<PAGE> 1
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, 2000
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
850 23rd Avenue, Suite D
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. [ ]
Revenues from continuing operations for the year ended June 30, 2000 were
$15,004,000.
The aggregate market value of voting stock held by non-affiliates of the
registrant is approximately $2,798,908 as of market close on August 18, 2000.
Common stock ($.01 Par Value): 8,103,320 shares outstanding as of August 31,
2000.
Documents incorporated by reference: Part III - The Registrant's definitive
Proxy Statement for its 2000 Annual Meeting of Shareholders, to be filed not
later than 120 days after the end of the fiscal year.
<PAGE> 2
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-out the United States via in-house sales
managers and manufacturer's representatives. The giftware products are sold
primarily to traditional and specialty retailers, as well as
manufacturers/wholesalers, the food service market and 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. ("NBI
Properties") and Willowbrook Properties, Inc. ("Willowbrook Properties"), in
order to pay the Internal Revenue Service ("IRS") debt due on December 31, 1999
(see Notes 2, 3, and 8 to the 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, 2000 and 1999. (See Note 3 to the Consolidated Financial Statements.)
NBI Properties, Inc.
In August 1995, NBI acquired 100% of the outstanding capital stock of the Belle
Vernon Motel Corporation now known as NBI Properties. NBI Properties owns and
operates an 80 room full service Holiday Inn in Belle Vernon, Pennsylvania (the
"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. The company intends to sell all of the capital stock of NBI
Properties to an entity which is 100% owned and controlled by NBI's Chief
Executive Officer ("CEO"), Jay H. Lustig.
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 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. Willowbrook Properties
successfully obtained a zoning variance to permit the
2
<PAGE> 3
development of a mixed use retail and residential project for the property.
During fiscal 1999, Willowbrook Properties entered into a lease agreement with a
national grocery store chain to lease a significant portion of phase I of the
development and began construction on a mixed use retail center. On December 17,
1999, the Company closed on the sale of a majority of the assets of Willowbrook
Properties, consisting of land and construction in progress, to an entity which
is 100% owned and controlled by NBI's CEO. The terms and conditions of the sale
had been previously approved at NBI's Annual Meeting of Stockholders held on
December 16, 1999. (See Note 19 to the Consolidated Financial Statements.)
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 manufactured roll-on and dot-on paints for children, as well as
bulk tempera paints. 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.
During fiscal 1999, Krazy Colors disposed of most of its assets and subleased
its warehouse space in Nevada. As of September 30, 1999, the disposal was
substantially complete.
HISTORY OF THE COMPANY
NBI was incorporated in 1973 to develop and market a proprietary word
processing system. During the 1970's and 1980's the Company focused on
manufacturing, sales and service of dedicated word processing and office
automation systems. Then, in 1990 NBI shifted its focus to systems integration
to transition the existing customer base from its proprietary hardware
platforms to an open platform.
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.
Then, due to continuing losses incurred by its computer industry segment, the
Company discontinued all of its operations in this segment during the period
from August 1992 through August 1996.
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 discussion in sections "Operations" and "Discontinued Operations".)
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, while 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
3
<PAGE> 4
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
24% and 31% of NBI's consolidated revenues from continuing operations for the
years ended June 30, 2000 and 1999, 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. Revenues from this customer in fiscal 2000 declined
significantly compared to fiscal 1999, but the Company anticipates the revenues
from this customer will increase significantly in fiscal 2001.
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. In addition, sales to L.E. Smith's other
customers during the third quarter of fiscal 2000 were unusually high because
the Company had a large increase in new customers during this quarter,
including a significant increase in sales to department stores.
EMPLOYEES
As of August 7, 2000, the Company had a total of 193 employees in its
continuing operations, including 190 full-time employees. Currently, 148
employees of L.E. Smith are covered by a collective bargaining agreement which
expires on August 31, 2001.
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 2000 and 1999, 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. The Company leases
approximately 2,300 square feet of office space for administrative personnel at
its corporate headquarters in Longmont, Colorado, under a lease expiring in
August 2003. 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.
4
<PAGE> 5
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, Willowbrook Properties acquired 88 acres of undeveloped land
in southwestern Pennsylvania. The Company began commercial development on phase
I of the property in fiscal 1999. Then on December 17, 1999, the Company sold a
majority of the assets of Willowbrook Properties, including the land and
construction-in-progress.
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,
2000.
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.
Fiscal 2000 High Low
----------- ---- ---
First Quarter $ 15/16 $ 11/16
Second Quarter 13/16 9/16
Third Quarter 11/16 7/16
Fourth Quarter 3/4 5/16
Fiscal 1999 High Low
----------- ---- ---
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
At June 30, 2000, there were 8,103,320 common shares of $.01 par value common
stock outstanding. The approximate number of common stockholders of the Company
was 1,220 as of August 31, 2000. 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.
5
<PAGE> 6
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 2000 - 1999 COMPARISON
The Company reported net income of $565,000 in fiscal 2000, compared to net
income of $278,000 in fiscal 1999. During fiscal 2000, the Company recorded a
moderate gain on investments and minimal income from discontinued operations
compared to significant losses on investments and discontinued operations in
fiscal 1999. In addition, the Company had increased interest income which arose
from a note receivable from a related party received in conjunction with its
sale of a majority of the assets of Willowbrook Properties. However, these
favorable changes were significantly offset by unfavorable margin performance
due to increased general costs, and substantially increased interest expense
resulting from the Company's default on its IRS debt.
Revenues from continuing operations of $15.0 million for the year ended June
30, 2000 reflected an increase of $283,000, or 1.9%, as compared to fiscal
1999. L.E. Smith experienced a significant increase in sales to department
stores and catalog companies during fiscal 2000, as well as considerable growth
in sales to specialty stores and a large increase in the number of new
customers during fiscal 2000. However, these increases were significantly
offset by declines of $876,000 and $291,000, respectively, in revenues from
L.E. Smith's largest customer and a customer that declared Chapter 11
bankruptcy during fiscal 1999. In addition, fiscal 1999 included $392,000 of
revenues from an order from a nonrecurring customer.
Revenues from continuing operations are expected to increase significantly in
fiscal 2001, as compared to fiscal 2000, primarily due to sustained revenue
growth expected from a larger customer base that was established during fiscal
2000, as well as a significant increase in projected revenues from L.E. Smith's
largest customer. This growth is reflected in a substantially higher backlog in
August 2000 compared to the prior year. However, the Company expects only a
moderate increase in revenues for the first quarter of fiscal 2001 compared to
the same period in the prior fiscal year primarily due to timing of orders from
its largest customer; whereas it expects substantial growth during the second
quarter of fiscal 2001 due to a large increase in expected holiday orders,
including a significant increase in orders from its largest customer.
