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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
PROLONG INTERNATIONAL CORPORATION
(Exact Name of Registrant in its Charter)
Nevada 74-2234246
(State or other jurisdiction (I.R.S. Employer identification
of incorporation or number)
organization)
1210 North Barsten Way, Anaheim, California 92806
-------------------------------------------------
(Address of principal offices) (Zip Code)
Registrant's telephone number: (714) 630-3040
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which
to be so Registered Such Class is to be Registered
None None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
(Title of Class)
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ITEM 1. BUSINESS
THE REGISTRANT
Prolong International Corporation (the "Registrant") is a Nevada corporation
that was incorporated on August 24, 1981 as Giguere Industries, Incorporated
("Giguere"). On September 14, 1981, Giguere consummated a merger with Medical
International, Inc., a Utah corporation, pursuant to which Giguere was the
surviving entity. Prior to the merger with Giguere, Medical International, Inc.
had completed an offering of its common stock which was exempt from registration
under the Securities Act of 1933, as amended, by reason of Regulation A
thereunder. All of the outstanding shares of Medical International, Inc. common
stock were exchanged for shares of Giguere as part of the plan of merger.
Subsequent to the merger, Giguere conducted operations for several years until
it liquidated its assets in order to satisfy its creditors and discontinued
operations in 1987. Giguere was inactive and held no significant assets from
1987 to June 21, 1995.
On June 21, 1995, Giguere acquired all of the outstanding common stock of
Prolong Super Lubricants, Inc., a Nevada corporation ("PSL"), in a share
exchange with PSL's then existing shareholders (the "Reorganization") and
changed its name from Giguere to Prolong International Corporation. Since the
Reorganization, the Registrant has changed its focus from being a company
without operations, a business or significant assets, to that of a holding
company for its wholly-owned operating subsidiary, PSL. The Registrant, through
PSL (referred to collectively in the operational context with the Registrant as
"Prolong"), is engaged in the manufacture, sale and worldwide distribution of a
line of high performance lubrication products which are based on a patented
extreme pressure lubricant additive for use in metal lubrication, commonly
referred to as anti-friction metal treatment ("AFMT").
PSL currently holds an exclusive, worldwide license to manufacture, sell and
distribute lubrication products based on AFMT. This license was acquired from
EPL Prolong, Inc., the holder of the patent for AFMT, in 1993. As part of the
license arrangement, PSL continues to pay royalties to EPL Prolong, Inc. based
on the gross sales of its AFMT-based products. Prolong is currently considering
acquiring all of the net assets of EPL Prolong, Inc., including the patents.
There can be no assurances, however, that Prolong will be successful in this
acquisition.
Prior to 1996, the Registrant's activities generated losses. However, due, in
part, to PSL's successful marketing campaign based primarily on an infomercial,
the Registrant's activities generated a profit in 1996. The Registrant
anticipates that its sales will continue to grow in the future as it takes
advantage of the worldwide market for its products. Prior to fiscal 1996, the
Registrant raised capital primarily through the issuance of its Common Stock in
private placements.
PRODUCTS
Prolong markets a variety of products which are based on AFMT. AFMT is a
patented formula which can be blended with many other lubricants and
formulations to create a wide variety of individual lubricant products with
superior friction fighting characteristics. AFMT can also be blended with other
constituents to create additional products which may be added to Prolong's
product line such as gun oil and brake cleaner. AFMT bonds to the metal
surfaces with which it comes into contact, resulting in reduced friction, wear
and heat buildup when subjected to pressure. Prolong believes that AFMT is most
effective in extreme pressure applications, where metal-to-metal contact, and
the resulting wear, can be severe such as: gears (at the contract point where
the teeth of the gear touch each other - for example in hypoid gears); engines
(at the contract points where metal to metal pressure squeezes out the normal
boundary lubrication - for example where the camshaft contacts the lifters;
where the main bearings contact the crankshaft; where the rod bearings contact
the rod and the bearing cap); and machinery (at the metal to metal contact
points where surface or boundary lubrication breaks down metal contacts metal
under heavy loads - for example in a steel mill where rolling steel contacts
steel roller).
AFMT is composed of petroleum distillates and other chemicals and contains no
solid particles. Typically, performance enhancing lubrication additive
formulations contain solid particles such as lead, molybdenum disulphides, PTFE
resins, Teflon(TM), fluorocarbon resins or fluorocarbon micropowder. Prolong
believes that the primary disadvantage to particulate material in lubricant
additives is that it tends to distribute unevenly and can result in excessive
particulate build-up. Because AFMT contains no solid particles, Prolong
believes that there is no risk of excessive build-up, and the lubrication "film
coat" is uniform and microscopically thin.
The friction fighting characteristics of AFMT have been documented by The
Foundation for Scientific and Industrial Research at the Norwegian Institute of
Technology, Trondheim Norway. This independent testing laboratory was
commissioned in 1987 by the principals of Prolong Technology of Canada, Inc. dba
Prolong International, the entity from which EPL Prolong, Inc., a Nevada
corporation, acquired the patented AFMT formula. Prolong licenses the patented
technology from EPL Prolong, Inc. The tests were conducted at the expense of
Prolong and at the request of customers for in-depth scientific data. The
friction fighting characteristics are further documented in US Patent 4,844,825,
which outlines various test conducted on AFMT precedent to the issuance of the
patent.
AFMT exhibits both the "hydrostatic" and "boundary" principles of lubrication.
Specifically, all surfaces tend to attract some substances from the environment.
Such substances or films may be only a few molecules thick, and are absorbed
into the surface. The strength of the absorption depends upon the electronic
structure of "polarized" molecules, which tend to absorb perpendicularly to the
surface. Warren Prince, Ph.D., a registered mechanical engineer and machine and
product design specialist was commissioned and retained by Prolong to
analyze
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and test its product fomulation and found that AFMT operates by attaching to the
metal at the microscopic level, evenly and uniformly. Prolong believes that
once this chemical/electrical action takes place through absorption, only very
extreme heat, grinding away of the surface area, or the introduction of material
with a stronger molecular adhesion will alter the surface bonding. As a result,
third party tests performed on AFMT have demonstrated that it is impervious to
many elements and chemicals and its benefits continue beyond the initial
application.
Prolong believes that the use of AFMT in lubrication products provides many
advantages for its users. For example, in clinical testing by third parties,
the use of AFMT resulted in reduced friction in mechanical devices. This, in
turn, caused the operating temperatures of the machinery to drop due to the
reduction in heat-generating friction. Prolong believes that in the long term,
this combination of friction and temperature reduction leads to a longer
operating life for the machinery and lower repair bills. Additionally, the use
of AFMT in internal combustion engines has been demonstrated to cause a
reduction in operating temperature and an increased resistance to catastrophic
failure occasioned by loss of engine oil. AFMT also has a high resistance to
oxidation, which, when combined with other oils, improves the oxidization
resistance of metals. Given the foregoing advantages demonstrated by AFMT,
Prolong has identified a broad market for its lubricant products.
Prolong believes that the following are examples of some of the applications
of AFMT-based products:
<TABLE>
<S> <C>
. Internal Combustion Engines . Automatic and Manual Transmissions
. Agricultural Equipment . Computer Numerically Controlled Machine Tools
. Airline Ground Equipment . Milling Equipment
. Marine Equipment . Trucks, Buses
. Railroad Equipment . Differentials, Gears
. Mining Equipment . Compressors
. Bearing Journals . Hydraulic Systems
. Pumps and Generators
</TABLE>
Prolong markets the following products, each of which can be utilized in
multiple applications:
Prolong Anti-Friction Metal Treatment "AFMT"
This is Prolong's fundamental lubricating oil which is made according to a
patented formula for use as an extreme pressure lubricant. It is packaged in
concentrate form and is designed to be added by the customer to the lubrication
oils in engines, gears, and other machinery.
Prolong Engine Treatment
Formulated for use in the lubrication of internal combustion engines, Prolong
believes that this product reduces friction, heat and wear. As a result of
enhanced lubrication of the engine, Prolong believes that there is increased
useful life of moving metallic parts. Prolong Engine Treatment is suitable for
use in both gasoline and diesel engines.
Prolong Transmission Treatment
Formulated for use in both automatic and manual transmissions and for other
applications, such as heavy duty industrial gear boxes where metal gears are
operated under high pressure, this product is designed to improve overall
transmission performance.
Prolong Gas/Diesel Fuel System Treatment
This product is formulated to increase fuel efficiency, lubricate the "top
end" of internal combustion engines, and clean and maintain fuel injectors and
other fuel system components. This product is also designed to help maintain
peak engine performance and overall mileage. The formula is EPA registered and
is suitable for both gasoline and diesel fuel systems.
Prolong High Performance Multi-Purpose EP-2 Grease
This product is formulated to provide a wide range of lubricating benefits to
industrial equipment under extreme pressure, high and low temperature extremes,
and potential water washout conditions. Prolong believes that this product
represents a substantial improvement in lubrication performance relative to
other products on the market in applications requiring an extreme pressure
grease formulation.
Prolong "SPL100" Super Penetrating Lubricant
This product is formulated to lubricate, penetrate, and prevent corrosion,
free sticky mechanisms, displace moisture, stop squeaks, and reduce friction and
wear. This product can also serve as a light duty machining, tapping and
drilling fluid.
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Prolong "Ultra-Cut 1" Water Soluble Cutting Fluid
This product is formulated to lubricate and cool metal tools and parts during
machining operations. This product can be used in Computer Numerically
Controlled ("CNC") metal turning and machining operations. Prolong believes that
the use of this product will provide higher feed rates and operating speeds,
finer surface finishes, and improved cutting tool life.
Prolong Multi-Purpose Precision Oil
This product is formulated as a fine, light oil for use in lubricating
precision tools and equipment. This product is designed to provide smooth
lubrication, which Prolong believes results in optimal operation of precision
equipment and tools and extension of useful life.
Despite PSL's current variety of products, there are other products which
Prolong believes could be successfully and beneficially formulated in the future
using AFMT technology and derivatives thereof that would result in products with
improved lubrication performance. Although there can be no assurances that
Prolong will have the financial or other resources to develop, manufacture and
market any such additional products, the following is a partial list of such
additional products:
High Performance Motor Oil
High Performance Synthetic Motor Oil
Motorcycle Engine & Transmission Treatment
Gun Oil & Cleaner
Gear/Differential Treatment
Heavy Duty Diesel Fuel Conditioner
Hydraulic System Treatment
Chain Oil
2-Cycle Engine Oil
Power Steering Treatment
Radiator Treatment
Compressor Treatment
Shock Absorber Lubricants
Brake Cleaner
Assembly Lube
In addition to the development of the above-referenced AFMT-based products,
Prolong is also engaged in efforts to expand its lubricant
formulations beyond its current AFMT-based technology.
RISK FACTORS
Prospective investors should consider carefully the following risk factors, in
addition to the other information contained in this Registration Statement
concerning the Registrant and its business, before making any investment in the
Registrant's securities. This Registration Statement contains forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act that involve certain risks and uncertainties.
Discussions containing such forward-looking statements may be found in the
material set forth under "Risk Factors," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and in this Registration
Statement generally. The Registrant's actual results could differ materially
from those anticipated in such forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and appearing
elsewhere in this Registration Statement. These forward-looking statements are
made as of the date of this Registration Statement and the Registrant assumes no
obligation to update such forward-looking statements or to update the reasons
why actual results could differ materially from those anticipated in such
forward-looking statements.
Managing Growth
The Registrant currently contemplates a period of rapid growth that will place
a significant strain on its financial, management and other resources. The
Registrant's ability to manage its growth effectively, should it occur, will
require it to continue to improve its operational, financial and management
information systems and to attract, train, motivate, manage and retain key
employees. If the Registrant's executives are unable to manage growth
effectively, the Registrant's business, operating results and financial
condition could be adversely affected.
Need to Raise Capital For Growth
Although the Registrant does not have plans to raise additional capital in the
next twelve months, the Registrant does expect that its capital requirements
will increase significantly in the future. There can be no assurance that the
Registrant will be successful in meeting such capital requirements on
satisfactory terms, if at all. The Registrant's capital requirements will
depend on numerous factors, including the progress of Prolong's product
development programs, the rate of growth of Prolong's business, the commercial
success of Prolong's products and the availability of cash from other sources,
notably, operations. The Registrant may seek additional
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funds through debt or equity financing. Issuance of additional equity securities
by the Registrant could result in substantial dilution to its present or future
shareholders. If adequate funds are not available on acceptable terms, the
Registrant will be required to delay or scale back Prolong's product development
and the manufacture of Prolong's current products. Any inability to fund its
capital requirements would have a material adverse effect on the Registrant's
business, operating results and financial condition.
Dependence on Third Party License
Prolong's formula for AFMT is currently licensed from a third party, EPL
Prolong, Inc. ("EPL"). The license agreement provides that it shall remain in
effect so long as Prolong does not commit a material breach of the agreement.
There can be no assurance that Prolong will be able to avoid committing such a
breach in the future and, consequently, may not be able to retain the license
indefinitely. Prolong is currently considering acquiring the rights to the AFMT
formula from EPL. Should Prolong be unable to continue as a licensee (as a
result of litigation or otherwise) successfully purchase the rights from EPL,
Prolong could not continue to manufacture its current AFMT-based products, which
would result in a material adverse effect on the Registrant's business,
operating results and financial condition.
Historic Reliance on Direct Response Sales
Approximately 77.7% of the Registrant's revenues in 1996 and 57.5% of the
Registrant's revenues during the six month period ending June 30, 1997 have been
generated from sales to retail customers in response to Prolong's 30 minute
direct response television commercial (the "Informercial"). Prolong's plans for
future growth contemplate the expansion of sales to both industrial/commercial
and international customers. To date, sales to such customers have constituted
only a limited portion of the Registrant's revenues. Prolong typically
consummates sales to both industrial/commercial and the international markets
through independent distributors. The Company anticipates that it will be
required to significantly expand its distributor network in order to achieve its
planned growth in both of these sectors. There can be no assurance that Prolong
will be successful in locating and engaging qualified distributors for its
products, either in the United States or abroad, or that it will be successful
in increasing its sales in the industrial/commercial and international
markets.
Dependence on Key Management
The Registrant's success depends, in large part, upon the continued
performance of Elton Alderman, President of the Registrant. The Registrant
currently has no employment agreement with Mr. Alderman and does not maintain
any "key man" life insurance. In the event that Mr. Alderman is no longer able
to provide his services to the Registrant, the operations of the Registrant
would be materially adversely effected.
Risk of Product Liability
The nature of the Registrant's business exposes it to risk from product
liability claims. The Registrant currently maintains product liability
insurance in the amount of $11,000,000 per occurrence and $12,000,000 in the
aggregate, per annum. Product liability coverage is becoming increasingly
expensive and that there can be no assurance that the Company's current
coverage will be adequate to cover future product liability claims. The
Registrant does not have any current plans to increase coverages under its
product liability insurance but intends to reevaluate such determination from
time to time in the future. Any losses that the Registrant may suffer from
future liability claims, and the effect that any product liability litigation
may have upon the reputation and marketability of Prolong's products, may have a
material adverse effect on the Registrant's business, financial condition and
results of operations.
Competition
The market for Prolong's products is highly competitive and is expected to be
increasingly competitive in the future. Prolong's principal competitors include
other providers of specialized lubrication products, such as First Brands
(STP(TM)) and Quaker State (Slick 50(TM)), both of which market engine oil
treatments. Prolong's competitors also include major oil companies such as Shell
Oil Company, Castrol, Pennzoil, and other companies who manufacture lubrication
products, such as WD40 Corp. Further, Prolong believes that major oil companies
not presently offering products that compete directly with those offered by
Prolong may enter its markets in the future. Increased competition could result
in price reductions, reduced gross margins, and a loss of market share, any of
which could have a material adverse effect on the Registrant's business,
financial condition and results of operations. In addition, many of Prolong's
competitors have significantly greater financial, technical, product
development, marketing and other resources and greater market recognition than
Prolong. Several of Prolong's competitors also currently have, or may develop or
acquire, substantial customer bases in the automotive and other related
industries. As a result of these factors, Prolong's competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development, promotion and
sale of their products than Prolong. Additionally, other dealers and
distributors may offer similar lubrication products at prices below those
offered by Prolong, appealing to the price-sensitive segment of the market.
While Prolong believes that the prices for its lubrication products are
competitive for the level of quality obtained by the customer, Prolong relies on
its brand name recognition and reputation for selling quality products supported
by strong customer service. There can be no assurance that Prolong will be able
to compete successfully against current and future competitors or that
competitive pressures faced by Prolong will not materially adversely effect the
Registrant's business, financial condition and results of operations.
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Market Volatility; Regulation as a Penny Stock
The market prices of the Registrant's Common Stock have been and may continue
to be highly volatile. Announcements of new products by Prolong or its
competitors, developments concerning or general conditions in the automotive or
related industries, or the economy in general, may have a significant adverse
effect on the Registrant's business and on the market price of the Registrant's
securities. Sales of a substantial number of shares of Common Stock by existing
security holders could also have a material adverse effect on the market price
of the Registrant's securities.
The Company's Common Stock is reported on the OTC Bulletin Board. The
Company's Common Stock is not listed on any exchange or Nasdaq Stock Market
("Nasdaq"). Because the Company's shares are not listed on the Nasdaq System,
they are subject to the regulations regarding trading in penny stocks (i.e.
those securities trading for less than $5.00 per share). Such regulations
require that broker-dealers affecting transactions in penny stocks (i) prior to
the sale of a penny stock by such broker-dealer to a new purchaser, must make an
informed determination as to whether the purchaser is suitable to invest in
penny stocks, taking into account the purchaser's financial condition and
investment experience and objectives, furnishing the purchaser with a written
statement setting forth the basis of the suitability finding; (ii) must obtain
from the purchaser a written agreement to purchase the security until the
purchaser becomes an "established customer;" (iii) must provide the purchaser
with a "risk disclosure document" that contains, among other things, a
description of the penny stock market and how it functions and the risks
associated with such investments, (iv) send a customer of a penny stock security
within ten days after the end of each calendar month a written account statement
including prescribed information relating to the security.
As a result of the lack of listing of the Company's securities on an exchange
or Nasdaq system and the rules regarding transactions in penny stocks, the
liquidity and salability of the Company's securities may be substantially
impaired. There is no assurance that the Company's current market-makers will
continue to make a market in the Company's securities, or that any market for
the Company's securities will continue. Following effectiveness of this
Registration Statement, the Registrant plans to apply to have its common stock
listed on the Nasdaq Small Cap Market. There can be no assurance that such
application will be accepted in a timely manner, if at all.
Costs of Components
Prolong depends upon its suppliers for the supply of the primary components
for its AFMT formula. Such components are subject to significant price
volatility beyond the control or influence of Prolong. Prices for the
components of the quality sought by Prolong are dependent on the origin, supply
and demand at the time of purchase. Prices can be affected by multiple factors
in the producing countries, including weather and political and economic
conditions. Additionally, petroleum products, which comprise AFMT, have been
affected in the past, and may be affected in the future, by the actions of
certain organizations and associations, such as the Organization of Petroleum
Exporting Countries ("OPEC"), that have historically attempted to establish
price controls on petroleum products through agreements establishing export
quotas or restricting petroleum supplies worldwide. No assurance can be given
that OPEC (or others) will not succeed in raising the price of petroleum
components or that, in such event, Prolong will be able or choose to maintain
its gross margins by quickly raising its prices without affecting demand.
Increases in the prices for the components, whether due to the failure of its
suppliers to perform, conditions affecting the component-producing countries, or
otherwise, could have a material adverse effect on the Registrant's business,
operating results and financial condition.
Limited Operating History; Absence of Profitability
Prolong, under its current management, has been an independent operating
company only since June 1995. Prior to such time, the Company had been an
inactive shell company without significant assets or operations for
approximately 8 years. There can be no assurance that the Company will be
successful in continuing to expand its operations and access markets so as to
enable continued growth.
From the Reorganization through December 1995, Prolong generated revenues of
approximately $391,000 and incurred operating losses of approximately $416,000.
Since such time, the Company has been successful in generating net income from
its operations. There can be no assurance that the Company will be successful
in generating net income from operations.
Dependence on Third Party Supply Relationships
To date, Prolong has been able to obtain adequate supplies of the components
required for its AFMT formula from its existing sources to meet its current
manufacturing schedule. Prolong does not foresee any shortages of supply in the
near future. However, Prolong has recently increased production and plans
further increases to meet increases in demand. These increases could eventually
place a strain on the production capacity of its existing suppliers. While
Prolong is working actively with each of its suppliers to increase production of
the components, there can be no assurance that each supplier will be able to
increase its production in time to satisfy Prolong's increasing requirements or
that alternative suppliers will be able to meet any such deficiency on an
ongoing basis. If Prolong is unable to obtain sufficient quantities of the
components, or if such components do not meet Prolong's quality standards,
delays or reductions in product shipments may result which would have a material
adverse effect on the Registrant's business, financial condition and results of
operations.
