<PAGE>
As filed with the Securities and Exchange Commission on January 14, 1997.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ............... to .............
Commission file number 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, California 90064-1507
(Address of principal executive offices) Zip code
Registrant's telephone number, including area code: (310) 444-1744
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01
Par Value
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Unless otherwise specifically indicated, all monetary references in this filing
are in U.S. dollars.
As of December 31, 1996 the aggregate market value of the Common Stock held by
non-affiliates of the Registrant was approximately $23,080,987.
Number of shares of Common Stock of the Registrant outstanding as of December
31, 1996: 59,586,594 shares, including 85,630 shares held as Treasury Stock.
This report includes a total of 35 pages, excluding exhibits. The exhibit index
appears on page 36.
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K.
--------------------------------------------------------------
(a) Exhibits. Following is a list of Exhibits filed with this report.
--------
Exhibit
- -------
Number Description
- ------ -----------
23.1 Consent of KPMG Peat Marwick LLP
2
<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: January 29, 1997
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.
<TABLE>
<CAPTION>
Signature Date Title
--------- ---- -----
<S> <C> <C>
/s/ Jerold H. Rubinstein January 29, 1997 Chairman of the Board and
Chief Executive Officer
/s/ J. Wendy Kim January 29, 1997 Chief Financial Officer
and Corporate Secretary
/s/ Kent Burkhart January 29, 1997 Director
/s/ Donne F. Fisher January 29, 1997 Director
/s/ Leo J. Hindery, Jr. January 29, 1997 Director
Bhaskar Menon January , 1997 Director
/s/ James R. Shaw, Sr. January 29, 1997 Director
/s/ J.C. Sparkman January 29, 1997 Director
</TABLE>
3
<PAGE>
DMX INC.
AND SUBSIDIARIES
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report on Consolidated Financial Statements
and Financial Statement Schedules................................... F-2
Consolidated Financial Statements of DMX Inc.:
Consolidated Balance Sheets - September 30, 1996
and 1995..................................................... F-3
Consolidated Statements of Operations -
Years ended September 30, 1996, 1995 and 1994................ F-4
Consolidated Statements of Stockholders' Deficit -
Years ended September 30, 1996, 1995 and 1994................ F-5
Consolidated Statements of Cash Flows -
Years ended September 30, 1996, 1995 and 1994................ F-6
Notes to Consolidated Financial Statements.................... F-7
Financial Statement Schedules have not been provided as any
information has been included in the financial statements
and notes thereto
Consolidated Financial Statements of DMX-Europe N.V.................. F-19
Independent Auditors' Report......................................... F-20
Consolidated Balance Sheets - Assets................................. F-21
Consolidated Balance Sheets - Liabilities and Stockholders' Equity... F-22
Consolidated Statements of Operations................................ F-23
Consolidated Statement of Stockholders' Equity....................... F-24
Consolidated Statements of Cash Flows................................ F-25
Notes to Consolidated Financial Statements........................... F-26-30
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
DMX Inc.:
We have audited the consolidated financial statements of DMX Inc. and
subsidiaries as listed in the accompanying index. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of DMX Inc. and
subsidiaries as of September 30, 1996 and 1995 and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1996, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 10 to
the consolidated financial statements, the Company has experienced recurring
losses from operations and has a net capital deficiency that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 10. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in Note 8 to the consolidated financial statements, the Company
changed its method of accounting for income taxes in the year ended September
30, 1994.
Los Angeles, California
January 15, 1997 KPMG Peat Marwick LLP
F-2
<PAGE>
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 928,399 $ 8,622,119
Securities held to maturity - 165,000
Prepaid expenses 464,545 112,281
Equipment inventory 438,163 264,895
Accounts receivable:
Trade related party 1,828,973 1,876,453
Other trade 2,732,018 1,893,020
Other - 45,692
Allowance for doubtful accounts (251,247) (856,802)
------------- -------------
Total current assets 6,140,851 2,958,363
Current assets DMX-Europe N.V.:
Cash 192,635 -
Prepaid expenses 851,586 -
Equipment inventory 98,517 -
Accounts receivable (net) 435,480 -
------------- -------------
Total current assets DMX-Europe N.V. 1,578,218 -
------------------------------
Total current assets 7,719,069 12,122,658
Investment in Galactic/TEMPO Sound (note 3) 504,156 456,929
Property and equipment, net (note 5) 4,418,799 4,336,378
Property and equipment DMX-Europe N.V., net (note 5) 1,475,189 -
Goodwill, net 4,535,658 -
Other assets 99,148 166,419
------------------------------
TOTAL ASSETS $ 18,752,019 $ 17,082,384
==============================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,097,476 $ 1,182,878
Accrued liabilities 4,886,837 1,449,938
Accrued liabilities - loss on disposal DMX-Europe N.V. (note 4) 1,468,530 -
Short-term note payable to bank (note 6) - 45,000
Note payable (note 6) - 201,090
Current portion of capital lease obligation (note 9) 410,108 371,136
------------ -------------
Total current liabilities 7,862,951 3,250,042
Current liabilities DMX-Europe N.V.:
Accounts payable 7,284,664 -
Accrued liabilities 1,488,492 -
------------- -------------
Total current liabilities DMX-Europe N.V.: 8,773,156 -
------------------------------
Total current liabilities 16,636,107 3,250,042
Deferred revenue 295,461 376,395
Royalty payable (note 9) 1,773,275 1,251,983
Investment in DMX-Europe N.V. (note 4) - 15,886,116
Capital lease obligation (note 9) 1,401,426 1,446,085
Stockholders' deficit (note 7):
Common Stock, $.01 par value. Authorized 100,000,000 shares; issued 59,672,224 shares in 1996 and
43,680,600 shares in 1995 596,722 436,806
Paid-in capital 136,758,259 99,210,706
Accumulated deficit (138,078,913) (104,224,136)
Foreign currency translation reserve (52,315) 26,390
Treasury stock, 85,630 shares, at cost (578,003) (578,003)
------------------------------
Net stockholders' deficit (1,354,250) (5,128,237)
Commitments and contingencies (note 9) - -
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 18,752,019 $ 17,082,384
==============================
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Subscriber fee revenues - related party $ 9,086,434 7,695,978 6,095,088
Subscriber fee revenues - other 6,972,671 4,920,380 3,281,971
Other revenue, net 431,060 157,026 -
Revenue--DMX-Europe N.V. (note 4) 836,438 - -
-----------------------------------------
17,326,603 12,773,384 9,377,059
Operating expenses:
General and administrative 5,803,043 5,511,615 4,897,948
Sales and marketing 8,570,141 7,438,023 6,468,848
Studio and programming 9,016,760 7,773,759 5,455,766
International development 1,598 168,629 61,251
Research and development 778,047 725,164 990,445
Compensation to affiliates - - 122,654
Stock bonus and option compensation 549,708 549,708 2,561,937
Depreciation and amortization 1,883,415 1,341,775 1,065,666
Operating expenses--DMX-Europe N.V. (note 4) 5,741,325 - -
Loss on disposal of DMX-Europe N.V. (note 4) 7,153,278 - -
-----------------------------------------
