Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to ___________
Commission File No.: 33-55254-447
TOUCHTUNES MUSIC CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 87-0485304
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1800 E. SAHARA AVENUE
SUITE 107
LAS VEGAS, NEVADA 89104
(Address of principal executive offices)
(702) 792-7405
(Registrant's telephone number)
Indicate by a check mark whether the registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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. Yes _X_ No ___
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes__ No _X_.
State the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: AS OF MAY 13, 2005, 14,827,394
SHARES OF CLASS A VOTING COMMON STOCK WERE OUTSTANDING.
TOUCHTUNES MUSIC CORPORATION
INDEX
Page
----
PART I - FINANCIAL INFORMATION:
Item 1. Consolidated Balance Sheets (unaudited) as at March 31, 2005
and December 31, 2004.................................................................... 1
Consolidated Statements of Operations and Comprehensive Loss (unaudited)
for the three-month periods ended March 31, 2005 and 2004................................ 3
Consolidated Statements of Cash Flows (unaudited) for the three-month
periods ended March 31, 2005 and 2004.................................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk and Supplementary Data........ 16
Item 4. Controls and Procedures ................................................................. 16
PART II - OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K......................................................... 16
Signatures....................................................................................... 17
Certifications...................................................................................
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited financial statements for the quarter ended March 31,
2005 have been prepared in accordance with the instructions to Form 10-Q and,
therefore, do not include all information and notes 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 United States. 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 March 31, 2005 are not necessarily indicative of the results that can be
expected for the fiscal year ending December 31, 2005. For further information,
refer to the financial statements and the notes thereto included in the Annual
Report for TouchTunes Music Corporation (the "Company") on Form 10-K, for the
fiscal year ended December 31, 2004. Note that all dollar amounts set forth in
this quarterly report on Form 10-Q are in United States dollars, except where
otherwise indicated, and references herein to "dollars" or "$" are to United
States dollars and references to "CDN" are to Canadian dollars.
TOUCHTUNES MUSIC CORPORATION
FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2005
CONSOLIDATED BALANCE SHEETS
[In U.S. dollars] AS AT As at
MARCH 31, 2005 December 31, 2004
$ $
-------------------------------------------------------------------------------------------------------------
(Note*)
ASSETS (note 5)
CURRENT
Cash and cash equivalents 1,732,065 780,897
Trade accounts receivable, net of provision for 5,935,328 6,597,194
doubtful accounts of $1,156,609 (2004 - $1,095,076)
Other receivables 221,932 415,656
Current portion of discounted receivable 130,254 125,546
Prepaid expenses and deposits 983,526 1,166,821
Inventory 2,737,918 4,284,416
Investment in sales-type leases 447,360 619,806
-------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 12,188,383 13,990,336
-------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 1,801,706 2,021,679
Intangibles 215,890 221,669
Discounted receivable 1,715,401 1,749,784
Other assets 568,879 579,417
-------------------------------------------------------------------------------------------------------------
16,490,259 18,562,885
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
1
TOUCHTUNES MUSIC CORPORATION
CONSOLIDATED BALANCE SHEETS
[CONT'D]
AS AT As at
MARCH 31, 2005 December 31, 2004
$ $
---------------------------------------------------------------------------------------------------------------
(Note*)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities 5,720,873 6,236,795
Income taxes payable 27,995 200,000
Current portion of long-term debt (note 5) 680,962 849,228
Notes payable (note 6)
82,142 482,714
---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 6,511,972 7,768,737
---------------------------------------------------------------------------------------------------------------
Long-term debt (note 5) 291,787 344,693
---------------------------------------------------------------------------------------------------------------
6,803,759 8,113,430
---------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Series A preferred stock, voting and participating, $0.001 par
value
Authorized: 15,000,000 shares
Issued and outstanding: 12,843,960 shares 12,844 12,844
Series B preferred stock, voting and participating, $0.001 par
value
Authorized: 10,000,000 shares
Issued and outstanding: 8,888,889 shares 8,889 8,889
Series C preferred stock, $0.001 par value
Authorized: 30,000,000 shares
Issued and outstanding: 25,000,000 shares 25,000 25,000
Class A voting common stock, $0.001 par value
Authorized: 100,000,000 shares
Issued and outstanding: 14,827,394 shares 14,828 14,828
Additional paid-in capital 9,306,910 9,306,910
Retained earnings
Net of elimination totaling $82,667,696 318,029 1,080,984
---------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 9,686,500 10,449,455
---------------------------------------------------------------------------------------------------------------
16,490,259 18,562,885
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
* Note: The balance sheet as at December 31, 2004 has been derived from the
financial statements at that date but does not include all of the information
and notes required by generally accepted accounting principles in the United
States for complete financial statements.
