Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
(Mark One)
[x] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended: December 31, 2004
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 Number)
888 Seventh Ave., 17th Floor, 10019
New York, NY ------------------------
----------------------------- (zip code)
(address of principal executive offices)
Registrant's telephone number, including area code: (212) 974-5730
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
--------------------------------------------------
Common Stock, $0.001 par value
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 if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2 of the Act). Yes [ ] No [ X ]
----- -----
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the Registrant as of June 30, 2004 (the last business
day of the Registrant's most recently completed second fiscal quarter) was
approximately $6,715,037 based on the closing price of the Common Stock as
reported on The Nasdaq OTC Bulletin Board for that date.
The number of shares outstanding of the registrant's Common Stock, par
value $.001 per share, as of March 17, 2005: 3,214,408.
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS..........................................................1
ITEM 2. PROPERTIES........................................................4
ITEM 3. LEGAL PROCEEDINGS.................................................4
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.................5
ITEM 6. SELECTED FINANCIAL DATA...........................................7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.........................................8
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.........................................15
ITEM 9A. CONTROLS AND PROCEDURES..........................................15
ITEM 9B. OTHER INFORMATION................................................15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............16
ITEM 11. EXECUTIVE COMPENSATION...........................................18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................25
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES...........................26
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES..........................27
================================================================================
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains forward-looking statements that
have been made in reliance on the provisions of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are based on
current expectations, estimates and projections about our industry, management's
beliefs, and certain assumptions made by management. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks" and
"estimates" and similar expressions are intended to identify forward-looking
statements. These statements are not guarantees of future performance, and
actual actions or results may differ materially. These statements are subject to
certain risks, uncertainties and assumptions that are difficult to predict. We
undertake no obligation to update publicly any forward-looking statements as a
result of new information, future events or otherwise, unless required by law.
Readers should, however, carefully review the risk factors included herein and
in other reports or documents filed by us from time to time with the Securities
and Exchange Commission.
OVERVIEW
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.
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.
1
On July 21, 2004, Joseph R. Wright, Jr. was appointed to the Company's
Board of Directors. On December 27, 2004, Mr. Wright resigned from the Board of
Directors of the Company in order to devote additional time to his position as
President, Chief Executive Officer and a director of PanAmSat Corporation, a
global provider of satellite-based video, broadcasting and network distribution
and delivery services.
On October 7, 2004, James Mitarotonda resigned as our President and Chief
Executive Officer. He continues to serve as a director and Chairman of the
Board. Mr. William Fox, a director of our Company, was appointed as our new
President and Chief Executive Officer on this date.
INTERNATIONAL OFFICES
We closed our international offices in 2002.
Information regarding financial data by geographic area, as well as
information regarding operating segments, is set forth in Part II, Item 8 on
this Form 10-K in the Notes to Consolidated Financial Statements at Note 1,
"Segment Information," which information is hereby incorporated by reference.
EMPLOYEES
Following the sale of our digital music fulfillment business and related
assets in January 2003, we terminated substantially all of our employees and as
of December 31, 2004, we have no employees.
COMPANY RISK FACTORS
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 currently do not have any operating business; 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 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.
2
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 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.
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.
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, 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 Securities and Exchange Commission 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 Securities and Exchange
Commission may require.
3
ITEM 2. PROPERTIES
Our principal executive offices are located in New York, New York, in a
space maintained by Barington Capital Group, L.P. ("Barington"), a limited
partnership whose general partner is a corporation of which James Mitarotonda is
Chairman, President and Chief Executive Officer. Mr. Mitarotonda is our Chairman
and former Chief Executive Officer. William Fox, the President, Chief Executive
Officer and a director of the Company, is the Vice Chairman of Barington. In
September 2004, we closed our office in Foster City, California and transferred
all of our administrative and accounting functions to our corporate headquarters
in New York, New York.
ITEM 3. 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.
4
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our 2004 Annual Meeting of Stockholders on December 22, 2004 in New
York, New York.
At this meeting, the stockholders approved a proposal to amend our Second
Amended and Restated Certificate of Incorporation to eliminate the
classification of our Board into three classes of directors serving staggered
three-year terms. Each director will hereafter be elected for a one-year term at
each annual meeting of our stockholders. There were 3,007,731 votes cast for the
amendment, 22,389 votes cast against the amendment and 360 abstentions.
The stockholders also elected the following individuals to serve as
directors for the succeeding year or until their successors are duly qualified
and elected:
Name Votes For Votes Withheld
--------------------- --------- --------------
Joseph R. Wright, Jr. 3,021,177 9,303
Stephen Liguori 3,021,177 9.303
Lastly, the stockholders approved the ratification of the appointment of
Rothstein, Kass & Company, P.C. as our independent auditors for the 2004 fiscal
year. There were 3,022,394 votes cast for the ratification, 7,957 votes cast
against the ratification and 129 abstentions.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET PRICE OF COMMON STOCK
Our common stock was quoted on the Nasdaq National Market under the symbol
"LQID" from July 8, 1999, until it was delisted on June 5, 2003. On June 5,
2003, our common stock began trading over the counter as a "pink sheet"
security. On June 20, 2003, our common stock began trading on the Nasdaq OTC
Bulletin Board under the symbol "LQID.OB," and currently trades under the symbol
"LQCI.OB." The following table presents, for the periods indicated, the high and
low closing prices per share of our common stock as reported on the Nasdaq
National Market and/or the Nasdaq OTC Bulletin Board, as applicable.
HIGH LOW
--------------------------
YEAR ENDED DECEMBER 31, 2004
- ----------------------------
First Quarter..................................... $ 3.1429 $ 2.0714
Second Quarter.................................... 3.3571 1.9357
Third Quarter..................................... 2.1500 1.8000
Fourth Quarter.................................... 2.0000 1.7400
YEAR ENDED DECEMBER 31, 2003
- ----------------------------
First Quarter..................................... $0.32 $0.31
Second Quarter.................................... 0.37 0.35
Third Quarter..................................... 0.32 0.32
Fourth Quarter.................................... 0.36 0.27
The high and low closing prices for the year ending December 31, 2004
reflect the effect of the reverse/forward stock split. The high and low closing
prices for the year ending December 31, 2003 do not reflect the effect of the
reverse/forward stock split.
5
The closing price per share of our common stock at March 17, 2005 was
$1.67. As of March 17, 2005, there were approximately 48 shareholders of record
of our common stock. Because many shares of our common stock are held by brokers
and other institutions on behalf of stockholders, we are unable to estimate the
total number of stockholders represented by these record holders.
DIVIDEND POLICY
We have not declared any distributions since our $2.50 return of capital
distribution was paid on January 29, 2003.
We continue to explore various ways of using and/or disposing of our
remaining assets and settling our final claims and liabilities. Depending on the
alternatives chosen, and the success of maximizing the return on assets and
minimizing the cost of settling claims and liabilities, we may or may not
declare future cash distributions to stockholders. If we choose to adopt a plan
of complete liquidation and dissolution, we intend to make a final cash
distribution to our stockholders in connection with this dissolution once all
our assets have been sold and obligations satisfied.
