<PAGE>
As filed with the Securities and Exchange Commission on May 15, 1997.
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 March 31, 1997
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 March 31, 1997, the Registrant had 59,586,594 shares of its Common Stock
outstanding, excluding 85,630 shares held as Treasury Stock.
<PAGE>
PART I.
Item 1. Financial Statements
DMX INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1997
with comparative figures at September 30, 1996
<TABLE>
<CAPTION>
March 31, 1997 September 30, 1996
--------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 883,904 928,399
Prepaid expenses 648,811 464,545
Equipment inventory 579,330 438,163
Accounts receivable:
Trade related party 1,648,601 1,828,973
Other trade 3,229,148 2,732,018
Allowance for doubtful accounts (381,029) (251,247)
------------- ----------
Total current assets 6,608,765 6,140,851
Current assets DMX-Europe N.V.:
Cash 136,191 192,635
Prepaid expenses 586,871 851,586
Equipment inventory 90,963 98,517
Accounts receivable (net) 721,660 435,480
------------- ----------
Total current assets DMX-Europe N.V. 1,535,685 1,578,218
--------------------------------------
Total current assets 8,144,450 7,719,069
Investment in Galactic/TEMPO Sound (note 3) 526,159 504,156
Property and equipment, net (note 5) 4,186,240 4,418,799
Property and equipment DMX-Europe N.V., net (note 5) 1,006,972 1,475,189
Goodwill, net (note 2 and 4) 4,275,264 4,535,658
Other assets 108,271 99,148
--------------------------------------
Total Assets $ 18,247,356 18,752,019
======================================
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 2,118,163 1,097,476
Accrued liabilities 5,549,313 4,886,837
Accrued loss on disposal - DMX-Europe N.V. (note 4) 1,468,530 1,468,530
Current portion of capital lease obligation 458,279 410,108
------------- ----------
Total current liabilities 9,594,285 7,862,951
Current liabilities DMX-Europe N.V.:
Accounts payable 10,441,835 7,284,664
Accrued liabilities 2,192,714 1,488,492
------------- ----------
Total current liabilities DMX-Europe N.V. 12,634,549 8,773,156
--------------------------------------
Total current liabilities 22,228,834 16,636,107
Deferred revenue 258,531 295,461
Royalty payable 1,773,275 1,773,275
Note payable related party (note 6) 1,867,791 -
Capital lease obligation 1,170,242 1,401,426
Stockholders' deficit (note 7):
Common Stock, $.01 par value. Authorized 100,000,000 shares;
issued 59,672,224 shares 596,722 at March 31, 1997 and at
September 30, 1996 596,722 596,722
Paid-in capital 136,895,686 136,758,259
Accumulated deficit (145,909,910) (138,078,913)
Foreign currency translation reserve (55,812) (52,315)
Treasury stock, 85,630 shares, at cost (578,003) (578,003)
--------------------------------------
Net stockholders' deficit (9,051,317) (1,354,250)
Commitments and contingencies (note 8) - -
Total Liabilities and Stockholders' Deficit $ 18,247,356 18,752,019
======================================
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
DMX INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Six month periods ended March 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Revenues:
Subscriber fee revenues - related party $ 4,772,259 4,353,559
Subscriber fee revenues - other 4,209,483 3,159,978
Other revenue, net 372,596 119,226
Revenue - DMX-Europe N.V. (note 4) 1,447,129 -
---------------- ---------------
10,801,467 7,632,763
Operating expenses:
General and administrative 3,034,308 2,779,077
Sales and marketing 3,331,336 4,696,127
Studio and programming 4,950,136 4,505,277
Research and development 358,152 416,912
Stock bonus and option compensation 137,427 274,854
Depreciation and amortization 1,193,713 805,762
Operating expenses - DMX-Europe N.V. (note 4) 5,578,790 -
---------------- ---------------
18,583,862 13,478,009
Net operating loss (7,782,395) (5,845,246)
Other income (expense):
Galactic/TEMPO Sound 172,003 31,241
Equity in loss of DMX-Europe N.V. (note 4) - (9,486,767)
Interest income 17,061 74,633
Interest expense (137,592) (100,042)
Interest expense - DMX-Europe N.V. (note 4) (99,473) -
Other income 1,520 137,080
Other expense (2,121) -
---------------- ---------------
(48,602) (9,343,855)
Net loss $ (7,830,997) (15,189,101)
================ ===============
Loss per share $ (.13) (.35)
================ ===============
Weighted average number of shares 59,586,594 43,727,048
