U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File No. 333-7006
TOUCHTUNES MUSIC CORPORATION
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(Name of small business issuer in its charter)
Nevada 87-0485304
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
1800 E. Sahara, Suite 107
Las Vegas, Nevada 89104
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(Address of principal executive offices, including zip code)
Issuer's telephone number, including area code (702)-792-7405
Issuer's facsimile number, including area code (702)-734-7500
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Class A Common Stock (Par Value $.001 per share)
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
(x) Yes ( ) No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part 1II of this Form 10-KSB or any
amendment to this Form 10-KSB. ( )
The issuer's revenues for its most recent fiscal year were $ 4,053,165
The aggregate market value for the voting and non-voting common equity held by
non-affiliates on March 21, 2000 was approximately $8,775,479
The total number of shares of Class A Common Stock outstanding on March 21,
2000 was 14,658,644.
PART I
The Form 10-KSB contains 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
Registrant's control.
ITEM 1. Description of Business
(a) Organization
The Registrant is a company involved in the digital distribution of music
content to music-on-demand applications. The first such music-on-demand
application developed by the Registrant is its Digital Jukebox ("Digital
Jukebox") The Registrant has become the leading provider of Digital Jukeboxes
in the United States and a significant digital distributor of music content,
downloading approximately 50,000 songs per month. The Registrant is actively
developing new music-on-demand products and applications as part of its
strategy to leverage its existing technology, music content and strategic
relationships.
The Registrant's network of Digital Jukeboxes currently play approximately
2.5 million songs to an estimated audience of approximately 1 million people
each month. This makes the Digital Jukebox network an interesting alternative
to radio for promoting record companies and their artists.
The Registrant was in the development stage until the fourth quarter of
1998, when it began generating revenues from its business operations and
implementing its sales and marketing strategy. Since acquiring the exclusive
rights to a patented technology for its Digital Jukebox in December 1994, the
Registrant has concentrated most of its efforts on the development and
marketing of its Digital Jukebox
(b) Products
The Digital Jukebox combines in a single unit, computer systems,
telecommunication peripherals and multimedia hardware. Management believes the
Digital Jukebox is capable of replacing the loading mechanisms, the laser and
the high maintenance parts employed by conventional jukeboxes, with this low
maintenance computer system, capable of storing and reproducing, in digital
format (MP3: 128 kbs; 44.1 KHz), any music selection at its original level of
quality.
The core of the Digital Jukebox technology is a proprietary operating
system, optimized for high-speed sound reproduction and video animation. The
Digital Jukebox is capable of storing, in compressed digital format, a minimum
of 750 songs, upgradable to virtually unlimited capacity. The Digital Jukebox
is also equipped with a telecommunication protocol allowing the secure
downloading of music to each individual jukebox from a remote central music
library. The result is a high performance, low maintenance, remotely
configurable, computer controlled unit, using state-of-the-art technology
standards. In the opinion of management, with its integrated and proprietary
software program, the Digital Jukebox outperforms any conventional jukebox on
the market today, for simultaneous sound reproduction, graphics display, video
animation, music management and telecommunication services.
The operating software accounts for all songs played and automatically
generates detailed pay-for-play statements indicating royalty amounts owing to
each respective record and publishing company. This feature has helped the
Registrant obtain performance, recording and publishing rights for the Digital
Jukebox from performance rights societies, various record companies and various
publishing companies, authorizing the Registrant to reproduce and play
copyrighted music on its Digital Jukebox units. The statistics generated by
Digital Jukeboxes can be used to determine the popularity of artists and
titles, together with music preferences and trends. This information on
musical tastes is critical to the music industry and can be made available by
the Registrant to record label companies. Furthermore, these data mining
capabilities can be used to test market new songs, monitor consumer preference,
monitor geographic trends, promote record labels and their artists, as well as
provide other useful information.
(c) Industry
The Digital Jukebox was primarily developed for the jukebox industry.
Based on information available to management, it believes approximately 300,000
conventional jukeboxes are in operation in the United States and approximately
10,000 new units were sold in 1999. There are approximately 2,300 jukebox
operators who own these units, which are placed in restaurants, bars and other
similar business venues. Annual gross coinage jukebox revenue in the industry
amounts to approximately $2 billion, of which on average, approximately 50% is
retained by location owners and 50% retained by jukebox operators. The
previous significant technological change in the industry occurred in 1987 when
CD jukeboxes were introduced. By 1991, older vinyl jukeboxes were no longer
being manufactured. The Registrant expects the industry to shift to digital
technology at a similar pace.
(d) Patents
To protect its technology, the Registrant has filed fourteen international
patent applications. One French patent application was filed on July 16, 1999,
which will be extended to the United States, Canada, Europe and Japan before
July 16, 2000. Seven of these international patent applications have a priority
date of October 12, 1994; the eighth patent application has a priority date of
September 25, 1996; the ninth patent application has a priority date of
September 26, 1997; the tenth patent application has a priority date of April
14, 1998; the eleventh, twelfth and thirteenth patent applications have a
priority date of July 22, 1998; and the fourteenth patent has a priority date
of July 21, 1998. Ten patent applications cover the Registrant's downloading
network configuration, operating system technology, title selection, system
control methodology, as it applies to the jukebox sector. Another four patent
applications cover its application to potential markets outside the jukebox
industry (residential and other markets) which can be serviced by the same
network configuration. One patent application covers the digital technology
applicable to wireless speakers. During 1998 four patents were granted in
Europe, and another two patents were granted during 1999. There can be no
assurances concerning the scope, validity or value of such patents and patent
applications; nor their freedom from infringement by others, although the
Registrant is not aware of any conflicting patents held by others.
(e) Promotion and Marketing
The Registrant promotes the Digital Jukebox through advertising, its Web-
site, spotlight shows, on-site demonstrations, direct mailings, banner ads and
on-premise promotion items. The Registrant also continues to attend all major
and selected minor industry trade shows and exhibitions. The two major trade
shows in which the Registrant participates each year are: the Amusement
Showcase International show and the Amusement & Music Operators Association
(AMOA) held in March and September each year, respectively. These events
attract most major participants in the coin operated industry and generate
orders from jukebox operators for the Digital Jukebox.
The Registrant's marketing and distribution strategies are aimed at
penetrating the jukebox industry through individualized arrangements with
existing jukebox operators. The Registrant arranges for the renewal and
payment of licensing fees to the performing rights societies; accountability
and disbursements of royalty payments to the record label companies and
publishing companies; and ongoing provision for music selections and the
manufacture and delivery of the Digital Jukeboxes to the jukebox operators. In
consideration for this, the Registrant sells or leases the Digital Jukebox to
the jukebox operators. The sales are formalized under a "Sales and Service
Agreement". The sales price for each Digital Jukebox is $5,995, with an
associated 5 year service agreement charging a minimum of $29 per week which
increases to a maximum of $49 per week based on the level of revenues derived
from the operation of the Digital Jukeboxes. Lease transactions are formalized
under a "Partner Lease and Service Agreement". The lease has a term of 5
years and charges a minimum of $69 per week, which increases to a maximum of
$89 per week based on the level of revenues derived from the operation of the
Digital Jukeboxes. In addition, due to the interactive monitor on each Digital
Jukebox, the Registrant is capable of advertising on its Digital Jukeboxes
generating advertising revenue for the Registrant and its jukebox operators.
As at December 31, 1999, the Registrant had delivered a total of 1,352 Digital
Jukeboxes to jukebox operators of which approximately 1,150 units had been
installed in various locations in the United States.
(f) Customer Service and Technical Support
The Registrant has established customer service and technical support
departments focused on providing the Registrant's customers with value beyond
the purchase or lease of the Registrant's Digital Jukebox. The customer
service and technical support consists of 24 hours per day 7 days per week
support through a toll free telephone number. The Registrant also conducts
jukebox installation training sessions, providing education and insight into
the use of the Registrant's Digital Jukebox.
(g) Manufacturing, Assembling and Distribution
The Registrant has secured rights to play their music from 4 major record
label companies (Universal Music Group, BMG North America, Warner Music Group
and Capitol Records Inc.), as well as several other independent record label
companies. The record rights obtained were based on a pay-per-play royalty fee
structure. The Registrant is still negotiating with the other major record
label company, Sony, as well as with several other independent record companies
for the right to play their music based on similar pay-per-play royalty fee
structures.
The Registrant has also obtained publishing rights from all of the major
publishing companies, as well as rights from over 300 other independent
publishing companies, in consideration for a royalty payable each time a song
is digitally reproduced or downloaded on a Digital Jukebox. The Registrant
continues to negotiate rights to play music with publishing companies.
The Registrant has entered into an agreement with Bose Corporation
("Bose") for the commercial manufacturing of the Digital Jukeboxes. The
Registrant has also entered into an agreement with 146473 Canada Inc.
("Microsource") to supply assembled and tested computer units for installation
in Digital Jukebox units manufactured by Bose. The Registrant has arrangements
with various telecommunication companies for access into their TCP/IP
networks, enabling the digital downloading of music content to its Digital
Jukeboxes.
There can be no assurance that the Registrant will be able to successfully
conclude its pending arrangements or renew existing agreements with record
label companies and publishing companies for the use of their music; conclude
sufficient leasing arrangements with jukebox operators for their use of the
Digital Jukeboxes; renegotiate key supplier contracts on terms favorable to the
Registrant; or finance the substantial costs needed to manufacture, assemble,
distribute and operate such Digital Jukebox units on a commercially profitable
basis.
(h) Product Development
The Registrant plans to leverage its existing expertise in the secure
digital distribution of music through TCP/IP networks, its established
relationships with record labels and publishers, as well as its strategic
partnerships with Bose and other key suppliers, to develop other music-on-
demand products and applications. The Registrant's current product development
efforts are focused on utilizing its core technologies to expand its music-on-
demand products and applications.
The Registrant's growth will be dependent upon the rate of market
penetration of the Digital Jukebox, revenues generated from sales, leasing,
music services and advertising on the Digital Jukebox, enhancements to the
Digital Jukebox, as well as the introduction of new products and applications.
There can be no assurance that any such market penetration and revenue growth
will be achieved, or such new products, applications or enhancements will
achieve market acceptance. If the Registrant were unable, due to resource
constraints or technological or other reasons, to develop and introduce such
products in a timely manner, this inability could have a material adverse
effect on the Registrant's business, operating results, cash flows and
financial condition.
The Registrant's research and development expenses were approximately
$1,640,000, $843,000, and $842,000 for 1999, 1998, and 1997, respectively.
(i) Competition
Competition in the manufacture, distribution and use of conventional
jukeboxes is intense. Some manufacturers have other lines of equipment which
they produce in addition to conventional jukeboxes, within the
amusement/entertainment industry. However, none of the manufacturers are known
to be involved in the placement or operation of any of their jukebox units in
the manner being proposed by the Registrant. Through their distribution
network, manufacturers sell their equipment, usually in bulk quantities, to
local distributors. All of these manufacturers have far greater experience
than the Registrant.
Competition for the Registrant's Digital Jukebox can also be expected from
those who seek to design, develop and market units similar to the Digital
Jukebox for use in the jukebox industry, with comparable or superior features,
technologies and advances. While the Registrant believes the Digital Jukebox
is currently superior to any conventional jukebox on the market, there can be
no assurance that other technologically advanced jukeboxes may not be designed
and marketed by existing manufacturers or others, in competition with the
Digital Jukeboxes of the Registrant.
The Registrant will face intense competition in commercializing any new
music-on-demand products and applications from companies that may have longer
operating histories and significantly greater financial, management,
technology, development, sales, marketing and other resources than the
Registrant.
(j) Employees
As at December 31, 1999, the Registrant and its wholly-owned subsidiary
had a total of 114 employees: including 44 in sales, marketing, customer
service and support; 40 in development, quality assurance and network
operations; and 30 in music related activities, general and administration.
