-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RgIMqpSLCEel/+3Ai6UPGUhYJ2LchkxZBxMg+UL2ut8clkIh0mkFyQGL1Gx5ZBqA E9JzBhUJTmLFTl1L0dWMqQ== 0001067310-01-500026.txt : 20020411 0001067310-01-500026.hdr.sgml : 20020411 ACCESSION NUMBER: 0001067310-01-500026 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIRECTRIX INC CENTRAL INDEX KEY: 0001067310 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ALLIED TO MOTION PICTURE PRODUCTION [7819] IRS NUMBER: 134015248 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-25111 FILM NUMBER: 1795903 BUSINESS ADDRESS: STREET 1: 236 W 26TH STREET STREET 2: SUITE 12W CITY: NEW YORK STATE: NY ZIP: 10001 BUSINESS PHONE: 2127416511 MAIL ADDRESS: STREET 1: DIRECTRIX INC STREET 2: 236 W 26TH STREET - SUITE 12W CITY: NEW YORK STATE: NY ZIP: 10001 10QSB 1 qe0901.txt FORM 10QSB - 9/30/01 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 September 30, 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.) 236 West 26th Street, Suite 12W, New York, NY 10001 (Address of principal executive offices) (212) 741-6511 (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 October 31, 2001 was 2,483,456.
PART I ITEM 1: FINANCIAL STATEMENTS DIRECTRIX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET ___________________________________________________________________________________________________________________________________ Sept 30, 2001 --------------- (unaudited) ASSETS: Current assets: Cash and cash equivalents ....................................... $ 12,000 Marketable securities ........................................... 158,000 Accounts receivable, billed ..................................... 87,000 Accounts receivable, unbilled ................................... 40,000 Prepaid expenses and other current assets ....................... 107,000 --------------- Total current assets ............................. 404,000 Property and equipment, net .......................................... 3,533,000 Library of movies, net ............................................... 210,000 Deferred financing costs ............................................. 449,000 Deferred lease costs ................................................. 426,000 Other assets ......................................................... 42,000 --------------- Total assets ..................................... $ 5,064,000 =============== LIABILITIES AND STOCKHOLDERS' DEFICIT: Current liabilities: Accounts payable ................................................ $ 2,595,000 Accrued expenses and other current liabilities .................. 249,000 Customer deposits ............................................... 359,000 --------------- Total current liabilities ........................ 3,203,000 Deferred rent ........................................................ 25,000 Revolving line of credit ............................................. 4,168,000 Subordinated convertible debentures .................................. 750,000 --------------- Total liabilities ................................ 8,146,000 --------------- Liabilities to be settled in Preferred Stock.......................... 4,650,000 --------------- Commitments and contingencies Stockholders' deficit Common stock, $.01 par value; authorized 25,000,000 shares; 2,456,670 shares issued and outstanding at September 30, 2001.. 25,000 Additional paid-in capital ...................................... 23,449,000 Deferred Compensation ........................................... (259,000) Accumulated other comprehensive loss ............................ (184,000) Accumulated deficit ............................................. (30,763,000) --------------- Total stockholders' deficit ...................... (7,732,000) --------------- Total liabilities and stockholders' deficit ...... $ 5,064,000 =============== The accompanying notes are an integral part of these financial statements.
DIRECTRIX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS of OPERATIONS (unaudited) ___________________________________________________________________________________________________________________________________ THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 ------------------------------------- ------------------------------------ Revenues $ 671,000 $ 1,169,000 $ 1,858,000 $ 2,810,000 ---------------- ---------------- ---------------- ---------------- Operating expenses: Salaries, wages and benefits ................. 837,000 827,000 1,709,000 1,636,000 Library amortization ......................... 136,000 162,000 276,000 333,000 Satellite costs .............................. 119,000 1,690,000 481,000 3,363,000 Broadband expenses ........................... 194,000 112,000 660,000 112,000 Selling, general and administrative expenses . 382,000 707,000 816,000 1,268,000 Depreciation ................................. 342,000 351,000 699,000 699,000 ---------------- ---------------- ---------------- ---------------- Total operating expenses .............. 2,010,000 3,849,000 4,641,000 7,411,000 ---------------- ---------------- ---------------- ---------------- Loss from operations .................. (1,339,000) (2,680,000) (2,783,000) (4,601,000) Other expenses: Interest expense ............................. (471,000) (205,000) (825,000) (350,000) Transponder penalty .......................... -- -- (4,620,000) -- ---------------- ---------------- ---------------- ---------------- Total other expenses .................. (471,000) (205,000) (5,445,000) (350,000) ---------------- ---------------- ---------------- ---------------- Loss before extraordinary item ........ (1,810,000) (2,885,000) (8,228,000) (4,951,000) Extraordinary item: Gain on extinguishment of transponder liability................................... 5,220,000 -- 5,220,000 -- ---------------- ---------------- ---------------- ---------------- Net income (loss) ..................... $ 3,410,000 $ (2,885,000) $ (3,008,000) $ (4,951,000) ================ ================ ================ ================ Net Income (Loss) per common share: Basic & Diluted: Loss before extraordinary gain .......... $ (0.75) $ (1.32) $ (3.46) $ (2.27) Extraordinary gain 2.17 -- 2.20 -- ---------------- ---------------- ---------------- ---------------- Net Income (Loss) .......................... $ 1.42 $ (1.32) $ (1.26) $ (2.27) ================ ================ ================ ================ Weighted average number of common shares outstanding: Basic & Diluted............................. 2,409,804 2,179,785 2,379,811 2,179,785 ================ ================ ================ ================ The accompanying notes are an integral part of these financial statements.
DIRECTRIX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT of STOCKHOLDERS' DEFICIT (unaudited) FOR THE SIX MONTHS ENDED SEPTEMBER 30, 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 1,000 473,000 (259,000) -- -- 215,000 Intrinsic value of benenficial conversion feature of debentures ....... -- -- 313,000 -- -- -- 313,000 Stock issued in connection with PIK credit facility interest .................... 53,230 1,000 155,000 -- -- -- 156,000 Adjust value of stock issued in connection with credit facility interest to fair market value ................ -- -- (9,000) -- -- -- (9,000) Warrants issued to Loral & executive officers in connection with extinguishment of transponder liability....... -- -- 856,000 -- -- -- 856,000 Warrants issued in connection with the West Coast facility ................... -- -- 224,000 -- -- -- 224,000 Additional warrants issued in connection with credit facility .................... -- -- 267,000 -- -- -- 267,000 Net loss ..................... -- -- -- -- -- (3,008,000) (3,008,000) Comprehensive loss due to decline in market value of marketable securities .................. -- -- -- -- (184,000) -- (184,000) ------------ Comprehensive Loss ........... -- -- -- -- -- -- (3,192,000) ------------ --------- -------- ------------ ------------ ------------- ------------- ------------ Balance at September 30, 2001 .... 2,456,670 $ 25,000 $ 23,449,000 $ (259,000) $ (184,000) $(30,763,000) $(7,732,000) ========= ======== ============ ============ ============= ============= ============ The accompanying notes are an integral part of these financial statements.
DIRECTRIX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) ___________________________________________________________________________________________________________________________________ Six months ended September 30, 2001 2000 ---------------- ---------------- Cash flows from operating activities: Net loss ........................................................... $ (3,008,000) $ (4,951,000) ---------------- ---------------- Adjustments to reconcile net loss to net cash used in operating activities: Depreciation of property and equipment ............................. 699,000 699,000 Amortization of library of movies .................................. 276,000 333,000 Amortization of deferred financing costs ........................... 198,000 139,000 Bad debt expense ................................................... 38,000 200,000 Non-cash rent expense .............................................. (24,000) (13,000) Non-cash interest for beneficial conversion feature of debentures .. 313,000 -- Non-cash interest for PIK of credit facility interest .............. 147,000 -- Deferred compensation .............................................. 215,000 -- Increase in transponder penalty .................................... 4,620,000 -- Gain on extinguishment of transponder liability .................... (5,220,000) -- Changes in assets and liabilities: Decrease (Increase) in accounts receivable .................... 449,000 (262,000) Increase in prepaid expenses and other current assets ......... (49,000) (8,000) Decrease in other assets ...................................... 125,000 51,000 Increase in deferred lease costs .............................. (202,000) -- Increase in accounts payable and accrued expenses ............. 1,074,000 2,091,000 Increase in transponder penalty ............................... -- -- Decrease (increase) in customer deposits ...................... (35,000) 61,000 ---------------- ---------------- Total adjustments ................................... 2,624,000 3,291,000 ---------------- ---------------- ---------------- ---------------- Net cash used in operating activities ............... (384,000) (1,660,000) ---------------- ---------------- Cash flows from investing activities: Purchase of property and equipment ............................ (52,000) (265,000) ---------------- ---------------- Net cash used in investing activities ............... (52,000) (265,000) ---------------- ---------------- Cash flows from financing activities: Officer loans ................................................. (8,000) -- Borrowings under revolving line of credit ..................... 2,000 1,604,000 Proceeds from issuance of subordinated convertible debentures . 375,000 - ---------------- ---------------- Net cash provided by financing activities ........... 369,000 1,604,000 ---------------- ---------------- Net decrease in cash and cash equivalents .............................. (67,000) (321,000) Cash and cash equivalents, beginning of the period ..................... 79,000 324,000 ---------------- ---------------- Cash and cash equivalents, end of the period ........................... $ 12,000 $ 3,000 ================ ================ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ............................................ $ -- $ 145,000 ================ ================ 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 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.
DIRECTRIX, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE & SIX MONTHS ENDED SEPTEMBER 30, 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. 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 six months ended September 30, 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 $3.0 million for the six months ended September 30, 2001. At September 30, 2001, Directrix has a working capital deficiency of $2.8 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. 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 has developed and begun implementation of 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. The areas addressed by this plan are outlined below, and include (i) the termination of Directrix' transponder services agreement, (ii) restructuring of Directrix' revolving line of credit ("Credit Facility"), (iii) the West Coast Facility, (iv) transition of its new business to the West Coast Facility and attracting new business and (v) new financing. Termination of Directrix' Transponder Services Agreement. Approximately $10.7 million of current liabilities through June 30, 2001 were attributable to amounts owed to Loral SpaceCom Corporation ("Loral") under Directrix' Agreement for Transponder Services ("Transponder Agreement"). In May 2001, Directrix terminated its Transponder Agreement 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. Under the terms of a July 13, 2001 letter agreement and term sheet (the "Restructuring Agreement"), Loral extinguished its receivable and the early termination charge in exchange for Directrix' issuance to Loral of: (i) a $1.65 million note under the Credit Facility, (ii) $3.0 million face amount of a new Series B junior preferred stock which is in the process of being issued (described below in Note 5) and (iii) a five-year warrant to acquire 200,000 shares at an exercise price of $3.00 per share. The Restructuring Agreement took effect with the consummation of the Playboy Transaction on September 20, 2001. Management believes that the direct leasing of satellite transponders no longer fits into Directrix' long-term plans and by terminating the Transponder Agreement, Directrix has eliminated its largest recurring monthly charge and has ceased providing transponder services. During the three months ended September 30, 2001, Directrix recorded an extraordinary gain on the extinguishment of the transponder liability of approximately $5.2 million. The determination of the amount of the extraordinary gain is based on management's preliminary estimate of the expected value of the preferred stock and warrants. The final determination of the amount of the extraordinary gain will be based on an analysis done by Directrix. Directrix recognized $0.8 million and $1.9 million, respectively, of revenue attributable to the leasing of transponders for the three and six months ended September 30, 2000 of which $0.6 million and $1.6 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 six months ended September 30, 2001. Restructuring of the Credit Facility. Directrix has a $4.5 million Credit Facility, from which $4.2 million has been drawn down as of September 30, 2001. The Credit Facility was to mature on March 15, 2002, but after March 15, 2001, Directrix could no longer draw down any further advances under the Credit Facility. The Credit Facility is 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 Restructuring Agreement. Under the Restructuring 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 and (iii) revise the stockholders' equity covenant commencing with the fiscal year ending March 31, 2002 to require that Directrix not allow its stockholders' deficit to exceed $5.0 million. In consideration of the foregoing, Directrix agreed to issue 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 (which is in the process of being issued as described below), warrants to acquire 125,000 shares of Directrix common stock at an exercise price of $3.00 per share. As noted above, the Restructuring Agreement took effect on the September 20, 2001 consummation of the Playboy Transaction. The Credit Facility notes held by two executive officers of Directrix, which aggregated $1.65 million at September 20, 2001, were cancelled and replaced with $1.65 million face amount of a new Series A senior preferred stock which is in the process of being issued, and warrants to acquire 200,000 shares of Directrix common stock. The terms of the Series A preferred stock are described below in Note 5. The Series A preferred stock is accounted for as a long term liability to be settled in preferred stock in the accompanying balance sheet until such time that the preferred stock is issued. The warrants will have an exercise price of $3.00 per share and will be exercisable for five years. The holders of the Credit Facility agreed to permit Directrix to PIK the interest payment owed on the Credit Facility with shares of Directrix Common Stock for the period from June 1, 2001 through September 19, 2001. (Under the Restructuring Agreement, Directrix can PIK the interest on the Credit Facility 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. The PIK interest payment is accounted for at its fair market value on the accompanying statement of stockholders' deficit. 