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 March 31, 2002
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 May 8, 2002
- ----------------------------------------- --------------------------
Common Stock, par value $.01 per share 8,103,320
NBI, INC.
INDEX TO FORM 10-QSB
For Quarter Ended March 31, 2002
<s> <c>
PAGE
--------
PART I - FINANCIAL INFORMATION
Consolidated Financial Statements (Unaudited) 3 - 6
Supplementary Notes to Consolidated Financial
Statements (Unaudited) 7 - 13
Management's Discussion and Analysis of Financial Condition
and Results of Operations 14 - 20
PART II - OTHER INFORMATION 21
NBI, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands Except Share Data)
March 31, June 30,
2002 2001
(Unaudited) (Audited)
ASSETS
------
<s> <c> <c>
Current assets:
Cash and cash equivalents $ 111 $ 28
Accounts receivable, less allowance for doubtful accounts
of $262 and $229, respectively 1,280 1,131
Inventories 3,412 2,925
Prepaid state income taxes 61 61
Other current assets 222 272
Short-term deferred income taxes 80 80
Net current assets of discontinued operations 91 105
-------- --------
Total current assets 5,257 4,602
Property, plant and equipment, net 6,267 6,895
Note receivable from related party 2,375 2,538
Other assets 28 36
Net long-term assets of discontinued operations 1,311 1,413
-------- --------
$15,238 $15,484
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term borrowings and current portion of notes payable $ 5,418 $ 5,475
Current portion of capital lease obligation 32 32
Accounts payable 1,750 1,515
Accrued liabilities and other 720 533
-------- --------
Total current liabilities 7,920 7,555
Long-term liabilities:
Capital lease obligation 959 985
Deferred income taxes 81 81
Postemployment disability benefits 124 138
Deferred gain from sale of discontinued operation, net of taxes 881 881
-------- --------
Total liabilities 9,965 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 (4,911) (4,340)
-------- --------
6,141 6,712
Less treasury stock, at cost (2,027,200 shares) (868) (868)
-------- --------
Total stockholders' equity 5,273 5,844
-------- --------
$15,238 $15,484
======== ========
<FN>
See accompanying notes.
NBI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
2002 2001 2002 2001
<s> <c> <c> <c> <c>
Revenues:
Sales $3,303 $3,289 $10,011 $11,246
Royalty revenue, net 13 -- 39 --
------- ------- -------- --------
3,316 3,289 10,050 11,246
------- ------- -------- --------
Costs and expenses:
Cost of sales 2,959 2,976 8,210 9,190
Marketing, general and administrative 766 714 2,195 2,277
------- ------- -------- --------
3,725 3,690 10,405 11,467
------- ------- -------- --------
Loss from operations (409) (401) (355) (221)
Other income (expense):
Interest income 29 52 115 173
Other income and expenses, net 1 -- 3 (16)
Interest expense (103) (113) (331) (306)
------- ------- -------- --------
(73) (61) (213) (149)
------- ------- -------- --------
Loss from continuing operations before
income taxes (482) (462) (568) (370)
Income tax benefit (provision) (21) 30 (5) 32
------- ------- -------- --------
Loss before discontinued operations (503) (432) (573) (338)
Income (loss) from discontinued operations,
net of income tax benefit (provision) of $20,
$17, $(7) and $(4), respectively (39) (65) 2 (37)
------- ------- -------- --------
Net loss (542) (497) (571) (375)
Dividend requirement on preferred stock (128) (128) (384) (384)
------- ------- -------- --------
Loss attributable to common stock $ (670) $ (625) $ (955) $ (759)
======= ======= ======== ========
Loss per common share - basic and diluted:
Loss before discontinued operations $ (.08) $ (.07) $ (.12) $ (.09)
Loss from discontinued operations -- (.01) -- --
------- ------- -------- --------
Net loss $ (.08) $ (.08) $ (.12) $ (.09)
======= ======= ======== ========
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)
Nine Months Ended
March 31,
2002 2001
<s> <c> <c>
Cash flows from operating activities:
Net loss $ (571) $ (375)
Adjustments to reconcile net loss to net cash
flow provided by operating activities:
Depreciation and amortization 963 813
Provision for bad debts and returns 48 93
Provision for write-downs of inventory 82 38
Loss on sales of property and equipment -- 18
Other (14) (12)
Changes in assets -- decrease (increase):
Accounts receivable (199) (34)
Inventories (570) 54
Other current assets 31 (216)
Other assets (3) (28)
Changes in liabilities -- (decrease) increase:
Accounts payable and accrued liabilities 503 (38)
Income taxes payable 5 (42)
-------- --------
Net cash flow provided by operating activities 275 271
-------- --------
Cash flows from investing activities:
Proceeds from sales of property and equipment -- 2
Refund of a portion of deposit on sale of hotel -- (118)
