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, 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 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 May 4, 2000 - -------------------------------------- -------------------------- Common Stock, par value $.01 per share 8,103,320 NBI, INC. INDEX TO FORM 10-QSB For Quarter Ended March 31, 2000 PAGE PART I - FINANCIAL INFORMATION Consolidated Financial Statements (Unaudited) 3 - 6 Supplementary Notes to Consolidated Financial Statements (Unaudited) 7 - 14 Management's Discussion and Analysis of Financial Condition and Results of Operations 15 - 18 PART II - OTHER INFORMATION 19 NBI, INC. CONSOLIDATED BALANCE SHEETS (Amounts in Thousands Except Share Data) March 31, June 30, 2000 1999 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 124 $ 311 Trading securities -- 36 Accounts receivable, less allowance for doubtful accounts of $255 and $223, respectively 2,124 1,243 Inventories 2,893 2,972 Other current assets 305 443 Net current assets of discontinued operations 57 -- -------- -------- Total current assets 5,503 5,005 Property, plant and equipment, net 4,124 4,140 Note receivable from related party 2,700 -- Other assets 6 9 Net long-term assets of discontinued operations 1,510 3,666 -------- -------- $13,843 $12,820 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings and current portion of notes payable $ 2,111 $ 1,719 Current portion of IRS debt and other income taxes payable 913 1,788 Accounts payable 1,484 1,372 Accrued liabilities 1,389 726 Net current liabilities of discontinued operations -- 173 -------- -------- Total current liabilities 5,897 5,778 Long-term liabilities: Notes payable 163 260 Deferred income taxes 92 92 Postemployment disability benefits and other 252 264 Deferred gain from sale of discontinued operation, net of taxes 881 -- -------- -------- Total liabilities 7,285 6,394 -------- -------- Commitments and contingencies Stockholders' equity: Preferred stock - $.01 par value; 5,000,000 shares authorized; 507,421 and 500,000 shares of Series A Cumulative Preferred Stock issued and outstanding, respectively (liquidation preference value of $5,074 and $5,000, respectively) 5 5 Capital in excess of par value - preferred stock 4,632 4,562 Common stock - $.01 par value; 20,000,000 shares authorized; 10,130,520 and 10,115,520 shares issued, respectively 101 101 Capital in excess of par value - common stock 6,566 6,561 Accumulated deficit (3,878) (3,935) -------- -------- 7,426 7,294 Less treasury stock at cost (2,027,200 shares) (868) (868) -------- -------- Total stockholders' equity 6,558 6,426 -------- -------- $13,843 $12,820 ======== ======== <FN> See accompanying notes. NBI, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in Thousands Except Per Share Data) (Unaudited) Three Months Ended Nine Months Ended March 31, March 31, 2000 1999 2000 1999 Revenues: Sales $4,047 $3,602 $11,008 $11,831 ------- ------- -------- -------- Costs and expenses: Cost of sales 3,003 2,587 8,170 8,211 Marketing, general and administrative 768 835 2,247 2,262 ------- ------- -------- -------- 3,771 3,422 10,417 10,473 ------- ------- -------- -------- Income from operations 276 180 591 1,358 Other income (expense): Interest income 55 19 65 19 Net gain (loss) on investments -- (507) 57 (507) Other income and expenses, net 2 1 2 15 Interest expense (268) (41) (365) (137) ------- ------- -------- -------- (211) (528) (241) (610) ------- ------- -------- -------- Income (loss) from continuing operations before income taxes 65 (348) 350 748 Income tax provision (36) (39) (57) (266) ------- ------- -------- -------- Income (loss) before discontinued operations 29 (387) 293 482 Income (loss) from discontinued operations, net of income tax benefit (provision) of $15, $20, $(9) and $108, respectively (17) (38) 16 (223) ------- ------- -------- -------- Net income (loss) 12 (425) 309 259 Dividend requirement on preferred stock (126) (126) (378) (126) ------- ------- -------- -------- Income (loss) attributable to common stock $ (114) $ (551) $ (69) $ 133 ======= ======= ======== ======== Income (loss) per common share - basic and diluted: Income (loss) before discontinued operations $ (.01) $ (.06) $ (.01) $ .04 Income (loss) from discontinued operations -- (.01) -- (.02) ------- ------- -------- -------- Net income (loss) $ (.01) $ (.07) $ (.01) $ .02 ======= ======= ======== ======== Weighted average number of common shares outstanding 8,103 8,088 8,102 8,088 ======= ======= ======== ======== <FN> See accompanying notes. NBI, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) (Unaudited) Nine Months Ended March 31, 2000 1999 Cash flows from operating activities: Net income $ 309 $ 259 Adjustments to reconcile net income to net cash flow provided by operating activities: Depreciation and amortization 737 620 Provision for bad debts and returns 34 190 Provision for (reversal of) writedown of inventory (1) 154 Provision for impairment of property and equipment and other long-term assets -- 53 Gain on sales of property and equipment -- (8) Net unrealized gain on trading securities (2) -- Other (11) 12 Changes in assets -- decrease (increase): Trading securities 38 -- Accounts receivable (912) (355) Inventory 83 (308) Other current assets 142 (126) Other assets (2) 64 Changes in liabilities -- (decrease) increase: Accounts payable and accrued liabilities 639 936 Income tax related accounts (22) 13 -------- -------- Net cash flow provided by operating activities 1,032 1,504 -------- -------- Cash flows from investing activities: Proceeds from sale of land and construction-in-progress, net of selling expenses 552 -- Proceeds from sales of property and equipment -- 16 Purchases of property and equipment (1,085) (1,164) -------- -------- Net cash flow used in investing activities (533) (1,148) -------- -------- Cash flows from financing activities: Collections on note receivable 22 5 Proceeds from issuance of preferred stock, net of offering costs -- 4,848 Dividends paid on preferred stock (182) -- Proceeds from stock option exercises 5 -- Payments on notes payable and line of credit from CEO (216) (196) Net borrowings on line of credit 492 181 Payments on IRS debt (900) (3,500) -------- -------- Net cash flow provided by (used in) financing activities (779) 1,338 -------- -------- Net increase (decrease) in cash and cash equivalents (280) 1,694 Less change in cash and cash equivalents included in net current assets or liabilities of discontinued operations 93 (19) Cash and cash equivalents at beginning of period 311 209 -------- -------- Cash and cash equivalents at end of period $ 124 $ 1,884 ======== ======== <FN> See accompanying notes. NBI, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) (Unaudited) Nine Months Ended March 31, 2000 1999 Supplemental disclosures of cash flow information: Interest paid $ 227 $196 ====== ==== Income taxes paid $ 89 $112 ====== ==== Noncash purchases of property, plant and equipment included in accounts payable at end of period $ 107 $123 ====== ==== Noncash issuance of note receivable for sale of land and construction-in-progress $2,700 $ -- ====== ==== Deferred gain recorded from sale of discontinued operation, net of taxes $ 881 $ -- ====== ==== Preferred stock dividends paid in-kind $ 70 $ -- ====== ==== <FN> See accompanying notes. NBI, INC. SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - Basis of Preparation The accompanying financial statements have been prepared in accordance with the requirements of Form 10-QSB and include all adjustments (consisting of all normal recurring adjustments) which in the opinion of management are necessary in order to make the financial statements not misleading. The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and profits have been eliminated. Note 2 - Going Concern As discussed in Note 8, the Company owed the Internal Revenue Service ("IRS") $1.8 million on or before 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 with the IRS dated April 8, 1998 ("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, Jay Lustig, related to NBI's pending sale of all of the capital stock of a wholly-owned subsidiary, NBI Properties, Inc. ("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 interest payment made by NBI on July 9, 1997 under the original agreement. Accrued interest through March 31, 2000 totaled $219,000. In addition, the IRS notified the Company that it intends to pursue its remedies. In order to pay the remaining amount outstanding, management intends to generate sufficient cash through the sale of the stock of NBI Properties; however, there can be no assurance that the Company will be able to complete a sale of this stock and satisfy its obligations to the IRS. This condition raises substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not contain any adjustments that might result from the outcome of this uncertainty. Management believes that after the Company has sold the stock of NBI Properties and pays off its IRS debt, it will generate sufficient future cash flows from its remaining operations to allow the Company to continue as a going concern. (See Notes 4, 8 and 13). 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 and Willowbrook Properties, Inc. ("Willowbrook Properties"), in order to pay the remaining balance of the IRS debt due on December 31, 1999 (see Notes 2 and 8). 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 and nine months ended March 31, 2000 and 1999 as follows: NBI, INC. SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Children's Real Paint Hotel Estate Manufacturing Operations Development Total (Amounts in thousands) For the Quarter Ended March 31, 2000: Revenues from discontinued operations $-- $ 476 $-- $ 476 === ======= ==== ======= Loss from discontinued operations before income taxes $-- $ (54) $-- $ (54) Income tax benefit -- 22 -- 22 --- ------- ---- ------- Net income (loss) from operations -- (32) -- (32) Gain on disposal, net of income tax provision of $7 15 -- -- 15 --- ------- ---- ------- Net income (loss) from discontinued operations $15 $ (32) $-- $ (17) === ======= ==== ======= For the Quarter Ended March 31, 1999: - ---------------------------------------------------- Revenues from discontinued operations $11 $ 463 $-- $ 474 === ======= ==== ======= Loss