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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED):
January 6, 2006
L Q CORPORATION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION)
000-25977 77-0421089
(COMMISSION FILE NUMBER) (I.R.S. EMPLOYER IDENTIFICATION NO.)
888 Seventh Avenue
New York, New York 10019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(212) 974-5730
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
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SPECIAL NOTE REGARDING FORWARD-LOOKING FINANCIAL INFORMATION
This Current Report on Form 8-K contains or may contain forward-looking
statements, which reflect our views with respect to future events and financial
performance. These forward-looking statements are based on current expectations,
estimates, projections and assumptions and are subject to certain uncertainties
and other factors that could cause actual results to differ materially from such
statements. These forward-looking statements are identified by, among other
things, the words "anticipates", "believes", "estimates", "expects", "plans",
"projects", "targets", will, and similar expressions. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date they were made. Registrant (as defined below) undertakes no
obligations to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. Important factors that
may cause actual results to differ significantly from those projected include
the risk factors specified below.
Item 2.01. Completion of Acquisition or Disposition of Assets.
--------------------------------------------------
On January 6, 2006, Sielox, LLC, ("Sielox"), a newly formed, wholly-owned
subsidiary of L Q Corporation, Inc., a Delaware corporation (the "Registrant"),
pursuant to the transactions contemplated by an asset purchase agreement dated
November 4, 2005 (the "Checkpoint Asset Purchase Agreement"), by and between
Sielox and Checkpoint Systems, Inc., a Pennsylvania corporation ("Checkpoint"),
completed the acquisition of substantially all of the assets (the "Checkpoint
Acquisition") of Checkpoint's Access Control Products Group division (the
"Access Control Products Group" or "ACPG"). The Checkpoint Acquisition is
effective as of December 30, 2005.
ACPG develops, designs and distributes a complete line of open architecture
access control software, programmable controllers (electronic circuit boards),
and related accessories such as readers and ID cards which can be configured to
monitor, manage and control physical access to building perimeters and interior
locations. The cash consideration for the transaction was approximately $2.6
million, subject to post-closing adjustments and escrow plus related expenses.
Registrant paid the consideration from available cash on hand.
In addition, on January 6, 2006, a newly formed, wholly-owned subsidiary of
Registrant, SES Resources International, Inc., a Delaware corporation ("SES"),
completed the acquisition of substantially all of the assets, consisting
principally of intangible assets (the "SES Acquisition"), of SES Resources,
Ltd., a New York corporation ("SES Resources"), pursuant to the transactions
contemplated by an asset purchase agreement, dated as of December 30, 2005 (the
"SES Asset Purchase Agreement"), by and between SES and SES Resources. For over
twelve months, SES Resources has been in the process of developing product lines
and services, and has identified and met with potential clients, staffing
resources and potential advisory panel members. As a result of negotiations
between the parties, SES agreed to issue shares to SES Resources representing
19.5% of the shares of SES in exchange for substantially all of the assets and
business development efforts of SES Resources. Upon consummation of the
transaction, Registrant will own 80.5% of the shares of SES and the remaining
19.5% will be owned by SES Resources. The Checkpoint Acquisition and the SES
Acquisition shall be referred to collectively as the "Acquisitions."
SES expects to specialize in delivering strategic security business protection
solutions based principally on best practices developed by accomplished high
ranking retired law enforcement and federal agents and in association with an
advisory panel comprised of Senior Executive Service (S.E.S.) level government
risk assessment and law enforcement professionals (the "SES Advisory Panel").
SES's primary areas of specialization are expected to include corporate
investigations (e.g. know your customer, know your employee, know your vendor
reviews); due diligence reviews; forensic accounting; anti-money laundering
investigatory services consistent with the requirements of the Patriot Act;
anti-counterfeiting and intellectual property protection; corporate health and
wellness consultancy; emergency preparedness and contingency planning; executive
staffing solutions; and education and government security training services.
-2-
There were no material relationships between Registrant or its affiliates and
any of the parties to the Checkpoint Asset Purchase Agreement or the SES Asset
Purchase Agreement, other than in respect of such agreements.
Registrant was a "shell company" (as such term is defined in Rule 12b-2 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"))
immediately before the completion of the Acquisitions. Accordingly, pursuant to
the requirements of Item 2.01(f) of Form 8-K, the information set forth below
includes the information that would be required if Registrant were filing a
general form for registration of securities on Form 10 under the Exchange Act,
reflecting Registrant's common stock, which is the only class of its securities
subject to the reporting requirements of Section 13 or Section 15(d) of the
Exchange Act, upon consummation of the Acquisitions, with such information
reflecting Registrant and its securities upon consummation of the Acquisitions.
Pursuant to Item 2.01(f) of Form 8-K, (1) the information with respect to
"Business" and "Market Price of and Dividends on Registrant's Common Equity
and Related Stockholder Matters," contained in Item 1 of Part I and Item 5 of
Part II, respectively, of Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 2004, and contained in the subsection entitled "The
Company" in Note 1 to the "Notes to Condensed Consolidated Financial Statements"
in Registrant's Quarterly Report on Form 10-Q for the period ended September 30,
2005; (2) the information with respect to "Legal Proceedings" contained in the
subsection entitled "Contingencies and Legal Proceedings" in Note 5 to the
"Notes to Condensed Consolidated Financial Statements" in Registrant's Quarterly
Report on Form 10-Q for the period ended September 30, 2005; and (3) the
information with respect to "Security Ownership of Certain Beneficial Owners and
Management," "Directors and Executive Officers," "Executive Compensation" and
"Certain Relationships and Related Transactions" contained in the subsections
entitled "Directors," "Executive Officers," "Security Ownership of Certain
Beneficial Owners and Management," "Board Meetings and Committees," "Option
Grants in Last Fiscal Year," "Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values," "Director Compensation," "Board Compensation
Committee Report on Executive Compensation," "Executive Compensation,"
"Performance Graph" and "Certain Relationships and Related Transactions" in
Registrant's Definitive Proxy Statement for its 2005 Annual Meeting of
Shareholders filed with the SEC on November 15, 2005, in each case, is hereby
incorporated by reference into this Current Report on Form 8-K under Item 2.01
hereof.
A. Description of Business
Summary
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 name was formally
changed to "L Q Corporation, Inc." 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.
From January 2003 until the completion of the Acquisitions, 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.
On January 6, 2006, Sielox, LLC completed the acquisition, which shall be
effective as of December 30, 2005, of substantially all of the assets of
Checkpoint's Access Control Products Group division from Checkpoint. Also on
January 6, 2006, SES completed the acquisition of substantially all of the
assets of SES Resources, a startup security consulting entity, to initiate
Registrant's launch into the professional security and services sector. The ACPG
business, which will operate as Sielox(TM) under Registrant's management,
develops, designs and distributes a complete line of open architecture access
control software, programmable controllers (electronic circuit boards), and
related accessories such as readers and ID cards, which can be configured to
monitor, manage and control physical access to building perimeters and interior
locations. SES expects to offer a wide range of professional services including
anti-money laundering and counterfeiting investigatory services, forensic
accounting and emergency preparedness and contingency planning.
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 our 1:250 reverse stock split and 35:1 forward
stock split effective as of June 8, 2004. The market price of our common stock
as of January 6, 2006 was $1.73 per share.
-3-
Additional information with respect to the "Description of Business" of
Registrant is hereby incorporated by reference to Item I of Part I of
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
2004 and to the subsection entitled "The Company" in Note 1 to the "Notes to
Condensed Consolidated Financial Statements" of Registrant's Quarterly Report on
Form 10-Q for the period ended September 30, 2005.
History
On September 8, 2005, Registrant entered into a non-binding letter of intent
with Checkpoint dated September 7, 2005 to acquire substantially all of the
assets of Checkpoint's Access Control Products Group division. On November 4,
2005 the parties entered into the Checkpoint Asset Purchase Agreement. On
December 30, 2005, Registrant and Checkpoint entered into a First Amendment to
the Checkpoint Asset Purchase Agreement to, among other things, extend the
closing of the acquisition to January 5, 2006. On January 6, 2006, Registrant's
subsidiary, Sielox, LLC, completed the acquisition from Checkpoint of
substantially all of the assets of the ACPG division, effective as of December
30, 2005. The cash consideration for the transaction was approximately $2.6
million, subject to post-closing adjustments, an escrow, and related expenses
estimated to be $0.4 million.
Also on January 6, 2006, Registrant's 80.5% owned subsidiary, SES, completed the
acquisition of substantially all of the assets of SES Resources, a start up
consulting venture. The newly formed business unit expects to specialize in
delivering critical strategic security and business protection solutions based
on best practices developed by accomplished retired law enforcement agents and
in association with the SES Advisory Panel, which is comprised of senior
executive service level government risk assessment and law enforcement
professionals. SES' primary areas of specialization are expected to include:
corporate investigations (e.g. know your customer, know your employee, know your
vendor reviews); due diligence reviews; forensic accounting; anti-money
laundering investigatory services consistent with the requirements of the
Patriot Act; anti-counterfeiting and intellectual property protection; corporate
health and wellness consultancy; emergency preparedness and contingency
planning; executive staffing solutions; and education and government security
training services.
SES has established an SES Advisory Panel which will serve the business with
advice and will seek to identify expert talent throughout the United States and
internationally, to manage and staff client assignments. The SES Advisory Panel
is in the process of formation and includes a senior executive service level
agent from the U.S. Internal Revenue Service, and a medical doctor who is
presently Assistant Clinical Professor at Albert Einstein College of Medicine.
The SES Advisory Panel is chaired by one of the owners/founders of SES Resources
and vice chaired by a former Vice President and Director of Brinks Inc. SES is
in the process of adding additional members to the SES Advisory Panel from
various law enforcement agencies. For additional information, please see the
section entitled "Certain Relationships and Related Transactions" below.
Business
Access Control Products Group
-----------------------------
The ACPG business was originally acquired by Checkpoint when Checkpoint acquired
Sielox Systems, Inc. of Sunnyvale, California in 1986. At that time, the ACPG
business distributed, developed and manufactured System Five and System Ten
access control systems for automated access to buildings and areas within
buildings. In the late eighties, ACPG introduced the Threshold series for use on
DOS and QNX operating systems and in the middle nineties developed a series of
applications for use on the Windows operating systems. In March 2003, the ACPG
business introduced Pinnacle, the next generation in access control software
solutions. Today ACPG develops, designs and distributes a complete line of open
architecture access control software, including both Pinnacle and the legacy
Enterprise Threshold, programmable controllers (electronic circuit boards), and
related accessories such as readers and ID cards which can be configured to
monitor, manage and control physical access to building perimeters and interior
locations. ACPG generally does not experience seasonality in its business and
there is no single customer which constitutes 10% or more of its revenue.
