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 March 31, 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 Identification No.)
incorporation or organization)
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, 6,530,000 shares outstanding as of May 19, 2000.
Traditional Small Business Disclosure Format (elect one) ____ Yes __X__ No
- --------------------------------------------------------------------------------
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis of the Company's results of operations and
financial condition should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto. The following discussion
and analysis of the results of operations and financial condition reflects
results of operations of the Company for the three months ended March 31, 2000
and 1999 as though the acquisition of Ferro Foods had been consummated on
January 1, 1999 and the acquisition of TheRobot had been consummated on January
24, 2000, the date TheRobot commenced operations.
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 Item 1, "Description of Business" above.
On a pro forma basis, the Company incurred a net loss of ($544,859) for the
three months ended March 31, 2000 as compared to net income of $71,401 for the
three months ended March 31, 1999.
Sales for the three months ended March 31, 2000 decreased by $748,559 or 16.7%
to $3,719,825 from $4,468,384 for the three months ended March 31, 1999. The
primary reason for the decrease in sales is due to 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.
Cost of sales for the three months ended March 31, 2000 decreased by $704,873 to
$3,173,684 or 18.7% from $3,878,557 for the three months ended March 31, 1999.
The decrease is primarily related to the decrease in sales.
Gross profit percentage for the three months ended March 31, 2000 increased by
1.4% to 14.6% from 13.2% for the three months ended March 31, 1999. The primary
reason for the increase is the greater efficiency in inventory purchasing and
the broadening of the product line to include higher margin products.
Selling expenses for the three months ended March 31, 2000 increased by $79,639
or 55.1% to $224,044 from $144,405 for the three months ended March 31, 2000.
The increase is primarily attributable to an increase in payroll.
General and Administrative expenses for the three months ended March 31, 2000
increased by $536,391 or 144.3% to $908,036 from $371,645 for the three months
ended March 31, 2000. The increase is mainly due to the following: (1) operating
expenses of TheRobot of approximately $100,000, (2) professional fees of
approximately $75,000, as a result of the Company being a public reporting
company, (3) salaries and related benefits of approximately $163,000, and (4)
increases in office and warehouse expenses, rent, officers' life insurance
expense, travel, and various other general and administrative expenses
aggregating approximately $200,000.
Liquidity/Capital Resources
The Company has losses from operations and negative cash flow, and this
is expected to continue for the foreseeable future. If revenues and current
spending levels are not adjusted accordingly, the Company may not generate
sufficient revenues to achieve profitability. Even if profitability is achieved,
the Company may not generate sufficient revenues to 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.
The Company is reviewing its options for additional sources of capital
and is offering securities of the Company to provide for working capital,
internal growth and future acquisitions. Presently, the Company is conducting an
offering of up to $6,000,000 for the aforementioned purposes. There is no
guarantee that the offering will be successfully completed. If additional funds
are raised by the issuance of our equity securities, such as through the
exercise of the redeemable warrants, then existing stockholders may experience
dilution of their ownership interest and such securities may have rights senior
to those of the then existing holders of common stock. If additional funds are
raised by the issuance of debt instruments, the Company may be subject to
certain limitations on our operations. If adequate funds are not available or
not available on acceptable terms, the Company may be unable to fund expansion,
take advantage of acquisition opportunities, develop or enhance services or
respond to competitive pressures. 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. 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.
In March 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.
Commitments
Pursuant to the Company's acquisition of a 51% interest in
TheRobot, the Company, through a wholly-owned subsidiary, must provide
additional funding to TheRobot on a quarterly basis commencing June 14,
2000. The terms of the acquisition agreement require the Company to make
five quarterly payments to TheRobot that are contingent upon the number of
subscribers to the services of TheRobot. If the number of subscribers
reaches the specified level for the quarter: (i) the Company is required to
pay TheRobot $200,000 and (ii) the Company will be required to issue the
number of common shares to TheRobot 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.
<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.
Changes in Securities. Effective March 31, 2000, the Company received $150,000
from an investor through the issuance of a promissory note and the issuance of
30,000 shares of common stock to said 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 Ferro Foods Corporation and leased by the Company. See Note 7 to
the Condensed Consolidated Financial Statements filed herein. The issuance was
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933,
as amended.
Item 3. Defaults upon Senior Securities. None.
Item 4. Submission of matters to a vote of Security Holders. None.