================ ===============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
DMX INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Three months ended March 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
--------------- ----------------
<S> <C> <C>
Revenues:
Subscriber fee revenues - related party $ 2,382,615 2,209,613
Subscriber fee revenues - other 2,215,820 1,669,996
Other revenue, net 226,111 82,686
Revenue - DMX-Europe N.V. (note 4) 753,836 -
--------------- ----------------
5,578,382 3,962,295
Operating expenses:
General and administrative 1,497,052 1,265,837
Sales and marketing 1,634,242 2,446,196
Studio and programming 2,517,207 2,414,383
Research and development 165,841 199,442
Stock bonus and option compensation - 137,427
Depreciation and amortization 602,244 425,436
Operating expenses - DMX-Europe N.V. (note 4) 2,609,229 -
--------------- ----------------
9,025,815 6,888,721
Net operating loss (3,447,433) (2,926,426)
Other income (expense):
Galactic/TEMPO Sound 77,352 62,937
Equity in loss of DMX-Europe N.V. (note 4) - (4,979,266)
Interest income 7,403 15,791
Interest expense (79,063) (57,809)
Interest expense - DMX-Europe N.V. (note 4) (55,618) -
Other income 132 68,068
Other expense (1,178) -
--------------- ----------------
(50,972) (4,890,279)
Net loss $ (3,498,405) (7,816,705)
=============== ================
Loss per share $ (.06) (.18)
=============== ================
Weighted average number of shares 59,586,594 43,774,007
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
DMX INC.
AND SUBSIDIARIES
Consolidated Statement of Stockholders Equity
For the period from September 30, 1995 to March 31, 1997
<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, 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 - - 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)
Accrued compensation
(unaudited) - - 137,427 - - - 137,427
Foreign currency translation
reserve (unaudited) - - - - - (3,497) (3,497)
Net loss (unaudited) - - - (7,830,997) - - (7,830,997)
--------------------------------------------------------------------------------------------------
Balance at March 31, 1997
(unaudited) 59,672,224 $ 596,722 $136,895,686 $(145,909,910) $ (578,003) $(55,812) $ (9,051,317)
==================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
DMX INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six months ended March 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,830,997) (15,189,101)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,680,613 805,762
Equity in loss (earnings) of Galactic/TEMO Sound (172,003) (31,241)
Equity in loss of of DMX-Europe N.V. - 9,486,767
Compensation expense for stock bonus and options 137,427 274,854
Provision for doubtful accounts 433,824 -
Increase in prepaid and other current assets (15,691) (205,253)
Increase in receivables (904,841) (1,351,689)
Increase in other assets (9,123) (129,073)
Decrease in deferred revenue (36,930) (57,418)
Increase in royalty payable - 288,674
Increase in accounts payable and accrued liabilities 5,511,252 1,620,084
---------------- -----------
Net cash used in operating activities (1,206,469) (4,487,634)
---------------- -----------
Cash flows from investing activities:
Purchase of property and equipment, net (700,397) (765,365)
Advances to DMX-Europe N.V., net - (551,848)
Investment in preferred stock of DMX-Europe (UK) Limited - (5,990,000)
Proceeds from securities held to maturity - 165,000
Dividend from Galactic/TEMPO Sound 150,000 -
---------------- -----------
Net cash used in investing activities (550,397) (7,142,213)
---------------- -----------
Cash flows from financing activities:
Issuance of common stock, net - 1,000,000
Proceeds from note payable to related party 1,867,791 2,500,000
Repayment of note payable to bank - (45,000)
Repayment of principal portion of capital lease obligation (211,864) (174,784)
---------------- -----------
Net cash used by financing activities 1,655,927 3,280,216
---------------- -----------
Net decrease in cash and cash equivalents (100,939) (8,349,631)
Cash and cash equivalents, beginning of period 1,121,034 8,622,119
---------------- -----------
Cash and cash equivalents, end of period $ 1,020,095 272,488
================ ===========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
DMX INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six month period ended March 31, 1997
(Unaudited)
(1) Basis of Presentation.
