<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
AMENDMENT NO 2 TO ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For The Transition Period From _______ To _______
Commission File No. 1-13338
Tivoli Industries, Inc.
(Name of small business issuer in its charter)
California 95-2786709
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1513 East St. Gertrude Place, Santa Ana, California 92705
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 957-6101
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
$.001 PAR VALUE COMMON STOCK
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months, and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [_]
[_] Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not 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.
State issuer's revenues for its most recent fiscal year: $9,846,174
The aggregate market value of this Registrant's voting stock held as of 12/5/97,
by non-affiliates of the Registrant was $4,550,918.
As of December 5, 1997, Registrant had 3,937,871 shares of $.001 par value
common stock outstanding.
<PAGE>
AMENDMENT NO 2 TO ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
TABLE OF CONTENTS
Page
----
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview ....................................................... F1
Results of Operations .......................................... F1
Seasonality .................................................... F2
Inflation ...................................................... F2
Financial Position, Capital Resources and Liquidity ............ F2
New Accounting Pronouncements .................................. F3
Factors Affecting Growth and Profitability ..................... F3
Penny Stock Regulations ........................................ F3
Item 7. FINANCIAL STATEMENTS ........................................... F4
INDEX TO FINANCIAL STATEMENTS ........................................... F4
<PAGE>
Amended Notes 6 and 7, of the Form 10-KSB for the year ended September 30, 1997.
- --------------------------------------------------------------------------------
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
The Company, since its founding in 1967, has established a reputation as an
innovator and supplier of miniature and low voltage lighting products. From
1991 onward the Company expanded its product range and is now regarded as a
designer, developer, manufacturer and supplier of specialty lighting and related
products, both domestically and internationally. Applications of the Company's
products, globally, are movie theater aisle, step, marquee and concession
lighting, illuminated ceiling systems, architectural cove, miniature lighting in
cabinetry, decorative, accent, task and energy efficient lighting in casinos,
hotels, restaurants, gaming vessels, cruise ships, specialty retail, themed
venues and high end residential.
In 1991, the Company was acquired by its present management who implemented
a strategy to revitalize and expand the Company's market position through
product line expansion and aggressive market penetration programs. The Company
completed a successful public offering in September of 1994, and continued to
focus, refine and implement its strategic business plan which encompassed new
product and patent development, market penetration, literature and catalog
development and an international reciprocal joint venture with Targetti of
Florence, Italy. The original joint venture, announced in November of 1994,
consisted of a reciprocal license and distribution agreement between the Company
and Targetti in the U.S. market, and provided the Company's products to
Targetti's global network of 66 representatives, distributors and sales offices.
In November 1997, the scope of the joint venture was expanded with the formation
of a jointly owned Company in the U.S. - Targetti USA, LLC ("Targetti USA").
Through this joint venture, Targetti offers a wide range of product families,
developed by Targetti, which broadens and complements the Company's products.
In North America and Mexico, the Company's products are sold through 69
independent marketing representatives, and directly by the Company's personnel
to a large customer base consisting of electrical distributors, contractors,
owner representatives, hotels, showrooms, theater distributors and other end
users. The Company has an international subsidiary, Tivoli de Mexico, S.A. de
C.V., in Mexico City, Mexico, to support the Company's sales in Mexico and
Central America. The Company also has opened a sales support office and
demonstration center in Las Vegas, Nevada, to support the growth of the
casino/gaming and hospitality markets in North America and internationally.
The Company currently holds eight U.S. patents on mechanical features and
three U.S. patents on design features. The Company's product families lines
include low voltage tube lighting, linear lighting systems, accent and task
lighting, chandelier and light curtains, decorative ceiling systems, specialized
vehicular, marine and aircraft lighting, long life, low voltage lamps, energy
efficient fluorescent cove, low voltage linear cove, illuminated surveillance
system, electronic transformers, dimmers and circuit protection devices, and
furniture, cabinet and kiosk lighting. The products offered through the
Targetti USA joint venture include low voltage track lighting, low voltage open
frame and open conductor systems, illuminated sky lights, low voltage recessed
lighting fixtures, precision adjustable projectors, energy efficient compact
fluorescent ("CF") downlights, decorative wall sconces, and a variety of
lighting accessories and options.
Since the acquisition of the Company in 1991, sales have consistently
trended upward, with sales of $2,529,053 in fiscal 1992, $2,974,819 in fiscal
1993, $3,544,533 in fiscal year 1994, $4,518,502 in fiscal 1995, $6,638,063 in
fiscal 1996 and $9,846,174 in fiscal 1997. Management believes that the growth
strategies and expenditures made from acquisition through the 1997 fiscal year
account for the strong annual growth rate and provide an expanded foundation to
support future Company growth.
Results of Operations
Net sales of $9,846,174 for the fiscal year 1997 were 48.3% above the net
sales of $6,638,063 in the fiscal year 1996. This substantial increase followed
a growth rate of 46.9% in fiscal 1996 net sales over fiscal
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year 1995 net sales. This sustained performance was the result of strong
marketing programs and expanded Tivoli and Targetti product families.
The gross profit for the fiscal year 1997 was $4,160,039 or 42.3% of net
sales as compared to $2,858,193 or 43.1% of net sales for the 1996 fiscal year.
This decrease in the gross profit percentage of sales was due primarily to the
competitive pricing related to several large project related orders.
Selling, general and administrative expenses for fiscal 1997 decreased to
36.4% of net sales or $3,581,453 as compared to 40.9% or $2,713,264 in the 1996
fiscal year. This decrease in SG&A expenses as a percentage of sales was
related to the increase in sales volume described above and a continuing
emphasis on control of major SG&A expense items.
Operating profits for the fiscal year 1997 increased to $578,586 or 5.9% of
net sales as compared to $144,929 or 2.2% net sales in the fiscal year 1996.
