SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1999
Commission File Number: 2-41015
LBU, Inc.
(Name of Small Business Issuer in its Charter)
Nevada 62-1203301
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
310 Paterson Plank Road, Carlstadt, New Jersey 07072
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (201) 933-2800
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes [_] No [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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. [ ]
Issuer's revenues for the year ended December 31, 1999 were $3,801,774.
The aggregate market value of the voting stock traded on the OTC Electronic
Bulletin Board held by non-affiliates computed by reference to the closing sale
price of such stock, as reported by the National Quotation Bureau, on May 4,
2000 was $13,133*.
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* Based on a trade price of $.025 per share on January 7, 2000, the last
available trade price of the shares of Common Stock.
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Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [_] No [_].
As of May 4, 2000, the issuer had 1,814,334 shares of Common Stock, par value
$.001 outstanding.
Transitional Small Business Disclosure Format Yes __________ No _____X____
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TABLE OF CONTENTS
PART I
Item 1. Description of Business...............................................1
Item 2. Description of Property...............................................8
Item 3. Legal Proceedings.....................................................9
Item 4. Submission of Matters to a Vote of Security Holders..................10
PART II
Item 5. Market For Common Equity and Related Stockholders Matters............10
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................11
Item 7. Financial Statements.................................................16
Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure...............................16
PART III
Item 9. Directors and Executive Officers of the Registrant...................17
Item 10. Executive Compensation...............................................17
Item 11. Security Ownership of Certain Beneficial Owners and Management.......18
Item 12. Certain Relationships and Related Transactions.......................20
Item 13. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K ..........................................20
SIGNATURES ...................................................................23
EXHIBIT INDEX ................................................................24
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PART I
Item 1. Description of Business
General
This Annual Report on Form 10-KSB contains certain "forward-looking
statements" within the meaning of the "safe harbor" provisions of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements concerning the Company's
products, results of operations and prospects. These forward-looking statements
involve risks and uncertainties, including risks relating to general economic
and business conditions, among them, the ability of the Company to successfully
emerge from bankruptcy proceedings, the availability and terms of additional
financing; changes which could affect customer payment practices or customer
spending; industry trends; the loss of major customers; changes in demand for
the Company's products; the timing of orders received from customers; cost and
availability of raw materials; increases in costs relating to manufacturing and
transportation of products; dependence on foreign manufacturing; 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 forward-looking statements are merely predictions
and therefore inherently subject to uncertainties and other factors, including
those set forth above, that could cause the actual results, performance, levels
of activity, or achievements of the Company, or industry results, to be
materially different from any future results, performance, levels of activity,
or achievements of the Company expressed or implied by such forward-looking
statements.
LBU, Inc., a Nevada corporation, (the "Company" or "LBU") 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.
On March 22, 1999, the Company filed a petition for reorganization under
Chapter 11 of Title 11 of the U.S. Bankruptcy Code in the United States
Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court").
The financial condition of the Company was adversely affected as a result of (i)
an increase in costs associated with the expansion of the Company's business and
product lines since the end of 1997; and (ii) a decrease in sales and a net loss
of approximately $1.7 million in 1998. The petition was precipitated by two
factors (i) the Company's inability to repay approximately $725,000 of
promissory notes (the "Notes") (principal and accrued interest thereon) which
became due to John P. Holmes & Company, Inc. ("JPHC"), a principal stockholder
of the Company, on January 1, 1999; and (ii) significant legal fees incurred by
the Company as a result of a securities suit filed by Wolverton Securities Ltd.
("Wolverton") and the diversion of management's attention to such litigation.
See Item 3. "Legal Proceedings."
As of May 4, 1999, the Company's secured debt to its factor, The CIT
Group/Commercial Services, Inc. ("CIT"), amounted to $349,451 and its total
unsecured debt was estimated at approximately $2,000,000
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On April 24, 1999, the Bankruptcy Court approved a financing arrangement
between the Company and CIT , which enabled the Company to continue its
operations during the Chapter 11 proceedings. On January 13, 2000, the
Bankruptcy Court issued an order confirming a plan of reorganization, as
amended, (the "Reorganization Plan") which was filed by the Company. The
Reorganization Plan provides for: (a) amending the factoring arrangement between
the Company and CIT; (b) payment to unsecured creditors who may elect to receive
either (i) one share of Common Stock for each $2.00 of debt, or (ii) 20 monthly
payments equal to 22.5% of such creditor's claims; and (c) retention of stock by
the existing stockholders of the Company.
Prior to filing the petition, the Company retained the services of a
workout consultant (the "Consultant") and effected certain changes pursuant to
his advice, which included reducing its executive staff, closing the New York
show room, and expanding its Dominican Republic production. In addition, the
aggregate guaranteed salaries of Jeffrey Mayer, the Company's Chairman of the
Board of Directors, President, Chief Executive Officer and Acting Chief
Financial Officer, and his spouse , Ms. Isel Pineda Mayer, were reduced from
$165,000 to $60,000.
In March 2000, the Company made the first monthly payment to 80 creditors
who elected a cash payment of 22.5% of their claim in 20 monthly installments
pursuant to the provisions of the Reorganization Plan. In addition, as of the
date of this Report, the Company issued an aggregate of 449,897 shares of Common
Stock to six of the eight creditors, including JPHC, who elected to receive
stock in full satisfaction of their claims. An additional 233,398 shares of
Common Stock are yet to be issued by the Company to two creditors, including
232,000 shares to Wolverton.
The bag and accessory business operated by the Company was founded in 1989
by Mr. Mayer, as a New York corporation, which manufactured and sold designer
laundry bags to local and regional retail outlets such as Zabar's, Conway and
college bookstores. The Company has since expanded its product line and
distribution channels to national and international customers 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, President and Chief
Executive Officer. See --"History of Corporate Structure."
Promotional Products
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, health care, automotive and other industries. During
1998 and 1999, sales of promotional products accounted for approximately $2.3
million and $2.2 million or 42% and 58% of the Company's total sales,
respectively.
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 due to the Company's QUICKPRO(TM) process, which features a
comprehensive "in house" product development operation. The QUICKPRO(TM) process
incorporates three distinct processes:
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The Creative Process includes the development of a unique promotional item
through LBU's in-house art and design capabilities. The Company's creative
staff, using a customer's 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 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
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
Houseware products
The Company manufacturers and sells a line of versatile laundry bags,
houseware and garment care products to regional and national customers. This
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 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. Some products
are seasonal, such as the Company's line of recreational summer products and its
"Back to School" laundry bag programs in which bags displaying college emblems
are purchased by mass merchants and university bookstores.
Accessory Products
The Company offers a 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 micromeshes. 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 1998 and 1999, sales of retail products consisted primarily of
housewares and accounted for approximately $2.9 million and $1.0 million or 53%
and 27% of the Company's total sales, respectively.
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Products Made for Industrial Manufactures and Original Equipment Manufacturers
("OEMs")
The Company sells custom made bags and cases for various commercial and
industrial packaging and government applications. In the Industrial segment, the
Company's products include heavy-duty laundry bags for commercial laundromats,
dry cleaners, prisons, hospitals and hotels. In the OEMs segment, products
include custom manufactured bags, pouches and cases that are typically reusable,
environmentally friendly and incorporated into the OEMs' product as value-added
features. During 1998 and 1999, sales of products to the industrial
manufacturers and OEMs accounted for $293,000 and $570,000 or 5% and 15% of the
Company's total sales, respectively.
Operation and Production
The Company is able 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'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 1999, the
Company invested a total of $85,000 in new computers, which enable the Company,
among others, to better monitor orders and inventory, and in new equipment for
the cutting department. The Company intends to invest an additional $75,000 in
automatic screen-printing equipment in the second and third quarters of 2000.
In order to meet production requirements, during 1999 the Company also
utilized outside sewing subcontractors located in close proximity to the
Company's facility. The use of outside sewing subcontractors provides the
Company with flexibility to meet peak production requirements without increasing
fixed 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. When the goods return 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. In
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. These arrangements offer LBU 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 production and inventory reports and the Company's personnel
make periodic on-site production visits.
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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
higher sales levels without having to expand its present production facility.
However, a significant increase in revenues would require the Company, among
other things, to obtain additional financing for the purchase of production
equipment and to maintain higher staffing, raw material and finished goods
inventory levels.
Sales and Marketing
The Company sells its products directly through in-house and outside
independent sales representatives. During 1999, 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.
Management believes that many 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 results in more focused selling efforts. To complement its sales
strategy, the Company will begin to distribute its first full product line
catalog for all of its non-houseware business segments in the second half of
2000.
Mr. Mayer, the Company's President, Chief Executive Officer and Acting
Chief Financial Officer, oversees the Company's marketing efforts and plays a
major role in selling the Company's products. In addition, the Company currently
employs four persons in its sales and marketing operation. The Company engages
15 non-exclusive outside sales representatives and intends to engage al least
two additional sales representatives in 2000. The Company compensates sales
representatives based on a percentage of sales generated.
Generally, before a distributor orders a product from the Company, such
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. The Company utilizes a
financing company, CIT, to provide accounts receivable, factoring and financing,
credit verification information on many of its customers and guarantee of
payment. The Company believes that its credit management practices and the
services provided by CIT have reduced its bad debt losses.
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The Company relies primarily on extensive advertising throughout the
industry trade publications and other industrial and government-buying guides to
increase market share of products made for industrial manufacturers and OEMs.
The Company also advertises its promotional products in various promotional
magazines.
Sources of Supply
The Company sources its 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 with whom it does business would be able to fill the Company's
requirements. In 1999, 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 46% and 42% of total inventory levels as of
December 31, 1998 and 1999, respectively, and consisted primarily of products
manufactured for sale in the retail housewares industry segment.
Competition
Promotional Products
The promotional products market is highly fragmented and competitive. The
Company competes with a large number of other promotional product suppliers,
some of which have more diversified product offerings, and others that market
only a limited number of products or lines. The Company's competitions in the
promotional products segment include Norwood Promotional Products, Toppers and
Gemline. The Company competes primarily on the basis of customer service,
turnaround time, selection and price. The Company believes that it has some
advantage over certain competitors in this 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. 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.