2
TOUCHTUNES MUSIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(UNAUDITED)
[IN U.S. DOLLARS] THREE MONTH Three month
PERIOD ENDED period ended
MARCH 31, 2005 March 31, 2004
$ $
- --------------------------------------------------------------------------------------------------------
REVENUES
Jukebox sales revenues 5,933,981 4,343,044
Music service revenues 5,091,626 3,516,194
Jukebox leasing and financing revenues 407,382 360,281
Gain on disposal of assets and investment in sales-type leases -- 2,210
- --------------------------------------------------------------------------------------------------------
11,432,989 8,221,729
- --------------------------------------------------------------------------------------------------------
EXPENSES
Cost of jukebox sales revenues 5,985,051 3,291,776
Cost of music service revenues 1,558,233 1,158,914
Sales and marketing 1,888,623 1,128,595
Research and development 1,108,897 935,308
Investment tax credits -- (52,644)
General and administrative 1,176,436 1,227,597
Interest expense 37,428 88,773
Depreciation of property, plant and equipment 315,941 271,423
Amortization of intangibles 67,887 89,286
Foreign exchange losses 57,448 141,334
- --------------------------------------------------------------------------------------------------------
12,195,944 8,280,362
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS AND HOLDERS OF COMMON
STOCK EQUIVALENTS (762,955) (58,633)
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
PER COMMON STOCK AND COMMON STOCK EQUIVALENTS
Basic and diluted net loss per share (note 4) (0.01) (0.00)
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON STOCK AND COMMON STOCK
EQUIVALENTS 93,359,274 93,359,274
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
3
TOUCHTUNES MUSIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
[In U.S. dollars] THREE MONTH Three month
PERIOD ENDED period ended
MARCH 31, 2005 March 31, 2004
$ $
- ---------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss and comprehensive loss (762,955) (58,633)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH USED IN OPERATING ACTIVITIES:
Non-cash portion of cost of
jukebox revenues and direct
operating costs 9,919 35,735
Depreciation and amortization 383,828 360,709
Gain (loss) on disposal of assets 5,873 (2,210)
CHANGES IN OPERATING ASSETS AND
LIABILITIES:
Accounts and other receivables 855,590 (497,380)
Discounted receivables 29,675 --
Prepaid expenses and deposits 183,295 (153,106)
Inventory 1,546,498 (114,553)
Other assets 619 22,112
Accounts payable and accrued liabilities (515,922) 740,918
Proceeds from disposal of investment in
sales-type leases 20,487 22,924
Investment in sales-type leases 152,641 236,089
Income taxes payable (172,005) --
- ---------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 1,737,543 592,595
- ---------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from disposition of
property, plant and equipment -- 3,457
Addition to intangibles (62,108) (40,031)
Purchase of property, plant, and
equipment (102,524) (623,099)
Increase in deferred charges -- (410,916)
- ---------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (164,632) (1,070,589)
- ---------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Decrease in bank indebtedness -- (342,321)
Proceeds of long-term debt -- 1,600,000
Repayment of long-term debt (221,171) (777,636)
Proceeds from notes payable -- 532,245
Repayment of notes payable (400,572) (218,052)
- ---------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (621,743) 794,236
- ---------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 951,168 316,242
Cash and cash equivalents, beginning of
period 780,897 338,614
- ---------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 1,732,065 654,856
- ---------------------------------------------------------------------------------------
SUPPLEMENTARY INFORMATION
Interest paid 34,098 63,987
Income taxes paid 172,005 --
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
4
TOUCHTUNES MUSIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2005
[In U.S. dollars]
1. ORGANIZATION AND 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 were its digital
jukeboxes (the "Digital Jukeboxes"), which utilize digitally compressed audio
technology to distribute music titles through a proprietary distribution
network. The Company is also developing its technology for other music-on-demand
applications.
2. BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States.
The consolidated financial statements at March 31, 2005 and for the three-month
periods ended March 31, 2005 and 2004, 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 in accordance with
accounting principles generally accepted in the U.S. for interim financial
statements. Accordingly, these interim consolidated financial statements do not
include all information and footnotes required by generally accepted accounting
principles for complete financial statements.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and the 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-K, for the
fiscal year ended December 31, 2004. The results of operations for the
three-month period ended March 31, 2005 are not necessarily indicative of the
results for the fiscal year ending December 31, 2005 or any other future
periods.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary TouchTunes Digital Jukebox, Inc. ("TouchTunes
Digital"). All significant inter-company balances and transactions since
acquisition of control have been eliminated on consolidation.
