UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number _______________
LIBERTY GROUP HOLDINGS, INC
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 59-3453151
------------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11 52nd Street, Brooklyn, New York 11232
---------------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
(718) 492-1200
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [_] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.004 par value, 6,613,500 shares outstanding as of August 18,
2000.
Traditional Small Business Disclosure Format (elect one) [_] Yes [X] No
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
PAGE
Part I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2000 (Unaudited) F-2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX AND THREE MONTHS ENDED JUNE 30, 2000
AND PREDESSOR SIX AND THREE MONTHS ENDED
JUNE 30, 1999 (Unaudited) F-3
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY SIX MONTHS ENDED JUNE 30, 2000 (Unaudited) F-4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND PREDESSOR
SIX MONTHS ENDED JUNE 30, 1999 (Unaudited) F-5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited) F-6/17
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION 18/21
Part II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 22
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 22
Item 3. DEFAULTS UPON SENIOR SECURITIES 22
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22
Item 5. OTHER INFORMATION 22
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 23
INDEX OF EXHIBITS 24
* * *
F-1
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash .................................................................. $ 47,940
Accounts receivable, net of allowance for doubtful accounts of $120,000 771,273
Inventories ........................................................... 1,064,141
Other current assets .................................................. 121,240
-----------
Total current assets ....................................... 2,004,594
Equipment and improvements, net of accumulated depreciation
and amortization of $39,308 ...................................... 255,035
Notes and other receivables from stockholders of Predecessor .......... 1,534,977
Goodwill, net of accumulated amortization of $15,360 .................. 220,103
Investment in equity investee ......................................... 89,272
Other assets .......................................................... 9,108
-----------
Total ...................................................... $ 4,113,089
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes and other obligations payable ................... $ 258,000
Current portion of capital lease obligations ..................... 12,283
Accounts payable ................................................. 1,478,886
Accrued payroll taxes and related expenses ....................... 410,482
Other accrued expenses ........................................... 563,224
-----------
Total current liabilities .................................. 2,722,875
Long-term capital lease obligations, net of current portion ........... 19,881
-----------
Total liabilities .......................................... 2,742,756
-----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.004 per share; 5,000,000 shares
authorized; none issued ....................................... --
Common stock, par value $.004 per share; 25,000,000 shares
authorized; 6,613,500 shares issued and outstanding ........... 26,454
Additional paid-in capital ....................................... 3,238,671
Accumulated deficit .............................................. (1,894,792)
-----------
Total stockholders' equity ................................. 1,370,333
-----------
Total ...................................................... $ 4,113,089
===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-2
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX AND THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Predecessor) (Predecessor)
<S> <C> <C> <C> <C>
Sales .................................... $ 7,459,887 $ 8,625,565 $ 3,740,062 $ 4,157,181
Cost of sales ............................ 6,055,510 7,608,059 2,881,826 3,729,502
----------- ----------- ----------- -----------
Gross profit ............................. 1,404,377 1,017,506 858,236 427,679
----------- ----------- ----------- -----------
Operating expenses:
Selling ............................. 458,705 370,774 234,661 223,483
General and administrative .......... 1,821,666 1,055,167 1,022,922 690,648
----------- ----------- ----------- -----------
Totals ........................... 2,280,371 1,425,941 1,257,583 914,131
----------- ----------- ----------- -----------
Loss from operations ..................... (875,994) (408,435) (399,347) (486,452)
----------- ----------- ----------- -----------
Other expenses:
Interest ............................ 195,751 47,778 183,279 18,075
Equity in net loss of equity investee 110,728 99,467
----------- ----------- ----------- -----------
Totals ........................... 306,479 47,778 282,746 18,075
----------- ----------- ----------- -----------
Net loss ................................. $(1,182,473) $ (456,213) $ (682,093) $ (504,527)
=========== =========== =========== ===========
Basic net loss per common share .......... $ (.18) $ (.10)
=========== =========== =========== ===========
Basic weighted average common shares ..... 6,543,555 6,558,553
outstanding =========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-3
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-in Accumulated
Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C>
Balance, January 1, 2000 ......... 6,500,000 $ 26,000 $ 2,999,000 $ (712,319) $ 2,312,681
Shares issued for:
Loan fees ..................... 50,000 200 119,800 120,000
Professional and other services 13,500 54 20,071 20,125
Conversion of note payable .... 50,000 200 99,800 100,000
Net loss ......................... (1,182,473) (1,182,473)
----------- ----------- ----------- ----------- -----------
Balance, June 30, 2000 ........... 6,613,500 $ 26,454 $ 3,238,671 $(1,894,792) $ 1,370,333
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-4
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
(Predecessor)
<S> <C> <C>
Operating activities:
Net loss ................................................... $(1,182,473) $ (456,215)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Shares issued for services .............................. 50,125
Depreciation and amortization ........................... 48,083 35,429
Provision for bad debts ................................. 138,266 145,112
Amortization of debt discount ........................... 90,000
Equity in net loss of equity investee ................... 110,728
Changes in operating assets and liabilities:
Accounts receivable .................................. (67,096) 208,249
Inventories .......................................... (292,577) 279,658
Other current assets ................................. (77,141) 80,913
Accounts payable ..................................... 478,212 (433,681)
Accrued expenses ..................................... 711,427 160,311
----------- -----------
Net cash provided by operating activities ........ 7,554 19,776
----------- -----------
Investing activities:
Purchase of investment in equity investee .................. (200,000)
Purchases of equipment and improvements .................... (86,973)
Loans to stockholders of Predecessor and other
related parties ......................................... (40,789) (104,672)
----------- -----------
Net cash used in investing activities ............ (327,762) (104,672)
----------- -----------
Financing activities:
Proceeds from short-term notes and other obligations payable 358,000 107,000
Repayments of long-term borrowings ......................... (4,865) (31,444)
----------- -----------
Net cash provided by financing activities ........ 353,135 75,556
----------- -----------
Net increase (decrease) in cash ................................. 32,927 (9,340)
Cash, beginning of period ....................................... 15,013 9,340
----------- -----------
Cash, end of period ............................................. $ 47,940 $ --
=========== ===========
Supplemental disclosures of cash flow data:
Interest paid .............................................. $ 5,858 $ 47,778
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-5
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Organization and business:
Bio-Response, Inc. ("Bio-Response") was incorporated in February
1972 in Delaware to conduct various research activities,
primarily in the area of immunology. In September 1989,
Bio-Response filed a voluntary petition under Chapter 11 of the
Bankruptcy Act. In July 1997, Bio-Response was restructured as an
inactive public shell company for the purpose of effecting a
business combination with a privately-held operating company. As
of November 23, 1999, the date of the consummation of the
business combinations described below, Bio-Response was inactive.
