NBI INC, 10KSB, 1998-08-28

NBI INC
10KSB, 1998-08-28
GLASS & GLASSWARE, PRESSED OR BLOWN

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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, 1998

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
-------------------------------------
to
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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. [X]

Revenues for the year ended June 30, 1998 were $14,693,000.

The aggregate market value of voting stock held by non-affiliates of the
registrant is approximately $5,915,000 as of market close on July 31, 1998.

Common stock ($.01 Par Value) 8,088,320 shares outstanding as of July 31, 1998.

Documents incorporated by reference: Part III-The Registrant's definitive
Proxy Statement for its 1998 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. 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 through an "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 80 room full service Holiday
Inn in Belle Vernon, Pennsylvania (the "Belle Vernon Holiday Inn"). The
Company is licensed pursuant to a license agreement with Holiday Inns
Franchising, Inc. which expires in August 2005, subject to renewal. 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 indebtedness of $1.0
million in order to complete such renovation, which is secured by a mortgage on
the hotel.

KRAZY COLORS, INC.

In January 1995, the Company acquired a majority interest in Krazy Colors, Inc.
("Krazy Colors") a small children's paint manufacturer currently 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
13 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. However,
during fiscal 1998, the Company experienced unfavorable results from these
efforts as well as from the business' inability to sustain long-term customers.
Therefore, the Company is currently in process of restructuring Krazy Colors in
order to reduce its overhead. In conjunction with this restructuring, the
Company is considering moving Krazy Colors' operations to L.E. Smith's
facilities in Pennsylvania.

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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 approximately 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. NBI
Development 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 recently entered into a development and a leasing agreement with
Michael Joseph Development Corporation, a well-respected local real estate
development company. NBI Development is currently in negotiations with a
number of prospective tenants for phase I, including a nationally prominent
grocery store which would be the primary anchor tenant. 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 1998, with an anticipated construction period of approximately ten
months from commencement. The construction costs are anticipated to be
approximately nine million dollars.

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. NBI
emerged from Chapter 11 on February 3, 1992, the effective date of the Plan.

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

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

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 discontinued all of its operations in the
computer industry segment. This segment consisted of its AlphaNet division,
its international subsidiary, NBI, Ltd., and its software development
activities.

INTERNATIONAL OPERATIONS

NBI, Ltd. was 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.

<PAGE>

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 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 participates 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 fewer environmental
restrictions and lower 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 with
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
because it is one of only a few hand pressed glass manufacturers remaining in
the United States. The company 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. Also, 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 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' roll-on and dot-on paints have
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
enabled the company to more 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. Krazy Colors focuses the majority of its sales
efforts on its unique 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 NBI Development's property. These
centers 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 result
in competition from entities that are better capitalized than NBI Development.

SIGNIFICANT CUSTOMERS AND SUPPLIERS

L.E. Smith currently has many small to medium-sized customers and one
significant customer. Sales to its significant customer totaled approximately
34% and 28% of NBI's consolidated revenues for the years ended June

4
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30, 1998 and 1997, 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

L.E. Smith and the Belle Vernon Holiday Inn typically have their strongest
revenue performance during the first fiscal quarter due to seasonal variations
in these businesses. Generally, the second and fourth fiscal quarters'
revenues from these operations are moderately lower than in the first quarter,
while the third fiscal quarter's revenue is usually significantly lower than
the other quarters. However, in fiscal 1998, L.E. Smith received several large
orders from its significant customer during the historically slower quarters,
which created a more consistent revenue stream for the year. The Company is
unsure whether this trend will continue.

EMPLOYEES

As of July 31, 1998, the Company employed a total of 237 employees including
194 full-time employees. Currently, 166 of the total employees are covered
by collective bargaining agreements, including 131 employees of L.E. Smith
who are covered by a collective bargaining agreement which expires on
September 1, 1998, and 35 employees of NBI Properties who are covered by a
collective bargaining agreement which expires on November 7, 1998. The
Company is engaged in collective bargaining negotiations with a union
representing the production and maintenance employees at its L.E. Smith
facility and the Company anticipates reaching an agreement with that union
regarding wages and other terms and conditions of employment in the near
future. The Company expects to begin collective bargaining negotiations with
a union representing the service employees of NBI Properties in late October,
and expects that an agreement will also be reached with that union. If the
Company was unable to renew these agreements on a timely basis or on
reasonable terms, it could have a material adverse effect upon the Company's
business.

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 is considering
moving Krazy Colors' manufacturing to L.E. Smith's facilities in Pennsylvania
during fiscal 1999. The Company believes it will be able to sublease the Las
Vegas warehouse space in the near future. 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 acquired the building and improvements of the Belle Vernon Holiday
Inn Hotel in Belle Vernon, Pennsylvania as a result of its related business
acquisition in August 1995. The building consists of approximately 21,000
square feet and is 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 and 1998, L.E. Smith leased
approximately 6,000 square feet of temporary warehouse space, under a lease
expiring in December 1999, in order to facilitate certain property improvement
projects, and to accommodate additional space requirements resulting from the
growth of the Company.

<PAGE>

In January 1997, NBI Development acquired 88 acres of undeveloped land in
southwestern Pennsylvania. The Company is pursuing 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 21, 1998, NBI's Board of Directors approved amendments 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, to
effect a reverse stock split of either one for two and one-half shares, one
for three shares, or one for four shares, at the Board's discretion, and to
eliminate Article Eleventh of the Certificate of Incorporation which contains
certain restrictions on transfers of the Company's stock. These amendments
will be submitted for approval from the Company's stockholders at its annual
meeting of stockholders scheduled to be held on October 14, 1998.

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, as quoted on the
OTC Bulletin Board, 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.

<TABLE>
<CAPTION>
FISCAL 1998 HIGH LOW
----------- ---- ---
<S> <C> <C>
First Quarter $ 3/4 $ 9/16
Second Quarter 5/8 17/32
Third Quarter 7/8 9/32
Fourth Quarter 7/8 25/32

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
</TABLE>

At June 30, 1998, there were 8,088,320 common shares of $.01 par value common
stock outstanding. The approximate number of stockholders of the Company was
1,260 as of July 31, 1998. 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
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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, as such term is defined in "The Private Securities Litigation
Reform Act of 1995". The forward-looking statements are based upon current
expectations and the actual results could differ materially from those
anticipated. Factors that may affect such forward-looking statements include,
among others, ability to obtain financing, loss of significant customers,
reliance on key personnel, competitive factors and pricing pressures,
availability of raw materials, labor disputes, investment results, limitations
on the utilization of net operating loss carryforwards, adequacy of insurance
coverage, inflation and general economic conditions.

RESULTS OF OPERATIONS 1998 - 1997 COMPARISON

The Company reported net income of $172,000 in fiscal 1998, compared to net
income of $1,044,000 in fiscal 1997. The primary reasons for the decline in
net income were the absence of $354,000 of income from discontinued operations
in fiscal 1998, a net loss of $39,000 on investments recorded in fiscal 1998
compared to a net gain of $601,000 included in fiscal 1997, and the inclusion
of an impairment of goodwill totaling $167,000 in fiscal 1998. However, these
items were partially offset by an extraordinary gain, net of income taxes, of
$290,000 recorded during fiscal 1998.

Sales revenues from continuing operations of $12.5 million for the year ended
June 30, 1998 reflected an increase of $822,000, or 7.03%, as compared to
fiscal 1997. The sales revenue growth was due to increased volume at L.E.
Smith, primarily resulting from a significant increase in orders from its
largest customer. This increase was partially offset by a significant decline
in revenues from Krazy Colors, due to a change in sales focus implemented late
in fiscal 1997 which, to-date, has been unsuccessful.

Service and rental revenues from continuing operations totaled $2.2 million and
$2.0 million, respectively, for the years ended June 30, 1998 and 1997. The
increased revenue was primarily related to an increase in the occupancy rate at
the Belle Vernon Holiday Inn, resulting from the absence of renovation
construction activity which limited the number of available rooms during the
second quarter and part of the third quarter of fiscal 1997. In addition, the
hotel experienced an increase in average daily room rates in fiscal 1998
compared to fiscal 1997, primarily because of the renovation completed during
fiscal 1997. The hotel also experienced a significant increase in restaurant
and bar business, due to increased occupancy and increased sales and marketing
efforts.

