option
granted to the Participant shall be exercisable only by the Participant
and no Option shall be assignable or transferable otherwise than by
will or by the laws of descent and distribution. The Committee may, in
any applicable agreement evidencing an Option, permit a Participant to
transfer all or some of the Options to (A) the Participant's spouse,
children or grandchildren ("Immediate Family Members"), (B) a trust or
trusts for the exclusive benefit of such Immediate Family Members, or
(C) other parties approved by the Committee in its absolute discretion.
Following any such transfer, any transferred Options shall continue to
be subject to the same terms and conditions as were applicable
immediately prior to the transfer.
(vi) Certificates for shares of Company Stock purchased upon
the exercise of an Option shall be issued in the name of the
Participant or his beneficiary, as the case may be, and delivered to
the Participant or his beneficiary, as the case may be, as soon as
practicable following the effective date on which the Option is
exercised.
(d) Effect of Discontinuance of Director's Term
(i) In the event that the term of a Participant's membership
on the Board of Directors expires because the Participant (A) loses an
election for a position on the Board of Directors, (B) resigns from the
Board of Directors prior to his completing ten years of service as a
director or (C) fails to seek election to the Board of Directors for a
term commencing prior to his completing ten years of service as a
director (in any case, other than on account of death or Disability),
Options granted to such Participant, to the extent that they were
exercisable at the time of such termination, shall remain exercisable
until the expiration of three months after such termination, on which
date they shall expire, and Options granted to such Participant, to the
extent that they were not exercisable at the time of such termination,
shall expire at the close of business on the date of such termination;
provided, however, that no Option shall be exercisable after the
expiration of its term.
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(ii) In the event that the term of a Participant's membership
on the Board of Directors expires (A) because of the Participant's
resignation on or after completing ten years of service, (B) because of
his failure to seek election after completing ten years of service or
(C) because of the Participant's Disability or death, Options granted
to such Participant, to the extent that they were exercisable at the
time of such termination, shall remain exercisable until the expiration
of one year after such termination, on which date they shall expire,
and Options granted to such Participant, to the extent that they were
not exercisable at the time of such termination, shall expire at the
close of business on the date of such termination; provided, however,
that no Option shall be exercisable after the expiration of its term.
(iii) In the event that a Participant is removed from the
Board of Directors by the shareholders of the Company for Cause, all
outstanding Options granted to such Participant shall expire at the
commencement of business on the date of such removal.
(e) Acceleration of Exercise Date Upon
Change in Control
Upon the occurrence of a Change in Control, each Option
granted under the Plan and outstanding at such time shall become fully and
immediately exercisable and shall remain exercisable until its expiration,
termination or cancellation pursuant to the terms of the Plan.
7. LSARs
Each Option granted hereunder shall include an LSAR relating
to a number of shares of Company Stock equal to the number of shares of Company
Stock subject to the related Option. An LSAR shall be granted at the same time
that its related Option is granted. Each LSAR shall be evidenced by the
agreement evidencing the related Option. Each LSAR shall be subject to the
following terms and conditions:
(a) Benefit Upon Exercise
The exercise of an LSAR relating to an Option with respect to
any number of shares of Company Stock shall entitle the Participant to a cash
payment, for each such share, equal to the excess of (i) the greater of (A) the
highest price per share of Company Stock paid in the Change in Control in
connection with which such LSAR became exercisable and (B) the Fair Market Value
of a share of Company Stock on the date of such Change in Control over (ii) the
exercise price of the related Option. Such payment shall be made as soon as
practicable, but in no event later than the expiration of five business days
after the effective date of such exercise.
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(b) Term and Exercise of LSARs
(i) An LSAR shall be exercisable only during the period
commencing on the first day following the occurrence of a Change in
Control and terminating on the expiration of sixty days after such
date. Notwithstanding anything else herein, an LSAR may be exercised
only if and to the extent that the Option to which it relates is
exercisable.
(ii) The exercise of an LSAR with respect to a number of
shares of Company Stock shall cause the immediate and automatic
cancellation of the Option to which it relates with respect to an equal
number of shares. The exercise of an Option, or the cancellation,
termination or expiration of an Option (other than pursuant to this
Paragraph 7(b)(ii)), with respect to a number of shares of Company
Stock, shall cause the cancellation of the LSAR related to it with
respect to an equal number of shares.
(iii) Each LSAR shall be exercisable in whole or in part;
provided, however, that no partial exercise of an LSAR shall be for an
aggregate exercise price of less than $1,000. The partial exercise of
an LSAR shall not cause the expiration, termination or cancellation of
the remaining portion thereof. Upon the partial exercise of an LSAR,
the agreement evidencing the LSAR and the related Option, marked with
such notations as the Committee may deem appropriate to evidence such
partial exercise, shall be returned to the Participant exercising such
LSAR together with the payment described in Paragraph 7(a) hereof.
(iv) Except as otherwise provided in an applicable agreement
evidencing an LSAR, during the lifetime of a Participant, each LSAR
granted to the Participant shall be exercisable only by the Participant
and no LSAR shall be assignable or transferable otherwise than by will
or by the laws of descent and distribution and otherwise than together
with its related Option. The Committee may, in any applicable agreement
evidencing an LSAR, permit a Participant to transfer all or some of the
LSAR to (A) the Participant's Immediate Family Members, (B) a trust or
trusts for the exclusive benefit of such Immediate Family Members, or
(C) other parties approved by the Committee in its absolute discretion.
Following any such transfer, any transferred LSARs shall continue to be
subject to the same terms and conditions as were applicable immediately
prior to the transfer.
(v) An LSAR shall be exercised by delivering notice to the
Company's principal office, to the attention of its Secretary, no less
than one business day in advance of the effective date of the proposed
exercise. Such notice shall be accompanied by the applicable agreements
evidencing the LSAR and the related Option shall specify the number of
shares of Company Stock with respect to which the LSAR is being
exercised and the effective date of the proposed exercise and shall be
signed by the Participant. The Participant may withdraw such notice at
any time prior to the close of business on the business day immediately
preceding the effective date of the proposed exercise, in which case
such agreements shall be returned to him.
