UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to __________________.
COMMISSION FILE NUMBER 000-25977
--------------------------
L Q CORPORATION, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0421089
------------------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
888 SEVENTH AVE., 17TH FLOOR, NEW YORK, NY 10019
-------------------------------------------- ---------------------------
(Address of principal executive offices) (Zip Code)
(212) 974-5730
---------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
---- ----
As of August 9, 2005, there were 3,214,408 shares of registrant's Common Stock
outstanding.
L Q CORPORATION, INC.
INDEX
PART I. FINANCIAL INFORMATION.................................................1
ITEM 1. FINANCIAL STATEMENTS..............................................1
Condensed Consolidated Balance
Sheets as of June 30, 2005 (unaudited)
December 31, 2004
Condensed Consolidated Statements of Operations
for the three and six months ended
June 30, 2005 and 2004 (unaudited)
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2005
and 2004 (unaudited)
Notes to Condensed Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS .................9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK...................................................14
ITEM 4. CONTROLS AND PROCEDURES.........................................14
PART II. OTHER INFORMATION...................................................15
ITEM 1. LEGAL PROCEEDINGS...............................................15
ITEM 6. EXHIBITS........................................................15
SIGNATURES...................................................................18
ITEM 1. FINANCIAL STATEMENTS
L Q CORPORATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2005 2004
UNAUDITED
----------- -------------
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 6,104 $ 6,432
Other current assets.................................................... 7 103
----------- -------------
Total current assets........................................... 6,111 6,535
----------- -------------
Total assets $ 6,111 $ 6,535
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses and other current liabilities.......................... $ 7 $ 114
----------- -------------
Stockholders' equity:
Common stock, $0.001 par value; 30,000,000 shares authorized; 3,214,408
shares issued and outstanding at June 30, 2005 and
December 31, 2004..................................................... 3 3
Additional paid-in capital.............................................. 146,006 146,006
Accumulated deficit.................................................... (139,814) (139,510)
Accumulated other comprehensive loss ................................... (91) (78)
----------- -------------
Total stockholders' equity..................................... 6,104 6,421
----------- -------------
Total liabilities and stockholders' equity..................... $ 6,111 $ 6,535
=========== =============
See accompanying notes to condensed consolidated financial statements.
1
L Q CORPORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts; unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -----------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Revenues......................................... $ -- $ -- $ -- $ --
----------- ----------- ----------- -----------
Operating expenses:
General and administrative................... 246 388 407 567
----------- ----------- ----------- -----------
Loss from operations............................. (246) (388) (407) (567)
Other income (expense), net...................... 54 35 103 80
----------- ----------- ----------- -----------
Net loss..................................... $ (192) $ (353) $ (304) $ (487)
=========== ========== ========== ==========
Net loss per share:
Basic and diluted............................ $ (0.06) $ (0.11) $ (0.09) $ (0.15)
=========== ========== ========== ==========
Weighted average shares...................... 3,214 3,243 3,214 3,243
=========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
2
L Q CORPORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
---------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................ $ (304) $ (487)
Adjustments to reconcile net loss to net cash used in operating
activities:
Accounts receivable 28
Other current assets 96 (108)
Accrued expenses and other current liabilities (107) (1,908)
-------- -------
Net cash used in operating activities (315) (2,475)
-------- -------
Effects of exchange rates on cash and cash equivalents (13) (1)
-------- -------
Net decrease in cash and cash equivalents.................................... (328) (2,476)
Cash and cash equivalents, beginning of period............................... 6,432 9,077
-------- -------
Cash and cash equivalents, end of period..................................... $ 6,104 $6,601
======== =======
See accompanying notes to condensed consolidated financial statements.
3
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
L Q Corporation, Inc. was incorporated in California as "Liquid Audio,
Inc." in January 1996 and reincorporated in Delaware in April 1999. In July
1999, we completed our initial public offering of common stock. Our Board of
Directors (the "Board") received stockholder approval on July 30, 2003 to change
our name to "L Q Corporation, Inc." Our name was formally changed on January 7,
2004. Our principal executive offices are located at 888 Seventh Avenue, 17th
Floor, New York, NY 10019, and our telephone number is (212) 974-5730.
