SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number
1-8232
Name of Registrant
NBI, INC.
State of Incorporation IRS Employer I. D. Number
Delaware 84-0645110
Address
850 23rd Avenue, Suite D
Longmont, Colorado 80501
(303) 684-2700
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [ ] NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 8, 2001
- -------------------------------------- -------------------------------
Common Stock, par value $.01 per share 8,103,320
NBI, INC.
INDEX TO FORM 10-QSB
For Quarter Ended September 30, 2001
PAGE
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PART I - FINANCIAL INFORMATION
Consolidated Financial Statements (Unaudited) 3 - 6
Supplementary Notes to Consolidated Financial
Statements (Unaudited) 7 - 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13 - 16
PART II - OTHER INFORMATION 17
NBI, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands Except Share Data)
September 30, June 30,
2001 2001
---- ----
(Unaudited) (Audited)
ASSETS
------
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Current assets:
Cash and cash equivalents $ 56 $ 28
Accounts receivable, less allowance for doubtful accounts
of $236 and $229, respectively 1,697 1,131
Inventories 3,059 2,925
Prepaid state income taxes 74 61
Other current assets 395 272
Short-term deferred income taxes 80 80
Net current assets of discontinued operations 207 105
-------- --------
Total current assets 5,568 4,602
Property, plant and equipment, net 6,655 6,895
Note receivable from related party 2,383 2,538
Other assets 33 36
Net long-term assets of discontinued operations 1,375 1,413
-------- --------
$16,014 $15,484
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term borrowings and current portion of notes payable $ 5,817 $ 5,475
Current portion of capital lease obligation 32 32
Accounts payable 1,733 1,515
Accrued liabilities and other 582 533
-------- --------
Total current liabilities 8,164 7,555
Long-term liabilities:
Capital lease obligation 977 985
Deferred income taxes 81 81
Postemployment disability benefits 133 138
Deferred gain from sale of discontinued operation, net of taxes 881 881
-------- --------
Total liabilities 10,236 9,640
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.01 par value; 5,000,000 shares authorized; 507,421
shares of Series A Cumulative Preferred Stock issued and
outstanding (liquidation preference value of $5,074) 5 5
Capital in excess of par value - preferred stock 4,380 4,380
Common stock - $.01 par value; 20,000,000 shares authorized;
10,130,520 shares issued 101 101
Capital in excess of par value - common stock 6,566 6,566
Accumulated deficit (4,406) (4,340)
-------- --------
6,646 6,712
Less treasury stock, at cost (2,027,200 shares) (868) (868)
-------- --------
Total stockholders' equity 5,778 5,844
-------- --------
$16,014 $15,484
======== ========
<FN>
See accompanying notes.
NBI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands Except Per Share Data)
(Unaudited)
Three Months Ended
September 30,
2001 2000
------- -------
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Revenues:
Sales $3,134 $3,976
------- -------
Costs and expenses:
Cost of sales 2,502 2,879
Marketing, general and administrative 699 768
------- -------
3,201 3,647
------- -------
Income (loss) from operations (67) 329
Other income (expense):
Interest income 44 56
Other income and expenses, net (1) 3
Interest expense (120) (82)
------- -------
(77) (23)
------- -------
Income (loss) from continuing operations before income taxes (144) 306
Income tax benefit (provision) 35 (13)
------- -------
Income (loss) before discontinued operations (109) 293
Income from discontinued operations, net of
income tax provisions of $29 and $24, respectively 43 38
------- -------
Net income (loss) (66) 331
Dividend requirement on preferred stock (128) (128)
------- -------
Income (loss) attributable to common stockholders $ (194) $ 203
======= =======
Income (loss) per common share - basic and diluted:
Income (loss) before discontinued operations $ (.03) $ .02
Income from discontinued operations .01 .01
------- -------
Net income (loss) $ (.02) $ .03
======= =======
Weighted average common shares and equivalents:
Basic 8,103 8,103
======= =======
Diluted 8,103 8,157
======= =======
<FN>
See accompanying notes.
