<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For Quarterly Period Ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
Commission File Number: 0-24604
TIVOLI INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specifies in its charter)
California 95-2786709
- --------------------------------------------------------------------------------
(State or 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)
(714) 957-6101
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at December 31, 1997
----- --------------------------------
<S> <C>
Common stock, $.001 par value 3,937,871
</TABLE>
<PAGE>
TIVOLI INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page No.
<C> <S> <C>
Item 1. Financial Statements (Unaudited)
Balance Sheet December 31, 1997...................... 3
Statements of Operations
Three Months Ended December 31, 1997 and 1996........ 4
Statements of Cash Flows
Three Months Ended December 31, 1997 and 1996........ 5
Notes to Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........ 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................... 10
Item 2. Changes in Securities................................ 10
Item 3. Defaults upon Senior Securities...................... 10
Item 4 Submissions of Matters to a Vote of Security Holders. 10
Item 5 Other Information.................................... 10
Item 6. Exhibits and Reports on Form 8-K..................... 10
Signatures.......................................................... 11
</TABLE>
2
<PAGE>
TIVOLI INDUSTRIES, INC.
BALANCE SHEET
DECEMBER 31,1997
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,883,989
Accounts receivable, less allowance for doubtful
accounts of $79,482 1,405,270
Inventories 1,769,002
Prepaid expenses and other 439,783
----------
Total current assets 5,498,044
----------
Property and equipment:
Machinery and equipment 253,116
Furniture and fixtures 341,290
Tooling 301,877
Computer equipment and software 575,719
----------
1,472,002
Less: accumulated depreciation (714,805)
----------
Net property and equipment 757,197
----------
Goodwill, net of accumulated amortization of $141,122 518,416
Patents, net of accumulated amortization of $179,656 226,895
Deferred tax asset 127,400
Deposits and other 112,965
----------
$7,240,917
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,117,164
Accrued expenses 144,294
Income taxes payable 51,953
Current maturities of obligations under a capital lease 47,823
Current portion of notes payable to bank 71
----------
Total current liabilities 1,361,305
Notes payable to bank, net of current portion 667,500
Obligations under a capital lease, net of current portion 156,390
Deferred tax liability 154,933
Minority Interest 299,128
----------
Total liabilities 2,639,256
----------
Stockholders' equity:
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 4,406,747
Retained earnings 190,976
----------
Total stockholders' equity 4,601,661
----------
$7,240,917
==========
</TABLE>
3
<PAGE>
TIVOLI INDUSTRIES, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended December
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net sales $2,652,918 $1,896,092
Cost of sales 1,519,289 1,033,061
---------- ----------
Gross profit 1,133,629 863,031
Selling, general and administrative expenses 997,996 793,556
---------- ----------
Income from operations 135,633 69,475
Interest expense 3,534 895
Minority interest in net losses of
consolidated subsidiary (8,976)
Income before benefit (provision)
for income taxes 141,075 68,850
(Provision) benefit for income taxes (56,000) 1,972
---------- ----------
Net income $ 85,075 $ 70,552
========== ==========
Basic earnings per share (Note 2) :
Earnings per share $ 0.02 $ 0.02
Weighted average shares 3,937,871 3,920,721
Diluted earnings per share (Note 2) :
Earnings per share $ 0.02 $ 0.02
Weighted average shares 4,546,371 4,031,388
</TABLE>
4
<PAGE>
TIVOLI INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 85,075 $ 70,552
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 73,510 35,771
Change in allowance for doubtful accounts (7,518)
Minority Interest 8,976
Deferred income taxes (41)
Warrants for the purchase of common stock
issued for services 15,000 -
Changes in operating assets and liabilities:
Accounts receivable 208,833 364,606
Inventories (77,059) (123,170)
Prepaid expenses and other (48,577) (2,066)
Accounts payable (12,241) (113,442)
Accrued expenses and other current liabilities (21,798) (25,223)
---------- ----------
Net cash provided by operating activities 224,201 206,987
---------- ----------
Cash flows from investing activities:
Deposits and other 13,683
Capital expenditures (16,663) (246,203)
Patent expenditures 11,074
Net cash (used in) provided by investing activities (16,663) (221,446)
---------- ----------
Cash flows from financing activities:
Investment by minority interest 299,128
Net borrowings under line of credit and
notes payable to bank (872) 19,373
Principal payments on capital lease obligations (11,525) -
---------- ----------
Net cash (used in) provided by financing activities 286,731 19,373
---------- ----------
Net increase (decrease) in cash and cash equivalents 494,269 4,914
Cash and cash equivalents, beginning of period 1,389,720 1,692,928
---------- ----------
Cash and cash equivalents, end of period $1,883,989 $1,697,842
========== ==========
</TABLE>
5
<PAGE>
TIVOLI INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statement
presentation.
The Company, in its opinion, has included all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the results of
operations for the quarters ended December 31, 1997 and 1996. The financial
statements and notes thereto should be read in conjunction with the audited
financial statements and notes and form 10-KSB for the year ended September 30,
1997.
NOTE 2 - NEW ACCOUNTING STANDARD
- --------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement
No.128, "Earnings Per Share," which is required to be adopted for fiscal periods
ending after December 15, 1997 (fiscal 1998 for the Company).
The following table represents the reconciliation of Basic EPS to Diluted EPS:
<TABLE>
<CAPTION>
For the quarters ending December 31,
1997 1996
---------------------------- -----------------------------
Income Shares Per Share Income Shares Per Share
Amount Amount
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available
to Shareholders $85,075 3,937,871 $0.02 $70,552 3,920,721 $0.02
Effect of Dilutive
Securities
Warrants 185,000 18,334
Stock Options 423,500 92,333
--------- ---------
Diluted EPS
Income available
to Shareholders $85,075 4,546,371 $0.02 $70,552 4,031,388 $0.02
------- --------- ----- ------- --------- -----
</TABLE>
Options to purchase 453,500 shares of Common Stock at prices between $2.80 and
$3.31 per share were outstanding during the period ending December 31, 1997.
Options to purchase 486,000 shares of Common Stock at prices between $2.80 and
$3.31 per share were outstanding during the period ending December 31, 1996.
These options were not included in the computation of diluted EPS because the
options' exercise price was greater than the average market price of the common
shares. These options which expire between May 10, 2004 and November 14, 2005
were still outstanding at December 31, 1997.