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This compares favorably to import competitors, which generally require two weeks
or more to generate samples. The Company further believes that 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,
may enhance 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.
Some competitors of the Company 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 promotional
products industry also competes against other advertising media, such as
television, radio, newspapers, magazines, billboards and the Internet.
Retail Products
The markets for retail products are highly competitive and include numerous
domestic and foreign competitors, some of which are significantly larger and
have substantially greater financial and other resources than the Company. The
Company's main competitor in the retail products segment is Seymour Housewares.
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 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 expenditure
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 the Company's management believes to be adequate.
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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 are registered or 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.
Employees
As of March 31, 2000, the Company had 18 full-time employees, of whom one
was employed in an executive capacity, three in financial, administrative or
clerical capacities and 14 in warehouse or distribution capacities. The Company
had one part time employee. 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.
History of Corporate Structure
Laundry Bags Unlimited, Inc., a New York corporation ("LBU-NY"), commenced
operations in 1989 as a privately held corporation in the business of designing,
manufacturing and selling laundry bags. LBU, Inc. was incorporated in Delaware
("LBU-Delaware") in August 1993 and LBU-NY was concurrently merged into it.
LBU-Delaware continued to operate as a privately held Subchapter S-corporation
until March 1995. On March 25, 1995, LBU-Delaware effected a reverse acquisition
transaction with New Century Media, Ltd. ("New Century"), a Nevada corporation,
whose common stock traded on the over-the-counter ("OTC") Electronic Bulletin
Board. Pursuant to the transaction, all of the outstanding common shares of
LBU-Delaware were acquired by New Century and LBU Delaware became a wholly owned
subsidiary of New Century. Upon completion of the transaction, New Century
changed its name to LBU, Inc.
New Century formerly operated under the following company names since
October 26, 1970: Halcyon Data Management Group, Inc., Galaxy Group, Inc., Quest
International Equities, Inc., Astrotek Inc. and Agri-Quest Mining, Inc. New
Century was a manufacturer of computer-related equipment in the 1970's and
1980's and attempted to develop a copper mining operation in 1991. This business
was assigned to a third party in 1992. New Century was not active in any
business operation from 1993 until the March 1995 transaction with LBU-Delaware.
LBU-Delaware and its then management and board of directors had no relationship
with any of its predecessor companies prior to the March 1995 transaction.
Item 2. Description of Property
LBU'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 2005 for this
facility. The Company's executive, administrative, accounting, sales and
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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 paid by the Company in 1999
was $148,900. Management believes that the New Jersey facility will continue to
satisfy the Company's space requirements for the foreseeable future.
Item 3. Legal Proceedings.
On March 22, 1999, the Company filed a petition for reorganization under
Chapter 11 of Title 11 of the U.S. Bankruptcy Code in the United States
Bankruptcy Court for the Southern District of New York (Case No. 99-41755(PCB)).
On April 24, 1999, the Bankruptcy Court approved a financing arrangement between
the Company and its factor, CIT, which enabled the Company to continue its
operations during the Chapter 11 proceedings. The Company filed a plan of
reorganization with the Bankruptcy Court and negotiated the terms of such
reorganization plan with the Creditors Committee and individual creditors of the
Company. On December 6, 1999, the Company filed an amended reorganization plan
which provides for: (a) amending the factoring arrangement between the Company
and CIT; (b) payment to unsecured creditors who may elect to receive either (i)
one share of Common Stock for each $2.00 of debt, or (ii) 20 monthly payments
equal to 22.5% of such creditors' claims; and (c) retention of stock by the
existing stockholders of the Company. On January 13, 2000, the Bankruptcy Court
issued an order confirming the Reorganization Plan. In March 2000, the Company
made the first monthly payment to 80 creditors who elected a cash payment. As of
the date of this Report, the Company issued a total of 449,897 shares of Common
Stock to six of the eight creditors who elected to receive stock distribution.
In March, 1996, Glenneyre Capital Corporation ("GCC"), Poimandres Financial
Corporation and HJS Financial Services, Inc. (the "Plaintiffs") filed a suit
against the Company in the Court of the State of Nevada alleging breach of
contract. The Plaintiffs claimed that 300,000 shares of the Company's Common
Stock (the "Shares"), which were issued to them pursuant to a financial services
agreement dated July 24, 1995 between the Company and the Plaintiffs, were
unlawfully canceled. The Company defended the suit claiming that the financial
and other consulting services, which were to include raising capital, were not
rendered to the Company and that the Shares were improperly registered and,
accordingly, on November 19, 1995, the Company invalidated some of the Shares
and subsequently 269,000 Shares were returned and canceled by LBU's stock
transfer agent. The Company, based on legal advice, believes the action it has
taken by invalidating and canceling the 269,000 Shares is appropriate. The
Company initiated a counter-suit against the Plaintiffs for breach of contract,
fraud and other causes of action. GCC filed a $7,469 proof of claim under the
bankruptcy proceedings and elected a cash distribution of 22.5% of its claim in
20 monthly installments .The Company made the first monthly installment to GCC
in March 2000.
In a related claim on September 12, 1997, Wolverton, a purchaser of some of
the Shares, filed an action against the Company in the U.S. District Court for
the District of Nevada, seeking (i) the reissue of 170,250 Shares; (ii) specific
damages in the amount of $405,000, and (iii) unspecified punitive damages. In
October 1997, the Company filed an answer and a third-party complaint against
the Plaintiffs and certain of their affiliates. In September 1998, the Court
granted Wolverton summary judgment on a number of claims, including the
conversion claim, and dismissed the Company's third party complaint. Wolverton
filed a proof of claim under the bankruptcy proceedings asserting damages in the
amount of $687,000 plus an undetermined amount. The
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Company and Wolverton agreed to settle the Wolverton suit by agreeing on an
unsecured claim of $464,000 and a distribution thereon of 232,000 shares of
Common Stock of the Company in full satisfaction of the debt. The Company
intends to issue such shares to Wolverton immediately after receipt of
Wolverton's consent to cover any short sales of the Shares previously made by it
to third parties out of the 232,000 shares.
In May 1999, the Company received a letter from the Depository Trust
Company ("DTC") requesting that 69,000 Shares registered to Cede & Co. be
revalidated. The 69,000 Shares comprise a portion of the 269,000 Shares
invalidated and canceled by the Company as described above. In its letter, DTC
stated that if the certificates for the 69,000 Shares will not be revalidated,
it will consider actions against the Company such as reconsidering the Company's
eligibility for DTC services, ceasing to provide it with DTC services, and
initiating legal action to recover the 69,000 Shares and any damages incurred as
a result of the Company's actions. The Company has not yet determined its
response to this letter. Although the Company and Wolverton settled the
Wolverton suit by agreeing to a stock distribution pursuant to the provisions of
the Reorganization Plan, no assurance can be given that the Company will not
face additional liability regarding the 69,000 Shares or other portions of the
Shares.
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 fourth quarter of the year ended December 31, 1999.
PART II
Item 5. Market For Common Equity and Related Stockholders Matters
Recent Sales of Unregistered Securities
The Company did not make any sales of securities that were not registered
under the Securities Act of 1933 during the year ended December 31, 1999.
Price Range of Common Stock and Dividend Policy
The Company's shares of Common Stock are traded on the OTC Electronic
Bulletin Board under the symbol "LBUAA." The following table sets forth, for the
periods indicated, the high and low closing bid prices of the shares of Common
Stock, as reported by the National Quotation Bureau, Inc.
High Low
---- ---
1998
----
First Quarter ................. $5.00 $2.50
Second Quarter ................ 4.00 2.00
Third Quarter ................. 3.80 0.75
Fourth Quarter ................ 2.50 0.55
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High Low
---- ---
1999
----
First Quarter ................. 1.65 0.25
Second Quarter ................ 1.0625 0.375
Third Quarter ................. 1.125 0.375
Fourth Quarter ................ 1.0625 0.1875
2000
----
First Quarter (through January 7)* 0.25 0.125
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* Subsequent to January 7, 2000, there was no trading in the shares of Common
Stock of the Company.
The above quotations are inter-dealer prices, without retail mark-up,
mark-down or commissions and may not necessarily represent actual transactions.
As of May 4, 2000, there were 334 holders of record of the Company's Common
Stock.
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.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Bankruptcy Proceedings
On March 22, 1999, the Company filed a petition for reorganization under
Chapter 11 of Title 11 of the U.S. Bankruptcy Code in the United States
Bankruptcy Court for the Southern District of New York. The financial condition
of the Company was adversely effected as a result of (i) an increase in costs
associated with the expansion of the Company business and product lines since
the end of 1997; and (ii) a decrease in sales and a net loss of approximately
$1.7 million in 1998. The petition was precipitated by two factors (i) the
Company's inability to repay approximately $725,000 of the Notes (principal
amount and accrued interest thereon) which became due to JPHC, a principal
stockholder of the Company, on January 1, 1999; and (ii) significant legal fees
incurred by the Company as a result of a securities suit filed by Wolverton and
the diversion of management's attention to such litigation.
As of May 4, 1999, the Company secured debt to its factor, CIT, amounted to
$349,451 and its total unsecured debt was estimated at approximately $2,000,000.
On April 24, 1999, the Bankruptcy Court approved a financing arrangement
between the Company and CIT, which enabled the Company to continue its
operations during the Chapter 11 proceedings. On January 13, 2000, the
Bankruptcy Court issued an order confirming the Reorganization Plan filed by the
Company, which provides for: (a) amending the factoring arrangement between the
Company and CIT; (b) payment to unsecured creditors who may elect to receive
either (i) one share of Common Stock for each $2.00 of debt, or (ii) 20 monthly
payments
11
<PAGE>
equal to 22.5% of such creditor's claims; and (c) retention of stock by the
existing stockholders of the Company.
Prior to filing the petition, the Company retained the services of the
Consultant and effected certain changes pursuant to his advice, which included
reducing its executive staff, closing the New York show room, and expanding its
Dominican Republic production. In addition, the aggregate guaranteed salaries of
Mr. Mayer, the Company's Chairman of the Board, President, Chief Executive
Officer and Acting Chief Financial, and his spouse, Ms. Isel Pineda Mayer, were
reduced from $165,000 to $60,000.
