UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
Commission File No.: 333-7006
TOUCHTUNES MUSIC CORPORATION
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Nevada 87-0485304
------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
1800 E. Sahara, Suite 107
Las Vegas, Nevada 89104
------------------------------------------------------------
(Address of principal executive offices, including zip code)
Issuer's telephone number, including area code (702)-792-7405
Issuer's facsimile number, including area code (702)- 734-7500
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. (x) Yes ( ) No
The total number of shares of Class A Common Stock outstanding on June 30, 2000
was 14,658,644.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying unaudited financial statements for the quarter ended June 30,
2000, have been prepared in accordance with the instructions to Form 10-QSB
and, therefore, do not include all information and footnotes necessary for a
complete presentation of financial position, results of operations, cash flows
and stockholders' equity for the quarter then ended, in conformity with
generally accepted accounting principles. In the opinion of management, all
adjustments considered necessary for a fair presentation of the results of
operations and financial position have been included and all such adjustments
are of a normal recurring nature. Operating results for the quarter ended June
30, 2000, are not necessarily indicative of the results that can be expected
for the year ending December 31, 2000. For further information, refer to the
financial statements and footnotes thereto included in the Registrants Annual
Report on Form 10-KSB for the year ended December 31, 1999.
FINANCIAL STATEMENTS
(UNAUDITED)
TOUCHTUNES MUSIC CORPORATION
June 30, 2000
Index
Page
Balance Sheets..............................2
Statements of Operations....................4
Statements of Cash Flows....................5
Notes to Financial Statements...............6
1
TouchTunes Music Corporation
CONSOLIDATED BALANCE SHEETS
[In U.S. dollars]
June 30, December 31,
2000 1999
---------------------------------------------------------------------------
[unaudited] [Note*]
ASSETS
Current
Cash and cash equivalents 10,799,703 719,902
Trade accounts receivable 1,344,306 621,841
Other receivables 87,850 291,262
Investment tax credits receivable 55,791 57,174
Prepaid expenses and deposits 648,096 644,997
Inventory 2,988,249 1,736,314
Other current assets 130,773 305,930
Current portion of investment in sales- 696,983 617,760
type leases
---------------------------------------------------------------------------
Total current assets 16,751,751 4,995,180
---------------------------------------------------------------------------
Investment in sales-type leases 5,540,593 1,146,668
Property, plant and equipment, net 6,703,705 7,311,058
Intangibles 751,218 829,443
Other assets 167,448 228,976
---------------------------------------------------------------------------
29,914,715 14,511,325
---------------------------------------------------------------------------
See accompanying notes.
* Note: The balance sheet as at December 31, 1999, has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
2
TouchTunes Music Corporation
CONSOLIDATED BALANCE SHEETS
[Cont'd]
[In U.S. dollars]
June 30, December 31,
2000 1999
---------------------------------------------------------------------------
[unaudited] [Note*]
LIABILITIES AND
STOCKHOLDERS' EQUITY/(DEFICIENCY)
Current liabilities
Accounts payable and accrued liabilities 2,602,961 2,479,331
Other liabilities 8,840 101,678
Income taxes payable 28,832 25,457
Current portion of long-term debt 3,227,106 1,641,423
Current portion of capital lease 252,589
obligations 230,632
---------------------------------------------------------------------------
Total current liabilities 6,098,371 4,500,478
---------------------------------------------------------------------------
Other liabilities 47,348 73,256
Long-term debt (note 3) 3,526,795 2,451,098
Capital lease obligations 156,723 271,969
Deferred tax liability 130,569 130,569
Advance from stockholder (note 4) -- 2,000,000
---------------------------------------------------------------------------
9,959,806 9,427,370
---------------------------------------------------------------------------
Series B preferred stock (note 4), $.001
par value
Authorized: 10,000,000
Issued and outstanding 8,888,889
[1999: Nil]
Redeemable, retractable and
convertible
Redeemable at $34,487,671 20,307,136 --
---------------------------------------------------------------------------
Stockholders' equity/(deficiency)
Series A preferred stock, $.001 par value
Authorized: 15,000,000 shares
Issued & outstanding: 12,843,960 [1999:
12,843,960] 12,844 12,844
Class A common stock, $.001 par value
Authorized: 50,000,000 shares
Issued & outstanding: 14,658,644 [1999:
14,658,644] 14,659 14,659
Additional paid-in capital 26,329,885 26,801,118
Accumulated deficit (26,709,615) (21,744,666)
---------------------------------------------------------------------------
(352,227) 5,083,955
---------------------------------------------------------------------------
29,914,715 14,511,325
---------------------------------------------------------------------------
Contingent Liabilities (note 6).
Subsequent Events (note 9).
See accompanying notes.
