UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
Commission File No.: 333-7006
TOUCHTUNES MUSIC CORPORATION
- -------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Nevada 87-0485304
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
1800 E. Sahara, Suite 107
Las Vegas, Nevada 89104
- -------------------------------------------------------------
(Address of principal executive offices, including zip code)
Issuer's telephone number, including area code (702)-734-7557
Issuer's facsimile number, including area code (702)- 734-7500
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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. (x) Yes ( ) No
The total number of shares of Class A Common Stock outstanding on March 31,
1999, was 14,658,644.
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying unaudited financial statements for the quarter ended March 31,
1999, have been prepared in accordance with the instructions to Form 10-QSB
and, therefore, do not include all information and footnotes necessary for a
complete presentation of financial position, results of operations, cash flows
and stockholders' equity for the quarter then ended, in conformity with
generally accepted accounting principles. In the opinion of management, all
adjustments considered necessary for a fair presentation of the results of
operations and financial position have been included and all such adjustments
are of a normal recurring nature. Operating results for the quarter ended
March 31, 1999, are not necessarily indicative of the results that can be
expected for the year ending December 31, 1999. For further information, refer
to the financial statements and footnotes thereto included in the Registrants
Annual Report on Form 10-KSB for the year ended December 31, 1998.
FINANCIAL STATEMENTS
(UNAUDITED)
TOUCHTUNES MUSIC CORPORATION
March 31, 1999
Index
Page
Balance Sheets............................... 3
Statements of Operations..................... 4
Statement of Stockholders' Equity (Deficiency) 5
Statements of Cash Flows..................... 6
Notes to Financial Statements................ 7
2
<TABLE>
<CAPTION>
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
BALANCE SHEETS
<S> <C> <C>
March 31 December 31
[In U.S. dollars] 1999 1998
$ $
(Unaudited) (Note *)
------------ ------------
ASSETS
Current
Cash & term deposits - 1,211,052
Accounts receivable 107,728 34,668
Prepaid music & performance rights 229,102 149,496
Other assets 107,072 114,701
------------ ------------
Total current assets 443,902 1,509,917
------------ ------------
Jukeboxes 1,784,250 1,711,619
Other fixed assets 402,333 333,143
Non-competition agreement - net of accumulated amortization
of $450,000 [1998 - $400,000] 550,000 600,000
Patents - net of accumulated amortization of $539,570
[1998 - $486,747] 579,168 507,475
------------ ------------
3,759,653 4,662,154
------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Bank Overdraft 73,116 -
Accounts payable and accrued liabilities 648,532 580,694
Deficit in jointly-controlled company [note 3] 72,123 81,512
Capital lease obligations, current 1,204,286 973,274
Due to jointly-controlled company [note 3] 10,250,236 9,147,802
------------ ------------
Total current liabilities 12,248,293 10,783,282
------------ ------------
Capital lease obligations 754,118 827,395
------------ ------------
13,002,411 11,610,677
------------ ------------
Stockholders' deficiency
Series A preferred stock, $.001 par value
Authorized: 10,000,000 shares
Issued & outstanding: 100 [1998 - 100] 1 1
Class A common stock, $.001 par value
Authorized: 50,000,000 shares
Issued & outstanding: 14,658,644 [1998 - 14,658,644] 14,659 14,659
Additional paid-in capital 3,483,382 3,483,382
Deficit (12,740,800) (10,446,565)
------------ ------------
Total stockholders' deficiency (9,242,758) (6,948,523)
------------ ------------
3,759,653 4,662,154
------------ ------------
</TABLE>
Contingent liabilities [notes 3 & 5]
See accompanying notes.
