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FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the year ended December 31, 1997
Commission File Number: 2-41015
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LBU, Inc.
(Exact name of Registrant as specified in its charter)
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NEVADA 62-1203301
(Jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
310 PATERSON PLANK ROAD, CARLSTADT, NJ 07072
(Address of principal 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
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, and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [X].
Registrant's revenues for the year ended December 31, 1997 were $6,463,479.
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 27, 1998, was approximately $2,679,885 based upon the
last sales price on March 26, 1998 on the OTC Electronic Bulletin Board for the
Company's Common Stock of $3.87 per share. As of March 27, 1998, the registrant
had 1,388,977 shares of its Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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LBU, Inc.
FORM 10-KSB
TABLE OF CONTENTS
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PART I
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1. Business 3
2. Promotional Products Industry 3
3. Retail Products Industry 5
4. Industrial and Original Equipment Manufacturer Industry 6
5. Strategy 7
6. Operation and Production 7
7. Competition 10
8. Environmental Matters 10
9. Insurance 11
10. Patents and Trademarks 11
11. Seasonality 11
12. Backlog 12
13. Employees 12
14. Risk Factors 12
15. History of Corporate Structure 14
16. Properties 14
17. Legal Proceedings 15
18. Submission of Matters to a Vote of Security Holders 15
PART II
19. Market for Registrant's Common Equity and Related Stockholders Matters 16
20. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
21. Financial Statements and Supplementary Data 21
22. Changes in and Disagreements with Accounts on Accounting and Financial
Disclosure 22
PART III
23. Directors and Executive Officers of the Registrant 23
24. Executive Compensation 24
25. Security Ownership of Certain Beneficial Owners and Management 24
26. Certain Relationships and Related Transactions 26
27. Exhibits, List and Reports on Form 8-K 27
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PART I
ITEM 1. BUSINESS
General
FORWARD LOOKING STATEMENTS: This Annual Report on Form 10-KSB 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, 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; and the seasonal nature of the
business as detailed elsewhere in this 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.
LBU, Inc. (the "Company", "LBU" or "Registrant") designs, markets, manufacturers
and distributes fashionable and functional custom bags, promotional products and
houseware accessories for the retail, promotional, original equipment
manufacturer and industrial markets. The Company's sales have increased, through
internal growth, from $2.7 million in 1994 to $6.5 million in calendar 1997.
Sales growth is the result of expanding product offerings and penetrating
various channels of distribution.
The bag and accessory business now operated by LBU was founded in 1989 by the
Company's Chairman, President and CEO, Jeffrey Mayer, as a New York City
"start-up" company which manufactured and sold designer laundry bags to local
and regional retail outlets such as Zabars, Conway and college bookstores. The
Company has since expanded its product line and levels of distribution to
national and international accounts in the retail, promotional, original
equipment manufacturer and industrial markets. In 1995, this business was
acquired by the Company in a reorganization which resulted in Mr. Mayer becoming
the Company's principal shareholder and executive officer. See "History of
Corporate Structure."
The Company's business consists of the following:
PROMOTIONAL PRODUCTS INDUSTRY
The United States promotional products industry, which consists of products
bearing a name, corporate logo, advertiser's slogan or insignia, which are given
by companies to promote goodwill, sales, customer loyalty and increased exposure
to a targeted audience totaled approximately $18.5 billion in 1997 up from $4.5
billion in 1989, according to figures
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published by the Promotional Products Association, Inc., an industry trade
organization. The Company believes that the growth of the industry in recent
years has resulted from (i) increased recognition by advertisers of promotional
products as an efficient form of advertising; (ii) an increase in the number of
distributors marketing these products, and (iii) growing acceptance of the
potential impact and success of promotional programs.
Specialty and premium promotional products can be valuable components of an
advertiser's overall advertising or marketing campaign. Promotional product
advertising generally represents a low cost alternative to more traditional
advertising media. In addition because promotional products are designed for use
or display, they provide repeat exposure of an advertiser's message to a
specific group of consumers. As such, promotional products, when measured on the
basis of "cost per exposure," often represent a more efficient use of
advertising dollars.
The promotional products industry is comprised of direct corporate users,
advertising agencies, over 2,500 suppliers, who decorate and customize products,
and over 15,000 independent distributors who solicit orders and sell directly to
advertisers on a non-exclusive basis. Generally, distributors are closely-held
entities with a local or regional focus. Distributors range from one-person,
one-product businesses, which only represent manufacturers, to large public
entities which manufacture products and employ large sales forces to solicit
orders from customers. While certain distributors maintain showrooms to assist
customers in the selection of the array of products which are available, the
majority of distributors are comprised of entities which bring sample cases and
suppliers' catalogs to their customers. Many of the larger distributors are
also vertically integrated in that they manufacture products traditionally used
in the specialty and premium advertising industry and principally market their
own product line. These distributors accounted for approximately $10.1 billion
of promotional product sales during 1997 according to the Advertising Specialty
Institute ("ASI"), the leading industry trade organization.
Specialty and premium advertising can be customized to appeal to an advertiser's
intended demographic because of the wide variety of merchandise available for
such purposes. Some of the Company's popular promotional products include gear
and travel bags, insulated water bottle holders, cosmetic bags, backpacks,
duffel and tote bags, compact disc holders and golf shoe bags. The Company has
successfully developed promotional programs for many Fortune 500 companies
operating in the retail, communications, financial, healthcare and automotive
industries. During 1996 and 1997, sales in the Company's Promotional Products
division accounted for approximately $1.9 and $2.9 million or 37% and 45% of the
Company's total sales respectively.
The Company believes that it has a competitive advantage in the promotional
products market due to its primary sales and marketing focus on the advantages
of functional and wearable bags and bag-related items as a marketing tool
compared with other industry participants which offer multiple lines of
promotional products, which include traditional items such as T-shirts, hats and
pens. In addition, the Company has the ability to create, manufacture and
distribute a complete promotional program to its clients on a relatively short
turnaround schedule. This is
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due to the Company's QUICKPRO/TM/ process which features a comprehensive in-
house product development operation. The Company believes that its Quickpro/TM/
process provides an advantage over competitors, which rely heavily on products
manufactured overseas. The Company has the ability to produce and deliver a
selection of custom manufactured samples in multiple styles and colors,
emblazoned with the client's corporate insignia, in 24 hours or less. This
compares favorably to import competitors, which generally require two weeks or
more to generate samples. The Company believes that success in the promotional
products industry is dependent upon quick shipments of orders, often in under
three weeks. The Company believes that, by virtue of its vertically integrated
United States manufacturing capabilities, it has a competitive advantage. The
Company's average turnaround time on custom orders is three weeks which compares
favorably to the average turnaround time of its import competitors which
averages twelve weeks. Offering decision-makers a complete marketing program
including a wide range of timely samples which are customized in terms of style,
design, material, color and function often enhances the likelihood that the
Company will receive certain orders. As such, certain of the Company s
competitors are also its clients and purchase the Company s products to fulfill
orders which they have received from their customers. In addition, QUICKPRO/TM/
often provides the Company with additional price flexibility as there is a
perceived value added by the process.
The QUICKPRO/TM/ process incorporates three distinct processes:
The Creative Process includes the development of a unique promotional item
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through LBU's in-house art and design capabilities. The Company's creative
staff, using a customers budget parameters and ideas, builds series of
distinctive product designs, which are customized to the client's targeted
demographics in terms of colors, material, construction, use and logo.
The Development Process utilizes the Company's production staff consisting of
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cutters, sewers and printers who generate several samples incorporating the
elements and features identified during the creative process for the client's
approval. LBU's staff then reviews the samples with the customer in order to
determine the features and specifications of the finished product to be
produced.
The Marketing Process focuses on packaging the program within the client's
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fulfillment needs. LBU's marketing staff then makes recommendations to the
customer on how the program could be presented to their targeted audience.
RETAIL PRODUCTS INDUSTRY
Houseware Industry
The Company manufacturers and sells a full line of versatile laundry bags,
houseware and garment care products to regional and national accounts. This
attractively packaged product line consists of approximately 75 different items
in various styles, sizes, colors and materials which are commonly displayed by a
retailer on racks, in-line wall displays or point-of-purchase displays, which
are free-standing organizers supplied by the Company. The Company
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manufacturers the following houseware items: mesh hosiery and sock/sweater bags,
nylon and canvas laundry novelty bags, hampers, travel bags, compact disc
carriers and a full line of ironing board pad and cover sets. These durable
products are sold to major regional and national houseware retailers primarily
by local independent sales representatives who market non-competing houseware
lines. The retail housewares industry is estimated to be $54 billion annually by
the National Housewares Manufacturing Association. Some products are seasonal,
such as the Company's recreational line of Summer products an its "Back to
School" laundry bag programs in which bags displaying college emblems are
purchased by university bookstores. The National Association of College
Bookstores estimates the college retail industry to be in excess of $7 billion
per year. The Company attends the National Housewares Show annually.
Accessory Industry
The Company has developed an extensive line of high-end designer bags for the
accessory market. These fashionable products include over 100 styles using
various high-tech fabrics such as Europrene/TM/, denims, nylons, vinyl and
micro-meshes. The accessory market is a $22 billion per year industry as
reported in Details Magazine in March 1996. The Company s accessory products
include: cosmetic cases, back packs, water bottle bags, briefcases, sports
sacks, hand bags and designer travel bags. The Company's clients include some of
the leading department stores and boutiques in the United States as well as
major retailers in Japan.
During 1996 and 1997, sales in the Company's Retail Products division consisted
primarily of housewares and accounted for approximately $2.8 and $3.0 million or
55% and 47% of the Company's total sales, respectively.
In February 1997, the Company opened a 1,000 square foot showroom in the
Accessory Building on Fifth Avenue in New York City. This showroom provides
accessibility and exposure for the Company's products to the buyers of accessory
items and is intended to generate sales by enabling the Company to capitalize on
the leads generated by attending various industry trade shows.
INDUSTRIAL AND ORIGINAL EQUIPMENT MANUFACTURER ("OEM") INDUSTRY
The Company's Industrial and OEM divisions sell custom made bags and cases for
various commercial and industrial packaging and government applications. In the
Industrial division, the Company's products include heavy-duty laundry bags for
commercial laundromats, dry cleaners, prisons, hospitals and hotels. In the OEM
segment, products include custom manufactured bags, pouches and cases with are
typically reusable, environmentally friendly and incorporated into the OEM's
product as value-added features. The Company relies primarily on extensive
advertising throughout the industry trade publications and other industrial and
government buying guides to increase market share in these segments. During
1996 and 1997, sales of products in the Company's Industrial and OEM divisions
accounted for $408,000 and $543,000 or 8% of the Company's total sales in each
year.
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STRATEGY
The Company's business strategy is to further develop its own brand name which
distinguishes its line of products and increases market share. The Company
believes that the full implementation and success of its business strategy is
primarily contingent on its liquidity and ability to obtain acceptable
additional financing in the future (See Item 2. Risk Factors and Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operation Liquidity and Capital Resources). The Company's business strategy
includes: (i) adding sales management, in-house and outside sales
representatives and increasing the Company's network of outside distributors in
order to facilitate continued growth in sales; (ii) increasing its production in
the Dominican Republic where lower labor and overhead costs can increase the
Company's gross margins; (iii) increasing its use of the "ARIA Textile
Manufacturing" enterprise software system and adding to the Company's operations
and finance infrastructure. The increased use of this advanced program will
allow the Company to enhance quotation, inventory and production controls,
reduce order processing time, increase inventory turnover and improve the
Company's cash flows; (iv) enhancing Company's brochures and catalogs in all
non-houseware product lines to generate incremental sales through independent
sales representatives; (v) using the Company's Internet website as a source of
generating business from new and existing clients as well as providing customer
service and product information; (vi) increasing LBU's attendance at industry
trade shows utilizing the Company's high visibility product display; and (vii)
promoting the Company's competitive advantages which stem from its domestic and
off-shore production capabilities and its specialization and experience in
creating and manufacturing bag and bag-related promotional programs for its
customers.
OPERATION AND PRODUCTION
The Company's growth is directly related to its ability to manufacture and ship
customized quality products to its customers in short time intervals. Depending
upon order size, product type, customization and raw material availability, the
Company's lead times generally range from 2 days to 4 weeks. The Company
utilizes the "ARIA Textile Manufacturing" software system. The computer program
has the ability to provide the Company with immediate information on customers
orders through an electronic data interchange ("EDI") system which details
invoices, accounts receivable, inventory allocations, product styles, raw
materials, vendors/subcontractors, production stages, production scheduling,
sales representative performance, sale returns and chargebacks. The system can
assist the Company in quickly and efficiently processing and monitoring customer
orders throughout the manufacturing and shipping cycles. During 1998, the
Company intends to increase its use of ARIA and its inventory control functions
to accommodate LBU's current level of production.
The Company's production facility is a vertically integrated operation which
houses creative design, samples, cutting, sewing and printing operations within
a 30,000 square foot facility in Carlstadt, New Jersey. In order to meet
increasing demand for the Company's products during 1997, the Company also
utilized outside sewing subcontractors located in close proximity to the
Company's facility. The use of outside sewing subcontractors provides the
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Company with flexibility to meet peak production requirements quickly and
efficiently without increasing overhead costs. The Company compensates sewing
subcontractors at a fixed rate per piece sewn.
The Federal government's "807 Plan" encourages U.S. manufacturers to ship
partially manufactured goods to the Caribbean Basin and Pacific Rim regions for
further processing. The goods are returned to the U.S. as finished products,
however, there are no collective duties on them. Duty is paid only on the
manufacturing cost, which is a small percentage of the entire product cost.
During November 1997, the Company began manufacturing products under
subcontractor arrangements relating to specific orders in the Dominican
Republic. Labor and overhead costs are significantly lower in the Dominican
Republic than in the United States. Accordingly, for certain orders that have
longer lead times and are more labor intensive, the Company contracts with
suppliers to produce products to customer specifications. These arrangements
offer LBU significantly increased production capacity. The Company does not
employ any personnel, nor does it own or rent fixed assets, real property or
production facilities in the Dominican Republic. However, the Company receives
weekly production and inventory reports and Company personal make periodic on-
site production visits. As of December 31, 1997 the Company maintained
approximately $160,000 of raw material and finished goods inventory in the
Dominican Republic. Sales of merchandise manufactured in the Dominican Republic
accounted for approximately $100,000 or 1.5% of the Company's 1997 total sales.
The Company expects its sales of products produced in the Dominican Republic to
increase significantly during 1998 and thereafter.
Quality Control
The Company bears the risk of nonconforming goods sold to its customers and, in
the case of outsourced products, has limited recourse against the subcontractor.
However, the Company relies primarily on monitoring and inspection activities to
ensure quality control rather than on any remedies it may have for defective
goods.
Capacity
By virtue of its domestic and off-shore manufacturing capabilities, the Company
believes that it has the ability to increase production to accommodate
significantly higher sales levels without having to expand its present
production facility. However, a significant increase in revenue would require
the Company to, among other things, obtain additional financing for the purchase
of production equipment and to maintain higher staffing, raw material and
finished goods inventory levels.
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Sales and Marketing
The Company's President and Chief Executive Officer has over 15 years experience
in various sales and marketing management positions. Mr. Mayer oversees the
Company's marketing direction and plays a major role in selling national
accounts in all of LBU's product lines. The Company markets its product lines
directly through in-house and outside independent sales representatives. During
1997, the Company's products were primarily sold in the United States to
independent and promotional product distributors, national and regional
retailers, department store chains, mass merchants and through other channels of
distribution. Two customers accounted for approximately 20% and 14% of the
Company's 1997 net sales, respectively. No other customer accounted for more
than 10% of 1997 sales. Sales orders are received through in-house and outside
independent sales representatives, distributors, catalogs, industrial buying
guides, the Internet, toll-free phone lines, and trade shows. The Company
attended nine trade shows during 1997.
The Company believes that most other promotional products suppliers generate
sales by (i) providing one or more product catalogs and utilizing customer
service representatives to take orders from the catalogs, and (ii) through the
use of outside sales representatives who serve more than one supplier. The
Company utilizes dedicated in-house representatives and outside sales
representatives to actively market products in regional territories. The Company
believes that this approach gives LBU a competitive advantage by allowing more
focused selling efforts. To complement its sales strategy the Company will
distribute its first full product line catalog for all of the Company's non-
houseware business segments during the second quarter of 1998. The Company
compensates its sales representatives based on a percentage of sales generated.
Generally, before a distributor orders a product from the Company, that
distributor has received an order for the product from an advertiser or
corporate client. The Company's products are sold on the basis of purchase
orders. Established customers generally receive 30-day payment terms and newer
customers purchase products from the Company on the basis of payment of all or a
significant portion of the order before processing. Like many of its
competitors, the Company utilizes a financing company, the CIT Group, to provide
accounts receivable, factoring and financing, credit verification information on
many of its customers and guarantee of payment. As a result of its internal
credit management practices and the services provided by CIT, the Company has
experienced nominal bad debt losses during the past three years.
Sources of Supply
The Company sources it raw materials from numerous manufacturers located
primarily in the United States. Prices for material used by the Company may
fluctuate for a variety of reasons. Although the Company has not experienced,
and does not anticipate, any difficulty in obtaining an adequate supply of the
materials it uses, an interruption of supply from these manufacturers could have
an adverse impact on the Company's ability to fill orders on a timely basis. In
the event of an interruption in supply, the Company believes other manufacturers
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with whom it does business would be able to fill the Company's requirements. In
1997, coated and uncoated nylon, mesh, canvas and Europrene/TM/ was purchased
from approximately twelve suppliers who comprise a substantial portion of the
Company's raw material sources.
The Company s policy, subject primarily to availability of capital, is to
maintain an adequate raw material inventory base and, accordingly, it orders
products substantially in advance of anticipated time of sale to its customers.
While the Company does not have any long-term formal arrangements with any of
its suppliers, in certain instances, the Company places firm commitments for
products up to six months in advance of receipt of firm orders from customers.
LBU's arrangements with most manufacturers allow for flexibility in modifying
the quantity, composition and delivery dates of each order. The Company's
finished goods inventory comprised 31% and 38% of total inventory levels as of
December 31, 1997 and 1996, respectfully, and consisted primarily of products
manufactured for sale in the retail housewares industry segment.
COMPETITION
Promotional Products Industry
The promotional products industry is highly fragmented and competitive. The
Company competes with a large number of other promotional products suppliers,
some of which have diversified product offerings, and others that market only a
limited number of products or lines. The Company competes primarily on the
basis of customer service, turnaround time, selection and price. Certain
competitors are divisions of significantly larger companies that have
substantially greater financial and other resources than the Company. In
addition, entry into the promotional products industry is generally not
difficult, and new competitors regularly enter the industry. The Company
believes their established relationship with distributors gives it an advantage
over its competitors, especially new entrants in the industry. The promotional
products industry also competes against other advertising media, such as
television, radio, newspapers, magazines, billboards and the Internet.
Retail Products Industry
The markets for retail products are highly competitive and include numerous
domestic and foreign competitors, some of which are larger than the Company.
