SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 8, 2002
- -------------------------------------- -------------------------------
Common Stock, par value $.01 per share 8,103,320
NBI, INC.
INDEX TO FORM 10-QSB
For Quarter Ended September 30, 2002
PAGE
------
PART I - FINANCIAL INFORMATION
<s> <c>
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
Controls and Procedures 21
PART II - OTHER INFORMATION 22
NBI, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands Except Share Data)
September 30, June 30,
2002 2002
(Unaudited) (Audited)
ASSETS
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Current assets:
Cash and cash equivalents $ 230 $ 199
Accounts receivable, less allowance for doubtful accounts
of $271 and $279, respectively 1,297 1,257
Inventories, net 2,980 3,262
Other current assets 89 132
-------- --------
Total current assets 4,596 4,850
Property, plant and equipment, net 7,789 8,057
Note receivable from related party 2,300 2,300
Other assets, net 376 288
-------- --------
$15,061 $15,495
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term borrowings and current portion of notes payable $ 3,446 $ 3,435
Current portion of capital lease obligation 45 41
Accounts payable 1,996 1,833
Accrued liabilities and other 857 747
-------- --------
Total current liabilities 6,344 6,056
Long-term liabilities:
Notes payable 2,902 2,951
Capital lease obligation 936 947
Deferred income taxes 64 64
Postemployment disability benefits 114 119
Deferred gain from sale of real estate, net of taxes 881 881
-------- --------
Total liabilities 11,241 11,018
-------- --------
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 (6,364) (5,707)
-------- --------
4,688 5,345
Less treasury stock, at cost (2,027,200 shares) (868) (868)
-------- --------
Total stockholders' equity 3,820 4,477
-------- --------
$15,061 $15,495
======== ========
<FN>
See accompanying notes.
NBI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands Except Per Share Data)
(Unaudited)
Three Months Ended
September 30,
2002 2001
------- -------
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Revenues:
Sales $2,274 $3,134
Service and rental 683 673
Royalty revenue, net -- --
------- -------
2,957 3,807
------- -------
Costs and expenses:
Cost of sales 2,258 2,502
Cost of rental and service 452 449
Marketing, general and administrative 815 833
------- -------
3,525 3,784
------- -------
Loss from operations (568) 23
Other income (expense):
Interest income 31 46
Other income and expenses, net 11 --
Interest expense (118) (141)
------- -------
(76) (95)
------- -------
Loss before income taxes (644) (72)
Income tax benefit (provision) (13) 6
------- -------
Net loss (657) (66)
Dividend requirement on preferred stock (128) (128)
------- -------
Loss attributable to common stockholders $ (785) $ (194)
======= =======
Loss per common share - basic and diluted $ (.10) $ (.02)
======= =======
Weighted average common shares and equivalents - basic and diluted 8,103 8,103
======= =======
<FN>
See accompanying notes.
NBI, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
Three Months Ended
September 30,
2002 2001
------ ------
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Cash flows from operating activities:
Net loss $(657) $ (66)
Adjustments to reconcile net loss to net cash
flow provided by (used in) operating activities:
Depreciation and amortization 275 324
Provision for bad debts and returns (10) 15
Inventory reserve provisions 6 19
Gain on sales of property and equipment (11) --
Other (5) (5)
Changes in assets -- decrease (increase):
Accounts receivable (30) (580)
Inventories 276 (155)
Prepaid state income taxes -- (13)
Other current assets 43 (141)
Other assets (41) --
Changes in liabilities -- (decrease) increase:
Accounts payable and accrued liabilities 198 336
Income taxes payable -- 6
------ ------
Net cash flow provided by (used in) operating activities 44 (260)
------ ------
Cash flows from investing activities:
Proceeds from sales of property and equipment 68 --
Purchases of property and equipment (26) (83)
------ ------
Net cash flow provided by (used in) investing activities 42 (83)
------ ------
Cash flows from financing activities:
Collections from notes receivable -- 155
Net borrowings on line of credit 96 490
Payments on notes payable (134) (155)
Payments on capital lease obligation (7) (8)
Loan costs paid (10) --
------ ------
Net cash flow provided by (used in) financing activities (55) 482
------ ------
Net increase in cash and cash equivalents 31 139
Cash and cash equivalents at beginning of period 199 270
------ ------
Cash and cash equivalents at end of period $ 230 $ 409
====== ======
<FN>
(continued on following page)
See accompanying notes.
NBI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
Three Months Ended
September 30,
2002 2001
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Supplemental disclosures of cash flow information:
Interest paid $107 $141
==== ====
Income taxes paid $ 12 $ --
==== ====
Noncash purchases of property, plant, and equipment included
in accounts payable and accrued liabilities at end of period $101 $ 66
==== ====
Loan fees incurred included in accounts payable at end of period $ 49 $ --
==== ====
<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 NBI, Inc. ("the Company") and its
wholly-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.
On August 19, 1999, the Board of Directors voted to sell the assets of the
Company's wholly-owned subsidiary, NBI Properties, Inc. ("NBI Properties"), to
an entity that is 100% owned and controlled by its CEO. Therefore, the
Company had classified its hotel operation as a discontinued operation at that
time. However, at of June 30, 2002 the Company determined that the sale would
not be completed within the next twelve months, therefore the hotel operation
was reclassified as a continuing operation for the quarters ended September
30, 2002 and 2001. There were no other adjustments in the financial
statements as a result of this change. Certain other items in the fiscal 2002
financial statements have been reclassified to conform to the fiscal 2003
manner of presentation.
Note 2 - Going Concern and Management's Plan
- ---------------------------------------------------
L.E. Smith has consistently been unable to repay the overborrowings on its
revolving line of credit with Sky Bank which are required to be repaid
promptly. L.E. Smith was also in arrears on certain payments related to its
revolving line of credit and bank term note payable in July and August, 2002.
