NBI INC, 10KSB, 1997-09-19

NBI INC
10KSB, 1997-09-19
GLASS & GLASSWARE, PRESSED OR BLOWN

Previous: VENUS EXPLORATION INC, PRE 14A, 1997-09-19

Next: PEREGRINE REAL ESTATE TRUST, 8-K, 1997-09-19

<PAGE>

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 - KSB

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For Fiscal Year Ended June 30, 1997

[ ] 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

NBI, INC.

State of Incorporation IRS Employer I.D. Number
Delaware 84 - 0645110

1880 Industrial Circle, Suite F
Longmont, Colorado 80501
(303) 684-2700

Securities registered pursuant Name of each exchange
to section 12(b) of the Act: None on which registered: N/A

Securities registered pursuant to Section 12(g) of the Act: Common Stock
($.01 par value)

Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

Revenues for the year ended June 30, 1997 were $13,669,000.

The aggregate market value of voting stock held by non-affiliates of the
registrant is approximately $5,030,000 as of market close on August 22, 1997.

Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. [X] YES [ ] NO

Common stock ($.01 Par Value) 8,077,820 shares outstanding as of August 22,
1997.

Documents incorporated by reference: Part III-The Registrant's definitive Proxy
Statement for its 1997 Annual Meeting of Shareholders, to be filed not later
than 120 days after the end of the fiscal year.
<PAGE>

PART I

ITEM 1. BUSINESS

DOMESTIC OPERATIONS

AMERICAN GLASS, INC., D/B/A L.E. SMITH GLASS COMPANY

In August 1995, American Glass, Inc., a wholly-owned subsidiary of NBI, Inc.
("NBI") closed on its purchase of a majority of the assets, including the name,
of L.E. Smith Glass Company ("L.E. Smith") of Mount Pleasant, Pennsylvania.
Founded in 1907, the L.E. Smith Glass Company is one of the few remaining
handmade pressed glass manufacturers in the United States. The company
manufactures and sells an assortment of crystal and colored glass giftware and
lighting fixtures for the domestic consumer market. None of the products
manufactured by the company contain lead. L.E. Smith produces its products with
highly skilled workers, utilizing manual and semi-automatic machines to mold,
press, and decorate glassware. L.E. Smith can be flexible in the types of
products it can make, which allows it to be responsive to smaller customers. In
addition, the company has far greater flexibility in designing and manufacturing
those products with unusual shapes, sizes, and weights than automated machine
glassmakers can economically make. L.E. Smith maintains almost every glass mold
it has used for the past 90 years (in excess of 2,300 molds).

L.E. Smith sells its products through in-house sales managers and manufacturer's
representatives. The giftware products are sold primarily to traditional and
specialty retailers, manufacturers/wholesalers and the food service market, as
well as the "on-site" company retail store. The lighting fixture products are
sold to manufacturers and retailers.

NBI PROPERTIES, INC.

In August 1995, NBI, Inc. acquired 100% of the outstanding capital stock of the
Belle Vernon Motel Corporation now known as NBI Properties, Inc. ("NBI
Properties"). NBI Properties owns and operates an 81 room full service Holiday
Inn in Belle Vernon, Pennsylvania (the "Belle Vernon Holiday Inn"). The Company
received approval as an authorized Holiday Inn franchisee prior to the closing
of the acquisition and is licensed pursuant to a license agreement with Holiday
Inns Franchising, Inc. which expires in August 2005, subject to renewal. The
property continues to be operated as a Holiday Inn Hotel. The Holiday Inn hotel
consists of approximately 21,000 square feet and sits on approximately 5.8 acres
of land leased under an acquired land lease expiring in 2026 with an option to
extend for an additional 25 year term.

During fiscal year 1997, NBI Properties completed a significant renovation of
the Belle Vernon Holiday Inn. NBI Properties incurred secured indebtedness of
$1,000,000 in order to complete such renovation. As a result of this renovation,
the hotel is now in compliance with the Holiday Inn franchise agreement
provisions regarding property improvement requirements.

KRAZY COLORS, INC.

In January 1995, the Company acquired a majority interest in Krazy Colors, Inc.
("Krazy Colors") a small children's paint and novelty toy manufacturer located
in Las Vegas, Nevada, which manufactures roll-on and dot-on paints for children,
as well as bulk tempera paints. Krazy Colors distributes its products primarily
through national and international retail chains and toy distributors. Krazy
Colors is subject to a royalty agreement which provides for royalty payments to
the minority shareholders based upon gross margin performance. (See also Note
12 to Consolidated Financial Statements).

Late in fiscal 1997, Krazy Colors transitioned its sales force from an
independent sales representative group, whose primary customers were small
specialty and gift shop retailers, to a new sales representative group whose
marketing focus is on the tier of retailers which are smaller than the top 100
retailers but significantly larger than the specialty and gift shop retailers on
which the previous representative group focused its efforts.

2
<PAGE>

WILLOWBROOK PROPERTIES, INC. D/B/A NBI DEVELOPMENT CORPORATION

In January 1997, the Company, through its wholly-owned subsidiary, Willowbrook
Properties, Inc. d/b/a, NBI Development Corporation ("NBI Development") closed
on the acquisition of a parcel of property consisting of 88 acres of farmland in
Belle Vernon, Pennsylvania. The acquisition cost was approximately $1.0
million, of which $100,000 was paid in fiscal 1996 and the balance was paid in
cash at the closing. The property is situated along Route 51 in Belle Vernon
and has frontage for approximately 2,000 feet. The company successfully
obtained a zoning variance to permit the development of a mixed use retail and
residential project for the property.

Phase I of the project is planned to be a mixed use retail center. NBI
Development is currently in negotiations with a number of prospective tenants
for phase I, including two anchor tenants, one grocery store and one multi-
screen movie theater, both of whom are regionally and/or nationally prominent.
NBI Development is currently seeking commercial financing to pay for the
construction costs of the center. The Company plans to begin construction on
phase I of the project late in calendar 1997, with an anticipated construction
period of 9 months from commencement. The construction costs are anticipated to
be approximately $6.7 million. NBI Development is currently exploring various
financing options to fund the construction.

After the successful development of phase I, the Company contemplates the
development of two additional phases for the project. Currently, the second
phase is projected to be additional retail stores with a town center concept,
and the third phase may include residential property.

HISTORY OF THE COMPANY

NBI was incorporated in 1973 to develop and market a proprietary word processing
system. The Company was the first to introduce a software-based word processing
system and within a few years became known as a leading provider of dedicated
word processing and office automation systems. Because of the declining
interest in purchasing entire system solutions, it was necessary to restructure
the Company in October, 1989 and shift its focus from manufacturing to customer
service and support and into development and marketing of word processing
software products for personal computers.

To further its reorganization efforts, in February 1991, NBI filed a voluntary
petition for reorganization under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court for the District of Colorado. In
January 1992, the Bankruptcy Court entered an order confirming the Company's
Plan of Reorganization. NBI emerged from Chapter 11 on February 3, 1992, the
effective date of the Plan.

In August 1992, NBI sold its domestic customer service and support division. As
of June 30, 1995, the Company discontinued all software development activities.

In 1990, NBI formed its domestic systems integration division to transition the
existing customer base from its proprietary hardware platforms to today's open
platforms. Because of the low margins, intense competition and long sales
cycle, NBI closed this business in June 1994.

Late in fiscal 1994, NBI acquired the AlphaNet division which was a network
infrastructure business located in southern Ohio. AlphaNet's market focus was
on the physical cable layer of networks, including utilization of fiberoptic
technology. In August 1996, NBI decided to dispose of its AlphaNet division and
in fiscal 1997 completed the disposition.

With the disposition of the AlphaNet division, the Company has discontinued all
of its operations in the computer industry segment. Therefore, it has
separately reported the loss from this segment, consisting of losses from its
AlphaNet division, its international subsidiary, NBI, Ltd., and its software
development activities, as discontinued operations for the fiscal year ended
June 30, 1996. The Company recorded income from discontinued operations for the
year ended June 30, 1997, due to a gain on the disposal of NBI, Ltd. (See Note 3
to Consolidated Financial Statements.)

3
<PAGE>

INTERNATIONAL OPERATIONS

NBI, Ltd. is a wholly-owned subsidiary of NBI, Inc. that sold integrated
document management solutions, workflow and COLD (Computer Output to Laser Disk)
to central and local government departments and commercial organizations
throughout the United Kingdom. Due to continuing losses incurred by the
subsidiary, NBI decided to sell the operation in fiscal 1995.

In April 1995, NBI, Ltd. completed a sale of certain assets of the company,
including its customer base. Under the terms of this agreement, NBI, Ltd.
retained certain assets and liabilities. NBI, Ltd. filed for voluntary
liquidation in the U.K. during fiscal 1996. As of June 30, 1997, the
liquidation of NBI, Ltd. was substantially complete. The loss from this
computer industry segment operation has been included in the loss from
discontinued operations for the fiscal year ended June 30, 1996. The gain on
disposal of NBI, Ltd. including a $316,000 translation gain recognized due to
the substantial completion of the company's liquidation, was included in income
from discontinued operations for the fiscal year ended June 30, 1997.

COMPETITION

The market segments in which the Company competes are extremely competitive.
Many of the Company's existing and potential competitors have substantially
greater financial, marketing and technological resources, as well as established
reputations for developing and distributing products and providing services in
the Company's markets. The Company expects that existing and new competitors
will continue to introduce products and provide services that are competitive
with those of the Company. There can be no assurance the Company will be able to
compete successfully in these markets.