NBI, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
Three Months Ended
September 30,
2001 2000
------ ------
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Cash flows from operating activities:
Net income (loss) $ (66) $ 331
Adjustments to reconcile net income (loss) to net cash
flow provided by (used in) operating activities:
Depreciation and amortization 324 265
Provision for bad debts and returns 15 40
Reduction of inventory provisions (37) (2)
Other (5) (3)
Changes in assets -- decrease (increase):
Accounts receivable (580) (479)
Inventories (99) 109
Prepaid state income taxes (13) --
Other current assets (141) (183)
Other assets -- 2
Changes in liabilities -- (decrease) increase:
Accounts payable and accrued liabilities 336 196
Income taxes payable 6 13
------ ------
Net cash flow provided by (used in) operating activities (260) 289
------ ------
Cash flows from investing activities:
Purchases of property and equipment (83) (272)
------ ------
Net cash flow used in investing activities (83) (272)
------ ------
Cash flows from financing activities:
Collections from notes receivable 155 2
Net borrowings on line of credit 490 83
Payments on notes payable (155) (39)
Payments on capital lease obligation (8) --
------ ------
Net cash flow provided by financing activities 482 46
------ ------
Net increase in cash and cash equivalents 139 63
Less change in cash and cash equivalents included
in net assets of discontinued operations (111) (69)
Cash and cash equivalents at beginning of period 28 33
------ ------
Cash and cash equivalents at end of period $ 56 $ 27
====== ======
(continued on following page)
<FN>
See accompanying notes.
NBI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
Three Months Ended
September 30,
2001 2000
---- ----
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Supplemental disclosures of cash flow information:
Interest paid $141 $ 72
==== ====
Income taxes paid $ -- $ 24
==== ====
Noncash purchases of property, plant, and equipment
included in accounts payable at end of period $ 66 $110
==== ====
<FN>
See accompanying notes.
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Preparation
The accompanying financial statements have been prepared in accordance with
the requirements of Form 10-QSB and include all adjustments (consisting of all
normal recurring adjustments) which in the opinion of management are necessary
in order to make the financial statements not misleading. The consolidated
financial statements include the accounts of the Company and its wholly-owned
and majority-owned subsidiaries. All significant intercompany accounts and
profits have been eliminated.
Beginning in the fourth quarter of fiscal 2001, freight charges billed to
customers which were previously treated as a reduction of freight costs and
included in cost of sales have been reclassified as an addition to sales
revenue. The financial statements have been restated to conform to this
presentation. Freight charges billed to customers totaled $46,000 and $70,000
for the quarters ended September 30, 2001 and 2000, respectively. Certain
other items in the fiscal 2001 financial statements have been reclassified to
conform to the fiscal 2002 manner of presentation.
Note 2 - Going Concern and Management's Plan
As of November 7, 2001, the borrowings under L.E. Smith's revolving line of
credit exceeded the allowed borrowing base by $377,000. L.E. Smith has not
been able to repay the overborrowings on its revolving line of credit which is
required to be repaid promptly. In addition, L.E. Smith has not been able to
meet certain financial ratios required under the credit agreement. These
conditions allow the bank, at its option, to demand immediate payment of the
entire outstanding bank debt. The Company's inability to repay the
overborrowings on its revolving line of credit when due also causes its other
note payable to be subject to immediate demand, at the option of the holder.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern as expressed in the Report of Independent Auditors
included in the Company's Form 10-KSB for the fiscal year ended June 30, 2001.
The Consolidated Financial Statements do not contain any adjustments that
might result from the outcome of this uncertainty, other than the
reclassification of the Company's notes payable to current.
Management has been in discussions with its bank regarding this situation and
is working with the bank towards a mutually satisfactory resolution, including
a possible restructuring of the terms of its bank debt. The Company plans to
repay its overborrowings and improve its financial ratios by increasing
revenues and gross profit, conserving cash through cost reductions and
controls, and significantly reducing its capital expenditures. Revenue
decreased significantly in fiscal 2001 and the first quarter of fiscal 2002
primarily due to the downturn in the economy resulting in changing markets
served by L.E. Smith, including a decline in demand for pressed glass from
traditional customers. In order to better utilize the plant capacity, L.E.
