U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(MARK ONE)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR A5(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (no fee required)
Commission file number 0-23544
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EROX CORPORATION
----------------------------------------------
(Name of small business issuer in its charter)
California 94-3107202
- --------------------------------------- --------------------
(State or other jurisdiction of (I.R.S. employee
incorporation or organization) Identification No.)
4034 Clipper Court, Fremont, California 94538
- --------------------------------------- --------------------
(Address of principal executive offices) (Zip code)
Issuer's telephone number: (510) 226-6874
--------------
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [ X ] No
[ ]
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. 10,289,488 shares of Common
Stock as of May 5, 1998.
Total Pages: 21
<PAGE>
EROX CORPORATION
<TABLE>
INDEX
<CAPTION>
Page
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<S> <C>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets (Unaudited) as of March 31, 1998
and December 31, 1997...........................................................................2
Statements of Operations (Unaudited) for the Three Months Ended
March 31, 1998 and 1997.........................................................................3
Condensed Statements of Cash Flows (Unaudited) for the Three Months
Ended March 31, 1998 and 1997...................................................................4
Notes to Condensed Financial Statements (Unaudited).............................................5
Item 2. Management's Discussion and Analysis
Management's Discussion and Analysis of Financial Condition and Results of Operations...........6
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................................................8
SIGNATURES........................................................................................................9
</TABLE>
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
<PAGE>
EROX Corporation
<TABLE>
Balance Sheets
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 33,930 $ 248,617
Accounts receivable, net of allowances of $499,606 2,670,450 3,084,784
and $822,813 in 1998 and 1997, respectively
Inventory 3,215,413 3,421,298
Other current assets 146,276 128,817
------------ ------------
Total current assets 6,066,069 6,883,516
Property and equipment, net 84,366 99,491
------------ ------------
$ 6,150,435 $ 6,983,007
============ ============
Liabilities and shareholders' equity
Loan payable, bank $ 614,462 $ 548,000
Accounts payable 393,631 800,648
Other accrued expenses 1,486,122 1,205,069
------------ ------------
Total current liabilities 2,494,215 2,553,717
Commitments -- --
Shareholders' equity:
Convertible preferred stock, issuable in
series, no par value, 10,000,000 shares
authorized, 1,433,333 shares issued and
outstanding at March 31, 1998
and December 31, 1997, respectively 2,145,535 2,145,535
Common stock, no par value, 40,000,000 shares
authorized, 10,289,488 shares
issued and outstanding at March
31, 1998 and December 31, 1997, respectively 17,667,024 17,667,024
Accumulated deficit (16,156,339) (15,383,269)
------------ ------------
Total shareholders' equity 3,656,220 4,429,290
------------ ------------
$ 6,150,435 $ 6,983,007
============ ============
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
EROX Corporation
Statements of Operations
Quarter ended March 31,
-----------------------
------------ ------------
1998 1997
------------ ------------
Net sales $ 3,363,161 $ 5,096,289
Cost of goods sold 1,044,199 907,686
------------ ------------
Gross profit 2,318,962 4,188,603
Expenses:
Research and development 82,132 91,770
Selling, general and administrative 2,999,595 3,907,279
------------ ------------
Total expenses 3,081,727 3,999,049
------------ ------------
Income (loss) from operations (762,765) 189,554
Interest income 56 11,980
Interest (expense) (10,955) (2,543)
Other (expense) 594 1,474
------------ ------------
Income (loss) before income taxes (773,070) 200,466
Income taxes -- 10,783
------------ ------------
Net income (loss) $ (773,070) $ 189,683
============ ============
Net income (loss) per common share-basic $ (.08) $ .02
============ ============
Net income (loss) per common share-
assuming dilution $ (.08) $ .02
============ ============
Weighted average shares used in
calculation of earnings per share 10,289,488 10,221,260
============ ============
Weighted average shares and equivalents,
if dilutive, used in calculation of net income
(loss) per common share 10,289,488 10,577,397
============ ============
See accompanying notes.
<PAGE>
EROX Corporation
Statements of Cash Flows
Quarter ended March 31,
-----------------------
1998 1997
----------- -----------
Cash flows from operating activities
Net income (loss) $ (773,070) $ 189,682
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 15,125 15,296
Changes in operating assets and liabilities:
Accounts receivable 414,334 (1,677,813)
Inventory 205,885 (1,602,757)
Other current assets (17,459) (385,062)
Accounts payable and accrued liabilities (125,964) 862,406
----------- -----------
Net cash used in operating activities (281,149) (2,598,247)
Cash flows from investing activities
Purchase of property and equipment -- (87,254)
----------- -----------
Net cash provided by (used in) investing activities -- (87,254)
Cash flows from financing activities
Proceeds from bank borrowings 66,462 442,378
Proceeds from issuance of common stock -- 184,039
----------- -----------
Net cash provided by financing activities 66,462 626,417
Net increase/(decrease) in cash and cash equivalents (214,687) (2,059,084)
Cash and cash equivalents at beginning of the year 248,617 2,059,084
----------- -----------
Cash and cash equivalents at end of the year $ 33,930 $ --
=========== ===========
See accompanying notes.
