U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Amendment No. 1
(MARK ONE)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended June 30, 1997
[ ] 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)
<TABLE>
<CAPTION>
<S> <C>
California 94-3107202
- ------------------------------------------------------------- -----------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. employee Identification No.)
4034 Clipper Court, Fremont, California 94538
- ------------------------------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip code)
</TABLE>
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. 10,289,488 shares of Common
Stock as of July 31, 1997.
Total Pages: 26
<PAGE>
<TABLE>
EROX CORPORATION
INDEX
<CAPTION>
Page
----
<S> <C>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets (Unaudited)
as of June 30, 1997
and December 31, 1996...........................................................................2
Statements of Operations (Unaudited)
for the Three Months and Six Months Ended
June 30, 1997 and 1996..........................................................................3
Statements of Cash Flows (Unaudited)
for the Six Months
Ended June 30, 1997 and 1996....................................................................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
</TABLE>
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
<PAGE>
<TABLE>
EROX CORPORATION
Condensed Balance Sheets
(unaudited)
<CAPTION>
June 30, December 31,
1997 1996
----------------- -----------------
(Restated)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 7,886 $ 2,059,084
Accounts receivable, net of allowances of $541,383 1,379,620 2,813,135
and $501,677 in 1997 and 1996, respectively
Inventory 4,806,498 2,906,517
Other current assets 94,253 74,414
----------------- -----------------
Total curren assets 6,288,257 7,853,150
Property and equipment, net 131,749 71,516
----------------- -----------------
$ 6,420,006 $ 7,924,666
================= =================
Liabilities and Shareholders' equity
Current liabilities:
Accounts payable $ 1,113,759 $ 1,218,741
Loan payable, bank 1,943,706 500,000
Other accrued expenses 1,488,881 876,320
----------------- -----------------
Total current liabilities 4,546,346 2,595,061
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,
10,289,488 and 10,156,905 shares issued and outstanding
at June 30, 1997 and December 31, 1996, respectively 17,667,023 17,374,734
Accumulated deficit (15,793,363) (12,045,129)
----------------- -----------------
Total shareholders' equity 1,873,660 5,329,605
----------------- -----------------
$ 6,420,006 $ 7,924,666
================= =================
<FN>
See accompanying notes
</FN>
</TABLE>
<PAGE>
<TABLE>
EROX CORPORATION
Condensed Statements of Operations
(unaudited)
<CAPTION>
Three months ended June 30, Six months ended June 30,
----------------------------------------------------------------
1997 1996 1997 1996
--------------- --------------- -------------- --------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Net sales $ 3,817,542 $ 5,142,144 $ 8,913,831 $ 9,193,002
Cost of goods sold 981,957 1,451,520 1,889,643 2,511,362
------------ ------------ ------------ ------------
Gross profit 2,835,585 3,690,624 7,024,188 6,681,640
Expenses:
Research and development 73,086 78,269 164,856 161,306
Selling, general and administrative 6,677,523 3,515,559 10,584,801 6,372,716
------------ ------------ ------------ ------------
Total expenses 6,750,609 3,593,828 10,749,657 6,534,022
------------ ------------ ------------ ------------
Income (loss) from operations (3,915,024) 96,796 (3,725,469) 147,618
Interest income 491 206 12,471 12,828
Interest expense 34,285 1,023 36,828 2,459
Other income 918 3,624 2,392 1,627
------------ ------------ ------------ ------------
Income (loss) before taxes (3,947,900) 99,603 (3,747,434) 159,614
Provision/(benefit) for income taxes (9,983) -- 800 --
------------ ------------ ------------ ------------
Net income (loss) $ (3,937,917) $ 99,603 $ (3,748,234) $ 159,614
============ ============ ============ ============
Net income (loss) per share $ (0.38) $ 0.01 $ (0.37) $ 0.02
============ ============ ============ ============
Shares used in calculation of net income (loss) per share 10,284,323 10,499,030 10,252,966 10,375,896
============ ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
EROX CORPORATION
Statements of Cash Flows
(unaudited)
<CAPTION>
Six months ended June 30,
1997 1996
----------------- -----------------
(Restated)
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $(3,748,234) $ 159,614
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 31,695 65,824
Changes in operating assets and liabilities:
Accounts receivable 1,433,515 (934,481)
Inventory (1,899,981) (1,132,924)
Other current assets (19,839) 120,748
Accounts payable and accrued liabilities 507,579 697,751
----------- -----------
Net cash used in operating activities (3,695,265) (1,023,468)
Cash Flows from Investing Activities
Purchase of property and equipment (91,928) (50,953)
----------- -----------
Net cash used in investing activities (91,928) (50,953)
Cash Flows from Financing Activities
Proceeds from issuance of common stock 292,289 134,966
Proceeds from (payments on) bank borrowings 1,443,706 (500,000)
----------- -----------
Net cash provided by (used in) financing activities 1,735,995 (365,034)
Net decrease in cash and cash equivalents (2,051,198) (1,439,455)
Cash and cash equivalents at beginning of the period 2,059,084 2,186,828
----------- -----------
Cash and cash equivalents at end of the period $ 7,886 $ 747,373
=========== ===========
</TABLE>
<PAGE>
EROX Corporation
Notes to Condensed Financial Statements
(Unaudited)
June 30, 1997
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 six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the calendar year
ending December 31, 1997. 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, 1996.
<TABLE>
Restatement of Financial Statements
Prior to filling the form 10QSB for the third quarter of 1997, the
Company determined that its previously reported operating results and balance
sheet data for the three month and six month periods ended June 30, 1997
required adjustment. Revisions to these periods have been made as a result of
previously unknown chargebacks for cooperative advertising expenditures
applicable to the second quarter's operations of 1997 but not reported or
charged to the Company by department stores until the third quarter of 1997.
These charges result in the restatement of the Company's net loss as shown in
the table below:
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1997 1997 1997 1997
(Reported) (Restated) (Reported) (Restated)
<S> <C> <C> <C> <C>
Net (loss) $ (2,953,638) $ (3,937,917) $ (2,763,955) $ (3,748,234)
================ ================== ================= =================
Net (loss) per share $ (0.29) $ (0.38) $ (0.27) $ (0.37)
================ ================== ================= =================
Shares used in calculation
of (loss) per share 10,284,323 10,284,323 10,252,966 10,252,966
</TABLE>
The financial statements included herein reflect this restatement.
Inventory
Inventories are stated at the lower of cost (first in - first out
method) or market. The inventory at June 30, 1997 consists of finished goods
inventory valued at $2,200,319, work in process of $350,725 and raw materials of
$2,255,454. At December 31, 1996, these balances were $1,188,882, $154,347 and
$1,563,288, 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>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounting Pronouncements
In February, 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share, which is required to be adopted by the
Company on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and restate all
prior periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. There is expected
to be no impact on primary earnings per share for either the three or six month
periods ended June 30, 1996 or June 30, 1997. The impact of Statement 128 on the
calculation of fully diluted earnings per share for these quarters is not
expected to be material.
Subsequent Events
On July 1, 1997, the Company renegotiated its Business Loan Agreement
with Mid Peninsula Bank of Palo Alto, California. The Company may borrow up to
$3.0 million at an interest rate equal to the bank's prime rate plus .75% with
borrowings secured primarily by the Company's trade receivables and inventory.
The agreement, which expires on April 1, 1998, contains certain debt-to-equity
and working capital covenants.
Subsequent to June 30, 1997, the Company reached an agreement to obtain
additional equity capital from affiliates of a current shareholder by issuing
1,433,333 shares of convertible preferred stock. This investment will provide
the Company with $2,150,000 in equity capital that will be used to reduce bank
borrowings and finance accounts receivable.
<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.
Risk Factors
The Company's future results may be affected to a greater or lesser
degree by the following factors among others:
Competition: The prestige fragrance market is volatile and extremely
competitive. Consumer preferences and demands can shift dramatically reflecting
changes in fashion and current fads. There are numerous fragrance products which
are better known than the products marketed by the Company. There are also many
companies which have substantially greater resources than EROX and which have
the ability to invest heavily in new product development and introduction. The
Company can expect that its competitors will attempt to compete with the Company
through the introduction of new products and promotion of existing products.
In addition, the product life cycle of fragrances is shortening.