The primary competitive factors in selling products to houseware and general
merchandise retailers are consumer brand name recognition, quality, packaging,
and breadth of product line, distribution capability, prompt delivery and price
to the customer.
ENVIRONMENTAL MATTERS
The Company's facility is subject to federal, state and local environmental laws
and regulations, including those relating to discharge to air, water and land,
the treatment, storage and disposal of solid and hazardous waste and the cleanup
of properties affected by hazardous substances. The Company believes that it is
in compliance with such laws and regulations and
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does not anticipate any material adverse effect on its operations or financial
condition as a result of its efforts to comply with, or its liabilities under,
such laws and regulations. The Company does not anticipate any material capital
expenditures for environmental control facilities or equipment. Some risk of
environmental liability is inherent in the Company's business, however, and
there can be no assurance that material environmental costs will not arise in
the future. In particular, the Company might incur capital and other costs to
comply with increasingly stringent environmental laws and enforcement policies.
At this time, the Company does not expect such capital and other costs to have a
material adverse effect on the Company's net cash flow.
INSURANCE
The Company maintains general liability, products, fire and property, business
interruption and oceangoing cargo insurance on its facilities and inventory in
amounts which management deems appropriate.
PATENTS AND TRADEMARKS
The Company uses a number of owned and shared patents, trademarks and
copyrighted material, such as SCAT/TM/ (Storage Compact Audio Traveler), the
Europrene/TM/ fabric, the Quickpro/TM/ process, novelty slogans which are
printed on laundry bags and the Company s motto, Success is in the Bag./TM/ Some
of these trademarks and patents are registered or are pending in the United
States Patent and Trademark Office and others have become distinctive marks as
to which the Company believes it has acquired common law rights. The Company
considers its trademark and patents to be significant to its competitive
position and actively defends and enforces them.
SEASONALITY
Although the Company sells its products throughout the year, the Company has
traditionally had higher net sales during the second and third quarters. In
1997, the Company's fourth quarter sales were significantly higher than in the
past due to sale of products to one customer. The following table sets forth the
Company's quarterly net sales for the three years ended December 31, 1997, 1996
and 1995.
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Net Sales (in thousands) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
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1997 $1,189 $1,811 $1,322 $2,141 $6,463
1996 $ 942 $1,987 $1,299 $ 875 $5,103
1995 $ 982 $1,419 $ 931 $ 495 $3,827
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BACKLOG
LBU's backlog at December 31, 1997 and 1996 was approximately $1.2 million and
$800,000, respectively. The Company expects to fill the 1997 backlog during
1998. The Company does not believe that backlog is indicative of its future
results of operations or prospects. Although the Company seeks commitments from
customers well in advance of shipment dates, actual confirmed orders are
typically not received until close to the required ship dates.
EMPLOYEES
As of December 31, 1997, the Company had 44 full-time employees, of whom three
were employed in an executive capacity, five in financial, administrative or
clerical capacities and 36 in warehouse or distribution capacities. The
Company's sales representative are retained and compensated as independent
contractors. None of the Company's employees are represented by a labor union.
The Company considers its employee relations to be good.
RISK FACTORS
The Company's business is subject to various risks and uncertainties. The
following factors should be carefully considered in reading this report.
Risks Relating to Growth Strategy
During the past four years, the Company has experienced significant internal
growth, averaging a 38% annual increase in revenues since 1993. There can be no
assurance that the Company will be able to maintain or accelerate its internal
growth or that the Company will be able to effectively manage and obtain
financing for its expanding operations on terms which are acceptable to the
Company. During 1998, the Company will attempt to raise additional capital in
order to fund its business and growth strategy. The failure of the Company to
raise sufficient additional capital in the future to enable it to implement its
business and growth strategy, to maintain or upgrade operating controls and
systems or to recruit or retain sufficient qualified personnel would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Leverage and Certain Debt Obligations
At December 31, 1997 and March 27, 1998, the Company had total indebtedness of
approximately $600,000 and $800,000, respectively, substantially all of which is
in the form of promissory notes payable to John P. Holmes and Co., Inc.
("JPHC"), a significant stockholder of the Company (the "Notes"). The Notes were
due on April 1, 1998, however, JPHC has agreed not to require repayment before
January 1, 1999. The Company's intends to negotiate a restructuring of the Notes
which would include a further extension of the due dates of the Notes during
1998. However, there can be no assurance that such negotiations will be
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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.
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 financial,
business and other factors, many of which are beyond the Company's control.
Although the Company currently believes that cash flow from operations 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 assurance 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.
1997 Operating Loss, Liquidity and Margin Declines
The Company generated an operating loss in 1997 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
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 enhance gross margins on its products. There can be no assurances
that the Company will be able to operate profitably, improve gross margins 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
business and growth strategy and implement cost reduction or other cash flow
enhancement programs.
Dependence on Key Personnel
The Company's success depends in part on the efforts of a few key management
personnel, including Jeffrey Mayer, its Chairman, Chief Executive Officer and
President. Mr. Mayer devotes all of his business time to the Company. If, for
any reason, Mr. Mayer does not continue to be active in the Company's
management, the Company's operations could be materially adversely affected.
None of the Company's executive officers are subject to employment or non-
competition agreements. The Company does not have key-man life insurance on any
of its executive officers.
Consumer Preferences and Industry Trends
The textile and retail industries are characterized by frequent introductions of
new products and services and are subject to changing consumer preferences and
industry trends. There can be no assurance that the Company will be able to
anticipate and/or respond to changing
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consumer preferences and industry trends or that its competitors will not
develop and commercialize new products that render the Company's products less
marketable.
HISTORY OF CORPORATE STRUCTURE
Laundry Bags Unlimited, Inc., a New York corporation ("LBU-NY") commenced
operations in 1989 as a privately held entity in the business of designing,
manufacturing and selling laundry bags. LBU, Inc. was incorporated in Delaware
("LBU-Delaware") during August 1993 and LBU-NY was concurrently merged into it.
LBU-Delaware continued to operate as a privately held Subchapter Corporation
until March 1995. On March 25, 1995, LBU-Delaware entered into a reorganization
transaction, (the "Reorganization") with New Century Media, Ltd. ("New
Century"), a Nevada corporation, whose Common Stock traded on the over-the-
counter ("OTC") Electronic Bulletin Board. In the Reorganization, the
shareholders of LBU-Delaware obtained a controlling interest in New Century in
exchange for all of the outstanding common shares of LBU-Delaware and LBU-
Delaware became a wholly owned subsidiary of New Century. Upon completion of
the Reorganization, New Century changed its name to LBU, Inc.
New Century formerly operated under the following company names since October
26, 1970; Halycyon Data Management Group, Inc., Galaxy Group, Inc., Quest
International Equities, Inc., Astrotek Inc. and Agri-Quest Mining, Inc. These
companies had engaged in business activities as a manufacturer of computer-
related equipment in the 1970's and 1980's and attempted to develop a copper
mining operation in 1991, which business was assigned to a third party in 1992.
New Century was not active in any business operation between 1993 and the
Reorganization with LBU-Delaware in 1995. LBU-Delaware and its then management
and Board of Directors had no relationship with any of the predecessor companies
of New Century prior to the Reorganization.
ITEM 2. PROPERTIES.
LBU, Inc.'s domestic production and administrative offices are housed within
approximately 30,000 square feet of commercial office space located at 310
Paterson Plank Road, Carlstadt, New Jersey. The Company, through a wholly owned
subsidiary, entered into a ten-year lease expiring in June 2006 for this
facility. The Company's executive, administrative, accounting, sales and
operations personnel occupy approximately 6,000 square feet of the facility
while the remainder of the space is used to warehouse, manufacture and
distribute the Company's products. The annual rent is approximately $140,000.
In February 1997, LBU, Inc. opened a 1,000 square foot showroom in the Accessory
Building on Fifth Avenue in New York City. The annual rental is approximately
$20,000 and the showroom lease expires December 31, 1999.
14
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
During March, 1996, Glenneyre Capital Corporation, Poimandres Financial
Corporation and HJS Financial Services, Inc. (the "Plaintiffs") 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
170,000 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 a third-party complaint
against the Plaintiffs and certain of their affiliates in the same court during
October 1997.
Discovery in connection with the Wolverton litigation is proceeding. Although
management of the Company believes the claims made against it in the foregoing
lawsuits are without merit, no evaluation of the potential likelihood of
outcomes can be made at this time and the Company has not made any provisions
for losses in its financial statements. The Company intends to vigorously pursue
its litigation and defend itself in these matters.
The Company is involved in litigation from time to time which is incidental to
the conduct of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders during the
year ended December 31, 1997.
PART II
15
<PAGE>
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS.
MARKET INFORMATION:
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is traded on the OTC Electronic Bulletin Board under
the symbol "LBUAA". Set forth below are the high and low closing bid prices for
the first quarter of 1998 and each quarter of 1996 and 1997 as reported by the
National Quotation Bureau, Inc.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
1996
- ----
First Quarter $1.30 $ .40
Second Quarter 1.15 .50
Third Quarter 3.87 1.50
Fourth Quarter 1.70 .50
1997
- ----
First Quarter 3.30 .50
Second Quarter 5.12 2.56
Third Quarter 5.75 3.60
Fourth Quarter 4.31 3.00
1998
- ----
First Quarter 5.00 2.50
</TABLE>
The above quotations are interdealer prices, without retail mark-up, markdown or
commissions and may not necessarily represent actual transactions.
The Company has never paid a cash dividend. The Company intends to retain all
of its earnings, if any, for use in the business and does not intend to pay cash
dividends in the foreseeable future. Future dividend policy will depend, among
other things, upon the Company's earnings and financial condition.
As of February 17, 1998, there were 385 holders of record of the Company's
Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
The following table sets forth, for the periods presented, certain elements of
the Company's statements of operations for the years indicated (in 000's):
16
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------
<S> <C> <C> <C>
Net sales $ 6,463 $ 5,103 $ 3,828
Gross profit 1,548 1,734 1,583
Selling, general and
administrative expenses (1,832) (1,639) (1,570)
Operating income (loss) (284) 95 13
Other income (expense) 20 51 (9)
Income tax (expense) benefit (62) 8
Net income (loss) (202) 105 12
</TABLE>
1997 versus 1996
The Company's net sales increased by $1,360,078 or 26.7% from $5,103,401 in 1996
to $6,463,479 in 1997 due to internal growth in sales in each of the Company's
industry segments. During 1997, the Company enhanced its relationships with
certain existing customers in the retail products segment resulting in increased
volume. One national retail customer accounted for approximately $1,288,000 or
42.9% and 19.9% of 1997 retail sales ($3,002,532) and total 1997 sales,
respectively. One order from a promotional customer, which was shipped during
the fourth quarter of 1997, accounted for approximately $890,000 in sales or
30.4% and 13.8% of promotional product revenue ($2,926,694) and total 1997
sales, respectively. The Company's OEM and Industrial division sales increased
by $126,058 or 30.8% from $408,195 in 1996 to $534,253 in 1997.
Costs of goods sold increased by $1,546,045 from $3,369,564 or 66.0% of net
sales in 1996 to $4,915,609 or 76.1% of 1997 sales. This increase is primarily
attributable to an increase in the costs of materials consumed in production.
Material costs increased from $1,928,041 or 33.6% of sales in 1996 to $3,179,058
or 37.7% of net sales during 1997 primarily due to the large fourth quarter
shipment referred to above, on which the Company realized a negative gross
margin of approximately ($62,000) based upon direct costs of production.
Excluding that order, material costs, as a percentage of 1997 net sales, would
have been approximately $2.6 million or 33.8% of net sales, which is comparable
to 1996 levels. In addition, 1997 material costs increased due to use of
certain fabrics, which had higher raw material cost per yard than in prior
periods. In addition, manufacturing labor and subcontractor costs, which include
sewing, cutting, printing, packaging and shipping increased from $1,565,060 or
30.7% of 1996 sales to $2,163,550 or 33.5% of 1997 sales.
As a result of the foregoing, gross profit decreased by $185,967 from $1,733,837
or 34.0% of 1996 sales to $1,547,870 or 23.9% of 1997 sales.
Shipping and selling costs decreased by $97,706 from $637,590 or 12.5% of net
sales in 1996 to $539,884 or 8.4% of 1997 net sales. This decrease is primarily
attributable to reductions in advertising and travel expenses, which declined
from $251,810 or 4.9% of sales in 1996 to
17
<PAGE>
$150,399 or 2.4% of 1997 sales due primarily to (i) cost controls implemented by
management during the year which were intended to result in more efficient and
focused selling efforts, and (ii) a reduction in sales commissions as a
percentage of sales from $259,959 or 5.1% of 1996 sales to $278,556 or 4.3% of
1997 sales due to an increase in house sales on which no commissions are earned.
General and administrative expenses increased by $277,245 from $831,281 or 16.3%
of 1996 sales to $1,108,526 or 17.2% of 1997 sales. This increase relates
primarily to an increase in professional fees incurred in connection with
litigation to which the Company is party. Office salaries and expenses, which
comprise the majority of this line item, increased by $121,844 from $697,941 or
13.7% of sales in 1996 to $819,785 or 12.7% of 1997 sales due to increases in
the Company's administrative staffing levels.
Factor fees and interest increased by $13,431 from $169,814 or 3.3% of 1996
sales to $183,245 or 2.8% of 1997 sales. This increase is the result of
interest on higher advance amounts, factor fees and wire transfer expenses in
connection with the Company's increased sales levels.
As a result of the foregoing, total operating expenses increased by $192,915
from $1,638,700 or 32.1% of 1996 revenues to $1,831,615 or 28.3% of 1997 sales.
Operating income (loss) declined by $378,881 from $95,136 in 1996 to $(283,745)
in 1997.
1996 versus 1995
Net sales increased to $5,103,000 in 1996 from $3,828,000 in 1995. Net income
before taxes increased to $146,000 in 1996, from $4,000 in 1995. Net income
after taxes increased to $105,000 in 1996 from $12,000 in 1995. Sales and
income growth was attributable to: (i) the successful introduction of the
Company's packaged line of laundry and garment care products to retail
companies, (ii) the Company's marketing and design efforts in producing over 200
new product styles in 1996 to the promotional product industry, and (iii) the
utilization of its Quickpro( process. This enabled the Company to capitalize on
booking and fulfilling successfully many client orders that required short turn
around times. The Company expects that a significant percentage of its future
sales growth objectives will be attributable to the promotional product
industry.
Costs of goods sold for 1996 increased $1,124,000 or 50% to $3,370,000 from
$2,246,000 in 1995. Approximately 70% of the increase was attributable
to the increased cost and expenses associated with the increased sales of the
Company's new laundry and garment care product lines. Of that amount,
approximately 25% was directly related to the cost of developing the product
packaging and there associated catalogs and brochures.
Gross profit from 1996 increased $151,000 or 9.5% to $1,734,000 from $1,583,000
in 1995. This increase was directly attributable to the investment the Company
made in new laundry and garment care product lines.
18
<PAGE>
Total operating expenses increased $69,000 or 4.4% to $1,639,000 from $1,570,000
in 1995. The increase was attributable to higher factor and interest charges of
$115,000. Not including factor and interest charges, the Company's total
operating expenses decreased $46,000 or 2.9%. This decrease was primarily
attributable to: (i) higher efficiencies, through the use of newly acquired
computerized equipment which helped reduced labor costs (ii) increased quality
assurance standards, which reduced sales returns and department store
chargebacks, and (iii) discounted pricing and through increased overall
economies of scale.
Operating income for 1996 increased $83,000 or 638% to $95,000 from $13,000 in
1995. Net income for 1996 increased $93,000 to $105,000 from $12,000 in 1995.
Part of the increase was attributable to the Company's success in of controlling
costs. In addition, the Company's move into its new operations facility during
the second quarter of 1995 helped facilitate the efficiency of its operations
during 1996.
Liquidity and Capital Resources
The Company's cash position as of December 31, 1997 and 1996 was $202,204 and
$185,508, respectively. Net cash provided by (used in) operating activities for
the years ended 1997 and 1996 was $(711,891) and $58,550, respectively,
representing a decrease of $770,443 in 1997. The decrease was primarily due to
the operating loss incurred by the Company and significant increases in accounts
receivable, inventory and other assets. The increase in accounts receivable
relates primarily to an increase in non-factored accounts receivable which
resulted from increased sales. The Company increased its raw material inventory
levels by $464,762, from $448,875 at December 31, 1996 to $913,637 at December
31, 1997, in order to facilitate improved turnaround and availability on orders.
Finished goods inventory levels increased by $275,004, from $295,875 at December
31, 1996 to $552,879 at December 31, 1997. These working capital uses were
offset by an increase in accounts payable at year end, which relates primarily
to the timing of payment received for a large order which was shipped during the
fourth quarter of 1997.
During 1997, cash used in investing activities totaled $135,706, which consists
primarily of capital expenditures for manufacturing equipment in the Company's
Carlstadt facility.
During 1997, net cash generated by financing activities totaled $864,293 which
includes (i)$375,000 in proceeds received through a private placement of the
Company's Common Stock and (ii)$500,000 of proceeds from borrowings during the
year offset by $10,707 utilized for the repayment of debt and capital lease
obligations.
Currently, LBU's primary source of financing is with 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 receivables.
In addition, the Company benefits from having CIT collect payments from its
customers for their outstanding invoices. The Company pays 2% above the prime-
lending rate on borrowings up to 85% of the outstanding accounts receivable. The
credit facility is secured by substantially all of the Company's assets and the
personal guaranties of its current executive officers. The Company intends to
expand its financing agreement with CIT
19
<PAGE>
to provide for advances based upon LBU's inventory levels. However, there can be
no assurance that such negotiations will be successful, the timing thereof or
that the Company will be able to obtain such financing on terms which are
acceptable to it.
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.
Subsequent to year-end 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. At December
31, 1997 and March 27, 1998, the Company had total indebtedness of approximately
$600,000 and $800,000, respectively, substantially all of which is in the form
of promissory notes payable JPHC, a significant stockholder of the Company (the
"Notes"). The Notes are due on April 1, 1998, however, JPHC has agreed not to
require repayment before January 1, 1999. The Company's intends to negotiate a
restructuring of the Notes which would include a further extension of the due
dates of the Notes during 1998. However, there can be no assurance 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.
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 financial,
business and other factors, many of which are beyond the Company's control.
Although the Company currently believes that cash flow from operations 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 assurance 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 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
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 enhance gross margins on its products. There can be no assurances
that the Company will be able to operate profitably, improve gross margins 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
business and growth 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
20
<PAGE>
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. 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 could 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 prices increases, improved productivity
and cost containment efforts.
New Financial Standards
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings Per Share", which is required to be adopted in
February 1998. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options will be excluded. The impact on basic and
fully diluted earnings per share is not expected to be material.
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.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and notes thereto are filed herewith
beginning at page F-1.