-4-
SES Resources International
---------------------------
The newly formed SES subsidiary will specialize in delivering critical strategic
security and business protection solutions based on best practices developed by
accomplished retired law enforcement agents and in association with its SES
Advisory Panel comprised of senior executive service level government risk
assessment and law enforcement professionals. SES' primary areas of
specialization are expected to include: corporate investigations (e.g. know your
customer, know your employee, know your vendor reviews); due diligence reviews;
forensic accounting; anti-money laundering investigatory services consistent
with the requirements of the Patriot Act; anti-counterfeiting and intellectual
property protection; corporate health and wellness consultancy; emergency
preparedness and contingency planning; executive staffing solutions; and
education and government security training services.
Industry
Access Control Products Group
-----------------------------
Registrant believes that as security concerns continue to mount around the
world, security access systems are an important component to a company's or
Government Agency's complete security solution. Organizations continue to invest
and upgrade such solutions and place increased reliance upon such systems. The
trend towards integrating all security solutions including access control, CCTV,
burglar and fire alarms into one system continues to expand.
SES Resources International
---------------------------
Companies and governments are faced with a variety of security concerns and risk
assessment challenges including terrorism, fraud, litigation, compliance,
intellectual property protection, cyber attacks, industrial espionage,
regulatory issues, crisis management and executive security staffing. The
security consulting industry is highly fragmented with various established firms
and a large number of independent organizations with various specializations and
capabilities throughout the United States and around the world.
Strategy
Access Control Products Group
-----------------------------
The primary strategy of ACPG is to continue to invest in the Pinnacle software
solution through added features and interfaces with other value added providers
in order to provide enhanced physical access security and event management
systems. ACPG will also continue to provide technical service and training to
ACPG's dealer base and end users and where necessary upgrade its technical
services.
SES Resources International
---------------------------
SES expects to distinguish its services and positioning by its diverse services
offering. SES is in the process of identifying Senior Executive Service level
retired law enforcement officers and federal agents with specialization and
experience related to each service offering. SES expects to utilize the
relationships and advice of its SES Advisory Panel in connection with
identifying such resources. Each resource is expected to participate in SES
projects as an independent contractor on a project by project basis in an effort
to match expert talent with each specific project.
Products
ACPG develops, designs and distributes a complete line of open architecture
access control software, programmable controllers (electronic circuit boards),
and related accessories such as readers and ID cards which can be configured to
monitor, manage and control physical access to building perimeters and interior
locations.
ACPG supports both the Pinnacle software solution, introduced in March 2003 and
the Threshold Enterprise solution introduced in 1997. The Pinnacle based system
runs on both Windows Server 2003 and XP Professional. The system is an access
control and event management system with unlimited scalability. The Threshold
Enterprise runs on a Windows NT or 2000 access control platform.
The Pinnacle access control system is extremely flexible and compatible and
offers added functionality including badging utility for use in the design and
production of professional quality badges. The Pinnacle system also has a DVR
interface with video and event management linking. In addition, an interface
with the OASIS mapping utility offers graphical mapping with icon links to over
75 systems from 30 vendors. Other Pinnacle utilities include standalone
applications using the SDK, ever expanding libraries including n-man rule,
report scheduler, door control, EventLink and Administrative Management. The
newly introduced visitor management system allows for integration with
STOPware's lobby visitor management system.
-5-
ACPG designs and distributes a complete line of intelligent controllers. This
believed to be state of the art technology is available as 16-bit or 32-bit
controllers capable of supporting from 2 to 8 door configurations. In addition,
these controllers support from 4 to 60 alarm monitored inputs and/or controlled
outputs and are configurable to meet any customer requirements. The 32-bit 1200
series controller can be used in a traditional hardwired environment or LAN/WAN
environment with static IP or DHCP. In addition, ACPG currently offers several
readers that are all compatible with both its Pinnacle and Threshold Enterprise
software solutions. Such readers include the Performa (and legacy Mirage)
readers, a 13.56 MHz reader manufactured by Checkpoint Systems, Inc., a complete
line of HID's 125 KHz Prox and 13.56 MHz iClass readers and cards, AWID's long
range Prox readers, BioScrypt's biometric fingerprint, and Panasonic's Iris Scan
Readers.
Intellectual Property
ACPG is entitled to the non-exclusive use of certain patents which were licensed
in connection with the acquisition from Checkpoint, and acquired certain patent
applications. Such patents and other intellectual property are utilized in the
Performa and Mirage ID card readers. ACPG also acquired identified trademarks as
well as licenses for specific intellectual properties which consist of critical
components to the Pinnacle and Threshold Enterprise operating systems. ACPG also
licenses two badging programs which it sells to third parties. ACPG pays
royalties on these licensing contracts.
Registrant has registered domain names for its key businesses including
SESresources.com and Sielox.com.
Technology and Product Development
ACPG's software engineers develop proprietary code for product functionality in
features. Certain product features have been acquired from third parties for
which ACPG pays royalties relative to the feature set embedded within certain
software products.
ACPG expended approximately $1.7 million and $1.6 million, in product
development activities during 2004 and 2003, respectively. The emphasis of these
activities is the continued broadening of the product lines offered by ACPG,
cost reductions of the current product lines, and an expansion of the markets
and applications for ACPG's products. ACPG's future growth in revenues will be
dependent, in part, on the products and technologies resulting from these
efforts. Registrant expects to continue to invest at comparable levels in such
activities in 2006 (and thereafter) in order to provide additional functionality
to ACPG's offerings to meet the needs of ACPG's customer base.
Marketing Efforts
ACPG uses a combination of internal and subcontract marketing and public
relations agencies. ACPG currently retains LRG Inc. as its public relations firm
focused on the security market. ACPG typically attends two trade shows a year,
ISCW and ASIS International. ACPG's marketing initiatives include trade
advertising and a company website - www.sielox.com. In addition, ACPG
distributes data sheets, marketing bulletins and brochures, and launch packages
to its current and prospective clients, dealers and end-users.
Components
ACPG purchases components from outside suppliers and assembles the electronic
components for legacy controllers and proximity readers at Checkpoint's
facilities in the Dominican Republic and Puerto Rico. The 32-bit controllers are
manufactured to specified designs by a third party. Select readers are also
manufactured in Thailand. As part of the acquisition, Registrant has entered
into a manufacturing agreement with Checkpoint for Checkpoint to manufacture
certain controllers and ID cards. For non-proximity electronic access control
components, ACPG subcontracts manufacturing activities. All electronic access
control final system assembly and testing is performed at ACPG's facility in
Thorofare, New Jersey.
Distribution
The sales personnel of the ACPG market electronic access control products to
approximately 200 independent dealers, some of whom are national dealers,
primarily located in the US. ACPG employs regional salespeople who are
compensated by salary plus commissions. Under the independent dealer program,
the dealer takes title to our products and sells them to the end-user customer.
The dealer installs the systems and provides ongoing service to the end-user
customer. The ACPG requires its dealers to be certified in our products and
requires them to attend training classes on our various product offerings.
-6-
Competition
ACPG competes with other manufacturers of electronic access control systems as
well as with conventional security systems. Major competitors are GE (the Casi
Rusco and Infographics divisions), Honeywell (the NexWatch and Northern
divisions), United Technologies (the Lenel Systems division), and Tyco (the
Software House and Kantech divisions).
SES expects to provide services that compete with the services provided by a
highly fragmented market of many firms of various sizes, including investigatory
firms and full service accounting and legal services firms, which provide such
services as part of a broad range of services. Some of the well recognized firms
include Kroll Worldwide, a division of AIG, and Guiliani Associates.
Employees
Immediately after giving effect to the Acquisitions, Registrant had 22
employees, including 9 employees engaged in product development activities and 9
employees engaged in sales and marketing activities. All employees are located
in the United States and none are represented by unions or work councils.
Facilities
Our principal corporate offices are located at 888 Seventh Avenue, New York, NY.
ACPG currently leases approximately 7,000 square feet from Checkpoint at 101
Wolf Drive, Thorofare, New Jersey and is currently in the process of negotiating
for new office space. Our SES subsidiary, on a sharing basis, leases
approximately 450 square feet in Jericho, New York.
Legal Proceedings
Please see subsection I. Legal Proceedings below.
Financial Information About Geographic and Business Segments
We operate domestically in one business segment.
B. Risk Factors
Registrant must overcome pricing competition with respect to its ACPG products.
Competitive pricing pressures can cause profit erosion.
The ACPG products compete against products sold by an increasing number of
competitors on the basis of several factors including price. In order to compete
in the marketplace, ACPG's products must provide superior technology at
competitive prices. Failure to produce cost-effective products could adversely
affect customer demand and adversely affect Registrant's results of operations.
In addition, the competitive business arena could create pricing pressure for
the ACPG products. A reduction in pricing of ACPG's products due to competitive
pressures could have an adverse effect on Registrant's revenues, operating
income and results of operations.
Registrant must develop new products and enhancements to existing products to
remain competitive. If Registrant fails to develop new products and product
enhancements on a timely basis, it may lose market share. Registrant's
investment in the Pinnacle software solution may not realize a return on
investment.
The market for ACPG's Pinnacle software solution is characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements and evolving industry standards. Accordingly, our future success
will depend to a substantial extent on our ability to:
o Invest significantly in research and product development;
o Develop, introduce and support new products and enhancements on a
timely basis; and
o Gain and consecutively increase market acceptance of our products.
Registrant's ACPG subsidiary is currently developing new products and
enhancements to its existing products. Registrant may not be able to
successfully complete the development and market introduction of new products or
product enhancements. If Registrant fails to develop and deploy new products and
product enhancements on a timely basis, or if Registrant fails to gain market
acceptance of its new products, revenues will decline and
-7-
Registrant may lose market share to its competitors. There is no assurance that
Registrant will be successful in marketing and selling its Pinnacle software
solution or other new products, that the revenues from the sales of the Pinnacle
software solution or other new products will justify the investment, or that the
sales of Pinnacle will continue to increase.
The availability and pricing of component parts may adversely affect production
and profitability.
Registrant's ability to grow earnings will be affected by increases in the cost
of component parts, including electronic components and circuit boards.
Registrant may not be able to offset fully the effects of higher component parts
through price increases, productivity improvements or cost reduction programs.
Future acquisitions may not be found or may not be successfully integrated into
Registrant's business and could adversely affect Registrant's business.
Registrant has pursued, and will continue to pursue, growth opportunities
through attempted acquisition of complementary businesses, products and
technologies. Registrant is unable to predict whether or when any other
prospective acquisition will be completed. The process of integrating an
acquired business may be prolonged due to unforeseen difficulties and may
require a disproportionate amount of Registrant's resources and management's
attention. There can be no assurances that management will be able to
successfully identify suitable acquisition candidates, complete acquisitions,
integrate acquired businesses into existing operations, or expand into new
markets. Further, once integrated, acquisitions may not achieve levels of
revenues, profitability or productivity comparable to Registrant's existing
business or otherwise perform as expected. The occurrence of any of these events
could harm Registrant's business, financial condition or results of operations.
