SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from January 1, 1999 to March 31, 1999
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.)
536 Broadway, New York, NY 10012
(Address of principal executive offices)
(212) 941-1434
(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 April 30, 1999
was 2,074,785.
PART I
ITEM 1: FINANCIAL STATEMENTS
DIRECTRIX, INC.
BALANCE SHEETS (unaudited)
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March 31, 1999 December 31, 1998
----------------- ------------------
ASSETS:
Current assets:
Cash .................................................................... $ 1,450,000 $ --
Marketable securities (Note 4)........................................... 4,475,000 --
Accounts receivable, less allowance for doubtful accounts of $1,789,000.. 720,000 755,000
Prepaid expenses and other current assets ............................... 253,000 650,000
------------ ------------
Total current assets ...................................... 6,898,000 1,405,000
Property and equipment, net ................................................. 2,669,000 2,539,000
Library of movies, net ...................................................... 833,000 839,000
Deferred financing costs .................................................... 173,000 --
Other assets ................................................................ 66,000 51,000
------------ ------------
$ 10,639,000 $ 4,834,000
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current liabilities:
Current portion of obligations under capital leases ..................... $ 370,000 $ 572,000
Accounts payable ........................................................ 664,000 73,000
Accrued expenses and other current liabilities .......................... 469,000 103,000
------------ ------------
Total current liabilities ................................. 1,503,000 748,000
Obligations under capital leases, less current portion ...................... 163,000 36,000
------------ ------------
Total liabilities ......................................... 1,666,000 784,000
------------ ------------
Commitments and contingencies:
Stockholder's equity
Common stock, $0.01 par value; authorized 25,000,000 shares,
2,074,785 shares issued and outstanding at March 31, 1999............. 21,000 --
Additional paid-in capital .............................................. 20,361,000 13,765,000
Accumulated deficit ..................................................... (11,409,000) (9,715,000)
------------ ------------
Total stockholder's equity ................................ 8,973,000 4,050,000
------------ ------------
$ 10,639,000 $ 4,834,000
============ ============
The accompanying notes are an integral part of these financial statements.
DIRECTRIX, INC.
STATEMENTS of OPERATIONS (unaudited)
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Three Months Ended March 31,
1999 1998
----------- -----------
Revenues .................................................... $ 1,996,000 $ 2,523,000
----------- -----------
Operating expenses:
Salaries, wages and benefits............................. 794,000 694,000
Library amortization..................................... 81,000 95,000
Satellite costs ......................................... 1,602,000 1,640,000
Selling, general and administrative expenses............. 919,000 427,000
Depreciation of fixed assets............................. 270,000 260,000
----------- -----------
Total operating expenses ................. 3,666,000 3,116,000
----------- -----------
Loss from operations........................... (1,670,000) (593,000)
Interest expense............................................. 24,000 35,000
----------- -----------
Net loss ...................................... $(1,694,000) $ (628,000)
=========== ===========
Net Loss per Common Share: Basic and Diluted ............... $ (0.82) $ (0.30)
=========== ===========
Weighted average number of shares outstanding:
Basic and Diluted (note 6) ............................ 2,074,785 2,074,785
=========== ===========
The accompanying notes are an integral part of these financial statements.
DIRECTRIX, INC.
STATEMENT of STOCKHOLDER'S EQUITY (unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
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Additional
Common Paid-In Accumulated
Stock Capital Deficit Total
---------- ----------- ------------ -----------
Balance at January 1, 1999 ........................................... $ -- $13,765,000 $ (9,715,000) $ 4,050,000
Shares issued in connection with spin-off ......................... 21,000 (21,000) -- --
Warrants issued in connection with credit facility ................ -- 180,000 -- 180,000
Net loss .......................................................... -- -- (1,694,000) (1,694,000)
Net transfers from Spice .......................................... -- 6,437,000 -- 6,437,000
---------- ----------- ------------ -----------
Balance at March 31, 1999 ............................................ $ 21,000 $20,361,000 $(11,409,000) $ 8,973,000
========== =========== ============ ===========
The accompanying notes are an integral part of this financial statement.