Report of Becher, Della Torre & Gitto, Independent Accountants;
Balance Sheets as of December 31, 1997 and December 31, 1996;
Statements of Operations for each of the three years in the period ended
December 31, 1997;
21
<PAGE>
Statements of Shareholders' Equity for each of the three years in the period
ended December 31, 1997;
Statements of Cash Flows for each of the three years in the period ended
December 31, 1997; and
Notes to Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
22
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Position/ Business Experience
Name Age Offices Held Background and Directorships
- ---- --- ------------ ----------------------------
<S> <C> <C> <C>
Jeffrey Mayer 35 CEO/President
and Director Mr. Mayer has over 16 years experience in various sales and marketing
positions. At the age of 15, he began selling laundry bags in New York
City. The following year he began distributing to many houseware and
discount stores throughout New York. Mr. Mayer graduated from Baruch
College in 1985 with a degree in Marketing and Management. Prior to
forming Laundry Bags Unlimited, Inc. in 1989, Mr. Mayer was a regional
sales manager from 1986 to 1988 with a division of Coca-Cola Foods, Snax
Management. Mr. Mayer leads the Company's marketing and sales direction.
Mr. Mayer has been a director of the Company since 1995.
Isel Pineda-Mayer 37 Secretary/Treasurer
and Director Ms. Mayer manages the Company's creative and product development. She is
responsible for designing and developing future product lines in all of
the Company's market segments. She was formerly East Coast Manager of Ebel
USA. Ms. Mayer is Jeffrey Mayer's spouse. Ms. Mayer has been a director of
the Company since 1995.
Fred King 55 Sales Representative
and Director Mr. King oversees the Company's in-house sales. He has over 30 years
experience in various sales management positions and formerly owned a 13
store retail houseware chain. Mr. King has been a director of the Company
since 1995.
John H. Robinson 75 Director Mr. Robinson was formerly the Chairman of the Harper Group for 45 years.
Mr. Robinson is also Chairman a director of Lukens Medical, Inc., which is
a publicly held Company. He is also a director of RJH Properties, Inc. and
the Commercial Bank of San Francisco and is Chairman of JPHC. See Item 12.
Certain Relationships and Related Transactions. Mr. Robinson has been a
director of the Company since 1997.
</TABLE>
23
<PAGE>
No director of the Company, other than Mr. Robinson, is also a director of any
other company which has a class of securities registered pursuant to Section 12
of the Securities Exchange Act of 1934, as amended or subject to the
requirements of Section 15 (d) of such Act or any company requested as an
investment company under the Investment Company Act of 1940.
ITEM 10. EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
Name and Other Annual
Principal Position Year Salary ($) Bonus ($) Compensation($) (1)
- ------------------ ---- ---------- -------- -------------------
<S> <C> <C> <C> <C>
Jeffrey Mayer 1997 101,190
CEO/President 1996 100,000
1995 100,000
Isel Pineda-Mayer 1997 56,155 9,956
Treasurer/Secretary 1996 49,000 11,164
1995 49,000
</TABLE>
(1) Includes amounts paid for automobile lease and related insurance.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the name, number of shares of Common Stock
beneficially owned and percent of the class of those shares which represent for
each officer, director and person known by the Company to be the beneficial
owner of more then 5% of the Company's outstanding Common Stock as of February
21, 1998. As of February 21, 1997, there were 1,338,977 shares of the Company's
Common Stock issued and outstanding.
<TABLE>
<CAPTION>
Name and address of Number of Shares Percent
Beneficial Owner Beneficially Owned of Class
- ---------------- ------------------ --------
<S> <C> <C>
Jeffrey Mayer 676,500 48.7%
310 Paterson Plank Rd.
Carlstadt, NJ 07071
Director, President
and CEO
Isel Pineda-Mayer 0 (1) -
310 Paterson Plank Rd.
Carlstadt, NJ 07071
Director, Secretary and Treasurer
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Name and address of Number of Shares Percent
Beneficial Owner Beneficially Owned of Class
- ---------------- ------------------ --------
<S> <C> <C>
Fred King 0 -
310 Paterson Plank Rd.
Carlstadt, NJ 07071
Sales Representative and Director
John H. Robinson 20,000 (2) 1.4%
316 Townsned St.
San Francisco, CA 94107
Director
John P. Holmes & Co. Inc. 512,500 (3) 32.1%
PO Box 428
Shelter Island, NY
Private Investor
JPO, LCC 110,000 (4) 7.6%
7 Webster Ave.
Summit, NJ 07901
Edward Cox 66,667 5.0%
39-12 Crescent St.
Long Island City, NY 11101
Private Investor
Neil Ragin 86,667 6.5%
180 W. End Ave.
New York, NY 10023
Private Investor
All officers and directors 696,500 (2) 50.1%
as a group.
</TABLE>
(1) Does not include 676,500 shares of common stock held by Jeffrey Mayer, who
is the spouse of Ms. Mayer.
(2) Includes shares held of record as of February 17, 1998 based on shareholder
lists obtained by the Company. Does not include 302,500 shares of Common
Stock held of record, 150,000 shares issuable pursuant to stock purchase
warrants or 60,000 shares issuable pursuant to the convertible note
described in (3) below held by John P. Holmes & Co. Inc., of which Mr.
Robinson is a minority shareholder and Chairman.
25
<PAGE>
(3) Includes: (i) 302,500 shares of Common Stock held of record as of February
17, 1998 based upon shareholders lists obtained by the Company; (ii) a
warrant dated August 24, 1997 to purchase 10,000 shares of the Company's
Common Stock at a price of $5.00 per share which expires in August 1999;
(iii) a warrant dated September 19, 1997 to purchase 40,000 shares of the
Company's Common Stock at a price of $5.00 per share which expires in
September 1999, (iv) a warrant dated February 21, 1998 to purchase 100,000
shares of the Company's Common Stock at a price of $4.25 per share which
expires in February 2000, and (v) up to 60,000 shares issuable on
conversion of a $300,000 Company note payable at a fixed conversion price
of $5.00 per share. JPHC has granted to the Company the voting rights
relating to the 60,000 shares which would be issuable upon conversion of
the note described in (v) above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 1997 and 1998, John P. Holmes & Co. ("JPHC") of which Mr. Robinson is a
shareholder, loaned an aggregated of $700,000 to the Company. Such loans bear
interest at a rate of 9.12% per annum and were due on April 1, 1998. In
conjunction with the foregoing advances, JPHC was granted the stock purchase
warrants described in (ii), (iii) and (iv) of Note (3) above. JPHC has agreed
not to require the Company to repay the foregoing loans before January 1, 1999.
As described in (v) of Note (3) above, $300,000 of the foregoing loans are
convertible into the Company's Common Stock at a fixed conversion price of $5.00
per share and JPHC has granted the Company a proxy for its voting rights
relating to shares issuable on conversion. In addition, during March 1997, JPHC
purchased 250,000 shares of the Company's Common Stock for aggregate
consideration of $375,000. The Company believes that the foregoing transactions
were entered into on terms which were no less favorable to the Company than
those which could have been obtained in similar transactions on an arms-length
basis with non-related parties. (See Item 1.
Risk Factors Leverage and Certain Debt Obligations)
During 1996 and 1997, the Company advanced $10,000 and $5,017, respectively, to
Mr. Mayer for non-business expenses. Mr. Mayer commenced repayment of $17,753,
plus interest at prime, to the Company during March 1998. During 1997, the
Company advanced $18,731 to Ms. Mayer for non-business expenses. Ms. Mayer
commenced repayment, plus interest at prime, to the Company during September
1997, reducing the outstanding advances to $16,331 and $14,231 at December 31,
1997 and March 27, 1998, respectively.
The Company utilizes the services of outside independent sales representatives.
During 1996 and 1997, the Company paid sales commissions of $21,300 and $40,000,
respectively, to Steven Mayer, who is the brother of Jeffrey Mayer.
26
<PAGE>
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
Exhibits
(a) Exhibit No. Description
----------- -----------
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. #
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 Lease agreement dated April 1, 1995 by and between Albert
Frassetto Enterprises, a sole proprietorship, and Bags of
Carlstadt, Inc. **
10.4 Subscription Agreement dated March 27, 1997 by and between
JPHC and the Registrant.**
10.5 Promissory note dated August 21, 1997, as amended on
February 21, 1998, by and between the Registrant and
JPHC**
10.6 Promissory note dated September 19, 1997, as amended on
November 21, 1997 and February 21, 1998, by and between
the Registrant and JPHC**
10.7 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.**
* 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.
# 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 herewith
(b) Reports on Form 8-K
None
27
<PAGE>
SIGNATURES
Pursuant to the requirements of 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.
LBU, INC.
By: /s/ Jeffrey Mayer
JEFFREY MAYER
President and CEO Date: March 31, 1998
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.
<TABLE>
<S> <C> <C>
/s/ Jeffrey Mayer Chairman of the Board March 31, 1998
JEFFREY MAYER Chief Executive Officer, President
(principal executive officer)
Director
/s/ Isel Pineda-Mayer Treasurer, Secretary March 31, 1998
Isel Pineda-Mayer (principal financial and
accounting officer)
Director
/s/ Fred King Sales Representative/Director March 31, 1998
Fred King
/s/ John H. Robinson Director March 31, 1998
John H. Robins
</TABLE>
28
<PAGE>
[LETTERHEAD OF BECHER DELLA TORRE GITTO & COMPANY]
March 30, 1998
To The Board of Directors of
LBU, Inc.
Independent Auditor's Report
----------------------------
We have audited the balance sheets of LBU, Inc. as of December 31, 1997 and
1996, and the related statements of income, changes in stockholders' equity and
cash flows for the three years in the period ended December 31, 1997. Our audits
also included the financial statement schedule listed at Item 7. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of LBU, Inc., as of December 31,
1997 and 1996, and the results of its operations, changes in stockholders'
equity and cash flows for the three years, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects the information set forth
therein.
/s/ Becher, Della Torre, Gitto and Company
BECHER, DELLA TORRE & GITTO AND COMPANY
Ridgewood, NJ
F-1
<PAGE>
LBU Inc.
--------
Balance Sheets
--------------
December 31,
------------
ASSETS
------
<TABLE>
<CAPTION> 1997 1996
---- ----
<S> <C> <C>
Current asset
Cash and cash equivalents $ 96,294 $ 81,273
Restricted cash 105,955 104,235
Accounts receivable (net of allowance for
bad debts of $25,000 and $41,300, respectively) 229,753 168,104
Inventory 1,528,318 789,090
Deferred tax asset 55,516 45,950
Other current assets 292,546 22,447
---------- ----------
Total current assets 2,308,337 1,211,099
Noncurrent assets
Fixed assets, net 289,177 193,924
Other assets 65,219 109,214
---------- ----------
Total assets $2,662,733 $1,514,237
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities
Accounts payable $1,076,968 $ 458,772
Accrued expenses 207,233 164,884
Customer advances 31,180 152,712
Accrued taxes 17,255 67,414
Lease payable current 2,788 2,474
Note payable - current 33,333 33,333
---------- ----------
Total current liabilities 1,368,757 879,589
---------- ----------
Long-term liabilities
Lease payable 6,992 9,780
Notes payable 255,657 63,890
Convertible Note payable 300,000
Deferred tax liability 8,793 11,393
---------- ----------
Total long-tem liabilities 571,442 85,063
---------- ----------
Total liabilities 1,940,199 964,652
---------- ----------
Stockholders' equity
Common stock ($.001 stated value)
Shares: 50,000,000 authorized,
1,338,977 and 1,088,977 issued
and outstanding, respectively 1,339 1,089
Additional paid-in capital 1,102,208 727,458
Retained earnings (deficit) (381,013) (178,962)
---------- ----------
Total stockholders' equity 722,534 549,585
---------- ----------
Total liabilities and stockholders' equity $2,662,733 $1,514,237
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
LBU Inc.
--------
Statements of Income
--------------------
For the years ended December 31,
-------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $6,463,479 $5,103,401 $3,827,995
Costs of goods sold 4,915,609 3,369,565 2,245,633
---------- ---------- ----------
Gross profit 1,547,870 1,733,836 1,582,362
---------- ---------- ----------
Operating expenses
Shipping and selling 539,844 637,605 668,672
General and administrative expense 1,108,526 831,281 846,491
Factor fees and interest 183,245 169,814 54,578
---------- ---------- ----------
Total operating expenses 1,831,615 1,638,700 1,569,741
---------- ---------- ----------
Income (loss) from operations (283,745) 95,136 12,621
---------- ---------- ----------
Other income (expense)
Loss on sale of fixed assets - - (19,932)
Interest 8,002 2,946 1,023
Rent 12,000 48,000 10,000
---------- ---------- ----------
Total other income (expense) 20,002 50,946 (8,909)
---------- ---------- ----------
Income before income taxes (263,743) 146,082 3,712
Income taxes (benefit) (61,692) 41,156 (8,300)
---------- ---------- ----------
Net income $ (202,051) $ 104,926 $ 12,012
========== ========== ==========
Basic Earnings per share $(.16) $.09 $.01
========== ========== ==========
Diluted Earning per share $(.16) $.09 $.01
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
LBU, Inc.
---------
Statement of Changes in Stockholders' Equity
--------------------------------------------
For the years ended December 31, 1997, 1996 and 1995
----------------------------------------------------
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid-in Earnings
Shares Amount Capital (Deficit) Total
--------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994
as adjusted for 20 to 1 stock split 102,500 $ 103 $ 636,311 $(636,414) $ -
Recapitalization pursuant to
a plan of reorganization 200,000 200 (183,067) 340,514 157,647
Capital investment 625,000 625 124,375 - 125,000
Financial services agreement 300,000 300 539,700 - 540,000
Financial service fees charged
to additional paid in capital (540,000) (540,000)
Capital investment 83,334 83 124,917 - 125,000
Net income for the year ended
December 31, 1995 - - - 12,012 12,012
--------- -------- ----------- --------- --------
Balance at December 31, 1995 1,310,834 1,311 702,236 (283,888) 419,659
Capital investment 47,143 47 24,953 - 25,000
Financial services agreement
shares retired (269,000) (269) (483,931) - (484,200)
Reversal of services fees
charged to paid in capital - - 484,200 - 484,200
--------- -------- ----------- --------- --------
Net income for the year ended
December 31, 1996 104,926 104,926
Balance at December 31, 1996 1,088,977 $ 1,089 $ 727,458 $(178,962) $ 549,585
Capital Investment 250,000 250 374,750 - 375,000
Net loss for the year ended December 31, 1997 - - - (202,051) (202,051)
--------- -------- ----------- --------- --------
Balance at December 31, 1997 1,338,977 $ 1,339 $1,102,208 $(381,013) $ 722,534
========= ======== =========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
LBU, Inc.
---------
Statements of Cash Flows
------------------------
For the year ended December 31,
-------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Cash flow from operating activities
Net income (loss) $(202,051) $ 104,926 $ 12,012
---------- --------- ---------
Adjustments to reconcile net income to net
cash provided (used) by operating activities
Depreciation and amortization 40,453 34,814 16,268
Provision for bad debts - 3,961 36,692
Deferred tax asset (9,566) (22,950) (23,000)
Loss on sale of fixed assets - - 19,932
(Increase) decrease in
Accounts receivable (61,649) (80,570) (84,465)
Inventories (739,228) (213,553) (154,642)
Other current assets (270,099) (15,311) 59,171
Other assets 43,995 (73,425) (38,782)
Increase (decrease) in
Accounts payable 618,196 176,466 (56,121)
Accrued expenses 42,349 20,241 48,409
Taxes payable (50,159) 52,714 14,700
Customer advances (121,532) 59,844 92,868
Deferred tax liability (2,600) 11,393 -
---------- --------- ---------
Total adjustments (509,840) (46,376) (68,970)
---------- --------- ---------
Net cash provided (used) by operating activities (711,891) 58,550 (56,958)
---------- --------- ---------
Cash flow from investing activities
Capital expenditures (135,706) (77,075) (130,356)
---------- --------- ---------
Net cash (used) by investing activities (135,706) (77,075) (130,356)
---------- --------- ---------
Cash flow from financing activities
Borrowing from banks 22,000 259,478 -
Repayment of loans (32,707) (150,000) (55,000)
Proceeds from financings 500,000 - -
Sales of Common Stock 375,000 25,000 250,000
---------- --------- ---------
Net cash provided by financing activities 864,293 134,478 195,000
---------- --------- ---------
Net increase in cash 16,698 115,953 7,686
Cash at beginning of period 185,508 69,555 61,869
---------- --------- ---------
Cash at end of period $ 202,204 $ 185,508 $ 69,555
========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
LBU, Inc.
---------
Statements of Cash Flows
------------------------
For the year ended December 31,
-------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Supplemental disclosures:
Cash paid during the period for
Interest and factor fees $183,245 $ 169,814 $ 54,578
Income taxes $ $ $ 3,155
- -
Non-cash financing activities:
Shares of common stock issued for financial services $540,000
--------
Shares of common stock retired $(484,200)
Shares of common stock issued in
recapitalization to acquire LBU, Inc. $157,647
--------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
LBU, Inc.
---------
Notes to the Financial Statements
---------------------------------
December 31, 1997 and 1996
--------------------------
Note 1 - Organization and the Significant Accounting Policies
- -------------------------------------------------------------
Organization: LBU, Inc. (the "Company"), a Nevada corporation, previously known
- ------------
as New Century Media Ltd. is a leading designer, marketer and manufacturer
specializing in fashionable bags, promotional products and houseware accessories
for the retail, promotional, OEM and industrial markets.
In February 1995, New Century Media, Ltd. entered into a plan of reorganization
with LBU, Inc. (a Delaware corporation referred to herein as LBU-Delaware
whereby the shareholders of LBU-Delaware obtained controlling interest in New
Century Media, Ltd., in a transaction accounted for as 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. Depreciation of
- ------------
furniture, fixtures and equipment is provided using the straight-line method
over the estimated useful lives of the assets ranging from 5 to 10 years.
Leasehold improvements are amortized over the term of the lease on the 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, the Company has committed $63,688 of cash, which serves as collateral
for the Company's outstanding debt with Summit Bank and $41,267 which serves as
collateral under the Company's financing and factoring arrangements with the CIT
Group.
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 the accelerated
depreciation methods, the amortizable lives of intangible assets the reserve
method for bad debt and the uniform capitalization rules under IRS Code Section
263A for financial and income tax reporting and the state net operating loss
carryforward. Deferred taxes represents the future tax return consequences of
those differences, which will either be 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 (see Note 6).
Advertising: The Company charges the costs of advertising to expense as
- -----------
incurred. Costs of advertising and promotion which will not be utilized until
or benefit future periods are capitalized and expressed in such periods.
Advertising expense was $60,348, $117,401 and $24,930 for the years ended
December 31, 1997, 1996 and 1995, respectively.
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 and
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 in a post-split basis.
F-7
<PAGE>
LBU, Inc.
