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 June 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
incorporation or organization) Identification
Number)
1800 E. Sahara, Suite 107
Las Vegas, Nevada 89104
- -------------------------------------------------------------
(Address of principal executive offices, including zip code)
Issuer's telephone number, including area code (702)-734-7557
Issuer's facsimile number, including area code (702)-734-7500
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
(x) Yes ( ) No
The total number of shares of Class A Common Stock outstanding on June 30,
1999, was 14,658,644.
0
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying unaudited financial statements for the quarter ended June 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 June
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
June 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
1
<TABLE>
<CAPTION>
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
BALANCE SHEETS
<S> <C> <C>
June 30 December 31
[In U.S. dollars] 1999 1998
$ $
(Unaudited) (Note *)
ASSETS
Current
Cash & term deposits - 1,211,052
Accounts receivable 206,051 34,668
Prepaid music & performance rights 237,520 149,496
Other assets 54,541 114,701
- ------------------------------------------------------------------ ------------- -------------
Total current assets 498,112 1,509,917
- ------------------------------------------------------------------ ------------- -------------
Jukeboxes 2,940,712 1,711,619
Other fixed assets 591,333 333,143
Non-competition agreement - net of accumulated amortization
of $500,000 [1998 - $400,000] 500,000 600,000
Patents - net of accumulated amortization of $539,585
[1998 - $486,747] 579,765 507,475
- ------------------------------------------------------------------ ------------- -------------
5,109,922 4,662,154
- ------------------------------------------------------------------ ------------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Bank overdraft 5,620 -
Accounts payable and accrued liabilities 603,930 580,694
Deficit in jointly-controlled company [note 3] 37,665 81,512
Deferred advertising revenue 36,000 -
Capital lease obligations, current 2,103,299 973,274
Due to jointly controlled company [note 3] 12,683,445 9,147,802
- ------------------------------------------------------------------ ------------- -------------
Total current liabilities 15,469,959 10,783,282
- ------------------------------------------------------------------ ------------- -------------
Capital lease obligations 1,135,714 827,395
- ------------------------------------------------------------------ ------------- -------------
16,605,673 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 (14,993,793) (10,446,565)
- ------------------------------------------------------------------ ------------- -------------
Total stockholders' deficiency (11,495,751) (6,948,523)
- ------------------------------------------------------------------ ------------- -------------
5,109,922 4,662,154
- ------------------------------------------------------------------ ------------- -------------
</TABLE>
Contingent liabilities [notes 3 & 5]
See accompanying notes.
* Note: The balance sheet as at December 31, 1998 has been derived from
the audited financial statements at that date but does not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
2
<TABLE>
<CAPTION>
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
STATEMENTS OF OPERATIONS
<S> <C> <C> <C> <C>
Quarter ended Six months ended Quarter ended Six months ended
(Unaudited) June 30, 1999 June 30, 1999 June 30, 1998 June 30,1998
- ----------------------------------- --------------- -------------------- -------------- -----------------
Revenues:
Jukebox lease revenues 374,447 582,337 - -
- ----------------------------------- --------------- -------------------- -------------- -----------------
374,447 582,337 - -
Expenses:
Sales and marketing 499,535 966,680 248,226 503,988
Research & development services 341,571 598,041 131,463 435,718
General and administrative 1,261,935 2,507,414 520,619 823,798
Depreciation & amortization 209,322 432,843 112,414 224,709
Interest and financing costs 289,349 545,488 (30,626) 131,769
Foreign exchange losses 60,188 122,948 - -
- ----------------------------------- --------------- -------------------- -------------- -----------------
2,661,900 5,173,414 982,096 2,119,982
- ----------------------------------- --------------- -------------------- -------------- -----------------
Net loss before share of net
income in jointly
controlled company 2,287,453 4,591,077 982,096 2,119,982
Share of net income in 34,460 43,849 19,224 61,875
jointly controlled company
[note 3]
- ----------------------------------- --------------- -------------------- -------------- -----------------
Net loss 2,252,993 4,547,228 962,872 2,058,107
- ----------------------------------- --------------- -------------------- -------------- -----------------
Per common share [note 4]
