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As filed with the Securities and Exchange Commission on July ___, 1998
Registration No. 333-51751
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_____________
PROLONG INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
_____________
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NEVADA 2990 74-2234246
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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6 THOMAS, IRVINE, CALIFORNIA 92618
(949) 587-2700
(Address, including zip code and telephone number,
including area code, of registrant's principal executive offices)
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
2 BROADWAY
NEW YORK, NEW YORK 10004
(212) 509-4000
(Name, address, including zip code and telephone number,
including area code, of agent for service)
Copies to:
Michael E. Flynn, Esq. Gary C. Wykidal, Esq.
Marc G. Alcser, Esq. Gary C. Wykidal & Associates
Stradling Yocca Carlson & Rauth 245 Fischer Avenue, Suite A-1
660 Newport Center Drive, Suite 1600 Costa Mesa, California 92626
Newport Beach, California 92660 (949) 751-8505
(949) 725-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As promptly as practicable after this Registration Statement becomes
effective and the closing of the acquisition of the assets of EPL Pro-Long, Inc.
by the Registrant has occurred, as described in the Agreement and Plan of
Reorganization, dated as of February 5, 1998, attached as Annex A to the Proxy
Statement/Prospectus forming a part of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
_____________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
PROLONG INTERNATIONAL CORPORATION
Cross Reference Sheet Pursuant to Item 501(b) of Regulation S-K
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Location or Caption in
Item No. Caption Proxy Statement/Prospectus
- ------- ------- --------------------------
A. INFORMATION ABOUT THE TRANSACTION
---------------------------------
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1. Forepart of Registration Statement and Facing Page of Registration Statement; Cross
Outside Front Cover Page of Prospectus Reference Sheet; Outside Front Cover Page of Proxy
Statement/Prospectus
2. Inside Front and Outside Back Cover Pages of Available Information; Table of Contents
Prospectus
3. Risk Factors, Ratio of Earnings to Fixed Summary; Risk Factors
Charges and Other Information
4. Terms of the Transaction Summary; The Transaction; Certain Differences in
the Rights of PIC and EPL Shareholders; Annex A;
Annex B
5. Pro Forma Financial Information Summary; Unaudited Pro Forma Combined Condensed
Financial Statements
6. Material Contacts with the Company Being Summary; The Transaction; Business of PIC; Legal
Acquired Proceedings Involving PIC; Certain Relationships
and Related Transactions; Management's Discussion
and Analysis of Financial Condition and Results of
Operations of PIC; Business of EPL; Management's
Discussion and Analysis of Financial Condition and
Results of Operations of EPL
7. Additional Information Required for Not Applicable
Reoffering by Persons and Parties Deemed to
be Underwriters
8. Interests of Named Experts and Counsel Summary; The Transaction
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9. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act Liabilities
B. INFORMATION ABOUT THE REGISTRANT
--------------------------------
10. Information With Respect to S-3 Registrants Not Applicable
11. Incorporation of Certain Information by Not Applicable
Reference
12. Information With Respect to S-2 or S-3 Not Applicable
Registrants
13. Incorporation of Certain Information by Not Applicable
Reference
14. Information With Respect to Registrants Other Available Information; Summary; The Transaction;
Than S-2 or S-3 Registrants Business of PIC; Properties of PIC; Legal
Proceedings Involving PIC; Market Price of and
Dividends on PIC's Common Equity; Common Stock
Ownership by Management and Principal
Shareholders of PIC; Selected
Financial Data -PIC; Management's Discussion
and Analysis of Financial Condition and Results
of Operations of PIC; Index to Financial Statements
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
--------------------------------------------
15. Information With Respect to S-3 Companies Not Applicable
16. Information With Respect to S-2 or S-3 Not Applicable
Companies
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3
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17. Information With Respect to Companies Other Available Information; Summary; The Transaction;
Than S-2 or S-3 Companies Business of EPL; Market Price of and Dividends on
EPL's Common Equity; Common Stock Ownership by
Management and Principal Shareholders of EPL;
Selected Financial Data -EPL; Analysis of Financial
Condition and Management's Discussion and Results of
Operations of EPL; Index to Financial Statements
D. VOTING AND MANAGEMENT INFORMATION
---------------------------------
18. Information if Proxies, Consents or Outside Front Cover Page of Proxy Statement;
Authorizations are to be Solicited Summary; The EPL Special Meeting; The Transaction;
Common Stock Ownership by Management and Principle
Shareholders of PIC; Common Stock Ownership by
Management and Principle Shareholders of EPL;
Directors and Executive Officers of PIC; Executive
Compensation; PIC Board Report on Executive
Compensation; Certain Relationships and
Related Transactions; Stockholder Proposals
19. Information if Proxies, Consents or Not Applicable
Authorizations are not to be Solicited or in
an Exchange Offer
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EPL PRO-LONG, INC.
