UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
Commission File No.: 333-7006
TOUCHTUNES MUSIC CORPORATION
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Nevada 87-0485304
- ------------------------------ --------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1800 E. Sahara, Suite 107
Las Vegas, Nevada 89104
- ------------------------------------------------------------
(Address of principal executive offices, including zip code)
Issuer's telephone number, including area code (702)-734-7557
Issuer's facsimile number, including area code (702)-734-7500
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. (x) Yes ( ) No
The total number of shares of Class A Common Stock outstanding on September 30,
1999, was 14,658,644.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying unaudited financial statements for the quarter ended September
30, 1999, have been prepared in accordance with the instructions to Form 10-QSB
and, therefore, do not include all information and footnotes necessary for a
complete presentation of financial position, results of operations, cash flows
and stockholders' equity for the quarter then ended, in conformity with
generally accepted accounting principles. In the opinion of management, all
adjustments considered necessary for a fair presentation of the results of
operations and financial position have been included and all such adjustments
are of a normal recurring nature. Operating results for the quarter ended
September 30, 1999, are not necessarily indicative of the results that can be
expected for the year ending December 31, 1999. For further information, refer
to the financial statements and footnotes thereto included in the Registrants
Annual Report on Form 10-KSB for the year ended December 31, 1998.
FINANCIAL STATEMENTS
(UNAUDITED)
TOUCHTUNES MUSIC CORPORATION
September 30, 1999
Index
Page
Balance Sheets 2
Statements of Operations 3
Statement of Stockholders' Equity (Deficiency) 4
Statements of Cash Flows 5
Notes to Financial Statements 6
<TABLE>
<CAPTION>
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
BALANCE SHEETS
<S> <C> <C>
September 30 December 31
[In U.S. dollars] 1999 1998
$ $
(Unaudited) (Note *)
ASSETS
Current
Cash & term deposits 112,853 1,211,052
Accounts receivable 494,388 34,668
Prepaid music & performance rights 240,641 149,496
Other assets 75,417 114,701
------------ ----------
Total current assets 923,299 1,509,917
------------ ----------
Jukeboxes 5,446,181 1,711,619
Other fixed assets 675,337 333,143
Non-competition agreement - net of accumulated amortization
of $550,000 [1998 - $400,000] 450,000 600,000
Patents - net of accumulated amortization of $648,599 571,709 507,475
------------ ----------
8,066,526 4,662,154
------------ ----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Accounts payable and accrued liabilities 699,459 580,694
Deficit in jointly controlled company [note 3] 45,854 81,512
Capital lease obligations, current 3,940,295 973,274
Due to jointly controlled company [note 3] 15,881,591 9,147,802
------------ -----------
Total current liabilities 20,567,199 10,783,282
------------ -----------
Capital lease obligations 1,994,542 827,395
------------ -----------
22,561,741 11,610,677
------------ -----------
Stockholders' deficiency
Series A preferred stock, $.001 par value
Authorized: 10,000,000 shares
Issued & outstanding: 100 [1998 - 100] 1 1
Class A common stock, $.001 par value
Authorized: 50,000,000 shares
Issued & outstanding: 14,658,644 [1998 - 14,658,644] 14,659 14,659
Additional paid-in capital 3,483,382 3,483,382
Deficit (17,993,257) (10,446,565)
------------ -----------
Total stockholders' deficiency (14,495,215) (6,948,523)
------------ -----------
8,066,526 4,662,154
------------ -----------
</TABLE>
Contingent liabilities [note 5]
See accompanying notes.