In addition, future acquisitions may require substantial capital resources,
which may require us to seek additional debt or equity financing. Future
acquisitions by us could result in the following, any of which could seriously
harm our results of operations or the price of our stock:
o issuance of equity securities that would dilute our current
stockholders' percentages of ownership;
o large one-time write-offs;
o the incurrence of debt and contingent liabilities;
o difficulties in the assimilation and integration of operations,
personnel, technologies, products and information systems of the
acquired companies;
o diversion of management's attention from other business concerns;
o contractual disputes;
o risks of entering geographic and business markets in which we have
no or only limited prior experience; and
o potential loss of key employees of acquired organizations.
The ACPG business has incurred net losses. There is no assurance that it will
turn profitable in the future.
Registrant (including the ACPG operations) has incurred losses in the past and
may incur losses in the future. The ACPG business incurred net losses in 2004
and 2003. In 2004, the ACPG business's net loss was approximately $(1.4)
million. In 2003, the ACPG business's net loss was approximately $(0.9) million.
Continued or increased net losses could have a material adverse effect on
Registrant's business, financial condition and results of operations and the
value and market price of Registrant's common stock.
Registrant's success in the SES business depends on its ability to expand the
SES Advisory Panel.
Registrant may not be able to identify additional senior executive service law
enforcement agents who are able to serve as Advisors on the SES Advisory Panel.
Such inability would harm the development of the SES business in general, and
prevent Registrant from distinguishing itself in the marketplace in particular,
which could adversely affect revenues and results of operations.
SES is a newly formed business.
-8-
As a newly formed organization, SES has no independent record of performance in
the various service categories it has identified. As a new business, SES may not
be successful in being engaged by prospective clients, which would have an
adverse affect on revenues and results of operations.
Some of Registrant's competitors have greater resources than Registrant, which
may limit its ability to effectively compete with them.
Some of Registrant's competitors have greater financial, personnel and other
resources than Registrant, which may limit its ability to effectively compete
with them. For example, Registrant's main competitors in the ACPG business
include Tyco International Ltd. and Honeywell International Inc. These and other
large competitors may be able to:
o Respond more quickly to new or emerging technologies or changes in
customer requirements;
o Benefit from greater economies of scale;
o Offer more aggressive pricing; and/or
o Devote greater resources to the promotion of their products.
Registrant is dependent on its key personnel, the loss of whom could negatively
affect business.
Registrant is dependent on its key personnel, including general management,
software and hardware engineers, technical support and sales executives, who
have significant industry experience, knowledge and know how. The loss of these
key personnel could negatively affect business and results of operations.
Registrant's stock was delisted from The NASDAQ National Market, and is
therefore significantly less liquid than before.
Registrant's common stock was delisted from trading on The NASDAQ National
Market in 2003 by reason of not maintaining listing requirements due to the lack
of tangible business operations and significantly reduced market price of the
common stock. As a result, Registrant's common stock currently trades over the
counter on the NASDAQ OTC Bulletin Board, and the ability of Registrant's
stockholders to obtain liquidity and consistent market prices for Registrant's
shares has been significantly impaired.
Registrant incurs the expense of complying with public company reporting and
other requirements.
As a public company, Registrant incurs significant legal, accounting, and other
expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as rules
subsequently implemented by the Securities and Exchange Commission and NASDAQ,
have required changes in corporate governance practices of public companies.
These rules and regulations increase legal and financial compliance costs and
make some activities more time consuming and costly. In addition, Registrant
incurs additional costs associated with its public company reporting
requirements. These rules and regulations also may make it more difficult and
more expensive for Registrant to obtain director and officer liability
insurance, and Registrant may be required to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same or similar
coverage.
Registrant relies on licenses with third parties to license software code that
is an integral part of the ACPG business's Pinnacle software solution and if
Registrant would need to seek alternate licenses, its results of operations
could be adversely affected.
Registrant licenses certain software code that is an integral part of ACPG's
Pinnacle software solution from third parties. In particular, Registrant obtains
from third party licensors certain software code included in the Pinnacle
software solution, and the software for its badging products. Registrant would
need to seek alternative licensors for the software code if any of the third
party licensors terminate or decides not to renew a license. If any of these
third party licensors become unable to or refuses to license its code, it could
interrupt and delay the development, design and delivery of the Pinnacle
software solution and related products. Any such disruption could adversely
affect Registrant's results of operations.
-9-
Cyclical industry and economic conditions may adversely affect Registrant's
financial condition and results of operations.
Registrant's operating results may be affected adversely by the general cyclical
pattern of the industries in which it operates. For example, demand for ACPG
products and services is significantly affected by levels of commercial
construction and consumer and business discretionary spending. The demand
patterns of these markets could impact the revenues and margins in this
business.
C. Financial Information
(a) Selected Financial Data
The information with respect to Registrant's Selected Financial Data is hereby
incorporated by reference to Item 6 of Part I of Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2004.
The following table sets forth supplemental selected financial data of ACPG and
should be read in conjunction with the Financial Statements and Notes thereto
included elsewhere herein. As ACPG was a unit of Checkpoint and not a separate
legal entity, prior to the Checkpoint Acquisition, the balance sheet data was
not segregated for financial reporting purposes and is not meaningful. As a
result the disclosures in this section are limited to only the Statement of
Operations. As SES has no prior operations, no information is included herein.
The following information reflects only the Access Control Products Group
business and does not reflect the prior operations of L Q Corporation, Inc.
December 26 December 28 December 29 December 30 December 31
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
($ in thousands)
Unaudited Statement of
Operations Data:
Revenues $ 6,560 $ 6,272 $ 7,221 $ 7,998 $ 10,105
Cost of Revenues 3,549 2,847 3,207 3,267 4,329
----------- ----------- ----------- ----------- -----------
Gross Profit 3,011 3,425 4,014 4,731 5,776
----------- ----------- ----------- ----------- -----------
Operating expenses
General and administrative 243 435 158 195 239
Product development 1,603 1,652 1,847 1,129 1,315
Sales and marketing 2,256 1,904 1,676 1,858 2,402
Overhead allocation
from Parent 300 300 300 300 300
----------- ----------- ----------- ----------- -----------
Total operating expenses 4,402 4,291 3,981 3,482 4,256
----------- ----------- ----------- ----------- -----------
Net Income (loss) $ (1,391) $ (866) $ 33 $ 1,249 $ 1,520
=========== =========== =========== =========== ===========
(b) Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations with respect to Registrant included in Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2004 and in Registrant's Form
10-Q for the period ended September 30, 2005 and is hereby incorporated by
reference.
The following supplemental 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
-10-
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 this Current Report on Form 8-K.
While we believe that the discussion and analysis in this report is adequate for
a fair presentation of the information, we recommend that you read this
discussion and analysis in conjunction with the description of our business
included elsewhere in this report.
Critical Accounting Policies
The preparation of Registrant's financial statements requires management to make
difficult, subjective or complex judgments, including making estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, based upon information
available at the time, historical experience and various other factors that are
believed to be reasonable under the circumstances. These estimates are subject
to an inherent degree of uncertainty. Registrant's significant accounting
policies are described in Note 2, Summary of Significant Accounting Policies, to
the financial statements of the Access Control Products Group included in this
Current Report on Form 8-K for the year ended December 26, 2004. No changes to
these critical policies have taken place during the year to date period ended
September 30, 2005.
Results of Operations ($ in thousands)
The following table sets forth, for the periods presented, certain data derived
from the statement of operations of the Access Control Products Group as a
percentage of total revenues. As SES has no prior operations, no information is
included herein. The following information reflects only the Access Control
Products Group business and does not reflect the prior operations of L Q
Corporation, Inc.
9 month (39 week) period ended Year ended
------------------------------ ----------
September 25, September 26, December 26 December 28
2005 2004 2004 2003
------------ ------------ ------------ ------------
REVENUES 100% 100% 100% 100%
COST OF REVENUES 56% 58% 54% 45%
------------ ------------ ------------ ------------
GROSS PROFIT 44% 42% 46% 55%
------------ ------------ ------------ ------------
OPERATING EXPENSES
General and administrative 3% 4% 4% 7%
Product development 16% 25% 24% 26%
Sales and marketing 34% 35% 34% 30%
Overhead allocation from
Parent 5% 5% 5% 5%
------------ ------------ ------------ ------------
Total operating expenses 58% 68% 67% 68%
OTHER EXPENSES
Loss on disposal
of fixed assets -1% 0% 0% 0%
------------ ------------ ------------ ------------
Total other expenses -1% 0% 0% 0%
------------ ------------ ------------ ------------
NET LOSS -15% -26% -21% -14%
============ ============ ============ ============
Nine month (39 week) periods ended September 25, 2005 and September 26, 2004
----------------------------------------------------------------------------
Revenues
Revenues for the nine month (39 week) period ended September 25, 2005 decreased
by $32, or 0.7%, to $4,838, as compared to $4,870 for the nine month (39 week)
period ended September 26, 2004 as a result of the increase in sales due to the
continued acceptance of the newer Pinnacle(TM) access control software package
and the AC-1200 32-bit controllers offset by the decline in sales of the legacy
Threshold(TM) Enterprise access control software package and related 16 bit
controllers. During the period since approximately March 2005, the ACPG business
was in the process of being sold by Checkpoint. Such sale process had a
disruptive effect on its business.
Gross Profit
Gross profit increased by $94 to $2,118 for the nine month (39 week) period
ended September 25, 2005, as compared to $2,024 for the nine month (39 week)
period ended September 26, 2004, and as a percent of sales increased to 43.8%
for the nine month (39 week) period ended September 25, 2005 from 41.6% for the
nine month
-11-
(39 week) period ended September 26, 2004 as a result of the larger scale of the
Pinnacle(TM) access control software projects in 2005 versus 2004.
Operating Expenses
Operating expenses decreased by $476 to $2,819 for the nine month (39 week)
period ended September 25, 2005, as compared to $3,295 for the nine month (39
week) period ended September 26, 2004 due to a decrease in product development
costs principally as a result of a reduction of outside contractors utilized
during the 2005 period versus the 2004 period.
Net Loss
ACPG incurred a net loss of $(739) for the nine month (39 week) period ended
September 25, 2005, as compared to a net loss of $(1,271) for the nine month (39
week) period ended September 26, 2004. The decrease in the net loss of $532 was
attributable to the factors discussed above primarily the decrease of the
product development costs principally as a result of a reduction of outside
contractors utilized during the 2005 period versus the 2004 period.
Fiscal years ended December 26, 2004 and December 28, 2003
----------------------------------------------------------
Revenues
Revenues for the fiscal year ended December 26, 2004 increased by $288, or 4.6%,
to $6,560, as compared to $6,272 for the fiscal year ended December 28, 2003 as
a result of the increase in sales due to the continued acceptance of the newer
Pinnacle(TM) access control software package and our AC-1200 32-bit controllers
offset by the decline in sales of the legacy Threshold(TM) Enterprise access
control software package and the 16 bit controllers.