from discontinued operations before income taxes $-- $ (57) $(1) $ (58) Income tax benefit -- 20 -- 20 --- ------- ---- ------- Net loss from operations -- (37) (1) (38) Loss on disposal -- -- -- -- --- ------- ---- ------- Net loss from discontinued operations $-- $ (37) $(1) $ (38) === ======= ==== ======= For the Nine Months Ended March 31, 2000: - ---------------------------------------------------- Revenues from discontinued operations $21 $1,767 $-- $1,788 === ======= ==== ======= Income (loss) from discontinued operations before income taxes $-- $ 4 $(1) $ 3 Income tax provision -- (2) -- (2) --- ------- ---- ------- Net income (loss) from operations -- 2 (1) 1 Gain on disposal, net of income tax provision of $7 15 -- -- 15 --- ------- ---- ------- Net income (loss) from discontinued operations $15 $ 2 $(1) $ 16 === ======= ==== ======= NBI, INC. SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Children's Real Paint Hotel Estate Manufacturing Operations Development Total (Amounts in thousands) For the Nine Months Ended March 31, 1999: Revenues from discontinued operations $ 106 $1,715 $-- $1,821 ====== ======= ==== ======= Loss from discontinued operations before income taxes $(125) $ (5) $(3) $ (133) Income tax benefit (provision) 43 (2) -- 41 ------ ------- ---- ------- Net income (loss) from operations (82) (7) (3) (92) Loss on disposal, including loss from operations from January 1, 1999 through disposition of $18 for the children's paint manufacturing (198) -- -- (198) Income tax benefit 67 -- -- 67 ------ ------- ---- ------- Net loss on disposal (131) -- -- (131) ------ ------- ---- ------- Net loss from discontinued operations $(213) $ (7) $(3) $ (223) ====== ======= ==== ======= In determining the loss on disposal of its children's paint manufacturing operation, which was recorded during the quarter ended December 31, 1998, the Company estimated the net realizable value of the disposal of the discontinued operation, including estimated costs and expenses directly associated with the disposal and the estimated loss from operations through the expected disposal date. The Company recorded a deferred gain on the sale of the land development during the second quarter of fiscal 2000 (see Notes 8 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; the gain will be recognized when realized. 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 its CEO. The Company intends to sell all of the capital stock of NBI Properties to an entity which is 100% owned and controlled by its CEO. (See Note 13). The net long-term assets of discontinued operations at March 31, 2000 consisted primarily of the hotel's building and furniture, fixtures and equipment, net of a long-term mortgage note payable by the hotel. The net current assets of discontinued operations at March 31, 2000 consisted primarily of cash balances net of accounts payable and accrued liabilities. Note 5 - Investments in Securities and Obligations from Short-Sale Transactions During the three and nine months ended March 31, 2000, 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, 2000. The Company recorded realized and unrealized gains of $55,000 and $2,000, respectively, for the nine months ended March 31, 2000, compared to a realized loss of $507,000 for the three and nine months ended March 31, 1999. NBI, INC. SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 5 - Investments in Securities and Obligations from Short-Sale Transactions (cont'd) 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, 2000, the Company had no investment positions. Note 6 - Inventories Inventories are comprised of the following amounts which are presented net of reserves totaling $241,000: March 31, 2000 (Amounts in thousands) Raw materials $ 818 Work in process 413 Finished goods 1,662 ------ $2,893 ====== 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 Jay Lustig, 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 March 31, 2000 was $63,000 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. NBI, INC. SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 8 - Income Taxes (cont'd) IRS Debt: (cont'd) On February 18, 2000, the Company paid the IRS $500,000 from a deposit received from its CEO, Jay Lustig, 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 interest payment made by NBI on July 9, 1997 under the original agreement. Accrued interest through March 31, 2000 totaled $219,000. In addition, the IRS notified the Company that it intends to pursue its remedies. In order to pay the remaining amount outstanding, management intends to generate sufficient cash through the sale of the stock of NBI Properties; however, there can be no assurance that the Company will be able to complete a sale of this stock and satisfy its obligations to the IRS. This condition raises substantial doubt about the Company's ability to continue as a going concern. Management believes that after the Company has sold the stock of NBI Properties and pays off its IRS debt, it will generate sufficient future cash flows from its remaining operations to allow the Company to continue as a going concern. (See Notes 2, 4 and 13). The IRS debt continues