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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For Fiscal Year Ended June 30, 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
NBI, INC.
State of Incorporation IRS Employer I.D. Number
Delaware 84 - 0645110
1880 Industrial Circle, Suite F
Longmont, Colorado 80501
(303) 684-2700
Securities registered pursuant Name of each exchange
to section 12(b) of the Act: None on which registered: N/A
Securities registered pursuant
to Section 12(g) of the Act: Common Stock ($.01 par value)
Series A Cumulative Preferred Stock
($.01 par value)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
[ X ] YES [ ]NO
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
Revenues from continuing operations for the year ended June 30, 1999 were
$14,721,000.
The aggregate market value of voting stock held by non-affiliates of the
registrant is approximately $6,830,000 as of market close on August 19, 1999.
Common stock ($.01 Par Value): 8,103,320 shares outstanding as of August 19,
1999.
Documents incorporated by reference: Part III-The Registrant's definitive
Proxy Statement for its 1999 Annual Meeting of Shareholders, to be filed not
later than 120 days after the end of the fiscal year.
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PART I.
ITEM 1. BUSINESS
OPERATIONS
AMERICAN GLASS, INC., D/B/A L.E. SMITH GLASS COMPANY
In August 1995, American Glass, Inc., a wholly-owned subsidiary of NBI, Inc.
("NBI" or the "Company"), closed on its purchase of a majority of the assets,
including the name, of L.E. Smith Glass Company ("L.E. Smith") of Mount
Pleasant, Pennsylvania. Founded in 1907, the L.E. Smith Glass Company is one
of the few remaining handmade pressed glass manufacturers in the United
States. The company manufactures and sells an assortment of crystal and
colored glass giftware and lighting fixtures for the domestic consumer
market. None of the products manufactured by the company contain lead. L.E.
Smith produces its products with highly skilled workers, utilizing manual and
semi-automatic machines to mold, press, and decorate glassware. L.E. Smith
can be flexible in the types of products it can make, which allows it to be
responsive to the needs of smaller customers. In addition, L.E. Smith has far
greater flexibility in designing and manufacturing products with unusual
shapes, sizes, and weights than automated machine glassmakers. L.E. Smith
maintains almost every glass mold it has used for the past 90 years (in
excess of 2,300 molds).
L.E. Smith sells its products through in-house sales managers and
manufacturer's representatives. The giftware products are sold primarily to
traditional and specialty retailers, manufacturers/wholesalers and the food
service market, as well as through an "on-site" company retail store. The
lighting fixture products are sold to manufacturers and retailers.
DISCONTINUED OPERATIONS
On December 31, 1998, the Company established a plan to dispose of its
children's paint manufacturing operation due to continuing losses incurred by
such operation, as well as the business' inability to sustain 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, Inc. and
Willowbrook Properties, Inc., in order to pay the IRS debt due on December
31, 1999 (see Notes 2, 3, and 7 to accompanying consolidated financial
statements). Therefore, the Company has discontinued its hotel, real estate
development and children's paint manufacturing operations, and it has
separately reported the income or loss from these segments as discontinued
operations for the years ended June 30, 1999 and 1998. (See Note 3 to
accompanying consolidated financial statements.)
NBI PROPERTIES, INC.
In August 1995, NBI, Inc. acquired 100% of the outstanding capital stock of
the Belle Vernon Motel Corporation now known as NBI Properties, Inc. ("NBI
Properties"). NBI Properties owns and operates an 80 room full service
Holiday Inn in Belle Vernon, Pennsylvania (the "Belle Vernon Holiday Inn").
The Company is licensed pursuant to a license agreement with Holiday Inns
Franchising, Inc. which expires in August 2005, subject to renewal. The
Holiday Inn hotel consists of approximately 21,000 square feet and 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.
WILLOWBROOK PROPERTIES, INC. D/B/A NBI DEVELOPMENT CORPORATION
In January 1997, the Company, through its wholly-owned subsidiary,
Willowbrook Properties, Inc. d/b/a NBI Development Corporation ("NBI
Development") closed on the acquisition of a parcel of property consisting of
approximately 88 acres of farmland in Belle Vernon, Pennsylvania. The
property is situated along Route 51 in Belle Vernon and has frontage for
approximately 2,700 feet. NBI Development successfully obtained a zoning
variance to permit the development of a mixed use retail and residential
project for the property.
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During fiscal 1999, NBI Development entered into a development and a leasing
agreement with a well-respected local real estate development company. In
March 1999, NBI Development 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 retail
center. NBI Development 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 nine million dollars. NBI Development is
currently seeking commercial financing to pay for a significant portion of
the construction costs of the project.
KRAZY COLORS, INC.
In January 1995, the Company acquired a majority interest in Krazy Colors,
Inc. ("Krazy Colors") a small children's paint manufacturer located in Las
Vegas, Nevada, which manufactures roll-on and dot-on paints for children, as
well as bulk tempera paints. During fiscal 1999, Krazy Colors disposed of
most of its assets and subleased its warehouse space in Nevada. The company
is currently in process of negotiating an agreement with a Canadian company
to manufacture the Krazy Colors' products in exchange for a royalty on its
sales of these products.
HISTORY OF THE COMPANY
NBI was incorporated in 1973 to develop and market a proprietary word
processing system. The Company was the first to introduce a software-based
word processing system and within a few years became known as a leading
provider of dedicated word processing and office automation systems. Because
of the declining interest in purchasing entire system solutions, it was
necessary to restructure the Company in October 1989 and shift its focus from
manufacturing to customer service and support, and into development and
marketing of word processing software products for personal computers.
In 1990, NBI formed its domestic systems integration division to transition
the existing customer base from its proprietary hardware platforms to an open
platform. Because of the low margins, intense competition and long sales
cycle, NBI closed this business in June 1994.
To further its reorganization efforts, in February 1991, NBI filed a
voluntary petition for reorganization under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the District of
Colorado. NBI emerged from Chapter 11 on February 3, 1992, the effective date
of the Plan of Reorganization.
In August 1992, NBI sold its domestic customer service and support division.
As of June 30, 1995, the Company discontinued all software development
activities.
NBI, Ltd. was a wholly-owned international subsidiary of NBI, Inc. that sold
integrated document management solutions, workflow and COLD (Computer Output
to Laser Disk) to central and local government departments and commercial
organizations throughout the United Kingdom. Due to continuing losses
incurred by the subsidiary, NBI decided to sell the operation in fiscal 1995.
Late in fiscal 1994, NBI acquired the AlphaNet division which was a network
infrastructure business located in southern Ohio. AlphaNet's market focus was
on the physical cable layer of networks, including utilization of fiberoptic
technology. In August 1996, NBI decided to dispose of its AlphaNet division
and in fiscal 1997 completed the disposition. With the disposition of the
AlphaNet division, the Company discontinued all of its operations in the
computer industry segment. This segment consisted of its AlphaNet division,
its international subsidiary, NBI, Ltd., and its software development
activities.
As NBI was departing from the computer industry, the Company shifted its
focus and acquired its children's paint manufacturing operation in January
1995 and its glass manufacturing and hotel operations in August 1995. In
January 1997, the Company purchased land for development in southwestern
Pennsylvania. (See previous sections "Operations" and "Discontinued
Operations".)
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COMPETITION
The market segments in which the Company participates are extremely
competitive. Many of the Company's existing and potential competitors have
substantially greater financial, marketing and technological resources, as
well as established reputations for developing and distributing products and
providing services in the Company's markets. The Company expects that
existing and new competitors will continue to introduce products that are
competitive with those of the Company. There can be no assurance the Company
will be able to compete successfully in these markets. With the Company's
discontinuance of its children's paint manufacturing, real estate development
and hotel operations, its primary focus is in the glass manufacturing
industry.
L.E. Smith's main competition in giftware is from imports, primarily from
Europe, South America and the Orient. Most of the competitive glass from
overseas is twenty-four percent leaded crystal, even though L.E. Smith's
giftware is unleaded crystal, because foreign manufacturers are able to
produce leaded glass less expensively due to significantly fewer
environmental restrictions and lower labor costs. The main competition for
the glass lighting fixtures is also imports from Europe, South America and
the Orient. There are also a few domestic companies that have competing
products with certain portions of L.E. Smith's giftware and lighting fixtures
product lines. The Company is able to compete with other domestic and foreign
glass companies because it is one of only a few hand pressed glass
manufacturers remaining in the United States. The Company produces a large
variety of unique designs using twelve different colors of glass, and has a
solid reputation for the quality and reliability of its products. Also, its
products are price competitive with those of other domestic manufacturers.
L.E. Smith can compete with foreign competitors because it has the
flexibility to meet shorter lead times without the restrictive minimum
quantities required by most foreign manufacturers.
SIGNIFICANT CUSTOMERS AND SUPPLIERS
L.E. Smith currently has many small to medium-sized customers and one
significant customer. Sales to its significant customer totaled approximately
31% and 41% of NBI's consolidated revenues from continuing operations for the
years ended June 30, 1999 and 1998, respectively. The loss of this customer's
business would have a material adverse effect on NBI; however, L.E. Smith is
continually focusing its sales efforts on expanding its customer base to
lessen the impact this customer has on its business. In addition, the
Company's management believes that its relationship with this customer will
continue into the foreseeable future. However, revenues from this customer in
fiscal 1999 declined significantly compared to fiscal 1998, and the Company
anticipates the revenues from this customer will continue to decline
significantly again in fiscal 2000.
L.E. Smith purchases a majority of its raw materials from only a few vendors.
Management believes that other suppliers could provide similar materials on
comparable terms.
SEASONAL VARIATIONS OF BUSINESSES
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 revenues
from L.E. Smith are 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.
EMPLOYEES
As of August 7, 1999, the Company had a total of 188 employees in its
continuing operations, including 185 full-time employees. Currently, 144
employees of L.E. Smith are covered by a collective bargaining agreement
which expires on August 31, 2001.
