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 December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number
1-8232
Name of Registrant
NBI, INC.
State of Incorporation IRS Employer I. D. Number
Delaware 84-0645110
Address
1880 Industrial Circle, Suite F
Longmont, Colorado 80501
(303) 684-2700
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [ ] NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at January 29, 1999
----- -----------------------------------
Common Stock, par value $.01 per share 8,088,320
Preferred Stock, par value $.01 per share 500,000
NBI, INC.
INDEX TO FORM 10-QSB
For Quarter Ended December 31, 1998
PAGE
----
PART I - FINANCIAL INFORMATION
Consolidated Financial Statements (Unaudited) 3 - 6
Supplementary Notes to Consolidated Financial
Statements (Unaudited) 7 - 11
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12 - 15
PART II - OTHER INFORMATION 16
NBI, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands Except Share Data)
December 31, June 30,
1998 1998
---------- ----------
(Unaudited)
ASSETS
-----------
Current assets:
Cash and cash equivalents $ 1,780 $ 209
Accounts receivable, less allowance for doubtful
accounts of $93 and $69, respectively 1,810 1,375
Inventories 2,537 2,750
Other current assets 207 156
-------- --------
Total current assets 6,334 4,490
Property, plant and equipment, net 7,667 7,436
Other assets 170 279
Net long-term assets of discontinued operations 25 --
-------- --------
$14,196 $12,205
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------
Current liabilities:
Short-term borrowings and current portion
of notes payable $ 1,691 $ 1,846
Current portion of IRS debt and other income taxes payable 1,860 3,527
Accounts payable 1,321 1,200
Accrued liabilities 786 796
Net current liabilities of discontinued operations 30 --
-------- --------
Total current liabilities 5,688 7,369
Long-term liabilities:
Income taxes payable -- 1,778
Notes payable 1,276 1,351
Deferred income taxes 223 223
Postemployment disability benefits 177 184
-------- --------
Total liabilities 7,364 10,905
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.01 par value; 5,000,000 shares
authorized; 500,000 shares of Series A Cumulative Preferred
Stock issued at December 31, 1998 5 --
Capital in excess of par value - preferred stock 4,843 --
Common stock - $.01 par value; 20,000,000 shares
authorized; 10,115,520 shares issued 101 101
Capital in excess of par value - common stock 6,280 6,280
Accumulated deficit (3,529) (4,213)
-------- --------
7,700 2,168
Less treasury stock at cost (2,027,200 shares) (868) (868)
-------- --------
Total stockholders' equity 6,832 1,300
-------- --------
$14,196 $12,205
========= ========
<FN>
See accompanying notes.
NBI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands Except Per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Sales $4,331 $3,081 $8,229 $6,084
Service and rental 573 519 1,252 1,155
------- ------- ------- -------
4,904 3,600 9,481 7,239
Costs and expenses:
Cost of sales 2,942 2,326 5,624 4,444
Cost of service and rental 441 402 879 816
Marketing, general and administrative 873 802 1,707 1,573
------- ------- ------- -------
4,256 3,530 8,210 6,833
------ ------- ------- -------
Income from operations 648 70 1,271 406
Other income (expense):
Net loss on investments -- -- -- (39)
Other income and expenses, net 21 15 53 24
Interest expense (67) (183) (140) (365)
------- ------- ------- -------
(46) (168) (87) (380)
------ ------- ------- -------
Income (loss) from continuing operations before
income tax benefit (provision) 602 (98) 1,184 26
Income tax benefit (provision) (168) 5 (262) (49)
------- ------- ------- -------
Income (loss) from continuing operations 434 (93) 922 (23)
Loss from discontinued operations,
net of income tax benefits of $94, $0, $123 and
$26, respectively (183) (84) (238) (135)
------- ------- ------- -------
Net income (loss) $ 251 $ (177) $ 684 $ (158)
======= ======= ======= =======
Income (loss) per common share - basic:
Income (loss) before discontinued operations $ .05 $ (.01) $ .11 $ --
Loss from discontinued operations (.02) (.01) (.03) (.02)
------- ------- ------- -------
Net income (loss) $ .03 $ (.02) $ .08 $ (.02)
======= ======= ======= =======
Income (loss) per common share - diluted:
Income (loss) before discontinued operations $ .05 $ (.01) $ .11 $ --
Loss from discontinued operations (.02) (.01) (.03) (.02)
------- ------- ------- -------
Net income (loss) $ .03 $ (.02) $ .08 $ (.02)
======= ======= ======= =======
Weighted average number of common
shares outstanding 8,088 8,088 8,088 8,066
======= ======= ======= =======
<FN>
See accompanying notes.
