LBU INC, 10KSB, 2000-02-29

LBU INC
10KSB, 2000-02-29
SECURITY & COMMODITY BROKERS, DEALERS, EXCHANGES & SERVICES

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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, 1998

Commission File Number: 2-41015

LBU, Inc.
(Name of Small Business Issuer in its Charter)

Nevada 62-1203301
(State or Other Jurisdiction (I.R.S. Employer
of 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, 1998 were $5,590,168.

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 January
19, 2000 was $109,484.

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____ .

<PAGE>

As of February 7, 2000, the issuer had 1,364,436 shares of Common Stock, par
value $.001 outstanding.

Transitional Small Business Disclosure Format Yes__________No_____X______

<PAGE>

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........................................17

PART III

Item 9. Directors and Executive Officers of the Registrant................18

Item 10. Executive Compensation.............................................18

Item 11. Security Ownership of Certain Beneficial Owners and Management.....19

Item 12. Certain Relationships and Related Transactions.....................21

Item 13. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K........................................................21

SIGNATURES....................................................................24

EXHIBIT INDEX ................................................................25

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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 effected 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 The CIT GROUP/Commercial Services, Inc. ("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 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 (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. On January 13, 2000, the Bankruptcy Court issued an
order confirming the Reorganization Plan.

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.

The Company believes that if it is able to increase its sales and gross
margins while reducing its expenses, the Company 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 return to
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 return to profitability.

The bag and accessory business operated by the Company was founded in 1989
by the Company's Chairman of the Board of Directors, President, Chief Executive
Officer and Acting Chief Financial Officer, Jeffrey 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 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
1997 and 1998, sales of promotional products accounted for approximately $2.9
million and $2.3 million or 45% and 42% of the Company's total sales,
respectively.

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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:

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 developed 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 1997 and 1998,
sales of retail products consisted

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primarily of housewares and accounted for approximately $3.0 million and $2.9
million or 47% and 53% of the Company's total sales, respectively.

Products Made for Industrial Manufactures and Original Equipment Manufacturer
("OEM")

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 OEM segment, products
include custom manufactured bags, pouches and cases that are typically reusable,
environmentally friendly and incorporated into the OEM's product as value- added
features. The Company relies primarily on extensive advertising throughout the
industry trade publications and other industrial and government-buying guides to
increase market share in these segments. During 1997 and 1998, sales of products
to the industrial manufacturers and OEM accounted for $534,000 and $293,000 or
8% and 5% 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 order to meet
production requirements, during 1998 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.
During November 1997, the Company began manufacturing products under
subcontractor arrangements relating to specific orders in the Dominican
Republic. Labor and overhead costs are significantly lower in the Dominican
Republic than in the United States. Accordingly, for certain orders that have
longer lead times and require more labor, the Company intends to contract with
suppliers to produce products to customer specifications. 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

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 to local customers. The Company
markets its products directly through in-house and outside independent sales
representatives. During 1998, 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.

The Company 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 began to distribute its first full
product line catalog for all of its non-houseware business segments in 1998. 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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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 1998, 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 36% of total inventory levels as of
December 31, 1998 and 1997, respectfully, 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 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. 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.

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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
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.

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.

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Employees

As of December 31, 1999, 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
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 1998
was $146,900. Management believes that the New Jersey facility will continue to
satisfy the Company's space requirements for the foreseeable future.

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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 enables 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, 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 which will be settled pursuant to the provisions of the
Reorganization Plan.

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 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.

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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, 1998.

PART II

Item 5. Market For Common Equity and Related Stockholders Matters

In June 1998, the Company issued to Allen Brachfeld, a consultant to the
Company, 10,526 shares of Common Stock in consideration of $25,000 ($2.375 per
share) in a private transaction.

In November 1998, the Company issued to JPO, LLC 10,000 shares of Common
Stock in consideration of consulting services rendered to the Company.

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

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

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2000
- ----
First Quarter (through February 24)................... 0.25 0.25

The above quotations are inter-dealer prices, without retail mark-up,
markdown or commissions and may not necessarily represent actual transactions.
Subsequent to January 19, 2000, there was no trading in the shares of Common
Stock of the Company.

As of February 7, 2000, there were 392 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 enables 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 creditor's 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.

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

11
<PAGE>

guaranteed salaries of Jeff Mayer, the Company's Chairman of the Board,
President, Chief Executive Officer and Acting Chief Financial Officer, and his
spouse, Ms. Isel Pineda Mayer, were reduced from $165,000 to $60,000.

