SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
_____________________
Form 10-KSB
Annual Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended March 31, 2000
DIRECTRIX, INC.
A Delaware Corporation
IRS Employer Identification No. 13-4015248
SEC File Number: 000-25111
226 West 26th Street, Suite 12W
New York, New York 10001
(212) 741-6511
Securities registered under Section 12(b) of the Exchange Act: None
Secruities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.01
Directrix, Inc., (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements within the past 90 days.
Directrix is unaware of any delinquent filers pursuant to Item 405 of Regulation
S-B.
Directrix's revenue for its most recent fiscal year: $8,796,000.
Directrix had 2,179,785 shares of Common Stock outstanding at July 20, 2000.
<PAGE>
Item 1. Business.
Forward-looking statements. Except for the historical information contained
herein, the matters discussed in herein and in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" are not historical
facts, but are "forward-looking statements," as that term is defined in the
Private Securities Litigation Reform Act of 1995. In addition, Directrix or its
representatives have made and may continue to make forward-looking statements,
orally or in writing, in other contexts, such as in reports filed with the
Securities and Exchange Commission, press releases or statements made with the
approval of an authorized Directrix executive officer. These forward-looking
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "plans," "may," "will," "would," "could," "should,"
"anticipates," "estimates," "project," "intend," or "outlook" or the negative of
these words or other variations of these words or other comparable words, or by
discussion of strategy that involve risks and uncertainties. These
forward-looking statements are only predictions, and actual events or results
may differ materially as a result of a wide variety of factors and conditions,
many of which are beyond Directrix's control. Some of the more important of
these factors and conditions include: (i) the possible loss of one or more of
the satellites on which Directrix's leased transponders are located; (ii)
Directrix's reliance on a limited number of customers and its limited operating
history as a stand-alone company and that it has incurred operating losses
since it began operating as a stand-alone company; (iii) an increase in the
availability of transponders or a decrease in available channel capacity in
cable or Direct Broadcast Satellite television systems, either of which may
cause a decline in the demand for Directrix's services; (iv) that Directrix may
continue to incur operating losses, have negative cash flow, require additional
money and suffer delays in meeting its targets; (v) severe competition in
Directrix's industry; (vi) changes in distribution technology and/or
unforeseen delays in the implementation of that technology by the cable and
satellite industries, which might affect realization of Directrix's business
plan; (vii) uncertainty as to the impact of the internet as a delivery modality
for television entertainment on Directrix's business; (viii) governmental or
regulatory changes, actions or initiatives, including attempts to limit or
otherwise regulate the distribution of adult-oriented materials of the type
distributed by Directrix's principal customers. In addition, as a result of
Directrix's stock price, trading volume and industry sector, Directrix's stock
price may be expected to be volatile and may be influenced by economic and other
factors beyond Directrix's control.
INTRODUCTION
Directrix, Inc. ("Directrix"), a Delaware corporation, is a provider of
digital video asset management services principally to the entertainment
industry. Included within the scope of available services, Directrix offers all
the technical and creative services required to develop, support, manage and
deliver network television, video, audio, interactive media and data services
from its recently constructed state-of-the-art digital operations center. Since
1998, Directrix has been providing turnkey 24 hours a day by 7 days a week
audio-video delivery systems and applications to nine cable channels and four
C-band networks available on two satellites, Telstar 4 and Telstar 7. Its
client list features cable and Direct Broadcast Satellite ("DBS") networks and
Internet networks.
Directrix provides major studios, cable operators, satellite
distributors, television networks and local broadcasters with end-to-end
economies of scale to digitize, encode, encrypt, archive and distribute their
video content for distribution via satellite, fiber optic, Internet, video file
server and other delivery modalities. These digital video asset management
services include:
* Digitization and compression of content;
* downlink services;
* digital video playback and uplink;
* video streaming on the Internet;
* digital video archiving and trafficking;
* digital ad insertion; and
* video-on-demand ("VOD") services.
Directrix can also provide the full range of traditional technical
broadcast services. From post-production, editing and quality control for
customer's video content to playback, uplink and transponder services, Directrix
can provide "Network in a Box" services to television networks for distribution
via cable television and DBS systems. Once the customer's content is digitized
(using any number of digital compression technologies employed at the digital
operations center), then Directrix's digital video asset management services can
be employed to productively manage this content and distribute it over other
delivery modalities such as the Internet, broadband Internet and video file
servers or for example, copy it onto DVD's.
Even though digital video asset management is a relatively new
business, Directrix is an experienced operator, having provided digital video
asset management services since the early broadband delivery and VOD trials.
Directrix has assembled a multi-disciplined team of veteran video engineers,
experienced software developers and creative talent to take advantage of its
recently completed New York Metro Area-based digital operations center.
FORMATION
Spice Entertainment Companies, Inc. ("Spice") formed Directrix in 1998
in contemplation of Spice's acquisition by Playboy Enterprises, Inc.
("Playboy"). On the March 15, 1999 closing of the Playboy transaction, Spice
transferred its network services division to Directrix including Spice's master
control and digital playback facility, service agreements to provide network
creation, playback and other technical services to Emerald Media, Inc. ("EMI")
and others, an option (the "EMI Option") to acquire the network business or
stock of EMI, certain rights in Spice's library of adult films, $750,000 in
cash, certain prepaid assets and accounts receivable. Spice also transferred
173,784 shares of Playboy Class B Common Stock to Directrix that it had acquired
as part of the Playboy transaction. Spice then spun off Directrix to its former
stockholders, distributing the Directrix stock as part of the merger
consideration.
In the calendar third quarter of 1999, Directrix relocated from Spice's
former New York City operations facility to a newly constructed and expanded
digital operations facility in Northvale, New Jersey (the "Operations Facility")
adjacent to its satellite uplink provider. The Operations Facility was completed
during the first calendar quarter of 2000. Directrix also relocated its
executive offices to Midtown Manhattan.
INDUSTRY ENVIRONMENT AND OUTLOOK
Television, movies, expanded cable and DBS channel capacity and the
Internet are converging into the new world of digital technology, increasing the
demand for content - both video and audio programming and data services. This
content will be created, stored and distributed in digital form as compressed
digital video and audio data files, replacing their tape-based analog
forerunners. On the distribution side, in addition to the more traditional
satellite/cable television delivery of video information (both analog and
digitally compressed), video file servers can now provide VOD via cable systems,
the Internet, hotels and multi-unit residential dwellings. These video file
servers can be remotely directed to replenish content and to collect, archive,
manage and distribute digital video. Video programming can also be streamed over
the Internet. Directrix can manage its customer's digitized video content and
believes this industry - Digital Video Asset Management - will experience high
growth.
According to Media Management Services, Inc., the overall "Digital
Media Management" market is projected to grow from $150 million in 1998 to over
$2 billion in 2002. There are over 100,000 potential clients for digital media
management products and services. The first targets for Directrix are on either
side of the supply chain - video content owners and VOD distributors. Only a
few, typically narrow-niche, providers are currently serving the high-growth
digital conversion and distribution services markets. Being a full service
provider, Directrix is well positioned to benefit from the projected growth of
this industry. Directrix's vision is to become a dominant provider to the
growing market demand for digital video asset management services.
Directrix has the following combination of assets to provide content
owners and content distributors with a complete end-to-end solution:
* A management team with years of collective technical
television network services experience;
* a recently completed multi-million dollar, 57,000 square
foot, digital playback, storage and transmission facility
and satellite downlink dish field, located in Northvale, New
Jersey; and
* in-house transponder capacity, fiber and Internet
connections.
On the content side, Directrix's prospective content owner clients
include:
* Hollywood Studios
* Television Producers
* Niche Market Producers
* Cable Networks Developers
* Established Cable Networks
* Copyright Holders
* Advertising Agencies
* Infomercial Producers
* Government Agencies
* Educational Institutions
* Universities
* Corporate Information/Training Groups
* Medical Facilities
On the distribution side, Directrix's prospective VOD
distributor clients include:
* Cable Operators
* Satellite Distributors
* Television Networks
* Local Broadcasters
* Advertising Insertion Networks
* Corporate Information/Training Groups
* Hotel/Motel Chains & Video Distribution Networks
* Internet Service Providers (ISP's)
DIRECTRIX SERVICES
Through its infrastructure and experience, Directrix can take a new
cable network and provide all the technical services in order to deliver their
services to cable head-ends. These services includes post-production, creative
and facilities services, network operations, transponder capacity, dedicated
Internet backbone and engineering services. Once the customer's content is
digitized (using any number of digital compression technologies employed at the
digital operations center including MPEG-2, RealMedia, Microsoft Media Player
and Apple QuickTime 4), then Directrix's digital video asset management
services can be employed to productively manage this content and distribute it
over other new media delivery modalities such as the Internet, broadband
Internet and video file servers.
The following sections describe the menu of services Directrix offers
its customers.
Playback Services. Directrix 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, 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. Directrix also provides program log and
traffic support to programmers, affiliate relations and station coordination
to aid their ordering and billing services. Directrix accepts daily program
schedules, programs, promotions and advertising, and delivers 24 hours of
seamless daily programming to home satellite subscribers.
Directrix uses video file servers controlled by state-of-the-art
automation systems enabling a single Master Control engineer to cost effectively
operate and monitor several channels. Playback systems are both videotape
(analog) and video file server-based (digital), and subtitling, closed
captioning and commercial advertisement insertion are supported.
Directrix currently provides a full range of playback services for the
three networks and a barker channel operated by EMI. Directrix also provides
playback and uplink services for the two Spice networks acquired by Playboy and
provides downlink and turnaround (re-uplinking) services for an additional two
Playboy networks. Directrix provides a full range of playback services for the
two networks operated by Califa Entertainment Group, Inc. ("Califa"), Channel
Korea and the Cornerstone Digital Network. Because of the scalability of
Directrix's playback facility, Directrix can add new playback customers with
little incremental cost.
Post Production and Facilities Services. Directrix integrates
traditional post-production services with the needs of digital content
distribution. Directrix offers clients a full spectrum of post-production
services such as:
* Traditional tape editing and duplication;
* MPEG-2, RealMedia, Media Player and QuickTime 4 encoding
and closed caption creation;
* "content processing" specialists - converting tapes to
computer files for non-linear editing;
* encoding video files for video file server playback - images
captured on tape for embellishment in print media;
* scanning print images into image banks to be incorporated
back onto tape;
* transferring animations to disk; and
* transferring MPEG files via FTP (Internet File Transfer
Protocol) and via satellite to remote servers.
Directrix operates two large analog linear edit facilities and a third
digital editing bay for non-linear editing, all of which incorporate software
and peripherals which allow for automated and semi-automated creation of feature
-length and short-form videos. Directrix also maintains two graphic suites used
to produce three-dimensional graphics and animation for print, video and the
worldwide web and maintains an announce booth. Directrix also utilizes various
codecs (technology used to encode and decode content) for the conversion of
video content among various international standards and the incorporation of
various data into the video signals.
The Directrix Design Group was developed specifically to leverage
creative services and resources efficiently across the converging media
platforms of print, web, tape and video server.
The Federal Communications Commission now requires closed captioning
for most television programming. Directrix provides closed-captioning services
to its clients.
Compression Services. Directix offers digital conversion/compression
services for its customer's video content. Directrix's cost effective digital
compression services benefit customers by:
* Offering ten to fifteen multi-channel transmissions on
a single transponder, significantly reducing per channel
transponder costs;
* allowing cable stations, through digitized head-ends, to offer
more channels in the same amount of bandwidth resulting in
significantly decreased costs;
* eliminating old technology analog disintegration; and
* providing instant video playback and storage capabilities
from the video server.
Directrix utilizes primarily 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, Directrix can encode such material in
RealVideo, Microsoft Media Player, QuickTime 4 and MPEG-4 formats (a codec for
encoding Internet video streams which includes interactivity) for full-motion
video transmission via the Internet.
Directrix owns Digicipher II digital systems and VideoCipher
II analog systems. Directrix also utilizes fully redundant Scientific Atlanta
PowerVu encoder systems. The PowerVu systems enable digitally compressed
video/audio programming to be added to transponders carrying analog television
signals.
Digital Archiving and Tape Duplication Services. Nearly all Directrix
clients still produce and master their content on some form of tape. As a
result, over 3,000 cubic feet of the Operations Facility is dedicated to
high-density tape storage for storage and traffic of broadcast master tapes.
Directrix's high-density, fire-resistant tape storage facility has a capacity of
over 25,000 tapes. Videotapes are bar-coded and tracked using Directrix's
distributed database which can be customized to meet its customers' needs. The
tape database is web-enabled allowing customers to log onto the database through
any web browser and track the disposition of their tapes.
Unauthorized duplication, lost or stolen master tapes and the lack of
proper security cost the major Hollywood producers millions of dollars annually.