Item 5. Other information. None.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K. During the quarter ended March 31, 2000, the
Company filed a Form 8-K/A on March 14, 2000, with respect to Item
5, regarding the release of certain shares from escrow and the
lawsuit instituted by a major vendor (see Notes 4 and 9 to the
Condensed Consolidated Financial Statements filed herein) and with
respect to Item 7, regarding the pro forma financial statements of
Ferro Foods Corporation (see Note 1 to the Condensed Consolidated
Financial Statements filed herein).
<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 May 22, 2000
-----------------------------------------------
Dennis E. Lane, Director, Chairman, Chief
Executive Officer, Treasurer
By: /s/ Barry L. Hawk May 22, 2000
-----------------------------------------------
Barry L. Hawk, Director, President, Chief
Operations Officer, Secretary
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
PAGE
Part I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2000 (Unaudited) F-2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (Unaudited) F-3
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY
THREE MONTHS ENDED MARCH 31, 2000 (Unaudited) F-4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (Unaudited) F-5
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited) F-6/15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION ??/??
Part II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS ??
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ??/??
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ??/??
Item 6. EXHIBITS AND REPORTS ON FORM 8-K ??
SIGNATURES ??
INDEX OF EXHIBITS ??
* * *
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2000
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Cash ................................................................... $ 215,863
Accounts receivable, net of allowance for doubtful accounts of $22,000 . 1,158,676
Inventories ............................................................ 1,186,698
Other current assets ................................................... 36,753
-----------
Total current assets ........................................ 2,597,990
Equipment and improvements, net of accumulated depreciation
and amortization of $20,612 ....................................... 223,389
Notes and other receivables from stockholders of Predecessor ........... 1,486,319
Goodwill, net of accumulated amortization of $11,745 ................... 496,275
Other assets ........................................................... 27,465
-----------
Total ....................................................... $ 4,831,438
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes payable, net of debt discount of $90,000 ......... $ 160,000
Current portion of capital lease obligations ...................... 10,890
Accounts payable .................................................. 2,098,335
Accrued salaries and related expenses ............................. 261,103
Other accrued expenses ............................................ 143,943
Advances from related party ....................................... 50,000
-----------
Total current liabilities ................................... 2,724,271
Long-term capital lease obligations, net of current portion ............ 23,528
-----------
Total liabilities ........................................... 2,747,799
-----------
Minority interest in subsidiary ........................................ 181,338
-----------
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; 6,530,000 shares issued and outstanding ............ 26,120
Additional paid-in capital ........................................ 3,088,880
Accumulated deficit ............................................... (1,212,699)
-----------
Total stockholders' equity .................................. 1,902,301
-----------
Total ....................................................... $ 4,831,438
===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
(Predecessor)
<S> <C> <C>
Sales ................................ $ 3,719,825 $ 4,468,384
Cost of sales ........................ 3,173,684 3,878,557
----------- -----------
Gross profit ......................... 546,141 589,827
----------- -----------
Operating expenses:
Selling ......................... 224,044 147,291
General and administrative ...... 820,821 364,519
----------- -----------
Totals ....................... 1,044,865 511,810
----------- -----------
Income (loss) from operations ........ (498,724) 78,017
Interest expense ..................... 12,472 29,703
----------- -----------
Income (loss) before minority interest (511,196) 48,314
Minority interest .................... 10,816
-----------
Net income (loss) .................... $ (500,380) $ 48,314
=========== ===========
Basic net loss per common share ...... $ (.08)
===========
Basic weighted average common shares
outstanding ..................... 6,500,000
===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Additional
Common Stock 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 as fee for loan 30,000 120 89,880 90,000
Net loss .................... (500,380) (500,380)
----------- ----------- ----------- ----------- -----------
Balance, March 31, 2000 ..... 6,530,000 $ 26,120 $ 3,088,880 $(1,212,699) $ 1,902,301
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
(Predecessor)
<S> <C> <C>
Operating activities:
Net income (loss) ........................................... $ (500,380) $ 48,314
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................ 25,773 18,504
Provision for bad debts .................................. 13,000
Minority interest ........................................ (10,816)
Changes in operating assets and liabilities:
Accounts receivable ................................... (316,233) 144,788
Inventories ........................................... (415,134) 192,160
Other current assets .................................. 9,759 15,250
Accounts payable ...................................... 1,097,661 (458,360)
Accrued expenses ...................................... 100,135 31,611
----------- -----------
Net cash provided by (used in) operating activities (9,235) 5,267
----------- -----------
Investing activities:
Purchase of business, net of cash acquired of $181,493 ...... (18,507)
Purchases of equipment and improvements ..................... (18,717)
Loans to stockholders of Predecessor and other related
parties .................................................. 7,869 (104,672)
Increase in other assets .................................... (7,949)
-----------
Net cash used in investing activities ............. (37,304) (104,672)
----------- -----------
Financing activities:
Proceeds from issuances of short-term notes payable, net .... 250,000 107,000
Repayments of long-term borrowings .......................... (2,611) (16,877)
----------- -----------
Net cash provided by financing activities ......... 247,389 90,123
----------- -----------
Net increase (decrease) in cash .................................. 200,850 (9,282)
Cash, beginning of period ........................................ 15,013 9,340
----------- -----------
Cash, end of period .............................................. $ 215,863 $ 58
=========== ===========
Supplemental disclosures of cash flow data:
Interest paid ............................................... $ 9,058 $ 29,701
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<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.