Other expense for fiscal year 1997 was $10,228 and consisted of interest
income of $74,925 on the investment of the proceeds of IPO funds, less interest
expense on the bank loan and capital leases of $85,153. Other income for the
fiscal year 1996 was $19,071 and was derived from interest income of $83,176 on
the investment of IPO funds less interest expense on the bank loan of $64,105.
The provision for income tax in the fiscal year 1997 was $56,593 and
represented state income tax requirements. Federal income tax provisions were
covered by net operating loss carry forwards. See Financial Statement Notes #6.
In the fiscal year 1996 net operating loss carry forwards covered both the
federal and state income tax provisions.
As a result of the above factors, net income for the fiscal year 1997
improved to $511,765 or $0.13 per share as compared to net income of $166,200 or
$0.04 per share in the 1996 fiscal year.
Seasonality
In the theater industry the release of new films has historically peaked in
the summer and fall. Similarly, new theater openings and remodeling tend to be
scheduled for completion just prior to these associated summer and holiday
seasons. Therefore, sales of the Company's theater related products peak in the
first and third quarters of the Company's fiscal year. Some landscape products,
such as twilights for tree lighting, are sold in high volumes in the holiday
season corresponding with the Company's first fiscal year quarter. However, in
fiscal years 1997 and 1996, new product, international and large project sales,
in general, offset these cyclical forces and induced a somewhat smoother pattern
of quarterly sales. In the future these influences are expected to continue to
have a counter effect on seasonal sales patterns.
Inflation
The modest rate of inflation in recent years has had no significant impact
on the Company's sales and profitability.
Financial Position, Capital Resources and Liquidity
The Company financed its working capital and capital investment
requirements in the fiscal year 1997 from funds generated by operations and
capital leases. Net cash provided by operating activities was $98,789 which
consisted primarily of net income of $511,765 and depreciation of $163,778 which
was substantially offset by an increase of accounts receivable of $338,478, and
inventories of $643,543 and a increase of accounts payable of $157,492 and
accrued expenses of $112,675. Capital expenditures during the year were $360,583
which contributed to a net decrease in cash of $303,208 in 1997.
Working capital increased to $3,725,303 at September 30, 1997, as compared
to $2,745,385 at September 30, 1996. A portion of this increase was due to the
change in the classification of the Notes payable to the Bank of $667,500 from
current to long term liabilities. See Financial Statements Note #3.
F-2
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Accounts receivable as of September 30, 1997, increased to $1,615,561 from
$1,348,484 at September 30, 1996. This increase was related to the increase in
sales volume. The days sales outstanding in accounts receivable decreased to 59
days at September 30, 1997, as compared to 62 days at September 30, 1996.
Inventories as of September 30, 1997, increased to $1,691,943 as compared
to $1,048,400 at September 30, 1996. The number of months material costs of
sales in inventory at September 30, 1997, increased to 3.6 months as compared to
3.3 months at September 30, 1996. The inventory increase was primarily related
to a build in material components to support new product programs such as the
Minicove line, which was related to a large customer demand, our expanding aisle
and step lighting line and the Lumitred, LED and Electroluminescence sources.
Accounts payable as of September 30, 1997, increased to $1,129,405 as
compared to $971,913 at September 30, 1996. The number of days in accounts
payable decreased to 56 days at September 30, 1997, as compared to 67 days as of
September 30, 1996.
Capital expenditures in the fiscal year 1997 totaled $360,583 and consisted
of Manufacturing Resources Planning System hardware and software $203,701, Las
Vegas showroom $82,324, new product tooling $57,508 and related
machinery/equipment $17,050. New product patent expenditures in the fiscal year
1997 totaled $36,428.
On July 20, 1995, the Company obtained a new $750,000 line of credit,
secured by accounts receivable, inventory, and assets of the company with Union
Bank, Laguna Hills, CA. This line of credit was used to pay off the former bank
debt on July 31, 1995, as negotiated with the FDIC and to provide additional
working capital resources. This agreement expired on February 28, 1997, and was
subsequently renewed with an expiration date of March 1, 1999. The renewal
agreement contains interest at the banks prime rate (8.5% at September 30, 1997)
plus 1% per annum. The terms of the agreement provide for borrowings of up to
the lesser of $750,000 or the aggregate of 80% of eligible accounts receivable
plus 50% of eligible inventory up to $300,000. This arrangement is secured by
substantially all of the Company's assets. The agreement contains certain
restrictive covenants which require the Company to maintain certain financial
ratios, among other restrictions. At September 30, 1997, the Company was in
compliance with all covenants and restrictions of this agreement. See Financial
Statement Note #3.
New Accounting Pronouncements
See Footnote #1 to the financial statement, organization and summary of
significant accounting policies, for the Company's treatment of new accounting
pronouncements.
Factors Affecting Growth and Profitability
The growth and profitability of the Company's business will be dependent
upon a number of factors beyond the control of the Company. For example,
economic conditions adversely affecting movie theater construction or remodeling
by major motion pictures distributors, could in turn adversely impact the
Company's growth and profitability. During the fiscal year ended September 30,
1997, aggregate sales to the motion picture industry accounted for approximately
30% of the Company's net sales. In addition, the Company's strategy for sales
growth to the casino and gaming industry is based upon the premise that these
will be continued expansion of major venues in the U.S. and overseas, as to
which there can be no assurance. Moreover, since the lighting industry generally
is directly affected by new construction, building permits, housing starts and
energy considerations, the Company's growth and profitability can be affected by
adverse developments in those areas.