6
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements and related notes
thereto included in Item 8 included elsewhere in this document to fully
understand factors that may affect the comparability of the information
presented below. Per share data reflects the revenue-forward split which took
place on June 7, 2004.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenues:
License .......................................... -- $ 4 $ 108 $ 682 $ 1,284
Services ......................................... -- 39 374 1,173 2,977
Business development (related party) ............. -- -- -- 2,873 7,307
---------- ---------- ---------- ---------- ----------
Total net revenues ............................. -- 43 482 4,728 11,568
---------- ---------- ---------- ---------- ----------
Cost of net revenues:
License .......................................... -- 5 388 491 290
Services ......................................... -- 2 654 1,503 2,722
Business development (related party) ............. -- -- -- -- 75
Non-cash cost of revenues ........................ -- -- 82 349 28
---------- ---------- ---------- ---------- ----------
Total cost of net revenues ..................... -- 7 1,124 2,343 3,115
---------- ---------- ---------- ---------- ----------
Gross profit (loss) ................................. -- 36 (642) 2,385 8,453
---------- ---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing .............................. -- 277 3,765 11,404 17,114
Non-cash sales and marketing ..................... -- -- (28) (43) 314
Research and development ......................... -- 165 9,111 16,957 22,917
Non-cash research and development ................ -- -- 6 -- 80
General and administrative ....................... 968 6,658 10,712 9,077 7,131
Non-cash general and administrative .............. -- -- 1 (14) 13
Impairment loss .................................. -- -- 689 -- --
Strategic marketing-equity instruments ........... -- -- -- 607 1,935
Restructuring .................................... -- 4,411 1,163 4,497 --
---------- ---------- ---------- ---------- ----------
Total operating expenses ....................... 968 11,511 25,419 42,485 49,504
---------- ---------- ---------- ---------- ----------
Loss from operations ................................ (968) (11,475) (26,061) (40,100) (41,051)
Other income (expense), net ......................... 121 313 1,886 4,170 8,236
Gain on sale of intellectual property ............... -- -- 7,000 -- --
Gain on sale of Digital Music fulfillment business... -- 2,868
Merger termination fee .............................. -- -- (2,100) -- --
Loss in equity investment ........................... -- -- -- (1,254) (870)
---------- ---------- ---------- ---------- ----------
Net loss ............................................ (847) $ (8,294) $ (19,275) $ (37,184) $ (33,685)
========== ========== ========== ========== ==========
Net loss per share:
Basic and diluted ................................ $ (0.26) $ (2.56) $ (6.04) $ (11.74) $ (10.87)
Weighted average shares .......................... 3,232 3,243 3,189 3,166 3,099
Cash distribution declared per common share ......... $ -- $ -- $ 2.50 $ -- $ --
DECEMBER 31,
--------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents ........................... $ 6,432 $ 9,077 $ 73,985 $ 91,594 $ 96,398
Short-term investments .............................. -- -- -- -- 27,378
Working capital ..................................... 6,421 7,334 14,227 87,233 119,089
Total assets ........................................ 6,535 9,269 76,797 97,415 138,210
Long-term debt, less current portion ................ -- -- -- -- 564
Mandatorily redeemable convertible preferred stock... -- -- -- -- --
Total stockholders' equity (deficit) ................ 6,421 7,334 15,618 91,825 128,674
7
ITEM 7. 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 this Management's Discussion and Analysis
on information currently available to us, and we assume no obligation to update
any of these forward-looking statements. Although we believe that the
expectations reflected in any of these 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, among others, those set forth in the "Risk Factors" section. The
following discussion should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 8 of this Form 10-K.
OVERVIEW
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.
On March 18, 2003, our Board acknowledged that many of our outstanding
options, whether or not currently exercisable, have exercise prices
significantly higher than the current market price of our current stock, and
therefore, in recognition of the $2.50 per share cash distribution made to
stockholders on January 29, 2003, unilaterally approved a reduction in the
exercise price for all options by $2.50. The Board further resolved that such
reduction will in no event reduce the exercise price of any options to less than
$0.10 per share.
As a result of this reduction in option exercise price, all outstanding
options will be treated for financial reporting purposes as variable awards.
This means that we will be required to record non-cash accounting charges or
credits for compensation expense reflecting any increases and decreases in the
price of our common stock. We will have to continue to reflect decreases and
increases in the price of our common stock in our statement of operations with
respect to the options until they are exercised, forfeited or terminated. In
recording these accounting charges or credits, the higher the market value of
our common stock, the greater the non-cash compensation expense.
We entered into a Settlement Agreement and Mutual Release on February 12,
2004 which finally resolved all matters between BeMusic and us with respect to
the litigation matter with 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.
CORPORATE RESTRUCTURINGS
In January 2003, we adopted a corporate restructuring program, consisting
of a worldwide workforce reduction, in connection with the sale of our digital
music fulfillment business and related assets to Geneva Media, LLC ("Geneva"),
an affiliate of Anderson Merchandisers, LP. A restructuring charge of $4,441,000
was recorded in operating expenses for the year. The restructuring charge
included involuntary separation costs of $796,000 for 29 employees worldwide,
lease termination fees of $3,569,000 and asset impairment costs of $46,000 for
prepaid expenses related to assets sold to Geneva. We terminated our last
remaining employee on September 4, 2004, as a result of which we paid
termination and accrued vacation payments of $10,592. We closed our office in
Foster City, California and as of September 30, 2004, we had no employees and
are focused on settling our claims and liabilities and pursuing other uses for
the remainder of our assets.
FUTURE OPERATIONS AND FINANCIAL RESULTS
We 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.
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 the
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.
8
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, certain data
derived from our statement of operations as a percentage of total net revenues.
At present, we have no plans for operating any business, so the operating
results in any period are not indicative of the results, if any, that may be
expected for any future period.
YEAR ENDED DECEMBER 31,
-------------------------
2004 2003 2002
---- --------- --------
Net revenues:
License............................................ -- 9% 22%
Services........................................... -- 91 78
Business development (related party)............... -- -- --
--------- --------
Total net revenues.............................. -- 100 100
--------- --------
Cost of net revenues:
License............................................ -- 12 80
Services........................................... -- 5 136
Business development (related party)............... -- -- --
Non-cash cost of revenues.......................... -- -- 17
--------- --------
Total cost of net revenues...................... -- 16 233
--------- --------
Gross profit (loss)................................... -- 84 (133)
--------- --------
Operating expenses:
Sales and marketing................................ -- 644 781
Non-cash sales and marketing....................... -- -- (6)
Research and development........................... -- 384 1,890
Non-cash research and development.................. -- -- 1
General and administrative......................... -- 155 2,223
Non-cash general and administrative................ -- -- --
Impairment loss.................................... -- -- 143
Strategic marketing-equity instruments............. -- -- --
Restructuring...................................... -- 10,258 241
--------- --------
Total operating expenses........................ -- 26,769 5,273
--------- --------
Loss from operations.................................. -- (26,686) (5,406)
Other income (expense), net........................... -- 728 390
Gain on sale of intellectual property................. -- -- 1,452
Gain on sale of Digital Music fulfillment business.... -- 6,670 --
Merger termination fee................................ -- -- (435)
Loss in equity investment............................. -- -- --
--------- --------
Net loss.............................................. -- (14,288)% (3,999)%
========= ========
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
TOTAL NET REVENUES. Total net revenues were $0 in 2004 compared to $42,860
in 2003 and $482,000 in 2002.
LICENSE. License revenues primarily consisted of fees from licensing our
software products to third parties. License revenues were $0 in 2004 compared to
$4,000 in 2003 and $108,000 in 2002. License revenues decreased 100% in 2004
from $4,000 in 2003. License revenues decreased 96% in 2003 from $108,000 in
2002. The decrease in 2004 and 2003 were due to the cessation of our operating
business activity.
SERVICES. Services revenues consisted of maintenance fees related to our
licensed software products, hosting fees, encoding, music delivery and
transaction fees, promotion and advertising services and kiosk-related equipment
sales from third parties. Services revenues were $0 in 2004, $39,000 in 2003 and
$374,000 in 2002. Service revenues decreased 100% in 2004 from $39,000 in 2003.
Service revenues decreased 90% in 2003 from $374,000 in 2002. The decrease in
2004 and 2003 were primarily due to the cessation of our business activity.
9
TOTAL COST OF NET REVENUES
Our gross profit (loss) decreased to approximately 0% of total net revenues
in 2004 from approximately 84% of total net revenues in 2003, and approximately
(133)% in 2002. Total cost of net revenues decreased 100% to $0 in 2004 from
$7,000 in 2003 and $1.1 million in 2002.
LICENSE. Cost of license revenues primarily consisted of royalties paid to
third-party technology vendors and costs of documentation, duplication and
packaging. Cost of license revenues decreased 100% to $0 in 2004, 98% to $5,000
in 2003 from $388,000 in 2002. Cost of license revenue decreased in 2004 and
2003 due to the cessation of our operating business activity.
SERVICES. Cost of services revenues primarily consisted of compensation for
customer service, encoding and professional services personnel, kiosk-related
equipment and an allocation of our occupancy costs and other overhead
attributable to our services revenues. Cost of services revenues decreased 100%
to $0 in 2004 from $2,000 in 2003, and 100% in 2003 from $654,000 in 2002. The
decreases in 2004 and 2003 in cost of services revenue were due to the cessation
of our operating business activity.