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ITEM 2. PROPERTIES
CONTINUING OPERATIONS
In connection with its purchase of the assets of L.E. Smith in August 1995,
the Company acquired the land and buildings held by L.E. Smith, including a
total of approximately 194,000 square feet of manufacturing, warehousing and
office space on approximately 11.1 acres of land in Mount Pleasant,
Pennsylvania. Subsequently, L.E. Smith acquired two small parcels of land,
with accompanying houses, adjacent to the glass manufacturing facility. It
has demolished one of these houses and is holding these properties for future
use by the company. During fiscal 1999 and 1998, L.E. Smith leased
approximately 6,000 square feet of temporary warehouse space, under a
month-to-month lease, in order to facilitate certain property improvement
projects, and to accommodate additional space requirements resulting from the
growth of the company. NBI leases approximately 5,100 square feet of office
space for administrative personnel at its corporate headquarters in Longmont,
Colorado, under a lease expiring in October 2000. The Company believes its
leased facilities are adequate to meet its needs for the next several years
and anticipates that it would encounter little difficulty in locating
alternative or additional suitable facilities should its requirements change.
DISCONTINUED OPERATIONS
In connection with its purchase of the stock of the Belle Vernon Motel
Corporation in August 1995, the Company acquired the building and
improvements of the Belle Vernon Holiday Inn Hotel in Belle Vernon,
Pennsylvania. The building consists of approximately 21,000 square feet and
is on approximately 5.8 acres of land leased pursuant to a land lease
expiring in 2026, with an option to extend for an additional 25 year term.
Subsequently, NBI Properties purchased one acre of land across from the hotel
for its future use.
In January 1997, NBI Development acquired 88 acres of undeveloped land in
southwestern Pennsylvania. The Company has begun commercial development on
phase I of the property and is currently exploring financing options to fund
the project.
The Company also leases 10,000 square feet of warehouse space in Las Vegas
Nevada, previously used for its Krazy Colors' manufacturing operation. The
Company has subleased this space through its lease expiration date of
December 31, 1999.
All of the land and buildings owned by the Company's discontinued operations
are included in net long-term assets of discontinued operations at June 30,
1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded over-the-counter under the symbol NBII.
The following table sets forth the high and low bid prices, as quoted on the
OTC Bulletin Board, for the common stock for the fiscal periods specified.
The quotations of the Company's common stock reflect inter-dealer prices,
without any retail mark-up, mark-down or commissions, and may not necessarily
represent actual transactions.
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<TABLE>
<CAPTION>
Fiscal 1999 High Low
----------- --------- ---------
<S> <C> <C>
First Quarter $ 29/32 $ 25/32
Second Quarter 1 1/32 13/16
Third Quarter 1 1/8 11/16
Fourth Quarter 1 1/32 11/16
<CAPTION>
Fiscal 1998 High Low
----------- --------- ---------
<S> <C> <C>
First Quarter $ 3/4 $ 9/16
Second Quarter 5/8 17/32
Third Quarter 7/8 9/32
Fourth Quarter 7/8 25/32
</TABLE>
At June 30, 1999, there were 8,088,320 common shares of $.01 par value common
stock outstanding. The approximate number of common stockholders of the
Company was 1,240 as of August 31, 1999. This includes shares held in nominee
or "street" accounts. To date, no dividends have been paid on the $.01 par
value common stock and it is anticipated that future earnings will be
retained for operating purposes.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The statements in this Form 10-KSB, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations", 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. The Company does not intend to
update such forward-looking statements.
RESULTS OF OPERATIONS 1999 - 1998 COMPARISON
The Company reported net income of $278,000 in fiscal 1999, compared to net
income of $172,000 in fiscal 1998. During fiscal 1999, the Company
experienced a significant increase in revenues from the L.E. Smith Glass
Company and reduced losses from discontinued operations, significantly offset
by increased marketing, general and administrative expenses and an increased
loss on investments. The decline in interest expense was related to the
absence of interest expense on the Company's IRS debt during fiscal 1999 and
was significantly offset by the absence of a net extraordinary gain recorded
during fiscal 1998, both of which resulted from an amended payment agreement
entered into with the IRS during fiscal 1998.
Revenues from continuing operations of $14.7 million for the year ended June
30, 1999 reflected an increase of $2.5 million, or 20.3%, as compared to
fiscal 1998. The revenue growth resulted primarily from significant sales to
new customers and increased sales to customers acquired in recent years.
However, this growth was partially offset by a significant decline in
revenues from L.E. Smith's largest customer, particularly during the fourth
quarter of fiscal 1999.
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Revenues from continuing operations are expected to remain constant in fiscal
2000, as compared to fiscal 1999. L.E. Smith expects a significant decline in
revenues from its largest customer to be offset by an increase in projected
revenues from new and other existing customers due to increased sales efforts
including hiring a new sales representative to concentrate on increasing the
volume of the glass decorating business. However, the Company expects a
decline in revenues for the first quarter of fiscal 2000 compared to the same
period of the prior fiscal year because the first quarter of fiscal 1999
included approximately $400,000 in revenues related to an order from a
nonrecurring customer.
Cost of sales from continuing operations as a percentage of related revenues
for the years ended June 30, 1999 and 1998 was 72.7% and 71.6%, respectively.
The resulting decline in gross margin occurred primarily because the
increased volume at L.E. Smith was insufficient to cover general cost
increases, including increased labor costs associated with a new labor
contract which was effective September 7, 1998. In addition, L.E. Smith
recorded increased inventory reserve provisions during the fourth quarter of
fiscal 1999, primarily due to an unusually large book-to-physical write-down
of inventory. The Company is in the process of instituting an inventory
control program, including cycle counts, in order to minimize such
write-downs in the future.
Cost of sales from continuing operations as a percentage of related revenues
is expected to remain constant in fiscal 2000 as compared to fiscal 1999.
General cost increases, including increased labor costs associated with the
labor contract executed during fiscal 1999, are expected to be offset by
improved production efficiency and other cost control measures.
Marketing, general and administrative expenses from continuing operations
totaled $3.0 million for the year ended June 30, 1999, an increase of
$404,000 compared to the previous fiscal year. The increase in expenses
included an additional bad debt provision of $127,000 recorded by L.E. Smith
during the third quarter of fiscal 1999, resulting from a customer's
declaration of Chapter 11 bankruptcy in March 1999. In addition, the Company
experienced increased expenses associated with higher revenues at L.E. Smith
including increased sales commissions, product development expenses and other
sales and marketing expenses. Also during fiscal 1999, the Company
experienced general cost increases and had a decline in credits related to a
reduction of a reserve for incurred but not reported insurance claims,
because the Company previously converted to a fully-insured health plan for
its corporate employees. These increases were partially offset by the absence
of executive severance and non-cash compensation expense for extensions of
certain executive stock options included in fiscal 1998. Included in
marketing, general and administrative expenses incurred in fiscal 1999 were
payroll and related expenses of $1.1 million, commissions to sales
representatives of $609,000, legal, accounting and other professional fees of
$179,000, and advertising costs of $157,000.
Total marketing, general and administrative expenses from continuing
operations are expected to increase moderately in fiscal 2000, compared to
fiscal 1999, primarily due to general cost increases.
The Company recorded a net loss on investments of $347,000 in fiscal 1999,
consisting of a net realized loss of $346,000 and a net unrealized loss of
$1,000. During fiscal 1998, the Company recorded a net loss on investments of
$39,000, consisting of a net realized loss of $92,000 and a net unrealized
gain of $53,000. As part of its investment policy, the Company's investment
portfolio may include investments in option instruments and may include a
concentrated position in one or more securities. As a result of this, the
financial results may fluctuate significantly and have larger fluctuations
than with a more diversified portfolio. In addition, the Company may invest
in short-sale transactions of trading securities. Short-sales can result in
off-balance sheet risk, because losses can be incurred in excess of the
reported obligation if market prices of the securities subsequently increase.
At June 30, 1999, the Company had no short investment positions.
Interest expense from continuing operations totaled $183,000 and $505,000 for
the fiscal years ended June 30, 1999 and 1998, respectively. The decline was
primarily related to the absence of interest on the Company's IRS debt during
fiscal 1999, resulting from the restructured agreement with the IRS entered
into in April 1998.
The Company recorded an income tax provision from continuing operations of
$85,000 for the year ended June 30, 1999, which included state income tax
provisions of $117,000 primarily related to L.E. Smith's operations. In
fiscal 1998, the Company recorded an income tax provision from continuing
operations of $96,000 which included state income tax provisions of $106,000,
also primarily related to L.E. Smith's operations. In accordance with fresh
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start accounting, which was adopted as of April 30, 1992, and as a result of
the Company's reorganization under Chapter 11 of the U.S. Bankruptcy Code,
future utilization of any income tax benefit from pre-reorganization net
operating loss carryforwards are not credited to the income tax provision,
but rather, reported as an addition to capital in excess of par value. No
pre-reorganization net operating loss carryforwards were utilized during
fiscal 1999; however, $28,000 of pre-reorganization net operating loss
carryforwards were utilized during fiscal 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 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, Inc. and Willowbrook Properties,
Inc., in order to pay the IRS debt due on December 31, 1999 (see Notes 2 and
7 to accompanying consolidated financial statements). Therefore, the Company
has discontinued its hotel, real estate development and children's paint
manufacturing operations, and it has separately reported the income or loss
from these segments as discontinued operations for the years ended June 30,
1999 and 1998.
Revenues from discontinued operations totaled $2.5 million for both of the
years ended June 30, 1999 and 1998. An increase of $198,000 in revenues from
the Belle Vernon Holiday Inn, resulting from increased occupancy rates and
average daily room rates, was offset by a decline in revenues from Krazy
Colors related to unfavorable results from the Company's restructuring
efforts.
The net loss from discontinued operations totaled $189,000 in fiscal 1999
compared to $352,000 in fiscal year 1998. The decreased loss resulted
primarily from a significant decline in losses from Krazy Colors' operations.