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):

1998 1997 1996
---- ---- ----
Net sales ............................. $ 5,590 $ 6,463 $ 5,103

Gross profit .......................... 834 1,548 1,734

Selling, general and
administrative expenses ........... 2,341 1,648 1,469

Operating income (loss) ............... (1,681) (284) 95

Other income (expense) ................ (10) 20 51

Income tax expense (benefit) .......... 50 (62) 41

Net income (loss) ..................... (1,741) (202) 105

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 OEM 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, Company wrote off $298,000 of
inventory due to a change in product mix, certain raw

12
<PAGE>

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 $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.

Operating and Net Loss. Operating loss increased by $1,397,135 to
$1,680,880 in 1998 from $283,745 in 1997. The Company had a net loss of
$1,741,391 in 1998 compared to a net loss of $202,051 in 1997.

Year Ended December 31, 1997 Compared with Year Ended December 31, 1996

Sales. Net sales increased by $1,360,079 to $6,463,479 in 1997 from
5,103,401in 1996. Sales and income growth was attributable to: (i) the
successful introduction of the Company's packaged line of laundry and garment
care products to retail companies, (ii) the Company's marketing and design
efforts in producing over 200 new product styles in 1996 to the promotional
product industry, and (iii) the utilization of its QUICKPRO(TM) process. This
enabled the Company to capitalize on booking and fulfilling successfully many
client orders that required short turn around times.

Cost of Sales. Cost of sales increased $1,546,044 to $4,915,609 in 1997
from $3,369,565 in 1996 due to the increase in sales.

Gross Profit. Gross profit decreased $185,966 to $1,547,870 in 1997 from
$1,733,836 in 1996, mainly due to a decrease in the profit margins of the
Company which were adversely affected by price reductions effected by the
Company in order to attract retail customers.

Operating Expenses. Total operating expenses increased $192,915 to
$1,831,615 in 1997 from $1,638,700 in 1996. The increase was attributable to
litigation expenses of $89,975, an increase in salaries of $49,400, an increase
in commissions paid to sales persons of $18,598 and rent of new premises in New
York City of $17,422.

Operating and Net Income (Loss). As a result of the foregoing, the Company
had an operating loss of $283,745 in 1997 compared to operating income of
$95,136 in 1996. The Company had a net loss of $202,051 in 1997 compared to net
income of $104,926 in 1996.

13
<PAGE>

Liquidity and Capital Resources

At September 30, 1999, the Company had working capital of $518,537 as
compared with a working capital deficiency of $1,228,707 at December 31, 1998
and compared with working capital of $939,580 at December 31, 1997. The
Company's cash position as of September 30, 1999 and December 31, 1998 and 1997
was $72,627, $145,454 and $202,204, respectively, of which $63,805, $94,124 and
$105,955, respectively, were restricted and not available for general corporate
purposes. Net cash provided by operating activities for the nine months ended
September 30, 1999 and 1998 was $188,033 and $526,643, respectively,
representing an increase of $338,610 in the 1999 period. The increase was
primarily due to a net income of $166,038 after adding depreciation and
amortization. Net cash used in operating activities for the years ended December
31, 1998 and 1997 was $503,333 and $711,891, respectively, representing a
decrease of $208,558 in 1998. The decrease was primarily due to the operating
loss incurred by the Company and significant increases in account receivable,
inventory and other assets. The increase in accounts receivable relates
primarily to an increase in non-factored account receivable which resulted from
increased sales. The Company decreased its inventory levels by $690,720 to
$477,347 at September 30, 1999 from $1,168,067 at September 30, 1998. The
decrease was attributable to closer adherence to just-in-time inventory
requirements techniques, sale of slow-moving raw materials at discounted prices,
conversion of idle materials to saleable materials, write off of obsolete items,
$81,000 of materials destroyed by flood which was reimbursed by an insurance
company and not replaced by the Company. The Company decreased its raw material
inventory levels by $553,545, to $360,092 at December 31, 1998 from $913,637 at
December 31, 1997, in order to facilitate improved turnaround and availability
on orders. Finished goods inventory levels decreased by $242,108, to $310,771 at
December 31, 1998 from $552,879 at December 31, 1997. These working capital uses
were offset by an increase in accounts payable at year-end, which relates
primarily to the timing of payment received for a large order, which was shipped
during the fourth quarter of 1997.

During the nine months ended September 30, 1999, cash used in investing
activities totaled $60,032 which consisted of capital expenditures for data
processing equipment and software. During 1998, cash used in investing
activities totaled $13,162, which consists primarily of capital expenditures for
manufacturing equipment in the Company's Carlstadt facility.

During 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.

