-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GoDfwdlIQMn5yGL1la0ue4kY2DbcwE79mKQhJQDZ8WqZnrFrpFXA85qvA+79O0QX PJpmDelaMh4gS9VzukDgNg== 0000313518-03-000004.txt : 20030515 0000313518-03-000004.hdr.sgml : 20030515 20030515174136 ACCESSION NUMBER: 0000313518-03-000004 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NBI INC CENTRAL INDEX KEY: 0000313518 STANDARD INDUSTRIAL CLASSIFICATION: GLASS, GLASSWARE, PRESSED OR BLOWN [3220] IRS NUMBER: 840645110 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-08232 FILM NUMBER: 03706494 BUSINESS ADDRESS: STREET 1: 850 23RD AVENUE STREET 2: SUITE D CITY: LONGMONT STATE: CO ZIP: 80501 BUSINESS PHONE: 3036842700 MAIL ADDRESS: STREET 1: 850 23RD AVENUE SUITE D CITY: LONGMONT STATE: CO ZIP: 80516 10QSB 1 mar0310q.txt 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, 2003 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 Check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [ ] YES [X] 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, 2003 - -------------------------------------- -------------------------- Common Stock, par value $.01 per share 8,103,320 NBI, INC. INDEX TO FORM 10-QSB For Quarter Ended March 31, 2003
PAGE -------- PART I - FINANCIAL INFORMATION Consolidated Financial Statements (Unaudited) 3 - 6 Supplementary Notes to Consolidated Financial Statements (Unaudited) 7 - 15 Management's Discussion and Analysis of Financial Condition and Results of Operations 16 - 23 Controls and Procedures 24 PART II - OTHER INFORMATION Exhibits and Reports on Form 8-K 25
NBI, INC. CONSOLIDATED BALANCE SHEETS (Amounts in Thousands Except Share Data)
March 31, June 30, 2003 2002 --------- --------- (Unaudited) (Audited) ASSETS ------ Current assets: Cash and cash equivalents $ 141 $ 199 Accounts receivable, less allowance for doubtful accounts of $291 and $279, respectively 680 1,127 Inventories 2,904 3,262 Other current assets 107 111 Current assets of discontinued operations -- 151 -------- -------- Total current assets 3,832 4,850 Property, plant and equipment, net 7,402 8,054 Note receivable from related party 2,228 2,300 Other assets 309 288 Long-term assets of discontinued operations -- 3 -------- -------- $13,771 $15,495 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Short-term borrowings and current portion of notes payable $ 4,748 $ 3,435 Current portion of capital lease obligation 51 41 Accounts payable 2,173 1,827 Accrued liabilities and other 886 722 Current liabilites of discontinued operations -- 31 -------- -------- Total current liabilities 7,858 6,056 Long-term liabilities: Notes payable 1,027 2,951 Capital lease obligation 916 947 Deferred income taxes 64 64 Postemployment disability benefits 104 119 Deferred gain from sale of real estate, net of taxes 881 881 -------- -------- Total liabilities 10,850 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 (7,263) (5,707) -------- -------- 3,789 5,345 Less treasury stock, at cost (2,027,200 shares) (868) (868) -------- -------- Total stockholders' equity 2,921 4,477 -------- -------- $13,771 $15,495 ======== ======== 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, 2003 2002 2003 2002 ------- ------- -------- -------- Revenues: Sales $2,367 $3,303 $ 7,790 $10,011 Rental and service 419 464 1,635 1,717 ------- ------- -------- -------- 2,786 3,767 9,425 11,728 ------- ------- -------- -------- Costs and expenses: Cost of sales 2,423 2,959 7,323 8,210 Cost of rental and service 382 385 1,269 1,268 Marketing, general and administrative 656 780 1,981 2,363 ------- ------- -------- -------- 3,461 4,124 10,573 11,841 ------- ------- -------- -------- Loss from operations (675) (357) (1,148) (113) Other income (expense): Interest income 21 29 83 119 Other income and expenses, net (1) 1 19 4 Interest expense (109) (123) (343) (392) ------- ------- -------- -------- (89) (93) (241) (269) ------- ------- -------- -------- Loss from continuing operations before income taxes (764) (450) (1,389) (382) Income tax benefit (provision) 10 (1) 1 (12) ------- ------- -------- -------- Loss before discontinued operations (754) (451) (1,388) (394) Loss from discontinued operations (1) (91) (168) (177) ------- ------- -------- -------- Net loss (755) (542) (1,556) (571) Dividend requirement on preferred stock (128) (128) (384) (384) ------- ------- -------- -------- Loss attributable to common stock $ (883) $ (670) $(1,940) $ (955) ======= ======= ======== ======== Loss per common share - basic and diluted: Loss before discontinued operations $ (.11) $ (.07) $ (.22) $ (.10) Loss from discontinued operations -- (.01) (.02) (.02) ------- ------- -------- -------- Net loss $ (.11) $ (.08) $ (.24) $ (.12) ======= ======= ======== ======== Weighted average number of common shares outstanding 8,103 8,103 8,103 8,103 ======= ======= ======== ======== See accompanying notes.