NON-CASH COST OF REVENUES. Non-cash cost of revenues consisted of expenses
associated with the value of common stock and warrants issued to partners as
part of our content acquisition agreements and stock-based employee compensation
arrangements. Common stock expense is based on the fair value of the stock at
the time it was issued. Warrant expense is based on the estimated fair value of
the warrants based on the Black-Scholes option pricing model and the provisions
of EITF 96-18. In December 2000, we signed an agreement with BMG Entertainment
to obtain the right to distribute BMG sound recordings and related artwork
through kiosks. In connection with this agreement, we issued 50,000 shares of
common stock to BMG, valued at $195,000 and which was recognized ratably over
the initial one-year term of the agreement; as a result, $181,000 and $14,000
was recognized as non-cash cost of revenues in 2001 and 2000, respectively. In
connection with this agreement, we granted a warrant for a total of 233,300
shares of common stock. Of the total, warrants to purchase 77,768 shares vested
in December 2001, and the cost was remeasured each quarter until a commitment
for performance was reached or the warrant vested based on market data. At
December 4, 2001, the 77,768 shares under this warrant were valued at $175,000,
of which $163,000 and $12,000 was recognized as non-cash cost of revenues in
2001 and 2000, respectively. The remaining warrants to purchase common shares
were scheduled to vest at 6,481 shares per month commencing December 2001 for
one year and 6,480 shares per month commencing December 2002 for one year. We
had the option to terminate the agreement, repurchase the 50,000 shares of
common stock and provide for the warrants to expire immediately if BMG failed to
make available to us a specified minimum number of sound recordings in a
specific time period. BMG failed to make the minimum number of sound recordings
in the specific time period, and accordingly in August 2002, we terminated the
agreement, repurchased the 50,000 shares of common stock, notified BMG of the
immediate expiration of the warrants and ceased recognizing non-cash cost of
revenues for the warrants. We recorded a total of $82,000 as non-cash cost of
revenue in 2002 related to the remaining warrants. Such warrants were valued at
the fair market value of our common stock at each vesting date. Stock based
compensation expense (income) for customer service, encoding and professional
services personnel was $0 in 2004, 2003 and 2002. We have fully amortized stock
compensation expense related to these personnel in 2001, and accordingly no
future expense related to these stock options will be incurred.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consisted primarily of
compensation for our sales, marketing and business development personnel,
compensation for customer service and professional services personnel
attributable to sales and marketing activities, advertising, trade show and
other promotional costs, design and creation expenses for marketing literature
and our website and an allocation of our occupancy costs and other overhead.
Sales and marketing expenses decreased 100% to $0 in 2004 from $277,000 in 2003
and 99% in 2003 from $3.8 million in 2002. The decrease in 2004 and 2003 were
due to the cessation of business activity and termination of all remaining sales
and marketing personnel.
RESEARCH AND DEVELOPMENT. Research and development expenses consisted
primarily of compensation for our research and development, network operations
and product management personnel, payments to outside contractors and, to a
lesser extent, depreciation on equipment used for research and development and
an allocation of our occupancy costs and other overhead. Research and
10
development expenses decreased 100% in 2004 to $0 from $165,000 in 2003 and
decreased 99% in 2003 from approximately $9.1 million in 2002. The decrease in
2004 and 2003 were due to the cessation of business activity and the termination
of all remaining research and development personnel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
86% to $0.9 million in 2004 from $6.6 million in 2003. General and
administrative expenses decreased 38% to $6.6 million in 2003 from $10.7 million
in 2002. The decrease in 2004 was due to the cessation of operating business
activity. The decrease in 2003 was due to the cessation of business activity
and, with the exception of one employee, the termination of all remaining
general and administrative personnel and the termination of leases for all
company premises. General and administrative expenses in 2004 include, directors
and officers liability insurance premium payments of approximately $224,000,
legal expenses of approximately $229,000, professional services for audit and
accounting of approximately $77,000, management fees of approximately $141,000
and director remuneration of $116,000. General and administrative expenses in
2003 include, directors and officers liability insurance premium payments of
approximately $1.2 million, payments relating to facilities of approximately $2
million, legal expenses of approximately $1.5 million and consulting expenses of
approximately $1 million. General and administrative expenses in 2002 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.
IMPAIRMENT LOSS. Impairment loss consists of a write-down of our property
and equipment to fair value. Our property and equipment were impaired when we
terminated our merger agreement with Alliance in November 2002. If the merger
had been approved, our property and equipment would have remained in use with
the continuation of our digital music fulfillment business under the combined
entity. When we terminated our merger agreement with Alliance, certain property
and equipment were no longer in use and we had to impair the economic life of
the property and equipment remaining in use. In January 2003, we announced the
sale of our digital music fulfillment business and related assets to Geneva.
These assets included certain property and equipment. We determined the fair
value of the assets remaining in use and those assets sold to Geneva based on
quoted market prices obtained from a business auction and valuation firm dealing
in similar assets. As a result of the foregoing, we recorded an impairment loss
of $689,000 in the three months ended December 31, 2002.
NON-CASH SALES AND MARKETING, RESEARCH AND DEVELOPMENT AND GENERAL AND
ADMINISTRATIVE. Non-cash sales and marketing, research and development and
general and administrative expenses relate to stock-based employee compensation
arrangements. The total unearned compensation recorded by us from inception to
December 31, 2004 was $3.5 million. We recognized $0, $0 and $(21,000) of stock
compensation expense (income) for 2004, 2003 and 2002, respectively. The income
amounts in 2004, 2003 and 2002 relate to the adjustment of cumulative expense
attributable to employees terminated in those periods from accelerated
amortization to straight-line amortization during the terminated employees'
service periods. We have fully amortized stock compensation expense related to
these personnel in 2002, and accordingly no future expense related to these
stock options will be incurred.
RESTRUCTURING- RESTRUCTURING CHARGE RELATES TO COSTS ASSOCIATED WITH OUR
CORPORATE RESTRUCTURING PROGRAM. We had no costs related to our restructuring in
2004. A $4.4 million charge in 2003 consisted of involuntary employee separation
costs of $796,000 and costs of $3,569,000 pertaining to lease termination
payments for certain facilities that were vacated due to reductions in our work
force. A $1.2 million charge in 2002 consisted of involuntary separation costs
of $852,0000, lease termination costs of $155,000 and asset impairment costs of
$156,000 for property and equipment no longer in use.
INTEREST INCOME. Interest income consists of earnings on our cash, cash
equivalents and short-term investments. Interest income decreased to $148,000 in
2004 from $242,200 in 2003, and decreased in 2003 from $1.3 million in 2002. The
decreases in 2004 and 2003 were due to lower average cash and cash equivalent
balances resulting from cash used in operating activities, and lower interest
rates.
INTEREST EXPENSE. Interest expense consists of expenses related to our
financing obligations, which include borrowings under equipment loans,
short-term loans and capital lease obligations. Interest expense decreased to $0
in 2004 and 2003 from $(50,000) in 2002. The declines in 2004 and 2003 are due
to the expiration of several capital leases expiring prior to such periods.
11
OTHER INCOME (EXPENSE), Other income (expense) decreased to $(27,000) in
2004 from $71,000 in 2003 and decreased from $489,000 in 2002. The decrease
reflects an overall decrease in investing activity. Other income of $489,000 in
2002 consists primarily of the extinguishment of a note payable to a related
party, which was canceled by the related party in December 2002.
GAIN ON SALE OF INTELLECTUAL PROPERTY AND DIGITAL MUSIC FULFILLMENT
BUSINESS. Gain on sale of intellectual property relates to the sale of our
Digital Music fulfillment business to Microsoft Corporation in September 2002
and to Geneva in January 2003.
MERGER TERMINATION FEE. Merger termination fee consists of a payment to
Alliance of $2.1 million in connection with the termination of the merger
agreement between us and Alliance in 2002.
CONTRACTUAL OBLIGATIONS
We did not have any contractual commitments and obligations as of December
31, 2004, including any long-term debt obligations, capital lease obligations,
operating lease obligations or purchase obligations, within the meaning of the
current rules of the Securities and Exchange Commission.
