SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period
Commission file number 000-25111
Directrix, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-4015248
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
230 Pegasus Avenue, Northvale, NJ 07647
(Address of principal executive offices)
(201) 750-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (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
filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of Registrant's Common Stock as of
February 28, 2002 was 2,564,098.
DIRECTRIX, INC. and SUBSIDIARIES
FORM 10-QSB
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.(*)
Condensed Consolidated Balance Sheet as of
December 31, 2001 (Unaudited)........................ 3
Condensed Consolidated Statement of Operations
for the three and nine months ended December 31, 2001
and 2000 (Unaudited)................................. 4
Condensed Consolidated Statement of
Stockholders' Deficit for the nine months ended
December 31, 2001 (Unaudited)........................ 5
Condensed Consolidated Statement of Cash Flows
for the nine months ended December 31, 2001
and 2000 (Unaudited)................................. 6
Notes to Condensed Consolidated Financial
Statements (Unaudited)............................... 7-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........ 16-25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................... 26
Item 2. Changes in Securities and Use of Proceeds............ 26
Item 6. Exhibits and Reports on Form 8-K..................... 26
SIGNATURES........................................... 27
(*) The accompanying unaudited financial statements have not yet been reviewed
by Directrix' independent auditors. Directrix expects that the review will be
completed as soon as practicable.
2
PART I
ITEM 1: FINANCIAL STATEMENTS
DIRECTRIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
- -----------------------------------------------------------------------------------------------------
Dec 31,
2001
---------------
(unaudited)
ASSETS:
Current assets:
Cash and cash equivalents........................................ $ 17,000
Marketable securities............................................ 282,000
Accounts receivable, billed...................................... 176,000
Accounts receivable, unbilled.................................... 18,000
Prepaid expenses and other current assets........................ 113,000
---------------
Total current assets.............................. 606,000
Property and equipment, net........................................... 3,232,000
Library of movies, net................................................ 81,000
Deferred financing costs.............................................. 410,000
Deferred lease costs.................................................. 499,000
Other assets.......................................................... 31,000
---------------
Total assets...................................... $ 4,859,000
===============
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Accounts payable.................................................. $ 2,745,000
Transponder lease liability...................................... 10,726,000
Accrued expenses and other current liabilities.................... 535,000
Customer deposits................................................. 287,000
Interim Financing................................................. 362,000
---------------
Total current liabilities......................... 14,655,000
Deferred rent......................................................... 15,000
Revolving line of credit.............................................. 4,168,000
Subordinated convertible debentures................................... 906,000
---------------
Total liabilities................................. 19,744,000
---------------
Commitments and contingencies
Stockholders' deficit
Common stock, $.01 par value; authorized 25,000,000 shares;
2,545,802 shares issued and outstanding at December 31, 2001.... 26,000
Additional paid-in capital........................................ 22,923,000
Deferred Compensation............................................. (129,000)
Accumulated other comprehensive loss.............................. (59,000)
Accumulated deficit............................................... (37,646,000)
---------------
Total stockholders' deficit....................... (14,885,000)
---------------
Total liabilities and stockholders' deficit....... $ 4,859,000
===============
The accompanying notes are an integral part of these financial statements.
3
DIRECTRIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS of OPERATIONS (unaudited)
___________________________________________________________________________________________________________________________________
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000 2001 2000
------------------------------------- -------------------------------------
Revenues $ 518,000 $ 1,203,000 $ 2,376,000 $ 4,013,000
---------------- ---------------- ---------------- ----------------
Operating expenses:
Salaries, wages and benefits.................. 847,000 828,000 2,556,000 2,464,000
Library amortization ......................... 130,000 155,000 406,000 488,000
Satellite costs .............................. 71,000 1,427,000 552,000 4,790,000
Broadband expenses ........................... -- -- 660,000 113,000
Selling, general and administrative expenses . 404,000 499,000 1,220,000 1,767,000
Depreciation ................................. 422,000 353,000 1,120,000 1,051,000
---------------- ---------------- ---------------- ----------------
Total operating expenses .............. 1,874,000 3,262,000 6,514,000 10,673,000
---------------- ---------------- ---------------- ----------------
Loss from operations .................. (1,356,000) (2,059,000) (4,138,000) (6,660,000)
Other expenses:
Interest expense ............................. (307,000) (300,000) (1,133,000) (650,000)
Transponder penalty .......................... -- -- (4,620,000) --
---------------- ---------------- ---------------- ----------------
Total other expenses .................. (307,000) (300,000) (5,753,000) (650,000)
---------------- ---------------- ---------------- ----------------
Net loss .............................. $ (1,663,000) $ (2,359,000) $ (9,891,000) $ (7,310,000)
================ ================ ================ ================
Net loss per common share:
Basic & Diluted .............................. $ (0.67) $ (1.06) $ (4.11) $ (3.33)
================ ================ ================ ================
Weighted average number of common shares outstanding:
Basic & Diluted .............................. 2,474,032 2,230,002 2,409,396 2,196,585
================ ================ ================ ================
The accompanying notes are an integral part of these financial statements.
4
DIRECTRIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT of STOCKHOLDERS' DEFICIT (unaudited)
FOR THE NINE MONTHS ENDED DECEMBER 31, 2001
___________________________________________________________________________________________________________________________________
Accumulated
Number Additional Other
of Common Paid-in Deferred Comprehensive Accumulated
Shares Stock Capital Compensation Loss Deficit Total
--------- -------- ------------ ------------ ------------- ------------- ------------
Balance at March 31, 2001 ........ 2,239,785 $ 23,000 $ 21,170,000 $ -- $ -- $(27,755,000) $(6,562,000)
Restricted stock issued
in connection with
salary reductions ........... 163,655 2,000 473,000 (129,000) -- -- 346,000
Intrinsic value of
benenficial conversion
feature of debentures ....... -- -- 438,000 -- -- -- 438,000
Stock issued in connection
with PIK credit facility
interest .................... 106,726 1,000 272,000 -- -- -- 273,000
Stock issued in connection
with PIK interim financing
interest .................... 35,636 -- 87,000 -- -- -- 87,000
Adjust value of stock issued
in connection with credit
facility interest to fair
market value ................ -- -- (8,000) -- -- -- (8,000)
Warrants issued in connection
with the West Coast
facility ................... -- -- 224,000 -- -- -- 224,000
Warrants issued in connection
with credit facility ........ -- -- 267,000 -- -- -- 267,000
Net loss ..................... -- -- -- -- -- (9,891,000) (9,891,000)
Comprehensive loss due to
decline in market
value of marketable
securities .................. -- -- -- -- (59,000) -- (59,000)
------------
Comprehensive loss ........... -- -- -- -- -- -- (9,950,000)
------------
--------- -------- ------------ ------------ ------------- ------------- ------------
Balance at December 31, 2001 ..... 2,545,802 $ 26,000 $ 22,923,000 $ (129,000) $ (59,000) $(37,646,000)$(14,885,000)
========= ======== ============ ============ ============= ============= ============
The accompanying notes are an integral part of these financial statements.
5
DIRECTRIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
___________________________________________________________________________________________________________________________________
Nine months ended December 31,
2001 2000
---------------- ----------------
Cash flows from operating activities:
Net loss ........................................................... $ (9,891,000) $ (7,310,000)
---------------- ----------------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation of property and equipment ............................. 1,120,000 1,051,000
Amortization of library of movies .................................. 406,000 488,000
Amortization of deferred financing costs ........................... 237,000 233,000
Bad debt expense ................................................... 38,000 200,000
Non-cash rent expense .............................................. (34,000) (20,000)
Non-cash interest for beneficial conversion feature of debentures .. 438,000 --
Non-cash interest for PIK of credit facility interest .............. 265,000 --
Amortization of non-cash interest for PIK of interim financing notes 11,000 --
Deferred compensation .............................................. 346,000 --
Increase in transponder penalty .................................... 4,620,000 --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable .................... 382,000 (337,000)
Increase in prepaid expenses and other current assets ......... (55,000) --
Decrease in other assets ...................................... 136,000 51,000
Increase in deferred lease costs .............................. (275,000) --
Increase in accounts payable, accrued expenses and other
current liabilities.......................................... 1,511,000 3,589,000
(Decrease) increase in customer deposits ...................... (107,000) 110,000
Increase in other liabilities.................................. 31,000 --
---------------- ----------------
Total adjustments ................................... 9,070,000 5,365,000
---------------- ----------------
---------------- ----------------
Net cash used in operating activities ............... (821,000) (1,945,000)
---------------- ----------------
Cash flows from investing activities:
Purchase of property and equipment ............................ (173,000) (373,000)
---------------- ----------------
Net cash used in investing activities ............... (173,000) (373,000)
---------------- ----------------
Cash flows from financing activities:
Officer loans ................................................. (8,000) --
Borrowings under revolving line of credit ..................... 2,000 2,121,000
Proceeds from issuance of subordinated convertible debentures . 500,000 --
Proceeds from issuance of interim financing notes ............. 438,000 --
---------------- ----------------
Net cash provided by financing activities ........... 932,000 2,121,000
---------------- ----------------
Net decrease in cash and cash equivalents .............................. (62,000) (197,000)
Cash and cash equivalents, beginning of the period ..................... 79,000 324,000
---------------- ----------------
Cash and cash equivalents, end of the period ........................... $ 17,000 $ 127,000
================ ================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................ $ 118,000 $ 245,000
================ ================
Supplemental schedule of non-cash investing and financing activities:
Reduction of accounts receivable in exchange for
marketable securities ....................................... $ (342,000) $ --
Warrants issued in connection with the West Coast facility .... $ 224,000 $ --
Warrants issued in connection with the credit facility ........ $ 267,000 $ --
Adjustment to value of warrants issued in connection with the
revolving line of credit .................................... $ -- $ (15,000)
The accompanying notes are an integral part of these financial statements.
