<PAGE>
As filed with the Securities and Exchange Commission on August 14, 1996
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File No. 0-18806
DMX INC.
(Exact name of Registrant as specified in its Charter)
Delaware 95-4275106
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11400 WEST OLYMPIC BOULEVARD, SUITE 1100, LOS ANGELES, CA 90064-1507
(Address of Principal Executive Offices) (Zip code)
(310) 444-1744
(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 such
filing requirements for the past 90 days. Yes [ X ] NO [ ]
At June 28, 1996, the Registrant had 59,586,594 shares of its Common Stock
outstanding, excluding 85,630 shares held as Treasury Stock.
Total number of pages in this report, including the cover page, is: 17
<PAGE>
PART I.
Item 1. Financial Statements
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996
WITH COMPARATIVE FIGURES AT SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
ASSETS June 30, 1996 September 30, 1995
--------------- ------------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,158,093 8,622,119
Securities held to maturity - 165,000
Prepaid expenses 923,159 112,281
Equipment inventory 802,990 264,895
Accounts receivable:
Trade related party 2,149,121 1,876,453
Other trade 5,014,925 1,893,020
Other - 45,692
Allowance for doubtful accounts (856,802) (856,802)
------------- -------------
Receivables - net 6,307,244 2,958,363
------------- -------------
Total current assets 11,191,486 12,122,658
Investment in Galactic/TEMPO
Sound (note 3) 414,500 456,929
Property and equipment, net
(note 6) 6,069,427 4,336,378
Other assets 105,132 166,419
Goodwill, net 10,350,603 -
------------- -------------
TOTAL ASSETS $ 28,131,148 17,082,384
============= =============
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 6,808,629 1,182,878
Accrued liabilities 6,029,482 1,449,938
Note payable to bank - 45,000
Note payable - 201,090
Current portion of capital 404,688 371,136
lease obligations
Other Liabilities 212,730 -
------------- -------------
Total current liabilities 13,455,529 3,250,042
Deferred revenue 289,285 376,395
Royalty payable 1,686,468 1,251,983
Investment in DMX-Europe - 15,886,116
N.V. (note 4)
Capital lease obligations 1,472,432 1,446,085
Stockholders' equity (deficit):
Common Stock, $.01 par value. Authorized
100,000,000 shares; issued 59,672,224
shares at June 30, 1996 and 43,680,600
shares at September 30, 1995 596,722 436,806
Paid-in capital 136,620,832 99,210,706
Accumulated deficit (125,366,836) (104,224,136)
Foreign currency translation
reserve (45,281) 26,390
Treasury stock, 85,630
shares, at cost (578,003) (578,003)
------------- -------------
Net stockholders' equity (deficit) 11,227,434 (5,128,237)
Commitments and
contingencies (note 8) - -
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY (DEFICIT) $ 28,131,148 17,082,384
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Subscriber fee revenues - related party $ 6,648,371 6,052,483
Subscriber fee revenues - other 5,255,283 3,259,029
Other revenue, net 287,627 94,287
------------ ------------
12,191,281 9,405,799
Operating expenses:
General and administrative 4,485,705 3,448,574
Sales and marketing 7,039,837 5,148,621
Studio and programming 7,671,586 5,723,225
International development 868 166,020
Research and development 623,842 516,275
Compensation for Stock Options 412,281 412,281
Depreciation and amortization 1,413,479 964,732
------------ ------------
21,647,598 16,379,728
Net operating loss (9,456,317) (6,973,929)
Other income (expense):
Galactic/TEMPO Sound 107,571 249,215
Equity in loss of DMX-E (11,853,686) (6,990,709)
Interest income 95,720 256,467
Interest expense (190,742) (159,252)
Other income (expense), net 154,754 (51,483)
------------ ------------
(11,686,383) (6,695,762)
Net loss $(21,142,700) (13,669,691)
============ ============
Loss per share $ (.46) (.36)
============ ============
Weighted average number of shares $ 46,308,220 37,780,968
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Revenues:
Subscriber fee revenues - related party $ 2,294,812 2,132,394
Subscriber fee revenues - other 2,095,306 1,148,212
Other revenue, net 168,403 90,892
----------- ----------
4,558,521 3,371,498
Operating expenses:
General and administrative 1,706,629 1,145,500
Sales and marketing 2,343,412 2,202,871
Studio and programming 3,166,609 1,962,137
International development 868 93,706
Research and development 206,930 220,016
Compensation expense for Stock Options 137,427 137,427
Depreciation and amortization 607,716 334,305
----------- ----------
8,169,591 6,095,962
Net operating loss (3,611,070) (2,724,464)
Other income (expense):
Galactic/TEMPO Sound 76,330 104,479
Equity in loss of DMX-E (2,366,919) (2,427,506)
Interest income 21,086 119,727
Interest expense (90,699) (51,946)
Other income (expense), net 17,673 (150,097)
----------- ----------
(2,342,529) (2,405,343)
Net loss $(5,953,599) (5,129,807)
=========== ==========
Loss per share $ (.12) (.13)
=========== ==========
Weighted average number of shares 51,671,128 39,580,600
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM SEPTEMBER 30, 1994 TO JUNE 30, 1996
<TABLE>
<CAPTION>
Common Stock Foreign
---------------------------- currency
Number of Paid in Accumulated Treasury translation
shares Amount capital deficit stock reserve Total
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994 36,280,600 $362,806 $ 81,543,456 $ (81,144,607) $(578,003) $ - $ 183,652
