U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File No. 333-7006
TOUCHTUNES MUSIC CORPORATION
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(Name of small business issuer in its charter)
Nevada 87-0485304
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1800 E. Sahara, Suite 107
Las Vegas, Nevada 89104
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(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
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Class A Common Stock (Par Value $.001 per share)
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(Title of Class)
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
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part 1II of this Form 10-KSB or any
amendment to this Form 10-KSB. ( )
The issuer's revenues for its most recent fiscal year were $ 71,620
The aggregate market value for the voting and non-voting common equity held by
non-affiliates on March 31, 1999 was approximately $13,253,319
The total number of shares of Class A Common Stock outstanding on March 31,
1999 was 14,658,644.<PAGE>
PART I
ITEM 1. Description of Business
(a) Organization and Technology.
The Registrant was incorporated under the laws of Nevada on August 9, 1990
by persons no longer principals. Prior to December 8, 1994, the Registrant did
not engage in any business activities. The Registrant was in the development
stage until the fourth quarter of 1998, when it began generating revenues from
business operations in which it is engaged and implementing its sales and
marketing strategy. During 1998, the Registrant employed a total of 22
persons. On December 4, 1998, the Registrant changed its name to TouchTunes
Music Corporation from Technical Maintenance Corporation.
On December 8, 1994, the Registrant acquired the exclusive rights to a
newly patented technology for a Digital Jukebox (the "Digital Jukebox"). Since
then, the Registrant has concentrated all of its efforts on the development and
marketing of this Digital Jukebox, which combines in a single unit, computer
systems, telecommunication peripherals and multimedia hardware. Management
believes the Digital Jukebox is capable of replacing the loading mechanisms,
the laser and the high maintenance parts employed by conventional jukeboxes,
with this low maintenance, high power computer system, capable of storing and
reproducing, in digital format, any music selection at its original level of
quality. The Registrant has incurred a total of $2,079,812 in research and
development costs relating to the Digital Jukebox from December 8, 1994 through
December 31, 1998.
The core of the Digital Jukebox technology is a proprietary programming
platform, optimized for high-speed sound reproduction and video animation. The
Digital Jukebox is capable of storing, in compressed digital format, a minimum
of 750 songs, upgradable to virtually unlimited capacity. The Digital Jukebox
is also equipped with a telecommunication protocol allowing the secure
downloading of music to each individual jukebox from a remote central library.
The result is a high performance, low maintenance, remotely configurable,
computer controlled unit, using state-of-the-art technology standards. In the
opinion of management, with its integrated and proprietary software program,
the Digital Jukebox outperforms any conventional jukebox on the market today,
for simultaneous sound reproduction, graphics display, video animation and
telecommunication services.
The Digital Jukebox is specifically designed for use in the jukebox
industry. The operating software will account for all songs played and
automatically generate detailed pay-for-play statements indicating royalty
amounts owing to each respective record and publishing company. This feature
has helped the Registrant obtain performance, recording and publishing rights
for the Digital Jukebox from performance rights societies, various record and
publishing companies, authorizing the Registrant to reproduce and play
copyrighted music on its Digital Jukebox units. The statistics generated by
Digital Jukeboxes can be used to determine the popularity of artists and
titles, together with music preferences and trends. This information on
musical tastes is critical to the music industry and can be made available by
<PAGE>
the Registrant to record label companies. Furthermore, Digital Jukeboxes can
be used to test market new songs, which can be downloaded on each Digital
Jukebox within 24 hours. Consumer response can be monitored on a daily basis.
(b) Patents.
To protect its technology, the Registrant has filed fourteen international
patent applications. Seven of these patent applications have a priority date of
October 12, 1994; the eighth patent application has a priority date of
September 25, 1996; the ninth patent application has a priority date of
September 26, 1997; the tenth patent application has a priority date of April
14, 1998; the eleventh twelfth and thirteen patent applications have a priority
date of July 22, 1998; and the fourteenth patent has a priority date of July
21, 1998. Nine patent applications cover the Registrant's downloading network
configuration, operating system technology, title selection, system control
methodology, as it applies to the jukebox sector. Another four patent
applications cover its application to potential markets outside the jukebox
industry (residential and other markets) which can be serviced by the same
network configuration. One patent application covers the digital technology
applicable to wireless speakers. During 1998, four patents were granted in
Europe. There can be no assurances concerning the scope, validity or value of
such patents and patent applications; nor their freedom from infringement by
others, although the Registrant is not aware of any conflicting patents held by
others.(see Item 3 - "Legal Proceedings").
(c) Promotion and Marketing.
To promote the Digital Jukebox, the Registrant continues to attend all
major and selected minor industry trade shows and exhibitions. During March
1998, the Registrant participated in the Amusement Showcase International show
held in Las Vegas, Nevada and also attended the Amusement & Music Operators
Association (AMOA) exposition in Atlanta, Georgia during September 1998. These
events attract most major participants in the coin operated industry and
generate orders from jukebox operators for the Digital Jukebox.
The Registrant's marketing and distribution strategies are aimed at
penetrating the jukebox industry through individualized arrangements with
existing jukebox operators. The Registrant arranges for the renewal and
payment of licensing fees to the performing rights societies; accountability
and disbursements of royalty payments to the record label companies; and
ongoing provision for music selections and the manufacture and delivery of the
Digital Jukeboxes to the jukebox operators. In consideration for this, the
Registrant charges the jukebox operators a minimum of $69, which increases to a
maximum of $89 based on the level of revenues derived from their operation of
the Digital Jukeboxes. The Registrant's arrangements with jukebox operators
are formalized by a 5 year operating lease agreement referred to as a "Partner
Lease Agreement".
As at December 31, 1998, the Registrant had delivered a total of 225
Digital Jukeboxes to jukebox operators under Partner Lease Agreements, of which
180 units had been installed in various locations in the United States. The
total jukebox lease revenues earned by the Registrant in 1998 amounted to
$71,620. There can be no assurance that Registrant's promotion and marketing
<PAGE>
strategy for the Digital Jukeboxes will be successful or profitable.
(d) Manufacturing, Assembling and Distribution.
The Registrant has secured rights to play their music from 3 major record
label companies: Warner Music Group, BMG North America, and Universal Music
Group, as well as several minor independent record label companies. The record
rights obtained were based on a pay-per-play royalty fee structure. The
Registrant is still negotiating with the two other major record label
companies, EMI Capital and Sony, as well as with several minor independent
record companies for the right to play their music based on similar pay-per-
play royalty fee structures. There can be no assurance that the Registrant will
obtain and/or renew rights from such record label companies on terms favorable
to the Registrant.
The Registrant has also obtained publishing rights from all of the major
publishing companies, as well as rights from over 290 other independent
publishing companies, in consideration for a royalty payable each time a song
is digitally reproduced or downloaded on a Digital Jukebox. The Registrant
continues to negotiate rights to play music with publishing companies.
However, there can be no assurance that it will obtain and/or renew the rights
from the publishing companies on terms favorable to the Registrant.
The Registrant has entered into an agreement with Bose Corporation
("Bose") for the commercial manufacturing of the Digital Jukeboxes. The first
units were manufactured by Bose and delivered to jukebox operators during the
third quarter of 1998. The Registrant has also entered into an agreement with
146473 Canada Inc. ("Microsource") to supply assembled and tested computer
units for installation in Digital Jukebox units manufactured by Bose. The
quantity of computer units supplied by Microsource will coincide with the
Digital Jukebox manufacturing schedule of Bose. The Registrant also entered
into an agreement with MCI Telecommunications Corporation ("MCI") for a one
year term by which MCI has agreed to host and maintain the central server,
which will store all the music data. MCI has also agreed to provide
telecommunication facilities for transmitting the compressed music data to the
Digital Jukebox units across the United States. Management is evaluating
various alternatives to improve the overall effectiveness and efficiency of its
telecommunication requirements.
Registrant has received indications of interest for approximately 4,000
Digital Jukebox units from jukebox operators under its proposed leasing
arrangements to be delivered over a period of twelve months commencing April
1999. There can be no assurance that the Registrant will be able to
successfully conclude its pending arrangements with the remaining record label
companies for the use of their music; conclude sufficient leasing arrangements
with jukebox operators for their use of the Digital Jukeboxes; renegotiate
key supplier contracts on terms favorable to the Registrant; or finance the
substantial costs needed to manufacture, assemble, distribute and operate such
Digital Jukebox units on a commercially profitable basis.
(e) Competition.
