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, 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 November 16, 1999
Common Stock, par value $.01 per share 8,103,320
NBI, INC.
INDEX TO FORM 10-QSB
For Quarter Ended September 30, 1999
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)
September 30, June 30,
1999 1999
(Unaudited)
ASSETS
--------
Current assets:
Cash and cash equivalents $ 77 $ 311
Trading securities -- 36
Accounts receivable, less allowance for doubtful accounts
of $236 and $223, respectively 1,920 1,243
Inventories 2,670 2,972
Other current assets 241 443
-------- --------
Total current assets 4,908 5,005
Property, plant and equipment, net 4,103 4,140
Other assets 10 9
Net long-term assets of discontinued operations 4,211 3,666
-------- --------
$13,232 $12,820
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------
Current liabilities:
Short-term borrowings and current portion
of notes payable $ 2,112 $ 1,719
Current portion of IRS debt and other income taxes payable 1,795 1,788
Accounts payable 1,112 1,372
Accrued liabilities 702 726
Net current liabilities of discontinued operations 273 173
-------- --------
Total current liabilities 5,994 5,778
Long-term liabilities:
Notes payable 228 260
Deferred income taxes 92 92
Postemployment disability benefits and other 259 264
-------- --------
Total liabilities 6,573 6,394
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.01 par value; 5,000,000 shares authorized; 507,421
and 500,000 shares of Series A Cumulative Preferred Stock issued and
outstanding, respectively (liquidation preference value of $5,074 and
$5,000, respectively) 5 5
Capital in excess of par value - preferred stock 4,632 4,562
Common stock - $.01 par value; 20,000,000 shares authorized;
10,130,520 and 10,115,520 shares issued, respectively 101 101
Capital in excess of par value - common stock 6,566 6,561
Accumulated deficit (3,777) (3,935)
-------- --------
7,527 7,294
Less treasury stock, at cost (2,027,200 shares) (868) (868)
-------- --------
Total stockholders' equity 6,659 6,426
-------- --------
$13,232 $12,820
======== ========
<FN>
See accompanying notes.
NBI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands Except Per Share Data)
(Unaudited)
Three Months Ended
September 30,
1999 1998
Revenues:
Sales $3,848 $3,898
------- -------
Costs and expenses:
Cost of sales 2,696 2,682
Marketing, general and administrative 745 686
------- -------
3,441 3,368
------- -------
Income from operations 407 530
Other income (expense):
Net gain on investments 48 --
Other income and expenses, net 3 12
Interest expense (48) (51)
------- -------
3 (39)
------- -------
Income from continuing operations before provision for income taxes 410 491
Provision for income taxes (28) (57)
------- -------
Income before discontinued operations 382 434
Income (loss) from discontinued operations, net of
income tax benefit of $21 and expense of $8, respectively 28 (1)
------- -------
Net income 410 433
Dividend requirement on preferred stock (126) --
------- -------
Income attributable to common stock $ 284 $ 433
======= =======
Income per common share - basic and diluted:
Income before discontinued operations $ .03 $ .05
Income (loss) from discontinued operations .01 --
------- -------
Net income $ .04 $ .05
======= =======
Weighted average number of common shares outstanding 8,100 8,088
======= =======
<FN>
See accompanying notes.