Issuance of common stock 7,400,000 74,000 17,188,500 - - - 17,262,500
Cost of issuance - - (70,958) - - - (70,958)
Accrued compensation - - 549,708 - - - 549,708
Foreign currency translation
reserve - - - - - 26,390 26,390
Net loss - - - (23,079,529) - - (23,079,529)
---------------------------------------------------------------------------------------------
Balance at September 30, 1995 43,680,600 $436,806 $ 99,210,706 $(104,224,136) $(578,003) $ 26,390 $ (5,128,237)
Issuance of common stock
(unaudited) 15,991,624 159,916 36,997,845 - - - 37,157,761
Accrued compensation - - 412,281 - - - 412,281
(unaudited)
Foreign currency translation
reserve (unaudited) - - - - - (71,671) (71,671)
Net loss (unaudited) - - - (21,142,700) - - (21,142,700)
---------------------------------------------------------------------------------------------
Balance at June 30, 1996
(unaudited) 59,672,224 $596,722 $136,620,832 $(125,366,836) $(578,003) $(45,281) $ 11,227,434
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(21,142,700) (13,669,691)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,413,479 964,732
Dividend from Galactic/TEMPO Sound 150,000 300,000
Equity in earnings of Galactic/TEMPO
Sound (107,571) (249,215)
Equity in loss of DMX-Europe N.V. 11,853,686 6,990,709
Compensation expense for stock options 412,281 412,281
(Increase) decrease in prepaid
expenses and inventory (827,469) 127,768
Increase in receivables (1,995,712) (1,018,490)
Decrease (increase) in other assets 64,801 (45,856)
Decrease in deferred revenue (87,110) (13,391)
Increase in royalty payable 434,485 402,787
Increase (decrease) in accounts
payable and accrued liabilities 2,369,520 (350,214)
------------ -----------
Net cash used in operating activities (7,462,310) (6,148,580)
------------ -----------
Cash flows from investing activities:
Purchase of property and equipment, net (1,050,754) (626,591)
Advances to DMX-Europe N.V., net (681,846) -
Investment in preferred stock of
DMX-Europe (UK) Limited (6,440,000) -
Proceeds from securities held to
maturity 165,000 2,064,738
------------ -----------
Net cash (used in) provided by
investing activities (8,007,600) 1,438,147
------------ -----------
Cash flows from financing activities:
Issuance of common stock, net 10,346,094 6,964,074
Repayment of note payable to bank (45,000) (180,000)
Repayment of note payable - (136,090)
Repayment of principal portion of
capital lease obligation (295,210) (212,541)
------------ -----------
Net cash provided by financing
activities 10,005,884 6,435,443
------------ -----------
Net (decrease) increase in cash and
cash equivalents (5,464,026) 1,725,010
------------ -----------
Cash and cash equivalents, beginning of
period 8,622,119 3,483,620
------------ -----------
Cash and cash equivalents, end of period $ 3,158,093 5,208,630
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) BASIS OF PRESENTATION.
- --------------------------
The accompanying consolidated balance sheets of DMX Inc. and Subsidiaries
("the Company") at June 30, 1996, the related consolidated statements of
operations for the nine months and three months ended June 30, 1996 and
1995, and related statements of cash flows and stockholders' equity
(deficit) for the nine months ended June 30, 1996 and 1995 are unaudited.
However, such information reflects all normal recurring adjustments which,
in the opinion of management, are necessary to present fairly the Company's
financial position at June 30, 1996. The results of operations for the
nine months and three months ended June 30, 1996 and 1995, are not
necessarily indicative of the results of operations to be expected for the
entire fiscal year. The accompanying financial information for the nine
months and three months ended June 30, 1996 and 1995, should be read in
conjunction with the audited consolidated financial statements and notes
thereto included in the Company's September 30, 1995, Form 10-K.
The Consolidated Financial Statement includes accounts of DMX, Inc. and its
wholly owned subsidiaries TEMPO Sound, 450714 B.C. and DMX - Europe N.V.
and subsidiary. All intercompany transactions and balances have been
eliminated.
Certain reclassifications of prior period amounts were made to conform to
the current period reporting format.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
- -----------------------------------------------
Goodwill
--------
Goodwill was calculated as the purchase price less the fair value of net
assets acquired and is being amortized over 20 years.
(3) INVESTMENT IN GALACTIC/TEMPO SOUND PARTNERSHIP.
- ---------------------------------------------------
The summarized balance sheet and operating data for the nine months ended
June 30, 1996, and the year ended September 30, 1995, of the Galactic/TEMPO
Sound Partnership follows:
<TABLE>
<CAPTION>
Nine months ended Year ended
June 30, 1996 September 30, 1995
(Unaudited) (Unaudited)
---------------------------------------
<S> <C> <C>
Current assets $ 739,613 828,804
Non-current assets 157,741 186,747
Current liabilities /(a)/ 68,354 101,694
Partners' capital 1,129,000 1,513,857
Partners' draws (300,000) (600,000)
Revenues /(a)/ 1,596,590 1,903,178
Operating expenses 1,381,447 (1,289,898)
Net income $ 215,143 613,280
=======================================
</TABLE>
(a) Revenues from subscribers that are billed in advance are recorded as
unearned revenue. Unearned revenue included with current liabilities
is recognized as income when earned on a pro rata basis as services are
provided.
