SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number
1-8232
Name of Registrant
NBI, INC.
State of Incorporation IRS Employer I.D. Number
Delaware 84-0645110
Address
850 23rd Avenue, Suite D
Longmont, Colorado 80501
(303) 684-2700
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [ ] NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 8, 2000
-------------------------------------- ---------------------------------
Common Stock, par value $.01 per share 8,103,320
<PAGE>
NBI, INC.
INDEX TO FORM 10-QSB
For Quarter Ended September 30, 2000
<TABLE>
<CAPTION>
PAGE
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PART I - FINANCIAL INFORMATION
<S> <C>
Consolidated Financial Statements (Unaudited) 3 - 6
Supplementary Notes to Consolidated Financial
Statements (Unaudited) 7 - 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13 - 15
PART II - OTHER INFORMATION 16
</TABLE>
<PAGE>
NBI, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands Except Share Data)
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
------------ -----------
(Unaudited)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 27 $ 33
Accounts receivable, less allowance for doubtful accounts
of $222 and $232, respectively 2,130 1,693
Inventories 2,887 3,000
Other current assets 384 234
Short-term deferred income taxes 57 56
Net current assets of discontinued operations 229 143
-------- --------
Total current assets 5,714 5,159
Property, plant and equipment, net 4,261 4,189
Note receivable from related party 2,700 2,700
Other assets 3 5
Net long-term assets of discontinued operations 1,443 1,480
-------- --------
$14,121 $13,533
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term borrowings and current portion of notes payable $ 2,031 $ 1,948
Current portion of IRS debt and other income taxes payable 933 918
Accounts payable 1,367 1,222
Accrued liabilities and other 1,326 1,277
-------- --------
Total current liabilities 5,657 5,365
Long-term liabilities:
Notes payable 97 130
Deferred income taxes 190 190
Postemployment disability benefits 151 153
Deferred gain from sale of discontinued operation, net
of taxes 881 881
-------- --------
Total liabilities 6,976 6,719
-------- --------
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 (3,039) (3,370)
-------- --------
8,013 7,682
Less treasury stock, at cost (2,027,200 shares) (868) (868)
-------- --------
Total stockholders' equity 7,145 6,814
-------- --------
$14,121 $13,533
======== ========
<FN>
See accompanying notes.
</TABLE>
<PAGE>
NBI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
2000 1999
<S> <C> <C>
Revenues:
Sales $3,906 $3,848
------- -------
Costs and expenses:
Cost of sales 2,809 2,696
Marketing, general and administrative 768 745
------- -------
3,577 3,441
------- -------
Income from operations 329 407
Other income (expense):
Interest income 56 2
Net gain on investments -- 48
Other income and expenses, net 3 1
Interest expense (82) (48)
------- -------
(23) 3
------- -------
Income from continuing operations before provision for income taxes 306 410
Provision for income taxes (13) (28)
------- -------
Income before discontinued operations 293 382
Income from discontinued operations, net of
income tax provisions of $24 and $21, respectively 38 28
------- -------
Net income 331 410
Dividend requirement on preferred stock (128) (126)
------- -------
Income attributable to common stock $ 203 $ 284
======= =======
Income per common share - basic and diluted:
Income before discontinued operations $ .02 $ .03
Income from discontinued operations .01 .01
------- -------
Net income $ .03 $ .04
======= =======
Weighted average common shares and equivalents:
Basic 8,103 8,100
======= =======
Diluted 8,157 8,263
======= =======
<FN>
See accompanying notes.
