<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
- --------------------------------------------------------------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended JUNE 30, 1998
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: 2-41015
- --------------------------------------------------------------------------------
LBU, INC.
(Exact Name of Registrant as specified in its charter)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
NEVADA 62-1203301
(Jurisdiction of incorporation) (I.R.S Employer Identification No.)
310 PATERSON PLANK ROAD, CARLSTADT, N.J. 07072
(Address of executive offices) (Zip code)
Registrant's telephone number, including area code: (201) 933-2800
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: None
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
As of June 30, 1998, the Registrant had an aggregate of 1,543,997 shares of its
Common Stock outstanding.
1
<PAGE>
LBU, INC.
INDEX TO FORM 10-QSB
QUARTER ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
PART I PAGE NO.
<S> <C>
Balance Sheet 3-4
Statements of Operations-Six months 5
Statements of Cash Flows-Six months 6
Notes to Financial Statements 7-11
Management's Discussion and Analysis 12-16
Part II
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 18-19
SIGNATURES 20
</TABLE>
2
<PAGE>
LBU, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(unaudited) (audited)
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 9,600 $ 96,249
Restricted cash $ 105,955 105,955
Accounts receivable (net of allowance for
bad debts of $25,000) 235,983 229,753
Inventory 1,770,713 1,528,318
Deferred tax asset 132,953 55,516
Other current assets 285,029 292,546
---------- -----------
Total current assets 2,540,233 2,308,337
Noncurrent assets:
Fixed assets, net 298,612 289,177
Other assets 118,267 65,219
---------- -----------
Total assets $2,957,112 $2,662,733
========== ===========
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Account payable 1,049,735 $1,076,968
Accrued expenses 119,321 207,233
Customer advances 133,270 31,180
Accrued taxes 17,255 17,255
Lease payable - current 2,788 2,788
Convertible note payable 300,000 -
Note payable - current 811,443 33,333
---------- -----------
Total current liabilities 2,433,812 1,368,757
---------- -----------
Long-term liabilities:
Lease payable 4,844 6,992
Notes payable - 255,657
Convertible note payable - 300,000
Deferred tax liability. 8,793 8,793
---------- -----------
Total long-term liabilities 13,637 571,442
---------- -----------
Total liabilities 2,447,449 1,940,199
---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
LBU, INC.
BALANCE SHEETS, CONTINUED
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(unaudited) (audited)
----------- ------------
<S> <C> <C>
Stockholders' equity:
Common stock ($.001 stated value)
50,000,000 shares authorized,
1,543,977 and 1,338,977 issued
and outstanding, respectively 1,544 1,339
Additional paid in capital 1,148,378 1,102,208
Retained earnings (deficit) (640,259) (381,013)
---------- ----------
Total stockholders' equity 509,663 722,534
---------- ----------
Total liabilities and stockholder's equity $2,947,512 $2,662,733
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
LBU, INC.
STAEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Net sales $2,645,966 $3,000,406
Costs of goods sold 1,808,818 1,884,334
---------- ----------
Gross profit 837,148 1,116,072
---------- ----------
Operating expenses:
Shipping and selling 316,115 321,512
General and administrative expense 747,952 425,515
Factor fees and interest 107,869 75,830
---------- ----------
Total operating expenses 1,171,936 822,857
---------- ----------
Operating (loss) income (334,788) 293,215
Other income:
Interest 1,514 4,953
Sale of Fixed Assets 1,134
Rent 12,000
---------- ----------
Total other income 2,648 16,953
---------- ----------
Income (loss) before income taxes (332,140) 310,168
Income tax provision 72,894 (135,513)
---------- ----------
Net (loss) income $ (259,246) $ 174,655
========== ==========
Net (loss) income per share-Basic $ (.17) $ 0.13
Net (loss) income per share-Fully diluted $ (.17) $ 0.13
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
LBU, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Six
months ended months ended
June 30, 1998 June 30, 1997
-------------- -------------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $(259,247) $ 174,655
--------- ---------
Adjustments to reconcile net income to net
cash provided (used) by operating activities
Depreciation and amortization 21,297 9,465
(Increase) decrease in
Accounts receivable (6,230) (425,116)
Inventories (242,394) (100,410)
Other assets (124,124) (77,628)
Increase (decrease) in
Accounts payable (111,190) 65,773
Accrued expenses (87,912) (64,754)
Other liabilities 102,090 41,385
--------- ---------
Total adjustments (448,463) (551,285)
--------- ---------
Net cash used by operating activities (707,710) (376,630)
--------- ---------
Cash flow from investing activities:
Capital expenditures (29,579) (39,835)
--------- ---------
Net cash used by investing activities (29,579) (39,835)
--------- ---------
Cash flow from financing activities:
Repayment of loans (27,695) (24,076)
Sales of common stock 46,375 375,000
Proceeds from borrowings 548,000 -
--------- ---------
Net cash provided by financing activities 566,680 350,924
--------- ---------
Net (decrease) increase in cash (170,609) (65,541)
Cash at beginning of period 202,204 185,508
--------- ---------
Cash at end of period $ 31,595 $ 119,967
========= =========
Supplemental disclosures:
Cash paid during the period for
Interest and factor fees $ 14,119 $ 75,831
Income taxes $ 4,543 $ 633
Non-cash financing transactions:
Issuance of Common Stock for consulting $ 21,375 $ -
</TABLE>
The accompanying notes are an integral part of these financial statements
6
<PAGE>
LBU, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
The accompanying unaudited financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Accordingly, they do not
include all of the information and footnotes in accordance with generally
accepted accounting principals for complete financial statements and should be
read in conjunction with the audited financial statements included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1997. In
the opinion of management, the accompanying unaudited financial statements
contain all adjustments, consisting only of those of a normal recurring nature,
necessary for a fair presentation of the Company's financial position, results
of operations and cash flows at the dates and for the periods presented.
The operating results for the six months ended June 30, 1998 are not necessarily
indicative of the results to be expected for the full year.
Note 1 Organization and Significant Accounting Policies
- --------------------------------------------------------
Organization: LBU, Inc. (the "Company"), a Nevada corporation, designs,
- -------------
markets, manufactures and distributes fashionable and functional custom bags,
promotional products and houseware accessories for the retail, promotional,
original equipment manufacturer and industrial markets.
In February 1995, New Century Media, Ltd., a publicly-held Nevada corporation,
entered into a plan of reorganization with LBU, Inc., a Delaware corporation,
whereby the shareholders of LBU-Delaware obtained controlling interest in New
Century Media, Ltd., through a reverse acquisition. New Century Media, Ltd.
changed its name to LBU, Inc. on March 31, 1995.
Inventories: Inventories are valued at the lower of cost or market.
- ------------
Fixed Assets: Property and equipment are stated at cost. Furniture, fixtures and
- -------------
equipment are depreciated using the straight-line method over the estimated
useful lives of the assets ranging from 5 to 20 years. Leasehold improvements
are amortized over the term of the lease on a straight-line basis.
Cash and Cash Equivalents: For purposes of the statements of cash flows, the
- --------------------------
Company considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents. Restricted cash
consists of amounts held as collateral for certain obligations. As of December
31, 1997 and June 30, 1998, the Company had committed $63,688 of cash, which
serves as collateral for the Company's outstanding debt with Summit Bank, and
$42,267, which serves as collateral under the Company's financing and factoring
arrangements with the CIT Group.
7
<PAGE>
LBU, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(unaudited)
Income taxes: Income taxes are provided for the tax effects of transactions
- -------------
reported in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between financial and income tax
reporting methods utilized for depreciation, the amortization of intangible
assets, the reserve method for bad debts and the uniform capitalization rules
under IRS Code Section 263A for and state net operating loss carryforwards.
Deferred taxes represent the future tax return consequences of those
differences, which will be either taxable or deductible when the assets and
liabilities are recovered or settled. Effective March 31, 1995, LBU-Delaware
became a taxable entity. Previously, its earnings and losses were included in
the personal tax returns of the stockholders and the Company did not record an
income tax provision.