Purchases of property and equipment (230) (2,412)
-------- --------
Net cash flow used in investing activities (230) (2,528)
-------- --------
Cash flows from financing activities:
Collections on note receivable 163 4
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 399 202
Payments on notes payable (478) (258)
Payments on IRS debt -- (878)
Payments on capital lease obligation (26) --
-------- --------
Net cash flow provided by financing activities 58 2,314
-------- --------
Net increase in cash and cash equivalents 103 57
Less change in cash and cash equivalents included in net current assets
or liabilities of discontinued operations (20) (34)
Cash and cash equivalents at beginning of period 28 33
-------- --------
Cash and cash equivalents at end of period $ 111 $ 56
======== ========
<FN>
See accompanying notes.
NBI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
Nine Months Ended
March 31,
2002 2001
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Supplemental disclosures of cash flow information:
Interest paid $382 $634
==== ====
Income taxes paid $ 4 $ 89
==== ====
Noncash purchases of property, plant and equipment included in
accounts payable and accrued liabilities at end of period $ 82 $380
==== ====
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.
Revenue from sales of products is recognized when title passes, generally when
the goods are shipped, except for goods shipped on consignment. Revenue is
recognized from products shipped on consignment when the consignee sells the
goods. Freight charges billed to customers are included in revenue. The
Company recognizes royalty revenues from sublicensees under its decoder master
license as earned when the sublicensee has substantially completed the work
per the terms of the sales agreement. 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 $66,000 and
$191,000 for the three and nine months ended March 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 May 10, 2002, the borrowings under L.E. Smith Glass Company's ("L.E.
Smith") revolving line of credit exceeded the allowed borrowing base by
$185,000. 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 $2,001,000 and $2,457,000 of the Company's notes
payable to current at March 31, 2002 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. On April, 12, 2002,
the Company reduced its overborrowings under L.E. Smith's revolving line of
credit by $250,000 with the proceeds from a second mortgage on its hotel (see
Note 14). L.E. Smith has been working on and plans to continue trying 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 beginning in the second half of fiscal 2001 and
continuing throughout 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
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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"). 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 Nine months ended
March 31, March 31,
2002 2001 2002 2001
(Amounts in thousands)
<s> <c> <c> <c> <c>
Revenues from discontinued operations $464 $441 $1,717 $1,656
===== ===== ======= =======
Income (loss) from discontinued operations
before income taxes $(59) $(82) $ 9 $ (33)
Income tax benefit (provision) 20 17 (7) (4)
----- ----- ------- -------
Net income (loss) from discontinued operations $(39) $(65) $ 2 $ (37)
===== ===== ======= =======
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 12). 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 March 31, 2002
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 March 31, 2002 consisted primarily of cash, net
of accounts payable and accrued liabilities.
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 - Inventories
- -----------------------
Inventories are comprised of the following amounts, which are presented net of
reserves totaling $236,000 and $154,000 at March 31, 2002 and June 30, 2001,
respectively:
March 31, June 30,
2002 2001
(Amounts in thousands)
<s> <c> <c>
Raw materials $ 627 $ 618
Work in process 714 590
Finished goods 2,071 1,717
------ ------
$3,412 $2,925
====== ======
Note 6 - 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 12). 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
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.
Note 7 - Income Taxes
- -------------------------
The Company recorded income tax provisions from continuing operations of
$21,000 and $5,000 for the three and nine months ended March 31, 2002,
respectively. For the three and nine months ended March 31, 2001, the Company
recorded income tax benefits from continuing operations of $30,000 and
$32,000, 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 nine months ended March 31, 2002 or 2001.
Note 8 - 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 12.)