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8. Adjustment Upon Changes in Company Stock
(a) Shares Available for Grants
In the event of any change in the number of shares of Company
Stock outstanding by reason of any stock dividend or split, reverse stock split,
recapitalization, merger, consolidation, combination or exchange of shares or
similar corporate change, the number of shares of Company Stock with respect to
which Options and LSARs are granted under Section 6 hereunder shall be
appropriately adjusted.
(b) Outstanding Options and LSARs -- Increase or Decrease
in Issued Shares Without Consideration
Subject to any required action by the shareholders of the
Company, in the event of any increase or decrease in the number of issued shares
of Company Stock resulting from a subdivision or consolidation of shares of
Company Stock or the payment of a stock dividend (but only on the shares of
Company Stock), or any other increase or decrease in the number of such shares
effected without receipt of consideration by the Company, the number of shares
of Company Stock subject to each outstanding Option and LSAR, and the exercise
price-per-share of Company Stock of each such Option and LSAR shall be
appropriately adjusted.
(c) Outstanding Options and LSARs - Certain Mergers
Subject to any required action by the shareholders of the
Company, in the event that the Company shall be the surviving corporation in any
merger or consolidation (except a merger or consolidation as a result of which
the holders of shares of Company Stock receive securities of another
corporation), each Option and LSAR outstanding on the date of such merger or
consolidation shall pertain to and apply to the securities which a holder of the
number of shares of Company Stock subject to such Option and LSAR would have
received in such merger or consolidation.
(d) Outstanding Options and LSARs - Certain Other Transactions
In the event of (i) a dissolution or liquidation of the
Company, (ii) a sale of all or substantially all of the Company's assets, (iii)
a merger or consolidation involving the Company in which the Company is not the
surviving corporation or (iv) a merger or consolidation involving the Company in
which the Company is the surviving corporation but the holders of shares of
Company Stock receive securities of another corporation and/or other property,
including cash, each Option (including each LSAR related thereto) outstanding
immediately prior to such event (whether or not then exercisable) shall be
canceled effective immediately prior to the occurrence of such event, and, in
full consideration of such cancellation, the Participant to whom such Option was
granted shall be paid an amount in cash for each share of Company Stock subject
to such Option, equal to the excess of (A) the value, as determined by an
independent appraisal of the property (including
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cash) received by the holder of a share of Company Stock as a result of such
event over (B) the exercise price of such Option.
(e) No Other Rights
Except as expressly provided in the Plan, no Participant shall
have any rights by reason of any subdivision or consolidation of shares of stock
of any class, the payment of any dividend, any increase or decrease in the
number of shares of stock of any class or any dissolution, liquidation, merger
or consolidation of the Company or any other corporation. Except as expressly
provided in the Plan, no issuance by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number of shares of Company Stock subject to an Incentive Award or the exercise
price of any Option or LSAR.
9. Rights as a Stockholder
No person shall have any rights as a stockholder with respect
to any shares of Company Stock covered by or relating to any Incentive Award
granted pursuant to this Plan until the date of the issuance of a stock
certificate with respect to such shares. Except as otherwise expressly provided
in Section 8 hereof, no adjustment to any Incentive Award shall be made for
dividends or other rights for which the record date occurs prior to the date
such stock certificate is issued.
10. Securities Matters
(a) The Company shall be under no obligation to effect the registration
pursuant to the Securities Act of any interests in the Plan or any shares of
Company Stock to be issued hereunder or to effect similar compliance under any
state laws. Notwithstanding anything herein to the contrary, the Company shall
not be obligated to cause to be issued or delivered any certificates evidencing
shares of Company Stock pursuant to the Plan unless and until the Company is
advised by its counsel that the issuance and delivery of such certificates is in
compliance with all applicable laws, regulations of governmental authority and
the requirements of any securities exchange on which shares of Company Stock are
traded. Each Participant may be required, as a condition of the issuance and
delivery of certificates evidencing shares of Company Stock pursuant to the
terms hereof, that the recipient of such shares make appropriate covenants,
agreements and representations, and that such certificates bear appropriate
legends.
(b) The exercise of any Option granted hereunder shall be effective
only at such time as counsel to the Company shall have determined that the
issuance and delivery of shares of Company Stock pursuant to such exercise is in
compliance with all applicable laws, regulations of governmental authority and
the requirements of any securities exchange on which shares of Company Stock are
traded. The effectiveness of any exercise of an Option granted hereunder may be
deferred in order to allow the issuance of shares of Company Stock pursuant
thereto to be made pursuant to registration or an exemption from registration or
other methods for compliance available under federal or state securities laws.
The
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Participant shall be informed in writing of any such deferral. During the
period that the effectiveness of the exercise of an Option has been deferred,
the Participant may, by written notice, withdraw such exercise and obtain the
refund of any amount paid with respect thereto.
11. Withholding Taxes
(a) Cash Remittance
Whenever shares of Company Stock are to be issued upon the
exercise of an Option, the Company shall have the right to require the
Participant to remit to the Company in cash an amount sufficient to satisfy
federal, state and local withholding tax requirements, if any, attributable to
such exercise, occurrence or payment prior to the delivery of any certificate or
certificates for such shares. In addition, upon the exercise of an LSAR, the
Company shall have the right to withhold from any cash payment required to be
made pursuant thereto an amount sufficient to satisfy the federal, state and
local withholding tax requirements, if any, attributable to such exercise
or grant.
(b) Stock Remittance
At the election of the Participant, subject to the approval of
the Board of Directors, when shares of Company Stock are to be issued upon the
exercise of an Option, in lieu of the remittance required by Section 11(a)
hereof, the Participant may tender to the Company a number of shares of Company
Stock, the Fair Market Value of which at the tender date is sufficient to
satisfy the federal, state and local withholding tax requirements, if any,
attributable to such exercise, occurrence or grant.
(c) Stock Withholding
The Company shall have the right, when shares of Company Stock
are to be issued upon the exercise of an Option, in lieu of requiring the
remittance required by Section 11(a) hereof, to withhold a number of such
shares, the Fair Market Value of which at the exercise date the Committee
determines to be sufficient to satisfy the federal, state and local withholding
tax requirements, if any, attributable to such exercise, occurrence or grant.
