SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number
1-8232
Name of Registrant
NBI, INC.
State of Incorporation IRS Employer I. D. Number
Delaware 84-0645110
Address
1880 Industrial Circle, Suite F
Longmont, Colorado 80501
(303) 684-2700
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [ ] NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 14, 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 March 31, 1999
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 - 16
PART II - OTHER INFORMATION 17
NBI, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands Except Share Data)
March 31, June 30,
1999 1998
---------- ----------
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 1,884 $ 209
Accounts receivable, less allowance for doubtful
accounts of $239 and $69, respectively 1,539 1,375
Inventories 2,874 2,750
Other current assets 249 156
Net current assets of discontinued operations 28 --
-------- --------
Total current assets 6,574 4,490
Property, plant and equipment, net 7,828 7,436
Other assets 174 279
Net long-term assets of discontinued operations 8 --
-------- --------
$14,584 $12,205
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------
Current liabilities:
Short-term borrowings and current portion
of notes payable $ 1,950 $ 1,846
Current portion of IRS debt and other income taxes payable 1,818 3,527
Accounts payable 1,787 1,200
Accrued liabilities 984 796
-------- --------
Total current liabilities 6,539 7,369
Long-term liabilities:
Income taxes payable -- 1,778
Notes payable 1,241 1,351
Deferred income taxes 223 223
Postemployment disability benefits 174 184
-------- --------
Total liabilities 8,177 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 and outstanding at March 31, 1999 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 (3,954) (4,213)
-------- --------
7,275 2,168
Less treasury stock at cost (2,027,200 shares) (868) (868)
-------- --------
Total stockholders' equity 6,407 1,300
-------- --------
$14,584 $12,205
======== ========
<FN>
See accompanying notes.
NBI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Sales $3,602 $ 3,086 $11,831 $ 9,170
Service and rental 463 429 1,715 1,584
------- -------- -------- -------
4,065 3,515 13,546 10,754
Costs and expenses:
Cost of sales 2,587 2,130 8,211 6,574
Cost of service and rental 378 389 1,257 1,205
Marketing, general and administrative 957 770 2,664 2,343
------- ------- -------- -------
3,922 3,289 12,132 10,122
------- ------- -------- -------
Income from operations 143 226 1,414 632
Other income (expense):
Net loss on investments (507) -- (507) (39)
Other income and expenses, net 20 3 73 27
Interest expense (62) (159) (202) (524)
------- ------- -------- -------
(549) (156) (636) (536)
------- ------- -------- -------
Income (loss) from continuing operations before
income tax benefit (provision) (406) 70 778 96
Income tax benefit (provision) (19) 5 (281) (44)
------- -------- -------- -------
Income (loss) from continuing operations (425) 75 497 52
Loss from discontinued operations,
net of income tax benefits of $0, $127, $123 and
$153, respectively -- (163) (238) (298)
------- -------- -------- -------
Net income (loss) $ (425) $ (88) $ 259 $ (246)
======= ======== ======== =======
Income (loss) per common share - basic:
Income (loss) before discontinued operations $ (.07) $ .01 $ .05 $ .01
Loss from discontinued operations -- (.02) (.03) (.04)
------- -------- -------- -------
Net income (loss) $ (.07) $ (.01) $ .02 $ (.03)
======= ======== ======== =======
Income (loss) per common share - diluted:
Income (loss) before discontinued operations $ (.07) $ .01 $ .04 $ .01
Loss from discontinued operations -- (.02) (.03) (.04)
------- -------- -------- -------
Net income (loss) $ (.07) $ (.01) $ .01 $ (.03)
======= ======== ======== =======
Weighted average number of common
shares outstanding 8,088 8,088 8,088 8,073
======= ======== ======== =======
<FN>
See accompanying notes.