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 - Stockholders' Equity
- ---------------------------------
The Company has authorized 20,000,000 shares of $.01 par value common stock.
At March 31, 2002, 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 March 31, 2002. At March 31, 2002, 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 March 31, 2002, 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 March 31, 2002 and 2001 and
$384,000 for the nine months ended March 31, 2002 and 2001. 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 $1,410,000 as
of March 31, 2002.
Note 10 - 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
March 31,
2002 2001
Basic Diluted Basic Diluted
(Amounts in thousands except per share data)
<s> <c> <c> <c> <c>
Loss before discontinued operations $ (503) $ (503) $ (432) $ (432)
Dividend requirement on preferred stock (128) (128) (128) (128)
------- ------- ------- -------
Loss before discontinued operations
attributable to common stockholders $ (631) $ (631) $ (560) $ (560)
======= ======= ======= =======
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 $ (.08) $ (.08) $ (.07) $ (.07)
======= ======= ======= =======
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the nine months ended
March 31,
2002 2001
Basic Diluted Basic Diluted
(Amounts in thousands except per share data)
<s> <c> <c> <c> <c>
Loss before discontinued operations $ (573) $ (573) $ (338) $ (338)
Dividend requirement on preferred stock (384) (384) (384) (384)
------- ------- ------- -------
Loss before discontinued operations
attributable to common stock $ (957) $ (957) $ (722) $ (722)
======= ======= ======= =======
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 $ (.12) $ (.12) $ (.09) $ (.09)
======= ======= ======= =======
<FN>
Because the Company had losses before discontinued operations attributable to
its common stock for the three and nine months ended March 31, 2002 and 2001,
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 March 31, 2002 were as follows:
Exercise Number
Price Outstanding
<s> <c> <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 11 - 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 12 - 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 6 and 8.)
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 13 - Decoder Venture
- -----------------------------
During the third quarter of fiscal 2002, the Company exercised its option for
the first renewal period, April 1, 2002 through September 30, 2002, under its
master license agreement for its decoder venture. During both the initial
term and the first renewal period, the Company is required to pay royalties
equal to the greater of $150,000 or 5% of the net revenues generated under
this license. As of March 31, 2002, the Company paid the minimum royalties
required for the initial term of $150,000 and included $125,000 in marketing,
general and administrative expenses as this amount represented the minimum
royalty expense in excess of the amount of royalties payable based upon
revenues.
Note 14 - Subsequent Event
- ------------------------------
On April 11, 2002, NBI Properties closed on a $250,000 second mortgage. The
proceeds were used to paydown a portion of L.E. Smith's overborrowings under
its revolving line of credit. The mortgage note bears interest at a variable
rate of prime plus 1%, has monthly payments consisting of fixed principal
payments of $2,083 plus interest and is due in full on June 1, 2007. The
mortgage note is collateralized by a second security interest in the hotel's
assets as well as a restricted cash account totaling $125,000, and is
guaranteed by NBI, Inc.
Note 15 - 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.
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In June 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 August 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
THIRD 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.
CRITICAL ACCOUNTING POLICIES
We prepare the consolidated financial statements of NBI, Inc. in conformity
with accounting principles generally accepted in the United States of America.
As such, we are required to make certain estimates, judgments and assumptions
that we believe are reasonable based upon the information available. These
estimates and assumptions affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the periods presented. The significant
accounting policies which we believe are the most critical to aid in fully
understanding and evaluating our reported financial results include the
following:
Accounts Receivable: We perform ongoing credit evaluations of our customers
and adjust credit limits based upon payment history and the customer's current
creditworthiness, as determined by our review of their current credit
information. We continuously monitor collections and payments from our
customers and maintain a provision for estimated credit losses based upon our
historical experience and any specific customer collection issues that we have
identified. We continually review and refine these estimates; however, we
cannot guarantee that we will be able to accurately estimate credit losses on
our accounts receivable. L.E. Smith currently has one significant customer,
and at times has large sales to one or more individual customers that
constitute a significant amount of the Company's accounts receivable balance.
A significant change in the liquidity or financial position of such customer
could have a material adverse impact on the collectibility of our accounts
receivables and our future operating results.