Directrix has created a secure digital environment for distribution of video and
filmed entertainment to file server ready head-ends across America and the
world. Through its secure network of encrypted satellites and fiber-optic
distribution, Directrix delivers not only digital video files, but also
state-of-the-art industry security, accountability and cost savings. Directrix's
secure work flow management offers its clients:
* A full audit of every movie purchased;
* conditional customer access to control and monitor who
receives the video content;
* denial of access to the casual or professional video pirate;
and
* increased revenues from VOD.
Directrix also maintains duplication facilities for both analog and
digital tape. The duplication facilities are equipped to digitize materials in
digital-video-disc format and in alternative formats such as AVI, MPEG-1,
MPEG-2, RealMedia, Microsoft Media Player and Apple QuickTime 4. In addition,
Directrix 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.
Prior to the move of the Operations Facility to Northvale, New Jersey,
Directrix was certified by the Motion Pictures Association of America ("MPAA")
as a secure tape storage facility. Directrix has applied for MPAA certification
for its new Operations Facility.
Directrix offers these services in a package price or ordered on an a
la carte basis. It is expected, based on its prior experience, that a la carte
services will be an important source of revenue for Directrix from customers who
use Directrix to provide basic network operational services.
Network Operations and Engineering. Directrix offers video file server
and videotape playback and network origination services on a 24 hours a day by 7
days a week basis to television networks from its digital operations center.
Directrix currently employs a 12-channel SeaChange MediaCluster server and a
10-channel Compaq Alpha Server. Directrix also offers editing and quality
control services for customer supplied programming, prior to broadcast.
Directrix will provide program logs and traffic support to its customers and
their affiliates to interface with their ordering and billing functions. This
data can be transmitted in any medium and/or format specified by the customer or
its affiliate.
Regionally Deployed Video File Servers. Using the digital operations
center as a hub for the distribution of digitized video content, Directrix was
one of the early users of regionally deployed video file servers to deliver
video programming through its participation in near-VOD initiatives. Video file
servers are computers which store and distribute compressed digitized video
programming. Many cable headends are investing in file servers that can handle
VOD and set-top boxes that can offer VOD to the home.
Regionally deployed video file servers allow a distributor to tailor
the programming distributed to the local demographic audience such as a
metropolitan area or, on a smaller scale, a hotel or other commercial
establishment, and provide near-VOD and VOD which cannot be effected by
traditional satellite distribution. Directrix believes it can leverage the
experience of its personnel and management to provide services in connection
with the use of video file servers including digitization of content, turnkey
refreshing 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).
Terrestrial Connectivity and Uplink Services. Directrix uplinks
networks originated from its digital operations center to an adjacently located
Northvale, New Jersey uplink facility owned by Atlantic Satellite
Communications, Inc. ("Atlantic"). (Uplinking refers to the transmission of
television programming or data to a communications satellite.) Directrix
transmits programming and data signals from its facility to the Atlantic
facility over fiber optic lines. Transponder customers may arrange to have
their signal delivered directly to the Atlantic uplink facility.
Directrix's customers may also connect to the video
switching/distribution hub operated by Waterfront Communications, an Atlantic
affiliate. Connection to the Waterfront Communications hub would facilitate,
for example, the movement of video files to and from other persons connected to
the hub.
Transponder Services. Loral SpaceCom Communications, Inc. ("Loral")
provides transponder services to Directrix on one non-pre-emptible and three
pre-emptible transponders. Directrix is able to add up to two digitally
compressed networks to each of its transponders that carry an analog signal.
Adding digitally compressed networks to a transponder is accomplished using
Scientific Atlanta's PowerVu digital compression system. Each of Directrix's two
PowerVu systems includes a primary system capable of digitally compressing two
channels and a back-up system for one channel. Other manufacturers, such as
Motorola, also make equipment which enables the addition of digitally compressed
channels to a transponder carrying an analog television signal. Directrix
continually evaluates new technology to expand the productive utilization of its
transponder capacity.
If sufficient demand for digitally compressed transponder services
exists, Directrix may use an entire transponder's bandwidth for digitally
compressed transponder services. With today's technology, Directrix can acquire
an encoder (the device that compresses the television signals and outputs a
digital data stream to the transponder) capable of compressing up to 12
television channels. There may be other uses for Directrix's transponders
including transmission of audio, video or other data. Directrix monitors the
marketplace for transponder services with a view to putting its transponder
capacity to its highest and best use.
Internet Hosting and Content Streaming. The Directrix Internet data
center can source and route over 800,000 secure Internet transactions per
second, supporting 10,000 simultaneous streams of web-directed content.
Directrix can provide web authoring, web-based database publishing, electronic
commerce, creation of graphics and animation services. Directrix applies its
expertise, storage capabilities and bandwidth to Internet services.
Directrix offers 24 hours a day by 7 days a week Internet hosting and
video streaming services. Akamai provides Directrix with dedicated multimedia
Internet backbone connectivity deployable across 5,000 simultaneous 56 kilobit
streams. This connectivity increases the reliability and quality of video files
streamed over the Internet. A portion of this Internet connectivity is used to
provide a simultaneous webcast of the EMI networks and related programming on
demand over the Internet. Directrix provides web hosting services to General TV.
Directrix currently serves as a principal point-of-presence on both
the Akamai and Globix multimedia data networks and provides downlinking and
Internet video encoding for these networks. Additionally, through its
connectivity with Atlantic, Directrix has access to multiple national fiber
networks including Vyvx, AT&T and Sprint.
New television networks may begin network distribution using streaming
technology over the Internet (a webcast) before migrating to satellite delivery.
Directrix offers one-stop shopping for these start-up networks.
EXISTING CUSTOMERS
Directrix's principal current customers include EMI, Playboy, Califa,
Bloomberg L.P., Channel Korea, Cornerstone Media Group, Kino Films
International, Troma Films, General TV, Akamai and Globix. Many customers are
under multi-year agreements that expire on various dates.
The agreements with Playboy and Califa currently expire on March 15,
2001. Directrix is currently in negotiations to extend the terms of these
agreements and is seeking to add additional networks and services.
SALES AND MARKETING
Directrix has positioned itself as a one-stop video service company
that can create and distribute television networks and other video content via
any medium. Directrix will rely on the business contacts and experience of its
management to attract customers and market Directrix's business. Directrix has
recently augmented its sales staff, adding two industry veterans as senior sales
executives in May, 2000.
By participating in cable industry trade shows and sponsoring
educational forums for the industry, Directrix plans to make its service
capabilities known to the marketplace. There can be no assurances that Directrix
will be successful in marketing some or all of these services.
GOVERNMENTAL REGULATION
Directrix's business is not currently subject to material governmental
regulation. Some of Directrix's customers distribute adult sexually themed
programming. Federal and state governments, along with various advocacy groups,
consistently propose and support legislation aimed at restricting the provision
of, access to and content of adult entertainment. Were any such legislation
enacted, it could adversely affect Directrix's customers which could, in turn,
adversely affect Directrix.
SUBSEQUENT DEVELOPMENTS
To assist Directrix in its acheving its business objectives, Messrs.
Faherty, McDonald and Kirby, Directrix's Chief Executive Officer, President and
Chief Operating Officer, respectively, voluntarily agreed to a reduction in
their annual salaries of $200,000 for Mr. Faherty, $24,750 for Mr. McDonald and
$22,584 for Mr. Kirby. The salary reductions took effect on June 24, 2000 and
will continue for the remainder of the year ended March 31, 2001. In
consideration of Mr. Faherty's agreement to the salary reduction, the
Compensation Committee of the Board of Directors re-priced the 50,000 options
previously granted to Mr. Faherty to an exercise price of $4.00 per share, the
closing price of Directrix on June 22, 2000 and provided for the immediate
vesting of the options. The Compensation Committee also granted each of Messrs.
McDonald and Kirby 5,000 fully vested options exercisable at $4.00 per share
in consideration of their agreement to the salary reduction.
Management forecasts that Directrix will require additional funding to
provide for the deficiency in working capital until Directrix generates
operating cash flow (see, "Management's Discussion and Analysis of Financial
Condition and Results of Operation, LIQUIDITY AND CAPITAL RESOURCES").
Management believes that it has access to potential sources of capital
sufficient enough to meet Directrix's needs over the next twelve months. The
potential sources of capital include, but are not limited to: (i) an increase in
its line of credit (see "Certain Relationships and Related Transactions,"
below), (ii) the sale of its option to acquire EMI and/or (iii) a possible
private placement of equity securities with individual, institutional and
strategic investors. There can be no assurance, however, that management will
be successful in its efforts to obtain sufficient capital.
EMPLOYEES
At March 31, 2000, Directrix had a total of 35 employees. Directrix
believes that its relationship with its employees is satisfactory.
Item 2. Properties.
Executive and Sales Offices. Directrix leases approximately 3,000
square feet of office space at 236 West 26th Street, New York, New York for its
executive and sales offices pursuant to a lease commencing April 1, 1999 and
expiring on January 31, 2002. The lease provides for monthly rent ranging from
$5,200 per month to $5,624 per month over the life of the lease.
Operations Facility. The Operations Facility is located in a 22,000
square foot building located at 230 Pegasus Avenue, Northvale, New Jersey
and includes a 25,000 square foot downlink and satellite dish field. Directrix
executed a four-year sublease with the building's existing tenant which expires
April, 2003 and a six-year lease with the building owner which expires April,
2009. The monthly rent ranges from $14,427 to $16,230 over the life of the
leases. Directrix was granted eight months free rent following the inception
of the sublease.
The Operations Facility was formerly located on the 10th floor and
a portion of the roof at Spice's former offices located at 536 Broadway,
New York, New York. As provided for in the Merger Agreement between Spice and
Playboy, a March 8, 1999 letter agreement among Playboy, Spice and Directrix
and an agreement among Spice, Playboy, Directrix and the landlord of 536
Broadway ("Landlord"), the 10th floor lease (including use of a portion of the
roof) was assigned to Directrix and the 6th and 7th floor leases were assigned
to Playboy. In addition, Playboy agreed to provide Directrix with rent-free use
of the 7th floor until June 30, 1999 and agreed to pay Directrix's rent for the
10th floor and roof until August 31, 1999. Under the agreement with the
Landlord, the 10th floor rent was increased by $3,000 per month to $13,500 per
month commencing March 16, 1999 and the landlord was granted the option of
terminating the 10th floor lease on 30 days prior written notice but not before
August 31, 1999. Directrix assumed responsibility for restoring the 10th floor
and roof to its former condition.
On September 1, 1999, Directrix relocated the Operations Facility to
its current location in Northvale, New Jersey and completed the Operations
Facility in the first calendar quarter of 2000. On March 3, 2000, the Landlord
located a tenant for the 10th floor at 536 Broadway and terminated the 10th
floor lease with Directrix.
Directrix believes its leased premises are adequate to conduct its
business operations.
Item 3. Legal Proceedings.
Directrix is not currently involved in any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during
the fourth quarter of the year ended March 31, 2000.
PART II
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters.
Directrix's Common Stock began trading on the OTC Electronic Bulletin
Board ("OTC") on March 15, 1999 under the symbol "DRCX". (for the period from
March 16, 1999 to March 31, 1999, Directrix Common Stock traded under the symbol
("DRCXV".)
The following table sets forth, for the periods indicated, the per
share range of high and low sales prices for Directrix' Common Stock as reported
on the OTC.
High Low
------ ------
Transition Period Ended March 31, 1999
--------------------------------------
Fourth Quarter ......................... $ 4.13 $3.88
Year Ended March 31, 2000
-------------------------
First Quarter .......................... $ 8.75 $3.88
Second Quarter ......................... $ 7.13 $4.75
Third Quarter .......................... $ 4.75 $3.69
Fourth Quarter ......................... $15.00 $4.00
Directrix currently has approximately 1,351 beneficial shareholders.
Directrix has never paid cash dividends on its Common Stock, intends
to retain future earnings to support the growth of its business and does not
anticipate paying any cash dividends in the near future. The payment of any
future cash dividend on common stock will be determined by Directrix's Board of
Directors in light of conditions then existing, including Directrix's earnings,
financial condition, capital requirements and other factors.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
OVERVIEW
Business. Directrix, a Delaware corporation, is a
full service provider of digital video asset management services, primarily to
the entertainment industry. Directrix provides all of the technical services
required to create, support and deliver digital video programming and data
services from its advanced digital network facility. Directrix offers a number
of services including digital video playback, downlink and uplink, satellite
space segments, digital video archiving and trafficking, video Internet
streaming, digital ad insertion and digital archiving and distribution for
VOD platforms.
Formation and Asset Transfer. Spice formed Directrix in contemplation
of the merger ("Merger") of Spice with a wholly-owned subsidiary of Playboy and
spun off Directrix to the former Spice stockholders. On March 15, 1999 as a
condition to the closing ("Closing") of the Merger, Spice and Directrix entered
into a Transfer and Redemption Agreement (the "Transfer Agreement") and certain
related agreements.