Ferro Foods Corporation ("Ferro") was incorporated in 1970 in New
York to market and distribute restaurant pizzeria food, food
related items and supplies. As of November 23, 1999, it was
conducting such marketing and distribution operations.
Liberty Food Group, Ltd. ("Liberty Food") was originally
incorporated in June 1999 in Delaware to acquire control of a
food marketing and distribution business and become a public
company. As of November 23, 1999, all of Liberty Food's
outstanding common shares were owned by trusts for the benefit of
its two key executive officers and/or members of their respective
families. It did not conduct any commercial operations during the
period from its incorporation through November 23, 1999.
As of November 23, 1999, Bio-Response had 650,000 shares of
common stock outstanding with a par value of $.004 per share. On
November 23, 1999, the following transactions were consummated:
(i) Bio-Response issued, effectively, 3,500,000 shares of common
stock in exchange for all of the then outstanding shares of
common stock, and it became the legal acquirer, of Liberty Food;
(ii) Liberty Food was merged into a wholly-owned subsidiary of
Bio-Response; (iii) Bio-Response issued, effectively, 2,000,000
shares of common stock in exchange for certain assets and the
business of Ferro and, accordingly, it became the legal acquirer
of Ferro; (iv) Bio-Response issued 225,000 shares of common stock
to an adviser for professional fees in connection with the
acquisitions; (v) the assets acquired from Ferro were contributed
to Liberty Food Group LLC ("Liberty Food LLC"), a Delaware
limited liability company that is a wholly-owned subsidiary of
Bio-Response; (vi) the shares of common stock issued to acquire
Ferro's assets and business were placed in escrow and will not be
released until Ferro and/or its stockholders have paid or
otherwise satisfied all of the liabilities of Ferro outstanding
on that date (see Note 10 herein); and (vii) Bio-Response's name
was changed to Liberty Group Holdings, Inc. ("Liberty Holdings").
Upon consummation of the transactions described above, Liberty
Holdings had 6,375,000 shares of common stock outstanding of
which 3,500,000 shares, or 54.9%, were owned by the former
stockholders of Liberty Food, 2,000,000 shares, or 31.4%, were
owned, effectively, by the stockholders of Ferro, 650,000 shares,
or 10.2%, were owned by the stockholders of Bio-Response prior to
the transactions and 225,000 shares, or 3.5%, were owned by the
adviser. In addition, the two former key executive officers of
Liberty Food became the key executive officers responsible for
the management of Liberty Holdings and its subsidiaries
subsequent to the consummation of the transactions.
F-6
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Organization and business (continued):
As used herein, the "Company" refers to Liberty Holdings and its
subsidiaries subsequent to the acquisitions and the other
transactions described above that were consummated on November
23, 1999, and the "Predecessor" refers to Ferro prior to its
acquisition by the Company.
Since the former stockholders of Liberty Food became the owners
of a majority of the outstanding shares of common stock and the
principal executive officers of the Company as of November 23,
1999 and Bio-Response had no significant operating activities or
assets and liabilities prior to that date, the acquisitions of
the outstanding shares of Liberty Food and the assets and
business of the Predecessor by Bio-Response have been accounted
for by the Company as purchase business combinations and "reverse
acquisitions" effective as of November 23, 1999 in which
Bio-Response was the legal acquirer and Liberty Food was the
accounting acquirer. Generally accepted accounting principles
require the accounting acquirer in a purchase business
combination to record the assets and liabilities of an acquired
business on the basis of their fair values as of the date of
acquisition and record the results of operations of the acquired
business commencing from the date of acquisition.
The Company did not record any of the assets or liabilities of
Bio-Response as of the date of its acquisition since they were
insignificant; however, it did record the 650,000 shares of
common stock owned by the stockholders of Bio-Response and the
3,500,000 shares of common stock issued by Bio-Response to the
former stockholders of Liberty Food as of that date at their
aggregate par value of $16,600 and it decreased additional
paid-in capital by an equivalent amount. The Company recorded the
assets and certain accrued expenses and capital lease obligations
of the Predecessor that it acquired or assumed at their fair
values as of the date of acquisition as further explained in Note
4 herein. Since Liberty Food, the accounting acquirer, had no
significant operating activities prior to November 23, 1999, the
accompanying condensed consolidated financial statements do not
contain any historical statements of operations or cash flows for
the Company prior to that date; instead, the condensed statements
of operations for the six and three months ended June 30, 1999
and cash flows for the six months ended June 30, 1999 of the
Predecessor have been included herein in accordance with the
rules and regulations of the Securities and Exchange Commission
(the "SEC").
As further explained in Note 4 herein, Liberty Group Services,
Inc., a newly formed subsidiary of the Company, acquired,
effectively, a 10% equity interest in AskTheRobot, LLC
("TheRobot") as of March 14, 2000. The Company has accounted for
its interest in TheRobot, which is an on-line personnel
recruiting and placement services company, pursuant to the equity
method of accounting from that date.
F-7
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Organization and business (concluded):
As a result, among other things, of the transactions that were
consummated on November 23, 1999, the acquisition of the equity
interest in TheRobot and the related accounting adjustments
described in Note 4 herein, the accompanying pre-acquisition
financial statements of the Predecessor are not comparable to the
accompanying post-acquisition consolidated financial statements
of the Company.
