-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V9qpuAd/mzhYkXzmgWfasDzIHFzSZJnZiu8KzpWTR3AYRAD70/62pbt8713ORP2o lRPs4C3f/Loq1wjyaHg+zw== 0000950005-97-000724.txt : 19970815 0000950005-97-000724.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950005-97-000724 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EROX CORP CENTRAL INDEX KEY: 0000878616 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 943107202 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-23544 FILM NUMBER: 97663313 BUSINESS ADDRESS: STREET 1: 4034 CLIPPER CT CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5102266874 10QSB 1 FORM 10QSB U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (MARK ONE) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 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) 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 July 31, 1997. Total Pages: 26 EROX CORPORATION INDEX Page 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 PART I FINANCIAL INFORMATION Item 1. Financial Statements EROX Corporation Notes to Condensed Financial Statements (Unaudited)
June 30, December 31, 1997 1996 ------------ ------------ Assets Current assets: Cash and cash equivalents $ 7,886 $ 2,059,084 Accounts receivable, net of allowances of $541,383 2,363,899 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 current assets 7,272,536 7,853,150 Property and equipment, net 131,749 71,516 ------------ ------------ $ 7,404,285 $ 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 (14,809,084) (12,045,129) ------------ ------------ Total shareholders' equity 2,857,939 5,329,605 ------------ ------------ $ 7,404,285 $ 7,924,666 ============ ============ See accompanying notes
EROX CORPORATION Condensed Statements of Operations (unaudited)
Three months ended June 30, Six months ended June 30, ----------------------------- ----------------------------- 1997 1996 1997 1996 ------------ ------------ ------------ ------------ 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 5,693,244 3,515,559 9,600,522 6,372,716 ------------ ------------ ------------ ------------ Total expenses 5,766,330 3,593,828 9,765,378 6,534,022 ------------ ------------ ------------ ------------ Income (loss) from operations (2,930,745) 96,796 (2,741,190) 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 (2,963,621) 99,603 (2,763,155) 159,614 Provision/(benefit) for income taxes (9,983) -- 800 -- ------------ ------------ ------------ ------------ Net income (loss) $ (2,953,638) $ 99,603 $ (2,763,955) $ 159,614 ============ ============ ============ ============ Net income (loss) per share $ (0.29) $ 0.01 $ (0.27) $ 0.02 ============ ============ ============ ============ Shares used in calculation of net income (loss) per share 10,284,323 10,499,030 10,252,966 10,375,896 ============ ============ ============ ============ See accompanying notes.
EROX CORPORATION Statements of Cash Flows (unaudited)
Six months ended June 30, 1997 1996 ----------- ----------- Cash Flows from Operating Activities Net income (loss) $(2,763,955) $ 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 449,236 (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 =========== =========== See accompanying notes.
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. 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. 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. 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 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 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 $5,047,141 (132% 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. 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. 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. 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 $8,306,304 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 $2,726,190. 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. 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. The number of votes cast for, against or withheld, as well as the number of abstention and broker non-votes as to each director are set forth below: Broker For Against Abstained Non-Votes --- ------- --------- --------- Bernard I. Grosser, MD 8,639,193 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 Item 6. Exhibits and Reports on Form 8-K (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 (b) The Company did not file any reports on Form 8-K during the three months ended June 30, 1997. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant had duly caused this Report to be signed on behalf by the undersigned thereunto duly authorized. EROX CORPORATION Registrant Date: August 14, 1997 /s/ William P. Horgan --------------------------- William P. Horgan Chairman of the Board and Chief Executive Officer Date: August 14, 1997 /s/ Maxine C. Harmatta --------------------------- Maxine C. Harmatta CFO, Vice President Finance and Administration EX-10.14 2 BUSINESS LOAN AGREEMENT BUSINESS LOAN AGREEMENT
- ---------------------------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials - ---------------------------------------------------------------------------------------------------- $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. - ----------------------------------------------------------------------------------------------------
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 07-01-1997 BUSINESS LOAN AGREEMENT Page 2 (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 07-01-1997 BUSINESS LOAN AGREEMENT Page 3 (Continued) ================================================================================ 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 07-01-1997 BUSINESS LOAN AGREEMENT Page 4 (Continued) ================================================================================ 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. 07-01-1997 BUSINESS LOAN AGREEMENT Page 5 (Continued) ================================================================================ 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 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 ================================================================================ PROMISSORY NOTE
- ------------------------------------------------------------------------------------------------------ Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials $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. - ------------------------------------------------------------------------------------------------------
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 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 ================================================================================ DISBURSEMENT REQUEST AND AUTHORIZATION
- ------------------------------------------------------------------------------------------------------ Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials $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. - ------------------------------------------------------------------------------------------------------
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 ================================================================================ AGREEMENT TO PROVIDE INSURANCE
- ------------------------------------------------------------------------------------------------------ Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials $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. - ------------------------------------------------------------------------------------------------------
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: _____________________________________________________________________ - -------------------------------------------------------------------------------- ================================================================================ AGREEMENT TO PROVIDE INSURANCE
- ------------------------------------------------------------------------------------------------------ Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials $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. - ------------------------------------------------------------------------------------------------------
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: _____________________________________________________________________ - -------------------------------------------------------------------------------- ================================================================================ EX-11 3 COMPUTATION OF PER SHARE EARNINGS (LOSS) Statement Re: Computation of Per Share Earnings (Loss)
Three months ended June 30, Six months ended June 30, ------------------------------ ------------------------------ 1997 1996 1997 1996 ------------ ------------ ------------ ------------ Primary 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 average market price -- 575,498 -- 460,056 ------------ ------------ ------------ ------------ Total 10,284,323 10,499,030 10,252,966 10,375,896 Net income (loss) $ (2,953,638) $ 99,603 $ (2,763,955) $ 159,614 ============ ============ ============ ============ Per share amount $ (0.29) $ 0.01 $ (0.27) $ 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) $ (2,953,638) $ 99,603 $ (2,763,955) $ 159,614 ============ ============ ============ ============ Per share amount $ (0.29) $ 0.01 $ (0.27) $ 0.02 ============ ============ ============ ============
EX-27 4 FINANCIAL DATA SCHDULE
5 The Schedule Contains Summary Financial Information Extracted From Balance Sheets and Statements of Income 0000878616 Erox Corporation 1 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 7,886 0 2,905,282 (541,383) 4,806,498 7,272,536 790,466 (658,717) 7,404,285 4,546,346 0 0 0 17,667,023 (14,809,084) 7,404,285 8,913,831 8,913,831 1,889,643 1,889,643 9,765,378 0 36,828 (2,763,155) 0 (2,763,155) 0 0 0 (2,763,155) (0.27) (0.27)
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