Pursuant to the terms of the Transfer Agreement, immediately prior to
the Merger, Spice contributed certain assets to Directrix, including (a) all of
the equipment and facilities relating to the Operations Facility, (b) the EMI
Option, (c) certain rights to Spice's library of adult films, (d) approximately
$0.8 million in cash, (e) 173,784 shares of Playboy stock with a market value of
approximately $4.5 million, and (f) accounts receivable and other current
assets, totaling approximately $1.2 million. Directrix assumed certain
liabilities (the "Assumed Liabilities") including (i) the liabilities relating
to EMI, (ii) the liabilities relating to the Operations Facility arising after
March 15, 1999, and (iii) those liabilities and obligations arising out of the
assets being transferred to Directrix. Under the Transfer Agreement, Directrix
indemnified Spice for the Assumed Liabilities.
RESULTS OF OPERATIONS
Year Ended March 31, 2000. The financial statements for the year
ended March 31, 2000, reflect the results of operations, financial position,
changes in stockholders' equity and cash flows of Directrix as a separate
entity.
Directrix became a stand-alone entity on March 16, 1999 following the
merger of Spice with Playboy. In May, 1999, the Board of Directors of Directrix
approved a change in Directrix's fiscal year to March 31 from December 31. The
three-month transition period from January 1, 1999 to March 31, 1999 that
preceded the start of the new fiscal year was presented in Form 10-QSB
Transition Report filed with the Securities and Exchange Commission in
May, 1999.
Year Ended December 31, 1998. Prior to the March 15, 1999 Closing,
Directrix was a wholly-owned subsidiary of Spice and consequently had no
operating history as a stand-alone entity. Accordingly, the financial statements
of Directrix prior to Closing were 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.
Directrix's revenues prior to Closing were generated principally from
services provided to two customers, EMI and internally to Spice. These revenues
were comprised of revenues from network operations, post-production and
technical services. For services provided to EMI and unrelated third party
customers, revenues were recorded based on contractual amounts or cash receipts.
For services provided to Spice, revenues were recorded based on the cost
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 were reasonable.
Transition Period Ended March 31, 1999. The financial statements of
Directrix include the results of operations, financial position, changes in
stockholders' equity and cash flows of the business that were contributed to
Directrix by Spice on March 15, 1999. Accordingly, the financial statements of
Directrix prior to Closing 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.
The financial information included herein for the year ended
December 31, 1998 and the transition period ended March 31, 1999 may not
necessarily reflect the results of operations, financial position, changes in
stockholders' equity and cash flows of Directrix in the future or what they
would have been had Directrix been a separate, stand-alone entity during the
periods presented.
YEAR ENDED MARCH 31, 2000 COMPARED TO DECEMBER 31, 1998
Net Loss. Directrix reported a net loss of $6.1 million for the year
ended March 31, 2000 as compared to a net loss of $4.2 million for the year
ended December 31, 1998. The increase in net loss was primarily attributable to
an increase in selling, general and administrative expenses of $1.7 million and
a decrease in revenue of $0.8 million, offset by a gain on the disposal of
Playboy stock of approximately $0.4 million. The increase in selling, general
and administrative expenses is primarily attributable to an increase in bad debt
expense relating to EMI of $1.0 million for the year ended March 31, 2000. Also
contributing to the net loss for the year ended December 31, 1998 was the
write-down of leasehold improvements and accrued rent associated with the former
operations facility of $0.6 million.
Revenues. Directrix reported total revenue of $8.8 million for the year
ended March 31, 2000 as compared to total revenue of $9.6 million for the year
ended December 31, 1998. The decline in total revenue was primarily attributable
to a decline in revenue from networks owned by Playboy and Califa of $3.9
million offset by increases in revenue associated with EMI of $3.0 million. For
the year ended March 31, 2000, approximately $6.7 million of revenues recorded
by Directrix were attributable to EMI.
For the period from April 1, 1999 to December 31, 1999, Directrix
recorded revenues from EMI based on contractual amounts. Prior to that time,
Directrix had been recording revenues from EMI based on cash receipts. During
the fourth quarter ended March 31, 2000, due to renewed uncertainty
surrounding EMI's ability to pay for all services provided, Directrix resumed
recording revenues from EMI based on cash receipts. For the year ended March 31,
2000, Directrix recorded bad debt expense associated with EMI of approximately
$1.0 million.
The amount of accounts receivable due from EMI at March 31, 2000 was
approximately $0.8 million, which equaled the exercise price of the EMI Option.
On September 30, 1999, Directrix and EMI reached an agreement whereby Directrix
acquired all broadcast and Internet worldwide rights to EMI's library of movies.
In consideration for these rights, Directrix reduced EMI's accounts receivable
balance by $735,000, the fair market value of the acquired rights on the
agreement date.
Salaries, Wages and Benefits. Directrix reported salaries, wages and
benefits of $3.0 million for the year ended March 31, 2000 as compared to $2.7
million for the year ended December 31, 1998. The increase in salaries, wages
and benefits was attributable to the fact that salaries, wages and benefits for
the year ended December 31, 1998 were allocated among Spice subsidiaries whereas
for the year ended March 31, 2000, Directrix was a stand-alone company and no
allocation was appropriate.
Library Amortization. Directrix reported library amortization for the
year ended March 31, 2000 of $0.4 million as compared to $0.3 million for the
year ended December 31, 1998. The increase is associated with additional
rights acquired from EMI.
Satellite Cost. Directrix reported satellite, playback and uplink
expenses for the year ended March 31, 2000 of approximately $6.5 million, which
was substantially the same for the year ended December 31, 1998. The assignment
of one transponder to Playboy at Closing was offset by Directrix's addition of
another transponder.
Selling, General and Administrative Expenses. Directrix reported
selling, general and administrative expenses of $3.9 million for the year ended
March 31, 2000 as compared to $2.2 million for the year ended December 31, 1998.
The increase was primarily attributable to an increase of $1.0 million in bad
debt expense associated with the accounts receivable balance due from EMI. A
portion of the selling, general and administrative expenses in 1998 were
allocated amoung Spice subsidaries.
Depreciation of Fixed Assets. Directrix reported depreciation of fixed
assets of $1.3 million for the year ended March 31, 2000 which was comparable to
depreciation expense for the year ended December 31, 1998.
Interest Expense. Directrix reported interest expense of $0.2 million
for the year ended March 31, 2000, which was substantially the same for the year
ended December 31, 1998.
RELIANCE ON A LIMITED NUMBER OF CUSTOMERS
For the year ended March 31, 2000, a significant portion of Directrix's
revenue was generated by a limited number of customers. While the loss of any
of these customers or a substantial reduction in orders by any of these
customers could have a material adverse effect on Directrix's operating results,
management believes that since the relocation and buildout of the Operations
Facility at Northvale is substantially complete, Directrix now has the capacity
to increase revenue by using its technological resources to expand its customer
base and develop new business lines.
Directrix's service agreements with Playboy and Califa currently expire
on March 15, 2001. Directrix is currently in negotiations to extend the term
of these agreements and is seeking to add additional networks and services.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Merger, Spice used a centralized approach to cash
management and the financing of its operations. As a result, prior to the
Merger, Spice funded all of the activities of Directrix. For the year ended
December 31, 1998 Spice provided funding of $3.9 million to Directrix.
Directrix had a working capital deficiency of $1.1 million on March 31,
2000 as compared to positive working capital of approximately $5.4 million on
March 31, 1999. The decline in working capital for the year ended March 31, 2000
was primarily attributable to purchases of property and equipment associated
with the buildout of the Operations Facility at Northvale, New Jersey of $3.7
million and an operating loss of $6.3 million. Directrix projects to spend an
additional $0.4 million on the renovation and buildout of the Operations
Facility at Northvale.
Directrix has a revolving line of credit of $3.5 million ("Credit
Facility") pursuant to the terms of a March 15, 1999 Security and Loan
Agreement, as amended by the Amended and Restated Loan and Security Agreement
(as amended, the "Amended Loan Agreement") dated February 15, 2000. Under the
terms of the Amended Loan Agreement, the Credit Facility was increased from $1.5
million to $3.5 million, the maturity date of the Credit Facility was changed
from March 15, 2004 to March 15, 2002 and the terms of the Loan Agreement were
modified to provide that Directrix was not permitted to draw down on the Credit
Facility after March 15, 2001. The providers of the Credit Facility include the
Chairman of the Board and Chief Executive Officer, the President and a Director
of Directrix, as well as two unrelated parties (collectively, the "Lenders").
The Credit Facility bears interest at 11% per annum, payable monthly, and
matures on March 15, 2002. In consideration of their agreeing to provide
the Credit Facility, Directrix granted the Lenders an aggregate of 105,000
Common Stock purchase warrants, exercisable for 10 years at $0.01 per share.
The aggregate fair market value of the warrants (determined using the
Black-Scholes pricing model) amounts to approximately $0.7 million and is
being amortized over the term of the Credit Facility. All of the warrants were
exercised as of March 31, 2000.
As of March 31, 2000, Directrix has drawn down $1.9 million from the
Credit Facility, with $1.6 million unused and available funds remaining under
the Credit Facility.
During the year ended March 31, 2000, Directrix sold all 173,784 shares
of its Playboy stock (contributed by Spice at Closing) for net cash proceeds
aggregating approximately $4.8 million, resulting in a gain of approximately
$0.4 million.
On September 1, 1999, Directrix relocated its Operations Facility to a
new facility located in Northvale, New Jersey. The new fully automated network
origination center is designed to be a 24 hours a day by 7 days a week full
service provider of all the technical and creative services required to
develop, support and deliver network television, video, audio and data services
via satellite, fiber and Internet.
As previously mentioned, Directrix commenced operations as a
stand-alone business following its spin-off from Spice on March 16, 1999.
Directrix incurred net losses of $4.2 million and $1.7 million for the fiscal
year ended December 31, 1998 and the transition period ended March 31, 1999,
respectively, on the basis of the presentation described above. For the year
ended March 31, 2000, Directrix incurred a net loss of $6.1 million. At March
31, 2000, Directrix has a working capital deficiency of $1.1 million. These
matters raise substantial doubt about Directrix's ability to continue as a
going concern. Directrix's continued existence is dependant upon several
factors, including it's ability to generate operating cash flow via execution
of its long term business plan, and secure additional financing to provide
for the immediate deficiency in working capital.
Management believes that the relocation and buildout of the
Operations Facility is critical to the realization of Directrix's long-term
business plan. Management also believes that since the buildout of the
Operations Facility is substantially complete, Directrix now has the capacity
to increase revenue by using its technological resources to expand its customer
base and develop new business lines without significantly changing its cost
structure and, as a result, generate operating cash flow.
Management forecasts that Directrix will require additional funding
to provide for the deficiency in working capital until Directrix generates
operating cash flow. Management believes that it has access to potential sources
of capital sufficient enough to meet Directrix's needs over the next twelve
months. The potential sources of capital include, but are not limited to: (i)
an increase in its line of credit (see "Certain Relationships and Related
Transactions," below), (ii) the sale of its option to acquire EMI and/or (iii)
a possible private placement of equity securities with individual, institutional
and strategic investors. There can be no assurance, however, that management
will be successful in its efforts to obtain sufficient capital, execute its
long-term business plan, or that the successful implementation of the
business plan will improve operating results.
Item 7. Financial Statements.
See the Financial Statements at pages F-1 through F-17.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors; Executive Officers, Promoters and Control Persons;
Compliance with Exchange Act Section 16(a).
The executive officers and directors of Directrix are as follows:
Name Age Position
---- --- --------
J. Roger Faherty 61 Chairman of the Board of Directors and
Chief Executive Officer
Donald J. McDonald, Jr. 48 President, Director, Treasurer and Chief
Financial Officer
Richard J. Kirby 39 Chief Operating Officer, Executive Vice
President and Secretary
Richard M. Cohen 49 Director
Rudy R. Miller 53 Director
Leland H. Nolan 53 Director
J. ROGER FAHERTY has been Chairman of the Board and Chief Executive
Officer of Directrix since its incorporation. From December, 1991 to March 15,
1999, Mr. Faherty was the Chairman of the Board and a director of Spice. In
1991, he was elected as the Chief Executive Officer of Spice and became
President of Spice in 1996.
DONALD J. MCDONALD, JR. has been President and a director of Directrix
since its incorporation. Mr. McDonald assumed the additional responsibilities of
Chief Financial Officer and Treasurer of Directrix on September 30, 1999. Mr.
McDonald joined Spice in 1995 and from January, 1997 until March 15, 1999, Mr.
McDonald was the president of Spice Direct, Inc., a wholly-owned Spice
subsidiary 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.
RICHARD J. KIRBY has been Chief Operating Officer, Executive Vice
President and Secretary of Directrix since its incorporation. Mr. Kirby was an
executive officer of Spice since 1988 and most recently and until March 15,
1999 was Senior Vice President, Network Operations and Chief Technology
Officer of Spice.
RICHARD M. COHEN has been a director of Directrix since its incorpora-
tion. 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 Directrix since its incorpora-
tion. 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. From July, 1996 until March 15, 1999 Mr. Miller was a director of Spice.