Included in the net loss from discontinued operations for fiscal year 1999
was a loss on disposal of Krazy Colors of $131,000, net of an income tax
benefit of $67,000. In determining the loss on disposal of its children's
paint manufacturing operation, the Company has estimated the net realizable
value of the disposal of the discontinued operation, including estimated
costs and expenses directly associated with the disposal and estimated loss
from operations through the expected disposal date. Because the Company
expects a significant gain overall from the discontinued operations of both
the hotel and land development, no amount has been recorded at June 30, 1999;
the gain will be recognized when realized. The loss on disposal of Krazy
Colors recorded in fiscal 1999 was offset by a non-cash impairment loss of
$167,000 related to a write-down of goodwill associated with Krazy Colors
recorded in the prior fiscal year.
The net long-term assets of discontinued operations at June 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 June
30, 1999 consisted primarily of accounts payable and accrued liabilities, net
of cash balances.
EXTRAORDINARY GAIN
The entire outstanding principal balance on its IRS debt of $5,278,000 was
due in full on October 1, 1997. Effective April 9, 1998, the Company and the
IRS entered into an amended payment agreement revising the payment terms
related to the Company's IRS debt. Under the new agreement, $3.5 million of
the IRS debt was due and paid on December 31, 1998 and the remaining balance
of approximately $1.8 million is due on or before December 31, 1999 (see
Notes 7 and 13 to accompanying consolidated financial statements). Provided
no event of default occurs prior to payment of the debt in full, NBI will not
be obligated to pay any past, current or future interest related to the debt.
Therefore, during the fourth quarter of fiscal 1998, the Company recorded a
net extraordinary gain of $290,000, consisting of forgiveness of accrued
interest recorded through March 31, 1998 totaling $439,000, less an income
tax provision of $149,000.
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FINANCIAL CONDITION
Total current assets of the Company increased $515,000 during fiscal year
1999 to $5.0 million at June 30, 1999. The increase in current assets during
fiscal 1999 was primarily related to increases in cash and trading
securities, as well as the inclusion in other current assets of a net
receivable from investment trades made at the end of fiscal 1999 which did
not settle until after year-end, all of which resulted from increased working
capital generated through a public offering of preferred stock. (See
"Liquidity and Capital Resources".)
Total assets of $12.8 million at June 30, 1999 reflected an increase of
$615,000 from June 30, 1998 and was primarily related to an increase in
current assets, as discussed above. During fiscal 1999, the Company
experienced a significant increase in capitalized land development costs,
included in net long-term assets from discontinued operations at June 30,
1999, as well as a significant increase in property and equipment, because it
is continually investing in capital improvement projects at L.E. Smith.
However, these increases were significantly offset by the reclassification of
the long-term portion of the mortgage payable on the hotel against net
long-term assets of discontinued operations at June 30, 1999, as well as an
increase in accumulated depreciation on the property and equipment held by
L.E. Smith.
NBI Development began construction on phase I of its commercial real estate
development project in April 1999, with an anticipated construction period of
approximately fourteen months. The construction costs will be capitalized
during the construction period and are anticipated to be approximately nine
million dollars. The Company is currently in process of seeking commercial
financing to pay for a significant portion of these costs. (See "Liquidity
and Capital Resources".)
Current liabilities decreased $1.6 million to $5.8 million at June 30, 1999,
primarily due to the payment of the $3.5 million installment on the IRS debt
on December 31, 1998, partially offset by the reclassification of $1.8
million of the IRS debt to current liabilities during fiscal 1999.
Stockholders' equity of $6.4 million at June 30, 1999 increased $5.1 million
from June 30, 1998, resulting primarily from a public offering of preferred
stock which closed on December 31, 1998 and raised gross proceeds of $5.0
million before associated expenses of $152,000. The proceeds of this offering
were used to pay the $3.5 million installment on the IRS debt which was due
on or before December 31, 1998. In addition, the proceeds were used to fund a
majority of the land development costs paid for during fiscal 1999, to
provide additional working capital for the Company, and were invested in
trading securities.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $102,000 during fiscal 1999. The increase
was primarily related to the proceeds from the Company's offering of
preferred stock during fiscal 1999 (see "Financial Condition"), which raised
gross proceeds of $5.0 million. However, a majority portion of these proceeds
were used to fund (i) associated expenses of $152,000, (ii) the $3.5 million
installment on the IRS debt which was due on or before December 31, 1998,
(iii) a majority of the land development costs paid for during fiscal 1999,
and (iv) investments included in trading securities and other current assets
at June 30, 1999. Substantial capital improvements made at L.E. Smith during
fiscal 1999 were funded by its cash on hand, cash flow from its operations
and borrowings on its line of credit.
The Company had negative working capital of $773,000 and $2.9 million at June
30, 1999 and 1998, respectively. The increase of $2.1 million in working
capital was primarily related to the proceeds from the Company's offering of
preferred stock during fiscal 1999, which raised $5.0 million before
associated expenses. However, this increase was partially offset by the
reclassification of $1.8 million of the IRS debt to current liabilities
during the fiscal 1999 and an increase in land development costs of
approximately $900,000 during fiscal 1999, which was funded by working
capital generated from the public offering of preferred stock.
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, Inc. and Willowbrook
Properties, Inc.; however, there can
9
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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. See also Report of Independent Certified
Public Accountants and Notes 2 and 7 to the Consolidated Financial Statements.
The Company expects to pay the cash dividends on its recently issued
preferred stock through existing working capital and internally generated
funds, including cash potentially available from L.E. Smith and NBI
Properties through dividend payments to the parent Company. However, L.E.
Smith's and NBI Properties' bank loan agreements limit their ability to pay
dividends and the amount of dividends payable. (See Notes 9, 12 and 13 to the
accompanying consolidated financial statements.)
The Company is currently pursuing various financing options for its real
estate development activities of NBI Development. It is currently funding the
construction activity out of existing cash; however, it will be necessary to
obtain financing during the first or second quarter of fiscal 2000 in order
to continue construction on phase one of the development.
Construction-in-progress totaled $97,000 at June 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 June 30, 1999, internally
generated funds and, for L.E. Smith's requirements, short-term borrowings
under an existing line of credit which expires on November 1, 1999. The
Company is currently seeking a replacement for this line of credit.
TAX LOSS CARRYFORWARDS
As discussed in Note 7 to the accompanying consolidated financial statements,
the Company has approximately $62 million of tax loss carryforwards. A
valuation allowance of approximately $23 million has been established for the
net deferred tax assets arising from the tax loss carryforwards because the
Company has not been able to determine that it is more likely than not that
the net deferred tax assets will be realized. Section 382 of the Internal
Revenue Code would materially limit the amount of net operating loss
carryforwards available for use in any single year if the Company were to
experience a change of ownership as defined by Section 382.
YEAR 2000 COMPLIANCE
The Company has completed a review and risk assessment of all technology
items used in its operations. The Company believes that the year 2000 problem
will pose no significant operational problems. Substantially all of the
machinery and equipment used by the Company's glass manufacturing 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
10
<PAGE>
needs of the Company. The upgrading or replacement of equipment which is
non-compliant, as well as the related testing of such equipment is expected
to be virtually complete by the end of the first quarter of fiscal 2000.
L.E. Smith currently has one customer of such significance that if such
customer were to experience year 2000 problems that resulted in the
cancellation or deferral of orders, it could materially adversely affect the
results of operations of the Company. The Company has discussed the year 2000
issue with this and other material customers and vendors and currently does
not anticipate any significant problems. In addition, the Company will
continue to review the status of the year 2000 issues with these customers
and vendors.
The Company presently believes that with the planned conversions to new
hardware and software, the year 2000 issue will be mitigated without causing
a material adverse impact on the operations of the Company. However, if such
conversions are not completed timely, the year 2000 issue could have an
impact on the operations of the Company. At this time, management does not
believe that the impact and any resulting costs will be material.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting reporting
standards for derivative instruments including certain derivative instruments
embedded in other contracts and for hedging activities. SFAS 133 was
originally to be effective for fiscal years beginning after June 15, 1999.
SFAS No. 137 has deferred the effective date of SFAS 133 to all fiscal
quarters of fiscal years beginning after June 15, 2000. Management believes
the adoption of this statement will not have a material impact on the
Company's financial statements.
11
<PAGE>
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of NBI, Inc.
We have audited the accompanying consolidated balance sheet of NBI, Inc. and
subsidiaries as of June 30, 1999, and the related consolidated statements of
income, stockholders' equity and cash flows for the years ended June 30, 1999
and 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NBI, Inc.
and subsidiaries at June 30, 1999, and the results of their operations and
their cash flows for the years ended June 30, 1999 and 1998 in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 2 to the financial statements, the Company may not be able to meet the
payment terms of the IRS debt within the contractual terms of the agreement.
This condition raises substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Denver, Colorado
August 19, 1999
12
<PAGE>
NBI, INC.
