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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended September 30, 1998
[_] 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: $9,578,681
The aggregate market value of this Registrant's voting stock held as of 12/3/98,
by non-affiliates of the Registrant was $1,140,616
As of December 3, 1998, Registrant had 3,831,571 shares of $.001 par value
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrants definitive proxy statement, which will be filed with the
Securities and Exchange Commission within 120 days after September 30, 1998
(incorporated by reference under Part III)
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TABLE OF CONTENTS
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Part I Page
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Item 1. DESCRIPTION OF BUSINESS......................................... 3
Business Development and Business of Issuer..................... 3
Industry Overview............................................... 5
The Company Strategy............................................ 6
Products........................................................ 6
Marketing....................................................... 9
Sales and Distribution.......................................... 10
Competition..................................................... 11
Assembly and Manufacturing Operations........................... 11
Customers....................................................... 12
Patents and Trademarks.......................................... 12
Government Approval............................................. 13
Product Development............................................. 13
Research and Development........................................ 13
Environmental Matters........................................... 13
Employees....................................................... 13
Item 2. DESCRIPTION OF PROPERTY......................................... 14
Item 3. LEGAL PROCEEDINGS............................................... 14
Item 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY HOLDERS............. 14
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Part II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........ 14
Recent Sales of Unregistered Securities......................... 15
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................... 15
Overview........................................................ 15
Results of Operations........................................... 16
Seasonality..................................................... 16
Inflation....................................................... 16
Financial Position, Capital Resources and Liquidity............. 18
New Accounting Pronouncements................................... 18
Factors Affecting Growth and Profitability...................... 18
Penny Stock Regulations......................................... 18
"Year 2000" Requirements........................................ 19
Item 7. FINANCIAL STATEMENTS............................................ 19
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE....................................... 19
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Part III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT..... 19
Item 10. EXECUTIVE COMPENSATION.......................................... 19
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................... 19
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 19
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Part IV
Item 13. EXHIBITS AND REPORTS............................................ 20
INDEX TO FINANCIAL STATEMENTS............................................ F1
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PART I
This report contains forward-looking statements that relate to future events or
future financial performance. These statements, which may be identified by
terms such as "may", "will", "should", "expects", "plans", "anticipates",
"believes", "estimates", forecasts", "potential" or "continue", or the negative
of such terms and other comparable technology, only reflect management's
expectations. Actual events or results may differ materially, as a result of
competitive products and pricing, new product introductions, developing
technologies and general economic conditions affecting the Company and its
customers, as more fully discussed below and in "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Item 1. DESCRIPTION OF BUSINESS
Business Development and Business of Issuer
Tivoli Industries, Inc. (the "Company") designs, develops, manufactures,
markets, sells and distributes specialty lighting and related products globally.
These products are designed to fulfill architectural applications where specific
requirements dictate the use of energy efficient, economical, precision,
decorative, integrated, high performance lighting equipment. The Company has
expanded its product lines and markets to serve general and specialized
commercial and high end residential construction projects and applications which
require a combination of specialty lighting and related product features. In
addition, the Company develops modified, customized and engineered to order
products for larger customers, and for those willing to pay the value added
development costs of special product development. Representative applications
of the Company's products, are casinos and gaming venues, movie theater aisle
and step lighting, illuminated ceilings, cove, soffit and valances, retail
accent and display, cabinet, and casegoods furniture, theme parks, high-end
residential, gaming vessel cruise ships, marquees, topiary, exterior building
accent, lighting truss and support systems, and integrated illuminated
surveillance systems.
Over 31 years ago, Tivoli introduced a series of low voltage miniature lamps
encased in a variety of plastic extrusions. These initial miniature products
established the Company as an innovator in decorative commercial, hospitality
and residential lighting applications. After the change in ownership in 1991,
Tivoli began a rapid expansion of its product lines. Through internal product
acquisition and development, the Company currently holds fourteen (14) U.S.
patents. The Company's product line expansion has encompassed broad development
of standard, line voltage products in addition to low voltage products. Low
voltage lighting uses transformers to convert standard electrical power from
110, 120, 220 or 277 volts down to 12 or 24 volts, and is generally used in
environments seeking decorative, accent, energy efficient, safe, easy to operate
applications. Since standard line voltage products have dominated commercial
market usage, the Company has included a number of products to satisfy these
requirements and offer differentiation in terms of features, design, performance
and energy efficiency. "Tivoli", "Tivolite", "The Light Fantastic", "Lumitred",
"Readi-Cove", "Paravision" and tivoli, are registered trademarks of the Company.
The Company's existing product families include low voltage tube lighting,
accent and task lighting, aisle guidelight and step lighting, chandeliers and
light curtains, decorative ceiling systems, energy efficient fluorescent cove
lighting, low voltage linear cove lighting, long life energy efficient low-
voltage lamps, electronic transformers and lighting controllers, illuminated
surveillance systems and furniture, cabinet and kiosk lighting. The Company
originally formed a joint venture with Targetti Sankey S.P.A. ("Targetti") of
Florence, Italy and in November of 1997, expanded its scope with the formation
of a jointly owned company in the U.S. - Targetti USA, LLC ("Targetti USA").
Through this joint venture, Targetti USA offers a wide range of product families
which both broaden and complement the Company's products. These products
include low voltage track lighting, low voltage open frame and open conductor
systems, illuminated sky lights, low voltage recessed lighting fixtures,
precision adjustable fixtures, energy efficient compact fluorescent downlights,
decorative wall sconces, pendants, modular projector systems, open grid
conductor systems and a variety of lighting accessories, filters and options.
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All the Company's products and that of its subsidiary are submitted to
National Recognized Testing Laboratories ("NRTL's") for testing and
certification. Such NRTL's are Underwriters Laboratory ("UL"), Intertek Testing
Laboratories ("ETL"), Canadian Standard Association ("SCA") and Canadian
Underwriters Laboratory ("CUL").
In North America, the Company's products are sold through 69 independent
marketing representatives, and directly by the Company to a large customer base
consisting of electrical distributors, contractors, owner representatives,
hotels, showrooms, theater distributors and other end users. In Mexico, the
Company's products are sold through its representatives and through the
Company's Mexican subsidiary, Tivoli de Mexico, S.A. The Company serves other
international markets through a network of over 50 representatives and
distributors who are part of the Targetti worldwide network, and through 6
independent offices located in other specialized territories.
After the Company was acquired by its present management in July of 1991, a
strategic goal was developed to become a globally recognized supplier offering a
broad range of specialty lighting and related products. Management believes
that this strategy will position the Company to be a supplier of choice to a
wide range of customers where lighting requirements are becoming more diverse.
The combined strategies of offering a broad range of products to a diverse
number of discrete and/or unique markets allow the Company to be perceived as a
one-source package to an extensive group of customers. The key elements that
are embodied in the Company's strategic plan are: A) Expansion, strengthening
and development of the Company's existing product lines and market positions.
B) The continued expansion of Targetti USA with unique, highly designed,
lighting products currently marketed in Europe by the Company's joint venture
partner, Targetti Sankey. C) The careful evaluation of select acquisitions,
strategic alliances and joint ventures of lighting companies and technologies.
Management believes these strategies will establish the Company as a leading
supplier of specialty lighting and related products globally. The Company's
comprehensive product development programs and aggressive market penetration
efforts have been key to broadening the Company's appeal as a single source
supplier of specialty lighting equipment. Continuing trends in a number of the
markets served by the Company appear to provide additional opportunity for
growth and penetration. Among the markets which exhibit these trends are
gaming, hospitality, specialty retail, multi-national, multi-unit accounts,
themed entertainment and high end residential. The trends among these types of
market segments are to utilize lighting as an integral part of architectural
design and as a tool to enhance the marketing perception of the client. In
order to continue to address these developments, management has positioned the
Company to provide lighting fixture and services to fulfill requirements of
customers who wish to achieve ambiance and energy efficiency while optimizing
environmental and merchandise requirements.
Several of the Company's core markets frequently use design elements
intended to enhance the image and environmental experience of their customers,
while achieving the economic requirements of balanced energy use. Core markets
such as casino/gaming, specialty retail, location based entertainment and
cinemas represent the leading edge of lighting design requirements. The Company
believes that the ability to provide both central design and local project
support will contribute to continued growth as global requirements continue.
Shopping centers, retail shops, theaters and restaurants have often
collaborated around a central theme to optimize development economics, increase
customer traffic and point of purchase support. This continued use of lighting
as a key design element extends to renovation as well as new construction
projects, and the rate and frequency of major renovation projects in core
markets is increasing.
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Industry Overview
In the U.S. the domestic lighting fixture market is estimated to be between
$8.0-8.6 billion (source - Economic Industry Reports 1998). The major
traditional segments of the lighting fixture industry have been historically
categorized as commercial/institutional, residential, outdoor, industrial,
vehicular and N.E.C. ("Not Elsewhere Classified"). Although there is currently
no specific category for specialty lighting, management believes that specialty
lighting products comprise a significant growth trend and opportunity within the
major categories. Additionally, specialty lighting products can be found in
non-lighting related industry classifications such as furniture, millwork,
cabinets, signage, security, exhibit builders, kiosk, and point of purchase
display manufacturers.
There are a number of major characteristics of the U.S. domestic lighting
fixture industry that affect its growth and competitive market assessment. The
industry has approximately 10 large conglomerates that are estimated to control
less than half of U.S. lighting fixture sales. With over 500 other companies
supplying lighting fixtures, the industry remains highly fragmented despite
several major restructionings of these conglomerates during 1998.