Inventories: Inventories are valued at the lower of the actual cost to
manufacture or the current estimated market value. We regularly review
inventory quantities on hand and record a provision for excess and obsolete
inventory based primarily on our estimated future usage and sales. Our
estimates of future product demand may prove to be inaccurate, in which case
we may have understated or overstated the provision required for excess and
obsolete inventory. In the future, if our inventory is determined to be over-
valued or undervalued, we would be required to recognize such operating income
or such costs, respectively, in our cost of goods sold at the time of such
determination. Any significant unanticipated changes in demand could have a
significant impact on the value of our inventory and our reported operating
results. In addition, the Company performs a physical inventory each fiscal
year-end and provides a provision during the year for the estimated book-to-
physical write-down based upon historical information. If the actual book-to-
physical write-down varies significantly from our estimate, such variance
would be recorded to cost of goods sold at fiscal year-end and could have a
significant impact on our reported operating results.
Deferred Income Tax Assets: The Company has substantial federal and various
state net operating loss carryforwards and has provided a full valuation
allowance for the related net deferred tax assets. In the future, if
sufficient evidence of the Company's ability to generate future taxable
income becomes apparent, the Company may then be allowed to reduce its
valuation allowance. A significant portion of these carryforwards are from
pre-reorganization net operating losses and would be required to be utilized
first. In accordance with fresh start accounting adopted as of April 30,
1992, and as a result of the Company's reorganization under Chapter 11 of the
U.S. Bankruptcy Code, if the Company has a reduction in its valuation
allowance, any income tax benefit attributable to pre-reorganization net
operating losses are reported as an addition to capital in excess of par value
rather than credited to the income tax provision. Any reduction in the
valuation allowance attributable to post-reorganization net operating losses
would then be credited to the income tax provision.
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER, FISCAL YEAR 2002
Minimum Royalties: The agreement with our master licensor related to our
decoder business requires us to pay royalties equal to the greater of the
amount of royalties based upon revenues earned or the contractual amount of
minimum royalty payments. The Company incurs minimum royalties expense when
the minimum royalties payable under the terms of the agreement are estimated
to exceed the royalties earned based upon revenues. We continually evaluate
the expected decoder revenues and royalties payable to the master licensor.
The minimum royalty expense is charged to marketing general and administrative
expense based upon our estimates. While we believe our estimate of expected
decoder revenues and minimum royalties expense is reasonable, if the actual
decoder revenues vary significantly from our estimate, the amount of the
minimum royalty expense could be overstated or understated between quarters
within each term under the master license agreement.
Contingent Liabilities: We account for contingencies in accordance with SFAS
No. 5, Accounting for Contingencies . SFAS No. 5 requires that we record an
estimated loss from a loss contingency when information available prior to
issuance of our financial statements indicates that it is probable that an
asset has been impaired or a liability has been incurred at the date of the
financial statements and the amount of the loss can be reasonably estimated.
Accounting for contingencies such as legal actions, disputed charges and other
claims requires us to use our judgment. While we believe that our accruals for
these matters are adequate, if the actual loss from a loss contingency is
significantly different than the estimated loss, our results of operations may
be overstated or understated.
Revenue Recognition: The Company recognizes revenue from sales of products
when title passes, generally when the goods are shipped, except for goods
shipped on consignment. Revenue is recognized from products shipped on
consignment when the consignee sells the goods. Freight charges billed to
customers are included in revenue. The Company recognizes royalty revenues
from sublicensees under its decoder master license as earned when the
sublicensee has substantially completed the work per the terms of the sales
agreement. The royalty revenues are presented net of related royalties earned
by the master licensor.