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 which provides for monthly sublease payments of $99,442 in the first year increasing 3% per year for the first 10 years. For the last five years of the sublease, the rent shall be 110% of the tenth year rent. 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 fiscal quarter ended March 31, 2002. The sublease commences with respect to the balance of the subleased premises 30 days after they are delivered in accordance with the work letter which is an exhibit to the Master Lease. As contemplated by a February 26, 2001 letter of intent between Playboy and Directrix ("LOI"), the parties negotiated a 15-year Master Services Agreement under which Directrix will provide network origination and studio management services for Playboy's networks and productions. The Master Services Agreement calls for minimum monthly service payments of $257,500 per month, increasing 3% per year. The Master Services Agreement as it relates to the studio services commences when Studio A is operational in accordance with technical specifications set forth in an exhibit to the Master Services Agreement. It is anticipated that this will occur 30 days after delivery by Kingston of Studio A. The Master Services Agreement for network origination services commences when Directrix is capable of originating the networks from the West Coast Facility. Directrix also has a right of first refusal to provide substantially all of Playboy's other technical service needs. The LOI also extended the term of Directrix' current services agreement with Playboy, which was set to expire on March 15, 2001, to March 31, 2002. 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. In July 2001, Playboy exercised its option to acquire the networks operated by Califa Entertainment Group, Inc. ("Califa") and VOD, Inc. ("VODI"), an affiliate of Califa. Under the Master Services Agreement, Directrix will continue to provide network origination services for the networks acquired by Playboy from Califa and VODI in addition to providing network origination services for all of Playboy's other networks from the West Coast Facility. The Master Services Agreement also provides for the extension of the existing service agreements until the networks are originated from the West Coast Facility. Upon execution of 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. Directrix is obligated to provide equipment, integration and technical improvements necessary to provide the services under the Master Services Agreement when the facility is operational. Directrix is currently finalizing the terms of $15 million of equipment lease financing which includes financing of systems integration fees and extended manufacturers' warranties. Directrix does not currently anticipate using the entire $15 million and under the proposed terms, the unused portion of the financing can be drawn down until December 31, 2002 which will afford Directrix financing to upgrade the West Coast Facility if required. There are no assurances that the equipment lease can be finalized. 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 has 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 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 find a lessee for the Northvale facility. 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 management and its investment banker are currently seeking up to $10 million of financing in addition to the equipment lease financing noted above. As a first step, Directrix secured $337,500 of interim financing on October 25, 2001 (the "Interim Financing") in a private placement to existing shareholders and investors. 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 bears 20% interest payable upfront in shares of Directrix common stock. Directrix issued 26,786 shares of common stock as payment of the interest on the interim financing. Directrix, with the assistance of its investment bankers, is seeking $5 million to $10 million of permanent financing under terms to be determined. The interim financing will be prepaid if Directrix places the permanent financing. There are no assurances that management will be successful in securing the permanent financing or even if successful, whether the proceeds of such financing will be sufficient to maintain Directrix as a going concern. Management believes that if it is successful in implementing the restructuring plan described above, Directrix will be able to realize its long-term business plan and achieve profitability. However, there can be no assurance that Directrix will be able to implement the restructuring plan or realize on its long-term business plan. 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. Preferred Stock. As part of the Restructuring Agreement described above in Note 4, Directrix is in the process of issuing $1.65 million of Series A Preferred Stock to two of Directrix' executive officers and $3.0 million of Series B Preferred Stock to Loral. The Series A Preferred Stock will bear a 6% cumulative dividend which Directrix may, at its option, PIK with Common Stock, is senior in liquidation preference to the Series B Preferred Stock and convertible at $1.50 per share. The conversion price is subject to standard anti-dilution adjustments for stock splits and dividends, recapitalizations, etc. and volume weighted anti dilution adjustments for below market issuances of Common Stock and issuances of convertible securities with a conversion price less than the Series A Preferred Stock conversion price. The Series A Preferred Stock is also entitled to vote on an as converted basis and the holders have the right to appoint two members to the Directrix Board of Directors. The holders of the Series A Preferred Stock may demand redemption after 10 years or upon change in control of Directrix (a person or group acquires more than 35% of the outstanding voting securities). Directrix has the option of paying the redemption price in cash or as a PIK. The Series B Preferred Stock has the same terms as the Series A Preferred Stock except that it is junior to the Series A Preferred Stock on liquidation preference, has a $3.00 per share conversion price and has no voting rights or rights to appoint Board members. The Series A and B preferred stock are accounted for as long term liabilities to be settled in preferred stock in the accompanying balance sheet until such time that the preferred stock is issued. 6. 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 Restructuring Agreement, Directrix issued five year warrants to acquire 125,000 shares to the Credit Facility holders and warrants to acquire 200,000 shares to each of Loral and the two executive officers of Directrix (as a group). 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. 7. Net Loss per Share. Net loss per share for the three and six months ended September 30, 2000 and September 30, 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 325,219 and 312,973 common stock options outstanding as of September 30, 2001 and September 30, 2000, respectively. At September 30, 2001 and 2000, all common stock purchase warrants were exercised except for the warrants described above in Note 6. 8. Significant Customers; Litigation. In May 2001, EMI 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 six months ended September 30, 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." At September 30, 2001, the 94,137 shares of New Frontier stock were recorded at a value of $1.68 each, which was the per share market value. In accordance with SFAS No. 130, "Reporting Comprehensive Income," the $0.2 million loss associated with the decrease in per share market value through September 30, 2001 is recorded as equity 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 alleges breach of contract, fraud and negligent misrepresentation. Logix is 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. Directrix believes the Logix suit and the cross complaint are without merit and plans a vigorous defense. 9. 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. 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. All the shares of restricted stock were issued on May 1, 2001. Directrix recorded approximately $475,000 of deferred compensation, of which $215,000 was expensed at September 30, 2001. The remaining amounts will be amortized over the remainder of the fiscal year. 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 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. 10. Subordinated Convertible Debentures. Directrix placed $500,000 of convertible debentures ("Debentures") in an offering completed in June 30, 2001. The Debentures are convertible into shares of Directrix 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 bear interest at 6% per annum, payable at maturity. Directrix can elect to PIK the interest payment in lieu of a cash interest payment. Directrix has 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. In July 2001, Directrix offered up to $600,000 of a second series of convertible debentures with the same terms as the Debentures. Through September 30, 2001, Directrix placed $250,000 of Debentures from the second series; $50,000 of Debentures were issued to an executive officer of Directrix. During the three and six months ended September 30, 2001, Directrix recorded interest expense attributable to the intrinsic value of the beneficial conversion feature of the convertible debenture of $250,000 and $312,500, respectively, based on the difference between the conversion price and the fair market value of Directrix common stock on the February 28, 2001 commitment date. 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. 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. This supercedes SFAS 121, while retaining many of the requirements of such statement. The Company is currently evaluating the impact of the statement. 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," "project," "intend," or "outlook" or the negative of these words or other variations of these words or other comparable words, or by discussion of strategy that involve risks and uncertainties. These forward-looking statements are only predictions, and actual events or results may differ materially as a result of a wide variety of factors and conditions, many of which are beyond Directrix's control. 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. In September 1999, Directrix relocated its master control and playback facility from New York City to Northvale, New Jersey. Directrix' service agreements with Playboy and Califa were set to expire on March 15, 2001. During the negotiations to secure an extension and expansion of Playboy's service agreements, Directrix agreed to establish a network origination, studio services and uplink facility in Los Angeles ("West Coast Facility") with Playboy as its anchor tenant and primary customer. Under the transaction which was completed on September 20, 2001, Directrix will build, outfit and operate a 109,000 square foot teleport, master control, and soundstage complex at the West Coast Facility. When complete, 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 and its affiliate and these networks were included in the Master Services Agreement between Directrix and Playboy. Results of Operations Revenues. Total revenue for the six and three months ended September 30, 2001 decreased by approximately $1.0 million and $0.5 million, respectively, as compared to the same periods in 2000. The decrease in revenue was primarily attributable to a decrease in revenue from EMI of $1.7 million and $0.7 million for the six and three months ended September 30, 2001, respectively, offset by the inclusion of revenue attributable to broadband services of $0.7 million and $0.2 million for the six and three months ended September 30, 2001, respectively. For the six and three months ended September 30, 2001, revenue from additional networks operated by Playboy and Califa increased by $0.2 million and $0.1 million, respectively, as compared to the corresponding periods in 2000. The decrease in revenue from EMI was attributable to the shut down of the EMI networks. In May 2001, EMI 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 six months ended September 30, 2001, Directrix recorded approximately $0.1 million of cash basis revenue associated with recovery of amounts owed in excess of the EMI receivable. Directrix' original service agreements with Playboy and Califa expired on March 15, 2001. Directrix extended the term of its service agreements with Playboy through March 31, 2002 under the terms of a February 26, 2001 letter of intent ("LOI") concerning the arrangements surrounding the West Coast Facility. Directrix continued to provide services to Califa and its affiliate VOD, Inc. ("VODI") and was in negotiation to extend their agreements and to provide additional services. In June 2001, Playboy exercised its option to acquire the networks operated by Califa and VODI. Under the Master Services Agreement with Playboy, Directrix will provide network origination services for the four networks operated by Califa and VODI in addition to providing network origination services for several Playboy owned and operated networks from the Los Angels based facility. The agreement will also provide for the extension of the existing service agreements until the networks are originated from the West Coast Facility. Salaries, Wages and Benefits. Salaries, wages and benefits for the six months ended September 30, 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 six months ended September 30, 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 September 30, 2001 were comparable to salaries, wages and benefits for the same period in 2000. Decreases in salaries, wages and benefits for the executive and sales & marketing departments during the three months ended September 30, 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 six and three months ended September 30, 2001 was comparable to library amortization for the same periods in 2000. Satellite Costs. Satellite costs for the six and three months ended September 30, 2001 decreased by approximately $2.9 million and $1.6 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 Transponder Services ("Transponder Agreement") with Loral SpaceCom Corporation ("Loral") in May 2001, as more fully described in "Liquidity and Capital Resources, Restructuring Plan, Transponder Agreement." Broadband Expenses. Broadband expenses for the six and three months ended September 30, 2001 increased by approximately $0.5 million and $0.1 million, respectively, as compared to the same periods in 2000. The increase in broadband expenses was attributable to the activities of a wholly-owned subsidiary, Directrix Broadband, Inc, which was a reseller 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"). On July 30, 2001, the parties terminated the Reseller Agreement. The Reseller Agreement calls for Akamai to directly provide services to Directrix' customers unless these accounts choose to move to another content delivery network. Directrix is currently seeking a replacement broadband services provider. There can be no assurance that Directrix will be successful in securing a replacement broadband services provider or if a replacement provider is found, then the terms of any such agreement would be acceptable at all. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the six and three months ended September 30, 2001 decreased by approximately $0.5 million and $0.3 million, respectively, as compared to the six and three months ended September 30, 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 six and three months ended September 30, 2001 was comparable to the corresponding periods in 2000. Interest Expense. Interest expense for the six and three months ended September 30, 2001 increased by approximately $0.6 million and $0.3 million, respectively, as compared to the six and three months ended September 30, 2000. The increase in interest expense was primarily attributable to interest associated with the intrinsic value of the beneficial conversion feature of the convertible debentures issued in March 2001, interest on the amounts drawn down from Directrix' revolving line of credit, and the amortization of additional common stock purchase warrants issued in October 2000 in connection with the revolving line of credit. Transponder Penalty & Extraordinary gain. Directrix recorded an early termination charge of $4.6 million associated with the termination of the Transponder Agreement in May 2001. 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. Under a July 13, 2001 letter agreement and Term Sheet ("Restructuring Agreement"), Loral agreed to settle this amount. The Restructuring Agreement as it relates to the Transponder Agreement is described below under "Liquidity and Capital Resources, Restructuring Plan, Transponder Agreement". During the three months ended September 30, 2001, Directrix recorded an extraordinary gain on the extinguishment of transponder liability of approximately $5.2 million. The determination of the amount of the extraordinary gain is based on management's preliminary estimate of the expected value of the preferred stock and warrants. The final determination of the amount of the extraordinary gain will be based on an analysis done by Directrix. Directrix recognized $0.8 million and $1.9 million, respectively, of revenue attributable to the leasing of transponders for the three and six months ended September 30, 2000 of which $0.6 million and $1.6 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 six months ended September 30, 2001. Net Loss. For the six months ended September 30, 2001, Directrix reported a net loss of $3.0 million as compared to a net loss of $5.0 million for the corresponding period in 2000. For the three months ended September 30, 2001, Directrix reported net income of $3.4 million as compared to a net loss of $2.9 million for the corresponding period in 2000. The decrease in the net loss for the three and six months ended September 30, 2001 was attributable to all the factors noted above. Liquidity and Capital Resources Working Capital. Directrix had a working capital deficiency of $2.8 million on September 30, 2001 as compared to a working capital deficiency of $11.4 million on March 31, 2001. The increase in working capital for the six months ended September 30, 2001 was primarily attributable to the extinguishment of the transponder liability and the reclassification of the revolving line of credit due to the extension of the maturity date during the three months ended September 30, 2001, as described below in "Restructuring Plan, Restructuring of the Credit Facility." Credit Facility. Directrix has a $4.5 million revolving line of credit 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"). The providers of the Credit Facility include the Chief Executive Officer, the President and four unrelated parties (collectively, the "Lenders"). The Credit Facility bears interest at 11% per annum, payable monthly, and was to mature on March 15, 2002. As part of the restructuring, the maturity date was extended to March 31, 2003. Substantially all of Directrix' assets have been pledged as collateral for this obligation. As of September 30, 2001, Directrix has drawn down approximately $4.2 million from the Credit Facility, with $0.3 million unused funds remaining under the facility. Under the Credit Facility, Directrix is not permitted to draw down on the Credit Facility after March 15, 2001. At March 31, 2001, the Lenders agreed as part of modifications to the Credit Facility to revise the stockholders' equity financial covenant as more fully described below. The Credit Facility was further amended under the Restructuring Agreement which is described below under "Restructuring Plan, Restructuring of the Credit Facility." Subordinated Convertible Debentures. Directrix placed $500,000 of convertible debentures ("Debentures") in an offering completed in June 30, 2001. The Debentures are convertible into shares of Directrix 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 bear interest at 6% per annum, payable at maturity. Directrix can elect to pay the interest by issuing additional shares of Directrix common stock in lieu of a cash interest payment. Directrix has 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. In July 2001, Directrix offered up to $600,000 of a second series of convertible debentures with the same terms as the Debentures. Through September 30, 2001, Directrix placed $250,000 of Debentures from the second series; $50,000 of Debentures were issued to an executive officer of Directrix. During the three and six months ended September 30, 2001, Directrix recorded interest expense attributable to the intrinsic value of the beneficial conversion feature of the convertible debenture of $250,000 and $312,500, respectively, based on the difference between the conversion price and the fair market value of Directrix common stock on the February 28, 2001 commitment date. 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 Restructuring Agreement, Directrix issued five year warrants to acquire 125,000 shares to the Credit Facility holders and warrants to acquire 200,000 shares to each of Loral and the two executive officers of Directrix (as a group). 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. 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 approximately $3.0 million for the six months ended September 30, 2001. At September 30, 2001, Directrix has a working capital deficiency of $2.8 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 via execution of its long-term business plan. Management has developed and begun implementation of 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. The areas addressed by this plan are outlined below, and include (i) the termination of Directrix' transponder services agreement, (ii) restructuring of Directrix' revolving line of credit ("Credit Facility"), (iii) the West Coast Facility, (iv) transition of its new business to the West Coast Facility and attracting new business and (v) new financing. Termination of Directrix' Transponder Services Agreement. Approximately $10.7 million of current liabilities through June 30, 2001 were attributable to amounts owed to Loral SpaceCom Corporation ("Loral") under Directrix' Agreement for Transponder Services ("Transponder Agreement"). In May 2001, Directrix terminated its Transponder Agreement 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. Under the terms of a July 13, 2001 letter agreement and term sheet (the "Restructuring Agreement"), Loral extinguished its receivable and the early termination charge in exchange for Directrix' issuance to Loral of: (i) a $1.65 million note under the Credit Facility, (ii) $3.0 million face amount of a new Series B junior preferred stock which is in the process of being issued and (iii) a five-year warrant to acquire 200,000 shares at an exercise price of $3.00 per share. The Restructuring Agreement took effect with the consummation of the Playboy Transaction on September 20, 2001. The Series B Preferred Stock has the same terms as the Series A Preferred Stock (which are described below in Restructuring of the Credit Facility) except that it is junior to the Series A Preferred Stock on liquidation preference, has a $3.00 per share conversion price and has no voting rights or rights to appoint Board members. The Series B preferred stock is accounted for as long term liability to be settled in preferred stock in the accompanying balance sheet until such time that the preferred stock is issued. Management believes that the direct leasing of satellite transponders no longer fits into Directrix' long-term plans and by terminating the Transponder Agreement, Directrix has eliminated its largest recurring monthly charge and has ceased providing transponder services. During the three months ended September 30, 2001, Directrix recorded an extraordinary gain on the extinguishment of the transponder liability of approximately $5.2 million. The determination of the amount of the extraordinary gain is based on management's preliminary estimate of the expected value of the preferred stock and warrants to be issued to Loral. The final determination of the amount of the extraordinary gain will be based on an analysis done by Directrix. Restructuring of the Credit Facility. Directrix has a $4.5 million Credit Facility, from which $4.2 million has been drawn down as of September 30, 2001. The Credit Facility was to mature on March 15, 2002, but after March 15, 2001, Directrix could no longer draw down any further advances under the Credit Facility. The Credit Facility is 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 Restructuring Agreement. Under the Restructuring 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 and (iii) revise the stockholders' equity covenant commencing with the fiscal year ending March 31, 2002 to require that Directrix not allow its stockholders' deficit to exceed $5.0 million. In consideration of the foregoing, Directrix agreed to issue to the holders of the Credit Facility, excluding 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 (which is in the process of being issued as described below), warrants to acquire 125,000 shares of Directrix common stock at an exercise price of $3.00 per share. As noted above, the Restructuring Agreement took effect on the September 20, 2001 consummation of the Playboy Transaction. The Credit Facility notes held by two executive officers of Directrix, which aggregated $1.65 million at September 20, 2001, were cancelled and replaced with $1.65 million face amount of a new Series A senior preferred stock which is in the process of being issued, and warrants to acquire 200,000 shares of Directrix common stock. The Series A Preferred Stock will bear a 6% cumulative dividend which Directrix may, at its option, PIK with Common Stock, is senior in liquidation preference to the Series B Preferred Stock and convertible at $1.50 per share. The conversion price is subject to standard anti-dilution adjustments for stock splits and dividends, recapitalizations, etc. and volume weighted anti dilution adjustments for below market issuances of Common Stock and issuances of convertible securities with a conversion price less than the Series A Preferred Stock conversion price. The Series A Preferred Stock is also entitled to vote on an as converted basis and the holders have the right to appoint two members to the Directrix Board of Directors. The holders of the Series A Preferred Stock may demand redemption after 10 years or upon change in control of Directrix (a person or group acquires more than 35% of the outstanding voting securities). Directrix has the option of paying the redemption price in cash or as a PIK in common stock. The Series A preferred stock is accounted for as long term liability to be settled in preferred stock in the accompanying balance sheet until such time that the preferred stock is issued. The warrants have an exercise price of $3.00 per share and are exercisable for five years. The holders of the Credit Facility agreed to permit Directrix to PIK the interest payment owed on the Credit Facility with shares of Directrix Common Stock for the period from June 1, 2001 through September 19, 2001. (Under the Restructuring 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. The PIK interest payment is accounted for at its fair market value on the accompanying statement of stockholders' deficit. 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 which provides for monthly sublease payments of $99,442 in the first year increasing 3% per year for the first 10 years. For the last five years of the sublease, the rent shall be 110% of the tenth year rent. 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 fiscal quarter ended March 31, 2002. The sublease commences with respect to the balance of the subleased premises 30 days after they are delivered in accordance with the work letter which is an exhibit to the Master Lease. As contemplated by a February 26, 2001 letter of intent between Playboy and Directrix ("LOI"), the parties negotiated a 15-year Master Services Agreement under which Directrix will provide network origination and studio management services for Playboy's networks and productions. The Master Services Agreement calls for minimum monthly service payments of $257,500 per month, increasing 3% per year. The Master Services Agreement as it relates to the studio services commences when Studio A is operational in accordance with technical specifications set forth in an exhibit to the Master Services Agreement. It is anticipated that this will occur 30 days after delivery by Kingston of Studio A. The Master Services Agreement for network origination services commences when Directrix is capable of originating the networks from the West Coast Facility. Directrix also has a right of first refusal to provide substantially all of Playboy's other technical service needs. The LOI also extended the term of Directrix' current services agreement with Playboy, which was set to expire on March 15, 2001, to March 31, 2002. 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. In July 2001, Playboy exercised its option to acquire the networks operated by Califa Entertainment Group, Inc. ("Califa") and VOD, Inc. ("VODI"), an affiliate of Califa. Under the Master Services Agreement, Directrix will continue to provide network origination services for the networks acquired by Playboy from Califa and VODI in addition to providing network origination services for all of Playboy's other networks from the West Coast Facility. The Master Services Agreement also provides for the extension of the existing service agreements until the networks are originated from the West Coast Facility. Upon execution of 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. Directrix is obligated to provide equipment, integration and technical improvements necessary to provide the services under the Master Services Agreement when the facility is operational. Directrix is currently finalizing the terms of $15 million of equipment lease financing which includes financing of systems integration fees and extended manufacturers' warranties. Directrix does not currently anticipate using the entire $15 million and under the proposed terms, the unused portion of the financing can be drawn down until December 31, 2002 which will afford Directrix financing to upgrade the West Coast Facility if required. There are no assurances that the equipment lease can be finalized. 