Basic and diluted net loss per (0.154) (0.310) (0.066) (0.140)
share
See accompanying notes
</TABLE>
3
<TABLE>
<CAPTION>
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Unaudited)
Series A Class A
Preferred Stock Common Stock
<S> <C> <C> <C> <C> <C> <C> <C>
Additional
paid-in Accumulated
Shares Amount 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
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 3,483,38 (10,446,565) (6,948,523)
Net loss 1999 (4,547,228) (4,547,228)
- ---------------------------- --------- ---------- ------------ ----------- ----------- ------------- -------------
Balances, June 30, 1999 100 1 14,658,644 14,659 3,483,38 (14,993,793) (11,495,751)
- ---------------------------- --------- ---------- ------------ ----------- ----------- ------------- -------------
See accompanying notes
</TABLE>
4
<TABLE>
<CAPTION>
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
STATEMENTS OF CASH FLOWS
Quarter Six months Quarter Six months
ended ended ended ended
June 30 1999 June 30, 1999 June 30, 1998 June 30, 1998
(Unaudited) $ $ $ $
<S> <C> <C> <C> <C>
- --------------------------------------------------- ------------- -------------- ------------- ------------
OPERATING ACTIVITIES
Net loss (2,252,993) (4,547,228) (962,872) (2,058,107)
Adjustments to reconcile net loss to net
cash used by operating activities:
Share of net income from jointly
controlled company (34,460) (43,849) (19,224) (61,875)
Depreciation and amortization 209,322 432,843 112,414 224,709
Changes in working capital assets and liabilities:
Accounts receivable (98,323) (171,383) - -
Prepaid expenses and other assets 44,113 (27,864) - -
Accounts payable and deferred revenue (8,601) 59,236 (43,883) (12,985)
- --------------------------------------------------- ------------- -------------- ------------- ------------
Cash used in operating activities (2,140,942) (4,298,245) (913,565) (1,908,258)
- --------------------------------------------------- ------------- -------------- ------------- ------------
INVESTING ACTIVITIES
Acquisition of jukeboxes for leasing (1,280,714) (1,438,212) - -
Increase in cost of patents (596) (125,112) - -
Acquisition of other capital assets (224,070) (329,090) - -
- --------------------------------------------------- ------------- -------------- ------------- ------------
Cash used in investing activities (1,505,380) (1,892,414) - -
- --------------------------------------------------- ------------- -------------- ------------- ------------
FINANCING ACTIVITIES
Increase in amounts due to jointly
controlled company including inter-company
capital leases 3,713,818 4,973,987 913,565 1,908,221
- --------------------------------------------------- ------------- -------------- ------------- ------------
Cash provided by financing activities 3,713,818 4,973,987 913,565 1,908,221
- --------------------------------------------------- ------------- -------------- ------------- ------------
Net increase (decrease) in cash 67,496 (1,216,672) - (37)
Cash, beginning of period (73,116) 1,211,052 736 773
- --------------------------------------------------- ------------- -------------- ------------- ------------
Cash (overdraft), end of period (5,620) (5,620) 736 736
See accompanying notes
</TABLE>
5
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
June 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 $14,993,793 and has not yet
generated significant revenue. Further, stockholders' deficiency as at June
30, 1999 totals $11,495,751. Since the beginning of 1999, the Company and
TouchTunes Digital Jukebox Inc. ("TouchTunes Digital") raised additional equity
of $6,330,579 U.S., with commitments from its investors to invest an additional
$4,000,000 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 $1,900,000 U.S. has been received to date [see notes 3 & 6].
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 an exclusive mandate with investment banker Nesbitt
Burns Securities Inc. The Company is also exploring the possibility of various
strategic alliances. The Company is currently negotiating a private placement
term sheet with a syndicate of private fund investors, for an investment of
$18,000,000 to $25,000,000 in equity of the Company. The Company has not
received any indications that this equity will not be raised.
The Company'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 Company be unable to
continue its business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
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 June 30, 1999, 535 jukebox units have been
installed in various locations in the United States.
The Company's operating expenses have been funded by TouchTunes Digital, a
jointly controlled Canadian entity [see notes 3 & 6]. Substantially all of the
management and technical developmental activities are conducted through
TouchTunes Digital for which the Company is charged certain costs incurred in
addition to a 5% mark-up on various services in accordance with the respective
inter-company service agreements.