Gross Profit
Gross profit decreased by $414 to $3,011 for the fiscal year ended December 26,
2004, as compared to $3,425 for the fiscal year ended December 28, 2003 and as a
percent of sales decreased to 45.9% for the fiscal year ended December 26, 2004
from 54.6% for the fiscal year ended December 28, 2003 as a result of the
increased volume of 32 bit controllers vs. the 16 bit controllers which have a
lower gross profit. In addition, the royalty payments on the Pinnacle(TM)
operating system are greater than those of the Threshold(TM) operating system.
Operating Expenses
Operating expenses increased by $111 to $4,402 for the fiscal year ended
December 26, 2004, as compared to $4,291 for the fiscal year ended December 28,
2003, as a result of increased sales salaries and commissions and increased
marketing efforts of Pinnacle(TM) access control software package offset by
reduced general and administrative expenses as a result of a reduced management
oversight costs.
Net Loss
ACPG incurred a net loss of $(1,391) for the fiscal year ended December 26,
2004, as compared to a net loss of $(866) for the fiscal year ended December 28,
2003. The increase in the net loss of $525 was attributable to the factors
discussed above primarily the decrease of the gross profit of $414 and the
increase in operating expenses of $111.
Financial Condition, Liquidity and Capital Resources
----------------------------------------------------
Registrant:
As of September 30, 2005, Registrant had approximately $5.9 million of cash
and cash equivalents.
As previously mentioned, on January 6, 2006, effective as of December 30, 2005,
Registrant purchased the assets of the Access Control Products Group division
from Checkpoint. The total purchase price was approximately $2.6 million plus
approximately $0.4 million in related transaction expenses, all of which was
funded by cash and cash equivalents on hand.
Registrant believes that its existing cash and cash equivalents will be
sufficient to meet our anticipated cash needs of funding future operating
losses, cash needs for working capital and capital expenditures in the near
future. If Registrant grows through acquisitions, Registrant could need to
obtain additional financing.
-12-
ACPG:
Net cash used in operating activities for the nine month (39 week) period
ended September 25, 2005 decreased to $654 as compared to $1,360 for the nine
month (39 week) period ended September 26, 2004. This decrease resulted from a
lower net loss in the nine month (39 week) period ended September 25, 2005, as
compared to the nine month (39 week) period ended September 26, 2004 and cash
used from changes in working capital of $31 in the nine month (39 week) period
ended September 25, 2005, compared with cash used from changes in working
capital of $136 in the nine month (39 week) period ended September 26, 2004. The
increase in cash generated from changes in working capital in the nine month (39
week) period ended September 25, 2005 was due to timing of sales in the
comparative third quarters in each of the periods and reduction of accrued
salaries, wages and commissions in the 2004 period.
Net cash provided by financing activities was $654 and $1,360 for the nine month
(39 week) period ended September 25, 2005 and September 26, 2004, respectively.
The decrease was due to a decrease in intercompany transactions related to
Checkpoint's funding of reduced net loss and decrease in net working capital in
the 2005 period versus the 2004 period.
Net cash used in operating activities for fiscal year ended December 26, 2004
increased to $1,778 as compared to $302 for the fiscal year ended December 28,
2003. This increase resulted from a higher net loss in the fiscal year ended
December 26, 2004, as compared to the fiscal year ended December 28, 2003 and
cash used in changes in working capital of $379 in the fiscal year ended
December 26, 2004, compared with cash generated from changes in working capital
of $661 in the fiscal year ended December 28, 2003. The increase in cash used by
changes in working capital in the fiscal year ended December 26, 2004 was due to
timing of sales in the comparative fourth quarters in each of the fiscal years
and increased inventory due to the transitioning to the new 32 bit controllers
from the 16 bit controllers.
Net cash provided by financing activities was $1,778 and $302 for the fiscal
year ended December 26, 2004 and December 28, 2003, respectively. The increase
was an increase in intercompany transactions related to Checkpoint's funding of
the above net loss and increase in net working capital for fiscal 2004 versus
fiscal 2003.
ACPG expects to incur additional losses as it anticipates investing funds into
product development of the Pinnacle(TM) access control software package, at
levels comparable with amounts expended in 2004, in order to maintain and expand
the business. ACPG expects to incur approximately $0.3 million of capital
expenditures in fiscal 2006. Such capital expenditures are expected to include
equipment to further its product development efforts and leasehold improvements
in its new facility which it is currently in the process of negotiating.
Off-Balance Sheet Arrangements
We do not have any off-balance arrangements required to be disclosed pursuant to
Item 303 of Regulation S-K.
(c) Quantitative and Qualitative Disclosures About Market Risk
The information with respect to "Quantitative and Qualitative Disclosures About
Market Risk" of Registrant is hereby incorporated by reference to Item 7A of
Part II of Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 2004 and Item 3 of Part I of Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 2005.
D. Security Ownership of Certain Beneficial Owners and Management
The information with respect to "Security Ownership of Certain Beneficial Owners
and Management" of Registrant is hereby incorporated by reference to the
subsection entitled "Security Ownership of Certain Beneficial Owners and
Management" in Registrant's Definitive Proxy Statement for its 2005 Annual
Meeting of Shareholders filed with the SEC on November 15, 2005.
E. Directors and Executive Officers
The information with respect to "Directors and Executive Officers" of Registrant
is hereby incorporated by reference to the subsections entitled "Directors" and
"Executive Officers" in Registrant's Definitive Proxy Statement for its 2005
Annual Meeting of Shareholders filed with the SEC on November 15, 2005.
-13-
F. Executive Compensation
The information with respect to "Executive Compensation" of Registrant is hereby
incorporated by reference to the subsections entitled "Executive Compensation,"
"Options Grants in Last Fiscal Year," "Aggregated Option Exercises in Last
Fiscal Year and Fiscal Year End Option Values," "Director Compensation," "Board
Compensation Committee Report on Executive Compensation" and "Performance Graph"
in Registrant's Definitive Proxy Statement for its 2005 Annual Meeting of
Shareholders filed with the SEC on November 15, 2005.
As approved by Registrant's Board of Directors, in connection with the
Acquisitions, Mr. Fox shall receive a bonus of $60,000 payable in January 2006
and, on January 6, 2006, was granted 40,000 ten year options on Registrant's
common stock at a strike price equal to the closing price of Registrant's common
stock on the date of the grant. Mr. Brunt shall also receive a bonus of $15,000
payable in January 2006 and, on January 6, 2006, was granted 5,000 ten year
options on Registrant's common stock at a strike price equal to the closing
price of Registrant's common stock on the date of the grant. On October 26,
2005, Registrant's Board of Directors agreed to modify Mr. Fox's compensation
arrangements to provide for a monthly retainer, beginning in October 2005, of
$11,000 per month and to provide for one year's severance at the prevailing
retainer level in the event of termination without cause of his appointment as
Chief Executive Officer.
G. Certain Relationships and Related Transactions
The information with respect to "Certain Relationships and Related Transactions"
of Registrant is hereby incorporated by reference to the subsection entitled
"Certain Relationships and Related Transactions" in Registrant's Definitive
Proxy Statement for its 2005 Annual Meeting of Shareholders filed with the SEC
on November 15, 2005.
SES Resources is a minority shareholder of SES with 19.5% of the SES equity. Mr.
Bradley Schnur, one of the shareholders of the SES Resources, is serving as
President of SES. Two of the other SES Resources shareholders may become members
of the SES Advisory Panel in the future. Mr. Dennis Schnur, the remaining
shareholder of SES Resources, is Mr. B. Schnur's father and also serves as
Chairman of the SES Advisory Panel. Sebastian Cassetta serves as Vice Chairman
of the SES Advisory Panel. Mr. Cassetta served as special assistant to Governor
and Vice President Nelson Rockefeller and was Vice President and Director of
Brinks Inc. Mr. Cassetta was also the founder and CEO of Burns and Roe
Securecom, a high level security systems consulting design and integration firm.
Mr. Cassetta is presently the Senior Managing Director and Chief Operating
Officer of the Barington Capital Group, an affiliate of Registrant. As
remuneration for their duties, Mr. D. Schnur and Mr. Cassetta, as well as other
SES Advisory Panel members, may receive remuneration fees in connection with the
gross profit earned by SES. In connection with the Acquisitions, Barington
served as a transaction advisor and shall receive a fee of approximately $60,000
in January 2006. Such amount was approved by the independent directors of
Registrant at a meeting of its Board of Directors meeting on October 26, 2005.
H. Legal Proceedings
The information with respect to "Legal Proceedings" of Registrant is hereby
incorporated by reference to the subsection entitled "Contingencies and Legal
Proceedings" in Note 5 to the "Notes to Condensed Consolidated Financial
Statements" in Registrant's Form 10-Q filed with the SEC on November 14, 2005.
I. Market Price of and Dividends on Registrant's Common Equity and
Related Stockholder Matters
The information with respect to "Market Price of and Dividends on the
Registrant's Common Equity and Related Stockholder Matters" is hereby
incorporated by reference to Item 5 of Part II of Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2004.
Market Price of Common Stock
-14-
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.
Year Ended December 31, 2005 High Low
First Quarter...................................... $ 1.78 $ 1.64
Second Quarter..................................... 2.18 1.65
Third Quarter...................................... 2.20 1.80
Fourth Quarter .................................... 1.95 1.64
Year Ended December 31, 2004
First Quarter..................................... $ 3.14 $ 2.07
Second Quarter.................................... 3.36 1.94
Third Quarter..................................... 2.15 1.80
Fourth Quarter.................................... 2.00 1.74
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 effective as of June 8, 2004. The
high and low closing prices for the year ending December 31, 2003 do not reflect
the effect of the reverse/forward stock split.
The closing price per share of our common stock at January 6, 2006 was $ 1.73.
As of December 28, 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.
J. Recent Sales of Unregistered Securities.
Not applicable.
K. Description of Registrant's Securities to be Registered.
Not applicable.
L. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law (the "DGCL") permits a
corporation, under specified circumstances, to indemnify its directors,
officers, employees or agents against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties by reason of the fact that they were or are directors, officers,
employees or agents of the corporation, if such directors, officers, employees
or agents acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, that is one by or in the right of the
corporation, indemnification may be made only for expenses actually and
reasonably
-15-
incurred by directors, officers, employees or agents in connection with the
defense or settlement of an action or suit, and only with respect to a matter as
to which they will have acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation,
except that no indemnification will be made if such person will have been
adjudged liable to the corporation, unless and only to the extent that the court
in which the action or suit was brought will determine upon application that the
defendant directors, officers, employees or agents are fairly and reasonably
entitled to indemnity for such expenses despite such adjudication of liability.