Total revenues are expected to increase moderately in fiscal 1999 as compared
to fiscal 1998, primarily due to a moderate increase in projected revenues from
L.E. Smith and a slight increase in expected revenues from the hotel. Revenues
from Krazy Colors are expected to remain relatively flat. Because the Company
is currently in the process of restructuring Krazy Colors' operations, it
expects a decline in revenues during the first two quarters of fiscal 1999,
anticipated to be offset by an increase in revenues for the third and fourth
quarters of fiscal 1999, when compared to the same periods in fiscal 1998.

Cost of sales as a percentage of sales revenues for the years ended June 30,
1998 and 1997 was 72.1% and 71.1%, respectively. The resulting small decline
in gross margin was related to a significant decline in gross margin from Krazy
Colors, due to the decreased revenue volume. In addition, the Company had
slightly lower margins from L.E. Smith, primarily due to a change in sales mix,
with more sales of lower margin products, increased production costs associated
with the development of new products, and unusually high gas costs incurred
during the second fiscal quarter; however, this was partially offset by
manufacturing efficiencies realized due to the higher volume.

Cost of service as a percentage of service and rental revenue was 74.9% and
75.2% for the years ended June 30, 1998, and 1997, respectively. The slight
improvement in related gross margin was primarily due to the increased rooms
revenue without a corresponding increase in related costs, as the costs include
a significant amount of fixed expenses. However, this was partially offset by
increased depreciation expense resulting from the renovations of the Belle
Vernon Holiday Inn completed during fiscal 1997.

Total cost of sales, service and rentals as a percentage of total revenues was
72.6% in fiscal 1998 and is expected to increase slightly in fiscal 1999. The
increase is primarily related to a small increase in service and rental costs

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at the hotel, as general costs increases are expected to exceed savings
resulting from cost reduction measures. In addition, the Company expects a
slight increase in the cost of sales at L.E. Smith; however, this is expected
to be offset by lower cost of sales projected for Krazy Colors, due to cost
reduction measures.

Marketing, general and administrative expenses totaled $3.4 million for the
year ended June 30, 1998, an increase of $178,000 compared to the previous
fiscal year. The increase included expenses incurred in connection with the
IRS negotiations, executive severance for L.E. Smith, a non-cash compensation
expense for extensions of certain executive stock options, and expenses
resulting from increased sales and marketing activities. However, these
increases were partially offset by savings resulting from lower payroll
costs, due to fewer executives, and credits related to a reduction of a
reserve for "incurred but not reported" health claims, as the Company
converted to a fully-insured health plan for its corporate and Krazy Colors
employees effective January 1, 1998. Included in marketing, general and
administrative expenses incurred in fiscal 1998 were payroll and related
expenses of $1.4 million, commissions to sales representatives of $478,000,
legal, accounting, hotel management and other professional fees of $286,000,
and advertising costs of $175,000.

Total marketing, general and administrative expenses are expected to increase
slightly in fiscal 1999, compared to fiscal 1998, primarily due to increased
sales and marketing activities and general cost increases, significantly offset
by savings resulting from cost reduction measures at the hotel and Krazy
Colors.

During the third quarter of fiscal 1998, the Company recorded a non-cash
impairment loss of $167,000 related to a write-down of goodwill associated with
Krazy Colors. The revised carrying value of this asset was based upon the
estimated future cash flow of the business. The impairment occurred primarily
due to the unfavorable results of a change in sales focus which was implemented
late in fiscal 1997.

The Company recorded a net loss on investments of $39,000 in fiscal 1998,
consisting of a net realized loss of $92,000 and a net unrealized gain of
$53,000. During fiscal 1997, the Company recorded a net gain on investments
of $601,000, consisting of a net realized gain of $419,000 and a net
unrealized gain of $182,000. As part of its investment policy, the Company's
investment portfolio may include investments in option instruments and may
include a concentrated position in one or more securities. As a result of
this, the financial results may fluctuate significantly and have larger
fluctuations than with a more diversified portfolio. In addition, the
Company may invest in short-sale transactions of trading securities.
Short-sales can result in off-balance sheet risk, as losses can be incurred
in excess of the reported obligation if market prices of the securities
subsequently increase. At June 30, 1998, the Company has no investment
positions.

The Company recorded net other expense for the year ended June 30, 1998
totaling $33,000. This compared to net other income of $208,000 in fiscal year
1997, which 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.

The Company recorded an income tax benefit from continuing operations of
$72,000 for the year ended June 30, 1998, which was net of state income tax
provisions of $118,000 primarily related to the Company's Pennsylvania
operations. In fiscal 1997, the Company recorded an income tax provision
from continuing operations of $105,000 which included state income tax
provisions of $123,000 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; however, $28,000 of
pre-reorganization net operating loss carryforwards were utilized during
fiscal 1998.

DISCONTINUED OPERATIONS

There were no revenues and no income or loss from discontinued operations for
the year, ended June 30, 1998. The Company reported net income from
discontinued operations in fiscal 1997 of $354,000, consisting primarily

8
<PAGE>

of a gain on the disposition of NBI, Ltd. of $402,000, including a $316,000
translation gain recognized as a result of the substantial completion of the
company's liquidation.

EXTRAORDINARY GAIN

The entire outstanding principal balance on its IRS debt of $5,278,000 was due
in full on October 1, 1997. Effective April 9, 1998, the Company and the IRS
entered into an amended payment agreement revising the payment terms related to
the Company's IRS debt. Under the new agreement, $3.5 million of the IRS debt
is due on or before December 31, 1998 and the remaining balance of
approximately $1.8 million is due on or before December 31, 1999. Provided no
event of default occurs prior to payment of the debt in full, NBI will not be
obligated to pay any past, current or future interest related to the debt.
Therefore, during the fourth quarter of fiscal 1998, the Company recorded a net
extraordinary gain of $290,000, consisting of forgiveness of accrued interest
recorded through March 31, 1998 totaling $439,000, less an income tax provision
of $149,000.

FINANCIAL CONDITION

Total current assets of the Company increased $267,000 during fiscal year 1998
to $4.5 million at June 30, 1998. The increase in current assets was primarily
related to increased accounts receivable and inventories resulting from the
increase in sales and production volume at the glass manufacturing company
during fiscal 1998. However, this was partially offset by an overall decrease
of $124,000 in cash and cash equivalents experience by the Company during
fiscal 1998 (see "Liquidity and Capital Resources").

Total assets of $12.2 million at June 30, 1998 reflected an increase of
$709,000 from June 30, 1997 and was primarily related to an increase in
property and equipment at L.E. Smith, because it is continually working on
capital improvement projects.

NBI Development is planning to begin construction on phase I of its commercial
real estate development project late in calendar 1998, with an anticipated
construction period of approximately ten months. The construction costs will
be capitalized during the construction period and are anticipated to be
approximately nine million dollars. The Company is currently in process of
seeking commercial financing to pay for these costs. (See "Liquidity and
Capital Resources".)

Current liabilities decreased $1.1 million to $7.4 million at June 30, 1998,
primarily due to the reclassification of approximately $1.8 million of the
IRS debt to long-term liabilities during the fourth quarter of fiscal 1998,
in accordance with an amended payment agreement (see also "Extraordinary
Gain" and "Liquidity and Capital Resources"). This decrease was partially
offset by an increase of $925,000 in short-term borrowings resulting
primarily from short-term borrowings used to fund capital improvements at
L.E. Smith and general working capital needs.

Stockholders' equity of $1.3 million at June 30, 1998 increased $275,000 from
June 30, 1997, primarily reflecting net income of $172,000 for fiscal 1998, as
well as a credit of $48,000 related to the non-cash compensation expense
recorded by the Company during fiscal 1998 for the extension of certain
executive stock options.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents decreased $124,000 during fiscal 1998. The decline
was primarily due to substantial capital improvements made at L.E. Smith which
were funded by cash on hand, cash flow from operations and borrowings on its
line of credit.

The Company had negative working capital of $2.9 million and $4.2 million at
June 30, 1998 and 1997, respectively. The increase of $1.3 million in working
capital was primarily related to the reclassification of approximately $1.8
million of the IRS debt to long-term during the fourth quarter of fiscal 1998,
partially offset by an increase in short-term borrowings primarily used to fund
capital improvements at L.E. Smith.