LELAND H. NOLAN has been a director of Directrix since its incorpora-
tion. From 1988 to March 15, 1999 Mr. Nolan was a director of Spice. From 1988
until December 31, 1995, he 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 Chairman and
Chief Execcutive Officer of Metronet S.A., a technology and services company
providing Internet and on-line services through television to customers in
Spain, Portugal and Latin America.
Directrix'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 that class may be elected for a three-year
term at the annual meeting of stockholders in the year in which their term
expires. Directors will hold office until the expiration of their term and until
that director's successor has been duly elected and qualified. It is anticipated
that at the next annual meeting of stockholders, currently scheduled for the
third quarter of 2000, Mr. Cohen will stand for re-election to the Board of
Directors of Directrix.
Executive officers of Directrix 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
Directrix.
CERTAIN PROCEEDINGS
On October 14, 1998, the National Adjudicatory Council of the National
Association of Securities Dealers, Inc. (the "NASD") (the self-regulatory
organization for broker-dealers) issued a decision (the "Decision") which
reversed in part and affirmed in part a prior decision of the NASD Market
Surveillance Committee regarding Mr. Faherty's activities as a corporate finance
consultant to a now defunct brokerage firm, Hibbard Brown & Co. Inc. The
Decision dismissed two of three remaining causes of action against Mr. Faherty
and rejected 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. The Decision did, however, hold that his activities with the
brokerage firm gave rise to aider-and-abettor liability for such firm's
violation of Section 15(c) of the Exchange Act, which prohibits the purchase or
sale of securities by brokers or dealers involving manipulative, deceptive or
fraudulent devices or contrivances, and Rule 15c1-2 promulgated thereunder,
which defines such conduct. 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 $150,000. In November, 1998 Mr. Faherty appealed
the Decision to the Securities and Exchange Commission. As a result of the
appeal, which is still pending, enforcement of the sanctions has been stayed.
Item 10. Executive Compensation
COMPENSATION AND OPTION/SAR GRANTS DURING MOST RECENT FISCAL YEARS
The following table sets forth compensation paid by Directrix for
services in all capacities to the Chief Executive Officer, the former Chief
Financial Officer and the remaining executive officers for the year ended
March 31, 2000. Directrix did not pay executive officers any compensation nor
grant any executive officer any options or SAR's during the year ended
December 31, 1998 and prior to the Closing on March 15, 1999. Directrix did not
grant any executive officer any options or SAR's from March 16, 1999 to March
31, 1999.
<TABLE>
<CAPTION>
Summary Compensation Table
Other
Annual Restricted Securities All Other
Compen- Stock Underlying Compen-
Name and 3/31 Salary sation(1) Awards Options sation(2)
Principal Position Year ($) ($) ($) (#) ($)
---------------------------- -------- --------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
J. Roger Faherty(4) 2000 400,716 - - 50,000 (3) 9,945
Chairman, Chief
Executive Officer &
President
Donald J. McDonald, Jr.(4) 2000 202,500 - - 25,000 (3) 1,850
President, Director,
Treasurer & Chief
Financial Officer
Richard J. Kirby(4) 2000 200,358 - - 25,000 (3) 549
Chief Operating Officer,
Executive Vice President
& Secretary
John R. Sharpe(5) 2000 73,787 - - 25,000 (3) 212
Vice President & Chief
Financial Officer
</TABLE>
(1) Refer to the "Other Annual Compensation/All Other Compensation" table
on the following page for information on the components of Other Annual
Compensation. Where no dollar amount appears, Other Annual Compensation
for these executives is less than 10% of the executive's salary and
bonus for the year.
(2) Refer to the "Other Annual Compensation/All Other Compensation" table
on the following page for information on the components of All Other
Compensation.
(3) Refer to the "Options/Grants in Last Fiscal Year" table below for
information concerning option grants for the year ended March 31, 2000.
(4) To assist Directrix in achieving its business objectives, Messrs.
Faherty, McDonald and Kirby, Directrix's Chief Executive Officer,
President and Chief Operating Officer, respectively, voluntarily
agreed to a reduction in their annual salaries of $200,000 for Mr.
Faherty, $24,750 for Mr. McDonald and $22,584 for Mr. Kirby. The salary
reductions took effect on June 24, 2000 and will continue for the
remainder of the year ended March 31, 2001. In consideration of Mr.
Faherty's agreement to the salary reduction, the Compensation Committee
of the Board of Directors re-priced the 50,000 options previously
granted to Mr. Faherty to an exercise price of $4.00 per share, the
closing price of Directrix's Common Stock on June 22, 2000 and provided
for the immediate vesting of the options. The Compensation Committee
also granted each of Messrs. McDonald and Kirby 5,000 fully vested
options exercisable at $4.00 per share in consideration of their
agreement to the salary reduction.
(5) Mr. Sharpe resigned effective September 30, 1999.
<TABLE>
<CAPTION>
Other Annual Compensation/All Other Compensation
All Other
Other Annual Compensation Compersation
------------------------------------------------ ----------------------
Automobile Deferred
Related Compen- Long-Term Life Ins.
Expenses sation Disability Premium 401(k)
Name Year ($) ($) ($) ($) ($)
------------------------- ------- ------------- ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
J. Roger Faherty 2000 14,460 - 4,274 9,945 -
Donald J. McDonald, Jr. 2000 12,000 - 1,277 1,850 -
Richard J. Kirby 2000 10,200 - 1,472 549 -
John R. Sharpe 2000 5,100 - 162 212 -
</TABLE>
COMPENSATION OF DIRECTORS
Directrix pays its non-employee directors $1,000 for each in-person
Board of Directors meeting, plus expenses and $250 for each telephone conference
call Board of Directors meeting.
EMPLOYMENT AGREEMENTS
Effective as of March 15, 1999, Directrix entered into an employment
agreement with Mr. Faherty providing for his employment as Chairman of the Board
and Chief Executive Officer of Directrix. 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 $385,875, to be adjusted annually by an amount equal to five
percent (5%) of the prior year's base salary. Salary increases are cumulative so
that the base salary for each succeeding year includes the prior year's
increase. In addition and pursuant to the agreement, Directrix reimburses Mr.
Faherty for automobile costs.
Effective as of March 15, 1999, Directrix entered into employment
agreements with each of Messrs. McDonald, Kirby and Sharpe providing for the
employment of Mr. McDonald as President of Directrix, Mr. Kirby as Executive
Vice President of Directrix and Mr. Sharpe as Vice President and Chief Financial
Officer of Directrix. The employment agreements provide for a term ending on
December 31, 2001. The agreements provide for an annual base salary of $195,000,
$192,938 and $127,050 for Messrs. McDonald, Kirby and Sharpe, respectively, to
be adjusted annually by an amount equal to five percent (5%) of the prior year's
base salary. Salary increases are cumulative so that the base salary for each
succeeding year includes the prior year's increase. The agreements provide that
if employment is terminated by Directrix "without cause" or by the executive for
"good reason" (both as defined in the agreement), the executive is entitled to
receive an amount equal to base salary, payable in monthly installments over the
longer of (i) the applicable termination date or (ii) twelve months. If the
executive dies or becomes disabled, Directrix will continue to make base salary
payments to the executive or his estate for twelve months following death or
disability. In addition, the agreements provide that the executive will be
entitled to a severance payment if Directrix terminates the executive's
employment within 18 months following a change in control of Directrix.
COMPENSATION PROGRAM FOR KEY EXECUTIVES
Senior officers were granted five percent (5%) salary increases
effective March 31, 2000. Directrix did not award cash bonuses for the year
ended March 31, 2000.
During the year ended March 31, 2000, the Compensation Committee
approved and Directrix granted options under the 1998 Stock Incentive Plan (the
"Stock Option Plan") to acquire 25,000 shares of Directrix Common Stock each to
Messrs. Kirby, McDonald and Sharpe, exercisable at $3.94 per share, the market
price on the grant date. The Compensation Committee also approved and Directrix
granted options under the Stock Option Plan to acquire 50,000 shares of
Directrix Common Stock to the Chief Executive Officer, exercisable at $6.44 per
share, the market price on the grant date.
To accommodate these grants, the Board of Directors approved an
amendment (the "Proposed Amendment") to the Stock Option Plan which increases
the available pool of options from 200,000 options to 400,000 options and
increases the number of options that may be granted to any one individual. The
Proposed Amendment is subject to shareholder approval and will be submitted
to the Directrix shareholders at the forthcoming annual meeting.
The options granted to Mr. Sharpe were cancelled on September 30, 1999
when Mr. Sharpe resigned as Vice President, Chief Financial Officer and
Treasurer of Directrix.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Directrix Compensation Committee has made recommendations relating to
executive compensation to the Board of Directors. The Compensation Committee
members currently are Messrs. Nolan and Cohen, non-employee directors of
Directrix.
BENEFIT PLANS
401(k) Plan. Directrix has established 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) to the 401(k) Plan, although the percentage
elected by certain highly compensated participants may be limited. All amounts
contributed to the 401(k) Plan by employee participants and earnings on these
contributions will be fully vested at all times. Directrix, at the discretion of
the Board of Directors, may match employee contributions. For the year ended
March 31, 2000, Directrix did not match employee contributions. Mr. Faherty,
the 401(k) Plan trustee, has retained Morgan Stanley Dean Witter Discover
to administer the 401(k) Plan.
1998 STOCK INCENTIVE PLAN
On July 25, 1998, the Board of Directors adopted the Stock Option Plan.
The Stock Option Plan is designed to promote the interests of Directrix and its
stockholders by providing Directrix's key employees with appropriate incentives
and rewards to encourage them to continue their employment with Directrix 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 or treasury shares of Directrix Common Stock, at
the discretion of the Compensation Committee or another committee appointed
by the Board of Directors to administer the Plan. The Proposed Amendment
increases the pool of available options to 400,000 shares.
The Plan specifically provides for the grant of (i) non-qualified stock
options,(ii) incentive stock options ("ISO's"), (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 at the discretion of the
Compensation Committee.
The exercise price per share of each ISO granted under the Plan must be
the fair market value of a share of Common Stock on the date on which such ISO
is granted. An ISO granted to any holder of stock representing more than 110%
of the total combined voting power of all classes of stock of Directrix
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
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 Common Stock for which ISO's are
exercisable (as determined on the grant date) by a participant during any
calendar year under the Plan, or any other plan of Directrix or its
subsidiaries, may not exceed $100,000.
In general, Incentive Awards are not 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 Directrix
and its affiliates, are eligible to receive grants of Incentive Awards. The
Compensation Committee determines 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 determines the prices, expiration dates and other
material features of Incentive Awards granted under the Plan. An individual may
be granted Incentive Awards for no more than 20,000 shares during any one year.
The Proposed Amendment increases this annual limitation to 50,000 shares. No
Incentive Award may be granted under the Plan after July 25, 2008. During the
year ended March 31, 2000, Directrix granted to key executives and other
employees 204,394 options to acquire shares of the Common Stock of
Directrix, of which 100,000 options were granted to key executives.
Administration. The Compensation Committee administers 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.
The Board of Directors may, at any time, suspend, discontinue, revise
or amend the Plan. Directrix, however, will obtain stockholder approval for any
amendment (i) that requires stockholder approval under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") (related to the grant of
ISO's), or (ii) to treat some or all of the Incentive Awards as
"performance-based compensation" within the meaning of Code Section 162(m). 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 Code
Section 162(m).
Other Features of the Plan. Incentive Awards granted under the Plan and
shares acquired pursuant thereto are subject to a number of rights and
restrictions, including provisions relating to a change in control of Directrix
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 Directrix and its stockholders by
providing Directrix's non-employee directors with appropriate incentives and
rewards to encourage them to take a long-term outlook when formulating Directrix
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 or treasury shares of Common Stock,
at the discretion of the Compensation Committee or another committee
appointed by the Board of Directors 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").
The Board of Directors adopted, subject to shareholder approval, an
amendment (the "Proposed Directors' Plan Amendment") which increases the pool of
available Directors Plan options to options to acquire 150,000 shares, provides
for an initial grant of options to acquire 25,000 shares to each non-employee
director and increases the automatic annual year-end grant of options to acquire
5,000 shares from the previous level of 1,250 shares.
In general, Directors Incentive Awards are not 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 non-employee directors are
eligible to receive grants of Directors Incentive Awards. There are currently
three non-employee directors of Directrix. Prior to the adoption of the Proposed
Directors' Plan Amendment, Directors Incentive Awards under the Directors Plan
were granted automatically on the last trading day of each fiscal year of
Directrix to each Director who is, on such date, eligible to participate in the
Directors Plan. Prior to the adoption of the Proposed Directors' Plan Amendment,
the Directors Incentive Awards were in the form of non-qualified stock options
to purchase 1,250 shares of Common Stock and may include limited stock
appreciation rights with respect to the same number of shares. The Proposed
Directors' Plan Amendment increases the automatic year-end annual grant to
options to acquire 5,000 shares and provides for an initial grant of 25,000
options to each non-employee director.