* Note: The balance sheet as at December 31, 1998 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
3
<TABLE>
<CAPTION>
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
STATEMENTS OF OPERATIONS
<S> <C> <C> <C>
Three months ended March 31
(Unaudited) 1999 1998 1997
----------- ---------- ---------
Revenues:
Jukebox lease revenues 207,890 - -
----------- ---------- ---------
207,890 - -
Expenses:
Sales and marketing 467,145 255,761 18,526
Research & development services 256,470 197,605 74,033
General and Administrative 1,245,479 409,828 222,993
Depreciation & amortization 223,521 112,295 99,843
Interest and financing costs 256,139 162,397 -
Foreign exchange losses 62,760 - -
----------- ---------- ---------
2,511,514 1,137,886 415,395
----------- ---------- ---------
Net loss before share of net
income loss in jointly
controlled company 2,303,624 1,137,886 415,395
Share of net income in
jointly controlled company
[note 3] 9,389 42,651 -
----------- ---------- ---------
Net loss 2,294,235 1,095,235 415,395
----------- ---------- ---------
Per common share [note 4]
Basic and diluted net loss per share (0.156) (0.075) (0.032)
See accompanying notes
</TABLE>
4
<TABLE>
<CAPTION>
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Unaudited)
Series A Class A
Preferred Stock Common Stock
<S> <C> <C> <C> <C> <C> <C> <C>
Additional
paid-in Accumulated
Shares Amount Share Amount capital deficit Total
$ $ $ $ $
------- ------- ----------- -------- ----------- ------------- ------------
Balances, December 31, 1995 - - 12,909,000 12,909 1,430,020 (786,063) 656,866
Net loss 1996 - - - - - (991,970) (991,970)
------- ------- ----------- -------- ----------- ------------- ------------
Balances, December 31, 1996 - - 12,909,000 12,909 1,430,020 (1,778,033) (335,104)
Issuance of preferred stock
March 15
$1.50 per share 100 1 - - 149 - 150
Issuance of common stock
April 21
$0.529999 per share - - 900,888 901 476,569 - 477,470
$0.533330 per share - - 75,000 75 39,925 - 40,000
$2.000000 per share - - 500,000 500 999,500 - 1,000,000
$2.105395 per share - - 199,819 200 420,498 - 420,698
October 7
$1.50 per share - - 56,820 57 85,173 - 85,230
$1.50 per share - - 5,337 5 8,000 - 8,005
$2.00 per share - - 11,780 12 23,548 - 23,560
Net loss 1997 - - - - - (2,675,580) (2,675,580)
------- ------- ----------- -------- ----------- ------------- ------------
Balances, December 31, 1997 100 1 14,658,644 14,659 3,483,382 (4,453,613) (955,571)
Net loss 1998 (5,992,952) (5,992,952)
------- ------- ----------- -------- ----------- ------------- ------------
Balances, December 31, 1998 100 1 14,658,644 14,659 3,483,382 (10,446,565) (6,948,523)
Net loss 1999 (2,294,235) (2,294,235)
------- ------- ----------- -------- ----------- ------------- ------------
Balances, March 31, 1999 100 1 14,658,644 14,659 3,483,382 (12,740,800) (9,242,758)
------- ------- ----------- -------- ----------- ------------- ------------
</TABLE>
See accompanying notes
5
<TABLE>
<CAPTION>
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
STATEMENTS OF CASH FLOWS
Three Months ended March 31
(Unaudited)
<S> <C> <C> <C>
1999 1998 1997
$ $ $
------------ ------------ ----------
OPERATING ACTIVITIES
Net loss (2,294,235) (1,095,235) (415,395)
Adjustments to reconcile net loss to net
cash used by operating activities:
Share of net income loss from jointly
controlled company (9,389) (42,651) -
Depreciation and amortization 223,521 112,295 99,843
Changes in working capital assets and liabilities:
Accounts receivable (73,060) - -
Prepaid expenses and other assets (71,977) - -
Accounts payable and accrued liabilities 67,837 30,898 11,538
Affiliated company - - 436,260
------------ ------------ ----------
Cash used in operating activities (2,157,303) (994,693) 132,246
------------ ------------ ----------
INVESTING ACTIVITIES
Investment in jointly controlled company - - (583)
Purchases of Jukeboxes for leasing (157,498) - -
Increase in costs of patents (124,516) - (131,909)
Purchase of other capital assets (105,020) - -
------------ ------------ ----------
Cash used in investing activities (387,034) - (132,492)
------------ ------------ ----------
FINANCING ACTIVITIES
Increase in amounts due to jointly-
controlled company including intercompany
capital leases 1,260,169 994,656 -
Proceeds from sale of preferred stock - - 150
------------ ------------ ----------
Cash provided by financing
Activities 1,260,169 994,656 150
------------ ------------ ----------
Net increase (decrease) in cash (1,284,168) (37) (96)
Cash, beginning of period 1,211,052 773 96
------------ ------------ ----------
Cash (overdraft), end of period (73,116) 736 -
------------ ------------ ----------
Cash consists of
Cash (overdraft) (73,116) 736 -
Term deposits - - -
------------ ------------ ----------
(73,116) 736 -
------------ ------------ ----------
</TABLE>
See accompanying notes
6
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION AND GOING CONCERN ASSUMPTION
The financial statements of the company have been prepared in accordance with
generally accepted accounting principles in the United States on a going
concern basis which presumes the realization of assets and the discharge of
liabilities in the normal course of business for the foreseeable future.
The Company has incurred operating losses since inception of operations in 1995
totalling $12,740,800 and has not yet generated significant revenue. Further,
stockholders' deficiency as at March 31, 1999 totals $9,242,758. As described
in Notes 3 & 6, the Company and TouchTunes Digital Jukebox Inc. raised
additional equity of $3,330,579 U.S., successfully negotiated bank loan
facilities totalling $11,700,000 U.S. and is currently negotiating to raise at
least $12,000,000 U.S. in equity. The Company has not received any indications
that this equity will not be raised.
The Corporation's ability to continue as a going concern is dependent upon its
ability to obtain further financing, achieving profitable operations through
increased revenues, upon generating positive cash flow from operations and on
maintaining or replacing existing supply arrangements. These financial
statements do not include any adjustments to amounts and classifications of
assets and liabilities that might be necessary should the Corporation be unable
to continue its business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
TouchTunes Music Corporation (the "Company") was a development stage company
with primary efforts directed at the development of a digital jukebox, which
utilizes digitally compressed audio technology to securely distribute music
titles through a proprietary distribution network. The Company completed its
development stage during the fourth quarter of 1998. As of March 31 1999, 345
jukebox units have been installed in various locations in the United States.