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 has 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 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 find a lessee for the Northvale facility. 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 management and its investment banker are currently seeking up to $10 million of financing in addition to the equipment lease financing noted above. As a first step, Directrix secured $337,500 of interim financing on October 25, 2001 (the "Interim Financing") in a private placement to existing shareholders and investors. 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 bears 20% interest payable upfront in shares of Directrix common stock. Directrix issued 26,786 shares of common stock as payment of the interest on the interim financing. Directrix, with the assistance of its investment bankers, is seeking $5 million to $10 million of permanent financing under terms to be determined. The interim financing will be prepaid if Directrix places the permanent financing. There are no assurances that management will be successful in securing the permanent financing or even if successful, whether the proceeds of such financing will be sufficient to maintain Directrix as a going concern. Management believes that if it is successful in implementing the restructuring plan described above, Directrix will be able to realize its long-term business plan and achieve profitability. However, there can be no assurance that Directrix will be able to implement the restructuring plan or realize on its long-term business plan. 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. Commitments and Contingencies. Legal Proceedings. 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 suit alleges breach of contract, fraud and negligent misrepresentation and Logix is seeking 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. Directrix believes the Logix suit and the cross complaint are without merit and plans a vigorous defense. PART II - OTHER INFORMATION Item 1: Legal Proceedings. 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 suit alleges breach of contract, fraud and negligent misrepresentation and Logix is seeking 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. Directrix believes the Logix suit and the cross complaint are without merit and plans a vigorous defense. Item 2: Changes in Securities and Use of Proceeds. On March 28, 2001, Directrix issued an aggregate of $375,000 of a total offering of $500,000 of Subordinated Convertible Debentures ("Debentures") in a private placement to five persons. During the three months ended June 30, 2001, Directrix issued the remaining $125,000 of Debentures to four persons, one of which participated in the March 28, 2001 offering. All proceeds were paid in cash and there were no underwriting discounts or commissions paid in connection with the offering. The offering was made solely to accredited investors who had made previous investments in Directrix and had a preexisting business relationship with Directrix and its senior executive officers in reliance of Section 4(2) of the Securities Act of 1933. The Debentures are convertible into shares of Directrix 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 bear interest at 6% per annum, payable at maturity. Directrix can elect to pay the interest by issuing additional shares of Directrix common stock in lieu of a cash interest payment. Directrix has 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. In July 2001, Directrix offered up to $600,000 of a second series of convertible debentures which have the same terms as the Debentures. The offering was made solely to accredited investors who had made previous investments in Directrix and/or had a preexisting business relationship with Directrix and its senior executive officers and in reliance of Section 4(2) of the Securities Act of 1933. Through September 30, 2001, Directrix has issued $250,000 of Debentures from the second series; $50,000 of Debentures were issued to Mr. Faherty, Directrix' Chairman and Chief Executive Officer. The proceeds of the Debenture offerings were used for working capital purposes. Item 6: Exhibits and Reports on Form 8-K. (a) Exhibits. Exhibit 4.8 - Form of Common Stock Purchase Warrant issued to Andrita Management, LLC. for 200,000 shares. Exhibit 10.22 - Sublease agreement between Playboy Entertainment Group, Inc. and Directrix dated September 20, 2001. Exhibit 10.23 - Letter agreement dated September 19, 2001 between Playboy Entertainment Group, Inc. and Directrix. (b) Reports on Form 8-K. None. 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: November 19, 2001 By: /s/ Donald J. McDonald, Jr. ---------------------------------------- Donald J. McDonald, Jr. President, Director, Chief Financial Officer and Principal Accounting Officer EX-4.8 4 ex4-8.txt CS PURCHASE WARRANT ISSUED TO ANDRITA MGMT LLC. THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SUCH ACT. WARRANT TO PURCHASE COMMON STOCK OF DIRECTRIX, INC. Void after 5:00 p.m. NY Time April 30, 2006 This warrant (the "Warrant") is issued to Andrita Management LLC (the "Holder") by Directrix, Inc., a Delaware limited liability company (the "Company"), on April 30, 2001 (the "Warrant Issue Date"). This Warrant is issued pursuant to that certain letter agreement dated as of even date herewith by and between the Company and the Holder. 1. Purchase Shares. Subject to the terms and conditions hereinafter set forth, the Holder is entitled, upon surrender of this Warrant at the principal office of the Company (or at such other place as the Company shall notify the Holder in writing), to purchase from the Company 100,000 fully paid and nonassessable shares (the "Shares") of the common stock of the Company. The number of Shares shall be subject to adjustment pursuant to Section 10 hereof. 2. Exercise Price. The exercise price for the Shares shall be $2.90 per Share, as adjusted from time to time pursuant to Section 10 hereof (the "Exercise Price"). 3. Exercise Period. This Warrant shall be exercisable, in whole or in part, during the term commencing on September 20, 2001 and terminating at 5:00 p.m. New York Time on April 30, 2006. 4. Cash Exercise. While this Warrant remains outstanding and exercisable in accordance with Section 3 above, the Holder may exercise, in whole or in part, its purchase rights hereunder by (i) surrendering this Warrant, together with a duly executed copy of the form of Notice of Election attached hereto, to the Secretary of the Company at its principal offices; and (ii) paying to the Company an amount equal to the aggregate Exercise Price for the number of Shares being purchased. 5. Intentionally Deleted 6. Representations, Warranties and Covenants of Holder. Holder acknowledges that Company is issuing this Warrant to Holder in reliance upon the following representations, warranties and covenants. The Holder represents, warrants, and to the extent applicable, covenants, that: (a) Authorization. The Holder has full power and authority to enter into this Warrant, and this Warrant constitutes Holder's valid and legally binding obligation, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies. (b) Purchase Entirely for Own Account. This Warrant and the common stock to be received by Holder upon exercise of this Warrant (collectively, the "Securities") will be acquired for investment for such Holder's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that Holder has no present intention of selling, granting any participation in, or otherwise distributing the same. (c) No Contracts. Holder does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. (d) Disclosure of Information. Holder has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Securities and the business, properties, prospects and financial condition of the Company. (e) Investment Experience. Holder is an investor in securities of companies in the development stage and acknowledges that Holder can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Securities. (f) Restricted Securities. Holder understands that the Securities are "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Securities Act of 1933, as amended (the "Act"), only in certain limited circumstances. In this connection, Holder represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act. (g) Further Limitations on Disposition. Without in any way limiting the representations set forth above, Holder agrees not to make any disposition of all or any portion of the Securities unless and until the transferee has agreed in writing for the benefit of the Company to be bound by this Section 6, provided and to the extent this Section is then applicable, and unless and until: (i) a registration statement under the Act is in effect covering such proposed disposition (and such disposition is made in accordance with such registration statement); or (ii) (A) Holder has notified the Company of the proposed disposition and has furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (B) if requested by the Company, Holder has furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of securities under the Act. The Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. (iii) Notwithstanding the provisions of Paragraphs (i) and (ii) above, no such registration statement or opinion of counsel shall be necessary for a transfer by a Holder to any entity or person that is controlled by, controls or is under common control with the Holder, if the transferee agrees in writing to be subject to the terms hereof to the same extent as if it, he or she were the Holder hereunder. 7. Legends. The certificates evidencing the Securities may bear one or all of the following legends: (a) "These securities have not been registered under the Securities Act of 1933, as amended. They may not be sold, offered for sale, pledged or hypothecated in the absence of a registration statement in effect with respect to the securities under such Act or an opinion of counsel satisfactory to the Company that such registration is not required, unless sold pursuant to Rule 144 of such Act." (b) Any legend required by the laws of the State of New York. 8. Certificates for Shares. Upon the exercise of the purchase rights evidenced by this Warrant, one or more certificates for the number of Shares so purchased shall be issued as soon as practicable thereafter (with appropriate restrictive legends, if applicable), and in any event within 30 days of the delivery of the exercise notice. If the Holder exercises this Warrant with respect to less than all of the Shares that may be purchased under this Warrant, the Company shall execute a new warrant in the form of this Warrant for the balance of such Shares and deliver such new warrant to Holder. 9. Issuance of Shares. The Company covenants that it will at all times keep available such number of authorized shares of its common stock, free from all preemptive rights with respect thereto, that will be sufficient to permit the exercise of this Warrant for the full number of Shares specified herein. The Company covenants that the Shares, when issued pursuant to the exercise of this Warrant, will be duly and validly issued, fully paid and nonassessable and free from all taxes, liens, and charges with respect to the issuance thereof. 10. Adjustment of Exercise Price and Number of Shares. The number of and kind of securities purchasable upon exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time as follows: (a) Subdivisions, Combinations and Other Issuances. If the Company shall at any time prior to the expiration of this Warrant subdivide its common stock, by split or otherwise, or combine its common sock, the number of Shares issuable on the exercise of this Warrant shall forthwith be proportionately increased in the case of a subdivision, or proportionately decreased in the case of a combination. Appropriate adjustments shall also be made to the purchase price payable per Share, but the aggregate purchase price payable for the total number of Shares purchasable under this Warrant (as adjusted) shall remain the same. Any adjustment under this Section 10(a) shall become effective at the close of business on the date the subdivision or combination becomes effective. (b) Reclassification, Reorganization and Consolidation. In case of any reclassification, capital reorganization, or change in the common stock of the Company (other than as a result of a subdivision or combination provided for in Section 10(a) above), then, as a condition of such reclassification, reorganization, or change, the Company or its successor shall deliver to Holder duly executed documents granting Holder the right at any time prior to the expiration of this Warrant to purchase, at a total price equal to that payable upon the exercise of this Warrant, the kind and amount of shares of stock and other securities and property receivable in connection with such reclassification, reorganization, or change by a holder of the same number of shares of common stock as were purchasable by the Holder immediately prior to such reclassification, reorganization, or change. In any such case, the Company or its successor shall make appropriate provisions with respect to the rights and interest of the Holder so that the provisions hereof shall thereafter be applicable with respect to any shares of stock or other securities and property deliverable upon exercise hereof, and appropriate adjustments shall be made to the purchase price per Share payable hereunder, provided the aggregate purchase price shall remain the same. (c) Notice of Adjustment. When any adjustment is required to be made in the number or kind of shares purchasable upon exercise of the Warrant, or in the Exercise Price, the Company shall promptly notify the Holder of such event and of the number of shares of common stock or other securities thereafter purchasable upon exercise of this Warrant. (d) No Impairment. The Company and the Holder will not, by any voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company or the Holder, respectively. Each party will in good faith take such action as may be necessary or appropriate in order to protect the rights of the Company and the Holder against impairment. 11. No Fractional Shares or Scrip. No fractional Shares or scrip representing fractional Shares shall be issued upon the exercise of this Warrant, but in lieu of such fractional Shares the Company shall make a cash payment therefor on the basis of the Exercise Price then in effect. 12. No Shareholder Rights. Prior to exercise of this Warrant, the Holder shall not be entitled to any rights of a shareholder with respect to the Shares, including, without limitation, the right to vote such Shares, receive dividends or other distributions thereon or be notified of shareholder meetings. Holder shall not be entitled to any notice or other communication concerning the business or affairs of the Company. However, nothing in this Section 12 shall limit the right of the Holder to be provided the notices required under this Warrant. 