Smith has started marketing to medium and large discount department stores.
The major challenge for the Company is to combine the higher margin, lower
volume specialty and catalog business with a lower margin, higher volume
business with more of a mass appeal. To accomplish this, the Company will
continue its current marketing efforts directed at the specialty retailers
through the existing independent sales representative groups. In addition,
the Company will increase its efforts to recruit independent representative
groups that target large discount department store chains. The Company is
also developing products, using existing molds, specifically designated for
mass retailers so as to protect our long-standing customers and sales
representative groups. The products selected will be chosen based not only on
the desirability of the product but also on the ease of manufacture.
Additionally, the Company is currently developing a new sales channel for its
manufacturing overruns, accomplished by utilizing the existing direct sales
force. Adding a line of lower margin products, selling manufacturing
overruns, and cost reductions and controls will help increase the Company's
revenues, utilize part of its excess capacity and reduce the overall cost of
manufacturing. However, there can be no assurance that the bank will continue
to work with the Company towards a mutually satisfactory resolution and not
demand immediate payment of all L.E. Smith's outstanding bank debt; nor can
there be any assurance that the Company's other note will not be called for
immediate payment. Furthermore, there can be no assurance that the Company
will be successful in increasing its sales and gross profit.
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Cash and Cash Equivalents
Cash and cash equivalents include investments that are readily convertible to
known amounts of cash and have original maturities of three months or less.
The Company places its cash and temporary cash investments with financial
institutions. At times, such investments may be in excess of federally
insured limits.
Note 4 - Discontinued Operations
On August 19, 1999, the Board of Directors voted to sell the stock of its
wholly-owned subsidiary, NBI Properties, Inc. ("NBI Properties"). (See Note
13.) Therefore, the Company has discontinued its hotel operation, and it has
separately reported the income or loss from this segment as discontinued
operations as follows:
For the quarters ended
September 30,
2001 2000
----- -----
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Revenues from discontinued operations $673 $673
===== =====
Income from discontinued operations
before income taxes $ 72 $ 62
Income tax provision (29) (24)
----- -----
Net income from discontinued operations $ 43 $ 38
===== =====
The Company intends to sell all of the capital stock of NBI Properties to an
entity which is 100% owned and controlled by NBI's CEO, Jay H. Lustig (see
Note 13). The Company expects a significant gain overall from the
discontinued operations of the hotel, and therefore, no amount has been
recorded related to this disposal; this gain will be recognized when realized.
The net long-term assets of discontinued operations at September 30, 2001
consisted primarily of land, buildings and hotel furniture, fixtures and
equipment, net of a long-term mortgage note payable. The net current assets
of discontinued operations at September 30, 2001 consisted primarily of cash,
net of accounts payable and accrued liabilities.
Note 5 - Inventories
Inventories are comprised of the following amounts, which are presented net of
reserves totaling $343,000 and $380,000 at September 30 and June 30, 2001,
respectively:
September 30, June 30,
2001 2001
------ ------
(Amounts in thousands)
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Raw materials $ 633 $ 618
Work in process 646 590
Finished goods 1,780 1,717
------ ------
$3,059 $2,925
====== ======
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Other Current Assets
Included in other current assets totaling $395,000 at September 30, 2001, were
$125,000 of prepaid royalties related to the Company's master license
agreement for its new decoder business venture. Also included in other
current assets at September 30, 2001 was accrued interest on the note
receivable from related party of $44,000 and restricted cash of $6,000,
representing amounts held in trust for payments under self-insured plans.
Note 7 - Note Receivable from Related Party
In conjunction with the sale of the land and construction-in-progress of NBI's
wholly-owned subsidiary, Willowbrook Properties, Inc. ( Willowbrook Properties
), on December 17, 1999, the Company received a note receivable in the amount
of $2.7 million from an entity which is 100% owned and controlled by NBI's CEO
(see Note 13). The note bears interest at the rate of two-year Treasury Notes
plus 200 basis points with a rate of 7.125% determined at December 31, 2000
for all of calendar 2001, and to be redetermined each succeeding December 31
for the following calendar year's rate. The note is collateralized by a
second security interest in the property and is payable in quarterly
installments of interest only with the entire outstanding principal balance
plus any accrued but unpaid interest to be paid in full on December 31, 2006.