(k) Funding of the Registrant's Operations
Equity
From December 1994 until March 1997, officers and principal shareholders
of the Registrant financed its operations primarily through their own
resources. On March 21, 1997, two independent Canadian Investors, Societe
Innovatech du Grand Montreal and Sofinov Societe Financiere D'Innovation Inc.
(the "Canadian Investors"), agreed to invest $4,000,000 Canadian Dollars (CDN)
for the development and promotion of the Registrant's Digital Jukebox, upon
certain terms and conditions. To accomplish this, the Canadian Investors
agreed to invest $4,000,000 CDN in TouchTunes Digital Jukebox Inc. ("TouchTunes
Digital"), a Canadian company jointly controlled by the Registrant and the
Canadian Investors, which was organized by the Registrant specifically for that
purpose. The Registrant contracted out to TouchTunes Digital the research and
development work needed for the Digital Jukeboxes and to provide all such
additional services reasonably requested by the Registrant in connection with
the implementation of the Digital Jukebox project.
The Canadian Investors initially purchased 100 Class B shares and 20
Class C shares of TouchTunes Digital, at a price of $5,000 CDN per share, for
an immediate cash consideration of $600,000 CDN. They also subscribed to an
additional 680 Class C shares of TouchTunes Digital, at a price of $5,000 CDN
per share, for a consideration of $3,400,000 CDN. Both the Class C shares and
the $3,400,000 CDN were deposited in escrow. The Class B and the Class C
shares of TouchTunes Digital could be exchanged at the option of the Canadian
Investors, into 2,000,000 shares of Series A Preferred Stock of the Registrant
and then converted share for share into Common Stock. Subsequently, on May 9,
1997, the Canadian Investors released an additional $750,000 CDN against
delivery of 150 Class C shares, leaving a balance of $2,650,000 CDN and 530
Class C shares in escrow. Finally, on July 17, 1997, the Canadian Investors
released the remaining $2,650,000 CDN to TouchTunes Digital against delivery to
them of the remaining 530 Class C shares of TouchTunes Digital. These funds
have been used to implement the start-up business activities of the Registrant.
The Registrant is the owner of 800 Class A shares of TouchTunes Digital.
As a result of the foregoing transactions, the Canadian Investors owned 100
Class B shares and 700 Class C shares of TouchTunes Digital. The Class A
shares entitle the holder to one vote per share. The Class B shares entitle
the holder to eight votes per share and the Class C shares are non-voting.
Therefore, the Registrant and the Canadian Investors had equal voting rights in
TouchTunes Digital. On December 31, 1999, the Registrant acquired the
remaining 50% ownership and control of TouchTunes Digital, as the Canadian
Investors exchanged their Class B and Class C shares of TouchTunes Digital for
2,000,000 Series A Preferred Shares of the Registrant. The Registrant now owns
all of the Class A, Class B and Class C shares of TouchTunes Digital, making
TouchTunes Digital a wholly-owned subsidiary of the Registrant (see further
detail below).
On February 11, 1998, the Canadian Investors subscribed for an aggregate
principal amount of $4,000,000 (US) of debentures ("Debentures") issued by
TouchTunes Digital. 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 default, the Debentures would bear interest at
the rate of 12% per annum, payable in one single installment, concurrently with
the payment of the principal amount. At any time prior to February 11, 1999,
TouchTunes Digital had the right to require the Canadian Investors to purchase
additional Debentures, up to an aggregate principal amount of $10,000,000 (US),
bearing the same terms and conditions, in six increments of $1,000,000 each.
The remaining Debentures were issued as follows: $ 2,000,000 (US) on August 5,
1998 and $4,000,000 (US) on November 2, 1998.
On that same date, February 11, 1998, the Registrant entered into a
"Debenture Put Right Agreement" with the Canadian Investors, providing them
with the right and option to require the Registrant to purchase all or any part
of the principal amount of Debentures they have acquired (up to $10,000,000 in
principal amount), at an exchange rate of $2.00 per share, for the issuance by
the Registrant of up to 5,000,000 shares of Series A Preferred Stock,
convertible at the option of the holders, share for share, into an aggregate of
up to 5,000,000 shares of the Registrant's Common Stock.
On February 11, 1998, the Registrant and the Canadian Investors amended
and restated their Shareholders' Agreement of March 21, 1997. Among other
things, the Amended and Restated Agreement provides that the Canadian Investors
collectively are entitled to two seats on the Registrant's Board of Directors,
which shall consist of at least six directors.
On March 22, 1999, the Canadian Investors subscribed for additional
Debentures issued by TouchTunes Digital for an aggregate principal amount of
$830,579 U.S. with the same terms as those previously issued in 1998.
Concurrently, on March 22, 1999, the Registrant entered into a "Debenture Put
Right Agreement" with the Canadian Investors providing them with the right and
option to require the Registrant to purchase all, or any part of the principal
amount of the Debentures aggregating $830,579 (US), at an exchange rate of
$2.00 (US) per share of the Registrant's Series A preferred stock. Each Series
A preferred share is convertible at the option of the holder, share for share,
into shares of the Registrant's Common Stock; an aggregate of 415,289 shares.
On April 8, 1999, Sofinov Societe Financiere d'Innovation Inc.
("Sofinov") subscribed for additional Debentures issued by TouchTunes Digital
for an aggregate principal amount of $2,500,000 (US) with the same terms as
those previously issued in 1998. On December 30, 1999, the Registrant and
Sofinov amended the "Debenture Put Right Agreement", providing Sofinov with the
right and option to require the Registrant to purchase all, or any part of the
principal amount of the Debentures aggregating $2,500,000 U.S. at an exchange
rate equal to the greater of $1.75 U.S. per share of the Registrant's Series A
preferred stock. 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 Registrant. Each
Series A preferred share is convertible at the option of the holder, share for
share, into shares of the Registrant's Common Stock; up to an aggregate of
1,428,571 shares.
On July 14, 1999, the Registrant entered into a Debenture Put Right
Agreement with the Canadian Investors, providing them with the right and option
to require the Registrant to purchase all or any part of the principal amount
of Debentures they have acquired (up to $7,000,000 U.S. in principal amount),
for the issuance by the Registrant of its Series A preferred stock. On
December 30, 1999 the Registrant and Sofinov agreed to amend the exchange rate
on the Debentures to $1.75 per share. The exchange rate on the Debentures was
previously equal to $2.00 per share or 93% of the price per share paid by a
third party investor for the issuance of additional equity by the Registrant.
Each Series A preferred share is convertible at the option of the holders,
share for share, into shares of the Registrant's Common Stock; up to an
aggregate of 4,000,000 shares. The Debentures were issued as follows:
$3,000,000 (US) on July 14, 1999, $2,000,000 on September 23, 1999 and
$2,000,000 on November 5, 1999.
On December 30, 1999, the Canadian Investors exercised their rights under
the February 11,1998, March 22, 1999, April 25, 1999 and July 14, 1999 Amended
Debenture Put Right Agreements requiring the Registrant to purchase all the
Debentures issued for an aggregate principle amount of $20,330,579 (US) in
exchange for 10,843,860 shares of the Registrant's Series A Preferred Stock.
Each Series A Preferred Share is convertible, share for share into the
Registrant's Common Stock.
As previously stated, on December 31, 1999, the Canadian Investors
exercised their rights under the March 21, 1997, Share Exchange Agreement
requiring the Registrant to issue 2,000,000 shares of its Series A Preferred
Shares in exchange for the Class B and Class C shares of TouchTunes Digital.
Each Series A Preferred Share is convertible, share for share into the
Registrant's Common Stock. This transaction resulted in the Registrant
retaining 100% ownership and control of TouchTunes Digital.
Based on the present number of shares of the Registrant's Common Stock
issued and outstanding (14,658,644 shares), upon the exchange of their
12,843,960 Series A Preferred shares of the Registrant and the conversion of
such Series A Preferred shares into 12,843,960 shares of the Registrant's
Common Stock, the Canadian Investors will own approximately 46.7% of the Common
Stock of the Registrant.
In December 1999, Sofinov agreed to advance the Registrant and its wholly-
owned subsidiary, TouchTunes Digital, an aggregate amount of $5,000,000 (US).
As at December 31,1999, Sofinov had advanced the Registrant a total amount of
$2,000,000 (US). The remaining amount of $3,000,000 (US) was advanced by
Sofinov during the first quarter of 2000. The intention between the Registrant
and Sofinov is that the entire amount will be exchanged for additional Series A
Preferred shares of the Registrant. The exchange rate has not yet been
determined.
Debt
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 to date is $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, as well as a guarantee
from the Registrant for the entire amount. Interest rates on these facilities
range from 1.0% to 3.75% over the bank's Canadian prime rate, with terms
ranging from 15 months to 60 months. The remaining $750,000 (CDN) is available
to TouchTunes Digital, subject to various terms and conditions.
On April 19, 1999, TouchTunes Digital successfully negotiated a term loan
facility aggregating $10,400,000 (US) with a major Canadian chartered bank for
financing the cost of manufacturing jukeboxes. The security provided to the
Bank by TouchTunes Digital was in the form of security interests on past,
present and future assets of TouchTunes Digital as well as a guarantee from the
Registrant for the entire amount. The interest rate on this facility is priced
at the Bank's US rate, plus 2.55%, in addition to other related fees. The loan
will be disbursed in monthly tranche amounts, based on various terms and
conditions, with each tranche having a term of 30 months. The Bank has
disbursed a total amount of $5,944,000 (US) as at March 21, 2000.
Based on the Registrant's projections it will need to raise approximately
$10,000,000-$15,000,000 (US) during the next year to cover its projected costs
of operations, fund Digital Jukebox lease agreements, expand its sales and
marketing activities, as well as provide the ability to expand its research and
development activities. While the Registrant is negotiating with financial
institutions and investors for such funds, there can be no assurances that it
will be able to raise this on terms satisfactory to the Registrant, or at all.
Nor can there be any assurances that the Registrant will interest enough
jukebox operators to enter into Sales and Service Agreements or Partner Lease
and Service Agreements. Finally, there can be no assurances that even if all
these events take place, the operations of the Registrant will prove
commercially profitable.
ITEM 2. Description of Property
The Registrant owns no real estate. Its operations are conducted through
TouchTunes Digital, its wholly-owned subsidiary. Effective March 1, 1998,
TouchTunes Digital entered into a new lease with the same landlord for a term
of 10 years. The premises comprise 13,724 square feet of office space at 3
Commerce Place, Nun's Island, Verdun, (Quebec) Canada, H3E 1H7, 4th floor. The
annual minimum rental is $254,443 (CDN).
The Registrant also has a lease for 3,934 square feet of office space at
1110 Cook Road, Suite 100, Buffalo Grove, Illinois 60089, at an annual rental
of $70,000 (US), for use as a sales and marketing office and its parts
distribution center, as well as leases for offices at 2300 Computer Avenue,
Suite 125, Willow Grove, Pennsylvania and at 1800 E. Sahara, Suite 107, Las
Vegas, Nevada, both at a nominal annual rentals. The Registrant also has a
lease for 625 square feet of office space at 1801 Avenue of the Stars, 6th
Floor, Los Angeles, California, 90067, at an annual rent of $34,200 (US), for
use as a business development, music rights and licensing office.
ITEM 3. Legal Proceedings
On October 18, 1999, the lawsuit filed in July 1998, in the United States
District Court for the Northern District of Illinois Eastern Division by
Arachnid, Inc.naming TouchTunes Digital and the Registrant as defendants, was
dismissed with prejudice.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
(a) Market for Common Stock
The Registrant's Common Stock has traded in the over-the-counter market on
the "OTC Bulletin Board" since June 7, 1995. Until December 1998 the symbol
was TCMN. The symbol is now TTMC. The quotations below from the National
Quotation Bureau, Inc. represent the high and low, closing bid and asked
prices, by quarters, since that date. These do not include retail markups,
markdowns or commissions. Nor do they represent actual transactions.