3. WARRANTY PROVISION
The change in the warranty provision recorded in the Company's balance sheet for
the relevant periods was as follows:
THREE MONTH Three month
PERIOD ENDED period ended
MARCH 31, March 31,
2005 2004
$ $
- ------------------------------------------------------------------------------
Balance at the beginning of the 802,489 696,784
period
Charged to cost of jukeboxes 152,962 125,444
Use of provision (144,647) (163,662)
- ------------------------------------------------------------------------------
BALANCE AT THE END OF THE PERIOD 810,804 658,566
- ------------------------------------------------------------------------------
5
4. BASIC AND DILUTED NET LOSS PER SHARE
The calculation of basic and diluted net loss per share for the periods ended
March 31 are as follows:
THREE MONTH Three month
PERIOD ENDED period ended
MARCH 31, 2005 March 31, 2004
- --------------------------------------------------------------------------------
Net loss attributable to common
stockholders and holders of
common stock equivalents (762,955) (58,633)
- --------------------------------------------------------------------------------
Weighted average common shares
and common share equivalents
outstanding used to compute
basic and diluted net loss per
common share 93,359,274 93,359,274
- --------------------------------------------------------------------------------
Basic and diluted net loss per
common share (0.01) (0.00)
- --------------------------------------------------------------------------------
The impact of the conversion of 12,843,960 shares of Series A preferred stock,
voting and participating ("Series A Preferred Stock"), into 38,531,880 shares of
Class A voting common stock ("Common Stock") and 8,888,889 shares of Series B
preferred stock, voting and participating ("Series B Preferred Stock"), into
40,000,000 shares of Common Stock are included in the weighted average common
shares outstanding, using the as-if-converted method, to compute the basic and
diluted net loss per share because they have characteristics similar to the
Common Stock.
The options and warrants to purchase the Company's Common Stock, were not
included in the computation of the diluted net loss per share as the effect
would be anti-dilutive.
5. BANK INDEBTEDNESS AND LONG-TERM DEBT
The Company's bank indebtedness consists of an operating line of credit (the
"Line of Credit") of $4,000,000. The collateralization provided to the bank by
the Company on the Line of Credit and the loans described below is in the form
of charges on past, present and future assets of the Company. The Line of Credit
bears interest at the U.S. prime rate of the bank plus 1.50%, representing a
rate of 7.75% as at March 31, 2005 (December 31, 2004 - 7.25%). The Line of
Credit is also collateralized by a first charge on moveable property in the
amount of $5,160,000 and by a certificate of guarantee issued by Export
Development Canada covering 50 percent of the net loss risk. The Company has
obtained an extension of the Line of Credit to April 30, 2006.
Long-term debt consists of the following:
MATURITY MARCH 31, 2005 December 31, 2004
$ $
-----------------------------------------------------------------
Music Advance Term Loan 2005-2007 972,749 1,193,921
-----------------------------------------------
Total 972,749 1,193,921
Less: Current portion 680,962 849,228
-----------------------------------------------
Total 291,787 344,693
-----------------------------------------------
-----------------------------------------------
6
Long-term debt as at March 31, 2005 consists of a music advance term loan
facility (the "Music Advance Term Loan") with National Bank of Canada (the
"Bank"). The Music Advance Term Loan represents, in the aggregate, $2,000,000
and was entered into in January 2004 for purposes of financing the recoupable
advances made to certain music providers. The security provided to the Bank by
the Company was in the form of charges on past, present and future assets of the
Company. The Music Advance Term Loan bears interest at the U.S. base rate of the
Bank plus 2%, representing a rate of 8.25% as at March 31, 2005 (December 31,
2004 - 7.75%). The Music Advance Term Loan is also collateralized by a
certificate of guarantee issued by La Financiere du Quebec covering 50% of the
net loss risk and a charge on moveable property in the amount of $ 2,400,000.
The Music Advance Term Loan is repayable over the term of the respective music
agreements financed, ranging from one year to five years.
The Company also has available a new term loan facility ("Revolving Credit Term
Loan") in an amount of up to an aggregate of $2,000,000. The Revolving Credit
Term Loan was entered into in December 2004 for purposes of financing certain of
the Company's products sold to its customers. The security provided to the Bank
by the Company was in the form of charges on past, present and future assets of
the Company. The Revolving Credit Term Loan bears interest at the US base rate
of the Bank plus 4.5%, representing a rate of 10.75% as at March 31, 2005. The
Revolving Credit Term Loan is also collateralized by a certificate of guarantee
issued by Export Development Canada covering 50% of the net loss risk and a
second charge on moveable property in the amount of $2,400,000. At March 31,
2005, the Company had not drawn any funds on this loan.
The agreements between the Company and the Bank governing the Music Advance Term
Loan, the Revolving Credit Term Loan and the Line of Credit contain financial
covenants including requirements that the Company maintain a minimum
stockholders' equity, as defined in the agreement, of $8,000,000, and a minimum
debt to equity ratio of 1.5 to 1. As at March 31, 2005, the Company satisfied
these covenants.
The principal payments of long-term debt are as follows:
$
-------------------------
2006 680,962
2007 291,787
-------------------------
972,749
-------------------------
-------------------------
6. NOTES PAYABLE
In October 2003, the Company entered into a loan facility with a lender under
which the Company could borrow up to a maximum of $1,500,000 for purposes of
financing the sale of one of the Company's products, Tune Central. The security
provided to the lender is a first ranking security in the Tune Centrals financed
by the lender. The loan bears interest at the rate of 9.5% and must be repaid
over a period of twelve months.