NBI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
Nine Months Ended
March 31,
1999 1998
---- ----
Cash flows from operating activities:
Net income (loss) $ 259 $(246)
Adjustments to reconcile net income (loss) to net cash
flow provided by (used in) operating activities:
Depreciation and amortization 620 546
Provision for bad debts and returns 190 71
Provision for writedown of inventory 154 34
Provision for writedown of note receivable -- 10
Provision for impairment of property and equipment and other
long-term assets 53 167
Loss (gain) on sales of property and equipment (8) 51
Net unrealized gain on trading securities -- (53)
Compensation expense related to stock option extensions -- 48
Other 12 (2)
Changes in assets -- decrease (increase):
Accounts receivable (355) (351)
Inventory (308) (125)
Other current assets (126) (6)
Other assets 64 (74)
Changes in liabilities -- (decrease) increase:
Obligations for short-sale transactions -- (58)
Accounts payable and accrued liabilities 936 286
Income tax related accounts (3,487) (169)
-------- ------
Net cash flow provided by (used in) by operating activities (1,996) 129
-------- ------
Cash flows from investing activities:
Proceeds from sales of property and equipment 16 2
Purchases of property and equipment (1,164) (875)
-------- ------
Net cash flow used in investing activities (1,148) (873)
-------- ------
Cash flows from financing activities:
Collections on note receivable 5 4
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 (196) (207)
Net borrowings (payments) on line of credit 181 645
-------- ------
Net cash flow provided by (used in) financing activities 4,838 571
-------- ------
Net increase (decrease) in cash and cash equivalents 1,694 (173)
Increase in cash and cash equivalents included in net current assets of
discontinued operations at March 31, 1999 (19) --
Cash and cash equivalents at beginning of period 209 333
-------- ------
Cash and cash equivalents at end of period $ 1,884 $ 160
======== ======
<FN>
See accompanying notes.
NBI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
Nine Months Ended
March 31,
1999 1998
---- ----
Supplemental disclosures of cash flow information:
Interest paid $ 196 $ 284
====== ======
Income taxes paid $3,612 $ 85
====== ======
Noncash purchases of property, plant and equipment included in
accounts payable at end of period $ 123 $ 58
====== ======
<FN>
See accompanying notes.
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Preparation
- - ----------------------------------
The accompanying financial statements have been prepared in accordance with
the requirements of Form 10-QSB and include all adjustments (consisting of all
normal recurring adjustments) which in the opinion of management are necessary
in order to make the financial statements not misleading. The consolidated
financial statements include the accounts of the Company and its wholly-owned
and majority-owned subsidiaries. All significant intercompany accounts and
profits have been eliminated.
Note 2 - 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 nine months ended
March 31, 1999 and 1998. 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 Nine
Months Ended Months Ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
(Amounts in thousands)
Revenues $11 $ 74 $ 106 $ 256
=== ====== ====== ======
Loss from operations before income taxes $-- (290) (163) (451)
Income tax benefit -- 127 56 153
--- ------ ------ ------
Loss from operations -- (163) (107) (298)
Estimated loss on disposal (including
provision for operating losses
through disposition date) -- -- (198) --
Income tax benefit -- -- 67 --
--- ------ ------ ------
Loss from discontinued operations $-- $(163) $(238) $(298)
=== ====== ====== ======
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
- - ------------
During the nine months ended March 31, 1999 and 1998, all of the Company's
securities were classified as trading securities; no securities were
classified as held-to-maturity or available for sale. The Company recorded a
net realized loss of $507,000 and no unrealized gain or loss during the three
and nine months ended March 31, 1999. The Company held no investments and had
no realized or unrealized gains or losses for the quarter ended March 31,
1998. An unrealized gain of $53,000 and a realized loss of $92,000 were
recorded for the nine months ended March 31, 1998.
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 March 31, 1999, the Company had
no investment positions.
Note 5 - Inventories
- - -----------------------
Inventories are comprised of the following:
March 31,
1999
---------
(Amounts in thousands)
Raw materials $ 803
Work in process 552
Finished goods 1,500
Food and beverage inventory 19
------
$2,874
======
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., d/b/a/ L.E. Smith Glass Company, 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 8).
Income tax provision:
- - -----------------------
For the nine months ended March 31, 1999 and 1998, the Company recorded
provisions for income taxes from continuing operations of $281,000 and
$44,000, 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 nine
months ended March 31, 1999 and 1998.
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Commitments and Contingencies
- - -------------------------------------------
In March 1999, Willowbrook Properties, Inc. d/b/a NBI Development ("NBI
Development"), a wholly-owned subsidiary of the Company, entered into a lease
agreement with a national grocery store chain to lease a significant portion
of the expected total rentable square footage of the first phase of NBI
Development's land development project. The lease is contingent upon NBI
Development's completion of a suitable building pad for the tenant by July 1,
1999. The agreement provides the tenant a set construction allowance from NBI
Development which they will use to construct the building. The tenant is
required to begin paying rent on the earlier of (a) the tenant's opening of
the building for business with the public; or (b) the later of (i) ten months
after NBI Development delivers a completed building pad to the tenant; (ii)
all improvements to the common areas necessary for operation of the
supermarket to be operating in the building are completed; and (iii) all
improvements shown on the highway occupancy permit are completed.