Competition in the manufacture, distribution and use of conventional
jukeboxes is intense. Some manufacturers have other lines of equipment, which
they produce, in addition to conventional jukeboxes, within the<PAGE>
amusement/entertainment industry. However, none of the manufacturers are known
to be involved in the placement or operation of any of their jukebox units in
the manner being proposed by the Registrant. Through their distribution
network, manufacturers sell their equipment, usually in bulk quantities, to
local distributors. All of these manufacturers have far greater experience
than the Registrant.
Competition for the Registrant's Digital Jukebox can also be expected from
those who seek to design, develop and market, units similar to the Digital
Jukebox for use in the jukebox industry, with comparable or superior features,
technologies and advances. While the Registrant believes the Digital Jukebox
is currently superior to any conventional jukebox on the market, there can be
no assurance that other technologically advanced jukeboxes may not be designed
and marketed by existing manufacturers or others, in competition with the
Digital Jukeboxes of the Registrant.
(f) Funding of the Registrant's Operations.
From December 1994 until March 1997, officers and principal shareholders
of the Registrant financed its operations primarily through their own
resources. On March 21, 1997, two independent Canadian Investors, Societe
Innovatech du Grand Montreal and Sofinov Societe Financiere D'Innovation Inc.
(the "Canadian Investors"), agreed to invest $4,000,000 Canadian Dollars (CDN)
for the development and promotion of the Registrant's Digital Jukebox, upon
certain terms and conditions. To accomplish this, the Canadian Investors
agreed to invest $4,000,000 CDN in TouchTunes Digital Jukebox Inc.
("TouchTunes"), a Canadian company jointly controlled by the Registrant and the
Canadian Investors, which was organized by the Registrant specifically for that
purpose. The Registrant contracted out to TouchTunes the research and
development work needed for the Digital Jukeboxes and to provide all such
additional services reasonably requested by the Registrant in connection with
the implementation of the Digital Jukebox project.
The Canadian Investors initially purchased 100 Class B shares and 20
Class C shares of TouchTunes, at a price of $5,000 CDN per share, for an
immediate cash consideration of $600,000 CDN. They also subscribed to an
additional 680 Class C shares of TouchTunes, at a price of $5,000 CDN per
share, for a consideration of $3,400,000 CDN. Both the Class C shares and the
$3,400,000 CDN were deposited in escrow. The Class B and the Class C shares of
TouchTunes may be exchanged at the option of the Canadian Investors, into
2,000,000 shares of Series A Preferred Stock of the Registrant and then
converted share for share into Common Stock. Subsequently, on May 9, 1997, the
Canadian Investors released an additional $750,000 CDN against delivery of 150
Class C shares, leaving a balance of $2,650,000 CDN and 530 Class C shares in
escrow. Finally, on July 17, 1997, the Canadian Investors released the
remaining $2,650,000 CDN to TouchTunes against delivery to them of the
remaining 530 Class C shares of TouchTunes. These funds have been used to
implement the start-up business activities of the Registrant.
The Registrant is the owner of 800 Class A shares of TouchTunes. As a
result of the foregoing transactions, the Canadian Investors own 100 Class B
shares and 700 Class C shares of TouchTunes. The Class A shares entitle the
holder to one vote per share. The Class B shares entitle the holder to eight<PAGE>
votes per share and the Class C shares are non-voting. Therefore, the
Registrant and the Canadian Investors have equal voting rights in TouchTunes.
On February 11, 1998, the Canadian Investors subscribed for an aggregate
principal amount of $4,000,000 (US) of debentures ("Debentures") issued by
TouchTunes. The Debentures are payable by TouchTunes on demand, only after the
occurrence of an event of default as defined by the subscription agreement.
Upon default, the Debentures would bear interest at the rate of 12% per annum,
payable in one single installment, concurrently with the payment of the
principal amount. At any time prior to February 11, 1999, TouchTunes had the
right to require the Canadian Investors to purchase additional Debentures, up
to an aggregate principal amount of $10,000,000 (US), bearing the same terms
and conditions, in six increments of $1,000,000 each.
On that same date, February 11, 1998, the Registrant entered into a
"Debenture Put Right Agreement" with the Canadian Investors, providing them
with the right and option to require the Registrant to purchase all or any part
of the principal amount of Debentures they have acquired (up to $10,000,000 in
principal amount), at an exchange rate of $2.00 per share, for the issuance by
the Registrant of up to 5,000,000 shares of Series A Preferred Stock,
convertible at the option of the holders, share for share, into an aggregate of
up to 5,000,000 shares of the Registrant's Common Stock.
On February 11, 1998, the Registrant and the Canadian Investors amended
and restated their Shareholders' Agreement of March 21, 1997. Among other
things, the Amended and Restated Agreement provides that the Canadian Investors
collectively are entitled to two seats on the Registrant's Board of Directors,
which shall consist of at least six directors.
On August 5, 1998, TouchTunes required the Canadian Investors to purchase
an additional $2,000,000 (US) principal amount of Debentures with the same
terms as those previously issued on February 11, 1998.
On November 2, 1998, TouchTunes required the Canadian Investors to
purchase an additional $4,000,000 (US) principal amount of Debentures with the
same terms as those previously issued on February 11, 1998, bringing the total
amount of Debentures purchased to the agreed upon maximum of $10,000,000 (US) .
On March 22, 1999, the Canadian Investors subscribed for additional
Debentures issued by TouchTunes for an aggregate principal amount of $830,579
U.S. with the same terms as those previously issued in 1998. Concurrently, on
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
Registrant to purchase all, or any part of the principal amount of the
Debentures aggregating $830,579 (US), at an exchange rate of $2.00 (US) per
share of the Company's Series A preferred stock. Each Series A preferred share
is convertible at the option of the holder, share for share, into shares of the
Company's Common Stock.; an aggregate of 415,289 shares.
On April 8, 1999, Sofinov Societe Financiere d'Innovation Inc. subscribed
for additional Debentures issued by TouchTunes for an aggregate principal
amount of $2,500,000 (US) with the same terms as those previously issued in
1998. Concurrently, on April 8, 1999, the Company entered into a "Debenture Put<PAGE>
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 holder, share for share, into shares of the
Company's Common Stock; up to an aggregate of 1,250,000 shares.
Based on the present number of shares of the Registrant's Common Stock
issued and outstanding (14,658,644 shares), upon the exchange of their
TouchTunes Class B and Class C Shares for Series A Preferred shares of the
Registrant and the conversion of such Series A Preferred shares into 2,000,000
shares of the Registrant's Common Stock, the Canadian Investors will own
approximately 12% of the Common Stock of the Registrant. Upon the exchange of
their $13,330,579 principal amount of Debentures into an approximately
6,665,289 shares of the Registrant's Series A Preferred Stock and their
conversion of such Series A Preferred shares into the Registrant's Common
Stock, the Canadian Investors will own approximately 37.15% of the Registrant's
Common Stock.
On January 29, 1999, TouchTunes 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, to date is $1,250,000 Canadian dollars. The security
provided to the Bank by TouchTunes was in the form of moveable hypothecs on
past, present and future assets of TouchTunes, as well as a guarantee from the
Registrant 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. The remaining $750,000 (CDN) is available to
TouchTunes, subject to various terms and conditions.
On April 19, 1999, TouchTunes successfully negotiated a term loan facility
aggregating $10,400,000 (US) with a major Canadian chartered bank for financing
the cost of manufacturing jukeboxes. The security provided to the Bank by
TouchTunes was in the form of moveable hypothecs on past, present and future
assets of TouchTunes as well as a guarantee from the Registrant 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 the Registrant must first increase its equity
by $15,000,000 (US).
During the year the Registrant entered into a capital master lease
agreement with TouchTunes whereby Digital Jukebox units are leased by
TouchTunes to the Registrant. TouchTunes acquires the Digital Jukebox units
from Bose and Microsource. The capital lease terms are as follows: 20% of the
cost of each jukebox is payable in the month it is delivered with the remaining
principal financed over 30 months at 15% interest per annum. At the end of the
lease the Registrant has the option to buy each Digital Jukebox for $1.<PAGE>
Based on the Registrant's estimate that it can lease approximately 4,000
Digital Jukebox units to prospective jukebox operators and expand its research
and development activities 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. While the Registrant is negotiating with
financial institutions for such funds, there can be no assurances that it will
be able to raise this on terms satisfactory to the Registrant, or at all. Nor
can there be any assurances that the Registrant will interest enough jukebox
operators to enter into Partner Lease Agreements. Finally, there can be no
assurances that even if all these events take place, the operations of the
Registrant will prove commercially profitable.