NBI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
Six Months Ended
December 31,
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) $ 684 $(158)
Adjustments to reconcile net income (loss) to net cash
flow provided by (used in) operating activities:
Depreciation and amortization 386 358
Provision for bad debts and returns 42 47
Provision for writedown of inventory 110 15
Provision for impairment of property and equipment and other
long-term assets 53 --
Loss (gain) on sales of property and equipment (8) 51
Net unrealized gain on trading securities -- (53)
Compensation expense related to stock option extensions -- 37
Other 12 1
Changes in assets -- decrease (increase):
Accounts receivable (486) (54)
Inventory 69 58
Other current assets (70) (50)
Other assets 70 (82)
Changes in liabilities -- (decrease) increase:
Obligations for short-sale transactions -- (58)
Accounts payable and accrued liabilities 214 122
Income tax related accounts (3,445) (29)
-------- ------
Net cash flow provided by (used in) by operating activities (2,369) 205
-------- ------
Cash flows from investing activities:
Proceeds from sales of property and equipment 9 2
Purchases of property and equipment (666) (395)
-------- ------
Net cash flow used in investing activities (657) (393)
-------- ------
Cash flows from financing activities:
Collections on note receivable 4 3
Proceeds from issuance of preferred stock, net of offering costs 4,848 --
Proceeds from borrowings -- 100
Proceeds from stock option exercises -- 29
Payments on notes payable (131) (141)
Net payments on line of credit (102) (12)
-------- ------
Net cash flow provided by (used in) financing activities 4,619 (21)
-------- ------
Net increase (decrease) in cash and cash equivalents 1,593 (209)
Increase in cash and cash equivalents included in net current liabilities of
discontinued operations at December 31, 1998 (22) --
Cash and cash equivalents at beginning of period 209 333
-------- ------
Cash and cash equivalents at end of period $ 1,780 $ 124
======== ======
<FN>
See accompanying notes.
NBI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
Six Months Ended
December 31,
1998 1997
---- ----
Supplemental disclosures of cash flow information:
Interest paid $ 137 $ 228
====== =====
Income taxes paid $ 3,551 $ 60
====== =====
Noncash purchases of property, plant and equipment
included in accounts payable at end of period $ 237 $ 90
====== =====
<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 - Discontinued Operations
- ------------------------------------
On February 1, 1999, the Company established a plan to dispose of its Krazy
Colors, Inc. operation. Therefore, it has separately reported the losses from
this segment as discontinued operations for the three and six months ended
December 31, 1998 and 1997. The Company has estimated the net realizable
value of the disposal of the discontinued operation, including estimated costs
and expenses directly associated with the disposal and estimated losses from
operations through the disposal date, and has recorded losses from
discontinued operations as follows:
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
(Amounts in thousands)
Revenues $ 64 $ 100 $ 95 $ 182
====== ===== ====== ======
Loss from operations before income taxes $ (79) (84) (163) (161)
Income tax benefit 27 -- 56 26
------ ----- ------ ------
Loss from operations (52) (84) (107) (135)
Estimated loss on disposal (including
provision for operating losses
through disposition date) (198) -- (198) --
Income tax benefit 67 -- 67 --
------ ----- ------ ------
Loss from discontinued operations $(183) $(84) $(238) $(135)
====== ===== ====== ======
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 six 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 - Investments in Securities and Obligations from Short-Sale
- ---------------------------------------------------------------------------
Transactions
- ------------
The Company held no investments and had no realized or unrealized gains or
losses for the quarter or six months ended December 31, 1998. The Company
also held no investments for the quarter ended December 31, 1997. During the
six months ended December 31, 1997, all of the Company's securities were
classified as trading securities; no securities were classified as
held-to-maturity or available-for-sale. An unrealized gain of $53,000 and a
realized loss of $92,000 were recorded for the six months ended December 31,
1997.