7. STOCK OPTIONS
Options granted under the Plan are exercisable for a period of ten years, except
for options granted to stockholders beneficially owning 5% or more of the
Company's Common Stock, which are exercisable over a period of five years. On
March 31, 2005, an aggregate of 1,970,256 shares of Common Stock were
7
reserved for future issuance under the Plan. The Plan was approved by
stockholders on February 8, 2001. On September 17, 2004, the Board of Directors
voted unanimously to amend the exercise price on all outstanding stock options
issued under the Plan to $0.40 therefore these stock options issued under the
Plan will be subject to variable stock option plan accounting.
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
common share would have been as follows:
THREE MONTH Three month
PERIOD ENDED period ended
MARCH 31, 2005 March 31, 2004
$ $
-----------------------------------------------
Net loss attributable to holders of
Common Stock and Common Stock
equivalents (762,954) (58,633)
Pro Forma loss (806,271) (132,588)
Basic and diluted loss per share of
Common Stock (0.01) (0.00)
Pro Forma basic and diluted loss per
share of Common Stock (0.01) (0.00)
The fair value of options at the date of grant was estimated using the
Black-Scholes pricing model with the following weighted average assumptions.
MARCH 31, 2005 March 31, 2004
-----------------------------------------------
Average expected life (years) 8.00 8.00
Risk-free interest rate 4.30 3.83
Volatility 96.8 96.8
Dividend yield 0.00 0.00
8. PROPOSED TRANSACTION
The Company filed with the Securities and Exchange Commission a preliminary
Schedule 13E-3 Transaction Statement with respect to a going private transaction
(the "Proposed Transaction") and a preliminary Schedule 14A Proxy Statement
soliciting a stockholders vote on the Proposed Transaction. In connection with
the Proposed Transaction, the Company intends to effect a reverse stock split of
Common Stock at a ratio of one to 2,000. Once the Schedule 13E-3 Transaction
Statement and Schedule 14A Proxy Statement are approved by the SEC and are in
definitive form, the Company will mail copies to all of its stockholders,
describing all of the material terms of the Proposed Transaction, and currently
intends to effect the Proposed Transaction as soon as possible thereafter.
8
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 OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED (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 COMPANY'S CONTROL.
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements, including the notes thereto,
contained in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2004. Note that all dollar amounts set forth in this quarterly
report on Form 10-Q are in United States dollars, except where otherwise
indicated, and references herein to "dollars" or "$" are to United States
dollars and references to "CDN" are to Canadian dollars.
BACKGROUND AND OVERVIEW
The Company was a development-stage company until September 1998. Prior to
September 1998, the Company's financial resources were used to finance the
development of its digital jukeboxes (the "Digital Jukeboxes"), which utilize
digitally compressed audio technology to distribute music titles securely
through a proprietary distribution network. Revenues since September 1998 have
been generated from sales and leases of the Digital Jukeboxes to jukebox
operators in the United States, as well as from the music service contracts
associated with such sales and leases of the Digital Jukeboxes. As at March 31,
2005, the Company had delivered a total of 11,149 Digital Jukeboxes as compared
with 8,235 Digital Jukeboxes delivered as at March 31, 2004. Management intends
to continue its development activities in applying its technologies to other
music-on-demand products and applications to other industries.
The Company plays over 26 million songs to an estimated audience of
approximately 5 million people each month. Management expects the base of
installed Digital Jukeboxes to continue to grow, thereby increasing the number
of plays and the audience exposure. This growth is expected to establish the
Digital Jukeboxes as a significant promotional medium for record labels and
their artists.
Total assets of the Company were approximately $16,490,000 at March 31,
2005, a decrease of approximately $2,073,000 from December 31, 2004. This
decrease was primarily due to a decrease in trade accounts receivable of
approximately $662,000 and a decrease in inventory of approximately $1,546,000.
These decreases were in part offset by an increase in cash, which was primarily
attributable to an increase in the collection of trade accounts receivable.
Total liabilities of the Company also decreased as compared to December 31,
2004, from approximately $8,113,000 to $6,804,000 at March 31, 2005. This is
primarily due to repayments on the Company's Music Advance Term Loan and notes
payable totaling approximately $622,000. In addition, the Company paid income
taxes of approximately $172,000 and recorded a decrease in accounts payable and
accrued liabilities.
9
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2005 COMPARED
TO THE THREE-MONTH PERIOD ENDED MARCH 31, 2004
The Company recorded a net loss of approximately $763,000 for the three-month
("first quarter 2005") period ended March 31, 2005 as compared to a net loss of
approximately $58,000 for the corresponding three-month period ended March 31,
2004 ("first quarter 2004").
REVENUES
Revenues from the sale of Digital Jukeboxes increased by approximately
$1,591,000 from approximately $4,343,000 for the first quarter 2004 to
$5,934,000 for the first quarter 2005. For promotional purposes the Company has
reduced the retail selling price of its Digital Jukeboxes, including Tune
Central, to $6,295 as compared to the comparative 2004 retail selling price of
$7,990 for a Rhapsody model and $7,685 for a Maestro model, including Tune
Central. The Company shipped 1,053 Digital Jukeboxes in the first quarter of
2005 as compared to 555 for the first quarter of 2004. The increase in revenues
from the sale of Digital Jukeboxes is attributable to the increased unit sales
offset by the impact of the aforementioned retail price reduction. In addition,
the Company had a backlog of orders for in excess of 400 digital Jukeboxes as at
March 31, 2005.