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are as follows:
o revenue recognition;
o estimating valuation allowances, specifically the allowance for
doubtful accounts and sales returns reserve;
o accounting for contingencies; and
o accounting for income taxes.
REVENUE RECOGNITION. To date, we have derived our revenues primarily from
the licensing of software products and service fees associated with business
development contracts. Business development revenues primarily consist of
license and maintenance fees from agreements under which we gave our strategic
related partners ("Partners") the right to license and use our digital recorded
music delivery technology. These U.S. dollar-denominated, non-refundable fees
are allocated among the various elements of the contract based on vendor
specific objective evidence ("VSOE") of fair value. VSOE of fair values for the
ongoing maintenance and support obligations are based upon the prices paid for
the separate renewal of these services by the customer or upon substantive
renewal rates stated in the contractual arrangements. VSOE of the fair value of
other services, primarily consulting services, is based upon separate sales of
these services. When VSOE of fair value exist for the undelivered elements,
primarily maintenance, we account for the license portion based on the "residual
method" as prescribed by SOP No. 98-9, "Modification of SOP 97-2 with Respect to
Certain Transactions." When VSOE of fair value does not exist for the
undelivered elements, we recognized the total fee from a business development
contract ratably over the term of the contract. The total fee from business
development arrangements was recognized when payments became due if extended
payment terms existed. Extended payment terms are defined as payment terms
outside our customary business practice, generally greater than 90 days. Revenue
is not recognized if the Partners stop making their contractual payments. We
also licensed our software products to original equipment manufacturers, record
companies, artists and websites. Software license revenues were recognized when
persuasive evidence of an arrangement exists, the fee is fixed and determinable,
collection is probable and delivery has occurred. Similarly with business
development contracts, the total fee from the arrangement is allocated among the
various elements based on VSOE of fair value. Maintenance revenue related to our
licensed software products and hosting revenue from record companies and artists
were recognized over the service period, typically one year. Revenue derived
from hosting services include subscription fees from artists for encoding and
storing music files, e-commerce services and transaction reporting. Music
delivery services revenues include transaction fees from sales of digital
recorded music through our LMN website affiliates and fees from music retailers
and websites related to the sample digital music clips delivery service. Revenue
from kiosk sales consisted of software licenses and services revenue from
equipment and kiosk-related services.
12
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS RESERVE. The preparation
of financial statements requires our management to make estimates and
assumptions that affect the reported amount of assets and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Specifically, our management must make estimates of the uncollectability of our
accounts receivables. Management specifically analyzes accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in our customer payment terms
when evaluating the adequacy of the allowance for doubtful accounts. Similarly,
our management must make estimates of the potential future product returns
related to current period product revenue. Management analyzes historical
returns, current economic trends, and changes in customer demand and acceptance
of our products when evaluating the adequacy of the sales returns reserve.
Significant management judgments and estimates must be made and used in
connection with establishing the allowance for doubtful accounts and sales
returns reserve in any accounting period. Material differences may result in the
amount and timing of our revenue and bad debt expense for any period if
management made different judgments or used different estimates. Our accounts
receivable from third parties balance was $0, net as of December 31, 2004.
ACCOUNTING FOR CONTINGENCIES. We are subject to various legal proceedings
and claims, the outcomes of which are subject to significant uncertainty. SFAS
5, Accounting for Contingencies, requires that an estimated loss from a loss
contingency should be accrued by a charge to income if it is probable that an
asset has been impaired or a liability has been incurred and the amount of the
loss can be reasonably estimated. Disclosure of a contingency is required if
there is at least a reasonable possibility that a loss has been incurred. We
evaluate, among other factors, the degree of probability of an unfavorable
outcome and the ability to make a reasonable estimate of the amount of loss.
Changes in these factors could materially impact our financial position or
results of operations.
ACCOUNTING FOR INCOME TAXES. As part of the process of preparing our
consolidated financial statements we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This process involves us
estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within our consolidated balance
sheet. We must then assess the likelihood that our deferred tax assets will be
recovered from future taxable income and to the extent we believe that recovery
is not likely, we must establish a valuation allowance. To the extent we
establish a valuation allowance or increase this allowance in a period, we must
include an expense within the tax provision in the statement of operations.
Significant management judgment is required in determining our provision
for income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have recorded a
valuation allowance of $8,701,000 as of December 31, 2004, due to uncertainties
related to our ability to utilize some of our deferred tax assets, primarily
consisting of certain net operating losses carried forward, before they expire.
The valuation allowance is based on our estimates of taxable income by
jurisdiction in which we operate and the period over which our deferred tax
assets will be recoverable. In the event that actual results differ from these
estimates or we adjust these estimates in future periods we may need to
establish an additional valuation allowance which could materially impact our
financial position and results of operations.
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 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
13
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.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through the
initial and follow-on public offerings of common stock, private placements of
our preferred stock, equipment financing, lines of credit and short-term loans.
As of December 31, 2004, we had raised $65.9 million and $93.7 million through
our initial and follow-on public offerings of common stock, respectively, and
$29.8 million through the sale of our preferred stock. In January 2003, we
distributed $57.7 million to our common stockholders of record as of December
10, 2002. At December 31, 2004, we had approximately $6.4 million of cash and
cash equivalents.
Net cash used in operating activities was $2.5 million, $10.3 million and
$18.1 million in 2004, 2003 and 2002, respectively. Net cash used in operating
activities in 2004 was primarily the result of net losses from operations of
$847,000, legal expense of $360,000 and the settlement in the BeMusic litigation
of $1.4 million. Net cash used in operating activities in 2003 was the result of
net losses from operations of $8.3 million, the gain on the sale of our digital
music fulfillment business and related assets of $2.8 million, a decrease in
accounts payable of $1.2 million, offset by a decrease in depreciation and
amortization of $226,000 and the recovery of restricted cash of $826,000
relating to the lease termination of our Redwood City facility. Net cash used
for operating activities in 2002 was primarily the result of net losses from
operations of $19.2 million, net of non-cash items including depreciation and
amortization of $2.3 million, amortization of unearned compensation of
$(21,000), note payable write-off of $(343,000) and loss on disposal and
impairment of property and equipment of $804,000, and a net decrease in working
capital items of $1.7 million. The net decrease in working capital items include
a decrease in accounts receivable of $70,000, increase in other assets of
$106,000, increase in accounts payable of $111,000, decrease in accrued
liabilities of $1.7 million and a decrease in deferred revenue of $83,000.
Net cash provided by (used in) investing activities was $0, $3.2 million
and $(87,000) in 2004, 2003 and 2002, respectively. The net cash provided in
2003 was from the sale of our digital music fulfillment business and related
assets. The net cash used by investing activities in 2002 was due to the
acquisition of property and equipment.
Net cash provided by (used in) financing activities was $(67,000), $(57.7)
million, and $626,000 in 2004, 2003 and 2002, respectively. The net cash used in
financing activities in 2004 was due to the purchase of fractional interests in
connection with the implementation of the Reverse/Forward stock split. The net
cash used in financing activities in 2003 of $57.7 million was from the cash
distribution to our shareholders of $2.50 per share on January 29, 2003. The net
cash provided in financing activities in 2002 was primarily due to proceeds from
sales of our common stock under our stock option and employee stock purchase
plans of $823,000, partially offset by payments of $169,000 made under our
equipment loan and $28,000 under capital leases.
We have no material commitments for capital expenditures or strategic
investments and anticipate a low rate of capital expenditures. 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 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.
14
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. However, uncertainties exist as to the precise value of
claims and liabilities, which may exceed our current existing cash and cash
equivalents. Additionally, if we decide to pursue a business strategy unrelated
to digital music distribution, we may need additional cash resources. See Part
I. "Business - Company Risk Factors"
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index to Financial Statements which appears on
page F-1 of this report. The Reports of Independent Registered Public Accounting
Firms, Financial Statements and Notes to Financial Statements which are listed
in the Index to Financial Statements and which appear beginning on page F-2 of
this report are incorporated into this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 the 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 Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules and forms.