In addition, L.E. Smith has not been able to meet certain financial ratios
required under the loan agreement covering L.E. Smith's revolving line of
credit and bank term note payable ("Loan Agreement"). However, on August 23,
2002, L.E. Smith and Sky Bank entered into a forbearance agreement and
amendment related to L.E. Smith's revolving line of credit and bank term
note ("Forbearance Agreement" and "Amendment"), whereby Sky Bank has agreed to
forbear from exercising its rights and remedies with respect to the existing
defaults by L.E. Smith under the Loan Agreement provided there is no event of
default by L.E. Smith under the terms of the Forbearance Agreement which
expires on July 7, 2003. In conjunction with the Forbearance Agreement and
Amendment, the due date of the bank term note has been extended to March 5,
2008 with monthly interest only payments allowed for September 5, 2002, and
February 5, 2003 through August 5, 2003; monthly principal payments of $34,000
plus interest will be due for all other months during the term of the note.
Sky Bank has authorized L.E. Smith to exceed its borrowing base by a maximum
of $800,000 ("Allowed Overborrowings"). In exchange, Bellevue Partners, L.P.
("Bellevue Partners"), an entity that is 100% owned and controlled by NBI's CEO,
has agreed to make unscheduled principal payments totaling $500,000 on its note
to the Company's wholly-owned subsidiary, Willowbrook Properties, Inc.
("Willowbrook Properties") from the sale of certain outparcels, and Willowbrook
Properties has assigned its interest in these payments to Sky Bank. The
Allowed Overborrowings will be reduced by the amount of these payments as they
are received by the bank. As of November 12, 2002, the borrowings under L.E.
Smith's revolving line of credit exceeded the allowed borrowing base by
$567,000 (unaudited), $233,000 below the maximum Allowed Overborrowings. The
Forbearance Agreement prohibits L.E. Smith from making any payments to NBI or
any of its subsidiaries. The Forbearance Agreement also requires the Company
to obtain written agreements with its vendors and other creditors regarding
revised payment terms acceptable to the bank. The Company has been working
with its vendors and creditors on revised payment terms and is in the process of
obtaining written agreements with them. The Company has obtained an extension
of time from Sky Bank to March 5, 2003 in which to obtain these written
agreements. With this extension, the Company is currently in compliance with
the terms of the Forbearance Agreement.
As of November 1, 2002, L.E. Smith was five months in arrears on its monthly
payments on its note payable from the Pennsylvania Department of Community and
Economic Development ("PADCED"). In addition, L.E. Smith has been unable to
pay various other liabilities when due as required under the PADCED loan
agreement. These conditions
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
cause the note payable from PADCED to be subject to immediate demand at the
option of the holder. Therefore, the Company has included the entire balance
of this note payable in current liabilities at September 30, 2002, as was
also required at June 30, 2002.
The Company has incurred significant losses for the quarter ended September
30, 2002 and during fiscal 2002 and 2001 and had a significant working capital
deficit at September 30 and June 30, 2002. In addition, a large amount of
L.E. Smith's accounts payable are significantly past due. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern, as expressed by our independent auditors in an explanatory paragraph
in their report dated September 5, 2002 on our June 30, 2002 financial
statements. The Consolidated Financial Statements do not contain any
adjustments that might result from the outcome of this uncertainty. The
Forbearance Agreement and Amendment with Sky Bank significantly reduces the
amount of principal payments required on the Company's long-term debt in fiscal
2003. L.E. Smith is currently trying to obtain a six-month deferral
of principal payments on its note payable from PADCED. L.E. Smith is also
working with its accounts payable vendors to obtain extended terms. Further-
more, management has been working on significantly reducing its costs and
expenses, including significantly reducing its health insurance costs through a
new collective bargaining agreement that it is currently negotiating with its
union employees at L.E. Smith (the current agreement expires on November 30,
2002 - see Note 8) and savings expected from other cost control measures.
The Company also is working on increasing its sales volume and gross profit at
L.E. Smith. Due to intense foreign competition and the unfavorable economic
conditions in the United States during the last two years, it has been
difficult for L.E. Smith to generate sufficient sales volume to allow it to
obtain the critical mass required in its production facility for it to be
profitable.
L.E. Smith is currently in discussions with other glass manufacturers to
develop marketing partnerships that would help increase sales volumes for each
party. This is possible when the companies offer different types of products
and consequently do not directly compete with one another. For example, one
company may be an automated glass manufacturer which sells to the mass market,
however, their manufacturing plant is not able to handle smaller quantities
efficiently. In those situations requiring smaller quantities, they would
sell L.E. Smith handmade products. In return, L.E. Smith could sell some of
that company's products to its customers when large quantities were required.
In addition, L.E. Smith has the capability to produce colored and decorated
glass, whereas another company may have the ability to produce leaded crystal
which L.E. Smith does not. Through a marketing partnership, two or three
companies become stronger by capitalizing on each other's strength.
In addition, L.E. Smith must find a way to be closer to the end-user. Today's
distribution methods are very expensive for manufacturers. In highly
competitive situations, the Company is often unable to sell its products or
does so at inadequate margins because of the mark-up required by the retailer.
For many years, L.E. Smith has had an on-site factory outlet store that has
been profitable. Therefore, the Company has decided on a retail strategy of
opening retail stores in several outlet locations over the next year. These
stores will be opened both independently and through joint ventures with
marketing partners. These retail outlets will do several things to improve
our Company. First, it will allow us to improve our margins because we have
eliminated several layers of distribution. Second, it allows us to increase
our sales volume by taking advantage of an increasing trend in retail markets
towards outlet and discount stores, away from pricey shopping malls. In
October 2002, the Company acquired retail space for an outlet store in
Lancaster, Pennsylvania and anticipates opening this store in November 2002.