Cost of sales from continuing operations as a percentage of related revenue for
the years ended June 30, 2000 and 1999 was 74.0% and 72.7%, respectively. The
resulting decline in gross margin occurred primarily due to general cost
increases, including increases of $151,000 in health and workmen's compensation
insurance costs and $152,000 in depreciation expense, which resulted from a
substantial amount of capital improvements made during the current and the
prior fiscal year. However, these increases were partially offset by
significantly reduced inventory reserve provisions resulting from an inventory
control program instituted during fiscal 2000.
Cost of sales from continuing operations as a percentage of related revenues is
expected to decline slightly in fiscal 2001 as compared to fiscal 2000, due to
significantly higher projected sales volume, causing favorable absorption of
fixed costs, partially offset by general cost increases including a significant
increase projected for natural gas costs after its current contract expires on
October 15, 2000.
6
<PAGE> 7
Marketing, general and administrative expenses from continuing operations
totaled $3.1 million for the year ended June 30, 2000, an increase of $92,000
compared to the previous fiscal year. The increase in expenses was primarily
related to general cost increases and higher sales commissions. The increased
sales commissions were due to increased sales from outside sales
representatives, while the Company experienced a significant decline in
revenues from its largest customer which is a house account and is not subject
to outside sales commissions. These increases were partially offset by lower
bad debt provisions during fiscal 2000 due to the absence of an additional bad
debt provision of $127,000 recorded by L.E. Smith during fiscal 1999 resulting
from a customer's declaration of Chapter 11 bankruptcy. Included in marketing,
general and administrative expenses incurred in fiscal 2000 were payroll and
related expenses of $1.2 million, commissions to sales representatives of
$774,000, legal, accounting and other professional fees of $154,000, and
advertising costs of $186,000.
Total marketing, general and administrative expenses from continuing operations
are expected to increase significantly in fiscal 2001, compared to fiscal 2000,
primarily due to increased sales and marketing activities and general cost
increases.
The Company recorded a net gain on investments of $57,000 in fiscal 2000,
consisting of a net realized gain of $55,000 and a net unrealized gain of
$2,000. During fiscal 1999, the Company recorded a net loss on investments of
$347,000, consisting of a net realized loss of $346,000 and a net unrealized
loss of $1,000. 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, 2000, the Company had no investment positions.
Interest expense from continuing operations totaled $442,000 and $183,000 for
the fiscal years ended June 30, 2000 and 1999, respectively. The increase was
due to $248,000 of interest expense on the Company's IRS debt, recorded during
fiscal 2000, resulting from the Company's default on this debt. (See Liquidity
and Capital Resources and Notes 2 and 8 to the Consolidated Financial
Statements.)
The Company recorded an income tax provision from continuing operations of
$61,000 for the year ended June 30, 2000, which included state income tax
provisions of $87,000 primarily related to L.E. Smith's operations. In fiscal
1999, the Company recorded an income tax provision from continuing operations
of $85,000 which included state income tax provisions of $117,000, also
primarily related to L.E. Smith's operations. In accordance with fresh start
accounting, which was adopted as of April 30, 1992, and as a result of the
Company's reorganization under Chapter 11 of the U.S. Bankruptcy Code, future
utilization of any income tax benefit from pre-reorganization net operating
loss carryforwards are not credited to the income tax provision, but rather,
reported as an addition to capital in excess of par value. No
pre-reorganization net operating loss carryforwards were utilized during fiscal
2000 or 1999. (See Note 8 to the Consolidated Financial Statements.)
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 and Willowbrook Properties in order to pay the IRS
debt due on December 31, 1999 (see Notes 2, 8 and 19 to the 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, 2000 and 1999.
The disposal of the children's paint manufacturing operation was substantially
complete as of September 30, 1999. On December 17, 1999, the Company sold a
majority of the assets of its real estate development, consisting of land and
construction-in-progress, to an entity which is 100% owned and controlled by
its CEO. The Company intends to sell all of the capital stock of NBI Properties
to an entity which is also 100% owned and controlled by its CEO. (See Note 19
to the Consolidated Financial Statements).
7
<PAGE> 8
Revenues from discontinued operations totaled $2.4 million and $2.5 million for
the years ended June 30, 2000 and 1999, respectively. A decline in revenues
from Krazy Colors related to closure of the operation was partially offset by a
small increase in revenues from the Belle Vernon Holiday Inn.
The Company recorded net income from discontinued operations of $55,000 in
fiscal 2000 compared to a net loss from discontinued operations of $189,000 in
fiscal 1999. The improvement was primarily due to the absence of losses on both
the disposal and operations of Krazy Colors. 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
estimated the net realizable value of the disposal of the discontinued
operation, including estimated costs and expenses directly associated with the
disposal and the estimated loss from operations through the expected disposal
date. The Company recorded a deferred gain on the sale of the real estate
development during the second quarter of fiscal 2000 (see Note 12) and expects
a significant gain overall from the discontinued operations of the hotel, and
therefore, no amount has been recorded related to these disposals; the gain
will be recognized when realized.
The net long-term assets of discontinued operations at June 30, 2000 consisted
primarily of land, buildings, and hotel furniture, fixtures and equipment, net
of a long-term mortgage note payable by the hotel. The net current assets of
discontinued operations at June 30, 2000 consisted primarily of cash, net of
accounts payable and accrued liabilities.
FINANCIAL CONDITION
Total current assets of the Company increased $154,000 during fiscal year 2000
to $5.2 million at June 30, 2000. The increase in current assets during fiscal
2000 was primarily related to an increase of $450,000 in accounts receivable at
June 30, 2000, resulting from significantly higher revenues in June 2000
compared to June 1999, and the presence of net current assets of discontinued
operations at June 30, 2000 compared to net current liabilities at June 30,
1999. However, these increases were significantly offset by declines in other
current assets, due to the absence of a net receivable of $225,000 from
investment trades made at the end of fiscal 1999, and in cash and cash
equivalents.
Total assets of $13.5 million at June 30, 2000 reflected an increase of
$713,000 from June 30, 1999 and was primarily related to an increase in current
assets, as discussed above, and the addition of a note receivable received from
a related party significantly offset by a decline in net long-term assets from
discontinued operations, both resulting from the sale of a majority of the
assets of Willowbrook Properties.
Current liabilities decreased $413,000 to $5.4 million at June 30, 2000,
primarily due to payments of $900,000 on the IRS debt, repayment of the
revolving line of credit with NBI's CEO of $100,000 and the absence of net
liabilities of discontinued operations at June 30, 2000, partially offset by an
increase in short-term borrowings under L.E. Smith's revolving line of credit
and the addition of a $500,000 deposit liability for a deposit received from
the Company's CEO during fiscal 2000 related to NBI's pending sale of all of
the capital stock of NBI Properties to an entity which is 100% owned and
controlled by the CEO.