NBI, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
Three Months Ended
September 30,
1999 1998
Cash flows from operating activities:
Net income $ 410 $ 433
Adjustments to reconcile net income to net cash
flow provided by operating activities:
Depreciation and amortization 241 193
Provision for bad debts and returns 16 21
Provision for (reversal of) writedown of inventories (6) 40
Loss (gain) on sales of property and equipment -- (8)
Net unrealized loss (gain) on trading securities (2) --
Changes in assets -- decrease (increase):
Trading securities 38 --
Accounts receivable (709) (632)
Inventories 316 (45)
Other current assets 215 (56)
Other assets -- (32)
Changes in liabilities -- (decrease) increase:
Accounts payable and accrued liabilities (299) 415
Income tax related accounts 11 7
------ ------
Net cash flow provided by operating activities 231 336
------ ------
Cash flows from investing activities:
Proceeds from sales of property and equipment -- 9
Purchases of property and equipment (797) (338)
------ ------
Net cash flow used in investing activities (797) (329)
------ ------
Cash flows from financing activities:
Collections from notes receivable 12 2
Dividends paid on preferred stock (182) --
Proceeds from stock options exercised 5 --
Proceeds from borrowings 155 --
Payments on notes payable (39) (66)
Net borrowings on line of credit 394 103
------ ------
Net cash flow provided by financing activities 345 39
------ ------
Net increase (decrease) in cash and cash equivalents (221) 46
Less change in cash and cash equivalents included
in net assets of discontinued operations (13) --
Cash and cash equivalents at beginning of period 311 209
------ ------
Cash and cash equivalents at end of period $ 77 $ 255
====== ======
<FN>
See accompanying notes.
NBI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
Three Months Ended
September 30,
1999 1998
Supplemental disclosures of cash flow information:
Interest paid $ 65 $71
==== ===
Income taxes paid $ 35 $27
==== ===
Noncash purchases of property, plant, and equipment
included in accounts payable at end of period $264 $82
==== ===
<FN>
See accompanying notes.
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Preparation
The accompanying financial statements have been prepared in accordance with
the requirements of Form 10-QSB and include all adjustments (consisting of all
normal recurring adjustments) which in the opinion of management are necessary
in order to make the financial statements not misleading. The consolidated
financial statements include the accounts of the Company and its wholly-owned
and majority-owned subsidiaries. All significant intercompany accounts and
profits have been eliminated.
Note 2 - Going Concern
As discussed in Note 7, the remaining balance of $1.8 million of the Company's
debt to the Internal Revenue Service ("IRS") is due on December 31, 1999.
This condition raises substantial doubt about the Company's ability to
continue as a going concern. In order to pay such amount, management intends
to generate sufficient cash through the sale of the assets or stock of its
wholly-owned subsidiaries, NBI Properties, Inc. ("NBI Properties") and
Willowbrook Properties, Inc., d/b/a NBI Development Corporation ("Willowbrook
Properties") (see Notes 4 and 7); however, there can be no assurance that the
Company will be able to complete a sale of these properties prior to the due
date of the IRS debt. The Company's ability to continue as a going concern is
dependent upon obtaining funds sufficient to pay off the IRS debt when due.
The accompanying financial statements do not contain any adjustments that
might result from the outcome of this uncertainty. Management believes that
after the Company has sold its real estate and hotel operations and pays off
its IRS debt, it will generate sufficient future cash flows from its remaining
operations to allow the Company to be a going concern.
Note 3 - Cash and Cash Equivalents
Cash and cash equivalents include investments that are readily convertible to
known amounts of cash and have original maturities of three months or less.
The Company places its cash and temporary cash investments with financial
institutions. At times, such investments may be in excess of federally
insured limits.