7
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) INVESTMENT IN AND ADVANCE TO DMX-EUROPE N.V. AND SUBSIDIARY.
- ----------------------------------------------------------------
On May 17, 1996, DMX Inc. consummated the merger of TCI-Euromusic, Inc.
("TCI-E") pursuant to the terms of the Agreement and Plan of Merger ("the
Agreement"), dated August 28, 1995, as amended as of November 1, 1995 and
January 17, 1996 between the Company, TCI-E and United Artists Programming
International, Inc. ("UAPI"), which provides, among other things, for the
merger of TCI-E with and into the Company, with the Company as the
surviving corporation (the "Merger"). Pursuant to the terms of the
Agreement and the Merger; (i) DMX-E's indebtedness to TCI-E under the
credit facility will be canceled and converted into intercompany notes
payable to the Company and (ii) each share of TCI-E Common Stock, $1.00 par
value, issued and outstanding immediately prior to the effective time of
the Merger was converted into approximately 10,841.62 shares of common
stock. As a result of the merger, the Company acquired the remaining 49%
interest in DMX-Europe N.V. and its wholly owned subsidiary, DMX-Europe
(UK) Limited ("DMX-E"). TCI-E, a special purpose company established to
hold UAPIs investment in DMX-E, conducted no business activity other than
holding the 49% interest in DMX-E and notes due from DMX-E and the Company.
The merger was accounted for as a purchase and the Company issued
10,841,624 shares of its common stock at a purchase price totalling
$27,104,060. The purchase price less the fair value of TCI-E net assets
acquired resulted in goodwill of $10,415,701 which is being amortized over
20 years.
The accompanying Consolidated balance sheet of the Company at June 30, 1996
is consolidated with the accounts of DMX-E and the accompanying
consolidated statements of operations and cash flows of the Company were
consolidated with the accounts of DMX-E for the period from May 18, 1996
through June 30, 1996. Prior to May 18, 1996, the Company accounted for its
investment in DMX-E using the equity method of accounting.
The summarized financial information of DMX-E for the period from October
1, 1995 through May 17, 1996, date of merger, and for the period from May
18, 1996 through June 30, 1996 and the year ended September 30, 1995 as
follows:
<TABLE>
<CAPTION>
For the Period from
For the Period from May 18, 1996
October 1, 1995 Through
Through May 17, 1996 June 30, 1996 Year ended
(Unaudited) (Unaudited) September 30, 1995
-----------------------------------------------------------------
<S> <C> <C> <C>
Current assets $ 2,146,889 3,159,772 1,989,314
Non-current assets 1,668,368 1,580,918 2,109,234
Current Intercompany liabilities 7,940,963 8,329,138 7,705,267
Non-current liabilities 33,519,068 33,924,648 28,664,046
Stockholders' (deficit) (47,861,235) (37,345,072) (32,262,449)
Foreign currency translation reserve 31,361 45,289 (8,316)
Revenues 722,824 238,305 151,177
Operating expenses 12,576,510 2,407,242 (19,864,196)
Net loss $(11,853,686) (2,168,937) (19,713,019)
=================================================================
</TABLE>
Non-current intercompany liabilities at June 30, 1996 included the
conversion of the TCI-E note and accrued interest and other accounts due
DMX, Inc. to an intercompany note which were eliminated in the accompanying
consolidated balance sheet of the Company. Non current liabilities at May
17, 1996 and June 30, 1996, included the TCI-E note with a principal
balance of $24,436,000 at each balance sheet date and accrued interest of
$6,357,000 and $4,225,000, respectively. The $24,436,000 credit facility
provided by TCI-E was secured by the assets of DMX-E and partially
guaranteed by the Company. During the fourth quarter of September 30, 1995,
DMX-E fully utilized all funds available under the facility. During the
fourth quarter ended September 30, 1995, the Company recognized 100% of the
DMX-E losses and the operating losses of DMX-E were funded by the Company.
For the period from October 1, 1995 through May 17, 1996 and the year
ended September 30, 1995, the Company charged DMX-E $682,000 and
$3,816,000, respectively, for expenses incurred by the Company on DMX-E's
behalf. At May 17, 1996, the intercompany liability was $2,726,000 and at
September 30, 1995, amounts aggregating $2,044,000, related to those
unreimbursed expenses were included in the Company's investment in DMX-E.
8
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company was issued redeemable non-cumulative, convertible, preferred
stock by DMX-Europe (UK) Limited for its advances totaling $9,940,000 at
May 18, 1996 and $3,500,000 at September 30, 1995. Those funds were used to
fund operations and were recorded with the Company's investment in DMX-E in
the accompanying Consolidated balance sheets. For the period from May 18,
1996 through June 30, 1996, and subsequent to June 30, 1996, the Company
advanced $2,500,000 and $937,000, respectively, toward additional purchases
of preferred stock of DMX-Europe (UK) Limited.
(5) STOCKHOLDERS' EQUITY (DEFICIT).
- -----------------------------------
STOCK OPTIONS AND COMMITMENTS.
-----------------------------
The Company has issued options to purchase common stock to certain
directors, officers and employees under various stock option plans. The
option prices represent fair market values at the date of grant.