245 FISCHER AVENUE, SUITE A-1
COSTA MESA, CALIFORNIA 92626
July 24, 1998
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders
("Special Meeting") of EPL Pro-Long, Inc., a California corporation ("EPL"), to
be held at 7:30 p.m. local time on August 3, 1998 at the Atrium Hotel (formerly
The Airporter), located at 18700 MacArthur Blvd., Irvine, California 92612.
At the Special Meeting, you will be asked to consider and vote upon, and
give your written consent to, a proposal (i) to approve the Agreement and Plan
of Reorganization (the "Agreement") dated as of February 5, 1998 between Prolong
International Corporation ("PIC") and EPL, pursuant to which PIC will acquire
substantially all of the assets and assume certain of the liabilities of EPL
(the "Acquisition") and (ii) to approve a Plan of Dissolution (the "EPL Plan of
Dissolution") to be effective immediately upon consummation of the Acquisition,
pursuant to which EPL will be liquidated and dissolved (the "Dissolution" and,
together with the Acquisition, the "Transaction"). Copies of the Agreement and
EPL Plan of Dissolution are set forth in the accompanying Proxy
Statement/Prospectus as Annex A and Annex B, respectively.
The proposed Transaction requires certain regulatory approvals and the
approval of the principal terms of the Agreement by the holders of a majority of
the outstanding shares of the common stock of EPL (the "EPL Common Stock"), in
addition to the satisfaction of other conditions. Shareholders who comply with
certain requirements (described in the Proxy Statement/Prospectus under "THE
TRANSACTION - Dissenters' Rights" and in Annex D to the Proxy
Statement/Prospectus) may be entitled to dissenters' rights with respect to
their shares. More detailed information about the Agreement and other matters
relating to the Transaction and the Special Meeting are included in the
accompanying Proxy Statement/Prospectus. You are urged to carefully review the
Proxy Statement/Prospectus.
The Transaction
- ---------------
Pursuant to the Agreement, as consideration for the Acquisition, PIC will
issue and deliver to EPL an aggregate of approximately two million nine hundred
ninety-three thousand thirty-five (2,993,035) shares of the common stock of PIC
(the "PIC Common Stock"). Assuming that the Transaction is consummated, each
shareholder of EPL will be entitled to receive in the Dissolution approximately
one (1) share of PIC Common Stock for every two (2) shares of EPL Common Stock
held by such shareholder (provided that certain shareholders will receive from
EPL cash in lieu of any fractional share of PIC Common Stock such shareholder is
otherwise entitled to receive). Management of EPL believes that the
consideration to be paid by PIC pursuant to the terms of the Agreement is fair,
from a financial point of view, to EPL's shareholders.
<PAGE>
THERE WILL BE RESTRICTIONS ON THE ABILITY OF EACH EPL SHAREHOLDER WHO RECEIVES
SHARES OF PIC COMMON STOCK TO SELL SUCH SHARES OF PIC COMMON STOCK FOLLOWING
CONSUMMATION OF THE TRANSACTION, WHICH RESTRICTIONS ARE DISCUSSED BELOW AND IN
THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS.