Through January 2003, we provided an open platform that enabled the digital
delivery of media over the Internet.
Since January 2003, we have not operated any business and have been
settling our remaining claims and liabilities while reviewing alternatives for
the use or disposition of our remaining assets. We intend to pursue other
business opportunities and investments unrelated to the downloading of digital
music. Neither our Board nor our stockholders have yet approved any such
opportunities. If we are unable to find any suitable business opportunities
and/or investments, we may pursue a plan of complete liquidation and
dissolution. If a complete liquidation and dissolution is approved, pursuant to
Delaware General Corporation Law, we will continue to exist for three years
after the dissolution becomes effective or for such longer period as the
Delaware Court of Chancery shall direct, for the purpose of prosecuting and
defending suits against us and enabling us gradually to close our business, to
dispose of our property, to discharge our liabilities and to distribute to our
stockholders any remaining assets.
At our September 29, 2003 meeting of our stockholders, our stockholders
approved amendments to our certificate of incorporation to effect a 1-for-250
reverse stock split, to be followed immediately by a 35-for-1 forward stock
split (collectively, the "Reverse/Forward Stock Split"), as well as a reduction
in the number of common shares authorized for issuance from 50,000,000 shares to
30,000,000 shares (the "Share Reduction"). On June 7, 2004, we filed amendments
necessary to implement the Reverse/Forward Stock Split and the Share Reduction,
which took place on July 26, 2004 with an effective date as of June 8, 2004. All
weighted average and earnings per share amounts have been restated to reflect
the retroactive effect of the Reverse/Forward Stock Split.
Our common stock is reported currently on The Nasdaq OTC Bulletin Board.
Our common stock was traded on The Nasdaq National Market, but was delisted on
June 5, 2003. The market price per share of our stock increased significantly
following the implementation of the Reverse/Forward stock split. The market
price of our common stock as of August 9, 2005 was $1.80 per share.
The Company has incurred losses and negative cash flows from operations for
every year since inception. For the six months ended June 30, 2005, the Company
incurred a net loss of approximately $304,000 and negative cash flows from
operations of approximately $315,000. As of June 30, 2005, the Company had an
accumulated deficit of approximately $139.8 million. The Company has not yet
settled on an operating plan, although the Company feels its existing cash and
cash equivalents are sufficient to fund the Company's current operations and
satisfy its obligations. The Company believes these obligations will primarily
relate to costs associated with its operation as a public company (legal,
accounting, insurance, etc.), as well as the satisfaction of any potential legal
judgments or settlements and the expenses associated with any new business
activities which may be undertaken by the Company. The Company continues to
consider future alternatives, including the possible acquisition of other
businesses. However, the Company has not consummated any significant
transactions to date and the Company's business prospects remain uncertain. To
the extent that management of the Company moves forward on any alternative
strategy, such strategy may have an impact on the Company's liquidity.
4
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On June 15, 2005, the Company entered into a non-binding letter of intent
with Southern Imaging, Inc., dated June 13, 2005, to acquire all of the assets
of Southern Imaging and its subsidiaries. Southern Imaging is a supplier of
video cameras, monitors, lenses and video printers to the industrial, security
and medical imaging markets. The transaction is subject to the execution of a
definitive purchase agreement between the parties, approval of the transaction
by the Board of Directors of the Company and the satisfaction of other terms and
conditions. During the process of negotiating a definitive purchase agreement,
representatives of Southern Imaging informed the Company that they desired to
change certain of the terms of the transaction that were outlined in the letter
of intent. The Company and its advisors have been in discussions with
representatives of Southern Imaging, but have not reached agreement on new terms
for the transaction. Although discussions are ongoing, there can be no assurance
that a transaction between the parties will ultimately be consummated.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of L Q
Corporation for the six months ended June 30, 2005 are unaudited and have been
prepared on a basis substantially consistent with our audited consolidated
financial statements for the year ended December 31, 2004. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information. Consequently, these
statements do not include all disclosures normally required by generally
accepted accounting principles for annual financial statements. These
consolidated interim financial statements should be read in conjunction with our
audited consolidated financial statements for the year ended December 31, 2004,