No change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal
quarter ended December 31, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table presents our directors and executive officers, their
ages and the positions held by them as of March 17, 2005:
NAME AGE POSITION
William J. Fox.........................48 President, Chief Executive
Officer and Director
Melvyn Brunt...........................61 Chief Financial Officer
and Secretary
James A. Mitarotonda...................50 Chairman and Director
Steven Berns...........................40 Director
Stephen Liguori........................48 Director
Michael A. McManus. Jr.................61 Director
MR. FOX has served as one of our directors since April 2003 and has served
as our President and Chief Executive Officer since October 7, 2004. Mr. Fox was
Chairman, President and Chief Executive Officer of AKI Inc. and President and
CEO of AKI Holdings, Inc., an international specialty marketing services
business, from February 1999 until October 2004. From September 1991 until
January 1999, Mr. Fox was an executive of Revlon Inc. (NYSE: REV) and of Revlon
Consumer Products Corporation ("RCPC"), holding various positions, including
Senior Executive Vice President of Revlon, Inc., President of Strategic and
Corporate Development, Revlon Worldwide, Chief Executive Officer of Revlon
Technologies, and, until December 1997, was Chief Financial Officer of Revlon,
Inc. Mr. Fox was concurrently Senior Vice President of MacAndrews & Forbes
Holdings Inc. ("MacAndrews"). Mr. Fox was a director of Revlon Inc. and RCPC
from 1994 until April 1999. At various times, beginning in April 1983, Mr. Fox
was also an executive officer of several affiliates of MacAndrews and Revlon,
including Technicolor Inc., The Coleman Company, New World Entertainment and
Revlon Group Incorporated. Mr. Fox served as a director and non-executive
Co-Chairman of Loehmann's Holdings Inc. from October 2000 until October 2004.
Mr. Fox currently serves as Vice Chairman of Barington Capital Group, L.P. and
certain of its affiliates and has been the President, Chief Executive Officer
and a director of Dynabazaar, Inc. (OTCBB:FAIM) since December 2004. Mr. Fox is
also a director of Nephros, Inc. (AMEX:NEP).
MR. BRUNT has served as our Chief Financial Officer and Secretary since
April 2003. He has also served as Chief Financial Officer to Barington Capital
Group, L.P. since January 2002 and as Chief Financial Officer and Secretary to
Dynbazaar, Inc. (OTCBB:FAIM) since January 2004. In addition, from January 2002
to May 2004, he served as Chief Financial Officer and Secretary to MM Companies,
Inc. (OTCBB:MMCO). From 1985 to 2001, Mr. Brunt was a Director and Chief
Financial Officer of Davies Turner & Co., an international freight forwarding
company with offices throughout the United States. From 1996 to 2001, Mr. Brunt
was President of Air Mar, Inc. and a Director of TCX International Inc. Both of
those companies provided logistics support services to a wide variety of
importing and exporting companies.
MR. MITAROTONDA has served as one of our directors since September 2002,
our Co-Chairman from April 2003 until May 2004 and our sole Chairman since May
2004. He served as our Co-Chief Executive Officer from April 2003 until May 2004
and our sole Chief Executive Officer from May 2004 to October 7, 2004. Mr.
Mitarotonda is Chairman of the Board, President and Chief Executive Officer of
Barington Capital Group, L.P., an investment firm that he co-founded in November
1991. Mr. Mitarotonda is also the Managing Director of Barington Companies
Offshore Fund, Ltd. and President and Chief Executive Officer of Barington
Companies Investors, LLC, the general partner of Barington Companies Equity
Partners, L.P., a small capitalization value fund which seeks to be actively
involved with its portfolio companies in order to enhance shareholder value. Mr.
Mitarotonda is also a director of Register.com (NASDAQ:RCOM) and Dynabazaar,
Inc. (OTCBB:FAIM) and served as the President and Chief Executive Officer of
Dynabazaar, Inc. from January 2004 until December 2004. In May 1988, Mr.
Mitarotonda co-founded Commonwealth Associates, an investment banking, brokerage
and securities trading firm. Mr. Mitarotonda served as Chairman of the Board and
Co-Chief Executive Officer of JMJ Management Company Inc., the general partner
of Commonwealth Associates.
16
MR. BERNS has served as one of our directors since October 2004. He has
been the Vice Chairman and Executive Vice President of MDC Partners, Inc.
(NASDAQ:MDCA) since September 2004. From August 1999 until September 2004, Mr.
Berns was the Senior Vice President and Treasurer of The Interpublic Group of
Companies, Inc. (NYSE:IPG), an organization of advertising agencies and
marketing services companies. Before that, Mr. Berns held a variety of positions
in finance at Revlon, Inc. (NYSE:REV) from April 1992 until August 1999,
becoming Vice President and Treasurer in 1996. Prior to joining Revlon, Mr.
Berns worked at Paramount Communications Inc. and at a predecessor public
accounting firm of Deloitte & Touche. Mr. Berns has served as a director for
Liveperson, Inc. (NASDAQ:LPSN) since April 2002.
MR. LIGUORI has served as one of our directors since October 2004. From
January 2001 until January 2005, Mr. Liguori was a Managing Director and the
Chief Retail Marketing Officer of Morgan Stanley's Individual Investor Group, a
group that provides investment products and services for individuals. From June
2000 to October 2000, Mr. Liguori was the head of Citibanking North America's
E-Consumer Division and from June 1998 to June 2000, was a Business Manager at
Citibanking, N.A. Before joining Citibank, Mr. Liguori worked in general
management and strategic marketing with the Kraft/Phillip Morris organization
(NYSE:KFT) and Pepsico (NYSE:PEP).
MR. MCMANUS has served as one of our directors since April 2003. Mr.
McManus has been President and Chief Executive Officer of Misonix, Inc.
(NASDAQ:MSON), a medical device company since November 1998. He was President
and Chief Executive Officer of New York Bancorp Inc. ("NYBI") from 1991 to 1998,
a director of NYBI from 1990 to 1998 and a director and Vice Chairman of Home
Federal Savings Bank, NYBI's subsidiary, from 1991 to 1998. He is also a
director of NWH, Inc. (NASDAQ:NWIR), American Home Mortgage Holdings, Inc.
(NYSE:AMH) and Novavax, Inc. (NASDAQ:NVAX). He has served in numerous government
capacities, including Assistant to the President of the United States from 1982
to 1985 and as Special Assistant to the Secretary of Commerce during the Ford
Administration.
There is no family relationship between any of the foregoing directors or
between any of such directors and any of our executive officers.
AUDIT COMMITTEE
The Audit Committee currently consists of Steven Berns (Chairman), Steve
Liquori and Michael McManus. The Board has determined that each member is
"independent" under the NASD's listing standards and the applicable rules of the
Securities Exchange Commission (the "SEC"), that each member is "financially
literate" under the NASD's listing standards and that Mr. Berns qualifies as an
Audit Committee Financial Expert under the applicable rules of the SEC.
The Audit Committee hires our independent accountants and is charged with
the responsibility of overseeing our financial reporting process. In the course
of performing its functions, the Audit Committee reviews, with management and
the independent accountants, our internal accounting controls, the annual
financial statements, the report and recommendations of the independent
accountants, the scope of the audit and the qualifications and independence of
the auditors. A copy of the Audit Committee charter as adopted by the Board on
October 7, 2004 is available upon request to the following address: L Q
Corporation, Inc., 888 Seventh Avenue, 17th Floor, New York, NY, 10019, Attn:
Secretary.
CODE OF BUSINESS CONDUCT AND ETHICS
We have adopted a Code of Business Conduct and Ethics that applies to our
directors, officers, senior management and certain other employees, including
our principal executive officer, principal financial officer, principal
accounting officer or controller or persons performing similar functions. We
will provide a copy of our Code of Business Conduct and Ethics to any person
without charge, upon request. Requests for a copy of the Code of Business
Conduct and Ethics can be made in writing to the following address: L Q
Corporation, Inc., 888 Seventh Avenue, 17th Floor, New York, NY, 10019, Attn:
Secretary.
17
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors, and persons who own more than 10% of a registered class of the
our equity securities, to file certain reports regarding ownership of, and
transactions in, our securities with the SEC and with Nasdaq. Such officers,
directors and 10% shareholders are also required by SEC rules to furnish us with
copies of all Section 16(a) forms that they file.