* Note: The balance sheet as at December 31, 1999, has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
3
<TABLE>
<CAPTION>
TouchTunes Music Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
[In U.S. dollars]
<S> <C> <C> <C> <C>
Quarter Six months Quarter Six months
ended ended Ended ended
June 30, June 30, June 30, June 30,
[Unaudited] 2000 2000 1999 1999
---------------------------------------- ------------- ------------- ------------ ------------
Revenues
Jukebox revenues 3,925,380 7,533,868 374,447 582,337
Advertising revenues 44,000 100,000 -- --
---------------------------------------- ------------- ------------- ------------ ------------
3,969,380 7,633,868 374,447 582,337
---------------------------------------- ------------- ------------- ------------ ------------
Expenses
Cost of jukebox revenues and direct 2,455,396 5,238,393 302,957 380,424
operating costs
Research and development 427,801 1,058,290 341,571 598,041
General and administrative 994,534 1,942,708 848,331 1,898,540
Sales and marketing 1,341,498 2,710,933 610,182 1,195,130
Financial expenses 268,040 491,504 289,349 545,488
Depreciation and amortization 606,128 1,142,541 209,322 432,843
Foreign exchange losses 42,385 14,448 60,188 122,948
---------------------------------------- ------------- ------------- ------------ ------------
6,135,782 12,598,817 2,661,900 5,173,414
---------------------------------------- ------------- ------------- ------------ ------------
Net loss before share of net earnings in 2,166,402 4,964,949 2,287,453 4,591,077
jointly controlled
company
Share of net income in jointly -- -- 34,460 43,849
controlled company
---------------------------------------- ------------- ------------- ------------ ------------
Net loss and comprehensive loss 2,166,402 4,964,949 2,252,993 4,547,228
---------------------------------------- ------------- ------------- ------------ ------------
Dividends and accretion of mandatorily 471,233 471,233 -- --
redeemable Series
B preferred stock
Net loss attributable to common 2,637,635 5,436,182 2,252,993 4,547,228
stockholders
---------------------------------------- ------------- ------------- ------------ ------------
Per Common share (note 5)
Basic and diluted net loss per share 0.18 0.37 0.15 0.31
---------------------------------------- ------------- ------------- ------------ ------------
</TABLE>
See accompanying notes.
4
<TABLE>
<CAPTION>
TouchTunes Music Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
[In U.S. dollars]
<S> <C> <C> <C> <C>
Quarter Six months Quarter Six months
ended ended ended Ended
June 30 2000 June 30, June 30 June 30,
[Unaudited] 2000 1999 1999
-------------------------------------------- ------------- --------------- --------------- ---------------
OPERATING ACTIVITIES
Net loss (2,166,402) (4,964,949) (2,252,993) (4,547,228)
Adjustments to reconcile net loss to net
cash used in operating activities:
Share of net income from jointly
Controlled company -- -- (34,460) (43,849)
Depreciation and amortization 606,128 1,142,541 209,322 432,843
Changes in operating assets and
liabilities:
Accounts and other receivables (287,221) (517,670) (98,323) (171,383)
Inventory (1,036,214) (1,251,935) -- --
Prepaid expenses (44,255) (3,099) 44,113 (27,864)
Accounts payable and accrued 286,626 33,897 59,236
liabilities (8,601)
Decrease of other current assets 29,491 175,157
-------------------------------------------- ------------- --------------- --------------- ---------------
Cash used in operating activities (2,611,847) (5,386,058) (2,140,942) (4,298,245)
-------------------------------------------- ------------- --------------- --------------- ---------------
INVESTING ACTIVITIES
Investment in sales-type leases (2,302,545) (4,473,148) (1,280,714) (1,438,212)
Increase in costs of intangibles (52,258) (68,899) (596) (125,112)
Purchase of other capital assets (33,528) (387,794) (224,070) (329,090)
Decrease in other assets 34,796 61,528
-------------------------------------------- ------------- --------------- --------------- ---------------
Cash used in investing activities (2,353,535) (4,868,313) (1,505,380) (1,892,414)
-------------------------------------------- ------------- --------------- --------------- ---------------
FINANCING ACTIVITIES
Increase in amounts due to jointly-
controlled Company -- -- 3,713,818 4,973,987
Proceeds from private placement 15,000,000 15,000,000 -- --
Share issue costs (164,097) (164,097) -- --
Decrease in other liabilities (13,277) (25,908) -- --
Increase in advance from stockholder -- 3,000,000 -- --
Decrease in capital lease obligations (70,828) (137,203) -- --
Increase in long term debt 836,000 3,380,000 -- --
Repayment of long term debt (467,529) (718,620) -- --
-------------------------------------------- ------------- --------------- --------------- ---------------
Cash provided by financing activities 15,120,269 20,334,172 3,713,818 4,973,987
-------------------------------------------- ------------- --------------- --------------- ---------------
Net increase/(decrease) in cash 10,154,887 10,079,801 67,496 (1,216,672)
Cash, beginning of period 644,816 719,902 (73,116) 1,211,052
-------------------------------------------- ------------- --------------- --------------- ---------------
Cash, end of period 10,799,703 10,799,703 (5,620) (5,620)
-------------------------------------------- ------------- --------------- --------------- ---------------
</TABLE>
See accompanying notes.