39,497,315 23,508,673 21,624,515
Net operating loss (22,170,712) (10,735,289) (12,247,456)
Other income (expense):
Galactic/TEMPO Sound 197,227 306,640 223,852
Equity in loss of DMX-Europe N.V. (note 4) (11,852,650) (13,271,599) (4,746,239)
Interest income 111,610 282,234 190,899
Interest expense (246,181) (208,694) (152,731)
Interest expense--DMX-Europe N.V. (note 4) (53,936) - -
Other income 172,270 779,866 332,368
Other expense (12,405) (232,687) (105,907)
-----------------------------------------
(11,684,065) (12,344,240) (4,257,758)
-----------------------------------------
Net loss $(33,854,777) (23,079,529) (16,505,214)
=========================================
Loss per share $ (.68) (.60) (.48)
=========================================
Weighted average number of shares 49,675,569 38,505,107 34,436,464
=========================================
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<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, 1993 32,031,480 $320,315 $ 63,976,740 $ (64,639,393) $(578,003) $ - $ (920,341)
Issuance of common stock 3,530,000 35,300 14,951,725 - - - 14,987,025
Cost of issuance - - (62,409) - - - (62,409)
Issuance of common stock as
compensation to affiliates 34,107 341 122,313 - - - 122,654
Issuance of common stock as
compensation 685,013 6,850 2,005,379 - - - 2,012,229
Accrued compensation (note 7) - - 549,708 - - - 549,708
Net loss - - - (16,505,214) - - (16,505,214)
--------------------------------------------------------------------------------------------------
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 (note 7) - - 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 15,991,624 159,916 37,237,643 - - - 37,397,559
Cost of issuance - - (239,798) - - - (239,798)
Accrued compensation (note 7) - - 549,708 - - - 549,708
Foreign currency translation
reserve - - - - - (78,705) (78,705)
Net loss - - - (33,854,777) - - (33,854,777)
--------------------------------------------------------------------------------------------------
Balance at September 30, 1996 59,672,224 $596,722 $136,758,259 $(138,078,913) $(578,003) $(52,315) $ (1,354,250)
==================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(33,854,777) (23,079,529) (16,505,214)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,229,646 1,341,775 1,065,666
Loss on retirement of property and equipment - - 107,806
Dividend from Galactic/TEMPO Sound 150,000 300,000 250,011
Equity in earnings of Galactic/TEMPO Sound (197,227) (306,640) (223,852)
Equity in loss of DMX-Europe N.V. 11,853,686 13,271,599 4,746,239
Loss on disposal of DMX-Europe N.V. 7,153,278 - -
Compensation expense for stock issued to affiliates - - 122,654
Compensation expense for stock bonus and options 549,708 549,708 2,561,937
Provision for doubtful accounts 643,148 700,000 156,802
Decrease in deferred compensation - - (370,095)
(Increase) decrease in prepaid and other current assets (947,596) 76,315 (427,852)
Decrease in advances to DMX-Europe N.V. - 490,296 161,387
(Increase) in receivables (1,077,525) (715,015) (1,283,119)
Decrease (increase) in other assets 93,157 (111,250) (1,169)
(Decrease) increase in deferred revenue (80,934) (42,145) 418,540
Increase in royalty payable 521,292 538,562 445,651
Increase (decrease) in accounts payable and accrued liabilities 4,035,653 (33,365) 37,941
-----------------------------------------
Net cash used in operating activities (8,928,491) (7,019,689) (8,736,667)
Cash flows from investing activities:
Purchase of property and equipment, net (1,519,444) (954,101) (540,105)
Advances to DMX-Europe N.V., net (681,846) (2,044,311) -
Investment in preferred stock of DMX-Europe (UK) Limited (6,440,000) (3,500,000) -
Purchase of securities held to maturity - (165,000) (2,244,781)
Proceeds from matured securities held to maturity 165,000 2,279,738 490,043
-----------------------------------------
Net cash used in investing activities (8,476,290) (4,383,674) (2,294,843)
Cash flows from financing activities:
Issuance of common stock, net 10,346,094 17,191,542 14,924,616
Repayment of note payable to bank (45,000) (240,000) (240,000)
Repayment of note payable - (181,455) (181,455)
Repayment of principal portion of capital lease obligation (397,398) (228,225) (71,419)
-----------------------------------------
Net cash provided by financing activities 9,903,696 16,541,862 14,431,742
-----------------------------------------
Net (decrease) increase in cash and cash equivalents (7,501,085) 5,138,499 3,400,232
Cash and cash equivalents, beginning of year 8,622,119 3,483,620 83,388
-----------------------------------------
Cash and cash equivalents, end of year $ 1,121,034 8,622,119 3,483,620
=========================================
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
(1) INCORPORATION AND NATURE OF BUSINESS.
------------------------------------
DMX Inc. (the "Company"), formerly International Cablecasting Technologies
Inc. ("ICT"), was incorporated under the laws of the state of Delaware in
May 1990, to accomplish a corporate reorganization which effected a change
of situs of its predecessor company of the same name (ICT-Canada). ICT-
Canada was incorporated pursuant to the Company Act (British Columbia) on
April 26, 1979, by registration of its Memorandum and Articles under the
name Can-Am Entertainment Corporation. On November 14, 1986, its name was
changed to International Cablecasting Technologies Inc. On April 27, 1995,
the Company changed its name to DMX Inc.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
------------------------------------------
ACCOUNTING PRINCIPLES AND CONSOLIDATION.
---------------------------------------
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, TEMPO Sound, 450714 B.C. Ltd. and DMX-
Europe N.V. and subsidiary ("DMX-E"). All material intercompany balances
and transactions have been eliminated.
GOODWILL.
--------
Goodwill was calculated as the purchase price of DMX-E less the fair value
of net assets acquired and is being amortized over 20 years. Goodwill will
be eliminated upon the ultimate disposition of DMX-E pursuant to the
Company's plan to dispose of its operations as described in note 4. In
connection with the anticipated disposal of operations and considering the
terms of such agreements, goodwill has been reduced by $5,685,000 due to
the impairment of its value.
REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS.
-------------------------------------------------------
The Company recognizes revenue based upon subscriber levels for affiliate
sales and the contract terms for its direct sales. The calculation of
subscriber levels for affiliate sales is based on billing and sales
information provided by its affiliates. Direct sales revenue is recognized
at inception of service in accordance with the contract terms. The Company
analyzes subsequent cash receipts and other data to determine the adequacy
of its allowance for doubtful accounts.
Accounts receivable and subscriber fee revenue from related party consists
of receivables and revenues due from Tele-Communications, Inc. ("TCI"), and
its affiliates. At September 30, 1996, TCI held 45.42% of the outstanding
common stock of the Company. Total subscriber fee revenue from TCI for the
fiscal years ended September 30, 1996, 1995 and 1994 represented
approximately 56%, 61% and 65%, respectively, of total subscriber fee
revenue.
INVESTMENT IN GALACTIC/TEMPO SOUND PARTNERSHIP.
----------------------------------------------
The Company's 50% investment in Galactic/TEMPO Sound, a partnership with
Galactic Radio Partners, Inc., is accounted for using the equity method.
The 50-50 joint venture commenced July 16, 1990, providing basic cable
audio programming to cable television system operators.