Transactions in stock options under these plans are summarized as follows:
<TABLE>
<CAPTION>
Shares Option price
---------- -------------------------------------
<S> <C> <C>
Outstanding options at
September 30, 1995 4,395,833 $1.95 - $6.25 per share, expiring
on various dates, December 31, 1996 to
July 1, 2006.
Expired options (15,000) $4.18 per share.
Canceled options (50,000) $2.56 per share
Exercised options (150,000) $1.95 per share
Options issued 100,000 $2.56 per share, expiring on
--------- various dates in October, 2005.
Outstanding options at
June 30, 1996 4,280,833 $1.95 - $6.25 per share, expiring
========= on various dates, December 1996 to
July 2006.
</TABLE>
At June 30, 1996, options to purchase 3,105,833 shares were exercisable at
prices ranging from $1.95 to $6.25 per share, and 2,674,583 of the
exercisable options were held by officers and directors of the Company.
(6) PROPERTY AND EQUIPMENT.
- ---------------------------
Property and equipment as of June 30, 1996, and September 30, 1995,
consisted of the following:
<TABLE>
<CAPTION>
June 30, 1996
(Unaudited) September 30, 1995
-----------------------------------
<S> <C> <C>
Furniture and equipment $ 3,645,364 2,041,147
Leasehold improvements 179,602 186,573
Studio equipment 6,007,469 4,041,594
Music library 887,360 845,218
Computer system 1,217,464 498,411
-----------------------------------
11,937,259 7,612,943
Less accumulated depreciation and
amortization (5,867,832) (3,276,565)
-----------------------------------
$ 6,069,427 4,336,378
===================================
</TABLE>
At June 30, 1996, studio equipment included approximately $281,000 in
equipment, net of accumulated depreciation of $439,000, that is being
leased to DMX-E for a monthly fee of approximately $23,000. Lease
9
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
income related to equipment leased to DMX-E for the period from October
1, 1995 through May 17, 1996 was $170,790 and $176,370 for the nine months
ended June 30, 1995, which is included in other income.
Studio equipment for the Company's studio and uplinking facility in
Littleton, Colorado of $1,417,500, net of accumulated depreciation of
$704,000, at June 30, 1996 was financed under the capital lease obligation
with Western Tele-Communications, Inc., a subsidiary of TCI.
(7) NOTE PAYABLE.
- -----------------
In the February 1996, the Company entered into a six month Promissory Note
Agreement ("Note") with TCI Communications, Inc. for $2.5 million. The Note
was paid off on May 22, 1996 in the principal amount of $2.5 million and
accumulated interest of approximately $67,000.
(8) COMMITMENTS AND CONTINGENCIES.
- ----------------------------------
The Company has guaranteed certain contracts of DMX-E related to their
uplink services agreement and subscriber management services agreement. To
the extent DMX-E is unable to perform under the agreements, certain
creditors of DMX-E may pursue claims against the Company under the
guarantees. A claim under the guaranty of DMX-E's obligation to indemnify
British Sky Broadcasting under the uplink services agreement could
potentially approximate $l.5 million. The Company has guaranteed certain
other obligations of DMX-E. The Company cannot estimate the amount of any
potential claims at this time; however, such liabilities could have a
material adverse effect upon the financial position and results of
operations of the Company.
As described below in note 9, the Company is exploring its options to fund
the expected continuing losses of DMX-E; however, to the extent that
outside financing is not available, the Company may terminate the European
operations. In such circumstances, claims may be filed under the guarantees
discussed above.
From time to time the Company may be a party to legal actions arising in
the ordinary course of business, including claims by former employees. In
the opinion of the Company's management, after consultation with counsel,
the disposition of current matters is not expected to have a material
adverse effect upon the financial position or results of operations of the
Company.
(9) LIQUIDITY AND CAPITAL RESOURCES.
- ------------------------------------
During the nine months ended June 30, 1996, the Company generated funds
through financing activities that included proceeds of $10.3 million
resulting from the sale of $1.0 million of its common stock to a former
director-stockholder, and the sale of $9.0 million of common stock to TCI.
The decrease in cash of $5.5 million for the nine months ended June 30,
1996, was the net result of $10.3 million of cash raised in financing
activities less cash used in investing activities of $8.0 million, relating
primarily to the funding of DMX-E losses, and cash used in operating
activities of $7.4 million.
Management believes that the Company will begin to generate cash from it's
non European operating activities on a prospective basis, and in the third
quarter ended June 30, 1996 has reduced operating expenses and capital
spending to extend the US operation's working capital. However, the Company
will need additional funding to continue to expand and develop the
Company's business pursuant to management's current plans. In the event
such financing is not obtained, management would continue to reduce
operating expenses and capital spending as necessary as a means to stem
cash shortfalls. These operating expenses include both discretionary
spending, such as sales and marketing expenses and overhead costs, such as
general and administrative expenses. Such expenses will continually be
evaluated giving consideration to the cash flow generated from subscriber
fee revenue, anticipated growth in such revenue and available working
capital.
At the Company's Board of Directors' Meeting of August 13, 1996, the
Company determined to cease funding the liquidity needs of DMX-E.
Accordingly, unless other outside financing arrangements to fund the
expected continuing losses of DMX-E can be concluded quickly, the Board of
Directors of DMX-E will be required to terminate the European operations.