During 1997, the Company received an equity investment in the amount of
$375,000 from a sale of Common Stock to JPHC and $500,000 in debt financing,
$300,000 of which is convertible into Common Stock of the Company, from JPHC. In
1998, JPHC provided the Company with an additional $200,000 of debt financing.
The proceeds of these financings were used by the Company primarily to fund its
working capital needs during 1997 and 1998. At September 30, 1999 and December
31, 1998, the Company had total indebtedness of $1,925,261 and $2,275,769,
respectively. Of the amount of $2,275,769, $725,000 is in the form of the Notes
(principal and accrued interest thereon) payable to JPHC. The Notes were due on
April 1, 1998, however, JPHC

14
<PAGE>

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. JPHC elected a stock
distribution of 362,500 shares of Common Stock under the Reorganization Plan in
satisfaction of its claim.

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. The facility is secured by
substantially all of the Company's assets and the personal guarantees of its
Chief Executive Officer and his spouse. CIT filed a proof of claim in the amount
of $349,451 which will be paid pursuant to 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 if its cash flow from operations during 2000 will be sufficient
to meet the Company's working capital needs, capital expenditure requirements
and debt service, assuming 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 $9,200 per month for distribution to its
other unsecured creditors for 20 months commencing one month after the date of
the confirmation order.

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.

Seasonality

Although the Company sells its products throughout the year, the Company
has traditionally had higher net sales during the second and third quarters of
the calendar year. The following table sets forth the Company's quarterly net
sales for the three years ended December 31, 1998, 1997 and 1996.

15
<PAGE>

Net Sales (in thousands)
----------------------------------------------------------

First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
1998 .......... $1,313 $1,333 $1,767 $1,177 $5,590
1997 .......... 1,189 1,811 1,322 2,141 6,463
1996 .......... 942 1,987 1,299 875 5,103

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.

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 here with
beginning at page F-1.

Report of Becher, Della Torre & Gitto & Company, P.C., Independent Accountants.
Balance Sheets as of December 31, 1998 and December 31, 1997;
Statements of Income for each of the three years in the period ended December
31, 1998;
Statement of Changes in Stockholders' Equity for each of the three years in the
period ended December 31, 1998;
Statements of Cash Flows for each of the three years in the period ended
December 31, 1998; and Notes to Financial Statements.

16
<PAGE>

Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.

None.

17
<PAGE>

PART III

Item 9. Directors and Executive Officers of the Registrant

Name Age Position/Offices Held
---- --- ---------------------
Jeffrey Mayer............. 36 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.

No director of the Company is also a director of any other company which
has a class of securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or is subject to the
requirements of Section 15(d) of such Act or any company registered as an
investment company under the Investment Company Act of 1940.

Item 10. Executive Compensation

The following table sets forth information concerning the total
compensation during the last three fiscal years for the Company's executive
officers whose total salary in fiscal 1998 totaled $100,000 or more:

18
<PAGE>

<TABLE>
<CAPTION>
Name and Other Annual
Principal Position Year Salary Bonus Compensation
- ------------------ ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Jeffrey Mayer 1998 $104,420 -- --
President and Chief Executive 1997 101,190 -- --
Officer 1996 100,000 -- --
</TABLE>

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 each executive officer named in the
Summary Compensation Table, for each of the Company's directors and for the
executive officers and directors of the Company as a group:

Name and Address of Number of Shares Percent
Beneficial Owner Beneficially Owned(1) of Class
- ---------------- --------------------- --------
Jeffrey Mayer ................................. 676,500 49.6%
310 Paterson Plank Rd
Carlstadt, NJ 07071

John P. Holmes & Co., Inc. (2) ................ 260,000(3) 18.9%
PO Box 428
Shelter Island, NY

JPO, LLC (4) .................................. 110,000(5) 7.5%
8 Webster Ave
Summit, NJ 07901

Neil Ragin ................................... 86,667 6.4%
180 W. End Ave
New York, NY 10023

All officers and directors
as a group (3 Persons) ........................ 676,500 49.6%

(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
(including options, warrants and convertible notes),

19
<PAGE>

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 stockholder of the shares of
Common Stock of the Company held by JPHC.

(3) Includes: (i) 250,000 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.
Does not include 362,500 shares of Common Stock which will be issued to
JPHC in satisfaction of its claim of $725,000 pursuant to the provisions of
the Reorganization Plan.

(4) 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
110,000 shares of the Company held by JPO.

(5) Includes 10,000 shares of Common Stock of the Company held of record as of
the date of this Report and 100,000 shares of the Common Stock of the
Company 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.