6
DIRECTRIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE & NINE MONTHS ENDED DECEMBER 31, 2001 (unaudited)
- --------------------------------------------------------------------------------
1. Basis of Presentation. The accompanying unaudited financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
the instructions to Form 10-QSB and do not include all the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. Furthermore, the
accompanying unaudited financial statements have not yet been reviewed by
Directrix' independent auditors. Directrix expects that the review will be
completed as soon as practicable. In the opinion of management, all adjustments
consisting of normal recurring accruals, considered necessary for a fair
presentation of the results for the interim period have been included. Operating
results for the three and nine months ended December 31, 2001 are not
necessarily indicative of the results that may be expected for the year ended
March 31, 2002. The accompanying condensed consolidated financial statements and
the information included under the heading "Management's Discussion and Analysis
of Financial Condition and Results of Operations" should be read in conjunction
with the condensed consolidated financial statements and related notes thereto
included in Directrix' Annual Report for the year ended March 31, 2001 as filed
with our Form 10-KSB.
2. Business Organization. Directrix, Inc. ("Directrix"), a Delaware
corporation, is a full service provider of network origination, digital
video asset management and digital content delivery services, primarily to the
adult entertainment industry. Directrix was originally a wholly owned subsidiary
of Spice Entertainment Companies, Inc. ("Spice") and provided network
origination and technical services for Spice's networks. Directrix became a
stand-alone company when, as part of the March 15, 1999 merger ("Merger") of
Spice into Playboy Enterprises Group, Inc. ("Playboy"), Spice spun off Directrix
by distributing approximately 2,075,000 shares of Directrix common stock, $.01
par value ("Common Stock") to the Spice stockholders. As part of the Merger,
Spice contributed certain assets to Directrix including its New York City based
master control and playback facility and related technical service agreements
and its transponder services agreement. Directrix is in the process of building
out a 109,000 square foot teleport, master control, and soundstage complex in
Los Angeles (the "West Coast Facility"). Under a transaction which was completed
on September 20, 2001, Directrix will provide network origination and production
services, digital archiving, studio facilities and personnel, and production and
post-production offices to Playboy at the facility over a 15-year term
(collectively, the "Playboy Transaction"). See Note 4 for a more complete
description of the Playboy Transaction.
3. Financial Condition & Liquidity. The accompanying financial statements
have been prepared in conformity with accounting principles generally
accepted in the United States of America, which contemplate continuation of
Directrix as a going concern. However, since becoming a stand-alone company on
March 15, 1999, Directrix incurred net losses of $6.1 million and $10.3 million
for the years ended March 31, 2000 and March 31, 2001, respectively, and a net
loss of $9.9 million for the nine months ended December 31, 2001. At December
31, 2001, Directrix has a working capital deficiency of $14.0 million. These
matters raise substantial doubt about Directrix' ability to continue as a going
concern. Directrix' continued existence is dependent upon several factors,
including management's ability to successfully implement the restructuring plan
described below and its ability to generate operating cash flow through the
successful execution of its long-term business plan. To date, management has not
yet secured the consent of Loral SpaceCom Corporation ("Loral"), which is one of
the parties to a July 13, 2001 letter agreement and term sheet (the "Settlement
Agreement") (described in Note 4, "Termination of Directrix' Transponder
Services Agreement"), to the final phase of the restructuring plan which is a
precondition to Directrix' ability to raise needed capital. If management is
unable to secure the required consent, Directrix will be forced to pursue other
alternatives which may include filing a petition under the Bankruptcy Code. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should Directrix be unable
to continue in existence. Management's plans and intentions in regard to this
matter are described below in Note 4.
4. Restructuring Plan. Management developed and is in the process of
implementing a multi-phase
7
restructuring plan. The restructuring plan addresses the areas that
management believes are critical to the realization of Directrix' short and
long-term plans which include (i) the termination of Directrix' transponder
services agreement, (ii) the establishment of the West Coast Facility, (iii) the
transition of its existing business to the West Coast Facility and attracting
new business, (iv) the restructuring of Directrix' capital structure and (v)
securing new financing. As noted above in Note 3, management has not yet secured
the consent of Loral, which is one of the parties to the Settlement Agreement
(described immediately below), to the final phase of the restructuring plan
which is a precondition to Directrix' ability to raise needed capital. If
Directrix is unable to implement the final phase of the restructuring plan and
thereby secure new financing, it may forced to file a petition under the
Bankruptcy Code.
Termination of Directrix' Transponder Services Agreement. In May 2001,
Directrix terminated its Agreement for SkyNet Transponder Services
("Transponder Agreement") with Loral and transferred its transponder
service customers to Loral. When the Transponder Agreement was terminated,
Directrix owed Loral approximately $6.1 million for past due service fees and a
$4.6 million early termination charge. The parties entered into a Settlement
Agreement which provided for Loral to extinguish its receivable and the early
termination charge in exchange for Directrix' issuance to Loral of: (i) a
$1.65 million note under Directrix' $4.5 million credit facility (the
"Credit Facility"), (ii) $3.0 million face amount of a new Series B junior
preferred stock ("Series B Preferred") which has not yet been issued and (iii) a
five-year warrant to acquire 200,000 shares at an exercise price of $3.00 per
share. The terms of the Series B Preferred if and when issued are described
below in Note 6.
The Settlement Agreement was to take effect with the consummation of
the Playboy Transaction on September 20, 2001 but was contingent upon the
parties entering into definitive documentation by January 14, 2002. To date, the
parties have not entered into definitive documentation or agreed to extend the
drop-dead date of the Settlement Agreement. In addition, Loral and Directrix
have been unable to agree on the terms of the global restructuring as it impacts
Loral. While Directrix is prepared to extend the term of the Settlement
Agreement, it will do so only if Loral and Directrix can agree on the terms of
the global restructuring. As a consequence of the foregoing, the Settlement
Agreement as it impacts Loral is not currently in effect.
Management terminated the Transponder Agreement because (i) Emerald
Media ("EMI"), Directrix' major customer of subleased transponder services,
had failed to pay in full amounts owed for transponder services and ultimately
ceased operations and (ii) it believed that the direct leasing of satellite
transponders no longer fit into Directrix' long-term plans. By terminating the
Transponder Agreement, Directrix eliminated its largest recurring monthly
charge.
Directrix recognized $0.8 million and $2.7 million, respectively, of
revenue attributable to the leasing of transponders for the three and nine
months ended December 31, 2000 of which $0.7 million and $2.3 million,
respectively, related to Emerald Media, Inc. ("EMI"). As a result of the May
2001 termination of the Transponder Agreement, Directrix recognized
approximately $0.1 million of revenue from transponder leasing for the nine
months ended December 31, 2001.
Establishment of the West Coast Facility. Management believes that the
establishment of the West Coast Facility is critical to the realization of
its long-term business plan. To finance the acquisition, renovation and
outfitting of the West Coast Facility Directrix entered into a three party
letter of intent with Kingston Investors Corp. ("Kingston") and Playboy, under
which Kingston agreed to purchase the building and make improvements to the
property and enter into a triple net lease of the property with Directrix for
fifteen years. During final negotiation, the transaction was restructured and
under the revised arrangement among the parties, Kingston acquired the property
on September 20, 2001 and triple net leased the property to Playboy under a 15
year Master Lease. Playboy then subleased, on a triple net basis, approximately
55% of the property to Directrix under a 15-year Sublease that provides for
monthly sublease payments of approximately $100,000 in the first year increasing
3% per year for the first 10 years. For the last five years of the sublease, the
sublease payment will be 110% of the tenth year payment. Directrix is required
to pay its proportionate
8
share of the insurance, real estate taxes and operating expenses of the
facility. The Sublease commences in stages; rent on Studio A commences 30 days
after Kingston delivers Studio A renovated in accordance with specifications set
forth in the Master Lease, anticipated to occur in the calendar quarter ended
September 30, 2002; the balance commences 30 days after the remainder of the
subleased premises are renovated in accordance with the work letter attached to
the Master Lease.
On September 19, 2001, the parties executed a binding agreement under
which Directrix will provide to Playboy network origination, studio
facilities and related technical services in consideration of Playboy's payment
of the service fees provided for in the most recent draft of the Master Services
Agreement. In the September 19th agreement the parties agreed to execute the
long form Master Services Agreement once the financing arrangements for the
equipment and integration services associated with outfitting the West Coast
Facility were finalized. The letter agreement also provides for Directrix to
manage the West Coast Facility and charge back to Playboy its proportionate
share of the operating expenses.
Under the Master Services Agreement, the minimum monthly service
payments will be $257,500 per month, increasing 3% per year. Directrix will
begin providing studio services when Studio A is operational in accordance with
technical specifications set forth in an exhibit to the Master Services
Agreement, anticipated to occur approximately 30 days after Kingston delivers a
renovated Studio A. Network origination services will commence when Directrix is
capable of originating the networks from the West Coast Facility. Playboy
granted Directrix a right of first refusal to provide substantially all of its
technical service needs.
In July 2001, Playboy acquired the four networks operated by Califa
and VODI. Directrix will provide network origination services for theses
four networks in addition to providing network origination services for all of
Playboy's other networks from the West Coast Facility. The parties agreed to
extend the existing service agreements until the networks are originated from
the West Coast Facility. When the parties execute the Master Services Agreement,
Directrix will issue a warrant to Playboy to acquire 650,000 shares of its
common stock at an exercise price of $3.45 per share.