NBI, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) (Unaudited)
Nine Months Ended March 31, 2003 2002 -------- ------ Cash flows from operating activities: Net loss $(1,556) $(571) Adjustments to reconcile net loss to net cash flow provided by operating activities: Depreciation and amortization 792 963 Provision for bad debts and returns 31 48 Inventory reserve provisions 83 82 Gain on sales of property and equipment (10) -- Other (15) (14) Changes in assets -- decrease (increase): Accounts receivable 546 (199) Inventories 275 (570) Other current assets 25 31 Other assets (14) (3) Changes in liabilities -- increase: Accounts payable and accrued liabilities 457 508 -------- ------ Net cash flow provided by operating activities 614 275 -------- ------ Cash flows from investing activities: Collections on note receivable 72 163 Proceeds from sales of property and equipment 69 -- Purchases of property and equipment (151) (230) -------- ------ Net cash flow used in investing activities (10) (67) -------- ------ Cash flows from financing activities: Net borrowings (payments) on line of credit (299) 399 Payments on notes payable (311) (478) Payments on capital lease obligation (22) (26) Loan costs paid (30) -- -------- ------ Net cash used in financing activities (662) (105) -------- ------ Net increase (decrease) in cash and cash equivalents (58) 103 Cash and cash equivalents at beginning of period 199 270 -------- ------ Cash and cash equivalents at end of period $ 141 $ 373 ======== ====== See accompanying notes.
NBI, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) (Unaudited)
Nine Months Ended March 31, 2003 2002 ---- ---- Supplemental disclosures of cash flow information: Interest paid $327 $382 ==== ==== Income taxes paid $ 18 $ 4 ==== ==== Noncash purchases of property, plant and equipment included in accounts payable and accrued liabilities at end of period $ 67 $ 82 ==== ==== Loan fees incurred included in accounts payable at end of period $ 29 $ -- ==== ==== 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. Rental and service revenue from the hotel operation is recognized when provided. 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, as of June 30, 2002, the Company determined that the sale would not be completed within the next twelve months and, therefore the hotel was a continuing operation. The hotel's operations for the three and nine months ended March 31, 2002 have been reclassified to continuing operations. There were no other adjustments in the financial statements as a result of this change. On January 8, 2003, the Board of Directors decided not to renew the license for its decoder business and to exit this business. Therefore, the Company has discontinued its decoder business, and it has separately reported the loss from this segment as discontinued operations for the three and nine months ended March 31, 2003 and 2002 (see Note 3). Certain other items in the fiscal 2002 financial statements have been reclassified to conform to the 2003 manner of presentation. Note 2 - Going Concern and Management's Plan - --------------------------------------------------- L.E. Smith Glass Company ("L.E. Smith"), a wholly-owned subsidiary, 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 was 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 are 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 ( see Note 15 ). The Allowed Overborrowings will be reduced by the amount of these payments as they are received by the bank. As of May 5, 2003, the borrowings under L.E. Smith's revolving line of credit exceeded the allowed borrowing base by $727,000, $73,000 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 L.E. Smith to obtain written agreements with its vendors and other creditors regarding revised payment terms acceptable to the bank by an extended due date of March 5, 2003. L.E. Smith has been working with its vendors and creditors on revised payment terms and is in the process of obtaining written agreements with them. However, L.E. Smith has not been able to obtain written agreements from all of its creditors, including its natural gas supplier ( see Note 9 ). This NBI, INC. SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) constitutes an event of default under the Forbearance Agreement which allows the bank, at its option, to demand immediate payment of the entire outstanding bank debt. Therefore, the Company has classified L.E. Smith's entire bank debt as current at March 31, 2003. Management has been in discussions with the bank regarding this situation and is working with the bank towards a mutually acceptable resolution. As of December 1, 2002, L.E. Smith was six months in arrears on its monthly payments on its note payable to the Pennsylvania Department of Community and Economic Development ("PADCED"). On December 13, 2002, L.E. Smith obtained a six-month deferral of principal payments on this note. In January 2003, L.E. Smith paid PADCED all of the past due interest as well as the regular loan payment scheduled for January 1, 2003. However, L.E. Smith is in arrears on the regular payments scheduled for March, April and May 2003, and has been unable to pay various other liabilities when due as required under the PADCED loan agreement. These conditions cause the note payable to 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 March 31, 2003, as was also required at June 30, 2002. The Company has