Primary econometric trends which directly affect the lighting industry are
commercial and residential construction, housing starts, renovation and capital
expenditures. Despite strong export sales to NAFTA countries, imports into the
domestic market from Asia, particularly aided in 1998 by a strengthening U.S.
dollar, continue to increase.
In addition to a continued requirement for energy efficiency and product
differention, there have been many major commodity lighting manufacturers shifts
in distribution brought about by shifts to large national chains such as Wal-
Mart, True-Value and Home Depot which have expanded their focus beyond do-it-
yourself to the construction trades.
The Company presently serves international clients located in Europe, the
Middle East, Mexico, South America, the Far East and Pacific Rim. The
characteristics and trends of the international lighting industry are somewhat
similar to those of the U.S. market. Local customs, electrical codes and
economic demographics provide unique differentiations that require an adaptive
strategy.
The European lighting industry is generally regarded to be more advanced,
relative to fixture design and technology than the U.S. lighting market. There
remains in Europe a high bias toward new technology accompanied by planned
obsolescence of products that occurs at a much faster rate than in the U.S.
Another factor that keeps European lighting manufacturers ahead of their U.S.
counterparts is that many of the major European companies embrace an aggressive
vertical and horizontal manufacturing strategy. For example, the simultaneous
development of lighting fixtures, reflector technology, lamps, power sources and
castings create a faster new product introduction cycle than in the U.S. The
conversion by the European Union to a common currency on January 1, 1999, may
have substantial economic impact on companies that can tailor products and
services to meet the requirements of a 'borderless' Europe. The Company's
partner - Targetti Sankey of Florence, Italy - is well positioned to provide the
Company access to those markets through its comprehensive network of sales and
distribution centers.
In the Far East, South America and other developing countries, emphasis in
lighting has been on low cost production with minimal design characteristics.
From an export perspective, many Far Eastern manufacturers have made significant
inroads in the U.S. and Europe by offering cheaper products with similar
characteristics, if not the same performance as locally made products. The
Asian economic crisis has added to the surge of imports. For example, China's
share of imports into the U.S. accounts for over 50% of all U.S. lighting
fixture imports. Regardless of the availability of low cost imports, these same
markets have niche segments that have increasing requirements for higher design
and performance products. Despite the recent economic crisis in Asia,
management believes that continued growth opportunity exists to export specialty
products to global multi-nationals.
Management believes that these domestic and international trends within the
lighting industry may provide the Company with opportunity for revenue growth.
The introduction of additional products has strengthened the Company's position
as a provider to these markets, while enabling the Company to participate in
larger, more diverse projects. Management believes that this combination of
products, markets, and technology position it to capitalize on
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developing trends within the international lighting industry, as well as to take
advantage of the select trends within its customers' markets.
While the key trends which affect the global lighting industry are important,
the Company also believes that trends affecting its customers within its served
markets are equally important. These trends include:
. Gaming/Casino - Despite overall softness in the Casino/Gaming market,
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selective expansion is forecast in Las Vegas during the next two years,
coupled with other jurisdictions in Detroit, Atlantic City and Native
Indian Gaming venues providing market opportunities for the Company.
. Hospitality - The expansion of resort hotel properties in Las Vegas,
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Orlando, Atlantic City, combined with development of newer, more tailored
business traveller hotels such as Hilton Garden Courts and Sofitel,
provide opportunity for the increasingly broad array of hospitality
lighting products that the Company offers.
. Location Based Entertainment ("LBE") - Venues combining restaurants,
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themed experience, shopping and entertainment are projected to increase
substantially over the next 3-5 years according to the Themed
Entertainment Association. Large venues, both domestically and
international, continue to require dramatic decorative and accent
lighting products.
. Cinema Construction - in the U.S. continues the trend to build stadium
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type environments in multi-screen formats (multiplex) ranging in size
from 8 to 23 screens. Combined with other LBE venues, the Company's
unique array of both cinema and specialty commercial lighting products
position it as a supplier of total lighting solutions to this market.
. Global customers - with multi-unit, multi-location stores and
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restaurants, are seeking long term strategic suppliers that can operate
internationally. Additionally, the global architectural profession,
whether in New York or Venice, Italy, has increasing requirements to
satisfy global clients and management believes that the Company's
products, sales strategies and partnership with Targetti provide a unique
opportunity to address these trends.
The Company's Strategy
During the past four years, the Company has developed and focused on its
strategic plan which encompasses new product development, market penetration,
and the joint venture with Targetti. Management believes that its investments in
product development, literature, catalogs, systems and technology acquisitions
continue to establish the foundation for expanded growth and earnings. The key
elements of this plan include (1) the continued development and expansion of the
Company's products to meet both domestic and international market demands, and
(2) the expansion of its joint venture - Targetti USA. The Company is also
interested in pursuing selective acquisition of lighting products or companies
that would improve the Company's competitive position.
Products
The Company's existing products can be grouped into the following major
categories, based upon technical features or the types of design applications
for which they are typically used:
Tube Lighting. A family of products in which a variety of sub-miniature, low-
voltage lamps are inserted into a linear plastic tube and connected to a
transformer and power source. A patented addition to tube lighting is the
company's process of injecting non-flammable, optically clear, viscous gel that
surrounds the lamps, protecting them from vibration and moisture. These
products are used in a wide variety of interior and exterior applications as
decorative highlights, guidelines, building outlines, pools and spas, and in
acoustic panels.
Aisle, Step and Stair Lighting. A variety of specialized vinyl, PVC,
composite extrusions and plastic light diffusing lenses that contain small,
replaceable lamps. These products are used to light the edges of aisles and
walkways, and for safety illumination in theaters, auditoriums and showrooms.
The unique dual stair/step lighting products are widely used in stadium seating
applications, lobbies and transition areas. The Company has received patents,
covering these products and their ability to simultaneously direct light to the
top of a step and illuminate, without glare, the adjoining step riser and tread.
Recent design innovations include the introduction of solid state
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light emitting diodes ("LED's") for extensive lamp life, low energy consumption
and minimum maintenance. Also included among the Company's innovations to these
product families is the use of electroluminescent ("EL") lighting devised from
phosphor coated, laminated linear lighting - sources which offer an even,
uninterrupted glow with minimum energy usage. The EL product family can also be
utilized in point of purchase display applications.
Accent and Task Lighting. An array of aluminum channels with a wide variety
of specialized and general purpose lamps to highlight, spot, or illuminate
products, merchandise or working areas. The task lighting products in this
group can also be mounted under a counter or shelf for specific illumination of
the working surface.
Cove, Soffit and Valance Lighting. An extensive family of products that use
several different aluminum channels onto which high performance, energy
efficient compact fluorescent lamps are attached. These products are used in
coves, valances, soffits, or raceways where the fixture is concealed to provide
indirect illumination from the ceiling and to highlight an architectural
feature, and to achieve architectural layering effects. These cove lighting
products use both 277 and 110 voltage, and are offered in a wide range of lamp
wattages and custom configurations. A patented innovation to the Company's cove
lighting family was developed as "Flex-Cove", a field adjustable product that
allows for uninterrupted illumination to be achieved when accommodating design
features such as curved radius applications. The field adjustability feature
reduces contractor installation time while minimizing errors caused by field
measurements and drawings not matching.
Minicove. A family of products which supplements the high performance cove
lighting family with a broad range of compact, small low voltage incandescent,
xenon, argon and halogen lamps. This product line also includes a range of
specialized halogen lamps such as the MR11 and MR16 for accent lighting
applications. Optional accessories include reflectors, lenses, mounting clips
and flexibility. These products are often selected to illuminate areas that
include small coves or are incorporated into furniture cabinets, retail store
fixtures and where minimum clearances are provided in an architectural element.
Readi Cove. A new product introduced in 1998 offers the ability to create a
lighted cove without field construction. Modules are available using Tivoli's
existing cove lighting options. Lighting integrated into a selection of
decorative hinged fascia moldings with easy accessibility to lamps for
maintenance.
Decorative Chandeliers. The chandelier product family consists of a wide
variety of low voltage and line voltage tubes, plastic extrusions and reflectors
affixed to aluminum, or brass mounting plates. These products are offered in
standard round or square single and multi-tiered configurations in addition to
custom requirements. Chandelier and light curtains manufactured by the Company
have been used in hotel lobbies, atriums, theaters, casinos and custom
residences. In addition to providing a decorative and economic alternative to
expensive crystal chandeliers, the addition of lighting controls can add special
effects such as the appearance of motion to the products.
Customized Lighted Ceiling Panels. Illuminated ceiling panels utilize
miniature lights inserted into a variety of ceiling tiles including acoustic
tiles, polycarbonate sheets and metalized panels. Referred to as "Starlight
Panels" these illuminated ceilings have been used as centerpieces in casinos,
gaming vessels, clubs and on wall panels. In addition to simulating a starfield,
custom designs such as "shooting stars," "galaxies," or other effects can be
added.
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Long Life, Low Voltage Lamps. A family of patented Tivolite bulbs which
consist of a multi-lamp filament inside a variety of glass envelopes. These
bulbs are provided in both low and line voltage as decorative, energy-efficient
alternatives to standard line voltage bulbs. Tivolites have a rated life of
10,000 - 25,000 hours compared to 1,000 - 1,200 hours for competitive lamps, and
can offer up to 80% savings in energy. The Tivolite lamps are used for
applications in concert with other products manufactured by the Company, such as
its "Lite-Bar" aluminum extrusion.
Perimeter and Landscape Lighting. A "Twilight" product series which uses
miniature lamps pre-mounted on wire and connected to a transformer for
perimeter, topiary and landscape lighting. These "Twilights" are approved by UL
for exterior usage and are mounted to trees, landscape, topiary elements, and
gazebo's. In addition, a version of the product is used inside various sized
plastic extrusions to outline perimeters and buildings providing a variety of
weather-resistant multi-colored lens caps.