The information in the above table does not reflect: (i) 200,000 shares of
Common Stock issuable upon the exercise of options which will be issued to
Howard Greenstein, the Consultant to the Company, at an exercise price equal to
the share price as it is quoted at the close of business on the effective date
of the Reorganization Plan, as part of a consideration for his continued
employment by the Company for a five-year period, and (ii) 232,000 shares of
Common Stock which will be issued to Wolverton in satisfaction of its claim
pursuant to the provisions of the Reorganization Plan.

20
<PAGE>

Item 12. Certain Relationships and Related Transactions.

In March 1997, JPHC, of which Mr. John H. Robinson (a director of the
Company until November 9, 1998), was a shareholder, purchased 250,000 shares of
the Company's Common Stock for $375,000.

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. In
satisfaction of its claim of $725,000, JPHC elected a stock distribution of
362,500 shares of Common Stock in accordance with the provisions of the
Reorganization Plan.

In August 1997, JPHC was granted by the Company warrants to purchase 10,000
shares of Common Stock at an exercise price of $5.00 per share. These warrants
expired in August 1999. In September 1997, the Company issued to JPHC warrants
to purchase 40,000 shares of Common Stock at an exercise price of $5.00 per
share, which warrants expired in September 1999. 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 by with
non-related parties.

The Company utilizes the services of outside independent sales
representatives. During 1997 and 1998, the Company paid sales commissions of
$40,000 and $22,782, respectively, 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. Such amount is
part of the aggregate debt of the Company to its unsecured creditors, the
payment of which will be made pursuant to the provisions of the Reorganization
Plan.

Jeff 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.

<PAGE>

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)

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

- --------------------------

22
<PAGE>

(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.

23
<PAGE>

[LETTERHEAD OF BECHER DELLA TORRE GITTO & COMPANY]

September 14, 1999, except Notes 9 and 11 are
January 13, 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, 1998 and
1997, and the related statements of income, changes in stockholders' equity and
cash flows for each of the three years ended December 31, 1998, 1997 and 1996.
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,
1998 and 1997, and the results of its operations, changes in stockholders'
equity and cash flows for the three years ended December 31, 1998, 1997 and
1996, in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 11 to the
financial statements, the Company has filed for bankruptcy which raises
substantial doubt about its ability to continue as a going concern. Management's
plans are also described in Note 11. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

/s/ BECHER, DELLA TORRE, GITTO & COMPANY

F-1
<PAGE>

LBU, Inc.
Balance Sheets
December 31,

<TABLE>
<CAPTION>
Assets

1998 1997
---- ----
<S> <C> <C>
Current assets
Cash and cash equivalents $ 51,330 $ 96,249
Restricted cash 94,124 105,955
Accounts receivable (net of allowance for bad debts of
$145,458 and $25,000, respectively) 47,189 229,753
Inventory 675,958 1,528,318
Deferred tax asset (net of valuation allowance of
$20,824 and $-0- respectively) -- 55,516
Other current assets 126,999 292,546
----------- -----------
Total current assets 995,600 2,308,337

Noncurrent assets
Fixed assets, net 262,967 289,177
Other assets 44,721 65,219
Deferred tax asset (net of valuation allowance of
$359,740 and $-0-, respectively) -- --
----------- -----------
Total assets $ 1,303,288 $ 2,662,733
=========== ===========

Liabilities and Stockholders' Equity

Current liabilities
Accounts payable $ 1,037,968 $ 1,076,968
Accrued expenses 198,565 207,233
Customer advances 11,484 31,180
Taxes payable 15,613 17,255
Notes payable-current 960,677 36,121
----------- -----------
Total current liabilities 2,224,307 1,368,757
----------- -----------

Long-term liabilities
Notes payable 51,462 262,649
Convertible note payable -- 300,000
Deferred tax liability -- 8,793
----------- -----------
Total long-term liabilities 51,462 571,442
----------- -----------

Total liabilities 2,275,769 1,940,199
----------- -----------

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 1,339
Additional paid-in capital 1,148,379 1,102,208
Retained earnings (deficit) (2,122,404) (381,013)
----------- -----------
Total stockholders' equity (deficit) (972,481) 722,534
----------- -----------

Total liabilities and stockholders' equity (deficit) $ 1,303,288 $ 2,662,733
=========== ===========
</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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $ 5,590,168 $ 6,463,479 $ 5,103,401
Costs of goods sold 4,756,110 4,915,609 3,369,565
----------- ----------- -----------