DIRECTRIX, INC.
STATEMENT of CASH FLOWS (unaudited)
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Three Months Ended March 31,
1999 1998
----------- ---------
Cash flows from operating activities:
Net loss ............................................................... $(1,694,000) $(628,000)
----------- ---------
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization of fixed assets .......................... 270,000 260,000
Amortization of library of movies ...................................... 81,000 95,000
Amortization of deferred financing costs ............................... 7,000 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable ................. 35,000 (1,000)
Decrease in prepaid expenses and other current assets ...... 397,000 --
Increase in other assets ................................... (15,000) --
(Decrease) increase in accounts payable and
accrued expenses ....................................... 957,000 (109,000)
Decrease in deferred income ................................ -- (78,000)
----------- ---------
Total adjustments ....................................... 1,732,000 167,000
----------- ---------
Net cash provided by (used in) operating activities .... 38,000 (461,000)
----------- ---------
Cash flows from investing activities:
Purchase of property and equipment ..................................... (210,000) (157,000)
Purchase of rights to movies ........................................... (75,000) (159,000)
----------- ---------
Net cash used in investing activities ............................ (285,000) (316,000)
----------- ---------
Cash flows from financing activities:
Repayment of long-term debt and capital lease obligations .............. (265,000) (113,000)
Net transfers from Spice ............................................... 1,962,000 890,000
----------- ---------
Net cash provided by financing activities ........................ 1,697,000 777,000
----------- ---------
Net increase in cash and cash equivalents ........................ 1,450,000 --
Cash and cash equivalents, beginning of the period ......................... -- --
----------- ---------
Cash and cash equivalents, end of the period ..................... $ 1,450,000 $ --
=========== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ......................................................... $ 16,000 $ 34,000
=========== =========
Income taxes ..................................................... $ -- $ --
=========== =========
Supplemental schedule of non-cash investing and financing activities:
Marketable securities contributed at spin-off .......................... 4,475,000 --
Capital lease obligations .............................................. 190,000 --
Issuance of warrants in connection with the credit facility ............ 180,000 --
Shares issued in connection with the spin-off .......................... 21,000 --
The accompanying notes are an integral part of these financial statements.
DIRECTRIX, INC.
NOTES to FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 (unaudited)
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1. In the opinion of Directrix, Inc (the "Company"), the accompanying unaudited
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as of
March 31, 1999, and the results of operations and cash flows for the three
months ended March 31, 1999 and 1998.
2. The results of operations for the three months ended March 31, 1999 and 1998
are not necessarily indicative of the results to be expected for the full year.
3. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
("GAAP") have been condensed or omitted. These consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998.
4. On March 15, 1999 as a condition to the merger (the "Merger") between Spice
Entertainment Companies, Inc. ("Spice") and Playboy Enterprises, Inc.
("Playboy"), Spice and the Company entered into a Transfer and Redemption
Agreement (the "Transfer Agreement") and certain related agreements, pursuant to
which Spice contributed certain assets to Directrix, Inc. ("Directrix") in
exchange for the assumption of certain related liabilities and the issuance of
Directrix's common stock (the "Common Stock"). In connection with the
Merger, Spice distributed the Common Stock to the stockholders of Spice as part
of the consideration for the Merger.
Pursuant to the terms of the Transfer Agreement, immediately prior to
the Merger, Spice contributed certain assets to Directrix, including (a) all of
the equipment and facilities relating to Spice's master control and digital
playback center (the "Operations Facility"), (b) an option ("EMI Option") to
purchase the assets and liabilities of Emerald Media, Inc. ("EMI") (c) certain
rights to Spice's library of adult films acquired before and after the closing
of the Merger (the "Closing"), (d) approximately $0.8 million in cash, (e)
173,784 shares of Playboy stock valued at approximately $4.5 million, and (f)
accounts receivable and other current assets, totaling approximately $1.2
million.