6
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
June 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.
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.
7
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Cont'd]
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. The Company
will capitalize any such costs incurred in 1999 and future years. No internal
software development costs have been capitalized as of June 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 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 1999, legal costs of approximately $125,112
(1998 - $135,000) were capitalized.
Non-competition agreements
The Company has non-competition agreements with the provider of computer
operating systems and several system programmers who assisted in the
development of the system. The agreements are effective January 1, 1997, and
cover the succeeding five years. The costs are amortized on a straight-line
basis over the five-year life of the agreements.
The Company periodically reviews the patents and non-competition agreements for
possible impairment, which would be recognized if a permanent decline in value
had occurred.
Currency of measurement
The currency of measurement used in the preparation of these financial
statements is the U.S. dollar.
8
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
June 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 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, 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 of the Class B and C shares 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; $4,000,000 U.S. on August 5, 1998 and $2,000,000 U.S on November 2,
1998.
On March 22, 1999, April 8, 1999, and July 14, 1999, TouchTunes Digital issued
additional Debentures to the Canadian Investors totaling $6,330,579 U.S. under
terms and conditions similar to the existing outstanding Debentures. [see note
6]
The Debentures are payable by TouchTunes Digital on demand, only after the
occurrence of an event of default as defined by the subscription agreement.
Upon such demand, the Debentures would bear interest at a rate of 12% per
annum, payable in one single installment, concurrently with the payment of the
principal amount.
9
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
June 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 $902,735 US 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 Investor 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, TouchTunes Digital issued another $3,000,000 U.S. in
Debentures to the Canadian Investors and the Company entered into a Debenture
Put Right Agreement relating to these Debentures [see note 6].
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
10
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
3. INVESTMENT IN JOINTLY CONTROLLED COMPANY [Cont'd]
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. On July 23, 1999, the
Bank disbursed the first tranche totaling $1,900,000 U.S.
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 June 30, 1999, was 7.75%.
Litigation
Both companies are jointly involved in a one litigation case [see note 5].
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 June 30,
1999 and December 31, 1998:
$ $
- -----------------------------------------------------------------------
Assets
June 30 December 31
1999 1998
Current
Cash & term deposits 131,418 163,828
Accounts receivable 317,373 167,550
Government grant recoverable 244,316 169,106
Inventory 254,104 203,188
Investment income tax credits - 72,034
Income tax recoverable 22,498 112,220
Prepaid expenses 116,776 119,801
Due from TouchTunes Music Corporation 12,683,445 9,147,802
Capital lease receivable 2,103,299 973,275
- -----------------------------------------------------------------------
Total current assets 15,873,229 11,128,804
- -----------------------------------------------------------------------
Fixed assets 2,152,764 2,114,836
Capital lease receivable 1,135,714 827,393
- -----------------------------------------------------------------------
19,161,707 14,071,033
- -----------------------------------------------------------------------
11
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
3. INVESTMENT IN JOINTLY CONTROLLED COMPANY [Cont'd]
$ $
- ---------------------------------------------------------------------------
Liabilities
Current
Bank overdraft - 14,450
Accounts payable and accrued liabilities 638,122 702,909
Capital lease obligations 228,265 227,832
Current portion of long-term debt 203,597 -
Advance from shareholder 1,000,000
Debentures 13,330,579 10,000,000
- ---------------------------------------------------------------------------
Total current liabilities 15,400,563 10,945,191
- ---------------------------------------------------------------------------
Capital lease obligation 424,524 494,191
Long term debt 576,858 -
Deferred income tax 119,226 99,806
- ---------------------------------------------------------------------------
16,521,171 11,539,188
- ---------------------------------------------------------------------------
Stockholders' Equity 2,640,536 2,531,845
- ---------------------------------------------------------------------------
19,161,707 14,071,033
- ---------------------------------------------------------------------------
For the six month periods ended June 30, 1999 and 1998, the results of
TouchTunes Digital's operations were as follows (in U.S. dollars):
$ $
- ---------------------------------------------------------------------------
1999 1998
(six months) (six months)
Services fees 1,483,776 942,267
Interest income 562,007 158,106
Foreign exchange gains 56,772 88,132
- ---------------------------------------------------------------------------
Total Revenue 2,102,555 1,188,505
- ---------------------------------------------------------------------------
Expenses (net of Research and Development
tax credits) 1,957,412 983,507
- ---------------------------------------------------------------------------
Income from operations
145,143 204,998
- ---------------------------------------------------------------------------
Income tax expense net of deferred portion 57,445 81,248
- ---------------------------------------------------------------------------
Net Income 87,698 123,750
- ---------------------------------------------------------------------------
12
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
4. LOSS PER SHARE
Quarter Six months Quarter Six months
ended ended ended ended
June 30, 1999 June 30, 1999 June 30, 1998 June 30, 1998
- ------------------------------------------------------------------------------
Numerator for basic
loss per share
Loss to common
shareholders 2,252,993 4,547,228 962,872 2,058,107
- ------------------------------------------------------------------------------
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 (0.154) (0.310) (0.066) (0.140)
- ------------------------------------------------------------------------------
The conversion of equity and Debentures of TouchTunes Digital into the
Company's Class A Common Stock referred to in notes 3 & 6 were not included in
the computation of the diluted loss per share because the effect would be
antidilutive.