Note 2 - Interim financial statements:
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements reflect all
adjustments, consisting of normal recurring accruals, necessary
to present fairly the Company's financial position as of June
30, 2000, the Company's results of operations for the six and
three months ended June 30, 2000 and changes in stockholders'
equity and cash flows for the six months ended June 30, 2000 and
the Predecessor's results of operations for the six and three
months ended June 30, 2000 and cash flows for the six months
ended June 30, 2000. Pursuant to the rules and regulations of
the SEC, certain information and disclosures normally included
in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
from these condensed consolidated financial statements unless
significant changes have taken place since the end of the most
recent fiscal year. Accordingly, these unaudited condensed
consolidated financial statements should be read in conjunction
with the audited financial statements of the Company as of
December 31, 1999 and for the period from November 23, 1999
through December 31, 1999 and the audited financial statements
of the Predecessor for the period from January 1, 1999 through
November 22, 1999 and the year ended December 31, 1998 included
in the Company's Annual Report on Form 10-KSB (the "10-KSB") for
the year ended December 31, 1999 that was previously filed with
the SEC.
The results of the Company's operations for the six and three
months ended June 30, 2000 are not necessarily indicative of the
results of operations for the full year ending December 31,
2000.
Note 3 - Net earnings (loss) per share:
The Company presents "basic" earnings (loss) per share and, if
applicable, "diluted" earnings per share pursuant to the
provisions of Statement of Financial Accounting Standards No.
128, "Earnings per Share". Basic earnings (loss) per share is
calculated by dividing net income or loss by the weighted
average number of shares outstanding during each period. The
calculation of diluted earnings per share is similar to that of
basic earnings per share, except that the denominator is
increased to include the number of additional common shares that
would have been outstanding if all potentially dilutive common
shares, such as those issuable upon the exercise of stock
options, were issued during the period.
F-8
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Net earnings (loss) per share (concluded):
Since the Company had a historical loss for the six and three
months ended June 30, 2000, the assumed effects of the exercise
of options outstanding at June 30, 2000 would have been
anti-dilutive for those periods. There were no potentially
dilutive common shares outstanding during the six months ended
June 30, 1999. Accordingly, no diluted per share amounts have
been presented on a historical basis in the accompanying
condensed consolidated statements of operations for the six and
three months ended June 30, 2000 or on a pro forma basis in Note
4 herein for the six and three months ended June 30, 2000 and
1999.
Note 4 - Purchases of interests in businesses:
As explained in Note 1, on November 23, 1999, the Company
acquired the business and certain assets of the Predecessor and
assumed certain of its liabilities, as shown below, by issuing
2,000,000 shares of common stock to, effectively, the
Predecessor's stockholders. The Company was required to account
for the acquisition pursuant to the purchase method of accounting
and, accordingly, the accompanying condensed consolidated
financial statements include the results of operations of the
Predecessor from the date of acquisition.
The total cost of the acquisition of the Predecessor was
$2,295,000, of which $2,000,000 was attributable to the estimated
fair value of the 2,000,000 shares of common stock issued to the
stockholders of the Predecessor, $225,000 was attributable to the
estimated fair value of 225,000 shares of common stock issued for
professional services related to the purchase and the balance of
$70,000 was attributable to cash payments for legal and
accounting services related to the purchase.
Pursuant to the purchase method of accounting, the initial cost
of acquiring the Predecessor, which exceeded the fair value of
the net assets acquired by $235,462, was allocated as follows:
<TABLE>
<S> <C>
Accounts receivable .................................. $ 877,070
Inventories .......................................... 718,733
Other current and noncurrent assets .................. 62,781
Goodwill ............................................. 235,462
Receivables from stockholders of Predecessor ......... 282,586
Property and equipment ............................... 207,371
Accrued expenses and capital lease obligations assumed (89,003)
-----------
Total ............................................. $ 2,295,000
===========
</TABLE>
In connection with the acquisition, the 2,000,000 shares issued
to the stockholders of the Predecessor were placed in escrow and
will not be released to the Predecessor's stockholders until the
Predecessor and/or its stockholders have paid or otherwise
satisfied all of the liabilities of the Predecessor outstanding
on the date of acquisition. Accordingly, shares may be forfeited
by the Predecessor's stockholders and used for the payment of
creditors in the event that other financial arrangements are not
consummated (see Notes 5 and 10 herein). A key executive officer
of the Company holds the voting rights for the shares of common
stock that are subject to escrow.
F-9
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Purchases of interests in businesses (continued):
The following unaudited pro forma information shows the results
of operations of the Company for the six and three months ended
June 30, 1999 as though the acquisition of the Predecessor had
been consummated on January 1, 1999:
<TABLE>
<CAPTION>
Six Three
Months Months
Ended Ended
June June
30, 1999 30, 1999
<S> <C> <C>
Sales .......................................... $ 8,625,565 $ 4,157,181
Cost of sales .................................. 7,608,059 3,729,502
----------- -----------
Gross profit ................................... 1,017,506 427,679
----------- -----------
Operating expenses:
Selling ..................................... 370,774 223,483
General and administrative .................. 1,055,167 696,539
----------- -----------
Totals .................................. 1,425,941 920,022
----------- -----------
Loss from operations ........................... (408,435) (492,343)
Interest expense ............................... 23,572 11,582
----------- -----------
Net loss ....................................... $ (432,007) $ (503,925)
=========== ===========
Basic net loss per common share ................ $ (.07) $ (.08)
=========== ===========
Basic weighted average common shares outstanding 6,375,000 6,375,000
=========== ===========
</TABLE>
In addition to combining the historical results of operations of
the Company and the Predecessor for all of 1999, the unaudited
pro forma results of operations include adjustments to reflect
for the entire period (i) the amortization of the goodwill
recorded in connection with the acquisition of the Predecessor
based on an estimated useful life of ten years, (ii) executive
officers' compensation based on the terms of employment contracts
that became effective on November 23, 1999 (see Note 11 in the
10-KSB); (iii) depreciation and amortization expense computed
based on the straight-line method (instead of accelerated
depreciation methods used by the Predecessor); and (iv)
elimination of interest expense on notes payable not assumed in
the acquisition.