Construction in progress totaled $312,000 at June 30, 1998 and consisted
primarily of various equipment refurbishments and a new computer system
installation at L.E. Smith. The Company estimates that it will cost

9
<PAGE>

approximately $120,000 to complete the outstanding projects, all of which are
expected to be completed during fiscal 1999. The construction costs will
primarily 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 was due
in full on October 1, 1997. Effective April 9, 1998, the Company and the IRS
entered into an amended payment agreement revising the payment terms related to
the Company's IRS debt. Under the new agreement, $3.5 million of the IRS debt
is due on or before December 31, 1998 and the remaining balance of
approximately $1.8 million is due on or before December 31, 1999. Provided no
event of default occurs prior to payment of the debt in full, NBI will not be
obligated to pay any past, current or future interest related to the debt. In
order to pay the IRS debt, management intends to obtain additional debt or
equity financing. The Company is currently pursuing various financing options,
not only for the IRS debt, but also for its real estate development activities;
however, there can be no assurance that the Company will be able to obtain such
financing or that if it is able to obtain such financing, that it will be on
favorable terms. The Company's ability to continue as a going concern is
dependent upon attainment of financing sufficient to pay off the IRS debt when
due. See also Report of Independent Certified Public Accountants and Notes 2
and 8 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, 1998, 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 approximately $23 million has been established for the
net deferred tax assets arising from the tax loss carryforwards 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.

YEAR 2000 COMPLIANCE

The Company has completed a review and risk assessment of all technology items
used in its operations. The Company believes that the year 2000 problem will
pose no significant operational problems. Substantially all of the machinery
and equipment used by the Company's glass manufacturing and children's paint
manufacturing operations are manually controlled and operated. In addition,
the hotel operation is not significantly reliant on computer technology, with
the exception of its reservation system, which is maintained and upgraded under
a contract with Holiday Inns Franchising, Inc. The Company expects the
reservation system to be year 2000 compliant early in fiscal 1999. The primary
effect of the year 2000 issue is on the company's accounting systems.

Year 2000 compliance will primarily be accomplished through purchases of new
equipment and data processing hardware and software upgrades, with an estimated
aggregate cost of approximately $140,000, a significant portion of which has
already been purchased and most of which was previously planned and
necessitated by other technological needs of the Company. The upgrading or
replacement of equipment which is non-compliant, as well as the related testing
of such equipment is expected to be substantially completed during fiscal 1999.

L.E. Smith currently has one customer of such significance that if such
customer were to experience year 2000 problems that resulted in the
cancellation or deferral of orders, it could materially adversely affect the
results of operations of the Company. The Company has discussed the year 2000
issue with this and other material customers and vendors and currently does not
anticipate any significant problems. In addition, the Company will continue to
review the status of the year 2000 issues with these customers and vendors.

ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

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

10
<PAGE>

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.

In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and other postretirement benefits and requires
additional information on changes in the benefit obligations and fair value of
plan assets that will facilitate financial analysis.

SFAS No. 130, 131 and 132 are all effective for financial statements for fiscal
years beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Management has not yet fully evaluated the
impact, if any, they may have on future financial statement disclosures.
However, results of operations and financial position will be unaffected by
implementation of these standards.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting reporting
standards for derivative instruments including certain derivative instruments
embedded in other contracts and for hedging activities. SFAS 133 is effective
for fiscal years beginning after June 15, 1999. Management believes the
adoption of this statement will not have a material impact on the Company's
financial statements.

<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, 1998, and the related consolidated statements of
income, stockholders' equity and cash flows for the years ended June 30, 1998
and 1997. 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, 1998, and the results of their operations and their
cash flows for the years ended June 30, 1998 and 1997 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 2 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 2. 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 31, 1998

<PAGE>

NBI, INC.
CONSOLIDATED BALANCE SHEET
June 30, 1998
(Amounts in thousands, except share data)

<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 209
Accounts receivable, less allowance for doubtful accounts
of $69 1,375
Inventories 2,750
Other current assets 156
-----------
Total current assets 4,490

Property, plant and equipment, net 7,436
Other assets 279
-----------

$ 12,205
-----------
-----------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Short-term borrowings and current portion of notes payable $ 1,846
Current portion of IRS debt and other income taxes payable 3,527
Accounts payable 1,200
Accrued liabilities 796
-----------
Total current liabilities 7,369
Long-term liabilities:
Income taxes payable 1,778
Notes payable 1,351
Deferred income taxes 223
Postemployment disability benefits 184
-----------
Total liabilities 10,905
-----------

Commitments and contingencies

Stockholders' equity:
Common stock - $.01 par value (20,000,000 shares
authorized; 10,115,520 shares issued) 101
Capital in excess of par value 6,280
Accumulated deficit (4,213)
-----------
2,168
Less treasury stock, at cost (2,027,200 shares) (868)
-----------
Total stockholders' equity 1,300
-----------

$ 12,205
-----------
-----------

</TABLE>

See accompanying Report of Independent Certified Public Accountants
and Notes to Consolidated Financial Statements.

<PAGE>

NBI, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 1998 and 1997
(Amounts in thousands, except per share data)

<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Revenues:
Sales $ 12,519 $ 11,697
Service and rental 2,174 1,972
---------- ----------
14,693 13,669
---------- ----------
Costs and expenses:
Cost of sales 9,032 8,314
Cost of service and rental 1,629 1,483
Marketing, general and administrative 3,395 3,217
Impairment of goodwill 167 --
---------- ----------
14,223 13,014
---------- ----------

Income from operations 470 655
---------- ----------

Other income (expense):
Interest income 5 17
Net gain (loss) on investments (39) 601
Other income (expense) (33) 208
Interest expense (593) (686)
---------- ----------
(660) 140
---------- ----------
Income (loss) from continuing operations before
provision for income taxes and extraordinary gain (190) 795
Benefit (provision) for income taxes 72 (105)
---------- ----------
Income (loss) before discontinued operations
and extraordinary gain (118) 690
Income from discontinued operations, net of
income tax benefit of $24 -- 354
Extraordinary gain, net of income taxes of $149 290 --
---------- ----------

Net income $ 172 $ 1,044
---------- ----------
---------- ----------

Income (loss) per common share - basic:
Income (loss) before discontinued operations
and extraordinary gain $ (.01) $ .09
Income from discontinued operations -- .04
Extraordinary gain .03 --
---------- ----------
Net income $ .02 $ .13
---------- ----------
---------- ----------

Income (loss) per common share - diluted:
Income (loss) before discontinued operations
and extraordinary gain $ (.01) $ .08
Income from discontinued operations -- .04
Extraordinary gain .03 --
---------- ----------
Net income $ .02 $ .12
---------- ----------
---------- ----------
</TABLE>

See accompanying Report of Independent Certified Public Accountants
and Notes to Consolidated Financial Statements.

14
<PAGE>

NBI, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1998 and 1997
(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, 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

Issued under
Employee Stock
Option Plan 110,500 1 28 -- -- -- 29

Utilization of
pre-reorganization
net operating loss
carryforwards -- -- 28 -- -- -- 28

Compensation expense
related to stock
option extensions -- -- 48 -- -- -- 48

Other -- -- (2) -- -- -- (2)

Net income for the year
ended June 30, 1998 -- -- -- 172 -- -- 172
----------- ------- -------- ---------- ---------- ---------- --------

Balance June 30, 1998 10,115,520 $ 101 $ 6,280 $ (4,213) $ -- $ (868) $ 1,300
----------- ------- -------- ---------- ---------- ---------- --------
----------- ------- -------- ---------- ---------- ---------- --------
</TABLE>

See accompanying Report of Independent Certified Public Accountants
and Notes to Consolidated Financial Statements.