Note 4 - Discontinued Operations
On December 31, 1998, the Company established a plan to dispose of its Krazy
Colors, Inc. ("Krazy Colors") operation due to continuing losses incurred by
the operation, as well as the business' inability to sustain significant
long-term customers. On August 19, 1999, the Board of Directors voted to sell
the assets or stock of its wholly-owned subsidiaries, NBI Properties and
Willowbrook Properties, in order to pay the remaining balance of the IRS debt
due on December 31, 1999 (see Note 7). Therefore, the Company has
discontinued its children's paint manufacturing, hotel and real estate
development operations, and it has separately reported the income or loss from
these segments as discontinued operations for the quarters ended September 30,
1999 and 1998 as follows:
Children's Real
Paint Hotel Estate
Manufacturing Operations Development Total
For the Quarter Ended September 30, 1999:
- -----------------------------------------------
Revenues from discontinued operations $21 $686 $ -- $707
==== ===== ===== =====
Income from discontinued operations
before income taxes $-- $ 49 $ -- $ 49
Income tax provision -- (21) -- (21)
--- ----- ----- -----
Net income from discontinued operations -- 28 -- 28
Loss on disposal -- -- -- --
--- ----- ----- -----
Net income from discontinued operations $-- $ 28 $ -- $ 28
=== ===== ===== =====
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Quarter Ended September 30, 1998:
- -----------------------------------------------
Revenues from discontinued operations $ 31 $679 $-- $710
===== ===== ==== =====
Income (loss) from discontinued operations
before income taxes $(65) $ 73 $(1) $ 7
Income tax benefit (expense) 22 (29) (1) (8)
----- ----- ---- -----
Income (loss) from discontinued operations (43) 44 (2) (1)
Loss on disposal -- -- -- --
----- ----- ---- -----
Net income (loss) from discontinued
operations $(43) $ 44 $(2) $ (1)
===== ===== ==== =====
In determining the loss on disposal of its children's paint manufacturing
operation, which was recorded during the second quarter of fiscal 1999, the
Company estimated the net realizable value of the disposal of the discontinued
operation, including estimated costs and expenses directly associated with the
disposal and estimated loss from operations through the expected disposal
date. However, because the Company expects a significant gain overall from
the discontinued operations of both the hotel and land development, no amount
has been recorded related to these disposals; the gain will be recognized when
realized.
The net long-term assets of discontinued operations at September 30, 1999
consisted primarily of land, buildings, development costs, and hotel
furniture, fixtures and equipment, net of a long-term mortgage note payable by
the hotel. The net current liabilities of discontinued operations at
September 30, 1999 consisted primarily of accounts payable and accrued
liabilities, net of cash balances.
Note 5 - Investments in Securities and Obligations from Short-Sale
Transactions
During the three months ended September 30, 1999, all of the Company's
securities were classified as trading securities; no securities were
classified as held-to-maturity or available-for-sale. Realized and unrealized
investment gains of $46,000 and $2,000, respectively, were recorded for the
quarter ended September 30, 1999. The Company held no investments and had no
realized or unrealized gains or losses for the quarter ended September 30,
1998.
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, 1999, the Company
had no investment positions.
Note 6 - Inventories
Inventories are comprised of the following amounts which are presented net of
reserves totaling $207,000:
September 30,
1999
(Amounts in thousands)
Raw materials $ 801
Work in process 426
Finished goods 1,443
------
$2,670
======
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Income Taxes
IRS Debt:
On April 28, 1998, the Company and the IRS entered into an amended payment
agreement, revising the payment terms related to NBI Inc.'s IRS debt of
$5,278,000. This agreement, effective April 9, 1998, revised the terms of the
agreement in principal with the IRS effective October 1, 1995 and the original
settlement agreement with the IRS dated June 12, 1991, with respect to NBI's
federal tax liabilities for the fiscal years ended June 30, 1980 through 1988.
Under the current agreement, $3,500,000 of the IRS debt was due and paid on
December 31, 1998, and the remaining balance of $1,778,000 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 ("L.E. Smith") and NBI Properties. Provided no event of default
occurs prior to payment of the IRS debt in full, NBI will not be obligated to
pay any interest from July 1, 1997 forward, related to the debt.
In order to pay the remaining balance on the IRS debt, management intends to
generate sufficient cash through the sale of the assets or capital stock of
its wholly-owned subsidiaries, NBI Properties and Willowbrook Properties;
however, there can be no assurance the Company will be able to complete a sale
of these properties prior to the due date of the IRS debt. The Company's
ability to continue as a going-concern is dependent upon satisfaction of the
IRS debt (See Note 2).
Income tax provision:
For the three months ended September 30, 1999 and 1998, the Company recorded
income tax provisions from continuing operations of $28,000 and $57,000,
respectively. These provisions include state and other income taxes and are
based upon book income.