Substantially all the assets of EPL are to be sold to PIC pursuant to the
Agreement. In addition, substantially all the liabilities of EPL, including
trade payables, will be assumed by PIC pursuant to the Agreement.
The Transaction is intended to qualify as a tax-free reorganization under
Sections 368(a)(1)(C) and (a)(2)(G) of the Internal Revenue Code of 1986, as
amended (the "Code"). In order for the Transaction to qualify as a tax-free
reorganization, among other things, EPL must be liquidated and dissolved
pursuant to the EPL Plan of Dissolution. The EPL Plan of Dissolution provides
for (i) the sale to PIC of substantially all of the assets of EPL, (ii) the
payment of certain liabilities (which will occur at the closing of the
Acquisition with respect to items such as the payment of transactional expenses
and all other amounts which are then due), and (iii) a liquidating distribution
to the EPL shareholders of the PIC Common Stock to be received by EPL pursuant
to the Agreement.
Assuming that the Transaction qualifies as a tax-free reorganization under
the Code, the shareholders of EPL will not recognize taxable gain or loss upon
receipt of shares of PIC Common Stock.
Resale Restrictions On PIC Common Stock
- ---------------------------------------
There are two important restrictions on the ability of the EPL shareholders
to realize immediately the value of the PIC Common Stock which they will receive
in the Dissolution:
First, if the Transaction is approved by a majority of the shares of
EPL Common Stock, each shareholder of EPL is agreeing that all PIC Common
Stock to be received by EPL in connection with the Acquisition and by each
EPL shareholder in the Dissolution shall be subject to the transfer
restriction set forth as Exhibit D to the Agreement which is set forth as
Annex A to the Proxy Statement/Prospectus (the "Transfer Restriction").
All PIC Common Stock shall be issued with a restrictive legend referencing
the Transfer Restriction. The Transfer Restriction provides that, for a
period of 365 days following the date of the Closing (as defined in the
Agreement), each shareholder of EPL will not, without the prior written
consent of PIC, directly or indirectly:
[S]ell, offer to sell, solicit an offer to sell, contract or
grant any option or warrant to sell (including, without
limitation, any short sale), register, pledge, transfer,
establish an open "put equivalent position" within the meaning of
Rule 16a-1(h) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or otherwise transfer or dispose of
any shares of the capital stock of PIC, options or warrants to
acquire shares of the capital stock of PIC, securities
2
<PAGE>
exchangeable or exercisable for or convertible into shares of the
capital stock of PIC or any rights to purchase or acquire capital
stock of PIC or enter into any hedging transaction that is likely
to result in a transfer of capital stock of PIC currently or
hereafter owned either of record or beneficially (as defined in
Rule 13d-3 under the Exchange Act) by such shareholder, including
capital stock which may be deemed to be beneficially owned by
such shareholder in accordance with the rules and regulations of
the Securities and Exchange Commission, otherwise than (i) as a
bona fide gift or gifts, including, without limitation, transfers
to beneficiaries or trusts for estate planning purposes, provided
the donee or donees thereof agree in writing to be bound by the
terms of this restriction and deliver a copy of such donee's
assumption to PIC, or (ii) as a distribution to affiliates of
such shareholder, if any, provided that distributees thereof
agree in writing to be bound by the terms of this restriction and
deliver a copy of such distributee's assumption to PIC, or
publicly announce such shareholder's intention to do any of the
foregoing.
Second, for two years after consummation of the Acquisition, shares of
PIC Common Stock distributed to shareholders of EPL who may be deemed
affiliates of EPL (which generally includes directors, executive officers
and 10% shareholders of EPL) may only be sold (i) pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), (ii) pursuant to Rule 144 under the Securities Act in
accordance with the volume and manner of sale restrictions set forth
therein or (iii) pursuant to another applicable exemption from the
registration requirements of the Securities Act.