5
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
June 30, 2000
[In U.S. dollars]
1. OPERATIONS OF THE COMPANY
TouchTunes Music Corporation (the "Company") is involved in the digital
distribution of interactive music to music-on-demand applications. The first
such music-on-demand application developed by the Company is its digital
jukebox. The Company is presently commercializing its digital jukebox, which
utilizes digitally compressed audio technology to securely distribute music
titles through a proprietary distribution network. Revenues are derived from
selling and leasing the digital jukebox units, as well as providing music
services and advertising through its digital jukebox network. The Company is
also developing its technology for other music-on-demand applications.
2. BASIS OF FINANCIAL STATEMENT PRESENTATION AND GOING CONCERN ASSUMPTION
The consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
item 310 of Regulation S-B on a going concern basis which presumes the
realization of assets and the discharge of liabilities in the normal course of
business for the foreseeable future. Accordingly, these financial statements
do not include any adjustments to amounts and classifications of assets and
liabilities that might be necessary should the Company be unable to continue
its business in the normal course.
The Company has incurred operating losses since the inception of operations.
The Company's ability to continue as a going concern is dependent principally
upon its ability to obtain further financing, as well as achieving profitable
operations and generating positive cash flow from operations.
The consolidated financial statements at June 30, 2000 and for the three and
six months ended June 30, 2000, as well as the financial statements of
operations for the three and six months ended June 30, 1999, are unaudited and
reflect all adjustments (consisting only of normal recurring accruals) which
are, in the opinion of management, necessary for a fair presentation of the
Company's financial position and operating results for the interim periods.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the
United States for complete financial statements.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with management's
discussion and analysis of financial condition and results of operations,
contained in the Company's annual report on Form 10-KSB for the fiscal year
ended December 31, 1999.
The results of operations for the six months ended June 30, 2000, are not
necessarily indicative of the results for the fiscal year ending December 31,
2000, or any other future periods.
6
TouchTunes Music Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
June 30, 2000
[In U.S. dollars]
2. BASIS OF FINANCIAL STATEMENT PRESENTATION AND GOING CONCERN ASSUMPTION
[Cont'd]
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary TouchTunes Digital Jukebox, Inc. ("TouchTunes
Digital"). All significant intercompany balances and transactions since
acquisition of control have been eliminated on consolidation.
On December 30, 1999, the Company acquired the remaining 50% interest of
TouchTunes Digital held by others. The purchase method of accounting has been
followed. Intercompany operating transactions before the acquisition of
control remain non-consolidated. Prior to December 30, 1999, the Company had
joint control of TouchTunes Digital and accounted for its investment using the
equity method, recording only the Company's share of net income or loss.
3. LONG TERM DEBT
During the quarter ended June 30, 2000, the Company, through its subsidiary,
utilized $836,000 from its bank term loan facility to pay for jukeboxes
manufactured and delivered to jukebox operators. The total proceeds received
under its jukebox loan facility aggregate to $6,780,000 as at June 30, 2000.
The remaining funds available from its jukebox loan facility is $3,620,000 as
at June 30, 2000 (see note 9).
4. REDEEMABLE PREFERRED STOCK
On May 18, 2000, the Company issued an aggregate of 8,888,889 shares of Series
B Redeemable preferred stock in exchange for $14,000,000 cash and $6,000,000 in
prior advances to the Company. The Series B preferred stock has a cumulative
preferential dividend rate of 9% and are convertible, share for share, into
common stock of the Company at the option of the holders. Each Series B
preferred stock has equal voting rights to each common stock. The Series B
preferred stock is redeemable by the holders no earlier than January 1, 2004,
at a premium of 20% including the 9% dividend per annum over the subscription
price paid which would be $34,487,671. The redemption premium for the quarter
was $471,233 and was recorded as a reduction to paid-in capital. The Company
has an option to redeem the Series B preferred stock after June 30, 2002, or
earlier, if certain performance targets are met. The transaction included
2,222,222 shares issued to a Company shareholder, CDP Innovation-Sofinov in
exchange for the $5,000,000 previously advanced to the Company. The remaining
6,666,667 shares were issued to a new investor, CDP TelecomMedia, in exchange
for proceeds of $14,000,000 cash and $1,000,000 previously advanced to the
Company.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
June 30, 2000
[In U.S. dollars]
5. BASIC AND DILUTED LOSS PER SHARE
The options to purchase Class A common stock and Series A and B preferred stock
were not included in the computation of the diluted loss per share because the
effect would be antidilutive.