In accordance with fresh start accounting, which was adopted as of April 30,
1992, and as a result of the Company's reorganization under Chapter 11 of the
U.S. Bankruptcy Code, utilization of any income tax benefit from
pre-reorganization net operating losses is not credited to the income tax
provision, but rather, reported as an addition to capital in excess of par
value. No pre-reorganization net operating losses were utilized for the three
months ended September 30, 1999 and 1998.
Note 8 - Stockholders' Equity
The Company has authorized 20,000,000 shares of $.01 par value common stock.
At September 30, 1999, 10,130,520 shares were issued including 2,027,200 held
in treasury. Therefore, the Company had 8,103,320 shares issued and
outstanding at September 30, 1999.
The Company has authorized 5,000,000 shares of preferred stock with a par
value of $.01 per share, and has designated 2,000,000 preferred shares as
Series A Cumulative Preferred Stock. At September 30, 1999, 507,421 shares of
Series A Cumulative Preferred Stock were issued and outstanding.
On August 19, 1999, the Board of Directors declared the first semi-annual
dividend on its outstanding Series A Cumulative Preferred Stock to holders of
record as of August 19, 1999. On September 3, 1999, $252,000 in dividends
were paid, consisting of $182,000 in cash and 7,421 in additional shares of
preferred stock, valued at $70,000, per the elections of the holders.
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 - Income Per Common Share
The Company reports earnings per common share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128 issued by the Financial
Accounting Standards Board. The following reconciles the numerators and
denominators of the basic and diluted earnings per common share computation
for income before discontinued operations:
For the quarters ended
September 30,
1999 1998
Basic Diluted Basic Diluted
(Amounts in thousands
except per share data)
Income before discontinued operations $ 382 $ 382 $ 434 $ 434
Dividend requirement on preferred stock (126) (126) -- --
------- ------- ------ ------
Income before discontinued operations
attributable to common stock $ 256 $ 256 $ 434 $ 434
======= ======= ====== ======
Weighted average number of common
shares outstanding 8,100 8,100 8,088 8,088
======= ====== ====== ======
Assumed conversions of stock options 163 179
------- ------
8,263 8,267
======= ======
Income per common share
before discontinued operations $ .03 $ .03 $ .05 $ .05
======= ======= ====== ======
For the three months ended September 30, 1999, stock options outstanding with
an exercise price of $.38, $.59 and $.77 per share were included in the
computation of diluted earnings per share because their exercise price was
less than the average market price of the common stock during such period.
Stock options outstanding with an exercise price of $.25 per share were also
included in the computation of diluted earnings per share for the three months
ended September 30, 1998; these options were not outstanding during the
quarter ended September 30, 1999.
The options and warrants outstanding at September 30, 1999 were as follows:
Number
Exercise Outstanding at
Price September 30, 1999
Stock options:
.38 201,000
.59 100,500
.77 400,000
.88 244,000
Warrants:
.89 1,700,000
1.20 1,000,000
---------
3,645,500
=========
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 three months ended September 30, 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
Excluding the effect of its significant customer, L.E. Smith typically has its
strongest revenue performance during the first and second fiscal quarters due
to seasonal variations. Generally, the fourth fiscal quarter's revenue is
moderately lower than in the first and second quarters, while the third fiscal
quarter's revenue is usually significantly lower than the other quarters.
However, historically these trends have been materially affected by
fluctuations in the timing of orders from its significant customer, which does
not have consistent trends.
Note 12 - Related Party Transactions
The Company's Chief Executive Officer ("CEO"), Jay Lustig, has proposed to
purchase a majority of the assets of Willowbrook Properties and all of the
capital stock of NBI Properties. The Company is submitting the transaction to
its disinterested shareholders for approval at its Fiscal 1999 Annual Meeting
of Stockholders.