Under the Master Services Agreement, Directrix is to provide equipment,
integration and technical improvements necessary to provide the services
under the agreement when the facility is operational. To finance the equipment
and improvements, Playboy has entered into a Memorandum of Understanding with
Sony Financial Services, LLC ("SFS") under which SFS will provide between $7.0
million and $8.0 million of equipment lease financing (including system
integration fees and maintenance agreements) for the facility. The parties are
currently finalizing the amount of financing to be provided. Directrix will have
the right to use the equipment on a pass-through basis under an agreement
currently being finalized with Playboy. There can be no assurances that the
equipment lease financing arrangements will be finalized.
Directrix has recorded approximately $500,000 of expenses attributable
to the establishment of the West Coast facility including legal fees,
financing fees and the issuance of warrants to Kingston as part of its fee.
These amounts have been capitalized as deferred lease costs on the accompanying
balance sheet and will be amortized over the 15-year term of the Master Services
Agreement.
Transition of its Existing Business to the West Coast Facility and
Attract New Business. Although Playboy will serve as the anchor tenant for
the West Coast Facility, the facility will have the capacity to provide network
origination, studio facilities and other technical services to additional
customers and will have two additional studios that will only be partially
utilized by Playboy. Management intends to transition Directrix' existing
service agreements for the networks operated by Playboy (including the networks
formerly owned by Califa and VODI) to the West Coast Facility, and anticipates
providing services to additional customers from the facility.
After transitioning Directrix' existing service agreements for the
networks operated by Playboy to the
9
West Coast Facility, Directrix will have substantial unused capacity at its
Northvale facility. Management would prefer to maintain the Northvale facility
and have operation centers on both coasts and is currently exploring several
options for the productive utilization of the facility, including diversifying
its East Coast customer base or subleasing the facility to a third party. There
can be no assurances that Directrix will be successful in obtaining new business
sufficient to maintain operation centers on both coasts or finding a lessee for
the Northvale facility.
Restructuring of the Credit Facility and Settlement Agreement.Directrix
is attempting to complete a global restructuring of its capital structure
and raise additional capital. To date, management has not yet secured the
required consent of Loral, which is one of the parties to the Settlement
Agreement, to the proposed restructuring plan. If management is unable to secure
the consent of all the parties, Directrix may be forced to file a petition under
the Bankruptcy Code. The status of these negotiations and Directrix' options
should it be unable to implement the restructuring plan are described below in
Proposed Global Restructuring and New Financing.
In July 2001, Directrix entered into a Settlement Agreement with Loral
which also modified the terms of the Credit Facility. As noted above, the
Settlement Agreement was to take effect with the consummation of the Playboy
Transaction on September 20, 2001 but was contingent upon the parties entering
into definitive documentation by January 14, 2002. To date, the parties have not
entered into definitive documentation or agreed to extend the drop-dead date of
the Settlement Agreement. While those aspects of the Restructuring Agreement
that deal with Loral's agreement to extinguish its receivable and early
termination charge have not taken effect, the aspects of the Restructuring
Agreement that modified the Credit Facility have taken effect.
As of December 31, 2001, Directrix had drawn down $4.2 million under
the Credit Facility. While the Credit Facility was to mature on March 15,
2002, Directrix could not draw down any further advances after March 15, 2001.
The Credit Facility was secured by a first lien on all of Directrix' assets. To
facilitate the agreement with Loral and enhance Directrix' ability to attract
new capital, Directrix negotiated a restructuring of the Credit Facility as part
of the Settlement Agreement. Under the Settlement Agreement, the holders of the
Credit Facility agreed to (i) extend the maturity date by one year until March
31, 2003, (ii) permit Directrix to pay in kind ("PIK") the interest payment with
shares of Directrix common stock ("Common Stock") and (iii) revise the
stockholders' equity covenant. In consideration of the foregoing, Directrix
issued to the holders of the Credit Facility, excluding Loral and the two
executive officers of Directrix who agreed to swap their portion of the Credit
Facility for a new Series A of senior preferred stock ("Series A Preferred") and
warrants to acquire 200,000 shares of Common Stock (which have not yet been
issued as described below), warrants to acquire 125,000 shares of Common Stock
at an exercise price of $3.00 per share. As noted above, the Settlement
Agreement was to take effect on the consummation of the Playboy Transaction
which occurred on September 20, 2001.
Under the Settlement Agreement, the Credit Facility notes held by two
executive officers of Directrix, which aggregated $1.65 million at
September 20, 2001, were to be cancelled and replaced with $1.65 million face
amount of a Series A Preferred. Directrix was also to issue five year warrants
to acquire 200,000 shares of Common Stock with an exercise price of $3.00 to the
two officers. Because this aspect of the Restructuring Agreement has not yet
taken effect, the Series A Preferred and warrants have not been issued and
the officers currently retain their $1.65 million of Credit Facility notes.
The terms of the Series A Preferred if and when issued are described below in
Note 6.
The holders of the Credit Facility agreed to permit Directrix to PIK
the interest payment owed on the Credit Facility with shares of Common
Stock for the period from June 1, 2001 through September 19, 2001. (Under the
Settlement Agreement, Directrix can PIK the interest on the Credit Facility on a
going forward basis.) Directrix issued 53,230 shares of Common Stock with an
aggregate fair market value of $156,000 as the PIK interest payment for the
period from June 1, 2001 through September 30, 2001 and issued 54,500
10
shares of Common Stock with an aggregate fair market value of $117,156 as
the PIK interest payment for the three months ended December 31, 2001. The PIK
interest payments are accounted for at its fair market value on the accompanying
statement of stockholders' deficit.
Proposed Global Restructuring and New Financing. The final phase of
management's plan is to locate a new source of working capital. Management
forecasts that Directrix will require additional funding to complete the
buildout of the West Coast Facility and to provide for the deficiency in working
capital until Directrix generates operating cash flow. Directrix had initially
planned to put the West Coast facility into operation during the first calendar
quarter of 2002 but because of delays in finalizing the Playboy Transaction,
this date has been pushed back into the third calendar quarter of 2002. The
delay in the completion of the West Coast facility has heightened Directrix'
need for additional funding.
As a preliminary step, Directrix secured an aggregate of $611,500 of
interim financing ("Interim Financing") in a private placement to existing
shareholders and investors of which $437,500 was placed during the three months
ended December 31, 2001 and the balance during the next two months. The terms of
the Interim Financing include a one year note secured by a perfected first lien
on Directrix' assets. (Under a letter agreement dated October 28, 2001, the
Credit Facility holders agreed to subordinate their security interest to the
Interim Financing holders' first lien.) The interim financing notes bear 20%
interest payable upfront in shares of Directrix common stock which Directrix is
recognizing as interest expense over the term of the notes. During the three
months ended December 31, 2001, Directrix issued 35,635 shares of Common Stock
as payment of interest on the notes and discounted the principal value of the
notes by the unamortized portion of the interest expense. During the two months
ended February 2002, Directrix issued 18,297 shares of Common Stock as payment
of interest on the notes.
To date, management has been unable to secure financing beyond the
Interim Financing, and believes that it will not be able to secure
additional financing unless it can first restructure its capital structure.
Directrix proposed a comprehensive restructuring plan that would convert the
interests of the holders of the Interim Financing, Credit Facility, Debentures
(as described below in Note 5) and Series A and Series B Preferred into Common
Stock. These steps were based on the assumption that all of the terms of the
Settlement Agreement would be in effect. As part of this plan, Directrix would
implement a revised business plan which provided for, among other things,
further reductions in its executives' salaries.
If Directrix was able to implement a restructuring plan along the lines
described above, Directrix could have secured preliminary commitments for
$2.0 million of new financing. However, Directrix has not yet secured the
consent of Loral, which is one of the parties to the Settlement Agreement, and
has been forced to consider other options, including filing a petition under the
Bankruptcy Code. If Directrix is forced to file a bankruptcy petition, its
business will most likely be adversely affected. Moreover, there is no assurance
that Directrix will be able to file a reorganization plan that will enable it to
remain in business and it may be forced to cease operations and liquidate.
Even if Directrix is able to implement a restructuring plan along the
lines described above and secure new financing, there is no assurance that
Directrix will be able to realize its long-term business plan and achieve
profitability. Moreover, there can be no assurance that the successful
implementation of the business plan will improve operating results and/or result
in Directrix achieving profitability. There also can be no assurance that
unforeseen circumstances could prevent Directrix from achieving its goal.
5. Subordinated Convertible Debentures. Directrix placed $500,000 of
convertible debentures ("Debentures") in an offering completed on June 30,
2001. In July 2001, Directrix offered up to $600,000 of a second series of
convertible debentures with the same terms as the Debentures. Through December
31, 2001, Directrix placed $375,000 of Debentures from the second series;
$50,000 of Debentures were issued to an executive officer of Directrix.
11
The Debentures are convertible into shares of Common Stock at any time,
at the option of the holders, at a conversion rate of $1.50 per share of
Common Stock. The conversion rate is subject to anti-dilution protection for
stock splits, stock dividends, stock reclassifications and mergers. Directrix
can require conversion at any time if the average trading price of its common
stock is over $5.00 for any ten consecutive trading days prior to maturity. The
Debentures mature on March 31, 2003, are senior to all of Directrix' other
obligations other than the Credit Facility and Interim Financing and bear
interest at 6% per annum, payable at maturity. Directrix can elect to PIK the
interest payment in Common Stock in lieu of a cash interest payment. Directrix
granted the Debenture holders' registration rights for the shares of common
stock into which the Debentures are convertible and has committed to file the
registration statement during the year ended March 31, 2002.
During the three and nine months ended December 31, 2001, Directrix
recorded non-cash interest expense attributable to the intrinsic value of
the beneficial conversion feature of the convertible debentures of $125,000 and
$437,500, respectively, based on the difference between the conversion price and
the fair market value of Directrix common stock on the February 28, 2001 and
July 16, 2001 commitment dates. Through December 31, 2001, Directrix recorded an
aggregate of $31,000 of accrued interest attributable to the first and second
series of the Debentures. As discussed above in Note 4, Directrix proposed
converting the Debentures into Common Stock as part of the proposed global
restructuring.