The Company's operating expenses have been funded by TouchTunes Digital Jukebox
Inc. ["TouchTunes Digital"], a jointly controlled Canadian entity [see notes 3
& 6]. Substantially all of the management and technical developmental
activities are conducted through TouchTunes Digital for which the Company is
charged certain costs incurred in addition to a 5% mark-up on various services
in accordance with the respective inter-company service agreements.
On August 31, 1998 the Company's Board of Directors authorized the change of
name of the Company to TouchTunes Music Corporation from Technical Maintenance
Corporation.
Basis of presentation
Investments in which the Company exercises joint control are accounted for
using the equity method. Under this method, only the Company's share of net
income or loss is recorded. Note 3 to the financial statements summarizes the
effect of the investments on the financial statements.
7
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Cont'd]
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect certain reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Accordingly, actual results could differ from those estimates.
Fixed assets
Jukeboxes consist of jukeboxes acquired by the Company for leasing to its
customers from TouchTunes Digital under a capital master lease agreement.
Depreciation is provided on a straight-line basis over an estimated economic
life of five years, commencing with commercial operation of the jukeboxes.
Other fixed assets are stated at cost and depreciated on the following basis:
Computer Equipment Straight line over 5 years
Furniture and Equipment 20% declining balance
Jukeboxes for promotion Straight line over 5 years
Computer software 30% declining balance
Computer operating system Straight line over 5 years
Jukebox spare parts Straight line over 5 years
Foreign currency translation
Monetary assets and liabilities denominated in foreign currencies are
translated into U.S. dollars at rates of exchange prevailing at the balance
sheet date. Revenues and expenses are translated into U.S. dollars at rates of
exchange in effect at the related transaction dates. Exchange gains and losses
arising from the translation of foreign currency items are included in the
determination of net earnings.
Intangibles
Software development costs
Costs related to the conceptual formation and design of internally developed
software are expensed as research and development as incurred. No internal
software development costs have been capitalized as of March 31, 1999.
8
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Cont'd]
Patents
Patents consist primarily of processes and systems related to the operation of
a digital jukebox and the interactive program for download distribution. In
1995, patents contributed by stockholders in exchange for shares of common
stock were valued at the shareholder's cost, which was approximately $500,000.
The patents and the related intellectual property are amortized on a straight-
line basis over their estimated economic life of 5 years. The Company is in
the process of having these patents registered in various countries. Costs of
registering the patents, consisting primarily of legal fees, are capitalized as
part of the cost of the patents. In 1997, legal costs associated with the
registration of patents were approximately $251,000. In 1999, legal costs of
approximately $124,516 (1998 - $135,000) were capitalized.
Non-competition agreements
The Company has non-competition agreements with the provider of computer
operating systems and several system programmers who assisted in the
development of the system. The agreements are effective January 1, 1997, and
cover the succeeding five years. The costs are amortized on a straight-line
basis over the five-year life of the agreements.
The Company periodically reviews the patents and non-competition agreements for
possible impairment, which would be recognized if a permanent decline in value
had occurred.
Currency of measurement
The currency of measurement used in the preparation of these financial
statements is the U.S. dollar.
Income taxes
The Company accounts for income taxes using the liability method. Under this
method, deferred income tax assets and liabilities are determined based on the
differences between the financial reporting and tax basis of assets and
liabilities using currently enacted tax rates and laws.
Net loss per share
Net loss per share is computed using the weighted-average number of shares of
common stock outstanding during the year or period.
9
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
3. INVESTMENT IN JOINTLY CONTROLLED COMPANY
Exchangeable Shares and Voting Rights
On March 21, 1997, the Company incorporated and acquired 800 shares of Class A
common stock of TouchTunes Digital for a total consideration of $584 US.
The Company controls 50% of the votes of TouchTunes Digital and has the ability
to elect 50% of the Board of Directors. Pursuant to an agreement with the
other 50% shareholders of TouchTunes Digital [the "Canadian Investors"], such
shareholders can exchange their Class B and Class C common shares in TouchTunes
Digital into 2,000,000 Common shares of the Company at any time. The Company
would then own 100% of TouchTunes Digital which would become a wholly-owned
subsidiary and which would result in the preparation of consolidated financial
statements.
Convertible Debentures
On February 11, 1998, the holders of the Class B and C shares subscribed for an
aggregate principal amount of $4,000,000 U.S. of debentures ("Debentures")
issued by TouchTunes Digital. On August 5, 1998, additional Debentures of
$2,000,000 US were issued. On November 2 1998, TouchTunes issued the additional
Debentures of $4,000,000 US.