Parallax(TM). A patented product line which provides a high quality linear
aluminum tube system with integrated, fully adjustable, halogen lamps offered
with a variety of spacing. The aluminum tube has structural strength and clean
design that provides an aesthetic, energy efficient alternative to traditional
track and down lighting systems. Applications also include self support kiosk
systems as well as integration into free standing lighting truss systems offered
through Targetti USA.
Paravision(TM). A patented version of Parallax(TM), which offers integrated
surveillance systems with closed circuit television cameras combined with the
high performance halogen lighting line. Applications are for casino/gaming
installations, hospitality, banking, retail and high end residential market
segments. The award winning Paravision product was named one of the "Top 20
most innovative gaming products".
Transformers and Controllers. Transformers and other specialized equipment
designed by the Company to provide power and safety when dealing with conversion
from primary (standard voltage) to secondary (low voltage).The Company offers
transformers for both Class 1 and Class 11 safety standards. Controllers are
the electrical devices that control the variety of effects such as "chasing,"
"sparkling," or "moving." In addition to offering a range of standard products
in this catalog, the Company offers custom capability to support larger
electrical control requirements. The Company continues to expand its selection
of specialized circuit protection devices that are used in conjunction with the
open conductor low voltage lighting products developed by Targetti such as
Stellaria and Structurella.
Targetti USA Product Families. The joint venture with Targetti which created
Targetti USA provides the Company with access to the complete Targetti product
range. At present, a large selection of the Targetti product range, as
identified in their most recent catalog has been selected and modified for
introduction into the U.S. market. The products introduced into the U.S. market
are:
. Structura: A unique truss system designed for large, open areas such as
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convention centers, or exhibition halls, which can provide architectural
design alternatives when ceiling systems are either too high or unsuited
for the installation of high quality, precise lighting applications.
. Minitondo: A complete low voltage track system, including both track
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sections as well as 14 heads or fixtures with a wide variety of lamping
and design options.
. Excelsior: An illuminated skylight type lighting fixture incorporating
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high performance energy efficient florescent lamps with a complete range
of polycarbonate and stained glass lenses. Available in a variety of
ceiling mounted options and capable of incorporation signage or
promotional messages.
. Stellaria & Structurella: A low voltage open frame linear and grid
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system that can be suspended from a ceiling or from a `Structura' truss
system, incorporating Minitondo low voltage heads. The Stellaria system
allows a free standing approach to high ceiling areas, providing
capability to achieve linear planes of design.
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. Mondial: A family of recessed products consisting of two main groups:
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the Mondial 50, a small aperture, low voltage recessed adjustable
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downlight, and Mondial, high performance, larger aperture precision
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adjustable projectors offering a variety of incandescent, halogen, and
metal halide lamp sources.
. CCT: A specialized recessed downlighting family of products, offering
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high performance energy efficient compact fluorescent lamps with a
complete series of unique decorative trims and a wall washer option.
. Low Voltage Downlights: A comprehensive family of low voltage,
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decorative downlights using high performance halogen (MR-16) lamps, the
'VIT', 'LITEX', 'BTT', and 'Micro', offer a variety of features
including glass trims, filters and directional options.
. Wall Sconces: Wall mounted indirect uplighting units designed for accent
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illumination as well as high performance lamp sources. 'Spectra' offers
decorative halogen accent lighting with dichroic filters to achieve
color accents.
. Mondial F1: A modular, integrated framework and lighting system that
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optimizes high performance projector units for a variety of commercial,
institutional and specialty applications.
Marketing
The primary markets served by the Company and its joint venture partner,
Targetti USA are: Theater, Hospitality, Casino/Gaming, Retail, Commercial and
Residential. The Company believes it has a unique ability to be a one source
supplier to lighting projects in these markets due to their diverse product
offerings. The primary objective of our marketing approach is to provide a more
comprehensive package of products and services to our customers by offering a
complete selection of specialty lighting and related equipment. A requirement
of this marketing strategy is that the Company maintain experienced and diverse
representative and distribution channels to support its sales objectives.
Therefore, the Company continually endeavors to strengthen and expand the
effectiveness of its manufacturer's representatives, both domestically and
internationally. The number of representatives covering the North American
market is 69. The Company, through its evaluation of representatives, performs
regionally select territory changes in the U.S. and Canada, designed to
strengthen our local representation. The Company's joint venture partner,
Targetti USA, has over 50 representatives covering the United States market.
Internationally, the Company's products are represented by a network of sales
offices and distributors of Targetti Sankey, the Company's international joint
venture partner. The Company periodically conducts formal training programs to
increase the effectiveness and revenue potential of the international Targetti
network. Sales managers from the Company also attend the annual training
sessions on Targetti products, while concurrently utilizing these training
sessions to educate the Targetti personnel on the Company's core products.
Additionally, the Company's core products are represented in the Targetti UNO
catalog which has a world-wide distribution of over 250,000 annually. Although
the Targetti sales network represents the major global representation of the
Company, there are certain markets in which the Company operates directly such
as Mexico, Canada and Hong Kong. In Mexico, the Company operates Tivoli de
Mexico, S.A., a corporation that registers all the Company's products and trade
names in that country and provides further opportunity to penetrate many growing
South American markets.
The primary purchasing influences for the Company's products are specification
professionals such as architects, lighting consultants, electrical engineers,
interior designers and corporate end users. As a consequence of this
specification oriented marketing, management believes that high quality
catalogs, literature and technical data sheets are necessary to present the
Company's products. Full color brochures and catalog sheets include both
suggested applications of products as well as required technical performance and
data. These catalogs and technical data sheets are contained within a custom
three ring binder that is distributed to specifiers by the Company's
manufacturer representatives, and directly to select corporate accounts by
Company personnel. Binders are registered to their end user, and a returned
registration program card is maintained on the Company's customer database. As
new products and features are introduced, catalogs and technical sheets are
updated, revised and expanded. Supplementing the catalog sheets are programs
geared at the introduction of new products or technologies. The Company
introduced seven new and expanded products and literature in fiscal 1998. The
Company introduced an updated and expanded price list in fiscal 1998. An
Illustrated Buyers Guide was also created as a tool for our representative
network and for use in other sales channels such as distributors.
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The Company reinforces its market presence in its primary markets by
selectively exhibiting products at specialized trade shows. Among the major
trade shows the Company attended in fiscal 1998 were: Hospitality Design,
"Lightfair International", "World Gaming Congress", "ShoWest", "ShowEast", and
"CinExpo". Respectively, these trade shows deal with the hospitality industry,
commercial lighting industry, casino gaming industry, and global theater
construction and distribution industry. The Company also attends select shows
on a regional basis for specific territories and representatives.
The Company is active in certain professional trade organizations such as The
National Association of Concessionaires, National Association of Theater Owners,
Themed Entertainment Association and the Illuminating Engineering Society.
Sales and Distribution
The Company's products currently are sold through 69 independent
manufacturers' representatives in the U.S. and Canada and directly by the
Company's own personnel to a broad customer base consisting of electrical
distributors, contractors, showrooms, owner representatives and end users. The
Company's focus in serving its diverse customer base is to increase both the
number of accounts, as well as the amount of product being purchased by these
accounts. The independent manufacturers' representatives who market the
Company's products are under a standard contract and are paid commissions on
their sales. These representatives market to architects, lighting designers,
electrical engineers, electrical distributors, lighting showrooms, contractors
and others within an assigned geographic territory. While sales through these
representatives are generally to commercial lighting markets, a number of
agencies in major territories have developed personnel trained to penetrate
specialized markets such as showrooms and corporate accounts.
The Company's national accounts have historically included a number of major
corporate customers within each of the market segments served by the Company.
In many cases, customers maintain their own internal design and development
departments that interface directly with the Company's internal sales personnel.
These corporate accounts also utilize professional services from interior
architects and lighting consultants to assist in achieving their desired market
image. Management anticipates that the Company will experience continued growth
in sales to national and corporate accounts as the Company increases its market
penetration efforts in these markets, since customers in these markets do not
generally purchase all of their specialty lighting requirements through
commercial lighting distributors or representatives. The Company has developed a
National Account Strategy to manage programs, products and services for these
accounts.
The Company's international sales represented 20% of total revenue for fiscal
1998. These sales are served by three sales and distribution elements: 1) in
Europe, Eastern Europe, the Middle East, Far East, South America and Australia,
the Company is represented by Targetti Sankey's extensive network of over 50
representatives and distributors. 2) in Hong Kong, Taiwan and Japan, the
Company uses additional independent representatives, and 3) Mexico and Central
America are served by the Company's subsidiary Tivoli S.A. de Mexico and its
representatives in these territories. International sales are subject to
certain risks, including foreign government regulation; longer payment cycles;
unexpected changes in, or imposition of, regulatory requirements, tariffs,
import and export restrictions and other barriers and restrictions; greater
difficulty in accounts receivable collection; the burdens of complying with a
variety of foreign laws; possible recessionary environments in economies outside
the United States; and other factors beyond the control of the Company. There
can be no assurance that such factors will not have a material adverse effect
on the Company's international sales and consequently, the Company's business,
operating results and financial condition. An increase in the relative value of
the dollar against foreign currencies would reduce the Company's revenues in
dollar terms or make the Company's products more expensive and, therefore,
potentially less competitive in foreign markets.