* Note: The balance sheet as at December 31, 1998 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
<TABLE>
<CAPTION>
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
STATEMENTS OF OPERATIONS
<S> <C> <C> <C> <C>
Quarter None Months Quarter Nine Months
(Unaudited) ended Ended Ended Ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30
1999 1999 1998 1998
----------- ------------- ------------ -------------
Revenues:
Jukebox lease revenues 567,827 1,150,164 - -
Advertising revenues 36,000 36,000 - -
----------- ------------- ------------ -------------
603,827 1,186,164 - -
Expenses:
Sales and marketing 647,632 1,614,312 455,097 959,085
Research & development services 453,080 1,051,121 232,121 667,839
General and administrative 1,573,590 4,081,004 1,043,841 1,867,639
Depreciation & amortization 390,448 823,291 121,735 346,444
Interest and financing costs 503,098 1,048,586 108,942 240,711
Foreign exchange losses 27,254 150,200 - -
----------- ------------- ------------ -------------
3,595,102 8,768,514 1,961,736 4,081,718
----------- ------------- ------------ -------------
Net loss before share of net
income (loss) in jointly
controlled company 2,991,275 7,582,350 1,961,736 4,081,718
Share of net income (loss) in (8,191) 35,658 28,925 90,800
jointly controlled company
[note 3]
----------- ------------- ------------ -------------
Net loss 2,999,466 7,546,692 1,932,811 3,990,918
----------- ------------- ------------ -------------
Basic and diluted net loss per
share 0.20 0.51 0.13 0.27
----------- ------------- ------------ -------------
</TABLE>
[Note 4]
See accompanying notes
<TABLE>
<CAPTION>
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Unaudited)
Series A Class A
Preferred Common Stock
Stock
Additional
paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
$ $ $ $ $
<S> <C> <C> <C> <C> <C> <C> <C>
------- ------ ----------- --------- ----------- ------------ ------------
Balances, December 31, 1995 _ _ 12,909,000 12,909 1,430,020 (786,063) 656,866
Net loss 1996 _ _ _ _ _ (991,970) (991,970)
------- ------ ----------- --------- ----------- ------------ ------------
Balances, December 31, 1996 _ _ 12,909,000 12,909 1,430,020 (1,778,033) (335,104)
Issuance of preferred stock
March 15
$1.50 per share 100 1 _ _ 149 _ 150
Issuance of common stock
April 21
$0.529999 per share _ _ 900,888 901 476,569 _ 477,470
$0.533330 per share _ _ 75,000 75 39,925 _ 40,000
$2.000000 per share _ _ 500,000 500 999,500 _ 1,000,000
$2.105395 per share _ _ 199,819 200 420,498 _ 420,698
October 7
$1.50 per share _ _ 56,820 57 85,173 _ 85,230
$1.50 per share _ _ 5,337 5 8,000 _ 8,005
$2.00 per share _ _ 11,780 12 23,548 _ 23,560
Net loss 1997 _ _ _ _ (2,675,580) (2,675,580)
------- ------ ----------- --------- ----------- ------------ ------------
Balances, December 31, 1997 100 1 14,658,644 14,659 3,483,382 (4,453,613) (955,571)
Net loss 1998 (5,992,952) (5,992,952)
------- ------ ----------- --------- ----------- ------------ ------------
Balances, December 31, 1998 100 1 14,658,644 14,659 3,483,382 (10,446,565) (6,948,523)
Net loss 1999 (7,546,692) (7,546,692)
------- ------ ----------- --------- ----------- ------------ ------------
Balances, September 30, 1999 100 1 14,658,644 14,659 3,483,382 (17,993,257) (14,495,215)
------- ------ ----------- --------- ----------- ------------ ------------
</TABLE>
See accompanying notes
<TABLE>
<CAPTION>
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
STATEMENTS OF CASH FLOWS
Quarter ended Nine months ended Quarter ended Nine months ended
Sept. 30, 1999 Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1998
(Unaudited) $ $ $ $
<S> <C> <C> <C> <C>
-------------- ----------------- -------------- -----------------
OPERATING ACTIVITIES
Net loss (2,999,466) (7,546,692) (1,932,811) (3,990,918)
Adjustments to reconcile net loss to net
cash used in operating activities:
Share of net income (loss) from jointly
controlled company 8,191 (35,658) (28,925) (90,800)
Depreciation and amortization 390,448 823,291 121,735 346,444
Changes in working capital assets and
liabilities:
Accounts receivable (288,337) (459,720) - -
Prepaid expenses and other assets (23,997) (51,861) (155,412) (155,412)
Cash used in operating activities 59,530 118,765 306,604 293,619
-------------- ----------------- -------------- -----------------
Accounts payable and deferred revenue (2,853,631) (7,151,875) (1,688,809) (3,597,067)
-------------- ----------------- -------------- -----------------
INVESTING ACTIVITIES
Acquisition of jukeboxes for leasing (2,695,680) (4,133,893) - -
Increase in costs of patents (100,972) (226,084) (134,553) (134,553)
Acquisition of other capital assets (125,214) (454,304) (405,326) (405,326)
-------------- ----------------- -------------- -----------------
Cash used in investing activities (2,921,866) (4,814,281) (539,879) (539,879)
-------------- ----------------- -------------- -----------------
FINANCING ACTIVITIES
Increase in amounts due to jointly
controlled company, including inter company
capital leases 5,893,970 10,867,957 2,240,960 4,149,181
-------------- ----------------- -------------- -----------------
Cash provided by financing activities 5,893,970 10,867,957 2,240,960 4,149,181
-------------- ----------------- -------------- -----------------
Net increase (decrease) in cash 118,473 (1,098,199) 12,272 12,235
Cash (overdraft), beginning of period (5,620) 1,211,052 736 773
-------------- ----------------- -------------- -----------------
Cash, end of period 112,853 112,853 13,008 13,008
-------------- ----------------- -------------- -----------------
Cash consists of:
Cash 112,853 112,853 13,008 13,008
-------------- ----------------- -------------- -----------------
112,853 112,853 13,008 13,008
-------------- ----------------- -------------- -----------------
</TABLE>
See accompanying note
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION AND GOING CONCERN ASSUMPTION
The financial statements of the company have been prepared in accordance with
generally accepted accounting principles in the United States on a going
concern basis which presumes the realization of assets and the discharge of
liabilities in the normal course of business for the foreseeable future.