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As part of its investment policy, 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 December 31, 1998, the Company
had no investment positions.
Note 5 - Inventories
- -----------------------
Inventories are comprised of the following:
December 31,
1998
----
(Amounts in thousands)
Raw materials $ 829
Work in process 451
Finished goods 1,238
Food and beverage inventory 19
------
$2,537
=======
Note 6 - Income Taxes
- -------------------------
IRS Debt:
- ----------
On April 28, 1998, the Company and the Internal Revenue Service ("IRS")
entered into an amended payment agreement, revising the payment terms related
to NBI Inc.'s IRS debt of $5,278,000. This agreement, effective as of April
9, 1998, 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 new agreement,
$3,500,000 of the IRS debt was due on or before December 31, 1998, and the
remaining balance of $1,778,000 is due on or before December 31, 1999. The
IRS debt continues to be collateralized by a security interest in all of the
capital stock of American Glass, Inc. and NBI Properties, Inc. Provided no
event of default occurs prior to payment of the IRS debt in full, NBI will not
be obligated to pay any past, current or future interest related to the debt.
On December 31, 1998, the Company paid the IRS the $3.5 million installment
due on that date from the proceeds of its preferred stock offering (see Note
7).
Income tax provision:
- -----------------------
For the six months ended December 31, 1998 and 1997, the Company recorded
provisions for income taxes from continuing operations of $262,000 and
$49,000, 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 six
months ended December 31, 1998 and 1997.
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Stockholders' Equity
- ---------------------------------
The Company has authorized 20,000,000 shares of $.01 par value common stock.
At December 31, 1998, 10,115,520 shares were issued including 2,027,200 held
in treasury. Therefore, the Company had 8,088,320 shares issued and
outstanding at December 31, 1998.
At the Company's annual meeting held on October 14, 1998, the stockholders
approved an amendment to the Company's Certificate of Incorporation
authorizing issuance of up to 5,000,000 shares of preferred stock with a par
value of $.01 per share. The Company has designated 2,000,000 preferred
shares as Series A Cumulative Preferred Stock with cumulative dividends from
the date of original issue, accruing semi-annually, commencing June 30, 1999,
and each December 31 and June 30 thereafter, at the annual rate per share of
either (a) $1.00 in cash, or (b) .11 additional shares of Series A Preferred
Stock, at the option of the holder, until December 31, 2004. Subsequent to
December 31, 2004, the annual dividend rate per share will increase to either
(a) $1.10 in cash or (b) .12 additional shares of Series A Preferred Stock,
at the option of the holder. The Series A Cumulative Preferred Stock has a
liquidation preference of $10 per share and is entitled to receive all accrued
and unpaid dividends through the date of distribution. In addition, the
Series A Cumulative Preferred Stock is redeemable at the option of the Company
beginning January 1, 1999. The redemption price would be as follows for each
calendar year: $11.00 per share if redeemed in 1999, $10.80 in 2000, $10.60 in
2001, $10.40 in 2002, $10.20 in 2003, and $10.00 in 2004 or thereafter.
The Company has registered and reserved 1,000,000 shares of the Series A
Cumulative Preferred Stock through its Registration Statement on Form SB-2,
effective November 9, 1998, in connection with its public offering of units
consisting of one share of the Series A Cumulative Preferred Stock and two
warrants to purchase the Company's common stock at $1.20 per share. In
addition, 550,000 shares of the Series A Cumulative Preferred Stock and
2,000,000 shares of the Company's common stock have been registered and
reserved for payment-in-kind of the preferred stock dividends and for the
exercise of the common stock purchase warrants, respectively.
