S-4 1 ds4.htm FORM S-4 Form S-4
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As filed with the Securities and Exchange Commission on March 24, 2009

Registration No.             

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

VICTORY ACQUISITION CORP.

(Exact Name of Each Registrant as Specified in Its Charter)

 

 

 

Delaware   6770   20-8218483

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

970 West Broadway, PMB 402

Jackson, Wyoming 83001

(307) 633-2831

 

Jonathan J. Ledecky, President

Victory Acquisition Corp.

970 West Broadway, PMB 402

Jackson, Wyoming 83001

(307) 633-2831

(Address, Including Zip Code, and Telephone Number,

Including Area Code, of Registrant’s Principal Executive Offices)

 

(Name, Address, Including Zip Code, and Telephone Number,

Including Area Code, of Agent for Service)

 

 

Copies to:

David Alan Miller, Esq.

Graubard Miller

The Chrysler Building

405 Lexington Avenue

New York, New York 10174

Telephone: (212) 818-8800

Fax: (212) 818-8881

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer     x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company     ¨

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective and all other conditions to the merger contemplated by the merger agreement described in the included proxy statement/prospectus have been satisfied or waived.

If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box:  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

Title of Each Class of Security Being Registered          Amount Being
Registered
               Proposed Maximum
Offering Price
per Security (1)
               Proposed Maximum
Aggregate
Offering Price
         Amount of
Registration Fee (2)

Shares of common stock(3)

        28,340,561              $9.88              $280,004,742.68              $15,624.26

Shares of common stock(4)

          8,016,265              $9.88                $79,200,698.20                $4,419.40

Total Fee Due

                                      $359,205,440.88              $20,043.66

 

(1) Based on the market price on March 16, 2009 of the common stock of Victory pursuant to Rule 457(f)(1).
(2) Determined in accordance with Section 6(b) of the Securities Act at a rate equal to $55.80 per $1,000,000 of the proposed maximum aggregate offering price.
(3) Represents the shares of common stock that will be issued to the holders of common stock of TouchTunes Corporation (“TouchTunes”) upon consummation of the merger between VAC Merger Sub, Inc., a wholly owned subsidiary of Victory Acquisition Corp. (“Victory”), and TouchTunes.
(4) Represents shares of common stock issuable to the TouchTunes stockholders if certain milestones related to the combined company’s earnings before interest, taxes, depreciation and amortization are achieved.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the SEC, acting pursuant to said Section 8(a), may determine.

 

 

 


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VICTORY ACQUISITION CORP.

970 WEST BROADWAY, PMB 402

JACKSON, WYOMING 83001

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

OF VICTORY ACQUISITION CORP.

TO BE HELD ON APRIL     , 2009

To the Stockholders of Victory Acquisition Corp.:

NOTICE IS HEREBY GIVEN that the special meeting of stockholders of Victory Acquisition Corp. (“Victory”), a Delaware corporation, will be held at 10:00 a.m. eastern time, on April     , 2009, at the offices of Graubard Miller, Victory’s counsel, at The Chrysler Building, 405 Lexington Avenue, 19th Floor, New York, New York 10174. You are cordially invited to attend the meeting, which will be held for the following purposes:

(1) to consider and vote upon a proposal to approve the Agreement and Plan of Reorganization, dated as of March 23, 2009, among Victory, VAC Merger Sub, Inc. (“Merger Sub”) and TouchTunes Corporation (“TouchTunes”) which, among other things, provides for the merger of Merger Sub with and into TouchTunes with TouchTunes being the surviving entity and becoming a wholly owned subsidiary of Victory — this proposal is referred to as the “merger proposal”;

(2) to consider and vote upon separate proposals to approve amendments to the amended and restated certificate of incorporation of Victory to (i) change the name of Victory from “Victory Acquisition Corp.” to “TouchTunes Corporation;” (ii) increase the number of authorized shares of Victory’s common stock from 85,000,000 shares to 300,000,000 shares; (iii) change Victory’s corporate existence to perpetual; (iv) incorporate the classification of directors that would result from the election of directors in the manner described in the director election proposal described below; (v) remove provisions that will no longer be applicable to Victory after the merger; and (vi) make certain other changes in terms, gender and number that Victory’s board of directors believes are immaterial — we refer to these proposals collectively as the “charter amendment proposals”;

(3) to consider and vote upon a proposal to approve the 2009 Stock Incentive Plan (an equity-based performance equity plan) — this proposal is referred to as the “stock plan proposal”;

(4) to elect six directors to Victory’s board of directors, of whom two will serve until the annual meeting to be held in 2010, one will serve until annual meeting to be held in 2011 and three will serve until the annual meeting to be held in 2012 and, in each case, until their successors are elected and qualified — we refer to this proposal as the “director election proposal”;

(5) to consider and vote upon a proposal to adjourn the special meeting to a later date or dates, if necessary, to permit further solicitation and vote of proxies if, based upon the tabulated vote at the time of the special meeting, Victory is not authorized to consummate the merger — this proposal is referred to as the “adjournment proposal.”

These items of business are described in the attached proxy statement/prospectus, which you are encouraged to read in its entirety before voting. Only holders of record of Victory common stock at the close of business on                     , 2009 are entitled to notice of the special meeting and to vote and have their votes counted at the special meeting and any adjournments or postponements of the special meeting.

After careful consideration, Victory’s board of directors has determined that the merger proposal and the other proposals are fair to and in the best interests of Victory and its stockholders and unanimously recommends that you vote or give instruction to vote “FOR” the approval of all of the proposals.

All Victory stockholders are cordially invited to attend the special meeting in person. To ensure your representation at the special meeting, however, you are urged to complete, sign, date and return the enclosed proxy card as soon as possible. If you are a stockholder of record of Victory common stock, you may also cast


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your vote in person at the special meeting. If your shares are held in an account at a brokerage firm or bank, you must instruct your broker or bank on how to vote your shares or, if you wish to attend the meeting and vote in person, obtain a proxy from your broker or bank. If you do not vote or do not instruct your broker or bank how to vote, it will have the same effect as voting against the merger proposal.

A complete list of Victory stockholders of record entitled to vote at the special meeting will be available for ten days before the special meeting at the principal executive offices of Victory for inspection by stockholders during ordinary business hours for any purpose germane to the special meeting.

Your vote is important regardless of the number of shares you own. Whether you plan to attend the special meeting or not, please sign, date and return the enclosed proxy card as soon as possible in the envelope provided. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker to ensure that votes related to the shares you beneficially own are properly counted.

Thank you for your participation. We look forward to your continued support.

 

                    , 2009     By Order of the Board of Directors
   

Eric J. Watson

    Chairman of the Board

IF YOU RETURN YOUR PROXY CARD WITHOUT AN INDICATION OF HOW YOU WISH TO VOTE, YOUR SHARES WILL BE VOTED IN FAVOR OF EACH OF THE PROPOSALS AND YOU WILL NOT BE ELIGIBLE TO HAVE YOUR SHARES CONVERTED INTO A PRO RATA PORTION OF THE TRUST ACCOUNT IN WHICH A SUBSTANTIAL PORTION OF THE NET PROCEEDS OF VICTORY’S IPO ARE HELD. YOU MUST AFFIRMATIVELY VOTE AGAINST THE MERGER PROPOSAL AND DEMAND THAT VICTORY CONVERT YOUR SHARES INTO CASH NO LATER THAN THE CLOSE OF THE VOTE ON THE MERGER PROPOSAL TO EXERCISE YOUR CONVERSION RIGHTS. IN ORDER TO CONVERT YOUR SHARES, YOU MUST TENDER YOUR STOCK TO VICTORY’S STOCK TRANSFER AGENT PRIOR TO THE SPECIAL MEETING OF VICTORY STOCKHOLDERS. YOU MAY TENDER YOUR STOCK BY EITHER DELIVERING YOUR STOCK CERTIFICATE TO THE TRANSFER AGENT OR BY DELIVERING YOUR SHARES ELECTRONICALLY USING DEPOSITORY TRUST COMPANY’S DWAC (DEPOSIT WITHDRAWAL AT CUSTODIAN) SYSTEM. IF THE MERGER IS NOT COMPLETED, THEN THESE SHARES WILL NOT BE CONVERTED INTO CASH. IF YOU HOLD THE SHARES IN STREET NAME, YOU WILL NEED TO INSTRUCT THE ACCOUNT EXECUTIVE AT YOUR BANK OR BROKER TO WITHDRAW THE SHARES FROM YOUR ACCOUNT IN ORDER TO EXERCISE YOUR CONVERSION RIGHTS. SEE “SPECIAL MEETING OF VICTORY STOCKHOLDERS — CONVERSION RIGHTS” FOR MORE SPECIFIC INSTRUCTIONS.


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The information in this proxy statement/prospectus is not complete and may be changed. We may not issue these securities until the registration statement filed with the Securities and Exchange Commission is effective. This proxy statement/prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO AMENDMENT AND COMPLETION, DATED MARCH 24, 2009

PROXY STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS OF

VICTORY ACQUISITION CORP.

PROSPECTUS FOR

UP TO

36,356,826 SHARES OF COMMON STOCK

Victory Acquisition Corp. (“Victory”) is pleased to report that its board of directors and the board of directors of TouchTunes Corporation (“TouchTunes”) have approved an agreement and plan of reorganization among Victory, VAC Merger Sub, Inc. (“Merger Sub”) and TouchTunes Corporation (“TouchTunes”) which, among other things, provides for the merger of Merger Sub with and into TouchTunes with TouchTunes being the surviving entity and becoming a wholly owned subsidiary of Victory. Victory will thereafter operate under the name “TouchTunes Corporation.” The holders of common stock of TouchTunes will receive in the merger 28,340,561 shares of Victory common stock. Additionally, all outstanding TouchTunes’ options shall be cancelled and substituted with options of similar tenor to purchase an aggregate of 6,605,978 shares of Victory common stock, of which options to purchase 4,659,579 shares are vested as of March 23, 2009. The holders of common stock of TouchTunes will also have the right to receive up to an additional 8,016,265 shares of Victory common stock if the combined company’s earnings before interests, taxes, depreciation and amortization (EBITDA) exceeds an aggregate of $50 million for any two consecutive quarters during the period ending on the fifth anniversary of the closing of the merger. We refer to these additional shares as the “EBITDA Shares.” The EBITDA Shares will be issued at the closing of the merger and will be placed in escrow until they are earned. If the EBITDA target is not met, the EBITDA Shares shall be returned to Victory for cancellation. If the EBITDA target is met, the TouchTunes’ options shall also be adjusted to purchase an additional 2,103,523 shares of Victory common stock, of which 1,483,736 EBITDA Shares relate to vested options as of March 23, 2009.

Proposals to approve the merger agreement and the other matters discussed in this proxy statement/prospectus will be presented at the special meeting of stockholders of Victory scheduled to be held on April     , 2009.

Upon completion of the merger, the current holders of common stock of TouchTunes will own approximately 28,340,561 shares of Victory common stock and the current holders of common stock of Victory will own 40,500,000 shares of Victory common stock. See the section entitled “The Merger Proposal — Structure of the Merger.” Of the shares of Victory common stock to be owned by the holders of TouchTunes common stock, 2,834,056 shares, representing 10% of the shares to be issued in the merger, will be placed in escrow to provide a fund to satisfy indemnification obligations under the merger agreement.

Victory’s common stock, units and warrants are currently listed on the NYSE Amex under the symbols VRY, VRY.U and VRY.WS, respectively. The parties intend to seek to have the securities of Victory listed on the Nasdaq Stock Market following consummation of the merger under the symbols             ,             .U and             .WS.

Victory is providing this proxy statement/prospectus and accompanying proxy card to its stockholders in connection with the solicitation of proxies to be voted at the special meeting of stockholders of Victory and at any adjournments or postponements of the special meeting. Unless the context requires otherwise, references to “you” are references to Victory stockholders, and references to “we”, “us” and “our” are to Victory. This proxy statement/prospectus also constitutes a prospectus of TouchTunes for the shares of Victory common stock to be issued to the holders of common stock of TouchTunes pursuant to terms of the merger.

This proxy statement/prospectus provides you with detailed information about the merger and other matters to be considered by the Victory stockholders. You are encouraged to carefully read the entire document and the documents incorporated by reference. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER RISK FACTORSBEGINNING ON PAGE 28.

Victory stockholders — Your vote is very important. Whether or not you expect to attend the special meeting, the details of which are described on the following pages, please complete, date, sign and promptly return the accompanying proxy in the enclosed envelope.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this proxy statement/prospectus. Any representation to the contrary is a criminal offense.

The proxy statement/prospectus statement is dated                     , 2009, and is first being mailed on or about                     , 2009.

This proxy statement/prospectus incorporates important business and financial information about Victory and TouchTunes that is not included in or delivered with this document. This information is available without charge to security holders upon written or oral request. To make this request, or if you would like additional copies of this proxy statement/prospectus or have questions about the merger, you should contact Jonathan J. Ledecky, President, Victory Acquisition Corp., c/o Paul Vassilakos, 590 Madison Avenue, 21st Floor, New York, New York 10022, (212) 521-4399.

To obtain timely delivery of requested materials, security holders must request the information no later than five business days before the date they submit their proxies or attend the special meeting. The latest date to request the information to be received timely is                     , 2009.

Victory consummated its initial public offering (“IPO”) on April 30, 2007. Citigroup Global Markets Inc. (“Citigroup”) acted as lead manager for the IPO and Ladenburg Thalmann & Co. Inc. and Broadband Capital Management LLC acted as co-managers for the IPO. Upon consummation of the merger, the underwriters in Victory’s IPO will be entitled to receive $10,560,000 of deferred underwriting commissions. If the merger is not consummated and Victory is required to be liquidated, the underwriters will not receive any of such funds.


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TABLE OF CONTENTS

 

     Page

Summary of the Material Terms of the Merger

   1

Questions and Answers For Victory Stockholders About the Proposals

   4

Summary of the Proxy Statement/Prospectus

   10

Selected Historical Consolidated Financial Information

   23

Selected Unaudited Pro Forma Condensed Combined Financial Information

   26

Risk Factors

   28

Forward-Looking Statements

   44

Special Meeting of Victory Stockholders

   45

The Merger Proposal

   50

The Merger Agreement

   62

Unaudited Pro Forma Condensed Combined Financial Information

   68

The Charter Amendment Proposals

   74

The Stock Plan Proposal

   76

The Adjournment Proposal

   81

Directors and Executive Officers of Victory Following the Merger

   83

Other Information Related to Victory

   97

Business of TouchTunes

   102

TouchTunes’ Management’s Discussion and Analysis of Financial Condition and Results of Operations

   115

Appraisal Rights

   129

Beneficial Ownership of Securities

   129

Certain Relationships and Related Transactions

   132

Description of Victory’s Securities

   135

Price Range of Victory Securities and Dividends

   138

Stockholder Proposals

   139

Legal Matters

   139

Experts

   139

Delivery of Documents to Stockholders

   139

Where You Can Find More Information

   140

Index to Financial Statements

   141

ANNEXES

  

Agreement and Plan of Reorganization

   A-1

Victory Acquisition Corp. Amended and Restated Certificate of Incorporation

   B-1

Forms of Merger Escrow Agreement and EBITDA Escrow Agreement

   C-1

Form of Lock-Up Agreement

   D-1

Tax Opinion of Graubard Miller

   E-1

2009 Stock Incentive Plan

   F-1

Form of Voting Agreement

   G-1

Trademarks, Trade Names and Service Marks

TouchTunes owns or has rights to use the trademarks, service marks and trade names that are used in conjunction with the operation of its business. Some of the more important trademarks that it owns or has rights to use that appear in this proxy statement/prospectus include TouchTunes, the Allegro MX-1TM, TouchTunes PlayPorTT™, myTouchTunes.com, TouchTunes Gen3, TouchTunes G2, Barfly and Barfly Interactive Networks marks, which may be registered in the United States and other jurisdictions.


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SUMMARY OF THE MATERIAL TERMS OF THE MERGER

 

   

In the prospectus included in the registration statement for Victory’s IPO, Victory undertook to enter into a business combination with an operating business in any industry other than the franchising, financial services or healthcare industries. Victory’s board of directors believes that the merger with TouchTunes described in this proxy statement/prospectus complies in all material respects with the terms for a transaction described in the registration statement.

 

   

The parties to the agreement and plan of reorganization are Victory, Merger Sub and TouchTunes. Pursuant to the agreement, Merger Sub will merge with and into TouchTunes with TouchTunes being the surviving entity and becoming a wholly owned subsidiary of Victory. Victory will thereafter operate under the name “TouchTunes Corporation.”

 

   

TouchTunes develops, manufactures and sells interactive digital entertainment systems, providing innovative digital entertainment content and highly-targeted advertising services to a network of approximately 38,000 out-of-home locations in North America, such as bars, restaurants, retailers and other businesses. These services are provided, under a usage-based revenue model, through long-term agreements with TouchTunes’ distribution channel of more than 2,800 amusement vendor operators (“Operators”) and through direct sales to national and regional chains, primarily restaurants. TouchTunes’ wholly-owned subsidiary, TouchTunes Music Corporation (“TouchTunes Music”) introduced the world’s first digital-downloading, pay-per-play commercial jukebox in 1998 and now operates one of the largest out-of-home interactive entertainment networks in the United States. Since mid-2007, TouchTunes has expanded its entertainment network offering, through acquisitions and product development, to include a wireless, portable entertainment system, an interactive advertising platform on the jukebox and an in-location television-based advertising and content solution. See the section entitled “Business of TouchTunes.”

 

   

The holders of common stock of TouchTunes will receive in the merger 28,340,561 shares of Victory common stock. Additionally, all outstanding TouchTunes’ options and warrants shall be cancelled and substituted with options and warrants of similar tenor to purchase an aggregate of 6,605,978 shares of Victory common stock, of which options to purchase 4,659,579 shares are vested as of March 23, 2009. The holders of common stock of TouchTunes will also have the right to receive up to an additional 8,016,265 EBITDA Shares if the combined company’s EBITDA exceeds an aggregate of $50 million for any two consecutive quarters during the period ending on the fifth anniversary of the closing of the merger. The EBITDA Shares will be issued at the closing of the merger and will be placed in escrow until they are earned. If the EBITDA target is not met, the EBITDA Shares shall be returned to Victory for cancellation. If the EBITDA target is met, the TouchTunes’ options and warrants shall also be adjusted to purchase an additional 2,103,523 shares of Victory common stock, of which 1,483,736 EBITDA Shares relate to vested options as of March 23, 2009.

 

   

As a result of the merger, the present Victory stockholders will own approximately from 58.8% of the shares of Victory common stock outstanding after the merger (assuming that no holders of shares issued in Victory’s initial public offering (“Public Shares”) vote against the merger proposal and elect to convert their Public Shares into cash in accordance with Victory’s amended and restated certificate of incorporation) to 54.5% of the shares of Victory common stock outstanding after the merger (assuming that the holders of approximately 19.99% of Victory’s Public Shares vote against the merger proposal and elect to convert their Public Shares into cash). It is possible that the present holders of 20.0% or more of the Public Shares will vote against the merger and seek conversion of their Public Shares into cash in accordance with Victory’s amended and restated certificate of incorporation. If such event were to occur, the merger could not be completed. To preclude such possibility Victory, its officers, directors and founding stockholders, TouchTunes and the holders of TouchTunes common stock may enter into arrangements to provide for the purchase of the Public Shares from holders thereof who indicate their intention to vote against the merger and seek conversion or otherwise wish to sell their Public Shares or other arrangements that would induce holders of Public Shares not to vote

 

 

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against the merger proposal. Definitive arrangements have not yet been determined but some possible methods are described in the section titled “Summary of the Proxy Statement/Prospectus — Actions That May Be Taken to Secure Approval of Victory’s Stockholders.” As it is not possible as of the date of this proxy statement/prospectus to determine the number of Public Shares, if any, that may be purchased pursuant to such arrangements, the actual percentage of the Victory shares outstanding after the merger that Victory stockholders will own cannot presently be determined.

 

   

The funds held in Victory’s trust account will be transferred to Victory, after deduction of transaction expenses, finders’ fees, tax obligations, deferred underwriting commissions and payments to converting stockholders. Victory estimates that such amount will be approximately $313 million, prior to deduction of payments to converting stockholders.

 

   

To provide a fund for payment to Victory with respect to its post-closing rights to indemnification under the merger agreement, at the closing of the merger, the current holders of common stock of TouchTunes will place in escrow (with an independent escrow agent) an aggregate of 2,834,056 shares of Victory common stock, representing 10% of the shares to be issued in the merger. See the section entitled “The Merger Proposal — Indemnification of Victory.”

 

   

After the merger, if management’s nominees are elected, the directors of Victory will be Jonathan J. Ledecky, Victory’s president and secretary, William J. Meder, TouchTunes’ Chairman, President and Chief Executive Officer, David Carlick, Joel A. Katz, Patrick Gallagher and Richard Y. Roberts. David Carlick, Joel A. Katz, Patrick Gallagher and Richard Y. Roberts, a current member of Victory’s board, will be considered independent directors under applicable regulatory rules. Certain of the founders of Victory and certain stockholders of TouchTunes will enter into a voting agreement at the time of closing of the merger that will provide that they will vote their shares of Victory common stock in favor of the election of four nominees of VantagePoint CDP Partners L.P. (“VantagePoint”) in classes B and C (one in Class B, three in Class C) in all elections through the annual meeting that will be held in 2012 (or earlier if VantagePoint owns less than 50% of the shares held by it upon Closing of the Merger).

 

   

Upon completion of the merger, certain members of TouchTunes’ management will become officers of Victory. These officers are William Meder, who will serve as Chairman of the Board of Directors, President and Chief Executive Officer, David Schwartz, who will serve as Chief Financial Officer, Secretary and Treasurer, Ron Greenberg, who will serve as Chief Marketing Officer & Senior Vice President, Digital Media, Dan McAllister, who will serve as Senior Vice President, Sales, Geoff Mott, who will serve as Senior Vice President, Strategy and Business Development, Michael Tooker, who will serve a Senior Vice President, Technology and Operations, and Bob Weinschenk, who will serve as Senior Vice President, Barfly Division. Each of these persons has entered or will enter into an employment agreement with TouchTunes that will be assumed by Victory as a result of the merger, or in the case of new employment agreements, effective upon the merger. See the section entitled “Directors and Executive Officers of Victory Following the Merger — Employment Agreements.”

 

   

Pursuant to the terms of lock-up agreements entered into upon signing of the merger agreement, current holders of common stock of TouchTunes, who will be receiving approximately 79% of the shares of Victory common stock to be issued in the merger, have agreed not to sell their shares until the 18-month anniversary of the consummation of the merger, subject to certain exceptions; provided however that certain of these holders of TouchTunes common stock will be entitled to sell up to an aggregate of approximately 10% of the shares they receive in the merger at any time they wish. All other holders of common stock of TouchTunes, who will be receiving approximately 21% of the shares of Victory common stock to be issued in the merger, will be free to sell their shares at any time. Further, in connection with Victory’s IPO, each of the persons who was a stockholder of Victory prior to its IPO, including all of the current officers and directors of Victory, executed a Stock Escrow Agreement dated as of April 24, 2007 with Victory pursuant to which such individuals agreed that they would be able to

 

 

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sell their shares of Victory common stock received prior to the IPO twelve months after the closing of the merger subject to certain exceptions. In connection with the merger, such individuals have agreed that they will not be able to sell their shares of Victory common stock until the 18-month anniversary of the consummation of the merger, subject to certain exceptions.

 

   

In addition to voting on the merger, the stockholders of Victory will vote on proposals to amend its amended and restated certificate of incorporation to (i) change its name to TouchTunes Corporation, (ii) increase the authorized number of shares of common stock to 300,000,000, (iii) make its corporate existence perpetual, (iv) incorporate the classification of directors that would result from the election of directors in accordance with the proposal relating to such election to be presented at the special meeting, (v) delete certain provisions that will no longer be applicable after the merger or are not required by Delaware law and (vi) to make certain other changes in tense, gender and number that Victor’s board of directors believes are immaterial. The stockholders of Victory will also vote to approve the stock plan proposal and a proposal to adjourn the meeting, if necessary. See the sections entitled “The Charter Amendment Proposals,” “The Stock Plan Proposal,” “The Adjournment Proposal” and “The Director Election Proposal.”

 

 

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QUESTIONS AND ANSWERS

FOR VICTORY STOCKHOLDERS ABOUT THE PROPOSALS

 

Q.     Why am I receiving this proxy statement/prospectus?

  

A.     Victory and TouchTunes have agreed to a business combination under the terms of the Agreement and Plan of Reorganization that is described in this proxy statement/prospectus. This agreement is referred to as the merger agreement. A copy of the merger agreement is attached to this proxy statement/prospectus as Annex A, which you are encouraged to read.

 

You are being asked to consider and vote upon a proposal to approve the merger agreement, which, among other things, provides for the merger of Merger Sub with and into TouchTunes with TouchTunes being the surviving entity and becoming a wholly owned subsidiary of Victory. Victory will thereafter operate under the name “TouchTunes Corporation.” You are also being asked to consider and vote upon (i) the charter amendment proposals, (ii) the stock plan proposal, (iii) the director election proposal and (iv) the adjournment proposal.

 

The approval of the merger proposal and the charter amendment proposals is a condition to the consummation of the merger. It the merger proposal is not approved, the other proposals will not be presented to stockholders for a vote. If the charter amendment proposals are not approved, the other proposals will not be presented to stockholders for a vote and the merger will not be consummated.

 

This proxy statement/prospectus contains important information about the proposed merger and the other matters to be acted upon at the special meeting. You should read it carefully.

 

Your vote is important. You are encouraged to vote as soon as possible after carefully reviewing this proxy statement/prospectus.

Q.     Why is Victory proposing the merger?

  

A.     Victory was organized for the purpose of consummating a business combination with an operating business in any industry other than the franchising, financial services or healthcare industries.

 

Victory consummated its IPO on April 30, 2007, raising net proceeds of $316,661,329. Of these net proceeds, $316,660,000 (including $10,560,000 of deferred underwriting commissions), together with $5,000,000 raised from the private sale of warrants (for a total of $321,660,000), was placed in a trust account immediately following the IPO and, in accordance with Victory’s amended and restated certificate of incorporation, will be released upon the consummation of a business combination. As of December 31, 2008, $330,144,884 was held in deposit in the trust account. Victory intends to use the funds held in the trust account to pay certain transaction expenses, finders’ fees, tax obligations and deferred underwriters compensation. The balance of the funds will be released to Victory after the closing of the merger to pay stockholders who properly exercise their conversion rights and for working capital and general corporate purposes.

 

 

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TouchTunes develops, manufactures and sells interactive digital entertainment systems, providing innovative digital entertainment content and highly-targeted advertising services to a network of approximately 38,000 out-of-home locations in North America, such as bars, restaurants, retailers and other businesses. These services are provided, under a usage-based revenue model, through long-term agreements with TouchTunes’ distribution channel of more than 2,800 Operators and through direct sales to national and regional chains, primarily restaurants. TouchTunes Music introduced the world’s first digital-downloading, pay-per-play commercial jukebox in 1998 and now operates one of the largest out-of-home interactive entertainment networks in the United States. Since mid-2007, TouchTunes has expanded its entertainment network offering, through acquisitions and product development, to include a wireless, portable entertainment system, an interactive advertising platform on the jukebox and an in-location television-based advertising and content solution.

 

Based on its due diligence investigations of TouchTunes and the industry in which it operates, including the financial and other information provided by TouchTunes in the course of their negotiations, Victory believes that TouchTunes’ management has been extremely successful in running TouchTunes’ business. As a result, Victory also believes that a business combination with TouchTunes will provide Victory stockholders with an opportunity to participate in a company with significant growth potential. See the section entitled “The Merger Proposal — Victory’s Board of Directors’ Reasons for the Approval of the Merger.”

 

In accordance with Victory’s amended and restated certificate of incorporation, if Victory is unable to complete a business combination by April 24, 2009, its corporate existence will automatically terminate and it will be required to liquidate. The merger agreement provides that either Victory or TouchTunes may terminate the merger agreement if the merger is not consummated by the date Victory is required to be liquidated.

Q.     Do I have conversion rights?

  

A.     If you are a holder of Public Shares, you have the right to vote against the merger proposal and demand that Victory convert such shares into a pro rata portion of the trust account in which a substantial portion of the net proceeds of Victory’s IPO are held. These rights to vote against the merger and demand conversion of the Public Shares into a pro rata portion of the trust account are sometimes referred to herein as conversion rights.

Q.     How do I exercise my conversion rights?

  

A.     If you are a holder of Public Shares and wish to exercise your conversion rights, you must (i) vote against the merger proposal, which must be approved and completed, (ii) demand that Victory convert your shares into cash, and (iii) deliver your stock to Victory’s transfer agent physically or electronically using Depository Trust Company’s DWAC (Deposit Withdrawal at Custodian) System prior to the meeting.

 

 

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Any action that does not include an affirmative vote against the merger will prevent you from exercising your conversion rights. Your vote on any proposal other than the merger proposal will have no impact on your right to convert.

 

You may exercise your conversion rights either by checking the box on the proxy card or by submitting your request in writing to Mark Zimkind of Continental Stock Transfer & Trust Company, Victory’s transfer agent, at the address listed at the end of this section. If you (i) initially vote for the merger proposal but then wish to vote against it and exercise your conversion rights or (ii) initially vote against the merger proposal and wish to exercise your conversion rights but do not check the box on the proxy card providing for the exercise of your conversion rights or do not send a written request to Victory to exercise your conversion rights, or (iii) initially vote against the merger but later wish to vote for it, you may request Victory to send you another proxy card on which you may indicate your intended vote. You may make such request by contacting Victory at the phone number or address listed at the end of this section.

 

Any request for conversion, once made, may be withdrawn at any time up to the vote taken with respect to the merger proposal. If you delivered your shares for conversion to Victory’s transfer agent and decide prior to the special meeting not to elect conversion, you may request that Victory’s transfer agent return the shares (physically or electronically). You may make such request by contacting Victory’s transfer agent at the phone number or address listed at the end of this section.

 

Any corrected or changed proxy card must be received by Victory’s secretary prior to the special meeting. No demand for conversion will be honored unless the holder’s stock has been delivered (either physically or electronically) to the transfer agent prior to the meeting.

 

If the merger is completed, then, if you have also properly exercised your conversion rights, you will be entitled to receive a pro rata portion of the trust account, including any interest earned thereon, calculated as of two business days prior to the date of the consummation of the merger. As of December 31, 2008, there was $330,144,884 in the trust account, which would amount to approximately $10.00 per Public Share upon conversion. If you exercise your conversion rights, then you will be exchanging your shares of Victory common stock for cash and will no longer own these shares.

 

Exercise of your conversion rights does not result in either the exercise or loss of any Victory warrants that you may hold. Your warrants will continue to be outstanding following a conversion of your common stock, shall be automatically converted into a warrant to purchase a share of Victory’s common stock that will have terms

 

 

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that are substantially similar in all material respects to those of the Victory warrants and will become exercisable upon consummation of the merger. A registration statement must be in effect to allow you to exercise any warrants you may hold or to allow Victory to call the warrants for redemption if the redemption conditions are satisfied. If the merger is not consummated, the warrants will not become exercisable and will be worthless.

Q.     Do I have appraisal rights if I object to the proposed merger?

  

A.     No. Victory stockholders do not have appraisal rights in connection with the merger.

Q.     What happens to the funds deposited in the trust account after consummation of the merger?

  

A.     At the closing of the merger, the funds in the trust account will be released to pay transaction expenses of approximately $5,000,000 and to pay deferred underwriters’ compensation of $10,560,000. The balance of the funds will be released to Victory to pay Victory stockholders who properly exercise their conversion rights and for working capital and general corporate purposes.

Q.     Since Victory’s IPO prospectus did not disclose that funds in the trust account might be used, directly or indirectly, to purchase Public Shares, what are my legal rights?

  

A.     You should be aware that because Victory’s IPO prospectus did not disclose that funds in its trust account might be used, directly or indirectly, to purchase Public Shares other than from holders who have voted against the merger proposal and converted their Public Shares into cash (as Victory may contemplate doing), each holder of Public Shares at the time of the merger who purchased such shares in the IPO may have securities law claims against Victory for rescission (under which a successful claimant has the right to receive the total amount paid for his or her securities pursuant to an allegedly deficient prospectus, plus interest and less any income earned on the securities, in exchange for surrender of the securities) or damages (compensation for loss on an investment caused by alleged material misrepresentations or omissions in the sale of a security). Such claims may entitle stockholders asserting them to up to $10.00 per share, based on the initial offering price of the IPO units comprised of stock and warrants, less any amount received from sale of the original warrants purchased with them, plus interest from the date of Victory’s IPO (which, in the case of holders of Public Shares, may be more than the pro rata share of the trust account to which they are entitled on conversion or liquidation). See “Summary of the Proxy Statement/Prospectus — Rescission Rights.”

Q.     What happens if the merger is not consummated?

  

A.     If the merger is not consummated by the date on which Victory must liquidate, either party may terminate the merger agreement. If Victory is unable to complete the merger or another business combination by April 24, 2009, its amended and restated certificate of incorporation provides that it must liquidate. In any liquidation of Victory, the funds deposited in the trust account, plus any interest earned thereon, less claims requiring payment from the trust account by creditors who have not waived their rights against the trust account, if any, will be distributed pro rata to the holders of Victory’s Public Shares. Holders of Victory common stock issued prior to the IPO, including all of Victory’s officers and directors,

 

 

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have waived any right to any liquidation distribution with respect to those shares. Eric J. Watson, Victory’s chairman and treasurer, and Jonathan J. Ledecky, Victory’s president and secretary, have agreed to be personally liable under certain circumstances to ensure that the proceeds in the trust account are not reduced by the claims of prospective target businesses and vendors or other entities that are owed money by Victory for services rendered or products sold to it, but only to the extent such entities have not signed a waiver. Victory cannot assure you that Messrs. Watson and Ledecky will be able to satisfy those obligations. See the section entitled “Other Information Related to Victory — Liquidation If No Business Combination” for additional information.

Q.     When do you expect the merger to be completed?

 

A.     It is currently anticipated that the merger will be consummated promptly following the Victory special meeting on April     , 2009.

 

For a description of the conditions for the completion of the merger, see the section entitled “The Merger Agreement — Conditions to the Closing of the Merger.”

Q.     What do I need to do now?

 

A.     Victory urges you to read carefully and consider the information contained in this proxy statement/prospectus, including the annexes, and to consider how the merger will affect you as a stockholder of Victory. You should then vote as soon as possible in accordance with the instructions provided in this proxy statement/prospectus and on the enclosed proxy card.

Q.     How do I vote?

 

A.     If you are a holder of record of Victory common stock on the record date, you may vote in person at the special meeting or by submitting a proxy for the special meeting. You may submit your proxy by completing, signing, dating and returning the enclosed proxy card in the accompanying pre-addressed postage paid envelope. If you hold your shares in “street name,” which means your shares are held of record by a broker, bank or nominee, you should contact your broker to ensure that votes related to the shares you beneficially own are properly counted. In this regard, you must provide the record holder of your shares with instructions on how to vote your shares or, if you wish to attend the meeting and vote in person, obtain a proxy from your broker, bank or nominee.

Q. If my shares are held in “street name,” will my broker, bank or nominee automatically vote my shares for me?

 

A.     No. Your broker, bank or nominee cannot vote your shares unless you provide instructions on how to vote in accordance with the information and procedures provided to you by your broker, bank or nominee.

Q. May I change my vote after I have mailed my signed proxy card?

 

A.     Yes. Send a later-dated, signed proxy card to Victory’s secretary at the address set forth below so that it is received by Victory’s secretary prior to the special meeting or attend the special meeting in person and vote. You also may revoke your proxy by sending a notice of revocation to Victory’s secretary, which must be received by Victory’s secretary prior to the special meeting.

 

 

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Q.     What should I do with my stock, warrant and unit certificates?

  

A.     If you are not electing conversion in connection with your vote on the merger proposal and` the merger is approved and consummated, you do not need to do anything with your certificates as the Victory securities are not being exchanged or converted.

 

Victory stockholders who vote against the merger and exercise their conversion rights must deliver their shares to Victory’s transfer agent (either physically or electronically) as instructed by Victory or Victory’s transfer agent prior to the meeting.

Q.     What should I do if I receive more than one set of voting materials?

  

A.     You may receive more than one set of voting materials, including multiple copies of this proxy statement/prospectus and multiple proxy cards or voting instruction cards. For example, if you hold your shares in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold shares. If you are a holder of record and your shares are registered in more than one name, you will receive more than one proxy card. Please complete, sign, date and return each proxy card and voting instruction card that you receive in order to cast a vote with respect to all of your Victory shares.

Q.     Who can help answer my questions?

  

A.     If you have questions about the merger or if you need additional copies of the proxy statement/prospectus or the enclosed proxy card you should contact:

 

Mr. Jonathan J. Ledecky

Secretary

Victory Acquisition Corp.

c/o Paul Vassilakos

590 Madison Avenue, 21st Floor

New York, New York 10022

Tel: (212) 521-4399

Fax: (212) 521-4389

 

Or

 

[Proxy solicitation firm]

 

You may also obtain additional information about Victory from documents filed with the Securities and Exchange Commission (“SEC”) by following the instructions in the section entitled “Where You Can Find More Information.”

 

If you intend to vote against the merger and seek conversion of your shares, you will need to deliver your stock (either physically or electronically) to Victory’s transfer agent prior to the meeting. If you have questions regarding the certification of your position or delivery of your stock, please contact:

 

Mr. Mark Zimkind

Continental Stock Transfer & Trust Company

17 Battery Place

New York, New York 10004

Tel: (212) 845-3287

Fax: (212) 845-3201

 

 

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SUMMARY OF THE PROXY STATEMENT/PROSPECTUS

This summary highlights selected information from this proxy statement/prospectus and may not contain all of the information that is important to you. To better understand the merger, you should read this entire document carefully, including the merger agreement, attached as Annex A to this proxy statement/prospectus. The merger agreement is the legal document that governs the merger and the other transactions that will be undertaken in connection with the merger. It is also described in detail elsewhere in this proxy statement/prospectus.

The Parties

Victory

Victory Acquisition Corp. is a blank check company, or a SPAC, formed on January 12, 2007 as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business in any industry other than the franchising, financial services or healthcare industries.

On April 30, 2007, Victory closed its initial public offering of 33,000,000 units, including 3,000,000 units that were subject to the underwriters’ over-allotment option, with each unit consisting of one share of its common stock and one warrant, each to purchase one share of its common stock at an exercise price of $7.50 per share. The units from the initial public offering (including the over-allotment option) were sold at an offering price of $10.00 per unit, generating total gross proceeds of $330,000,000. Simultaneously with the consummation of the IPO, Victory consummated the private sale of 5,000,000 warrants (“Sponsors’ Warrants”) at $1.00 per warrant to Eric J. Watson and Jonathan J. Ledecky for an aggregate purchase price of $5,000,000. After deducting the underwriting discounts and commissions and the offering expenses, $321,660,000 was deposited into the trust account and the remaining proceeds became available to be used to provide for business, legal and accounting due diligence on prospective business combinations and continuing general and administrative expenses. In addition, Victory was entitled to draw for use of working capital up to $3,000,000 of interest earned on the trust account, as well as any amounts necessary to pay its tax obligations. Through December 31, 2008, Victory had used all of the net proceeds that were not deposited into the trust account to pay general and administrative expenses and has used interest income in the amount of $1,156,555 and $1,740,750 for its tax obligations and working capital, respectively. The net proceeds of $321,660,000 deposited into the trust fund remain on deposit in the trust fund and have earned $12,446,678 in interest through December 31, 2008 of which $8,484,884 that has not been released to Victory as described above.

Victory intends to use the funds held in the trust account to pay transaction fees and expenses, deferred underwriting discounts and commissions and to pay stockholders who properly exercise their conversion rights and for working capital and general corporate purposes. It is possible that the present holders of 20.0% or more of the Public Shares will vote against the merger and seek conversion of their Public Shares into cash in accordance with Victory’s amended and restated certificate of incorporation. If such event were to occur, the merger could not be completed. To preclude such possibility, Victory, its officers, directors and founding stockholders, TouchTunes and the holders of TouchTunes common stock may enter into arrangements to provide for the purchase of the Public Shares from holders thereof who indicate their intention to vote against the merger and seek conversion or otherwise wish to sell their Public Shares or other arrangements that would induce holders of Public Shares not to vote against the merger proposal. It is likely that such arrangements would involve the purchase by Victory, after the merger, of the Public Shares that were initially purchased by the persons or entities who enter into such arrangements using funds transferred to Victory from Victory’s trust account. As a consequence, it is likely that the amount of funds available to Victory for working capital and general corporate purposes from the trust account would be diminished. Definitive arrangements have not yet been determined but some possible methods are described in the section titled “Summary of the Proxy Statement/Prospectus — Actions That May Be Taken to Secure Approval of Victory’s Stockholders.” Regardless of the specific arrangements that are made to purchase Public Shares, there will be sufficient funds from the trust account funds transferred to Victory to pay the holders of all Public Shares that are properly converted and Victory will use such funds for such purpose.

 

 

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If the merger is not consummated by the date on which Victory is required to be liquidated, either party may terminate the merger agreement. If Victory is unable to complete the merger or another business combination by April 24, 2009, its amended and restated certificate of incorporation provides that its corporate existence will automatically terminate and it will liquidate and promptly distribute to its public stockholders the amount in its trust account plus any remaining non-trust account funds after payment of its liabilities.

Victory’s common stock, units and warrants are currently listed on the NYSE Amex under the symbols VRY, VRY.U and VRY.WS, respectively. The parties intend to seek to have the securities of Victory listed on the Nasdaq Stock Market following consummation of the merger under the symbols             ,             .U and             .WS.

The mailing address of Victory’s principal executive office is 970 West Broadway, PMB 402, Jackson, Wyoming 83001. Its telephone number is (307) 633-2831.

Merger Sub

VAC Merger Sub, Inc. is a Delaware corporation that was organized in March 2009 for the sole purpose of merging with and into TouchTunes. All of Merger Sub’s capital stock is owned by Victory. Merger Sub has no material assets and does not operate any business.

The mailing address of Merger Sub’s principal executive office is 970 West Broadway, PMB 402, Jackson, Wyoming 83001. Its telephone number is (307) 633-2831.