In such circumstances, claims may be filed under the Company's guarantees
of certain DMX-E obligations. Management is unable at this time to quantify
the extent of any such claims, however such claims could have a material
adverse effect upon the financial position and results of operations of the
Company. See "Note 8 to Consolidated Financial Statement."
The accompanying consolidated financial statements have been prepared
assuming that the Company and its subsidiaries will continue as a going
concern. The consolidated financial statements do not include any
adjustments that would result from the termination of the European
operations. Such adjustments could have an adverse material effect upon the
financial position and results of operations of the Company.
10
<PAGE>
DMX INC.
AND SUBSIDIARIES
NINE MONTHS AND THREE MONTHS ENDED JUNE 30, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
SUMMARY OF PERFORMANCE.
The net loss for the nine months ended June 30, 1996 was $21.1 million, or $0.46
per share, compared to $13.7 million or $0.36 per share, for the nine months
ended June 30, 1995. The net loss for the three months ended June 30, 1996 was
$6.0 million, or $0.12 per share, compared to $5.1 million or $0.13 per share
for the three months ended June 30, 1995.
The increase in net loss primarily resulted from increased losses of DMX-E.
The Company recorded 100% of the DMX-E losses for the nine and three months
ended June 30, 1996 as opposed to 51% of DMX-E losses for the nine and three
months ended June 30 1995. In addition until May 17, 1996, the closing date of
the merger, the Company recorded results of DMX-E using the equity method.
After the merger, DMX-E's financial statements were consolidated.
The $7.4 million increase in net loss for the nine months ended June 30, 1996
over the nine months ended June 30, 1995 consisted primarily of an increase in
the equity in loss of DMX-E of $4.9 million and the $2.1 million of DMX-E's
operating expenses for the period from May 18, 1996, to June 30, 1996 that were
consolidated with the Company's operating expenses in the accompanying
consolidated statements of operations for the nine months ended June 30, 1996.
The $824,000 increase in net loss for the three months ended June 30, 1996 over
the three months ended June 30, 1995 was primarily attributed to the inclusion
of DMX-E's $2.1 million net loss, offset by the Company's increase in revenue of
$1.1 million. The amount of DMX-E's loss recognized by the Company for the three
months ended June 30, 1996 totaled $4.5 million, which included the equity in
loss of DMX-E of $2.4 million and the $2.1 million of DMX-E's operating expenses
that were consolidated with the Company's operating expenses, since May 18, 1996
to June 30, 1996, in the accompanying consolidated statement of operations; as
compared to the equity in loss of DMX-E of $2.4 million for the three months
period ended June 30, 1995.
The Company's increase in revenues to $12.2 million for the nine months ended
June 30, 1996 from $9.4 million for the nine months ended June 30, 1995 and the
increase in revenues to $4.6 million for the three months ended June 30, 1996
from $3.4 million for the three months ended June 30, 1995, was primarily
attributed to growth in commercial subscribers and growth in residential
subscribers resulting from the launch of DMX on PrimeStar.
RESULTS OF OPERATIONS
REVENUES.
- --------
Revenues increased $2.8 million, or 29.6% to $12.2 million for the nine months
ended June 30, 1996, from $9.4 million for the nine months ended June 30, 1995.
Revenues increased $1.2 million, or 35.2% to $4.6 million for the three months
ended June 30, 1996, from $3.4 million for the three months ended June 30, 1995.
The increase was primarily attributed to : i) increased residential subscriber
fees resulting from the launch of DMX on PrimeStar in the first fiscal quarter
of 1996, this added source of revenue did not exist during the nine or three
months ended June 30, 1995; and ii) growth in commercial subscriber fee revenue
as a result of increased sales and marketing activity in the national accounts
and O&O groups. In June, 1994, the Company launched on the Ku-Band satellite
which enabled DMX for Business to gain access to nearly 100% of the business
marketplace. Concurrent with this launch, the Company's commercial division
implemented its national accounts sales program and in May 1995 launched its
first owned and operated sales group ("O&O") in the Southern California market.
Additionally, revenues for the nine and three months ended June 30, 1996
included DMX-E revenues of $238,000 for the period from May 18, 1996 to June 30,
1996.
Residential subscriber fees represented approximately 73.9% and 71.4% of total
subscriber fee revenue for the nine months ended June 30, 1996 and 1995,
respectively, and 64.1% and 67.6% of total subscriber fee revenue for the three
months ended June 30, 1996 and 1995, respectively. Commercial subscriber fees
represented approximately 25.4% and 28.5% of total subscriber fee revenue for
the nine months ended June 30, 1996 and 1995, respectively, and 34.6% and 32.2%
of total subscriber fee revenue for the three months ended June 30, 1996 and
1995, respectively.
11
<PAGE>
DMX INC.
AND SUBSIDIARIES
NINE MONTHS AND THREE MONTHS ENDED JUNE 30, 1996
OPERATING EXPENSES.
- ------------------
Total operating expenses increased to $21.6 million for the nine months ended
June 30, 1996 from $16.4 million for the nine months ended June 30, 1995. The
increase in operating expenses of $5.2 million for the nine months ended June
30, 1996 over the nine months ended June 30, 1995 was primarily attributed to
the inclusion of $2.1 million of operating expenses of DMX-E for the period from
May 18, 1996, to June 30, 1996 that were consolidated with the Company's
operating expenses, and increased sales and marketing activity and studio and
programming expenses that occurred in the first half of the fiscal year.