Bid Prices Asked Prices
High Low High Low
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1998
January through March 31 $4.25 $1.5313 $4.625 $1.8125
April 1 through June 30 $6.125 $3.375 $6.50 $3.50
July 1 through September 30 $3.375 $2.00 $3.875 $2.50
October 1 through December 31 $3.6875 $1.75 $3.75 $2.00
1999
January 4 through March 31 4.375 2.50 4.8125 3.125
April 1 through June 30 3.8125 1.75 4.03125 2.25
July 1 through September 30 2.375 1.375 2.875 1.625
October 1 through December 31 2.1875 1.375 2.50 1.625
On March 21, 2000, closing bid and asked prices of the Common Stock on the
OTC Bulletin Board were $2.0625 and $2.25 per share, respectively. On that
date, there were approximately 450 holders of record of the Common Stock.
(b) Recent Sales of Unregistered Securities
In the past three years, the Registrant has made the following sales of
unregistered securities, all of which sales were exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof, or as
otherwise indicated herein.
On April 1, 1997, the Board of Directors authorized the issuance of 56,820
shares of Common Stock to repay accounts payable totalling $85,230 and
authorized the issuance of 17,117 shares of Common Stock to a Director for
cash consideration of $31,565. These shares were issued on October 7, 1997 to
such two persons who acquired these shares for investment.
Reference is made to the transactions described in Item 1 (k) above,
between the Canadian Investors, the Registrant and the Registrants wholly owned
subsidiary, TouchTunes Digital, which information is incorporated herein by
such reference. Based on the present number of shares of the Registrant's
Common Stock issued and outstanding (14,658,644 shares), upon the exchange by
the Canadian Investors of their 12,843,960 Series A Preferred shares of the
Registrant into 12,843,960 shares of the Registrant's Common Stock, the
Canadian Investors will own approximately 46.7% of the Common Stock of the
Registrant
ITEM 6.Management's Discussion and Analysis or Plan of Operation
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 Registrant's control.
.
(a) Overview
The Registrant was a development stage company up until September 1998.
Prior to this date, the Registrant financial resources were used to finance the
development of its Digital Jukebox. Revenues generated since September 1998,
have been generated from sales and leases of its Digital Jukebox to jukebox
operators in the United States. As at December 31, 1999 the Registrant had
delivered a total of 1,352 Digital Jukeboxes as compared to 255 units delivered
as at December 31, 1998. Management plans to devote significant resources to
continue its aggressive sales and marketing efforts within the jukebox
industry. Management also intends to continue its development activities in
applying its technology to other music-on-demand products and applications to
other industries.
The Registrant plays approximately 2.5 million songs to an estimated
audience of approximately 1 million people each month. Management expects the
number of plays and the audience exposure to increase as the install base of
Digital Jukeboxes continues to grow, becoming a significant promotional medium
for record companies and their artists. This should assist the Registrant in
obtaining and/or renewing new agreements with various record companies
On December 31, 1999, the Registrant acquired the remaining 50% ownership
10
and control of its subsidiary TouchTunes Digital, (see Item 1 (k) "Funding of
the Registrant's Operations"). As a result, all significant intercompany
balances and transactions since the acquisition have been eliminated.
(b) Revenues
Revenues from sales and leases from its Digital Jukebox amounted to
approximately $4,000,000 for the year ended December 31, 1999, as compared to
approximately $72,000 for the year ended December 31, 1998. The increase in
revenues was a result of significant increases in demand for the Digital
Jukebox during 1999. Revenues for 1998, represent approximately 3 months of
results. During the fourth quarter 1999, the Registrant commenced accounting
for all new lease transactions as capital leases, resulting in revenues of
$5,995 to be recognized upon the delivery of each Digital Jukebox to jukebox
operators. All prior leases were accounted for as operating leases,
recognizing revenue as the lease payments came due.
The Registrant also had advertising revenues of $84,000 in 1999. There
were no advertising revenues during 1998. Advertising revenues are generated
from advertising that is placed on the Digital Jukebox. Due to the interactive
monitor on each Digital Jukebox, there is potential that the Registrant will be
able to significantly increase advertising revenues in the future.
(c) Expenses
Total expenses incurred by the Registrant amounted to approximately
$15,400,000 in 1999, as compared to approximately $5,900,000 in 1998. The
increase in expenses is directly attributable to the increased resources that
were needed to support the high rate of growth in the sales and leases of
Digital Jukeboxes. Furthermore, research and development costs increased to
approximately $1,600,000 in 1999, from approximately $800,000 in 1998, due to
the Registrant's continued development of its technologies to enhance the
performance of its Digital Jukebox, as well as leveraging its technology to
apply it towards other products and applications. Management expects greater
cost efficiencies as the installed base of Digital Jukeboxes increases.
(d) Liquidity and Capital Resources
From March 21, 1997 through March 21, 2000, the Canadian Investors invested
an aggregate of $28,330,579 (See Item 1(k) "Funding of the Registrant's
Operations"). This has supplied the Registrant with sufficient capital resources
necessary to conclude the financing of its start-up activities, and commence
commercial operations. The Registrant estimates it will need to raise
approximately $10,000,000 to $15,000,000 (US) during the next year to cover all
its projected operating costs, fund Digital Jukebox lease agreements, expand its
sales and marketing activities, 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 established by TouchTunes Digital, for financing
the cost of manufacturing the Digital Jukebox, upon certain terms and conditions
previously described. (See Item 1(k) "Funding of the Registrant's Operations").
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.
The Registrant is exploring various financial alternatives for additional
funding, including private equity placement transactions. There can be no
assurances that the Registrant will be successful in obtaining additional
funding.
11
(e) Other Events.
On August 20, 1999, the Registrant increased its authorized shares to
15,000,000 shares of Series A Preferred Stock.
ITEM 7. Financial Statements
Attached is Appendix A containing the following information:
Independent Auditor's Report
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended December 31, 1999,
1998, 1997.
Consolidated Statements of Stockholders' Equity (Deficiency) for the years
ended December 31, 1999, 1998, 1997.
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998, 1997.
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act:
(a) Directors and Officers.
The executive officers and directors of the Registrant are listed below.
The term of each director is for one year.
Name Office Age
Tony Mastronardi Chief Executive Officer 39
President and Director
(Since December 1994)
Guy Nathan Senior Vice President, 56
Secretary,and Director
(Since December 1994)
Tonino Lattanzi Vice President and Director 48
(Since December 1994)
Jacques Bourque Assistant Secretary 48
And Director
(Since March 1997)
Pierre Pharand Director 57
(Since March 1997)
Caroline Singleton Director 46
(Since February 1998)
John Margold Vice President, Sales 48
and Marketing
12
Linda Komorsky Vice President, Business 55
Affairs, Music Rights and
Licenses
Tony Mastronardi has 11 years of diverse business experience holding senior
management positions in various industries. Mr. Mastronardi has had hands-
on involvement in the downloading jukebox project since conception, and
currently has the responsibility of overseeing the management of the
operations for the Registrant and TouchTunes Digital. Mr. Mastronardi
possesses previous experience in new ventures having already participated
in launching two other companies in the retail sector. Between 1985 and
1994, Mr. Mastronardi was employed as a Vice President and then President
of Les Pavages Samacon Inc., a Montreal based family-owned construction
company. Since April 1993, he has also been active in the Management of
Viatel Communications Inc., a Montreal-based cellular phone distributor.
Guy Nathan is a recognized inventor, having patented over 100 intellectual
property inventions since 1965. He has founded numerous research and
development companies specializing in a variety of highly innovative
products, such as microradars for military use, videodiscs using laser and
CD technology, high efficiency DC motors and interactive cable TV. He also
founded several companies for the purpose of promoting and marketing his
inventions. Mr. Nathan has a great deal of experience in
telecommunications. He was directly involved in the creation of
photovoltaic powered television transmitters and repeaters and microwave
links; created a photovoltaic powered modular television set for communal
and educational TV use in third world countries; acted as consultant for
numerous African countries in matters of telecommunications, more
particularly in setting-up radio and television networks by satellite;
developed satellite dish antennas for direct television reception in KU
band and developed and patented an interactive cable TV.
Tonino Lattanzi resides in France. Mr. Lattanzi has launched two
successful waste management companies in France and Italy. Mr. Lattanzi is
not involved in the Registrant's or TouchTunes Digital's management or
ongoing daily activities.
Jacques Bourque is a lawyer and senior partner of the law firm of De
Grandpre Chait, which has offices in Montreal, Canada. Mr. Bourque
graduated from the law faculty of Universite de Montreal in 1973 and was
admitted to the Bar of the Province of Quebec in 1975. He also holds a
Masters in Business Administration from McGill University. Mr. Bourque has
extensive experience in corporate and commercial law, specializing in
mergers and acquisitions.
Pierre Pharand is Vice President of Sofinov Societe Financiere d'Innovation
Inc. ("Sofinov") since September 1996. Sofinov is a venture capital fund
and a wholly-owned subsidiary of Caisse de Depot et Placement du Quebec, a
major pension fund with over $100 billion Canadian of assets under
management. He holds a Bachelor's degree in Industrial Relations from the
Universite de Montreal received in 1972 and a Bachelor's degree in Business
Administration from McGill University received in 1964. He is also a
Chartered Administrator. Prior to joining Sofinov, Mr. Pharand was
President of Acero Management International Inc., a consulting firm
specializing in the corporate development of technology-related companies.
He was also Chairman of the Board as well as President and Chief Executive
Officer of Datagram Inc., a communications and technology company.
13
Caroline Singleton is Vice President, Information Technology and
Telecommunications for Societe Innovatech du Grand Montreal ("Innovatech"),
a $ 350 million Canadian high-technology venture capital fund. Prior to
joining Innovatech in 1997, Ms. Singleton was president of Tordion
Consulting Inc., a company specializing in the management of high
technology projects in Canada, the United States and the Far East. She
obtained a Bachelor of Science in Mathematics (Honours) from McGill
University in 1978 and during the course of her career has designed or
managed state-of-the-art software systems in many different areas including
astrophysics, electric power generation, telecommunications, banking and
medical technology. She currently serves on the Board of Directors of a
number of leading edge technology companies and professional organizations
and is a former elected member of the Canadian Executive Board of DECUS
(The Digital Computer Users Society), an international organization which
at the time had 50,000 members world-wide.
John Margold has over 20 years of experience in the coin-op industry and
has relationships with many jukebox operators across the United States.
Prior to joining the Registrant, Mr. Margold was a Senior Vice President of
NSM America, one of the leading manufacturers of traditional CD jukeboxes,
both in the United States and Europe, where he alone accounted for the
sales of approximately 6,000 jukeboxes per year. Mr. Margold received a
Bachelor of Arts degree in Communications from St. Laurence University in
1973.
Linda Komorsky, based In Los Angeles, has 25 years of experience in the
music industry where she has held several senior positions with diverse
responsibilities at national and international levels. Most recently, she
served on the worldwide management committee of BMG Music Publishing
International as Vice President, International Acquisitions and Marketing.
Reporting directly to the CEO, Mrs. Komorsky had specific responsibilities
with respect to the strategic growth of BMG Music Publishing on a worldwide
level.
(b) Section 16(a) Beneficial Ownership Reporting Compliance.
During the most recent fiscal year, Registrant's reporting persons did not
file Forms 4 to reflect their receipt of stock options granted to them.
ITEM 10. Executive Compensation
Until January 1, 1997, the Registrant had no arrangement for the
remuneration of its executive officers and directors, except that they received
reimbursement for actual out-of-pocket expenses, including travel expenses,
made on behalf of the Registrant. No remuneration was paid to the executive
officers and directors of the Registrant for the year ended December 31, 1996.
