SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities and Exchange Act
of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for the Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Sec. 240.14a-11(c) or Sec. 240.14a-12
NBI, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchanged Act Rule 0-11 (set forth the amount on which the filing
fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by the registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, schedule or registration statement number:
(3) Filing party:
(4) Date filed:
<PAGE>
NBI, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 16, 1999
The Annual Meeting of Stockholders of NBI, Inc., a Delaware corporation
(the "Company" or "NBI"), will be held on Thursday, December 16, 1999, at 4:30
p.m., Eastern Time, at the Belle Vernon Holiday Inn, I-70 and Highway 51,
Belle Vernon, Pennsylvania, for the following purposes:
1. To elect two directors to the Company's Board of Directors.
2. To consider and approve the terms and conditions of the Company's plan
to sell a majority of the assets of a wholly-owned subsidiary, Willowbrook
Properties, Inc. ("Willowbrook Properties") and all of the capital stock of a
wholly-owned subsidiary, NBI Properties, Inc. ("NBI Properties").
3. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
All stockholders are cordially invited to attend the meeting, although
only stockholders of record at the close of business on October 18, 1999 will
be entitled to notice of and to vote at the meeting. The minutes of the last
Annual Stockholders' Meeting and the stockholders' list of their share
eligibility to vote at the 1999 Annual Meeting will be open to inspection by
the stockholders at the Company's principal office, 1880 Industrial Circle,
Suite F, Longmont, Colorado 80501, for a period of ten (10) days prior to the
annual meeting.
Shares can only be voted at the meeting if the holder is present or
represented by proxy. If you do not expect to attend the meeting, you are
urged to date and sign the enclosed proxy and return it in the accompanying
envelope promptly so that your shares may be voted in accordance with your
wishes and the presence of a quorum may be assured. The prompt return of your
signed proxy, regardless of the number of shares you hold, will aid the
Company in reducing the expense of additional proxy solicitation. The giving
of such proxy does not affect your right to vote in person in the event you
attend the meeting.
By Order of the Board of Directors
Marjorie A. Cogan
Secretary
Longmont, Colorado
November 26, 1999
YOUR PROXY
PLEASE SIGN AND RETURN YOUR PROXY PROMPTLY IN THE ENCLOSED POSTPAID ENVELOPE.
SHOULD YOU ATTEND THE MEETING, YOU MAY VOTE IN PERSON EVEN THOUGH YOU HAVE
GIVEN A PROXY. THE PROMPT RETURN OF YOUR PROXY WILL BE OF GREAT HELP IN
PREPARATION FOR THE MEETING.
<PAGE>
NBI, INC.
1880 INDUSTRIAL CIRCLE, SUITE F
LONGMONT, COLORADO 80501
PROXY STATEMENT
SOLICITATION, EXERCISE AND REVOCABILITY OF PROXY
The enclosed proxy is solicited by the Board of Directors of NBI, Inc.
for use at the Annual Meeting of Stockholders to be held on Thursday, December
16, 1999, or at any adjournment or postponement thereof. The meeting will be
held at 4:30 p.m., Eastern Time, at the Belle Vernon Holiday Inn, I-70 and
Highway 51, Belle Vernon, Pennsylvania. It is anticipated that this proxy
statement and the accompanying form of proxy will first be mailed to the
stockholders of the Company on or about November 23, 1999. The Company's
principal executive offices are located at 1880 Industrial Circle, Suite F,
Longmont, Colorado 80501, and its telephone number at those offices is (303)
684-2700.
A proxy is revocable at any time, before it is voted, by written notice
to the Company, grant of a subsequent proxy, or voting at the meeting in
person. Unless contrary instructions are indicated on the proxy, all shares
represented by valid proxies received pursuant to this solicitation (and not
properly revoked before they are voted) will be voted for the election of the
two nominees to the Board of Directors named elsewhere herein, for approval of
the terms and conditions of the Company's plan to sell a majority of the
assets of Willowbrook Properties and all of the capital stock of NBI
Properties, and to transact such other business as may come before the
meeting. In the event a stockholder specifies a different choice on his
proxy, his shares will be voted in accordance with the specifications so made.
Abstentions and broker non-votes are counted toward a quorum. Abstentions are
counted in the tabulations of the votes cast, but broker non-votes on any
proposal are not considered to be represented at the meeting, as to such
proposal, and, therefore, are not counted for purposes of determining whether
a proposal has been approved.
COST OF SOLICITATION
The cost of soliciting proxies will be borne by the Company.
VOTING
Only stockholders of record at the close of business on October 18, 1999,
will be entitled to vote at the meeting. On that date there were 8,103,320
shares of the Company's common stock issued and outstanding, entitled to one
vote per share. Stockholders are not entitled to cumulate their votes in the
election of directors, which means that the holders of more than half the
shares voting for the election of directors can elect all the directors if
they choose to do so. On all matters, unless otherwise noted, a favorable
vote consists of a simple majority of the votes represented at a meeting at
which a quorum is present. The Company believes that as of October 18, 1999,
the approximate number of stockholders of record of its common stock was
1,230. This includes shares held in nominee or "street" accounts.
The Board of Directors knows of only four stockholders owning more than
five percent of the outstanding voting securities of the Company: (i) Jay H.
Lustig, the Chairman of the Board and Chief Executive Officer of the Company,
(ii) Hakatak Enterprises, Inc., (iii) Harry J. and Patricia S. Brown, and (iv)
Transamerica Occidental Life Insurance Company. See "Beneficial Ownership of
Common Stock."
<PAGE>
ELECTION OF DIRECTORS
At the time of the annual meeting, the Board of Directors will consist of
two incumbent members who are seeking to be elected at the meeting to hold
office until the next meeting of stockholders and until their successors are
elected and qualified. Although the Bylaws specify that the Board of
Directors shall consist of three directors, there is one vacancy on the Board,
and it is not presently contemplated that such vacancy will be filled.
INFORMATION CONCERNING DIRECTORS
Jay H. Lustig and Martin J. Noonan, both incumbent directors, have been
nominated by the Board of Directors for election. Both nominees have informed
the Company that they are willing to serve, if elected, and management has no
reason to believe that either nominee will be unavailable. In the event a
nominee for director should become unavailable for election, the persons named
in the proxy will vote for the election of any other person who may be
recommended and nominated by the Board for the office of director.
Information regarding nominees and directors is set forth below.
NOMINEES FOR ELECTION AS DIRECTORS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name Age Principal Occupation Director Since
- ----------------- --- --------------------------------------------- --------------
Jay H. Lustig 45 President, J.H.L. Holdings and Equibond, Inc. February 1992
Martin J. Noonan 47 Managing Director of NBI, Inc. April 1994
</TABLE>
JAY H. LUSTIG has been Chairman of the Board since February 1992 and
Chief Executive Officer since October 1993, although he began acting in the
capacity of Chief Executive Officer in September 1992. Mr. Lustig has also
been President of J.H.L. Holdings, Inc., an investment management firm, since
1989, and President of Equibond, Inc., a securities broker-dealer and member
of the National Association of Securities Dealers, Inc., since 1995. In
addition, he is Chairman of the Board of National Bancshares Corporation of
Texas, a four-bank holding company headquartered in San Antonio, Texas.
MARTIN J. NOONAN, Director, has been with the Company for thirteen years
and has been Managing Director of NBI, Inc. since June 1993 with the
responsibility for managing the day-to-day activities within the Company. He
has also been President of L.E. Smith Glass Company, a wholly-owned subsidiary
of NBI, since October 1997. In addition, he was General Manager of the
systems integration operation from June 1992 to June 1994 and Director of
Marketing from September 1986 to June 1992. Mr. Noonan is also a licensed
stock broker for Equibond, Inc.
COMMITTEES, ATTENDANCE, NOMINATIONS
The Company has standing audit, compensation and nominating committees,
each of which consists of Mr. Lustig and Mr. Noonan. The nominating committee
is responsible for the nomination of persons whose names shall appear on the
ballot for election of directors. The audit committee recommends engagement
of the Company's independent accountants, approves services performed by such
accountants, and reviews and evaluates the Company's accounting system of
internal controls. The compensation committee approves salaries and other
compensation arrangements for the officers of the Company; however, Mr. Lustig
does not vote on matters relating to his compensation. These committees did
not meet during fiscal year 1999; however, these issues were discussed at
regular board meetings.
The Company's Board of Directors met four times during fiscal year 1999.
Both directors participated by personally or telephonically attending, during
fiscal year 1999, all Board of Directors meetings.
<PAGE>
EXECUTIVE OFFICERS
JAY H. LUSTIG is the Chairman of the Board and Chief Executive Officer of
the Company (a "Named Executive Officer"). He has been on the Board since
February 1992. Mr. Lustig has performed the functions of a chief executive
officer since September 25, 1992, but only assumed the title of Chief
Executive Officer on October 1, 1993, the effective date of his employment
agreement with the Company. Prior to October 1, 1993, Mr. Lustig received no
compensation for performing the functions of the chief executive officer.
MARTIN J. NOONAN has been with the Company for thirteen years and has
been Managing Director of NBI, Inc. since June 1993 with the responsibility
for managing the day-to-day activities within the Company (a "Named Executive
Officer"). He has also been President of L.E. Smith Glass Company, a
wholly-owned subsidiary of NBI, since October 1997. In addition, he was
General Manager of the systems integration operation from June 1992 to June
1994, and Director of Marketing from September 1986 to June 1992. He has been
on the Board of Directors since April 1994. Mr. Noonan is also a licensed
stock broker for Equibond, Inc.
MARJORIE A. COGAN has been Chief Financial Officer of the Company since
October 1997, with responsibility for managing the accounting and finance
functions of the Company. She has also been Secretary of the Company since
May 1993 and was previously Corporate Controller of the Company from May 1993
until October 1997. Ms. Cogan has been NBI for twelve years; prior to joining
NBI, Ms. Cogan was an auditor with a Denver-based CPA firm for four years.
Ms. Cogan graduated from Regis University summa cum laude with a bachelor's
degree in accounting and business administration and obtained her CPA license
in 1983.
MORRIS D. WEISS has been Senior Vice President and General Counsel since
April 1997 with responsibilities for overseeing and managing the legal affairs
of the Company. Prior to joining the Company, Mr. Weiss was a partner with
the law firm of Weil, Gotshal & Manges, LLP from January 1994 until April
1997, and had been an associate at such firm since October 1985. In addition,
Mr. Weiss has been General Counsel of Equibond, Inc. since April 1997, and
Senior Vice President and General Counsel of National Bancshares Corporation
of Texas since April 1997.
The Company has no other executive officers as defined under the
Securities Exchange Act of 1934.
EXECUTIVE COMPENSATION
Following is information regarding the compensation of the Company's CEO
and Managing Director (the "Named Executive Officers"). The Company has no
other executive officers whose total annual salary and bonus exceeded
$100,000.
The summary compensation table following contains information regarding
the compensation of the Named Executive Officers for services rendered in all
capacities during fiscal years 1999, 1998 and 1997.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
Other
Annual
Name and Fiscal Salary Bonus Compensation
Principal Position Year ($) ($) ($)
<S> <C> <C> <C> <C>
Jay H. Lustig, 1999 $ 60,000 -- $ 6,475(1)
Chief Executive Officer 1998 $ 60,000 -- $ 6,475(1)
1997 $ 60,000 $ 22,000 --
Martin J. Noonan,
Managing 1999 $ 90,000 $ 15,000 --
Director 1998 $ 90,000 -- --
1997 $ 90,000 -- --
Long Term Compensation
Restricted
Stock Securities All Other
Name and Award(s) Underlying Compensation
Principal Position ($) Options (#) ($)
<S> <C> <C> <C>
Jay H. Lustig, -- -- --
Chief Executive Officer -- 400,000(2) --
-- -- --
Martin J. Noonan,
Managing -- -- --
Director -- 100,500(3) --
-- -- --
<FN>
(1) Value of personal use of company vehicle.
(2) During fiscal 1998, the expiration date of these options was extended to October 1, 2003, with no
change in the exercise price or other terms of the options. These options were originally granted under
the terms of his employment agreement, and were scheduled to expire on October 1, 1998.
(3) During fiscal 1998, the expiration date of these options was extended to August 27, 2002, with no
change in the exercise price or other terms of the options. These options were originally granted under
the Company's employee stock option plan and were scheduled to expire on August 27, 1997.
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
No options were granted to the Named Executive Officers during the fiscal
year ended June 30, 1999.
The following table shows that the Named Executive Officers did not
exercise any stock options during the fiscal year ended June 30, 1999 and
states the number of shares covered by both exercisable and non-exercisable
stock options as of June 30, 1999. Also reported are the values for
"in-the-money" options which represent the positive spread between the
exercise price of any such existing stock options and the year-end price of
Common Stock.
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Shares
Acquired on Value
Name Exercise (#) Realized ($)
<S> <C> <C>
Jay H.Lustig -- --
Martin J. Noonan -- --
Number of Securities Value of Unexercised In-the-
Underlying Unexercised Money Options at FY-End
Options at FY-End (#) ($) Exercisable/Unexercisable
Exercisable/Unexercisable (1)
<S> <C> <C>
Jay H. Lustig 400,000(2) 0 $ 79,500 $ 0
Martin J. Noonan 100,500(3) 0 $ 59,169 $ 0
<FN>
(1) Based on the closing stock price as of June 30, 1999 of the
underlying shares of common stock of $.96875 per share, less the per share
exercise price of $.77 for J. Lustig and the per share exercise price of $.38
for M. Noonan.
(2) Includes 400,000 shares underlying options issued during fiscal 1994
in conjunction with this Named Executive Officer's employment agreement.
During fiscal 1998, the expiration date of these options was extended to
October 1, 2003.
(3) Consists of 100,500 shares issuable upon exercise of options. During
fiscal 1998, the expiration date of these options was extended to August 27,
2002.
</TABLE>
DIRECTOR COMPENSATION
Directors who are not employees of the Company receive a fee of $1,000
per regular meeting, $500 per telephonic meeting, $500 per committee meeting
(except when attended in conjunction with a Board meeting) and reimbursement
of expenses incurred in attending meetings. No directors' fees were incurred
during fiscal 1999, as all directors were also employees of the Company.
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Company entered into an employment agreement effective October 1,
1993, with Jay H. Lustig (the "CEO Agreement"). Pursuant to the terms of the
CEO Agreement, Mr. Lustig became an employee and Chief Executive Officer of
the Company as of October 1, 1993. Under the terms of this agreement, the
Company pays Mr. Lustig an annual salary of $60,000.
Mr. Lustig's position as CEO of the Company is a part-time position to
which he is required to dedicate no less than one-third of normal executive
business hours. In addition to Mr. Lustig's salary, the CEO Agreement
provides that the Company will pay Mr. Lustig an annual bonus of 10% of the
Company's pre-tax profits, if any, derived from all sources, but only to the
extent such 10% figure exceeds Mr. Lustig's base salary. Mr. Lustig remains
eligible for such bonus for twelve months after his termination from the
position of CEO. The Company has accrued, but not paid a $22,000 bonus for
fiscal year 1997, under the terms of this agreement. No other amounts have
been paid or accrued under the terms of this agreement, since its inception.
In addition to the salary and bonus described above, the CEO Agreement
required that Mr. Lustig be granted a non-qualified stock option to purchase
400,000 shares of the Company's common stock at an exercise price of $.77 per
share. Such price was approximately 400% of certain historic trading levels
of the Company's common stock. This option was effective as of October 1,
1993, was fully vested as of October 1, 1997 and is still outstanding. On
January 13, 1998, the Company extended the expiration date of these options to
October 1, 2003.
<PAGE>
The CEO Agreement runs for one year terms which automatically renew on
July 1, unless terminated in writing by a majority of the Board of Directors
prior to such renewal date. As there was no action to terminate the CEO
Agreement, it automatically renewed for an additional one year term on July 1,
1999.
