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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 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,
par value $.001 per share ("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
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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 contact point where the
teeth of the gears touch each other - for example in hypoid gears); engines (at
the contact 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 and metal contacts
metal under heavy loads - for example in a steel mill where rolling steel
contacts the 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 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 Technology of Canada 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 tests conducted on AFMT precedent
to the issuance of the patent on the AFMT formula.
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:
. 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
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
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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
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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. 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 Registrant 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 there can be no assurance that the Registrant's current
coverage will be adequate to cover future product liability claims. The
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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 Registrant'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 Registrant's shares are not listed on Nasdaq,
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 Registrant's securities on an
exchange or Nasdaq and the rules regarding transactions in penny stocks, the
liquidity and salability of the Registrant's securities may be substantially
impaired. There is no assurance that the Registrant's current market-makers will
continue to make a market in the Registrant's securities, or that any market for
the Registrant's securities will continue. Following effectiveness of this
Registration Statement, the Registrant plans to apply to have its Common Stock
listed on either the Nasdaq Small Cap Market or a national securities exchange,
such as the American Stock Exchange ("AMEX"). Each of the Nasdaq Small Cap
Market and the AMEX have specific listing and maintenance requirements which the
Registrant must satisfy in order to have its Common Stock listed for trading.
There can be no assurances that the Registrant will be able to satisfy the
listing or maintenance requirements which related to either the Nasdaq Small Cap
Market or the AMEX, as applicable. Furthermore, in August 1997, Nasdaq raised
certain of its entry standards to require that listing companies meet certain
minimum requirements such as financial thresholds of either net tangible assets,
market capitalization or net income, $5 million in market value of public float
and a minimum bid price of $4 per share. These requirements and other
regulations maintained by Nasdaq and the AMEX could impair the Registrant's
ability to have its Common Stock listed for trading.
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There can be no assurances that the Registrant's Common Stock will be accepted
for trading by Nasdaq, the AMEX or any other exchange 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 Registrant had become
dormant, without significant assets or operations for approximately 8 years.
There can be no assurance that the Registrant will be successful in continuing
to expand its operations and access markets so as to continue its 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 Registrant has been successful in generating net income
from its operations. There can be no assurance that the Registrant will continue
to be successful in generating net income from operations in the future.
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,
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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.
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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 EPA registrations have no term but require the Registrant to notify the EPA
of any changes in the chemical composition of such conditioners or other
information contained in such registration. 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 and
bottlers 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 or bottlers 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
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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
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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
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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
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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
customers 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 5.0% 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 (the "License
Agreement"). The License Agreement calls for Prolong to pay to the Licensor
royalties equal to 3.5% of gross sales of any products which utilize AFMT
technology or bear the "Prolong" name. Payments to the Licensor under the
License Agreement are subject to a minimum royalties of $3,000 per month
beginning in 1996. 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
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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 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 for 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. The Registrant does not anticipate that it will continue to
experience increasing sales resulting from the Infomercial of the magnitude
obtained in between the two periods under comparison, as infomercial
sales have demonstrated a fairly consistent return relative to air time
expenditures and such expenditures were significantly restricted in the six
month period ended June 30, 1996 due to a lack of available cash to make such
purchases. The Registrant does not currently anticipate increasing air time
expenditures over levels incurred in the six month period ended June 30, 1997.
The Registrant does expect continued growth from retail sales which were
initiated in the final quarter of 1996 and continue to gain momentum. For the
six-month period ended June 30, 1997 the rollout of its retail sales efforts
resulted in revenues of $3,766,00.
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 in the applicable
period of 1997 relative to the higher cost of goods associated with start-up
levels of production in 1996. Management does not anticipate that such
reductions are likely in the future.
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
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at June 30, 1997 were $9,497,327 while current liabilities were $1,645,897.
Inventory at June 30, 1997 was $1,933,000, an increase of $398,000, and
consisted of finished goods of $1,553,000, an increase of $509,000, raw
materials of $294,000, a decrease of $122,000 and promotional items of
$86,000, an increase of $12,000, each relative to December 31, 1996.
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. Such sales were largely
attributable to the Infomercial but also included international sales of
approximately $1,700,000 and a relatively insignificant quantity of sales from
commercial/industrial customers. The international sales experienced in this
year resulted largely from initial stock orders of significant international
customers and distributors filled in the final quarter of 1996. Because of the
nature of such orders, the Registrant does not believe that the level of such
sales will be indicative of future international sales levels.
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
28
<PAGE>
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
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 Registrant 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
29
<PAGE>
(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.
30
<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. McCaffery --
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 subsequently repurchased as of
September 8, 1997.
(4) Ramon Pratt held of record 507,500 shares in his name and an additional
31
<PAGE>
640,000 shares in joint tenancy with his wife, Marie Z. Pratt.