12. Amendment or Termination of the Plan
The Board of Directors may, at any time, suspend or
discontinue the Plan or revise or amend it in any respect whatsoever; provided,
however, that if and to the extent required by Rule l6b-3 promulgated under
Section 16(b) of the Exchange Act or by any comparable or successor exemption
under which the Board of Directors believes it is appropriate for the Plan to
qualify, no amendment shall be effective without the approval of the
shareholders of the Company. No action hereunder may, without the consent of a
Participant, reduce the Participant's rights under any previously granted and
outstanding Incentive Award.
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13. No Obligation to Exercise
The grant to a Participant of an Option and LSAR shall impose
no obligation upon such Participant to exercise such Option or LSAR.
14. Transfers Upon Death
Upon the death of a Participant, outstanding Incentive Awards
granted to such Participant may be exercised only by the executors or
administrators of the Participant's estate or by any person or persons who shall
have acquired such right to exercise by will or by the laws of descent and
distribution. No transfer by will or the laws of descent and distribution of any
Incentive Award, or the right to exercise any Incentive Award, shall be
effective to bind the Company unless the Committee shall have been furnished
with (a) written notice thereof and with a copy of the will and/or such evidence
as the Committee may deem necessary to establish the validity of the transfer
and (b) an agreement by the transferee to comply with all the terms and
conditions of the Incentive Award that are or would have been applicable to the
Participant and to be bound by the acknowledgements made by the Participant in
connection with the grant of the Incentive Award. Except as
provided in this Section 14, or in any applicable agreement pursuant to Sections
6(c)(v) or 7(b)(iv) of this Plan, no Incentive Award shall be transferable, and
shall be exercisable only by a Participant during the Participant's lifetime.
15. Expenses and Receipts
The expenses of the Plan shall be paid by the Company. Any
proceeds received by the Company in connection with any Incentive Award will be
used for general corporate purposes.
16. Limitations Imposed by Section 162(m)
Notwithstanding any other provision hereunder, prior to a
Change in Control, if and to the extent that the Committee determines the
Company's federal tax deduction in respect of an Incentive Award may be limited
as a result of Section 162(m) of the Code, the Committee may take the following
actions. The Committee may delay the payment in respect of Options until a date
that is within 30 days after the earlier to occur of (i) the date that
compensation paid to the Participant no longer is subject to the deduction
limitation under Section 162(m) of the Code and (ii) the occurrence of a Change
in Control. In the event that a Participant exercises an Option at a time when
the Participant is a "covered employee," and the Committee determines to delay
the payment in respect of any such Incentive Award, the Committee shall credit
the Fair Market Value of the Company Stock, payable to the Participant to a book
account. The Participant shall have no rights in respect of such book account
and the amount credited thereto shall not be transferable by the Participant
other than by will or laws of descent and distribution. The Committee may credit
additional amounts to such book account as it may determine in its sole
discretion. Any book account created hereunder shall represent only an unfunded,
unsecured promise by the Company to pay the amount credited thereto to the
Participant in the future.
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17. Certain Board Action
To the extent consistent with Rule 16b-3, any member of the
Board of Directors who is eligible to participate in the Plan will abstain from
any action taken by the Board of Directors with respect to the Plan.
18. Failure to Comply
In addition to the remedies of the Company elsewhere provided
for herein, failure by a Participant (or beneficiary) to comply with any of the
terms and conditions of the Plan or the agreement executed by such Participant
(or beneficiary) evidencing an Incentive Award, unless such failure is remedied
by such Participant (or beneficiary) within ten days after having been notified
of such failure by the Committee, shall be grounds for the cancellation and
forfeiture of such Incentive Award, in whole or in part.
19. Effective Date of Plan
The Plan was adopted by the Board of Directors on November 6,
1998, subject to approval by the shareholders of the Company at their next
annual meeting, in accordance with applicable law, and the requirements of Rule
l6b-3 promulgated under Section 16(b) of the Exchange Act. Incentive Awards may
be granted under the Plan at any time prior to the receipt of such shareholder
approval; provided, however, that each such grant shall be subject to such
approval. Without limitation on the foregoing, no Option or LSAR may be
exercised prior to the receipt of such approval. If the Plan is not so approved,
then the Plan and all Incentive Awards then outstanding hereunder shall
forthwith automatically terminate and be of no force and effect.
20. Term of the Plan
The Plan will terminate automatically upon the expiration of 5
years after the date the Plan was adopted.
21. Applicable Law
Except to the extent preempted by any applicable federal law,
the Plan will be construed and administered in accordance with the laws of the
State of New York, without reference to the principles of conflicts of law.
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LOAN AND SECURITY AGREEMENT
LOAN AND SECURITY AGREEMENT (this "Agreement"), dated as of ,
1998, between DIRECTRIX, INC., a Delaware corporation (the "Borrower"), and J.
ROGER FAHERTY, LELAND H. NOLAN and DONALD J. MCDONALD, JR. (collectively, the
"Lenders").
RECITALS
WHEREAS, the Borrower desires to borrow from the Lenders an amount of
up to One and One-Half Million United States Dollars (US$1,500,000) (the
"Maximum Amount") in one loan or in installments (such loan and each such
installment, an "Advance") and the Lenders desire to make the Advances to the
Borrower; and
WHEREAS, the parties desire to set forth the terms of their agreement
with respect to the foregoing.
NOW, THEREFORE, in consideration of the Advances made to the Borrower,
the parties hereby agree as follows:
ARTICLE I
TAKEDOWN; REPAYMENT OF THE ADVANCES; GRANT OF SECURITY
SECTION 1.01. Loans. Subject to the terms and conditions hereof, each
Lender severally agrees to make Advances for the loans to the Borrower from time
to time prior to the second anniversary of the date of this Agreement (such date
is referred to as the "Maturity Date") in the manner set forth in Section 1.02
in an aggregate principal amount at any one time outstanding which does not
exceed the amount of such Lender's Commitment Percentage ("Commitment
Percentage"), as set forth on Schedule 1.01, of the Maximum Amount. The Borrower
may prepay such Advances and may reborrow any amounts repaid prior to the
Maturity Date.