DISPOSITION OF DMX-EUROPE N.V. AND SUBSIDIARY.
---------------------------------------------
On December 13, 1996, the Company announced that its board of directors had
approved the disposition of DMX-Europe N.V. and its subsidiary, DMX-Europe
(UK) Limited collectively, ("DMX-E") to Jerold H. Rubinstein, Chairman and
Chief Executive Officer of the Company. The Company had previously
determined to cease financial support of DMX-E and, in the absence of some
other arrangements to provide financial support to those Companies, to
place them in receivership. The Company has since entered into definitive
agreements with Mr. Rubinstein providing for such disposition.
F-7
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DISPOSITION OF DMX-EUROPE N.V. AND SUBSIDIARY, CONTINUED.
--------------------------------------------------------
Mr. Rubinstein will seek to reorganize the operations of DMX-E and will
seek new equity investors. In the event DMX-E cannot be reorganized, Mr.
Rubinstein intends to organize a new company to distribute the music
service on essentially the same terms. DMX Inc. will retain or obtain a ten
percent equity interest in the European companies which would have an
exclusive, five year, royalty-free license to distribute the DMX service in
Europe, the former Soviet Union, and in the Middle East.
The Company has accounted for the effects of this disposal and accordingly
has estimated the loss on the disposal of DMX-E in the accompanying
consolidated statements of operations. The loss on disposal was estimated
as the net investment of DMX-E of $5,720,000 and the incurrence of certain
potential liabilities of $1,469,000 in conjunction with such disposal
activities.
DMX-E was formed by the Company to provide the necessary management,
marketing services and operating structure for the distribution of Digital
Music Express(R) ("DMX(R)"), throughout Europe. In 1993, TCI-Euromusic,
Inc. ("TCI-E"), an indirect affiliate of Tele-Communications, Inc. ("TCI"),
acquired a 49% equity interest in DMX-E through the purchase of 49% of the
outstanding common stock of DMX-E for $120,100, in addition to providing a
$24.4 million credit facility which was used for the start-up costs and
initial operations of DMX-E . The Company partially guaranteed the credit
facility, and would be liable for one-half of the TCI-E's "loss" as
defined, which may be payable at the option of the Company, in the
Company's Common Stock.
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 among the Company, TCI-E and United Artists Programming
International, Inc. ("UAPI"), an indirect affiliate of TCI and owner of the
outstanding shares of TCI-E. As a result of the merger, the Company
acquired the remaining 49% interest in DMX-E.
The merger was accounted for as a purchase and the Company issued
10,841,624 shares of its Common Stock to UAPI at a purchase price totaling
$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 and was calculated as follows:
<TABLE>
<S> <C>
Purchase price $27,104,060
Less book value of TCI-E net assets acquired (3,479,694)
-----------
23,624,366
Purchase price adjustments:
To adjust the investment in DMX-E for losses recorded by TCI-E, which were
also recognized by DMX Inc. based on the modified equity method of accounting (9,026,263)
To reverse allowance for uncollectible interest recorded by TCI-E @ 49% of the
interest accrued on the notes receivable (4,213,793)
Other 31,391
-----------
Goodwill $10,415,701
===========
</TABLE>
F-8
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DISPOSITION OF DMX-EUROPE N.V. AND SUBSIDIARY, CONTINUED.
--------------------------------------------------------
The accompanying consolidated balance sheet of the Company at September 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 September 30, 1996. Prior to May 18, 1996, the Company accounted
for its investment in DMX -E using the equity method of accounting.
PROPERTY AND EQUIPMENT.
----------------------
Property and equipment is carried at cost and is depreciated over three to
six years using the straight-line method. Leasehold improvements are
carried at cost and are depreciated over the shorter of the estimated five-
year useful life of the related asset or the term of the lease.
INCOME TAXES.
------------
Effective October 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS") No. 109. SFAS No. 109 requires
the "asset and liability" method of accounting for income taxes. The
adoption of SFAS No. 109 did not have any effect on the results of
operations for 1994.
FOREIGN CURRENCY TRANSLATION RESERVE.
------------------------------------
Unrealized gains and losses resulting from the translation of financial
statements are reflected as a separate component of stockholders' equity.
LOSS PER SHARE.
--------------
The loss per share has been calculated by dividing the loss for the year by
the weighted average number of common shares issued and outstanding during
the period. Outstanding share options, warrants, awards and shares
contingently issuable under equity participation agreements have not been
considered in the computation as their impact on the net loss per common
share would be antidilutive.
CASH EQUIVALENTS.
----------------
Cash equivalents include highly liquid investments with an original
maturity of three months or less.
CASH FLOW INFORMATION.
---------------------
Cash payments for interest in fiscal 1996, 1995 and 1994 were
$246,200, $236,500 and $152,700, respectively.
USE OF ESTIMATES.
----------------
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosures of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK.
----------------------------
The Company's accounts receivable balance is comprised primarily of amounts
due from cable system operators, with the majority due from its largest
customer, TCI.
F-9
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
RECLASSIFICATIONS.
-----------------
Certain reclassifications of prior period amounts have been made to conform
to the current year's reporting format.
(3) INVESTMENT IN GALACTIC/TEMPO SOUND PARTNERSHIP.
----------------------------------------------
The summarized balance sheet and operating data for the twelve month
periods ended September 30, 1996 and 1995 of the Galactic/TEMPO Sound
partnership follows:
<TABLE>
<CAPTION>
1996 1995
(Unaudited) (Unaudited)
-------------------------
<S> <C> <C>
Current assets $ 890,383 828,804
Non-current assets 143,797 186,747
Current liabilities 26,021 101,694
Partners' capital 1,008,159 913,857
Partners' draws for the period (300,000) (600,000)
Revenues 2,226,753 1,903,178
Operating expenses (1,832,299) (1,289,898)
Net income $ 394,454 613,280
=========================
</TABLE>
F-10
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) INVESTMENT IN DMX-EUROPE N.V. AND SUBSIDIARY.
--------------------------------------------
The summarized operating data for the years ended September 30, 1996 ,1995
and 1994, of DMX-Europe N.V. and subsidiary follows:
<TABLE>
<CAPTION>
For the year ended September 30,
STATEMENTS OF OPERATIONS DATA: 1996 1995 1994
---------------------------------------------
<S> <C> <C> <C>
Revenue $ 1,559,262 151,176 51,274
Operating, selling, general and administrative expenses 15,594,979 16,500,784 8,057,052
Depreciation and amortization 909,022 541,678 125,697
---------------------------------------------
Operating loss (14,944,739) (16,891,286) (8,131,475)
Interest expense (3,115,621) (2,876,252) (1,217,452)
Other 22,851 54,519 22,892
---------------------------------------------
Net loss $(18,037,509) (19,713,019) (9,326,035)
=============================================
</TABLE>
The summarized balance sheet date of DMX-E as of May 17, 1996 follows:
<TABLE>
At May 17, 1996
BALANCE SHEET DATA: (Unaudited)
---------------
<S> <C>
Current assets $ 2,146,889
Property and equipment net of accumulated depreciation 1,668,368
---------------
Total assets $ 3,815,257
===============
Trade accounts payable and accrued expenses $ 7,940,963
Intercompany - payables due parent 2,726,157
Long-term debt 30,792,911
---------------
Total liabilities 41,460,031
Net stockholders' deficit (37,644,774)
---------------
Total liabilities and stockholders' deficit $ 3,815,257
===============
</TABLE>
Long-term debt at September 30, 1996 of $34,393,318 represents intercompany
debt which included the original principal amount of the TCI-E note of
$24,436,000, the intercompany payables at May 17, 1996 of $2,726,157 and
related accrual interest of $7,231,161 thereon. Amounts were eliminated in
the accompanying consolidated balance sheets.