The Company will also increase its marketing efforts related to a new line of
home building products that it has been developing including glass sinks,
glass tiles, and glass blocks, as well as glass used in various architectural
projects.
However, there can be no assurance that the Company will be successful in
increasing its sales and gross profit and reducing its costs and expenses; nor
can there be any assurance that L.E. Smith's creditors will grant the Company
extended payment terms.
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.
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Inventories
- -----------------------
Inventories are comprised of the following amounts, which are presented net of
reserves totaling $204,000 and $198,000 at September 30 and June 30, 2002,
respectively:
September 30, June 30,
2002 2002
------ ------
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Raw materials $ 550 $ 590
Work in process 629 638
Finished goods 1,781 2,017
Food and beverage inventory 20 17
------ ------
$2,980 $3,262
====== ======
Note 5 - Note Receivable from Related Party
- --------------------------------------------------
In conjunction with the sale of the land and construction-in-progress of
Willowbrook Properties, on December 17, 1999, the Company received a note
receivable in the amount of $2.7 million from Bellevue Partners, an entity
which is 100% owned and controlled by NBI's CEO (see Note 13). The note bears
interest at the rate of two-year Treasury Notes plus 200 basis points with a
rate of 7.125% determined at December 31, 2000 for all of calendar 2001, a
rate of 5.05% determined on 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. On August 23,
2003 Willowbrook Properties assigned its rights to $500,000 of future payments
on the note receivable to Sky Bank (see Note 2 and 13).
Note 6 - Income Taxes
- -------------------------
The Company recorded an income tax provision of $13,000 and an income tax
benefit of $6,000 for the three months ended September 30, 2002 and 2001,
respectively. These benefits and provisions include state and other income
taxes and are based upon book income. The net deferred tax assets arising
from the pre-tax losses incurred for the quarter ended September 30, 2002 have
been fully allowed for because the Company has not been able to determine that
it is more likely than not that such deferred tax assets will be realized.
In accordance with fresh start accounting, which was adopted as of April 30,
1992, and as a result of the Company's reorganization under Chapter 11 of the
U.S. Bankruptcy Code, utilization of any income tax benefit from
pre-reorganization net operating losses is not credited to the income tax
provision, but rather, reported as an addition to capital in excess of par
value. No pre-reorganization net operating losses were utilized for the three
months ended September 30, 2002 or 2001.
Note 7 - 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 8 - Contingencies
- -------------------------
L.E. Smith purchases natural gas under a long-term contract. In September
2000 and then in May 2001, the Company contracted for natural gas for the
periods October 1 through September 30, 2001 and 2002, respectively, at a
fixed cost per unit with no minimum volume requirements. L.E. Smith's current
contract expired on September 30, 2002 and the Company is currently purchasing
natural gas at market rates. The Company is in the process of trying to
obtain a new natural gas contract; however, due to L.E. Smith's poor financial
condition, it may be unable to obtain a contract for fixed natural gas prices.
If this occurs, L.E. Smith will be forced to continue to fulfill its natural
gas requirements at market rates which historically rise during the winter
months and would be not be limited. This could have a material adverse impact
on the Company's financial condition.
A majority of L.E. Smith's employees are covered by a collective bargaining
agreement that has been extended to November 30, 2002; L.E. Smith is currently
negotiating a new contract with this union; however, if the company is unable
to reach an agreement with this union it could have a material adverse effect
on the NBI's financial condition.
During the third quarter of fiscal 2002, the Company exercised its option for
the first new renewal period, April 1, 2002 through September 30, 2002, under
its master license agreement for its decoder business. For the first renewal
period, the Company is required to pay royalties equal to the greater of
$150,000 or 5% of the net decoder sales and services generated under the
license, including decoder sales and services produced by sublicensees. As of
September 30, 2002, the Company made minimum royalty payments required under
the master license agreement totaling $125,000 and has $25,000 minimum
royalties payable outstanding for the first renewal period, which have
subsequently been paid. The Company included $75,000 in marketing, general
and administrative expenses for the quarter ended September 30, 2002 related
to the amount of minimum royalty expense in excess of royalties payable based
upon net decoder sales and services. The Company has not exercised its option
for the second renewal period, October 1, 2002 through September 30, 2003,
under the master license but is currently in the process of negotiating new
terms for this period. If NBI is unable to negotiate mutually acceptable
terms with the master licensor for the second renewal period, then the Company
will be exiting the business. If the master license is renewed under the
existing terms, the Company would be required to pay royalties equal to the
greater of $400,000 or 5% of the net decoder sales and services generated
under the license.
Note 9 - Stockholders' Equity
- -------------------------------
The Company has authorized 20,000,000 shares of $.01 par value common stock.
At September 30, 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 September 30, 2002. At September 30, 2002, 1 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 September 30, 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 September 30, 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 $1,666,000 as
of September 30, 2002.
In February 1995, the Company issued warrants to purchase 1.7 million shares
of its common stock at $.89 per share in conjunction with its acquisition of a
children's paint manufacturer. These warrants are exercisable through
December 31, 2002. As of September 30, 2002, no warrants had been exercised.
(See also Note 13.)
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 - Income Per Common Share
- ---------------------------------------
NBI calculates earnings per share in accordance with SFAS No. 128, which
provides for the calculation of "Basic" and "Diluted" earnings per share.
Basic earnings per share includes no dilution and is computed by dividing
income (loss) available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution of securities that could share in the earnings
of an entity.
Because the Company incurred a net loss attributable to common stockholders
for each of the quarters ended September 30, 2002 and 2001, none of its
outstanding options or warrants were included in the computation of diluted
earnings per share as their effect would be anti-dilutive.