In September and November 1999, Mr. Lustig advanced Willowbrook Properties
$155,000 and $159,740, respectively, to fund development costs incurred on
Phase I of its land development project. Concurrently with the closing of the
proposed Willowbrook Properties sale transaction, such amounts will be deemed
to be expenses of the buyer. In the event the closing does not occur on this
transaction, NBI will repay the CEO such amounts on a due date to be
determined at that time, with interest at the rate of ten percent per annum
since the dates of the advances.
The Company's CEO has personally guaranteed a $500,000 letter of credit for
the benefit of the Commonwealth of Pennsylvania, Department of Transportation
("PennDOT"), required in order for Willowbrook Properties to commence certain
road improvements mandated by PennDOT in conjunction with Phase I of its land
development project. In addition, in conjunction with the Company's efforts
to obtain construction financing for Phase I of the development, Mr. Lustig
has committed to personally guarantee the repayment of such construction
financing and to guarantee the completion of Phase I of the development.
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER, FISCAL YEAR 2000
The statements in this discussion contain certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, that are not
historical facts. The forward-looking statements are based upon the Company's
current expectations and are subject to known and unknown risks,
uncertainties, assumptions and other factors. Should one or more of such
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, the actual results could differ materially from those contemplated
by the forward-looking statements. Factors that may affect such
forward-looking statements include, among others, ability to obtain financing,
loss of significant customers, reliance on key personnel, competitive factors
and pricing pressures, availability of raw materials, labor disputes,
investment results, limitations on the utilization of net operating loss
carryforwards, adequacy of insurance coverage, inflation and general economic
conditions.
RESULTS OF OPERATIONS
Revenues from continuing operations totaling $3,848,000 for the first quarter
of fiscal 2000 decreased slightly from $3,898,000 for the three months ended
September 30, 1998. As expected, L.E. Smith experienced a significant
decline, approximately $300,000, in revenue from its largest customer, as well
as the absence of $392,000 in revenues related to an order from a nonrecurring
customer included in the first quarter of fiscal 1999. However, these
declines were significantly offset by sustained revenue growth from its other
customers.
Revenues from continuing operations are expected to decline substantially for
the three months ended December 31, 1999, compared to the same period in the
prior fiscal year, because L.E. Smith expects a substantial decline in
revenues from its largest customer which is only expected to be partially
offset by increased business from its other customers. Revenues from
continuing operations are expected to decrease significantly for the second
quarter of fiscal 2000 compared to the first quarter of fiscal 2000 due to a
significant decline in revenues expected from L.E. Smith's largest customer
which is only expected to be partially offset by increased business from its
other customers. The Company is still in the process of hiring a new sales
representative to concentrate on increasing the volume of the glass decorating
business in order to help offset the effect of the continuing decline in
revenues from L.E. Smith's largest customer.
Cost of sales from continuing operations as a percentage of related revenue
was 70.1% for the quarter ended September 30, 1999, compared to 68.8% for the
same period in fiscal 1999. The resulting decline in gross margin was
primarily due to significantly higher depreciation expense, resulting from a
large amount of capital improvements made in the prior fiscal year, and
general cost increases. However, these increased costs were partially offset
by a $42,000 credit resulting from the reversal of excess reserves for a prior
self-insured workmen's compensation plan and lower inventory reserve
provisions during the first quarter of fiscal 2000.
Cost of sales from continuing operations as a percentage of related revenue
for the second quarter of fiscal 2000 is expected to be significantly higher
compared to the second quarter of fiscal 1999, due to significantly higher
depreciation expense, general cost increases and a substantial decline in
expected sales volume which will cause unfavorable absorption of fixed costs.
Cost of sales from continuing operations as a percentage of related revenue
for the second quarter of fiscal 2000 is expected to be moderately higher
compared to the first quarter of fiscal 2000, due to general cost increases
and a significant decline in expected sales volume which will cause
unfavorable absorption of fixed costs.
Marketing, general and administrative expenses from continuing operations
totaled $745,000 and $686,000 for the three months ended September 30, 1999
and 1998, respectively. The increase was primarily related to increased sales
commissions resulting from increased sales from outside sales representatives,
while the Company experienced a significant decline in revenues from its
largest customer, which is a house account and is not subject to outside sales
commissions.