For the period from October 1, 1995 through May 17, 1996 and for the year
ended September 30, 1995, the Company charged DMX-E for certain expenses
totaling $682,000 and $3,816,000, respectively, related to salaries,
programming, marketing, equipment lease and research and development
expenses incurred by the Company on DMX-E's behalf. Amounts are included in
the accompanying consolidated statements of operations.
For the period from May 17, 1996 through September 30, 1996, the Company
charged DMX-E for certain expenses totaling $269,000, related to salaries,
programming, marketing, equipment lease and research and development
expenses incurred by the Company on DMX-E's behalf; $51,000 for royalties
and $874,000 for interest on intercompany debt. These amounts along with
the intercompany balances were eliminated in consolidation in the
accompanying consolidated balance sheet and statement of operations.
F-11
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
INVESTMENT IN DMX-EUROPE N.V. AND SUBSIDIARY, CONTINUED.
-------------------------------------------------------
In 1996, the Company was issued 10,000,000 shares of redeemable non-
cumulative, convertible, preferred stock by DMX-Europe (UK) Limited and had
advanced $3,377,000 for subscriptions to additional shares. These funds
were used to fund the operations of DMX-E.
(5) PROPERTY AND EQUIPMENT.
-----------------------
Property and equipment as of September 30, 1996 and 1995 consist of the
following:
<TABLE>
<CAPTION>
1996 1995
------------------------
<S> <C> <C>
Furniture and equipment $ 3,957,369 2,041,147
Leasehold improvements 181,348 186,573
Studio equipment 6,144,707 4,041,594
Music library 918,126 845,218
Computer system 1,251,460 498,411
-------------------------
12,453,010 7,612,943
-------------------------
Less accumulated depreciation and amortization (6,559,022) (3,276,565)
-------------------------
$ 5,893,988 4,336,378
=========================
</TABLE>
At September 30, 1996, studio equipment included approximately $245,000 in
equipment, net of accumulated depreciation of $475,000, that is being
leased to DMX-E for a monthly fee of approximately $23,000. Lease income
related to leased equipment to DMX-E for the period from October 1, 1995
through May 17, 1996, and the fiscal years ended September 30, 1995 and
1994 was approximately $172,000, $245,000 and $215,000, respectively, and
is included in other income. For the period from May 18, 1996 through
September 30, 1996, the lease income of approximately $103,000 was
eliminated in consolidation.
Studio equipment of $1,247,000, net of accumulated depreciation of
$919,000, at September 30, 1996 was financed under the capital lease
obligation.
During the fiscal year ended September 30, 1994, the Company moved its
studio and uplinking facility from Douglasville, Georgia to Littleton,
Colorado. As a result, the Company retired equipment that would not be
used in operations at its new location. The Company retired equipment with
a net book value of $107,806, resulting in a loss recorded during the
fiscal year ended September 30, 1994 included in other expense in the
accompanying consolidated statements of operations.
(6) NOTES PAYABLE.
-------------
At September 30, 1995, note payable to bank of $45,000 was secured by a
certificate of deposit included in securities held to maturity. The note
bore interest at one percent (1%) over the interest earned on the
certificate of deposit, or 6.2%. The note was repaid in the first quarter
of 1996.
At September 30, 1995, note payable of $201,090 was payable to TCI-
Euromusic, Inc. and bore interest at the rate of nine percent (9%) per
annum. The studio equipment purchased with the original proceeds of
$564,000 from this loan, is leased to DMX-E. The note was repaid in
connection with the merger with TCI-Euromusic, Inc. on May 17, 1996.
F-12
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) STOCKHOLDERS' (DEFICIT) EQUITY.
------------------------------
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, 1993 2,401,667 $1.95 - $8.875 per share, expiring on various dates,
December 31, 1995 to July 1, 2006.
Options issued 825,000 $3.50 - $5.375 per share
Options exercised (30,000) $4.59 - $4.18 per share
Options expired and terminated (100,834) $4.18 - $8.875 per share
---------
Outstanding options at
September 30, 1994 3,095,833 $1.95 - $6.25 per share, expiring on various dates,
December 31, 1996 to July 1, 2006.
Options issued 1,631,250 $2.00 - $3.25 per share
Options expired and terminated (331,250) $3.25 - $5.625 per share
---------
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
Options issued 100,000 $2.563 per share
Option expired and canceled (230,000) $2.563 - $4.180 per share
Option exercised (150,000) $1.95 per share
---------
Outstanding options at
September 30, 1996 4,115,833 $1.95 - $6.25 per share, expiring on various dates,
December 31, 1996 to July 1, 2006
</TABLE>
At September 30, 1996, options to purchase 3,157,500 shares were
exercisable at prices ranging from $1.95 to $6.25 per share. 2,891,250 of
the exercisable options were held by officers and directors of the Company.
EQUITY PARTICIPATION AGREEMENTS WITH AFFILIATES.
-----------------------------------------------
The Company entered into equity participation agreements with certain
affiliated cable companies during the fiscal years ended September 30, 1989
through 1992. Pursuant to the terms of those agreements, the Company issues
shares of Common Stock in exchange for the distribution of DMX, based on
distribution goals. Compensation to affiliates expense is calculated at the
fair market value of the Common Stock issued at the date the affiliated
cable company complied with the terms of the agreement. For the fiscal
years ended September 30, 1996 and 1995, no shares of Common Stock were
earned by the affiliated cable companies. In 1994, a total of 34,107
shares, were earned and issued.
F-13
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
STOCK BONUS AND OPTION COMPENSATION.
-----------------------------------
Stock bonus expense included $549,708 of compensation for each of the years
in the three-year period ended September 30, 1996, related to the 1992
extension of the exercise date of an option issued in October 1990. The
exercise date was extended from 1993 to December 31, 1996 and is an option
to purchase 350,000 shares of common stock granted to Jerold H. Rubinstein,
Chairman and Chief Executive Officer ("Chairman and CEO"). During the
fiscal year ended September 30, 1996, options to purchase 150,000 shares
were exercised.
Stock bonus expenses included $2,012,229 of compensation for the year ended
September 30, 1994, related to a stock bonus granted the Chairman and CEO
in 1991. The grant was for 1,027,520 shares of Common Stock at $5.875 per
share with original vesting at one-third per year. During the fiscal year
ended September 30, 1993, the Stock Bonus Agreement was amended to change
the vesting schedule, whereby two-thirds or 685,013 of the 1,027,520 shares
granted would all vest in 1994. As consideration for the Chairman and
CEO's agreement to defer the vesting of the shares, the Company granted the
Chairman and CEO a non-qualified option, pursuant to the 1993 Option Plan,
to purchase 70,000 shares of Common Stock at $5.00 per share (the fair
market value of the Common Stock on the date of grant).