In April 1999, NBI Development entered into a construction contract for site
work totaling $1.2 million on phase one of its land development project. This
site work is scheduled to be completed no later than August 20, 1999. NBI
Development is required to make monthly progress payments based upon the work
completed.
Note 8 - Stockholders' Equity
- - ---------------------------------
The Company has authorized 20,000,000 shares of $.01 par value common stock.
At March 31, 1999, 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 March 31, 1999.
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 (a) one share of the Series A Cumulative Preferred Stock, and
(b) 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 March 31, 1999, 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 sale of these
units resulted in net proceeds of $4.8 million. 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.
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 regarding this matter.
Note 9 - 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.
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
March 31,
1999 1998
---- ----
Basic Diluted Basic Diluted
----- ------- ----- -------
(Amounts in thousands
except per share data)
Income (loss) before discontinued operations $ (425) $ (425) $ 75 $ 75
Less preferred stock dividends (126) (126) -- --
------- ------- ------ ------
Income (loss) before discontinued operations available
to common stockholders $ (551) $ (551) $ 75 $ 75
======= ======= ====== ======
Weighted average number of common
shares outstanding 8,088 8,088 8,088 8,088
======= ======
Assumed conversions of stock options -- 150
------- ------
8,088 8,238
======= ======
Income (loss) per common share
before discontinued operations $ (.07) $ (.07) $ .01 $ .01
======= ======= ====== ======
<FN>
Because the Company incurred a net loss before discontinued operations for the three
months ended March 31, 1999, none of its outstanding options or warrants were included
in the computation of diluted earnings per share as their effect would be anti-dilutive.
For the three months ended March 31, 1998, only the options with exercise prices of
$.25, $.38, $.59 and $.77 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.
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the nine months ended
March 31,
1999 1998
---- ----
Basic Diluted Basic Diluted
----- ------- ----- -------
(Amounts in thousands
except per share data)
Income (loss) before discontinued operations $ 497 $ 497 $ 52 $ 52
Less preferred stock dividends (126) (126) -- --
------- ------- ------ ------
Income (loss) before discontinued operations available
to common stockholders $ 371 $ 371 $ 52 $ 52
======= ======= ====== ======
Weighted average number of common
shares outstanding 8,088 8,088 8,073 8,073
======= ======
Assumed conversions of stock options 381 127
------- ------
8,469 8,200
======= ======
Income (loss) per common share
before discontinued operations $ .05 $ .04 $ .01 $ .01
======= ======= ====== ======
<FN>
For the nine months ended March 31, 1999, 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, while only the options with exercise prices
of $.25, $.38, and $.59 were included in same period of the prior fiscal year, because
their exercise prices were less than the average market price of the common stock during
such periods.
The options and warrants outstanding at March 31, 1999 were as follows:
Number
Exercise Outstanding at
Price March 31, 1999
----- ----------------
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
=========
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 - 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 nine months ended March 31, 1999 and 1998,
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 11 - 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. However, the Company does expect a significant decline
in revenues from L.E. Smith during the fourth quarter of fiscal 1999 due to a
significant decline in projected revenues from its major customer.
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD 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 third quarter of fiscal year 1999
increased $550,000, or 15.6%, to $4.1 million, from $3.5 million in the third
quarter of the prior fiscal year. Year-to-date, revenues totaled $13.5
million for the nine months ended March 31, 1999, an increase of $2.8 million,
or 26.0%, compared to the same period of fiscal 1998.
The revenue improvement was primarily attributable to increased sales revenue
from L.E. Smith. Sales revenue from L.E. Smith increased $516,000, or 16.7%,
to $3,602,000 for the third quarter of fiscal 1999, and increased $2,661,000,
or 29.0%, to $11,831,000 for the nine months ended March 31, 1999, compared to
the same periods in the previous fiscal year. The increased volume at L.E.
Smith included a significant amount of revenue growth from both new and
existing customers. Fiscal year-to-date, L.E. Smith experienced a moderate
increase in orders from its largest customer when compared to fiscal 1998;
however, L.E. Smith had a moderate decline in orders from this customer during
the third quarter of fiscal 1999, compared to the same period in fiscal 1998.