The options and warrants outstanding at September 30, 2002 were as follows:
Number
Exercise Outstanding at
Price September 30, 2002
<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
- -------------------------------------------------
L.E. Smith: 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 from L.E. Smith 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 do not have consistent trends. In fiscal
2002, L.E. Smith did not experience the seasonal increase in sales during its
first and second quarters as seen historically, due to the slow economy. L.E.
Smith experienced a substantial decline in revenues during the first quarter
of fiscal 2003 primarily related to cash constraints imposed on L.E. Smith by
its bank due to its ongoing overborrowed position until August 23, 2002 when
L.E. Smith obtained the Forbearance Agreement from the bank. These cash
constraints severely limited L.E. Smith's ability to produce and ship goods
during that time period.
Belle Vernon Holiday Inn: The Belle Vernon Holiday Inn generally has its
strongest revenue performance during the first fiscal quarter due to seasonal
variations, followed by the second fiscal quarter revenues which are
moderately lower. Typically revenues from the hotel in the fourth fiscal
quarter are significantly lower than in the first quarter and revenues in the
third fiscal quarter are substantially lower.
Note 12 - Segment Reporting
- -------------------------------
The Company's main operations are in the glass manufacturing and hotel
industries. The glass manufacturer sells its glass products primarily to
traditional and specialty retailers throughout the United States, as well as
to manufacturers/wholesalers, the food service market and through an on-site
retail store. The hotel is an 80-room full-service Holiday Inn hotel. In
addition, the Company has the right to use and sublicense certain patented
decoder technology under a master license agreement with the right to
manufacture and sell decoders made in accordance with such patent. The
decoder is a small translucent plastic-like piece that is used in marketing
activities in which a hidden message is revealed when the decoder is placed
against a colored field on a computer screen.
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Information by segment and a reconciliation to reported amounts are as
follows:
Corporate,
Glass Hotel Other, and Consoli-
Manufac- Opera- Decoder Elimina- dated
turing tions Business tions Total
-------- ------- -------- --------- --------
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Three Months Ended September 30, 2002:
Revenues from external customers $ 2,274 $ 683 $ -- $ -- $ 2,957
======== ====== ======== ========= ========
Operating profit (loss) $ (447) $ 91 $ (145) $ (67) $ (568)
======== ====== ======== ========= ========
Total assets $10,530 $2,563 $ 3 $ 1,965 $15,061
======== ====== ======== ========= ========
Three Months Ended September 30, 2001:
Revenues from external customers $ 3,134 $ 673 $ -- $ -- $ 3,807
======== ====== ======== ========= ========
Operating profit (loss) $ 7 $ 90 $ (14) $ (60) $ 23
======== ====== ======== ========= ========
Total assets $12,185 $3,043 $ 141 $ 2,106 $17,475
======== ====== ======== ========= ========
Note 13 - Related Party Transactions
- -----------------------------------------
In conjunction with NBI's purchase of its children's paint manufacturer in
1995, the sellers were issued warrants to purchase 1.7 million shares of the
Company's common stock at a price of $.89 per share; this included warrants to
purchase 935,000 shares issued to the Company's CEO, Jay H. Lustig. All of
the warrants are still outstanding and are exercisable through December 31,
2002.
Prior to NBI's 1999 Annual Meeting of Stockholders, the Company received a
fairness opinion regarding its proposed sale of the majority of the assets of
Willowbrook Properties and all of the capital stock of NBI Properties to
entities which are 100% owned and controlled by its CEO. The fairness opinion
concluded that the transaction was fair from a financial point of view. The
terms and conditions of the proposed transaction were approved at NBI's Annual
Meeting of Stockholders on December 16, 1999. The Company has not yet
completed the sale of all of the capital stock of NBI Properties and does not
anticipate it being completed within the next year.
On December 17, 1999, the Company closed on the sale of a majority of the
assets of Willowbrook Properties, to Bellevue Partners, an entity which is
100% owned and controlled by NBI's CEO. The Company has accounted for the
sale in accordance with 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 approximately $48,000
and net of approximately $40,000 of related income taxes. The sale consisted
of land and construction-in-progress and was for a net purchase price of $3.3
million. The purchase price was net of construction costs which were
previously funded by advances from Mr. Lustig. Concurrently with the closing
of the Willowbrook Properties sale transaction, such amounts were deemed to be
expenses of the buyer. The purchase price was paid by $600,000 in cash and a
note payable in the amount of $2.7 million. (See Notes 5 and 7.)
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In conjunction with L.E. Smith's Forbearance Agreement and Amendment, Sky Bank
has authorized L.E. Smith to exceed its borrowing base by a maximum of
$800,000. In exchange, Bellevue Partners has agreed to make unscheduled
principal payments totaling $500,000 on its note to Willowbrook Properties
from the sale of certain outparcels, and Willowbrook Properties has assigned
its interest in these payments to Sky Bank. The Allowed Overborrowings will
be reduced by the amount of these payments as they are received by the bank.
(See Notes 2 and 5.)
The Company believes that these transactions were in its best interests, were
on terms no less favorable to the Company than could be obtained from
unaffiliated third parties and were in connection with bona fide business
purposes of the Company.
Note 14 - Recent Accounting Pronouncements
- -------------------------------------------------
In June 2001, the Financial Accounting Standards Board ("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 forimpairment
in accordance with the guidance in SFAS No. 142. This Statement was effective
July 1, 2002 for the Company. The adoption of these Statements had no
material impact on the 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 was effective July 1, 2002 for the Company.
The adoption of this Statement had no material impact on the financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 requires the classification of gains and losses
from extinguishments of debt as extraordinary items only if they meet the
criteria for such classification in APB Opinion No. 30, "Reporting the Results
of Operations, Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions".