Increased sales and marketing activity resulted from the expansion of the
national accounts sales program and the O&O sales group. Increased studio and
programming expenses resulted from the increased music formats from 69 to over
90 channels, and increased satellite and uplink costs due to double illumination
in December 1995 through February 1996, as the company migrated from the AT&T
Telstar 401 Ku-band satellite to the AT&T Telstar 402R Ku-band satellite. The
double illumination terminated on February 28, 1996. Total operating expenses
for the three months ended June 30, 1996 increased by $2.1 million to $8.2
million from $6.1 million for the three months ended June 30, 1995. The increase
was primarily attributed to the inclusion of $2.1 million of operating expenses
of DMX-E that were consolidated with the Companys operating expenses from May
18, 1996 to June 30, 1996.
The following table summarizes the operating expenses of the Company and DMX-E
that were consolidated in the accompanying statements of operations for the nine
and three months ended June 30, 1996:
<TABLE>
<CAPTION>
DMX INC. DMX-E CONSOLIDATED
FOR THE NINE FOR THE PERIOD FOR THE NINE NINE MONTHS
MONTHS ENDED FROM MAY 17, 1996 MONTHS ENDED ENDED
JUNE 30, 1996 TO JUNE 30, 1996 JUNE 30, 1996 JUNE 30, 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GENERAL & ADMINISTRATIVE $ 3,945,166 $ 540,539 $ 4,485,705 $ 3,448,574
SALES & MARKETING 6,672,658 367,179 7,039,837 5,148,621
STUDIO & PROGRAMMING 6,651,651 1,019,935 7,671,586 5,723,225
INTERNATIONAL DEVELOPMENT 868 - 868 166,020
RESEARCH & DEVELOPMENT 588,506 35,336 623,842 516,275
COMPENSATION EXPENSE FOR STOCK OPTIONS
412,281 - 412,281 412,281
DEPRECIATION & AMORTIZATION
1,301,937 111,542 1,413,479 964,732
-------------------------------------------------------------------
TOTAL OPERATING EXPENSES $19,573,067 $2,074,531 $21,647,598 $16,379,728
===================================================================
</TABLE>
12
<PAGE>
DMX INC.
AND SUBSIDIARIES
NINE MONTHS AND THREE MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
DMX INC. DMX-E CONSOLIDATED
FOR THE THREE FOR THE PERIOD FOR THE THREE THREE MONTHS
MONTHS ENDED FROM MAY 18, 1996 MONTHS ENDED ENDED
JUNE 30, 1996 TO JUNE 30, 1996 JUNE 30, 1996 JUNE 30, 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GENERAL & ADMINISTRATIVE $1,166,090 $ 540,539 $1,706,629 $1,145,500
SALES & MARKETING 1,976,233 367,179 2,343,412 2,202,871
STUDIO & PROGRAMMING 2,146,674 1,019,935 3,166,609 1,962,137
INTERNATIONAL DEVELOPMENT 868 - 868 93,706
RESEARCH & DEVELOPMENT 171,594 35,336 206,930 220,016
COMPENSATION EXPENSE FOR STOCK OPTIONS
137,427 - 137,427 137,427
DEPRECIATION & AMORTIZATION
496,174 111,542 607,716 334,305
------------------------------------------------------------------
TOTAL OPERATING EXPENSES $6,095,060 $2,074,531 $8,169,591 $6,095,962
==================================================================
</TABLE>
GENERAL AND ADMINISTRATIVE EXPENSES.
General and administrative expenses increased $1.1 million to $4.5 million for
the nine months ended June 30, 1996 from $3.4 million for the nine months ended
June 30, 1995. The net increase was primarily attributed to $541,000 of general
and administrative expenses of DMX-E for the period from May 18, 1996 to June
30, 1996, and increases incurred during the first half of the fiscal year in
personnel cost of $419,000 which included an increased performance bonus paid to
the Chairman, a reclassification of a certain executive's compensation from
sales and marketing to general and administrative, and increases due to
additional staff. The remaining net increases, also primarily incurred in the
first half of the fiscal year, represented increased accounting, legal and
consultant expenses of $95,000, and general office expense of $25,000, due to
the expansion and growth of the Company; and public relations and printing
expenses of $35,000, due to increased business development activities. These
increases in expenses were offset by a reduction in occupancy expense of
$102,000 which resulted from the negotiation of favorable lease terms.
General and administrative expenses increased $561,000 to $1.7 million for the
three months ended June 30, 1996 from $1.1 million for the three months ended
June 30, 1995. The increase resulted from the inclusion of $541,000 of general
and administrative expenses of DMX-E for the period from May 18,1996 to June 30,
1996.
SALES AND MARKETING EXPENSES.
Sales and marketing expenses increased to $7.0 million for the nine months ended
June 30, 1996 from $5.1 million for the nine months ended June 30, 1995. The
increase of $1.9 million primarily represented increased salaries and
commissions of $675,000, resulting from increased sales and marketing activities
of the Company's commercial division, and adding sales and support staff for the
national account sales program and the O&O group; and the inclusion of DMX-E's
marketing expenses of $367,000 for the period from May 18, 1996 to June 30,
1996.
