U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(MARK ONE)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR A5(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (no fee required)
Commission file number 0-23544
EROX CORPORATION______
(Name of small business issuer in its charter)
California 94-3107202
- --------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. employee
or organization) Identification No.)
4034 Clipper Court, Fremont, California 94538
- --------------------------------------------- -------------------
(Address of principal executive offices) Zip code)
Issuer's telephone number: (510) 226-6874
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. 10,041,905 shares of Common
Stock as of October 31, 1996.
Total Pages: 13
<PAGE>
EROX CORPORATION
INDEX
Page
----
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets (Unaudited)
as of September 30, 1996
and December 31, 1995............................................ 2
Condensed Statements of Income (Unaudited)
for the Three Months and Nine Months Ended
September 30, 1996 and 1995...................................... 3
Statements of Cash Flows (Unaudited)
for the Nine Months
Ended September 30, 1996 and 1995................................ 4
Notes to Condensed Financial Statements (Unaudited).............. 5
Item 2. Management's Discussion and Analysis
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 6
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 9
SIGNATURES................................................................... 10
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
<PAGE>
<TABLE>
EROX CORPORATION
Condensed Balance Sheets
(Unaudited)
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 982,436 $ 2,186,828
Accounts receivable, net of allowances of $55,934 2,737,225 1,954,508
and $128,324 in 1996 and 1995, respectively
Inventory 3,404,318 1,799,728
Other current assets 128,596 168,785
------------ ------------
Total current assets 7,252,575 6,109,849
Property and equipment, net 75,138 78,214
------------ ------------
$ 7,327,713 $ 6,188,063
============ ============
Liabilities and Shareholders' equity
Current liabilities:
Accounts payable $ 2,328,551 $ 731,777
Loan payable, bank -- 500,000
Other accrued expenses 543,194 1,395,056
------------ ------------
Total current liabilities 2,871,745 2,626,833
Commitments -- --
Shareholders' equity:
Convertible preferred stock, issuable in series, no par value,
10,000,000 shares authorized, no shares issued and outstanding -- --
Common stock, no par value, 40,000,000 shares authorized,
10,041,905 and 9,911,972 shares issued and outstanding
at September 30, 1996 and December 31, 1995, respectively 17,324,734 16,823,918
Accumulated deficit (12,868,766) (13,262,688)
------------ ------------
Total shareholders' equity 4,455,968 3,561,230
------------ ------------
$ 7,327,713 $ 6,188,063
============ ============
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
EROX CORPORATION
Condensed Statements of Income
(Unaudited)
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 4,472,682 $2,067,835 $ 13,665,684 $ 5,189,795
Cost of goods sold 1,227,048 634,723 3,738,410 1,530,110
----------- ---------- ------------ -----------
Gross profit 3,245,634 1,433,112 9,927,274 3,659,685
Expenses:
Research and development 140,364 67,909 301,670 214,070
Selling, general and administrative 2,875,166 1,727,881 9,247,882 4,780,642
----------- ---------- ------------ -----------
Total expenses 3,015,530 1,795,790 9,549,552 4,994,712
----------- ---------- ------------ -----------
Income (loss) from operations 230,104 (362,678) 377,722 (1,335,027)
Interest income 11,266 20,963 24,094 100,810
Interest expense 522 -- 2,981 --
Other income 14,193 -- 15,820 --
----------- ---------- ------------ -----------
Income (loss) before taxes 255,041 (341,715) 414,655 (1,234,217)
Income taxes 20,733 -- 20,733 --
----------- ---------- ------------ -----------
Net income (loss) $ 234,308 $ (341,715) $ 393,922 $(1,234,217)
=========== ========== ============ ===========
Net income (loss) per share $ 0.02 $ (0.03) $ 0.04 $ (0.13)
=========== ========== ============ ===========
Shares used in calculation of net
income (loss) per share 10,624,096 9,853,439 10,459,904 9,852,467
=========== ========== ============ ===========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
EROX CORPORATION
Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine months ended September 30,
1996 1995
----------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 393,922 $(1,234,217)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 82,296 129,708
Changes in operating assets and liabilities:
Accounts receivable (782,717) (1,099,436)
Inventory (1,604,590) (894,863)
Other current assets 40,189 (1,804)
Accounts payable and accrued liabilities 744,912 699,586
----------- -----------
Net cash used in operating activities (1,125,988) (2,401,026)
Cash Flows from Investing Activities
Proceeds from maturity of held-to-maturity investments -- 3,461,735
Purchase of property and equipment (79,220) (33,130)
----------- -----------
Net cash provided by (used in) investing activities (79,220) 3,428,605
Cash Flows from Financing Activities
Proceeds from issuance of common stock 500,816 40,000
Proceeds from (payments on) bank borrowings (500,000) --
----------- -----------
Net cash provided by financing activities 816 40,000
Net increase (decrease) in cash and cash equivalents (1,204,392) 1,067,579
Cash and cash equivalents at beginning of the period 2,186,828 520,181
----------- -----------
Cash and cash equivalents at end of the period $ 982,436 $ 1,587,760
=========== ===========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
EROX Corporation
Notes to Condensed Financial Statements
(Unaudited)
September 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months and nine months ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for the calendar year ending December 31, 1996. For further
information, refer to the financial statements and footnotes thereto included in
the Company's annual report on Form 10-KSB for the year ended December 31, 1995.