In March 2000, the Company made the first monthly payment to 80 creditors
who elected a cash payment of 22.5% of their claim in 20 monthly installments.
The aggregate amount owed by the Company to these investors is $146,140. In
addition, as of the date of this Report, the Company issued an aggregate of
449,897 shares of Common Stock to six of the eight creditors, including JPHC,
who elected to receive stock in full satisfaction of their claims. An additional
233,398 shares of Common Stock are yet to be issued by the Company to two
creditors, including 232,000 shares to Wolverton
The Company believes that it will be able to pay its creditors' debts
pursuant to the provisions of the Reorganization Plan, avoid bankruptcy
proceedings under Chapter 7 of the Bankruptcy Code, as it has returned to
profitability. However, no assurance can be given that this will be the case.
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
thousands):
1999 1998 1997
---- ---- ----
Net sales ............................ $3,802 $5,590 $6,463
Gross profit ......................... 1,681 834 1,548
Selling, general and
administrative expenses .............. 1,064 2,341 1,648
Operating income (loss) .............. 504 (1,681) (284)
Other income (expense) ............... (114) (10) 20
Income tax expense (benefit) ......... 16 50 (62)
Net income (loss) .................... 374 (1,741) (202)
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Sales. The Company's net sales decreased by $1,788,394 or 32% to $3,801,774
in 1999 from $5,590,168 in 1998, mainly due to the loss of one large retail
customer and a decrease in the Company's sales efforts because of the departure
of two sales representatives in the first quarter of 1999 and the shift in the
Company's focus on higher profit, lower volume sales of promotional
12
<PAGE>
products. The Company's OEMs and Industrial sales increased by $277,456 or 94.7%
to $570,456 in 1999 from $293,000 in 1998 due to a change in market focus.
Cost of Sales. Cost of sales decreased by $2,635,006 to $2,121,104 (or
55.8% of sales) in 1999 from $4,756,110 (or 85.1% of sales) in 1998,
corresponding to the decrease in sales and better pricing of orders shipped.
Gross Profit. As a result of the foregoing, gross profit increased by
$846,612 to $1,680,670 (or 44.2% of sales) in 1999 from $834,058 (or 14.9% of
sales) in 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $1,277,742 to $1,063,673 (or 28.0 % of
sales) in 1999 from $2,341,415 (or 41.9% of sales) in 1998. The decrease is
primarily due to an aggressive expense reduction program across the board
implemented by the Company pursuant to the advice of the Consultant and due to a
decrease in legal fees, salaries and overhead expenses.
Interest and Factor Fees. Interest expense and factor fees decreased by
$60,148 to $113,375 (or 3.0% of sales) in 1999 from $173,523 (or 3.1% of sales)
in 1998. The decrease was mainly due to the decrease in sales.
As a result of the foregoing, the Company's operating expenses decreased by
$1,337,890 to $1,177,048 (or 31.0 % of sales) in 1999 from $2,514,938 (or 45.0%
of sales) in 1998.
Net Income. As a result of the foregoing, the Company had a net income of
$373,703 in 1999 compared with a net loss of $1,741,391 in 1998.
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
Sales. The Company's net sales decreased by $873,311 or 13.5% to $5,590,168
in 1998 from $6,463,479 in 1997, mainly due to the loss of two major customers
which resulted in a decrease of sales of promotional products in 1998. The
Company's OEMs and Industrial sales decreased by $241,253 or 45.2% to $293,000
in 1998 from $534,253 in 1997 due to the focus of the Company's marketing
efforts on promotional products.
Cost of Sales. Cost of sales decreased by $159,499 to $4,756,110 (or 85.1%
of sales) in 1998 from $4,915,609 (or 76.1% of sales) in 1997, corresponding to
the decrease in sales.
Gross Profit. As a result of the foregoing and loss of profit margins,
gross profit decreased by $713,812 to $834,058 (or 14.9% of sales) in 1998 from
$1,547,870 (or 23.9% of sales) in 1997. In 1998, the Company wrote off $298,000
of inventory due to a change in product mix, certain raw materials inventory
held by an overseas vendor to offset unpaid manufacturing bills, and slow
inventory movement.
Selling, General and Administrative Expenses. General and administrative
expenses increased by $693,045 to $2,341,415 (or 41.9% of sales) in 1998 from
$1,648,370 (or 25.5% of sales) in 1997. This increase relates to an increase in
advertising and promotion expenses of
13
<PAGE>
$363,171, of which approximately $90,000 related to expired promotion material,
an increase in legal fees of $79,991 in connection with a securities suit, and
an increase in shipping costs of approximately $104,000.
Interest and Factor Fees. Interest expense and factor fees decreased by
$9,722 to $173,523 (or 3.1% of sales) in 1998 from $183,245 (or 2.8% sales) in
1997.
As a result of the foregoing, the Company's operating expenses increased by
$683,323 to $2,514,938 (or 45.0% of sales) in 1998 from $1,831,615 (or 28.3% of
sales) in 1997.
Net Loss. As a result of the foregoing, the Company had a net loss of
$1,741,391 in 1998 compared to a net loss of $202,051 in 1997.
Liquidity and Capital Resources
At December 31, 1999, the Company had working capital of $657,537 as
compared with a working capital deficiency of $1,228,707 at December 31, 1998.
The Company's cash position as of December 31, 1999 and 1998 was $20,546 and
$145,454, respectively. Of the $145,454 amount, $94,124 was restricted and not
available for general corporate purposes.
Net cash provided by operating activities was $228,420 in 1999 and net cash
used in operating activities was $503,333 in 1998, representing an increase of
$731,753 in 1999. The increase was primarily due to a net income of $430,955
after adding depreciation and amortization. The Company increased its inventory
levels by $4,126 to $680,084 at December 31, 1999 from $675,958 at December 31,
1998.
In 1999, cash used in investing activities was $80,327, which consisted of
capital expenditures for data processing equipment and software. In 1998, cash
used in investing activities was $13,162, which consists primarily of capital
expenditures for manufacturing equipment in the Company's Carlstadt facility.
In 1999, cash used in financing activities was $273,001 which includes the
repayment of loans of $73,001, and the repayment of cash advance of $200,000
provided by CIT. In 1998, net cash generated by financing activities totaled
$459,745 which includes (i) $230,000 of proceeds from borrowings during the year
offset by $16,631 utilized for the repayment of debt and capital lease
obligations; (ii) cash advance of $200,000 provided by CIT; and (iii) $46,376 in
proceeds received from issues of shares of Common Stock to consultants to the
Company.
Currently, LBU's primary source of financing is CIT, which provides
factoring and accounts receivable financing. The Company pays a 1.125% factor
charge on its invoices for the guarantee of payment on receivables. In addition,
the Company benefits from having CIT collect outstanding invoices from its
customers. The Company pays 1% above the prime-lending rate on borrowings up to
85% of the outstanding accounts receivable. In addition, CIT agreed to provide
the Company a loan which is equal to 25% of the value of the Company's inventory
at any given time but not more than $200,000. The facility is secured by
substantially all of the Company's assets and the personal guarantees of its
Chief Executive Officer and his spouse.
14
<PAGE>
The Company's ability to satisfy its financial obligations under its
outstanding indebtedness will depend upon the Company successfully emerging from
bankruptcy proceedings and 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. The Company
believes, that its cash flow from operations during 2000 will be sufficient to
meet its working capital needs, capital expenditure requirements and debt
service, based on the issuance of stock in satisfaction of unsecured debt or
monthly payments equal to 22.5% of the creditors' claims. In light of the fact
that JPHC and Wolverton elected a stock distribution, the Company estimates it
will require approximately $7,800 per month for distribution to its other
unsecured creditors for 20 months commencing February 2000.
Since its inception, the Company has required significant capital to fund
its operations and growth. During 2000, the Company intends to seek additional
financing through the issuance of debt, equity, other securities or a
contribution thereof. Although there can be no assurances that any additional
capital will be raised, any such financing which involves the issuance of equity
securities would result in dilution to existing shareholders and the issuance of
debt securities would subject the Company to the risks associated therewith,
including the risks that interest rates may fluctuate and the Company's cash
flows may be insufficient to pay interest and principal on such indebtedness.
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 financing would have a significant negative impact on the
Company's operations.
Seasonality
Although the Company sells its products throughout the year, until 1998 the
Company had had traditionally higher net sales during the second and third
quarters of the calendar year. The following table sets forth the Company's net
sales for each of the 12 quarters ended December 31, 1999.
Net Sales
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
(In thousands)
1999 .......... $1,010 $855 $937 $1,000 $3,802
1998 .......... 1,313 1,333 1,767 1,177 5,590
1997 .......... 1,189 1,811 1,322 2,141 6,463
Inflation
The Company does not believe that its operating results have been
materially affected by inflation during the preceding two years. There can be no
assurance, however, that the Company's operating results will not be affected by
inflation in the future.
15
<PAGE>
New Financial Standards
In June 1997, the Financial Accounting Standards Board (the FASB) issued
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information" ("FAS 131"). FAS 131 establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in financial
reports issued to shareholders. It also establishes standards for disclosures
about products and services, geographic areas and major customers. FAS 131 is
effective for financial statements for fiscal years beginning after December 15,
1997. Financial statement disclosures for prior periods are required to be
restated. The adoption of FAS 131 has had no impact on the Company's results of
operations, financial position or cash flows. The Company operates in three
business segments, retail, promotional products, and OEM and Industrial.
Management does not receive, nor does the Company generate, discrete financial
operating results for any portion of the business other than for product sales.
Item 7. Financial Statements
The following financial statements and notes thereto are filed herewith
beginning at page F-1.
Report of Becher, Della Torre & Gitto & Company, P.C., Independent Accountants.
Balance Sheets as of December 31, 1999 and 1998;
Statements of Income for each of the three years in the period ended December
31, 1999; Statement of Changes in Stockholders' Equity for each of the three
years in the period ended December 31, 1999; Statements of Cash Flows for each
of the three years in the period ended December 31, 1999; and Notes to Financial
Statements.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
16
<PAGE>
LBU, INC
FINANCIAL STATEMENTS
* * * *
DECEMBER 31, 1999 and 1998
<PAGE>
March 24, 2000
To The Board of Directors of
LBU, Inc.