6. Preferred Stock. The Restructuring Agreement sets forth the terms of
the Series A and Series B Preferred to be issued if and when the portion of
the Restructuring Agreement relating to the extinguishment of the Loral
receivable and early termination charge takes effect. If this occurs, Directrix
will issue $1.65 million of Series A Preferred to two of Directrix' executive
officers and $3.0 million of Series B Preferred to Loral. As noted above in Note
4, Directrix has not yet issued the preferred stock and this aspect of the
Settlement Agreement has not taken effect. Under the proposed global
restructuring (described in Note 4), all aspects of the Settlement Agreement
will take effect; the Series A and B Preferred will be deemed issued and
converted into Common Stock. If issued, the Series A Preferred will bear a 6%
cumulative dividend which Directrix may, at its option, PIK in Common Stock,
will be senior in liquidation preference to the Series B Preferred and will be
convertible at $1.50 per share. The conversion price will be subject to standard
anti-dilution adjustments for stock splits and dividends and recapitalizations,
and adjustments for issuances of Common Stock or convertible securities with an
issue or conversion price less than the Series A Preferred conversion price. The
Series A Preferred will also be entitled to vote on an as converted basis and
the holders will have the right to appoint two members to the Directrix Board of
Directors. The holders of the Series A Preferred will have the right to demand
redemption after 10 years or upon change in control of Directrix (such as if a
person or group acquires more than 35% of the outstanding voting securities).
Directrix will have the option of paying the redemption price in cash or as a
PIK in Common Stock. If issued, the Series B Preferred will have the same terms
as the Series A Preferred except that it will be junior to the Series A
Preferred on liquidation preference, will have a $3.00 per share conversion
price which will be subject to volume weighted adjustment for issuances of
Common Stock or convertible securities with an issue or conversion price less
than the Series B Preferred conversion price, and will have no voting rights or
rights to appoint Board members.
7. Warrants. As part of the fee arrangement for assisting with the
Playboy Transaction, Directrix issued to Kingston a five-year warrant to
acquire 100,000 shares of Directrix common stock at an exercise price of $2.90
per share, the fair market value of Directrix stock on the grant date. The
aggregate fair market value of the warrants (preliminarily determined by
management using the Black-Scholes pricing model) amounts to approximately $0.2
million and is capitalized as a deferred lease cost on the accompanying balance
sheet. As noted above in Note 4, Directrix has committed to issue to Playboy
upon execution of the Master Services Agreement, a five year warrant to acquire
650,000 shares at an exercise price of $3.45 per share. As noted above in Note 4
and as part of the Settlement Agreement, Directrix issued five year warrants to
acquire 125,000 shares of Directrix common stock to the Credit Facility holders.
Directrix will also issue warrants to acquire 200,000 shares to each of Loral
and the two executive officers of Directrix (as a group) if and when the
Restructuring Agreement as it relates to the extinguishment of the Loral
receivable and early termination charge takes effect. All of the warrants have
an exercise price of $3.00 per share. The aggregate fair market value of
12
the warrants (preliminarily determined by management using the
Black-Scholes pricing model) issued to the Credit Facility holders amounts to
approximately $0.3 million and is being amortized over the term of the Credit
Facility. The final determination of the valuation of the warrants described
above will be based on an analysis done by Directrix.
8. Net Loss per Share. Net loss per share for the three and nine months
ended December 31, 2000 and December 31, 2001 are calculated in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." Since Directrix reported a loss before extraordinary item 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, warrants and
convertible debentures were excluded from the calculation of diluted earnings
per share because their effect would be anti-dilutive. Directrix had 280,886 and
312,973 common stock options outstanding as of December 31, 2001 and December
31, 2000, respectively. At December 31, 2001 and 2000, all common stock purchase
warrants were exercised except for the warrants described above in Note 7.
9. Significant Customers; Litigation. In May 2001, EMI (which was
Directrix' major customer) shut down its networks, and sold its customer
list to its largest competitor, a wholly owned subsidiary of New Frontier Media,
Inc. ("New Frontier"), for cash and 94,137 shares of New Frontier stock.
Directrix entered into an agreement with EMI dated May 1, 2001 that provided for
the extinguishment of the option Directrix held to acquire the business or
assets of EMI (the "EMI Option") and for EMI's transfer of the cash and stock
proceeds from the sale of its customer list to Directrix in settlement of the
EMI receivable which amounted to approximately $0.6 million. At May 1, 2001, the
94,137 shares of New Frontier stock were recorded at a value of $3.63 each,
which was the per share market value, aggregating approximately $0.3 million of
marketable securities. During the nine months ended December 31, 2001, Directrix
recorded approximately $0.1 million of cash basis revenue associated with
recovery of amounts owed in excess of the EMI receivable.
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," on May 1, 2001, Directrix classified the
94,137 shares of New Frontier stock as "available for sale securities." At
December 31, 2001, the 94,137 shares of New Frontier stock were recorded at a
value of $3.00 each, which was the per share market value. In accordance with
SFAS No. 130, "Reporting Comprehensive Income," the $59,000 loss associated with
the decrease in per share market value through December 31, 2001 is classified
as equity in the accompanying balance sheet under "Accumulated other
comprehensive loss."
EMI had acquired some of its networks from Logix Development
Corporation ("Logix") under an agreement dated January 18, 1997. Under that
agreement, EMI engaged Logix to operate its call center for the EMI networks.
After the sale of the customer list to the New Frontier subsidiary, Logix
brought an action in the Los Angels County Superior Court (Logix, et. al. v.
Emerald Media, Inc., et. al., Case No. BC250732) in May 2001, naming Directrix
as a defendant to the suit. Logix also named as defendants in the action Spice
(now a subsidiary of Playboy Enterprises, Inc.) and New Frontier. The suit
alleges, among other things, that the sale of the customer list to New Frontier
was in derogation of Logix' rights to the customer list. The suit alleged breach
of contract, fraud and negligent misrepresentation. Logix was seeking damages in
excess of $10 million. Directrix is obligated to defend the suit on behalf of
Spice.
On July 12, 2001, New Frontier filed a cross complaint against Logix,
EMI, Roger Faherty and Donald McDonald, Directrix' Chief Executive Officer and
President, respectively, and Daniel J. Barsky, counsel to EMI in the New
Frontier transaction. The cross complaint alleges, among other things, that EMI
breached its representations and warranties concerning its rights to the
customer list and that Messrs. Faherty, McDonald and Barsky had misrepresented
EMI's rights to the customer list. Directrix has undertaken the defense of the
cross complaint on behalf of Messrs. Faherty, McDonald and Barsky. Subsequently,
Mr. Barsky was dismissed from the action. A June hearing is scheduled.
13
On March 7, 2002 Logix filed a Motion for Leave to Amend Complaint
which proposed to add new parties to the action and additional causes of
action. Logix is now seeking damages of not less than $90 million plus exemplary
damages. Directrix believes the Logix suit and the New Frontier cross complaint
are without merit and is engaged in a vigorous defense of the action.
10. Executive Compensation. To assist Directrix in achieving its
business objectives, Messrs. Faherty, McDonald and Kirby, Directrix' Chief
Executive Officer, President and Chief Operating Officer, respectively,
voluntarily agreed to extend the prior year reductions in their annual
salaries through March 31, 2002. The reductions took effect on June 24, 2000 and
provided for reductions in their annual salaries of $200,000 for Mr. Faherty,
$24,750 for Mr. McDonald and $22,584 for Mr. Kirby. In addition, the three
officers and Terry Taylor, the Executive Vice-President of Sales and Marketing,
voluntarily agreed to an additional reduction in their annual salaries of
$25,000 on an annualized basis. The additional salary reductions took effect on
May 1, 2001 and will continue for the remainder of the fiscal year ended March
31, 2002.
In consideration of their agreements to the June 24, 2000 salary
reduction, the Compensation Committee of the Board of Directors granted
each of Messrs. McDonald and Kirby 5,000 fully vested options to acquire shares
of the common stock of Directrix exercisable at $4.00 per share, the closing
price of Directrix' stock on June 22, 2000. Mr. Faherty was granted 25,000 fully
vested stock options exercisable at $2.25 per share, the closing price of
Directrix' stock on September 18, 2000.
In consideration of their agreement to continue the salary reductions
through March 31, 2002, the Compensation Committee awarded Messrs. Faherty,
McDonald and Kirby 96,552, 11,948 and 10,903 restricted shares, respectively, of
Directrix common stock under a restricted stock plan which provides for vesting
of the shares on March 31, 2003 if the holders are then employed by Directrix.
In consideration of the additional salary reduction that took effect on May 1,
2001, the Compensation Committee granted each of the executives 11,063
restricted shares of Directrix common stock under the restricted stock plan
described above. All the shares of restricted stock were issued on May 1, 2001.
Directrix recorded approximately $475,000 of deferred compensation, of which
$345,000 was expensed at December 31, 2001. The remaining amounts will be
amortized over the remainder of the fiscal year.
Effective February 1, 2002, Mr. Faherty's employment agreement was
amended and restated. Under the amended agreement, the term of Mr.
Faherty's employment will expire on March 31, 2004 (his previous agreement had a
five-year rolling term) and his salary was fixed at $180,000 per annum. If Mr.
Faherty is required to relocate to Los Angeles, Directrix and Mr. Faherty agreed
to negotiate in good faith a relocation allowance and an adjustment in Mr.
Faherty's compensation.
Under the proposed global restructuring described above in Note 4,
senior executives have agreed to further salary reductions.