---------
Notes to the Financial Statements
---------------------------------
December 31, 1997 and 1996
--------------------------
Note 1 - Organization and Significant Accounting Policies (continued)
- ---------------------------------------------------------------------
In July 1995, the Company entered into a financial services agreement with
Glenneyre Capital Corp. (GCC), Poimandres Financial Corp. (PFC) and Bristol
Media, Ltd. (BML). The agreement required GCC, PFC and BML to provide certain
professional services relating to raising of capital by the Company in exchange
for 300,000 shares of the Company's Common Stock. The agreement specified that
such services were assigned a value of $60,000. However, the Company has
recorded the issuance of the 300,000 shares based upon the then market value of
its Common Stock, $540,000, resulting in a charge to additional paid in capital
during the period ended December 31, 1995 (see Note 9). In 1996, 269,000 of the
forgoing shares were cancelled.
Note 2 - Accounts Receivable And Factoring Arrangements
- -------------------------------------------------------
The Company entered into a factoring arrangement whereby a factor makes advances
to the Company on certain accounts receivable balances. Interest of 2% per
annum above the prime rate is charged on outstanding advances. The factor has a
lien against all assigned receivables. In addition, the Company's President and
principal shareholder and his wife, who is also an officer of the Company, have
personally guaranteed factor advances under this agreement. The factor also
charges a commission of 1 1/8% on the gross face amount of all accounts
factored, subject to a minimum commission per invoice and other service fees.
The components of accounts receivable at December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Accounts receivable assigned to factor, net $219,396 $ 41,512
Non-factored accounts receivable 35,357 167,892
Allowance for doubtful accounts (25,000) (41,300)
-------- --------
Net accounts receivable $229,753 $168,104
======== ========
</TABLE>
Note 3 - Inventories
- --------------------
As of December 31, 1997 and 1996 the components of inventories were as follows:
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Raw materials $ 913,637 $448,875
Work in process 61,802 44,340
Finished goods 552,879 295,875
---------- --------
Total $1,528,318 $789,090
========== ========
</TABLE>
F-8
<PAGE>
LBU, Inc.
---------
Notes to the Financial Statements
---------------------------------
December 31, 1997 and 1996
--------------------------
Note 4 - Equipment and Leasehold Improvements
- ---------------------------------------------
Equipment and leasehold improvements at December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Machinery and equipment $190,482 $131,637
Furniture and fixtures 93,571 59,085
Leasehold improvements 115,280 72,905
-------- --------
Total 399,333 263,627
Less accumulated depreciation and amortization 110,156 69,703
-------- --------
Net equipment and leasehold improvements $289,177 $193,924
======== ========
</TABLE>
Note 5 - Related Party Transactions
- -----------------------------------
During 1995, loans in the amount of $55,000 were repaid to related parties plus
interest of approximately $6,500.
Note 6 - Income Taxes
- ---------------------
The provision for income taxes for the years ended December 31, 1997, 1996 and
1995 consists of the following components:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current taxes
Federal $(43,631) $ 37,311 $ 8,000
State (5,895) 15,402 6,700
-------- -------- --------
Total current provision (49,526) 52,713 14,700
-------- -------- --------
Deferred tax benefit
Federal (209) (1,557) (7,800)
State (11,957) - (5,200)
Change in tax status - (10,000) (10,000)
-------- -------- --------
Total deferred benefit (12,166) (11,557) (23,000)
-------- -------- --------
Total tax provision (benefit) $(61,692) $ 41,156 $ (8,300)
======== ======== ========
</TABLE>
As discussed in Note 1, LBU-Delaware changed its tax status from nontaxable to
taxable effective March 31, 1995. Accordingly, the deferred tax asset at the
termination election was filed of approximately $10,000 has been recorded as a
credit to the deferred tax provision.
The current year federal tax loss will be carried back and will generate a
federal tax refund of $43,687. As of December 31, 1997 the Company had a state
net operating loss carryforward of approximately $170,000 which will expire in
2004 and is available to offset future state taxable income.
F-9
<PAGE>
LBU, Inc.
---------
Notes to the Financial Statements
---------------------------------
December 31, 1997 and 1996
--------------------------
Note 6 Income Taxes (continued)
- --------------------------------
Deferred tax liabilities, assets consist of the following at December 31, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Reserve for bad debts $ 5,250 $21,248
Inventory capitalization under Section 263A 36,314 24,702
Accrued expenses 2,100 -
State net operating loss carryforward 11,852 -
------- -------
Total deferred tax assets 55,516 45,950
Depreciation 6,105 11,393
Amortization 2,688 -
------- -------
Total deferred tax liabilities 8,793 11,393
Net deferred tax asset $46,723 $34,557
======= =======
</TABLE>
A reconciliation of the Federal statutory rate to the effective tax rate for the
years ended December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -----------
<S> <C> <C>
Taxes at federal statutory rate $(39,561) (15%) $21,912 15%
State income tax net of federal benefit (15,825) (6) 14,068 10
Permanent differences 5,360 2 3,280 2
(Overaccrual)/underaccrual of prior years income taxes (6,720) (2) - -
Other (4,946) (2) 1,896 1
------------- -----------
Total $(61,692) (23)% $41,156 28%
============= ===========
</TABLE>
Note 7 - Notes and Capital Lease Payable
- -----------------------------------------
Notes and capital lease payable consist of the following as of December 31, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Note payable to a bank (a) $ 98,770 $ 97,223
Promissory notes payable (b) 200,000 -
Convertible notes payable (c) 300,000 -
Capital lease (d) 9,780 12,254
-------- --------
Total 608,550 109,447
Less, current installments 36,121 35,807
-------- --------
Notes and capital lease payable,
Less current installments $562,649 $ 73,670
======== ========
</TABLE>
F-10
<PAGE>
LBU, Inc.
---------
Notes to the Financial Statements
---------------------------------
December 31, 1997 and 1996
--------------------------
Note 7 Notes and Capital Lease Payable (continued)
- --------------------------------------------------
(a) Principal of $33,333 matures in 1998; $30,557 in 1999. Interest accrues at
prime plus 1.5%
(b) Principal matures on January 1, 1999. Interest accrues at 9.12%.
(c) 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.
(d) Lease payments are $3,812 for each year through December 31, 2000.
Interest accrues at 12% per annum.
Note 8 - Segment Information
- ----------------------------
The following sets forth the Company's net sales by segment for the years ended
December 31 (in 000's):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Sales:
Retail $3,002 $2,808 $2,527
Promotional Products 2,927 1,887 957
OEM and Industrial 534 408 344
------ ------ ------
Total $6,463 $5,103 $3,828
====== ====== ======
</TABLE>
Foreign sales are were $74,842, $391,000 and $348,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Note 9 - Commitments and Contingencies
- --------------------------------------
In August 1993, LBU-Delaware entered into employment agreements with the
President and principal shareholder and his wife, who is an officer of the
Company. These agreements provide for payments of approximately $148,999 per
year, and escalate to approximately $163,000 per year in 1996. The Company'os
executive officers currently do not have employment or non-competition
agreements.
The Company entered into a ten year lease agreement for its facilities in
Carlstadt, New Jersey, which commenced on July 1, 1995. During 1995, the Company
incurred incidental non-recurring costs due to the relocation to this facility
of approximately $200,000. The minimum future rental payments under the non-
cancelable operating leases as of December 31, 1997 are:
Year Ending
December 31, Amount
----------- -------
1998 143,228
1999 148,369
2000 154,245
2001 160,121
During March, 1996, Glenneyre Capital Corporation, Poimandres Financial
Corporation and HJS Financial Services, Inc. (the "Plaintiffs") 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.
F-11
<PAGE>
LBU, Inc.
---------
Notes to the Financial Statements
---------------------------------
December 31, 1997 and 1996
--------------------------
Note 9 - Commitments and Contingencies (continued)
- -------------------------------------------------
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 170,000 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 a third-party
complaint against the Plaintiffs and certain of their affiliates in the same
court during October 1997.
Discovery in connection with the Wolverton litigation is proceeding. Although
management of the Company believes the claims made against it in the foregoing
lawsuits are without merit, no evaluation of the potential likelihood of
outcomes can be made at this time and the Company has not made any provisions
for losses in its financial statements. The Company intends to vigorously
pursue its litigation and defend itself in these matters.
The Company is involved in litagation from time to time which is incidental to
the conduct of its business.
Note 10 - Shareholders Equity
- -----------------------------
Common Stock
In March 1997, the Company sold 250,000 shares of its Common Stock to John P.
Holmes and Co., Inc. ("JPHC") for $375,000 in a private placement transaction.
Stock Purchase Warrant
In connection with certain financing transactions during August and September
1997, the Company granted stock purchase warrants to JPHC to purchase 10,000
shares of the Company's Common Stock at $5.00 per share and 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.
Note 11 - Subsequent Events
- ---------------------------
During February and March 1998, JPHC loaned the Company an additional $200,000
in the form of promissory notes payable. In conjunction with this financing,
thy Company granted JPHC 100,000 stock purchase warrants with an exercise price
of $4.25 per share. The warrants have a term of three years and are exercisable
from the date of the grant.
On February 19, 1998, the Company entered into a consulting agreement with JPO,
LLC to provide financial services to the Company. The agreement provides for a
base consulting fee, the issuance of 10,000 shares of Common Stock of the
Company 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.
F-12
<PAGE>
EXHIBIT 10.1
CIT Group/
Commercial Services, Inc.
1211 Avenue of the Americas
New York, NY 11102
THE
CIT
GROUP Oct. 25, 1993
FACTORING AGREEMENT
-------------------
Gentlemen:
We are pleased to confirm the terms and conditions that are to govern our
collected funds accounting, factoring arrangement with you.
1. You hereby sell, transfer and assign to us, and we agree to purchase as
absolute owner, all of your accounts receivable created by or arising from all
of your sales of goods or rendition of services (herein "Accounts"). This
includes without limitation, all Accounts arising from, sales made under any or
your trade names or styles or through any of your division.
2. Credit approval on all orders, as they are received from your customer,
is to be requested from our Credit Department via computer under our Order
Maintenance Automated Credit System ("OMACS"). This includes orders submitted by
either; (i) on-line Terminal Access, or (ii) Electronic Batch Transmissions. All
orders from your customers are to be submitted to us for credit approval in
accordance with the procedures more particularly described in either the Client
------
Guide for On-Line Terminal Access or the Client Guide for Electronic Batch
- --------------------------------- ---------------------------------
Transmission (herein the "Guides"). The entire Credit Risk (customer's failure
- ------------
to pay an invoice in full when due at its maturity because of its financial
inability to pay) will be assumed by us on each shipment which our Credit
Department has approved in writing, and as to which the customer actually
receives and finally accepts delivery of the goods. Without prior written
consent, you will not change the amount, terms or shipping dates of any invoice,
whether or not approved by us as to credit, or grant any other indulgence with
respect thereto. Credit approval with respect to any shipment of goods may be
withdrawn any time before, but not after shipment is made and shall be effective
only if delivery is made within thirty (30) days from the date specified in the
approved order, or within thirty (30) days from the date of approval (if no
delivery date is specified). We shall have no liability whatsoever to you or to
any person or firm for not approving, or withholding approval of, any credit to
any customer.
<PAGE>
We shall send to you a computer generated Order Conformation Report (the
"Report") each day, for orders entered that day, which will indicate credit
approvals by our Credit Department, or other disposition. This Report shall
constitute the official record of our written credit approvals. All information
and exhibits contained in the Guides or on any screen accessed by you or any
print-outs, reports, statements or notices received by you (herein "Information
and Documentation") are, and shall remain, our exclusive property and shall be
used only by you for the training, reference and business use of authorized
personnel within your organization and for the processing of factoring related
transactions between you and us. Further, the Guides and any Information or
Documentation shall not be disclosed to or used by anyone other than you (nor by
any unauthorized party whatsoever), in whole or part, except after obtaining the
express written permission of an authorized officer of the undersigned. Although
we will make every effort to assure the correctness of the Information and
Documentation, we make no representatives or warranties, express or implied,
with respect to the Information or Documentation or its intended use.
3. All of your invoices shall bear a notice that the Account has been
assigned to, is owned by, and is payable only to us. All invoices shall be
mailed by you to your customers at your expense. You will give us copies of all
invoices with such confirmation of the transfer of Accounts to us and such proof
of shipment or delivery as we may require. We are authorized to regard your
printed name or rubber stamp signature on confirmatory assignment schedules, or
invoices as the equivalent of a manual signature by one of your authorized
officers or agents. Should you for any reason defer shipment of goods which you
have sold and invoiced to a customer, you will; so note on the copies of
invoices submitted to us; submit all other relevant details to us; and comply
with any conditions we deem necessary as a prerequisite to our handling these
Accounts on our books.
4. You hereby represent and warrant that: each Account is based on an
actual and bona fide sale and delivery of goods or rendition of services to
customers, made by you in the ordinary course of your business; the goods and
inventory being sold and the Accounts created are your exclusive property and
are not and shall not be subject to any lien, consignment arrangement,
encumbrance, security interest or financing statement whatsoever, other than in
our favor; your customers have accepted the goods or services, owe and are
obligated to pay the full amounts stated in the invoices according to their
terms, without dispute, offset, defense of counterclaim; all amounts are due in
United States Dollars; all original invoices bear notice of the assignment to
us; any taxes or fees relating to your Accounts or goods are solely your
responsibility; and none of the Accounts factored with us hereunder represent
sales to any subsidiary, parent of affiliated company of yours, You also warrant
and represent that you are a duly organized and validly existing corporation and
are qualified in all states where necessary. You agree to maintain such books
and records will be available to us at reasonable business hours, and you agree
to furnish us with such other information regarding your business affairs and
financial condition, all as we may require from time to time. You further agree
promptly to notify us if any change in your name, place of business or corporate
structure.
<PAGE>
5. We shall purchase the Accounts at the gross amount of the respective
invoices, less any trade and cash discounts (based on the longest or shortest
terms allowable to your customers, as we elect), and less credits and allowance
(the "Net Sales"). Trade and cash discounts shall be considered applicable to
postage, freight and incidental charges, as well as to the price of the goods.
Net Sales factored with us each month shall be posted to your account as of the
date we received confirmatory assignment schedules.
6. We may at your request, make advances to you against the Net Sales
prior to the collection thereof, subject to our right to hold any reserve we
deem necessary as security for payment and performance of any and all of your
Obligations as herein defined Any advances which may be made to you
prior to shipment, and any debit balances whatsoever in your account shall be
payable to us in demand. Checks and other proceeds of Net Sales, as are received
by us in payment of Accounts, will be posted to your account with us; however,
we shall debt your account monthly with the cost of seven (7) additional
business days on all such amounts computed at the rate set forth in paragraph 13
hereof.
7. The amount of Net Sales for any Account shipped at our Credit Risk
(as herein above provided), which remains unpaid due solely to Credit Risk, will
be credited to your account with us.
(a) as of the date of the Accounts longest maturity, if such
customer: makes an assignment for the benefit of creditors;
filed against it a pertiton under any bankruptcy or insolvency
act; calls a meeting of its creditors; institutes any proceeding
to compromise or adjust its debts; of if any proceeding is
instituted by or against such customer for relief under any
State or Federal bankruptcy or insolvency law; or if a receiver
or trustee is appointed for the customer; or
(b) as of the last day of the third month following its longest
maturity date, if such Account remains unpaid as of said date
without the happening of any of the events specified in (a)
herein above.
Should it subsequently be determined that any such account credited to you
hereby remained unpaid due to any reason other than Credit Risk, we shall have
the right to reverse the credit, and debit your account accordingly.
8. You agree to notify us promptly of any matter affecting the value
enforceability or collectability of any Account and of all customer disputes,
offsets, defenses, counterclaims, returns and rejections. You agree to issue
credit memoranda promptly (with duplicates to us) upon accepting returns or
granting allowances, and may continue to do so until we have notified you that
such credits or allowances are to be made only after our prior written approval.
We shall cooperate in the adjustment of any
<PAGE>
such customer disputes, but we may at any time charge your account as of the due
date of the invoice, with the amount of (a) each Account with respect to which
any alleged customer dispute, offset, defense, deduction or counterclaim is
asserted or which is not paid in full at maturity for any other reason other
than Credit Risk (including, but not limited to, non-payment due to acts of God,
civil strife, war and the like); (b) each Account upon which we do not have the
Credit Risk at the time of the shipment and which is not paid in full at
maturity; and (c) any Account as to which there is any breach of warranty. Such
charge shall not constitute a reassignment to you of the Account involved. It is
further agreed that any deduction taken by a customer shall be immediately
charged back to your account. We shall also be entitled to charge your account
with: amounts we receive in payment of Accounts at your Credit Risk and which
thereafter we are required to turnover or return; any and all expenses and
attorney's fees incurred by us in collecting or attempting to collect any
Accounts charged back to you, or any Obligation hereunder; and any expenses
incurred by us as a result of customer checks that are not paid upon presentment
for any reason. Further, we shall be entitled to charge your account a
reasonable fee for each Account at your Credit Risk which we may place with a
collection agency or attorney for collection.
9. After the end of each month, we shall send you an Account Current
statement showing the accounting for the Net Sales, charges, advances and other
transactions occurring between us during that month. The monthly statements
shall be deemed correct and binding upon you and shall constitute an account
stated between us, unless we receive a written statement of your exceptions
within thirty (30) days after same is mailed to you.
10. Without the necessity of further formality or writing, you hereby
transfer, assign and grant to us a lien on and security interest in all of your
right, title and interest in and to all of your now existing and future (a)
Accounts (whether or not specifically assigned or factored hereunder), any and
all instruments, documents, contract rights, chattel paper, general intangibles,
including, without limitation, all federal, state and local income tax refunds,
and all forms of obligations owing to you; (b) unpaid seller's rights (including
recision, replevin, reclamation and stopping in transit) relating to the
foregoing or arising therefrom; (c) rights to any goods represented by any of
the foregoing, including returned or repossessed goods; (d) reserves and credit
balances arising hereunder; (e) guarantees or collateral for any of the
foregoing; (f) insurance policies or rights relating to any of the foregoing;
and (g) cash and non-cash proceeds of any and all of the foregoing. (It is
however understood that we shall have no obligation to perform in any respect,
any contracts relating to any Accounts). You agree to comply with all
appropriate laws in order to perfect our interest in the collateral pledged
hereunder, and to execute any financing statements or additional documents, as
we may require, to effectuate the foregoing and to carry out this agreement. We
are hereby authorized by you to file any financing statements covering the
collateral whether or not your signature appears thereon.
11. The lien and security interest hereunder and any lien or security
interest that we may have in any of your other assets or property, shall secure
payment and
<PAGE>
performance of all your now existing and future indebtedness or obligations to
us, whether absolute or contingent and whether arising hereunder or under any
other agreements or arrangements between us, or by operation of law or
otherwise, including without limitation, indebtedness for goods or services
purchased by you or from any concern whose accounts receivable are factored or
financed by us and indebtedness arising under any guaranty made by you to us
(herein "Obligations"). Any reserves or balances to your credit and any other
property or assets of yours in out possession may be held by us as security for
any Obligations. We may in our discretion, charge any or all of the Obligations
to your account at any time and from time to time.