TouchTunes

TouchTunes develops, manufactures and sells interactive digital entertainment systems, providing innovative digital entertainment content and highly-targeted advertising services to a network of approximately 38,000 out-of-home locations in North America, such as bars, restaurants, retailers and other businesses. These services are provided, under a usage-based revenue model, through long-term agreements with TouchTunes’ distribution channel of more than 2,800 Operators and through direct sales to national and regional chains, primarily restaurants. TouchTunes Music introduced the world’s first digital-downloading, pay-per-play commercial jukebox in 1998 and now operates one of the largest out-of-home interactive entertainment networks in the United States. Since mid-2007, TouchTunes has expanded its entertainment network offering, through acquisitions and product development, to include a wireless, portable entertainment system, an interactive advertising platform on the jukebox and an in-location television-based advertising and content solution.

TouchTunes’ principal executive offices are located at 740 Broadway, Suite 1102, New York, New York 10003. The telephone number at its executive offices is (212) 991-6521. Upon consummation of the merger, TouchTunes will become a wholly owned subsidiary of Victory and operate under the name “            .”

The Merger

The merger agreement provides for the merger of Merger Sub with and into TouchTunes with TouchTunes being the surviving entity and becoming a wholly owned subsidiary of Victory. Victory will thereafter operate under the name “TouchTunes Corporation.”

The holders of common stock of TouchTunes will receive in the merger 28,340,561 shares of Victory common stock. Additionally, all outstanding TouchTunes’ options and warrants shall be cancelled and substituted with options and warrants of similar tenor to purchase an aggregate of 6,605,978 shares of Victory common stock, of which options to purchase 4,659,579 shares are vested as of March 23, 2009. The holders of common stock of TouchTunes will also have the right to receive up to an additional 8,016,265 EBITDA Shares if the combined company’s EBITDA exceeds an aggregate of $50 million for any two consecutive quarters during the period ending on the fifth anniversary of the closing of the merger. The EBITDA

 

 

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Shares will be issued at the closing of the merger and will be placed in escrow until they are earned. If the EBITDA target is not met, the EBITDA Shares shall be returned to Victory for cancellation. If the EBITDA target is met, the TouchTunes’ options and warrants shall also be adjusted to purchase an additional 2,103,523 shares of Victory common stock, of which 1,483,736 EBITDA Shares relate to vested options as of March 23, 2009.

Upon consummation of the merger, the holders of common stock of TouchTunes will own approximately 28,340,561 shares of Victory common stock and the holders of common stock of Victory will own 40,500,000 shares of Victory common stock.

To provide a fund for payment to Victory with respect to its post-closing rights to indemnification under the merger agreement, at the closing of the merger, the current holders of common stock of TouchTunes will place in escrow (with an independent escrow agent) an aggregate of 2,834,056 shares of Victory common stock, representing 10% of the shares to be issued in the merger, valued at $10.00 per share. Other than with respect to certain specified matters, the escrow will be the sole remedy for Victory for its rights to indemnification under the merger agreement. See the section entitled “The Merger Proposal — Indemnification.”

Victory and TouchTunes plan to complete the merger promptly after the Victory special meeting, provided that:

 

   

Victory’s stockholders have approved the merger proposal;

 

   

holders of fewer than 20% of Victory’s Public Shares have voted against the merger proposal and demanded conversion of their shares into cash; and

 

   

the other conditions specified in the merger agreement have been satisfied or waived.

After consideration of the factors identified and discussed in the section entitled “The Merger Proposal — Factors Considered by Victory’s Board of Directors,” Victory’s board of directors concluded that the merger met all of the requirements disclosed in Victory’s Registration Statement on Form S-1 (Registration Nos. 333-140359 and 333-142341), that became effective on April 24, 2007, including that TouchTunes has a fair market value of at least 80% of Victory’s trust account balance (excluding deferred underwriting discounts and commissions) at the time of the merger.

Upon completion of the merger, assuming that none of the holders of the Public Shares elects to convert such shares into cash, the current holders of TouchTunes common stock will own approximately 41.2% of the shares of Victory common stock outstanding immediately after the closing of the merger and the former Victory stockholders will own approximately 58.8% of the shares of Victory common stock. If the holders of 19.99% of the Public Shares elect to convert their shares into cash, such percentages would be approximately 45.5% and 54.5%, respectively. Such percentages assume that none of the holders of common stock of TouchTunes exercise appraisal rights. To the extent appraisal rights are exercised by the holders of TouchTunes common stock, the percentage owned by the holders of common stock of TouchTunes would decrease and the percentage owned by the Victory stockholders would increase.

The Charter Amendment Proposals

The proposed amendments to Victory’s amended and restated certificate of incorporation addressed by the charter amendment proposals would, upon consummation of the merger, (i) change Victory’s name to “TouchTunes Corporation,” (ii) increase the authorized number of shares of its common stock from 85 million to 300 million, (iii) make its corporate existence perpetual, (iv) incorporate the classification of directors that would result from the election of directors in the manner described in the director election proposal; (v) remove provisions that will no longer be applicable to Victory after the merger; and (vi) make certain other changes that Victory’s board of directors believes are immaterial. See the section entitled “The Charter Amendment Proposals.”

 

 

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The Stock Plan Proposal

The proposed 2009 Stock Incentive Plan reserves             shares of Victory common stock for issuance to executive officers (including executive officers who are also directors), employees and consultants in accordance with the plan’s terms. The purpose of the plan is to provide Victory’s directors, executive officers and other employees as well as persons who, by their position, ability and diligence are able to make important contributions to Victory’s growth and profitability, with an incentive to assist Victory in achieving its long-term corporate objectives, to attract and retain executive officers and other employees of outstanding competence and to provide such persons with an opportunity to acquire an equity interest in Victory. See the section entitled “The Stock Plan Proposal.” The plan is attached as Annex F to this proxy statement/prospectus. We encourage you to read the plan in its entirety. If the merger proposal is not approved by Victory’s stockholders at the special meeting, the stock plan proposal will not be presented at the meeting for a vote.

The Director Election Proposal; Management of Victory

At the special meeting, six directors will be elected to Victory’s board of directors, of whom two will serve until the special meeting to be held in 2010, one will serve until the special meeting to be held in 2011 and three will serve until the special meeting to be held in 2012 and, in each case, until their successors are elected and qualified. If all of the directors that are nominated for election in this proxy statement/prospectus are elected, Victory will have one vacant board seat for a Class B director on its board of directors. Victory does not have any immediate plans to fill the vacancy on the board of directors, but will do so when an appropriate candidate has been identified.

Upon consummation of the merger, if management’s nominees are elected, the directors of Victory will be Jonathan J. Ledecky, Victory’s president and secretary, William J. Meder, TouchTunes’ Chairman, President and Chief Executive Officer, David S. Carlick, Joel A. Katz, Patrick Gallagher and Richard Y. Roberts. David S. Carlick, Joel A. Katz, Patrick Gallagher and Richard Y. Roberts will be considered independent directors under applicable regulatory rules.

The directors of Victory will be classified as follows:

 

   

in the class to stand for reelection in 2010: Jonathan J. Ledecky and Richard Y. Roberts, the “Class A Directors”;

 

   

in the class to stand for reelection in 2011: David S. Carlick, the “Class B Directors”; and

 

   

in the class to stand for reelection in 2012: William J. Meder, Patrick Gallagher and Joel A. Katz, the “Class C Directors”.

Certain of the founders of Victory and certain stockholders of TouchTunes will enter into a voting agreement at the time of closing of the merger that will provide that they will vote their shares of Victory common stock in favor of the election of four nominees of VantagePoint in classes B and C (one in Class B, three in Class C) in all elections through the annual meeting that will be held in 2012 (or earlier if VantagePoint owns less than 50% of the shares held by it upon Closing of the Merger). A copy of the form of voting agreement is attached to this proxy statement/prospectus as Annex G.

Upon completion of the merger, certain members of TouchTunes’ management will become officers of Victory. These officers are William Meder, who will serve as Chairman of the Board of Directors, President and Chief Executive Officer, David Schwartz, who will serve as Chief Financial Officer, Secretary and Treasurer, Ron Greenberg, who will serve as Chief Marketing Officer & Senior Vice President, Digital Media, Dan McAllister, who will serve as Senior Vice President, Sales, Geoff Mott, who will serve as Senior Vice President, Strategy and Business Development, Michael Tooker, who will serve a Senior Vice President, Technology and

 

 

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Operations, and Bob Weinschenk, who will serve as Senior Vice President, Barfly Division. Each of these persons has entered or will enter into an employment agreement with TouchTunes that will be assumed by Victory as a result of the merger, or in the case of new employment agreements, effective upon the merger.

If the merger proposal is not approved by Victory’s stockholders at the special meeting or an adjournment thereof, the director election proposal will not be presented at the meeting for a vote and Victory’s current directors and executive officers will continue in office.

The Adjournment Proposal

If, based on the tabulated vote, there are not sufficient votes at the time of the special meeting to authorize Victory to consummate the merger (because either the merger proposal is not approved or 20% or more of the holders of the Public Shares vote against the merger proposal and elect to convert their Public Shares into cash), the adjournment proposal allows Victory’s board of directors to adjourn the special meeting to a later date or dates, if necessary, to permit further solicitation of proxies. See the section entitled “The Adjournment Proposal.”

Vote of Victory Founders

As of                     , 2009, the record date for the Victory special meeting, Eric J. Watson, Victory’s chairman of the board and treasurer, Jonathan J. Ledecky, Victory’s president and secretary and a director, Jay H. Nussbaum, Kerry Kennedy, Robert B. Hersov, Edward J. Mathias, Richard Y. Roberts and Jimmie Lee Solomon, Jr., each a director of Victory, and Martin Dolfi, a former consultant to Victory, who are collectively referred to as the Victory Founders, beneficially owned and were entitled to vote 7,500,000 shares (“Founders’ Shares”). The Founders’ Shares constituted approximately 18.5% of the outstanding shares of Victory’s common stock immediately after the IPO.

In connection with the IPO, Victory and Citigroup, the representative of the underwriters of the IPO, entered into agreements with each of the Victory Founders pursuant to which each Victory Founder agreed to vote his, her or its Founders’ Shares on the merger proposal in accordance with the majority of the votes cast by the holders of Public Shares. The Victory Founders have also indicated that they intend to vote their Founders’ Shares in favor of all other proposals being presented at the meeting. The Founders’ Shares have no liquidation rights and will be worthless if no business combination is effected by Victory. In connection with the IPO, the Victory Founders placed their Founders’ Shares in escrow with Continental Stock Transfer & Trust Company and agreed that they would not sell the Founders’ Shares until the earlier of twelve months after a business combination or Victory’s liquidation, subject to earlier release within such twelve month period if (i) Victory’s common stock having a last sales price equal to or exceeding $20.00 per share for any 20 trading days within any 30-trading day period following successful consummation of a business combination or (ii) Victory consummates a subsequent liquidation, merger, stock exchange or other similar transaction that results in all of Victory’s stockholders having the right to exchange their shares for cash, securities or other property. In connection with the merger, such individuals have agreed to the additional restriction that they will not be able to sell their Founders’ Shares until the 18-month anniversary of the consummation of the merger, subject to certain exceptions.

As of March 23, 2009, no Victory Founder has purchased any shares of Victory common stock in the open market. If the Victory Founders believe it would be desirable for them or their affiliates to purchase shares in advance of the special meeting, such determination would be based on factors such as the likelihood of approval or disapproval of the merger proposal, the number of shares for which conversion may be requested and the financial resources available to such prospective purchasers. Any additional shares purchased by the Victory Founders will be voted by them in favor of the merger.

 

 

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Date, Time and Place of Special Meeting of Victory’s Stockholders

The special meeting of the stockholders of Victory will be held at 10:00 a.m., Eastern time, on April     , 2009, at the offices of Graubard Miller, Victory’s counsel, at The Chrysler Building, 405 Lexington Avenue, 19th Floor, New York, New York 10174 to consider and vote upon the proposals.

Voting Power; Record Date

You will be entitled to vote or direct votes to be cast at the special meeting if you owned shares of Victory common stock at the close of business on                     , 2009, which is the record date for the special meeting. You will have one vote for each share of Victory common stock you owned at the close of business on the record date. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker to ensure that votes related to the shares you beneficially own are properly counted. Victory warrants do not have voting rights. On the record date, there were 40,500,000 shares of Victory common stock outstanding, of which 33,000,000 were Public Shares and 7,500,000 were shares held by the Victory Founders that were acquired prior to the IPO.

Quorum and Vote of Victory Stockholders

A quorum of Victory stockholders is necessary to hold a valid meeting. A quorum will be present at the Victory special meeting if a majority of the outstanding shares entitled to vote at the meeting are represented in person or by proxy. Abstentions and broker non-votes will count as present for the purposes of establishing a quorum. The Victory Founders hold approximately 18.5% of the outstanding shares of Victory common stock, none of which are Public Shares. Such shares will be voted on the merger proposal in accordance with the majority of the votes cast by the holders of Public Shares and in favor of all of the other proposals.

 

   

The approval of the merger proposal will require the affirmative vote of the holders of a majority of the Public Shares present (in person or represented by proxy) and entitled to vote on the proposal at the meeting. There are currently 40,500,000 shares of Victory common stock outstanding, of which 33,000,000 are Public Shares. The merger will not be consummated if the holders of 20% or more of the Public Shares (6,600,000 shares or more) properly demand conversion of their Public Shares into cash.

 

   

The approval of each of the charter amendment proposals will require the affirmative vote of the holders of a majority of the outstanding shares of Victory common stock on the record date.

 

   

The approval of the stock plan proposal will require the affirmative vote of the holders of a majority of the shares of Victory common stock represented in person or by proxy and entitled to vote thereon at the meeting.

 

   

The election of directors requires a plurality vote of the shares of common stock represented in person or by proxy and entitled to vote thereon at the meeting. “Plurality” means that the individuals who receive the largest number of votes cast “FOR” are elected as directors. Consequently, any shares not voted “FOR” a particular nominee (whether as a result of abstentions, a direction to withhold authority or a broker non-vote) will not be counted in the nominee’s favor.

 

   

The approval of an adjournment proposal will require the affirmative vote of the holders of a majority of the shares of Victory common stock represented in person or by proxy and entitled to vote thereon at the meeting.

Abstentions will have the same effect as a vote “AGAINST” the merger proposal, the stock plan proposal and the adjournment proposal, if the latter is presented. Broker non-votes, while considered present for the purposes of establishing a quorum, will have the effect of votes against the charter amendment proposals, but will have no effect on the other proposals. Please note that you cannot seek conversion of your shares unless you affirmatively vote against the merger proposal.

 

 

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Conversion Rights

Pursuant to Victory’s amended and restated certificate of incorporation, a holder of Public Shares may, if the stockholder affirmatively votes against the merger, demand that Victory convert such shares into cash if the merger is consummated. See the section entitled “Special Meeting of Victory Stockholders — Conversion Rights” for the procedures to be followed if you wish to convert your shares into cash. If properly demanded, Victory will convert each Public Share into a pro rata portion of the trust account, calculated as of two business days prior to the anticipated consummation of the merger. As of December 31, 2008, this would amount to approximately $10.00 per share. If you exercise your conversion rights, then you will be exchanging your shares of Victory common stock for cash and will no longer own the shares. You will be entitled to receive cash for these shares only if you affirmatively vote against the merger, properly demand conversion and, prior to the meeting, tender your stock (either physically or electronically) to Victory’s transfer agent.

If the merger is not consummated by the date Victory must liquidate, either party may terminate the merger agreement. If Victory is unable to complete the merger or another business combination by April 24, 2009, its amended and restated certificate of incorporation provides that its corporate existence will terminate on that date and, upon its resulting liquidation, the holders of Public Shares will receive an amount equal to the amount of funds in the trust account, inclusive of interest not previously released to Victory, as well as any remaining net assets outside of the trust account, at the time of the liquidation distribution divided by the number of Public Shares. Although both the per share liquidation price and the per share conversion price are equal to the amount in the trust account divided by the number of Public Shares, the amount a holder of Public Shares would receive at liquidation may be more or less than the amount such a holder would have received had it sought conversion of its shares in connection with the merger because (i) there will be greater earned interest in the trust account at the time of a liquidation distribution since it would occur at a later date than a conversion and (ii) Victory may incur expenses it otherwise would not incur if Victory consummates the merger, including, potentially, claims requiring payment from the trust account by creditors who have not waived their rights against the trust account. Eric J. Watson, Victory’s chairman and treasurer, and Jonathan J. Ledecky, Victory’s president and secretary, will be personally liable under certain circumstances (for example, if a vendor successfully makes a claim against funds in the trust account) to ensure that the proceeds in the trust account are not reduced by the claims of prospective target businesses and vendors or other entities that are owed money by Victory for services rendered or products sold to it, but only if such target business, vendor or other entity does not execute a waiver. While Victory has no reason to believe that Messrs. Watson and Ledecky will not be able to satisfy those obligations, there cannot be any assurance to that effect. See the section entitled “Other Information Related to Victory — Liquidation If No Business Combination” for additional information.

The merger will not be consummated if the holders of 20% or more of the Public Shares (6,600,000 shares or more) properly demand conversion of their shares into cash.

Appraisal Rights

Victory stockholders do not have appraisal rights in connection with the merger.

Proxies

Proxies may be solicited by mail, telephone or in person. [Victory has engaged             to assist in the solicitation of proxies.]

If you grant a proxy, you may still vote your shares in person if you revoke your proxy before the special meeting. You may also change your vote by submitting a later-dated proxy as described in the section entitled “Special Meeting of Victory Stockholders — Revoking Your Proxy.”

 

 

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Interests of Victory’s Directors and Officers and Others in the Merger

When you consider the recommendation of Victory’s board of directors in favor of approval of the merger proposal, you should keep in mind that Victory’s directors and officers have interests in the merger transaction that are different from, or in addition to, your interests as a stockholder. These interests include, among other things:

 

   

If the merger is not consummated by April 24, 2009, Victory’s amended and restated certificate of incorporation provides that it will automatically be liquidated. In such event, the 7,500,000 Founders’ Shares held by Victory Founders, including Victory’s directors and officers, that were acquired before the IPO for an aggregate purchase price of $25,000 would be worthless because Victory’s directors and officers are not entitled to receive any of the liquidation proceeds with respect to such shares. Such shares had an aggregate market value of $            based upon the closing bid price of $            on the NYSE Amex on                         , 2009, the record date for the Victory special meeting.

 

   

Eric J. Watson and Jonathan J. Ledecky also purchased 5,000,000 warrants (“Sponsors’ Warrants”) for an aggregate purchase price of $5,000,000 (or $1.00 per warrant) pursuant to agreements with Victory and Citigroup and entered into in connection with Victory’s IPO. These purchases took place on a private placement basis simultaneously with the consummation of Victory’s IPO. All of the proceeds Victory received from these purchases were placed in Victory’s trust fund. The Sponsors’ Warrants are identical to the Victory warrants except that the warrants will not be transferable or salable by Messrs. Watson and Ledecky (except in certain limited circumstances such as to relatives and trusts for estate planning purposes, providing the transferee agrees to be bound by the transfer restrictions) until Victory completes a business combination, and if Victory calls the warrants for redemption, the Sponsors’ Warrants will not be redeemable so long as such warrants are held by Messrs. Watson or Ledecky or their affiliates, including any permitted transferees. All of the Sponsors’ Warrants will become worthless if the merger is not consummated and Victory is liquidated (as will the public warrants). Such Sponsors’ Warrants had an aggregate market value of $            , based on the closing bid price of $            on the NYSE Amex on                         , 2009, the record date for the Victory special meeting.

 

   

The transactions contemplated by the merger agreement provide that Jonathan J. Ledecky and Richard Y. Roberts, a current member of the board of directors of Victory, will each be a director of Victory after the closing of the merger. As such, in the future they will receive any cash fees, stock options or stock awards that the Victory board of directors determines to pay to its non-executive directors.

 

   

If Victory liquidates prior to the consummation of a business combination, Messrs. Watson and Ledecky will be personally liable to pay debts and obligations to vendors and other entities that are owed money by Victory for services rendered or products sold to Victory, or to any target business, to the extent such creditors bring claims that would otherwise require payment from monies in the trust account, but only if such entities did not execute a waiver. Based on Victory’s estimated debts and obligations, it is not currently expected that Messrs. Watson and Ledecky will have any exposure under this arrangement in the event of a liquidation.

 

   

If Victory is required to be liquidated and there are no funds remaining to pay the costs associated with the implementation and completion of such liquidation, Messrs. Watson and Ledecky have agreed to advance Victory the funds necessary to pay such costs and complete such liquidation (currently anticipated to be no more than approximately $15,000) and not to seek repayment for such expenses.

Additionally, upon consummation of the merger, the underwriters in Victory’s IPO will be entitled to receive $10,560,000 of deferred underwriting commissions. Furthermore, Messrs. Watson and Ledecky have agreed to transfer an aggregate of 300,000 shares of common stock of Victory to Constellation Consulting LLC (“Constellation”) for providing consulting services in connection with the transaction. Additionally, Messrs. Watson and Ledecky have agreed to transfer an aggregate of 100,000 shares to two consultants of Victory that

 

 

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were entitled to such shares being issued directly by Victory. As a result, such shares will not be issued by Victory. Neither the consultants, the underwriters nor Constellation will receive anything if the merger is not consummated.

Actions That May Be Taken to Secure Approval of Victory’s Stockholders

It is believed by Victory that the present holders of 20% or more of the Public Shares may have the intention to vote against the merger and seek conversion of their Public Shares into cash in accordance with Victory’s amended and restated certificate of incorporation. If such event were to occur, the merger could not be completed. To preclude such possibility, Victory, the Victory Founders, TouchTunes and the holders of TouchTunes common stock may negotiate arrangements to provide for the purchase of the Public Shares from the holders of Public Shares who indicate their intention to vote against the merger and seek conversion or otherwise wish to sell their Public Shares. These arrangements might also include arrangements to provide such holders of Public Shares with incentives to vote in favor of the merger proposal.

Arrangements of such nature would only be entered into and effected at a time when Victory, the Victory Founders, TouchTunes and the holders of TouchTunes common stock and/or their respective affiliates are not aware of any material nonpublic information regarding Victory, its securities or TouchTunes. Definitive arrangements have not yet been determined but might include:

 

   

Agreements between Victory and the holders of Public Shares pursuant to which Victory would agree to purchase Public Shares from such holders immediately after the closing of the merger for the price and fees specified in the arrangements.

 

   

Agreements with third parties to be identified pursuant to which the third parties would purchase Public Shares during the period beginning on the date that the registration statement of which this prospectus/proxy statement/prospectus is a part is declared effective. Such arrangements would also provide for Victory, immediately after the closing of the merger, to purchase from the third parties all of the Public Shares purchased by them for the price and fees specified in the arrangements.

 

   

Agreements with third parties pursuant to which Victory would borrow funds to make purchases of Public Shares for its own account. Victory would repay such borrowings with funds transferred to it from Victory’s trust account upon closing of the merger.

As a result of the purchases that may be effected through such arrangements, it is likely that the number of shares of common stock of Victory in its public float will be significantly reduced and that the number of beneficial holders of Victory’s and Victory’s securities also will be reduced. This may make it difficult to obtain the quotation, listing or trading of Victory’s securities on the Nasdaq Stock Market or any other national securities exchange.

Victory will file a Current Report on Form 8-K to disclose arrangements entered into or significant purchases made by any of the aforementioned persons that would affect the vote on the merger proposal or the conversion threshold. Any such report will include descriptions of any arrangements entered into or significant purchases by any of the aforementioned persons. If members of Victory’s board of directors or officers make purchases pursuant to such arrangements, they will be required to report these purchases on beneficial ownership reports filed with the Securities and Exchange Commission.

The purpose of such arrangements would be to increase the likelihood of satisfaction of the requirements that the holders of a majority of the Public Shares present (in person or represented by proxy) and entitled to vote on the merger proposal vote in its favor and that holders of fewer than 20% of the Public Shares vote against the merger proposal and demand conversion of their Public Shares into cash where it appears that such requirements would otherwise not be met. All shares purchased pursuant to such arrangements would be voted in favor of the merger proposal. If, for some reason, the merger is not closed despite such purchases, the purchasers would be entitled to participate in liquidation distributions from Victory’s trust fund with respect to such shares.

 

 

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Purchases pursuant to such arrangements ultimately paid for with funds in Victory’s trust account would diminish the funds available to Victory after the merger for working capital and general corporate purposes. Nevertheless, in all events there will be sufficient funds available to Victory from the trust account to pay the holders of all Public Shares that are properly converted.

It is possible that the special meeting could be adjourned to provide time to seek out and negotiate such transactions if, at the time of the meeting, it appears that the requisite vote will not be obtained or that the limitation on conversion will be exceeded, assuming that an adjournment proposal is approved. Also, under Delaware law, the board of directors may postpone the meeting at any time prior to it being called to order in order to provide time to seek out and negotiate such transactions.

Recommendation to Stockholders

Victory’s board of directors believes that the merger proposal and the other proposals to be presented at the meeting are fair to and in the best interest of Victory’s stockholders and unanimously recommends that its stockholders vote “FOR” each of the proposals.

Conditions to the Closing of the Merger

General Conditions

Consummation of the merger is conditioned on (i) the holders of the Public Shares, at a meeting called for this and other related purposes, approving the merger proposal and each of the charter amendment proposals and (ii) the holders of fewer than 20% of the Public Shares voting against the merger and exercising their right to convert their Public Shares into a pro-rata portion of the trust account, calculated as of two business days prior to the anticipated consummation of the merger.

In addition, the consummation of the transactions contemplated by the merger agreement is conditioned upon, among other things, (i) no order, stay, judgment or decree being issued by any governmental authority preventing, restraining or prohibiting in whole or in part, the consummation of such transactions, (ii) the execution by and delivery to each party of each of the various transaction documents, (iii) the delivery by each party to the other party of a certificate to the effect that the representations and warranties of each party are true and correct in all material respects as of the closing and all covenants contained in the merger agreement have been materially complied with by each party, and (iv) the receipt of consents and approvals by third parties and the completion of necessary proceedings.

Other Conditions

The obligations of Victory and TouchTunes to consummate the transactions contemplated by the merger agreement also are conditioned upon a number of other matters that are described in the section entitled “The Merger Agreement — Conditions to Closing of the Merger.”

Termination

The merger agreement may be terminated at any time, but not later than the closing, as follows:

 

   

by mutual written agreement of Victory and TouchTunes;

 

   

by either Victory or TouchTunes if the merger is not consummated by the date Victory is required to liquidate, provided that such termination is not available to a party whose action or failure to act has been a principal cause of or resulted in the failure of the merger to be consummated before such date and such action or failure to act is a breach of the merger agreement;

 

 

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by either Victory or TouchTunes if a governmental entity shall have issued an order, decree or ruling or taken any other action, in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the merger, which order, decree, judgment, ruling or other action is final and nonappealable;

 

   

by either Victory or TouchTunes if the other party has breached any of its covenants or representations and warranties in any material respect and has not cured its breach within thirty days of the notice of an intent to terminate, provided that the terminating party is itself not in breach; and

 

   

by either Victory or TouchTunes if, at the Victory stockholder meeting, the merger agreement shall fail to be approved by the affirmative vote of the holders of a majority of the Public Shares present (in person or represented by proxy) and entitled to vote at the meeting or the holders of 20% or more of the Public Shares exercise conversion rights.

If permitted under the applicable law, either TouchTunes or Victory may waive any inaccuracies in the representations and warranties made to such party contained in the merger agreement and waive compliance with any agreements or conditions for the benefit of itself or such party contained in the merger agreement. The condition requiring that the holders of fewer than 20% of the Public Shares affirmatively vote against the merger proposal and demand conversion of their shares into cash may not be waived. Victory cannot assure you that any or all of the conditions will be satisfied or waived.

The existence of the financial and personal interests of the directors may result in a conflict of interest on the part of one or more of them between what he may believe is best for Victory and what he may believe is best for himself in determining whether or not to grant a waiver in a specific situation.

Effect of Termination

In the event of proper termination by either Victory or TouchTunes, the merger agreement will become void and have no effect, without any liability or obligation on the part of Victory or TouchTunes, except that:

 

   

The confidentiality obligations set forth in the merger agreement will survive;

 

   

The waiver by TouchTunes of all rights against Victory to collect from the trust account any monies that may be owed to it by Victory for any reason whatsoever, including but not limited to a breach of the merger agreement, and the acknowledgement that TouchTunes will not seek recourse against the trust account for any reason whatsoever, will survive;

 

   

the rights of the parties to bring actions against each other for breach of the merger agreement will survive; and

 

   

the fees and expenses incurred in connection with the merger agreement and the transactions contemplated thereby will be paid by the party incurring such expenses.

Fees and Expenses

All fees and expenses incurred in connection with the merger agreement and the transactions contemplated thereby will be paid by the party incurring such expenses whether or not the merger agreement is consummated, except that Victory agreed to pay up to $250,000 in legal expenses incurred with the proposed merger irrespective of whether the merger is consummated.

 

 

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Tax Consequences of the Merger

Victory has obtained an opinion from Graubard Miller, its counsel, that, for federal income tax purposes:

 

   

The merger of Merger Sub will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code and no gain or loss will be recognized by Victory as a result of the merger;

 

   

A stockholder of Victory who exercises conversion rights and effects a termination of the stockholder’s interest in Victory will be required to recognize capital gain or loss upon the exchange of that stockholder’s shares of common stock of Victory for cash, if such shares were held as a capital asset on the date of the merger. Such gain or loss will be measured by the difference between the amount of cash received and the tax basis of that stockholder’s shares of Victory common stock; and

 

   

No gain or loss will recognized by non-converting stockholders of Victory

The tax opinion is attached to this proxy statement/prospectus as Annex F. Graubard Miller has consented to the use of its opinion in this proxy statement/prospectus.

For a description of the material federal income tax consequences of the business combination and merger, please see the information set forth in “The Merger Proposal — Material Federal Income Tax Consequences of the Merger.”

Anticipated Accounting Treatment

The acquisition will be accounted for as a “reverse merger” and recapitalization since immediately following the completion of the transaction, the shareholders of TouchTunes immediately prior to the business combination will have effective control of Victory through its approximately 41.2% shareholder interest in the combined entity, assuming no share conversions (45.5% in the event of maximum share conversion), which includes its largest principal shareholder owning approximately 34.3% of the TouchTunes shareholder interest. In addition, through TouchTunes’ 41.2% shareholder interest TouchTunes will maintain effective control of the combined entity through control of a substantial proportion of the board of directors by maintaining four of the seven board seats for an expected term of three years. Additionally, all of TouchTunes senior executive positions will continue on as management of the combined entity after consummation of the transaction. For accounting purposes, TouchTunes will be deemed to be the accounting acquirer in the transaction and, consequently, the transaction will be treated as a recapitalization of TouchTunes. Accordingly, TouchTunes’ assets, liabilities and results of operations will become the historical financial statements of the registrant, and Victory’s assets, liabilities and results of operations will be consolidated with TouchTunes effective as of the acquisition date. No step-up in basis or intangible assets or goodwill will be recorded in this transaction.

Rescission Rights

Because Victory’s IPO prospectus did not disclose that funds in its trust account might be used, directly or indirectly, to purchase Public Shares in order to secure approval of Victory’s stockholders on the merger, each holder of Public Shares at the time of the merger who purchased his Public Shares in the IPO and who has not converted his shares into cash may have securities law claims against Victory for rescission (under which a successful claimant has the right to receive the total amount paid for his or her securities pursuant to an allegedly deficient prospectus, plus interest and less any income earned on the securities, in exchange for surrender of the securities) or damages (compensation for loss on an investment caused by alleged material misrepresentations or omissions in the sale of a security). As Victory’s existence will terminate at the time of the merger and its rights and obligations will become rights and obligations of Victory, the rescission right will continue against Victory after the merger.

 

 

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Such claims may entitle stockholders asserting them to up to $10.00 per share, based on the initial offering price of the IPO units comprised of stock and warrants, less any amount received from sale of the original warrants purchased with them, plus interest from the date of Victory’s IPO (which, in the case of holders of Public Shares, may be more than the pro rata share of the trust account to which they are entitled on conversion or liquidation).

In general, a person who purchased shares pursuant to a defective prospectus or other representation must make a claim for rescission within the applicable statute of limitations period, which, for claims made under Section 12 of the Securities Act and some state statutes, is one year from the time the claimant discovered or reasonably should have discovered the facts giving rise to the claim, but not more than three years from the occurrence of the event giving rise to the claim. A successful claimant for damages under federal or state law could be awarded an amount to compensate for the decrease in value of his or her shares caused by the alleged violation (including, possibly, punitive damages), together with interest, while retaining the shares. Claims under the anti-fraud provisions of the federal securities laws must generally be brought within two years of discovery, but not more than five years after occurrence. Rescission and damages claims would not necessarily be finally adjudicated by the time the merger with TouchTunes may be completed, and such claims would not be extinguished by consummation of that transaction.

Even if you do not pursue such claims, others, who may include all holders of Public Shares, may. Neither Victory nor TouchTunes can predict whether stockholders will bring such claims, how many might bring them or the extent to which they might be successful.

Regulatory Matters

The merger and the transactions contemplated by the merger agreement are not subject to any additional federal or state regulatory requirement or approval, except the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or HSR Act, and for filings with the State of Delaware necessary to effectuate the merger.

Risk Factors

In evaluating the merger proposal, the stock plan proposal and the adjournment proposal, you should carefully read this proxy statement/prospectus and especially consider the factors discussed in the section entitled “Risk Factors.”

 

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

Victory and TouchTunes are providing the following selected historical financial information to assist you in your analysis of the financial aspects of the merger.

TouchTunes’ balance sheet data as of December 28, 2008, December 30, 2007 and December 31, 2006 and statements of operations and cash flow data for the years ended December 28, 2008, December 30, 2007 and December 31, 2006 are derived from TouchTunes’ unaudited financial statements, which are included elsewhere in this proxy statement/prospectus.

Victory’s balance sheet data as of December 31, 2008 and December 31, 2007 and statements of income data for the year ended December 31, 2008, and for the period from January 12, 2007 (inception) through December 31, 2007 and 2008 are derived from Victory’s audited financial statements, which are included elsewhere in this proxy statement/prospectus.

The information is only a summary and should be read in conjunction with each of Victory’s and TouchTunes’ historical financial statements and related notes and “Other Information Related to Victory —Victory’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “TouchTunes’ Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere herein. The historical results included below and elsewhere in this proxy statement/prospectus are not indicative of the future performance of TouchTunes.

 

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION —

TOUCHTUNES CORPORATION

(000’s of USD)

(Unaudited)(1)

 

     Year Ended
December 28,
2008
    Year Ended
December 30,
2007
    Year Ended
December 31,
2006
 

Statement of Operations:

      

Net sales

   $ 84,985     $ 80,568     $ 67,375  

Net loss

     (2,216 )     (16,539 )     (11,076 )

Basic and diluted loss per share

   $ (0.04 )   $ (0.32 )   $ (0.24 )
                        
     Year Ended
December 28,
2008
    Year Ended
December 30,
2007
    Year Ended
December 31,
2006
 

Balance Sheet:

      

Total assets

   $ 74,738     $ 51,019     $ 30,897  

Total liabilities

     66,394       58,740       24,780  

Retractable common stock

     440       200    

Stockholder’s equity

     7,904       (7,921 )     6,117  
     Year Ended
December 28,
2008
    Year Ended
December 30,
2007
    Year Ended
December 31,
2006
 

Other Case Flow Data:

      

Cash Flow from operations

   $ (2,092 )   $ (16,956 )   $ (13,901 )

Cash Flow from investing activities

     (5,238 )     (5,270 )     (1,909 )

Cash Flow from financing activities

     12,973       25,883       15,384  

 

(1) The TouchTunes historical financial statements have not been audited because it would be impracticable to do so at this time. The financial statements are currently undergoing audit by an independent registered public accounting firm.

 

 

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SELECTED HISTORICAL FINANCIAL INFORMATION — VICTORY

 

     Year Ended
December 31, 2008
    For the Period from
January 12, 2007
(Inception) through
December 31, 2007
    For the Period from
January 12, 2007
(Inception) through
December 31, 2008
 

Statement of Income Data:

      

Revenue

   $ —       $ —       $ —    
                        

Formation and operating costs

     1,515,347       748,262       2,263,609  
                        

Interest and dividend income

     4,907,372       7,558,794       12,466,166  
                        

Income before provision for income taxes

     3,392,025       6,810,532       10,202,557  

Provision for income taxes

     341,086       341,555       682,641  
                        

Net income

     3,050,939       6,468,977       9,519,916  

Accretion of trust account income relating to common stock subject to possible conversion

     (788,294 )     (908,683 )     (1,696,977 )
                        

Net income attributable to other common stockholders

   $ 2,262,645     $ 5,560,294     $ 7,822,939  
                        

Weighted average number of common shares outstanding excluding shares subject to possible conversion — basic and diluted

     33,900,001       25,845,763    
                  

Net income per share — basic and diluted

   $ 0.07       0.22    
                  

 

     As of
December 31, 2008
   As of
December 31, 2007

Balance Sheet Data:

     

Total assets

   331,551,792    328,974,416

Common stock subject to possible conversion

   66,028,967    65,240,672

Total liabilities

   345,547    819,111

Total stockholders’ equity

   265,177,278    262,914,633

 

 

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SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The selected unaudited pro forma condensed combined financial information has been derived from, and should be read in conjunction with, the unaudited pro forma condensed combined financial information included elsewhere in this proxy statement/prospectus.

The unaudited pro forma combined condensed statement of operations for the year ended December 31, 2008 give pro forma effect to the merger as if it had occurred on January 1, 2008. The pro forma statements of operations are based on the historical results of operations of TouchTunes for the years ended December 28, 2008 (unaudited) and Victory for the year ended December 31, 2008.

The unaudited pro forma combined condensed balance sheet as of December 31, 2008 gives pro forma effect to the merger as if it had occurred on that date.

The historical financial information has been adjusted to give effect to pro forma events that are related and/or directly attributable to the merger, are factually supportable and, in the case of the unaudited pro forma statement of operations data, are expected to have a continuing impact on the combined results. The adjustments presented on the unaudited pro forma condensed combined financial information have been identified and presented in “Unaudited Pro Forma Condensed Combined Financial Information” to provide relevant information necessary for an accurate understanding of the combined company upon consummation of the merger.

The historical financial information of TouchTunes is derived from the unaudited financial information of TouchTunes for the year ended December 28, 2008 included elsewhere in this proxy statement/prospectus. The historical financial information of Victory is derived from the audited financial information of Victory for the year ended December 31, 2008 and for the period from January 12, 2007 (Inception) through December 31, 2007 and 2008 included elsewhere in this proxy statement/prospectus.

This information should be read together with TouchTunes’ and Victory’s financial information and related notes, “Unaudited Pro Forma Condensed Combined Financial Information,” “TouchTunes’ Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Other Information Related to Victory — Victory’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this proxy statement/prospectus/ prospectus.

The unaudited pro forma condensed combined balance sheet data as of December 31, 2008 have been prepared using two different levels of approval of the transaction by the Victory stockholders, as follows:

 

   

Assuming No Conversion: This presentation assumes that no Victory stockholders seek conversion of their Victory stock into pro rata shares of the trust account; and

 

   

Assuming Maximum Conversion: This presentation assumes that holders of 19.99% (6,599,999) of the Public Shares exercise their conversion rights and that such shares were converted into their pro rata share of the trust account.

The unaudited pro forma financial statements are not necessarily indicative of the financial position or results of operations that may have actually occurred had the transaction taken place on the dates noted, or the future financial position or operating results of the combined company.

 

 

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SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (000’s USD Except Earning per Share)

 

     Pro Forma
Combined-No
Conversion
    Pro Forma
Combined -
Maximum
Allowable
Conversion
 
     USD $     USD $  

Consolidated Pro Forma Income Statement Data:

    

Net sales

   $ 84,985     $ 84,985  

Net loss available to common stockholders

     (2,270 )     (3,237 )

Basic and diluted net income per share

     (0.03 )     (0.05 )

Shares Outstanding

     68,840,561       62,240,562  

Weighted average number of shares

     68,840,561       62,240,562  

Consolidated Pro Forma Balance Sheet Data:

    

Total assets

   $ 385,730     $ 320,489  

Total liabilities

     64,421       64,421  

Long-term debt

     43,819       43,819  

Total stockholders’ equity

     321,309       256,069  

 

 

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RISK FACTORS

You should carefully consider the following risk factors, together with all of the other information included in this proxy statement/prospectus, before you decide whether to vote or instruct your vote to be cast to approve the proposals described in this proxy statement/prospectus.

General Risks Related to TouchTunes’ Business and Operations Following the Merger

The value of your investment in Victory following consummation of the merger will be subject to the significant risks affecting TouchTunes and inherent in its business. The risks described below are not the only risks TouchTunes faces. Additional risks and uncertainties not currently known to TouchTunes or that TouchTunes currently deems to be immaterial also may materially and adversely affect TouchTunes’ business and operations. If any of the events described below occur, TouchTunes’ post-acquisition business and financial results could be adversely affected in a material way. This could cause the trading price of our common stock to decline, perhaps significantly, and you may lose all or part of your investment.

Risks Related to TouchTunes

TouchTunes has a history of substantial losses and may not achieve or sustain profitability in the future.

TouchTunes has incurred losses from operations in all years but one since inception. Although TouchTunes achieved profitability in the last two quarters of 2008, there is no assurance that TouchTunes will achieve or maintain profitability in 2009 or in any later years. TouchTunes anticipates that its expenses will increase significantly in 2009 following the merger as it accelerates the deployment of its Barfly network in advance of potential revenue from such network, which will materially adversely affect TouchTunes’ results from operations. In addition, TouchTunes’ expenses will increase substantially in the foreseeable future as it:

 

   

continues its expansion into additional revenue channels, including digital advertising;

 

   

continues to undertake product development efforts;

 

   

acquires and integrates products and businesses;

 

   

expands its internal systems and infrastructure; and

 

   

hires additional personnel.

In order to maintain profitability, TouchTunes will need to continue to expand, and successfully integrate, new lines of business and revenues. The patronage of local bars, which constitutes the principal market for digital jukeboxes, has decreased, due to the implementation of smoking bans in several states, decline in the importance of neighborhood bars and an increased enforcement of laws prohibiting driving motor vehicles under the influence of alcohol. There can be no assurances that these factors will not affect systems revenue and services revenue in the future or that TouchTunes’ expansion plans will be successfully implemented and will be adequate to offset the impact of any such revenue decline.

TouchTunes’ revenue to date has been derived almost exclusively from sales and leases of digital jukebox systems and from music service revenue from these systems. TouchTunes’ failure to integrate and deploy PlayPorTT systems and to generate advertising revenue from all of its systems, including Barfly systems could adversely affect TouchTunes’ growth and financial condition.