CONSOLIDATED BALANCE SHEET
June 30, 1999
(Amounts in thousands, except share data)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 311
Trading securities 36
Accounts receivable, less allowance for doubtful accounts of $223 1,243
Inventories 2,972
Other current assets 443
-------------
Total current assets 5,005
Property, plant and equipment, net 4,140
Other assets 9
Net long-term assets of discontinued operations 3,666
-------------
$ 12,820
-------------
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of notes payable $ 1,719
Current portion of IRS debt and other income taxes payable 1,788
Accounts payable 1,372
Accrued liabilities 726
Net current liabilities of discontinued operations 173
-------------
Total current liabilities 5,778
Long-term liabilities:
Notes payable 260
Deferred income taxes 92
Postemployment disability benefits and other 264
-------------
Total liabilities 6,394
-------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.01 par value; 5,000,000 shares
authorized; 500,000 shares of Series A Cumulative Preferred
Stock issued and outstanding (liquidation preference value of $5,000) 5
Capital in excess of par value - preferred stock 4,562
Common stock - $.01 par value (20,000,000 shares
authorized; 10,115,520 shares issued) 101
Capital in excess of par value - common stock 6,561
Accumulated deficit (3,935)
-------------
7,294
Treasury stock, at cost (2,027,200 shares) (868)
-------------
Total stockholders' equity 6,426
-------------
$ 12,820
-------------
-------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
13
<PAGE>
NBI, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 1999 and 1998
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Sales $ 14,721 $ 12,233
----------- -----------
Costs and expenses:
Cost of sales 10,709 8,762
Marketing, general and administrative 2,972 2,568
----------- -----------
13,681 11,330
----------- -----------
Income from operations 1,040 903
----------- -----------
Other income (expense):
Interest income 26 2
Net loss on investments (347) (39)
Other income (expense) 16 (31)
Interest expense (183) (505)
----------- -----------
(488) (573)
----------- -----------
Income from continuing operations before
provision for income taxes and extraordinary gain 552 330
Provision for income taxes (85) (96)
----------- -----------
Income before discontinued operations
and extraordinary gain 467 234
Loss from discontinued operations, net of
income tax benefit of $92 in 1999 and $168 in 1998 (189) (352)
Extraordinary gain, net of income taxes of $149 -- 290
----------- -----------
Net income 278 172
Dividend requirement on preferred stock (251) --
----------- -----------
Income attributable to common stock $ 27 $ 172
----------- -----------
----------- -----------
Income (loss) per common share - basic:
Income before discontinued operations
and extraordinary gain $ .03 $ .03
Loss from discontinued operations (.03) (.04)
Extraordinary gain -- .03
----------- -----------
Net income $ -- $ .02
----------- -----------
----------- -----------
Income (loss) per common share - diluted:
Income before discontinued operations
and extraordinary gain $ .03 $ .03
Loss from discontinued operations (.03) (.04)
Extraordinary gain -- .03
----------- -----------
Net income $ -- $ .02
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
14
<PAGE>
NBI, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1999 and 1998
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------------------------- ------------------------------------
Capital in Capital in
Number of (Par Value Excess of Number of (Par Value Excess of
Shares $.01) Par Value Shares $.01) Par Value
-------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance July 1, 1997 -- $ -- $ -- 10,005,020 $ 100 $ 6,178
Issued under
Employee Stock
Option Plan -- -- -- 110,500 1 28
Utilization of
pre-reorganization
net operating loss
carryforwards -- -- -- -- -- 28
Compensation expense
related to stock
option extensions -- -- -- -- -- 48
Other -- -- -- -- -- (2)
Net income for the year
ended June 30, 1998 -- -- -- -- -- --
-------- ---------- -------- ---------- ---------- ----------
Balance June 30, 1998 -- -- -- 10,115,520 101 6,280
Preferred stock with
detachable warrants,
issued in public offering,
net of offering costs 500,000 5 4,562 -- -- 281
Net income for the year
ended June 30, 1999 -- -- -- -- -- --
-------- ---------- -------- ---------- ---------- ----------
Balance June 30, 1999 500,000 $ 5 $ 4,562 10,115,520 $ 101 $ 6,561
-------- ---------- -------- ---------- ---------- ----------
-------- ---------- -------- ---------- ---------- ----------
<CAPTION>
Accumulated Treasury
Deficit Stock Total
---------------- ----------- ----------
<S> <C> <C> <C>
Balance July 1, 1997 $ (4,385) $ (868) $1,025
Issued under
Employee Stock
Option Plan -- -- 29
Utilization of
pre-reorganization
net operating loss
carryforwards -- -- 28
Compensation expense
related to stock
option extensions -- -- 48
Other -- -- (2)
Net income for the year
ended June 30, 1998 172 -- 172
---------- ---------- ----------
Balance June 30, 1998 (4,213) (868) 1,300
Preferred stock with
detachable warrants,
issued in public offering,
net of offering costs -- -- 4,848
Net income for the year
ended June 30, 1999 278 -- 278
---------- ---------- ----------
Balance June 30, 1999 $ (3,935) $ (868) $ 6,426
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
15
<PAGE>
NBI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999 and 1998
(Amounts in Thousands)
<TABLE>
<CAPTION>
1999 1998
---------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 278 $ 172
Adjustments to reconcile net income to net cash flow provided by (used in)
operating activities:
Depreciation and amortization 843 738
Utilization of pre-reorganization net operating loss carryforwards -- 28
Provision for bad debts and returns 191 89
Provision for write-down of inventories 289 69
Provision for write-down of note receivable -- 10
Provision for impairment of property and equipment
and other long-term assets 53 --
Loss (gain) on sales of property and equipment (8) 54
Impairment of goodwill -- 167
Net unrealized loss (gain) on trading securities 1 (53)
Compensation expense related to stock option extensions -- 48
Deferred income tax benefit (131) (28)
Other 12 (2)
Changes in assets -- decrease (increase):
Accounts receivable (91) (226)
Inventory (556) (349)
Trading securities (37) --
Other current assets (324) 22
Other assets 56 (86)
Changes in liabilities -- (decrease) increase:
Obligations for short-sale transactions -- (58)
Accounts payable and accrued liabilities 635 (259)
Income tax related accounts (15) 31
---------- ------------
Net cash flow provided by operating activities 1,196 367
---------- ------------
Cash flows from investing activities:
Proceeds from sales of property and equipment 16 2
Purchases of property and equipment (1,931) (1,199)
---------- ------------
Net cash flow used in investing activities (1,915) (1,197)
---------- ------------
</TABLE>
(continued on following page)
See accompanying Notes to Consolidated Financial Statements.
16
<PAGE>
NBI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999 and 1998
(Amounts in Thousands)
<TABLE>
<CAPTION>
1999 1998
---------- ------------
<S> <C> <C>
Cash flows from financing activities:
Collections on notes receivable $ 13 $ 5
Proceeds from issuance of preferred stock, net of offering costs 4,848 --
Proceeds from borrowing -- 105
Proceeds from stock option exercises -- 29
Payments on notes payable (261) (270)
Net borrowings (payments) on line of credit (1) 837
Payment on IRS debt (3,500) --
---------- ------------
Net cash flow provided by financing activities 1,099 706
---------- ------------
Net increase (decrease) in cash and cash equivalents 380 (124)
Less change in cash and cash equivalents included
in net assets of discontinued operations (278) --
Cash and cash equivalents at beginning of year 209 333
---------- ------------
Cash and cash equivalents at end of year $ 311 $ 209
---------- ------------
---------- ------------
Supplemental disclosures of cash flow information:
Interest paid $ 262 $ 349
---------- ------------
---------- ------------
Income taxes paid $ 108 $ 88
---------- ------------
---------- ------------
Noncash purchases of property, plant and equipment
included in accounts payable at end of year $ 315 $ 190
---------- ------------
---------- ------------
Noncash issuance of note receivable for sale of
inventory and equipment $ 40 $ --
---------- ------------
---------- ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
17
<PAGE>
NBI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION: With the discontinuance of its NBI Properties, Inc.'s
hotel operations, Willowbrook Properties, Inc.'s real estate development
operations and Krazy Colors, Inc.'s children's paint manufacturing operations
(see Note 3), the Company's continuing operations are solely in the glass
manufacturing industry. The Company's glass manufacturing operation is
located in southwestern Pennsylvania.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company, its wholly-owned subsidiaries, and its 80% owned
children's paint manufacturing subsidiary. All significant intercompany
accounts, transactions and profits have been eliminated. The Company records
the minority interest in consolidated net assets equal to the minority's
percentage ownership in the net assets of the subsidiary entity, to the
extent the minority interest is positive. At June 30, 1999, the minority
interest in the children's paint manufacturing subsidiary was a deficit
balance and accordingly, was limited to zero. The minority's share of income
(losses) is shown as a separate component of consolidated net income, if
significant. In addition, the minority's share of losses are recorded only
until the minority interest in the net asset of the subsidiary has been
reduced to zero.
USE OF ESTIMATES: Preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions. These estimates or assumptions affect reported
amounts of assets, liabilities, revenue and expenses as reflected in the
financial statements. Actual results could differ from those estimates.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Unless otherwise specified, the Company
believes the book value of financial instruments approximates their fair
value.
RECENT ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting
Standards Board (" FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities" which establishes accounting reporting standards for derivative
instruments including certain derivative instruments embedded in other
contracts and for hedging activities. SFAS 133 was originally to be effective
for fiscal years beginning after June 15, 1999. SFAS No. 137 has deferred the
effective date of SFAS 133 to all fiscal quarters of fiscal years beginning
after June 15, 2000. Management believes the adoption of this statement will
not have a material impact on the Company's financial statements.
CASH: Cash and cash equivalents include investments that are readily
convertible to known amounts of cash and have original maturities of three
months or less. The Company places its cash and temporary cash investments
with financial institutions. At times, such investments may be in excess of
federally insured limits.
INVESTMENTS IN SECURITIES: The Company's accounting policies for investments
in securities are as follows:
TRADING SECURITIES: Trading securities are held for resale in anticipation of
short-term market movements. These types of securities, consisting of
marketable debt and equity securities, are stated at fair market value. Gains
and losses, both realized and unrealized, are included in net gain (loss) on
investments when incurred. All dividends, interest and discount or premium
amortization is included in interest income as earned. Cash flows from
purchases and sales of trading securities are classified as cash flows from
operating activities rather than from investing activities.
SECURITIES HELD-TO-MATURITY: Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at
amortized cost. Interest earned on securities classified as held-to-maturity,
including any discount or premium amortization, is included in interest
income as earned.
18
<PAGE>
AVAILABLE FOR SALE: Marketable equity securities and debt securities not
classified as either trading or held-to- maturity are classified as
available-for-sale. Available-for-sale securities are carried at fair market
value, with the unrealized gains and losses, net of tax, reported as a
separate component of stockholders' equity. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in net gain (loss) on investments and other income
(expense) when incurred. The cost of securities sold is based on the specific
identification method. Interest and dividends earned on securities classified
as available-for-sale, including any discount or premium amortization, are
included in interest income as earned.
The Company computes realized gains or losses based upon the specific
identification method.