6
<PAGE>
TIVOLI INDUSTRIES, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
The following discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those discussed here. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this section, as
well as in the Company's Form 10-KSB for the fiscal year ended September 30,
1997.
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 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") down-lights, 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, $9,846,174 in fiscal 1997, and $2,652,918 in the first three months of
fiscal 1998. Management believes that the growth strategies and expenditures
made from acquisition through December 31, 1997 account for the strong annual
growth rate and provide an expanded foundation to support future Company growth.
7
<PAGE>
TIVOLI INDUSTRIES, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS - continued
-------------------------
Results of Operations - Three Months Ended December 31, 1997 as Compared to
Three Months Ended December 31, 1996
Net sales of $2,652,918 for the first quarter of fiscal year 1998 were 40%
higher than net sales of $1,896,092 in the same period of the prior year. This
increase was attributed to new product introductions and successful
implementation of market penetration programs in the core markets of theater,
retail and casino gaming and expansion of the sales of products sold through
Targetti USA, LLC. The gross profit margin for the first quarter of the fiscal
year 1998 was 42.7% of net sales which was lower than the gross profit margin of
45.5% for the first quarter of fiscal year 1997. The first quarter of fiscal
year 1997 benefited from the capitalization of certain warehouse costs in
inventory.
Selling, general and administrative expenses for the first quarter of fiscal
1998 decreased to 37.6% of net sales or $997,996 as compared to 41.9% or
$793,556 in the same quarter of the prior year. This decrease in SG&A expenses
as a percentage of sales was related to the increase in sales volume described
above and increased efforts to control operating costs.
Operating profits for the first quarter of fiscal year 1998 increased to
$135,633 or 5.1% of net sales as compared to $69,475 or 3.7% of net sales in the
same quarter of fiscal year 1996.
Net interest expense for the first quarter of fiscal year 1998 was $3,534 and
consisted of interest income of $15,516 on the investment of the proceeds of IPO
funds, less interest expense on the bank loan of $14,886 and capital lease
interest of $4,164. Net interest expense for the first quarter of fiscal year
1997 was $895 and was derived from interest income of $19,090 on the investment
of IPO funds less interest expense on the bank loan of $19,985.
The provision for income tax in the first quarter of fiscal year 1998 was
$56,000 and represented both federal and state income tax requirements. In the
same quarter of the prior fiscal year 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 first quarter of fiscal
year 1998 was $85,075 or $0.02 per share as compared to net income of $70,552 or
$0.02 per share in the 1997 fiscal year.
8
<PAGE>
TIVOLI INDUSTRIES, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS - continued
-------------------------
Financial Position, Capital Resources and Liquidity
The Company's primary sources of cash during the first quarter of fiscal year
1998 were funds generated through operations of $247,704 which consisted of net
income of $85,075, depreciation and amortization of $73,510, and net changes in
accounts receivable, inventory and accounts payable of $119,533. In addition,
Targetti Sankey S.P.A. contributed cash of $286,494 to the Targetti USA, LLC
partnership during the period.
Working capital increased to $4,145,715 at December 31, 1997, as compared to
$3,725,303 at September 30, 1997. A portion of this increase was due to the
cash contribution of $286,494 by Targetti Sankey S.P.A. referenced above.
Accounts receivable as of December 31, 1997, decreased to $1,414,246 from
$1,615,561 at September 30, 1997. The days sales outstanding in accounts
receivable decreased to 49 days at December 31, 1997, as compared to 59 days at
September 30, 1997.
Inventories as of December 31, 1997, increased to $1,769,002 as compared to
$1,691,943 at September 30, 1997. The number of months costs of sales in
inventory at December 31, 1997, decreased to 3.5 months as compared to 3.6
months at September 30, 1997.
Accounts payable as of December 31, 1997, decreased to $1,117,164 as compared
to $1,129,405 at September 30, 1997. The number of days in accounts payable
remained constant at 56 days at December 31,1997 and September 30, 1997.
Capital expenditures in the first three months of fiscal year 1998 totaled
$16,663 and consisted of new product tooling, and related machinery and
equipment.
The Company is currently assessing computer hardware and software difficulties
that may be experienced in connection with the so-called "Year 2000" problems.
The Company currently relies upon computer hardware and software systems from
various third party vendors to manage critical functions of the company.
Internally generated software systems do not comprise a material element of the
Company's information technology. The Company is in the process of securing from
third party software and hardware vendors, including providers of telephone
services, certificates of compliance with Year 2000 issues for currently
installed systems that are material to the Company's operations. At this time,
the Company expects that its key information technology vendors will be
compliant with Year 2000 requirements. A failure by a third party vendor to
adequately address the Year 2000 issue would have a material adverse effect on
the Company. In addition, the magnitude of certain risks, for example those
associated with embedded chips, are unknown at this point, and could
nevertheless have a material adverse impact on the Company and other companies
in its industry.
9
<PAGE>
TIVOLI INDUSTRIES, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
Bank agreement effective April 22, 1997.
b) Reports on Form 8-K
None
10
<PAGE>
TIVOLI INDUSTRIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 10, 1998 TIVOLI INDUSTRIES, INC.
/s/ Terrence C. Walsh
-----------------------------------------
Terrence C. Walsh
Chairman, Chief Executive Officer and
Director
/s/ Charles Kimmel
-----------------------------------------
Charles Kimmel
President, Chief Operation Officer and
Chief Financial Officer
(Principal Financial and Accounting Officer)
11
<PAGE>
EXHIBIT 99.1
UNION BANK OF CALIFORNIA
BUSINESS LOAN AGREEMENT
This Business Loan Agreement (this "Agreement") is entered into as of the date
set forth below between Union Bank of California. N.A. ("Bank") and the
undersigned ("Borrower") with respect to each and every extension of credit
(whether one of more, collectively referred to as the "Loan") from Bank to
Borrower. In consideration of the Loan, Bank and Borrower agree to the
following terms and conditions.
1. THE LOAN
1.1 The Note. The Loan is evidenced by one or more promissory notes or
other evidences of indebtedness, including each amendment, extension,
renewal or replacement thereof, which are incorporated herein by this
reference (whether one or more, collectively referred to as the "Note").
1.2 Revolving Loan Clean-up Period. For any portion of the Loan which is
a revolving loan, at least N/A consecutive days during each 12 month
---
period, the principal amount outstanding under such revolving loan must be
zero.