Although TouchTunes’ strategy is to become a provider of integrated interactive content and advertising services on all of its systems, to date, TouchTunes’ revenue has come almost exclusively from sales and leases of its digital jukebox systems and from music service revenues generated by those systems. TouchTunes only

 

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recently introduced its PlayPorTT system, and has deployed most of these units in restaurant locations, a target market that TouchTunes has only recently begun to penetrate. Most of these restaurant locations do not have TouchTunes jukebox systems on premise and, therefore, there are few locations where PlayPorTT and TouchTunes’ jukebox systems are working on an integrated basis. In addition, TouchTunes initiated its advertising strategy in 2008 and, to date, has only received advertising revenue from one advertising campaign, which was conducted on the company’s jukebox systems in 20 markets. No advertising revenue has been derived to date from advertising on PlayPorTT or on Barfly screens and TouchTunes has not entered into any agreements to provide advertising on these systems. There can be no assurances that TouchTunes will be able to successfully market and sell to bars, restaurants and other venues all of its systems and services on an integrated basis, which would adversely affect TouchTunes’ profitability and prospects.

TouchTunes’ revenue model and strategy is evolving and there is no assurance that TouchTunes will achieve success in the market and will yield profitable results.

Historically, TouchTunes has principally sold its jukebox systems to distributors and operators, together with a five-year license for music content to play exclusively on TouchTunes’ systems, which have been deployed primarily in bars. With the introduction of PlayPorTT, TouchTunes is focusing on regional and national restaurant chains and is deploying the initial PlayPorTT systems without charge, with substantially all revenue expected to be derived from usage fees from games and other digital content. TouchTunes also deploys its Barfly systems without charge and expects that revenue from these systems in the foreseeable future will come, if at all, from advertising fees. TouchTunes’ strategy is also dependent in part on its success in selling multiple systems into single locations--such as digital jukeboxes and PlayPorTT systems. This would allow the company to integrate these systems, which TouchTunes believes will enhance its per system revenues. In addition, TouchTunes’ future growth strategy depends on TouchTunes’ integration of its new products and growth into venues, such as restaurants, where TouchTunes has limited experience. If TouchTunes is not successful in its digital advertising strategy, and is not able to successfully deploy multiple systems in the restaurant and bar locations where its products are placed, its prospects and results of operations will likely be adversely affected.

TouchTunes may not succeed in its strategy to attract advertisers to advertise on its various systems and network.

Beginning the second quarter of 2008, when TouchTunes launched its digital advertising initiative, TouchTunes has conducted over 20 promotional campaigns with music labels and artists free of charge, in an effort to demonstrate effectiveness and measurability of advertising on the TouchTunes network and the capabilities of the network technology. While TouchTunes considered these promotional campaigns to be successful, TouchTunes may not be able to duplicate these results consistently, or at all, and TouchTunes may not be able to attract advertisers on a paying basis for these services.

The amount of fees that TouchTunes will be able to charge advertisers for time slots on its digital entertainment systems will depend, among other things, on the size of its out-of-home network, the quality of available content, the number of user impressions, and TouchTunes brand name and reputation In addition, the fees that TouchTunes will be able to charge advertisers for advertising space on its digital entertainment systems will depend on the quality of the locations in which TouchTunes places advertising and the demand by advertisers for advertising space. If TouchTunes is unable to secure the most desirable locations for deployment of its advertising space, it may be unable to attract advertisers to purchase advertising space on its out-of-home network, TouchTunes may fail to successfully implement its advertising strategy and to attract advertisers to purchase time slots and frame space on its network at targeted fee levels, which could negatively affect its ability to increase its total revenues in the future.

 

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TouchTunes depends on component and product manufacturing and logistics services provided by third parties, some of which are the sole source for specific components or systems. TouchTunes’ production may be seriously harmed if these suppliers are not able to meet TouchTunes’ demand and alternative sources are not available, or if the costs of components or related costs rise.

TouchTunes assembles and tests its PlayPorTT and Barfly systems. However, TouchTunes’ digital jukebox systems and most of the components in TouchTunes’ PlayPorTT and Barfly systems are manufactured in whole or in part by third-party manufacturers. A significant concentration of this outsourced manufacturing is currently performed under a new manufacturing relationship with a Taiwanese company, International Currency Technologies Inc. (“ICT”). ICT began to manufacture TouchTunes’ newest digital jukebox system, the Allegro MX-1, and the new computer used in all TouchTunes’ digital jukeboxes, incorporating TouchTunes’ proprietary designs in mid-2008. Shipment of Allegro MX-1 digital jukeboxes and computers began in the fall of 2008. TouchTunes also has outsourced much of its transportation and logistics management. Alternative sources may not be currently available to manufacture the Allegro MX-1.

While TouchTunes’ arrangements with ICT and other third party manufacturers and distributors may lower operating costs, such arrangements also reduce TouchTunes’ direct control over production and distribution. In addition, TouchTunes may be responsible to a purchaser of its digital jukeboxes for warranty service in the event of product defects. In 2006, a new lighting system manufactured by a third party and installed in certain TouchTunes digital jukebox systems, experienced electrical wiring problems that led to incidences of fire conditions at approximately six bar and operator locations. This in turn resulted in the need to redesign and replace the lighting and the need to disconnect a number of units prior to replacement of the lighting. It is uncertain what effect TouchTunes’ diminished control over existing and new manufacturing relationships will have on the quality or supply of products or services, or TouchTunes’ flexibility to respond to changing market conditions. Foreign manufacturing can also be affected by factors such as currency devaluation, other currency fluctuations, tariffs, nationalization, exchange controls, interest rates, and other political, economic and regulatory risks and difficulties. Any unanticipated delay in the production or shipment of TouchTunes’ products, whether pursuant to arrangements with ICT or otherwise, may have a material adverse effect on TouchTunes’ reputation, financial condition and results of operations.

TouchTunes relies on licenses to music rights and to other third-party digital content, which may not be available on commercially reasonable terms or at all.

TouchTunes contracts with third parties to offer music on their digital jukeboxes, and, with growing importance, to offer additional digital content on its other digital entertainment systems. TouchTunes pays substantial fees to obtain the rights to certain of this content, particularly music. TouchTunes’ music licensing arrangements are generally under contracts with terms of for two or three years, and the terms in agreements for other forms of digital content vary. TouchTunes cannot guarantee the continuation or renewal of existing arrangements on similar pricing and other terms, or at all. If the cost of digital content on TouchTunes’ digital entertainment systems increases, or if TouchTunes is unable to continue to offer a wide variety of content at reasonable cost with acceptable usage rules, TouchTunes financial condition and results of operations could be materially adversely affected.

TouchTunes depends on its intellectual property to make its products competitive and if it is unable to protect its intellectual property, its business could suffer.

TouchTunes relies on a combination of patent, trade secret, copyright and trademark law, and nondisclosure agreements to establish and protect its intellectual property rights in its products. As of the date of this proxy statement/prospectus, TouchTunes owned over 50 patents and/or applications for patents, more than 200 foreign patents and/or applications for foreign patents, including applications for patents, over 20 registered trademarks and/or applications for registered foreign trademarks in the United States, over 145 registered foreign trademarks and/or applications for registered trademarks, and one registered foreign copyright. TouchTunes believes that, due to the rapid pace of technological innovations in its industry, its ability to establish and maintain a position

 

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among the technology leaders in the industry depends on its patents and other intellectual property as well as the skills of its development personnel. TouchTunes cannot make any assurance that any of its intellectual property, including any patent, trademark, copyright or license owned or held by it will not be invalidated, circumvented, rendered unenforceable or challenged, that the rights granted thereunder will provide competitive advantages to TouchTunes, or that any of TouchTunes’ future patent applications will be issued with the scope of the claims asserted by TouchTunes, if at all. Further, no assurances can be made that third parties or competitors will not develop technologies that are similar or superior to TouchTunes’ technology, duplicate TouchTunes’ technology, design around its patents, or reverse engineer its technology and discover its non-public intellectual property and trade secrets. TouchTunes’ intellectual property could be infringed or misappropriated by a third party or competitors, an event that could give rise to enforcement of TouchTunes’ intellectual property costs.

TouchTunes may be subject to or may initiate proceedings in the United States Patent and Trademark Office in state or federal court in the United States, or in another government tribunal. Such proceedings can require significant financial and management resources. In addition, the laws of foreign countries in which TouchTunes’ products are or may be developed, manufactured or sold may not protect TouchTunes’ products and intellectual property rights to the same extent as the laws of the United States. TouchTunes’ inability to protect its intellectual property adequately could have a material adverse effect on its financial condition or results of operations.

Because of technological changes in the electronics and software industry, current extensive patent coverage, and the rapid issuance of new patents, it is possible that certain components of TouchTunes’ products and business methods may unknowingly infringe the patents or other intellectual property rights of third parties. TouchTunes is involved in ongoing litigation over several of its patents and third-party patents, including patent litigation with Arachnid, Inc. and AMI Entertainment, Inc., as well as a principal competitor, Rowe International/Merit Industries, Inc. (the “Rowe claim”). In addition, from time to time, TouchTunes has been notified that it may be infringing other third party intellectual property rights. Responding to such claims, regardless of their merit, can consume significant time and expense, and several pending claims are in various stages of evaluation. Moreover, litigation is both time-consuming and disruptive to TouchTunes’ operations and causes significant expense and diversion of management attention. Should TouchTunes fail to prevail in the Rowe claim, or in other claims or proceedings, or should several of these matters be resolved against TouchTunes, TouchTunes could potentially require a license from one or more of these parties (and it is uncertain whether TouchTunes could obtain a license on commercially reasonable terms, or otherwise) or TouchTunes potentially could become subject to a temporary or permanent injunction prohibiting TouchTunes from marketing or selling certain products, which in turn could increase its operating costs and materially adversely affect its financial condition.

TouchTunes relies on access to certain third-party patents and intellectual property, and its future results could be materially adversely affected if TouchTunes is alleged or found to have infringed intellectual property rights.

TouchTunes’ digital jukeboxes and other digital entertainment systems are designed to include certain third-party intellectual property, such as licensing for MP3 technology, and it may be necessary in the future to seek or renew licenses relating to various aspects of TouchTunes’ products and business methods. Although TouchTunes believes that, based on past experience and industry practice, such licenses generally could be obtained on commercially reasonable terms, there is no assurance that the necessary licenses would be available on acceptable terms or at all.

TouchTunes may be subject to network disruptions and breaches in data security.

TouchTunes’ network is designed to capture all transaction data from its jukeboxes and PlayPorTT systems, including data with respect to each song played, impressions and customer credit card information. Network disruptions and breaches of data security could disrupt TouchTunes’ operations by causing the loss of this data and delays or cancellations of customers orders, negatively affecting TouchTunes’ services, impeding processing

 

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transactions and reporting financial results, resulting in the unintentional disclosure of customer or TouchTunes’ information, or damage to TouchTunes’ reputation. In addition, many third-party content providers require that TouchTunes provide certain digital rights management (“DRM”) and other security solutions. While TouchTunes has developed its own proprietary DRM, if these security requirements change, TouchTunes may have to develop or license new technology to provide these solutions. TouchTunes’ management has taken steps to address these concerns by implementing sophisticated network security and internal control measures. However, there can be no assurance that a system failure or data security breach will not have a material adverse effect on TouchTunes’ financial condition and results of operations.

The market for digital jukeboxes and other out-of-home digital entertainment systems is highly competitive and subject to rapid technological change. TouchTunes may not be able to compete effectively in these markets.

TouchTunes competes in markets that are highly competitive and characterized by frequent introduction of new products and technologies, short product life cycles, evolving industry standards, continual improvement in product price/performance characteristics, rapid adoption of technological and product advancements by competitors, and price sensitivity on the part of consumers.

TouchTunes’ ability to compete successfully depends heavily on its ability to ensure a continuing and timely introduction of new innovative products and technologies to the marketplace. As a result, TouchTunes must make significant investments in product development. If TouchTunes is unable to continue to develop and commercialize innovative new products, its financial condition and results of operations could be materially adversely affected.

Historically, TouchTunes has faced substantial competition from two other principal digital jukebox companies–Ecast Inc. and Rowe International/Merit Industries Inc., the latter of which has significantly greater financial and other resources than TouchTunes. With TouchTunes’ expansion into other forms of digital entertainment, TouchTunes will compete with additional companies that have significant technical, marketing, distribution, and other resources, as well as established hardware, software, and digital content supplier relationships. Some current and potential competitors have substantial resources and experience, and they may be able to provide such products and services at little or no profit or even at a loss. There can be no assurance that TouchTunes will be able to continue to provide products and services that effectively compete.

TouchTunes sells its jukeboxes and other systems and services through a fragmented distribution channel of distributors and operators.

TouchTunes sells its jukebox systems to distributors, who in turn sell them to operators, and TouchTunes sells these systems directly to operators as well. These operators, in turn, place these systems in bars and restaurants which do not have direct contractual relationships with TouchTunes. Many of TouchTunes distributors also distribute products from competing manufacturers. This distribution channel involves over 2,000 customers and no TouchTunes’ customer accounts for more than 5% of TouchTunes’ revenue or owns more than 5% of TouchTunes in service digital jukebox systems.

If TouchTunes is unable to recruit or retain experienced management personnel and recruit and retain additional qualified personnel, its business and prospects could be adversely affected.

The success of TouchTunes following the merger will depend in significant part on its ability to retain its senior executives and other key personnel in technical, marketing and staff positions. TouchTunes has experienced significant turnover in the past several years, including departures in the recent past of its chief executive officer and chief financial officer. TouchTunes’ current Chief Executive Officer is serving on a transitional basis, while TouchTunes is actively engaged in a search for a new Chief Executive Officer. Experienced personnel in the technology and media industry are in high demand and competition for their talents

 

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is intense. There can be no assurance that TouchTunes will be able to successfully attract and retain a new highly qualified chief executive officer other key personnel, either in existing markets and market segments or in new areas that it enters. If TouchTunes is unable to recruit and retain an experienced management team or recruit and retain additional qualified personnel, its business, and consequently its sales and results of operations, may be adversely affected.

The principal stockholder of TouchTunes will have significant influence on decisions regarding the business of the resulting entity.

If a business combination with TouchTunes is consummated, based on the outstanding shares of TouchTunes and Victory as of the date hereof, TouchTunes’ largest stockholder, VantagePoint CDP Partners L.P. and its affiliates (“VantagePoint”), will own almost 30% of the shares of the resulting entity. If shares are purchased by the public, then VantagePoint along with existing stockholders of TouchTunes will hold a greater percentage of the combined entity. As a condition to the consummation of the Merger, VantagePoint will enter into a voting agreement with Victory and certain stockholders of Victory including former TouchTunes’ stockholders and Jon Ledecky and Eric Watson. The voting agreement will provide that, as long as VantagePoint holds a number of shares at least equal to 50% of the shares of Victory that it holds at the time of the Merger (but not less than 10% of the outstanding shares of Victory), VantagePoint will have the voting power to designate and elect four of the seven members of the board of directors of Victory. This voting agreement will permit VantagePoint to control the outcome of certain actions submitted to the Board of Directors and the stockholders of Victory for their approval. This concentration of ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of Victory’s common stock.

TouchTunes customers may experience financial difficulty, particularly in the current economic climate.

TouchTunes has sold a substantial number of digital jukebox systems to operators in the “automotive” states. If the financial condition of the United States’ auto industry worsens, these areas may become economically depressed resulting in significant decline in revenue per system. In addition, TouchTunes has in the past extended credit and payment terms to many of its customers. While TouchTunes performs frequent credit evaluations of its distributors and operators to which it extends payment terms for equipment, there can be no assurances that TouchTunes’ customers will not experience financial difficulty and be unable to make payments to TouchTunes. For example, at least two of TouchTunes’ operators have recently filed for debtor protection under the U.S. Bankruptcy Code. TouchTunes could suffer significant losses in the event of a customer’s bankruptcy, insolvency or other credit failure if TouchTunes were unable to reclaim any systems for which it retains ownership or to discontinue its music services if either TouchTunes is not being paid or the system is not connected to the network and generating any revenue. A significant loss of an accounts receivable or the inability to redeploy systems would have a negative impact on TouchTunes’ recurring service revenues and financial results.

Advertising in bars is subject to state regulation that varies and changes to regulations could adversely affect alcoholic-beverage advertising on TouchTunes’ network.

Most states have alcoholic beverage control laws and regulations which apply to TouchTunes’ proposed digital advertising activities in bars via Barfly. TouchTunes has focused its efforts in understanding the potential applicability and effect of these statutes in a significant number of states with the most potential for advertising revenue and is working with those states’ attorneys general to ensure that its digital advertising services comply with applicable laws and regulations. Laws and regulations may be adopted in the United States and elsewhere that could restrict the placement of content on out-of-home entertainment and advertising systems and these laws could vary significantly from jurisdiction to jurisdiction. These laws include laws and regulations relating to alcoholic beverage control laws, customer privacy, taxation, content suitability, copyright, distribution and antitrust. Changes in current state or federal laws or regulations or the imposition of new laws and regulations in the United States or elsewhere regarding the out-of-home advertising industries may lessen the growth of out-of-

 

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home advertising services and may materially reduce TouchTunes’ ability to attract sales of alcoholic-beverage advertising on its network.

If TouchTunes engages in acquisitions, TouchTunes may experience significant costs and difficulty assimilating the operations or personnel of the acquired companies, which could threaten TouchTunes’ future growth.

If TouchTunes makes any acquisitions, it could have difficulty assimilating the operations, technologies and products acquired or integrating or retaining personnel of acquired companies. TouchTunes has acquired two companies in the past year and a half and is still in the process of integrating their products and personnel and there is no assurance that the products arising from those acquisitions, PlayporTT and Barfly, will be successfully deployed in the market. Acquisitions may involve entering markets in which TouchTunes has no or limited direct prior experience. The occurrence of any one or more of these factors could disrupt TouchTunes ongoing business, distract its management and employees and increase its expenses. In addition, pursuing acquisition opportunities could divert our management’s attention from our ongoing business operations and result in decreased operating performance. Moreover, our profitability may suffer because of acquisition-related costs or amortization of acquired goodwill and other intangible assets. Furthermore, we may have to incur debt or issue equity securities in future acquisitions. The issuance of equity securities would dilute our existing stockholders. TouchTunes is not in any discussions to make acquisitions with any party.

A failure of TouchTunes’ proprietary operating system or a catastrophic event at its primary facility could result in reduced revenue and the loss of customers.

TouchTunes’ digital jukeboxes and other systems are dependent on the operation of TouchTunes’ proprietary operating system, which allows it to communicate and service these systems remotely. TouchTunes’ ability to manage future growth, if it occurs, will depend upon the scalability, reliability and security of its operating system. Although designed to be highly scalable, TouchTunes’ operating could experience an unforeseen operational failure. Moreover, maintaining TouchTunes’ operating system as a state-of-the-art system could be more expensive than TouchTunes expects. Operational failures could be expensive to remedy and could require TouchTunes to develop additional capacity and computing power. An expansion of TouchTunes’ network infrastructure to process increasingly numerous and complex services could result in inefficiencies and may increase the risk of an operational failure. The costs associated with a system operational failure could harm TouchTunes’ results of operations and its reputation with current or future customers.

TouchTunes’ operations facility where its network is hosted is vulnerable to damage or interruption from fire, loss of primary and backup generator and battery power, telecommunications failures, terrorist attacks, wars, Internet failures, computer viruses, adverse weather conditions and other events beyond its control. While backups of critical data systems are performed daily and backups stored in a secure third party location, TouchTunes does not currently have the capability to immediately switch over all of its systems to a back-up facility. In June 2009, TouchTunes plans to move its digital jukebox servers to a secure data center co-location facility, which will provide redundancy. In the event that a catastrophic event destroys or severely damages TouchTunes’ operations facility, TouchTunes could lose music service and royalty fee and other customer data, its business would be disrupted and TouchTunes’ ability to provide services to its clients could be impaired for an extended period of time. An unexpected closure of TouchTunes’ operations facility could result in lengthy interruptions in its services. Any damage to or failure of TouchTunes’ systems could result in interruptions to its services, which could reduce its revenue and profits and damage its brand.

TouchTunes may apply the proceeds released from the trust account in a manner that does not improve TouchTunes’ results of operations or increase the value of your investment.

TouchTunes intends to use the net proceeds released from the trust account for general corporate purposes, including working capital and capital expenditures to accelerate the roll-out of its Barfly network and entertainment systems. TouchTunes may also use a portion of the net proceeds to repay its senior secured credit

 

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facility. TouchTunes recently acquired TouchTunes Game Studio, LLC (f/k/a White Rabbit Game Studio, LLC) (“TGS”) and National Broadcast Media Corp. as part of its strategy to further expand its business. If after the merger, TouchTunes is presented with appropriate opportunities, TouchTunes may acquire additional businesses, services or products that are complementary to TouchTunes’ core business. TouchTunes integration of TGS and Barfly as well as future acquired entities into TouchTunes’ business may not be successful. This would significantly affect the expected benefits of these acquisitions. Moreover, the integration of any acquired companies into TouchTunes’ operations have required, and will continue to require, significant attention from its management. Future acquisitions will also likely present similar challenges and could have an adverse effect on TouchTunes’ ability to manage its business. In addition, TouchTunes may face challenges trying to integrate new operations, services and personnel with its existing operations

Other than these uses, TouchTunes does not have specific plans for the funds and will have broad discretion regarding how it uses such funds. These funds could be applied in ways that do not improve TouchTunes’ results of operations or increase the value of your investment.

Changing tax laws, rules and regulations are subject to interpretation by applicable taxing authorities. If interpretations or tax laws, rules and regulations were to change, this may adversely affect TouchTunes’ business, financial condition and results of operations.

TouchTunes operates in all, or almost all, of the states in the United States, and its products are subject to various domestic and international sales, use, value-added and other tax laws, rules and regulations. TouchTunes downloads digital content to its products, which consumers use. Regulations for use of digital media are subject to change, and applicable laws, rules and regulations are subject to interpretation by the applicable taxing authorities. TouchTunes attempts to be in compliance with all applicable tax provisions, however compliance with these tax provisions, taxing authorities may take a contrary position. Such positions could have an adverse effect on TouchTunes’ businesses, financial condition and results of operations. If the tax laws, rules and regulations were amended or if current interpretations of the laws were to change adversely to TouchTunes’ interests, particularly with respect to sales or value-added taxes, the results could have an adverse affect on TouchTunes’ businesses, results of operations and financial condition.

Exchange rate fluctuations between the U.S. dollar and the Canadian dollar could harm TouchTunes’ operations and financial condition

The majority of TouchTunes’ revenues are generated in U.S. dollars. A significant portion of its expenses, however, are incurred in Canadian dollars. A fluctuation in the value of the U.S. dollar relative to the Canadian dollar may result in variations in TouchTunes’ revenues, expenses and earnings. For example, if the value of the U.S. dollar decreases relative to the value of the Canadian dollar, TouchTunes’ levels of revenue and profitability will decline since the translation of a certain number of U.S. dollars into Canadian dollars will represent fewer Canadian dollars. Conversely, if the value of the U.S. dollar increases relative to the value of the Canadian dollar, TouchTunes’ levels of revenue and profitability will increase since the translation of a certain number of Canadian dollars into U.S. dollars will represent additional U.S. dollars.

In certain circumstances, TouchTunes has entered into individual put options under which it has the option to sell a certain amount of U.S. dollars at a fixed strike price to the counterparty on a monthly basis for a set price. TouchTunes’ objective in entering into these transactions is to hedge the forecasted Canadian dollar transactions of and the cash-flow exposure resulting from changes in the value of the Canadian dollar compared to the U.S. dollar. These contracts may not be effective, however, and as a result, significant fluctuations in the exchange rate for U.S. dollars or Canadian dollars may adversely impact TouchTunes’ operations and financial condition.

 

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If TouchTunes expands into international markets outside of North America, such expansion may be unsuccessful and which would in turn limit TouchTunes’ prospects for growth.

TouchTunes is exploring the provision of its services in countries in Asia, Europe and Latin America. Expansion into markets outside of the United States and Canada requires significant management attention and financial resources. TouchTunes faces the following risks associated with any expansion outside the United States:

 

   

challenges caused by distance, language and cultural differences;

 

   

legal, legislative and regulatory restrictions;

 

   

currency exchange rate fluctuations;

 

   

foreign exchange controls that might prevent TouchTunes from repatriating cash earned in countries outside the United States;

 

   

economic instability and export restrictions;

 

   

longer payment cycles in some countries;

 

   

credit risk and higher levels of payment fraud;

 

   

potentially adverse tax consequences;

 

   

nationalization or seizure of private assets; and

 

   

higher costs associated with doing business internationally.

These risks could harm TouchTunes’ international expansion efforts, which would in turn harm TouchTunes’ growth prospects.

The historical financial information for TouchTunes included in this proxy statement/prospectus is not necessarily indicative of its future performance.

The historical financial information for TouchTunes included in this proxy statement/prospectus is not necessarily indicative of what TouchTunes’ financial position, results of operations and cash flows would have been if it had been a public company during those periods. The results of future periods may be materially different as a result of the additional costs associated with being a public company.

As a public company, TouchTunes will incur significant legal, accounting and other expenses that it did not incur as a private company. For example, it will be required to prepare and file quarterly annual and current reports with the SEC, as well as comply with myriad rules applicable to public companies, such as the proxy rules, beneficial ownership reporting requirements and other obligations. In addition, the Sarbanes-Oxley Act of 2002 and the rules implemented by the SEC in response to that legislation have required significant changes in corporate governance practices of public companies. TouchTunes expects these rules and regulations to significantly increase its legal and financial compliance costs and to make some activities more time-consuming and costly. For example, in anticipation of becoming a public company, TouchTunes will be creating additional board committees and adopting policies regarding internal control over financial reporting and disclosure controls and procedures.

TouchTunes also expects these new rules and regulations to make it more difficult and more expensive for it to obtain director and officer liability insurance for the same or similar coverage. These changes also may make it more difficult for TouchTunes to attract and retain qualified persons to serve on its board of directors or as executive officers. TouchTunes’ historical financial information does not reflect the impact of all of these factors, and as a result, may not be indicative of TouchTunes’ future performance once it becomes a public company.

 

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Risks Related to Victory and the Merger

If Victory is unable to effect a business combination and is forced to liquidate, its warrants will expire worthless.

If Victory does not complete the merger or another business combination by April 24, 2009, its amended and restated certificate of incorporation provides that its corporate existence will automatically terminate and it will distribute to all holders of IPO Shares, in proportion to the number of IPO Shares held by them, an aggregate sum equal to the amount in the trust fund, inclusive of any interest, plus any remaining net assets. In such event, there will be no distribution with respect to Victory’s outstanding warrants. Accordingly, the warrants will expire worthless.

Victory’s stockholders may be held liable for claims by third parties against Victory to the extent of distributions received by them.

Victory’s amended and restated certificate of incorporation provides that Victory will continue in existence only until April 24, 2009. If Victory has not completed a business combination by such date and amended this provision in connection thereto, pursuant to the Delaware General Corporation Law, its corporate existence will cease except for the purposes of winding up its affairs and liquidating. Under Sections 280 through 282 of the Delaware General Corporation Law, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If the corporation complies with certain procedures set forth in Section 280 of the Delaware General Corporation Law intended to ensure that it makes reasonable provision for all claims against it, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder’s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution. However, it is Victory’s intention to make liquidating distributions to its stockholders as soon as reasonably possible after April 24, 2009 and, therefore, it does not intend to comply with those procedures.

Because Victory will not be complying with those procedures, it is required, pursuant to Section 281 of the Delaware General Corporation Law, to adopt a plan that will provide for its payment, based on facts known to it at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against it within the subsequent 10 years. Accordingly, Victory would be required to provide for any creditors known to it at that time or those that it believes could be potentially brought against it within the subsequent 10 years prior to distributing the funds held in the trust to stockholders. Victory cannot assure you that it will properly assess all claims that may be potentially brought against it. As such, Victory’s stockholders could potentially be liable for any claims to the extent of distributions received by them (but no more) and any liability of Victory’s stockholders may extend well beyond the third anniversary of such date. Accordingly, there can be no assurance that third parties will not seek to recover from Victory’s stockholders amounts owed to them by Victory.

If Victory is forced to file a bankruptcy case or an involuntary bankruptcy case is filed against it which is not dismissed, any distributions received by stockholders could be viewed under applicable debtor/creditor and/or bankruptcy laws as either a “preferential transfer” or a “fraudulent conveyance.” As a result, a bankruptcy court could seek to recover all amounts received by Victory’s stockholders. Furthermore, because Victory intends to distribute the proceeds held in the trust fund to its public stockholders promptly after April 24, 2009 if it has not completed a business combination by such date, this may be viewed or interpreted as giving preference to Victory’s public stockholders over any potential creditors with respect to access to or distributions from Victory’s assets. Furthermore, Victory’s board may be viewed as having breached their fiduciary duties to Victory’s creditors and/or may have acted in bad faith; thereby exposing itself and Victory to claims of punitive damages, by paying public stockholders from the trust fund prior to addressing the claims of creditors. There can be no assurance that claims will not be brought against Victory for these reasons.

 

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You will not be able to exercise your warrants if an effective registration statement is not in place when you desire to do so.

No public warrant will be exercisable and Victory will not be obligated to issue shares of common stock unless, at the time a holder seeks to exercise such public warrant, a prospectus relating to the common stock issuable upon exercise of the warrant is current. Under the terms of the warrant agreement, Victory will be required to use its best efforts to meet these conditions and to maintain a current prospectus relating to the shares of common stock issuable upon exercise of the warrants until the expiration of the warrants. However, there can be no assurance that Victory will be able to do so, and if it does not maintain a current prospectus related to the shares of common stock issuable upon exercise of the warrants, holders will be unable to exercise their warrants. Additionally, Victory will have no obligation to settle the warrants for cash or “net cash settle” any warrant exercise. Accordingly, if the prospectus relating to the common stock issuable upon the exercise of the warrants is not current, the warrants may have no value, the market for the warrants may be limited and the warrants may expire worthless. If the warrants expire worthless, this would mean that a person who paid $10.00 for a unit in Victory’s IPO and who did not sell the warrant included in the unit would have effectively paid $10.00 for one share of Victory common stock.

An investor will only be able to exercise a warrant if the issuance of Victory common stock upon such exercise has been registered or qualified or is deemed exempt under the securities laws of the state of residence of the holder of the warrants.

No warrants will be exercisable by a warrant holder and Victory will not be obligated to issue shares of common stock unless the shares of common stock issuable upon such exercise have been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. At the time that the warrants become exercisable (following completion of the merger), Victory expects to become listed on the Nasdaq Stock Market, which would provide an exemption from registration in every state. Accordingly, Victory believes holders in every state will be able to exercise their warrants as long as its prospectus relating to the shares of common stock issuable upon exercise of the warrants is current. However, there can be no assurance of this fact. If a warrant holder is unable to exercise his warrants in a particular state, he may be forced to sell his warrant and therefore lose out of the benefit of purchasing Victory stock. Furthermore, the price he receives for his warrant may not equal the difference between the exercise price and the stock price.

Victory’s working capital will be reduced if Victory stockholders exercise their right to convert their shares into cash, which reduced working capital may adversely affect TouchTunes’ business and future operations.

Pursuant to Victory’s amended and restated certificate of incorporation, holders of Public Shares may vote against the merger proposal and demand that it convert their shares, calculated as of two business days prior to the anticipated consummation of the merger, into a pro rata share of the trust account where a substantial portion of the net proceeds of the IPO are held. Victory and TouchTunes will not consummate the merger if holders of 6,600,000 or more Public Shares exercise these conversion rights. The trust account will be approximately $330,000,000 at closing. Such funds will be used to pay approximately $10,560,000 to the underwriters in Victory’s IPO for deferred underwriting discounts and commissions and to pay approximately $5,000,000 for transaction expenses. If holders of 6,599,999 Public Shares seek to exercise their conversion rights, the maximum potential conversion cost would be approximately $66,000,000. Accordingly, approximately $313,000,000 will be released to Victory upon consummation of the merger for working capital and general corporate purposes. If such amount is insufficient to fund TouchTunes’ working capital requirements, Victory would need to seek to borrow funds necessary to satisfy such requirements. Victory cannot assure you that such funds would be available to Victory on terms favorable to it or at all. If such funds were not available to Victory, it may adversely affect TouchTunes’ operations and profitability.

 

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Victory’s outstanding warrants may be exercised in the future, which would increase the number of shares eligible for future resale in the public market and result in dilution TouchTunes’ stockholders.

Outstanding redeemable warrants to purchase an aggregate of 33,000,000 shares of Victory common stock (issued in exchange for Victory warrants issued in the IPO) and warrants to purchase an aggregate of 5,000,000 shares of common stock (issued in exchange for the Sponsors’ Warrants) will become exercisable after the consummation of the merger. These warrants likely will be exercised only if the $7.50 per share exercise price is below the market price of the shares of Victory common stock. To the extent such warrants are exercised, additional shares of Victory common stock will be issued, which will result in dilution to the holders of common stock of TouchTunes and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price of Victory’s common stock.

If Victory stockholders fail to vote against the merger proposal and fail to deliver their shares in accordance with the conversion requirements specified in this proxy statement/prospectus, they will not be entitled to convert their shares of common stock of Victory into a pro rata portion of the trust account.

Victory stockholders holding Public Shares who affirmatively vote against the merger proposal may demand that Victory convert their shares into a pro rata portion of the trust account, calculated as of two business days prior to the anticipated consummation of the merger. Victory stockholders who seek to exercise this conversion right must affirmatively vote against the merger and deliver their stock (either physically or electronically) to Victory’s transfer agent prior to the meeting. Any Victory stockholder who fails to vote against the merger proposal and who fails to deliver his or her stock will not be entitled to convert his or her shares into a pro rata portion of the trust account for conversion of his or her shares. See the section entitled “Special Meeting of Victory Stockholders — Conversion Rights” for the procedures to be followed if you wish to convert your shares to cash.

The Nasdaq Stock Market may not list Victory’s securities on its exchange, which could limit investors’ ability to make transactions in TouchTunes’ securities and subject TouchTunes to additional trading restrictions.

Victory will seek listing of its securities on the Nasdaq Stock Market as soon as practicable in connection with the merger. Victory will be required to meet the Nasdaq Stock Market initial listing requirements to be listed. Victory may not be able to meet those initial listing requirements. Even if such application is accepted and Victory’s securities are so listed, Victory may be unable to maintain the listing of its securities in the future.

If the Nasdaq Stock Market does not list Victory’s securities for trading on its exchange, Victory could face significant material adverse consequences, including:

 

   

a limited availability of market quotations for its securities;

 

   

reduced liquidity with respect to its securities;

 

   

a determination that its shares of common stock are “penny stock,” which will require brokers trading in its Shares of common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for the shares of common stock;

 

   

a limited amount of news and analyst coverage for TouchTunes; and

 

   

a decreased ability to issue additional securities or obtain additional financing in the future.

Victory’s stock price could fluctuate and could cause you to lose a significant part of your investment.

Following consummation of the merger, the market price of Victory’s securities may be influenced by many factors, some of which are beyond its control, including those described above and the following:

 

   

changes in financial estimates by analysts;

 

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announcements by it or its competitors of significant contracts, productions, acquisitions or capital commitments;

 

   

fluctuations in its quarterly financial results or the quarterly financial results of companies perceived to be similar to it;

 

   

general economic conditions;

 

   

changes in market valuations of similar companies;

 

   

terrorist acts;

 

   

changes in its capital structure, such as future issuances of securities or the incurrence of additional debt;

 

   

future sales of its common stock;

 

   

investor perception of the filmmaking industry;

 

   

regulatory developments in the United States, foreign countries or both;

 

   

litigation involving Victory, its subsidiaries or its general industry; and

 

   

additions or departures of key personnel.

Future sales of Victory shares may cause the market price of its securities to drop significantly, even if our business is doing well.

The current holders of common stock of TouchTunes will be able to sell their shares of Victory common stock they receive in the merger on the 18-month anniversary of the consummation of the merger, subject to certain exceptions; provided however that certain holders of TouchTunes common stock will be entitled to sell up to an aggregate of             shares they receive in the merger at any time they wish. Further, the officers and directors of Victory will not be able to sell any of the Founders’ Shares until the 18-month anniversary of the consummation of the merger, subject to certain exceptions.

The sale by any of the foregoing, or entities they control or their permitted transferees, could cause the market price of our securities to decline.

Victory’s ability to request indemnification from TouchTunes’ stockholders for damages arising out of the merger is limited in certain instances to those claims where damages exceed $500,000 and, except in very limited circumstances, is also limited to the shares of common stock placed in escrow.

To provide a fund to secure the indemnification obligations of TouchTunes to Victory against losses that the surviving entity of the merger may sustain as a result of (i) the inaccuracy or breach of any representation or warranty made by TouchTunes in the merger agreement or any schedule or certificate delivered by them in connection with the merger agreement and (ii) the non-fulfillment or breach of any covenant or agreement made by TouchTunes in the merger agreement, the current holders of common stock of TouchTunes will place in escrow (with an independent escrow agent) an aggregate of 2,834,056 shares of Victory common stock valued at $10.00 per share, representing 10% of the shares to be issued in the merger, which will be canceled to the extent that Victory has damages for which it is entitled to indemnification. Other than with respect to claims of fraud or intentional or willful misrepresentation or omission, the escrow will be the sole remedy for TouchTunes for its rights to indemnification pursuant to the merger agreement. Claims for indemnification may be asserted against the escrow by Victory once its damages exceed a deductible and will be reimbursable to the full extent of the damages in excess of such amount up to a maximum of the escrowed funds. Claims for indemnification may be asserted until thirty (30) days after the date on which Victory has filed its annual report on Form 10-K for the fiscal year ending December 31, 2009 but in no event later than April 30, 2010. As a consequence of these limitations, Victory may not be able to be entirely compensated for indemnifiable damages that it may sustain.

 

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Victory’s current directors and executive officers have certain interests in consummating the merger that may have influenced their decision to approve the business combination with TouchTunes.

Victory’s Founders beneficially own Founders’ Shares that they purchased prior to its IPO. Additionally, Messrs. Watson and Ledecky purchased 5,000,000 Sponsors’ Warrants in a private placement that occurred simultaneously with Victory’s IPO. Such persons are not entitled to receive any of the cash proceeds that may be distributed upon Victory’s liquidation with respect to shares they acquired prior to its IPO. Therefore, if the merger is not approved and Victory does not consummate another business combination by April 24, 2009 and is forced to liquidate, such Founders’ Shares and Sponsors’ Warrants held by such persons will be worthless. As of the             , 2009, the record date for the special meeting, Victory’s Founders held $            in common stock (based on a market price of $            ) and $            in warrants (based on a market price of $            ). See the section entitled “The Merger Proposal — Interests of Victory’s Directors and Officers and Others in the Merger.”

Additionally, the transactions contemplated by the merger agreement provide that each of Jonathan J. Ledecky and Richard Y. Roberts will be a director of Victory after the closing of the merger. As such, in the future they will receive any cash fees, stock options or stock awards that the Victory board of directors determines to pay to its non-executive directors.

These financial interests of Victory’s Founders may have influenced their decision to approve Victory’s merger with TouchTunes and to continue to pursue the merger. In considering the recommendations of Victory’s board of directors to vote for the merger proposal and other proposals, you should consider these interests.

Victory’s chairman and president are liable to ensure that proceeds of the trust are not reduced by vendor claims in the event the merger is not consummated. Such liability may have influenced their decision to approve the merger with TouchTunes.

If Victory liquidates prior to the consummation of a business combination, Eric J. Watson, Victory’s chairman and treasurer, and Jonathan J. Ledecky, Victory’s president and secretary, will be personally liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by Victory for services rendered or contracted for or products sold to Victory, but only if such entities did not execute a waiver. On the other hand, if Victory consummates the merger, Victory will be liable for all such claims. Neither Victory nor Messrs. Watson and Ledecky has any reason to believe that Messrs. Watson and Ledecky will not be able to fulfill their indemnity obligations to Victory if required to do so.

Additionally, if Victory is required to be liquidated and there are no funds remaining to pay the costs associated with the implementation and completion of such liquidation, Messrs. Watson and Ledecky have agreed to advance Victory the funds necessary to pay such costs and complete such liquidation (currently anticipated to be no more than approximately $15,000) and not to seek repayment for such expenses. If Victory consummates the merger, Messrs. Watson and Ledecky will no longer be responsible for such expenses. See the section entitled “Other Information Related to Victory — Victory’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information.

These personal obligations may have influenced Messrs. Watson’s and Ledecky’s decision to approve Victory’s merger with TouchTunes and to continue to pursue the merger. In considering the recommendations of Victory’s board of directors to vote for the merger proposal and other proposals, you should consider these interests.

 

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The exercise of Victory’s directors’ and officers’ discretion in agreeing to changes or waivers in the terms of the merger may result in a conflict of interest when determining whether such changes to the terms of the merger or waivers of conditions are appropriate and in Victory’s stockholders’ best interest.

In the period leading up to the closing of the merger, events may occur that, pursuant to the merger agreement, would require Victory to agree to amend the merger agreement, to consent to certain actions taken by TouchTunes or to waive rights that Victory is entitled to under the merger agreement. Such events could arise because of changes in the course of TouchTunes’ business, a request by TouchTunes to undertake actions that would otherwise be prohibited by the terms of the merger agreement or the occurrence of other events that would have a material adverse effect on TouchTunes’ business and would entitle Victory to terminate the merger agreement. In any of such circumstances, it would be discretionary on Victory, acting through its board of directors, to grant its consent or waive its rights. The existence of the financial and personal interests of the directors described in the preceding risk factors may result in a conflict of interest on the part of one or more of the directors between what he may believe is best for Victory and what he may believe is best for himself in determining whether or not to take the requested action. As of the date of this proxy statement/prospectus, Victory does not believe there will be any changes or waivers that its directors and officers would be likely to make after stockholder approval of the merger proposal has been obtained. While certain changes could be made without further stockholder approval, Victory will circulate a new or amended proxy statement/prospectus and resolicit its stockholders if changes to the terms of the transaction that would have a material impact on its stockholders are required prior to the stockholder vote on the merger proposal.

If the merger is completed, a large portion of the funds in the trust account established by Victory in connection with its IPO for the benefit of the holders of the Public Shares may be used for the purchase, directly or indirectly, of Public Shares. As a consequence, if the merger is completed, such funds will not be available to Victory for working capital and general corporate purposes and the number of beneficial holders of Victory’s and Victory’s securities may be reduced to a number that may preclude the quotation, trading or listing of Victory’s securities other than on the Over-the-Counter Bulletin Board.

