PAGE 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, 1997 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 October 31, 1997 ----- ------------------------------- Common Stock par value $.01 per share 8,088,320 PAGE NBI, INC. INDEX TO FORM 10-QSB For Quarter Ended September 30, 1997 PAGE ---- PART I - FINANCIAL INFORMATION Consolidated Financial Statements (Unaudited) 3 - 6 Supplementary Notes to Consolidated Financial Statements (Unaudited) 7 - 9 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 12 PART II - OTHER INFORMATION 13 PAGE NBI, INC. CONSOLIDATED BALANCE SHEETS (Amounts in Thousands Except Share Data) September 30, June 30, 1997 1997 ---- ---- (Unaudited) ASSETS ------ Current assets: Cash and cash equivalents $ 154 $ 333 Accounts receivable, less allowance for doubtful accounts of $100 and $97, respectively 1,674 1,231 Inventories 2,395 2,470 Other current assets 226 189 -------- -------- Total current assets 4,449 4,223 Property, plant and equipment, net 6,734 6,869 Other assets. 414 404 -------- -------- $ 11,597 $ 11,496 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY -------------------------------------------------------------- Current liabilities: Short-term borrowings and current portion of notes payable $ 1,185 $ 921 Obligation for short-sale transactions -- 111 Current portion of IRS debt and other income taxes payable 5,293 5,274 Accounts payable 932 960 Accrued liabilities 1,125 1,154 -------- -------- Total current liabilities 8,535 8,420 Long-term liabilities: Notes payable 1,536 1,604 Deferred income taxes 225 251 Postemployment disability benefits 193 196 -------- ------- Total liabilities 10,489 10,471 -------- -------- Commitments and contingencies Stockholders' equity: Common stock - $.01 par value; 20,000,000 shares authorized; 10,115,520 and 10,005,020 shares issued, respectively 101 100 Capital in excess of par value 6,241 6,178 Accumulated deficit (4,366) (4,385) -------- ------- 1,976 1,893 Less treasury stock at cost (2,027,200 shares) (868) (868) -------- -------- Total stockholders' equity 1,108 1,025 -------- ------- $11,597 $11,496 ======= ======= <FN> See accompanying notes. NBI, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in Thousands Except Per Share Data) (Unaudited) Three Months Ended September 30, 1997 1996 ---- ---- Revenues: Sales $ 3,085 $ 3,148 Service and rental 636 594 ------- ------- 3,721 3,742 Costs and expenses: Cost of sales 2,191 2,092 Cost of service and rental 414 375 Marketing, general and administrative 840 739 ------- ------- 3,445 3,206 ------- ------ Income from operations 276 536 Other income (expense): Net loss on investments (39) (107) Other expense (8) (49) Interest expense (182) (163) ------- ------- (229) (319) ------- ------ Income before provision for income taxes 47 217 Provision for income taxes (28) (110) ------- ------- Net income $ 19 $ 107 ======= ======= Net income per common share $ -- $ .01 ======= ======= Weighted average number of common shares outstanding 8,044 7,998 ======= ======= <FN> See accompanying notes. NBI, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Amounts in Thousands) (Unaudited) Three Months Ended September 30, 1997 1996 ---- ---- Cash flows from operating activities: Net income $ 19 $ 107 Adjustments to reconcile net income to net cash flow provided by (used in) operating activities: Utilization of net operating loss carryforwards -- 54 Depreciation and amortization 176 134 Provision for bad debts and returns 34 25 Provision for writedown of inventories 17 36 Loss (gain) on sales of property and equipment 50 (2) Net unrealized loss (gain) on trading securities (53) 36 Compensation expense related to stock option extensions 37 -- Other -- 1 Changes in assets -- decrease (increase): Accounts receivable (477) (695) Inventories 58 (35) Other current assets (34) 512 Net assets of discontinued operations -- (35) Other assets (24) (6) Changes in liabilities -- (decrease) increase: Obligations for short-sale transactions (58) (270) Accounts payable and accrued liabilities (30) 188 Income tax related accounts (7) 16 ----- ------ Net cash flow provided by (used in) operating activities (292) 66 ----- ----- Cash flows from investing activities: Proceeds from sales of property and equipment 1 3 Purchases of property and equipment (112) (309) ----- ------ Net cash flow used in investing activities (111) (306) ----- ------ Cash flows from financing activities: Collections from notes receivable 1 -- Proceeds from issuance of stock, net of offering costs (2) 1 Proceeds from stock options exercised 29 -- Proceeds from borrowing 50 -- Payments on notes payable (77) (85) Net borrowings on line of credit 223 262 ------ ----- Net cash flow provided by financing activities 224 178 ------ ----- Net decrease in cash and cash equivalents (179) (62) Less increase in cash and cash equivalents included in net current assets of discontinued operations -- (71) Cash and cash equivalents at beginning of period 333 782 ------ ----- Cash and cash equivalents at end of period $ 154 $ 649 ======= ===== <FN> See accompanying notes. NBI, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) (Unaudited) Three Months Ended September 30, 1997 1996 ---- ---- Supplemental disclosures of cash flow information: Interest paid $ 166 $ 142 ====== ===== Income taxes paid $ 26 $ 52 ====== ===== <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 which in the opinion of management are necessary in order to make the financial statements not misleading. The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and