1.3 Term Loan Availability Period. For any portion of the Loan which is a
term loan, loan proceeds shall be available for disbursement from N/A.
---
199_, through __________. 199_, only.
1.4 Fee. Borrower shall pay to Bank a fee of $0.00.
----
1.5 Collateral. The payment and performance of all obligations of
Borrower under the Loan Documents are and shall be during the term of the
Loan secured by a perfected security interest in such real or personal
property collateral as is required by Bank.
1.6 Guaranty. The payment and performance of all obligations of Borrower
under the Loan Documents are and shall be during the term of the Loan
guaranteed by: N/A
---
1.7 Subordination. Certain other obligations of Borrower are and shall be
during the term of the Loan subordinated to the repayment of the Loan and
all other obligations of Borrower to Bank, pursuant to one or more
subordination agreement(s) in favor of Bank executed and delivered by:
____________
_______________________________________________________________________________.
2. CONDITIONS TO AVAILABILITY OF THE LOAN. Before Bank is obligated to
disburse all or any portion of the Loan, Bank must have received (a) the Note
and every other document required by Bank in connection with the Loan, each of
which must be in form and substance satisfactory to Bank (together with this
Agreement, referred to as the "Loan Documents"), (b) confirmation of the
perfection of its security interest in any collateral for the Loan, and (c)
payment of any fee required in connection with the Loan.
3. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants (and each
request for a disbursement of the proceeds of the Loan shall be deemed a
representation and warranty made on the date of such request) that:
3.1 Borrower is an individual or Borrower is duly organized and existing
under the laws of the state of its organization and is duly qualified to
conduct business in each jurisdiction in which its business is conducted;
<PAGE>
3.2 The execution, delivery and performance of the Loan Documents executed
by Borrower are within Borrower's power, have been duly authorized, are
legal, valid and binding obligations of Borrower, and are not in conflict
with the terms of any charter, bylaw or other organization papers of
Borrower or with any law, indenture, agreement or undertaking to which
Borrower is a party or by which Borrower is bound or affected:
3.3 All financial statements and other financial information submitted by
Borrower to Bank are true and correct in all material respects, and there
has been no material adverse change in Borrower's financial condition since
the date of the latest of such financial statements:
3.4 Borrower is properly licensed and in good standing in each state in
which Borrower is doing business, and Borrower has complied with all laws
and regulations affecting Borrower, including without limitation, each
applicable fictitious business name statute;
3.5 There is no event which is, or with notice or lapse of time or both
would be, and Event of Default (as defined in Article 5);
3.6 Borrower is not engaged in the business of extending credit for the
purpose of, and no part of the Loan will be used, directly or indirectly,
for purchasing or carrying margin stock within the meaning of Federal
Reserve Board Reg. U; and
3.7 Borrower is not aware of any fact, occurrence or circumstance which
Borrower has not disclosed to Bank in writing which has, or could
reasonably be expected to have, a material adverse effect on Borrower's
ability to repay the Loan or perform its obligations under the Loan
Documents.
4. COVENANTS. Borrower agrees, so long as the Loan or any commitment to make
any advance under the Loan is outstanding and until full and final payment of
all sums outstanding under any Loan Document, that Borrower will:
4.1 Maintain:
(a) Working Capital of at least $N/A (As used herein, "Working Capital"
---
means the excess of current assets over current liabilities):
(b) A ratio of current assets to current liabilities of at least N/A:1.00:
---
(c) A quick ratio of cash, accounts receivable and marketable securities to
current liabilities of at least N/A:1.00:
---
(d) Tangible Net Worth of at least $3,000,000.00 (As used herein, "Tangible
------------
Net Worth" means net worth increased by indebtedness of Borrower
subordinated to Bank and decreased by patents, licenses, trademarks, trade
names, goodwill and other similar intangible assets, organizational
expenses, and monies due from affiliates (including officers, shareholders
and directors)):
(e) A ratio of total liabilities to Tangible Net Worth of not greater than
N/A: 1.00 (As used herein "Tangible Net Worth" means net worth increased by
---
indebtedness of Borrower subordinated to Bank and decreased by patents,
licenses, trademarks, trade names, goodwill and other similar intangible
assets, organizational expenses, and monies due from affiliates (including
officers, shareholders and directors)):
<PAGE>
(f) A ratio of Cash Flow to Debt Service of at least N/A, to be measured as
---
of the end of each fiscal __________ of Borrower for the _____________
period immediately preceding the date of measurement:
(g) A ratio of Cash Flow to Debt Service of at least N/A:1:00. Compliance
---
with this subsection to be measured as of the end of each fiscal
_____________ of Borrower. (As used herein, "Cash Flow" means net profit
after taxes, to which depreciation, amortization and other non-cash
expenses are added for the ______________ month period immediately
preceding the date of calculation, and "Debt Service" means that portion of
long-term liabilities and capital leases coming due within _________ months
after the date of calculation): and
(h) N/A ___________________________________________________________________
---
___________________________________________________________________________
All accounting terms used in this Agreement shall have the definitions
given them by generally accepted accounting principles, unless otherwise
defined herein.
4.2 Give written notice to Bank within 15 days of the following:
(a) Any litigation or arbitration proceeding affecting Borrower where the
amount in controversy is $100,000.00 or more:
----------
(b) Any material dispute which may exist between Borrower and any
government body or law enforcement body;
(c) Any Event of Default or any event which, upon notice, or lapse of time,
or both, would become an Event of Default;
(d) Any other matter which has resulted or is likely to result in a
material adverse change in Borrower's financial condition or operation; and
(e) Any change in Borrower's name or the location of Borrower's principal
place of business, or the location of any collateral for the Loan, or the
establishment of any new place of business or the discontinuance of any
existing place of business.