6. CONTINGENT LIABILITIES
During 1999, the Company received a letter claiming certain prior rights to the
Company's trade name. Based on information presently available, management
does not expect any material adverse result and believes the claim is without
merit. Included in accounts payable and accrued liabilities is management's
best estimate of the legal costs to defend or settle this claim.
7. STOCK OPTION PLAN
On April 19, 2000, the Board of Directors authorized a Long-Term Incentive Plan
(the "Plan"), which provides for the grant to employees, directors, officers,
consultants and outside contractors of various types of stock options and
common stock. Concurrently, the Board of Directors approved the cancellation
of the previous Stock Option Plan approved on August 31, 1998. Stock options
under the previous plan were cancelled and new options were issued at the same
terms for the same number.
On April 19, 2000, the Board of Directors granted stock options to purchase an
aggregate of 2,510,018 shares of Class A common stock, with vesting provisions
ranging up to four years. Options granted under the Plan are exercisable for a
period of ten years. On April 19, 2000 an aggregate of 4,489,982 shares of
Class A common stock were reserved for additional future issuance under the
Plan. The exercise price of these options ranges from $2.0625 per share to
$5.98 per share. The Plan is subject to shareholder approval.
8. ACCOUNTING PRONOUNCEMENTS
Securities and Exchange Commission Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements (SAB101) clarifies certain conditions to be
met in order to recognize revenue. The Company is studying the application of
this new standard but has not yet determined its impact.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25. The Company is required
to adopt the Interpretation on July 1, 2000. The Company is studying the
application of this new standard but has not yet determined its impact.
9. SUBSEQUENT EVENTS
Loan Facilities
In July 2000, the Company received an additional $816,000 in jukebox financing
from its bank, bringing the aggregate jukebox financing proceeds received by
the Company to $7,596,000.
8
10. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform to the
presentation for the current periods.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The discussion and analysis below contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Words such as "anticipates",
"expects", "intends", "plans", "believes", "seeks", "estimates", variations of
such words and similar expressions are intended to identify such forward-
looking statements. These statements are not guarantees of future performance
and are subject to certain risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual results could differ materially from
those expressed or forecasted in any such forward-looking statements as a
result of a number of factors, which are not within the Registrant's control.
Operating Results
The Registrant is involved in the digital distribution of music to
interactive music-on-demand applications. The first such application developed
and commercialized by the Registrant is its Digital Jukebox. The Registrant
currently generates revenues from the U.S. jukebox market.
The Registrant incurred a net loss of $2,166,402 during the quarter ended
June 30, 2000 (the "second quarter"), compared to a net loss of $2,252,993 for
the same period in 1999. The increase in revenues during the quarter was
partially offset by the increase in expenses, resulting in an overall decrease
of 3.8% in net loss. The loss for the six month period ended June 30, 2000 was
$4,964,949, compared to $4,547,228 for the same period in 1999, resulting in an
increase of 9.2%.
Net loss attributable to common shareholders for the second quarter of 2000 was
$2,637,635 and $5,436,182 for the six months ended in June 30, 2000. Included
in these amounts was an amount of $471,233 accrued for dividends and accretion
of mandatorily redeemable Series B preferred stock issued in May 2000 (see
"Liquidity and Capital Resources" for more details on the Series B preferred
stock).
Losses before interest, taxes, depreciation and amortization decreased by 26.3%
to $1,292,234 for the second quarter 2000, compared to $1,754,322 for the
second quarter 1999. Losses before interest, taxes, depreciation and
amortization decreased by 6.7% to $3,330,904, for the six months ended June 30,
2000, compared to $3,568,897 for the same period in 1999.
Revenues
The Registrant generated revenues of $3,969,380 from sales, leases, music
services and advertising with respect to its Digital Jukebox during the second
quarter of 2000, compared to revenue of $374,447 for the same period in 1999.
Revenues for the six months ended June 30, 2000 were $7,633,868, compared to
$582,337 for the same period in 1999. Revenues for the second quarter included
a sales returns allowance of $269,775, compared to no allowance for the second
quarter 1999. The increase in revenues was due to increased advertising
revenue, as well as significant increases in demand for the Digital Jukebox
during the second quarter, as well as for the first six months of 2000. In
addition, the Registrant sold units during the six months in 2000 and accounted
9
for all new lease transactions as capital leases, resulting in revenues
recognized upon the delivery of each Digital Jukebox to the jukebox operators.
The Registrant did not sell any jukeboxes during the six months ended June 30,
1999, and all its leases were accounted for as operating leases, recognizing
revenue as the lease payments came due.