</TABLE>
<PAGE>
NBI, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
2000 1999
------- ------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 331 $ 410
Adjustments to reconcile net income to net cash
flow provided by operating activities:
Depreciation and amortization 265 241
Provision for bad debts and returns 40 16
Provision for writedown of inventories (2) (6)
Net unrealized gain on trading securities -- (2)
Other (3) --
Changes in assets -- decrease (increase):
Trading securities -- 38
Accounts receivable (479) (709)
Inventories 109 316
Other current assets (183) 215
Other assets 2 --
Changes in liabilities -- (decrease) increase:
Accounts payable and accrued liabilities 196 (299)
Income taxes payable 13 11
------ ------
Net cash flow provided by operating activities 289 231
------ ------
Cash flows from investing activities:
Purchases of property and equipment (272) (797)
------ ------
Net cash flow used in investing activities (272) (797)
------ ------
Cash flows from financing activities:
Collections from notes receivable 2 12
Dividends paid on preferred stock -- (182)
Proceeds from stock options exercised -- 5
Proceeds from borrowings -- 155
Payments on notes payable (39) (39)
Net borrowings on line of credit 83 394
------ ------
Net cash flow provided by financing activities 46 345
------ ------
Net increase (decrease) in cash and cash equivalents 63 (221)
Less change in cash and cash equivalents included
in net assets of discontinued operations (69) (13)
Cash and cash equivalents at beginning of year 33 311
------ ------
Cash and cash equivalents at end of period $ 27 $ 77
====== ======
<FN>
(continued on following page)
See accompanying notes.
</TABLE>
<PAGE>
NBI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
2000 1999
----- -----
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid $ 72 $ 65
==== ====
Income taxes paid $ 24 $ 35
==== ====
Noncash purchases of property, plant, and equipment
included in accounts payable at end of period $110 $264
==== ====
Preferred stock dividends paid in-kind $ -- $ 70
==== ====
<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 (consisting of all
normal recurring adjustments) which in the opinion of management are necessary
in order to make the financial statements not misleading. The consolidated
financial statements include the accounts of the Company and its wholly-owned
and majority-owned subsidiaries. All significant intercompany accounts and
profits have been eliminated.
Certain items in the fiscal 2000 financial statements have been reclassified
to conform to the fiscal 2001 manner of presentation.
Note 2 - Going Concern
As of September 30, 2000, the Company was still in default on its debt to the
Internal Revenue Service ("IRS"). However, on November 1, 2000, the Company
paid off all of the outstanding principal and accrued interest on its IRS
debt, curing its default. The Company paid the IRS with funds received from a
bank refinancing at its glass manufacturing subsidiary, L.E. Smith Glass
Company ("L.E. Smith"). (See Notes 8 and 14.)
Note 3 - Cash and Cash Equivalents
Cash and cash equivalents include investments that are readily convertible to
known amounts of cash and have original maturities of three months or less.
The Company places its cash and temporary cash investments with financial
institutions. At times, such investments may be in excess of federally
insured limits.
Note 4 - Discontinued Operations
On December 31, 1998, the Company established a plan to dispose of its Krazy
Colors, Inc. ("Krazy Colors") operation due to continuing losses incurred by
the operation, as well as the business' inability to sustain significant
long-term customers. On August 19, 1999, the Board of Directors voted to sell
the assets or stock of its wholly-owned subsidiaries, NBI Properties, Inc.
("NBI Properties") and Willowbrook Properties, Inc. ("Willowbrook
Properties"), in order to pay the remaining balance of the IRS debt due on
December 31, 1999 (see Notes 8 and 13). Therefore, the Company has
discontinued its children's paint manufacturing, hotel and real estate
development operations, and it has separately reported the income or loss from
these segments as discontinued operations for the quarters ended September 30,
2000 and 1999 as follows:
<TABLE>
<CAPTION>
Children's Real
Paint Hotel Estate
Manufacturing Operations Development Total
<S> <C> <C> <C> <C>
For the Quarter Ended September 30, 2000:
-----------------------------------------
Revenues from discontinued operations $ -- $ 673 $ -- $ 673
====== ====== ====== ======
Income from discontinued operations
before income taxes $ -- $ 62 $ -- $ 62
Income tax provision -- (24) -- (24)
------ ------ ------ ------
Net income from discontinued operations $ -- $ 38 $ -- $ 38
====== ====== ====== ======
</TABLE>
<PAGE>
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Children's Real
Paint Hotel Estate
Manufacturing Operations Development Total
<S> <C> <C> <C> <C>
For the Quarter Ended September 30, 1999:
-----------------------------------------
Revenues from discontinued operations $ 21 $ 686 $ -- $ 707
====== ====== ====== ======
Income from discontinued operations
before income taxes $ -- $ 49 $ -- $ 49
Income tax provision -- (21) -- (21)
------ ------ ------ ------
Net income from discontinued operations $ -- $ 28 $ -- $ 28
====== ====== ====== ======
</TABLE>
The disposal of the children's paint manufacturing operation was substantially
complete as of September 30, 1999.