5. CONTINGENT LIABILITIES
In July 1998, the Company and TouchTunes Digital became jointly involved in a
litigation case, the outcome of which is not yet determinable. However, based
on information presently available, management does not expect any material
adverse result and believes the litigation is without merit.
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 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, as well as, pay
an increased price on future purchases. 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.
6. SUBSEQUENT EVENTS
Debenture Put Right Agreements
On July 14, 1999, the Canadian Investors subscribed for an aggregate principal
amount of $3,000,000 U.S. of Debentures issued by TouchTunes Digital, under
terms and conditions similar to the previous Debentures issued to the Canadian
Investors. TouchTunes Digital has the right to require the Canadian Investors
to purchase additional Debentures for an aggregate principal amount of
$4,000,000 U.S., bearing the same terms and conditions, in two additional
increments of $2,000,000 each, bringing the total new Debentures issued to
$7,000,000 U.S.
13
TouchTunes Music Corporation
(formerly Technical Maintenance Corporation)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
6. SUBSEQUENT EVENTS [Cont'd]
Concurrently, 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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(a) Plan of Operations
Management believes the Registrant's on-going development, marketing and sales
of the Digital Jukebox provides it with opportunities for future financial
success. Management also intends to continue its development activities in
applying its technology to other product applications for markets outside the
jukebox industry. To date, the Registrant's financial resources have been used
primarily to finance development and begin to commercialize the Digital
Jukebox. From the indications of interest received 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 second quarter of the year 2000. As of June 30, 1999, 535
jukebox units have been installed in various locations in the United States.
The Registrant commenced generating revenues during the fourth quarter of
1998. A total of $582,337 in revenues were earned from its Partner Lease
Agreements with jukebox operators for the six month period ended June 30, 1999.
Revenues for the quarter ended June 30, 1999, were $374,447, representing an
increase of 80% compared to the previous quarter's revenues of $207,890. The
Registrant currently has approximately 65-70% 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 the demand for it and the
related revenues generated from its Partner Lease Agreements.
There can be no assurance that the Registrant will be able to obtain and
renew licensing agreements with record label and publishing companies on terms
favorable to the Registrant. Further, there can be no assurance that the
Registrant's marketing strategy will be successful or profitable to the
Registrant.
(b) Seasonality
Management is not aware of any factors or attributes relating to the
Registrant's business that have caused, or in the future are reasonably likely
to cause, any seasonality factors which would have a material effect on the
Registrant's financial condition or results of operations.