As of December 31, 1998, the Company had sold 500,000 units and thus issued
500,000 shares of Series A Cumulative Preferred Stock and 1,000,000 common
stock purchase warrants in connection with this offering. The Company filed
the related amendments to its Certificate of Incorporation and Certificate of
Designation with the Delaware Secretary of State during the quarter ended
December 31, 1998.
The stockholders also approved an amendment that allows the Company to effect
a reverse stock split of either 1 for 2.5, 1 for 3, or 1 for 4 shares, at the
discretion of the Board of Directors. Further, the Board of Directors has the
discretion not to effect a reverse stock split, and to-date, has not taken any
action.
Note 8 - Net Income (Loss) Per Common Share
- ---------------------------------------------------
During the Company's second quarter of fiscal 1998, NBI, Inc. adopted
Statement of Financial Accounting Standards ("SFAS") No. 128 issued by the
Financial Accounting Standards Board. SFAS No. 128 provides for the
calculation of "Basic" and "Diluted" earnings per share. Basic earnings per
share includes no dilution and is computed by dividing income (loss) available
to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of the entity, similar
to fully diluted earnings per share.
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following reconciles the numerators and denominators of the basic and
diluted earnings per common share computation for net income:
For the three months ended
December 31,
1998 1997
---- ----
Basic Diluted Basic Diluted
----- ------- ----- -------
(Amounts in thousands
except per share data)
Income (loss) before discontinued operations $ 434 $ 434 $ (93) $ (93)
====== ====== ======= =======
Weighted average number of common
shares outstanding 8,088 8,088 8,088 8,088
====== =======
Assumed conversions of stock options 295 --
------ -------
8,383 8,088
====== =======
Income (loss) per common share
before discontinued operations $ .05 $ .05 $ (.01) $ (.01)
====== ====== ======= =======
For the six months ended
December 31,
1998 1997
---- ----
Basic Diluted Basic Diluted
----- ------- ----- -------
(Amounts in thousands
except per share data)
Income (loss) before discontinued operations $ 922 $ 922 $ (23) $ (23)
====== ====== ======= =======
Weighted average number of common
shares outstanding 8,088 8,088 8,066 8,066
====== =======
Assumed conversions of stock options 274 --
------ -------
8,362 8,066
====== =======
Income (loss) per common share
before discontinued operations $ .11 $ .11 $ -- $ --
====== ====== ======= =======
For the three and six months ended December 31, 1998, all stock options and
warrants outstanding, except for the warrants with an exercise price of $1.20,
were included in the computation of diluted earnings per share because their
exercise prices were less than the average market price of the common stock
during such period. Because the Company incurred net losses before
discontinued operations for the three and six months ended December 31, 1997,
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)
The options and warrants outstanding at December 31, 1998 were as follows:
Number
Exercise Outstanding at
Price December 31, 1998
----- -------------------
Stock options:
$ .38 216,000
$ .59 100,500
$ .77 400,000
$ .88 244,000
Warrants:
$ .89 1,700,000
$ 1.20 1,000,000
---------
3,660,500
=========
Note 9 - 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
distribution to owners. For the six months ended December 31, 1998 and 1997,
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 10 - Seasonal Variations of Operations
- -------------------------------------------------
L.E. Smith Glass Company ("L.E. Smith") and the Belle Vernon Holiday Inn
typically have their strongest revenue performance during the first fiscal
quarter due to seasonal variations in these businesses. 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. However, in fiscal 1998,
L.E. Smith received several large orders from its significant customer during
the historically slower quarters, which created a more consistent revenue
stream for the year. In addition, during the second quarter of fiscal 1999,
L.E. Smith experienced a significant increase in revenues compared to the
first quarter of fiscal 1999, primarily due to a significant increase in
revenues from its significant customer. The Company is unsure whether these
trends will continue.