As at June 30, 2000, the Registrant had delivered a total of approximately
2,000 Digital Jukebox units as compared to a total of approximately 535 units
as at June 30, 1999.
The Registrant had advertising revenues of $44,000 during the second
quarter of 2000 and $100,000 for the six months ended June 30, 2000. No
advertising revenues were generated during the same periods in 1999.
Cost of Jukebox Revenues and Direct Operating Costs
Cost of jukebox revenues and direct operating costs increased by
$2,152,439, from $302,957 in the second quarter of 1999, to $2,455,396 in the
second quarter of 2000. For the six months ended June 30, 2000 the cost of
jukebox revenues and direct operating costs increased by $4,857,969 to
$5,238,393 from $380,424 for the same period in 1999. The increases were
primarily a result of the associated costs of all jukeboxes sold and leased
under sales-type leases. For the first six months of 1999, all jukeboxes were
accounted for as operating leases, therefore no related cost of sales was
applicable. In addition, direct operating costs consisting mainly of
communication, transportation, installation and licensing fees, increased in
relation to the greater number of Digital Jukeboxes delivered to jukebox
operators.
Research and Development
Research and development expenses increased by $86,230 from $341,571 in
the second quarter of 1999, to $427,801 in the second quarter of 2000. Research
and development expenses increased by $460,249 to $1,058,290 for the six months
ended June 30, 2000, compared to $598,041 for the same period in 1999. The
increases were primarily due to headcount growth and the resulting increases in
compensation, and benefits to support new projects and the larger network of
Digital Jukeboxes.
General and Administrative
General and administrative costs increased by $146,203, from $848,331 in
the second quarter 1999, to $994,534 in the second quarter of 2000. General and
administrative costs increased by $44,168 from $1,898,540 in the six months
ended 1999, to $1,942,708 for the same period in 2000. The increases were
primarily due to headcount growth and the resulting increases in compensation,
and benefit costs to support the higher levels of business activity.
Sales and Marketing
Sales and marketing costs increased by $731,316, from $610,182 in the
second quarter of 1999, to $1,341,498 in the second quarter of 2000. For the
six months ended June 30, 2000, sales and marketing costs increased by
$1,515,803, to $2,710,933 from $1,195,130 for the same six month period in
1999. The increases were primarily due to expenses related to headcount growth
and infrastructure costs to support increased revenue.
Financial Expenses
Financial expenses decreased by $21,309 from $289,349 in the second
10
quarter of 1999 to $268,040 in the second quarter of 2000. For the six months
ended June 30, 2000, the financial expenses decreased by $53,984, to $491,504
from $545,488 for the same period in 1999. The decreases were due to 1999
amounts having included interest charges charged by the Registrant's
subsidiary, TouchTunes Digital Jukebox Inc. ("TouchTunes Digital") which became
a subsidiary on December 31, 1999. In fiscal 2000, intercompany interest
charges were eliminated upon consolidation. The financial expenses in fiscal
2000 relate to interest on long-term debt obligations by the Registrant and its
subsidiary.
Depreciation and Amortization
Depreciation and amortization costs increased by $396,806 from $209,322 in
the second quarter of 1999, to $606,128 in the second quarter of 2000. In the
six months ended June 30, 2000, depreciation and amortization increased by
$709,698, to $1,142,541, from $432,843 in the same period in 1999. The
increases are primarily due to the growth in the number of jukeboxes under
operating leases, as well as the addition of other fixed assets.
Foreign Exchange Losses
The Registrant experienced a foreign exchange loss of $42,385 during the second
quarter 2000, and a total foreign exchange loss of $14,448 for the six months
ended June 30, 2000, compared to a foreign exchange losses of $60,188 and
$122,948 for the respective second quarter and six months ended June 30, 1999.
Foreign exchange gains/losses result from the company paying certain
expenditures in currencies other than the United States dollar. The main
foreign currency in which the Registrant's subsidiary transacts is the Canadian
dollar.
Share of Net Loss in Jointly Controlled Company
On December 30, 1999, the Company acquired the remaining 50% interest of
TouchTunes Digital held by others. Intercompany operating transactions before
the acquisition of control remain non-consolidated. Prior to December 30,
1999, the Company had joint control of TouchTunes Digital and accounted for its
investment using the equity method, recording only the Company's share of net
income or loss.
Seasonality
The Registrant has experienced lower sales volume during the summer
vacation period between the months of June, July and August, as well as during
national holiday periods. These seasonal fluctuations may result in
significant decreases in the Registrant's results of operations and have
material effects on its financial condition.
