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 December 31, 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 February 8, 2002
- -------------------------------------- -------------------------------
Common Stock, par value $.01 per share 8,103,320
NBI, INC.
INDEX TO FORM 10-QSB
For Quarter Ended December 31, 2001
PAGE
PART I - FINANCIAL INFORMATION
<s> <c>
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)
December 31, June 30,
2001 2001
-------- --------
(Unaudited) (Audited)
ASSETS
<s> <c> <c>
Current assets:
Cash and cash equivalents $ 57 $ 28
Accounts receivable, less allowance for doubtful accounts
of $269 and $229, respectively 1,911 1,131
Inventories 3,402 2,925
Prepaid state income taxes 61 61
Other current assets 335 272
Short-term deferred income taxes 80 80
Net current assets of discontinued operations 121 105
-------- --------
Total current assets 5,967 4,602
-------- --------
Property, plant and equipment, net 6,419 6,895
Note receivable from related party 2,375 2,538
Other assets 30 36
Net long-term assets of discontinued operations 1,336 1,413
-------- --------
$16,127 $15,484
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term borrowings and current portion of notes payable $ 5,703 $ 5,475
Current portion of capital lease obligation 32 32
Accounts payable 2,034 1,515
Accrued liabilities and other 485 533
-------- --------
Total current liabilities 8,254 7,555
Long-term liabilities:
Capital lease obligation 968 985
Deferred income taxes 81 81
Postemployment disability benefits 128 138
Deferred gain from sale of discontinued operation, net of taxes 881 881
-------- --------
Total liabilities 10,312 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 (4,369) (4,340)
-------- --------
6,683 6,712
Less treasury stock, at cost (2,027,200 shares) (868) (868)
-------- --------
Total stockholders' equity 5,815 5,844
-------- --------
$16,127 $15,484
======== ========
<FN>
See accompanying notes.
NBI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands Except Per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
2001 2000 2001 2000
<s> <c> <c> <c> <c>
Revenues:
Sales $3,574 $3,981 $6,708 $7,957
Royalty revenue, net 26 -- 26 --
------- ------- ------- -------
3,600 3,981 6,734 7,957
------- ------- ------- -------
Costs and expenses:
Cost of sales 2,749 3,335 5,251 6,214
Marketing, general and administrative 730 795 1,429 1,563
------- ------- ------- -------
3,479 4,130 6,680 7,777
------- ------- ------- -------
Income (loss) from operations 121 (149) 54 180
Other income (expense):
Interest income 42 65 86 121
Other income and expenses, net 3 (19) 2 (16)
Interest expense (108) (111) (228) (193)
------- ------- ------- -------
(63) (65) (140) (88)
------- ------- ------- -------
Income (loss) from continuing operations before
income taxes 58 (214) (86) 92
Income tax benefit (provision) (19) 15 16 2
------- ------- ------- -------
Income (loss) before discontinued operations 39 (199) (70) 94
Income (loss) from discontinued operations,
net of income tax benefit (provision) of $2,
$3, $(27) and $(21), respectively (2) (10) 41 28
------- ------- ------- -------
Net income (loss) 37 (209) (29) 122
Dividend requirement on preferred stock (128) (128) (256) (256)
------- ------- ------- -------
Loss attributable to common stock $ (91) $ (337) $ (285) $ (134)
======= ======= ======= =======
Loss per common share - basic:
Loss before discontinued operations $ (.01) $ (.04) $ (.04) $ (.02)
Income (loss) from discontinued operations -- -- -- --
------- ------- ------- -------
Net loss $ (.01) $ (.04) $ (.04) $ (.02)
======= ======= ======= =======
Loss per common share - diluted:
Loss before discontinued operations $ (.01) $ (.04) $ (.04) $ (.02)
Income (loss) from discontinued operations -- -- -- --
------- ------- ------- -------
Net loss $ (.01) $ (.04) $ (.04) $ (.02)
======= ======= ======= =======
Weighted average number of common
shares outstanding 8,103 8,103 8,103 8,103
======= ======= ======= =======
<FN>
See accompanying notes.