Effective April 7, 1997, the Company entered into a consulting agreement
with Morris D. Weiss. The agreement is for an initial term of three years and
automatically renews for successive one year periods unless one of the parties
elects not to extend the agreement. The agreement provides for Mr. Weiss to
be paid an annual consulting fee of $75,000 and requires the Company to grant
Mr. Weiss a stock option on terms similar to those available to other senior
executives. During fiscal year 1998, Mr. Weiss was granted an option to
acquire 100,500 shares of common stock.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding the
beneficial ownership of the Company's common stock, as of September 30, 1999
by (i) persons, including groups, known to the Company to own beneficially
more than five percent (5%) of the outstanding common stock of the Company,
(ii) each director and nominee for director, (iii) each Named Officer and (iv)
all executive officers and directors as a group. A person is deemed to be a
beneficial owner of common stock that can be acquired by such person within 60
days from September 30, 1999, upon the exercise of warrants or options.
<TABLE>
<CAPTION>
Amount and
Nature of Total as
Name and Address of Beneficial Percent
Beneficial Owner Ownership of Class
<S> <C> <C>
Jay H. Lustig 2,679,565 (1) 26.16%
P.O. Box 505
Belle Vernon, PA 15012
Martin J. Noonan 100,500 (2) 1.23%
1880 Industrial Circle, Suite F
Longmont, CO 80501
Hakatak Enterprises, Inc. 928,645 11.46%
PO Box 1623
Pacific Palisades, CA 90272
Harry J. and Patricia S. Brown 961,000 11.86%
16079 Mesquite Circle
Fountain Valley, CA 92708
Transamerica Occidental Life
Insurance Co. 445,029 5.49%
1150 Olive Street
Los Angeles, CA 90015
All Executive Officers and
Directors as a Group (4 persons) 2,920,890 (3) 27.90%
<FN>
(1) Includes 400,000 shares issuable upon exercise of options and 1,740,000
shares issuable upon exercise of warrants. Also includes 324,565 shares owned
by an investment partnership in which he has an ownership interest and as to
which he has sole voting and investment power.
(2) Consists of 100,500 shares issuable upon exercise of options.
(3) Includes 626,125 shares issuable upon exercise of options and 1,740,000
shares issuable upon exercise of warrants.
</TABLE>
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 ("Exchange Act")
requires the Company's officers and directors, and persons who beneficially
own more than 10% of a registered class of the Company's equity securities, to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than 10% stockholders
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, the Company believes all forms required by Section
16(a) during the fiscal year ended June 30, 1999 were timely filed.
RELATED PARTY TRANSACTIONS
In February 1995, the Company entered into an agreement to acquire 80% of
the outstanding stock of Krazy Colors, Inc., a small children's paint
manufacturing company, effective as of 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. Under the purchase
agreement, the Company paid $288,000 in cash for the stock, including $158,000
paid to NBI's CEO. In addition, the sellers are eligible to receive
continuing annual royalty payments equal to a specified percentage of annual
gross margin. No royalties were incurred by the Company during the fiscal
years ended June 30, 1999 and 1998 and no royalties are expected to be earned
in the future due to the Company's discontinuance of this operation in fiscal
1999. In conjunction with the purchase agreement, the sellers were issued
warrants to purchase a total of 1.7 million shares of NBI's common stock,
including warrants to purchase 935,000 shares issued to the Company's CEO, at
a price of $.89 per share. These warrants are exercisable through December
31, 2002.
During fiscal 1999 and 1998, the Company utilized Equibond, Inc., a
securities broker-dealer, 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 Equibond related to investment transactions by NBI in fiscal 1999
and 1998, totaled $10,000 and $1,000, respectively, on purchase and sale
transactions totaling $19,216,000 and $1,250,000, respectively, before fees.
During fiscal 1998, the Company borrowed $100,000 from its CEO for
working capital needs. The borrowings are subject to the terms of a revolving
line of credit. The line of credit provides for interest to be paid at the
rate of ten percent per annum and is due and payable in full on December 31,
1999. In September and November 1999, NBI's CEO advanced Willowbrook
Properties $155,000 and $159,740, respectively, to fund development costs
incurred on Phase I of its land development project. Concurrently with the
closing of the Willowbrook Properties' sale transaction (see "Proposal 2: Sale
of Willowbrook Properties and NBI Properties"), such amounts shall be deemed
to be expenses of the buyer. In the event the closing does not occur on this
transaction, NBI will repay the CEO such amounts on a due date to be
determined at that time, with interest at the rate of ten percent per annum
accrued since the dates of the advances.
The Company's CEO has personally guaranteed a $500,000 letter of credit for
the benefit of the Commonwealth of Pennsylvania, Department of Transportation,
required in order for Willowbrook Properties to commence certain road
improvements mandated by the Pennsylvania Department of Transportation in
conjunction with Phase I of its land development project. In addition, in
conjunction with the Company's efforts to obtain construction financing for
Phase I of the development, Mr. Lustig has committed to personally guarantee
the repayment of such construction financing and to guarantee the completion
of Phase I of the development.
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. As a matter of policy, any future transactions
between the Company and any of its executive officers, directors or principal
stockholders will be subject to these same standards and will be approved by a
majority of the disinterested members of the Board of Directors.
<PAGE>
PROPOSALS FOR VOTING
PROPOSAL 1: ELECTION OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
RE-ELECTION OF THE TWO INCUMBENT DIRECTORS AS DISCUSSED UNDER "ELECTION OF
DIRECTORS."
PROPOSAL 2: SALE OF WILLOWBROOK PROPERTIES AND NBI PROPERTIES
The Board has approved the terms and conditions of the Company's proposed
sale of a majority of the assets of Willowbrook Properties and all of the
capital stock of NBI Properties. The Company is planning to sell such assets
and stock in order to generate sufficient cash to pay the final installment of
$1.8 million on its IRS debt which is due on December 31, 1999. The Company's
ability to continue as a going concern is dependent upon obtaining funds
sufficient to pay off the IRS debt when due. The Company had originally
intended to raise the additional funds necessary to make the final installment
payment through a sale of Series A Cumulative Preferred Stock. The Company was
able to raise $4.8 million of net proceeds from the sale of such Preferred
Stock in December 1998, the proceeds of which were used to (i) pay a $3.5
million installment on the IRS debt due on December 31, 1998, (ii) fund a
majority of the land development costs paid for during fiscal 1999, and (iii)
invest in trading securities. However, in August of 1999, the Company
determined that it would not be able to raise sufficient funds from the sale
of additional shares of Preferred Stock, and determined that it would be
necessary to sell a portion of its assets to make the final installment
payment to the IRS.
The Company believes that a shareholder vote is not required for the sale
of these properties. However, because the proposed transactions would be
entered into with a director with a financial interest in the Company, the
Board of Directors decided to submit the transactions for approval by a
majority of the disinterested shareholders. If the Company does not receive
shareholder approval for the sale of the properties as described below, the
Company will, depending upon all of the facts and circumstances at that time,
and without seeking shareholder approval, (i) elect to modify the terms and
proceed with the sale to the same or related parties, (ii) elect to proceed
with the proposed transactions, or (iii) elect to sell the properties to a
third party. However, the Company believes that the purchase price for these
properties would be less favorable from a third party at this time, and NBI
also believes it would have difficulty completing a sale of the properties to
a third party prior to the due date of its IRS debt. Consequently, the
Company would likely default on the remaining $1.8 million installment payment
owed to the IRS, unless the Company could negotiate with the IRS for an
extension of time. There can be no assurance that the Company would be
successful in obtaining an extension. If the IRS did not agree to an
extension of time, it could declare a default and assess interest on the debt
since the last interest payment thereon (July 1, 1997), at the statutory rate
provided under the Internal Revenue Code, in amount estimated to total
approximately $1 million as of December 31, 1999, and seek to foreclose upon
the stock of NBI Properties and L.E. Smith, the Company's only other operating
subsidiary, in order to obtain payment of the final installment of $1.8
million and such default interest. If the proposed transactions are approved
by a majority of disinterested shareholders, in the event of any action
challenging the fairness of the transactions, the Company would have the right
to and would invoke the provisions of Delaware General Corporation Code
Section 144. This section provides in relevant part that no transaction
between a corporation and the affiliates of one or more of its directors or
officers is void or voidable solely for this reason if the material facts of
the affiliates' interests are disclosed and the transaction is approved in
good faith by a vote of the disinterested shareholders of the corporation.
The Delaware courts have held that the operative effect of this provision is
to change the standard of review of the transaction to the business judgment
rule, with the burden of proof resting upon the party challenging the
transaction.
HISTORY OF WILLOWBROOK PROPERTIES AND NBI PROPERTIES
Land and construction-in-progress comprise substantially all of the
assets of Willowbrook Properties. The land was acquired in January 1997 for
$1.0 million and consists of 88 acres of undeveloped land in Belle Vernon,
Pennsylvania situated along Route 51 with frontage for approximately 2,700
feet. During fiscal 1999, Willowbrook Properties retained a real estate
developer and entered into a lease agreement with a national grocery store
chain to lease a significant portion of the total rentable square feet of
phase I of the development, which will be a mixed use
<PAGE>
retail center. Willowbrook Properties is currently in negotiations with a
number of other prospective tenants for occupancy in phase I. Construction on
phase I of the project began in April 1999, with an anticipated construction
period of approximately fourteen months from commencement. The construction
costs are projected to be approximately $9.0 million. As of September 30,
1999, the construction-in-progress totaled $1.4 million, excluding the land.
In September and November 1999, NBI's CEO advanced Willowbrook Properties
$155,000 and $159,740, respectively, to fund development costs incurred on
phase I, due to NBI's inability to pay for these costs out of its available
cash and cash equivalents. Concurrently with the closing of this Willowbrook
Properties' sale transaction, such amounts shall be deemed to be expenses of
the buyer. In the event the closing does not occur on this transaction, NBI
will repay the CEO such amounts on a due date to be determined at that time,
with interest at the rate of ten percent per annum accrued since the dates of
the advances (see "Related Party Transactions"). Willowbrook Properties
recently received a commitment for commercial financing to pay for a
significant portion of the construction costs of the project and Mr. Lustig
has committed to personally guarantee the repayment of such construction
financing and to guarantee the completion of Phase I of the development, in
order to facilitate NBI's attainment of such financing. In addition, the
Company's CEO has personally guaranteed a $500,000 letter of credit for the
benefit of the Commonwealth of Pennsylvania, Department of Transportation,
required in order for Willowbrook Properties to commence certain road
improvements mandated by the Pennsylvania Department of Transportation in
conjunction with Phase I of the development. Willowbrook Properties has
completed funding of the initial equity contribution required by the lender,
partially through proceeds from the advances received from Mr. Lustig.
However, significant additional equity contributions will be required during
the construction period of Phase I.
In August 1995, NBI acquired 100% of the outstanding capital stock of the
Belle Vernon Motel Corporation, now known as NBI Properties. NBI Properties
owns and operates an 80 room full service Holiday Inn in Belle Vernon
Pennsylvania. The hotel consists of approximately 21,000 square feet and is
situated 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. The hotel has generated operating income of $129,000, $38,000 and
$5,000 for the last three years ended June 30, 1999, 1998 and 1997,
respectively, representing a total of approximately 13%, 8% and 1% of the
total operating income from all operations of the Company.
TERMS AND CONDITIONS OF THE SALE OF WILLOWBROOK PROPERTIES
The Company plans to sell the land and construction-in-progress of
Willowbrook Properties to Bellevue Partners LP, which is 100% owned and
controlled by NBI's CEO, for a net purchase price of $3,300,000. The purchase
price is net of the construction costs which are being funded from advances
from Mr. Lustig. The purchase price is to be paid by $600,000 in cash and
$2.7 million in a note payable to Willowbrook Properties. The note payable by
the purchaser to NBI will bear interest at the rate of two-year Treasury Notes
plus 200 basis points (7.875% at November 1, 1999), with the rate to be
determined on the closing date of this transaction for the remainder of
calendar 1999 and all of calendar 2000, and to be redetermined each succeeding
December 31 for the following calendar year's rate. The note will be payable
in quarterly installments of interest only with the entire outstanding
principal balance plus any accrued but unpaid interest to be paid in full on
December 31, 2006. The note will be collateralized by a second security lien
in the property, to the extent permitted by the construction or permanent
lender, as the case may be, and will be subordinate to any construction
financing or permanent financing obtained for development of the property. In
the event the purchaser experiences a change in control, which requires the
consent of NBI, the note will be due in full immediately, at the option of
NBI. The note will be subject to customary representations and covenants,
including a prohibition against the incurrence of any debt senior to the
repayment obligation to NBI, unless such funds are procured for the purpose of
construction or development on the property.
The Company determined that the purchase price for the property was
reasonable based upon prior market valuations of the unimproved land and the
cost of the construction-in-progress completed on Phase I. The terms of the
note may not be as favorable as the Company might be able to obtain from an
unaffiliated third party. However, the Company believes that the total
purchase price is more favorable than the Company could have obtained from an
unaffiliated third party at this time. The Company did not seek independent
offers for purchase of the property, because it did not believe that it would
be possible to obtain terms as favorable to the Company as those proposed by
the purchaser, and it also did not believe that it could reasonably complete a
sale to a third party prior to the due date of its IRS debt.
<PAGE>
The Board believes the terms and conditions of this sale are in the best
interests of the Company because (i) the Company will be able to complete the
sale prior to the due date of the final installment on its IRS debt, (ii)
significant additional equity contributions would be required by the Company
during the construction period of Phase I, and the Company does not believe
that it could have raised such equity capital at the present time or in the
foreseeable future, (iii) the Company anticipates ultimately realizing a gain
on the transaction of approximately $900,000, net of selling expenses, and
(iv) the Company would be unable to utilize the future tax losses expected to
be generated by the completed development due to its $62.5 million of existing
net operating loss carryforwards. The Company has received a fairness opinion
from Mark I. Wolk and Associates regarding the terms and conditions of the
proposed transaction. (See "Fairness Opinion")
TERMS AND CONDITIONS OF THE SALE OF NBI PROPERTIES
The Company plans to sell all of the capital stock of NBI Properties to
Tybojen, Inc., which is 100% owned and controlled by NBI's CEO, for a purchase
price of $2,500,000. In addition, NBI agrees to allow a step-up in tax basis
to the purchaser through a Section 338(h)(10) election on its federal income
tax return, effectively treating the sale as an asset sale for tax purposes.
The purchase price is to be paid by $1.4 million in cash and $1.1 million in a
note payable to NBI, Inc. The note payable will bear interest at the rate of
two-year Treasury Notes plus 200 basis points (7.875% at November 1, 1999),
with the rate to be determined on the closing date of this transaction for the
remainder of calendar 1999 and all of calendar 2000, and to be redetermined
each succeeding December 31 for the following calendar year's rate. The note
will be payable in quarterly installments of interest only with the entire
outstanding principal balance plus any accrued but unpaid interest to be paid
in full on December 31, 2006. The note will be collateralized by a second
security lien in the property and will be subordinate to the existing mortgage
note on the hotel. In the event the purchaser experiences a change in
control, which requires the consent of NBI, the note will be due in full
immediately, at the option of NBI. The note will be subject to customary
representations and covenants, including a prohibition against the incurrence
of any debt senior to the repayment obligation to NBI without NBI's
permission.
The Company determined that the purchase price for the stock of NBI
Properties was reasonable based upon prior market valuations of the hotel.
The terms of the note may not be as favorable as the Company might be able to
obtain from an unaffiliated third party. However, the Company believes that
the total purchase price is more favorable than the Company could have
obtained from an unaffiliated third party at this time. The Company did not
seek independent offers for purchase of the hotel, because it did not believe
that it would be possible to obtain terms as favorable to the Company as those
proposed by Tybojen, Inc., and it also did not believe that it could
reasonably complete a sale to a third party prior to the due date of its IRS
debt.
The Board believes the terms and conditions of this sale are in the best
interests of the Company because (i) the Company will be able to complete the
sale prior to the due date of the final installment on its IRS debt, and (ii)
the Company anticipates ultimately realizing a financial statement gain on the
transaction of approximately $900,000, net of selling expenses. The Company
has received a fairness opinion from Mark I. Wolk and Associates regarding the
terms and conditions of the proposed transaction. (See "Fairness Opinion".)