15
<PAGE>

NBI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1998 and 1997
(Amounts in Thousands)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:

Net income $ 172 $ 1,044

Adjustments to reconcile net income to net cash
flow provided by operating activities:

Depreciation and amortization 738 591
Realized translation gain from discontinued operations -- (316)
Utilization of pre-reorganization net operating loss carryforwards 28 --
Provision for bad debts and returns 89 112
Provision for writedown of inventories 69 105
Provision for writedown of note receivable 10 --
Loss (gain) on sales of property and equipment 54 (9)
Impairment of goodwill 167 --
Net unrealized gain on trading securities (53) (182)
Compensation expense related to stock option extensions 48 --
Other (2) 7

Changes in assets -- decrease (increase):
Accounts receivable (226) 231
Inventory (349) (243)
Other current assets 22 586
Other assets (86) (11)
Changes in liabilities -- (decrease) increase:
Obligations for short-sale transactions (58) (200)
Accounts payable and accrued liabilities (259) (128)
Income tax related accounts 3 (88)
---------- ----------

Net cash flow provided by operating activities 367 1,499
---------- ----------

Cash flows from investing activities:

Proceeds from sales of property and equipment 2 23
Purchases of property and equipment (1,199) (2,868)
---------- ----------

Net cash flow used in investing activities (1,197) (2,845)
---------- ----------
</TABLE>

(continued on following page)

See accompanying Report of Independent Certified Public Accountants
and Notes to Consolidated Financial Statements.

16
<PAGE>

Collections on notes receivable $ 5 $ --
Proceeds from issuance of stock, net of offering costs -- (5)
Proceeds from borrowing 105 1,650
Proceeds from stock option exercises 29 2
Payments on notes payable (270) (208)
Net borrowings (payments) on line of credit 837 (595)
---------- ----------

Net cash flow provided by financing activities 706 844
---------- ----------

Net decrease in cash and cash equivalents (124) (502)

Change in cash and cash equivalents included
in net assets of discontinued operations -- 53

Cash and cash equivalents at beginning of year 333 782
---------- ----------

Cash and cash equivalents at end of year $ 209 $ 333
---------- ----------
---------- ----------

Supplemental disclosures of cash flow information:

Interest paid $ 349 $ 663
---------- ----------
---------- ----------

Income taxes paid $ 88 $ 163
---------- ----------
---------- ----------

Noncash purchases of property, plant and equipment
included in accounts payable at end of year $ 190 $ 99
---------- ----------
---------- ----------
</TABLE>

See accompanying Report of Independent Certified Public Accountants
and Notes to Consolidated Financial Statements.

17
<PAGE>

NBI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS DESCRIPTION: The Company 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 manufacturing company in Las Vegas, Nevada. In January 1997,
the Company acquired 88 acres of undeveloped land in southwestern Pennsylvania.
The Company is pursuing commercial development of the property. 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 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, 1998, 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: In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("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.

<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.

The Company computes realized gains or losses based upon the specific
identification method.

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:

<TABLE>
<CAPTION>
June 30,
1998
----
(Amounts in thousands)
<S> <C>

Raw Materials $ 807
Work in Process 390
Finished Goods 1,539
Food and Beverage Inventory 14
-----------
$ 2,750
-----------
-----------
</TABLE>

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.

<PAGE>

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
---------- ----
<S> <C>

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
</TABLE>

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.

ADVERTISING COSTS: The Company expenses the production costs of advertising
the first time the advertising takes place, except for costs related to the
production of new catalogs. These cost are capitalized and amortized over
three years, their expected period of future benefits. Included in other
current assets at June 30, 1998 were capitalized catalog advertising costs of
$65,000. These costs are net of accumulated amortization of $120,000.

The Company also has a contract for billboard advertising for the hotel. These
costs were capitalized and are being amortized over ten years, the life of the
contract. Included in other assets at June 30, 1998 were capitalized billboard
costs of $9,000, which are net of accumulated amortization of $1,000.

Advertising expense was $174,000 and $133,000 for the years ended June 30, 1998
and 1997, respectively.

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.

NET INCOME (LOSS) PER SHARE: During fiscal 1998, NBI, Inc. adopted SFAS No.
128, which provides for the calculation of "Basic" and "Diluted" earnings per
share. Basic earnings per share includes no dilution and is computed by
dividing income (loss) available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution of securities that could share in the earnings
of an entity, similar to fully diluted earnings per share. (See Note 16.)

20
<PAGE>

RECLASSIFICATIONS AND ADJUSTMENTS: Certain items in the 1997 financial
statements have been reclassified to conform to the 1998 manner of
presentation.

2. GOING CONCERN

As discussed in Note 8, $3.5 million of the Company's debt to the Internal
Revenue Service ("IRS") is due on December 31, 1998 and the balance of
approximately $1.8 million is due on December 31, 1999. This condition raises
substantial doubt about the Company's ability to continue as a going concern.
In order to pay such amount, management intends to 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. The accompanying financial statements do not contain any adjustments
that might result from the outcome of this uncertainty.

3. 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.

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.

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 from this segment as
discontinued operations for the years ended June 30, 1998 and 1997 as follows:

<TABLE>
<CAPTION>
1998 1997
-------- --------
(Amounts in thousands)
<S> <C> <C>

Revenues from discontinued operations $ -- $ 395
-------- --------
-------- --------
Income from discontinued operations before
income taxes $ -- $ --
Income tax provision -- --
-------- --------
Net income from discontinued operations $ -- $ --
-------- --------

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

Net income from discontinued operations $ -- $ 354
-------- --------
-------- --------
</TABLE>

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 was a foreign entity.

<PAGE>

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

During the years ended June 30, 1998 and 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 loss of $92,000 and a net unrealized gain of $53,000 on
investments for the year ended June 30, 1998. For the year ended June 30,
1997, a net realized gain of $419,000 and a net unrealized gain of $182,000
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, 1998, the Company had no
investment positions.

5. OTHER CURRENT ASSETS

Included in other current assets totaling $156,000 at June 30, 1998, was
restricted cash of $3,000, representing amounts held in trust for payments
under self insurance plans.

6. PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
June 30,
1998
--------
(Amounts in thousands)
<S> <C>

Land $ 1,269
Buildings 3,356
Machinery and equipment 3,851
Office and hotel furniture and fixtures 828
Construction in-progress 312
----------
9,616
Accumulated depreciation (2,180)
----------
$ 7,436
----------
----------
</TABLE>

Total depreciation expense from continuing operations was $705,000 and $552,000
for the years ended June 30, 1998 and 1997, respectively. The Company
estimates that it will cost approximately $120,000 to complete the outstanding
projects, all of which are expected to be competed during fiscal 1999. The
Company is continually working on capital improvement projects at the glass
manufacturing facility.

7. OTHER ASSETS

Included in other assets of $279,000 at June 30, 1998, was $29,000 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 $265,000 at June 30, 1998.
Related amortization expense was $24,000 and $29,000 for the years ended June
30, 1998 and 1997, respectively. In addition, the Company recorded a non-cash
impairment loss of $167,000 during fiscal year 1998 related to a write-down of
the Krazy Color's goodwill. The revised carrying value of this asset was based
upon the estimated undiscounted future cash flow of the business. The
impairment occurred primarily due to the unfavorable results of a change in
sales focus which was implemented late in fiscal 1997, as well as the business'
inability to sustain long-term customers.

<PAGE>

8. INCOME TAXES

IRS DEBT:

On April 28, 1998, the Company and the IRS entered into an amended payment
agreement, revising the payment terms related to NBI Inc.'s IRS debt of
$5,278,000. This agreement, effective April 9, 1998, revises the terms of the
agreement in principal with the IRS effective October 1, 1995 and the original
settlement agreement with the IRS dated June 12, 1991, as to NBI's federal tax
liabilities for the fiscal years ended June 30, 1980 through 1988. Under the
current agreement, $3,500,000 of the IRS debt is due on or before December 31,
1998, and the remaining balance of $1,778,000 is due on or before December 31,
1999. The IRS debt continues to be collateralized by a security interest in
all of the capital stock of American Glass, Inc. and NBI Properties, Inc.

Provided no event of default occurs prior to payment of the debt in full, NBI
will not be obligated to pay any past, current or future interest related to
the IRS debt. Therefore, during the fourth quarter of fiscal 1998, the Company
recorded a net extraordinary gain of $290,000, consisting of forgiveness of
accrued interest recorded through March 31, 1998 totaling $439,000, less an
income tax provision of $149,000.