4.3 Furnish to Bank an income statement, balance sheet, and statement of
retained earnings, with supportive schedules ("Financial Statement") and
any other financial information requested by Bank, prepared in accordance
with generally accepted accounting principles and in a form satisfactory to
Bank as follows:
(a) Within 60 days after the close of each 6 Month Interim Fiscal Period
-- -----------------------------
Borrower's Financial Statement as the close of such period:
(b) Within 120 days after the close of each fiscal year, a copy of
---
Borrower's annual Financial Statement prepared by an independent certified
------------------------
public accountant on an audited basis. Any independent certified public
----------------- -------
accountant who prepares Borrower's Financial Statement shall be selected by
Borrower and reasonably satisfactory to Bank;
(c) Annually, upon request, a copy of each guarantor's annual Financial
Statement:
(d) If a Borrowing Base Addendum is made part of this Agreement, within
20 days after each calendar month-end, in form required by Bank, a copy of
--
Borrower's monthly accounts receivable and accounts payable agings, a
report of Borrower's inventory, and a certificate of compliance with the
borrowing base described in said Borrowing Base Addendum, which certificate
shall accurately report the collateral in form required by Bank; and
(e) Promptly upon request, any other financial information requested by
Bank.
4.4 Furnish to Bank, on Bank's request, a copy of Borrower's and each
guarantor's most recently filed federal income tax return with all
accompanying schedules.
<PAGE>
4.5 Pay or reimburse Bank for all costs, expenses and fees incurred by
Bank in preparing and documenting this Agreement and the Loan, and all
amendments and modifications thereof, including but not limited to all
filing and recording fees, costs of appraisals, insurance and attorney's
fees, including the reasonable estimate of the allocated costs and expenses
of in-house legal counsel and staff.
4.6 Maintain and preserve Borrower's existence, present form of business
and all rights, privileges and franchises necessary or desirable in the
normal course of its business, and keep all of Borrower's properties in
good working order and condition.
4.7 Maintain and keep in force insurance with companies acceptable to
Bank and in such amounts and types, including without limitation fire and
public liability insurance, as is usual in the business carried on by
Borrower, or as Bank may reasonably request. Such insurance policies must
be in form and substance satisfactory to Bank.
4.8 Maintain adequate books, accounts and records and prepare all
financial statements required hereunder in accordance with generally
accepted accounting principles, and in compliance with the regulations of
any governmental regulatory body having jurisdiction over Borrower or
Borrower's business and permit employees or agents of Bank at any
reasonable time to inspect Borrower's assets and properties, and to examine
or audit Borrower's books, accounts and records and make copies and
memoranda thereof.
4.9 At all times comply with, or cause to be complied with, all laws,
statutes, rules, regulations, orders and directions of any governmental
authority having jurisdiction over Borrower or Borrower's business, and all
material agreements to which Borrower is a party.
4.10 Except as provided in this Agreement, or in the ordinary course of
its business as currently conducted, not make any loans or advances, become
a guarantor or surety, pledge its credit or properties in any manner, or
extend credit.
4.11 Not purchase the debt or equity of another person or entity except
for savings accounts and certificates of deposit of Bank, direct U.S.
Government obligations and commercial paper issued by corporations with top
ratings of Moody's or Standard & Poor's, provided that all such permitted
investments shall mature within one year of purchase; *see Addendum 4.11(a)
4.12 Not create, assume or suffer to exist any mortgage, encumbrance,
security interest, pledge or lien ("Lien") on Borrower's real or personal
property, whether now owned or hereafter acquired, or upon the income or
profits thereof except the following: (a) Liens in favor of Bank, (b) Liens
for taxes or other items not delinquent or contested in good faith and (c)
other Liens which do not exceed in the aggregate $N/A at any one time.
---
4.13 Not sell or discount any account receivable or evidence of
indebtedness, except to Bank: not borrow any money or become contingently
liable for money borrowed, except pursuant to agreements made with Bank.
4.14 Neither liquidate, dissolve, enter into any consolidation, merger,
partnership or other combination; nor convey, sell or lease all or the
greater part of its assets or business; nor purchase or lease all or the
greater part of the assets or business of another.
4.15 Not engage in any business activities or operations substantially
different from or unrelated to Borrower's present business activities and
operations.
4.16 Not, in any single fiscal year of Borrower, expend or incur
obligations of more than $N/A for the acquisition of fixed or capital
---
assets.
<PAGE>
4.17 Not, in any single fiscal year of Borrower, enter into any lease of
real or personal property which would cause Borrower's aggregate annual
obligations under all such real and personal property leases to exceed
$N/A.
---
4.18 Borrower will promptly, upon demand by Bank, take such further action
and execute all such additional documents and instruments in connection
with this Agreement as Bank in its reasonable discretion deems necessary,
and promptly supply Bank with such other information concerning its affairs
as Bank may request from time to time.
5. EVENTS OF DEFAULT. The occurrence of any of the following events ("Events
of Default") shall terminate any obligation on the part of Bank to make or
continue the Loan and automatically, unless otherwise provided under the Loan
Documents, shall make all sums of interest and principal and any other amounts
owing under the Loan immediately due and payable, without notice of default,
presentment or demand for payment, protest or notice of nonpayment or dishonor,
or any other notices or demands:
5.1 Borrower shall default in the due and punctual payment of the
principal of or the interest on the Note or any of the other Loan
Documents.
5.2 Any default shall occur under the Note or any of the other Loan
Documents:
5.3 Borrower shall default in the due performance or observance of any
covenant or condition of the Loan Documents:
5.4 Any guaranty or subordination agreement required hereunder shall be
breached or become ineffective, or any guarantor or subordinating creditor
shall die or disavow or attempt to revoke to terminate such guaranty or
subordination agreement:
or
5.5 There shall be a change in ownership or control of 10% or more of the
issued and outstanding stock of Borrower or any guarantor, or (if the
Borrower is a partnership) there shall be a change in ownership or control
of any general partner's interest.
6. MISCELLANEOUS PROVISIONS
6.1 The rights, powers and remedies given to Bank hereunder shall be
cumulative and not alternative and shall be in addition to all rights,
powers and remedies given to Bank by law against Borrower or any other
person, including but not limited to Bank's rights of setoff and banker's
lien.
6.2 Any forbearance or failure or delay by Bank in exercising any right,
power or remedy hereunder shall not be deemed a waiver thereof and any
single or partial exercise of any right, power or remedy shall not preclude
the further exercise thereof. No waiver shall be effective unless it is in
writing and signed by an officer of Bank.
6.3 The benefits of this Agreement shall inure to the successors and
assigns of Bank and the permitted successors and assigns of Borrower
without Bank's consent shall be null and void.
6.4 This Agreement and all other agreements and instruments required by
Bank in connection herewith shall be governed by and construed according to
the laws of the State of California.
<PAGE>
6.5 Should any one or more provisions of this Agreement be determined to
be illegal or unenforceable, all other provisions nevertheless shall be
effective.