SECTION 1.02. The Notes; Repayment of the Advances. The Borrower's
obligation to repay the unpaid principal amount of the Advances shall be
evidenced by the notes in the form of attached Exhibit A (the "Notes"), payable
to the Lenders and their registered assigns, duly executed and delivered by the
Borrower to the Lenders. The Notes shall mature on the Maturity Date and bear
interest and be subject to such other terms and conditions as provided
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for herein and in the Notes. Upon receipt of duly executed Notes on ,
1998, or such other date as the parties may agree, the Lenders shall make the
first Advance to the Borrower in the amount requested by Borrower up to the
Maximum Amount in a manner to be mutually agreed upon by the parties. All
subsequent Advances will be made within five business days of the Lenders'
receipt of a request therefor, such request to be signed by the Chairman and
Chief Financial Officer of the Borrower and in amounts of not less than
$5,000 or integral multiples thereof. At no time shall the amount outstanding
under this Agreement exceed the Maximum Amount. The principal amount of the
Advances, together with all accrued and unpaid interest shall be repaid on
the Maturity Date. The Borrower shall make all principal repayments and
prepayments among the Lenders in proportion to their respective Commitment
Percentage.
SECTION 1.03. Payment of Interest; Default Rate. Interest shall be
payable on the outstanding unpaid principal amount of the Notes at the rate and
at the times specified in the Notes. The Borrower shall make all interest
payments among the Lenders in proportion to their respective Commitment
Percentage. Any amounts not paid when due shall bear interest at the Default
Rate (as such term is defined in the Notes).
SECTION 1.04. Loan Record. The Lenders shall maintain a loan record in
which they shall record the date and amount of each Advance and payment or
prepayment of principal of the Advances and the interest paid with respect
thereto, which record may be kept by recordations on the Notes. The failure of
any Lender to make an entry in the loan register or any error made in any such
entry shall not in any way affect the Borrower's obligations under this
Agreement, including the Borrower's obligations to repay the principal amount of
the Advances and the interest accrued from the actual date on which the Advances
are made. The Borrower shall not be bound by any entry in the loan register not
made in accordance with the terms hereof.
SECTION 1.05. Prepayments. Any prepayments of Advances shall be
applied first to the payment of interest due hereunder and then to principal.
SECTION 1.06. Place and Manner of Payments. The Borrower shall make all
payments of principal and interest on the Advances to the Lenders in immediately
available funds to such place as the Lenders shall instruct the Borrower in
writing.
SECTION 1.07. Payment Without Setoff. The principal of, interest on and
all expenses and costs related to the Advances (collectively, the "Obligations")
shall be paid
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without setoff or counterclaim and free and clear of and exempt from, and
without deduction for or on account of, any present or future taxes, imposts,
duties, deduction, withholdings or other charges of whatsoever nature imposed,
levied, collected, withheld or assessed by any government or any political
subdivision or taxing authority thereof.
SECTION 1.08. Advances Scheduled. As security for the prompt and
unconditional payment of any and all Obligations, the Borrower, subject to
Section 3.07, does hereby grant to the Lenders a continuing lien upon and first
security interest in the Collateral (as defined below) and hereby grants,
pledges, assigns and transfers to the Lenders all of the Collateral. For the
purposes of this Agreement "Collateral" shall mean and include all of the
Borrower's assets, including without limitation, all Accounts Receivables,
Inventory, Accounts (as such terms are defined in the New York Uniform
Commercial Code, as amended) and all Machinery, Equipment, Furniture and
Fixtures and Hardware & Software as more specifically listed on attached
Schedule 1.08, which Schedule 1.08 shall be deemed part of this Agreement, and
the Proceeds of the foregoing.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants that the following statements are
true and correct as of the date hereof and shall be true and correct on the date
each Advance is made:
SECTION 2.01. Good Standing. The Borrower is a company duly
constituted, validly existing and in good standing under the laws of Delaware
and has all requisite power and authority to conduct its business, to own its
properties, and to execute and deliver and to perform all of its obligation
under this Agreement and the Notes.
SECTION 2.02. Authority. The execution, delivery and performance by the
Borrower of this Agreement and the issuance, execution and delivery by the
Borrower of the Notes have been duly authorized by all necessary action of the
Borrower and do not and will not (i) violate any provision of the Borrower's
governing documents or any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award presently in effect having
applicability to the Borrower, or (ii) result in a breach or constitute a
default under any indenture or loan or credit agreement or any other agreement,
lease or instrument to which the Borrower is a party or by which the
Borrower's properties may be bound or affected, and the Borrower is not in
default under any such law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award or any such indenture, agreement,
lease or
3
<PAGE>
instrument.
SECTION 2.03. Ownership of Collateral. The Borrower owns the Collateral
free and clear of any lien, security interest or other charge or encumbrance of
any kind (collectively the "Liens"), except to the extent of any Liens
associated with the equipment lease financing set forth on attached Schedule
2.03 or any liens specifically permitted by the Lenders (collectively,
"Permitted Liens").
SECTION 2.04. Representations Relating to the Collateral. No financing
statement or other filing listing any of the Collateral is on file in any
jurisdiction (other than any financing statement filed on behalf of the Lenders
as secured party or in connection with a Permitted Lien); (b) the chief
executive office of the Borrower is located at the address set forth in Section
5.03 herein; (c) the Borrower has not created and is not aware of any Lien on or
affecting any Collateral other than the Lien created by this Agreement in favor
of the Lenders or the Permitted Liens; and (d) the Borrower did not have or
conduct business under any name or trade name in any jurisdiction during the
past six years other than the name set forth on the signature page of this
Agreement, and the Borrower is entitled to use such name.
SECTION 2.05. Binding Obligations. This Agreement constitutes, and when
executed and delivered to the Lenders by the Borrower the Notes will constitute,
legal, valid and binding obligations of the Borrower that are enforceable
against the Borrower in accordance with their respective terms.
SECTION 2.06. Consents. All authorizations, consents, approvals, and
licenses of, and filing and registrations with, any governmental authority
required under applicable law or regulations for the Borrower to enter into and
perform its obligations under this Agreement and the Notes have been obtained
and are in full force and effect.