Gross profit 834,058 1,547,870 1,733,836
----------- ----------- -----------

Operating expenses
Selling, general and administrative expense 2,341,415 1,648,370 1,468,886
Factor fees and interest 173,523 183,245 169,814
----------- ----------- -----------
Total operating expenses 2,514,938 1,831,615 1,638,700
----------- ----------- -----------

Income (loss) from operations (1,680,880) (283,745) 95,136
----------- ----------- -----------

Other income (expense)
Loss on sale of fixed assets (13,859) -- --
Interest 3,704 8,002 2,946
Rent -- 12,000 48,000
----------- ----------- -----------

Total other income (expense) (10,155) 20,002 50,946
----------- ----------- -----------

Income (loss) before income taxes (1,691,035) (263,743) 146,082

Income taxes (benefit) 50,356 (61,692) 41,156
----------- ----------- -----------

Net income (loss) $(1,741,391) $ (202,051) $ 104,926
=========== =========== ===========

Basic Earnings per share $ (1.28) $ (0.16) $ 0.09
=========== =========== ===========

Diluted Earning per share $ (1.28) $ (0.16) $ 0.09
=========== =========== ===========
</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, 1998, 1997 and 1996

Common Stock Additional Retained
---------------------------- Paid-in Earnings
Shares Amount Capital (Deficit) Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 1,310,834 $ 1,311 $ 702,236 $ (283,888) $ 419,659
Capital investment 47,143 47 24,953 -- 25,000
Financial services agreement
shares retired (269,000) (269) (483,931) -- (484,200)
Reversal of services fees
charged to paid in capital -- -- 484,200 -- 484,200
Net income for the year ended
December 31, 1996 104,926 104,926
----------- ----------- ----------- ----------- -----------

Balance at December 31, 1996 1,088,977 1,089 727,458 (178,962) 549,585

Capital investment 250,000 250 374,750 -- 375,000

Net loss for the year ended December 31, 1997 -- -- -- (202,051) (202,051)
----------- ----------- ----------- ----------- -----------

Balance at December 31, 1997 1,338,977 1,339 1,102,208 (381,013) 722,534

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)
=========== =========== =========== =========== ===========
</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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flow from operating activities
Net income (loss) $(1,741,391) $ (202,051) $ 104,926
----------- ----------- -----------

Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities
Provision for bad debt 120,458 -- 3,961
Allowance for inventory obsolesence 298,000 -- --
Depreciation and amortization 56,599 40,453 34,814
Deferred tax asset 55,516 (9,566) (22,950)
Deferred tax liability (8,793) (2,600) 11,393
Loss on sale of fixed assets (13,859) -- --
(Increase) decrease in
Accounts receivable 62,106 (61,649) (80,570)
Inventories 554,360 (739,228) (213,553)
Other current assets 165,547 (270,099) (15,311)
Other assets 17,130 43,995 (73,425)
Increase (decrease) in
Accounts payable (39,000) 618,196 176,466
Accrued expenses (8,668) 42,349 20,241
Taxes payable (1,642) (50,159) 52,714
Customer advances (19,696) (121,532) 59,844
----------- ----------- -----------

Total adjustments 1,238,058 (509,840) (46,376)
----------- ----------- -----------
Net cash provided (used) by operating activities (503,333) (711,891) 58,550
----------- ----------- -----------

Cash flow from investing activities
Capital expenditures (13,162) (135,706) (77,075)
----------- ----------- -----------
Net cash (used) by investing activities (13,162) (135,706) (77,075)
----------- ----------- -----------

Cash flow from financing activities
Borrowing from financial institutions 200,000 22,000 259,478
Repayment of loans (16,631) (32,707) (150,000)
Proceeds from other financings 230,000 500,000 --
Proceeds of issuing Common Stock 46,376 375,000 25,000
----------- ----------- -----------
Net cash provided by financing activities 459,745 864,293 134,478
----------- ----------- -----------

Net increase (decrease) in cash (56,750) 16,696 115,953

Cash at beginning of period 202,204 185,508 69,555
----------- ----------- -----------

Cash at end of period $ 145,454 $ 202,204 $ 185,508
=========== =========== ===========
</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,

1998 1997 1996
---- ---- ----

Supplemental disclosures
Cash paid during the period for
Interest and factor fees $ 173,523 $ 183,245 $ 169,814
Income taxes $ -- $ -- $ --

Non-cash activities
Shares of common stock retired $(484,200)

The accompanying notes are an integral part of these financial statements.

F-6
<PAGE>

LBU, Inc.
Notes to the Financial Statements
December 31, 1998 and 1997

Note 1 - Organization and the Significant Accounting Policies

Organization: LBU, Inc. (the "Company"), a Nevada corporation, previously known
as New Century Media Ltd. is a leading designer, marketer and manufacturer
specializing in fashionable bags, promotional products and houseware accessories
for the retail, promotional, OEM and industrial markets.