to be collateralized by a security interest in all of the capital stock of American Glass, Inc., d/b/a L.E. Smith Glass Company ("L.E. Smith") and NBI Properties. Income tax provision: The Company recorded income tax provisions from continuing operations of $36,000 and $57,000 for the three and nine months ended March 31, 2000, respectively. For the three and nine months ended March 31, 1999, the Company recorded income tax provisions from continuing operations of $39,000 and $266,000, 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 or nine months ended March 31, 2000 or 1999. Willowbrook Properties' Sale: During the second quarter of fiscal 2000, the Company recorded a taxable gain of approximately $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 Note 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 - Stockholders' Equity The Company has authorized 20,000,000 shares of $.01 par value common stock. At March 31, 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 March 31, 2000. NBI, INC. SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 9 - Stockholders' Equity 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, 2000, 507,421 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 other dividends have been declared or paid to-date. Note 10 - 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: For the quarters ended March 31, 2000 1999 Basic Diluted Basic Diluted ------- ------- ------- ------- (Amounts in thousands except per share data) Income (loss) before discontinued operations $ 29 $ 29 $ (387) $ (387) Dividend requirement on preferred stock (126) (126) (126) (126) ------- ------- ------- ------- Loss before discontinued operations attributable to common stock $ (97) $ (97) $ (513) $ (513) ======= ======= ======= ======= Weighted average number of common shares outstanding 8,103 8,103 8,088 8,088 ======= ======= Assumed conversions of stock options -- -- ------- ------- 8,103 8,088 ======= ======= Loss per common share before discontinued operations $ (.01) $ (.01) $ (.06) $ (.06) ======= ======= ======= ======= Because the Company had a loss before discontinued operations attributable to common stock for the quarters ended March 31, 2000 and 1999, none of its outstanding options or warrants were included in the computation of diluted earnings per share, as their effect would be anti-dilutive. NBI, INC. SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the nine months ended March 31, 2000 1999 Basic Diluted Basic Diluted ------- ------- ------- ------- (Amounts in thousands except per share data) Income before discontinued operations $ 293 $ 293 $ 482 $ 482 Dividend requirement on preferred stock (378) (378) (126) (126) ------- ------- ------- ------- Income (loss) before discontinued operations attributable to common stock $ (85) $ (85) $ 356 $ 356 ======= ======= ======= ======= Weighted average number of common shares outstanding 8,102 8,102 8,088 8,088 ======= ======= Assumed conversions of stock options -- 381 ------- ------- 8,102 8,469 ======= ======= Income (loss) per common share before discontinued operations $ (.01) $ (.01) $ .04 $ .04 ======= ======= ======= ======= Because the Company had a loss before discontinued operations attributable to common stock for the nine months ended March 31, 2000, 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 nine months ended March 31, 1999, all of the Company's outstanding options and warrants, except for the warrants with an exercise price of $1.20, 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. The options and warrants outstanding at March 31, 2000 and 1999 were as follows: Number Number Exercise Outstanding at Outstanding at Price March 31, 2000 March 31, 1999 Stock options: $ .38 201,000 216,000 $ .59 100,500 100,500 $ .77 400,000 400,000 $ .88 184,000 244,000 Warrants: $ .89 1,700,000 1,700,000 $ 1.20 1,000,000 1,000,000 --------- --------- 3,585,500 3,660,500 ========= ========= NBI, INC. SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 11 - Comprehensive Income Effective July 1, 1998, the Company has adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income." Comprehensive income includes all changes in equity except those resulting from investments by owners and distributions to owners. For the three and nine months ended March 31, 2000 and 1999, the Company had no items of comprehensive income other than net income; therefore, a separate statement of comprehensive income has not been presented for these periods. 