ACCOUNTING TREATMENT
For financial statement purposes, the proposed sales would be recorded by
the Company in accordance with Financial Accounting Standards Board Statement
of Financial Standards ("SFAS") No. 66, "Accounting for Sales of Real Estate".
Under SFAS No. 66, because the buyer is a related party, no gain will be
recognized on these sales until the purchase price is collected in full in
cash, or the Company's CEO transfers all or a portion of his interest in the
purchaser(s) to outside parties; at such time, NBI could recognize a portion
of the gain on the NBI Properties sale transaction equal to the percentage of
ownership transferred. However, the Willowbrook Properties sale does not meet
the other requirements of SFAS No. 66 for recognition of gain until the
purchase price is paid in full in cash.
TAX CONSEQUENCES AND REGULATORY REQUIREMENTS
NBI expects to record a taxable gain of approximately $900,000 resulting
from the sale of the Willowbrook Properties assets, and a taxable gain of
approximately $2.1 million from the sale of the capital stock of NBI
<PAGE>
Properties. The Company has agreed to allow a step-up in tax basis to the
purchaser of the capital stock of NBI Properties through a Section 338(h)(10)
election on its federal income tax return, effectively treating the sale as an
asset sale for tax purposes. NBI does not expect to incur any significant
federal income taxes payable, due to the availability of capital loss and net
operating loss carryforwards. However, the Company does expect to incur
approximately $44,000 and $188,000 of Pennsylvania state income taxes on the
Willowbrook Properties and NBI Properties transactions, because it has
significantly lower Pennsylvania net operating loss carryforwards available.
There are no federal or state regulatory requirements that must be
complied with in connection with the proposed sales transactions, other than
the requirement that Tybojen, Inc. receive approval from the Pennsylvania
Liquor Control Board to transfer the hotel's liquor license.
PROFORMA INFORMATION
The following unaudited proforma consolidated balance sheet gives effect
to the dispositions of a majority of the assets of Willowbrook Properties and
all of capital stock of NBI Properties, as described in the terms of the sales
above. The proforma information is based on historical financial statements
of NBI, Inc. giving effect to these transactions through adjustments described
in the following explanatory notes to the unaudited proforma statement. The
September 30, 1999 unaudited consolidated proforma balance sheet gives effect
to these transactions as if they had occurred on September 30, 1999.
The operations of Willowbrook Properties and NBI Properties were
classified as discontinued operations in the Company's financial statements
for the three months ended September 30, 1999 and 1998 as shown in the
Company's Form 10-QSB. The only proforma adjustment to the Company's
historical consolidated statements of income resulting from these sales
transactions, other than the income tax adjustments reflected below, is
recognition of interest income on the notes receivable of $75,000 for the
quarter ended September 30, 1999, assuming the current two-year Treasury Notes
rate plus 200 basis points of 7.875%.
UNAUDITED PROFORMA CONSOLIDATED BALANCE SHEET
September 30, 1999
(amounts in thousands)
<TABLE>
<CAPTION>
Historical Proforma Proforma
NBI, Inc. Adjustments NBI, Inc.
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 77 $ 600 A $ 266
(33)B
1,400 D
(1,778)H
Accounts receivable, net 1,920 1,920
Inventories 2,670 2,670
Other current assets 241 (6)B 229
(6)E
------- --------- --------
Total current assets 4,908 177 5,085
Long-term notes receivable -- 2,700 A 3,800
1,100 D
Property and equipment, net 4,103 4,103
Deferred tax asset -- 623 G 623
Other assets 10 10
Net long-term assets of discontinued
operations 4,211 (2,641)A 8
(1,562)D
------- --------- -------
$13,232 $ 397 $13,629
======= ========= =======
</TABLE>
<PAGE>
UNAUDITED PROFORMA CONSOLIDATED BALANCE SHEET (cont'd)
September 30, 1999
(amounts in thousands)
<TABLE>
<CAPTION>
Historical Proforma Proforma
NBI, Inc. Adjustments NBI, Inc.
(unaudited) (unaudited)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of IRS debt and
other income taxes payable $ 1,795 $ 45 C $ 252
190 F
(1,778)H
Short-term borrowings and current
portion of notes payable 2,112 2,112
Accounts payable 1,112 24 B 1,175
39 E
Accrued liabilities 702 702
Net current liabilities of discontinued operations 273 (330)A 21
78 D
-------- ---------- --------
Total current liabilities 5,994 (1,732) 4,262
Long-term liabilities:
Notes payable 228 228
Deferred income taxes 92 (92)D --
Postemployment disability benefits and other 259 259
Deferred gain on sale -- 989 A 1,833
(63)B
952 D
(45)E
-------- ---------- --------
Total liabilities 6,573 9 6,582
-------- ---------- --------
Stockholders' equity:
Preferred stock 5 5
Capital in excess of par value - preferred 4,632 4,632
Common stock 101 101
Capital in excess of par value - common 6,566 6,566
Retained earnings (deficit) (3,777) (45)C (3,389)
(190)F
623 G
--------- ---------- --------
7,527 388 7,915
Less treasury stock at cost (868) (868)
-------- ---------- --------
Total stockholders' equity 6,659 388 7,047
-------- ---------- --------
$13,232 $ 397 $13,629
======== ========== ========
<FN>
EXPLANATORY NOTES TO PROFORMA BALANCE SHEET
(A) To record the gross proceeds from the sale of Willowbrook Properties' land
and construction-in-progress.
(B) To accrue the estimated selling expenses related to the Willowbrook
Properties sale consisting of 50% of the transfer taxes, legal and other
professional fees.
(C) To accrue the estimated state and federal income taxes related to the
Willowbrook Properties sale transaction.
(D) To record gross proceeds from the sale of all of the capital stock of NBI
Properties, Inc.
(E) To accrue the estimated selling expenses related to the sale of NBI
Properties' stock including legal and other professional fees.
(F) To accrue the estimated state and federal income taxes related to the NBI
Properties sale transaction.
<PAGE>
(G) To record the deferred tax asset for the timing difference related to the
gains on both the Willowbrook Properties and NBI Properties sales. For tax
purposes, these gains are recognized currently, whereas, for financial statement
purposes these gains will be deferred.
(H) To record payment of the Company's IRS debt from the proceeds of the
Willowbrook Properties and NBI Properties sale transactions.
</TABLE>
FAIRNESS OPINION
SUMMARY
Wolk Valuation Consultants, Inc. has issued a fairness opinion dated
November 4, 1999, regarding the Company's proposed sale of a majority of the
assets of Willowbrook Properties and all of the capital stock of NBI
Properties and has concluded that the transaction is fair to NBI, Inc. from a
financial point of view.
WOLK VALUATION CONSULTANTS, INC.
Wolk Valuation Consultants, Inc. is a Pittsburgh firm specializing in
financial and economic research and consulting, principally regarding the
valuation of closely held businesses and related interests.
The firm conducts valuation studies of public and private companies for a
variety of purposes, including: litigation, sale, equitable distribution,
ESOPs, buy/sell, estate and gift tax, and mergers and acquisitions. In
addition, the firm possesses considerable litigation support capabilities,
especially in rendering forensic expertise in loss measurement in commercial
disputes and lender liability claims, and fair consideration opinions in
leveraged buy-out, insider transaction and fraudulent conveyance matters.
MARK I. WOLK, A.S.A., A.E.P, is the founder and President of Wolk Valuation
Consultants, Inc., a business valuation and litigation support firm, and of
Mark I. Wolk and Associates, P.C., an accounting firm specializing in
taxation. He is a practicing Certified Public Accountant with over forty years
of experience. He has participated extensively in valuation studies of
closely held companies, including the rendering of expert testimony in court
and taking part in settlement negotiations.
Mr. Wolk is an Accredited Senior Appraiser (A.S.A.), Business Valuation
Division, of the American Society of Appraisers, a national professional
organization comprised of appraisal specialists. The designation of A.S.A. is
achieved only after meeting Society criteria, including: written examinations,
submission of representative appraisal reports, a minimum of five years of
full-time valuation experience and screening of applicants' practices and
ethics.
He is also a former President of the Estate Planning Council of Pittsburgh,
Former Director of the Family Firm Institute, and is a member of the Allegheny
Tax Society and the Pittsburgh Tax Club. In addition, he has lectured
extensively on the subjects of valuation, utilization of computers in
forecasting and decision-making, accountancy and taxation, financial planning
and public speaking. Mr. Wolk is also a member of the Business Valuation
Committee of the Pennsylvania Institute of Certified Public Accountants.
NOREEN DORNENBURG, M.B.A., PH.D. is a Consultant at Wolk Valuation
Consultants, Inc. She has been a consultant in the fields of Business
Strategy and Business Ethics for over fifteen years in Pittsburgh and Denver,
and has taught on the faculties of eight major colleges and universities
across the United States. She has addressed dozens of national conferences on
a variety of topics in the fields of leadership, strategy, management and
business ethics and has published three professional articles in the area of
business ethics.
Dr. Dornenburg earned her Ph.D. at Yale University in 1972 and her M.B.A. from
the University of Colorado-Boulder. Her undergraduate degree is a B.A. from
Seton Hill College, Greensburg, PA. She is a candidate member of the
American Society of Appraisers and a member of the Academy of Management and
the Society for Business Ethics.
<PAGE>
FAIRNESS OPINION
November 4, 1999
Board of Directors
NBI, Inc.
1880 Industrial Circle - Suite F
Longmont, CO 80501
Re: Proposed Purchase of the Assets of Willowbrook Development, Inc.
and 100% of the Capital Stock of NBI Properties, Inc.
Members of the Board:
You have asked us to advise you with respect to the fairness from a financial
point of view to NBI, Inc. (the "Company") of the consideration to be received
by the Company pursuant to the terms of the proposed transaction (the
"Transaction") with regard to the above referenced assets and entities as more
completely described below, between the Company and two entities in which the
Company's Chief Executive Officer, Mr. Jay Lustig, will hold an ownership
interest: Tybojen, Inc., a to be formed S-Corporation ( Tybojen ), and
Bellevue Partners, LP, a to be formed limited partnership. Our understanding
of the Transaction is as follows:
1. Tybojen will purchase 100% of the capital stock of NBI Properties, Inc.
from NBI, Inc. for a purchase price of $2,500,000. The purchase price will be
paid in two parts: $1,400,000 in cash upon purchase and a note for $1,100,000
due and payable on December 31, 2006. In addition, NBI, Inc. agrees to allow
a step-up in tax basis to Tybojen through a Section 338(h)(10) election.
2. Bellevue Partners, LP will purchase the assets of Willowbrook
Properties, Inc. (land and construction-in-progress) for a purchase price of
$3,300,000. The purchase price will be paid in two parts: $600,000 in cash
upon purchase and a note for $2,700,000, in connection with a loan due to NBI,
Inc. from Willowbrook Properties, Inc., due and payable on December 31, 2006.
Prior to and after the date of the Transaction, Mr. Lustig has and will
advance certain amounts for payment of ongoing construction costs at the
Willowbrook site. These amounts are to be deemed expenses of the buyer and
are not included in the purchase price.
3. The terms of the notes in each purchase are as follows:
a. INTEREST RATE: Two-Year U. S. Treasury rate plus 200 basis points,
with the rate to be determined on the closing date for the remainder of
calendar year 1999 and all of calendar year 2000, and to be re-determined each
succeeding December 31 for the following year's interest rate.
b. PAYMENTS: Interest only with a balloon payment due on December 31,
2006.
c. COLLATERAL: Second security interest in the Willowbrook property,
subordinate to the Three Rivers Bank security interest securing the
construction loan and a second security interest in the property known as the
Belle Vernon Holiday Inn, subordinate to its current mortgage. (It is our
understanding that Mr. Jay Lustig will also personally guarantee the Three
Rivers Bank construction loan for the Willowbrook site.)
d. OTHER: The respective notes are due in full at the option of NBI,
Inc. upon a change in control of the purchaser of either property.
In connection with our analysis, you have furnished us with certain documents
and other information concerning the Company, the assets to be sold and the
proposed purchasers as we requested. We have performed such studies, analyses
and inquiries as considered appropriate. Among other items we have
considered, we have:
<PAGE>
1) Read current and historical financial information with respect to the
results of operations, including: audited financial statements of NBI, Inc.
for fiscal years ended June 30, 1996, 1997, 1998 and 1999; audited and
unaudited financial statements for the Belle Vernon Motel Corporation prior to
its purchase by NBI Properties, Inc. and CPA-reviewed financial statements for
NBI Properties Inc. for fiscal years 1997, 1998 and 1999; consolidating
worksheets for NBI, Inc. and its subsidiaries for FYE 1999; and development
costs for Willowbrook Properties, Inc. through October, 1999;
2) Read certain publicly available business and financial information
relating to the Company for recent years and interim periods to date,
including the Company's Annual Reports for the years ended June 30, 1996,
1997, 1998 and 1999, the Company's prospectus for its Series A Cumulative
Preferred Stock Offering dated November 9, 1998, related SEC filings, and
drafts of proposed SEC filings for 1999;
3) Read certain internal financial and operating information, including
financial forecasts and projections, prepared by management of the Company and
by Michael Joseph Development Company;
4) Held telephone conferences with management and senior personnel to
discuss the business, operations, assets, historical financial situation and
future strategic goals of the Company, including its significant Federal tax
arrearages;
5) Performed an analysis of the impact of the Transaction on projected
future earnings of the Company;
6) Considered the appraisals and appraisal updates of the relevant
properties submitted by Lodging Evaluation Group and RTA Group, Inc. as well
as development projections for Willowbrook Plaza through September, 1999
submitted by Michael Joseph Development Corporation; and
7) Conducted such other studies, analyses, inquiries and investigations
as we deemed appropriate.
In our analysis and in formulating our opinion, we have assumed and relied
upon the accuracy and completeness of all the financial and other information
provided to us or publicly available, and we have not assumed any
responsibility for the independent verification of such information. We have
further relied upon the assurances of management of the Company that they are
unaware of any facts that would make the information provided to us incomplete
or misleading in any respect. We have assumed, pursuant to the terms of our
engagement, that the financial forecasts and projections provided to us by the
Company were prepared in good faith and on bases reflecting the best currently
available judgments and estimates of the Company's management. In addition,
we have not conducted a physical inspection of the properties or facilities of
the Company and have not made or obtained an independent valuation or
appraisal of the assets or liabilities of the Company. We express no view
whatever as to the federal, state or local tax consequences of the
Transaction.
Our services to the Company in connection with the Transaction have been
comprised solely of financial advisory services and not accounting, audit or
tax services. Without limiting the foregoing, our services with respect to
the Transaction do not constitute, nor should they be construed to constitute
in any way, a review or audit of or any other procedures with respect to any
financial information nor should such services be relied upon by any person to
disclose weaknesses in internal controls, financial statement errors or
irregularities, or illegal acts or omissions of any person affiliated with the
Transaction. Our opinion is necessarily based on economic and market
conditions and other circumstances as they exist and can be evaluated by us on
the date hereof. We shall have no obligation to update the Opinion unless
requested by you in writing to do so and expressly disclaim any responsibility
to do so in the absence of any such request.
Additionally, we have not been engaged to and have not solicited alternative
offers for the Company or its assets, or investigated any other alternative
transactions that may be available to the Company. Our opinion does not
address, nor shall it be construed to address, the underlying business
decision to effect the Transaction.
We have acted as financial advisor to the Company in connection with the
Transaction and will receive a fee of $18,000 for such services. Our only
other involvement with the Company was an independent valuation in 1998 of the
L.E. Smith Glass Company, one of the Company's subsidiaries, for use in the
Company's discussions with the Internal Revenue Service, and for which we were
paid our requested fee of $36,000.
<PAGE>
It is understood that this letter is for the benefit and use of the Board of
Directors of the Company in its consideration of the Transaction and may not
be relied upon by any other person, used for any other purpose or reproduced,
disseminated, quoted or referred to at any time, in any manner or for any
purpose without our prior written consent. In this context, however, it is
understood that the text of this letter will be printed in the Proxy Statement
for the Company's 1999 Annual Stockholders' Meeting. This letter does not
constitute a recommendation to any stockholder with respect to whether to vote
in favor of the Transaction or take any other action in connection with the
Transaction or otherwise, and should not be relied upon by any stockholder as
such.