- --------------------------
The accompanying consolidated balance sheets of DMX Inc. and Subsidiaries
("the Company") at March 31, 1997, the related consolidated statements of
operations for the six months and three months ended March 31, 1997 and
1996, and related statements of cash flows and stockholders' deficit for
the six months ended March 31, 1997 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 March 31, 1997 and the results of operations and cash flows for
the six months ended March 31, 1997 and 1996. The results of operations for
the six months ended March 31, 1997, are not necessarily indicative of the
results of operations to be expected for the entire fiscal year. The
accompanying financial information for the six months and three months
ended March 31, 1997 and 1996, should be read in conjunction with the
audited consolidated financial statements and notes thereto included in the
Company's annual report filed on Form 10-K for the year ended September 30,
1996.
The Consolidated Financial Statements include accounts of DMX Inc. and its
wholly owned subsidiaries TEMPO Sound, Inc., 450714 B.C., Ltd. 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 of DMX-Europe N.V. and
subsidiary ("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 was reduced by $5,685,000 in the 1996 fiscal year due to the
impairment of its value.
(3) Investment in Galactic/TEMPO Sound Partnership.
- ---------------------------------------------------
The summarized balance sheet and operating data for the six months ended
March 31, 1997, and the twelve months ended September 30, 1996, of the
Galactic/TEMPO Sound Partnership follows:
<TABLE>
<CAPTION>
Six months ended Twelve months ended
March 31, 1997 September 30, 1996
(Unaudited) (Unaudited)
-------------------------------------------
<S> <C> <C>
Current assets $ 857,000 890,000
Non-current assets 244,000 144,000
Current liabilities 49,000 26,000
Partners' capital 1,052,000 1,008,000
Partners' draws (300,000) (300,000)
Revenues 1,136,000 2,227,000
Operating expenses (792,000) (1,833,000)
Net income $ 344,000 394,000
===========================================
</TABLE>
7
<PAGE>
DMX INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Six month period ended March 31, 1997
(Unaudited)
(4) Investment in DMX-Europe N.V. and Subsidiary.
- -------------------------------------------------
The summarized operating data for the six months ended March 31, 1997 of
DMX-Europe N.V. and subsidiary follows:
<TABLE>
<CAPTION>
Six months ended
March 31, 1997
(Unaudited)
Statements of Operations Data: ----------------
<S> <C>
Revenue $ 1,447,129
Operating, selling, general and
administrative expenses (including
$579,308 of intercompany expenses). 5,671,198
Depreciation and amortization 486,900
----------------
Operating loss (4,710,969)
Interest expense (including $1,169,954
of intercompany expense). (1,290,489)
Other 21,062
----------------
Net loss $ (5,980,396)
================
</TABLE>
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.
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 and will have the
right to use the Company's trademarks for two years.
The Company has accounted for the effects of this disposal and
accordingly has estimated the loss on the disposal of DMX-E in the
September 30, 1996 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 was payable at the option of the Company, in the Company's
Common Stock.
On May 17, 1996, DMX Inc. consummated the merger of 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.
8
<PAGE>
DMX INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Six month period ended March 31, 1997
(Unaudited)
(4) Investment in DMX-Europe N.V. and Subsidiary, continued.
- ------------------------------------------------------------
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>
The accompanying consolidated balance sheets of the Company at March 31,
1997 and 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 six and
three months ended March 31, 1997. Prior to May 18, 1996, the Company
accounted for its investment in DMX-E using the equity method of
accounting.
(5) Property and Equipment.