Penny Stock Regulations
The Common Stock is traded on the Nasdaq SmallCap Market. Class A warrants
and Class B warrants were traded on the NASDAQ SmallCap Market until September
21, 1997, at which time they expired and were subsequently delisted at the
request of the Company. In order to maintain its listing on the Nasdaq SmallCap
Market, the Company must maintain total assets, capital and public float at
specified levels, and generally must maintain a minimum bid price of $1.00 per
share. Under current rules, the
F-3
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Company may remain listed on the Nasdaq SmallCap Market even if the bid price
for the Common stock falls below $1.00 per share, provided it meets certain
alternative tests. However, Nasdaq has recently proposed the elimination of
these alternative tests. If the Company fails to maintain the standard necessary
to be quoted on the Nasdaq SmallCap Market, the Company's securities could
become subject to delisting. If the securities are delisted, trading in the
securities could be conducted on the OTC Bulletin Board or in the over-the-
counter market in what is commonly referred to as the "pink sheets." If this
occurs, a security holder will find it more difficult to dispose of the
securities or to obtain accurate quotations as to the price of the securities.
In addition, the Common Stock could become subject to the "penny stock"
regulations promulgated under the Securities Exchange Act of 1934, as amended,
which impose additional restrictions on broker-dealers who trade in such stock
and could severely limit the market liquidity of the Company's securities.
Item 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report............................................. F-2
Balance Sheet As Of September 30, 1996................................... F-3
Statements Of Operations For Each Of The Years
In The Two-Year Period Ended September 30, 1997....................... F-4
Statements Of Stockholders' Equity (Capital Deficiency)
For Each Of The Years In The Two-Year Period Ended
September 30, 1996 and 1997........................................... F-5
Statements Of Cash Flows For Each Of The Years In
The Two-Year Period Ended September 30, 1996 and 1997................. F-6
Notes To Financial Statements............................................ F-7
F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Tivoli Industries, Inc.
We have audited the accompanying balance sheet of Tivoli Industries, Inc. (the
"Company") as of September 30, 1997, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the two-year period
ended September 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tivoli Industries, Inc. as of
September 30, 1997, and the results of its operations and its cash flows for
each of the years in the two-year period ended September 30, 1997, in conformity
with generally accepted accounting principles.
CORBIN & WERTZ
Irvine, California
November 14, 1997
F-5
<PAGE>
TIVOLI INDUSTRIES, INC.
BALANCE SHEET
September 30, 1997
ASSETS (Note 3)
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents $1,389,720
Accounts receivable, less allowance for doubtful accounts
of $87,000 1,615,561
Inventories 1,691,943
Prepaid expenses and other 423,685
----------
Total current assets 5,120,909
----------
Property and equipment (Note 4):
Machinery and equipment 294,040
Furniture and fixtures 334,165
Tooling 301,877
Computer equipment and software 525,257
----------
1,455,339
Less: accumulated depreciation (662,294)
----------
Net property and equipment 793,045
----------
Goodwill, net of accumulated amortization of $135,627 523,911
Patents, net of accumulated amortization of $164,152 242,399
Deferred tax asset (Note 6) 127,400
Deposits and other (Note 2) 80,486
----------
$6,888,150
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,129,405
Accrued expenses 182,160
Income taxes payable (Note 6) 35,885
Current maturities of obligations under a capital lease (Note 4) 47,213
Current portion of notes payable to bank (Note 3) 943
----------
Total current liabilities 1,395,606
Notes payable to bank, net of current portion (Note 3) 667,500
Obligations under a capital lease, net of current portion (Note 4) 168,525
Deferred tax liability (Note 6) 154,933
----------
Total liabilities 2,386,564
----------
Commitments and contingencies (Notes 5 and 9)
Stockholders' equity (Note 7):
Preferred stock, $.001 par value; 1,000,000 shares authorized,
none outstanding -
Common stock, $.001 par value; 10,000,000 shares authorized,
3,937,871 shares outstanding 3,938
Additional paid-in capital 4,391,747
Retained earnings 105,901
----------
Total stockholders' equity 4,501,586
----------
$6,888,150
==========
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
TIVOLI INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
For Each of The Years In The Two-Year
Period Ended September 30, 1997
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net sales $9,846,174 $6,638,063
Cost of sales 5,686,135 3,779,870
---------- ----------
Gross profit 4,160,039 2,858,193
Selling, general and administrative expenses (Note 5) 3,581,453 2,713,264
---------- ----------
Income from operations 578,586 144,929
---------- ----------
Other income (expenses):
Interest expense (Note 3) (85,153) (64,105)
Interest income 74,925 83,176
---------- ----------
Total other income (expense) (10,228) 19,071
---------- ----------
Income before benefit (provision) for income taxes 568,358 164,000
(Provision) benefit for income taxes (Note 6) (56,593) 2,200
---------- ----------
Net income $ 511,765 $ 166,200
========== ==========
Net income per share $ .13 $ .04
========== ==========
Weighted average shares outstanding 3,933,584 3,920,721
========== ==========
</TABLE>
See accompanying notes to financial statements
F-7
<PAGE>
TIVOLI INDUSTRIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For Each of The Years In The Two-Year
Period Ended September 30, 1997
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings
------------------ Paid-in (Accumulated
Shares Amount Capital Deficit) Total
--------- ------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balances, October 1, 1995 3,920,721 $3,921 $4,352,698 $(572,064) $3,784,555
Net income - - - 166,200 166,200
--------- ------ ---------- --------- ----------
Balances, September 30, 1996 3,920,721 3,921 4,352,698 (405,864) 3,950,755
Issuance of common stock
for services (Note 7) 17,150 17 22,478 - 22,495
Issuance of warrants for
services rendered (Note 7) - - 16,571 - 16,571
Net income - - - 511,765 511,765
--------- ------ ---------- --------- ----------
Balances, September 30, 1997 3,937,871 $3,938 $4,391,747 $ 105,901 $4,501,586
========= ====== ========== ========= ==========
</TABLE>
See accompanying notes to financial statements
F-8
<PAGE>
TIVOLI INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
For Each of The Years In The Two-Year
Period Ended September 30, 1997
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 511,765 $ 166,200