On March 11, 1997, the Registrant entered into an employment agreement
with Tony Mastronardi, its President. The term of his employment is for five
years and the salary for his first year of employment was fixed at $125,000
CDN, commencing January 1, 1997. Mr. Mastronardi entered a non-competition and
confidentiality agreement with the Registrant for as long as he remains in its
employ and for an additional year thereafter. The non-competition covenant
will continue for as long as Mr. Mastronardi owns any shares, directly or indi-
rectly, in the Registrant. On August 31, 1998, the Board of Directors
increased Mr. Mastronardi's annual base salary to $150,000 CDN retroactively
effective to January 1, 1998. In addition, Mr. Mastronardi was granted options
to purchase an aggregate of 261,000 shares of the Registrant's Class A Common
Stock at an exercise price of $2.78 (U.S.) per share. Options to purchase
14
51,000 shares will vest at the rate of 12,750 shares on September 1 of each of
the four years commencing with the year 1999. Subject to certain
contingencies, options to purchase an additional 210,000 shares will vest on
December 31, 2000. The term of the options is for ten years and the shares
acquired upon exercise will be restricted securities.
On March 11, 1997, the Registrant also negotiated an employment agreement
with Guy Nathan, its Senior Vice-President for Research and Development, and
Secretary. The terms of the employment agreement with Mr. Nathan were
identical to those of the employment agreement entered with Mr. Mastronardi.
Mr. Nathan also executed a non-competition and confidentiality agreement in
favor of the Registrant on terms identical to those of the non-competition and
confidentiality agreement executed by Mr. Mastronardi. On August 31, 1998, the
Board of Directors fixed Mr. Nathan's annual base salary at $150,000 CDN
retroactively effective to January 1, 1998. In addition, Mr. Nathan was
granted options to purchase an aggregate of 261,000 shares of the Registrant's
Class A Common Stock at an exercise price of $2.78 (U.S.) per share. Options
to purchase 51,000 shares will vest at the rate of 12,750 shares on September
1 of each of the four years commencing with the year 1999. Subject to certain
contingencies, options to purchase 210,000 shares will vest on December 31,
2000. The term of the options is for ten years and the shares acquired upon
exercise will be restricted securities.
On August 31, 1998, the Board of Directors approved and confirmed the
employment terms and conditions of John Margold as the Registrant's Vice-
President of Sales and Marketing. His employment is at will, with provisions
made for severance payments depending on the length of his employment by the
Registrant. Mr. Margold will receive a base annual salary of $135,000 (U.S.).
Depending upon his own performance and that of the Registrant, Mr. Margold will
be eligible for an annual bonus of up to 100% of his base salary. In addition,
Mr. Margold was granted options to purchase an aggregate of 93,000 shares of
the Registrant's Class A Common Stock. Options to purchase 12,500 shares at
$2.78(U.S.) per share have vested. Options to purchase an additional 37,500
shares at $2.78 (U.S.) per share will vest at the rate of 12,500 shares on
September 1 of each of the three years commencing with 1999 and options to
purchase the remaining 43,000 shares at $2.78 (U.S.) per share will vest at the
rate of 10,750 shares on September 1 of each of the four years commencing with
the year 1999. The term of the options is for ten years and the shares
acquired upon exercise will be restricted securities.
On August 31, 1998, the Board of Directors approved and confirmed the
employment terms and conditions of Linda Komorsky as the Registrant's Vice-
President of Business Affairs, Music and Licensing. Her employment is at will,
with provisions made for severance payments depending on the length of her
employment by the Registrant. Ms. Komorsky will receive a base annual salary
of $110,000 (U.S.). Depending upon her own performance and that of the
Registrant, Ms. Komorsky will be eligible for an annual bonus of up to 60% of
her base salary. In addition, Ms Komorsky was granted options to purchase an
aggregate of 58,000 shares of the Registrant's Class A Common Stock. Options
to purchase 38,000 shares at $2.78 (U.S.) per share will vest at the rate of
9,500 shares on September 1 of each of the four years commencing with the year
1999. Options to purchase the remaining 20,000 shares at $5.98 (U.S.) per
share will vest at the rate of 15% on May 26, 1999; 35% on May 26, 2000; and
50% on May 26, 2001. The term of the options is for ten years and the shares
acquired upon exercise will be restricted securities.
On August 31, 1998, the Board of Directors also granted options to
purchase an aggregate of 15,000 shares of the Company's Class A Common Stock
(5,000 shares each) to the Registrant's three independent directors: Pierre
15
Pharand; Caroline Singleton and Jacques Bourque. The exercise price is $2.78
(U.S.) per share. These options will vest at the rate of 50% each on August
31, 1999 and August 31, 2000. The term of the options is for ten years and the
shares acquired upon exercise will be restricted securities. Directors who are
not employees of the Registrant receive an annual fee of $3,000 (U.S.) for
attendance at 50% of the meetings and attendance fees of $500 (U.S.) for Board
and committee meetings. Committee presidents receive $1,000 (U.S.) for
attendance.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding the beneficial stock
ownership of the Registrant's executive officers and directors and each person
known by the Registrant to own five percent or more of the outstanding shares
of its Common Stock as of March 21, 2000.
Name and Address Amount and Nature
of Beneficial Owner of Beneficial Percent of
Ownership Class
------------------------ ----------------------- -------------
Tony Mastronardi 10,001,920 shares (1) 36.4%
President, Director 393,090 shares (2) 1.4%
4973, Felix McLernan 12,750 shares (3) *
Pierrefonds, QC H8Y 3L2
Guy Nathan 10,001,920 shares (1) 36.4%
Senior Vice President 393,090 shares (2) 1.4%
Secretary, Director 12,750 shares (4) *
50 Berlioz
Nun's Island, Quebec
H3E-1A3
Tonino Lattanzi 328,038 shares 1.19%
Vice President, Director 10,001,920 shares (1) 36.4%
12, rue Dubois 393,090 shares (2) 1.4%
92140 14,666 shares (5) *
Clamart France
Sofinov Societe Financiere 9,235,774 shares (6) 33.6%
d'Innovation Inc. 2,500 shares (6) *
1981 McGill College Ave.
Montreal, Quebec H3A 3C7
Societe Innovatech du Grand 3,608,186 shares (7) 13.1%
Montreal 2,500 shares (7) *
2020 University
Montreal Quebec H3A 2A5
John Margold 35,750 shares (8) *
Vice President Sales and
Marketing
704 Patton Drive
Buffalo Grove, IL 60089
Linda Komorky 14,000 shares (9) *
Vice President Business
Affairs Music Rights &
Licensing
1600 South Rexford Drive
Los Angeles, CA 90035
16
Jacques Bourque 20,717 shares *
Director 2,500 shares (10) *
1000 rue De La Gauchetiere
West
Suite 2900
Montreal, QC H3B 4W5
All officers and 23,685,141 shares 85.9%
Directors as a group (11)
(eight persons)
* under 1%
_____________________
(1) Messrs. Mastronardi, Nathan and Lattanzi each own 33% of the capital stock
of Techno Expres, SA, a French corporation with offices at 36, rue du Marche,
94140 Alfortville France, the owner of 10,001,920 shares of the Registrant's
Common Stock.
(2) Messrs. Mastronardi, Nathan and Lattanzi own 50%, 16.67% and 33.33%
respectively, of the capital stock of Touchtunes Juke Box Inc., a Canadian
corporation with offices at 3 Place du Commerce, Suite 400, Nuns Island
(Quebec) H3E 1H7, the owner of 393,090 shares of the Registrant's common Stock.
(3) Represents 12, 750 shares subject to options held by Mr. Mastronardi that
are exercisable within 60 days of March 21, 2000.
(4) Represents 12, 750 shares subject to options held by Mr. Nathan that are
exercisable within 60 days of March 21, 2000.
(5) Mr. Lattanzi indirectly owns Neturba SRL, an Italian corporation with
offices at via Bonafica 26 63040 Malitignano, Italy the owner of 14,666 shares
of the Registrant's Common Stock.
(6) Represents 9,235,774 shares subject to Series A Preferred Stock held by
Sofinov Societe Finaciere d'Innovation Inc.("Sofinov") that is convertible
share for share into Common Stock of the Registrant, at the option of the
holder. Each share of Series A Preferred Stock has equal voting rights as
each share of Common Stock. In addition, it represents 2,500 shares subject to
options held by Sofinov that are exercisable within 60 days of March 21, 2000.
Pierre Pharand is a Vice President of Sofinov and represents Sofinov on the
Registrant's Board of Directors
(7) Represents 3,608,186 shares subject to Series A Preferred Stock held by
Societe Innovatech du Grand Montreal that is convertible share for share into
Common Stock of the Registrant, at the option of the holder. Each share of
Series A Preferred Stock has equal voting rights as each share of Common Stock.
In addition, it represents 2,500 shares subject to options held by Innovatech
that are exercisable within 60 days of March 21, 2000. Caroline Singleton is a
Vice President Information Technology and Telecommunications of Innovatech and
represents Innovatech on the Registrant's Board of Directors.
(8) Represents 35,750 shares subject to options held by Mr. Margold that are
exercisable within 60 days of March 21, 2000.
(9) Represents 14,000 shares subject to options held by Mrs. Komorsky that are
exercisable within 60 days of March 21, 2000.
(10) Represents 2,500 shares subject to options held by Mr. Bourque that are
exercisable within 60 days of March 21, 2000.
17
(11) Includes 82,750 shares subject to options that are exercisable within 60
days of March 21, 2000 and 12,843,960 shares subject to the conversion of
Series A Preferred Stock.
ITEM 12. Certain Relationships and Related Transactions.
(a) On September 25, 1996, the Registrant authorized the issuance of
900,888 shares of Common Stock to Touchtunes Juke Box Inc. for a cash
consideration of $477,470. On December 20, 1996, the Registrant authorized the
issuance of 400,000 shares of Common Stock to Oraxium International Inc., in
consideration for agreeing to extend the scope and duration of a non-
competition covenant given to the Registrant and 50,000 shares each, to Pierre
Martineau and Sylvain Duchesne, employees of Touchtunes Juke Box Inc., in
consideration for their non-compete covenants. On December 27, 1996, the
Registrant authorized the issuance of 199,819 shares of Common Stock to
Touchtunes Juke Box Inc. for a cash consideration of $420,698. On April 1,
1997, the Registrant approved the issuance of 17,117 shares to Jacques Bourque
for a cash consideration of $31,565. Jacques Bourque is a director of the
Registrant. Touchtunes Juke Box Inc. is owned 50% by Tony Mastronardi; 16.66%
by Guy Nathan; and 33.33% by Tonino Lattanzi, officers and directors of the
Registrant.
(b) Reference is made to the transactions described in Item 1 (k) above,
between the Canadian Investors, the Registrant and the Registrant's wholly
owned subsidiary, TouchTunes Digital, which information is incorporated herein
by such reference. Based on the present number of shares of the Registrant's
Common Stock issued and outstanding (14,658,644 shares), upon the exchange by
the Canadian Investors of their 12,843,960 Series A Preferred shares of the
Registrant in to 12,843,960 shares of the Registrant's Common Stock, the
Canadian Investors will own approximately 46.7% of the Common Stock of the
Registrant
18
ITEM 13. Exhibits and Reports on Form 8-K
a) Index To Exhibits
Exhibit
Number Description
3. (i) Registrant's Amended and Restated Articles of Incorporation.
Reference is made to Exhibit 8 of Registrant's Form 8-K for the month
of March 1997, which Exhibit is incorporated herein by reference.
3. (ii) Registrant's Bylaws. Reference is made to Exhibit 3 (i) of
Registrant's Registration Statement on Form SB-2, File No. 33-7006,
which Exhibit is incorporated herein by reference.
3.(iii) Certificate of Amendment to Articles of Incorporation.