- ----------------------------
Property and equipment as of March 31, 1997 and September 30, 1996, consist
of the following:
<TABLE>
<CAPTION>
March 31, 1997 September 30, 1996
------------------------------------
<S> <C> <C>
Furniture and equipment $ 4,459,105 3,957,369
Leasehold improvements 200,834 181,348
Studio equipment 6,195,372 6,144,707
Music library 1,038,264 918,126
Computer system 1,282,975 1,251,460
-------------------------------------
13,176,550 12,453,010
Less accumulated depreciation and
amortization (7,983,338) (6,559,022)
-------------------------------------
$ 5,193,212 5,893,988
=====================================
</TABLE>
At March 31, 1997, studio equipment included approximately $173,000 in
equipment, net of accumulated depreciation of $546,000, that is being
leased to DMX-E for a monthly fee of approximately $23,000. Lease income
related to equipment leased to DMX-E for the six months ended March 31,
1997 was $137,520 and was eliminated in consolidation. Lease income for
the six months ended March 31, 1996 was $137,520 and is included in other
income.
Studio equipment of $1,057,500, net of accumulated depreciation of
$1,138,000, at March 31, 1997 was financed under the capital lease
obligation.
9
<PAGE>
DMX INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Six month period ended March 31, 1997
(Unaudited)
(6) Note Payable Related Party.
- ------------------------------
On February 6, 1997 the Company entered into a loan and security agreement
with TCI which provides the Company up to $3.5 million. The loan proceeds
were used to purchase and/or reimburse the Company for equipment and
certain costs related to obtaining commercial customers. The loan bears an
annual interest rate of 12.5% and is to be paid in 36 equal monthly
installments commencing July 1, 1997. At May 9, 1997 the principal balance
outstanding was approximately $2,420,000 and accrued interest was
approximately $45,000.
(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, 1996 4,115,833 $1.95 - $6.25 per share, expiring
on various dates, December 31, 1996 to
July 1, 2006
Options expired and canceled (456,250) $1.95 - $5.75 per share
---------
Outstanding options at March
31, 1997 3,659,583 $1.95 - $6.25 per share, expiring
========= on various dates, May 1998 to July 1,
2006.
</TABLE>
At March 31, 1997, options to purchase 3,136,249 shares were exercisable at
prices ranging from $1.95 to $6.25 per share, 2,859,999 of the exercisable
options were held by officers and directors of the Company.
New Accounting Pronouncements
-----------------------------
The Financial Accounting Standards Board has issued Statement No. 123 which
is effective for years commencing after December 15, 1995. The Company does
not intend to adopt the measurement and recognition criteria of Statement
No. 123 but will be adopting the pro forma disclosure requirements of
Statement No. 123 in its 1997 financial statements.
(8) Commitments and Contingencies.
- ----------------------------------
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
10
<PAGE>
DMX INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Six month period ended March 31, 1997
(Unaudited)
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 4, "Investment in 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,
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.
(9) TCI Merger.
- ---------------
On February 6, 1997, the Company, TCI Music, Inc., and TCI Merger Sub, Inc.
executed an Agreement and Plan of Merger which provides for the merger (the
"Merger") of Merger Sub, Inc. with and into the Company. The stockholders
of the Company would receive stock of TCI Music, Inc. representing
approximately 19.25% of TCI Music, Inc. with TCI and its affiliates holding
the remaining 80.75%. Upon consummation of the merger, each outstanding
share of common stock of the Company will be converted into (i) one-half of
a share of TCI Music, Inc. Series A Common Stock, and (ii) one Right for
each whole share of TCI Music, Inc. Series A Common Stock received. Each
Right will entitle the holder to require TCI to purchase from such holder
one share of TCI Music, Inc. Series A Common Stock for $4.00 per share if
during the one year period beginning on the effective date of the merger,
the price of TCI Music, Inc. Series A Common Stock does not equal or exceed
$4.00 per share for a period of at least 20 consecutive trading days. The
$4.00 is payable at the election of TCI in either cash, a number of shares
of Tele-Communications, Inc. Series A TCI Group Common Stock having a
equivalent value, or a combination of cash and stock.
The Merger is conditioned upon certain regulatory and other approvals,
including approval by the affirmative vote of holders of a majority of the
outstanding shares of the Company's common stock.
11
<PAGE>
DMX INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Six month period ended March 31, 1997
(Unaudited)
(10) Liquidity and Capital Resources.