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Product Concentration
The Registrant derives substantially all of its net revenues from sales of
Prolong's AFMT-based products, and these products are expected to continue to
account for most, if not all, of the Registrant's net revenue in the foreseeable
future. Because of this concentration of revenue in one product line, namely
lubricants, a decline in demand for, or in the prices of, Prolong's AFMT-based
products as a result of competition, technological advances or otherwise, could
have a material adverse effect on the Registrant's business, financial condition
and results of operations. Prolong has recently expanded its product line and
intends to continue such expansion in the future, but there can be no assurance
that these new AFMT-based products introduced by Prolong will receive widespread
acceptance.
Risk of Declining Selling Prices
Prolong may experience declining average sales prices for its products.
Specialty lubricant suppliers have come under increasing price pressure from
competitors and consumers, which in turn could result in downward pricing
pressure on Prolong's products. In addition, average sales prices are affected
by price discounts negotiated for large volume purchases by certain customers.
To offset the potential for declining average sales prices, Prolong believes
that in the near term it must achieve manufacturing cost reductions, and in the
longer term Prolong must develop new AFMT-based products that can be
manufactured at lower cost or sold at higher average sales prices. If, however,
Prolong is unable to achieve such cost reductions or product diversification,
Prolong's gross margins could decline, and such decline could have a material
adverse effect on the Registrant's business, results of operations and financial
condition.
Dependence on International Sales for Future Growth
International sales comprised 10.3% and 3.6% of the Registrant's revenues
in 1996 and the first six months of 1997, respectively, resulting in
approximately 34% and 6% of Registrant's net income, respectively. Prolong
intends to expand its international sales in the future, which will require
significant management attention and financial resources. In order to expand
worldwide sales, Prolong must establish additional marketing and sales
operations, hire additional personnel and recruit additional distributors
internationally. To the extent that Prolong is unable to do so effectively,
Prolong's growth is likely to be limited and the Registrant's business,
operating results and financial condition could be materially adversely
affected. In addition, as Prolong expands its international operations, a
portion of the revenues generated from such international sales may be subject
to taxation by such jurisdictions at rates higher than those to which Prolong is
subject to in the United States. Prolong's worldwide sales are currently
denominated in United States dollars. An increase in the value of the United
States dollar relative to foreign currencies would make Prolong's products more
expensive and, therefore, potentially less competitive in those markets.
Additional risks inherent in Prolong's worldwide business activities generally
include unexpected changes in regulatory requirements, tariffs and other trade
barriers, costs of localizing products in foreign countries, longer accounts
receivable payment cycles, difficulties in operations management, potentially
adverse tax consequences, including restrictions on the repatriation of
earnings, and the burdens of complying with a wide variety of foreign laws.
There can be no assurance that such factors will not have a material adverse
effect on Prolong's future international sales and, consequently, the
Registrant's overall business, operating results and financial condition.
Environmental Compliance
Federal, state and local regulations impose various controls on the storage,
handling, discharge and disposal of substances used in Prolong's manufacturing
process and on the facilities leased by Prolong. Prolong has registered its fuel
conditioners with the United States Environmental Protection Agency ("EPA").
Such registrations have no term but require the Registrant to notify the EPA
should the chemical composition of such conditioners or other information
contained in such registration were to change. The Registrant is not aware of
any additional governmental approvals required for Prolong's products nor does
the Registrant know of any existing or probable governmental regulations which
would have any material adverse effect on its current business. Because Prolong
does not manufacture or store any significant quantity of its products, direct
costs of compliance with environmental laws have been nominal and have had no
material effect on the business of the Registrant. Prolong has attempted to
minimize its economic risk from violations by its manufacturers or bottlers by
qualifying alternate sources of such services. The Registrant believes that its
activities, PSL's activities and those of its contract manufacturers conform to
present governmental regulations applicable to each such entities' operations.
Additionally, the Registrant believes that its current facilities as well as
PSL's facilities conform to present governmental regulations relating to
environmental, land use, public utility utilization and fire code matters. There
can be no assurance that such governmental regulations will not in the future
impose additional requirements upon Prolong or restrict Prolong's ability to
expand its operations. The adoption of such measures or any failure by Prolong
to comply with the applicable environmental and land use regulations or to
restrict the discharge of hazardous substances could subject the Registrant to
future liability or could cause its operations, PSL's operations or those of its
contract manufacturers to be curtailed, relocated or suspended.
Control by Management and Existing Shareholders
The present directors, executive officers and principal shareholders of the
Registrant beneficially own, in the aggregate, approximately 61% of the
outstanding Common Stock. These shareholders, acting together, will have the
ability to control the election of the Registrant's directors and most other
shareholders' actions and, as a result, direct the Registrant's affairs and
business. Such concentration may have the effect of delaying or preventing
certain actions that can be taken by the Registrant including, but not limited
to, a change in control of the Registrant.
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Effects of Preferred Stock on the Rights of Common Stock
The Registrant's Board of Directors is authorized to issue, without
shareholder approval, up to 50,000,000 shares of Preferred Stock with voting,
conversion and other rights and preferences that may be superior to those of the
Common Stock and that could adversely effect the voting power or other rights of
the holders of Common Stock. The issuance of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Registrant, which may not be in the best interests of certain of its
shareholders. The Registrant has no present plans to issue shares of Preferred
Stock. However, there is no assurance that the issuance of Preferred Stock will
not have a material adverse effect on the market value of the Registrant's stock
in the future.
CURRENT MARKETS FOR PROLONG'S PRODUCTS
The Registrant's strategy is to successfully direct Prolong's product line to
a number of different markets, each of which is currently large, representing
significant future revenue potential for the Registrant. Although the
Registrant is currently actively addressing both the consumer automotive and
consumer household markets described below, the Registrant's strategy is to
adapt Prolong's product line and address the industrial and governmental markets
also described below:
Consumer Automotive
The consumer automotive market consists of automobiles, light trucks,
motorhomes, motorcycles, snowmobiles, jetskis, and other fuel burning vehicles.
According to the National Petroleum Refiners Association, during 1996 the demand
for automotive lubricants was in excess of 1.5 billion gallons. The owners of
the vehicles using these lubricants represent a significant source of customers
for Prolong's lubricants, fuel conditioners and other future additions to
Prolong product line. Recognizing this fact, this market has been the primary
target of Prolong's marketing efforts to date.
Consumer Household
The consumer household lubrication market is a potentially lucrative segment
of the industry which could prove receptive to Prolong's products for uses as
varied as fishing reels, guns, windows, sliding doors, garage doors, sewing
machines, electric hair clippers, bicycles, tricycles, scooters, skateboards,
garage door openers, lawn mowers, snow blowers, drills, saws, door locks,
hinges, rusted bolts, and virtually anything made of metal that must be
lubricated in order to maintain performance. Prolong currently manufactures
"SPL100 Super Penetrating Lubricant" and "Prolong Multi-Purpose Precision Oil"
for this market.
Industrial
The industrial market encompasses an enormous variety of major and minor
manufacturers. This market includes businesses such as steel mills, automobile
manufacturers, aircraft manufacturers, paper mills, electric motor
manufacturers, petrochemical manufacturers, oil refineries, mining operations
and electrical generating facilities, all of which require lubricants and
Prolong believes would benefit from the increased performance of Prolong's
products. Even more numerous are the smaller industrial facilities, such as
machine shops and other fabrication businesses throughout the world. Prolong
further believes that businesses engaged in stamping, molding, die casting,
boring, drilling, honing and a number of other similar operations could realize
significant cost savings by using the full line of Prolong's products.
Prolong anticipates pursuing the industrial market through a network of
manufacturer's sales representatives and through established industrial
distributors.
Federal, State, & Local Governments
The government market is not only very large, but Prolong believes it is also
extremely varied. It includes cities, counties, states and all of the federal
government agencies. Prolong believes that these agencies collectively
purchase, operate, and maintain a significant investment in trucks, automobiles,
buses, tanks, airplanes, helicopters, boats, ships, radar equipment, guns,
miscellaneous equipment and tools, as well as many other mechanisms, all of
which require adequate lubrication.
Federal Government. The federal government represents potential sales by
Prolong to many different agencies such as the Department of Defense, NASA,
Department of Energy, Department of Transportation and other federal
governmental agencies.
Military Sales. Procurement procedures require that products used in or on
military equipment must be manufactured according to certain military
specifications ("MIL Specs"). Prolong intends to apply for and receive United
States MIL Specs for certain of its products, and to market products not only to
the United States military, but to foreign militaries as well. Prolong plans to
develop the military market, both here and abroad, through the utilization of
specialists who are familiar with military procurement procedures and with the
special needs of the military services.
State Government. Potential sales to state governments include users such as
the National Guard, highway patrol, state police and other state agencies.
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County and City Government. Both county and city governments are potential
Prolong customers for use by police, fire, water, gas, waste management and
other local departments.
Public Transportation. Public transportation entities are major potential
customers for Prolong's products, and Prolong intends to focus its efforts to
market products to these entities at the various levels of government. Prolong
believes that rapid transit districts throughout the country are facing a
serious problem with noisy and polluting diesel buses. The Los Angeles Rapid
Transit District, for example, has 3,300 buses and is currently under heavy
public and regulatory pressure to reduce emissions. In addition to diesel
buses, there are a significant number of other vehicles currently operated by
county and city public transportation agencies which Prolong believes, if
treated with its products, could run cleaner, quieter, last longer and would
burn less fuel.
FUTURE MARKETS FOR PROLONG'S PRODUCTS
Although not being directly addressed by the Registrant at the present, the
Registrant believes the following to be significant opportunities for expansion
of its marketing efforts into diverse niches of the lubricant market. There can
be no assurances that Prolong will be successful at penetrating any of these
potential markets.
Commercial Trucking
Prolong intends to develop a market for its products in the long-haul trucking
industry. A substantial portion of the distribution of goods in this country
occurs via truck shipments. Consequently, large quantities of oil and diesel
fuel are consumed by trucks operated in this industry. Prolong believes that
the use of its products in the long-haul trucking industry may provide an
economic advantage to truck operators because of the increased operating
efficiency demonstrated by engines treated with AFMT-based products. Prolong
believes that this increased efficiency may directly result in a reduction in
fuel costs and overall transportation costs. Further, the use of AFMT-based
products may provide additional savings to this industry in the form of reduced
service and repair costs over the useful life of the trucks due to AFMT's
propensity to reduce engine wear and the wear of other "treated" components.
Agricultural Applications
The agricultural industry represents another potentially significant market
for Prolong's products. Modern agricultural machinery and equipment tend to be
highly complex and are often subjected to harsh working environments. As a
result of the harsh environments, the machinery and equipment operates
inefficiently and results in increased fuel consumption and a decreased
productive life-cycle due to increased mechanical wear. Prolong believes that
the use of its products could save the agriculture industry substantial sums by
reducing these industry wide losses caused by friction and contaminants.
Marine Applications
The marine market includes both freshwater and salt water boats and ships,
from outboard fishing skiffs to pleasure boats, yachts and other marine vessels.
Prolong has the ability to formulate special products for the harsh marine
environments, including marine grease and a special 2-cycle oil for small
outboard motors. Prolong believes that in diesel powered boats and ships,
Prolong Gas/Diesel Fuel System Treatment can provide benefits similar to those
attained from use in diesel truck engines.
Railroads
The railroad industry is currently a large user of lubrication products.
Prolong would have to obtain certain mandatory product certifications prior to
being able to market its products to the railroad industry. Prolong is not
actively pursuing such certifications for its products at this time, but may do
so in the future.
GEOGRAPHIC MARKETS
Prolong currently markets its products in the United States, Canada, Japan,
Hong Kong, Thailand, India, Sub-Saharan Africa, Chile, Kuwait and Saudi Arabia
and intends to continue developing distributor relationships in other foreign
countries. Prolong's current focus is to identify distributors that possess the
expertise and industry relationships necessary to assist it in further
penetrating retail sales channels in the various markets identified above, with
a primary focus on the consumer automotive and industrial lubricant markets.
Prolong intends to selectively grant distributorships to established companies
on a country by country basis. Prolong intends to build on this relationship and
continue to expand sales and revenues in the international marketplace. There
can be no assurance that Prolong will be able to successfully penetrate any
foreign markets.
International sales comprised 10.3% and 3.6% of the Registrant's revenues in
1996 and the first six months of 1997, respectively, resulting in approximately
34% and 6% of its net income, respectively. The Registrant consummates such
sales through independent distributors and, as such has no assets attributable
to its international sales. Prior to 1996 the Registrant had no significant
amount of international sales.
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If it is economically feasible, Prolong intends to grant distributorships
throughout Europe. Consistent with this goal, Prolong is analyzing the
economics of the industry, competitive aspects, regulatory matters, and methods
of distribution on a country by country basis in Europe. Prolong has also
obtained patent protection on its products in several of the EEC member
countries.
MARKETING AND DISTRIBUTION OF THE PRODUCTS
Prolong currently distributes its products through direct response television,
direct distribution, independent distributors and manufacturers representative
organizations. Specifically, Prolong distributes its industrial and commercial
products, both nationally and internationally, through independent distributors.
Currently, Prolong has 22 distributors in the United States and five
international distributors located in Asia and Africa.
Prolong has produced a 30 minute direct response television commercial (the
"Infomercial") entitled "The Prolong World Challenge" which it began airing in
January, 1996. The Infomercial features celebrities such as four-time Indy 500
Champion Al Unser, well known TV personality Bob Eubanks, International
Motorsports Champion Roberto Guererro, Olympic Champion and Olympic Gold
Medalist Mark Spitz, former Los Angeles Dodgers baseball star and World Series
MVP Steve Yeager, and renowned motorcyclist Nick Nichols promoting Prolong's
product line. The purpose of making the Infomercial was to build brand name
recognition for Prolong's products in the United States, while simultaneously
marketing its principal consumer lubricant products (i.e., the Prolong Car Care
Kit) directly to consumers. Sales made through the Infomercial are currently
completed through a third-party order processing and sales fulfillment facility
located in Burbank, California. This facility contains a warehouse that is
prestocked with Prolong's products in order to provide a quicker and more
efficient delivery of its products to the consumer. Prolong intends to use the
exposure generated by the Infomercial, along with the funds generated by the
sales realized therefrom, to further expand its national retail sales program in
the automotive and household consumer markets.
The products offered by Prolong have also been publicized through print and
electronic media, trade shows and motorsports sponsorships. For example, in the
area of motorsports sponsorship, Prolong executed a co-sponsorship agreement
with King Entertainment and Kenneth D. Bernstein pursuant to which Mr. Bernstein
will provide promotional services and appearances and will recognize "Prolong
Super Lubricants" as a co-sponsor of the "Budweiser King Prolong Top Fuel
Dragster." The agreement calls for the display of the Prolong Super Lubricants
name and logo on the dragster and related racing components in all races and
other events in which the dragster appears. Further, Prolong has entered into a
separate agreement in which it retained the services of Al Unser to endorse and
promote Prolong's products. Mr. Unser has agreed to make certain appearances to
assist in marketing the products and has agreed to license his name and likeness
in connection with the marketing of Prolong's products. Prolong has entered
into an agreement with Smokey Yunick pursuant to which it retained the services
of Mr. Yunick to promote Prolong's products and to act as a spokesman for, and
technical consultant to, Prolong. Mr. Yunick has agreed to make certain
appearances to assist in marketing Prolong's products and has agreed to license
his name and likeness in connection with the marketing of Prolong's products.
Additionally, Prolong has entered into an advertising contract with Motor Trend
magazine for print ads during 1997. In addition to motorsports sponsorship,
endorsements and magazine advertising, Prolong is engaging experienced marketing
personnel to commence concentrated marketing efforts in order to increase
retail, commercial, industrial, governmental and international sales. Prolong
believes that the foregoing advertising and marketing efforts, which began with
the production of its Infomercial in 1995, have resulted in recognition of the
product line as a superior alternative to other conventional lubricants
available within the lubricant industry.
COMPETITION
The market for Prolong's products is highly competitive and is expected to
increase in the future. The basic formula of Prolong's products has not changed
materially since its development in 1986. The formula was granted a United
States patent on July 4, 1986. The market for Prolong's products is
characterized by rapid technological advances, frequent new product
introductions and evolving industry standards. Some of Prolong's principal
competitors include other providers of specialized lubrication products, such as
First Brands (STP(TM)) and Quaker State (Slick 50(TM)), both of which market
engine oil treatments. Prolong's competitors also include major oil companies
such as Shell Oil Company, Castrol, Pennzoil, Quaker State and others who
manufacture lubrication products, such as WD40 Corp. Further, Prolong believes
that major oil companies not presently offering products that compete directly
with those offered by Prolong may enter Prolong's markets in the future.
Increased competition could result in price reductions, reduced gross margins,
and a loss of market share, any of which could have a material adverse effect on
the Registrant's business, financial condition and results of operations. In
addition, many of Prolong's competitors have significantly greater financial,
technical, research and product development, marketing and other resources and
greater market recognition than Prolong. Several of Prolong's competitors also
currently have, or may develop or acquire, substantial customer bases in the
automotive and other related industries. As a result of these factors, Prolong's
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sale of their products than Prolong. Additionally,
other dealers and distributors may offer similar lubrication products at prices
below those offered by Prolong, appealing to the price-sensitive segment of the
market. While Prolong believes that the prices for Prolong lubrication products
are competitive for the level of quality obtained by the customer, Prolong
relies on PSL's brand name recognition for selling high quality, state of the
art products. There can be no assurance that Prolong will be able to compete
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successfully against current and future competitors or that competitive
pressures faced by Prolong will not materially adversely effect the Registrant's
business, financial condition and results of operations.
Prolong believes that its current competitive edge lies solely with the
superior lubrication performance of its products relative to that of its
competitors. In order for Prolong to draw attention to the superior performance
of its products, Prolong is treating and marketing its products as a unique
specialty line of high performance products as opposed to a high volume product
line.
A key strategy for Prolong's continued growth is to use direct response
television ("DRTV") to generate sales, build brand name recognition, and to lay
the foundation for other, more conventional forms of advertising and marketing.
For example, Prolong believes that its Infomercial that debuted in 1996 has
resulted in a significant increase in sales and brand name recognition. This
broad public exposure generated by the Infomercial may permit Prolong to
position itself favorably among larger companies competing in both the national
and international lubricant markets.
PRODUCTION
The AFMT formula contained in all of Prolong's products and the formulas for
such products themselves are comprised of petroleum-based components which are
readily available from several suppliers. Prolong does not foresee any
shortages of supply in the near future. However, Prolong has recently increased
volume production and plans on continued expansion. This continued expansion
could eventually place a strain on the production capacity of its existing
suppliers. While Prolong is working actively with each of its suppliers to
increase production of the components, there can be no assurance that each
supplier will be able to increase its production in time to satisfy Prolong's
increasing requirements or that alternative suppliers will be able to meet any
such deficiency on an ongoing basis. If Prolong is unable to obtain sufficient
quantities of the components, or if such components do not meet Prolong's
quality standards, delays or reductions in product shipments could occur which
would have a material adverse effect on the Registrant's business, financial
condition and results of operations.
In addition to the potential deficiency in supply of the AFMT components, such
components are also subject to significant price volatility beyond the control
or influence of Prolong. Prices for the components of the quality sought by
Prolong are dependent on the origin, supply and demand at the time of purchase.
Prices can be affected by multiple factors in the producing countries, including
weather and political and economic conditions. Additionally, petroleum products,
of which Prolong relies on for its AFMT formula, have been affected in the past,
and may be affected in the future, by the actions of certain organizations and
associations, such as the Organization of Petroleum Exporting Countries
("OPEC"), that have historically attempted to establish price controls on
petroleum products through agreements establishing export quotas or restricting
petroleum supplies worldwide. No assurance can be given that OPEC (or others)
will not succeed in raising the price of petroleum components or that, in such
event, Prolong will be able or choose to maintain its gross margins quickly by
raising its prices without effecting demand. Increases in the prices for the
components, whether due to the failure of its suppliers to perform, conditions
affecting the component- producing countries, or otherwise, could have a
material adverse effect on the Registrant's results of operations.
The production of Prolong's products is comprised of contract manufacturers
mixing the components pursuant to the AFMT and other proprietary formulas and
bottling the resulting mixtures in packaging specified by Prolong. Prolong's
current contract manufacturers have the capacity to produce its products in high
volumes, having been designed to meet the production requirements of major oil
companies. By utilizing existing third party manufacturing facilities, Prolong
avoids the large capital expenditures associated with mixing and packaging
operations, as well as costly management of human resources. At present, there
are facilities located throughout the world that are capable of mixing and
packaging the components into finished products. However, Prolong's increased
volume production and continued expansion may result in shortages or
restrictions in supply and manufacturing capabilities in the future. Prolong has
not entered into any long term contracts with respect to the supply or
production of its products, preferring to intermittently review quotations
provided by interested parties in order to take advantage of competition among
suppliers and manufacturers.
