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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 March 31, 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 May 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 (unaudited)...................................1
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
MARCH 31, 2005 AND DECEMBER 31, 2004
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
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..........................................................16
SIGNATURES....................................................................18
ITEM 1.FINANCIAL STATEMENTS
L Q CORPORATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31,
2005 DECEMBER 31,
UNAUDITED 2004
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 6,350 $ 6,432
Other current assets ........................................ 55 103
--------------- ---------------
Total current assets .................................... 6,405 6,535
--------------- ---------------
Total assets ............................................ $ 6,405 $ 6,535
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses and other current liabilities .............. $ 109 $ 114
--------------- ---------------
Total current liabilities ............................... 109 114
--------------- ---------------
Stockholders' equity:
Common stock, $0.001 par value; 30,000,000 shares
authorized; 3,214,408 shares issued and outstanding
at March 31, 2005 and December 31, 2004 ................... 3 3
Additional paid-in capital .................................. 146,006 146,006
Accumulated deficit ......................................... (139,622) (139,510)
Accumulated other comprehensive loss (net) .................. (91) (78)
--------------- ---------------
Total stockholders' equity .............................. 6,296 6,421
--------------- ---------------
Total liabilities and stockholders' equity .............. $ 6,405 $ 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
MARCH 31,
----------------------
2005 2004
------- -------
Revenues .......................................... $ -- $ --
------- -------
Operating expenses:
General and administrative .................... 161 179
------- -------
Loss from operations .............................. (161) (179)
Other income (expense), net ....................... 49 45
------- -------
Net loss ...................................... $ (112) $ (134)
======= =======
Net loss per share:
Basic and diluted ............................. $ (.03) $ (.04)
======= =======
Weighted average shares ....................... 3,214 3,244
======= =======
See accompanying notes to condensed consolidated financial statements.
2
L Q CORPORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
2005 2004
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................ $ (112) $ (134)
Adjustments to reconcile net loss to net cash
used in operating activities:
Accounts receivable .................................. -- 28
Other current assets ................................. 48 97
Accrued expenses and other current liabilities ....... (5) (1,890)
------- -------
Net cash used in operating activities .......... (69) (1,899)
------- -------
Effects of exchange rates on cash and cash equivalents ....... (13) (1)
------- -------
Net decrease in cash and cash equivalents .................... (82) (1,900)
Cash and cash equivalents, beginning of period ............... 6,432 9,077
------- -------
Cash and cash equivalents, end of period ..................... $ 6,350 $ 7,177
======= =======
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.
We entered into a Settlement Agreement and Mutual Release on February
12, 2004 with BeMusic, Inc. ("BeMusic") which finally resolved all matters
between BeMusic and us with respect to the litigation matter with SightSound,
Inc. ("SightSound") alleging that certain former customers of ours (which have
since merged into BeMusic) infringed certain patents of SightSound. Under the
terms of this Agreement, we paid approximately $1,452,000 to BeMusic as
settlement expenses and approximately $314,000 in legal fees relating to the
SightSound litigation. These payments were in addition to $335,827 previously
paid by us for our share of attorney fees incurred in connection with this
matter.
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 March 17, 2005 was $1.67 per share.
The Company has incurred losses and negative cash flows from operations
for every year since inception. For the three months ended March 31, 2005, the
Company incurred a net loss of approximately $112,000 and negative cash flows
from operations of approximately $69,000. As of March 31, 2005, the Company had
an accumulated deficit of approximately $139.6 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 the 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)
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by us and reflect all adjustments which are, in the opinion
of management, necessary for a fair presentation of the interim periods
presented. The results of operations for the period ended March 31, 2005 is not
necessarily indicative of the results to be expected for any subsequent quarter
or for the year ending December 31, 2005. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to the Securities and Exchange
Commission's ("SEC") rules and regulations.
These unaudited condensed consolidated interim financial statements and
notes included herein should be read in conjunction with our audited
consolidated financial statements and notes as included in our Annual Report on
Form 10-K for the year ended December 31, 2004 as filed with the SEC on March
31, 2005.
PRINCIPLES OF CONSOLIDATION
The financial statements include our accounts and 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 March 31, 2005,
and at various times during the three 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):
MARCH 31, DECEMBER 31,
2005 2004
-------------- --------------
Cash and cash equivalents:
Cash ........................ $ 10 $ 53
Money market funds .......... 6,340 6,379
-------------- --------------
$ 6,350 $ 6,432
============== ==============
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.
5
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
STOCK-BASED COMPENSATION
The Company complies with 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
MARCH 31,
2005 2004
----- -----
Net loss--as reported ........................................... $(112) $(134)
Less stock-based compensation (income) expense determined
under fair value based method, net of tax effects ............. (6) (45)
----- -----
Net loss--pro forma ............................................. $(118) $(179)
===== =====
Basic and diluted net loss per share--as reported ............... $(.03) $(.04)
Basic and diluted net loss per share--pro forma ................. $(.04) $(.06)
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) supercedes APR 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 exchanges 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 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.
The Company has not completed its evaluation of SFAS No. 123(R) but
expects the adoption of this new standard will not have a material impact on
operating results of the Company.