Management believes that the combination of its representation, distribution
and product lines, has increased the Company's opportunity for success as a
specialty lighting supplier, with global growth. This belief is based on the
worldwide recognition of the Tivoli trademark, the extensive experience this
Company has obtained in low voltage lighting and the increase in multi-unit,
multi-location international customers.
10
<PAGE>
Competition
The lighting industry remains highly fragmented despite the presence of large
conglomerates that service the general electrical distribution and contractor
marketplaces. These conglomerates are substantially larger and more
established, and offer a broader range of products, combined with greater
financial, marketing and other resources, than the Company. During fiscal 1998,
there was significant merger and consolidation amongst a number of the large
companies such as National Service Industries, Genlyte, Thomas Industries and
Cooper Industries. Nonetheless, there are a larger number of companies that
collectively offer a wide range of products to a broad market base, including
niche and general lighting markets. Although many of these companies are
smaller than the conglomerates, there are a number that have greater financial
and other resources than those presently available to the Company. If the
Company is not able to compete successfully, its business, financial position
and results of operations will be materially adversely affected.
The Company's competition, within its served markets, is generally divided
into two categories. First there are a number of companies that sell products
similar to those offered by the Company that can be used as substitutions or
replacements for the Company's products. Although many of these products do
not have all the features of the Company's products, they are often sold at a
lower price. The Company endeavors to compete with the suppliers of these
alternative products primarily on the basis of quality, special features,
service delivery and value pricing. The second category of potential
competitors consists of companies that offer products not currently sold by the
Company, and/or products that can be used in alternative methods for achieving
desired lighting effects. Management believes that the joint venture with
Targetti, offered exclusively through Targetti USA, greatly enhances the
Company's competitive position, by providing access to products and technologies
unavailable to the Company's competitors.
Assembly and Manufacturing Operations
The Company's manufacturing operations consist primarily of procurement,
inspection and testing of components, selected fabrication, cutting and metal
work and the assembly of finished products, at the Company's facility in Santa
Ana, California. The Company operates one shift of production from this
facility, but frequently utilizes additional personnel to operate a second shift
to support demand. The growth of the Company over the past several years,
combined with future products being added from the Targetti USA joint venture,
has required the Company to expand its warehouse storage space. Quality and
reliability are constantly emphasized in the selection of components and in the
assembly of finished products.
The Company obtains materials parts and components, such as aluminum and
plastic extrusions, plastic lens covers, wire, lamps, injection molded
components, sockets, ballasts, transformers, controllers and housing, from
numerous suppliers. Management believes that alternative suppliers are
available for most of these components. Several components used in the
Company's products are supplied by companies located in Taiwan and China.
However, the Company has identified alternative overseas suppliers for these
components, and continues to evaluate the possibility of purchasing all or some
of these components from domestic or North American sources, in an effort to
ensure supply of critical or proprietary components. The Company maintains an
inventory of items supplied by offshore companies to minimize any potential
disruption caused by an interruption of shipments. Some of the vendors to the
Company do require minimum order quantities. In general the Company is able to
purchase components at quantities that are consistent with product demand. The
Company's joint venture with Targetti has provided additional resources in
evaluating and procuring selected components and materials that enhance the
ability to manage its inventory. A goal of the Company's operations management
is to reduce the overall inventory levels and minimize the number of unique
parts. Management believes that the combination of minimizing its finished goods
inventory and maintaining an adequate component parts inventory provides
protection against unanticipated supply interruptions. With this scheme, the
Company does not maintain an extensive finished goods inventory.
The Company maintains a comprehensive state-of-the-art software system
provided by a leading international software developer and a new computer system
to support the software. The software system is comprised of a number of
modules - inventory management, order entry, material requirements and
purchasing, forecasting, and financial reporting. This system has supported the
Company's capability in dealing with customers,
11
<PAGE>
order processing, purchasing, production and resource planning, inventory
management, and sales forecasting. Management believes the implementation of the
system and software greatly enhances the Company's ability to manage its growth
more efficiently and allow the critical assets such as inventory to be
optimized.
Customers
The Company has a broad and diverse base of customers consisting of thousands
of clients such as electrical distributors and wholesalers, contractors,
lighting showrooms, theater owners, casino and gaming establishments, and
corporate clients. In addition, the Company also sells to a number of
specialized firms such as cruise line shipbuilders, restaurant suppliers,
furniture fixture manufacturers, high end residential customers and commercial
signage companies.
The existing customer base includes a substantial number of companies that are
recognized leaders in either the motion picture, theme park, casino or specialty
retail store industries. These customers represent leaders within their
respective industries that rely upon the Company for some of their lighting
requirements. The importance and influence of these types of account
constitutes an important market strategy for the Company. Management believes
that the continued success with leaders of corporate multi-nationals will have a
complementary effect on sales to other customers in similar market segments.
The established customers provide the Company with a diverse, broad and deep
base that represents continued opportunity for growth in revenues and
profitability. If the Company is successful in expanding its strategic program
it will become a single source supplier from which many of its customers can
fill their lighting requirements.
The Company strengthens relationships with certain key customers by working
with them on the development of lighting projects. Selectively, the Company
provides the services of a sales engineer trained on the use of the Company's
computer aided design systems to collaborate with the customer's architects in
developing both concept and specific design plans. Management believes that
this service, accompanied with pricing quotations for the Company's products
that have been specified, is a successful marketing practice that enhances
customer loyalty. Further, such custom development projects can benefit the
Company by enabling it to develop new products, often with a large portion of
the cost of the development effort paid for by the customer.
Patents and Trademarks
The performance of the Company will depend on the success of its existing
product families as well as its ability to develop, acquire and market new
products and encompass new developing and changing technologies. Concurrently,
the ability to address pricing considerations and other market factors, is an
important element.
The Company maintains, and relies on a combination of patents, trademarks,
trade secrets, nondisclosure agreements and licensing arrangements to establish
and protect its proprietary rights. The Company has received fourteen (14)
United States patents and has a number of patent applications pending. The
Company intends to continue to file patent applications covering certain of its
products both domestically and in certain key foreign countries, as appropriate.
The process of seeking patent protection can be long and expensive, and there
can be no assurance that patents will be issued from patent applications or that
any of the Company's existing patents or additional patents are or will be of
sufficient scope or strength to provide meaningful protection or marketing
advantage to the Company. The Company is not aware of any pending or threatened
claims against the Company relating to its patents or trademarks.
Through Targetti USA the Company also has an exclusive license for all
Targetti products and technologies for the U.S. market.
Government Approval
Many of the Company's products have received approval from UL and from ETL,
both of which are
12
<PAGE>
federally accredited by OSHA, as Nationally Recognized Testing Laboratories
(NRTL's). The Company has applied for UL or ETL approval for a number of
additional task, accent and cove lighting fixtures. Through its joint venture
with Targetti, the Company has also submitted and received UL and ETL approval
on recently introduced products through Targetti USA. Products sold for use in
marine vessels must adhere to Coast Guard approval standards, while those sold
for use in aircraft must have FAA approval. The National Electric Code adopted
Article 411 dealing with guidelines for use and approval of low voltage lighting
systems. The Company is continually evaluating these new requirements for UL and
ETL for low voltage lighting products. The Company anticipates that approval
from an appropriate NRTL will be obtained for the Company's existing and planned
low voltage and standard products, although there can be no assurance that such
approval will be granted. If such approval is not obtained, the Company's
business, financial position and results of operations will be materially
adversely affected.
Product Development
The Company maintains an engineering department to support its product
development efforts and to produce custom products for special applications as
well as develop enhancements, improvements and modifications to standard product
configurations. The Company maintains an on-going effort to develop lighting
and related products that can utilize new methods, materials and technology.
The Company's joint venture with Targetti has been very beneficial in
supplementing and expanding engineering development opportunities. Targetti's
maintenance of a state of the art research facility is available to the Company
and access to its experienced personnel assists the Company's own development
effort. Through Targetti USA, the Company expects to continue to expand and
develop its access to Targetti's research facility.
Research and Development
During the last three fiscal years, the Company did not incur any material
research and development expenses.
Environmental Matters
During the last three fiscal years, compliance with environmental laws and
regulations did not have a significant impact on the Company's capital
expenditures, earnings or competitive position. The Company does not anticipate
that it will incur any material capital expenditures for environmental control
facilities during the next fiscal year.
Employees
As of September 30, 1998, the Company had 55 full-time employees, of which 3
were engaged in product development and engineering, 31 were engaged in
manufacturing and assembly operations, 10 were engaged in marketing and sales,
and 11 were employed in finance and administrative positions. None of the
Company's employees are represented by a labor union, and the Company believes
it generally has good relations with its employees. The Company also hires
temporary labor personnel to accommodate special requirements for large projects
and seasonal increases in production. The temporary labor pool represents an
experienced base of people which can be drawn upon as permanent requirements
evolve.
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Item 2. DESCRIPTION OF PROPERTY
The Company's main facility and headquarters is a leased building with
approximately 20,000 square feet of warehouse, assembly and office space,
located in Santa Ana, California. The lease expires September 30, 2001. The
Company has the option to terminate the lease at any time after September 30,
1997 for a one time payment of $12,500. The monthly rent is $7,318 per month in
fiscal 1998 (with an annual 4% increase each October 1st for the term of the
lease) on a "triple net" basis. The Company believes that this current facility
will satisfy its needs for manufacturing and administrative space through the
end of 1999, but will consider leasing additional space in other geographic
locations as the need for regional marketing, sales or distribution capabilities
continues to materialize.