Music service revenues grew to approximately $5,092,000 for the first
quarter 2005 as compared with approximately $3,516,000 for the first quarter
2004. This increase in music service revenues resulted from an increase in the
total number of Digital Jukeboxes and the installation of Tune Centrals on the
Company's network, which generate recurring music service revenues.
Digital Jukebox leasing and financing revenues increased to approximately
$407,000 for the first quarter 2005 as compared to $360,000 for the first
quarter 2004. This increase is attributable to the sale of Tune Centrals, which
the Company has leased to customers, offset by a reduction in leasing and
financing revenues on Digital Jukeboxes as many of these leases reach the
expiration of their term.
COST OF JUKEBOX REVENUES
The cost of jukebox revenues increased by approximately $2,693,000, or 82%,
from approximately $3,292,000 in the first quarter 2004 to approximately
$5,985,000 during the first quarter 2005. The increase in cost of jukebox
revenues is due to an increase in the number of Digital Jukeboxes and Tune
Centrals sold in the period as compared to the first quarter 2004.
COST OF MUSIC REVENUES
The cost of music revenues increased by approximately $398,000 or 34%, from
approximately $1,160,000 for the three-month period ended March 31, 2004 to
approximately $1,558,000 for the three-month period ended March 31, 2005. The
increase in the number of Digital Jukeboxes and Tune Centrals sold has resulted
in an increase in the number of plays on the Company's network, thereby
resulting in an increase in the royalties paid to music labels and publishers.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased by approximately $52,000 or
4%, from approximately $1,228,000 in the first quarter 2004 to approximately
$1,176,000 in the first quarter 2005. This decrease is principally attributable
to a decrease in professional fees and the recording of interest revenue on the
amount receivable from Ecast, Inc. offset by higher staff-related costs to
support increased sales growth.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased by approximately $174,000, or
19%, from approximately $935,000 in the first quarter 2004 to approximately
$1,109,000 in the first quarter 2005.
10
This increase in research and development expenses is due to higher
staff-related costs in connection with the ongoing development and design of new
products.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased by approximately $760,000, or 67%,
from approximately $1,129,000 in the first quarter 2004 to approximately
$1,889,000 in the first quarter 2005. This increase is mainly due to two
factors. Firstly an increase in commissions paid to the Company's distributors
of approximately $391,000 and secondly, commissions paid to the Company's
salespeople as a result of the overall increase in unit sales of Digital
Jukeboxes and Tune Centrals. In addition, the Company spent approximately
$175,000 more in marketing and promotional costs in the first quarter 2005 as
compared to the first quarter 2004 to support its sales growth.
INTEREST EXPENSE
Interest expense decreased by approximately $52,000, or 58%, from
approximately $89,000 in the first quarter 2004 to approximately $37,000 in the
first quarter 2005. This decrease is primarily due to the elimination of
interest expense on the Company's Jukebox Term Loan which was repaid in March
2004 and the reduction in use of the Company's Line of Credit, offset by
interest on the Company's Music Advance Term.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased by approximately $24,000,
or 7%, from approximately $360,000 in the first quarter 2004 to approximately
$384,000 in the first quarter 2005. This increase is primarily attributable to
an increase in depreciation expense due to Tune Centrals which are leased to the
Company's customers and recorded as capital assets.
FOREIGN EXCHANGE LOSSES
The Company experienced a foreign exchange loss of approximately $57,000
during the first quarter 2005 as compared to a foreign exchange loss of
approximately $141,000 during the first quarter of 2004. Foreign exchange gains
or losses result from the Company paying certain expenditures in currencies
other than the United States dollar. The main foreign currency in which the
Company's wholly-owned subsidiary, TouchTunes Digital Jukebox, Inc., transacts
is the Canadian dollar.
SEASONALITY
The Company has experienced lower sales volume during the summer vacation
period of June, July and August, as well as during national holiday periods.
These seasonal fluctuations may result in significant decreases in the Company's
results of operations and have material adverse effects on its financial
condition.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes selected financial data (amounts in
thousands):
MARCH 31, 2005 December 31, 2004
-----------------------------------------------
Cash and cash equivalents $ 1,732 $ 781
Total assets $16,490 $18,563
Total current and non-current $ 1,055 $ 1,677
interest-bearing debt
Stockholders' equity $ 9,687 $10,450
11
The Company believes that existing funds, cash generated from operations and
existing sources of and access to financing are adequate to satisfy its working
capital, capital expenditure and debt service requirements for the foreseeable
future.
The Company's funding has come principally from a group of three investors:
Societe Innovatech du Grand Montreal, CDP Capital Technologies (formerly known
as CDP Sofinov) and CDP Capital Communications (formerly known as Capital
Communications CDPQ Inc.). To date, they have collectively invested
approximately $43,000,000 in the Company, which has provided the Company with
sufficient capital resources to finance its start-up activities and to commence
commercial operations. Financing arrangements with the National Bank of Canada
(the "Bank") are another significant source of funding for the Company's
operations.