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 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, as of March 31, 2000, which is net of selling expenses of approximately $48,000 and net of approximately $40,000 of related income taxes. The sale consisted of land and construction-in-progress and was for a net purchase price of $3.3 million. The purchase price was net of construction costs which were previously funded by advances from Mr. Lustig. Concurrently with the closing of the Willowbrook Properties sale transaction, such amounts were deemed to be expenses of the buyer. The purchase price was paid by $600,000 in cash and a note payable in the amount of $2.7 million. (See Notes 4, 7 and 8.) In December, 1999, the Company paid Mr. Lustig approximately $148,000 consisting of repayment of a revolving line of credit balance of $100,000, cumulative accrued interest thereon of $25,000 and an accrued bonus from fiscal 1997 of $23,000. Mr. Lustig has proposed to purchase all of the capital stock of NBI Properties for $1,400,000 in cash and a note payable of $1.1 million. The terms and conditions of the sale were approved at NBI's Annual Meeting of Stockholders held on December 16, 1999. On February 18, 2000, Mr. Lustig paid the Company a deposit of $500,000 related to this proposed purchase. Mr. Lustig is currently working on obtaining the funds to enable him to close on this transaction. NBI, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIRD QUARTER, FISCAL YEAR 2000 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 satisfy the Company's obligations to the IRS, 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 totaling $4.0 million for the third quarter of fiscal 2000 reflected an increase of $445,000, or 12.4%, from $3.6 million for the three months ended March 31, 1999. L.E. Smith experienced a large increase in new customers during the third quarter of fiscal 2000, including a significant increase in sales to department stores. However, this was partially offset by a decline of $342,000 in revenue from its largest customer. Revenues from continuing operations totaled $11.0 million for the nine months ended March 31, 2000, a decline of $823,000 or 7.0%, compared to $11.8 million in revenues for the same period in fiscal 1999, resulting from a decline of $1,681,000 in revenue from L.E. Smith's largest customer and a decline of $317,000 in revenue from a customer that declared Chapter 11 bankruptcy in March 1999. Although the Company expected a substantial decline in revenues from its largest customer, the decline has been far more severe than originally expected. However, these declines were significantly offset by sustained revenue growth from its other customers, including a large increase in new customers. Revenues from continuing operations are expected to increase substantially for the three months ended June 30, 2000, compared to the same period in the prior fiscal year; L.E. Smith expects increased business from new and existing customers, as well as a significant increase in revenue from its largest customer, as revenues from this customer during the fourth quarter of fiscal 1999 was unusually low. Revenues from continuing operations are expected to decrease moderately for the fourth quarter of fiscal 2000 compared to the third quarter of fiscal 2000. Although the Company expects a substantial increase in revenue from its largest customer during the fourth quarter of fiscal 2000 compared to the same period in the prior year, it expects revenues from this customer to be flat compared to the third quarter of fiscal 2000. In addition, the Company expects a decline in revenues from its other customers due to a drop-off in initial sales to new customers. The Company is still in the process of hiring a new sales representative to concentrate on increasing the volume of the glass decorating business in order to help offset the effect of the continuing decline in revenues from its largest customer. Cost of sales from continuing operations as a percentage of related revenue was 74.2% for the quarter ended March 31, 2000, compared to 71.8% for the same period in fiscal 1999. For the nine months ended March 31, 2000 and 1999, cost of sales from continuing operations as a percentage of related revenue was 74.2% and 69.4%, respectively. The related significant decline in gross margin was primarily due to general cost increases, including significant increases in its health and workmen's compensation insurance costs (increases of $41,000 quarter-to-date and $97,000 year-to-date), as well as higher depreciation expense (increases of $18,000 quarter-to-date and $118,000 year-to-date), resulting from $1.0 million of capital improvements made in the prior fiscal year, and for the nine months ended March 31, 2000, a significant decline in revenue volume available to cover fixed costs. Cost of sales from continuing operations as a percentage of related revenue for the fourth quarter of fiscal 2000 is expected to be significantly lower compared to the fourth quarter of fiscal 1999, due to substantially higher expected sales volume, causing favorable absorption of fixed costs, partially offset by general cost increases. Cost NBI, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIRD QUARTER, FISCAL YEAR 2000 - CONTINUED of sales from continuing operations as a percentage of related revenue for the fourth quarter of fiscal 2000 is expected to be slightly higher compared to the third quarter of fiscal 2000, primarily due to lower projected sales volume. Marketing, general and administrative expenses from continuing operations decreased $67,000, or 8.0% to $768,000 for the three months ended March 31, 2000 compared to $835,000 for the third quarter of fiscal 1999. The decrease resulted primarily from the absence of an additional bad debt provision