In February 1995, New Century Media, Ltd. entered into a plan of reorganization
with LBU, Inc. a Delaware corporation referred to herein as LBU-Delaware whereby
the shareholders of LBU-Delaware obtained controlling interest in New Century
Media, Ltd., in a transaction accounted for as a reverse acquisition. New
Century Media, Ltd. changed its name to LBU, Inc. on March 31, 1995.

Inventories: Inventories are valued at the lower of cost or market, 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, 1998 and 1997, the Company has $94,124 and $105,955 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 and federal and state net operating loss
carryforwards. Deferred taxes represents the future tax return consequences of
those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. Effective March 31, 1995, LBU-Delaware
became a taxable entity. Previously, its earnings and losses were included in
the personal tax returns of the stockholders and the Company did not record an
income tax provision (see Note 6).

Advertising: The Company charges the costs of advertising to expense as
incurred.

Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

Stockholders Equity: In August 1995, the Company declared a 20 for 1 reverse
stock split on the then issued and outstanding common shares. All outstanding
share amounts included in the accompanying financial statements have been
retroactively adjusted to reflect the 20 for 1 reverse stock split. The result
of this action reduced 24,550,000 shares of pre-split outstanding Common Stock
to 1,227,500 shares in a post-split basis.

F-7
<PAGE>

LBU, Inc.
Notes to the Financial Statements
December 31, 1998 and 1997

Note 1 - Organization and Significant Accounting Policies (continued)

Stockholders Equity (continued):

In July 1995, the Company entered into a financial services agreement with
Glenneyre Capital Corp. (GCC), Poimandres Financial Corp. (PFC) and Bristol
Media, Ltd. (BML). The agreement required GCC, PFC and BML to provide certain
professional services relating to raising of capital by the Company in exchange
for 300,000 shares of the Company's Common Stock. The agreement specified that
such services were assigned a value of $60,000. However, the Company has
recorded the issuance of the 300,000 shares based upon the then market value of
its Common Stock, $540,000, resulting in a charge to additional paid in capital
during the period ended December 31, 1995 (see Note 9). In 1996, 269,000 of the
forgoing shares were cancelled.

Note 2 - Accounts Receivable And Factoring Arrangements

The Company entered into a factoring arrangement whereby a factor makes advances
to the Company on certain accounts receivable balances. Interest of 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.

The components of accounts receivable at December 31, 1998 and 1997 are as
follows:

1998 1997
---- ----

Accounts receivable assigned to factor, net $ 179,822 $ 219,396
Non-factored accounts receivable 12,825 35,357
Allowance for doubtful accounts (145,458) (25,000)
----------- -----------

Net accounts receivable $ 47,189 $ 229,753
=========== ===========

Note 3 - Inventories

As of December 31, 1998 and 1997 the components of inventories were as follows:

1998 1997
----------- -----------

Raw materials $ 360,092 $ 913,637
Work in process 5,095 61,802
Finished goods 310,771 552,879
----------- -----------

Total $ 675,958 $ 1,528,318
=========== ===========

The December 31, 1998 inventory is net of a valuation allowance of $298,000
based on a general allowance for slow moving and obsolete inventory and
unrecoverage foreign inventory. The allowance is based on an estimate by the
Company's management. The inventory is encumbered by CIT Financial (Note 7).

F-8
<PAGE>

LBU, Inc.
Notes to the Financial Statements
December 31, 1998 and 1997

Note 4 - Equipment and Leasehold Improvements

Equipment and leasehold improvements at December 31, 1998 and 1997 are as
follows:

1998 1997
---- ----

Machinery and equipment $211,712 $190,482
Furniture and fixtures 99,365 93,571
Leasehold improvements 115,280 115,280
-------- --------
Total 426,357 399,333

Less accumulated depreciation and amortization 163,390 110,156
-------- --------

Net equipment and leasehold improvements $262,967 $289,177
======== ========

Depreciation expense is $56,599 in 1998 and $40,453 in 1997.

Note 5 - Related Party Transactions

At December 31, 1998, loans in the amount of $45,467 were due from related
parties. These amounts were included in Other Current Assets.

Also as of December 31, 1998, loans in the amount of $700,000, with interest at
9.12%, were due to related parties. Such amounts were included in Notes Payable
Current. (See Notes Capital Lease Payable - Note 7 and Subsequent Event - Note
11.)