RESULTS OF OPERATIONS
Revenues from continuing operations totaled $3,316,000 for the three months
ended March 31, 2002, compared to $3,289,000 for the same period in the prior
fiscal year, reflecting an increase of $27,000, or 0.8%. During the third
quarter of fiscal 2002, L.E. Smith experienced an increase of $204,000 in
sales to its largest customer, $331,000 in sales to one new "home-party"
business and an increase of $46,000 in sales from its retail outlets resulting
from increased promotions and the addition of a new retail location. The
Company also recognized net royalty revenues of $13,000 from a sublicensee
under its master license related to its new decoder business. However, these
increases were substantially offset by the absence of initial sales of
$214,000 to one new specialty store, as included in the third quarter of
fiscal 2001, and declines in sales to many of its lighting customers and
medium and small giftware customers primarily due to customers' continued
apprehension regarding the economy. Revenues from continuing operations of
$10,050,000 for the nine months ended March 31, 2002 reflected a decrease of
$1.2 million, or 10.6% compared to revenues of $11,246,000 for the same period
in the prior fiscal year. L.E. Smith experienced declines in sales to a
majority of its customers, particularly specialty stores, as well as a
year-to-date decline of $145,000 in sales to its largest customer, primarily
due to the downturn in the economy. However, L.E. Smith did have $404,000 in
sales to one new "home-party" business, an increase of $203,000 in sales from
its retail outlets and $153,000 of sales from a tent sale held in July to
generate additional cash. The Company also recognized net royalty revenues of
$39,000 during the nine months ended March 31, 2002.
Revenues from continuing operations are expected to reflect a substantial
increase for the fourth quarter of fiscal 2002 compared to fiscal 2001
primarily due to extremely poor revenue performance in the fourth quarter of
fiscal 2001. Revenues for the fourth quarter of fiscal 2002 are expected to
include a substantial increase in revenue from its largest customer as well as
the addition of a small amount of sales to one new "home-party" business and a
small amount of revenues from its new decoder business. However, revenues
from continuing operations are expected to decrease substantially for the
three months ended June 30, 2002 compared to the third quarter of fiscal 2002,
primarily due to seasonal variations, including a significant decrease in
sales to one new "home-party" business, slightly offset by a small increase in
projected revenues from its new decoder business.
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER, FISCAL YEAR 2002
Cost of sales from continuing operations as a percentage of related sales
revenue of 89.6% for the quarter ended March 31, 2002 reflected a small
decrease compared to 90.5% for the third quarter of fiscal 2001. The Company
experienced a decrease of $66,000 in utilities during the third quarter of
fiscal 2002 due to a moderate decrease in the contracted natural gas price
beginning October 1, 2001, decreased natural gas usage related to efficiencies
from a new crystal tank placed in service at the end of March 2001, and
decreased liquid oxygen requirements from its new oxygen generating facility
utilized in conjunction with the new crystal tank. In addition, L.E. Smith
had savings resulting from the absence of production inefficiencies associated
with the installation of the new crystal tank during the third quarter of
fiscal 2001. However, these improvements were significantly offset by lower
margins resulting from increased sales discounting, and higher insurance and
depreciation expenses (increases of $24,000 and $34,000, respectively). Cost
of sales from continuing operations as a percentage of related sales revenue
of 82.0% for the nine months ended March 31, 2002 reflected a slight increase
compared to 81.7% for the same period in the prior fiscal year. The impact of
lower sales volume available to cover fixed costs, lower margins realized
related to increased sales discounting and a tent sale in July, as well as
higher insurance and depreciation expenses (increases of $67,000 and
$135,000, respectively) were substantially offset by savings resulting from
reduced labor costs, lower utilities (a decrease of $197,000) and general cost
control measures.
Cost of sales from continuing operations as a percentage of related sales
revenue for the fourth quarter of fiscal 2002 is expected to reflect a
significant decrease compared to the fourth quarter of fiscal 2001 primarily
due to a substantial increase in the projected sales volume. Savings expected
from cost control measures and in utilities expenses, due to lower contracted
gas prices, will be partially offset by increased insurance expenses.
However, cost of sales from continuing operations as a percentage of related
sales revenue for the fourth quarter of fiscal 2002 is expected to increase
significantly compared to the third quarter of fiscal 2002 primarily due to a
substantial decrease in the projected sales revenue volume.
Marketing, general and administrative expenses from continuing operations
totaled $766,000 for the third quarter of fiscal 2002, an increase of $52,000,
or 7.3% compared to the third quarter of fiscal 2001. The increase resulted
primarily from sales and marketing expenses associated with the new decoder
business totaling $104,000 for the third quarter of fiscal 2002, including
$61,000 of minimum royalties expense. This increase was partially offset by a
decrease of $27,000 in sales commissions, related to increased sales
discounting as well as variations in the sales mix, a reduction of $24,000 in
bad debt provisions, resulting from a decline in provisions required for
insolvent companies, and savings from general cost control measures.