The unaudited pro forma results of operations set forth above do
not purport to represent what the combined results of operations
actually would have been if the acquisition of the Predecessor
had been consummated on January 1, 1999 instead of November 23,
1999.
F-10
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Purchases of interests in businesses (concluded):
On March 14, 2000, Liberty Group Services, Inc. entered into an
agreement whereby it acquired a 51% equity interest in TheRobot,
a subscription-based, on-line personnel recruiting and placement
services company that targets Internet and e-commerce companies
through its website, "AskTheRobot.com." The total consideration
initially paid by the Company to TheRobot for the 51% interest
was $200,000, of which $175,000 was paid in cash and $25,000 was
paid through the cancellation of a receivable that arose from
loans made by the Company to TheRobot. The terms of the
acquisition agreement also required the Company to make four
quarterly payments to TheRobot through June 13, 2001 that were
contingent upon the growth of the revenues of TheRobot to
specified levels during each quarter. If the revenues of TheRobot
had reached the specified level for a quarter, the Company would
have been required to pay as additional consideration $200,000 in
cash and issue the number of shares of its common stock equal to
$760,000 divided by the greater of $3.00 per share or the market
value per share at the end of the quarter.
The Company initially accounted for the acquisition of the 51%
equity interest in the TheRobot in its interim financial
statements as of and for the three months ended March 31, 2000
pursuant to the purchase method of accounting and, accordingly,
the condensed financial statements therein included the results
of operations of TheRobot from March 14, 2000, the date of
acquisition, to March 31, 2000 on a consolidated basis. However,
TheRobot had no sales or material results of operations during
that period.
During the period from July 1, 2000 to August 15, 2000, the
Company and TheRobot negotiated changes to the original
acquisition agreement whereby the Company's equity interest in
TheRobot will be reduced from 51% to 10%. As a result: (i) all of
the Company's obligations to TheRobot with respect to the
contingent payments of cash and/or shares of common stock were
cancelled and, accordingly, the Company's investment in the
remaining 10% equity interest will be comprised of the initial
consideration it paid on March 14, 2000 of $200,000; and (ii)
upon the investment by a third party in TheRobot of a specified
amount, the Company will have a 60 day option to acquire an
additional 18% equity interest in TheRobot in exchange for
additional consideration of $600,000 to be paid in cash.
To reflect the temporary nature of its control of TheRobot, the
Company changed its method of accounting for its 51% equity
interest from consolidation to the equity method retroactive to
March 31, 2000. The change had no material effect on the
Company's sales and operating expenses and no effect on the
Company's net loss for the six and three month periods ended June
30, 2000. The excess of the Company's initial investment of
$200,000 over its proportionate underlying interest in the equity
of TheRobot as of March 14, 2000 (assuming that a 10% equity
interest had been acquired) was approximately $190,000 which is
being amortized on a straight-line basis over an estimated useful
life of five years. Management does not believe that the Company
will have significant influence over the operations of TheRobot
subsequent to the effective date of the amendments and,
accordingly, the Company will account for its 10% equity interest
pursuant to the cost method subsequent to that date.
F-11
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 - Notes and other receivables from stockholders of Predecessor:
At June 30, 2000, the Company had notes and other receivables
from related parties aggregating $1,534,977, including
receivables of $282,586 acquired from the Predecessor on November
23, 1999 (see Note 4 herein) that arose from loans to the
stockholders of the Predecessor who are also stockholders of the
Company. The receivable balance also included $1,252,391 that
arose, primarily, from payments to vendors made subsequent to
November 23, 1999 by the Company and certain stockholders of the
Company on behalf of the stockholders of the Predecessor for
amounts owed by the Predecessor for purchases prior to its
acquisition by the Company.
On December 16, 1999, a portion of the loans receivable from the
stockholders of the Predecessor was converted to a note
receivable through the issuance of a promissory note (the "First
Note") to the Company with a principal balance of $1,000,000. The
First Note matures on November 23, 2000. On May 1, 2000, an
additional portion of the loans receivable from the stockholders
of the Predecessor was converted to a note receivable through the
issuance of another promissory note (the "Second Note") to the
Company with a principal balance of $1,000,000. The Second Note
matures on May 31, 2001. The First and Second Notes bear interest
at 10%. As of June 30, 2000, the principal balance of the First
and Second Notes and the remainder of the receivable from the
stockholders of the Predecessor were secured by the personal
assets of the stockholders of the Predecessor, including a first
lien on real estate owned by the stockholders of the Predecessor
with a fair value of approximately $1,050,000 based on an
appraisal received by the Company in January 2000. They were also
secured by an interest in the 1,933,000 shares of the Company's
common stock issued to the stockholders of the Predecessor in
connection with the acquisition of the Predecessor that were held
in escrow as of June 30, 2000 (see Notes 1, 4 and 7 herein).
However, due to the uncertainties related to collectibility, the
Company has not accrued any interest on the First and Second
Notes.
F-12
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Income taxes:
As of June 30, 2000, the Company had net operating loss
carryforwards of approximately $1,316,000 available to reduce
future Federal taxable income which will expire in 2020.
The Company's deferred tax assets as of June 30, 2000 consisted
of the effects of temporary differences attributable to the
following:
Compensation paid through the issuance of
stock options ........................ $ 220,000
Allowance for doubtful accounts ......... 48,000
Net operating loss carryforwards ........ 527,000
---------
795,000
Less valuation allowance ................ (795,000)
---------
Total ............................ $ --
=========
Due to the uncertainties related to, among other things, the
extent and timing of its future taxable income, the Company
offset its deferred tax assets by an equivalent valuation
allowance as of June 30, 2000. The Company also offset its
deferred tax assets by equivalent valuation allowances as of
March 31, 2000 and December 31, 1999. As a result of the
increases in the valuation allowance of $297,000 and $242,000
during the six and three months ended June 30, 2000,
respectively, no credits for income taxes are included in the
accompanying condensed consolidated statements of operations for
those periods.