- ------------------------------------
The decrease in cash of $101,000 for the six months ended March 31, 1997,
was the net result of $1.9 million provided by financing activities and
used to purchase equipment of $700,000, primarily related to the obtaining
of commercial customers, $212,000 used to pay the Company's capital lease
obligation and approximately $1.2 million of cash used in operating
activities.
With the discontinuation of the operations of DMX-E, management believes
that the Company will begin to generate cash from its operating activities
on a prospective basis, and has reduced its operating expenses to extend
its 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 managements current plans. On February 6, 1997 the Company entered into
a loan and security agreement with TCI which provides the Company up to
$3.5 million. The loan proceeds will be used to purchase and/or reimburse
the Company for equipment and certain costs related to obtaining commercial
customers. The loan bears an annual interest rate of 12.5% and is to be
paid in 36 equal monthly installments commencing July 1, 1997. However,
the Company is not seeking any other additional financing at this time to
fund its other operational requirements and its obligation related to the
discontinuance of the operations of DMX-E due to the pendency of the
Merger. As more fully described in note 9, on February 6, 1997, TCI and
the Company executed a definitive Merger Agreement pursuant to which the
Company would become a wholly-owned subsidiary of TCI Music, Inc., a newly
formed TCI subsidiary. Pursuant to a Contribution Agreement between TCI
and TCI Music, Inc., to be entered into at the closing of the merger, TCI
will transfer to TCI Music, Inc. among other things, the revenue it derives
from its business with the Company. After giving effect to these
transactions, TCI Music, Inc. as successor to the Company, is expected to
be cash flow positive. 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 existing cash requirements while maintaining its competitive position.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. 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 4 and 8,
the Company has ceased funding the operations of DMX-E and has entered into
agreements providing for disposition of DMX-E to Jerold Rubinstein,
Chairman and Chief Executive Officer of the Company. Mr. Rubinstein is
seeking to reorganize the operations of DMX-E and is also seeking 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.
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, 1996. 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".
12
<PAGE>
DMX INC.
AND SUBSIDIARIES
Six months ended March 31, 1997
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
-----------------------------------------------------------------------
SUMMARY OF PERFORMANCE.
The net loss for the six months ended March 31, 1997 was $7.8 million or $0.13
per share, compared to $15.2 million or $0.35 per share, for the six months
ended March 31, 1996. The net loss for the three months ended March 31, 1997 was
$3.5 million or $0.06 per share, compared to $7.8 million or $0.18 per share for
the three months ended March 31, 1996. The decrease in the net loss was
primarily attributed to increased revenues to $10.8 million for the six ended
March 31, 1997, compared to $7.6 million for the six months ended March 31, 1996
and increased revenues to $5.6 million for the three months ended March 31,
1997, compared to $4.0 million for the three months ended March 31, 1996 and
decreased operating expenses of DMX-E. Prior to May 17, 1996 the Company
recorded the losses of DMX-E using the equity method and subsequent to that
date, the financial statements of DMX-E were consolidated. Total consolidated
operating expenses for the six months ended March 31, 1997 increased to $18.6
million from $13.5 million for the six months ended March 31, 1996 and increased
to $9.0 million for the three months ended March 31, 1997, compared to $6.9
million for the three months ended March 31, 1996. The increase of $5.1 million
and $2.1 million for each respective period was due to the inclusion of DMX-E
operating expenses of $5.6 million and $2.6 million as compared to the recorded
equity loss in DMX-E of $9.5 million and $5.0 million in other income/expense
for the six months and three month ended March 31, 1996, respectively.
RESULTS OF OPERATIONS
Revenue - DMX Inc.
- ------------------
The Company's revenues increased to $10.8 million for the six months ended March
31, 1997 from $7.6 million for the six months ended March 31, 1996. The $3.2
million increase was primarily attributed to increased subscriber fee revenues
of $1.5 from continued growth in commercial subscribers and residential
PrimeStar subscribers and $1.4 million of DMX-E revenues included in
consolidated revenues for the six months ended March 31, 1997.