which are contained in our Annual Report on Form 10-K, filed with the Securities
and Exchange Commission, the ("SEC"). The condensed consolidated interim
financial statements, in the opinion of management, reflect all adjustments
(including all normal recurring accruals) necessary to present fairly the
Company's financial position, results of operations and cash flows for the
interim periods ended June 30, 2005 and 2004. The results of operations for the
interim periods are not necessarily indicative of the results of operations to
be expected for the fiscal year.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include our accounts of our
wholly-owned (inactive) subsidiary. Significant intercompany transactions and
balances have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid debt instruments with original
maturities of three months or less to be cash equivalents. At June 30, 2005, and
throughout the preceding six month period, balances of cash at financial
institutions exceeded the federally insured limit. The Company has not
experienced any losses in such accounts and believes it is not subject to any
significant credit risk on cash and cash equivalents. The following schedule
summarizes the estimated fair value of the Company's cash and cash equivalents
(in thousands):
JUNE 30, DECEMBER 31,
2005 2004
-------- -------
Cash and cash equivalents:
Cash................................... $ 5 $ 53
Money market funds..................... 6,099 6,379
-------- -------
$ 6,104 $ 6,432
======== =======
5
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Concentration of Credit Risk
Substantially all of the Company's cash and cash equivalents are invested in
highly-liquid money market funds.
Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents
and accrued expenses payable are carried at cost. The Company's financial
instruments approximate fair value due to their relatively short maturities. The
Company does not hold or issue financial instruments for trading purposes.
STOCK-BASED COMPENSATION
The Company complies with Statement of Financial Accounting Standards
("SFAS") No. 148, "Accounting for Stock-Based Compensation, Transition and
Disclosure." SFAS 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. SFAS 148 also requires that disclosures of the pro forma effect of
using the fair value method of accounting for stock-based employee compensation
be displayed more prominently and in a tabular format. Additionally, SFAS 148
requires disclosure of the pro forma effect in interim financial statements.
We account for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF") Issue No.
96-18 "Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services."
Consistent with the disclosure provisions of SFAS 123 and SFAS 148, our net
loss and basic and diluted net loss per share would have been adjusted to the
pro forma amounts indicated below (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ---------------------
2005 2004 2005 2004
----------- --------- --------- ----------
Net loss--as reported.................................................... $ (192) $ (353) $ (304) $ (487)
Less stock-based compensation expense determined under fair value based
method, net of tax effects.............................................. (5) (8) (11) (54)
----------- --------- --------- ----------
Net loss--pro forma...................................................... $ (197) $ (361) $ (315) $ (541)
----------- --------- --------- ----------
Basic and diluted net loss per share--as reported........................ $ (0.06) $(0.11) $(0.09) $(0.15)
Basic and diluted net loss per share--pro forma.......................... $ (0.06) $(0.11) $(0.10) $(0.17)
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123(R), "Accounting for Stock-Based Compensation (Revised)." SFAS No.
123(R) supersedes APB No. 25 and its related implementation guidance. SFAS No.
123(R) establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. SFAS No. 123(R)
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. SFAS No. 123(R) requires
a public entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the
award (with limited exceptions). That cost will be recognized over the period
during which an employee is required to provide service in exchange for the
award during the requisite service period (usually the vesting period). No
compensation costs are recognized for equity instruments for which employees do
not render the requisite service. The grant-date fair value of employee share
options and similar instruments will be estimated using option-pricing models
adjusted for the unique characteristics of those instruments (unless observable
market prices for the same or similar instruments are available). If an equity
award is modified after the grant date, incremental compensation cost will be
recognized in an amount equal to the excess of the fair value of the modified
award over the fair value of the original award immediately before the
modification.
6
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company has not completed its evaluation of SFAS No. 123(R) but
expects the adoption of this new standard, which will take effect for the
Company during the first quarter of 2006, will not have a material impact on
operating results of the Company.