incurred significant losses for the nine months ended March 31, 2003 and during fiscal 2002 and 2001 and had a significant working capital deficit at March 31, 2003 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 audit report dated September 5, 2002, on our June 30, 2002 financial statements. In addition, at March 31, 2003, L.E. Smith was in default on its Forbearance Agreement with Sky Bank and continues to be in default on its PADCED loan agreement. The accompanying Consolidated Financial Statements do not contain any adjustments that might result from the outcome of these uncertainties other than the reclassification of L.E. Smith's bank and PADCED debts to current at March 31, 2003, as was also required at June 30, 2002 for the PADCED note payable. The Forbearance Agreement and Amendment with Sky Bank significantly reduces the amount of principal payments required on L.E. Smith's long-term debt in fiscal 2003. L.E. Smith is also working with its accounts payable vendors to obtain extended terms. Furthermore, management has significantly reduced its costs and expenses, including significantly reducing its health insurance costs through a new collective bargaining agreement which it obtained on November 26, 2002, reductions in workforce and savings 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 has been 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's 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. However, L.E. Smith has not been able to capitalize on any marketing partnerships to-date, because the weak economy has also caused a slowdown in business for the other parties. 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, L.E. Smith 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, L.E. Smith 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 are expected to do several things to improve L.E. Smith. First, NBI, INC. SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) it would improve gross margins due to the elimination of several layers of distribution. Second, it would increase 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, L.E. Smith acquired retail space for an outlet store in Lancaster, Pennsylvania which it opened in mid-November 2002. Sales from this store have been very disappointing due to the poor retail market and several months of inclement weather. In an effort to increase the sales of the Lancaster store, L.E. Smith has retained the services of a merchandising and advertising consultant, as of April 1, 2003. Due to the poor results from its Lancaster store, L.E. Smith has delayed its pursuit of any additional outlet locations at this time. L.E. Smith has also increased its marketing efforts related to food service and hospitality products as well as glass blocks used in various architectural projects. In addition, L.E. Smith is exploring a direct marketing channel for one of its newer product lines because it believes this would be more successful than using traditional distribution methods for these products. There can be no assurance that the bank will continue to work with the Company towards a mutually acceptable resolution and not demand immediate payment of all of L.E. Smith's bank debt; nor can there be any assurance that L.E. Smith's other note will not be called for immediate payment. Furthermore, there can be no assurance that L.E. Smith will be successful in increasing its sales and gross profit; nor can there be any assurance that L.E. Smith's creditors will grant it extended payment terms. Note 3 - Discontinued Operations - ------------------------------------ The Company's master license related to its decoder business expired on September 30, 2002. During the second quarter of fiscal 2003, the Company obtained a nonexclusive licence from the master licensor covering NBI and its existing sublicensees for the period October 1 through December 31, 2002, while it continued negotiations on revised terms for the second renewal period under the master license. The Company was unable to negotiate acceptable renewal terms for the license and, consequently, on January 8, 2003, the Board of Directors decided not to renew the license and to exit its decoder business. Therefore, the Company has discontinued its decoder business, and it has separately reported the loss from this segment as discontinued operations as follows:
Three months ended Nine months ended March 31, March 31, 2003 2002 2003 2002 ------ ------ ------ ------ (Amounts in thousands) Revenues from discontinued operations $-- $ 13 $ 21 $ 39 ==== ===== ====== ====== Loss from discontinued operations before income taxes $(1) $(91) $(168) $(177) Income tax benefit (provision) -- -- -- -- ---- ----- ------ ------ Net loss from discontinued operations $(1) $(91) $(168) $(177) ==== ===== ====== ======
There were minimal expenses associated with exiting this business, all of which were incurred in the third quarter of fiscal 2003. The Company does not expect to incur any additional expenses associated with its decoder business. There were no assets or liabilities of discontinued operations at March 31, 2003. Note 4 - 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 5 - Inventories - ----------------------- Inventories are comprised of the following amounts, which are presented net of reserves totaling $281,000 and $198,000 at March 31, 2003 and June 30, 2002, respectively:
March 31, June 30, 2003 2002 ------ ------ Raw materials $ 476 $ 590 Work in process 570 638 Finished goods 1,841 2,017 Food and beverage inventory 17 17 ------ ------ $2,904 $3,262 ====== ======
Note 6 - 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 15). The note bears interest at the rate of two-year Treasury Notes plus 200 basis points with a rate of 5.05% determined on December 31, 2001 for all of calendar 2002, a rate of 3.602% determined on December 31, 2002 for all of calendar 2003, 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, 2002 Willowbrook Properties assigned its rights to $500,000 of future payments on the note receivable to Sky Bank (see Notes 2 and 15). At March 31, 2003, the note receivable balance was $2,228,000. Note 7 - Income Taxes - ------------------------- The Company recorded income tax benefits of $10,000 and $1,000 for the three and nine months ended March 31, 2003. Income tax provisions of $1,000 and $12,000, respectively, were recorded for the same periods in the prior fiscal year. 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 nine months ended March 31, 2003 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 or nine months ended March 31, 2003 or 2002. 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 15.) NBI, INC. SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 9 - Contingencies - ------------------------- Historically, L.E. Smith has purchased natural gas under long-term contracts, at a fixed cost per unit with no minimum volume requirements. L.E. Smith's most recent contract expired on September 30, 2002 and due to L.E. Smith's poor financial condition, it has been unable to obtain a contract for fixed natural gas prices. Therefore, L.E. Smith has been purchasing its natural gas on a month-to-month basis with its supplier. In November 2002, L.E. Smith reached a verbal agreement regarding the purchase price for its natural gas. However, since December 1, 2002, the supplier has been charging a significantly higher rate than had been agreed upon. L.E. Smith is disputing approximately $163,000 of natural gas charges in excess of the verbally agreed-upon rate. The full amount of natural gas costs billed by its supplier has been recorded and included in cost of sales and accounts payable at March 31, 2003. Because L.E. Smith does not have a contract for fixed natural gas prices, the rates it will be charged for future consumption may vary significantly and may not be limited. This could have a material adverse impact on the Company's financial condition. Note 10 - Stockholders' Equity - ---------------------------------- The Company has authorized 20,000,000 shares of $.01 par value common stock. At March 31, 2003, 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, 2003. At March 31, 2003, 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 March 31, 2003, 507,421 registered shares of Series A Cumulative Preferred Stock were issued and outstanding. The Company reported dividend requirements of $128,000 and $384,000 attributable to its preferred stock for each of the three and nine month periods ended on March 31, 2003 and 2002. 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 $1,922,000 as of March 31, 2003. Note 11 - Income (Loss) Per Common Share - ----------------------------------------------- NBI calculates earnings (loss) per share in accordance with SFAS No. 128, which provides for the calculation of "Basic" and "Diluted" earnings (loss) per share. Basic earnings (loss) 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 three and nine month periods ended March 31, 2003 and 2002, 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 March 31, 2003 were as follows:
Number Exercise Outstanding at Price March 31, 2003 ----- -------------- Stock options: $ .22 350,000 $ .38 201,000 $ .77 400,000 Warrants: $1.20 1,000,000 --------- 1,951,000 =========
NBI, INC. SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 12 - Stock Options - -------------------------- In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure -- an Amendment of FASB Statement No. 123". This statement amends SFAS No. 123, "Accounting for Stock - Based Compensation ", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock - based employee compensation and the effect of the method used on reported results. The Company has adopted the disclosure requirements effective December 31, 2002. The following provides pro forma information regarding net income (loss) as if compensation cost for the Company's stock option plan had been determined in accordance with the fair value based method as required by SFAS No. 148.
Three months ended Nine months ended March 31, March 31, 2003 2002 2003 2002 ------ ------ -------- ------ (Amounts in thousands) Net loss attributable to common stockholders - as reported $(883) $(670) $(1,940) $(955) ====== ====== ======== ====== Net loss attributable to common stockholders - proforma $(884) $(672) $(1,944) $(958) ====== ====== ======== ====== Net loss per common share - as reported $(.11) $(.08) $ (.24) $(.12) ====== ====== ======== ====== Net loss per common share - proforma $(.11) $(.08) $ (.24) $(.12) ====== ====== ======== ====== The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for the grants issued during fiscal 2002: no dividend yield; expected volatility of 85.15%; risk-free interest rate of 3.94%; and expected lives of 4 years. No other options have been granted that would affect fiscal 2003 or 2002.