Service and rental revenue from continuing operations increased moderately
from $429,000 and $1,584,000 for the three and nine months ended March 31,
1998, respectively, to $463,000 and $1,715,000 for the same periods in fiscal
year 1999. The revenue growth was related to a significant increase in both
occupancy rates and average daily room rates of the Belle Vernon Holiday Inn
primarily resulting from higher Holiday Inn Priority Club business due to
increased marketing efforts. During the third quarter of fiscal 1999,
however, this improvement was partially offset by a moderate decline in
restaurant and bar business resulting from increased local competition.
Total revenues from continuing operations are expected to decrease
significantly for the three months ended June 30, 1999, compared to the same
period in the prior fiscal year, due to a substantial decline in revenue
expected from L.E. Smith's major customer, partially offset by increased
revenues from L.E. Smith's other customers, as L.E. Smith expects to maintain
the revenue growth from these customers generated during fiscal 1999. This
decline is also expected to be slightly offset by a small increase in hotel
room revenues from the Belle Vernon Holiday Inn. Revenues for the fourth
quarter of fiscal 1999 are expected to decrease substantially compared to the
third quarter of fiscal 1999, due to the substantial decline in revenues
expected from L.E. Smith's major customer, with steady revenues from L.E.
Smith's other customers, partially offset by increased revenues from the Belle
Vernon Holiday Inn resulting from seasonal variations. The Company does not
expect the decline in revenue from L.E. Smith's major customer to be ongoing.
Cost of sales, service and rental was $3.0 million, or 72.9% of total revenue
from continuing operations, and $9.5 million, or 69.9% of total revenue, for
the three and nine months ended March 31, 1999, respectively. Comparable
figures for the same periods in fiscal 1998 were $2.5 million and $7.8
million, or 71.7% and 72.3% of total revenues, respectively.
Cost of sales as a percentage of sales revenue for the three and nine months
ended March 31, 1999 was 71.8% and 69.4%, respectively, compared to 69.0% and
71.7% for the same periods in fiscal 1998. L.E. Smith experienced a decline
in gross margin for the third quarter of fiscal 1999 when compared to fiscal
1998, primarily because the revenue growth was insufficient to cover the
general cost increases including increased labor costs associated with a new
labor contract. However, the improvement in gross margin year-to-date was
primarily due
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER, FISCAL YEAR 1999 - CONTINUED
to increased volume and production efficiency for the nine months ended March
31, 1999, causing favorable absorption of fixed costs, partially offset by
general cost increases including increased labor costs associated with the new
labor contract.
Cost of service and rental as a percentage of service and rental revenue was
81.6% and 73.3% for the three and nine months ended March 31, 1999,
respectively, compared to 90.7% and 76.1% for the same periods in the prior
fiscal year. The improvement in the related gross margin was primarily due to
the increased rooms revenue volume available to cover fixed costs, partially
offset by general cost increases. This was also partially offset by a
moderate decline in the gross margin from its restaurant and bar business, due
to general cost increases, without a corresponding increase in related
revenues.
Cost of sales, service and rental as a percentage of total revenue from
continuing operations for the fourth quarter of fiscal 1999 is expected to be
significantly higher, compared to the fourth quarter of fiscal 1998, due to
lower margins expected from L.E. Smith resulting primarily from lower
projected revenues, anticipated close-out sales of old inventory at low
margins and general cost increases. Cost of sales, service and rental as a
percentage of total revenue for the fourth quarter of fiscal 1999 is expected
to be moderately higher compared to the third quarter of fiscal 1999 due to
projected lower revenue volume, anticipated close-out sales of old inventory
at low margins and general cost increases at L.E. Smith, partially offset by
increased revenue volume at the Belle Vernon Holiday Inn available to cover
its fixed costs.
Marketing, general and administrative expenses from continuing operations
totaled $957,000 and $770,000 for the three months ended March 31, 1999 and
1998, respectively, reflecting an increase of $187,000. Year-to-date,
marketing, general and administrative expenses totaled $2,664,000 for the nine
months ended March 31, 1999, an increase of $321,000 compared to expenses of
$2,343,000 for the same period of fiscal 1998. The increase in expenses
included an additional bad debt provision of $127,000 recorded by L.E. Smith
during the third quarter of fiscal 1999, resulting from a customer's
declaration of Chapter 11 bankruptcy in March 1999. In addition, the Company
experienced 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. These increases were
partially offset by the absence of executive severance accrued during the
second quarter of fiscal 1998 and the absence of a non-cash compensation
expense for extensions of certain executive stock options included in the
first and third quarters of fiscal 1998.