TouchTunes Music Corporation (the "Company") has incurred operating losses
since inception of operations in 1995 totaling $17,993,257. Further,
stockholders' deficiency as at September 30, 1999 totals $14,495,215. Since
the beginning of 1999, the Company and TouchTunes Digital Jukebox Inc.
("TouchTunes Digital") raised additional equity of $8,330,579 U.S., with
commitments from its investors to invest an additional $2,000,000 U.S. by the
end of this year. The Company and TouchTunes Digital also successfully
negotiated bank loan facilities totaling $11,700,000 U.S. of which $3,900,000
U.S. has been received to date [see note 3].
To obtain additional funds required to finance its operations, the Company is
actively seeking additional private equity capital. To assist in its efforts,
the Company has signed a mandate with investment banker Nesbitt Burns
Securities Inc. The Company is also exploring the possibility of various
strategic alliances.
The Company's ability to continue as a going concern is dependent upon its
ability to obtain further financing, achieve profitable operations through
increased revenues, generate positive cash flow from operations and maintain or
replace 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 Company be unable to continue
its business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
The Company is commercializing its digital jukebox, which utilizes digitally
compressed audio technology to securely distribute music titles through a
proprietary distribution network. The Company is also developing its
technology for applications targeting other markets and industries.
The Company's operating expenses have been funded by TouchTunes Digital, a
jointly controlled Canadian entity [see note 3]. 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.
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Cont'd]
On August 31, 1998 the Company's Board of Directors authorized the change of
name of the Company to TouchTunes Music Corporation from Technical Maintenance
Corporation.
Basis of presentation
Investments in which the Company exercises joint control are accounted for
using the equity method. Under this method, only the Company's share of net
income or loss is recorded. Note 3 to the financial statements summarizes the
effect of the investments on the financial statements.
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.
Revenue recognition
Revenues are derived from both the sale and lease of digital jukebox units to
jukebox operators. Revenues from sales and sales type lease contracts are
recognized in the period in which the transactions take place. Rental revenue
from operating leases is recognized over the term of the lease as it is earned.
To date, virtually all of the Company's revenue has been derived from operating
lease contracts.
Fixed assets
Jukeboxes consist of jukeboxes acquired by the Company for leasing or sale 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
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Cont'd]
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, expenses and non-monetary assets and liabilities are
translated into U.S. dollars at rates of exchange in effect at the related
transaction dates. Gains and losses on translation of foreign currency items
are included in the determination of net earnings.
Intangibles
Software development costs
Costs related to the conceptual formation and design of internally developed
software were expensed as research and development in prior years. In
accordance with AICPA's SOP 98-1, the Company will capitalize any such costs
incurred in 1999 and future years. No internal software development costs have
been capitalized as of September 30, 1999.
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 five 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 1999, legal costs of approximately $226,084
(1998 - $135,000) were capitalized.
Non-competition agreements
The Company has non-competition agreements with the provider of computer
operating systems and several system programmers who assisted in the
development of the system. The agreements are effective January 1, 1997, and
cover the succeeding five years. The costs are amortized on a straight-line
basis over the five-year life of the agreements.