Note 6 - Income Taxes

The provision for income taxes for the years ended December 31, 1998, and 1997
consists of the following components:

1998 1997
---- ---
Current taxes
Federal $ -- $(43,631)
State 4,499 (5,895)
-------- --------
Total current provision (benefit) 4,499 (49,526)
-------- --------

Deferred taxes
Federal 33,900 (209)
State 11,957 (11,957)
-------- --------
Total deferred expense (benefit) 45,857 (12,166)
-------- --------
Total tax provision (benefit) $ 50,356 $(61,692)
======== ========

The December 31, 1997 federal tax loss was carried back and generated a federal
tax refund of $45,348. As of December 31, 1998 the Company had federal and state
net operating loss carryforwards of approximately $1,750,000 and $1,930,000,
respectively which will begin to expire in 2018 and 2005, respectively.

F-9
<PAGE>

LBU, Inc.
Notes to the Financial Statements
December 31, 1998 and 1997

Note 6 - Income Taxes (continued)

Deferred tax liabilities, assets consist of the following at December 31, 1998
and 1997:

1998 1997
---- ----

Reserve for bad debts $ 5,250 $ 5,250
Inventory capitalization under Section 263A 13,184 36,314
Accrued expenses 2,100 2,100
Intangible assets 290 --
Net operating loss carryforward 367,709 11,852
--------- ---------
Total deferred tax assets 388,533 55,516
--------- ---------

Fixed assets 7,969 6,105
Intangible assets -- 2,688
--------- ---------
Total deferred tax liabilities 7,969 8,793
--------- ---------

Net deferred tax asset before valuation allowance 380,564 46,723
Valuation allowance (380,564) --
--------- ---------

Net deferred tax asset $ -- $ 46,723
========= =========

Change in valuation allowance $ 380,564 $ --
========= =========

A reconciliation of the Federal statutory rate to the effective tax rate for the
years ended December 31, 1998 and 1997 is as follows:

<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C> <C> <C>
Taxes at federal statutory rate $(253,655) (15)% $ (39,561) (15)%
State income tax - net of federal benefit (101,463) (6) (15,825) (6)
Permanent differences 2,546 -- 3,280 2
(Overaccrual)/underaccrual of prior years income taxes 17,484 1 (6,720) (2)
Other 4,880 -- (2,866) (2)
Increase in valuation allowance 380,564 23 -- --
--------- --- --------- ---
Total $ 50,356 3% $ (61,692) (23)%
========= === ========= ===
</TABLE>

F-10
<PAGE>

LBU, Inc.
Notes to the Financial Statements
December 31, 1998 and 1997

Note 7 - Notes and Capital Lease Payable

Notes and capital lease payable consist of the following as of December 31, 1998
and 1997:

1998 1997
---- ----

Credit advance, CIT Financial (a) $ 200,000 $ --
Note payable to a bank (b) 73,001 98,770
Promissory note payable(c) 200,000 200,000
Promissory note payable (d) 30,000 --
Convertible notes payable (e) 500,000 300,000
Capital lease (f) 9,138 9,780
---------- ----------
Total 1,012,139 608,550

Current portion 960,677 36,121
---------- ----------

Notes and capital lease payable,
Less current installments $ 51,462 $ 562,649
========== ==========

(a) CIT extended the Company $200,000 credit, collateralized by inventory and
equipment at approximately prime plus 2%.

(b) Principal of schedule to be repaid in 1999. Interest accrues at prime plus
1.5%. Restricted cash as collateral.

(d) Principal matures on June 22, 2000. Interest accrues at 9.12%.

(e) Principal of $300,000 matures 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 party 100,000 stock
purchase warrants with an exercise price of $4.25 per share. The warrants
have a term of approximately two years and are exercisable from the date of
the grant.

(f) Lease payments are approximately $4,000 for each year through December 31,
2000. Interest accrues at 12% per annum.

F-11
<PAGE>

LBU, Inc.
Notes to the Financial Statements
December 31, 1998 and 1997

Note 8 - Segment Information

The following sets forth the Company's net sales by segment for the years ended
December 31 (in 000's):

1998 1997 1996
---- ---- ----
Sales:
Retail $2,949 $3,002 $2,808
Promotional Products 2,348 2,927 1,887
OEM and Industrial 293 534 408
------ ------ ------

Total $5,590 $6,463 $5,103
====== ====== ======

Foreign sales were $226,369, $74,842 and $391,000 for the years ended December
31, 1998, 1997 and 1996, respectively.