On July 26 and September 5, 2001, the Company received unscheduled principal
payments of $125,000 and $30,000, respectively, on this note receivable.
These funds were used to pay minimum royalty payments required under the
Company's master license agreement related to the new decoder business venture
and for other working capital needs of the Company (see Note 6).
Note 8 - Income Taxes
The Company recorded an income tax benefit from continuing operations of
$35,000 and an income tax provision from continuing operations of $13,000 for
the three months ended September 30, 2001 and 2000, respectively. These
benefits and provisions include state and other income taxes and are based
upon book income.
In accordance with fresh start accounting, which was adopted as of April 30,
1992, and as a result of the Company's reorganization under Chapter 11 of the
U.S. Bankruptcy Code, utilization of any income tax benefit from
pre-reorganization net operating losses is not credited to the income tax
provision, but rather, reported as an addition to capital in excess of par
value. No pre-reorganization net operating losses were utilized for the three
months ended September 30, 2001 or 2000.
Note 9 - Deferred Gain from Sale of Operation
The Company has accounted for the sale of a majority of the assets of
Willowbrook Properties in accordance with Statement of Financial Accounting
Standards ( SFAS ) No. 66, Accounting for Sales of Real Estate." The terms
of the sale do not meet the requirements of SFAS No. 66 for recognition of
gain until the purchase price is paid in full in cash. Consequently, the
Company recorded a deferred gain on the sale of $881,000 during fiscal 2000,
which is net of selling expenses of $48,000 and net of approximately $40,000
of related income taxes. (See Note 13.)
Note 10 - Stockholders' Equity
The Company has authorized 20,000,000 shares of $.01 par value common stock.
At September 30, 2001, 10,130,520 shares were issued including 2,027,200 held
in treasury. Therefore, the Company had 8,103,320 shares issued and
outstanding at September 30, 2001. At September 30, 2001, 1 million
registered common stock purchase
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
warrants at $1.20 per share issued in conjunction with the Company's preferred
stock offering in fiscal 1999 were outstanding.
The Company has authorized 5,000,000 shares of preferred stock with a par
value of $.01 per share, and has designated 2,000,000 preferred shares as
Series A Cumulative Preferred Stock. At September 30, 2001, 507,421
registered shares of Series A Cumulative Preferred Stock were issued and
outstanding.
The Company reported dividend requirements of $128,000 attributable to its
preferred stock for each of the quarters ended September 30, 2001 and 2000.
On September 3, 1999, $252,000 in dividends were paid, consisting of $182,000
in cash and 7,421 in additional shares of preferred stock, valued at $70,000,
per the elections of the holders. No dividends have been declared or paid
subsequently. Cumulative unpaid dividends totaled approximately $1,153,000 as
of September 30, 2001.
Note 11 - Income Per Common Share
The Company reports earnings per common share in accordance with SFAS No. 128
issued by the Financial Accounting Standards Board (FASB). The following
reconciles the numerators and denominators of the basic and diluted earnings
per common share computation for income (loss) before discontinued operations:
For the quarters ended
September 30,
2001 2000
Basic Diluted Basic Diluted
------- ------- ------- -------
(Amounts in thousands except per share data)
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Income (loss) before discontinued operations $ (109) $ (109) $ 293 $ 293
Dividend requirement on preferred stock (128) (128) (128) (128)
------- ------- ------- -------
Income (loss) before discontinued operations
attributable to common stockholders $ (237) $ (237) $ 165 $ 165
======= ======= ======= =======
Weighted average number of common
shares outstanding 8,103 8,103 8,103 8,103
======= =======
Assumed conversions of stock options -- 54
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8,103 8,157
======= =======
Income (loss) per common share
before discontinued operations $ (.03) $ (.03) $ .02 $ .02
======= ======= ======= =======
<FN>
Because the Company incurred losses before discontinued operations attributable
to common stockholders for the quarter ended September 30, 2001, none of its
outstanding options or warrants were included in the computation of diluted
earnings per share as their effect would be anti-dilutive. For the three months
ended September 30, 2000, only stock options outstanding with an exercise price
of $.38 per share were included in the computation of diluted earnings per share
because their exercise price was less than the average market price of the
common stock during such period.