Based solely on our review of copies of Forms 3, 4, 5 and amendments
thereto furnished to us and representations made to us, we believe that during
the fiscal year ended December 31, 2004 all reports required by Section 16(a) to
be filed by our officers and directors and 10% beneficial owners were filed on a
timely basis, except as follows: (i) Joseph R. Wright, Jr. filed late his
Initial Statement of Beneficial Ownership of Securities on Form 3; and (ii)
James A. Mitarotonda filed late one Statement of Changes in Beneficial Ownership
on Form 4 relating to certain acquisitions of shares of common stock of the
Company.
BOARD COMPOSITION
We currently have five directors. At our December 22, 2004 meeting of our
stockholders, our stockholders voted in favor of an amendment to our certificate
of incorporation to eliminate the classification of our board of directors into
three classes with staggered three-year terms, and all directors hereafter will
be elected for one-year terms at each annual meeting of stockholders.
Our board of directors is currently comprised of five (5) members, namely,
James A. Mitarotonda, Steven Berns, William J. Fox, Michael A. McManus, Jr. and
Stephen Liguori.
Each officer is elected by, and serves at the discretion of, the Board.
Each of our officers and directors, devote the amount of time necessary to
discharge their duties to the Company. There are no family relationships among
any of our directors, officers or key employees.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the total compensation received for services
rendered to us for the years ended December 31, 2004, 2003 and 2002 by our Chief
Executive Officer, individuals who served as our Chief Executive Officer during
2004 and our Chief Financial Officer (Named Executive Officers).
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------- ------------
# SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS
- ---------------------------------------------------- ---- ------ ----- ------------ ------------
William J. Fox, Chief Executive Officer........... 2004 $15,000 -- -- --
2003 -- -- -- --
2002 -- -- -- --
James A. Mitarotonda, Chairman and Chief.......... 2004 $37,000 -- -- --
Executive Officer (resigned as Chief Executive 2003 $46,487 -- -- 63,000
Officer on October 2004) 2002 -- -- -- --
Seymour Holtzman, Co-Chairman and Co-Chief........ 2004 $20,000 -- -- --
Executive Officer (resigned as Co-Chairman and 2003 $10,000 -- -- 63,000
Co-Chief Executive Officer in May 2004) 2002 -- -- -- --
Melvyn Brunt, Chief Financial Officer............. 2004 (1) -- -- --
2003 (1) -- -- 14,000
2002 -- -- -- --
________
(1) From April 2003 through May 16, 2004, the Company paid Barington
Capital Group, L.P. ("Barington") a monthly fee of $7,290 for certain
administrative and accounting services provided by Barington on its behalf,
which includes services performed by Mr. Brunt, the Chief Financial Officer of
Barington, on behalf of the Company. The Company entered into a new services
agreement with Barington dated as of November 18, 2004. Under this agreement,
the Company paid Barington $8,000 per month for providing certain
administrative, accounting and other services on its behalf in 2004. For more
information, see "Certain Relationships and Related Transactions" in Item 13 of
this Form 10-K.
18
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information relating to stock options awarded
to each of the Named Executive Officers during the year ended December 31, 2004.
All such options were awarded under our 1996 Equity Incentive Plan. Number of
securities and exercise prices reflect the reverse-forward stock split which
took place on June 7, 2004.
These options are either incentive stock options or nonqualified stock
options. Options are granted at an exercise price equal to the fair market value
of our Common Stock, as determined by the Board on the date of grant according
to the provisions of the 1996 Equity Incentive Plan.
INDIVIDUAL GRANTS
-----------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED FOR OPTIONS TERM (1)
OPTIONS IN FISCAL EXERCISE EXPIRATION ----------------------
NAME GRANTED 2004 PRICE DATE 5% 10%
- ----------------- ---------- ------------- -------- ---------- ---------- ----------
William Fox 67,347(2) 55 $1.82 11/16/2014 77,000 195,000
James Mitarotonda 56,000(3) 45 $1.82 11/16/2009 28,000 62,000
---------- -------------
Total 123,347 100%
(1) The potential realizable value is calculated based on the term of the
option at its time of grant, or 10 years. In accordance with the rules of
the SEC, the following table also sets forth the potential realizable value
over the term of the options, the period from the grant date to the
expiration date, based on assumed rates of stock appreciation of 5% and 10%
compounded annually. These amounts do not represent our estimate of future
stock price performance. Actual realizable values, if any, of stock options
will depend on the future performance of the common stock.
(2) In November 2004, we granted options to purchase 67,347 shares of common
stock to William J. Fox. One-third of the options vest on the one year
anniversary of the grant date and the remainder vest ratably per month over
the next two years.
(3) In November 2004, we granted options to purchase 56,000 shares of common
stock to Barington Capital Group, L.P. ("Barington") pursuant to the
Administrative Services Agreement dated as of November 18, 2004. James
Mitarotonda is the Chairman of the Board, President and Chief Executive
Officer of Barington. The options granted to Barington are immediately
exercisable.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table provides summary information concerning stock options
held as of December 31, 2004 by each of the Named Executive Officers. Number of
securities and exercise prices reflect the reverse-forward stock split which
took place on June 7, 2004. The value of unexercised in-the-money options at
fiscal year-end is based on a price per share of $1.79 on December 31, 2004 less
the exercise price.
19
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES VALUE OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END
ACQUIRED ON REALIZED -------------------------- --------------------------
NAME EXERCISE ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------- ----------- -------- ----------- ------------- ----------- -------------
James Mitarotonda -- -- 182,000(1) -- -- --
William Fox -- -- 16,800 67,347 -- --
Melvyn Brunt -- -- 14,000 -- -- --
-------- -------- ---------- --------- -------- -------
Total -- -- 212,800 67,347 -- --
(1) In May 2004, 63,000 options were transferred to Mr. Mitarotonda from
Mr. Holtzman pursuant to the terms of a securities purchase agreement
by and among Jewelcor Management, Inc., Seymour Holtzman, Barington
Capital Group, L.P., James A. Mitarotonda and Ramius Securities, LLC,
dated as of May 13, 2004.
DIRECTOR COMPENSATION
In February 2003, our Board approved a plan that provides our non-employee
directors with cash compensation of $10,000 upon initial election and on each
anniversary of becoming a director during their term of service, and $1,000 per
meeting of the Board attended during their term of service. Attendance at
Committee meetings will be compensated at the rate of $1,000 per meeting for
members and $2,000 per meeting for the chairperson. In 2004, we paid $116,000
for Board and Committee attendance. During the period of 2004, James Mitarotonda
received $37,000 and William J. Fox received $30,000 as compensation for their
service as directors while they were non-employee directors.
Non-employee directors are granted a fully vested option to purchase 21,000
shares of common stock upon initial election and a fully vested option to
purchase 1,400 shares of common stock on each anniversary of becoming a director
during their term of service at an exercise price equal to the fair market value
of a share of common stock as of the date of grant.
EMPLOYMENT CONTRACT, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
None
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the Board reviews and recommends to the Board
the compensation and benefits of all of our executive officers, administers our
stock and option plans and establishes and reviews general policies relating to
compensation and benefits. The compensation committee currently consists of
Stephen Liguori and Michael A. McManus, Jr. The compensation committee is
currently composed of independent, non-employee directors. No interlocking
relationships exist among our Board, compensation committee or executive
officers and the Board, compensation committee or executive officers of any
other company, nor has an interlocking relationship existed in the past.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The compensation committee generally believes that the compensation of the
executive officers, including that of the Chief Executive Officer (each, an
"Executive Officer" and collectively, the "Executive Officers"), should be
influenced by our performance. The compensation committee establishes the
salaries and bonuses of all of the Executive Officers by considering: (i) our
financial performance for the past year; (ii) the achievement of certain
objectives related to the particular Executive Officer's area of responsibility;
(iii) the salaries and bonuses of Executive Officers in similar positions of
comparably-sized companies; and (iv) the relationship between revenue and
Executive Officer compensation. No specific weight is given to any of these
factors in the evaluation of an executive officer's base salary.