Independent Auditors' Report
We have audited the balance sheets of LBU, Inc. as of December 31, 1999 and
1998, and the related statements of income, changes in stockholders' equity and
cash flows for each of the three years ended December 31, 1999, 1998 and 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements 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,
1999 and 1998, and the results of its operations, changes in stockholders'
equity and cash flows for the three years ended December 31, 1999, 1998 and
1997, in conformity with generally accepted accounting principles.
F-1
<PAGE>
LBU, Inc.
Balance Sheets
December 31,
Assets
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 20,546 $ 51,330
Restricted cash -- 94,124
Accounts receivable (net of allowance for bad debts of
$53,135 and $145,458, respectively) 222,813 47,189
Inventory 680,084 675,958
Deferred tax asset (net of valuation allowance of
$ -0- and $20,824 respectively) 4,370 --
Other current assets 32,431 126,999
----------- -----------
Total current assets 960,244 995,600
Noncurrent assets
Fixed assets, net 286,043 262,967
Other assets 82,244 44,721
Deferred tax asset (net of valuation allowance of
$ -0- and $359,740, respectively) -- --
----------- -----------
Total assets $ 1,328,531 $ 1,303,288
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 113,647 $ 1,037,968
Accrued expenses 82,009 198,565
Customer advances 91,438 11,484
Taxes payable 15,613 15,613
Notes payable-current -- 960,677
----------- -----------
Total current liabilities 302,707 2,224,307
----------- -----------
Liabilities subject to compromise
Accounts payable 792,689 --
Accrued expenses 73,030 --
Notes payable 739,139 --
----------- -----------
Total liabilities subject to compromise 1,604,858 --
----------- -----------
Long term liabilities
Notes payable -- 51,462
Deferred income tax 19,744 --
----------- -----------
Total long-term liabilities 19,744 51,462
----------- -----------
Total liabilities 1,927,309 2,275,769
----------- -----------
Stockholders' equity (deficit)
Common stock ($.001 stated value)
Shares: 50,000,000 authorized, 1,359,477 and
1,338,977 issued and outstanding, respectively 1,544 1,544
Additional paid-in capital 1,148,379 1,148,379
Retained earnings (deficit) (1,748,701) (2,122,404)
----------- -----------
Total stockholders' equity (deficit) (598,778) (972,481)
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 1,328,531 $ 1,303,288
=========== ===========
</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>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 3,801,774 $ 5,590,168 $ 6,463,479
Costs of goods sold 2,121,104 4,756,110 4,915,609
----------- ----------- -----------
Gross profit 1,680,670 834,058 1,547,870
----------- ----------- -----------
Operating expenses
Selling, general and administrative expense 1,063,673 2,341,415 1,648,370
Factor fees and interest 113,375 173,523 183,245
----------- ----------- -----------
Total operating expenses 1,177,048 2,514,938 1,831,615
----------- ----------- -----------
Income (loss) from operations 503,622 (1,680,880) (283,745)
----------- ----------- -----------
Other income (expense)
Reorganization costs (121,117) -- --
Interest 7,397 3,704 8,002
Other -- (13,859) 12,000
----------- ----------- -----------
Total other income (expense) (113,720) (10,155) 20,002
----------- ----------- -----------
Income (loss) before income taxes 389,902 (1,691,035) (263,743)
Income taxes (benefit) 16,199 50,356 (61,692)
----------- ----------- -----------
Net income (loss) $ 373,703 $(1,741,391) $ (202,051)
=========== =========== ===========
Basic earnings per share $ 0.32 $ (1.28) $ (0.16)
=========== =========== ===========
Diluted earnings per share $ 0.32 $ (1.28) $ (0.16)
=========== =========== ===========
</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, 1999, 1998, and1997
<TABLE>
<CAPTION>
Common Stock Additional Retained
-------------------------- Paid-in Earnings
Shares Amount Capital (Deficit) Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 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
Capital investment 20,500 205 46,171 46,376
Net loss for the year ended December 31, 1998 -- -- -- (1,741,391) (1,741,391)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 1,359,477 1,544 1,148,379 (2,122,404) (972,481)
Net income for the year ended December 31, 1999 -- -- -- 373,703 373,703
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 1,359,477 $ 1,544 $ 1,148,379 $(1,748,701) $ (598,778)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
LBU, Inc.
Statements of Cash Flows
For the years ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flow from operating activities
Net income (loss) $ 373,703 $(1,741,391) $ (202,051)
----------- ----------- -----------
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities
Depreciation and amortization 57,252 56,599 40,453
Deferred tax asset (4,370) 55,516 (9,566)
Deferred tax liability 19,744 (8,793) (2,600)
Loss on sale of fixed assets -- (13,859) --
(Increase) decrease in
Accounts receivable (175,624) 182,564 (61,649)
Inventories (4,126) 852,360 (739,228)
Other current assets 94,568 165,547 (270,099)
Other assets (37,523) 17,130 43,995
Increase (decrease) in
Accounts payable (924,321) (39,000) 618,196
Accrued expenses (116,556) (8,668) 42,349
Taxes payable -- (1,642) (50,159)
Customer advances 79,954 (19,696) (121,532)
Liabilities subject to compromise
Accounts payable 792,689 -- --
Accrued expenses 73,030 -- --
----------- ----------- -----------
Total adjustments (145,283) 1,238,058 (509,840)
----------- ----------- -----------
Net cash provided (used) by operating activities 228,420 (503,333) (711,891)
----------- ----------- -----------
Cash flow from investing activities
Capital expenditures (80,327) (13,162) (135,706)
----------- ----------- -----------
Net cash (used) by investing activities (80,327) (13,162) (135,706)
----------- ----------- -----------
Cash flow from financing activities
Borrowing from financial institutions -- 200,000 22,000
Repayment of loans (273,001) (16,631) (32,707)
Proceeds from other financings -- 230,000 500,000
Proceeds of issuing Common Stock 46,376 375,000
----------- ----------- -----------
Net cash provided by financing activities (273,001) 459,745 864,293
----------- ----------- -----------
Net increase (decrease) in cash (124,908) (56,750) 16,696
Cash at beginning of period 145,454 202,204 185,508
----------- ----------- -----------
Cash at end of period $ 20,546 $ 145,454 $ 202,204
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
LBU, Inc.
Statements of Cash Flows
For the years ended December 31,
1999 1998 1997
--------- --------- --------
Supplemental disclosures
Cash paid during the period for
Interest and factor fees $ 113,375 $ 173,523 $183,245
Income taxes $ -- $ -- $ --
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
LBU, Inc.
Notes to the Financial Statements
December 31, 1999 and 1998
Note 1 - Organization and the Significant Accounting Policies
Organization: LBU, Inc. (the "Company") is a leading designer, marketer and
manufacturer specializing in fashionable bags, promotional products and
houseware accessories for the retail, promotional, OEM and industrial markets.
On March 22, 1999 the Company filed a petition for reorganization under Chapter
11 bankruptcy, which was confirmed on January 13, 2000. See Notes 8 and 12.
Inventories: Inventories are valued at the lower of cost or market average cost.
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, 1999 and 1998, the Company has $-0- and $94,124 of restricted cash,
respectively.
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 accelerated depreciation
methods, the amortizable lives of intangible assets, the reserve method for bad
debts, the uniform capitalization rules under IRS Code Section 263A for
financial and income tax reporting, accrued expense and federal and state net
operating loss carryforwards. Deferred taxes represent the future tax return
consequences of those differences, which will either be taxable or deductible
when the assets and liabilities are recovered or settled.
Advertising: The Company charges the costs of advertising to expense as
incurred.
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.
Note 2 - Accounts Receivable and Factoring Arrangements
The Company entered into a factoring arrangement with The CIT Group/Commercial
Services, Inc. ("CIT") whereby CIT makes advances to the Company on certain
accounts receivable balances. Interest of 1% 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, who
is also an officer of the Company, has 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.
F-7
<PAGE>
LBU, Inc.
Notes to the Financial Statements
December 31, 1999 and 1998
Note 2 - Accounts Receivable and Factoring Arrangements (continued)
The components of accounts receivable at December 31, 1999 and 1998 are as
follows:
1999 1998
--------- ---------
Accounts receivable assigned to factor, net $ 232,880 $ 179,822
Non-factored accounts receivable 43,068 12,825
Allowance for doubtful accounts (53,135) (145,458)
--------- ---------
Net accounts receivable $ 222,813 $ 47,189
========= =========
Note 3 - Inventories
As of December 31, 1999 and 1998 the components of inventories were as follows:
1999 1998
-------- --------
Raw materials $393,817 $360,092
Work in process -- 5,095
Finished goods 286,267 310,771
-------- --------
Total $680,084 $675,958
======== ========
The December 31, 1999 and 1998 inventory is net of a valuation allowance of
$15,000 and $298,000, respectively, based on a general allowance for slow moving
and obsolete inventory and unrecovered foreign inventory. The allowance is based
on an estimate by the Company's management. The inventory is encumbered by CIT
(Note 7).
Note 4 - Equipment and Leasehold Improvements
Equipment and leasehold improvements at December 31, 1999 and 1998 are as
follows:
1999 1998
-------- --------
Machinery and equipment $240,116 $211,712
Furniture and fixtures 99,365 99,365
Computer software 50,757 --
Leasehold improvements 115,280 115,280
-------- --------
Total 505,518 426,357
Less accumulated depreciation and amortization 219,475 163,390
-------- --------
Net equipment and leasehold improvements $286,043 $262,967
======== ========
Depreciation expense was $52,701 in 1999 and $56,599 in 1998.
F-8
<PAGE>
LBU, Inc.
Notes to the Financial Statements
December 31, 1999 and 1998
Note 5 - Related Party Transactions
At December 31, 1999 and 1998, loans in the amount of $46,991 and $45,467,
respectively, were due from a related party. These amounts were included in
Other Current Assets and Other Assets.
Also as of December 31, 1999 and 1998, loans in the amount of $700,000 were due
to a related party. See Note 7, items (c) and (d).