On December 17, 1999, the Company sold a majority of the assets of its real
estate development, consisting of land and construction-in-progress, to an
entity which is 100% owned and controlled by NBI's CEO, Jay Lustig. The
Company intends to sell all of the capital stock of NBI Properties to an
entity which is also 100% owned and controlled by its CEO (see Note 13). The
Company recorded a deferred gain on the sale of the real estate development
during the second quarter of fiscal 2000 (see Notes 9 and 13) and expects a
significant gain overall from the discontinued operations of the hotel, and
therefore, no amount has been recorded related to these disposals; these gains
will be recognized when realized.
The net long-term assets of discontinued operations at September 30, 2000
consisted primarily of land, buildings and hotel furniture, fixtures and
equipment, net of a long-term mortgage note payable by the hotel. The net
current assets of discontinued operations at September 30, 2000 consisted
primarily of cash, net of accounts payable and accrued liabilities.
Note 5 - Investments in Securities
The Company held no investments and had no realized or unrealized gains or
losses for the quarter ended September 30, 2000. During the three months
ended September 30, 1999, all of the Company's securities were classified as
trading securities; no securities were classified as held-to-maturity or
available-for-sale. Realized and unrealized investment gains of $46,000 and
$2,000, respectively, were recorded for the quarter ended September 30, 1999.
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 September 30, 2000, the Company
had no investment positions.
<PAGE>
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Inventories
Inventories are comprised of the following amounts which are presented net of
reserves totaling $257,000:
<TABLE>
<CAPTION>
September 30,
2000
(Amounts in thousands)
<S> <C>
Raw materials $ 694
Work in process 539
Finished goods 1,654
-------
$2,887
=======
</TABLE>
Note 7 - Note Receivable from Related Party
In conjunction with the sale of Willowbrook Properties' land and
construction-in-progress (see Notes 4 and 13), on December 17, 1999, the
Company received a note receivable in the amount of $2.7 million from an
entity which is 100% owned and controlled by NBI's CEO. The note bears
interest at the rate of two-year Treasury Notes plus 200 basis points with a
rate of 8.14% determined at closing for the remainder of calendar 1999 and all
of calendar 2000, and to be redetermined each succeeding December 31 for the
following calendar year's rate. The note 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. Included
in other current assets at September 30, 2000 was $173,000 of accrued interest
on the note.
Note 8 - 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 April 9, 1998, revised 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, with respect to NBI's
federal tax liabilities for the fiscal years ended June 30, 1980 through 1988.
Under the current agreement, $3,500,000 of the IRS debt was due and paid on
December 31, 1998, and the remaining balance of $1,778,000 was due on December
31, 1999. On December 30, 1999, the Company paid the IRS $400,000 and as of
December 31, 1999, $1,378,000 of the IRS debt was still outstanding. On
January 5, 2000, the IRS sent NBI notice of a default of its Amended Payment
Agreement, due to the Company's failure to pay the remaining $1,378,000 that
was due on December 31, 1999. Per the terms of the agreement, an event of
default occurred on January 20, 2000, fifteen days after written notice and
demand from the IRS to NBI.
On February 18, 2000, the Company paid the IRS $500,000 from a deposit
received from its CEO related to NBI's pending sale of all of the capital
stock of NBI Properties to an entity which is 100% owned and controlled by Mr.