Additionally, SFAS No. 145 requires sale-leaseback accounting for certain
lease modifications that have economic effects similar to sale-leaseback
transactions. SFAS No. 145 was also effective July 1, 2002 for the Company.
The adoption of this Statement had no material impact on the financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company believes the adoption of this
Statement will have no material impact on its consolidated financial
statements.
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER, FISCAL YEAR 2003
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
overvalued 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
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER, FISCAL YEAR 2003 - CONTINUED
reduction in the valuation allowance attributable to post-reorganization net
operating losses would then be credited to the income tax provision.
Minimum Royalties: The agreement with our master licensor related to our
decoder business requires us to pay royalties equal to the greater of 5% of
net decoder sales and services generated under the license, including decoder
sales and services produced by sublicensees, 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 incurred based upon net decoder sales and services.
We continually evaluate the amount of estimated decoder sales and services to
be generated under the license 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 that our estimate of net
decoder sales and services to be generated under the license and minimum
royalties expense is reasonable, if the actual decoder sales and services vary
significantly from our estimate, the amount of 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. Service and rental revenue from the hotel
operations is recognized when provided. 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
Sales revenues totaled $2.3 million for the first quarter of fiscal 2002 and
reflected a decrease of $860,000 or 27.4%, compared to revenues of $3.1
million for the quarter ended September 30, 2001. L.E. Smith experienced a
substantial decline in revenues during July and August of 2002 compared to the
prior year primarily because Sky Bank tightly restricted L.E. Smith's
borrowings under its line of credit due to its ongoing overborrowed position
until August 23, 2002 when L.E. Smith obtained the Forbearance Agreement from
the bank. These cash constraints severely limited L.E. Smith's ability to
produce and ship goods during that time period. However, L.E. Smith's
revenues in September 2002 were comparable with the same period in the prior
year. L.E. Smith had a decrease of $156,000 in sales to its largest customer
primarily due to the cash constraints. L.E. Smith also experienced declines
in sales to many of its customers resulting from the weak economy. However,
L.E. Smith did have the addition of $133,000 in revenues from a new
home-party business which it obtained during the second quarter of fiscal
2002. In addition, the Company realized an increase of $44,000 in sales from
its retail outlets. Included in the revenues from retail outlets were revenues
totaling $161,000 from a tent sale held in July 2002 compared to $153,000 from
the tent sale held in July 2001.
Service and rental revenues totaled $683,000 for the first quarter of fiscal
2003 compared to $673,000 for the same period in the prior fiscal year. The
small increase resulted from a moderate increase in the average daily room
rate and a slight increase in the occupancy rate.
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER, FISCAL YEAR 2003 - CONTINUED
No royalty revenues were recognized for the three months ended September 30,
2002 primarily due to a long sales cycle for decoder sales. No royalty
revenues were recognized for the three months ended September 30, 2001 during
the start-up of the business.
Cost of sales as a percentage of related revenue was 99.3% for the quarter
ended September 30, 2002, compared to 79.8% for the same period in fiscal
2002. The resulting decline in gross margin was primarily due to
substantially lower sales volume available to cover fixed costs, production
inefficiencies resulting from the cash constraints during July and August,
increased sales discounting, and higher insurance expenses (an increase of
$38,000). These items were partially offset by reduced labor costs and other
expenses resulting from cost controls and low production during July and
August due to the cash constraints, and a decrease of $48,000 in depreciation
expense as many of L.E. Smith's assets acquired by the Company effective
August 1, 1995 became fully depreciated during the quarter.
Cost of service and rental as a percentage of related revenue remained fairly
constant at 66.2% for the three months ended September 30, 2002 compared to
66.7% for the same period in the prior fiscal year.
Marketing, general and administrative expenses totaled $815,000 and $833,000
for the three months ended September 30, 2002 and 2001, respectively. The
decrease was primarily due to lower sales commissions (a decrease of $40,000)
related to the decline in revenues, reduced bad debt provisions (a decrease of
$25,000), and significant savings from cost control measures. However, these
savings were significantly offset by increased sales and marketing expenses
associated with the decoder business (an increase of $131,000) including
$75,000 of minimum royalties expense for the minimum royalties in excess of
the amount of royalties earned based upon decoder sales and services. There
was no minimum royalty expense and other decoder expenses were minimal for the
quarter ended September 30, 2001 during the start-up of the decoder business.
Interest expense totaled $118,000 and $141,000 for the quarters ended
September 30, 2002 and 2001, respectively. The decrease was primarily due to
significantly lower interest rates, related to declines in the prime rate, and
a lower average balance of debt outstanding, partially offset by a 1% increase
in interest rates effective October 1, 2001 (from prime to prime plus 1%) on
L.E. Smith's bank financing due to its failure to meet certain financial
ratios during fiscal 2001.
The Company recorded an income tax provision of $13,000 and an income tax
benefit of $6,000 for the first quarter of fiscal 2003 and 2002, respectively.
These benefits and provisions include state and other income taxes and are
based upon book income. The net deferred tax assets arising from the pre-tax
losses incurred for the quarter ended September 30, 2002 have been fully
allowed for because the Company has not been able to determine that it is more
likely than not that such deferred tax assets will be realized. In accordance
with fresh-start accounting, the income tax provisions recorded include
non-cash charges to the extent that the Company expects to use its
pre-reorganization net operating loss carryforwards. These charges are
reported as an addition to capital in excess of par value, rather than as a
credit through the income tax provision. There were no non-cash components
included in the income tax benefit and provision for the three months ended
September 30, 2002 and 2001.