COMMON STOCK.
------------
During 1996, the Company completed private placements with certain related
parties. Stephen A. Wynn, a director of the Company, acquired 500,000
shares at 2.00 per share on March 15, 1996. TCI acquired 4,500,000 shares
at 2.00 per share on May 17, 1996 and was issued 10,841,624 shares valued
at $2.50 per share in the Company merger with TCI-E. In addition, TCI
bought Stephen A. Wynn's 5,200,000 shares in the Company for 2.00 per
share.
During 1995, the Company completed private placements with certain related
parties. Tele-Communications, Inc. acquired 2,000,000 shares, at $2.50 per
share on August 29, 1995. Shaw Communications Inc. acquired 1,100,000
shares, at $2.13 per share on March 9, 1995, and acquired 2,000,000 shares
at $2.50 per share on August 25, 1995. J.C. Sparkman, a director of the
Company, acquired 100,000 shares at $2.50 per share on September 21, 1995.
Stephen A. Wynn, a director of the Company, acquired 2,200,000 shares at
$2.13 per share on February 21, 1995.
(8) INCOME TAXES.
------------
At September 30, 1996, the Company had approximately $82,900,000 of net
operating loss carryforwards for U.S. Federal income tax reporting
purposes, expiring in years 2002 through 2011. The net operating loss
carryforward for U.S. Federal income tax purposes does not include
deductions for the following: equity in loss of DMX-E and option
compensation, offset partially by a deduction of executive compensation
resulting from the exercise of stock options for U.S. Federal income tax
purposes. The amount of U.S. income tax loss carryforwards available to
offset U.S. taxable income in any year may be limited under Section 382 of
the Internal Revenue Code of 1986 ("Code"), as amended, which limits the
amount of loss carryforwards that may be utilized in any particular tax
period when a "change of control" of the Company has occurred for U.S. tax
purposes.
Any deferred tax amount relating to the net operating loss carryforwards,
or any other deferred tax asset, has been fully offset by a valuation
allowance. Accordingly, no income tax benefit has been recorded.
F-14
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(9) COMMITMENTS AND CONTINGENCIES.
-----------------------------
CAPITAL LEASE WITH RELATED PARTY.
--------------------------------
During fiscal 1995 the Company entered into an Agreement (the "Agreement")
with Western Tele-Communications, Inc. ("WTCI"), a subsidiary of TCI, to
lease up to $2.2 million of equipment on a draw-down basis. As of September
30, 1996, the Company had drawn $2,166,000 to finance equipment for its
studio and uplinking facility in Littleton, Colorado. This amount is
included in Property and Equipment in the accompanying consolidated balance
sheets. The Agreement term extends through the year 2000, at an interest
rate of 9.5%.
OPERATING LEASE COMMITMENTS.
---------------------------
The Company is obligated under various operating leases for office space,
uplinking and satellite services. Certain leases are cancelable subject to
penalties. Total expenses under these leases were approximately $5,324,000
in 1996, $5,097,900 in 1995 and $4,185,000 in 1994 and are included in
general and administrative, sales and marketing and studio expenses in the
accompanying consolidated statements of operations.
Minimum lease payments under the capital and operating leases at September
30, 1996 follows:
<TABLE>
<CAPTION>
Operating Operating
Fiscal year ending Capital Leases with Leases with
September 30: Lease Related Parties Others
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 $ 622,173 $ 4,516,200 $ 607,900
1998 622,173 4,516,200 727,200
1999 610,550 4,516,200 703,500
2000 407,906 3,316,800 679,300
2001 73,778 2,258,400 666,900
Thereafter - 7,904,400 -
----------------------------------------------
Total minimum lease payments $2,336,580 $27,028,200 $3,384,800
==============================================
Less amounts representing interest (525,046)
----------
Present value of net minimum lease payments $1,811,534
==========
</TABLE>
The operating leases with related parties include the lease of studio
facilities in Colorado and uplinking and satellite services from WTCI.
Total expenses under leases with related party were $4,831,000 in 1996,
$4,489,000 in 1995 and $3,678,000 in 1994.
MANUFACTURING COMMITMENTS AND ROYALTY PAYABLE.
---------------------------------------------
The Company and Scientific-Atlanta, Inc. ("S-A"), had an agreement with
respect to the manufacture, distribution and servicing of the DM-2000
tuners and DMXsDJ's. The Company was not obligated to purchase or
guarantee the purchase of any minimum number of tuners or DMXsDJ's, but
S-A was the exclusive tuner manufacturer in the U.S. and Canada and
earned a royalty of approximately five percent (5%) of the Company's
premium audio service revenues until August 1996. No payments are
required until the Company achieves "operating breakeven", as defined in
the agreement.
The Company and Comstream Corporation ("Comstream"), have an agreement with
respect to the manufacture, distribution and servicing of the DR-200
Digital Satellite Receiver. The Company has guaranteed the purchase of
50,000 digital satellite receivers by it, its approved customers and/or
affiliates within 42 months after commencement of the agreement.
F-15
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
401(k) SAVINGS PLAN.
-------------------
The Company maintains a qualified defined contribution 401(k) savings plan.
Prior to January 1, 1995 eligible participants vested 100% in employer
matching contributions of 10% of the participants pretax deferrals invested
in the Company's common stock. Subsequent to January 1, 1995, eligible
participants vest in employer matching contributions of 10% of the
participants pretax deferrals invested in the Company's common stock in
accordance with the vesting schedule as defined in the agreement. The
discretionary employer matching contribution was 10 percent of the
participants pretax deferrals invested in the Company's common stock. For
the fiscal year ended September 30, 1996, the Company's employee benefit
expense for matching contributions totaled $5,160.
PARENT GUARANTEES.
-----------------
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 $1.3 million which is included in the loss on
disposal of DMX-E in the accompanying consolidated statement of operations.
The Company has also guaranteed certain other obligations of DMX-E under
the Subscriber Management Services Agreement between DMX-E and Selco
Servicegesellschaft Fur Elektronische Kommunikation mbH and the related
side letter agreement. The Company cannot estimate the amount of any
potential claims at this time under such guarantee; however, such
liabilities could have a material adverse effect upon the financial
position and results of operation of the Company.
As described in note 2, "Discontinued Operations of DMX-Europe N.V. and
subsidiary", the Company has ceased funding the operations of DMX-E and has
entered into agreements providing for the disposition of DMX-E to Jerold
Rubinstein, Chairman and Chief Executive Officer of the Company. Mr.
Rubinstein will seek to reorganize the operations of DMX-E and also seek
new equity partners. To the extent a reorganization cannot be achieved and
in the absence of some other arrangement to provide financial support to
DMX-E, the European companies will be placed into receivership. In such
circumstances, claims may be filed under the guarantees discussed above or
other claims may be asserted.
LEGAL ACTIONS.
-------------
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,
except as set forth in the next paragraph, disposition of such matters are
not expected to have a material adverse effect upon the financial position,
results of operations or liquidity of the Company.