Lustig. On March 15, 2000, the Company received a notice of default from the
IRS regarding NBI's failure to cure the default of its Amended Payment
Agreement. The IRS declared the remaining principal amount of $878,000 due
and payable with interest thereon at the statutory rate provided under the
Internal Revenue Code since the last payment made by NBI. On November 1,
2000, the Company paid the IRS in full and cured its default with funds
received from a bank refinancing at L.E. Smith (see Note 14). The payment
totaled $1,157,000 and consisted of the remaining principal balance of
$878,000 and cumulative accrued interest of $279,000.
<PAGE>
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Income tax provision:
The Company recorded income tax provisions from continuing operations of
$13,000 and $28,000 for the three months ended September 30, 2000 and 1999,
respectively. These provisions 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 is not credited to the income tax
provision, but rather, reported as an addition to capital in excess of par
value. No pre-reorganization net operating losses were utilized for the three
months ended September 30, 2000 or 1999.
Willowbrook Properties' Sale:
During the second quarter of fiscal 2000, the Company recorded a taxable gain
of $921,000 from the sale of a majority of the assets of Willowbrook
Properties, whereas, the gain has been deferred for financial statement
purposes (see Notes 9 and 13). NBI does not expect to incur any federal
income taxes payable from this gain, due to the availability of
post-reorganization capital loss carryforwards. However, it does expect to
incur approximately $40,000 of Pennsylvania state income taxes on this gain
because Willowbrook Properties' does not have sufficient Pennsylvania net
operating loss carryforwards available to offset the entire gain. The income
tax expense has been netted against the deferred gain on the sale.
Note 9 - Deferred Gain from Sale of Operation
On December 17, 1999, the Company closed on the sale of a majority of the
assets of a wholly-owned subsidiary, Willowbrook Properties, to an entity
which is 100% owned and controlled by NBI's CEO. The terms and conditions of
the sale were previously approved at NBI's Annual Meeting of Stockholders held
on December 16, 1999. 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 $48,000 and net of approximately $40,000 of related
income taxes. (See Notes 4, 8 and 13.)
Note 10 - Stockholders' Equity
The Company has authorized 20,000,000 shares of $.01 par value common stock.
At September 30, 2000, 10,130,520 shares were issued including 2,027,200 held
in treasury. Therefore, the Company had 8,103,320 shares issued and
outstanding at September 30, 2000.
The Company has authorized 5,000,000 shares of preferred stock with a par
value of $.01 per share, and has designated 2,000,000 preferred shares as
Series A Cumulative Preferred Stock. At September 30, 2000, 507,421
registered shares of Series A Cumulative Preferred Stock were issued and
outstanding.
On August 19, 1999, the Board of Directors declared the first semi-annual
dividend on its outstanding Series A Cumulative Preferred Stock to holders of
record as of August 19, 1999. 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 $640,000 as of September 30, 2000.
<PAGE>
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11 - Income Per Common Share
The Company reports earnings per common share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128 issued by the Financial
Accounting Standards Board. The following reconciles the numerators and
denominators of the basic and diluted earnings per common share computation
for income before discontinued operations:
<TABLE>
<CAPTION>
For the quarters ended
September 30,
2000 1999
Basic Diluted Basic Diluted
------- ------- ------- -------
(Amounts in thousands except per share data)
<S> <C> <C> <C> <C>
Income before discontinued operations $ 293 $ 293 $ 382 $ 382
Dividend requirement on preferred stock (128) (128) (126) (126)
------- ------- ------- -------
Income before discontinued operations
attributable to common stock $ 165 $ 165 $ 256 $ 256
======= ======= ======= =======
Weighted average number of common
shares outstanding 8,103 8,103 8,100 8,100
======= =======
Assumed conversions of stock options 54 163
------- -------
8,157 8,263
======= =======
Income per common share
before discontinued operations $ .02 $ .02 $ .03 $ .03
======= ======= ======= =======
</TABLE>
For the three months ended September 30, 2000, only stock options outstanding
with an exercise price of $.38 per share 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 during such period. Stock options
outstanding with an exercise price of $.59 and $.77 per share were also
included in the computation of diluted earnings per share for the three months
ended September 30, 1999.