In order to pay the newly restructured IRS debt, management intends to obtain
additional debt or equity financing. The Company is currently pursuing
various financing options; however there can be no assurances the Company
will be able to obtain such financing. The Company's ability to continue as
a going-concern is dependent upon satisfaction of the IRS debt. (See Note 2.)

INCOME TAX PROVISION AND DEFERRED INCOME TAXES:

For the years ended June 30, 1998 and 1997, the benefit (provision) for income
taxes was included in the consolidated statements of operations as follows:

<TABLE>
<CAPTION>
1998 1997
---- ----
(Amounts in thousands)
<S> <C> <C>

Continuing operations benefit (provision) $ 72 $ (105)
Discontinued operations benefit -- 24
Extraordinary gain (149) --
-------- --------
$ (77) $ (81)
-------- --------
-------- --------
</TABLE>

The benefit (provision) for income taxes from continuing operations for the
years ended June 30, 1998 and 1997 consisted of:

<TABLE>
<CAPTION>
1998 1997
---- ----
(Amounts in thousands)
<S> <C> <C>
Federal:
Current $ -- $ --
Deferred 121 (24)
------ --------
121 (24)
------ --------
State and other:
Current (110) (40)
Deferred 61 (41)
------ --------
(49) (81)
------ --------
Total $72 $(105)
------ --------
------ --------
</TABLE>

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. The Company utilized $28,000 and no pre-reorganization net operating
loss carryforwards in fiscal 1998 and 1997, respectively.

<PAGE>

The reconciliation of income taxes from continuing operations at the U.S.
federal statutory tax rate to the effective tax rate for the years ended June
30, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
1998 1997
---------- ----------
(Amounts in thousands)
<S> <C> <C>
Federal tax benefit (expense) computed at 34% on
income (loss) from continuing operations before
provision for income taxes and extraordinary gain $ 65 $ (270)
State taxes, net of federal benefit (78) (81)
Change in the balance of the valuation
allowance for deferred tax assets and other 85 246
---------- ----------
Income tax benefit (provision) from
continuing operations $ 72 $ (105)
---------- ----------
---------- ----------
</TABLE>

Significant components of the Company's deferred tax assets and liabilities as
of June 30, 1998 were as follows:

<TABLE>
<CAPTION>
1998
-------------
(Amounts in thousands)
<S> <C>
Deferred tax assets:
Current
Deductible portion of IRS Settlement amount $ 915
Other 225
Noncurrent
Net operating loss carryforwards 20,886
Capital loss carryforwards 585
Tax basis in subsidiaries 570
Other - net 89
-----------
Total deferred tax assets 23,270

Valuation allowance for deferred tax assets (22,725)
-----------

Net deferred tax assets 545
-----------

Deferred tax liabilities:
Noncurrent
Other 300
Basis difference in fixed assets assumed
with Belle Vernon Holiday Inn acquisition 468
-----------

Total deferred tax liabilities: 768
-----------

Net deferred tax liability $ (223)
-----------
-----------
</TABLE>

The net change in the valuation allowance was a decrease of $351,000 for the
year ended June 30, 1998, and a decrease of $184,000 for the year ended June
30, 1997. The valuation allowance of $22,725,000 at June 30, 1998 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.

The tax loss carryforward at June 30, 1998 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.

<PAGE>

9. ACCRUED LIABILITIES

<TABLE>
<CAPTION>
June 30,
1998
----------
(Amounts in thousands)
<S> <C>

Accrued interest $ 23
Payroll and related benefits and taxes 365
Acquired liabilities under previously self-insured
health and other benefit plans 171
Other 237
----------

$ 796
----------
----------
</TABLE>

10. NOTES PAYABLE AND SHORT-TERM BORROWINGS

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

<TABLE>
<CAPTION>
June 30,
1998
----------------------
(Amounts in thousands)
<S> <C>
Revolving bank credit note of $2,000,000, due November 1, 1998, interest
at bank's prime rate (8.50% at June 30, 1998) 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. $ 1,490

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. 100

Bank note payable in monthly installments of $10,834 plus interest at
bank's prime rate (8.50% at June 30, 1998) 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. 520

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 $8,983 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. 979

Revolving line of credit from the Company's CEO; interest at ten percent;
outstanding principal and interest due in full on December 31, 1998. 100

Other 8
-------------

Total notes payable and short-term borrowings $ 3,197

Less current portion 1,846
-------------

Long-term portion of notes payable $ 1,351
-------------
-------------
</TABLE>

<PAGE>

At June 30, 1998, the principal maturities of notes payable and short-term
borrowings for each of the five subsequent fiscal years ending June 30 are:
1999 - $1,846,000; 2000 - $152,000; 2001 - $154,000; 2002 - $157,000; and 2003
- - $31,000.

The glass manufacturing company's revolving bank credit note is subject to a
credit agreement which contains covenants requiring maintenance of a minimum
interest expense coverage ratio and a maximum leverage ratio. In addition, it
prohibits certain activities of the glass manufacturing company without the
bank's approval, including creation of debt or liens, sales of assets, granting
loans or making certain investments and participation in any mergers or
acquisitions. Also, the agreement limits the glass manufacturing company's
ability to pay dividends and the amount of dividends payable.

The hotel's bank mortgage note contains covenants requiring maintenance of a
minimum cash flow to debt service ratio and specifying the maximum amount of
capital expenditures that can be made in any year. In addition, it prohibits
certain activities of the hotel without the bank's approval, including the
creation of debts or liens, sales of assets and participation in any mergers or
acquisitions.

11. POSTEMPLOYMENT BENEFITS

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.

The Company's current health, 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,
1998, was $216,000, of which $184,000 is classified as long-term.

12. EMPLOYEE BENEFIT PLANS

The Company has contributory savings and retirement 401(k) plans for a majority
of its employees. An employee may elect to contribute up to 15% of their
compensation during each plan year, subject to the maximum allowed by the IRS.
The Company's contributions to the union employees' plans are governed by union
labor contracts. The Company's contributions to its other plans are determined
by the Board of Directors. No liability exists for any future contributions,
except as may subsequently be determined by the Board of Directors. The
contributions expense for these plans totaled $62,000 and $58,000 for the years
ended June 30, 1998 and 1997, respectively.

13. 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 $47,000 and $44,000, for
the years ended June 30, 1998 and 1997, respectively.

The Company also leases various office facilities and equipment. The office
facilities and equipment leases from continuing operations have expiration
dates that extend through December 2001. Total rental expense for continuing
operations was $155,000 and $138,000 for the years ended June 30, 1998 and
1997, respectively.

<PAGE>

The future minimum rental commitments for continuing operations for the next
five fiscal years, under non-cancellable leases, are: 1999 - $146,000; 2000 -
$109,000; 2001 - $28,000, 2002 - $9,000; and 2003 - $8,000.

OTHER COMMITMENTS AND CONTINGENCIES:

In conjunction with NBI's acquisition of Krazy Colors, Inc. in February 1995,
the stock purchase agreement provided for continuing annual 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, 1998 and
1997. (See also Note 19.)

14. STOCKHOLDERS' EQUITY

The Company has authorized 20,000,000 shares of $.01 par value common stock.
At June 30, 1998, 10,115,520 shares were issued including 2,027,200 held in
treasury. Therefore, the Company had 8,088,320 shares issued and outstanding
at June 30, 1998.

In accordance with the provisions of the Company's fiscal 1992 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 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, 1998, no
warrants had been exercised. (See also Note 19.)

15. STOCK OPTIONS

The Employee Stock Option Plan was established pursuant to the Company's Plan
of Reorganization. At June 30, 1998, 885,750 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. During fiscal 1998, the
Company extended 201,000 options held by certain executives for an additional
five years and recorded related noncash compensation expense of $48,000. These
options were fully vested prior to the extension date. 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.

Options to purchase 150,000 shares of stock were 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. All of these options were either exercised or
forfeited during fiscal 1998.

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 vested over four years at 25% per
year and were fully vested as of October 1, 1997. During fiscal 1998, the
Company extended these options for an additional five years. No compensation
expense was recorded as a result of the extension because the exercise price
was greater than the fair market value of the stock on the extension date.

At June 30, 1998, 450,000 shares were reserved for options issued outside of
the Stock Option Plan.