Based upon and subject to the foregoing, including the various assumptions and
limitations set forth herein, it is our opinion that as of 5:00 pm on the date
hereof the consideration to be received in the Transaction is fair to NBI,
Inc. from a financial point of view.
Very truly yours,
WOLK VALUATION CONSULTANTS, INC.
BUSINESS VALUATION AND LITIGATION SERVICES
By: /s/ Mark I. Wolk
Mark I. Wolk, CPA, ASA, AEP
President
By: /s/ Noreen Dornenburg
Noreen Dornenburg, MBA, PhD
Senior Consultant
VOTE REQUIRED FOR APPROVAL
Because NBI's CEO is an interested party to this transaction, his shares
will not be counted for the vote. The affirmative vote of disinterested
holders of at least a majority of the outstanding shares of the disinterested
holders' shares of Common Stock is required in order to approve this Proposal
2. Therefore, failure to vote has the same effect as a negative vote.
Accordingly, if stockholders are in favor of this Proposal 2 and do not vote
their shares in favor of this Proposal 2, either in person or by proxy, such
stockholders will have effectively voted against the Proposal.
If the sale of Willowbrook Properties and NBI Properties are not
approved, the sale will not be completed. However, shareholders should be
aware that the Company would then be required to obtain an extension of time
from the IRS to make the final installment payment of $1.8 million owed. If
an extension could not be obtained, the IRS could declare a default and assess
interest on the debt since the last interest payment thereon (July 1, 1997),
at the statutory rate provided under the Internal Revenue Code, in amount
estimated to total approximately $1 million as of December 31, 1999, and seek
to foreclose upon the stock of NBI Properties and L.E. Smith, the Company's
only other operating subsidiary, in order to obtain payment of the final
installment of $1.8 million and such default interest.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
TERMS AND CONDITIONS OF THE COMPANY'S PLAN TO SELL A MAJORITY OF THE ASSETS OF
WILLOWBROOK PROPERTIES AND ALL OF THE CAPITAL STOCK OF NBI PROPERTIES.
OTHER MATTERS
The Board of Directors of the Company knows of no other matters to be
presented at the annual meeting other than those described above. However, if
any other matters properly come before the meeting, it is intended that any
shares voted by proxy will be voted in the discretion of the Board of
Directors.
<PAGE>
STOCKHOLDER PROPOSALS
In accordance with the rules of the Securities and Exchange Commission
("SEC"), any proposal of a stockholder intended to be presented at the
Company's 2000 Annual Meeting of Stockholders must be received by the Company,
to the attention of the Secretary, 1880 Industrial Circle, Suite F, Longmont,
Colorado 80501, by July 26, 2000, in the form and subject to the other
requirements of the applicable rules of the SEC, in order for the proposal to
be considered for inclusion in the Company's notice of meeting, proxy
statement and proxy relating to the 2000 Annual Meeting. The Company's
management proxies may exercise their discretionary voting authority, without
any discussion of the proposal in the Company's proxy materials, for any
proposal which is received by the Company after August 31, 2000.
ANNUAL REPORT, FINANCIAL STATEMENTS, AND OTHER
A copy of the Company's 1999 Annual Report on Form 10-KSB, including
financial statements for years ended June 30, 1999 and 1998, is being mailed
to all stockholders herewith.
A copy of the Company's interim financial statements for the three months
ended September 30, 1999 and 1998 on Form 10-QSB is included herewith as
Attachment I to this proxy.
A copy of the current budget of Phase I of Willowbrook Properties' real
estate development is included herewith as Attachment II to this proxy.
A copy of the Unaudited Financial Statements for Willowbrook Properties
for the three months ended September 30, 1999 and 1998 and for the years ended
June 30, 1999 and 1998 is included herewith as Attachment III to this proxy.
A copy of the Unaudited Financial Statements for NBI Properties for the
three months ended September 30, 1999 and 1998 is included herewith as
Attachment IV to this proxy.
A copy of the Reviewed Financial Statements for NBI Properties for the
years ended June 30, 1999 and 1998 is included herewith as Attachment V to
this proxy.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents which have been filed with the Commission
pursuant to the Exchange Act (Exchange Act File No. 1-8232) are hereby
incorporated by reference to this Proxy:
(1) the Company's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1999, filed September 20, 1999, and as amended by Form 10-KSB/A
No. 1, filed October 28, 1999.
By order of the Board of Directors
Marjorie A. Cogan
Secretary
Dated: November 26, 1999
<PAGE>
NBI, INC.
ATTACHMENTS TO
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 16, 1999
Attachment I NBI, Inc.'s interim financial statements for the three
months ended September 30, 1999 and 1998 on Form 10-QSB.
Attachment II Willowbrook Properties, Inc.'s budget for Phase I of
its real estate development.
Attachment III Willowbrook Properties, Inc.'s Unaudited Financial
Statements for the three months ended September 30, 1999 and 1998 and for the
years ended June 30, 1999 and 1998.
Attachment I NBI Properties, Inc.'s Unaudited Financial Statements
for the three months ended September 30, 1999 and 1998.
Attachment V NBI Properties, Inc.'s Reviewed Financial Statements
for the years ended June 30, 1999 and 1998.
ATTACHMENT I
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number
1-8232
Name of Registrant
NBI, INC.
State of Incorporation IRS Employer I.D. Number
Delaware 84-0645110
Address
1880 Industrial Circle, Suite F
Longmont, Colorado 80501
(303) 684-2700
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [ ] NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 16, 1999
Common Stock, par value $.01 per share 8,103,320
<PAGE>
NBI, INC.
INDEX TO FORM 10-QSB
For Quarter Ended September 30, 1999
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
<S> <C>
Consolidated Financial Statements (Unaudited) I-3 - I-6
Supplementary Notes to Consolidated Financial
Statements (Unaudited) I-7 - I-11
Management's Discussion and Analysis of Financial Condition
and Results of Operations I-12 - I-15
PART II - OTHER INFORMATION I-16
</TABLE>
<PAGE>
NBI, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands Except Share Data)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
(Unaudited)
ASSETS
--------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 77 $ 311
Trading securities -- 36
Accounts receivable, less allowance for doubtful accounts
of $236 and $223, respectively 1,920 1,243
Inventories 2,670 2,972
Other current assets 241 443
-------- --------
Total current assets 4,908 5,005
Property, plant and equipment, net 4,103 4,140
Other assets 10 9
Net long-term assets of discontinued operations 4,211 3,666
-------- --------
$13,232 $12,820
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------
Current liabilities:
Short-term borrowings and current portion
of notes payable $ 2,112 $ 1,719
Current portion of IRS debt and other income taxes payable 1,795 1,788
Accounts payable 1,112 1,372
Accrued liabilities 702 726
Net current liabilities of discontinued operations 273 173
-------- --------
Total current liabilities 5,994 5,778
Long-term liabilities:
Notes payable 228 260
Deferred income taxes 92 92
Postemployment disability benefits and other 259 264
-------- --------
Total liabilities 6,573 6,394
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.01 par value; 5,000,000 shares authorized; 507,421
and 500,000 shares of Series A Cumulative Preferred Stock issued and
outstanding, respectively (liquidation preference value of $5,074 and
$5,000, respectively) 5 5
Capital in excess of par value - preferred stock 4,632 4,562
Common stock - $.01 par value; 20,000,000 shares authorized;
10,130,520 and 10,115,520 shares issued, respectively 101 101
Capital in excess of par value - common stock 6,566 6,561
Accumulated deficit (3,777) (3,935)
-------- --------
7,527 7,294
Less treasury stock, at cost (2,027,200 shares) (868) (868)
-------- --------
Total stockholders' equity 6,659 6,426
-------- --------
$13,232 $12,820
======== ========
<FN>
See accompanying notes.
</TABLE>
<PAGE>
NBI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
<S> <C> <C>
Revenues:
Sales $3,848 $3,898
------- -------
Costs and expenses:
Cost of sales 2,696 2,682
Marketing, general and administrative 745 686
------- -------
3,441 3,368
------- -------
Income from operations 407 530
Other income (expense):
Net gain on investments 48 --
Other income and expenses, net 3 12
Interest expense (48) (51)
------- -------
3 (39)
------- -------
Income from continuing operations before provision for income taxes 410 491
Provision for income taxes (28) (57)
------- -------
Income before discontinued operations 382 434
Income (loss) from discontinued operations, net of
income tax benefit of $21 and expense of $8, respectively 28 (1)
------- -------
Net income 410 433
Dividend requirement on preferred stock (126) --
------- -------
Income attributable to common stock $ 284 $ 433
======= =======
Income per common share - basic and diluted:
Income before discontinued operations $ .03 $ .05
Income (loss) from discontinued operations .01 --
------- -------
Net income $ .04 $ .05
======= =======
Weighted average number of common shares outstanding 8,100 8,088
======= =======
<FN>
See accompanying notes.
</TABLE>
<PAGE>
NBI, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 410 $ 433
Adjustments to reconcile net income to net cash
flow provided by operating activities:
Depreciation and amortization 241 193
Provision for bad debts and returns 16 21
Provision for (reversal of) writedown of inventories (6) 40
Loss (gain) on sales of property and equipment -- (8)
Net unrealized loss (gain) on trading securities (2) --
Changes in assets -- decrease (increase):
Trading securities 38 --
Accounts receivable (709) (632)
Inventories 316 (45)
Other current assets 215 (56)
Other assets -- (32)
Changes in liabilities -- (decrease) increase:
Accounts payable and accrued liabilities (299) 415
Income tax related accounts 11 7
------ ------
Net cash flow provided by operating activities 231 336
------ ------
Cash flows from investing activities:
Proceeds from sales of property and equipment -- 9
Purchases of property and equipment (797) (338)
------ ------
Net cash flow used in investing activities (797) (329)
------ ------
Cash flows from financing activities:
Collections from notes receivable 12 2
Dividends paid on preferred stock (182) --
Proceeds from stock options exercised 5 --
Proceeds from borrowings 155 --
Payments on notes payable (39) (66)
Net borrowings on line of credit 394 103
------ ------
Net cash flow provided by financing activities 345 39
------ ------
Net increase (decrease) in cash and cash equivalents (221) 46
Less change in cash and cash equivalents included
in net assets of discontinued operations (13) --
Cash and cash equivalents at beginning of period 311 209
------ ------
Cash and cash equivalents at end of period $ 77 $ 255
====== ======
<FN>
See accompanying notes.
</TABLE>
<PAGE>
NBI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid $ 65 $71
==== ===
Income taxes paid $ 35 $27
==== ===
Noncash purchases of property, plant, and equipment
included in accounts payable at end of period $264 $82
==== ===
<FN>
See accompanying notes.
</TABLE>
<PAGE>
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Preparation
The accompanying financial statements have been prepared in accordance with
the requirements of Form 10-QSB and include all adjustments (consisting of all
normal recurring adjustments) which in the opinion of management are necessary
in order to make the financial statements not misleading. The consolidated
financial statements include the accounts of the Company and its wholly-owned
and majority-owned subsidiaries. All significant intercompany accounts and
profits have been eliminated.
Note 2 - Going Concern
As discussed in Note 7, the remaining balance of $1.8 million of the Company's
debt to the Internal Revenue Service ("IRS") is due on December 31, 1999.
This condition raises substantial doubt about the Company's ability to
continue as a going concern. In order to pay such amount, management intends
to generate sufficient cash through the sale of the assets or stock of its
wholly-owned subsidiaries, NBI Properties, Inc. ("NBI Properties") and
Willowbrook Properties, Inc., d/b/a NBI Development Corporation ("Willowbrook
Properties") (see Notes 4 and 7); however, there can be no assurance that the
Company will be able to complete a sale of these properties prior to the due
date of the IRS debt. The Company's ability to continue as a going concern is
dependent upon obtaining funds sufficient to pay off the IRS debt when due.
The accompanying financial statements do not contain any adjustments that
might result from the outcome of this uncertainty. Management believes that
after the Company has sold its real estate and hotel operations and pays off
its IRS debt, it will generate sufficient future cash flows from its remaining
operations to allow the Company to be a going concern.
Note 3 - Cash and Cash Equivalents
Cash and cash equivalents include investments that are readily convertible to
known amounts of cash and have original maturities of three months or less.
The Company places its cash and temporary cash investments with financial
institutions. At times, such investments may be in excess of federally
insured limits.
Note 4 - Discontinued Operations
On December 31, 1998, the Company established a plan to dispose of its Krazy
Colors, Inc. ("Krazy Colors") operation due to continuing losses incurred by
the operation, as well as the business' inability to sustain significant
long-term customers. On August 19, 1999, the Board of Directors voted to sell
the assets or stock of its wholly-owned subsidiaries, NBI Properties and
Willowbrook Properties, in order to pay the remaining balance of the IRS debt
due on December 31, 1999 (see Note 7). Therefore, the Company has
discontinued its children's paint manufacturing, hotel and real estate
development operations, and it has separately reported the income or loss from
these segments as discontinued operations for the quarters ended September 30,
1999 and 1998 as follows:
<TABLE>
<CAPTION>
Children's Real
Paint Hotel Estate
Manufacturing Operations Development Total
For the Quarter Ended September 30, 1999:
- -----------------------------------------------
<S> <C> <C> <C> <C>
Revenues from discontinued operations $21 $686 $ -- $707
==== ===== ===== =====
Income from discontinued operations
before income taxes $-- $ 49 $ -- $ 49
Income tax provision -- (21) -- (21)
--- ----- ----- -----
Net income from discontinued operations -- 28 -- 28
Loss on disposal -- -- -- --
--- ----- ----- -----
Net income from discontinued operations $-- $ 28 $ -- $ 28
=== ===== ===== =====
</TABLE>
<PAGE>
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
For the Quarter Ended September 30, 1998:
- -----------------------------------------------
<S> <C> <C> <C> <C>
Revenues from discontinued operations $ 31 $679 $-- $710
===== ===== ==== =====
Income (loss) from discontinued operations
before income taxes $(65) $ 73 $(1) $ 7
Income tax benefit (expense) 22 (29) (1) (8)
----- ----- ---- -----
Income (loss) from discontinued operations (43) 44 (2) (1)
Loss on disposal -- -- -- --
----- ----- ---- -----
Net income (loss) from discontinued
operations $(43) $ 44 $(2) $ (1)
===== ===== ==== =====
</TABLE>
In determining the loss on disposal of its children's paint manufacturing
operation, which was recorded during the second quarter of fiscal 1999, the
Company estimated the net realizable value of the disposal of the discontinued
operation, including estimated costs and expenses directly associated with the
disposal and estimated loss from operations through the expected disposal
date. However, because the Company expects a significant gain overall from
the discontinued operations of both the hotel and land development, no amount
has been recorded related to these disposals; the gain will be recognized when
realized.
The net long-term assets of discontinued operations at September 30, 1999
consisted primarily of land, buildings, development costs, and hotel
furniture, fixtures and equipment, net of a long-term mortgage note payable by
the hotel. The net current liabilities of discontinued operations at
September 30, 1999 consisted primarily of accounts payable and accrued
liabilities, net of cash balances.
Note 5 - Investments in Securities and Obligations from Short-Sale
Transactions
During the three months ended September 30, 1999, all of the Company's
securities were classified as trading securities; no securities were
classified as held-to-maturity or available-for-sale. Realized and unrealized
investment gains of $46,000 and $2,000, respectively, were recorded for the
quarter ended September 30, 1999. The Company held no investments and had no
realized or unrealized gains or losses for the quarter ended September 30,
1998.
As part of its investment policies, the Company's investment portfolio may
include option instruments and may include a concentrated position in one or
more securities. As a result of this, the financial results may fluctuate
significantly and have larger fluctuations than with a more diversified
portfolio. In addition, the Company may invest in short-sale transactions of
trading securities. Short-sales can result in off-balance sheet risk, as
losses can be incurred in excess of the reported obligation if market prices
of the securities subsequently increase. At September 30, 1999, the Company
had no investment positions.