Traditional fragrance companies now introduce a new fragrance every one to two
years compared to every four to five years as in the past. This increase in
competing fragrances makes it difficult for any one fragrance to hold the
consumer's attention on a long-term basis. Although the Company believes the
inclusion of human pheromones as a component clearly differentiates its
products, other fragrances are competing for space with the Company's products
at both the store level and in print and media advertising.
Marketing: The failure to establish and maintain the necessary sales or
distribution channels could have a material adverse effect on the Company's
business. Although the Company believes its marketing strategy is the most cost
effective way to introduce its products, there can be no assurance that
broader-scale retail launches will be successful. The Company cannot guarantee
that retail outlets or catalogues will continue to carry the EROX products. If
the current strategy is unsuccessful, marketing of the Company's products would
require a new strategy and may require a significantly more expensive sales
effort for which the Company may not have sufficient funds.
Retail environment: Continued consolidation in the retail trade has led
to the emergence of four major retail players who control the major share of the
market. Federated Department Stores, The May Company, Dayton Hudson/Marshall
Fields and Dillard Department Stores now comprise the majority of U.S. better
priced department stores. This consolidation could lead to price and promotional
pressure and increased credit risk for the Company.
The major U.S. retailers are also moving away from the traditional
service oriented environment toward one that is based on "value pricing" and
self service. This change in emphasis away from trained sales personnel and
retailer support of manufacturer's products has created an environment that
values "newness" and price above quality and value. In light of these changes in
the retail environment, the Company may find it necessary to seek alternate
channels of distribution to sell their products.
Seasonality: Sales in the fragrance industry are generally seasonal,
with generally higher sales in the second half of the calendar year as a result
of increased demand for fragrance products in anticipation of and during
<PAGE>
the Christmas holiday season. The anticipated seasonality of the Company's sales
could cause a significant variation in its quarterly operating results.
Patent protection: There can be no assurance that any patent or patent
application owned or controlled by the Company will continue to provide
commercially significant protection of the Company's technology or ensure that
the Company may not be determined to infringe valid patents of others. No
assurance can be given that others will not independently develop substantially
equivalent proprietary information or otherwise gain access to the Company's
trade secrets or that the Company can meaningfully protect its technology,
proprietary information or trade secrets.
Attraction and retention of key employees: The success of the Company's
future operations depends in large part on the Company's ability to recruit and
retain key employees and consultants with research, product development and
marketing experience, as well as other professionals who are in considerable
demand. There can be no assurance that the Company will be successful in
retaining or recruiting such key personnel.
Dependence on third parties for manufacturing: The Company does not
have facilities to manufacture its products and relies on Pherin to manufacture
its pheromones and third parties to supply components and to blend, fill and
package its fragrance products. The Company believes that such manufacturing
services are the most effective method of producing its products. Contract
fillers are used by the majority of the fragrance industry, and the Company has
no current plans to set up its own filling facilities. However, as with any
business that is not vertically integrated, if the Company is unable to obtain
or retain fragrance suppliers, component manufacturers or third party
manufacturing on acceptable terms, it may not be able to obtain commercial
quantities of its products, which would adversely affect results.
Results of Operations
Three Months ended June 30, 1997 as compared to the Three Months ended June 30,
1996
Net sales for the second quarter of 1997 were $3,817,542 compared to
$5,142,144 for the second quarter of 1996. Three factors were primarily
responsible for the decline: first, retailers began the year 1997 with higher
than expected overall fragrance inventories, second, 1997 witnessed the
beginning of an industry wide trend in department store retailing to increase
inventory turns from 3 to 6 times per year, and lastly, the industry has been
experiencing overall negative growth in the department store fragrance category.
These factors adversely affected the demand for the Company's products as
retailers adjusted fragrance stocks in-line with new inventory level directives
and delayed making purchases until chain-wide fragrance department inventories
achieved desired levels.
During the second quarter of 1996, the Company continued to open new
regional department stores. Castner Knott, Elder Beerman, McCrae's, Parisian's,
Profitt's, Von Maur, and Younkers were opened during the second quarter of 1996.
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.
Also in the second quarter of 1996, opening orders were shipped to two
distributors in the Middle East. The comparison of sales for these periods is as
follows:
- -------------------------------------------------------------------------------
Class of Trade 1997 1996
- -------------------------------------------------------------------------------
US Department Store/Retail $ 3,495,408 $ 4,674,278
Duty Free and International 318,283 447,121
Direct Marketing 3,851 20,745
---------------- -----------------
Net Sales $ 3,817,542 $ 5,142,144
Gross margin increased 2 points in the first quarter of 1997 from the
prior year's quarter (to 74% in 1997 from 72% in 1996) due to the Company's
success at lowering cost of goods of the primary and secondary packaging of its
Realm(R) fragrance products. Overall gross margins have increased as the Company
has reduced costs on both in-line and promotional products. 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
<PAGE>
sales through third party distributors. Gross margin in the second quarter of
1996, reflected the Company's previous overall higher cost of goods structure.
Research and Development expenses for the second quarters of 1997 and
1996 were $73,086 and $78,269, respectively. These costs principally reflect
payments and costs under the Company's contract with Pherin Corporation.
Selling and marketing expenses increased to $6,031,420 (158% of sales)
in the three months ended June 30, 1997 from $3,171,093 (62% of sales) in the
period ended June 30, 1996. This dollar increase is the result of advertising
and promotional activities to support the launch of inner Realm(TM) and Realm
Women and Realm Men in domestic department store retailers. Many of these
expenditures had been committed to as far back as the fourth quarter of 1996,
and the Company was unable to change or alter these programs in the short term
when sales did not materialize to support these levels of expenditure.
Additionally, the Company subsequently received unanticipated chargebacks
against accounts receivable payments from many of its department store customers
that were not authorized within Company established procedures. The Company has
increased its controls on cooperative advertising expense authorization and
communicated these tightened policies to all employees, customers and suppliers.
During the second quarter of 1997, General and Administrative costs increased
due to headcount, consulting and legal expenditures. Clerical headcount
additions were made in the later half of 1996 to process the administrative
aspects of the Company's larger customer base. Up front legal costs were
incurred for foreign trademark and patent work to prepare for expansion into
additional foreign markets.
Interest income was $491 and $206 for the second quarters of 1997 and
1996, respectively. The Company paid $34,285 in interest expense in the second
quarter of 1997 on balances on its revolving bank line of credit. This compares
to $1,023 interest expense in the second quarter of 1996.
The provision for income taxes for the three months ended June 30, 1997
reflects a benefit of $9,983. This benefit effectively reverses the tax
provision recorded in the first quarter as a result of decreased estimated
pretax income for the year.
Six Months ended June 30, 1997 as compared to the Six Months ended June 30, 1996
Net sales for the six months ended June 30, 1997 were $8,913,831. This
was a 3% decrease over net sales of $9,193,002 for the first half of 1996, the
result of decreased purchases of fragrance products by its customers due to
inventory contraction policies imposed by the major department store chains.
During the first six months of 1997, the Company launched its second women's
fragrance, inner Realm. This fragrance was rolled out by a majority of the
Company's retailers including the Federated chains, Dillard Department Stores,
Mercantile and several independent local retailers. The Company did not achieve
anticipated levels of initial sell-in with the launch of inner Realm, in part
because its retail customers have initiated a process of decreasing overall
inventories to increase inventory turns from 3 per year to 6 per year. During
the first six months of 1997, the Company made its first shipments to a
distributor servicing alternative distribution channels.
- -------------------------------------- -----------------------------------------
Class of Trade 1997 1996
- -------------------------------------- -----------------------------------------
US Department Store/Retail $ 8,242,518 $ 8,619,982
Duty Free and International 662,471 523,123
Direct Marketing 8,842 49,897
---------------- ----------------
Net Sales $ 8,913,831 $ 9,193,002
Gross margin for the first half of 1997 was 79% compared to 73% for the
same period in 1996. 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.
<PAGE>
Research and Development expenses for the first half of 1997 and 1996
were $164,856 and $161,306, respectively and are principally comprised of
payments under the Company's contract with Pherin Corporation.
Selling and marketing expenses increased to $9,290,583 in the six
months ended June 30, 1997 from $5,658,489 in the period ended June 30, 1996. In
1997, the Company incurred expenses to launch its second women's fragrance:
inner REALM. Due to the differing advertising requirements of the Company's
department store customers, future advertising plans will be evaluated and
targeted to suit specific regional and consumer preferences. 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
increased due to additional headcount in distribution and accounting to support
the Company's larger customer base.