L.E. SMITH. L.E. Smith's main competition in giftware is from imports,
primarily from Europe, South America and the Orient. Most of the competitive
glass from overseas is twenty-four percent leaded crystal, even though L.E.
Smith's giftware is unleaded crystal, because foreign manufacturers are able to
produce leaded glass less expensively due to significantly less environmental
restrictions and labor costs. The main competition for the glass lighting
fixtures is also imports from Europe, South America and the Orient. There are
also a few domestic companies that have competing products to certain portions
of L.E. Smith's giftware and lighting fixtures product lines. The company is
able to compete with other domestic and foreign glass companies primarily for
the following reasons. L.E. Smith is one of only a few hand pressed glass
manufacturers remaining in the United States. L.E. Smith produces a large
variety of unique designs using twelve different colors of glass and has a solid
reputation for the quality and reliability of its products. In addition, its
products are price competitive with those of other domestic manufacturers. L.E.
Smith can compete with foreign competitors because it has the flexibility to
meet shorter lead times without the restrictive minimum quantities required by
most foreign manufacturers.

BELLE VERNON HOLIDAY INN. The hotel has limited competition from other full-
service hotels in a relatively wide-spread area. However, it does compete with
several limited-service hotels in the wide-spread area including three new
hotels which opened approximately 300 new rooms during fiscal 1996. The local
market includes several non-competitive motels in a different class as to price
and amenities.

KRAZY COLORS. Krazy Colors' primary competitors are children's finger paint,
paint and crayon manufacturers. Krazy Colors' competitive advantage on the
roll-on and dot-on paints is a unique bottle design that allows children to use
non-toxic, washable paint with little cleanup. Because of the high procurement
costs for paint (primarily due to freight costs), the company decided late in
fiscal 1995, to manufacture its own tempera paint for its roll-on and dot-on
paints. This also enabled the company to cost-effectively produce and package
tempera and finger paints under the Krazy Color label. The competitors for
these products are large, well-established companies with significantly better
distribution capabilities. Consequently, Krazy Colors focuses the majority of
its sales efforts on its roll-on and dot-on paints.

NBI DEVELOPMENT. There is some competition to the proposed retail center in the
surrounding area; however, there are competitive advantages in favor of NBI
Development. The advantages include the significant property frontage on Route
51 in Belle Vernon, the lack of significant competition in the immediate area
and the projected ease of access to the property. Among the close competitors
is a concentration of three centers, also in Rostraver Township, which are
approximately four to five miles from the property owned by NBI Development.
These centers

4
<PAGE>

include retail shops, banks and restaurants, many of which are regionally or
nationally prominent, including a Wal-Mart Supercenter, Kmart, Foodland,
Giant Eagle and Lowe's. If the center is successful, it could invite
competition from entities that are better capitalized than NBI Development.

SIGNIFICANT CUSTOMERS AND SUPPLIERS

L.E. Smith currently has one significant customer and sales to this customer
totaled approximately 28% and 26% of NBI's consolidated revenues for the years
ended June 30, 1997 and 1996, respectively. The loss of this customer's
business would have a material adverse effect on NBI; however, L.E. Smith is
continually focusing its sales efforts on expanding its customer base to lessen
the impact this customer has on its business. In addition, the Company's
management believes that its relationship with this customer will continue into
the foreseeable future, due in part to the large number of different items this
customer purchases from L.E. Smith.

L.E. Smith purchases a majority of its raw materials from only a few vendors.
Management believes that other suppliers could provide similar materials on
comparable terms.

SEASONAL VARIATIONS OF BUSINESSES

All of the Company's current operations 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.

EMPLOYEES

As of June 30, 1997, the Company employed a total of 212 employees including 160
full-time employees. Currently, 130 of the total employees are covered by
collective bargaining agreements, including 97 employees of L.E. Smith who are
covered by a collective bargaining agreement which expires on September 1, 1998
and 33 employees of NBI Properties who are covered by a collective bargaining
agreement which expires on November 7, 1998.

ITEM 2. PROPERTIES

NBI leases approximately 5,100 square feet of office space for administrative
personnel at its corporate headquarters in Longmont, Colorado under a lease
expiring in October 2000. The Company also leases approximately 10,000 square
feet of warehouse space in Las Vegas, Nevada for its Krazy Colors manufacturing
operation, under a lease expiring in December 1999. The Company believes its
leased facilities are adequate to meet its needs for the next several years and
anticipates that it would encounter little difficulty in locating alternative or
additional suitable facilities should its requirements change.

The Company's international subsidiary has outstanding commitments under an
office lease for 7,540 square feet of office space in Slough in the United
Kingdom under a lease that expires in March 1998. However, NBI, Inc. has no
liability for this subsidiary's leases.

The Company acquired the building and improvements of the Belle Vernon Holiday
Inn Hotel in Belle Vernon, Pennsylvania as a result of its business acquisition
in August 1995. The building consists of approximately 21,000 square feet and
sits on approximately 5.8 acres of land leased pursuant to a land lease expiring
in 2026 with an option to extend for an additional 25 year term. In connection
with its franchise agreement, the Company's hotel operation completed
approximately $1.1 million in renovations to the hotel during fiscal 1997.

In August 1995, the Company acquired the land and buildings held by L.E. Smith,
including a total of approximately 194,000 square feet of manufacturing,
warehousing and office space on approximately 11.1 acres of land in Mount
Pleasant, Pennsylvania. During fiscal 1997, L.E. Smith leased approximately
6,000 square feet of temporary warehouse space, under a lease expiring in
December 1997, in order to facilitate certain property improvement projects.

5
<PAGE>

In January 1997, NBI Development acquired 88 acres of undeveloped land in
southwestern Pennsylvania. The Company plans to pursue commercial development
of the property and is currently exploring financing options to fund the
project.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any material pending legal proceeding.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On August 26, 1997, NBI's Board of Directors approved an amendment to its
Certificate of Incorporation to grant the Corporation authority to issue up to 5
million shares of preferred stock with a par value of $.01 per share. In
addition, the amendment will allow the Company to effect a reverse stock split
of either 4:1 or 5:1, at its discretion. The Company is currently attempting to
obtain written consents, in lieu of a meeting, of a majority of its stockholders
to approve these amendments.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's common stock is traded over-the-counter under the symbol NBII.
The following table sets forth the high and low bid prices for the common stock
for the fiscal periods specified. The quotations of the Company's common stock
reflect inter-dealer prices, without any retail mark-up, mark-down or
commissions, and may not necessarily represent actual transactions.

FISCAL 1997 HIGH LOW
----------- ----- -----
First Quarter $ 7/8 $9/16
Second Quarter 7/8 3/8
Third Quarter 1 3/4
Fourth Quarter 29/32 3/4

FISCAL 1996 HIGH LOW
----------- ----- -----
First Quarter 1 1/4 1/8
Second Quarter 1 1/8 5/8
Third Quarter 7/8 3/4
Fourth Quarter 13/16 11/16

At June 30, 1997, there were 7,977,820 common shares of $.01 par value common
stock outstanding. The approximate number of stockholders of the Company was
1,270 as of August 22, 1997. This includes shares held in nominee or "street"
accounts.

To date, no dividends have been paid on the $.01 par value common stock and it
is anticipated that future earnings will be retained for operating purposes.

6
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The statements in this discussion contain both historical and forward-looking
statements. The forward-looking statements are based upon current expectations
and the actual results could differ materially from those anticipated. Factors
that may affect such forward-looking statements include, among others, ability
to obtain financing, 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 1997 - 1996 COMPARISON

The Company reported net income of $1,044,000 in fiscal 1997, compared to a net
income of $88,000 in fiscal 1996. The improved results for the year ended June
30, 1997 were primarily related to favorable investment performance, as well as
an increase in other income resulting from the recovery of a note receivable.
In addition, fiscal 1997 included a gain from discontinued operations of
$354,000, resulting primarily from a realized translation gain on the Company's
foreign subsidiary, compared to a loss from discontinued operations of $137,000
recorded in fiscal 1996.

Sales revenues from continuing operations of $11.7 million for the year ended
June 30, 1997 reflected an increase of $1.7 million as compared to fiscal 1996.
The sales revenue growth was primarily related to expanded market penetration by
L.E. Smith resulting from its increased focus on smaller individually-owned
stores. In addition, sales revenues reflected an increase resulting from the
inclusion of a full twelve months of revenue from L.E. Smith during fiscal 1997,
compared to revenues for the period August 1, 1995, its acquisition date,
through June 30, 1996 included in the same period of fiscal 1996. During fiscal
1997, as compared to fiscal 1996, the Company also had increased sales revenue
from Krazy Colors primarily resulting from a large order from a new catalog
distributor.

Service and rental revenues from continuing operations totaled $2.0 million and
$1.8 million, respectively, for the years ended June 30, 1997 and 1996. The
increased revenues were due to the inclusion of twelve full months of revenue
from NBI Properties during fiscal 1997, compared to revenues for the period
August 4, 1995, its acquisition date, through June 30, 1996 included in the same
period of fiscal 1996, increased room rates during the second half of fiscal
1997 resulting from the recent renovation, and a moderate increase in food and
beverage revenues because of increased local business. However, these increases
were partially offset by a decrease in revenues during the second quarter of
fiscal 1997, resulting from a reduction in available rooms at the Belle Vernon
Holiday Inn during the hotel renovation activity. In addition, the hotel
experienced a reduction in revenues during the third quarter of fiscal 1997
compared to 1996, because fiscal 1996 included increased occupancy rates related
to bookings from flood assistance organizations and inclement weather activity.

Total revenues from continuing operations are expected to increase slightly in
fiscal 1998 as compared to fiscal 1997, primarily due to a small increase in
projected revenues from L.E. Smith and a moderate increase in expected revenues
from NBI Properties, due to an increase in the expected average daily room rates
and annual occupancy rates resulting from the completion of the renovation.
However, these increases are partially offset by a projected decline in revenues
from Krazy Colors due to expected transition time related to a change in sales
focus implemented late in fiscal 1997.