To contain expenses in 2004, the compensation committee established a
salary freeze on all of our employees. In approving the salary of the Company's
Chief Executive Officer, the compensation committee generally follows the
policies set forth above. However, as the Company does not have an operating
business, the Chief Executive Officer was compensated at a level deemed
reasonable and appropriate for the services being provided to the Company by the
Chief Executive Officer.
20
In 2004, the compensation committee did not establish bonus targets for the
Executive Officers. In prior years, bonus targets have been equal to either 30%
or 50% of base salary. Actual bonus amounts were based on both corporate and
individual performance measurements. The corporate performance measurements were
based on revenue and operating loss targets. No bonus payouts were made in 2004.
In addition to salary and bonus, the compensation committee, from time to
time, grants options to Executive Officers. The compensation committee views
option grants as an important component of its long-term, performance-based
compensation philosophy. Since the value of an option bears a direct
relationship to our stock price, the compensation committee believes that
options motivate Executive Officers to manage us in a manner that will also
benefit stockholders. As such, the specific number of stock options granted to
an Executive Officer is determined by the committee's perception of relative
contributions or anticipated contributions to overall corporate performance. The
committee also reviews the total number of options already held by individual
executive officers at the time of grant.
In 2004, we granted options to purchase 67,347 shares of common stock to
William J. Fox and 56,000 shares to James Mitarotonda.
In approving the Chief Executive Officers' salary, the compensation
committee generally follows the policies set forth above.
COMPENSATION COMMITTEE
OF L Q CORPORATION, INC.
/s/ Stephen Liguori
--------------------
Stephen Liguori
/s/ Michael A. McManus, Jr.
----------------------------
Michael A. McManus, Jr.
21
PERFORMANCE GRAPH
The following graph compares the cumulative total return to stockholders on
our common stock with the cumulative total return of the Nasdaq Stock Market
Index-U.S. and a group of former peer issuers selected in good faith and
comprised of Intertrust Technologies Corporation (ITRU) and RealNetworks, Inc.
(RNWK). The graph assumes that $100 was invested on July 9, 1999, the date of
our initial public offering, in our common stock, the Nasdaq Stock Market
Index-U.S. and the peer group, including reinvestment of dividends. No dividends
have been declared or paid on our common stock. Historic stock price performance
is not necessarily indicative of future stock price performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG LQ CORPORATION INC, THE NASDAQ STOCK MARKET (U.S.) INDEX
AND A PEER GROUP
[GRAPH HERE]
* $100 invested on July 9, 1999 in stock or index, including reinvestment of
dividends. Fiscal year ending December 31.
22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information with respect to beneficial
ownership of our common stock as of March 22, 2005 by:
o each person known by us who beneficially owns more than 5% of the
common stock;
o each of our named executive officers;
o each of our directors; and
o all executive officers and directors as a group.
Except as otherwise noted, the address of each 5% stockholder listed in the
table is c/o L Q Corporation, Inc., 888 Seventh Avenue, 17th Floor, New York, NY
10019. The table includes all shares of common stock issuable within 60 days of
March 22, 2005 upon the exercise of options and other rights beneficially owned
by the indicated stockholders on that date. Beneficial ownership is determined
in accordance with the rules of the SEC and includes voting and investment power
with respect to all shares of common stock. To our knowledge, except under
applicable community property laws or as otherwise indicated, the persons named
in the table have sole voting and sole investment control with respect to all
shares of common stock beneficially owned. The applicable percentage of
ownership for each stockholder is based on 3,214,408 shares of common stock
outstanding as of March 22, 2005, together with applicable options for that
stockholder. Shares of common stock issuable upon exercise of options and other
rights beneficially owned are deemed outstanding for the purpose of computing
the percentage ownership of the person holding those options and other rights,
but are not deemed outstanding for computing the percentage ownership of any
other person. Numbers of shares in the following table and footnotes thereto
have been adjusted to account for the Company's reverse-forward stock split
which took effect on June 7, 2004.
SHARES BENEFICIALLY
OWNED
------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- ----------------------------------------------------------------- ------------ -----------
Lloyd I. Miller III(1) 408,446 12.71
4550 Gordon Drive,
Naples, Florida 34102
Phillip Goldstein(2) 377,791 11.75
60 Heritage Drive
Plesantville, NY 10570
PNC Financial Services Group, Inc. and related entities(3) 339,694 10.57
One PNC Plaza
249 Fifth Avenue
Pittsburgh, PA 15265
Coghill Capital Management, L.L.C. and related entities(4) 196,584 6.11
One North Wacker Drive - Suite 4350
Chicago, IL 60606
SC Fundamental Value Fund, L.P. and related entities(5) 195,660 6.09
420 Lexington Avenue, Suite 2601
New York, NY 10170
Jay Gottlieb(6) 169,170 5.26
27 Misty Brook Lane
New Fairfield, CT 06812
Barington Companies Equity Partners, L.P. and related entities(7) 354,214 11.02
c/o Barington Capital Group, L.P.
888 Seventh Avenue, 17th Floor
New York NY 10019
James A. Mitarotonda(8) 341,936 10.24
Steve Berns(9) 21,000 *
Melvyn Brunt(10) 14,000 *
William J. Fox(11) 22,400 *
Steven Liquori(12) 21,000 *
Michael McManus(13) 22,400 *
All executive officers and directors as a group (6 persons) 442,736 13.14
- -------------------
23
(1) On February 18, 2004, Lloyd I. Miller III filed an amendment to Schedule
13G pursuant to Rule 13d-1 of the Securities Exchange Act of 1934 with
the Securities and Exchange Commission, reporting combined ownership of
408,446 shares of Common Stock. According to this Schedule 13G/A, Mr.
Miller holds sole dispositive and voting power with respect to 68,748
shares of the reported securities as (i) the manager of a limited
liability company that is the general partner of a certain limited
partnership and (ii) an individual and shared dispositive and voting
power with respect to 2,426,398 shares of the reported securities as an
advisor to the trustee of certain family trusts.
(2) On March 16, 2004, Phillip Goldstein filed an amendment to Schedule 13D
pursuant to Rule 13d-1 of the Securities Exchange Act of 1934 with the
Securities and Exchange Commission, reporting combined ownership of
377,791 shares of Common Stock.
(3) On February 10, 2004, PNC Financial Services Group, Inc. filed an
amendment to Schedule 13G pursuant to Rule 13d-1 of the Securities
Exchange Act of 1934 with the Securities and Exchange Commission,
reporting combined ownership of 339,694 shares of Common Stock as the
total owned by three entities, PNC Financial Services Group, Inc., PNC
Bancorp, Inc. and PNC Bank, National Association. The total shares of
Common Stock reported are held in Trust Accounts created by an Amended
and Restated Trust Agreement dated September 20, 1983, in which Lloyd I.
Miller, Jr. was Grantor and for which PNC Bank, National Association
serves as Trustee.
(4) On February 16, 2005, Coghill Capital Management, L.L.C. filed a Schedule
13G, pursuant to Rule 13d-1 of the Securities Exchange Act of 1934 with
the Securities and Exchange Commission, reporting combined ownership of
196,384 shares of Common Stock as the total owned.
(5) On December 6, 2002, SC Fundamental Value Fund and related entities filed
a Schedule 13G pursuant to Rule 13d-1 of the Securities Exchange Act of
1934 with the Securities and Exchange Commission, reporting combined
ownership of 1,195,660 shares of Common Stock as the total owned.
(6) On November 17, 2004, Jay Gottlieb filed a Schedule 13D reporting
ownership of 169,170 shares of Common Stock as the total owned.
(7) On May 25, 2004, the Barington group jointly filed and amendment to
Schedule 13D pursuant to Rule 13d-1 of the Securities Exchange Act of
1934 with the Securities and Echange Commission, reporting combined
ownership of 298,214 shares of Common Stock as the total owned by the
four entities. According to that Schedule 13D/A, Barington Company Equity
Partners L.P. owns 67,438 shares of Common Stock, Ramius Securities, LLC
owns 34,512 shares of Common Stock. Barington Capital Group, L.P. owns
80,598 shares of Common Stock and Starboard Value & Opportunity Fund, LLC
owns 103,766 shares of Common Stock. Subsequent to this filing, Barington
Capital Group, L.P. purchased an additional 11,900 shares of Common Stock
and was granted an option to purchase 56,000 shares of Common Stock.