After the payment of expenses associated with the transaction, including investment banking and finder’s fees and deferred underwriting commissions, the balance of funds in Victory’s trust account will be available to Victory for working capital and general corporate purposes. However, a portion of the funds in the trust account may be used to acquire Public Shares, either from holders thereof who vote against the merger proposal and elect to convert their shares into cash or from holders thereof who have indicated their intention to do so but first sell their shares to Victory or its affiliates so that such shares will be voted in favor of the merger proposal. As a consequence of such purchases,

 

   

the funds in Victory’s trust account that are so used will not be available to Victory after the merger and the actual amount of such funds that Victory may retain for its own use will be diminished; and

 

   

the public “float” of Victory’s common stock may be reduced and the number of beneficial holders of Victory’s and Victory’s securities may be reduced, which may make it difficult to obtain the quotation, listing or trading of Victory’s securities on the Nasdaq Stock Market or any other national securities exchange.

 

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If funds in Victory’s trust account are used to purchase, directly or indirectly, Public Shares from holders thereof who have indicated an intention to vote against the merger proposal and convert their Public Shares into cash, which action was not disclosed in the prospectus for Victory’s IPO, holders of Public Shares at the time of the merger who purchased their units in the IPO and have not converted their shares into cash may have rights to rescind their purchases and assert a claim for damages therefor against Victory, its directors and officers and the former directors and officers of Victory.

The prospectus issued by Victory in its IPO did not disclose that funds in the trust account might be used to purchase Public Shares from holders thereof who have indicated their intention to vote against the merger and convert their shares into cash. Consequently, such use of the funds in the trust account might be grounds for a holder of Public Shares who purchased them in the IPO and still held them at the time of the merger without seeking to convert them into cash to seek rescission of the purchase of the units he acquired in the IPO. A successful claimant for damages under federal or state law could be awarded an amount to compensate for the decrease in value of his or her shares caused by the alleged violation (including, possibly, punitive damages), together with interest, while retaining the shares.

If Victory is unable to complete the merger with TouchTunes or another business combination by April 24, 2009, its amended and restated certificate of incorporation provides that its corporate existence will automatically terminate and will liquidate. In such event, third parties may bring claims against Victory and, as a result, the proceeds held in trust could be reduced and the per-share liquidation price received by stockholders could be less than $10.00 per share.

Victory must complete a business combination with TouchTunes or another target business by April 24, 2009, when, pursuant to its amended and restated certificate of incorporation, its corporate existence will terminate and it will be required to liquidate. In such event, third parties may bring claims against Victory. Although Victory has obtained waiver agreements from certain vendors and service providers it has engaged and owe money to, and the prospective target businesses it has negotiated with, whereby such parties have waived any right, title, interest or claim of any kind they may have in or to any monies held in the trust account, there is no guarantee that they or other vendors who did not execute such waivers will not seek recourse against the trust account notwithstanding such agreements. Furthermore, there is no guarantee that a court will uphold the validity of such agreements. Accordingly, the proceeds held in trust could be subject to claims which could take priority over those of Victory’s public stockholders. Additionally, if Victory is forced to file a bankruptcy case or an involuntary bankruptcy case is filed against it which is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in Victory’s bankruptcy estate and subject to the claims of third parties with priority over the claims of Victory’s stockholders. To the extent any bankruptcy or other claims deplete the trust account, there can be no assurance that Victory will be able to return to its public stockholders at least $10.00 per share.

Victory’s board of directors did not obtain a fairness opinion in determining whether or not to proceed with the transaction with TouchTunes and as a result, the terms may not be fair from a financial point of view to Victory’s public stockholders.

In analyzing the transaction with TouchTunes, the Victory board conducted significant due diligence on TouchTunes, including, among other things, researching the industry in which TouchTunes operates, reviewing comparisons of comparable companies and performing a discounted cash flow analysis. The Victory board of directors believes because of the financial skills and background of its directors, it was qualified to conclude that the business combination was fair from a financial perspective to its stockholders and that TouchTunes’ fair market value was at least equal to 80% of Victory’s trust account balance (excluding deferred underwriting discounts and commissions). Notwithstanding the foregoing, Victory’s board of directors did not obtain a fairness opinion to assist it in its determination. Accordingly, Victory’s board of directors may be incorrect in its assessment of the transaction.

 

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FORWARD-LOOKING STATEMENTS

Certain statements made in this proxy statement/prospectus constitute forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “potential,” “intend” or similar expressions. These statements include, among others, statements regarding the successful merger of Victory and TouchTunes, TouchTunes’ expected business outlook, anticipated financial and operating results, business strategy and means to implement the strategy, the amount and timing of capital expenditures, the likelihood of its success in building its business, financing plans, budgets, working capital needs and sources of liquidity. Victory and TouchTunes believe it is important to communicate their expectations to their stockholders. However, there may be events in the future that they are not able to predict accurately or over which they have no control.

Forward-looking statements, estimates and projections are based on management’s beliefs and assumptions, are not guarantees of performance and may prove to be inaccurate. Forward-looking statements also involve risks and uncertainties that could cause actual results to differ materially from those contained in any forward-looking statement and which may have a material adverse effect on TouchTunes’ business, financial condition, results of operations and liquidity. A number of important factors could cause actual results or events to differ materially from those indicated by forward-looking statements. These risks and uncertainties include, but are not limited to:

 

   

TouchTunes’ ability to achieve sustainable profitability;

 

   

the continued availability of third-party digital content on commercially reasonable terms;

 

   

TouchTunes’ ability to protect its intellectual property and access to third party intellectual property;

 

   

the quantity and quality of products and services produced by third party manufacturers;

 

   

competition in the market for digital jukeboxes and other digital entertainment systems;

 

   

TouchTunes’ successful introduction of new products and services;

 

   

the performance of TouchTunes’ distributors, operators and other resellers;

 

   

TouchTunes’ ability to recruit and retain key personnel;

 

   

TouchTunes’ ability to attract advertisers; and

 

   

the ability to successfully effect the business combination.

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this proxy statement/prospectus. Additional information on these and other factors that may cause actual results and Victory’s performance to differ materially is included in the “Risk Factors” section and elsewhere in this proxy statement/prospectus and in Victory’s periodic reports filed with the SEC.

All forward-looking statements included herein attributable to any of Victory, TouchTunes or any person acting on either party’s behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, Victory and TouchTunes undertake no obligations to update these forward-looking statements to reflect events or circumstances after the date of this proxy statement/prospectus or to reflect the occurrence of unanticipated events.

 

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SPECIAL MEETING OF VICTORY STOCKHOLDERS

General

Victory is furnishing this proxy statement/prospectus to its stockholders as part of the solicitation of proxies by its board of directors for use at the special meeting of Victory stockholders to be held on April     , 2009, and at any adjournment or postponement thereof. This proxy statement/prospectus is first being furnished to Victory stockholders on or about             , 2009 in connection with the vote on the merger proposal and the adjournment proposal. This proxy statement/prospectus provides you with information you need to know to be able to vote or instruct your vote to be cast at the special meeting.

Date, Time and Place

The special meeting of stockholders will be held on April     , 2009, at 10:00 a.m., eastern time, at the offices of Graubard Miller, Victory’s counsel, at The Chrysler Building, 405 Lexington Avenue, 19th Floor, New York, New York 10174.

Purpose of the Victory Special Meeting

At the special meeting, Victory will ask holders of its common stock to:

 

   

consider and vote upon a proposal to approve the Agreement and Plan of Reorganization, dated as of March 23, 2009, among Victory, Merger Sub and TouchTunes which, among other things, provides for the merger of Merger Sub with and into TouchTunes, with TouchTunes being the surviving entity and becoming a wholly owned subsidiary of Victory (merger proposal);

 

   

consider and vote upon a proposal to approve amendments to Victory’s amended and restated certificate of incorporation to (i) change Victory’s name to “TouchTunes Corporation,” (ii) increase the authorized number of shares of its common stock from 85 million to 300 million, (iii) make its corporate existence perpetual, (iv) incorporate the classification of directors that would result from the election of directors in the manner described in the director election proposal; (v) remove provisions that will no longer be applicable to Victory after the merger; and (vi) make certain other changes that Victory’s board of directors believes are immaterial (charter amendments proposal);

 

   

consider and vote upon a proposal to approve the 2009 Stock Incentive Plan (stock plan proposal);

 

   

elect six directors to Victory’s board of directors, of whom two will serve until the annual meeting of stockholders to be held in 2010, one will serve until the annual meeting of stockholders to be held in 2011 and three will serve until the annual meeting of stockholders to be held in 2012 (director election proposal); and

 

   

consider and vote upon a proposal to adjourn the special meeting to a later date or dates, if necessary, to permit further solicitation and vote of proxies if, based upon the tabulated vote at the time of the special meeting, Victory is not authorized to consummate the merger (adjournment proposal).

Recommendation of Victory Board of Directors

Victory’s board of directors:

 

   

has unanimously determined that each of the proposals is fair to and in the best interests of Victory and its stockholders;

 

   

has unanimously approved each of the proposals;

 

   

unanimously recommends that Victory’s common stockholders vote “FOR” the merger proposal;

 

   

unanimously recommends that Victory’s common stockholders vote “FOR” each of the charter amendment proposals;

 

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unanimously recommends that Victory’s common stockholders vote “FOR” the stock plan proposal;

 

   

unanimously recommends that Victory’s common stockholders vote “FOR” the election of the persons nominated by Victory’s management for election as directors; and

 

   

unanimously recommends that Victory’s common stockholders vote “FOR” the adjournment proposal.

Record Date; Who is Entitled to Vote

Victory has fixed the close of business on             , 2009, as the “record date” for determining Victory stockholders entitled to notice of and to attend and vote at its special meeting. As of the close of business on             , 2009, there were 40,500,000 shares of Victory’s common stock outstanding and entitled to vote. Each share of Victory’s common stock is entitled to one vote per share at the special meeting.

Pursuant to agreements with Victory, the 7,500,000 Founders’ Shares held by the Victory Founders will be voted on the merger proposal in accordance with the majority of the votes cast at the special meeting on such proposal by the holders of the Public Shares. Accordingly, the vote of such shares will not affect the outcome of the vote on the merger proposal.

Quorum

The presence, in person or by proxy, of a majority of all the outstanding shares of common stock entitled to vote constitutes a quorum at the special meeting.

Abstentions and Broker Non-Votes

Proxies that are marked “abstain” and proxies relating to “street name” shares that are returned to Victory but marked by brokers as “not voted” will be treated as shares present for purposes of determining the presence of a quorum on all matters. The latter will not be treated as shares entitled to vote on the matter as to which authority to vote is withheld from the broker. If you do not give the broker voting instructions, under applicable self-regulatory organization rules, your broker may not vote your shares on “non-routine” proposals, such as the merger proposal, each of the charter amendment proposals and the stock plan proposal. Since a stockholder must affirmatively vote against the merger proposal to have conversion rights, individuals who fail to vote or who abstain from voting may not exercise their conversion rights. See the information set forth in “Special Meeting of Victory Stockholders — Conversion Rights.”

Vote of Victory’s Stockholders Required

The approval of the merger proposal will require the affirmative vote for the proposal by the holders of a majority of the Public Shares present (in person or represented by proxy) and entitled to vote on the proposal at the meeting. Abstentions will have the same effect as a vote “AGAINST” the merger proposal and broker non-votes, while considered present for the purposes of establishing a quorum, will have no effect on the merger proposal. You cannot seek conversion unless you affirmatively vote against the merger proposal.

Each of the charter amendment proposals will require the affirmative vote of the holders of a majority of Victory common stock outstanding on the record date. Because these proposals require the affirmative vote of a majority of the shares of common stock outstanding for approval, abstentions and shares not entitled to vote because of a broker non-vote will have the same effect as a vote against these proposals.

The approval of the stock plan proposal and adjournment proposal will require the affirmative vote of the holders of a majority of Victory’s common stock represented and entitled to vote thereon at the meeting. Abstentions are deemed entitled to vote on such proposal. Therefore, they have the same effect as a vote against either proposal. Broker non-votes are not deemed entitled to vote on such proposals and, therefore, they will have no effect on the vote on such proposals.

 

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Directors are elected by a plurality. “Plurality” means that the individuals who receive the largest number of votes cast “FOR” are elected as directors. Consequently, any shares not voted “FOR” a particular nominee (whether as a result of abstentions, a direction to withhold authority or a broker non-vote) will not be counted in the nominee’s favor.

Voting Your Shares

Each share of Victory common stock that you own in your name entitles you to one vote. Your proxy card shows the number of shares of Victory’s common stock that you own. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker to ensure that votes related to the shares you beneficially own are properly counted.

There are two ways to vote your shares of Victory common stock at the special meeting:

 

   

You Can Vote By Signing and Returning the Enclosed Proxy Card. If you vote by proxy card, your “proxy,” whose name is listed on the proxy card, will vote your shares as you instruct on the proxy card. If you sign and return the proxy card but do not give instructions on how to vote your shares, your shares will be voted as recommended by Victory’s board “FOR” the merger proposal, each of the charter amendment proposals, the stock plan proposal, the persons nominated by Victory’s management for election as directors and, if necessary, the adjournment proposal. Votes received after a matter has been voted upon at the special meeting will not be counted.

 

   

You Can Attend the Special Meeting and Vote in Person. Victory will give you a ballot when you arrive. However, if your shares are held in the name of your broker, bank or another nominee, you must get a proxy from the broker, bank or other nominee. That is the only way Victory can be sure that the broker, bank or nominee has not already voted your shares.

Revoking Your Proxy

If you give a proxy, you may revoke it at any time before it is exercised by doing any one of the following:

 

   

you may send another proxy card with a later date;

 

   

you may notify Jonathan J. Ledecky, Victory’s president and secretary, in writing before the special meeting that you have revoked your proxy; or

 

   

you may attend the special meeting, revoke your proxy, and vote in person, as indicated above.

Who Can Answer Your Questions About Voting Your Shares

If you have any questions about how to vote or direct a vote in respect of your shares of Victory’s common stock, you may call [            , Victory’s proxy solicitor, at             , or] Jonathan J. Ledecky, Victory’s secretary, at (212) 521-4399.

Conversion Rights

Any of Victory’s stockholders holding Public Shares as of the record date who affirmatively vote their Public Shares against the merger proposal may also demand that such shares be converted into a pro rata portion of the trust account, calculated as of two business days prior to the consummation of the merger. If demand is properly made and the merger is consummated, these shares will be converted into a pro rata portion of funds deposited in the trust account plus interest, calculated as of such date.

Victory stockholders who seek to exercise this conversion right (“converting stockholders”) must affirmatively vote against the merger proposal. Abstentions and broker non-votes do not satisfy this requirement. Additionally, holders demanding conversion must deliver their shares (either physically or electronically using

 

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Depository Trust Company’s DWAC (Deposit Withdrawal at Custodian) System) to Victory’s transfer agent prior to the meeting. If you hold the shares in street name, you will have to coordinate with your broker to have your shares certificated or delivered electronically. Shares that have not been tendered (either physically or electronically) in accordance with these procedures will not be converted into cash.

If the holders of at least 6,600,000 or more Public Shares (an amount equal to 20% or more of the Public Shares) vote against the merger proposal and properly demand conversion of their shares, Victory will not be able to consummate the merger.

The closing bid price of Victory’s common stock on             , 2009 (the record date for the Victory special meeting) was $            . The cash held in the trust account on             , 2009 was approximately $             ($            per Public Share). Prior to exercising conversion rights, stockholders should verify the market price of Victory’s common stock as they may receive higher proceeds from the sale of their common stock in the public market than from exercising their conversion rights if the market price per share is higher than the conversion price. Victory cannot assure its stockholders that they will be able to sell their shares of Victory common stock in the open market, even if the market price per share is higher than the conversion price stated above, as there may not be sufficient liquidity in Victory’s securities when Victory’s stockholders wish to sell their shares.

If you exercise your conversion rights, then you will be exchanging your shares of Victory common stock for cash and will no longer own those shares. You will be entitled to receive cash for these shares only if you affirmatively vote against the merger proposal, properly demand conversion, and deliver your stock certificate (either physically or electronically) to Victory’s transfer agent prior to the meeting.

Appraisal Rights

Victory stockholders do not have appraisal rights in connection with the merger.

Proxy Solicitation Costs

Victory is soliciting proxies on behalf of its board of directors. All solicitation costs will be paid by Victory. This solicitation is being made by mail but also may be made by telephone or in person. Victory and its directors, officers and employees may also solicit proxies in person, by telephone or by other electronic means, including email and facsimile.

[Victory has hired             to assist in the proxy solicitation process. It will pay that firm a fee of $            plus disbursements. Such payments will be made from non-trust account funds. If the merger is successfully closed, Victory will pay             an additional contingent fee of $            .]

Victory will ask banks, brokers and other institutions, nominees and fiduciaries to forward its proxy materials to their principals and to obtain their authority to execute proxies and voting instructions. Victory will reimburse them for their reasonable expenses.

Victory Founders

As of             , 2009, the record date for the Victory special meeting, the Victory Founders beneficially owned and were entitled to vote 7,500,000 Founders’ Shares. The Founders’ Shares constituted approximately 18.5% of the outstanding shares of Victory’s common stock immediately after the IPO (including shares of common stock issued pursuant to the exercise of the over-allotment option). In connection with Victory’s IPO, Victory and Citigroup entered into agreements with each of the Victory Founders pursuant to which each Victory Founder agreed to vote his, her or its Founders’ Shares on the merger proposal in accordance with the majority of the votes cast by the holders of Public Shares. The Victory Founders have indicated that they intend to vote their Founders’ Shares in favor of all other proposals being presented at the meeting. The Founders’ Shares have no

 

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liquidation rights and will be worthless if no business combination is effected by Victory. In connection with the IPO, the Victory Founders placed their Founders’ Shares in escrow with Continental Stock Transfer & Trust Company and agreed that they would not sell the Founders’ Shares until the earlier of twelve months after a business combination or Victory’s liquidation, subject to earlier release within such twelve month period if (i) Victory’s common stock having a last sales price equal to or exceeding $20.00 per share for any 20 trading days within any 30-trading day period following successful consummation of a business combination or (ii) Victory consummates a subsequent liquidation, merger, stock exchange or other similar transaction that results in all of Victory’s stockholders having the right to exchange their shares for cash, securities or other property. In connection with the merger, such individuals have agreed to the additional restriction that they will not be able to sell their Founders’ Shares until the 18-month anniversary of the consummation of the merger, subject to certain exceptions.

At any time prior to the special meeting, during a period when they are not then aware of any material nonpublic information regarding Victory or its securities, Victory, the Victory Founders, TouchTunes or the holders of common stock of TouchTunes and/or their respective affiliates may purchase shares from institutional and other investors, or execute agreements to purchase such shares from them in the future, or they or Victory may enter into transactions with such persons and others to provide them with incentives to acquire shares of Victory’s common stock or vote their shares in favor of the merger proposal. The purpose of such share purchases and other transactions would be to increase the likelihood of satisfaction of the requirements that the holders of a majority of the Public Shares present (in person or represented by proxy) and entitled to vote on the merger proposal vote in its favor and that holders of fewer than 20% of the Public Shares vote against the merger proposal and demand conversion of their Public Shares into cash where it appears that such requirements would otherwise not be met.

If such transactions are effected, the consequence could be to cause the merger to be approved in circumstances where such approval could not otherwise be obtained. Purchases of shares by the persons described above would allow them to exert more influence over the approval of the merger proposal and other proposals and would likely increase the chances that such proposals would be approved. Moreover, any such purchases may make it less likely that the holders of 20% or more of the Public Shares will vote against the merger proposal and exercise their conversion rights.

As of the date of this proxy statement/prospectus, there have been no such discussions and no agreements to such effect have been entered into with any such investor or holder. Victory will file a Current Report on Form 8-K to disclose arrangements entered into or significant purchases made by any of the aforementioned persons that would affect the vote on the merger proposal or the conversion threshold. Any such report will include descriptions of any arrangements entered into or significant purchases by any of the aforementioned persons.

It is possible that the special meeting could be adjourned to provide time to seek out and negotiate such transactions if, at the time of the meeting, it appears that the requisite vote will not be obtained or that the limitation on conversion will be exceeded, assuming that an adjournment proposal is presented and approved. Also, under Delaware law, the board of directors may postpone the meeting at any time prior to it being called to order in order to provide time to seek out and negotiate such transactions.

 

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THE MERGER PROPOSAL

The discussion in this proxy statement/prospectus of the merger and the principal terms of the merger agreement by and among Victory, Merger Sub and TouchTunes is subject to, and is qualified in its entirety by reference to, the merger agreement. A copy of the merger agreement is attached as Annex A to this proxy statement/prospectus and is incorporated into this proxy statement/prospectus by reference.

Structure of the Merger

The merger agreement provides for the merger of Merger Sub with and into TouchTunes with TouchTunes surviving the merger and becoming a wholly owned subsidiary of Victory. Thereafter, Victory will operate under the name “TouchTunes Corporation.” As a result of the merger, the holders of common stock of TouchTunes will receive 28,340,561 shares of Victory common stock. Additionally, all outstanding TouchTunes’ options and warrants shall be cancelled and substituted with options and warrants of similar tenor to purchase an aggregate of 6,605,978 shares of Victory common stock, of which options to purchase 4,659,579 shares are vested as of March 23, 2009. The holders of common stock of TouchTunes will also have the right to receive up to an additional 8,016,265 EBITDA Shares if the combined company’s EBITDA exceeds an aggregate of $50 million for any two consecutive quarters during the period ending on the fifth anniversary of the closing of the merger. The EBITDA Shares will be issued at the closing of the merger and will be placed in escrow until they are earned. If the EBITDA target is not met, the EBITDA Shares shall be returned to Victory for cancellation. If the EBITDA target is met, the TouchTunes’ options and warrants shall also be adjusted to purchase an additional 2,103,523 shares of Victory common stock, of which 1,483,736 EBITDA Shares relate to vested options as of March 23, 2009.

Interest of Victory Stockholders in the Merger

As a result of the merger, the present Victory stockholders (including the Victory Founders) will own approximately from 58.8% of the shares of Victory common stock outstanding after the merger (assuming that no holders of Public Shares vote against the merger proposal and elect to convert their Public Shares into cash in accordance with Victory’s amended and restated certificate of incorporation) to 54.5% of the shares of Victory common stock outstanding after the merger (assuming that the holders of 19.99% of Victory’s Public Shares vote against the merger proposal and elect to convert their Public Shares into cash).

Name; Headquarters; Stock Symbols

After completion of the merger:

 

   

the name of the publicly traded holding company will be TouchTunes Corporation;

 

   

the corporate headquarters and principal executive offices of Victory will be located at 740 Broadway, Suite 1102, New York, New York 10003; and

 

   

the parties intend to apply to have Victory’s common stock, warrants and units (each consisting of one share of common stock and one warrant), listed for trading on the Nasdaq Stock Market under the symbols             ,             .WS and             .U, respectively, after consummation of the merger.

Indemnification

To provide a fund for payment to Victory with respect to its post-closing rights to indemnification under the merger agreement for losses that it may sustain as a result of (i) the inaccuracy or breach of any representation or warranty made by TouchTunes in the merger agreement or any schedule or certificate delivered by them in connection with the merger agreement and (ii) the non-fulfillment or breach of any covenant or agreement made by TouchTunes in the merger agreement, the current holders of common stock of TouchTunes will place in escrow (with an independent escrow agent) an aggregate of 2,834,256 shares of Victory common stock, representing 10% of the shares to be issued in the merger, valued at $10.00 per share, which will be canceled to

 

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the extent that Victory has damages for which it is entitled to indemnification. Other than with respect to claims of fraud or intentional or willful misrepresentation or omission, the escrow will be the sole remedy for TouchTunes for its rights to indemnification pursuant to the merger agreement. Claims for indemnification may be asserted against the escrow by Victory once its damages exceed a deductible and will be reimbursable to the full extent of the damages in excess of such amount up to a maximum of the escrowed funds. Claims for indemnification may be asserted until thirty (30) days after the date on which Victory has filed its annual report on Form 10-K for the fiscal year ending December 31, 2009 but in no event later than April 30, 2010. A copy of the escrow agreement is attached to this proxy statement/prospectus as Annex D.

Employment Agreements

Upon completion of the merger, certain members of TouchTunes’ management will become officers of Victory. These officers are William Meder, who will serve as Chairman of the Board of Directors, President and Chief Executive Officer, David Schwartz, who will serve as Chief Financial Officer, Secretary and Treasurer, Ron Greenberg, who will serve as Chief Marketing Officer & Senior Vice President, Digital Media, Dan McAllister, who will serve as Senior Vice President, Sales, Geoff Mott, who will serve as Senior Vice President, Strategy and Business Development, Michael Tooker, who will serve a Senior Vice President, Technology and Operations, and Bob Weinschenk, who will serve as Senior Vice President, Barfly Division. Each of these persons has entered or will enter into an employment agreement with TouchTunes that will be assumed by Victory as a result of the merger, or in the case of new employment agreements, effective upon the merger. See the section entitled “Directors and Executive Officers of Victory Following the Merger — Employment Agreements.”

Lock-Up Agreements

Current holders of common stock of TouchTunes, who will be receiving approximately 79% of the shares of Victory common stock to be issued in the merger, have agreed not to sell their shares of Victory common stock they receive in the merger until the 18-month anniversary of the consummation of the merger, subject to certain exceptions; provided however that certain holders of TouchTunes common stock will be entitled to sell up to an aggregate of approximately 10% of the shares they receive in the merger at any time they wish. All other holders of common stock of TouchTunes, who will be receiving approximately 21% of the shares of Victory common stock to be issued in the merger, will be free to sell their shares at any time.

In connection with the IPO, the Victory Founders placed their Founders’ Shares in escrow with Continental Stock Transfer & Trust Company pursuant to a Stock Escrow Agreement dated as of April 24, 2007. Pursuant to this agreement, the Victory Founders agreed that they would not sell the Founders’ Shares until the earlier of twelve months after a business combination or Victory’s liquidation, subject to earlier release within such twelve month period if (i) Victory’s common stock having a last sales price equal to or exceeding $20.00 per share for any 20 trading days within any 30-trading day period following successful consummation of a business combination or (ii) Victory consummates a subsequent liquidation, merger, stock exchange or other similar transaction that results in all of Victory’s stockholders having the right to exchange their shares for cash, securities or other property. In connection with the merger, such individuals have agreed that they will not be able to sell their Founders’ Shares until the 18-month anniversary of the consummation of the merger, subject to certain exceptions.

A copy of the form of lock-up agreement that was entered into upon signing of the merger agreement by each holder of common stock of TouchTunes is attached to this proxy statement/prospectus as Annex D.

Voting Agreement

After the merger, if management’s nominees are elected, the directors of Victory will be Jonathan J. Ledecky, William J. Meder, David S. Carlick, Joe A. Katz, Patrick Gallagher and Richard Y. Roberts. David S. Carlick, Joel A. Katz, Patrick Gallagher and Richard Y. Roberts will be considered independent directors under applicable regulatory rules. Certain of the Victory Founders and certain stockholders of TouchTunes will enter into a voting agreement at the time of closing of the merger that will provide that they will vote their shares of

 

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Victory common stock in favor of the election of four nominees of VantagePoint in classes B and C (one in Class B, three in Class C) in all elections through the annual meeting that will be held in 2012 (or earlier if VantagePoint owns less than 50% of the shares held by it upon Closing of the Merger). A copy of the form of voting agreement is attached to this proxy statement/prospectus as Annex G.

Background of the Merger

The terms of the merger agreement are the result of arms’-length negotiations between representatives of TouchTunes and Victory. The following is a brief discussion of the background of these negotiations, the merger agreement and related transactions.

Victory was formed on January 12, 2007 to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business in any industry other than the franchising, financial services or healthcare industries. Victory completed its IPO on April 30, 2007, raising net proceeds of $316,661,329, including net proceeds from the sale of units on exercise of the underwriters’ over-allotment option. Of these net proceeds, $316,660,000 (including $10,560,000 of deferred underwriting commissions), together with $5,000,000 raised from the private sale of warrants (for a total of $321,660,000), was placed in a trust account. In accordance with Victory’s amended and restated certificate of incorporation, these funds will be released upon either its consummation of a business combination or its liquidation. Victory’s amended and restated certificate of incorporation provides that Victory must liquidate unless it has consummated a business combination by April 24, 2009. As of December 31, 2008, $330,144,884 was held in deposit in the trust account.

Promptly following the IPO of Victory, Victory contacted several investment bankers, private equity firms, consulting firms, legal and accounting firms, as well as numerous other business relationships. Through these and further efforts, Victory identified and reviewed information with respect to more than 250 potential target companies. On several occasions described below, Victory engaged in multiple meetings with potential targets and engaged in serious discussions with a select few highly profitable, rapidly expanding, global businesses.

In May 2007, Mr. Ledecky was introduced to a leading billion-dollar, vertically integrated apparel wholesaler, manufacturer and retailer by an investment-banking consultant. Throughout May and June 2007, Victory held multiple meetings with the target and its majority owner. This included due diligence visits to its domestic and international facilities and an extensive strategic and operational review. As a result of these meetings, investment bankers were retained, a non-binding letter of intent was negotiated and a definitive agreement was drafted. However, the majority owner of the business ultimately determined that he would receive a higher valuation for the business if he first completed joint venture agreements with one of the largest global retailers. As a result, negotiations ceased. Contact resumed between the parties at various times throughout 2007 and 2008 but the parties were never able to reach an agreement on a transaction.

In September 2007, Mr. Ledecky was contacted by an investment banker representing a second vertically integrated apparel manufacturer and retailer looking for substantial equity capital. Victory conducted extensive due diligence and held numerous meetings with the target. A letter of intent was negotiated and Victory held several meetings with the principal stockholders and board representatives of the target. On October 30, 2007, it was determined that the target’s board did not agree with Victory’s valuation of the business and discussions were halted. In June 2008, Victory was again approached by the target for further negotiations at a much lower valuation. Accordingly, Victory conducted another round of extensive due diligence. However, this due diligence revealed that the target had not met its earlier forecasts originally presented to Victory in the initial discussions. As a result, Victory determined not to proceed with the transaction.

In November 2007, Mr. Ledecky, met with a representative of an investment banking firm and the chairman of a multi-billion hedge fund to discuss SPACs and the track record of Victory’s principals. Messrs. Ledecky and Watson had a second meeting with the investment banker and additional principals from the hedge fund concerning that fund’s investment in a highly profitable company in the minerals industry. On several occasions in December 2007 and January 2008, Victory met with officials of the minerals company to discuss a potential transaction and to conduct due diligence. On December 19, 2007, a non-binding letter of intent was executed and

 

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a subsequent purchase and sale agreement was negotiated. The Victory board met on January 14, 2008 in Washington to consider the transaction and gave its preliminary approval subject to completion of due diligence and the negotiation of a definitive agreement relating to the transaction. However, prior to execution of a definitive agreement, the target received a bid from a third party conglomerate that provided greater consideration to the target. As a result, on January 31, 2008, the target announced that it had agreed to be purchased by this conglomerate and ended discussions with Victory.

In April 2008, Mr. Ledecky was contacted by a representative of an investment banking firm and the president of a firm in the mobile communications industry. Messrs. Ledecky and Watson received a presentation from this company about its history and future prospects which they reviewed. During May and June 2008, Victory conducted due diligence on the company and its management team and held several meetings with company officials. On June 5, 2008, a dinner meeting was held with several members of the target’s board of directors. Subsequent to that meeting, a non-binding letter of intent was drafted and negotiations for a definitive agreement ensued. However, after continued discussions, the parties determined that they could not agree on a valuation for the target and discussions ended.

In December 2008, Mr. Ledecky was contacted by the head of a leading independent film production company regarding the possibility of engaging in a transaction. The parties subsequently prepared a term sheet regarding the transaction and continued negotiations. On January 21 and 22, 2009, Mr. Ledecky conducted ongoing due diligence at the company’s corporate headquarters. At this time, Victory sent a draft of a merger agreement for review. Victory’s attorneys also subsequently prepared drafts of the other transaction documents which were submitted to the target, its attorneys and other representatives and were revised several times through the course of the negotiations, which took place by email and teleconference. On February 3, 2009, Victory’s board of directors held a meeting to consider the transaction. However, certain accounting issues caused the target to not be able to proceed with the transaction and discussions ended.

On February 27, 2009, Jon Ledecky received a call from a consultant at Constellation Consulting who indicated that he had a relationship with Rad Weaver. Mr. Weaver worked for a wealthy investor, Red McCombs, who had invested in a company called Barfly. TouchTunes had acquired Barfly in September 2008. The consultant inquired as to whether Mr. Ledecky would be receptive to a call from Mr. Weaver about a potential business combination between Victory and TouchTunes.

On February 28, 2009, Mr. Ledecky and Mr. Weaver held a telephone call to discuss the situation regarding the future of TouchTunes now that it owned the Barfly business. Mr. Weaver described the significant upside potential inherent in the 38,000-customer base of TouchTunes being customer targets for the Barfly system. Mr. Ledecky was impressed with the nature of the opportunity and discussed the condition of TouchTunes’ financial statements for inclusion in any proxy statement involving Victory.

On March 1 and 2, 2009, Mr. Ledecky held additional telephone calls with the consultant from Constellation and Mr. Weaver to discuss various accounting issues at TouchTunes and to find out additional information about TouchTunes. Mr. Weaver said that he would receive answers from TouchTunes’ management team regarding Mr. Ledecky’s inquiries and whether their major investor, VantagePoint Venture Partners, had an interest in proceeding with discussions.

On March 4, 2009, the consultant contacted Mr. Ledecky to indicate that TouchTunes was in fact interested in proceeding with discussions and was developing a set of information regarding TouchTunes if Victory was willing to execute a confidentiality agreement.

On March 6, 2009, Mr. Ledecky contacted Mr. Weaver to inquire as to his progress regarding the informational package and confidentiality agreement. Mr. Weaver indicated that he was continuing to have discussions with various officials of TouchTunes and its investors.

On March 9, 2009, Mr. Ledecky held a series of conference calls with Mr. Weaver and representatives of TouchTunes. Mr. Ledecky, Mr. Watson and consultants to Victory received a lengthy overview of the business

 

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from William Meder, chairman of the board and chief executive officer of TouchTunes, and Geoff Mott, a board member of TouchTunes. Mr. Ledecky then indicated that he would be willing to fly out with Mr. Watson the next day to visit with representatives of VantagePoint. Mr. Weaver called Mr. Ledecky later that day to say that Jon Quick and Alan Salzman of VantagePoint would be willing to meet on March 10, 2009. Mr. Ledecky and consultants to Victory then held a long conference call with Barfly division executive Bob Weinschenk that evening to discuss the future opportunities available from the Barfly/TouchTunes operations.

On March 10, 2009, Mr. Ledecky and Mr. Watson visited the headquarters of VantagePoint in San Bruno, California. They met with Mr. Weaver, Mr. Salzman, Mr. Mott and Mr. Quick, among others, with the consultant from Constellation participating telephonically. A discussion ensued for several hours concerning both Victory and how a such a company operated as well as a review of the TouchTunes business. After much discussion, Mr. Salzman outlined his general view of the valuation necessary to proceed with a transaction. Mr. Salzman indicated that if Victory was interested it should return with a term sheet outlining in detail a proposed transaction.

On March 11 through March 13, 2009, Mr. Ledecky and Mr. Watson along with the Victory consultants conducted an extensive review of TouchTunes’ operations, the industry in which it operated and other detailed due diligence investigations and background investigations.

On March 13, 2009, drafts of a merger agreement and proxy statement were circulated by Victory counsel to TouchTunes and its counsel. Mr. Ledecky and Mr. Watson then conducted a series of telephone conference calls with Mr. Salzman and Mr. Quick to go through the terms and conditions of a potential transaction.

On March 14, 2009, a series of additional negotiating sessions between Mssrs. Watson, Ledecky, Salzman and Quick transpired telephonically regarding various deal terms and conditions. A preliminary understanding of the specific deal terms was reached and counsels to both parties were instructed to revise the merger agreement and proxy statement accordingly.

On March 15 through March 18, 2009, the parties continued to negotiate various terms and conditions telephonically and continued their due diligence work. Multiple phone conferences transpired between Mssrs. Quick, Salzman, Mott, Ledecky, Watson and Meder during this period.

On March 19, 2009, Mr. Ledecky met in New York City with Mr. Meder, Mr. Mott and Mr. Quick to discuss the transaction. Mr. Ledecky then introduced these representatives of TouchTunes to several current investors of Victory who had executed confidentiality agreements with Victory to discuss the proposed transaction. Following those meetings, Mr. Ledecky had a separate dinner meeting with Mr. Quick to further review the results of the day and to continue negotiations on the transaction and the various documents supporting it.

On March 20, 2009, Mr. Ledecky met with Mr. Quick for lunch and then spent the entire day working with him to further refine the merger agreement and complete negotiation of various deal points.

On March 21, 2009, Mr. Ledecky received a call from Mr. Quick with several additional inquiries and negotiating points so that Mr. Quick could prepare for a meeting to discuss his findings with the TouchTunes board of directors.

On March 23, 2009, a meeting of the Victory board of directors was held. All directors attended, as did, by invitation, David Alan Miller, Brian L. Ross and Jeffrey M. Gallant of Graubard Miller. Prior to the meeting, copies of the most recent drafts of the significant transaction documents, in substantially final form, were delivered to the directors. After considerable review and discussion, the merger agreement and related documents were unanimously approved, subject to final negotiations and modifications, and the board determined to recommend the approval of the merger agreement.

 

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The merger agreement was signed on March 23, 2009. Prior to the market open on March 24, 2009, Victory issued a press release and on March 24, 2009 filed a Current Report on Form 8-K announcing the execution of the merger agreement and discussing the terms of the merger agreement.

Victory’s Board of Directors’ Reasons for the Approval of the Merger

The final agreed-upon consideration in the merger agreement was determined by several factors. Victory’s board of directors reviewed industry and financial data in order to determine that the transaction terms were reasonable and that the merger was in the best interests of Victory’s stockholders.

Victory conducted a due diligence review of TouchTunes that included an industry analysis, a description of TouchTunes’ existing business model, a valuation analysis and financial projections in order to enable the board of directors to ascertain the reasonableness of the of consideration. During its negotiations with TouchTunes, Victory did not receive consulting services from any unrelated financial advisors because its officers and directors believe that their experience and backgrounds were sufficient to enable them to make the necessary analysis and determinations.

The management of Victory, including members of its board of directors, has long and diverse experience in operational management, investments and financial management and analysis. In the opinion of Victory, it is well qualified to conduct the due diligence and other investigations and analyses required in connection with the search for a merger partner. Eric J. Watson, Victory’s chairman and treasurer, Jonathan J. Ledecky, Victory’s president and secretary, Jay H. Nussbaum, Kerry Kennedy, Robert B. Hersov, Edward J. Mathias and Richard Y. Roberts, each a director of Victory, were officers and directors of Endeavor Acquisition Corp., a special purpose acquisition company, which successfully consummated a merger with American Apparel, Inc. on December 12, 2007. Eric J. Watson and Jonathan J. Ledecky have substantial experience in identifying, acquiring and operating a wide variety of service businesses. Together, they have been personally involved in the formation of over 25 companies and such companies have made over 400 acquisitions. In all of these transactions, each of Messrs. Watson and Ledecky was involved, either directly or in a supervisory capacity, in searching for targets, conducting due diligence, negotiating the terms of the acquisitions and consummating such transactions. Additionally, members of Victory’s board are experienced in the investment, securities and capital management industries. Victory believes that this experience makes Victory’s management and board highly qualified to render an opinion on the merits of this transaction.

The Victory board of directors concluded that the merger agreement with TouchTunes is in the best interests of Victory’s stockholders. In reaching this conclusion, it considered a wide variety of factors. In light of the complexity of those factors, the board did not consider it practicable to quantify or otherwise assign relative weights to the specific factors it considered in reaching its decision. In addition, individual members of the board may have given different weight to different factors. In considering the merger, the board of directors gave considerable weight to the following factors:

TouchTunes’ Record of Growth and Potential for Future Growth

Important criteria to Victory’s board of directors in identifying an acquisition target were that the target business had established business operations, that it was generating stable current revenues, and that it had what the board believed to be the potential to experience growth in EBITDA and earnings per share in the future. Victory’s board of directors believes that TouchTunes has the appropriate infrastructure in place and is well positioned in its industry to achieve organic growth through the integration of the Barfly and PlayporTT systems into TouchTunes’ established network. The board’s belief in TouchTunes’ growth potential is based on TouchTunes historical growth rate in its jukebox segment and the positive overall industry dynamics in the out-of-home interactive entertainment network industry. TouchTunes has been able to increase the number of its installed jukebox locations from 15,000 locations in 2005 to over 36,500 locations in 2008. During the last three years, TouchTunes installed over 6,000-plus digital jukebox units per year. Victory’s board of directors believes

 

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that this installed base, combined with the capital provided by Victory, will accelerate the ability of TouchTunes to implement a national rollout of the Barfly and PlayporTT systems.

The Experience of TouchTunes’ Management

Another important criteria to Victory’s board of directors in identifying an acquisition target was that the target business has a seasoned operations team with specialized knowledge of the markets within which it operates. Victory’s board of directors believes that the management teams at TouchTunes leading the jukebox, Barfly and PlayporTT initiatives have unique expertise in both the technological aspects of the products and their successful development, sales, marketing and product innovation.

Financial Condition and Results of Operations

TouchTunes current financial condition and results of operations was another important criteria to Victory’s board of directors. TouchTunes initially incurred losses in installing jukeboxes in order to gain multi-year contracts, leading to recurring revenue streams from song plays. This enabled TouchTunes to gain a 64% market share in the digital jukebox market and to shift its strategy to making a profit on both the equipment and the play of songs. The Board considered the value of TouchTunes having 700 million songs played annually on its jukeboxes. This ranks TouchTunes as the number two provider of digital music in the world behind Apple’s iTunes system. TouchTunes recorded on average $9,000 in gross revenues per jukebox and received approximately 20% of that revenue stream. Its industry leadership within an otherwise fragmented distribution channel has led it to work with 21 distributors and over 2,800 Operators. As a result of this strategy, after several years of losses, TouchTunes recorded positive EBITDA of approximately $7.6 million in 2008. This growth is consistent with its 2009 sales revenue forecast of $98.1 million and EBITDA of $23.5 million without the use of any capital provided from the proposed merger with Victory.

Valuation

The Victory board considered the value of TouchTunes in relation to its growth potential and found it to be compelling. Given the unique nature of both the existing TouchTunes business and its Barfly and PlayporTT initiatives, the Victory board did not have a directly related public or private comparable company with which to value the TouchTunes transaction. In addition, the board relied upon base case projections from TouchTunes that showed a compound annual growth rate of 29% in revenue and 110% in EBITDA from 2008 through 2011. During this period, EBITDA is forecasted to increase from $7.6 million in 2008 to $70.4 million in 2011, while revenues increase from $85.0 million in 2008 to $182.0 million in 2011. The Victory board studied the projected trajectory of the business and concluded that the majority of the revenue and EBITDA growth in the baseline projections came from the existing digital jukebox business. The jukebox business projections tracked historical play-amounts consistent with historical performance. These baseline projections provided an underpinning to a multi-hundred million dollar valuation by the Victory board for TouchTunes’ jukebox business alone, based on discounted cash flow, normalized market EBITDA multiples and revenue multiples used for companies with growth potential on top of an existing positive EBITDA business.