Estimates: The preparation of financial statements in conformity with generally
- ----------
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Stockholders Equity: In August 1995, the Company declared a 20 for 1 reverse
- --------------------
stock split on the then issued and outstanding common shares. All outstanding
share amounts included in the accompanying financial statements have been
retroactively adjusted to reflect the 20 for 1 reverse stock split. The result
of this action reduced 24,550,000 shares of pre-split outstanding Common Stock
to 1,227,500 shares on a post-split basis.
Note 2 Accounts Receivable and Factoring Arrangements
- ------------------------------------------------------
The Company entered into a factoring arrangement whereby a factor makes advances
to the Company based upon a percentage of certain eligible invoices. In
addition, the factor makes advances to the Company based upon its eligible
inventory levels. During April 1998, CIT agreed to make advances to the Company
based upon a percentage of its levels of eligible inventories. As of May 14,
1998, approximately $200,000 had been advanced to the Company under this
arrangement. Interest of 2% per annum above the prime rate is charged on
outstanding advances. The advances are collateralized by the Company's accounts
receivable, inventories and certain other assets. In addition, the Company's
President and principal shareholder and his wife, who is also an officer of the
Company, have personally guaranteed advances under these agreements. The factor
also charges a commission of 1 1/8% on the gross face amount of all amounts
factored, subject to a minimum commission per invoice and other service fees.
8
<PAGE>
LBU, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(unaudited)
The components of accounts receivable at June 30, 1998 and December 31, 1997 are
as follows:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Accounts receivable assigned to factor, net $225,168 $219,396
Non-factored accounts receivable 35,815 35,357
Allowance for doubtful accounts (25,000) (25,000)
-------- --------
Net accounts receivable $235,983 $229,753
======== ========
</TABLE>
Note 3 Related Party Transactions
- ----------------------------------
Of the notes described in (c) and (d) in Note 4 and Note 8, $700,000 is payable
to JPHC, a company whose chairman is a Director and shareholder of the Company.
Note 4 Notes and Capital Lease Payable
- ----------------------------------------
Notes and capital lease payable consist of the following as of June 30, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Note payable to a bank (a) $ 86,443 $ 88,990
Credit Line from Factor(b) 200,000 -
Promissory notes payable (c) 525,000 200,000
Convertible notes payable (d) 300,000 300,000
Capital lease (e) 7,632 9,780
---------- --------
Total 1,119,075 598,770
Less, current installments 1,083,674 36,121
---------- --------
Notes and capital lease payable,
Less current installments $ 35,401 $562,649
========== ========
</TABLE>
(a) Principal of $33,333 matures in 1998; $30,557 in 1999. Interest accrues at
prime plus 1.5%.
(b) Credit Line from Factor against inventory. Interest paid monthly at 2% per
annum.
(c) $400,000 of principal matures on January 1, 1999. Interest accrues at
9.12%. $125,000 of principal matures at December 31, 1998 at 5% per annum.
(d) Principal matures on January 1, 1999. Interest accrues at 9.12%. Notes are
convertible into Common Stock of the Company at a fixed conversion price of
$5.00 per share.
(e) Lease payments are $3,812 for each year through December 31, 2000. Interest
accrues at 12% per annum.
9
<PAGE>
LBU, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(unaudited)
Note 5 Segment Information
- ---------------------------
The following sets forth the Company's net sales by segment for the six months
ended June 30, 1998 and 1997 (in 000's):
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Sales:
Retail $1,013,938 $1,860,252
Promotional Products $1,402,362 $ 870,118
OEM and Industrial $ 229,696 $ 270,036
--------- ---------
Total $2,645,996 $3,000,406
========= =========
</TABLE>
Note 6 Legal Proceedings & Issues
- ------------------------------------
During March, 1996, Glennyre Capital Corporation, Poimandres Financial
Corporation and HJS Financial Services, Inc. (the "Plaintiff's") filed suit
against the Company in the State of Nevada. The lawsuit stems from a financial
service agreement dated July 24, 1995, by and between the Plaintiff's and LBU.