ITEM 2. Description of Property
The Registrant owns no real estate. Its operations are conducted through
TouchTunes, its jointly owned subsidiary. Effective March 1, 1998, TouchTunes
entered into a new lease with the same landlord for a term of 10 years. The
premises comprise 13,724 square feet of office space at 3 Commerce Place, Nun's
Island, Verdun, (Quebec) Canada, H3E 1H7, 4th floor. The annual minimum rental
is $254,443 (CDN).
The Registrant also has a lease for 3,934 square feet of office space at
1110 Cook Road, Suite 100, Buffalo Grove, Illinois 60089, at an annual rental of
$70,000 (US), for use as a sales and marketing office and its parts distribution
center, as well as leases for offices at 2300 Computer Avenue, Suite 125, Willow
Grove, Pennsylvania and at 1800 E. Sahara, Suite 107, Las Vegas, Nevada, both at
a nominal annual rentals.
ITEM 3. Legal Proceedings
In July 1998 a lawsuit was filed in the United States District Court for
the Northern District of Illinois Eastern Division by Arachnid, Inc.
("Arachnid"), naming TouchTunes and the Registrant as defendants. The suit
seeks a judgment ruling that Arachnid's patent is valid, enforceable and is
being infringed by the Registrant's Digital Jukebox. The Registrant has
obtained an opinion from its patent counsel that its patents on the Digital
Jukebox do not infringe upon Arachnid's patent and intends to vigorously defend
against this claim.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
(a) Market for Common Stock
The Registrant's Common Stock has traded in the over-the-counter market on
the "OTC Bulletin Board" since June 7, 1995. Until December 1998 the symbol
was TCMN. The symbol is now TTMC. The quotations below from the National
Quotation Bureau, Inc. represent the high and low, bid and asked prices, by<PAGE>
quarters, since that date. These do not include retail markups, markdowns or
commissions. Nor do they represent actual transactions.
Bid Prices Asked Prices
------------------- -------------------
High Low High Low
1996
January 2 through $1.625 $.875 $2.25 $1.125
March 29
April 1 through $3.25 $1.1875 $5.00 $1.375
June 28
July 1 through $3.75 $1.875 $4.25 $3.00
September 30
October 1 through $2.00 $1.00 $3.00 $2.00
December 31
1997
January 2 through $2.75 $1.00 $4.00 $1.50
March 31
April 1 through $2.125 $1.25 $3.00 $2.00
June 30
July 1 through $2.625 $1.00 $3.50 $1.968
September 30
1998
January through $4.25 $1.5313 $4.625 $1.8125
March 31
April 1 through $6.125 $3.375 $6.50 $3.50
June 30
July 1 through $3.375 $2.00 $3.875 $2.50
September 30
October 1 through $3.6875 $1.75 $3.75 $2.00
December 31
On March 31, 1999, closing bid and asked prices of the Common Stock on the
OTC Bulletin Board were $3.25 and $3.5625 per share, respectively. On that
date, there were approximately 500 holders of record of the Common Stock.<PAGE>
(b) Recent Sales of Unregistered Securities
In the past three years, the Registrant has made the following sales of
unregistered securities, all of which sales were exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof, or as
otherwise indicated herein.
On September 25, 1996, the Registrant authorized the issuance of 900,888
shares of Common Stock to TouchTunes Juke Box Inc. for a cash consideration of
$477,470, and 75,000 shares to Giovanni D'Andrea, an independent third party,
for professional services valued at $40,000. On December 20, 1996, the
Registrant authorized the issuance of 400,000 shares of Common Stock to Oraxium
International Inc., in consideration for agreeing to extend the scope and
duration of a non-competition covenant given to the Registrant, and 50,000
shares each, to Pierre Martineau and Sylvain Duchesne, employees of TouchTunes
Juke Box Inc., in consideration for their non-compete covenants. On December
27, 1996, the Registrant authorized the issuance of 199,819 shares of Common
Stock to TouchTunes Juke Box Inc. for a cash consideration of $420,698. All
1,675,707 shares were issued in April 1997 and were acquired for investment by
such persons, none of whom (except for Mr. D'Andrea) is a resident or citizen
of the United States.
On April 1, 1997, the Board of Directors authorized the issuance of 56,820
shares of Common Stock to repay accounts payable totalling $85,230 and
authorized the issuance of 17,117 shares of Common Stock to a Director for
cash consideration of $31,565. These shares were issued on October 7, 1997 to
such two persons who acquired these shares for investment.
Reference is made to the transactions described in Item 1 (f) above,
between Societe Innovatech du Grand Montreal and Sofinov Societe Financiere
d'Innovation Inc. (the "Canadian Investors"); the Registrant; and TouchTunes
Digital Jukebox, Inc. ("TouchTunes") a Canadian company jointly controlled by
the Registrant and the Canadian Investors, which information is incorporated
herein by such reference. Based on the present number of shares of the
Registrant's Common Stock issued and outstanding (14,658,644 shares), upon the
exchange by the Canadian Investors of their TouchTunes Class B and Class C
Shares for Series A Preferred shares of the Registrant and the conversion of
such Series A Preferred shares into 2,000,000 shares of the Registrant's Common
Stock, the Canadian Investors will own approximately 12% of the Common Stock of
the Registrant. Upon the exchange of their $13,330,579 principal amount of
Debentures into an additional 6,665,289 shares of the Registrant's Series A
Preferred Stock and their conversion of such Series A Preferred shares into the
Registrant's Common Stock, the Canadian Investors will own approximately 37.15%
of the Registrant's Common Stock.
ITEM 6.Management's Discussion and Analysis or Plan of Operation
(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<PAGE>
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 proposed
lease arrangements over a twelve month period commencing April 1999 (see Item
1(c) "Promotion and Marketing"). The Registrant commenced generating revenues
during the fourth quarter of 1998. A total of $71,620 in revenues were earned
from its lease arrangements with jukebox operators for its Digital Jukebox.
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
lease arrangements. 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 which would have a material effect on the Registrant's
financial condition or results of operations.
(c) Liquidity and Capital Resources
From March 21, 1997 through April 8, 1999, the 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.
(See Item 1(f) "Funding of the Registrant's Operations"). 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 the Registrant's affiliated company,
TouchTunes, for financing the cost of manufacturing the Digital Jukebox, upon
certain terms and conditions previously described. (See Item 1(f) "Funding of
the Registrant's Operations". There can be no assurances that The Registrant or
its affiliated company, TouchTunes, will be able to satisfy all terms and
conditions specified by the bank for the full or any use of the bank 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
<PAGE>
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) Other Events.
On December 4, 1998, the Registrant changed its name to TouchTunes Music
Corporation and increased its authorized shares to 50,000,000 shares of Class A
Voting Common Stock, and 10,000,000 shares of Series A Preferred Stock.
(e)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
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
<PAGE>
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.
ITEM 7. Financial Statements
Attached is Appendix A containing the following information:
Independent Auditor's Report
Balance Sheets as of December 31, 1998 and 1997
Statements of Operations for the years ended December 31, 1998, 1997, 1996.
Statements of Stockholders' Equity (Deficiency) for the years ended
December 31, 1998, 1997, 1996.
Statements of Cash Flows for the years ended December 31, 1998, 1997, 1996.
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act:
(a) Directors and Officers.
The executive officers and directors of the Registrant are listed below.
The term of each director is for one year.
<PAGE>
Name Office Age
-------------------- --------------------- ------
Tony Mastronardi Chief Executive Officer 38
President and Director
(Since December 1994)
Guy Nathan Senior Vice President, 55
Secretary,and Director
(Since December 1994)
Tonino Lattanzi Vice President and Director 47
(Since December 1994)
Jacques Bourque Assistant Secretary 47
And Director
(Since March 1997)
Pierre Pharand Director 56
(Since March 1997)
Caroline Singleton Director 45
(Since February 1998)
Guy Rivard Senior Vice President, 53
Finance and Administration
Pierre Trudeau Vice President, Research 38
and Development
John Margold Vice President, Sales 47
and Marketing
Linda Komorsky Vice President, Business 54
Affairs, Music Rights and
Licenses
Tony Mastronardi has 11 years of diverse business experience holding senior
management positions in various industries. Mr. Mastronardi has had hands-
on involvement in the downloading jukebox project since conception, and
currently has the responsibility of overseeing the management of the
operations for TouchTunes. Mr. Mastronardi possesses previous experience
in new ventures having already participated in launching two other
companies in the retail sector. Between 1985 and 1994, Mr. Mastronardi was
employed as a Vice President and then President of Les Pavages Samacon
Inc., a Montreal based family-owned construction company. Since April
1993, he has also been active in the Management of Viatel Communications
Inc., a Montreal-based cellular phone distributor.
