UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended September 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to ___________
Commission File No.: 333-7006
TOUCHTUNES MUSIC CORPORATION
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 87-0485304
----------------------------- ---------------------------------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or Number)
organization)
1800 E. Sahara
Suite 107
Las Vegas, Nevada 89104
----------------------------------------
(Address of principal executive offices)
(702) 792-7405
----------------------------
(Issuer's telephone number)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of November 10, 2000,
14,658,644 shares of Class A voting common stock were outstanding.
Transition Small Business Disclosure Format (check one): Yes [ ] No [X]
1
TOUCHTUNES MUSIC CORPORATION
INDEX
Page
PART I - FINANCIAL INFORMATION:
Item 1. Consolidated Balance Sheets - September 30, 2000 (unaudited)
and December 31, 1999 4
Consolidated Statements of Operations - Three and Nine Months
Ended September 30, 2000 and 1999 (unaudited) 6
Consolidated Statements of Cash Flow - Three and Nine Months
Ended September 30, 2000 and 1999 (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II - OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8K 16
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying unaudited financial statements for the quarter ended September
30, 2000, 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, 2000, are not necessarily indicative of the results that can be
expected for the year ending December 31, 2000. For further information, refer
to the financial statements and footnotes thereto included in the Registrant's
Annual Report on Form 10-KSB for the year ended December 31, 1999.
3
TOUCHTUNES MUSIC CORPORATION
FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2000
CONSOLIDATED BALANCE SHEETS
[In U.S. dollars]
September 30, December 31,
2000 1999
--------------- ------------
[unaudited] [Note*]
ASSETS
Current
Cash and cash equivalents 8,377,839 719,902
Trade accounts receivable 1,533,056 621,841
Other receivables 119,443 291,262
Investment tax credits receivable 54,784 57,174
Prepaid expenses and deposits 680,487 644,997
Inventory 3,438,053 1,736,314
Other current assets 232,033 305,930
Current portion of investment in sales-type 965,652 617,760
leases
--------------- ------------
Total current assets 15,401,347 4,995,180
--------------- ------------
Investment in sales-type leases 7,516,364 1,146,668
Property, plant and equipment, net 6,331,933 7,311,058
Intangibles 826,889 829,443
Other assets 137,542 228,976
--------------- ------------
30,214,075 14,511,325
--------------- ------------
See accompanying notes.
* Note: The balance sheet as at December 31, 1999, 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.
4
TouchTunes Music Corporation
CONSOLIDATED BALANCE SHEETS
[Cont'd]
[In U.S. dollars]
September December
30,2000 31, 1999
------------ -----------
[unaudited] [Note*]
LIABILITIES AND
STOCKHOLDERS' EQUITY/(DEFICIENCY)
Current
Accounts payable and accrued liabilities 2,688,025 2,479,331
Other liabilities -- 101,678
Income taxes payable 69,220 25,457
Current portion of long-term debt 4,375,662 1,641,423
Current portion of capital lease obligations 237,780 252,589
------------ -----------
Total current liabilities 7,370,687 4,500,478
------------ -----------
Other liabilities 133,565 73,256
Long-term debt (note 3) 4,451,103 2,451,098
Capital lease obligations 185,389 271,969
Deferred tax liability 130,569 130,569
Advance from stockholder (note 4) -- 2,000,000
------------ -----------
12,271,313 9,427,370
------------ -----------
Series B preferred stock (note 4), $.001 par
value
Authorized: 10,000,000
Issued and outstanding 8,888,889 [1999:
Nil]
Redeemable, retractable and convertible
Redeemable at $34,487,671 21,315,355 --
------------ -----------
Stockholders' equity/(deficiency)
Series A preferred stock, $.001 par value
Authorized: 15,000,000 shares
Issued & outstanding: 12,843,960 [1999:
12,843,960] 12,844 12,844
Class A voting common stock, $.001 par value
Authorized: 50,000,000 shares
Issued & outstanding: 14,658,644 [1999:
14,658,644] 14,659 14,659
Additional paid-in capital 25,321,666 26,801,118
Accumulated deficit (28,721,762) (21,744,666)
------------ -----------
(3,372,593) 5,083,955
------------ -----------
30,214,075 14,511,325
------------ -----------
Contingent Liabilities (note 6).