On May 1, 2000, pursuant to employment agreements, Directrix granted
employees an aggregate of 50,000 options to acquire shares of the common stock
of Directrix exercisable at $5.75 per share, the fair market value of the common
stock on the date of grant.
In accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock
incentive plans, Directrix did not recognize compensation expense in connection
with the above mentioned option grants because the exercise price of the options
was equal to the market value of the stock on the grant date.
In May 2000, Directrix entered into a four-month agreement with an
individual who, at the time, was a one of its non-employee directors to
provide various consulting services to Directrix. In consideration for providing
these services, Directrix agreed to pay an aggregate of $20,000 over the term of
the agreement.
14
11. 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 reduced the estimated life of its library of movies to two years.
12. Explicit Rights Agreement. As part of the Merger and under an
Explicit Rights Agreement, Directrix was to receive a royalty free license
of the explicit rights for distribution in the domestic C-band market and via
the Internet for adult movies licensed by Playboy under Spice's license
agreements which Playboy succeeded to after the Merger where the adult licensors
executed licensor consents. Approximately 30 adult licensors executed licensor
consents. Directrix was unable to secure theses rights because Playboy acquired
these rights itself, refused to make these rights available to Directrix and/or
frustrated Directrix' efforts to secure these rights. Directrix noticed Playboy
of its breach of the Explicit Rights Agreement shortly after the Merger and most
recently in December 2001 and to date Playboy has not cured the breach.
Directrix estimates that its damages attributable to the failure to receive the
C-band Explicit Rights and the Internet Explicit Rights are substantial.
Directrix is attempting to negotiate a resolution of this matter with Playboy.
13. Recent Accounting Pronouncements. In August 2001, the FASB issued
statement of Financial Accounting Standard No.144 "Accounting for the
Impairment or Disposal of Long Lived Assets", ("SFAS144"). This statement is
effective for fiscal years beginning after December 15, 2001 and will commence
on April 1, 2002 for Directrix. This supercedes SFAS 121, while retaining many
of the requirements of such statement. The Company is currently evaluating the
impact of the statement.
14. Litigation - Collection Actions. Directrix is a party to several
collection actions. The amount sought to be recovered aggregates
approximately $217,000. The largest amount sought is in a suit instituted by the
Xerox Corporation in the Supreme Court of the Sate of New York filed February 4,
2002 which seeks damages of approximately $82,000 plus counsel fees and is
attributable to alleged breaches of leases for office equipment. The other suits
seek damages of amounts less than $50,000. Directrix intends to contest these
suits and/or seek to settle these and other outstanding payables. There are no
assurances that Directrix will be able to negotiate favorable terms on which to
settle these amounts. Directrix has not filed or paid its employment withholding
taxes since September 30, 2001. The amount, exclusive of any penalties which may
be assessed, is recorded as an other current liability on the accompanying
balance sheet.
15
DIRECTRIX, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Except for the historical information contained therein, the matters discussed
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," "projects," "intends," 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' control.
Overview
Directrix, a Delaware corporation, is a full service provider of
network origination, digital video asset management and digital content
delivery services, primarily to the adult entertainment industry. Directrix
offers a complete range of network origination services for the creation and
distribution of traditional television networks using advanced video file server
based playback capabilities. Directrix provides digital content management and
delivery services using The Directrix Content Delivery Network that provides
media owners with the ability to manage their content and distribute it using
Directrix' satellite, fiber optic and Internet connectivity.
Directrix was originally a wholly owned subsidiary of Spice
Entertainment Companies, Inc. ("Spice") and provided network origination
and technical services for Spice's networks. Directrix became a stand-alone
company when, as part of the March 15, 1999 merger ("Merger") of Spice into
Playboy Enterprises Group, Inc. ("Playboy"), Spice spun off Directrix by
distributing approximately 2,075,000 shares of Directrix common stock to the
Spice stockholders. As part of the Merger, Spice contributed certain assets to
Directrix including its New York City based master control and playback facility
and related technical services agreements and its transponder services
agreement. The transferred assets included the agreements to provide network
origination services for the three networks acquired by Playboy and Califa
Entertainment Group, Inc. ("Califa") as part of the Merger and the agreements to
provide transponder and network origination services for the C-Band networks
operated by Emerald Media, Inc. ("EMI"). Spice also transferred its option to
acquire the network business or stock of EMI (the "EMI Option"). Directrix
assumed certain liabilities related to the transferred assets.
Directrix is in the process of building out a 109,000 square foot
teleport, master control, and soundstage complex in Los Angeles (the "West
Coast Facility"). Under a transaction which was completed on September 20, 2001,
Directrix will provide network origination and production services, digital
archiving, studio facilities and personnel, and production and post-production
offices to Playboy at the facility over a 15-year term (collectively, the
"Playboy Transaction"). In June 2001, Playboy acquired the four networks
operated by Califa Entertainment Group, Inc. ("Califa") and its affiliate VOD,
Inc. ("VODI") and Directrix will continue to provide network origination
services for these networks under its 15-year agreement with Playboy.
Results of Operations
Basis of Presentation. The accompanying unaudited financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
the instructions to Form 10-QSB and do not include all the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. Furthermore, the
accompanying unaudited financial statements have not yet been reviewed by
Directrix'
16
independent auditors. Directrix expects that the review will be
completed as soon as practicable.
Revenues. Total revenue for the nine and three months ended
December 31, 2001 decreased by approximately $1.6 million and $0.7 million,
respectively, as compared to the same periods in 2000. The decrease in revenue
for the nine months ended December 31, 2001 was primarily attributable to a
decrease in revenue from EMI of $2.5 million, offset by the inclusion of revenue
attributable to broadband services of $0.7 million and revenue from additional
networks operated by Playboy and Califa of $0.2 million for the nine months
ended December 31, 2001.
The inclusion of broadband revenue was attributable to Directrix'
resale of Internet media delivery services provided by Akamai Technologies,
Inc. ("Akamai") under an Amended and Restated Akamai Reseller Agreement dated
August 15, 2000, as amended (the "Reseller Agreement"). The parties had disputes
concerning services and payments which could not be resolved and on July 30,
2001, the Reseller Agreement was terminated. As a result of the termination,
Directrix ceased providing broadband services and will not have broadband
revenue until a replacement services provider can be found and customers
secured. There can be no assurance that Directrix will be successful in securing
a replacement broadband services provider or whether the terms on which such
services can be secured will be acceptable or whether Directrix can again
attract customers for these services.
For the nine and three months ended December 31, 2001, revenue from
video-on-demand services increased by $0.2 million and $0.1 million,
respectively, as compared to the corresponding periods in 2000.
The decrease in revenue for the three months ended December 31, 2001
was primarily attributable to a decrease in revenue from EMI of $0.8
million which related to the shut down of the EMI networks. In May 2001, EMI
(which was Directrix' major customer) shut down its networks, and sold its
customer list to its largest competitor, a wholly owned subsidiary of New
Frontier Media, Inc. ("New Frontier"), for cash and 94,137 shares of New
Frontier stock. Directrix entered into an agreement with EMI that provided for
the extinguishment of the EMI Option and for the settlement of the EMI
receivable, which amounted to approximately $0.6 million, in consideration of
EMI's transfer of the cash and stock proceeds from the sale of its customer list
to Directrix. At May 1, 2001, the 94,137 shares of New Frontier stock were
recorded at a value of $3.63 each, which was the per share market value,
aggregating approximately $0.3 million of marketable securities. For the nine
months ended December 31, 2001, Directrix recorded approximately $0.1 million of
cash basis revenue associated with recovery of amounts owed in excess of the EMI
receivable.
Salaries, Wages and Benefits. Salaries, wages and benefits for the nine
months ended December 31, 2001 increased by $0.1 million as compared to the
same period in 2000. The increase in salaries, wages and benefits was primarily
attributable to the recording of compensation expense associated with the
issuance of restricted stock issued in consideration of salary reductions taken
by key executives during the nine months ended December 31, 2001, which exceeded
the amount that would have been recorded had the executives received cash
compensation.
Salaries, wages and benefits for the three months ended December 31,
2001 were comparable to salaries, wages and benefits for the same period in
2000. Decreases in salaries, wages and benefits during the three months ended
December 31, 2001 were offset by the recording of compensation expense
associated with the issuance of restricted stock for the salary reductions
described above.
Library Amortization. Library amortization for the nine and three
months ended December 31, 2001 was comparable to library amortization for the
same periods in 2000.
Satellite Costs. Satellite costs for the nine and three months ended
December 31, 2001 decreased by approximately $4.2 million and $1.4 million,
respectively, as compared to the same periods in 2000. The decrease in satellite
costs was primarily attributable to the termination of Directrix' Agreement for
SkyNet
17
Transponder Services ("Transponder Agreement") with Loral SpaceCom
Corporation ("Loral") in May 2001, as more fully described in "Liquidity and
Capital Resources, Restructuring Plan, Termination of Directrix' Transponder
Agreement."
Broadband Expenses. Broadband expenses for the nine months ended
December 31, 2001 increased by approximately $0.5 million as compared to the
same period in 2000. The increase in broadband expenses was attributable to
Directrix' resale of Internet media delivery services provided by Akamai under
the Reseller Agreement. As noted above, the parties terminated the Reseller
Agreement on July 30, 2001 and Directrix did not incur any broadband expenses
for the three months ended December 31, 2001.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine and three months ended December 31, 2001
decreased by approximately $0.5 million and $0.1 million, respectively, as
compared to the nine and three months ended December 31, 2000. The decrease in
selling, general and administrative expenses was attributable to decreases in
various expenses including bad debt expense, production costs, public relation
costs, convention and trade show costs and office cleaning costs.