Interest income was $12,471 and $12,828 for the first half of 1997 and
1996, respectively. In 1997, the Company paid $36,828 in interest expense
related to advances under its bank line of credit. During the first half of
1996, the Company had interest expense of $2,459.
LIQUIDITY
At June 30, 1997, the Company had working capital of $1,741,911. Net
cash used in operating activities was $3,695,265 for the six months ended June
30, 1997.
On July 1, 1997, the Company renegotiated its Business Loan Agreement
with Mid-Peninsula Bank of Palo Alto, California. The Company may borrow up to
$3,000,000 at an interest rate equal to the bank's prime rate plus .75% 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. Under the terms of the renegotiated bank line, the
Company may borrow against both eligible accounts receivable and eligible
inventory. There were borrowings totaling $1,943,706 at June 30, 1997. 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, product promotion and
training and accounts receivable financing.
If the Company fails to achieve significant revenues from its 1997
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. The Company has been presented with several opportunities to obtain
additional working capital from current investors.
Subsequent to June 30, 1997, the Company reached an agreement to obtain
additional equity capital from affiliates of a current shareholder by issuing
1,433,333 shares of convertible preferred stock. This investment will provide
the Company with $2,150,000 in equity capital that will be used to reduce bank
borrowings and finance accounts receivable.
<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, 1997. At the Annual Meeting, the shareholders elected five
directors, Bernard I. Grosser, MD, William P. Horgan, Helen C. Leong, Robert
Marx and Michael V. Stern to serve until the next annual meeting and their
successors are elected.
<TABLE>
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:
<CAPTION>
Broker
For Against Abstained Non-Votes
--- ------- --------- ---------
<S> <C> <C> <C> <C>
Bernard I. Grosser, MD 8,639,193 15,700 0 0
William P. Horgan 8,639,193 15,700 0 0
Helen C. Leong 8,639,193 15,700 0 0
Robert Marx 8,636,893 18,000 0 0
Michael V. Stern 8,639,193 15,700 0 0
</TABLE>
<TABLE>
<CAPTION>
Item 6. Exhibits and Reports on Form 8-K
<S> <C>
(a) Exhibit 10.14 Business Loan Agreement dated July 1, 1997 E- 14
Exhibit 11-Statement re: Computation of Per Share Earnings E- 25
Exhibit 27.01-Financial Data Schedule E- 26
</TABLE>
(b) The Company did not file any reports on Form 8-K during the three
months ended June 30, 1997.
<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, 1997 /s/ William P. Horgan
--------------------------------------------------
William P. Horgan
Chairman of the Board and Chief Executive Officer
Date: November 10, 1997 /s/ Maxine C. Harmatta
--------------------------------------------------
Maxine C. Harmatta
CFO, Vice President Finance and Administration
<TABLE>
BUSINESS LOAN AGREEMENT
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$3,000,000 07-01-1997 04-01-1998 0108143855 513 04 JS JS
- ----------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
- ----------------------------------------------------------------------------------------------------
</TABLE>
Borrower: EROX Corporation Lender: Mid-Peninsula Bank
4034 Clipper Court c/o Greater Bay Bancorp 2860 W. Bayshore
Fremont, CA 94538 Palo Alto, CA 94303
================================================================================
THIS BUSINESS LOAN AGREEMENT between EROX Corporation ("Borrower") and
Mid-Peninsula Bank ("Lender") is made and executed on the following terms and
conditions. Borrower has received prior commercial loans from Lender or has
applied to Lender for a commercial loan or loans and other financial
accommodations, including those which may be described on any exhibit or
schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations from
Lender to Borrower, are referred to in this Agreement individually as the "Loan"
and collectively as the "Loans." Borrower understands and agrees that: (a) in
granting, renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties, and agreements, as set forth in this Agreement; (b)
the granting, renewing, or extending of any Loan by Lender at all times shall be
subject to Lender's sole judgment and discretion; and (c) all such Loans shall
be and shall remain subject to the following terms and conditions of this
Agreement.
TERM. This Agreement shall be effective as of July 1, 1997, and shall continue
thereafter until all Indebtedness of Borrower to Lender has been performed in
full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Business Loan Agreement, as
this Business Loan Agreement may be amended or modified from time to
time, together with all exhibits and schedules attached to this
Business Loan Agreement from time to time.
Borrower. The word "Borrower" means EROX Corporation. The word
"Borrower" also includes, as applicable, all subsidiaries and
affiliates of Borrower as provided below in the paragraph titled
"Subsidiaries and Affiliates."
CERCLA. The word "CERCLA" means the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.
Cash Flow. The words "Cash Flow" mean net income after taxes, and
exclusive of extraordinary gains and income, plus depreciation and
amortization.
Collateral. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan,
whether real or personal property, whether granted directly or
indirectly, whether granted now or in the future, and whether granted
in the form of a security interest, mortgage, deed of trust,
assignment, pledge, chattel mortgage, chattel trust, factor's lien,
equipment trust, conditional sale, trust receipt, lien, charge, lien or
title retention contract, lease or consignment intended as a security
device, or any other security or lien interest whatsoever, whether
created by law, contract, or otherwise.
Debt. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ERISA. The word "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
Grantor. The word "Grantor" means and includes without limitation each
and all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all
Borrowers granting such a Security Interest.
Guarantor. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
Indebtedness. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well
as all claims by Lender against Borrower, or any one or more of them;
whether now or hereafter existing, voluntary or involuntary, due or not
due, absolute or contingent, liquidated or unliquidated; whether
Borrower may be liable individually or jointly with others; whether
Borrower may be obligated as a guarantor, surety, or otherwise; whether
recovery upon such Indebtedness may be or hereafter may become barred
by any statute of limitations; and whether such Indebtedness may be or
hereafter may become otherwise unenforceable.
Lender. The word "Lender" means Mid-Peninsula Bank, its successors and
assigns.
Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand
plus Borrower's readily marketable securities.
Loan. The word "Loan" or "Loans" means and includes without limitation
any and all commercial loans and financial accommodations from Lender
to Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to
this Agreement from time to time.
Note. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan
obligations in favor of Lender, as well as any substitute, replacement
or refinancing note or notes therefor.
Permitted Liens. The words "Permitted Liens" mean: (a) liens and
security interests securing Indebtedness owed by Borrower to Lender;
(b) liens for taxes, assessments, or similar charges either not yet due
or being contested in good faith; (c) liens of materialmen, mechanics,
warehousemen, or carriers, or other like liens arising in the ordinary
course of business and securing obligations which are not yet
delinquent; (d) purchase money liens or purchase money security
interests upon or in any property acquired or held by Borrower in the
ordinary course of business to secure indebtedness outstanding on the
date of this Agreement or permitted to be incurred under the paragraph
of this Agreement titled "Indebtedness and Liens"; (e) liens and
security interests which, as of the date of this Agreement, have been
disclosed to and approved by the Lender in writing; and (f) those liens
and security interests which in the aggregate constitute an immaterial
and insignificant monetary amount with respect to the net value of
Borrower's assets.
Related Documents. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection
with the Indebtedness.
Security Agreement. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract,
or otherwise, evidencing, governing, representing, or creating a
Security
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07-01-1997 BUSINESS LOAN AGREEMENT Page 2
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Interest.
Security Interest. The words "Security Interest" mean and include
without limitation any type of collateral security, whether in the form
of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel
mortgage, chattel trust, factor's lien, equipment trust, conditional
sale, trust receipt, lien or title retention contract, lease or
consignment intended as a security device, or any other security or
lien interest whatsoever, whether created by law, contract, or
otherwise.
SARA The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
Subordinated Debt. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written
agreement to indebtedness owed by Borrower to Lender in form and
substance acceptable to Lender.
Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's
total assets excluding all intangible assets (i.e., goodwill,
trademarks, patents, copyrights, organizational expenses, and similar
intangible items, but including leaseholds and leasehold improvements)
less total Debt.
Working Capital. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current
liabilities.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions set
forth in this Agreement and in the Related Documents.
Loan Documents. Borrower shall provide to Lender in form satisfactory
to Lender the following documents for the Loan: (a) the Note, (b)
Security Agreements granting to Lender security interests in the
Collateral, (c) Financing Statements perfecting Lender's Security
Interests; (d) evidence of insurance as required below; and (e) any
other documents required under this Agreement or by Lender or its
counsel.