On March 22, 1999 and April 8, 1999, TouchTunes Digital issued additional
Debentures to the Canadian Investors totaling $3,330,579 U.S. under terms and
conditions similar to the existing outstanding Debentures. [see note 6]
The Debentures are payable by TouchTunes Digital on demand, only after the
occurrence of an event of default as defined by the subscription agreement.
Upon such demand, the Debentures would bear interest at a rate of 12% per
annum, payable in one single installment, concurrently with the payment of the
principal amount.
Under present conditions, it is unlikely that interest would have to be paid on
the Debentures. In the event TouchTunes Digital would have to pay interest on
the Debentures, the amounts would be $902,735 US from the date of issuance of
the Debentures.
On February 11, 1998 and March 22, 1999, the Company entered into a "Debenture
Put Right Agreement" with the Canadian Investors, providing them with the right
and option to require the Company to purchase all or any part of the principal
amount of Debentures they have acquired (up to $10,830,579 US in principal
amount), at an exchange rate of $2.00 per share, for the issuance by the
Company of up to 5,415,289 shares of its Series A preferred stock, convertible
at the option of the holders, share for share, into an aggregate of up to
5,415,289 shares of the Company's Common Stock. On April 8, 1999, the Company
entered into another "Debenture Put Right Agreement". [see note 6]
10
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
3. INVESTMENT IN JOINTLY CONTROLLED COMPANY [Cont'd]
Loan Facilities
On January 29, 1999, TouchTunes Digital successfully negotiated term loan
facilities aggregating $2,000,000 Canadian dollars with a major Canadian
chartered bank for financing of equipment acquisitions, leasehold improvements
and research and development expenditures. The total funds received from these
loan facilities aggregated $1,250,000 Canadian dollars. The security provided
to the Bank by TouchTunes Digital was in the form of moveable hypothecs on
past, present and future assets of TouchTunes Digital Jukebox Inc., as well as
a guarantee from the Company for the entire amount. Interest rates on these
facilities range from 1.0% to 3.75% over the bank's Canadian prime rate, with
terms ranging from 15 months to 60 months.[see note 6].
Sources of Revenues
TouchTunes Digital's revenues are derived from various services provided to the
Company as well as interest earned on its balance due from the Company. Some
interest revenue has also been earned through the investment of surplus funds.
In addition, TouchTunes Digital earns interest at a rate of 15% on jukeboxes
leased to the Company under a capital master lease agreement.
The Company is charged interest on the intercompany balance payable to
TouchTunes Digital at a rate equal to the Canadian prime rate plus 1.5%. The
adjusted rate as at March 31, 1999, was 8.25%.
Litigation
Both companies are jointly involved in a one litigation case [see note 5].
11
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
3. INVESTMENT IN JOINTLY CONTROLLED COMPANY [Cont'd]
Analysis of Investment
The investment in TouchTunes Digital is accounted for on the equity basis. The
following summarizes the balance sheet of TouchTunes Digital as at March 31,
1999:
$ $
Assets
March 31 December 31
1999 1998
----------- ------------
Current
Cash & term deposits 584,661 163,828
Accounts receivable 171,480 167,550
Government grant recoverable 198,781 169,106
Inventory 371,857 203,188
Investment income tax credits - 72,034
Income tax recoverable 111,343 112,220
Prepaid expenses 110,982 119,801
Due from TouchTunes Music Corporation 10,250,236 9,147,802
Capital lease receivable 1,204,286 973,275
----------- ------------
Total current assets 13,003,626 11,128,804
----------- ------------
Fixed assets 2,060,933 2,114,836
Capital lease receivable 754,118 827,393
----------- ------------
15,818,677 14,071,033
----------- ------------
Liabilities
Current
Bank overdraft - 14,450
Accounts payable and accrued liabilities 839,847 702,909
Capital lease obligations 175,504 227,832
Debentures
10,830,579 10,000,000
----------- ------------
Total current liabilities 11,845,930 10,945,191
----------- ------------
Capital lease obligation 502,008 494,191
Long term debt 662,603 -
Deferred income tax 107,230 99,806
----------- ------------
13,117,771 11,539,188
----------- ------------
Stockholders'Equity 2,700,906 2,531,845
----------- ------------
15,818,677 14,071,033
----------- ------------
12
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
3.INVESTMENT IN JOINTLY CONTROLLED COMPANY [Cont'd]
For the three month periods ended March 31, 1999 and 1998, the results of
TouchTunes Digital's operations were as follows (in U.S. dollars):
$ $
1999 1998
(three months) (three months)
--------------- ---------------
Services fees 639,737 616,647
Interest income 262,470 -
Foreign exchange loss (27,280) -
--------------- ---------------
Total Revenue 874,927 616,647
--------------- ---------------
Expenses (net of Research and Development
tax credits) 843,543 473,005
--------------- ---------------
Income from operations 31,384 143,642
--------------- ---------------
Income tax expense net of deferred portion 12,606 58,340
--------------- ---------------
Net Income 18,778 85,302
--------------- ---------------
4. LOSS PER SHARE
Three Months Ended 1999 1998 1997
$ $ $
----------- ----------- -----------
Numerator for basic loss per share
Loss to common shareholders 2,294,235 1,095,235 415,395
----------- ----------- -----------
Denominator for basic loss per share -
weighted-average number shares issued
and outstanding 14,658,644 14,658,644 12,909,000
----------- ----------- -----------
Basic and diluted net loss per share (.156) (.075) (.032)
----------- ----------- -----------
The conversion of equity and Debentures of TouchTunes Digital into the
Company's Class A Common Stock referred to in notes 3 & 6 were not included in
the computation of the diluted loss per share because the effect would be
antidilutive.