Liquidity and Capital Resources
At June 30, 2000 the Registrant had cash and cash equivalents of
$10,799,703. Cash used from operating activities during the six months ended
June 30, 2000 was $5,386,058, which was mainly attributed to the net loss from
operations and the increase in inventory; partially offset by depreciation and
amortization. Cash used by investing activities during the six months ended
June 30, 2000 of $4,868,313, was primarily for the investment in jukebox sales
type leases and the purchase of other capital assets. Cash provided by
financing activities of $20,334,172 was primarily from the issuance of Series B
preferred stock, as well as from long-term jukebox bank financing.
Collectively, the above activity resulted in a net increase of $10,079,801 from
the December 31, 1999 balances of cash and cash equivalents. The Registrant
11
estimates its capital expenditures for the remainder of fiscal year 2000 will
amount to approximately $7,000,000. A portion of the funds required for
capital expenditures will be paid from the Registrant's cash on hand and the
remaining portion will be obtained from available bank financing facilities,
however there can be no assurances that the Registrant or its subsidiary will
be able to satisfy all terms and conditions specified by the bank for the full
or any use of the bank funds.
On May 18, 2000, the Registrant issued an aggregate of 8,888,889 Series B
Redeemable preferred stock in exchange for $14,000,000 in cash and $6,000,000
in prior advances to the Registrant. The Series B preferred stock has a
cumulative dividend rate of 9% and are convertible, share for share, into
common stock of the Registrant at the option of the holders. Each Series B
preferred share has equal voting rights to each common share. The Series B
preferred stock is redeemable by the investor no earlier than January 1, 2004,
at a premium of 20% per annum over the subscription price paid. The Registrant
has an option to redeem the Series B preferred stock after June 30, 2002, or
earlier, if certain performance targets are met. The transaction included
2,222,222 shares issued to Registrant's shareholder, CDP Innovation-Sofinov in
exchange for the $5,000,000 previously advanced to the Registrant. The
remaining 6,666,667 shares were issued to a new investor, CDP TelecomMedia, in
exchange for proceeds of $14,000,000 and $1,000,000 previously advanced to the
Registrant.
Long Term Incentive Plan
On April 19, 2000, the Board of Directors authorized a Long-Term Incentive Plan
(the "Plan"), which provides for the grant to employees, directors, officers,
consultants and outside contractors, various types of stock options and stock.
Concurrently, the Board of Directors approved the cancellation of the previous
Stock Option Plan approved on August 31, 1998. Stock options under the
previous plan were cancelled and new options were issued.
On April 19, 2000, the Board of Directors granted incentive and non-statutory
stock options to purchase an aggregate of 2,510,018 shares of Class A common
stock, with vesting provisions ranging up to four years. Options granted under
the Plan are exercisable for a period of ten years. On April 19, 2000 an
aggregate of 4,489,982 shares of Class A common stock were reserved for
additional future issuance under the Plan. The exercise price of these options
range from $2.0625 per share to $5.98 per share. The plan is subject to
shareholder approval.
Change to Authorized Stockholders' Capital
On April 19, 2000, the Board of Directors approved the amendment to the
Registrant's Amended and Restated Articles of Incorporation authorizing the
issuance of up to 10,000,000 Series B redeemable, retractable, convertible
$0.001 preferred stock (See above "Liquidity and Capital Resources", for
further details on Series B preferred stock).
Product Manufacturing
On June 2, 2000 the Registrant's subsidiary, TouchTunes Digital Jukebox Inc.,
signed an OEM Purchase and Development Agreement (the "Agreement") with Bose
Corporation ("Bose") to continue to develop, manufacture and supply Digital
Jukeboxes according to the specifications and requirements provided to Bose by
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the Registrant and/or its subsidiary. The agreement has a term of three years
and is automatically extended for successive one-year periods, unless either
the Registrant or Bose provides a six month notification prior to the end of
the term or renewal period, of their desire to terminate the Agreement. Bose
has the right to terminate the Agreement prior to the end of its term, should
the Registrant not satisfy certain conditions specified by Bose. There can be
no assurances that the Registrant will be able to satisfy all or any of the
conditions specified by Bose. Consequently, there are no assurances that the
Agreement will not be terminated prior to the end of its term.
Product Sales and Distribution
The Registrant has decided to expand its sales efforts by selling and leasing
its Digital Jukeboxes through existing coin-operated equipment distributors.
The Registrant has recently signed distributor agency agreements with three
distributors to date and expects to sign several others prior to year-end. The
distributors will act as sales agents of the Registrant and will be remunerated
based on the number of units they assist the Registrant in selling or leasing.
The Registrant believes that its agreements with distributors will result in
increased future sales, however, there can be no assurances that such increases
in sales will actually occur.
13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Index To Exhibits
Exhibit
Number Description
3. (i) Registrant's Amended and Restated Articles of Incorporation.
Reference is made to Exhibit 8 of Registrant's Form 8-K for the month
of March 1997, which Exhibit is incorporated herein by reference.