Depreciation of Fixed Assets. Depreciation of fixed assets for the nine
and three months ended December 31, 2001 increased by approximately $0.1 million
as compared to the corresponding periods in 2000. The increase in depreciation
of fixed assets was primarily attributable to accelerated depreciation relating
to the relocation of the executive offices to Northvale, New Jersey in December
2001.
Interest Expense. Interest expense for the nine months ended December
31, 2001 increased by approximately $0.5 million as compared to the nine months
ended December 31, 2000. The increase in interest expense was primarily
attributable to the recording of non-cash interest associated with the intrinsic
value of the beneficial conversion feature of the convertible debentures issued
during the nine months ended December 31, 2001.
Interest expense for the three months ended December 31, 2001 was
comparable to interest expense for the corresponding period in 2000. For the
three months ended December 31, 2001, an increase in interest expense
attributable to the recording of non-cash interest associated with the intrinsic
value of the beneficial conversion feature of the Convertible Debentures was
offset by a decrease in interest expense associated with the transponder
agreements and a decrease in the amortization of deferred financing costs due to
the extension of the term of the Credit Facility to March 31, 2003.
Transponder Penalty. When the Transponder Agreement was terminated in
May 2001, Directrix owed Loral approximately $6.1 million for past due
service fees and a $4.6 million early termination charge that was recorded
during the nine months ended December 31, 2001. The parties entered into a July
13, 2001 letter agreement and Term Sheet ("Settlement Agreement"), which
provided for Loral to extinguish its receivable and the early termination charge
for a note under the credit facility, preferred stock and warrants. The
Settlement Agreement was to take effect with the consummation of the Playboy
Transaction on September 20, 2001 but was contingent upon the parties entering
into definitive documentation by January 14, 2002. To date, the parties have not
entered into definitive documentation or agreed to extend the drop-dead date of
the Settlement Agreement. As a consequence of the foregoing, the Settlement
Agreement as it impacts Loral is not currently in effect. The Settlement
Agreement as it relates to the Transponder Agreement is further described below
under "Liquidity and Capital Resources, Restructuring Plan, Termination of
Directrix' Transponder Services Agreement ".
Directrix recognized $0.8 million and $2.7 million, respectively, of
revenue attributable to the leasing of transponders for the three and nine
months ended December 31, 2000 of which $0.7 million and $2.3 million,
respectively, related to EMI. As a result of the May 2001 termination of the
Transponder Agreement,
18
Directrix recognized approximately $0.1 million of revenue from transponder
leasing for the nine months ended December 31, 2001.
Net Loss. For the nine and three months ended December 31, 2001,
Directrix reported net losses of $9.9 million and $6.9 million, respectively, as
compared to net losses of $7.3 million and $2.4, respectively, for the
corresponding periods in 2000. The increase in the net losses for the nine
months ended December 31, 2001 and the decrease in the net loss for the three
months ended December 31, 2001 were attributable to all the factors noted above.
Management expects to continue to incur net losses at least until the
restructuring plan described below is fully implemented. See, Liquidity and
Capital Resources, Restructuring Plan.
Liquidity and Capital Resources
Working Capital. Directrix had a working capital deficiency of $14.0 million on
December 31, 2001 as compared to a working capital deficiency of $11.4 million
on March 31, 2001. The increase in working capital for the nine months ended
December 31, 2001 was primarily attributable to the inclusion of a $4.6 million
early termination charge associated with the termination of the Transponder
Agreement. Directrix' working capital deficiency, coupled with the fact that it
is has incurred net losses since inception of $6.1 million and $10.3 million for
the years ended March 31, 2000 and March 31, 2001, respectively, and a net loss
of $9.9 million for the nine months ended December 31, 2001 raise substantial
doubt about Directrix' ability to continue as a going concern. Directrix'
continued existence is dependent upon several factors, including management's
ability to successfully implement the restructuring plan described below and its
ability to generate operating cash flow via execution of its long-term business
plan. To date, management has not yet secured the consent of Loral, which is one
of the parties to the Settlement Agreement) (described below in "Restructuring
Plan, Termination of Directrix' Transponder Services Agreement"), to the final
phase of the restructuring plan which is a precondition to Directrix' ability to
raise needed capital. If management is unable to secure the required consent,
Directrix will be forced to pursue other alternatives which may include filing a
petition under the Bankruptcy Code. If Directrix is forced to file a bankruptcy
petition, its business will most likely be adversely affected. Moreover, there
is no assurance that Directrix will be able to file a reorganization plan that
will enable it to remain in business and it may be forced to cease operations
and liquidate. Even if Directrix is able to implement a restructuring plan along
the lines described below and secure new financing, there is no assurance that
Directrix will be able to realize its long-term business plan and achieve
profitability. Moreover, there can be no assurance that the successful
implementation of the business plan will improve operating results and/or result
in Directrix achieving profitability. There also can be no assurance that
unforeseen circumstances could prevent Directrix from achieving its goal.
Credit Facility. Directrix has a $4.5 million revolving line of credit ("Credit
Facility") pursuant to the terms of a March 15, 1999 Loan and Security
Agreement, as amended by the Amended and Restated Loan and Security Agreement
dated February 15, 2000 (as amended, the "Loan Agreement"). As of December 31,
2001, Directrix had drawn down approximately $4.2 million under the Credit
Facility and is not permitted to make any further drawdowns. The Chief Executive
Officer, the President and four unrelated parties (collectively, the "Lenders")
provided the Credit Facility. The Credit Facility bears interest at 11% per
annum, which was originally payable monthly, and was to mature on March 15,
2002. Directrix pledged substantially all of its assets as collateral for this
obligation.
The Credit Facility was amended under the Settlement Agreement
(described below under "Restructuring Plan, Restructuring of the Credit Facility
and Settlement Agreement") to extend the maturity date to March 31, 2003, revise
the stockholder's equity financial covenant and permit interest to be paid in
kind in Directrix common stock ("Common Stock"). Under the proposed global
restructuring, (described below under "Restructuring Plan, Proposed Global
Restructuring and New Financing"), the Lenders proposed converting the Credit
Facility into Common Stock.
19
Subordinated Convertible Debentures. Directrix placed $500,000 of convertible
debentures ("Debentures") in an offering completed on June 30, 2001. In July
2001, Directrix offered up to $600,000 of a second series of convertible
debentures with the same terms as the Debentures. Through December 31, 2001,
Directrix placed $375,000 of Debentures from the second series; $50,000 of
Debentures were issued to an executive officer of Directrix.
The Debentures are convertible into shares of Common Stock at any time,
at the option of the holders, at a conversion rate of $1.50 per share of Common
Stock. The conversion rate is subject to anti-dilution protection for stock
splits, stock dividends, stock reclassifications and mergers. Directrix can
require conversion at any time if the average trading price of its common stock
is over $5.00 for any ten consecutive trading days prior to maturity. The
Debentures mature on March 31, 2003, are senior to all of Directrix' other
obligations other than the Credit Facility and Interim Financing and bear
interest at 6% per annum, payable at maturity. Directrix can elect to PIK the
interest payment in Common Stock in lieu of a cash interest payment. Directrix
granted the Debenture holders' registration rights for the shares of common
stock into which the Debentures are convertible and has committed to file the
registration statement during the year ended March 31, 2002.
During the three and nine months ended December 31, 2001, Directrix
recorded non-cash interest expense attributable to the intrinsic value of the
beneficial conversion feature of the convertible debentures of $125,000 and
$437,500, respectively, based on the difference between the conversion price and
the fair market value of Directrix common stock on the February 28, 2001 and
July 16, 2001 commitment dates. Through December 31, 2001, Directrix recorded an
aggregate of $31,000 of accrued interest attributable to the first and second
series of the Debentures. Under the proposed global restructuring, Directrix
proposed converting the Debentures into Common Stock as discussed below in
"Restructuring Plan, Proposed Global Restructuring and New Financing".
Warrants. As part of the fee arrangement for assisting with the Playboy
Transaction, Directrix issued to Kingston a five-year warrant to acquire 100,000
shares of Directrix common stock at an exercise price of $2.90 per share, the
fair market value of Directrix stock on the grant date. The aggregate fair
market value of the warrants (preliminarily determined by management using the
Black-Scholes pricing model) amounts to approximately $0.2 million and is
capitalized as a deferred lease cost on the accompanying balance sheet.
Directrix has committed to issue to Playboy upon execution of the Master
Services Agreement, a five-year warrant to acquire 650,000 shares at an exercise
price of $3.45 per share. As part of the Settlement Agreement, Directrix issued
five-year warrants to acquire 125,000 shares to the Credit Facility holders.
Directrix will also issue warrants to acquire 200,000 shares to each of Loral
and the two executive officers of Directrix (as a group) if and when the
Restructuring Agreement as it relates to the extinguishment of the Loral
receivable and early termination charge takes effect. All of the warrants have
an exercise price of $3.00 per share. The aggregate fair market value of the
warrants (preliminarily determined by management using the Black-Scholes pricing
model) issued to the Credit Facility holders amounts to approximately $0.3
million and is being amortized over the term of the Credit Facility.
The final determination of the valuation of the warrants described
above will be based on an analysis done by Directrix.
Restructuring Plan. Management developed and is in the process of implementing a
multi-phase restructuring plan. The restructuring plan addresses the areas that
management believes are critical to the realization of Directrix' short and
long-term plans which include (i) the termination of Directrix' transponder
services agreement, (ii) the establishment of the West Coast Facility, (iii) the
transition of its existing business to the West Coast Facility and attracting
new business, (iv) the restructuring of Directrix' capital structure and (v)
securing new financing. As noted above in "Working Capital", management has not
yet secured the consent of Loral, which is one of the parties to the Settlement
Agreement (described immediately below), to the final phase of the restructuring
plan which is a precondition to Directrix' ability to raise needed capital. If
Directrix is unable to implement the final phase of the restructuring plan and
thereby secure new financing, it may forced to file a petition under the
Bankruptcy Code.