The Company periodically reviews the patents and non-competition agreements for
possible impairment, which would be recognized if a permanent decline in value
occurs.
Currency of measurement
The currency of measurement used in the preparation of these financial
statements is the U.S. dollar.
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
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.
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 U.S.
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, Sofinov Societe Financiere
d'Innovation Inc. and Societe Innovatech du Grand Montreal, [the "Canadian
Investors"], such shareholders can exchange their Class B and Class C common
shares in TouchTunes Digital into 2,000,000 Common shares of the Company at any
time. The Company would then own 100% of TouchTunes Digital which would become
a wholly-owned subsidiary and which would result in the preparation of
consolidated financial statements.
Convertible Debentures
During 1998, the Canadian Investors subscribed for an aggregate principal
amount of $10,000,000 U.S. of debentures ("Debentures") which were issued by
TouchTunes Digital as follows: $4,000,000 U.S. on February 11, 1998; $2,000,000
U.S. on August 5, 1998 and $4,000,000 U.S on November 2, 1998.
During 1999, TouchTunes Digital issued additional Debentures to the Canadian
Investors totaling $10,330,579 U.S. under terms and conditions similar to the
existing outstanding Debentures. The additional Debentures were issued as
follows: $830,579 U.S. on March 22, 1999; $2,500,000 U.S. on April 8, 1999;
$3,000,000 U.S. on July 14, 1999; $2,000,000 U.S. on September 23, 1999 and
$2,000,000 U.S. on November 3, 1999.
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.
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
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 $1,775,387 U.S. from the date of issuance
of the Debentures.
On February 11, 1998 and March 22, 1999, the Company entered into "Debenture
Put Right Agreements" with the Canadian Investors, providing them with the
right and option to require the Company to purchase all, or any part of the
principal amount of Debentures they have acquired (up to $10,830,579 U.S. in
principal amount), for the issuance by the Company of its Series A preferred
stock, convertible at the option of the holders, share for share, into the
Company's Common Stock. On July 14, 1999, the Company and the Canadian
Investors agreed to amend the exchange rate on the Debentures to the lesser of
$2.00 per share, or the price per share paid by a third party investor for the
issuance of additional equity by the Company. The exchange rate on the
Debentures was previously set at $2.00 per share.
On April 8, 1999, the Company entered into a "Debenture Put Right Agreement"
with one of 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 $2,500,000 U.S. in principal amount), for
the issuance by the Company of its Series A preferred stock, convertible at the
option of the holders, share for share, into shares of the Company's Common
Stock. On July 14, 1999, the Company and the Canadian Investors agreed to amend
the exchange rate on the Debentures to 85% of the price per share paid by a
third party investor for the issuance of additional equity by the Company. If
the Company does not issue additional equity to third party investors, the
Debentures will have an exchange rate equal to $2.00 per share. The exchange
rate on the Debentures was previously equal to the greater of $2.00 per share
or 85% of the price per share paid by a third party investor for the issuance
of additional equity by the Company
On July 14, 1999, the Company entered into a Debenture Put Right Agreement with
the Canadian Investors, providing them with the right and option to require the
Company to purchase all or any part of the principal amount of Debentures they
have acquired (up to $7,000,000 U.S. in principal amount), for the issuance by
the Company of its Series A preferred stock, at an exchange rate equal to 93%
of the price per share paid by a third party investor for the issuance of
additional equity by the Company. If the Company does not issue additional
equity to third party investors, the Debentures will have an exchange rate
equal to $2.00 per share. Each Series A preferred share is convertible at the
option of the holders, share for share, into shares of the Company's Common
Stock.
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
3. INVESTMENT IN JOINTLY CONTROLLED COMPANY [Cont'd]
Loan Facilities
On January 29, 1999, TouchTunes Digital successfully negotiated term loan
facilities aggregating $2,000,000 Canadian dollars with a major Canadian
chartered bank for financing of equipment acquisitions, leasehold improvements
and research and development expenditures. The total funds received from these
loan facilities aggregated $1,250,000 Canadian dollars. The security provided
to the Bank by TouchTunes Digital was in the form of security interests 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 security interests 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 U.S. 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. To date, the Bank has disbursed
a total of $3,168,000 U.S. from this loan facility.
Sources of Revenues
TouchTunes Digital's revenues are derived from various services provided to the
Company as well as from 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 September 30, 1999, was 7.75%.