3. (ii) Registrant's Bylaws. Reference is made to Exhibit 3 (i) of
Registrant's Registration Statement on Form SB-2, File No. 33-7006,
which Exhibit is incorporated herein by reference.
3.(iii) Certificate of Amendment to Articles of Incorporation.
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.
4. (i) Second Amended and Restated Articles of Incorporation. . Reference
is made to Exhibit 4.1 of Registrant's Registration Statement on Form
S-8, Filed No. 333-41544 , which Exhibit is incorporated herein by
reference.
4. (ii) Registrant's 2000 Long-Term Incentive Plan. Reference is made to
Exhibit 4.3 of Registrant's Registration Statement on Form S-8, Filed
No. 333-41544 , which Exhibit is incorporated herein by reference.
5. Opinion of Arnold & Porter with respect to the validity of the Common
Stock
being registered. Reference is made to Exhibit 5 of Registrant's
Registration Statement on Form S-8, Filed No. 333-41544, 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
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Form 10-K for the fiscal year ended December 31, 1994, which Exhibit
is incorporated herein by reference.
10. (iv) Agreement between Oraxium International, Inc. and Registrant, dated
January 30, 1995, relative to the acquisition of a computer operating
system. Reference is made to Exhibit A of Registrant's Form 8-K for
the month of March 1995, which Exhibit is incorporated herein by
reference.
10. (v) Agreement between S.G.R.M. Inc. and Registrant, dated March 6, 1995,
relative to the acquisition of patent rights in exchange for
10,000,000 shares of Common Stock. Reference is made to Exhibit B of
Registrant's Form 10-K for the fiscal year ended December 31, 1994,
which Exhibit is incorporated herein by reference.
10. (vi) Amended Agreement between S.G.R.M. Inc., Techno Expres, S.A. and
Registrant, dated November 30, 1995, relative to the acquisition of
patent rights in exchange for 10,000,000 shares of Common Stock.
Reference is made to Exhibit C annexed to Registrant's Form 8-K for
the month of November 1995, which Exhibit is incorporated herein by
reference.
10. (vii) Subscription Agreement for the purchase of 100 Class B shares and 20
Class C shares of TouchTunes Digital Jukeboxes Inc., dated March 21,
1997. Reference is made to Exhibit 1 of Registrant's Form 8-K for
the month of March 1997, which Exhibit is incorporated herein by
reference.
10. (viii) Escrow Agreement for the deposit of $3,400,000 CDN and 680 Class
C shares of TouchTunes by the Selling Shareholders, dated March 21,
1997. Reference is made to Exhibit 2 of Registrant's Form 8-K for
the month of March 1997, which Exhibit is incorporated herein by
reference.
10. (ix) Agreement between TouchTunes and Registrant, relative to work to be
rendered in connection with Registrant's Digital Jukebox project.
Reference is made to Exhibit 4 of Registrant's Form 8-K for the month
of March 1997, which Exhibit is incorporated herein by reference.
10. (x) Stock Exchange Agreement between Registrant and Selling Shareholders
for the exchange by the Selling Shareholders of their Class B and
Class C shares of TouchTunes for Series A Preferred shares of Regis-
trant. Reference is made to Exhibit 5 of Registrant's Form 8-K for
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
15
for the month of March 1997, which Exhibit is incorporated herein by
reference.
10. (xiv) Employment and Non-Competition Agreement between Registrant and Guy
Nathan. Reference is made to Exhibit 10 of Registrant's Form 8-K for
the month of March 1997, which Exhibit is incorporated herein by
reference.
10. (xv) Lease for premises at One Commerce Place, Nun's Island, Verdun
(Quebec), Canada, H3E 1A2 between TouchTunes Digital Jukebox Inc. and
landlord of said premises. Reference is made to Exhibit 10(xv) of
Registrant's Registration Statement on form SB-2, File No. 33-7006,
which Exhibit is incorporated herein by reference.
10. (xvi) OEM Purchase and Development Agreement with Bose Corporation, dated
March 1997. Reference is made to Exhibit 10(xvi) of Registrant's
Registration Statement on Form SB-2, File No. 33-7006, which Exhibit
is incorporated herein by reference.
10. (xvii)Jukebox License Office Certificate, dated March 11, 1997. Reference
is made to Exhibit 10(xvii) of Registrant's Registration Statement on
Form SB-2, File No. 33-7006, which Exhibit is incorporated herein by
reference.
10. (xviii)Jukebox License Agreement with the American Society of Composers
Authors and Publishers, Broadcast Music Inc. and SESAC, Inc., dated
March 11, 1997. Reference is made to Exhibit 10(xviii) of
Registrant's Registration Statement on Form SB-2, File No. 33-7006,
which Exhibit is incorporated herein by reference.