The options and warrants outstanding at September 30, 2000 were as follows:
<TABLE>
<CAPTION>
Number
Exercise Outstanding at
Price September 30, 2000
-------- ------------------
<S> <C> <C>
Stock options:
$ .38 201,000
$ .77 400,000
$ .88 184,000
Warrants:
$ .89 1,700,000
$1.20 1,000,000
---------
3,485,000
=========
</TABLE>
<PAGE>
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12 - Seasonal Variations of Operations
Excluding the effect of its significant customer, L.E. Smith typically has its
strongest revenue performance during the first and second fiscal quarters due
to seasonal variations. Generally, the fourth fiscal quarter's revenue is
moderately lower than in the first and second quarters, while the third fiscal
quarter's revenue is usually significantly lower than the other quarters.
However, historically these trends have been materially affected by
fluctuations in the timing of orders from its significant customer, which does
not have consistent trends. In addition, sales to L.E. Smith's other
customers during the third quarter of fiscal 2000 were higher than in the
first and second quarters of fiscal 2000 because the Company had a large
increase in new customers during the third quarter.
Note 13 - 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.
On December 17, 1999, the Company closed on the sale of a majority of the
assets of a wholly-owned subsidiary, Willowbrook Properties, to 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 $48,000 and net of
approximately $40,000 of related income taxes. The sale consisted of land and
construction-in-progress and was for a net purchase price of $3.3 million.
The purchase price was net of construction costs which were previously funded
by advances from Mr. Lustig. Concurrently with the closing of the Willowbrook
Properties sale transaction, such amounts were deemed to be expenses of the
buyer. The purchase price was paid by $600,000 in cash and a note payable in
the amount of $2.7 million. (See Notes 4, 7 and 9.)
Mr. Lustig has proposed to purchase all of the capital stock of NBI Properties
for $1.4 million in cash and a note payable of $1.1 million. On February 18,
2000, Mr. Lustig paid the Company a deposit of $500,000 related to this
proposed purchase. This amount was included in accrued liabilities and other
at September 30, 2000. Mr. Lustig is currently working on obtaining the funds
to enable him to close on this transaction.
Note 14 - Subsequent Event
On November 1, 2000, the Company paid off all of the outstanding principal and
accrued interest on its IRS debt, curing its default. The Company paid the
IRS with funds received from a bank refinancing of L.E. Smith (see Notes 2 and
8). The bank refinancing consists of a $3.0 million revolving line of credit
and a five-year term note payable of $2,950,000, and replaces the existing
revolving line of credit and term note payable. The proceeds from the
financing will also be used for a new crystal tank for the glass manufacturing
facility. The debt provides for interest ranging from the bank's prime rate
less 1/2% to the bank's prime rate plus 1%, depending upon L.E. Smith's debt
to tangible net worth ratio. The debt is collateralized by a first security
interest in all of L.E. Smith's accounts receivable, inventories, personal and
real property, as well as all of the capital stock of American Glass, Inc.
d/b/a L.E. Smith Glass Company. The debt is subject to a loan agreement which
contains covenants requiring maintenance of a minimum debt service coverage
ratio and minimum tangible net worth. In addition, it prohibits certain
activities of L.E. Smith without the bank's approval, including creation of
debts or liens, payment of dividends, granting loans or making certain
investments and participation in any mergers, acquisitions or ownership
changes. Also, the agreement limits the amount of L.E. Smith's capital
expenditures and dispositions of assets not in the ordinary course of
business.
<PAGE>
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER, FISCAL YEAR 2001
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 of raw materials, labor disputes,
investment results, limitations on the utilization of net operating loss
carryforwards, adequacy of insurance coverage, inflation and general economic
conditions.