4. Form of Registrant's Common Stock certificates. Reference is made to
Exhibit 3 (ii) of Registrant's Registration Statement on Form SB-2,
File No. 33-7006, which Exhibit is incorporated herein by reference.
9. Shareholder Agreement between Techno Expres S.A. the majority
shareholder of Registrant and the Selling Shareholders dated March
21, 1997, relative to their shares of Registrant. Reference is made
to Exhibit 7 of Registrant's Form 8-K for the month of March 1997,
which Exhibit is incorporated herein by reference.
10. (i) Agreement of Sale between Touchtunes Jukebox Joint Venture and
Registrant, dated December 9, 1994, relative to transfer of patent
rights in exchange for 1,000,000 shares of Common Stock of
Registrant. Reference is made to Exhibit A of Registrant's Form 10-K
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.
19
Reference is made to Exhibit C annexed to Registrant's Form 8-K for
the month of November 1995, which Exhibit is incorporated herein by
reference.
10. (vii) Subscription Agreement for the purchase of 100 Class B shares and 20
Class C shares of TouchTunes Digital Jukeboxes Inc., dated March 21,
1997. Reference is made to Exhibit 1 of Registrant's Form 8-K for
the month of March 1997, which Exhibit is incorporated herein by
reference.
10. (viii)Escrow Agreement for the deposit of $3,400,000 CDN and 680 Class C
shares of TouchTunes by the Selling Shareholders, dated March 21,
1997. Reference is made to Exhibit 2 of Registrant's Form 8-K for
the month of March 1997, which Exhibit is incorporated herein by
reference.
10. (ix) Agreement between TouchTunes and Registrant, relative to work to be
rendered in connection with Registrant's Digital Jukebox project.
Reference is made to Exhibit 4 of Registrant's Form 8-K for the month
of March 1997, which Exhibit is incorporated herein by reference.
10. (x) Stock Exchange Agreement between Registrant and Selling Shareholders
for the exchange by the Selling Shareholders of their Class B and
Class C shares of TouchTunes for Series A Preferred shares of Regis-
trant. Reference is made to Exhibit 5 of Registrant's Form 8-K for
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.
20
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.
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.
21
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.
10. (xxx) Debenture Put Right Agreement dated July 14, 1999.
10. (xxxi)Addendum Entered into in Montreal on July 14, 1999 to Amend the Put
Right Agreements Entered into on February 11, 1998, March 22, 1999
and April 8, 1999.
16. Letter from prior auditor, Armstrong Gilmour Accountancy Corporation,
relative to the information set forth in Item 4 of Registrant's Form
8-K/A for the month of February 1998, which Exhibit is incorporated
herein by reference.
27. Financial Data Schedule.
b) Reports on Form 8-K
Registrant filed a Form 8-K dated November 25, 1999, reporting on Items
1and 5 during the last quarter of 1999.
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: March 30, 2000 Per: /s/Tony Mastronardi
---------------------------
Tony Mastronardi
President and Director
Dated: March 30, 2000 Per: /s/Guy Nathan
---------------------------
Guy Nathan
Secretary and Director
22
APPENDIX A
TOUCHTUNES MUSIC CORPORATION
FINANCIAL STATEMENTS
INDEX
Page
Independent Auditor's Report...................... (i)
Consolidated Balance Sheet as of December 31, 1999 and 1998 (ii)
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998, 1997..................... (iv)
Consolidated Statements of Stockholders' Equity (Deficiency)
For the years ended December 31, 1999, 1998, 1997. (v)
Consolidated Statements of Cash Flows for the year ended
December 31, 1999, 1998, 1997..................... (vi)
Notes to Consolidated Financial Statements........ (viii)
23
CONSOLIDATED
FINANCIAL STATEMENTS
TOUCHTUNES MUSIC CORPORATION
December 31, 1999
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
TouchTunes Music Corporation
We have audited the accompanying consolidated balance sheets of TouchTunes
Music Corporation (the "Company") as at December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity
(deficiency) and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 1999 and 1998, and the consolidated results of operations and cash
flows of the Company for each of the three years in the period ended December
31, 1999 in conformity with accounting principles generally accepted in the
United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 1 to the
financial statements, the Company requires further financing, which raises
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 1.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Montreal, Canada, /s/Earnst & Young, LLP
March 8, 2000. Chartered Accountants
(i)
<TABLE>
<CAPTION>
TouchTunes Music Corporation
CONSOLIDATED BALANCE SHEETS
As at December 31
[In U.S. dollars]
<S> <C> <C>
1999 1998
$ $
- -------------------------------------------------------------- ----------- -------------
ASSETS [note 1]
Current
Cash and cash equivalents 719,902 1,211,052
Trade accounts receivable 621,841 34,668
Other receivables 291,262 _
Investment tax credits receivable [note 12] 57,174 _
Prepaid expenses and deposits 644,997 _
Inventory 1,736,314 _
Other current assets 305,930 114,701
Current portion of investment in sales-type leases [note 4] 617,760 _
- -------------------------------------------------------------- ----------- -------------
Total current assets 4,995,180 1,360,421
- -------------------------------------------------------------- ----------- -------------
Investment in sales-type leases [note 4] 1,146,668 _
Property, plant and equipment, net [note 6] 7,311,058 2,044,762
Intangibles [note 7] 829,443 1,107,475
Other assets 228,976 149,496
- -------------------------------------------------------------- ----------- -------------
14,511,325 4,662,154
- -------------------------------------------------------------- ----------- -------------
</TABLE>
(ii)
<TABLE>
<CAPTION>
TouchTunes Music Corporation
CONSOLIDATED BALANCE SHEETS
[Cont'd]
<S> <C> <C>
1999 1998
$ $
- -------------------------------------------------------- ------------ --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable and accrued liabilities 2,479,331 580,694
Other liabilities 101,678 _
Income taxes payable 25,457 _
Deficit in jointly controlled company [note 3] _ 81,512
Current portion of capital lease obligations
to jointly controlled company _ 973,274
Due to jointly controlled company [note 3] _ 9,147,802
Current portion of long-term debt [note 10] 1,641,423 _
Current portion of capital lease obligations [note 11] 252,589 _
- -------------------------------------------------------- ------------ --------------
Total current liabilities 4,500,478 10,783,282
- -------------------------------------------------------- ------------ --------------
Other liabilities [note 9] 73,256 _
Long-term debt [note 10] 2,451,098 _
Capital lease obligations [note 11] 271,969 _
Capital lease obligations to jointly controlled company _ 827,395
Deferred tax liability [note 12] 130,569 _
Advance from stockholder [note 8] 2,000,000 _
- -------------------------------------------------------- ------------ --------------
9,427,370 11,610,677
- -------------------------------------------------------- ------------ --------------
Stockholders' equity (deficiency) [note 13]
Series A preferred stock, $.001 par value
Authorized: 15,000,000 shares
Issued & outstanding: 12,843,960 [1998: 100] 12,844 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 26,801,118 3,483,382
Accumulated deficit (21,744,666) (10,446,565)
- -------------------------------------------------------- ------------ --------------
Total stockholders' equity (deficiency) 5,083,955 (6,948,523)
- -------------------------------------------------------- ------------ --------------
14,511,325 4,662,154
- -------------------------------------------------------- ------------ --------------
</TABLE>
Contingencies [notes 1 and 20]
Subsequent events [note 21]
See accompanying notes.
Approved:
/s/Tony Mastronardi /s/Guy Nathan
- -------------------- --------------------
Director Director
(iii)
<TABLE>
<CAPTION>
TouchTunes Music Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31
[In U.S. dollars]
<S> <C> <C> <C>
1999 1998 1997
$ $ $
- -------------------------------------------- ----------- ----------- ------------
Revenues
Jukebox revenues 3,969,165 71,620 _
Advertising revenues 84,000 _ _
- -------------------------------------------- ----------- ----------- ------------
4,053,165 71,620 _
- -------------------------------------------- ----------- ----------- ------------
Expenses [note 17]
Cost of jukebox revenues and
direct operating costs 3,724,423 835,498 _
Research and development services 1,640,271 843,421 841,654
General and administrative 3,370,011 1,624,067 1,059,072
Sales and marketing 3,220,226 1,732,753 316,132
Financial expenses 1,520,807 478,922 84,790
Depreciation and amortization 1,668,971 580,017 423,083
Foreign exchange losses (gains) 235,229 (161,353) _
- -------------------------------------------- ----------- ----------- ------------
15,379,938 5,933,325 2,724,731
- -------------------------------------------- ----------- ----------- ------------
Net loss before share of net loss (income)
in jointly controlled company 11,326,773 5,861,705 2,724,731
Share of net loss (income) in jointly
controlled company (28,672) 131,247 (49,151)
- -------------------------------------------- ----------- ----------- ------------
Net loss and comprehensive loss [note 12] 11,298,101 5,992,952 2,675,580
- -------------------------------------------- ----------- ----------- ------------
Per common share [note 14]
Basic and diluted net loss per share .77 0.41 0.19
</TABLE>
See accompanying notes
(iv)
<TABLE>
<CAPTION>
TouchTunes Music Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Years ended December 31
[In U.S. dollars]
See accompanying notes
Series A Class A
Preferred Stock Common Stock
<S> <C> <C> <C> <C> <C> <C> <C>
Additional Accumulated
Shares Amount Shares Amount paid-in deficit Total
$ $ capital $ $ $
- --------------------------------------- ----------- ------- -------------- -------- ----------- --------------- ---------------
Balances, December 31, 1996 _ _ 12,909,000 12,909 1,430,020 (1,778,033) (335,104)
Issuance of preferred stock
March 15
$1.50 per share 100 1 _ _ 149 _ 150
Issuance of common stock [note 13]
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)
- --------------------------------------- ----------- ------- -------------- -------- ----------- --------------- ---------------
Issuance of preferred stock [note 13]
December 30
$1.87 per share 10,843,860 10,844 _ _ 20,319,736 _ 20,330,579
December 31
$1.50 per share 2,000,000 2,000 _ _ 2,998,000 _ 3,000,000
Net loss 1999 (11,298,101) (11,298,101)
- --------------------------------------- ----------- ------- -------------- -------- ----------- --------------- ---------------
Balances, December 31, 1999 12,843,960 12,844 14,658,644 14,659 26,801,118 (21,744,666) 5,083,955
- --------------------------------------- ----------- ------- -------------- -------- ----------- --------------- ---------------
</TABLE>
(v)
<TABLE>
<CAPTION>
TouchTunes Music Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31
[In U.S. dollars]
<S> <C> <C> <C>
1999 1998 1997
$ $ $
- ---------------------------------------------- ------------ ------------- -------------
OPERATING ACTIVITIES
Net loss (11,298,101) (5,992,952) (2,675,580)
Adjustments to reconcile net loss to net cash
used in operating activities:
Share of net loss (income) from jointly
controlled company (28,672) 131,247 (49,151)
Depreciation and amortization 1,668,971 580,017 423,083
Write-off of capital assets 12,456 _ _
Changes in operating assets and liabilities:
Accounts and other receivables (629,860) (34,668) _
Other assets (115,052) _ _
Prepaid expenses (79,480) (264,197) 21,306
Accounts payable and accrued liabilities 899,239 537,816 26,763
Investment in sales-type leases (1,764,428) _ _
- ---------------------------------------------- ------------ ------------- -------------
Cash used in operating activities (11,334,927) (5,042,737) (2,253,579)
- ---------------------------------------------- ------------ ------------- -------------
INVESTING ACTIVITIES
Assumption of cash on acquisition [note 3] 543,995 _ _
Investment in jointly controlled company _ _ (584)
Purchases of jukeboxes for leasing _ _ _
Increase in costs of intangibles (287,397) (134,554) (251,409)
Purchase of other capital assets (496,942) (275,835) _
- ---------------------------------------------- ------------ ------------- -------------
Cash used in investing activities (240,344) (410,389) (251,993)
- ---------------------------------------------- ------------ ------------- -------------
</TABLE>
(vi)
<TABLE>
<CAPTION>
TouchTunes Music Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS [Cont'd]
Years ended December 31
[In U.S. dollars]
<S> <C> <C> <C>
1999 1998 1997
$ $ $
- ---------------------------------------------------- ----------- ------------ ------------
FINANCING ACTIVITIES
Increase in amounts due to jointly- controlled
company 8,982,421 6,663,405 2,484,397
Increase in other liabilities 101,700 _ _
Increase (decrease) in advance from stockholder 2,000,000 _ (9,863)
Proceeds from issue of common stock _ _ 31,565
Proceeds from issue of preferred stock _ _ 150
- ---------------------------------------------------- ----------- ------------ ------------
Cash provided by financing activities 11,084,121 6,663,405 2,506,249
- ---------------------------------------------------- ----------- ------------ ------------
Net increase (decrease) in cash (491,150) 1,210,279 677
Cash, beginning of year 1,211,052 773 96
- ---------------------------------------------------- ----------- ------------ ------------
Cash, end of year 719,902 1,211,052 773
- ---------------------------------------------------- ----------- ------------ ------------
Non-cash investing and financing activities
The following were exchanged for common stock:
Due to jointly controlled company 20,330,579 _ _
Purchase of digital shares for preferred shares 3,000,000 _ _
Advances from stockholders _ _ 898,168
Non-competition agreement _ _ 1,000,000
Accounts payable _ _ 125,235
- ---------------------------------------------------- ----------- ------------ ------------
23,330,579 _ 2,023,403
- ---------------------------------------------------- ----------- ------------ ------------
The following were acquired under capital lease
from the jointly controlled company:
Inventory 1,736,161 _ _
Jukeboxes for leasing 3,263,242 1,800,669 _
- ---------------------------------------------------- ----------- ------------ ------------
4,999,403 1,800,669 _
- ---------------------------------------------------- ----------- ------------ ------------
</TABLE>
See accompanying notes
(vii)
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
1. BASIS OF FINANCIAL STATEMENT PRESENTATION AND GOING CONCERN ASSUMPTION
The financial statements of the Company have been prepared in accordance with
accounting principles generally accepted 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.