On September 8, 1996, a purported class action lawsuit entitled
Brickell Partners v. Jerold H. Rubinstein, Donne F. Fisher, Leo J. Hindery,
---------------------------------------------------------------------------
Jr., James R. Shaw, Sr., Kent Burkhart, J.C. Sparkman, Menon Bhaskar, DMX
-------------------------------------------------------------------------
Inc., and Tele-Communications, Inc. (Civil Action No. 15206) was filed in
-----------------------------------
the Delaware Chancery Court alleging, among other things, that the proposed
acquisition of the Company by TCI is wrongful, unfair and harmful to
the Company's public stockholders and seeking to enjoin the consummation of
the Merger. The Company believes that this action is without merit and
intends to defend it vigorously.
F-16
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) LIQUIDITY AND CAPITAL RESOURCES.
-------------------------------
The Company has historically funded its operations primarily through the
sale of its common stock. During the fiscal year ended September 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-shareholder, the sale of $9.0 million of
Common Stock to TCI and $293,000 from the exercise of options by the Chief
Executive Officer to purchase 150,000 shares of Common Stock at $1.95 per
share. The decrease in cash of $7.5 million for the year was the net result
of $10.3 million of cash raised in financing activities less cash used in
investing activities of $8.5 million, relating primarily to the funding of
DMX-E losses, and cash used in operating activities of $8.9 million.
With the discontinuation of the operations of DMX-E, management believes
that the Company will begin to generate cash from it's operating activities
on a prospective basis, and has reduced its operating expenses to extend
the U.S. operation's working capital. However, the Company will need
additional funding to meet certain obligations related to the
discontinuance of operations of DMX-E and to continue to expand and develop
the Company's business pursuant to management's current plans. The Company
is negotiating with TCI for a $3.5 million loan to fund past and future
tuner purchases. However, the Company is not seeking additional financing
at this time to fund its other operational requirements and its obligations
related to the discontinuance of the operations of DMX-E due to the
pendency of the TCI acquisition proposal and management's belief that with
the closure of the Company's European operations, its domestic cash flow
should be sufficient to meet the Company's cash requirements. However, if
such assumption is not accurate or if future financing is required and is
not available, then management would seek to 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.
There can be no assurance that the Company will be able to reduce its
operating expenses sufficiently to meet its available cash resources while
maintaining its competitive position.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
experienced reoccurring losses from operations and has a net capital
deficiency. While the Company believes it will be able to generate cash
from its operating activities on a prospective basis, there can be no
assurance that such cash, if any, combined with other financings will be
sufficient to meet the Company's existing and future obligations. The
consolidated financial statements do not include all potential adjustments
that could result from potential claims under the above noted parent
guarantees or other obligations of DMX-E. As described in notes 2 and 9 to
the Company's consolidated financial statements and in "Disposal of DMX-E"
above, the Company has ceased funding the operations of DMX-E and the
Company has entered into agreements providing for the disposition of DMX-E
to Jerold Rubinstein, Chairman and Chief Executive Officer of the Company.
Mr. Rubinstein will seek to reorganize the operations of DMX-E and also
seek new equity partners. To the extent a reorganization cannot be achieved
and in the absence of some other arrangement to provide financial support
to DMX-E, the European companies will be placed into receivership. In such
circumstances, claims may be filed under the guarantees. Such adjustments
could have a material adverse effect upon the financial position and
results of operations of the Company.
F-17
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) RECENT DEVELOPMENTS.
-------------------
On August 30, 1996, the Company received an unsolicited proposal from TCI
proposing the merger of the Company with a TCI subsidiary. Following
receipt of the proposal, the Company established a special committee of its
Board of Directors to consider the proposal and retained Houlihan Lokey
Howard & Zukin to act as its financial advisor. The Company is currently
negotiating the terms of a definitive merger agreement with TCI, which owns
approximately 45% of DMX Inc.'s outstanding stock. The merger agreement
would provide for a merger in which DMX Inc. would be acquired by a new
corporation ("Music Co.") to be formed by TCI pursuant to which the
shareholders of DMX Inc. would receive Class A Common Stock of Music Co.
representing approximately 19.25% of the total outstanding shares of Music
Co.'s Class A Common Stock and Class B Common Stock The Class A Common
Stock would be identical to the Class B Common Stock to be held by TCI
except that each share of Class B Common Stock would have ten votes on all
matters while shares of Class A Common Stock would have one vote. In
connection with the merger and the issuance of the Class B Common Stock to
TCI, TCI would cause certain affiliates to contribute and transfer to Music
Co. all of their respective rights, title and interest in certain specified
assets. To the extent that Music Co.'s Class A Common Stock does not trade
at or above $2 per share, for at least twenty consecutive trading days
during the first year following the merger, holders of the Class A Common
Stock would have the right, exercisable during the 30 day period beginning
on the first anniversary of the merger, to require TCI to purchase such
Class A Common Stock at a price of $2.00 per share, payable at TCI's option
either in cash or shares of TCI's TCI Group Series A Common Stock. In
connection with the merger negotiations, the Company is negotiating with
TCI for a $3.5 million loan to purchase, or reimburse the Company for the
purchase of, tuners and related equipment.
F-18
<PAGE>
DMX-EUROPE N.V.
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
With Independent Auditors' Report
F-19
<PAGE>
PO Box 695
8 Salisbury Square
London EC4Y 8BB
Independent auditors' report
To the Board of directors and stockholders of DMX-Europe N.V.
We have audited the accompanying consolidated balance sheets of DMX-Europe
N.V. and subsidiary as of September 30, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the years in the three year period ended 30 September 1996. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in Note 8 to the
financial statements, the company has suffered recurring losses from
operations and has a net capital deficiency that raise substantial doubt about
its ability to continue as a going concern. In addition, during 1996, DMX
Inc. stated that it would no longer financially support DMX-Europe. In
December 1996, DMX Inc.'s board of directors approved the disposal of DMX-
Europe N.V. and subsidiary to Mr Jerold Rubinstein, its Chairman and Chief
Executive Officer. Mr Rubinstein's plans in regard to these matters are also
described in note 8. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Because of the significance of the uncertainty discussed in the preceding
paragraph, we are unable to express, and we do not express, an opinion on the
accompanying financial statements.
KPMG
Chartered Accountants
Registered Auditors London, England
January 9, 1997
F-20
<PAGE>
DMX-Europe N.V.
Consolidated Balance Sheets
as of September 30, 1996 and 1995
Assets
<TABLE>
<CAPTION>
1996 1995
$ $
<S> <C> <C>
Current assets
Cash and cash equivalents 192,635 694,079
Prepaid expenses 851,586 971,998
Trade accounts receivable 435,480 96,712
Inventories 98,517 226,525
---------- ---------
Total current assets 1,578,218 1,989,314
---------- ---------
Fixed assets
Equipment 3,080,294 2,806,647
Less accumulated depreciation and amortization (1,605,105) (697,413)
---------- ---------
1,475,189 2,109,234
---------- ---------
Total assets 3,053,407 4,098,548
========== =========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-21
<PAGE>
DMX-Europe N.V.