INVENTORIES: Inventories are stated at the lower of cost (at standard which
approximates first-in, first-out method) or market and were comprised of the
following amounts which are presented net of reserves totaling $197,000:
<TABLE>
<CAPTION>
June 30,
1999
----
(Amounts in thousands)
<S> <C>
Raw Materials $ 899
Work in Process 466
Finished Goods 1,607
-----------
$ 2,972
-----------
-----------
</TABLE>
LONG-TERM ASSETS: The Company applies SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets". Under SFAS No. 121, long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be
held and used are reported at the lower of the carrying amount or their
estimated fair market value. Long-lived assets and certain identifiable
intangibles to be disposed of are reported at the lower of the carrying
amount or their estimated fair market value less costs to sell.
Identifiable intangible assets not covered by SFAS No. 121 and goodwill not
identified with assets that are subject to an impairment loss under SFAS No.
121 are accounted for in accordance with Accounting Principal Board ("APB")
Opinion No. 17. Under APB No. 17, the amortization periods of identifiable
assets and goodwill are continually evaluated to determine if the useful
lives should be revised. If the useful lives are changed, the unamortized
cost would be allocated to the remaining periods in the revised useful lives.
In addition, the Company periodically reviews the carrying values of its
identifiable intangible assets and goodwill by comparing them to their
estimated fair market value and expected future benefits of the assets to
determine if an impairment exists under APB No. 17.
Property, plant and equipment: Capital assets are recorded at cost and are
depreciated on a straight-line basis over the following lives:
<TABLE>
<CAPTION>
Asset Type Life
---------- ----
<S> <C>
Land N/A
Buildings and building improvements 20-25 years
Machinery and equipment 3-15 years
Office furniture and fixtures 5-10 years
Construction-in-progress N/A
</TABLE>
STOCK OPTION PLAN: The Company applies APB No. 25, "Accounting for Stock
Issued to Employees" and related interpretations in accounting for its stock
option plan. Under APB No. 25, no compensation cost has been recognized for
stock options granted, as the option price equals or exceeds the market price
of the underlying common stock on the date of grant. SFAS No. 123,
"Accounting for Stock-Based Compensation" requires the Company to provide pro
forma information regarding net income as if compensation cost for the
Company's stock option plan had been determined in accordance with the fair
value based method prescribed in SFAS No. 123. To provide the required pro
forma information, the Company estimates the fair value of each stock option
at the grant date by using the Black-Scholes option-pricing model.
19
<PAGE>
REVENUE RECOGNITION: Revenue from sales of products is recognized when title
passes, generally when the goods are shipped, except for goods shipped on
consignment. Revenue is recognized from products shipped on consignment when
the consignee sells the goods.
ADVERTISING COSTS: The Company expenses the production costs of advertising
the first time the advertising takes place, except for costs related to the
production of new catalogs. These costs are capitalized and amortized over
two to three years, their expected period of future benefits. Included in
other current assets at June 30, 1999 were capitalized catalog advertising
costs of $100,000. These costs are net of accumulated amortization of $46,000.
The Company also has a contract for billboard advertising for the hotel.
These costs were capitalized and are being amortized over ten years, the life
of the contract. Included in net long-term assets of discontinued operations
at June 30, 1999 were capitalized billboard costs of $10,000, which are net
of accumulated amortization of $2,000.
Advertising expense from continuing operations was $157,000 and $131,000 for
the years ended June 30, 1999 and 1998, respectively.
INCOME TAXES: The Company accounts for income taxes in conformity with SFAS
109. Under the provisions of SFAS 109, a deferred tax liability or asset (net
of a valuation allowance) is provided in the financial statements by applying
the provisions of applicable tax laws to measure the deferred tax
consequences of temporary differences which result in net taxable or
deductible amounts in future years as a result of events recognized in the
financial statements in the current or preceding years.
NET INCOME (LOSS) PER SHARE: During fiscal 1998, NBI, Inc. adopted SFAS No.
128, which provides for the calculation of "Basic" and "Diluted" earnings per
share. Basic earnings per share includes no dilution and is computed by
dividing income (loss) available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution of securities that could share in
the earnings of an entity, similar to fully diluted earnings per share (see
Note 15).
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 AND ADJUSTMENTS: Certain items in the 1998 financial
statements have been reclassified to conform to the 1999 manner of
presentation.
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. and Willowbrook Properties,
Inc. (see Notes 3 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.
3. 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 long-term customers. On August 19,
20
<PAGE>
1999, the Board of Directors voted to sell the assets or stock of its
wholly-owned subsidiaries, NBI Properties, Inc. and Willowbrook Properties,
Inc., in order to pay the IRS debt due on December 31, 1999 (see Notes 2 and
7). Therefore, the Company has discontinued its hotel, real estate
development and children's paint manufacturing operations, and it has
separately reported the income or loss from these segments as discontinued
operations for the years ended June 30, 1999 and 1998 as follows:
<TABLE>
<CAPTION>
Children's
Paint Hotel Land
Manufacturing Operations Development Total
------------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Fiscal Year 1999:
Revenues from discontinued operations $ 112 $ 2,372 $ -- $ 2,484
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Income (loss) from discontinued operations
before income taxes $ (125) $ 41 $ 1 $ (83)
Income tax benefit (provision) 43 (17) (1) 25
---------- ---------- ----------- ----------
Net income (loss) from discontinued operations (82) 24 -- (58)
---------- ---------- ----------- ----------
Loss on disposal, including loss from operations
from January 1, 1999
through disposition of $18,000
for the children's paint manufacturing (198) -- -- (198)
Income tax benefit 67 -- -- 67
---------- ---------- ----------- ----------
Net loss on disposal (131) -- -- (131)
---------- ---------- ----------- ----------
Net loss from discontinued operations $ (213) $ 24 $ -- $ (189)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Fiscal Year 1998:
Revenues from discontinued operations $ 286 $ 2,174 $ -- $ 2,460
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Loss from discontinued operations
before income taxes $ (449) $ (50) $ (21) $ (520)
Income tax benefit 152 10 6 168
---------- ---------- ----------- ----------
Loss from discontinued operations (297) (40) (15) (352)
Loss on disposal -- -- -- --
---------- ---------- ----------- ----------
Net loss from discontinued operations $ (297) $ (40) $ (15) $ (352)
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>
In determining the loss on disposal of its children's paint manufacturing
operation, the Company has estimated the net realizable value of the disposal
of the discontinued operation, including estimated costs and expenses
directly associated with the disposal and estimated loss from operations
through the expected disposal date. Because the Company expects a significant
gain overall from the discontinued operations of both the hotel and land
development, no amount has been recorded at June 30, 1999; the gain will be
recognized when realized.
The net long-term assets of discontinued operations at June 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 (see Note 12). The net current liabilities of discontinued
operations at June 30, 1999 consisted primarily of accounts payable and
accrued liabilities, net of cash balances.
21
<PAGE>
4. INVESTMENTS IN SECURITIES
During the years ended June 30, 1999 and 1998, all of the Company's
securities were classified as trading securities; no securities were
classified as held-to-maturity or available-for-sale. The Company recorded a
net realized loss of $346,000 and a net unrealized loss of $1,000 on
investments for the year ended June 30, 1999. For the year ended June 30,
1998, a net realized loss of $92,000 and a net unrealized gain of $53,000
were recorded.
As part of its investment policies, the Company's investment portfolio may
include option instruments and may include a concentrated position in one or
more securities. As a result of this, the financial results may fluctuate
significantly and have larger fluctuations than with a more diversified
portfolio. In addition, the Company may invest in short-sale transactions of
trading securities. Short-sales can result in off-balance sheet risk, as
losses can be incurred in excess of the reported obligation if market prices
of the securities subsequently increase. At June 30, 1999, the Company had no
short investment positions.
5. OTHER CURRENT ASSETS
Included in other current assets totaling $443,000 at June 30, 1999, was a
net receivable of $225,000 from investment trades made at the end of fiscal
1999 which did not settle until after year-end. Also included was restricted
cash of $4,000, representing amounts held in trust for payments under self-
insurance plans.
6. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
June 30,
1999
----
(Amounts in thousands)
<S> <C>
Land $ 144
Buildings 1,235
Machinery and equipment 4,772
Office furniture and fixtures 288
Construction in-progress 97
----------
6,536
Accumulated depreciation (2,396)
----------
$ 4,140
----------
----------
</TABLE>
Total depreciation expense from continuing operations was $644,000 and
$519,000 for the years ended June 30, 1999 and 1998, respectively. 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 costs estimated to complete
the outstanding projects is related to a new crystal tank for the glass
manufacturing facility. Included in construction in-progress at June 30, 1999
were design and engineering costs totaling $76,000 related to this project.
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.
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, as to NBI's
federal tax liabilities for the fiscal years ended June 30, 1980 through
1988. Under the current agreement, $3,500,000 of the IRS debt was due on or
before December 31, 1998, and the remaining balance of $1,778,000 is due on
or before December 31, 1999. On December 31, 1998, the Company
22
<PAGE>
paid the IRS the $3.5 million installment due on that date from the proceeds
of its preferred stock offering (see Note 13). The IRS debt continues to be
collateralized by a security interest in all of the capital stock of American
Glass, Inc. and NBI Properties, Inc.
Provided no event of default occurs prior to payment of the debt in full, NBI
will not be obligated to pay any past, current or future interest related to
the IRS debt. Therefore, during the fourth quarter of fiscal 1998, the
Company recorded a net extraordinary gain of $290,000, consisting of
forgiveness of accrued interest recorded through March 31, 1998 totaling
$439,000, less an income tax provision of $149,000.