ARTICLE III
COVENANTS
So long as the Notes are outstanding, unless the Lenders shall have
waived compliance in writing, the Borrower agrees that:
SECTION 3.01. Financial Statements. The Borrower will deliver to the
Lenders: (a) within 90 days after the end of each fiscal year of the Borrower, a
consolidated balance sheet and consolidated statements of income and surplus
showing the financial condition of the Borrower and its consolidated
subsidiaries or affiliates, if any, as at the close of such year and
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<PAGE>
the results of operations during such year, all certified by a duly authorized
officer of the Borrower and (b) promptly, from time to time, such other
information regarding the operations, business affairs and financial condition
of the Borrower as the Lenders may reasonably request. Furthermore, the Borrower
will deliver to the Lenders within 60 days after the end of each fiscal quarter,
a copy of Borrower's quarterly financial statements, or year-to-date statements,
as the case may be.
SECTION 3.02. Notice of Defaults. The Borrower shall promptly notify
the Lenders of the occurrence of any event of which the Borrower has knowledge
which, alone or with lapse of time or notice or both, would constitute an Event
of Default (as hereinafter defined).
SECTION 3.03. Notice of Proceedings. The Borrower will promptly give
notice in writing to the Lenders of all material litigation, arbitral
proceedings and regulatory proceedings affecting the Borrower or any of its
subsidiaries or affiliates or the property of the Borrower or any of its
subsidiaries or affiliates.
SECTION 3.04. Certain Affirmative Covenants. The Borrower will, and
will cause each of its affiliates to: (i) preserve and maintain its existence
and all of its rights, privileges and franchises necessary or desirable in the
normal conduct of its business, and conduct its business in a regular manner,
(ii) comply with the requirements of all material applicable laws, rules,
regulations and orders of any governmental body or regulatory agency having
jurisdiction, (iii) pay and discharge all taxes, assessments and governmental
charges or levies imposed on it or on its income or profits or on any of its
property prior to the date on which penalties attach thereto (unless such
payment is being contested in good faith and by proper proceedings and which is
adequately reserved), (iv) maintain insurance in responsible companies in such
amounts and against such risks as are usually carried by owners of similar
businesses and properties in the same general areas in which the Borrower and
its affiliates operate and (v) keep all of its properties necessary in its
business in good working order and condition, ordinary wear and tear excepted,
without mortgage or lien incurred other than in the ordinary course of business.
SECTION 3.05. Collateral. Unless and until all of the Obligations have
been indefeasibly paid in full and all commitments of the Lenders to extend
credit which, once extended, would give rise to Obligations, have expired or
been terminated, the Borrower shall: (a) keep the Collateral free and clear of
any Lien of any kind, other than the Lien created by this Agreement and
Permitted Liens; (b) promptly pay, when due, all taxes and transportation,
storage, warehousing and other charges and fees affecting or arising out of the
Collateral and defend the Collateral against all claims and demands of all
Persons at any time claiming any
5
<PAGE>
interest therein adverse to or the same as that of the Lenders, unless the
Borrower is disputing such claim or demand in good faith by appropriate
proceedings; (c) provide the Lenders with such information as the Lenders may
from time to time reasonably request with respect to the Collateral and the
Borrower's place of business or location of any Collateral; (d) give the Lenders
at least 30 days' prior written notice before changing the Borrower's name or
chief executive office or changing the location or disposing of any Collateral
other than cash and cash equivalents; (e) not sell or otherwise dispose of any
Collateral other than cash and cash equivalents except on commercially
reasonable terms and in the ordinary course of business; (f) permit the Lenders
or their representatives, to have access to, examine and copy at all reasonable
times the Collateral, properties, minute books and other corporate or
partnership records, books of accounts, and financial and other business records
of the Borrower (including, without limitation, all books, records, ledger
cards, computer programs, tapes and computer disks and diskettes and other
property recording, evidencing or relating to any Collateral); and (g) promptly
notify the Lenders upon the occurrence of any Event of Default of which the
Borrower has knowledge.
SECTION 3.06. Preservation and Protection of Security Interest; Power
of Attorney. Subject to Section 3.07, the Borrower will faithfully preserve and
protect the Lien in the Collateral created by this Agreement and will, at its
own cost and expense, cause such Lien to be perfected and continue to be
perfected and to be and remain prior to all other Liens, so long as all or any
part of the Obligations are outstanding and unpaid, and for such purpose the
Borrower will from time to time at the request of the Lenders (i) make notations
of the security interest in certificates of title constituting proceeds of
Collateral, a security interest in which is perfected by such notation, and
deliver the same to the Lenders and (ii) file or record, or cause to be filed or
recorded, such instruments, documents and notices, including, without
limitation, financing statements and continuation statements, as the Lenders may
reasonably deem necessary or advisable from time to time in order to perfect and
continue to perfect the Lien and to maintain their priority over all the Lien.
The Borrower will do all such other acts and things and will execute and deliver
all such other instruments and documents, including further security agreements,
pledges, endorsements, assignments, and notices as the Lenders may reasonably
deem necessary or advisable from time to time in order to perfect and preserve
the priority of the Lien in the Collateral as contemplated by this Agreement.
The Lenders, acting through its authorized agent, are hereby irrevocably
appointed the attorney-in-fact of the Borrower to do, at the Borrower's expense,
all acts and things which the Lenders may reasonably deem necessary or advisable
to preserve, perfect, continue to perfect and/or maintain the priority of the
Lien in the Collateral, including the signing of financing, continuation or
other similar statements and notices on behalf of the Borrower, and which the
Borrower is required to do by the terms of this Agreement. The Borrower hereby
authorizes
6
<PAGE>
the Lenders to sign and file financing statements with respect to the Collateral
without the signature of the Borrower. The Borrower shall be liable for and pay
all filing fees for financing statements with respect to the Collateral.
SECTION 3.07. Additional Lender. If the Borrower agrees to borrow
additional amounts from any other lender (the "Additional Borrowing"), the
Lenders agree to negotiate in good faith concerning the sharing of the
Collateral and to enter into an intercreditor agreement and any related
documents, as necessary, with such other lender on terms mutually acceptable to
such parties and in a manner which will facilitate the execution of the
documents related to the Additional Borrowing.
SECTION 3.08. Financial Covenants. The Lenders and the Borrower agree
to negotiate, in good faith, financial covenants (including net revenues,
earnings before interest, taxes, depreciation and amortization, net worth and
working capital) consistent with an asset-based loan facility of this type and
based on the Borrower's results of operations for its first fiscal year. The
financial covenants shall be included in an amendment to this Agreement which
shall take effect one year after the date hereof.