Consolidated Balance Sheets
as of September 30, 1996 and 1995
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
1996 1995
$ $
<S> <C> <C>
Current liabilities
Trade accounts payable 7,284,664 3,761,246
Due to parent company 355,152 2,044,311
Accrued expenses 1,495,546 1,899,710
----------- -----------
Total current liabilities 9,135,362 7,705,267
Long term debt (note 3) 34,393,318 28,664,046
----------- -----------
Total liabilities 43,528,680 36,369,313
----------- -----------
Stockholders' equity/(deficit)
Common stock 10 Dutch Florins par value,
authorised 100,000 shares, issued 39,216 shares 245,100 245,100
Minority interests - non-cumulative, non-voting,
convertible, redeemable 5% preference shares of
$1 each of DMX-Europe (UK) Limited owned by DMX
Inc., authorised 10,000,000 shares:
- - subscribed and issued 10,000,000 -
- - subscribed and unissued 3,377,000 3,500,000
Accumulated deficit (54,045,058) (36,007,549)
Cumulative translation adjustment (52,315) (8,316)
----------- -----------
Net stockholders' deficit (40,475,273) (32,270,765)
----------- -----------
Total liabilities and stockholders' equity 3,053,407 4,098,548
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-22
<PAGE>
DMX-Europe N.V.
Consolidated Statements of Operations
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
$ $ $
<S> <C> <C> <C>
Revenues
Subscriber fees 1,357,733 151,176 51,274
Other revenue 201,529 - -
----------- ----------- ----------
1,559,262 151,176 51,274
Operating expenses
General and administrative 3,386,993 3,117,943 1,979,256
Sales and marketing 3,109,790 3,259,442 1,125,124
Studio and programming 8,766,981 8,148,891 4,135,345
Research and development 331,215 1,974,508 817,327
Depreciation and amortization 909,022 541,678 125,697
----------- ----------- ----------
16,504,001 17,042,462 8,182,749
----------- ----------- ----------
Loss from operations (14,944,739) (16,891,286) (8,131,475)
Other income/(expenses)
Interest income 22,851 54,519 22,892
Interest expense (3,115,621) (2,876,252) (1,217,452)
----------- ----------- ----------
Net loss (18,037,509) (19,713,019) (9,326,035)
=========== =========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-23
<PAGE>
DMX-Europe N.V.
Consolidated Statement of Stockholders' Equity
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Common Preference Accumulated Translation Total
Stock Stock Deficit Adjustment Stockholders'
Equity
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
Balance October 1, 1993 245,100 - (6,968,495) 32,312 (6,691,083)
Movement year ended
September 30, 1994 - - - (12,630) (12,630)
Net loss for the year ended
September 30, 1994 - - (9,326,035) - (9,326,035)
------- ---------- ----------- ------- -----------
Balance October 1, 1994 245,100 - (16,294,530) 19,682 (16,029,748)
Movement year ended
September 30, 1995 - - - (27,998) (27,998)
Subscribed and unissued
preference shares - 3,500,000 - - 3,500,000
Net loss for the year ended
September 30,1995 - - (19,713,019) - (19,713,019)
------- ---------- ----------- ------- -----------
Balance October 1, 1995 245,100 3,500,000 (36,007,549) (8,316) (32,270,765)
Movement year ended
September 30, 1996 - - - (43,999) (43,999)
Authorised and subscribed
preference shares - 10,000,000 - - 10,000,000
Conversion of unissued to
issued preference shares - (3,500,000) - - (3,500,000)
Subscribed and unissued
preference shares - 3,377,000 - - 3,377,000
Net loss for the year
September 30, 1996 - - (18,037,509) - (18,037,509)
------- ---------- ----------- ------- -----------
Balance September 30, 1996 245,100 13,377,000 (54,045,058) (52,315) (40,475,273)
======= ========== =========== ======= ===========
</TABLE>
F-24
<PAGE>
DMX-Europe N.V.
Consolidated Statements of Cash Flows
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
$ $ $
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss (18,037,509) (19,713,019) (9,326,035)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization 909,022 541,678 125,697
Change in prepaid expenses 133,140 (520,647) (54,974)
Change in accounts receivable (364,432) (67,496) (6,885)
Change in inventories 123,943 (227,292) -
Change in accounts payable 3,539,707 3,510,898 (276,604)
Change in accrued liabilities (379,443) 1,073,850 206,877
Change in intercompany liability with DMX Inc. (1,689,159) 1,554,015 (161,386)
Change in accrued interest liability with TCI - Euromusic (4,228,046) 2,849,368 1,217,425
Change in accrued interest liability with DMX Inc. 874,250 - -
----------- ----------- ----------
NET CASH USED IN OPERATING ACTIVITIES (19,118,527) (10,998,645) (8,275,885)
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (288,174) (2,277,906) (246,180)
----------- ----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (288,174) (2,277,906) (246,180)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Note payable DMX Inc. 33,519,068 - -
Loan principal (assignments)/drawdowns (24,436,000) 9,436,000 9,500,000
Subscribed preference stock 9,877,000 3,500,000 -
----------- ----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 18,960,068 12,936,000 9,500,000
----------- ----------- ----------
Effect of exchange rate changes on cash (54,811) (29,004) 5,337
NET CHANGE IN CASH AND CASH EQUIVALENTS (501,444) (369,555) 983,272
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 694,079 1,063,634 80,362
----------- ----------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR 192,635 694,079 1,063,634
=========== =========== ==========
</TABLE>
No interest or tax was paid in any of the periods presented.
F-25
<PAGE>
DMX-Europe N.V.
Notes to consolidated financial statements
(forming part of the consolidated financial statements)
1 INCORPORATION AND NATURE OF BUSINESS
DMX-Europe N.V. was incorporated under the laws of the Netherlands on
February 17, 1992. DMX-Europe N.V.'s primary business is to market premium
digital audio channels of music programming, known as Digital Music
Express(R) ("DMX(R)"), throughout Europe to cable, and direct-to-home
subscribers.
DMX-Europe N.V. owns 100% of the outstanding share capital of DMX-Europe (UK)
Limited, a United Kingdom company.
DMX Inc., a Delaware corporation, owns 100% of the outstanding common stock
having acquired the 49% shareholding previously held by TCI-Euromusic Inc.,
("TCI-E"), a Colorado corporation and a subsidiary of Tele-Communications
Inc., ("TCI"), as part of the merger transaction on May 17, 1996 whereby DMX
Inc. acquired all the outstanding equity of TCI-E.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PREPARATION
The company and its subsidiary, DMX-Europe (UK) Limited have suffered
recurring losses from operations, have negative working capital and a net
stockholders' deficit. In addition, during 1996, DMX Inc. stated that it
would no longer financially support DMX-Europe. In December 1996, DMX Inc.'s
board of directors approved the disposal of DMX-Europe N.V. and subsidiary,
DMX-Europe (UK) Limited ("DMX-E") to Mr Jerold Rubinstein, its Chairman and
Chief Executive Officer. DMX Inc. will retain a ten percent equity interest
in the companies which would have an exclusive five year, royalty free
license to use DMX Inc.'s music in Europe, the former Soviet Union, and in
the Middle East. It is Mr Rubinstein's intention to seek to reorganize the
operation of DMX-E and seek new equity investors. However, there can be no
assurances that the proposed reorganization will take place or that new
equity investors will be found. Accordingly there is significant doubt as to
the company's ability to continue as a going concern. The financial
statements do not include any adjustment that might result from the outcome
of this uncertainty.