Subsequent Events (note 10).
See accompanying notes.
* Note: The balance sheet as at December 31, 1999, 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.
5
<TABLE>
<CAPTION>
TouchTunes Music Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
[In U.S. dollars]
<S> <C> <C> <C> <C>
Quarter Nine months Quarter Nine months
Ended ended Ended ended
September September September September
[Unaudited] 30, 2000 30, 2000 30, 1999 30, 1999
----------- ------------ ---------- ------------
Revenues
Jukebox revenues 4,707,591 12,241,459 567,827 1,150,164
Advertising revenues 75,833 175,833 36,000 36,000
----------- ------------ ---------- ------------
4,783,424 12,417,292 603,827 1,186,164
----------- ------------ ---------- ------------
Expenses
Cost of jukebox revenues and direct 3,312,899 8,551,292 358,097 817,957
operating costs
Research and development 452,098 1,510,388 453,080 1,051,121
General and administrative 1,066,049 3,008,757 989,311 2,808,315
Sales and marketing 1,310,060 4,020,993 873,814 2,069,044
Financial expenses 85,362 576,866 503,098 1,048,586
Depreciation and amortization 534,970 1,677,511 390,448 823,291
Foreign exchange losses (7,342) 7,106 27,254 150,200
----------- ------------ ---------- ------------
6,754,096 19,352,913 3,595,102 8,768,514
----------- ------------ ---------- ------------
Net loss before share of net income
(loss) in 1,970,672 6,935,621 2,991,275 7,582,350
Jointly-controlled company and
corporate income taxes
Share of net income (loss) in jointly- -- -- (8,191) 35,658
controlled company
Corporate income tax provision 41,476 41,476 -- --
----------- ------------ ---------- ------------
Net loss and comprehensive loss 2,012,148 6,977,097 2,999,466 7,546,692
Dividends and accretion of mandatorily-
redeemable Series 1,008,219 1,479,452 -- --
B preferred stock
Net loss attributable to common 3,020,367 8,456,549 2,999,466 7,546,692
stockholders
----------- ------------ ---------- ------------
Per common share (note 5)
Basic and diluted net loss per share 0.21 0.58 0.20 0.51
----------- ------------ ---------- ------------
</TABLE>
See accompanying notes.
6
<TABLE>
<CAPTION>
TouchTunes Music Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
[In U.S. dollars]
<S> <C> <C> <C> <C>
Quarter Nine months Quarter Nine months
Ended ended Ended Ended
September September 30, September 30 September
[Unaudited] 30 2000 2000 1999 30, 1999
------------ -------------- ------------- -------------
OPERATING ACTIVITIES
Net loss (2,012,148) (6,977,097) (2,999,466) (7,546,692)
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)
Depreciation and amortization 534,970 1,677,511 390,448 823,291
Changes in operating assets and liabilities:
Accounts and other receivables (219,336) (737,006) (288,337) (459,720)
Inventory (449,804) (1,701,739) -- --
Prepaid expenses (32,391) (35,490) (23,997) (51,861)
Accounts payable and accrued liabilities 116,611 150,778 59,530 118,765
Decrease of other current assets (101,260) 73,897
------------ -------------- ------------- -------------
Cash used in operating activities (2,163,358) (7,549,146) (2,853,631) (7,151,875)
------------ -------------- ------------- -------------
INVESTING ACTIVITIES
Investment in sales-type leases (2,244,440) (6,717,588) (2,695,680) (4,133,893)
Increase in costs of intangibles (156,599) (208,857) (100,972) (226,084)
Purchase of other capital assets (82,270) (486,975) (125,214) (454,304)
Increase in other assets 29,906 91,434
------------ -------------- ------------- -------------
Cash used in investing activities (2,453,403) (7,321,986) (2,921,866) (4,814,281)
------------ -------------- ------------- -------------
FINANCING ACTIVITIES
Increase in amounts due to jointly-controlled
Company -- -- 5,893,970 10,867,957
Advance from private placement -- 1,000,000
Proceeds from private placement -- 14,000,000 -- --
Share issue costs -- (164,097) -- --
Decrease in other liabilities 86,219 60,311 -- --
-- --
Increase in advance from stockholder 3,000,000 --
Increase (decrease) in capital lease obligations 35,814 (101,389) -- --
Increase in long term debt 2,664,000 6,044,000 -- --
Repayment of long term debt (591,135) (1,309,756) -- --
------------ -------------- ------------- -------------
Cash provided by financing activities 2,194,897 22,529,069 5,893,970 10,867,957
------------ -------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents (2,421,864) 7,657,937 118,473 (1,098,199)
Cash and cash equivalents, beginning
of period 10,799,703 719,902 (5,620) 1,211,052
------------ -------------- ------------- -------------
Cash and cash equivalents, end of period 8,377,839 8,377,839 112,853 112,853
------------ -------------- ------------- -------------
</TABLE>
See accompanying notes.