Cost of sales as a percentage of sales revenues for the years ended June 30,
1997 and 1996 was 71.1% and 71.9%, respectively. The improved gross margin
included a slight improvement in gross margin from L.E. Smith and a moderate
improvement in gross margin from Krazy Colors in fiscal 1997, both resulting
from the higher revenue.

Cost of service as a percentage of service and rental revenue was 75.2% and
70.9% for the year ended June 30, 1997, and 1996, respectively. The related
decline in gross margin occurred primarily due to the lower room rental volume
experienced during the second and third quarters of fiscal 1997 without a
corresponding decrease in costs, as the costs include a significant amount of
fixed expenses. In addition, the Company realizes more favorable gross margin
on room rentals than on food and beverage services. Furthermore, the hotel had
increased fixed costs for the six months ended June 30, 1997, resulting from
additional depreciation and amortization related to the renovations completed
during fiscal 1997.

7
<PAGE>

Total cost of sales, service and rentals as a percentage of total revenues was
71.7% in fiscal 1997 and is expected to increase modestly in fiscal 1998. The
related decline in gross margin is primarily related to a less favorable sales
mix expected from L.E. Smith, as well as a projected increase in costs from the
hotel operations primarily resulting from additional depreciation and
amortization related to the renovations completed during fiscal 1997.

Marketing, general and administrative expenses totaled $3.2 million for the year
ended June 30, 1997, compared to $2.7 million for the previous fiscal year. The
increase resulted primarily from increased sales and marketing activities, as
well as the inclusion of the glass manufacturing and hotel operations for a full
twelve months in fiscal 1997, while these operations were only included since
their acquisition dates, August 1, 1995 and August 4, 1995, respectively, in the
same period of fiscal 1996. Included in marketing, general and administrative
expenses incurred in fiscal 1997 were payroll and related expenses of $1.4
million, commissions to outside sales representatives of $429,000, and legal,
accounting, hotel management and other professional fees totaling $250,000.

Total marketing, general and administrative expenses are expected to increase
moderately in fiscal 1998, compared to fiscal 1997, primarily due to general
cost increases and increased sales and marketing activities.

The Company recorded a net gain on investments of $601,000 in fiscal 1997,
compared to a net gain on investments of $354,000 for fiscal 1996. For the year
ended June 30, 1997, the Company recorded a net realized gain on investments of
$419,000 and a net unrealized gain on investments of $182,000. This compares to
a net realized gain on investments of $663,000 and a net unrealized loss on
investments of $309,000 recorded in fiscal 1996. 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.

Other income totaled $208,000 for the year ended June 30, 1997 and included
income of $348,000, net of legal fees, related to the recovery of a note
receivable for which the Company had previously established a reserve, partially
offset by expenses of $126,000 for architect fees related to hotel improvement
projects that the Company has decided not to pursue. Other income for the year
ended June 30, 1996 totaled $50,000.

The Company recorded income tax provisions from continuing operations of
$105,000 and $172,000 for the years ended June 30, 1997 and 1996, respectively,
including $123,000 and $130,000, respectively, of state income tax provisions,
primarily related to the Company's Pennsylvania operations. 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,
future utilization of any income tax benefit from pre-reorganization net
operating loss carryforwards are not credited to the income tax provision, but
rather, reported as an addition to capital in excess of par value. No pre-
reorganization net operating loss carryforwards were utilized during fiscal 1997
or 1996.

DISCONTINUED OPERATIONS

During April 1995, NBI, Ltd. completed a sale of certain assets of the company
including its customer base. NBI, Ltd. filed for voluntary liquidation in the
U.K. during fiscal 1996. As of June 30, 1997, the liquidation of NBI, Ltd. was
substantially complete.

As of June 30, 1995, NBI, Inc. discontinued all software development activities.
The Company had no expenditures for product development and engineering for the
years ended June 30, 1997 or 1996, respectively.

In August 1996, the Company decided to dispose of its AlphaNet division. During
fiscal 1997, the Company completed its disposition of this division through a
sale of certain assets and the assumption of certain liabilities of the
operation.

With the decision to dispose of its AlphaNet division, the Company discontinued
all of its operations in the computer industry segment. Therefore, it
separately reported the income (loss) from this segment as discontinued
operations for the years ended June 30, 1997 and 1996.

8
<PAGE>

The Company reported net income from discontinued operations in fiscal 1997 of
$354,000 compared to a net loss of $137,000 in fiscal 1996. The improved
results in fiscal 1997 were primarily due to a gain on the disposition of NBI,
Ltd. of $402,000 recorded in fiscal 1997, including a $316,000 translation gain
recognized as a result of the substantial completion of the company's
liquidation. The net income (loss) from discontinued operations was net of an
income tax benefit of $24,000 and $68,000 in fiscal years 1997 and 1996,
respectively. No federal or state income taxes were recorded related to the
gain on disposal of NBI, Ltd., because it is a foreign entity. Revenues from
the discontinued operations totaled $395,000 and $776,000 for the years ended
June 30, 1997 and 1996, respectively.

FINANCIAL CONDITION

Total current assets of the Company decreased $1.1 million, or 20.4%, during
fiscal year 1997 from $5.3 million at June 30, 1996 to $4.2 million at June 30,
1997. The decline in current assets during fiscal 1997 was primarily related to
the absence of both a receivable of $498,000 for proceeds from short-sale
transactions and $108,000 related to a land option, because this option was
exercised during fiscal 1997. In addition, the Company experienced an overall
decrease of $449,000 in cash and cash equivalents during fiscal 1997 (see
"Liquidity and Capital Resources").

Total assets of $11.5 million at June 30, 1997 reflected an increase of $1.3
million from June 30, 1996 and was primarily related to an increase in hotel
property and equipment of $1.1 million related to the renovations, the majority
of which was funded by a mortgage note.

Current liabilities increased $4.6 million to $8.4 million at June 30, 1997,
primarily due to the reclassification of the IRS debt of $5.3 million to current
liabilities during the second quarter of fiscal 1997 (see "Liquidity and Capital
Resources"). This increase was partially offset by a reduction of $533,000 in
short-term borrowings and current portion of notes payable resulting from
payments during fiscal 1997, as well as a decline of $382,000 in obligations
from short-sale transactions.

Stockholders' equity of $1,025,000 at June 30, 1997 increased $725,000 from
$300,000 at June 30, 1996, primarily reflecting net income from continuing
operations of $690,000 for fiscal 1997. As previously discussed, the net income
from discontinued operations included a $316,000 translation gain, related to
the completion of NBI, Ltd.'s liquidation, which has no effect on total
stockholders' equity.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents decreased $449,000 during fiscal 1997, primarily due
to working capital requirements. As previously discussed, a majority of the
hotel renovations were funded by a mortgage note. In addition, the land
purchase, discussed below, was funded by cash and cash equivalents generated
from investment gains and the recovery of a note receivable.

The Company had negative working capital of $4.2 million at June 30, 1997,
compared to working capital of $1.5 million at June 30, 1996. The decline of
$5.7 million in working capital was primarily related to the reclassification
of the IRS debt to current during the second quarter of fiscal 1997. In
addition, in January 1997, the Company exercised its purchase option of $1
million for 88 acres of undeveloped land located in southwestern Pennsylvania.
The purchase was funded by cash and cash equivalents. The Company plans to
pursue commercial development of the property and is currently exploring
financing options to fund the project. These declines were partially offset by
$690,000 of income from continuing operations for fiscal 1997.

In conjunction with its franchise agreement, the Company's hotel operation
completed approximately $1.1 million in renovations to the hotel during fiscal
1997. As a result of these renovations, the Company is now in compliance with
the Holiday Inn franchise agreement provisions regarding its property
improvement requirements. During the second quarter of fiscal 1997, the Company
was successful in obtaining a first mortgage on the hotel assets to fund a
majority of these renovations.

Included in construction in progress at June 30, 1997 was $15,000 related to a
roofing project at L.E. Smith. The Company estimates that it will cost
approximately $385,000 to complete this project, which is expected to be

9
<PAGE>

completed in the second quarter of fiscal 1998. The construction costs will be
funded by short-term borrowings under L.E. Smith's existing line of credit.

The entire outstanding principal balance on the IRS debt of $5,278,000 at June
30, 1997 is due in full on October 1, 1997 and was reclassified to current
liabilities during the second quarter of fiscal 1997. This condition raises
substantial doubt about the Company's ability to continue as a going concern.
In order to pay such amount, the Company will need to obtain additional debt or
equity financing. The Company is currently pursuing various financing
alternatives; however, there can be no assurance that the Company will be able
to obtain such financing or that if it is able to obtain such financing, that it
will be on favorable terms. The Company's ability to continue as a going
concern is dependent upon attainment of financing sufficient to pay off the IRS
debt when due. See also Report of Independent Certified Public Accountants and
Notes 8 and 18 to the Consolidated Financial Statements.

The Company expects its other working capital requirements in the next fiscal
year to be met by existing working capital at June 30, 1997, internally
generated funds and, for L.E. Smith's requirements, short-term borrowings under
an existing line of credit.

TAX LOSS CARRYFORWARDS

As discussed in Note 8 to the accompanying consolidated financial statements,
the Company has approximately $62 million of tax loss carryforwards. A
valuation allowance of $23 million has been established for the net deferred tax
assets arising from the tax loss carryforwards because, in the Company's
assessment, it is more likely than not that the net deferred tax assets will not
be realized.

ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

On March 3, 1997, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." This pronouncement provides a different method of calculating earnings
per share than is currently used in accordance with Accounting Principles Board
Opinion No. 15, "Earnings per Share." 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 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 an entity, similar to fully diluted earnings per
share. The Company will adopt SFAS No. 128 in fiscal 1998 and its
implementation is not expected to have a material effect on the financial
statements.

In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income" which
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is defined to include
all changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under current accounting standards
as components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements.

Also, in June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise". SFAS No. 131 establishes
standards for the way that public companies report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products
and services, geographic areas and major customers. SFAS No. 131 defines
operating segments as components of a company about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.

Both SFAS No. 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Because of the recent issuance of these
standards, management has been unable to fully evaluate the impact, if any, they
may have on future financial statement disclosures. Results of operations and
financial position, however, will be unaffected by implementation of these
standards.

10
<PAGE>

ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of NBI, Inc.

We have audited the accompanying consolidated balance sheet of NBI, Inc. and
subsidiaries as of June 30, 1997, and the related consolidated statements of
income, stockholders' equity (deficit) and cash flows for the years ended June
30, 1997 and 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NBI, Inc. and
subsidiaries at June 30, 1997, and the results of their operations and their
cash flows for the years ended June 30, 1997 and 1996 in conformity with
generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 18 to
the financial statements, the Company may not be able to meet the payment terms
of the IRS debt within the contractual terms of the agreement. This condition
raises substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 18. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

/s/ BDO Seidman, LLP
BDO Seidman, LLP

Denver, Colorado
July 24, 1997

11
<PAGE>

NBI, INC.
CONSOLIDATED BALANCE SHEET
June 30, 1997
(Amounts in thousands, except share data)

<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 333
Accounts receivable, less allowance for doubtful accounts of $97 1,231
Inventories 2,470
Other current assets 189
-------
Total current assets 4,223

Property, plant and equipment, net 6,869
Other assets 404
-------
$11,496
-------
-------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Short-term borrowings and current portion of notes payable $ 921
Obligation for short-sale transactions 111
Current portion of IRS debt and other income taxes payable 5,274
Accounts payable 960
Accrued liabilities 1,154
-------
Total current liabilities 8,420
Long-term liabilities:
Notes payable 1,604
Deferred income taxes 251
Postemployment disability benefits 196
-------
Total liabilities 10,471
-------

Commitments and contingencies

Stockholders' equity:
Common stock - $.01 par value (20,000,000 shares
authorized; 10,005,020 shares issued) 100
Capital in excess of par value 6,178
Accumulated deficit (4,385)
-------
1,893
Less treasury stock, at cost (2,027,200 shares) (868)
-------
Total stockholders' equity 1,025
-------
$11,496
-------
-------
</TABLE>

See accompanying notes to consolidated financial statements.

12
<PAGE>
NBI, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 1997 and 1996
(Amounts in thousands, except per share data)

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Revenues:
Sales $11,697 $ 9,972
Service and rental 1,972 1,795
------- -------
13,669 11,767
Costs and expenses:
Cost of sales 8,314 7,172
Cost of service and rental 1,483 1,273
Marketing, general and administrative 3,217 2,702
------- -------
13,014 11,147
------- -------
Income from operations 655 620
------- -------

Other income (expense):
Interest income 17 28
Net gain on investments 601 354
Other income 208 50
Interest expense (686) (655)
------- -------
140 (223)
------- -------

Income from continuing operations before provision
for income taxes 795 397
Provision for income taxes (105) (172)
------- -------

Income from continuing operations 690 225
Income (loss) from discontinued operations, net of
income tax benefit of $24 in 1997 and $68 in 1996 354 (137)
------- -------
Net income $ 1,044 $ 88
------- -------
------- -------

Income per common share:
Income from continuing operations .09 .03
Income (loss) from discontinued operations .04 (.02)
------- -------
Net income $ .13 $ .01
------- -------
------- -------

Weighted average number of common and
common equivalent shares outstanding 7,991 6,923
------- -------
------- -------
</TABLE>

See accompanying notes to consolidated financial statements.

13
<PAGE>

NBI, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended June 30, 1997 and 1996
(Amounts in thousands, except share data)

<TABLE>
<CAPTION>
Common Foreign
Number of Stock Capital in Currency
Common (Par Value Excess of Accumulated Translation Treasury
Shares $.01) Par Value Deficit Adjustment Stock Total
---------- ---------- ---------- ----------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1995 10,001,270 $ 100 $ 5,769 $ (5,517) $ 311 $ (1,517) $ (854)

Foreign currency translation
adjustment -- -- -- -- 5 -- 5

Proceeds from private
placement, net of
offering costs -- -- 398 -- -- 649 1,047

Other -- -- 14 -- -- -- 14

Net income for the year
ended June 30, 1996 -- -- -- 88 -- -- 88
---------- ------ -------- --------- ------ --------- ------

Balance June 30, 1996 10,001,270 100 6,181 (5,429) 316 (868) 300

Issued under
Employee Stock
Option Plan 3,750 -- 2 -- -- -- 2

Realized translation gain
from discontinued
operations -- -- -- -- (316) -- (316)

Other -- -- (5) -- -- -- (5)

Net income for the year
ended June 30, 1997 -- -- -- 1,044 -- -- 1,044
---------- ------ -------- --------- ------ --------- ------

Balance June 30, 1997 10,005,020 $ 100 $ 6,178 $ (4,385) $ -- $ (868) $1,025
---------- ------ -------- --------- ------ --------- ------
---------- ------ -------- --------- ------ --------- ------
</TABLE>

See accompanying notes to consolidated financial statements.

14
<PAGE>

NBI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)

<TABLE>
<CAPTION>
Year Ended
June 30,
----------------
1997 1996
------- ------
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,044 $ 88
Adjustments to reconcile net income to net cash
flow provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . 591 480
Realized translation gain from discontinued operations. (316) --
Provision for bad debts and returns . . . . . . . . . . 112 125
Provision for writedown of inventories. . . . . . . . . 105 123
Gain on sales of property and equipment . . . . . . . . (9) (2)
Net unrealized loss (gain) on trading securities. . . . (182) 309
Other . . . . . . . . . . . . . . . . . . . . . . . . . (4) (49)
Changes in assets -- decrease (increase):
Accounts receivable . . . . . . . . . . . . . . . . . 231 (144)
Inventories . . . . . . . . . . . . . . . . . . . . . (243) (276)
Trading securities. . . . . . . . . . . . . . . . . . -- 4,010
Other current assets. . . . . . . . . . . . . . . . . 586 (578)
Changes in liabilities -- (decrease) increase:
Obligations for short-sale transactions . . . . . . . (200) 493
Accounts payable and accrued liabilities. . . . . . . (128) (272)
Income tax related accounts . . . . . . . . . . . . . (88) (897)
------- ------
Net cash flow provided by operating activities. . . . . 1,499 3,410
------- ------

Cash flows from investing activities:
Payments for business acquisitions, net of cash acquired . -- (3,483)
Proceeds from sales of property and equipment. . . . . . . 23 2
Purchases of property and equipment. . . . . . . . . . . . (2,868) (636)
Payments for land option . . . . . . . . . . . . . . . . . -- (108)
------- ------
Net cash flow used in investing activities . . . . . . . . (2,845) (4,225)
------- ------
</TABLE>

(continued on following page)

See accompanying notes to consolidated financial statements

15
<PAGE>

NBI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)

<TABLE>
<CAPTION>
Year Ended
June 30,
----------------
1997 1996
------- ------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of stock, net of offering costs . . (5) 1,047
Proceeds from borrowing. . . . . . . . . . . . . . . . . . 1,650 --
Proceeds from stock option exercises . . . . . . . . . . . 2 --
Payments on notes payable. . . . . . . . . . . . . . . . . (208) (462)
Net payments on line of credit and short-term margin
borrowings . . . . . . . . . . . . . . . . . . . . . . . . (595) (871)
------- ------
Net cash flow provided by (used in) financing activities 844 (286)
------- ------

Effects of exchange rates on cash. . . . . . . . . . . . . . -- 5
------- ------

Net decrease in cash and cash equivalents. . . . . . . . . . (502) (1,096)

Decrease (increase) in cash and cash equivalents included
in net assets of discontinued operations . . . . . . . . 53 (53)

Cash and cash equivalents at beginning of year . . . . . . . 782 1,931
------- ------

Cash and cash equivalents at end of year . . . . . . . . . . $ 333 $ 782
------- ------
------- ------

Supplemental disclosures of cash flow information:

Interest paid. . . . . . . . . . . . . . . . . . . . . . . $ 663 $ 676
------- ------
------- ------

Income taxes paid:
Payments on IRS debt. . . . . . . . . . . . . . . . . . $ -- $ 864
Other income tax payments . . . . . . . . . . . . . . . 163 109
------- ------
$ 163 $ 973
------- ------
------- ------

Noncash purchases of property, plant and equipment
included in accounts payable at end of year . . . . . . $ 99 $ 127
------- ------
------- ------
</TABLE>

See accompanying notes to consolidated financial statements.

16
<PAGE>

NBI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997 and 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS DESCRIPTION: With the business acquisitions completed during the first
quarter of fiscal 1996 (see Note 2), the Company now operates primarily in the
glass manufacturing and hotel operations industries. Both of these operations
are located in southwestern Pennsylvania. The Company also owns 80% of a small
children's paint and novelty toy manufacturing company in Las Vegas, Nevada.
Previously, the Company operated primarily in the computer industry. Those
operations have been discontinued and reported separately (see Note 3).

PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company, its wholly-owned subsidiaries, and its 80% owned
children's paint and novelty toy manufacturing subsidiary. All significant
intercompany accounts, transactions and profits have been eliminated. The
Company records the minority interest in consolidated net assets equal to the
minority's percentage ownership in the net assets of the subsidiary entity, to
the extent the minority interest is positive. At June 30, 1997, the minority
interest in the children's paint manufacturing subsidiary was a deficit balance
and was limited to zero, accordingly. The minority's share of income (losses)
is shown as a separate component of consolidated net income, if significant. In
addition, the minority's share of losses are recorded only until the minority
interest in the net asset of the subsidiary has been reduced to zero.

USE OF ESTIMATES: Preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions. These estimates or assumptions affect reported amounts of
assets, liabilities, revenue and expenses as reflected in the financial
statements. Actual results could differ from those estimates.

FAIR VALUES OF FINANCIAL INSTRUMENTS: Unless otherwise specified, the Company
believes the book value of financial instruments approximates their fair value.

RECENT ACCOUNTING PRONOUNCEMENTS: On March 3, 1997, the Financial Accounting
Standards Board ("FASB") issued the Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share." This pronouncement provides a different
method of calculating earnings per share than is currently used in accordance
with Accounting Principles Board Opinion No. 15, "Earnings per Share." 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
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 an entity, similar to
fully diluted earnings per share. The Company will adopt SFAS No. 128 in fiscal
1998 and its implementation is not expected to have a material effect on the
financial statements.

17
<PAGE>

CASH: 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.

INVESTMENTS IN SECURITIES:

The Company's accounting policies for investments in securities are as follows:

TRADING SECURITIES: Trading securities are held for resale in anticipation of
short-term market movements. These types of securities, consisting of
marketable debt and equity securities, are stated at fair market value. Gains
and losses, both realized and unrealized, are included in net gain (loss) on
investments when incurred. All dividends, interest and discount or premium
amortization is included in interest income as earned. Cash flows from
purchases and sales of trading securities are classified as cash flows from
operating activities rather than from investing activities.

SECURITIES HELD-TO-MATURITY: Debt securities are classified as held-to-maturity
when the Company has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost. Interest
earned on securities classified as held-to-maturity, including any discount or
premium amortization, is included in interest income as earned.

AVAILABLE FOR SALE: Marketable equity securities and debt securities not
classified as either trading or held-to-maturity are classified as available-
for-sale. Available-for-sale securities are carried at fair market value, with
the unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity. Realized gains and losses and declines in value judged to
be other-than-temporary on available-for-sale securities are included in net
gain (loss) on investments and other income (expense) when incurred. The cost
of securities sold is based on the specific identification method. Interest and
dividends earned on securities classified as available-for-sale, including any
discount or premium amortization, are included in interest income as earned.

INVENTORIES: Inventories are stated at the lower of cost (at standard which
approximates first-in, first-out method) or market and were comprised of the
following:

JUNE 30,
1997
------
(AMOUNTS IN THOUSANDS)
Raw Materials $ 858
Work in Process 303
Finished Goods 1,294
Food and Beverage Inventory 15
-------
$ 2,470
-------
-------

PROPERTY, PLANT AND EQUIPMENT: Capital assets are recorded at cost and are
depreciated on a straight-line basis over the following lives:

ASSET TYPE LIFE
---------- ----
Land N/A
Buildings and building improvements 20-25 years
Machinery and equipment 3-15 years
Office and hotel furniture, fixtures 5-10 years
Construction-in-progress N/A

18
<PAGE>

LONG-TERM ASSETS: The Company applies SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets". Under SFAS No. 121, long-lived assets and
certain identifiable intangibles are reported at the lower of the carrying
amount or their estimated recoverable amounts.

TRANSLATION OF FOREIGN CURRENCIES: Accounts of foreign subsidiaries were
maintained in the currencies of the countries in which they operated and were
translated to U.S. dollars in conformity with generally accepted accounting
principles. Adjustments resulting from the translation of foreign currency
financial statements were deferred and classified as a separate component of
stockholders' equity.

The translation adjustment at June 30, 1996 was related to the Company's foreign
subsidiary, NBI Ltd. which filed for voluntary liquidation in the U.K. during
fiscal 1996 (see Note 3). Because this liquidation was substantially complete
at June 30, 1997, the translation adjustment was recorded as a realized gain and
included in the net gain from disposal of discontinued operations.

STOCK OPTION PLAN: The Company applies APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations in accounting for its stock
option plan. Under APB Opinion No. 25, no compensation cost has been recognized
for stock options granted, as the option price equals or exceeds the market
price of the underlying common stock on the date of grant. SFAS No. 123,
"Accounting for Stock-Based Compensation" requires the Company to provide pro
forma information regarding net income as if compensation cost for the Company's
stock option plan had been determined in accordance with the fair value based
method prescribed in SFAS No. 123. To provide the required pro forma
information, the Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model.

REVENUE RECOGNITION: Revenue from sales of products from all operations is
recognized when title passes, generally when the goods are shipped. Service and
rental revenue from the hotel operations is recognized when provided.

NET INCOME (LOSS) PER SHARE: Net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of common shares and,
if dilutive, common equivalent shares outstanding during the period. Common
equivalent shares recognize the potential dilutive effects of the future
exercise of stock options, warrants, convertible debt and convertible preferred
shares. For the years ended June 30, 1997 and 1996, the Company had no
preferred stock or convertible debt. In 1997 and 1996 the common equivalent
shares were not included in the computation because their effect is not
dilutive.

RECLASSIFICATIONS AND ADJUSTMENTS: Certain items in the 1996 financial
statements have been reclassified to conform to the 1997 manner of presentation.
The Company recorded a $99,000 reduction to cost of sales in the fourth quarter
of fiscal 1996 to correct a first quarter overstatement.

NOTE 2 - BUSINESS ACQUISITIONS

On August 4, 1995, NBI, Inc. acquired 100% of the outstanding capital stock of
the Belle Vernon Motel Corporation for $2,430,000 in cash. The Belle Vernon
Motel Corporation owns and operates an 81 room Holiday Inn in Southwestern
Pennsylvania. The primary assets held by the acquired corporation consist of
cash, accounts receivable, property and equipment. The Company received
approval as an authorized Holiday Inn franchisee prior to the purchase
transaction. The property and equipment acquired continues to be operated as a
Holiday Inn Hotel. During fiscal 1996, the Company changed the name of the
Belle Vernon Motel Corporation to NBI Properties, Inc.

On August 14, 1995, with an effective date of close of business on July 31,
1995, American Glass, Inc., a newly formed, wholly-owned subsidiary of NBI,
Inc., completed its purchase of a majority of the assets of L.E. Smith Glass
Company of Mount Pleasant, Pennsylvania. L.E. Smith Glass Company is a
manufacturer of handmade fine glass giftware and lighting fixtures and has been
in business since 1907. The assets purchased consisted primarily of accounts
receivable, inventories, and property, plant and equipment. The property, plant
and equipment acquired continues to be used in the manufacture of handmade fine
glass giftware and lighting fixtures. The final adjusted purchase price of
$5,770,000 was paid through the assumption of $3,449,000 of certain liabilities
at July 31, 1995, cash, and cash proceeds from the liquidation of other current
assets held by the Company.

19
<PAGE>

Both acquisitions have been accounted for under the purchase method of
accounting. The results of operations of these acquired businesses have been
included in the accompanying Statements of Income since the effective dates of
acquisition. The total purchase price, including acquisition costs, for the
Belle Vernon Motel Corporation and the L.E. Smith Glass Company was $2,496,000
and $5,913,000, respectively. The fair market value of the net assets acquired
of the Belle Vernon Motel Corporation exceeded the purchase price by $844,000.
Accordingly, the noncurrent assets consisting of property and equipment have
been reduced by this amount under the purchase method of accounting. Similarly,
the fair market value of the net assets acquired of the L.E. Smith Glass Company
exceeded the purchase price by $916,000; therefore, the noncurrent assets
consisting of property, plant and equipment were reduced by this amount.

Unaudited proforma consolidated results of operations of the Company are shown
in the following table as if these businesses were acquired as of the first day
of the period presented, July 1, 1995. This unaudited proforma information is
based on the Company's accompanying Statements of Income and the historical
financial information of the acquired companies, and includes adjustments to
income taxes and depreciation, giving effect of the terms of the transaction as
if the acquisitions had occurred on the first day presented.

Unaudited proforma consolidated results of operations:

YEAR ENDED
JUNE 30, 1996
-------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)

Revenue $12,591
-------
-------

Income from continuing operations before
cumulative effect of accounting change $ 257
-------
-------

Net income $ 120
-------
-------

Income per common share from continuing operations
before cumulative effect of accounting change $ .04
-------
-------

Net income per common share $ .02
-------
-------

No proforma information has been presented for the year ended June 30, 1997, as
the actual results of operations from these acquisitions have been included in
the accompanying Statement of Income.

3. DISCONTINUED OPERATIONS

As of June 30, 1995, NBI, Inc. discontinued all software development activities.
The Company had no expenditures for product development and engineering for the
years ended June 30, 1997 or 1996.

On August 27, 1996, the Company decided to dispose of its AlphaNet division.
During fiscal 1997, the Company completed its disposition of this division
through a sale of certain assets and the assumption of certain liabilities of
the operation.