5. CONTINGENT LIABILITIES
In July 1998, the Company and TouchTunes Digital became jointly involved in a
litigation case, the outcome of which is not yet determinable. However, based
on information presently available, management does not expect any material
adverse result and believes the litigation is without merit.
13
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
5. CONTINGENT LIABILITIES [Cont'd]
The Company has guaranteed the loan facilities of TouchTunes Digital. The
total amounts guaranteed are for $1,750,000 Canadian and $12,480,000 U.S.,
supported by moveable hypothecs on the Company's past, present and future
assets. [see notes 3 & 6]
The Company and TouchTunes Digital have committed to purchase a minimum number
of jukeboxes in the period ending October 31, 1999. Should this minimum
commitment not be met, the Company and TouchTunes Digital are contractually
obligated to reimburse certain costs incurred by the supplier.
6. SUBSEQUENT EVENTS
Debenture Put Right Agreements
On April 8, 1999, Sofinov Societe Financiere d'Innovation Inc. subscribed for
additional Debentures issued by TouchTunes Digital for an aggregate principal
amount of $2,500,000 U.S. Concurrently, on April 8, 1999, the Company entered
into a "Debenture Put Right Agreement" with Sofinov Societe Financiere
d'Innovation Inc., providing them with the right and option to require the
Company to purchase all, or any part of the principal amount of the Debentures
aggregating $2,500,000 U.S. at an exchange rate equal to the greater of $2.00
U.S. per share of the Company's Series A preferred stock or 85% of the price
per share offered in a private placement, closing no later than July 1, 1999.
Each Series A preferred share is convertible at the option of the holders,
share for share, into an aggregate of up to 1,250,000 shares of the Company's
Common Stock.
The Debentures are payable by TouchTunes Digital on demand, only after the
occurrence of an event of default as defined by the subscription agreement.
Upon such demand, the Debentures would bear interest at a rate of 12% per
annum, payable in one single installment, concurrently with the payment of the
principal amount.
Loan Facilities
On April 19, 1999, TouchTunes Digital successfully negotiated a term loan
facility aggregating $10,400,000 U.S. with a major Canadian chartered bank for
financing the cost of manufacturing jukeboxes. The security provided to the
Bank by TouchTunes Digital was in the form of moveable hypothecs on past,
present and future assets of TouchTunes Digital, as well as a guarantee from
the Company for the entire amount. The interest rate on this facility is
priced at the Bank's US rate, plus 2.55%, in addition to other related fees.
The loan will be disbursed in monthly tranche amounts, based on various terms
and conditions, with each tranche having a term of 30 months. As a condition to
the Bank disbursing loan amounts in excess of $3,400,000 U.S., the Company must
increase its equity by $15,000,000 U.S.
14
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
6. SUBSEQUENT EVENTS [Cont'd]
Private Placement Transaction
The Company is actively seeking additional private equity capital. To assist
in its efforts, the Company has signed an exclusive mandate with investment
banker Nesbitt Burns Securities Inc. The Company is also exploring the
possibility of various strategic alliances. The Company has signed a term
sheet and is negotiating a final agreement, exclusively with a syndicate of
private fund investors, for an investment of $12,000,000 in equity of the
Company.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(a) Plan of Operations
Management believes the Registrant's on-going development marketing and
sales of the Digital Jukebox provides it with opportunities for future
financial success. Management also intends to continue its development
activities in applying its technology to other product applications for markets
outside the jukebox industry. To date, the Registrant's financial resources
have been used primarily to finance development and begin to commercialize the
Digital Jukebox. From the indications of interest received thusfar, the
Registrant estimates that approximately 4,000 Digital Jukebox units can be
manufactured, assembled and delivered to jukebox operators under its "Partner
Lease Agreements" over a twelve month period commencing April 1999.
The Registrant commenced generating revenues during the fourth quarter of
1998. A total of $207,890 in revenues were earned from its Partner Lease
Agreements with jukebox operators for its Digital Jukebox during the quarter
ended March 31, 1999, compared to total revenues of $71,620 for the entire year
1998. These revenues were earned with less than 45% of the available record
label rights obtained by the Registrant. The Registrant has subsequently
increased the level of record rights to approximately 65-70% of the available
record label rights, with the signing of Warner Music Group. Management
believes that the Registrant's increase in the overall music available to its
Digital Jukebox will increase the demand for it and the related revenues
generated from its Partner Lease Agreements.
