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, 1998
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
1880 Industrial Circle, Suite F
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 April 30, 1998
----- -------------------------------
Common Stock, par value $.01 per share 8,088,320
<PAGE>
NBI, INC.
INDEX TO FORM 10-QSB
For Quarter Ended March 31, 1998
<TABLE>
<CAPTION>
PAGE
----
PART I - FINANCIAL INFORMATION
<S> <C>
Consolidated Financial Statements (Unaudited) 3 - 6
Supplementary Notes to Consolidated Financial
Statements (Unaudited) 7 - 11
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12 - 14
PART II - OTHER INFORMATION 15
</TABLE>
<PAGE>
NBI, INC.
CONSOLIDATED BALANCE SHEET
(Amounts in Thousands Except Share Data)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
---- ----
(Unaudited)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 160 $ 333
Accounts receivables, less allowance for doubtful
accounts of $102 and $97, respectively 1,511 1,231
Inventories 2,561 2,470
Other current assets 198 189
-------- --------
Total current assets 4,430 4,223
Property, plant and equipment, net 7,225 6,869
Other assets 265 404
-------- --------
$ 11,920 $ 11,496
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------
Current liabilities:
Short-term borrowings and current portion
of notes payable $ 1,651 $ 921
Obligation for short-sale transactions -- 111
Current portion of IRS debt and other income taxes payable 5,280 5,274
Accounts payable 1,047 960
Accrued liabilities 1,413 1,154
-------- --------
Total current liabilities 9,391 8,420
Long-term liabilities:
Notes payable 1,412 1,604
Deferred income taxes 76 251
Postemployment disability benefits 187 196
-------- --------
Total liabilities 11,066 10,471
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock - $.01 par value; 20,000,000 shares authorized;
10,115,520 and 10,005,020 shares issued, respectively 101 100
Capital in excess of par value 6,252 6,178
Accumulated deficit (4,631) (4,385)
-------- --------
1,722 1,893
Less treasury stock, at cost 2,027,200 shares (868) (868)
-------- --------
Total stockholders' equity 854 1,025
-------- --------
$ 11,920 $ 11,496
======== ========
<FN>
See accompanying notes.
</TABLE>
<PAGE>
NBI, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Sales $ 3,160 $ 2,868 $ 9,426 $ 9,221
Service and rental 429 398 1,584 1,389
------- ------ ------ ------
3,589 3,266 11,010 10,610
Costs and expenses:
Cost of sales 2,201 2,084 6,806 6,381
Cost of service and rental 389 339 1,205 1,056
Marketing, general and
administrative 876 819 2,596 2,475
Impairment of goodwill 167 -- 167 --
----- ------ ------- -------
3,633 3,242 10,774 9,912
------ ------ -------- ------
Income (loss) from operations (44) 24 236 698
Other income (expense):
Net gain (loss) on investments -- 414 (39) 585
Other income and expenses, net (17) 22 (28) 223
Interest expense (159) (174) (524) (508)
------- ------ ------ ------
(176) 262 (591) 300
------ ------ ------ -------
Income (loss) before income taxes (220) 286 (355) 998
Income tax benefit (provision) 132 11 109 (90)
------ ------ ------- ------
Net income (loss) $ (88) $ 297 $ (246) $ 908
======== ======== ====== ====
Earnings per common share - basic and diluted:
Net income (loss) $ (.01) $.04 $ (.03) $.11
========= ======= ===== ====
Weighted average number of common
shares outstanding 8,088 7,986 8,073 7,995
======= ====== ====== ======
<FN>
See accompanying notes.
</TABLE>
<PAGE>
NBI, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
<PAGE>
Nine Months Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $(246) $ 908
Adjustments to reconcile net income (loss) to net cash
flow provided by operating activities:
Depreciation and amortization 546 420
Provision for bad debts and returns 71 76
Provision for writedown of inventory 34 102
Provision for writedown of note receivable 10 --
Loss (gain) on sales of property and equipment 51 (10)
Impairment of goodwill 167 --
Net unrealized loss (gain) on trading securities (53) (232)
Compensation expense related to stock option extensions 48 --
Other (2) (55)
Changes in assets -- decrease (increase):
Accounts receivable (351) (89)
Inventory (125) (309)
Trading securities -- 175
Other current assets (6) 469
Other assets (74) --
Changes in liabilities -- (decrease) increase:
Obligations for short-sale transactions (58) (493)
Accounts payable and accrued liabilities 286 83
Net liabilities of discontinued operations -- (72)
Income tax related accounts (169) (61)
------ --------
Net cash flow provided by operating activities 129 912
------ --------
Cash flows from investing activities:
Proceeds from sales of property and equipment 2 22
Purchases of property and equipment (875) (2,305)
------ --------
Net cash flow used in investing activities (873) (2,283)
------ --------
Cash flows from financing activities:
Collections on notes receivable 4 --
Proceeds from borrowing 100 981
Proceeds from stock option exercises 29 2
Payments on notes payable (207) (171)
Net short-term borrowings 645 63
------ --------
Net cash flow provided by financing activities 571 875
------ --------
Net decrease in cash and cash equivalents (173) (496)
Less decrease in cash and cash equivalents included in net assets
of discontinued operations -- 22
Cash and cash equivalents at beginning of period 333 782
------ --------
Cash and cash equivalents at end of period $ 160 $ 308
====== ========
<FN>
See accompanying notes.