13. Successors and Assigns. Subject to the conditions imposed by Section 6(g) herein, the terms and provisions of this Warrant shall inure to the benefit of, and be binding upon, the respective successors and assigns of the parties. 14. Piggy Back Registration Rights. (a) Rights. The Company shall notify Holder (a "Registration Notice") at least 20 days prior to the filing of any registration statement under the Act for purposes of a public offering of the common stock of the Company (including but not limited to registration statements relating to secondary offerings of the Company's common stock, but excluding registration statements related to employee benefit plans or with respect to corporate reorganizations or other transactions under Rule 145 of the Act and excluding the registration statement filed in connection with the initial public offering of the Company's securities). Subject to the provisions of this Section 14, Holder may request that Company include all or a portion of the Shares held by Holder (as a result of the exercise of all or a portion or the Warrant) (the "Issued Shares") by providing Company with written notice within 15 days after receipt of Company's Registration Notice. Holder's notice must specify the number of Issued Shares it desires to include in the registration statement. (b) Reduction. If the registration statement under which the Company gives notice under this Section 14 is for an underwritten offering, the Company shall so advise Holder. Holder's right to have the Issued Shares included in a registration pursuant to this Section 14 shall be conditioned upon Holder's entering into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding anything to the contrary in this Warrant, if the underwriter determines in good faith that marketing factors require a limitation on the number of shares to be underwritten, the number of shares that may be included in the underwriting shall be allocated as follows: (i) first, to the Company; and then (ii) to the Holder on a pro rata basis based on the total number of securities requested by all holders of the Company's securities (each, a "Securities Holder") to be included in such underwriting. (c) Holder's Right to Withdraw; Company's Right to Terminate. If Holder disapproves of the terms of any such underwriting, Holder may elect to withdraw therefrom by written notice to the Company and the underwriter, delivered at least ten days prior to the effective date of the registration statement. Any securities excluded or withdrawn from such underwriting shall be excluded and withdrawn from the registration. The Company may terminate or withdraw any registration initiated by it under this Section 14 prior to the effectiveness of such registration whether or not Holder has elected to include any Issued Shares in such registration. (d) The Company agrees that if the Holders request inclusion of the Issued Shares in a registration statement filed by the Company under this Section 14, the Company agrees to keep such registration statement continuously effective for a period ending on the earlier of (A) the date on which all Issued Shares covered by such registration statement have been sold and (B) the date on which the Holders may sell all of the Issued Shares covered by such registration statement without restriction pursuant to Rule 144 promulgated under the Act. 15. Amendments and Waivers. The terms of this Warrant may be amended or waived (either generally or in a particular instance and either retroactively or prospectively), with the written consent of the Company and the Holder. Any such amendment or waiver shall be binding upon each holder of any Shares purchased under this Warrant at the time outstanding, each future holder of all such Shares, and the Company. 16. Notices. All notices required under this Warrant shall be deemed to have been given or made (i) upon personal delivery, (ii) upon confirmation receipt that the communication was successfully sent to the applicable number if sent by facsimile; (iii) one day after being sent, when sent by reputable overnight courier service, or (iv) five days after posting when sent by registered or certified mail. Notices to the Company shall be sent to the principal office of the Company (or at such other place as the Company shall notify the Holder hereof in writing). Notices to the Holder shall be sent to the address of the Holder on the books of the Company (or at such other place as the Holder shall notify the Company hereof in writing). 17. Captions. The section and subsection headings of this Warrant are for convenience only and are not to be construed as part of as a limitation on the provision to which they refer. 18. Governing Law. New York law governs the interpretation of this Warrant. 19. Survival. The warranties, representations and covenants contained in or made pursuant to this Warrant shall survive the execution, delivery and exercise of this Warrant. IN WITNESS WHEREOF, this Warrant has been executed as of the day and date first indicated above. DIRECTRIX, INC. By:____________________________________ J. Roger Faherty, Chairman & CEO ANDRITA MANAGEMENT LLC By:____________________________________ Name: Title: NOTICE OF EXERCISE To: [________________________] The undersigned warrant holder (the "Holder") elects to [check applicable subsection]: [ ] (a) purchase _________________ Shares of common stock of [________________], pursuant to the terms of the attached Warrant. The Holder has included with this notice payment of the Exercise Price per Share required under such Warrant, in the aggregate amount of $_______________. OR [ ] (b) exercise the attached Warrant for [all of the Shares] [________ of the Shares] [cross out inapplicable phrase] purchasable under the Warrant pursuant to the net exercise provisions of Section 5 of such Warrant. Holder hereby represents and warrants that it is acquiring such Shares for its own account for investment purposes only, and not for resale or with a view to distribution of such shares or any part thereof. Capitalized terms not otherwise defined in this notice are defined in the Warrant. HOLDER: - ----------------------------------------- [signature] - ----------------------------------------- [Print Name] Address:__________________________________ __________________________________________ Date:_____________________________________ Name in which shares should be registered: __________________________________________ EX-10.22 5 ex10-22.txt SUBLEASE AGREEMENT BTW PLA & DRCX SUBLEASE THIS SUBLEASE ("Sublease") dated as of September ,2001, is made between, and Playboy Entertainment Group, Inc., a Delaware corporation ("Playboy") and Directrix, Inc., a Delaware corporation ("Directrix"). RECITALS A. Playboy is the tenant under that certain Agreement of Lease dated as of September , 2001 ("Master Lease"), pursuant to which Kingston Andrita LLC, a Delaware limited liability company ("Master Landlord"), leased to Playboy the real property located in the City of Los Angeles, County of Los Angeles, State of California, described in attached Exhibit "A", and commonly known as 3030 Andrita Street, Los Angeles, California, and more particularly described in the Master Lease ("Master Premises"). B. This Sublease is also made with reference to that certain Master Services Agreement (the "Services Agreement") between Playboy and Directrix, that certain Guarantee between Playboy Enterprises, Inc. ("PEI") and Kingston (the "Guarantee"), that certain Equipment Lease Tri Party Agreement ("Equipment Lease Agreement") among Directrix, Playboy and CapitalSource Finance, LLC, that certain Security Agreement made by Directrix in favor of Playboy ("Security Agreement"), that certain Common Stock Purchase Warrant (the "Warrant") issued by Directrix to Playboy and that that certain Registration Rights Agreement (the "Registration Rights Agreement") between Directrix and Playboy. The Master Lease shall be entered into concurrently with this Sublease. The parties anticipate entering into one or more of the other agreements referred to in this Recital B or may enter into other agreements in lieu thereof. The Master Lease, Master Services Agreement, Guarantee, the Equipment Lease Agreement and the Security Agreement and/or any agreements or documents which supersede theses agreements and which are entered into by the parties as part of the transactions associated with the Master Premises are referred to collectively as the "Transaction Documents." C. Capitalized words or terms not otherwise defined shall have the meaning set forth in the Master Lease. 1. SUBLEASE. Playboy subleases to Directrix on the terms and conditions in this Sublease that portion of the Master Premises described as approximately 62,207 square feet of office, technical, studio and basement space (the "Directrix Premises") together with the right to use in common with Playboy and other tenants of the Master Premises, the Common Area (as defined below). The outline of the Directrix Premises is set forth in attached Exhibit "B". 2. SUBLEASE TERM. The term of this Sublease shall commence on the earliest of (i) the Substantial Completion Date, (ii) the Studio Delivery Date, (iii) the Master Control Room Start Date or (iv) the date on which Directrix commences to occupy any material portion of the Directrix Premises ("Sublease Commencement Date") and shall terminate on the Expiration Date unless sooner terminated as provided for herein. Playboy shall furnish Directrix or cause the Master Landlord to furnish to Directrix a copy of any notice delivered under Master Lease Section 15.1(d) regarding substantial completion of Landlord's Work or Studio A being in operational condition. 3. SUBLEASE RENT. 3.1 Sublease Base Rent. (a) Directrix is obligated to pay to Playboy as minimum rent an annual rent (the "Sublease Base Rent") as follows: (i) for the period beginning on the earlier of the Substantial Completion Date or the date on which Directrix commences to occupy any material portion of the Directrix Premises ("Sublease Base Rent Commencment Date") and ending on the day preceding the first anniversary thereof (such period being the first "Sublease Year" and each successive twelve month period thereafter also being referred to herein individually as a "Sublease Year" and collectively as "Sublease Years", $1,193,308.49 per annum, payable in advance in equal monthly installments of $99,442.37; (ii) for the second Sublease Year, $1,229,107.74 per annum, payable in advance in equal monthly installments of $102,425.65; (iii) for the third Sublease Year, $1,265,980.98 per annum, payable in advance in equal monthly installments of $105,498.41; (iv) for the fourth Sublease Year, $1,303,960.41 per annum, payable in advance in equal monthly installments of $108,663.37; (v) for the fifth Sublease Year, $1,343,079.22 per annum, payable in advance in equal monthly installments of $111,923.27; (vi) for the sixth Sublease Year, $1,383,371.60 per annum, payable in advance in equal monthly installments of $115,280.97; (vii) for the seventh Sublease Year per annum, $1,424,872.74 payable in advance in equal monthly installments of $118,739.40; (viii)for the eighth Sublease Year $1,467,618.93 per annum, payable in advance in equal monthly installments of $122,301.58; (ix) for the ninth Sublease Year $1,511,647.49 per annum, payable in advance in equal monthly installments of $125,970.62; (x) for the tenth Sublease Year, $1,556,996.92 per annum, payable in advance in equal monthly installments of $129,749.41; and (xi) for the eleventh Sublease Year through the Expiration Date, a rate per annum equal to $1,712,696.61 per annum, payable in advance in equal monthly installments of $142,724.35. (b) Directrix is obligated to pay Playboy Sublease Base Rent for Studio A at the rate of $35,417.44 per month payable in advance together with any Sublease Additional Rent related thereto commencing concurrently with Playboy becoming obligated to pay Base Rent on Studio A as provided for in Master Lease Section 2.2(a), after taking into account any applicable abatement period. (c) Directrix is obligated to pay Playboy Sublease Base Rent for the Master Control Room at the rate of $25,000.00 per month payable in advance together with any Sublease Additional Rent related thereto commencing concurrently with Playboy becoming obligated to pay Base Rent on the Master Control Room as provided for in Master Lease Section 2.2(c), after taking into account any applicable abatement period. (d) If the Base Rent payable by Playboy under the Master Lease is increased under Master Lease Section 2.2(e), the Sublease Base Rent shall be increased by multplying such increase by Directrix' Share (as that term is defined in Section 3.3.3 below). (e) Playboy hereby authorizes and directs Directrix to pay the Sublease Rent (which includes the Sublease Base Rent and Sublease Additional Rent as defined below) to Playboy at 9242 Beverly Boulevard, Beverly Hills, California 902010, or at such other address as Playboy designates by written notice to Directrix. 3.2 Operating Expenses. In addition to paying the Sublease Base Rent specified in Section 3.1 above, Directrix shall pay "Directrix' Share" of the annual "Operating Expenses," as the quoted terms are defined below. Directrix' Share of the Operating Expenses and any other charges hereunder shall be referred to as the "Sublease Additional Rent." The obligation of Directrix to pay the Sublease Additional Rent shall survive the expiration of the Term. The Sublease Base Rent and the Sublease Additional Rent are herein collectively referred to as the "Sublease Rent." 3.3 Definitions of Key Terms Relating to Sublease Additional Rent. As used in this Sublease, the following terms shall have the meanings set forth below: 3.3.1 "Expense Year" shall mean each calendar year in which any portion of the Term falls, through and including the calendar year in which the Expiration Date falls. 