DISCONTINUED OPERATIONS
On August 19, 1999, the Board of Directors voted to sell the assets of the
Company's wholly-owned subsidiary, NBI Properties, to an entity that is 100%
owned and controlled by its CEO. Therefore, the Company had classified its
hotel operation as a discontinued operation at that time. However, at of June
30, 2002 the Company determined that the sale would not be completed within
the next twelve months, therefore the hotel operation was been reclassified as
a continuing operation for the quarters ended September 30, 2002 and 2001.
There were no other adjustments in the financial statements as a result of
this change.
NBI, INC.MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER, FISCAL YEAR 2003 - CONTINUED
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets decreased $434,000 to $15.1 million at September
30, 2002 from $15.5 million at June 30, 2002. The decrease was primarily due
to a significant decrease in inventory resulting from low production related
to cash constraints, and a significant decrease in property, plant and
equipment primarily related to depreciation. The Company had working capital
deficits of $1,748,000 and $1,206,000 at September 30 and June 30, 2002,
respectively.
The increase of $542,000 in the working capital deficit was primarily due to
the decrease in inventory and an increase in accounts payable and accrued
liabilities resulting from cash constraints and the loss incurred during the
quarter.
The Company significantly reduced its capital expenditures during fiscal 2002
and in the first quarter of fiscal 2003 and did not have any significant
construction-in-progress outstanding at September 30, 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 and
unscheduled principal payments on the note receivable from a related party.
The hotel's bank loan agreement indirectly limits the amount of cash
distributions it can make to the parent company through a covenant requiring
the maintenance of a minimum cash flow to debt service ratio. Short-term
borrowings under an existing line of credit can also be used for L.E. Smith's
working capital requirements. L.E. Smith has consistently been unable to
repay the overborrowings on its revolving line of credit which are required to
be repaid promptly. L.E. Smith was also in arrears on certain payments
related to its revolving line of credit and bank term note payable in July and
August, 2002. In addition, L.E. Smith has not been able to meet certain
financial ratios required under the Loan Agreement covering L.E. Smith's
revolving line of credit and bank term note payable. However, on August 23,
2002, L.E. Smith and Sky Bank entered into a Forbearance Agreement and
Amendment related to L.E. Smith's revolving line of credit and bank term note,
whereby Sky Bank has agreed to forbear from exercising its rights and remedies
with respect to the existing defaults by L.E. Smith under the Loan Agreement
provided there is no event of default by L.E. Smith under the terms of the
Forbearance Agreement which expires on July 7, 2003. In conjunction with the
Forbearance Agreement and Amendment, the due date of the bank term note has
been extended to March 5, 2008 with monthly interest only payments allowed for
September 5, 2002, and February 5, 2003 through August 5, 2003; monthly
principal payments of $34,000 plus interest will be due for all other months
during the term of the note. Sky Bank has authorized L.E. Smith to exceed its
borrowing base by a maximum of $800,000. In exchange, Bellevue Partners has
agreed to make unscheduled principal payments totaling $500,000 on its note to
Willowbrook Properties from the sale of certain outparcels, and Willowbrook
Properties has assigned its interest in these payments to Sky Bank. The
Allowed Overborrowings will be reduced by the amount of these payments as they
are received by the bank. As of November 12, 2002, the borrowings under L.E.
Smith's revolving line of credit exceeded the allowed borrowing base by
$567,000 (unaudited), $233,000 below the maximum Allowed Overborrowings. The
Forbearance Agreement prohibits L.E. Smith from making any payments to NBI or
any of its subsidiaries. The Forbearance Agreement also requires the Company
to obtain written agreements with its vendors and other creditors regarding
revised payment terms acceptable to the bank. The Company has been working
with its vendors and creditors on revised payment terms and is in the process
of obtaining written agreements with them. The Company has obtained an
extension of time from Sky Bank to March 5, 2003 in which to obtain these
written agreements. With this extension, the Company is currently in
compliance with the Forbearance Agreement. (See Note 2 to the Consolidated
Financial Statements.)
As of November 1, 2002, L.E. Smith was five months in arrears on its monthly
payments on its note payable from PADCED. In addition, L.E. Smith has been
unable to pay various other liabilities when due as required under the PADCED
loan agreement. These conditions cause the note payable from PADCED to be
subject to immediate demand at the option of the holder. Therefore, the
Company has included the entire balance of this note payable in current
liabilities at September 30, 2002, as was also required at June 30, 2002.
(See Note 2 to the Consolidated Financial Statements.)
The Company has incurred significant losses for the quarter ended September
30, 2002 and during fiscal 2002 and 2001 and had a significant working capital
deficit at September 30 and June 30, 2002. In addition, a large amount of
L.E. Smith's accounts payable are significantly past due. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern, as expressed by our independent auditors in an explanatory paragraph
in their report dated September 5, 2002 on our June 30, 2002 financial
statements. The Consolidated Financial Statements do not contain any
adjustments that might result from the outcome of this uncertainty. The
Forbearance Agreement and Amendment with
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER, FISCAL YEAR 2003 - CONTINUED
Sky Bank significantly reduces the amount of principal payments required on
the Company's long-term debt in fiscal 2003. L.E. Smith is currently trying
to obtain a six-month deferral of principal payments on its note payable from
the PADCED. L.E. Smith is also working with its accounts payable vendors to
obtain extended terms. Furthermore, management has been working on
significantly reducing its costs and expenses, including significantly
reducing its health insurance costs through a new collective bargaining
agreement that it is currently negotiating with its union employees at L.E.
Smith (the current agreement expires on November 30, 2002 - see Note 8 to the
Consolidated Financial Statements).
The Company also is working on increasing its sales volume and gross profit at
L.E. Smith. Due to intense foreign competition and the unfavorable economic
conditions in the United States during the last two years, it has been
difficult for L.E. Smith to generate sufficient sales volume to allow it to
obtain the critical mass required in its production facility for it to be
profitable.