</TABLE>
<PAGE>
NBI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1998 1997
---- ----
<PAGE>
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid $ 284 $ 508
==== ====
Income taxes paid $ 85 $ 133
==== ====
<FN>
See accompanying notes.
</TABLE>
<PAGE>
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 which in the
opinion of management are necessary in order to make the financial statements
not misleading. The consolidated financial statements include the accounts of
the Company and its wholly-owned and majority-owned subsidiaries. All
significant intercompany accounts and profits have been eliminated.
Note 2 - Cash and Cash Equivalents
- ----------------------------------------
Cash and cash equivalents include investments that are readily convertible to
known amounts of cash and have original maturities of three months or less.
The Company places its cash and temporary cash investments with financial
institutions. At times, such investments may be in excess of federally
insured limits.
Note 3 - Investments in Securities and Obligations from Short-Sale
- ---------------------------------------------------------------------------
Transactions
- ------------
During the nine months ended March 31, 1998 and 1997, all of the Company's
securities were classified as trading securities; no securities were
classified as held-to-maturity or available-for-sale. The Company held no
investments and had no realized or unrealized gains or losses for the quarter
ended March 31, 1998. Net realized and unrealized gains of $292,000
and $122,000, respectively, were recorded in the same quarter of the prior
fiscal year. For the nine months ended March 31, 1998, the Company recorded
a net unrealized gain of $53,000 and a realized loss of $92,000, compared to
net realized and unrealized gains of $353,000 and $232,000, respectively, in the
same period of fiscal 1997.
As part of its investment policies, the Company's investment portfolio may
include option instruments and may include a concentrated position in one or
more securities. As a result of this, the financial results may fluctuate
significantly and have larger fluctuations than with a more diversified
portfolio. In addition, the Company may invest in short-sale transactions of
trading securities. Short-sales can result in off-balance sheet risk, as
losses can be incurred in excess of the reported obligation if market prices
of the securities subsequently increase. At March 31, 1998, the Company had
no investment positions.
Note 4 - Inventories
- -----------------------
Inventories are comprised of the following:
<TABLE>
<CAPTION>
March 31,
1998
----
(Amounts in thousands)
<S> <C>
Raw materials $ 740
Work in process 299
Finished goods 1,507
Food and beverage inventory 15
------
$ 2,561
========
</TABLE>
<PAGE>
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 - Income Taxes
- -------------------------
IRS Debt:
- ----------
On April 28, 1998, the Company and the IRS entered into an amended payment
agreement, revising the payment terms related to NBI Inc.'s IRS debt of
$5,278,000. This agreement, effective as of April 9, 1998, revises the terms
of the agreement in principal with the IRS effective October 1, 1995 and the
original settlement agreement with the IRS dated June 12, 1991, as to NBI's
federal tax liabilities for the fiscal years ended June 30, 1980 through 1988.
Under the new agreement, $3,500,000 of the IRS debt is due on or before
December 31, 1998, and the remaining balance of $1,778,000 is due on or
before December 31, 1999. However, because the agreement was not effective
until April 9, 1998, the entire principal balance has been classified as
current at March 31, 1998. The IRS debt continues to be collateralized by a
security interest in all of the capital stock of American Glass, Inc. and NBI
Properties, Inc.
Provided no event of default occurs prior to payment of the debt in full, NBI
will not be obligated to pay any past, current or future interest related to
the debt. Therefore, during the fourth quarter of fiscal 1998, the Company
intends to record a net extraordinary gain of $290,000, consisting of
forgiveness of accrued interest recorded through March 31, 1998 totaling
$439,000, less an income tax provision of $149,000.
In order to pay the newly restructured IRS debt, management intends to obtain
additional debt or equity financing. The Company is currently pursuing
various financing options; however there can be no assurances the Company will
be able to obtain such financing. The Company's ability to continue as a
going-concern is dependent upon satisfaction of the IRS debt.