As part of the financial service agreement, 300,000 shares of LBU Common Stock
("the Shares") were issued to the Plaintiffs in return for financial and other
consulting services, which were to include raising capital. LBU claims such
services were not rendered and that the Shares were improperly registered and,
accordingly, on November 19, 1995, the Company invalidated the Shares and
subsequently 269,000 shares were returned and canceled by LBU's stock transfer
agent.
The Company and its legal counsel believe the action it has taken by
invalidating and canceling the Shares is appropriate. The Company has since
initiated a counter-suit against the Plaintiffs for breach of contract, fraud,
and other causes of action. Discovery in this case is proceeding.
In a related claim on September 12, 1997, Wolverton Securities Ltd.
("Wolverton") filed an action against the Company in U.S. District Court for the
District of Nevada. Wolverton Securities, Ltd. seeks to have the Company
reissue approximately 140,000 shares of the common stock referred to in the
preceding paragraphs. Wolverton also seeks specific damages in the amount
$405,000 and unspecified punitive damages. The Company filed an answer and
third-party complaint against the Plaintiff's and certain of their affiliates in
the same court during October 1997.
10
<PAGE>
LBU, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(unaudited)
Note 6 Legal Proceedings & Issues - (continued)
- ------------------------------------------------
Discovery in connection with the Wolverton litigation is proceeding. As of
August 13, 1998, the Company is considering a settlement offer from Wolverton in
the amount of 140,000 shares of common stock and $30,000 in cash. Management
and its attorneys are evaluating the outcome and its affects on the Company.
The Company has not made any provisions for settlement in its financial
statements. The Company will continue to vigorously pursue its counter suit and
defend itself in these and all other matters.
The Company is involved in litigation from time to time which is incidental to
the conduct of its business.
Note 7 Shareholders Equity
- ---------------------------
Common Stock
In March 1997, the Company sold 250,000 shares of restricted Common Stock to
John P. Holmes and Co., Inc. ("JPHC") for $375,000 in a private placement
transaction.
On February 19, 1998, the Company entered into a consulting agreement with JPO,
LLC ("JPO"), to provide financial services to the Company. In conjunction with
the agreement, the Company granted JPO 10,000 shares of restricted Common Stock
and 100,000 stock purchase warrants with an exercise price of $4.00 per share.
The warrants have a term of five years and are exercisable from the date of the
grant.
Stock Purchase Warrants
In connection with certain financing transactions, during August and September
1997, the Company granted JPHC stock warrants to purchase 10,000 shares of the
Company's Common Stock at $5.00 per share and to purchase 40,000 shares at $5.00
per share. The warrants have a term of three years and are exercisable from the
date of the grant. During February and March 1998, JPHC loaned the Company an
additional $200,000 in the form of promissory notes payable and agreed to defer
principal repayments under all of its debt with the Company until January 1,
1999. In connection with these transactions, the Company granted JPHC stock
warrants to purchase 100,000 shares at $4.25 per share. The warrants have a
term of two years and are exercisable from the date of the grant.
11
<PAGE>
LBU, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Note 8. - Forward Looking Statements and Associated Risks
- ---------------------------------------------------------
This Annual Report on Form 10-QSB contains certain forward-looking statements
within the meaning of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, including statements concerning the Company's
products, results of operations and prospects. These forward-looking statements
involve risks and uncertainties, including risks relating to general economic
and business conditions, among them, the availability and terms of additional
financing; changes which could affect customer payment practices or customer
spending; industry trends; the loss of major customers; changes in demand for
the Company's products; the timing of orders received from customers; cost and
availability of raw materials; increases in costs relating to manufacturing and
transportation of products; dependence on foreign manufacturing; the outcome of
litigation to which the Company is a party and the seasonal nature of the
business as detailed elsewhere in this Quarterly Report on Form 10-QSB, the
Company's Annual Report on Form 10-KSB and from time to time in the Company's
filings with the Securities and Exchange Commission. Such statements are based
on management's current expectations and are subject to a number of factors and
uncertainties, including those set forth above, which could cause actual results
to differ materially from those, described in the forward-looking statements.