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 163,778 214,861
Change in allowance for doubtful accounts 71,401 1,919
Deferred income taxes 22,639 (8,259)
Common stock issued for services 22,495 -
Warrants for the purchase of common stock
issued for services 16,571 -
Changes in operating assets and liabilities:
Accounts receivable (338,478) (394,069)
Inventories (643,543) (119,232)
Prepaid expenses and other 1,994 (29,284)
Accounts payable 157,492 122,344
Accrued expenses and other current liabilities 112,675 66,471
---------- ----------
Net cash provided by operating activities 98,789 20,951
---------- ----------
Cash flows from investing activities:
Deposits and other 38,656 (91,804)
Capital expenditures (360,583) (215,098)
Patent expenditures (36,428) (111,816)
---------- ----------
Net cash used in investing activities (358,355) (418,718)
---------- ----------
Cash flows from financing activities:
Net borrowings under line of credit and notes
payable to bank (3,080) 118,917
Principal payments on capital lease obligations (40,562) -
---------- ----------
Net cash (used in) provided by financing activities (43,642) 118,917
---------- ----------
Net decrease in cash and cash equivalents (303,208) (278,850)
Cash and cash equivalents, beginning of year 1,692,928 1,971,778
---------- ----------
Cash and cash equivalents, end of year $1,389,720 $1,692,928
========== ==========
Supplemental disclosure of cash flow information -
Cash paid during the year for:
Interest $ 80,153 $ 64,105
========== ==========
Income taxes $ 3,133 $ 800
========== ==========
</TABLE>
Noncash investing and financing activities:
The Company acquired computer software under capital lease obligations totaling
$235,000 during the year ended September 30, 1997
See accompanying notes to financial statements
F-9
<PAGE>
TIVOLI INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
For Each of The Years In The Two-Year
Period Ended September 30, 1997
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------
Organization
- ------------
Effective July 31, 1991, Tivoli Lighting, Inc. acquired 100% of the outstanding
shares of Tivoli Industries, Inc. through a newly formed entity, Tivoli
Acquisition Subsidiary. The acquisition was consummated by a tax-free statutory
merger accounted for under the purchase method of accounting. The purchase
price was $772,852, including acquisition costs of $90,196. The excess of
$659,538 of the purchase price over the fair value of the assets acquired, net
of liabilities assumed, was allocated to goodwill (see below).
Effective June 1994, Tivoli Lighting, Inc. merged into Tivoli Industries, Inc.
with Tivoli Industries, Inc. (the "Company") becoming the surviving entity. The
stockholders of Tivoli Lighting, Inc. received 2,600 shares of Tivoli
Industries, Inc. common stock for each share exchanged. Upon consummation of
the merger, 2,600,000 shares were issued and outstanding. The net assets of
Tivoli Lighting, Inc. were transferred at their historical values upon the
consummation of the merger and the effects of the exchange of shares were
reflected as outstanding for all periods presented.
Business
- --------
The Company manufactures and distributes a broad range of specialty, decorative
accent lighting products using both standard and low voltage electrical power.
The Company's products are primarily for commercial use. The Company's customer
base consists of thousands of clients (unaudited) comprised of national theater
chains, specialty retail stores, casino and gaming establishments, electrical
distributors and wholesalers, hotels and restaurants, specialty vehicular
companies, marine ship-builders, sign manufacturers, and a specialized group of
representatives who resell the Company's products in some international markets.
To date, the Company's sales have been primarily to customers within the United
States.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reported periods.
Actual results could materially differ from those estimates. Significant
estimates made by management include, but are not limited to, the provision for
losses on uncollectible accounts receivable, the net realizability of inventory,
and the impairment of long-lived assets.
Fair Value of Financial Instruments
- -----------------------------------
These historical financial statements contain financial instruments whereby the
fair market value of the financial instruments could be different than that
recorded on a historical basis in the accompanying historical financial
statements. The financial instruments consist of cash and cash equivalents,
accounts receivable, note receivable from related party, accounts payable and
notes payable to bank. The carrying amounts of the Company's financial
instruments generally approximate their fair values as of September 30, 1997.
In the case of the note receivable from related party, which is included in
deposits and other assets in the accompanying balance sheet (see Note 2), it was
not practical to determine the fair value due to the lack of a market for such
financial instrument.
Continued
F-10
<PAGE>
TIVOLI INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1997
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
Concentrations of Credit Risk
- -----------------------------
The Company maintains cash balances at a certain financial institution in excess
of amounts insured by Federal agencies. The potential uninsured amount
aggregates $1,289,221 as of September 30, 1997.
Management believes that the number and diversity of its customer base provides
two advantages: 1) avoiding undue concentration of its accounts on any one
customer, and 2) an increased opportunity to supply and distribute its
increasing number of products. The Company performs periodic credit evaluations
of its customers and does not require collateral; however, the Company does
require deposits for certain large projects and specialized products designed to
a customer's specification. The Company maintains reserves for potential credit
losses. Historically, such losses have been within management's expectations.
During the year ended September 30, 1997, one customer accounted for 14% of net
sales. As of September 30, 1997, no one customer accounted for greater than 10%
of total accounts receivable. During the year ended September 30, 1996, no one
customer accounted for greater than 10% of net sales.
The Company purchased certain products from one supplier which accounted for
27.6% and 23.3% of total purchases in 1997 and 1996, respectively. One supplier
accounted for 21.2% of total accounts payable as of September 30, 1997.
Cash and Cash Equivalents
- -------------------------
Management considers highly liquid instruments with original maturities of 90
days or less when purchased to be cash equivalents. At September 30, 1997, cash
and cash equivalents included approximately $1,017,000 of U.S. Treasury bills.
Inventories
- -----------
Inventories, consisting primarily of component parts, are valued at the lower of
cost (average cost method) or market.