20
Termination of Directrix' Transponder Services Agreement. In May 2001,
Directrix terminated its Transponder Agreement with Loral and transferred its
transponder service customers to Loral. When the Transponder Agreement was
terminated, Directrix owed Loral approximately $6.1 million for past due service
fees and a $4.6 million early termination charge. The parties entered into a
Settlement Agreement which provided for Loral to extinguish its receivable and
the early termination charge in exchange for Directrix' issuance to Loral of:
(i) a $1.65 million note under Directrix' $4.5 million credit facility (the
"Credit Facility"), (ii) $3.0 million face amount of a new Series B junior
preferred stock ("Series B Preferred") and (iii) a five-year warrant to acquire
200,000 shares at an exercise price of $3.00 per share.
The Settlement Agreement was to take effect with the consummation of
the Playboy Transaction on September 20, 2001 but was contingent upon the
parties entering into definitive documentation by January 14, 2002. To date, the
parties have not entered into definitive documentation or agreed to extend the
drop-dead date of the Settlement Agreement. In addition, Loral and Directrix
have been unable to agree on the terms of the global restructuring as it impacts
Loral. While Directrix is prepared to extend the term of the Settlement
Agreement, it will do so only if Loral and Directrix can agree on the terms of
the global restructuring. As a consequence of the foregoing, the Settlement
Agreement as it impacts Loral is not currently in effect.
Management terminated the Transponder Agreement because (i) Emerald
Media ("EMI"), Directrix' major customer of subleased transponder services, had
failed to pay in full amounts owed for transponder services ands ultimately
ceased operations and (ii) it believed that the direct leasing of satellite
transponders no longer fit into Directrix' long-term plans. By terminating the
Transponder Agreement, Directrix eliminated its largest recurring monthly
charge.
Directrix recognized $0.8 million and $2.7 million, respectively, of
revenue attributable to the leasing of transponders for the three and nine
months ended December 31, 2000 of which $0.7 million and $2.3 million,
respectively, related to EMI. As a result of the May 2001 termination of the
Transponder Agreement, Directrix recognized approximately $0.1 million of
revenue from transponder leasing for the nine months ended December 31, 2001.
As noted above, Directrix has not yet issued the preferred stock and
this aspect of the Settlement Agreement has not taken effect. If issued, the
Series B Preferred will have the same terms as the Series A Preferred (which is
described below in Restructuring of the Credit Facility and Settlement
Agreement) except that it will be junior to the Series A Preferred on
liquidation preference, will have a $3.00 per share conversion price which will
be subject to volume weighted adjustment for issuances of Common Stock or
convertible securities with an issue or conversion price less than the Series B
Preferred conversion price, and will have no voting rights or rights to appoint
Board members. Under the proposed global restructuring, (described below under
"Restructuring Plan, Proposed Global Restructuring and New Financing"), all
aspects of the Settlement Agreement will take effect; the Series A Preferred and
Series B Preferred will be deemed issued and converted into Common Stock.
Establishment of the West Coast Facility. Management believes that the
establishment of the West Coast Facility is critical to the realization of its
long-term business plan. To finance the acquisition, renovation and outfitting
of the West Coast Facility Directrix entered into a three party letter of intent
with Kingston Investors Corp. ("Kingston") and Playboy, under which Kingston
agreed to purchase the building and make improvements to the property and enter
into a triple net lease of the property with Directrix for fifteen years. During
final negotiation, the transaction was restructured and under the revised
arrangement among the parties, Kingston acquired the property on September 20,
2001 and triple net leased the property to Playboy under a 15 year Master Lease.
Playboy then subleased, on a triple net basis, approximately 55% of the property
to Directrix under a 15-year Sublease that provides for monthly sublease
payments of approximately $100,000 in the first year increasing 3% per year for
the first 10 years. For the last five years of the sublease,
21
the sublease payment will be 110% of the tenth year payment. Directrix is
required to pay its proportionate share of the insurance, real estate taxes and
operating expenses of the facility. The Sublease commences in stages; rent on
Studio A commences 30 days after Kingston delivers Studio A renovated in
accordance with specifications set forth in the Master Lease, anticipated to
occur in the calendar quarter ended September 30, 2002; the balance commences 30
days after the remainder of the subleased premises are renovated in accordance
with the work letter attached to the Master Lease.
On September 19, 2001, the parties executed a binding agreement under
which Directrix will provide to Playboy network origination, studio facilities
and related technical services in consideration of Playboy's payment of the
service fees provided for in the most recent draft of the Master Services
Agreement. In the September 19th agreement the parties agreed to execute the
long form Master Services Agreement once the financing arrangements for the
equipment and integration services associated with outfitting the West Coast
Facility were finalized. The letter agreement also provides for Directrix to
manage the West Coast Facility and charge back to Playboy its proportionate
share of the operating expenses.
Under the Master Services Agreement, the minimum monthly service
payments will be $257,500 per month, increasing 3% per year. Directrix will
begin providing studio services when Studio A is operational in accordance with
technical specifications set forth in an exhibit to the Master Services
Agreement, anticipated to occur approximately 30 days after Kingston delivers a
renovated Studio A. Network origination services will commence when Directrix is
capable of originating the networks from the West Coast Facility. Playboy
granted Directrix a right of first refusal to provide substantially all of its
technical service needs.
In July 2001, Playboy acquired the four networks operated by Califa and
VODI. Directrix will provide network origination services for theses four
networks in addition to providing network origination services for all of
Playboy's other networks from the West Coast Facility. The parties agreed to
extend the existing service agreements until the networks are originated from
the West Coast Facility. When the parties execute the Master Services Agreement,
Directrix will issue a warrant to Playboy to acquire 650,000 shares of its
common stock at an exercise price of $3.45 per share.
Under the Master Services Agreement, Directrix is to provide equipment,
integration and technical improvements necessary to provide the services under
the agreement when the facility is operational. To finance the equipment and
improvements, Playboy has entered into a Memorandum of Understanding with Sony
Financial Services, LLC ("SFS") under which SFS will provide between $7.0
million and $8.0 million of equipment lease financing (including system
integration fees and maintenance agreements) for the facility. The parties are
currently finalizing the amount of financing to be provided. Directrix will have
the right to use the equipment on a pass-through basis under an agreement
currently being finalized with Playboy. There are can be no assurances that the
equipment lease financing arrangements will be finalized.
Directrix has recorded approximately $500,000 of expenses attributable
to the establishment of the West Coast facility including legal fees, financing
fees and the issuance of warrants to Kingston as part of its fee. These amounts
have been capitalized as deferred lease costs on the accompanying balance sheet
and will be amortized over the 15-year term of the Master Services Agreement.
Transition of its Existing Business to the West Coast Facility and
Attract New Business. Although Playboy will serve as the anchor tenant for the
West Coast Facility, the facility will have the capacity to provide network
origination, studio facilities and other technical services to additional
customers and will have two additional studios that will only be partially
utilized by Playboy. Management intends to transition Directrix' existing
service agreements for the networks operated by Playboy (including the networks
formerly owned by Califa and VODI) to the West Coast Facility, and anticipates
providing services to additional customers from the facility.
After transitioning Directrix' existing service agreements for the
networks operated by Playboy, to the
22
West Coast Facility, Directrix will have substantial unused capacity at its
Northvale facility. Management would prefer to maintain the Northvale facility
and have operation centers on both coasts and is currently exploring several
options for the productive utilization of the facility, including diversifying
its East Coast customer base or subleasing the facility to a third party. There
can be no assurances that Directrix will be successful in obtaining new business
sufficient to maintain operation centers on both coasts or finding a lessee for
the Northvale facility.
Restructuring of the Credit Facility and Settlement Agreement.
Directrix is attempting to complete a global restructuring of its capital
structure and raise additional capital. To date, management has not yet secured
the required consent of Loral, which is one of the parties to the Settlement
Agreement, to the proposed restructuring plan. If management is unable to secure
the consent of all the parties, Directrix may be forced to file a petition under
the Bankruptcy Code. The status of these negotiations and Directrix' options
should it be unable to implement the restructuring plan are described below in
Proposed Global Restructuring and New Financing.
In July 2001, Directrix entered into a Settlement Agreement with Loral
which also modified the terms of the Credit Facility. As noted above, the
Settlement Agreement was to take effect with the consummation of the Playboy
Transaction on September 20, 2001 but was contingent upon the parties entering
into definitive documentation by January 14, 2002. To date, the parties have not
entered into definitive documentation or agreed to extend the drop-dead date of
the Settlement Agreement. While those aspects of the Restructuring Agreement
that deal with Loral's agreement to extinguish its receivable and early
termination charge have not taken effect, the aspects of the Restructuring
Agreement that modified the Credit Facility have taken effect.
As of December 31, 2001, Directrix had drawn down $4.2 million under
the Credit Facility. While the Credit Facility was to mature on March 15, 2002,
Directrix could not draw down any further advances after March 15, 2001. The
Credit Facility was secured by a first lien on all of Directrix' assets. To
facilitate the agreement with Loral and enhance Directrix' ability to attract
new capital, Directrix negotiated a restructuring of the Credit Facility as part
of the Settlement Agreement. Under the Settlement Agreement, the holders of the
Credit Facility agreed to (i) extend the maturity date by one year until March
31, 2003, (ii) permit Directrix to pay in kind ("PIK") the interest payment with
shares of Directrix common stock ("Common Stock") and (iii) revise the
stockholders' equity covenant. In consideration of the foregoing, Directrix
issued to the holders of the Credit Facility, excluding Loral and the two
executive officers of Directrix who agreed to swap their portion of the Credit
Facility for a new Series A of senior preferred stock ("Series A Preferred") and
warrants to acquire 200,000 shares of Common Stock (which have not yet been
issued as described below), warrants to acquire 125,000 shares of Common Stock
at an exercise price of $3.00 per share. As noted above, the Settlement
Agreement was to take effect on the consummation of the Playboy Transaction
which occurred on September 20, 2001.