Registrant's Second Amended and Restated Certificate of Incorporation and
Restated Bylaws provide for indemnification of directors, officers and employees
of Registrant to the fullest extent permitted by the DGCL. Registrant also, as
permitted by Delaware law and in accordance with the Restated Bylaws,
indemnifies its officers and directors for certain events or occurrences,
subject to certain limits, while the officer is or was serving at Registrant's
request in such capacity. Registrant has obtained liability insurance for each
director and officer for certain losses arising from claims or charges made
against them while acting in their capacities as directors or officers of
Registrant.
Registrant has entered into indemnification agreements with its officers and
directors containing provisions which may require Registrant, among other
things, to indemnify its 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. Registrant also intends to execute such
agreements with its future directors and executive officers.
M. Financial Statements and Supplementary Data.
Reference is made to the disclosure set forth under Item 9.01 of this Current
Report on Form 8-K, which disclosure is incorporated herein by reference.
N. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure.
None.
O. Financial Statements and Exhibits.
Reference is made to the disclosure set forth under Item 9.01 of this Current
Report on Form 8-K, which disclosure is incorporated herein by reference.
Item 5.06. Change in Shell Company Status.
------------------------------
Registrant was a "shell company" (as such term is defined in Rule 12b-2 under
the Securities Exchange Act of 1934, as amended) immediately before the
Acquisitions. As a result of the Acquisitions, Registrant acquired the assets of
the Access Control Group division of Checkpoint, an operating business, and the
intangible assets of SES Resources. Consequently, Registrant believes that the
Acquisitions have caused it to cease to be a shell company. For information
about the Acquisitions, please see the information set forth above under Item
2.01 of this Current Report on Form 8-K, which information is incorporated
herein by reference.
Item 9.01. Financial Statements and Exhibits.
---------------------------------
(a) Financial Statements of Business Acquired
Filed herewith are the audited financial statements of the Access Control
Products Group for the fiscal years ended December 26, 2004 and December 28,
2003 and the unaudited financial statements for the nine month (39 week) periods
ended September 25, 2005 and September 26, 2004.
-16-
(b) Pro Forma financial information
Filed herewith are the pro forma consolidated financial statements of Registrant
and the Access Control Products Group for the fiscal year ended December 31,
2004 and for the nine month period ended September 25, 2005.
(d) Exhibits
Exhibit No. Description
2.1 Asset Purchase Agreement, dated as of November 4, 2005, by and
between Sielox, LLC and Checkpoint Systems, Inc.
2.2 Asset Purchase Agreement, dated as of December 30, 2005, by and
between SES Resources International, Inc. and SES Resources, Ltd.
2.3 First Amendment, dated as of December 30, 2005, to the Asset
Purchase Agreement, dated as of November 4, 2005, by and between
Checkpoint Systems, Inc. and Sielox, LLC.
23.1 Consent of Rothstein Kass & Company, P.C.
-17-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
L Q CORPORATION, INC.
Dated: January 6, 2006 By: /s/ William J. Fox
-------------------------------------
William J. Fox
President and Chief Executive Officer
-18-
Access Control Products Group
(A Unit of Checkpoint Systems, Inc.)
-------------------------------------------------------------------------------
CONTENTS
Report of Independent Registered Public Accounting Firm F-2
Audited Financial Statements
Balance Sheets as of December 26, 2004 and December 28, 2003 F-3
Statements of Operations - Years ended December 26, 2004 and
December 28, 2003 F-4
Statements of Changes in Parent's Equity in Unit - Years
ended December 26, 2004 and December 28, 2003 F-5
Statements of Cash Flows - Years ended December 26, 2004 and
December 28, 2003 F-6
Notes to Financial Statements F-7
Unaudited Financial Statements
Balance Sheets as of September 25, 2005 and December 26, 2004 F-17
Statements of Operations - Nine month (39 week) periods ended
September 25, 2005 and September 26, 2004 F-18
Statements of Changes in Parent's Equity in Unit - Nine month
(39 week) periods ended September 25, 2005 and September 26, 2004 F-19
Statements of Cash Flows - Nine month (39 week) periods ended
September 25, 2005 and September 26, 2004 F-20
Notes to Financial Statements F-21
Access Control Products Group (A Unit of Checkpoint Systems, Inc.)
AUDITED FINANCIAL STATEMENTS
AND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
DECEMBER 26, 2004 AND DECEMBER 28, 2003
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Checkpoint Systems, Inc.
We have audited the accompanying balance sheets of Access Control Products Group
(a unit of Checkpoint Systems, Inc.) (the "Company") as of December 26, 2004 and
December 28, 2003, and the related statements of operations, changes in parent's
equity in unit, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 26,
2004 and December 28, 2003, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
As described in Note 1, the accompanying financial statements have been prepared
using the assets, liabilities, revenues and expenses related to the historical
operation of the Company on a carve-out basis and are not necessarily indicative
of the costs and expenses that would have resulted if the Company had been
operated as a separate entity. Certain expenses represent allocations and
estimates of costs from Checkpoint Systems, Inc. Allocations and estimates are
based on assumptions that management believes are reasonable under the
circumstances. Such financial statements have been prepared in connection with
the sale of the Company by Checkpoint Systems, Inc. to L Q Corporation, Inc.
/s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey
December 23, 2005
F-2
Access Control Products Group
(A Unit of Checkpoint Systems, Inc.)
BALANCE SHEETS
(Dollars in thousands)
-------------------------------------------------------------------------------------------------
ASSETS
December 26, 2004 December 28, 2003
----------------- -----------------
CURRENT ASSETS:
Accounts receivable, net $ 1,397 $ 1,065
Inventories 712 669
----------------- -----------------
Total current assets 2,109 1,734
PROPERTY AND EQUIPMENT, NET 44 59
GOODWILL 410 410
----------------- -----------------
TOTAL ASSETS $ 2,563 $ 2,203
================= =================
LIABILITIES AND PARENT'S EQUITY IN UNIT
CURRENT LIABILITIES
Accounts payable $ 104 $ 85
Accrued salaries, wages and commissions 100 195
Accrued warranty costs 33 33
Accrued royalties 114 65
----------------- -----------------
Total current liabilities 351 378
----------------- -----------------
TOTAL LIABILITIES 351 378
COMMITMENTS AND CONTINGENCIES
PARENT'S EQUITY IN UNIT 2,212 1,825
----------------- -----------------
TOTAL LIABILITIES AND PARENT'S EQUITY IN UNIT $ 2,563 $ 2,203
================= =================
See accompanying notes to audited financial statements.
F-3
Access Control Products Group
(A Unit of Checkpoint Systems, Inc.)
STATEMENTS OF OPERATIONS
(Dollars in thousands)
--------------------------------------------------------------------------------
Years ended
-----------
December 26, 2004 December 28, 2003
----------------- -----------------
REVENUES $ 6,560 $ 6,272
COST OF REVENUES 3,549 2,847
----------------- -----------------
GROSS PROFIT 3,011 3,425
----------------- -----------------
OPERATING EXPENSES
General and administrative 243 435
Product development 1,603 1,652
Sales and marketing 2,256 1,904
Overhead allocation from Parent 300 300
----------------- -----------------
Total operating expenses 4,402 4,291
----------------- -----------------
NET LOSS $ (1,391) $ (866)
================= =================
See accompanying notes to audited financial statements.
F-4
Access Control Products Group
(A Unit of Checkpoint Systems, Inc.)
STATEMENTS OF CHANGES IN PARENT'S EQUITY IN UNIT
YEARS ENDED DECEMBER 26, 2004 AND DECEMBER 28, 2003
(Dollars in thousands)
------------------------------------------------------------------------------
BALANCE, DECEMBER 30, 2002 $ 2,389
Net loss (866)
Intercompany transactions - net 302
----------
BALANCE, DECEMBER 28, 2003 1,825
Net loss (1,391)
Intercompany transactions - net 1,778
----------
BALANCE, DECEMBER 26, 2004 $ 2,212
==========
See accompanying notes to audited financial statements.
F-5
Access Control Products Group
(A Unit of Checkpoint Systems, Inc.)
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
---------------------------------------------------------------------------------------------------
Years ended
-----------
December 26, 2004 December 28, 2003
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,391) $ (866)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation 15 13
Provision for doubtful accounts 24 (1)
Provision for inventory obsolescence reserve (47) (109)
Changes in operating assets and liabilities:
Accounts receivable (356) 102
Inventories 4 363
Accounts payable 19 20
Accrued salaries, wages and commissions (95) 124
Accrued warranty costs -- (9)
Accrued royalties 49 61
----------------- -----------------
Net cash used in operating activities (1,778) (302)
----------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES:
Intercompany transactions, net 1,778 302
----------------- -----------------
NET INCREASE (DECREASE) IN CASH -- --
CASH, BEGINNING OF YEAR -- --
----------------- -----------------
CASH, END OF YEAR $ -- $ --
================= =================
See accompanying notes to audited financial statements.
F-6
Access Control Products Group
(A Unit of Checkpoint Systems, Inc.)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The Access Control Products Group (a unit of Checkpoint Systems, Inc.) (the
"Company") develops, designs and distributes a complete line of open
architecture access control software, programmable controllers (electronic
circuit boards), and related accessories such as readers and ID cards which can
be configured to monitor, manage and control physical access to building
perimeters and interior locations. The Company's product portfolio consists of
head-end administration/database software, remote client guard station software,
and intelligent field controller panels with door access decisions made by the
controller via downloaded database information from the head. The Company's
sales are primarily derived from sales through a dealer/integrator channel of
approximately 200. The Company employs approximately 22 people in Thorofare, NJ
and certain remote sales locations. The Company's business was acquired by
Checkpoint Systems, Inc (the "Parent") in 1986 as part of the acquisition of
Sielox Systems, Inc. ("Sielox").
The accompanying financial statements present, in conformity with accounting
principles generally accepted in the United States of America, the assets,
liabilities, revenues and expenses related to the historical operation of the
Company on a carve-out basis. The Company is not a legal entity. Checkpoint
Systems, Inc.'s net investment in the Company ("Parent's Equity in Unit") is
shown in lieu of stockholder's equity in the financial statements.
The statements of operations include all revenues and expenses directly
attributable to the Company, including costs for certain functions and services
performed by centralized Checkpoint System, Inc departments and directly charged
or allocated to the Company. Specific identifiable costs and expenses incurred
by the Parent on behalf of the Company are recognized in the accompanying
financial statements within operating expenses. Overhead costs and expenses
incurred by the Parent that are not specifically identifiable to the Company are
allocated by the Parent to the Company based upon estimated usage and have been
recorded within the accompanying financial statements as overhead allocation
from Parent.
All of the allocations and estimates in the financial statements are based on
the assumptions that management believes are reasonable under the circumstances.
However, these allocations and estimates are not necessarily indicative of the
costs and expenses that would have resulted if the Company had been operated as
a separate entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and judgments that affect the reported amounts of assets and
liabilities 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. Although management believes the estimates and
assumptions used in the preparation of these financial statements were
appropriate in the circumstances, actual results could differ from those
estimates and assumptions.