L.E. Smith is currently in discussions with other glass manufacturers to
develop marketing partnerships that would help increase sales volumes for each
party. This is possible when the companies offer different types of products
and consequently do not directly compete with one another. For example, one
company may be an automated glass manufacturer which sells to the mass market,
however, their manufacturing plant is not able to handle smaller quantities
efficiently. In those situations requiring smaller quantities, they would sell
L.E. Smith handmade products. In return, L.E. Smith could sell some of that
company's products to its customers when large quantities were required. In
addition, L.E. Smith has the capability to produce colored and decorated
glass, whereas another company may have the ability to produce leaded crystal
which L.E. Smith does not. Through a marketing partnership, two or three
companies become stronger by capitalizing on each other's strength.
In addition, L.E. Smith must find a way to be closer to the end-user. Today's
distribution methods are very expensive for manufacturers. In highly
competitive situations, the Company is often unable to sell its products or
does so at inadequate margins because of the mark-up required by the retailer.
For many years, L.E. Smith has had an on-site factory outlet store that has
been profitable. Therefore, the Company has decided on a retail strategy of
opening retail stores in several outlet locations over the next year. These
stores will be opened both independently and through joint ventures with
marketing partners. These retail outlets will do several things to improve
our Company. First, it will allow us to improve our margins because we have
eliminated several layers of distribution. Second, it allows us to increase
our sales volume by taking advantage of an increasing trend in retail markets
towards outlet and discount stores, away from pricey shopping malls. In
October 2002, the Company acquired retail space for an outlet store in
Lancaster, Pennsylvania and anticipates opening this store in November 2002.
The Company will also increase its marketing efforts related to a new line of
home building products that it has been developing including glass sinks,
glass tiles, and glass blocks, as well as glass used in various architectural
projects.
However, there can be no assurance that the Company will be successful in
increasing its sales and gross profit and reducing its costs and expenses; nor
can there be any assurance that L.E. Smith's creditors will grant the Company
extended payment terms. (See Note 2 to the Consolidated Financial
Statements.)
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER, FISCAL YEAR 2003 - CONTINUED
The following summarizes the Company's aggregate contractual obligations as of
September 30, 2002:
Nine Total payments due during
Months fiscal years ended June 30,
Ended -------------------------------
June 30, 2004 2006
Total 2003 & 2005 & 2007 Thereafter
-------- -------- -------- -------- -----------
(Amounts in thousands)
<s> <c> <c> <c> <c> <c>
Line of credit(a) $ 2,896 $ 2,896 $ -- $ -- $ --
Long-term notes payable
- Sky Bank(a) 2,011 134 737 804 336
- State of Pennsylvania Machinery
& Equipment Loan Fund note(b) 322 322 -- -- --
- Other notes payable 1,119 45 126 259 689
Present value of capital
lease obligation 982 35 88 106 753
Operating leases 1,469 196 374 276 623
Minimum royalties(c) 25 25 -- -- --
Purchase obligation 42 42 -- -- --
CEO employment agreement(d) 55 55 -- -- --
Other 16 12 4 -- --
-------- -------- -------- -------- -----
Total contractual obligations $ 8,937 $ 3,762 $ 1,329 $ 1,445 $ 2,401
======== ======== ======== ======== ========
(a) L.E. Smith has consistently been unable to repay the overborrowings on its
revolving line of credit which are required to be repaid promptly. L.E. Smith
was also in arrears on certain payments related to its revolving line of
credit and bank term note payable in July and August 2002. In addition, L.E.
Smith has not been able to meet certain financial ratios required under the
Loan Agreement. On August 23, 2002, L.E. Smith and Sky Bank entered into a
Forbearance Agreement and Amendment to L.E. Smith's revolving line of credit
and bank term note, whereby Sky Bank has agreed to forbear from exercising its
rights and remedies with respect to the existing defaults by L.E. Smith under
the Loan Agreement provided there is no event of default by L.E. Smith under
the terms of the Forbearance Agreement which expires on July 7, 2003. As of
November 12, 2002, the borrowings under L.E. Smith's revolving line of credit
exceeded the allowed borrowing base by $567,000 (unaudited), $233,000 below
the maximum allowed overborrowings. See previous discussion in this
Liquidity and Capital Resources section.
(b) As of November 1, 2002, L.E. Smith was five months in arrears on its
monthly payments on its note payable from PADCED. In addition, L.E. Smith has
been unable to pay various other liabilities when due as required under the
PADCED loan agreement. These conditions cause the note payable from PADCED to
be subject to immediate demand at the option of the holder. Therefore, the
Company has included the entire balance of this note payable in current
liabilities at September 30, 2002, as was also required at June 30, 2002.
L.E. Smith is currently trying to obtain a six-month deferral of principal
payments on its note payable from the PADCED.
(c) During the third quarter of fiscal 2002, the Company exercised its option
for the first new renewal period, April 1, 2002 through September 30, 2002,
under its master license agreement for its decoder business. For the first
renewal period, the Company is required to pay royalties equal to the greater
of $150,000 or 5% of the net decoder sales and services generated under the
license, including decoder sales and services produced by sublicensees. As of
September 30, 2002, the Company made minimum royalty payments required under
the master license agreement totaling $125,000 and has $25,000 minimum
royalties payable outstanding for the first renewal period, which have
subsequently been paid. The Company included $75,000 in marketing, general
and administrative expenses for the quarter ended September 30, 2002 related
to the amount of minimum royalty expense in excess of royalties payable based
upon net decoder sales and services. The Company has not exercised its option
for the second
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER, FISCAL YEAR 2003 - CONTINUED
renewal period, October 1, 2002 through September 30, 2003, under the master
license but is currently in the process of negotiating new terms for this
period. If NBI is unable to negotiate mutually acceptable terms with the
master licensor for the second renewal period, then the Company will be
exiting the business. If renewed under the existing terms, the Company would
be required to pay royalties equal to the greater of $400,000 or 5% of the net
decoder sales and services generated under the license.