ACCOUNTING PRINCIPLES AND CONSOLIDATION
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States. The
consolidated financial statements include the accounts of the company and its
wholly owned subsidiary, DMX-Europe (UK) Limited. All material intercompany
transactions have been eliminated.
F-26
<PAGE>
DMX-Europe N.V.
Notes (continued)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
CASH EQUIVALENTS
Cash equivalents of approximately $193,000 at September 30, 1996, (1995:
$694,000) consist of balances held by banks.
The company considers short-term, highly liquid investments with original
maturities of three months or less to be cash equivalents.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and amounted to
$334,000 during 1996 (1995: $1,988,000).
EQUIPMENT
Equipment is stated at cost and depreciated over 3 to 5 years using the
straight line method.
INVENTORIES
Inventories are stated at the lower of cost and net realisable value.
FOREIGN CURRENCY
The financial statements of DMX-Europe N.V. and its subsidiary are maintained
in their functional currencies, US Dollars and British Pound Sterling,
respectively. Translation gains have been recorded in a separate section of
stockholders' equity. Exchange gains resulting from foreign currency
transactions, amounting to $69,042 (1995: $13,930), have been included in the
consolidated statement of operations.
INCOME TAXES
These financial statements adopt the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 109. SFAS No. 109 requires the "asset and
liability" method of accounting for income taxes.
F-27
<PAGE>
DMX-Europe N.V.
Notes (continued)
3 LONG TERM DEBT
Long term debt at September 30, 1996, and September 30, 1995 consists of
the following:
<TABLE>
<CAPTION>
1996 1995
$ $
<S> <C> <C>
Loan draw-downs from TCI-Euromusic Inc. - 24,436,000
Interest on the above loan - 4,228,046
Note payable DMX Inc. 33,519,068 -
Accrued interest on the above 874,250 -
---------- ----------
34,393,318 28,664,046
========== ==========
</TABLE>
On May 19, 1993, the company entered into a financing agreement with its then
49% shareholder, TCI-E. Under the terms of this agreement, TCI-E agreed to
provide a maximum loan facility of $24,436,000 to the company. As at
September 30, 1995, DMX-Europe N.V. had drawn down the maximum amount,
$24,436,000, available under this facility.
On May 17, 1996 TCI-E was fully merged with and into DMX Inc. the parent
company of DMX-Europe NV. As a result of this merger the loan principal of
$24,436,000 together with the related accrued interest outstanding as at May
17, 1996 of $6,356,911 was assigned to DMX Inc.
These assigned loan and accrued interest amounts, together with the
intercompany liability of $2,726,157 due to DMX Inc. as at May 17, 1996, were
converted into a note payable totalling $33,519,068 in favour of DMX Inc. The
terms and conditions attaching to this note payable have yet to be finalised
and incorporated into a formal loan agreement. In the interim, an interest
charge of 7% per annum is being accrued on the total amount of the note
payable outstanding.
As at September 30, 1996 accrued interest of $874,250 was due and payable to
DMX Inc. as part of this interim arrangement.
F-28
<PAGE>
DMX-Europe N.V.
Notes (continued)
4 COMMITMENTS
The company is obligated under various operating leases for office space,
uplinking and satellite services, which include sub leases for Astra digital
subcarriers and associated advertising and marketing commitments. Certain
leases are cancellable subject to penalties. The company is also obligated
under various agreements for the provision of subscriber management services.
Total expenses under these leases and agreements were approximately
$8,937,000 in 1996 (1995: $8,263,000) and are included in general and
administrative, studio and programming, and sales and marketing costs in the
accompanying consolidated statements of operations. As of September 30, 1996,
minimum annual lease commitments were as follows:
Fiscal year ending 30 September:
<TABLE>
<CAPTION>
$
<S> <C>
1997 9,902,000
1998 6,567,000
1999 5,950,000
2000 6,252,000
2001 6,094,000
Thereafter 6,157,000
----------
Total minimum lease commitments 40,922,000
==========
</TABLE>
5 RELATED PARTY TRANSACTIONS
DMX-Europe N.V. has incurred expenses of approximately $1,036,997 (1994:
$2,392,181) for salaries, programming, marketing and research and development
costs recharged from DMX Inc. These are included in the consolidated
financial statements as part of operating expenses.
6 INCOME TAXES
As at September 30, 1996 the company and its subsidiary have net operating
losses carried forward for Dutch and UK tax authority purposes. These have
still to be quantified with the relevant fiscal authority. However any
deferred tax asset relating to net operating losses carried forward, or any
other deferred tax asset, will be fully offset by a valuation allowance.
Accordingly, no income tax benefit has been recorded.
F-29
<PAGE>
DMX-Europe N.V.
Notes (continued)
7 SEGMENTAL ANALYSIS
<TABLE>
<CAPTION>
1996 1995 1994
$ $ $
<S> <C> <C> <C>
UK and Eire 229,114 18,125 8,503
Germany, Austria and Switzerland 1,087,378 - -
Scandinavia 59,797 78,250 42,458
Rest of Europe 162,973 54,801 313
Asia Pacific rim 20,000 - -
--------- ------- ------
1,559,262 151,176 51,274
========== ======= ======
</TABLE>
8 LIQUIDITY AND CAPITAL RESERVES
The company and its subsidiary, DMX-Europe (UK) Limited have suffered
recurring losses from operations, have negative working capital and a net
stockholders' deficit. In addition, during 1996, DMX Inc. stated that it
would no longer financially support DMX-Europe. In December 1996, DMX Inc.'s
board of directors approved the disposal of DMX-Europe N.V. and subsidiary,
DMX-Europe (UK) Limited ("DMX-E") to Mr Jerold Rubinstein, its Chairman and
Chief Executive Officer. DMX Inc. will retain a ten percent equity interest
in the companies which would have an exclusive five year, royalty free
license to use DMX Inc.'s music in Europe, the former Soviet Union, and in
the Middle East. It is Mr Rubinstein's intention to seek to reorganize the
operation of DMX-E and seek new equity investors. However, there can be no
assurances that the proposed reorganization will take place or that new
equity investors will be found. Accordingly there is significant doubt as to
the company's ability to continue as a going concern. The financial
statements do not include any adjustment that might result from the outcome
of this uncertainty.
F-30
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
The Board of Directors
DMX Inc.:
We consent to the incorporation by reference in the registration statement (No.
33-62002) on Form S-8 of DMX Inc. and the registration statement (No. 33-57168)
on Form S-8 of DMX Inc. of our report dated January 15, 1997, relating to the
consolidated balance sheets of DMX Inc. and subsidiary as of September 30, 1996,
and 1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
September 30, 1996, which report appears in the September 30, 1996 annual report
on Form 10-KA of DMX Inc.
Our report dated January 15, 1997 contains an explanatory paragraph that states
that the Company has experienced recurring losses from operations and has a net
capital deficiency that raise substantial doubt about its ability to continue as
a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
KPMG Peat Marwick LLP
Los Angeles, California
January 15, 1997