Other sales and marketing expense increases related primarily to the first half
of the fiscal year and represented: increased office, rent and telephone of
$216,000, which related to the commercial division expansion; increased travel
and entertainment of $254,000, and conventions and conferences of $98,000,
reflecting growth in the sales force and direct marketing activities for both
the residential and commercial divisions; and increased expenses of $120,000 for
consultants who were involved with the development of the Company's DMX-Disc
sales program and development and
13
<PAGE>
DMX INC.
AND SUBSIDIARIES
NINE MONTHS AND THREE MONTHS ENDED JUNE 30, 1996
launch of the DMX-Direct sales program in October 1995. In addition, the Company
incurred warranty service costs of $151,000 related to new equipment sold by the
commercial division.
Sales and marketing expenses increased to $2.3 million for the three months
ended June 30, 1996 from $2.2 million for the three months ended June 30, 1995.
The $100,000 net increase primarily represented the sales and marketing expenses
of DMX-E of $367,000 for the period from May 18, 1996, to June
30, 1996; offset by decreased salaries and commissions of $173,000; marketing
expenses of $94,000; and decreased cost of installations of $90,000, as the
Company has been successfully recouping costs of installations.
STUDIO AND PROGRAMMING EXPENSES.
Studio and programming expenses increased to $7.7 million for the nine months
ended June 30, 1996 from $5.7 million for the nine months ended June 30, 1995.
The $2.0 million net increase was primarily attributed to the inclusion of $1.0
million of studio and programming expenses of DMX-E for the period from May 18,
1996 to June 30, 1996; an increase in music rights of $515,000, commensurate
with the growth in subscribers and fee revenue; and increased uplink and
satellite cost of $219,000, representing the cost of double illumination as the
Company migrated from the AT&T Telstar 401 Ku-Band satellite to the AT&T Telstar
402R Ku-Band satellite in the second fiscal quarter. The remainder of the net
increase of $266,000 represented increased salaries, program consultant expenses
and other direct costs related to the Company's increase in music formats from
approximately 69 to over 90 over the last year and DMX-Disc production cost
incurred to establish the new DMX-Disc product line.
Studio and programming expenses increased to $3.2 million for the three months
ended June 30, 1996 from $2.0 million for the three months ended June 30, 1995.
The net increase of $1.2 million was primarily attributed to the inclusion of
$1.0 million of studio and programming expenses of DMX-E for the period from May
18, 1996 to June 30, 1996 and an increase in music rights of $181,000
commensurate with the growth in subscribers and fee revenue.
EQUITY IN LOSS OF DMX-E.
The equity in loss of DMX-E increased to $11.9 million for the nine months ended
June 30, 1996 from $7.0 million for the nine months ended June 30, 1995. The
increase in the equity loss of DMX-E was primarily attributed to the Company
recording 100% of DMX-E loss for the nine months ended June 30, 1996 as opposed
to 51% of DMX-E loss for the nine months ended June 30, 1995. Additionally, $2.1
million of DMX-E's total net loss of $14.0 million for the nine months ended
June 30, 1996, represented the net loss for the period from May 18, 1996 to June
30, 1996 and was consolidated in the accompanying consolidated statements of
operations for the nine and three months ended June 30, 1996.
During the fiscal year ended September 30, 1995, DMX-E fully utilized all funds
available under the TCI-E credit facility and therefore losses funded by the
Company in excess of its guaranteed portion of the debt were recognized by the
Company. During the period from October 1, 1995 through May 17, 1996 the
Company funded operating losses of DMX-E and accordingly 100% of DMX-E losses
were recorded by the Company using the equity method of accounting. For the
period from May 18, 1996 through June 30, 1996, the Company consolidated the
statements of operations of DMX-E with those of the Company, as DMX-E became a
wholly owned subsidiary of the Company.
The equity in loss of DMX-E for the three months ended June 30, 1996 was $2.4
million compared to $2.4 million for the three months ended June 30, 1995.
DMX-E's net loss for the three months ended June 30, 1996 was $ 4.5 million of
which $2.4 million was recognized by the Company on the equity method and $2.1
million, which represented the DMX-E's net loss for the period from May 18,
1996, date of merger to June 30, 1996, was consolidated in the accompanying
consolidated statements of operations for the nine and three months ended June
30, 1996.
Summary of Performance of DMX-E.
DMX-E's net loss for the nine months ended June 30, 1996 was $14.0 million
compared to $13.6 million for the nine months ended June 30, 1995. The increase
in the net loss was primarily attributed to increased rental expense associated
with the satellite audio subcarriers on the ASTRA satellite system to provide 62
music channels for the European direct-to-home ("DTH") distribution of DMX,
provisions for subscriber and management fees to cover the administrative costs
of processing DTH customers in Europe and increased interest expense on the debt
which financed the development of
14
<PAGE>
DMX INC.
AND SUBSIDIARIES
NINE MONTHS AND THREE MONTHS ENDED JUNE 30, 1996
operations of DMX-E. The net increase in loss
was offset by increased subscriber revenue earned after the European DTH launch
in September 1995, the reduction in transponder rentals resulting from the
transfer of the transatlantic satellite transmissions from Intelsat to TDRSS and
the reduction in research and development and engineering expense as DMX-E
infrastructure was completed. Prior to the launch of the DTH services in
September 1995 on ASTRA in Germany, Austria and Switzerland, which marked the
start of the Pan European DTH launch, DMX-E's resources were primarily used for
technological, legal and administrative expenses to develop the necessary
infrastructure.