<PAGE>
EROX Corporation
Notes to Condensed Financial Statements
(unaudited)
March 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 1998 are
not necessarily indicative of the results that may be expected for the calendar
year ending December 31, 1998. 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, 1997.
Inventory
Inventories are stated at the lower of cost (first in - first out
method) or market. The inventory at March 31, 1998 consists of finished goods
inventory valued at $1,512,065 work in process of $210,754 and raw materials of
$1,492,594. At December 31, 1997, these balances were $1,665,393, $151,143 and
$1,604,762, respectively.
Net (Loss) Income Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), Earnings per Share. Statement
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is similar to
the previously reported fully diluted earnings per share. All per share amounts
for all periods have been presented, and where necessary, restated to conform to
Statement 128 requirements.
Basic net (loss) income per share is computed using the
weighted-average number of common shares outstanding. Diluted net income per
share is computed using the weighted-average number of common shares and
dilutive common equivalent shares outstanding during the period. Dilutive common
share equivalents consist of employee stock options using the treasury stock
method and dilutive convertible securities using the if-converted method.
Diluted loss per share is computed using the weighted-average number of common
shares outstanding during the period. Common stock equivalents are excluded from
the diluted loss per share computation as their effect in antidilutive. The
following table sets forth the computation for basic and diluted (loss) income
per share:
March 31, 1998 March 31 1997
------------ ------------
Numerator:
Net (loss) income from operations $ (773,070) $ 189,683
Denominator:
Denominator for basic earnings per share-data 10,289,488 10,221,260
Effect of dilutive securities:
Employee stock options -- 356,137
------------ ------------
Denominator for diluted earnings per share-data 10,289,488 10,577,397
Basic net (loss) income per share $ (0.08) $ 0.02
------------ ------------
Diluted net (loss) income per share $ (0.08) $ 0.02
------------ ------------
<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 that could cause actual results to differ materially from the
statements made. In addition to the risks and uncertainties described in "Risk
Factors", below, these risks and uncertainties may include consumer trends,
business cycles, scientific developments, changes in governmental policy and
regulation, currency fluctuations, economic trends in the United States and
inflation. 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 that
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 catalogs 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 US upper end
department stores. This consolidation could lead to price and promotional
pressure and increased credit risk for the Company.
The retail environment in better department stores is increasingly
challenging. Retailers have aggressively cut inventories across the board.
Promotional support in the form of co-op advertising dollars is being cut back
and retailers are feeling pressure to become more promotional in order to
compete with price conscious chains appealing to bargain hunters. Fragrances and
cosmetics are increasingly being sold in secondary markets such as discount
perfumeries, drug chains and lower priced department stores. It is not
anticipated that the department store class of trade in the U.S. will become
more profitable in the near future.
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 the
Christmas holiday season. The anticipated seasonality of the Company's sales
could cause a significant variation in its quarterly operating results.
<PAGE>
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. The majority
of the fragrance industry uses contract fillers, 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 March 31, 1998 as compared to the Three Months ended March
31, 1997
Net sales for the first quarter of 1998 were $3,363,161 representing a
decrease of 34% from sales of $5,096,289 for the prior year's quarter. Sales in
the first quarter of 1997 included the launch of inner REALM(R) into the major
department store chains in the U.S. The Company attributes the 34% decrease in
net sales entirely to inner REALM. Initial launch quantities shipped in the
first quarter of 1997 were not duplicated by reorders in the first quarter of
1998. The Company's first fragrance offerings: Realm Women(R) and Realm Men(R)
have shown level reorder quantities between the two quarters. During the first
quarter of 1998, the Company expanded sales to distributors for secondary
markets. Also in 1998, international shipments increased with expansion into
selected European markets for both retail and direct marketing. The Company
plans to aggressively pursue these outlets as they offer a cost-effective method
of distribution.