<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 and cash flows of the Predecessor for the three
months ended March 31, 1999 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, on March 14, 2000, Liberty
Group Services, Inc., a newly formed subsidiary of the Company,
acquired a 51% equity interest in AskTheRobot, LLC ("TheRobot"),
an on-line personnel recruiting and placement services company,
in a transaction that was also accounted for as a purchase
business combination. Accordingly, the results of operations of
TheRobot have only been consolidated from the date of
acquisition.
<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 and March 14, 2000 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 financial position of the Company as of
March 31, 2000, and the results of operations and cash flows of
the Company and the Predecessor for the three months ended March
31, 2000 and 1999. 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 three months
ended March 31, 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" ("SFAS 128"). 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.
<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 loss for the three months ended March
31, 2000, the assumed effects of the exercise of options
outstanding at March 31, 2000 would have been anti-dilutive. The
Predecessor did not have any potentially dilutive common shares
during the three months ended March 31, 1999. Therefore, no
diluted per share amounts have been presented in the
accompanying condensed consolidated statements of operations.
Note 4 - Purchase acquisitions:
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.
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Purchase acquisitions (continued):
On March 14, 2000, Liberty Group Services, Inc. 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 for its 51% interest in TheRobot 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 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 TheRobot from the
date of acquisition.
Pursuant to the purchase method of accounting, the initial cost
of acquiring TheRobot, which exceeded the underlying fair value
of the Company's 51% interest in the net assets acquired by
$272,558, was allocated as follows:
<TABLE>
<S> <C>
Cash .................................................. $ 181,493
Office equipment ...................................... 17,901
Goodwill .............................................. 272,558
Other current and noncurrent assets ................... 12,837
Noninterest bearing advances from related party without
specific due date .................................. (50,000)
Accrued expenses ...................................... (42,632)
Minority interest ..................................... (192,157)
---------
Total ............................................. $ 200,000
=========
</TABLE>
The terms of the acquisition agreement also require the Company
to make four quarterly payments to TheRobot through June 13, 2001
that are contingent upon the growth of the revenues of TheRobot
to specified levels during each quarter. If the revenues of
TheRobot reach the specified level for the quarter: (i) the
Company is required to pay $200,000 to the sellers in cash, and
(ii) the Company will be required to issue the number of common
shares to the sellers 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.
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Purchase acquisitions (concluded):
The following unaudited pro forma information shows the results
of operations of the Company for the three months ended March 31,
2000 and 1999 as though the acquisition of the Predecessor had
been consummated on January 1, 1999 and the acquisition of
TheRobot had been consummated on January 24, 2000, the date
TheRobot commenced operations:
<TABLE>
2000 1999
----------- -----------
<S> <C> <C>
Sales .......................................... $ 3,719,825 $ 4,468,384
Cost of sales .................................. 3,173,684 3,878,557
----------- -----------
Gross profit ................................... 546,141 589,827
----------- -----------
Operating expenses:
Selling ..................................... 224,044 144,405
General and administrative .................. 908,036 371,645
----------- -----------
Totals .................................. 1,132,080 516,050
----------- -----------
Income (loss) from operations .................. (585,939) 73,777
Interest expense ............................... 12,472 2,376
----------- -----------
Income (loss) before minority interest ......... (598,411) 71,401
Minority interest .............................. 53,552
-----------
Net income (loss) .............................. $ (544,859) $ 71,401
=========== ===========
Basic net income (loss) per common share ....... $ (.08) $ .01
=========== ===========
Basic weighted average common shares outstanding 6,500,000 6,375,000
=========== ===========
</TABLE>
In addition to combining the historical results of operations of
the Company for the three months ended March 31, 2000 and
TheRobot for the period from January 24, 2000 through March 31,
2000, the unaudited pro forma results of operations include
adjustments to reflect for the three months ended March 31, 2000
and/or March 31, 1999 (i) the amortization of the goodwill
recorded in connection with the acquisition of the Predecessor
and TheRobot based on estimated useful lives of ten and five
years, respectively, (ii) the minority interest in the results of
operations of TheRobot; (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 by the
Predecessor 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, and the acquisition of TheRobot had been consummated on
January 24, 2000 instead of March 14, 2000.