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER, FISCAL YEAR 1999
The statements in this discussion contain both historical and
"forward-looking" statements, as such term is defined in "The Private
Securities Litigation Reform Act of 1995". The forward-looking statements are
based upon current expectations and the actual results could differ materially
from those anticipated. Factors that may affect such forward-looking
statements include, among others, ability to obtain financing, loss of
significant customers, reliance on key personnel, competitive factors and
pricing pressures, availability of raw materials, labor disputes, investment
results, adequacy of insurance coverage, inflation and general economic
conditions.
RESULTS OF OPERATIONS
Revenues from continuing operations for the second quarter of fiscal year 1999
increased $1.3 million, or 36.2%, to $4.9 million, from $3.6 million in the
second quarter of the prior fiscal year. Year-to-date, revenues totaled $9.5
million for the six months ended December 31, 1998, an increase of $2.2
million, or 31.0%, compared to the same period of fiscal 1998.
The revenue improvement was primarily attributable to increased sales revenue
from the L.E. Smith Glass Company ("L.E. Smith"). Sales revenue from L.E.
Smith increased $1,250,000, or 40.6%, to $4,331,000 for the second quarter of
fiscal 1999, and increased $2,145,000, or 35.3%, to $8,229,000 for the six
months ended December 31, 1998, as compared to the same periods in the
previous fiscal year. The increased volume at L.E. Smith included a
significant amount of revenues from new customers, as well as a significant
increase in orders from its largest customer. In addition, during the second
quarter of fiscal 1999, L.E. Smith experienced a significant increase in
revenue growth from its existing customers as compared to the second quarter
of fiscal 1998.
Service and rental revenue from continuing operations increased moderately
from $519,000 and $1,155,000 for the three and six months ended December 31,
1997, respectively, to $573,000 and $1,252,000 for the same periods in fiscal
year 1999. The increased revenue was primarily related to a moderate increase
in both occupancy rates and average daily room rates of the Belle Vernon
Holiday Inn.
Total revenues from continuing operations are expected to increase moderately
for the three months ended March 31, 1999, as compared to the same period in
the prior fiscal year, resulting primarily from sustained growth from new and
existing customers at L.E. Smith. However, revenues for the third quarter of
fiscal 1999 are expected to decrease significantly compared to the second
quarter of fiscal 1999, as seasonal variations historically cause the third
fiscal quarter to be the lowest revenue quarter for both L.E. Smith and the
Belle Vernon Holiday Inn.
Cost of sales, service and rental was $3.4 million, or 69.0% of total revenue,
and $6.5 million, or 68.6% of total revenue, for the three and six months
ended December 31, 1998, respectively. Comparable figures for the same
periods in fiscal 1998 were $2.7 million and $5.3 million, or 75.8% and 72.7%
of total revenues, respectively.
Cost of sales as a percentage of sales revenue for the three and six months
ended December 31, 1998 was 67.9% and 68.3%, respectively, compared to 75.5%
and 73.0% for the same periods in fiscal 1998. The resulting improvement in
gross margin was primarily due to increased volume and production efficiency
at L.E. Smith, causing favorable absorption of fixed costs, partially offset
by general cost increases including increased labor costs associated with a
new labor contract.
Cost of service and rental as a percentage of service and rental revenue was
77.0% and 70.2% for the three and six months ended December 31, 1998,
respectively, compared to 77.5% and 70.6% for the same periods in the prior
fiscal year. The slight improvement in the related gross margin was primarily
due to the increased revenue volume available to cover fixed costs, partially
offset by general cost increases.
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER, FISCAL YEAR 1999 - CONTINUED
Cost of sales, service and rental as a percentage of total revenue for the
third quarter of fiscal 1999 is expected to be slightly higher, compared to
the third quarter of fiscal 1998, due to lower margins from general cost
increases at both L.E. Smith and the Belle Vernon Holiday Inn, partially
offset by greater absorption of fixed costs at L.E. Smith resulting from the
projected increase in revenues. Cost of sales, service and rental as a
percentage of total revenue for the third quarter of fiscal 1999 is expected
to be moderately higher compared to the second quarter of fiscal 1999 due to
seasonally lower revenue volume at both L.E. Smith and the Belle Vernon
Holiday Inn available to cover fixed costs.