6.6 Except for documents and instruments specifically referenced herein,
this Agreement constitutes the entire agreement between Bank and Borrower
regarding the Loan and all prior communications, verbal or written, between
Borrower and Bank shall be of no further effect or evidentiary value.
6.7 The section and subsection headings herein are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
6.8 This Agreement may be amended only in writing signed by all parties
hereto.
6.9 Borrower and Bank may execute one or more counterparts to this
Agreement, each of which shall be deemed an original, but taken together
shall be one and the same instrument.
6.10 Any notices or other communications provided for or allowed hereunder
shall be effective only when given by one of the following methods and
addressed to the respective party at its address given with the signatures
at the end of this Agreement and shall be considered to have been validly
given: (a) upon delivery, if delivered personnally; (b) upon receipt, if
mailed, first class postage prepaid, with the United States Postal Service;
(c) on the next business day if sent by overnight courier service of
recognized standing; and (d) upon telephoned confirmation of receipt, if
telecopied.
7. ADDITIONAL PROVISIONS
The following additional provisions, if any, are hereby made a part of this
Agreement:
THIS AGREEMENT is executed on behalf of the parties as of _______________, 199_.
Union Bank of California, N.A. Tivoli Industries, Inc.
("Bank") ("Borrower")
By: /s/ Kurt Ross By: /s/ Terrence C. Walsh
Title: Vice President Title: President
Printed Name: Kurt W. Ross Printed Name: Terrence C. Walsh
By:
Title:
Printed Name:
<PAGE>
Address where notices to Bank Address where notices to Borrower
are to be sent: are to be sent:
. UBOC - South Orange County BBC . Tivoli Industries, Inc.
. 23511 Paseo de Valencia . 1513 E. St. Gertrude
. Laguna Hills, CA 92653 . Santa Ana, CA 92705
Attn: Kurt W. Ross Attn: Terrence C. Walsh
Fax Number: (714)457-1148 Fax Number: (714)
Telephone No. (714)457-1145 Telephone No. (714)957-6101
<PAGE>
ADDENDUM 4.11(a)
provided, however, that (i) so long as no Event of Default or event which, with
notice or lapse of time, or both, would become an Event of Default has occured
and is continuing or would result from such acquisition, (ii) such acquisition
is not contested by such other person or entity and (iii) the consideration paid
or to be paid by the Borrower in connection with such acquisition does not
exceed Two Million Dollars ($2,000,000.00) in the aggregate, the Borrower may
acquire the stock or assets of any other person or entity.
<PAGE>
BORROWING BASE ADDENDUM
This Borrowing Base Addendum is hereby made a part of and incorporated into the
Business Loan Agreement dated as of _________, 199_, as amended and supplemented
from time to time (the "Agreement") between Union Bank of California, N.A. and
the undersigned ("Borrower").
1.8 Borrowing Base. An amount of the Loan equal to $750,000.00, evidenced by
----------
the Note dated _________, 199_, or any substitutions or replacements thereof, is
a revolving loan subject to a borrowing base ("Borrowing Base Loan").
Notwithstanding any other provision of the Agreement or any other Loan Document,
Bank shall not be obligated to advance any funds under the Borrowing Base Loan
if the principal amount of such Borrowing Base Loan including such advance
exceeds 80% of Borrower's Eligible Accounts plus 50% of Borrower's Eligible
-- --
Inventory. However, extensions of credit under the Borrowing Base Loan which are
based on availability under Borrower's Eligible Inventory shall not at any time
exceed $300,000.00. If at any time Borrower's obligations to Bank under the
----------
Borrowing Base Loan exceed the sum so permitted, Borrower shall immediately
repay to Bank such excess.
The term "Accounts" means all presently existing and hereafter arising accounts
receivable, contract rights, chattel paper, and all other forms of obligations
owing to Borrower, payable in U.S. Dollars, arising out of the sale or lease of
goods, or the rendition of services by Borrower, whether or not earned by
performance, and any and all credit insurance, guaranties and other security, as
well as all merchandise returned to or reclaimed by Borrower and Borrower's
books and records relating to any of the foregoing.
The term "Eligible Accounts" means those Accounts, net of finance charges, which
are due and payable within ninety (90) days, or less, from the date of invoice,
----------
have been validly assigned to Bank and strictly comply with all of Borrower's
representations and warranties to Bank, but Eligible Accounts shall not include
the following:
(a) Any Account with respect to which the account debtor is an officer,
shareholder, director, employee or agent of Borrower:
(b) Any Account with respect to which the account debtor is a subsidiary
of, related to, or affiliated or has common officers or directors with Borrower:
(c) Any Account relating to goods placed on consignment, guaranteed sale or
other terms by reason of which the payment by the account debtor may be
conditional:
(d) Any Account with respect to which the account debtor is not a resident
of the United States:
(e) Any Account with respect to which the account debtor is the United
States or any department, agency or instrumentality of the United States:
(f) Any Account with respect to which Borrower is or may become liable to
the account debtor for goods sold or services rendered by the account debtor to
Borrower:
(g) Any Account with respect to which there is asserted a defense,
counterclaim, discount or setoff, whether well-founded or otherwise; except for
those discounts, allowances and returns arising in the ordinary course of
Borrower's business:
(h) Any Account with respect to which the account debtor becomes insolvent,
fails to pay its debts as they mature or goes out of business or which is owed
by an account debtor which has become the subject of a proceeding under any
provision of the United States Bankruptcy Code, as amended, or under any other
bankruptcy or insolvency law, including, but not limited to, assignments for the
benefit of
<PAGE>
creditors, formal or informal moratoriums, compositions or extensions with all
or substantially all of its creditors:
(i) Any account owed by any account debtor with respect to which twenty-
five percent (25%) or more of the aggregate dollar amount is its Accounts is not
paid within ninety (90) days from the date of invoice:
(j) Any Account that is not paid by the account debtor within ninety (90)
days of the date of invoice:
(k) That portion of the Account owed by any single account debtor which
exceeds 25% of all of the Accounts:
--
(l) Any Account which Bank deems not to be an Eligible Account: and
(m) N/A____________________________________________________________________
---
________________________________.
The term "Inventory" means all present and future inventory of Borrower
held by Borrower for sale or lease or to be furnished under a contract of
service and all of Borrower's present and future raw materials, work in process
used or consumed in Borrower's business.