Guy Nathan is a recognized inventor, having patented over 100 intellectual
property inventions since 1965. He has founded numerous research and
<PAGE>
development companies specializing in a variety of highly innovative
products, such as microradars for military use, videodiscs using laser and
CD technology, high efficiency DC motors and interactive cable TV. He also
founded several companies for the purpose of promoting and marketing his
inventions. Mr. Nathan has a great deal of experience in
telecommunications. He was directly involved in the creation of
photovoltaic powered television transmitters and repeaters and microwave
links; created a photovoltaic powered modular television set for communal
and educational TV use in third world countries; acted as consultant for
numerous African countries in matters of telecommunications, more
particularly in setting-up radio and television networks by satellite;
developed satellite dish antennas for direct television reception in KU
band and developed and patented an interactive cable TV.
Tonino Lattanzi resides in France. Mr. Lattanzi has launched two
successful waste management companies in France and Italy. Mr. Lattanzi is
not involved in TouchTunes' management or ongoing daily activities.
Jacques Bourque is a lawyer and senior partner of the law firm of Guy &
Gilbert, which has offices in Montreal, Canada. Mr. Bourque graduated from
the law faculty of Universite de Montreal in 1973 and was admitted to the
Bar of the Province of Quebec in 1975. He also holds a Masters in Business
Administration from McGill University. Mr. Bourque has extensive experience
in corporate and commercial law, specializing in mergers and acquisitions.
Pierre Pharand was appointed Vice President of Societe Financiere
d'Innovation Inc. ("Sofinov") in September 1996. Sofinov is a venture
capital fund and a wholly-owned subsidiary of Caisse de Depot et Placement
du Quebec, a major pension fund with C$69 billion of assets under
management. He holds a Bachelor's degree in Industrial Relations from the
Universite de Montreal received in 1972 and a Bachelor's degree in Business
Administration from McGill University received in 1964. He is also a
Chartered Administrator. Prior to joining Sofinov, Mr. Pharand was
President of Acero Management International Inc., a consulting firm
specializing in the corporate development of technology-related companies.
He was also Chairman of the Board as well as President and Chief Executive
Officer of Datagram Inc., a communications and technology company.
Caroline Singleton is Project Director, Information Technology for Societe
Innovatech du Grand Montreal, a C$350 million high-technology venture
capital fund. Prior to joining Innovatech in 1997, Ms. Singleton was
president of Tordion Consulting Inc., a company specializing in the
<PAGE>
management of high technology projects in Canada, the United States and the
Far East. She obtained a Bachelor of Science in Mathematics (Honours) from
McGill University in 1978 and during the course of her career has designed
or managed state-of-the-art software systems in many different areas
including astrophysics, electric power generation, telecommunications,
banking and medical technology. She currently serves on the Board of
Directors of a number of leading edge technology companies and professional
organizations and is a former elected member of the Canadian Executive
Board of DECUS (The Digital Computer Users Society), an international
organization which at the time had 50,000 members world-wide.
Guy Rivard is a chartered accountant with 30 years of diversified
experience in several industries including financial services,
transportation, engineering, manufacturing, consulting and accounting
services. He has held various senior managerial and financial positions
for large national and international public companies. During the last ten
years, Mr. Rivard was a Senior Vice President and Chief Financial Officer
of Desjardins Laurentian Financial Group. Mr. Rivard received a degree in
Business Administration and Accountancy from Laval University in Quebec
City in 1968.
Mr. Trudeau has 16 years of experience in the hi-tech industry, where he
has held several management and development roles covering research and
development on hardware and software projects. Mr. Trudeau was previously
a division head, as well as responsible for research, at Eicon Technology
Corporation, with a strong focus on customized and private label products
at the national and international level. Mr. Trudeau received a Bachelor
of Science degree in Computer Science (1982) and an M. S. degree in
Computer Science (1985) from Sherbrooke University.
John Margold has over 20 years of experience in the coin-op industry and
has relationships with many jukebox operators across the United States.
Prior to joining TouchTunes, Mr. Margold was a Sr. Vice President of NSM
America, one of the leading manufacturers of traditional CD jukeboxes, both
in the United States and Europe, where he alone accounted for the sales of
approximately 6,000 jukeboxes per year. Mr. Margold received a Bachelor of
Arts degree in Communications from St. Laurence University in 1973.
Linda Komorsky, based In Los Angeles, has 25 years of experience in the
music industry where she has held several senior positions with diverse
responsibilities at national and international levels. Most recently, she
served on the worldwide management committee of BMG Music Publishing
<PAGE>
International as Vice President, International Acquisitions and Marketing.
Reporting directly to the CEO, Mrs. Komorsky had specific responsibilities
with respect to the strategic growth of BMG Music Publishing on a worldwide
level.
(b) Section 16(a) Beneficial Ownership Reporting Compliance.
During the most recent fiscal year, Registrant's reporting persons did not
file Forms 4 to reflect their receipt of stock options granted to them.
ITEM 10. Executive Compensation
Until January 1, 1997, the Registrant had no arrangement for the
remuneration of its executive officers and directors, except that they received
reimbursement for actual out-of-pocket expenses, including travel expenses,
made on behalf of the Registrant. No remuneration was paid to the executive
officers and directors of the Registrant for the year ended December 31, 1996.
On March 11, 1997, the Registrant entered into an employment agreement
with Tony Mastronardi, its President. The term of his employment is for five
years and the salary for his first year of employment was fixed at $125,000
CDN, commencing January 1, 1997. Mr. Mastronardi entered a non-competition and
confidentiality agreement with the Registrant for as long as he remains in its
employ and for an additional year thereafter. The non-competition covenant
will continue for as long as Mr. Mastronardi owns any shares, directly or indi-
rectly, in the Registrant. On August 31, 1998, the Board of Directors
increased Mr. Mastronardi's annual base salary to $150,000 CDN retroactively
effective to January 1, 1998. In addition, Mr. Mastronardi was granted options
to purchase an aggregate of 261,000 shares of the Registrant's Class A Common
Stock at an exercise price of $2.78 (U.S.) per share. Options to purchase
51,000 shares will vest at the rate of 12,750 shares on September 1 of each of
the four years commencing with the year 1999. Subject to certain
contingencies, options to purchase an additional 105,000 shares will vest on
<PAGE>
December 31, 1999; and options to purchase the remaining 105,000 shares will
vest on December 31, 2000. The term of the options is for ten years and the
shares acquired upon exercise will be restricted securities.
On March 11, 1997, the Registrant also negotiated an employment agreement
with Guy Nathan, its Senior Vice-President for Research and Development, and
Secretary. The terms of the employment agreement with Mr. Nathan were
identical to those of the employment agreement entered with Mr. Mastronardi.
Mr. Nathan also executed a non-competition and confidentiality agreement in
favor of the Registrant on terms identical to those of the non-competition and
confidentiality agreement executed by Mr. Mastronardi. On August 31, 1998, the
Board of Directors fixed Mr. Nathan's annual base salary at $150,000 CDN
retroactively effective to January 1, 1998. In addition, Mr. Nathan was
granted options to purchase an aggregate of 261,000 shares of the Registrant's
Class A Common Stock at an exercise price of $2.78 (U.S.) per share. Options
to purchase 51,000 shares will vest at the rate of 12,750 shares on September
1 of each of the four years commencing with the year 1999. Subject to certain
contingencies, options to purchase 105,000 shares will vest on December 31,
1999; and options to purchase an additional 105,000 shares will vest on
December 31, 2000. The term of the options is for ten years and the shares
acquired upon exercise will be restricted securities.
On August 31, 1998, the Board of Directors approved and confirmed the
employment terms and conditions of Guy Rivard, as the Registrant's Senior Vice-
President of Finance and Administration. His employment is at will, with
provisions made for severance payments depending on the length of his
employment by the Registrant. Mr. Rivard will receive a base annual salary of
$125,000 CDN. Depending upon his own performance and that of the Registrant,
Mr. Rivard will be eligible for an annual bonus of up to 60% of his base
salary. In addition, Mr. Rivard was granted options to purchase an aggregate
of 168,000 shares of the Registrant's Class A Common Stock. Options to
purchase 28,000 shares at $2.78 (U.S.) per share will vest at the rate of 7,000
shares on September 1 of each of the four years commencing with the year 1999.