7
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
September 30, 2000
[In U.S. dollars]
1. OPERATIONS OF THE COMPANY
TouchTunes Music Corporation (the "Company") is involved in the digital
distribution of interactive music to music-on-demand applications. The first
such music-on-demand application developed by the Company is its digital
jukebox. The Company is presently commercializing its digital jukebox, which
utilizes digitally compressed audio technology to securely distribute music
titles through a proprietary distribution network. Revenues are derived from
selling and leasing the digital jukebox units, as well as providing music
services and advertising through its digital jukebox network. The Company is
also developing its technology for other music-on-demand applications.
2. BASIS OF FINANCIAL STATEMENT PRESENTATION AND GOING CONCERN ASSUMPTION
The consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
item 310 of Regulation S-B 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. Accordingly, 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 in the normal course.
The Company has incurred operating losses since the inception of operations.
The Company's ability to continue as a going concern is dependent principally
upon achieving profitable operations and generating positive cash flow from
operations, as well as its ability to obtain further financing, if needed.
The consolidated financial statements at September 30, 2000 and for the nine
months ended September 30, 2000, as well as the financial statements of
operations for the nine months ended September 30, 1999, are unaudited and
reflect all adjustments (consisting only of normal recurring accruals) which
are, in the opinion of management, necessary for a fair presentation of the
Company's financial position and operating results for the interim periods.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the
United States for complete financial statements.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with management's
discussion and analysis of financial condition and results of operations,
contained in the Company's annual report on Form 10-KSB for the fiscal year
ended December 31, 1999.
The results of operations for the nine months ended September 30, 2000, are not
necessarily indicative of the results for the fiscal year ending December 31,
2000, or any other future periods.
8
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
September 30, 2000
[In U.S. dollars]
2. BASIS OF FINANCIAL STATEMENT PRESENTATION AND GOING CONCERN ASSUMPTION
[Cont'd]
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary TouchTunes Digital Jukebox, Inc. ("TouchTunes
Digital"). All significant intercompany balances and transactions since
acquisition of control have been eliminated on consolidation.
On December 30, 1999, the Company acquired the remaining 50% interest of
TouchTunes Digital held by others. The purchase method of accounting has been
followed. Intercompany operating transactions before the acquisition of
control remain non-consolidated. Prior to December 30, 1999, the Company had
joint control of TouchTunes Digital and accounted for its investment using the
equity method, recording only the Company's share of net income or loss.
3. LONG TERM DEBT
During the quarter ended September 30, 2000, the Company, through its
subsidiary, utilized $2,664,000 from its bank term loan facility to pay for
jukeboxes manufactured and delivered to jukebox operators. The total proceeds
received under its jukebox loan facility aggregate to $9,444,000 as at
September 30, 2000. The remaining funds available from its jukebox loan
facility is $956,000 as at September 30, 2000.