CUSTOMERS
In 1996 approximately 77.7% of Prolong's sales resulted as a response to the
airing of its Infomercial. Such sales are made to large numbers of individual
consumers and, accordingly, Prolong does not consider itself dependent on any
particular customers in this market segment. In 1996, Prolong's sales to
commercial and industrial customers and international customers, which are
derived through independent manufacturers representatives and distributors,
comprised approximately 5.2% and 10.3% of its revenues, respectively, and sales
to retail customers comprised 6.0% of total revenues. None of such customers
accounted for more than 5% of Prolong's aggregate sales in 1996. Consequently,
the Registrant does not consider itself to be dependent on these customers or
any of its other customers.
INTELLECTUAL PROPERTY
Prolong holds the exclusive worldwide license to manufacture and sell products
based on AFMT, which PSL acquired from the patent holder, EPL Prolong, Inc.
(referred to herein as "EPL" or the "Licensor"), in 1993. This agreement calls
for Prolong to pay to the Licensor 3.5% of gross sales of any products which
utilize AFMT technology or bear the "Prolong" name. This agreement calls for
minimum royalties of $3,000 per month beginning in 1995. During 1996, Prolong
expended $553,900 in royalties under this agreement. The license is perpetual
absent a major breach of Prolong's obligations thereunder, effectively a failure
to pay royalties due under the license. There can be no assurance that Prolong
will be able to meet all financial obligations under the license in the future
and, consequently, may
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not be able to retain the license indefinitely. Prolong is currently engaged in
discussions to purchase the rights to the AFMT formula from EPL. Should Prolong
be unable to continue as a licensee or successfully purchase the rights from
EPL, Prolong could not continue to manufacture its current AFMT-based products,
which would result in a material adverse effect on the Registrant's business,
operating results and financial condition.
The U.S. patent on AFMT expires July 4, 2006. There are a number of other
patents and patent applications covering Prolong's products in other countries
worldwide. Additionally, Prolong has obtained or applied for the exclusive
rights to the use of a number of trademarks which it utilizes in the marketing
of its products. Currently, "SPL100" is a registered trademark of the
Registrant and the Registrant has trademark applications with respect to the
"Prolong," "Prolong Super Lubricants," "The Ultimate in Protection &
Performance" and "No Equal in the World" marks.
ROYALTY AGREEMENTS
Aside from the royalties due to EPL as described above, Prolong has entered
into a memorandum agreement with the producer of its Infomercial whereby Prolong
has agreed to pay The 2M Group, Inc. 1.5% of gross sales generated from DRTV
promotions made via a toll-free telephone number, which utilize the Infomercial
video footage. The term of this agreement is dependent upon the life cycle of
the Infomercial. During 1996, Prolong expended $151,400 in royalties under this
agreement.
Prolong has also entered into a personal service agreement with Al Unser
whereby Prolong has agreed to pay Mr. Unser 1.0% of gross sales resulting from
DRTV sales from the Infomercial, with guaranteed annual minimum royalties of
$40,000, $50,000 and $60,000 during the first, second and third years of the
agreement, respectively, following an initial 120 day test period. Royalties
earned are to commence with the first airing of the Infomercial and continue for
three years and 120 days, contingent upon (i) the continued airing of the
Infomercial after the 120 day test period and; (ii) after each one-year period
thereafter. The maximum term of this agreement is until May, 1999. During 1996,
Prolong paid Mr. Unser $100,900 under this agreement.
Further, Prolong has entered into a service and endorsement contract with Al
Unser whereby Prolong has agreed to pay royalties on all net retail sales of its
products according to the following rates: 1.5% from November 1, 1996 through
October 31, 1997; 1.25% from November 1, 1997 through October 31, 1998; and 1%
from November 1, 1998 through October 31, 1999. For each of the years included
in the arrangement, Prolong must pay a guaranteed minimum amount of $15,000.
Earnings maximums under the arrangement are as follows: $100,000 in year 1;
$125,000 in year 2; and $150,000 in year 3. Either party has the option to
extend the arrangement for an additional 4 years. If the option to extend is
exercised by either party, the agreement terminates on October 31, 2003. During
1996, Prolong paid Mr. Unser $7,800 under this agreement.
EMPLOYEES
As of June 1997, the Registrant and PSL collectively employs twenty-nine (29)
full-time employees, including two (2) executive officers, and no part-time
employees. None of Prolong's employees are represented by a labor organization
and the Registrant considers the relationships with its employees and those of
PSL to be good.
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ITEM 2. FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to, and should
be read in conjunction with the consolidated financial statements, related notes
and other information included elsewhere in this Registration Statement as well
as "Management's Discussion and Analysis of Financial Condition and Results of
Operations." The financial data for the years ended December 31, 1994 and 1995,
respectively, is derived from the consolidated financial statements of the
Registrant and PSL that have been audited by Corbin & Wertz. The financial data
set forth below for the year ended December 31, 1996 is derived from the
consolidated financial statements of the Registrant and PSL that have been
audited by Deloitte & Touche, LLP. The selected financial data for the six
month periods ended June 30, 1997 and 1996 are derived from the unaudited
consolidated financial statements of the Registrant and PSL. The unaudited
consolidated financial statements include all adjustments, consisting of normal
recurring accruals and eliminating entries, which the Registrant considers
necessary for a fair presentation of the financial position and results of
operations for these periods. There is no available financial data concerning
the Registrant's activities in the years ended December 31, 1992 and 1993,
respectively, as prior to the Reorganization the Registrant was inactive during
those periods within the meaning of Rule 3-11 of Regulation S-X.
<TABLE>
<CAPTION>
Year ended Six months ended
December 31 June 30,
-----------------------------------------------------------------------
1994 1995 1996 1996 1997
------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
- SALES.................................... $ -- $ 390,506 $15,813,493 $ 3,102,242 $12,615,529
- NET PROFIT (LOSS)........................ (134,285) (415,740) 721,178 (535,823) 786,662
- NET PROFIT (LOSS) PER SHARE OF
COMMON STOCK............................ N/A(1) $(0.02) $0.03 $(0.02) $0.03
- WEIGHTED AVERAGE SHARES OF
COMMON STOCK OUTSTANDING................ N/A(1) 17,156,501 23,463,620 21,628,433 25,518,175
BALANCE SHEET DATA
TOTAL ASSETS............................... $ 139,984 $ 730,760 $ 9,023,317 $ 2,268,003 $ 9,754,659
TOTAL LIABILITIES.......................... 12,452 88,218 1,732,467 623,857 1,645,897
TOTAL STOCKHOLDERS' EQUITY................. 127,532 642,542 7,290,850 1,644,146 8,108,762
</TABLE>
- -----------
(1) Net loss per share and weighted average shares of Common Stock outstanding
information for the year ended December 31, 1994 have not been provided as
such period preceded the Registrant's merger with PSL in June 1995 and,
therefore, such information would not be meaningful.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
Since the Reorganization, management of the Registrant and PSL has
concentrated a significant portion of its efforts and resources on the marketing
and sale of Prolong's consumer oriented products, principally the Car Care Kit,
through DRTV advertising. Management now believes that it has attained a
significant level of brand and product identification and Prolong has now begun
efforts to expand sales of its consumer lubrication products into retail
channels.
The lubricant business is extremely competitive. Prolong's business requires
that it compete with larger, better financed entities, most of which have brand
names which are well established in the marketplace. Although Prolong, in the
opinion of management, has unique products which have superior performance
characteristics relative to the well known products available in the
marketplace, Prolong remains at a distinct disadvantage and will be required to
expend substantial sums in order to promote brand name identity and product
acceptance among its prospective customers. In order
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to establish brand name identity, Prolong has relied primarily on its
Infomercial and intends to continue to utilize this means to gain product
recognition for purposes of directly increasing sales as well as increasing
retail, commercial and industrial and governmental sales resulting from broader
public knowledge of its products.
Comparison of the Six Month Period Ended June 30, 1997 and June 30, 1996
Revenues for the six month period ended June 30, 1997 were derived from the
following sources; infomercial sales of $7,402,000,retail sales of $3,766,000,
industrial/commercial sales of $1,000,000 and international sales of $448,000.
Revenues for the six month period ended June 30, 1996 were derived almost
exclusively from the infomercial sales of approximately $3,102,000.
Prolong began to air its infomercial in January of 1996, however the number
of airings was limited by the cash available on television advertising. During
the six months period ended June 30, 1997 the infomercial aired approximately
11,000 times in markets throughout the United States which resulted in revenues
of $7,402,000. Additionally, Prolong continued the rollout of its retail sales
efforts, resulting in revenues of $3,766,000.
Cost of goods sold decreased 16% as a percentage of revenues for the six
month period ended June 30, 1997 as compared to the six month period ended June
30, 1996. This decrease was mainly attributable to the increased efficiencies
in the outside production processes and volume discounts.
Selling general and administrative costs increased significantly during the
first six months of 1997 as compared to the first six months of 1996. The
increases were primarily for expenditures for television airtime, endorsement
and sponsorship payments, royalties, salaries for new employees, new group
insurance plans and other administrative costs incurred as a result of the
volume increase. The selling, general and administrative expenses as a
percentage of sales decreased from 80% in the first six months of 1996 to 70% in
the first six months of 1997 due to the holding of costs relative to the volume
increase in revenues.
During the first six months of 1997 cash increased $12,688. Current assets
at June 30, 1997 were $9,497,327 while current liabilities were $1,645,897.
Comparison of the Years Ended December 31, 1996 and December 31, 1995
During the year ended December 31, 1995, Prolong entered into the business of
manufacturing and selling its products and had sales of $390,506. During 1995,
PSL was mainly engaged in the production of its Infomercial and the organization
of television airing, product delivery, product and packaging design and related
marketing activities. No sales of product were made during 1995 from television
airings, since the Infomercial did not air until January, 1996. PSL expended
$223,748 in the production of its Infomercial, $117,562 in advance royalties to
the holder of the AFMT patent and $806,235 in product costs and selling, general
and administrative expenses. At December 31, 1995, the Registrant's current
assets of $542,909 exceeded its current liabilities of $88,218 by $454,691 and
its total assets of $730,760 exceeded its total liabilities of $88,218 by
$642,542.
During the year ended December 31, 1996, Prolong debuted its Infomercial and
experienced a dramatic increase in sales to $15,813,493. During 1996, Prolong
obtained working capital from the sales of its products as well as the sale of
its common stock through private placements. Prolong expended $553,900 in
royalties to the holder of the AFMT patent and related trademarks, $151,400 in
royalties to the producer of its Infomercial, $100,900 in royalties to Al Unser
for his appearance in the Infomercial, $7,800 in royalties to Al Unser in
connection with an endorsement contract, $87,500 in royalties pursuant to other
endorsement and sponsorship agreements, and $14,920,478 in product costs and
selling, general and administrative expenses. At December 31, 1996, the
Registrant's current assets of $8,745,635 exceeded its current liabilities of
$1,706,626 by $7,039,009 and its total assets of $9,023,317 exceeded its total
liabilities of $1,732,467 by $7,290,850.
Comparison of the Years Ended December 31, 1995 and December 31, 1994
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During the year ended December 31, 1994, PSL's activities were limited to the
entry into its license agreement with EPL for the use of the AFMT formula and
the creation and organization of its business plan.
There were no revenues and limited operating activities during the year. PSL's
cash flows were derived principally from the issuance of its common stock and
were used mainly to pay the initial license fee under the license with EPL and
related expenses. At December 31, 1994, PSL's current assets of $14,132
exceeded its current liabilities of $12,452 by $1,680 and its total assets of
$139,984 exceeded its total liabilities of $12,452 by $127,532.
Liquidity and Capital Resources
Prior to the fiscal year ended December 31, 1996, the Registrant had not
generated sufficient revenues to finance its operations and was able to remain
in business primarily with the proceeds from the issuances of its Common Stock
in private placements. Currently, the Registrant has sufficient revenues to meet
its current expenses and does not currently anticipate raising additional
capital in the next twelve months. However, the Registrant believes that it may
need to obtain additional financing in the future to fund its anticipated period
of growth. As of June 30, 1997, the Registrant did not have any commitments for
material capital equipment acquisitions. Further, the Registrant anticipates no
immediate future need for any material production-related capital expenditures.
The Registrant expects that all future manufacturing will be sub-contracted out,
bypassing the need for any infrastructure investment. However, despite the
minimal capital expenditures anticipated in the near future, the Registrant
plans to significantly increase its level of operations, and in particular plans
to increase its marketing activities to include additional markets in the United
States and abroad.
In July 1997, PSL entered into a $4 million line of credit with Bank of
America National Trust and Savings Association ("Bank of America") which is
collateralized by PSL's inventory and receivables. This credit line bears
interest at either Bank of America's Reference Rate or the LIBOR rate plus
2.25%, at PSL's option, and expires on July 31, 1999. The Registrant believes
that its current level of revenues and cash flow generated from operations, if
sustained, in addition to the funds provided from the foregoing credit facility,
if consummated, will be sufficient to meet its liquidity needs for fiscal 1997
and 1998. The Registrant anticipates that it may seek additional capital in the
future to fund its growth. Any additional required financings may not be
available on terms satisfactory to the Registrant, if at all. The Registrant is
electing to become a reporting company under the Securities Exchange Act of 1934
in part to enable it to apply for listing on the Nasdaq Small Cap Market.
Registrant believes that such listing may create a trading market for its Common
Stock which would then permit the Company to more readily use its Common Stock
to attract capital, in private or public offerings, when and if required in the
future.
Recently Issued Accounting Standards
During 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share" (FAS 128). FAS 128 requires the Registrant to disclose
a basic and diluted earnings per share calculation. Basic earnings per share
(EPS) excludes common stock equivalents from the EPS calculation, while diluted
EPS is calculated consistent with the Registrant's primary earnings per share
calculation. The Registrant will adopt the provisions of FAS 128 within the 1997
year-end consolidated financial statements. Basic and diluted EPS, as computed
under FAS 128, would not have been materially different than EPS determined in
accordance with APB 15 for the periods presented.
ITEM 3. PROPERTIES
Neither the Registrant nor its subsidiary owns any real property. As its
headquarters, Prolong leases approximately 7,000 square feet of office and
warehouse space on a month-to-month basis in a one story building located at
1210 North Barsten Way in Anaheim, California. The base rent for this property
is $4,557 per month. Prolong also leases a limited amount of space on a month-
to-month basis in each of two adjacent facilities located at 1200 North Barsten
Way and 1220 North Barsten Way, respectively. The aggregate base rent for this
additional space is $1,925 per month. The Registrant considers these present
facilities to be adequate for Prolong's current operations and for those
reasonably expected to be conducted during the next twelve months. Further,
Prolong believes that any additional space, if required, will be available on
commercially reasonable terms.
14
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the beneficial
ownership of the Registrant's outstanding Common Stock as of June 30, 1997 for
(i) person(s) who are known by the Registrant to be the beneficial owner of more
than five percent of the Registrant's Common Stock, (ii) each director and
officer of the Registrant and (iii) all current directors and executive officers
as a group.
<TABLE>
<CAPTION>
Name and Address of Shares Beneficially Percent of
Beneficial Owner Owned(1) Class
------------------- ------------------- ----------
<S> <C> <C>
Elton Alderman 3,954,000 15.41
1210 N. Barsten Way
Anaheim, California 92806
Carol Auld 3,794,999(2) 14.79
1210 N. Barsten Way
Anaheim, California 92806
Emthree Enterprises, Inc. 1,850,000(3) 7.21
22681 Sweet Meadow
Mission Viejo, California 92692
Tom T. Kubota 1,790,000 6.98
1210 N. Barsten Way
Anaheim, California 92806
Thomas C. Billstein 1,545,000 6.03
1210 N. Barsten Way
Anaheim, California 92806
Ramon D. Pratt 1,147,500(4) 4.47
73-304 Willow Street
Palm Desert, CA 92260
Melanie A. McCaffrey --
1210 N. Barsten Way
Anaheim, California 92806
All officers and directors as a group 7,289,000(5) 28.42
(4 persons)
</TABLE>
- -------------
(1) Beneficial ownership as reported in the table above has been determined in
accordance with Rule 13d-3 promulgated under the Securities Exchange Act
of 1934. Accordingly, except as noted, all of the Registrant's securities
over which the individuals named, or as a group, directly or indirectly
have, or share voting or investment power, have been deemed beneficially
owned.
(2) Carol Auld obtained beneficial ownership of the above 3,794,999 shares
following the death of her husband, Edwin C. Auld Jr., on February 8, 1996
and as a result of the subsequent settlement of his estate.
(3) Indicated shareholdings include 330,000 shares of the Registrant's common
stock which Registrant has agreed it will repurchase from such holder for
a purchase price equal to the price paid for such shares. Such repurchase
is expected to be consummated on or about August 31, 1997.
(4) Ramon Pratt held of record 507,500 shares in his name and an additional
640,000 shares in joint tenancy with his wife, Marie Z. Pratt.
(5) Includes shares held by Messrs. Alderman, Kubota and Billstein and Ms.
McCaffrey who collectively served as the Registrant's directors and
executive officers as of June 30, 1997.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS.
The following sets forth certain information with respect to each of the
directors and executive officers of the Registrant as of June 30, 1997.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
George Elton Alderman 58 President, Chief Executive Officer and Director
Thomas C. Billstein 44 Vice-President, Secretary and Director
Tom T. Kubota 57 Vice President, Investor Relations and Director
Nicholas M. Rosier 51 Chief Financial Officer
Melanie A. McCaffery 44 Director
</TABLE>
George Elton Alderman has served as the Chairman of the Board of Directors,
President and Chief Executive Officer of the Registrant since the Reorganization
in June, 1995. From October 1993 to the present, Mr. Alderman has also served
as a director, President and Chief Executive Officer of PSL, the Registrant's
wholly-owned operating subsidiary. Prior to joining PSL, Mr. Alderman served as
the President and Chief Executive Officer of EPL Prolong, Inc., the holder of
the patent for the AFMT formula, from July 1988 until October 1993.
Thomas C. Billstein has served as a director of the Registrant since the
Reorganization in June, 1995. Mr. Billstein has also served as the Registrant's
Vice President and Secretary since February 1996. From October 1993 to the
present, Mr. Billstein has also served as a director of PSL, and has served as
PSL's Secretary since February 1996. Prior to joining PSL, Mr. Billstein served
as an independent financial and legal consultant to EPL Prolong, Inc. from
August 1992 until October 1993. From November 1991 to August 1992, Mr.
Billstein provided independent financial and
15
<PAGE>
legal consulting services to various small companies located in Southern
California. Since commencing his employment with the Registrant and PSL, Mr.
Billstein has served as an independent financial and legal consultant to those
entities as well. Mr. Billstein holds a Bachelor of Science Degree in Business
Administration with an emphasis in Finance-Investments from California State
University Long Beach. He attended Whittier College School of Law, was awarded
the American Jurisprudence Award for Agency Law, and graduated with a Juris
Doctorate degree in 1978. Mr. Billstein is a member of the State Bar of
California.
Tom T. Kubota has served as a director of the Registrant since the
Reorganization in June 1995. Between June 1995 and April 1997, Mr. Kubota
served as the Registrant's Vice President, Finance. In June 1997, Mr. Kubota
was promoted to Vice President, Investor Relations. From October 1993 to the
present, Mr. Kubota has also served as a director of PSL. Prior to joining PSL,
Mr. Kubota served as an independent consultant for EPL Prolong, Inc., from March
1992 to October 1993. Since the date of Mr. Kubota's employment with the
Registrant and PSL, respectively, he has served as an independent consultant to
each entity. Mr. Kubota is also a vice president and director of GenCell, Inc.,
a publicly-traded company.
Nicholas M. Rosier has served as Controller of PSL since March 1997 and was
promoted to Chief Financial Officer of the Registrant and PSL, effective July
1997. For the four year period prior to his joining PSL, Mr. Rosier was the
Controller and Financial Accounting Manager of two divisions for DePUY, Inc., a
major public manufacturing company in the global orthopaedic industry. Prior to
that position Mr. Rosier was the Controller/Director of Finance for thirteen
years for Adams Rite Manufacturing Company, a privately owned manufacturer of
locks and automotive equipment. He holds a Bachelors degree in accounting and
finance from H.B.S. in Holland.
Melanie A. McCaffery was appointed to the Board of Directors in June 1997.
Mrs. McCaffery, a certified public accountant, is the President of McCaffery &
Associates, a financial and accounting firm which she founded in October 1995.