<PAGE>

The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Had compensation cost been
determined based upon the fair value at the grant date for theoptions,
consistent with the provisions of SFAS No. 123, the Company's net income and
earnings per share for the years ended June 30, 1998 and 1997 would have been
reduced to the proforma amounts as follows:

<TABLE>
<CAPTION>
1998 1997
----------- ------------
(amounts in thousands,
except per share data)
<S> <C> <C>

Net income - as reported $ 172 $ 1,044
----------- ------------
----------- ------------

Net income - proforma $ 81 $ 1,011
----------- ------------
----------- ------------

Net income per share - as reported $ .02 $ .13
----------- ------------
----------- ------------

Net income per share - proforma $ .01 $ .13
----------- ------------
----------- ------------
</TABLE>

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 or extended during fiscal 1996 through fiscal 1998: no dividend
yield; expected volatility of 43.35% to 45.61%; risk-free interest rate of
5.51% to 6.18%; and expected lives of 4 to 4.75 years.

During the initial phase-in period of SFAS 123, the above numbers do not
include the effect of options granted prior to July 1, 1995.

The following table summarizes, by number of shares, option transactions under
all plans:

<TABLE>
<CAPTION>
Employee Other Weighted-Average
Plan Options Total Exercise Price
----------- --------- ---------- --------------
<S> <C> <C> <C> <C>

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

Granted (1) 301,500 400,000 701,500 .63
Exercised (10,500) (100,000) (110,500) .26
Forfeited (1) (301,000) (450,000) (751,000) .65
----------- --------- ----------

Outstanding June 30, 1998 560,500 400,000 960,500 .69
----------- --------- ----------
----------- --------- ----------

Options exercisable
at June 30, 1998 334,250 400,000 734,250 $.68
----------- --------- ----------
----------- --------- ----------

</TABLE>

(1) Amounts include options for 201,000 shares and 400,000 shares under
the employee plan and other, respectively, that were extended during fiscal
1998.

<PAGE>

<TABLE>
<CAPTION>
Employee Other
Plan Options
---------- ----------
<S> <C> <C>

Weighted-average fair value of
options granted for the year
ended June 30, 1998 $ .26 $ --
---------- ----------
---------- ----------
Weighted-average fair value of
options granted for the year
ended June 30, 1997 $ -- $ --
---------- ----------
---------- ----------
</TABLE>

The following table summarizes information about the stock options outstanding
at June 30, 1998:

<TABLE>
<CAPTION>
Weighted-Average
Remaining
Exercise Number Number Contractual
Price Outstanding Exercisable Life
---------- ----------- ----------- -----------
<S> <C> <C> <C>
$.38 216,000 212,250 4.15 years
$.59 100,500 -- 4.42 years
$.77 400,000 400,000 5.25 years
$.88 244,000 122,000 2.45 years
------- -------
960,500 734,250
------- -------
------- -------
</TABLE>

16. INCOME (LOSS) PER COMMON SHARE

During the Company's second quarter of fiscal 1998, NBI, Inc. adopted SFAS No.
128 issued by the Financial Accounting Standards Board. SFAS No. 128 provides
for the calculation of "Basic" and "Diluted" earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
(loss) available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution of securities that could share in the earnings of an
entity, similar to fully diluted earnings per share. Fiscal 1997's earnings
per share data has been restated to reflect the requirements of SFAS No. 128.

The following reconciles the numerators and denominators of the basic and
diluted earnings per common share computation for income (loss) before
discontinued operations and extraordinary gain for the years ended June 30,
1998 and 1997:

<TABLE>
<CAPTION>
1998 1997
---- ----
Basic Diluted Basic Diluted
----- ------- ----- -------
(Amounts in thousands
except per share data)
<S> <C> <C> <C> <C>
Income (loss) before discontinued
operations and extraordinary gain $ (118) $ (118) $ 690 $ 690
-------- -------- ------- -------
-------- -------- ------- -------

Weighted average number of common
shares outstanding 8,077 8,077 7,991 7,991
-------- -------
-------- -------

Assumed conversions of stock options -- 211
-------- -------

8,077 8,202
-------- -------
-------- -------
Income (loss) per common share before
discontinued operations and
extraordinary gain $ (.01) $ (.01) $ .09 $ .08
-------- -------- ------- -------
-------- -------- ------- -------
</TABLE>

<PAGE>

Because the Company incurred a loss before discontinued operations and
extraordinary gain for the year ended June 30, 1998, none of its outstanding
options or warrants were included in the computation of diluted earnings per
share as their effect would be anti-dilutive.

For the year ended June 30, 1997, the Company's $.25 and $.38 stock options
were included in the computation of diluted earnings per share because their
exercise price was less than the average market price of the common stock
outstanding.

The options and warrants outstanding at June 30, 1998 were as follows:

<TABLE>
<CAPTION>
Number
Exercise Outstanding at
Price June 30, 1998
----- -------------
<S> <C>
Stock options:
$ .38 216,000
$ .59 100,500
$ .77 400,000
$ .88 244,000
Warrants:
$ .89 1,700,000
---------
2,660,500
---------
---------
</TABLE>

17. SEGMENT INFORMATION

The Company 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. Sales to this customer totaled
approximately 34% and 28% of NBI's consolidated revenues in fiscal 1998 and
1997, respectively. In addition, this customer constituted approximately 33%
of the Company's consolidated accounts receivable at June 30, 1998.

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, 1998, approximately 70% of the Company's employees were covered
by collective bargaining agreements expiring in fiscal 1999.

<TABLE>
<CAPTION>
1998 1997
----------- -----------
(Amounts in thousands)
<S> <C> <C>
Revenue from continuing operations:

Glass manufacturing $ 12,233 $ 11,052
----------- -----------
----------- -----------
Hotel operations $ 2,174 $ 1,972
----------- -----------
----------- -----------
Children's paint manufacturing $ 286 $ 645
----------- -----------
----------- -----------
Land development $ -- $ --
----------- -----------
----------- -----------
</TABLE>

30
<PAGE>

<TABLE>
<CAPTION>
1998 1997
------------ -----------
(Amounts in thousands)
<S> <C> <C>
Operating income (loss):
Glass manufacturing $ 1,391 $ 1,376
------------ -----------
------------ -----------
Hotel operations $ 38 $ 5
------------ -----------
------------ -----------
Children's paint manufacturing $ (447) $ (114)
------------ -----------
------------ -----------
Land development $ (24) $ (7)
------------ -----------
------------ -----------
Identifiable assets:
Glass manufacturing $ 7,751 $ 6,595
------------ -----------
------------ -----------
Hotel operations $ 2,862 $ 2,919
------------ -----------
------------ -----------
Children's paint manufacturing $ 290 $ 563
------------ -----------
------------ -----------
Land development $ 1,183 $ 1,131
------------ -----------
------------ -----------
Additions to property, plant and equipment:
Glass manufacturing $ 1,237 $ 701
------------ -----------
------------ -----------
Hotel operations $ 38 $ 1,154
------------ -----------
------------ -----------
Children's paint manufacturing $ 1 $ 41
------------ -----------
------------ -----------
Land development $ 52 $ 1,105
------------ -----------
------------ -----------
Depreciation and amortization:
Glass manufacturing $ 513 $ 405
------------ -----------
------------ -----------
Hotel operations $ 181 $ 137
------------ -----------
------------ -----------
Children's paint manufacturing $ 39 $ 41
------------ -----------
------------ -----------
Land development $ -- $ --
------------ -----------
------------ -----------
</TABLE>

18. OTHER INCOME AND EXPENSE

Included in other income and expense 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.

19. 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 purchase agreement, the sellers are eligible to receive continuing annual
royalty payments based upon gross margin performance in excess of specified
amounts (see Note 13). NBI's CEO will receive 55% of any such royalty
payments. No royalties were incurred by the Company during fiscal years ended
June 30, 1998 or 1997. In addition, in conjunction with the purchase
agreement, the sellers were issued warrants to purchase 1.7 million shares of
the Company's common stock, including warrants

<PAGE>

to purchase 935,000 shares issued to the Company's CEO, at a price of $.89
per share. All of the warrants are still outstanding and are exercisable
through December 31, 2002.