of $127,000 recorded by L.E. Smith during the third quarter of fiscal 1999, due to a customer's declaration of Chapter 11 bankruptcy in March 1999, as well as savings resulting from cost control measures. However, these declines were partially offset by increased selling expenses due to higher sales and marketing activity and increased sales commissions. The increased sales commissions were due to increased sales from outside sales representatives, while the Company experienced a significant decline in revenues from its largest customer which is a house account and is not subject to outside sales commissions. Fiscal year-to-date, marketing, general and administrative expenses from continuing operations were stable at $2,247,000 for the nine months ended March 31, 2000 compared to $2,262,000 for the same period of fiscal 1999. The savings resulting from lower bad debt provisions and cost control measures slightly exceeded increased selling expenses and general cost increases incurred for the nine months ended March 31, 2000 compared to the same period in the prior fiscal year. Marketing, general and administrative expenses are expected to increase significantly for the three months ended June 30, 2000, compared to the same period in the prior fiscal year resulting primarily from increased sales and marketing expenses, higher commissions, due to the expected sales mix and higher projected revenues, and general cost increases slightly offset by savings from cost control measures. Marketing, general and administrative expenses are expected to remain constant for the three months ended June 30, 2000, compared to the third quarter of fiscal 2000 due to slightly lower commissions from lower expected sales partially offset by general cost increases. For the nine months ended March 31, 2000, the Company recorded realized and unrealized gains on investments of $55,000 and $2,000, respectively, compared to a realized loss on investments of $507,000 for the three and nine months ended March 31, 1999. The Company held no investments and had no unrealized gains or losses for the quarter ended March 31, 2000. As part of its invest- ment 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 March 31, 2000, the Company had no investment positions. The Company recorded interest expense of $268,000 and $365,000 for the three and nine months ended March 31, 2000, respectively, compared to $41,000 and $137,000 for the same periods in fiscal 1999. The increase was due to $219,000 of interest expense on NBI's IRS debt recorded during the third quarter of fiscal 2000 resulting from the Company's default on this debt. (See Financial Condition, Liquidity and Capital Resources and Notes 2 and 8.) The Company recorded income tax provisions from continuing operations of $36,000 and $57,000 for the three and nine months ended March 31, 2000, respectively. For the three and nine months ended March 31, 1999, the Company recorded income tax provisions from continuing operations of $39,000 and $266,000, respectively. These provisions include state and other income taxes and are based upon book income. 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 such non-cash components included in the income tax provisions for the three or nine months ended March 31, 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 NBI, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIRD QUARTER, FISCAL YEAR 2000 - CONTINUED 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 2, 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 three and nine months ended March 31, 2000 and 1999. Revenues from discontinued operations totaled $476,000 and $1,788,000 for the three and nine months ended March 31, 2000, compared to $474,000 and $1,821,000 for the same periods in the prior fiscal year. The Company recorded a net loss from discontinued operations of $17,000 for the three months ended March 31, 2000 compared to a net loss from discontinued operations of $38,000 for the same period of the prior fiscal year. Year-to-date, the Company recorded net income from discontinued operations of $16,000 in fiscal 2000 compared to a net loss from discontinued operations of $223,000 in fiscal 1999. The improvement resulted primarily from the absence of a loss from the Krazy Colors operation because the estimated loss on disposal of this operation was accrued for during the second quarter of fiscal 1999. In determining the estimated loss on disposal of its Krazy Colors operation, the Company estimated the net realizable value of the disposal of the discontinued operation, including estimated costs and expenses directly associated with the disposal and the estimated loss from operations through the expected disposal date. The Company recorded a deferred gain on the sale of the land development during the second quarter of fiscal 2000 and expects a significant gain overall from the discontinued operations of the hotel, and therefore, no amount has been recorded related to these disposals; the gain will be recognized when realized. 