Subject to the terms of the Directors Plan, the Compensation Committee
determines 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.
Subject to the adoption of the Proposed Directors Plan Amendment,
during the year ended March 31, 2000, 25,000 options to acquire shares of the
Common Stock of Directrix were granted to each of Messrs. Nolan, Cohen and
Miller.
Administration. The Compensation Committee administers 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 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. Directrix, however, will obtain stockholder
approval for any amendment that Rule 16b-3 Securities Act of 1934 (the "Exchange
Act") requires stockholder approval. 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 awards from constituting "applicable employee
remuneration" within the meaning of Code Section 162(m).
Other Features of the Plan. Directors Incentive Awards granted under
the Directors Plan and shares acquired pursuant thereto are subject to a number
of rights and restrictions, including provisions relating to a change in control
of Directrix and the termination of service of a grantee.
The following table sets forth stock options that Directrix granted to
the named executive officers during the year ended March 31, 2000:
<TABLE>
<CAPTION>
Option/Grants in Last Fiscal Year
Number of
Shares of Total
Common Options
Stock Granted to
Underlying Employees Exercise
Options in Fiscal or Base
Granted Year Price Expiration
NAME (#) (%) ($/Sh) Date
------------------------- ------------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
J. Roger Faherty 50,000 (1) 24.5 6.44 7/15/09
Donald J. McDonald, Jr. 25,000 (2) 12.2 3.94 4/21/09
Richard J. Kirby 25,000 (2) 12.2 3.94 4/21/09
John R. Sharpe 25,000 (3) 12.2 3.94 4/21/09
</TABLE>
(1) The April 21, 1999, employee grant did not include options for the
Chief Executive Officer (the "CEO") because the Compensation Committee
had not yet completed its evaluation concerning the granting of options
commensurate with the CEO's duties and responsibilities. Subject to
shareholder approval of the Stock Option Plan Amendment, on July 15,
1999 the Compensation Committee approved and Directrix granted options
to acquire 50,000 shares of Directrix Common Stock to the CEO,
exercisable at $6.44 per share, the market price on the grant date.
One-third of the options will vest on January 15, 2000. The next
one-third will vest on January 15, 2001 and the final one-third will
vest on July 15, 2001. In consideration of a voluntary reduction in
Mr. Faherty annual salary from June 24, 2000 through the remainder of
the year ended March 31, 2001, Directrix re-priced the exercise price
of the foregoing options to $4.00 per share and modified the options to
be fully vested.
(2) These option grants are subject to shareholder approval of the Proposed
Amendment. One-third of the options will vest on October 21, 1999.
The next one-third will vest on October 21, 2000 and the final
one-third will vest on April 21, 2001.
(3) The options were cancelled on September 30, 1999, when Mr. Sharpe
resigned as Vice President, Chief Financial Officer and Treasurer of
Directrix.
<TABLE>
<CAPTION>
Aggregate Options Exercised in Last Fiscal Year
and Year End Option Value
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
FY-End FY-End
--------------- -----------------
Shares Acquired Value Exercisable/ Exercisable/
on Exercise Realized Unexercisable Unexercisable(1)
Name (#) ($) (#) ($)
------------------------- ----------------- ---------- --------------- -----------------
<S> <C> <C> <C> <C>
J. Roger Faherty None None 16,667 80,208
33,333 160,417
Donald J. McDonald, Jr. None None 8,333 60,938
16,667 121,875
Richard J. Kirby None None 8,333 60,938
16,667 121,875
John R. Sharpe None None - -
</TABLE>
(1) Based on the last trade price on March 31, 2000 of $11.25 quoted by the
OTC Electronic Bulletin Board.
Filings With Securities and Exchange Commission. Exchange Act Section
16(a) requires that officers, directors and 10% stockholders of Directrix file
reports of their ownership with the Securities and Exchange Commission. Messrs.
McDonald, Faherty, Nolan, Cohen, Kirby and Miller were late with some of their
filings during the year ended March 31, 2000 due to complications arising from
the spin-off of Directrix as a stand-alone entity.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of July 14, 2000, the number and
percentage of outstanding shares of Directrix Common Stock beneficially owned by
(i) each person who, to the knowledge of Directrix, will own beneficially more
than five percent (5%) of the outstanding shares of Directrix Common Stock,
(ii) each director and executive officer of Directrix and (iii) all
directors and executive officers of Directrix as a group.
<TABLE>
<CAPTION>
Shares Beneficially Percentage of Shares
Name and address Owned (1) Outstanding (1)
----------------- --------------------- ---------------------------
<S> <C> <C>
J. Roger Faherty (2) 423,575 19.00%
236 W. 26th St., Suite 12W
New York, NY 10001
Donald J. McDonald, Jr. 65,583 2.99%
236 W. 26th St., Suite 12W
New York, NY 10001
Richard J. Kirby 45,458 2.07%
236 W. 26th St., Suite 12W
New York, NY 10001
Richard M. Cohen 28,375 1.29%
630 Fifth Avenue, Suite 601
New York, NY 10111
Rudy R. Miller 21,250 0.97%
4909 East McDowell Road
Phoenix, AZ 85008
Leland H. Nolan 146,399 6.68%
90 Prince Street
New York, NY 10012
Marlin Capital Corp. (3) 126,000 5.78%
11 S. LaSalle St., Suite 3310
Chicago, IL 60603
All directors and executive officers
as a group (6 persons) 735,641 31.85%
</TABLE>
-------------------------------
(1) Assumes exercise of all outstanding Directrix options and warrants
exercisable within 60 days.
(2) Mr. Faherty's shares do not include 1,657 shares owned by his wife or
1,350 shares owned by his minor children. Mr. Faherty does not have or
share voting or investment power over the shares owned by his wife or
his minor children and disclaims beneficial ownership of such shares.
(3) The information concerning beneficial ownership of Directrix Common
Stock by Marlin Capital Corp. was obtained from Schedule 13D filed with
the Commission by such stockholder. Pursuant to the Schedule 13D, the
stockholder reported that Marlin Capital Corp. owns 126,000 shares of
Directrix Common Stock which includes 57,000 shares of Directrix Common
Stock owned by Mark Egan. Mr. Egan is an officer and shareholder of
Marlin Capital Corp.
Item 12. Certain Relationships and Related Transactions.
On July 21, 1998, J. Roger Faherty, Leland H. Nolan and Donald J.
McDonald, Jr. (the "Original Lenders") agreed to provide Directrix with a
revolving line of credit (the "Credit Facility") of $1.5 million pursuant to a
March 15, 1999 Security and Loan Agreement. Messrs. Faherty and McDonald are
officers and directors of Directrix. Mr. Nolan is a non-employee director of
Directrix. The Credit Facility bears interest, payable monthly in arrears, at a
rate of 11% per annum and had an original maturity date of March 15, 2001.
On November 1, 1999, the Original Lenders agreed to extend the maturity date
of the Credit Facility to March 15, 2004. On February 16, 2000, pursuant to
an Amended and Restated Loan and Security Agreement (the "Amended Loan
Agreement"), two additional parties (the "New Lenders"), neither of which are
employees or directors of Directrix, agreed to provide Directrix with an
additional $2.0 million under the Credit Facility. Under the terms of the
Amended Loan Agreement, the Credit Facility was increased from $1.5 million to
$3.5 million, the maturity date of the Credit Facility was changed from March
15, 2004 to March 15, 2002 and the terms of the Loan Agreement were modified
to provide that Directrix was not permitted to draw down on the Credit Facility
after March 15, 2001. The Credit Facility is secured by accounts receivable,
equipment, intellectual property, certain intangibles and the proceeds from
the sale of accounts receivable and equipment.
In consideration of agreeing to provide the Credit Facility, Directrix
granted Messrs. Faherty, Nolan, McDonald and the New Lenders an aggregate of
105,000 Common Stock purchase warrants to purchase Directrix Common Stock (the
"Lenders Warrants") of which 45,000 were issued to the officers and directors of
Directrix. Each Lenders Warrant entitles the holder thereof to purchase, at any
time until the tenth anniversary of the Closing Date, one share of Directrix
Common Stock at an exercise price of $.01 per common share. In addition, the
Original and New Lenders have the right to (a) request Directrix to register the
Directrix Common Stock underlying the Lenders Warrants and (b) include the
Directrix Common Stock underlying the Lenders Warrants in certain registration
statements filed by Directrix. At March 31, 2000, all of the Lender Warrants
have been exercised.
Directrix believes that the terms of the Credit Facility that pertain
to Messrs. Faherty, Nolan and McDonald are no less favorable than those that
could be negotiated with an independent third party on an arm's length basis.
Certain payments made by Spice prior to Closing resulted in a dispute
between Playboy and Directrix. As a result, Playboy withheld approximately $0.5
million of severance payments payable to the Chief Executive Officer of
Directrix. Pending resolution of the dispute, Directrix loaned approximately
$0.6 million to the Chief Executive Officer. The loan was secured by an
assignment of the withheld severance payments. In September 1999, Playboy and
Directrix settled the dispute, at which time Playboy paid the severance to the
Chief Executive Officer, and the Chief Executive Officer repaid the loan to
Directrix.
<PAGE>
ITEM 13. Exhibits, List and Reports of Form 8-K.
(a) Exhibits
Exhibit
No. Description
-------- -----------
2.1 Form of Transfer and Redemption Agreement between Directrix, Inc.
("Directrix") and Spice Entertainment Companies, Inc. ("Spice").
Incorporated by reference to Exhibit 2.1 of the Registration
Statement on Form SB-2, Registration No. 333-664485, effective
December 1, 1998 (the "Form SB-2").
3.1 Certificate of Incorporation of Directrix. Incorporated by
reference to Exhibit 3.1 of the Form SB-2.
3.2 By-Laws of Directrix. Incorporated by reference to Exhibit 3.2
of the Form SB-2.
4.1 Form of certificate representing shares of Directrix Common
Stock. Incorporated by reference to Exhibit 4.1 of the Form SB-2.
4.2 Form of Common Stock Purchase Warrant issued to J. Roger Faherty,
Leland H. Nolan and Donald J. McDonald, Jr. for 27,000, 12,000
and 6,000 shares, respectively. Incorporated by reference to
Exhibit 4.2 of the Form 10-KSB for the year ended December 31,
1998.
4.3 Registration Rights Agreement between Directrix and J. Roger
Faherty, Leland H. Nolan and Donald J. McDonald, Jr. dated as of
March 15, 1999. Incorporated by reference to Exhibit 4.3 of the
Form 10-KSB for the year ended December 31, 1998.
4.4 Form of Common Stock Purchase Warrant issued to Marlin Capital
Corp. and New Horizons Investment Corp., N.V. for 15,000 and
45,000 shares, respectively. (*)
4.5 Registration Rights Agreement between Directrix, Marlin Capital
Corp. and New Horizons Investment Corp., N.V. dated as of
February 16, 2000. (*)
10.2 Form of Explicit Rights Agreement between Directrix and Spice.
Incorporated by reference to Exhibit 10.2 of the Form SB-2.
10.3 Form of Owned Rights Agreement between Directrix and Spice.
Incorporated by reference to Exhibit 10.3 of the Form SB-2.
10.4 Form of Non-Competition Agreement between Directrix and Spice.
Incorporated by reference to Exhibit 10.4 of the Form SB-2.
10.5 Form of Satellite Services Agreement between Directrix and Califa
Entertainment Group, Inc. ("Califa"). Incorporated by reference
to Exhibit 10.5 of the Form SB-2.
10.6 Form of Non-Competition Agreement between Directrix and Califa.
Incorporated by reference to Exhibit 10.6 of the Form SB-2.
10.7 Employment Agreement dated March 15, 1999 between Directrix and
J. Roger Faherty. Incorporated by reference to Exhibit 10.7 of
the Form SB-2.
10.8 Employment Agreement dated March 15, 1999 between Directrix and
Donald J. McDonald, Jr. Incorporated by reference to Exhibit 10.8
of the Form SB-2.
10.9 Employment Agreement dated March 15, 1999 between Directrix and
Richard J. Kirby. Incorporated by reference to Exhibit 10.10 of
the Form SB-2.
10.10 1998 Stock Incentive Plan of Directrix. Incorporated by
reference to Exhibit 10.11 of the Form SB-2.
10.11 1998 Stock Incentive Plan for Outside Directors of Directrix.
Incorporated by reference to Exhibit 10.12 of the Form SB-2.
10.12 Commitment Letter Agreement dated July 20, 1998 among Directrix,
J. Roger Faherty, Leland H. Nolan and Donald J. McDonald, Jr.
Incorporated by reference to Exhibit 10.14 of the Form SB-2.
10.13 Loan and Security Agreement dated as of March 15, 1999 between
Directrix and J. Roger Faherty, Leland H. Nolan and Donald J.