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER, FISCAL YEAR 2000 - CONTINUED
Marketing, general and administrative expenses are expected to increase
moderately for the three months ended December 31, 1999, compared to both the
same period in the prior fiscal year and the first quarter of fiscal 2000, due
to general cost increases.
For the three months ended September 30, 1999, the Company recorded a realized
gain on investments of $46,000 and an unrealized gain on investments of $2,000
compared to no gain or loss on investments for the same period in the prior
fiscal year. As part of its investment policy, the Company's investment
portfolio may include investments in option instruments and may include a
concentrated position in one or more securities. As a result of this, the
financial results may fluctuate significantly and have larger fluctuations
than with a more diversified portfolio. In addition, the Company may invest
in short-sale transactions of trading securities. Short-sales can result in
off-balance sheet risk, as losses can be incurred in excess of the reported
obligation if market prices of the securities subsequently increase. At
September 30, 1999, the Company had no investment positions.
The Company recorded provisions for income taxes from continuing operations of
$28,000 and $57,000 the first quarter of fiscal 2000 and 1999, respectively,
primarily due to the inclusion of Pennsylvania state income tax provisions.
The state income tax provisions are related to the Company's Pennsylvania
operations and are based upon book income, because the continuing operations
do not have any net operating loss carryforwards available in Pennsylvania.
In accordance with fresh-start accounting, the income tax provisions recorded
include non-cash charges to the extent that the Company expects to use its
pre-reorganization net operating loss carryforwards. These charges are
reported as an addition to capital in excess of par value, rather than as a
credit through the income tax provision. There were no non-cash components
included in the income tax provisions for the three months ended September 30,
1999 or 1998.
DISCONTINUED OPERATIONS
On December 31, 1998, the Company established a plan to dispose of its Krazy
Colors' operation due to continuing losses incurred by the operation, as well
as the business' inability to sustain significant long-term customers. On
August 19, 1999, the Board of Directors voted to sell the assets or stock of
its wholly-owned subsidiaries, NBI Properties and Willowbrook Properties in
order to pay the remaining balance of the IRS debt due on December 31, 1999
(see Notes 4 and 7 to accompanying consolidated financial statements).
Therefore, the Company has discontinued its children's paint manufacturing,
hotel, and real estate development operations, and it has separately reported
the income or loss from these segments as discontinued operations for the
quarters ended September 30, 1999 and 1998.
Revenues from discontinued operations totaled $707,000 for the first quarter
of fiscal 2000 compared to $710,000 for the same period of the prior fiscal
year.
The Company recorded net income from discontinued operations of $28,000 for
the three months ended September 30, 1999 compared to a net loss from
discontinued operations of $1,000 for the same period of the prior fiscal
year. The improvement resulted primarily from the absence of a loss from the
Krazy Colors operation because the estimated loss on disposal of this
operation was accrued for during fiscal 1999. In determining the loss on
disposal of its Krazy Colors operation, which was recorded during the second
quarter of fiscal 1999, the Company estimated the net realizable value of the
disposal of the discontinued operation, including estimated costs and expenses
directly associated with the disposal and estimated loss from operations
through the expected disposal date. However, because the Company expects a
significant gain overall from the discontinued operations of both the hotel
and land development, no amount has been recorded related to these disposals;
the gain will be recognized when realized.
The net long-term assets of discontinued operations at September 30, 1999
consisted primarily of land, buildings, development costs, and hotel
furniture, fixtures and equipment, net of a long-term mortgage note payable by
the hotel. The net current liabilities of discontinued operations at
September 30, 1999 consisted primarily of accounts payable and accrued
liabilities, net of cash balances.