4. REDEEMABLE PREFERRED STOCK
On May 18, 2000, the Company issued an aggregate of 8,888,889 shares of Series
B preferred stock in exchange for $14,000,000 in cash and $6,000,000 in prior
advances to the Company. The aggregate amount of Class A voting common stock
issuable upon the conversion of Series B preferred stock is subject to certain
antidilutive provisions. The shares of Series B preferred stock have a
cumulative preferential dividend rate of 9%, and are convertible, share for
share (subject to certain antidilutive provisions), into shares of Class A
voting common stock of the Company at the option of the holders. The holders of
Series B preferred stock are entitled to one vote for each share of Class A
voting common stock into which the shares of Series B preferred stock would be
convertible. The holders of Series B preferred stock vote together with the
holders of Class A voting common stock as a single class on all matters to be
voted upon by the stockholders of the Company. The shares of Series B preferred
stock are redeemable by the holders no earlier than January 1, 2004, at a
premium of 20%, including the 9% dividend, per annum over the subscription
price paid which would be $34,487,671. The redemption premium for the quarter
was $1,008,219 and was recorded as a reduction of paid-in capital. The Company
has an option to redeem the Series B preferred stock after June 30, 2002, or
earlier, if certain performance targets are met, at a redemption price equal to
the face value plus accrued premiums and dividends. The Company issued
2,222,222 shares of Series B preferred stock to one of the Company's existing
stockholders, CDP Innovation-Sofinov ("Sofinov"), in exchange for proceeds of
$5,000,000 previously advanced by Sofinov to the Company. The remaining
6,666,667 shares of Series B preferred stock were issued to a new investor in
the Company, CDP TelecomMedia ("TelecomMedia"), in exchange for proceeds of
$14,000,000 in cash and $1,000,000 previously advanced by TelecomMedia to the
Company.
9
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
September 30, 2000
[In U.S. dollars]
5. BASIC AND DILUTED LOSS PER SHARE
The Series A preferred stock are not included in the computation of basic loss
per share because the effect would be antidilutive. The options to purchase
Class A voting common stock and Series B preferred stock were not included in
the computation of the diluted loss per share because the effect would be
antidilutive.
6. CONTINGENT LIABILITIES
During 1999, the Company received a letter claiming certain prior rights to the
Company's trade name. Based on information presently available, management
does not expect any material adverse result and believes the claim is without
merit. Included in accounts payable and accrued liabilities is management's
best estimate of the legal costs to defend or settle this claim.
7. STOCK OPTION PLAN
On April 19, 2000, the Board of Directors authorized a Long-Term Incentive Plan
(the "Plan"), which provides for the grant to employees, directors, officers,
consultants and outside contractors of various types of stock options and
common stock. Concurrently, the Board of Directors approved the cancellation
of the previous Stock Option Plan approved on August 31, 1998. Stock options
under the previous plan were cancelled and new options were issued at the same
terms for the same number.
On April 19,2000, and September 12, 2000, the Board of Directors granted stock
options to purchase an aggregate of 2,510,018 shares and 571,500 shares,
respectively, of Class A voting common stock, with vesting provisions ranging
up to four years. Options granted under the Plan are exercisable for a period
of ten years. On September 12, 2000, an aggregate of 3,918,482 shares of Class
A voting common stock were reserved for additional future issuance under the
Plan. The exercise price of these options ranges from $1.625 per share to
$5.98 per share. The Plan is subject to shareholder approval.
8. ACCOUNTING PRONOUNCEMENTS
Securities and Exchange Commission Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements (SAB101) clarifies certain conditions to be
met in order to recognize revenue. The Company is studying the application of
this new standard but has not yet determined its impact.
FASB Statement 133, Accounting for Derivative Instruments and Hedging
Activities (as amended by Statements 137 and 138) is required to be adopted,
effective January 1, 2001, for companies with fiscal years ending December 31,
2000. The Company is studying the application of this standard but has not yet
determined its impact.
10
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
September 30, 2000
[In U.S. dollars]
9. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform to the
presentation for the current periods.
10. SUBSEQUENT EVENTS
On October 19, 2000, the Company signed a Vendor Lease Plan Agreement ("Lease
Plan") with a leasing company, SierraCities, Inc. ("SierraCities"). Under the
Lease Plan, SierraCities will provide lease financing to the Company's
qualified operator customers for its Digital Jukeboxes. The Company will
receive additional compensation for each Digital Jukebox financed under the
Lease Plan. The additional compensation will be partially offset by limited
recourse provided by the Company on leases under the Lease Plan.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The discussion and analysis below contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Words such as "anticipates",
"expects", "intends", "plans", "believes", "seeks", "estimates", variations of
such words and similar expressions are intended to identify such forward-
looking statements. These statements are not guarantees of future performance
and are subject to certain risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual results could differ materially from
those expressed or forecasted in any such forward-looking statements as a
result of a number of factors, which are not within the control of TouchTunes
Music Corporation.