14
(c) Liquidity and Capital Resources
From March 21, 1997 through April 8, 1999, certain Canadian investors (the
"Canadian Investors") invested $4,000,000 (CDN) and $13,330,579 (US) for the
further development and promotion of the Digital Jukebox, upon certain terms and
conditions previously described in earlier filings. This has supplied the
Company with sufficient capital resources necessary to conclude the financing of
its start-up activities, and commence commercial operations. Based on the
Registrant's estimate that it can lease approximately 4,000 Digital Jukebox
units to prospective jukebox operators by the second quarter of the year 2000,
the Registrant must raise approximately $25,000,000 (US) for the manufacturing
and distribution costs of such units, as well as provide for the ability to
expand its research and development activities. A portion of the funding will
be obtained from bank financing facilities in the amount of $10,400,000 (US),
established by an affiliate company of the Registrant, for financing the cost of
manufacturing the Digital Jukebox, upon certain terms and conditions previously
described in earlier filings. On July 23, 1999, the bank disbursed a total of
$1,900,000 (US) 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.
On July 14, 1999, the Canadian Investors invested an additional amount of
$3,000,000 (US), and have committed to invest another $4,000,0000 (US) by the
end of the year, with terms and conditions similar to their previous
investments, as described in earlier filings. These funds will be used to
further develop commercial operations.
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 between $18,000,000
to $25,000,000 through a private equity placement. Management is currently
negotiating a private placement with a syndicate of private fund investors and
anticipates completing this transaction during the third quarter of 1999. There
can be no assurances that the private placement will be successfully completed
on terms satisfactory to the Registrant, or at all.
(d)Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the applicable year. This may
cause computer programs or operating equipment that have date-sensitive
software using two digits to define the applicable year to recognize "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations including, among other
things, a temporary inability to process transactions or engage in normal
business activities.
The Registrant has a comprehensive program in place to address the impact
and issues associated with processing dates up to, through and beyond the Year
2000. This program consists of three main areas: (a) information systems, (b)
supply chain and critical third party readiness and (c) business equipment.
The Registrant is utilizing both internal and external resources to inventory,
assess, remediate, replace and test its systems for Year 2000 compliance. To
coordinate the implementation of the program, the Registrant has appointed the
Vice President, R&D and Technology as the Project Leader who reports to
Management, the Board of Directors and the Audit Committee.
Currently, all information systems projects are fully staffed. Most of
the critical systems have been verified and are year 2000 compliant. Certain
delays have been experienced by the Registrant in completing its year 2000
program, however, Management has taken the necessary measures to ensure its
year 2000 program will be completed by September 1999. Based on its review and
analysis to date, the Registrant believes that its software and computer
systems will be Year 2000 compliant without having to incur significant
additional expenditures.
15
The nature of its business makes the Registrant very dependent on critical
suppliers and service providers. The failure of such third parties to address
the Year 2000 issue adequately, could have a material impact on the
Registrant's ability to conduct its business. Accordingly, the Registrant has
a team in place to assess the Year 2000 readiness of all third parties on which
it depends. Surveys will be obtained from critical suppliers and service
providers, and each survey response will be scored and assessed based on the
third party's Year 2000 project plans in place and its progress to date. On-
site visits or follow-up telephone interviews will be performed for critical
suppliers and service providers. For any critical supplier or service provider
which does not provide the Registrant with satisfactory evidence of their Year
2000 readiness, contingency plans will be developed which will include
establishing alternative sources for the product or service provided.
The Registrant believes, based on available information, that it will be
able to manage its Year 2000 transition without any material adverse effect on
its business operations. However, the costs of the project and the ability of
the Registrant to complete it on a timely basis are based on management's best
estimates, which were based on numerous assumptions of future events including
the availability of certain resources, third party modification plans and other
factors over which it has no control. Specific factors that could have a
material adverse effect on the cost of the project and its completion date
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes,
unanticipated failures by critical vendors, as well as a failure by the
Registrant to execute its own remediation efforts. As a result, there can be
no assurance that these forward looking statements and estimates will be
achieved and actual results may differ materially from those plans, resulting
in material financial risk to the Registrant. With the completion of the its
Year 2000 project, the Registrant will have established the appropriate
contingency plans.
(e) Forward Looking Statements
Certain matters discussed within this filing may constitute forward
looking statements within the meaning of the federal securities laws. Although
the Registrant believes these statements are based on reasonable assumptions,
it can give no assurance that its expectations will be attained. Actual
results and the timing of certain events referred to, could differ materially
from those projected in or contemplated by the forward looking statements due
to a number of factors which are not within the Registrant's control.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Index To Exhibits
Exhibit
Number Description
3. (i) Registrant's Amended and Restated Articles of Incorporation.