RESULTS OF OPERATIONS
Revenues from continuing operations totaled $3.9 million for the first quarter
of fiscal 2001 and reflected a minimal increase, as expected, compared to
revenues of $3,848,000 for the quarter ended September 30, 1999.
Revenues from continuing operations are expected to increase substantially for
the three months ended December 31, 2000 compared to the same period in the
prior fiscal year, because L.E. Smith expects a substantial increase in
revenues from its largest customer as well as a significant increase in
holiday orders from its other customers. Revenues from continuing operations
are expected to increase moderately for the second quarter of fiscal 2001
compared to the first quarter of fiscal 2001 primarily due to a moderate
increase in revenues from its largest customer.
Cost of sales from continuing operations as a percentage of related revenue
was 71.9% for the quarter ended September 30, 2000, compared to 70.1% for the
same period in fiscal 2000. The resulting decline in gross margin was
primarily due to the absence of a $42,000 credit recorded in fiscal 2000,
resulting from the reversal of excess reserves for a prior self-insured
workmen's compensation plan, and from general cost increases.
Cost of sales from continuing operations as a percentage of related revenue
for the second quarter of fiscal 2001 is expected to be moderately lower
compared to the second quarter of fiscal 2000 due to the projected increase in
expected sales volume, which will cause favorable absorption of fixed costs
partially offset by general cost increases, including a substantial increase
projected for natural gas costs after L.E. Smith's current contract expires in
October 2000. However, cost of sales from continuing operations as a
percentage of related revenue for the second quarter of fiscal 2001 is
expected to be moderately higher compared to the first quarter of fiscal 2001,
as the increases expected from higher gas costs, general cost increases,
anticipated year-end bonuses and projected production inefficiencies related
to preparations for installation of the new crystal tank are expected to exceed
favorable variances caused by the moderately higher projected revenue volume.
Marketing, general and administrative expenses from continuing operations
totaled $768,000 and $745,000 for the three months ended September 30, 2000
and 1999, respectively. The increase was related to general cost increases
partially offset by lower sales commissions resulting from the commissionable
sales mix.
Marketing, general and administrative expenses for the second quarter of
fiscal 2001 are expected to increase significantly compared to both the same
period of the prior fiscal year and the first quarter of fiscal 2001,
resulting from general cost increases, higher sales commissions expected due
to the projected increases in revenues, and anticipated year-end bonuses.
Interest expense totaled $82,000 and $48,000 for the quarters ended September
30, 2000 and 1999, respectively. The increase was primarily due to $27,000 of
interest expense recorded on the Company's IRS debt during the first quarter
of fiscal 2001, resulting from the Company's default on this debt (see notes
2, 8 and 14 to the accompanying consolidated financial statements). In
addition, L.E. Smith had an increase in interest expense resulting from higher
average outstanding balances on its line of credit as well as increased
interest rates.
<PAGE>
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER, FISCAL YEAR 2001 - CONTINUED
The Company expects to have a significant increase in interest expense during
the second quarter of fiscal 2001 compared to both the same period in the
prior fiscal year and the first quarter of fiscal 2001 primarily due to higher
expected average outstanding debt resulting from its new bank financing at
L.E. Smith.
The Company held no investments and had no realized or unrealized gains or
losses for the quarter ended September 30, 2000. For the three months ended
September 30, 1999, the Company recorded a realized gain on investments of
$46,000 and an unrealized gain on investments of $2,000. 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 can be incurred in excess of the reported obligation if market prices
of the securities subsequently increase. At September 30, 2000, the Company
had no investment positions.
The Company recorded provisions for income taxes from continuing operations of
$13,000 and $28,000 the first quarter of fiscal 2001 and 2000, respectively,
primarily due to the inclusion of Pennsylvania state income tax provisions.