Income tax provision:
- -----------------------
For the three and nine months ended March 31, 1998, the Company recorded
income tax benefits of $132,000 and $109,000, respectively. An income tax
benefit of $11,000 and an income tax provision of $90,000 were recorded for
the three and nine months ended March 31, 1997, respectively. These benefits
and provision include state and other income taxes and are based upon book
income.
In accordance with fresh start accounting, which was adopted as of April 30,
1992, and as a result of the Company's reorganization under Chapter 11 of the
U.S. Bankruptcy Code, utilization of any income tax benefit from
pre-reorganization net operating losses are 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
quarter or nine months ended March 31, 1998 and 1997. However, there was a
non-cash reversal of $25,000 for the three months ended March 31, 1997.
Note 6 - Stockholders' Equity
- ---------------------------------
The Company has authorized 20,000,000 shares of $.01 par value common stock.
At March 31, 1998, 10,115,520 shares were issued including 2,027,200 held in
treasury. Therefore, the Company had 8,088,320 shares issued and outstanding
at March 31, 1998. During the first quarter of fiscal 1998, 110,500 shares of
common stock were issued pursuant to stock option exercises.
During the second quarter of fiscal 1998, stock options to purchase 100,500
shares of common stock at an exercise price of $.59 were granted. The options
vest over four years at 25% per year and expire in five years.
<PAGE>
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On August 26, 1997, NBI's Board of Directors approved an amendment to its
Certificate of Incorporation to grant the Corporation authority to issue up to
five million shares of preferred stock with a par value of $.01 per share. In
addition, the amendment allows the Company to effect a reverse stock split of
either 4:1 or 5:1 at the discretion of the Board of Directors. The Company
obtained sufficient written consents, in lieu of a meeting, of a majority of
its stockholders approving these amendments. The Company has not yet filed
the amendment to its Certificate of Incorporation with the Delaware Secretary
of State, because it was awaiting the results of the IRS negotiations; however,
it intends to file the amendment during the fourth quarter of fiscal 1998.
Note 7 - Impairment Loss
- ----------------------------
During the third quarter of fiscal 1998, in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, the Company recorded
a non-cash impairment loss of $167,000 related to a write-down of goodwill
associated with the Company's childrens' paint manufacturing operation.
The revised carrying value of this asset was based upon the estimated
undiscounted future cash flow of the business. The impairment occurred
primarily due to the unfavorable results of a change in sales focus which was
implemented late in fiscal 1997, as well as the business' inability to
sustain long-term customers.
Note 8 - Net Income (Loss) Per Common Share
- -------------------------------------------------
During the Company's second quarter of fiscal 1998, NBI, Inc. adopted SFAS
No. 128 issued by the Financial Accounting Standards Board. SFAS No. 128
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 shareholders 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, similar to fully diluted earnings per share.
The following reconciles the numerators and denominators of the basic and
diluted earnings per common share computation for net income (loss):
<TABLE>
<CAPTION>
For the quarters ended
March 31,
1998 1997
---- ----
Basic Diluted Basic Diluted
----- ------- ----- -------
(Amounts in thousands
except per share data)
<S> <C> <C> <C> <C>
Net income (loss) $ (88) $ (88) $ 297 $ 297
======= ======= ====== ======
Weighted average number
of common
shares outstanding 8,088 8,088 7,986 7,986
======= ======
Assumed conversions of
stock options -- 241
------- ------
8,088 8,227
======= ======
Net income (loss) per
common share $ (.01) $ (.01) $ .04 $ .04
======= ======= ====== ======
</TABLE>
<PAGE>
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 - Net Income (Loss) Per Common Share (continued)
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
For the nine months ended
March 31,
1998 1997
---- ----
Basic Diluted Basic Diluted
----- ------- ----- -------
(Amounts in thousands
except per share data)
<S> <C> <C> <C> <C>
Net Income (loss) $ (246) $ (246) $ 908 $ 908
======= ======= ====== ======
Weighted average number
of common shares
outstanding 8,073 8,073 7,995 7,995
======= ======
Assumed conversions
of stock options -- 200
------- ------
8,073 8,195
======= ======
Net income (loss) per
common share $ (.03) $ (.03) $ .11 $ .11
======= ======= ====== ======
</TABLE>
Because the Company incurred net losses for the three and nine months ended
March 31, 1998, none of its outstanding options or warrants were included in
the computation of diluted earnings per share as their effect would be
anti-dilutive.