In order to pay the remaining balance on the IRS debt, management intends to
generate sufficient cash through the sale of the assets or stock of its
wholly-owned subsidiaries, NBI Properties, Inc. and Willowbrook Properties,
Inc.; 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 AND DEFERRED INCOME TAXES:
For the years ended June 30, 1999 and 1998, the benefit (provision) for income
taxes was included in the consolidated statements of operations as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
(Amounts in thousands)
<S> <C> <C>
Continuing operations provision $ (85) $ (96)
Discontinued operations benefit 92 168
Extraordinary gain provision -- (149)
---------- ---------
$ 7 $ (77)
---------- ---------
---------- ---------
</TABLE>
The benefit (provision) for income taxes from continuing operations for the
years ended June 30, 1999 and 1998 consisted of:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
(Amounts in thousands)
<S> <C> <C>
Federal:
Current $ -- $ --
Deferred 32 (59)
---------- ---------
32 (59)
---------- ---------
State and other:
Current (137) (98)
Deferred 20 61
---------- ---------
(117) (37)
---------- ---------
Total $ (85) $ (96)
---------- ---------
---------- ---------
</TABLE>
In accordance with fresh-start accounting, which was adopted as of April 30,
1992, and as a result of the Company's reorganization under Chapter 11 of the
United States Bankruptcy Code, future utilization of any income tax benefit
from pre-reorganization net operating losses are not credited to the income
tax provision, but rather, reported as an addition to capital in excess of
par value. The Company utilized $0 and $28,000 of pre- reorganization net
operating loss carryforwards in fiscal 1999 and 1998, respectively.
23
<PAGE>
The reconciliation of income taxes from continuing operations at the U.S.
federal statutory tax rate to the effective tax rate for the years ended
June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
(Amounts in thousands)
<S> <C> <C>
Federal tax expense computed at 34% on
income from continuing operations before
provision for income taxes and extraordinary gain $ (188) $ (112)
State taxes, net of federal benefit (77) (70)
Change in the balance of the valuation
allowance for deferred tax assets and other 180 86
------------ ------------
Provision for income taxes from continuing operations $ (85) $ (96)
------------ ------------
------------ ------------
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
June 30,
1999
------------
(Amounts in thousands)
<S> <C>
Deferred tax assets:
Current
Deductible portion of IRS Settlement amount $ 308
Reserve provisions and other 318
Noncurrent
Net operating loss carryforwards 21,244
Capital loss carryforwards 1,300
Tax basis in subsidiaries 570
Other - net 100
------------
Total deferred tax assets 23,840
Valuation allowance for deferred tax assets (23,146)
------------
Net deferred tax assets 694
------------
Less deferred tax liabilities:
Noncurrent
Fixed asset depreciation/basis differences 332
Basis difference in fixed assets assumed
with Belle Vernon Holiday Inn acquisition 454
------------
Total deferred tax liabilities: 786
------------
Net deferred tax liability $ 92
------------
------------
</TABLE>
The net change in the valuation allowance was an increase of $421,000 for the
year ended June 30, 1999, and a decrease of $351,000 for the year ended June
30, 1998. The valuation allowance of $23,146,000 at June 30, 1999 was
established because the Company has not been able to determine that it is
more likely than not that the net deferred tax assets will be realized.
The tax loss carryforward at June 30, 1999 is approximately $62,500,000,
which expires in fiscal years 2004 through 2019. Section 382 of the Internal
Revenue Code would materially limit the amount of net operating loss
carryforwards available for use in any single year if the Company were to
experience a change of ownership as defined by Section 382.
24
<PAGE>
8. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
June 30,
1999
--------
(Amounts in thousands)
<S> <C>
Accrued interest $ 33
Payroll and related benefits and taxes 427
Acquired liabilities under previously self-insured
health and other benefit plans 124
Other 142
--------
$ 726
--------
--------
</TABLE>
9. NOTES PAYABLE AND SHORT-TERM BORROWINGS
The following summarizes the Company's notes payable and short-term borrowings
outstanding at:
<TABLE>
<CAPTION>
June 30,
1999
----------------------
(Amounts in thousands)
<S> <C>
Revolving bank credit note of $2,000,000, due November 1, 1999, interest at
bank's prime rate (7.75% at June 30, 1999) plus 1/2% or less, depending upon
attainment of certain financial ratios as defined in the agreement;
collateralized by a first security interest in all accounts receivable,
inventories and personal property of the glass manufacturing
company. $ 1,489
Bank note payable in monthly installments of $10,834 plus interest at bank's
prime rate (7.75% at June 30, 1999) plus 1/2% or less, depending upon the
attainment of certain financial ratios, commencing on June 1, 1997, with the
outstanding principal balance plus accrued interest due in full on May 1,
2002. The note is cross-collateralized with the glass manufacturing
company's revolving bank credit note. 390
Revolving line of credit from the Company's CEO; interest at ten percent;
outstanding principal and interest due in full on December 31, 1999 100
-------------
Total notes payable and short-term borrowings 1,979
Less current portion 1,719
-------------
Long-term portion of notes payable $ 260
-------------
-------------
</TABLE>
At June 30, 1999, the principal maturities of notes payable and short-term
borrowings for the subsequent fiscal years ending June 30 are: 2000
- -$1,719,000; 2001 - $130,000; and 2002 - $130,000.
The glass manufacturing company's revolving bank credit note is subject to a
credit agreement which contains covenants requiring maintenance of a minimum
interest expense coverage ratio and a maximum leverage ratio. In addition, it
prohibits certain activities of the glass manufacturing company without the
bank's approval, including creation of debt or liens, sales of assets,
granting loans or making certain investments and participation in any mergers
or acquisitions. Also, the agreement limits the glass manufacturing company's
ability to pay dividends and the amount of dividends payable.
See also Note 12 regarding notes payable related to discontinued operations.
25
<PAGE>
10. POSTEMPLOYMENT BENEFITS AND OTHER LONG-TERM LIABILITIES
The Company provides health care, life insurance, and disability benefits for
eligible active employees. Prior to adoption of SFAS No. 112, the Company
recognized and funded the cost of these benefits over the employees' working
lives, except for self-insured long-term disability costs which were
recognized monthly as the disability continued. SFAS No. 112 requires the
Company to accrue the expected costs over the employee service period.
The Company's current health, life insurance and disability benefits are
fully insured. Accordingly, the Company has no further liability and no
accrual is needed. However, the Company previously had a disability benefit
plan that was self-insured, under which payments are still being made. In
accordance with SFAS No. 112, the Company accrued the present value of the
expected payments discounted at 10%, as of July 1, 1994, of $271,000. The
expected payments were calculated based upon the earlier of the expected
duration of each individual's disability or the time remaining until the
individual reaches the age of 65, at which time the benefits cease. The total
liability for post-employment benefits outstanding at June 30, 1999 was
$184,000, of which $170,000 was classified as long-term and was included in
post-employment benefits and other long-term liabilities.
11. EMPLOYEE BENEFIT PLANS
The Company has contributory savings and retirement 401(k) plans for a
majority of its employees in its continuing operations. An employee may elect
to contribute up to 15% of their compensation during each plan year, subject
to the maximum allowed by the IRS. The Company's contributions to the union
employees' plan is governed by a union labor contract. Under the terms of the
L.E. Smith Glass Company's Union Contract effective September 7, 1998, the
employer's contribution rate increased from i) $.12 to $.20 per hour worked
for eligible employees with less than ten years of services and from ii) $.19
to $.30 per hour worked for eligible employees with ten or more years of
service. The Company's contributions to its other plans are determined by the
Board of Directors. Effective October 1998, the L.E. Smith Glass Company's
Non-Union 401(K) Plan employer contribution rate changed from 2% to 4% of the
employee wages. No liability exists for any future contributions, except as
may subsequently be determined by the Board of Directors. The contributions
expense from continuing operations for these plans totaled $103,000 and
$58,000 for the years ended June 30, 1999 and 1998, respectively.
12. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS:
The Company leases various office facilities and equipment. The office
facilities and equipment leases from continuing operations have expiration
dates that extend through April 2004. Total rental expense for continuing
operations was $120,000 and $108,000 for the years ended June 30, 1999 and
1998, respectively.
The future minimum rental commitments for continuing operations for the next
five fiscal years, under non-cancelable leases, are: 2000 - $99,000; 2001
- -$45,000, 2002 - $17,000; 2003 - $10,000; and 2004 - $7,000.
OTHER COMMITMENTS AND CONTINGENCIES - DISCONTINUED OPERATIONS:
The hotel has an outstanding bank mortgage note payable of $959,000 at June
30, 1999, included in net long-term assets from discontinued operations.
Principal and interest at 8.85% is payable in monthly installments of $8,933.
The note is due in full on July 1, 2007 and is collateralized by a first
security interest in the hotel's assets. The hotel's bank mortgage note
contains covenants requiring maintenance of a minimum cash flow to debt
service ratio and specifying the maximum amount of capital expenditures that
can be made in any year. In addition, it prohibits certain activities of the
hotel without the bank's approval, including the creation of debts or liens,
sales of assets and participation in any mergers or acquisitions.
The Company's hotel operations leases the land supporting its hotel, under an
operating lease expiring in the year 2026, with an option to extend for an
additional 25 years. The monthly lease payments are based upon 3% of room and
related revenue and 1% of other revenues of the hotel, with a minimum annual
rental of $8,000.
26
<PAGE>
On August 1, 1998, the Company entered into a development and a leasing
agreement with a real estate developer for phase I of its planned commercial
real estate project in Belle Vernon, Pennsylvania. The development agreement
provides for a development fee of $250,000 to be paid over the construction
period, with a minimum fee of $15,000 if the Company is unsuccessful in
obtaining adequate financing for the project. The leasing agreement requires
a leasing commission based upon the square footage of the space leased,
payable 50% upon execution of the lease and 50% upon tenant occupancy. In
addition, the leasing agreement provides for a sales commission based upon
the gross proceeds of the sale of an outparcel, payable upon closing of the
sale.
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. NBI Development is currently seeking commercial financing to
pay for a significant portion of the construction costs of the project.
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 NBI Development's land
development project. The lease is contingent upon NBI Development'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 NBI Development which
they will use to construct the building. The tenant is required to begin
paying rent on the earlier of (a) the tenant's opening of the building for
business with the public; or (b) the later of (i) ten months after NBI
Development delivers a completed building pad to the tenant; (ii) all
improvements to the common areas necessary for operation of the supermarket
to be operating in the building are completed; and (iii) all improvements
shown on the highway occupancy permit are completed.