Revenues increased to $5.6 million for the three months ended March 31, 1997
from $4.0 for the three months ended March 31, 1996. The $1.6 million increase
was attributed to increased subscriber fee revenues of $719,000 from continued
growth in commercial subscribers and residential PrimeStar subscribers and
$754,000 of DMX-E revenues included in consolidated revenue for the three months
ended March 31, 1997.
Commercial subscriber fee revenue for the six months ended March 31, 1997
represented approximately 41.6% of total subscriber fee revenue compared to
33.2% of total subscriber fee revenue for the six months ended March 31, 1996
and represented approximately 42.7% for the three months ended March 31, 1997,
compared to 33.4% for the three months ended March 31, 1996. Residential
subscriber fee revenue for the six months ended March 31, 1997 represented
approximately 58.4% of total subscriber fee revenue compared to 66.8% of total
subscriber fee revenue for the six months ended March 31, 1997 and represented
approximately 57.3% for the three months ended March 31, 1997, compared to 66.6%
for the three months ended March 31, 1996.
Revenue - DMX-E.
- ----------------
The Company began consolidating the operations of DMX-E from the acquisition
date of May 17, 1996. As discussed below, the Company has decided to dispose of
or cease the operations of DMX-E.
Operating Expenses.
- -------------------
Total operating expenses increased to $18.6 million for the six months ended
March 31, 1997 from $13.5 million for the six months ended March 31, 1996. The
increase of $5.1 million was primarily attributable to the inclusion of $5.6
million of DMX-E operating expenses for the six months ended March 31, 1997 as
compared to the recorded equity in loss of DMX-E of $9.5 million in other
income/expense for the six months ended March 31, 1996, when the Company
accounted for DMX-E on the equity method.
Total operating expenses increased to $9.0 million for the three months ended
March 31, 1997 from $6.9 million for the three months ended March 31, 1996. The
increase of $2.1 million was primarily attributable to the inclusion of $2.6
million of DMX-E operating expenses for the three months ended March 31, 1997,
as
13
<PAGE>
DMX INC.
AND SUBSIDIARIES
Six months ended March 31, 1997
compared to the recorded equity in loss of DMX-E of $5.0 million in other
income/expense for the three months ended March 31, 1996, when the Company
accounted for DMX-E on the equity method.
General and Administrative Expenses.
General and administrative expenses increased to $3.0 million for the six months
ended March 31, 1997 from $2.8 million for the six months ended March 31,
1996. The $255,000 net increase consisted of increased legal fees of $519,000
due to the pending merger transaction with TCI and the activities related to the
disposition of DMX-E, a provision for doubtful accounts of $434,000 and
increased rent of $50,000, due to expansion of space for the commercial sales
and marketing divisions, reduced by decreases in salaries and related expenses
of $563,000 resulting from two executive officers leaving the Company in the
third and fourth quarters of the 1996 fiscal year and the performance bonus
which was paid to the Chairman in the first quarter of 1996 fiscal year;
decreases in other professional and consultancy fees of $92,000 and decreases in
public/shareholder relation expenses of $100,000.
General and administrative expenses increased to $1.5 million for the three
months ended March 31, 1997 from $1.3 million for the three months ended March
31, 1996. The net increase of $231,000 consisted of increased legal fees of
$226,000 due to the pending merger transaction with TCI and the activities
related to the disposition of DMX-E; a provision for doubtful accounts of
$92,000 and increase in rent of approximately $100,000, due to the expansion of
space for the commercial and sales marketing divisions, reduced by salaries and
related expenses of $118,000 resulting from two executives officers leaving the
Company subsequent to the second quarter in the 1996 fiscal year, decreases in
professional and consultancy fees of $47,000 and decreases in public/shareholder
relation expenses of $31,000.
Sales and Marketing Expenses.
Sales and marketing decreased to $3.3 million for the six months ended March 31,
1997 from $4.7 million for the six months ended March 31, 1996. The net
decrease of $1.4 million primarily represented a decrease in royalties of
$289,000 as the manufacture, distribution and servicing agreement with
Scientific Atlanta, Inc. expired in August 1996; a decrease in net installation
cost of $102,000 for commercial accounts as the Company typically recoups the
cost of installations; and decreases in warranty service expense of $99,000,
salaries and consultants of $323,000, travel and entertainment of $164,000,
marketing expenses of $242,000, and office and other related expenses of $89,000
due to the Company's efforts to reduce overhead.