The term "Eligible Inventory" means that portion of Borrower's Inventory of
raw materials and finished goods consisting of Borrower's main line(s) of
business products, which is (a) owned by Borrower, free and clear of all liens
and encumbrances except those in favor of Bank, (b) held for sale or lease by
Borrower and normally and currently saleable in the ordinary course of
Borrower's business, (c) of good and merchantable quality, free from defects (d)
located only at locations of which Bank is notified in writing, and (e) at all
times subject to a perfected first priority security interest in favor of Bank.
"Eligible Inventory" does not include any of the following: work in process,
spare parts, returned items, damaged, defective or recalled items, items unfit
for further processing, obsolete or unmerchantable items, items used as
salesperson's samples or demonstrators, inventory held in stock more than twelve
(12) months, or inventory which Bank otherwise deems not to be Eligible
Inventory.
Capitalized terms used herein which are not otherwise defined shall have the
meanings given to them in the Agreement.
Union Bank of California, N.A. Tivoli Industries, Inc.
("Bank") ("Borrower")
By: /s/ Kurt W. Ross By: /s/ Terrence C. Walsh
Title: Vice President Title: President
Printed Name: Kurt W. Ross Printed Name: Terrence C. Walsh
By:
Title:
Printed Name:
<PAGE>
UNION BANK OF CALIFORNIA
COMMERCIAL PROMISSORY NOTE
<TABLE>
<S> <C> <C>
Borrower Name:
TIVOLI INDUSTRIES, INC.
Borrower Address: Office: Loan Number:
1513 E. ST. GERTRUDE PLACE 04402 9209823046 0002010001
SANTA ANA, CA 92705
Maturity Date: Amount:
MARCH 1, 1999 $750,000.00
________________________________________________________________________________
DATE:
April 22, 1997 $750,000.00
</TABLE>
FOR VALUE RECEIVED, on March 1, 1999 the undersigned ("Debtor") promises to pay
-------------
to the order of UNION BANK OF CALIFORNIA, N.A. ("Bank"), as indicated below, the
principal sum of Seven hundred fifty thousand and no/100 Dollars ($750,000.00),
--------------------------------------- -----------
or so much thereof as is disbursed, together with interest on the balance of
such principal sum from time to time outstanding, at a per annum rate equal to
the Reference Rate plus one and no/100 percent (1.000%), such per annum rate to
-------------- ------
change as and when the Reference Rate shall change.
As used herein, the term "Reference Rate" shall mean the rate announced by Bank
from time to time at its corporate headquarters as its "Reference Rate." The
Reference Rate is an index rate determined by Bank from time to time as a means
of pricing certain extensions of credit and is neither directly tied to any
external rate of interest or index nor necessarily the lowest rate of interest
charged by Bank at any given time. All computations of interest under this note
shall be made on the basis of a year of 360 days, for actual days elapsed.
1. Interest Payments. Debtor shall pay interest on the 1st day of each month
--- -----
commencing May 1, 1997. Should interest not be so paid, it shall become a part
-----------
of the principal and thereafter bear interest as herein provided.
At any time prior to the maturity of this note, the maker(s) may borrow, repay
and reborrow hereon so long as the total outstanding at any one time does not
exceed the principal amount of this note.
Debtor shall pay all amounts due under this note in lawful money of the United
States at Bank's South Coast County - BBC Office, or such other office as may be
------------------------
designated by Bank, from time to time.
2. Late payments. If any installment payment required by the terms of this
note shall remain unpaid ten days after due, at the option of Bank, Debtor shall
pay a fee of $100 to Bank.
3. Interest Rate Following Default. In the event of default, at the option of
Bank, and, to the extend permitted by law, interest shall be payable on the
outstanding principal under this note at a par annum rate equal to five percent
(5%) in excess of the interest rate specified in the initial paragraph of this
note, calculated from the date of default until all amounts payable under this
note are paid in full.
4. Default and Acceleration of Time For Payment. Default shall include , but
not be limited to, any of the following: (a) the failure of Debtor to make any
payment required under this note when due; (b) any breach, misrepresentation or
other default by Debtor, any guarantor, co-maker, endorser, or any person
<PAGE>
or other entity other than Debtor providing security for this note (hereinafter
individually and collectively referred to as the "Obligor") under any security
agreement, guaranty or other agreement between Bank and any Obligor; (c) the
insolvency of any Obligor or the failure of any Obligor generally to pay such
Obligor's debts as such debts become due; (d) the commencement as to any Obligor
of any voluntary or involtary proceeding under any laws relating to bankruptcy,
insolvency, reorganization, arrangement, debt adjustment or debtor relief; (e)
the assignment by any Obligor's creditors; (f) the appointment, or commencement
of any proceedings for the appointment, of a receiver, trustee, custodian or
similar official for all or substantially all of any Obligor's property; (g) the
commencement of any proceeding for the dissolution or liquidation of any
Obligor; (h) the termination of existence or death of any Obligor; (i) the
revocation of any guaranty or subordination agreement given in connection with
this note (j) the failure of any Obligor to comply with any order, judgment,
injunction, decree, writ or demand of any court or other public authority; (k)
the filing or recording against any Obligor, or the property of any authority;
(k) the filing or recording against any Obligor, or the property of any Obligor,
of any notice of levy, notice to withhold, or other legal process for taxes,
other than property taxes (l) the default by any Obligor personally liable for
amounts owed hereunder on any obligation concerning the borrowing of money; (m)
the issuance against any Obligor, or the property of any Obligor,of any writ of
attachment, execution, or other judicial lien; or (n) the deterioration of the
financial condition of any Obligor which results in Bank deeming itself, in good
faith, insecure.
Upon the occurrence of any such default, Bank, in its discretion, may cease to
advance funds hereunder and may declare all obligations under this note
immediately due and payable; however, upon the occurrence of an event of default
under d, e, f, or g, all principal and interest shall automatically become
immediately due and payable.