F-13
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Short-term notes and other obligations payable:
On March 10, 2000, the Company received $100,000 from an
"accredited investor" through the issuance of a short-term, 9%
promissory note in the same principal amount to the lender. On
April 25, 2000, the note was converted into 50,000 shares of
common stock and warrants to purchase 10,000 shares of common
stock. The warrants remained outstanding as of June 30, 2000 and
will be exercisable at $8.00 per share through April 25, 2003.
As of June 30, 2000, the Company had remaining short-term notes
and other obligations payable as further described below:
<TABLE>
<S> <C>
9% promissory note (A) ..................................... $150,000
Payments received for preferred stock prior to issuance (B) 108,000
--------
Total ............................................... $258,000
========
</TABLE>
(A) Effective March 31, 2000, the Company received $150,000 from an "accredited
investor" through the issuance of a short-term, 9% promissory note in the
same principal amount and 30,000 shares of common stock to the lender. The
Company initially increased common stock and additional paid-in capital by
a total of $90,000 based on the estimated fair value of the shares issued
and reduced the carrying value of the notes payable by an equivalent amount
of debt discount (all of which was amortized to interest expense prior to
June 30, 2000). The note is secured by all of the Company's assets as well
as real estate owned by certain parties related to the stockholders of the
Predecessor and leased by the Company (see Note 11 in the 10-KSB). In
addition, the loan agreement requires the Company to issue 1,000 shares of
its common stock per day to the lender, commencing ten days after the
occurrence of a default, as a penalty until the obligation is repaid. The
note initially became due but was not paid on May 15, 2000. The Company had
charged $45,000 to interest expense during the six months ended June 30,
2000 for the approximate fair value of the 36,000 shares issuable to the
lender as of June 30, 2000 as a result of the default and had included an
equivalent amount in accrued expenses. On August 15, 2000, the Company
agreed to issue 108,000 shares of common stock to the lender as the total
penalty for the default and the lender agreed to extend the due date to
August 31, 2000.
F-14
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Short-term notes and other obligations payable (concluded):
(B) During the six months ended June 30, 2000, the Company received
unrestricted cash payments of $108,000 from investors for the purchase of
units of shares of convertible preferred stock and warrants to purchase
shares of the Company's common stock pursuant to a proposed private
placement intended to be exempt from registration under the Securities Act
of 1933 (the "Act"), as further described in Note 10. Since the issuance of
the preferred stock is subject to the consummation of the proposed private
placement, the amount received has been reflected as a short-term
obligation as of June 30, 2000 and the fair value of $30,000 of the 20,000
shares of common stock issued to the lender as a loan fee was charged to
interest expense. In the event that the private placement is not
consummated, the Company will have to negotiate revised terms with the
investors for their investment.
Note 8 - Stock options:
Effective as of January 1, 2000, the board of directors approved
the adoption of a stock option plan (the "Option Plan") whereby
it may grant options for the purchase of up to 300,000 shares of
common stock to employees, consultants and other agents of the
Company. Under the Option Plan, the maximum term of an option may
not exceed five years. The actual term of each option, the
exercise price, the vesting period and the manner of exercise for
each option will be determined by the board of directors. During
the period from January 1, 2000 through June 30, 2000, the board
of directors granted options to employees pursuant to the Option
Plan for the purchase of 73,000 shares of common stock that could
be exercised at $3.00 per share at any time during the five year
period subsequent to the date of grant. Options to purchase
18,000 shares were cancelled prior to June 30, 2000, and options
to purchase 55,000 remained outstanding.
In connection with the acquisition by the Company of its interest
in TheRobot (see Note 4), the board of directors of the Company
granted options to two of the executives of TheRobot whereby they
may purchase, in the aggregate, up to 20,000 shares of common
stock of the Company at $3.00 per share if TheRobot achieves
specified increases in revenues or it acquires businesses with
specified levels of revenues at various dates through March 14,
2001. If the milestones are met, the options will be exercisable
during the three year period subsequent to March 14, 2001.
See Note 9 in the 10-KSB for a description of options granted to
the Company's two key executive officers prior to December 31,
1999 that remained outstanding as of June 30, 2000 for the
purchase of up to 4,350,000 shares of common stock if the Company
achieves specified increases in revenues or it acquires
businesses with specified levels of revenues.
F-15
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 - Settlement of litigation:
On February 22, 2000, one of the Company's major vendors (the
"Vendor") commenced litigation against the Predecessor and
Liberty Food LLC, a subsidiary of the Company, in connection with
the collection of approximately $1,063,000 owed by the
Predecessor to the Vendor. On May 12, 2000, the Vendor, the
Predecessor, certain stockholders of the Predecessor and Liberty
Food LLC entered into a settlement agreement whereby, among other
things: (i) the Predecessor agreed to issue a term note to the
Vendor in the principal amount of $1,063,000 that is payable in
varying installments through May 1, 2001 with interest at .75%
above a specified bank's "base" rate; (ii) certain stockholders
of the Predecessor personally guaranteed the payment of the term
note and the interest thereon and pledged a total of 500,000
shares of the Company's common stock owned by them, but held in
escrow (see Notes 1, 4 and 7), as additional collateral for the
term note; and (iii) Liberty Food LLC guaranteed the payment of
the term note and the interest thereon.
