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 JUNE 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 (I.R.S. employee
incorporation 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. 9,974,805 shares of Common
Stock as of July 31, 1996.
Total Pages: 13
<PAGE>
EROX CORPORATION
INDEX
Page
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets (Unaudited)
as of June 30, 1996
and December 31, 1995.............................................2
Statements of Income (Unaudited)
for the Three Months and Six Months Ended
June 30, 1996 and 1995............................................3
Statements of Cash Flows (Unaudited)
for the Six Months
Ended June 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 4. Submission of Matters to Vote of Security Holders.................9
Item 6. Exhibits and Reports on Form 8-K..................................9
SIGNATURES...................................................................10
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
1
<PAGE>
<TABLE>
EROX CORPORATION
Condensed Balance Sheets
(unaudited)
<CAPTION>
June 30, December 31,
1996 1995
------------- --------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 747,373 $ 2,186,828
Accounts receivable, net of allowances of $55,934 2,888,989 1,954,508
and $316,972 in 1996 and 1995, respectively
Inventory 2,932,652 1,799,728
Other current assets 48,037 168,785
------------ ------------
Total current assets 6,617,051 6,109,849
Property and equipment, net 63,343 78,214
------------ ------------
$ 6,680,394 $ 6,188,063
============ ============
Liabilities and Shareholders' equity
Current liabilities:
Accounts payable $ 1,444,702 $ 731,777
Loan payable, bank -- 500,000
Other accrued expenses 1,379,882 1,395,056
------------ ------------
Total current liabilities 2,824,584 2,626,833
Commitments -- --
Shareholders' equity:
Convertible preferred stock, issuable in series, no par value,
10,000,000 shares authorized, no shares issued a -- --
Common stock, no par value, 40,000,000 shares authorized,
9,974,805 and 9,911,972 shares issued and outstanding
at June 30, 1996 and December 31, 1995, respectively 16,958,884 16,823,918
Accumulated deficit (13,103,074) (13,262,688)
------------ ------------
Total shareholders' equity 3,855,810 3,561,230
------------ ------------
$ 6,680,394 $ 6,188,063
============ ============
<FN>
See accompanying notes
</FN>
</TABLE>
2
<PAGE>
<TABLE>
EROX CORPORATION
Condensed Statements of Income
(unaudited)
<CAPTION>
Three months ended June 30, Six months ended June 30,
------------------------------ ----------------------------
1996 1995 1996 1995
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 5,142,144 $ 2,009,363 $ 9,193,002 $ 3,121,960
Cost of goods sold 1,451,520 604,909 2,511,362 895,387
------------ ------------ ----------- -----------
Gross profit 3,690,624 1,404,454 6,681,640 2,226,573
Expenses:
Research and development 78,269 83,461 161,306 146,161
Selling, general and administrative 3,515,559 1,695,880 6,372,716 3,052,761
------------ ------------ ----------- -----------
Total expenses 3,593,828 1,779,341 6,534,022 3,198,922
------------ ------------ ----------- -----------
Income (loss) from operations 96,796 (374,887) 147,618 (972,349)
Interest income 206 36,469 12,828 79,847
Interest expense 1,023 - 2,459 -
Other (expense) 3,624 - 1,627 -
------------ ------------ ----------- -----------
Net income (loss) $ 99,603 $ (338,418) $ 159,614 $ (892,502)
============ ============ =========== ===========
Net income (loss) per share $ 0.01 $ (0.03) $ 0.02 $ (0.09)
============ ============ =========== ===========
Shares used in calculation of net income
(loss) per share 10,499,030 9,851,972 10,375,896 9,851,972
============ ============ =========== ===========
<FN>
See accompanying notes
</FN>
</TABLE>
3
<PAGE>
<TABLE>
EROX CORPORATION
Statements of Cash Flows
(unaudited)
<CAPTION>
Six months ended June 30,
1996 1995
------------ -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 159,614 $ (892,502)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 65,824 98,757
Changes in operating assets and liabilities:
Accounts receivable (934,481) (1,069,354)
Inventory (1,132,924) (523,851)
Other current assets 120,748 36,621
Accounts payable and accrued liabilities 697,751 440,225
------------ ------------
Net cash used in operating activities (1,023,468) (1,910,104)
Cash Flows from Investing Activities
Proceeds from maturity of held-to-maturity investments - 3,461,735
Purchase of property and equipment (50,953) (18,958)
------------ ------------
Net cash provided by (used in) investing activities (50,953) 3,442,777
Cash Flows from Financing Activities
Proceeds from issuance of common stock 134,966 -
Proceeds from (payments on) bank borrowings (500,000) -
------------ ------------
Net cash provided by (used in) financing activities (365,034) 0
Net increase/(decrease) in cash and cash equivalents (1,439,455) 1,532,673
Cash and cash equivalents at beginning of the period 2,186,828 520,181
------------ ------------
Cash and cash equivalents at end of the period $ 747,373 $ 2,052,854
============ ============
<FN>
See accompanying notes
</FN>
</TABLE>
4
<PAGE>
EROX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 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 six months ended June
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 June 30, 1996 consists of finished goods inventory
valued at $1,509,934, work in process of $289,100 and raw materials of
$1,133,618. 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.