Options to purchase an additional 100,000 shares at $5.07 (U.S.) per share will
vest at the rate of 15% on May 8, 1999; 35% on May 8, 2000; and 50% on May 8,
2001. Options to purchase the remaining 40,000 shares at $10.00 (U.S.) per
share will vest, subject to certain market conditions, on May 8, 1999. The
term of the options is for ten years and the shares acquired upon exercise will
be restricted securities.
On August 31, 1998, the Board of Directors approved and confirmed the
employment terms and conditions of Pierre Trudeau as the Registrant's Vice-
President of Research and Development. His employment is at will, with
provisions made for severance payments depending on the length of his
employment by the Registrant. Mr. Trudeau will receive a base annual salary of
$125,000 CDN. Depending upon his own performance and that of the Registrant,
Mr. Trudeau will be eligible for an annual bonus of up to 60% of his base
salary. In addition, Mr. Trudeau was granted options to purchase an aggregate
of 68,000 shares of the Registrant's Class A Common Stock. Options to purchase
28,000 shares at $2.78 (U.S.) per share will vest at the rate of 7,000 shares
on September 1 of each of the four years commencing with the year 1999.
Options to purchase the remaining 40,000 shares at $2.97 (U.S.) per share will
vest at the rate of 15% on August 10, 1999; 35% on August 10, 2000; and 50% on
August 10, 2001. The term of the options is for ten years and the shares
acquired upon exercise will be restricted securities.
On August 31, 1998, the Board of Directors approved and confirmed the
employment terms and conditions of John Margold as the Registrant's Vice-
President of Sales and Marketing. His employment is at will, with provisions
made for severance payments depending on the length of his employment by the
Registrant. Mr. Margold will receive a base annual salary of $135,000 (U.S.).
Depending upon his own performance and that of the Registrant, Mr. Margold will
be eligible for an annual bonus of up to 100% of his base salary. In addition,
Mr. Margold was granted options to purchase an aggregate of 93,000 shares of
the Registrant's Class A Common Stock. Options to purchase 12,500 shares at
$2.78(U.S.) per share have vested. Options to purchase an additional 37,500
shares at $2.78 (U.S.) per share will vest at the rate of 12,500 shares on
September 1 of each of the three years commencing with 1999 and options to
purchase the remaining 43,000 shares at $2.78 (U.S.) per share will vest at the
rate of 10,750 shares on September 1 of each of the four years commencing with
the year 1999. The term of the options is for ten years and the shares
acquired upon exercise will be restricted securities.<PAGE>
On August 31, 1998, the Board of Directors approved and confirmed the
employment terms and conditions of Linda Komorsky as the Registrant's Vice-
President of Business Affairs, Music and Licensing. Her employment is at will,
with provisions made for severance payments depending on the length of her
employment by the Registrant. Ms. Komorsky will receive a base annual salary
of $110,000 (U.S.). Depending upon her own performance and that of the
Registrant, Ms. Komorsky will be eligible for an annual bonus of up to 60% of
her base salary. In addition, Ms Komorsky was granted options to purchase an
aggregate of 58,000 shares of the Registrant's Class A Common Stock. Options
to purchase 38,000 shares at $2.78 (U.S.) per share will vest at the rate of
9,500 shares on September 1 of each of the four years commencing with the year
1999. Options to purchase the remaining 20,000 shares at $5.98 (U.S.) per
share will vest at the rate of 15% on May 26, 1999; 35% on May 26, 2000; and
50% on May 26, 2001. The term of the options is for ten years and the shares
acquired upon exercise will be restricted securities.
On August 31, 1998, the Board of Directors also granted options to
purchase an aggregate of 15,000 shares of the Company's Class A Common Stock<PAGE>
(5,000 shares each) to the Registrant's three independent directors: Pierre
Pharand; Caroline Singleton and Jacques Bourque. The exercise price is $2.78
(U.S.) per share. These options will vest at the rate of 50% each on August
31, 1999 and August 31, 2000. The term of the options is for ten years and the
shares acquired upon exercise will be restricted securities. Directors who are
not employees of the Registrant receive an annual fee of $3,000 (U.S.) for
attendance at 50% of the meetings and attendance fees of $500 (U.S.) for Board
and committee meetings. Committee presidents receive $1,000 (U.S.) for
attendance.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding the beneficial stock
ownership of the Registrant's executive officers and directors and each person
known by the Registrant to own five percent or more of the outstanding shares
of its Common Stock as of March 31, 1999.
Name and Address Amount and Nature
of Beneficial Owner of Beneficial Percent of
Ownership Class
-------------------- --------------------- -----------
Tony Mastronardi 10,001,920 shares (1) 68.23%
President, Director 573,073 shares (2) 3.91%
4973, Felix McLernan
Pierrefonds, QC H8Y 3L2
Guy Nathan 10,001,920 shares (1) 68.23%
Senior Vice President 573,073 shares (2) 3.91%
Secretary, Director
50 Berlioz
Nun's Island, Quebec
H3E-1A3
<PAGE>
Tonino Lattanzi 328,038 shares 2.24%
Vice President, Director 10,001,920 shares (1) 68.23%
12, rue Dubois 573,073 shares (2) 3.91%
92140 14,666 shares (3) 0.10%
Clamart France
Jacques Bourque 20,717 shares 0.14%
Director
770, Sherbrooke Street,
West
Suite 2300
Montreal, QC H3A IG1
All officers and 10,938,414 shares 74.62%
Directors as a group
(four persons)
_____________________
(1) Messrs. Mastronardi, Nathan and Lattanzi each own 33% of the capital stock
of Techno Expres, SA, a French corporation with offices at 36, rue du Marche,
94140 Alfortville France, the owner of 10,001,920 shares of the Registrant's
Common Stock.
(2) Messrs. Mastronardi, Nathan and Lattanzi own 50%, 16.67% and 33.33%
respectively, of the capital stock of Touchtunes Juke Box Inc., a Canadian
corporation with offices at 1 Commerce Place, Suite 330, Nuns Island (Quebec)
H3E1A2, the owner of 866,825 shares of the Registrant's common Stock.
(3) Mr. Lattanzi indirectly owns Neturba SRL, an Italian corporation with
offices at via Bonafica 26 63040 Malitignano, Italy the owner of 14,666 shares
of the Registrant's Common Stock.
ITEM 12. Certain Relationships and Related Transactions.
(a) On September 25, 1996, the Registrant authorized the issuance of
900,888 shares of Common Stock to Touchtunes Juke Box Inc. for a cash
consideration of $477,470. On December 20, 1996, the Registrant authorized the
issuance of 400,000 shares of Common Stock to Oraxium International Inc., in
consideration for agreeing to extend the scope and duration of a non-competition
covenant given to the Registrant and 50,000 shares each, to Pierre Martineau and
Sylvain Duchesne, employees of Touchtunes Juke Box Inc., in consideration for
their non-compete covenants. On December 27, 1996, the Registrant authorized
the issuance of 199,819 shares of Common Stock to Touchtunes Juke Box Inc. for a
cash consideration of $420,698. On April 1, 1997, the Registrant approved the
issuance of 17,117 shares to Jacques Bourque for a cash consideration of
$31,565. Jacques Bourque is a director of the Registrant. Touchtunes Juke Box
Inc. is owned 50% by Tony Mastronardi; 16.66% by Guy Nathan; and 33.33% by
Tonino Lattanzi, officers and directors of the Registrant.
(b) Reference is made to the transactions described in Item 1 (f) above,
between Societe Innovatech du Grand Montreal and Sofinov Societe Financiere
d'Innovation Inc. (the "Canadian Investors"); the Registrant; and TouchTunes
<PAGE>
Digital Jukebox, Inc. ("TouchTunes") a Canadian company jointly controlled by
the Registrant and the Canadian Investors, which information is incorporated
herein by such reference. Based on the present number of shares of the
Registrant's Common Stock issued and outstanding (14,658,644 shares), upon the
exchange by the Canadian Investors of their TouchTunes Class B and Class C
Shares for Series A Preferred shares of the Registrant and the conversion of
such Series A Preferred shares into 2,000,000 shares of the Registrant's Common
Stock, the Canadian Investors will own approximately 12% of the Common Stock of
the Registrant. Upon the exchange of their $13,330,579 principal amount of
Debentures into an additional 6,665,289 shares of the Registrant's Series A
Preferred Stock and their conversion of such Series A Preferred shares into the
Registrant's Common Stock, the Canadian Investors will own approximately 37.15%
of the Registrant's Common Stock.