There can be no assurance that the Registrant will be able to obtain and
renew licensing agreements with record label and publishing companies on terms
favorable to the Registrant. Further, there can be no assurance that the
Registrant's marketing strategy will be successful or profitable to the
Registrant.
(b) Seasonality
Management is not aware of any factors or attributes relating to the
Registrant's business that have caused, or in the future are reasonably likely
to cause, any seasonality factors which would have a material effect on the
Registrant's financial condition or results of operations.
15
(c) Liquidity and Capital Resources
From March 21, 1997 through April 8, 1999, certain Canadian investors
invested $4,000,000 (CDN) and $13,830,579 (US) for the further development and
promotion of the Digital Jukebox, upon certain terms and conditions previously
described in earlier filings. This has supplied the Company with sufficient
capital resources necessary to conclude the financing of its start-up
activities, and commence commercial operations. Based on the Registrant's
estimate that it can lease approximately 4,000 Digital Jukebox units to
prospective jukebox operators over a twelve month period commencing April 1999,
the Registrant must raise approximately $25,000,000 (US) for the manufacturing
and distribution costs of such units, as well as provide for the ability to
expand its research and development activities. A portion of the funding will
be obtained from bank financing facilities in the amount of $10,400,000 (US),
established by an affiliate company of the Registrant, for financing the cost of
manufacturing the Digital Jukebox, upon certain terms and conditions previously
described in earlier filings. There can be no assurances that the Registrant or
its affiliated company, will be able to satisfy all terms and conditions
specified by the bank for the use of its funds.
In addition to the funding mentioned above, the Registrant will require
more funds during the following twelve month period. Management has engaged
Nesbitt Burns Securities to assist the Registrant in raising at least
$12,000,000 through a private equity placement. Management is currently
negotiating a private placement with potential investors and anticipates
completing this transaction during the second quarter of 1999. There can be no
assurances that the private placement will be successfully completed on terms
satisfactory to the Registrant, or at all.
(d)Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the applicable year. This may
cause computer programs or operating equipment that have date-sensitive
software using two digits to define the applicable year to recognize "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations including, among other
things, a temporary inability to process transactions or engage in normal
business activities.
The Registrant has a comprehensive program in place to address the impact
and issues associated with processing dates up to, through and beyond the Year
2000. This program consists of three main areas: (a) information systems, (b)
supply chain and critical third party readiness and (c) business equipment.
The Registrant is utilizing both internal and external resources to inventory,
assess, remediate, replace and test its systems for Year 2000 compliance. To
coordinate the implementation of the program, the Registrant has appointed the
Vice President, R&D and Technology as the Project Leader who reports to
Management, the Board of Directors and the Audit Committee.
Currently, all information systems projects are on schedule and are fully
staffed. Systems that are critical to the Registrant's operations are targeted
to be Year 2000 compliant by June of 1999. The Registrant has inventoried and
determined the business criticality of all software and computer systems.
Based on preliminary review and analysis the Registrant believes that its
16
software and computer systems will be Year 2000 compliant without having to
incur significant additional expenditures.
The nature of its business makes the Registrant very dependent on critical
suppliers and service providers. The failure of such third parties to address
the Year 2000 issue adequately, could have a material impact on the
Registrant's ability to conduct its business. Accordingly, the Registrant has
a team in place to assess the Year 2000 readiness of all third parties on which
it depends. Surveys will be obtained from critical suppliers and service
providers, and each survey response will be scored and assessed based on the
third party's Year 2000 project plans in place and its progress to date. On-
site visits or follow-up telephone interviews will be performed for critical
suppliers and service providers. For any critical supplier or service provider
which does not provide the Registrant with satisfactory evidence of their Year
2000 readiness, contingency plans will be developed which will include
establishing alternative sources for the product or service provided.
The Registrant believes, based on available information, that it will be
able to manage its Year 2000 transition without any material adverse effect on
its business operations. However, the costs of the project and the ability of
the Registrant to complete it on a timely basis are based on management's best
estimates, which were based on numerous assumptions of future events including
the availability of certain resources, third party modification plans and other
factors over which it has no control. Specific factors that could have a
material adverse effect on the cost of the project and its completion date
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes,
unanticipated failures by critical vendors, as well as a failure by the
Registrant to execute its own remediation efforts. As a result, there can be
no assurance that these forward looking statements and estimates will be
achieved and actual results may differ materially from those plans, resulting
in material financial risk to the Registrant. As the Year 2000 project
progresses, the Registrant will establish contingency plans.
(e) Forward Looking Statements
Certain matters discussed within this filing may constitute forward
looking statements within the meaning of the federal securities laws. Although
the Registrant believes these statements are based on reasonable assumptions,
it can give no assurance that its expectations will be attained. Actual
results and the timing of certain events referred to, could differ materially
from those projected in or contemplated by the forward looking statements due
to a number of factors which are not within the Registrant's control.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Index To Exhibits
Exhibit
Number Description
3. (i) Registrant's Amended and Restated Articles of Incorporation.