NBI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
Six Months Ended
December 31,
2001 2000
------- -------
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Cash flows from operating activities:
Net income (loss) $ (29) $ 122
Adjustments to reconcile net income (loss) to net cash flow
provided by (used in) operating activities:
Depreciation and amortization 647 534
Provisions for bad debts and returns 53 75
Provisions for writedowns of inventory 48 45
Loss on sales of property and equipment -- 20
Other (10) (8)
Changes in assets -- decrease (increase):
Accounts receivable (831) (218)
Inventory (528) (42)
Other current assets (81) (60)
Other assets 1 (23)
Changes in liabilities -- (decrease) increase:
Accounts payable and accrued liabilities 555 (397)
Income tax related accounts 5 (38)
------ --------
Net cash flow provided by (used in) operating activities (170) 10
------ --------
Cash flows from investing activities:
Funding of restricted cash to be used for purchase of crystal tank -- (1,110)
Refund of a portion of deposit on sale of hotel -- (118)
Purchases of property and equipment (155) (1,071)
------ --------
Net cash flow used in investing activities (155) (2,299)
------ --------
Cash flows from financing activities:
Collections on note receivable 163 2
Proceeds from new line of credit, term loan and interim loan -- 5,650
Payoff of existing line of credit, term loan and interim loan -- (2,406)
Net borrowings on lines of credit 529 198
Payments on notes payable (316) (129)
Payments on IRS debt -- (878)
Payments on capital lease obligation (17) --
------ --------
Net cash flow provided by financing activities 359 2,437
------ --------
Net increase in cash and cash equivalents 34 148
Less change in cash and cash equivalents included in net current assets
or liabilities of discontinued operations (5) (70)
Cash and cash equivalents at beginning of period 28 33
------ --------
Cash and cash equivalents at end of period $ 57 $ 111
====== ========
<FN>
See accompanying notes.
NBI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
Six Months Ended
December 31,
2001 2000
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Supplemental disclosures of cash flow information:
Interest paid $272 $499
==== ====
Income taxes paid $ 3 $ 87
==== ====
Noncash purchases of property, plant and equipment included in
accounts payable at end of period $ 32 $106
==== ====
Application of a portion of deposit on sale of hotel
towards accrued interest on note receivable from a related
party and other miscellaneous receivable $ -- $124
==== ====
<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.
The Company recognizes royalty revenues from sublicensees under its decoder
master license when earned. The royalty revenues are presented net of related
royalties earned by the master licensor. The Company incurs minimum royalties
expense when the minimum royalties payable under the terms of the master
license agreement are estimated to exceed the royalties earned based upon
revenues. The minimum royalty expense is included in marketing general and
administrative expenses.
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 $55,000 and
$125,000 for the three and six months ended December 31, 2001, 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 January 31, 2002, the borrowings under L.E. Smith's revolving line of
credit exceeded the allowed borrowing base by $265,000. 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 $2,136,000 and $2,457,000 of the Company's notes payable
to current at December 31 and June 30, 2001, respectively.
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. In addition, the
Company is in the process of obtaining a $250,000 second mortgage on the Belle
Vernon Holiday Inn, the proceeds of which will be used to pay down a majority
of L.E. Smith's overborrowings. The Company has been and plans on continuing
to reduce 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 the second half of fiscal 2001 and the first six
months 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:
Three months ended Six months ended
December 31, December 31,
2001 2000 2001 2000
<s> <c> <c> <c> <c>
Revenues from discontinued operations $580 $542 $1,253 $1,215
===== ===== ======= =======
Income (loss) from discontinued operations
before income taxes $ (4) $(13) $ 68 $ 49
Income tax benefit (provision) 2 3 (27) (21)
----- ----- ------- -------
Net income (loss) from discontinued operations $ (2) $(10) $ 41 $ 28
===== ===== ======= =======
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 December 31, 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 December 31, 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 $202,000 and $154,000 at December 31 and June 30, 2001,
respectively:
December 31, June 30,
2001 2001
<s> <c> <c>
Raw materials $ 667 $ 618
Work in process 688 590
Finished goods 2,047 1,717
------ ------
$3,402 $2,925
====== ======
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Other Current Assets
- ----------------------------------
Included in other current assets totaling $335,000 at December 31, 2001, were
$70,000 of prepaid royalties related to the Company's master license agreement
for its new decoder business venture. Also included in other current assets
at December 31, 2001 was accrued interest on the note receivable from related
party of $43,000 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 on December 31, 2000
for all of calendar 2001, a rate of 5.05% determined at December 31, 2001 for
all of calendar 2002, and the rate 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.