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 its ability to obtain further financing, as well as achieving profitable
operations and generating positive cash flow from operations.
Management is currently negotiating further financing which, if successfully
completed, management believes will be sufficient to allow the Company to
operate into the foreseeable future. The outcome of these negotiations cannot
be predicted at this time.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
TouchTunes Music Corporation (the "Company") is involved in the digital
distribution of 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. The Company is also developing its
technology for other music-on-demand applications.
Principles of consolidation
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.
(viii)
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Cont'd]
Acquisition
On December 30, 1999, the Company acquired the remaining 50% interest of
TouchTunes Digital held by others .note 3.. 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.
Note 3 to the financial statements summarizes the effect of the investment on
the Statements of Operations.
Utilization 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.
Inventory
Inventory consists of jukeboxes and related parts. The Company periodically
evaluates the carrying value of its inventory and makes any adjustments
necessary. Inventories are stated at the lower of cost or market, with cost
determined using the average cost for the year.
Property, plant and equipment
Jukeboxes are acquired by the Company for leasing or sale to its customers.
Jukeboxes acquired for leasing under operating leases are depreciated on a
straight-line basis over an estimated economic life of five years, commencing
with commercial operation of the jukeboxes.
Other fixed assets, including items financed through capital leases, are
recorded at cost less applicable research and development tax credits,
including, when applicable, salaries directly related to their construction.
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Cont'd]
Depreciation is provided on the following basis:
Furniture and equipment 20% declining balance
Vehicles 20% declining balance
Computer equipment 30% declining balance and straight-line
over 5 years
Computer software 30% declining balance
Computer operating system Straight-line over 5 years
Digitized music library Straight-line over 5 years
PC sound card rights Straight-line over 5 years
Jukeboxes for promotion or testing Straight-line over 5 years
Jukebox spare parts Straight-line over 5 years
Leasehold improvements Term of lease
Foreign currency translation
The currency of measurement used in the preparation of these consolidated
financial statements is the U.S. dollar. The wholly-owned subsidiary,
TouchTunes Digital, uses the Canadian dollar as the currency of measurement.
Monetary assets and liabilities denominated in foreign currencies are
translated into U.S. dollars at rates of exchange prevailing at the balance
sheet date and non-monetary items are translated at historic rates. Revenues
and expenses are translated into U.S. dollars at rates of exchange in effect at
the related transaction dates, except depreciation of assets, which is
translated at the same historical exchange rates as the corresponding assets.
Exchange gains and losses arising from the translation of foreign currency
items are included in the determination of net earnings.
Advertising costs
The Company expenses the costs of advertising as incurred. Advertising expense
for the year was $248,000 [1998: $251,000, 1997: $229,000].
Debt issue costs
Debt issue costs are expensed as incurred.
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Cont'd]
Cash equivalents
The Company considers all highly liquid investments purchased with a maturity
of three months or less to be cash equivalents.
Intangibles
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. The SOP provides guidance
that requires capitalization of certain costs incurred during an internal-use
software development project. Costs that are considered to be related to
research and development activities and costs of certain data conversion
activities should be expensed as incurred. Similarly, training, maintenance
and general and administrative or overhead costs should be expensed as
incurred.
Costs related to the conceptual formation and design of internally developed
software were expensed as research and development in prior years. In 1999, in
accordance with the SOP, the Company has capitalized $12,523 of internal
software development costs.
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 stockholders' 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
$287,000 [1998: $135,000, 1997: $251,000] were capitalized.
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Cont'd]
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 systems. The agreements were effective January 1, 1997, and
cover the succeeding five years. In 1999, the Company expensed the remaining
net non-competition balance of $400,000 (included in depreciation and
amortization) due to management's intended changes to the computer operating
system. In prior years, the costs were amortized on a straight-line basis over
the five-year life of the agreements.
Goodwill
Goodwill is amortized on a straight-line basis over periods not exceeding 5
years.
Intangibles are amortized as described above. The Company continually
evaluates whether events and circumstances have occurred that indicate the
remaining useful lives of intangible assets may warrant revision or that the
remaining balance may not be recoverable. The Company uses an estimate of
undiscounted future cash flows over their remaining useful lives to assess
whether they are recoverable. If management's assessment of other facts and
circumstances pertaining to the recoverability of intangible assets were to
change from the current assessment, the Company would adjust the carrying
values as appropriate and charge such costs to operations.
Revenue recognition
Effective November 1, 1999, the Company formally implemented changes to its
business approach by offering to sell, as well as lease, its jukeboxes. As a
result of these changes, all jukeboxes leased subsequent to November 1, 1999,
are accounted for as sales-type leases. Leases entered into prior to November
1, 1999, continue to be accounted for as operating leases, in accordance with
Statement of Financial Accounting Standards ("SFAS") 13.
Revenue from sales and sales-type lease contracts is recognized upon receipt of
the unit by the customer. Rental revenue from operating leases is recognized
over the term of the leases as it is earned.
The Company also generates advertising revenue, which is recognized in the
period in which it is earned.
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Cont'd]
Warranty expense
The Company provides an extensive 5-year warranty on all the jukeboxes sold or
leased. The warranty is provided for equally over the 5-year period, based on
the estimated average warranty cost per jukebox. As at December 31, 1999, the
Company has provided for approximately $126,800 in warranty costs [1998: nil].
Income taxes
The Company uses the liability method to account for income taxes as required
by SFAS No. 109, "Accounting for Income Taxes." Under this method, deferred
tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities. Deferred tax
assets and liabilities are measured using enacted tax rates and laws that will
be in effect when the differences are expected to reverse.
Net loss per share
Net loss per share is computed using the weighted-average number of shares of
common stock outstanding during the period.
Stock-Based Compensation
SFAS No 123, "Accounting for Stock-Based Compensation," encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to
account for stock-based compensation awards to employees and directors using
the intrinsic value method prescribed in Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, compensation cost for stock options awarded to
employees and directors is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of grant over the amount an employee
or director must pay to acquire the stock.
Business Segments
As at December 31, 1999, the Company is managed as one business segment and, as
such, the Company has determined that it does not have separately reportable
operating segments.
The Company maintains offices in both the U.S. and Canada. For the period
ended December 31, 1999, all of the Company's revenue was earned in the U.S.
and $3,800,000 of the Company's assets were held in Canada, with the balance
held in the U.S.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Cont'd]
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
Reclassification
Certain balances have been reclassified to conform to the 1999 presentation.
Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
The Financial Accounting Standards Board has issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" and SFAS No. 137, "Deferral
of Effective Date." SFAS No. 133 requires all derivatives to be recorded on
the balance sheet at fair value and provides a comprehensive and consistent
standard for the recognition and measurement of derivatives and hedging
activities. As required, the Company plans to adopt this statement upon its
applicable effective date in fiscal 2001. Management has not yet determined
the impact of this new standard on the consolidated financial position or
results of operations of the Company.
Comparative Figures
Certain figures in the 1998 financial statements have been reclassified to
conform with the basis of presentation used in 1999.
3. INVESTMENT IN SUBSIDIARY
Convertible Debentures
During 1998 and 1999, Sofinov Societe Financiere d'Innovation Inc. ("Sofinov"),
and Societe Innovatech du Grand Montreal, (the "Canadian Investors") subscribed
for an aggregate principal amount of $20,330,579 of debentures ("Debentures")
which were issued by TouchTunes Digital. The Company also 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 the Debentures for the issuance by the Company of its
Series A preferred stock, convertible at the option of the holder, share for
share, into the Company's Common Stock.
On December 30, 1999, the Canadian Investors exercised their Debenture Put
Right and converted all their outstanding Debentures into 10,843,860 Series A
preferred shares of the Company.
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
3.INVESTMENT IN SUBSIDIARY [Cont'd]
Exchangeable Shares and Voting Rights
Pursuant to an agreement with the Canadian Investors on December 31, 1999, the
Company was required to issue Series A preferred stock in exchange for the
Canadian Investors' Class B and Class C common shares, representing a 50%
interest in TouchTunes Digital. As a result of this transaction, TouchTunes
Digital became a wholly-owned subsidiary of the Company.
The allocation of the purchase price is as follows:
- -------------------------------------------------------------
Preferred Shares issued $3,000,000
Less: Assets acquired 10,505,305
Liabilities Assumed (7,767,460) 2,737,845
- -------------------------------------------------------------
Goodwill $262,155
- -------------------------------------------------------------
Sources of Revenues
TouchTunes Digital's revenues are derived from various services provided to the
Company, as well as interest earned on its balance due from the Company. Some
interest revenue has also been earned through the investment of surplus funds.
In addition, TouchTunes Digital earns interest at a rate of 15% on jukeboxes
leased to the Company under a capital master lease agreement.
The Company is charged interest on the intercompany balance payable to
TouchTunes Digital at a rate equal to the Canadian prime rate plus 1.5%. The
adjusted rate as at December 31, 1999, was 8.00%.
All intercompany revenues and expenses subsequent to December 30, 1999, were
eliminated on consolidation.
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
3.INVESTMENT IN SUBSIDIARY [Cont'd]
Analysis of Investment
For the years ended December 31, 1999, 1998 and 1997, the results of TouchTunes
Digital's operations were as follows (in U.S. dollars):
1999 1998 1997
$ $ $
- ----------------------------------------------------------------------
[from February 7]
Services fees 3,476,820 2,073,418 1,619,556
Interest income 1,611,386 441,523 _
Foreign exchange gain (loss) 118,828 (113,880) _
- ----------------------------------------------------------------------
Total Revenue 5,207,034 2,401,061 1,619,556
Expenses (net of Research
and Development tax credits) 5,082,386 2,708,425 1,373,515
- ----------------------------------------------------------------------
Income (loss) from operations 124,648 (307,364) 246,041
Income tax recovery (provision
for income taxes) (67,304) 44,870 (101,127)
- ----------------------------------------------------------------------
Net Income (loss) 57,344 (262,494) 144,914
- ----------------------------------------------------------------------
The following unaudited pro forma information gives effect to the acquisition
as if it had occurred at January 1, 1998. The pro forma information does not
necessarily reflect the results of operations of the Company that would have
been achieved if the acquisition had been consummated at that time.