The Company has a Line of Credit available from the Bank of $4,000,000. The
interest rate on the Line of Credit is the Bank's U.S. base rate plus 1.5%. The
Line of Credit is secured by a first charge on the past, present and future
assets of the Company and is collateralized by a certificate of guarantee issued
by Export Development Canada covering 50% of the net loss risk and a charge on
moveable property in the amount of $5,160,000. The Company has negotiated an
extension of the Line of Credit to April 30, 2006.
In January 2004, the Company entered into a Music Advance Term Loan with
the Bank for an aggregate $2,000,000 for purposes of financing the recoupable
advances made to certain music providers. The Term Loan bears interest at the
U.S. base rate of the Bank plus 3%, representing a rate of 9.25% as at March 31,
2005. The Music Advance Term Loan is also collateralized by a certificate of
guarantee issued by La Financiere du Quebec covering 50% of the net loss risk
and a charge on moveable property in the amount of $2,400,000. The Music
Advance Term Loan is repayable over the term of the respective music agreements
financed, ranging from one to five years.
The Music Advance Term Loan is secured by a lien on the past, present and
future assets of the Company.
The Company also has available a term loan facility ("Revolving Credit Term
Loan") in an amount of up to an aggregate of $2,000,000. The Revolving Credit
Term Loan was entered into in December 2004 for purposes of financing certain of
the Company's products sold to its customers. The security provided to the Bank
by the Company was in the form of charges on past, present and future assets of
the Company. The Revolving Credit Term Loan bears interest at the US base rate
of the Bank plus 4.5%, representing a rate of 10.75% as at March 31, 2005. The
Revolving Credit Term Loan is also collateralized by a certificate of guarantee
issued by Export Development Canada covering 50% of the net loss risk and a
second charge on moveable property in the amount of $2,400,000. At March 31,
2005 the Company had not drawn on this Facility.
The agreements as amended between the Company and the National Bank of
Canada governing the Music Advance Term Loan, the Revolving Credit Term Loan and
the Line of Credit contain financial covenants including requirements that the
Company maintains a minimum net stockholders' equity, as defined in the
agreement, of $8,000,000 and a minimum debt to equity ratio of 1.5 to 1. As at
March 31, 2005, the Company satisfied all of its covenants.
The Company has contractual obligations totaling approximately $2,033,000.
These relate to payments due under the Company's long-term debt obligations
described above, notes payable and operating leases. The operating leases are
primarily related to office space.
12
-----------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
-----------------------------------------------------------------------------------------------------------
TOTAL LESS THAN 1 YEAR(1) MORE THAN 1 YEAR(2)
-----------------------------------------------------------------------------------------------------------
LONG TERM DEBT(3) 972,749 680,962 291,787
-----------------------------------------------------------------------------------------------------------
NOTES PAYABLE 82,142 82,142 --
-----------------------------------------------------------------------------------------------------------
OPERATING LEASES 978,136 363,963 614,173
-----------------------------------------------------------------------------------------------------------
TOTAL CONTRACTUAL CASH
OBLIGATIONS 2,033,027 1,127,067 905,960
-----------------------------------------------------------------------------------------------------------
(1) Refers to "less than 1 year" from April 1, 2005.
(2) Refers to "more than 1 year" from April 1, 2005.
(3) Refers to Music Advance Term Loan.
The Company filed with the Securities and Exchange Commission a preliminary
Schedule 13E-3 Transaction Statement with respect to a going private transaction
(the "Proposed Transaction") and a preliminary Schedule 14A Proxy Statement
soliciting a stockholders vote on the Proposed Transaction. In connection with
the Proposed Transaction, the Company intends to effect a reverse stock split of
Common Stock at a ratio of one to 2,000. Once the Schedule 13E-3 Transaction
Statement and Schedule 14A Proxy Statement are approved by the SEC and are in
definitive form, the Company will mail copies to all of its stockholders,
describing all of the material terms of the Proposed Transaction, and currently
intends to effect the Proposed Transaction as soon as possible thereafter. The
Company expects the cost of acquiring the partial shares, after the proposed
reverse stock split, to be approximately $360,000. The Company expects to
finance this from its existing financial resources.
Cash Flows
The following table summarizes the Company's cash flow activity (amounts in
thousands):
THREE MONTHS Three months
ENDED MARCH ended March
2005 2004
-----------------------------
Net cash provided by operating activities $1,738 $ 593
Net cash used in investing activities (165) (1,071)
Net cash provided by (used in) financing activities (622) 794
OPERATING
Cash provided by operating activities has been and is expected to be the
Company's primary recurring source of funds (see Consolidated Statement of Cash
Flows).
INVESTING
Purchase of property, plant and equipment during the three-month period
ended March 31, 2005 decreased from approximately $623,000 in the first quarter
of 2004 to $103,000 in the first quarter of 2005 due to the discontinuance of
the Company's Tune Central leasing program. During the first quarter 2004, the
Company also incurred costs totaling approximately $411,000 relating to the
settlement of the E-Cast, Inc. litigation.