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. The Company intends to sell all of the capital stock of NBI Properties to an entity which is 100% owned and controlled by its CEO. (See Notes 8 and 13). The net long-term assets of discontinued operations at March 31, 2000 consisted primarily of the hotel's building and furniture, fixtures and equipment, net of a long-term mortgage note payable by the hotel. The net current assets of discontinued operations at March 31, 2000 consisted primarily of cash balances net of accounts payable and accrued liabilities. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company's total assets increased $1.0 million to $13.8 million at March 31, 2000 from $12.8 million at June 30, 1999. The increase was primarily due to a net gain on the sale of Willowbrook Properties' land and construction-in-progress of $881,000, which was deferred for financial statement purposes, and an increase in accounts receivable of $881,000 resulting primarily from significantly higher sales from L.E. Smith in March 2000 than in June 1999. However, these increases in assets were significantly offset by a cash payment of $182,000 for a portion of the preferred dividends paid during the first quarter of fiscal 2000 and the use of the net cash proceeds from the Willowbrook Properties' sale to pay $400,000 on the IRS debt and $148,000 to the Company's CEO to pay-off a revolving line of credit with cumulative accrued interest, as well as an accrued bonus payable from fiscal 1997. The Company had negative working capital of $394,000 at March 31, 2000, compared to negative working capital of $773,000 at June 30, 1999. The decrease in the working capital deficit resulted primarily from net cash proceeds of $552,000 from the sale of Willowbrook Properties' land and construction-in-progress, partially offset by cash and proceeds from investment trades receivable, included in other current assets at June 30, 1999, which were used to fund a portion of the land development costs incurred during fiscal 2000, prior to its sale. As discussed in Notes 2 and 8 to the Consolidated Financial Statements, the remaining balance of $1.8 million of the Company's debt to the IRS was due on December 31, 1999. On December 30, 1999, the Company paid NBI, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIRD QUARTER, FISCAL YEAR 2000 - CONTINUED 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, Jay Lustig, 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 interest payment made by NBI on July 9, 1997 under the original agreement. Accrued interest through March 31, 2000 totaled $219,000. In addition, the IRS notified the Company that it intends to pursue its remedies. In order to pay the remaining amount outstanding, management intends to generate sufficient cash through the sale of the stock of NBI Properties; however, there can be no assurance that the Company will be able to complete a sale of this stock and satisfy its obligations to the IRS. This condition raises substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not contain any adjustments that might result from the outcome of this uncertainty. Management believes that after the Company has sold the NBI Properties stock and pays off its IRS debt, it will generate sufficient future cash flows from its remaining operations to allow the Company to continue as a going concern. (See Notes 2, 4, 8 and 13). Construction-in-progress from continuing operations totaled $287,000 at March 31, 2000 and included $78,000 for design and engineering costs related to a new crystal tank for the glass manufacturing facility. The Company estimates that it will cost approximately $1.8 million to complete the outstanding construction-in-progress, all of which are expected to be completed by the end of fiscal 2000, except for the new crystal tank which is expected to be completed within the next year. 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 is currently pursuing various financing alternatives for this capital improvement. The Company expects its other working capital requirements in the next fiscal year to be met by existing working capital at March 31, 2000, internally generated funds including interest income from the note receivable from its CEO received in conjunction with the sale of Willowbrook Properties' land and construction in progress, and for L.E. Smith's requirements, short-term borrowings under an existing line of credit. YEAR 2000 COMPLIANCE To-date, the Company has not experienced any material problems resulting from the year 2000 issue, nor has it experienced any problems from its suppliers or customers related to the year 2000 issue. NBI believes that as a result of the completed conversions to new hardware and software, the year 2000 issue has been mitigated. NBI, INC. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27. Financial Data Schedule (b) Form 8-K dated March 15, 2000, Item 5 - Other Events: The Company received a notice of default and assessment of interest from the IRS related to its outstanding debt with the IRS. 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, 2000 By: /s/ Marjorie A. Cogan -------------- ---------------------------------- (Date) Marjorie A. Cogan As a duly authorized officer Chief Financial Officer, Secretary