Sales and marketing decreased to $1.6 million for the three months ended March
31, 1997 from $2.4 million for the three months ended March 31, 1996. The net
decrease of $812,000 primarily represented a decrease in royalties of $145,000
as the manufacture, distribution and servicing agreement with Scientific
Atlanta, Inc. expired in August 1996; a decrease in net installation cost of
$33,000 for commercial accounts as the Company typically recoups the cost of
installations; and decreases in warranty service expense of $96,000 salaries and
consultants of $169,000, travel and entertainment of $75,000, marketing expenses
of $182,000, convention and conference expense of $43,000 and office and other
related expenses of $22,000 due to the Company's efforts to reduce overhead.
Studio and Programming Expenses.
Studio and programming expenses increased to $4.9 million for the six months
ended March 31, 1997 from $4.5 million for the six months ended March 31,
1996. The $445,000 increase was primarily attributed to an increase in music
rights of $453,000 commensurate with the growth in subscribers and fee revenue.
Other components of the net increase represent approximately $286,000 relating
to programming expenses incurred on behalf of DMX-E for the six months ended
March 31, 1997. Prior to the consolidation of DMX-E financial statements with
the Company's, these expenses were charged to DMX-E, however, the benefit of
DMX-E's reimbursement has been eliminated in the consolidated financial
statements for the six months ended March 31, 1997; reduced by a decrease in
satellite and uplink expense of $314,000 due to the double illumination cost as
the Company migrated from the AT&T Telstar 401 Ku-Band satellite to the AT&T
Telstar 402R Ku-Band satellite in 1996.
14
<PAGE>
DMX INC.
AND SUBSIDIARIES
Six months ended March 31, 1997
Studio and programming expenses increased to $2.5 million for the three months
ended March 31, 1997 from $2.4 million for the three months ended March 31,
1996. The $103,000 increase was primarily attributed to approximately $101,000
relating to programming expenses incurred on behalf of DMX-E for the three
months ended March 31, 1997. Prior to the consolidation of DMX-E financial
statements with the Company's, these expenses were charged to DMX-E, however,
the benefit of DMX-E's reimbursement has been eliminated in the consolidated
financial statements for the three months ended March 31, 1997. Other components
of the net increase represent an increase in music rights of $301,000
commensurate with the growth in subscribers and fee revenue reduced by a
decrease in satellite and uplink expense of $317,000 due to the double
illumination cost as the Company migrated from the AT&T Telstar 401 Ku-Band
satellite to the AT&T Telstar 402R Ku-Band satellite in 1996.
Operating Expenses - DMX-E.
- ---------------------------
The Company began consolidating the operations of DMX-E from the acquisition
date of May 17, 1996. As discussed below, the Company has decided to dispose of
or cease the operations of DMX-E
Disposal of DMX-E.
- ------------------
The Company has entered into definitive agreements providing for the disposition
of DMX-E to Mr. Jerold Rubinstein, the Company's 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 distribute the
DMX music service in Europe, the former Soviet Union and in the Middle East and
will have the right to use the Company's trademarks for two years. In addition,
Mr. Rubinstein has agreed to guaranty certain obligations of the European
operations for satellite-uplink capacity. The Company had previously determined
to cease financial support for DMX-E operations and in the absence of some other
arrangements to provide financial support to DMX-E, to place the companies in
receivership. Mr. Rubinstein will seek to reorganize the operations of DMX-E
and will seek new equity investors. If DMX-E cannot be reorganized, then Mr.
Rubinstein intends to organize a new company to distribute the music service on
essentially the same terms and the Company will subscribe for a ten percent
equity interest in the new venture.
The Company estimated the loss on the disposal of DMX-E, which included its net
investment of $5.7 million and other obligations guaranteed by the Company of
$1.4 million, was accounted for in the Company's consolidated financial
statements at September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES.