Fiscal Year
The Company's fiscal year is the 52 or 53 week period ending the last Sunday of
December. References to 2004 and 2003 are for the 52 weeks ended December 26,
2004 and December 28, 2003, respectively.
F-7
Access Control Products Group
(A Unit of Checkpoint Systems, Inc.)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounts Receivable, net
Accounts receivables are recorded at net realizable values. The Company
maintains an allowance for estimated losses resulting from the inability of
customers to make required payments and for anticipated returns. The allowance
is based on specific facts and circumstances surrounding individual customers as
well as historical experience. Provisions for the losses on receivables and
returns are charged to income to maintain the allowance at a level considered
adequate to cover losses and future returns. Receivables are charged off against
the reserve when they are deemed uncollectible and returns are charged off
against the reserve when the actual returns are incurred.
Inventories
Inventories are stated on the first-in, first-out method, at the lower of cost
or market. A provision is made to reduce excess or obsolete inventories to their
net realizable value.
Property and Equipment, net
Property and equipment are carried at cost less accumulated depreciation.
Maintenance, repairs, and minor renewals are expensed as incurred. Additions,
improvements, and major renewals are capitalized. Depreciation generally is
provided on a straight-line basis over the estimated useful lives of the assets.
Machinery and equipment estimated useful lives range from three to ten years.
The cost and accumulated depreciation applicable to assets retired are removed
from the accounts and the gain or loss on disposition is included on the
statements of operations.
Impairment of Long - Lived Assets
The Company reviews property and equipment for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. A loss is recognized on the statements of operations if it is
determined that an impairment exists based on expected future undiscounted cash
flows. The amount of the impairment is the excess of the carrying amount of the
impaired asset over its fair value.
Goodwill
Goodwill had been allocated to the Company in connection with the Parent's
acquisition of Sielox. Pursuant to Statement of Financial Accounting Standards
SFAS No. 142, "Goodwill and Other Intangible Assets," effective December 31,
2001 (fiscal year 2002), goodwill is no longer being amortized. The Company
tests goodwill for impairment on an annual basis, relying on a number of factors
including operating results, business plans and future cash flows.
Recoverability of goodwill is evaluated using a two-step process. The first step
involves a comparison of fair value of the Company with its carrying value. If
the carrying amount exceeds its fair value, the second step of the process
involves a comparison of the fair value and carrying value of the goodwill. If
the carrying value exceeds its fair value, an impairment loss is recognized in
an amount equal to the excess. The Company performs the annual assessment as of
October 31 each fiscal year. Refer to Note 6.
F-8
Access Control Products Group
(A Unit of Checkpoint Systems, Inc.)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accrued Warranty Costs
The Company provides product warranties for various products. These warranties
vary in length depending on the product. The Company accrues warranty costs
based on historical data of warranty transactions. See Note 7.
Accounts Payable
Customers with net credit balances are recorded as Accounts Payable on the
accompanying balance sheets.
Revenue Recognition
Revenues and related costs are recognized upon transfer of ownership, which
generally coincides with the shipment of products to customers. Service revenue
is recognized as services are performed. The Company records revenues net of an
allowance for estimated return activities. Return activity was immaterial to
revenue and results of operations for all periods presented.
Shipping and Handling Fees and Costs
Shipping and handling fees are accounted for in revenues, and shipping and
handling costs in cost of revenues.
Royalty Expenses
The Company pays royalties at amounts defined in each agreement based upon units
sold of certain components of its software solution products to various third
parties, which expire at various dates through May 2008. Royalty expenses
related to these products approximated $196,000 and $155,000 for the years ended
December 26, 2004 and December 28, 2003, respectively. These expenses are
included as part of cost of revenues.
Research and Development Costs
Expenditures for research, development and engineering of software and hardware
products are expensed as incurred. Such amounts are represented by the caption
"Product development" on the statements of operations.
Advertising Costs
Advertising costs are charged to operations when incurred. Advertising expenses
approximated $304,000 and $465,000 for the years ended December 26, 2004 and
December 28, 2003, respectively and are included in the caption "Sales and
Marketing" on the statements of operations.
F-9
Access Control Products Group
(A Unit of Checkpoint Systems, Inc.)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
401 (k) Plan
The Company participates in a defined contribution plan of the Parent in which
most employees are eligible to participate. Under this plan, eligible employees
may make basic (up to 6% of an employee's earnings) and supplemental
contributions. The Parent matches 50% of the participant's basic contributions.
Parent contributions vest to participants in increasing percentages over one to
five years of service. The plan provides for Company matching contributions that
totaled approximately $29,000 and $27,000, for the years ended December 26, 2004
and December 28, 2003, respectively, which was recorded in general and
administrative expenses on the statements of operations.
Employee Stock Purchase Plan
Under the Parent's non-qualified Employee Stock Purchase Plan, employees may
contribute up to $80 per week for the purchase of the Parent's common stock at
fair value. The Company matches employee contributions up to a maximum of $20.75
per week. Under this plan, the Company contributed approximately $6,000 and
$4,000 for the years ended December 26, 2004 and December 28, 2003,
respectively. Such costs are included in operating expenses on the statements of
operations.
Employee Stock Option Plan
The Parent has stock option plans in which employees may be granted options to
purchase the common stock of Checkpoint Systems, Inc. The exercise price of
options granted may not be less than the fair market value of the underlying
stock on the date of grant. Options generally vest over three years and
generally expire ten years from the grant date. The Parent accounts for its
stock option awards under the recognition and measurement principles of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations. Had compensation expense been
determined based on fair value, consistent with SFAS No 123, Accounting for
Stock-Based Compensation, net loss would have increased by approximately $42,000
for the years ended December 26, 2004 and December 28, 2003.
Income Taxes
For the years ended December 26, 2004 and December 28, 2003, the Parent filed a
consolidated income tax return that included the Company. For purposes of these
financial statements, income taxes have been not been allocated to the Company
as the Company is not a taxpaying entity, thus no tax provision has been
recorded in the accompanying statements of operations.
Fair Value of Financial Instruments
The carrying amounts of the Company's accounts receivable, net and accounts
payable approximate fair value because of their short-term nature.
F-10
Access Control Products Group
(A Unit of Checkpoint Systems, Inc.)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Debt and Interest
The Parent has not allocated any portion of its debt or related interest cost to
the Company, and no portion of the Parent's debt is specifically related to the
operations of the Company. Accordingly, the Company's financial statements
include no charges for interest or capitalized interest.
Concentration of Credit Risk
In conducting its business, the Company performs ongoing evaluations of its
customers' financial condition. The Company does not believe that significant
risk of loss from a concentration of credit risk exists given the large number
of customers that compose its customer base and their geographical dispersion.
Recently Issued Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 151, "Inventory Costs", an amendment of Accounting Research Bulletin (ARB)
No. 43, Chapter 4. The amendments made by SFAS No. 151 clarify that abnormal
amounts of idle facility expense, freight, handling costs and wasted materials
(spoilage) should be recognized as current-period charges and require the
allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. This pronouncement will be effective for
the first quarter 2006. The Company does not believe that this statement will
have a material effect on the financial statements.
In March 2005, the FASB issued Interpretation FIN No. 47, "Accounting for
Conditional Asset Retirement Obligations," that requires an entity to recognize
a liability for a conditional asset retirement obligation when incurred if the
liability can be reasonably estimated. FIN No. 47 clarifies that the term
Conditional Asset Retirement Obligation refers to a legal obligation to perform
an asset retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. FIN No. 47 also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. FIN No. 47 is effective no later than the end of fiscal years ending
after December 15, 2005. The Company does not believe that this statement will
have a material effect on the financial statements.
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," which will require entities that voluntarily make a change in
accounting principle to apply that change retrospectively to prior periods'
financial statements, unless this would be impracticable. SFAS No. 154
supersedes APB Opinion No. 20, Accounting Changes, which previously required
that most voluntary changes in accounting principle be recognized by including
in the current period's net income the cumulative effect of changing to the new
accounting principle. SFAS No. 154 also makes a distinction between
"retrospective application" of an accounting principle and the "restatement" of
financial statements to reflect the correction of an error. Another significant
change in practice
F-11
Access Control Products Group
(A Unit of Checkpoint Systems, Inc.)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
under SFAS No. 154 will be that if an entity changes its method of depreciation,
amortization, or depletion for long-lived, non-financial assets, the change must
be accounted for as a change in accounting estimate. Under APB Opinion No. 20,
such a change would have been reported as a change in accounting principle. SFAS
No. 154 applies to accounting changes and error corrections that are made in
fiscal years beginning after December 15, 2005. The Company does not believe
that this statement will have a material effect on the financial statements.
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 exchanges 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
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 have an impact on operating results due to
the Company's use of options as employee incentives.
3. ACCOUNTS RECEIVABLE, NET ($ in thousands)
Accounts receivable, net consist of the following:
December 26, 2004 December 28, 2003
----------------- -----------------
Trade $ 1,442 $ 1,086
Allowance for doubtful accounts (45) (21)
----------------- -----------------
$ 1,397 $ 1,065
================= =================
4. INVENTORIES ($ in thousands)
Inventories consist of the following:
December 26, 2004 December 28, 2003
----------------- -----------------
Finished goods $ 614 $ 598
Work in process 155 175
Allowance for obsolesence (57) (104)
----------------- -----------------
$ 712 $ 669
================= =================
F-12
Access Control Products Group
(A Unit of Checkpoint Systems, Inc.)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
5. PROPERTY AND EQUIPMENT, NET ($ in thousands)
Property and equipment, net consist of the following:
December 26, 2004 December 28, 2003
----------------- -----------------
Machinery and equipment $ 910 $ 910
Accumulated depreciation (866) (851)
----------------- -----------------
$ 44 $ 59
================= =================
6. GOODWILL ($ in thousands)
There have been no changes in the carrying amount of goodwill for 2004 and 2003.
The goodwill balance of $410 at December 26, 2004 and December 28, 2003 is net
of accumulated amortization of $2,233.
7. ACCRUED WARRANTY COSTS ($ in thousands)
Changes in the aggregate accrued warranty costs are reported as follows:
BALANCE, DECEMBER 30, 2002 $ 42
Adjustment to provision (9)
-------------
BALANCE, DECEMBER 28, 2003 33
Payments made for warranty costs
incurred (13)
Adjustment to provision 13
-------------
BALANCE, DECEMBER 26, 2004 $ 33
=============
F-13
Access Control Products Group
(A Unit of Checkpoint Systems, Inc.)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
8. TRANSACTIONS WITH RELATED PARTIES
The Company purchases products from and sells products to other Parent Company
Units. Finished goods were sold to such affiliates at cost plus a margin, which
averaged 38% and 35% during the years ended December 26, 2004 and December 28,
2003, respectively. These sales with affiliates represent approximately 0.2% and
4.1% of sales for the years ended December 26, 2004 and December 28, 2003,
respectively, in the amount of approximately $17,000 and $255,000 for the years
ended December 26, 2004 and December 28, 2003 respectively. The Company also
purchases components from affiliates at the respective affiliate's cost plus a
negotiated margin of approximately 35%. Affiliate receivables and payables are
assumed immediately settled and, accordingly, are recorded through the Parent's
Equity in Unit account.