NOTE 2 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
The components of accrued expenses are as follows (in thousands):
JUNE 30, DECEMBER 31,
2005 2004
------------ ------------
Accrued liabilities:
Consulting and professional services......... $ 7 $ 104
Other........................................ -- 10
----------- -------
$ 7 $ 114
=========== =======
NOTE 3 - COMPREHENSIVE LOSS:
Comprehensive loss includes net loss and other comprehensive loss. Other
comprehensive loss includes accumulated translation adjustments. The components
of comprehensive loss are as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -------------------------
2005 2004 2005 2004
----------- ---------- --------- ------------
Comprehensive loss:
Net loss.................................. $ (192) $ (353) $ (304) $ (487)
Foreign currency translation adjustments....... -- (1) (13) (1)
----------- ---------- --------- ------------
$ (192) $ (354) $ (317) $ (488)
=========== ========== ========= ============
NOTE 4 - NET LOSS PER SHARE:
Basic and diluted net loss per share is computed by dividing the net loss
for the period by the weighted average number of common shares outstanding
during the period. The calculation of diluted net loss per share excludes
potential common shares if the effect is anti-dilutive. Potential common shares
consist of unvested restricted common stock, incremental common shares issuable
upon the exercise of stock options and common shares issuable upon the exercise
of common stock warrants, as follows (in thousands):
7
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ---------------------
2005 2004 2005 2004
--------- --------- -------- ---------
Common stock options 349 193 349 193
Common stock warrants -- 37 -- 37
--------- --------- -------- ---------
349 230 349 230
========= ========= ======== =========
NOTE 5 - CONTINGENCIES AND LEGAL PROCEEDINGS:
We, certain of our former officers and directors, and various of the
underwriters in our initial public offering ("IPO") and secondary offering, were
named as defendants in a consolidated action filed in the United States District
Court for the Southern District of New York on July 20, 2001, In re Liquid
Audio, Inc. Initial Public Offering Securities Litigation, CV-6611. The
consolidated amended complaint generally alleges that various investment bank
underwriters engaged in improper and undisclosed activities related to the
allocation of shares in our IPO and secondary offering of securities. The
plaintiffs brought claims for violation of several provisions of the federal
securities laws against those underwriters, and also against us and certain of
our former directors and officers, seeking unspecified damages on behalf of a
purported class of purchasers of our common stock between July 8, 1999 and
December 6, 2000. Various plaintiffs filed similar actions asserting virtually
identical allegations against more than 40 investment banks and 250 other
companies. All of these "IPO allocation" securities class actions currently
pending in the Southern District of New York are assigned to Judge Shira A.
Scheindlin for coordinated pretrial proceedings as In re Liquid Audio, Inc.
Initial Public Offering Securities Litigation, 21 MC 92. The issuer defendants
in the coordinated proceedings including the Company, filed omnibus motions to
dismiss the actions. In October 2002, our former directors and officers named as
defendants were dismissed without prejudice pursuant to a tolling agreement. In
February 2003, the court issued a ruling denying the motion to dismiss with
respect to the claims against us. In June 2004, a stipulation of settlement for
the release of claims against the issuer defendants, including the Company, in
exchange for a contingent payment to be made by the issuer defendants' insurance
carriers and an assignment of certain claims, was submitted to the Court for
approval. On February 15, 2005, the Court granted a conditional preliminary
approval of the stipulation of settlement. The settlement is subject to a number
of conditions, including approval of the Court. If the settlement does not
occur, and litigation against us continues, we believe that we have meritorious
defenses to the claims against us and intend to defend ourselves vigorously.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis contains forward-looking
statements within the meaning of Federal securities laws. You can identify these
statements because they use forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," "continue," "believe," and "intend" or other
similar words. These words, however, are not the exclusive means by which you
can identify these statements. You can also identify forward-looking statements
because they discuss future expectations, contain projections of results of
operations or of financial conditions, characterize future events or
circumstances or state other forward-looking information. We have based all
forward-looking statements included in Management's Discussion and Analysis on
information currently available to us, and we assume no obligation to update any
such forward-looking statements. Although we believe that the expectations
reflected in such forward-looking statements are based on reasonable
assumptions, actual results could differ materially from those projected in the
forward-looking statements. Potential risks and uncertainty include, but are not
limited to, those set forth under the caption "Additional Factors Affecting
Future Results" included in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
While we believe that the discussion and analysis in this report is
adequate for a fair presentation of the information, we recommend that you read
this discussion and analysis in conjunction with the description of our business
included elsewhere in this report and "Management's Discussion and Analysis"
included in our Annual Report on Form 10-K for the year ended December 31, 2004
filed with the SEC.