6
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - ACCRUED LIABILITIES:
The components of accrued liabilities are as follows (in thousands):
MARCH 31, DECEMBER 31,
2005 2004
------------ ------------
Accrued liabilities:
Consulting and professional services ...... $ 109 $ 104
Other ..................................... -- 10
------------ ------------
$ 109 $ 114
============ ============
NOTE 3 - COMPREHENSIVE LOSS:
Comprehensive loss includes net loss and other comprehensive income
(loss). Other comprehensive income (loss) includes accumulated translation
adjustments. The components of comprehensive loss are as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
----- -----
Comprehensive loss:
Net loss ....................................... $(112) $(134)
Foreign currency translation adjustments ....... (13) (1)
----- -----
$(125) $(135)
===== =====
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.
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
----- -----
Common stock options ................. 349 1,368
Common stock warrants ................ -- 264
----- -----
349 1,632
===== =====
7
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - CONTINGENCIES AND LEGAL PROCEEDINGS:
On or about April 7, 2000, SightSound filed an Amended Complaint in a
lawsuit in the United States District Court for the Western District of
Pennsylvania (the "Pennsylvania Court") alleging that certain former customers
of ours, N2K, Inc., CDNow, Inc. and CDNow Online, Inc., which have since merged
into BeMusic, infringed one or more of three patents of SightSound (Nos.
5,191,573; 5,675,734; and 5,996,440). In January 2002, we agreed to share evenly
with CDNow Online, Inc. all legal fees incurred by CDNow Online, Inc. in
defending the patent infringement action, but required BeMusic to consult in
good faith with us regarding its defense and/or settlement of the patent
infringement action. On February 20, 2004, an Order was entered in the
Pennsylvania Court ending the lawsuit by SightSound against BeMusic. As a result
of the entry of the Order and pursuant to a separate agreement between
SightSound and BeMusic executed on February 12, 2004, SightSound dismissed the
SightSound litigation and released all claims against us. Entry of the Order
also made effective a Settlement Agreement and Mutual Release executed on
February 13, 2004 by us and BeMusic (the "Settlement Agreement"). The Settlement
Agreement finally resolves all matters between BeMusic and us relating to the
SightSound litigation. Under the terms of the Settlement Agreement, we paid
$1,452,000 to BeMusic and approximately $314,000 in legal fees relating to the
SightSound litigation. These payments were in addition to $335,827 previously
paid by us for our share of attorney fees incurred in connection with this
matter. As a result of the Settlement Agreement, we have no further obligation
to maintain available cash on hand in connection with the SightSound litigation.
Neither party to the Settlement Agreement admitted any wrongdoing or any
indemnification obligations in connection with this litigation.
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. The settlement is subject to a number of conditions, including
approval of the Court. On February 15, 2005, the Court granted a conditional
preliminary approval of the stipulation of settlement. 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 March 17, 2005 was $1.67
per share.
9
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
TOTAL REVENUES
We did not derive any revenues in each of the three months ended March
31, 2005 and March 31, 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.
TOTAL COST OF NET REVENUES
We had no sales or costs relating to sales for each of the three months
ended March 31, 2005 and March 31, 2004, since we are not currently operating
any businesses.
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 10% to $161,000 for the
three months ended March 31, 2005 from $179,000 in the comparable period of
2004. This decrease was primarily due to the cessation of business activity.
OTHER INCOME (EXPENSE), NET. Other income was $49,000 for the three
months ended March 31, 2005 and $45,000 for the three months ended March 31,
2004.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2005, we had approximately $6.35 million of cash and
cash equivalents.
Net cash used in operating activities was $69,000 compared to net cash
used of $1.9 million for the three months ended March 31, 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
$134,000 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 $112,000.
We have no material commitments for capital expenditures or strategic
investments and anticipate no capital expenditures 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.
10
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 three months ended March 31,
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. 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. We have not yet
identified any such opportunities, and thus, you will not be able to evaluate
the impact of such a business strategy on the value of your stock. In addition,
we cannot assure you that we will be able to identify any appropriate business
opportunities. 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.
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. Nevertheless, we
have not yet identified any appropriate business opportunities, and, due to a
variety of factors outside of our control, we may not be able to identify or
fully capitalize on any such opportunities. These factors include: (1)
competition from other potential acquirors and partners of and investors in
potential acquisitions, many of whom may have greater financial resources than
we do; (2) in specific cases, failure to agree on the terms of a potential
acquisition, such as the amount or price of our acquired interest, or
incompatibility between us and management of the company we wish to acquire; and
(3) the possibility that we may lack sufficient capital and/or expertise to
develop promising opportunities. 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 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.
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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.
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.
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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.
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 office 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
3.1 Second Amended and Restated Certificate of Incorporation of the
Registrant
3.2 Certificate of Amendment of the Second Amended and Restated Certificate
of Incorporation of the Registrant
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: May 13, 2005 L Q CORPORATION, INC.
/s/ William J. Fox
--------------------------------------------
William J. Fox
Chief Executive Officer
(Principal Executive Officer)
/s/ Melvyn Brunt
--------------------------------------------
Melvyn Brunt
Chief Financial Officer
(Principal Financial and Accounting Officer)
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