Note 6 - Inventories
Inventories are comprised of the following amounts which are presented net of
reserves totaling $207,000:
<TABLE>
<CAPTION>
September 30,
1999
(Amounts in thousands)
<S> <C>
Raw materials $ 801
Work in process 426
Finished goods 1,443
------
$2,670
======
</TABLE>
<PAGE>
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Income Taxes
IRS Debt:
On April 28, 1998, the Company and the IRS entered into an amended payment
agreement, revising the payment terms related to NBI Inc.'s IRS debt of
$5,278,000. This agreement, effective April 9, 1998, revised the terms of the
agreement in principal with the IRS effective October 1, 1995 and the original
settlement agreement with the IRS dated June 12, 1991, with respect to NBI's
federal tax liabilities for the fiscal years ended June 30, 1980 through 1988.
Under the current agreement, $3,500,000 of the IRS debt was due and paid on
December 31, 1998, and the remaining balance of $1,778,000 is due on or before
December 31, 1999. The IRS debt continues to be collateralized by a security
interest in all of the capital stock of American Glass, Inc., d/b/a L.E. Smith
Glass Company ("L.E. Smith") and NBI Properties. Provided no event of default
occurs prior to payment of the IRS debt in full, NBI will not be obligated to
pay any interest from July 1, 1997 forward, related to the debt.
In order to pay the remaining balance on the IRS debt, management intends to
generate sufficient cash through the sale of the assets or capital stock of
its wholly-owned subsidiaries, NBI Properties and Willowbrook Properties;
however, there can be no assurance the Company will be able to complete a sale
of these properties prior to the due date of the IRS debt. The Company's
ability to continue as a going-concern is dependent upon satisfaction of the
IRS debt (See Note 2).
Income tax provision:
For the three months ended September 30, 1999 and 1998, the Company recorded
income tax provisions from continuing operations of $28,000 and $57,000,
respectively. These provisions include state and other income taxes and are
based upon book income.
In accordance with fresh start accounting, which was adopted as of April 30,
1992, and as a result of the Company's reorganization under Chapter 11 of the
U.S. Bankruptcy Code, utilization of any income tax benefit from
pre-reorganization net operating losses is not credited to the income tax
provision, but rather, reported as an addition to capital in excess of par
value. No pre-reorganization net operating losses were utilized for the three
months ended September 30, 1999 and 1998.
Note 8 - Stockholders' Equity
The Company has authorized 20,000,000 shares of $.01 par value common stock.
At September 30, 1999, 10,130,520 shares were issued including 2,027,200 held
in treasury. Therefore, the Company had 8,103,320 shares issued and
outstanding at September 30, 1999.
The Company has authorized 5,000,000 shares of preferred stock with a par
value of $.01 per share, and has designated 2,000,000 preferred shares as
Series A Cumulative Preferred Stock. At September 30, 1999, 507,421 shares of
Series A Cumulative Preferred Stock were issued and outstanding.
On August 19, 1999, the Board of Directors declared the first semi-annual
dividend on its outstanding Series A Cumulative Preferred Stock to holders of
record as of August 19, 1999. On September 3, 1999, $252,000 in dividends
were paid, consisting of $182,000 in cash and 7,421 in additional shares of
preferred stock, valued at $70,000, per the elections of the holders.
<PAGE>
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 - Income Per Common Share
The Company reports earnings per common share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128 issued by the Financial
Accounting Standards Board. The following reconciles the numerators and
denominators of the basic and diluted earnings per common share computation
for income before discontinued operations:
<TABLE>
<CAPTION>
For the quarters ended
September 30,
1999 1998
Basic Diluted Basic Diluted
(Amounts in thousands
except per share data)
<S> <C> <C> <C> <C>
Income before discontinued operations $ 382 $ 382 $ 434 $ 434
Dividend requirement on preferred stock (126) (126) -- --
------- ------- ------ ------
Income before discontinued operations
attributable to common stock $ 256 $ 256 $ 434 $ 434
======= ======= ====== ======
Weighted average number of common
shares outstanding 8,100 8,100 8,088 8,088
======= ====== ====== ======
Assumed conversions of stock options 163 179
------- ------
8,263 8,267
======= ======
Income per common share
before discontinued operations $ .03 $ .03 $ .05 $ .05
======= ======= ====== ======
</TABLE>
For the three months ended September 30, 1999, stock options outstanding with
an exercise price of $.38, $.59 and $.77 per share were included in the
computation of diluted earnings per share because their exercise price was
less than the average market price of the common stock during such period.
Stock options outstanding with an exercise price of $.25 per share were also
included in the computation of diluted earnings per share for the three months
ended September 30, 1998; these options were not outstanding during the
quarter ended September 30, 1999.
The options and warrants outstanding at September 30, 1999 were as follows:
<TABLE>
<CAPTION>
Number
Exercise Outstanding at
Price September 30, 1999
<S> <C>
Stock options:
.38 201,000
.59 100,500
.77 400,000
.88 244,000
Warrants:
.89 1,700,000
1.20 1,000,000
---------
3,645,500
=========
</TABLE>
<PAGE>
NBI, INC.
SUPPLEMENTARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 - Comprehensive Income
Effective July 1, 1998, the Company has adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." Comprehensive income includes all
changes in equity except those resulting from investments by owners and
distribution to owners. For the three months ended September 30, 1999 and
1998, the Company had no items of comprehensive income other than net income;
therefore, a separate statement of comprehensive income has not been presented
for these periods.
Note 11 - Seasonal Variations of Operations
Excluding the effect of its significant customer, L.E. Smith typically has its
strongest revenue performance during the first and second fiscal quarters due
to seasonal variations. Generally, the fourth fiscal quarter's revenue is
moderately lower than in the first and second quarters, while the third fiscal
quarter's revenue is usually significantly lower than the other quarters.
However, historically these trends have been materially affected by
fluctuations in the timing of orders from its significant customer, which does
not have consistent trends.
Note 12 - Related Party Transactions
The Company's Chief Executive Officer ("CEO"), Jay Lustig, has proposed to
purchase a majority of the assets of Willowbrook Properties and all of the
capital stock of NBI Properties. The Company is submitting the transaction to
its disinterested shareholders for approval at its Fiscal 1999 Annual Meeting
of Stockholders.
In September and November 1999, Mr. Lustig advanced Willowbrook Properties
$155,000 and $159,740, respectively, to fund development costs incurred on
Phase I of its land development project. Concurrently with the closing of the
proposed Willowbrook Properties sale transaction, such amounts will be deemed
to be expenses of the buyer. In the event the closing does not occur on this
transaction, NBI will repay the CEO such amounts on a due date to be
determined at that time, with interest at the rate of ten percent per annum
since the dates of the advances.
The Company's CEO has personally guaranteed a $500,000 letter of credit for
the benefit of the Commonwealth of Pennsylvania, Department of Transportation
("PennDOT"), required in order for Willowbrook Properties to commence certain
road improvements mandated by PennDOT in conjunction with Phase I of its land
development project. In addition, in conjunction with the Company's efforts
to obtain construction financing for Phase I of the development, Mr. Lustig
has committed to personally guarantee the repayment of such construction
financing and to guarantee the completion of Phase I of the development.
<PAGE>
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER, FISCAL YEAR 2000
The statements in this discussion contain certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, that are not
historical facts. The forward-looking statements are based upon the Company's
current expectations and are subject to known and unknown risks,
uncertainties, assumptions and other factors. Should one or more of such
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, the actual results could differ materially from those contemplated
by the forward-looking statements. Factors that may affect such
forward-looking statements include, among others, ability to obtain financing,
loss of significant customers, reliance on key personnel, competitive factors
and pricing pressures, availability of raw materials, labor disputes,
investment results, limitations on the utilization of net operating loss
carryforwards, adequacy of insurance coverage, inflation and general economic
conditions.
RESULTS OF OPERATIONS
Revenues from continuing operations totaling $3,848,000 for the first quarter
of fiscal 2000 decreased slightly from $3,898,000 for the three months ended
September 30, 1998. As expected, L.E. Smith experienced a significant
decline, approximately $300,000, in revenue from its largest customer, as well
as the absence of $392,000 in revenues related to an order from a nonrecurring
customer included in the first quarter of fiscal 1999. However, these
declines were significantly offset by sustained revenue growth from its other
customers.
Revenues from continuing operations are expected to decline substantially for
the three months ended December 31, 1999, compared to the same period in the
prior fiscal year, because L.E. Smith expects a substantial decline in
revenues from its largest customer which is only expected to be partially
offset by increased business from its other customers. Revenues from
continuing operations are expected to decrease significantly for the second
quarter of fiscal 2000 compared to the first quarter of fiscal 2000 due to a
significant decline in revenues expected from L.E. Smith's largest customer
which is only expected to be partially offset by increased business from its
other customers. The Company is still in the process of hiring a new sales
representative to concentrate on increasing the volume of the glass decorating
business in order to help offset the effect of the continuing decline in
revenues from L.E. Smith's largest customer.
Cost of sales from continuing operations as a percentage of related revenue
was 70.1% for the quarter ended September 30, 1999, compared to 68.8% for the
same period in fiscal 1999. The resulting decline in gross margin was
primarily due to significantly higher depreciation expense, resulting from a
large amount of capital improvements made in the prior fiscal year, and
general cost increases. However, these increased costs were partially offset
by a $42,000 credit resulting from the reversal of excess reserves for a prior
self-insured workmen's compensation plan and lower inventory reserve
provisions during the first quarter of fiscal 2000.
Cost of sales from continuing operations as a percentage of related revenue
for the second quarter of fiscal 2000 is expected to be significantly higher
compared to the second quarter of fiscal 1999, due to significantly higher
depreciation expense, general cost increases and a substantial decline in
expected sales volume which will cause unfavorable absorption of fixed costs.
Cost of sales from continuing operations as a percentage of related revenue
for the second quarter of fiscal 2000 is expected to be moderately higher
compared to the first quarter of fiscal 2000, due to general cost increases
and a significant decline in expected sales volume which will cause
unfavorable absorption of fixed costs.
Marketing, general and administrative expenses from continuing operations
totaled $745,000 and $686,000 for the three months ended September 30, 1999
and 1998, respectively. The increase was primarily related to increased sales
commissions resulting from increased sales from outside sales representatives,
while the Company experienced a significant decline in revenues from its
largest customer, which is a house account and is not subject to outside sales
commissions.
<PAGE>
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER, FISCAL YEAR 2000 - CONTINUED
Marketing, general and administrative expenses are expected to increase
moderately for the three months ended December 31, 1999, compared to both the
same period in the prior fiscal year and the first quarter of fiscal 2000, due
to general cost increases.
For the three months ended September 30, 1999, the Company recorded a realized
gain on investments of $46,000 and an unrealized gain on investments of $2,000
compared to no gain or loss on investments for the same period in the prior
fiscal year. As part of its investment policy, the Company's investment
portfolio may include investments in option instruments and may include a
concentrated position in one or more securities. As a result of this, the
financial results may fluctuate significantly and have larger fluctuations
than with a more diversified portfolio. In addition, the Company may invest
in short-sale transactions of trading securities. Short-sales can result in
off-balance sheet risk, as losses can be incurred in excess of the reported
obligation if market prices of the securities subsequently increase. At
September 30, 1999, the Company had no investment positions.
The Company recorded provisions for income taxes from continuing operations of
$28,000 and $57,000 the first quarter of fiscal 2000 and 1999, respectively,
primarily due to the inclusion of Pennsylvania state income tax provisions.
The state income tax provisions are related to the Company's Pennsylvania
operations and are based upon book income, because the continuing operations
do not have any net operating loss carryforwards available in Pennsylvania.
In accordance with fresh-start accounting, the income tax provisions recorded
include non-cash charges to the extent that the Company expects to use its
pre-reorganization net operating loss carryforwards. These charges are
reported as an addition to capital in excess of par value, rather than as a
credit through the income tax provision. There were no non-cash components
included in the income tax provisions for the three months ended September 30,
1999 or 1998.
DISCONTINUED OPERATIONS
On December 31, 1998, the Company established a plan to dispose of its Krazy
Colors' operation due to continuing losses incurred by the operation, as well
as the business' inability to sustain significant long-term customers. On
August 19, 1999, the Board of Directors voted to sell the assets or stock of
its wholly-owned subsidiaries, NBI Properties and Willowbrook Properties in
order to pay the remaining balance of the IRS debt due on December 31, 1999
(see Notes 4 and 7 to accompanying consolidated financial statements).
Therefore, the Company has discontinued its children's paint manufacturing,
hotel, and real estate development operations, and it has separately reported
the income or loss from these segments as discontinued operations for the
quarters ended September 30, 1999 and 1998.
Revenues from discontinued operations totaled $707,000 for the first quarter
of fiscal 2000 compared to $710,000 for the same period of the prior fiscal
year.
The Company recorded net income from discontinued operations of $28,000 for
the three months ended September 30, 1999 compared to a net loss from
discontinued operations of $1,000 for the same period of the prior fiscal
year. The improvement resulted primarily from the absence of a loss from the
Krazy Colors operation because the estimated loss on disposal of this
operation was accrued for during fiscal 1999. In determining the loss on
disposal of its Krazy Colors operation, which was recorded during the second
quarter of fiscal 1999, the Company estimated the net realizable value of the
disposal of the discontinued operation, including estimated costs and expenses
directly associated with the disposal and estimated loss from operations
through the expected disposal date. However, because the Company expects a
significant gain overall from the discontinued operations of both the hotel
and land development, no amount has been recorded related to these disposals;
the gain will be recognized when realized.
The net long-term assets of discontinued operations at September 30, 1999
consisted primarily of land, buildings, development costs, and hotel
furniture, fixtures and equipment, net of a long-term mortgage note payable by
the hotel. The net current liabilities of discontinued operations at
September 30, 1999 consisted primarily of accounts payable and accrued
liabilities, net of cash balances.
<PAGE>
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER, FISCAL YEAR 2000 - CONTINUED
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets increased $412,000 to $13.2 million at September
30, 1999 from $12.8 million at June 30, 1999. The increase was primarily due
to a significant increase in trade accounts receivable resulting from the
increased revenues in September 1999 compared to June 1999. The Company had
negative working capital of $1.1 million at September 30, 1999, compared to
negative working capital of $773,000 at June 30, 1999. The increase in the
working capital deficit was primarily due to cash and proceeds from investment
trades receivable, included in other current asset at June 30, 1999, used to
fund a portion of the land development costs incurred during the first quarter
of fiscal 2000 and included in long-term assets from discontinued operations
at September 30, 1999.
The Company has a final installment of $1.8 million on the IRS debt which is
due on or before December 31, 1999. In order to pay such amount, management
intends to generate sufficient cash through the sale of the assets or stock of
its wholly-owned subsidiaries, NBI Properties and Willowbrook Properties;
however, there can be no assurance that the Company will be able to complete a
sale of these properties prior to the due date of the IRS debt. The Company's
ability to continue as a going concern is dependent upon obtaining funds
sufficient to pay off the IRS debt when due. Management believes that after
the Company has sold its real estate and hotel operations and pays off its IRS
debt, it will generate sufficient future cash flows from its remaining
operations to allow the Company to be a going concern.
The Company's CEO has proposed to purchase a majority of the assets of
Willowbrook Properties and all of the capital stock of NBI Properties. The
Company is submitting the transaction to its disinterested shareholders for
approval at its Fiscal 1999 Annual Meeting of Stockholders.
The Company expects to pay the cash dividends on its outstanding preferred
stock through existing working capital and internally generated funds,
including cash potentially available from L.E. Smith through dividend payments
to the parent Company. However, L.E. Smith's bank loan agreement limits the
ability to pay and the amount of dividends payable by L.E. Smith.