Net sales for the quarters ended March 31, 1998 and 1997 were as
follows:
- --------------------------------------------------------------------------------
Markets 1998 1997
- --------------------------------------------------------------------------------
U.S. Markets $ 2,952,227 $ 4,752,101
International Markets 410,934 344,188
---------------- -----------------
Net Sales $ 3,363,161 $ 5,096,289
Gross margin for the quarter ended March 31, 1998 declined 13% to
$2,318,962 from $4,188,603 in the prior year primarily due to the decrease in
full price launch shipments of inner REALM. The Company created inner REALM to
be a product with a higher gross margin than Realm Women and Realm Men, and the
decrease in the quantity of inner REALM items sold resulted in the margin
shortfall. Also contributing to the margin shortfall was the increase in sales
to secondary and international classes of trade. The Company sells into these
markets through distributors. While the net selling price is lower to
distributors than the wholesale price to department stores, the Company
anticipates seeing long term benefits as there are no ongoing advertising or
field support chargebacks to lower overall operating results.
Research and Development expenses for the first quarters of 1998 and
1997 were $82,132 and $91,770, respectively. These costs principally reflect
payments and costs under the Company's contract with Pherin Corporation.
<PAGE>
Operating expenses decreased $907,684 to $2,999,595 in the first
quarter of 1998 from $3,907,279 in the first quarter of 1997. While $781,105 of
this decrease was attributable to lower advertising and marketing costs, costs
in all operational areas were decreased. Headcount in the sales area decreased
due to attrition, and the Company used this opportunity to change its focus to
emphasizing selling-through at the retail level from selling-into Department
stores. The Company replaced regional managers primarily responsible for making
headquarters calls with additional field selling staff responsible for in-store
activities geared toward selling directly to the retail consumer. The Company
anticipates this change in selling strategy will increase retail turns and lead
to higher volume sales to its department store customers. Distribution and
general and administrative costs decreased as well as selling and marketing in
the first quarter of 1998. MIS consulting costs were lower in the 1998 quarter
due to completion of the Company's installation of automated warehousing and EDI
systems. Additionally, temporary workers employed during the first quarter 1997
launch of inner REALM were not required during 1998.
The Company incurred $10,899 in net interest expense during the first
quarter of 1998 compared to $9,437 net interest income in 1997. During the first
quarter of 1998, the Company was in a net borrowing position as compared to the
same period in 1997 when the Company was earning interest on cash balances.
LIQUIDITY
At March 31, 1998, the Company had borrowed $614,462 against its
$3,000,000 line of credit. Working capital was $3,571,854. At March 31, 1997,
the Company had net borrowings of $942,378 and working capital of $5,559,853.
For the first quarter of 1998, net cash used in operating activities was
$281,149 compared to $2,598,247 for the prior year's quarter. Assuming the
Company's activities proceed substantially as planned, the Company's 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 and accounts
receivable financing.
Additional working capital may be required should the Company's
continued expansion fail to generate anticipated consumer response levels.
Furthermore, additional working capital may be required should the Company
experience a greater than planned success with its product and retail expansion.
Funds would be needed for inventory build, accounts receivable financing and
staffing purposes. If the Company fails to achieve significant revenues from its
1998 marketing efforts, or if retail expansion proves to be more capital
intensive than planned, the Company may require additional funding.
On April 1, 1998, the Company signed a renegotiated loan agreement with
Mid-Peninsula Bank of Palo Alto, California (the "Bank") providing for a
continued line of credit. The Company may borrow up to $3,000,000 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
in April, 1999, contains certain debt-to-equity and working capital covenants.
There are no charges for any unused portions of the line.
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.14 Business Loan Agreement dated April 1, 1998 E- 11
Exhibit 27.01-Financial Data Schedule E- 19
(b) The Company did not file any reports on Form 8-K during the three
months ended March 31, 1998.
<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: May 15, 1998 /s/ William P. Horgan
------------------------------------------
William P. Horgan
Chairman and Chief Executive Officer
Date: May 15, 1998 /s/ Maxine C. Harmatta
------------------------------------------
Maxine C. Harmatta
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 04-01-1998 04-01-1999 0108143855 CL 10 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
Fremont, CA 94538 2860 W. Bayshore Road
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 March 27, 1998, 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
<PAGE>
04-01-1998 BUSINESS LOAN AGREEMENT Page 2
Loan No 0108143855 (Continued)
================================================================================
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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04-01-1998 BUSINESS LOAN AGREEMENT Page 3
Loan No 0108143855 (Continued)
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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 $3,200,000.00.
Net Worth Ratio. Maintain a ratio of Total Liabilities to
Tangible Net Worth of less than 1.25 to 1.00.
Other Ratio. Maintain a ratio of Minimum Quick Ratio of 0.90 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
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04-01-1998 BUSINESS LOAN AGREEMENT Page 4
Loan No 0108143855 (Continued)
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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 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 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.
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. 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
monthly period.
ADDITIONAL FINANCIAL REPORTING. Borrower will provide to Lender the following:
Monthly Accounts Receivable Agings, Accounts Payable Agings and Borrowing Base
Certificate to be received within 20 days of month end.