OVERVIEW
Since January 2003, we have not operated any business and have been
settling our remaining claims and liabilities while reviewing alternatives for
the use or disposition of our remaining assets. We intend to pursue other
business opportunities and investments unrelated to the downloading of digital
music. Neither our Board nor our stockholders have yet approved any such
opportunities. If we are unable to find any suitable business opportunities
and/or investments, we may pursue a plan of complete liquidation and
dissolution. If a complete liquidation and dissolution is approved, pursuant to
Delaware General Corporation Law, we will continue to exist for three years
after the dissolution becomes effective or for such longer period as the
Delaware Court of Chancery shall direct, for the purpose of prosecuting and
defending suits against us and enabling us gradually to close our business, to
dispose of our property, to discharge our liabilities and to distribute to our
stockholders any remaining assets.
Our common stock currently trades over the counter on The Nasdaq OTC
Bulletin Board. Our common stock was traded on The Nasdaq National Market, but
was delisted on June 5, 2003. The market price per share of our common stock
increased significantly following the implementation of the Reverse/Forward
Stock Split. The market price of our common stock as of August 9, 2005 was $1.80
per share.
CRITICAL ACCOUNTING POLICIES
In December 2001, the SEC requested that all registrants discuss their most
"critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. Our
significant accounting policies are more fully described in Note 2, Summary of
Significant Accounting Policies, to our consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2004.
No changes to these critical polices have taken place during the quarter ended
June 30, 2005.
9
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005 AND 2004
Total Revenues
We did not derive any revenues in each of the three months ended June 30,
2005 and June 30, 2004 due to the discontinuation of our software license and
our music hosting businesses and the sale of our digital music fulfillment
business to Geneva Media, LLC in January 2003.
Operating Expenses
General and Administrative. General and administrative expenses consist
primarily of compensation for personnel and payments to outside contractors for
general corporate functions, including finance, information systems, human
resources, facilities, legal and general management, fees for professional
services, bad debt expense and an allocation of our occupancy costs and other
overhead. General and administrative expenses decreased 37% to $246,000 for the
three months ended June 30, 2005 from $388,000 in the comparable period of 2004.
This decrease was primarily due to the cessation of business activity.
Other Income. Substantially all other income is from interest received from
investments in highly-liquid money market funds. Other income was $54,000 for
the three months ended June 30, 2005 and $35,000 for the three months ended June
30, 2004.
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
Total Revenues
We did not derive any revenues in each of the six months ended June 30, 2005 and
June 30, 2004 due to discontinuation of our software license and our music
hosting businesses and the sale of our digital music fulfillment business to
Geneva Media, LLC in January 2003.
Operating Expenses
General and Administrative. General and administrative expenses consist
primarily of compensation for personnel and payments to outside contractors for
general corporate functions, including finance, information systems, human
resources, facilities, legal and general management, fees for professional
services, bad debt expense and an allocation of our occupancy costs and other
overhead. General and administrative expenses decreased 28% to $407,000 for the
three months ended June 30, 2005 from $567,000 in the comparable period of 2004.
This decrease was primarily due to the cessation of business activity.
Other Income (Expense), Net. Substantially all other income is from
interest received from investments in highly-liquid money market funds. Other
income was $103,000 for the six months ended June 30, 2005 and $80,000 for the
six months ended June 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2005, we had approximately $6.1 million of cash and cash
equivalents.
Net cash used in operating activities was $315,000 compared to net cash
used of $ 2.5 million for the six months ended June 30, 2005 and 2004,
respectively. Net cash used for operating activities in the 2004 period was
primarily the result of the payment of $1,452,000 to BeMusic and approximately
$314,000 in legal fees relating to the SightSound litigation, combined with our
$487,000 operating loss. Net cash used for operating activities in 2005 was
primarily the result of payment of general and administrative expenses, combined
with our operating loss of $304,000.