Stockholders' equity of $6.8 million at June 30, 2000 increased $388,000 from
June 30, 1999, primarily reflecting net income of $565,000 for fiscal 2000
partially offset by cash dividends of $182,000 paid on the outstanding
preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $278,000 during fiscal 2000. Considerable
cash outflows for payments on the IRS debt ($900,000), purchases of property
and equipment for continuing operations ($804,000), payment of cash dividends
on NBI's outstanding preferred stock ($182,000), and repayment of a revolving
line of credit from the Company's CEO ($100,000) were significantly offset by
cash proceeds from the Willowbrook Properties' sale ($600,000), receipt of a
deposit from NBI's CEO related to the pending sale of all of the capital stock
of NBI Properties ($500,000), cash proceeds from a net receivable from
investment trades made at the end of fiscal 1999 ($225,000), and other cash
generated from operations.
8
<PAGE> 9
The Company had working capital deficits of $206,000 and $773,000 at June 30,
2000 and 1999, respectively. The increase of $567,000 in working capital was
primarily related to cash proceeds of $600,000 from the Willowbrook Properties'
sale of land and construction-in-progress. These funds were used to pay selling
expenses ($48,000), part of the IRS debt ($400,000), and outstanding
liabilities to the Company's CEO ($148,000), consisting of a revolving line of
credit balance, accrued interest thereon and an accrued bonus from fiscal 1997.
The remaining balance of $1.8 million of the Company's debt to the IRS was due
on December 31, 1999. On December 30, 1999, the Company paid the IRS $400,000
and as of December 31, 1999, $1,378,000 of the IRS debt was still outstanding.
On January 5, 2000, the IRS sent NBI notice of a default of its Amended Payment
Agreement, due to the Company's failure to pay the remaining $1,378,000 that
was due on December 31, 1999. Per the terms of the agreement, an event of
default occurred on January 20, 2000, fifteen days after written notice and
demand from the IRS to NBI. On February 18, 2000, the Company paid the IRS
$500,000 from a deposit received from its CEO, Jay Lustig, related to NBI's
pending sale of all of the capital stock of NBI Properties to an entity which
is 100% owned and controlled by Mr. Lustig. On March 15, 2000, the Company
received a notice of default from the IRS regarding NBI's failure to cure the
default of its Amended Payment Agreement. The IRS declared the remaining
principal amount of $878,000 due and payable with interest thereon at the
statutory rate provided under the Internal Revenue Code since the last interest
payment made by NBI on July 9, 1997 under the original agreement. Accrued
interest through June 30, 2000 totaled $248,000. In addition, the IRS notified
the Company that it intends to pursue its remedies. Management intends to
obtain bank financing in order to pay the Company's outstanding obligations to
the IRS. The Company has received a commitment letter from a bank for such
financing and expects to close on this financing by October 31, 2000. However,
there can be no assurance that the Company will be able to satisfy its
obligations to the IRS. This condition raises substantial doubt about the
Company's ability to continue as a going concern. The Consolidated Financial
Statements do not contain any adjustments that might result from the outcome of
this uncertainty. Management believes that after the Company pays off its IRS
debt, it will generate sufficient future cash flows to allow the Company to
continue as a going concern. See also Report of Independent Certified Public
Accountants and Notes 2, 3, 8 and 19 to the Consolidated Financial Statements.
Construction-in-progress totaled $206,000 at June 30, 2000 and included $80,000
for design and engineering costs related to a new crystal tank for the glass
manufacturing facility. The Company estimates that it will cost approximately
$1,727,000 to complete the outstanding construction-in-progress, all of which
is expected to be completed during fiscal 2001. 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 has received a commitment letter from a bank for financing of this
project and expects to close on this financing by October 31, 2000.
The Company expects its other working capital requirements in the next fiscal
year, including any cash dividends on its preferred stock, to be met by
existing working capital at June 30, 2000, internally generated funds including
interest income on the note receivable from its CEO received in conjunction
with the sale of Willowbrook Properties' land and construction-in-progress,
remaining cash proceeds due in conjunction with the pending sale of the stock
of NBI Properties to the Company's CEO and, for L.E. Smith's requirements,
short-term borrowings under an existing line of credit which expires on
November 1, 2000. The Company has received a commitment letter from a bank for
a replacement for this line of credit and expects to close on this financing by
October 31, 2000. In addition, the Company has 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 10,
14, 15 and 19 to the Consolidated Financial Statements.)
TAX LOSS CARRYFORWARDS
As discussed in Note 8 to the Consolidated Financial Statements, the Company
has approximately $66 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.
9
<PAGE> 10
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. In March 2000, the FASB issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, An Interpretation of APB Opinion No. 25." The Company is required
to adopt the Interpretation on July 1, 2000. The Interpretation requires that
stock options that have been modified to reduce the exercise price be accounted
for as variable. Management believes the adoption of these pronouncements will
not have a material impact on the Company's financial statements.
10
<PAGE> 11
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, 2000, and the related consolidated statements of
income, stockholders' equity and cash flows for the years ended June 30, 2000
and 1999. 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, 2000, and the results of their operations and their
cash flows for the years ended June 30, 2000 and 1999 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 consolidated financial statements, the Company has not been 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 9, 2000
11
<PAGE> 12
NBI, INC.