Reference is made to Exhibit 8 of Registrant's Form 8-K for the month
of March 1997, which Exhibit is incorporated herein by reference.
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.
17
10. (ix) Agreement between TouchTunes and Registrant, relative to work to be
rendered in connection with Registrant's Digital Jukebox project.
Reference is made to Exhibit 4 of Registrant's Form 8-K for the month
of March 1997, which Exhibit is incorporated herein by reference.
10. (x) Stock Exchange Agreement between Registrant and Selling Shareholders
for the exchange by the Selling Shareholders of their Class B and
Class C shares of TouchTunes for Series A Preferred shares of Regis-
trant. Reference is made to Exhibit 5 of Registrant's Form 8-K for
the month of March 1997, which Exhibit is incorporated herein by
reference.
10. (xi) Subscription Agreement for the purchase of 100 Series A Preferred
shares of Registrant by the Selling Shareholders. Reference is made
to Exhibit 6 of Registrant's Form 8-K for the month of March 1997,
which Exhibit is incorporated herein by reference.
10. (xii) Shareholder Agreement between Techno Expres S.A., the majority
shareholder of Registrant and the Selling Shareholders, relative to
their shares of Common Stock of Registrant. Reference is made to
Exhibit 7 of Registrant's Form 8-K for the month of March 1997, which
Exhibit is incorporated herein by reference.
10. (xiii)Employment and Non-Competition Agreement between Registrant and Tony
Mastronardi. Reference is made to Exhibit 9 of Registrant's Form 8-K
for the month of March 1997, which Exhibit is incorporated herein by
reference.
10. (xiv) Employment and Non-Competition Agreement between Registrant and Guy
Nathan. Reference is made to Exhibit 10 of Registrant's Form 8-K for
the month of March 1997, which Exhibit is incorporated herein by
reference.
10. (xv) Lease for premises at One Commerce Place, Nun's Island, Verdun
(Quebec), Canada, H3E 1A2 between TouchTunes Digital Jukebox Inc. and
landlord of said premises. Reference is made to Exhibit 10(xv) of
Registrant's Registration Statement on form SB-2, File No. 33-7006,
which Exhibit is incorporated herein by reference.
10. (xvi) OEM Purchase and Development Agreement with Bose Corporation, dated
March 1997. Reference is made to Exhibit 10(xvi) of Registrant's
Registration Statement on Form SB-2, File No. 33-7006, which Exhibit
is incorporated herein by reference.
10. (xvii)Jukebox License Office Certificate, dated March 11, 1997. Reference
is made to Exhibit 10(xvii) of Registrant's Registration Statement on
Form SB-2, File No. 33-7006, which Exhibit is incorporated herein by
reference.
10.(xviii)Jukebox License Agreement with the American Society of Composers
Authors and Publishers, Broadcast Music Inc. and SESAC, Inc., dated
March 11, 1997. Reference is made to Exhibit 10(xviii) of
Registrant's Registration Statement on Form SB-2, File No. 33-7006,
which Exhibit is incorporated herein by reference.
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.
18
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.
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 June 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: August 12, 1999 Per: /s/Tony Mastronardi
----------------------------
Tony Mastronardi
President and Director
Dated: August 12, 1999 Per: /s/Guy Nathan
----------------------------
Guy Nathan
Secretary and Director
20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 206051
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 498112
<PP&E> 4232436
<DEPRECIATION> 700391
<TOTAL-ASSETS> 5109922
<CURRENT-LIABILITIES> 15469959
<BONDS> 0
0
1
<COMMON> 14659
<OTHER-SE> (11510411)
<TOTAL-LIABILITY-AND-EQUITY> 5109922
<SALES> 582337<F1>
<TOTAL-REVENUES> 582337
<CGS> 0
<TOTAL-COSTS> 966680
<OTHER-EXPENSES> 4206734
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 545488
<INCOME-PRETAX> (4591077)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4547228)<F2>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4547228)
<EPS-BASIC> (0.31)
<EPS-DILUTED> (0.31)
<FN>
<F1>Jukebox lease revenues
<F2>Includes net income of $43,849 from jointly controlled company
</FN>
</TABLE>