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER, FISCAL YEAR 2000 - CONTINUED
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets increased $412,000 to $13.2 million at September
30, 1999 from $12.8 million at June 30, 1999. The increase was primarily due
to a significant increase in trade accounts receivable resulting from the
increased revenues in September 1999 compared to June 1999. The Company had
negative working capital of $1.1 million at September 30, 1999, compared to
negative working capital of $773,000 at June 30, 1999. The increase in the
working capital deficit was primarily due to cash and proceeds from investment
trades receivable, included in other current asset at June 30, 1999, used to
fund a portion of the land development costs incurred during the first quarter
of fiscal 2000 and included in long-term assets from discontinued operations
at September 30, 1999.
The Company has a final installment of $1.8 million on the IRS debt which is
due on or before December 31, 1999. In order to pay such amount, management
intends to generate sufficient cash through the sale of the assets or stock of
its wholly-owned subsidiaries, NBI Properties and Willowbrook Properties;
however, there can be no assurance that the Company will be able to complete a
sale of these properties prior to the due date of the IRS debt. The Company's
ability to continue as a going concern is dependent upon obtaining funds
sufficient to pay off the IRS debt when due. Management believes that after
the Company has sold its real estate and hotel operations and pays off its IRS
debt, it will generate sufficient future cash flows from its remaining
operations to allow the Company to be a going concern.
The Company's CEO has proposed to purchase a majority of the assets of
Willowbrook Properties and all of the capital stock of NBI Properties. The
Company is submitting the transaction to its disinterested shareholders for
approval at its Fiscal 1999 Annual Meeting of Stockholders.
The Company expects to pay the cash dividends on its outstanding preferred
stock through existing working capital and internally generated funds,
including cash potentially available from L.E. Smith through dividend payments
to the parent Company. However, L.E. Smith's bank loan agreement limits the
ability to pay and the amount of dividends payable by L.E. Smith.
During the three months ended September 30, 1999, the Company funded the
construction activity for phase I of its Willowbrook Properties' development
out of existing cash, proceeds from investment trades receivable at June 30,
1999 and a $155,000 advance from its CEO. Subsequent to September 30, 1999,
the Company received an additional advance of $159,740 from its CEO to pay for
construction costs. The Company has recently received a commitment for
commercial financing to pay for a significant portion of the construction
costs of phase I of its land development project. The Company expects to
close on this financing at the end of November. However, significant
additional equity contributions will be required by the Company during the
construction period of phase I. The Company intends to sell the development
in order to generate cash for its IRS payment due on December 31, 1999 and to
minimize its required additional equity contributions.
Construction-in-progress from continuing operations totaled $176,000 at
September 30, 1999 and included $76,000 for design and engineering costs
related to a new crystal tank for the glass manufacturing facility. The
Company estimates that it will cost approximately $1,735,000 to complete the
outstanding construction-in-progress, all of which is expected to be completed
during fiscal 2000. A majority of the estimated costs to complete the
outstanding projects is related to the new crystal tank. The new tank will
have an estimated useful life of 20 to 25 years, with major refurbishments,
costing approximately $500,000, required every seven years. The Company is
currently pursuing various financing alternatives for this capital
improvement.
The Company expects its other working capital requirements in the next fiscal
year to be met by existing working capital at September 30, 1999, internally
generated funds and, for L.E. Smith's requirements, short-term borrowings
under an existing line of credit.
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER, FISCAL YEAR 2000 - CONTINUED
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. and has already been upgraded and tested to be
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 $285,000, a majority 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 now virtually complete.
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.
The Company presently believes that with the completed conversions to new
hardware and software, the year 2000 issue will be mitigated without causing a
material adverse impact on the operation of the Company. However, if such
conversions are not sufficiently, the year 2000 issue could have an impact
on the operation of the Company. At this time, management does not believe
that the impact and any resulting costs will be material.
NBI, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
a. For the quarter ended September 30, 1999
b. Restated for the quarter ended September 30, 1998
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1999 or subsequently.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NBI, INC.
November 22, 1999 By: /s/ Marjorie A. Cogan
(Date) Marjorie A. Cogan
As a duly authorized officer
Chief Financial Officer, Secretary