In addition to baseline projections for the jukebox business, the Victory board reviewed the baseline projections of the Barfly and PlayporTT business segments. Data was presented to the Victory board showing Barfly trial data for initial units and orders for PlayporTT units from both restaurant chains in the United States and Canada. The Victory Board assessed the initial market acceptance of PlayporTT, with approximately 1,500 units scheduled for installation by the end of the first half of 2009, and the scalability of the Barfly system. The Victory board also made its own assessment of potential advertising revenues, given the desirability of the target demographic of 21-34 year-olds in bars, that could be achieved using digital jukeboxes in service, in addition to the potential installed base of Barfly and PlayporTT units.

 

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The forecasts reviewed by Victory’s board did not include the potential impact on both sales and EBITDA through the use of up to approximately $310 million of Victory’s equity capital. Victory’s board evaluated the use of this capital to continue the expansion of the jukebox segment while accelerating the rollout of the Barfly and PlayporTT systems.

The Board evaluated the revenues that could be achieved if TouchTunes installs different numbers of digital jukeboxes, PlayPorTT and Barfly units, based on assumed per-unit revenue projections multiplied by hypothetical numbers of installed units. Per-unit revenue projections for digital jukeboxes are based on TouchTunes’ historical results for those systems, without assumption of advertising revenues on jukeboxes. Per-unit revenue projections for PlayPorTT units are based on the results produced by a limited trial of 350 units used for approximately three months. Per-unit Barfly advertising inventory value projections are based on a single study and business model and are not yet supported by actual results. This business model uses observed traffic volumes and assumes a CPM of $1.00. The number of installed units assumed was merely to demonstrate what could be installed, and was not based on a projection of the number of units which would be installed at any point in time.

The following chart illustrates, without projecting, the potential revenues which TouchTunes could achieve, subject to the limitations described above:

LOGO

Given the board’s significant transaction experience, and in the case of several directors, direct operating experience in high growth industries, the Board agreed with Victory management that it had negotiated terms which they felt were in the best interest of Victory stockholders.

The forecasts of TouchTunes’ future operating results are based on assumptions that are inherently subject to significant uncertainties and contingencies, many of which are beyond TouchTunes’ control. While all projections are necessarily speculative, Victory believes that the prospective financial information covering periods beyond twelve months from its date of preparation carries increasingly higher levels of uncertainty and should be read in that context. There will be differences between actual and projected results, and actual results may be materially greater or materially less than those reflected by the projections. The inclusion of the

 

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projections in this proxy statement/prospectus should not be regarded as an indication that Victory, TouchTunes or their respective representatives considered or consider the forecasts to be a reliable prediction of future events, and reliance should not be placed on the forecasts.

The forecasts were disclosed to Victory for use as one of many factors in its overall evaluation of TouchTunes, and are included in this proxy statement/prospectus solely for that reason. Neither TouchTunes’ management nor any of its representatives has made or makes any representation to any person regarding the ultimate performance of TouchTunes compared to the information contained in the forecasts, and none of them intends to update or otherwise revise the projections to reflect circumstances existing after the date when made or to reflect the occurrence of future events in the event that any or all of the assumptions underlying the forecasts are shown to be in error. Accordingly, they should not be looked upon as “guidance” of any sort. TouchTunes will not refer back to these forecasts in its future periodic reports filed under the Exchange Act.

TouchTunes’ registered independent public accounting firm has neither examined nor compiled the projections and, accordingly, they do not express an opinion or any other form of assurance with respect thereto.

Satisfaction of 80% Test

It is a requirement that any business acquired by Victory have a fair market value equal to at least 80% of Victory’s trust account balance (excluding amounts payable for deferred underwriting discounts and commissions) at the time of such acquisition. Based on the financial analysis of TouchTunes generally used to approve the transaction, including a comparison of comparable companies and a discounted cash flow analysis, the Victory board of directors determined that this requirement was met. The Victory board of directors believes because of the financial skills and background of its directors, it was qualified to conclude that the acquisition of TouchTunes met this requirement.

Interests of Victory’s Directors and Officers and Others in the Merger

In considering the recommendation of the board of directors of Victory to vote for the proposal to approve the merger proposal, you should be aware that certain Victory directors and officers have agreements or arrangements that provide them with interests in the merger that differ from, or are in addition to, those of Victory stockholders generally. In particular:

When you consider the recommendation of Victory’s board of directors in favor of approval of the merger proposal, you should keep in mind that Victory’s directors and officers have interests in the merger transaction that are different from, or in addition to, your interests as a stockholder. These interests include, among other things:

 

   

If the merger is not consummated by April 24, 2009, Victory’s amended and restated certificate of incorporation provides that it will automatically be liquidated. In such event, the 7,500,000 Founders’ Shares held by Victory’s directors and officers that were acquired before the IPO for an aggregate purchase price of $25,000 would be worthless because Victory’s directors and officers are not entitled to receive any of the liquidation proceeds with respect to such shares. Such shares had an aggregate market value of $            based upon the closing bid price of $            on the NYSE Amex on             , 2009, the record date for the Victory special meeting.

 

   

Eric J. Watson and Jonathan J. Ledecky also purchased 5,000,000 Sponsors’ Warrants, for an aggregate purchase price of $5,000,000 (or $1.00 per warrant) pursuant to agreements with Victory and Citigroup and entered into in connection with Victory’s IPO. These purchases took place on a private placement basis simultaneously with the consummation of Victory’s IPO. All of the proceeds Victory received from these purchases were placed in Victory’s trust fund. The Sponsors’ Warrants are identical to the Victory warrants except that the warrants will not be transferable or salable by Messrs. Watson and Ledecky (except in certain limited circumstances such as to relatives and trusts for estate planning

 

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purposes, providing the transferee agrees to be bound by the transfer restrictions) until Victory completes a business combination and if Victory calls the warrants for redemption, the Sponsors’ Warrants will not be redeemable so long as such warrants are held by Messrs. Watson or Ledecky or their affiliates, including any permitted transferees. All of the Sponsors’ Warrants will become worthless if the merger is not consummated and Victory is liquidated (as will the public warrants). Such Sponsors’ Warrants had an aggregate market value of $            , based on the closing bid price of $            on the NYSE Amex on             , 2009, the record date for the Victory special meeting.

 

   

The transactions contemplated by the merger agreement provide that each of Jonathan J. Ledecky and Richard Y. Roberts will be a director of Victory after the closing of the merger. As such, in the future they will receive any cash fees, stock options or stock awards that the Victory board of directors determines to pay to its non-executive directors.

 

   

If Victory liquidates prior to the consummation of a business combination, Eric J. Watson, Victory’s chairman and treasurer, and Jonathan J. Ledecky, Victory’s president and secretary, will be personally liable to pay debts and obligations to vendors and other entities that are owed money by Victory for services rendered or products sold to Victory, or to any target business, to the extent such creditors bring claims that would otherwise require payment from monies in the trust account, but only if such entities did not execute a waiver. Based on Victory’s estimated debts and obligations, it is not currently expected that Messrs. Watson and Ledecky will have any exposure under this arrangement in the event of a liquidation.

 

   

If Victory is required to be liquidated and there are no funds remaining to pay the costs associated with the implementation and completion of such liquidation, Eric J. Watson and Jonathan J. Ledecky have agreed to advance Victory the funds necessary to pay such costs and complete such liquidation (currently anticipated to be no more than approximately $15,000) and not to seek repayment for such expenses.

Additionally, upon consummation of the merger, the underwriters in Victory’s IPO will be entitled to receive $10,560,000 of deferred underwriting commissions. Furthermore, Messrs. Watson and Ledecky have agreed to transfer an aggregate of 300,000 shares of common stock of Victory to Constellation for providing consulting services in connection with the transaction. Additionally, Messrs. Watson and Ledecky have agreed to transfer an aggregate of 100,000 shares to two consultants of Victory that were entitled to such shares being issued directly by Victory. As a result, such shares will not be issued by Victory. Neither the consultants, the underwriters nor Constellation will receive anything if the merger is not consummated.

Recommendation of Victory’s Board of Directors

After careful consideration of the matters described above, particularly TouchTunes’ record of growth, high return on equity, potential for growth and profitability, the experience of TouchTunes’ management, the company’s competitive positioning, its customer and labor relationships, and technical skills, Victory’s board of directors determined unanimously that the merger proposal is fair to and in the best interests of Victory and its stockholders. Victory’s board of directors has approved and declared advisable and unanimously recommend that you vote or give instructions to vote “FOR” the merger proposal.

The foregoing discussion of the information and factors considered by the Victory board of directors is not meant to be exhaustive, but includes the material information and factors considered by the Victory board of directors.

 

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Material Federal Income Tax Consequences of the Merger to Victory and Its Stockholders

The following section is a summary of the opinion of Graubard Miller, counsel to Victory, regarding material United States federal income tax consequences of the merger to holders of Victory common stock. This discussion addresses only those Victory security holders that hold their securities as a capital asset within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (“the Code”), and does not address all the United States federal income tax consequences that may be relevant to particular holders in light of their individual circumstances or to holders that are subject to special rules, such as:

 

   

financial institutions;

 

   

investors in pass-through entities;

 

   

tax-exempt organizations;

 

   

dealers in securities or currencies;

 

   

traders in securities that elect to use a mark-to-market method of accounting;

 

   

persons that hold Victory common stock as part of a straddle, hedge, constructive sale or conversion transaction; and

 

   

persons who are not citizens or residents of the United States.

The Graubard Miller opinion is based upon the Code, applicable treasury regulations thereunder, published rulings and court decisions, all as currently in effect as of the date hereof, and all of which are subject to change, possibly with retroactive effect. Tax considerations under state, local and foreign laws, or federal laws other than those pertaining to the income tax, are not addressed.

Neither Victory nor TouchTunes intends to request any ruling from the Internal Revenue Service as to the U.S. federal income tax consequences of the merger.

It is the opinion of Graubard Miller that the merger of Merger Sub will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code and that no gain or loss will be recognized by Victory or by the stockholders of Victory if their conversion rights are not exercised.

It is also the opinion of Graubard Miller that a stockholder of Victory who exercises conversion rights and effects a termination of the stockholder’s interest in Victory will be required to recognize gain or loss upon the exchange of that stockholder’s shares of common stock of Victory for cash. Such gain or loss will be measured by the difference between the amount of cash received and the tax basis of that stockholder’s shares of Victory common stock. This gain or loss will be a capital gain or loss if such shares were held as a capital asset on the date of the merger and will be a long-term capital gain or loss if the holding period for the share of Victory common stock is more than one year.

The conclusions expressed above are based on current law. Future legislative, administrative or judicial changes or interpretations, which can apply retroactively, could affect the accuracy of those conclusions. The tax opinion issued to Victory by Graubard Miller, its counsel, is attached to this proxy statement/prospectus as Annex E. Graubard Miller has consented to the use of its opinion in this proxy statement/prospectus.

This discussion is intended to provide only a summary of the material United States federal income tax consequences of the merger. It does not address tax consequences that may vary with, or are contingent on, your individual circumstances. In addition, the discussion does not address any non-income tax or any foreign, state or local tax consequences of the merger. Accordingly, you are strongly urged to consult with your tax advisor to determine the particular United States federal, state, local or foreign income or other tax consequences to you of the merger.

 

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Anticipated Accounting Treatment

The acquisition will be accounted for as a “reverse merger” and recapitalization since immediately following the completion of the transaction, the shareholders of TouchTunes immediately prior to the business combination will have effective control of Victory through its approximately 41.2% shareholder interest in the combined entity, assuming no share conversions (45.5% in the event of maximum share conversion), which includes its largest principal shareholder owning approximately     % of the TouchTunes shareholder interest. In addition, through TouchTunes’ 41.2% shareholder interest TouchTunes will maintain effective control of the combined entity through control of a substantial proportion of the board of directors by maintaining four of the seven board seats for an expected term of three years. Additionally, all of TouchTunes senior executive positions will continue on as management of the combined entity after consummation of the transaction. For accounting purposes, TouchTunes will be deemed to be the accounting acquirer in the transaction and, consequently, the transaction will be treated as a recapitalization of TouchTunes. Accordingly, TouchTune’s assets, liabilities and results of operations will become the historical financial statements of the registrant, and Victory’s assets, liabilities and results of operations will be consolidated with TouchTunes effective as of the acquisition date. No step-up in basis or intangible assets or goodwill will be recorded in this transaction.

Regulatory Matters

The merger and the transactions contemplated by the merger agreement are not subject to any additional federal or state regulatory requirement or approval, except for the HSR Act and for filings with the State of Delaware necessary to effectuate the merger.

Required Vote

The approval of the merger proposal will require the affirmative vote of the holders of a majority of the Public Shares present (in person or represented by proxy) and entitled to vote at the Victory special meeting.

THE VICTORY BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE VICTORY STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE MERGER PROPOSAL.

 

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THE MERGER AGREEMENT

For a discussion of the merger structure, merger consideration and indemnification provisions of the merger agreement, see the section entitled “The Merger Proposal.” Such discussion and the following summary of other material provisions of the merger agreement is qualified by reference to the complete text of the merger agreement, a copy of which is attached as Annex A to this proxy statement/prospectus and is incorporated herein by reference. All stockholders are encouraged to read the merger agreement in its entirety for a more complete description of the terms and conditions of the merger.

Closing and Effective Time of the Merger

The closing of the merger will take place promptly following the satisfaction of the conditions described below under the subsection entitled “Conditions to the Closing of the Merger,” unless Victory and TouchTunes agree in writing to another time. The merger is expected to be consummated promptly after the special meeting of Victory’s stockholders described in this proxy statement/prospectus.

Representations and Warranties

The merger agreement contains customary representations and warranties of each of Victory and TouchTunes relating, among other things, to:

 

   

proper organization and similar limited liability and corporate matters;

 

   

capital structure of each constituent company;

 

   

the authorization, performance and enforceability of the merger agreement;

 

   

taxes;

 

   

financial statements, information and absence of undisclosed liabilities;

 

   

holding of leases and ownership of other properties, including intellectual property;

 

   

contracts;

 

   

title to, and condition of, properties and assets and environmental and other conditions thereof;

 

   

absence of certain changes;

 

   

employee matters;

 

   

compliance with laws;

 

   

litigation; and

 

   

regulatory matters.

Covenants

The parties have each agreed to take such actions as are necessary, proper or advisable to consummate the merger. Victory and TouchTunes each also have agreed to continue to operate their respective businesses in the ordinary course prior to the closing and, unless otherwise required or permitted under the merger agreement, not to take the following actions, among others, without the prior written consent of the other party:

 

   

waive any stock repurchase rights, accelerate, amend or (except as specifically provided for in the merger agreement) change the period of exercisability of options or restricted stock, or reprice options granted under any employee, consultant, director or other stock plans or authorize cash payments in exchange for any options granted under any of such plans;

 

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grant any severance or termination pay to any officer or employee (other than severance or termination pay to an employee consistent with past practices or as identified in schedules to the merger agreement) except pursuant to applicable law, written agreements outstanding, or policies currently existing and disclosed to the other party, or adopt any new severance plan, or amend or modify or alter in any manner any severance plan, agreement or arrangement;

 

   

transfer or license to any person or otherwise extend, amend or modify any material rights to any intellectual property or enter into grants to transfer or license to any person future patent rights, other than in the ordinary course of business consistent with past practices provided that in no event will either party license on an exclusive basis or sell any of its intellectual property;

 

   

declare, set aside or pay any dividends on or make any other distributions (whether in cash, stock, equity securities or property) in respect of any capital stock or split, combine or reclassify any capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any capital stock;

 

   

purchase, redeem or otherwise acquire, directly or indirectly, any shares of its own capital stock or other equity securities or ownership interests;

 

   

except as contemplated by the merger agreement, issue, deliver, sell, authorize, pledge or otherwise encumber, or agree to any of the foregoing with respect to, any shares of its capital stock or other equity securities or ownership interests or any securities convertible into or exchangeable for shares of its capital stock or other equity securities or ownership interests, or subscriptions, rights, warrants or options to acquire any shares of its capital stock or other equity securities or ownership interests or any securities convertible into or exchangeable for shares of its capital stock or other equity securities or other ownership interests, or enter into other agreements or commitments of any character obligating it to issue any such shares, equity securities or other ownership interests or convertible or exchangeable securities;

 

   

amend its charter documents;

 

   

acquire or agree to acquire by merging or consolidating with, or by purchasing any equity interest in or a portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to its business, or enter into any joint ventures, strategic partnerships or alliances or other arrangements that provide for exclusivity of territory or otherwise restrict such party’s ability to compete or to offer or sell any products or services;

 

   

sell, lease, license, encumber or otherwise dispose of any properties or assets, except (i) sales of inventory in the ordinary course of business consistent with past practice, and (ii) the sale, lease or disposition (other than through licensing) of property or assets that are not material, individually or in the aggregate, to the business of such party;

 

   

except with respect to Victory as permitted pursuant to the merger agreement, incur any indebtedness for borrowed money or guarantee any such indebtedness of another person or persons, issue or sell any debt securities or options, warrants, calls or other rights to acquire any debt securities of Victory or TouchTunes, as applicable, enter into any “keep well” or other agreement to maintain any financial statement condition or enter into any arrangement having the economic effect of any of the foregoing;

 

   

adopt or amend any employee benefit plan, policy or arrangement, any employee stock purchase or employee incentive stock option plan, or enter into any employment contract or collective bargaining agreement (other than offer letters and letter agreements entered into in the ordinary course of business consistent with past practice with employees who are terminable “at will”), pay any special bonus or special remuneration to any director or employee, or increase the salaries or wage rates or fringe benefits (including rights to severance or indemnification) of its directors, officers, employees or consultants, except in the ordinary course of business consistent with past practices or to conform to the requirements of any applicable law;

 

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pay, discharge, settle or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), or litigation (whether or not commenced prior to the date of the merger agreement) other than the payment, discharge, settlement or satisfaction, in the ordinary course of business consistent with past practices or in accordance with their terms, of liabilities previously disclosed in financial statements to the other party in connection with the merger agreement or incurred since the date of such financial statements, or waive the benefits of, agree to modify in any manner, terminate, release any person from or knowingly fail to enforce any confidentiality or similar agreement to which it is a party or of which it is a beneficiary;

 

   

except in the ordinary course of business consistent with past practices, modify, amend or terminate any material contract, or waive, delay the exercise of, release or assign any material rights or claims thereunder;

 

   

except as required by U.S. GAAP, revalue any of its assets or make any change in accounting methods, principles or practices;

 

   

except in the ordinary course of business consistent with past practices, incur or enter into any agreement, contract or commitment requiring such party to pay in excess of $100,000 in any 12 month period;

 

   

settle any litigation where an officer, director or stockholder is a party or the consideration is anything other than monetary in an amount of more than $100,000;

 

   

make or rescind any tax elections that, individually or in the aggregate, could be reasonably likely to adversely affect in any material respect the tax liability or tax attributes of such party, settle or compromise any material income tax liability or, except as required by applicable law, materially change any method of accounting for tax purposes or prepare or file any return in a manner inconsistent with past practice;

 

   

take any action not provided for or contemplated in the merger agreement that would cause the merger to fail to qualify, as a tax-free reorganization within the meaning of Section 368(a) of the tax code;

 

   

form or establish any subsidiary except in the ordinary course of business consistent with prior practice or as contemplated by the merger agreement;

 

   

permit any person or entity to exercise any of its discretionary rights under any employee benefit plan to provide for the automatic acceleration of any outstanding options, the termination of any outstanding repurchase rights or the termination of any cancellation rights issued pursuant to such plans;

 

   

make capital expenditures except in accordance with prudent business and operational practices consistent with prior practice;

 

   

make or omit to take any action that would be reasonably anticipated to have a material adverse effect;

 

   

enter into any transaction with or distribute or advance any assets or property to any of its officers, directors, partners, stockholders, managers, stockholders or other affiliates other than the payment of salary and benefits and tax distributions in the ordinary course of business consistent with prior practice; or

 

   

agree in writing or otherwise agree, commit or resolve to take any of the foregoing actions.

The merger agreement also contains additional covenants of the parties, including covenants providing for:

 

   

the parties to use commercially reasonable best efforts to obtain all necessary approvals from governmental agencies and other third parties that are required for the consummation of the transactions contemplated by the merger agreement;

 

   

the protection of confidential information of the parties and, subject to the confidentiality requirements, the provision of reasonable access to information;

 

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Victory and TouchTunes to prepare and file a registration statement, which shall contain this proxy statement/prospectus, to register, under the Securities Act, the shares that will be issued to the holders of common stock of TouchTunes pursuant to the merger, and to solicit proxies from the Victory stockholders to vote on the proposals that will be presented for consideration at the special meeting;

 

   

TouchTunes to waive its rights to make claims against Victory to collect from the trust fund established for the benefit of the holders of the Public Shares for any monies that may be owed to it by Victory; and

 

   

TouchTunes to provide periodic financial information to Victory through the closing.

Conditions to Closing of the Merger

General Conditions

Consummation of the merger is conditioned on (i) the holders of the Public Shares, at a meeting called for this and other related purposes, approving the merger proposal and each of the charter amendment proposals and (ii) the holders of fewer than 20% of the Public Shares voting against the merger and properly demanding that their Public Shares be converted into a pro-rata portion of the trust account, calculated as of two business days prior to the anticipated consummation of the merger.

In addition, the consummation of the transactions contemplated by the merger agreement is conditioned upon, among other things:

 

   

no order, stay, judgment or decree being issued by any governmental authority preventing, restraining or prohibiting in whole or in part, the consummation of such transactions;

 

   

the execution by and delivery to each party of each of the various transaction documents;

 

   

the delivery by each party to the other party of a certificate to the effect that the representations and warranties of each party are true and correct in all material respects as of the closing and all covenants contained in the merger agreement have been materially complied with by each party;

 

   

the receipt of all necessary consents and approvals by third parties and the completion of necessary proceedings in compliance with the rules and regulations of each jurisdiction having jurisdiction over the subject matters; and

 

   

the lock-up agreements and the escrow agreements shall have been executed and delivered by the parties thereto.

TouchTunes’ Conditions to Closing

The obligations of TouchTunes to consummate the transactions contemplated by the merger agreement also are conditioned upon, among other things,

 

   

there being no material adverse change in the business of Victory since the date of the merger agreement;

 

   

specified officers and directors of Victory shall have resigned from their positions;

 

   

receipt by TouchTunes of an opinion from its counsel (or, in certain circumstances, Victory’s counsel) that the merger qualifies as a reorganization under Section 368(a) of the Internal Revenue Code and that each of Victory and TouchTunes is a party to the reorganization within the meaning of Section 368(b) of the Internal Revenue Code; and

 

   

Victory being in compliance with the reporting requirements under the Securities Act and the Exchange Act.

 

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Victory’s Conditions to Closing

The obligations of Victory to consummate the transactions contemplated by the merger agreement also are conditioned upon each of the following, among other things:

 

   

there shall have been no material adverse change in the business of TouchTunes since the date of the merger agreement;

 

   

repayment of all outstanding indebtedness owed by TouchTunes’ insiders;

 

   

receipt of TouchTunes’ audited financial statements; and

 

   

exercise of dissenter rights by stockholders owning no more than 5% of the total outstanding amount of Victory common stock.

Waiver

If permitted under applicable law, either Victory or TouchTunes may waive any inaccuracies in the representations and warranties made to such party contained in the merger agreement or in any document delivered pursuant to the merger agreement and waive compliance with any agreements or conditions for the benefit of itself or such party contained in the merger agreement or in any document delivered pursuant to the merger agreement. The condition requiring that the holders of fewer than 20% of the Public Shares affirmatively vote against the merger proposal and demand conversion of their shares into cash may not be waived. There can be no assurance that all of the conditions will be satisfied or waived.

At any time prior to the closing, either Victory or TouchTunes may, in writing, to the extent legally allowed, extend the time for the performance of any of the obligations or other acts of the other parties to the merger agreement.

The existence of the financial and personal interests of the directors may result in a conflict of interest on the part of one or more of them between what he may believe is best for Victory and what he may believe is best for himself in determining whether or not to grant a waiver in a specific situation.

Termination

The merger agreement may be terminated at any time, but not later than the closing, as follows:

 

   

by mutual written agreement of Victory and TouchTunes;

 

   

by either Victory or TouchTunes if the merger is not consummated by the date Victory is required to liquidate, provided that such termination is not available to a party whose action or failure to act has been a principal cause of or resulted in the failure of the merger to be consummated before such date and such action or failure to act is a breach of the merger agreement;

 

   

by either Victory or TouchTunes if a governmental entity shall have issued an order, decree or ruling or taken any other action, in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the merger, which order, decree, judgment, ruling or other action is final and nonappealable;

 

   

by either Victory or TouchTunes if the other party has breached any of its covenants or representations and warranties in any material respect and has not cured its breach within thirty days of the notice of an intent to terminate, provided that the terminating party is itself not in breach; and

 

   

by either Victory or TouchTunes if, at the Victory stockholder meeting, the merger agreement shall fail to be approved by the affirmative vote of the holders of a majority of the Public Shares present (in person or represented by proxy) and entitled to vote at the meeting or the holders of 20% or more of the Public Shares exercise conversion rights.

 

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Effect of Termination

In the event of proper termination by either Victory or TouchTunes, the merger agreement will become void and have no effect, without any liability or obligation on the part of Victory or TouchTunes, except that:

 

   

The confidentiality obligations set forth in the merger agreement will survive;

 

   

The waiver by TouchTunes of all rights against Victory to collect from the trust account any monies that may be owed to it by Victory for any reason whatsoever, including but not limited to a breach of the merger agreement, and the acknowledgement that TouchTunes will not seek recourse against the trust account for any reason whatsoever, will survive;

 

   

the rights of the parties to bring actions against each other for breach of the merger agreement will survive; and

 

   

the fees and expenses incurred in connection with the merger agreement and the transactions contemplated thereby will be paid by the party incurring such expenses.

Fees and Expenses

All fees and expenses incurred in connection with the merger agreement and the transactions contemplated thereby will be paid by the party incurring such expenses whether or not the merger agreement is consummated, except that Victory agreed to pay up to $250,000 in legal expenses incurred with the proposed merger irrespective of whether the merger is consummated.

Confidentiality; Access to Information

Victory and TouchTunes will afford to the other party and its financial advisors, accountants, counsel and other representatives prior to the completion of the merger reasonable access during normal business hours, upon reasonable notice, to all of their respective properties, books, records and personnel to obtain all information concerning the business, including the status of product development efforts, properties, results of operations and personnel, as each party may reasonably request. Victory and TouchTunes will maintain in confidence any non-public information received from the other party, and use such non-public information only for purposes of consummating the transactions contemplated by the merger agreement.

Amendments

The merger agreement may be amended by the parties thereto at any time by execution of an instrument in writing signed on behalf of each of the parties.

Public Announcements

The parties have agreed that until closing or termination of the merger agreement, the parties will:

 

   

cooperate in good faith to jointly prepare all press releases and public announcements pertaining to the merger agreement and the transactions governed by it; and

 

   

not issue or otherwise make any public announcement or communication pertaining to the merger agreement or the transaction without the prior consent of the other party, which shall not be unreasonably withheld by the other party, except as may be required by applicable law or court process.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

(IN THOUSANDS OF DOLLARS)

The following unaudited pro forma condensed combined balance sheet combines Victory’s historical balance sheet and those of TouchTunes as of December 31, 2008, giving effect to the transactions described in the Merger Agreement as if they had occurred on December 31, 2008. The following unaudited pro forma condensed combined statements of operations combine Victory’s historical statement of operations for the year ended December 31, 2008 with those of TouchTunes companies for the year ended December 31, 2008, in each case giving effect to the acquisition as if it had occurred on January 1, 2008.

The acquisition will be accounted for as a “reverse merger” and recapitalization since the stockholders of TouchTunes will own a large percentage of the outstanding shares of the common stock as well as control a majority of the board of directors immediately following the completion of the transaction. TouchTunes will be deemed to be the accounting acquirer in the transaction and, consequently, the transaction is treated as a recapitalization of TouchTunes. Accordingly, the assets and liabilities and the historical results of operations that are reflected in the unaudited pro forma condensed financial statements are those of TouchTunes and are recorded at the historical cost basis of TouchTunes. Victory’s assets, liabilities and results of operations will be consolidated with the assets, liabilities and results of operations of TouchTunes after consummation of the acquisition.

The pro forma adjustments give effect to events that are directly attributable to the transactions discussed below that have a continuing impact on the operations of Victory and are based on available data and certain assumptions that management believes are factually supportable.

The unaudited pro forma condensed combined financial statements described above should be read in conjunction with Victory’s historical financial statements and those of TouchTunes companies and the related notes thereto. The pro forma adjustments are preliminary and the unaudited pro forma information is not necessarily indicative of the financial position or results of operations that may have actually occurred had the acquisition taken place on the dates noted, or of Victory’s future financial position or operating results.

On March 23, 2009, Victory entered into an agreement and plan of reorganization by which it will acquire TouchTunes. In exchange for all of the securities of TouchTunes, Victory will issue 28,340,561 shares of its common stock.

Consummation of the acquisition is conditioned upon, among other things, the Victory stockholders adopting and approving the acquisition agreement. If Victory stockholders owning 20% or more of Victory common stock sold in the IPO vote against the acquisition and exercise their right to convert their shares of Victory common stock issued in the IPO into a pro rata portion of the funds held in the trust account, then the acquisition cannot be consummated. Consequently, up to 6,599,999 shares of Victory common stock, representing 19.99% of the 33,000,000 shares of Victory common stock issued in Victory’s IPO are subject to possible conversion in this manner. This would represent an aggregate maximum conversion amount of approximately $66.0 million as of December 31, 2008.

The following unaudited pro forma financial statements have been prepared using two different assumptions with respect to the number of outstanding shares of Victory stock and cash, as follows:

 

   

assuming no conversions — this presentation assumes that no stockholders of Victory seek to convert their shares into a pro rata share of the trust account;

 

   

assuming maximum conversions — this presentation assumes stockholders of Victory owning 19.99% of the stock sold in Victory’s initial public offering seek conversion.

We are providing this information to aid you in your analysis of the financial aspects of the acquisition. The unaudited pro forma condensed combined financial statements described above should be read in conjunction with Victory’s historical financial statements and those of TouchTunes companies and the related notes thereto. The pro forma adjustments are preliminary and the unaudited pro forma information is not necessarily indicative of the financial position or results of operations that may have actually occurred had the acquisition taken place on the dates noted, or of Victory’s future financial position or operating results.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

DECEMBER 31, 2008

(in thousands of dollars)

 

    Victory
Acquisition
Corp.
  TouchTunes
Corp.
    Note   Pro Forma
Adjustments
No
Conversion
    Pro Forma
Combined-No
Conversion
    Pro Forma
Adjustments
Maximum
Allowable
Conversion
    Note   Pro Forma
Combined-
Maximum
Allowable
Conversion
 
    USD $   USD $         USD $     USD $     USD $         USD $  
    Note 1   Note 2                                  

Assets

               

Current Assets

               

Cash and cash equivalents

  $ 1,235   $ 9,300     3,4,8   $ 309,506     $ 320,041     $ (65,241 )   11   $ 254,800  

Accounts receivable

    —       17,708         —         17,708       —           17,708  

Prepaid expenses and other current assets

    251     2,985         —         3,236       —           3,236  

Inventories, net

    —       9,342         —         9,342       —           9,342  
                                                 

Total current assets

    1,486     39,335         309,506       350,327       (65,241 )       285,086  

Cash held in Trust Account

    330,066     —       3     (330,066 )     —         —           —    

Property and equipment, net

    —       5,475         —         5,475       —           5,475  

Intangible assets, net

    —       10,081         —         10,081       —           10,081  

Goodwill

    —       11,473         —         11,473       —           11,473  

Other Assets

    —       8,374         —         8,374       —           8,374  
                                                 

Total assets

  $ 331,552   $ 74,738       $ (20,560 )   $ 385,730     $ (65,241 )     $ 320,489  
                                                 

Liabilities and stockholders’ equity

               

Current liabilities

               

Current portion of long-term debt

  $ —     $ 508       $ —       $ 508     $ —         $ 508  

Accounts payable and Accrued expenses

    346     15,329         —         15,675       —           15,675  

Current portion of other liabilities

    —       2,434         —         2,434       —           2,434  
                                           

Total current liabilities

    346     18,271         —         18,617       —           18,617  

Long-term debt, net of current portion

    —       43,311         —         43,311       —           43,311  

Subordinated Debt

    —       2,319     4     (2,319 )     —         —           —    

Redeemable Warrant

      2,317         —         2,317       —           2,317  

Deferred Income Tax

    —       176         —         176       —           176  
                                                 

Total liabilities

    346     66,394         (2,319 )     64,421       —           64,421  

Common stock, subject to possible conversion

    66,029     —       5,9     (66,029 )     —             —    

Retractable Common Stock

      440     10     (440 )     —             —    

Stockholders’ equity

               

Common stock

    3     82     6     (79 )     6       —           6  

Additional paid-in capital

    255,654     40,242     5,6,7,8,9,10     60,508       356,404       (65,241 )   11     291,163  

Loan receivable collateralized by Common stock

    —       (678 )       —         (678 )     —           (678 )

Accumulated other comprehensive income (loss)

    —       (10 )       —         (10 )     —           (10 )

Retained earnings

    9,520     (31,732 )   4,7     (12,201 )     (34,413 )     —           (34,413 )
                                                 

Total stockholders’ equity

    265,177     7,904         48,228       321,309       (65,241 )       256,069  
                                                 

Total liabilities and stockholders’ equity

  $ 331,552   $ 74,738       $ (20,560 )   $ 385,730     $ (65,241 )     $ 320,489  
                                                 

 

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

DECEMBER 31, 2008

(in thousands of dollars)

 

    Victory
Acquisition
Corp.
    TouchTunes
Corp.
        Pro Forma
Adjustment No
Conversion
    Pro Forma
Combined-No
Conversion
    Pro Forma
Adjustments
Maximum
Allowable
Conversion
        Pro Forma
Combined -
Maximum
Allowable
Conversion
 
    USD $     USD $         USD $     USD $     USD $         USD $  
    Note 1     Note 2                                  

Net sales

  $ —       $ 84,985       $ —       $ 84,985     $ —         $ 84,985  

Cost of goods sold

    —         38,170         —         38,170       —           38,170  
                                                   

Gross profit

    —         46,815         —         46,815       —           46,815  
                                                   

Selling, general and administrative

    1,515       34,388     16     500       36,403       —           36,403  

Research and development

    —         5,598         —         5,598       —           5,598  
               

Depreciation

    —         3,224         —         3,224       —           3,224  
                                                   

Income (loss) from operations

    (1,515 )     3,605         (500 )     1,590       —           1,590  
                                                   

Interest and other (income) expense

               

Interest expense

    —         6,296     13     2,619       8,915       —           8,915  

Other (income) expense

    —         (629 )       —         (629 )     —           (629 )

Dividend and Interest income

    (4,907 )     —       12     318       (4,590 )     966     17     (3,623 )
                                                   
    (4,907 )     5,667         2,937       3,696       966         4,663  
                                                   

Income (loss) before income taxes

    3,392       (2,062 )       (3,437 )     (2,107 )     (966 )       (3,073 )

Income tax provision (benefit)

    341       154     14     (341 )     154       —           154  
                                                   

Net income (loss)

    3,051       (2,216 )       (3,096 )     (2,261 )     (966 )       (3,227 )

Accretion of trust account, relating to Common Stock

    788       —       15     (788 )     —         —           —    

subject to possible conversion

               

Change in fair value of currency option

    —         10         —         10       —           10  
                                                   

Net income (loss) available to common stockholders

  $ 2,263     $ (2,226 )     $ (2,307 )   $ (2,271 )   $ (966 )     $ (3,237 )
                                                   

Shares Outstanding

    40,500,000       18     28,340,561       68,840,561       (6,599,999 )       62,240,562  
                     

Weighted average number of shares

    33,900,001           34,490,560       68,840,561       (6,599,999 )   19     62,240,562  
                                 

Basic and diluted net income per share

    0.07             (0.03 )         (0.05 )
                                 

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

DECEMBER 31, 2008

(in thousands of dollars)

 

Note 1

   Derived from the audited financial statements of Victory Acquisition Corp. as of December 31, 2008.   

Note 2

   Derived from the unaudited consolidated financial statements of TouchTunes, Inc. as of December 31, 2008.   

Pro Forma Balance Sheet Adjustments

  

Note 3

   Reclass cash held in trust   
   Decrease cash held in trust account    330,066  
   Increase cash and cash equivalents    330,066  

Note 4

   Repayment of Subordinated Debt   
   Decrease Cash and cash equivalents    5,000  
   Decrease Subordinated Debt    2,319  
   Decrease Retained Earnings    2,681  

Note 5

   Reclass common stock subject to possible conversion   
   Decrease common stock subject to possible conversion    65,241  
   Increase additional paid in capital    65,241  

Note 6

   Record common stock issued at closing to TouchTunes as per merger agreement   
   Increase common stock issued    3  
   Decrease common stock related to TouchTunes    82  
   Decrease additional paid in capital    (79 )

Note 7

   Record recapitalization upon consummation of acquisition   
   Increase additional paid in capital    9,520  
   Decrease retained earnings    9,520  

Note 8

   Record payment of deferred underwriting fees and deal fees   
   Decrease cash and cash equivalents    15,560  
   Decrease additional paid in capital    15,560  

Note 9

   Related to elimination of accretion of trust account, relating to common stock   
   Decrease common stock, subject to possible conversion    788  
   Increase additional paid in capital    788  

Note 10

   Related to issuance of common stock for retractable commmon stock   
   Increase common stock    440  
   Derease retractable common stock    440  

Assuming maximum conversions

  

Note 11

   Record maximum conversion of common stock   
   Decrease additional paid in capital    65,241  
   Decrease cash and cash equivalents    65,241  

 

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

DECEMBER 31, 2008 (Continued)

(in thousands of dollars)

 

Pro Forma Income Statement Adjustments

  

Note 12

   To record reduction in interest income   
   Decrease interest income    318

Note 13

   To adjust interest expense related to Subordinated debt discount   
   Increase Interest Expense to account for debt discount and warrant value    2,681
   Decrease Interest Expense related to Debt Repayment    62

Note 14

   Record reduction in tax expense due to offset of TouchTunes current year tax loss with Victory taxable income   
   Decrease income tax expense    341

Note 15

   Eliminate accretion of trust account, relating to common stock   
   Decrease accretion of trust account, relating to common stock    788

Note 16

   Increase in selling, general and administrative due to additional employment agreements   
   Increase in selling, general and administrative expense    500

Assuming maximum conversions

  

Note 17

   Record reduction of interest income   
   Decrease interest income    966

Note 18

   To record issuance of shares of Victory common stock in connection with the merger with TouchTunes and to adjust the outstanding shares of common stock for 6,599,999 shares of common stock assuming not converted (not including the Victory historical outstanding shares.)   

Shares issued to TouchTunes in connection with merger

   28,340,561

Adjusting for shares assuming no conversion

   6,599,999

Total

   34,940,560

Increase

   Weighted average shares outstanding- basic    34,940,560
Common stock equivalents consisting of warrants and stock options were not included in the calculation of the diluted per share because it is not certain that these securities would be in the money subsequent to the merger. Potentially dilutive securities of 30,000,000 warrants (included within the units sold in the IPO), 3,000,000 warrants issued upon the exercise of the underwriters’ unit price option, 5,000,000 incentive warrants purchased by the founders and 6,605,978 Victory stock options, of which 4,659,579 are vested as of March 23, 2009, exchanged for stock options and warrants outstanding in TouchTunes at the date of the merger have been excluded from the computation of diluted net income(loss) per share, because the effect would be anti-dilutive.

Note 19

   To record the conversion of 6,599,999 shares of Victory common stock   
   Maximum number of shares to be converted    6,599,999

Decrease

   Weighted average shares outstanding, basic and diluted    6,599,999

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

DECEMBER 31, 2008 (Continued)

(in thousands of dollars)

Additional Disclosures:

Contingent Consideration

The holders of common stock of TouchTunes will also have the right to receive up to an additional 8,016,265 shares of Victory common stock if the combined company’s earnings before interests, taxes, depreciation and amortization (EBITDA) exceeds an aggregate of $50 million for any two consecutive quarters ending on the fourth anniversary of the closing of the merger. We refer to these additional shares as the “EBITDA Shares.” The EBITDA Shares will be issued at the closing of the merger and will be placed in escrow until they are earned. If the EBITDA target is not met, the EBITDA Shares shall be returned to Victory for cancellation. If the EBITDA target is met, the TouchTunes’ options shall also be adjusted to purchase an additional 2,103,523 shares of Victory common stock, of which 1,483,731 shares relate to vested option as of March 23, 2009.

Employment Agreements

In addition to Note 16 above, the Company is in the process of negotiating additional employment agreements associated with certain officers. No pro forma adjustment has been made due to the anticipation that these agreements are not expected to materially differ from the existing arrangements in place prior to the business combination.

 

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THE CHARTER AMENDMENT PROPOSALS

The charter amendment proposals, if approved, will provide for the amendment of Victory’s present amended and restated certificate of incorporation to:

 

   

change Victory’s corporate name to “TouchTunes Corporation;”

 

   

increase the authorized number of shares of its common stock from 85 million to 300 million;

 

   

change the period of its corporate existence to perpetual;

 

   

specify that the Class A directors will be elected for a term expiring at the annual meeting of stockholders to be held in 2010, the Class B directors will be elected for a term expiring at the annual meeting of stockholders to be held in 2011 and the Class C directors will be elected for a term expiring at the annual meeting of stockholders to be held in 2012, and that, beginning with the 2010 annual meeting, each class of directors will be elected for a term of office to expire at the third succeeding annual meeting of stockholders after its election;

 

   

delete the preamble and sections A through I, inclusive, of Article Seventh and to redesignate section J of Article Seventh as Article Seventh, as such provisions will no longer be applicable to Victory after the merger; and

 

   

make certain other changes in tense, number and gender that Victory’s board of directors believes are immaterial.