Included in the accompanying balance sheet is inventory with a historical
carrying value of $1,691,943 which represents management's estimate of its net
realizable value. Such value is based or forecasts for sales of the Company's
products in ensuing years. Should demand for the Company's products prove to be
significantly less than anticipated, the ultimate realizable value of such
inventory could be substantially less than the amount shown in the balance
sheet. Management provides an allowance for excess and obsolete inventory which
it believes is adequate to cover such uncertainty.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets using the straight-line method. Repairs
and maintenance are charged to expense as incurred; replacements and betterments
are capitalized.
Useful lives for property and equipment are as follows:
Machinery and equipment 5 years Furniture and fixtures 1 to 5 years
Computer equipment and software 5 years Tooling 5 years
Continued
F-11
<PAGE>
TIVOLI INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1997
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
Included within computer equipment and software is the Company's manufacturing
resource planning system.
Depreciation expense for the years ending September 30, 1997 and 1996 totaled
$98,064 and $157,510, respectively.
The Company assesses the impairment of property and equipment by comparing the
future undiscounted net cash flows from the use and ultimate disposition of such
assets with their carrying amounts. The amounts of impairment, if any, is
measured based on fair value and is charged to operations in the period in which
such impairment is determined by the company. No impairment of property and
equipment has been identified by the company to date.
Goodwill
- --------
Goodwill, which represents the excess of the purchase price over the fair value
of net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited. Management of the Company expects that the goodwill
will have a 30-year life. The Company assesses the recoverability of goodwill
periodically by determining whether the amortization of the goodwill balance
over its remaining life can be recovered through projected undiscounted cash
flows. The amount of goodwill impairment, if any, is charged to operations in
the period in which goodwill impairment is determined by management. As of
September 30, 1997, no impairment of goodwill was determined by management.
Amortization of goodwill for each of the two years ended September 30, 1997
amounted to $21,985.
Patents
- -------
The Company's proprietary products are protected by certain patents and
trademarks. The costs of developing and maintaining existing patents and the
research and development costs incurred in the generation of patents are
expensed as incurred. Costs of successful legal defenses of patents, as
determined by management, are capitalized. A substantial amount of the costs
capitalized in fiscal 1996 were patent defense related. To the extent that the
Company's use of such patents and trademarks is ever successfully challenged,
the Company's future results of operations would be materially adversely
affected. Patents are amortized on a straight-line basis over their respective
lives not to exceed 17 years. Amortization of patents for the years ended
September 30, 1997 and 1996 amounted to $43,729 and $35,366, respectively.
Income Taxes
- ------------
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement 109"). Under Statement 109, an asset and liability method is used
whereby deferred tax assets and liabilities are determined based on temporary
differences between bases used for financial reporting and income tax reporting
purposes. Income taxes are provided based on the enacted tax rates in effect at
the time such temporary differences are expected to reverse. A valuation
allowance is provided for certain deferred tax assets if it is more likely than
not that the Company will not realize tax assets through future operations (see
Note 6).
Revenue Recognition
- -------------------
Revenues from product sales are recognized upon shipment. The Company records a
provision for the effect of returned products at the time the units are shipped.
Historically, the Company has experienced minimal product returns.
Continued
F-12
<PAGE>
TIVOLI INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1997
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
Foreign Currency Transactions
- -----------------------------
The Company obtains certain products from offshore facilities in Taiwan and
Italy. Foreign currency transaction gains or losses are included in operations
in the period in which the exchange rate changes or the underlying transaction
settles. To date, such transaction gains and losses have not been material.
Product Development
- -------------------
Product development expenditures are charged to operations as incurred.
Advertising
- -----------
The Company reports the costs of all advertising as expense in the period in
which those costs are incurred. Advertising expense was approximately $82,000
and $54,000 for the years ended September 30, 1997 and 1996, respectively.
Per Share Information
- ---------------------
Per share information is computed using the weighted average number of common
and common equivalent shares outstanding for the years presented. See "New
Disclosure Standards" below.
Stock-Based Compensation
- ------------------------
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation", which defines a fair value based method of accounting for stock-
based compensation. However, SFAS 123 allows an entity to continue to measure
compensation cost related to stock and stock options issued to employees using
the intrinsic method of accounting prescribed by Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees". Entities
electing to remain with the accounting method of APB 25 must make pro forma
disclosures of net income and earnings per share, as if the fair value method of
accounting defined in SFAS 123 had been applied (see Note 7). The Company has
elected to account for its stock-based compensation to employees under APB 25.
New Disclosure Standards
- ------------------------
In February 1997, Statement of Financial Accounting Standards ("SFAS") No. 128
("SFAS 128"), "Earnings per Share" was issued which establishes new standards
for computing and presenting earnings per share ("EPS"). Specifically, SFAS
128: (a) eliminates the presentation of primary EPS and replaces it with basic
EPS, (b) eliminates the modified treasury stock method and the three percent
materiality provision and (c) revised the contingent share provision and the
supplemental EPS data requirements. SFAS 128 also makes a number of changes to
existing disclosure requirements. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997; early
implementation is not permitted. The Company does not expect that the effect of
adopting SFAS 128 will have a material effect upon the Company's financial
statements.
Continued
F-13
<PAGE>
TIVOLI INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1997
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
In February 1997, the Financial Accounting Standards Board issued SFAS No. 129
("SFAS 129"), "Disclosure of Information about Capital Structure." SFAS 129
requires companies to disclose descriptive information about securities that is
not necessarily related to the computation of earnings per share. It also
requires disclosure of information about the liquidation preference of preferred
stock and redeemable stock. SFAS 129 is effective for financial statements for
periods ending after December 15, 1997. The Company does not expect that the
implementation of SFAS 129 will require signification revision of prior
disclosures.