McDonald, Jr. Incorporated by reference to Exhibit 10.14 of the
Form 10-KSB for the year ended December 31, 1998.
10.14 Amended and Restated Loan and Security Agreement dated February
16, 2000 between Directrix, J. Roger Faherty, Donald J. McDonald,
Jr., Leland H. Nolan, Marlin Capital Corp. and New Horizons
Investment Corp., N.V. (*)
10.15 First Amendment to the 1998 Stock Incentive Plan of Directrix.(*)
10.16 First Amendment to the 1998 Stock Incentive Plan for Outside
Directors of Directrix. (*)
10.17 Letter Agreement dated June 22,2000 between Directrix and J.
Roger Faherty. (*)
10.18 Letter Agreement dated June 22,2000 between Directrix and Richard
J. Kirby. (*)
10.19 Letter Agreement dated June 22,2000 between Directrix and Donald
J. McDonald, Jr. (*)
27.00 Financial Data Schedule. (*)
(*) Exhibit filed herein.
(b) Reports on Form 8-K.
Directrix did not file any reports on Form 8-K for the year ended
March 31, 2000.
<PAGE>
SIGNATURES
In accordance with Section 13 and 15(d) of the Securities Exchange Act
of 1934, Directrix, Inc. caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: July 20, 2000
DIRECTRIX, INC.
BY: /s/ J. Roger Faherty
-------------------------
J. Roger Faherty
Chairman and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of Directrix, Inc. and in the capacities and on the
dates indicated.
/s/ Donald J. McDonald, Jr. President and Director Date: July 20, 2000
----------------------------
Donald J. McDonald, Jr.
/s/ Rudy R. Miller Director Date: July 20, 2000
----------------------------
Rudy R. Miller
/s/ Richard M. Cohen Director Date: July 20, 2000
----------------------------
Richard M. Cohen
/s/ Leland H. Nolan Director Date: July 20, 2000
----------------------------
Leland H. Nolan
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
/s/ Donald J. McDonald, Jr. Chief Financial Officer Date: July 20, 2000
---------------------------- & Principal Accounting
Donald J. McDonald, Jr. Officer
CC: NASD
<PAGE>
Exhibits, List and Reports of Form 8-K.
Exhibit
No. Description
-------- -----------
2.1 Form of Transfer and Redemption Agreement between Directrix, Inc.
("Directrix") and Spice Entertainment Companies, Inc. ("Spice").
Incorporated by reference to Exhibit 2.1 of the Registration
Statement on Form SB-2, Registration No. 333-664485, effective
December 1, 1998 (the "Form SB-2").
3.1 Certificate of Incorporation of Directrix. Incorporated by
reference to Exhibit 3.1 of the Form SB-2.
3.2 By-Laws of Directrix. Incorporated by reference to Exhibit 3.2
of the Form SB-2.
4.1 Form of certificate representing shares of Directrix Common
Stock. Incorporated by reference to Exhibit 4.1 of the Form SB-2.
4.2 Form of Common Stock Purchase Warrant issued to J. Roger Faherty,
Leland H. Nolan and Donald J. McDonald, Jr. for 27,000, 12,000
and 6,000 shares, respectively. Incorporated by reference to
Exhibit 4.2 of the Form 10-KSB for the year ended December 31,
1998.
4.3 Registration Rights Agreement between Directrix and J. Roger
Faherty, Leland H. Nolan and Donald J. McDonald, Jr. dated as of
March 15, 1999. Incorporated by reference to Exhibit 4.3 of the
Form 10-KSB for the year ended December 31, 1998.
4.4 Form of Common Stock Purchase Warrant issued to Marlin Capital
Corp. and New Horizons Investment Corp., N.V. for 15,000 and
45,000 shares, respectively. (*)
4.5 Registration Rights Agreement between Directrix, Marlin Capital
Corp. and New Horizons Investment Corp., N.V. dated as of
February 16, 2000. (*)
10.2 Form of Explicit Rights Agreement between Directrix and Spice.
Incorporated by reference to Exhibit 10.2 of the Form SB-2.
10.3 Form of Owned Rights Agreement between Directrix and Spice.
Incorporated by reference to Exhibit 10.3 of the Form SB-2.
10.4 Form of Non-Competition Agreement between Directrix and Spice.
Incorporated by reference to Exhibit 10.4 of the Form SB-2.
10.5 Form of Satellite Services Agreement between Directrix and Califa
Entertainment Group, Inc. ("Califa"). Incorporated by reference
to Exhibit 10.5 of the Form SB-2.
10.6 Form of Non-Competition Agreement between Directrix and Califa.
Incorporated by reference to Exhibit 10.6 of the Form SB-2.
10.7 Employment Agreement dated March 15, 1999 between Directrix and
J. Roger Faherty. Incorporated by reference to Exhibit 10.7 of
the Form SB-2.
10.8 Employment Agreement dated March 15, 1999 between Directrix and
Donald J. McDonald, Jr. Incorporated by reference to Exhibit 10.8
of the Form SB-2.
10.9 Employment Agreement dated March 15, 1999 between Directrix and
Richard J. Kirby. Incorporated by reference to Exhibit 10.10 of
the Form SB-2.
10.10 1998 Stock Incentive Plan of Directrix. Incorporated by
reference to Exhibit 10.11 of the Form SB-2.
10.11 1998 Stock Incentive Plan for Outside Directors of Directrix.
Incorporated by reference to Exhibit 10.12 of the Form SB-2.
10.12 Commitment Letter Agreement dated July 20, 1998 among Directrix,
J. Roger Faherty, Leland H. Nolan and Donald J. McDonald, Jr.
Incorporated by reference to Exhibit 10.14 of the Form SB-2.
10.13 Loan and Security Agreement dated as of March 15, 1999 between
Directrix and J. Roger Faherty, Leland H. Nolan and Donald J.
McDonald, Jr. Incorporated by reference to Exhibit 10.14 of the
Form 10-KSB for the year ended December 31, 1998.
10.14 Amended and Restated Loan and Security Agreement dated February
16, 2000 between Directrix, J. Roger Faherty, Donald J. McDonald,
Jr., Leland H. Nolan, Marlin Capital Corp. and New Horizons
Investment Corp., N.V. (*)
10.15 First Amendment to the 1998 Stock Incentive Plan of Directrix.(*)
10.16 First Amendment to the 1998 Stock Incentive Plan for Outside
Directors of Directrix. (*)
10.17 Letter Agreement dated June 22,2000 between Directrix and J.
Roger Faherty. (*)
10.18 Letter Agreement dated June 22,2000 between Directrix and Richard
J. Kirby. (*)
10.19 Letter Agreement dated June 22,2000 between Directrix and Donald
J. McDonald, Jr. (*)
27.00 Financial Data Schedule. (*)
(*) Exhibit filed herein.
(b) Reports on Form 8-K.
Directrix did not file any reports on Form 8-K for the year ended
March 31, 2000.
<PAGE>
DIRECTRIX, INC.
FINANCIAL STATEMENTS
For the year ended December 31, 1998,
transition period ended March 31, 1999 and
the year ended March 31, 2000
<PAGE>
DIRECTRIX, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
PAGE
Report of Independent Certified Public Accountants ................................................................... F-2
Balance Sheet as of March 31, 2000 ................................................................................... F-3
Statements of Operations for the years ended March 31, 2000 and December 31, 1998, and the transition period ended
March 31, 1999 ....................................................................................................... F-4
Statement of Stockholders' Equity for the years ended March 31, 2000 and December 31, 1998, and the transition period
ended March 31, 1999 ................................................................................................. F-5
Statements of Cash Flows for the years ended March 31, 2000 and December 31, 1998, and the transition period ended
March 31, 1999 ....................................................................................................... F-6
Notes to Financial Statements ........................................................................................ F-7 - F-17
F-1
</TABLE>
<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 March 31, 2000, and the related statements of operations,
stockholders' equity and cash flows for the years ended March 31, 2000 and
December 31, 1998 and for the three months ended March 31, 1999. 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 auditing standards generally accepted
in the United States of America. 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 March 31,
2000 and the results of its operations and its cash flows for the years ended
March 31, 2000 and December 31, 1998 and for the three months ended March 31,
1999, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company incurred net losses of $6.1 million during the
year ended March 31, 2000 and, as of that date, has a working capital deficiency
of $1.1 million. The Company's continuing losses and deficiency in working
capital raise substantial doubt about its ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
GRANT THORNTON LLP
New York, New York
June 28, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
DIRECTRIX, INC.
BALANCE SHEET
MARCH 31, 2000
ASSETS:
<S> <C>
Current assets:
Cash and cash equivalents ................................................. $ 324,000
Accounts receivable ....................................................... 825,000
Prepaid expenses and other current assets ................................. 87,000
------------
Total current assets ....................................... 1,236,000
Property and equipment, net .................................................... 5,141,000
Library of movies, net ......................................................... 1,122,000
Deferred financing costs ....................................................... 562,000
Other assets ................................................................... 93,000
------------
Total assets ............................................... $ 8,154,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable ........................................................... $ 1,867,000
Customer deposits .......................................................... 110,000
Accrued expenses and other current liabilities ............................. 322,000
------------
Total current liabilities .................................. 2,299,000
Transponder lease liability .................................................... 464,000
Other liabilities .............................................................. 96,000
Revolving line of credit ....................................................... 1,913,000
------------
Total liabilities .......................................... 4,772,000
------------
Commitments and contingencies
Stockholders' equity
Common stock, $.01 par value; authorized 25,000,000 shares;
2,179,785 shares issued and outstanding ................................. 22,000
Additional paid-in capital ................................................. 20,833,000
Accumulated deficit ........................................................ (17,473,000)
------------
Total stockholders' equity ................................. 3,382,000
------------
Total liabilities and stockholders' equity ................. $ 8,154,000
============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
DIRECTRIX, INC.
STATEMENTS OF OPERATIONS
YEAR THREE MONTHS YEAR
ENDED ENDED ENDED
MARCH 31, MARCH 31, DECEMBER 31,
----------------------------------------------------------------------
<S> <C> <C> <C>
2000 1999 1998
---- ---- ----
Revenues ................................................ $ 8,796,000 $ 1,996,000 $ 9,581,000
------------------- --------------------- --------------------
Operating expenses:
Salaries, wages and benefits ........................ 2,954,000 794,000 2,688,000
Library amortization ................................ 446,000 81,000 350,000
Satellite costs ..................................... 6,525,000 1,602,000 6,579,000
Selling, general and administrative expenses ........ 3,872,000 919,000 2,199,000
Depreciation ........................................ 1,264,000 270,000 1,174,000
Write-down of operation facility .................... - - 632,000
------------------- --------------------- --------------------
Total operating expenses ..................... 15,061,000 3,666,000 13,622,000
------------------- --------------------- --------------------
Loss from operations ......................... (6,265,000) (1,670,000) (4,041,000)
Interest expense ........................................ (168,000) (24,000) (139,000)
Gain on sale of marketable securities ................... 369,000
------------------- --------------------- --------------------
Net loss ..................................... $(6,064,000) $(1,694,000) $(4,180,000)
=================== ===================== ====================
Net loss per common share (presented on pro forma
basis for the fiscal year ended December 31, 1998):
Basic and diluted ................................. $ (2.86) $ (0.82) $ (2.01)
=================== ===================== ====================
Weighted average number of shares outstanding:
Basic and diluted ................................. 2,123,228 2,074,785 2,074,785
=================== ===================== ====================
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-4
<PAGE>
DIRECTRIX, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
--------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 ....................................... $ - $ 9,859,000 $ (5,535,000) $ (4,324,000)
Net transfers from Spice ..................................... - 3,906,000 - 3,906,000
Net loss ..................................................... - - (4,180,000) (4,180,000)
--------- --------------- ---------------- ---------------
Balance at December 31, 1998 ..................................... - 13,765,000 (9,715,000) 4,050,000
Warrants issued in connection with revolving line of credit .. - 180,000 - 180,000
Transfer and redemption adjustments .......................... 21,000 6,416,000 - 6,437,000
Net loss ..................................................... - - (1,694,000) (1,694,000)
--------- --------------- ---------------- ---------------
Balance at March 31, 1999 ........................................ 21,000 20,361,000 (11,409,000) 8,973,000
Warrants issued in connection with credit facility ........... - 472,000 - 472,000
Warrants exercised in connection with credit facility ........ 1,000 - - 1,000
Net loss ..................................................... - - (6,064,000) (6,064,000)
--------- --------------- ---------------- ---------------
Balance at March 31, 2000 ........................................ $ 22,000 $ 20,833,000 $ (17,473,000) $ 3,382,000
========= =============== ================ ===============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-5
<PAGE>
DIRECTRIX, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR THREE MONTHS YEAR
ENDED ENDED ENDED
MARCH 31, MARCH 31, DECEMBER 31,
2000 1999 1998
--------------- --------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .............................................................. $ (6,064,000) $ (1,694,000) $ (4,180,000)
--------------- --------------- --------------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation of property and equipment ................................. 1,264,000 270,000 2,071,000
Amortization of library of movies ...................................... 446,000 81,000 350,000
Amortization of deferred financing costs ............................... 83,000 7,000 -
Gain on sale of marketable securities .................................. (369,000) - -
Bad debt expense ....................................................... 971,000 - -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable ....................... (1,811,000) 35,000 17,000
Decrease (increase) in prepaid expenses and other current assets .. 166,000 397,000 (577,000)
Increase in other assets .......................................... (27,000) (15,000) -
Increase (decrease) in accounts payable and accrued expenses ...... 1,294,000 957,000 (156,000)
Increase (decrease) in customer deposits .......................... 110,000 - (109,000)
Increase in other liabilities ..................................... 96,000 - -
--------------- --------------- --------------
Total adjustments ....................................... 2,223,000 1,732,000 1,487,000
--------------- --------------- --------------
Net cash (used in) provided by operating activities ..... (3,841,000) 38,000 (2,693,000)
--------------- --------------- --------------
Cash flows from investing activities:
Proceeds from sale of Playboy Stock .................................... 4,844,000 - -
Purchase of property and equipment ..................................... (3,736,000) (210,000) (476,000)
Purchase of rights to libraries of movies .............................. - (75,000) (380,000)
--------------- --------------- --------------
Net cash provided by (used in) investing activities ..... 1,108,000 (285,000) (856,000)
--------------- --------------- --------------
Cash flows from financing activities:
Payment of capital lease obligations ................................... (307,000) (265,000) (466,000)
Borrowings under revolving line of credit .............................. 1,913,000 - -
Proceeds from issuance of warrants ..................................... 1,000 - -
Net transfers from Spice ............................................... - 1,962,000 3,906,000
--------------- --------------- --------------
Net cash provided by financing activities ............... 1,607,000 1,697,000 3,440,000
-------------- --------------- --------------
Net (decrease) increase in cash and cash equivalents .... (1,126,000) 1,450,000 -
Cash and cash equivalents, beginning of the period ......................... 1,450,000 - -
--------------- --------------- --------------
Cash and cash equivalents, end of the period ............ $ 324,000 $ 1,450,000 $ -
=============== =============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ................................................ $ 69,000 $ 16,000 $ 119,000
=============== =============== ==============
Supplemental schedule of non-cash investing and financing activities:
Acquisition of movie rights for reducing EMI accounts receivable .. $ 735,000 - -
Capital lease obligation .......................................... - $ 190,000 -
Marketable securities contributed at spin-off ..................... - 4,475,000 -
Issuance of warrants in connection with the credit facility ....... 472,000 180,000 -
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-6
<PAGE>
DIRECTRIX, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND BASIS OF PRESENTATION
BUSINESS. Directrix, Inc. ("Directrix"), a Delaware corporation, is a
full service provider of digital video asset management services, primarily to
the entertainment industry. Directrix provides all of the technical services
required to create, support and deliver digital video programming and data
services from its advanced digital network facility. Directrix offers a number
of services including digital video playback, downlink and uplink, satellite
space segments, digital video archiving and trafficking, video Internet
streaming, digital ad insertion and digital archiving and distribution for VOD
(Video-on-Demand) platforms.