The provisions of Article Seventh that are proposed to be deleted, by the terms of the preamble (which also will be deleted), apply only during the period that will terminate upon the consummation of the business combination that will be effected by the merger. Section A requires that the business combination be submitted to Victory’s stockholders for approval under the Delaware General Corporation Law and is authorized by the vote of a majority of the Public Shares, provided that the business combination shall not be consummated if the holders of 20% or more of the Public Shares exercise their conversion rights. Section B specifies the procedures for exercising conversion rights. Section C provides that, if a business combination is not consummated by the “Termination Date” (April 24, 2009), only the holders of the Public Shares will be entitled to receive liquidating distributions. Section D provides that holders of Public Shares are entitled to receive distributions from Victory’s trust account established in connection with its initial public offering only in the event of Rhapsody’s liquidation or by demanding conversion in accordance with section B. Section E provides that no other business combination may be consummated until Victory’s initial business combination meeting all of the requirements set forth in its amended and restated certificate of incorporation is consummated. Sections F and G provide when funds may be disbursed from Victory’s trust account and who must approve such disbursements. Section H provides that the audit committee must approve certain actions until consummation by Victory of its initial business combination. Section I provides that Victory may not issue any additional securities that share in the trust account.

In the judgment of Victory’s board of directors, the charter amendment proposals are desirable for the following reasons:

 

   

The change of Victory’s corporate name is desirable to reflect the merger with TouchTunes.

 

   

The present amended and restated certificate of incorporation provides that Victory’s corporate existence will terminate on April 24, 2009. In order to continue in existence after the consummation of the merger subsequent to such date, this provision must be amended. Perpetual existence is the usual period of existence for corporations and Victory’s board of directors believes it is the most appropriate period for Victory as the surviving company in the merger.

 

   

As no meetings of stockholders have been held since the IPO, the present directors are the same persons who were appointed at the time of Victory’s organization. Pursuant to the merger agreement, the directors to be elected at the special meeting of stockholders to which this proxy statement/prospectus

 

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relates will serve for terms that expire in 2010 (Class A directors), 2011 (Class B directors) and 2012 (Class C directors). The proposed amendment to the present Article Seventh incorporates these classifications.

 

   

The preamble and sections A through I of the present Article Seventh relate to the operation of Victory as a blank check company prior to the consummation of its initial business combination and will not be applicable after consummation of the merger. Accordingly, they will serve no further purpose.

 

   

The other changes, which change certain verb tenses and pronouns, are believed by Victory’s board to be immaterial.

Pursuant to the merger agreement, approval of each charter amendment proposal is a condition to the consummation of the merger. If the merger proposal is not approved, the charter amendment proposals will not be presented at the meeting. If all of the charter amendment proposals are not approved, the merger will not be consummated even if the merger proposal is approved and the holders of fewer than 20% of the Public Shares vote against the merger proposal and properly demand that their Public Shares be converted into cash.

The approval of each charter amendment proposal will require the affirmative vote of the holders of a majority of the outstanding shares of Victory common stock on the record date.

A copy of Victory’s second amended and restated certificate of incorporation, as it will be in effect assuming approval of all of the charter amendment proposals and filing in the office of the Secretary of State of the State of Delaware, is attached to this proxy statement/prospectus as Annex B.

VICTORY’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE APPROVAL OF EACH OF THE CHARTER AMENDMENT PROPOSALS.

 

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THE STOCK PLAN PROPOSAL

Background

The Victory 2009 Stock Incentive Plan has been approved by Victory’s board of directors and will take effect upon consummation of the merger, provided that it is approved by the stockholders at the special meeting. We are submitting the plan to stockholders for their approval so that options granted under the plan may qualify for treatment as incentive stock options and awards under the plan may constitute performance-based compensation not subject to Section 162(m) of the IRC.

The plan reserves             shares of Victory common stock for issuance in accordance with the plan’s terms, subject to annual increases as provided in the plan. The purpose of the plan is to enable Victory to offer its employees, officers, directors and consultants whose past, present and/or potential contributions to Victory have been, are or will be important to the success of Victory, an opportunity to acquire a proprietary interest in Victory. The various types of incentive awards that may be provided under the plan are intended to enable Victory to respond to changes in compensation practices, tax laws, accounting regulations and the size and diversity of its business.

A summary of the principal features of the plan is provided below, but is qualified in its entirety by reference to the full text of the plan, which is attached to this proxy statement/prospectus as Annex F. As used below in this section, “the “Company” refers to Victory (which will be operating under the name “TouchTunes Corporation”) as the surviving entity of the merger.

Administration

The plan will be administered by the compensation committee of the board of directors of Victory. Subject to the provisions of the plan, the committee determines, among other things, the persons to whom from time to time awards may be granted, the specific type of awards to be granted, the number of shares subject to each award, share prices, any restrictions or limitations on the awards, and any vesting, exchange, deferral, surrender, cancellation, acceleration, termination, exercise or forfeiture provisions related to the awards.

Stock Subject to the Plan

If any shares are subject to an award that is forfeited, settled in cash, or expires, any such unissued shares covered by such award will be available for issuance under the plan. Shares not issued as a result of the net exercise of a stock appreciation right, shares tendered by a participant or retained by the company as full or partial payment for the purchase of an award or to satisfy tax withholding obligations in connection with an award, or shares repurchased on the open market with the proceeds from the payment of an exercise price of a stock option will not again be available for issuance under the plan.

In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, stock split, reverse stock split, spin-off, combination, repurchase or exchange of shares or other securities of the Company, or similar corporate transaction, as determined by the Committee, the Committee shall, in such manner as it may deem equitable and to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the plan, adjust the number and type of shares available for awards under the plan.

Duration of Plan

The plan will become effective upon the date the stockholders of the Company first approve the plan. Unless sooner terminated, the plan will terminate on the tenth anniversary of the stockholders’ approval. After the plan is terminated, no awards will be granted under the plan, but awards previously granted will remain outstanding.

 

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Eligibility

Awards may be granted under the plan to employees, officers, directors and consultants who are deemed to have rendered, or to be able to render, significant services to the Company and who are deemed to have contributed, or to have the potential to contribute, to our success.

Types of Awards

Options. The plan provides both for “incentive” stock options as defined in Section 422 of the IRC, and for options not qualifying as incentive options, both of which may be granted with any other stock based award under the plan. The committee determines the exercise price per share of common stock purchasable under an incentive or non-qualified stock option, which may not be less than 100% of the fair market value on the day of the grant. However, the exercise price of an incentive stock option granted to a person possessing more than 10% of the total combined voting power of all classes of stock may not be less than 110% of the fair market value on the date of grant. The aggregate fair market value of all shares of common stock with respect to which incentive stock options are exercisable by a participant for the first time during any calendar year (under all of our plans), measured at the date of the grant, may not exceed $100,000.

A stock option may only be exercised within ten years from the date of the grant, or within five years in the case of an incentive stock option granted to a person who, at the time of the grant, owns common stock possessing more than 10% of the total combined voting power of all classes of our stock. Subject to any limitations or conditions the board or committee may impose, stock options may be exercised, in whole or in part, at any time during the term of the stock option by giving written notice of exercise to us specifying the number of shares of common stock to be purchased. The notice must be accompanied by payment in full of the purchase price, either in cash or, if provided in the agreement, in our securities or in combination of the two.

Except as otherwise permitted by the committee, stock options granted under the plan may not be transferred other than by will or by the laws of descent and distribution and all stock options are exercisable during the holder’s lifetime, or in the event of legal incapacity or incompetency, the holder’s guardian or legal representative.

Stock Appreciation Rights. The plan permits the committee to grant stock appreciation rights. A stock appreciation right entitles the holder to receive a number of shares of common stock having a fair market value equal to the excess fair market value of one share of common stock over the exercise price, multiplied by the number of shares subject to the stock appreciation rights. The committee determines the exercise price per share, which may not be less than 100% of the fair market value on the day of the grant. A stock appreciation right may only be exercised within ten years from the date of the grant.

Restricted Stock. Under the plan, shares of restricted stock may be awarded either alone or in addition to other awards granted under the plan. The committee determines the number of shares to be awarded, the price if any to be paid for the restricted stock by the person receiving the stock from us, the time or times within which awards of restricted stock may be subject to forfeiture, the vesting schedule and rights to acceleration thereof, and all other terms and conditions of the restricted stock awards.

Performance Awards. Under the plan, awards may be granted that are vest upon the achievement of specified performance goals during a performance period. Performance awards may consist of shares of restricted stock (Performance Shares) or units having a dollar value. Performance Shares may, in the committee’s discretion, be intended to satisfy the requirements for performance-based compensation within the meaning of Section 162(m) of the IRC.

 

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If the Committee intends for a performance award to satisfy the requirements for performance-based compensation within the meaning of Section 162(m) of the IRS, payment will be contingent upon the achievement of one or more performance goals, as certified by the committee. Such performance goals will be based on one or more of the following performance measures:

 

  (a) Net earnings or net income (before or after taxes);

 

  (b) Earnings per share;

 

  (c) Net sales or revenue growth;

 

  (d) Net operating profit;

 

  (e) Return measures (including, but not limited to, return on assets, capital, invested capital, equity, sales, or revenue);

 

  (f) Cash flow (including, but not limited to, operating cash flow, free cash flow, cash flow return on equity, and cash flow return on investment);

 

  (g) Earnings before or after taxes, interest, depreciation, and/or amortization;

 

  (h) Gross or operating margins;

 

  (i) Productivity ratios;

 

  (j) Share price (including, but not limited to, growth measures and total shareholder return);

 

  (k) Expense targets;

 

  (l) Margins;

 

  (m) Operating efficiency;

 

  (n) Market share;

 

  (o) Customer satisfaction;

 

  (p) Working capital targets; and

 

  (q) Economic value added (net operating profit after tax minus the sum of capital multiplied by the cost of capital).

Any performance measure(s) may be used to measure the performance of the company and/or an affiliate as a whole or any business unit of the Company and/or affiliate or any combination thereof, as the committee may deem appropriate, or any of the above performance measures as compared to the performance of a group of comparable companies, or published or special index that the committee, in its sole discretion, deems appropriate, or the company may select performance measure (j) above as compared to various stock market indices.

Other Stock Awards. Under the plan, other stock-based awards may be granted, subject to limitations under applicable law, that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, shares of common stock, as deemed consistent with the purposes of the plan.

Award Limitation. No participant may be granted awards for more than             shares in any calendar year, and no participant may be granted options and stock appreciation rights for more than             shares in any calendar year.

Withholding Taxes

Upon the exercise of any award granted under the plan, the holder may be required to remit to the Company an amount sufficient to satisfy all federal, state and local withholding tax requirements prior to delivery of any certificate or certificates for shares of common stock.

 

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Amendments

Subject to the approval of the Board, where required, the committee may at any time, and from time to time, amend the plan, provided that no amendment will be made that would impair the rights of a holder under any agreement entered into pursuant to the plan without the holder’s consent (except to the extent necessary to comply with Section 409A of the IRC). In addition, the committee may not increase the shares available under the plan, increase the individual limits on awards, allow for an exercise price below fair market value, permit the repricing of options or stock appreciation rights, or adopt any other amendment that would require stockholder approval.

Federal Income Tax Consequences

The material U.S. federal income tax consequences of awards under the plan, based on the current provisions of the Internal Revenue Code and the regulations thereunder, with respect to employees who are subject to U.S. income tax are as follows:

The grant of an option to an employee will have no tax consequences to the employee or to the company or its subsidiaries or affiliates. In general, upon the exercise of an incentive stock option (“ISO”), the employee will not recognize income, and the employer will not be entitled to a tax deduction. However, the excess of the acquired shares’ fair market value on the exercise date over the exercise price is included in the employee’s income for purposes of the alternative minimum tax. When an employee disposes of ISO shares, the difference between the exercise price and the amount realized by the employee will, in general, constitute capital gain or loss, as the case may be. However, if the employee fails to hold the ISO shares for more than one year after exercising the ISO and for more than two years after the grant of the ISO, (i) the portion of any gain realized by the employee upon the disposition of the shares that does not exceed the excess of the fair market value of the shares on the exercise date over the exercise price generally will be treated as ordinary income, (ii) the balance of any gain or any loss will be treated as a capital gain or loss, and (iii) the employer generally will be entitled to a tax deduction equal to the amount of ordinary income recognized by the employee. If an employee exercises an ISO more than three months after his termination of employment with the company and any subsidiary in which the company owns at least 50% of the voting power (or one year after his termination of employment if the reason for the termination is disability), the option will be treated for tax purposes as a non-qualified stock option, as described below.

In general, upon the exercise of a non-qualified stock option, the employee will recognize ordinary income equal to the excess of the acquired shares’ fair market value on the exercise date over the exercise price, and the employer generally will be entitled to a tax deduction in the same amount.

With respect to other awards that are settled either in cash or in shares that are transferable or are not subject to a substantial risk of forfeiture, the employee will recognize ordinary income equal to the excess of (a) the cash or the fair market value of any shares received (determined as of the date of settlement) over (b) the amount, if any, paid for the shares by the employee, and the employer generally will be entitled to a tax deduction in the same amount.

In the case of an award to an employee that is settled in shares that are nontransferable and subject to a substantial risk of forfeiture, the employee generally will recognize ordinary income equal to the excess of (a) the fair market value of the shares received (determined as of the date on which the shares become transferable or not subject to a substantial risk of forfeiture, whichever occurs first) over (b) the amount, if any, paid for the shares by the employee, and the employer generally will be entitled to a tax deduction in the same amount.

An employee whose shares are both nontransferable and subject to a substantial risk of forfeiture may elect under Section 83(b) of the IRC to recognize income when the shares are received, rather than upon the expiration of the transfer A participant may make a Section 83(b) election, within 30 days of the transfer of the restricted

 

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stock. If a participant makes an election and thereafter forfeits the shares, no ordinary loss deduction will be allowed. The forfeiture will be treated as a sale or exchange upon which there is realized loss equal to the excess, if any, of the consideration paid for the shares over the amount realized on such forfeiture. The loss will be a capital loss if the shares are capital assets. If a participant makes an election under Section 83(b), the holding period will commence on the day after the date of transfer and the tax basis will equal the fair market value of shares, as determined without regard to the restrictions, on the date of transfer.

New Plan Benefits

The selection of employees to receive awards under the plan (other than substitute options, as described below) will be determined by the committee in its discretion. Therefore, the actual value of benefits under the plan that will be received by any individual or group is not determinable. On March 16, 2009, the closing price of Victory common stock on the NYSE Amex was $9.88 per share.

All outstanding TouchTunes’ options and warrants shall be cancelled and substituted with options and warrants of similar tenor to purchase an aggregate of 6,605,978 shares of Victory common stock, of which options to purchase 4,659,579 shares are vested as of March 23, 2009. If the EBITDA target is met, the TouchTunes’ options and warrants shall also be adjusted to purchase an additional 2,103,523 shares of Victory common stock, of which 1,483,736 EBITDA Shares relate to vested options as of March 23, 2009.

Vote Required

The affirmative vote of a majority of the shares of the Common Stock, present in person or by proxy and entitled to vote at the Special Meeting, is required to approve the plan.

VICTORY’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT VICTORY’S STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE STOCK PLAN PROPOSAL.

 

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THE ADJOURNMENT PROPOSAL

The adjournment proposal, if adopted, will allow Victory’s board of directors to adjourn the special meeting to a later date or dates to permit further solicitation of proxies in the event, based on the tabulated votes, there are not sufficient votes at the time of the special meeting to approve the consummation of the merger. In no event will Victory adjourn the special meeting or consummate the merger beyond the date by which it may properly do so under its amended and restated certificate of incorporation and Delaware law. The purpose of the adjournment proposal is to provide more time for the Victory Founders, TouchTunes and the current holders of common stock of TouchTunes to make purchases of Public Shares or other arrangements that would increase the likelihood of obtaining a favorable vote on the merger proposal and to meet the requirement that the holders of fewer than 20% of the Public Shares vote against the merger proposal and demand that their Public Shares be converted into cash (although no such purchases will be made by Victory itself). See the section entitled “Summary of the Proxy Statement/Prospectus — Interests of Victory’s Directors and Officers and Others in the Merger.”

In addition to an adjournment of the special meeting upon approval of an adjournment proposal, the board of directors of Victory is empowered under Delaware law to postpone the meeting at any time prior to the meeting being called to order. In such event, Victory will issue a press release and take such other steps as it believes are necessary and practical in the circumstances to inform its stockholders of the postponement.

Consequences if the Adjournment Proposal is Not Approved

If the adjournment proposal is not approved by the stockholders, Victory’s board of directors may not be able to adjourn the special meeting to a later date in the event, based on the tabulated votes, there are not sufficient votes at the time of the special meeting to approve the consummation of the merger (because the merger proposal is not approved or because the holders of 20% or more of the Public Shares vote against the merger proposal and demand conversion of their Public Shares into cash). In such event, the merger would not be completed and, unless Victory were able to consummate a business combination with another party no later than April 24, 2009, it would be required to liquidate.

Required Vote

Adoption of the adjournment proposal requires the affirmative vote of a majority of the issued and outstanding shares of Victory’s common stock represented in person or by proxy at the meeting and entitled to vote thereon. Adoption of the adjournment proposal is not conditioned upon the adoption of any of the other proposals.

VICTORY’S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT VICTORY’S STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE ADJOURNMENT PROPOSAL.

 

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THE DIRECTOR ELECTION PROPOSAL

At the special meeting, six directors will be elected to Victory’s board of directors, of whom two will serve until the special meeting to be held in 2010, one will serve until the special meeting to be held in 2011 and three will serve until the annual meeting to be held in 2012 and, in each case, until their successors are elected and qualified.

Upon consummation of the merger, if management’s nominees are elected, the directors of Victory will be classified as follows:

 

   

Class A Directors: Jonathan J. Ledecky and Richard Y. Roberts;

 

   

Class B Director: David S. Carlick; and

 

   

Class C Directors: William J. Meder, Patrick Gallagher and Joel A. Katz.

Certain of the founders of Victory and certain stockholders of TouchTunes will enter into a voting agreement at the time of closing of the merger that will provide that they will vote their shares of Victory common stock in favor of the election of four nominees of VantagePoint in classes B and C (two each) in all elections through the annual meeting that will be held in 2012 (or earlier if VantagePoint owns less than 50% of the shares held by it upon Closing of the Merger). A copy of the form of voting agreement is attached to this proxy statement/prospectus as Annex G.

If all of the directors that are nominated for election in this proxy statement/prospectus are elected, Victory will have one vacant board seat for a Class B director on its board of directors. Victory does not have any immediate plans to fill the vacancy on the board of directors, but will do so when an appropriate candidate has been identified. The election of directors requires a plurality vote of the shares of common stock present in person or represented by proxy and entitled to vote at the special meeting. “Plurality” means that the individuals who receive the largest number of votes cast “FOR” are elected as directors. Consequently, any shares not voted “FOR” a particular nominee (whether as a result of abstentions, a direction to withhold authority or a broker non-vote) will not be counted in the nominee’s favor.

Unless authority is withheld, the proxies solicited by the board of directors will be voted “FOR” the election of these nominees. In case any of the nominees becomes unavailable for election to the board of directors, an event that is not anticipated, the persons named as proxies, or their substitutes, will have full discretion and authority to vote or refrain from voting for any other candidate in accordance with their judgment.

If the merger is not authorized by the approval of both the merger proposal and the charter amendment proposals and the proper election by the holders of fewer than 20% of the Public Shares to convert their Public Shares into cash, the director election proposal will not be submitted to the stockholders for a vote and Victory’s current directors will continue in office until Victory is required to be liquidated.

 

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Directors and Executive Officers of Victory Following the Merger

At the effective time of the merger and assuming the election of the individuals set forth above, the board of directors and executive officers of Victory will be as follows:

 

Name

   Age   

Position

William J. Meder

   66    Executive Chairman of the Board of Directors and President and Chief Executive Officer

David Schwartz

   39    Chief Financial Officer, Secretary and Treasurer

Ronald Greenberg

   50    Chief Marketing Officer & Senior Vice President, Digital Media

Geoff Mott

   56    Senior Vice President, Strategy and Business Development

Dan McAllister

   43    Senior Vice President, Sales

Michael Tooker

   52    Senior Vice President Technology and Operations

Bob Weinschenk

   46    Senior Vice President, Barfly Division

David S. Carlick

   59    Director

Patrick Gallagher

   37    Director

Jonathan J. Ledecky

   51    Director

Joel A. Katz

   64    Director

Richard Y. Roberts

   57    Director

Information About the Executive Officers of Victory Following the Merger

William Meder has served as President and Chief Executive Officer of TouchTunes since September 2008 and has been Chairman of the board of directors since September 2004. Mr. Meder served as venture advisor to VantagePoint Venture partners from June 2007 to April 2008. His career includes 14 years with IBM in various senior positions.

David Schwartz has been the chief financial officer of TouchTunes since March 2009. From March 2007 to March 2009, he was chief financial officer at Optimal Payments Inc. From May 2005 to March 2007, Mr. Schwartz was chief financial officer of FireOne Group plc. and from April 2004 to May 2005, he was vice president, investor relations and chief financial officer of Optimal Services Group Inc. Prior to 2004, Mr. Schwartz was chief financial officer of Terra Payments Inc.

Dan McAllister has been Senior Vice President, Sales for TouchTunes since 2002. Mr. McAllister oversees the company’s international sales initiatives. Dan has been a TouchTunes team member since September 2000 when he came on as Director of Sales and played an instrumental role in launching the company’s internet-based products and services. Through the years, he rapidly progressed and now manages all aspects of sales and marketing from the company’s Pennsylvania sales office. Dan brings more than 16 years of invaluable experience in the technology and coin-op industries to his role as vice president. Throughout his career, Dan has worked with industry giants including Sales Technologies, a division of Dun and Bradstreet, Merit Industries, where he served as Director of Sales and Rock-Ola Manufacturing where he took on the role of National Sales Manager.

Ronald Greenberg has been the chief marketing officer and senior vice president, digital media of TouchTunes since March 2007. From July 2005 to February 2007, Mr. Greenberg was executive vice president, marketing & business development at Actimize Inc. From March 2004 to April 2005, Mr. Greenberg served as general manager, global marketing for Microsoft’s Enterprise & Partner Group, based in Redmond, WA. Before that, he was vice president, global industry marketing at IBM and held other senior worldwide marketing positions at IBM headquarters in NY. He was also vice president of marketing for IBM for Asia Pacific, based in Tokyo, for all b-to-b and b-to-c efforts. Earlier, he was senior vice president, client services at Dentsu New York, overseeing all of the agency’s consumer and business brand marketing. Mr. Greenberg held consumer and business marketing roles in New York agencies prior to this.

 

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Geoff Mott is Senior Vice President, Strategy and Business Development since March 2009. Prior to March 2009, Mr. Mott was a managing director at VantagePoint Venture Partners from December 2002 until March 2009. From January, 1998 to December, 2002, Mr. Mott was a managing partner of The McKenna Group. Mr. Mott has 25 years of experience acting as a consultant and entrepreneur to the high-tech industry, in sectors ranging from optical components and telecom systems to enterprise software. Earlier in his career, he built a business strategy practice for technology firms at Lochridge & Co., where he was heavily involved in global telecom deregulation. Mr. Mott serves on the board of directors for a variety of privately held companies, including Nexsan Technologies Incorporated, where he has been a member of the board since 2003.

Michael Tooker has been the senior vice president, technology and operations of TouchTunes since July 2006. From May 2002 until joining TouchTunes, he was a managing partner in Fleetmind, an innovator in vehicle logging, tracking and messaging. In 1999, he founded Dolphin Software Services a LEO Satellite tracking ASP which was acquired by Orbcomm, where he served as executive vice president until 2002. Prior to Dolphin, Mr. Tooker founded and was president for 12 years of Vector, a leading IBM Business Partner in Eastern Canada and New England.

Bob Weinschenk has been president of the Barfly Division since TouchTunes acquired Barfly Interactive Networks in August 2008. From September 2007 to August 2008, Mr. Weinschenk served as president and chief executive officer of Barfly Interactive Networks. From May 2004 until September 2007, Mr. Weinschenk served as the president and chief executive officer of Britestream Networks. From May 2000 to November 2003, Mr. Weinschenk served as president and chief executive officer of Pixim, Inc.

Information About the Nominees

David Carlick serves on the board of directors for a number of privately held companies, including TouchTunes, where he has been a director since December 2008, Grocery Shopping Network, where he has been a director since January 2007, and ReachLocal, where he has been a director since June 2004. From January 1999 until December 2008, Mr. Carlick was a partner and managing director at VantagePoint Venture Partners. Mr. Carlick was a director at Ask Jeeves (NASDAQ ASKJ) from August 2001 through its sale in June 2005. Mr. Carlick was chairman of the compensation and nominating committees and served on the audit committee. Mr. Carlick was on the board of Intermix Media (parent company of MySpace) from November 2003, and served as Chairman of Intermix Media at the time of the sale to News Corporation in September 2005. Intermix was public on the American Stock Exchange (IMIX).

Patrick Gallagher is a principal at VantagePoint Venture Partners, which he joined in June 2008. Mr. Gallagher has served as a director of Constant Contact since June 2003. Prior to joining VantagePoint, he was a principal at American Capital’s Technology Group, where he was charged with developing and implementing marketing strategies to build a national presence. Prior to American Capital, he was vice president of Morgan Stanley Venture Partners (MSVP) and Morgan Stanley and joined the firm in July 1995. While at Morgan Stanley he also spent a year in each of the Debt Capital Markets Group and Technology Corporate Finance Department. Prior to joining Morgan Stanley, Mr. Gallagher spent two years working in Toyota’s Corporate Treasury Department. In April 2003, Mr. Gallagher rejoined MSVP after working in various business development roles at RealNames, an Internet services company.

Joel A. Katz has been a shareholder at the international law firm Greenberg Traurig LLP since 1998, where he is the global chair of the firm’s international media and entertainment practice. Before joining Greenberg Traurig, he founded Katz, Smith & Cohen, then one of the nation’s largest entertainment law firms. Having subsequently merged his firm with Greenberg Traurig, he now leads the world’s largest entertainment law practice. Mr. Katz is a former chairman of the American Bar Association’s Entertainment and Sports Law Section, and holds a number of leadership positions in a variety of social, professional and cultural organizations, including service as a Music Industry Representative for the State of Georgia Film, Video and Music Advisory Commission, general counsel for The Recording Academy where he formerly served as the organization’s chairman, the initial board of directors for the GRAMMY Museum, founding chairman of The Recording

 

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Academy’s Entertainment Law Initiative; former chairman of the board of advisors for America’s Junior Miss; special counsel to the Country Music Association, the Gospel Music Association and the Rock and Roll Hall of Fame and Museum; general counsel and member of the board of directors of Farm Aid Inc. Mr. Katz has also previously served on the boards of the T. J. Martell Foundation for Leukemia Research, Cancer and AIDS Research, WhiteFence, Natrol Inc., The Yellowstone Club, the International Tennis Hall of Fame and former Museum, and Very Special Arts. He presently serves on the board of governors of The Buckhead Club, and on the advisory council of the Otis Redding Big “O” Youth Educational Dream Foundation.

Jonathan J. Ledecky has been Victory’s president, secretary and a member of its board of directors since its inception. From July 2005 to December 2007, Mr. Ledecky served as president, secretary and a director of Endeavor Acquisition Corp., an NYSE Amex listed blank check company formed to acquire an operating business. Endeavor Acquisition Corp. consummated its business combination with American Apparel Inc. and its subsidiaries on December 12, 2007. Since June 2007, Mr. Ledecky has served as president, secretary and a director of Triplecrown Acquisition Corp., a blank check company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business in the financial services industry. Since June 1999, Mr. Ledecky has served as chairman of the Ledecky Foundation, a philanthropic organization which contributes funds to programs for the education of disadvantaged inner city youth in Washington, D.C., New York and Boston. Since March 1999, Mr. Ledecky has also served as chairman of Ironbound Partners Fund LLC, a private investment management fund that oversees the Ledecky Foundation and other Ledecky family investments. In October 1994, Mr. Ledecky founded U.S. Office Products and served as its chief executive officer until November 1997 and chairman until June 1998. During his tenure, U.S. Office Products completed over 260 acquisitions, and grew to a Fortune 500 company with over $2.6 billion in revenues. In June 1998, U.S. Office Products completed a comprehensive restructuring plan whereby four separate entities were spun off to stockholders and U.S. Office Products underwent a leveraged recapitalization. In connection with these transactions, Mr. Ledecky resigned from his position as chairman of U.S. Office Products and became a director of each of the four spin-off entities. In February 1997, Mr. Ledecky founded Building One Services Corporation (originally Consolidation Capital Corporation), an entity formed to identify attractive consolidation opportunities which ultimately focused on the facilities management industry. In November 1997, Building One raised $552 million in an initial public offering. Mr. Ledecky served as Building One’s chief executive officer from November 1997 through February 1999 and as its chairman from inception through its February 2000 merger with Group Maintenance America Corporation. During his tenure with Building One, it completed 46 acquisitions and grew to over $1.5 billion in revenues. From July 1999 to July 2001, Mr. Ledecky was vice chairman of Lincoln Holdings, owners of the Washington sports franchises in the NBA, NHL and WNBA. Since June 1998, Mr. Ledecky has served as a director of School Specialty, a Nasdaq Global Market listed education company that provides products, programs and services that enhance student achievement and development. School Specialty spun out of U.S. Office Products in June 1998. Since 1994, Mr. Ledecky has been involved with numerous other companies in director positions. Mr. Ledecky was a trustee of George Washington University, served as a director of the U.S. Chamber of Commerce and served as commissioner on the National Commission on Entrepreneurship. In addition, in 2004, Mr. Ledecky was elected the Chief Marshal of the 2004 Harvard University Commencement, a singular honor bestowed by his alumni peers for a 25th reunion graduate deemed to have made exceptional contributions to Harvard and the greater society while achieving outstanding professional success. Mr. Ledecky received a B.A. (cum laude) from Harvard University and a M.B.A from Harvard Business School.

Richard Y. Roberts has been a member of Victory’s board of directors since its inception. In February 2006, Mr. Roberts co-founded a regulatory/legislative consulting firm, Roberts, Raheb & Gradler LLC. He was a partner with Thelen Reid & Priest LLP, a national law firm, from January 1997 to February 2006. From August 1995 to January 1997, Mr. Roberts was a consultant at Princeton Venture Research, Inc., a private consulting firm. From 1990 to 1995, Mr. Roberts was a commissioner of the Securities and Exchange Commission, and, in this capacity, was actively involved in, has written about or has testified on, a wide range of subjects affecting the capital markets. Since leaving the Commission, Mr. Roberts has been a frequent media commentator and writer on various securities public policy issues and has assisted the Governments of Romania and Ukraine in the

 

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development of a securities market. Since September 2005, Mr. Roberts has served as a member of the board of directors of Nyfix, Inc., a Nasdaq Global Market listed provider of industry interconnectivity networks, electronic trade communication technologies, trading workstations and middle-office trade automation technologies. He was a director of Endeavor Acquisition Corp. from July 2005 to December 2007. Since June 2007, he has served as a director of Triplecrown Acquisition Corp. From 1987 to 1990, he was the chief of staff for Senator Richard Shelby. He is a member of the Alabama Bar and the District of Columbia Bar. Mr. Roberts is a member of the Advisory Board of Securities Regulation & Law Reports, of the Advisory Board of the International Journal of Disclosure and Governance, and of the Editorial Board of the Municipal Finance Journal. Mr. Roberts also previously served as a member of the District 10 Regional Consultative Committee of the Financial Industry Regulatory Authority, the Market Regulation Advisory Board of the FINRA, and the Legal Advisory Board of the FINRA. Mr. Roberts received a B.E.E. from Auburn University, a J.D. from the University of Alabama School of Law, and a Master of Laws from the George Washington University Law Center.

Independence of Directors

As a result of its securities being listed on the NYSE Amex, Victory adheres to the rules of that exchange in determining whether a director is independent. Upon the consummation of the merger, it is anticipated that Victory’s securities will be listed on the Nasdaq Stock Market. As a result, the board of directors of Victory will consult with its counsel to ensure that the board’s determinations are consistent with those rules and all relevant securities and other laws and regulations regarding the independence of directors. The Nasdaq Stock Market requires that a majority of the board must be composed of “independent directors,” which is defined generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company’s board of directors would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. Consistent with these considerations, the board of directors of Victory has affirmatively determined that, upon the closing of the merger, David Carlick, Patrick Gallagher, Richard Y. Roberts and Joel A. Katz will be the independent directors of Victory.

Audit Committee Information

Effective April 2007, Victory established an audit committee of the board of directors, which consists of Edward J. Mathias, as chairman, Jay H. Nussbaum and Richard Y. Roberts, each of whom is an independent director under the NYSE Amex listing standards. The audit committee met three times in 2007 and four times in 2008. Upon the consummation of the merger, the members of Victory’s audit committee will be Messrs. Carlick, Gallagher, Katz and Roberts, with Mr. Roberts serving as chairman. Each is an independent director under the NYSE Amex and Nasdaq Stock Market listing standards. The audit committee’s duties, which are specified in Victory’s Audit Committee Charter, include, but are not limited to:

 

   

reviewing and discussing with management and the independent auditor the annual audited financial statements, and recommending to the board whether the audited financial statements should be included in Victory’s Annual Report;

 

   

discussing with management and the independent auditor significant financial reporting issues and judgments made in connection with the preparation of Victory’s financial statements;

 

   

discussing with management major risk assessment and risk management policies;

 

   

monitoring the independence of the independent auditor;

 

   

verifying the rotation of the audit partners having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law;

 

   

reviewing and approving all related-party transactions;

 

   

inquiring and discussing with management TouchTunes’ compliance with applicable laws and regulations;

 

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pre-approving all audit services and permitted non-audit services to be performed by Victory’s independent auditor, including the fees and terms of the services to be performed;

 

   

appointing or replacing the independent auditor;

 

   

determining the compensation and oversight of the work of the independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work; and

 

   

establishing procedures for the receipt, retention and treatment of complaints received by Victory regarding accounting, internal accounting controls or reports which raise material issues regarding Victory’s financial statements or accounting policies.

Financial Experts on Audit Committee

The audit committee will at all times be composed exclusively of “independent directors” who are “financially literate” as defined under Nasdaq Stock Market listing standards. The Nasdaq Stock Market listing standards define “financially literate” as being able to read and understand fundamental financial statements, including a company’s balance sheet, income statement and cash flow statement.

In addition, a listed company must certify to the Nasdaq Stock Market that the committee will have at least one member who has past employment experience in finance or accounting, requisite professional certification in accounting, or other comparable experience or background that results in the individual’s financial sophistication. The board of directors of Victory has determined that Mr. Roberts satisfies the definition of financial sophistication and also qualifies as an “audit committee financial expert,” as defined under rules and regulations of the Securities and Exchange Commission.

Independent Auditors’ Fees

The firm of Marcum & Kliegman LLP (“Marcum”) acts as Victory’s independent registered public accounting firm. The following is a summary of fees paid or to be paid to Marcum for services rendered.

Audit Fees

During the year ended December 31, 2008, fees for Victory’s registered public accounting firm were $85,000 for the services they performed in connection with its Annual Report for the fiscal year ended December 31, 2007 and for the three Quarterly Reports for the fiscal quarters ended March 31, 2008, June 30, 2008 and September 30, 2008.

During the period from January 12, 2007 (inception) to December 31, 2007, fees for Victory’s independent registered public accounting firm were $125,000 for the services they performed in connection with Victory’s IPO, including the financial statements included in the Form 8-K filed with the Securities and Exchange Commission on May 1, 2007.

Marcum has not waived its right to make claims against the funds in Victory’s trust account for fees of any nature owed to it due to independence requirements.

Audit Related Fees

During 2008, Victory was billed $8,900 for related services that are reasonably related to the performance of the audit or review of Victory’s financial statements and are not reported under the caption “Audit Fees” above. For 2007, there were no fees billed for audited related services provided by Marcum.

 

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Tax Fees

During 2008, Victory was billed $3,900 for tax services, principally the preparation of income tax returns. For 2007, Marcum did not render services to Victory for tax compliance, tax advice and tax planning.

All Other Fees

During 2008 and 2007, there were no fees billed for products and services provided by Marcum to Victory other than those set forth above.

Audit Committee Pre-Approval Policies and Procedures

Since Victory’s audit committee was not formed until April 2007, the audit committee did not pre-approve all of the foregoing services although any services rendered prior to the formation of Victory’s audit committee were approved by its board of directors. However, all services render since April 2007 were pre-approved by Victory’s audit committee. In addition, in accordance with Section 10A(i) of the Securities Exchange Act of 1934, before Victory engages its independent accountant to render audit or non-audit services on a going-forward basis, the engagement will be approved by its audit committee.

Code of Ethics

In April 2007, Victory’s board of directors adopted a code of ethics that applies to Victory’s directors, officers and employees as well as those of its subsidiaries. A copy of Victory’s code of ethics may be obtained free of charge by submitting a request in writing to Victory Acquisition Corp., 970 West Broadway, PMB 402, Jackson, Wyoming 83001.

Compensation Committee Information

Upon consummation of the merger, the board of directors of Victory will establish a compensation committee with Messrs. Carlick, Gallagher and Katz as its members with [] serving as chairman. Each will be an independent director under Nasdaq Stock Market listing standards. The purpose of the compensation committee will be to review and approve compensation paid to Victory’s officers and directors and to administer Victory’s incentive compensation plans, including the 2009 long-term incentive equity plan and any other plans that may be adopted in the future, including authority to make and modify awards under such plans.

Compensation Committee Interlocks and Insider Participation

None of the persons designated as directors of Victory currently serves on the compensation committee of any other company on which any other director designee of Victory or any officer or director of Victory or TouchTunes is currently a member.

Nominating Committee Information

Effective April 2007, Victory established a nominating committee of the board of directors, which consists of Kerry Kennedy, as chairman, and Jimmie Lee Solomon, Jr., each of whom is an independent director under the NYSE Amex listing standards. Under the charter of the Nominating Committee, the committee is responsible for the appropriate size, functioning and needs of the board including, but not limited to, recruitment and retention of high quality board members and committee composition and structure. Upon consummation of the merger, the members will be Messrs. Carlick, Gallagher and Katz with [] serving as chairman, each of whom is an independent director under the Nasdaq Stock Market listing requirements. During the period commencing with the closing of the merger and ending with the 2012 annual meeting, the nominees for Victory’s board of directors will be determined pursuant to the terms of the merger agreement and approved by the Nominating Committee.

 

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Guidelines for Selecting Director Nominees

Victory’s Nominating Committee is responsible for overseeing the selection of persons to be nominated to serve on Victory’s board of directors. The Nominating Committee considers persons identified by its stockholders, management, stockholders, investment bankers and others. The guidelines for selecting nominees, which are specified in the Nominating Committee charter, provide that, generally, persons to be nominated should be actively engaged in business, have an understanding of financial statements, corporate budgeting and capital structure, be familiar with the requirements of a publicly traded company, be familiar with industries relevant to the Victory business, be willing to devote significant time to the oversight duties of the board of directors of a public company, and be able to promote a diversity of views based on the person’s education, experience and professional employment. The Nominating Committee will evaluate each individual in the context of the board as a whole, with the objective of recommending a group of persons that can best implement Victory’s business plan, perpetuate its business and represent stockholder interests. The Nominating Committee may require certain skills or attributes, such as financial or accounting experience, to meet specific board needs that arise from time to time. The Nominating Committee will not distinguish among nominees recommended by stockholders and other persons.

Specifically, the guidelines for selecting nominees provide that the Nominating Committee will consider and evaluate based on, among other factors, the following:

 

   

The candidate’s independence under the rules of the Nasdaq Stock Market;

 

   

The candidate’s accomplishments and reputations, both personal and professional;

 

   

The candidate’s relevant experience and expertise;

 

   

The candidate’s knowledge of the company and issues affecting Victory;

 

   

The candidate’s moral and ethical character; and

 

   

The candidate’s ability to commit the required time necessary to discharge the duties of board membership.

Communication with the Board of Directors

After consummation of the merger, stockholders and other interested parties may send written communications directly to the Board of Directors or to specified individual directors, including the Chairman or any non-management directors, by sending such communications to the company’s corporate headquarters. Such communications will be reviewed by our legal department and, depending on the content, will be:

 

   

forwarded to the addressees or distributed at the next scheduled Board meeting;

 

   

if they relate to financial or accounting matters, forwarded to the Audit Committee or distributed at the next scheduled Audit Committee meeting;

 

   

if they relate to executive officer compensation matters, forwarded to the Compensation Committee or discussed at the next scheduled Compensation Committee meeting;

 

   

if they relate to the recommendation of the nomination of an individual, forwarded to the Nominating Committee or discussed at the next scheduled Nominating Committee meeting; or

 

   

if they relate to the operations of the company, forwarded to the appropriate officers of the company, and the response or other handling of such communications reported to the Board of Directors at the next scheduled Board meeting.

Compensation of Officers and Directors

No compensation of any kind, including finders and consulting fees, has been or will be paid to any of Victory’s officers or their affiliates for services rendered through the closing of the merger. However, Victory’s

 

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executive officers are reimbursed for any out-of-pocket expenses incurred in connection with activities on Victory’s behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. As of December 31, 2008, an aggregate of approximately $             has been reimbursed to them for such expenses. There is no limit on the amount of these out-of-pocket expenses and there will be no review of the reasonableness of the expenses by anyone other than Victory’s board of directors and audit committee, which includes persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged.

The policies of Victory with respect to the compensation of its executive officers and following the merger will be administered by Victory’s board in consultation with its compensation committee (as described above). The compensation policies followed by Victory will be intended to provide for compensation that is sufficient to attract, motivate and retain executives of outstanding ability and potential and to establish an appropriate relationship between executive compensation and the creation of stockholder value. To meet these goals, the compensation committee will be charged with recommending executive compensation packages to Victory’s board of directors.

It is anticipated that performance-based and equity-based compensation will be an important foundation in executive compensation packages as Victory and TouchTunes believe it is important to maintain a strong link between executive incentives and the creation of stockholder value. Victory and TouchTunes believe that performance and equity-based compensation can be an important component of the total executive compensation package for maximizing stockholder value while, at the same time, attracting, motivating and retaining high-quality executives. Since Victory will not have a compensation committee until completion of the merger, it has not yet adopted any formal guidelines for allocating total compensation between equity compensation and cash compensation for executives hired in the future.

Compensation Discussion and Analysis

The following constitutes the Compensation Discussion and Analysis of TouchTunes’ executive compensation program prior to the transactions contemplated by the merger and does not necessarily represent compensation decisions that will be made by TouchTunes following completion of the merger, except where otherwise noted.

Named Executive Officers.