FINANCIAL REPORTING. Borrower will provide to Lender the following:
1.) Company prepared Financial Statements including Balance Sheet, Income
Statement, and Statement of Cash flows on a monthly basis.
2.) Audited financial statement, bearing an unqualified opinion, will be
provided within 120 days of fiscal year end, by way of submission of the 10-K
filing.
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
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04-01-1998 BUSINESS LOAN AGREEMENT Page 5
Loan No 0108143855 (Continued)
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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 pursuant to which any
person or controlled group acquires 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
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' reasonable fees and Lender's reasonable legal
expenses, whether or not there is a lawsuit; 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 (unless otherwise
required by law), and shall be effective when actually delivered or
when deposited with a nationally recognized overnight courier or
deposited in the United
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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 APRIL
1, 1998.
BORROWER:
EROX Corporation
By: /s/ William P. Horgan
-----------------------------------------------------
William P. Horgan, Chairman & Chief Executive Officer
LENDER:
Mid-Peninsula Bank
By: /s/ J. H. Stafford
-----------------------------------------------------
Authorized Officer J. H. Stafford, Sr. Vice President
================================================================================
<PAGE>
EXHIBITS "A"
A. Definitions
(1) "Account Receivable" shall mean an account arising in the ordinary
course of Borrower's business from the sale of goods or the performance of
services;
(2) "Account Debtor" shall mean the obligor on any Account Receivable;
(3) "Eligible Account" shall mean an Account Receivable, excluding the
following;
a. Accounts Receivable which remain uncollected more than 90 days from
invoice date ("Delinquent Accounts");
b. Accounts Receivable due from an Account Debtor which has suffered a
business failure or the termination of its existence, or as to which a
dissolution, insolvency or bankruptcy proceeding has been commenced, any
assignment for the benefit of creditors has been made or a trustee, receiver or
conservator has been appointed for all or any part of the property of such
Account Debtor;
c. Accounts Receivable due from an Account Debtor affiliated with
Borrower in any manner, including without limitation, as a stockholder, owner,
officer, director, agent or employee;
d. Accounts Receivable with respect to which payment is or may be
conditional;
e. Accounts Receivable due from an Account Debtor who is not a resident
or citizen of, located in, or subject to service of process in the United States
of America;
f. Accounts Receivable due from an Account Debtor who is any national,
federal or state government, including without limitation, an instrumentality,
division, agency, body or department thereof;
g. Accounts Receivable commonly known as "bill and hold" or a similar
arrangement;
h. Accounts Receivable due from an Account Debtor as to which 20% or
more of the aggregate dollar amount of all outstanding Accounts Receivable owing
from such Account Debtor are Delinquent Accounts;
(1)
<PAGE>
EXHIBIT "A"
Page Two.
i. That portion of Accounts Receivable due from an Account Debtor which
is in excess of 50% of the Borrower's aggregate dollar amount of all outstanding
Accounts Receivable;
j. Accounts Receivable as to which Borrower is or may become liable to
the Account Debtor for any reason;
k. Accounts Receivable which are not free of all liens, encumbrances,
charges, rights and interest of any kind, except in favor of Lender;
l. Accounts Receivable which are supported or represented by a
promissory note, post-dated check or letter of credit unless such instrument is
actually delivered to Lender;
m. Accounts Receivable which are unsuitable as collateral, as
determined by Lender in the exercise of its reasonable sole discretion.
Dated: April 1, 1998 Borrower:
By: /s/ William P. Horgan
-----------------------
William P. Horgan, Chairman &
Chief Executive Officer
By:
-----------------------
Lender: Mid-Peninsula Bank
By: /s/ J. H. Stafford
-----------------------
J. H. Stafford, Senior Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule Contains Summary Financial Information Extracted From Balance
Sheets and Statements of Income
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 33,930
<SECURITIES> 0
<RECEIVABLES> 3,170,055
<ALLOWANCES> (499,605)
<INVENTORY> 3,215,413
<CURRENT-ASSETS> 6,154,435
<PP&E> 790,466
<DEPRECIATION> (706,100)
<TOTAL-ASSETS> 6,150,435
<CURRENT-LIABILITIES> 2,494,214
<BONDS> 0
0
2,145,535
<COMMON> 17,667,024
<OTHER-SE> (16,156,338)
<TOTAL-LIABILITY-AND-EQUITY> 3,656,221
<SALES> 3,363,161
<TOTAL-REVENUES> 3,363,161
<CGS> 1,044,199
<TOTAL-COSTS> 1,044,199
<OTHER-EXPENSES> 82,132
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,955
<INCOME-PRETAX> (773,070)
<INCOME-TAX> 0
<INCOME-CONTINUING> (773,070)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (773,070)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