Note 13 - 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. NBI, INC. SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 14 - 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. Information by segment and a reconciliation to reported amounts are as follows:
Corporate, Glass Hotel Other, and Consolidated Manufacturing Operations Eliminations Total ------------- ---------- ------------ ------------ Three Months Ended March 31, 2003: Revenues from external customers $ 2,367 $ 419 $ -- $ 2,786 ======== ======= ======= ======== Operating loss $ (535) $ (75) $ (65) $ (675) ======== ======= ======= ======== Three Months Ended March 31, 2002: Revenues from external customers $ 3,303 $ 464 $ -- $ 3,767 ======== ======= ======= ======== Operating loss $ (258) $ (39) $ (60) $ (357) ======== ======= ======= ======== Nine Months Ended March 31, 2003: Revenues from external customers $ 7,790 $1,635 $ -- $ 9,425 ======== ======= ======= ======== Operating loss $ (927) $ (23) $ (198) $(1,148) ======== ======= ======= ======== Total assets at March 31, 2003 $ 9,498 $2,423 $1,850 $13,771 ======== ======= ======= ======== Nine Months Ended March 31, 2002: Revenues from external customers $10,011 $1,717 $ -- $11,728 ======== ======= ======= ======== Operating profit (loss) $ (2) $ 65 $ (176) $ (113) ======== ======= ======= ======== Total assets at March 31, 2002 $11,725 $2,896 $1,695 $16,316 ======== ======= ======= ========
Note 15 - Related Party Transactions - ----------------------------------------- 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. NBI, INC. SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 Company obtained a note receivable from Bellevue Partners in conjunction with this transaction. (See Notes 6 and 8.) 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 6.) 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 16 - Recent Accounting Pronouncements - ------------------------------------------------- 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 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. The Company voluntarily adopted SFAS No. 144 early, effective July 1, 2001. 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 adopted this Statement during the quarter ended March 31, 2003. The adoption of this statement had no material impact on the financial statements. NBI, INC. SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure -- an Amendment of FASB Statement No. 123". This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has adopted the disclosure requirements effective December 31, 2002 (see Note 12). NBI, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIRD 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, 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 reduction NBI, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIRD QUARTER, FISCAL YEAR 2003 - CONTINUED in the valuation allowance attributable to post-reorganization net operating losses would then be credited to the income tax provision. 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. Rental and service revenue from the hotel operation is recognized when provided. RESULTS OF OPERATIONS Sales revenue totaled $2,367,000 for the three months ended March 31, 2003, compared to sales revenue of $3,303,000 for the same period in the prior fiscal year, reflecting a decline of $936,000, or 28.3% including a decrease of $222,000 in revenues to a home-party customer that was new in fiscal 2002, a decline of $69,000 in sales to L.E. Smith's significant customer, a decrease of $119,000 in sales to one of its larger specialty store customers and large decreases in sales to many other customers. The decreased revenues in the third quarter of fiscal 2003 resulted from the poor economy, including the effects of concern over the situation in Iraq, combined with sales momentum and customer confidence lost due to the period of severe financial difficulties before L.E. Smith obtained the Forbearance Agreement with its bank on August 23, 2002. Sales revenue totaled $7,790,000 for the nine months ended March 31, 2003 compared to sales revenue of $10,011,000 for the same period in the prior fiscal year reflecting a decrease of $2,221,000, or 22.2%. L.E. Smith has experienced significant declines in revenues to most of its customers, particularly specialty and retail stores, as well as a decrease in the number of active customers. In addition to declines resulting from the poor economy and the decrease in sales momentum and customer confidence, 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. In addition, L.E. Smith closed one retail outlet in September and has had poor results from its new Lancaster store which opened in mid-November. The decreased sales for the nine months ended March 31, 2003 compared to 2002 included a decline of $77,000 in sales to its significant customer, a decrease of $316,000 in sales to one of its larger specialty store customers and a decline of $125,000 in sales to one its larger department store customers. However, L.E. Smith did experience an increase of $95,000 in sales to a home-party customer that was new in fiscal 2002. Rental and service revenues totaled $419,000 for the third quarter of fiscal 2003, a decrease of $45,000, or 9.7% compared to $464,000 for the same period in the prior fiscal year. Fiscal year-to-date, rental and service revenues totaled $1,635,000, a decrease of $82,000 or 4.8% compared to $1,717,000 for the nine months ended March 31, 2002. These decreases resulted primarily from a moderate decrease in the occupancy rate during the second and third quarters of fiscal 2003, partially offset by a slight increase in the average daily room rate. The decline in occupancy rates was primarily due to the poor economy as well as several months of inclement weather during the second and third quarters of fiscal 2003. The occupancy rate was 51.5% and 66.3% for the three and nine months ended March 31, 2003 compared to 57.1% and 70.9% for the same periods in the prior fiscal year. In addition to the effect of the decreased occupancy rates, the restaurant business also declined for the third quarter of fiscal 2003 compared to 2002 because Easter Sunday occurred in April 2003 whereas it was included in the third quarter of fiscal 2002. NBI, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIRD QUARTER, FISCAL YEAR 2003 - CONTINUED Cost of sales