(5) Includes shares held by Messrs. Alderman, Kubota and Billstein and Ms.
McCaffery 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
32
<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 $100,000 or
more in base salaries during any of the periods covered.
The information presented below represents compensation in all capacities in
which each identified individual served the Registrant and PSL, as applicable.
33
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
RESTRICTED ALL OTHER
NAME AND STOCK COMPEN-
PRINCIPAL POSITION YEAR SALARY($) 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.
34
<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 Registrant 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 years 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 Registrant or within 30 days
after termination of employment. The 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
officer's performance generally as well as specified criteria related to each
officer's 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.
35
<PAGE>
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.
36
<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 's products are based, has
been the subject of litigation, primarily suits contesting the ownership
thereof. In July 1993, the trial court ruled in favor of the Prolong's licensor,
EPL Prolong, Inc., 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, arguments relating to which were heard in
June 1997. The decision of the appellate court has not yet been rendered. The
Registrant believes, based on a review of the trial court records and the
appellate arguments posed, that it is unlikely that the ultimate disposition of
the appeal will result in the trial court's rulings being reversed and or a
change in control of the AFMT Patent. As such, the Registrant does not
anticipate that such litigation will have a material adverse effect on the
Registrant's continued use of such patent and its continued manufacture and sale
of the Registrant's products pursuant to the license agreement, but no
assurances can be made of such fact. Should this or any other litigation result
in an adverse ruling precluding the Registrant'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."
37
<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 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
38
<PAGE>
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 was 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 took place on or
about September 8, 1997. The obligor under the note receivable continues to be
obligated to pay all accrued interest with respect to such note. 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"
39
<PAGE>
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,
40
<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
41
<PAGE>
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 Registrant's financial statements for the years ended December 31, 1995 and
1994 were audited by Corbin & Wertz, independent accountants. In February 1997,
the Registrant dismissed Corbin & Wertz and engaged Deloitte and Touche, LLP as
its independent accountants. The change in the Registrant's independent
accountants was the result of a mutual agreement between the Registrant 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 caused it to make a reference to
the subject matter of the disagreements in connection with its records. The
report of Corbin & Wertz on the Registrant's Financial Statements for the years
ended December 31, 1995 and 1994 contained an explanatory paragraph regarding
the Registrant's ability to continue as a going concern.
42
<PAGE>
The decision to engage Deloitte & Touche, LLP was approved by the Board of
Directors of the Registrant.
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
43
<PAGE>
EXHIBIT
NO.
- ----
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.*
- ------------
* Previously filed.
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant has duly caused this Amendment No. 2 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
PROLONG INTERNATIONAL CORPORATION
---------------------------------
(Registrant)
Date: September 15, 1997
By: /s/ NICHOLAS M. ROSIER
-----------------------------
Nicholas M. Rosier
Chief Financial Officer
45
<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
F-2
<PAGE>
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS
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.
F-3
<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.
F-4
<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 71,680 72,000
Shares issued for 320,000
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.
F-5
<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
F-6
<PAGE>
auditors' report.
F-7
<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
F-8
<PAGE>
direct-response television
Continued
F-9
<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.
F-10
<PAGE>
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
F-11
<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:
<TABLE>
<S> <C>
Raw materials $12,289
Finished goods 33,919
------
$46,208
======
</TABLE>
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.
F-12
<PAGE>
Continued
F-13
<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
F-14
<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
F-15
<PAGE>
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
F-16
<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.
F-17
<PAGE>
PROLONG INTERNATIONAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEAR ENDED DECEMBER 31, 1996 AND
INDEPENDENT AUDITORS' REPORT
F-18
<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
F-19
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1996
- ----------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
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 notes to consolidated financial statements.
F-20
<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 notes to consolidated financial statements.
F-21
<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 notes to consolidated financial statements.
F-22
<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
=========== ======= ======== ====== ========== ============
</TABLE>
TOTAL
NOTE STOCKHOLDERS'
RECEIVABLE EQUITY
<TABLE>
<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>
F-23
<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 notes to consolidated financial statements.
F-24
<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
$395,000.00
Issued 320,000 shares of common stock previously committed.
Issued 330,000 shares of common stock in exchange for a note receivable of
$660,000.00
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 notes to consolidated financial statements.
F-25
<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
infomercial production. Amounts capitalized related thereto of $223,748
were expensed in their entirety in January 1996, the time of the first public
showing of the infomercial.
Prepaid Television Time - The Company capitalizes the cost of purchasing a
time slot for the airing of the infomercial. Upon the airing of the
infomercial, the related cost is expensed. During fiscal 1996, the total
amount expensed for television time was $5,227,091. As of December 31, 1996,
prepaid television time was $367,161.
F-26