CONSOLIDATED BALANCE SHEET
June 30, 2000
(Amounts in thousands, except share data)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 33
Accounts receivable, less allowance for doubtful accounts of $232 1,693
Inventories 3,000
Other current assets 234
Short-term deferred income taxes 56
Net current assets of discontinued operations 143
--------
Total current assets 5,159
Property, plant and equipment, net 4,189
Note receivable from related party 2,700
Other assets 5
Net long-term assets of discontinued operations 1,480
--------
$ 13,533
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of notes payable $ 1,948
Current portion of IRS debt and other income taxes payable 918
Accounts payable 1,222
Accrued liabilities and other 1,277
--------
Total current liabilities 5,365
Long-term liabilities:
Notes payable 130
Deferred income taxes 190
Postemployment disability benefits 153
Deferred gain from sale of discontinued operation, net of taxes 881
--------
Total liabilities 6,719
--------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.01 par value; 5,000,000 shares authorized; 507,421
shares of Series A Cumulative Preferred
Stock issued and outstanding (liquidation preference value of $5,074) 5
Capital in excess of par value - preferred stock 4,380
Common stock - $.01 par value (20,000,000 shares
authorized; 10,130,520 shares issued) 101
Capital in excess of par value - common stock 6,566
Accumulated deficit (3,370)
--------
7,682
Treasury stock, at cost (2,027,200 shares) (868)
--------
Total stockholders' equity 6,814
--------
$ 13,533
========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
12
<PAGE> 13
NBI, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 2000 and 1999
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Revenues:
Sales $ 15,004 $ 14,721
-------- --------
Costs and expenses:
Cost of sales 11,106 10,709
Marketing, general and administrative 3,064 2,972
-------- --------
14,170 13,681
-------- --------
Income from operations 834 1,040
-------- --------
Other income (expense):
Interest income 120 26
Net gain (loss) on investments 57 (347)
Other income and expense (net) 2 16
Interest expense (442) (183)
-------- --------
(263) (488)
-------- --------
Income from continuing operations before
provision for income taxes 571 552
Provision for income taxes (61) (85)
-------- --------
Income before discontinued operations 510 467
Income (loss) from discontinued operations, net of income
tax benefit (provision) of $(30) in 2000 and $92 in 1999 55 (189)
-------- --------
Net income 565 278
Dividend requirement on preferred stock (513) (251)
-------- --------
Income attributable to common stock $ 52 $ 27
======== ========
Income (loss) per common share - basic:
Income before discontinued operations $ -- $ .03
Income (loss) from discontinued operations .01 (.03)
-------- --------
Net income $ .01 $ --
======== ========
Income (loss) per common share - diluted:
Income before discontinued operations $ -- $ .03
Income (loss) from discontinued operations .01 (.03)
-------- --------
Net income $ .01 $ --
======== ========
Weighted Average Common Shares and Equivalents:
Basic 8,103 8,088
======== ========
Diluted 8,103 8,458
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
13
<PAGE> 14
NBI, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 2000 and 1999
(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, 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 -- -- -- -- -- --
------- ----- -------- ---------- ------ -------
Balance June 30, 1999 500,000 5 4,562 10,115,520 101 6,561
Issued under Employee
Stock Option Plan -- -- -- 15,000 -- 5
Preferred dividends:
- paid in-kind 7,421 -- -- -- -- --
- paid in cash -- -- (182) -- -- --
Net income -- -- -- -- -- --
------- ----- -------- ---------- ------ -------
Balance June 30, 2000 507,421 $ 5 $ 4,380 10,130,520 $ 101 $ 6,566
======= ===== ======== ========== ====== ========
<CAPTION>
Accumulated Treasury
Deficit Stock Total
----------- -------- --------
<S> <C> <C> <C>
Balance July 1, 1998 $(4,213) $(868) $ 1,300
Preferred stock with
detachable warrants,
issued in public offering,
net of offering costs -- -- 4,848
Net income 278 -- 278
------- ---- -------
Balance June 30, 1999 (3,935) (868) 6,426
Issued under Employee
Stock Option Plan -- -- 5
Preferred dividends:
- paid in-kind -- -- --
- paid in cash -- -- (182)
Net income 565 -- 565
------- ----- -------
Balance June 30, 2000 $(3,370) $(868) $ 6,814
======= ===== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
14
<PAGE> 15
NBI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2000 and 1999
(Amounts in Thousands)
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 565 $ 278
Adjustments to reconcile net income to net cash flow provided by operating
activities:
Depreciation and amortization 997 843
Provision for bad debts and returns 37 191
Provision for write-down of inventories (23) 289
Provision for impairment of property and equipment
and other long-term assets -- 53
Gain on sales of property and equipment -- (8)
Net unrealized loss (gain) on trading securities (2) 1
Deferred income taxes 14 (131)
Other (16) 12
Changes in assets -- decrease (increase):
Trading securities 38 (37)
Accounts receivable (486) (91)
Inventories 6 (556)
Other current assets 153 (324)
Other assets (3) 56
Changes in liabilities -- (decrease) increase:
Accounts payable and accrued liabilities (214) 635
Income taxes payable (14) (15)
---------- ----------
Net cash flow provided by operating activities 1,052 1,196
---------- ----------
Cash flows from investing activities:
Proceeds from sale of land and construction-in-progress,
net of selling expenses 552 --
Deposit on sale of hotel 500 --
Proceeds from sales of property and equipment -- 16
Purchases of property and equipment (1,388) (1,931)
---------- ----------
Net cash flow used in investing activities (336) (1,915)
---------- ----------
</TABLE>
(continued on following page)
See accompanying Notes to Consolidated Financial Statements.
15
<PAGE> 16
NBI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 2000 and 1999
(Amounts in Thousands)
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Cash flows from financing activities:
Collections on notes receivable $ 22 $ 13
Proceeds from issuance of preferred stock, net of offering costs -- 4,848
Dividends paid on preferred stock (182) --
Proceeds from stock option exercises 5 --
Payments on notes payable and line of credit from CEO (255) (261)
Net borrowings (payments) on line of credit 329 (1)
Payments on IRS debt (900) (3,500)
------- -------
Net cash flow provided by (used in) financing activities (981) 1,099
------- -------
Net increase (decrease) in cash and cash equivalents (265) 380
Less change in cash and cash equivalents included
in net assets of discontinued operations (13) (278)
Cash and cash equivalents at beginning of year 311 209
------- -------
Cash and cash equivalents at end of year $ 33 $ 311
======= =======
Supplemental disclosures of cash flow information:
Interest paid $ 297 $ 262
======= =======
Income taxes paid $ 118 $ 108
======= =======
Noncash purchases of property, plant and equipment
included in accounts payable at end of year $ 89 $ 315
======= =======
Noncash issuance of note receivable for sale of land and
construction-in-progress for 2000 and inventory and
equipment for 1999 $ 2,700 $ 40
======= =======
Deferred gain recorded from sale of discontinued
operation, net of taxes $ 881 $ --
======= =======
Preferred stock dividends paid in-kind $ 70 $ --
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
16
<PAGE> 17
NBI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
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, 2000, 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 assets 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. In March 2000, the FASB issued FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation, An
Interpretation of APB Opinion No. 25." The Company is required to adopt the
Interpretation on July 1, 2000. The Interpretation requires that stock options
that have been modified to reduce the exercise price be accounted for as
variable. Management believes the adoption of these pronouncements 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.
17
<PAGE> 18
Securities held-to-maturity: Debt securities are classified as held-to-maturity
when the Company has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost. Interest
earned on securities classified as held-to-maturity, including any discount or
premium amortization, is included in interest income as earned.