In April 1999, NBI Development entered into a construction contract for site
work totaling $1.2 million on phase one of its land development project. This
site work is scheduled to be completed in September 1999. NBI Development is
required to make monthly progress payments based upon the work completed, and
as of June 30, 1999, had paid approximately $315,000 related to the contract.
In conjunction with NBI's acquisition of Krazy Colors, Inc. in February 1995,
the stock purchase agreement provided for continuing annual royalty payments
to the sellers, including NBI's CEO, based upon gross margin performance.
Royalties are calculated based upon gross margin in excess of $150,000 in any
calendar year and will be earned at the rate of twenty percent when the gross
margin is greater than $150,000 and less than or equal to $300,000,
twenty-five percent when the gross margin is greater than $300,000 and less
than or equal to $450,000, and thirty percent when the gross margin is
greater than $450,000. No royalties were incurred during the fiscal years
ended June 30, 1999 and 1998 and the Company does not expect any royalties to
be earned in the future (see also Notes 3 and 17).
13. STOCKHOLDERS' EQUITY
The Company has authorized 20,000,000 shares of $.01 par value common stock.
At June 30, 1999, 10,115,520 shares were issued including 2,027,200 held in
treasury. Therefore, the Company had 8,088,320 shares issued and outstanding
at June 30, 1999.
At the Company's annual meeting held on October 14, 1998, the stockholders
approved an amendment to the Company's Certificate of Incorporation
authorizing issuance of up to 5,000,000 shares of preferred stock with a par
value of $.01 per share. The Company has designated 2,000,000 preferred
shares as Series A Cumulative Preferred Stock with cumulative dividends from
the date of original issue, accruing semi-annually, commencing June 30, 1999,
and each December 31 and June 30 thereafter, at the annual rate per share of
either (a) $1.00 in cash, or (b) .11 additional shares of Series A Preferred
Stock, at the option of the holder, until December 31, 2004. Subsequent to
December 31, 2004, the annual dividend rate per share will increase to either
(a) $1.10 in cash or (b) .12 additional shares of Series A Preferred Stock,
at the option of the holder. The Series A Cumulative Preferred Stock has a
liquidation preference of $10 per share and is entitled to receive all
accrued and unpaid dividends through the date of distribution. In addition,
the Series A Cumulative Preferred Stock is redeemable at the option of the
Company beginning January 1, 1999. The redemption price would be as follows
for each
27
<PAGE>
calendar year: $11.00 per share if redeemed in 1999, $10.80 in 2,000, $10.60
in 2001, $10.40 in 2002, $10.20 in 2003, and $10.00 in 2004 and thereafter.
The Company has registered and reserved 1,000,000 shares of the Series A
Cumulative Preferred Stock through its Registration Statement on Form SB-2,
effective November 9, 1998, in connection with its public offering of units
consisting of (a) one share of the Series A Cumulative Preferred Stock, and
(b) two warrants to purchase the Company's common stock at $1.20 per share.
In addition, 550,000 shares of the Series A Cumulative Preferred Stock and
2,000,000 shares of the Company's common stock have been registered and
reserved for payment-in- kind of the preferred stock dividends and for the
exercise of the common stock purchase warrants, respectively.
As of June 30, 1999, the Company had sold 500,000 units and thus issued
500,000 shares of Series A Cumulative Preferred Stock and 1,000,000 common
stock purchase warrants in connection with this offering. The sale of these
units resulted in net proceeds of $4.8 million. The Company filed the related
amendments to its Certificate of Incorporation and Certificate of Designation
with the Delaware Secretary of State during the quarter ended December 31,
1998. For the year ended June 30, 1999, the Company reported a dividend
requirement totaling approximately $251,000 attributable to its preferred
stock.
On August 19, 1999, the Board of Directors of NBI declared the first
semi-annual dividend on it outstanding Series A Cumulative Preferred Stock,
payable on September 3, 1999 to holders of record as of August 19, 1999.
The stockholders also approved an amendment that allows the Company to effect
a reverse stock split of either 1 for 2.5, 1 for 3, or 1 for 4 shares, at the
discretion of the Board of Directors. Further, the Board of Directors has the
discretion not to effect a reverse stock split, and to-date, has not taken
any action regarding this matter.
In February 1995, the Company issued warrants to purchase 1.7 million shares
of its common stock at $.89 per share in conjunction with its acquisition of
Krazy Colors, Inc. These warrants are exercisable through December 31, 2002.
As of June 30, 1999, no warrants had been exercised. (See also Note 17.)
14. STOCK OPTIONS
The Employee Stock Option Plan was established pursuant to the Company's Plan
of Reorganization. At June 30, 1999, 885,750 shares were reserved under the
Employee Stock Option Plan. Options granted under this plan have an exercise
price of no less than fair market value and no more than 150% of fair market
value. The employee options are exercisable for a period of five years from
the date of the grant, unless previously forfeited. During fiscal 1998, the
Company extended 201,000 options held by certain executives for an additional
five years and recorded related noncash compensation expense of $48,000.
These options were fully vested prior to the extension date. Options vest
over four years at 25% per year with vesting continuing as long as the
optionee is employed by the Company. Options are forfeited by the optionee
three months following termination of employment with the Company. The
options granted under this plan prior to fiscal 1996 are intended to be
non-qualified stock options. Those issued subsequent to fiscal 1995 are
intended to be incentive stock options.
Options to purchase 150,000 shares of stock were outstanding at July 1,
1997, that were issued to directors of the Company during fiscal 1993. These
options were not issued pursuant to an existing stock option plan and were
immediately exercisable on the grant date. All of these options were either
exercised or forfeited during fiscal 1998.
Options to purchase 400,000 shares of stock were issued to the Chief
Executive Officer during fiscal 1994. These options were not issued pursuant
to an existing stock option plan. These options vested over four years at 25%
per year and were fully vested as of October 1, 1997. During fiscal 1998, the
Company extended these options for an additional five years. No compensation
expense was recorded as a result of the extension because the exercise price
was greater than the fair market value of the stock on the extension date.
At June 30, 1999, 450,000 shares were reserved for options issued outside of
the Stock Option Plan.
28
<PAGE>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Had compensation cost been
determined based upon the fair value at the grant date for the options,
consistent with the provisions of SFAS No. 123, the Company's net income and
earnings per share for the years ended June 30, 1999 and 1998 would have been
reduced to the proforma amounts as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
(amounts in thousands,
except per share data)
<S> <C> <C>
Net income attributable to common stock - as reported $ 27 $ 172
------------ ------------
------------ ------------
Net income attributable to common stock - proforma $ 8 $ 81
------------ ------------
------------ ------------
Net income per common share - as reported $ -- $ .02
------------ ------------
------------ ------------
Net income per common share - proforma $ -- $ .01
------------ ------------
------------ ------------
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions for the
grants issued or extended during fiscal 1996 through fiscal 1999: no dividend
yield; expected volatility of 43.35% to 45.61%; risk-free interest rate of
5.51% to 6.18%; and expected lives of 4 to 4.75 years.
During the initial phase-in period of SFAS 123, the above numbers do not
include the effect of options granted prior to July 1, 1995.
The following table summarizes, by number of shares, option transactions
under all plans:
<TABLE>
<CAPTION>
Employee Other Weighted-Average
Plan Options Total Exercise Price
---------- --------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding July 1, 1997 570,500 550,000 1,120,500 $ .66
Granted(1) 301,500 400,000 701,500 .63
Exercised (10,500) (100,000) (110,500) .26
Forfeited(1) (301,000) (450,000) (751,000) .65
---------- --------- ----------
Outstanding June 30, 1998 560,500 400,000 960,500 .69
Granted -- -- -- --
Exercised -- -- -- --
Forfeited -- -- -- --
---------- --------- ----------
Outstanding June 30, 1999 560,500 400,000 960,500 .69
---------- --------- ----------
---------- --------- ----------
Options exercisable
at June 30, 1999 424,125 400,000 824,125 $ .69
---------- --------- ----------
---------- --------- ----------
</TABLE>
(1) Amounts include options for 201,000 shares and 400,000 shares under the
employee plan and other, respectively, that were extended during fiscal
1998.
<TABLE>
<CAPTION>
Employee Other
Plan Options
---------- ---------
<S> <C> <C>
Weighted-average fair value of
options granted for the year
ended June 30, 1999 $ -- $ --
---------- ---------
---------- ---------
Weighted-average fair value of
options granted for the year
ended June 30, 1998 $ .26 $ --
---------- ---------
---------- ---------
</TABLE>
29
<PAGE>
The following table summarizes information about the stock options
outstanding at June 30, 1999:
<TABLE>
<CAPTION>
Weighted-Average
Remaining
Exercise Number Number Contractual
Price Outstanding Exercisable Life
-------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
$ .38 216,000 216,000 3.15 years
$ .59 100,500 25,125 3.42 years
$ .77 400,000 400,000 4.25 years
$ .88 244,000 183,000 1.45 years
----------- -----------
960,500 824,125
----------- -----------
----------- -----------
</TABLE>
15. INCOME (LOSS) PER COMMON SHARE
During the Company's second quarter of fiscal 1998, NBI, Inc. adopted SFAS
No. 128 issued by the Financial Accounting Standards Board. SFAS No. 128
provides for the calculation of "Basic" and "Diluted" earnings per share.
Basic earnings per share includes no dilution and is computed by dividing
income (loss) available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted earnings per share.