Transactions with affiliates were as follows: ($ in thousands)
December 26, 2004 December 28, 2003
----------------- -----------------
Transactions with affiliates:
Purchases of components $ 698 $ 693
Sales of finished goods $ 17 $ 255
The Company also purchases certain services from its Parent, including
liability, property and workers' compensation insurance. These transactions are
discussed in further detail below. All transactions with the Parent are assumed
to be immediately settled and accordingly, are recorded through the Parent's
Equity in Unit account.
Parent Provided Services - The Parent maintains a program of self-insurance for
medical and dental insurance. The cost of the self-insurance program is charged
to the Company based upon an estimate of claims experience. Charges included in
the statements of operations in general and administrative expenses related to
the insurance programs noted herein totaled approximately $138,000 and $122,000
for the years ended December 26, 2004 and December 28, 2003.
Allocated Parent Expenses - The Parent allocates a certain portion of its
corporate expenses to its business units. These allocated costs include the
Parent's executive management and corporate overhead, corporate legal, audit,
treasury, insurance (including broad all-risk coverage for liability, general
product liability, workers' compensation insurance and other standard liability
coverage), benefits administration, accounting services, office rent and
utilities, and other corporate support and executive compensation and totaled
approximately $300,000 for the years ended December 26, 2004 and December 28,
2003.
Other Transactions with Parent - The Parent maintains all banking relationships.
All payments from the Company's customers are deposited into accounts maintained
by the Parent Company. The Parent also makes cash disbursements on behalf of the
Company from bank accounts which are maintained and funded by the Parent on a
daily basis.
F-14
Access Control Products Group
(A Unit of Checkpoint Systems, Inc.)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES
Litigation - The Company is party to various legal proceedings in the normal
course of business. The Company is neither involved in nor threatened by any
proceedings for which the Company believes it is not adequately insured or
indemnified or which if determined adversely, would have a material effect on
its financial position, results of operations or cash flows.
Leases - The Company leases certain office equipment under operating leases
which are paid for by the Parent Company and charged to earnings in the period
incurred. Future minimum payments for operating leases having non-cancelable
terms in excess of one year at December 26, 2004 are approximately $28,000.
Rent expense for its principal offices for the years ended December 26, 2004 and
December 28, 2003 are included in the total allocated Parent expenses described
in Note 8.
Major Suppliers - The Company purchased approximately $1,439,000 and $1,151,000
in readers,ID cards and controllers from HID Corporation and SMTC Manufacturing
Corp. in the periods December 26, 2004 and December 28, 2003, respectively.
Alternative sources of these readers, ID cards and controllers are readily
available.
10. LIQUIDITY
Historically the Company has been reliant on its Parent for funding of its
operations. Upon consummation of the transaction described in Note 11, the
Company will rely upon funding from L Q Corporation, Inc.
11. SUBSEQUENT EVENT
On November 4, 2005, the Parent entered into an asset purchase agreement with a
newly formed, wholly-owned subsidiary of L Q Corporation, Inc., to sell
principally all of the assets of the Company. The contemplated cash
consideration for the transaction was approximately $2.6 million, subject to
post-closing adjustments and escrow plus related expenses. The transaction was
consummated on January 6, 2006, effective as of December 30, 2005.
As part of the above asset purchase agreement, the Company entered into a
transitional services agreement, which among other things, incorporates a
manufacturing agreement whereby the Company will purchase certain products from
the Parent at a negotiated price over a period of up to two years, and which
provides the Company with office space and related office services at the
Parent's facility for up to three months at no cost and at a negotiated price
thereafter for up to an additional three months.
********
F-15
Access Control Products Group (A Unit of Checkpoint Systems, Inc.)
UNAUDITED FINANCIAL STATEMENTS
AS OF SEPTEMBER 25, 2005 AND THE
NINE MONTH (39 WEEK) PERIODS ENDED
SEPTEMBER 25, 2005 AND SEPTEMBER 26, 2004
Access Control Products Group
(A Unit of Checkpoint Systems, Inc.)
BALANCE SHEETS
(Dollars in thousands)
------------------------------------------------------------------------------------------------------
(Unaudited)
September 25, 2005 December 26, 2004
------------------ -----------------
ASSETS
CURRENT ASSETS:
Accounts receivable, net $ 1,159 $ 1,397
Inventories 756 712
------------------ -----------------
Total current assets 1,915 2,109
PROPERTY AND EQUIPMENT, NET 3 44
GOODWILL 410 410
------------------ -----------------
TOTAL ASSETS $ 2,328 $ 2,563
================== =================
LIABILITIES AND PARENT'S EQUITY IN UNIT
CURRENT LIABILITIES
Accounts payable $ 13 $ 104
Accrued salaries, wages and commissions 137 100
Accrued warranty costs 26 33
Accrued royalties 25 114
------------------ -----------------
Total current liabilities 201 351
------------------ -----------------
TOTAL LIABILITIES 201 351
COMMITMENTS AND CONTINGENCIES
PARENT'S EQUITY IN UNIT 2,127 2,212
------------------ -----------------
TOTAL LIABILITIES AND PARENT'S EQUITY IN UNIT $ 2,328 $ 2,563
================== =================
See accompanying notes to unaudited financial statements.
F-17
Access Control Products Group
(A Unit of Checkpoint Systems, Inc.)
UNAUDITED STATEMENTS OF OPERATIONS
(Dollars in thousands)
------------------------------------------------------------------------------------------
9 month (39 week) periods ended
-------------------------------
September 25, 2005 September 26, 2004
------------------ ------------------
REVENUES $ 4,838 $ 4,870
COST OF REVENUES 2,720 2,846
------------------ ------------------
GROSS PROFIT 2,118 2,024
------------------ ------------------
OPERATING EXPENSES
General and administrative 169 183
Product development 788 1,199
Sales and marketing 1,637 1,688
Overhead allocation from Parent 225 225
------------------ ------------------
Total operating expenses 2,819 3,295
------------------ ------------------
LOSS FROM OPERATIONS (701) (1,271)
OTHER EXPENSES
Loss on disposal of fixed assets (38) --
------------------ ------------------
Total other expenses (38) --
------------------ ------------------
NET LOSS $ (739) $ (1,271)
================== ==================
See accompanying notes to unaudited financial statements.
F-18
Access Control Products Group
(A Unit of Checkpoint Systems, Inc.)
UNAUDITED STATEMENTS OF CHANGES IN PARENT'S EQUITY IN UNIT
(Dollars in thousands)
---------------------------------------------------------------------------------------------
9 month (39 week) periods ended
-------------------------------
September 25, 2005 September 26, 2004
------------------ ------------------
Parent's Equity in Unit - beginning of period $ 2,212 $ 1,825
Net loss (739) (1,271)
Intercompany transactions - net 654 1,360
------------------ ------------------
Parent's Equity in Unit - end of period $ 2,127 $ 1,914
================== ==================
See accompanying notes to unaudited financial statements.
F-19
Access Control Products Group
(A Unit of Checkpoint Systems, Inc.)
UNAUDITED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
--------------------------------------------------------------------------------------------------------------
9 month (39 week) periods ended
-------------------------------
September 25, 2005 September 26, 2004
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (739) $ (1,271)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation 3 16
Loss on disposal of fixed assets 38 --
Provision for doubtful accounts 50 43
Provision for inventory obsolescence reserve 25 (12)
Changes in operating assets and liabilities:
Accounts receivable 188 (85)
Inventories (69) (38)
Accounts payable (91) 66
Accrued salaries, wages and commissions 37 (119)
Accrued warranty costs (7) (7)
Accrued royalties (89) 47
------------------ ------------------
Net cash used in operating activities (654) (1,360)
------------------ ------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES:
Intercompany transactions, net 654 1,360
------------------ ------------------
NET INCREASE (DECREASE) IN CASH -- --
CASH, BEGINNING OF PERIOD -- --
------------------ ------------------
CASH, END OF PERIOD $ -- $ --
================== ==================
See accompanying notes to unaudited financial statements.
F-20
Access Control Products Group
(A Unit of Checkpoint Systems, Inc.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by management
in conformity with accounting principles generally accepted in the United States
of America ("U.S. GAAP"), the assets, liabilities, revenues and expenses related
to the historical operation of the Access Control Products Group (a unit of
Checkpoint Systems, Inc.) (the "Company") on a carve-out basis. The Company is
not a legal entity. Checkpoint Systems, Inc.'s net investment in the Company
("Parent's Equity in Unit") is shown in lieu of stockholder's equity in the
unaudited financial statements.
In the opinion of management, these unaudited financial statements contain all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the financial position of the Company as of September 25, 2005 and the
results of its operations and cash flows for the nine month (39 week) periods
ended September 25, 2005 and September 26, 2004. The results of the operations
for the nine month (39 week) periods ended September 25, 2005 and September 26,
2004 are not necessarily indicative of the results expected for the full year.
The accompanying unaudited financial statements should be read in conjunction
with the audited financial statements for the year ended December 26, 2004 and
notes thereto.
2. ACCOUNTS RECEIVABLE, NET ($ in thousands)
Accounts receivable, net consist of the following:
September 25, 2005 December 26, 2004
------------------ -----------------
Trade $ 1,254 $ 1,442
Allowance for doubtful accounts (95) (45)
------------------ -----------------
$ 1,159 $ 1,397
================== =================
3. INVENTORIES ($ in thousands)
Inventories consist of the following:
September 25, 2005 December 26, 2004
------------------ -----------------
Finished goods $ 656 $ 614
Work in process 182 155
Allowance for obsolesence (82) (57)
------------------ -----------------
$ 756 $ 712
================== =================
F-21
Access Control Products Group
(A Unit of Checkpoint Systems, Inc.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
4. PROPERTY AND EQUIPMENT, NET ($ in thousands)
Property and equipment, net consist of the following:
September 25, 2005 December 26, 2004
------------------ -----------------
Machinery and equipment $ 764 $ 910
Accumulated depreciation (761) (866)
------------------ -----------------
$ 3 $ 44
================== =================
5. ACCRUED WARRANY COSTS ($ in thousands)
Changes in the aggregate accrued warranty costs are reported as follows:
9 month (39 week) period ending
-------------------------------
September 25, 2005 September 26, 2004
------------------ ------------------
Balance at beginning of period $ 33 $ 33
Payments made for warranty costs incurred -- (12)
Adjustment to provision (7) 4
------------------ ------------------
Balance at end of period $ 26 $ 25
================== ==================
F-22
Access Control Products Group
(A Unit of Checkpoint Systems, Inc.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
6. LIQUIDITY
Historically the Company has been reliant on its Parent for funding of its
operations. Upon consummation of the transaction described in Note 7 below, the
Company will rely upon funding from L Q Corporation, Inc.