profits have been eliminated. Note 2 - Cash and Cash Equivalents ---------------------------------------- Cash and cash equivalents include investments that are readily convertible to known amounts of cash and have original maturities of three months or less. The Company places its cash and temporary cash investments with financial institutions. At times, such investments may be in excess of federally insured limits. Note 3 - Investments in Securities and Obligations from Short-Sale - --------------------------------------------------------------------------- Transactions - ------------ During the three months ended September 30, 1997, all of the Company's securities were classified as trading securities; no securities were classified as held-to-maturity or available-for-sale. For the quarter ended September 30, 1997, the Company recorded a net unrealized gain of $53,000 and a realized loss of $92,000; compared to a net unrealized loss of $36,000 and a net realized loss of $71,000 for the same period of the prior fiscal year. 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, 1997, the Company had no short investment positions. Note 4 - Inventories - ----------------------- Inventories are comprised of the following: September 30, 1997 ---- (Amounts in thousands) Raw materials $ 811 Work in process 293 Finished goods 1,275 Food and beverage inventory 16 ------ $ 2,395 ====== NBI, INC. SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 5 - Property and Equipment - ------------------------------------ Capital assets are depreciated on a straight-line basis over their useful lives shown below: Asset September 30, Lives 1997 ----- ---- (Amounts in thousands) Land N/A $ 1,226 Buildings 20-25 yrs 2,660 Machinery and equipment 3-15 yrs 3,482 Office and hotel furniture, fixtures 5-10 yrs 791 Construction-in-progress N/A 224 ------ 8,383 Accumulated depreciation (1,649) ----------- $ 6,734 =========== Note 6 - Income Taxes - ------------------------- IRS Debt: - ---------- On October 13, 1995, the Company entered into an agreement in principle with the IRS, effective October 1, 1995. This agreement revised the payment terms provided in its settlement agreement with the IRS dated June 12, 1991, as to NBI's federal income tax liabilities for the fiscal years ended June 30, 1980 through 1988. The new agreement provided for a principal payment of $250,000, plus accrued interest for the period July 1, 1995 through September 30, 1995, at the original stated rate, and accrued interest for the period October 1, 1995 through December 31, 1995, at the rate of 7.5% per annum, which was paid upon execution of the definitive agreement on March 19, 1996. Subsequently, quarterly interest payments were due beginning April 1, 1996 through October 1, 1997. Interest was paid and accrued on the outstanding principal balance at the rate of 7.5% for the period October 1, 1995 through March 31, 1996. The interest rate for April 1, 1996 through October 1, 1997 is being negotiated, under the terms of the agreement, based upon NBI's ability to pay the statutory rate, but in no event will the interest rate for this period exceed the lesser of the statutory rate or 10%. The Company paid interest on the scheduled payment dates through July 1, 1997, based upon the rate of 7.5%. The final quarterly interest payment due October 1, 1997 is still outstanding. The remaining principal balance of $5.3 million was due in full on October 1, 1997 and is included in the current portion of IRS debt and other income taxes payable at September 30, 1997. Prior to September 30, 1997, the Company began negotiations with the IRS regarding the payment terms of the debt. Effective September 30, 1997, the Company executed a Forbearance Agreement with the IRS. This agreement stipulates that the IRS will forbear from exercising its rights and remedies related to the Company's debt until the earlier of i) fifteen days after receipt of written notice from the IRS that it desires to terminate the Forbearance Agreement, ii) a bankruptcy or insolvency proceeding has been initiated by or against NBI, Inc. or iii) December 31, 1997. To date, no notice of termination has been received by NBI from the IRS. In order to pay the IRS debt, management intends to obtain additional debt or equity financing. The Company is currently pursuing various financing options; however there can be no assurances the Company will be able to obtain such financing. The Company's ability to continue as a going-concern is dependent upon attainment of financing sufficient to satisfy the IRS debt. NBI, INC. SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Under the debt agreement, the Company granted the IRS a security interest in all of the capital stock of (i) American Glass, Inc. and (ii) NBI Properties, Inc. The security interest will automatically terminate upon full payment by NBI of all principal and interest owed to the IRS. Income tax provision: - ----------------------- For the three months ended September 30, 1997 and 1996, the Company recorded income tax provisions of $28,000 and $110,000, respectively, including state and other income tax provisions totaling $28,000 and $56.000, respectively. These amounts were based upon book income. In accordance with fresh start accounting, which was adopted as of April 30, 1992, and as a result of the Company's reorganization under Chapter 11 of the U.S. Bankruptcy Code, utilization of any income tax benefit from pre-reorganization net operating losses are not credited to the income