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 NBI, INC. INDEX TO FORM 10-QSB For Quarter Ended September 30, 2000 PAGE --------- PART I - FINANCIAL INFORMATION 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 NBI, INC. CONSOLIDATED BALANCE SHEETS (Amounts in Thousands Except Share Data) September 30, June 30, 2000 2000 ------------ ----------- (Unaudited) ASSETS ------ 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. NBI, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in Thousands Except Per Share Data) (Unaudited) Three Months Ended September 30, 2000 1999 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. NBI, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Amounts in Thousands) (Unaudited) Three Months Ended September 30, 2000 1999 ------- ------ 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. NBI, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) (Unaudited) Three Months Ended September 30, 2000 1999 ----- ----- 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. 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: Children's Real Paint Hotel Estate Manufacturing Operations Development Total 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 ====== ====== ====== ====== NBI, INC. SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Children's Real Paint Hotel Estate Manufacturing Operations Development Total 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 ====== ====== ====== ====== 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. 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: September 30, 2000 (Amounts in thousands) Raw materials $ 694 Work in process 539 Finished goods 1,654 ------- $2,887 ======= 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. 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. 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: For the quarters ended September 30, 2000 1999 Basic Diluted Basic Diluted ------- ------- ------- ------- (Amounts in thousands except per share data) 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 ======= ======= ======= ======= 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: Number Exercise Outstanding at Price September 30, 2000 -------- ------------------ Stock options: $ .38 201,000 $ .77 400,000 $ .88 184,000 Warrants: $ .89 1,700,000 $1.20 1,000,000 --------- 3,485,000 ========= 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. 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. 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. 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. 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. 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