For the three months ended March 31, 1997, the Company's $.25, $.38 and $.77
stock options were included in the computation of diluted earnings per share
because their exercise price was less than the average market price of the
common stock outstanding. Whereas, for the nine months ended March 31, 1997,
only the Company's $.25 and $.38 stock options were included in the
computation of diluted earnings per share.
The options and warrants outstanding at March 31, 1998 were as follows:
<TABLE>
<CAPTION>
Number
Exercise Outstanding at
Price March 31, 1998
----- ----------------
<S> <C> <C>
Stock options:
$ .25 --
$ .38 216,000
$ .59 100,500
$ .77 400,000
$ .88 244,000
Warrants:
$ .89 1,700,000
----------
2,660,500
==========
</TABLE>
<PAGE>
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 - Seasonal Variations of Operations
- ------------------------------------------------
Due to seasonal variations in these businesses, all of the Company's ongoing
operations typically have their strongest revenue performance during the first
fiscal quarter. Generally, the second and fourth fiscal quarters' revenues
from these operations are moderately lower than in the first quarter, while
the third fiscal quarter's revenue is usually significantly lower than the
other quarters.
Note 10 - Related Party Transactions
- -----------------------------------------
During the nine months ended March 31, 1998, the Company borrowed a total of
$100,000 from its Chief Executive Officer for working capital needs. This
amount was included in short-term borrowings at March 31, 1998. The
borrowings are subject to the terms of a revolving promissory note which
provides for interest to be paid at the rate of ten percent per annum. In
addition, the note will be secured by a mortgage on a portion of the land held
by the Company for development. The entire principal amount outstanding is
due and payable in full on December 31, 1998.
Note 11 - Subsequent Events
- -------------------------------
On April 28, 1998, the Company and the IRS entered into an amended payment
agreement, revising the payment terms related to NBI Inc.'s IRS debt of
$5,278,000. Under the new agreement, $3,500,000 of the IRS debt is due on or
before December 31, 1998, and the remaining balance of $1,778,000 is due on or
before December 31, 1999. Because the agreement was not effective until April
9, 1998, the entire principal balance has been classified as current at March
31, 1998.
Provided no event of default occurs prior to payment of the debt in full, NBI
will not be obligated to pay any past, current or future interest related to
the debt. Therefore, during the fourth quarter of fiscal 1998, the Company
intends to record a net extraordinary gain of $290,000, consisting of
forgiveness of accrued interest recorded through March 31, 1998 totaling
$439,000, less an income tax provision of $149,000.
<PAGE>
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER, FISCAL YEAR 1998
The statements in this discussion contain both historical and "forward-looking"
statements, as such term is defined in "The Private Securities Litigation Reform
Act of 1995". The forward-looking statements are based upon current
expectations and the actual results could differ materially from those
anticipated. 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 of raw materials, labor disputes, investment results, adequacy of
insurance coverage, inflation and general economic conditions.
RESULTS OF OPERATIONS
Revenues totaling $3.6 million for the third quarter of fiscal 1998 increased
$323,000, or 9.9%, from $3.3 million for the three months ended March 31,
1997. Year-to-date, revenues totaling $11.0 million reflected an increase of
$400,000, or 3.8% compared to the same period of fiscal 1997.
Sales revenue increased $292,000, or 10.2% for the third quarter of fiscal
1998 and $205,000, or 2.2% fiscal year-to-date, as compared to the same
periods in fiscal 1997, due to significantly increased volume at the L.E.
Smith Glass Company ("L.E. Smith"), particularly during the quarter ended
March 31, 1998. The favorable revenue performance at L.E. Smith was primarily
due to a significant increase in orders from its largest customer. This
increase was partially offset by a significant decline in revenues from Krazy
Colors, Inc. ("Krazy Colors"), the Company's children's paint manufacturing
operation, due to a change in sales focus implemented late in fiscal 1997
which has been unsuccessful.
Service and rental revenue totaled $429,000 for the three months ended March
31, 1998, as compared to $398,000 for the same quarter in fiscal 1997.
Service and rental revenue totaled $1.6 million for the nine months ended
March 31, 1998, as compared to $1.4 million for the same period in fiscal
1997. The increased revenue was primarily related to an increase in occupancy
and in average daily room rates from the hotel, resulting from the absence of
renovation construction activity which limited the number of available rooms
during the second quarter and part of the third quarter of fiscal 1997. The
Company also experienced a significant increase in restaurant and bar business
year-to-date, due to increased occupancy and increased sales and marketing
efforts.
Total revenues are expected to increase moderately for the three months ended
June 30, 1998, as compared to the same period in the prior fiscal year,
primarily due to a significant increase in projected revenues from L.E. Smith,
partially offset by a decrease in expected revenues from Krazy Colors. The
expected increase in revenues from L.E. Smith is due to lower revenue volume
experienced during the fourth quarter of fiscal 1997, because of the
postponement of orders received from a major customer during that period.