Marketing, general and administrative expenses totaled $873,000 and $802,000
for the three months ended December 31, 1998 and 1997, respectively.
Year-to-date, marketing, general and administrative expenses totaled
$1,707,000 for the six months ended December 31, 1998, an increase of $134,000
compared to expenses of $1,573,000 for the same period of fiscal 1998. The
increase in expenses was primarily related to increased expenses associated
with higher revenues at both L.E. Smith and the Belle Vernon Holiday Inn,
including increased sales commissions, product development expenses, franchise
and royalty fees and other sales and marketing expenses. Also during fiscal
1999, the Company had a decline in credits related to a reduction of a reserve
for incurred but not reported claims, because the Company previously converted
to a fully-insured health plan for its corporate and Krazy Colors employees.
In addition, the second quarter of fiscal 1999 included an accrual for a CEO
bonus, based upon the provisions of the CEO's employment agreement, whereas no
CEO bonus expense was incurred during fiscal 1998. These increases were
partially offset by the absence of executive severance accrued during the
second quarter of fiscal 1998. In addition, the year-to-date increase was
partially offset by the absence of a non-cash compensation expense for
extensions of certain executive stock options included during the first
quarter of fiscal 1998.
Marketing, general and administrative expenses are expected to increase
moderately for the three months ended March 31, 1999, as compared to the same
period in the prior fiscal year, primarily due to increased sales and
marketing activities. Marketing, general and administrative expenses are
expected to decrease moderately in the third quarter of fiscal 1999 compared
to the second quarter of fiscal 1999, primarily due to lower sales and
marketing expenses resulting from the expected decline in revenues.
The Company recorded no gain or loss on investments during the six months
ended December 31, 1998, compared to a net loss on investments of $39,000 for
the six months ended December 31, 1997. The Company recorded no gain or loss
on investments for the quarters ended December 31, 1998 or 1997. 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 December 31, 1998,
the Company had no investment positions.
Interest expense totaled $67,000 and $140,000 for the three and six months
ended December 31, 1998, respectively, compared to $183,000 and $365,000 for
the same periods in the prior fiscal year. The decline was primarily related
to the absence of interest on the Company's IRS debt during fiscal 1999,
resulting from the restructured agreement with the IRS in April, 1998.
The Company recorded income tax provisions from continuing operations of
$168,000 and $262,000 for the three and six months ended December 31, 1998,
respectively, compared to an income tax benefit of $5,000 for the second
quarter of fiscal 1998 and an income tax provision of $49,000 for the six
months ended December 31, 1997. Included in these amounts are state
provisions of $74,000 and $139,000 for the three and six months ended December
31, 1998, respectively, compared to $12,000 and $57,000 for the same periods
in fiscal 1998. The state income tax provisions are primarily related to the
Company's Pennsylvania operations and are based upon
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER, FISCAL YEAR 1999 - CONTINUED
book income, as NBI does not have any net operating loss carryforwards
available in Pennsylvania. The Company does have significant federal net
operating loss carryforwards, as well as significant net operating loss
carryforwards in several states, and, therefore, has no federal or other state
income taxes payable. In accordance with fresh start accounting, the income
tax benefit and 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
were no non-cash components included in the income tax provisions for the
three and six months ended December 31, 1998 or 1997.
DISCONTINUED OPERATIONS
On February 1, 1999, the Company established a plan to dispose of its Krazy
Colors, Inc. operation. Therefore, it has separately reported the operating
losses from this segment as discontinued operations for the three and six
months ended December 31, 1998 and 1997. The Company has also recorded an
estimated loss on disposal at December 31, 1998 based upon the estimated net
realizable value of the discontinued operation, including estimated costs and
expenses directly associated with the disposal and estimated losses from
operations through the disposal date. Losses from discontinued operations
totaled $183,000 and $238,000, for the three and six months ended December 31,
1998, respectively, net of income tax benefits of $94,000 and $123,000,
respectively. This compares to losses of $84,000 and $135,000 for the three
and six months ended December 31, 1997, respectively, net of income tax
benefits of $0 and $26,000, respectively. The increase in the loss from
discontinued operations for the three and six months ended December 31, 1998,
as compared to the same periods of the prior fiscal year, consisted primarily
of the estimated loss on disposal, including the estimated loss from
operations through its disposition.