12. As owners and assignees of the Accounts, we shall have the right to
bring suit, in your name or ours, and generally have all other rights respecting
said Accounts, including without limitation the right to: accelerate or extend
the time of payment, settle, compromise, release in whole or in part any amounts
owing on any Accounts and issue credits in your name or ours. Any checks, cash,
notes or other instruments or property received by you with respect to any
Accounts shall be held by you in trust for us, separate from your own property
and funds, and immediately turned over to us with proper assignments or
endorsements. We may endorse or sign your name or ours on any checks or other
instruments with respect to Accounts or the goods covered thereby. All returned,
reclaimed or repossessed merchandise or goods shall be set aside by you, marked
with our name and held by you for out account as owner, and you shall notify us
promptly of all such goods. If we so request, you agree promptly to pay us the
invoice price thereof, or if we so elect you will deliver such merchandise or
goods to us or sell same for our account. We shall however have the right to
sell or otherwise dispose of such goods on terms acceptable to us without notice
to you. You further agree to make your records, files and books of account
available to us on request and that we may visit your premises during normal
business hours to examine such records, files and books of account and to make
copies of extracts thereof and to conduct such examinations as we deem
necessary. In order to cover any costs and expenses we may incur in connection
with performing any such examinations, we shall be entitled to charge your
account a fee for each day or part thereof in which the examination is
conducted, plus any additional out-of-pocket costs and expenses we incur as a
result of conducting said examination.
13. Interest shall be calculated at the rate of eight percent (8%) per
annum, based on the six percent (6%) per annum "Chemical Rate" as of October 1,
1993. The Chemical Rate is the rate of interest publicly announced by Chemical
Bank in New York, New York from time to time as its prime rate. (The prime rate
is not intended to be the lowest rate or interest charged by Chemical Bank to
its borrowers.) In the event of any change in the aforesaid Chemical Rate, the
rate of interest hereunder shall change 1/4 of 1% for each 1/4 of 1% change in
the Chemical Rate, as of the first of the month following any such change.
Interest shall be calculated based on a 360 day year. Interest shall be charged
on: all advances, all charges hereunder, and any debit balance in your account.
14. For our services hereunder, we shall be entitled to a commission of
one and one-eighth (1 1/8%) on the gross face amount of all Accounts factored
with us during each calendar month, plus one-quarter of one percent (1/4 of 1%)
of the gross face
<PAGE>
amount of each Account for each thirty-day period or part thereof by which the
terms of sale applicable to such Account (whether as originally stated, or as a
result of a change of terms requested by you or the customer) exceed sixty (60)
days, based on the longest terms allowed. The commission shall be due and
charged to your account as of the 15th day of that month. In no event shall the
factoring commission payable by you to us for the first Contract Year, or part
thereof, be less than $25,000.00. Commencing on November 1, 1994, and for each
Contract Year or any part thereof thereafter, in no event shall the factoring
commission payable by you to us be less than $36,000.00. The minimum commission
on each invoice evidencing an account receivable purchased by us shall not be
less than $5.00. In the event that the actual commission paid to us by you
during any Contract Year, or part thereof, is less than the amounts as set forth
herein, we shall charge your account as of the end of such Contract Year with an
amount equal to the difference between the actual commission paid by you during
such period and the amounts set forth herein. Nothing contained herein should be
construed as consenting to a termination of the Agreement other than as provided
herein. As used herein, the term "Contract Year" shall mean the twelve-month
period commencing on November 1, 1993 and each consecutive twelve-month period
thereafter.
15. Any balance on our books in your favor in your advance account shall
be credited with interest at a rate four percent (4%) per annum below the
Chemical Rate being used to calculate interest hereunder for the period.
16. We shall be entitled to charge your account with all costs and
expenses incurred by us in connection with the preparation, execution,
administration and enforcement of this Agreement, including without limitation,
all reasonable fees and expenses of our attorneys (whether in-house or outside
counsel), all search fees, the cost of all public record filings and wire
transfer charges. We shall also be entitled to charge your account, in out
discretion, with a reasonable fee for all trial balances and sales summaries we
prepare at your request, and for the use by you of the on-line computer services
described in paragraph 2 hereof, which fee for computer usage is presently
$20.00 per hour, or any part of an hour. Further, a fee will be charged to your
account for each new customer set-up on our accounts receivable data base, as
follows: a fee of $10.00 will be charged when you submit an order or invoice for
any customer that has not had any activity with us for at least eighteen (18)
months prior thereto and is not established on our files; and a fee of $5.00
will be charged when you submit an order or invoice for any customer that has
not had any activity with us on your account for at least eighteen (18) months,
but has been active during such period with respect to other clients of ours;
provided, however, that no fees will be charged for new customer set-ups during
the first six (6) months from the date of this Agreement. All fees and charges
referred to in this paragraph may be changed by us from time to time on notice
to you.
17. You may terminate this Agreement only as of any Anniversary Date, as
herein defined, and then only by giving us at least sixty (60) days prior
written notice of termination. We may terminate this agreement at any time by
giving you written notice stating a termination date not less than sixty (60)
days from the date such notice is given. This Agreement continues uninterrupted
unless terminated as herein provided. As used
<PAGE>
herein the term "Anniversary Date" shall mean November 1, 1995, and the same
date in every year thereafter. Unless sooner demanded, all of your Obligations
shall become due and payable as of any termination and, pending a final
accounting, we may withhold any balances in your account unless supplied with an
indemnity satisfactory to us to cover all of your Obligations, whether absolute
or contingent. All our rights and security hereunder shall continue after any
termination until all Obligations have been paid and satisfied in full. We may
terminate this agreement immediately upon the occurrence of any of the
following: cessation of your business or the calling of a meeting of your
creditors; failure to meet your debts as they mature; the commencement by or
against you of any bankruptcy, insolvency, arrangement, reorganization,
receivership or similar proceedings under any federal or state law; breach by
you of any warranty or covenant contained herein; or your failure to pay any of
the Obligations when due. In any such event, we may remove from any premises
where same may be located any and all documents, instruments, files and records,
and any receptacles or cabinets containing same, relating to the Accounts, or we
may use (at your expense) such of your personnel, supplies or space at your
place of business or otherwise, as may be necessary to properly administer and
control the Accounts of the handling of collections and realizations thereon.
Also in any such event we may without advertisement, sell, assign and deliver
the Accounts and any returned, reclaimed or repossessed merchandise, goods or
other property, held by you or by us for our account, at public or private sale,
for cash, on credit or otherwise at our sole option and discretion, and we may
bid or become purchasers at any such sale, free from any right of redemption
which is hereby expressly waived by you. (If notice of intended disposition of
any said collateral is required by law five days notice shall constitute
reasonable notification.) The net cash proceeds resulting from the exercise of
any of the foregoing rights, after deducting all charges, costs and expenses
(including attorneys' fees) shall be applied by us to the payment of your
Obligations to us, whether due or to become due in such order as we may elect
and you shall remain liable to us for any deficiencies.
18. This constitutes the entire agreement between us; supercedes any
prior agreements; can be changed only by a writing signed by both of us; and
shall bind and benefit each of us and our respective successors and assigns. Our
failure or delay to exercise any right hereunder shall not constitute a waiver
thereof or bar us from exercising any of our rights at any time; nor shall any
course of dealing between us change or modify this agreement. The validity,
interpretation and enforcement of this agreement shall be governed by the laws
of the State of New York.
19. WE EACH HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR
PROCEEDING ARISING OUT OF THIS AGREEMENT OR TRANSACTIONS BETWEEN US.
<PAGE>
If the foregoing is in accordance with your understanding, please so
indicate by signing and returning to us the original and one copy of this
agreement. This agreement shall take effect as of the date set forth above after
being accepted below by one of the officers in New York, after which, we shall
forward your copy to you with signatures completed for your files.
Very truly yours,
THE CIT GROUP/ COMMERCIAL SERVICES, INC.
By /s/ Joseph Pascal
------------------------------
Name: JOSEPH PASCAL
Title: Vice President
Read and Agreed to:
LBU, INC.
By /s/ Jeffrey Mayer
--------------------------
Name: JEFFREY MAYER
Title: President
Accepted at New York, New York
THE CIT GROUP/ COMMERCIAL SERVICES, INC.
By /s/ Richard V. Romer
------------------------------
Name: RICHARD V. ROMER
Title: EVP
<PAGE>
EXHIBIT 10.2
Date October 25, 1993
------------------
To: THE CIT GROUP/COMMERCIAL SERVICES, INC.
1211 Avenue of the Americas
New York, NY 10036
GUARANTY
--------
Re: LBU, INC. (the "Client")
27-50 First Street
Long Island City, New York 11102
Gentlemen:
Reference is made to certain factoring or financing agreements or
arrangements (herein the "Agreements") between you and the above-named Client.
Each of the undersigned hereby unconditionally jointly and severally guarantees
and agrees to be liable for the full and indefeasible payment and to you,
howsoever arising, whether direct or indirect, absolute or contingent, secured
or unsecured, whether arising under any of the Agreements as now written or as
amended or supplemented hereafter, or by operation of law or otherwise.
Further, each of the undersigned agrees to pay to you on demand the amount of
all expenses (including reasonable attorney's fees) incurred by you in
collecting or attempting to collect any of the Client's obligations to you,
whether from the Client, or from any other obligor, or from the undersigned, or
in realizing upon any collateral; and agrees to pay any interest at the highest
lawful rate on all amounts payable to you hereunder, even if such amount cannot
be collected from the Client. (All of the aforementioned obligations,
liabilities, expenses and interest are hereinafter collectively called the
"Obligations"). To the extent you receive payment on account of the Obligations
guaranteed hereby, which payment is thereafter set aside or required to be
repaid by you in whole or in part, then, to the extent of any sum not finally
retained by you (regardless of whether such sum is recovered from you by the
Client, its trustee, or any other part acting for, on behalf of or through the
Client or its representative), the undersigned's obligation to you under this
Guaranty, as amended, modified or supplemented, shall remain in full force and
effect (or be reinstated) until the undersigned have made payment to you
therefor, which payment shall be due upon demand.
This Guaranty is executed as an inducement to you to make loans or advances
to the Client or otherwise to extend credit or financial accommodations to the
Client, or to enter into or continue a factoring or financing arrangement with
the Client, and is executed in consideration of your doing or having done any of
the foregoing. Each of the undersigned agrees that any of the foregoing shall
be done or extended by you in your sole discretion, and shall be deemed to have
been done or extended by you in consideration of and in reliance upon the
execution of this Guaranty, but that nothing herein shall obligate you to do any
of the foregoing.
<PAGE>
Notice of acceptance of this Guaranty, the making of loans or advances, or
the extension of credit to the Client, the purchase or acquisition of
receivables from the Client, the amendment, execution or termination of any of
the Agreements or any other agreements between you and the Client, and
presentment, demand, protest, notice of protest, notice of non-payment and all
other notices to which the Client or the undersigned may be entitled, and your
reliance on this Guaranty are hereby waived. The undersigned also waive notice
of: changes in terms or extensions of time of payment, the taking and releasing
of collateral or guarantees (including the release of any of the undersigned)
and the settlement, compromise or release of any Obligations, and agree that, as
to each of the undersigned, the amount of the Obligation shall not be diminished
by any of the foregoing. The undersigned also agree that you need not attempt
to collect any Obligations from the Client or other obligors or to realize upon
any collateral, but may require the undersigned to make immediate payment of
Obligations or to realize upon any collateral or security therefor, or any part
thereof, or for any delay in so doing, nor shall you be under any obligation to
take any action whatsoever with regard thereto.
This Guaranty is absolute, unconditional and continuing, regardless of the
validity, regularity or enforceability of any of the Obligations or the fact
that a security interest or lien in any collateral or security therefor may not
be enforceable by you or may otherwise be subject to equities or defenses or
prior claims in favor of others or may be invalid or defective in any way and
for any reason, including any action, or failure to act, on your part. The
liability of the undersigned under this Guaranty shall be unaffected by the
death of any of the undersigned. Payment by the undersigned shall be made to
you at your office from time to time on demand as Obligations become due, and
one or more successive or concurrent actions may be brought hereon against the
undersigned (or any one or more of them) either in the same action in which the
Client is sued or in separate actions. In the event any claim or action, or
action on any judgement, based on this Guaranty, is made or brought against the
undersigned, the undersigned agree not to assert against you any set-off or
counterclaim which the Client may have, and further the undersigned agree not to
deduct, set-off, or seek to counterclaim for or recoup, any amounts which are or
may be owed by you to the undersigned, or for any loss of contribution from any
other guarantor. Furthermore, in any litigation based on the Guaranty in which
you and any of the undersigned shall be adverse parties, the undersigned hereby
waive trial by jury and waive the right to interpose any defense based upon any
Statute of Limitations or any claim of laches and waive the performance of each
and every condition precedent to which the undersigned might otherwise be
entitle by law. Each of the undersigned hereby consent to the inpersonam
jurisdiction of the courts of New York State. In the event that you bring any
action or suit in any court of record of New York State or the Federal
Government to enforce any or all liabilities of the undersigned hereunder,
service of process may be made on the undersigned by mailing a copy of the
summons to the undersigned at the address below set forth.
All sums at any time to the credit of the undersigned and any property of
the undersigned on which you at any time have a lien or security interest, or of
which you at any time have possession, shall secure payment and performance of
all Obligations and any and all other obligations of the undersigned to you
however arising. The undersigned
<PAGE>
shall have no right of subrogation, indemnification or recourse to any
Obligations or collateral or guarantees therefor, or to any assets of the
Client.
In the event of any breach of, default under or termination of any of the
Agreements between you and the Client, or in the event that the undersigned
shall fail to observe or perform any agreements, warranties, or covenants
contained herein, or on the death of any undersigned, or should any of the
undersigned dissolve or cease its business, call a meeting of its creditors,
fail to meet its debts as they mature, commit an act of bankruptcy, have
commenced by or against the undersigned any bankruptcy, insolvency, arrangement,
reorganization, receivership or similar proceeding under any federal or state
law, then the liability of all of the undersigned for the entire Obligations
shall mature even if the liability of the Client therefor does not.
This Guaranty may be terminated as to any one of the undersigned only upon
receipt by one of your officers of at least ninety (90) days prior written
notice of termination sent by registered or certified mail; provided however,
that any of the undersigned so terminating this Guaranty shall remain bound
hereunder, and this Guaranty shall continue in full force and effect, with
respect to any and all Obligations created or arising prior to the effective
date of such termination and with respect to any and all extensions, renewals or
modifications of said pre-existing Obligations. Termination as to any one of
the undersigned shall not affect the obligations of any of the other
undersigned, nor relieve the one giving such notice from liability for any post
termination collection expenses or interest. This is a continuing agreement and
written notice as above provided shall be the only means of termination,
notwithstanding the fact that for certain periods of time there may be no
Obligations owing to you by the Client.
Your books and records showing the account between you and the Client shall
be admissible in evidence in any action or proceeding as prima facie proof of
the items therein set forth. Your monthly statements rendered to the Client
shall be binding upon the undersigned (whether or not the undersigned received
copies thereof) and, shall constitute an account stated between you and the
Client, unless you shall have received a written statement of the Client's
exceptions within thirty (30) days after the statement was mailed to the Client.
This Guaranty embodies the whole agreement of the parties and may not be
modified except in writing, and no course of dealing between you and any of the
undersigned shall be effective to change or modify this Guaranty. Your failure
to exercise any right hereunder shall not be construed as a waiver of the right
to exercise the same or any other right at any other time and from time to time
thereafter, and such rights shall be considered as cumulative rather than
alternative. No knowledge of any breach or other nonobservance by any of the
undersigned of the terms and provisions of this Guaranty shall constitute a
waiver thereof, nor a waiver of any obligations to be performed by the
undersigned hereunder.
This instrument is executed and given in addition to, and not in
substitution, reduction, replacement or satisfaction of any other endorsements
or guarantees of the
<PAGE>
Obligations, now existing or hereafter executed, by any or all of the
undersigned, or others in your favor.
When used in this agreement all pronouns shall, wherever applicable, be
deemed to include the plural as well as the masculine and feminine gender. This
agreement shall inure to the benefit of you, your successors, and assigns and
any parent, subsidiary or affiliate of yours, as well as to any concern which
you may now or hereafter factor or finance; shall be binding jointly and
severally upon the undersigned and upon the respective heirs, executors,
administrators, successors and assigns of each of the undersigned; and shall
pertain to the Client and its successors and assigns. This Guaranty may be
executed in any number of counterparts, each of which when so executed shall be
deemed an original and such counterparts shall, together, constitute but one and
the same document.
This Guaranty shall be governed by and construed in accordance with the
laws of the State of New York.
IN WITNESS WHEREOF, the undersigned have executed and delivered this
Guaranty effective as of the date set forth.
/s/ Jeffrey Mayer L.S.
-------------------------------
Jeffrey Mayer, individually
Address: 100 Winston Drive, Apartment 8H
Cliffside Park, New Jersey 07010
Date: October 25, 1993
/s/ Isel Mayer L.S.
-------------------------------
Isel Mayer, individually
Address: 100 Winston Drive, Apartment 8H
Cliffside Park, New Jersey 07010
Date: October 25, 1993
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EXHIBIT 10.3
A 917-Blumberg's Improved Gilsey Form Lease. JULIUS BLUMBERG, INC.,
PUBLISHER, NYC 10013
THIS AGREEMENT, BETWEEN ALBERT FRASSETTO ENTERPRISES, A SOLE PROPRIETORSHIP,
ORGANIZED AND EXISTING PURSUANT TO THE LAWS OF THE STATE OF NEW JERSEY, HAVING
AN ADDRESS AT 2 PARK WAY & RT. 17 SOUTH, UPPER SADDLE RIVER, NEW JERSEY 07458
as Landlord and
BAGS OF CARLSTADT, INC. an affiliate of LBU, INC., having an address at 27-50
First Street, Long Island City, New York 11102
as Tenant
WITNESSETH: That the said Landlord has let unto the said Tenant and the
said Tenant has hired from the said Landlord, the following premises:
29,380 square feet total area in a free standing building comprising of 6,000
sq.ft. of office and restroom space and the balance of 23,380 sq.ft. of
warehouse space in a building commonly known as 310 PATERSON PLANK ROAD,
CARLSTADT, NEW JERSEY and sometimes, hereinafter referred to as the "Demised
Premises".
for the term of TWENTY (20) YEARS
to commence from the 1st day of APRIL 1995, and to end on the 30th
day of MARCH 2015 to be used and occupied only for office, light
manufacturing, and warehouse distribution of nylon and mesh laundry bags
1st: That the Tenant shall pay the BASIC AGGREGATE RENTAL OF THREE
MILLION SIX HUNDRED EIGHTY ONE THOUSAND THREE HUNDRED FOURTEEN AND OO/OO DOLLARS
($3,681,314.00) to be paid in equal monthly installments, in advance, on demand,
on the first day of each month, at such address as the Landlord may designate,
as per the rent schedule attached hereto as Exhibit "A" of the Rider.