During fiscal 1998 and 1997, 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 clearing
firm for its investment assets. Gross revenues earned by the brokerage firm
related to investment transactions by NBI in fiscal 1998 and 1997, totaled
$1,000 and $90,000, respectively, on purchase and sale transactions totaling
$1,250,000 and $47,968,000 before fees, respectively.

During fiscal 1998, the Company borrowed a total of $100,000 from its Chief
Executive Officer for working capital needs. This amount was included in
short-term borrowings at June 30, 1998. The borrowings are subject to the
terms of a revolving line of credit note which provides for interest to be paid
at the rate of ten percent per annum. The entire principal amount outstanding
is due and payable in full on December 31, 1998.

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.

20. SUBSEQUENT EVENT

On August 1, 1998, the Company entered into a development and a leasing
agreement with a real estate developer for phase I of its planned commercial
real estate project in Belle Vernon, Pennsylvania. The development agreement
provides for a development fee of $250,000 to be paid over the construction
period, with a minimum fee of $15,000 if the Company is unsuccessful in
obtaining adequate financing for the project. The leasing agreement requires a
leasing commission based upon the square footage of the space leased, payable
50% upon execution of the lease and 50% upon tenant occupancy. In addition,
the leasing agreement provides for a sales commission based upon the gross
proceeds of the sale of an outparcel, payable upon closing of the sale.

32
<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(3)
b. Restated Bylaws(3)

10. Material Contracts
a. NBI, Inc. Employee and Director Stock Option Plan(1)
b. Form of NBI, Inc. Director Non-Qualified Stock Option
Agreement(1)
c. Form of NBI, Inc. Chief Executive Officer Non-Qualified
Stock Option Agreement(1)
d. Krazy Colors, Inc. Stock Purchase Agreement(2)
e. Krazy Colors, Inc. Shareholder Agreement(2)
f. Jay H. Lustig Warrant Certificate(2)
g. Belle Vernon Motel Corporation Land Lease Agreement(3)
h. Agreement between L.E. Smith Glass Company and The American
Flint Glass Workers' Union(3)
i. Amended Payment Agreement with the Internal Revenue
Service(4)
j. Consulting Agreement between the Company and Morris D.
Weiss(5)
k. Revolving Line of Credit from Chief Executive Officer(5)

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

23. Consent of Independent Accountant(5)

27. Financial Data Schedule
a. For the year ended June 30, 1998(5)

(b) Reports on Form 8-K:

1. Form 8-K dated April 28, 1998, Item 5 - Other Events:

The Company and the IRS entered into an Amended Payment
Agreement revising the payment terms related to NBI, Inc. IRS
debt of $5,278,000.

----------------------------------------------------------------------
(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 10-KSB for
the year ended June 30, 1995.
(4) Incorporated by reference to the Company's report on Form 10-QSB for
the quarter ended March 31, 1998.
(5) Filed herewith.

33
<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.

August 27, 1998 By: /s/ Jay H. Lustig
- --------------- -----------------------------
Jay H. Lustig
Chief 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
- --------------------- Chief Financial Officer, Secretary
Marjorie A. Cogan (Principal Financial and Accounting Officer) 8/27/98
-----------

/s/ Jay H. Lustig
- --------------------- Chief Executive Officer, Director
Jay H. Lustig (Principal Executive Officer) 8/27/98
-----------

/s/ Martin J. Noonan
- --------------------- Director 8/27/98
Martin J. Noonan -----------

<PAGE>
Exhibit 10(j):

CONSULTING AGREEMENT

Agreement, made as of April 7, 1997 (the "Effective Date"), by and
between NBI, Inc., a Delaware corporation (together with its successors and
assigns permitted under this Agreement, the "Company"), and Morris D. Weiss (the
"Consultant").

W I T N E S S E T H :

WHEREAS, the Consultant has the ability to offer to the Company
expertise, knowledge and assistance with respect to business and legal matters;
and

WHEREAS, the Company desires to retain Consultant to provide such
services to the Company, and the Consultant desires to provide such services to
the Company, subject to the terms and provisions of this Agreement;

NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the Company and the Consultant (individually a "Party" and
together the "Parties") agree as follows:

1. CONSULTING TERM.

The term of this Agreement shall commence as of the Effective Date
hereof and shall continue for three (3) years. Upon the expiration of the
initial three (3) year term, this Agreement shall be automatically renewed for
successive periods of one (1) year each, unless, not later than ninety (90) days
prior to the end of the initial term or any renewal term, the Company shall have
given notice to the Consultant or the Consultant shall have given notice to the
Company that either of them does not wish to extend this Agreement. The first
one (1) year renewal period shall commence on the first day immediately
following the conclusion of the initial three (3) year term. (The term of this
Agreement shall be referred to herein as the "Consulting Term.")

2. CONSULTING SERVICES.

2.1 The Consultant shall provide consulting services to the Company
at the request of the President and Chief Executive Officer of the Company.
Such consulting services shall include advice on business and legal issues and
other mutually agreeable projects.

2.2 The Consultant shall devote substantial but not exclusive
attention to the affairs of the Company as the

<PAGE>

Consultant's duties may reasonably require, it being understood that the
Consultant is simultaneously entering into a consulting agreement, either
personally or through an entity he owns or controls, and an employment
agreement with unrelated businesses and will be devoting substantial
attention to such other entities as well.

2.3 The Parties acknowledge and agree that the Consultant is an
independent contractor and is not a partner, employee, or agent with the Company
or any of its subsidiaries or affiliates. Nothing in the Agreement shall be
construed to grant either Party the authority to enter into a contract in the
name of the other Party, or to bind the other Party in any manner.
Notwithstanding the above, at the request of the Company the Consultant agrees
to accept and serve in the position of a Senior Vice President and General
Counsel of the Company during the Consulting Term.

3. CONSULTING FEE.

The Consultant shall be paid an annual Consulting Fee of Seventy Five
Thousand Dollars ($75,000.00) such consulting fee to be paid in substantially
equal semi-monthly installments.

4. GRANT OF STOCK OPTION.

The Company has previously adopted an Employee and Director Stock
Option Plan (the "Stock Plan"). As soon as practicable after the Effective
Date, the Company agrees to recommend to the Company's Board that the Consultant
be granted under the Stock Plan the same benefits and incentives (on the same
terms and conditions) as those available to other senior executives of the
Company.

5. REIMBURSEMENT OF BUSINESS AND OTHER EXPENSES.

The Consultant is authorized to incur reasonable expenses in carrying
out his duties and responsibilities under this Agreement and the Company shall
promptly reimburse him for all reasonable business expenses incurred in
connection with carrying out the business of the Company, subject to
documentation in accordance with the Company's policy.

6. PERQUISITES.

During the Consulting Term, the Consultant shall be entitled to
benefits and perquisites that are comparable to the fringe benefits and
perquisites offered to the Company's senior executive officers and directors in
accordance with the most favorable plans, practices, programs and policies of
the Company.

7. TERMINATION OF CONSULTING TERM.

<PAGE>

7.1 The Consulting Term shall terminate at the earlier of the (i)
expiration of this Agreement as provided in section 1. hereof, or (ii) the date
of the death of the Consultant.

7.2 Notwithstanding anything herein to the contrary, the Consulting
Term shall not terminate during any period of physical or mental incapacity of
the Consultant which results in the Consultant's temporary or permanent
inability to perform the services contemplated under this Agreement, as
determined by an Approved Medical Doctor. For this purpose, an Approved Medical
Doctor shall be a medical doctor jointly selected by the Consultant and the
Company. In the event that the Consultant and the Company cannot agree on a
medical doctor, each Party shall select a medical doctor and the two selected
medical doctors shall jointly select a third medical doctor to serve as the
Approved Medical Doctor.

8. INDEMNIFICATION.

To the full extent authorized or permitted by law, the Company shall
hold harmless and indemnify the Consultant against any and all judgments,
penalties (including excise and similar taxes), fines, settlements and
reasonable expenses (including, but not limited to attorney's fees), incurred in
connection with any actual or threatened action or proceeding, whether civil or
criminal, to which the Consultant is made or is threatened to be made a party by
reason of the fact that the Consultant then is or was a director or officer of
the Company or then serves or has served any other corporation, partnership,
joint venture, trust, employment benefit plan or other enterprise in any
capacity at the request of the Company. To the fullest extent so permitted, the
foregoing shall in any actual or threatened proceeding require the Company to
advance expenses on behalf of the Consultant as said expenses are incurred.