The Company has received unscheduled principal payments of totaling $163,000
during fiscal 2002. 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 provision from continuing operations of
$19,000 and an income tax benefit from continuing operations of $16,000 for
the three and six months ended December 31, 2001, respectively. For the three
and six months ended December 31, 2000, the Company recorded income tax
benefits from continuing operations of $15,000 and $2,000, respectively.
These benefits and provisions include state and other income taxes primarily
related to the Company's Pennsylvania operations.
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
or six months ended December 31, 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.)
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 - Stockholders' Equity
- ----------------------------------
The Company has authorized 20,000,000 shares of $.01 par value common stock.
At December 31, 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 December 31, 2001. At December 31, 2001, one million
registered common stock purchase 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 December 31, 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 December 31, 2001 and 2000 and
$256,000 for the six months ended December 31, 2001 and 2000, respectively.
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 $1,281,000 as
of December 31, 2001.
Note 11 - Income (Loss) 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
December 31,
2001 2000
Basic Diluted Basic Diluted
(Amounts in thousands except per share data)
<s> <c> <c> <c> <c>
Income (loss) before discontinued operations $ 39 $ 39 $ (199) $ (199)
Dividend requirement on preferred stock (128) (128) (128) (128)
------- ------- ------- -------
Loss before discontinued operations
attributable to common stockholders $ (89) $ (89) $ (327) $ (327)
======= ======= ======= =======
Weighted average number of common
shares outstanding 8,103 8,103 8,103 8,103
======= =======
Assumed conversions of stock options -- --
------- -------
8,103 8,103
======= =======
Loss per common share
before discontinued operations $ (.01) $ (.01) $ (.04) $ (.04)
======= ======= ======= =======
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the six months ended
December 31,
2001 2000
Basic Diluted Basic Diluted
(Amounts in thousands except per share data)
<s> <c> <c> <c> <c>
Income (loss) before discontinued operations $ (70) $ (70) $ 94 $ 94
Dividend requirement on preferred stock (256) (256) (256) (256)
------- ------- ------- -------
Loss before discontinued operations
attributable to common stock $ (326) $ (326) $ (162) $ (162)
======= ======= ======= =======
Weighted average number of common
shares outstanding 8,103 8,103 8,103 8,103
======= =======
Assumed conversions of stock options -- --
------- -------
8,103 8,103
======= =======
Loss per common share before
discontinued operations $ (.04) $ (.04) $ (.02) $ (.02)
======= ======= ======= =======
Because the Company had losses before discontinued operations attributable to
its common stock for the three and six months ended December 31, 2001 and 2000,
none of its outstanding options and warrants were included in the computation of
diluted earnings per share, as their effect would be anti-dilutive.
The options and warrants outstanding at December 31, 2001 were as follows:
Exercise Number
Price Outstanding
<s> <c>
Stock options:
$ .22 350,000
$ .38 201,000
$ .77 400,000
Warrants:
$ .89 1,700,000
$1.20 1,000,000
---------
3,651,000
=========
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.
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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 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.
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
SECOND 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. The Company does not intend to update such
forward-looking statements.
RESULTS OF OPERATIONS
Revenues from continuing operations totaled $3,600,000 and $6,734,000 for the
three and six months ended December 31, 2001, respectively, compared to
$3,981,000 and $7,957,000 for the same periods in the prior fiscal year,
reflecting declines of $381,000, or 9.6% and $1,223,000 or 15.4%,
respectively. L.E. Smith experienced declines in sales to many of its
customers, particularly specialty stores, gift stores and lighting customers,
primarily due to the weak economy. However, L.E. Smith did have increases
from a few of its medium-sized customers, mainly department stores and one new
home-party business, as well as increases of $33,000 and $116,000 in revenues
from its largest customer for the three and six months ended December 31,
2001, respectively, compared to the same periods in the prior fiscal year. In
addition, the Company recognized revenues totaling $153,000 during the first
quarter of fiscal 2002 from a tent sale held in July to generate additional
cash. The Company also recognized net royalty revenues of $26,000 during the
second quarter of fiscal 2002 from a sublicensee under its master license
related to its new decoder business.