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The options and warrants outstanding at September 30, 2001 were as follows:
Number
Exercise Outstanding at
Price September 30, 2001
----- ------------------
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Stock options:
$ .38 201,000
$ .77 400,000
Warrants:
$ .89 1,700,000
$1.20 1,000,000
---------
3,301,000
=========
Note 12 - Seasonal Variations of Operations
Excluding the effect of its significant customer, L.E. Smith typically has its
strongest revenue performance during the first and second fiscal quarters due
to seasonal variations. Generally, the third and fourth fiscal
quarters' revenues are moderately to significantly lower than in the first and
second quarters. However, historically these trends have been materially
affected by fluctuations in the timing of orders from its significant
customer, which does not have consistent trends. In addition, during the
fourth quarter of fiscal 2001, the Company experienced a substantial decline
in revenues from its significant customer, as well as its other customers, due
to the weak economy.
Note 13 - Related Party Transactions
On December 17, 1999, the Company closed on the sale of a majority of the
assets of Willowbrook Properties to an entity which is 100% owned and
controlled by NBI's CEO. The terms and conditions of the sale were previously
approved at NBI's Annual Meeting of Stockholders on December 16, 1999. In
conjunction with the sale, the Company received a note receivable in the
amount of $2.7 million and recorded a deferred gain on the sale of $881,000,
net of related selling expenses and income taxes. (See Notes 7 and 9.)
Mr. Lustig has proposed to purchase all of the capital stock of NBI Properties
for $1.4 million in cash and a note payable of $1.1 million. On February 18,
2000, Mr. Lustig paid the Company a deposit of $500,000 related to this
proposed purchase. During fiscal 2001, the Company refunded Mr. Lustig
$118,000 of this deposit, applied $206,000 of the deposit towards interest
receivable for July 1, 2000 through June 30, 2001 on the note receivable from
related party, applied $162,000 towards the note receivable and applied the
remaining $14,000 of the deposit towards a miscellaneous receivable from a
related party. Mr. Lustig is currently working on obtaining the funds to
enable him to close on this transaction. The Company is also having
discussions with other potential buyers.
Note 14 - Recent Accounting Pronouncements
In June 2001, the FASB finalized SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires
the use of the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS No. 141 also requires that companies recognize
acquired intangible assets apart from goodwill if the acquired intangible
assets meet certain criteria and, upon adoption of SFAS No. 142, that
companies reclassify the carrying amounts of intangible assets and goodwill
based on the criteria in SFAS No. 141. SFAS No. 142 requries, among other
things that companies no longer amortize goodwill, but instead test goodwill
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
for impairment at least annually. In addition, SFAS No. 142 requires that
companies identify reporting units for the purposes of assessing potential
future impairments of goodwill, reassess the useful lives of other existing
recognized intangible assets, and cease amortization of intangible assets
with an indefinite useful life. An intangible asset with an indefinite useful
life should be tested for impairment in accordance with the guidance in SFAS
No. 142. This Statement is effective July 1, 2002 for the Company. The
Company believes the adoption of these Statements will have no material
impact on its consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 requires the fair value of a liability for an
asset retirement obligation to be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective June 30, 2003 for the Company.
The Company has not yet determined the impact that this Statement will have
on its consolidated financial statements upon adoption.
In October 2001, the FASB issued SFAS No. 144,"Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS No. 144 requires that long-lived assets
be measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
No. 144 is effective July 1, 2002 for the Company. The Company has not yet
determined the impact that this Statement will have on its consolidated
financial statements upon adoption.