9. EFFECT OF AGREEMENT.

Except as specifically provided in this Agreement, this Agreement
shall not affect nor have any force or effect upon any other agreement to which
the Consultant is a party and/or beneficiary.

<PAGE>

10. ASSIGNABILITY; BINDING NATURE.

This Agreement shall be binding upon and inure to the benefit of the
Parties and their respective successors, heirs (in the case of the Consultant)
and assigns. No rights or obligations of the Company under this Agreement may
be assigned or transferred by the Company except that such rights or obligations
may be assigned or transferred pursuant to a merger or consolidation in which
the Company is not the continuing entity, or the sale or liquidation of all or
substantially all of the assets of the Company; PROVIDED, HOWEVER, that the
assignee or transferee is the successor to all or substantially all of the
assets of the Company and such assignee or transferee assumes the liabilities,
obligations and duties of the Company, as contained in this Agreement, either
contractually or as a matter of law. The Company further agrees that, in the
event of a sale of assets or liquidation as described in the preceding sentence,
it shall take whatever action it legally can in order to cause such assignee or
transferee to expressly assume the liabilities, obligations and duties of the
Company hereunder. No rights or obligations of the Consultant under this
Agreement may be assigned or transferred by the Consultant other than his rights
to compensation and benefits, which may be transferred only by will or operation
of law, except as provided in Section 15 below; provided, however, that
Consultant may in the future assign or transfer his rights or obligations to an
entity he owns or controls.

11. REPRESENTATION.

The Company represents and warrants that it is fully authorized and
empowered to enter into this Agreement and that the performance of its
obligations under this Agreement will not violate any agreement between it and
any other person, firm or organization. The Consultant represents that he knows
of no agreement between him and any other person, firm or organization that
would be violated by the performance of his obligations under this Agreement.

12. ENTIRE AGREEMENT.

This Agreement contains the entire understanding and agreement between
the Parties concerning the subject matter hereof and supersedes all prior
agreements, understandings, discussions, negotiations and undertakings, whether
written or oral, between the Parties with respect thereto.

<PAGE>

13. AMENDMENT OR WAIVER.

No provision in this Agreement may be amended unless such amendment
is agreed to in writing and signed by the Consultant and an authorized
officer of the Company. No waiver by either Party of any breach by the other
Party of any condition or provision contained in this Agreement to be
performed by such other Party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same or any prior or subsequent
time. Any waiver must be in writing and signed by the Consultant or an
authorized officer of the Company, as the case may be.

14. SEVERABILITY.

In the event that any provision or portion of this Agreement shall
be determined to be invalid or unenforceable for any reason, in whole or in
part, the remaining provisions of this Agreement shall be unaffected thereby
and shall remain in full force and effect to the fullest extent permitted by
law.

15. SURVIVORSHIP.

The respective rights and obligations of the Parties hereunder shall
survive any termination of the Consultant's employment to the extent necessary
to the intended preservation of such rights and obligations.

16. BENEFICIARIES/REFERENCES.

The Consultant shall be entitled, to the extent permitted under any
applicable law, to select and change a beneficiary or beneficiaries to receive
any compensation or benefit payable hereunder following the Consultant's death
by giving the Company written notice thereof. In the event of the Consultant's
death or a judicial determination of his incompetence, reference in this
Agreement to the Consultant shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative.

17. GOVERNING LAW/JURISDICTION.

This Agreement shall be governed by and construed and interpreted in
accordance with the laws of Texas without reference to principles of conflict of
laws.

<PAGE>

18. RESOLUTION OF DISPUTES.

Any disputes arising under or in connection with this Agreement shall,
at the election of the Consultant or the Company, be resolved by binding
arbitration, to be held in San Antonio, Texas in accordance with the rules and
procedures of the American Arbitration Association. Judgment upon the award
rendered by the arbitrator(s) may be entered in any court having jurisdiction
thereof. Costs of the arbitration or litigation, including, without limitation,
reasonable attorneys' fees of both Parties, shall be borne by the Company. Each
party shall have an opportunity to present evidence on the issues in dispute
before the arbitrator(s) and each party may be represented by legal counsel.
Pending the resolution of any arbitration or court proceeding, the Company shall
continue payment of all amounts due the Consultant under this Agreement and all
benefits to which the Consultant is entitled at the time the dispute arises.
The arbitrators shall decide which party will bear the expenses of such
arbitration (including attorneys' fees).

19. NOTICES.

Any notice given to a Party shall be in writing and shall be deemed
to have been given when delivered personally or sent by certified or
registered mail, postage prepaid, return receipt requested, duly addressed to
the Party concerned at the address indicated below or to such changed address
as such Party may subsequently give such notice of:

If to the Company, to:

NBI, Inc.
1880 Industrial Circle
Suite F
Longmont, CO 80501
Attention: Mr. Jay H. Lustig

and:

If to the Consultant, to:

NBI, Inc.
701 Brickell Avenue
Suite 2100
Miami, Florida 33131
Attention: Morris D. Weiss

<PAGE>

20. HEADINGS.

The headings of the sections contained in this Agreement are for
convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.

21. COUNTERPARTS.

This Agreement may be executed in two or more counterparts.

IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first written above.

NBI, Inc.

By: /s/ JAY H. LUSTIG
-----------------------------------
Jay H. Lustig
Chairman of the Board and CEO

/s/ MORRIS D. WEISS
--------------------------------------
Morris D. Weiss

<PAGE>
Exhibit 10 (k):
REVOLVING LINE OF CREDIT

$100,000 Longmont, Colorado
September 5, 1997

For value received, NBI, Inc., the borrower ("Borrower") hereby promises to pay
to the order of Jay H. Lustig, the ("Lender"), at the Lender's offices at 100
Wilshire Blvd., Suite 1700, Santa Monica, California 90401, the principle sum
outstanding, not to exceed $100,000, together with interest compounded monthly,
at the rate of ten percent (10%) per annum on the unpaid balance of the line of
credit until such balance is paid in full. The principal amount of the line of
credit, together with all interest accrued thereon as set forth above shall be
due and payable on December 31, 1998.

Prepayment of this line of credit is allowed at any time without penalty or
premium. Payments received shall be first applied to payment of accrued
interest and then to satisfaction of principle.

This line of credit shall be governed by, and construed and enforced in
accordance with, the laws in the State of Colorado. The terms of this line of
credit have been previously approved by the Board of Directors of NBI, Inc.

The interest on this line of credit shall not exceed the maximum interest rate
permitted by applicable law.

In witness thereof, the Borrower has executed and delivered this line of credit
effective as of the date first set forth above.

/s/ Marjorie A. Cogan
---------------------------------------
NBI, Inc.
by Marjorie A. Cogan, CFO

Sworn to (or affirmed) and subscribed before me this
16th day of July, 1998

/s/ Lora Flynn
- -------------------------------
(Notary Public Signature)

October 9, 2001
- -------------------------------
(Commission Expires)

<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 31, 1998, 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, 1998.

BDO Seidman, LLP

Denver, Colorado
August 27, 1998

<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,
1998 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-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 209
<SECURITIES> 0
<RECEIVABLES> 1,444
<ALLOWANCES> 69
<INVENTORY> 2,750
<CURRENT-ASSETS> 4,490
<PP&E> 9,616
<DEPRECIATION> 2,180
<TOTAL-ASSETS> 12,205
<CURRENT-LIABILITIES> 7,369
<BONDS> 3,313
101
0
<COMMON> 0
<OTHER-SE> 1,199
<TOTAL-LIABILITY-AND-EQUITY> 12,205
<SALES> 12,519
<TOTAL-REVENUES> 14,693
<CGS> 9,032
<TOTAL-COSTS> 10,661
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 99
<INTEREST-EXPENSE> 593
<INCOME-PRETAX> (190)
<INCOME-TAX> (72)
<INCOME-CONTINUING> (118)
<DISCONTINUED> 0
<EXTRAORDINARY> 290
<CHANGES> 0
<NET-INCOME> 172
<EPS-PRIMARY> .02
<EPS-DILUTED> .02

</TABLE>