10
We have no material commitments for capital expenditures or strategic
investments during the remainder of 2005. We anticipate that we will experience
a decline in our operating expenses for the foreseeable future and that our
operating expenses will be a material use of our cash resources.
We also, as permitted under Delaware law and in accordance with our Bylaws,
indemnify our officers and directors for certain events or occurrences, subject
to certain limits, while the officer or director is or was serving at our
request in such capacity. The term of the indemnification period is for the
officer's or director's lifetime. The maximum amount of potential future
indemnification is unlimited; however, we have a Director and Officer Insurance
Policy that limits our exposure and enables us to recover a portion of any
future amounts paid. As a result of our insurance policy coverage, we believe
the fair value of these indemnification agreements is minimal.
We believe that our existing cash and cash equivalents will be sufficient
to meet our anticipated cash needs for working capital and capital expenditures
in the near future. Additionally, we do not currently have an operating business
and, consequently, we are currently exploring various options for the use of our
remaining assets, including pursuit of a business strategy unrelated to digital
music distribution. Acquisition and/or operation of any future business strategy
may require additional cash resources. See "ADDITIONAL FACTORS AFFECTING FUTURE
RESULTS "below.
MARKET RISK
No material changes exist to the market risk our investment portfolio of
cash and money market funds faced during the six months ended June 30, 2005.
ADDITIONAL FACTORS AFFECTING FUTURE RESULTS
Before deciding to invest in us or to maintain or increase your investment,
you should carefully consider the risks described below, in addition to the
other information contained in this report and in our other filings with the
SEC, including our Annual Report on Form 10-K filed March 31, 2005. The risks
and uncertainties described below are not the only ones facing us. Additional
risks and uncertainties not presently known to us or that we currently deem
immaterial may also affect our business operations. If any of these risks
actually occur, our business, financial condition or results of operations could
be seriously harmed. In that event, the market price of our common stock could
decline and you may lose all or part of your investment.
WE CURRENTLY DO NOT HAVE AN OPERATING BUSINESS, BUT ALSO DO NOT INTEND TO PURSUE
A COURSE OF COMPLETE LIQUIDATION AND DISSOLUTION, AND ACCORDINGLY, THE VALUE OF
YOUR SHARES MAY DECREASE
We have not had an operating business since January 2003; we are
considering various options for the use of our remaining assets, but have yet to
approve any definitive plans. On June 15, 2005, the Company entered into a
non-binding letter of intent with Southern Imaging, Inc., dated June 13, 2005,
to acquire all of the assets of Southern Imaging and its subsidiaries. Southern
Imaging is a supplier of video cameras, monitors, lenses and video printers to
the industrial, security and medical imaging markets. The transaction is subject
to the execution of a definitive purchase agreement between the parties,
approval of the transaction by the Board of Directors of the Company and the
satisfaction of other terms and conditions. During the process of negotiating a
definitive purchase agreement, representatives of Southern Imaging informed the
Company that they desired to change certain of the terms of the transaction that
were outlined in the letter of intent. The Company and its advisors have been in
discussions with representatives of Southern Imaging, but have not reached
agreement on new terms for the transaction. Although discussions are ongoing,
there can be no assurance that a transaction between the parties will ultimately
be consummated. In the meantime, we will continue to incur operating expenses
while we consider alternative operating plans. These plans may include business
combinations with or investments in other operating companies, or entering into
a completely new line of business. Even if we are able to identify business
opportunities that our Board deems appropriate, we cannot assure you that such a
strategy will provide you with a positive return on your investment, and it may
in fact result in a substantial decrease in the value of your stock. These
factors will substantially increase the uncertainty, and thus the risk, of
investing in our shares. Furthermore, we currently do not intend to pursue a
course of complete liquidation and dissolution. As a result, you should also not
expect any further cash distributions.
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WE MAY NOT BE ABLE TO IDENTIFY OR FULLY CAPITALIZE ON ANY APPROPRIATE BUSINESS
OPPORTUNITIES
We are considering various options for the use of our remaining assets,
which may include business combinations with or investments in other operating
companies, or entering into a completely new line of business. As discussed
above, the Company filed a Form 8-K announcing that it had entered into a
non-binding letter of intent with Southern Imaging, Inc.