1999 1998
$ $
- -------------------------------------------------------
Revenue 4,092,580 468,534
Net Loss 11,378,395 5,914,136
Loss per Share 0.78 0.40
- -------------------------------------------------------
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
4. INVESTMENT IN SALES-TYPE LEASES
Total minimum lease payments to be received under the sales-type leases are as
follows:
$
- ---------------------------------------------------------------
2000 617,794
2001 617,794
2002 617,794
2003 617,794
2004 564,331
- ---------------------------------------------------------------
3,035,507
Less: Unearned interest income 25% (1,271,079)
Less: Current portion (617,760)
- ---------------------------------------------------------------
1,146,668
- ---------------------------------------------------------------
5. JUKEBOXES UNDER OPERATING LEASES
The following is a schedule of minimum future receipts under operating leases:
$
- -------------------------------------------------------
2000 3,419,364
2001 3,419,364
2002 3,419,364
2003 3,389,004
2004 1,793,310
- -------------------------------------------------------
15,440,406
- -------------------------------------------------------
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
6. PROPERTY, PLANT AND EQUIPMENT
Accumulated
Cost Depreciation Net
$ $ $
- --------------------------------------------------------------------------
1999
Jukeboxes for leasing 5,042,349 718,913 4,323,436
Computer equipment 1,099,091 392,793 706,298
Computer software 503,974 163,960 340,014
Leasehold improvements 55,873 9,054 46,819
Jukebox test units 64,334 12,127 52,207
Digitized music library 423,457 64,808 358,649
PC sound card rights 270,605 76,125 194,480
Furniture and equipment 272,513 77,108 195,405
Jukeboxes for promotion 80,387 24,116 56,271
Computer operating system 360,000 354,000 6,000
Jukebox spare parts 494,705 95,506 399,199
Computer equipment under capital lease 797,228 239,168 558,060
Vehicles 82,467 8,247 74,220
- --------------------------------------------------------------------------
9,546,983 2,235,925 7,311,058
- --------------------------------------------------------------------------
1998
Jukeboxes for leasing 1,800,669 89,050 1,711,619
Computer equipment 47,890 23,393 24,497
Furniture and equipment 38,852 3,885 34,967
Jukeboxes for promotion 80,387 8,039 72,348
Computer software 5,417 812 4,605
Computer operating system 360,000 282,000 78,000
Jukebox spare parts 131,919 13,193 118,726
- --------------------------------------------------------------------------
2,465,134 420,372 2,044,762
- --------------------------------------------------------------------------
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
7. INTANGIBLES
Accumulated
Cost Depreciation Net
$ $ $
- ----------------------------------------------------------------
1999
Patents 1,281,620 714,332 567,288
Non-competition agreements 1,000,000 1,000,000 _
Goodwill [note 3] 262,155 _ 262,155
- ----------------------------------------------------------------
2,543,775 1,714,332 829,443
- ----------------------------------------------------------------
1998
Patents 994,222 486,747 507,475
Non-competition agreements 1,000,000 400,000 600,000
- ----------------------------------------------------------------
1,994,222 886,747 1,107,475
- ----------------------------------------------------------------
8. ADVANCE FROM STOCKHOLDER
The advance from a principal stockholder is due on demand and is non-interest
bearing. [see note 21]. The principal stockholder intends to convert this
advance into preferred stock of the Company on terms to be mutually agreed.
9. OTHER LIABILITIES
Other liabilities consist of financing totalling $73,256 (CDN$105,782) obtained
by the Company in connection with the purchase of computer software. The
financing bears interest at 9.6% and is payable in equal monthly installments
of $4,625 expiring in June 2001. The current portion of this financing is
$46,266 and the long-term portion is $26,990.
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
10.LONG-TERM DEBT
Long-term debt at December 31 consists of the following:
Maturity 1999 1998
- -----------------------------------------------------------------------------
Small Business Loan ("SBL") (CDN$166,667)(ii) 2001 115,421 _
Term Loan ("TL")(CDN$333,333) (iii) 2001 230,840 _
CED Term Loan (CDN$500,000)(iv) 2004 346,260 _
Jukebox Term Loan (v) 2002 3,400,000 _
- -----------------------------------------------------------------------------
4,092,521 _
- -----------------------------------------------------------------------------
Less: Current portion 1,641,423 _
- -----------------------------------------------------------------------------
2,451,098 _
- -----------------------------------------------------------------------------
Long-term debt consists of term loan facilities with a major Canadian chartered
bank, which are collateralized by charges on present and future assets of the
Company. The terms of the loans are as follows:
i. The SBL, TL and CED Loan are collateralized by a guarantee in the amount
of $1,211,911, in favour of the bank, collateralized by a first charge on
movable property, both corporeal and non-corporeal.
ii. Funds received under the Small Business Loans Program sponsored by the
Government of Canada were to be used to finance up to 90% of the costs of
acquisition and installation of new equipment and site improvements. The
SBL bears interest at the Canadian prime rate of the bank plus 3.00%,
representing a rate of 9.50% as at December 31, 1999, and is payable in
monthly principal installments of $5,771, expiring in August, 2001. This
loan is collateralized by a Certificate of Guarantee issued by the
Government of Canada, and by a first charge in the amount of $173,130 on
all of the equipment.
iii.The TL is to be used to finance up to 50% of the costs of acquisition and
installation of new equipment and site improvements. This loan bears
interest at the Canadian prime rate of the bank plus 3.75%, representing a
rate of 10.25% as at December 31, 1999, and is payable in monthly principal
installments of $11,542, expiring in August 2001. The loan is
collateralized by a charge in the amount of $346,260 on all the Company's
equipment, tools and office furniture.
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
10.LONG-TERM DEBT [Cont'd]
iv. The CED facility is a term loan under the Loan Program for Technology Firms
sponsored by Canada Economic Development and is to be used to finance up to
75% of the Company's research, development and marketing costs for 1998 and
1999. The loan bears interest at the Canadian prime rate of the bank plus
3.50%, representing a rate of 10% as at December 31, 1999. Principal
repayment will be in thirty-six monthly payments of $9,618 commencing
February 2001. The loan is collateralized by a certificate of guarantee
issued by Canada Economic Development covering 80% of the net loss risk and
by a charge in the amount of $346,260 on all moveable property.
v. On April 19, 1999, the Company successfully negotiated a term loan facility
aggregating $10,400,000 with a major Canadian chartered bank for financing
the cost of manufacturing jukeboxes. The security provided to the Bank by
the Company was in the form of charges on past, present and future assets
of the Company. As at December 31, 1999, an aggregate of $3,400,000 has
been disbursed by the bank in 5 tranches. The facility bears interest at
the U.S. prime rate of the bank plus 2.55% representing a rate of 11.55% as
at December 31, 1999. Additional compensation must be paid to the bank each
year equal to .5% of the Company's annual gross revenues.
The loan is also collateralized by a certificate of guarantee issued jointly
by Investissement Quebec and the Export Development Corporation covering
67% of the net loss risk; and a charge on movable property in the amount of
$10,400,000. Principal payments commence six months from the date of
disbursement and are payable in twenty-four monthly installments of $79,667
beginning February 2000, $35,500 beginning March 2000, $16,833 beginning
May 2000 and $9,667 beginning June 2000. The remaining $7,000,000 will be
disbursed in 2000 subject to conditions for additional capital investment
being met. [see note 21].
The principal payments of long-term debt are as follows:
$
- --------------------------------------------------------
2000 1,641,423
2001 1,944,306
2002 381,753
2003 115,420
2004 9,619
- --------------------------------------------------------
4,092,521
- --------------------------------------------------------
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
11.CAPITAL LEASE OBLIGATIONS
Future minimum lease payments under the capital leases are as follows:
$
- ---------------------------------------------------------------------------
2000 280,391
2001 167,451
2002 94,936
2003 27,778
- ---------------------------------------------------------------------------
570,556
Less: Interest portion at rates varying between 6.6% and 7.5% (45,998)
Less: Current portion (252,589)
- ---------------------------------------------------------------------------
271,969
- ---------------------------------------------------------------------------
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
12.INCOME TAXES
There is no provision for income taxes or income tax recovery as the Company
has had continuous losses and there is no assurance that there will be future
taxable income which might offset the current loss carryforwards.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
1999 1998
Non - U.S. U.S. U.S.
$ $ $
- ---------------------------------------------------------------------------
Deferred tax assets
Net operating loss carryforwards 128,550 5,650,764 1,241,843
Capitalized start-up costs - 1,644,135 2,099,028
Accruals and reserves - 183,288 -
Excess of tax basis of financing 56,535 - -
fees over accounting value
Capital loss carryforwards 10,769 - -
Intercompany interest - - 170,711
Excess of tax basis of - - 46,194
property, plant and equipment over
accounting value
- ---------------------------------------------------------------------------
Total deferred tax assets 195,854 7,478,187 3,557,776
- ---------------------------------------------------------------------------
Deferred tax liabilities
Excess of accounting value of 257,100 119,600 -
property, plant and equipment over
tax basis
Foreign exchange 34,998 - 54,860
Other 34,325 - -
- ---------------------------------------------------------------------------
Total deferred tax liabilities 326,423 119,600 54,860
- ---------------------------------------------------------------------------
Net deferred tax assets
(liabilities)
Deferred tax assets 195,854 7,478,187 3,557,776
Deferred tax liabilities 326,423 119,600 54,860
- ---------------------------------------------------------------------------
(130,569) 7,358,587 3,502,916
Valuation allowance - (7,358,587) (3,502,916)
- ---------------------------------------------------------------------------
Net deferred tax assets
(liabilities) (130,569) - -
- ---------------------------------------------------------------------------
Realization of deferred tax assets is dependent on future earnings, the timing
and amount of which are uncertain. Accordingly, the net deferred tax assets
have been fully offset by a valuation allowance. The valuation allowance
increased by $3,855,671 [1998: $1,970,950] for the year.
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
12.INCOME TAXES [Cont'd]
The Company has net operating loss carryforwards of approximately $16,619,000
for U.S. federal income tax purposes. In 1999, the Company issued shares which
resulted in an ownership change for U.S. federal income tax purposes. Pursuant
to section 382 of the Internal Revenue Code of 1986, as amended, the Company's
net operating losses which were incurred prior to and including the date of the
ownership change will be restricted in terms of their deductibility for
subsequent taxation years. The net operating losses expire as follows:
$
- --------------------------------------------------------
2006 1,000
2009 28,000
2010 290,000
2011 246,000
2012 842,000
2018 2,328,000
2019 12,884,000
- --------------------------------------------------------
16,619,000
- --------------------------------------------------------
The Company has loss carryforwards of approximately $442,000 (CDN$657,000) for
Canadian federal income tax purposes, all of which expire in 2005. The future
tax benefit pertaining to these losses has been recognized for accounting
purposes as a deferred tax asset.
Also, the Company has capital loss carryforwards of approximately $37,500
(CDN$56,000), without expiry, for Canadian federal and provincial income tax
purposes. The future tax benefit pertaining to these losses has been
recognized for accounting purposes as a deferred tax asset.
Investment Tax Credits
Investment tax credits recoverable represent non-refundable Quebec investment
tax credits earned on labor costs attributed to research and development
activities.
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
13.CAPITAL STOCK
Authorized
50,000,000 Class A common shares, $.001 par value, authorized. Each common
share has the right to one vote per share.