From October 1988 through September 1995, Mrs. McCaffery was a Partner with the
international accounting firm of Coopers & Lybrand L.L.P. From 1978 through
October 1988, Mrs. McCaffery served as a staff member at Coopers & Lybrand
L.L.P. Mrs. McCaffery serves on the board of directors of Boyds Wheels, Inc. a
publicly-traded company, and the March of Dimes of Orange County, California.
Mrs. McCaffery received a Bachelors degree in political science from the
University of California, Los Angeles, in 1975 and a Master's in Business
Administration from the University of Southern California in 1978.
All directors hold office until the next annual meeting of the shareholders
and until their successors have been duly elected and qualified. Officers are
elected by and serve at the discretion of the Board of Directors. There are no
family relationships among any of the directors or officers of the Registrant.
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth the compensation of the named executive
officers paid by the Registrant and PSL for the last three fiscal years. None
of the named executive officers of the Registrant or PSL were paid $100,000 or
more in base salaries during any of the periods covered.
The information presented below represents compensation in all capacities in
which each identified individual served the Registrant and PSL, as applicable.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Restricted All Other
Name and Stock Compen-
Principal Position Year Salary($) Awards($)(1) sation ($)
- ------------------ ---- --------- -------------- ----------
<S> <C> <C> <C> <C>
George Elton 1994 5,000 4,150 ---
Alderman 1995 --- --- 61,250
President and Chief Executive Officer 1996 93,337 --- ---
Thomas C. Billstein 1994 --- 1,750 ---
Vice-President and 1995 --- --- 53,008
Secretary 1996 90,256 --- ---
Ramon D. Pratt (2) 1994 --- 1,500 ---
Vice-President and 1995 --- --- 19,250
Treasurer 1996 43,600 --- ---
Tom T. Kubota 1994 --- 1,500 ---
Vice President 1995 --- --- 65,250
Investor Relations 1996 90,000 62,500 118,500
</TABLE>
- -----------
(1) At June 30, 1997, the above-named individuals collectively held
approximately 7,289,000 shares of the Registrant's Common Stock with a
value of $20,263,420 in the aggregate, based on the average of the high
and low share price of $2.78 per share on such date.
(2) Mr. Pratt resigned from his officer and director positions effective April
1, 1997.
16
<PAGE>
The Registrant's 1997 Stock Incentive Plan (the "Plan") was adopted by the
Registrant's shareholders and Board of Directors in June 1997. The Plan
provides for the granting of "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
nonqualified stock options and restricted stock. The Plan has authorized for
issuance up to 2,500,000 shares of the Registrant's Common Stock. Under the
Plan, shares of the Registrant's Common Stock may be granted to directors,
officers, employees, consultants and other service providers of the Registrant,
except that incentive stock options may not be granted to non-employee
directors. The Plan is administered by the Board of Directors or a committee
appointed by the Board (the "Committee"), which has sole discretion and
authority, consistent with the provisions of the Plan, to determine which
eligible participants will receive options, the time when options will be
granted, the terms of options granted and the number of shares which will be
subject to options granted under the Plan. Presently, the Board of Directors
administers the Plan. As of June 30, 1997, there were 1,128,687 options
outstanding under the Plan at a weighted average exercise price of $2.00 per
share. Officers and directors hold options to purchase 945,000 shares of Common
Stock, none of which were exercisable as of June 30, 1997. In the event of a
merger of the Registrant with or into another corporation or the sale of
substantially all of the assets of the Registrant, all outstanding unvested
options of the Plan shall be accelerated.
The exercise price under the Plan is determined by the Board of Directors,
provided that, generally in the case of an incentive stock option, the exercise
price shall be equal to the fair market value of the Common Stock as of the date
of grant, as determined by the Board of Directors. In the case of an incentive
stock option granted to an optionee who owns more than 10% of the voting power
of all classes of stock of the Company or any parent or subsidiary of the
Company (a "10% Holder"), the exercise price may be no less than 110% of the
fair market value of the Common Stock on the date the option is granted. The
Board has the authority to determine the time or times at which options granted
under the Plan become exercisable, provided that incentive options must expire
no later than ten years from the date of grant, or five year in the case of a
10% Holder. Options are not assignable and are nontransferable, other than upon
death by will and the laws of descent and distribution, and generally may be
exercised only by an employee while employed by the Company or within 30 days
after termination of employment. The Tandem Plan will terminate in June 2007,
unless earlier terminated by the Board of Directors.
EMPLOYMENT AGREEMENTS
The Registrant does not have employment agreements with any of its executive
officers. Compensation of the executive officers is evaluated, from time to
time, by the Board of Directors and may be increased or decreased based on each
officers performance generally as well as specified criteria related to each
officers performance of his duties.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Registrant does not have a compensation committee or any other board
committee that performs equivalent functions. However, during the fiscal year
1996, the directors determined executive officer compensation. As discussed in
the section entitled "Directors and Executive Officers," Messrs. Alderman,
Billstein, and Kubota all serve concurrently as officers and directors of both
the Registrant and PSL.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January, 1997, Prolong Acquisition Corporation, a Delaware corporation
("PAC") owned by Elton Alderman and Thomas C. Billstein, acquired the
International Hot Rod Association, a sanctioning body for certain motorsports
competitions commonly known as drag races. Following the acquisition, PAC was
renamed the International Hot Rod Association, Inc. (the "IHRA"). It was
contemplated that the Registrant or PSL purchase an equity interest in the IHRA.
In February 1997, the Registrant's Board of Directors formally considered
purchasing an equity interest in IHRA but determined not to make such an
investment at that time. The proposed terms were substantially the same as those
terms at which Messrs. Alderman and Billstein made the acquisition. Messrs.
Alderman and Billstein abstained from voting on such proposed transaction.
Currently, the Registrant is a party to a sponsorship agreement with the IHRA.
Under this sponsorship agreement, the Registrant is obligated to sponsor at
least two races in 1997. During 1997, the Registrant paid IHRA $50,000 for
sponsorship of the Prolong SuperLubricants Spring Nationals in Bristol,
Tennessee and $35,000 for sponsorship of the Prolong SuperLubricants - Ohio
Lottery World Nationals in Norwalk, Ohio. In addition to the above contemplated
transaction with IHRA, as of March 31, 1997, the Registrant has advanced the
IHRA approximately $120,000 in the aggregate as a prepayment for sponsorship and
title rights of nationally televised national events to occur in 1998.
From the date of the Reorganization and continuing to January 1997, Thomas
Billstein has provided the Registrant with legal consulting services in his
capacity as an attorney sole practitioner, and has provided PSL with such
services since October 1993. Mr. Billstein's responsibilities include
conducting a general review of all potential legal issues involving the
Registrant or PSL and acting as a liaison with all outside counsel retained by
the Registrant or PSL. In addition to Mr. Billstein's consulting services to
the Registrant and PSL, Mr. Billstein also provides such services from time to
time to EPL Prolong, Inc., the holder of the patent to the AFMT formula. This
relationship with EPL Prolong, Inc. has been fully disclosed to and approved by
both the Registrant's and PSL's board of directors. In the fiscal year ended
December 31, 1996 receipts from the Registrant and PSL amounted to $90,256 which
represented approximately ninety percent (90%) of Mr. Billstein's total
compensation as an attorney/consultant.
From the date of the Reorganization and continuing to June 1997, Tom Kubota
has served as an independent consultant for the Registrant. In the fiscal year
ended December 31, 1996, receipts from the Registrant amounted to $208,500.
17
<PAGE>
Messrs. Alderman, Billstein, and Kubota all hold concurrent positions as
officers and directors of both the Registrant and PSL. See "Directors and
Executive Officers."
On January 30, 1996 Tom Kubota acquired 250,000 shares of the Registrant's
Common Stock, valued at $0.25 per share, as consideration for services rendered
to the Registrant and PSL, in lieu of cash compensation. Such acquisition of
Common Stock was made pursuant to the exemption from registration under Section
4(2) of the Securities Act of 1933, as amended. See "Recent Sales of
Unregistered Securities."
Other than the related transactions disclosed above, the Registrant is not
aware of any transactions or proposed transactions to which the Registrant or
PSL was or is to be a party, in which any director, executive officer, nominee
for election as a director, security holder or any member of the immediate
family of the persons named above had or is to have a direct or indirect
material interest.
ITEM 8. LEGAL PROCEEDINGS
Neither the Registrant nor PSL is a party to any pending or threatened legal,
governmental, administrative or judicial proceedings that Prolong believes will
have a materially adverse effect upon the Registrant's or PSL's financial
condition or operations. The AFMT patent on which Prolong's products are based,
has been the subject of litigation, primarily suits contesting the ownership
thereof. Prolong believes that EPL, the third party which owns such patent and
exclusively licenses its use to Prolong, has been successful in the defense of
all such claims to date. The Registrant does not anticipate that any such
litigation will have a material adverse effect on Prolong's continued use of
such patent and its continued manufacture and sale of Prolong's products
pursuant to the license agreement, but no assurances can be made of such fact.
Should such litigation result in an adverse ruling precluding Prolong's
continued use of the AFMT patent under the license agreement, the Registrant's
business, operating results and financial condition would be materially
adversely effected.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Registrant's common stock is currently trading on the system of the
National Association of Securities Dealers, Inc., known as the OTC Bulletin
Board under the symbol "PROL."
18
<PAGE>
The Registrant's common stock resumed trading (after approximately 8 years of
dormancy) in January, 1996. High and low bids for each quarter during 1996 and
for the first two quarters of 1997 are as indicated below.
<TABLE>
<CAPTION>
Quarter Ended: High Bid Low Bid
-------------- -------- -------
<S> <C> <C>
March 31, 1996 $2.25 $ .38
June 30, 1996 $4.38 $1.88
September 30, 1996 $4.63 $3.75
December 31, 1996 $6.38 $4.25
March 31, 1997 $6.50 $3.25
June 30, 1997 $3.75 $1.50
</TABLE>
Information during the period has been furnished by the OTC Bulletin Board.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions.
The Registrant has authorized only one class of common stock, namely Common
Stock, having a par value of $0.001 per share. The number of holders of record
of the Registrant's common stock is approximately 438. The Registrant has not
declared any cash dividends since inception, and does not intend to do so in the
foreseeable future. The Registrant currently intends to retain its earnings for
the operation and expansion of its business. The Registrant does not have any
restrictions on its ability to pay dividends on common equity. The Registrant's
Board of Directors is authorized to issue up to 50,000,000 shares of Preferred
Stock with such rights, preferences and privileges as may be determined by the
Registrant's Board of Directors. No such shares of Preferred Stock have been
issued to date.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
The following information sets forth all securities of the Registrant sold
within the past three years without registering the securities under the
Securities Act of 1933, as amended. The Registrant made no public offerings of
its securities during the past three years. It sold only one class of stock,
namely Common Stock. The sales were made pursuant to negotiated transactions
between the parties, and the price per share for each transaction was a result
of the negotiations.
On June 21, 1995, the Registrant effected a two-for-one reverse stock split of
shares of its outstanding restricted unregistered common stock in the amount of
789,535 shares. On the same date, the Registrant acquired all of the
outstanding common stock of PSL in a one-for-one share exchange for the
Registrant's restricted unregistered common stock in the amount of 15,967,500
shares.
Between June 21, 1995 and December 31, 1995, the Registrant issued for cash
1,980,000 shares of its restricted unregistered common stock at prices ranging
from $0.14 to $0.25 per share. The Registrant also issued 445,000 shares of its
restricted unregistered common stock in exchange for services performed by its
employees and outside consultants. Such services were recorded at a price of
$0.25 per share. Additionally, during this period the Registrant sold 320,000
shares of its restricted unregistered common stock pursuant to subscription
receivables aggregating $80,000.
During fiscal 1996, the Registrant issued 4,891,665 shares of its restricted
unregistered common stock in exchange for $5,322,630 at prices ranging from $.25
to $2.70 per share. The Registrant also issued 730,000 shares of its restricted
unregistered common stock for services performed by its employees and outside
consultants during the year ended December 31, 1996. Consulting expense was
recorded at share prices ranging from $.25 to $2.00 per share. Additionally,
during fiscal 1996 the Registrant issued 320,000 shares of its restricted
unregistered common stock which had been subscribed for $80,000 in fiscal 1995.
In September 1996, the Registrant entered into an agreement whereby it issued
330,000 shares of its restricted unregistered common stock in exchange for a
note receivable of $660,000. Such note bore interest at the rate of 7% per annum
and is due in full on August 31, 1997. The Registrant has entered into an
agreement with the obligor of such note to reacquire the shares for the full
principal amount of such note. The reacquisition of the shares will take place
on or about August 31, 1997 and the obligor under the note receivable will pay
all accrued interest. In October 1996, the Registrant granted an option to an
employee to purchase 30,000 shares of its restricted unregistered common stock
at an exercise price of $5.38 per share. This option was cancelled in June 1997
and replaced by an option to purchase 30,000 shares of the Registrant's
restricted unregistered common stock under its 1997 Stock Incentive Plan. The
option vests over a five-year period beginning June 4, 1997 and is exercisable
for a period of up to ten (10) years at a price of $2.00 per share. Lastly, in
1996, the Registrant received subscriptions receivable aggregating $209,500 for
the sale of 155,800 shares of its restricted unregistered common stock.
During the first quarter ended March 31, 1997, the Registrant privately issued
5,000 shares of its common stock in exchange for an aggregate of $12,500 at a
price of $2.50 per share. During the first quarter ended March 31, 1997, the
Registrant also privately issued 37,500 shares of its common stock under
contracts dated April 24, 1995 and May 9, 1996 for services performed by outside
service providers. A charge to selling expenses was recorded at shares prices
ranging from $.25 to $1.00 per share. Additionally, during the first quarter
ended March 31, 1997 the Registrant privately issued 60,000 shares of its common
stock which had been subscribed for $150,000 in fiscal 1996. The Registrant
believes, based upon the representations of the investors at the time of each of
such issuances, that such issuances were made solely to "accredited investors"
as such term is defined under Rule 501 of Regulation D promulgated under the
Securities Act of 1933, as amended. The Registrant made such sales with the
intention of relying upon the exemption afforded by Rule 506 of Regulation D;
however, the Registrant has never filed a Form D with the Securities and
Exchange Commission. In all transactions for the issuance of stock for which the
exemption from registration is claimed pursuant to Regulation D,
19
<PAGE>
the stock certificates issued contain a legend imprinted thereon setting forth
the exemption from registration claimed and the restrictions on transferability
of the stock.
The Registrant's transfer agent has placed "stop transfer" instructions on
each stock certificate with orders that such stock cannot be transferred except
in accordance with applicable securities laws.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
COMMON STOCK
The authorized capital of the Registrant which the Registrant is registering
consists of 150,000,000 shares of Common Stock with a par value of one mill
($0.001) per share. As of December 31, 1996, the Registrant had 25,453,700
shares of common stock issued and outstanding.
Each of the holders of record of Common Stock is entitled to one (l) vote per
share thereof in the election of the Registrant's directors and all other
matters submitted to each such holder for a vote of shareholders; to share
ratably in all dividends, when, as, and if declared by the Registrant's board of
directors from funds legally available therefor; and to share ratably in all
assets available for distribution to holders of record of capital stock upon
liquidation or dissolution. There are no cumulative voting rights with respect
to the election of the Registrant's directors, and no conversion rights or
sinking fund provisions applicable to capital stock.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VII of the Registrant's Amended and Restated Articles of Incorporation
provides that, subject to any restrictions set forth in the Registrant's By-
Laws, it shall indemnify and hold its directors, officers, others serving at the
request of the Registrant as a director or officer of another corporation and
those individuals serving as the Registrant's representative in a partnership,
joint venture, trust or other enterprise, harmless and free from liability,
expenses and loss (including attorney's fees, judgments, fines and amounts paid
or to be paid in settlement) reasonably incurred or suffered by such individual
to the fullest extent permitted under the laws of the State of Nevada for any
claims against such individual arising out of the performance of his duties on
behalf of the Registrant. Additionally, Article IX of the Registrant's By-Laws
gives the Registrant the ability to provide indemnification for each of its
employees and agents to the same extent as its directors and officers upon
action by its Board of Directors. Article IX also permits the Registrant to
enter into indemnity agreements with any director, officer, employee, fiduciary
or agent of the Registrant. The Registrant has entered into indemnification
agreements with each of its directors and officers (Exhibit 10.1 hereto), which
provide for the indemnification of directors and officers of the Registrant
against any and all expenses, judgments, fines, penalties and amounts paid in
settlement, to the fullest extent permitted by law. Lastly, Article IX permits
the Registrant to maintain indemnification insurance for its directors,
officers, employees, fiduciaries or agents. The Registrant does not currently
maintain indemnification insurance.
Section 78.751 of the Nevada General Corporation Law allows the Registrant to
indemnify any person who was or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding by reason of the
fact that he or she is or was serving at the request of the Registrant as a
director, officer, employee or agent of any corporation, partnership, joint
venture, trust or other enterprise. The Registrant may advance expenses in
connection with defending any such proceeding, provided the indemnitee
undertakes to pay any such amounts if it is later determined that such person
was not entitled to be indemnified by the Registrant.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing, the Registrant has been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy and is, therefore, unenforceable.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The required financial statements are included under the section "Financial
Statements and Exhibits" in this Registration Statement.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company's financial statements for the years ended December 31, 1995
and 1994 were audited by Corbin & Wertz, independent accountants. In February
1997, the Company dismissed Corbin & Wertz and engaged Deloitte and Touche, LLP
as its independent accountants. The change in the Company's independent
accountants was the result of a mutual agreement between the Company and Corbin
& Wertz. There were no disagreements with Corbin & Wertz on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure during such period, which disagreements, if not resolved to
the satisfaction of Corbin & Wertz, would have cause it to make a reference to
the subject matter of the disagreements in connection with its records. The
report of Corbin & Wertz on the Company's Financial Statements for the years
ended December 31, 1995 and 1994 contained an explanatory paragraph regarding
the Company's ability to continue as a going concern.
20
<PAGE>
The decision to engage Deloitte & Touche, LLP was approved by the Board of
Directors of the Company.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) CONSOLIDATED FINANCIAL STATEMENTS FILED WITH THIS FORM 10
(i) Audited statements of operations, cash flows, and stockholders'
equity for the year ended December 31, 1994.
(ii) Audited consolidated balance sheets as of December 31, 1995 and
1996 and consolidated statements of income, cash flows, and
stockholders' equity for the years, ended December 31, 1995 and
1996.
(iii) Unaudited consolidated balance sheets and consolidated statements
of income, cash flows, and stockholders' equity for the periods
ended June 30, 1996 and 1997.
(B) EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
2.1 Exchange Agreement between Stockholders of PSL and the Registrant.*
3.1 Amended and Restated Articles of Incorporation of the Registrant.*
3.2 Bylaws of the Registrant.*
3.3 Second Amendment and Restatement of the Articles of Incorporation of
Corporate Development, Inc.*
3.4 Bylaws of Corporate Development, Inc.*
4.1 Specimen Certificate of Registrant's Common Stock.*
10.1 Form of Indemnification Agreement for Executive Officers and Directors.*
10.2 Exclusive License Agreement between PSL and EPL Prolong, Inc., d.b.a.
Prolong International, dated November 10, 1993.*
10.3 Memorandum of Agreement between PSL and 2M Corporation, dated April 24,
1995.*
10.4 Agreement between PSL and Al Unser, dated July 28, 1995.*
10.5 Service Agreement between PSL and Tylie Jones & Associates, Inc., dated
October 24, 1995.*
10.6 Telemarketing Agreement between PSL and West Telemarketing Corporation,
dated October 24, 1995.*
10.7 Service and Endorsement Contract between PSL and Al Unser, dated April
29, 1996.*
10.8 Associate Sponsorship Agreement between PSL, King Entertainment, Inc.
and Kenneth D. Bernstein, dated May 9, 1996.*
10.9 Sponsorship Agreement between PSL, Pikes Peak Auto Hill Climb
Educational Museum, Inc. and Barnes Dyer Marketing, Inc., dated February
21, 1997.*
10.10 Major Associate Sponsorship Agreement between PSL, Norris Racing, Inc.
and Barnes Dyer Marketing, Inc., dated December 15, 1996.*
10.11 Standard Industrial Lease-Gross between Coronado Investors Properties
and Prolong International for the property Anaheim, California, dated
April 20, located at 1210 North Barsten Way, 1990.*
10.12 The Registrant's 1997 Stock Incentive Plan and form of Stock Option
Agreement.*
10.13 The Registrant's Revolving Credit Agreement with Bank of America
National Trust and Savings Association dated July 14, 1997.