Even if we are able to consummate this transaction or identify other
business opportunities that our Board deems appropriate, we cannot assure you
that such a strategy will provide you with a positive return on your investment,
and may in fact result in a substantial decrease in the value of your stock. In
addition, if we enter into a combination with a business that has operating
income, we cannot assure you that we will be able to utilize all or even a
portion of our existing net operating loss carryover for federal or state tax
purposes following such a business combination. If we are unable to make use of
our existing net operating loss carryover, the tax advantages of such a
combination may be limited, which could negatively impact the price of our stock
and the value of your investment. These factors will substantially increase the
uncertainty, and thus the risk, of investing in our shares.
WE MAY HAVE TO TAKE ACTIONS THAT ARE DISRUPTIVE TO OUR BUSINESS STRATEGY TO
AVOID REGISTRATION UNDER THE INVESTMENT COMPANY ACT OF 1940
We traded shares of an available-for-sale security in August and September
of 2003. Although we liquidated our entire remaining position in this security
as of November 12, 2003 and do not intend to make any additional purchases of
available-for-sale securities, we may inadvertently have become, or may become
in the future, an investment company under the Investment Company Act of 1940
(the "Investment Company Act"). The Investment Company Act provides a set of
regulations for companies that are or that hold themselves out as being engaged
primarily in the business of investing, reinvesting, owning, holding or trading
in securities. A company may also become subject to regulation under the
Investment Company Act if it owns "investment securities" with a value exceeding
40% of the value of its total assets (exclusive of government securities and
cash items) as a result of our lack of an operating business, our significant
cash balance as a percentage of our total assets and our recent trading
activities. Although we continue to consider future operating alternatives,
including the possible acquisition of one or more operating businesses, we could
become subject to regulation under the Investment Company Act. Registration as
an investment company would be very expensive and further deplete our cash
balances, which would leave us with fewer resources to pursue further operating
alternatives. Registration would also subject us to restrictions that may be
inconsistent with any future business strategy we may decide upon. In order to
avoid these regulations, we may have to take actions that we would not otherwise
choose to take to avoid registration under the Investment Company Act.
STOCKHOLDERS MAY BE LIABLE TO OUR CREDITORS FOR UP TO AMOUNTS RECEIVED FROM US
IF OUR RESERVES ARE INADEQUATE
If we pursue a plan of complete liquidation and dissolution, a Certificate
of Dissolution will be filed with the State of Delaware after such plan is
approved by our stockholders. Pursuant to the Delaware General Corporation Law,
we will continue to exist for three years after the dissolution becomes
effective or for such longer period as the Delaware Court of Chancery shall
direct, for the purpose of prosecuting and defending suits against us and
enabling us gradually to close our business, to dispose of our property, to
discharge our liabilities and to distribute to our stockholders any remaining
assets. Under the Delaware General Corporation Law, in the event we fail to
create an adequate contingency reserve for payment of our expenses and
liabilities during this three-year period, each stockholder could be held liable
for payment to our creditors for such stockholder's pro rata share of amounts
owed to creditors in excess of the contingency reserve. The liability of any
stockholder would be limited, however, to the amounts previously received by
such stockholder from us (and from any liquidating trust or trusts), including
the return of capital cash distribution of $2.50 per share paid to stockholders
on January 29, 2003. Accordingly, in such event a stockholder could be required
to return all distributions previously made to such stockholder. In such event,
a stockholder could receive nothing from us under a plan of complete liquidation
and dissolution. Moreover, in the event a stockholder has paid taxes on amounts
previously received, a repayment of all or a portion of such amount could result
in a stockholder incurring a net tax cost if the stockholder's repayment of an
amount previously distributed does not cause a commensurate reduction in taxes
payable. There can be no assurance that the contingency reserve maintained by us
will be adequate to cover any expenses and liabilities.
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SUCCESS OF A PLAN OF COMPLETE LIQUIDATION AND DISSOLUTION DEPENDS ON QUALIFIED
PERSONNEL TO EXECUTE IT
If we pursue a plan of complete liquidation and dissolution, the success of
any such plan depends in large part upon our ability to retain the services of
qualified personnel to handle the sale of our remaining assets and settlement of
remaining liabilities. We may retain the services of a consulting firm
specializing in such purpose, however the retention of qualified personnel is
particularly difficult under our current circumstances.