In connection with the contribution, Directrix issued to Spice the
Common Stock and assumed certain liabilities (the "Assumed Liabilities"),
subject to the indemnification obligations of Spice described below. The Assumed
Liabilities include (a) all of the liabilities relating to EMI, (b) all of the
liabilities relating to or arising from the Operations Facility, but only to the
extent they arise after March 15, 1999, and (c) those liabilities and
obligations arising out of the assets being transferred to Directrix. The
Transfer Agreement provides, among other things, that Directrix will indemnify
Spice for the Assumed Liabilities.
In connection with the Merger, Playboy and Directrix entered into a
Satellite Services Agreement, pursuant to which Directrix will provide playback,
uplink and compressed transponder services for at least two networks. In
addition, Directrix and Califa Entertainment Group, Inc. ("Califa") entered into
a Satellite Services Agreement, pursuant to which Directrix will provide
playback, uplink and compressed transponder services for one network.
5. Playboy is disputing certain payments made on behalf of Directrix prior to
the closing of the Merger totaling approximately $0.7 million. Playboy withheld
approximately $0.7 million from severance payments due Mr. Faherty under his
Spice employment agreement as a result of this dispute. The parties are
currently in discussion to settle this matter. Should the parties be unable to
reach a negotiated settlement, the Company could be involved in an action
pertaining to this matter and may be required to repay some or all of the
prepayments made prior to the Merger which could adversely affect the Company.
Pending resolution of this dispute, the Company loaned Mr. Faherty the amount
withheld by Playboy.
6. On May 4, 1999 the Board of Directors of Directrix approved a change
in Directrix's fiscal year from December 31 to March 31. This will enable
Directrix to more timely report a full year's worth of operations as a
stand-alone entity and more meaningfully reflects its operational results. The
three month transition period from January 1, 1999 to March 31, 1999 precedes
the start of the new fiscal year and is represented in this Form 10-QSB
Transition Report.
7. Pro Forma Net Loss per Common Share: Historical earnings per share have not
been presented because they would not be meaningful. Pro forma net loss per
share is calculated after giving effect to the distribution of Directrix's
Common Stock. Pro forma net loss per share is calculated in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." Basic earnings per share exclude dilution and are computed by dividing
income attributable to common shareholders by the weighted-average common shares
outstanding for the period. Diluted earnings per share reflects the
weighted-average common shares outstanding plus the potential dilutive effect of
securities or contracts which are convertible to common shares, such as options
and warrants. Potentially dilutive securties were excluded from the calculation
of diluted earnings per share because their effect was anti-dilutive.
DIRECTRIX, INC.
ITEM 2: MANAGEMENT'S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATION
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This report contains forward-looking statements that involve a number of risks
and uncertainties. In addition to the factors discussed elsewhere in this
report, among the other factors that could cause actual results to differ
materially are the following: business condition and the general economy,
reliance on a limited number of customers and limited operating history with
absence of history as a stand-alone company.
Overview
Directrix is a Delaware corporation formed by Spice in contemplation of
the Merger. On March 15, 1999, prior to the Closing, Spice contributed to
Directrix, among other things, all of the assets and liabilities associated the
Operations Facility, the EMI Option and the rights to distribute the explicit
version of Spice's adult films in the DTH market and over the Internet. Spice
also contributed approximately $0.8 million in cash, accounts receivable and
other current assets totaling approximately $1.2 million and 173,784 shares of
Playboy stock valued at approximately $4.5 million, which were purchased by
Spice prior to the Closing.
On March 15, 1999, after the contribution from Spice, Directrix had
working capital of approximately $5.3 million. Directrix has also secured a $1.5
million credit facility (the "Credit Facility") provided by certain officers and
directors of Directrix. Management believes the transferred working capital and
the credit facility will provide sufficient funding to implement management's
plans.