(d) Under the terms of an agreement with the Company's CEO ("CEO Agreement"),
the Company pays its CEO, Jay H. Lustig, an annual salary of $60,000. The CEO
Agreement runs for one-year terms which expire on June 30. The CEO Agreement
also provides that the Company will pay Mr. Lustig 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. The Company suspended salary payments to Mr. Lustig as of
August 16, 2002 but is accruing his salary for future payment when the
Company's cash flow improves.
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 was effective July 1, 2002 for the Company. The adoption
of these Statements had no material impact on the 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 was effective July 1, 2002 for the Company.
The adoption of this Statement had no material impact on the financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 requires the classification of gains and losses
from extinguishments of debt as extraordinary items only if they meet the
criteria for such classification in APB Opinion No. 30, "Reporting the Results
of Operations, Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions".
Additionally, SFAS No. 145 requires sale-leaseback accounting for certain
lease modifications that have economic effects similar to sale-leaseback
transactions. SFAS No. 145 was also effective July 1, 2002 for the Company.
The adoption of this Statement had no material impact on the financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company believes the adoption of this
Statement will have no material impact on its consolidated financial
statements.
NBI, INC.
Item 3. Controls and Procedures
- -------------------------------------
In order to ensure that the information the Company must disclose in its
filings with the Securities and Exchange Commission is recorded, processed,
summarized and reported on a timely basis, the Company has formalized its
disclosure controls and procedures. The Company's principal executive officer
and principal financial officer have reviewed and evaluated the Company's
disclosure controls and procedures as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934, as amended as of a date within 90
days prior to the filing date of this report (the "Evaluation Date"). Based
on such evaluation, such officers have concluded that, as of the Evaluation
Date, the Company's disclosure controls and procedures are effective in
bringing to their attention on a timely basis material information relating to
the Company required to be included in the Company's periodic filings under
the Securities Exchange Act of 1934.
Since the Evaluation Date, there have not been any significant changes in the
internal controls of the Company, or in other factors that could significantly
affect these controls subsequent to the Evaluation Date.
NBI, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 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.
November 15, 2002 By: /s/ Marjorie A. Cogan
- ------------------- ----------------------------------
(Date) Marjorie A. Cogan
As a duly authorized officer
Chief Financial Officer, Secretary
CERTIFICATIONS
CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF NBI, INC.
PURSUANT OF 18 U.S.C. Section 1350
I, Jay H. Lustig, certify that:
1. I have reviewed this quarterly report on Form 10-KSB of NBI, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of NBI,
Inc. as of, and for, the periods presented in this quarterly report.
4. NBI, Inc's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures, as defined in
Exchange Act Rules 13a-14 and 15d-14, for NBI, Inc. and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to NBI, Inc., including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which the quarterly report is being prepared;
b. evaluated the effectiveness of NBI, Inc.'s disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. NBI, Inc.'s other certifying officer and I have disclosed, based
on our most recent evaluation, to NBI Inc.'s auditors and the audit committee
of NBI, Inc.'s board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect NBI Inc.'s ability to record,
process, summarize, and report financial data and have identified for NBI
Inc.'s auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in NBI Inc.'s internal controls.
6. NBI Inc.'s other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 15, 2002 /s/ JAY H. LUSTIG
------------------- -----------------------
Jay H. Lustig
Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER OF NBI, INC.
PURSUANT OF 18 U.S.C. SECTION 1350
I, Marjorie A. Cogan, certify that:
1. I have reviewed this quarterly report on Form 10-KSB of NBI, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of NBI,
Inc. as of, and for, the periods presented in this quarterly report.
4. NBI, Inc's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures, as defined in
Exchange Act Rules 13a-14 and 15d-14, for NBI, Inc. and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to NBI, Inc., including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which the quarterly report is being prepared;
b. evaluated the effectiveness of NBI, Inc.'s disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. NBI, Inc.'s other certifying officer and I have disclosed, based
on our most recent evaluation, to NBI Inc.'s auditors and the audit committee
of NBI, Inc.'s board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect NBI Inc.'s ability to record,
process, summarize, and report financial data and have identified for NBI
Inc.'s auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in NBI Inc.'s internal controls.
6. NBI Inc.'s other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 15, 2002 /s/ MARJORIE A. COGAN
----------------------------------
Marjorie A. Cogan
Chief Financial Officer, Secretary
CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF NBI, INC.
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of NBI, Inc. on Form 10-QSB for the
period ending September 30, 2002 as filed with the Securities and Exchange
Commission on November 15, 2002 (the "Report" ), Jay H. Lustig, as Chief
Executive Officer of NBI, Inc., hereby certifies, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, to the best of his knowledge, that:
1. The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of NBI,
Inc.
Date: November 15, 2002 /s/ JAY H. LUSTIG
-----------------------
Jay H. Lustig
Chief Executive Officer
This certification accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
CERTIFICATION OF CHIEF FINANCIAL OFFICER OF NBI, INC.
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of NBI, Inc. on Form 10-QSB for the
period ending September 30, 2002 as filed with the Securities and Exchange
Commission on November 15, 2002 (the "Report"), Marjorie A. Cogan, as Chief
Financial Officer of NBI, Inc., hereby certifies, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, to the best of her knowledge, that:
1. The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of NBI,
Inc.
Date: November 15, 2002 /s/ MARJORIE A. COGAN
------------------- -------------------------
Marjorie A. Cogan
Chief Financial Officer
This certification accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.