16.1 Letter relating to change Registrant's in certifying accountant.
21.1 Subsidiaries of the Registrant.*
</TABLE>
- ------------
* Previously filed.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant has duly caused this Amendment No. 1 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
PROLONG INTERNATIONAL CORPORATION
---------------------------------
(Registrant)
Date: August 28, 1997
By: /s/ NICHOLAS M. ROSIER
-----------------------------
Nicholas M. Rosier
Chief Financial Officer
22
<PAGE>
PROLONG INTERNATIONAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 1995 AND
1994 WITH INDEPENDENT AUDITORS' REPORT
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Prolong International Corporation:
We have audited the accompanying consolidated balance sheet of Prolong
International Corporation and subsidiary (the Company) as of December 31, 1995
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the two-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Prolong
International Corporation and subsidiary as of December 31, 1995, and the
results of their operations and their cash flows for each of the years in the
two-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Prolong International Corporation and subsidiary will continue as a going
concern. As discussed in Note 2 to the consolidated financial statements, the
Company's limited sales, losses from operations and liquidity problems raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ CORBIN & WERTZ
Irvine, California
February 23, 1996
<PAGE>
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 122,096
Accounts receivable, net of allowance for doubtful
accounts of $4,778 31,965
Subscription receivable (Note 5) 80,000
Inventories (Notes 2 and 3) 46,208
Prepaid royalties (Note 4) 36,000
Prepaid expenses and other 2,892
Capitalized advertising costs (Note 2) 223,748
----------
Total current assets 542,909
----------
License agreement, net of accumulated
amortization of $21,240 (Note 4) 84,950
Prepaid royalties, less current portion (Note 4) 81,562
Other assets 21,339
----------
$ 730,760
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 66,375
Other liabilities (Note 7) 21,843
----------
Total current liabilities 88,218
----------
Commitments (Note 8)
Stockholders' equity (Note 5):
Common stock, $0.001 par value, 150,000,000
shares authorized, 19,182,035,
shares issued and outstanding 19,182
Common stock subscribed, $0.001 par value,
320,000 shares to be issued 320
Additional paid-in capital 1,186,833
Accumulated deficit (563,793)
----------
Total stockholders' equity 642,542
----------
$ 730,760
==========
</TABLE>
See accompanying notes to consolidated financial statements and independent
auditors' report.
1
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
----------------------
<S> <C> <C>
Revenues (Note 2) $ 390,506 $ --
Cost of revenues $ 211,220 $ --
--------- ---------
Gross profit 179,286 --
Selling, general and administrative expenses (Note 5) 595,015 132,685
--------- ---------
Loss from operations (415,729) (132,685)
Other income -
Interest income, net 1,589 --
--------- ---------
Loss before provision for income taxes (414,140) (132,685)
Provision for income taxes (Notes 2 and 6) $ 1,600 $ 1,600
--------- ---------
Net loss $(415,740) $(134,285)
========= =========
Earnings per common share $ (0.02) N/A
Weighted average number of
Common shares outstanding 17,134,848 N/A
</TABLE>
See accompanying notes to consolidated financial statements and independent
auditors' report.
2
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common
Common Stock Stock Subscribed Total
------------------- ------------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
------ ------ ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1994 180,000 $ 180 13,767,500 $ 13,768 $ 51,637 $ (13,768) $ 51,817
Shares issued for
cash (Note 5) 320,000 320 79,680 80,000
Contributed
services (Note 5) 130,000 130,000
Net loss (134,285) (134,285)
---------- ------- ----------- -------- ---------- --------- ---------
Balance at
December 31, 1994 500,000 500 13,767,500 13,768 261,317 (148,053) 127,532
Shares issued for
cash, net of costs
of $48,000 (Note 5) 1,700,000 1,700 325,300 327,000
Shares issued for
common stock
subscribed (Note 5) 13,767,500 13,768 (13,767,500) (13,768)
Issuance of shares
to effect reverse
acquisition (Note 1) 789,535 789 (789)
Shares issued for
cash, net of costs
of $33,000
(Note 5) 1,980,000 1,980 394,520 396,500
Shares subscribed
for receivable,
net of costs of
$8,000 (Note 5) 320,000 320 71,680 72,000
Shares issued for
services (Note 5) 445,000 445 110,805 111,250
Contributed
services (Note 5) 24,000 24,000
Net loss (415,740) (415,740)
---------- ------- ----------- -------- ---------- --------- ---------
Balance at
December 31, 1995 19,182,035 $19,182 320,000 $ 320 $1,186,833 $(563,793) $ 642,542
========== ======= =========== ======== ========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements and independent
auditors' report.
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(415,740) $(134,285)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 23,116
Provision for doubtful accounts 4,778
Expense recorded upon
subscription of shares 111,250
Contributed services 24,000 130,000
Change in operating assets and
liabilities:
Accounts receivable (30,064) (6,679)
Inventories (46,208)
Prepaid expenses and other (2,892)
Accounts payable 66,375
Other liabilities 1,391 12,452
--------- ---------
Net cash provided by (used in) operating
activities (263,994) 1,488
--------- ---------
Cash flows from investing activities:
Increase in license agreement (55,000)
Increase in prepaid royalties (102,062) (15,500)
Increase in capitalized advertising
costs (223,748)
Increase in other assets (19,053) (4,047)
--------- ---------
Net cash used in investing
activities (344,863) (74,547)
Cash flows from financing activities:
Sale of common stock 723,500 80,000
--------- ---------
Net increase in cash and cash equivalents 114,643 6,941
Cash and cash equivalents, beginning of year 7,453 512
--------- ---------
Cash and cash equivalents, end of year $ 122,096 $ 7,453
========= =========
</TABLE>
Supplemental disclosures of cash flow information -
There was no cash paid during the years for interest or income taxes.
See Note 5 for non-cash financing activities.
See accompanying notes to consolidated financial statements and independent
auditors' report.
4
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
1. ORGANIZATION
Prolong International Corporation (PIC) is a Nevada corporation
organized August 24, 1981 as Giguere Industries Incorporated (Giguere).
Pursuant to a stockholders' action, on June 21, 1995, Giguere changed
its name to Prolong International Corporation.
PIC remained dormant from 1987 to June 21, 1995, when, pursuant to
stockholders' action, it acquired 100% of the outstanding stock of
Prolong Super Lubricants, Inc., a Nevada corporation (PSL).
Because the former stockholders' of PSL have retained control of PIC,
the acquisition has been accounted for as a reverse acquisition. In
connection with the transaction, PIC issued 15,967,500 shares of its
common stock in exchange for 100% of the common stock of PSL. For
financial statement purposes, the shares issued by PIC are considered
outstanding as of the date of the acquisition and the 789,535 shares
retained by the stockholders of PIC are reflected as consideration
issued to consummate the reverse acquisition.
The reverse acquisition was accounted for by the purchase method of
accounting, however, there were no material assets acquired or
liabilities assumed. No value was ascribed to the consideration given to
consummate the reverse acquisition.
PIC, through PSL, is engaged in the manufacture and sale of a patented
line of super lubricants primarily in the United States.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of PIC and its wholly-owned subsidiary,
PSL (collectively, the Company). All significant intercompany accounts
have been eliminated in consolidation.
Basis of Presentation - The consolidated financial statements have been
prepared on a going concern basis which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business.
The Company's ability to generate positive cash flows depends on its
ability to maintain a level of revenues sufficient to meet its
obligations and sustain its operations. The Company has had limited
sales to date, has sustained operating losses since inception, and has
been primarily dependent upon proceeds from the sale of its common stock
for cash flows. These matters raise substantial doubt about the
Company's ability to continue as a going concern. The Company is engaged
in developing and expanding its commercial/industrial distributor
network, both nationally and internationally. The Company is also
expanding the marketing of its products directly to government entities
through manufacturers' representatives. In order to develop and promote
Prolong's brand name recognition, increase sales, and prepare for the
introduction of its products to the retail automotive aftermarket, the
Company has produced and plans to air in January 1996 a 30 minute
direct-response television
Continued
5
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 (CONTINUED)
- --------------------------------------------------------------------------------
commercial ("Infomercial") (see Note 8). The Company believes that these
activities will generate sufficient revenues to meet its obligations and
sustain its operations. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could materially differ from those estimates.
Cash and Cash Equivalents - The Company considers securities with a
remaining maturity of three months or less when purchased to be cash
equivalents.
Accounts Receivable - The Company reviews a potential customer's credit
history before extending credit and generally does not require
collateral. The Company establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of specific customers,
historical trends and other information.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Capitalized Advertising Costs - The Company has capitalized certain
incremental direct costs and payroll-related costs associated with its
direct-response infomercial production. Amounts capitalized related
thereto will be expensed in their entirety in January 1996, the time of
the first public showing of the Infomercial.
Revenue Recognition - Revenue from product sales is recognized upon
shipment.
Income Taxes - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. Under the asset and liability method of Statement 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the consolidated
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. Under Statement 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
Earnings per share - Earnings per common share are computed by dividing
net income by the weighted average number of common shares outstanding.
Common share equivalents are included where their impact is not anti-
dilutive. Fully diluted earnings per share is materially the same as
primary earnings per share.
Continued
6
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 (CONTINUED)
- --------------------------------------------------------------------------------
3. INVENTORIES
Inventories at December 31, 1995 consist of the following:
Raw materials $12,289
Finished goods 33,919
------
$46,208
======
4. LICENSE AGREEMENT AND PREPAID ROYALTIES
The Company has entered into a perpetual license agreement with EPL
Prolong, Inc. (EPL), an unrelated entity. The agreement called for an
initial one-time fee of $106,190, which the Company capitalized and is
amortizing over a five year period. The Company amortized $21,240 for
the year ended December 31, 1995. The agreement requires the Company to
pay royalties of 3.5% of sales (as defined) of the Company's products
that utilize the proprietary information licensed from EPL. Effective
January 1, 1996, the minimum annual royalty under the agreement is
$36,000. In addition, during the years ended December 31, 1995 and 1994,
the Company paid certain expenses totaling $117,562 on behalf of EPL
which have been classified as prepaid royalties on the accompanying
consolidated balance sheet. Prepaid royalties representing the minimum
annual royalty for the year ended December 31, 1996 of $36,000 has been
reflected as a current asset in the accompanying 1995 consolidated
balance sheet.
5. STOCKHOLDERS' EQUITY
During the year ended December 31, 1994, the Company issued for cash
320,000 shares of common stock at $.25 per share.
During the year ended December 31, 1995, the Company received $723,500
for the issuance of 3,680,000 shares of common stock at prices between
$.20 and $.25 per share, net of costs of $81,000.
During the year ended December 31, 1995, the Company issued 13,767,500
shares for common stock subscribed.
During December 1995, the Company received an $80,000 subscription
receivable for the sale of 320,000 shares of its common stock at $.25
per share, net of costs of $8,000. The $80,000 subscription receivable
was received subsequent to December 31, 1995.
During the year ended December 31, 1995, the Company agreed to issue
445,000 shares of common stock for services performed by outside
consultants of the Company. Consulting expense at $.25 per share has
been recorded in the accompanying statement of operations and is
included in selling, general and administrative expenses.
Continued
7
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 (CONTINUED)
- --------------------------------------------------------------------------------
The Company recorded compensation expense during fiscal 1994 and 1995 of
$130,000 and $24,000, respectively, for services provided by two key
employees. The services were provided without payment required and,
accordingly, the Company has recorded the services as contributed
capital.
6. INCOME TAXES
Income tax expense was $1,600 for each of the years ended December 31,
1995 and 1994 and consists of the minimum state taxes.
Income tax expense for the years ended December 31, 1995 and 1994
differs from the amounts computed by applying a U.S. federal income tax
rate of 34% to pretax loss as a result of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Computed "expected" tax benefit $(140,808) $(45,113)
Nondeductible expenses 46,000 44,200
Increase (reduction) in income taxes resulting from:
Change in the beginning-of-the-year
balance of the valuation allowance
to income tax expense 94,808 913
State income taxes 1,600 1,600
--------- --------
$ 1,600 $ 1,600
========= ========
</TABLE>
The tax effect of temporary differences that give rise to deferred tax
assets at December 31, 1995 and 1994 are presented below. Deferred tax
liabilities at December 31, 1995 and 1994 are not significant:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts $ 1,900 $-------
Operating loss carryforwards 111,000 9,000
--------- --------
Total gross deferred tax assets 112,900 9,000
Less valuation allowance (112,900) (9,000)
--------- --------
Net deferred tax assets $ $
========= ========
</TABLE>
Continued
8
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 (CONTINUED)
- --------------------------------------------------------------------------------
There was no valuation allowance as of January 1, 1994. At December 31,
1995, the Company had net operating loss carryforwards of approximately
$300,000 and $150,000 for federal and state tax reporting purposes,
respectively, which, if not utilized to offset future taxable income,
will expire through 2010. The Tax Reform Act of 1986 includes provisions
which may limit the net operating loss carryforwards available for use
in any given year if certain events, including changes in stock
ownership (see Note 1), should occur.
7. RELATED PARTY TRANSACTIONS
The Company is a guarantor on a note wherein a stockholder of the
Company is the lender and EPL is the promisor, with a maximum guarantee
not in excess of $36,000.
Included in other liabilities is approximately $9,000 owed to two
shareholders for advances made by the shareholders to the Company. The
advances are non-interest bearing and have no due date.
8. COMMITMENTS
Leases - The Company and its wholly-owned subsidiary occupy
approximately 7,000 square feet of office and warehouse space located in
Anaheim, California on a month to month basis with a monthly rental of
$4,557. The Company leases its office furniture and fixtures, laboratory
equipment and warehouse equipment at a monthly rate of $1,000 from EPL.
Rent expense for the year ended December 31, 1995 was $67,453. There was
no rent expense incurred during the year ended December 31, 1994.
Royalties - The Company is contractually obligated for the production of
a one-half hour, direct response, television commercial ("Infomercial")
(See Note 2) in the total amount of $87,084, plus 80,000 shares of
common stock of the Company plus a bonus payment of 20,000 additional
shares of common stock of the Company (all of which have been reflected
as shares issued for services in the accompanying statement of
stockholders' equity for the year ended December 31, 1995). In addition
thereto, the Company is required to pay royalties to the producer of the
Infomercial of 1.5% of gross sales (as defined) generated from direct
response television sales made via an 800 telephone number, which
utilize the Infomercial video footage. As of December 31, 1995, the
Company had paid a total of $70,084 of the contracted amount and is
obligated to pay an additional $17,000 in cash.
In connection with the production of the Infomercial mentioned above,
the Company has entered into certain personal service agreements. In
addition to cash payments, the Company has agreed to pay royalties of 1%
of gross sales resulting from direct response sales from the
Infomercial, with guaranteed annual minimum royalties of $40,000,
$50,000 and $60,000 during the first, second and third years of the
agreement, respectively, following an initial 120 day test period.
Royalties earned will commence with the first airing of the Infomercial
and continue for three years and 120 days, contingent upon; (i) the
continued airing of the Infomercial after the 120 day test period and;
(ii) after each one-year period thereafter.
Continued
9
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 (CONTINUED)
- --------------------------------------------------------------------------------
The Company is required to pay royalties of 3.5% on all sales of its
products with minimum annual royalties of $36,000 beginning January 1,
1996 (see Note 4).
9. CONCENTRATION OF RISK AND SIGNIFICANT CUSTOMERS AND SUPPLIERS
The Company, at times, has cash and cash equivalents held with financial
institutions in excess of federally insured amounts.
Sales to one customer accounted for approximately 29% of consolidated
net sales for the year ended December 31, 1995. Sales to another
customer accounted for approximately 26% of consolidated net sales for
the year ended December 31, 1995. Accounts receivable from these two
customers amounted to $0 and $7,900, at December 31, 1995, respectively.
Raw material purchases from one supplier accounted for approximately 41%
of total purchases for the year ended December 31, 1995. Accounts
payable from this vendor amounted to $9,300 at December 31, 1995.
10
<PAGE>
PROLONG INTERNATIONAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEAR ENDED DECEMBER 31, 1996 AND
INDEPENDENT AUDITORS' REPORT
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Prolong International Corporation:
We have audited the accompanying consolidated balance sheet of Prolong
International Corporation and subsidiary (the Company) as of December 31, 1996
and the related consolidated statements of income, stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Prolong International Corporation
and subsidiary as of December 31, 1996, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
March 28, 1997
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1996
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $5,063,585
Accounts receivable, net of allowance for doubtful accounts
of $94,282 1,361,878
Subscriptions receivable 189,500
Inventories 1,534,938
Prepaid expenses 184,284
Prepaid television time 367,161
Deferred tax asset 44,289
----------
Total current assets 8,745,635
PROPERTY AND EQUIPMENT, net 117,758
OTHER ASSETS 115,462
DEPOSITS 44,462
----------
TOTAL ASSETS $9,023,317
==========
</TABLE>
See independent auditors' report and
notes to consolidated financial statements. 2
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 748,870
Accrued expenses 703,222
Income taxes payable 251,563
Note payable, current 2,971
----------
Total current liabilities 1,706,626
NOTE PAYABLE, net of current portion 25,841
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 50,000,000 shares authorized;
no shares issued or outstanding
Common stock, $0.001 par value; 150,000,000 shares authorized;
25,453,700 shares issued and outstanding 25,454
Common stock subscribed 156
Additional paid-in capital 7,767,855
Retained earnings 157,385
Note receivable issued for common stock (660,000)
----------
Total stockholders' equity 7,290,850
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,023,317
==========
</TABLE>
See independent auditors' report and
notes to consolidated financial statements. 3
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
NET REVENUES $15,813,493
COST OF GOODS SOLD 4,660,926
-----------
GROSS PROFIT 11,152,567
OPERATING EXPENSES:
Selling expenses 8,218,450
General and administrative expenses 2,041,102
-----------
Total operating expenses 10,259,552
-----------
OPERATING INCOME 893,015
OTHER INCOME, net:
Interest expense (51,666)
Interest income 15,224
Dividend income 71,879
-----------
Total other income, net 35,437
-----------
INCOME BEFORE PROVISION FOR INCOME TAXES 928,452
PROVISION FOR INCOME TAXES 207,274
-----------
NET INCOME $ 721,178
===========
EARNINGS PER COMMON SHARE $0.03
===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 23,463,620
===========
</TABLE>
See independent auditors' report and
notes to consolidated financial statements. 4
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON (ACCUMULATED
COMMON STOCK STOCK SUBSCRIBED ADDITIONAL DEFICIT)
------------ ----------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1995 19,182,035 $19,182 320,000 $ 320 $1,186,833 $(563,793)
Shares issued for cash 4,891,665 4,892 5,317,738
Shares issued for services 730,000 730 394,270
Issuance of shares previously subscribed 320,000 320 (320,000) (320)
Shares subscribed 155,800 156 209,344
Shares issued in exchange for a note receivable 330,000 330 659,670
Net income 721,178
---------- ------- -------- ----- ---------- -----------
BALANCES, December 31, 1996 25,453,700 $25,454 155,800 $ 156 $7,767,855 $ 157,385
========== ======= ======== ===== ========== ===========
<CAPTION>
TOTAL
NOTE STOCKHOLDERS'
RECEIVABLE EQUITY
<S> <C> <C>
BALANCES, December 31, 1995 $ - $ 642,542
Shares issued for cash 5,322,630
Shares issued for services 395,000
Issuance of shares previously subscribed
Shares subscribed 209,500
Shares issued in exchange for a note receivable (660,000)
Net income 721,178
---------- ----------
BALANCES, December 31, 1996 $(660,000) $7,290,850
========== ==========
</TABLE>
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 721,178
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 42,874
Provision for doubtful accounts 89,504
Deferred taxes (44,289)
Reserve for obsolescence (2,432)
Common stock issued in exchange for services 395,000
Changes in assets and liabilities:
Accounts receivable (1,418,855)
Inventories (1,486,298)
Accounts payable 673,252
Accrued expenses 692,222
Prepaid expenses (181,954)
Prepaid television time (367,161)
Income taxes payable 249,963
-----------
Net cash used in operating activities (636,996)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized infomercial production costs 223,748
Prepaid initial royalties 117,562
Purchases of property and equipment (97,489)
Increase in deposits (25,000)
Increase in other assets (57,500)
-----------
Net cash provided by investing activities 161,321
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (5,466)
Proceeds from issuance of common stock 5,322,630
Proceeds from subscriptions receivable 100,000
-----------
Net cash provided by financing activities 5,417,164
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,941,489
CASH AND CASH EQUIVALENTS, beginning of year 122,096
-----------
CASH AND CASH EQUIVALENTS, end of year $ 5,063,585
===========
</TABLE>
See independent auditors' report and
notes to consolidated financial statements. 6
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
SUPPLEMENTAL DISCLOSURES - Cash paid during the year for:
Income taxes $ 800
=======
Interest $51,666
=======
</TABLE>
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES -
During 1996, the Company completed the following transactions:
Issued 730,000 shares of common stock in exchange for services valued at
$395,000.
Issued 320,000 shares of common stock previously committed.
Issued 330,000 shares of common stock in exchange for a note receivable of
$660,000.