TouchTunes’ chief executive officer, chief financial officer and three other most highly compensated executive officers who were serving as executive officers as of December 31, 2008 were:

 

   

William J. Meder, Executive Chairman, President and Chief Executive Officer

 

   

Phillip Livingston, Chief Financial Officer

 

   

Ron Greenberg, Chief Marketing Officer and Vice President, Digital Media

 

   

Michael Tooker, Senior Vice President, Technology and Operations

 

   

Bob Weinschenk, Senior Vice President, Barfly Division

Arthur Matin served as president and chief executive officer until August 2008. William Meder has served as President and Chief Executive Officer since September 2008 when he accepted the position of acting President and Chief Executive Officer on a transitional basis. Throughout this section, these executive officers are referred to as the “named executive officers.”

Overview of TouchTunes’ Compensation Scheme as a Private Company

Prior to the closing of the merger, TouchTunes has been a privately held company, operating under the direction of its chief executive officer and its board of directors. Historically, TouchTunes has generally not used,

 

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and has not had the need to use, many of the more formal compensation practices and policies employed by publicly traded companies subject to the executive compensation disclosure rules of the SEC and Section 162(m) of the Code.

Role of the Chief Executive Officer. Prior to the merger, all compensation decisions have been recommended by TouchTunes’ chief executive officer for the review and approval of the compensation committee of TouchTunes’ board of directors (the “Committee”), with the exception of the compensation of the chief executive officer which has been determined by the Committee with input from the chief executive officer.

Objectives of TouchTunes’ Compensation Program.

TouchTunes’ executive compensation program is designed to achieve the following three primary objectives:

 

   

to provide a competitive compensation package to attract and retain talented individuals to manage and operate all aspects of its business;

 

   

to reward the achievement of corporate and individual objectives that promote the growth and profitability of TouchTunes’ business; and

 

   

to align the interests of executive officers with those of TouchTunes’ stockholders by providing long-term equity-based compensation.

To meet these objectives, TouchTunes’ executive compensation package has generally consisted of a mix of base salary, performance-based annual cash bonuses, standard employee benefits and long-term incentives in the form of equity-based awards. TouchTunes believes that performance-based compensation is an important component of the total executive compensation package for attracting, motivating and retaining high quality executives. Accordingly, a significant portion of the named executive officers’ compensation is in the form of cash compensation that is subject to the achievement of annual performance goals and equity-based compensation which enables the named executive officers to share in the growth of TouchTunes’ above pre-established threshold amounts.

Elements of Compensation of Executive Officers.

The compensation received by TouchTunes’ named executive officers in 2008 consisted of the following elements:

Base Salary

Base salaries for TouchTunes’ executive officers are established based on the scope of their responsibilities, historical performance and individual experience. Base salaries are reviewed annually, and adjusted from time to time. During 2008, Mr. Matin’s base salary was $244,246, Mr. Livingston’s base salary was $285,577, Mr. Greenberg’s base salary was $285,577, Mr. Tooker’s base salary was $222,000, and Mr. Weinschenk’s base salary was $275,000. Mr. Meder did not have a base salary in 2008, however he was paid a total of $124,162 for his services as acting President and Chief Executive Officer.

Annual Bonus

Bonus compensation at TouchTunes is designed to motivate performance and to advance the interests of TouchTunes by linking a portion of annual compensation to the achievement of financial objectives and key performance indicators, while contributing to increased long-term stockholder value. Bonus opportunities exist for performance at a semi-annual and annual target levels of EBITDA. No bonus opportunity exists for performance at or below the target level. EBITDA target levels are determined by the Committee and set at a level that is achievable only if TouchTunes’ financial performance exceeds it performance in the prior year.

 

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Equity-Based Incentive Compensation.

TouchTunes also makes equity incentive awards to its employees, non-employee directors and employees of TouchTunes’ subsidiaries to promote the interests of TouchTunes’ company and TouchTunes’ stockholders. These awards are designed to promote these interests by providing such individuals with a proprietary interest in pursuing the long-term growth, profitability and financial success of TouchTunes’ company. During 2008, these equity incentive awards consisted of stock options. These options vest according to schedules established at grant, conditioned on continued employment with TouchTunes, with vesting upon certain events, including upon a change of control that is followed by a termination without cause within 12 months of such change in control. TouchTunes believes stock options align the interests of TouchTunes’ employees with those of TouchTunes’ stockholders, because the stock options have value only if the value of TouchTunes’ stock increases after the date of grant.

Severance Benefits. In connection with his commencement of employment, each of the named executive officers individually negotiated the severance provisions set forth in their respective employment agreements or employment letter agreements that are applicable under various termination scenarios including termination without cause, termination for good reason (or constructive discharge) and termination in connection with a change in control.

Other Benefits. TouchTunes provides named executive officers with premium-paid health, hospitalization, short and long term disability, dental, life and other insurance as TouchTunes may have in effect from time to time. A named executive officer is entitled to reimbursement for all business travel and other out-of-pocket expenses reasonably incurred in the performance of his services. Each named executive officer also is entitled to participate in all other company-wide benefit plans (non-contributory 401(k) plans), as they may be made available and to receive four weeks of paid vacation per calendar year. TouchTunes does not currently, and has not previously, made available to any employees any defined benefit pension or nonqualified deferred compensation plan or arrangement.

 

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Summary Compensation Table

The Summary Compensation Table below shows, for the year ended December 31, 2008, the compensation paid to or earned by TouchTunes’ named executive officers.

 

Name and Principal Position

   Year    Salary
($)
    Bonus
($)
   Stock
Awards

($)
   Option
Awards

($)
   All Other
Compensation

($)(1)
   Total
($)

William Meder

Executive Chairman of the Board of Directors and President and Chief Executive Officer

   2008    124,162 (2)   —      —      —      —      124,162

Ronald Greenberg

Chief Marketing Officer & Senior Vice President

   2008    285,577     9,625    —      —      15,370    310,572

Arthur Matin

President & Chief Executive Officer

   2008    244,246     —      —      —      22,500    266,746

Philip Livingston

Chief Financial Officer, Secretary & Treasurer

   2008    285,577     25,000    —      —      22,500    333,077

Michael Tooker

Executive Vice President

   2008    222,000     19,425    —      1,104    7,332    249,861

Bob Weinschenk

Senior Vice President, Barfly Division

   2008    253,545     35,000    —      —      15,202    303,747

 

(1) All other compensation for the fiscal year ended December 28, 2008, consists of premiums paid by us for an insurance policy on the life of the named executive officer, premiums on accidental death and dismemberment insurance and premiums on long-term disability insurance.
(2) Comprised of compensation paid to Mr. Meder as a consultant to TouchTunes for his service as acting President and Chief Executive Officer beginning in September 2008.

Grants of Plan-Based Awards

The following table sets forth a summary of grants of plan-based awards to the named executive officers for the fiscal year ended December 28, 2008.

 

Name

   Grant Date    Estimated Future Payouts Under
Equity Incentive Plan Awards
   Exercise or Base
Price of Option
Awards

($/Sh)
   Grant Date Fair
Value of Stock
and Option
Awards
      ($)      

William Meder

   —        —      —        —  

Ronald Greenberg

   —        —      —        —  

Arthur Matin

   —        —      —        —  

Philip Livingston

   —        —           —  

Michael Tooker

   12/2/2008    $ 61,975.00    0.32    $ 61,975.00

Bob Weinschenk

   —        —      —        —  

 

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Outstanding Equity Awards at Fiscal Year End

The following table sets forth certain information with respect to outstanding equity awards at December 28, 2008 for each of the named executive officers.

 

Name

   Grant Date     Number of Securities
Underlying
Unexercised Options

(#)
Exercisable
   Number of Securities
Underlying
Unexercised Options

(#)
Unexercisable
   Option Exercise
Price

($)
   Option Expiration
Date

William Meder

   11/13/2006 (1)   671,875    328,125    0.210    11/13/2016

Ronald Greenberg

   3/1/2007 (2)   550,000    550,000    0.40    3/1/2017

Arthur Matin

   1/3/2007     2,037,500    —      0.40    3/31/2009

Philip Livingston

   12/6/2007     365,625    —      0.40    4/16/2009

Michael Tooker

   12/2/2008 (3)   —      250,000    0.320    12/2/2018
   11/13/2006 (4)   769,166    530,834    0.210    11/13/2016

 

(1) Options vest as follows: (i) 250,000 shall vest on November 13th 2006, the date of grant and (ii) the remaining 750,000 shares of Common Stock vesting in forty-eight (48) equal monthly installments of 15,625 shares over the four-year period commencing on November 13, 2006, the date of grant.
(2) Options vest as follows: (i) 275,000 shares of Common Stock shall vest on the first anniversary of March 1, 2007, the date of grant, and (ii) the remaining 825,000 shares of Common Stock shall vest in thirty-six (36) equal monthly installments of 22,916 shares of Common Stock, with such vesting commencing on the first anniversary of the date of grant and ending on the fourth anniversary of the date of grant; provided, that the final installment shall be for 22,940 shares of Common Stock.
(3) Options vest as follows: (i) 62,500 Shares of Common Stock shall vest on the first anniversary of the date of grant, and (ii) the remaining 187,500 Shares of Common Stock shall vest in thirty-six (36) equal monthly installments of 5,208 Shares of Common Stock , with such vesting commencing on the first anniversary of the date of grant and ending on the fourth anniversary of the date of grant.
(4) Options vest as follows: (a) 130,000 shares of Common Stock shall vest on November 13, 2006, the date of grant, (b) 260,000 shares of Common Stock shall vest on the first anniversary of the date of grant, and (c) the remaining 910,000 shares of Common Stock shall vest in thirty-six (36) monthly installments of 25,277 shares over the three-year period commencing on the date of grant; provided, that the last such installment shall be for 25,305 shares of Common Stock.

Director Compensation

Directors received attendance fees of $1,500 for each board of directors meeting attended in person, $1,500 for each committee meeting attended in person and $750 and $750 respectively for each board or committee meeting attended by phone. The chairman of the board of directors receives $2,000 per meeting attended in person and $1,000 per meeting attended by phone and chairmen of committees receive $2,000 per meeting attended in person and $1,000 per meeting attended by phone. Executive officers of TouchTunes who are directors or members of committees of the board receive no compensation for serving in such positions.

Directors and Executive Officers of Victory Following the Merger

Upon completion of the merger, certain members of TouchTunes’ management will become officers of Victory. These officers are William Meder, who will serve as Chairman of the Board of Directors, President and Chief Executive Officer, David Schwartz, who will serve as Chief Financial Officer, Secretary and Treasurer, Ron Greenberg, who will serve as Chief Marketing Officer & Senior Vice President, Digital Media, Dan McAllister, who will serve as Senior Vice President, Sales, Geoff Mott, who will serve as Senior Vice President, Strategy and Business Development, Michael Tooker, who will serve a Senior Vice President, Technology and Operations, and Bob Weinschenk, who will serve as Senior Vice President, Barfly Division. Mr. Meder’s position as Chief Executive Officer is transitional; TouchTunes is actively searching for a new Chief Executive

 

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Officer. Each of these persons has entered or will enter into an employment agreement with TouchTunes that will be assumed by Victory as a result of the merger, or in the case of new employment agreements, effective upon the merger.

Employment Agreements

The following is a summary of the material terms of the employment agreements that will be assumed by Victory as a result of the merger, or in the case of new employment agreements, effective upon the merger. A copy of the form of employment agreements which, except for provisions noted therein, is essentially identical for all of the executive officers listed below, is annexed to this proxy statement/prospectus as Annex E.

William Meder, Executive Chairman of the Board of Directors, President and Chief Executive Officer. Under the terms of Mr. Meder’s employment agreement, Mr. Meder will be entitled to a base salary of $500,000 and an annual bonus that will be based on a percentage of his base salary based on his achievement of performance targets to be determined by the compensation committee of the company. In addition to salary and bonus, Mr. Meder will be eligible to receive equity awards under the Long Term Incentive Plan that is being submitted for shareholder approval at the Victory special meeting.

David Schwartz, Chief Financial Officer, Secretary and Treasurer. Under the terms of Mr. Schwartz’s employment agreement, Mr. Schwartz will be entitled to a base salary of $300,000 and an annual bonus that will be based on a percentage of his base salary based on his achievement of performance targets to be determined by the compensation committee of the company. In addition to salary and bonus, Mr. Schwartz will be eligible to receive equity awards under the Long Term Incentive Plan that is being submitted for shareholder approval at the Victory special meeting.

Ron Greenberg, Chief Marketing Officer & Senior Vice President, Digital Media. Under the terms of Mr. Greenberg’s employment agreement, Mr. Greenberg will be entitled to a base salary of $275,000 and an annual bonus that will be based on a percentage of his base salary based on his achievement of performance targets to be determined by the compensation committee of the company. In addition to salary and bonus, Mr. Greenberg will be eligible to receive equity awards under the Long Term Incentive Plan that is being submitted for shareholder approval at the Victory special meeting.

Dan McAllister, Senior Vice President, Sales. Under the terms of Mr. McAllister’s employment agreement, Mr. McAllister will be entitled to a base salary of $200,000 and an annual bonus that will be a percentage of his base salary based on his achievement of performance targets to be determined by the compensation committee of the company. In addition to salary and bonus, Mr. McAllister will be eligible to receive equity awards under the Long Term Incentive Plan that is being submitted for shareholder approval at the Victory special meeting.

Geoff Mott, Senior Vice President, Strategy and Business Development. Under the terms of Mr. Mott’s employment agreement, Mr. Mott will be entitled to a base salary of $450,000 and an annual bonus that will be based on a percentage of his base salary based on his achievement of performance targets to be determined by the compensation committee of the company. In addition to salary and bonus, Mr. Mott will be eligible to receive equity awards under the Long Term Incentive Plan that is being submitted for shareholder approval at the Victory special meeting.

Michael Tooker, Senior Vice President Technology and Operations. Under the terms of Mr. Tooker’s employment agreement, Mr. Tooker will be entitled to a base salary of $280,000 and an annual bonus that will be based on a percentage of his base salary based on his achievement of performance targets to be determined by the compensation committee of the company. In addition to salary and bonus, Mr. Tooker will be eligible to receive equity awards under the Long Term Incentive Plan that is being submitted for shareholder approval at the Victory special meeting.

 

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Bob Weinschenk, Senior Vice President, Barfly Division. Under the terms of Mr. Weinschenk’s employment agreement, Mr. Weinschenk will be entitled to a base salary of $275,000 and an annual bonus that will be based on a percentage of his base salary based on his achievement of performance targets to be determined by the compensation committee of the company. In addition to salary and bonus, Mr. Weinschenk will be eligible to receive equity awards under the Long Term Incentive Plan that is being submitted for shareholder approval at the Victory special meeting.

Other Benefits

All of TouchTunes’ executive officers are eligible to participate in non-contributory 401(k) plans, premium-paid health, hospitalization, short and long term disability, dental, life and other insurance plans as TouchTunes may have in effect from time to time. They also will be entitled to reimbursement for all business travel and other out-of-pocket expenses reasonably incurred in the performance of their services.

 

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OTHER INFORMATION RELATED TO VICTORY

Business of Victory

Victory was formed on January 12, 2007 to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business in any industry other than the franchising, financial services or healthcare industries. Prior to executing the merger agreement with TouchTunes, Victory’s efforts were limited to organizational activities, completion of its IPO and the evaluation of possible business combinations.

Offering Proceeds Held in Trust

On April 30, 2007, Victory consummated its IPO of 33,000,000 units, including 3,000,000 units which were subject to the underwriters’ over-allotment option. The net proceeds of the offering, including proceeds from the over-allotment option and from the private sale of 5,000,000 Sponsors’ Warrants at a price of $1.00 per warrant and after deducting the underwriting discounts and commissions and the offering expenses, were $321,661,329. Of that amount, $321,660,000 was deposited into the trust account and invested in government securities. The remaining proceeds have been used by Victory in its pursuit of a business combination. In addition, Victory was entitled to draw for use of working capital up to $3,000,000 of interest earned on the trust account, as well as any amounts necessary to pay its tax obligations. Through December 31, 2008, Victory has drawn from the trust account $1,740,750 for working capital and $1,156,555 for taxes and can draw up to an additional $1,259,250 for working capital and any future tax payments. Except as set forth above, no funds in the trust account have been released and only the remaining interest income that Victory may use for working capital requirements and amounts necessary for its tax obligations will be released until the earlier of the consummation of a business combination or the liquidation of Victory. The trust account contained $330,144,884 as of December 31, 2008.

Victory intends to use funds held in the trust account to pay certain transaction expenses, finders’ fees, tax obligations and deferred underwriters compensation. The balance of the funds will be released to Victory after the closing of the merger to pay stockholders who properly exercise their conversion rights and for working capital and general corporate purposes.

The holders of Public Shares will be entitled to receive funds from the trust account only in the event of Victory’s liquidation or if they seek to convert their shares into cash and the merger is actually completed. In no other circumstances will a stockholder have any right or interest of any kind to or in the trust account.

Fair Market Value of Target Business

Pursuant to the underwriting agreement for Victory’s IPO, the initial target business that Victory acquires must have a fair market value equal to at least 80% of the trust account balance (excluding deferred underwriting discounts and commissions) at the time of such business combination. Victory’s board of directors determined that this test was met in connection with its business combination with TouchTunes.

Stockholder Approval of Business Combination

Victory will proceed with the merger only if a majority of the Public Shares present and entitled to vote on the merger proposal at the special meeting is voted in favor of the merger proposal. The Victory Founders have agreed to vote their common stock issued prior to the IPO on the merger proposal in accordance with the vote of holders of a majority of the Public Shares present (in person or represented by proxy) and entitled to vote at the special meeting. If the holders of 20% or more of the Public Shares vote against the merger proposal and properly demand that Victory convert their Public Shares into their pro rata share of the trust account, Victory will not consummate the merger. In this case, Victory will be forced to liquidate.

 

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Liquidation if No Business Combination

Victory’s amended and restated certificate of incorporation provides for the automatic termination of Victory’s corporate existence and mandatory liquidation of Victory if Victory does not consummate a business combination by April 24, 2009. The amended and restated certificate of incorporation provides that if Victory has not completed a business combination by such date, its corporate existence will cease except for the purposes of winding up its affairs liquidating, pursuant to Section 278 of the DGCL. This has the same effect as if Victory’s board of directors and stockholders had formally voted to approve Victory’s dissolution pursuant to Section 275 of the DGCL. Accordingly, limiting Victory’s corporate existence to a specified date as permitted by Section 102(b)(5) of the DGCL removes the necessity to comply with the formal procedures set forth in Section 275 (which would have required Victory’s board of directors and stockholders to formally vote to approve its dissolution and liquidation and to have filed a certificate of dissolution with the Delaware Secretary of State).

Victory anticipates notifying the trustee of the trust account within 10 business days to begin liquidating such assets promptly after such date and anticipates it will take no more than 10 business days to effectuate such distribution. If there are no funds remaining to pay the costs associated with the implementation and completion of the liquidation and distribution, Eric J. Watson and Jonathan J. Ledecky have agreed to advance Victory the funds necessary to pay such costs and complete such liquidation (currently anticipated to be no more than approximately $15,000) and not to seek repayment for such expenses.

In connection with its liquidation, Victory will distribute to the holders of its Public Shares, in proportion to their respective amounts of Public Shares, an aggregate sum equal to the amount in the trust account, inclusive of any interest thereon, plus remaining net assets (subject to Victory’s obligations under Delaware law to provide for claims of creditors as described below). The Victory Founders have waived their rights to participate in any liquidation distribution with respect to their Founders’ Common Stock. As a consequence of such waivers, a liquidating distribution will be made only with respect to the Public Shares. There will be no distribution from the trust account with respect to Victory’s warrants, which will expire worthless.

The per-share liquidation price for the Public Shares as of             , 2009, the record date for Victory’s special meeting, is approximately $10.00. The proceeds deposited in the trust account could, however, become subject to the claims of Victory’s creditors (which could be prior to the claims of the holders of the Public Shares and could include vendors and service providers Victory has engaged to assist it in connection with its search for a target business and that are owed money by it, as well as target businesses themselves) and there is no assurance that the actual per-share liquidation price will not be less than $10.00, due to those claims. If Victory liquidates prior to the consummation of a business combination, Messrs. Watson and Ledecky have agreed that they will be personally liable to pay debts and obligations to target businesses or vendors or other entities that are owed money by Victory for services rendered or contracted for or products sold to Victory in excess of the net proceeds of Victory’s IPO not held in the trust account, but only if such a target business or vendor or other entity did not execute such a waiver. Accordingly, if a claim brought by a target business or vendor or other entity did not exceed the amount of funds available to Victory outside of the trust account or available to be released to Victory from interest earned on the trust account balance or if such an entity executed a waiver, Messrs. Watson and Ledecky would not have any personal obligation to indemnify such claims as they would be paid from such available funds. However, if a claim exceeded such amounts and such entity did not execute a waiver, there is no exception to the obligations of Messrs. Watson and Ledecky to pay such claim. There is no assurance, however, that they would be able to satisfy those obligations. Accordingly, Victory cannot assure you that the per-share distribution from the trust account, if Victory liquidates, will not be less than $10.00, plus interest, due to claims of creditors.

Under the DGCL, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If the corporation complies with certain procedures set forth in Section 280 of the DGCL intended to ensure that it makes reasonable provision for all claims against it,

 

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including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distribution is limited to the lesser of such stockholder’s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution. However, as stated above, it is Victory’s intention to make liquidating distributions to its stockholders as soon as reasonably possible after April 24, 2009 and, therefore, Victory does not intend to comply with those procedures. As such, Victory’s stockholders could potentially be liable for any claims to the extent of distributions received by them and any liability of Victory’s stockholders may extend well beyond the third anniversary of such date. Because Victory will not be complying with Section 280, Section 281(b) of the DGCL requires Victory s to adopt a plan that will provide for payment, based on facts known to it at such time, of (i) all existing claims, (ii) all pending claims and (iii) all claims that may be potentially brought against it within the subsequent 10 years. Accordingly, Victory would be required to provide for any claims of creditors known to it at that time or those that it believes could be potentially brought against it within the subsequent 10 years prior to it distributing the funds in the trust account to its public stockholders. However, because Victory is a blank check company, rather than an operating company, and its operations have been limited to searching for prospective target businesses to acquire, the only likely claims to arise would be from potential target businesses, many of whom have given Victory agreements waiving any right, title, interest or claim of any kind they may have in or to any monies held in the trust account, or Victory’s vendors (such as accountants, lawyers, investment bankers, etc.). As a result, the claims that could be made against Victory are significantly limited and the likelihood that any claim that would result in any liability extending to the trust is remote. Nevertheless, such agreements may not be enforceable. Accordingly, Victory cannot assure you that third parties will not seek to recover from Victory’s stockholders amounts owed to them by Victory.

Additionally, if Victory is forced to file a bankruptcy case or an involuntary bankruptcy case is filed against it that is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in Victory’s bankruptcy estate and subject to the claims of third parties with priority over the claims of Victory’s stockholders. Also, in any such case, any distributions received by stockholders could be viewed under applicable debtor/creditor and/or bankruptcy laws as either a “preferential transfer” or a “fraudulent conveyance.” As a result, a bankruptcy court could seek to recover all amounts received by Victory’s stockholders. Furthermore, because, in the event of a liquidation, Victory intends to distribute the proceeds held in the trust account to its public stockholders promptly after April 24, 2009, this may be viewed or interpreted as giving preference to Victory’s public stockholders over any potential creditors with respect to access to or distributions from Victory’s assets. In addition, Victory’s board may be viewed as having breached their fiduciary duties to Victory’s creditors and/or may have acted in bad faith, and thereby exposing itself and Victory to claims of punitive damages, by paying public stockholders from the trust account prior to addressing the claims of creditors and/or complying with certain provisions of the DGCL with respect to Victory’s liquidation. Victory cannot assure you that claims will not be brought against it for these reasons. To the extent any bankruptcy or other claims deplete the trust account, Victory cannot assure you it will be able to return to its public stockholders at least $9.99 per share.

Facilities

Victory maintains executive offices at 970 West Broadway, PMB 402, Jackson, Wyoming 83001. Jonathan J. Ledecky is providing this space to Victory at no charge.

Employees

Victory has two executive officers. These individuals are not obligated to contribute any specific number of hours per week and devote only as much time as they deem necessary to Victory’s affairs. Victory does not intend to have any full time employees prior to the consummation of the merger.

 

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Periodic Reporting and Audited Financial Statements

Victory has registered its securities under the Exchange Act and has reporting obligations, including the requirement to file annual and quarterly reports with the SEC. In accordance with the requirements of the Exchange Act, Victory’s annual reports contain financial statements audited and reported on by Victory’s independent accountants. Victory has filed with the SEC its Annual Reports on Form 10-K covering the fiscal years ended December 31, 2008 and 2007 and its Quarterly Reports on Form 10-Q covering the quarters ended March 31, 2008, June 30, 2008 and September 30, 2008.

Legal Proceedings

There are no legal proceedings pending against Victory.

Victory’s Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with Victory’s financial statements and related notes thereto included elsewhere in this proxy statement/prospectus.

Victory is a blank check company formed on January 12, 2007 to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business in any industry other than the franchising, financial services or healthcare industries.

For the fiscal year ended December 31, 2008, Victory had a net income of $3,050,939 consisting of $4,907,372 of dividend and interest income offset by $1,515,347 of formation and operating costs and $341,086 of provisions for income tax.

For the period from January 12, 2007 (inception) through December 31, 2007, Victory had a net income of $6,468,977 consisting of $7,558,794 of dividend and interest income offset by $748,262 of formation and operating costs and $341,555 of provisions for income tax.

Victory consummated its initial public offering of 33,000,000 units, including 3,000,000 units subject to the underwriters’ over-allotment option, on April 30, 2007. Gross proceeds from the initial public offering were $330,000,000. As of December 31, 2008, Victory paid a total of $12,540,000 in underwriting discounts and commissions and $798,671 for other costs and expenses related to the offering and the over-allotment option.

After deducting the underwriting discounts and commissions and the offering expenses, $321,660,000 including the proceeds from the sale of sponsors’ warrants was deposited into the trust account which includes $10,560,000 of deferred underwriting discounts and commissions.

As of December 31, 2008, Victory’s trust account totaled $330,144,884. Upon consummation of the merger, approximately $10,560,000 of such funds will be used to pay deferred underwriting discounts and commissions to the underwriters in Victor’s IPO and approximately $5,000,000 of such funds will be used to pay transaction expenses incurred in connection with the merger.

As of December 31, 2008, Victory had working capital of $1,061,361. From the date of consummation of the IPO, until such time as Victory effectuates a business combination, Victory may draw for use of working capital up to $3,000,000 of interest earned on the trust account, as well as any amounts necessary to pay its tax obligations. Victory has drawn from the trust account $1,740,750 for working capital and may draw up to an additional $1,259,250 for working capital. Victory has also drawn from the trust account $1,156,555 to pay tax obligations.

Victory had an agreement with an affiliate of one of its executive officers for various office and administrative services. The agreement commenced on April 24, 2007, the effective date of the initial public

 

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offering, and was terminated by Victory as of July 1, 2007. Victory subsequently paid rent expense from July 1, 2007 to September 30, 2007 as needed. From January 12, 2007 (inception) through July 1, 2007, Victory paid rent expense of $12,500 to this affiliate related to this agreement.

In addition, in January 2007, Messrs. Ledecky and Watson advanced an aggregate of $175,000 to Victory for payment on its behalf of offering expenses in connection with the IPO. These loans were repaid following the IPO from the proceeds of the offering.

Off-Balance Sheet Arrangements

Victory does not have any obligations, assets or liabilities that would be considered off-balance sheet arrangements as defined in Item 303 (a)(4)(ii) of Regulation S-K. Victory does not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.

Victory has not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or acquired any non-financial assets.

Contractual Obligations

Victory does not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities.

Critical Accounting Policies

Victory’s significant accounting policies are more fully described in its condensed financial statements. However certain accounting policies are particularly important to the portrayal of financial position and results of operations and require the application of significant judgments by management. In applying those policies, management used its judgment to determine the appropriate assumptions to be used in determination of certain estimates. Victory’s accounting policy will be to use estimates based on its historical experience, terms of existing contracts, observance of trends in the industry and information available from outside sources, as appropriate.

 

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BUSINESS OF TOUCHTUNES

Business Overview

TouchTunes develops, manufactures and sells interactive digital entertainment systems, principally digital jukebox systems, that are designed to provide innovative digital entertainment content and-targeted advertising services to a currently active network of approximately 38,000 out-of-home locations, such as bars, restaurants, retailers and other businesses, in North America. In addition, TouchTunes has recently begun to offer a wireless portable digital entertainment systems and digital advertising. These services are provided, under a recurring revenue model, through long-term agreements with the company’s distribution channel of more than 2,800 Operators and, more recently, through direct sales to national and regional chains, primarily restaurants. TouchTunes’ wholly-owned subsidiary, TouchTunes Music, introduced the world’s first digital-downloading, pay-per-play commercial jukebox in 1998 and now operates what it believes to be one of the largest out-of-home interactive entertainment networks in the United States. Since mid-2007, TouchTunes has expanded its entertainment network offering, through acquisitions and product development, to include a wireless, portable entertainment system, an interactive advertising platform on the jukebox and an in-location television-based advertising and content solution primarily in bars.

Out-of-Home Digital Entertainment Industry

The out-of-home entertainment industry encompasses retail shopping malls, movie theaters, high tech theme parks, gaming and gambling establishments and other types of locations that provide entertainment. This industry, as a whole, is becoming increasingly digital and networked, from IMAX theaters to networked slot machines at casinos and pervasive digital signage at retail shopping malls. In tandem with these trends, the broadly-defined retail industry is also starting to deploy location-based entertainment systems and services. Bars and restaurants constitute a substantial segment of the out-of-home entertainment industry. A growing number of these establishments are beginning to adopt a variety of entertainment, promotional and advertising technologies to improve the consumer experience and enable advertisers to address more targeted audiences, defined by the establishment’s demographics.

TouchTunes is part of a multi-tier chain that serves the bar and restaurant segment of the out-of-home entertainment industry. System vendors, such as TouchTunes, design, build and deliver jukeboxes and other entertainment systems, operate the networks that manage these systems, and download and monitor usage of content such as music, video, games, and digital advertising and software updates, to the systems. These vendors sell or otherwise deploy their products principally through distributors, who in turn sell to Operators, or alternatively they sell these systems directly to Operators. Operators deploy the systems into their bar and restaurant customers, collect the revenue from each system in each location and share that revenue with the system vendors and, in most cases, with the location owner. The external systems on the network interface with internal vendor systems in order to determine amounts of payment for content-related royalties, measurement of advertising performance and other back-office processes.

According to a 2008 study by Handshake Marketing, an independent marketing firm, approximately 150,000 bar and bar-restaurant locations sell alcoholic beverage for consumption on premises in the United States. Conventional (mostly CD) jukeboxes, which represented a significant technological change in the industry when they were introduced in 1987, had been deployed in most of these establishments and by 1991, vinyl jukeboxes were no longer manufactured. TouchTunes believes, however, that approximately 40% of these jukeboxes have now been converted into or replaced by digital jukeboxes. TouchTunes estimates that approximately 10,000 new digital jukebox systems, industry-wide, were sold in the United States and Canada in 2008. There are approximately 4,000 Operators who own these jukebox units. Annual gross coinage jukebox revenue in the industry amounts to approximately $500 million, of which, on average, approximately 80% is retained by Operators, who share up to half of their revenues with the location owners.

 

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In addition to the bar and bar/restaurant segment, out-of-home entertainment systems are deployed in some casual and quick-service restaurants. According to a 2008 report by the National Restaurant Association, a 2008 study by Chain Store Guide and a 2008 study by Handshake Marketing, there are approximately 190,000 casual and 285,000 quick-service restaurant outlets in the United States and Canada. Penetration of entertainment equipment into restaurant locations is limited, although according to a 2008 Chain Store Guide survey one of the key priorities for the industry is the application of new technology to improve the customer experience. Entertainment systems (mostly game and music) are also deployed in other types of out-of-home locations, such as entertainment centers and certain retail verticals (such as apparel stores).

TouchTunes believes that it was the first company to develop a networked digital jukebox that provides locations such as bars and restaurants with music services that are updated and refreshed on a regular basis over the network from a central server. More recently, TouchTunes has continued to innovate by (i) bringing to market PlayPorTT, which it believes is the first commercially-available broadband wireless entertainment product that brings fresh, frequently updated, content to patrons who wish to play games and access a jukebox remotely; and, (ii) acquiring Barfly, one of the first vendors to develop a system to offer intelligent, interactive, advertising and content on the bar or restaurant television screen. TouchTunes believes that consumers in the 21 to 34 age group are interested in more active forms of entertainment in out-of-home locations, involving interaction with their friends through systems that are connected to the Internet and the mobile data network.

TouchTunes believes that there is a significant opportunity for growth in the out-of-home advertising market for alcoholic beverages and certain other advertisers, particularly in bars. According to The Beverage Information Group’s 2009 Handbook Advance (“Handbook Advance”), the alcoholic beverage industry spent approximately $1.6 billion on measured advertising (television, radio, print and outdoor advertising) during 2008. According to a 2006 study by Advertising Age, unmeasured advertising (signage, displays, trinkets, promotions, etc.) is approximately equal to measured advertising, which means that the alcoholic beverage industry is estimated to have spent in excess of $3 billion on advertising in 2008. According to the Moving Picture Association of America (“MPAA”), approximately $4 billion was spent on advertising by movie studios in 2008. TouchTunes believes that alcoholic beverage and motion picture companies are both very attractive target advertising customers for companies offering advertising solutions in bars due to the demographic audience they seek to reach, particularly where it must be established that the audience is over the age of 21.

TouchTunes Competitive Strengths

TouchTunes believes that it has the following competitive strengths:

One of the largest out-of-home Interactive Entertainment networks in the United States

TouchTunes believes that its interactive touchscreen out-of-home entertainment system network is one of the largest in the United States. As of December 31, 2008, there were more than 36,500 bars and restaurants in the United States, Canada and Mexico, with active, networked, TouchTunes digital jukebox systems.

Large and diverse customer base

As of December 31, 2008, TouchTunes had agreements with over 2,800 Operators for the license of music on TouchTunes’ jukeboxes and had distribution agreements with approximately 21 distributors. TouchTunes believes that its operator customer base represents at least 70% of all Operators in the United States. Most of these customers have been customers of TouchTunes for at least three years.

Recurring revenue model

TouchTunes’ business model is a recurring revenue model based on usage fees for its music and other entertainment services delivered through its network of digital jukeboxes and, recently, with the introduction of PlayPorTT, through those systems as well. TouchTunes believes that its digital jukebox recurring service sources provide it with a strong operational and financial foundation.

 

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TouchTunes’ digital entertainment systems reach a large and advertiser-desirable audience

According to a 2007 study by Arbitron, TouchTunes’ network audience consists primarily of active, social, 21 to 34 year-old adults, 55% of whom are male, single, college educated and with household incomes of over $60,000. TouchTunes believes that advertising on its digital entertainment systems targets these consumers in an environment where they are more receptive to absorbing and responding to brand messages. In 2008, there were approximately 360 million sessions between TouchTunes jukebox systems and consumers (typically groups of two to three friends interacting with the touchscreen), with each session lasting an average of six minutes.

TouchTunes Strategy

TouchTunes believes that the out-of-home interactive entertainment market provides an emerging market opportunity. Out-of-home interactive networks are increasingly attractive to advertisers who are seeking to expand their advertising options from traditional venues, such as television, radio and print publications into alternative media that reaches the consumer in a social setting and, for some categories of products, are closer to the point of purchase. TouchTunes is committed to maintaining this high-quality experience and to becoming the leading interactive out-of-home digital entertainment system in North America. TouchTunes’ key strategies to achieve this objective are as follows:

Reinforce leadership in bar segment

TouchTunes believes that the traditional jukebox market in bars and similar establishments continues to be an opportunity for growth, as more of these businesses shift to digital technology. TouchTunes will seek to increase its market penetration through innovation in digital jukebox systems to create an even larger market footprint for both its music service offerings and other products and services such as PlayPorTT and Barfly interactive systems.

Expand Barfly deployments to capitalize on leadership in bar segment

TouchTunes is seeking to leverage its existing Operator and distribution relationships in the bar segment in order to deploy its Barfly systems in as many locations as possible where it has existing activated jukeboxes. TouchTunes believes that this will enhance its attractiveness to advertisers for two reasons. First, TouchTunes’ ability to attract advertisers will depend in large part on the breadth of its network and the demographics of its audience. In addition, by placing Barfly systems in locations where TouchTunes’ jukebox systems already exist, TouchTunes will be able to demonstrate the advantages of interoperability of the systems, which TouchTunes believes will enhance the digital entertainment experience for the bar’s customers.

Further expand to deploy an integrated suite of digital entertainment products

TouchTunes has designed its jukebox systems, PlayPorTT and Barfly systems to have the capability to act as an integrated product suite. TouchTunes will seek to use its recently expanded range of complementary products to (i) attract bars and restaurants that are seeking multiple avenues to address the interactive entertainment needs of their customers; and (ii) appeal to Operators who are able to deploy additional, revenue producing units in their bar and restaurant locations; and (iii) address the needs of key advertisers, such as alcoholic beverage companies, movie studios and mobile service providers. In addition, TouchTunes believes that the compatibility of these systems, such as using the PlayPorTT touch screen to access a jukebox across a restaurant or bar, may lead to an increase in the number of paid plays on its other systems in the same location. TouchTunes also believes that its ability to attract larger, multi-location customers, such as restaurant chains, is enhanced by having a broad and integrated suite of products. TouchTunes is currently developing software to allow its digital entertainment systems to interface with mobile networks, myTouchTunes, the company’s web destination, as well as popular social networks and social messaging systems, such as Twitter.

 

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Expand presence in restaurant segment

TouchTunes believes that, of the approximately 190,000 casual restaurant, approximately 285,000 quick-service restaurant and thousands of other addressable retail outlets in the United States and Canada, only a small percentage have incorporated digital entertainment systems or advertising systems into their locations. TouchTunes is seeking to penetrate this market, initially through its national accounts sales force and its recently introduced PlayPorTT system.

Tightly couple content and advertising

TouchTunes intends to use its existing highly scalable network, its capability to integrate its suite of digital entertainment systems and its established channels of distribution to roll out its PlayPorTT and Barfly systems. TouchTunes believes that its planned integration of the Barfly system into TouchTunes network will result in a complementary -media, rich advertising, marketing and transactional services network. TouchTunes believes that its high-quality entertainment and related digital content engage consumers more effectively and make them more receptive to advertising, promotional and merchandising messages than they are when advertisers use traditional, non-interactive advertising approaches. As a result, TouchTunes believes that it can provide several advantages to advertisers that will increase the effectiveness of their advertising campaigns and, in turn, increase TouchTunes’ planned advertising rates.

The company also intends to further develop its web destination, myTouchTunes, to be addressable by mobile telephones and other web-based systems, including popular social networks. In order to promote social video gaming, entertainment and an entertainment community, TouchTunes intends to build consumer loyalty by encouraging growth in myTouchTunes membership and through other social networking initiatives.

Expand strategic relationships with key content providers

TouchTunes has developed strategic relationships with key content providers, such as music record labels, to develop promotional services for music, bands, events, albums and tours. TouchTunes is seeking to expand the number of these strategic relationships (for example, with video content owners and game developers) as well as to broaden them to include the promotion of related merchandise, music downloads, concert tickets and other relevant promotional and merchandising opportunities.

International expansion and acquisitions

TouchTunes will seek to expand its geographic reach internationally. Currently, TouchTunes markets and sells its digital jukeboxes in the United States and has recently started to sell its jukeboxes in Canada and Mexico. The company also believes that several opportunities exist to provide these systems and services outside North America and is currently engaged in evaluations and trials in some of these markets. For example, TouchTunes is currently working with a partner in the United Kingdom in a trial of its PlayPorTT system with restaurant chains that collectively control approximately 10,000 locations out of a total market of 55,000 bars and pubs.

TouchTunes also plans to look at selective acquisition opportunities that can leverage its service base and distribution channels. Since mid-2007, TouchTunes has acquired the companies that developed the PlayPorTT and Barfly platforms and integrated them into its network and designed these products to be interoperable with its digital jukeboxes. TouchTunes will evaluate additional acquisitions of companies or technologies that bring complementary technology, products or market presence.

 

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Products and Services

TouchTunes offers the following systems and services:

Music systems and services.

The cornerstone of TouchTunes’ interactive out-of-home entertainment network is its active base of over 38,000 jukebox systems (as of March 1, 2009), which play approximately 2 million songs per day. TouchTunes develops and manufactures state-of-the-art digital jukebox systems, which it sells or leases to distributors who in turn sell to Operators, or directly to Operators, who, in turn, install and maintain these systems in bars, restaurants and other retail establishments. TouchTunes also has agreements with some larger customers whereby it retains ownership of systems in exchange for a higher percentage of the recurring revenue they generate. TouchTunes Music maintains a digital music library of more than two million licensed songs, through licenses with major record labels, independent music distributors, music publishers and independent labels. TouchTunes enters into five-year music services agreements with each of its operators and other customers, pursuant to which TouchTunes licenses its music library solely for use on its jukeboxes, in exchange for a payment each time a song is played. TouchTunes distributes and tracks these songs using its proprietary operating system, which enables downloads of location-specific content to each digital jukebox in TouchTunes’ network. In cooperation with music label companies and other entertainment providers, TouchTunes develops promotional campaigns to promote artists, albums and concert tours. TouchTunes believes that these initiatives can sustain consumer interest in its music content and increase personal interaction with the jukebox, while providing an effective promotional tool for music label companies. There can be no assurances that TouchTunes’ initiatives will be successfully implemented.

Portable, broadband entertainment systems.

TouchTunes has started to manufacture and sell a portable, broadband, interactive entertainment system, PlayPorTT, which allows the user to play a wide variety of more than fifty classic and exclusively developed games. PlayPorTT offers both single and multi-player games, tapping into the trend toward casual multi-player gaming, as well as the ability to access TouchTunes’ jukeboxes via WiFi from the PlayPorTT console. PlayPorTT was launched commercially at the end of 2008, and had achieved an aggregate in service base of 350 portable units as of March 1, 2009 with firm commitments to ship a total of more than 1,500 units by the end of June, 2009. Services are currently paid for on a per-play basis. Since PlayPorTT is early in its product lifecycle, no pattern has yet been established for typical monthly service revenue. While existing in-locations game systems provide a point of comparison, PlayPorTT is a new product category that provides a different consumer value proposition, which may lead to a different revenue profile than TouchTunes’ jukebox systems, and which may also vary from the results produced by a relatively small number of units during a few months of operations.

Jukebox interactive advertising and promotion platform.