SECTION 3.09. Borrower Subsidiaries. If the Borrower forms or acquires
any subsidiaries ("Subsidiaries"), at the Lenders' request, the Borrower agrees
to (i) cause the Subsidiaries to guarantee the Obligations and (ii) pledge the
stock of the Subsidiaries to the Lenders.
ARTICLE IV
EVENTS OF DEFAULT
SECTION 4.01. Events of Default. If any of the following events
("Events of Default") shall occur:
(a) The Borrower shall fail to pay any principal of the Notes within
three days of such principal becoming due and payable, or shall fail to pay any
interest thereon within twenty days after such interest becoming due and
payable; or
(b) any representation or warranty made in connection with the
execution and delivery of this Agreement, the Notes or in any document delivered
pursuant hereto shall prove to have been incorrect in any material respect upon
the date when made; or
(c) the Borrower shall fail to perform or observe any term, covenant or
agreement
7
<PAGE>
contained in this Agreement and any such failure remains unremedied for thirty
days after written notice thereof shall have been given to the Borrower by the
Lenders; or
(d) the Borrower shall cease to own the Collateral; or
(e) any indebtedness of the Borrower for borrowed money in excess of
[$500,000] is not paid when due, whether by acceleration or otherwise, or is
declared to be due and payable, or required to be prepaid (other than by a
regularly scheduled required payment), prior to the stated maturity thereof; or
(f) the Borrower shall make an assignment for the benefit of
creditors, file a petition in bankruptcy, be adjudicated insolvent or bankrupt,
petition or apply to any tribunal for any receiver or trustee for itself or for
any substantial part of its property, commence any proceeding relating to it
under any reorganization, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, whether now or hereafter in
effect, or by any act indicate its consent to, approval of, or acquiescence in,
any such proceeding for the appointment of any receiver of, or trustee for, it
or any substantial part of its property and such appointment shall continue
undischarged for a period of thirty days, or a petition in bankruptcy or for
reorganization shall be filed against the Borrower and shall not be dismissed
for a period of thirty days;
then, and in any such event, the Lenders may, in their sole discretion, by
notice to the Borrower, declare the entire unpaid principal amount of the Notes,
all interest accrued and unpaid thereon, and all other amounts payable hereunder
to be forthwith due and payable, whereupon the Notes, all such accrued interest
and all such other amounts shall become and be forthwith due and payable,
without presentment, demand, protest or further notice of any kind, all of which
are hereby expressly waived by the Borrower.
SECTION 4.02. Effect of Default on the Collateral. After the occurrence
and during the continuance of an Event of Default, the Lenders may, without
notice to or demand (other than any notice required by law, the giving of which
is not waivable), upon the Borrower (all of which are hereby waived by the
Borrower), without releasing the Borrower from any obligation under this
Agreement or any other instruments or agreements with the Lenders and without
waiving any rights the Lenders may have: (i) demand, collect or receive upon all
or any part of the Collateral; (ii) in such manner and to such extent as the
Lenders may deem necessary to protect the Collateral or the interest, rights,
powers or duties of the Lenders, enter into and upon any premises of the
Borrower and take and hold possession of all or any
8
<PAGE>
part of the Collateral (the Borrower hereby waiving and releasing any claim for
damages in respect of such taking) and exclude the Borrower and all other
Persons from the Collateral; (iii) collect any and all income, rents, issues,
profits and proceeds from the Collateral, the same being hereby assigned and
transferred to the Lenders and from time to time apply or accumulate such
income, rents, issues, profits and proceeds in such order and manner as the
Lenders in its sole discretion, shall instruct, it being understood that the
collection or receipt of income, rents, issues, profits or proceeds from the
Collateral after declaration of default and election to cause the Collateral to
be sold under the pursuant to the terms of this Agreement shall not affect or
impair any event of default or declaration of default under any agreement or
instrument among the Borrower and the Lenders or election to cause any
Collateral to be sold or any sale proceedings predicated on the same, but such
proceedings may be conducted and sale effected notwithstanding the collection or
receipt of any such income, rents, issues, profits and proceeds; (iv) take
control of any and all of the Accounts, contractual or other rights that are
included in the Collateral and Proceeds arising from any such Accounts or
contractual or other rights, enforce collection, either in the name of the
Lenders or in the name of the Borrower, of any or all of the Accounts,
contractual and other rights that are included in the Collateral and Proceeds by
suit or otherwise, receive, receipt for, surrender, release or exchange all or
any part of such Collateral or compromise, settle, extend or renew (whether or
not longer than the original period) any indebtedness under such Collateral; (v)
sell all or any part of the Collateral at public or private sale at such place
or places and at such time or times and in such manner and upon such terms,
whether for cash or credit, as the Lenders in their sole discretion may
determine; (vi) endorse in the name of the Borrower any instrument, however
received by the Lenders representing Collateral or Proceeds of any of the
Collateral; and (vii) exercise all of the rights and remedies granted to a
secured party under the New York Uniform Commercial Code and all other rights
and remedies given to the Lenders under this Agreement or any other instrument
or agreement otherwise available at law or in equity. The Lenders shall be under
no obligation to make any of the payments or do any of the acts referred to in
this Section 4.02 or elsewhere in this Agreement and any of the actions referred
to in this Section 4.02 or elsewhere in this Agreement may be taken regardless
of whether any notice of default or election to sell has been given under this
Agreement (provided, however, that all notices required by law, the giving of
which may not be waived, shall be given in accordance with such law) without
regard to the adequacy of the security for the Obligations.
SECTION 4.03. Application of Proceeds of Sale The Lenders may apply the
net proceeds of any sale, lease or other disposition of Collateral pursuant to
Section 4.02, after conducting all reasonable costs and expenses of every kind
incurred thereon or incidental to the retaking, holding, preparing for sale,
selling, leasing, or the like of the Collateral or in any way relating to the
rights of the Lenders thereunder, including attorneys' fees and expenses
9
<PAGE>
hereinafter provided for, to the payment, in whole or in part, of one or more of
the Obligations in accordance with the terms of this Agreement. The Borrower
shall remain liable to the Lenders for the payment of any deficiency, with
interest at the Default Rate, as provided in the Notes.