Note 6 - Income Taxes
The provision for income taxes for the years ended December 31, 1999, and 1998
consists of the following components:
1999 1998
------- -------
Current taxes
Federal $ -- $ --
State 825 4,499
------- -------
Total current provision (benefit) 825 4,499
------- -------
Deferred taxes
Federal 11,915 33,900
State 3,459 11,957
------- -------
Total deferred expense (benefit) 15,374 45,857
------- -------
Total tax provision (benefit) $16,199 $50,356
======= =======
As of December 31, 1999 and 1998 the Company had federal and state net operating
loss carryforwards of approximately $1,330,000 and $1,510,000, respectively,
which will begin to expire in 2018 and 2005, respectively.
Deferred tax liabilities, assets consist of the following at December 31, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Reserve for bad debts $ 21,254 $ 5,250
Inventory capitalization under Section 263A 39,644 13,184
Accrued expenses 4,000 2,100
Intangible assets -- 290
Net operating loss carryforward 522,960 367,709
--------- ---------
Total deferred tax assets 587,858 388,533
--------- ---------
Fixed assets 19,145 7,969
Intangible assets 600 --
Adjustment relating to liabilities subject to compromise 583,487 --
--------- ---------
Total deferred tax liabilities 603,232 7,969
--------- ---------
Net deferred tax asset (liability) before valuation allowance (15,374) 380,564
Valuation allowance -- (380,564)
--------- ---------
Net deferred tax asset (liability) $ (15,374) $ --
========= =========
Change in valuation allowance $(380,564) $ 380,564
========= =========
</TABLE>
F-9
<PAGE>
LBU, Inc.
Notes to the Financial Statements
December 31, 1999 and 1998
Note 6 - Income Taxes (continued)
A reconciliation of the Federal statutory rate to the effective tax rate for the
years ended December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C> <C> <C>
Taxes at federal statutory rate $ 120,870 31% $(253,655) (15)%
State income tax - net of federal benefit 35,091 9 (101,463) (6)
Permanent differences 1,140 -- 2,546 --
(Overaccrual)/underaccrual of prior years income taxes -- -- 17,484 1
Other 495 -- 4,880 --
Adjustment relating to liabilities subject to compromise 583,487 151 -- --
Adjustment relating to increase in effective tax rate (344,320) (89) -- --
Increase (decrease) in valuation allowance (380,564) (98) 380,564 23
--------- --------- --------- ---------
Total $ 16,199 4% $ 50,356 3%
========= ========= ========= =========
</TABLE>
Note 7 - Notes and Capital Lease Payable
Notes and capital lease payable consist of the following as of December 31, 1999
and 1998:
1999* 1998
---------- ----------
Credit advance, CIT Financial (a) $ -- $ 200,000
Note payable to a bank (b) -- 73,001
Promissory note payable (c) 200,000 200,000
Convertible notes payable (d) 500,000 500,000
Promissory note payable (e) 30,000 30,000
Capital lease (f) 9,138 9,138
---------- ----------
Total 739,138 1,012,139
Liabilities subject to compromise 739,138 --
Current portion -- 960,677
---------- ----------
Notes and capital lease payable,
Less current installments $ -- $ 51,462
========== ==========
* The December 31, 1999 balances are Liabilities Subject to Compromise under
a bankruptcy petition filed March 22, 1999 and confirmed on January 13,
2000. See Notes 8 and 12.
(a) CIT extended the Company $200,000 credit, collateralized by inventory and
equipment at approximately prime plus 2%. The amount was repaid in January,
1999.
(b) Principal repaid in October, 1999. Interest accrued at prime plus 1.5%.
Restricted cash as collateral.
(c) Principal matured on January 1, 1999 to a related party. Interest accrues
at 9.12%. (See Subsequent Event - Note 12.)
F-10
<PAGE>
LBU, Inc.
Notes to the Financial Statements
December 31, 1999 and 1998
Note 7 - Notes and Capital Lease Payable (continued)
(d) Principal of $300,000 matured on January 1, 1999 to a related party.
Interest accrues at 9.12%. Notes are convertible into Common Stock of the
Company at a fixed conversion price of $5.00 per share. (See Subsequent
Event - Note 11.)
During February and March 1998, a related party loaned the Company an
additional $200,000 in the form of promissory notes payable. In conjunction
with this financing, the Company granted the related partywarrants to
purchase 100,000 shares of Common Stock at an exercise price of $4.25 per
share. The warrants have a term of two years and are exercisable from the
date of the grant.
(e) Principal matures on June 22, 2000. Interest accrues at 9.12%.
(f) Lease payments are approximately $4,000 for each year through December 31,
2000. Interest accrues at 12% per annum.
Note 8 - Petition for Relief Under Chapter 11 of Federal Bankruptcy Law
On March 22, 1999, the Company filed a petition for reorganization under Chapter
11 of Title 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court
for the Southern District of New York (the "Bankruptcy Court"). The financial
condition of the Company was adversely effected as a result of a net loss of
approximately $1.7 million in 1998. The petition was precipitated by two factors
(a) the Company's inability to repay approximately $725,000 of promissory notes
(the "Notes") (principal and accrued interest thereon) which became due to John
P. Holmes & Company, Inc. ("JPHC"), a principal stockholder of the Company, on
January 1, 1999; and (b) significant legal fees incurred by the Company as a
result of a securities suit filed by Wolverton Securities Ltd. ("Wolverton") and
the diversion of management's attention to such litigation.
As of May 4, 1999, the Company secured debt to its factor, CIT, amounted to
$349,451 and its total unsecured debt was estimated at approximately $2,000,000.
On April 24, 1999, the Bankruptcy Court approved a financing arrangement between
the Company and CIT which enables the Company to continue its operations during
the Chapter 11 proceedings. The Company filed a plan of reorganization with the
Bankruptcy Court which was further amended (the "Reorganization Plan"). On
January 13, 2000, the Bankruptcy Court issued an order confirming the
Reorganization Plan, which provides for: (a) amending the factoring arrangement
between the Company and CIT (b) payment to unsecured creditors who may elect to
receive either (i) one share of Common Stock for each $2.00 of debt, or (ii) 20
monthly payments equal to 22.5% of such creditor's claims; and (c) retention of
stock by the existing stockholders of the Company. See Note 12.
F-11
<PAGE>
LBU, Inc.
Notes to the Financial Statements
December 31, 1999 and 1998
Note 9 - Segment Information
The following sets forth the Company's net sales by segment for the years ended
December 31 (in 000's):
1999 1998 1997
------ ------ ------
Sales:
Retail $1,026 $2,949 $3,002
Promotional Products 2,205 2,348 2,927
OEM and Industrial 570 293 534
------ ------ ------
Total $3,801 $5,590 $6,463
====== ====== ======
Foreign sales were $135,821, $226,369 and $74,842 for the years ended December
31, 1999, 1998, and 1997, respectively.
Note 10 - Commitments and Contingencies
The Company entered into a ten-year lease agreement for its facilities in
Carlstadt, New Jersey, which commenced on July 1, 1995. The minimum future
rental payments under the non-cancelable operating lease as of December 31, 1999
are:
Year Ending
December 31, Amount
------------ ------
2000 154,245
2001 160,121
2002 167,465
2003 172,521
2004 179,368
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.
During March, 1996, Glenneyre Capital Corporation ("GCC"), Poimandres Financial
Corporation and HJS Financial Services, Inc. (the "Plaintiffs") filed a suit
against the Company in the State of Nevada. The lawsuit stems from a financial
service agreement dated July 24, 1995, between the Plaintiffs and the Company.
As part of the financial service agreement, 300,000 shares of the Company's
Common Stock (the "Shares") were issued to the Plaintiffs in return for
financial and other consulting services, which were to include raising capital.
The Company claimed such services were not rendered and that the Shares were
improperly registered and, accordingly, on November 19, 1995, the Company
invalidated some of the Shares and subsequently 269,000 shares were canceled by
its stock transfer agent.
F-12
<PAGE>
LBU, Inc.
Notes to the Financial Statements
December 31, 1999 and 1998
Note 10 - Commitments and Contingencies (continued)
The Company believes, based on legal advice, its action of invalidating and
canceling the Shares was appropriate. The Company initiated a counter-suit
against the Plaintiffs for breach of contract, fraud and other causes of action.
GCC filed a proof of claim under the bankruptcy proceedings which was settled
pursuant to the provisions of the Reorganization Plan.
In a related claim on September 12, 1997, Wolverton Securities Ltd.
("Wolverton"), a purchaser of some of the Shares, filed an action against the
Company in the U.S. District Court for the District of Nevada. Wolverton sought
to have the Company reissue 170,250 shares of the Common Stock referred to in
the preceding paragraphs. Wolverton also sought 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.
In September 1998, the Court granted Wolverton summary judgement on a number of
claims including the conversion claim and dismissed the Company's third party
complaint. Wolverton filed a proof of claim under the bankruptcy proceedings
asserting damages in the amount of $687,000 plus an undetermined amount. The
Company and Wolverton agreed to settle the Wolverton suit by agreeing on an
unsecured claim of $464,000 and a distribution thereon of 232,000 shares of
Common Stock of the Company in full satisfaction of the debt pursuant to the
provision of the Reorganization Plan.
In May 1999, the Company received a letter from the Depository Trust Company
("DTC") requesting that 69,000 Shares registered to Cede & Co. be revalidated.
The 69,000 Shares comprise a portion of the 269,000 Shares invalidated and
canceled by the Company as described above. In its letter, DTC stated that if
the certificates for the 69,000 Shares will not be revalidated, it will consider
actions against the Company such as reconsidering the Company's eligibility for
DTC services, ceasing to provide it with DTC services and initiating legal
action to recover the 69,000 Shares and any damages incurred as a result of the
Company's actions. The Company has not yet determined its response to this
letter. Although the Company and Wolverton settled the Wolverton suit by
agreeing to a stock distribution pursuant to the provisions of the
Reorganization Plan, no assurance can be given that the Company will not face
additional liability regarding the 69,000 Shares or other portions of the Shares
According to the Company's stock transfer agent, 50,000 Shares relating to JPO,
LLC which were previously issued and outstanding have been canceled.