In June 1997, SFAS No. 130 ("SFAS 130"), "Comprehensive Income" was issued which
becomes effective in 1998 and requires reclassification of earlier financial
statements for comparative purposes. SFAS 130 requires that changes in the
amounts of certain items, including foreign currency translation adjustments and
gains and losses on certain securities, be shown in the financial statements.
SFAS 130 does not require a specific format for the financial statement in which
comprehensive income is reported, but does require that an amount representing
total comprehensive income be reported in that statement. The Company does not
expect that the implementation of SFAS 130 will have a material effect upon the
Company's financial statements.
In June 1997, SFAS No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information" was issued. This statement will change the
way public companies report information about segments of their business in
their annual financial statements and requires them to report selected segment
information in their quarterly reports issued to shareholders. It also requires
entity-wide disclosures about the products, services an entity provides, the
material countries in which it holds assets and reports revenues, and its major
customers. SFAS 131 is effective for fiscal years beginning after December 15,
1997. The Company does not expect that the implementation of SFAS 131 will have
a material effect upon the Company's financial statements.
NOTE 2 - NOTE RECEIVABLE FROM RELATED PARTY
- -------------------------------------------
Included in deposits and other assets in the accompanying balance sheet is a
$50,000 note receivable due from the Company's Chief Executive Officer that
bears an interest rate of 6% per annum and is due on September 30, 1999. The
note is collateralized by 70,000 shares of the Company's common stock owned by
the Chief Executive Officer. No payments for principal or interest were made to
the Company during the periods presented, and no interest income has been
recorded in the accompanying consolidated statements of operations.
NOTE 3 - NOTES PAYABLE TO BANK
- ------------------------------
Notes payable to bank at September 30, 1997 consist of:
<TABLE>
<S> <C>
Line of credit (see discussion below) $667,500
Note payable to bank in monthly installments of $274 plus interest
at prime plus 1% per annum (9.25% at September 30, 1997), due
January 13, 1998, collateralized by a light truck 943
--------
668,443
Less current maturities (943)
--------
$667,500
========
</TABLE>
Continued
F-14
<PAGE>
TIVOLI INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1997
NOTE 3 - NOTES PAYABLE TO BANK, continued
- -----------------------------------------
The Company has a line of credit agreement (the "Agreement") with a financial
institution, bearing interest at the bank's prime rate (8.5% at September 30,
1997) plus 1.0% per annum, which expires on March 1, 1999. The terms of the
Agreement provide for borrowings of up to the lesser of $750,000 or the
aggregate of 80% of eligible accounts receivable plus 50% of eligible inventory
up to $300,000. Such arrangement is secured by substantially all of the
Company's assets. This Agreement contains certain restrictive covenants which
require the Company to maintain certain financial ratios, among other
restrictions.
NOTE 4 - CAPITAL LEASE OBLIGATIONS
- ----------------------------------
On October 10, 1996, the Company entered into a capital lease agreement which
expire in 2002 whereby the Company will lease certain software and hardware in
connection with an integrated manufacturing resource planning system (the "MRP
System"). The present value of the minimum lease payments amounted to $235,000.
The Company, additionally, leases certain equipment under a capital lease which
expires in 2001. Included in the accompanying balance sheet under property and
equipment related to capital lease obligations is the following:
<TABLE>
<S> <C>
Equipment $258,236
Accumulated depreciation (6,196)
--------
$252,040
========
</TABLE>
Future minimum lease obligations pursuant to the capital leases are as follows:
<TABLE>
<CAPTION>
Fiscal Years Ending
-------------------
<S> <C>
1998 $ 62,523
1999 62,523
2000 62,523
2001 60,975
2002 4,823
--------
Total minimum lease obligations 253,367
Less interest, primarily at 8.5% per annum (37,629)
--------
Present value of future minimum lease obligations 215,738
Less current installments (47,213)
--------
Long-term obligations $168,525
========
</TABLE>
Continued
F-15
<PAGE>
TIVOLI INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1997
NOTE 5 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Operating Leases
- ----------------
The Company has two building leases which expire through the year 2001. The
Company also has equipment leases which will expire in 2001.
Future annual minimum rental commitments in the aggregate under these operating
leases are as follows:
<TABLE>
<CAPTION>
Years Ending
September 30,
-------------
<S> <C>
1998 $169,145
1999 150,622
2000 140,984
2001 120,198
2002 3,390
--------
$584,339
========
</TABLE>
Total rent expense under operating leases amounted to $126,036 and $104,063 for
the years ended September 30, 1997 and 1996, respectively.
Employment Agreement
- --------------------
On May 1, 1997, the Company entered into a three year employment agreement with
its Chief Executive Officer, requiring among other things, an annual base salary
of $140,000 in fiscal 1997 with increases of no less than 5% a year in
subsequent years.
Royalty Agreements
- ------------------
The Company has certain royalty agreements in connection with various patents
and a license and distribution agreement which require royalties to be paid on
sales of specific products. For the years ended September 30, 1997 and 1996,
sales levels on those specific products have not been sufficient to require
material royalty payments.
Litigation
- ----------
In the ordinary course of business, there are claims and lawsuits brought by or
against the Company. In the opinion of management, the ultimate outcome of
these matters will not materially affect the Company's operations or financial
position.