tax provision, but rather, reported as an addition to capital in excess of par value. No pre-reorganization net operating losses were utilized for the quarter ended September 30, 1997; however, $54,000 of pre-reorganization net operating losses were utilized for the same period in the prior fiscal year. Note 7 - Stockholders' Equity - --------------------------------- The Company has authorized 20,000,000 shares of $.01 par value common stock. At September 30, 1997, 10,115,520 shares were issued including 2,027,200 held in treasury. Therefore, the Company had 8,088,320 shares issued and outstanding at September 30, 1997. During the quarter ended September 30, 1997, 110,500 shares were issued pursuant to stock option exercises. Note 8 - Seasonal Variations of Operations - ------------------------------------------------ Due to seasonal variations in these businesses, all of the Company's ongoing operations typically have their strongest revenue performance during the first fiscal quarter. Generally, the second and fourth fiscal quarters' revenues from these operations are moderately lower than in the first quarter, while the third fiscal quarter's revenue is usually significantly lower than the other quarters. Note 9 - Related Party Transactions - ---------------------------------------- During the first quarter of fiscal 1998, the Company borrowed $50,000 from its Chief Executive Officer (CEO) for working capital needs. This amount was included in short-term borrowings at September 30, 1997. Subsequently, in October 1997, the Company borrowed an additional $50,000 from its CEO. The borrowings are subject to the terms of a revolving promissory note which provides for interest to be paid at the rate of ten percent per annum. In addition, the note will be secured by a mortgage on a portion of the land held by the Company for development. The entire principal amount outstanding is due and payable in full on March 5, 1998. NBI, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST QUARTER, FISCAL YEAR 1998 The statements in this discussion contain both historical and forward-looking statements. The forward-looking statements are based upon current expectations and the actual results could differ materially from those anticipated. Factors that may affect such forward-looking statements include, among others, ability to obtain financing, competitive factors and pricing pressures, loss of significant customers, availability of raw materials, labor disputes, investment results, adequacy of insurance coverage, reliance on key personnel, inflation and general economic conditions. RESULTS OF OPERATIONS Revenues for the first quarter of fiscal year 1998 remained constant at $3.7 million, as compared to the first quarter of the prior fiscal year. Sales revenue was $3,085,000 and $3,148,000 for the quarters ended September 30, 1997 and 1996, respectively. The decline in revenue was primarily related to a significant decline in revenues from Krazy Colors, Inc., the Company's children's paint manufacturing operation, due to the implementation of a change in sales focus, partially offset by a slight increase in revenue from L.E. Smith Glass Company. Service and rental revenue totaled $636,000 for the three months ended September 30, 1997, as compared to $594,000 for the same period in fiscal 1997. This increase was primarily due to increased food and beverage sales at the Belle Vernon Holiday Inn. Total revenues are expected to increase slightly for the three months ended December 31, 1997, as compared to the same period in the prior fiscal year, primarily due to an increase in the expected average daily room rates and occupancy rates from the Belle Vernon Holiday Inn, resulting from the absence of renovation construction activity which limited the number of available rooms during the second quarter of fiscal 1997. Total revenues for the second quarter of fiscal 1998 are expected to decrease slightly compared to the first quarter of fiscal 1998, primarily due to seasonal variations expected in all operations. Cost of sales, service and rental was 70.0% and 65.9% of total revenue for the three months ended September 30, 1997 and 1996, respectively. Cost of sales as a percentage of sales revenue for the three months ended September 30, 1997 was 71.0% compared to 66.5% for the same period in fiscal 1997. The resulting decline in gross margin was primarily related to a variance in sales mix of L.E. Smith Glass Company and lower revenue volume of Krazy Colors, Inc. Cost of service and rental as a percentage of service and rental revenue was 65.1% and 63.1% for the three months ended September 30, 1997 and 1996, respectively. The related decline in gross margin occurred primarily due to increased fixed costs resulting from additional depreciation and amortization related to the renovations of the Belle Vernon Holiday Inn completed during fiscal 1997. Cost of sales, service and rental as a percentage of total revenue for the second quarter of fiscal 1998 is expected to remain fairly steady as compared to the first quarter of fiscal 1998; it is also expected to remain fairly constant as compared to the second quarter of fiscal 1997, as a projected decline in gross margin from L.E. Smith Glass Company, due to a less favorable sales mix, is expected to be offset by an increase in gross margin from the Belle Vernon Holiday Inn, due to the absence of significant construction activity which had been experienced during the second quarter of fiscal 1997. NBI, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST QUARTER, FISCAL YEAR 1998 - CONTINUED Marketing, general and administrative expenses totaled $840,000 and $739,000 for the three months ended September 30, 1997 and 1996, respectively. The increased expenses were primarily related to non-cash compensation expense recorded for extensions of certain executive stock options, general cost increases and increased sales and marketing activities at L.E. Smith Glass Company. Marketing, general and administrative expenses are expected to remain fairly constant for the three months ended December 31, 1997, as compared to the same period in the prior fiscal year and are expected to increase moderately from the first quarter of fiscal 1998. This expected increase is primarily due to general cost increases and increased sales and marketing activities. The Company recorded net losses on investments of $39,000 and $107,000 for the three months ended September 30, 1997 and 1996, respectively. 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, 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, 1997, the Company had no short investment positions. The Company recorded provisions for income taxes of $28,000 and $110,000 for the first quarter of fiscal 1998 and 1997, respectively, primarily due to the inclusion of Pennsylvania state income tax provisions. NBI does not have any net operating loss carryforwards available in Pennsylvania; however it does have significant federal net operating loss carryforwards, as well as significant net operating loss carryforwards in several other states. Therefore, the Company has no federal or other state income taxes payable. In accordance with fresh start accounting, the income tax provisions recorded do 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 was no non-cash component included in the income tax provision for the three months ended September 30, 1997, compared to a non-cash charge of $54,000 for the three months ended September 30, 1996. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company experienced no significant change in total assets or working capital during the first quarter of fiscal 1998. The Company had total assets of $11.6 million at September 30, 1997, compared to $11.5 million at June 30, 1997, and negative working capital of $4.1 million and $4.2 million at September 30, 1997 and June 30, 1997, respectively. The entire outstanding principal balance on the IRS debt of $5,278,000 at September 30, 1997 was due in full on October 1, 1997. Prior to September 30, 1997, the Company began negotiations with the IRS regarding the payment terms of the debt. Effective September 30, 1997, the Company executed a Forbearance Agreement with the IRS. This agreement stipulates that the IRS will forbear from exercising its rights and remedies related to the Company's debt until the earlier of i) fifteen days after receipt of written notice from the IRS that it desires to terminate the Forbearance Agreement, ii) a bankruptcy or insolvency proceeding has been initiated by or against NBI, Inc. or iii) December 31, 1997. To date, no notice of termination has been received by NBI from the IRS. NBI, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST QUARTER, FISCAL YEAR 1998 - CONTINUED In order to pay the IRS debt, management intends to obtain additional debt or equity financing. The Company is currently pursuing various financing options, not only for the IRS debt, but also for its real estate development activities; however, there can be no assurance that the Company will be able to obtain such financing or that if it is able to obtain such financing, that it will be on favorable terms. The Company's ability to continue as a going-concern is dependent upon attainment of financing sufficient to satisfy the IRS debt. The Company expects its other working capital requirements in the next fiscal year to be met by existing working capital at September 30, 1997, internally generated funds and, for L.E. Smith Glass Company's requirements, short-term borrowings under an existing line of credit. NBI, INC. PART II - OTHER INFORMATION Item 4 Results of Votes of Security Holders - ---------------------------------------------------- On August 26, 1997, NBI's Board of Directors approved an amendment to its Certificate of Incorporation to grant the Corporation authority to issue up to five million shares of preferred stock with a par value of $.01 per share. In addition, the amendment allows the Company to effect a reverse stock split of either 4:1 or 5:1 at the discretion of the Board of Directors. The Company obtained written consents, in lieu of a meeting, of a majority of its stockholders approving these amendments. Written consents were received from shareholders holding 4,295,798 shares, or 53.1%, of the shares outstanding. The Company has not yet filed the amendment to its Certificate of Incorporation with the Delaware Secretary of State. Item 6 Exhibits and Reports on Form 8-K - ------- ------------------------------------- (a) Exhibits 27. Financial Data Schedule (b) The following Form 8-K was filed during the quarter ended September 30, 1997: 1. Form 8-K dated September 30, 1997, Item 5 - Other Events: The Company executed a Forbearance Agreement with the IRS related to NBI, Inc.'s IRS debt of $5,278,000 that was due in full on October 1, 1997. 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, 1997 By: /s/ Marjorie A. Cogan - ------------------- -------------------------------------- (Date) Marjorie A. Cogan As a duly authorized officer Chief Financial Officer, Secretary