Revenues from continuing operations are expected to reflect a small increase
for the three months ended March 31, 2002 compared to the same period in the
prior fiscal year as the Company expects a moderate increase in revenues from
L.E. Smith's largest customer during the third quarter of fiscal 2002, as well
as the addition of a moderate amount of revenues from its new home-party
customer and from its new decoder business. However, these increases will be
significantly offset by the absence of a large initial order from a new customer
as included in the third quarter of fiscal 2001, as well as declines expected
from other customers. Revenues from continuing operations are expected to
decrease moderately for the three months ended March 31, 2002 compared to the
second quarter of fiscal 2002, primarily due to seasonal variations, including
a significant decrease in revenues from its largest customer, slightly offset
by a small increase in projected revenues from its new decoder business.
Cost of sales from continuing operations as a percentage of related sales
revenue was 76.9% for the quarter ended December 31, 2001, compared to 83.8%
for the same period in fiscal 2001. The resulting improvement in gross margin
was primarily related to reduced labor costs resulting from lower headcount
and the absence of year-end bonuses in fiscal 2002. In addition, the Company
experienced a decrease of $116,000 in utilities due to a moderate decrease in
the contracted natural gas price beginning October 1, 2001, decreased natural
gas usage related to efficiencies from the installation of a new crystal tank
in March 2001, and decreased liquid oxygen requirements, from its new oxygen
generating facility placed in service in December 2000. However, these
savings were partially offset by higher insurance and depreciation expenses
(increases of $19,000 and $49,000, respectively). For the six months ended
December 31, 2001 and 2000 cost of sales from continuing operations as a
percentage of related revenue was 78.3% and 78.1%, respectively. The impact
of lower sales volume available to cover fixed costs, lower margins realized
related to a tent sale in July as well as increased sales discounting, and
higher insurance and depreciation expenses (increases of $44,000 and
$101,000, respectively) were significantly offset by savings resulting
from reduced labor costs, lower utilities ($131,000 decrease) and general
cost control measures.
Cost of sales from continuing operations as a percentage of related sales
revenue for the third quarter of fiscal 2002 is expected to reflect a
significant decrease compared to the third 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) the
absence of production inefficiencies associated with the installation of the
new crystal tank in the prior year; and (iii) cost saving measures are
expected
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER, FISCAL YEAR 2002
to be partially offset by increases in depreciation, due to significant
capital improvements placed in service during fiscal 2001, insurance expenses,
from general cost increases, and unemployment taxes, due to an increase in the
tax rate for calendar 2002. Cost of sales from continuing operations as a
percentage of related sales revenue for the third quarter of fiscal 2002 is
expected to increase significantly compared to the second quarter of fiscal
2002. The Company expects a significant decrease in the projected sales
revenue volume, increased health insurance premiums and higher unemployment
taxes, due to both an increase in the tax rate and the beginning of a new
calendar year, slightly offset by a decrease related to a lower number of paid
holidays.
Marketing, general and administrative expenses from continuing operations
totaled $730,000 and $1,429,000 for the three and six months ended December
31, 2001, respectively, compared to $795,000 and $1,563,000 for the same
periods in fiscal 2001, reflecting decreases of $65,000, or 8.2%, and
$134,000, or 8.6%, respectively. These decreases were primarily due to
substantially lower sales commissions (decreases of $40,000 and $97,000,
respectively), resulting from the decline in revenues and increased price
discounting, and decreases in other costs due to cost control measures.
However, these savings were partially offset by sales and marketing expenses
associated with the new decoder business totaling $98,000 and $112,000 for
the three and six months ended December 31, 2001, respectively, including
$64,000 of minimum royalties expensed in the second fiscal quarter related to
amounts estimated to exceed earned royalties prior to the expiration of the
initial term of the master license agreement on March 31, 2002. In addition,
during the six months ended December 31, 2001, compared to the same period in
the prior fiscal year, the Company recorded additional sales and marketing
expenses of $41,000 associated with the tent sale in July, but experienced a
decline of $22,000 in bad debt provisions primarily due to the decline in
sales. Bad debt expense was consistent for the quarters ended December 31,
2001 and 2000 and both periods included additional provisions for insolvent
companies.