Formation and Asset Transfer. Spice Entertainment Companies, Inc.
("Spice") formed Directrix in contemplation of the merger ("Merger") of Spice
with a wholly-owned subsidiary of Playboy Enterprises, Inc. ("Playboy") and spun
off Directrix to the former Spice stockholders. On March 15, 1999 as a condition
to the closing ("Closing") of the Merger, Spice and Directrix entered into a
Transfer and Redemption Agreement (the "Transfer Agreement") and certain related
agreements.
Pursuant to the terms of the Transfer Agreement, immediately prior to
the Merger, Spice contributed certain assets to Directrix, including (a) all of
the equipment and facilities relating to Spice's master control and digital
playback center (the "Operations Facility"), (b) an option ("EMI Option") to
purchase the stock or assets of Emerald Media, Inc. ("EMI"), (c) certain rights
to Spice's library of adult films ("Library Rights"), (d) approximately $0.8
million in cash, (e) 173,784 shares of Playboy stock with a market value of
approximately $4.5 million, and (f) accounts receivable and other current
assets, totaling approximately $1.2 million. Directrix assumed certain
liabilities (the "Assumed Liabilities") including (i) the liabilities relating
to EMI, (ii) the liabilities relating to the Operations Facility arising after
March 15, 1999, and (iii) those liabilities and obligations arising out of the
assets being transferred to Directrix. Under the Transfer Agreement, Directrix
indemnified Spice for the Assumed Liabilities.
On March 15, 1999, in connection with the Merger, Spice transferred
approximately 2,075,000 shares of Common Stock to the Spice stockholders on the
basis of one share of Common Stock in partial exchange for eight shares of Spice
Common Stock owned prior to the Merger. Fractional shares were not issued; any
fractional share of Common Stock was rounded up to the next whole share.
BASIS OF PRESENTATION
Year Ended March 31, 2000. The financial statements for the year ended
March 31, 2000, reflect the results of operations, financial position, changes
in stockholders' equity and cash flows of Directrix as a separate entity.
Directrix became a stand-alone entity on March 16, 1999 following the
merger of Spice with Playboy. In May, 1999, the Board of Directors approved a
change in Directrix's fiscal year to March 31 from December 31. The three-month
transition period from January 1, 1999 to March 31, 1999 that preceded the start
of the new fiscal year was presented in Form 10-QSB Transition Report filed with
the Securities and Exchange Commission in May, 1999.
Year Ended December 31, 1998. Prior to the March 15, 1999 Closing,
Directrix was a wholly-owned subsidiary of Spice and consequently had no
operating history as a stand-alone entity. Accordingly, the financial statements
of Directrix prior to Closing were carved out from the financial statements of
Spice using the historical results of operations and historical basis of the
assets and
F-7
<PAGE>
DIRECTRIX, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
liabilities of such business. The following paragraphs describe the
methodology employed in carving out the Directrix financial statements.
For the year ended December 31, 1998, the financial statements
include the results of operations, financial position, changes in stockholders'
equity and cash flows that were directly related to the Operations Facility, the
EMI Option and the Library Rights that were contributed to Directrix by Spice as
if Directrix were a separate entity prior to Closing. Changes in stockholders'
equity include the net losses of Directrix and net transfers from Spice through
Closing.
The financial statements include certain Spice corporate headquarters
assets and liabilities relating to the business that Spice transferred to
Directrix, including certain Library Rights. The value of the Library Rights
that Spice transferred to Directrix were 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. The liabilities transferred to
Directrix included capital lease obligations and the amounts of debt and related
interest expense associated with the liabilities assumed by Directrix pursuant
to the Merger Agreement.
The financial statements include allocations of revenues and expenses
relating to the business that Spice transferred to Directrix. Directrix's
revenues prior to Closing were generated principally from services provided to
two customers, EMI and internally to Spice. These revenues were comprised of
revenues from network operations, post-production and technical services. For
services provided to EMI and unrelated third party customers, revenues were
recorded based on contractual amounts or cash receipts. For services provided to
Spice, revenues were recorded based on the cost 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 were reasonable.
Prior to Closing, general corporate overhead related to Spice's
corporate headquarters and common support divisions were allocated to Directrix
based on the ratio of Directrix'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 Directrix
would have incurred for these services if Directrix were a stand-alone entity.
Transition Period Ended March 31, 1999. The financial statements of
Directrix include the results of operations, financial position, changes in
stockholders' equity and cash flows of the business that were contributed to
Directrix by Spice on March 15, 1999. Accordingly, the financial statements of
Directrix prior to Closing 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. Directrix's activity
during its initial operating period from March 16, 1999 to March 31, 1999 was
insignificant.
The financial information included herein for the year ended
December 31, 1998 and the transition period ended March 31, 1999 may not
necessarily reflect the results of operations, financial position, changes in
stockholders' equity and cash flows of Directrix in the future or what they
would have been had Directrix been a separate, stand-alone entity during the
periods presented.
F-8
<PAGE>
DIRECTRIX, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
2. LIQUIDITY
Directrix commenced operations as a stand-alone business following its
spin-off from Spice on March 16, 1999. Directrix incurred net losses of $4.2
million and $1.7 million for the year ended December 31, 1998 and the transition
period ended March 31, 1999, respectively, on the basis of the presentation
described above. For the year ended March 31, 2000, Directrix incurred a net
loss of $6.1 million. At March 31, 2000, Directrix has a working capital
deficiency of $1.1 million. These matters raise substantial doubt about
Directrix's ability to continue as a going concern. Directrix's continued
existence is dependent upon several factors, including its ability to generate
operating cash flow via execution of its long term business plan, and secure
additional financing to provide for the immediate deficiency in working capital.
Directrix's increase in net loss for the year ended March 31, 2000 is
primarily attributable to increases in bad debt expense relating to EMI of
approximately $1.0 million and a decrease in total revenue of approximately $0.8
million, offset by a gain on the disposal of Playboy stock of approximately $0.4
million. The working capital deficiency was primarily attributable to the
relocation of, and investment in equipment for the Operations Facility.
On September 1, 1999, Directrix relocated its Operations Facility to a
new facility located in Northvale, New Jersey. The new fully automated network
origination center is designed to be a 24 hours a day by 7 days a week full
service provider of all the technical and creative services required to develop,
support and deliver network television, video, audio and data services via
satellite, fiber and Internet.
Management believes that the relocation and build-out of the Operations
Facility is critical to the realization of Directrix's long-term business plan.
Management also believes that since the build-out of the Operations Facility is
substantially complete, Directrix now has the capacity to increase revenue by
using its technological resources to expand its customer base and develop new
business lines without significantly changing its cost structure and, as a
result, generate operating cash flow. However, there can be no assurance that
management will actually be successful at executing it's long-term business plan
or that the successful implementation of the business plan will improve
operating results.
Directrix's service agreements with Playboy and Califa currently expire
on March 15, 2001. Directrix is currently in negotiations to extend the terms of
these agreements and is seeking to add additional networks and services.
Directrix has a $3.5 million revolving line of credit, from which $1.9
million has been drawn down as of March 31, 2000 (see Note 10). Management
forecasts that Directrix will require additional funding to provide for the
deficiency in working capital until Directrix generates operating cash flow.
Management believes that it has access to potential sources of capital
sufficient enough to meet Directrix's needs over the next twelve months. The
potential sources of capital include, but are not limited to: (i) an increase in
its line of credit (see "Certain Relationships and Related Transactions,"
below), (ii) the sale of its option to acquire EMI and/or (iii) a possible
private placement of equity securities with individual, institutional and
strategic investors. There can be no assurance, however, that management will
be successful in its efforts to obtain sufficient capital.
F-9
<PAGE>
DIRECTRIX, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS. Directrix considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents include mutual fund and money market
accounts in which the balances were insignificant at March 31, 2000.
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 cash and
cash equivalents, accounts receivable, accounts payable and accrued expenses
reflected in the financial statements approximate fair value because of the
short maturity of these items. The carrying amounts of the transponder lease
liability and the revolving line of credit reflected in the financial statements
approximate fair value because no major changes have occurred in the applicable
interest rates.
CONCENTRATION OF CREDIT RISK. Financial instruments which subject
Directrix to concentrations of credit risk consist primarily of cash and trade
accounts receivable. Directrix's cash and cash equivalents are deposited in high
credit quality institutions. At March 31, 2000, Directrix's cash balances in one
bank exceeded the FDIC limit by approximately $0.2 million.
At March 31, 2000, Directrix had a net trade receivable with EMI of
approximately $0.8 million, which represented 92% of the net trade receivables.
Receivables arising from sales to customers are not 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-LIVED ASSETS. Directrix continually reviews
long-lived assets and certain identifiable intangibles held and used for
possible impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Directrix has determined
that no provision is necessary for the impairment of long-lived assets at March
31, 2000. In the year ended December 31, 1998, Directrix took a write-down of
its operations facility of approximately $0.6 million.
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 provided for
using the straight-line method over the estimated useful lives of the related
assets, ranging from five to seven years. Leasehold improvements are amortized
over the shorter of their estimated useful life or the related lease term.
REVENUE RECOGNITION. Revenues from the sale of transponder, playback
and other related services are recognized in the period the service is
performed. For the period from April 1, 1999 to December 31, 1999, Directrix
recorded revenues from EMI based on contractual amounts. Prior to that time,
Directrix had been recording revenues from EMI based on cash receipts.
During the fourth quarter ended March 31, 2000, due to renewed uncertainty
surrounding EMI's ability to pay for all services provided, Directrix resumed
recording revenue from EMI based on cash receipts.
F-10
<PAGE>
DIRECTRIX, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
LIBRARY OF MOVIES. Directrix 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. Effective April 1, 2000,
Directrix changed the estimated life of its library of movies to two years.