The state income tax provisions are related to the Company's Pennsylvania
operations and are based upon book income, because the continuing operations
do not have any net operating loss carryforwards available in Pennsylvania.
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 provisions for the three months ended September 30,
2000 or 1999.
DISCONTINUED OPERATIONS
On December 31, 1998, the Company established a plan to dispose of its Krazy
Colors' operation due to continuing losses incurred by the operation, as well
as the business' inability to sustain significant long-term customers. On
August 19, 1999, the Board of Directors voted to sell the assets or stock of
its wholly-owned subsidiaries, NBI Properties and Willowbrook Properties in
order to pay the remaining balance of the IRS debt due on December 31, 1999
(see Notes 4, 8 and 13 to accompanying consolidated financial statements).
Therefore, the Company has discontinued its children's paint manufacturing,
hotel, and real estate development operations, and it has separately reported
the income or loss from these segments as discontinued operations for the
quarters ended September 30, 2000 and 1999.
Revenues from discontinued operations totaled $673,000 for the first quarter
of fiscal 2001 compared to $707,000 for the same period of the prior fiscal
year. The decline in revenues was primarily related to the absence of
revenues from Krazy Colors.
The Company recorded net income from discontinued operations of $38,000 and
$28,000 for the three months ended September 30, 2000 and 1999, respectively.
The net long-term assets of discontinued operations at September 30, 2000
consisted primarily of land, buildings, development costs, and hotel
furniture, fixtures and equipment, net of a long-term mortgage note payable by
the hotel. The net current assets of discontinued operations at September 30,
2000 consisted primarily of cash, net of accounts payable and accrued
liabilities.
<PAGE>
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER, FISCAL YEAR 2001 - CONTINUED
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets increased $588,000 to $14.1 million at September
30, 2000 from $13.5 million at June 30, 2000. The increase was primarily due
to a significant increase in trade accounts receivable resulting from
increased revenues in September 2000 compared to June 2000, and from slower
collections. The Company had working capital of $57,000 at September 30,
2000, compared to negative working capital of $206,000 at June 30, 2000. The
increase in working capital was primarily due to an increase in accounts
receivable partially offset by increases in accounts payable and accrued
liabilities at September 30, 2000.
As of September 30, 2000, the Company was still in default on its debt to the
IRS. However, on November 1, 2000, the Company paid off all of the
outstanding principal and accrued interest on its IRS debt, curing its
default. The Company paid the IRS with funds received from a bank refinancing
at L.E. Smith Glass Company. (See Notes 2, 8 and 14 to the accompanying
consolidated financial statements.)
Construction-in-progress from continuing operations totaled $338,000 at
September 30, 2000 and included $120,000 for design and engineering costs
related to a new crystal tank for the glass manufacturing facility. The
Company estimates that it will cost approximately $1,785,000 to complete the
outstanding construction-in-progress, all of which is expected to be completed
during fiscal 2001. A majority of the estimated costs to complete the
outstanding projects is related to the new crystal tank. The new tank will
have an estimated useful life of 20 to 25 years, with major refurbishments,
costing approximately $500,000, required every seven years. The Company has
subsequently closed on bank financing to fund this project. (See Note 14 to
the accompanying consolidated financial statements.)
The Company expects its other working capital requirements in the next fiscal
year, including any cash dividends on its preferred stock, to be met by
existing working capital at September 30, 2000, internally generated funds,
remaining cash proceeds due in conjunction with the pending sale of the stock
of NBI Properties to the Company's CEO and short-term borrowings under L.E.
Smith's new line of credit.
<PAGE>
NBI, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
-------------------------------------------
(a) Exhibits
27 Financial Data Schedule
a. For the quarter ended September 30, 2000
(b) No reports on Form 8-K were filed during the quarter ended September
30, 2000 or subsequently.
<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.
November 14, 2000 By: /s/ Marjorie A. Cogan
------------------- ----------------------------------
(Date) Marjorie A. Cogan
As a duly authorized officer
Chief Financial Officer, Secretary