3.3.2 "Operating Expenses" shall mean all necessary and reasonable expenses, costs and amounts of every kind and nature which Playboy pays or accrues during any Expense Year because of or in connection with the management, maintenance, security, repair, replacement, restoration or operation of the Master Premises, or any portion thereof, except as excluded below. Without limiting the generality of the foregoing, Operating Expenses shall specifically include any and all of the following: (1) The operation, repair, replacement and maintenance, in neat, clean, good order and condition of (i) the Master Premises, including parking areas, loading and unloading areas, trash areas, roadways, parkways, walkways, driveways, landscaped areas, bumpers, irrigation systems; (ii) Common Area lighting facilities, fences and gates, and to the extent not repaired or maintained by Master Landlord, the roofs and roof rainage systems; (iii) Landlord's Work, to the extent not required to be repaired or maintained by Master Landlord, and any leasehold improvements constructed or installed by Playboy pursuant to this Sublease, but excluding costs or expenses associated with maintaining any Alteration made by Playboy or any other tenant of the Master Premises (which shall be the sole obligation of the party who made or for whom such Alteration or improvement were made); (iv) exterior signs (excluding signs devoted to the exclusive use of a tenant of the Building) and any tenant directories; (v) any fire detection and/or sprinkler systems; (vi) heating, ventilation and air conditioning systems and utility systems; and (vii) any other equipment and components of the Common Areas; (2) The cost of water and gas to the Master Premises, and telephone and electricity to service the Common Areas; (3) Trash disposal, janitorial, pest control services, security services, and the costs of any environmental inspections (subject to subsection (p) below and excluding any such inspections necessitated by the existing condition of the Master Premises); (4) The cost of licenses, certificates, permits and inspections and the cost of contesting any governmental enactments or exactions which may affect Operating Expenses, and the costs incurred in connection with any governmentally-mandated transportation system management program or similar program; (5) The cost of all insurance carried by Playboy in connection with the Master Premises, to the extent required in the Master Lease; (6) Fees and other costs, including reasonable management fees, consulting fees, legal fees and accounting fees, of all contractors and consultants in connection with the management, operation, maintenance and repair of the Master Premises; (7) The fair and reasonable allocation of the fair rental value of any management office space; (8) Amortization (including interest at the published prime interest rate upon unsecured loans charged by the Chase Manhattan Bank on the unamortized cost) over the useful life, in accordance with GAAP, of the cost of acquiring personal property used in the maintenance, operation and repair of the Master Premises (excluding any trade fixtures and equipment thereon), or any portion thereof; and payments under any equipment rental agreements on equipment used in the maintenance and operation of the Master Premises; (9) Amortization (including interest at the published prime interest rate upon unsecured loans charged by the Chase Manhattan Bank on the unamortized cost) over the useful life, in accordance with GAAP, of the cost of capital improvements or other costs incurred in connection with the Master Premises that are required by the Master Lease, if any, or which are replacements or modifications of nonstructural items located in the Common Areas required to keep the Common Areas in good order or condition, or are required under any Law, except capital repairs, replacements or other improvements required to be paid or remedied by Master Landlord under the Master Lease; (10) Impositions (as defined in the Master Lease); (11) Costs, fees, charges or assessments imposed by, or resulting from any mandate imposed on Playboy by, any federal, state or local government for fire and police protection, trash removal, community services, or other services relating to the Master Premises (and not merely Playboy or its business) which do not constitute Impositions. (12) Any amounts paid or incurred by Playboy under Master Lease Section 13.3(ii) and (iii) and not Section 13.3(i), which amounts shall be payable solely by Directrix, and Sublease Section 8.1. Notwithstanding anything to the contrary contained in the above definition, Operating Expenses shall not include: (a) Depreciation, amortization, interest, principal and other payments on mortgages, on any other form of monetary encumbrance or on any form of financing for Playboy relating to the Master Premises, or Playboy's equipment or personal property, if any, except as otherwise provided for in clauses (8) and (9) above; (b) Any marketing costs, legal fees, space planners' fees, advertising and promotional expenses, tenant improvement costs, brokerage fees and other costs and expenses incurred in connection with future leasing, or in connection with any assignment, sublease, or similar transactions in the Master Premises; (c) Any costs which are actually reimbursed by any tenant or occupant of the Project, or any third party (including Master Landlord), or by insurance carried by Playboy, by any tenant or by anyone else and is actually paid to Playboy; (d) Expenses in connection with services or other benefits which are not provided to Directrix but which are provided to other tenants or occupants, if any; (e) Any costs associated with the operation of the business of the corporation or entity which constitutes Playboy (or of which Playboy is a direct or indirect subsidiary, parent or affiliate) (as the same are distinguished from the costs of operation of the Master Premises); (f) Late fees, penalties, and interest on past due amounts, unless Directrix is late in making payment of Sublease Additional Rent hereunder; (g) Any payments paid to Playboy or to subsidiaries or affiliates of Playboy or any partner thereof for goods or services in the Master Premises to the extent the same exceeds the cost of such goods or services if rendered by qualified, first-class unaffiliated third parties in the same general area on a competitive basis; provided Playboy shall have no obligation to obtain competitive bids; (h) Any charitable or political contributions; (i) Any repairs or replacements actually covered by warranties or guaranties (but only to the extent of such actual recovery under such warranty or guaranties) and damage and repairs actually paid for or reimbursed from any insurance policy carried by Playboy in connection with the Master Premises (but only to the extent of such actual payment or reimbursement) or which are necessitated because of Playboy's misuse or willful misconduct; (j) Insurance on and any other costs related to Playboy's trade fixtures, furniture, equipment and other personal property; (k) Electricity relating to the Master Premises other than the Common Areas as well as the cost of any utilities separately metered and paid by Directrix for the Directrix Premises; (l) Any costs or expenses incurred by Playboy attributable to a default by Playboy under the Master Lease unless Playboy's default under the Master Lease is precipitated by Directrix' default under the Transaction Documents; (n) Any fees paid to Playboy attributable to property management services performed by Playboy for the Master Premises to the extent the such fees exceed the cost of such services if rendered by qualified, first-class unaffiliated third parties in the same general area on a competitive basis provided Playboy shall have no obligation to obtain competitive bids; (o) Any Playboy employee expense above the level of building manager; and (p) Subject to the provisions of Master Lease Section 6.9 as incorporated herein by reference, any cost or expenses to the extent not covered by insurance incurred as a result of the negligent acts or omissions or willful misconduct of Playboy, Directrix or other tenant or occupant of the Master Premises which shall be the responsibility of the party which caused such cost or expense to be incurred. 3.3.3 "Directrix' Share" shall mean 55.3%. 3.3.4 "Common Area" shall mean all areas and facilities which are not leased or held for lease to tenants or occupied by Playboy and which are within the exterior boundary line of the land described in Exhibit "A" and the interior utility raceways and installations within the Master Premises that are typically considered common area in office buildings in Los Angeles County and are designated by Playboy from time to time for the general non-exclusive use of Playboy, Directrix or other tenants of the Master Premises and their respective employees, suppliers, shippers, customers, contractors and invitees, including parking areas, loading and unloading areas, trash areas, roadways, walkways, driveways and landscaped areas. 3.4 Statement of Estimated Operating Expenses. Playboy will deliver to Directrix within 30 days of the date hereof, an expense estimate statement (the "Estimate Statement") which shall set forth Playboy's reasonable estimate (the "Estimate") of the total amount of Operating Expenses for the first Expense Year, which Estimate Statement identifies the Estimate for Directrix' Share of the Operating Expenses. Playboy shall endeavor to provide a new Estimate Statement on or before the anniversary of each Expense Year. The failure of Playboy to timely furnish the Estimate Statement for any Expense Year shall not preclude Playboy from enforcing its rights to collect Directrix' Share of the Operating Expenses. Directrix shall pay monthly an amount equal to one-twelfth (1/12) of Directrix' Share of the Estimate Statement, as such amount may increase or decrease each Expense Year. Playboy shall maintain books and records with respect to the Operating Expenses in accordance with GAAP. 3.5 Statement of Actual Operating Expenses and Payment by Directrix. As soon as reasonably possible after the end of each Expense Year, but in no event later than three months following the end of any Expense Year, Playboy shall deliver to Directrix a statement (the "Statement") which shall state the Operating Expenses incurred or accrued for such preceding Expense Year, and which shall indicate the amount of the difference, if any, between the Estimate Statement and the Statement. If the Operating Expenses described in the Statement exceed the Estimate Statement, Directrix shall pay the full amount of the deficiency for such Expense Year with in thirty (30) days, and if Directrix paid more Operating Expenses as set forth in the Estimated Statement than the actual Operating Expenses set forth in the Statement, then Directrix shall receive a credit in the amount of Directrix' overpayment against the Sublease Rent next due under this Sublease. The failure of Playboy to timely furnish the Statement for any Expense Year shall not prejudice Playboy or Directrix from enforcing its rights under this Section provided Playboy delivers the Statement to Directrix within twelve (12) months of the year to which it relates. Even though the Term has expired and Directrix has vacated the Sublease Premises, when the final determination is made of Directrix' Share of Operating Expenses for the Expense Year in which this Lease and Sublease terminates, if a deficiency is present, Directrix shall immediately pay to Playboy such amount, and if Directrix paid more as estimated Operating Expenses than the actual Operating Expenses, Playboy shall promptly pay the deficiency to Directrix. 3.6 Audit Rights. Upon Directrix' written request given not more than one (1) year after Directrix' receipt of an Estimate Statement or Statement for a particular Expense Year, and provided that Directrix is not in default of its obligation to pay Sublease Rent after the giving of notice and expiration of any applicable cure period and has paid all amounts required to be paid under the Estimate Statement or Statement, as the case may be, Directrix shall have the right (but not the obligation), directly and through its agents, to inspect, copy and audit the Statements and such books and records with respect to Operating Expenses for the calendar year to which the Statement relates. Any objection to a Statement, or to any information reported therein, shall be deemed waived if not raised by written notice to Playboy within thirteen (13) months following delivery of such Statement. If Directrix discovers an error, an appropriate adjustment shall be made and either Playboy or Directrix shall reimburse the other for any amounts due within fifteen (15) days, together with interest at the Late Charge Rate. Directrix' right to inspect, copy and audit shall be exercisable upon reasonable prior written notice not more than once during any 365-day period and shall be conducted during business hours at Playboy's office at the Master Premises. Directrix shall keep any information gained from its review of Playboy's records confidential and shall not disclose it to any other party, except as required by law. If the audit discloses an overcharge of more than three percent (3%), Playboy shall pay the cost of such audit. 3.7 Late Payment. If any payment of Sublease Rent is not received by Playboy under this Sublease within ten (10) days of the day on which it first becomes due, a late charge on the sums so overdue, calculated at the Late Charge Rate from the due date thereof to the date on which actual payment of the overdue sums is received by Playboy, shall become due and payable to Playboy because of Directrix' failure to make prompt payment. If Playboy owes Directrix any other amounts under this Sublease which are not paid within ten (10) days after written notice thereof, a late charge on the sums so overdue, calculated at the Late Charge Rate from the due date thereof to the date on which actual payment of the overdue sum is received by Directrix, shall become due and payable to Directrix. 3.8 Shared Excess. If Directrix owes any Shared Excess under Master Lease Article 15, Directrix shall be obligated to pay the first $50,000 of such Shared Excess directly to Kingston (or, if Playboy has paid Directrix' share of the Shared Excess to Kingston, to Playboy as reimbursement therefore). If Directrix owes Shared Excess in excess of $50,000, Playboy shall pay such excess on Directrix' behalf and Playboy shall recover such excess by offsetting up to 10% of the Service Fees (as such term is defined under the Services Agreement) owed in any month by Playboy to Directrix until Playboy has recouped the amount of the Shared Excess paid by Playboy on Directrix' behalf. If Directrix fails to pay its share of the Shared Excess as provided for in the preceding two sentences, such failure may be treated by Playboy as an event of default under this Sublease and the Services Agreement and Playboy will have all of its rights and remedies as provided for under this Sublease and the Services Agreement. 4. INCORPORATION OF MASTER LEASE PROVISIONS INTO THIS SUBLEASE. 4.1 Except as specifically provided below, or otherwise superseded or modified by the provisions of this Sublease and except where the Master Lease includes specific provisions with respect to Directrix' rights and obligations, all terms, covenants and conditions of the Master Lease are incorporated into and made a part of this Sublease by reference with the same force and effect as if such terms, covenants and conditions were completely set forth in this Sublease except that the words Landlord and Tenant in the Master Lease shall be construed to mean, respectively, Playboy and Directrix in this Sublease, and the words Premises in the Master Lease shall be construed to mean Directrix Premises in this Sublease, and the word Lease in the Master Lease shall be construed to mean this Sublease. For all time limits contained in the Master Lease for Playboy to give notices, make demands or for Directrix' performance of any act (such periods are referred to as "Notice Periods") that have a duration of at least six (6) days, such Notice Periods shall be modified in this Sublease by shortening the Notice Periods by three (3) days, so that in each instance, Directrix' Notice Periods shall be three (3) days shorter under this Sublease than Playboy's Notice Periods under the Master Lease. For all Notice Periods in the Master Lease that have a duration of less than six (6) days, Directrix' Notice Period shall be half of the number of days in such Notice Period that Playboy has, rounded down to the nearest whole integer, except as relating to payment of Sublease Base Rent, in which case Directrix shall have three (3) days to observe or perform. The following Articles and Sections of the Master Lease shall not be deemed incorporated into this Sublease: Section 2.2(a) and (b) (Base Rent); Section 3.1(a) and (b) (Payment of Impositions), Section 3.3 (Evidence of Payment), Section 3.4(b) (Proration of Impositions)Section 6.1(a) (Basic Insurance Coverage); Section 9.2(b) (Permitted Assignment and Subletting); Section 9.7 (Landlord's Sale or Conveyance); Article 10 (Mortgages); Section 11.1(b) (Maintenance of Premises); Section 11.2 (Free of Dirt, Etc.); Section 11.3 (No Obligation to Supply Utilities);; Section 15.1(f) (Studio Operational Condition); Article 22 (Notices); and Article 36 (Right of First Offer). 