15,000,000 Series A preferred shares, $.001 par value, authorized. Each share
of Series A preferred stock can be converted into one share of Class A common
stock at the option of the holder. Each Series A preferred share has the right
to one vote per share.
Issued
1999 1998
$ $
- ----------------------------------------------------------------------
14,658,644 Class A common stock [1998: 14,659 14,659
14,658,644]
12,843,960 Series A preferred stock 12,844 1
[1998: 100]
- ----------------------------------------------------------------------
27,503 14,660
- ----------------------------------------------------------------------
The holders of the Class A common stock and Series A preferred stock are
entitled to receive any dividends or distributions declared by the Company, on
an equal basis, without any distinction as to class.
Capital transactions from 1997 through 1999 are as follows:
Common Stock
On September 25, 1996, the Board of Directors approved the issuance of 75,000
shares of Class A common stock to repay accounts payable of $40,000 which were
issued on April 21, 1997.
On September 25, 1996, the Board of Directors approved the issuance of 900,888
shares of Class A common stock to repay advances from stockholders totaling
$477,470 which were issued on April 21, 1997.
On December 20, 1996, the Board of Directors approved the issuance of 500,000
shares of Class A common stock to repay accounts payable totaling $1,000,000
which were issued on April 21, 1997.
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
13.CAPITAL STOCK [Cont'd]
On December 27, 1996, the Board of Directors approved the issuance of 199,819
shares of Class A common stock to repay advances from stockholders totaling
$420,698 which were issued on April 21, 1997.
On October 7, 1997, the Company issued 17,117 shares of Class A common stock
for total proceeds of $31,565.
On October 7, 1997, the Company issued 56,820 shares of Class A common stock to
repay accounts payable totaling $85,230.
On August 31, 1998, the Board of Directors authorized the amendment to the
Company's amended and Restricted Articles of Incorporation, increasing the
authorized Class A voting common stock to 50,000,000 shares from 25,000,000 in
1997.
Preferred Stock
On August 20, 1999, the Board of Directors authorized the amendment to the
Company's Amended and Restricted Articles of Incorporation increasing the
authorized Series A preferred stock to 15,000,000 shares from 10,000,000 in
1998.
On December 30, 1999, the Company issued 10,843,860 Series A Preferred Shares
pursuant to Debenture Put Right Agreements with the Canadian Investors [see
notes 2 & 3].
On December 31, 1999, the Company issued 2,000,000 Series A Preferred Shares
pursuant to a share exchange agreement with the Canadian Investors [see notes 2
& 3] .
Stock Options
On August 31, 1998, the Board of Directors authorized a Stock Option Plan (the
"Plan"), which provides for the grant to employees, including officers and
directors, of incentive stock options. As of December 31, 1999, options to
purchase an aggregate of 878,918 shares of Class A common stock were
outstanding under the Plan, with vesting provisions ranging up to four years.
Options granted under the Plan are exercisable for a period of ten years. As
at December 31, 1999, an aggregate of 621,082 shares of Class A common stock
were reserved for future issuance under the Plan. The exercise price of these
options range from $2.78 per share to $5.98 per share [see note 15].
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
14.BASIC AND PRO FORMA LOSS PER SHARE
Pro forma net loss per share has been computed as described below and gives
effect to the conversion of preferred shares not included above using the
as-if-converted method.
The calculation of basic, diluted and pro forma net loss per share is as
follows:
1999 1998 1997
$ $ $
- ----------------------------------------------------------------------
Loss to common shareholder 11,298,101 5,992,952 2,675,580
- ----------------------------------------------------------------------
Weighted average shares 14,658,644 14,658,644 2,675,580
outstanding used to
compute basic and diluted
net loss per share
Basic and diluted net loss .77 .41 .19
per share
Pro forma net loss 11,298,101 _ _
Weighted average number of 14,658,644 _ _
shares of common stock used
in computing basic and
diluted net loss per share
[from above]
Adjustments to reflect the 35,189 _ _
effect of the assumed
conversion of preferred
stock from the date of
issuance
Weighted average shares 14,693,833 _ _
outstanding used in
computing pro forma basic
net loss per share
Pro forma basic and diluted .77 _ _
net loss per share
- ----------------------------------------------------------------------
The options to purchase Class A common stock were not included in the
computation of the diluted loss per share because the effect would be
antidilutive.
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
15. STOCK-BASED COMPENSATION PLANS
The Company accounts for options granted to employees and directors under the
Plan using APB No.25, under which no compensation cost has been recognized for
stock options granted. Had compensation cost for these stock options been
determined consistent with SFAS No. 123, the Company's pro forma loss per share
would have been as follows:
1999 1998
$ $
- --------------------------------------------------------
Net loss attributable 11,298,101 5,992,952
to common
stockholders
Pro Forma loss 11,606,793 6,060,938
Basic loss per share .77 .41
Pro Forma loss per .79 .41
share
- --------------------------------------------------------
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. Additional awards in future years are
anticipated.
During 1999 the stockholders of the Company approved the adoption of the Plan
which authorizes the granting of stock options (either non-qualified stock
options or incentive stock options), the exercise of which would allow up to an
aggregate of 878,918 shares of the Company's common stock to be acquired by the
holders of the stock options.
Under the Plan, non_qualified stock options have been granted to directors and
employees for terms of up to four years at exercise prices of not less than
100% of the fair market value of the shares at the date of grant, exercisable
in whole or in part at stated times from the date of grant. At December 31,
1999, options to purchase 149,735 shares of common stock were exercisable with
respect to the Plan. Option activity during 1999 and 1998 is summarized as
follows:
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
15. STOCK-BASED COMPENSATION PLANS [Cont'd]
Shares Weighted
Average
Exercise
Price
$
- ------------------------------------------------------------
1999
Outstanding, beginning of year 1,108,478 2.84
Granted _ _
Exercised _ _
Expired _ _
Canceled/ surrendered (235,060) 2.78
- ------------------------------------------------------------
Outstanding, end of year 878,918 2.85
- ------------------------------------------------------------
Exercisable, end of year 149,735 2.85
- ------------------------------------------------------------
Weighted average fair value of 1.83
options granted
1998
Outstanding, beginning of year _ _
Granted 1,110,630 2.84
Exercised _ _
Expired _ _
Canceled/surrendered (2,152) 2.78
- ------------------------------------------------------------
Outstanding, end of year 1,108,478 2.84
- ------------------------------------------------------------
Exercisable, end of year 16,435 2.78
- ------------------------------------------------------------
Weighted average fair value of 1.83
options granted
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
15. STOCK-BASED COMPENSATION PLANS [Cont'd]
The fair value of options at the date of grant was estimated using the Black-
Scholes pricing model with the following weighted average assumptions.
- ---------------------------------------------------------
1999 1998
% %
- ---------------------------------------------------------
Expected life (years) 5.00 5.00
Risk-free interest rate 8.25 8.25
Volatility 1.012 1.012
Dividend yield 0.00 0.00
- ---------------------------------------------------------
The following table summarizes information with respect to stock options
outstanding at December 31, 1999:
Options outstanding Options exercisable
- ---------------------------------------------------------------------------
Range of Number Weighted Weighted Number Weighted
exercise outstan- average average exercisable average
prices ding remaining exercise exercise
contractual price price
life
- ---------------------------------------------------------------------------
2.78 - 5.98 878,918 .58 years 2.85 149,735 2.85
- ---------------------------------------------------------------------------
16. GOVERNMENT GRANT AND TAX CREDITS
Government grants on salaries of $148,068 [1998: $175,250, 1997: nil] are
recorded as a reduction of the cost of salaries and are recognized as the
Company fulfills hiring requirements. Research and Development tax credits
earned have been presented as a reduction of the related expenses or capital
cost.
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
17. RELATED PARTY TRANSACTIONS
The following related party transactions are not disclosed elsewhere in the
financial statements and were concluded between the Company and its subsidiary:
Expenses
In 1999, TouchTunes Digital charged the Company $3,480,538 [1998: $2,053,787,
1997: $1,365,937] for research and development, as well as various managerial
and ongoing technical support services. The total profit on these services,
which is included in the total fees amounts to $124,731 [1998: $75,425, 1997:
$80,493]. TouchTunes Digital charged the Company $1,017,842 [1998: $320,882,
1997: $84,790] in interest on amounts owing during 1999, as well as $554,129
[1998: $44,609, 1997: nil] in interest relating to the capital master lease
agreement. The transactions described above are measured at the exchange
amount, being the consideration established and agreed to by the Company and
TouchTunes Digital.
18. RELATED PARTY TRANSACTIONS
Contract for operating lease
The Company occupies office facilities under an operating lease that expires in
2008. Future minimum rentals are as follows.
$
- --------------------------------------------------------
2000 248,207
2001 250,207
2002 252,207
2003 173,970
2004 166,323
Thereafter 526,689
- --------------------------------------------------------
1,617,603
- --------------------------------------------------------
Agreement with principal supplier
The Company has provided an inventory security deposit in the amount of
CDN$750,000 to the supplier for the value of the parts and materials that the
supplier must procure to support the purchase orders issued for 2000 delivery.
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
19.FINANCIAL INSTRUMENTS
Fair value of financial instruments
For the Company's short-term financial instruments, including cash and term
deposits and accounts payable and accrued liabilities, the carrying amounts
approximate the fair value due to their short maturities. The carrying value
of the investment in sales-type leases, capital leases payable and the long-
term debt approximates their fair value.
Credit Risk
The Company sells and leases its products directly to jukebox operators who
place the jukeboxes in various locations throughout the United States. Credit
is extended based on an evaluation of each operator's financial condition and
generally, collateral is not required. Estimated credit losses and returns
have been provided for in the consolidated financial statements and have
generally been within management's expectations. As at December 31, 1999, the
Company has an allowance for doubtful accounts of $100,000. No allowance
existed as at December 31, 1998.
Currency Risk
As at December 31, 1999, $1,312,000 of the Company's consolidated net
liabilities were denominated in Canadian dollars. The equivalent Canadian
dollar balance as at December 31, 1999 amounted to $1,895,000.
20. 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 this claim.
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
[In U.S. dollars]
21.SUBSEQUENT EVENTS
Loan Facilities
In February and March 2000, the Company received an additional $2,544,000 in
jukebox financing from its bank, bringing the aggregate jukebox financing
proceeds received by the Company to $5,944,000.
Additional Advances
In January and February 2000, Sofinov advanced additional amounts aggregating
$2,000,000 to the Company. The advances are payable on demand. The principal
stockholder intends to convert this advance into preferred stock of the Company
on terms to be mutually agreed.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 719902
<SECURITIES> 0
<RECEIVABLES> 621841<F1>
<ALLOWANCES> 100000
<INVENTORY> 1736314
<CURRENT-ASSETS> 4995180
<PP&E> 7311058<F2>
<DEPRECIATION> 2235925
<TOTAL-ASSETS> 14511325
<CURRENT-LIABILITIES> 4500478
<BONDS> 4617079
0
12844
<COMMON> 14659
<OTHER-SE> 5056452
<TOTAL-LIABILITY-AND-EQUITY> 14511325
<SALES> 3969165<F3>
<TOTAL-REVENUES> 4053165<F4>
<CGS> 3724423<F5>
<TOTAL-COSTS> 6944649<F5>
<OTHER-EXPENSES> 8435289
<LOSS-PROVISION> 100000
<INTEREST-EXPENSE> 1520807
<INCOME-PRETAX> (11326773)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11326773)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11298101)
<EPS-BASIC> (.77)
<EPS-DILUTED> (.77)
<FN>
<F1>Net of allowance for doubtful accounts
<F2>Net of accumulated depreciation
<F3>Includes jukebox sales, leasing and music service revenue
<F4>Includes $84,000 advertising revenue
<F5>Includes cost of revenue & direct operating costs
</FN>
</TABLE>