The Company maintained a 3,200 square foot Las Vegas showroom and
demonstration center during fiscal 1998. The lease is a five year lease, with
approximate costs of $3,200 per month on a triple net basis. The office
showroom is intended to support the Company's marketing and sales strategy in
the growing casino/gaming and hospitality market, both in the U.S. and
internationally. The Company, during September 1998, negotiated a sub-lease for
this property to its new distributor in Nevada - Integrated Luminary Alliance
("ILA"). Under the terms of the agreement, ILA is responsible for all costs
associated with the lease of the office.
The Company has leased additional warehouse facilities located close to their
main manufacturing facility in Santa Ana, California. The warehouse is
approximately 5000 square feet and is leased for one year ending April 30, 1999.
The monthly rent for these units is $4,910.
Item 3. LEGAL PROCEEDINGS
The Company is occasionally involved in lawsuits with respect to product
liability claims by third parties. The Company maintains product liability
insurance to cover these type of claims. The Company believes that its
insurance is adequate to cover known existing claims.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's Common Stock is listed on the Nasdaq "Small Cap" Market
under the symbol "TVLI".
The following table reflects the high and low sales prices of the common
stock reported by the Nasdaq small cap market, for the last two fiscal
years.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Quarter Ending: 12/31/96 3/31/97 6/30/97 9/30/97 12/31/97 3/31/98 6/30/98 9/30/98
Common Stock
High 2 3/16 2 11/32 1 15/16 2 1/8 2 1/2 2 1/32 1 7/8 1 1/25
Low 1 1 5/8 1 1/2 1 3/8 1 25/32 1 5/8 1 3/16 7/16
</TABLE>
(b) The number of holders of record of Common Stock was approximately
1,550 on December 3, 1998.
(c) The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain future earnings, if any,
to finance the growth and development of its business.
Recent Sales of Unregistered Securities
14
<PAGE>
In January 1998, and July 1998 the Company issued warrants for the purchase
of the Company's Common Stock to Hill Thompson Capital Markets, Inc. as partial
compensation for investment banking services performed by Hill Thompson Capital
Markets, Inc. The first warrant for 25,000 was issued on January 7, 1998 and is
exercisable at any time until December 31, 2003 at an exercise price of $1.78
per share. The second warrant for 50,000 was issued on July 7, 1998 and is
exercisable at any time until December 31, 2003 at an exercise price of $1.78
per share.
On January 7, 1997, the Company issued two warrants for the purchase of the
Company's Common Stock to Steven J. Goodman in consideration for his services as
a Director of the Company. The first warrant for 12,500 was exercisable at any
time between February 5, 1998 and February 4, 2002 at an exercise price of $1.75
per share. The second warrant for 12,500 was exercisable at any time between
February 5, 1999 and February 4, 2002 at an exercise price of $1.75 per share.
On March 20, 1998 the exercisability date of the second warrant was accelerated
so that the warrant may be exercised effective March 20, 1998.
Each of the above transactions was made in reliance on Section 4(2) of the
Securities Act of 1933, as amended, as a transaction not involving any public
offering. No underwriter or placement agent was involved in any of the
issuances.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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. In November 1997, the joint venture was expanded with the
formation of a jointly owned Company in the U.S. - 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.
Results of Operations
Net sales of $9,578,681 for the fiscal year 1998 were 3% lower than the net
sales of $9,846,174 in the fiscal year 1997. Net sales in 1997 included
$1,272,113 attributed to the shipment of a large project order for a national
customer. Sales of products not related to this large project order increased
12% from $8,574,061 in 1997 to $9,578,681 in 1998 as a result of new product
introductions and successful implementation of market penetration programs in
the core markets of theater, retail and casino gaming.
The gross profit for the fiscal year 1998 was $3,925,230 or 40.9% of net
sales as compared to $4,160,039 or 42.3% of net sales for the 1997 fiscal year.
Selling, general and administrative expenses for fiscal 1998 increased to
49.3% of net sales or $4,722,750 as compared to 36.4% or $3,581,453 in the 1997
fiscal year. This increase in SG&A expenses was related to new product
introductions and heightened sales and marketing activities, incremental SG&A
expenses of Targetti USA and costs associated with the Manufacturing Resource
Planning (MRP) system which was installed in October 1997. A
15
<PAGE>
receipt of $250,000 from Tivoli Systems, Inc. for the settlement of a trademark
dispute, is included as a reduction of SG & A expenses in fiscal year 1998.
Operating losses for the fiscal year 1998 were $797,250 or 8.3% of net
sales as compared to an operating profit of $578,586 or 5.9% of net sales in the
fiscal year 1997. This decrease was due primarily to higher SG&A expenses as
mentioned above, coupled with lower gross margins.
Other expense for fiscal year 1998 was $17,397 and consisted of interest
income of $63,503 on bank deposits, less interest expense on bank loans and
capital leases of $80,900. Other income for the fiscal year 1997 was $10,228
and was derived from interest income of $74,925 on bank deposits less interest
expense on bank loans and capital leases of $85,153.
On November 1, 1997 the Company and Targetti Sankey S.P.A. formed a new
company - Targetti USA. The operating results of Targetti USA are consolidated
with the operating results of the Company. Operating losses of Targetti USA in
fiscal year 1998 were $377,146, resulting in a Minority interest in net loss of
$188,573.
The provision for state income taxes in fiscal year 1998 was $800 compared
to $56,593 in fiscal year 1997. Federal income tax provisions for both years
were covered by net operating loss carry forwards. See Financial Statement Notes
#6.
As a result of the above factors, net losses for the fiscal year 1998 were
$627,144 or $0.16 per share as compared to net income of $511,765 or $0.13 per
share in the 1997 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
recent years, 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's primary sources of cash during fiscal year 1998 were $286,494
contributed by Targetti Sankey S.P.A. to Targetti USA LLC. and $165,234 from
increased use of our available bank lines of credit. Net cash used in operating
activities was $208,271 which primarily consisted of net losses of $627,144 and
losses of $188,573 generated by Targetti USA, offset by depreciation of $294,373
and changes in operating assets and liabilities of $210,291.
On August 6, 1998 the Company announced that its Board of Directors had
approved the repurchase of up to an aggregate of 250,000 shares of its Common
Stock. Under this program the Company repurchased 47,000 shares at a cost of
$29,318 during fiscal year 1998.
The above factors contributed to a net decrease in cash of $27,081 in 1998.
Working capital decreased to $3,555,994 at September 30, 1998, as compared
to $3,725,303 at September
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<PAGE>
30, 1997.
Accounts receivable as of September 30, 1998, decreased to $1,438,036 from
$1,615,561 at September 30, 1997. This decrease was related to the decrease in
sales volume. The days sales outstanding in accounts receivable decreased to 57
days at September 30, 1998, as compared to 59 days at September 30, 1997.
Inventories as of September 30, 1998, increased to $1,857,865 as compared
to $1,691,943 at September 30, 1997. The number of months material costs of
sales in inventory at September 30, 1998, increased to 4.0 months as compared to
3.6 months at September 30, 1997. The inventory increase was primarily related
to a build in material components to support new product programs such as CCT
and Mondial.
Accounts payable as of September 30, 1998, increased to $1,376,254 as
compared to $1,129,405 at September 30, 1997. The number of days in accounts
payable were 55 days at September 30, 1998 which represents a small decrease
from 56 days as of September 30, 1997.
Capital expenditures in the fiscal year 1998 totaled $170,654 and consisted
of $97,311 for improvements to the manufacturing facility and new tooling, and
$73,343 for computer equipment and other assets.
The Company obtained a line of credit in July, 1995, with Union Bank of
California which was renewed on March 31, 1998, with an increased borrowing base
of $1,250,000. The agreement has an expiration date of March 1, 2000. The
renewal agreement contains interest at the bank's Reference Rate (8.25% at
September 30,1998) plus 1% per annum. The terms of the new agreement provide for
borrowings of up to the lessor of $1,250,000 or the aggregate of 80% of eligible
accounts receivable plus 50% of eligible inventory up to $400,000. At September
30, 1998, $717,500 was outstanding and $532,500 was available pursuant to the
Agreement. 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, 1998, the Company was in compliance with all covenants and
restrictions of this agreement. See Financial Statement Note #4.
The renewal agreement also provides an additional line of credit of
$250,000 to be used for fixed asset purchases. This part of the agreement
contains interest at the bank's Reference Rate (8.25% at March 31, 1998) plus
1.0% per annum. The Company may borrow, repay and re-borrow amounts up to
$250,000, at any time prior to March 3, 1999.The Company will then repay the
balance by monthly installments through February 3, 2002. At September 30, 1998,
$106,177 was outstanding pursuant to the agreement. See Financial Statement Note
#4.
On June 4th 1998 Targetti USA LLC, obtained a line of credit of $150,000
with a financial institution, bearing interest at the bank's Reference Rate
(8.25% at September 30, 1998) plus 1.0% per annum. The Company may borrow, repay
and re-borrow amounts up to $150,000, at any time prior to March 1, 1999. At
September 30, 1998, $10,000 was outstanding and $140,000 was available pursuant
to the agreement. The arrangement is secured by substantially all of the assets
of Targetti USA LLC. There are no restrictive covenants contained in the
agreement. See Financial Statement #4.
17
<PAGE>
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. The Company's strategy for sales growth to
the casino and gaming industry is based upon the premise that there 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. Should the Company experience a slowdown
in construction, the slowdown may cause the Company's business, financial
position and results to be materially adversely affected.
Penny Stock Regulations
The Common Stock is traded on the Nasdaq SmallCap Market. 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. 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.