Total revenues for the fourth quarter of fiscal 1998 are expected to decrease
moderately compared to the third quarter of fiscal 1998, as the Company
expects a moderate decrease in revenues from L.E. Smith, due to the inclusion
of a significant increase in orders from their largest customer during the
third quarter of fiscal 1998, partially offset by a significant increase in
projected revenues from the hotel due to seasonal variations.
Cost of sales, service and rental as a percentage of total revenue was 72.2%
for the quarter ended March 31, 1998, compared to 74.2% for the same period in
fiscal 1997. For the nine months ended March 31, cost of sales, service and
rental was 72.8% in fiscal 1998 compared to 70.1% in fiscal 1997.
Cost of sales as a percentage of sales revenue was 69.7% for the quarter ended
March 1998 compared to 72.7% for the third quarter of fiscal 1997. The
resulting improvement in gross margin was primarily due to increased volume
and production efficiency at L.E. Smith, causing favorable absorption of fixed
costs. However, this improvement was slightly offset by a significant decline
in gross margin from Krazy Colors, due to the decreased revenue volume.
Year-to-date, cost of sales as a percentage of sales revenue was 72.2% in
fiscal 1998 compared to 69.2% in fiscal 1997. The resulting decline in gross
margin was primarily related to lower margins from L.E.
<PAGE>
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER, FISCAL YEAR 1998 - CONTINUED
Smith, primarily due to the sales mix, production costs associated with the
development of new products and unusually high gas costs incurred during the
second fiscal quarter.
Cost of service and rental as a percentage of service and rental revenue was
90.7% for the quarter ended March 1998 compared to 85.2% for the third quarter
of fiscal 1997. The resulting decline in gross margin was primarily due to
poor margins on the food and beverage business from the Belle Vernon Holiday
Inn, resulting from sales mix variations, increased competition and general
cost increases. Year-to-date, cost of service and rental as a percentage of
service and rental revenue was relatively flat at 76.1% in fiscal 1998 and
76.0% in fiscal 1997, as the revenue volume increase was sufficient to cover
the increased costs.
Cost of sales, service and rental as a percentage of total revenue for the
fourth quarter of fiscal 1998 is expected to be moderately lower, compared to
the fourth quarter of fiscal 1997, primarily due to the projected increase in
revenues at L.E. Smith available to cover fixed costs. Cost of sales, service
and rental as a percentage of total revenue for the fourth quarter of fiscal
1998 is expected to be slightly higher compared to the third quarter of fiscal
1998 due to an expected decline in revenue volume at L.E. Smith and Krazy
Colors available to cover fixed costs.
Marketing, general and administrative expenses totaled $876,000 and $819,000
for the three months ended March 31, 1998 and 1997, respectively. The
increase was primarily related to professional fees incurred in connection
with the IRS negotiations and increased sales and marketing activities.
However, this was partially offset by savings resulting from the absence of a
Chief Executive Officer bonus accrual, as was included in the third quarter of
fiscal 1997, and lower payroll costs resulting from fewer executives at L.E.
Smith. Year-to-date expenses increased $121,000 to $2.6 million for the nine
months ended March 31, 1998, compared to expenses of $2.5 million for the same
period of fiscal 1997. This increase included expenses incurred in connection
with the IRS negotiations, severance for an executive of L.E. Smith, a
non-cash compensation expense for extensions of certain executive stock
options and expenses resulting from increased sales and marketing activities.
However, these increases were partially offset by savings resulting from the
absence of a Chief Executive Officer bonus accrual during fiscal 1998 and
lower payroll costs resulting from fewer executives.
Marketing, general and administrative expenses are expected to increase
significantly for the three months ended June 30, 1998, as compared to the
same period in the prior fiscal year, primarily due to increased sales and
marketing activities and the absence of a CEO bonus credit adjustment which
was included in the fourth quarter of fiscal 1997, partially offset by lower
payroll costs resulting from fewer executives. Marketing, general and
administrative expenses are expected to decrease moderately in the fourth
quarter of fiscal 1998 compared to the third quarter of fiscal 1998, primarily
due to minimal expenses related to the IRS negotiations and lower overall
sales activity.
During the third quarter of fiscal 1998, the Company recorded a non-cash
impairment loss of $167,000 related to a write-down of goodwill associated
with the Company's children's paint manufacturing operation. The revised
carrying value of this asset was based upon the estimated undiscounted future
cash flow of the business. The impairment occurred primarily due to the
unfavorable results of a change in sales focus which was implemented late in
fiscal 1997, as well as the business' inability to sustain long-term
customers.