Marketing, general and administrative expenses from continuing operations are
expected to increase moderately for the three months ended June 30, 1999,
compared to the same period in the prior fiscal year, primarily due to
increased sales and marketing activities and general cost increases.
Marketing, general and administrative expenses are expected to decrease
substantially in the fourth quarter of fiscal 1999 compared to the third
quarter of fiscal 1999, primarily due to the projected decline in bad debt
provisions and lower sales and marketing expenses resulting from the expected
decline in revenues.
The Company recorded a realized loss on investments of $507,000 for the three
and nine months ended March 31, 1999. No gain or loss on investments was
recorded during the quarter ended March 31, 1998; however, the Company had a
net loss on investments of $39,000 for the nine months ended March 31, 1998.
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 March 31, 1999, the
Company had no investment positions.
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER, FISCAL YEAR 1999 - CONTINUED
Interest expense totaled $62,000 and $202,000 for the three and nine months
ended March 31, 1999, respectively, compared to $159,000 and $524,000 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
$19,000 and $281,000 for the three and nine months ended March 31, 1999,
respectively, compared to an income tax benefit of $5,000 for the third
quarter of fiscal 1998 and an income tax provision of $44,000 for the nine
months ended March 31, 1998. Included in these amounts are state provisions
of $19,000 and $158,000 for the three and nine months ended March 31, 1999,
respectively, compared to $34,000 and $91,000 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 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 nine months ended
March 31, 1999 or 1998.
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 nine
months ended March 31, 1999 and 1998. The Company 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 $0 and
$238,000, for the three and nine months ended March 31, 1999, respectively,
net of income tax benefits of $0 and $123,000, respectively. This compares to
losses of $163,000 and $298,000 for the three and nine months ended March 31,
1998, respectively, net of income tax benefits of $127,000 and $153,000,
respectively.
At March 31, 1999, the net current assets of discontinued operations
consisted primarily of cash and receivables net of accounts payable and
accrued liabilities and the net long-term assets of discontinued operations
consisted primarily of equipment.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Total assets increased $2.4 million during the first nine months of fiscal
1999, from $12.2 million at June 30, 1998, to $14.6 million at March 31, 1999.
The Company had working capital of $35,000 at March 31, 1999, 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 8). 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 potentially 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
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER, FISCAL YEAR 1999 - CONTINUED
offering. However, there can be no assurance that the Company will have
sufficient funds available or be able to raise sufficient funds to pay the
final installment on the IRS debt when due. The Company's ability to continue
as a going concern is dependent upon satisfaction of the IRS debt when due.
The Company expects to pay the cash dividends on its recently issued preferred
stock through existing working capital, internally generated funds, including
cash potentially available from L.E. Smith through dividend payments to the
parent Company.
The Company is currently pursuing various financing options for its real
estate development activities of its NBI Development Corporation subsidiary.
It is currently funding the construction activity out of existing cash;
however, it will be necessary to obtain financing in late fiscal 1999 or early
fiscal 2000 to enable the Company to complete phase one of the development.
The Company expects its other working capital requirements in the next fiscal
year to be met by existing working capital at March 31, 1999, 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 L.E. Smith'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 $225,000, approximately $160,000 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.
The Company's internal operations and business are also dependent upon the
computer-controlled systems of third parties such as suppliers, customers and
service providers. Management believes that absent a systemic failure outside
the control of these parties, such as a prolonged loss of electrical or
telephone service, year 2000 problems at such third parties will not have a
material impact on the Company. The Company has no contingency plan for
systemic failures such as a loss of electrical or telephone service. The
Company's contingency plan in the event of a non-systemic failure is to
establish relationships with alternative suppliers or vendors to replace
failed suppliers vendors.
L.E. Smith currently has one customer of such significance that if such
customer were to experience year 2000 problems resulting 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
10. Shopping Center Lease with SuperValu Holdings Inc. (1)
27. Financial Data Schedule(1)
(b) No reports on Form 8-K were filed during the quarter ended March 31,
1999 or subsequently.
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(1) 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.
May 17, 1999 By: /s/ Marjorie A. Cogan
- - -------------- --------------------------------------
(Date) Marjorie A. Cogan
As a duly authorized officer
Chief Financial Officer, Secretary