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER, FISCAL YEAR 2002
The statements in this discussion contain certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, that are not
historical facts. The forward-looking statements are based upon the Company's
current expectations and are subject to known and unknown risks,
uncertainties, assumptions and other factors. Should one or more of such
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, the actual results could differ materially from those contemplated
by the forward-looking statements. Factors that may affect such
forward-looking statements include, among others, ability to obtain financing,
loss of significant customers, reliance on key personnel, competitive factors
and pricing pressures, availability and pricing of raw materials and natural
resources, labor disputes, investment results, limitations on the utilization
of net operating loss carryforwards, adequacy of insurance coverage, inflation
and general economic conditions, including the continued economic uncertainty
following the terrorist attacks on September 11, 2001. The Company does not
intend to update such forward-looking statements.
RESULTS OF OPERATIONS
Revenues from continuing operations totaled $3.1 million for the first quarter
of fiscal 2002 and reflected a decrease of $842,000 or 21.2%, compared to
revenues of $4.0 million for the quarter ended September 30, 2000. L.E. Smith
experienced declines in sales to many of its customers, primarily due to the
weak economy. However, L.E. Smith did have an increase of $83,000 in revenues
from its largest customer as well as increases from a few of its other
medium-sized customers. In addition, the Company recognized revenues totaling
$153,000 from a tent sale held in July to generate additional cash. The
Company has not yet recognized any revenues related to its new decoder
business venture.
Revenues from continuing operations are expected to decrease substantially for
the three months ended December 31, 2001 compared to the same period in the
prior fiscal year, due to the decline in the economy. Revenues from
continuing operations are expected to reflect a small increase for the second
quarter of fiscal 2002 compared to the first quarter of fiscal 2002. The
Company does not expect any significant revenues to be recognized from its new
decoder venture during the second quarter of fiscal 2002.
Cost of sales from continuing operations as a percentage of related revenue
was 79.8% for the quarter ended September 30, 2001, compared to 72.4% for the
same period in fiscal 2001. The resulting decline in gross margin was
primarily due to the lower sales volume available to cover fixed costs, lower
margins realized from the tent sale and increased sales discounting, and
higher insurance and depreciation expenses (increases of $24,000 and $53,000,
respectively). These increases were partially offset by reduced labor costs
and other expenses resulting from cost controls. Although the Company
experienced a significant increase in utilities related to a substantial
increase in natural gas costs during the first quarter of fiscal 2002 as
compared to the first quarter of fiscal 2001, this was largely offset by
decreased natural gas usage, due to efficiencies resulting from the
installation of the new crystal tank in March 2001, and decreased liquid
oxygen requirements, from its new oxygen generating facility placed in service
in December 2000.
Cost of sales from continuing operations as a percentage of related revenue
for the second quarter of fiscal 2002 is expected is reflect a small decrease
compared to the second quarter of fiscal 2001. Savings related to (i) a
significant decline in utilities, due to moderately lower contract gas prices
and reduced requirements resulting from the new crystal tank and oxygen
generating facilities installed during fiscal 2001; (ii) production
efficiencies; (iii) the absence of year-end bonuses; and (iv) cost saving
measures are expected to be significantly offset by the projected decrease in
expected sales volume available to cover fixed costs, as well as increases in
depreciation, due to significant capital improvements placed in service during
fiscal 2001, and insurance expenses, from general cost increases. Cost of
sales from continuing operations as a percentage of related revenue for the
second quarter of fiscal 2002 is expected to be relatively flat compared to
the first quarter of fiscal 2002 as an increase related to a higher number of
paid holidays is expected to be offset by moderately lower natural gas prices
and a small increase in projected revenues.
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER, FISCAL YEAR 2002 - CONTINUED
Marketing, general and administrative expenses from continuing operations
totaled $699,000 and $768,000 for the three months ended September 30, 2001
and 2000, respectively. The decrease was primarily due to lower sales
commissions, related to the decline in revenues, and reduced bad debt
provisions (decreases of $58,000 and $24,000, respectively), partially offset
by increased sales and marketing expenses associated with the tent sale in
July ($41,000).