Marketing, general and administrative expenses from continuing operations for
the third quarter of fiscal 2002 are expected to reflect a small decrease
compared to the same period of the prior fiscal year, as decreases resulting
from general cost saving measures and lower projected bad debt provisions are
expected to be offset significantly by the addition of sales and marketing
expenses associated with the new decoder business. Marketing, general and
administrative expenses for the third quarter of fiscal 2002 are expected to
be moderately lower compared to the second quarter of fiscal 2002. The
Company expects a decrease in minimum royalties expense related to the new
decoder business and lower projected bad debt provisions partially offset by
increased sales and marketing expenses due to increased trade show activity
and increased activity associated with the new decoder business.
Interest expense totaled $108,000 and $111,000 for the quarters ended December
31, 2001 and 2000, respectively. An increase related 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, was offset by significantly lower overall interest
rates despite a 1% increase in the Company's interest rate on the bank
financing effective October 1, 2001 (from prime to prime plus 1%) due to L.E.
Smith's failure to meet certain financial ratios during fiscal 2001. Interest
expense totaled $228,000 and $193,000 for the six months ended December 31,
2001 and 2000, respectively. The increase resulted primarily from interest
on a higher average balance of debt outstanding partially offset by
significantly lower overall interest rates and the absence of interest on the
IRS debt as incurred during the first quarter of fiscal 2001.
The Company recorded an income tax provision from continuing operations of
$19,000 and an income tax benefit from continuing operations of $16,000 for
the three and six months ended December 31, 2001, respectively. For the three
and six months ended December 31, 2000, the Company recorded income tax
benefits from continuing operations of $15,000 and $2,000, respectively.
Included in the provision and benefits are state and other income taxes
primarily related to the Company's Pennsylvania operations. 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 or six months
ended December 31, 2001 and 2000.
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER, FISCAL YEAR 2002
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 three and six months ended
December 31, 2001 and 2000.
Revenues from discontinued operations totaled $580,000 and $1,253,000 for the
three and six months ended December 31, 2001, compared to $542,000 and
$1,215,000 for the same periods in the prior fiscal year. The increase was
primarily related to an increase in the average daily room rental rate.
Although the hotel had a moderate increase in occupancy rate in the second
quarter of fiscal 2002 as compared to 2001, year-to-date, the occupancy rate
reflected a small decline.
The Company recorded net losses from discontinued operations of $2,000 and
$10,000 for the second quarter of fiscal 2002 and 2001, respectively.
Year-to-date, the Company recorded net income from discontinued operations of
$41,000 in fiscal 2002 compared to $28,000 in fiscal 2001. These improvements
were primarily related to the increased revenue.
The net long-term assets of discontinued operations at December 31, 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 December 31, 2001 consisted primarily of cash,
net of accounts payable and accrued liabilities.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets increased $643,000 to $16.1 million at December 31,
2001 from $15.5 million at June 30, 2001. The Company experienced a
substantial increase in trade accounts receivable, resulting from
significantly increased revenues in the quarter ended December 31, 2001
compared to the quarter ended June 30, 2001, and an increase in inventory due
to increased production during the period. These increases were partially
offset by decreases in property, plant and equipment, related to
depreciation, and in the note receivable from related party from unscheduled
principal payments received. The Company had working capital deficits of
$2,287,000 and $2,953,000 at December 31 and June 30, 2001, respectively. The
improvement resulted from the increases noted in accounts receivable and
inventory, partially offset by increases in short-term borrowings and current
portion of notes payable, and accounts payable at December 31, 2001.
The Company significantly reduced its capital expenditures in the first six
months 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
December 31, 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, potential 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
January 31, 2002, the borrowings under L.E. Smith's revolving line of credit
exceeded the allowed borrowing base by $265,000. 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 $2,136,000 and $2,457,000 of the Company's long-term notes
payable to current at December 31 and June 30, 2001, respectively.
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER, FISCAL YEAR 2002
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. In addition, the
Company is in the process of obtaining a $250,000 second mortgage on the Belle
Vernon Holiday Inn, the proceeds of which will be used to pay down a majority
of L.E. Smith's overborrowings. The Company has been and plans on continuing
to reduce 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 the second half of fiscal 2001 and the first six
months 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
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 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.
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.
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
December 31, 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.
February 14, 2002 By: /s/ Marjorie A. Cogan
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(Date) Marjorie A. Cogan
As a duly authorized officer
Chief Financial Officer, Secretary