Issued subscriptions receivable of $209,500 in exchange for 155,800 shares of
common stock subscribed.
Purchased automotive equipment for $34,278 in exchange for a note payable.
See independent auditors' report and
notes to consolidated financial statements. 7
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
- -------------------------------------------------------------------------------
1. BUSINESS
Prolong International Corporation (PIC) is a Nevada corporation organized on
August 24, 1981 as Giguere Industries Incorporated (Giguere). PIC remained
dormant from 1987 to June 21, 1995, when, pursuant to a stockholder's
action, it acquired 100% of the outstanding stock of Prolong Super
Lubricants, Inc., a Nevada corporation (PSL), then changed its name to
Prolong International Corporation. The transaction was treated as a reverse
acquisition and was accounted for under the purchase method of accounting;
however, there were no material assets acquired or liabilities assumed.
PIC, through PSL, is engaged in the manufacture, sale and worldwide
distribution (under license - Notes 5 and 11) of a patented complete line of
high performance lubricants.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of PIC and its wholly-owned subsidiary, PSL
(collectively, the Company). All significant intercompany accounts have
been eliminated in consolidation.
Cash and Cash Equivalents - Cash and cash equivalents consist of all highly-
liquid, short-term investments with an original maturity of three months or
less.
Accounts Receivable - The Company reviews a potential customer's credit
history before extending credit and generally does not require collateral.
The Company establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical trends
and other information.
Inventories - Inventories are valued at the lower of cost (determined on the
first-in, first-out basis) or market.
Capitalized Infomercial Production Costs - The Company capitalizes certain
incremental direct costs and payroll-related costs associated with its
direct-response infomercial production. Amounts capitalized related thereto
were expensed in their entirety in January 1996, the time of the first
public showing of the infomercial.
8
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996 (CONTINUED)
- -------------------------------------------------------------------------------
Property and Equipment - Property and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives
of the assets, which are as follows:
Computer equipment 3 years
Office equipment 5 years
Furniture and fixtures 7 years
Automotive equipment 5 years
When assets are retired or otherwise disposed of, the cost and the related
accumulated depreciation are removed from the accounts and any resulting
gain or loss is recognized in operations for the period. Renewals and
betterments which extend the life of an existing asset are capitalized while
normal repairs and maintenance costs are expensed as incurred.
Other Assets - Other assets are comprised of licensed technology and
trademarks, which are being amortized over five years.
Fair Value of Financial Instruments - Statement of Financial Accounting
Standards (SFAS) No. 107, Disclosures About Fair Value of Financial
Instruments, requires management to disclose the estimated fair value of
certain assets and liabilities defined by SFAS No. 107 as financial
instruments. Financial instruments are generally defined by SFAS No. 107 as
cash and cash equivalents, evidence of ownership interest in equity, or a
contractual obligation that both conveys to one entity a right to receive
cash or other financial instruments from another entity and imposes on the
other entity the obligation to deliver cash or other financial instruments
to the first entity. At December 31, 1996, management believes that the
carrying amounts of cash and cash equivalents, accounts receivable,
subscriptions receivable, notes receivable, accounts payable, other current
liabilities, and notes payable approximate fair value because of the short
maturity of these financial instruments.
Accounting For Income Taxes - The Company follows SFAS No. 109, Accounting
for Income Taxes, which requires the recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the differences
between the financial statements and the tax bases of assets and liabilities
using enacted rates in effect for the year in which the differences are
expected to reverse. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
Revenue Recognition - Revenue is recognized as products are shipped.
9
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996 (CONTINUED)
- -------------------------------------------------------------------------------
Earnings per Common Share - Earnings per common share are computed by
dividing net income by the weighted average number of common shares
outstanding. Common share equivalents are included where their impact is
not anti-dilutive. Fully diluted earnings per share is materially the same
as primary earnings per share.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
New Accounting Pronouncement - In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, Accounting for Stock-Based
Compensation, which requires the determination and disclosure of
compensation costs implicit in stock option grants or other stock rights.
The Company was required to adopt certain provisions of this standard for
nonemployee transactions entered into after December 15, 1995. The Company
has adopted the required provisions during fiscal 1996. Under the employee
transaction provisions, companies are encouraged, but not required, to adopt
the fair value of accounting for employee stock-based transactions.
Companies are also permitted to continue to account for such transactions
under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, but would be required to disclose in a note to the
financial statements pro forma net earnings and earnings per share as if the
Company had adopted SFAS No. 123. The Company will continue to account for
employee stock-based compensation under APB Opinion No. 25.
3. INVENTORIES
Inventories at December 31, 1996 consist of the following:
<TABLE>
<S> <C>
Raw materials $ 416,223
Finished goods 1,044,776
Promotional items 73,939
----------
$1,534,938
==========
</TABLE>
10
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996 (CONTINUED)
- -------------------------------------------------------------------------------
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 consists of the following:
<TABLE>
<S> <C>
Computer equipment $ 60,823
Office equipment 16,669
Furniture and fixtures 11,649
Automotive equipment 42,626
--------
131,767
Less accumulated depreciation (14,009)
--------
$117,758
========
</TABLE>
5. LICENSE AGREEMENT
The Company has entered into a license agreement which requires the Company
to pay royalties of 3.5% of sales (as defined) of the Company's products
that utilize certain proprietary technology, trademarks and copyrights. The
royalty expense under this arrangement for the year ended December 31, 1996
approximated $553,900. The agreement also called for an initial one-time
license fee of $106,190, which the Company capitalized and is amortizing
over a five-year period. The Company amortized $21,238 for the year ended
December 31, 1996 resulting in an accumulated amortization balance of
$42,478 as of December 31, 1996. The agreement shall remain in effect as
long as the Company has not committed any breach of the terms and provisions
of the agreement. (See Note 11 regarding contingency involving the
licensor.)
6. ACCRUED EXPENSES
Accrued expenses at December 31, 1996 consist of the following:
<TABLE>
<S> <C>
Accrued royalties payable $354,889
Sales taxes payable 93,727
Payroll and payroll taxes payable 235,430
Accrued commissions payable 19,176
--------
$703,222
========
</TABLE>
11
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996 (CONTINUED)
- -------------------------------------------------------------------------------
7. NOTE PAYABLE
Note payable at December 31, 1996 consists of the following:
<TABLE>
<CAPTION>
Note payable to a credit institution bearing interest at 10.5%, monthly
principal and interest payments of $488 through September 2001
and a balloon payment of $11,478 plus interest in October 2001,
<S> <C>
collateralized by automotive equipment $28,812
Less current portion (2,971)
-------
$25,841
=======
</TABLE>
The future principal payments for the note payable are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1997 $ 2,971
1998 3,298
1999 3,661
2000 4,065
2001 14,817
-------
$28,812
=======
</TABLE>
8. STOCKHOLDERS' EQUITY
On June 21, 1995, PIC issued 15,967,500 shares of its common stock in
exchange for 100% of the common stock of PSL. In addition to these shares,
the existing stockholders of PIC at that date held 789,535 shares of common
stock.
During fiscal 1996, the Company issued 4,891,665 shares of restricted
unregistered common stock in exchange for $5,322,630 at prices ranging from
$.25 to $2.70 per share.
The Company issued 730,000 shares of restricted unregistered common stock
for services performed by outside consultants during the year ended December
31, 1996. Consulting expense was recorded at share prices ranging from $.25
to $2.00 per share and is included in selling and general and administrative
expenses.
12
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996 (CONTINUED)
- -------------------------------------------------------------------------------
During 1996, the Company issued 320,000 shares of restricted unregistered
common stock which had been subscribed for $80,000 in fiscal 1995. The
$80,000 was collected in the first quarter of 1996.
In September 1996, the Company entered into an agreement whereby it issued
330,000 shares of restricted unregistered common stock in exchange for a
note receivable of $660,000.
In 1996, the Company received subscriptions receivable aggregating $209,500
for the sale of 155,800 shares of restricted unregistered common stock.
Subscriptions of $20,000 were collected in fiscal 1996, with the balance of
$189,500 being collected in the first quarter of 1997.
9. STOCK OPTION
In October 1996, the Company granted an option to an employee to purchase
30,000 shares of the common stock of the Company at an exercise price of
$5.38 per share, which represented the market value at the date of grant.
The option vests over a three-year period beginning on December 31, 1997 and
is exercisable for a period of 10 years.
Stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE
UNDER PRICE
OPTION PER SHARE
<S> <C> <C>
OUTSTANDING, December 31, 1995 - $ -
Granted 30,000 $ 5.38
------
OUTSTANDING, December 31, 1996 30,000 $ 5.38
======
</TABLE>
As of December 31, 1996, no options were exercisable.
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations to account for the stock option. Had
compensation cost for the stock option been determined based on the fair
value at the grant date consistent with the method of SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net income would have
been the pro forma amounts indicated below:
<TABLE>
<S> <C>
Net income, as reported $721,178
Net income, pro forma $657,630
</TABLE>
13
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996 (CONTINUED)
- -------------------------------------------------------------------------------
The fair value of options granted was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: no dividend yield, risk-free interest rate of 6.9% and an
expected life of 7 1/2 years.
10. INCOME TAXES
The provision for income taxes consists of the following for the year ended
December 31, 1996:
<TABLE>
<S> <C>
Current:
Federal $178,816
State 72,747
--------
251,563
Deferred:
Federal (34,027)
State (10,262)
--------
(44,289)
--------
$207,274
========
</TABLE>
The provision for income taxes differs from the amount that would result
from applying the federal statutory rate as follows:
<TABLE>
<S> <C>
Federal statutory income tax rate $ 315,674
State income taxes, net of federal benefit 41,241
Change in valuation allowance (112,900)
Other (36,741)
---------
$ 207,274
=========
</TABLE>
Temporary differences which give rise to deferred tax assets and liabilities
are as follows at December 31, 1996:
14
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
<TABLE>
<S> <C>
Deferred tax liabilities -
State taxes $(3,489)
Deferred tax assets:
Accrued vacation 1,325
Allowance for doubtful accounts 40,824
Other 5,629
-------
$44,289
=======
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
Contingency - As discussed in Note 5, the Company licenses the use of
certain technology, trademarks and copyrights (intellectual property). The
licensor, but not the Company, brought suit against two of its own directors
on causes of action for common law and statutory damages, and for injunctive
and declaratory relief in connection with the defendants' attempts to
unlawfully interfere with the licensor's efforts to manufacture and market
lubricants. In July 1993, the trial court ruled in favor of the licensor,
awarding the licensor damages in excess of $15.5 million, and made findings
of fact that the defendants had signed certain key documents which evidenced
the licensor's ownership of the intellectual property. The defendants
appealed the trial court's findings. The appellate court is expected to
hear oral arguments in June 1997. Based upon consultations with management
of the licensor and review of the trial court records, it is the opinion of
management of the Company that the ultimate disposition of the appeal will
not result in the trial court's rulings being reversed and that control of
the intellectual property will not be affected.
Leases - The Company leases its office facilities, located in three adjacent
buildings, under month-to-month operating leases. Additionally, it leases
some office equipment under operating leases.
Lease expense was approximately $61,900 for the year ended December 31,
1996.
Guarantee - The Company is a guarantor on a note wherein a stockholder of
the Company is the lender and the company from which the technology is
licensed (Note 5) is the promisor. The maximum guarantee is $36,000.
Royalties - The Company is obligated to pay royalties to the producer of a
one-half hour, direct response, television commercial (infomercial) at the
rate of 1.5% of gross sales (as defined) generated from direct response
television sales made via an 800 telephone number which utilizes the
infomercial video footage. For the year ended December 31, 1996, the
Company expensed approximately $151,400 under this arrangement.
In connection with this infomercial, the Company is obligated to pay
royalties to another individual at the rate of 1% of gross sales resulting
from direct response sales from the infomercial. The agreement has a term
of three years beginning in January 1996. Guaranteed minimum payments are:
$40,000 in 1996; $50,000 in 1997; and $60,000 in 1998. The Company expensed
approximately $100,900 under this arrangement for the year ended December
31, 1996.
15
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996 (CONTINUED)
- -------------------------------------------------------------------------------
The Company has an arrangement with an individual whereby it has agreed to
pay royalties on all net retail sales according to the following rates:
1.5% from November 1, 1996 through October 31, 1997; 1.25% from November 1,
1997 through October 31, 1998; and 1% from November 1, 1998 through October
31, 1999. For each of the years included in the arrangement, the Company
must pay a guaranteed minimum amount of $15,000. Earnings maximums under
this arrangement are: $100,000 in year one, $125,000 in year two and
$150,000 in year three. Either party has the option to extend this
arrangement for an additional four years. For the year ended December 31,
1996, the Company expensed approximately $7,800 under this arrangement.
Endorsement and Sponsorship Agreements - The Company has entered into
endorsement and sponsorship agreements with various automotive and racing
personalities for product marketing and promotion purposes. The remaining
terms for individual agreements range from two to three years. The Company
is committed to aggregate future payments under these agreements as follows:
<TABLE>
<S> <C>
Year ending December 31:
1997 $ 600,000
1998 585,000
1999 645,000
----------
$1,830,000
==========
</TABLE>
Endorsement and sponsorship expense charged to operations related to these
agreements was approximately $87,500 for the year ended December 31, 1996.
16
<PAGE>
PROLONG INTERNATIONAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS FOR
THE SIX MONTHS ENDED JUNE 30, 1996 AND
JUNE 30, 1997.
1
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
ASSETS 1996 1997
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............................................................................. $ 796,615 $5,076,273
Accounts receivable, net of allowance for doubtful accounts of $21,596 at June 30, 1996 and $ 61,243
at June 30, 1997..................................................................................... 168,144 1,790,113
Subscriptions receivable............................................................................... 213,750
Inventories............................................................................................ 460,585 1,933,317
Prepaid expenses....................................................................................... 341,095 346,175
Prepaid television time................................................................................ 125,175 307,160
Deferred tax asset..................................................................................... -- 44,289
---------- ----------
Total current assets................................................................................ 2,105,362 9,497,327
PROPERTY AND EQUIPMENT, net............................................................................ 28,638 138,777
OTHER ASSETS........................................................................................... 134,003 99,093
DEPOSITS............................................................................................... -- 19,462
---------- ----------
TOTAL ASSETS........................................................................................... $2,268,003 $9,754,659
========== ==========
</TABLE>
2
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997
------------ -----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable....................................................................................... $ 314,614 $ 443,968
Accrued expenses....................................................................................... 9,243 627,017
Income taxes payable................................................................................... -- 574,912
Note payable, current.................................................................................. -- --
----------- ----------
Total current liabilities........................................................................... 323,857 1,645,897
NOTE PAYABLE, net of current portion 300,000 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 50,000 shares authorized; no shares issued or outstanding
Common stock, $0.001 par value; 150,000,000 shares authorized; 23,092,035 and 25,652,000 shares issued
and outstanding, respectively......................................................................... 23,092 25,652
Common stock subscribed................................................................................ 143 --
Additional paid-in capital 2,720,527 7,799,063
Retained earnings (accumulated deficit) (1,099,616) 944,047
Note receivable issued for common stock................................................................ -- (660,000)
----------- ----------
Total stockholders' equity.......................................................................... 1,644,146 8,108,762
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................................................. $ 2,268,003 $9,754,659
=========== ==========
</TABLE>
3
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(UNAUDITED) FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------
1996 1997
------------ -------------
<S> <C> <C>
NET REVENUES........................................................................................ $ 3,102,242 $12,615,529
COST OF GOODS SOLD.................................................................................. 1,158,169 2,654,283
----------- -----------
GROSS PROFIT........................................................................................ 1,944,073 9,961,246
OPERATING EXPENSES:
Selling expenses.................................................................................... 2,477,356 7,390,318
General and administrative expenses................................................................. -- 1,449,834
----------- -----------
Total operating expenses......................................................................... 2,477,356 8,840,152
----------- -----------
OPERATING INCOME (LOSS)............................................................................. (533,283) 1,121,094
OTHER INCOME, net:
Other income........................................................................................ 156,313
Interest expense.................................................................................... (2,540) (1,240)
Interest income..................................................................................... 11,821
Dividend income..................................................................................... -- 99,423
----------- -----------
Total other income, net.......................................................................... (2,540) 266,317
----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES..................................................... (535,823) 1,387,411
PROVISION FOR INCOME TAXES.......................................................................... -- 600,749
----------- -----------
NET INCOME (LOSS)................................................................................... $ (535,823) $ 786,662
=========== ===========
Earnings Per common share).......................................................................... $ (0.02) $ 0.03
=========== ===========
Weighted average number of common shares outstanding................................................ 21,628,433 25,518,175
=========== ===========
</TABLE>
4
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Six Months Ended June 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
Common stock
Common stock subscribed Additional
------------ ----------- paid-in
Shares Amount Shares Amount capital
------------ --------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
BALANCES, December 31, 1996................ 25,453,700 $ 25,454 155,800 $ 156 $7,767,855
Shares issued for cash..................... 5,000 5 12,495
Shares issued for services................. 37,500 37 18,713
Issuance of shares previously subscribed... 155,800 156 (155,800) (156)
Net income................................. ---------- --------- ---------- ----- ----------
BALANCES, March 31, 1997 25,652,000 $ 25,652 0 $ 0 $7,799,063
========== ========= ---------- ===== ==========
<CAPTION>
Total
Retained Note stockholders'
earnings receivable equity
---------- ---------- -------------
BALANCES, December 31, 1996................ $ 157,385 $(660,000) $7,290,850
Shares issued for cash..................... 12,500
Shares issued for services................. 18,750
Issuance of shares previously subscribed...
Net income................................. 786,662 786,662
---------- --------- ----------
BALANCES, March 31, 1997 $ 944,047 $(660,000) $8,108,762
========== ========= ==========
</TABLE>
5
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED
(UNAUDITED) JUNE 30,
1996 1997
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................................... $ (535,823) $ 786,662
Adjustments to reconcile net income to net cash used in operating activities :
Depreciation and amortization.................................................................. 16,946 37,017
Provision for doubtful accounts................................................................ 16,818 (33,039)
Reserve for obsolesence........................................................................ -- 110,771
Expense recorded upon subscription of shares................................................... 355,000 --
Changes in assets and liabilities :
Accounts receivable........................................................................... (286,746) (395,196)
Inventories................................................................................... (414,377) (509,159)
Prepaid expenses.............................................................................. (177,026) (36,891)
Prepaid television time....................................................................... (125,175) 60,001
Accounts payable.............................................................................. 248,239 (304,902)
Accrued expenses.............................................................................. (12,600) (76,205)
Income taxes payable.......................................................................... -- 323,349
---------- ----------
Net cash used in operating activities....................................................... (914,744) (37,583)
CASH FLOWS FROM INVESTING ACTIVITIES :
Prepaid advances................................................................................ 106,838 (100,000)
Purchases of property and equipment............................................................. -- (41,667)
---------- ----------
Net cash provided by investing activities................................................... 106,838 (141,667)
CASH FLOWS FROM FINANCING ACTIVITIES :
Payments on notes payable....................................................................... -- (28,812)
Proceeds from subscriptions receivable.......................................................... -- 189,500
Proceeds from long term loan 300,000 --
Proceeds from issuance of common stock.......................................................... 1,182,425 31,250
---------- ----------
Net cash provided by financing activities................................................... 1,482,425 191,938
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................................ 674,519 12,688
CASH AND CASH EQUIVALENTS, beginning of period.................................................. 122,096 5,063,585
---------- ----------
CASH AND CASH EQUIVALENTS, end of period........................................................ $ 796,615 $5,076,273
========== ==========
</TABLE>
6
<PAGE>
EXHIBIT 10.13
BUSINESS LOAN AGREEMENT
This Agreement dated as of July 14, 1997 is between Bank of America
National Trust and Savings Association (the "Bank") and Prolong Super
Lubricants, Inc. (the "Borrower").
1. LINE OF CREDIT AMOUNT AND TERMS.
1.1 Line of Credit Amount.
---------------------
(a) During the availability period described below, the Bank will
provide a line of credit to the Borrower. The amount of the line of credit (the
"Commitment") is Four Million Dollars ($4,000,000).
(b) This is a revolving line of credit providing for cash
advances. During the availability period, the Borrower may repay principal
amounts and reborrow them.
(c) The Borrower agrees not to permit the outstanding principal
balance of advances under the line of credit to exceed the Commitment.
1.2 Availability Period. The line of credit is available between the
-------------------
date of this Agreement and July 31, 1999 (the "Expiration Date") unless the
Borrower is in default.
1.3 Interest Rate.
-------------
(a) Unless the Borrower elects an optional interest rate as
described below, the interest rate is the Bank's Reference Rate.