F-13
<PAGE>
LBU, Inc.
Notes to the Financial Statements
December 31, 1999 and 1998
Note 11 - Shareholders Equity
Stock Purchase Warrant
In connection with certain financing transactions during August and September
1997, the Company granted to JPHC warrants to purchase 10,000 shares of Common
Stock at $5.00 per share and 40,000 shares of Common Stock at $5.00 per share.
The warrants have a term of three years and are exercisable from the date of the
grant.
In addition, in March 1998, the Company granted to JPHC warrants to purchase
10,000 shares of Common Stock at $3.87 per share. The warrants have a term of
three years and are exercisable from the date of grant.
Note 12 - Subsequent Event
The Reorganization Plan was confirmed on January 13, 2000 (Note 8). JPHC elected
a stock distribution of 362,500 shares of Common Stock under the Reorganization
Plan in satisfaction of its $725,000 claim. In addition, JPHC would no longer be
entitled to the 60,000 shares issuable upon the conversion of the $300,000
convertible note. Of the $904,858 balance of the $1,604,858 liabilities subject
to compromise, a total of $146,140 is subject to payout under the 20-month cash
payment election and an additional 233,398 shares are to be issued under the 1
share for $2 of debt election. Management estimates that approximately $30,000
of liabilities subject to compromise is subject to dispute. Accordingly, the
total debt reduction is $1,458,718 as a result of the Reorganization. The total
increase in shares issued and outstanding as a result of the Reorganization Plan
will be 683,295.
The aforementioned events relating to the bankruptcy are shown on a proforma
basis, as if the related debt disposition happened on December 31, 1999, on the
following page.
In March, 2000 the Company issued to an outside consultant of the Company
warrants to purchase 200,000 shares of Common Stock at the price of $0.25 per
share. The warrants have a term of two years.
F-14
<PAGE>
Note 12 - Subsequent Event (continued)
LBU, Inc.
Balance Sheet - Pro-forma after Reorganization
December 31,
Assets
<TABLE>
<CAPTION>
1999 Pro-forma
Actual -----------------------------------
1999 Adjustment Post Reorg.
----------- -----------
<S> <C> <C> <C>
Current assets
Cash and cash equivalents $ 20,546 $ 20,546
Restricted cash -- --
Accounts receivable (net of allowance for bad debts of
$53,135 and $145,458, respectively) 222,813 222,813
Inventory 680,084 680,084
Deferred tax asset (net of valuation allowance of
$-0- and $20,824 respectively) 4,370 4,370
Other current assets 32,431 32,431
----------- -----------
Total current assets 960,244 960,244
Noncurrent assets
Fixed assets, net 286,043 238,670
Other assets 82,244 129,617
Deferred tax asset (net of valuation allowance of
$359,740 and $-0-, respectively) -- --
----------- -----------
Total assets $ 1,328,531 $ 1,328,531
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 113,647 113,647
Accrued expenses 82,009 82,009
Customer advances 91,438 91,438
Taxes payable 15,613 15,613
Notes payable-current -- --
Payout of $.22 Reorganization settlement - due in one year 87,683 87,683
----------- -----------
Total current liabilities 302,707 390,390
----------- -----------
Liabilities subject to compromise
Accounts payable 792,689 (792,689) --
Accrued expenses 73,030 (73,030) --
Notes payable 739,139 (739,139) --
----------- -----------
Total liabilities subject to compromise 1,604,858 (1,604,858) --
----------- -----------
Long term liabilities
Pay out of $.22 Reorganization settlement - due after one year -- 58,457 58,457
Deferred income tax 19,744 19,744
----------- -----------
Total long-term liabilities 19,744 78,201
----------- -----------
Total liabilities 1,927,309 468,591
----------- -----------
Stockholders' equity (deficit)
Common stock 1,544 1,544
Additional paid-in capital 1,148,379 1,148,379
Retained earnings (deficit) (1,748,701) 1,458,718 (289,983)
----------- -----------
Total stockholders' equity (deficit) (598,778) 859,940
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 1,328,531 $ 1,328,531
=========== ===========
Share of common stock issued and outstanding 1,359,477 683,295 2,042,772
----------- -----------
</TABLE>
F-15
<PAGE>
PART III
Item 9. Directors and Executive Officers of the Registrant
Name Age Position/Offices Held
- ---- --- ---------------------
Jeffrey Mayer................... 37 Chairman of the Board of Directors,
President, Chief Executive Officer and
Acting Chief Financial Officer
Jeffrey Mayer has served as Chairman of the Board of Directors, President
and Chief Executive Officer of the Company since March 1995, when the merger
between New Century and LBU-Delaware took place. Mr. Mayer has served as Acting
Chief Financial Officer since January 1999. Mr. Mayer leads the marketing and
sales operations and new product development of the Company. From August 1993
until March 1995, Mr. Mayer served as Chairman of the Board of Directors,
President and Chief Executive Officer of LBU-Delaware. Mr. Mayer held the same
positions with LBU-NY since its formation by him in 1989 until its merger with
LBU-Delaware in August 1993. Mr. Mayer holds a B.B.A. degree in Marketing and
Management from Baruch College.
Mr. Mayer is not 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 (the "Exchange Act"), or is subject to the requirements of
Section 15(d) of the Exchange Act or any company registered as an investment
company under the Investment Company Act of 1940.
Item 10. Executive Compensation
Summary Compensation
The following table sets forth information concerning the total
compensation during the last three fiscal years for the Company's Chief
Executive Officer:
<TABLE>
<CAPTION>
Name and Other Annual
Principal Position Year Salary Bonus Compensation
- ------------------ ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Jeffrey Mayer 1999 $136,089* -- --
President and Chief Executive Officer 1998 104,420 -- --
1997 101,190
</TABLE>
- ----------
* Of such amount, $79,425 was paid to Mr. Mayer in commissions earned on
sales of the Company's products.
17
<PAGE>
The aggregate value of all other perquisites and other personal benefits
furnished in each of the last three years to the Company's Chief Executive
Officer was less than 10% of his salary for such year.
There is currently no employment agreement between the Company and its
Chief Executive Officer. Mr. Mayer has not received any cash remuneration for
his service as Director in the last three years.
Stock Options
No options were granted to Mr. Mayer in the year ended December 31, 1999.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of the date of this Report, certain
information regarding the Company's Common Stock, $.001 par value, for each
person known by the Company to be the beneficial owner of more than 5% of its
outstanding shares of Common Stock, for the executive officer named in the
summary compensation table, for the Company's director and for the executive
officers and directors of the Company as a group:
<TABLE>
<CAPTION>
Name and Address of Number of Shares Percent
Beneficial Owner Beneficially Owned(1) of Class
- ---------------- --------------------- --------
<S> <C> <C>
Jeffrey Mayer ............................................. 676,500 37.3%
310 Paterson Plank Rd.
Carlstadt, NJ 07071
John P. Holmes & Co., Inc. (2)(3).......................... 622,500 34.1%
PO Box 428
Shelter Island, NY
Wolverton Securities Ltd.(4)(5)............................ 232,000 11.3%
777 Dunsmuir Street, 17th Floor
P.O. Box 10115 Pacific Centre
Vancouver, British Columbia
Canada
Howard Greenstein (6)(7)................................... 300,000 14.2%
759 Mulberry Valley Stream
New York 11581
JPO, LLC (8)(9)............................................ 110,000 5.7%
8 Webster Ave.
Summit, NJ 07901
All officers and directors as a group
(1 person)............................................ 676,500 37.3%
</TABLE>
18
<PAGE>
(1) Calculated pursuant to Rule 13d-3 promulgated under the Exchange Act.
Accordingly with respect to certain beneficial owners, the number of shares
gives effect to the deemed exercise of such owner's convertible securities,
which are currently exercisable or will first become exercisable within 60
days of the date of this Report. Except as otherwise disclosed in the
footnotes below, the shares listed in this column for a person named in
this table are directly held by such person, with sole voting and
dispositive power.
(2) John P. Holmes is the controlling shareholder of JPHC. Accordingly, Mr.
Holmes may be deemed to be the beneficial shareholder of the shares of
Common Stock of the Company held by JPHC.
(3) Includes: (i) 612,500 shares of Common Stock held of record as of the date
of this Report; and (ii) 10,000 shares of Common Stock issuable upon the
exercise of currently exercisable warrants issued on March 26, 1998, at an
exercise price of $3.87 per share, which warrants expire in March 2001.
(4) Frank Wolverton is the controlling shareholder of Wolverton. Accordingly,
Mr. Wolverton may be deemed to be the beneficial shareholder of the shares
of Common Stock of the Company to be issued to Wolverton.
(5) Such 232,000 shares of Common Stock will be issued to Wolverton in
satisfaction of its claim pursuant to the provisions of the Reorganization
Plan.
(6) Howard Greenstein is the an outside consultant retained by the Company
prior to filing its petition for bankruptcy proceedings.
(7) Of such shares, 200,000 shares of Common Stock are issuable upon the
exercise of currently exercisable warrants at an exercise price of $0.25
per share issued to Mr. Greenstein by the Company pursuant to a Warrant
dated February 11, 2000. The term of the warrants is two years from the
date of grant. The remaining 100,000 shares of Common Stock are subject to
warrants which will be issued to Mr. Greenstein by the Company in May 2000,
at an exercise price of $0.25 per share.
(8) John P. O'Maley owns the controlling interest in JPO, LLC ("JPO").
Accordingly, Mr. O'Maley may be deemed to be the beneficial owner of the
shares of Common Stock of the Company held by JPO.
(9) Includes 10,000 shares of Common Stock held of record as of the date of
this Report and 100,000 shares of the Common Stock issuable upon the
exercise of currently exercisable warrants pursuant to a warrant dated
February 19, 1998, at an exercise price of $4.00 per share. The warrants
expire in February 2003. Such shares of Common Stock and warrants were
issued in connection with a consulting agreement between JPO and the
Company.
19
<PAGE>
Item 12. Certain Relationships and Related Transactions.