Continued
F-16
<PAGE>
TIVOLI INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1997
NOTE 6 - INCOME TAXES
- ---------------------
The following summarizes the (provision) benefit for income taxes for the years
ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current:
Federal $ - $ -
State (33,954) (6,059)
-------- -------
(33,954) (6,059)
-------- -------
Deferred:
Federal (20,013) (3,607)
State (2,626) 11,866
-------- -------
(22,639) 8,259
-------- -------
(Provision) benefit for income taxes $(56,593) $ 2,200
======== =======
</TABLE>
A reconciliation of the expected statutory Federal income tax provision to the
(provision) benefit for income taxes for the years ended September 30, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
(Provision) for income taxes at a Federal statutory rate
of 34% $(193,242) $(55,760)
(Increase) reduction in income taxes resulting from:
Changes in the valuation allowance for deferred tax
assets allocated to income tax 180,704 59,628
State income taxes (36,580) 5,807
Depreciation and amortization primarily due to
timing differences (7,475) (7,475)
--------- --------
(Provision) benefit for income taxes $ (56,593) $ 2,200
========= ========
</TABLE>
Continued
F-17
<PAGE>
TIVOLI INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1997
NOTE 6 - INCOME TAXES, continued
- --------------------------------
At September 30, 1997, significant components of the Company's net deferred
taxes are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 89,514
Property and equipment 22,874
Reserves and allowances 107,962
---------
220,350
Less: valuation allowance (92,950)
---------
Total deferred tax assets 127,400
Deferred tax liabilities-
Computer Software (154,933)
---------
Net deferred tax liability $ (27,533)
=========
</TABLE>
The net change in the valuation allowance was a decrease of approximately
$180,000 for the year ended September 30, 1997.
Because of the "change in ownership" provisions of the Tax Reform Act of 1986,
net operating loss carryforwards for Federal income tax reporting purposes can
be subject to annual limitation.
The Company has federal net operating loss carryforwards of approximately
$263,000 as of September 30, 1997 that expire through the year 2000 and are
subject to annual limitations of $50,000.
NOTE 7 - STOCKHOLDERS' EQUITY
- -----------------------------
Preferred Stock
- ---------------
The Company is authorized to issue up to 1,000,000 shares of preferred stock in
one or more series, the terms of which may be determined at the time of issuance
by the Board of Directors, without further action by the Company's stockholders,
and may include voting rights, preferences as to dividends and liquidation,
conversion and redemptive rights and sinking fund provisions. No shares of
preferred stock are currently outstanding.
Common Stock
- ------------
Private Placement - In April and May of 1994, the Company issued 300,000 equity
units at $1.365 per unit ($409,500), net of offering costs of $13,675. Each
unit consists of one share of the Company's common stock, one redeemable Class A
warrant and one redeemable Class B warrant. The redeemable Class A and B
warrants entitle the holder to purchase one share of the Company's common stock
for $4.25 and $6.25 per share, respectively. Such warrants are redeemable for
$0.05 each, at the Company's option, in the event the Company's common stock
trades in excess of certain price levels, as defined, over 20 consecutive days.
The warrants are exercisable 180 days from the date of issuance and expire three
years from such date.
Continued
F-18
<PAGE>
TIVOLI INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1997
NOTE 7 - STOCKHOLDERS' EQUITY, continued
- ----------------------------------------
Initial Public Offering - On September 21, 1994, the Company issued 925,000
equity units at a price of $3.50 per unit ($3,237,500), net of offering costs
of $783,671. Each unit consists of one share of the Company's common stock, and
one redeemable Class A and one redeemable Class B warrant. On October 21, 1994,
the underwriters exercised their "over-allotment" provision of the underwriting
agreement which resulted in the Company issuing an additional 137,150 units at a
price of $3.50 ($480,025), net of offering costs of $66,264. Class A and B
warrants expired on September 21, 1997 and were subsequently delisted at the
Company's request.
In addition, upon the consummation of the initial public offering, the Company
issued warrants to acquire 8,571 shares of restricted common stock at $0.01 per
share. On October 17, 1994 warrants for 8,571 shares were exercised at $0.01
per share which resulted in net proceeds to the Company of $86.
On August 15, 1996, the Company issued warrants to purchase 10,000 shares of its
common stock as compensation for certain marketing services performed. The
warrants were issued in consideration for $4,000 of services which would have
otherwise been paid in cash. The warrants are exercisable at any time until
their expiration on August 15, 1998 (the "Expiration Date") at an exercise price
of $1.75 per share. Such warrants are subject to, among other things,
adjustment and anti-dilution provisions as more thoroughly described in the
warrant agreement. The Company is obligated to register the warrants, on a best
efforts basis, beginning 30 days after either: (i) the date the warrant has been
fully exercised, or (ii) if the warrant has been exercised in part only, the
Expiration Date, and ending on the date the holder may sell warrant shares to
the public pursuant to Securities and Exchange Commission Rule 144 or, if
earlier, on the date the distribution described in the registration statement is
complete.
During fiscal 1997, the Company issued 17,150 shares of common stock for
services. The services were valued at $22,495.
On December 6, 1996, the Company issued warrants to purchase 12,500 shares of
its common stock as compensation for certain director fees. The warrants are
exercisable at any time after December 6, 1997 until their expiration on
December 4, 2001 (the "Expiration Date") at an exercise price of $1.56 per
share. Such warrants are subject to, among other things, adjustment and anti-
dilution provisions as more thoroughly described in the warrant agreement.
On December 6, 1996, the Company issued warrants to purchase 12,500 shares of
its common stock as compensation for certain director fees. The warrants are
exercisable at any time after December 6, 1998 until their expiration on
December 5, 2001 (the "Expiration Date") at an exercise price of $1.56 per
share. Such warrants are subject to, among other things, adjustment and anti-
dilution provisions as more thoroughly described in the warrant agreement.
Continued
F-19
<PAGE>
TIVOLI INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1997
NOTE 7 - STOCKHOLDERS' EQUITY, continued
- ----------------------------------------
On January 7, 1997, the Company issued warrants to purchase 100,000 shares of
its common stock as compensation for certain professional services performed.
The warrants are exercisable at any time until their expiration on December 31,
2003 (the "Expiration Date") at an exercise price of $1.78 per share. Such
warrants are subject to, among other things, adjustment and anti-dilution
provisions as more thoroughly described in the warrant agreement. The Company
recorded $16,571 for the fair value of the warrants issued, based on an
independent appraisal obtained by the Company.