FINANCING
The Company repaid long-term debt totaling approximately $622,000 in the
first quarter 2005 as compared to approximately $996,000 in the first quarter
2004. The Company did not draw on any of its existing credit facilities in the
first quarter 2005 as compared to approximately $1,600,000 of long-term debt and
$532,000 of notes payable which were drawn in the first quarter 2004.
13
SUMMARY OF CRITICAL ACCOUNTING POLICIES
ALLOWANCE FOR DOUBTFUL ACCOUNTS - METHODOLOGY
The Company evaluates the collectibility of accounts receivable based on a
combination of factors. In circumstances where the Company is aware of a
specific customer's inability to meet its financial obligations (e.g.,
bankruptcy filings, substantial downgrading of credit scores), the Company
records a specific reserve for bad debts against amounts due to reduce the net
recognized receivable to the amount the Company reasonably believes will be
collected. For all other customers, the Company recognizes reserves for bad
debts based on the length of time the receivables are past due based on the
Company's historical experience and the Company's specific experience with that
customer. If circumstances change (i.e., higher than expected defaults or an
unexpected material adverse change in a major customer's ability to meet its
financial obligations to the Company), the Company's estimates of the
recoverability of amounts due could be reduced by a material amount.
WARRANTY PROVISION - METHODOLOGY
The Company provides warranties on all jukeboxes sold or leased for a
period of 2 to 5 years. Estimated costs for warranties are provided based upon
management's best estimate. The adequacy of the warranty provision is reviewed
regularly in light of the Company's past experience and expectation of costs to
be incurred and adjusted accordingly.
REVENUE RECOGNITION
Jukebox sales are recognized when the jukebox is shipped to the customers.
The Company further provides for the estimated cost of product warranties as
described above. Shipping and handling costs are included in the cost of jukebox
revenues and direct operating costs. Revenues generated from music service
contracts and operating leases are recognized as the services are performed.
RISK FACTORS
The following items are representative of the risks, uncertainties and
assumptions that could affect the outcome of the forward looking statements. The
risks described below are not the only ones facing the Company. Additional risks
we are not presently aware of or that we currently believe are immaterial may
also impair our business operations.
WE HAVE HAD LOSSES, AND WE CANNOT ASSURE FUTURE PROFITABILITY.
We reported net income for fiscal year 2004 and operating losses for fiscal
years 2000, 2001, 2002 and 2003 and the three-month period ended March 31, 2005.
We cannot be assured that we will operate profitably, and if we do not, we may
not be able to meet our debt service requirements, working capital requirements,
capital expenditure plans, acquisition or other cash needs. Our inability to
meet those needs could have a material adverse effect on our business, results
of operations and financial condition.
Our credit facilities contain certain covenants and financial tests that
limit the way we conduct business. Our credit facilities contain various
covenants limiting our ability to incur or guarantee additional indebtedness,
pay dividends and make other distributions, make investments and other
restricted payments, make capital expenditures and sell assets. These covenants
may prevent us from raising additional financing, competing effectively or
taking advantage of new business opportunities. Under our credit facilities, we
are also required to maintain specified financial ratios and satisfy certain
financial tests. If we cannot comply with these covenants or meet these ratios
and other tests, it could result in a default under our credit facility, and
unless we are able to negotiate an amendment, forbearance or waiver, we could be
required to repay all amounts then outstanding, which could have a material
adverse effect on our business, results of operations and financial condition.
14
Borrowings under our credit facilities also are secured by liens on
substantially all of our assets and the assets of our subsidiary. If we are in
default under one of these credit facilities, the lender could foreclose upon
all or substantially all of our assets and the assets of our subsidiary. We
cannot assure you that we will generate sufficient cash flow to repay our
indebtedness, and we further cannot assure you that, if the need arises, we will
be able to obtain additional financing or to refinance our indebtedness on terms
acceptable to us, if at all. Any such failure to obtain financing could have a
material adverse effect on our business, results of operations and financial
condition.
We do not own the rights to the music we offer under our music and service
agreements. These rights are obtained through license agreements with music
label companies, music publishing companies and performing rights societies.
There can be no assurances that the Company will be able to renew existing
arrangements with record label companies and publishing companies for the use of
their music. If we are unable to renew these agreements, it could have a
material adverse effect on our business results of operations and financial
condition.
We rely on a few major distributors. A small number of distributors account
for a significant percentage of our jukebox sales revenues. We do not have
long-term agreements with any of these distributors. We cannot be assured that
we will continue to maintain favorable relationships with these distributors or
that they will not be adversely affected by economic conditions. If any of these
distributors reduces or cancels a significant order, it could have a material
adverse effect on our business, results of operations and financial condition.