Other Liabilities Of EPL Shareholders
- -------------------------------------
The shareholders of EPL may have certain residual liabilities after the
Transaction. Shareholders of EPL may be liable under California state law to
the remaining unsatisfied creditors of EPL, if any, following EPL's liquidation
and dissolution. Such liabilities are limited to the value of the property each
shareholder receives in connection with the Dissolution. These liabilities are
explained in the accompanying Proxy Statement/Prospectus.
AS YOU CONSIDER YOUR VOTE ON THE TRANSACTION, PLEASE KEEP IN MIND THAT EPL HAS
BEEN REPRESENTED IN THE NEGOTIATION OF THE ACQUISITION AND THE PREPARATION OF
DOCUMENTS RELATING TO THE ACQUISITION AND THE DISSOLUTION BY THE LAW FIRM OF
GARY C. WYKIDAL & ASSOCIATES. PIC HAS BEEN REPRESENTED IN THE NEGOTIATION OF
THE ACQUISITION AND THE PREPARATION OF DOCUMENTS RELATING TO THE ACQUISITION BY
THE LAW FIRM OF STRADLING YOCCA CARLSON & RAUTH. NEITHER OF THE FOREGOING LAW
FIRMS HAS REPRESENTED THE INTERESTS OF ANY OF THE SHAREHOLDERS OF EPL WITH
RESPECT TO THE TRANSACTION OR THE RIGHTS, LIABILITIES AND OBLIGATIONS OF ANY OF
THE SHAREHOLDERS OF EPL ARISING FROM THE TRANSACTION OR THE FEDERAL OR STATE TAX
CONSEQUENCES THEREOF AND, THEREFORE, EACH SHAREHOLDER IS ENCOURAGED TO RETAIN
THEIR OWN
3
<PAGE>
COUNSEL AND/OR OBTAIN INDEPENDENT TAX AND FINANCIAL ADVICE. IN THE EVENT OF
A DISPUTE OR CLAIM ARISING UNDER THE AGREEMENT OR OTHERWISE IN CONNECTION
WITH THE TRANSACTION, NEITHER GARY C. WYKIDAL & ASSOCIATES, NOR STRADLING
YOCCA CARLSON & RAUTH WOULD REPRESENT ANY OF THE SHAREHOLDERS OF EPL AND
ANY SUCH SHAREHOLDER WOULD NEED TO RETAIN SEPARATE COUNSEL.
Enclosed are a (i) Notice of Special Meeting, (ii) Proxy
Statement/Prospectus and (iii) form of proxy for the Special Meeting. The Proxy
Statement/Prospectus describes in more detail the Transaction, including a
description of the conditions to consummation of the Transaction and the effects
of the Acquisition on the rights of the EPL shareholders.
The affirmative vote and written consent of the holders of a majority of
the outstanding shares of EPL Common Stock entitled to vote at the Special
Meeting is required to approve the Transaction. The Board of Directors of EPL
has determined that the Transaction is in the best interests of EPL and its
shareholders and, accordingly, has unanimously approved the Transaction and
unanimously recommends that you vote FOR approval of the Transaction.
It is important that your shares be represented at the Special Meeting,
either in person or by proxy. Whether or not you plan to attend the Special
Meeting, please complete, sign and date the enclosed proxy and return it in the
enclosed postage pre-paid envelope. Your proxy will be revocable by filing with
the Secretary a written revocation or a proxy bearing a later date at any time
prior to the time it is voted, or by attending the Special Meeting and voting in
person. Your prompt cooperation will be greatly appreciated.
I look forward to seeing you at the Special Meeting.
Sincerely,
________________________________________
Michael R. Davis, President
4
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EPL PRO-LONG, INC.