2nd: That the Tenant shall take good care of the premises and shall at
the Tenant's own cost and expense make all repairs specified to be Tenant's
obligation in Article 30,
and at the end or other expiration of the term, shall deliver up the demised
premises in good order or condition, damages by the elements excepted.
3rd: That the Tenant shall promptly execute and comply with all
statutes, ordinances, rules, orders, regulations and requirements of the
Federal, State and City Government and of any and all their Departments and
Bureaus applicable to said premises, for the correction, prevention, and
abatement of nuisances, violations or other grievances, in, upon or connected
with said premises during said term; and shall also promptly comply with and
execute all rules, orders, and regulations of the Board of Fire Underwriters, or
any other similar body, for the prevention of fires, at the Tenant's own cost
and expense.
4th: That in case the Tenant shall fail or neglect to comply with the
aforesaid statutes, ordinances, rules, orders, regulations and requirements or
any of them, or in case the Tenant shall fail or neglect to make any necessary
repairs, then the Landlord or the Landlord's Agents may enter said premises and
make said repairs and comply with any and all of the said statutes, ordinances,
rules, orders, regulations or requirements, at the cost and expense of the
Tenant and in case of the Tenant's failure to pay therefor, the said cost and
expense shall be added to the next month's rent and be due and payable as such,
or the Landlord may deduct the same from the balance of any sum remaining in the
Landlord's hands. This provision is in addition to the right of the Landlord to
terminate this lease by reason of any default on the part of the Tenant.
5th: That the Tenant shall not assign this agreement, or underlet or
underlease the premises or any part thereof, or occupy, or permit or suffer the
same to be occupied for any business or purpose deemed disreputable or
extra-hazardous on account of fire, under penalty of damages and forfeiture.
6th: That no alterations, additions or improvements shall be made in or
to the premises without the consent of the Landlord in writing, under penalty of
damages and forfeiture, and all additions and improvements made by the Tenant
shall belong to the Landlord.
7th: In case of damage, by fire or other cause, to the building in
which the leased premises are located, without the fault of the Tenant or of
Tenant's agent or employees, if the damage is so extensive as to amount
practically to the total destruction of the leased premises or of the building,
or if the Landlord shall within a reasonable time decide not to rebuild, this
lease shall cease and come to an end, and the rent shall be apportioned to the
time of the damage. In all other cases where the leased premises are damaged
without the fault of the Tenant or of Tenant's agents or employees the Landlord
shall repair the damage with reasonable dispatch after notice of damage, and if
the damage has rendered the premises untenantable, in whole or in part, there
shall be an apportionment of the rent until the damage has been repaired. In
determining what constitutes reasonable dispatch consideration shall be given to
delays caused by strikes, adjustment of insurance and other causes beyond the
Landlord's control.
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8TH: That said Tenant agrees that the said Landlord and Landlord's
Agents, and other representatives, shall have the right to enter into and upon
said premises, or any part thereof, at all reasonable hours for the purpose of
examining the same, or making such repairs or alterations therein as may be
necessary for the safety and preservation thereof.
9TH: The Tenant also agrees to permit the Landlord or Landlord's Agents
to show the premises to persons wishing to hire or purchase the same; and the
Tenant further agrees that during the six months next prior to the expiration of
the term, the Landlord or Landlord's Agents shall have the right to place
notices on the front of said premises, or any part thereof, offering the
premises "To Let" or "For Sale," and the Tenant hereby agrees to permit the same
to remain thereon without hindrance or molestation.
10TH: That if the said premises, or any part thereof, shall become
vacant during the said term, or should the Tenant be evicted by summary
proceedings or otherwise, the Landlord or Landlord's representatives may re-
enter the same, either by force or otherwise, without being liable to
prosecution therefor; and re-let the said premises as the Agent of the said
Tenant and receive the rent thereof; applying the same, first to the payment of
such expenses as the Landlord may be put to in re-entering and then to the
payment of the rent due by these presents; the balance (if any) to be paid over
to the Tenant who shall remain liable for any deficiency.
11TH: Landlord may replace, at the expense of Tenant, any and all
broken glass in and about the demised premises. Landlord may insure, and keep
insured, all plate glass in the demised premises for and in the name of
Landlord. Bills, for the premiums therefor shall be rendered by Landlord to
Tenant at such times as Landlord may elect, and shall be due from, and payable
by Tenant when rendered, and the amount thereof shall be deemed to be, and be
paid as, additional rental. Damage and injury to the said premises, caused by
the carelessness, negligence or improper conduct on the part of the said Tenant
or the Tenant's agents or employees shall be repaired as speedily as possible by
the Tenant at the Tenant's own cost and expense.
12TH: That the Tenant shall neither encumber, nor obstruct the sidewalk
in front of, entrance to or halls and stairs of said building, nor allow the
same to be obstructed or encumbered in any manner.
13TH: The Tenant shall neither place, nor cause, nor allow to be
placed, any sign or signs of any kind whatsoever at, in or about the entrance to
said premises nor any other part of same except in or at such place or places as
may be indicated by the said Landlord and consented to by Landlord in writing.
And in case the Landlord or Landlord's representatives shall deem it necessary
to remove any such sign or signs in order to paint or to make any other repairs,
alterations or improvements in or upon said premises or the building wherein
same is situated or any part thereof, the Landlord shall have the right to do
so, providing the same be removed and replaced at the Landlord's expense
whenever the said repairs, alterations or improvements shall have been
completed.
14TH: It is expressly agreed and understood by and between the parties
to this agreement, that the Landlord shall not be liable for any damage or
injury to person or property caused by or resulting from steam, electricity,
gas, water, rain, ice or snow, or any leak or flow from or into any part of said
building, or from any damage or injury resulting or arising from any other cause
or happening whatsoever.
15TH: That if default be made in any of the covenants herein contained,
then it shall be lawful for the said Landlord to re-enter the said premises, and
the same to have again, re-possess and enjoy.
16TH: That this lease shall not be a lien against said premises in
respect to any mortgages that are now on or that hereafter may be placed against
said premises, and that the recording of such mortgage or mortgages shall have
preference and precedence and be superior and prior in lien of this lease
irrespective of the date of recording and the Tenant agrees to execute any
instrument without cost, which may be deemed necessary or desirable to further
effect the subordination of this lease to any such mortgage or mortgages, and a
refusal to execute such instruments shall entitle the Landlord, or the
Landlord's assigns and legal representatives to the option of cancelling this
lease without incurring any expense or damage, and the term hereby granted is
expressly limited accordingly.
17TH: The Tenant has this day deposited with the Landlord the sum of
$46,016.43 as security for the full and faithful performance by the Tenant of
all of the terms and conditions upon the Tenant's part to be performed, which
said sum shall be returned to the Tenant after the time fixed as the expiration
of the term herein, provided the Tenant has fully and faithfully carried out all
of the terms, covenants and conditions on the Tenant's part to be performed. In
the event of a bona fide sale, subject to this lease, the Landlord shall have
the right to transfer the security to the vendee for the benefit of the Tenant
and the Landlord shall be considered released by the Tenant from all liability
for the return of such security; and the Tenant agrees to look to the new
Landlord solely for the return of the said security, and it is agreed that this
shall apply to every transfer or assignment made of the security to a new
Landlord.
18TH: That the security deposited under this lease shall not be
mortgaged, assigned or encumbered by the Tenant without the written consent of
the Landlord.
19TH: It is expressly understood and agreed that if for any reason it
shall be impossible to obtain fire insurance on the building and improvements on
the demised premises in an amount, and in the form, and in fire insurance
companies acceptable to the Landlord the Landlord may, if the Landlord so
elects, at any time thereafter terminate this lease and the term thereof, on
giving to the Tenant three days' notice in writing of Landlord's intention so to
do and upon the giving of such notice, this lease and the term thereof shall
terminate and come to an end.
20TH: It is expressly understood and agreed that in case the demised
premises shall be deserted or vacated, or if default be made in the payment of
the rent or any part thereof as herein specified, or if, without the consent of
the Landlord, the Tenant shall sell, assign, or mortgage this lease or if
default be made in the performance of any of the covenants and agreements in
this lease contained on the part of the Tenant to be kept and performed, or if
the Tenant shall fail to comply with any of the statutes, ordinances, rules,
orders, regulations and requirements of the Federal, State and City Government
or of any and all their Departments and Bureaus, applicable to said premises, or
if the Tenant shall file or there be filed against Tenant a petition in
bankruptcy or arrangement, or Tenant be adjudicated a bankrupt, or make an
assignment for the benefit of creditors or take advantage of any insolvency act,
the Landlord may, if the Landlord so elects, a any time thereafter terminate
this lease and the term hereof, on giving to the Tenant five days' notice in
writing of the Landlord's intention so to do, and this lease and the term hereof
shall expire and come to an end on the date fixed in such notice as if the said
date were the date originally fixed in this lease for the expiration hereof.
Such notice may be given by mail to the Tenant addressed to the demised
premises.
All notices required to be given to the Tenant may be given by mail
addressed to the Tenant at the demised premises.
21ST: The Tenant shall pay to the Landlord the rent or charge, which
may, during the demised term, be assessed or imposed for the water used or
consumed in or on the said premises, whether determined by meter or otherwise,
as soon as and when the same may be assessed or imposed, and will also pay the
expenses for the setting of a water meter in the said premises should the latter
be required. If such rent or charge or expenses are not so paid the same shall
be added to the next month's rent thereafter to become due.
22ND: That the Tenant will not nor will the Tenant permit undertenants
or other persons to do anything in said premises, or bring anything into said
premises, or permit anything to be brought into said premises or to be kept
therein, which will in any way increase the rate of fire insurance on said
demised premises, nor use the demised premises or any part thereof, nor suffer
or permit their use for any business or purpose which would cause an increase in
the rate of fire insurance on said building, and the Tenant agrees to pay on
demand any such increase.
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23rd: If after default in payment of rent or violation of any other
provision of this lease, or upon the expiration of this lease, the Tenant moves
out or is dispossessed and fails to remove any trade fixtures or other property
prior to such said default, removal, expiration of lease, or vacates the demised
premises prior to the issuance of the final order or execution of the warrant,
then and in that event, the said fixtures and property shall be deemed abandoned
by the said Tenant and shall become the property of the Landlord.
24th: The failure of the Landlord to insist upon strict performance of
any of the covenants or conditions of this lease or to exercise any option
herein conferred in any one or more instances, shall not be construed as a
waiver or relinquishment for the future of any such covenants, conditions or
options, but the same shall be and remain in full force and effect.
25th: In the event that the relation of the Landlord and Tenant may
cease or terminate by reason of the re-entry of the Landlord under the terms and
covenants contained in this lease or by the ejectment of the Tenant by summary
proceedings or otherwise, or after the abandonment of the premises by the
Tenant, it is hereby agreed that the Tenant shall remain liable and shall pay in
monthly payments the rent which accrues subsequent to the re-entry by the
Landlord, and the Tenant expressly agrees to pay as damages for the breach of
the covenants herein contained, the difference between the rent reserved and the
rent collected and received, if any, by the Landlord, during the remainder of
the unexpired term, such difference or deficiency between the rent herein
reserved and the rent collected, if any, shall become due and payable in monthly
payments during the remainder of the unexpired term, as the amounts of such
difference or deficiency shall from time to time be ascertained.
26th: If the whole or any part of the demised premises shall be
acquired or condemned by Eminent Domain for any public or quasi public use or
purpose, then and in that event, the term of this lease shall cease and
terminate from the date of title vesting in such proceeding and Tenant shall
have no claim against Landlord for the value of any unexpired term of said
lease. No part of any award shall belong to the Tenant.
27th: This lease and the obligation of Tenant to pay rent hereunder and
perform all of the other covenants and agreements hereunder on part of Tenant to
be performed shall in nowise be affected, impaired or excused because Landlord
is unable to supply or is delayed in supplying any service expressly or
impliedly to be supplied or is unable to make, or is delayed in making any
repairs, additions, alterations or decorations or is unable to supply or is
delayed in supplying any equipment or fixtures if Landlord is prevented or
delayed from so doing by reason of governmental preemption in connection with a
National Emergency declared by the President of the United States or in
connection with any rule, order or regulation of any department or subdivision
thereof of any governmental agency or by reason of the conditions of supply and
demand which have been or are affected by war or other emergency.
28th: Landlord shall not be liable for failure to give possession of
the premises upon commencement date by reason of the fact that premises are not
ready for occupancy, or due to a prior Tenant wrongfully holding over or any
other person wrongfully in possession or for any other reason; in such event the
rent shall not commence until possession is given or is available, but the term
herein shall not be extended.
29th: This lease is subject and is hereby subordinated to all present
and future mortgages, deeds of trust and other encumbrances affecting the
demised premises or the property of which said premises are a part. The Tenant
agrees to execute, at no expense to the Landlord, any instrument which may be
deemed necessary or desirable by the Landlord to further effect the
subordination of this lease to any such mortgage, deed of trust or encumbrance.
** SEE RIDER ATTACHED HERETO **
And the said Landlord doth covenant that the said Tenant on paying the
said yearly rent, and performing the covenants aforesaid, shall and may
peacefully and quietly have, hold and enjoy the said demised premises for the
term aforesaid, provided however, that this covenant shall be conditioned upon
the retention of title to the premises by the Landlord.
And it is further understood and agreed, that the covenants and
agreements herein contained are binding on the parties hereto and upon their
respective successors, heirs, executors, administrators and assigns.
It is further expressly agreed that the words used in the singular shall
include words in the plural where the text of this instrument so requires.
IN WITNESS WHEREOF, the parties have inter-changeably set their hands
and seals or caused these presents to be signed by their proper corporate
officers and caused their proper corporate seal to hereto affixed, this
day of 19 .
LANDLORD: ALBERT FRASSETTO ENTERPRISES
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Signed, Sealed and Delivered }
in the presence of
/s/ Albert Frassetto
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Date: March, 1995 By: Albert Frassetto, Owner
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TENANT: BAGS OF CARLSTADT, INC. an
---------------------------------------
Affiliate of LBU, INC.
/s/ Jeffrey Mayer
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Date: March, 1995 By: Jeffrey Mayer-President
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RIDER TO LEASE AGREEMENT BETWEEN
ALBERT FRASSETTO ENTERPRISES
AND
BAGS OF CARLSTADT, INC.
AN AFFILIATE OF LBU, INC.
30. Notwithstanding anything to the contrary contained herein
(including without limitation on the provisions of Paragraph 2nd hereof) it is
agreed that the Tenant shall, at Tenant's sole cost and expense keep the demised
premises in good order, condition and repair at its own expense and make all
necessary repairs, both structural (except as hereinafter set forth) and non-
structural and replacements with respect to said demised premises, including but
not limited to plate glass, heating, plumbing, electrical, roofing, air
conditioning and ventilating equipment. Landlord's sole responsibility shall be
for the structural steel that supports the roof and walls of the property,
and no other. Tenant will be responsible for maintenance to the demised
premises due to normal operations, aging and normal wear and tear. Tenant will
at his own expense obtain a maintenance contract for the HVAC unit to be
serviced at least two (2} times a year by a reputable contractor and provide
Landlord with a copy of the contract.
Each party shall cause endorsements to be added to their
respective policies of insurance covering any insurable interest A may have with
respect to the demised premises or any property thereon, which will provide that
the insurers waive all rights to subrogation to the rights of the insured party
against the other party to this Lease in connection with any loss or damage
covered by said policies. If any such waiver of subrogation is obtainable
only upon such payment of an additional premium, then the obligation to obtain
such waiver of subrogation shall be conditioned upon the payment of such
additional premium by the party for whose benefit such waiver is sought.
31. Municipal Real Estate Taxes.
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(A) Tenant shall pay as additional rent its proportionate share
of all municipal real estate taxes, assessments, water and sewer rents, any road
improvements and or road assessments and governmental impositions, duties and
charges of every kind and nature whatsoever, extraordinary as well as ordinary,
and whether now within the contemplation of the parties or not, and each and
every installment of each of them, which shall or may during the term of the
Lease be charged, laid, levied, assessed or imposed upon the premises of which
the demised premises form a part or upon any sidewalks or streets in front of or
adjoining the said premises, or which may become due and payable with respect
thereto, and any and all taxes, charges, laid, levied, assessed or imposed in
lieu of the foregoing, under or by virtue of any present or future laws, rules,
requirements, orders, directions, ordinances, or regulations of the United
States of America or of the State, County, Municipal, Governmental or lawful
authority whatsoever; all to the extent applicable to the term of this Lease.
(B) Nothing herein contained shall require or be construed to
obligate Tenant to pay any Franchise, Corporation, Capital Stock, Capital
Levies, Transfer, Estate or Inheritance, Income or Excess profits tax imposed
upon Landlord or upon its successors or assigns of any of them. If, however, at
any time during the term hereof, the methods of taxation prevailing on the date
hereof shall be altered so as to cause the whole or any part of the real estate
taxes, assessments, levies, impositions or other charges now or hereinafter
after levied, assessed or imposed on the premises or any interest therein or
portion thereof to be levied, assessed or imposed wholly or partially, as a
capital levy, otherwise on the Landlord or its assigns, or use of the premises,
or any portion thereof or interest therein, or if any such tax, assessment, levy
(including but not limited to any municipal, county, state or federal levy},
imposition or charge, or any part thereof, shall be measured by or based in
whole or in part upon the premises or any portion thereof interest therein,
and/or upon any other taxable interest, the portion of the sums which Tenant is
required to pay hereunder in lieu of the methods of taxation prevailing on the
date hereof shall be Tenant's proportionate share of all such taxes,
assessments, levies, impositions or charges, to the extent that they are so
measured or based, and the same shall be deemed to be included with the term
real estate taxes for the purposes hereof to the extent
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the same would be payable if the premises were the only property of Landlord
subject thereto, and if the income from the premises were the only taxable
income of Landlord during the year in question.
(C) All real estate taxes, assessments and other charges and
installments thereof which shall become payable for periods falling within and
without the term hereof shall be equitably apportioned pro rate between Landlord
and Tenant in accordance with the respective periods during which Tenant shall
be in possession of the demised premises in said respective tax years.
(D) Tenant's proportionate share of all taxes, assessments,
levies, impositions and charges for any tax year shall be determined by
multiplying the same by the following fraction:
Total number in square feet 29,380'
demised herein = = 100%
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Total number of square feet 29,380'
in the building
(E) Landlord may bill Tenant each month during the term of this
Lease Agreement for Tenant's estimated proportionate share of municipal real
estate taxes, assessments, added assessments, omitted assessments, water rents,
and other charges or any other governmental impositions, duties and charges, and
Tenant shall pay same within thirty (30) days after receipt of said bill. The
said aggregate monthly payment by Tenant or other payments by Tenant made during
each calendar year of this Lease Agreement shall be adjusted at the end of each
calendar year of this Lease Agreement in accordance with the actual municipal
real estate taxes, assessments, added assessments, omitted assessments, water,
rent and charges and other governmental impositions, duties and charges during
said calendar year, and Landlord upon demand shall reimburse Tenant for any
overpayment of same received by Landlord and Tenant shall remit to Landlord upon
demand any underpayment.