Inventory
Inventories are stated at the lower of cost (first in - first out method) or
market. The inventory at September 30, 1996 consists of finished goods inventory
valued at $923,551 work in process of $452,160 and raw materials of $2,028,607.
At December 31, 1995, these balances were $352,313, $279,177 and $1,168,238,
respectively.
Net Income (Loss) Per Share
Net income per share is computed using the weighted average number of shares of
common stock outstanding and common equivalent shares from stock options. The
latter are excluded from the computation of net loss per share as their effect
is antidilutive.
<PAGE>
Item 2. Management's Discussion and Analysis
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Except for the historical
information contained in this discussion and analysis of financial condition and
results of operations, the matters discussed herein are forward looking
statements. These forward looking statements include but are not limited to the
Company's plans for sales growth and expansion into new channels of trade,
expectations of gross margin, expenses, new product introduction, and the
Company's liquidity and capital needs. These matters involve risks and
uncertainties which include but are not limited to the acceptance of new
products, the credit risk associated with consolidation in the retail trade, the
costs of components and advertising associated with product retail roll-out and
new product introductions, supply constraints or difficulties, the impact of
competitive pricing or government regulation and the risk of diverted goods in a
slow retail environment. These and other factors may cause actual results to
differ materially from those anticipated in forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof.
Three Months ended September 30, 1996 as compared to the Three Months ended
September 30, 1995
Net sales for the third quarter of 1996 were $4,472,682 compared to
$2,067,835 for the third quarter of 1995. This increase was due to the Company's
continued expansion of its US retail presence and shipments to new international
markets. During the third quarter of 1996, the Company opened several new
regional chains: Carson Pirie Scott, Gayfers, J.B. White and Kaufmann's. These
chains brought the total number of US department store doors to 1,075 and
expanded the Company's retail presence to include regions of the United States
not serviced by chains such as Dillards, Federated, and Dayton Hudson/Marshall
Fields. In addition to these US chains, the Company expanded its presence
internationally by opening 31 doors of the Eaton chain in Canada. This total of
1,106 compares to 355 US retail doors in the third quarter of 1995. The
comparison of sales for these periods is as follows:
- --------------------------------------------------------------------------------
Class of Trade 1996 1995
- --------------------------------------------------------------------------------
North American Department Store/Retail $3,811,993 $1,905,163
US Infomercial 0 33,972
Duty Free and International 643,917 92,798
Direct Marketing 16,772 35,902
--------- ----------
Net Sales $4,472,682 $2,067,835
During the quarter, the Company's Italian distributor continued to
market the Company's REALM(R) products through a ten minute infomercial
formulated for Italian audiences. The Middle Eastern markets are supplied
through two distributors and REALM products are available in fragrance boutiques
throughout the Gulf States and Saudi Arabia. REALM products were introduced in
the North American duty free markets during the third quarter of 1996.
Gross margin was 73% for the third quarter of 1996 compared to 69% in
the third quarter of 1995. Overall gross margins have increased as the Company
has reduced costs on both in-line and promotional products. The Company has
continued to pursue cost reductions by reviewing secondary packaging options,
exploring new sourcing opportunities and exploiting manufacturing cost
efficiencies. Future quarters may have a different gross margin depending on the
demand for promotional products and the percentage of higher margin department
store sales in comparison to sales through third party distributors. Gross
margin in the third quarter of 1995, reflected the Company's previous overall
higher cost of goods structure.
Research and Development expenses for the third quarters of 1996 and
1995 were $140,364 and $67,909, respectively. During the third quarter of 1996,
the Company increased spending on pheromone research and the development of a
new fragrance line for women. During 1995, these costs were principally payments
and costs under the Company's contract with Pherin Corporation.