Our revenues and results of operations are vulnerable to currency
fluctuations. We report our revenues and results of operations in US dollars,
but a significant portion of our expenses is incurred outside of the United
States. Our principal currency exposure is between Canadian and US dollars,
although this exposure is partially mitigated through the entering into forward
foreign exchange contracts. The Company has not designated its forward exchange
contracts as a hedge and accordingly records the derivatives at their fair value
on the consolidated balance sheet with the corresponding gains or losses
included with foreign exchange loss in the consolidated statement of operations.
We cannot accurately predict the impact of future exchange rate fluctuations
between the Canadian dollar and the US dollar or other foreign currencies on
revenues and operating margins, and fluctuations could have a material adverse
effect on our business, results of operations and financial condition.
IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS OR FAIL TO
IMPLEMENT CHANGES TO ADDRESS REPORTABLE CONDITIONS, WE MAY NOT BE ABLE TO REPORT
OUR FINANCIAL RESULTS ACCURATELY.
Effective internal controls are necessary for us to provide reliable
financial reports. We may in the future discover, areas of our internal controls
that need improvement.
PROTECTING AND DEFENDING AGAINST INTELLECTUAL PROPERTY CLAIMS MAY HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Our ability to compete depends, in part, upon successful protection of our
intellectual property. We attempt to protect proprietary and intellectual
property rights through available patent and trademark laws. Despite these
precautions, existing patent and trademark laws afford only limited practical
protection in certain countries. As a result, it may be possible for
unauthorized third parties to copy our applications which could have a material
adverse effect on our business, results of operations and financial condition.
Litigation may also be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets, or to determine the validity and
scope of the proprietary rights of others or to defend against claims or
infringement or invalidity. As such, litigation could result in substantial
costs and the diversion of resources and could have a material adverse effect on
our business, results of operations and financial condition. We cannot assure
you that infringement or invalidity claims will not materially adversely affect
our business, results of operations and financial condition. Regardless of the
validity or the success of the assertion of these claims, we could incur
significant costs and diversion of resources in enforcing our intellectual
property rights or in defending against such claims, which could have a material
adverse effect on our business, results of operations and financial condition.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND
SUPPLEMENTARY DATA
CURRENCY RATE RISK MANAGEMENT
Market risks relating to our operations result primarily from changes in
foreign currency exchange rates. As part of our overall risk management program,
we evaluate and manage our exposure to changes in currency exchange risks on an
ongoing basis. Hedges and derivative financial instruments will be used in the
future, within guidelines approved or to be approved by the Board of Directors
for counterpart exposure, limits and hedging practices, in order to manage our
currency exposure. We have no intention of entering into financial derivative
contracts, other than to hedge a specific financial risk.
Currency Rate Risk
We incur certain operating and manufacturing costs in Canada and are
subject to market risks resulting from fluctuations in foreign currency exchange
rates. Our principal currency exposure is between Canadian and US dollars. We
also enter into forward foreign exchange contracts. The Company has not
designated its forward foreign exchange contracts as a hedge and accordingly
records the derivatives at their fair value on the consolidated balance sheet
with the corresponding gains or losses included with foreign exchange loss in
the consolidated statement of operations. These forward exchange contracts do
not subject us to risk from exchange rate movements because gains and losses on
the contracts offset losses and gains on the transactions being hedged. As at
March 31, 2005, the Company had contract to sell US $2.5 million in exchange for
CDN dollars over a period to June 1, 2005 at a weighted average exchange rate of
CDN $1.1734. The company has recorded a foreign currency loss of approximately
$71,000 in respect of these contracts in its financial results for the
three-month period ended March 31, 2005. These contracts are entered into with a
major financial institution as counterparty. The Company is exposed to credit
loss in the event of nonperformance by the counterparty, which is limited to the
cost of replacing the contracts, at current market rates. The company does not
require collateral or other security to support these contracts. We currently
intend to continue to enter into such contracts to hedge against future material
foreign currency exchange rate risks.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation as of March 31, 2005 that the Company's
disclosure controls and procedures (as defined in Rule 13a-15 of the Exchange
Act) are effective in ensuring that all material information required to be
disclosed in this quarterly report has been made known to them in a timely
fashion. There have been no significant changes in the Company's internal
controls or in other factors, or any corrective actions with regard to
significant deficiencies and material weaknesses that could significantly affect
these controls subsequent to the date of their evaluation.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The exhibits listed on the Index of Exhibits of this quarterly
report are included in this filing or incorporated herein by
reference to other filings, as specified in the Index of
Exhibits.
b. The Company has filed the following report on Form 8-K for the
three month period ended March 31, 2005:
Form 8-K dated March 12, 2005, announcing the resignation of Marc Ferland from
his position as a Director of the Company and as Chairman of the Company's Audit
Committee and a member of the Company's Compensation and Strategic Committees.
16
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TOUCHTUNES MUSIC CORPORATION
Dated: May 16, 2005 By: /s/ John Perrachon
-----------------------
John Perrachon
Chief Executive Officer, President and Director
Dated: May 16, 2005 By: /s/ Matthew Carson
------------------
Matthew Carson
Vice President Finance and
Chief Financial Officer
(Principal Financial Officer)
17