Available for sale: Marketable equity securities and debt securities not
classified as either trading or held-to-maturity are classified as
available-for-sale. Available-for-sale securities are carried at fair market
value, with the unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. Realized gains and losses and declines in
value judged to be other-than-temporary on available-for-sale securities are
included in net gain (loss) on investments and other income (expense) when
incurred. The cost of securities sold is based on the specific identification
method. Interest and dividends earned on securities classified as
available-for-sale, including any discount or premium amortization, are
included in interest income as earned.
The Company computes realized gains or losses based upon the specific
identification method.
INVENTORIES: Inventories are stated at the lower of cost (at standard which
approximates the first-in, first-out method) or market and were comprised of
the following amounts which are presented net of reserves totaling $243,000:
<TABLE>
<CAPTION>
June 30,
2000
--------
(Amounts in thousands)
<S> <C>
Raw Materials $ 731
Work in Process 648
Finished Goods 1,621
-------
$ 3,000
=======
</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>
Buildings and building improvements 20-25 years
Machinery and equipment 3-15 years
Office furniture and fixtures 5-10 years
</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
18
<PAGE> 19
Company to provide pro forma information regarding net income as if compensation
cost for the Company's stock option plan had been determined in accordance with
the fair value based method prescribed in SFAS No. 123. To provide the required
pro forma information, the Company estimates the fair value of each stock option
at the grant date by using the Black-Scholes option-pricing model.
REVENUE RECOGNITION: Revenue from sales of products 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, 2000 were capitalized catalog advertising costs of
$27,000. These costs are net of accumulated amortization of $101,000.
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, 2000 were capitalized billboard costs of $7,000, which are net of
accumulated amortization of $3,000.
Advertising expense from continuing operations was $186,000 and $157,000 for
the years ended June 30, 2000 and 1999, 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: NBI, Inc. calculates earnings per share in
accordance with 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 17).
COMPREHENSIVE INCOME: The Company applies 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, 2000 and 1999, 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 1999 financial
statements have been reclassified to conform to the 2000 manner of
presentation.
2. Going Concern
As discussed in Note 8, the Company owed the Internal Revenue Service ("IRS")
$1.8 million on or before December 31, 1999. On December 30, 1999, the Company
paid the IRS $400,000 and as of December 31, 1999, $1,378,000 of the IRS debt
was still outstanding. On January 5, 2000, the IRS sent NBI notice of a default
of its amended payment agreement with the IRS dated April 8, 1998 ("Amended
Payment Agreement"), due to the Company's failure to pay the remaining
$1,378,000 that was due on December 31, 1999. Per the terms of the agreement,
an event of default occurred on January 20, 2000, fifteen days after written
notice and demand from the IRS to NBI. On February 18, 2000, the Company paid
the IRS $500,000 from a deposit received from its CEO, Jay H. Lustig, related
to NBI's pending sale of all of the capital stock of a wholly-owned subsidiary,
NBI Properties, to an entity which is 100% owned and controlled by Mr. Lustig.
On March 15, 2000, the Company received a notice of default from the IRS
regarding NBI's failure to cure the default of its Amended Payment Agreement.
The IRS declared the remaining principal amount of $878,000 due and payable
with interest thereon at the statutory rate
19
<PAGE> 20
provided under the Internal Revenue Code since the last interest payment made
by NBI on July 9, 1997 under the original agreement. Accrued interest through
June 30, 2000 totaled $248,000. In addition, the IRS notified the Company that
it intends to pursue its remedies. Management intends to obtain bank financing
in order to pay the Company's outstanding obligations to the IRS. The Company
has received a commitment letter from a bank for such financing and expects to
close on this financing by October 31, 2000. However, there can be no assurance
that the Company will be able to satisfy its obligations to the IRS. This
condition raises substantial doubt about the Company's ability to continue as a
going concern. The Consolidated Financial Statements do not contain any
adjustments that might result from the outcome of this uncertainty. Management
believes that after the Company pays off its IRS debt, it will generate
sufficient future cash flows to allow the Company to continue as a going
concern. (See Notes 3 and 8).
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, 1999, the
Board of Directors voted to sell the assets or stock of its wholly-owned
subsidiaries, NBI Properties and Willowbrook Properties, in order to pay the
IRS debt due on December 31, 1999 (see Notes 2, 8 and 19). 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, 2000 and 1999 as follows:
<TABLE>
<CAPTION>
Children's
Paint Hotel Real Estate
Manufacturing Operations Development Total
-------------- ---------- ------------- ----------
(amounts in thousands)
<S> <C> <C> <C> <C>
Fiscal Year 2000:
Revenues from discontinued operations $ 21 $ 2,423 $ -- $ 2,444
========= ========= ======== =========
Income (loss) from discontinued operations
before income taxes $ -- $ 47 $ (1) $ 46
Income tax provision -- (17) -- (17)
--------- --------- -------- ---------
Income (loss) from discontinued operations -- 30 (1) 29
Gain on disposal, net of income tax
provision of $13,000 26 -- -- 26
--------- --------- -------- ---------
Net income (loss) from discontinued operations $ 26 $ 30 $ (1) $ 55
========= ========= ======== =========
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 income (loss) from discontinued operations $ (213) $ 24 $ -- $ (189)
========= ========= ======== =========
</TABLE>
20
<PAGE> 21
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. The disposal of the children's paint manufacturing
operation was substantially complete as of September 30, 1999.
On December 17, 1999, the Company sold a majority of the assets of its real
estate development, consisting of land and construction-in-progress, to an
entity which is 100% owned and controlled by its CEO. The Company intends to
sell all of the capital stock of NBI Properties to an entity which is also 100%
owned and controlled by its CEO (see Note 19). The Company recorded a deferred
gain on the sale of the real estate development during the second quarter of
fiscal 2000 (see Notes 12 and 19) and expects a significant gain overall from
the discontinued operations of the hotel, and therefore, no amount has been
recorded related to these disposals; the gain will be recognized when realized.
The net long-term assets of discontinued operations at June 30, 2000 consisted
primarily of land, buildings and hotel furniture, fixtures and equipment, net
of a long-term mortgage note payable by the hotel (see Note 14). The net
current assets of discontinued operations at June 30, 2000 consisted primarily
of cash, net of accounts payable and accrued liabilities.
4. Investments in Securities
During the years ended June 30, 2000 and 1999, all of the Company's securities
were classified as trading securities; no securities were classified as
held-to-maturity or available-for-sale. The Company recorded a net realized
gain of $55,000 and a net unrealized gain of $2,000 on investments for the year
ended June 30, 2000 compared to a net realized loss of $346,000 and a net
unrealized loss of $1,000 on investments for the year ended June 30, 1999.
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, 2000, the Company had no
investment positions.
5. Other Current Assets
Included in other current assets totaling $234,000 at June 30, 2000, was
$118,000 of accrued interest on the Company's note receivable from a related
party (see Notes 6 and 19). Also included was restricted cash of $6,000,
representing amounts held in trust for payments under self-insurance plans.