(c) By reason of their respective stock ownership in Techno Expres, SA, a
French corporation; Touchtunes Juke Box Inc., a Canadian corporation; and
Neturba SRL, an Italian corporation, Messrs. Tony Mastronardi, Guy Nathan and
Tonino Lattanzi, officers and directors of the Registrant, may be deemed
"parents" of the Registrant. Reference is made to Item 11 above, for the
precise number of shares owned by each of them in each such corporation.
ITEM 13. 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.
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
2 <PAGE>
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,
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
2 <PAGE>
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.
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.
2 <PAGE>
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.
2 <PAGE>
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
Registrant filed a Form 8-K dated December 13, 1998 reporting on Items 1,
5 and 7 during the last quarter of 1998.
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 18, 1999 Per: /s/Tony Mastronardi
------------------------------
Tony Mastronardi
President and Director
Dated: May 18, 1999 Per: /s/Guy Nathan
------------------------------
Guy Nathan
Secretary and Director
2 <PAGE>
APPENDIX A
TOUCHTUNES MUSIC CORPORATION
FINANCIAL STATEMENTS
INDEX
Page
Independent Auditor's Report........................... (i)
Balance Sheet as of December 31, 1998 and 1997........ (ii)
Statements of Operations for the years ended
December 31, 1998, 1997, 1996.........................(iii)
Statements of Stockholders' Equity (Deficiency)
For the years ended December 31, 1998, 1997, 1996..... (iv)
Statements of Cash Flows for the year ended
December 31, 1998, 1997, 1996.......................... (v)
Notes to Financial Statements......................... (1)
2 <PAGE>
FINANCIAL STATEMENTS
TOUCHTUNES MUSIC CORPORATION
[Formerly Technical Maintenance Corporation]
December 31, 1998
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
TouchTunes Music Corporation
We have audited the accompanying balance sheet of TouchTunes Music Corporation
[formerly Technical Maintenance Corporation] (the "Company") as at December 31,
1998 and 1997, and the related statements of operations, stockholders'
deficiency and cash flows for the two years ended December 31, 1998 and 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. The statements of operations, stockholders' deficiency and cash
flows for the year ended December 31, 1996 were audited by other auditors whose
report dated March 28, 1997 expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements audited by us present fairly, in all material respects,
the financial position of the Company at December 31, 1998 and 1997, and the
results of operations and cash flows of the Company for the periods described
in the first paragraph above, in conformity with accounting principles
generally accepted in the United States.<PAGE>
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 1 to the
financial statements, the Company has suffered recurring losses from operations
which raises substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ERNST & YOUNG LLP
Montreal, Canada,
April 16, 1999. Chartered Accountants
(i)
<PAGE>
<TABLE>
<CAPTION>
TouchTunes Music Corporation
BALANCE SHEETS
As at December 31
[In U.S. dollars]
<S> <C> <C>
1998 1997
$ $
------------ -----------
ASSETS
Current
Cash and term deposits 1,211,052 773
Accounts receivable 34,668 -
Prepaid music and performance rights 149,496 -
Other assets 114,701 -
------------ -----------
Total current assets 1,509,917 773
------------ -----------
Investment in jointly-controlled company [note 3] - 49,735
Jukeboxes [note 4] 1,711,619 -
Other fixed assets [note 4] 333,143 162,887
Non-competition agreement - net of accumulated amortization
of $400,000 [1997 - $200,000] 600,000 800,000
Patents - net of accumulated amortization of $486,747
[1997 - $301,360] [note 7] 507,475 558,309
------------ -----------
4,662,154 1,571,704
------------ -----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Accounts payable and accrued liabilities 580,694 42,878
Deficit in jointly-controlled company [note 3] 81,512 -
Capital lease obligations, current [note 5] 973,274 -
Due to jointly-controlled company [notes 3 and 7] 9,147,802 2,484,397
------------ -----------
Total current liabilities 10,783,282 2,527,275
------------ -----------
Capital lease obligations [note 5] 827,395 -
------------ -----------
11,610,677 2,527,275
------------ -----------
Stockholders' deficiency [notes 10 and 13]
Series A preferred stock, $.001 par value
Authorized: 10,000,000 shares
Issued & outstanding: 100 [1997 - 100] 1 1
Class A common stock, $.001 par value
Authorized: 50,000,000 shares
Issued & outstanding: 14,658,644 [1997 - 14,658,644] 14,659 14,659
Additional paid-in capital 3,483,382 3,483,382
Deficit (10,446,565) (4,453,613)
------------ -----------
Total stockholders' deficiency (6,948,523) (955,571)
------------ -----------
4,662,154 1,571,704
------------ -----------
</TABLE>
Contingent liabilities [notes 3 and 12]
See accompanying notes
On behalf of the Board:Director Director
(ii)
<PAGE>
<TABLE>
<CAPTION>
TouchTunes Music Corporation
STATEMENTS OF OPERATIONS
Years ended December 31
[In U.S. dollars]
<S> <C> <C> <C>
1998 1997 1996
$ $ $
---------- ---------- ----------
Revenues
Jukebox lease revenues 71,620 - -
---------- ---------- ----------
Expenses
Sales and marketing 1,584,787 316,132 65,681
Research and development services 843,422 841,654 246,430
General and Administrative 2,597,364 1,059,072 490,616
Depreciation & amortization 580,017 423,083 189,243
Interest and financing costs 489,088 84,790 -
Foreign exchange gains (161,353) - -
---------- ---------- ----------
5,933,325 2,724,731 991,970
---------- ---------- ----------
Net loss before share of net (income) loss in
jointly controlled company 5,861,705 2,724,731 991,970
Share of net (income) loss in jointly
controlled company [note 3] 131,247 (49,151) -
---------- ---------- ----------
Net loss 5,992,952 2,675,580 991,970
---------- ---------- ----------
Per common share [note 8]
Basic and diluted net loss per share (0.41) (0.19) (0.08)
</TABLE>
See accompanying notes
(iii)
<PAGE>
<TABLE>
<CAPTION>
TouchTunes Music Corporation
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Years ended December 31
[In U.S. dollars]
Series A Class A
Preferred Common Stock
Stock
<C> <C> <C> <C> <C> <C> <C>
Additional
paid-in Accumulated
Shares Amount Shares 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
[note 10]
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)
------- ------- ------------- ---------- ------------ ----------- ------------
See accompanying notes
(iv)
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
TouchTunes Music Corporation
STATEMENTS OF CASH FLOWS
Years ended December 31
[In U.S. dollars]
<S> <C> <C> <C>
1998 1997 1996
$ $ $
----------- ----------- ----------
OPERATING ACTIVITIES
Net loss (5,992,952) (2,675,580) (991,970)
Adjustments to reconcile net loss to net
cash used by operating activities:
Share of (net income) loss from jointly
controlled company 131,247 (49,151) -
Depreciation and amortization 580,017 423,083 189,243
Changes in working capital assets and liabilities:
Accounts receivable (34,668) - -
Prepaid expenses and other assets (264,197) 21,306 (21,306)
Accounts payable and accrued liabilities 537,816 26,763 107,405
----------- ----------- ----------
Cash used in operating activities (5,042,737) (2,253,579) (716,628)
----------- ----------- ----------
INVESTING ACTIVITIES
Investment in jointly controlled company - (584) -
Purchases of Jukeboxes for leasing (1,800,669) - -
Increase in costs of patents (134,554) (251,409) (101,346)
Purchase of other capital assets (275,835) - -
----------- ----------- ----------
Cash used in investing activities (2,211,058) (251,993) (101,346)
----------- ----------- ----------
FINANCING ACTIVITIES
Increase in amounts due to jointly-controlled
company including intercompany capital
leases 8,464,074 2,484,397 -
Advances from stockholders - (9,863) 818,070
Proceeds from sale of common stock - 31,565 -
Proceeds from sale of preferred stock - 150 -
----------- ----------- ----------
Cash provided by financing activities 8,464,074 2,506,249 818,070
----------- ----------- ----------
Net increase in cash 1,210,279 677 96
Cash, beginning of period 773 96 -
----------- ----------- ----------
Cash, end of period 1,211,052 773 96
----------- ----------- ----------
Cash consists of
Cash 312,176 773 96
Term deposits 898,876 - -
----------- ----------- ----------
1,211,052 773 96
----------- ----------- ----------
</TABLE>
(v)
<PAGE>
<TABLE>
<CAPTION>
TouchTunes Music Corporation
STATEMENTS OF CASH FLOWS [Cont'd]
Years ended December 31
[In U.S. dollars]
<S> <C> <C> <C>
1998 1997 1996
$ $ $
------ ---------- ----------
Supplemental cash flow information
Interest paid - - -
Income taxes paid - - -
------ ---------- ----------
Non-cash investing & financing activities
The following were exchanged for common stock:
Advances from stockholders - 898,168 -
Non-competition agreement - 1,000,000 -
Accounts payable - 125,235 -
------ ---------- ----------
- 2,023,403 -
------ ---------- ----------
Accrual of non-competition agreement - - 1,000,000
------ ---------- ----------
</TABLE>
See accompanying notes
(vi)
<PAGE>
TouchTunes Music Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
[In U.S. dollars]
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 $10,445,565, and has not yet generated significant revenue. Further,
stockholders' deficiency as at December 31, 1998 totals $6,948,523. As
described in Note 13, 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 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 December 31, 1998,
181 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 note 3 &
13]. 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.