Note 9. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
The following is a discussion of the financial condition and results of
operations of the Company for the three and six months ended June 30, 1998 as
compared to the same periods in the previous year. This discussion should be
read in conjunction with the Financial Statements of the Company and related
Notes included elsewhere in this Form 10-QSB.
Operational Background
Due to the sales growth experienced through 1997 the Company needed to address
additional capacity needs. Management entered in to an outsourcing arrangement
with an established manufacturing company in the Dominican Republic. The result
of this action gives the company access to increased capacity with lower
production costs while maintaining the highest quality standards. Management
believes this leaves the company well positioned to market its quick turn around
U.S. based manufacturing program, (Quickpro), while allowing the company to take
advantage of lower production costs in the Dominican Republic on orders with
longer lead times.
12
<PAGE>
LBU, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
Throughout 1998 the percentage of manufacturing outsourced to the Dominican
Republic increased. During this transition period, the company experienced some
disruptions in the established work flow due to start-up problems with raw
material allocations and scheduling conflicts encountered while distributing
work between the two facilities. These disruptions had a negative impact on
productivity and profit margins. Beginning in the second quarter the company
took steps to restore its operational efficiencies by implementing new processes
and new internal controls.
Results of Operations
Six months ended June 30,1998 versus the six months ended June 30, 1997
The Company's net sales decreased by $ 354,440 or 11.8% from $ 3,000,406 for the
six months ended June 30, 1997 to $ 2,645,966 and six months ended June 30,
1998. This decrease was primarily due to lost sales in the company's retail
division. Several clients were lost due to unforeseen consolidations within the
retail market. Additionally, the company was operating without a retail sales
manager from December 1997 through June 1998. In July 1998, this position was
filled. Presently, the company is expanding it's sales force by utilizing
independent, commission only, sales representatives through out the United
States. Several of which have already been hired.
As a result of the foregoing, gross profit decreased by $278,9224 from
$1,116,072 for the six months ended June 30, 1997 to $ 837,148 for the six
months ended June 30, 1998.
Costs of goods sold decreased by $ 75,516 from $1,884,334 (or 63% of net sales)
to $1,808,818 (or 68% of net sales) for the six months ended June 30, 1998.
These decreases are attributable to the corresponding decrease in sales.
General and administrative expenses increased by $322,437 from $425,515 six
months ended June 30, 1997 to $ 747,952 for the six months ended June 30, 1998.
This increase is primarily attributable to legal fees incurred in connection
with the law suit discussed under Note-6 of this document and incremental
startup costs incurred as a result of expanding operations into the Dominican
Republic.
Factor fees and interest expenses increased by $32,038 from $75,831 for the six
months ended June 30, 1997 to $107,869 for the six months ended June 30, 1998.
This increase is primarily attributable to an increase in notes payable.
As a result of the foregoing, total operating expenses increased by $349,078
from $822,858 for the six months ended June 30, 1997 to $ 1,171,936 for the six
months ended June 30, 1998.
13
<PAGE>
LBU, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position as of June 30, 1998 and December 31, 1997 was
$ 31,595 and $ 202,204, respectively, of which $ 105,955 was restricted
and not available for general corporate purposes. Net cash used in operating
activities for the six months ended June 30, 1998 and 1997 was $(707,710) and
$(376,630), respectively, representing a increase of $331,080 in 1998. The
increase in cash used was primarily due to a build up in inventory needed for
the Dominican Republic, and the increase in general and administrative expenses
that were incurred during the period.
During the six months ended June 30, 1998, cash used in investing activities
totaled $29,579, which consists of factory and office equipment.
During the six months ended June 30, 1998, net cash generated by financing
activities totaled $566,680, which consists of short-term borrowings, additional
paid in capital and the sale of common stock..