Marketing, general and administrative expenses for the second quarter of
fiscal 2002 are expected to decrease significantly compared to the same period
of the prior fiscal year, primarily due to lower sales commissions resulting
from the projected decline in revenues, the absence of year-end bonuses, lower
bad debt provisions and cost saving measures. Marketing, general and
administrative expenses for the second quarter of fiscal 2002 are expected to
be relatively flat compared to the first quarter of fiscal 2002, as the
absence of sales and marketing expenses associated with the tent sale in July
are expected to be significantly offset by sales and marketing expenses
associated with the new decoder business venture.
Interest expense totaled $120,000 and $82,000 for the quarters ended September
30, 2001 and 2000, respectively. The increase was primarily due to interest
on a higher average balance of debt outstanding due to L.E. Smith's new bank
financing which closed on October 31, 2000, the Company's new capital lease
obligation beginning December 1, 2000 and its new low-interest equipment loan
which closed on April 18, 2001, partially offset by the absence of interest on
the IRS debt during the first quarter of fiscal 2002, as well as lower
interest rates.
The Company recorded an income tax benefit from continuing operations of
$35,000 and an income tax provision from continuing operations of $13,000 for
the first quarter of fiscal 2002 and 2001, respectively, which included a
Pennsylvania state income tax benefit and provision. The state income tax
benefit and provision are related to the Company's Pennsylvania operations and
are based upon book income. In accordance with fresh-start accounting, the
income tax provisions recorded include non-cash charges to the extent that the
Company expects to use its pre-reorganization net operating loss
carryforwards. These charges are reported as an addition to capital in excess
of par value, rather than as a credit through the income tax provision. There
were no non-cash components included in the income tax benefit and provision
for the three months ended September 30, 2001 and 2000.
DISCONTINUED OPERATIONS
On August 19, 1999, the Board of Directors voted to sell the stock of its
wholly-owned subsidiary, NBI Properties (see Notes 4 and 13 to accompanying
consolidated financial statements). Therefore, the Company has discontinued
its hotel operation, and it has separately reported the income or loss from
this segment as discontinued operations for the quarters ended September 30,
2001 and 2000.
Revenues from discontinued operations totaled $673,000 for both of the
quarters ended September 30, 2001 and 2000. The Company recorded net income
from discontinued operations of $43,000 and $38,000 for the three months ended
September 30, 2001 and 2000, respectively.
The net long-term assets of discontinued operations at September 30, 2001
consisted primarily of land, buildings and hotel furniture, fixtures and
equipment, net of a long-term mortgage note payable. The net current assets
of discontinued operations at September 30, 2001 consisted primarily of cash,
net of accounts payable and accrued liabilities.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets increased $530,000 to $16.0 million at September
30, 2001 from $15.5 million at June 30, 2001. The increase was primarily due
to a significant increase in trade accounts receivable resulting from
increased revenues in the quarter ended September 30, 2001 compared to the
quarter ended June 30, 2001. The
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER, FISCAL YEAR 2002 - CONTINUED
Company had working capital deficits of $2,596,000 and $2,953,000 at September
30 and June 30, 2001, respectively. The decrease in the working capital
deficit was primarily due to a significant increase in accounts receivable and
in other current assets, resulting primarily from prepaid royalties related to
the Company's master license agreement for its new decoder business venture,
partially offset by an increase in short-term borrowings and current portion
of notes payable at September 30, 2001.
The Company significantly reduced its capital expenditures in the first
quarter of fiscal 2002 as compared to the same period in the prior fiscal
year and did not have any significant construction-in-progress outstanding at
September 30, 2001. The Company plans to continue restricting its capital
expenditures for the remainder of fiscal 2002.
The Company expects its working capital requirements in the next fiscal year
to be met by internally generated funds including interest income on the note
receivable from a related party, unscheduled principal payments on the note
receivable from a related party and, for L.E. Smith's requirements, short-term
borrowings under an existing line of credit. However, as of November 7, 2001,
the borrowings under L.E. Smith's revolving line of credit exceeded the
allowed borrowing base by $377,000. L.E. Smith has not been able to repay the
overborrowings on its revolving line of credit which is required to be repaid
promptly. In addition, L.E. Smith has not been able to meet certain financial
ratios required under the credit agreement. These conditions allow the bank,
at its option, to demand immediate payment of the entire outstanding bank
debt. The Company's inability to repay the overborrowings on its revolving
line of credit when due also causes its other note payable to be subject to
immediate demand, at the option of the holder. These conditions raise
substantial doubt about the Company's ability to continue as a going concern
as expressed in the Report of Independent Auditors included in the Company's
Form 10-KSB for the fiscal year ended June 30, 2001. The Consolidated
Financial Statements do not contain any adjustments that might result from the
outcome of this uncertainty, other than the reclassification of the Company's
long-term notes payable to current.