On September 17, 1998 the Company received correspondence from The Nasdaq
Small Cap Market notifying the Company that its Common Stock will be subject to
delisting from the Nasdaq Small Cap Market if the minimum closing bid price of
its Common Stock does not close above $1.00 for ten consecutive trading days
prior to December 17, 1998. Tivoli has requested a hearing to appeal this
proposed action, which pursuant to Nasdaq rules will have the effect of
postponing the proposed delisting until the appeal is heard and considered by
Nasdaq. As at December 22,1998 the stock had failed to trade above $1.00 for ten
consecutive trading days since the receipt of the September 17, 1998 letter from
the Nasdaq Small Cap. Market.
"Year 2000" Requirements
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 has identified its manufacturing and financial
planning software as being most critical. The manufacturing and financial
planning software was purchase and installed in fiscal year ending September 30,
1997. The Company has received information from the vendor of this software
indicating that the software will properly handle dates for the year 2000 and
beyond. In addition, the Company currently relies upon computer hardware and
software systems from various third party vendors to manage other 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. A failure by a third party vendor to adequately address the Year
2000 issue could 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. The Company does not have
more than 10% of its revenue with any one customer. Therefore, the financial
exposure to the Company of the failure of any one customer to be Year 2000
compliant is limited. Should a number of customers not be Year 2000 compliant,
or should a number the Company's customers be negatively impacted by Year 2000
problems, the negative consequences to the Company's customers could have a
material adverse effect on the Company's business, financial position, and
results of operation. The costs to become Year 2000 compliant and to obtain
certificates from third party vendors is not material to the Company.
Item 7. FINANCIAL STATEMENTS
Independent Auditors' Report................................ F-2
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Balance Sheet As Of September 30, 1998...................... F-3
Statements Of Operations For Each Of The Years
In The Two-Year Period Ended September 30, 1998............ F-4
Statements Of Stockholders' Equity (Capital Deficiency)
For Each Of The Years In The Two-Year Period Ended
September 30, 1997 and 1998................................ F-5
Statements of Cash Flows For Each Of The Years In
The Two-Year Period Ended September 30, 1997 and 1998...... F-6
Notes To Financial Statements............................... F-7
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Item 10. EXECUTIVE COMPENSATION
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by items 9, 10, 11 and 12 is incorporated by
reference to Tivoli Industries, Inc.'s definitive proxy statement relating to
its annual meeting of stockholders, which will be filed with the Commission
within 120 days of the end of fiscal 1998.
Item 13: EXHIBITS AND REPORTS
Exhibit No. Description
3.1 Articles of Incorporation, as amended (1)
3.2 Bylaws, as amended (1)
4.1 Form of common stock warrant (4)
10.1 Line of credit agreement with Union Bank (5)
19
<PAGE>
10.2 Lease of the Company's principal executive offices at
1513 East St. Gertrude Place, Santa Ana, California
92705 (1)
*10.3 Employment Agreement between the Company and Terrence
C. Walsh (4)
*10.4 1994 Stock Option Plan (1)
*10.5 1995 Stock Option Plan (2)
*10.6 1995 Non-Employee Director's Stock Option Plan (2)
*10.7 1997 Equity Incentive Plan (3)
10.8 Master Agreement between the Company, Targetti Sankey,
S.p.A. and Targetti USA LLC dated as of November 1,
1997 (4)
**10.9 Operating Agreement of Targetti USA LLC, dated as of
November 1, 1997 (4)
**10.10 Amended and Restated License and Distribution Agreement
Between the Company and Targetti Sankey, S.p.A., dated
as of November 1, 1997 (4)
**10.11 Manufacturing Agreement between the Company and
Targetti USA LLC, dated as of November 1, 1997 (4)
10.12 Line of credit agreement between Targetti USA LLC and
Union Bank of California as at May 6, 1998 (6)
22 Power of Attorney. See Signature Page.
23 Consent of Corbin & Wertz
24 List of subsidiaries
27 Financial Data Schedule
* Indicates management contract or compensatory plan or agreement.
** Confidential treatment has been requested for portions of this agreement.
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (File No. 33-79322-L.A.).
(2) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended September 30, 1995 (File No. 0-24604)
(3) Incorporated by reference to Exhibit 99.1 to the Company's Registration
Statement on Form S-8, File No. 333-24795, filed April 9, 1997.
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended September 30, 1997 (File No. 0-24604).
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for quarterly period ended March 31, 1998 (File No. 0-24604).
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarterly period ended June 30, 1998 (File No. 0-24604).
20
<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: December 23, 1998 By: /s/ Terrence C. Walsh
------------------------------------
Terrence C. Walsh
Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Terrence C. Walsh, his attorney-in-fact, each
with the power of substitution, for him, in any and all capacities, to sign any
amendments to this Report, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and conforming all that each the attorney in-fact, or his
substitute may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Terrence C. Walsh Chairman, Chief Executive December 23, 1998
- -------------------------- Officer and Director
Terrence C. Walsh
/s/ Charles Kimmel President, Chief Operation December 23, 1998
- -------------------------- Officer and Chief
Charles Kimmel Financial Officer
/s/ Vincent F. Monte Director December 23, 1998
- --------------------------
Vincent F. Monte
/s/ Gerald Morris Director December 23, 1998
- --------------------------
Gerald Morris
/s/ Peter Shaw Director December 23, 1998
- --------------------------
Peter Shaw
</TABLE>
21
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report............................................. F-2
Balance Sheet As Of September 30, 1998................................... F-3
Statements Of Operations For Each Of The Years
In The Two-Year Period Ended September 30, 1998........................ F-4
Statements Of Stockholders' Equity (Capital Deficiency)
For Each Of The Years In The Two-Year Period Ended
September 30, 1997 and 1998............................................ F-5
Statements Of Cash Flows For Each Of The Years In
The Two-Year Period Ended September 30, 1997 and 1998.................. F-6
Notes To Financial Statements............................................ F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Tivoli Industries, Inc.
We have audited the accompanying consolidated balance sheet of Tivoli
Industries, Inc. and subsidiary (the "Company") as of September 30, 1998, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the two-year period ended September 30, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Tivoli
Industries, Inc. and subsidiary as of September 30, 1998, and the results of
their operations and their cash flows for each of the years in the two-year
period ended September 30, 1998, in conformity with generally accepted
accounting principles.
CORBIN & WERTZ
Irvine, California
October 30, 1998, except as to Note 9,
Which is as of December 31, 1998
See accompanying notes to financial statements
F-2
<PAGE>
TIVOLI INDUSTRIES, INC.
BALANCE SHEET
September 30, 1998
ASSETS
<TABLE>
<CAPTION>
Current assets:
<S> <C>
Cash and cash equivalents $1,362,639
Accounts receivable, less allowance for doubtful
accounts of $37,721 1,438,036
Inventories 1,857,865
Prepaid expenses and other 608,215
----------
Total current assets 5,266,755
----------
Property and equipment:
Machinery and equipment 928,846
Furniture and fixtures 273,058
Tooling 329,708
----------
1,531,612
Less accumulated depreciation (843,388)
----------
Net property and equipment 688,224
----------
Goodwill, net of accumulated amortization of $157,612 501,926
Patents, net of accumulated amortization of $177,141 115,000
Deferred tax asset 105,518
Other assets 168,572
----------
$6,845,995
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
Current liabilities:
Accounts payable $1,376,254
Accrued expenses 283,525
Current maturities of obligations under a capital lease 50,982
----------
Total current liabilities 1,710,761
Bank line of credit 833,677
Obligations under a capital lease, net of current portion 117,172
Deferred tax liability 133,051
Minority interest 119,531
----------
Total liabilities 2,914,192
----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 1,000,000 shares
authorized, none outstanding -
Common stock, $.001 par value; 10,000,000 shares
authorized, 3,890,871 shares outstanding 3,938
Additional paid-in capital 4,478,426
Accumulated deficit (521,243)
Less: Treasury stock, 47,000 shares (29,318)
----------
Total stockholders' equity 3,931,803
----------
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
TIVOLI INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For Each of The Years In The Two-Year
Period Ended September 30, 1998
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net sales $9,578,681 $9,846,174
Cost of sales 5,653,451 5,686,135
---------- ----------
Gross profit 3,925,230 4,160,039
Selling, general and administrative expenses 4,722,750 3,581,453
---------- ----------
(Loss) income from operations (797,520) 578,586
---------- ----------
Other income (expense):
Interest expense (80,900) (85,153)
Interest income 63,503 74,925
---------- ----------
Total other income (expense) (17,397) (10,228)
---------- ----------
(Loss) income before provision for income taxes (814,917) 568,358
Minority interest in net loss of consolidated subsidiary 188,573 -
---------- ----------
Income before provision for income taxes (626,344) 568,358
Provision for income taxes 800 56,593
---------- ----------
Net (loss) income $ (627,144) $ 511,765
========== ==========
Per share data:
Net (loss) income (basic) $ (0.16) $ 0.13
========== ==========
Net (loss) income (diluted) $ (0.16) $ 0.13
========== ==========
Weighted average number of common and common
equivalent shares:
Basic 3,933,581 3,933,584
========== ==========
Diluted 3,933,581 3,970,667
========== ==========
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
TIVOLI INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For Each of The Years In The Two-Year
Period Ended September 30, 1998
<TABLE>
<CAPTION>
Retained
Common Stock Treasury Stock Additional Earnings
-------------------- -------------------- Paid-in (Accumulated
Shares Amount Shares Amount Capital Deficit) Total
----------- ------ ------- -------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, October 1, 1996 3,920,721 $3,921 - $ - $4,352,698 $(405,864) $3,950,755
Issuance of common stock
for services 17,150 17 - - 22,478 - 22,495
Issuance of warrants for
services rendered - - - - 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
Issuance of warrants for
services rendered - - - - 86,679 - 86,679
Stock repurchase - - (47,000) (29,318) - - (29,318)
Net loss - - - - - (627,144) (627,144)
--------- ------ ------- -------- ---------- --------- ----------
Balances, September 30,
1998 3,937,871 $3,938 (47,000) $(29,318) $4,478,426 $(521,243) $3,931,803
========= ====== ======= ======== ========== ========= ==========
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
TIVOLI INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Each of The Years In The Two-Year
Period Ended September 30, 1998
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (627,144) $ 511,765
Adjustment to reconcile net (loss) income to net cash
provided by operating activities:
Change in allowance for doubtful accounts (49,279) 71,401
Depreciation and amortization 294,373 163,778
Write-off of capitalized patent costs 65,382 -
Deferred income taxes - 22,639
Minority interest in net loss of consolidated subsidiary (188,573) -
Common stock issued for services - 22,495
Warrants for the purchase of common stock
issued for services 86,679 16,571
Changes in operating assets and liabilities:
Accounts receivable 226,804 (338,478)
Inventories (144,312) (643,543)
Prepaid expenses and other (184,530) 1,994
Accounts payable 246,849 157,492
Accrued expenses and other current liabilities 65,480 112,675
---------- ----------
Net cash (used in) provided by operating activities (208,271) 98,789
---------- ----------
Cash flows from investing activities:
Deposits and other (23,280) 38,656
Purchases of property and equipment (170,654) (360,583)
Proceeds from sales of property and equipment 298 -
Patent expenditures - (36,428)
---------- ----------
Net cash used in investing activities (193,636) (358,355)
---------- ----------
Cash flows from financing activities:
Net borrowings under bank line of credit 165,234 (3,080)
Principal payments on capital lease obligations (47,584) (40,562)
Stock repurchase (29,318) -
Investment by minority interest 286,494 -
---------- ----------
Net cash provided by (used in) financing activities 374,826 (43,642)
---------- ----------
Net decrease in cash and cash equivalents (27,081) (303,208)
Cash and cash equivalents, beginning of year 1,389,720 1,692,928
---------- ----------
Cash and cash equivalents, end of year $1,362,639 $1,389,720
========== ==========
Supplemental disclosure of cash flow information -
Cash paid during the year for:
Interest $ 80,723 $ 80,153
========== ==========
Income taxes $ 40,423 $ 3,133
========== ==========
Noncash investing and financing activities:
The Company acquired computer software under capital lease obligations totaling
$235,000 during the year ended September 30, 1997.