Marketing, general and administrative expenses from continuing operations were
$2,195,000 and $2,277,000 for the nine months ended March 31, 2002, and 2001
respectively, reflecting a decrease of $82,000, or 3.6%. The decrease was
primarily due to substantially lower sales commissions (a decrease of
$124,000) resulting from the decline in revenues and increased price
discounting, a reduction of $44,000 in bad debt provisions resulting from a
decline in provisions required for insolvent companies, and significant
savings from general cost control measures primarily including decreased
advertising and travel expenses as well as the absence of calendar year-end
bonuses. However, these savings were partially offset by sales and marketing
expenses associated with the new decoder business totaling $216,000 for the
nine months ended March 31, 2002, including $125,000 of minimum royalties
expense representing the amount of minimum royalties in excess of the amount
of royalties payable based upon revenues for the initial term of the master
license agreement which expired on March 31, 2002. In addition, L.E. Smith
recorded $41,000 of sales and marketing expenses associated with a tent sale
in July 2001.
Marketing, general and administrative expenses from continuing operations for
the fourth quarter of fiscal 2002 are expected to reflect a significant
increase compared to the same period of the prior fiscal year primarily due to
the addition of sales and marketing expenses associated with the new decoder.
However, marketing, general and administrative expenses for the fourth quarter
of fiscal 2002 are expected to be moderately lower compared to the third
quarter of fiscal 2002 primarily due to a projected decrease in the minimum
royalty expense related to the new decoder business.
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER, FISCAL YEAR 2002
Interest expense totaled $103,000 and $113,000 for the quarters ended March
31, 2002 and 2001, respectively. The decrease was primarily related to
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, partially offset by an increase related to interest
on a higher average balance of debt outstanding. Interest expense totaled
$331,000 and $306,000 for the nine months ended March 31, 2002 and 2001,
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 income tax provisions from continuing operations of
$21,000 and $5,000 for the three and nine months ended March 31, 2002,
respectively. For the three and nine months ended March 31, 2001, the Company
recorded income tax benefits from continuing operations of $30,000 and
$32,000, respectively. Included in the provisions 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 such non-cash
components included in the income tax benefit and provision for the three or
nine months ended March 31, 2002 and 2001.
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 12 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 nine months ended
March 31, 2002 and 2001.
Revenues from discontinued operations totaled $464,000 and $1,717,000 for the
three and nine months ended March 31, 2002, compared to $441,000 and
$1,656,000 for the same periods in the prior fiscal year. The improvement was
primarily related to an increase in the restaurant business resulting from
increased local promotions and banquet activity, as well as the inclusion of
sales from Easter weekend in the third quarter of fiscal 2002 compared to the
fourth quarter in fiscal 2001. Room revenues for the third quarter of fiscal
2002 were relatively flat compared to the same period in the prior fiscal year
as a small increase in the average daily room rate was offset by a small
decrease in the occupancy rate. For the nine months ended March 31, 2002
compared to March 31, 2001, room revenues reflected a small increase due to a
moderate increase in the average daily room rate partially offset by a small
decline in the occupancy rate.
The Company recorded net losses from discontinued operations of $39,000 and
$65,000 for the third quarter of fiscal 2002 and 2001, respectively.
Year-to-date, the Company recorded net income from discontinued operations of
$2,000 in fiscal 2002 compared to a net loss of $37,000 in fiscal 2001. These
improvements were primarily related to the increased revenue.
The net long-term assets of discontinued operations at March 31, 2002
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 March 31, 2002 consisted primarily of cash, net
of accounts payable and accrued liabilities.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets decreased $246,000 to $15.2 million at March 31,
2002 from $15.5 million at June 30, 2001. The decline was primarily due to
decreases in property, plant and equipment, related to depreciation, and in
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER, FISCAL YEAR 2002
the note receivable from related party from unscheduled principal payments.
These declines were partially offset by an increase in trade accounts
receivable, due to extremely low revenues in the quarter ended June 30, 2001,
and an increase in inventory as the drop in sales has exceeded the decline in
production levels during the period. The Company had working capital deficits
of $2,663,000 and $2,953,000 at March 31, 2002 and June 30, 2001,
respectively, reflecting a reduction of $290,000. The improvement resulted
from the increases noted in inventory and trade accounts receivable
significantly offset by increased accounts payable and accrued liabilities at
March 31, 2002 resulting from cash constraints.