Note 10- Subsequent events:
The Company has prepared a private placement memorandum for a
proposed offering to "accredited investors" intended to be exempt
from registration pursuant to the provisions of Regulation D of
the Act for the sale of 120 units of Series A Preferred Stock
(the "Series A Stock") and warrants to purchase shares of the
Company's common stock at $50,000 per unit. As proposed, each
unit offered will consist of 25,000 shares of Series A Stock and
10,000 redeemable common stock purchase warrants (the
"Warrants"). Each Warrant will give the holder the right to
purchase one share of common stock at the initial exercise price
of $5.00 per share during the three year period subsequent to the
closing of the offering. The Warrants would be redeemable by the
Company if the price of the common stock equals or exceeds 120%
of the exercise price of the Warrant for 20 consecutive trading
days prior to the redemption date.
F-16
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10- Subsequent events (concluded):
In order to commence the private placement, the Company's Board
of Directors will be required to authorize the issuance of up to
3,000,000 shares of Series A Stock. Each share of Series A Stock
would have a par value of $.004 per share and a preference in
liquidation equal to $2.00 per share plus all declared but unpaid
dividends. Subject to anti-dilution provisions, each share of
Series A Stock would be convertible into two shares of common
stock at the option of the holder and would be automatically
converted into two shares of common stock if the average closing
price of the Company's common stock for 20 consecutive days is
equal to or greater than $5.00 per share. In addition, the
holders of Series A Stock would be entitled to cast that number
of votes equal to the number of shares of common stock into which
a share of Series A Stock is convertible on each matter submitted
to the Company's stockholders for voting. The holders of Series A
Stock would be entitled to receive noncumulative dividends at the
rate of 6% per annum on a semi-annual basis and whenever funds
are legally available. The holders of the Series A Stock would
have the right to redeem those shares at any time 30 months after
issuance at the initial purchase price plus all declared but
unpaid dividends. Management cannot assure that any of the units
will be sold under the proposed terms. However, if the offering
is consummated on the proposed terms, the Company would be
required to issue 3,000,000 shares of Series A Stock and Warrants
to purchase 1,200,000 shares of common stock.
* * *
F-17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD LOOKING STATEMENTS
The statements contained in this Quarterly Report on Form 10-QSB that are not
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The Company intends that all forward-looking
statements be subject to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include statements in
which words such as "expect," "anticipate," "intend," "plan," "believe,"
"estimate," "consider," or similar expressions are used. These forward-looking
statements reflect the Company's views as of the date they are made with respect
to future events and financial performance. Forward-looking statements are not
guarantees of future performance. They involve many risks, uncertainties and
assumptions which cold cause the actual results of the Company to differ
materially from any future results expressed or implied by such forward-looking
statements. Examples of such risks and uncertainties include, but are not
limited to: obtaining sufficient financing to maintain the Company's planned
operation, the Company's ability to sustain and increase revenue, the continued
acceptance and growth of the internet, the changing of market conditions and
other risks detailed in "Management's Discussion and Analysis or Plan of
Operation" in this Quarterly Report on Form 10-QSB and elsewhere herein. The
Company does not have any intention or obligation to up-date these
forward-looking statements.
The following discussion and analysis of the Company's historical
results of operations for the six and three months ended June 30, 2000, pro
forma results of operations for the six and three months ended June 30, 1999 and
financial condition as of June 30, 2000 should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto herein
of the Company and Ferro Foods Corp., the Company's predecessor. The following
discussion and analysis of the results of operations and financial condition
compare the historical results of operations of the Company for the six and
three months ended June 30, 2000 with the pro forma results of operations for
the six and three months ended June 30, 1999 set forth in Note 4 to the
financial statements herein as though the acquisition of Ferro Foods had been
consummated on January 1, 1999, instead of November 23, 1999, the date the
predecessor was acquired.
Results of Operations
From July 1997 until November 23, 1999, Bio Response was actively
seeking an acquisition. Prior to November 23, 1999, Bio Response had no assets,
liabilities, or obligations and did not engage in any operations or generate any
revenues. On November 23, 1999 Bio Response was renamed Liberty Group Holdings,
Inc. and simultaneously acquired Liberty Food Group, Ltd. and certain assets of
Ferro Foods Corp. (see Notes 1 and 4 to the financial statements herein).
HISTORICAL SIX MONTHS ENDED JUNE 30, 2000 AS COMPARED TO
PRO FORMA SIX MONTHS ENDED JUNE 30, 1999
The Company incurred a net loss of ($1,182,473) for the six months
ended June 30, 2000 as compared to a net loss of ($432,007) for the six months
ended June 30, 1999.
SALES:
For the six months ended June 30, 2000, sales decreased by $1,165,678
or 13.5% to $7,459,887 from $8,625,565 for the six months ended June 30,
1999.The decrease was due to (1) the reorganization of the operational focus of
Ferro and the attention of management necessary in order to incorporate the
business of Ferro into the Company and (2) the Company incorporating new credit
procedures for the elimination of nonprofitable customers.
COST OF SALES:
For the six months ended June 30, 2000, cost of sales decreased by
$1,552,549 or 20.4% to $6,055,510 from $7,608,059 for the six months ended June
30, 1999. This decrease was due to (1) decrease in sales and (2) greater
efficiency in inventory purchasing.
18
<PAGE>
GROSS PROFIT PERCENTAGE:
For the six months ended June 30, 2000, gross profit percentage
increased by 7.0% to 18.8% from 11.8% for the six months ended June 30, 1999.
This increase was due to (1) greater efficiency in inventory purchasing and the
broadening of the product line to include higher margin product, (2) an increase
in sale prices and (3) the sale of more products with higher margins.
SELLING EXPENSES:
For the six months ended June 30, 2000, selling expenses increased by
$87,931 or 23.7% to $458,705 from $370,774 for the six months ended June 30,
1999. This increase was primarily related to an increase in the number of
tractor trailer rentals, in an attempt by the Company to broaden it sales
territories, as well as an overall increase in the cost of fuel.
GENERAL AND ADMINISTRATIVE EXPENSES:
For the six months ended June 30, 2000, general and administrative
expenses increased by $766,499 or 72.6% to $1,821,666 from $1,055,167 for the
six months ended June 30, 1999. The increase was due to (1) professional fees of
approximately $271,000, as a result of the acquisitions, reverse acquisition and
related public filings, (2) salaries and related benefits of approximately
$250,000 and (3) increases in office and warehouse expenses, rent, officers'
life insurance expense, travel, and various other general and administrative
expenses aggregating approximately $245,000 due to an increase in the corporate
infrastructure.