6. Note Receivable from Related Party
In conjunction with the sale of Willowbrook Properties' land and
construction-in-progress (see Notes 3 and 19), on December 17, 1999, the
Company received a note receivable in the amount of $2.7 million from an entity
which is 100% owned and controlled by NBI's CEO. The note bears interest at the
rate of two-year Treasury Notes plus 200 basis points with a rate of 8.14%
determined at closing for the remainder of calendar 1999 and all of calendar
2000, and to be redetermined each succeeding December 31 for the following
calendar year's rate. The note is payable in quarterly installments of interest
only with the entire outstanding principal balance plus any accrued but unpaid
interest to be paid in full on December 31, 2006 (see Note 5).
21
<PAGE> 22
7. Property, Plant and Equipment
<TABLE>
<CAPTION>
June 30,
2000
----------------------
(Amounts in thousands)
<S> <C>
Land $ 144
Buildings 1,330
Machinery and equipment 5,399
Office furniture and fixtures 307
Construction in-progress 206
-------
7,386
Accumulated depreciation (3,197)
-------
$ 4,189
=======
</TABLE>
Total depreciation expense from continuing operations was $801,000 and $644,000
for the years ended June 30, 2000 and 1999, respectively. The Company estimates
that it will cost approximately $1,727,000 to complete the outstanding
construction in-progress, all of which is expected to be completed during
fiscal 2001. 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, 2000 were design and
engineering costs totaling $80,000 related to this project. The new tank will
have an estimated useful life of 20 to 25 years, with major refurbishment,
costing approximately $500,000, required every seven years. The Company has
received a commitment letter from a bank for financing of this project and
expects to close on this financing by October 31, 2000.
8. Income Taxes
IRS Debt:
On April 28, 1998, the Company and the IRS entered into an amended payment
agreement, revising the payment terms related to NBI Inc.'s IRS debt of
$5,278,000. This agreement, effective April 9, 1998, revised the terms of the
agreement in principal with the IRS effective October 1, 1995 and the original
settlement agreement with the IRS dated June 12, 1991, with respect to NBI's
federal tax liabilities for the fiscal years ended June 30, 1980 through 1988.
Under the current agreement, $3,500,000 of the IRS debt was due and paid on
December 31, 1998, and the remaining balance of $1,778,000 was due on December
31, 1999. On December 30, 1999, the Company paid the IRS $400,000 and as of
December 31, 1999, $1,378,000 of the IRS debt was still outstanding. On January
5, 2000, the IRS sent NBI notice of a default of its Amended Payment Agreement,
due to the Company's failure to pay the remaining $1,378,000 that was due on
December 31, 1999. Per the terms of the agreement, an event of default occurred
on January 20, 2000, fifteen days after written notice and demand from the IRS
to NBI.
On February 18, 2000, the Company paid the IRS $500,000 from a deposit received
from its CEO, related to NBI's pending sale of all of the capital stock of NBI
Properties to an entity which is 100% owned and controlled by Mr. Lustig. On
March 15, 2000, the Company received a notice of default from the IRS regarding
NBI's failure to cure the default of its Amended Payment Agreement. The IRS
declared the remaining principal amount of $878,000 due and payable with
interest thereon at the statutory rate provided under the Internal Revenue Code
since the last interest payment made by NBI on July 9, 1997 under the original
agreement. Accrued interest through June 30, 2000 totaled $248,000. In addition,
the IRS notified the Company that it intends to pursue its remedies. Management
intends to obtain bank financing in order to pay the Company's outstanding
obligations to the IRS. The Company has received a commitment letter from a bank
for such financing and expects to close on this financing by October 31, 2000.
However, there can be no assurance that the Company will be able to satisfy its
obligations to the IRS. This condition raises substantial doubt about the
Company's ability to continue as a going concern. The Consolidated Financial
Statements do not contain any adjustments that might result from the outcome of
this uncertainty. Management believes that after the Company pays off its IRS
debt, it will generate sufficient future cash flows to allow the Company to
continue as a going concern. (See Notes 2 and 3). The IRS debt continues to be
collateralized by a security interest in all of the capital stock of American
Glass, Inc., d/b/a L.E. Smith Glass Company and NBI Properties.
22
<PAGE> 23
Income Tax Provision and Deferred Income Taxes:
For the years ended June 30, 2000 and 1999, the benefit (provision) for income
taxes was included in the consolidated statements of operations as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
(Amounts in thousands)
<S> <C> <C>
Continuing operations provision $(61) $(85)
Discontinued operations benefit (provision) (30) 92
---- ----
$(91) $ 7
==== ====
</TABLE>
The benefit (provision) for income taxes from continuing operations for the
years ended June 30, 2000 and 1999 consisted of:
<TABLE>
<CAPTION>
2000 1999
----- -----
(Amounts in thousands)
<S> <C> <C>
Federal:
Current $ -- $ --
Deferred 26 32
----- -----
26 32
----- -----
State and other:
Current (72) (137)
Deferred (15) 20
----- -----
(87) (117)
----- -----
Total $ (61) $ (85)
===== =====
</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 no amounts of pre-reorganization net operating loss
carryforwards in fiscal 2000 or 1999.
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, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
----- -----
(Amounts in thousands)
<S> <C> <C>
Federal tax expense computed at 34% on
income from continuing operations before
provision for income taxes $(194) $(188)
State taxes, net of federal benefit (57) (77)
Change in the balance of the valuation
allowance for deferred tax assets and other 190 180
----- -----
Provision for income taxes from continuing operations $ (61) $ (85)
===== =====
</TABLE>
23
<PAGE> 24
Significant components of the Company's deferred tax assets and liabilities as
of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
June 30, 2000
--------------------------------------------
Current Noncurrent Total
------- ---------- -----
(Amounts in thousands)
<S> <C> <C> <C>
Deferred tax assets:
Deductible portion of IRS Settlement amount $ 152 $ -- $ 152
Reserve provisions and other 334 -- 334
Net operating loss carryforwards -- 21,269 21,269
Capital loss carryforwards -- 1,288 1,288
Sale of a majority of Willowbrook Properties' assets -- 313 313
Other - net -- 99 99
-------- -------- --------
Total deferred tax assets 486 22,969 23,455
Valuation allowance for deferred tax assets (430) (22,261) (22,691)
-------- -------- --------
Deferred tax assets, net of valuation allowance 56 708 764
Less deferred tax liabilities:
Fixed asset depreciation/basis differences -- (898) (898)
-------- -------- --------
Net deferred tax asset (liability) $ 56 $ (190) $ (134)
======== ======== ========
</TABLE>
The net change in the valuation allowance was a decrease of $455,000 for the
year ended June 30, 2000, and an increase of $421,000 for the year ended June
30, 1999. The valuation allowance of $22,691,000 at June 30, 2000 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 net operating tax loss carryforwards at June 30, 2000 totaled $62.6 million
and expire in fiscal years 2004 through 2020. 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. The capital loss
carryforwards at June 30, 2000 totaled $3.8 million and expire in fiscal years
2003 and 2005. During fiscal 2000, approximately $1.5 million of the capital
loss carryforwards expired unused.