The decrease in cash of $101,000 for the six months ended March 31, 1997, was
the net result of $1.9 million provided by financing activities and used to
purchase equipment of $700,000, primarily related to the obtaining of commercial
customers, $212,000 used to pay the Company's capital lease obligation and
approximately $1.2 million of cash used in operating activities.
With the discontinuation of the operations of DMX-E, management believes that
the Company will begin to generate cash from its operating activities on a
prospective basis and has reduced its operating expenses to extend its 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 managements current
plans. On February 6, 1997 the Company entered into a loan and security
agreement with TCI which provides the Company up to $3.5 million. The loan
proceeds as of May 9, 1997 totaling $2.4 million have been used to purchase
and/or reimburse the Company for equipment and certain costs related to
obtaining commercial customers. The loan bears an annual interest rate of 12.5%
and is to be paid in 36 equal monthly installments commencing July 1, 1997.
However, the Company is not seeking any other additional financing at this time
to fund its other operational requirements and its obligation related to the
discontinuance of the operations of DMX-E due to the pendency of the Merger. As
more fully described in note 9 to the Company's consolidated financial
statements, on February 6, 1997, TCI and the Company executed a definitive
Merger Agreement pursuant to which the Company would become a wholly-owned
subsidiary of TCI Music, Inc., a newly formed TCI subsidiary. Pursuant to a
Contribution Agreement between TCI and TCI Music, Inc., to be entered into at
the closing of the merger, TCI will transfer to TCI Music, Inc. among other
things, the revenue it derives from its business with the Company. After giving
effect to these transactions, TCI Music, Inc. as successor to the Company, is
expected to be cash flow positive. 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,
15
<PAGE>
DMX INC.
AND SUBSIDIARIES
Six months ended March 31, 1997
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 existing cash requirements while maintaining its
competitive position.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. 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 4 and 8 to the Company's consolidated financial
statements and in the Disposal of DMX-E above, the Company has ceased funding
the operations of DMX-E and has entered into agreements providing for
disposition of DMX-E to Jerold Rubinstein, Chairman and Chief Executive Officer
of the Company. Mr. Rubinstein is seeking to reorganize the operations of DMX-E
and also seeks 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.
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, 1996. The
foregoing is not a complete description of the Company's business or the risks
associated with and investment in the Company. A more complete discussion of
these items can be found in the 10-K under the heading "Business".
16
<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 Events.
- ---------------------
None.
Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) None.
(b) Reports on Form 8-K. The Company filed no reports on Form 8-K
--------------------
during the quarter ended March 31, 1997.
17
<PAGE>
SIGNATURES
DMX INC.
(Registrant)
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 May 15, 1997 Chairman of the Board and
Chief Executive Officer
/s/ Joanne Wendy Kim May 15, 1997 Chief Financial Officer and
Corporate Secretary
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1997
<PERIOD-START> OCT-01-1996 JAN-01-1997
<PERIOD-END> MAR-31-1997 MAR-31-1997
<CASH> 1,020,095 1,020,095
<SECURITIES> 0 0
<RECEIVABLES> 5,599,409 5,599,409
<ALLOWANCES> 381,029 381,029
<INVENTORY> 670,293 670,293
<CURRENT-ASSETS> 8,144,450 8,144,450
<PP&E> 13,176,550 13,176,550
<DEPRECIATION> 7,983,338 7,983,338
<TOTAL-ASSETS> 18,247,356 18,247,356
<CURRENT-LIABILITIES> 22,228,834 22,228,834
<BONDS> 0 0
0 0
0 0
<COMMON> 596,722 596,722
<OTHER-SE> (9,648,039) (9,648,039)
<TOTAL-LIABILITY-AND-EQUITY> 18,247,356 18,247,356
<SALES> 10,801,467 5,578,382
<TOTAL-REVENUES> 10,801,467 5,578,382
<CGS> 0 0
<TOTAL-COSTS> 18,583,862 9,025,815
<OTHER-EXPENSES> 2,121 1,178
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 237,065 371,746
<INCOME-PRETAX> (7,830,997) (3,498,405)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,830,997) (3,498,405)
<EPS-PRIMARY> (.13) (.06)
<EPS-DILUTED> (.13) (.06)
</TABLE>