During 1997 and 1998, JPHC loaned an aggregate principal amount of $700,000
to the Company, of which amount $300,000 was convertible into the Company's
Common Stock at a conversion price of $5.00 per share. The Notes bore interest
at a rate of 9.12% per annum and were due on April 1, 1998. However, JPHC agreed
not to require repayment until January 1, 1999. The Company was unable to pay
the Notes at that time, which in part, precipitated its Chapter 11 filing. On
February 29, 2000,the Company issued to JPHC 362,500 shares of Common Stock in
satisfaction of its claim in accordance with the provisions of the
Reorganization Plan.
In February 1998, JPHC was granted by the Company warrants to purchase
100,000 shares of Common Stock at an exercise price of $4.25 per share. Such
warrants expired in February 2000. In addition, the Company granted to JPHC
warrants to purchase 10,000 shares of Common Stock at an exercise price of $3.87
per share in March 1998. Such warrants are currently exercisable and will expire
in March 2001.
The Company believes that the transactions with JPHC 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.
The Company utilizes the services of outside independent sales
representatives. In 1998, the Company paid sales commissions of $22,782 to
Steven Mayer, who is the brother of Jeffrey Mayer, Chairman of the Board of
Directors, President, Chief Executive Officer and Acting Chief Financial Officer
of the Company. In addition, the Company owes Mr. Mayer $34,003 for commissions
earned in 1998. The Company will pay to Mr. Mayer 22.5% of such amount in 20
monthly installments beginning March 2000 pursuant to the provisions of the
Reorganization Plan. Mr. Mayer did not provide the Company with any services in
1999.
Jeffery Mayer, who is the principal shareholder as well as Chairman of the
Board of Directors, President, Chief Executive Officer and Acting Chief
Financial Officer of the Company, and his spouse, Isel Pineda Mayer, personally
guaranteed all the Company's obligations to its factor, CIT.
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 (1)
3.1 Certificate of Incorporation of LBU, Inc. dated September 2,
1994 (2)
3.2 By-laws of LBU, Inc. dated October 4, 1994 (2)
3.3 Form of Two-year Stock Purchase Warrant (3)
3.4 Form of Three-year Stock Purchase Warrant (3)
20
<PAGE>
(a) Exhibit No. Description
----------- -----------
3.5 [Form of Two-Year Stock Purchase Warrant issued to Howard
Greenstein]
10.1 Factoring Agreement dated October 25, 1993 by and between LBU,
Inc. (Delaware) and The CIT Group/Commercial Services Inc. (4)
10.2 Guaranty dated October 25, 1993 by and between The CIT
Group/Commercial Services, Inc. and Jeffrey and Isel Mayer,
individually, relating to the above Factoring Agreement (4)
10.3 Inventory Security Agreement dated January 4, 1995 by and
between LBU, Inc. and The CIT Group/Commercial Services, Inc.
(4)
10.4 Lease agreement dated April 1, 1995 by and between Albert
Frassetto Enterprises, a sole proprietorship, and Bags of
Carlstadt, Inc. (4)
10.5 Subscription Agreement dated March 27, 1997 by and between
John P. Holmes & Company, Inc. and the Registrant (4)
10.6 Promissory note dated August 21, 1997, as amended on February
21, 1998, by and between the Registrant and John P. Holmes &
Company, Inc. (4)
10.7 Promissory note dated September 19, 1997, as amended on
November 21, 1997 and February 21, 1998, by and between the
Registrant and John P. Holmes & Company, Inc. (4)
10.8 Consulting agreement dated February 19, 1998 by and between
JPO, LLC and the Registrant (4)
21. List of Subsidiaries.
Subsidiary State of Incorporation
---------- ----------------------
LBU, Inc. Delaware
Bags of Carlstadt, Inc. New Jersey
27 Financial Data Schedule (filed via EDGAR only).
99 Additional Information Regarding Forward Looking Statements
- -----------
(1) 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 and incorporated herein by reference thereto.
(2) Filed as an exhibit to the New Century Media, Ltd. Form 10-Q for the
quarter ended September 30, 1994 dated November 8, 1994 and
incorporated herein by reference thereto.
(3) Filed as an exhibit to the Registrant's Form 10-QSB for the quarter
ended March 31, 1998 and incorporated herein by reference thereto.
(4) Filed as an exhibit to the Registrant's Form 10-QSB/A for the year
ended December 31, 1997 (filed on April 22, 1998) and incorporated
herein by reference thereto.
(b) Reports on Form 8-K filed during the last quarter of the period covered by
this report:
None.
21
<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, hereunto duly authorized on May 18, 2000.
LBU, INC.
By /s/Jeffrey Mayer
----------------------------------
Jeffrey Mayer
Chairman of the Board of Directors,
President, Chief Executive Officer
and Acting Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following person on behalf of the Registrant and
in the capacity indicated on May 18, 2000.
/s/ Jeffrey Mayer Chairman of the Board of Directors
----------------- President, Chief Executive Officer
Jeffrey Mayer and Acting Chief Financial Officer
(principal executive, financial and accounting
officer)
22
<PAGE>
ADDITIONAL INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
The Company's Annual Report on Form 10-KSB for the year ended December 31,
1999 (the "Annual Report") contains various forward-looking statements, which
reflect the Company's current views with respect to future events and financial
results. Forward-looking statements usually include the verbs "anticipates,"
"believes," "estimates," "expects," "intends," "plans," "projects,"
"understands' and other verbs suggesting uncertainty. The Company reminds
shareholders that forward-looking statements are merely predictions, which are
inherently subject to uncertainties and other factors, which could cause the
actual results to differ materially from the forward-looking statements. Some of
these uncertainties and other factors are discussed in the Annual Report. See
Item 9 "Management's Discussion and Analysis of Financial Condition and Results
of Operations." In this Exhibit 99, the Company has attempted to identify
additional uncertainties and other factors, which may affect its forward-looking
statements.
Shareholders should understand that the uncertainties and other factors
identified in the Annual Report and this Exhibit 99 do not constitute a
comprehensive list of all the uncertainties and other factors, which may affect
forward-looking statements. The Company has merely attempted to identify those
uncertainties and other factors, which, in its view at the present time, have
the highest likelihood of significantly affecting its forward-looking
statements. In addition, the Company does not undertake any obligation to update
or revise any forward-looking statements or the list of uncertainties and other
factors, which could affect such statements.
Capitalized terms not otherwise defined have been defined in the Annual
Report.
We are in Bankruptcy Proceedings. On March 22, 1999, the Company filed a
petition for reorganization under Chapter 11 of Title 11 of the U.S. Bankruptcy
Code in the United States Bankruptcy Court for the Southern District of New York
(the "Bankruptcy Court"). The petition was precipitated by two factors (i) the
Company's inability to repay approximately $725,000 principal amount of
promissory notes (the "Notes") and accrued interest thereon which became due to
John P. Holmes & Company, Inc. ("JPHC"), a principal stockholder of the Company,
on January 1, 1999; and (ii) significant legal fees incurred by the Company as a
result of a securities suit filed by Wolverton Securities Ltd. ("Wolverton") and
the diversion of management's attention to such litigation.
As of May 4, 1999, the Company secured debt to its factor, The CIT
Group/Commercial Services, Inc. ("CIT"), amounted to $349,451 and its total
unsecured debt was estimated at approximately $2,000,000.
On April 24, 1999, the Bankruptcy Court approved a financing arrangement
between the Company and CIT which enabled the Company to continue its operations
during the Chapter 11 proceedings. On January 13, 2000, the Bankruptcy Court
issued an order confirming a reorganization plan, as amended, (the
"Reorganization Plan"), which provides for: (a) amending the factoring
arrangement between the Company and CIT; (b) payment to unsecured creditors who
may elect to receive either (i) one share of Common Stock for each $2.00 of
debt, or (ii) 20 monthly payments equal to 22.5% of such creditor's claims; and
(c) retention of stock by the existing stockholders of the Company.
23
<PAGE>
Prior to filing the petition, the Company retained the services of a
workout consultant (the "Consultant") and effected certain changes pursuant to
his advice, which included reducing its executive staff, closing the New York
show room, and expanding its Dominican Republic production. In addition, the
aggregate guaranteed salaries of Jeff Mayer, the Company's Chairman of the Board
of Directors, President, Chief Executive Officer and Acting Chief Financial
Officer, and his spouse, Ms. Isel Pineda Mayer, were reduced from $165,000 to
$60,000.
In March 2000, the Company made the first monthly payment to 80 creditors
who elected a cash payment of 22.5% of their claim in 20 monthly installments
pursuant to the provisions of the Reorganization Plan. In addition, as of the
date of this Report, the Company issued an aggregate of 449,897 shares of Common
Stock to six of the eight creditors, including JPHC, who elected to receive
stock in full satisfaction of their claims. An additional 233,398 shares of
Common Stock are yet to be issued by the Company to two creditors, including
232,000 shares to Wolverton.
The Company believes that if it is able to increase its sales and gross
margins while reducing its expenses, it will be able to pay its creditors' debts
pursuant to the provisions of the Reorganization Plan, avoid bankruptcy
proceedings under Chapter 7 of the Bankruptcy Code and maintain profitability.
However, there is no assurance that the Company will be able to comply with the
provisions of the Reorganization Plan, avoid bankruptcy proceedings under
Chapter 7 of the Bankruptcy Code or maintain its newly achieved profitability.
We Have Had a History of Losses. The Company incurred a net loss of
$1,741,391 million in the year ended December 31, 1998 and a net loss of
$202,051 in the year ended December 31, 1997. Although the Company had a net
income of $373,703 in the year ended ended December 31, 1999, no assurance can
be given that the Company will be able to maintain profitable operations in the
future.
Leverage and Certain Debt Obligations. At December 31, 1999 and 1998 the
Company had total indebtedness of $1,927,309 and $2,275,769, respectively. Of
the $2,275,769, $725,000 was in the form of the Notes (principal and accrued
interest thereon) payable to JPHC. The Notes were due on April 1, 1998, however,
JPHC agreed not to require repayment before January 1, 1999. The Company was
unable to pay the Notes at that time, or to obtain alternative financing, which
in part, precipitated the Company's Chapter 11 filing. On February 29, 2000, the
Company issued JPHC 362,500 shares of Common Stock in satisfaction of its claim
in accordance with the provisions of the Reorganization Plan.