At December 31, 1998, the net long-term assets of the discontinued operation
consisted primarily of equipment and the net current liabilities of the
discontinued operations consisted primarily of accounts payable and accrued
liabilities net of cash and inventory.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total assets increased $2.0 million during the first six months of fiscal
1999, from $12.2 million at June 30, 1998, to $14.2 million at December 31,
1998. The Company had working capital of $646,000 at December 31, 1998,
compared to negative working capital of $2.9 million at June 30, 1998. The
improvement in working capital was primarily related to a public offering of
preferred stock with an initial closing on December 31, 1998 which raised $5.0
million, before associated expenses, of which $3.5 million was used to pay an
installment on the IRS debt which was due on or before that date (see Notes 6
and 7). This improvement in working capital was partially offset by the
reclassification of the remaining IRS debt of $1.8 million to current
liabilities at December 31, 1998.
The Company has a final installment of $1.8 million on the IRS debt which is
due on or before December 31, 1999. The Company expects to pay this
installment from a combination of cash on hand and internally generated funds,
including cash available from L.E. Smith through dividend payments to
the parent company. In addition, the Company may raise additional funds by
selling additional preferred stock through its outstanding preferred stock
offering.
The Company expects to pay the cash dividends on its recently issued preferred
stock through internally generated funds, including cash available from
L.E.Smith through dividend payments to the parent company.
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER, FISCAL YEAR 1999 - CONTINUED
The Company is currently pursuing various financing options for its real
estate development activities of its NBI Development Corporation subsidiary.
The Company expects its other working capital requirements in the next fiscal
year to be met by existing working capital at December 31, 1998, internally
generated funds and, for L.E. Smith Glass Company's requirements, short-term
borrowings under an existing line of credit.
YEAR 2000 COMPLIANCE
The Company has completed a review and risk assessment of all technology items
used in its operations. The Company believes that the year 2000 issue will
pose no significant operational problems. Substantially all of the machinery
and equipment used by the Company's glass manufacturing operation is manually
controlled and operated. In addition, the hotel operation is not
significantly reliant on computer technology, with the exception of its
reservation system, which is maintained and upgraded under a contract with
Holiday Inns Franchising, Inc. Holiday Inns Franchising, Inc. has recently
completed the upgrades necessary to make the reservation system Year 2000
compliant. The primary effect of the year 2000 issue is on the Company's
accounting systems.
Year 2000 compliance will primarily be accomplished through purchases of new
equipment and data processing hardware and software upgrades, with an
estimated aggregate cost of approximately $140,000, a significant portion of
which has already been purchased and most of which was previously planned and
necessitated by other technological needs of the Company. The upgrading or
replacement of equipment which is non-compliant, as well as the related
testing of such equipment is expected to be substantially completed during
fiscal 1999.
L.E. Smith currently has one customer of such significance that if such
customer were to experience year 2000 problems that resulted in the
cancellation or deferral of orders, it could materially adversely affect the
results of operations of the Company. The Company has discussed the year 2000
issue with this and other material customers and vendors and currently does
not anticipate any significant problems. In addition, the Company will
continue to review the status of the year 2000 issues with these and other
customers and vendors.
NBI, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits
3. Certificate of Amendment to Certificate of Incorporation(2)
4. Form of Certificate of Designation of Series A Preferred
Stock(1)
10. Agreement between L.E. Smith Glass Company and The American
Flint Glassworkers' Union(2)
27. Financial Data Schedule(2)
(b) No reports on Form 8-K were filed during the quarter ended December
31, 1998 or subsequently.
(1) Incorporated by reference to Registration Statement No. 333-63053.
(2) Filed herewith.
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.
February 12, 1999 By: /s/ Marjorie A. Cogan
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(Date) Marjorie A. Cogan
As a duly authorized officer
Chief Financial Officer, Secretary