4.2 For the purpose of incorporating Article 15 of the Master Lease into this Sublease and construing its meaning, the word Landlord shall mean Master Landlord, the word Tenant shall mean Directrix, the word Premises shall mean Directrix Premises, and the word Lease shall mean this Sublease. Therefore, all obligations of Master Landlord to complete Landlord's Work contained in Master Lease Article 15 or the Work Letter, shall run directly between Directrix and Master Landlord with respect to Directrix Premises. Notwithstanding the provisions of Section 4.1 above, the time limits contained in Article 15 of the Master Lease for the giving of notices, making of demands or performing of any act shall NOT be deemed shortened. Playboy will exercise due diligence in attempting to cause Master Landlord to perform its obligations under Article 15 of the Master Lease for the benefit of Directrix and the Directrix Premises, but Playboy shall have no responsibility to Directrix for Master Landlord's failure to so perform. Directrix shall pay one half of the Shared Excess which is solely attributable to the Other Office Work Allowance (other than increases in the cost of Other Work Allowance which results from Above-Standard Work requested by Directrix which shall be payable solely by Directrix) if any, directly to Master Landlord in accordance with the requirements of the Master Lease. Directrix shall pay one third of the Shared Excess which is solely attributable to the Base Building Work (other than increases in the cost of Base Building Work which results from Above-Standard Work, which if requested by Playboy shall be payable solely by Playboy and if requested by Directrix, shall be payable solely by Directrix) in accordance with the requirements of the Master Lease. Directrix shall have no responsibility for Playboy's share of the Shared Excess attributable to the Playboy Office Work. Anything contained herein to the contrary notwithstanding, except for the cost of any special services requested by Playboy or Directrix (which shall be paid by the requesting party), Directrix shall pay or there shall be charged against the Landlord Work Allowance attributable to the Directrix Premises any portion of the design fees which are not the Master Landlord's responsibility. Each of Directrix and Playboy shall pay any additional costs of Landlord's Work for Above-Standard Work they request and shall bear all costs occasioned by any delay in the completion of Landlord's Work as a result of such Above-Standard Work. 4.3 Any obligation of Playboy which is contained in this Sublease by the incorporation by reference of the provisions of the Master Lease, may be observed or performed by Playboy using diligent efforts to cause the Master Landlord under the Master Lease to observe and/or perform the same, and Playboy shall have a reasonable time to enforce its rights to cause such observance or performance and to diligently pursue enforcement and Playboy shall have no liability to Directrix if Master Landlord fails to observe or perform its obligations provided Playboy has used commercially reasonable efforts to enforce its rights under the Master Lease. 4.4 If Playboy accepts possession of the Master Premises subject to the continued occupancy of FX and the FX Lease is assigned to and assumed by Playboy as provided for in Master Lease Section 1.3, Playboy shall assign the FX Lease to Directrix and Directrix shall assume the FX Lease pursuant to an assignment and assumption agreement substantially in the form of Master Lease Exhibit K except that Playboy shall be substituted for Kingston and Directrix shall be substituted for Playboy in each place such terms appear in the form assignment and assumption agreement. 5. MASTER LEASE OBLIGATIONS OF DIRECTRIX AND OF PLAYBOY. 5.1 Directrix shall hold Playboy free and harmless from all liability, judgments, costs, damages, claims or demands, including reasonable attorneys' fees, arising out of Directrix' failure to comply with or perform Directrix' obligations hereunder. Playboy shall hold Directrix free and harmless from all liability, judgments, costs, damages, claims or demands arising out of Playboy's failure to comply with or perform Playboy's obligations hereunder. 5.2 If Directrix shall breach any of Directrix' obligations hereunder then Playboy shall have the right, but not the obligation, after the lesser of five (5) business days notice to Directrix or the time within which Master Landlord may act on Playboy's behalf under the Master Lease, or without notice to Directrix in the case of an emergency, and without waiving or releasing Directrix from any obligations of Directrix hereunder, to cure such default of Directrix' obligations, in such manner and to such extent as Playboy shall deem necessary, and in exercising any such right to pay any incidental costs and expenses, employ attorneys, and incur and pay reasonable attorney's fees. Directrix shall pay to Playboy, within thirty (30) days upon written demand, all sums so paid by Playboy together with interest thereon at the Late Charge Rate. 5.3 If Playboy shall breach any of Playboy's obligations hereunder, then Directrix shall have the right, but not the obligation, after five (5) business days notice to Playboy or without notice to Playboy in the case of an emergency, and without waiving or releasing Playboy from any obligations of Playboy hereunder, to cure such default of Playboy's obligations, in such manner and to such extent as Directrix shall deem necessary, and in exercising any such right, to pay any incidental costs and expenses, employ attorneys, and incur and pay reasonable attorney's fees. Playboy shall pay to Directrix, upon thirty (30) days of written demand, all sums so paid by Directrix together with interest thereon at the Late Charge Rate. If not paid, Directrix shall have the right of reimbursement and offset from and against Playboy of any amounts owed by Directrix to Playboy under Section 25.3 of the Services Agreement or this Sublease, in Directrix' discretion . 5.4 If the Master Lease terminates as a result of a default or breach by Playboy or Directrix under this Sublease or the Master Lease, the defaulting party will be liable to the nondefaulting party for the damage suffered as a result of the termination. 5.5 Playboy shall give Directrix notice of its intention to exercise its right to terminate the Master Lease pursuant to 7.3(ii) thereof at least ten (10) business days before Playboy gives Master Landlord such notice of termination as required under Section 7.3(ii) of the Master Lease. If Playboy does plan on exercising its termination right, Directrix shall have the right within such ten (10) business day period to cause Playboy to assign the Master Lease to Directrix provided the Master Landlord shall agree to release Playboy from further liability under the Master Lease arising from and after the date of the assignment. Notwithstanding anything contained herein but subject to the provisions of the immediately preceding sentence, if the Master Lease gives Playboy any right to terminate the Master Lease in the event of the partial or total damage, destruction or condemnation of the Master Premises, the exercise of this right by Playboy will not constitute a default or breach. 6. EVENTS OF DEFAULT. 6.1 Directrix Cross Defaults. In addition to any other defaults specified herein and incorporated herein by reference to the Master Lease, the following events shall constitute a default under this Sublease: 6.1.1 If Directrix fails to observe or perform one or more of the terms, conditions, covenants or agreements of the Services Agreement and the Services Agreement is actually terminated by Playboy by reason of said default; 6.1.2 If under the Security Agreement, an Event of Default (as that term is defined in the Security Agreement) occurs and Playboy exercises any rights or remedies it may have as the secured party under the Security Agreement; or 6.1.3 If Playboy leases the Equipment (as that term is defined in the Services Agreement) to Directrix under Services Agreement Section 25.3 and Directrix defaults under the equipment lease agreement executed in connection therewith and such equipment lease agreement is actually terminated by Playboy by reason of said default. 6.2 Playboy Cross Defaults. In addition to any other defaults specified herein and incorporated herein by reference to the Master Lease, the following events shall constitute a default under this Sublease: 6.2.1 If Playboy fails to observe or perform one or more of the terms, conditions, covenants or agreements of the Services Agreement and the Services Agreement is actually terminated by reason of said default; or 6.2.2 If Playboy leases the Equipment (as that term is defined in the Services Agreement) to Directrix under Services Agreement Section 25.3 and in connection with such equipment lease, Playboy grants a security interest in the Equipment to Directrix and Directrix exercises any rights or remedies it may have as the secured party under such security agreement following a default by Playboy under such security agreement. 6.3 If Playboy or Directrix defaults hereunder, the nondefaulting party shall have such rights and remedies as are provided herein, in the Master Lease (as incorporated herein) or at law or equity all of which rights shall be cumulative. 6.4 If Directrix fails to make any payment owed to Playboy hereunder, Playboy shall have the right to offset the same against amounts owed to Directrix under the Services Agreement. 7. UTILITIES. Directrix shall obtain and pay for Directrix' entire separate supply of electric current used at the Directrix Premises by direct application to and arrangement with the public utility company servicing the Master Premises. Directrix shall install an electric meter and related equipment to measure Directrix' consumption of electric at its cost and expense or by direction of the Directrix Work Allowance for that purpose. Directrix agrees that at all times its use of electric current shall never exceed the capacity of the then existing feeder allocated to the Directrix Premises or the risers or wiring installation. In the event Directrix shall require additional feeders, risers or wiring to service the Directrix Premises, same shall be installed by Directrix at Directrix' sole cost and expense. Playboy shall in no way be liable or responsible to Directrix for any loss or damage or expense which Directrix may sustain or incur if either the quantity or character of electric service is changed or is no longer available or suitable for Directrix' requirements. Notwithstanding any provision to the contrary, Directrix shall be solely responsible for all utilities used in connection with the studios and related technical areas. 8. SERVICES TO BE PROVIDED BY PLAYBOY; DIRECTRIX' OBLIGATION TO MAINTAIN DIRECTRIX PREMISES. 8.1 Playboy shall provide the following services: Maintenance and cleaning of the Master Premises, including the alleys and curbs in front of or adjacent to the Master Premises, pipes, mains and other utility systems within the Master Premises, maintenance and repair of the fire alarm system and all other equipment and components which are used in connection with the Master Premises; maintenance and repair of Landlord's Work (but not Alterations which shall be the responsibility of the tenant who made or for whom such Alterations were made); adequate lighting of parking lot and sidewalks during dusk to dawn hours; maintenance of plants and exterior landscaping in the Common Areas; janitorial and clean-up service for the Master Premises, including rubbish removal. Subject to limitations imposed by all governmental rules, regulations and guidelines applicable thereto, Playboy shall provide heating, ventilation and air conditioning (HVAC) to the Directrix Premises when necessary for normal comfort, for normal office use in the Directrix Premises from 8:00 A.M. to 6:00 P.M. Monday through Friday, and on Saturdays from 9:00 A.M. to 12:00 P.M. (collectively, the "Office Hours"), for the date of observation of New Years Day, President's Day, Independence Day, Labor Day, Memorial Day, Thanksgiving Day, Christmas Day and, at Playboy's discretion, other locally or nationally recognized holidays which are observed by other comparable buildings in the vicinity of the Master Premises (collectively, "Holidays") and on a seven days per week, 24 hours per day, 365 days per year basis for Master Control Room, core room, production control rooms, telephone room and similar technical areas and rooms. Playboy shall provide city water from the regular outlets for drinking, lavatory and toilet purposes in the Common Areas and to the designated outlets of Landlord's Work. Playboy shall provide janitorial services to the Directrix Premises five (5) days per week, except on the date of observation of the Holidays. Subject to factors outside Playboy's control, Directrix shall have access to the Directrix Premises and the parking facilities 24 hours per day, 7 days per week, 52 weeks per year. 8.2 If by reason of an Unavoidably Delay, Playboy shall be unable to fulfill its obligations under this Sublease or shall be unable to supply any service which Playboy is obligated to supply and except for any abatement rights contained n the Master Lease, this Sublease and Directrix' obligation to pay Sublease Rent hereunder shall in no way be affected, impaired or excused and Playboy shall have no liability to Directrix on account thereof. 8.3 Directrix shall take good care of the Directrix Premises, and all Alterations within the Directrix Premises and shall keep and maintain the Directrix Premises (including all of the foregoing) in good and safe order and condition, and shall make all nonstructural repairs therein and thereon, ordinary and extraordinary, foreseen and unforeseen, necessary to keep the Directrix Premises in good and safe order and condition, howsoever the necessity or desirability therefore may occur, except to the extent any such maintenance, repair or replacement is Master Landlord's responsibility pursuant to the Master Lease or is Playboy's obligation pursuant to this Sublease. Directrix shall cooperate fully with Playboy at all times and abide by all regulations and requirements that Playboy may reasonably prescribe for the proper functioning and protection of the HVAC, electrical, mechanical and plumbing systems. 9. PARKING. Directrix shall be entitled to use without charge 30 unreserved parking spaces on those portions of the Common Areas to be agreed to by Playboy and Directrix. Directrix shall not use more parking spaces than the amount specified. Playboy may regulate the loading and unloading of vehicles by adopting reasonable rules and regulations for the management, safety, care and cleanliness of the grounds and the parking areas. Directrix shall not permit or allow any vehicles that belong to or are controlled by Directrix or Directrix' employees, suppliers, shippers, customers, contractors or invitees to be loaded, unloaded, or parked in areas other than those designated by Playboy for such activities. Directrix shall not service or store any vehicles in the Common Areas. 