Borrower's Authorization. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of this Agreement, the Note and
the Related Documents, and such other authorizations and other
documents and instruments as Lender or its counsel, in their sole
discretion, may require.
Payment of Fees and Expenses. Borrower shall have paid to Lender all
fees, charges, and other expenses which are then due and payable as
specified in this Agreement or any Related Document.
Representations and Warranties. The representations and warranties set
forth in this Agreement, in the Related Documents, and in any document
or certificate delivered to Lender under this Agreement are true and
correct.
No Event of Default. There shall not exist at the time of any advance a
condition which would constitute an Event of Default under this
Agreement.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
Organization. Borrower is a corporation which is duly organized,
validly existing, and in good standing under the laws of the State of
California and is validly existing and in good standing in all states
in which Borrower is doing business. Borrower has the full power and
authority to own its properties and to transact the businesses in which
it is presently engaged or presently proposes to engage. Borrower also
is duly qualified as a foreign corporation and is in good standing in
all states in which the failure to so qualify would have a material
adverse effect on its businesses or financial condition.
Authorization. The execution, delivery, and performance of this
Agreement and all Related Documents by Borrower, to the extent to be
executed, delivered or performed by Borrower, have been duly authorized
by all necessary action by Borrower; do not require the consent or
approval of any other person, regulatory authority or governmental
body; and do not conflict with, result in a violation of, or constitute
a default under (a) any provision of its articles of incorporation or
organization, or bylaws, or any agreement or other instrument binding
upon Borrower or (b) any law, governmental regulation, court decree, or
order applicable to Borrower.
Financial Information. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as
of the date of the statement, and there has been no material adverse
change in Borrower's financial condition subsequent to the date of the
most recent financial statement supplied to Lender. Borrower has no
material contingent obligations except as disclosed in such financial
statements.
Legal Effect. This Agreement constitutes, and any instrument or
agreement required hereunder to be given by Borrower when delivered
will constitute, legal, valid and binding obligations of Borrower
enforceable against Borrower in accordance with their respective terms.
Properties. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender
and as accepted by Lender, and except for property tax liens for taxes
not presently due and payable, Borrower owns and has good title to all
of Borrower's properties free and clear of all Security Interests, and
has not executed any security documents or financing statements
relating to such properties. All of Borrower's properties are titled in
Borrower's legal name, and Borrower has not used, or filed a financing
statement under, any other name for at least the last five (5) years.
Hazardous Substances. The terms "hazardous waste," "hazardous
substance," "disposal," "release," and "threatened release," as used in
this Agreement, shall have the same meanings as set forth in the
"CERCLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, et seq., the Resource Conservation and Recovery Act, 42
U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20
of the California Health and Safety Code, Section 25100, et seq., or
other applicable state or Federal laws, rules, or regulations adopted
pursuant to any of the foregoing. Except as disclosed to and
acknowledged by Lender in writing, Borrower represents and warrants
that: (a) During the period of Borrower's ownership of the properties,
there has been no use, generation, manufacture, storage, treatment,
disposal, release or threatened release of any hazardous waste or
substance by any person on, under, about or from any of the properties.
(b) Borrower has no knowledge of, or reason to believe that there has
been (i) any use, generation, manufacture, storage, treatment,
disposal, release, or threatened release of any hazardous waste or
substance on, under, about or from the properties by any prior owners
or occupants of any of the properties, or (ii) any actual or threatened
litigation or claims of any kind by any person relating to such
matters. (c) Neither Borrower nor any tenant, contractor, agent or
other authorized user of any of the properties shall use, generate,
manufacture, store, treat, dispose of, or release any hazardous waste
or substance on, under, about or from any of the properties; and any
such activity shall be conducted in compliance with all applicable
federal, state, and local laws, regulations, and ordinances, including
without limitation those laws, regulations and ordinances described
above. Borrower authorizes Lender and its agents to enter upon the
properties to make such inspections and tests as Lender may deem
appropriate to determine compliance of the properties with this section
of the Agreement. Any inspections or tests made by Lender shall be at
Borrower's expense and for Lender's purposes only and shall not be
construed to create any responsibility or liability on the part of
Lender to Borrower or to any other person. The representations and
warranties contained herein are based on Borrower's due diligence in
investigating the properties for hazardous waste and hazardous
substances. Borrower hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Borrower
becomes liable for cleanup or other costs under any such laws, and (b)
agrees to indemnify and hold harmless Lender against any and all
claims, losses, liabilities, damages, penalties, and expenses which
Lender may directly or indirectly sustain or suffer resulting from a
breach of this section of the Agreement or as a consequence of any use,
generation, manufacture, storage, disposal, release or threatened
release occurring prior to Borrower's ownership or interest in the
properties, whether or not the same was or should have been known to
Borrower. The provisions
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07-01-1997 BUSINESS LOAN AGREEMENT Page 3
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of this section of the Agreement, including the obligation to
indemnify, shall survive the payment of the Indebtedness and the
termination or expiration of this Agreement and shall not be affected
by Lender's acquisition of any interest in any of the properties,
whether by foreclosure or otherwise.
Litigation and Claims. No litigation, claim, investigation,
administrative proceeding or similar action (including those for unpaid
taxes) against Borrower is pending or threatened, and no other event
has occurred which may materially adversely affect Borrower's financial
condition or properties, other than litigation, claims, or other
events, if any, that have been disclosed to and acknowledged by Lender
in writing.
Taxes. To the best of Borrower's knowledge, all tax returns and reports
of Borrower that are or were required to be filed, have been filed, and
all taxes, assessments and other governmental charges have been paid in
full, except those presently being or to be contested by Borrower in
good faith in the ordinary course of business and for which adequate
reserves have been provided.
Lien Priority. Unless otherwise previously disclosed to Lender in
writing, Borrower has not entered into or granted any Security
Agreements, or permitted the filing or attachment of any Security
Interests on or affecting any of the Collateral directly or indirectly
securing repayment of Borrower's Loan and Note, that would be prior or
that may in any way be superior to Lender's Security Interests and
rights in and to such Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements
directly or indirectly securing repayment of Borrower's Loan and Note
and all of the Related Documents are binding upon Borrower as well as
upon Borrower's successors, representatives and assigns, and are
legally enforceable in accordance with their respective terms.
Commercial Purposes. Borrower intends to use the Loan proceeds solely
for business or commercial related purposes.
Employee Benefit Plans. Each employee benefit plan as to which Borrower
may have any liability complies in all material respects with all
applicable requirements of law and regulations, and (i) no Reportable
Event nor Prohibited Transaction (as defined in ERISA) has occurred
with respect to any such plan, (ii) Borrower has not withdrawn from any
such plan or initiated steps to do so, (iii) no steps have been taken
to terminate any such plan, and (iv) there are no unfunded liabilities
other than those previously disclosed to Lender in writing.
Location of Borrower's Offices and Records. Borrower's place of
business, or Borrower's Chief executive office, if Borrower has more
than one place of business, is located at 4034 Clipper Court, Fremont,
CA 94538. Unless Borrower has designated otherwise in writing this
location is also the office or offices where Borrower keeps its records
concerning the Collateral.
Information. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection
with this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender
will be, true and accurate in every material respect on the date as of
which such information is dated or certified; and none of such
information is or will be incomplete by omitting to state any material
fact necessary to make such information not misleading.
Survival of Representations and Warranties. Borrower understands and
agrees that Lender, without independent investigation, is relying upon
the above representations and warranties in extending Loan Advances to
Borrower. Borrower further agrees that the foregoing representations
and warranties shall be continuing in nature and shall remain in full
force and effect until such time as Borrower's Indebtedness shall be
paid in full, or until this Agreement shall be terminated in the manner
provided above, whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material
adverse changes in Borrower's financial condition, and (b) all existing
and all threatened litigation, claims, investigations, administrative
proceedings or similar actions affecting Borrower or any Guarantor
which could materially affect the financial condition of Borrower or
the financial condition of any Guarantor.
Financial Records. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent
basis, and permit Lender to examine and audit Borrower's books and
records at all reasonable times.
Additional Information. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and
other reports with respect to Borrower's financial condition and
business operations as Lender may request from time to time.