(b) The Reference Rate is the rate of interest publicly announced
from time to time by the Bank in San Francisco, California, as its Reference
Rate. The Reference Rate is set by the Bank based on various factors, including
the Bank's costs and desired return, general economic conditions and other
factors, and is used as a reference point for pricing some loans. The Bank may
price loans to its customers at, above, or below the Reference Rate. Any change
in the Reference Rate shall take effect at the opening of business on the day
specified in the public announcement of a change in the Bank's Reference Rate.
1.4 Repayment Terms.
----------------
(a) The Borrower will pay interest on July 31, 1997, and then
monthly thereafter until payment in full of any principal outstanding under this
line of credit.
(b) The Borrower will repay in full all principal and any unpaid
interest or other charges outstanding under this line of credit no later than
the Expiration Date.
<PAGE>
(c) Any interest period for an optional interest rate (as
described below) shall expire no later than the Expiration Date.
1.5 Optional Interest Rates. Instead of the interest rate based on
-----------------------
the Bank's Reference Rate, the Borrower may elect the optional interest rates
listed below during interest periods agreed to by the Bank and the Borrower.
The optional interest rates shall be subject to the terms and conditions
described later in this Agreement. Any principal amount bearing interest at an
optional rate under this Agreement is referred to as a Apportions The following
optional interest rate is available:
(a) the LIBOR Rate plus two and one quarter (2.25) percentage
points during the availability period.
1.6 LIBOR Rate. The election of LIBOR Rates shall be subject to the
----------
following terms and requirements:
(a) The interest period during which the LIBOR Rate will be in
effect will be one, two, three, four, five, six, seven, eight, nine, ten,
eleven, or twelve months. The first day of the interest period must be a day
other than a Saturday or a Sunday on which the Bank is open for business in
California, New York and London and dealing in offshore dollars (a LABOR Banking
Days). The last day of the interest period and the actual number of days during
the interest period will be determined by the Bank using the practices of the
London interbank market.
(b) Each LIBOR Rate Portion will be for an amount not less than
Five Hundred Thousand Dollars ($500,000).
(c) The LABOR Rate means the interest rate determined by the
following formula, rounded upward to the nearest 1/100 percent. (All amounts in
the calculation will be determined by the Bank as of the first day of the
interest period.)
LIBOR Rate = London Inter-Bank Offered Rate
------------------------------
(1.00 - Reserve Percentage)
Where,
(i) "London Inter-Bank Offered Rate" means the interest
rate at which the Bank's London Branch, London, Great
Britain, would offer U.S. dollar deposits for the
applicable interest period to other major banks in the
London inter-bank market at approximately 11:00 a.m.
London time two (2) London Banking Days before the
commencement of the interest period. A London Banking
Day. is a day on which the Bank's London Branch is open
for business and dealing in offshore dollars.
(ii) "Reserve Percentage" means the total of the maximum
reserve percentages for determining the reserves to be
maintained by member banks of the Federal Reserve
System for Eurocunency Liabilities, as defined in
Federal Reserve Board Regulation D, rounded upward to
the nearest 1/100 of one percent. The percentage will
be expressed as a decimal, and will include, but
2
<PAGE>
not be limited to, marginal, emergency, supplemental,
special, and other reserve percentages.
(d) The Borrower shall irrevocably request a LIBOR Rate Portion no
later than 12:00 noon San Francisco time on the LIBOR Banking Day preceding the
day on which the London Inter-Bank Offered Rate will be set, as specified above.
(e) The Borrower may not elect a LIBOR Rate with respect to any
principal amount which is scheduled to be repaid before the last day of the
applicable interest period.
(f) Any portion of the principal balance already bearing interest at
the LIBOR Rate will not be converted to a different rate during its interest
period.
(g) Each prepayment of a LIBOR Rate Portion, whether voluntary, by
reason of acceleration or otherwise, will be accompanied by the amount of
accrued interest on the amount prepaid and a prepayment fee as described below.
A "prepayment" is a payment of an amount on a date earlier than the scheduled
payment date for such amount as required by this Agreement. The prepayment fee
shall be equal to the amount (if any) by which:
(i) the additional interest which would have been payable
during the interest period on the amount prepaid had it
not been prepaid, exceeds
(ii) the interest which would have been recoverable by the
Bank by placing the amount prepaid on deposit in the
domestic certificate of deposit market, the eurodollar
deposit market, or other appropriate money market
selected by the Bank, for a period starting on the date
on which it was prepaid and ending on the last day of
the interest period for such portion (or the scheduled
payment date for the amount prepaid, if earlier).
(h) The Bank will have no obligation to accept an election for a LIBOR
Rate Portion if any of the following described events has occurred and is
continuing:
(i) Dollar deposits in the principal amount, and for
periods equal to the interest period, of a LIBOR Rate
Portion are not available in the London interbank
market; or
(ii) the LIBOR Rate does not accurately reflect the cost of
a LIBOR Rate Portion.
2. FEES AND EXPENSES.
2.1 Unused Commitment Fee. The Borrower agrees to pay a fee on any
---------------------
difference between the Commitment and the amount of credit it actually uses,
determined by the weighted average loan balance maintained during the specified
period. The fee will be calculated at .25% per year. This fee is due on
September 30, 1997, and quarterly thereafter until July 31, 1999.
3
<PAGE>
2.2 Reimbursement Costs.
--------------------
(a) The Borrower agrees to reimburse the Bank for any expenses it
incurs in the preparation of this Agreement and any agreement or instrument
required by this Agreement. Expenses include, but are not limited to,
reasonable attorneys' fees, including any allocated costs of the Bank's in-house
counsel.
(b) The Borrower agrees to reimburse the Bank for the cost of
periodic audits and appraisals of the personal property collateral securing this
Agreement, at such intervals as the Bank may reasonably require.
3. PERSONAL PROPERTY COLLATERAL. The Borrower's obligations to the Bank
under this Agreement will be secured by personal property the Borrower now owns
or will own in the future as listed below. The collateral is further defined in
security agreement(s) executed by the Borrower. In addition, all personal
property collateral securing this Agreement shall also secure all other present
and future obligations of the Borrower to the Bank (excluding any consumer
credit covered by the federal Truth in Lending law, unless the Borrower has
otherwise agreed in writing).. All personal property collateral securing any
other present or Future obligations of the Borrower to the Bank shall also
secure this Agreement.
(a) Machinery and equipment.
(b) Inventory.
(c) Receivables.
4. DISBURSEMENTS, PAYMENTS AND COSTS.
4.1 Telephone and Telefax Authorization.
------------------------------------
(a) The Bank may honor telephone or telefax instructors for
advances or repayments or for the designation of optional interest rates given
by any one of the individuals authorized to sign loan agreements on behalf of
the Borrower, or any other individual designated by any one of such authorized
signers.
(b) Advances will be deposited in and repayments will be
withdrawn from the Borrower's account number #07604-16528, or such other of the
------------
Borrower's accounts with the Bank as designated in writing by the Borrower.
(c) The Borrower indemnifies and excuses the Bank (including its
officers, employees, and agents) from all liability, loss, and costs in
connection with any act resulting from telephone or telefax instructions it
reasonably believes are made by any individual authorized by the Borrower to
give such instructions. This indemnity and excuse will survive this Agreement's
termination.
4.2 Direct Debit. (Pre-Billing). The Borrower agrees that the Bank
------------
will debit the Borrower's deposit account number #07604-16528, or such other of
the Borrower's accounts with the
4
<PAGE>
Bank as designated in writing by the Borrower (the "Designated Account") on the
date each payment of principal and interest and any fees from the Borrower
becomes due (the "Due Date"). Approximately 10 days prior to each Due Date, the
Bank will mail to the Borrower a statement of the amounts that are expected to
be due on that Due Date, based on current information (the "Billed Amounts").
The Bank will debit the Designated Account for the Billed Amount, regardless of
the actual amount due on that date (the "Accrued Amount"). If the Billed Amount
debited to the Designated Account differs from the Accrued Amount, the
discrepancy will be added or subtracted from the amount due on the next due
date. Regardless of any such discrepancy, interest will continue to accrue based
on the actual amount of principal outstanding without compounding. The Bank will
not pay the Borrower interest on any overpayment. If there are insufficient
funds in the Designated Account on the date the Bank enters any debit authorized
by this Agreement, the debit will be reversed.
4.3 Banking Days. Unless otherwise provided in this Agreement, a
------------
banking day is a day other than a Saturday or a Sunday on which the Bank is open
for business in California. All payments and disbursements which would be due
on a day which is not a banking day will be due on the next banking day. All
payments received on a day which is not a banking day will be applied to the
credit on the next banking day.
4.4 Additional Costs. The Borrower will pay the Bank, on demand, for
----------------
the Bank's costs or losses arising from any statute or regulation, or any
request or requirement of a regulatory agency which is applicable to all
national banks or a class of all national banks. The costs and losses will be
allocated to the loan in a manner determined by the Bank, using any reasonable
method. The costs include the following: (a) any reserve or deposit
requirements; and (b) any capital requirements relating to the Bank's assets and
commitments for credit.
4.5 Interest Calculation. Except as otherwise stated in this
--------------------
Agreement, all interest and fees, H any, will be Computed on the basis of a 360-
day year and the actual number of days elapsed. This results in more interest
or a higher fee than if a Monday year is used. Installments of principal which
are not paid when due under this Agreement shall continue to bear interest until
paid.
4.6 Default Rate. Upon the occurrence and during the continuation of
------------
any default under this Agreement, principal amounts outstanding under this
Agreement will at the option of the Bank bear interest at a rate which is three
(3.00) percentage points higher than the rate of interest otherwise provided
under this Agreement. This will not constitute a waiver of any default.
4.7 Interest Compounding. At the Bank's sole option in each
--------------------
instance, any interest, fees or costs which are not paid when due under this
Agreement shall bear interest from the due date at the Bank's Reference Rate
plus three (3.00) percentage points. This may result in compounding of
interest.
5. CONDITIONS. The Bank must receive any documents and other items it may
reasonably require, including but not limited to the following items' in form
and content acceptable to the Bank, before it is required to extend any credit
to the Borrower under this Agreement.
5
<PAGE>
5.1 Authorizations. Evidence that the execution, delivery and
--------------
performance by the Borrower and each guarantor of this Agreement and any
instrument or agreement required under this Agreement have been duly authorized.
5.2 Governing Documents. A copy of the Borrower's articles of
-------------------
incorporation.
5.3 Security Agreements. Signed original security agreements,
-------------------
assignments, financing statements and fixture flings (together with collateral
in which the Bank requires a possessory security interest), and deeds of trust
which the Bank requires.
5.4 Evidence of Priority. Evidence that security interests and liens
--------------------
in favor of the Bank are valid, enforceable, and prior to all others' rights and
interests, except those the Bank consents to in writing.
5.5 Guaranty. A guaranty signed by Prolong International Corporation
--------
in the amount of Four Million Dollars ($4,000,000).
6. REPRESENTATIONS AND WARRANTIES. When the Borrower signs this
Agreement, and until the Bank is repaid in full, the Borrower makes the
following representations and warranties. Each request for an extension of
credit constitutes a renewed representation:
6.1 Organization of Borrower. The Borrower is a corporation duly
------------------------
formed and existing under the laws of the state where organized.
6.2 Authorization. This Agreement has been duly authorized and is
-------------
enforceable without conflict with any laws or any other obligation of the
Borrower.
6.3 Good Standing. In each state in which the Borrower does
-------------
business, it is properly licensed, in good standing, and, where required, in
compliance with fictitious name statutes.
6.4 Lawsuits. There is no lawsuit, tax claim or other dispute
--------
pending or threatened against the Borrower, which, if lost, would impair the
Borrower's financial condition or ability to repay the loan, except as have been
disclosed in writing to the Bank.
6.5 Permits, Franchises. The Borrower possesses all permits,
-------------------
memberships, franchises, contracts and licenses required and all trademark
rights, brace name rights, patent rights and fictitious name rights necessary to
enable it to conduct the business in which it is now engaged.
6.6 Location of Borrower. The Borrower's place of business (or, if
--------------------
the Borrower has more than one place of business, its chief executive office) is
located at the address listed under the Borrower's signature on this Agreement.
7. COVENANTS. The Borrower agrees, so long as credit is available under
this Agreement and until the Bank is repaid in full:
7.1 Use of Proceeds. To use the proceeds of the credit only for
---------------
working capital purposes.
6
<PAGE>
7.2 Financial Information. To provide the following financial
---------------------
information and statements in form and content acceptable to the Bank, and such
additional information as requested by the Bank from time to time:
(a) Within 90 days of the Borrower's fiscal year end, the Borrower's
annual financial statements. These financial statements must be audited (with
an unqualified opinion) by a certified public accountant ("CPA") acceptable to
the Bank. The statements shall be prepared on a consolidated and consolidating
basis.
(b) Within 45 days of the period's end, the Borrower's quarterly
financial statements. These financial statements may be Borrower prepared. The
statements shall be prepared on a consolidated and consolidating basis.
(c) Upon the Bank's request, statements showing an aging of the
Borrower's receivables.
(d) Upon the Bank's request, a statement showing an aging of
accounts payable.
(e) Upon the Bank's request, an inventory listing, which shall include
a description of the inventory, its location and cost, and such other
information as the Bank may require.
(f) Borrower's annual projections for the forthcoming fiscal year
by March 31st of each year.
7.3 Financial Covenants. To maintain the following financial
-------------------
covenants on a consolidated basis:
(a) Quick Ratio. A ratio of quick assets to current liabilities
-----------
of at least 1.50:1.0.
"Quick assets" means cash, short-term cash investments, net trade
receivables and marketable securities not classified as long-term
investments. "Current liabilities" shall include (a) all
obligations classified as current liabilities under generally
accepted accounting principles, plus (b) all principal amounts
outstanding under revolving lines of credit, whether classified as
current or long-term, which are not already included under (a)
above.
(b) Tangible Net Worth. Tangible net worth equal to at least the
------------------
amounts indicated for each period specified below:
Period Amount
------ ------
For the quarter ending
September 30, 1997 through
December 30, 1997 $7,250,000
7
<PAGE>
For the quarter ending
December 31, 1997 and
thereafter $8,000,000
"Tangible net worth" means the gross book value of the Borrower's
assets (excluding goodwill, patents, trademarks, trade names,
organization expense, treasury stock, unamortized debt discount
and expense, capitalized or deferred research and development
costs, deferred marketing expenses, deferred receivables, and
other like intangibles, and monies due from affiliates, officers,
directors, employees, or shareholders, of the Borrower) plus
subordinated debt less total liabilities, including but not
limited to accrued and deferred income taxes, and any reserves
against assets.
(c) Total Liabilities to Tangible Net Worth Ratio. A ratio of total
---------------------------------------------
liabilities not subordinated to tangible net worth not exceeding 1:00:1.0.
"Total liabilities not subordinated". means the sum of
current liabilities plus long term liabilities, excluding
subordinated debt.
(d) Profitability. A positive net income after taxes, interest and
-------------
extraordinary items for each annual accounting period.
(e) Limitation on Losses. Not to incur a net loss after taxes,
--------------------
interest and extraordinary items in any two consecutive quarterly accounting
periods.
7.4 Other Debts. Not to have outstanding or incur any direct or
-----------
contingent Me Bank), or become liable for the liabilities of others without the
Bank's written consent. This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade
credit.
(b) Endorsing negotiable instruments received in the usual course
of business.
(c) Obtaining surety bonds in the usual course of business.
(d) Liabilities and lines of credit in existence on the date of
this Agreement disclosed in writing to the Bank.
(e) Additional debts which do not exceed a total principal amount of
Three Hundred Thousand Dollars ($300,000) outstanding at any one time.
7.5 Other Liens. Not to create, assume, or allow any security
-----------
interest or lien (including judicial liens) on property the Borrower now or
later owns, except:
(a) Deeds of trust and security agreements in favor of the Bank.
8
<PAGE>
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement disclosed in
writing to the Bank.
(d) Additional purchase money security interests in personal
property acquired after the date of this Agreement, if the total principal
amount of debts secured by such liens does not exceed Three Hundred Thousand
Dollars ($300,000) at any one time.
7.6 Capital Expenditures. Not to spend or incur obligations
--------------------
(including the total amount of any capital leases) for more than Three Hundred
Thousand Dollars ($300,000) in any single fiscal year to acquire fixed or
capital assets.
7.7 Notices to Bank. To promptly notify the Bank in writing of:
---------------
(a) any lawsuit over One Hundred Thousand Dollars (S100,000)
against the Borrower or any guarantor (or any trustor).
(b) any substantial dispute between the Borrower or any guarantor
(or any trustor) and any government authority.
(c) any failure to comply with this Agreement.
(d) any material adverse change in the Borrower's or any
guarantor's (or any trustor's) business condition (financial or otherwise),
operations, properties or prospects, or ability to repay the credit.
(e) any change in the Borrower's name, legal structure, place of
business, or chief executive office if the Borrower has more than one place of
business.
7.8 Audits. To allow the Bank and its agents to inspect the
------
Borrower's properties and examine, audit, and make copies of books and records
at any reasonable time. If any of the Borrower's properties, books or records
are in the possession of a third party, the Borrower authorizes that third party
to permit the Bank or its agents to have access to perform inspections or audits
and to respond to the Bank's requests for information concerning such
properties, books and records. The Bank has no duty to inspect the Borrower's
properties or to examine, audit, appraise or copy books and records and the Bank
shall not incur any obligation or liability by reason of not making any such
inspection or inquiry. In the event that the Bank inspects the Borrower's
properties or examines, audits, appraises or copies books and records, the Bank
will be acting solely for the purposes of protecting the Bank's security and
preserving the Bank's rights under this Agreement. Neither the Borrower nor any
other party is entitled to rely on any inspection or other inquiry by the Bank.
The Bank owes no duty of care to protect the Borrower or any other party
against, or to inform the Borrower or any other party of, any adverse condition
that may be observed as affecting the Borrower's properties or premises, or the
Borrower's business. The Bank may in its discretion disclose to the Borrower or
any other party any findings made as a result of, or in connection with, any
inspection of the Borrower's properties.
7.9 Compliance win Laws. To comply with the laws (including any
-------------------
fictitious name statute), regulations, and orders of any government body with
authority over the Borrower's business.
9
<PAGE>
7.10 Perfection of Liens. To help the Bank perfect and protect Its
-------------------
security Interests for related costs it incurs to protect its security interests
and liens, and reimburse it for related costs it incurs to protect its security
interests and liens
7.11 Insurance.
---------
(a) To maintain an risk property damage insurance policies
covering the tangible property comprising the collateral. Each insurance policy
must be acceptable to the Bank and include a lender's loss payable endorsement
in favor of the Bank.
(b) To maintain insurance as is usual for the Borrower's
business.
(c) Upon the request of the Bank, to deliver to the Bank a copy
of each insurance policy, or, if permitted by the Bank, a certificate of
insurance listing all insurance in force.
7.12 Additional Negative Covenants. Not to, without the Banks
-----------------------------
written consent:
(a) engage in any business activities substantially different
from the Borrower's present business;
(b) liquidate or dissolve the Borrower's business;
(c) enter into any consolidation, merger, or other combination,
or become a partner in a partnership, a member of a joint venture, or a member
of a limited liability company;
(d) sell, assign, lease, transfer or otherwise dispose of any
assets for less than fair market value, or enter into any agreement to do so.
(e) sell, assign, lease, transfer or otherwise dispose of all or
a substantial part of the Borrower's business or the Borrower's assets;
(f) enter into any sale and leaseback agreement covering any of
its fixed or capital assets.
(g) acquire or purchase a business or its assets;
(h) voluntarily suspend its business for more than one day
(except for weekends and state or federal holidays).
8. HAZARDOUS WASTE INDEMNIFICATION. The Borrower will indemnify and hold
harmless the Bank from any loss or liability directly or indirectly arising out
of the use, generation, manufacture, production, storage, release, threatened
release, discharge, disposal or presence of a hazardous substance. This
indemnity will apply whether the hazardous substance is on, under or about the
Borrower's property or operations or property leased to the Borrower. The
indemnity includes but is not limited to attorneys' fees (including the
reasonable estimate of the allocated cost of in-house counsel and staff). The
indemnity extends to the Bank, its parent, subsidiaries and all of their
directors, officers, employees, agents, successors, attorneys and assigns.
"Hazardous substances" means any substance, material or waste that is or becomes
designated or regulated as "toxic," "hazardous," "pollutant," or "contaminant"
or a similar designation or regulation under any federal, state or local law
10
<PAGE>
(whether under common law, statute, regulation or otherwise) or judicial or
administrative interpretation of such, including without limitation petroleum or
natural gas. This indemnity will survive repayment of the Borrower's
obligations to the Bank.
9. DEFAULT. If any of the following events occurs, the Bank may do one or
more of the following: declare the Borrower in default, stop making any
additional credit available to the Borrower, and require the Borrower to repay
its entire debt immediately and without prior notice.. If a bankruptcy petition
is filed with respect to the Borrower, the entire debt outstanding under this
Agreement will automatically become due immediately.