5. Additional Agreements of Debtor. If any amounts owing under this note are
not paid when due, Debtor promises to pay all costs and expenses, including
reasonable attorney's fees, incurred by Bank in the collection of enforcement of
this note. Debtor and any endorsers of this note, for the maximum period of
time and the full extent permitted by law, (a) waive diligence, presentment,
demand, notice of nonpayment, protest, notice of protest, and notice of every
kind; (b) waive the right to assert the defense of any statute of limitations to
any debt or obligation hereunder; and (c) consent to renewals and extensions of
time for the payment of any amounts due under this note. If this note is signed
by more than one party, the term "Debtor" includes each of the undersigned and
any successors in interest thereof; all of whose liability shall be joint and
several. Any married person who signs this note agrees that recourse may be had
against the separate property of that person for any obligations hereunder. The
receipt of any check or other item of payment by Bank, at its option, shall not
be considered a payment on account until such a check or other item of payment
is honored when presented for payment at the drawee bank. Bank may delay the
credit of such payment based upon Bank's schedule of funds availability, and
interest under this note shall accrue until the funds are deemed collected. In
any action brought under or arising out of this note, Debtor and any endorser of
this note, including their successors and assigns, hereby consents to the
jurisdiction of any competent court within the State of California, as provided
in any alternative dispute resolution agreement executed between Debtor and
Bank, and consents to service of process by any means authorized by California
law. The term "Bank" includes, without limitation, any holder of this note.
This note shall be construed in accordance with and governed by the laws of the
State of California. This note hereby incorporates any alternative dispute
resolution agreement previously, concurrently or hereafter executed between
Debtor and Bank.
TIVOLI INDUSTRIES, INC.
By: /s/ Terrence C. Walsh
<PAGE>
UNION BANK OF CALIFORNIA
SECURITY AGREEMENT
This Agreement executed at Santa Ana, CA, on April 22, 1997, by Tivoli
------------- -------------- ------
Industries, Inc. (herein called "Debtor"). As security for the payment and
- ----------------
performance of all of Debtor's obligations to Union Bank of California, N.A.,
(herein called "Bank"), irrespective of the manner in which or the time at which
such obligations arose or shall arise, and whether direct or indirect, alone or
with others, absolute or contingent, Debtor does hereby grant a continuing
security interest to Bank in all personal property (herein called "Collateral"),
whether now or hereafter owned or in existence described as
A. Motor Vehicles:
<TABLE>
<CAPTION>
New or Number of
Year Trade Name Body Type Serial Number Used Cylinders
- ---- ---------- --------- ------------- ------ ---------
<S> <C> <C> <C> <C> <C>
</TABLE>
B. Other:
ALL ACCOUNTS, DEPOSIT ACCOUNTS, INSTRUMENTS, CHATTEL PAPER, DOCUMENTS, GENERAL
INTANGIBLES, INVENTORY, EQUIPMENT, FURNITURE, AND FIXTURES, NOW OR HEREAFTER
OWNED OR ACQUIRED BY DEBTOR, ALL PROCEEDS AND INSURANCE PROCEEDS OF THE
FOREGOING, ALL GUARANTEES AND OTHER SECURITY THEREFOR, AND ALL OF DEBTOR'S
PRESENT AND FUTURE BOOKS AND RECORDS RELATING THERETO (INCLUDING COMPUTER-STORED
INFORMATION AND ALL SOFTWARE RELATING THERETO) AND ALL CONTRACT RIGHTS WITH
THIRD PARTIES RELATING TO THE MAINTENANCE OF ANY SUCH BOOKS, RECORDS AND
INFORMATION.
The Collateral described above will be maintained 1513 E. St. Gertrude Place,
---------------------------
Santa Ana, CA and any other locations.
- -------------------------------------
C. All personal property of any kind which is delivered to or in the possession
or control of bank or its agents;
D. Proceeds of any of the above-described property. The grant of a security
interest in proceeds does not imply the right of Debtor to sell or dispose of
any Collateral described herein without the express consent in writing by Bank.
The maximum amount of indebtedness to be secured at any one time is unlimited
unless an amount is inserted N/A________________________________________________
---
_________________________________________ ($N/A).
---
To be completed only if an accommodation) N/A___________________________________
---
________________________________________________________________________________
is executing this Agreement as an Accommodation Debtor only and his liability is
limited to the security interest created in Collateral described herein. The
Debtor being accommodated is N/A________________________________________________
---
__________________________________________________________________________.
All terms and conditions on the reverse side hereof are incorporated herein as
though set forth in full.
TIVOLI INDUSTRIES, INC.
By: /s/ Terrence C. Walsh
<PAGE>
AGREEMENT
1. The term credit is used throughout this Agreement in its broadest and most
comprehensive sense. Credit may be granted at the request of any one Debtor
without further authorization or notice to any other Debtor, including an
Accommodation Debtor. Collateral shall be security for all obligations of
Debtor to Bank in accordance with the terms and conditions herein.
2. Debtor will: (a) execute such Financing Statement and other documents and do
such other acts and things, all as Bank may from time to time require, to
establish and maintain a valid security interest in Collateral, including
payment of all costs and fees in connection with any of the foregoing when
deemed necessary by Bank; (b) pay promptly when due all indebtedness to Bank;
(c) furnish Bank such information concerning Debtor and Collateral as Bank may
from time to time request, including but not limited to current financial
statements; (d) keep Collateral separate and identifiable and at the location
described herein and permit Bank and its representatives to inspect Collateral
and/or records pertaining thereto from time to time during normal business
hours; (e) not sell, assign or create or permit to exist any lien on or security
interest in Collateral in favor of anyone other than the Bank unless Bank
consents thereto in writing and at Debtor's expense upon Bank's request remove
any unauthorized lien or security interest and defend any claim affecting the
Collateral; (f) pay all charges against Collateral prior to delinquency
including but not limited to taxes, assessments, encumbrances, insurance and
diverse claims, and upon Debtor's failure to do so Bank may pay any such charge
as it deems necessary and add the amount paid to the indebtedness of Debtor
hereunder; (g) reimburse Bank for any expenses including but not limited to
reasonable attorneys' fees and legal expenses incurred by Bank in seeking to
protect, collect or enforce any rights in Collateral; (h) when required, provide
insurance in form and amounts and with companies acceptable to Bank and when
required assign the policies or the rights thereunder to Bank; (i) maintain
Collateral in good condition and not use Collateral for any unlawful purpose;
(j) at its own expense, upon request of Bank, notify any parties obligated to
Debtor on any Collateral to make payment to Bank and Debtor hereby irrevocably
grants Bank power of attorney to make said notifications and collections; (k)
and does hereby authorize Bank to perform any and all acts which Bank in good
faith deems necessary for the protection and preservation of Collateral or its
value or Bank's security interest therein, including transferring any Collateral
into its own name and receiving the income thereon as additional security
hereunder. Bank may not exercise any right under any corporate security which
might constitute the exercise of control by Bank so as to make any such
corporation an affiliate of Bank within the meaning of the banking laws until
after default.