7. SUBSEQUENT EVENT
On November 4, 2005, the Parent entered into an asset purchase agreement with a
newly formed, wholly-owned subsidiary of L Q Corporation, Inc., to sell
principally all of the assets of the Company. The contemplated cash
consideration for the transaction was approximately $2.6 million, subject to
post-closing adjustments and escrow plus related expenses. The transaction was
consummated on January 6, 2006, effective as of December 30, 2005.
As part of the above asset purchase agreement, the Company entered into a
transitional services agreement, which among other things, incorporates a
manufacturing agreement whereby the Company will purchase certain products from
the Parent at a negotiated price over a period of up to two years, and which
provides the Company with office space and related office services at the
Parent's facility for up to three months at no cost and at a negotiated price
thereafter for up to an additional three months.
********
F-23
L Q Corporation, Inc.
Unaudited Pro Forma Condensed Combined Financial Statements
(Dollars in thousands)
Introduction
------------
On January 6, 2006, L Q Corporation, Inc., ("L Q"), completed the acquisition of
principally all of the assets of Checkpoint Systems, Inc.'s Access Control
Products Group ("ACPG") for $2.6 million, subject to post-closing adjustments
and escrow, plus related expenses. The acquisition was effective as of December
30, 2005. ACPG develops, designs and distributes a complete line of open
architecture access control software, programmable controllers (electronic
circuit boards), and related accessories such as readers and ID cards which can
be configured to monitor, manage and control physical access to building
perimeter and interior locations. The net assets acquired primarily include
receivables, inventories, and other identifiable intangible assets net of
certain current liabilities.
The following unaudited pro forma financial statements give effect to the
acquisition of ACPG assuming the transaction took place as of December 31, 2003
for the condensed combined statement of operations and as of September 30, 2005
for the condensed combined balance sheet. The pro forma adjustments are
described in the accompanying notes to the unaudited pro forma condensed
combined financial statements. Such unaudited pro forma condensed combined
financial statements should be read in conjunction with ACPG's financial
statements and notes included herein for the year ended December 26, 2004 and
for the nine month (39 week) period ended September 25, 2005.
Under the purchase method of accounting, the purchase price is allocated to the
underlying tangible and intangible assets acquired and liabilities assumed based
on their respective fair market values, with the excess recorded as goodwill.
These unaudited pro forma condensed combined financial statements reflect
preliminary estimates of fair market value of the assets acquired and
liabilities assumed and the related allocations of purchase price. L Q is
currently reviewing the preliminary estimates of the fair market value of assets
acquired and liabilities assumed in the ACPG acquisition, including preliminary
valuations of intangible assets and property and equipment. The final
determination of the fair market value of assets acquired and liabilities
assumed and final allocation of the purchase price may differ from the amounts
assumed in these unaudited pro forma condensed combined financial statements,
and there can be no assurance that any adjustments will not be material.
The unaudited pro forma condensed combined financial statements are provided for
illustrative purposes only and do not purport to represent what the actual
consolidated results of operations or the consolidated financial position of LQ
would have been had the acquisition of ACPG been consummated on December 31,
2003 or September 30, 2005 nor are they necessarily indicative of future
consolidated results of operations or financial position.
L Q Corporation, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
September 30, 2005
(Dollars in thousands except per share data)
Historical
----------- Pro Forma Pro Forma
L Q Corp ACPG Adjustments Combined
-------- ----------- ----------- ---------
ASSETS
CURRENT ASSETS:
Cash $ 5,930 $ -- $(2,991)(1) $ 2,939
Accounts receivable, net -- 1,159 (112)(2) 1,047
Inventories -- 756 -- 756
Other 65 -- -- 65
------- ------- ------- -------
Total current assets 5,995 1,915 (3,103) 4,807
PROPERTY AND EQUIPMENT, NET -- 3 97 (3) 100
GOODWILL -- 410 (410)(4) --
(5)
INTANGIBLE ASSETS, NET -- -- 1,127 (3) 1,127
------- ------- ------- -------
TOTAL ASSETS $ 5,995 $ 2,328 $(2,289) $ 6,034
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ -- $ 13 $ -- (2) $ 13
Accrued salaries, wages and commissions -- 137 (137)(2) --
Accrued warranty costs -- 26 -- 26
Accrued royalties -- 25 (25) --
Other accrued expenses 57 -- -- 57
------- ------- ------- -------
Total current liabilities 57 201 (162) 96
TOTAL LIABILITIES 57 201 (162) 96
COMMITMENTS AND CONTINGENCIES -- -- -- (6) --
SHAREHOLDERS' EQUITY 5,938 2,127 (2,127)(7) 5,938
------- ------- ------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,995 $ 2,328 $(2,289) $ 6,034
======= ======= ======= =======
L Q Corporation, Inc.
Unaudited Pro Forma Condensed Combined Statements of Operations
Nine Months Ended September 30, 2005
(In thousands except share data)
Historical
----------- Pro Forma Pro Forma
L Q Corp ACPG Adjustments Combined
-------- ----------- ------------ ---------
REVENUES $ -- $ 4,838 $ -- $ 4,838
COST OF REVENUES -- 2,720 -- 2,720
------- ------- ------- -------
GROSS PROFIT -- 2,118 -- 2,118
------- ------- ------- -------
OPERATING EXPENSES
General and administrative 636 169 225(8) 1,199
169(9)
Product development -- 788 15(10) 803
Sales and marketing -- 1,637 -- 1,637
Overhead allocation from Parent -- 225 (225)(8) --
------- ------- ------- -------
Total operating expenses 636 2,819 184 3,639
------- ------- ------- -------
LOSS FROM OPERATIONS (636) (701) (184) (1,521)
INTEREST INCOME 166 -- (81)(11) 85
OTHER (EXPENSE), NET -- (38) -- (38)
------- ------- ------- -------
LOSS BEFORE INCOME TAXES (470) (739) (264) (1,473)
INCOME TAXES -- -- -- (12) --
------- ------- ------- -------
NET LOSS $ (470) $ (739) $ (264) $(1,473)
======= ======= ======= =======
NET LOSS PER SHARE:
Basic and diluted $ (0.15) $ (0.46)
======= =======
Weighted average shares 3,214 3,214
======= =======
L Q Corporation, Inc.
Pro Forma Condensed Combined Statements of Operations
Year Ended December 31, 2004
(In thousands except share data)
Historical
---------- Pro Forma Pro Forma
Adjustments Combined
L Q Corp ACPG (Unaudited) (Unaudited)
-------- ---------- ----------- ---------
REVENUES $ -- $ 6,560 $ -- $ 6,560
COST OF REVENUES -- 3,549 -- 3,549
------- ------- ------- -------
GROSS PROFIT -- 3,011 -- 3,011
------- ------- ------- -------
OPERATING EXPENSES
General and administrative 968 243 300 (8) 1,736
225 (9)
Product development -- 1,603 19(10) 1,622
Sales and marketing -- 2,256 -- 2,256
Overhead allocation from Parent -- 300 (300)(8) --
------- ------- ------- -------
Total operating expenses 968 4,402 244 5,614
------- ------- ------- -------
LOSS FROM OPERATIONS (968) (1,391) (244) (2,603)
INTEREST INCOME 148 -- (72)(11) 76
OTHER (EXPENSE), NET (27) -- -- (27)
------- ------- ------- -------
LOSS BEFORE INCOME TAXES (847) (1,391) (316) (2,554)
INCOME TAXES -- -- -- (12) --
------- ------- ------- -------
NET LOSS $ (847) $(1,391) $ (316) $(2,554)
======= ======= ======= =======
NET LOSS PER SHARE:
Basic and diluted $ (0.26) $ (0.79)
======= =======
Weighted average shares 3,232 3,232
======= =======
LQ Corporation, Inc.
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
(Dollars in thousands)
1. To record the cash utilized to purchase ACPG including related fees of
approximately $410. The transactional fees include $60 paid to Barington
Capital, a stockholder of L Q Corporation, Inc., for investment banking services
rendered.
2. To eliminate assets including accounts receivable from two customers and
liabilities of ACPG not assumed by L Q Corporation, Inc.
3. To reflect preliminary adjustments to fair market value based upon
preliminary valuation. Identifiable intangible assets recognized separately from
goodwill relate primarily to technology-based and customer-related intangible
assets. The final determination of fair market value of the assets acquired and
the final allocation of the purchase price may differ from the amounts assumed
in these unaudited pro forma condensed combined financial statements, and there
can be no assurance that any adjustments will not be material.
4. To remove goodwill related to a previous acquisition of ACPG.
5. To reflect the excess of acquisition cost over the estimated fair value of
net assets acquired (i.e. goodwill) Based on a preliminary purchase price
allocation, which is subject to finalization, as follows:
Purchase price paid as:
Cash to Checkpoint Systems, Inc. $ 2,581
Related fees 410
-------
$ 2,991
=======
Allocated to:
Historical value of ACPG net assets $ 2,127
Liabilities not assumed in acquisition:
Accrued salaries, wages and commissions 137
Accrued royalties 25
Assets not assumed in acquisition (112)
Deduct goodwill from previous acquisition (410)
Fair value of adjustments to assets and liabilities
Identifiable intangible assets 1,127
Property and equipment 97
-------
Estimated fair value of net assets acquired 2,991
-------
Excess purchase price over allocation to identifiable
assets and liabilities (i.e., goodwill) $ --
=======
6. L Q Corporation, Inc. will not assume any known or threatened litigation as
it relates to the ACPG business.
7. To eliminate the equity of ACPG.
8. To eliminate the overhead allocation from the Parent of ACPG and to record an
estimate of the ongoing cost of such services including corporate, legal, audit,
treasury, insurance, benefits administration, accounting services, office rent,
utilities and other corporate support and executive compensation.
9. To reflect the estimated increase in amortization of identifiable intangible
assets based on a preliminary valuation. The estimated amortization of
identifiable intangible assets was calculated using an estimated life of 5 years
on a straight-line basis.
10. To reflect the estimated increase in depreciation arising from the fair
market value (FMV) adjustments to ACPG's property and equipment. The estimated
depreciation after the FMV adjustments was based on expected useful lives of
machinery and equipment of 5 years on a straight line basis.
11. For purposes of determining the adjustment to interest income in the pro
forma condensed combined statements of operations, it was assumed that that the
$2,991 of cash used to purchase ACPG was dispersed on December 31, 2003. The
weighted-average interest rate earned on such amount was 2.4% and 3.6% for the
year ended December 31, 2004 and the nine months ended September 30, 2005,
respectively.
12. L Q Corporation, Inc. has incurred a loss in each period since inception. L
Q has extensive NOLs which might effectively be obviated if certain future
events were to occur that would invoke Section 382 provisions. Future use of the
NOLs therefore is extremely speculative and should not be presumed to exist
absent extensive analysis of the complex Section 382 provisions.