Note 9 - Commitments and Contingencies

In August 1993, LBU-Delaware entered into employment agreements with the
President and principal shareholder and his wife, who is an officer of the
Company. These agreements provide for payments of approximately $148,999 per
year, and escalate to approximately $163,000 per year in 1996 (See Subsequent
Event - Note 11). The Company's executive officers did not have employment or
non-competition agreements in 1997 and 1998.

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 leases as of December 31,
1998 are:

Year Ending
December 31, Amount
------------ ------

1999 148,369
2000 154,245
2001 160,121
2002 167,465
2003 172,521

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 suit
against the Company in the State of Nevada. The lawsuit stems from a financial
service agreement dated July 24, 1995, by and between the Plaintiff's and LBU.

F-12
<PAGE>

LBU, Inc.
Notes to the Financial Statements
December 31, 1998 and 1997

Note 9 - Commitments and Contingencies (continued)

As part of the financial service agreement, 300,000 shares of LBU Common Stock
("the Shares") were issued to the Plaintiffs in return for financial and other
consulting services, which were to include raising capital. LBU claims such
services were not rendered and that the Shares were improperly registered and,
accordingly, on November 19, 1995, the Company invalidated some of the Shares
and subsequently 269,000 shares were returned and canceled by LBU's stock
transfer agent.

The Company and its legal counsel believe the action it has taken by
invalidating and canceling the Shares is appropriate. The Company has since
initiated a counter-suit against the Plaintiffs for breach of contract, fraud
and other causes of action. GCC filed a proof of claim under the bankruptcy
proceedings which will be 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 U.S. District Court for the District of Nevada. Wolverton Securities,
Ltd. seeks to have the Company reissue 170,250 shares of the Common Stock
referred to in the preceding paragraphs. Wolverton also seeks specific damages
in the amount $405,000 and unspecified punitive damages. The Company filed an
answer and a third-party complaint against the Plaintiffs and certain of their
affiliates in the same court during October 1997.

Discovery in connection with the Wolverton litigation is proceeding. Although
management of the Company believes the claims made against it in the foregoing
lawsuits are without merit, no evaluation of the potential likelihood of
outcomes can be made at this time and the Company has not made any provisions
for losses in its financial statements. The Company intends to vigorously pursue
its litigation and defend itself in these matters. (See Subsequent Event - Note
11.)

The Company is involved in litigation from time to time which is incidental to
the conduct of its business.

Note 10 - Shareholders Equity

Common Stock

In March 1997, the Company sold 250,000 shares of its Common Stock to John P.
Holmes and Co., Inc. ("JPHC") for $375,000 in a private placement transaction.

Stock Purchase Warrant

In connection with certain financing transactions during August and September
1997, the Company granted stock purchase warrants to JPHC to purchase 10,000
shares of the Company's Common Stock at $5.00 per share and 40,000 shares at
$5.00 per share. The warrants have a term of three years and are exercisable
from the date of the grant.

In addition, in March 1998, the Company granted stock purchase warrants to
purchase 10,000 shares of Company's Common Stock at $3.87 per share. The
warrants have a term of three years and are exercisable from the date of grant.

F-13
<PAGE>

LBU, Inc.
Notes to the Financial Statements
December 31, 1998 and 1997

Note 11 - Subsequent Event

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, 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 enables 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 (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. On January 13, 2000, the Bankruptcy
Court issued an order confirming the Reorganization Plan.

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.

The Company believes that if it is able to increase its sales and gross margins
while reducing its expenses, the Company will be able to pay its creditors'
debts pursuant to the provisions of the Reorganization Plan, to avoid bankruptcy
proceedings under Chapter 7 of the Bankruptcy Code and return to 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 return to profitability.

F-14
<PAGE>

LBU, Inc.
Notes to the Financial Statements
December 31, 1998 and 1997

Note 11 - Subsequent Event (continued)

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 in Note 9. 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.

As it relates to JPHC, whose actions precipitated the Company's Chapter 11
filing, JPHC elected a stock distribution of 362,500 shares of Common Stock,
under the Reorganization Plan in satisfaction of its claim. In addition, JPHC
would no longer be entitled to the 60,000 shares issuable upon the conversion of
the $300,000 convertible note.

Per LBU's stock transfer agent, 50,000 Shares relating to JPO, LLC (see Note 9)
which were previously issued and outstanding have been canceled.

F-15
<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 February 25, 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 persons on behalf of the Registrant and
in the capacities indicated on February 25, 2000.

/s/ Jeffrey Mayer
- --------------------------
Jeffrey Mayer Chairman of the Board of Directors
President, Chief Executive Officer
and Acting Chief Financial Officer
(principal executive, financial and accounting
officer)

<PAGE>

EXHIBIT INDEX

Exhibit No. Description
----------- -----------