Reference is made to Exhibit 8 of Registrant's Form 8-K for the month
of March 1997, which Exhibit is incorporated herein by reference.
17
3. (ii) Registrant's Bylaws. Reference is made to Exhibit 3 (i) of
Registrant's Registration Statement on Form SB-2, File No. 33-7006,
which Exhibit is incorporated herein by reference.
3.(iii) Certificate of Amendment to Articles of Incorporation.
4. Form of Registrant's Common Stock certificates. Reference is made to
Exhibit 3 (ii) of Registrant's Registration Statement on Form SB-2,
File No. 33-7006, which Exhibit is incorporated herein by reference.
9. Shareholder Agreement between Techno Expres S.A. the majority
shareholder of Registrant and the Selling Shareholders dated March
21, 1997, relative to their shares of Registrant. Reference is made
to Exhibit 7 of Registrant's Form 8-K for the month of March 1997,
which Exhibit is incorporated herein by reference.
10. (i) Agreement of Sale between Touchtunes Jukebox Joint Venture and
Registrant, dated December 9, 1994, relative to transfer of patent
rights in exchange for 1,000,000 shares of Common Stock of
Registrant. Reference is made to Exhibit A of Registrant's Form 10-K
for the fiscal year ended December 31, 1994, which Exhibit is
incorporated herein by reference.
10. (ii) Summary of International Patent Application for the Digital Jukebox.
Reference is made to Exhibit B of Registrant's Form 10-K for the
fiscal year ended December 31, 1994, which Exhibit is incorporated
herein by reference.
10. (iii) Development Agreement between Touchtunes Jukebox Inc. and Registrant,
dated March 8, 1995. Reference is made to Exhibit C of Registrant's
Form 10-K for the fiscal year ended December 31, 1994, which Exhibit
is incorporated herein by reference.
10. (iv) Agreement between Oraxium International, Inc. and Registrant, dated
January 30, 1995, relative to the acquisition of a computer operating
system. Reference is made to Exhibit A of Registrant's Form 8-K for
the month of March 1995, which Exhibit is incorporated herein by
reference.
10. (v) Agreement between S.G.R.M. Inc. and Registrant, dated March 6, 1995,
relative to the acquisition of patent rights in exchange for
10,000,000 shares of Common Stock. Reference is made to Exhibit B of
Registrant's Form 10-K for the fiscal year ended December 31, 1994,
which Exhibit is incorporated herein by reference.
10. (vi) Amended Agreement between S.G.R.M. Inc., Techno Expres, S.A. and
Registrant, dated November 30, 1995, relative to the acquisition of
patent rights in exchange for 10,000,000 shares of Common Stock.
Reference is made to Exhibit C annexed to Registrant's Form 8-K for
the month of November 1995, which Exhibit is incorporated herein by
reference.
10. (vii) Subscription Agreement for the purchase of 100 Class B shares and 20
Class C shares of TouchTunes Digital Jukeboxes Inc., dated March 21,
1997. Reference is made to Exhibit 1 of Registrant's Form 8-K for
the month of March 1997, which Exhibit is incorporated herein by
reference.
10. (viii)Escrow Agreement for the deposit of $3,400,000 CDN and 680 Class C
shares of TouchTunes by the Selling Shareholders, dated March 21,
18
1997. Reference is made to Exhibit 2 of Registrant's Form 8-K for
the month of March 1997, which Exhibit is incorporated herein by
reference.
10. (ix) Agreement between TouchTunes and Registrant, relative to work to be
rendered in connection with Registrant's Digital Jukebox project.
Reference is made to Exhibit 4 of Registrant's Form 8-K for the month
of March 1997, which Exhibit is incorporated herein by reference.
10. (x) Stock Exchange Agreement between Registrant and Selling Shareholders
for the exchange by the Selling Shareholders of their Class B and
Class C shares of TouchTunes for Series A Preferred shares of Regis-
trant. Reference is made to Exhibit 5 of Registrant's Form 8-K for
the month of March 1997, which Exhibit is incorporated herein by
reference.
10. (xi) Subscription Agreement for the purchase of 100 Series A Preferred
shares of Registrant by the Selling Shareholders. Reference is made
to Exhibit 6 of Registrant's Form 8-K for the month of March 1997,
which Exhibit is incorporated herein by reference.
10. (xii) Shareholder Agreement between Techno Expres S.A., the majority
shareholder of Registrant and the Selling Shareholders, relative to
their shares of Common Stock of Registrant. Reference is made to
Exhibit 7 of Registrant's Form 8-K for the month of March 1997, which
Exhibit is incorporated herein by reference.
10. (xiii)Employment and Non-Competition Agreement between Registrant and Tony
Mastronardi. Reference is made to Exhibit 9 of Registrant's Form 8-K
for the month of March 1997, which Exhibit is incorporated herein by
reference.
10. (xiv) Employment and Non-Competition Agreement between Registrant and Guy
Nathan. Reference is made to Exhibit 10 of Registrant's Form 8-K for
the month of March 1997, which Exhibit is incorporated herein by
reference.