Operating Results
TouchTunes Music Corporation (the "Company" or the "Registrant") is
involved in the digital distribution of music to interactive music-on-demand
applications. The first such application developed and commercialized by the
Registrant is its Digital Jukebox. The Registrant currently generates revenues
from the U.S. jukebox market.
The Registrant incurred a net loss of $2,012,148 during the quarter ended
September 30, 2000 (the "third quarter"), compared to a net loss of $2,999,466
for the same period in 1999. The increase in revenues during the quarter was
partially offset by the increase in expenses, resulting in an overall decrease
of 33% in net loss. The loss for the nine-month period ended September 30,
2000, was $6,977,097, compared to $7,546,692 for the same period in 1999,
resulting in a decrease of 7.5%.
Net loss attributable to common shareholders for the third quarter of 2000 was
$3,020,367 and $8,456,549 for the nine months ended in September 30, 2000.
Included in these amounts is an accrued amount of $1,008,219 and $1,479,452,
respectively, for dividends and accretion of mandatorily-redeemable Series B
preferred stock issued in May 2000 (see "Liquidity and Capital Resources" for
more details on the Series B preferred stock).
Losses before interest, taxes, depreciation and amortization decreased by
35.6% to $1,350,340 for the third quarter 2000, compared to $2,097,729 for the
third quarter 1999. Losses before interest, taxes, depreciation and
amortization decreased by 18% to $4,681,244, for the nine months ended
September 30, 2000 compared to $5,710,473 for the same period in 1999.
Revenues
The Registrant generated revenues of $4,783,424 from sales, leases, music
services and advertising with respect to its Digital Jukebox during the third
quarter of 2000, compared to revenue of $603,827 for the same period in 1999.
Revenues for the nine months ended September 30, 2000 were $12,417,292,
compared to $1,186,164 for the same period in 1999. Revenues for the nine
months in 2000 included a sales return allowance of $221,800, compared to no
allowance for the same period in 1999. The increase in revenues was due to
significant increases in demand for the Digital Jukebox, as well as increased
advertising revenue during the third quarter, as well as for the first nine
months of 2000. In addition, the Registrant sold units during the nine months
in 2000 and accounted for all new lease transactions as capital leases,
resulting in revenues recognized upon the delivery of each Digital Jukebox to
the jukebox operators. The Registrant did not sell any jukeboxes during the
nine months ended September 30, 1999, and all its leases were accounted for as
operating leases, recognizing revenue as the lease payments came due.
As at September 30, 2000, the Registrant had delivered a total of
approximately 2,600 Digital Jukebox units as compared to a total of
approximately 800 units as at September 30, 1999.
The Registrant had advertising revenues of $75,833 during the third
quarter of 2000 compared to advertising revenues of $36,000 for the same period
in 1999. Advertising revenues for the nine months ended September 30, 2000 were
$175,833, compared to $36,000 for the same period in 1999.
12
Cost of Jukebox Revenues and Direct Operating Costs
Cost of jukebox revenues and direct operating costs increased by
$2,954,802, from $358,097 in the third quarter of 1999, to $3,312,899 in the
third quarter of 2000. For the nine months ended September 30, 2000 the cost
of jukebox revenues and direct operating costs increased by $7,733,335 to
$8,551,292 from $817,957 for the same period in 1999. The increases were
primarily a result of the associated costs of all jukeboxes sold and leased
under sales-type leases. For the first nine months of 1999, all jukeboxes were
accounted for as operating leases, therefore no related cost of sales was
applicable. In addition, direct operating costs consisting mainly of
communication, transportation, installation and licensing fees, increased in
relation to the greater number of Digital Jukeboxes delivered to jukebox
operators.
Research and Development
Research and development expenses decreased by $982 from $453,080 in the
third quarter of 1999, to $452,098 in the third quarter of 2000. Research and
development expenses increased by $459,267 to $1,510,388 for the nine months
ended September 30, 2000, compared to $1,051,121 for the same period in 1999.
The increases for the nine months of fiscal 2000 were primarily due to
headcount growth and the resulting increases in compensation, and benefits to
support new projects and the larger network of Digital Jukeboxes.