The Company recorded no gain or loss on investments during the third quarter
of fiscal 1998, compared to a net gain of $414,000 for the three months ended
March 31, 1997. For the nine months ended March 31, 1998, the Company
recorded a net loss on investments of $39,000 compared to a net gain of
$585,000 for the same period in fiscal 1997. The decline in investment gains
resulted from the lack of funds available to invest during fiscal 1998. As
part of its investment policy, the Company's investment portfolio may include
investments in option instruments and may include a concentrated position in
one or more securities. As a result of this, the financial results may
fluctuate significantly and have larger fluctuations than with a more
diversified portfolio. In addition, the Company may invest in short-sale
transactions of trading securities. Short-sales can result in off-balance
sheet risk, as losses
<PAGE>
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER, FISCAL YEAR 1998 - CONTINUED
can be incurred in excess of the reported obligation if market prices of the
securities subsequently increase. At March 31, 1998, the Company had no
investment positions.
The Company recorded net other expense of $17,000 and $28,000 for the three
and nine months ended March 31, 1998, respectively, compared to other income
of $22,000 and $223,000 for the same periods in the prior fiscal year. The
decrease year-to-date resulted primarily from the absence of a recovery of a
note receivable which was recorded in the second quarter of fiscal 1997,
partially offset by the absence of architectural expenses recorded during
fiscal 1997 for hotel improvement projects that the Company decided not to
pursue.
The Company recorded an income tax benefit of $132,000 for the third quarter
of fiscal 1998 and $109,000 for the nine months ended March 31, 1998, compared
to an income tax benefit of $11,000 for the third quarter of fiscal 1997 and
an income tax provision of $90,000 for the nine months ended March 31, 1997.
Included in these amounts are state provisions of $34,000 and $91,000 for the
three and nine months ended March 31, 1998, respectively, compared to $24,000
and $122,000 for the same periods in fiscal 1997, respectively. The state
income tax provisions are related to the Company's Pennsylvania operations and
are based upon book income, as NBI does not have any net operating loss
carryforwards available in Pennsylvania.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets increased $424,000 to $11.9 million at March 31,
1998 from $11.5 million at June 30, 1997. The increase was primarily related
to capital improvements made at L.E. Smith. The Company had negative working
capital of $5.0 million at March 31, 1998, compared to negative working
capital of $4.2 million at June 30, 1997. The decline in working capital
resulted primarily from an increase in short-term borrowings used to fund
capital improvements.
The entire outstanding principal balance on the IRS debt of $5,278,000 was due
in full on October 1, 1997. Effective as of April 9, 1998, the Company
and the IRS entered into an amended payment agreement revising the payment
terms related to NBI, Inc.'s IRS debt. Because the agreement was not effective
until April 9, 1998, the entire principal balance has been classified as
current at March 31, 1998. Under the new agreement, $3.5 million of the IRS
debt is due on or before December 31, 1998 and the remaining approximately
$1.8 million is due on or before December 31, 1999.
Provided no event of default occurs prior to payment of the debt in full, NBI
will not be obligated to pay any past, current or future interest related to
the debt. Therefore, during the fourth quarter of fiscal 1998, the Company
will record a net extraordinary gain of $290,000, consisting of forgiveness of
accrued interest recorded through March 31, 1998 totaling $439,000, less an
income tax provision of $149,000.
In order to pay the IRS debt, management intends to obtain additional debt or
equity financing. The Company is currently pursuing various financing
options, not only for the IRS debt, but also for its real estate development
activities; however, there can be no assurance that the Company will be able
to obtain such financing or that if it is able to obtain such financing, that
it will be on favorable terms. The Company's ability to continue as a
going-concern is dependent upon satisfaction of the IRS debt.
The Company expects its other working capital requirements in the next fiscal
year to be met by existing working capital at March 31, 1998, internally
generated funds and, for L.E. Smith Glass Company's requirements, short-term
borrowings under an existing line of credit.
<PAGE>
NBI, INC.
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
- ------- -------------------------------------
(a) Exhibits
10. Amended Payment Agreement with the Internal Revenue
Service (IRS)
27. Financial Data Schedule
(b) The following Forms 8-K were filed during the quarter
ended March 31, 1998 and subsequently:
1. Form 8-K dated March 31, 1998 Item 5 -
Other Events:
The Company executed a Second Amended Forbearance
Agreement with the IRS which extends the deadline
under the original Forbearance Agreement related to
NBI, Inc.'s IRS debt of $5,278,000 that was due
in full on October 1, 1997.