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
TIVOLI INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Each of The Years In The Two-Year
Period Ended September 30, 1998
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.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Tivoli Industries,
Inc. and Targetti USA, LLC. On November 1, 1997, the Company and Targetti Sankey
S.P.A, a corporation organized under the laws of Italy, formed Targetti USA, LLC
("Targetti USA") for the purpose of engaging in the marketing and sale of
lighting products. The Company contributed approximately $476,000 of certain
assets and $168,000 of related liabilities to Targetti USA. Targetti Sankey
S.P.A. contributed approximately $286,000 of cash and $22,000 of inventories to
Targetti USA. All significant intercompany balances and transactions have been
eliminated in consolidation.
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 numbers approximately 6,000 (unaudited) accounts and is 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 consolidated 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 consolidated
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.
F-7
<PAGE>
TIVOLI INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
Fair Value of Financial Instruments
- -----------------------------------
These historical consolidated 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
consolidated financial statements. The financial instruments consist of cash
and cash equivalents, accounts receivable, note receivable from related party,
accounts payable and the bank line of credit. The carrying amounts of the
Company's financial instruments generally approximate their fair values as of
September 30, 1998. In the case of the note receivable from related party, which
is included in other assets in the accompanying consolidated balance sheet (see
Note 2), it was not practical to determine the fair value due to the lack of a
market for such financial instruments.
Concentrations of Credit Risk
- -----------------------------
The Company maintains cash balances at a certain financial institution in which
amounts up to $100,000 are insured by the Federal Deposit Insurance Corporation
("FDIC"). During the year ended September 30, 1998, the Company had cash
balances at the financial institution which exceeded the FDIC limit.
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, 1998, no one customer accounted for greater
than 10% of net sales. As of September 30, 1998, no one customer accounted for
greater than 10% of total accounts receivable. During the year ended September
30, 1997, one customer accounted for 14% of net sales.
The Company purchased certain products from one nonaffiliated supplier which
accounted for 30.3% and 27.6% of total purchases in 1998 and 1997, respectively.
This nonaffiliated supplier accounted for 8.6% and 21.2% of total accounts
payable as of September 30, 1998 and 1997, respectively. Accounts payable to a
related party totaled 23.6% of total accounts payable as of September 30, 1998.
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, 1998, cash
and cash equivalents included approximately $851,000 of U.S. Treasury bills.
Inventories
- -----------
Inventories, consisting primarily of component parts, are valued at the lower of
cost (average cost method) or market.
F-8
<PAGE>
TIVOLI INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
Included in the accompanying consolidated balance sheet is inventory with a
historical carrying value of $1,857,865 which represents management's estimate
of its net realizable value. Such value is based on 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
consolidated 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
Tooling 5 years
Included within machinery and equipment is the Company's manufacturing resource
planning system.
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 amount 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.
Depreciation expense for the years ending September 30, 1998 and 1997 totaled
$210,371 and $98,064, respectively.
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 amortizes the goodwill over
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, 1998, no impairment of goodwill was determined by management.
Amortization of goodwill for each of the two years ended September 30, 1998
amounted to $21,985.
F-9
<PAGE>
TIVOLI INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
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, 1998 and 1997 amounted to $62,017 and $43,729, respectively.
During fiscal 1998, the Company wrote-off $65,382 of capitalized patent costs.
Selling, general and administration ("SG&A") expenses for the fiscal year ended
September 30, 1998 includes a payment of $250,000 for the settlement of a
trademark dispute. The payment of $250,000 is included as a reduction to SG&A
expenses in the fiscal year ended September 30, 1998.
Minority Interest
- -----------------
Minority interest represents the minority stockholders proportionate share of
the equity of Targetti USA.
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 (loss) and income (loss) per share, as if the fair
value method of accounting defined in SFAS 123 had been applied (see Note 6).
The Company has elected to account for its stock-based compensation to employees
under APB 25.
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.
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.
F-10
<PAGE>
TIVOLI INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
Advertising
- -----------
The Company reports the costs of all advertising as expense in the period in
which those costs are incurred. Advertising expense was approximately $59,000
and $82,000 for the years ended September 30, 1998 and 1997, 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 7).
Earnings Per Share
- ------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share
("EPS"). SFAS No. 128 requires dual presentation of basic EPS and diluted EPS
on the face of all income statements issued after December 15, 1997 for all
entities with complex capital structures. Basic EPS is computed as net income
divided by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur from
common shares issuable through stock options, warrants and other convertible
securities. Both years presented have been restated to adopt the provisions of
SFAS No. 128. The weighted average number of common shares outstanding have been
restated to adopt the provisions of SFAS No. 128. The effects of common stock
equivalents were not included in the per share calculations of net loss per
common share for fiscal 1998, as their effects would be antidilutive.
The following table illustrates the required disclosure of the reconciliation of
the numerators and denominators of the basic and diluted EPS computations.
<TABLE>
<CAPTION>
For The Year Ended September 30, 1997
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------------------------------
<S> <C> <C> <C>
Basic EPS -
Income available to common
stockholders $511,765 3,933,584 $0.13
=====
Effect of dilutive securities -
Options - 37,083
-------- ----------
Diluted EPS -
Income available to common
stockholders plus assumed
conversions $511,765 3,970,667 $0.13
======== ========== =====
</TABLE>
F-11
<PAGE>
TIVOLI INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
- -------------------------------------------------------------------------------
Limitations on Dividends
- ------------------------
Pursuant to various state laws, the Company is currently restricted, and may be
restricted for the foreseeable future, from making dividends to its stockholders
as a result of an accumulated deficit as of September 30, 1998.
New Accounting Pronouncements
- -----------------------------
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 130 requires that an enterprise report, by major
components and as a single total, the change in its net assets during the period
from nonowner sources; and SFAS No. 131 establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas and major customers. Adoption of these
statements is not expected to impact the Company's financial position, results
of operations or cash flows and any effect will be limited to the form and
content of its disclosures. Both statements are effective for fiscal years
beginning after December 15, 1997, with earlier application permitted.
Year 2000
- ---------
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 could 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.
NOTE 2 - OTHER ASSETS
- ---------------------
Other assets consist of the following at September 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Note receivable from related party $ 50,000
Note receivable - other 64,806
Deposits and other 53,766
--------
$168,572
========
</TABLE>
Note receivable from related party 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.
F-12
<PAGE>
TIVOLI INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1998
NOTE 2 - OTHER ASSETS, continued
- --------------------------------
During fiscal 1998, the Company sold certain of its property and equipment,
which had a net book value of $64,806, in exchange for a note receivable of the
same amount. The note bears interest at 6% per annum payable over 60 months
beginning March 1, 1999.