10. PLAYBOY'S RIGHT TO PERFORM MASTER LANDLORD'S OBLIGATIONS. If Playboy seeks to cure default of Master Landlord and exercise the offset remedies available to it pursuant to Section 19.8 of the Master Lease, Playboy shall, concurrently with the notices required to be sent to Master Landlord, send Directrix copies of such notices. If Master Landlord shall not have commenced to cure such default within the time periods provided in the Master Lease, then Playboy may, at its option, undertake to cure such default and Directrix shall pay Directrix' Share of Playboy's cost to cure within ten (10) days of written notice from Playboy, together with statements or invoices evidencing the cost thereof. If Master Landlord disputes Playboy's entitlement to reimbursement of such cost for any reason, then Directrix and Playboy shall join together and share the costs of arbitration as provided in Master Lease Section 19.8. If Playboy's position is sustained in such arbitration, and Playboy is thereby entitled to offset Rent as provided in Section 19.8 of the Master Lease, then Directrix shall be entitled to offset Directrix' Share of such offset amount against ensuing installments of Sublease Base Rent under this Sublease. 11. ASSIGNMENT AND SUBLETTING. Playboy's rights to assign the Master Lease are set forth in the Master Lease Article 9. Directrix' rights to assign this Sublease or sublease all or any portion of the Directrix Premises are also set forth in the Master Lease Article 9 as incorporated herein as provided for in Section 4.1 with the following modifications: (i) Directrix may not assign this Sublease on a change in control as contemplated by the first sentence of Master Lease Section 9.2(a) without Playboy's consent, which consent shall not be unreasonably withheld or delayed, unless Directrix is permitted to assign the Services Agreement to the proposed assignee without Playboy's consent under Services Agreement Section 27, (ii) if Playboy consents to the assignment of the Services Agreement under Services Agreement Section 27 and Directrix requests assignment of this Sublease to the same assignee, Playboy shall be deemed to have consented to the assignment of this Sublease to such assignee, (iii) with regard to a proposed subletting by Directrix, if Directrix complies with the provisions of Master Lease Section 9.2(b)(x) and Kingston consents to such sublet, Playboy shall also have the right to approve such sublet, such approval not to be unreasonably withheld or delayed, and (iv) Directrix may not assign or sublet to, or otherwise permit occupancy of any portion of the Directrix Premises by, a Competing Adult Business, as that term is defined in Services Agreement Section 14.5. 12. CONTINGENT RIGHT OF FIRST OFFER. If Directrix shall have the right to purchase the Master Premises pursuant to Article 36 of the Master Lease and provided Directrix is not then in default, beyond applicable notice and cure periods under this Agreement or any of the other Transaction Documents, Directrix shall have the first option to exercise the right to purchase the Premises set forth in the Offer Notice. Notwithstanding the provisions of Section 4.1, if Directrix, in its sole discretion elects to acquire the Premises, it shall send the Election Notice contemplated by Master Lease Section 36 to Master Landlord, with a copy to Playboy within twenty (20) days of its receipt of the Offer Notice. If Directrix does not send the Election Notice within such twenty (20) day period, Directrix will be deemed to have waived its rights under Master Lease Article 36 and the Offer Notice and to have assigned such rights to Playboy. If Directrix does send the Election Notice within such twenty (20) day period, Directrix shall offer to Playboy the opportunity to participate with Directrix in the acquisition of the Property in such manner that Directrix and Playboy shall become equal co-owners of the Property and shall each be responsible for half of the purchase price for the Master Premises. 13. COVENANT NOT TO CONDUCT BUSINESS PRIOR TO SUBSTANTIAL COMPLETION DATE. Each of the parties covenants and agrees that it will not commence occupancy of any portion of the Master Premises for the conduct of business prior to the Substantial Completion Date other than (i) Studio A and the technical areas associated with Studio A and (ii) the Master Control Room and the technical areas associated with the Master Control Room. If a party, in violation of the foregoing covenant, causes the Premises Base Rent Commencement Date to occur prior to the Substantial Completion Date, such party shall be responsible for all of the Base Rent payable until such time as, but for such action by such party, the other party would have been obligated to begin paying Base Rent or Sublease Base Rent, as the case may be. 14. ATTORNEY FEES. If either party commences an action against the other in connection with this Sublease, the prevailing party will be entitled to recover costs of suit and reasonable attorney fees. 15. CONSENTS AND APPROVALS. If the Master Landlord fails to acknowledge any request for approval or consent from Directrix, Playboy shall immediately make such request on Directrix' behalf. In any such instance, if the Master Landlord refuses to grant its consent or approval, Playboy shall also be deemed to have refused to grant its consent or approval and such refusal shall be deemed reasonable, provided, however, that at Directrix' request and at Directrix' cost, Playboy shall take such steps as may be reasonably requested by Directrix, including, without limitation, commencing legal action against Master Landlord, in order to contest and/or seek such remedies as may be available on account of Master Landlord's refusal to consent to the matter in question. If, as a result of Master Landlord's refusal to grant its consent or approval, Directrix contests or seeks other remedies as provided for in the preceding sentence, Directrix shall (i) advance to Playboy any cost incurred by Playboy in connection therewith and (ii) indemnify Playboy from and against any costs, losses, liabilities, claims or other damages (including reasonable attorney's fees) incurred by Playboy as result thereof. Notwithstanding any other provision of this Sublease or the Master Lease to the contrary, neither party will require any changes to Landlord's Work or the Construction Drawings or request Above-Standard Work or otherwise take any action which could result in an increase in Landlord's Work if the other party would be obligated to pay all or any portion of such increased cost without the prior written consent of the other party. 16. ASBESTOS REALTED CALIMS. With respect to any claims, losses, damages and costs (including reasonable attorney's fees) related to the presence of asbestos in the Property incurred by Playboy ("Asbestos Related Claims"), Playboy shall first seek indemnification for such Asbestos Related Claims from Kingston as provided for in the Master Lease. If Kingston fails to provide Playboy indemnification from any Asbestos Related Claims, Directrix shall indemnify Playboy for, and hold Playboy harmless from and against, any and all Asbestos Related Claims. 17. NOTICES. 17.1 Whenever it is provided that notice, demand, request, consent, approval or other communication shall or may be given to, or served upon, either of the parties by the other or whenever either of the parties desires to give or serve upon the other any notice, demand, request, consent, approval or other communication with respect to the Sublease Premises or to the Master Premises, each such notice, demand, request, consent, approval or other communication shall be in writing and shall be effective for any purpose if given or served by a nationally recognized overnight courier service, by hand delivery or mailing by certified mail, postage prepaid, return receipt requested to the following addresses: To Playboy: Playboy Entertainment Group, Inc. 9242 Beverly Boulevard Los Angeles, California 90210 Attention: President With a copy to: Playboy Enterprises International, Inc. 680 North Lakeshore Drive Chicago, IL 60611 Attention: General Counsel And to: Dennis B. Ellman, Esq. Greenberg Glusker Fields Claman Machtinger & Kinsella LLP 1900 Avenue of the Stars Suite 2100 Los Angeles, California 90067-4590 To Directrix: Directrix, Inc. 236 West 26th Street, Unit 12W New York, New York 10001 Attention: Donald J. McDonald, Jr. With a copy to: Mindy Sheps, Esq. Wolf, Rifkin & Shapiro, LLP 11400 West Olympic Boulevard, 9th Floor Los Angeles, California 90064 Notices shall be deemed given or effective as provided for in Master Lease Section 22.2. 17.2 If either party hereto sends a notice to or receives a notice from the Master Landlord and such notice does not indicate that a copy thereof has been sent to the other party, such party shall forthwith furnish a copy of such notice to the other party. 18. SUCCESSORS AND ASSIGNS. The agreements, terms, covenants and conditions herein are binding upon Playboy and Directrix and, except as otherwise provided herein, their respective successors and assigns. 19. SUBORDINATION AND ATTORNMENT. Subject to the Directrix SNDA, this Sublease is and shall be at all times subject and subordinate to the Master Lease and if the Master Lease shall terminate this Sublease shall also terminate. Playboy covenants and agrees not to modify, amend or, except in the event of a default by the Master Landlord, terminate the Master Lease without Directrix' prior written consent, such consent not to be unreasonably withheld or delayed provided Directrix' rights and obligations hereunder or under any of the Transaction Documents are not materially altered. If Playboy shall cause an Event of Default under the Master Lease, then Master Landlord, at its option, and without being obligated to do so, may require Directrix to attorn to Master Landlord in which event Master Landlord shall undertake the obligations of Playboy under this Sublease from the time of the exercise of said option of termination of this Sublease, but Master Landlord shall not be liable for any defaults of Playboy under this Sublease. 20. ENTRY. Playboy reserves the right to enter the Directrix Premises on reasonable notice to Directrix to inspect the Directrix Premises, confirm performance by Directrix of the terms and conditions of this Sublease and to maintain and repair the Directrix Premises or the Master Premises. Playboy and its representatives shall not materially interfere with the operation of the Directrix Premises or the conduct of Directrix' business within the Directrix Premises except in the event of an emergency. 21. ENTIRE AGREEMENT. This Sublease sets forth all the agreements between Playboy and Directrix concerning the Directrix Premises, and except for the Transaction Documents, there are no other agreements either oralor written other than as set forth in this Sublease. Playboy and Directrix agree NOT to amend or modify the provisions of this Sublease without the written consent of Master Landlord, which consent shall not be unreasonably withheld; provided such limited modification will not increase Directrix' obligations under the Transaction Documents or reduce its rights under said agreements. 22. NO BROKER. Playboy and Directrix each warrant that they have not dealt with any real estate broker in connection with this transaction. Playboy and Directrix each agree to indemnify, defend, and hold the other harmless against any damages incurred as a result of the breach of the warranty contained in this Sublease. 23. GOVERNING LAW. This Sublease will be governed by and construed in accordance with California law. 24. SIGNING AUTHORITY. Each individual executing this Sublease on behalf of the corporate Directrix and Playboy entities represent and warrant that he or she is duly authorized to execute and deliver this Sublease on behalf of said entity in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the bylaws of said corporation. IN WITNESS WHEREOF, the parties have executed this Sublease as of the date first above written. "Playboy" PLAYBOY ENTERTAINMENT GROUP, INC, a Delaware corporation By: ___________________________________ Its: ___________________________________ "Directrix" DIRECTRIX, INC., a Delaware corporation By: ___________________________________ Its: ___________________________________ EX-10.23 6 ex10-23.txt LETTER AGREEMENT BTW PLA & DRCX PLAYBOY ENTERTAINMENT GROUP, INC. September 19, 2001 Mr. Roger Faherty President Directrix, Inc. 236 West 26th Street Unit Number 12-W New York, NY 10011 RE: Letter Agreement Dear Roger: This letter shall serve as a binding agreement between Playboy Entertainment Group, Inc. ("Playboy") and Directrix, Inc. ("Directrix") regarding Directrix' obligation, on the one hand, to provide network origination and studio facilities/tenant improvements and Playboy's obligation, on the other hand, to pay to Directrix service fees for the provision of such services on substantially the same terms and conditions as contained in the draft of the Master Services Agreement dated September 14, 2001. The parties further acknowledge and agree that (i) other than Directrix not agreeing, as part of the base Service Fees, to provide a second Pinnacle DekoCast (it being acknowledged that Playboy will provide equipment to enable the inclusion of digital effects for three (3) additional television networks) and (ii) open issues relating to the equipment lease financing provisions of Master Services Agreement Sections 25.1 and 25.3, the Master Services Agreement is in an executable form. With regard to the equipment lease financing issue and based on the totality of any Playboy proposed alternate equipment lease financing package, Playboy acknowledges that Directrix shall not be obligated to agree to equipment lease financing provided by Playboy on terms less favorable than those secured by Directrix from CapitalSource Finance, LLC and reflected in the August 20, 2001 term sheet approved by Playboy ("Term Sheet"). If Playboy is unable to secure alternate equipment lease financing, Playboy will use best efforts to enter into an equipment finance lease with CapitalSource; provided that, it is able to do so on reasonable financing terms and conditions which do not violate any of Playboy's bank covenants. In consideration of the foregoing, and other good and valuable consideration, Playboy and Directrix further agree, at Playboy's option, to enter into a customary property maintenance/management agreement, on usual terms and conditions, whereby Directrix shall have all of the same obligations concerning such property maintenance/management as originally provided in version 16 of the draft Sublease Agreement between Directrix and Playboy whereby Directrix was to sublet to Playboy a portion of the premises as described therein and Playboy was to bear its proportionate share of such obligations, preserving to the greatest extent possible, the economic terms, benefits and burdens relating to property maintenance/management contained in version 16 of the draft Sublease Agreement. Playboy further agrees to pay Directrix' documented, reasonable out-of-pocket legal and other fees as of September 14, 2001 directly related to Playboy's request to restructure the Andrita Studio transaction documents. If the foregoing accurately reflects the mutual understanding of the parties, please sign this letter agreement as provided below and forward to me an executed copy thereof. Sincerely, James L. English AGREED AND ACCEPTED: Directrix, Inc. By:______________________ Roger Faherty, President cc: B.Campbell, L. Havard, J. Jenest, H. Shapiro, A. Shepard, C. Zulfer -----END PRIVACY-ENHANCED MESSAGE-----