2. Form 8-K dated April 28, 1998, Item 5 -
Other Events:
The Company and the IRS entered into an Amended
Payment Agreement revising the payment terms
related to NBI, Inc.'s IRS debt of $5,278,000.
<PAGE>
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 20, 1998 By: /s/ Marjorie A. Cogan
---------------- --------------------------------------------
(Date) Marjorie A. Cogan
As a duly authorized officer
Chief Financial Officer, Secretary
Exhibit 10:
AMENDED PAYMENT AGREEMENT
This Amended Agreement between NBI, Inc., a Delaware corporation ("NBI"),
and the Internal Revenue Service, Department of the Treasury, United States of
America ("IRS"), dated as of April 9, 1998 (the "Agreement").
WHEREAS, NBI is as of this date obligated to the IRS in the amount of
$5,278,000 in principal (the "Remaining Principal Amount") pursuant to a
Stipulation and Agreement Re Internal Revenue Service Tax Claim and Tax
Liabilities dated June 12, 1991 (the "Stipulation"), which as a part of NBI's
chapter 11 bankruptcy reorganization, settled certain tax obligations and
interest thereon of NBI from previous tax years; and
WHEREAS, NBI and the IRS previously entered into that certain Payment
Agreement dated as of March 19, 1996 (the "Original Agreement") (any term not
otherwise defined herein shall have the meaning set forth in the Original
Agreement); and
WHEREAS, NBI and the IRS have agreed on certain different payment terms
for such obligation and this Agreement shall, in all respects, amend and
supersede the Original Agreement and the Stipulation;
NOW, THEREFORE, the parties agree as follows:
1. Repayment Terms. NBI shall repay the Remaining Principal Amount
---------------
in two installments: (a) on or before December 31, 1998, NBI shall pay the IRS
the sum of $3,500,000.00, and (b) on or before December 31, 1999, NBI shall
pay the IRS the remaining $1,778,000.00. Upon satisfying such payments, the
Remaining Principal Amount shall be deemed satisfied in full. NBI may prepay
all or any portion of the Remaining Principal Amount at any time without
premium or penalty. NBI agrees to remit the $3,500,000.00 payment to the IRS
as soon as practicable after such amount becomes available to NBI, but in no
event later than December 31, 1998.
2. Collateral. NBI owns all the capital stock of American Glass,
----------
Inc. d/b/a L.E. Smith Glass Company, a glass products manufacturer located in
Mount Pleasant, Pennsylvania ("American Glass"). NBI also owns all of the
capital stock of NBI Properties, Inc. f/k/a Belle Vernon Motel Corporation
which owns and operates the Belle Vernon Holiday Inn located in Belle Vernon,
Pennsylvania ("NBI Properties"). Pursuant to a Pledge Agreement dated as of
March 19, 1996 which was executed in connection with the Original Agreement,
NBI granted the IRS a valid first security interest in all the capital stock
of American Glass and NBI Properties to secure the obligations under the
Original Agreement, as evidenced by the related physical stock certificates,
which have previously been delivered to the IRS. The capital stock of
American Glass and NBI Properties shall similarly secure the obligations of
NBI to the IRS under this Agreement. Upon the full payment of the Remaining
Principal Amount, the Pledge Agreement and the IRS security interest in the
capital stock of American Glass and NBI Properties will terminate and such
stock certificates shall be returned to NBI.
3. Default Provisions. In the event of a failure of NBI to make any
------------------
payment provided in paragraph 1. hereof, an event of default shall have
occurred fifteen (15) days after written notice and demand from IRS to NBI in
respect of such payment unless NBI has previously (a) cured the default by
payment of the amount due, or (b) given written notice to IRS that it disputes
the existence of the default with a recitation of the reasons why, with
supporting documentation. In the event of a failure of NBI to take any other
action required by this Agreement, an event of default shall have occurred
thirty (30) days after written notice and demand from IRS to NBI in respect of
such failure unless NBI had previously (a) cured the default, or (b) given
written notice to IRS that it disputes the existence of the default with a
recitation of the reasons why, with supporting documentation. In the event of
a continuing event of default, IRS may by written notice to NBI declare the
Remaining Principal Amount due and payable and interest thereon at the
statutory rate provided under the Internal Revenue Code since the last
interest payment made by NBI under the Original Agreement, and the IRS shall
be entitled to pursue its remedies. Nothing herein shall limit the rights and
remedies of the IRS or NBI with respect to post-effective date taxes.