Litigation
On October 18, 1999, the litigation in which both companies were jointly
involved was dismissed without any payments made by the companies to the
plaintiffs. [see note 6].
11
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
3. INVESTMENT IN JOINTLY CONTROLLED COMPANY [Cont'd]
Analysis of Investment
The investment in TouchTunes Digital is accounted for on the equity basis. The
following summarizes the balance sheet of TouchTunes Digital as at September
30, 1999 and December 31, 1998:
Assets $ $
September 30 December 31
1999 1998
- ------------------------------------------------------------------------
Current
Cash & term deposits 1,051,495 163,828
Accounts receivable 186,391 167,550
Government grant recoverable 319,837 169,106
Inventory 120,005 203,188
Investment income tax credits - 72,034
Income tax recoverable 54,732 112,220
Prepaid expenses 162,788 119,801
Due from TouchTunes Music Corporation 15,881,765 9,147,802
Capital lease receivable 3,940,295 973,275
- ------------------------------------------------------------------------
Total current assets 21,717,308 11,128,804
- ------------------------------------------------------------------------
Fixed assets 2,255,534 2,114,836
Capital lease receivable 1,994,507 827,393
- ------------------------------------------------------------------------
25,967,349 14,071,033
$ $
- ------------------------------------------------------------------------
Liabilities
Current
Bank overdraft - 14,450
Accounts payable and accrued liabilities 727,545 702,909
Capital lease obligations 249,111 227,832
Current portion of long-term debt 912,815 -
Debentures 18,330,579 10,000,000
- ------------------------------------------------------------------------
Total current liabilities 20,220,050 10,945,191
- ------------------------------------------------------------------------
Capital lease obligation 327,476 494,191
Long term debt 2,582,726 -
Deferred income tax 103,599 99,806
- ------------------------------------------------------------------------
3,013,801 11,539,188
- ------------------------------------------------------------------------
Stockholders' Equity 2,733,498 2,531,845
- ------------------------------------------------------------------------
25,967,349 14,071,033
- ------------------------------------------------------------------------
12
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
3. INVESTMENT IN JOINTLY CONTROLLED COMPANY [Cont'd]
For the nine month periods ended September 30, 1999 and 1998, the results of
TouchTunes Digital's operations were as follows (in U.S. dollars):
$ $
1999 1998
(Nine months) (Nine months)
- ------------------------------------------------------------------------
Services fees 2,553,191 1,549,565
Interest income 1,007,851 219,351
Foreign exchange gains 73,886 98,750
- ------------------------------------------------------------------------
Total Revenue 3,634,928 1,867,666
- ------------------------------------------------------------------------
Expenses
(net of Research and Development
tax credits) 3,551,713 1,568,922
- ------------------------------------------------------------------------
Income from operations 83,215 298,744
- ------------------------------------------------------------------------
Income tax expense net of deferred portion 11,899 117,144
- ------------------------------------------------------------------------
Net Income 71,316 181,600
- ------------------------------------------------------------------------
4. LOSS PER SHARE Quarter Nine Months Quarter Nine Months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30
1999 1999 1998 1998
- -----------------------------------------------------------------------------
Numerator for basic
loss per share
Loss to common shareholders 2,999,466 7,546,692 1,932,811 3,990,918
- -----------------------------------------------------------------------------
Denominator for basic loss
per share - weighted-average
number shares issued
and outstanding 14,658,644 14,658,644 14,658,644 14,658,644
- -----------------------------------------------------------------------------
Basic and diluted net loss
per share 0.20 0.51 0.13 0.27
- -----------------------------------------------------------------------------
The conversion of equity and Debentures of TouchTunes Digital into the
Company's Class A Common Stock referred to in note 3 were not included in the
computation of the diluted loss per share because the effect would be
antidilutive.
5. CONTINGENT LIABILITIES
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 security interests on the Company's past, present and future
assets. [see note 3]
The Company and TouchTunes Digital have agreed to provide security to the
supplier for the value of the parts and materials that the supplier must
procure to support the purchase orders issued by TouchTunes Digital. Management
is still negotiating the amount and the form of the security.