Financial Covenants and Ratios. Comply with the following covenants and
ratios:
Tangible Net Worth. Maintain a minimum Tangible Net Worth of not
less than $2,800,000.00 through November 30, 1997 and
$4,000,000.00 thereafter.
Net Worth Ratio. Maintain a ratio of Total Liabilities to
Tangible Worth of less than 1.50 to 1.00. Except as provided
above, all computations made to determine compliance with the
requirements contained in this paragraph shall be made in
accordance with generally accepted accounting principles, applied
on a consistent basis, and certified by Borrower as being true
and correct.
Insurance. Maintain fire and other risk insurance, public
liability insurance, and such other insurance as Lender may
require with respect to Borrower's properties and operations, in
form, amounts, coverages and with insurance companies reasonably
acceptable to Lender. Borrower, upon request of Lender, will
deliver to Lender from time to time the policies or certificates
of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished
without at least ten (10) days' prior written notice to Lender.
Each insurance policy also shall include an endorsement providing
that coverage in favor of Lender will not be impaired in any way
by any act, omission or default of Borrower or any other person.
In connection with all policies covering assets in which Lender
holds or is offered a security interest for the Loans, Borrower
will provide Lender with such loss payable or other endorsements
as Lender may require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports
on each existing insurance policy showing such information as Lender
may reasonably request, including without limitation the following: (a)
the name of the insurer; (b) the risks insured; (c) the amount of the
policy; (d) the properties insured; (e) the then current property
values on the basis of which insurance has been obtained, and the
manner of determining those values; and (f) the expiration date of the
policy. In addition, upon request of Lender (however not more often
than annually), Borrower will have an independent appraiser
satisfactory to Lender determine, as applicable, the actual cash value
or replacement cost of any Collateral. The cost of such appraisal shall
be paid by Borrower.
Other Agreements. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
Taxes, Charges and Liens. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all
assessments, taxes, governmental charges, levies and liens, of every
kind and nature, imposed upon Borrower or its properties, income, or
profits, prior to the date on which penalties would attach, and all
lawful claims that, if unpaid, might become a lien or charge upon any
of Borrower's properties, income, or profits. Provided however,
Borrower will not be required to pay and discharge any such assessment,
tax, charge, levy, lien or claim so long as (a) the legality of the
same shall be contested in good faith by appropriate proceedings, and
(b) Borrower shall have established on its
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07-01-1997 BUSINESS LOAN AGREEMENT Page 4
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books adequate reserves with respect to such contested assessment, tax,
charge, levy, lien, or claim in accordance with generally accepted
accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies,
liens and claims and will authorize the appropriate governmental
official to deliver to Lender at any time a written statement of any
assessments, taxes, charges, levies, liens and claims against
Borrower's properties, income, or profits.
Performance. Perform and comply with all terms, conditions, and
provisions set forth in this Agreement and in the Related Documents in
a timely manner, and promptly notify Lender if Borrower learns of the
occurrence of any event which constitutes an Event of Default under
this Agreement or under any of the Related Documents.
Operations. Maintain executive and management personnel with
substantially the same qualifications and experience as the present
executive and management personnel; provide written notice to Lender of
any change in executive and management personnel; conduct its business
affairs in a reasonable and prudent manner and in compliance with all
applicable federal, state and municipal laws, ordinances, rules and
regulations respecting its properties, charters, businesses and
operations, including without limitation, compliance with the Americans
With Disabilities Act and with all minimum funding standards and other
requirements of ERISA and other laws applicable to Borrower's employee
benefit plans.
Inspection. Permit employees or agents of Lender at any reasonable time
to inspect any and all Collateral for the Loan or Loans and Borrower's
other properties and to examine or audit Borrower's books, accounts,
and records and to make copies and memoranda of Borrower's books,
accounts, and records. If Borrower now or at any time hereafter
maintains any records (including without limitation computer generated
records and computer software programs for the generation of such
records) in the possession of a third party, Borrower, upon request of
Lender, shall notify such party to permit Lender free access to such
records at all reasonable times and to provide Lender with copies of
any records it may request, all at Borrower's expense.
Compliance Certificate. Unless waived in writing by Lender, provide
Lender at least annually and at the time of each disbursement of Loan
proceeds with a certificate executed by Borrower's chief financial
officer, or other officer or person acceptable to Lender, certifying
that the representations and warranties set forth in this Agreement are
true and correct as of the date of the certificate and further
certifying that, as of the date of the certificate, no Event of Default
exists under this Agreement.
Environmental Compliance and Reports. Borrower shall comply in all
respects with all environmental protection federal, state and local
laws, statutes, regulations and ordinances; not cause or permit to
exist, as a result of an intentional or unintentional action or
omission on its part or on the part of any third party, on property
owned and/or occupied by Borrower, any environmental activity where
damage may result to the environment, unless such environmental
activity is pursuant to and in compliance with the conditions of a
permit issued by the appropriate federal, state or local governmental
authorities; shall furnish to Lender promptly and in any event within
thirty (30) days after receipt thereof a copy of any notice, summons,
lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection with
any environmental activity whether or not there is damage to the
environment and/or other natural resources.
Additional Assurances. Make, execute and deliver to Lender such
promissory notes, mortgages, deeds of trust, security agreements,
financing statements, instruments, documents and other agreements as
Lender or its attorneys may reasonably request to evidence and secure
the Loans and to perfect all Security Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
Indebtedness and Liens. (a) Except for trade debt incurred in the
normal course of business and indebtedness to Lender contemplated by
this Agreement, create, incur or assume indebtedness for borrowed
money, including capital leases, (b) except as allowed as a Permitted
Lien, sell, transfer, mortgage, assign, pledge, lease, grant a security
interest in, or encumber any of Borrower's assets, or (c) sell with
recourse any of Borrower's accounts, except to Lender.
Continuity of Operations. (a) Engage in any business activities
substantially different than those in which Borrower is presently
engaged; (b) cease operations, liquidate, merge, transfer, acquire or
consolidate with any other entity, change ownership, change its name,
dissolve or transfer or sell Collateral out of the ordinary course of
business, (c) pay any dividends on Borrower's stock (other than
dividends payable in its stock), provided, however that notwithstanding
the foregoing, but only so long as no Event of Default has occurred and
is continuing or would result from the payment of dividends, if
Borrower is a "Subchapter S Corporation" (as defined in the Internal
Revenue Code of 1986, as amended), Borrower may pay cash dividends on
its stock to its shareholders from time to time in amounts necessary to
enable the shareholders to pay income taxes and make estimated income
tax payments to satisfy their liabilities under federal and state law
which arise solely from their status as Shareholders of a Subchapter S
Corporation because of their ownership of shares of stock of Borrower,
or (d) purchase or retire any of Borrower's outstanding shares or alter
or amend Borrower's capital structure.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance
money or assets, (b) purchase, create or acquire any interest in any
other enterprise or entity, or (c) incur any obligation as surety or
guarantor other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; or (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender.
ADVANCES AGAINST ACCOUNTS RECEIVABLE/INVENTORY. Lender shall make advances to
Borrower, at Borrower's request, equal to a maximum of seventy five percent
(75%) of Eligible Accounts Receivable; Plus Retail Inventory to a maximum of
thirty percent (30%) of Components (Raw Materials) and to a maximum of fifty
percent (50%) of Finished Goods. (The total advance on inventory may not exceed
$750,000.00). The definition of Accounts Receivable and Eligible Accounts
Receivable is described on Exhibit "A" consisting of two (2) pages which is
attached hereto and made a part of this Business Loan Agreement by this
reference. The maximum line borrowing will be limited by the advance rates
specified above, based on the trading assets levels at the end of each
semi-monthly period.
ADDITIONAL FINANCIAL REPORTING. Borrower will provide to Lender the following:
Semi-monthly Accounts Receivable Agings, Accounts Payable Agings, Inventory
Valuation and Borrowing Base Certificate to be received within 15 days of month
end and at mid-month (i.e. as of the 15th of the month).
FINANCIAL REPORTING. Borrower will provide to Lender the following:
1.) Company prepared Financial Statements including Balance Sheet, Income
Statement, and Statement of Cash flows, within 20 days of each months end.
2.) Copies of all 10QSB filings within 15 days of its quarterly filing with the
Security and Exchange Commission.