OUR STOCK HAS BEEN DELISTED FROM THE NASDAQ NATIONAL MARKET, AND IS THEREFORE
SIGNIFICANTLY LESS LIQUID THAN BEFORE
Our stock has been delisted from trading on The Nasdaq National Market by
reason of not maintaining listing requirements due to the lack of tangible
business operations and significantly reduced market price of our common stock.
As a result, our common stock currently trades over the counter on the Nasdaq
OTC Bulletin Board and the ability of our stockholders to obtain liquidity and
fair market prices for our shares has been significantly impaired.
AFTER OUR WIND UP THERE MAY BE NO ADDITIONAL CASH TO DISTRIBUTE TO OUR
STOCKHOLDERS AND IF THERE IS ADDITIONAL CASH TO DISTRIBUTE, THE TIMING OF ANY
SUCH FUTURE DISTRIBUTION IS UNCERTAIN
If we pursue a plan of complete liquidation and dissolution, uncertainties as
to the ultimate amount of the proceeds, if any, from the sale of our assets and
the amount of our liabilities make it impracticable to predict the aggregate net
value ultimately distributable to our stockholders. Claims, liabilities and
expenses from operations (including costs associated with any retained firm's
efforts to sell our remaining assets and settle our remaining liabilities,
taxes, legal and accounting fees and miscellaneous office expenses) will
continue to be incurred. These expenses will reduce the amount of cash available
for ultimate distribution to stockholders. However, no assurances can be given
that available cash and amounts received on the sale of assets will be adequate
to provide for our obligations, liabilities, expenses and claims and to make
cash distributions to stockholders. If such available cash and amounts received
from the sale of assets are not adequate to provide for our obligations,
liabilities, expenses and claims, we may not be able to distribute meaningful
cash, or any cash, to our stockholders. Further, if we pursue a plan of complete
liquidation and dissolution, (a) the actual nature, amount and timing of all
distributions will be determined by our Board, in its sole discretion, and will
depend in part upon our ability to resolve our remaining contingencies, (b)
there will be no firm timetable for the distribution of proceeds to our
stockholders because of contingencies inherent in winding up a business and (c)
the liquidation should be concluded prior to the third anniversary of the filing
of the Certificate of Dissolution in Delaware.
WE WILL CONTINUE TO INCUR THE EXPENSE OF COMPLYING WITH PUBLIC COMPANY REPORTING
AND OTHER REQUIREMENTS
We have an obligation to continue to comply with the applicable reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and other applicable requirements including those under the
Sarbanes-Oxley Act of 2002 even though compliance with such requirements is
economically burdensome. In order to curtail expenses, if we elect to pursue a
liquidation and dissolution strategy, after we file our Certificate of
Dissolution, we will seek relief from the SEC from the reporting requirements
under the Exchange Act, which may or may not be granted. Until such relief is
granted we will continue to make obligatory Exchange Act filings. We anticipate
that even if such relief is granted in the future, we will continue to file
current reports on Form 8-K to disclose material events relating to our
liquidation and dissolution along with any other reports that the SEC may
require.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Market Risk" in Part I, Item 2, Management's Discussion and Analysis
of Financial Condition and Results of Operations.
ITEM 4. CONTROLS AND PROCEDURES
Based on the evaluation of the effectiveness of our disclosure controls and
procedures by our management, with the participation of our chief executive
officer and our chief financial officer, as of end of the period covered by this
report, our chief executive officer and our chief financial officer have
concluded that our disclosure controls and procedures were effective to ensure
that information required to be disclosed in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC's rules and forms.
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) or 15d-15(f) under the Exchange Act) occurred during the period
covered by this report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information contained in Note 5 from Part I of this report is incorporated
herein by reference.
ITEM 6. EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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L Q CORPORATION, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: August 13, 2005 L Q CORPORATION, INC.
---------------------------------
William J. Fox
Chief Executive Officer
(Principal Executive Officer)
---------------------------------
Melvyn Brunt
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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