13
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
6. SUBSEQUENT EVENTS
On October 18, 1999, the Company and TouchTunes Digital were dismissed from the
litigation initiated in July 1998, without any payments made by the Company and
TouchTunes Digital to the plaintiffs.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(a) Plan of Operations
Based on the Registrant's marketing and sales efforts to date, management
believes the Registrant's on-going development, marketing and sales of the
Digital Jukebox provides it with opportunities for future financial success.
Management also intends to continue its development activities by applying its
technology to other product applications for markets outside the jukebox
industry. During 1999, the Registrant's financial resources have been used
primarily to aggressively commercialize the Digital Jukebox. From the
indications of interest received thus far, the Registrant estimates that
approximately 4,000 Digital Jukebox units can be manufactured, assembled and
delivered to jukebox operators under its "Partner Lease Agreements" by the end
of the year 2000. This would render the Registrant the leader amongst all
jukebox manufacturers in the United States. As of September 30, 1999, 800
jukebox units have been installed in various locations in the United States.
Presently, the Registrant has delivered over 1000 Digital Jukebox units to over
220 jukebox operators.
The Registrant commenced generating revenues during the fourth quarter of
1998. A total of $1,186,164 in revenues were earned from its Partner Lease
Agreements with jukebox operators and from advertising for the nine month
period ended September 30, 1999. Revenues for the quarter ended September 30,
1999, were $603,827, representing an increase of 61% compared to the previous
quarter's revenues of $374,447. The Registrant expects jukebox revenues to
continue to increase significantly over the following year. Management is also
exploring possibilities of generating revenues from other applications of its
technology.
Based on feedback received from many jukebox operators expressing their
desire to own the digital jukebox, management has recently adjusted its
business approach to accommodate the market's demands. The Registrant will
continue to lease its Digital Jukeboxes to jukebox operators, however the lease
will allow for an option to purchase the digital jukebox at the end of the 5-
year lease. The Registrant will also offer to sell Digital Jukebox units and
sign respective five-year service agreements with jukebox operators. Lease
agreements previously signed with jukebox operators will still remain in
effect, unless the Registrant and its operator clients mutually agree to amend
the agreements. Management believes that this timely response to the market
will result in greater sales and revenue for the Registrant. However, there
can be no assurance that the Registrant's new business approach will be
successful or profitable to the Registrant.
The Registrant currently has approximately 65 to 70% of the total
available record label rights for the United States, and is currently
negotiating licensing agreements with record companies to obtain rights to
additional music. Management believes that the Registrant's increase in the
overall music available to its Digital Jukebox will increase demand and related
revenues generated from its Partner Lease Agreements.
14
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 future are reasonably likely to
cause, any seasonal fluctuations 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 November 3, 1999, certain Canadian investors
(the "Canadian Investors") invested $4,000,000 CDN and $20,330,579 U.S. for the
further development and promotion of the Digital Jukebox, upon certain terms and
conditions previously described in earlier filings. This has supplied the
Company with sufficient capital resources necessary to conclude the financing of
its start-up activities, and support its commercial operations over the past 15
months. Based on the Registrant's estimate that it can lease approximately 4,000
Digital Jukebox units to prospective jukebox operators by the end of the year
2000, the Registrant must raise approximately $25,000,000 U.S. 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 U.S., established by an affiliate company of the Registrant, for
financing the cost of manufacturing the Digital Jukebox, upon certain terms and
conditions previously described in earlier filings. To date, the bank disbursed
a total of $3,168,000 U.S. from this financing facility. There can be no
assurances that the Registrant or its affiliated company, will be able to
satisfy all terms and conditions specified by the bank for the use of its
remaining 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 approximately $15,000,000
U.S. through a private equity placement. There can be no assurances that the
private placement will be successfully completed on terms satisfactory to the
Registrant, or at all.
(d)Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the applicable year. This may
cause computer programs or operating equipment that have date-sensitive
software using two digits to define the applicable year to recognize "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations including, among other
things, a temporary inability to process transactions or engage in normal
business activities.
The Registrant has a comprehensive program in place to address the impact
and issues associated with processing dates up to, through and beyond the Year
2000. This program consists of three main areas: (a) information systems, (b)
supply chain and critical third party readiness and (c) business equipment.
The Registrant is utilizing both internal and external resources to inventory,
assess, remediate, replace and test its systems for Year 2000 compliance. To
coordinate the implementation of the program, the Registrant has appointed the
Vice President, R&D and Technology as the Project Leader who reports to
Management, the Board of Directors and the Audit Committee.