3.) Borrowers audited Financial Statement, bearing an unqualified opinion from
Borrower's auditor, to be provided within 90 days of its fiscal year end of
December 31, 1997.
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4.) Lender requires an accounts receivable/inventory audit satisfactory to the
Lender, to be obtained by August 15, 1997.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on the Indebtedness against
any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when
due on the Loans.
Other Defaults. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or
failure of Borrower to comply with or to perform any other term,
obligation, covenant or condition contained in any other agreement
between Lender and Borrower.
Default in Favor of Third Parties. Should Borrower or any Grantor
default under any loan, extension of credit, security agreement,
purchase or sales agreement, or any other agreement, in favor of any
other creditor or person that may materially affect any of Borrower's
property or Borrower's or any Grantor's ability to repay the Loans or
perform their respective obligations under this Agreement or any of the
Related Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under
this Agreement or the Related Documents is false or misleading in any
material respect at the time made or furnished, or becomes false or
misleading at any time thereafter.
Defective Collateralization. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of
any Security Agreement to create a valid and perfected Security
Interest) at any time and for any reason.
Insolvency. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a
receiver for any part of Borrower's property, any assignment for the
benefit of creditors, any type of creditor workout, or the commencement
of any proceeding under any bankruptcy or insolvency laws by or against
Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any
creditor of any Grantor against any collateral securing the
Indebtedness, or by any governmental agency. This includes a
garnishment, attachment, or levy on or of any of Borrower's deposit
accounts with Lender. However, this Event of Default shall not apply if
there is a good faith dispute by Borrower or Grantor, as the case may
be, as to the validity or reasonableness of the claim which is the
basis of the creditor or forfeiture proceeding, and if Borrower or
Grantor gives Lender written notice of the creditor or forfeiture
proceeding and furnishes reserves or a surety bond for the creditor or
forfeiture proceeding satisfactory to Lender.
Events Affecting Guarantor. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or any Guarantor
dies or becomes incompetent, or revokes or disputes the validity of, or
liability under, any Guaranty of the Indebtedness. Lender, at its
option, may, but shall not be required to, permit the Guarantor's
estate to assume unconditionally the obligations arising under the
guaranty in a manner satisfactory to Lender, and, in doing so, cure the
Event of Default.
Change In Ownership. Any change in ownership of twenty-five percent
(25%) or more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment or
performance of the Indebtedness is impaired.
Right to Cure. If any default, other than a Default on Indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been
given a notice of a similar default within the preceding twelve (12)
months, it may be cured (and no Event of Default will have occurred) if
Borrower or Grantor, as the case may be, after receiving written notice
from Lender demanding cure of such default: (a) cures the default
within fifteen (15) days; or (b) if the cure requires more than fifteen
(15) days, immediately initiates steps which Lender deems in Lender's
sole discretion to be sufficient to cure the default and thereafter
continues and completes all reasonable and necessary steps sufficient
to produce compliance as soon as reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and, at Lender's option, all Indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment
to this Agreement shall be effective unless given in writing and signed
by the party or parties sought to be charged or bound by the alteration
or amendment.
Applicable Law. This Agreement has been delivered to Lender and
accepted by Lender in the State of California. If there is a lawsuit,
Borrower agrees upon Lender's request to submit to the jurisdiction of
the courts of Santa Clara County, the State of California. This
Agreement shall be governed by and construed in accordance with the
laws of the State of California.
Caption Headings. Caption headings in this Agreement are for
convenience purposes only and are not to be used to interpret or define
the provisions of this Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation
whatsoever, to any one or more purchasers, or potential purchasers, any
information or knowledge Lender may have about Borrower or about any
other matter relating to the Loan, and Borrower hereby waives any
rights to privacy it may have with respect to such matters. Borrower
additionally waives any and all notices of sale of participation
interests, as well as all notices of any repurchase of such
participation interests. Borrower also agrees that the purchasers of
any such participation interests will be considered as the absolute
owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the
sale of such participation interests. Borrower further waives all
rights of offset or counterclaim that it may have now or later against
Lender or against any purchaser of such a participation interest and
unconditionally agrees that either Lender or such purchaser may enforce
Borrower's obligation under the Loans irrespective of the failure or
<PAGE>
07-0l-1997 BUSINESS LOAN AGREEMENT Page 6
(Continued)
================================================================================
insolvency of any holder of any interest in the Loans. Borrower further
agrees that the purchaser of any such participation interests may
enforce its interests irrespective of any personal claims or defenses
that Borrower may have against Lender.
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification
and collection of this Agreement or in connection with the Loans made
pursuant to this Agreement. Lender may pay someone else to help collect
the Loans and to enforce this Agreement, and Borrower will pay that
amount. This includes, subject to any limits under applicable law,
Lender's attorneys' fees and Lender's legal expenses, whether or not
there is a lawsuit; including attorneys' fees for bankruptcy
proceedings (including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection
services. Borrower also will pay any court costs, in addition to all
other sums provided by law.
Notices. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile, and shall be effective
when actually delivered or when deposited with a nationally recognized
overnight courier or deposited in the United States mail, first class,
postage prepaid, addressed to the party to whom the notice is to be
given at the address shown above. Any party may change its address for
notices under this Agreement by giving formal written notice to the
other parties, specifying that the purpose of the notice is to change
the party's address. To the extent permitted by applicable law, if
there is more than one Borrower, notice to any Borrower will constitute
notice to all Borrowers. For notice purposes, Borrower will keep Lender
informed at all times of Borrower's current address(es).
Severability. If a court of competent jurisdiction finds any provision
of this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible,
any such offending provision shall be deemed to be modified to be
within the limits of enforceability or validity; however, if the
offending provision cannot be so modified, it shall be stricken and all
other provisions of this Agreement in all other respects shall remain
valid and enforceable.
Subsidiaries and Affiliates of Borrower. To the extent the context of
any provisions of this Agreement makes it appropriate, including
without limitation any representation, warranty or covenant, the word
"Borrower" as used herein shall include all subsidiaries and affiliates
of Borrower. Notwithstanding the foregoing however, under no
circumstances shall this Agreement be construed to require Lender to
make any Loan or other financial accommodation to any subsidiary or
affiliate of Borrower.
Successors and Assigns. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall
inure to the benefit of Lender, its successors and assigns. Borrower
shall not, however, have the right to assign its rights under this
Agreement or any interest therein, without the prior written consent of
Lender.
Survival. All warranties, representations, and covenants made by
Borrower in this Agreement or in any certificate or other instrument
delivered by Borrower to Lender under this Agreement shall be
considered to have been relied upon by Lender and will survive the
making of the Loan and delivery to Lender of the Related Documents,
regardless of any investigation made by Lender or on Lender's behalf.
Time is of the Essence. Time is of the essence in the performance of
this Agreement.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender.
No delay or omission on the part of Lender in exercising any right
shall operate as a waiver of such right or any other right. A waiver by
Lender of a provision of this Agreement shall not prejudice or
constitute a waiver of Lender's right otherwise to demand strict
compliance with that provision or any other provision of this
Agreement. No prior waiver by Lender, nor any course of dealing between
Lender and Borrower, or between Lender and any Grantor, shall
constitute a waiver of any of Lender's rights or of any obligations of
Borrower or of any Grantor as to any future transactions. Whenever the
consent of Lender is required under this Agreement, the granting of
such consent by Lender in any instance shall not constitute continuing
consent in subsequent instances where such consent is required, and in
all cases such consent may be granted or withheld in the sole
discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF JULY
1, 1997.
BORROWER:
EROX Corporation
By: /s/ William P. Horgan
-----------------------------------------------------
William P. Horgan, Chairman & Chief Executive Officer
LENDER:
Mid-Peninsula Bank
By: /s/ ????????????????
-----------------------------------------------------
Authorized Officer
================================================================================
<PAGE>
<TABLE>
PROMISSORY NOTE
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C>
$3,000,000.00 07-01-1997 04-01-1998 0108143855 513 04 JS
- ------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- ------------------------------------------------------------------------------------------------------
</TABLE>
Borrower: EROX Corporation Lender: Mid-Peninsula Bank
4034 Clipper Court c/o Greater Bay Bancorp
Fremont, CA 94538 2860 W. Bayshore
Palo Alto, CA 94303
================================================================================
Principal Amount: $3,000,000.00 Initial Rate: 9.250% Date of Note: ]uly 1, 1997
PROMISE TO PAY. EROX Corporation ("Borrower") promises to pay to Mid-Peninsula
Bank ("Lender"), or order, in lawful money of the United States of America, the
principal amount of Three Million & 00/100 Dollars ($3,000,000.00) or so much as
may be outstanding, together with interest on the unpaid outstanding principal
balance of each advance. Interest shall be calculated from the date of each
advance until repayment of each advance.
PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in one
payment of all outstanding principal plus all accrued unpaid interest on April
1, 1998. In addition, Borrower will pay regular monthly payments of accrued
unpaid interest beginning August 1, 1997, and all subsequent interest payments
are due on the same day of each month after that. Interest on this Note is
computed on a 365/360 simple interest basis; that is, by applying the ratio of
the annual interest rate over a year of 360 days, multiplied by the outstanding
principal balance, multiplied by the actual number of days the principal balance
is outstanding. Borrower will pay Lender at Lender's address shown above or at
such other place as Lender may designate in writing. Unless otherwise agreed or
required by applicable law, payments will be applied first to accrued unpaid
interest, then to principal, and any remaining amount to any unpaid collection
costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an independent index which is the Wall Street
Journal Prime (Western Edition) (the "Index"). The Index is not necessarily the
lowest rate charged by Lender on its loans. If the Index becomes unavailable
during the term of this loan, Lender may designate a substitute index after
notice to Borrower. Lender will tell Borrower the current Index rate upon
Borrower's request. Borrower understands that Lender may make loans based on
other rates as well. The interest rate change will not occur more often than
each Day. The Index currently is 8.500% per annum. The interest rate to be
applied to the unpaid principal balance of this Note will be at a rate of 0.750
percentage points over the Index, resulting in an initial rate of 9.250% per
annum. NOTICE: Under no circumstances will the interest rate on this Note be
more than the maximum rate allowed by applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and
other prepaid finance charges are earned fully as of the date of the loan and
will not be subject to refund upon early payment (whether voluntary or as a
result of default), except as otherwise required by law. In any event, even upon
full prepayment of this Note, Borrower understands that Lender is entitled to a
minimum interest charge of $250.00. Other than Borrower's obligation to pay any
minimum interest charge, Borrower may pay without penalty all or a portion of
the amount owed earlier than it is due. Early payments will not, unless agreed
to by Lender in writing, relieve Borrower of Borrower's obligation to continue
to make payments of accrued unpaid interest. Rather, they will reduce the
principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment or $10.00, whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries
to take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts with Lender.
(g) Any guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this Note. (h) A material
adverse change occurs in Borrower's financial condition, or Lender believes the
prospect of payment or performance of the Indebtedness is impaired.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiates steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon Borrower's failure to pay
all amounts declared due pursuant to this section, including failure to pay upon
final maturity, Lender, at its option, may also, if permitted under applicable
law, do one or both of the following: (a) increase the variable interest rate on
this Note to 5.750 percentage points over the index, and (b) add any unpaid
accrued interest to principal and such sum will bear interest therefrom until
paid at the rate provided in this Note (including any increased rate). Lender
may hire or pay someone else to help collect this Note if Borrower does not pay.
Borrower also will pay Lender that amount. This includes, subject to any limits
under applicable law, Lender's attorneys' fees and Lender's legal expenses
whether or not there is a lawsuit, including attorneys' fees and legal expenses
for bankruptcy proceedings (including efforts to modify or vacate any automatic
stay or injunction), appeals, and any anticipated post-judgement collection
services. Borrower also will pay any court costs, in addition, to all other sums
provided by law. This Note has been delivered to Lender and accepted by Lender
in the State of California. If there is a lawsuit, Borrower agrees upon Lender's
request to submit to the jurisdiction of the courts of Santa Clara County, the
State of California. This Note shall be governed by and construed in accordance
with the laws of the State of California.
RIGHTS OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
COLLATERAL. This Note is secured by a Ucc-1 Financing Statement dated July 17,
1995 and recorded August 3, 1995 with the California Secretary of State as
instrument #9521960081; and UCC-1 Financing Statement dated July 17, 1995 and
recorded August 3, 1995 with the Arizona Secretary
<PAGE>
07-01-1997 PROMISSORY NOTE Page 2
(Continued)
================================================================================
of State as Instrument #841477; and a UCC--1 Financing Statement dated July 17,
1995 and recorded with the Tennessee Secretary of State on August 4, 1995 and
further described in that certain Commercial Security Agreement dated July 17,
1995 executed by Borrower in favor of Lender.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note, as well as directions for payment from Borrower's accounts, may be
requested orally or in writing by Borrower or by an authorized person. Lender
may, but need not, require that all oral requests be confirmed in writing. The
following party or parties are authorized to request advances under the line of
credit until Lender receives from Borrower at Lender's address shown above
written notice of revocation of their authority: William P. Horgan, Chairman &
Chief Executive Officer. Borrower agrees to be liable for all sums either: (a)
advanced in accordance with the instructions of an authorized person or (b)
credited to any of Borrower's accounts with Lender. The unpaid principal balance
owing on this Note at any time may be evidenced by endorsements on this Note or
by Lender's internal records, including daily computer print-outs. Lender will
have no obligation to advance funds under this Note if: (a) Borrower or any
guarantor is in default under the terms of this Note or any agreement that
Borrower or any guarantor has with Lender, including any agreement made in
connection with the signing of this Note; (b) Borrower or any guarantor ceases
doing business or is insolvent; (c) any guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such guarantor's guarantee of this Note or
any other loan with Lender; or (d) Borrower has applied funds provided pursuant
to this Note for purposes other than those authorized by Lender.
LOAN AGREEMENT. In addition to the terms and conditions contained in the Note,
it is further subject to the terms and conditions contained in that certain
Business Loan Agreement dated July 1, 1997 executed by Borrower in favor of
Lender, which Agreement is hereby incoporated herein by this reference.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. Lender may delay or forgo enforcing
any of its rights or remedies under this Note without losing them. Borrower and
any other person who signs, guarantees or endorses this Note, to the extent
allowed by law, waive any applicable statute of limitations, presentment, demand
for payment, protest and notice of dishonor. Upon any change in the terms of
this Note, and unless otherwise expressly stated in writing, no party who signs
this Note, whether as maker, guarantor, accommodation maker or endorser, shall
be released from liability. All such parties agree that Lender may renew or
extend (repeatedly and for any length of time) this loan, or release any party
or guarantor or collateral; or impair, fail to realize upon or perfect Lender's
security interest in the collateral; and take any other action deemed necessary
by Lender without the consent of or notice to anyone. All such parties also
agree that Lender may modify this loan without the consent of or notice to
anyone other than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
EROX, Corporation
By: /s/ William P. Horgan
------------------------------------------------------------
William P. Horgan, Chairman & Chief Executive Officer
================================================================================
<PAGE>
<TABLE>
DISBURSEMENT REQUEST AND AUTHORIZATION
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C>
$3,000,000.00 07-01-1997 04-01-1998 0108143855 513 04 JS
- ------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- ------------------------------------------------------------------------------------------------------
</TABLE>
Borrower: EROX Corporation Lender: Mid-Peninsula Bank
4034 Clipper Court c/o Greater Bay Bancorp
Fremont, CA 94538 2860 W. Bayshore
Palo Alto, CA 94303
================================================================================
LOAN TYPE. This is a Variable Rate (0.750% over Wall Street Journal Prime
(Western Edition), making an initial rate of 9.250%), Revolving Line of Credit
Loan to a Corporation for $3,000,000.00 due on April 1, 1998.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for (please
initial):
[ ] ____ Personal, Family, or Household Purposes or Personal
Investment.
[X] ____ Business (Including Real Estate Investment).
SPECIFIC PURPOSE. The specific purpose of this loan is: to finance Accounts
Receivable and Inventory.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Lender's conditions for making the loan have been
satisfied. Please disburse the loan proceeds of $3,000,000.00 as follows:
Amount paid to Borrower directly: $0.00
Undisbursed Funds: $1,253,000.00
Amount paid on Borrower's account: $1,747,000.00
$1,747,000.00 Payment on Loan # (Renew)0108143855
-------------
Note Principal: $3,000,000.00
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
Prepaid Finance Charges Paid in Cash: $11,875.00
$11,875.00 Loan Fees
-------------
Total Charges Paid in Cash: $11,875.00
AUTOMATIC PAYMENTS. Borrower hereby authorizes Lender automatically to deduct
from Borrower's account numbered 0108143801 the amount of any loan payment. If
the funds in the account are insufficient to cover any payment, Lender shall not
be obligated to advance funds to cover the payment. At any time and for any
reason, Borrower or Lender may voluntarily terminate Automatic Payments.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION
AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO LENDER. THIS
AUTHORIZATION IS DATED JULY 1, 1997.