The Borrower agrees that forthwith upon the occurrence of an
Event of Default it will notify the Lenders of the details thereof and the
action which it is taking or proposes to take with regard thereto. If an Event
of Default occurs and shall be continuing and the Lenders, in their sole
discretion, do not declare the Notes, all interest accrued and unpaid thereon,
and all other amounts payable hereunder to be forthwith due and payable, the
terms of this Agreement and the Notes shall continue in full force and effect
subject to the right of the Lenders to declare the Notes, all interest accrued
and unpaid thereon, and all other Obligations to be forthwith due and payable.
ARTICLE V
MISCELLANEOUS
SECTION 5.01. No Waiver, Cumulative Remedies. No failure or delay on
the part of the Lenders or the holder of the Notes in exercising any right,
power or remedy hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such right, power or remedy preclude any other
or further exercise thereof or the exercise of any other right, power or remedy
hereunder. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.
SECTION 5.02. Amendments. No amendment, modification, termination, or
waiver of any provision of this Agreement or the Notes, nor consent to any
departure by the Borrower therefrom, shall in any event be effective unless the
same shall be in writing and signed by the Lenders and then such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given. No notice to or demand on the Borrower in any case
shall entitle the Borrower to any other or further notice or demand in similar
or other circumstances.
SECTION 5.03. Addresses for Notices. All notices, requests, demands and
other communications provided for hereunder shall be in writing and, if to the
Lenders, mailed by certified mail) or delivered to it, by hand or by facsimile,
addressed to them at 536 Broadway, 10th Floor, New York, NY 10012 (fax number
212-941-7846), Attention: J. Roger Faherty and if to the Borrower, mailed (by
certified mail) or delivered to it by hand or by facsimile, addressed to it at
536 Broadway, 10th Floor, New York, NY 10024 (fax number 212-941-
10
<PAGE>
7846), Attention: John H. Sharpe, Chief Financial Officer or as to each party,
at such other address as shall be designated by such party in written notice to
the other party complying as to delivery with the terms of this Section. All
notices, requests, demands and other communication provided for hereunder shall
be effective when received.
SECTION 5.05. Costs. The Borrower agrees to pay all of the Lenders'
legal and other professional fees in connection with this Agreement and the
enforcement thereof and of the Notes.
SECTION 5.06. Binding Effect, Assignment. This Agreement shall become
effective when it shall have been executed by the Borrower and the Lenders and
thereafter shall be binding upon and inure to the benefit of the Borrower and
the Lenders and their respective successors and assigns, except that the
Borrower shall not have the right to assign its rights or obligation hereunder
or any interest herein without the prior written consent of the Lenders except
that the Borrower may assign all of such rights and obligations, including,
without limitation, the security interest in the Collateral to any successor
corporation following any merger of the Borrower.
SECTION 5.07. Additional Security. If the Lenders at any time hold
security for any Obligations in addition to the Collateral, the Lenders may
enforce the terms of this Agreement or otherwise realize upon the Collateral, at
their option, either before or concurrently with the exercise of remedies as to
such other security or, after a sale is made of such other security, they may
apply the proceeds upon the Obligations without affecting the status of or
waiving any right to exhaust all or any other security, including the
Collateral, and without waiving any breach or default or any right or power
whether exercised under this Agreement, contained in this Agreement, or provided
for in respect of any such other security.
SECTION 5.08. Governing Law and Submission to Jurisdiction. This
Agreement and the Notes shall be deemed to be contracts made under the laws of
the State of New York, and for all purposes shall be governed by, and construed
in accordance with, the laws of said State, and the parties hereto hereby
irrevocably agree to submit to the jurisdiction and venue of the federal and
state courts of said State, and the Borrower authorizes the service of process
on it by registered or certified mail sent to any address authorized in Section
5.03 as an address for the sending of notices.
SECTION 5.09. Severability of Provisions. Any provision of this
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions
11
<PAGE>
hereof or affecting the validity or enforceability of such provision in any
other jurisdiction.
SECTION 5.10. Headings. Article and Section headings used in this
Agreement are for convenience only and shall not affect the construction of this
Agreement.
SECTION 5.11. Execution in Counterparts. This Agreement may be executed
and delivered (including by facsimile) in any number of counterparts, each of
which when so executed and delivered shall be deemed to be an original and all
of which taken together shall constitute but one and the same instrument.
SECTION 5.12. WAIVER OF TRIAL BY JURY. EACH OF THE LENDERS AND THE
BORROWER HEREBY WAIVES TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
BROUGHT BY OR AGAINST IT ON ANY MATTERS WHATSOEVER, IN CONTRACT OR IN TORT,
ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS AGREEMENT, THE NOTES, OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
DIRECTRIX, INC.
By:
---------------------------
Name:
Title:
LENDERS
------------------------------
J. Roger Faherty
12
<PAGE>
------------------------------
Leland H. Nolan
------------------------------
Donald J. McDonald, Jr.
13
<PAGE>
Schedule 1.01
Commitment Percentage
<TABLE>
<CAPTION>
<S> <C>
J. Roger Faherty 60.00%
Leland H. Nolan 26.67%
Donald J. McDonald, Jr. 13.33%
</TABLE>
14
<PAGE>
Exhibit A
New York, New York
Dated: , 1998
PROMISSORY NOTE
$900,000
FOR VALUE RECEIVED DIRECTRIX, INC., a company organized under the laws
of Delaware (the "Borrower"), does hereby promise to pay to the order of J.
ROGER FAHERTY (the "Lender") the principal amount of NINE HUNDRED THOUSAND
UNITED STATES DOLLARS ($900,000), or the aggregate principal amount of all
advances (the "Advances") made by the Lenders pursuant to the Loan Agreement
referred to below, whichever is less, at the time and in the manner specified in
the Loan Agreement. All defined terms used herein shall have the meanings
assigned thereto in the Loan Agreement.
The Borrower also promises to pay interest on the unpaid principal
amount of this Note at 11% per annum. The interest rate in effect from time to
time pursuant to this Note shall be referred to herein as the "Applicable Rate".