5
<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 June 30, 1996 as compared to the Three Months ended June 30,
1995
Net sales for the second quarter of 1996 were $5,142,144 compared to
$2,009,363 for the second quarter of 1995. This increase was due to the
Company's continued expansion of its US retail introduction and shipments to new
overseas markets. During the second quarter of 1996, the Company opened several
new regional stores: Castner Knott, Elder Beerman, Mc Rae's, Parisian's,
Profitt's, Von Maur, and Younkers. The Company also doubled its presence in the
California market by opening an additional 45 doors of the Macy's West division
of Federated Department Stores. Opening orders were also shipped to two
distributors in the Middle East. At the end of the second quarter of 1996, the
Company had expanded distribution to include 948 doors in the US and distributor
relationships for Italy, the Middle East and the Caribbean. This compares to
shipments to 241 US retail doors and one foreign distributor, in Italy, in the
second quarter of 1995. The comparison of sales for these periods is as follows:
----------------------------------------------------------------------
Class of Trade 1996 1995
----------------------------------------------------------------------
US Department Store/Retail $ 4,674,278 $ 1,573,186
US Infomercial 0 320,867
Duty Free and International 447,121 72,848
Direct Marketing 20,745 42,462
---------- -----------
Net Sales $ 5,142,144 $ 2,009,363
During the quarter, the Company's Italian distributor introduced on
local Italian television a ten minute infomercial formulated for Italian
audiences. The infomercial was developed and aired by the Company's distributor
as a cost effective way to drive demand for REALM(R) products in the Italian
market which has very fragmented retail distribution. The Middle Eastern markets
are being supplied through two distributors and REALM products are available in
fragrance boutiques throughout the Gulf States and Saudi Arabia. Demand for
REALM products remained strong in the Caribbean.
Gross margin was 72% for the second quarter of 1996 compared to 70% in
the second quarter of 1995. Overall gross margins have increased as the Company
has reduced costs on both in-line and promotional products. The Company has
affected major reductions in its cost of goods structure due to changes in
secondary packaging, new sourcing and 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
second quarter of 1995 reflected the Company's previous overall higher cost of
goods structure.
Research and Development expenses for the second quarters of 1996 and
1995 were $78,269 and $83,461, respectively. These costs principally reflect
payments and costs under the Company's contract with Pherin Corporation.
6
<PAGE>
Selling and marketing expenses increased to $3,171,093 (62% of sales)
in the three months ended June 30, 1996 from $1,267,520 (63% of sales) in the
period ended June 30, 1995. This dollar increase is the result of advertising
and promotional activities to support sales in the additional retail doors the
Company opened over the past periods. At the end of the second quarter of 1995,
the Company had opened 241 retail doors in Bloomingdale's, Rich's/Lazarus and
several divisions of Dillard's Department Stores. This compares to 948 doors at
the end of the second quarter of 1996. The Company increased headcount in the
sales and marketing area as the geographical scope of its distribution expanded.
Increased costs in the sales and marketing area have been for radio advertising,
in-store special events, product sampling, fragrance modeling and training for
department store sales personnel.