The Company's ability to satisfy its financial obligations under its
outstanding indebtedness will depend upon the Company successfully emerging from
bankruptcy proceedings and 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. The Company
believes, that its cash flow from operations during 2000 will be sufficient to
meet its working capital needs, capital expenditure requirements and debt
service, assuming monthly payments equal to 22.5% of the creditors' claims. In
light of the fact that JPHC and Wolverton elected a stock distribution, the
Company estimates it will require approximately $7,800 per month
24
<PAGE>
for distribution to its other unsecured creditors. There can be no assurance
that the Company will be able to repay such monthly installments and any new
debt incurred to its creditors.
Liquidity and Need for Additional Financing. Since its inception, the
Company has required significant capital to fund its operations and growth.
During 2000, the Company intends to seek additional financing through the
issuance of debt, equity, other securities or a contribution thereof. Although
there can be no assurances that any additional capital will be raised, any such
financing which involves the issuance of equity securities would result in
dilution to existing shareholders and the issuance of debt securities would
subject the Company to the risks associated therewith, including the risks that
interest rates may fluctuate and the Company's cash flows may be insufficient to
pay interest and principal on such indebtedness. There can be no assurances that
the Company will be able to obtain additional financing on terms which are
acceptable to it. The inability of the Company to obtain additional acceptable
financing would have a significant negative impact on the Company's operations.
Dependence on Key Personnel. The Company's success depends in part on the
efforts of Jeffrey Mayer, its Chairman of the Board of Directors, President,
Chief Executive Officer and Acting Chief Financial Officer and a few key
employees. 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. Mr.
Mayer is not subject to an employment or non-competition agreement. The Company
does not maintain key-man life insurance for Mr. Mayer.
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 or respond to changing
consumer preferences and industry trends or that its competitors will not
develop and commercialize new products that render the Company's products less
marketable.
25
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000039743
<NAME> LBU, Inc.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 20,546
<SECURITIES> 0
<RECEIVABLES> 275,948
<ALLOWANCES> (53,135)
<INVENTORY> 680,084
<CURRENT-ASSETS> 960,244
<PP&E> 505,518
<DEPRECIATION> (219,475)
<TOTAL-ASSETS> 1,328,531
<CURRENT-LIABILITIES> 302,707
<BONDS> 0
0
0
<COMMON> 1,544
<OTHER-SE> (1,748,701)
<TOTAL-LIABILITY-AND-EQUITY> 1,328,531
<SALES> 3,801,774
<TOTAL-REVENUES> 3,809,171
<CGS> 2,121,104
<TOTAL-COSTS> 2,121,104
<OTHER-EXPENSES> 1,184,790
<LOSS-PROVISION> 4,029
<INTEREST-EXPENSE> 113,375
<INCOME-PRETAX> 389,902
<INCOME-TAX> 16,199
<INCOME-CONTINUING> 373,703
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 373,703
<EPS-BASIC> .32
<EPS-DILUTED> .32
</TABLE>
EXHIBIT 99
25
<PAGE>
ADDITIONAL INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
The Company's Annual Report on Form 10-KSB for the year ended December 31,
1999 (the "Annual Report") contains various forward-looking statements, which
reflect the Company's current views with respect to future events and financial
results. Forward-looking statements usually include the verbs "anticipates,"
"believes," "estimates," "expects," "intends," "plans," "projects,"
"understands' and other verbs suggesting uncertainty. The Company reminds
shareholders that forward-looking statements are merely predictions, which are
inherently subject to uncertainties and other factors, which could cause the
actual results to differ materially from the forward-looking statements. Some of
these uncertainties and other factors are discussed in the Annual Report. See
Item 9 "Management's Discussion and Analysis of Financial Condition and Results
of Operations." In this Exhibit 99, the Company has attempted to identify
additional uncertainties and other factors, which may affect its forward-looking
statements.
Shareholders should understand that the uncertainties and other factors
identified in the Annual Report and this Exhibit 99 do not constitute a
comprehensive list of all the uncertainties and other factors, which may affect
forward-looking statements. The Company has merely attempted to identify those
uncertainties and other factors, which, in its view at the present time, have
the highest likelihood of significantly affecting its forward-looking
statements. In addition, the Company does not undertake any obligation to update
or revise any forward-looking statements or the list of uncertainties and other
factors, which could affect such statements.
Capitalized terms not otherwise defined have been defined in the Annual
Report.
We are in Bankruptcy Proceedings. On March 22, 1999, the Company filed a
petition for reorganization under Chapter 11 of Title 11 of the U.S. Bankruptcy
Code in the United States Bankruptcy Court for the Southern District of New York
(the "Bankruptcy Court"). The petition was precipitated by two factors (i) the
Company's inability to repay approximately $725,000 principal amount of
promissory notes (the "Notes") and accrued interest thereon which became due to
John P. Holmes & Company, Inc. ("JPHC"), a principal stockholder of the Company,
on January 1, 1999; and (ii) significant legal fees incurred by the Company as a
result of a securities suit filed by Wolverton Securities Ltd. ("Wolverton") and
the diversion of management's attention to such litigation.
As of May 4, 1999, the Company secured debt to its factor, The CIT
Group/Commercial Services, Inc. ("CIT"), amounted to $349,451 and its total
unsecured debt was estimated at approximately $2,000,000.
On April 24, 1999, the Bankruptcy Court approved a financing arrangement
between the Company and CIT which enabled the Company to continue its operations
during the Chapter 11 proceedings. On January 13, 2000, the Bankruptcy Court
issued an order confirming a reorganization plan, as amended, (the
"Reorganization Plan"), which provides for: (a) amending the factoring
arrangement between the Company and CIT; (b) payment to unsecured creditors who
may elect to receive either (i) one share of Common Stock for each $2.00 of
debt, or (ii) 20 monthly
26
<PAGE>
payments equal to 22.5% of such creditor's claims; and (c) retention of stock by
the existing stockholders of the Company.
Prior to filing the petition, the Company retained the services of a
workout consultant (the "Consultant") and effected certain changes pursuant to
his advice, which included reducing its executive staff, closing the New York
show room, and expanding its Dominican Republic production. In addition, the
aggregate guaranteed salaries of Jeff Mayer, the Company's Chairman of the Board
of Directors, President, Chief Executive Officer and Acting Chief Financial
Officer, and his spouse, Ms. Isel Pineda Mayer, were reduced from $165,000 to
$60,000.
In March 2000, the Company made the first monthly payment to 80 creditors
who elected a cash payment of 22.5% of their claim in 20 monthly installments
pursuant to the provisions of the Reorganization Plan. In addition, as of the
date of this Report, the Company issued an aggregate of 449,897 shares of Common
Stock to six of the eight creditors, including JPHC, who elected to receive
stock in full satisfaction of their claims. An additional 233,398 shares of
Common Stock are yet to be issued by the Company to two creditors, including
232,000 shares to Wolverton.
The Company believes that if it is able to increase its sales and gross
margins while reducing its expenses, it will be able to pay its creditors' debts
pursuant to the provisions of the Reorganization Plan, avoid bankruptcy
proceedings under Chapter 7 of the Bankruptcy Code and maintain profitability.
However, there is no assurance that the Company will be able to comply with the
provisions of the Reorganization Plan, avoid bankruptcy proceedings under
Chapter 7 of the Bankruptcy Code or maintain its newly achieved profitability.
We Have Had a History of Losses. The Company incurred a net loss of
$1,741,391 million in the year ended December 31, 1998 and a net loss of
$202,051 in the year ended December 31, 1997. Although the Company had a net
income of $373,703 in the year ended ended December 31, 1999, no assurance can
be given that the Company will be able to maintain profitable operations in the
future.
Leverage and Certain Debt Obligations. At December 31, 1999 and 1998 the
Company had total indebtedness of $1,927,309 and $2,275,769, respectively. Of
the $2,275,769, $725,000 was in the form of the Notes (principal and accrued
interest thereon) payable to JPHC. The Notes were due on April 1, 1998, however,
JPHC agreed not to require repayment before January 1, 1999. The Company was
unable to pay the Notes at that time, or to obtain alternative financing, which
in part, precipitated the Company's Chapter 11 filing. On February 29, 2000, the
Company issued JPHC 362,500 shares of Common Stock in satisfaction of its claim
in accordance with the provisions of the Reorganization Plan.
The Company's ability to satisfy its financial obligations under its
outstanding indebtedness will depend upon the Company successfully emerging from
bankruptcy proceedings and 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. The Company
believes, that its cash flow from operations during 2000 will be sufficient to
meet its working capital needs, capital expenditure requirements and debt
service, assuming monthly payments equal to 22.5% of the creditors' claims. In
light of the fact that JPHC and Wolverton
27
<PAGE>
elected a stock distribution, the Company estimates it will require
approximately $7,800 per month for distribution to its other unsecured
creditors. There can be no assurance that the Company will be able to repay such
monthly installments and any new debt incurred to its creditors.
Liquidity and Need for Additional Financing. Since its inception, the
Company has required significant capital to fund its operations and growth.
During 2000, the Company intends to seek additional financing through the
issuance of debt, equity, other securities or a contribution thereof. Although
there can be no assurances that any additional capital will be raised, any such
financing which involves the issuance of equity securities would result in
dilution to existing shareholders and the issuance of debt securities would
subject the Company to the risks associated therewith, including the risks that
interest rates may fluctuate and the Company's cash flows may be insufficient to
pay interest and principal on such indebtedness. There can be no assurances that
the Company will be able to obtain additional financing on terms which are
acceptable to it. The inability of the Company to obtain additional acceptable
financing would have a significant negative impact on the Company's operations.
Dependence on Key Personnel. The Company's success depends in part on the
efforts of Jeffrey Mayer, its Chairman of the Board of Directors, President,
Chief Executive Officer and Acting Chief Financial Officer and a few key
employees. 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. Mr.
Mayer is not subject to an employment or non-competition agreement. The Company
does not maintain key-man life insurance for Mr. Mayer.
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 or respond to changing
consumer preferences and industry trends or that its competitors will not
develop and commercialize new products that render the Company's products less
marketable.
28