10. (xv) Lease for premises at One Commerce Place, Nun's Island, Verdun
(Quebec), Canada, H3E 1A2 between TouchTunes Digital Jukebox Inc. and
landlord of said premises. Reference is made to Exhibit 10(xv) of
Registrant's Registration Statement on form SB-2, File No. 33-7006,
which Exhibit is incorporated herein by reference.
10. (xvi) OEM Purchase and Development Agreement with Bose Corporation, dated
March 1997. Reference is made to Exhibit 10(xvi) of Registrant's
Registration Statement on Form SB-2, File No. 33-7006, which Exhibit
is incorporated herein by reference.
10. (xvii)Jukebox License Office Certificate, dated March 11, 1997. Reference
is made to Exhibit 10(xvii) of Registrant's Registration Statement on
Form SB-2, File No. 33-7006, which Exhibit is incorporated herein by
reference.
10.(xviii)Jukebox License Agreement with the American Society of Composers
Authors and Publishers, Broadcast Music Inc. and SESAC, Inc., dated
March 11, 1997. Reference is made to Exhibit 10(xviii) of
Registrant's Registration Statement on Form SB-2, File No. 33-7006,
which Exhibit is incorporated herein by reference.
19
10. (xix) Subscription Agreement dated February 11, 1998, by and among Societe
Innovatech du Grand Montreal, Sofinov Societe Financiere d'Innovation
Inc. and TouchTunes Digital Jukebox Inc. for the purchase of up to an
aggregate of $10,000,000 (US) Debentures. Reference is made to
Exhibit 2 of Registrant's Form 8-K for the month of February 1998,
which Exhibit is incorporated herein by reference.
10. (xx) Debenture Put Right Agreement dated February 11, 1998, by and among
Societe Innovatech du Grand Montreal, Sofinov Societe Financiere
d'Innovation Inc. and Technical Maintenance Corporation. Reference
is made to Exhibit 3 of Registrant's Form 8-K for the month of
February 1998, which Exhibit is incorporated herein by reference.
10. (xxi) Amended and Restated Shareholders' Agreement dated February 11, 1998,
by and among Techno Expres S.A., Societe Innovatech du Grand
Montreal, Sofinov Societe Financiere d'Innovation Inc. and Technical
Maintenance Corporation. Reference is made to Exhibit 4 of
Registrant's Form 8-K for the month of February 1998, which Exhibit
is incorporated herein by reference.
10. (xxii)Debenture dated August 5, 1998, registered in the name of Sofinov
Societe Financiere D'Innovation Inc. in the principal amount of
$700,000.
10.(xxiii)Debenture dated August 5, 1998, registered in the name of Sofinov
Societe Financiere D'Innovation Inc. in the principal amount of
$700,000.
10. (xxiv)Debenture dated August 5, 1998, registered in the name of Societe
Innovatech Du Grand Montreal in the principal amount of $300,000.
10. (xxv) Debenture dated August 5, 1998, registered in the name of Societe
Innovatech Du Grand Montreal in the principal amount of $300,000.
10. (xxii)Debenture dated November 2, 1998, registered in the name of Sofinov
Societe Financiere D'Innovation Inc. in the principal amount of
$700,000.
10.(xxiii)Debenture dated November 2, 1998, registered in the name of Sofinov
Societe Financiere D'Innovation Inc. in the principal amount of
$700,000.
10. (xxiv)Debenture dated November 2, 1998, registered in the name of Sofinov
Societe Financiere D'Innovation Inc. in the principal amount of
$700,000.
10. (xxv) Debenture dated November 2, 1998, registered in the name of Sofinov
Societe Financiere D'Innovation Inc. in the principal amount of
$700,000.
10.(xxvi) Debenture dated November 2, 1998, registered in the name of Societe
Innovatech Du Grand Montreal in the principal amount of $300,000.
10. (xxv) Debenture dated November 2, 1998, registered in the name of Societe
Innovatech Du Grand Montreal in the principal amount of $300,000.
10.(xxviii)Debenture dated November 2, 1998, registered in the name of Societe
Innovatech Du Grand Montreal in the principal amount of $300,000.
20
10. (xxix)Debenture dated November 2, 1998, registered in the name of Societe
Innovatech Du Grand Montreal in the principal amount of $300,000.
16. Letter from prior auditor, Armstrong Gilmour Accountancy Corporation,
relative to the information set forth in Item 4 of Registrant's Form
8-K/A for the month of February 1998, which Exhibit is incorporated
herein by reference.
27. Financial Data Schedule.
(b) Reports on Form 8-K
No Form 8-K was filed during the quarter ended March 31, 1999.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TOUCHTUNES MUSIC CORPORATION
Dated: May 27, 1999 Per: /s/Tony Mastronardi
--------------------------
Tony Mastronardi
President and Director
Dated: May 27, 1999 Per: /s/Guy Nathan
--------------------------
Guy Nathan
Secretary and Director
22
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