General and Administrative
General and administrative costs increased by $76,738, from $989,311 in
the third quarter 1999, to $1,066,049 in the third quarter of 2000. General and
administrative costs increased by $200,442 from $2,808,315 in the nine months
ended 1999, to $3,008,757 for the same period in 2000. The increases were
primarily due to headcount growth and the resulting increases in compensation,
and benefit costs.
Sales and Marketing
Sales and marketing costs increased by $436,246, from $873,814 in the
third quarter of 1999, to $1,310,060 in the third quarter of 2000. For the nine
months ended September 30, 2000, sales and marketing costs increased by
$1,951,949, to $4,020,993 from $2,069,044 for the same nine month period in
1999. The increases were primarily due to expenses related to headcount growth
and higher levels of advertising and promotion.
Financial Expenses
Financial expenses decreased by $417,736 from $503,098 in the third
quarter of 1999 to $85,362 in the third quarter of 2000. For the nine months
ended September 30, 2000, the financial expenses decreased by $471,720, to
$576,866 from $1,048,586 for the same period in 1999. The decreases were
primarily due to 1999 amounts having included interest charges charged by the
Registrant's subsidiary, TouchTunes Digital Jukebox Inc. ("TouchTunes Digital")
which became a subsidiary of the Registrant on December 31, 1999. In fiscal
year 2000, intercompany interest charges were eliminated upon consolidation.
The financial expenses in fiscal year 2000 relate to interest on long-term debt
obligations by the Registrant and its subsidiary.
Depreciation and Amortization
Depreciation and amortization costs increased by $144,522 from $390,448 in
the third quarter of 1999, to $534,970 in the third quarter of 2000. In the
nine months ended September 30, 2000, depreciation and amortization increased
by $854,220, to $1,677,511, from $823,291 in the same period in 1999. The
increases are primarily due to the growth in the number of jukeboxes under
operating leases, as well as the addition of other fixed assets.
13
Foreign Exchange Losses
The Registrant experienced a foreign exchange gain of $7,342 during the
third quarter 2000, and a total foreign exchange loss of $7,106 for the nine
months ended September 30, 2000, compared to a foreign exchange losses of
$27,254 and $150,200 for the respective third quarter and nine months ended
September 30, 1999. Foreign exchange gains/losses result from the Company
paying certain expenditures in currencies other than the United States dollar.
The main foreign currency in which the Registrant's subsidiary transacts is the
Canadian dollar.
Share of Net Income (Loss) in Jointly-Controlled Company
On December 30, 1999, the Company acquired the remaining 50% interest of
TouchTunes Digital held by others. Intercompany operating transactions before
the acquisition of control remain non-consolidated. Prior to December 30,
1999, the Company had joint control of TouchTunes Digital and accounted for its
investment using the equity method, recording only the Company's share of net
income or loss.
Seasonality
The Registrant has experienced lower sales volume during the summer
vacation period in the months of June, July and August, as well as during
national holiday periods. These seasonal fluctuations may result in
significant decreases in the Registrant's results of operations and have
material effects on its financial condition.
Liquidity and Capital Resources
At September 30, 2000 the Registrant had cash and cash equivalents of
$8,377,839. Cash used by operating activities during the nine months ended
September 30, 2000 was $7,549,146, which was mainly attributed to the net loss
from operations and the increase in inventory; partially offset by depreciation
and amortization. Cash used by investing activities during the nine months
ended September 30, 2000 of $7,321,986, was primarily for the investment in
jukebox sales type leases and the purchase of other capital assets. Cash
provided by financing activities of $22,529,069 was primarily from the issuance
of Series B preferred stock, as well as from long-term jukebox bank financing.
Collectively, the above activity resulted in a net increase of $7,657,937 from
the December 31, 1999 balances of cash and cash equivalents. The Registrant
estimates its capital expenditures for the remainder of fiscal year 2000 will
amount to approximately $3,000,000. A portion of the funds required for
capital expenditures will be paid from the Registrant's cash on hand, and the
remaining portion will be obtained from available bank financing facilities.
However there can be no assurances that the Registrant or its subsidiary will
be able to satisfy all terms and conditions specified by the bank for the full
or any use of the bank funds.