INTEREST EXPENSE:
For the six months ended June 30, 2000, interest expense increased by
$172,179 or 730.4% to $195,751 from $23,572 for the six months ended June 30,
1999. The increase was due primarily to noncash charges for (1) the amortization
of debt discount in the amount of $90,000 (2) a charge of $45,000 for the
approximate fair value of 36,000 common shares issuable to a lender as a penalty
for a past due loan and (3) a charge of $30,000 which was the approximate fair
value of 20,000 common shares issued as a loan fee in connection $108,000 of
short-term financing.
EQUITY IN NET LOSS OF EQUITY INVESTEE:
On March 14, 2000, the Company acquired a 51% equity interest in
AskTheRobot for total initial consideration of $200,000. The terms of the
acquisition agreement also required the Company to make additional payments that
were contingent upon the growth of the revenues of AskTheRobot. The Company
initially accounted for the acquisition of the 51% equity interest in
AskTheRobot in its interim financial statements as of and for the three months
ended March 31, 2000 pursuant to the purchase method of accounting and,
accordingly, the condensed financial statements therein included the results of
operations of AskTheRobot from March 14, 2000, the date of acquisition, to March
31, 2000 on a consolidated basis. However, AskTheRobot had no sales or material
results of operations during that period. During the period from July 1, 2000 to
August 15, 2000, the Company and AskTheRobot negotiated changes to the original
acquisition agreement whereby the Company's equity interest in AskTheRobot will
be reduced from 51% to 10%. As a result the Company's obligations with respect
to the contingent payments were cancelled and, accordingly, the Company's
investment in the remaining 10% equity interest will be comprised of the initial
consideration it paid on March 14, 2000 of $200,000. To reflect the temporary
nature of its control of AskTheRobot, the Company changed its method of
accounting for its 51% equity interest from consolidation to the equity method
retroactive to March 31, 2000. The change had no material effect on the
Company's sales and operating expenses and no effect on the Company's net loss
for the six and three month periods ended June 30, 2000.
For the six months ended June 30, 2000, the Company recorded a loss of
$110,728 for its 51% equity interest in AskTheRobot for the period from March
14, 2000, the date of acquisition to June 30, 2000.
HISTORICAL THREE MONTHS ENDED JUNE 30, 2000 AS COMPARED TO
PRO FORMA THREE MONTHS ENDED JUNE 30, 1999
The Company incurred a net loss of ($682,093) for the three months
ended June 30, 2000 as compared to a net loss of ($503,925) for the three months
ended June 30, 1999.
19
<PAGE>
SALES:
For the three months ended June 30, 2000, sales decreased by $417,119
or 10.0% to $3,740,062 from $4,157,181 for the three months ended June 30, 1999.
This decrease was due to (1) the reorganization of the operational focus of
Ferro and the attention of management necessary in order to incorporate the
business of Ferro into the Company and (2) the Company incorporating new credit
procedures for the elimination of nonprofitable customers.
COST OF SALES:
For the three months ended June 30, 2000, cost of sales decreased by
$847,676 or 22.7% to $2,881,826 from $3,729,502 for the three months ended June
30, 1999. This decrease was due to (1) a decrease in sales and (2) greater
efficiency in inventory purchasing.
GROSS PROFIT PERCENTAGE:
For the three months ended June 30, 2000, gross profit percentage
increased by 12.66% to 22.95% from 10.29% for the three months ended June 30,
1999. This increase was due to (1) greater efficiency in inventory purchasing
and the broadening of the product line to include higher margin product, (2) an
increase in sale prices and (3) the sale of more products with higher margins.
SELLING EXPENSES:
For the three months ended June 30, 2000, selling expenses increased by
$11,178 or 5.0% to $234,661 from $223,483 for the three months ended June 30,
1999. This increase was primarily related to an increase in in the number of
tractor trailer rentals, in an attempt by the Company to broaden its sales
territories, as well as an overall increase in the cost of fuel.
GENERAL AND ADMINISTRATIVE EXPENSES:
For the three months ended June 30, 2000, general and administrative
expenses increased by $326,383 or 46.8% to $1,022,922 from $696,539 for the
three months ended June 30,1999. This increase was due to (1) professional fees
of approximately $224,000, as a result of the acquisitions, reverse acquisition
and related public filings and (2) salaries and related benefits of
approximately $120,000.
INTEREST EXPENSE:
For the three months ended June 30, 2000, interest expense increased by
$171,697 or 1,482.4% to $183,279 from $11,582 for the three months ended June
30, 1999. This increase was due primarily to the same noncash charges as for the
six months ended June 30, 2000 described above.
EQUITY IN NET LOSS OF EQUITY INVESTEE:
For the three months ended June 30, 2000, the Company recorded a loss
of $99,467 for its 51% equity interest in AskTheRobot. Since AskTheRobot
commenced operations in January 2000, the Company did not recognized its 51%
ownership interest of the operations of AskTheRobot for the three months ended
June 30, 1999.
Liquidity/Capital Resources
The Company has incurred losses from inception and such losses and
negative cash flow is expected to continue for the foreseeable future. As of
June 30, 2000 the Company has a working capital deficit of ($718,281). If
revenues and current spending levels are not adjusted accordingly, the Company
may not achieve profitability. Even if profitability is achieved, the Company
may not sustain or increase such profitability on a quarterly or annual basis in
the future.
Financing received by the Company during the six months ended June 30,
2000 and management's plans related to obtaining additional financing for the
Company subsequent to June 30, 2000 are described below.