NET LOSS PER SHARE. For the year ended December 31, 1998, Directrix
presented net loss per share on a pro forma basis because historical net loss
per share would not be meaningful. The pro forma net loss per share for the year
ended December 31, 1998 is calculated by giving retroactive effect to the
distribution of 2,074,785 shares of Directrix Common Stock to the former Spice
shareholders. Net loss per share and pro forma net loss per share for the
transition period ended March 31, 1999 and the year ended March 31, 2000 are
calculated in acordance with Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share." Since Directrix reported a net loss for
all periods presented, basic and diluted earnings per share exclude dilution and
are computed by dividing net loss attributable to common shareholders by the
weighted-average common shares outstanding for the period. Options and warrants
were excluded from the calculation of earnings per share because their effect
would be anti-dilutive. Directrix had 239,140 Common Stock options outstanding
as of March 31, 2000. At March 31, 2000 all Common Stock purchase warrants
were exercised.
INCOME TAXES. Prior to March 16, 1999, Directrix was a division of
Spice and did not file separate income tax returns. Directrix's results of
operations were included in the income tax returns filed by Spice and its
subsidiaries. Directrix was not allocated any income tax benefit associated
with the net losses incurred through March 15, 1999.
Directrix 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.
4. PROPERTY AND EQUIPMENT
March 31, 2000
---------------
Equipment ...................................................... $ 9,412,000
Furniture and fixtures ......................................... 303,000
Leasehold improvements ......................................... 2,694,000
---------------
12,409,000
Less accumulated depreciation and amortization ................. (7,268,000)
---------------
$ 5,141,000
===============
5. STOCK OPTION PLANS
Directrix has two Stock Incentive Plans covering employees and non-
employee directors. The employees' plan authorizes the Compensation Committee
(or another Board of Directors committee
F-11
<PAGE>
DIRECTRIX, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
designated by the Board of Directors) to grant employees non-qualified and
incentive stock options, stock appreciation rights, restricted stock, cash
bonuses and other types of awards at the discretion of the Compensation
Committee. The directors' plan authorizes the Compensation Committee to grant
non-employee directors non-qualified stock options and limited stock
appreciation rights.
At March 31, 2000, the plans provide for an aggregate reservation and
availability of up to 220,000 shares of Common Stock of Directrix. The Board of
Directors recently adopted, subject to shareholder approval, certain amendments
to the plans that would increase the aggregate number of shares available for
issuance under the plans to 550,000, increase the maximum number of shares
issuable to an individual during any one year and increase the aggregate number
of shares available under the initial and the annual automatic grants to
non-employee directors.
Directrix has adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123,"Accounting for Stock-Based Compensation"
("SFAS No. 123"). It applies APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations in accounting for its plans and does
not recognize compensation expense for its stock-based compensation plans,
which provide for granting of options with exercise prices equal to the fair
market value of Common Stock at the date of grant. If Directrix had elected
to recognize compensation expense based upon the fair value at the grant date
for awards under these plans consistent with the methodology prescribed by SFAS
No. 123, Directrix's net loss and net loss per share would be increased to the
pro forma amounts as follows:
Year Ended
March 31, 2000
--------------
Net loss
As reported ................................................. $ (6,064,000)
Pro forma ................................................... $ (6,228,000)
Basic and diluted loss per share
As reported ................................................. $ (2.86)
Pro forma ................................................... $ (2.93)
The fair value of these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for the year ended March 31, 2000: expected volatility of 50
percent; risk-free interest rates of six percent (6%); and expected lives of ten
years.
F-12
<PAGE>
DIRECTRIX, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
The table below summarizes the activity in the plans:
<TABLE>
<CAPTION>
Weighted-
Average
Stock Options Exercise
Outstanding Price
--------------- ------------
<S> <C> <C>
Balance at April 01, 1999 ....................... - $ -
Granted ......................................... 294,394 4.73
Exercised ....................................... - -
Canceled ........................................ (55,254) 3.94
--------------- ------------
Balance at March 31, 2000 ....................... 239,140 4.91
Exercisable at March 31, 2000 ................... 49,800 4.77
Weighted-average fair value of options
granted during the fiscal year
ended March 31, 2000 ......................... 3.25
</TABLE>
At March 31, 2000, there were 149,140 and 90,000 options issued and outstanding
under the Employees' Plan and Director's Plan, respectively. Directrix has an
additional 310,860 shares remaining for future grants under the plans,
consisting of 250,860 and 60,000 shares under the employees' plan and director's
plan, respectively.
The following table summarizes information concerning currently outstanding and
exercisable stock options at March 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- --------------------------------
Weighted Weighted Weighted
Average Average Average
Ranges of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
--------------------- --------------- -------------------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C>
$ 3.69 - $6.44 224,140 9.14 years $ 4.48 49,800 $ 4.77
11.25 15,000 10 years 11.25 - -
</TABLE>
6. INCOME TAXES
As described in Note 3, Directrix was a Division of Spice until March
15, 1999 and did not file separate income tax returns. In addition, Directrix
was not allocated any income tax benefit associated with the losses that it
incurred through March 15, 1999. Directrix also had minimal activity during its
F-13
<PAGE>
DIRECTRIX, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
initial operating period of March 16, 1999 through March 31, 1999 and therefore
did not recognize any income tax benefit or provision.
Significant components of Directrix's net deferred tax assets at March 31, 2000
are as follows:
Net operating loss .......................... $1,700,000
Bad debt .................................... 400,000
Transponder lease liability ................. 360,000
Property and equipment ...................... (400,000)
Other ....................................... 40,000
-----------------
2,100,000
Less valuation allowance .................... (2,100,000)
-----------------
-0-
=================
At March 31, 2000, Directrix has Federal and State net operating loss
carryforwards of approximately $4.0 million that will be available to offset
future taxable income, if any through March, 2020. A 100% valuation allowance
has been established to reserve for the deferred tax assets since there is no
assurance that theire benefit will be realized in the future.
7. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS. Directrix has employment agreements with its
three Executive Officers providing for aggregate annual compensation amounting
to approximately $0.8 million plus increases of five percent (5%)per annum. The
Chief Executive Officer's agreement is for a six-year term, renewable annually
for five years from the agreement date. The other agreements expire on December
31, 2001.
The agreements for the President and Chief Operating Officer provide
for up to 12 months additional salary upon the death or disability of the
officers or termination without cause. In addition, the officers are entitled
to severance pay, in an amount to be determined, upon termination following a
change in control of Directrix.
The officers of Directrix have agreed to a voluntary salary reduction
as described in Note 12.
LEASES AND SERVICE CONTRACTS. Directrix leases its office space and
operating facilities under non-cancelable operating leases, expiring March, 2002
and April, 2009, respectively. Directrix also leases satellite transponders
under various lease agreements (as amended), expiring at various times through
November, 2004. Aggregate minimum rental commitments under non-cancelable
operating leases at March 31, 2000 are as follows:
F-14
<PAGE>
DIRECTRIX, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
Satellite
Years Ending Office Facilities Transponder
March 31, and Equipment and Uplink Total
-------------------- ------------------------- ------------------- -------------------
<S> <C> <C> <C>
2001 $ 327,000 $ 6,444,000 $ 6,771,000
2002 319,000 6,436,000 6,755,000
2003 253,000 6,240,000 6,493,000
2004 239,000 6,240,000 6,479,000
2005 207,000 3,785,000 3,992,000
Thereafter 795,000 - 795,000
------------------------- ------------------- -------------------
Total $ 2,140,000 $ 29,145,000 $ 31,285,000
========================= =================== ===================
</TABLE>
Rent expense under operating leases amounted to $6,778,000 and
$6,658,000 for the years ended March 31, 2000 and December 31, 1998,
respectively. Rent expense for the period ended March 31, 1999 amounted to
$1,700,000.
Directrix has the option to extend one of its transponder lease
agreements through November, 2007 for approximately $375,000 per month.
In December, 1999, Directrix entered into an agreement to defer
approximately $1.0 million of lease payments that will be repaid in twenty-four
equal monthly installments of $40,833 beginning April 1, 2000.
8. SIGNIFICANT CUSTOMERS
Directrix derives its revenues from a limited number of customers, some
of which are in the adult entertainment industry. Directrix's largest customers
are EMI and Spice. Revenues from EMI and Spice amounted to $3.8 million and $5.2
million during the year ended December 31, 1998 representing 40% and 55% of that
year's revenues, respectively. For the three months ended March 31, 1999
revenues from EMI and Spice amounted to $0.6 million and $1.2 million
representing 28% and 58% of that period's revenues, respectively. Revenues from
EMI amounted to $6.7 million during the year ended March 31, 2000 representing
76% of total revenue for the year. For the year ended March 31, 2000, Directrix
recorded bad debt expense associated with EMI of approximately $1.0 million.
At March 31, 2000, accounts receivable includes $755,000 due from EMI,
which equals the exercise price of the EMI Option, and represents 92% of all
accounts receivable.
Directrix and EMI are parties to certain service and licensing
agreements, as amended, in which Directrix is providing EMI with various
technical services including satellite uplink, broadcast and video playback and
access to its library of movies.
9. RETIREMENT PLAN
Directrix has established 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) to the 401(k) Plan. Directrix, at the discretion of the
Board of Directors, may match
F-15
<PAGE>
DIRECTRIX, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
employee contributions. For the year ended March 31, 2000, Directrix did not
match employee contributions.
10. REVOLVING LINE OF CREDIT
Directrix has a revolving line of credit of $3.5 million ("Credit
Facility") pursuant to the terms of a March 15, 1999 Security and Loan
Agreement, as amended by the Amended and Restated Loan and Security Agreement
(as amended, the "Amended Loan Agreement") dated February 15, 2000. Under the
terms of the Amended Loan Agreement, the Credit Facility was increased from
$1.5 million to $3.5 million, the maturity date of the Credit Facility was
changed from March 15, 2004 to March 15, 2002 and the terms of the Loan
Agreement were modified to provide that Directrix was not permitted to draw
down on the Credit Facility after March 15, 2001. The providers of the Credit
Facility include the Chief Executive Officer, the President, a Director of
Directrix, and two unrelated parties (collectively, the "Lenders"). The Credit
Facility bears interest at 11% per annum, payable monthly, and matures
on March 15, 2002. In consideration of their agreeing to provide the Credit
Facility, Directrix granted the Lenders an aggregate of 105,000 Common Stock
purchase warrants, exercisable for 10 years at $0.01 per share. The
aggregate fair market value of the warrants (determined using the Black-
Scholes pricing model) amounts to approximately $0.7 million and is being
amortized over the term of the Credit Facility. All of the warrants were
exercised as of March 31, 2000.
The Amended Loan Agreement, among other things, requires Directrix to
maintain certain minimum levels of net worth and earnings (as defined in the
agreement), commencing with the year ended March 31, 2001 and the quarter ended
September 30, 2000, respectively. Substantially all of Directrix's assets have
been pledged as collateral for this obligation.
As of March 31, 2000, Directrix has drawn down $1.9 million, with
$1.6 million unused and available funds remaining under the Credit Facility.
11. RELATED PARTY TRANSACTIONS
Certain payments made by Spice prior to Closing resulted in a dispute
between Playboy and Directrix. As a result, Playboy withheld approximately $0.5
million of severance payments payable to the Chief Executive Officer of
Directrix. Pending resolution of the dispute, Directrix loaned approximately
$0.6 million to the Chief Executive Officer. The loan was secured by an
assignment of the withheld severance payments. In September 1999, Playboy and
Directrix settled the dispute, at which time Playboy paid the severance to the
Chief Executive Officer, and the Chief Executive Officer repaid the loan to
Directrix.
As described in Note 10, Directrix has a revolving Credit Facility with
five individuals, including two of Directrix's executive officers and a
director.
12. SUBSEQUENT EVENTS
Executive Compensation. To assist Directrix in achieving its business
objectives, Messrs. Faherty, McDonald and Kirby, Directrix's Chief Executive
Officer, President and Chief Operating Officer, respectively, voluntarily agreed
to a reduction in their annual salaries of $200,000 for Mr. Faherty, $24,750 for
Mr. McDonald and $22,584 for Mr. Kirby. The salary reductions took effect on
June 24, 2000 and will continue for the remainder of the year ended March 31,
2001. In consideration
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<PAGE>
DIRECTRIX, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
of Mr. Faherty's agreement to the salary reduction, the Compensation Committee
of the Board of Directors re-priced the 50,000 options previously granted to
Mr. Faherty to an exercise price of $4.00 per share, the closing price of
Directrix's stock on June 22, 2000, and provided for the immediate vesting of
the options. The Compensation Committee also granted each of Messrs. McDonald
and Kirby 5,000 fully vested options exercisable at $4.00 in consideration of
their agreement to the salary reduction.
EMI Service and License Agreements Extension. Effective April 1, 2000,
Directrix and EMI agreed to extend the terms of their existing agreements to
December 31, 2002.
Change in Accounting Estimate. As described in Note 3, Directrix
changed the estimated life of its Library of Movies to two years.
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