The Company significantly reduced its capital expenditures in the first nine
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 March
31, 2002. The Company plans to continue restricting its capital expenditures.
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,
expected net proceeds of $72,000 from the pending sale of a small building
adjacent to the factory as well as short-term borrowings under an existing
line of credit. However, as of May 10, 2002, the borrowings under L.E.
Smith's revolving line of credit exceeded the allowed borrowing base by
$185,000. 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 $2,001,000 and $2,457,000 of
the Company's long-term notes payable to current at March 31, 2002 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. On April, 12, 2002,
the Company reduced its overborrowings under L.E. Smith's revolving line of
credit by $250,000 with the proceeds from a second mortgage on its hotel (see
Note 14). L.E. Smith has been working on and plans to continue trying 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 beginning in the second half of fiscal 2001 and continuing
throughout 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
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER, FISCAL YEAR 2002
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.
The following summarizes the Company's aggregate contractual obligations as of
March 31, 2002:
Total payments due during
fiscal years ended June 30,
Three Months -----------------------------------------
Ended June 30, 2003 & 2005 & 2007 &
Total 2002 2004 2006 Thereafter
------------ ------------ ------------ ------------ -------------
(Amounts in thousands)
<s> <c> <c> <c> <c> <c>
Continuing operations:
Line of credit (a) $ 2,815 $ 2,815 $ -- $ -- $ --
Long-term notes payable (a) 2,603 154 1,333 1,116 --
Present value of capital
lease obligation 991 6 80 97 808
Operating leases 909 39 223 148 499
Minimum royalties (b) 150 50 100 -- --
Purchase obligation 54 18 36 -- --
CEO employment agreement (c) 15 15 -- -- --
Other 18 3 15 -- --
Discontinued operations:
Long-term note payable (d) 891 7 66 75 743
Operating leases 195 2 16 16 161
------------ ------------ ------------ ------------ ------------
Total contractual obligations $ 8,641 $ 3,109 $ 1,869 $ 1,452 $ 2,211
============ ============ ============ ============ ============
<FN>
(a) 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. Therefore, the entire amount of the
Company's long-term notes payable from continuing operations is included in current liabilities at
March 31, 2002 and June 30, 2001. See previous discussion in this Financial Condition, Liquidity
and Capital Resources section.
(b) During the third quarter of fiscal 2002, the Company exercised its option for the first renewal
period, April 1, 2002 through September 30, 2002, under its master license agreement for its decoder
venture. During both the initial term and the first renewal period, the Company is required to pay
royalties equal to the greater of $150,000 or 5% of the net revenues generated under this license.
As of March 31, 2002, the Company paid the minimum royalties required for the initial term of
$150,000 and included $125,000 in marketing, general and administrative expenses as this amount
represented the minimum royalty expense in excess of the amount of royalties payable based upon
revenues.
(c) The CEO Agreement also provides that the Company will pay an annual bonus of 10% of the
Company's pre-tax profits, if any, derived from all sources, but only to the extent such 10% figure
exceeds Mr. Lustig's base salary. Mr. Lustig remains eligible for such bonus for twelve months
after termination from the position of CEO.
(d) Subsequent to March 31, 2002, NBI Properties closed on a $250,000 second mortgage which is not
included in the amounts above. The proceeds were used to paydown a portion of L.E. Smith's
overborrowings under its revolving line of credit. The mortgage note bears interest at a variable
rate of prime plus 1%, has monthly payments consisting
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER, FISCAL YEAR 2002
of fixed principal payments of $2,083 plus interest and is due in full on June 1, 2007. The
mortgage note is collateralized by a second security interest in the hotel's assets as well as a
restricted cash account totaling $125,000, and is guaranteed by NBI, Inc.
The Company has no other long-term contractual obligations or commercial commitments.
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 June 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 August 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 March 31,
2002 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.
May 15, 2002 By: /s/ Marjorie A. Cogan
- -------------- ----------------------------------
(Date) Marjorie A. Cogan
As a duly authorized officer
Chief Financial Officer, Secretary