1<PAGE>
TouchTunes Music Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
[In U.S. dollars]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Cont'd]
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.
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.
2<PAGE>
TouchTunes Music Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
[In U.S. dollars]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Cont'd]
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 December 31, 1998.
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 1998, legal costs of
approximately $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.
3<PAGE>
TouchTunes Music Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
[In U.S. dollars]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Cont'd]
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.
Reclassification
Certain 1997 balances have been reclassified to conform to the 1998
presentation.
Accounting Pronouncements
Accounting for the Costs of Computer Software Developed or Obtained
In March 1998, the AICPA issued SOP 98-1 "Accounting for the costs of Computer
Software Developed or Obtained for Internal Use". The SOP provides guidance
that requires capitalization of certain costs incurred during an internal-use
software development project. Costs that are considered to be related to
research and development activities and costs of certain data conversion
activities should be expensed as incurred. Similarly, training, maintenance
and general and administrative or overhead costs should be expensed as
incurred.
The SOP is effective for the Company and is required to adopt the SOP in fiscal
1999. The Company has not yet determined the impact of this standard on its
financial statements.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement requires all derivatives
to be recorded on the balance sheet at fair value and provides a comprehensive
and consistent standard for the recognition and measurement of derivatives and
hedging activities. The Company is studying the application of this new
statement and has not yet determined the impact, if any, on its financial
statements. The adoption of this statement is not expected to change the
Company's business practices. As required, the Company plans to adopt this
statement upon its applicable effective date in fiscal 2000.
4<PAGE>
TouchTunes Music Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
[In U.S. dollars]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Cont'd]
Cost of Start-Up Activities
The AICPA issued Statement of Position 98-5 which requires that the cost of
start-up activities be expensed as incurred. This SOP is effective for
entities with fiscal years beginning after December 15, 1998. The initial
application of this SOP is reported as a cumulative effect of a change in
accounting principles. The Company has not yet determined the impact of this
standard on its financial statements.
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 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 [see
note 13].
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 13]
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.
5<PAGE>
TouchTunes Music Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
[In U.S. dollars]
3. INVESTMENT IN JOINTLY CONTROLLED COMPANY [Cont'd]
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 $600,000 US from the date of issuance of
the Debentures.
On February 11, 1998, 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 $10,000,000 US in principal
amount), at an exchange rate of $2.00 per share, for the issuance by the
Company of up to 5,000,000 shares of its Series A preferred stock, convertible
at the option of the holders, share for share, into an aggregate of up to
5,000,000 shares of the Company's Common Stock.
Loan Facilities
On January 29, 1999 and April 19, 1999, TouchTunes Digital successfully
negotiated term loan facilities aggregating $2,000,000 Canadian and
$10,400,000 U.S. [see note 13].
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 December 31, 1998, was 8.25%.
Litigation
Both companies are jointly involved in a one litigation case [see note 12].
6<PAGE>
TouchTunes Music Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
[In U.S. dollars]
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 December 31,
1998:
1998 1997
$ $
- ------------------------------------------------------------------
Current
Cash and term deposits 163,828 99,718
Accounts receivable 167,550 129,911
Government grant recoverable 169,106 -
Inventory 203,188 -
Investment income tax credits 72,034 -
Income tax recoverable 112,220
Prepaid expenses 119,801 131,985
Due from TouchTunes Music Corporation 9,147,802 2,484,397
Capital lease receivable 973,275 -
Total current assets 11,128,804 2,846,011
- ------------------------------------------------------------------
Fixed assets 2,114,836 279,907
Capital lease receivable 827,393 -
- ------------------------------------------------------------------
14,071,033 3,125,918
- ------------------------------------------------------------------
Liabilities
Current
Bank overdraft 14,450 -
Accounts payable and accrued liabilities 702,909 135,507
Income taxes payable - 95,383
Capital lease obligations 227,832 -
Debentures 10,000,000 -
- ------------------------------------------------------------------
Total current liabilities 10,945,191 230,890
- ------------------------------------------------------------------
Capital lease obligation 494,191 -
Deferred income tax 99,806 -
- ------------------------------------------------------------------
11,539,188 -
- ------------------------------------------------------------------
Stockholders'Equity 2,531,845 2,895,028
- ------------------------------------------------------------------
14,071,033 3,125,918
- ------------------------------------------------------------------
7<PAGE>
TouchTunes Music Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
[In U.S. dollars]
3. INVESTMENT IN JOINTLY CONTROLLED COMPANY [Cont'd]
For the periods ended December 31, 1998 and 1997, the results of TouchTunes
Digital's operations were as follows (in U.S. dollars):
1998 1997
$ $
- ------------------------------------------------------------------------
[12 months] [From February 7]
Services fees 2,073,418 1,619,556
Interest income 441,523 -
Foreign exchange loss (113,880) -
- ------------------------------------------------------------------------
Total Revenue 2,401,061 1,619,556
- ------------------------------------------------------------------------
Expenses (net of Research and Development
tax credits) 2,708,425 1,373,515
- ------------------------------------------------------------------------
Income (loss) from operations (307,364) 246,041
- ------------------------------------------------------------------------
Income tax recovery net of deferred portion 44,870 101,127
- ------------------------------------------------------------------------
Net Income (loss) (262,494) 144,914
- ------------------------------------------------------------------------
TouchTunes Digital occupies an office facility under an operating lease which
expires in 2008. Future minimum rental commitments are as follows.
$
- ------------------------------------------------------------------------
1999 165,491
2000 165,491
2001 165,491
2002 165,491
2003 157,756
Thereafter 650,868
- ------------------------------------------------------------------------
1,470,588
8<PAGE>
TouchTunes Music Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
[In U.S. dollars]
4. FIXED ASSETS
Cost Accumulated Net
1998 $ $ $
- -------------------------------------------------------------
Jukeboxes:
Jukeboxes 1,800,669 89,050 1,711,619
- -------------------------------------------------------------
1,800,669 89,050 1,711,619
- -------------------------------------------------------------
Other Fixed Assets:
Computer equipment 47,890 23,393 24,497
Furniture & equipment 38,852 3,885 34,967
Jukeboxes for promotion 80,387 8,039 72,348
Computer software 5,417 812 4,605
Computer operating 360,000 282,000 78,000
system
Jukebox spare parts 131,919 13,193 118,726
- -------------------------------------------------------------
664,465 331,322 333,143
- -------------------------------------------------------------
1997
- -------------------------------------------------------------
Computer Equipment 28,629 15,742 12,887
Computer Operating System 360,000 210,000 150,000
- -------------------------------------------------------------
388,629 225,742 162,887
5. CAPITAL LEASE OBLIGATION
During the year the Company entered into a capital master lease agreement with
TouchTunes Digital whereby jukeboxes are leased by TouchTunes Digital to the
Company. The capital lease terms are as follows: 20% of the cost of each
jukebox is payable in the month it is delivered with the remaining principal
financed over 30 months at 15% interest per annum. At the end of the lease the
Company has the option to buy each jukebox for $1.
9<PAGE>
TouchTunes Music Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
[In U.S. dollars]
5. CAPITAL LEASE OBLIGATION [Cont'd]
Minimum lease payments are due by the Company to TouchTunes Digital as follows:
$
- ----------------------------------------------------------------------
1999 (including outstanding 20% deposits of $360,134): 1,150,193
2000 694,543
2001 251,756
- ----------------------------------------------------------------------
2,096,492
Less: Interest portion (295,823)
Current portion of capital lease obligation (973,274)
- ----------------------------------------------------------------------
827,395
- ----------------------------------------------------------------------
6. INCOME TAXES
No provision for income taxes is included in the financial statements because
the Company has had continuous losses and there is no assurance that there will
be future taxable income which might offset the current loss carry-forward.