Under the Settlement Agreement, the Credit Facility notes held by two
executive officers of Directrix, which aggregated $1.65 million at September 20,
2001, were to be cancelled and were intended to be replaced with $1.65 million
face amount of Series A Preferred, which has not yet been issued. Warrants to
acquire 200,000 shares of Directrix common stock were also to be issued. The
warrants were to have an exercise price of $3.00 per share and were to be
exercisable for five years. Because this aspect of the Restructuring Agreement
has not yet taken effect, the Series A Preferred and warrants have not been
issued and the officers currently retain their $1.65 million of Credit Facility
notes. Under the proposed global restructuring, (described below under
"Restructuring Plan, Proposed Global Restructuring and New Financing"), all
aspects of the Settlement Agreement will take effect; the Series A Preferred
will be deemed issued and converted into Common Stock. If issued, the Series A
Preferred will bear a 6% cumulative dividend which Directrix may, at its option,
PIK in Common Stock, will be senior in liquidation preference to the Series B
Preferred and will be convertible at $1.50 per share. The conversion price will
be subject to standard anti-dilution adjustments for stock splits and dividends
and recapitalizations, and adjustments for issuances of Common Stock or
convertible securities with an issue or conversion price less than the Series A
Preferred conversion price. The Series A Preferred will also be entitled to vote
on an as converted basis and the holders will have the right to appoint two
members to the Directrix Board of Directors. The holders of the Series A
Preferred will have the right to demand redemption after 10 years or upon change
in control of
23
Directrix (such as if a person or group acquires more than 35% of the
outstanding voting securities). Directrix will have the option of paying the
redemption price in cash or as a PIK in Common Stock.
The holders of the Credit Facility agreed to permit Directrix to PIK
the interest payment owed on the Credit Facility with shares of Common Stock for
the period from June 1, 2001 through September 19, 2001. (Under the Settlement
Agreement, Directrix can PIK the interest on the Credit Facility on a going
forward basis.) Directrix issued 53,230 shares of Common Stock with an aggregate
fair market value of $156,000 as the PIK interest payment for the period from
June 1, 2001 through September 30, 2001 and issued 54,500 shares of Common Stock
with an aggregate fair market value of $117,156 as the PIK interest payment for
the three months ended December 31, 2001. The PIK interest payments are
accounted for at its fair market value on the accompanying statement of
stockholders' deficit.
Proposed Global Restructuring and New Financing. The final phase of
management's plan is to locate a new source of working capital. Management
forecasts that Directrix will require additional funding to complete the
buildout of the West Coast Facility and to provide for the deficiency in working
capital until Directrix generates operating cash flow. Directrix had initially
planned to put the West Coast facility into operation during the first calendar
quarter of 2002 but because of delays in finalizing the Playboy Transaction,
this date has been pushed back into the third calendar quarter of 2002. The
delay in the completion of the West Coast facility has heightened Directrix'
need for additional funding.
As a preliminary step, Directrix secured an aggregate of $611,500 of
interim financing ("Interim Financing") in a private placement to existing
shareholders and investors of which $437,500 was placed during the three months
ended December 31, 2001 and the balance during the next two months. The terms of
the Interim Financing include a one year note secured by a perfected first lien
on Directrix' assets. (Under a letter agreement dated October 28, 2001, the
Credit Facility holders agreed to subordinate their security interest to the
Interim Financing holders' first lien.) The interim financing notes bear 20%
interest payable upfront in shares of Directrix common stock which Directrix is
recognizing as interest expense over the term of the notes. During the three
months ended December 31, 2001, Directrix issued 35,635 shares of Common Stock
as payment of interest on the notes and discounted the principal value of the
notes by the unamortized portion of the interest expense. During the two months
ended February 2002, Directrix issued 18,297 shares of Common Stock as payment
of interest on the notes.
To date, management has been unable to secure financing beyond the
Interim Financing, and believes that it will not be able to secure additional
financing unless it can first restructure its capital structure. Directrix
proposed a comprehensive restructuring plan that would convert the interests of
the holders of the Interim Financing, Credit Facility, Debentures and Series A
and Series B Preferred into Common Stock. These steps were based on the
assumption that all of the terms of the Settlement Agreement would be in effect.
As part of this plan, Directrix would implement a revised business plan which
provided for, among other things, further reductions in its executives'
salaries.
If Directrix was able to implement a restructuring plan along the lines
described above, Directrix could have secured preliminary commitments for $2.0
million of new financing. However, Directrix has not yet secured the consent of
Loral, which is one of the parties to the Settlement Agreement, and has been
forced to consider other options, including filing a petition under the
Bankruptcy Code. If Directrix is forced to file a bankruptcy petition, its
business will most likely be adversely affected. Moreover, there is no assurance
that Directrix will be able to file a reorganization plan that will enable it to
remain in business and it may be forced to cease operations and liquidate.
Even if Directrix is able to implement a restructuring plan along the
lines described above and secure new financing, there is no assurance that
Directrix will be able to realize its long-term business plan and achieve
profitability. Moreover, there can be no assurance that the successful
implementation of the business plan will improve operating results and/or result
in Directrix achieving profitability. There also can be no assurance that
unforeseen circumstances could prevent Directrix from achieving its goal.
24
Commitments and Contingencies.
Legal Proceedings - Logix. Directrix was named as a defendant in an
action brought by Logix Development Corporation ("Logix") in the Los Angels
County Superior Court (Logix, et. al. v. Emerald Media, Inc., et. al., Case No.
BC250732) in May 2001. Logix also named as defendants in the action Spice
Entertainment Companies, Inc. and New Frontier Media, Inc. ("New Frontier"). The
suit arises out of EMI's sale of its customer list to a wholly owned subsidiary
of New Frontier and alleges, among other things, that the sale was in derogation
of Logix' rights to the customer list. The initial complaint alleged breach of
contract, fraud and negligent misrepresentation and sought damages in excess of
$10 million. Directrix is obligated to defend the suit on behalf of Spice
Entertainment Companies, now a subsidiary of Playboy Enterprises, Inc.
On July 12, 2001, New Frontier filed a cross complaint against Logix,
EMI, Roger Faherty and Donald McDonald, Directrix' Chief Executive Officer and
President, respectively, and Daniel J. Barsky, counsel to EMI in the New
Frontier transaction. The cross complaint alleges, among other things, that EMI
breached its representations and warranties concerning its rights to the
customer list and that Messrs. Faherty, McDonald and Barsky had misrepresented
EMI's rights to the customer list. Directrix has undertaken the defense of the
cross complaint on behalf of Messrs. Faherty, McDonald and Barsky. Subsequently,
Mr. Barsky was dismissed from the action.
On March 7, 2002 Logix filed a Motion for Leave to Amend Complaint
which proposed to add new parties to the action and additional causes of action.
Logix is now seeking damages of not less than $90 million plus exemplary
damages. Directrix believes the Logix suit and the New Frontier cross complaint
are without merit and is engaged in a vigorous defense of the action. A June
hearing is currently scheduled.
Collection Actions. Directrix is a party to several collection actions.
The amount sought to be recovered aggregates approximately $217,000. The largest
amount sought was in a suit instituted by the Xerox Corporation in the Supreme
Court of the Sate of New York which seeks damages of approximately $82,000 plus
counsel fees and is attributable to alleged breaches of leases for office
equipment. The other suits seek damages of amounts less than $50,000. Directrix
intends to contest these suits and/or seek to settle these and other outstanding
payables. There are no assurances that Directrix will be able to negotiate
favorable terms on which to settle these amounts. Directrix has not filed or
paid its employment withholding taxes since September 30, 2001. The amount,
exclusive of any penalties which may be assessed, is recorded as an other
current liability on the accompanying balance sheet.
Explicit Rights Agreement.
As part of the Merger and under an Explicit Rights Agreement, Directrix
was to receive a royalty free license of the explicit rights for distribution in
the domestic C-band market and via the Internet for adult movies licensed by
Playboy under Spice's license agreements which Playboy succeeded to after the
Merger where the adult licensors executed licensor consents. Approximately 30
adult licensors executed licensor consents. Directrix was unable to secure
theses rights because Playboy acquired these rights itself, refused to make
these rights available to Directrix and/or frustrated Directrix' efforts to
secure these rights. Directrix noticed Playboy of its breach of the Explicit
Rights Agreement shortly after the Merger and most recently in December 2001 and
to date Playboy has not cured the breach. Directrix estimates that its damages
attributable to the failure to receive the C-band Explicit Rights and the
Internet Explicit Rights are substantial. Directrix is attempting to negotiate a
resolution of this matter with Playboy.
25
PART II - OTHER INFORMATION
Item 1: Legal Proceedings.
See Part I, Item 2, Management's Discussion and Analysis,
Commitments and Contingencies, Legal Proceedings for a
discussion of Legal Proceedings.
Item 2: Changes in Securities and Use of Proceeds.
See the discussion under Part I, Item 2, Management's Discussion
and Analysis, Restructuring Plan, New Financing, for a
discussion of unregistered equity securities issued by
Registrant during the three months ended December 31, 2001.
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.
DIRECTRIX, INC.
Dated: March 25, 2002
By: /s/ Donald J. McDonald, Jr.
----------------------------------------
Donald J. McDonald, Jr.
President, Director, Chief Financial
Officer and Principal Accounting Officer
27