On May 18, 2000, the Registrant issued an aggregate of 8,888,889 shares of
Series B preferred stock in exchange for $14,000,000 in cash and $6,000,000 in
prior advances to the Registrant. The aggregate amount of Class A voting common
stock issuable upon the conversion of Series B preferred stock is subject to
certain antidilutive provisions. The shares of Series B preferred stock have a
cumulative preferential dividend rate of 9%, and are convertible, share for
share (subject to certain antidilutive provisions), into shares of Class A
voting common stock of the Registrant at the option of the holders. The holders
of Series B preferred stock are entitled to one vote for each share of Class A
voting common stock into which the shares of Series B preferred stock would be
convertible. The holders of Series B preferred stock vote together with the
holders of Class A voting common stock as a single class on all matters to be
voted upon by the stockholders of the Registrant. The shares of Series B
preferred stock are redeemable by the holders no earlier than January 1, 2004,
at a premium of 20%, including the 9% dividend, per annum over the subscription
price paid which would be $34,487,671. The redemption premium for the quarter
was $1,008,219 and was recorded as a reduction of paid-in capital. The
Registrant has an option to redeem the Series B preferred stock after June 30,
2002, or earlier, if certain performance targets are met, at a redemption price
equal to the face value plus accrued premiums and dividends. The Registrant
issued 2,222,222 shares of Series B preferred stock to one of the Registrant's
existing stockholders, CDP Innovation-Sofinov ("Sofinov"), in exchange for
proceeds of $5,000,000 previously advanced by Sofinov to the Registrant. The
remaining 6,666,667 shares of Series B preferred stock were issued to a new
investor in the Registrant, CDP TelecomMedia ("TelecomMedia"), in exchange for
proceeds of $14,000,000 in cash and $1,000,000 previously advanced by
TelecomMedia to the Registrant.
14
On October 19, 2000, the Company signed a Vendor Lease Plan Agreement ("Lease
Plan") with a leasing company, SierraCities, Inc. ("SierraCities"). Under the
Lease Plan, SierraCities will provide lease financing to the Company's
qualified operator customers for its Digital Jukeboxes. The Company will
receive additional compensation for each Digital Jukebox financed under the
Lease Plan. The additional compensation will be partially offset by limited
recourse provided by the Company on leases financed under the Lease Plan.
The Lease Plan is expected to result in a reduction of the Company's capital
financing requirements in the future, however, there are no assurances that the
Lease Plan will result in the expected levels of financing or be accepted by
the Company's operator customers.
Product Sales and Distribution
The Registrant has decided to expand its sales efforts by selling and leasing
its Digital Jukeboxes through existing coin-operated equipment distributors.
The Registrant has signed distributor agency agreements with seven distributors
to date and expects to sign several others prior to year-end. The distributors
will act as sales agents of the Registrant and will be remunerated based on the
number of units they assist the Registrant in selling or leasing. The
Registrant believes that its agreements with distributors will result in
increased future sales, however, there can be no assurances that such increases
in sales will actually occur.
Accounting Pronouncements
Securities and Exchange Commission Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements (SAB101) clarifies certain
conditions to be met in order to recognize revenue. The Company is studying
the application of this new standard but has not yet determined its impact.
FASB Statement 133, Accounting for Derivative Instruments and Hedging
Activities (as amended by Statement 137 and 138) is required to be adopted
effective January 1, 2001 for companies with fiscal years ending December 31,
2000. The Company is studying the application of this standard but has not yet
determined its impact.
15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits listed on the Index of Exhibits of this quarterly report
are filed herewith or incorporated herein by reference to other
filings, as specified in the Index of Exhibits.
(b) Registrant did not file any reports on Form 8-K during the third
quarter of 2000.
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 14, 2000 Per: /s/ Tony Mastronardi
-----------------------------------------
Tony Mastronardi
President and Chief Executive Officer
Dated: November 14, 2000 Per: /s/ Chris Marcolefas
-----------------------------------------
Chris Marcolefas
Principal Financial Officer
16
INDEX OF EXHIBITS
Exhibit
Number Description
3.1 Second Amended and Restated Articles of Incorporation, which Exhibit
is filed herewith.
3.2 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.
27 Financial Data Schedule, which Exhibit is filed herewith.
17