During the three months ended September 30, 1999, the Company funded the
construction activity for phase I of its Willowbrook Properties' development
out of existing cash, proceeds from investment trades receivable at June 30,
1999 and a $155,000 advance from its CEO. Subsequent to September 30, 1999,
the Company received an additional advance of $159,740 from its CEO to pay for
construction costs. The Company has recently received a commitment for
commercial financing to pay for a significant portion of the construction
costs of phase I of its land development project. The Company expects to
close on this financing at the end of November. However, significant
additional equity contributions will be required by the Company during the
construction period of phase I. The Company intends to sell the development
in order to generate cash for its IRS payment due on December 31, 1999 and to
minimize its required additional equity contributions.
Construction-in-progress from continuing operations totaled $176,000 at
September 30, 1999 and included $76,000 for design and engineering costs
related to a new crystal tank for the glass manufacturing facility. The
Company estimates that it will cost approximately $1,735,000 to complete the
outstanding construction-in-progress, all of which is expected to be completed
during fiscal 2000. A majority of the estimated costs to complete the
outstanding projects is related to the new crystal tank. The new tank will
have an estimated useful life of 20 to 25 years, with major refurbishments,
costing approximately $500,000, required every seven years. The Company is
currently pursuing various financing alternatives for this capital
improvement.
The Company expects its other working capital requirements in the next fiscal
year to be met by existing working capital at September 30, 1999, internally
generated funds and, for L.E. Smith's requirements, short-term borrowings
under an existing line of credit.
<PAGE>
NBI, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER, FISCAL YEAR 2000 - CONTINUED
YEAR 2000 COMPLIANCE
The Company has completed a review and risk assessment of all technology items
used in its operations. The Company believes that the year 2000 issue will
pose no significant operational problems. Substantially all of the machinery
and equipment used by the Company's glass manufacturing operation is manually
controlled and operated. In addition, the hotel operation is not
significantly reliant on computer technology, with the exception of its
reservation system, which is maintained and upgraded under a contract with
Holiday Inns Franchising, Inc. and has already been upgraded and tested to be
year 2000 compliant. The primary effect of the year 2000 issue is on the
Company's accounting systems.
Year 2000 compliance will primarily be accomplished through purchases of new
equipment and data processing hardware and software upgrades, with an
estimated aggregate cost of approximately $285,000, a majority of which has
already been purchased and most of which was previously planned and
necessitated by other technological needs of the Company. The upgrading or
replacement of equipment which is non-compliant, as well as the related
testing of such equipment is now virtually complete.
L.E. Smith currently has one customer of such significance that if such
customer were to experience year 2000 problems that resulted in the
cancellation or deferral of orders, it could materially adversely affect the
results of operations of the Company. The Company has discussed the year 2000
issue with this and other material customers and vendors and currently does
not anticipate any significant problems. In addition, the Company will
continue to review the status of the year 2000 issues with these and other
customers and vendors.
The Company presently believes that with the completed conversions to new
hardware and software, the year 2000 issue will be mitigated without causing a
material adverse impact on the operation of the Company. However, if such
conversions are not sufficient, the year 2000 issue could have an impact
on the operation of the Company. At this time, management does not believe
that the impact and any resulting costs will be material.
<PAGE>
NBI, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
a. For the quarter ended September 30, 1999
b. Restated for the quarter ended September 30, 1998
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1999 or subsequently.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NBI, INC.
November 22, 1999 By: /s/ Marjorie A. Cogan
(Date) Marjorie A. Cogan
As a duly authorized officer
Chief Financial Officer, Secretary
ATTACHMENT II
Willowbrook, Inc.
Rostraver, PA
<TABLE>
<CAPTION>
Revised Budget Original Budget
Costs Costs
<S> <C> <C> <C> <C>
Land $ 500,000 $ 500,000
==========================
Building-Shop N Save 45,000 50.00 $ 2,250,000 $ 2,250,000
Building-Small shops 21,600 50.00 1,000,000 1,000,000
Building-Theatre 30,000 $ 0.00 0 0
--------------------------
$ 3,250,000 $ 3,250,000
==========================
Site excavation-excl Theatre area $ 1,375,000 $ 1,350,000
Site excavation-Theatre area 60,000 --
Curbing -- 105,000
Landscaping-excl Theatre area 65,000 75,000
Landscaping- Theatre area 10,000 --
Site lighting-excl Theatre area 100,000 80,000
Site lighting-Theatre area 40,000 --
Site misc. utilities-excl Theatre area 75,000 75,000
Utilities-Theatre area 30,000 --
Paving-excl Theatre area 400,000 552,500
Paving-Theatre area 160,000 --
Offsite road improvements 850,000 800,000
Misc. sitework 40,000 50,000
--------------------------
$ 3,205,000 $ 3,087,500
==========================
Appraisals $ 10,000 $ 7,500
Pylon/landmark signs 30,000 40,000
Title insurance 30,000 30,000
Civil/survey/traffic/phase I engineering 300,000 260,000
Soil engineering report 26,000 30,000
Soil engineering - ongoing testing 40,000 40,000
Architect 60,000 72,000
Inspecting architect 15,000 15,000
Sewer taps 75,000 75,000
Permits 20,000 20,000
Insurance/R.E. taxes 5,000 10,000
Lease commissions 175,000 175,000
Development fees 250,000 250,000
Project manager onsite 20,000 20,000
Overhead/marketing costs 10,000 12,000
Legal fees 100,000 100,000
Lender fee-constr/perm 150,000 150,000
Construction interest 225,000 225,000
Contingency 160,000 200,000
--------------------------
$ 1,701,000 $ 1,731,500
==========================
Total project costs $ 8,656,000 $ 8,569,000
==========================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Revised Budget Original Budget
Costs Costs
<S> <C> <C> <C> <C>
Shop N Save 45,000 $ 9.00 $ 405,000 $ 405,000
Small Shops 21,600 $ 11.00 237,600 220,000
Theatre 30,000 $ 4.50 135,000 135,000
Outparcel 1 0 30,000 30,000
Outparcel 2 0 30,000 30,000
Outparcel 3 0 30,000 30,000
Outparcel 4 0 30,000 30,000
------ --------- --------
96,000 $ 897,600 $ 880,000
========
Vacancy Small shops 10.00% (23,760) (22,000)
--------- --------
Total Revenue $ 873,840 $ 858,000
CAM/Tax Vacancy $ 2.00 (4,320) (4,000)
Management fees 3.00% (26,215) (25,740)
Replacement reserves $ 0.10 (9,660) (9,500)
--------- --------
Net operating income $ 833,645 $ 818,760
========= ========
</TABLE>
<PAGE>
ATTACHMENT III
Willowbrook Properties, Inc.
d/b/a NBI Development Corporation
Three Months Ended September 30, 1999 and 1998
Years Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Page
Number
<S> <C>
Balance Sheet III-2
Statements of Operations and Retained
Earnings (Accumulated Deficit) III-3
Statements of Cash Flows III-4
Notes to Financial Statements III-5 - III-8
</TABLE>
<PAGE>
Willowbrook Properties, Inc.
d/b/a NBI Development Corporation
Unaudited Balance Sheets
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
ASSETS
<S> <C> <C>
Current assets:
Cash $ 280 $ 1,243
Other current assets 3,705 3,795
------------ ------------
Total current assets 3,985 5,038
------------ ------------
Land and construction-in-progress:
Phase I Development 2,092,555 1,532,670
Land held for future development 522,240 522,240
------------ ------------
2,614,795 2,054,910
------------ ------------
Other assets 26,544 26,544
------------ ------------
Total assets $ 2,645,324 $ 2,086,492
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Payable to CEO $ 155,000 $ --
Accounts payable 179,023 264,761
------------ ------------
Total current liabilities 334,023 264,761
Long-term liabilities:
Long-term payable to parent 6,868,591 6,334,452
------------ ------------
Total liabilities 7,202,614 6,599,213
------------ ------------
Commitments and contingencies
Stockholder's equity:
Common stock - $.01 par value; 10,000 shares authorized,
1,000 issued and outstanding 10 10
Paid-in capital 990 990
Retained earnings (4,558,290) (4,513,721)
------------ ------------
Total stockholder's equity (4,557,290) (4,512,721)
------------ ------------
Total liabilities and stockholder's equity $ 2,645,324 $ 2,086,492
============ ============
</TABLE>
<PAGE>
Willowbrook Properties, Inc.
d/b/a NBI Development Corporation
Unaudited Statements of Operations and Accumulated Deficit
<TABLE>
<CAPTION>
Three Months Ended Year Ended
September 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenue $ -- $ -- $ -- $ --
Administrative expenses (413) (2,357) (1,035) (24,425)
---------- ----------- ----------- -----------
Loss from operations (413) (2,357) (1,035) (24,425)
Interest expense on parent
company payable (65,856) (38,472) (165,485) (139,803)
Other income -- 543 3,527 2,577
---------- ----------- ----------- -----------
Loss before income tax
benefit (66,269) (40,286) (162,993) (161,651)
Income tax benefit 21,700 12,900 54,740 54,120
---------- ----------- ----------- -----------
Net loss (44,569) (27,386) (108,253) (107,531)
Accumulated deficit -
beginning of period (4,513,721) (4,405,468) (4,405,468) (4,297,937)
----------- ----------- ----------- -----------
Accumulated deficit -
end of period $(4,558,290) $(4,432,854) $(4,513,721) $(4,405,468)
============ ============ ============ ============
</TABLE>
<PAGE>
Willowbrook Properties, Inc.
d/b/a NBI Development Corporation
Unaudited Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended Year Ended
September 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (44,569) $(27,386) $(108,253) $(107,531)
Adjustments to reconcile net loss to net cash
flow used in operating activities:
Bad debt expense -- -- -- 11,679
Changes in assets - decrease (increase):
Other current assets 90 (52) 176 9
Other assets -- (854) (11,701) (16,197)
Changes in liabilities - (decrease) increase:
Accounts payable (274) (105) (9,867) (40,541)
Long-term payable to parent 43,857 24,471 109,485 84,739
--------- -------- --------- ---------
Net cash flow used in
operating activities (896) (3,926) (20,160) (67,842)
--------- -------- --------- ---------
Cash flows from investing activities:
Notes receivable payments -- 2,057 6,924 4,575
Purchases of property, plant
and equipment (645,349) (26,301) (649,627) (39,695)
--------- -------- --------- ---------
Net cash flow used in investing
activities (645,349) (24,244) (642,703) (35,120)
--------- -------- --------- ---------
Cash flows from financing activities:
Proceeds from borrowings from CEO 155,000 -- -- --
Proceeds from borrowings from Parent 490,282 29,000 664,100 102,500
--------- -------- --------- ---------
Net cash flow provided by
financing activities 645,282 29,000 664,100 102,500
--------- -------- --------- ---------
Net increase (decrease) in cash (963) 830 1,237 (462)
Cash, beginning of period 1,243 6 6 468
--------- -------- -------- ---------
Cash, end of period $ 280 $ 836 $ 1,243 $ 6
========= ======== ======== =========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ -- $ -- $ -- $ --
========= ======== ======== =========
Income taxes paid $ 300 $ 1,100 $ 1,260 $ 1,480
========= ======== ======== =========
Supplemental Schedule of Noncash Investing
and Financing Activities:
Noncash purchases of property, plant
and equipment included in accounts
payable at end of period $175,391 $ 3,600 $260,855 $ 12,400
========= ======== ========= =========
</TABLE>
<PAGE>
Willowbrook Properties, Inc.
d/b/a NBI Development Corporation
Notes to Unaudited Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF
BUSINESS
The accounting and reporting policies conform to generally accepted accounting
principles.
Business
Willowbrook Properties, Inc. d/b/a NBI Development Corporation ("the
Company"), a wholly-owned subsidiary of NBI, Inc. ("parent company") acquired
approximately 88 acres of farmland in Belle Vernon, Pennsylvania in January
1997, which is situated along Route 51 in Belle Vernon and has frontage for
approximately 2,700 feet. The Company successfully obtained a zoning variance
to permit the development of a mixed use retail and residential project for
the property, and began construction of phase I of the planned development in
April 1999, which will be a mixed use retail center.
On August 19, 1999, the Company's Board of Directors and the parent company's
Board of Directors voted to sell the assets or the stock of Willowbrook
Properties, in order to generate sufficient funds to allow the parent company
to pay its IRS debt due on December 31, 1999. No transactions have been
completed to date resulting from this decision. However, the parent company's
Chief Executive Officer ("CEO"), Jay Lustig, has proposed to purchase a
majority of the assets of Willowbrook Properties. The parent company is
submitting the transaction to its disinterested shareholders for approval at
its Fiscal 1999 Annual Meeting of Stockholders.
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,
revenues 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.
Cash Equivalents
The Company considers all investments that are readily convertible to known
amounts of cash and have original maturities of three months or less to be
cash equivalents.
Land and construction-in-progress
Expenditures directly related to acquisition of the land and all
construction-in-progress are capitalized at cost.
The Company applies Statement of Financial Accounting Standards "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>
Willowbrook Properties, Inc.
d/b/a NBI Development Corporation
Notes to Unaudited Financial Statements
Income Taxes
The Company accounts for income taxes in conformity with SFAS No. 109. Under
the provisions of SFAS No. 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.
Comprehensive Income
Effective July 1, 1998, the Company has adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." Comprehensive income includes all
changes in equity except those resulting from investments by owners and
distribution to owners. For the three months ended September 30, 1999 and
1998 and for the years ended June 30, 1999 and 1998, the Company had no items
of comprehensive income other than net income; therefore, a separate statement
of comprehensive income has not been presented for these periods.
NOTE 2 - GOING CONCERN
As discussed in Note 5, significant additional equity contributions will be
required during the construction period of phase I of the real estate
development. The Company and its parent company currently have no ability to
pay such costs, and do not believe they can raise such equity capital in the
foreseeable future. During the three months ended September 30, 1999 and
subsequently, the Company has had to rely on advances and personal guarantees
from the parent Company's CEO, Mr. Lustig, to continue the
construction-in-progress. This condition raises substantial doubt about the
Company's ability to continue as a going concern. In order to pay such
amounts, the parent company intends to sell the assets or stock of the Company
to a new owner who can provide the necessary equity contributions (See Note 1
- - Business); however, there can be no assurance that the parent company will
be able to complete a sale of the Company. The Company's ability to continue
as a going concern is dependent upon obtaining funds sufficient to pay the
additional equity outlays as the costs become due. The accompanying financial
statements do not contain any adjustments that might result from the outcome
of this uncertainty.
NOTE 3 - OTHER ASSETS
Included in other assets are direct costs incurred in connection with the
completion of a lease with the anchor tenant for Phase I of the real estate
development. These costs will be amortized over the life of the lease upon
commencement of rent. (See Note 5.)
NOTE 4 - INCOME TAXES
The Company is part of an affiliated group with its parent company which files
a consolidated tax return for federal tax purposes. The parent company
allocates each of the members of the group its share of income taxes as if it
filed on a separate return basis. The Company pays its allocated federal
income taxes to the parent company based upon its book income. The deferred
federal tax asset or liability arising from timing differences is offset by a
long-term payable or receivable from the parent company. The Company files
its state income tax returns on a separate basis.
The Company has Pennsylvania net operating loss carryforwards of approximately
$458,000 and $392,000 at September 30, 1999 and June 30, 1999, respectively;
however, it pays a minimum capital stock tax based on historical earnings and
book equity balances of the Company.
<PAGE>
Willowbrook Properties, Inc.
d/b/a NBI Development Corporation
Notes to Unaudited Financial Statements
The Company currently has no temporary differences in which there is different
treatment for tax purposes than for book purposes, other than its state net
operating loss carryforwards. As the Company has not been able to determine
that it is more likely than not that the deferred tax assets related to the
Pennsylvania net operating loss carryforwards will be realized, valuation
allowances for the total of such deferred tax assets have been established at
September 30, 1999 and June 30, 1999 of approximately $46,000 and $39,000,
respectively. Consequently, the income tax benefits for the three months
ended September 30, 1999 and 1998 and for the years ended June 30, 1999 and
1998 consist primarily of current federal tax benefits.