NOTE 3 - CAPITAL LEASE OBLIGATIONS
- ----------------------------------
On October 10, 1996, the Company entered into a capital lease agreement which
expires in 2002 whereby the Company will lease certain software and hardware in
connection with an integrated manufacturing resource planning 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>
<CAPTION>
<S> <C>
Equipment $258,236
Accumulated depreciation (57,844)
--------
$200,392
========
</TABLE>
Future minimum lease obligations pursuant to the capital leases are as follows:
<TABLE>
<CAPTION>
Fiscal Years Ending
-------------------
<S> <C>
1999 $ 62,523
2000 62,523
2001 60,271
2002 4,823
--------
Total minimum lease obligations 190,140
Less interest, primarily at 8.5% per annum (21,986)
--------
Present value of future minimum lease obligations 168,154
Less current installments (50,982)
--------
Long-term obligations $117,172
========
</TABLE>
NOTE 4 - BANK LINE OF CREDIT
- ----------------------------
The Company has a line of credit agreement (the "Agreement") with a financial
institution, bearing interest at the bank's public reference rate (8.25% at
September 30, 1998) plus 1.0% per annum, which expires on March 1, 2000. The
terms of the Agreement provide for borrowings of up to the lesser of $1,250,000
or the aggregate of 80% of eligible accounts receivable plus 50% of eligible
inventory up to $400,000. At September 30, 1998, $717,500 was outstanding and
$532,500 was available pursuant to the Agreement. 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.
F-13
<PAGE>
TIVOLI INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1998
NOTE 4 - BANK LINE OF CREDIT, continued
- ---------------------------------------
The Company has an equipment line of credit agreement (the "Equipment Line")
with a financial institution, bearing interest at the bank's public reference
rate (8.25% at September 30, 1998) plus 1.0% per annum, which expires on
February 3, 2003. The terms of the Equipment Line provide for purchase advances
of up to $250,000, secured by the related equipment purchased. At September
30, 1998, $106,177 was outstanding pursuant to the Equipment Line.
Targetti USA has a line of credit agreement (the "Line") with a financial
institution, bearing interest at the bank's prime rate (8.25% at September 30,
1998) plus 1.0% per annum, which expires on March 1, 1999. The terms of the
Line provide for borrowings of up to $150,000. At September 30, 1998, $10,000
was outstanding and $140,000 was available pursuant to the Line. Such
arrangement is secured by substantially all of Targetti USA's assets.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Operating Leases
- ----------------
The Company has two building leases which expire through fiscal 2001 and four
building leases which expire through fiscal 1999. The Company also has equipment
leases which will expire through fiscal 2003.
Future annual minimum rental commitments in the aggregate under these operating
leases are as follows:
<TABLE>
<CAPTION>
Years Ending
September 30,
------------
<S> <C>
1999 $196,491
2000 159,089
2001 132,170
2002 8,863
2003 1,477
--------
$498,090
========
</TABLE>
Total rent expense under operating leases amounted to $175,516 and $126,036 for
the years ended September 30, 1998 and 1997, 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, 1998 and 1997,
sales levels on those specific products have not been sufficient to require
material royalty payments.
F-14
<PAGE>
TIVOLI INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1998
NOTE 5 - COMMITMENTS AND CONTINGENCIES, continued
- -------------------------------------------------
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.
NOTE 6 - 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.
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
F-15
<PAGE>
TIVOLI INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1998
NOTE 6 - STOCKHOLDERS' EQUITY, continued
- ----------------------------------------
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. The warrants expired on
August 15, 1998.
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.
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. During fiscal 1998, 12,500
warrants were accelerated as to their exercise date (March 20, 1998). For
financial statement purposes, such warrants have been treated as cancelled and
new warrants issued.
On January 7, 1998, the Company issued warrants to purchase 25,000 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 $26,500
for the fair value of the warrants issued.
On July 7, 1998, the Company issued warrants to purchase 50,000 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 $26,000
for the fair value of the warrants issued.
To date, no warrants have been exercised.
F-16
<PAGE>
TIVOLI INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1998
NOTE 6 - STOCKHOLDERS' EQUITY, continued
- ----------------------------------------
During 1998, the Board of Directors of the Company authorized the repurchase, in
the name and on behalf of the Company, of up to a maximum of 250,000 shares of
the common stock of the Company. As of September 30, 1998, the Company
repurchased and plans to retire 47,000 shares of its common stock for aggregate
consideration of $29,318.
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 December 1997, options to purchase 75,000 shares were granted at the
estimated fair value of the Company's common stock of $2.19 per share at the
time of grant. The options vest 25% annually, beginning on the date of grant
and expire in December 2007.
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.
A summary of all employee stock option activity for the years ended September
30, 1998 and 1997 follows:
F-17
<PAGE>
TIVOLI INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1998
NOTE 6 - STOCKHOLDERS' EQUITY, continued
- ----------------------------------------
<TABLE>
<CAPTION>
Price Range
Options Per Share
-------- -------------
<S> <C> <C>
Balance, October 1, 1996 486,000 $ 2.80-$5.875
Granted 473,500 $ 1.375-$1.75
Canceled (140,834) $ 1.375-$3.31
--------
Balance, September 30, 1997 818,666 $1.375-$5.875
Granted 75,000 $ 2.19
Canceled (76,666) $ 1.375-$3.31
--------
Balance, September 30, 1998 817,000 $1.375-$5.875
========
Exercisable, September 30, 1998 329,400
========
</TABLE>
SFAS 123 Pro Forma Information
- ------------------------------
Pro forma information regarding net income (loss) and net income (loss) 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, 1998 and 1997; risk free interest rate 5.74% and
5.86%, respectively; dividend yield of 0%; expected life of the options of 1 and
2 years, respectively; and volatility factors of the expected market price of
the Company's common stock of 72% and 122%, respectively.
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.
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 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,
1998 and 1997, are as follows:
F-18
<PAGE>
TIVOLI INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1998
NOTE 6 - STOCKHOLDERS' EQUITY, continued
- ----------------------------------------
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Net income (loss), as reported $(627,144) $ 511,765
Adjustment to compensation expense under SFAS 123 (70,000) (130,000)
--------- ---------
Pro forma net (loss) income $(697,144) $ 381,765
========= =========
Pro forma net (loss) income per share - basic $ (.16) $ .13
========= =========
Pro forma net (loss) income per share - diluted $ (.18) $ .10
========= =========
</TABLE>
NOTE 7 - INCOME TAXES
- ---------------------
The following summarizes the provision for income taxes for the years ended
September 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Current:
Federal $ - $ -
State 800 33,954
-------- ---------
800 33,954
-------- ---------
Deferred:
Federal - 20,013
State - 2,626
-------- ---------
- 22,639
-------- ---------
Provision for income taxes $ 800 $ 56,593
======== =========
</TABLE>
A reconciliation of the expected statutory Federal income tax provision to the
(provision) benefit for income taxes for the years ended September 30, 1998 and
1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
(Benefit) provision for income taxes at a Federal
statutory rate of 34% $(212,957) $ 193,242
(Increase) reduction in income taxes resulting from:
Changes in the valuation allowance for deferred
Tax-assets allocated to income tax 212,957 (173,229)
State income taxes 800 36,580
--------- ---------
Provision for income taxes $ 800 $ 56,593
========= =========
</TABLE>
F-19
<PAGE>
TIVOLI INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For Each of The Years In The Two-Year
Period Ended September 30, 1998
NOTE 7 - INCOME TAXES, continued
- --------------------------------
At September 30, 1998, significant components of the Company's net deferred
taxes are as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 259,881
Reserves and allowances 129,158
---------
389,039
Less valuation allowance (283,521)
---------
Total deferred tax assets 105,518
Deferred tax liabilities-
Computer software (133,051)
---------
Net deferred tax liability $ (27,533)
=========
</TABLE>
The net change in the valuation allowance was a increase of approximately
$190,571 for the year ended September 30, 1998.
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
$764,000 as of September 30, 1998 that expire through the year 2001, of which
approximately $263,000 are subject to annual limitations of $50,000.
NOTE 8 - RELATED PARTY TRANSACTION
- ----------------------------------
The Company made cash payments totaling $106,154 during fiscal 1997 to various
related parties of the Company for consulting services which were capitalized in
connection with the Company's manufacturing resource planning system.
During fiscal 1998, $24,000 was paid to a related party for consulting services.
NOTE 9 - SUBSEQUENT EVENT
- -------------------------
On September 17, 1998, the Company received correspondence from the Nasdaq Small
Cap Market notifying the Company that its common stock will be subject to
delisting from the Nasdaq Small Cap Market if the minimum closing bid price of
its common stock does not close above $1.00 for ten consecutive days prior to
December 17, 1998. Tivoli has requested a hearing to appeal this proposed
action, which pursuant to Nasdaq rules will have the effect of postponing the
proposed delisting until the appeal is heard and considered by Nasdaq. As of
December 3, 1998, the stock failed to trade above $1.00 for ten consecutive days
since the receipt of the September 17, 1998 letter from the Nasdaq Small Cap
Market.
F-20
<PAGE>
EXHIBIT 24
List of Subsidiaries
- --------------------
Targetti USA LLC - Incorporated in California, USA
Tivoli de Mexico, S. A. - Incorporated in Mexico
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 1,362,639
<SECURITIES> 0
<RECEIVABLES> 1,438,036
<ALLOWANCES> 37,721
<INVENTORY> 1,857,865
<CURRENT-ASSETS> 5,266,755
<PP&E> 1,531,612
<DEPRECIATION> 843,388
<TOTAL-ASSETS> 6,845,995
<CURRENT-LIABILITIES> 1,710,761
<BONDS> 0
0
0
<COMMON> 3,938
<OTHER-SE> 3,927,865
<TOTAL-LIABILITY-AND-EQUITY> 6,845,995
<SALES> 9,578,681
<TOTAL-REVENUES> 9,578,681
<CGS> 5,653,451
<TOTAL-COSTS> 10,376,201
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,900
<INCOME-PRETAX> (626,344)
<INCOME-TAX> 800
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (627,144)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