In 2008, based on an agreement with an industry supplier, TouchTunes created and launched a platform to present, schedule and measure the effects of, advertising and promotional content on its network. This platform is capable of addressing each individual jukebox with targeted short video and interactive content. While introduced as a support service for major labels’ music promotions, TouchTunes is now offering this service to advertisers and national restaurant chains. The company believes that its network now offers the following advantages to advertisers:

 

   

Compelling content draws consumers to the screen for extended dwell times.

 

   

Advertising campaigns can be targeted to individual jukeboxes delivering customized messages woven into compatible media/applications at the point of consumption, increasing brand awareness and purchase;

 

   

The software has the ability to capture survey responses and email addresses from users for further customer relationship management (CRM) purposes, or survey users of TouchTunes’ network for

 

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market research purposes. For example, the company has run a number of music promotions for major music labels each of which has generated tens of millions of banner impressions, hundreds of thousands of click-throughs, more than 100,000 survey responses and tens of thousands of consumer opt-in e-mail addresses.

To date, TouchTunes has had only one commercial advertising contract, relating to advertising on the jukebox systems. Accordingly, there can be no assurances that TouchTunes’ digital jukebox advertising and promotions will be successful or generate any meaningful revenue.

Barfly television-based digital entertainment and advertising services.

Through its subsidiary Barfly, TouchTunes supplies video and entertainment programming through existing television screens in bars, restaurants and other alcoholic beverage-serving establishments. Barfly’s interactive network system allows customers to watch content or play a variety of games, including trivia, by interacting with Barfly’s system using their cellular phone’s Short Message Service (SMS) capability. Barfly’s programming content is complemented by contextual advertising that allows Barfly to target the 21-34 demographic by placing by placing advertising for beer, spirits, and other alcoholic beverages, along with a broad range of consumer brands, at the point of purchase and consumption of those products. Barfly provides:

 

   

a proprietary screen within a screen that wraps around live TV content (called a ‘dogleg’)

 

   

reliable video delivery to each screen

 

   

ability to control both the dogleg and the center screen for multiple purposes, including ads, promotional messages, syndicated, custom and user-generated content

 

   

individual screen addressability to target delivery of content and ads down to the individual bar level

 

   

context-sensitive ad-serving software that matches the precise ad to specific TV content or keywords from consumer messages posted to the screen

Collectively, TouchTunes systems have the capacity to enable bar and restaurant owners to provide advertisements for food and drink specials, encourage on-site social networking and encourage return business with customized messages about special events, live music and DJ schedules and contests. Barfly is a new offering from TouchTunes that has yet to produce any meaningful revenue for the company. As such it is difficult to predict when and if the Barfly systems that the company deploys will generate sufficient revenue to become a profitable line of business and justify TouchTunes’ investment.

myTouchtunes and integration of social networks.

Operating as both a web destination and service to users at locations or when mobile, myTouchTunes is a repository for member-created personalized music playlists and profile data. Members of myTouchTunes use the service on digital jukebox systems. PlayPorTT systems and other connected devices to interact with the TouchTunes out-of-home entertainment network. Over the web, users can also view profiles of other members in the myTouchTunes community and share their musical tastes. Over time, TouchTunes plans to enable these capabilities through popular social networking services to bridge the physical and virtual music spaces. However, there can be no assurances that TouchTunes will be successful in this effort.

TouchTunes plans to extend social network integration into a TouchTunes-equipped location. TouchTunes is testing a capability for consumers to order up songs and send playlists from mobile phones as well as to deliver social messages to a TouchTunes or Barfly screen using Twitter or other social messaging services. TouchTunes plans to deploy these capabilities on all TouchTunes’ platforms and also integrate them into the social networking environment and ‘buzz’ of the bar or restaurant location. However, there can be no assurances that TouchTunes will be successful in this effort.

 

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Technology

TouchTunes currently offers two principal digital jukebox models: the Ovation and the Allegro MX-1. The Ovation is TouchTunes’ wall-mounted digital jukebox. The floor-mounted Allegro MX-1, TouchTunes’ most advanced digital jukebox model, was first shipped in November, 2008 and supports PlayPorTT, TouchTunes’ portable entertainment system, and TouchTunes web destination, myTouchTunes.com. The Allegro MX-1 is substantially less expensive to manufacture than the prior model of Allegro and is equipped with a better sound system and a more powerful computer that can support higher-resolution video content. Substantially all of the computer hardware in TouchTunes’ jukebox systems in the field can be upgraded to the computer hardware powering the Allegro MX-1.

Each TouchTunes’ digital jukebox system is capable of storing thousands of songs, in compressed digital format. Each digital jukebox can access and play licensed tracks available in TouchTunes’ catalog of approximately 200,000 songs that is constantly being expanded with material from its two million song digital music library. The core of TouchTunes’ digital jukebox technology is a proprietary operating system, which is optimized for high-speed sound reproduction and video animation. TouchTunes also licenses music services to the operators of its digital jukeboxes, and these services are TouchTunes’ main source of revenue. TouchTunes’ social networking service, myTouchTunes, allows users to create personalized music playlists and profiles on TouchTunes’ digital jukebox systems.

The operating software employed by TouchTunes’ digital jukeboxes accounts for all songs played and automatically generates detailed pay-for-play statements, indicating royalty amounts owing to each record label and publishing company. This feature has helped TouchTunes obtain performance, recording, and publishing rights for the digital jukeboxes from performance rights societies, various record label companies, and various publishing companies. These rights authorize TouchTunes to reproduce and play copyrighted music on its digital jukeboxes. The aggregate statistics generated by TouchTunes’ digital jukeboxes can be used to determine the popularity of artists and titles, together with music preferences and trends. This information on musical tastes is critical to the music industry and can be made available by TouchTunes to record labels.

TouchTunes supports two generations of the operating software that drives each jukebox. TouchTunes Gen3 software, generally available since June, 2007 has a suite of applications that allow the jukebox to take advantage of new features, such as a recommendation engine, broadband connections and a host of interactive services that support advertising and promotional activities on the touchscreen. TouchTunes Gen 3 software also supports a range of additional capabilities that can be used to test market new products and services, assess the popularity of new content and monitor consumer preference and geographic trends. It allows the user to, test different creative and copy approaches (copy splits or A/B testing), conduct surveys, promote record labels and their artists, as well as provide other useful information.

The in service base of TouchTunes digital jukeboxes has rapidly migrated to its Gen3 software. As of the end of 2008, approximately two-thirds of TouchTunes in service base of digital jukeboxes was running TouchTunes’ Gen3 software and approximately one-third was running TouchTunes’ Gen2 software.

Continuing its position as one of the industry leaders and its history of innovation, TouchTunes launched TouchTunes PlayPorTT at the end of 2008. PlayPorTT is a wireless portable entertainment system that can interact with TouchTunes’ digital jukeboxes, and provides patrons of bars, restaurants, retailers, and entertainment centers with a personalized and highly interactive game and music experience.

TouchTunes believes that PlayPorTT has a unique power management architecture that delivers rich-media applications and games with over five hours of continuous usage between charges. Ruggedized to survive a user’s rough handling in a bar or restaurant, PlayPorTT communicates with TouchTunes’ network through a fortified WiFi service that enables a user to roam throughout the establishment and not lose his or her connection to TouchTunes’ network. TouchTunes believes that PlayPorTT is also the first commercially-available portable entertainment system to provide credit card payment options directly at the terminal in a secure manner,

 

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compliant with the Payment Card Industry (PCI) standards. In addition, PlayPorTT has been designed to interact with all of TouchTunes’ services, including its digital advertising, music and social networking platforms.

Barfly’s rich-media content and ad delivery system has three major components: (i) a display player that manages the delivery of custom content and ads to a TV screen; (ii) a media database and management system that allows content placement, tailors advertising to match center-screen content, and facilitates distribution to one or more screens according to the terms of engagement with an advertiser; and (iii) reporting software that provides real-time status reports on in bar systems and generates a digital audit trail for advertisers. The system supports highly selective targeting by bar demographic, day part and other important targeting parameters.

Network

TouchTunes has built its IT system to support a scalable network that can reliably deliver content, applications and services to both broadband and dial-up jukeboxes. The rate of broadband connections is accelerating as Operators come to realize that broadband-enabled systems generate more revenue on average than their dial-up counterparts (at least 10% for systems with the latest generation software that can take full advantage of broadband services). Operators are migrating their TouchTunes jukeboxes to broadband and as of December 31, 2008 approximately 38% of TouchTunes’ total active in service base of digital jukeboxes had made the transition.

TouchTunes has arrangements with various telecommunication companies to obtain access into their TCP/IP networks, enabling the digital downloading of music content to its digital jukeboxes. TouchTunes also has recently finalized a nationwide arrangement with a major mobile carrier to provide inexpensive broadband services to TouchTunes’ jukeboxes. This initiative is intended to help accelerate the conversion of dial-up locations to broadband, enabling those systems to benefit from the full range of TouchTunes applications and services, specifically including Barfly.

TouchTunes’ network infrastructure represents a core component of TouchTunes’ business and TouchTunes believes that it can leverage the infrastructure roll out of PlayPorTT and Barfly interactive systems to existing TouchTunes digital jukebox-equipped locations. However, since PlayPorTT and Barfly interactive systems are new product lines for TouchTunes, there can be no assurances that TouchTunes will successfully integrate these systems into its network.

Product Development

TouchTunes has developed and upgraded its network over the course of the last ten years. During this time, TouchTunes has introduced four generations of hardware and three generations of software. Since 2006 TouchTunes has invested more than $15 million in its products, operating software, applications software and its network. R&D expenditures were $3.2 million in 2006, $5.4 million in 2007 and $9.0 million in 2008.

Manufacturing, Assembly and Distribution

Most of TouchTunes’ components and products are manufactured in whole or in part by third-party manufacturers. A significant concentration of this outsourced manufacturing is currently performed by only a few third-party manufacturers, often in single locations. TouchTunes’ also has outsourced much of its transportation and logistics management. TouchTunes recently ended a long-term relationship with Bose Corporation as part of its strategy to manufacture its systems offshore. The termination of this agreement coincided with the end of life of TouchTunes’ Allegro floor-mounted jukebox and the introduction of the Allegro MX-1 floor-mounted jukebox. TouchTunes entered into a new manufacturing agreement with International Currency Technologies Inc. (“ICT”), a Taiwanese company, in July 2008, and both Allegro MX-1 digital jukeboxes and the new computer used in all TouchTunes digital jukeboxes are manufactured under this agreement. Shipment of Allegro MX-1 digital jukeboxes and computers began in late 2008. TouchTunes also recently ended its relationship with Positron, Inc., after Positron filed for protection under the Companies’ Creditor Arrangement Act in Canada and was subsequently acquired by Triton Electronik Québec Inc. (“Triton”). Triton continues the manufacturing of the TouchTunes’ Ovation digital jukebox, and its MJS

 

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computers used in some of TouchTunes digital jukeboxes. These legacy products will be discontinued in the near future (Ovation will be replaced by Ovation II using a different contract manufacturer). Triton has itself recently experienced financial problems and is currently operating under the Canadian equivalent of Chapter 11.

Music Licensing

TouchTunes offers approximately 200,000 songs logically from its catalog of over two million songs in its music library, obtained via public performance licenses with major record labels and publishers. TouchTunes arranges for the renewal and payment of licensing fees to the performance rights societies, the accountability and disbursement of royalty payments to the record label companies and publishing companies (Warner Music Group, Universal Music Entertainment, EMI, Sony BMG, Warner Chappell, Sony/ATV/Music Publishing, Universal Music Publishing, Careers — BMG Music Publishing Inc. and EMI Entertainment World Inc.), and the ongoing provision of music selections to jukebox operators. These agreements are generally for two or three years and allow TouchTunes to cater to the constantly evolving musical tastes of its customers. The agreements with the music labels include a number of promotions, in which TouchTunes promotes plays of specific artists, builds awareness of new music or artists, captures play data and engages in joint public relations activity. At times, TouchTunes has been able to gain some exclusive content and sweepstakes or surveys, the results of which are valuable to the labels for marketing purposes. The labels also periodically make available other select assets, such as videos and artwork. While TouchTunes believes that it will continue to be able to obtain public performance licenses for its music library, there can be no assurances that these licenses will continue to be granted on commercially reasonable terms or at all.

Customer Service and Technical Support

TouchTunes has well-staffed customer service and technical support departments that are accessed through a toll-free telephone number. TouchTunes also conducts training sessions for its digital entertainment and advertising systems, providing education and insight into their installation, use and optimization.

Sales and Marketing

TouchTunes promotes the digital jukeboxes and associated music service and PlayPorTT units through a direct sales force, distributors, trade advertising, its own and other web sites, spotlight shows and on-site demonstrations; through industry events in the coin-op, music, restaurant, advertising and digital industries; through press activities, partnerships, sponsorships; through “house” advertising on the jukeboxes and Barfly systems themselves; and through a full range of marketing collateral in various forms. These serve to promote both the product and service lines of the business, as well as to address different verticals. TouchTunes also has strategic partnerships with key content providers, such as music record labels, to promote music, bands, events, albums and tours.

To serve its large base of distributors and operators, TouchTunes employs an experienced sales force in the form of regional sales teams across the United States and an inside-sales team in Lake Zurich, Illinois. TouchTunes provides in-house education and training to its sales force to ensure that they provide its current and prospective clients with comprehensive information about TouchTunes’ products and services. With the launch of PlayPorTT and the acquisition of Barfly, TouchTunes has begun engaging in cross-selling initiatives to enable existing and potential advertising clients to take advantage of its multi-platform entertainment network. These cross-selling initiatives are at their preliminary stage, however, and there can be no assurances that they will be successful.

Competition

TouchTunes is confronted by aggressive competition in all areas of its business. TouchTunes’ competitors range in their stage of development and their geographic expansion and their business models also vary.

 

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Digital Entertainment Systems

In general, TouchTunes’ competitors sell their equipment to Operators through distributors. TouchTunes believes that most distributors are exclusive to one system vendor. TouchTunes’ competitors include:

 

   

Music services: Rowe International/Merit Industries, a provider of non-portable video game terminals and digital jukeboxes and Ecast, a provider of digital jukeboxes, are the two main competitors to TouchTunes’ digital jukebox business. TouchTunes believes that its installed base is at least three times larger than those of its direct competitors. DMX Inc., a provider of entertainment services for commercial environments, and SIRIUS Satellite Radio/XM, a recently merged provider of satellite radio services also offer music services to bars, restaurants and other retail locations, but, as of this date, their systems lack the interactive features of a TouchTunes jukebox.

 

   

Portable entertainment systems: To the company’s knowledge, no other vendor offers a portable entertainment system like the PlayPorTT on the US market. Rowe International/Merit Industries has the largest installed base of fixed location proprietary game systems; JVL Corporation provides fixed-location systems that support games and other applications and NTN Buzztime, Inc., a public company, has a large installed base of trivia game systems focused primarily on the restaurant segment. PlayPorTT’s portability provides several advantages over fixed-location systems, primarily allowing patrons to utilize the system from the comfort of their own tables. This is expected to result in longer usage times and may increase the revenue-generating capacity of the units.

TouchTunes faces intense competition in commercializing any new music-on-demand or other digital entertainment products and applications. Some competition may come from companies that may have longer operating histories and similar financial resources, management experience, technology capability, development, sales and as well as effectiveness and other strengths to TouchTunes.

 

   

Digital Advertising

TouchTunes competes with other advertising companies in the United States and Canada including the following:

 

   

Large, established companies that operate out-of-home advertising media networks, such as Clear Channel and Decaux, both large vendors of outdoor billboard advertising services and CBS Outernet, a subsidiary of CBS building an out-of-home digital signage network. To-date, none of these players has entered the bar segment.

 

   

Smaller, more focused competitors like Rowe International/Merit Industries and Zoom Media & Marketing, a leading provider of static advertising displays which is entering the market for networked television-based advertising displays. To date, none of these competitors has established a meaningful interactive systems footprint in the bar segment.

 

   

Start-up providers of in-location television-based advertising systems and services, such as TargetCast, OnSite Networks, BarCast, The Bar Network and Tap TV. The company believes that these vendors do not have as fully-developed a solution as Barfly and TouchTunes are bringing to the market, lack the installed base of entertainment systems with which to integrate their service offerings, and will face obstacles in building a distribution channel comparable to the 2,800-strong Operators channel that TouchTunes has developed over the last ten years;

TouchTunes also competes for overall advertising spending with other alternative advertising media companies, such as companies that offer advertising services on the Internet, billboards, frame and public transport, and with traditional advertising media, such as newspapers, television, magazines and radio.

TouchTunes’ future financial condition and operating results are substantially dependent on TouchTunes’ ability to continue to develop and offer new innovative products and services in each of its markets.

 

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Intellectual Property

TouchTunes’ intellectual property is an essential element of its business. TouchTunes protects its intellectual property by using a combination of trademark, patent and trade secrets laws, licensing and nondisclosure agreements and other security measures. TouchTunes currently holds rights to patents and copyrights relating to certain aspects of its digital entertainments systems and digital advertising systems. In addition, TouchTunes has registered, and/or has applied to register, trademarks and service marks in the United States and a number of foreign countries for “TouchTunes”, “myTouchTunes”. TouchTunes has 12 issued trademarks in the United States, 13 applications to register trademarks and service marks in the United States, 145 foreign-issued trademarks and 16 foreign applications to register trademarks and service marks.

TouchTunes regularly files patent applications to protect inventions arising from its research and development. TouchTunes has accumulated a portfolio of 19 issued registered patents and 38 registered patent applications in the United States, and 127 foreign-issued registered patents and 77 foreign registered patent applications. In addition, TouchTunes currently holds one copyright in Canada relating to certain aspects of its digital jukebox system.

TouchTunes’ employees and independent contractors are required to sign agreements acknowledging that all inventions, developments and other intellectual property created by them on TouchTunes’ behalf are TouchTunes’ property. The agreements require employees to assign to TouchTunes any ownership that they may claim in the inventions and intellectual property.

TouchTunes’ products are designed to include intellectual property obtained from third parties. While it may be necessary in the future to seek or renew licenses relating to various aspects of its products and business methods, and in particular, public performance licenses related to music content, TouchTunes believes based upon past experience that such licenses generally could be obtained on commercially reasonable terms. However, there is no guarantee that such licenses will be obtained. In addition, because of technological changes in the digital entertainment industries, current extensive patent coverage, and the rapid rate of issuance of new patents, it is possible that certain components of TouchTunes’ products and business methods may unknowingly infringe existing patents or intellectual property rights of others.

From time to time, TouchTunes has been notified that it may be infringing certain patents or other intellectual property rights of third parties. TouchTunes is involved in ongoing litigation over several of its patents with Arachnid, Inc. and AMI Entertainment, Inc., as well as a principal competitor, Rowe International/Merit Industries, Inc. (the “Rowe claim”). Although TouchTunes believes that it will prevail in its claims against the other parties to this litigation, there is no assurance that it will succeed in doing so.

Product Development

TouchTunes designs and manufactures its digital entertainment systems and digital advertising solutions through a combination of in-house technical staff and manufacturing or consulting partners. Each of these solutions includes customer-premise hardware, customer-premise software and a database server that hosts central content and distribution information. TouchTunes Digital Jukebox, Inc. employees perform research and development on digital entertainment systems, social network and digital advertising systems in Montreal, Quebec. In addition, certain TouchTunes Game Studio, LLC employees perform research and develop video game software and applications in Elk Grove, Illinois, and certain Barfly employees develop video game systems, digital advertising systems and social networking interfaces and systems in Austin, Texas. Hardware products are developed through TouchTunes mechanical and electronic engineering teams that collaborate with engineers at TouchTunes’ manufacturing partners globally. The use of third party manufacturing allows a relatively small TouchTunes development team to produce leading technology components that integrate into what it believes is a unique and technically superior finished product. However, such arrangements also reduce TouchTunes’ direct control over production and distribution and it is uncertain what effect, if any, such diminished control over existing and new manufacturing relationships will have on the quality or quantity of products or services, or TouchTunes’ flexibility to respond to changing conditions.

 

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TouchTunes’ software teams work with TouchTunes’ sales, marketing, product management and music departments to develop software that provides an entertaining user experience using a remotely managed computing device. In addition, because TouchTunes provides music video and game entertainment that is protected by copyright, TouchTunes has developed, and continues to refine its own digital rights management (“DRM”) and other security solutions to protect music record labels, artists and publishers. TouchTunes’ proprietary DRM is embedded in TouchTunes’ network and entire product line.

TouchTunes’ out-of-home network is protected by multiple redundant, high-availability firewalls, offering virtually instant failover. Backups of all of TouchTunes’ critical data and systems are performed daily, with backups stored offsite in a secure third party location. By June 2009, TouchTunes proprietary system will be re-located to a secure data center co-location facility at an undisclosed location. This facility will be able to provide full physical security and redundancy. However, an unexpected closure of TouchTunes’ operations facility could result in lengthy interruptions in its services. Any damage to or failure of TouchTunes’ operating system or network could result in service interruptions and loss of any music service or royalty fee data, which might reduce its revenue and profits and damage its brand.

TouchTunes continues to develop new products and technologies and to enhance existing products in the areas of digital entertainment systems and digital advertising systems. TouchTunes may expand the range of its product offerings and intellectual property through licensing and/or acquisition of third-party business and technology.

Legal Proceedings

TouchTunes is involved in certain legal actions and claims arising in the ordinary course of business, including, without limitation, commercial disputes, intellectual property matters, personal injury claims, tax claims and employment matters. Although the outcome of any legal matter cannot be predicted with certainty, TouchTunes’ management does not expect any of these legal proceedings or matters, with the exception of those described below, to have the potential to have a material adverse effect on TouchTunes’ consolidated financial position or results of operations.

TouchTunes v. Rowe et al. In December 2007, TouchTunes filed a patent infringement action in the United States District Court for the Southern District of New York against Rowe, Merit and AMI for infringement of three patents owned by TouchTunes. TouchTunes also filed for declaratory judgment of non-infringement and invalidity on seven patents owned by or licensed to Rowe. Rowe, Merit, AMI and Arachnid counterclaimed for infringement of 5 of the 7 patents raised by TouchTunes in its declaratory judgment claims. TouchTunes is currently in active negotiations with Rowe, Merit and AMI to settle the case with respect to these companies through a cross-license.

Antor Media Corp. v. Nokia, Inc., et al. In 2007, TouchTunes was named as one of several defendants sued in the United States District Court for the Eastern District of Texas for alleged infringement of U.S. Patent No. 5,734,961, which pertains to a system for transmitting information from a central server to a customer over a network. The plaintiff seeks monetary damages of an amount equal to no less than a reasonable royalty, enhanced damages, attorney fees and a permanent injunction. TouchTunes filed an answer denying infringement and all other claims, has asserted patent invalidity and inequitable conduct as defenses and filed counterclaims seeking declaratory judgments of patent invalidity, unenforceability, and non-infringement. The Court stayed the action pending an ongoing reexamination of the relevant patent in the United States Patent and Trademark Office. The Patent Office finally rejected all claims of the patent. Antor Media Corp. is seeking to amend the patent claims and to overcome the rejections.

Customers

As of December 31, 2008, TouchTunes has agreements with over 2,800 operators, and has distribution agreements with 21 distributors. TouchTunes’ revenue provides for substantial leverage on fixed production

 

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costs. None of TouchTunes’ customers accounts for more than 5% of TouchTunes’ revenue or own more than 5% of TouchTunes in service digital jukeboxes. The economic recession has caused a number of Operators to have severe financial difficulties, resulting in some cases in service interruptions until their routes (groups of bars and restaurants exclusively served by the Operator in a given geographic area) are acquired by other Operators.

Facilities

TouchTunes’ main offices in Canada are moving to a twenty-five thousand square foot facility in April 2009 at an annual cost of $500,000 under a lease that expires June 30, 2011. TouchTunes’ main offices in Canada currently are in Montreal, Quebec, Canada, where it leases approximately twenty-three thousand square feet at an annual cost of approximately $500,000 under a lease that expires on July 31, 2009. These offices are used for back office processing, research and business development, storage of TouchTunes’ equipment and technology, and general corporate and finance activities. TouchTunes’ main office in the United States, which also is its corporate headquarters, is in New York City, New York; the lease on this facility costs approximately $200,000 a year and expires in August 2012. TouchTunes’ main warehouse, and operations facility is in Lake Zurich, Illinois, where TouchTunes leases approximately thirty-two thousand square feet at an annual cost of approximately $300,000 under a lease that expires on June 30, 2009. This facility will move to as smaller location in June 2009 at an annual cost of approximately $180,000 under as lease that expires October 30, 2015. The company’s Barfly business unit is based in Austin Texas and its video gaming unit is based in Elk Grove Village, Illinois, both at nominal rents. TouchTunes believes that its space is adequate for its current needs and that suitable additional or substitute space will be available to accommodate the foreseeable expansion of its operations.

Government Regulations

TouchTunes intends to deliver digital advertising systems into bars and other establishments that serve alcoholic beverages, on behalf of its customers, some of which may be alcoholic beverage vendors. Most states have alcoholic beverage control laws and regulations. TouchTunes has worked with several states’ attorneys general to ensure that its planned digital advertising services will comply with applicable laws and regulations. However, changes in government regulation of the out-of-home advertising industries may adversely affect TouchTunes’ growth prospects.

Employees

As of December 31, 2008, TouchTunes and its subsidiaries had 229 full-time employees and 9 part-time employees, all located in the United States and Canada, including 30 in executive, finance, human resources and administrative roles, 40 in sales, 32 in marketing and digital media, 70 in research and development and 67 in operations. TouchTunes has never had a work stoppage and none of its employees is represented by a labor organization or under any collective bargaining agreements. TouchTunes considers its employee relations to be good.

Organization

TouchTunes is a holding company, with one wholly-owned subsidiary, TouchTunes Music. TouchTunes Music’s principal offices are in New York City, New York, Montreal, Quebec, Canada, Lake Zurich, Illinois and Austin, Texas. TouchTunes Music has three wholly owned subsidiaries. The first, TouchTunes Game Studio, LLC (f/k/a White Rabbit Game Studio, LLC, an Illinois limited liability company), developed TouchTunes PlayPorTT and was acquired by TouchTunes Music in September 2007. The second, TouchTunes Digital Jukebox Inc. (“TouchTunes Digital”), is a Canadian corporation headquartered in Montreal, and provides TouchTunes Music with, among other services, research and development in connection with TouchTunes’ digital jukebox projects. The third, National Broadcast Media Corp., d/b/a Barfly Interactive Networks (“Barfly”), is a Texas corporation, and provides digital interactive media in bars and other drinking establishments, and was acquired by TouchTunes in September 2008. TouchTunes Music and TouchTunes Digital together own TouchTunes de Mexico, S.A. de C.V., a Mexican corporation.

 

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TouchTunes’ Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations for TouchTunes includes periods prior to the closing of the acquisition by Victory. Accordingly, the following discussion and analysis of historical periods does not reflect the significant impact that the acquisition by Victory will have on TouchTunes, including significantly increased leverage and liquidity requirements.

The following discussion should be read in conjunction with TouchTunes’ Unaudited Consolidated Financial Statements as of December 28, 2008 and December 30, 2007 and for the years ended December 28, 2008, December 30, 2007 and December 31, 2006 and related Notes thereto included elsewhere in this proxy statement/prospectus. Except for the consolidated historical information, the following discussion contains forward-looking statements. Actual results could differ from those projected in the forward-looking statements. Please refer to “Special Note Regarding Forward-Looking Statements” and “Risk Factors” elsewhere in this proxy statement/prospectus.

Overview

TouchTunes develops, manufactures and sells digital jukeboxes and other digital interactive entertainment systems, providing innovative digital entertainment and advertising services to over 38,000 out-of-home locations, such as bars, restaurants, retailers and other businesses, in North America. TouchTunes’ wholly-owned subsidiary, TouchTunes Music, introduced the world’s first digital-downloading, pay-per-play commercial jukebox in 1998 and now operates the largest out-of-home interactive entertainment network in the United States. Since mid-2007, TouchTunes has expanded its entertainment network offering, through acquisitions and product development, to include wireless, portable game systems and in-location television-based advertising and content solutions.

Background

TouchTunes Music, the original parent company and now a wholly-owned subsidiary of TouchTunes Corporation, was a development stage company engaged in the development of digital jukeboxes through mid-1998. In September 1998, TouchTunes Music introduced one of the first digital jukeboxes in the marketplace. This first model, Genesys, which represented a breakthrough in jukebox technology, was capable of storing 750 songs locally and was connected via the Internet to a central repository where music licensed by TouchTunes Music was stored and accessible. These initial systems were sold by TouchTunes Music to distributors and operators under a music license arrangement that did not provide recurring revenue to the company.

TouchTunes Music continued to invest in the development of new models and enhancement of existing features including the ability for these systems to receive daily content updates. TouchTunes Music also introduced replacement kits, which enable another manufacturer’s digital jukebox to be converted to a TouchTunes Music system connected to its music repository. In mid-2006, TouchTunes Music made a strategic decision to invest in an accelerated expansion of its jukebox customer base by ramping up significantly its sales and marketing promotional activity to raise TouchTunes Music’s visibility in the market and by offering various financing programs. These financing programs included extending volume discounts to smaller operators and allowing operators to purchase TouchTunes Music’s digital jukeboxes on an installment basis or to lease them for a five-year term.

In order to support its expanding network and to offer more content-rich and interactive features, during 2006 and 2007, TouchTunes Music focused on building scalability and reliability and enhancing the connectivity of its network. In anticipation of introducing its Gen 3 software in mid-2006, which enabled, for the first time, real-time distribution of video content, advertising and social networking services on the network, TouchTunes Music initiated a program to encourage and assist its operators and other customers, and their customers (such as

 

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bars and restaurants), to connect their locations via broadband, rather than through a dial up connection. As of December 31, 2008, approximately 35%, of TouchTunes Music’s installed jukeboxes were connected to the Internet by broadband, up from approximately 5% at December 31, 2006. This conversion to broadband by TouchTunes Music’s customers is important, because in TouchTunes Music’s experience, the average service revenue generated by the company’s broadband-connected jukeboxes is higher than the revenues generated by its jukeboxes connected via dial up. In addition, its PlayPorTT system requires a broadband connection for its operation. During the period from January 1, 2006 to December 31, 2008, TouchTunes’ base of installed digital jukeboxes, measured by an active connection to the TouchTunes’ network, grew from approximately 15,250 to approximately 36,500.

In August 2007, TouchTunes Music made its first acquisition to expand its product offering, purchasing TouchTunes Game Studio LLC (formerly White Rabbit Game Studio LLC), the developer of a wireless portable game console which has evolved into TouchTunes Music’s product PlayPorTT. The purchase price was a combination of cash and TouchTunes Common Stock, a portion of which is payable pursuant to an earnout arrangement based on unit sales of the digital entertainment PlayPorTT product. Following the acquisition, TouchTunes enhanced this system to enable access by a patron, through PlayPorTT, to a TouchTunes jukebox in the same location and designed the system to connect to the TouchTunes Music network to enable direct download from the company’s central repository of software, games and advertising. The first shipments of the PlayPorTT system were made in January 2009 and, as of March 1, 2009, there were 350 units installed and a total backlog of 1,556 units scheduled for delivery in the second quarter of 2009.

To support the expanded operations of TouchTunes and its increased investment in new products and services, in December 2007, TouchTunes Music entered into a $50 million credit facility with an affiliate of Goldman Sachs, consisting of a $45 million multi-draw credit facility and a $5 million revolving credit facility. In connection with the credit facility, a holding company, TouchTunes Corporation, was created, and TouchTunes Music became its wholly-owned subsidiary.

TouchTunes Music’s efforts to create capabilities for interactive digital advertising and promotions resulted in the launch of TouchTunes Music’s advertising management platform in the fourth quarter of 2007. Following the integration of this platform with DoubleClick ad serving platform in second quarter 2008, TouchTunes engaged in more than 20 advertising promotional campaigns on behalf of music labels and artists in 2008. These promotions were done in order to demonstrate the effectiveness and measurability of advertising on the TouchTunes network and the capabilities of the network technology. Based on the results of these campaigns, in August 2008, Verizon Wireless engaged TouchTunes, on a commercial basis, to conduct a three-month advertising campaign in 20 geographic markets. Based on the results of this campaign, which delivered over 450,000 impressions on the TouchTunes network in these markets, TouchTunes has significantly increased its sales efforts targeted towards advertisers and advertising agencies.

In the second quarter of 2008, TouchTunes announced the introduction of its newest model of jukebox system, the MX-1. The MX-1 was designed with the same real-time content distribution capabilities as Gen 3 but at a significantly lower manufacturing cost and with higher network reliability and self diagnostics, resulting in lower expected overall network administration costs. Based on a standard set of modular components, this system is configurable to meet individual system orders more quickly and reliably and at a lower cost than previous models. Delays in shipping this system until November 2008 led to delays by customers in their systems orders for a significant part of 2008 and/or purchases of TouchTunes Music’s lower margin existing systems, which adversely affected TouchTunes’ systems revenues during that period. In total, the company shipped just over six thousand systems in 2008.

In exploring opportunities to collaborate with other companies in the advertising and digital media space, TouchTunes was introduced to Barfly in mid-2008 as a possible collaboration partner. Discussions regarding synergies in the two companies’ products and advertising strategies evolved into acquisition discussions, and TouchTunes completed the acquisition of Barfly in September 2008. TouchTunes has integrated Barfly screens,

 

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which are located primarily in bars, into its network and is in active discussions with potential advertising partners. Given the recent integration of this system, TouchTunes has not yet entered into any advertising agreements or generated any revenue with respect to Barfly.

Revenue Model

TouchTunes’ revenue is derived from the sale or lease of its products as well as from the provision of services. TouchTunes’ proprietary product line is comprised of its digital jukeboxes and its wireless, portable entertainment console, PlayPorTT. TouchTunes service revenue is derived from the provision of licensed music and proprietary and licensed games on a pay-per-play or subscription basis. As well, TouchTunes generates service revenue from advertising displayed throughout its network of jukebox, PlayPorTT and its proprietary, interactive advertising system, Barfly.

As TouchTunes has continued to expand its network through the sale of its digital jukeboxes and, more recently, PlayPorTT consoles, as well as through the installation of Barfly systems, its service revenue has become an increasingly larger percentage of total revenues. Service revenues represented 55%, 62% and 72% of total revenues in fiscal 2006, 2007 and 2008, respectively. As a result of the recurring nature of TouchTunes’ service revenue, the increase in services revenue as a percentage of total revenue results in a more stable and predictable revenue base.

TouchTunes’ digital jukeboxes are sold primarily to local or regional distributors who in turn sell the digital jukeboxes to operators. These operators place the digital jukeboxes in retail establishments, primarily bars and restaurants, and are responsible for servicing the equipment. In the case of PlayporTT customers enter into similar agreements under which TouchTunes provides owned or licensed game software, exclusively for play on PlayporTT consoles, on similar terms. Operators enter into 5-year music service contracts with TouchTunes under which TouchTunes provides licensed music, exclusively for play on TouchTunes’ digital jukeboxes sold or leased to the operator. Operators pay TouchTunes for music and games service based on a fixed percentage (20%) of the song/game price. In some instances, such as with national restaurant chains, TouchTunes may maintain ownership and place its digital jukeboxes and PlayPorTT consoles in exchange for a higher fixed percentage of usage fees. In cases, where TouchTunes maintains ownership of the digital jukeboxes or PlayPorTT consoles, it capitalizes these systems and includes them in furniture and equipment. Patrons can pay for music and games with either cash or credit card. The digital jukeboxes and PlayPorTT consoles are connected via the Internet to TouchTunes’ servers. This allows TouchTunes with the ability to track usage as well as to remotely push content to the network of more than 38,000 systems.

TouchTunes licenses music from more than two thousand record labels, independent music distributors, music publishers and independent labels. TouchTunes pays a fixed dollar amount for each song played on its digital jukeboxes.

Barfly, TouchTunes’ interactive advertising system, allows TouchTunes’ to display advertising during live television programming. Barfly’s compression technology reformats the television screen so that TouchTunes can place advertising in around the bottom and side of the content. TouchTunes installs the Barfly systems in retail establishments to provide advertisers with the ability to target their potential customers at the point of sale.

Seasonality

TouchTunes’ operating results are subject to some variability. Both product and service revenues are typically lower in the summer months of June, July and August as well as during national holiday periods. The variation in TouchTunes’ operating results is attributable to lower bar patronage in some months versus others and somewhat unpredictable product ordering patterns by distributors and operators.

 

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Critical Accounting Policies and Estimates

TouchTunes’ unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require that TouchTunes make numerous estimates and assumptions. Financial results as determined by actual events could differ from those estimates and assumptions, and therefore could affect TouchTunes’ reported results of operations and financial position.

The preparation of financial statements also involves significant management judgment in making estimates about the effect of matters that are inherently uncertain. While best estimates have been used for reporting financial statement items subject to measurement uncertainty, management considers that it is possible, based on existing knowledge, that changes in future conditions in the near term could affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities.

In the following section TouchTunes describes the critical accounting policies that are most important to the depiction of TouchTunes’ financial condition and results of operations. These policies are more fully described in the notes to the consolidated financial statements.

Revenue Recognition

TouchTunes treats the sale of products and services as separate units of accounting. TouchTunes provides for the estimated cost of sales incentives in the same period the sales are recorded. Service revenue generated from music and advertising contracts are recognized as the services are performed. Product sales including revenues from sales-type leases and service revenues are recognized when persuasive evidence of an arrangement exists, the products are shipped or services are provided to the customers at agreed upon prices and payment terms and collectibility is reasonably assured. Revenues are recorded net of sales taxes. Shipping and handling costs are recorded as cost of sales in the consolidated statements of operations and comprehensive loss.

Sales incentives

The Company participates in various sales incentive programs with its customers including volume based rebates and promotional allowances. Sales incentives are deducted from revenue and accrued as earned based on management’s estimate for the total amount the customer is expected to claim. The Company regularly reviews its sales incentive programs ensure that the accruals are appropriate.

Warranty Provision

TouchTunes provides warranties on all products sold or leased for periods of up to five years. The standard warranty provides that TouchTunes will repair or replace defective products from the date a product is delivered. Product warranty costs are estimated based on the cost expected to be incurred during the warranty period and recorded as a charge to cost of sales for the estimated warranty cost. In determining the appropriate warranty provision, consideration is given to historical warranty cost information, the status of the product life cycle and current performance. The adequacy of our product warranty reserves is assessed periodically and adjusted as necessary in the period when the information necessary to make the adjustment becomes available. The reserve for product warranty is included in accounts payable and accrued liabilities in the consolidated balance sheets.

Stock-based compensation

TouchTunes has stock-based compensation plans which are described in detail in the notes to the TouchTunes’ financial statements. SFAS 123(R) requires all share-based payments, including grants of employee stock options, to be recognized in the financial statements based on their fair values. TouchTunes elected to use the modified prospective transition method of adoption. This method requires that compensation expense be recorded for all share-based payments granted, modified or settled after the date of adoption and for all unvested stock options at the date of adoption.

 

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TouchTunes recognizes stock-based compensation expense over the requisite service period of the individual grants, which generally equals the vesting period. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from these estimates. Stock-based compensation is expensed on a straight-line basis over the requisite service period for the entire award.

Income Taxes

The Company uses the liability method to account for income taxes as required by SFAS No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is recorded to reduce the carrying amount of deferred income tax assets when it is more likely than not that these assets will not be realized. Deferred taxes are not provided on the unremitted earnings of subsidiaries to the extent it is expected that these earnings are permanently reinvested in accordance with Accounting Principles Board Opinion No. 23, Accounting for Income Taxes — Special Areas. Such earnings may become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. Further utilization of non-operating losses are limited under the provisions of Internal Revenue Code Section 382.

Allowance for Doubtful Accounts

Trade accounts receivable represents trade receivables, net of allowances for doubtful accounts. The allowance for doubtful accounts reflects TouchTunes’ best estimate of probable losses inherent in the accounts receivable balance. TouchTunes determines the allowance based on known troubled accounts, historical experience and other currently available evidence. When a specific account is deemed uncollectible, the account is written off against the allowance.

Inventory

Inventories, consisting of products, components and spare parts, are stated at the lower of cost or market, with cost determined using the average cost method. TouchTunes provides an allowance for obsolescence. Periodic revisions to allowance estimates are required, based upon the evaluation of several factors, including changes in estimated product life cycles, usage levels, and technology changes. Changes in these estimates are reflected immediately in income.

Intangible Assets

Intangible assets consist of intellectual property, non-competition agreements, service agreements, patents, and technology. Significant additions to intangible assets in 2008 and 2007 relate to the acquisitions described in “Note 4 — Business Acquisitions”. Intangible assets with finite life are amortized on a straight-line basis over the respective economic lives, and amortization expense is included in selling, general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Loss.

Goodwill

Goodwill represents the excess of the purchase price of an acquired entity over the amounts assigned to the tangible and intangible assets acquired and liabilities assumed. Goodwill is not amortized but is tested annually for impairment or more frequently if indicators of impairment exist. As part of the impairment analysis, the carrying value of the goodwill is compared to an estimate of its fair value. If the estimated fair value is less than the carrying value, the goodwill is impaired and is written down to its estimated fair value. The Company completed its annual goodwill impairment analysis for the year ended December 28, 2008, that no adjustment to the carrying value of goodwill was required.

 

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Financial Instruments

In determining fair value, TouchTunes applies valuation techniques including market and income approaches. Statement of Financial Accounting Standards No. 157, Fair Value Measurements establishes a three-level hierarchy for inputs used in measuring assets and liabilities recorded at fair value, based on the reliability of those inputs. TouchTunes has categorized its financial instruments measured at fair value within this hierarchy based on whether the inputs to the valuation technique are observable or unobservable.

Derivative financial instruments

TouchTunes uses derivative financial instruments to manage foreign exchange risk related to future cash flows. TouchTunes does not enter into derivatives for speculative purposes. TouchTunes primarily uses foreign exchange put options as cash flow hedging instruments. In order to qualify as a cash flow hedge, TouchTunes must designate and formally document at inception the hedge relationship, detailing the particular risk management objective and strategy for the hedge, which includes the item and risk being hedged, and how effectively it is being hedged. When these criteria are satisfied, and the hedge is deemed an effective cash flow hedge, TouchTunes records the fair value of the derivative on the balance sheet and the effective portion of the derivatives gain or loss is initially reported as a component of other comprehensive loss and subsequently reclassified into earnings when the forecasted transaction affects earnings.

Results of Operations

Comparison of the Results of Operations For The Year Ended December 28, 2008 Compared To The Year Ended December 30, 2007.

 

     Year ended  
     December 28,
2008
    December 30,
2007
 

Revenue

    

Product sales

   $ 24,013     $ 30,483  

Services

     60,972       50,085  
                
     84,985       80,568  

Cost of sales (exclusive of depreciation)

    

Product sales

     23,120       46,091  

Services

     15,050