10. (xix) Subscription Agreement dated February 11, 1998, by and among Societe
Innovatech du Grand Montreal, Sofinov Societe Financiere d'Innovation
Inc. and TouchTunes Digital Jukebox Inc. for the purchase of up to an
aggregate of $10,000,000 (US) Debentures. Reference is made to
Exhibit 2 of Registrant's Form 8-K for the month of February 1998,
which Exhibit is incorporated herein by reference.
10. (xx) Debenture Put Right Agreement dated February 11, 1998, by and among
Societe Innovatech du Grand Montreal, Sofinov Societe Financiere
d'Innovation Inc. and Technical Maintenance Corporation. Reference
is made to Exhibit 3 of Registrant's Form 8-K for the month of
February 1998, which Exhibit is incorporated herein by reference.
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.
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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. (xxvi) Debenture dated November 2, 1998, registered in the name of Sofinov
Societe Financiere D'Innovation Inc. in the principal amount of
$700,000.
10. (xxvii) Debenture dated November 2, 1998, registered in the name of
Sofinov Societe Financiere D'Innovation Inc. in the principal
amount of $700,000.
10. (xxviii)Debenture dated November 2, 1998, registered in the name of
Sofinov Societe Financiere D'Innovation Inc. in the principal
amount of $700,000.
10. (xxix) Debenture dated November 2, 1998, registered in the name of
Sofinov Societe Financiere D'Innovation Inc. in the principal
amount of $700,000.
10. (xxx) Debenture dated November 2, 1998, registered in the name of Societe
Innovatech du Grand Montreal in the principal amount of $300,000.
10. (xxxi) Debenture dated November 2, 1998, registered in the name of Societe
Innovatech du Grand Montreal in the principal amount of $300,000.
10. (xxxii) Debenture dated November 2, 1998, registered in the name of Societe
Innovatech du Grand Montreal in the principal amount of $300,000.
10. (xxxiii)Debenture dated November 2, 1998, registered in the name of Societe
Innovatech du Grand Montreal in the principal amount of $300,000.
10. (xxxiv)Debenture Put Right Agreement dated July 14, 1999. Reference is
made to Exhibit 1 of Registrant's Form 8-K for the month of July
1999, which Exhibit is incorporated herein by reference.
10. (xxxv) 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. Reference is made to Exhibit 2 of Registrant's
Form 8-K for the month of July 1999, which Exhibit is incorporated
herein by reference.
10. (xxxvi)Subscription Agreement entered into on May 18, 2000, between
Capital Communications CDPQ Inc., Sofinov Societe Financiere
D'Innovation Inc., and the Registrant. Reference is made to Exhibit
1 of Registrant's Form 8-K for the month of May 2000, which Exhibit
is incorporated herein by reference.
10. (xxxvii) Registration Rights Agreement entered into on May 18, 2000,
between Capital Communications CDPQ Inc., Sofinov Societe
Financiere D'Innovation Inc., and the Registrant. Reference is made
to Exhibit 2 of Registrant's Form 8-K for the month of May 2000,
which Exhibit is incorporated herein by reference.
10. (xxxviii) Voting Trust and Limited Shareholders Agreement entered into on
May 18, 2000, between Capital Communications CDPQ Inc., Sofinov
Societe Financiere D'Innovation Inc., and the Registrant. Reference
is made to Exhibit 3 of Registrant's Form 8-K for the month of May
2000, which Exhibit is incorporated herein by reference.
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10. (xxxix)* OEM Purchase and Development Agreement between TouchTunes
Digital Jukebox Inc. and Bose Corporation dated June 2, 2000, plus
Amendment No.1 between TouchTunes Digital Jukebox Inc. and Bose
Corporation dated August 9, 2000.
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.
23. Consent of Ernst & Young, LLP, Chartered Accountants. Reference is
made to Exhibit 23.1 of Registrant's Registration Statement on Form
S-8, Filed No. 333-41544, which Exhibit is incorporated herein by
reference.
23. (i) Consent of Arnold & Porter (contained in the Opinion, see Exhibit 5).
Reference is made to Exhibit 23.2 of Registrant's Registration
Statement on Form S-8, Filed No. 333-41544, which Exhibit is
incorporated herein by reference.
27. Financial Data Schedule.
* Portions of this Exhibit have been omitted pursuant to a Confidential
Treatment Request, which the Registrant has filed separately with the
Securities and Exchange Commission.
(b) Reports on Form 8-K
Registrant filed a Form 8-K dated June 2, 2000, reporting on Item 1 during
the second quarter of 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TOUCHTUNES MUSIC CORPORATION
Dated: August 11, 2000 Per: /s/ Tony Mastronardi
---------------------------------------
Tony Mastronardi
President and Chief Executive Officer
Dated: August 11, 2000 Per: /s/ Chris Marcolefas
---------------------------------------
Chris Marcolefas
Principal Financial Officer
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