9.1 Failure to Pay. The Borrower fails to make a payment under this
--------------
Agreement when due.
9.2 Lien Priority. The Bank fails to have an enforceable first lien
-------------
(except for any prior liens to which the Bank has consented in writing) on or
security interest in any property given as security for this Agreement (or any
guaranty).
9.3 False Information. The Borrower or any guarantor (or any
-----------------
trustor) has given the Bank false or misleading information or representations.
9.4 Bankruptcy and Receivers. The Borrower or any guarantor (or any
------------------------
trustor) or any general partner of the Borrower files a bankruptcy petition, a
bankruptcy petition is filed against the Borrower or any guarantor (or any
trustor) or any general partner of the Borrower or the Borrower or any guarantor
(or any trustor) or any general partner of the Borrower makes a general
assignment for the benefit of creditors; or a receiver or similar official is
appointed for the Borrower's or any guarantor's (or any trustors) business, or
the business is terminated or any guarantor is liquidated or dissolved.
9.5 Lawsuits. Any lawsuit or lawsuits are filed on behalf of one or
--------
more trade creditors against the Borrower or any guarantor (or any trustor) in
an aggregate amount of One Hundred Thousand Dollars ($100,000) or more in excess
of any insurance coverage.
9.6 Judgments. Any judgments or arbitration awards are entered
---------
against the Borrower or any guarantor (or any trustor), or the Borrower or any
guarantor (or any trustor) enters into any settlement agreements with respect to
any litigation or arbitration, in an aggregate amount of One Hundred Thousand
Dollars ($100,000) or more in excess of any insurance coverage.
9.7 Government Action. Any government authority takes action that
-----------------
the Bank believes materially adversely affects the Borrower's or any guarantor's
(or any trustor's) financial condition or ability to repay.
9.8 Material Adverse Change. A material adverse change occurs in the
-----------------------
Borrower's or any guarantor's (or any trustor's) business condition (financial
or otherwise), operations, properties or prospects, or ability to repay the
credit.
9.9 Cross-default. Any default occurs under any agreement in
-------------
connection with any credit the Borrower or any guarantor (or any trustor) or any
of the Borrower's related entices or
11
<PAGE>
affiliates has obtained from anyone else or which the Borrower or any guarantor
(or any trustor) or any of the Borrower's related entices or affiliates has
guaranteed.
9.10 Default Under Related Documents. Any guaranty, security
-------------------------------
agreement or other document required by this Agreement is violated or no longer
in effect.
9.11 Other Bank Agreements. The Borrower or any guarantor (or any
---------------------
trustor) fails to meet the conditions of, or fails to perform any obligation
under any other agreement the Borrower or any guarantor (or any trustor) has
with the Bank or any affiliate of the Bank.
9.12 Other Breach Under Agreement. The Borrower fails to meet the
----------------------------
conditions of, or fails to perform any obligation under, any term of this
Agreement not specifically referred to in this Article.. This includes any
failure or anticipated failure by the Borrower to comply with any financial
covenants set forth in this Agreement, whether such failure is evidenced by
financial statements delivered to the Bank or is otherwise known to the Borrower
or the Bank.
10. ENFORCING THIS AGREEMENT; MISCELLANEOUS.
10.1 GAAP. Except as otherwise stated in this Agreement, all
----
financial information provided to the Bank and all financial covenants will be
made under generally accepted accounting principles, consistently applied.
10.2 California Law. This Agreement is governed by California law.
--------------
10.3 Successors and Assigns. This Agreement is binding on the
----------------------
Borrower's and the Bank's successors and assignees. The Borrower agrees that it
may not assign this Agreement without the Bank's prior consent.
10.4 Arbitration.
------------
(a) This paragraph concerns the resolution of any controversies or
claims between the Borrower and the Bank, including but not limited to those
that arise from:
(i) This Agreement including any renewals, extensions or
modifications of this Agreement);
(ii) Any document, agreement or procedure related to or
delivered in connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business
conducted between the Borrower and the Bank, including
claims for injury to persons, property or business
interests (tort).
(b) At the request of the Borrower or the Bank, any such controversies
or claims will be settled by arbitration in accordance with the United States
Arbitration Act. The United States Arbitration Act will apply even though this
Agreement provides that it is governed by California law.
12
<PAGE>
(c) Arbitration proceedings will be administered by the American
Arbitration Association rules of arbitration.
(d) For purposes of the application of the statute of limitations, the
filing of an arbitration pursuant to this paragraph is the equivalent of the
filing of a lawsuit, and any claim or controversy which may be arbitrated under
this paragraph is subject to any applicable statute of limitations. The
arbitrators well have the authority to decide whether any such claim or
controversy is barred by the statute of limitations and, if so, to dismiss the
arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitrable, the
arbitrators we have the authority to resolve any such dispute.
(f) The decision that results from an arbitration proceeding may be
submitted to any authorized court of law to be confirmed and enforced.
(g) The procedure described above will not apply if the controversy or
claim, at the time of the proposed submission to arbitration, arises from or
relates to an obligation to the Bank secured by real property located in
California. In this case, both the Borrower and the Bank must consent to
submission of the claim or controversy to arbitration. If both parties do not
consent to arbitration, the controversy or claim will be settled as follows:
(i) The Borrower and the Bank will designate a referee (or a
panel of referees) selected under the auspices of the
American Arbitration Association in the same manner as
arbitrators are selected in Association-sponsored
proceedings;
(ii) The designated referee (or the panel of referees) will
be appointed by a court as provided in California Code
of Civil Procedure Section 638 and the following
related sections;
(iii) The referee (or the presiding referee of the panel)
will be an active attorney or a refired judge; and
(iv) The award that results from the decision of the referee
(or the panes will be entered as a judgment in the
court that appointed the referee, in accordance with
the provisions of California Code of Civil Procedure
Sections 644 and 645.
(h) This provision does not limit the right of the Borrower or the
Bank to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any real or personal
property collateral; or
(iii) act in a court of law, before, during or after the
arbitration proceeding to obtain:
13
<PAGE>
(A) an interim remedy; and/or
(B) additional or supplementary remedies.
(i) The pursuit of or a successful action for interim, additional or
supplementary remedies, or the filing of a court action, does not constitute a
waiver of the right of the Borrower or the Bank, including the suing party, to
submit the controversy or claim to arbitration if the other party contests the
lawsuit. However, if the controversy or claim arises from or relates to an
obligation to the Bank which is secured by real property located in California
at the time of the proposed submission to arbitration, this right is limited
according to the provision above requiring the consent of both the Borrower and
the Bank to seek resolution through arbitration.
(j) If the Bank forecloses against any real property securing this
Agreement, the Bank has the option to exercise the power of sale under the deed
of trust or mortgage, or to proceed by judicial foreclosure.
10.5 Severability; Waivers. If any part of this Agreement is not
---------------------
enforceable, the rest of the Agreement may be enforced. The Bank retains all
rights, even if it makes a loan after default. If the Bank waives a default, it
may enforce a later default. Any consent or waiver under this Agreement must be
in writing.
10.6 Attorneys' Fees. The Borrower shall reimburse the Bank for any
---------------
reasonable costs and attorneys' fees incurred by the Bank in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and in
connection with any amendment, waiver, "workout" or restructuring under this
Agreement. In the event of a lawsuit or arbitration proceeding, the prevailing
party is entitled to recover costs and reasonable attorneys' fees incurred in
connection with the lawsuit or arbitration proceeding, as determined by the
court or arbitrator. In the event that any case is commenced by or against the
Borrower under the Bankruptcy Code (Title 11, United States Code) or any similar
or successor statute, the Bank is entitled to recover costs and reasonable
attorneys' fees incurred by the Bank related to the preservation, protection, or
enforcement of any rights of the Bank in such a case. As used in this
paragraph "attorneys' fees" includes the allocated costs of the Bank's in-house
counsel.
10.7 One Agreement. This Agreement and any related security or other
-------------
agreements required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the
Bank and the Borrower concerning this credit;
(b) replace any prior oral or written agreements between the Bank
and the Borrower concerning this credit; and
(c) are intended by the Bank and the Borrower as the final, complete
and exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
14
<PAGE>
10.8 Indemnification. The Borrower will indemnify and hold the Bank
---------------
harmless from any loss, liability, damages, judgments, and costs of any kind
relating to or arising directly or indirectly out of
(a) this Agreement or any document required hereunder,
(b) any credit extended or committed by the Bank to the Borrower
hereunder, and
(c) any litigation or proceeding related to or arising out of
this Agreement, any such document, or any such credit.
This indemnity includes but is not limited to attorneys' fees (including the
allocated cost of in-house counsel). This indemnity extends to the Bank, its
parent, subsidiaries and all of their directors, officers, employees, agents,
successors, attorneys, and assigns. This indemnity will survive repayment of
the Borrower's obligations to the Bank. All sums due to the Bank hereunder
shall be obligations of the Borrower, due and payable immediately without
demand.
This Agreement is executed as of the date stated at the top of the first page.
<TABLE>
<CAPTION>
<S> <C>
Bank of America National Trust and Savings
Association Prolong Super Lubricants, Inc.
By /s/ David M. Surch /s/ Elton Alderman
- ------------------------------------------ -------------------------------------------------
Name: David M. Surch Name: Elton Alderman
Title: Vice President Title: President
By /s/ Thomas C. Billstein
-------------------------------------------------
Name: Thomas C. Billstein
Title: Secretary
Address where notices to Bank are to be sent: Address where notices to Borrower are to be sent:
300 S. Harbor Boulevard 1210 N. Barsten Way
Anaheim, California 92805 Anaheim, California 92806
</TABLE>
15
<PAGE>
Security Agreement
(Receivables, Inventory and Equipment)
1. THE SECURITY. The undersigned Prolong Super Lubricants, Inc. ("Borrower")
hereby assigns and grants to Bank of America National Trust and Savings
Association ("Bank") a security interest in the following described property
("Collateral"):
A. All of the following, whether now owned or hereafter acquired by
Borrower: accounts, contract rights, chattel paper, instruments and
deposit accounts.
B. All inventory now owned or hereafter acquired by Borrower.
C. All machinery, furniture, futures and other equipment of every type
now owned or hereafter acquired by Borrower (including, but not
limited to, the equipment described in the attached Equipment
Description, if any).
D. All negotiable and nonnegotiable documents of title now owned or
hereafter acquired by Borrower covering any of the above-described
property.
E. All rights under contracts of insurance now owned or hereafter
acquired by Borrower covering any of the above-described property.
F. All proceeds, product, rents and profits now owned or hereafter
acquired by Borrower of any of the above-described property.
G. All books and records now owned or hereafter acquired by Borrower
pertaining to any of the above-described property, including but not
limited to any computer-readable memory and any computer hardware or
software necessary to process such memory ("Books and Records").
2. THE INDEBTEDNESS. The Collateral secures and will secure all Indebtedness
of Borrower to Bank. For the purposes of this Agreement, "Indebtedness" means
all loans and advances made by Bank to Borrower and all other obligations and
liabilities of Borrower to Bank, whether now existing or hereafter incurred or
created, whether voluntary or involuntary, whether due or not due, whether
absolute or contingent, or whether incurred directly or acquired by Bank by
assignment or otherwise. Unless Borrower shall have otherwise agreed in
writing, Indebtedness, for the purposes of this Agreement, shall not include
"consumer credit" subject to the disclosure requirements of the Federal Truth in
Lending Act or any regulations promulgated thereunder.
3. BORROWER'S COVENANTS. Borrower covenants and warrants that unless
compliance is waived by Bank in writing:
A. Borrower will properly preserve the Collateral; defend the Collateral
against any adverse claims and demands; and keep accurate Books and
Records.
<PAGE>
B. Borrower has notified Bank in writing of, and will notify Bank in
writing prior to any change in, the locations of (i) Borrower's place
of business or Borrower's chief executive office if Borrower has more
than one place of business, and (ii) any Collateral, including the
Books and Records.
C. Borrower will notify Bank in writing prior to any change in Borrower's
name, identity or business structure.
D. Borrower will maintain and keep in force insurance covering Collateral
designated by Bank against fire and extended coverages. Such
insurance shall require losses to be paid on a replacement cost basis,
be issued by insurance companies acceptable to Bank and include a loss
payable endorsement in favor of Bank in a form acceptable to Bank.
E. Borrower has not granted and will not grant any security interest in
any of the Collateral except to Bank, and will keep the Collateral
free of all liens, claims, security interests and encumbrances of any
kind or nature except the security interest of Bank.
F. Borrower will not sell, lease, agree to sell or lease, or otherwise
dispose of, or remove from Borrower's place of business (i) any
inventory except in the ordinary course of business as heretofore
conducted by Borrower, or (ii) any other Collateral except with the
prior written consent of Bank.
G. Borrower will promptly notify Bank in writing of any event which
affects the value of the Collateral, the ability of Borrower or Bank
to dispose of the Collateral, or the rights and remedies of Bank in
relation thereto, including, but not limited to, the levy of any legal
process against any Collateral and the adoption of any marketing
order, arrangement or procedure affecting the Collateral, whether
governmental or otherwise.
H. If any Collateral is or becomes the subject of any registration
certificate or negotiable document of title, including any warehouse
receipt or bill of lading, Borrower shall immediately deliver such
document to Bank.
I. Borrower will not attach any Collateral to any real property or
fixture in a manner which might cause such Collateral to become a part
thereof unless Borrower first obtains the written consent of any
owner, holder of any lien on the real property or fixture, or other
person having an interest in such property to the removal by Bank of
the Collateral from such real property or fixture. Such written
consent shall be in form and substance acceptable to Bank and shall
provide that Bank has no liability to such owner, holder of any lien,
or any other person.
J. Until Bank exercises its rights to make collection, Borrower will
diligently collect all Collateral.
2
<PAGE>
4. ADDITIONAL OPTIONAL REQUIREMENTS. Borrower agrees that Bank may at its
option at any time, whether or not) Borrower is in default:
A. Require Borrower to segregate all collections and proceeds of the
Collateral so that they are capable of identification and deliver
daily such collections and proceeds to Bank in kind.
B. Require Borrower to deliver to Bank (i) copies of or extracts from the
Books and Records, and (ii) information on any contracts or other
matters affecting the Collateral.
C. Examine the Collateral, including the Books and Records, and make
copies of or extracts from the Books and Records, and for such
purposes enter at any reasonable time upon the property where any
Collateral or any Books and Records are located.
D. Require Borrower to deliver to Bank any instruments or chattel paper.
E. Require Borrower to obtain Bank's prior written consent to any sale,
lease, agreement to sell or lease, or other disposition of any
inventory.
F. Notify any account debtors, any buyers of the Collateral, or any other
persons of Bank's interest in the Collateral.
G. Require Borrower to direct all account debtors to forward all payments
and proceeds of the Collateral to a post office box under Bank's
exclusive control.
H. Demand and collect any payments and proceeds of the Collateral. In
connection therewith Borrower irrevocably authorizes Bank to endorse
or sign Borrower's name on all checks, drafts, collections, receipts
and other documents, and to take possession of and open the mail
addressed to Borrower and remove therefrom any payments and proceeds
of the Collateral.
5. DEFAULTS. Any one or more of the following shall be a default hereunder:
A. Borrower fails to pay any Indebtedness when due.
B. Borrower breaches any term, provision, warranty or representation
under this Agreement, or under any other obligation of Borrower to
Bank.
C. Any custodian, receiver or trustee is appointed to take possession,
custody or control of all or a substantial portion of the property of
Borrower or of any guarantor of any Indebtedness.
D. Borrower or any guarantor of any Indebtedness becomes insolvent, or is
generally not paying or admits in writing its inability to pay its
debts as they become due, fails in business, makes a general
assignment for the benefit of creditors, dies or commences any case,
proceeding or other action under any bankruptcy or other law for the
relief of, or relating to, debtors.
3
<PAGE>
E. Any case, proceeding or other action is commenced against Borrower or
any guarantor of any Indebtedness under any bankruptcy or other law
for the relief of, or relating to, debtors.
F. Any involuntary lien of any kind or character attaches to any
Collateral.
G. Any financial statements, certificates, schedules or other information
now or hereafter furnished by Borrower to Bank proves false or
incorrect in any material respect.
6. BANK'S REMEDIES AFTER DEFAULT. In the event of any default Bank may do any
one or more of the following:
A. Declare any Indebtedness immediately due and payable, without notice
or demand.
B. Enforce the security interest given hereunder pursuant to the Uniform
Commercial Code and any other applicable law.
C. Enforce the security interest of Bank in any deposit account of
Borrower maintained with Bank by applying such account to the
Indebtedness.
D. Require Borrower to assemble the Collateral, including the Books and
Records, and make them available to Bank at a place designated by
Bank.
E. Enter upon the property where any Collateral, including any Books and
Records, are located and take possession of such Collateral and such
Books and Records, and use such property (including any buildings and
facilities) and any of Borrower's equipment, if Bank deems such use
necessary or advisable in order to take possession of, hold, preserve,
process, assemble, prepare for sale or lease, market for sale or
lease, sell or lease, or otherwise dispose of, any Collateral.
F. Grant extensions and compromise or settle claims with respect to the
Collateral for less than face value, all without prior notice to
Borrower.
G. Use or transfer any of Borrower's rights and interests in any
Intellectual Property now owned or hereafter acquired by Borrower, if
Bank deems such use or transfer necessary or advisable in order to
take possession of, hold, preserve, process, assemble, prepare for
sale or lease, market for sale or lease, sell or lease, or otherwise
dispose of, any Collateral. Borrower agrees that any such use or
transfer shall be without any additional consideration to Borrower.
As used in this paragraph, "Intellectual Property" includes, but is
not limited to, all trade secrets, computer software, service marks,
trademarks, trade names, trade styles, copyrights, patents,
applications for any of the foregoing, customer lists, working
drawings, instructional manuals, and rights in processes for technical
manufacturing, packaging and labeling, in which Borrower has any right
or interest, whether by ownership, license, contract or otherwise.
H. Have a receiver appointed by any court of competent jurisdiction to
take possession of the Collateral.
4
<PAGE>
I. Take such measures as Bank may deem necessary or advisable to take
possession of, hold, preserve, process, assemble, insure, prepare for
sale or lease, market for sale or lease, sell or lease, or otherwise
dispose of, any Collateral, and Borrower hereby irrevocably
constitutes and appoints Bank as Borrower's attorney-in-fact to
perform all acts and execute all documents in connection therewith.
7. MISCELLANEOUS.
A. Any waiver, express or implied, of any provision hereunder and any
delay or failure by Bank to enforce any provision shall not preclude
Bank from enforcing any such provision thereafter.
B. Borrower shall, at the request of Bank, execute such other agreements,
documents, instruments, or financing statements in connection with
this Agreement as Bank may reasonably deem necessary.
C. All notes, security agreements, subordination agreements and other
documents executed by Borrower or furnished to Bank in connection with
this Agreement must be in form and substance satisfactory to Bank.
D. This Agreement shall be governed by and construed according to the
laws of the State of California, to the jurisdiction of which the
parties hereto submit.
E. All rights and remedies herein provided are cumulative and not
exclusive of any rights or remedies otherwise provided by law. Any
single or partial exercise of any right or remedy shall not preclude
the further exercise thereof or the exercise of any other right or
remedy.
F. All terms not defined herein are used as set forth in the Uniform
Commercial Code.
G. In the event of any action by Bank to enforce this Agreement or to
protect the security interest of Bank in the Collateral, or to take
possession of, hold, preserve, process, assemble, insure, prepare for
sale or lease, market for sale or lease, sell or lease, or otherwise
dispose of, any Collateral, Borrower agrees to pay immediately the
costs and expenses thereof, together with reasonable attorney's fees
and allocated costs for in-house legal services.
H. Any Borrower who is married agrees that such Borrower's separate
property shall be liable for payment of the Indebtedness if such
Borrower is personally liable for the Indebtedness.
5
<PAGE>
Date: July 14, 1997
Bank of America Borrower
National Trust and Savings Association Prolong Super Lubricants, Inc.
/s/ DAVID M. SURCH /s/ ELTON ALDERMAN
- ----------------------------------- ------------------------------
By: David M. Surch, Vice President By: Elton Alderman, President
/s/ THOMAS C. BILLSTEIN
-----------------------------------
By: Thomas C. Billstein, Secretary
6
<PAGE>
EXHIBIT 16.1
August 28, 1997
Office of Chief Accountant
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Amendment No. 1 to Form 10
of Prolong International Corporation
We have read Item 14 included in Amendment No. 1 to the Form 10 of Prolong
International Corporation dated August 28, 1997, filed with the Securities and
Exchange Commission and are in agreement with the statements contained therein
with regards to Corbin & Wertz.
/s/ CORBIN & WERTZ
CORBIN & WERTZ