The Company has unrecognized net operating loss carry-forwards of approximately
$3,652,000 for U.S. federal income tax purposes, expiring as follows:
$
- --------------------------------------------------------
2006 1,000
2009 28,000
2010 290,000
2011 246,000
2012 842,000
2018 2,245,000
- --------------------------------------------------------
3,652,000
- --------------------------------------------------------
10<PAGE>
TouchTunes Music Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
[In U.S. dollars]
6. INCOME TAXES [Cont'd]
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities as at December 31, 1998 and 1997 are
as follows:
1998 1997
$ $
- ----------------------------------------------------------------
Net operating losses 1,241,843 478,736
Depreciation and amortization expense 46,194 (58,236)
Capitalized start-up costs 2,099,028 1,082,637
Unrealized Foreign Exchange Gain (54,860) -
Intercompany interest 170,711 28,829
- ----------------------------------------------------------------
3,502,916 1,531,966
Valuation allowance (3,502,916) (1,531,966)
- ----------------------------------------------------------------
Total deferred tax assets (liabilities) - -
7. RELATED PARTY TRANSACTIONS
The following related party transactions are not disclosed elsewhere in the
financial statements and were concluded between the Company and its
shareholders:
Non-competition agreement
On December 20, 1996, the Company entered into a five-year non-competition
agreement with Oraxium International, Inc., which is a shareholder and the
supplier of the Company's computer operating system. The agreement took effect
January 1, 1997 and provided for a consideration of $800,000 U.S.. The Board
of Directors authorized the issuance of 400,000 shares of restricted Class A
common stock which it valued at $2.00 US per share. The shares were issued on
April 21, 1997.
11<PAGE>
TouchTunes Music Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
[In U.S. dollars]
7. RELATED PARTY TRANSACTIONS [Cont'd]
Expenses
Touchtunes Jukebox, Inc., a shareholder, charged the Company approximately
$647,000 in 1996 for research and development and operating expense
reimbursements. Included in the reimbursements were fees to Touchtunes
Jukebox, Inc. of $85,847 in 1996 as a 15% mark-up on actual costs.
In 1998, TouchTunes Digital charged the Company $2,053,787 [1997 - $1,365,937]
for research & development, as well as various managerial and on-going
technical support services. The total profit on these services which is
included in the total fees amounts to $75,425 [1997 - $80,493]. TouchTunes
Digital charged the Company $320,882 [1997 - $84,790] in interest on amounts
owing during 1998, as well as, $44,609 [1997 - nil] in interest relating to the
capital master lease agreement.
Due to jointly controlled company
The balance of $9,147,802 [1997 - $2,484,397] is due on demand and bears
interest at the Canadian prime rate plus 1.5%. At December 31, 1998, this rate
was 8.25% [see note 13].
8. LOSS PER SHARE
1998 1997 1996
$ $ $
- -----------------------------------------------------------------------------
Numerator for basic loss per share
Loss to common shareholders 5,992,952 2,675,580 991,970
- -----------------------------------------------------------------------------
Denominator for basic loss per share -
weighted-average number shares issued
and outstanding 14,658,644 14,092,327 12,909,000
- -----------------------------------------------------------------------------
Basic and diluted net loss per share (.41) (.19) (.08)
- -----------------------------------------------------------------------------
The options to purchase shares of Class A Common Stock referred to in note 10
[i] and the effects of the conversion referred to in note 10 [g] were not
included in the computation of the diluted loss per share because the effect
would be antidilutive.
12<PAGE>
TouchTunes Music Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
[In U.S. dollars]
9. COMMITMENTS
The Company occupies an office facility under an operating lease which expires
in 2003. Future minimum rental commitments are as follows:
$
- --------------------------------------------------------
1999 70,000
2000 72,000
2001 74,000
2002 76,000
2003 6,000
- --------------------------------------------------------
298,000
- --------------------------------------------------------
10.CAPITAL STOCK
Authorized
Class A common stock, $.001 par value, authorized -
50,000,000 shares. Each common share has the right to one
vote per share.
Series A preferred stock, $.001 par value, authorized -
10,000,000 shares. Each share of Series A preferred stock
can be converted into one share of Class A common stock at
the option of the holder. Each Series A preferred has the
right to one vote per share.
Issued
1998 1997
$ $
- -----------------------------------------------------------------------
14,658,644 Class A common stock [1997 - 14,659 14,659
14,658,644]
100 Series A preferred stock [1997 - 100] 1 1
- -----------------------------------------------------------------------
14,660 14,660
- -----------------------------------------------------------------------
13<PAGE>
TouchTunes Music Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
[In U.S. dollars]
10.CAPITAL STOCK [Cont'd]
The holders of the Class A common stock and Series A preferred stock are
entitled to receive any dividend or any distribution declared by the Company,
on an equal basis, without any distinction as to class.
Capital transactions from 1996 through 1998 are as follows:
[a] On September 25, 1996, the Board of Directors approved the issuance of
75,000 shares of Class A common stock to repay accounts payable of $40,000
which were issued on April 21, 1997.
[b] On September 25, 1996, the Board of Directors approved the issuance of
900,888 shares of Class A common stock to repay advances from stockholders
totaling $477,470 which were issued on April 21, 1997.
[c] On December 20, 1996, the Board of Directors approved the issuance of
500,000 shares of Class A common stock to repay accounts payable totaling
$1,000,000 which were issued on April 21, 1997.
[d] On December 27, 1996, the Board of Directors approved the issuance of
199,819 shares of Class A common stock to repay advances from stockholders
totaling $420,698 which were issued on April 21, 1997.
[e] On October 7, 1997, the Company issued 17,117 shares of Class A common
stock for total proceeds of $31,565.
[f] On October 7, 1997, the Company issued 56,820 shares of Class A common
stock to repay accounts payable totaling $85,230.
[g] The Company has reserved 7,000,000 shares of the Series A preferred stock
for issuance to the Canadian Investors upon the occurrence of certain
events. In addition, 7,000,000 shares of Class A common stock have been
reserved for issuance in the event of the conversion of the Series A
preferred stock.
[h] On August 31, 1998, the Board of Directors authorized the amendment to the
company's Amended and Restricted Articles of Incorporation, increasing the
authorized Class A voting common stock to 50,000,000 shares from 25,000,000
in 1997.
14<PAGE>
TouchTunes Music Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
[In U.S. dollars]
10.CAPITAL STOCK [Cont'd]
[i] On August 31, 1998, the Board of Directors authorized stock option plans
with a total of 1,086,678 stock options for management and certain
employees. Each option is for the purchase of one share. The exercise
price of these options range from $2.78 per share to $10.00 per share.
Stock options vest over a period of 3 to 5 years.
11.FINANCIAL INSTRUMENTS
Fair value of financial instruments
For the Company's financial instruments, including cash and term deposits,
accounts payable and accrued liabilities, the carrying amounts approximate the
fair value due to their short maturities.
Rates currently available to the Company for the capital lease obligations with
similar terms and remaining maturities are not significantly different from
contractual interest rates disclosed in Note 5. The carrying value of the
capital lease obligations are therefore a reasonable estimate of their fair
values.
Currency Risk
As at December 31, 1998, $3,438,278 of the Company's accounts payable were
denominated in Canadian Dollars. The equivalent Canadian dollar balance as at
December 31, 1998 amounted to $5,277,122.
12.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.
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 and 13]
15<PAGE>
TouchTunes Music Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
[In U.S. dollars]
12.CONTINGENT LIABILITIES [Cont'd]
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.
13.SUBSEQUENT EVENTS
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.
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.
Debenture Put Right Agreements
On March 22, 1999, the Canadian Investors subscribed for additional Debentures
issued by TouchTunes Digital for an aggregate principal amount of $830,579
U.S.. Concurrently, on 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 the Debentures aggregating $830,579 U.S., at an exchange rate of
$2.00 US per share of the Company's Series A preferred stock. Each Series A
preferred share is convertible at the option of the holders, share for share,
into an aggregate of up to 415,289 shares of the Company's Common Stock.
16<PAGE>
TouchTunes Music Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
[In U.S. dollars]
13.SUBSEQUENT EVENTS [Cont'd]
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.
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.
17<PAGE>
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<PERIOD-END> DEC-31-1998
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