The reconciliation of income taxes at the U.S. federal statutory tax rate to
the income tax benefit for the three months ended September 30, 1999 and 1998,
and for the years ended June 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Years Ended
September 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Federal income tax benefit
computed at 34% on pre-tax income $22,531 $13,697 $55,418 $54,961
State taxes payable, net of federal benefit (198) (726) (832) (581)
Other (633) (71) 154 (260)
-------- -------- -------- --------
Income tax benefit $21,700 $12,900 $54,740 $54,120
======== ======== ======== ========
</TABLE>
NOTE 5 - COMMITMENTS AND CONTINGENCIES
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. 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.
Construction on phase I of the project began in April 1999, with an
anticipated construction period of approximately fourteen months from
commencement. The construction costs are projected to be approximately nine
million dollars. The Company has received a commitment for commercial
financing to pay for a significant portion of the construction costs of phase
I. The Company expects to close on this financing at the end of November.
However, significant additional equity contributions will be required during
the construction period of phase I.
In March 1999, the Company entered into a lease agreement with a national
grocery store chain to lease a significant portion of the expected total
rentable square footage of the first phase of Willowbrook Properties' land
development project. The lease is contingent upon the Company's completion of
a suitable building pad for the tenant, which has been completed and was
accepted by the tenant on September 1, 1999. The agreement provides the
tenant a set construction allowance from the Company which they will use to
construct the building. The tenant is required to begin paying rent on the
earlier of (a) the tenant's opening of the building for business with the
public; or (b) the later of (i) ten months after Willowbrook Properties
delivers a completed building pad to the tenant; (ii) all improvements to the
common areas necessary for operation of the supermarket to be operating in the
building are completed; and (iii) all improvements shown on the highway
occupancy permit are completed.
<PAGE>
Willowbrook Properties, Inc.
d/b/a NBI Development Corporation
Notes to Unaudited Financial Statements
In April 1999, Willowbrook Properties entered into a construction contract for
site work totaling $1.2 million. This site work is estimated to be completed
in December 1999. The Company is required to make monthly progress payments
based upon the work completed, and as of September 30 and June 30, 1999, had
paid approximately $879,000 and $315,000, respectively, related to the
contract.
In September and November 1999, the Company received $155,000 and $159,740 in
advances from the parent company's CEO in order to fund construction costs
incurred. In addition, Mr. Lustig has personally guaranteed a $500,000 letter
of credit necessary for the project. (See Note 6.)
NOTE 6 - RELATED PARTY TRANSACTIONS
The Company pays its allocated federal income taxes to the parent company
based upon its book income (see Note 4).
The parent company charges interest at the prime rate (7.75% at June 30, 1999)
plus 1% on the outstanding balance of the Company's long-term payable to the
parent company.
In September and November 1999, Mr. Lustig advanced Willowbrook Properties
$155,000 and $159,740, respectively, to fund development costs incurred on
Phase I. Concurrently with the closing of the proposed Willowbrook Properties
sale transaction, such amounts will be deemed to be expenses of the buyer. In
the event the closing does not occur on this transaction, the Company will
repay the parent company's CEO such amounts on a due date to be determined at
that time, with interest at the rate of ten percent per annum since the dates
of the advances.
In addition, Mr. Lustig has personally guaranteed a $500,000 letter of credit
for the benefit of the Commonwealth of Pennsylvania, Department of
Transportation ("PennDOT"), required in order for Willowbrook Properties to
commence certain road improvements mandated by PennDOT in conjunction with
Phase I of its land development project. In addition, in conjunction with the
Company's efforts to obtain construction financing for Phase I of the
development, Mr. Lustig has committed to personally guarantee the repayment of
such construction financing and to guarantee the completion of Phase I of the
development.
Included in the payable to the parent company at September 30 and June 30,
1999 was $4,295,742 related to previous discontinued operations of the
Company.
<PAGE>
ATTACHMENT IV
NBI Properties, Inc.
d/b/a Holiday Inn of Belle Vernon
Three Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Page
Number
<S> <C>
Balance Sheet IV-2
Statements of Operations and Retained
Earnings (Accumulated Deficit) IV-3
Statements of Cash Flows IV-4 - IV-5
Notes to Financial Statements IV-6 - IV-7
</TABLE>
<PAGE>
NBI Properties, Inc.
d/b/a Holiday Inn of Belle Vernon
Unaudited Balance Sheet
<TABLE>
<CAPTION>
September 30,
1999
ASSETS
<S> <C>
Current assets:
Cash $ 291,479
Trade accounts receivable, less allowance of $1,703 34,153
Inventories 21,163
-----------
Total current assets 346,795
-----------
Property, plant and equipment:
Land and buildings 2,308,924
Machinery and equipment 64,913
Furniture and equipment 584,344
-----------
2,958,181
Accumulated depreciation (600,093)
-----------
Net property, plant and equipment 2,358,088
-----------
Other assets 140,494
-----------
Long-term receivable from parent 360,652
-----------
Total assets $3,206,029
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt $ 25,202
Accounts payable 80,742
Accrued payroll, payroll taxes and benefits 43,074
Other accrued liabilities 119,182
Payable to parent 23,118
-----------
Total current liabilities 291,318
Long-term liabilities:
Long-term debt 935,696
Deferred income taxes 453,502
-----------
Total liabilities 1,680,516
-----------
Commitments and contingencies
Stockholder's equity:
Common stock - no par value; 100,000 shares authorized,
34,515 issued and outstanding 34,515
Paid-in capital 1,514,503
Accumulated deficit (23,505)
-----------
Total stockholder's equity 1,525,513
-----------
Total liabilities and stockholder's equity $3,206,029
===========
</TABLE>
<PAGE>
NBI Properties, Inc.
d/b/a Holiday Inn of Belle Vernon
Unaudited Statements of Operations and Retained Earnings (Accumulated Deficit)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
<S> <C> <C>
Revenue:
Room rental and related revenue $ 463,529 $ 461,822
Food and beverage revenue 222,562 217,566
---------- ----------
Total revenue 686,091 679,388
---------- ----------
Cost of sales:
Room rental and related direct expenses (130,681) (125,764)
Food and beverage (204,286) (194,922)
Other operating expenses (125,401) (117,448)
---------- ----------
Total cost of sales (460,368) (438,134)
---------- ----------
Gross profit 225,723 241,254
Selling and administrative expenses (142,630) (145,738)
---------- ----------
Income from operations 83,093 95,516
Interest expense (21,848) (22,472)
Other income and expenses, net (11,659) 251
---------- ----------
Income before income tax benefit 49,586 73,295
Income tax expense (21,000) (29,000)
---------- ----------
Net income 28,586 44,295
Dividends paid to parent (60,000) --
Retained earnings (accumulated deficit) - beginning of period 7,909 (144,440)
---------- ----------
Accumulated deficit - end of period $ (23,505) $(100,145)
========== ==========
</TABLE>
<PAGE>
NBI Properties, Inc.
d/b/a Holiday Inn of Belle Vernon
Unaudited Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 28,586 $ 44,295
Adjustments to reconcile net income (loss) to net cash
flow provided by operating activities:
Depreciation and amortization 48,270 45,843
Changes in assets - decrease (increase):
Trade accounts receivable (2,235) 7,903
Inventories (2,888) (6,798)
Other current assets 7,461 (22,086)
Other assets (285) (251)
Changes in liabilities - (decrease) increase:
Accounts payable (66) 19,033
Accrued payroll, payroll taxes and benefits (7,969) (11,328)
Other accrued liabilities 32,881 11,139
Payable to parent 17,919 (1,060)
--------- ---------
Net cash flow provided by operating activities 121,674 86,690
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (29,034) (11,150)
--------- ---------
Net cash flow used in investing activities (29,034) (11,150)
--------- ---------
Cash flows from financing activities:
Payments on mortgage payable and other debt (5,993) (6,658)
Dividend payment to parent (60,000) --
--------- ---------
Net cash flow used in financing activities (65,993) (6,658)
--------- ---------
Net increase in cash 26,647 68,882
Cash, beginning of period 264,832 130,585
--------- ---------
Cash, end of period $291,479 $199,467
========= =========
<FN>
(continued on next page)
</TABLE>
<PAGE>
NBI Properties, Inc.
d/b/a Holiday Inn of Belle Vernon
Unaudited Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Interest paid to unrelated parties $21,848 $22,180
Interest paid to parent 1,365 908
------- -------
Total interest paid $23,213 $23,088
======= =======
Income taxes paid to unrelated parties $ 2,100 $ --
Income taxes paid to parent 7,635 --
------- -------
Total income taxes paid $ 9,735 $ --
======= =======
Supplemental Schedule of Noncash Investing
and Financing Activities:
Noncash purchases of property, plant and equipment
included in accounts payable at end of period $11,920 $ 1,980
======= =======
Capital lease obligations incurred for equipment
purchases during the period $ -- $ 3,675
======= =======
</TABLE>
<PAGE>
NBI Properties, Inc.
d/b/a Holiday Inn of Belle Vernon
Notes to Unaudited Financial Statements
NOTE 1 - BASIS OF PREPARATION AND BUSINESS
The accompanying financial statements have been prepared in accordance with
the requirements of interim financial statements and include all adjustments
(consisting of all normal recurring adjustments) which in the opinion of
management are necessary in order to make the financial statements not
misleading.
NBI Properties, Inc. ("the Company"), a wholly-owned subsidiary of NBI, Inc.
("parent company") owns and operates an 80-room full service Holiday Inn Hotel
in Belle Vernon, Pennsylvania.
In October 1995, the parent company granted the Internal Revenue Service
("IRS") a security interest in all of the capital stock of NBI Properties,
Inc., as a result of a revision of the payment terms for a debt the parent
company has outstanding with the IRS.
On August 19, 1999, NBI Properties, Inc.'s Board of Directors and the parent
company's Board of Directors voted to sell the assets or stock of NBI
Properties, Inc., in order to generate sufficient funds to allow the parent
company to pay its IRS debt due on December 31, 1999. No transactions have
been completed to date resulting from this decision. However, the parent
company's Chief Executive Officer ("CEO"), Jay Lustig, has proposed to
purchase all of the capital stock of NBI Properties, Inc. The parent company
is submitting the transaction to its disinterested shareholders for approval
at its Fiscal 1999 Annual Meeting of Stockholders.
NOTE 2 - STOCKHOLDER'S EQUITY
On August 19, 1999, the Board of Directors declared a $60,000 dividend payable
to the parent company, the sole stockholder. The dividend was paid on
September 3, 1999.
NOTE 3 - CONTINGENCIES
The hotel has disputed approximately $50,000 of architects' fees charged by an
unrelated party during fiscal 1997. During fiscal 1999, the party filed a
suit against the Company for payment of these fees. The Company filed a
counterclaim and no further actions have been taken by either party.
Management intends to defend its position and believes it is likely to
prevail. Therefore, these fees have not been accrued by the Company.
However, in the event of an unanticipated adverse outcome or settlement, the
Company would reduce its net income in the period in which such outcome or
settlement occurs.
NOTE 4 - OTHER INCOME AND EXPENSES
Included in other income and expenses for the three months ended September 30,
1999, was a civil penalty settlement expense of $12,000 for reporting
violations regarding the hotel's untimely filing of several monthly sewage
discharge monitoring reports to the Commonwealth of Pennsylvania, Department
of Environmental Protection.
NOTE 5 - CONCENTRATIONS OF RISK
As of September 30, 1999, approximately 62% of the Company's employees were
covered by a collective bargaining agreement that was renegotiated during
November 1998 and which now expires on November 3, 2001.
<PAGE>
NBI Properties, Inc.
d/b/a Holiday Inn of Belle Vernon
Notes to Unaudited Financial Statements
NOTE 6 - RELATED PARTY TRANSACTIONS
Discretionary management and accounting fees are charged by the parent company
to cover certain administrative costs.
The Company pays its allocated federal income taxes to the parent company
based upon its book income. The deferred federal tax asset or liability
arising from timing differences is offset by a long-term payable or receivable
from the parent company. The Company had a long-term receivable from the
parent at September 30, 1999 related to these timing differences.
The parent company charges interest at the prime rate (8.25% at September 30,
1999) plus 1% on the outstanding balance of the Company's current payable to
the parent company.
In addition, NBI Properties, Inc. is reimbursed for room and restaurant
charges incurred by another wholly-owned subsidiary of the parent company.
<PAGE>
ATTACHMENT V
NBI Properties, Inc.
d/b/a Holiday Inn of Belle Vernon
Year Ended June 30, 1999
<TABLE>
<CAPTION>
Page
Number
<S> <C>
Independent Accountants' Review Report V-2
Balance Sheet V-3
Statements of Operations and Retained
Earnings (Accumulated Deficit) V-4
Statements of Cash Flows V-5 - V-6
Notes to Financial Statements V-7 - V-12
</TABLE>
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Stockholder of
NBI Properties, Inc.
d/b/a Holiday Inn of Belle Vernon
Belle Vernon, Pennsylvania
We have reviewed the accompanying balance sheet of NBI Properties, Inc., d/b/a
Holiday Inn of Belle Vernon (a subsidiary of NBI, Inc.), as of June 30, 1999,
and the related statements of operations and retained earnings (accumulated
deficit) and cash flows for the years ended June 30, 1999 and 1998, in
accordance with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants. All
information included in these financial statements is the representation of
the management of NBI Properties, Inc. d/b/a Holiday Inn of Belle Vernon.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than
an audit in accordance with generally accepted auditing standards, the object
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based upon our reviews, we are not aware of any material modifications that
should be made to the accompanying financial statements in order for them to
be in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
Denver, Colorado
August 19, 1999
<PAGE>
NBI Properties, Inc.
d/b/a Holiday Inn of Belle Vernon
Balance Sheet
<TABLE>
<CAPTION>
June 30,
1999
ASSETS
<S> <C>
Current assets:
Cash $ 264,832
Trade accounts receivable, less allowance of $1,703 31,918
Inventories 18,275
Other current assets 7,461
-----------
Total current assets 322,486
-----------
Property, plant and equipment:
Land and buildings 2,299,074
Machinery and equipment 62,525
Furniture and equipment 566,938
-----------
2,928,537
Accumulated depreciation (554,241)
-----------
Net property, plant and equipment 2,374,296
-----------
Other assets 142,627
-----------
Long-term receivable from parent 360,652
-----------
Total assets $3,200,061
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt $ 25,202
Accounts payable 80,198
Accrued payroll, payroll taxes and benefits 51,043
Other accrued liabilities 86,301
Payable to parent 5,199
-----------
Total current liabilities 247,943
Long-term liabilities:
Long-term debt 941,689
Deferred income taxes 453,502
-----------
Total liabilities 1,643,134
-----------
Commitments and contingencies
Stockholder's equity:
Common stock - no par value; 100,000 shares authorized,
34,515 issued and outstanding 34,515
Paid-in capital 1,514,503
Retained earnings 7,909
-----------
Total stockholder's equity 1,556,927
-----------
Total liabilities and stockholder's equity $3,200,061
===========
<FN>
See accompanying Independent Accountants' Review Report and Notes to Financial
Statements.
</TABLE>
<PAGE>
NBI Properties, Inc.
d/b/a Holiday Inn of Belle Vernon
Statements of Operations and Retained Earnings (Accumulated Deficit)
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, June 30,
1999 1998
<S> <C> <C>
Revenue:
Room rental and related revenue $ 1,561,281 $ 1,396,493
Food and beverage revenue 811,482 777,992
------------ ------------
Total revenue 2,372,763 2,174,485
------------ ------------
Cost of sales:
Room rental and related direct expenses (474,012) (452,253)
Food and beverage (759,529) (705,463)
Other operating expenses (470,384) (472,230)
------------ ------------
Total cost of sales (1,703,925) (1,629,946)
------------ ------------
Gross profit 668,838 544,539
Selling and administrative expenses (540,002) (506,742)
------------ ------------
Income from operations 128,836 37,797
Interest expense (90,451) (89,167)
Other income 881 827
------------ ------------
Income (loss) before income tax benefit 39,266 (50,543)
Income tax benefit 113,083 38,285
------------ ------------
Net income (loss) 152,349 (12,258)
Accumulated deficit - beginning of year (144,440) (132,182)
------------ ------------
Retained earnings (accumulated deficit) - end of year $ 7,909 $ (144,440)
============ ============
<FN>
See accompanying Independent Accountants' Review Report and Notes to Financial
Statements.