Barington Companies Investors, LLC is the general partner of Barington
Companies Equity Partners, L.P. James Mitarotonda is the managing member
of Barington Companies Investors, LLC and Chairman of the Board,
President and Chief Executive Officer of Barington Capital Group, L.P.
(8) Includes 67,438 shares of Common Stock owned by Barington Companies
Equity Partners, L.P., 148,498 shares of Common Stock owned by Barington
Capital Group, L.P. and 126,000 shares of Common Stock issuable upon the
exercise of stock options excercisable within 60 days of March 22, 2005.
James A. Mitarotonda is President and Chief Executive Officer of
Barington Companies Investors, LLC, the general partner of Barington
Companies Equity Partner L.P., and Chairman of the Board, President and
Chief Executive Officer of Barington Capital Group, L.P. Consequently,
Mr. Mitarotonda may be deemed to beneficially own all of the shares held
by Barington Companies Equity Partners, L.P. and Barington Capital Group,
L.P. Mr. Mitarotonda disclaims beneficial ownership of such shares,
except to the extent of his respective pecuniary interest therein.
(9) Includes 21,000 shares of Common Stock issuable upon the exercise of
stock options excercisable within 60 days of March 22,2005.
(10) Includes 14,000 shares of Common Stock issuable upon the exercise of
stock options exercisable within 60 days of March 22, 2005.
(11) Includes 22,400 shares of Common Stock issuable upon the exercise of
stock options exercisable within 60 days of March 22, 2005.
(12) Includes 21,000 shares of Common Stock issuable upon the exercise of
stock options exercisable within 60 days of March 22, 2005.
(13) Includes 22,400 shares of Common Stock issuable upon the exercise of
stock options exercisable within 60 days of March 22, 2005.
* Does not exceed 1%.
24
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information, as of December 31,
2004, concerning shares of our common stock authorized for issuance under all of
our equity compensation plans (shares in thousands)
NUMBER OF SECURITIES
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE REMAINING AVAILABLE FOR
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING FUTURE ISSUANCE UNDER
PLAN CATEGORY OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND EQUITY COMPENSATION PLANS
WARRANTS AND RIGHTS RIGHTS (EXCLUDING SECURITIES
REFLECTED IN COLUMN (a)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
(a) (b) (c)
Equity compensation plans 361 1.93 5,194
approved by security
holders
Equity compensation plans -- -- --
not approved by
security holders
------------- ------------- -----------
Total 361 1.93 5,194
On March 18, 2003, our Board elected to reduce the exercise price of all
stock options by $2.50, but not lower than $0.10, to account for the $2.50 per
share return of capital distribution made on January 29, 2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 2003, we relocated our principal executive offices to 888 Seventh
Avenue, 17th Floor, New York, 10019, an office maintained by Barington Capital
Group, LP ("Barington"), a limited partnership whose general partner is a
corporation of which James Mitarotonda is Chairman, President and Chief
Executive Officer. Mr. Mitarotonda is our Chairman and former Chief Executive
Officer. William Fox, the President, Chief Executive Officer and a director of
the Company, is the Vice Chairman of Barington. From April 2003 through May 16,
2004, we paid Barington a monthly fee of $7,290 for certain administrative and
accounting services provided by Barington on our behalf. During the same period,
we also paid Jewelcor Management, Inc. ("Jewelcor"), a corporation whose
Chairman and Chief Executive Officer is Seymour Holtzman, a fee of $5,000 for
certain administrative services provided by Jewelcor on our behalf. Mr. Holtzman
is a former Co-Chairman and Co-Chief Executive Officer of the Company. In May
2004, Mr. Holtzman resigned from the Board and Jewelcor ceased to provide
administrative services to us. The Board then decided to enter into a new
services arrangement with Barington, and it was agreed that all payments for
services would be suspended until a new services arrangement was negotiated,
although Barington continued to provide services on our behalf. We entered into
a new services agreement with Barington dated as of November 18, 2004. Under
this agreement, we agreed to pay Barington $8,000 per month for providing
certain administrative, accounting and other services on our behalf and a fee of
$125 per hour for any legal services provided by Barington at our request. We
also agreed that in the event Barington identifies for us at our request a
business transaction such as a merger, acquisition or joint venture, and
provides us with financial consulting services in connection with such business
transaction, we will pay Barington a fee of two percent of the amount of the
consideration paid in the transaction. In connection with the agreement, we
granted to Barington or its designees stock options to purchase 56,000 shares of
our Common Stock. The options are fully exercisable and were granted with an
exercise price per share equal to $1.82, the fair market value of our Common
Stock on the grant date.
The services agreement with Barington was amended as of January 1, 2005 to,
among other things, increase the monthly fee payable by the Company to Barington
from $8,000 to $15,000 and increase the hourly fee payable for legal services
from $125 per hour to $175 per hour. We believe that the fees payable to
Barington are less than those that would be charged in arm's length transactions
between unaffiliated third parties.
We have entered into indemnification agreements with our officers and
directors containing provisions which may require us, among other things, to
indemnify our officers and directors against certain liabilities that may arise
by reason of their status or service as officers or directors (other than
liabilities arising from willful misconduct of a culpable nature) and to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified. We also intend to execute such agreements with our
future directors and executive officers.
25
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The public accounting firm of Rothstein Kass & Company, PC has served as our
independent accountant to perform the audit of our financial statements for the
fiscal year ended December 31, 2004 and December 31, 2003. The table below sets
forth the aggregate audit fees, audit-related fees, tax fees and all other fees
billed for services rendered by our principal accountants in our fiscal years
ended December 31, 2004 and 2003.
FISCAL FISCAL
FEE CATEGORY 2004 2003
Audit Fees (1) $65,700 $42,500
Audit-Related Fees (2) - -
Tax Fees (3) $19,630 $12,780
All Other Fees (4) - -
Total All Fees $85,330 $55,280
- -----------------
(1) AUDIT FEES. These consist of fees billed for professional services rendered
for the audit of our annual financial statements and review of the interim
financial statements included in quarterly 10-Q reports and for services
normally provided in connection with statutory and regulatory filings.
(2) AUDIT-RELATED FEES. These consist of fees billed for assurance and related
services that are reasonably related to the performance of the audit or review
of our financial statements that are not reported under "Audit Fees," These
services include accounting consultations in connection with acquisitions and
consultations concerning financial accounting and reporting standards.
(3) TAX FEES. These consist of fees billed for professional services for tax
compliance, tax advice and tax planning. These services include
(4) ALL OTHER FEES. These consist of other fees not reported in the above
categories.
PRE-APPROVAL POLICIES AND PROCEDURES OF AUDIT COMMITTEE
The Audit Committee has responsibility for the appointment, compensation
and oversight of the work of the independent accountant. As part of this
responsibility, the Audit Committee must pre-approve all permissible services to
be performed by the independent accountant.
The Audit Committee has adopted an auditor pre-approval policy which sets
forth the procedures and conditions pursuant to which pre-approval may be given
for services per-approval may be given for services performed by the independent
auditor. Under the policy, the Committee must give prior approval for all
auditing services and the terms thereof (which may include providing comfort
letters in connection with securities underwritings) and non-audit services
(other than non-audit services prohibits under Section 10A(g) of the Exchange
Act or the applicable rules of the SEC or the Public Company Accounting
Oversight Board) to be provided. Prior approval need not be given with respect
to the provision of non-audit services if certain "de minimus" provisions of
Section 10A(i)(1)(B) of the Exchange Act are satisfied. The Audit Committee may
delegate to one or more of its members authority to approve a request for
pre-approval provided the member reports any approval so given to the Audit
Committee at its next scheduled meeting.
26
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) INDEX TO FINANCIAL STATEMENTS
Please see the accompanying Index to Financial Statements which appears on
page F-1 of this report. The Report of Independent Registered Public Accounting
Firm, Financial Statements and Notes to Financial Statements which are listed in
the Index to Financial Statements and which appear beginning on page F-2 of this
report are included in Item 8 above.
(a)(2) The financial statement schedule of L Q Corporation, Inc. for the years
ended December 31, 2004, 2003 and 2002 included in subsection (c) below is filed
as part of this Annual Report and