During the second quarter of 1996, the Company's distribution costs
decreased. This is attributable to the fact that the Company brought this
function in-house during 1996 and to the economies of scale in filling large
department store orders as opposed to individual infomercial orders. During
1995, the Company was still selling through the infomercial and out-sourcing the
fulfillment and distribution of these products. General and Administrative
expenses have remained fairly flat between the two periods. The Company expects
distribution and general and administrative expenses to increase over the next
quarters due to expenses related to upgrading the Company's MIS resources,
additional equipment and leasehold improvements required in the warehouse due to
increased volume sales. The Company is currently involved in an ongoing project
to convert all of its retail customer's order processing to Electronic Data
Interface ("EDI"). This project will create additional costs for computer
consultants and software, but the Company hopes to be able to access retail
sales information from its customers to more timely and accurately determine
consumer trends and buying patterns.
Interest income was $206 and $36,469 for the second quarters of 1996
and 1995, respectively. The decrease in interest income was due to lower cash
balances. The Company paid $1,023 in interest expense in the second quarter of
1996 on balances on its revolving bank line of credit. This compares to $0
interest expense in the second quarter of 1995.
Six Months ended June 30, 1996 as compared to the Six Months ended June 30, 1995
Net sales for the six months ended June 30, 1996 were $9,193,002. This
was a 194% increase over net sales of $3,121,960 for the first half of 1995. The
Company attributes this increase to the expansion of its retail department and
specialty store business in the US. During the first quarter of 1996, the
Company opened the California market by introducing its REALM products in Macy's
West. Two additional regional retailers, Burdines and Famous Barr, were also
opened during this time period. Outside the US, the Company entered into
distribution agreements for the Middle East and Mexican and Latin American duty
free markets. The following table shows a comparison of first half net sales by
Class of Trade:
----------------------------------------------------------------------
Class of Trade 1996 1995
----------------------------------------------------------------------
US Department Store/Retail $ 8,619,982 $ 1,970,677
US Infomercial 0 913,624
Duty Free and International 523,123 144,876
Direct Marketing 49,897 92,783
------------ ------------
Net Sales $ 9,193,002 $ 3,121,960
Gross margin for the second half of 1996 was 73% compared to 71% for
the same period in 1995. This increase is the result of decreases 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. These changes have resulted in more competitively
costed products. 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 at the same time as
providing a perceived value to the consumer.
Research and Development expenses for the second half of 1996 and 1995
were $161,306 and $146,161, respectively and are principally comprised of
payments under the Company's contract with Pherin Corporation.
7
<PAGE>
Selling and marketing expenses increased to $5,658,489 (62% of sales)
in the six months ended June 30, 1996 from $2,191,530 (70% of sales) in the
period ended June 30, 1995. Selling and marketing expenses have decreased as a
percentage of sales as the Company's business shifted into repeat orders from
existing retail partners. In 1995 the Company was mainly in a launch mode. On
going expenses in the sales and marketing area are radio advertising and
fragrance modeling to support local in-store promotions and to support the REALM
brand in general, headcount and commissions. The Company's general and
administrative expenses have remained fairly constant for the two periods, and
distribution costs have decreased due to efficiencies gained from shipping large
orders to retailers rather than single units to individuals.
Interest income was $12,828 and $79,847 for the first half of 1996 and
1995, respectively. The decrease in interest income was due to lower cash
balances. In 1996, the Company paid $2,459 in interest expense related to
advances under its bank line of credit. During 1995, the Company had no interest
expense.
LIQUIDITY
At June 30, 1996, the Company had cash and cash equivalents equal to
$747,373 and working capital of $3,792,467. Net cash used in operating
activities was $1,023,468 for the six months ended June 30, 1996.
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 agreement, which has a one year term, contains
certain debt to equity and working capital covenants. There were no borrowings
against the line of credit at June 30, 1996. Assuming the Company's activities
proceed substantially as planned and if there are no new brand introductions,
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 the supply of
inventory, staffing, the purchase of improved distribution/financial software
and hardware, product promotion and training and accounts receivable financing.