20
<PAGE>
In March 2000, the Company received $100,000 from an accredited
investor through the issuance of a short term, 9% promissory note in the same
principal amount and the issuance of 11,000 shares of common stock. On April 25,
2000, the note was converted into 50,000 shares of common stock and warrants to
purchase 10,000 shares of common stock. The warrants are exercisable at $8 per
share through April 25, 2003.
On March 31, 2000, the Company received $150,000 from another
accredited investor through the issuance of a short term, 9% promissory note in
the same principal amount and 30,000 shares of common stock to the lender. The
note is secured by all of the Company's assets as well as real estate owned by
certain parties related to the stockholders of the predecessor company and
leased by the Company. In addition, the loan agreement required the Company to
issue 1,000 shares of its common stock per day to the lender, commencing ten
days after the occurrence of a default, as a penalty until the obligation is
repaid. The note initially became due but was not paid on May 15, 2000. On
August 15, 2000, the Company agreed to issue 108,000 shares of common stock to
the lender as the total penalty for the default and the lender agreed to extend
the due date to August 31, 2000.
During the six months ended June 30, 2000, the Company received
unrestricted cash payments of $108,000 from investors for the purchase of units
of shares of convertible preferred stock and warrants to purchase shares of the
Company's common stock pursuant to a proposed private placement intended to be
exempt from registration under the Securities Act of 1933 (the "Act"), as
further described below. The amount received has been reflected as a short term
obligation as of June 30, 2000. In the event that the private placement is not
consummated, the Company will have to negotiate revised terms with the investors
for their investment.
The Company has prepared a private placement memorandum for a proposed
offering to "accredited investors" intended to be exempt from registration
pursuant to the provisions of Regulation D of the Act for the sale of 120 units
of Series A Preferred Stock (the "Series A Stock") and warrants to purchase
shares of the Company's common stock at $50,000 per unit. As proposed, each unit
offered will consist of 25,000 shares of Series A Stock and 10,000 redeemable
common stock purchase warrants (the "Warrants"). Each Warrant will give the
holder the right to purchase one share of common stock at the initial exercise
price of $5.00 per share during the three year period subsequent to the closing
of the offering. The Warrants would be redeemable by the Company if the price of
the common stock equals or exceeds 120% of the exercise price of the Warrant for
20 consecutive trading days prior to the redemption date.
In order to commence the private placement, the Company's Board of
Directors will be required to authorize the issuance of up to 3,000,000 shares
of Series A Stock. Each share of Series A Stock would have a par value of $.004
per share and a preference in liquidation equal to $2.00 per share plus all
declared but unpaid dividends. Subject to anti-dilution provisions, each share
of Series A Stock would be convertible into two shares of common stock at the
option of the holder and would be automatically converted into two shares of
common stock if the average closing price of the Company's common stock for 20
consecutive days is equal to or greater than $5.00 per share. In addition, the
holders of Series A Stock would be entitled to cast that number of votes equal
to the number of shares of common stock into which a share of Series A Stock is
convertible on each matter submitted to the Company's stockholders for voting.
The holders of Series A Stock would be entitled to receive noncumulative
dividends at the rate of 6% per annum on a semi-annual basis and whenever funds
are legally available. The holders of the Series A Stock would have the right to
redeem those shares at any time 30 months after issuance at the initial purchase
price plus all declared but unpaid dividends. Management cannot assure that any
of the units will be sold under the proposed terms. However, if the offering is
consummated on the proposed terms, the Company would be required to issue
3,000,000 shares of Series A Stock and Warrants to purchase 1,200,000 shares of
common stock.
21
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in various claims and lawsuits incidental to its
business. On May 12, 2000, the Company settled the lawsuit brought against it by
one of the Company's major vendors. See Note 9 to the Notes to Condensed
Consolidated Financial Statements filed herein.
Item 2. Changes in Securities and Use of Proceeds. On April 25, 2000, the note
which was issued by the Company to an accredited investor in March 2000 for
$100,000 was converted into 50,000 shares of common stock and warrants to
purchase 10,000 shares of common stock at an exercise price of $8.00 per share.
The warrants are exercisable through April 25, 2003. The transaction was exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
As of June 1, 2000, (i) 15,000 shares of common stock were issued in connection
with a loan made to the Company in the amount of $75,000, (ii) 11,000 shares
stock were issued in connection with a loan made to the Company in the amount of
$100,000 and (iii) 5,000 shares of common stock were issued in connection with a
loan in the amount of $43,000. These transactions were exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended.
See "Part II, Item 3. Defaults upon Senior Securities" below with respect to
addition issuances of shares of common stock by the Company.
Although the Company has prepared a private placement memorandum for a proposed
offering of preferred stock and warrants to purchase common stock, neither the
preferred stock nor the warrants have been issued. See "Part I, Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity/Capital Resources" above.
Item 3. Defaults upon Senior Securities. The note issued to an investor for
$150,000, which was initially due on May 15, 2000, was extended until August 31,
2000. Since such note requires the Company to issue the lender 1,000 shares a
day after a default of the note, 108,000 shares of common stock are to be issued
to the lender. If the note is not paid on August 31, 2000, the 1,000 share
penalty shall commence accruing again.
Item 4. Submission of matters to a vote of Security Holders.
None.
Item 5. Other information.
On July 31, 2000, the Company expanded its Board of Directors to add Crawford
Shaw and Wayne Beale.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K. None.
22
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
LIBERTY HOLDINGS GROUP, INC.
By: /s/ Dennis E. Lane
Dennis E. Lane,
Chairman, Chief Executive Officer,
Treasurer
By: /s/ Barry L. Hawk
Barry L. Hawk,
President, Chief Operations Officer,
Secretary
In accordance with the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
By: /s/ Dennis E. Lane August 21, 2000
-----------------------------------------------
Dennis E. Lane, Director, Chairman, Chief
Executive Officer, Treasurer
By: /s/ Barry L. Hawk August 21, 2000
-----------------------------------------------
Barry L. Hawk, Director, President, Chief
Operations Officer, Secretary
23
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INDEX OF EXHIBITS
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27.1 Financial Data Schedule
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