as a percentage of related revenue was 102.4% for the quarter ended March 31, 2003, compared to 89.6% for the same period in fiscal 2002. For the nine months ended March 31, 2003 and 2002, cost of sales as a percentage of related revenue was 94.0% compared to 82.0%. The resulting decline in gross margin for the three and nine months ended March 31, 2003 compared to the same periods in fiscal 2002 was primarily due to substantially lower sales volume available to cover fixed costs, increased sales discounting, and higher utilities expenses (increases of $128,000 and $52,000, respectively) resulting from L.E. Smith's inability to obtain a long-term contract for its natural gas requirements (see below). However, these items were partially offset by significant declines in other expenses during the three and nine months ended March 31, 2003 compared to the same periods in fiscal 2002, resulting from lower activity and cost controls including (i) substantially lower labor costs related to a reduction in the average factory headcount of approximately 29%; (ii) declines of $38,000 and $97,000, respectively, in factory supplies, repairs and general expenses; and (iii) decreases of $102,000 and $63,000, respectively, in insurance expenses due to continued reductions in manufacturing headcount, as well as an increase in the employees' portion of health insurance premiums effective December 1, 2002, resulting from a new union contract, partially offset by insurance cost increases. In addition, L.E. Smith had decreases of $68,000 and $185,000, respectively, in depreciation expense, as many of its assets became fully depreciated in August 2002. Historically, L.E. Smith has purchased natural gas under long-term contracts, at a fixed cost per unit with no minimum volume requirements. L.E. Smith's most recent contract expired on September 30, 2002 and due to L.E. Smith's poor financial condition, it has been unable to obtain a contract for fixed natural gas prices. Therefore, L.E. Smith has been purchasing its natural gas on a month-to-month basis with its supplier. In November 2002, L.E. Smith reached a verbal agreement regarding the purchase price for its natural gas. However, since December 1, 2002, the supplier has been charging a significantly higher rate than had been agreed upon. L.E. Smith is disputing approximately $163,000 of natural gas charges in excess of the verbally agreed-upon rate. The full amount of natural gas costs billed by its supplier has been recorded and included in cost of sales and accounts payable at March 31, 2003. Because L.E. Smith does not have a contract for fixed natural gas prices, the rates it will be charged for future consumption may vary significantly and may not be limited. This could have a material adverse impact on the Company's financial condition. (See Note 9). As noted above, L.E. Smith reported negative gross margin of $56,000, or 2.4%, for the third quarter of fiscal 2003. However, the natural gas charges included in cost of sales for the third quarter of fiscal 2003 are significantly higher than would be incurred with a long-term market rate and have been recorded as period costs, not capitalized as part of L.E. Smith's inventory. The Company believes that its inventory is properly stated at the lower of cost or market and no adjustment to the carrying value of inventory is required at March 31, 2003. Cost of rental and service as a percentage of related revenue was 91.2% for the third quarter of fiscal 2003 compared to 83.0% for the third quarter of fiscal 2002. For the nine months ended March 31, 2003 and 2002, cost of rental and service as a percentage of related revenue was 77.6% compared to 73.9%. The related declines in gross margin resulted from the decreased revenue during the second and third quarters of fiscal 2003, as well as general cost increases partially offset by lower depreciation expense, as many of the hotel's assets became fully depreciated in August 2002. Marketing, general and administrative expenses totaled $656,000 and $1,981,000 for the three and nine months ended March 31, 2003, respectively, compared to $780,000 and $2,363,000 for the same periods in fiscal 2002, reflecting decreases of $124,000, or 15.9%, and $382,000, or 16.2%, respectively. The decreases were primarily due to significantly lower sales commissions (decreases of $60,000 and $132,000, respectively), related to the decline in sales revenue, the sales mix and increased price discounting, and significant savings from lower activity and cost control measures, including (i) decreases totaling $48,000 and $94,000, respectively, for payroll and related expenses, and (ii) declines of $23,000 and $52,000, respectively, in L.E. Smith's advertising, catalog and gift show expenses. Interest income totaled $21,000 and $83,000 for the three and nine months ended March 31, 2003 compared to $29,000 and $119,000 for the same periods in the prior fiscal year. The decrease was primarily due to a decline in the average interest rate and average balance outstanding on the note receivable from a related party. Interest expense totaled $109,000 and $343,000 for the three and nine months ended March 31, 2003 compared to $123,000 and $392,000 for the same periods in the prior fiscal year. The decrease was primarily due to 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. NBI, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIRD QUARTER, FISCAL YEAR 2003 - CONTINUED The Company recorded income tax benefits of $10,000 and $1,000 for the three and nine months ended March 31, 2003. Income tax provisions totaling $1,000 and $12,000 were recorded for the same periods in the prior fiscal year. 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 nine months ended March 31, 2003 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 nine months ended March 31, 2003 or 2002. 