<PAGE>
Selling and marketing expenses increased to $2,461,254 (55% of sales)
in the three months ended September 30, 1996 from $1,340,686 (65% of sales) in
the period ended September 30, 1995. This dollar increase was the result of
advertising and promotional activities undertaken to support sales in the
additional retail doors the Company opened in the current year. Headcount in the
third quarter of 1996 expanded to include sales personnel for six regions
covering all of the 48 contiguous states. In the same period in 1995, the
company was only represented in three geographic regions. Other increased costs
in the sales and marketing area were for radio advertising, in-store special
events, product sampling, fragrance modeling and training for department store
sales personnel. Distribution and general and administrative expenses for the
period have remained fairly constant at $413,912 and $387,195 for 1996 and 1995,
respectively.
Interest income declined to $11,266 in the third quarter of 1996 from
$20,963 for the same period in 1995. The decrease in interest income was due to
lower cash balances.
The Company's effective tax rate for the third quarter of 1996 was 8.1%
which brings the effective tax rate for the first nine months of 1996 to 5%. The
increase in the third quarter of 1996 is based upon projected profits for the
entire year and takes into account utilization of net operating loss carry
forwards.
Nine Months ended September 30, 1996 as compared to the Nine Months ended
September 30, 1995
Net sales for the nine months ended September 30, 1996 were
$13,665,684. This was a 163% increase over net sales of $5,189,795 for the same
period in 1995. This increase was due to the expansion of the Company's
distribution into new geographic areas in the United States and internationally.
One of the most significant changes in the Company's retailer base was the
addition in 1996 of distribution in California. The launching of 91 doors of
Federated Department Store's Macy's West chain was completed in 1996. In 1995,
the Company's distribution was primarily located in the Southeast, Northeast and
Southwest regions of the country. A total of 13 new retail chains with more than
500 doors have been added during 1996. Additionally, the Company entered into
distribution agreements for the Middle East, Latin American and Caribbean duty
free markets and launched the Realm product line in 31 doors of Eaton's
department stores in Canada. The following table shows a comparison of fthe nine
month's net sales by class of trade:
- --------------------------------------------------------------------------------
Class of Trade 1996 1995
- --------------------------------------------------------------------------------
North American Department Store/Retail $12,431,975 $3,875,838
US Infomercial 0 947,596
Duty Free and International 1,167,039 237,675
Direct Marketing 66,670 128,686
----------- ----------
Net Sales $13,665,684 $5,189,795
Gross margin increased to 73% from 70.5% for the first nine months of
1996 compared to the same period in 1995. This increase was the result of
reductions in the Company's cost of goods structure. The Company has
aggressively sought new suppliers and manufacturing processes in order to
decrease the cost of its distinctive primary packaging. The Company has also
created gift and promotional sets using cosmetic modifications of its signature
bottles. The lower cost of these sets has allowed the Company to achieve
targeted gross margins while providing a value to the consumer.
Research and Development expenses increased 41% to $301,670 in the nine
months ended September 30, 1996 as the Company pursued new pheromone research
projects and began development on a new line of women's products for launch in
1997. In the same time period in 1995, $214,070 in costs were principally
comprised of payments under the Company's contract with Pherin Corporation.
As a percentage of sales, selling and marketing expenses decreased to
59% ($8,119,743) from 68% ($3,532,216) in the nine months ended September 30,
1996 and 1995. The Company attributes this decrease to broader distribution of
its REALM fragrances. Penetration into additional chains has made it possible
for the Company to leverage advertising expenses. The Company continued to use
radio as its main method of advertising. Ongoing expenses in the sales and
marketing area are employee staffing, commissions, radio
<PAGE>
advertising and fragrance modeling to support local in-store promotions and to
support the REALM brand in general. The Company's general and administrative
expenses decreased to $1,128,139 (8% of sales) from $1,248,426 (24% of sales)
for 1996 and 1995, respectively, as distribution costs lowered due to
efficiencies gained by bringing this function in-house and from shipping large
orders to retailers rather than single units to individuals.
Interest income was $24,094 and $100,810 for the first three quarters
of 1996 and 1995, respectively. The decrease in interest income was due to lower
cash balances. In 1996, the Company paid $2,981 in interest expense related to
advances under its bank line of credit. During 1995, the Company had no interest
expense.
The Company's effective tax rate for the first nine months of 1996 was
5%. The increase in the third quarter of 1996 is based upon projected profits
for the entire year and takes into account utilization of net opperating loss
carry forwards.
LIQUIDITY
At September 30, 1996, the Company had cash and cash equivalents equal
to $982,436 and working capital of $4,380,830. Net cash used in operating
activities was $1,125,988 for the nine months ended September 30, 1996. During
1996, the Company received $500,816 in cash from the exercise of stock options
issued under the Company's Employee Stock Option Plan..