<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 March 31, 2000, the Company had notes and other receivables
from related parties aggregating $1,426,998, 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 $1,144,412 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 and bears interest at
10%. As of March 31, 2000, the principal balance of the First
Note 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
March 31, 2000 (see Notes 1, 4 and 10 herein). However, due to
the uncertainties related to collectibility, the Company has not
accrued any interest on the First Note.
Note 6 - Income taxes:
As of March 31, 2000, the Company had net operating loss
carryforwards of approximately $635,000 available to reduce
future Federal taxable income which will expire in 2020.
The Company's deferred tax assets as of March 31, 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 ......... 9,000
Net operating loss carryforwards ........ 254,000
---------
483,000
Less valuation allowance ................ (483,000)
---------
Total ............................ $ --
=========
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Income taxes (concluded):
Due to the uncertainties related to, among other things, the
extent and timing of its future taxable income, the Company
offset the deferred tax assets by an equivalent valuation
allowance as of March 31, 2000. As a result of the establishment
of the valuation allowance as of March 31, 2000, there is no
credit for income taxes reflected in the accompanying condensed
consolidated statement of operations for the three months ended
March 31, 2000 to offset the Company's pre-tax loss.
Note 7 - Short-term notes payable:
As of March 31, 2000, the Company had short-term obligations with
an aggregate carrying value of $160,000 attributable to the notes
issued in March 2000 described below.
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 through a private placement intended to be exempt from
registration pursuant to the provisions of Regulation D of the
Securities Act of 1933. The warrants will be exercisable at $8.00
per share through April 25, 2003.
Effective 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 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. 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 Predeccessor
and leased by the Company (see Note 11 in the 10-KSB). The note
became due but was not paid on May 15, 2000. The loan agreement
provides that if the Company defaults on the payment of this
obligation it must issue 1,000 shares of its common stock per day
to the lender, commencing ten days after the occurrence of the
default, as a penalty.
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 March 31, 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 are
exercisable at $3.00 per share during the five year period
subsequent to the date of grant.
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 - Stock options (concluded):
In connection with the acquisition on March 14, 2000, the board
of directors granted options to two executives of TheRobot
whereby they may purchase, in the aggregate, up to 20,000 shares
of common stock at $3.00 per share if TheRobot achieves specified
increases in revenues or it acquires businesses with specified
levels of revenues.
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 March 31, 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.
Note 9 - Other commitments and contingencies: 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
10), as additional collateral for the term note; and (iii)
Liberty Food LLC guaranteed the payment of the term note and
the interest thereon.
Employment agreements:
In addition to the Company's obligations under employment
agreements that were effective prior to December 31, 1999, as
further explained in Note 11 in the 10-KSB, TheRobot has
entered into employment agreements with two of its executives
which became effective on March 14, 2000 and require aggregate
payments of approximately $150,000 in 2000; $233,000 in 2001;
$239,000 in 2002; $261,000 in 2003; $309,000 in 2004; and
$53,000 in 2005. The executives will also receive bonuses to
be determined by the board of directors of the Company;
however, such bonuses may not be paid unless TheRobot's
revenues and income reach certain specified levels; if these
levels are reached, such bonuses may not be less than 10% of
annual base compensation.
<PAGE>
LIBERTY GROUP HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10- Subsequent events:
During the period from January 1, 2000 through May 1, 2000, the
Company made additional payments on behalf of the stockholders of
the Predecessor that increased the total balance receivable from
related parties to approximately $2,000,000. In addition, a total
of 67,000 shares of the Company's common stock were transferred
from escrow during that period to satisfy obligations to
creditors of the Predecessor (see Notes 1 and 4 herein). 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 a promissory note (the "Second
Note") to the Company with a principal balance of $1,000,000. The
Second Note matures on May 31, 2001, bears interest at 10% and is
secured by the same assets and interests as the First Note (see
Note 5 herein).
* * *