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, as of June 30, 2002, the Company determined that the sale would not be completed within the next twelve months and, therefore the hotel was a continuing operation. The hotel's operations for the three and nine months ended March 31, 2002 were reclassified to continuing operations. There were no other adjustments in the financial statements as a result of this change. The Company's master license related to its decoder business expired on September 30, 2002. During the second quarter of fiscal 2003, the Company obtained a nonexclusive licence from the master licensor covering NBI and its existing sublicensees for the period October 1 through December 31, 2002, while it continued negotiations on revised terms for the second renewal period under the master license. The Company was unable to negotiate acceptable renewal terms for the license and, consequently, on January 8, 2003, the Board of Directors decided not to renew the license and to exit its decoder business. Therefore, the Company has discontinued its decoder business, and it has separately reported the loss from this segment as discontinued operations for the three and nine months ended March 31, 2003 and 2002. There were no revenues from discontinued operations for the third quarter of fiscal 2003 compared to revenues of $13,000 for the third quarter of fiscal 2002. Revenues from discontinued operations totaled $21,000 and $39,000 for the nine months ended March 31, 2003 and 2002, respectively. The Company recorded net losses from discontinued operations of $1,000 and $168,000 for the three and nine months ended March 31, 2003 compared to net losses from discontinued operations of $91,000 and $177,000 for the three and nine months ended March 31, 2002, respectively. There were minimal expenses associated with exiting the decoder business, all of which were incurred in the third quarter of fiscal 2003. The Company does not expect to incur any additional expenses associated with its decoder business. There were no assets or liabilities of discontinued operations at March 31, 2003. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company's total assets decreased $1.7 million to $13.8 million at March 31, 2003 from $15.5 million at June 30, 2002. The decrease was primarily due to significant decreases in accounts receivable, due to the decline in sales, inventory, resulting from low production related to cash constraints, and property, plant and equipment, primarily related to depreciation. The Company had working capital deficits of $4,026,000 and $1,206,000 at March 31, 2003 and June 30, 2002, respectively. The increase of $2,820,000 in the working capital deficit was primarily due to the reclassification of $1.6 million of L.E. Smith's bank debt to current at March 31, 2003 resulting from its default under the terms of the Forbearance Agreement, as well as the resources required to fund the loss and note payments during the nine months ended March 31, 2003. NBI, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIRD QUARTER, FISCAL YEAR 2003 - CONTINUED The Company significantly reduced its capital expenditures during fiscal 2002 and during fiscal 2003 and did not have any significant construction-in- progress outstanding at March 31, 2003. 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. However, 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. Then, 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 was 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 are 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 May 5, 2003, the borrowings under L.E. Smith's revolving line of credit exceeded the allowed borrowing base by $727,000, $73,000 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 L.E. Smith to obtain written agreements with its vendors and other creditors regarding revised payment terms acceptable to the bank by an extended due date of March 5, 2003. L.E. Smith has been working with its vendors and creditors on revised payment terms and is in the process of obtaining written agreements with them. However, L.E. Smith has not been able to obtain written agreements from all of its creditors, including its natural gas supplier (see Note 9). This constitutes an event of default under the Forbearance Agreement which allows the bank, at its option, to demand immediate payment of the entire outstanding bank debt. Therefore, the Company has classified L.E. Smith's entire bank debt as current at March 31, 2003. Management has been in discussions with the bank regarding this situation and is working with the bank towards a mutually acceptable resolution. (See Note 2 to the Consolidated Financial Statements.) As of December 1, 2002, L.E. Smith was six months in arrears on its monthly payments on its note payable to PADCED. On December 13, 2002, L.E. Smith obtained a six-month deferral of principal payments on this note. In January 2003, L.E. Smith paid PADCED all of the past due interest as well as the regular loan payment scheduled for January 1, 2003. However, L.E. Smith is in arrears on the regular payments scheduled for March, April and May 2003, and has been unable to pay various other liabilities when due as required under the PADCED loan agreement. These conditions cause the note payable to 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 March 31, 2003, as was also required at June 30, 2002. (See Note 2 to the Consolidated Financial Statements.) The Company has incurred significant losses for the nine months ended March 31, 2003 and during fiscal 2002 and 2001 and had a significant working capital deficit at March 31, 2003 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 audit report dated September 5, 2002, on our June 30, 2002 financial statements. In addition, at March 31, 2003, L.E. Smith was in default on its Forbearance Agreement with Sky Bank and continues to be in default NBI, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIRD QUARTER, FISCAL YEAR 2003 - CONTINUED on its PADCED loan agreement. The accompanying Consolidated Financial Statements do not contain any adjustments that might result from the outcome of these uncertainties other than the reclassification of L.E. Smith's bank and PADCED debts to current at March 31, 2003, as was also required at June 30, 2002 for the PADCED note payable. The Forbearance Agreement and Amendment with Sky Bank significantly reduces the amount of principal payments required on L.E. Smith's long-term debt in fiscal 2003. L.E. Smith is also working with its accounts payable vendors to obtain extended terms. Furthermore, management has significantly reduced its costs and expenses, including significantly reducing its health insurance costs through a new collective bargaining agreement which it obtained on November 26, 2002, reductions in workforce and savings 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 has been 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's 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. However, L.E. Smith has not been able to capitalize on any marketing partnerships to-date, because the weak economy has also caused a slowdown in business for the other parties. 