Currently, LBU's primary source of financing is the CIT Group ("CIT"), which
provides factoring and accounts receivable financing. The Company pays a 1.25%
factor charge on its invoices for the guarantee of payment on eligible
receivables, which CIT then collects from the Company's customers. During April
1998, CIT agreed to make advances to the Company based upon a percentage of its
levels of eligible inventories. As of May 14, 1998, approximately $200,000 had
been advanced to the Company under this arrangement. The Company pays 2% above
the prime-lending rate on borrowings up to 85% of an invoice amount and on
inventory advances. These facilities are secured by the Company's accounts
receivable, inventory, and certain other assets and by the personal guarantees
of the Company's current executive officers.
During 1997, the Company received an equity investment in the amount of $375,000
from a sale of Common Stock to JPHC and $500,000 in debt financing, $300,000 of
which is convertible into Common Stock of the Company, from the same entity.
During the first quarter of 1998, JPHC provided the Company with and additional
$200,000 of debt financing. The proceeds of these financings were used by the
Company primarily to fund its working capital needs during 1997 and 1998. On
June 30, 1998, the Company had total indebtedness of approximately $1,114,231;
substantially all of which is in the form of promissory notes payable to JPHC
(the "Notes").
14
<PAGE>
LBU, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
The Notes were due on April 1, 1998, however, JPHC agreed not to require
repayment before January 1, 1999. The Company will attempt to negotiate a
restructuring of the Notes that would include a further extension of the due
dates of the Notes during 1998. However, there can be no assurances that such
negotiations will be successful. In the event that due dates of the Notes are
not deferred beyond January 1, 1999 and the Company is unable to obtain
alternative financing, the Company does not believe that it can repay the Notes
at that time, which would have a material adverse effect on the Company's
business.
During 1997 and [for the 6 months ended June 30, 1998], the Company's net loss
and changes in its working capital utilized approximately $712,000 and $707,710
in working capital, respectively. The Company's ability to satisfy its financial
obligations under outstanding indebtedness will depend on its future operating
performance, which is subject to prevailing economic conditions, levels of
interest rates and other factors, many of which are beyond the Company's
control. Although the Company currently believes that its cash flow during 1998
will be sufficient to meet the Company's working capital and capital expenditure
requirements, debt service (on borrowings other than the Notes) and interest on
the Notes, there can be no assurances that this will be the case or that JPHC
will agree to restructure the Notes or allow additional deferrals of the due
dates of all or a portion of the Notes.
The Company generated an operating loss in 1997 and [for the 6 months ended June
30, 1998] and has experienced a decline in its gross margins in each year since
1994. These events had a significant negative impact on the Company's liquidity.
Management of the Company believes that a significant portion of the 1997
operating loss relates to a single order which was shipped during the fourth
quarter and that declines in gross margins since 1994 relate primarily to (i)
costs associated with the expansion of the Company's business and product lines
and (ii) competition, which impacts the Company's ability to maintain its gross
margins on its products. There can be no assurances that the Company will be
able to operate profitably, improve gross margins or cash flows or increase
liquidity during 1998 and beyond. In the event that the Company is unsuccessful
in its efforts to raise additional capital or cannot operate profitably on a
sustained basis, it may be required to significantly alter its strategy and
implement cost reduction or other cash flow enhancement programs.
Since its inception, the Company has required significant capital to fund its
operations and growth. During 1998, the Company intends to seek additional
financing through the issuance of debt, equity, other securities or a
contribution thereof. Although there can be no assurances that any additional
capital will be raised, any such financing which involves the issuance of equity
securities would result in dilution to existing shareholders and the issuance of
debt securities would subject the Company to the risks associated therewith,
including the risks that interest rates may fluctuate and the Company's cash
flows may be insufficient to pay interest and principal on such indebtedness.
15
<PAGE>
LBU, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
The Company currently has no commitments to obtain additional funds from CIT,
JPHC or any other financing source and there can be no assurances that the
Company will be able to obtain additional financing on terms which are
acceptable to it. The inability of the Company to obtain additional acceptable
financing would have a significant negative impact on the Company's operations.
Inflation
Inflation affects the cost of goods and services used by the Company. The
competitive environment somewhat limits the ability of the Company to recover
higher costs by raising prices, although the Company does selectively increase
prices for certain products. Moreover, the Company's products are sold to
distributors based on catalog and product sheet prices, which are published
annually. As such, the Company generally is not able to raise prices until a
new catalog is published. The Company attempts to mitigate the adverse effects
of future inflation through selective price increases, improved productivity and
cost containment efforts.