LIQUIDITY AND CAPITAL RESOURCES.
During the nine months ended June 30, 1996, the Company generated funds through
financing activities that included proceeds of $10.3 million resulting from the
sale of $1.0 million of its common stock to a former director-stockholder, and
the sale of $9.0 million of common stock to TCI. The decrease in cash of $5.5
million for the nine months ended June 30, 1996, was the net result of $10.3
million of cash raised in financing activities less cash used in investing
activities of $8.0 million, relating primarily to the funding of DMX-E losses,
and cash used in operating activities of $7.4 million.
Management believes that the Company will begin to generate cash from it's non
European operating activities on a prospective basis, and in the third quarter
ended June 30, 1996 has reduced operating expenses and capital spending to
extend the US operation's working capital. However, the Company will need
additional funding to continue to expand and develop the Company's business
pursuant to management's current plans. In the event such financing is not
obtained, management would continue to reduce operating expenses and capital
spending as necessary as a means to stem cash shortfalls. These operating
expenses include both discretionary spending, such as sales and marketing
expenses and overhead costs, such as general and administrative expenses. Such
expenses will continually be evaluated giving consideration to the cash flow
generated from subscriber fee revenue, anticipated growth in such revenue and
available working capital.
At the Company's Board of Directors' Meeting of August 13, 1996, the Company
determined to cease funding the liquidity needs of DMX-E. Accordingly, unless
other outside financing arrangements to fund the expected continuing losses of
DMX-E can be concluded quickly, the Board of Directors of DMX-E will be required
to terminate the European operations. In such circumstances, claims may be
filed under the Company's guarantees of certain DMX-E obligations. Management
is unable at this time to quantify the extent of any such claims, however such
claims could have a material adverse effect upon the financial position and
results of operations of the Company. See "Note 8 to Consolidated Financial
Statement."
The accompanying consolidated financial statements have been prepared assuming
that the Company and its subsidiaries will continue as a going concern. The
consolidated financial statements do not include any adjustments that would
result from the termination of the European operations. Such adjustments could
have an adverse material effect upon the financial position and results of
operations of the Company.
To the extent that this Quarterly Report contains forward looking statements
with respect to the financial condition, results of operations, or business of
the Company, such statements involve risks and uncertainties including but not
limited to those factors described above and those described in the Company's
Annual Report on Form 10-K ("10-K") for the year ended September 30, 1995 and
the Proxy Statement filed with the SEC on January 12, 1996 and February 12,
1996, respectively. The foregoing is not a complete description of the Company's
business or the risks associated with an investment in the Company. A more
complete discussion of these items can be found in the 10-K under the heading
"Business", and in the Proxy Statement under the headings "The Merger" and
"Information concerning DMX-E".
15
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
NONE.
ITEM 2. CHANGES IN SECURITIES
- ------------------------------
NONE.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
NONE.
ITEM 5. OTHER INFORMATION
- --------------------------
NONE.
16
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DMX INC.
(Registrant)
By: /s/ JEROLD H. RUBINSTEIN Date: August 14, 1996
---------------------------------
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Signature Date Title
--------- ---- -----
/s/ JEROLD H. RUBINSTEIN August 14, 1996 Chairman of the Board and
- ------------------------ Chief Executive Officer
JEROLD H. RUBINSTEIN
/s/ J. WENDY KIM August 14, 1996 Chief Financial Officer and
- ------------------------ Corporate Secretary
J. WENDY KIM
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-1996 SEP-30-1996
<PERIOD-START> OCT-01-1995 APR-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 3,158,093 3,158,093
<SECURITIES> 0 0
<RECEIVABLES> 7,164,046 7,164,046
<ALLOWANCES> 856,802 856,802
<INVENTORY> 802,990 802,990
<CURRENT-ASSETS> 11,191,486 11,191,486
<PP&E> 11,937,259 11,937,259
<DEPRECIATION> 5,867,832 5,867,832
<TOTAL-ASSETS> 28,131,148 28,131,148
<CURRENT-LIABILITIES> 13,455,529 13,455,529
<BONDS> 0 0
0 0
0 0
<COMMON> 596,722 596,722
<OTHER-SE> 11,253,996 11,253,996
<TOTAL-LIABILITY-AND-EQUITY> 28,131,148 28,131,148
<SALES> 12,191,281 4,558,521
<TOTAL-REVENUES> 12,191,281 4,558,521
<CGS> 0 0
<TOTAL-COSTS> 21,647,598 8,169,591
<OTHER-EXPENSES> 11,853,686<F1> 2,366,919<F1>
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 190,742 90,699
<INCOME-PRETAX> (21,142,700) (5,953,599)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (21,142,700) (5,953,599)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (21,142,700) (21,142,700)
<EPS-PRIMARY> (0.46) (0.12)
<EPS-DILUTED> 0 0
<FN>
<F1>EQUITY IN LOSS OF DMX-E REPRESENTS 100% LOSS OF DMX-E FOR THE PERIOD FROM
OCTOBER 1, 1995 THROUGH MAY 17, 1996 FOR THE NINE MONTHS ENDED JUNE 30, 1996,
AND FOR THE PERIOD FROM APRIL 1, 1996 THROUGH MAY 17, 1996 FOR THE THREE MONTHS
ENDED JUNE 30, 1996.
</FN>
</TABLE>