9. Accrued Liabilities and Other
<TABLE>
<CAPTION>
June 30,
2000
--------
(Amounts in thousands)
<S> <C>
Accrued interest $ 263
Payroll and related benefits and taxes 322
Acquired liabilities under previously self-insured
health and other benefit plans 35
Deposit liability 500
Other 157
--------
$ 1,277
========
</TABLE>
The deposit liability is from a deposit received from the Company's CEO related
to NBI's pending sale of all of the capital stock of a wholly-owned subsidiary,
NBI Properties, to an entity which is 100% owned and controlled by the CEO (see
Notes 2, 3 and 19).
24
<PAGE> 25
10. Notes Payable and Short-term Borrowings
The following summarizes the Company's notes payable and short-term borrowings
outstanding at:
<TABLE>
<CAPTION>
June 30,
2000
---------------------
(Amounts in thousands)
<S> <C>
Revolving bank credit note of $2,000,000, due November 1, 2000, interest at
bank's prime rate (9.50% at June 30, 2000) 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. $1,818
Bank note payable in monthly installments of $10,834 plus interest at bank's
prime rate (9.50% at June 30, 2000) plus 1/2% or less, depending upon the
attainment of certain financial ratios, 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. 260
------
Total notes payable and short-term borrowings 2,078
Less current portion 1,948
------
Long-term portion of notes payable $ 130
======
</TABLE>
At June 30, 2000, the principal maturities of notes payable and short-term
borrowings for the subsequent fiscal years ending June 30 are: 2001 -
$1,948,000; 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. The Company is in
full compliance with all of the covenants on this loan.
See also Note 14 regarding notes payable related to discontinued operations.
11. Postemployment Benefits
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, 2000 was $175,000, of which $153,000 was
classified as long-term.
25
<PAGE> 26
12. Deferred Gain from Sale of Operation
On December 17, 1999, the Company closed on the sale of a majority of the
assets of a wholly-owned subsidiary, Willowbrook Properties, to an entity which
is 100% owned and controlled by NBI's CEO. The terms and conditions of the sale
were previously approved at NBI's Annual Meeting of Stockholders held on
December 16, 1999. The Company has accounted for the sale in accordance with
SFAS No. 66, "Accounting for Sales of Real Estate." The terms of the sale do
not meet the requirements of SFAS No. 66 for recognition of gain until the
purchase price is paid in full in cash. Consequently, the Company recorded a
deferred gain on the sale of $881,000 during fiscal 2000, which is net of
selling expenses of approximately $48,000 and net of approximately $40,000 of
related income taxes. (See Notes 3, 6 and 19.)
13. 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 $129,000 and $103,000 for
the years ended June 30, 2000 and 1999, respectively.
14. 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 July 2005. Total rental expense for continuing
operations was $123,000 and $120,000 for the years ended June 30, 2000 and
1999, respectively.
The future minimum rental commitments for continuing operations for the next
five fiscal years, under non-cancelable leases, are: 2001 - $62,000; 2002 -
$43,000, 2003 - $37,000; 2004 - $13,000; and 2005 - $3,000.
Other Commitments and Contingencies - Discontinued Operations:
The hotel has an outstanding bank mortgage note payable of $936,000 at June 30,
2000, of which $911,000 was 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 is in full
compliance with all of the covenants on this loan.
The Company's hotel operation 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.
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 performance in excess of
specified amounts. No royalties were
26
<PAGE> 27
incurred during the fiscal years ended June 30, 2000 and 1999 and the Company
does not expect any royalties to be earned in the future (see also Notes 3 and
19).
15. Stockholders' Equity
The Company has authorized 20,000,000 shares of $.01 par value common stock. At
June 30, 2000, 10,130,520 shares were issued including 2,027,200 held in
treasury. Therefore, the Company had 8,103,320 shares issued and outstanding at
June 30, 2000.
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. The redemption price would be as
follows for each calendar year: $10.80 per share if redeemed in 2000, $10.60 in
2001, $10.40 in 2002, $10.20 in 2003, and $10.00 in 2004 and thereafter.
During fiscal 1999, the Company sold 500,000 shares of Series A Cumulative
Preferred Stock and 1,000,000 common stock purchase warrants through a public
offering resulting in net proceeds of $4.8 million. For the years ended June 30,
2000 and 1999, the Company reported a dividend requirement totaling $513,000 and
$251,000, respectively, attributable to its preferred stock. On September 3,
1999, the Board of Directors of NBI paid the first semi-annual dividend on its
outstanding Series A Cumulative Preferred Stock, including 7,421 shares of
additional preferred stock which were paid in-kind. No dividends have been
declared or paid subsequently. As of June 30, 2000, 507,421 registered shares of
Series A Cumulative Preferred Stock and 1,000,000 registered common stock
purchase warrants at $1.20 per share were outstanding.
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, 2000, no warrants had been exercised. (See also Note 19.)
16. Stock Options
The Employee Stock Option Plan was established pursuant to the Company's Plan
of Reorganization. At June 30, 2000, 870,750 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. 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 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.
At June 30, 2000, 450,000 shares were reserved for options issued outside of
the Stock Option Plan.
27
<PAGE> 28
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, 2000 and 1999 would have been
reduced to the proforma amounts as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
(amounts in thousands, except per share data)
<S> <C> <C>
Net income attributable to common stock - as reported $ 52 $27
==== ===
Net income attributable to common stock - proforma $ 42 $ 8
==== ===
Net income per common share - as reported $.01 $--
==== ===
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 June 30, 1998 560,500 400,000 960,500 $.69
Granted -- -- -- --
Exercised -- -- -- --
Forfeited -- -- -- --
-------- -------- --------
Outstanding June 30, 1999 560,500 400,000 960,500 .69
Granted -- -- -- --
Exercised (15,000) -- (15,000) .38
Forfeited (60,000) -- (60,000) .88
-------- -------- --------
Outstanding June 30, 2000 485,500 400,000 885,500 .68
======== ======== ========
Options exercisable
at June 30, 2000 435,250 400,000 835,250 $.69
======== ======== ========
</TABLE>
The following table summarizes information about the stock options outstanding
at June 30, 2000:
Weighted-Average
Remaining
Exercise Number Number Contractual
Price Outstanding Exercisable Life
-------- ----------- ----------- ----------------
.38 201,000 201,000 2.37 years
$ .59 100,500 50,250 .02 years
$ .77 400,000 400,000 3.25 years
$ .88 184,000 184,000 .45 years
------- -------
885,500 835,250
======= =======
28
<PAGE> 29
17. Income (Loss) Per Common Share
NBI calculates earnings per share in accordance with 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.
