LIBERTY GROUP HOLDINGS INC
10QSB, 2000-05-22
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                                  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).



                                      * * *


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