The following reconciles the numerators and denominators of the basic and
diluted earnings per common share computation for income (loss) before
discontinued operations and extraordinary gain for the years ended June 30,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
Basic Diluted Basic Diluted
-------- ------- ------- --------
(Amounts in thousands
except per share data)
<S> <C> <C> <C> <C>
Income before discontinued
operations and extraordinary gain $ 467 $ 467 $ 234 $ 234
Dividend requirement on preferred stock (251) (251) -- --
-------- ------- ------- --------
Income before discontinued operations and
extraordinary gain attributable to common stock $ 216 $ 216 $ 234 $ 234
-------- ------- ------- --------
-------- ------- ------- --------
Weighted average number of common
shares outstanding 8,088 8,088 8,077 8,077
-------- -------
-------- -------
Assumed conversions of stock options 370 129
------- --------
8,458 8,206
------- --------
------- --------
Income per common share before
discontinued operations and
extraordinary gain $ .03 $ .03 $ .03 $ .03
-------- ------- ------- --------
-------- ------- ------- --------
</TABLE>
For the year ended June 30, 1999, all of the Company's stock options and
warrants outstanding, except for the warrants with an exercise price of
$1.20, were included in the computation of diluted earnings per share, while
only the Company's $.25, $.38, and $.59 stock options were included in the
computation of diluted earnings per share for the year ended June 30, 1998,
because their exercise prices were less than the average market price of the
common stock outstanding.
30
<PAGE>
The options and warrants outstanding at June 30, 1999 were as follows:
<TABLE>
<CAPTION>
Number
Exercise Outstanding at
Price June 30, 1999
----- -------------
<S> <C>
Stock options:
$ .38 216,000
$ .59 100,500
$ .77 400,000
$ .88 244,000
Warrants:
$ .89 1,700,000
$ 1.20 1,000,000
---------
3,660,500
---------
---------
</TABLE>
16. SEGMENT INFORMATION
With the discontinuance of its hotel, real estate development and children's
paint manufacturing operations, the Company's continuing operations are
solely in the glass manufacturing industry. The Company's glass manufacturing
operation is located in southwestern Pennsylvania.
The Company's glass manufacturer sells its glass giftware primarily to
traditional and specialty retailers, manufacturers/wholesalers and the food
service market throughout the United States. L.E. Smith Glass Company
currently has one significant customer. Sales to this customer totaled
approximately 31% and 41% of NBI's consolidated revenues from continuing
operations in fiscal 1999 and 1998, respectively. In addition, this customer
constituted approximately 7% of the Company's consolidated accounts
receivable at June 30, 1999, while one other customer, a national retailer,
comprised another 15% of the accounts receivable balance.
The glass manufacturer purchases a majority of its raw materials from only a
few vendors. Management believes that other suppliers could provide similar
materials on comparable terms.
As of June 30, 1999, approximately 77% of the Company's employees in its
continuing operations were covered by a collective bargaining agreement that
was renegotiated in September 1998 and expires on August 31, 2001.
17. RELATED PARTY TRANSACTIONS
In February 1995, the Company entered into an agreement to purchase 80% of
the outstanding stock of Krazy Colors effective January 1, 1995. Prior to
this agreement, the Company's Chief Executive Officer ("CEO"), Jay H. Lustig,
owned 55% of the outstanding stock of the manufacturer. Subsequent to this
transaction, the CEO owns 11% of the stock in Krazy Colors, Inc. As a part of
the purchase agreement, the sellers are eligible to receive continuing annual
royalty payments based upon gross margin performance in excess of specified
amounts (see Notes 3 and 12). NBI's CEO will receive 55% of any such royalty
payments. No royalties were incurred by the Company during fiscal years ended
June 30, 1999 or 1998, and no royalties are expected to be earned in the
future. In addition, in conjunction with the purchase agreement, the sellers
were issued warrants to purchase 1.7 million shares of the Company's common
stock, including warrants to purchase 935,000 shares issued to the Company's
CEO, at a price of $.89 per share. All of the warrants are still outstanding
and are exercisable through December 31, 2002.
During fiscal 1999 and 1998, the Company utilized a stock brokerage firm,
which is 100% owned by its CEO, to execute certain transactions on its
behalf. However, NBI uses another unrelated company to act as custodian and
clearing firm for its investment assets. Gross revenues earned by the
brokerage firm related to investment
31
<PAGE>
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 before fees, respectively.
During fiscal 1998, the Company borrowed a total of $100,000 from its Chief
Executive Officer for working capital needs. This amount was included in
short-term borrowings at June 30, 1999. The borrowings are subject to the
terms of a revolving line of credit note which provides for interest to be
paid at the rate of ten percent per annum. The entire principal amount
outstanding is due and payable in full on December 31, 1999.
The Company believes that these transactions were in its best interests, were
on terms no less favorable to the Company than could be obtained from
unaffiliated third parties and were in connection with bona fide business
purposes of the Company.
18. FOURTH QUARTER RESULTS
During the fourth quarter of fiscal 1999, the Company recorded an additional
inventory provision to cost of goods sold totaling $125,000. This was the
result of its annual physical inventory count at L.E. Smith.
32
<PAGE>
PART III
Items 9, 10, 11, and 12 are hereby incorporated by reference to the Annual
Meeting Proxy Statement to be filed pursuant to Regulation 14A.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3. Articles of Incorporation and Bylaws
a. Restated Certificate of Incorporation(7)
b. Restated Bylaws(3)
c. Form of Certificate of Designation of Series A Preferred
Stock(6)
10. Material Contracts
a. NBI, Inc. Employee and Director Stock Option Plan(1)
b. Form of NBI, Inc. Director Non-Qualified Stock Option
Agreement(1)
c. Form of NBI, Inc. Chief Executive Officer Non-Qualified
Stock Option Agreement(1)
d. Krazy Colors, Inc. Stock Purchase Agreement (2)
e. Krazy Colors, Inc. Shareholder Agreement (2)
f. Jay H. Lustig Warrant Certificate (2)
g. Belle Vernon Motel Corporation Land Lease Agreement (3)
h. Agreement between L.E. Smith Glass Company and The
American Flint Glass Workers' Union (7)
i. Amended Payment Agreement with the Internal Revenue
Service(4)
j. Consulting Agreement between the Company and Morris D.
Weiss(5)
k. Revolving Line of Credit from Chief Executive Officer(5)
l. Shopping Center Lease with SuperValu Holdings, Inc. (8)
21. Subsidiaries of Registrant
a. See Item 1 - Business, herein
23. Consent of Independent Accountant(9)
27. Financial Data Schedule
a. For the year ended June 30, 1999(9)
b. Restated for the year ended June 30, 1998(9)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter
ended June 30, 1999.
------------------------------------
(1) Incorporated by reference to Registration Statement No. 33-73334.
(2) Incorporated by reference to the Company's report on Form 10-QSB for
the quarter ended December 31, 1994.
(3) Incorporated by reference to the Company's report on Form 10-KSB for
the year ended June 30, 1995.
(4) Incorporated by reference to the Company's report on Form 10-QSB for
the quarter ended March 31, 1998.
(5) Incorporated by reference to the Company's report on Form 10-KSB for
the year ended June 30, 1998.
(6) Incorporated by reference to Registration Statement No. 333-63053.
(7) Incorporated by reference to the Company's report on Form 10-QSB for
the quarter ended December 31, 1998.
(8) Incorporated by reference to the Company's report on Form 10-QSB for
the quarter ended March 31, 1999.
(9) Filed herewith.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NBI, Inc.
September 20, 1999 By: /s/ JAY H. LUSTIG
- ------------------ -----------------------------------
Jay H. Lustig
Chairman of the Board
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ MARJORIE A. COGAN Chief Financial Officer, Secretary September 20, 1999
- --------------------------- (Principal Financial and Accounting Officer) ------------------
Marjorie A. Cogan
/s/ JAY H. LUSTIG Chief Executive Officer, Director September 20, 1999
- --------------------------- (Principal Executive Officer) ------------------
Jay H. Lustig
/s/ MARTIN J. NOONAN Director September 20, 1999
- --------------------------- ------------------
Martin J. Noonan
</TABLE>
34
<PAGE>
Exhibit 23:
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
NBI, Inc.
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 33-73334) of NBI, Inc. of our report dated
August 19, 1999, relating to the consolidated financial statements of NBI,
Inc. appearing in the Company's Annual Report on Form 10-KSB for the year
ended June 30, 1999. Our report contains an explanatory paragraph regarding
the Company's ability to continue as a going concern.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Denver, Colorado
September 20, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF NBI, INC. FOR THE YEAR ENDED JUNE 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 311
<SECURITIES> 36
<RECEIVABLES> 1,466
<ALLOWANCES> 223
<INVENTORY> 2,972
<CURRENT-ASSETS> 5,005
<PP&E> 6,536
<DEPRECIATION> 2,396
<TOTAL-ASSETS> 12,820
<CURRENT-LIABILITIES> 5,778
<BONDS> 524
0
5
<COMMON> 101
<OTHER-SE> 6,320
<TOTAL-LIABILITY-AND-EQUITY> 12,820
<SALES> 14,721
<TOTAL-REVENUES> 14,721
<CGS> 10,709
<TOTAL-COSTS> 10,709
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 191
<INTEREST-EXPENSE> 183
<INCOME-PRETAX> 552
<INCOME-TAX> (85)
<INCOME-CONTINUING> 467
<DISCONTINUED> (189)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 278
<EPS-BASIC> .00
<EPS-DILUTED> .00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF NBI, INC. FOR THE YEAR ENDED JUNE 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 209
<SECURITIES> 0
<RECEIVABLES> 1,444
<ALLOWANCES> 69
<INVENTORY> 2,750
<CURRENT-ASSETS> 4,490
<PP&E> 9,616
<DEPRECIATION> 2,180
<TOTAL-ASSETS> 12,205
<CURRENT-LIABILITIES> 7,369
<BONDS> 3,313
0
0
<COMMON> 101
<OTHER-SE> 1,199
<TOTAL-LIABILITY-AND-EQUITY> 12,205
<SALES> 12,233
<TOTAL-REVENUES> 12,233
<CGS> 8,762
<TOTAL-COSTS> 8,762
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 99
<INTEREST-EXPENSE> 505
<INCOME-PRETAX> 330
<INCOME-TAX> (96)
<INCOME-CONTINUING> 234
<DISCONTINUED> (352)
<EXTRAORDINARY> 290
<CHANGES> 0
<NET-INCOME> 172
<EPS-BASIC> .02
<EPS-DILUTED> .02
</TABLE>