Interest on the Advances shall accrue and be due and payable on each
monthly anniversary of the date hereof within two days from receipt by the
Borrower from the Lender of a notice specifying the amount of interest then due,
until the entire principal amount of the Note has been repaid in full. All
interest accrued hereunder not previously paid shall be due and payable on the
date that the last payment of the principal amount hereof is paid or payable as
set forth in Section 1.01 of the Loan Agreement. Payments of interest and
principal will be made to the order of the Lender at its Account ______________
maintained at [Bank] in the City of New York.
Any amount of principal or interest hereof which is not paid when due,
whether at stated maturity, by acceleration, or otherwise, shall bear interest
from the date when due until said amount is paid in full, payable on demand, at
a rate per annum equal to 2% above the then Applicable Rate (the "Default
Rate").
Absent manifest error, the records of the Lender and the notice in
respect of interest due, shall be conclusive as to amounts of principal
outstanding and interest due on this Note
15
<PAGE>
from time to time.
This Note is one of the Notes referred to in, and is entitled to the
benefits of, the Loan and Security Agreement dated as of __________ __, 1998
among the Borrower, the Lender, Leland H. Nolan and Donald J. McDonald, Jr.
which Loan Agreement, among other things, contains provisions for the
acceleration of the maturity hereof upon the happening of certain stated events.
This Note shall be governed by the laws of the State of New York.
DIRECTRIX, INC.
By:
Name:
Title:
16
<PAGE>
New York, New York
Dated: , 1998
PROMISSORY NOTE
$400,000
FOR VALUE RECEIVED DIRECTRIX, INC., a company organized under the laws
of Delaware (the "Borrower"), does hereby promise to pay to the order of LELAND
H. NOLAN (the "Lender") the principal amount of FOUR HUNDRED THOUSAND UNITED
STATES DOLLARS ($400,000), or the aggregate principal amount of all advances
(the "Advances") made by the Lenders pursuant to the Loan Agreement referred to
below, whichever is less, at the time and in the manner specified in the Loan
Agreement. All defined terms used herein shall have the meanings assigned
thereto in the Loan Agreement.
The Borrower also promises to pay interest on the unpaid principal
amount of this Note at 11% per annum. The interest rate in effect from time to
time pursuant to this Note shall be referred to herein as the "Applicable Rate".
Interest on the Advances shall accrue and be due and payable on each
monthly anniversary of the date hereof within two days from receipt by the
Borrower from the Lender of a notice specifying the amount of interest then due,
until the entire principal amount of the Note has been repaid in full. All
interest accrued hereunder not previously paid shall be due and payable on the
date that the last payment of the principal amount hereof is paid or payable as
set forth in Section 1.01 of the Loan Agreement. Payments of interest and
principal will be made to the order of the Lender at its Account ______________
maintained at [Bank] in the City of New York.
Any amount of principal or interest hereof which is not paid when due,
whether at stated maturity, by acceleration, or otherwise, shall bear interest
from the date when due until said amount is paid in full, payable on demand, at
a rate per annum equal to 2% above the then Applicable Rate (the "Default
Rate").
Absent manifest error, the records of the Lender and the notice in
respect of interest due, shall be conclusive as to amounts of principal
outstanding and interest due on this Note from time to time.
17
<PAGE>
This Note is one of the Notes referred to in, and is entitled to the
benefits of, the Loan and Security Agreement dated as of _________ __, 1998
among the Borrower, the Lender, J. Roger Faherty and Donald J. McDonald, Jr.
which Loan Agreement, among other things, contains provisions for the
acceleration of the maturity hereof upon the happening of certain stated events.
This Note shall be governed by the laws of the State of New York.
DIRECTRIX, INC.
By:
Name:
Title:
18
<PAGE>
New York, New York
Dated: , 1998
PROMISSORY NOTE
$200,000
FOR VALUE RECEIVED DIRECTRIX, INC., a company organized under the laws
of Delaware (the "Borrower"), does hereby promise to pay to the order of DONALD
J. MCDONALD, JR. (the "Lender") the principal amount of TWO HUNDRED THOUSAND
UNITED STATES DOLLARS ($200,000), or the aggregate principal amount of all
advances (the "Advances") made by the Lenders pursuant to the Loan Agreement
referred to below, whichever is less, at the time and in the manner specified in
the Loan Agreement. All defined terms used herein shall have the meanings
assigned thereto in the Loan Agreement.
The Borrower also promises to pay interest on the unpaid principal
amount of this Note at 11% per annum. The interest rate in effect from time to
time pursuant to this Note shall be referred to herein as the "Applicable Rate".
Interest on the Advances shall accrue and be due and payable on each
monthly anniversary of the date hereof within two days from receipt by the
Borrower from the Lenders of a notice specifying the amount of interest then
due, until the entire principal amount of the Note has been repaid in full. All
interest accrued hereunder not previously paid shall be due and payable on the
date that the last payment of the principal amount hereof is paid or payable as
set forth in Section 1.01 of the Loan Agreement. Payments of interest and
principal will be made to the order of the Lender at its Account ______________
maintained at [Bank] in the City of New York.
Any amount of principal or interest hereof which is not paid when due,
whether at stated maturity, by acceleration, or otherwise, shall bear interest
from the date when due until said amount is paid in full, payable on demand, at
a rate per annum equal to 2% above the then Applicable Rate (the "Default
Rate").
Absent manifest error, the records of the Lender and the notice in
respect of interest due, shall be conclusive as to amounts of principal
outstanding and interest due on this Note from time to time.
19
<PAGE>
This Note is one of the Notes referred to in, and is entitled to the
benefits of, the Loan and Security Agreement dated as of ___________ __, 1998
among the Borrower, the Lender, J. Roger Faherty and Leland H. Nolan which Loan
Agreement, among other things, contains provisions for the acceleration of the
maturity hereof upon the happening of certain stated events.
This Note shall be governed by the laws of the State of New York.
DIRECTRIX, INC.
By:
Name:
Title:
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued of our report dated July 10, 1998, (except for Notes 1,
5, 6 and 10, as to which the date is July 25, 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 and Prospectus
and to the use of our name as it appears under the caption "Experts."
/s/ Grant Thornton LLP
New York, New York
November 19, 1998
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