New Financial Standards
In June 1997, the FASB issued SFAS No. 131. "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 established standards for the
reporting of financial information from operating segments in annual and interim
financial statements. This statement requires that for evaluating segment
performance and deciding how to allocate resources to segments. Because this
statement addresses how supplemental financial information is disclosed in
annual and interim reports, the adoption will have no material impact on the
Company's financial statements. SFAS No. 131 will become effective in 1999.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibit No. Description
----------- -----------
<S> <C>
2.1 Plan of Reorganization dated February 17, 1995
by and between New Century Media, Ltd. a Nevada Corporation.
and LBU, Inc. a Delaware Corporation.*
3.1 Articles of Incorporation of LBU, Inc. dated September 2,
1994. #
3.2 By-laws of LBU, Inc. dated October 4, 1994. #
3.3 Form of two-year stock purchase warrant.**
3.4 Form of Three-year stock purchase warrant.**
10.1 Factoring Agreement dated October 25, 1993 by and
between LBU, Inc. (Delaware) and The CIT
Group/Commercial Services Inc.+
10.2 Guaranty dated October 25, 1993 by and between CIT and
Jeffrey and Isel Mayer, individually, relating to the above
Factoring Agreement.+
10.3 Inventory Security Agreement dated January 4, 1995 by
and between LBU, Inc. and The CIT Group/Commercial
Services, Inc.+
10.4 Lease agreement dated April 1, 1995 by and between Albert
Frassetto Enterprises, a sole proprietorship, and Bags of
Carlstadt, Inc. +
10.5 Subscription Agreement dated March 27, 1997 by and
between JPHC and the Registrant.+
10.6 Promissory note dated August 21, 1997, as amended on
February 21, 1998, by and between the Registrant and
JPHC.+
10.7 Promissory note dated September 19, 1997, as amended on
November 21, 1997 and February 21, 1998, by and
between the Registrant and JPHC.+
10.8 Consulting agreement dated February 19, 1998 by and
between JPO, LLC and the Registrant. +
21.1 List of Subsidiaries
Subsidiary State of Incorporation
---------- ----------------------
LBU, Inc. Delaware
Bags of Carlstadt, Inc. New Jersey
27.1 Financial Data Schedule.
</TABLE>
* Filed as an Exhibit to the New Century Media, Ltd. (a predecessor of
the Registrant) Form 10-K/A for the year ended December 31, 1994
dated March 10, 1995.
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K, CONTINUED
# Filed as an Exhibit to the New Century Media, Ltd. Form 10-Q for the
quarter ended September 30, 1994 dated November 8, 1994.
+ Filed as an Exhibit to the Company's Form 10-KSB for the year ended
December 31, 1997.
** Filed as an Exhibit to the Company's Form 10-QSB for the quarter ended
March 31, 1998.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
June 30, 1998.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: August 15, 1998
LBU, INC.
By: /s/ Jeffrey Mayer
-----------------------
JEFFREY MAYER
Chairman of the Board
Chief Executive Officer, President
/s/ Isel Pineda-Mayer
------------------------
Isel Pineda-Mayer
Treasurer, Secretary
19
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 9,600
<SECURITIES> 0
<RECEIVABLES> 235,983
<ALLOWANCES> (25,000)
<INVENTORY> 1,770,713
<CURRENT-ASSETS> 2,540,233
<PP&E> 298,612
<DEPRECIATION> 130,300
<TOTAL-ASSETS> 2,947,512
<CURRENT-LIABILITIES> 2,433,812
<BONDS> 0
0
0
<COMMON> 1,148,378
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,947,512
<SALES> 2,645,966
<TOTAL-REVENUES> 2,645,966
<CGS> 1,808,818
<TOTAL-COSTS> 2,980,754
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 107,869
<INCOME-PRETAX> (332,140)
<INCOME-TAX> 72,894
<INCOME-CONTINUING> (259,246)
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