15
Currently, all information systems projects are fully staffed. All of the
critical systems have been verified and are year 2000 compliant. Based on its
review and analysis to date, the Registrant believes that its software and
computer systems are Year 2000 compliant.
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. Year 2000 compliance statements have been obtained from most critical
suppliers and service providers. Follow-up telephone interviews were performed
when a statement of compliance was not readily available. For any critical
supplier or service provider which did not provide the Registrant with
satisfactory evidence of their Year 2000 readiness, contingency plans have been
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 Registrant's abilities 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 abilities of the
Registrant to manage its Year 2000 transition which include, but are not
limited to, the availability 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. The Registrant has established the appropriate contingency plans
for its Year 2000 transition.
(e) Forward Looking Statements
Certain matters discussed within this filing may constitute forward
looking statements within the meaning of the federal securities laws. Although
the Registrant believes these statements are based on reasonable assumptions,
it can give no assurance that its expectations will be attained. Actual
results and the timing of certain events referred to, could differ materially
from those projected in or contemplated by the forward looking statements due
to a number of factors which are not within the Registrant's control.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Index To Exhibits
Exhibit
Number Description
3. (i) Registrant's Amended and Restated Articles of Incorporation.
Reference is made to Exhibit 8 of Registrant's Form 8-K for the month
of March 1997, which Exhibit is incorporated herein by reference.
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.
16
4. Form of Registrant's Common Stock certificates. Reference is made to
Exhibit 3 (ii) of Registrant's Registration Statement on Form SB-2,
File No. 33-7006, which Exhibit is incorporated herein by reference.
9. Shareholder Agreement between Techno Expres S.A. the majority
shareholder of Registrant and the Selling Shareholders dated March
21, 1997, relative to their shares of Registrant. Reference is made
to Exhibit 7 of Registrant's Form 8-K for the month of March 1997,
which Exhibit is incorporated herein by reference.
10. (i) Agreement of Sale between Touchtunes Jukebox Joint Venture and
Registrant, dated December 9, 1994, relative to transfer of patent
rights in exchange for 1,000,000 shares of Common Stock of
Registrant. Reference is made to Exhibit A of Registrant's Form 10-K
for the fiscal year ended December 31, 1994, which Exhibit is
incorporated herein by reference.
10. (ii) Summary of International Patent Application for the Digital Jukebox.
Reference is made to Exhibit B of Registrant's Form 10-K for the
fiscal year ended December 31, 1994, which Exhibit is incorporated
herein by reference.
10. (iii) Development Agreement between Touchtunes Jukebox Inc. and Registrant,
dated March 8, 1995. Reference is made to Exhibit C of Registrant's
Form 10-K for the fiscal year ended December 31, 1994, which Exhibit
is incorporated herein by reference.
10. (iv) Agreement between Oraxium International, Inc. and Registrant, dated
January 30, 1995, relative to the acquisition of a computer operating
system. Reference is made to Exhibit A of Registrant's Form 8-K for
the month of March 1995, which Exhibit is incorporated herein by
reference.
10. (v) Agreement between S.G.R.M. Inc. and Registrant, dated March 6, 1995,
relative to the acquisition of patent rights in exchange for
10,000,000 shares of Common Stock. Reference is made to Exhibit B of
Registrant's Form 10-K for the fiscal year ended December 31, 1994,
which Exhibit is incorporated herein by reference.
10. (vi) Amended Agreement between S.G.R.M. Inc., Techno Expres, S.A. and
Registrant, dated November 30, 1995, relative to the acquisition of
patent rights in exchange for 10,000,000 shares of Common Stock.
Reference is made to Exhibit C annexed to Registrant's Form 8-K for
the month of November 1995, which Exhibit is incorporated herein by
reference.
10. (vii) Subscription Agreement for the purchase of 100 Class B shares and 20
Class C shares of TouchTunes Digital Jukeboxes Inc., dated March 21,
1997. Reference is made to Exhibit 1 of Registrant's Form 8-K for
the month of March 1997, which Exhibit is incorporated herein by
reference.
10. (viii) Escrow Agreement for the deposit of $3,400,000 CDN and 680 Class
C shares of TouchTunes by the Selling Shareholders, dated March 21,
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.