(F) If the Landlord shall receive any monetary refund, rebate or
credit for any item of tax, assessment, levy, imposition, or charge with respect
to which the Tenant has paid Landlord its proportionate share hereunder the
proceeds or benefit thereof, after deducting all expenses incurred in obtaining
the same, shall be paid by Landlord to Tenant to the extent necessary to
reimburse the Tenant for any sums previously paid by Tenant pursuant to the
Paragraph 30 based upon the Tenant's proportionate share thereof.
(G) Landlord agrees that it will not prepay any assessment and
that it will pay for any such assessment in installments over the longest period
of time permitted by law.
(H) Tenant shall have the right to contest with any governmental
authority the amount of any tax, assessment, levy or imposition, provided
that it shall have paid to Landlord the entire amount of such tax, assessment,
levy or imposition.
32. Parking, etc.
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Tenant shall have the right to utilize twenty-five (25) parking
spaces during the term hereof. The Tenant will be responsible for the
maintenance of the driveways, entrances, exits, parking areas and common areas
hereof and shall keep the same clean and free from snow and ice at the sole cost
and expense of the Tenant.
33. Exculpation.
-----------
Notwithstanding anything to the contrary contained herein, it is
agreed (a) that if Landlord or any successor in interest is a corporation, there
shall be no personal liability on the part of any stockholder, officer or
director of such corporation or any subsidiary, affiliate, joint venturer, or
partner of such corporation herewith, and (b) that if Landlord is a firm,
partnership, joint venture or association, there shall be no personal liability
on the part of any partner, general or limited, or member thereof with respect
to any obligations hereunder or in connection herewith. If Landlord shall be in
breach or default with respect to its obligations under this Lease, Tenant
agrees (a) that it shall look solely to the estate, equity and interest
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of Landlord in the land and building of which the demised premises form a part
for the collection of any judgement (or other judicial process} requiring the
payment of money by Landlord in the event of any default or breach by Landlord
hereunder and (b) that there shall be no personal liability on the part of
Landlord or its stockholders, officers, directors, subsidiaries, affiliates,
joint venturers, partners or members for the collection of any such judgement or
other judicial process beyond their respective interests in the land and
building of which the demised premises form a part. The provisions hereof shall
not, however, be deemed a waiver or modification of Tenant's rights or
Landlord's obligations under this Lease, nor shall it prevent Tenant from
obtaininq judgement against the Landlord in case of such breach or default to
the extent that the same shall be a lien against Landlord's equity or interest
in said land and building or from levying against Landlord's equity or interest
therein, nor from asserting any set off or deduction against the rents payable
under this Lease to which Tenant may be entitled under this Lease, or by
judgement in its favor.
34. Fire and Extended Coverage Insurance.
------------------------------------
Landlord shall be obligated to insure the premises to its full
insurable replacement value including Landlord's loss of rent, against the
perils covered by standard fire and extended coverage policies, and Tenant shall
be responsible for payment of premiums for same as provided in Paragraph 38
hereof. In the event that it shall be impossible to obtain fire and extended
coverage insurance on the buildings and improvements on the demised premises in
an amount, in the form and with fire insurance companies reasonably acceptable
to Landlord, because of any reason due to or connected with the occupancy of the
Tenant, the Landlord may at its option, at any time thereafter, terminate this
Lease and the term thereof by giving the Tenant ten (10) days notice in writing
of its intention to do so, provided, however, that this Lease shall not
terminate if Tenant shall procure the insurance required hereunder prior to the
expiration of the 10-day notice period set out above.
For the purpose of determining replacement value, the Landlord may
determine same by setting forth its determination in a Certification of
Replacement Value which shall then constitute the minimum replacement value
referred to herein.
35. Public Liability.
----------------
Tenant shall maintain during the term of this Lease comprehensive
general public liability and property damage with an insurance company licensed
to do business in the State of New Jersey, having a rating of A or A+ in the
most recent edition of Best's key rating guide and shall be reasonably
acceptable to Landlord with a single limit of no less than Three Million Dollars
($3,000,000) applicable to either bodily injury, personal injury, death or
property damage. Landlord is to be named as "an additional insured on said
policy, with no obligation to pay any of the premiums".
36. Endorsements & Non-Cancelable Provisions.
----------------------------------------
The certificates of insurance shall be furnished to Landlord and
shall carry endorsements thereon for the benefit of the Landlord and Tenant, and
Landlord's mortgagees, agents, servants and employees and all persons claiming
against the Landlord and/or Tenant as their respective interest may appear.
Each policy shall contain an endorsement to the effect that said
policy shall not be canceled or modified without ten (10) days prior to notice
to Landlord.
37. Renewals.
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At least fifteen (15) days prior to the expiration or termination
date of any of the insurance policies, Tenant shall deliver to Landlord a copy
of the renewal or replacement policy with proof of payment of the premium
therefor.
38. Premium Payment and Other Insurance.
-----------------------------------
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Tenant shall pay all insurance premiums for insurance coverages
required to be obtained by Landlord and/or Tenant as herein provided.
39. Mutual Release of Liability to Extent of Recovery of Insurance
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Proceeds.
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Neither the Landlord nor the Tenant shall be liable to the other for
any business interruption or any loss or damage to property or injury to or
death of persons occurring on the demised premises or the adjoining property, or
in any manner growing out of or connected with the Tenant's use and occupation
of the demised premises, or the condition thereof, or of fault of the Landlord
or the Tenant or of their respective agents, employees, subtenants, Licensees,
or assigns. This release shall apply only to the extent that such business
interruption, loss or damage to property, or injury to or death of persons
covered by insurance, regardless of whether such insurance is payable to or
protects the Landlord or the Tenant or both. Nothing in this paragraph shall be
construed to impose any other or greater liability upon either the Landlord or
the Tenant than would have existed in the absence of this paragraph. This
release shall be in effect only so long as the applicable insurance policies
contain a clause incorporating the foregoing and to the effect that this release
shall not affect the right of the insured to recover under such policies. Such
clauses shall be obtained by the parties whenever possible. Landlord and/or
Tenant shall obtain appropriate clauses pursuant to which their respective
insurance carriers waive rights of subrogation.
40. Reimbursement of Landlord's Expenses.
------------------------------------
Landlord or its agents, at Landlord's expense, subject to the
reimbursement formula hereinafter set forth in this paragraph may incur
expenditures in connection with the building of which the demised premises form
a part. All costs and expenditures reasonably required in connection with the
operation and maintenance of the building and the surrounding premises, shall be
handled directly by the Tenant at its sole cost and expense and to the
satisfaction of the Landlord.
Without limiting in any manner whatsoever the, generality of the
foregoing, such costs and expenditures shall include the following:
(A) Cost and expenditures relating to the removal of snow, ice,
debris, garbage and waste; and
(B) Cost and expenditures relating to maintenance of landscaping,
planting and shrubbery; and
(C) Any and all Legal Fees In and Out of Court, pertaining to the
collections from and or evictions against the "Tenant"; and
(D) All costs and expenditures relating, to the repair of the parking
lot, exterior sealing of the building, roof maintenance and repairs, sprinkler
repairs, plumbing repairs; and electrical facility repairs necessary for the
maintenance of the building; and
(E) All cost and expenditures reasonably incurred by Landlord
pertaining to or related with Landlord's maintenance of the building; and
In each rental year, Tenant shall pay Landlord, as additional rent, Tenant's
proportionate share of Landlord's costs and expenditures as specified above for
Real Estate Taxes and building insurance in accordance with a fractional share
computed as follows:
Total number of square feet 29,380'
demised herein
--------------------------- = ---------- = 100%
Total number of square feet 29,380'
in building
4
<PAGE>
Said fractional share shall then be applied to Landlord's costs
and expenditures to determine Tenant's proportionate share of same. The charge
required hereunder shall by Tenant in such installments and in such amounts as
are reasonably estimated and billed by the Landlord during the term of this
Lease Agreement. Each installment shall be due and payable on the first day of
each month after the installment is billed to the Tenant.
Within sixty (60} days after the end of Landlord's fiscal year or
calendar year, whichever is applicable, inclusive of the year during which the
term of this Lease is terminated, Landlord shall make available for Tenant's
inspection Landlord's records relating to the operating expenses for such
preceding 12 month period, and the monthly payments to be made by Tenant
thereafter shall be adjusted and revised to compensate for any overpayment or
underpayment made by the Tenant in such preceding 12-month period.
41. Utility Charges.
---------------
(A) The Tenant shall pay as and when the same become due and payable
all water rents, rates and charges, and all charges for electricity, gas, heat,
water, sewer, sprinkler and any other utilities supplied in the demised premises
directly to the utility company and any other agency that may bill them
directly, including, but not limited to the lighting of the common areas; i.e.
Parking Lots and Building Exterior.
(B) All utility charges shall be deemed to be additional rent, and
Landlord shall have the remedies for default in payment for same as are provided
for in Default paragraph of this Lease Agreement.
42. Triple Net Rent.
---------------
In addition to the Basic Rent hereinbefore reserved, except as
otherwise provided in the Lease, Tenant shall pay any and all of the charges,
costs and expenses arising out of its use or occupation of the demised premises
of whatsoever nature, kind or description as additional rent. In the event of
non-payment, Landlord shall have all the rights and remedies herein provided and
as provided by law in the case of non-payment of rent or of breach of condition.
If the Tenant shall default in making any payment required to be made by the
Tenant, or shall be in default in performing any terms, covenants, or conditions
of this Lease on the part of the Tenant to be performed, which shall involve the
expenditure of money by Tenant, Landlord, at its option, may after ten (10) days
written notice to Tenant, expend such sums as may be necessary to perform and
fulfill such terms, covenants or conditions, and any and all sums so expended by
Landlord, with interest thereon at the rate of 15% per annum from the date of
such expenditure shall be and be deemed to be additional rent, and shall be
repaid by Tenant to Landlord on demand, and in the case of non-payment of any
other additional rent. However, no such payment or expenditure by Landlord shall
be deemed a waiver of Tenant's default nor shall it affect any of the remedies
of Landlord by reason of such default.
It is the intention of the parties that the rent specified
herein shall be triple net to the Landlord and the Landlord shall be indemnified
by the Tenant against all the costs, expenses and charges arising out of
Tenant's use or occupation of the demised premises or any part thereof during
the term of this Lease Agreement except as otherwise provided in Lease
Agreement.
In the event that the tenant vacates the premises prior to the
expiration of the lease, without the express written permission of the landlord
or, in the event the tenant abandons the premises and fails to maintain
occupancy and removes property from the demised premises, the rent for the
balance of the unexpired term shall, at once, become fully due and payable at
the option of the landlord.
43. The premises shall be leased in what is commonly referred to "As Is"
Condition.
5
<PAGE>
44. Security Deposit.
----------------
The Tenant shall pay a three (3) month security deposit in the
amount of $46,016.43 upon the signing of this Lease Agreement as well as the
first month's rent in the amount of $11,017.50.
45. Lease Commencement.
------------------
April 15, 1995
46. Rent Commencement.
-----------------
June 15, 1995
47. CAM Charges.
-----------
April 15, 1995
48. Option To Purchase.
------------------
Provided Tenant is in possession of the demised premises and is
not in default of the Lease at these dates he shall have the right to purchase
the building as follows:
Price S 1,600,000.00 Cash - 4/1/95 thru 9/30/95
Price $ 1,625.000.00 Cash - 10/1/95 thru 3/31/96
Price S 1,650,000.00 Cash 4/1/96 thru 9/30/96
49. Signage.
-------
The Tenant may place a sign on the building at his sole cost and
expense. All permits and approvals shall be obtained by the Tenant from the
Borough of Carlstadt. Upon vacating the premises, the Tenant shall remove sign
and restore the premises to its original condition.
50. GUARANTEE.
---------
This Lease Agreement will be guaranteed by LBU, Inc. of 27-50 First
Street, Long Island City, New York for the first five (5) years of this Lease
Agreement.
51. Attached hereto and made a part of this Lease Agreement is a "Cross-
Over" Easement for eleven (11) parking spaces for the motel at 340 Paterson
Plank Road, Carlstadt, Nd
6
<PAGE>
52. Environmental Cleanup Responsibility.
------------------------------------
Tenant is prohibited from utilizing the premises for the generation,
manufacture, refining, transportation, treatment, storage, handling, or disposal
of hazardous substances as those defined in the Environmental Cleanup
Responsibility Act (hereinafter ECRA) N.J.S.A. 13: 1K-6 et. seq. Tenant's use of
the premises for any of the foregoing shall constitute a default under the terms
of this agreement.
In the event that Tenant's Standard Industrial Classification Number
falls within the 22-39 inclusive, 46-49 inclusive, 51 or 76, as designated in
the Standard Industrial Classifications Manual prepared by the Office of
Management and Budget in the Executive Office of the President of the United
States, or Tenant's particular use of the demised premises causes Landlord to
fall within the purview of ECRA either during the terms of this Lease Agreement
or at the termination of this agreement and any extensions hereto, Tenant shall
be responsible for obtaining a negative declaration from the New Jersey
Department of Environmental Protection, and for all costs and fees including but
not limited to governmental, environmental consultant, attorney and
environmental testing, incidental to obtaining a negative declaration.
In the event a negative declaration cannot be obtained, Tenant shall
be responsible for all costs incidental to the preparation and execution of a
cleanup plan approved by the New Jersey Department of Environmental Protection
and shall obtain any and all documents required by Landlord and any mortgagee of
the premises from all applicable governmental entities indicating that the
cleanup plan has been fully executed, the entity shall not place a lien on the
property for the cost of clean up and the then existing condition of the
property will not cloud Landlord's title to the property nor prohibit the
transfer of same.
Tenant shall indemnify and hold harmless Landlord for any costs
incurred as a result of ECRA, arising from Tenant's S.I.C. number or as a result
of Tenant's use of the demised premises.
Tenant shall not be responsible for the condition of the premises
existing prior to its occupancy.
Tenant shall begin to comply with ECRA no later than nine {9) months
prior to the expiration of this agreement. In the event of sooner termination,
Tenant shall begin to comply upon its submission to or receipt of from Landlord,
Notice of Termination.
7
<PAGE>
EXHIBIT "A"
RENT SCHEDULE
Year One $11,017.50 per month
Year Two $11,384.75 per month
Year Three $11,752.00 per month
Year Four $12,119.25 per month
Year Five $12,608.92 per month
Year Six $13,098.58 per month
Year Seven $13,588.25 per month
Year Eight $14,077.92 per month
Year Nine $14,567.58 per month
Year Ten $15,057.25 per month
Year Eleven $15,546.92 per month
Year Twelve $16,036.58 per month
Year Thirteen $16,526.25 per month
Year Fourteen $17,015.92 per month
Year Fifteen $17,505.58 per month
Year Sixteen $17,995.25 per month
Year Seventeen $18,484.92 per month
Year Eighteen $18,974 58 per month
Year Nineteen $19,464.25 per month
Year Twenty $19,953.92 per month
8
<PAGE>
EXHIBIT 10.4
SUBSCRIPTION AGREEMENT
----------------------
LBU, Inc.
310 Paterson Plank Road
Carlstadt, New Jersey 07072
Dear Sir:
1. Subscription. John P. Holmes & Co., Inc. (the "Investor") hereby
------------
subscribes to purchase 250,000 shares of Common Stock, $.001 par value (the
"Shares"), of LBU, Inc., a Nevada corporation (the "Company").
2. Closing; Acceptance of Subscription. The Closing (the "Closing") of
-----------------------------------
the purchase of the Shares shall take place on or before March 27, 1997 (such
date being the "Closing Date") at a location mutually agreeable to the Investor
and the Company. At the Closing, the Investor will tender payment for the
subscribed for Shares by delivery of a certified check payable to LBU, INC. in
the amount of $375,000 and the Company will deliver to the Investor a stock
certificate representing the Shares.
3. Representations and Warranties of the Undersigned. The Investor hereby
-------------------------------------------------
represents and warrants to the Company as follows:
(a) The Investor can bear the economic risk of this investment and can
afford a complete loss thereof. The Investor (i) has sufficient liquid assets
to pay the full purchase price for the Shares, (ii) has adequate means of
providing for its current and presently foreseeable future needs, (iii) has no
present need for liquidity of its investment in the Shares, and (iv) will not
have an overall commitment to non-marketable investments disproportionate to its
net worth.
(b) The Investor qualifies as an "Accredited Investor" Regulation D,
under the Securities Act of 1933, as amended (the "Act") because it meets one or
more of the requirements which are set forth in Exhibit A annexed hereto.
(c) The Investor and such other persons whom it has found it necessary
or advisable to consult, have sufficient knowledge and experience in business
and financial matters to evaluate the risks of the investment and to make an
informed investment decision with respect thereto.
(d) The Investor has had the opportunity to ask questions of, and to
receive answers from, the Company and its representatives, with respect to the
Company and the terms and
<PAGE>
conditions of this offering. The Investor and its representatives, if any, have
been offered access to the books and records of the Company (i) relating to its
purchase of the Shares and (ii) which are necessary to verify the accuracy of
any information which was furnished to it. All materials and information
requested either by the Investor or others representing it, including any
information requested to verify any information furnished, have been made
available.
(e) The Investor is aware that the purchase of the Shares is a
speculative investment involving a high degree of risk and that there is no
guarantee that it will realize any gain from its investment and that it could
lose the total amount of its investment.
(f) The Investor understands that the Shares have not been registered
under the Act, nor pursuant to the provisions of the securities or other laws of
any other applicable jurisdictions. The Investors understands that the Shares
are being sold in reliance upon the exemption for private offerings contained in
Regulation D promulgated under the Act and the laws of such jurisdictions.
(g) The Investor is making the investment hereunder for its own account
and not for the account of others and for investment purposes only and not with
a view to or for the transfer, assignment, resale or distribution thereof, in
whole or in part. The Investor has no present plans to enter into any such
contract, undertaking, agreement or arrangement.
(h) The Investor acknowledges that the certificates evidencing the
Shares will contain a legend substantially as follows:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN PURCHASED FOR
INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED, OR ASSIGNED UNLESS THE
SHARES ARE COVERED BY A CURRENT REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933, OR COUNSEL OF THE COMPANY IS OF THE OPINION THAT
NO REGISTRATION STATEMENT IS REQUIRED.
(i) The undersigned is domiciled in the state set forth on the
signature page hereof and has no present intention of changing its principal
place of business or its domicile to any other state or jurisdiction.
(j) The undersigned represents and warrants that it was not organized
or reorganized for the specific purpose of acquiring Shares. The undersigned has
the full power and authority to execute this Subscription Agreement on behalf of
such entity and to make the representations and warranties made
-2-
<PAGE>
herein on its behalf and this investment in the Company has been affirmatively
authorized by the governing board of such entity and is not prohibited by the
governing documents of the entity.
The Investor understands the meaning and legal consequences of the
foregoing representations and warranties, which are true and correct as of the
date hereof and will be true and correct as of the Closing. Each such
representation and warranty shall survive such purchase.