Management has been in discussions with its bank regarding this situation and
is working with the bank towards a mutually satisfactory resolution, including
a possible restructuring of the terms of its bank debt. The Company plans to
repay its overborrowings and improve its financial ratios by increasing
revenues and gross profit, conserving cash through cost reductions and
controls and significantly reducing its capital expenditures. Revenue
decreased significantly in fiscal 2001 and the first quarter of fiscal 2002
primarily due to the downturn in the economy resulting in changing markets
served by L.E. Smith, including a decline in demand for pressed glass from
traditional customers. In order to better utilize the plant capacity, L.E.
Smith has started marketing to medium and large discount department stores.
The major challenge for the Company is to combine the higher margin, lower
volume specialty and catalog business with a lower margin, higher volume
business with more of a mass appeal. To accomplish this, the Company will
continue its current marketing efforts directed at the specialty retailers
through the existing independent sales representative groups. In addition,
the Company will increase its efforts to recruit independent representative
groups that target large discount department store chains. The Company is
also developing products, using existing molds, specifically designated for
mass retailers so as to protect our long-standing customers and sales
representative groups. The products selected will be chosen based not only on
the desirability of the product but also on the ease of manufacture.
Additionally, the Company is currently developing a new sales channel for its
manufacturing overruns, accomplished by utilizing the existing direct sales
force. Adding a line of lower margin products, selling manufacturing
overruns, and cost reductions and controls will help increase the Company's
revenues, utilize part of its excess capacity and reduce the overall cost of
manufacturing. However, there can be no assurance that the bank will continue
to work with the Company towards a mutually satisfactory resolution and not
demand immediate payment of all L.E. Smith's outstanding bank debt; nor can
there be any assurance that the Company's other note will not be called for
immediate payment. Furthermore, there can be no assurance that the Company
will be successful in increasing its sales and gross profit. See also Note 2
to the Consolidated Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB finalized SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires
the use of the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS No. 141 also requires that companies recognize
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER, FISCAL YEAR 2002 - CONTINUED
acquired intangible assets apart from goodwill if the acquired intangible
assets meet certain criteria and, upon adoption of SFAS No. 142, that
companies reclassify the carrying amounts of intangible assets and goodwill
based on the criteria in SFAS No. 141. SFAS No. 142 requires, among other
things that companies no longer amortize goodwill, but instead test goodwill
for impairment at least annually. In addition, SFAS No. 142 requires that
companies identify reporting units for the purposes of assessing potential
future impairments of goodwill, reassess the useful lives of other existing
recognized intangible assets, and cease amortization of intangible assets with
an indefinite useful life. An intangible asset with an indefinite useful life
should be tested for impairment in accordance with the guidance in SFAS
No. 142. This Statement is effective July 1, 2002 for the Company. The
Company believes the adoption of these Statements will have no material
impact on its consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 requires the fair value of a liability for an
asset retirement obligation to be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective June 30, 2003 for the Company.
The Company has not yet determined the impact that this Statement will have
on its consolidated financial statements upon adoption.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS No. 144 requires that long-lived
assets be measured at the lower of carrying amount or fair value less cost
to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at
net realizable value or include amounts for operating losses that have not yet
occurred. SFAS No. 144 is effective July 1, 2002 for the Company. The Company
has not yet determined the impact that this Statement will have on its
financial statements upon adoption.
NBI, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 2001 or subsequently.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NBI, INC.
November 14, 2001 By: /s/ Marjorie A. Cogan
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(Date) Marjorie A. Cogan
As a duly authorized officer
Chief Financial Officer, Secretary