245 Fischer Avenue, Suite A-1
COSTA MESA, CALIFORNIA 92626
__________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be Held August 3, 1998
__________
To the Shareholders of EPL Pro-Long, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders (the "Special
Meeting") of EPL Pro-Long, Inc. ("EPL") will be held at the Atrium Hotel
(formerly The Airporter), located at 18700 MacArthur Blvd., Irvine, California
92612, at 7:30 p.m., local time on August 3, 1998 for the following
purposes:
1. The Transaction. To consider, vote upon and give written consent to a
---------------
proposal (i) to approve the Agreement and Plan of Reorganization (the
"Agreement") dated as of February 5, 1998 between Prolong International
Corporation ("PIC") and EPL, pursuant to which PIC will acquire substantially
all of the assets and assume certain liabilities of EPL (the "Acquisition") and
(ii) to approve a Plan of Dissolution of EPL (the "EPL Plan of Dissolution") to
be effective immediately after consummation of the Acquisition, pursuant to
which EPL will be liquidated and dissolved (the "Dissolution" and, together with
the Acquisition, the "Transaction"). A copy of the Agreement is set forth in
Annex A to the accompanying Proxy Statement/Prospectus. A copy of the EPL Plan
of Dissolution, which provides the terms for the Dissolution, is set forth in
Annex B to the accompanying Proxy Statement/Prospectus.
2. Other Business. To transact such other business as may properly come
--------------
before the Special Meeting or any adjournments or postponements thereof.
Only shareholders of record at the close of business on July 1, 1998 (the
"Record Date") are entitled to receive notice of and to vote at the Special
Meeting or any adjournment thereof. Holders of common stock, no par value per
share, of EPL ("EPL Common Stock") held of record at the close of business on
the Record Date are entitled to one vote per share on each matter considered and
voted on at the Special Meeting. The affirmative vote and written consent of
the holders of a majority of the outstanding EPL Common Stock entitled to vote
at the Special Meeting is required to approve the Transaction. A list of
shareholders as of the Record Date will be open for examination during the
Special Meeting.
THE BOARD OF DIRECTORS OF EPL HAS DETERMINED THAT THE TRANSACTION IS IN THE BEST
INTERESTS OF EPL AND ITS SHAREHOLDERS. THE BOARD OF DIRECTORS OF EPL
UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF THE TRANSACTION.
<PAGE>
BY ORDER OF THE BOARD OF DIRECTORS
________________________________________
Lois M. Miller, Secretary
_________________
July 24, 1998
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN
THE ENCLOSED ENVELOPE WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING. IF
YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU
HAVE PREVIOUSLY RETURNED YOUR PROXY CARD. UNLESS OTHERWISE INSTRUCTED, EACH
VALID PROXY CARD RETURNED THAT IS NOT REVOKED WILL BE VOTED "AGAINST" APPROVAL
OF THE TRANSACTION AND, IN THE DISCRETION OF THE PROXY HOLDER, VOTED "FOR" ANY
OTHER MATTER WHICH MAY PROPERLY COME BEFORE THE MEETING.
2
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EPL PRO-LONG, INC.
[PIC LOGO] PROXY STATEMENT [EPL LOGO]
__________
PROSPECTUS
PROLONG INTERNATIONAL CORPORATION
COMMON STOCK
(PAR VALUE $0.001 PER SHARE)
This Proxy Statement/Prospectus (this "Proxy Statement/Prospectus") is
being furnished to shareholders of EPL Pro-Long, Inc., a California corporation
("EPL"), in connection with the solicitation of proxies by the Board of
Directors of EPL for use at a special meeting of shareholders to be held at 7:30
p.m., local time on August 3, 1998, at the Atrium Hotel (formerly The
Airporter), located at 18700 MacArthur Blvd., Irvine, California 92612, and at
any adjournment thereof (the "EPL Special Meeting"). The purpose of the EPL
Special Meeting is to consider and vote upon a proposal to (i) approve the
Agreement and Plan of Reorganization (the "Agreement") dated as of February 5,
1998 between Prolong International Corporation ("PIC") and EPL, pursuant to
which PIC will acquire substantially all of the assets and assume certain of the
liabilities of EPL (the "Acquisition") and to (ii) approve a Plan of Dissolution
of EPL (the "EPL Plan of Dissolution") to be effective immediately after
consummation of the Acquisition, pursuant to which EPL will be liquidated and
dissolved (the "Dissolution" and, together with the Acquisition, the
"Transaction"). A copy of the Agreement is set forth in Annex A to this Proxy
Statement/Prospectus. A copy of the EPL Plan of Dissolution, which provides the
terms for the Dissolution, is set forth in Annex B to this Proxy
Statement/Prospectus. This Proxy Statement/Prospectus and the form of proxy for
the Special Meeting will be first sent to shareholders of EPL on or about July
24, 1998. The expenses of soliciting proxies for the EPL Special Meeting will be
borne by EPL. EPL intends to solicit shareholders of record by mail, telephone
or personal contact.