If the Company fails to achieve significant revenues from its 1996
marketing efforts or if ongoing business proves to be more capital intensive
than planned or if the Company elects to develop and launch a new brand,
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. In such instance, funds
would be needed for inventory build, accounts receivable financing and staffing
purposes.
8
<PAGE>
PART II
OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
Registrant held its annual meeting of shareholders ( the "Annual
Meeting") on May 15, 1996. At the Annual Meeting, the shareholders elected six
directors, Bernard I. Grosser, MD, Claude Guilbaud, William P. Horgan, Helen C.
Leong, Robert Marx and Michael V. Stern to serve until the next annual meeting
and their successors are elected.
The number of votes cast for, against or withheld, as well as the
number of abstention and broker non-votes as to each director are set forth
below:
Broker
For Against Abstained Non-Votes
--- ------- --------- ---------
Bernard I. Grosser, MD 8,462,015 14,200 0 0
Claude Guilbaud 8,462,015 14,200 0 0
William P. Horgan 8,462,015 14,200 0 0
Helen C. Leong 8,462,015 14,200 0 0
Robert Marx 8,457,015 19,200 0 0
Michael V. Stern 8,462,015 14,200 0 0
Item 6. Exhibits and Reports on Form 8-K
(a) 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 June 30, 1996.
9
<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: August 12, 1996 /s/ William P. Horgan
---------------------------------------
William P. Horgan
President and Chief Executive Officer
Date: August 12, 1996 /s/ Maxine C. Harmatta
---------------------------------------
Maxine C. Harmatta
Vice President, Finance and Operations
10
<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.
Date: August 12, 1996 /s/ William P. Horgan
---------------------------------------
William P. Horgan
President and Chief Executive Officer
Date: August 12, 1996 /s/ Maxine C. Harmatta
---------------------------------------
Maxine C. Harmatta
Vice President, Finance and Operations
Exhibit 11
<TABLE>
Statement Re:
Computation of Per Share Earnings (Loss)
<CAPTION>
Three months ended June 30, Six months ended June 30,
-------------------------------- -----------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Primary
Average shares outstanding 9,923,53 9,851,972 9,915,840 9,851,972
Net effect of dilutive stock options-based
on the treasury stock method using
average market price 575,498 -- 460,056 --
----------- ---------- ----------- ----------
Total 10,499,030 9,851,972 10,375,896 9,851,972
Net income (loss) $ 99,603 $ (338,418) $ 159,614 $ (892,502)
=========== ========== =========== ===========
Per share amount $ 0.01 $ (0.03) $ 0.02 $ (0.09)
=========== ========== =========== ===========
Fully Diluted
Average shares outstanding 9,923,532 9,851,972 9,915,840 9,851,972
Net effect of dilutive stock options-based
on the treasury stock method using the
period-end market price if higher than
average market price 698,875 -- 521,744 --
----------- ---------- ----------- -----------
Total 10,622,407 9,851,972 10,437,584 9,851,972
Net income (loss) $ 99,603 $ (338,418) $ 159,614 $ (892,502)
=========== =========== =========== ============
Per share amount $ 0.01 $ (0.03) $ 0.02 $ (0.0
=========== =========== =========== ============
</TABLE>
11
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 747,373
<SECURITIES> 0
<RECEIVABLES> 2,944,923
<ALLOWANCES> (55,934)
<INVENTORY> 2,932,652
<CURRENT-ASSETS> 6,617,051
<PP&E> 660,719
<DEPRECIATION> (597,376)
<TOTAL-ASSETS> 6,680,394
<CURRENT-LIABILITIES> 2,824,584
<BONDS> 0
<COMMON> 16,958,884
0
0
<OTHER-SE> (13,103,074)
<TOTAL-LIABILITY-AND-EQUITY> 6,680,394
<SALES> 9,193,002
<TOTAL-REVENUES> 9,193,002
<CGS> 2,511,362
<TOTAL-COSTS> 2,511,362
<OTHER-EXPENSES> 6,534,022
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,459
<INCOME-PRETAX> 159,614
<INCOME-TAX> 0
<INCOME-CONTINUING> 159,614
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 159,614
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