17
10. (x) Stock Exchange Agreement between Registrant and Selling Shareholders
for the exchange by the Selling Shareholders of their Class B and
Class C shares of TouchTunes for Series A Preferred shares of Regis-
trant. Reference is made to Exhibit 5 of Registrant's Form 8-K for
the month of March 1997, which Exhibit is incorporated herein by
reference.
10. (xi) Subscription Agreement for the purchase of 100 Series A Preferred
shares of Registrant by the Selling Shareholders. Reference is made
to Exhibit 6 of Registrant's Form 8-K for the month of March 1997,
which Exhibit is incorporated herein by reference.
10. (xii) Shareholder Agreement between Techno Expres S.A., the majority
shareholder of Registrant and the Selling Shareholders, relative to
their shares of Common Stock of Registrant. Reference is made to
Exhibit 7 of Registrant's Form 8-K for the month of March 1997, which
Exhibit is incorporated herein by reference.
10. (xiii) Employment and Non-Competition Agreement between Registrant and
Tony Mastronardi. Reference is made to Exhibit 9 of Registrant's
Form 8-K for the month of March 1997, which Exhibit is incorporated
herein by reference.
10. (xiv) Employment and Non-Competition Agreement between Registrant and Guy
Nathan. Reference is made to Exhibit 10 of Registrant's Form 8-K for
the month of March 1997, which Exhibit is incorporated herein by
reference.
10. (xv) Lease for premises at One Commerce Place, Nun's Island, Verdun
(Quebec), Canada, H3E 1A2 between TouchTunes Digital Jukebox Inc. and
landlord of said premises. Reference is made to Exhibit 10(xv) of
Registrant's Registration Statement on form SB-2, File No. 33-7006,
which Exhibit is incorporated herein by reference.
10. (xvi) OEM Purchase and Development Agreement with Bose Corporation, dated
March 1997. Reference is made to Exhibit 10(xvi) of Registrant's
Registration Statement on Form SB-2, File No. 33-7006, which Exhibit
is incorporated herein by reference.
10. (xvii) Jukebox License Office Certificate, dated March 11, 1997.
Reference is made to Exhibit 10(xvii) of Registrant's Registration
Statement on Form SB-2, File No. 33-7006, which Exhibit is
incorporated herein by reference.
10. (xviii) Jukebox License Agreement with the American Society of Composers
Authors and Publishers, Broadcast Music Inc. and SESAC, Inc., dated
March 11, 1997. Reference is made to Exhibit 10(xviii) of
Registrant's Registration Statement on Form SB-2, File No. 33-7006,
which Exhibit is incorporated herein by reference.
10. (xix) Subscription Agreement dated February 11, 1998, by and among Societe
Innovatech du Grand Montreal, Sofinov Societe Financiere d'Innovation
Inc. and TouchTunes Digital Jukebox Inc. for the purchase of up to an
aggregate of $10,000,000 (US) Debentures. Reference is made to
Exhibit 2 of Registrant's Form 8-K for the month of February 1998,
which Exhibit is incorporated herein by reference.
10. (xx) Debenture Put Right Agreement dated February 11, 1998, by and among
Societe Innovatech du Grand Montreal, Sofinov Societe Financiere
d'Innovation Inc. and Technical Maintenance Corporation. Reference
is made to Exhibit 3 of Registrant's Form 8-K for the month of
February 1998, which Exhibit is incorporated herein by reference.
18
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.
10. (xxix) Debenture dated November 2, 1998, registered in the name of
Societe Innovatech Du Grand Montreal in the principal amount of
$300,000.
16. Letter from prior auditor, Armstrong Gilmour Accountancy Corporation,
relative to the information set forth in Item 4 of Registrant's Form
8-K/A for the month of February 1998, which Exhibit is incorporated
herein by reference.
27. Financial Data Schedule.
(b) Reports on Form 8-K
No Form 8-K was filed during the quarter ended September 30, 1999.
19
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: November 12, 1999 Per: /s/Tony Mastronardi
---------------------------
Tony Mastronardi
President and Director
Dated: November 12, 1999 Per: /s/Guy Nathan
---------------------------
Guy Nathan
Secretary and Director
20
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
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<ALLOWANCES> 30000
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<PP&E> 7053330
<DEPRECIATION> 931812
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<COMMON> 14659
<OTHER-SE> (14509875)
<TOTAL-LIABILITY-AND-EQUITY> 8066526
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<CGS> 0
<TOTAL-COSTS> 1614312
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