20
<PAGE>

YEAR YEAR
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
(AMOUNTS IN THOUSANDS)

Revenues from discontinued operations $395,000 $ 776,000
-------- ---------
-------- ---------

Loss from discontinued operations before
income taxes $ -- $(205,000)
Income tax benefit -- 68,000
-------- ---------
Net loss from discontinued operations $ -- $(137,000)
-------- ---------

Gain (loss) on disposal
NBI, Ltd. $402,000 --
AlphaNet Division (72,000) --
(including loss from operations of $67,000
from August 27, 1996 through its disposition)
Income tax benefit 24,000 --
-------- ---------
$354,000 $ --
-------- ---------

Net income (loss) from discontinued operations $354,000 $(137,000)
-------- ---------
-------- ---------

The gain on disposal of NBI, Ltd. included a $316,000 translation gain
recognized as a result of the substantial completion of the company's
liquidation. No federal or state income taxes were recorded related to the gain
on disposal of NBI, Ltd., as it is a foreign entity.

4. INVESTMENTS IN SECURITIES AND OBLIGATIONS FROM SHORT-SALE TRANSACTIONS

During the year ended June 30, 1997, all of the Company's securities were
classified as trading securities; no securities were classified as held-to-
maturity or available-for-sale. The Company recorded a net realized gain of
$419,000 and a net unrealized gain of $182,000 on investments for the year ended
June 30, 1997. For the year ended June 30, 1996, a net realized gain of
$663,000 and a net unrealized loss of $309,000 were recorded.

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 June 30, 1997, the Company had one short investment position totaling
$111,000 which was included in obligation from short-sale transactions. This
short position was closed subsequent to year-end, resulting in a $39,000 net
loss.

5. OTHER CURRENT ASSETS

Included in other current assets totaling $189,000 at June 30, 1997, was
restricted cash of $19,000, representing amounts held in trust for payments
under self insurance plans.

21
<PAGE>

6. PROPERTY, PLANT AND EQUIPMENT

JUNE 30,
1997
------
(AMOUNTS IN THOUSANDS)

Land $ 1,218
Buildings 2,642
Machinery and equipment 3,228
Office and hotel furniture and fixtures 791
Construction in-progress 495
-------
8,374
Accumulated depreciation (1,505)
-------
$ 6,869
-------
-------

Total depreciation expense from continuing operations was $552,000 and $435,000
for the years ended June 30, 1997 and 1996, respectively. Included in
construction in progress at June 30, 1997 was $15,000 related to a roofing
project at L.E. Smith. The Company estimates that it will cost approximately
$385,000 to complete this project, which is expected to be competed in the
second quarter of fiscal 1998.

7. OTHER ASSETS

Included in other assets of $404,000 at June 30, 1997, was $219,000 of goodwill
and other intangibles related to the acquisition of 80% of the outstanding stock
of Krazy Colors during fiscal 1995. The goodwill and other intangibles are net
of accumulated amortization totaling $74,000 at June 30, 1997, and are being
amortized on a straight-line basis over ten years. The carrying value of
goodwill is periodically reviewed by the Company, and impairments, if any, are
recognized when expected future discounted cash flows derived from goodwill is
less than its carrying value. Related amortization expense was $29,000 for both
the years ended June 30, 1997 and 1996, respectively. Also included in other
assets at June 30, 1997 was $47,000 of deferred offering costs related to an
offering being considered by the Company (see Note 18).

8. INCOME TAXES

IRS DEBT:

On October 13, 1995, the Company entered into an agreement in principle with the
IRS, effective October 1, 1995. This agreement revises the payment terms
provided in its settlement agreement with the IRS dated June 12, 1991, as to
NBI's federal income tax liabilities for the fiscal years ended June 30, 1980
through 1988. The new agreement provided for a principal payment of $250,000,
plus accrued interest for the period July 1, 1995 through September 30, 1995, at
the original stated rate, and accrued interest for the period October 1, 1995
through December 31, 1995, at the rate of 7.5% per annum, which was paid upon
execution of the definitive agreement on March 19, 1996. Subsequently,
quarterly interest payments are due beginning April 1, 1996 through October 1,
1997. Interest was paid and accrued on the outstanding principal balance at the
rate of 7.5% for the period October 1, 1995 through March 31, 1996. The
interest rate for April 1, 1996 through October 1, 1997 is being negotiated,
under the terms of the agreement, based upon NBI's ability to pay the statutory
rate, but in no event will the interest rate for this period exceed the lesser
of the statutory rate or 10%. The Company is paying interest on the scheduled
payment dates based upon the rate of 7.5% for this period until the negotiations
are finalized. The remaining principal balance is due in full on October 1,
1997.

In order to pay such amount, management intends to obtain additional debt or
equity financing. The Company is currently pursuing various financing
alternatives; however there can be no assurances the Company will be able to
obtain such financing. The Company's ability to continue as a going concern is
dependent upon attainment of financing sufficient to pay off the IRS debt when
due. (See Note 18.)

22
<PAGE>

In conjunction with the new agreement, the Company granted the IRS a security
interest in all of the capital stock of American Glass, Inc., d/b/a L.E. Smith
Glass Company, as well as all of the capital stock of NBI Properties, Inc. The
security interest will automatically terminate upon full payment by NBI of all
principal and interest owed to the IRS under the agreement. The agreement also
provides for accelerated principal payments to be made within forty-five days
after the end of any fiscal quarter in which NBI, Inc.'s unconsolidated cash and
cash equivalents, excluding restricted cash, exceed $1.3 million. The Company
is required to pay to the IRS fifty percent of the amount by which such cash and
cash equivalents exceed $1.3 million. Any such payment shall be applied to and
shall reduce the outstanding principal balance.

There is no accelerated principal amount payable in accordance with the revised
agreement based upon the Company's cash and cash equivalents at June 30, 1997.

INCOME TAX PROVISION AND DEFERRED INCOME TAXES:

The Company accounts for income taxes in conformity with FAS 109. Under the
provisions of FAS 109, a deferred tax liability or asset (net of a valuation
allowance) is provided in the financial statements by applying the provisions of
applicable tax laws to measure the deferred tax consequences of temporary
differences which result in net taxable or deductible amounts in future years as
a result of events recognized in the financial statements in the current or
preceding years.

For the years ended June 30, 1997 and 1996, the provision for income taxes was
included in the consolidated statements of operations as follows:

1997 1996
----- ----
(AMOUNTS IN THOUSANDS)
Continuing operations $ 105 $172
Discontinued operations (benefit) (24) (68)
------ ----
$ 81 $104
------ ----
------ ----

The provision for income taxes from continuing operations for the years ended
June 30, 1997 and 1996 consisted of:

1997 1996
---- ----
(AMOUNTS IN THOUSANDS)
Federal:
Current $ -- $ --
Deferred 24 82
---- ----
24 82
---- ----

State and other:
Current 40 90
Deferred 41 --
---- ----
81 90
---- ----

Total $105 $172
---- ----
---- ----

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
United States Bankruptcy Code, future utilization of any income tax benefit from
pre-reorganization net operating losses are not credited to the income tax
provision, but rather, reported as an addition to capital in excess of par
value. No pre-reorganization net operating loss carryforwards were utilized in
fiscal 1997 or 1996.

23
<PAGE>

The reconciliation of income taxes from continuing operations at the U.S.
federal statutory tax rate to the effective tax rate is as follows:

1997 1996
------ ------
(AMOUNTS IN THOUSANDS)
Federal tax expense computed at 34% on
income from continuing operations before
provision for income taxes $ 270 $ 135

State taxes, net of federal benefit 81 86

Change in the balance of the valuation
allowance for deferred tax assets and other (246) (49)
------ ------

Total income taxes from continuing operations $ 105 $ 172
------ ------
------ ------

Significant components of the Company's deferred tax liabilities and assets as
of June 30, 1997 were as follows:

1997
--------
(AMOUNTS IN THOUSANDS)

Deferred tax assets:
Current
Interest portion of IRS Settlement amount $ 909
Other 299
Noncurrent
Net operating loss carryforwards 20,971
Capital loss carryforwards 443
Tax basis in subsidiaries 595
Other - net 326
--------
Total deferred tax assets 23,543

Valuation allowance for deferred tax assets (23,076)
--------

Net deferred tax assets 467
--------

Deferred tax liabilities:
Noncurrent
Other 235
Basis difference in fixed assets assumed
with Belle Vernon Holiday Inn acquisition 483
--------

Total deferred tax liabilities: 718
--------

Net deferred tax liability $ (251)
--------
--------

The net change in the valuation allowance was a decrease of $184,000 for the
year ended June 30, 1997, and an increase of $309,000 for the year ended
June 30, 1996.

The valuation allowance of $23,076,000 at June 30, 1997 was established because
the Company has not been able to determine that it is more likely than not that
the net deferred tax assets will be realized.

24
<PAGE>

The tax loss carryforward at June 30, 1997 is approximately $62,000,000, of
which approximately $18,000,000, $14,000,000, $14,000,000, $7,000,000,
$4,000,000, $3,000,000, $1,000,000 and $1,000,000 expire in fiscal years 2004,
2005, 2006, 2008, 2009, 2010, 2011 and 2012, respectively.