4. Representations and Warranties of the Company.
---------------------------------------------
(a) The Company has been duly and validly incorporated and is
validly existing and in good standing as a corporation under the laws of the
State of Nevada. The Company has all requisite power and authority, and all
necessary authorizations, approvals and orders required as of the date hereof to
own its properties and conduct its business as described in the Memorandum and
to enter into this Subscription Agreement and to be bound by the provisions and
conditions hereof.
(b) All corporate action required to be taken by the Company prior
to the issuance and sale of the Shares has been, or prior to the Closing of the
sale of the Shares, will have been taken; and the Shares, when issued and sold
for the consideration expressed herein shall be duly and validly issued. The
Shares have been duly and validly authorized by proper corporate authority; and
the Shares have been reserved by the Company for issuance, and upon issuance by
the Company upon receipt of the purchase price therefore, will be validly
issued, fully paid and nonassessable and free of preemptive rights.
5. Directors. Effective as of the Closing, the Company shall cause
---------
John P. Holmes and John H. Robinson to each be elected as directors of the
Company. The Company shall thereafter cause each of such persons to be
nominated as a member of the management slate of the Board of Directors and use
its best efforts to cause them to be elected and continue to serve as directors
of the Company for such period until the Investor owns less than 10% of the
issued and outstanding Common Stock of the Company. At such time as the
Investor owns less than 10% but 5% or more of the Company's issued and
outstanding Common Stock, the Investor shall have the right to designate one
member of the Company's Board of Directors. If the Investor owns less than 5%
of the Company's issued and outstanding Common Stock, it shall have no right to
designate any directors of the Company.
-3-
<PAGE>
6. Piggyback Registration.
----------------------
(a) If at any time or from time to time, prior to the date which
is five years after the Closing Date, the Company proposes to register any of
its securities, for its own account or the account of any of its shareholders
(other than a registration relating solely to employee stock option or purchase
plans, or a registration on Form S-4 or any successor to such form), the Company
will promptly give to the Investor written notice thereof and include in such
registration, and in any underwriting involved therein, all the Shares of the
Investor and specified in a written request or requests by the Investor, made
within thirty (30) days after receipt of such written notice from the Company,
to be included in any such registration, except as set forth in subsection 6(b),
below.
(b) If the registration of which the Company gives notice
pursuant to Section 6(a) is for a registered public offering involving an
underwriting, the Company shall so advise the Investor as a part of the written
notice given pursuant to subsection 6(a). In such event, the right of the
Investor to registration shall be conditioned upon the Investor's participation
in such underwriting and the inclusion of the Investor's Shares acquired
pursuant to this Agreement in the underwriting to the extent provided herein. If
the Investor proposes to distribute its shares through such underwriting it
shall (together with the Company and the other shareholders distributing their
securities through such underwriting) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for such
underwriting by the Company. Notwithstanding any other provision of this Section
6, if the underwriter(s) shall notify the Company in writing that in their good
faith opinion, marketing factors require a limitation of the number of Shares to
be underwritten, the number of securities that may be included in the
underwriting shall be allocated, first, to the Company for its own account;
second, to any shareholders (other than the Investor) invoking contractual
rights to have their securities registered on the registration statement
pursuant to which Investor is invoking its rights under this subsection 6(b), if
any, on a pro rata basis, and third, to the Investor. In the event of such a
limitation by the underwriters of the number of Share of the Investor to be
included in the registration and underwriting, the Company shall so advise the
Investor.
7. Restriction on Sale. The Investor agrees that it will not,
-------------------
without the prior written consent of the Company, sell, assign, pledge,
hypothecate or transfer in any manner the Shares prior to the date which is two
years after the Closing Date; provided, however, that the Investor shall be
-------- -------
permitted to sell any Shares registered pursuant to Section 6 hereof prior to
the expiration of such two year period.
-4-
<PAGE>
8. Access to Books and Records. Prior to the Closing, the Company
---------------------------
shall give the Investor and its representatives full and complete access during
normal business hours to the Company's premises, and all books and records
regarding the Company and its business as the Investor may reasonably request.
9. No Waiver. Except as otherwise specifically provided for
---------
hereunder, no parties shall be deemed to have waived any of his or its rights
hereunder or under any other agreement, instrument or papers signed by any of
them with respect to the subject matter hereof unless such waiver is in writing
and signed by the party waiving said right. Except as otherwise specifically
provided for hereunder, no delay or omission by any party in exercising any
right with respect to the subject matter hereof shall operate as a waiver of
such right or of any such other right. A waiver on any one occasion with
respect to the subject matter hereof shall not be construed as a bar to, or
waiver of, any right or remedy on any future occasion.
10. Entire Agreement. The parties have not made any representations
----------------
or warranties with respect to the subject matter hereof not set forth herein or
in the Memorandum, and this Subscription Agreement, together with any
instruments executed simultaneously herewith, constitutes the entire agreement
between them with respect to the subject matter hereof. All understandings and
agreements heretofore had between the parties with respect to the subject matter
hereof are merged in this Subscription Agreement, which alone fully and
completely expresses their agreement.
11. Indemnification. The undersigned acknowledges that he
---------------
understands the meaning and legal consequences of the representations and
warranties contained in Section 3 hereof, and he hereby agrees to indemnify and
hold harmless the Company and its officers and directors from and against any
and all loss, damage or liability (including costs and reasonable attorneys'
fees) due to or arising our of a breach of any representation, warranty or
acknowledgement of the undersigned contained in this Subscription Agreement or
in the Confidential Subscriber Questionnaire.
12. Changes. This Agreement may not be changed, modified, extended,
-------
terminated or discharged orally, but only by any agreement in writing, which is
signed by all of the parties to this Agreement.
13. Further Documents. The parties agree to execute any and all such
-----------------
other and further instruments and documents, and to take any and all such
further actions reasonably required to effectuate this Agreement and the intent
and purposes hereof.
-5-
<PAGE>
14. Notices. All notices or others communications required or
-------
permitted hereunder shall be in writing and shall be mailed by First-Class,
Registered or Certified Mail, Return Receipt Requested, postage prepaid, as
follows:
To the Investor: To the Address listed at the end of this
Agreement.
To the Company: LBU, INC.
310 Paterson Plank Road
Carlstadt, New Jersey 07072
or in each case to such other address as shall have last been furnished by like
notice. If mailing by Registered or Certified Mail is impossible due to an
absence of postal service, notice shall be in writing and personally delivered
to the aforesaid address. Each notice or communication shall be deemed to have
been given as of the date so mailed or delivered, as the case may be.
15. Governing Law. This Agreement shall be construed and enforced in
-------------
accordance with the internal laws of the State of New York, without giving
effect to the principles of conflicts of law.
16. Transferability. This Subscription Agreement shall be binding
---------------
upon and inure to the benefit of the parties hereto and their heirs, executors,
administrators, personal representatives and successor. The undersigned agrees
not to transfer or assign this Subscription Agreement, or any portion of his
interest herein, and further agrees that the assignment and transfer of the
Shares, acquired pursuant hereto shall be made only in accordance with all
applicable laws.
-6-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Subscription
Agreement this 18th day of March, 1997.
JOHN P. HOLMES & CO., INC.
By: /s/ John P. Holmes
--------------------------
Name: John P. Holmes
Title: President
Address to which information regarding this subscription should be
mailed:
Box 428
----------------------------------------
Street Address
Shelter Island HTS, New York 11965
----------------------------------------
City and State Zip
516-749-0323
----------------------------------------
Telephone Number
13-2938767
----------------------------------------
Taxpayer Identification Number
ACCEPTED AND AGREED TO
THIS 18th DAY OF March, 1997
LBU, INC.
By: /s/ Jeffrey Mayer
------------------------------
Title: /s/ President/CEO
----------------------------
-7-
<PAGE>
EXHIBIT A
---------
"Accredited Investors" as defined in Regulation D under the Securities
Act of 1933, as amended (the "Act"), include any of the following:
(1) Any natural person whose individual net worth, or joint net worth
with that person's spouse, at the time of his purchase exceeds $1,000,000;
(2) Any natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with that person's
spouse in excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year;
(3) Any bank as defined in section 3(a)(2) of the Act, or any savings
and loan association or other institution as defined in section 3(a)(5)(A) of
the Act whether acting in its individual or fiduciary capacity; any broker or
dealer registered pursuant to section 15 of the Securities Exchange Act of 1934;
any insurance company as defined in section 2(13) of the Act; any investment
company registered under the Investment Company Act of 1940 or a business
development company as defined in section 2(a)(48) of that Act; any Small
Business Investment Company licensed by the U.S. Small Business Administration
under section 301(c) or (d) of the Small Business Investment Act of 1958; any
plan established and maintained by a state, its political subdivisions, or any
agency or instrumentality of a state or its political subdivisions, for the
benefits of its employees if such plan has total assets in excess of $5,000,000;
any employee benefit plan within the meaning of the Employee Retirement Income
Security Act of 1974 if the investment decision is made by a plan fiduciary, as
defined in section 3(21) of such Act, which is either a bank, savings and loan
association, insurance company, or registered investment adviser, or if the
employee benefit plan has total assets in excess of $5,000,000 or, if a self-
directed plan, with investment decisions made solely by persons that are
accredited investors;
(4) Any private business development company as defined in section
202(a)(22) of the Investment Advisers Act of 1940;
(5) Any organization described in section 501(c)(3) of the Internal
Revenue Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000;
(6) Any director, executive officer, or general partner of the issuer
of the securities being offered or sold, or
<PAGE>
any director, executive officer, or general partner of a general partner of that
issuer;
(7) Any trust, with total assets in excess of $5,000,000, not formed
for the specific purpose of acquiring the securities offered, whose purchase is
directed by sophisticated person as described in 230.506(b)(2)(ii);
(8) Any entity in which all of the equity owners are accredited
investors.
-2-
<PAGE>
EXHIBIT 10.5
PROMISSORY NOTE
$400,000 Carlstadt, New Jersey
February 21, 1998
FOR VALUE RECEIVED, LBU, Inc., a Nevada corporation (the "Maker"),
hereby promises to pay on April 1, 1998 to the order of John Holmes & Co., Inc.,
at P.O. Box 428, Shelter Island Heights, NY 11965 (the "Payee"), the principal
sum of $400,000. The Maker hereby promises to pay monthly interest to Payee, in
arrears, at a rate of 9.12% on the principal amount per annum, until the
principal amount hereof is repaid in full. Such interest payments shall be
prorated for any partial month in which the principal amount is outstanding.
1. The Payee may, at any time during the period any principal amount
hereunder is outstanding, convert up to one hundred percent (100%) of the
principal amount of this Note (in increments of not less than $100,000) into
shares of common stock, par value $.001 per share (the "Common Stock"), of the
Company at a conversion price for each share of Common Stock equal to $5.00,
provided that, in conjunction with such conversion, Payee shall deliver to Maker
its irrevocable voting proxy granting the Maker, or its designee, the voting
rights relating to the Common Stock issuable on conversion.
2. All payments of the principal are to be made in lawful money of the
United States of America at the address of Payee as set forth above, or such
other place as the Payee or other holder of this Note shall designate to the
Maker in writing.
3. The principal sum of this Note may be prepaid by the Maker at any
time or times prior to the date it is due, in whole or in part, without premium
or penalty. The Maker hereby waives any requirement of presentment, notice of
protest, notice of intent
<PAGE>
to accelerate, notice of acceleration and all other notices in connection with
the delivery, acceptance, performance, default or enforcement of this Note.
4. Upon receipt of evidence, reasonably satisfactory to the Maker, of
the loss, theft, destruction or mutilation of this Note, and upon request of the
indemnity reasonably satisfactory to the Maker, the Maker will, at the expense
of the Payee or the other holder, execute and deliver, in lieu thereof, a new
note of like tenor and amount.
5. No delay, failure or omission by the Payee or any subsequent holder
in respect of the exercise of any right or remedy granted to the Payee or other
holder or allowed to the Payee or other holder by law, herein, under said Note
or otherwise, shall constitute a waiver of the right to exercise the right or
remedy at that or any future time or in the same or other circumstances.
6. This Note shall be governed by and construed and enforced under the
laws of the State of New York.
7. Notices and demands hereunder on the Maker may be given in writing at
310 Paterson Plank Road, Carlstadt, New Jersey 07072, or such other place as the
Maker may inform the Payee in writing.
8. This Note shall bind the Maker and its successors and assigns.
LBU, INC.
By: /s/ Jeffrey Mayer
______________________
Jeffrey Mayer, Chief
Executive Officer
<PAGE>
EXHIBIT 10.6
PROMISSORY NOTE
$300,000 Carlstadt, New Jersey
February 21, 1998
FOR VALUE RECEIVED, LBU, Inc., a Nevada corporation (the "Maker"),
hereby promises to pay on April 1, 1998 to the order of John Holmes & Co., Inc.,
at P.O. Box 428, Shelter Island Heights, NY 11965 (the "Payee"), the principal
sum of $300,000. The Maker hereby promises to pay monthly interest to Payee, in
arrears, at a rate of 9.12% on the principal amount per annum, until the
principal amount hereof is repaid in full. Such interest payments shall be
prorated for any partial month in which the principal amount is outstanding.
1. The Payee may, at any time during the period any principal amount
hereunder is outstanding, convert up to one hundred percent (100%) of the
principal amount of this Note (in increments of not less than $100,000) into
shares of common stock, par value $.001 per share (the "Common Stock"), of the
Company at a conversion price for each share of Common Stock equal to $5.00,
provided that, in conjunction with such conversion, Payee shall deliver to Maker
- -------------
its irrevocable voting proxy granting the Maker, or its designee, the voting
rights relating to the Common Stock issuable on conversion.
2. All payments of the principal are to be made in lawful money of the
United States of America at the address of Payee as set forth above, or such
other place as the Payee or other holder of this Note shall designate to the
Maker in writing.
3. The principal sum of this Note may be prepaid by the Maker at any
time or times prior to the date it is due, in whole or in part, without premium
or penalty. The Maker hereby waives any requirement of presentment, notice of
protest, notice of intent
<PAGE>
to accelerate, notice of acceleration and all other notices in connection with
the delivery, acceptance, performance, default or enforcement of this Note.
4. Upon receipt of evidence, reasonably satisfactory to the Maker, of
the loss, theft, destruction or mutilation of this Note, and upon request of the
indemnity reasonably satisfactory to the Maker, the Maker will, at the expense
of the Payee or the other holder, execute and deliver, in lieu thereof, a new
note of like tenor and amount.
5. No delay, failure or omission by the Payee or any subsequent holder
in respect of the exercise of any right or remedy granted to the Payee or other
holder or allowed to the Payee or other holder by law, herein, under said Note
or otherwise, shall constitute a waiver of the right to exercise the right or
remedy at that or any future time or in the same or other circumstances.
6. This Note shall be governed by and construed and enforced under the
laws of the State of New York.
7. Notices and demands hereunder on the Maker may be given in writing at
310 Paterson Plank Road, Carlstadt, New Jersey 07072, or such other place as the
Maker may inform the Payee in writing.
8. This Note shall bind the Maker and its successors and assigns.
LBU, INC.
By: /s/ Jeffery Mayer
______________________
Jeffrey Mayer, Chief
Executive Officer
<PAGE>
EXHIBIT 10.7
February 10, 1998
JPO, LLC
c/o Mr. John O'Malley
8 Webster Avenue
Summit, NJ 07901
Dear Mr. O'Malley:
On behalf of LBU, Inc. (the "Company"), the Company agrees and has obtained
the requisite approval of its Board of Directors, to retain JPO, LLC as an
independent consultant ("Consultant") based upon the following terms ("the
Agreement"):
1. Commencement Date-2/10/98
2. Base Compensation - $105,000 payable in weekly installments of $2,019.23
without the need to present further documentation.
3. Other Compensation - Consultant shall be entitled to receive additional
compensation for participating in any acquisition, capital raising, or
other financing transactions, which is initiated during the term hereof
and consummated by the Company during the term of this agreement or
subsequent thereto. Compensation for any such transactions shall be
mutually agreed upon by the parties hereto in conjunction with such
transaction and shall be payable upon consummation of such transaction.
4. Stock Purchase Warrants - As an inducement to enter into this agreement,
Consultant shall receive fully vested warrants (the "Stock Purchase
Warrants") to purchase 100,000 shares of Company's Common Stock in the
form attached hereto as Exhibit A. In the event that an adverse outcome
to the litigation described in the footnotes to the Company's financial
statements results in the issuance of additional shares of Common Stock
of the Company, Consultant shall receive a pro rata grant of additional
fully vested Stock Purchase Warrants in the form attached hereto as
Exhibit A to adjust for such dilution.
<PAGE>
5. As an inducement to enter into this agreement, Consultant shall receive
50,000 restricted shares of LBU, Inc. Common Stock (subject to a one-
year holding period) and vesting as follows:
10,000 shares on commencement of this Agreement
20,000 shares on March 10, 1998
20,000 shares on April 10, 1998
The issuance of the shares on March 10 and April 10, 1998 shall be conditioned
upon this agreement not having terminated prior thereto.
6. Duties Consultant shall consult with and advise the Company with respect
to financial and other matters as reasonably directed by the Company's
President or its Board of Directors from time to time. It is agreed and
understood that the Consultant shall dedicate an average of three (3)
business days per week on-site (at the Corporate offices of the Company
or at such other locations as may be necessary) to the performance of
it's duties hereunder.
7. Indemnification and Hold Harmless In order to induce Consultant to enter
into this Agreement, the Company hereby agrees to indemnify and hold
harmless, to the fullest extent of the law, Consultant from and against
any liability, claim, loss or expenses to which Consultant may become
subject as a result of this Agreement or from the services provided
hereunder. Any costs, fees, and/or expenses incurred by Consultant in
defending or investigating any action, suit or proceeding shall be paid
by the Company in advance of the final deposition of such matter; upon
request. In the event that such advances are necessary, Consultant shall
undertake, in writing, to repay any such advances in the event that it
is ultimately adjudicated that Consultant is not entitled to
indemnification.
8. Expenses Consultant's business related out-of-pocket expenses shall be
reimbursed upon submission of requisite documentation to the Company.
9. Termination This Agreement may be terminated on thirty (30) days prior
written notice delivered by either party hereto. Consultant's
indemnification and hold harmless rights and the Company's related
obligations, under section 7 hereof, shall survive any termination.
10. Governing Law This Agreement is made under and shall be construed
pursuant to the laws of the Stare of New Jersey.
11. Entire Agreement This Agreement, including the Stock Purchase Warrants
described in Section 4 hereof and the restricted Common Stock described
in Section 5 hereof, shall constitute the entire agreement of the
parties with regard to the subject matter hereof, and shall supersede
any and all other understandings or agreements between the parties
regarding such subject matter.
<PAGE>
If you are in agreement with the foregoing terms, please indicate your
acceptance by signing below, whereupon this Agreement shall be binding on the
parties.
Sincerely,
/s/ Jeffrey Mayer
Jeffrey Mayer
CEO
Agreed and approved:
/s/ John P. O'Malley, III
- -------------------------
JPO, LLC
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<PAGE>
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<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
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