</TABLE>
<PAGE>
NBI Properties, Inc.
d/b/a Holiday Inn of Belle Vernon
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, June 30,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 152,349 $(12,258)
Adjustments to reconcile net income (loss) to net cash
flow provided by operating activities:
Depreciation and amortization 187,610 180,832
Deferred income tax benefit (130,083) (28,285)
Changes in assets - decrease (increase):
Trade accounts receivable (7,176) (2,985)
Inventories (4,274) 1,334
Other current assets (872) 260
Other assets (7,006) (66,442)
Changes in liabilities - (decrease) increase:
Accounts payable 17,086 18,113
Accrued payroll, payroll taxes and benefits (1,263) 3,757
Other accrued liabilities 19,587 (26,625)
Payable to parent (14,910) 17,973
----------- ---------
Net cash flow provided by operating activities 211,048 85,674
----------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (49,307) (52,523)
------------ ---------
Net cash flow used in investing activities (49,307) (52,523)
------------ ---------
Cash flows from financing activities:
Proceeds from borrowing -- 5,410
Payments on mortgage payable and other debt (27,494) (21,476)
------------ ---------
Net cash flow used in financing activities (27,494) (16,066)
------------ ---------
Net increase in cash 134,247 17,085
Cash, beginning of year 130,585 113,500
------------ ---------
Cash, end of year $264,832 $130,585
============ =========
<FN>
(continued on next page)
See accompanying Independent Accountants' Review Report and Notes to Financial Statements.
</TABLE>
<PAGE>
NBI Properties, Inc.
d/b/a Holiday Inn of Belle Vernon
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, June 30,
1999 1998
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Interest paid to unrelated parties $88,228 $ 96,222
Interest paid to parent 1,160 4,375
------- --------
Total interest paid $89,388 $100,597
======= ========
Supplemental Schedule of Noncash Investing
and Financing Activities:
Noncash purchases of property, plant and equipment
included in accounts payable at year-end $11,310 $ --
======= ========
Capital lease obligations incurred for equipment
purchases during the year $10,452 $ --
======= ========
<FN>
See accompanying Independent Accountants' Review Report and Notes to
Financial Statements.
</TABLE>
<PAGE>
NBI Properties, Inc.
d/b/a Holiday Inn of Belle Vernon
Notes to Financial Statements
June 30, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND DESCRIPTION OF
BUSINESS
The accounting and reporting policies conform to generally accepted accounting
principles.
Business
NBI Properties, Inc. ("the Company"), a wholly-owned subsidiary of NBI, Inc.
("parent company") owns and operates an 80-room full service Holiday Inn Hotel
in Belle Vernon, Pennsylvania.
In October 1995, the parent company granted the Internal Revenue Service
("IRS") a security interest in all of the capital stock of NBI Properties,
Inc., as a result of a revision of the payment terms for a debt the parent
company has outstanding with the IRS.
On August 19, 1999, NBI Properties, Inc.'s Board of Directors and the parent
company's Board of Directors voted to sell the assets or stock of NBI
Properties, Inc., in order to generate sufficient funds to allow the parent
company to pay its IRS debt due on December 31, 1999. No transactions have
been completed to date resulting from this decision.
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,
revenues 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.
Concentration of Credit Risk
The Hotel's exposure to concentration of credit risk consists primarily of
trade accounts receivable. Concentrations of credit risk with respect to such
accounts receivable are limited, due to the generally short payment terms and
the granting of credit only to select local customers.
Cash Equivalents
The Company considers all investments that are readily convertible to known
amounts of cash and have original maturities of three months or less to be
cash equivalents.
Inventories
Inventories are stated at the lower of cost or market based upon the first-in,
first-out method and consist of food and beverage inventories.
See accompanying Independent Accountants' Review Report.
<PAGE>
Long-term Assets
The Company applies Statement of Financial Accounting Standards "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.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Property, plant and
equipment is depreciated over the estimated useful lives of the related
assets, as follows, using the straight-line method.
<TABLE>
<CAPTION>
<S> <C>
Asset Type Life
- -------------------------- -------------
Land N/A
Buildings and improvements 20 - 25 years
Machinery and equipment 3 - 15 years
Furniture and fixtures 5 - 10 years
</TABLE>
Improvements that extend the useful life of an asset are capitalized.
Maintenance and repairs are charged to expense as incurred. Depreciation
expense was $177,936 and $171,158 for the years ended June 30, 1999 and 1998,
respectively.
Income Taxes
The Company accounts for income taxes in conformity with SFAS No. 109. Under
the provisions of SFAS No. 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.
Revenue Recognition
Service and rental revenue is recognized when provided. All retail sales
exclude sales taxes.
Advertising Costs
The Company has a contract for billboard advertising. These costs were
capitalized and are being amortized over ten years, the life of contract.
Included in other assets at June 30, 1999 were capitalized billboard costs of
$7,462. These costs are net of accumulated amortization of $2,488. The
Company expenses other advertising costs as it is incurred. Advertising
expense was $52,083 and $39,669 for the years ended June 30, 1999 and 1998,
respectively.
Comprehensive Income
Effective July 1, 1998, the Company has adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." Comprehensive income includes all
changes in equity except those resulting from investments by owners and
distribution to owners. For the years ended June 30, 1999 and 1998, the
Company had no items of comprehensive income other than net income; therefore,
a separate statement of comprehensive income has not been presented for these
periods.
Reclassifications
Certain items in the 1998 financial statements have been reclassified to
conform to the 1999 manner of presentation.
See accompanying Independent Accountants' Review Report.
<PAGE>
NOTE 2 - OTHER ASSETS
Included in other assets at June 30, 1999 were capitalized franchise and loan
fees of $24,638 and $37,080, respectively. These costs are net of accumulated
amortization of $15,862 and $11,574, respectively. The franchise fees are
being amortized over 10 years, the term of the franchise agreement, and the
loan fees are being amortized over 10.5 years, the term of the mortgage.
Amortization expense related to the franchise and loan fees were $4,050 and
$4,628, respectively, for each of the years ended June 30, 1999 and 1998.
Also included in other assets at June 30, 1999 was $73,447 of restricted cash
for a replacement reserve maintained in accordance with the terms of the
mortgage note payable (see Note 3).
NOTE 3 - LONG-TERM DEBT
The Company has a bank mortgage note payable related to renovations made
during fiscal year 1997. The principal balance at June 30, 1999 was $958,689,
of which $22,436 was included in short-term borrowings and current portion of
long-term debt. Principal and interest at 8.85% is payable in monthly
installments of $8,983 until June 30, 2001. On July 1, 2001 the interest rate
changes to the five-year U.S. Treasury rate plus 2.7%. The note payable is
due in full on July 1, 2007, is collateralized by a first lien security
interest in the Company's assets, and is guaranteed by the parent company.
The 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.
At June 30, 1999, the Company also had debt of $8,202 related to equipment
purchases, of which $2,766 was included in short-term borrowings and current
portion of long-term debt.
Principal maturities of the borrowings are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Years ending June 30,
2000 $ 25,202
2001 27,819
2002 30,457
2003 32,018
2004 34,119
Thereafter 817,276
--------
$966,891
========
</TABLE>
NOTE 4 - INCOME TAXES
The Company is part of an affiliated group with its parent company which files
a consolidated tax return for federal tax purposes. The parent company
allocates each of the members of the group its share of income taxes as if it
filed on a separate return basis. The Company pays its allocated federal
income taxes to the parent company based upon its book income. The deferred
federal tax asset or liability arising from timing differences is offset by a
long-term payable or receivable from the parent company. The Company files
its state income tax returns on a separate basis.
The Company's deferred taxes relate to temporary differences that result
primarily from different treatment of depreciation for tax purposes than for
book purposes.
See accompanying Independent Accountants' Review Report.
<PAGE>
The income tax benefit (provision) for the years ended June 30, 1999 and 1998
consisted of:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Federal:
Current $(11,000) $ 21,000
Deferred 127,746 23,728
--------- ---------
116,746 44,728
--------- ---------
State:
Current (6,000) (11,000)
Deferred 2,337 4,557
--------- ---------
(3,663) (6,443)
--------- ---------
Total income tax benefit $113,083 $ 38,285
========= =========
</TABLE>
The Company's state income tax expenses for the years ended June 30, 1999 and
1998 include state taxes from the Pennsylvania capital stock and franchise
taxes, which are based upon the historical earnings as well as the book equity
balances of the Company.
The reconciliation of income taxes at the U.S. federal statutory tax rate to
the income tax benefit for the years ended June 30, 1999 and 1998 was as
follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Federal income tax (provision) benefit
computed at 34% on pre-tax income $(13,350) $17,185
State taxes payable, net of federal benefit (3,960) (7,260)
Change in intercompany receivable related to
parent company federal deferred tax asset 115,576 30,331
Other 14,817 (1,971)
-------- -------
Income tax benefit $113,083 $38,285
========= ========
</TABLE>
The Company's deferred income taxes at June 30, 1999 included only a
noncurrent deferred income tax liability of $453,502 related to depreciation.
The Company's parent company has significant federal net operating loss
carryforwards. To the extent the Company's deferred tax liabilities will be
realized during the availability of the parent company's net operating loss
carryforwards, a deferred tax benefit exists. During fiscal year 1999, an
additional deferred tax benefit of $91,260 was recognized resulting from a
change in the tax laws which extended the availability of the parent company's
federal net operating losses for five additional years. At June 30, 1999, the
amount of the benefit was $360,652 and is recorded as a long-term receivable
from the parent company. During the years ended June 30, 1999 and 1998, the
benefits increased $115,576 and $30,331, respectively, and were included in
the income tax benefits for those years.
NOTE 5 - LEASE COMMITMENTS
The Company leases the land supporting its hotel, under an operating lease
expiring in the year 2026, with an option to extend the lease 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 $52,327 and $47,158 for
the years ended June 30, 1999 and 1998, respectively.
See accompanying Independent Accountants' Review Report.
<PAGE>
Future minimum lease commitments under this noncancellable operating lease for
the next five fiscal years ending June 30 are:
<TABLE>
<CAPTION>
Year Amount
<S> <C>
2000 $8,000
2001 8,000
2002 8,000
2003 8,000
2004 8,000
</TABLE>
NOTE 6 - OTHER COMMITMENTS AND CONTINGENCIES
The hotel has a franchise agreement with Holiday Inns Franchising, Inc.
granting it a license to operate the hotel as a full service Holiday Inn Hotel
through August 4, 2005. Pursuant to the terms of the Franchise Agreement, the
hotel pays a royalty fee of 5% of gross rooms revenue. The hotel incurred
$77,449 and $68,480 in royalty fees for the years ended June 30, 1999 and
1998, respectively.
In addition, the hotel pays marketing and reservation contributions of 1.5%
and 1%, respectively, of gross rooms revenue to Holiday Inn under the terms of
this agreement. For the years ended June 30, 1999 and 1998, the hotel
incurred $22,671 and $20,544 of marketing contributions, respectively, and
$14,319 and $13,696 of reservation contributions, respectively.
The hotel has disputed approximately $50,000 of architects' fees charged by an
unrelated party during fiscal 1997. During fiscal 1999, the party filed a
suit against the Company for payment of these fees. The Company filed a
counterclaim and no further actions have been taken by either party.
Management intends to defend its position and believes it is likely to
prevail. Therefore, these fees have not been accrued by the Company.
However, in the event of an unanticipated adverse outcome or settlement, the
Company would reduce its net income in the period in which such outcome or
settlement occurs.
NOTE 7 - CONCENTRATIONS OF RISK
As of June 30, 1999, approximately 62% of the Company's employees were covered
by a collective bargaining agreement that was renegotiated during November
1998 and which now expires on November 3, 2001.
NOTE 8 - RELATED PARTY TRANSACTIONS
Discretionary management and accounting fees are charged by the parent company
to cover certain administrative costs.
The Company pays its allocated federal income taxes to the parent company
based upon its book income (see Note 4). The deferred federal tax asset or
liability arising from timing differences is offset by a long-term payable or
receivable from the parent company. The Company had a long-term receivable
from the parent at June 30, 1999 related to these timing differences.
The parent company charges interest at the prime rate (7.75% at June 30, 1999)
plus 1% on the outstanding balance of the Company's current payable to the
parent company.
In addition, NBI Properties, Inc. is reimbursed for room and restaurant
charges incurred by another wholly-owned subsidiary of the parent company.
See accompanying Independent Accountants' Review Report.
<PAGE>
The following summarizes the balances from these related party transactions
included in the balance sheet at June 30, 1999:
<TABLE>
<CAPTION>
June 30,
1999
Current payable to parent:
<S> <C>
Interest payable $ 1,812
Federal income taxes payable 11,000
Management fees payable 7,849
Room charges receivable (15,462)
---------
$ 5,199
=========
Long-term receivable from parent $360,652
=========
</TABLE>
The following summarizes the amounts included in income and expenses for the
years ended June 30, 1999 and 1998 from these related party transactions:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Room and restaurant charges included
in revenues $ 16,119 $ --
========== =========
Interest expense $ 2,223 $ 862
========== =========
Management and accounting fees
included in general and administrative
expenses $ 93,000 $100,500
========== =========
Federal income tax benefit $(116,746) $(44,728)
========== =========
</TABLE>
NOTE 9 - SUBSEQUENT EVENT
On August 19, 1999, the Board of Directors declared a $60,000 dividend payable
in September 1999 to the parent company, the sole stockholder.
See accompanying Independent Accountants' Review Report.
<PAGE>
APPENDIX TO PROXY STATEMENT
FORM OF PROXY
PROXY SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF NBI, INC.
For Annual Meeting on December 16, 1999
The undersigned hereby appoints Marjorie A. Cogan and Martin J. Noonan,
or either of them, attorneys and proxies for the undersigned, with full power
of substitution, to vote all shares of capital stock of NBI, Inc. (the
"Company") held of record by the undersigned on October 18, 1999, at the
Annual Meeting of Stockholders of NBI, Inc., to be held at the Belle Vernon
Holiday Inn, I-70 and Highway 51, Belle Vernon, Pennsylvania, on Thursday,
December 16, 1999, at 4:30 p.m. Eastern Time, and at any adjournment or
postponement thereof. The undersigned hereby revokes any proxy or proxies
heretofore given in respect to the same shares of stock.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED ON THE
REVERSE SIDE BY THE UNDERSIGNED WITH RESPECT TO PROPOSALS 1 AND 2. IF NO
DIRECTION IS GIVEN, SUCH SHARES WILL BE VOTED FOR SUCH PROPOSALS, AND SUCH
SHARES WILL BE VOTED IN THE DISCRETION OF THE BOARD OF DIRECTORS UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
TO ENSURE A QUORUM, YOU ARE URGED TO DATE AND SIGN THIS PROXY ON THE LINE
PROVIDED AND MAIL IT PROMPTLY IN THE ENCLOSED POSTAGE PAID ENVELOPE.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
SEE REVERSE
SIDE
<PAGE>
X Please Mark votes as in this example
The Board of Directors recommends a VOTE FOR proposals 1 and 2.
1. Election of Directors
Nominees: Jay H. Lustig and Martin J. Noonan.
For Both Nominees
Withheld From Both
Nominees
For all nominees
except as noted above
2. Approval of Sale of the majority of assets of Willowbrook Properties and
all of the capital stock of NBI Properties.
For
Against
Withheld
3. In their discretion, the above-named proxies are authorized to vote upon
such other business as may properly come before the meeting or any adjournment
or postponement thereof.
MARK HERE
FOR ADDRESS
CHANGE AND
NOTE AT LEFT _____
Please sign as name appears hereon. When shares are held by joint tenants,
both should sign. When signing as attorney, executor, administrator, trustee
or guardian, please give full title as such. If a corporation, please sign in
full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
Signature Date
Signature Date