9. ACCRUED LIABILITIES
JUNE 30,
1997
------
(AMOUNTS IN THOUSANDS)

Accrued interest $ 217
Payroll and related benefits and taxes 436
Acquired liabilities under previously self-insured
health and other benefit plans 117
Other 384
------
$1,154
------
------

10. NOTES PAYABLE AND SHORT-TERM BORROWINGS

The following summarizes the Company's notes payable and short-term borrowings
outstanding at:

JUNE 30,
1997
--------
(AMOUNTS IN THOUSANDS)

Revolving bank credit note of $2,000,000, due November 1,
1998, interest at bank's prime rate (8.50% at June 30,
1997) plus 1/2% or less, depending upon attainment of
certain financial ratios as defined in the agreement;
collateralized by a first security interest in all
accounts receivable, inventories and personal property
of the glass manufacturing company. $ 653

8.75% bank note payable; payable in monthly installments
of $8,333 plus interest through July 1999; cross
collateralized with the revolving credit note above. 200

Bank note payable in monthly installments of $10,834 plus
interest at bank's prime rate plus 1/2% or less,
depending upon the attainment of certain financial
ratios, commencing on June 1, 1997, with the outstanding
principal balance plus accrued interest due in full on
May 1, 2002. The note is cross-collateralized with the
glass manufacturing company's revolving bank credit note
and 8.75% bank note payable. 650

Bank mortgage note of $1,000,000 obtained December 3, 1996
for hotel renovations. Principal and interest at 8.85%
is payable in monthly installments of $9,000 beginning
July 1, 1997. On July 1, 2002, the interest rate changes
to U.S. Treasury rate plus 2.7%. Note is due in full on
July 1, 2007 and is collateralized by a first security
interest in hotel assets. 1,000

Other 22
------
Total notes payable and short-term borrowings 2,525

25
<PAGE>

10. NOTES PAYABLE AND SHORT-TERM BORROWINGS (CONTINUED)

JUNE 30,
1997
--------
(AMOUNTS IN THOUSANDS)

Total notes payable and short-term borrowings 2,525

Current portion 921
-------

Long-term portion of notes payable $ 1,604
-------
-------

At June 30, 1997, the principal maturities of notes payable and short-term
borrowings for each of the subsequent fiscal years ending June 30 are: 1998 -
$921,000; 1999 - $256,000; 2000 - $154,000; 2001 - $156,000; 2002 - $159,000;
and 2003 - $879,000.

11. POSTEMPLOYMENT BENEFITS

During fiscal 1995, the Company adopted the provisions of Statements of
Financial Accounting Standards No. 112, "Employers' Accounting For
Postemployment Benefits" ("FAS 112"). The cumulative effect as of July 1, 1994
of adopting this standard reduced net income by $271,000.

The Company provides health care, life insurance, and disability benefits for
eligible active employees. Prior to adoption of FAS No. 112, the Company
recognized and funded the cost of these benefits over the employees' working
lives, except for self-insured long-term disability costs which were recognized
monthly as the disability continued. FAS No. 112 requires the Company to accrue
the expected costs over the employee service period.

As required by the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA"), the Company allows terminated employees who wish to continue health
care coverage to pay the expected cost to be incurred, as determined by the
insurance company administering the claims. However, because the Company is
self-insured for health care costs for its corporate and Krazy Colors, Inc.
employees, it is liable for any actual cost incurred in excess of the expected
costs. As of June 30, 1997, there were no such known amounts.

The Company's current life insurance and disability benefits are fully insured.
Accordingly, the Company has no further liability and no accrual is needed.
However, the Company previously had a disability benefit plan that was self-
insured, under which payments are still being made. In accordance with FAS No.
112, the Company accrued the present value of the expected payments discounted
at 10%, as of July 1, 1994, of $271,000. The expected payments were calculated
based upon the earlier of the expected duration of each individual's disability
or the time remaining until the individual reaches the age of 65, at which time
the benefits cease. The total liability outstanding at June 30, 1997, is
$214,000, of which $196,000 is classified as long-term.

12. COMMITMENTS AND CONTINGENCIES

LEASE COMMITMENTS:

The Company's hotel operations leases the land supporting its hotel, under an
operating lease expiring in the year 2026, with an option to extend for an
additional 25 years. The monthly lease payments are based upon 3% of room and
related revenue and 1% of other revenues of the hotel, with a minimum annual
rental of $8,000. Rent expense under this lease was $44,000 for the year ended
June 30, 1997 and $39,000 for the period August 4, 1995, the hotel acquisition
date, through June 30, 1996.

26
<PAGE>

The Company also leases various office facilities and equipment. The office
facilities and equipment leases from continuing operations have expiration dates
that extend through September 2000. Total rental expense for continuing
operations was $138,000 and $100,000 for the years ended June 30, 1997 and 1996,
respectively.

The future minimum rental commitments for continuing operations for the next
five fiscal years, under non-cancellable leases, are: 1998 - $147,000; 1999 -
$131,000; 2000 - $102,000; 2001 - $26,000 and 2002 - $8,000.

The Company also has non-cancellable facility and equipment leases related to
its discontinued operations. However, it has no liability related to the leases
of its subsidiary, NBI, Ltd., that is in the process of voluntary liquidation
(see Note 3).

OTHER COMMITMENTS AND CONTINGENCIES:

In conjunction with NBI's acquisition of Krazy Colors, Inc. in February 1995,
the stock purchase agreement provided for royalty payments to the sellers,
including NBI's CEO, based upon gross margin performance. Royalties are
calculated based upon gross margin in excess of $150,000 in any calendar year
and will be earned at the rate of twenty percent when the gross margin is
greater than $150,000 and less than or equal to $300,000, twenty-five percent
when the gross margin is greater than $300,000 and less than or equal to
$450,000, and thirty percent when the gross margin is greater than $450,000. No
royalties were incurred during the fiscal years ended June 30, 1997 and 1996.
(See also Note 17.)

In connection with its franchise agreement, the Company's hotel operation
completed approximately $1.1 million in renovations to the hotel during fiscal
1997. As a result of these renovations, the Company is now in compliance with
the Holiday Inn franchise agreement provisions regarding its property
improvement requirements.

13. STOCKHOLDERS' EQUITY

The Company has authorized 20,000,000 shares of $.01 par value common stock. At
June 30, 1997, 10,005,020 shares were issued including 2,027,200 held in
treasury. Therefore, the Company had 7,977,820 shares issued and outstanding
at June 30, 1997.

In accordance with the provisions of the Plan of Reorganization, on February 3,
1997, the fifth anniversary of its effective date, all of the new common stock
held for unexchanged holders of NBI's old common stock and convertible
debentures reverted to the Company. As a result, the Company received 23,164
shares of its common stock at no cost. These shares are held in treasury.

In March 1996, the Company issued 1,500,000 unregistered shares of its common
stock from shares held in treasury through a private placement stock offering.
The offering resulted in net proceeds of $1,047,000 which was used by the
Company first to pay obligations due to the IRS and then for operating capital
of the Company.

In February 1995, the Company issued warrants to purchase 1.7 million shares of
its common stock at $.89 per share in conjunction with an acquisition. These
warrants are exercisable through December 31, 2002. As of June 30, 1997, no
warrants had been exercised.

14. STOCK OPTIONS

The Employee Stock Option Plan was established pursuant to the Company's Plan of
Reorganization. At June 30, 1997, 896,250 shares were reserved under the
Employee Stock Option Plan. Options granted under this plan have an exercise
price of no less than fair market value and no more than 150% of fair market
value. The employee options are exercisable for a period of five years from the
date of the grant, unless previously forfeited. The options vest over four
years at 25% per year with vesting continuing as long as the optionee is
employed by the Company. Options are forfeited by the optionee three months
following termination of employment with the Company. The options granted under
this plan prior to fiscal 1996 are intended to be non-qualified stock options.
Those issued subsequent to fiscal 1995 are intended to be incentive stock
options.

27
<PAGE>

Options to purchase 150,000 shares of stock are outstanding at June 30, 1997,
that were issued to directors of the Company during fiscal 1993. These options
were not issued pursuant to an existing stock option plan and were immediately
exercisable on the grant date. These options are exercisable for a period of
five years from the date of grant.

Options to purchase 400,000 shares of stock were issued to the Chief Executive
Officer during fiscal 1994. These options were not issued pursuant to an
existing stock option plan. These options vest over four years at 25% per year
with vesting continuing as long as the optionee is employed as Chief Executive
Officer.

At June 30, 1997, 550,000 shares were reserved for options issued outside of the
Stock Option Plan.

The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost
has been recognized for the stock options. Had compensation cost been
determined based upon the fair value at the grant date for the options,
consistent with the provisions of SFAS No. 123, the Company's net income and
earnings per share for the years ended June 30, 1997 and 1996 would have been
reduced to the proforma amounts shown below:

YEARS ENDED
JUNE 30,
1997 1996
------ ----
Net income - as reported $1,044 $ 88
------ ----
------ ----
Net income - proforma $1,011 $ 88
------ ----
------ ----
Net income per share - as reported $ .13 $.01
------ ----
------ ----
Net income per share - proforma $ .13 $.01
------ ----
------ ----

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option - pricing model with the following assumptions for the
grants issued during fiscal 1996 (all on the same date): no dividend yield;
expected volatility of 45.61%; risk-free interest rate of 6.0% and expected
lives of 4 years.

During the initial phase-in period of SFAS 123, the effect on pro forma results
are not likely to be representative of the effects on pro forma results in
future years, since options vest over several years and additional awards could
be made each year.