In the event of a dispute over the existence of an event of default and
the inability of the parties to resolve such a dispute within twenty (20) days
after NBI gives written notice that such dispute exists, the parties jointly
or separately must submit the dispute to the United States Bankruptcy Court
for the District of Colorado for adjudication within fifteen (15) days of the
expiration of the twenty (20) day resolution period. Such submission will not
relieve the parties of any continuing obligation under this Agreement which
might arise following such submission unless such obligation is the subject of
the dispute. Failure of the party disputing the existence of an event of
default to make such submission to the court within the referenced time period
will constitute an admission of default and trigger the remedies available.
In the event NBI incurs undisputed post-petition Federal Tax Liabilities,
an event of default under this Agreement shall have occurred fifteen (15) days
after written notice and demand from IRS to NBI for payment of such undisputed
liabilities unless NBI has previously (a) paid the undisputed liability, with
undisputed interest and penalties, if any, or (b) given written notice to IRS
that it disputes the existence of the default, with a recitation of the
reasons why, with supporting documentation. In the case of an event of
default or a dispute, the provisions of the preceding paragraph shall apply.
4. Effects of this Agreement, etc. This Agreement constitutes the
-------------------------------
entire agreement among the parties with respect to the subject matter hereof.
This Agreement is binding on the parties hereto and their successors and
assigns and shall have the effect of amending, replacing and modifying the
payment and all other terms of the Stipulation and the Original Agreement
(including, without limitation, the requirement to pay past, current or future
interest in respect of this obligation). This Agreement may only be modified
in writing executed by the parties and its construction or interpretation
shall be governed by the laws of the State of Colorado.
5. Financial Reporting. Within five (5) days after NBI shall file
-------------------
with the Securities and Exchange Commission (a) any report or proxy statement,
or amendment thereto, under the Securities Exchange Act of 1934, or (b) any
registration statement, or amendment thereto, under the Securities Act of
1933, the Debtor shall mail such document to the IRS. NBI shall promptly mail
to IRS the consolidated monthly financial statements of NBI at the time such
statements are generally circulated within NBI. IRS shall also have the right
at reasonable times and upon reasonable notice to NBI to obtain financial and
business information from NBI concerning the business and operations of NBI
and its subsidiaries as would be relevant to a lender. Such statements and
information shall be treated as confidential information by the IRS.
6. Notice. Notice required hereunder shall be in writing and shall
------
be delivered by hand, facsimile or deposited in the United States mail
addressed to:
NBI, Inc.
Attn: Marjorie A. Cogan
1880 Industrial Circle, Suite F
Longmont, CO 80501
Facsimile: (303) 684-2804
with a copy to:
NBI, Inc.
Attn: Morris D. Weiss
701 Brickell Avenue, Suite 2100
Miami, FL 33131
Facsimile: (305) 577-3225
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof). Any notice given by delivery, mail or courier, shall be
effective when received by NBI. Any notice given by facsimile shall be
effective upon oral or machine confirmation of transmission.
7. Descriptive Headings. The descriptive headings are inserted for
--------------------
convenience of reference only and are not intended to be a part of or to
affect the meaning or interpretation of this Agreement.
8. Parties in Interest. This Agreement shall be binding upon and
-------------------
inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
9. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same Agreement. A facsimile signature will
be treated as if it is an original signature.
INTERNAL REVENUE SERVICE
By: /s/ Thomas Moore
----------------------
Name: Thomas Moore
---------------
Title: Chief Special Procedures
--------------------------------
NBI, Inc.
By: /s/ Jay H. Lustig
--------------------
Jay H. Lustig, Chairman
<TABLE> <S> <C>
<CAPTION>
<S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-START> Jul-01-1997
<PERIOD-END> Mar-31-1998
<CASH> 160
<SECURITIES> 0
<RECEIVABLES> 1,613
<ALLOWANCES> 102
<INVENTORY> 2,561
<CURRENT-ASSETS> 4,430
<PP&E> 9,219
<DEPRECIATION> 1,994
<TOTAL-ASSETS> 11,920
<CURRENT-LIABILITIES> 9,391
<BONDS> 1,599
<COMMON> 101
0
0
<OTHER-SE> 753
<TOTAL-LIABILITY-AND-EQUITY> 11,920
<SALES> 9,426
<TOTAL-REVENUES> 11,010
<CGS> 6,806
<TOTAL-COSTS> 8,011
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 71
<INTEREST-EXPENSE> 524
<INCOME-PRETAX> (355)
<INCOME-TAX> 109
<INCOME-CONTINUING> (246)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (246)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
<FN>
This schedule contains summary financial information extracted from the
consolidated financial statements of NBI, Inc. for the nine months ended
March 31, 1998 and is qualified in its entirety by reference to such financial
statements.
</TABLE>