3. The term default shall mean the occurrence of any of the following events:
(a) non-payment of any indebtedness when due or non-performance of any
obligation when due, whether required hereunder or otherwise; (b) deterioration
or impairment of the value of Collateral; (c) non-performance by Debtor under
this Agreement, default by Debtor of any other agreements with Bank dealing with
the extension of credit or with debt owing Bank or any misrepresentation of
Debtor or its representative to Bank whether or not contained herein; (d) a
change in the composition of any Debtor which is a business entity; or (e)
belief by Bank in good faith that there exists, or the actual existence of, any
deterioration or impairment in the ability of Debtor to meet its obligations to
Bank.
4. Whenever a default exists, Bank, at its option may: (a) without notice
accelerate the maturity of any part or all of the secured obligations and
terminate any agreement for the granting of further credit to Debtor; (b) sell,
lease or otherwise dispose of Collateral at public or private sale; unless
Collateral is perishable and threatens to decline speedily in value or is a type
customarily sold on a recognized market, Bank will give Debtor at least five (5)
days prior written notice of the time and place of any public sale or of the
time after which any private sale or any other intended disposition may be made;
(c) transfer any Collateral into its own name or that of its nominee; (d) retain
Collateral in satisfaction of obligations secured hereby, with notice of such
retention sent to Debtor as required by law; (e) notify any parties obligated on
any Collateral consisting of accounts, instruments, chattel paper, choses in
action or the like to make payment to Bank and enforce collection of any
Collateral herein; (f) require Debtor to assemble and deliver any Collateral to
Bank at a reasonable convenient place designated by Bank; (g) apply all sums
<PAGE>
received or collected from or on account of Collateral including the proceeds of
any sales thereof to the payment of the costs and expenses incurred in
preserving and enforcing rights of Bank including but not limited to reasonable
attorneys' fees, and indebtedness secured hereby in such order and manner as
Bank in its sole discretion determines; Bank shall account to Debtor for any
surplus remaining thereafter, and shall pay such surplus to the party entitled
thereto, including any second secured party who has made a proper demand upon
Bank and has furnished proof to Bank as requested in the manner provided by law;
in like manner, Debtor, unless an Accommodation Debtor only, agrees to pay to
Bank without demand any deficiency after any Collateral has been disposed of and
proceeds applied as aforesaid; and (h) exercise its banker's lien or right of
setoff in the same manner as though the credit were unsecured. Bank shall have
all the rights and remedies of a secured party under the Uniform Commercial Code
of California in any jurisdiction where enforcement is sought, whether in
California or elsewhere. All rights, powers and remedies of Bank hereunder
shall be cumulative and not alternative. No delay on the part of Bank in the
exercise of any right or remedy shall constitute a waiver thereof and no
exercise by Bank of any right or remedy shall preclude the exercise of any other
right or remedy or further exercise of the same remedy.
5. Debtor waives: (a) all right to require Bank to proceed against any other
person including any other Debtor hereunder or to apply any Collateral Bank may
hold at any time or to pursue any other remedy; Collateral, endorsers or
guarantors may be released, substituted or added without affecting the liability
of Debtor hereunder; (b) the defense of the Statute of Limitations in any action
upon any obligations of Debtor secured hereby; (c) if he is an Accommodation
Debtor, all rights under Uniform Commercial Code Section 9112; and (d) any right
of subrogation and any right to participate in Collateral until all obligations
hereby secured have been paid in full.
6. Debtor warrants: (a) that it is or will be the lawful owner of all
Collateral free of all claims, liens or encumbrances whatsoever, other than the
security interest granted pursuant hereto; (b) all information, including but
not limited to financial statements furnished by Debtor to Bank heretofore or
hereafter, whether oral or written, is and will be correct and true as of the
date given; and (c) if Debtor is a business entity, the execution, delivery and
performance hereof are within its powers and have been duly authorized.
7. The right of Bank to have recourse against Collateral shall not be affected
in any way by the fact that the credit is secured by a mortgage, deed or trust
or other lien upon real property.
8. Debtor may terminate this Agreement at any time upon written notice to Bank
of such termination; provided however, that such termination shall not affect
his obligations then outstanding, any extensions or renewals thereof, nor the
security interest granted herein which shall continue until such obligations are
satisfied in full. Such termination shall not affect the obligations of other
Debtors if more than one executes this Agreement.
9. If more than one Debtor executes this Agreement, the obligations hereunder
are joint and several. All words used herein in the singular shall be deemed to
have been used in the plural when the context and construction so require. Any
married persons who sign this Agreement expressly agree that recourse may be had
against his/her separate property for all of his/her obligations to Bank.
10. This Agreement shall inure to the benefit of and bind Bank, its successors
and assigns and each of the undersigned, their respective heirs, executors,
administrators and successors in interest. Upon transfer by Bank of any part of
the obligations secured hereby, Bank shall be fully discharged from all
liability with respect to Collateral transferred therewith.
11. Whenever possible, each provision of this Agreement shall be interpreted in
such manner as to be effective and valid under applicable law, but, if any
provision of this Agreement shall be prohibited or invalid under applicable law,
such provisions shall be ineffective to the extend of such prohibition or
invalidity without invalidating the remainder of such or the remaining
provisions of this Agreement.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,883,989
<SECURITIES> 0
<RECEIVABLES> 1,405,270
<ALLOWANCES> 79,482
<INVENTORY> 1,769,002
<CURRENT-ASSETS> 5,498,044
<PP&E> 1,472,002
<DEPRECIATION> 714,805
<TOTAL-ASSETS> 7,240,917
<CURRENT-LIABILITIES> 1,361,305
<BONDS> 0
0
0
<COMMON> 3,938
<OTHER-SE> 4,597,723
<TOTAL-LIABILITY-AND-EQUITY> 7,240,917
<SALES> 2,652,918
<TOTAL-REVENUES> 2,652,918
<CGS> 1,519,289
<TOTAL-COSTS> 2,517,285
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,534
<INCOME-PRETAX> 141,075
<INCOME-TAX> 56,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85,075
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