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, L.E. Smith 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, L.E. Smith 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 are expected to do several things to improve L.E. Smith. First, it would improve gross margins due to the elimination of several layers of distribution. Second, it would increase 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, L.E. Smith acquired retail space for an outlet store in Lancaster, Pennsylvania which it opened in mid-November 2002. Sales from this store have been very disappointing due to the poor retail market and inclement weather. In an effort to increase the sales of the Lancaster store, L.E. Smith has retained the services of a merchandising and advertising consultant, as of April 1, 2003. Due to the poor results from its Lancaster store, L.E. Smith has delayed pursuit of any additional outlet locations at this time. L.E. Smith has also increased its marketing efforts related to food service and hospitality products as well as glass blocks used in various architectural projects. In addition, L.E. Smith is exploring a direct marketing channel for one of its newer product lines because it believes this would be more successful than using traditional distribution methods for these products. There can be no assurance that the bank will continue to work with the Company towards a mutually acceptable resolution and not demand immediate payment of all of L.E. Smith's bank debt; nor can there be any assurance that L.E. Smith's other note will not be called for immediate payment. Furthermore, there can be no assurance that L.E. Smith 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 it 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 THIRD QUARTER, FISCAL YEAR 2003 - CONTINUED The following summarizes the Company's aggregate contractual obligations as of March 31, 2003:
Total payments due during Three fiscal years ended June 30, Months Ended -------------------------------- June 30, 2004 2006 There- Total 2003 & 2005 & 2007 after -------- ---------- -------- -------- -------- (Amounts in thousands) Line of credit(a) $ 2,502 $2,502 $ -- $ -- $ -- Long-term notes payable - Sky Bank(a) 1,877 1,877 -- -- -- - State of Pennsylvania Machinery & Equipment Loan Fund note(b) 309 309 -- -- -- - Other notes payable 1,087 13 126 259 689 Present value of capital lease obligation 967 20 88 106 753 Operating leases 1,365 87 380 276 622 Purchase obligation 42 42 -- -- -- CEO employment agreement(c) 50 50 -- -- -- Other 14 10 4 -- -- ------- ------ ---- ---- ------ Total contractual obligations $ 8,213 $4,910 $598 $641 $2,064 ======= ====== ==== ==== ====== (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. However, 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 May 5, 2003, the borrowings under L.E. Smith's revolving line of credit exceeded the allowed borrowing base by $727,000, $73,000 below the maximum allowed overborrowings. L.E. Smith has not been able to obtain written agreements from all of its creditors, including its natural gas supplier, which were required to be obtained by the extended due date of March 5, 2003. This constitutes an event of default under the Forbearance Agreement which allows the bank, at its option, to demand immediate payment of the entire outstanding debt. Therefore, the Company has classified L.E. Smith's entire bank debt as current at March 31, 2003. Management has been in discussions with the bank regarding this situation and is working with the bank towards a mutually acceptable resolution. See previous discussion in this "Liquidity and Capital Resources" section. (b) As of December 1, 2002, L.E. Smith was six months in arrears on its monthly payments on its note payable to PADCED. On December 13, 2002, L.E. Smith obtained a six-month deferral of principal payments on this note. In January 2003, L.E. Smith paid PADCED all of the past due interest as well as the regular loan payment scheduled for January 1, 2003. However, L.E. Smith is in arrears on the regular payments scheduled for March, April and May 2003, and has been unable to pay various other liabilities when due as required under the PADCED loan agreement. These conditions cause the note payable to 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 March 31, 2003, as was also required at June 30, 2002. (c) 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 1, 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. NBI, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIRD QUARTER, FISCAL YEAR 2003 - CONTINUED RECENT ACCOUNTING PRONOUNCEMENTS 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 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. The Company voluntarily adopted SFAS No. 144 early, effective July 1, 2001. 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 adopted this Statement during the quarter ended March 31, 2003. The adoption of this statement had no material impact on the financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure -- an Amendment of FASB Statement No. 123". This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has adopted the disclosure requirements effective December 31, 2002 (see Note 12). 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 March 31, 2003 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, 2003 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-QSB 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: May 14, 2003 /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-QSB 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: May 14, 2003 /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 March 31, 2003 as filed with the Securities and Exchange Commission on May 15, 2003 (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: May 14, 2003 /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 March 31, 2003 as filed with the Securities and Exchange Commission on May 15, 2003 (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: May 14, 2003 /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. -----END PRIVACY-ENHANCED MESSAGE-----