On May 4, 1999 the Board of Directors of Directrix approved a change
in Directrix's fiscal year from December 31 to March 31. This will enable
Directrix to more timely report a full year's worth of operations as a
stand-alone entity and more meaningfully reflects its operational results. The
three month transition period from January 1, 1999 to March 31, 1999 precedes
the start of the new fiscal year and is represented in this Form 10-QSB
Transition Report.
Results of Operations
The financial statements of Directrix reflect the results of
operations, financial position and cash flows of the business that were
contributed to Directrix by Spice on March 15, 1999. As a result, the financial
statements of Directrix prior to the closing have been carved out from the
financial statements of Spice using the historical results of operations and
historical basis of the assets and liabilities of such business.
Additionally, the financial statements of Directrix include certain
assets, liabilities, revenues and expenses which were not historically recorded
at the level of, but are primarily associated with, such business. Directrix
believes the assumptions underlying its financial statements to be reasonable.
The financial information included herein, however, may not necessarily
reflect the results of operations, financial position and cash flows of
Directrix in the future or what the results of operations, financial position
and cash flows would have been had Directrix been a separate stand-alone entity
during the periods presented. The financial information included herein does not
reflect the many changes that will now occur in the funding and operations of
Directrix as a result of the transactions involving Spice, Playboy and
Directrix.
Revenues were earned principally from services provided to two
customers, EMI and Spice. Through December 31, 1997 revenues attributable to EMI
were recorded based upon contractual amounts for playback and transponder
services. In 1998, as a result of the ongoing uncertainty surrounding EMI's
ability to pay for all services provided, Directrix started recording revenues
from EMI upon receipt. Revenues attributable to Spice relate to network
operations, post-production and technical services provided internally. These
revenues have been recorded based on either (i) services provided to unrelated
third party customers or (ii) costs associated with an applicable service plus
an appropriate markup based on a reasonable assessment of a market-based charge.
Management believes that the methods used to record revenues are reasonable.
Net Loss. Directrix reported a net loss of $1.7 million for the three
months ended March 31, 1999 as compared to $0.6 million net loss for the
corresponding period in 1998. The increase in the net loss was primarily
attributable to a decline in revenues of approximately $0.5 million and an
increase in selling, general and administrative expenses of approximately $0.5
million.
Revenues. Directrix reported total revenue of $2.0 million for the
three months ended March 31, 1999 as compared to $2.5 million for the
corresponding period in 1998. The decline in revenue was primarily attributable
to declines in revenue generated from (a) EMI totaling $0.3 million and (b)
services provided to Playboy and Califa relating to the three networks
previously owned by Spice totaling $0.2 million.
The decline in revenues from EMI was the result of continued
competition in a declining C-band market where EMI generated substantially all
of its revenue. As a result of EMI's inability to pay Directrix in full for
services provided, Directrix is taking a more active role in monitoring the
progress of EMI in the continued development, implementation and execution of
its business plan. Directrix is also assessing various strategies with respect
to the EMI Option.
Salaries, Wages and Benefits. Directrix reported salaries, wages and
benefits of $0.8 million for the three months ended March 31, 1999 as compared
to $0.7 million for the corresponding period in 1998.
Library Amortization. Directrix reported library amortization of $0.1
million for the three months ended March 31, 1999 which was substantially the
same as the corresponding period in 1998.
DIRECTRIX, INC.
ITEM 2: MANAGEMENT'S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATION (continued)
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Satellite Costs. Directrix reported satellite costs of $1.6 million for
the three months ended March 31, 1999 which was substantially the same as the
corresponding period in 1998.
Selling, General and Administrative Expenses. Directrix reported
selling, general and administrative expenses of $0.9 million for the three
months ended March 31, 1999 as compared to $0.4 million for the corresponding
period in 1998. The increase was primarily attributable to marketing,
webcasting, and maintenance costs associated with business devlopment efforts
and the establishment of Directrix as a stand-alone entity.