The following table summarizes, by number of shares, option transactions under
all plans:
EMPLOYEE OTHER WEIGHTED-AVERAGE
PLAN OPTIONS TOTAL EXERCISE PRICE
-------- ------- --------- ----------------
Outstanding June 30, 1995 245,000 550,000 795,000 $ .55

Granted 360,000 -- 360,000 .88
Exercised -- -- -- --
Forfeited (3,500) -- (3,500) .38
------- ------- --------- -----
Outstanding June 30, 1996 601,500 550,000 1,151,500 .65

Granted -- -- -- --
Exercised (3,750) -- (3,750) .38
Forfeited (27,250) -- (27,250) .67
------- ------- --------- -----
Outstanding June 30, 1997 570,500 550,000 1,120,500 $ .66
------- ------- --------- -----
------- ------- --------- -----
Options exercisable
at June 30, 1997 305,000 450,000 755,000 $ .57
------- ------- --------- -----
------- ------- --------- -----

28
<PAGE>

EMPLOYEE OTHER
PLAN OPTIONS
-------- -------
Weighted-average fair
value of options
granted for the
year ended
June 30, 1996 $ .38 $ --
-------- ------
-------- ------
Weighted-average fair
value of options
granted for the
year ended
June 30, 1997 $ -- $ --
-------- ------
-------- ------

The following table summarizes information about the stock options outstanding
at June 30, 1997:

WEIGHTED-AVERAGE
REMAINING
EXERCISE NUMBER NUMBER CONTRACTUAL
PRICE OUTSTANDING EXERCISABLE LIFE
-------- ----------- ----------- ----------------
$.25 150,000 150,000 .22 years
$.38 226,500 219,000 .48 years
$.77 400,000 300,000 1.25 years
$.88 344,000 86,000 3.45 years
--------- -------

1,120,500 755,000
--------- -------
--------- -------

15. SEGMENT INFORMATION

With the business acquisitions completed during the first quarter of fiscal
1996, the Company now operates primarily in the glass manufacturing and hotel
operations industries. Both of these operations are located in southwestern
Pennsylvania. Previously, the Company operated primarily in the computer
industry. Those operations have been discontinued and reported separately (see
Note 3). The segment information presented below excludes amounts related to
general corporate activities.

The Company's glass manufacturer sells its glass giftware primarily to
traditional and specialty retailers, manufacturers/wholesalers and the food
service market throughout the United States. L.E. Smith Glass Company currently
has one significant customer and sales to this customer totaled approximately
28% and 26% of NBI's consolidated revenues in fiscal 1997 and 1996,
respectively. In addition, this customer constituted approximately 22% of the
Company's consolidated accounts receivable at June 30, 1997, while one other
customer, a national retailer, comprised another 12% of the accounts receivable
balance.

In addition, the glass manufacturer purchases a majority of its raw materials
from only a few vendors. Management believes that other suppliers could provide
similar materials on comparable terms.

As of June 30, 1997, approximately 61% of the Company's employees were covered
by collective bargaining agreements expiring in fiscal 1999.

29
<PAGE>

YEAR YEAR
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1996
------------- --------------
(AMOUNTS IN THOUSANDS)

Revenue from continuing operations:
Glass manufacturing $11,052 $ 9,500
------- -------
------- -------
Hotel operations $ 1,972 $ 1,795
------- -------
------- -------
Other operations $ 645 $ 472
------- -------
------- -------
Operating income (loss):
Glass manufacturing $ 1,376 $ 1,285
------- -------
------- -------
Hotel operations $ 5 $ 159
------- -------
------- -------
Other operations $ (121) $ (135)
------- -------
------- -------
Identifiable assets:
Glass manufacturing $ 6,595 $ 6,240
------- -------
------- -------
Hotel operations $ 2,919 $ 2,062
------- -------
------- -------
Other operations $ 1,694 $ 592
------- -------
------- -------
Additions to property, plant and equipment:
Glass manufacturing $ 701 $ 422
------- -------
------- -------
Hotel operations $ 1,154 $ 307
------- -------
------- -------
Other operations $ 1,146 $ 28
------- -------
------- -------
Depreciation and amortization:
Glass manufacturing $ 405 $ 343
------- -------
------- -------
Hotel operations $ 137 $ 80
------- -------
------- -------
Other operations $ 41 $ 36
------- -------
------- -------

16. OTHER INCOME AND EXPENSES

Included in other income and expenses for the year ended June 30, 1997 was
income of $348,000, net of legal fees, related to the recovery of a note
receivable for which the Company had previously established a reserve,
partially offset by expenses of $126,000 for architect fees related to hotel
improvement projects that the Company has decided not to pursue.

17. RELATED PARTY TRANSACTIONS

In February 1995, the Company entered into an agreement to purchase 80% of the
outstanding stock of Krazy Colors effective January 1, 1995. Prior to this
agreement, the Company's Chief Executive Officer ("CEO"), Jay H. Lustig, owned
55% of the outstanding stock of the manufacturer. Subsequent to this
transaction, the CEO owns 11% of the stock in Krazy Colors, Inc. As a part of
the sales agreement, the sellers are eligible to receive royalty payments based
upon gross margin performance in excess of specified amounts (see Note 12).
NBI's CEO will receive 55% of any such royalty payments. No royalties were
incurred by the Company during fiscal years ended June 30, 1997 or 1996.

During fiscal 1997 and 1996, the Company utilized a stock brokerage firm, which
is 100% owned by its CEO, to execute certain transactions on its behalf.
However, NBI uses another unrelated company to act as custodian and

30
<PAGE>

clearing firm for its investment assets. Gross revenues earned by the
brokerage firm related to investment transactions by NBI in fiscal 1997 and
1996, totaled $90,000 and $89,000, respectively, on purchase and sale
transactions totaling $47,968,000 and $26,988,000 before fees, respectively.

The Company believes that these transactions were in its best interests, were on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties and were in connection with bona fide business purposes of the
Company.

18. GOING CONCERN

As discussed in Note 8, the entire outstanding principal balance on the IRS debt
of $5,278,000 at June 30, 1997 is due in full on October 1, 1997. 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 obtain
additional debt or equity financing. The Company is currently pursuing various
financing alternatives; however there can be no assurance that the Company will
be able to obtain such financing. The Company's ability to continue as a going
concern is dependent upon attainment of financing sufficient to pay off the IRS
debt when due.

31
<PAGE>

PART III

Items 9, 10, 11, and 12 are hereby incorporated by reference to the Annual
Meeting Proxy Statement to be filed pursuant to Regulation 14A.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

3. Articles of Incorporation and Bylaws
a. Restated Certificate of Incorporation(5)
b. Restated Bylaws(5)

10. Material Contracts
a. Agreement in Principle dated October 13, 1995 between NBI, Inc.
and the Internal Revenue Service(5)
b. Belle Vernon Motel Corporation Land Lease Agreement(5)
c. Agreement between L.E. Smith Glass Company and The American
Flint Glass Workers' Union(5)
d. Stock Purchase Agreement with Romaine Gilmour and Rose B.
Calderone dated August 4, 1995(3)
e. Asset Purchase and Sale Agreement between Lawrence F. Ranallo,
Trustee in Bankruptcy of Pittsburgh Food & Beverage Company,
Inc., L.E. Smith Glass Company and American Glass, Inc. dated
June 29, 1995(3)
f. Krazy Colors, Inc. Stock Purchase Agreement(2)
g. Krazy Colors, Inc. Shareholder Agreement(2)
h. Jay H. Lustig Warrant Certificate(2)
i. Krazy Colors, Inc. Revolving Line of Credit(2)
j. NBI, Inc. Employee and Director Stock Option Plan(1)
k. Form of NBI, Inc. Director Non-Qualified Stock Option
Agreement(1)
l. Form of NBI, Inc. Chief Executive Officer Non-Qualified Stock
Option Agreement(1)

16. Letter on Change in Certifying Accountant(4)

21. Subsidiaries of Registrant
a. See Item 1 - Business, herein

23. Consent of Independent Accountant(6)

27. Financial Data Schedule
a. For the year ended June 30, 1997(6)

(b) Reports on Form 8-K:

No reports on Form 8-K were filed during the fourth quarter ended June 30,
1997.

- ----------------------------------------------------------------------
(1) Incorporated by reference to Registration Statement No. 33-73334.
(2) Incorporated by reference to the Company's report on Form 10-QSB for
the quarter ended December 31, 1994.
(3) Incorporated by reference to the Company's report on Form 8-K dated
August 4, 1995.
(4) Incorporated by reference to the Company's report on Form 8-K dated
August 11, 1995.
(5) Incorporated by reference to the Company's report on Form 10-KSB for
the year ended June 30, 1995.
(6) Filed herewith.

32
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

September 16, 1997 By: /s/ JAY H. LUSTIG
- ------------------ -------------------------------------
Chairman of the Board
(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

/s/ MARJORIE A. COGAN Corporate Controller, Secretary September 16, 1997
- ------------------------ (Principal Financial and ------------------
Marjorie A. Cogan Accounting Officer)

/s/ JAY H. LUSTIG Director September 16, 1997
- ------------------------ ------------------
Jay H. Lustig

/s/ MARTIN J. NOONAN Director September 16, 1997
- ------------------------ ------------------
Martin J. Noonan

<PAGE>

EXHIBIT 23

CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors
NBI, Inc.

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 33-73334) of NBI, Inc. of our report dated
July 24, 1997, relating to the consolidated financial statements of NBI, Inc.
appearing in the Company's Annual Report on Form 10-KSB for the year ended
June 30, 1997.

BDO Seidman, LLP

Denver, Colorado
September 16, 1997

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF NBI, INC. FOR THE YEAR ENDED
JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 333
<SECURITIES> 0
<RECEIVABLES> 1,328
<ALLOWANCES> 97
<INVENTORY> 2,470
<CURRENT-ASSETS> 4,223
<PP&E> 8,374
<DEPRECIATION> 1,505
<TOTAL-ASSETS> 11,496
<CURRENT-LIABILITIES> 8,420
<BONDS> 1,800
0
0
<COMMON> 100
<OTHER-SE> 925
<TOTAL-LIABILITY-AND-EQUITY> 11,496
<SALES> 11,697
<TOTAL-REVENUES> 13,669
<CGS> 8,314
<TOTAL-COSTS> 9,797
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 112
<INTEREST-EXPENSE> 686
<INCOME-PRETAX> 795
<INCOME-TAX> 105
<INCOME-CONTINUING> 690
<DISCONTINUED> 354
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,044
<EPS-PRIMARY> .13
<EPS-DILUTED> .13

</TABLE>