BORROWER:
EROX Corporation
By: /s/ William P. Horgan
-----------------------------------------------------
William P. Horgan, Chairman & Chief Executive Officer
================================================================================
<PAGE>
<TABLE>
AGREEMENT TO PROVIDE INSURANCE
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C>
$3,000,000.00 07-01-1997 04-01-1998 0108143855 513 04 JS
- ------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- ------------------------------------------------------------------------------------------------------
</TABLE>
Borrower: EROX Corporation Lender: Mid-Peninsula Bank
4034 Clipper Court c/o Greater Bay Bancorp
Fremont, CA 94538 2860 W. Bayshore
Palo Alto, CA 94303
================================================================================
INSURANCE REQUIREMENTS. EROX Corporation ("Grantor") understands that insurance
coverage is required in connection with the extending of a loan or the providing
of other financial accommodations to Grantor by Lender. These requirements are
set forth in the security documents. The following minimum insurance coverages
must be provided on the following described collateral (the "Collateral"):
Collateral: All Inventory and Equipment.
Type. All risks, including fire, theft and liability.
Amount. Full insurable value.
Basis. Replacement value.
Endorsements. Lender's loss payable clause with stipulation that
coverage will not be cancelled or diminished without a minimum of
ten (10) days' prior written notice to Lender.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance company
Grantor may choose that is reasonably acceptable to Lender. Grantor understands
that credit may not be denied solely because insurance was not purchased through
Lender.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Lender, thirty (30)
days from the date of this Agreement, evidence of the required insurance as
provided above, with an effective date of July 1, 1997, or earlier. Grantor
acknowledges and agrees that if Grantor fails to provide any required insurance
or fails to continue such insurance in force, Lender may do so at Grantor's
expense as provided in the applicable security document. The cost of any such
insurance, at the option of Lender, shall be payable on demand or shall be added
to the indebtedness as provided in the security document. GRANTOR ACKNOWLEDGES
THAT IF LENDER SO PURCHASES ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE
LIMITED PROTECTION AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE
OF THE LOAN; HOWEVER, GRANTOR'S EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN
ADDITION, THE INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE
INDEMNIFICATION AND MAY NOT MEET THE REQUIREMENTS OF ANY FINANCIAL
RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral, Grantor
authorizes Lender to provide to any person (including any insurance agent or
company) all information Lender deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO PROVIDE
INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JULY 1, 1997.
GRANTOR:
EROX Corporation
By: /s/ William p. Horgan
--------------------------------------------------------
William P. Horgan, Chairman & Chief Executive Officer
- --------------------------------------------------------------------------------
FOR LENDER USE ONLY
INSURANCE VERIFICATION
DATE: __________________________ PHONE: __________________________
AGENT'S NAME:__________________________________
INSURANCE COMPANY:_____________________________________________________________
POLICY NUMBER: ________________________________________________________________
EFFECTIVE DATES: ______________________________________________________________
COMMENTS: _____________________________________________________________________
- --------------------------------------------------------------------------------
================================================================================
<PAGE>
<TABLE>
AGREEMENT TO PROVIDE INSURANCE
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C>
$3,000,000.00 07-01-1997 04-01-1998 0108143855 513 04 JS
- ------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- ------------------------------------------------------------------------------------------------------
</TABLE>
Borrower: EROX Corporation Lender: Mid-Peninsula Bank
4034 Clipper Court c/o Greater Bay Bancorp
Fremont, CA 94538 2860 W. Bayshore
Palo Alto, CA 94303
================================================================================
INSURANCE REQUIREMENTS. EROX Corporation ("Grantor") understands that insurance
coverage is required in connection with the extending of a loan or the providing
of other financial accommodations to Grantor by Lender. These requirements are
set forth in the security documents. The following minimum insurance coverages
must be provided on the following described collateral (the "Collateral"):
Collateral: All Inventory and Equipment.
Type. All risks, including fire, theft and liability.
Amount. Full insurable value.
Basis. Replacement value.
Endorsements. Lender's loss payable clause with stipulation that
coverage will not be cancelled or diminished without a minimum of
ten (10) days' prior written notice to Lender.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance company
Grantor may choose that is reasonably acceptable to Lender. Grantor understands
that credit may not be denied solely because insurance was not purchased through
Lender.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Lender, thirty (30)
days from the date of this Agreement, evidence of the required insurance as
provided above, with an effective date of July 1, 1997, or earlier. Grantor
acknowledges and agrees that if Grantor fails to provide any required insurance
or fails to continue such insurance in force, Lender may do so at Grantor's
expense as provided in the applicable security document. The cost of any such
insurance, at the option of Lender, shall be payable on demand or shall be added
to the indebtedness as provided in the security document. GRANTOR ACKNOWLEDGES
THAT IF LENDER SO PURCHASES ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE
LIMITED PROTECTION AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE
OF THE LOAN; HOWEVER, GRANTOR'S EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN
ADDITION, THE INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE
INDEMNIFICATION AND MAY NOT MEET THE REQUIREMENTS OF ANY FINANCIAL
RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral, Grantor
authorizes Lender to provide to any person (including any insurance agent or
company) all information Lender deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO PROVIDE
INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JULY 1, 1997.
GRANTOR:
EROX Corporation
By: /s/ William P. Horgan
-----------------------------------------------------
William P. Horgan, Chairman & Chief Executive Officer
- --------------------------------------------------------------------------------
FOR LENDER USE ONLY
INSURANCE VERIFICATION
DATE: __________________________ PHONE: __________________________
AGENT'S NAME:__________________________________
INSURANCE COMPANY:_____________________________________________________________
POLICY NUMBER: ________________________________________________________________
EFFECTIVE DATES: ______________________________________________________________
COMMENTS: _____________________________________________________________________
- --------------------------------------------------------------------------------
================================================================================
<TABLE>
Exhibit 11
Statement Re:
Computation of Per Share Earnings (Loss)
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Primary 10,284,323 9,923,532 10,252,966 9,915,840
Average shares outstanding
Net effect of dilutive stock
options-based on the
treasury stock method
using average market price -- 575,498 -- 460,056
------------ ------------ ------------ ------------
Total 10,284,323 10,499,030 10,252,966 10,375,896
Net income (loss) $ (3,937,917) $ 99,603 $ (3,748,234) $ 159,614
============ ============ ============ ============
Per share amount $ (0.38) $ 0.01 $ (0.37) $ 0.02
============ ============ ============ ============
Fully Diluted
Average shares outstanding 10,284,323 9,923,532 10,252,966 9,915,840
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 10,284,323 10,622,407 10,252,966 10,437,584
Net income (loss) $ (3,937,917) $ 99,603 $ (3,748,234) $ 159,614
============ ============ ============ ============
Per share amount $ (0.38) $ 0.01 $ (0.37) $ 0.02
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule Contain Summary Financial Information Extracted From
Balance Sheets and Statements of Income
</LEGEND>
<CIK> 0000878616
<NAME> Erox Corporation
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 7,886
<SECURITIES> 0
<RECEIVABLES> 1,921,003
<ALLOWANCES> (541,383)
<INVENTORY> 4,806,498
<CURRENT-ASSETS> 6,288,257
<PP&E> 790,466
<DEPRECIATION> (658,717)
<TOTAL-ASSETS> 6,420,006
<CURRENT-LIABILITIES> 4,546,346
<BONDS> 0
0
0
<COMMON> 17,667,023
<OTHER-SE> (15,793,363)
<TOTAL-LIABILITY-AND-EQUITY> 6,420,006
<SALES> 8,913,831
<TOTAL-REVENUES> 8,913,831
<CGS> 1,889,643
<TOTAL-COSTS> 1,889,643
<OTHER-EXPENSES> 10,749,657
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,828
<INCOME-PRETAX> (3,747,434)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,747,434)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,747,434)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