Depreciation of Fixed Assets. Directrix reported depreciation of fixed
assets of $0.3 million for the three months ended March 31, 1999 which was
substantially the same as the corresponding period in 1998.
Liquidity and Capital Resources
Prior to the Merger, Spice used a centralized approach to cash
management and the financing of its operations. As a result, prior to the
Merger, Spice funded all of Directrix's activities. Spice provided funding of
$3.9 million to Directrix for 1998 and $1.7 million in the first quarter of
1999.
On March 31, 1999, Directrix had working capital of approximately $5.4
million, principally from Spice's contribution at closing, and a revolving
line of credit ("Credit Facility") of $1.5 million which was provided by two
officers and one director of Directrix. The Credit Facility bears interest at
11% per annum and matures on March 15, 2001. Two officers As additional
consideration, the Company issued an aggregate 45,000 warrants to the lenders of
the Credit Facility. As of March 31, 1999, there were no borrowings under the
Credit Facility.
Playboy is disputing certain payments made on behalf of Directrix
prior to the closing of the Merger totaling approximately $0.7 million.
Playboy withheld approximately $0.7 million from severance payments due Mr.
Faherty under his Spice employment agreement as a result of this dispute. The
parties are currently in discussion to settle this matter. Should the parties be
unable to reach a negotiated settlement, the Company could be involved in an
action pertaining to this matter and may be required to repay some or all of the
prepayments made prior to the Merger which could adversely affect the Company.
Pending resolution of this dispute, the Company loaned Mr. Faherty the amount
withheld by Playboy.
Year 2000 Compliance
Directrix is implementing a Year 2000 program to ensure that
Directrix's computer systems and applications will function properly beyond
1999. Directrix believes that adequate resources have been allocated for this
purpose and expects its Year 2000 date conversion program to be completed on a
timely basis. Directrix does not believe that the cost of implementing its Year
2000 program will have a material effect on Directrix's financial condition or
results of operations. However, there can be no assurance that Directrix will
identify all Year 2000 problems in its computer systems in advance of their
occurrence or that Directrix will be able to successfully remedy any problems
that are discovered. The expenses of Directrix's efforts to address such
problems, or the expenses or liabilities to which Directrix may become subject
as a result of such problems, could have a material adverse effect on
Directrix's results of operations and financial condition. In addition, the
revenue stream and financial ability of existing suppliers, service providers or
customers may be adversely impacted by Year 2000 problems, which could cause
fluctuations in Directrix's revenues and operating profitability.
Directrix has investigated Year 2000 compatibility with its major
customers and service providers. Logix Development Corp., which operates the
call center for EMI's networks, has analyzed its software and believes that its
systems are Year 2000 compliant. Playboy is addressing its Year 2000 issues
through a combination of modifications to existing programs and conversions to
Year 2000 compliant software. Directrix has not been able to adequately assess
Califa's compliance with Year 2000 issues because Califa has only recently been
organized and is in the process of establishing its computer systems and
applications; however, Directrix intends to work with Califa to address any Year
2000 issues that may arise.
Except as described above, Directrix has not developed a contingency
plan for the reasonably likely worst case scenario concerning the Year 2000. If
a Year 2000 problem were to occur that Directrix could not successfully resolve,
it could have a material adverse effect on the results of operations and
financial condition of Directrix.
PART II - OTHER INFORMATION
Item 1: Legal Proceedings.
None.
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 27.00 - Financial Data Schedule.
(b) Reports on Form 8-K.
On May 14, 1999, Directrix filed a Current Report on Form 8-K
reporting, under Item 8, a change in Directrix's fiscal year.
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: May 17, 1999
By: /s/ John R. Sharpe
_____________________________
John R. Sharpe
Chief Financial Officer and
Principal Accounting Officer