On January 2, 1996, the Company repaid $500,000 of borrowings against
its $2,000,000 line of credit. On March 13, 1996, the Company renegotiated its
Business Loan Agreement with Mid-Peninsula Bank of Palo Alto, California. The
Company may borrow up to $3,500,000 at an interest rate equal to the bank's
prime rate plus .5% with borrowings primarily secured by the Company's trade
receivables and inventory. The renewable agreement, which has a one year term,
contains certain debt to equity and working capital covenants. The Company has
had discussions with its bank about further increasing its line of credit and
received indications the bank would entertain such a request if made. There were
no borrowings against the line of credit at September 30, 1996. During the third
quarter of 1996, the Company was cash positive. Assuming the Company's
activities proceed substantially as planned, there is no major change in the
payment practices of the Company's major customers and the Company's line of
credit is increased if requested, the Company's current cash, line of credit and
anticipated revenues from product sales should be adequate to meet its working
capital needs over the next twelve months. Working capital requirements will
primarily be for staffing, the purchase of improved distribution/financial
software and hardware, product promotion and training and for the supply of
inventory and accounts receivable financing related to a new product launch.
If the Company fails to achieve targeted revenues from its 1996
marketing efforts or if ongoing business proves to be more capital intensive
than planned or if the Company is unable to obtain an increase in its line of
credit if requested, additional funding may be required. Furthermore, additional
working capital may be required should the Company experience a greater than
planned success with its retail distribution and new product development. While
the Company may explore strategic alliances, and other ways to provide
additional working capital, no assurances can be given that a strategic alliance
would be realized or that additional financing would be available, or if
available, could be consummated on terms acceptable to the Company.
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11-Statement Re: Computation of Per share Earnings (Loss)
(b) The Company did not file any reports on Form 8-K during the three
months ended September 30, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant had duly caused this Report to be signed on behalf by the
undersigned thereunto duly authorized.
EROX CORPORATION
Registrant
Date: November 10, 1996 /s/ William P. Horgan
------------------------------------------
William P. Horgan
President and Chief Executive Officer
Date: November 10, 1996 /s/ Maxine C. Harmatta
------------------------------------------
Maxine C. Harmatta
Vice President and Chief Financial Officer
Exhibit 11
<TABLE>
Statement Re:
Computation of Per share Earnings (Loss)
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Primary
Average shares outstanding 10,007,454 9,853,439 9,947,653 9,852,467
Net effect of dilutive stock options-based
on the treasury stock method using
average market price 616,642 -- 512,251 --
----------- ---------- ----------- -----------
Total 10,624,096 9,853,439 10,459,904 9,852,467
Net income (loss) $ 234,308 $ (341,715) $ 393,922 $(1,234,217)
=========== ========== =========== ===========
Per share amount $ 0.02 $ (0.03) $ 0.04 $ (0.13)
=========== ========== =========== ===========
Fully Diluted
Average shares outstanding 10,007,454 9,853,439 9,947,653 9,852,467
Net effect of dilutive stock options-based
on the treasury stock method using the
period-end market price if higher than
average market price 616,642 -- 553,377 --
----------- ---------- ----------- -----------
Total 10,624,096 9,853,439 10,501,030 9,852,467
Net income (loss) $ 234,308 $ (341,715) $ 393,922 $(1,234,217)
=========== ========== =========== ===========
Per share amount $ 0.02 $ (0.03) $ 0.04 $ (0.13)
=========== ========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule Contains Summary Financial Information
Extracted From Balance Sheets and Statements of Income
</LEGEND>
<CIK> 0000878616
<NAME> Erox Corporation
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-1-1996
<PERIOD-END> Sep-30-1996
<EXCHANGE-RATE> 1
<CASH> 982,436
<SECURITIES> 0
<RECEIVABLES> 2,793,159
<ALLOWANCES> (55,934)
<INVENTORY> 3,404,318
<CURRENT-ASSETS> 7,252,575
<PP&E> 688,986
<DEPRECIATION> (613,848)
<TOTAL-ASSETS> 7,327,713
<CURRENT-LIABILITIES> 2,871,745
<BONDS> 0
<COMMON> 17,324,734
0
0
<OTHER-SE> (12,868,766)
<TOTAL-LIABILITY-AND-EQUITY> 7,327,713
<SALES> 13,665,684
<TOTAL-REVENUES> 13,665,684
<CGS> 3,738,410
<TOTAL-COSTS> 3,738,410
<OTHER-EXPENSES> 301,670
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (21,113)
<INCOME-PRETAX> 414,655
<INCOME-TAX> 20,733
<INCOME-CONTINUING> 393,922
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 393,922
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