On January 7, 1997, the Company issued warrants to purchase 50,000 shares of its
common stock as compensation for certain director fees. The warrants are
exercisable at any time until their expiration on February 4, 2002 (the
"Expiration Date") at an exercise price of $1.75 per share. Such warrants are
subject to, among other things, adjustment and anti-dilution provisions as more
thoroughly described in the warrant agreement.
To date, no warrants have been exercised.
Stock Option Plans
- ------------------
In May 1994, the Board of Directors approved the 1994 nonqualified and qualified
stock option plan, and reserved a total of 370,000 shares of the Company's
common stock available for the plan. Options to purchase 105,000 shares were
granted during fiscal 1996 at the estimated fair value of the Company's common
stock of $3.31 per share at the time of grant. The options vest 20% annually,
beginning one year from the date of grant and expire in April 2004. Options to
purchase 70,000 shares were granted during fiscal 1997 at the estimated fair
value of the Company's common stock ranging from $1.38 to $1.75 per share at the
time of grant. The options vest in a range from 20% to 30% annually, beginning
one year from the date of grant and expire on various dates through October
2006.
In February 1995, the Board of Directors approved the 1995 nonqualified and
qualified stock option plan, and reserved a total of 350,000 shares of the
Company's common stock available for the plan. Options to purchase 50,000
shares were granted in fiscal 1995 at the estimated fair value of the Company's
common stock at the time of grant. Options to purchase 191,000 shares were
granted in fiscal 1996 at the estimated fair value of the Company's common stock
of $3.31 per share at the time of grant. The options vest 20% annually,
beginning one year from the date of grant and expire in April 2005. The
Company's stockholders approved this plan on April 21, 1995. Options to
purchase 153,500 shares were granted during fiscal 1997 at the estimated fair
value of the Company's common stock ranging from $1.38 to $1.75 per share at the
time of grant. The options vest in a range from 20% to 30% annually, beginning
one year from the date of grant and expire on various dates through October
2006.
In January 1997, the Board of Directors approved the 1997 nonqualified and
qualified stock option plan, and reserved a total of 390,000 shares of the
Company's common stock available for the plan. The Company's stockholders
approved this plan on March 21, 1997. Options to purchase 275,000 shares were
granted 25,000 of which were to a non-employee, in June 1997 at the estimated
fair value of the Company's common stock of $1.625 per share at the time of
grant. The options vest 25% to 50% annually, beginning one year from the date
of grant and expire in January 2007.
Continued
F-20
<PAGE>
TIVOLI INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1997
NOTE 7 - STOCKHOLDERS' EQUITY, continued
- ----------------------------------------
A summary of all employee stock option activity for the years ended September
30, 1997 and 1996 follows:
<TABLE>
<CAPTION>
Price Range
Options Per Share
--------- -------------
<S> <C> <C>
Balance, October 1, 1995 315,000 $2.80-$5.875
Granted 296,000 $3.31
Canceled (125,000) $3.31-$5.875
Exercised -
--------
Balance, September 30, 1996 486,000 $2.80-$5.875
Granted 473,500 $1.375-$1.75
Canceled (140,834) $1.375-$3.31
Exercised -
--------
Balance, September 30, 1997 818,666 $1.375-$5.875
========
Exercisable, September 30, 1997 204,408
========
</TABLE>
SFAS 123 Pro Forma Information
- ------------------------------
Pro forma information regarding net income and net income per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS 123. The fair value
for these options was estimated at the date of grant using the Black Scholes
option pricing model with the following assumptions for the years ended
September 30, 1997 and 1996; risk free interest rate 5.86%; dividend yield of
0%; expected life of the options of 2 years; and volatility factors of the
expected market price of the Company's common stock of 46-145%.
The Black Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Continued
F-21
<PAGE>
TIVOLI INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1997
NOTE 7 - STOCKHOLDERS' EQUITY, continued
- ----------------------------------------
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option vesting period. Adjustments are made
for options forfeited prior to vesting. The effect on compensation expense, net
income, and net income per common share had compensation cost for the Company's
stock option plans been determined based on a fair value of the date of grant
consistent with the provisions of SFAS 123, for the years ended September 30,
1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Net income, as reported $ 511,765 $166,200
Adjustment to compensation expense under SFAS 123 (130,000) (68,000)
--------- --------
Net income, pro forma $ 381,765 $ 98,200
========= ========
Net income per share, as reported $ .13 $ .04
========= ========
Net income per share, pro forma $ .10 $ .03
========= ========
</TABLE>
NOTE 8 - RELATED PARTY TRANSACTION
- ----------------------------------
The Company made cash payments totaling $106,154 and $52,784 during fiscal 1997
and 1996, respectively, to various related parties of the Company for consulting
services which were capitalized in connection with the Company's manufacturing
resource planning system.
NOTE 9 - SUBSEQUENT EVENT
- -------------------------
On November 1, 1997, the Company and Targetti Sankey S.P.A, a corporation
organized under the laws of Italy, formed a new company "Targetti USA LLC". The
purpose of the new company is to (a) engage in the marketing and sale of
lighting products and (b) engage in any lawful act or activity for which a
limited liability company may be organized under the laws of the State of
California. In connection with this new company the Company entered into an
operating agreement, which among other items outlines the various ownership,
officers, management, and capital contributions of the new company. The Company
is required to contribute a capital contribution of approximately $476,000 of
certain assets and $168,000 of related liabilities to this new company. As of
September 30, 1997, the Company owed Targetti Sankey S.P.A. approximately
$115,000 related to inventory purchases. The Company intends to consolidate the
operating results of Targetti USA LLC with the operating results of the Company.
F-22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Tivoli Industries, Inc.
Dated: June 5, 1998 By: /s/ Terrence C. Walsh
--------------------------------
Terrence C. Walsh
Chairman and Chief Executive
Officer