The following reconciles the numerators and denominators of the basic and
diluted earnings per common share computation for income (loss) before
discontinued operations for the years ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
--------------------- ------------------
Basic Diluted Basic Diluted
------- ------- ----- -------
(Amounts in thousands except per share data)
<S> <C> <C> <C> <C>
Income before discontinued operations $ 510 $ 510 $ 467 $ 467
Dividend requirement on preferred stock (513) (513) (251) (251)
------- ------- ------- -------
Income (loss) before discontinued operations
attributable to common stock $ (3) $ (3) $ 216 $ 216
======= ======= ======= =======
Weighted average number of common
shares outstanding 8,103 8,103 8,088 8,088
======= =======
Assumed conversions of stock options -- 370
------- -------
8,103 8,458
======= =======
Income (loss) per common share before
discontinued operations $ -- $ -- $ .03 $ .03
======== ======= ======= =======
</TABLE>
Because the Company incurred a loss before discontinued operations attributable
to common stock for the year ended June 30, 2000, none of its outstanding
options or warrants were included in the computation of diluted earnings per
share as their effect would be anti-dilutive.
For the year ended June 30, 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 because their
exercise prices were less than the average market price of the common stock
outstanding.
The options and warrants outstanding at June 30, 2000 were as follows:
<TABLE>
<CAPTION>
Number
Exercise Outstanding at
Price June 30, 2000
-------- --------------
<S> <C>
Stock options:
$ .38 201,000
$ .59 100,500
$ .77 400,000
$ .88 184,000
Warrants:
$ .89 1,700,000
$ 1.20 1,000,000
---------
3,585,500
=========
</TABLE>
29
<PAGE> 30
18. 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 throughout the United States as well as to
manufacturers/wholesalers, the food service market and through an on-site retail
store. L.E. Smith Glass Company currently has one significant customer. Sales to
this customer totaled approximately 24% and 31% of NBI's consolidated revenues
from continuing operations in fiscal 2000 and 1999, respectively. In addition,
this customer constituted approximately 17% of the Company's consolidated
accounts receivable at June 30, 2000, while one other customer, a national
retailer, comprised another 13% 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, 2000, approximately 77% of the Company's employees in its
continuing operations were covered by a collective bargaining agreement that
expires on August 31, 2001.
19. Related Party Transactions
In February 1995, the Company entered into an agreement to purchase 80% of the
outstanding stock of Krazy Colors effective January 1, 1995. Prior to this
agreement, the Company's CEO 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 14). NBI's CEO will
receive 55% of any such royalty payments. No royalties were incurred by the
Company during fiscal years ended June 30, 2000 or 1999, 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 2000 and 1999, the Company utilized a stock brokerage firm, which
is 100% owned by its CEO, to execute certain transactions on its behalf.
However, NBI uses another unrelated company to act as custodian and clearing
firm for its investment assets. Gross revenues earned by the brokerage firm
related to investment transactions by NBI in fiscal 2000 and 1999 totaled
$6,000 and $10,000, respectively, on purchase and sale transactions totaling
$16,204,000 and $19,216,000 before fees, respectively.
During fiscal 1998, the Company borrowed a total of $100,000 from its Chief
Executive Officer for working capital needs. The borrowings were 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. In December, 1999, the Company paid Mr.
Lustig approximately $148,000 consisting of repayment of the revolving line of
credit balance of $100,000, cumulative accrued interest thereon of $25,000 and
an accrued bonus from fiscal 1997 of $23,000.
Prior to NBI's 1999 Annual Meeting of Stockholders, the Company received a
fairness opinion regarding its proposed sale of the majority of the assets of
Willowbrook Properties and all of the capital stock of NBI Properties to
entities which are 100% owned and controlled by its CEO. The fairness opinion
concluded that the transaction was fair from a financial point of view. The
terms and conditions of the proposed transaction were approved at NBI's Annual
Meeting of Stockholders on December 16, 1999.
30
<PAGE> 31
On December 17, 1999, the Company closed on the sale of a majority of the
assets of a wholly-owned subsidiary, Willowbrook Properties, to an entity which
is 100% owned and controlled by NBI's CEO. The Company has accounted for the
sale in accordance with SFAS No. 66, "Accounting for Sales of Real Estate." The
terms of the sale do not meet the requirements of SFAS No. 66 for recognition
of gain until the purchase price is paid in full in cash. Consequently, the
Company recorded a deferred gain on the sale of $881,000 during fiscal 2000,
which is net of selling expenses of approximately $48,000 and net of
approximately $40,000 of related income taxes. The sale consisted of land and
construction-in-progress and was for a net purchase price of $3.3 million. The
purchase price was net of construction costs which were previously funded by
advances from Mr. Lustig. Concurrently with the closing of the Willowbrook
Properties sale transaction, such amounts were deemed to be expenses of the
buyer. The purchase price was paid by $600,000 in cash and a note payable in
the amount of $2.7 million. (See Notes 3, 6 and 12.)
Mr. Lustig has proposed to purchase all of the capital stock of NBI Properties
for $1,400,000 in cash and a note payable of $1.1 million. On February 18,
2000, Mr. Lustig paid the Company a deposit of $500,000 related to this
proposed purchase (see Note 9). Mr. Lustig is currently working on obtaining
the funds to enable him to close on this transaction.
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.
31
<PAGE> 32
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. Willowbrook Properties, Inc. Purchase and Sale Agreement(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, 2000(9)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter
ended June 30, 2000.
----------
(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 December 31, 1999.
(9) Filed herewith.
32
<PAGE> 33
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 28, 2000 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 28, 2000
---------------------- (Principal Financial and Accounting Officer)
Marjorie A. Cogan
/s/ JAY H. LUSTIG Chief Executive Officer, Director September 28, 2000
---------------------- (Principal Executive Officer)
Jay H. Lustig
/s/ MARTIN J. NOONAN Director September 28, 2000
----------------------
Martin J. Noonan
</TABLE>
<PAGE> 34
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
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. Willowbrook Properties, Inc. Purchase and Sale Agreement(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, 2000(9)
</TABLE>
----------
(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 December 31, 1999.
(9) Filed herewith.