This Proxy Statement/Prospectus also constitutes the prospectus of PIC
relating to the issuance of shares of common stock, par value $0.001 per share,
of PIC ("PIC Common Stock") to EPL pursuant to the terms of the Agreement. PIC
has filed a registration statement on Form S-4 (the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), with the
Securities and Exchange Commission (the "Commission") covering the shares of PIC
Common Stock to be issued pursuant to the Agreement.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY SHAREHOLDERS WITH RESPECT TO THE ACQUISITION.
THE SHARES OF PIC COMMON STOCK TO BE ISSUED IN CONNECTION WITH THE ACQUISITION
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is July___ , 1998.
<PAGE>
AVAILABLE INFORMATION
PIC is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith,
files reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information can be inspected and copied at
the Commission's Public Reference Section at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices located at Citicorp Center,
500 West Madison, 14th Floor, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Such material may also
be accessed electronically by means of the Commission's home page on the
Internet at http://www.sec.gov.
This Proxy Statement/Prospectus constitutes a part of the Registration
Statement, which has been filed by PIC with the Commission under the Securities
Act. This Proxy Statement/Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information relating to PIC and the PIC Common Stock offered hereby, reference
is hereby made to the Registration Statement, including the exhibits and
schedules thereto, which may be inspected without charge at the office of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of
which may be obtained from the Commission at prescribed rates. Statements
contained in this Proxy Statement/Prospectus concerning the provisions of
certain documents filed as exhibits to the Registration Statement are not
necessarily complete, and each such statement is qualified in its entirety by
reference to the full text of such document filed as an exhibit to the
Registration Statement.
2
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED. THIS PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY
SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION MAY NOT LAWFULLY BE MADE. NEITHER THE DELIVERY OF THIS
PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
All information contained herein with respect to PIC and its subsidiaries
has been supplied by PIC, and all information with respect to EPL has been
supplied by EPL.
3
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TABLE OF CONTENTS
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SUMMARY.................................................................. 1
Parties to the Acquisition............................................. 1
EPL Special Meeting.................................................... 2
PIC Corporate Action................................................... 2
The Acquisition........................................................ 3
Opinion of EPL's Financial Advisor..................................... 4
Interests of Certain Persons in the Transaction........................ 4
The Dissolution........................................................ 4
Governmental Approvals Required........................................ 4
Federal Income Tax Consequences........................................ 4
Accounting Treatment................................................... 5
Dissenters' Rights..................................................... 5
Comparison of Shareholder Rights....................................... 5
Comparative Market Value............................................... 6
Unaudited Pro Forma Combined Financial Data............................ 7
Comparative Per Share Information...................................... 8
RISK FACTORS............................................................. 10
Federal Income Tax Risks Relating to the Transaction................... 10
Managing Growth........................................................ 11
Need to Raise Capital for Growth....................................... 11
Historic Reliance on Direct Response Sales............................. 11
Dependence on Key Management Personnel................................. 12
Risk of Product Liability.............................................. 12
Competition............................................................ 12
Market Volatility...................................................... 13
Costs of Components.................................................... 14
Limited Operating History.............................................. 14
Dependence on Third Party Supply Relationships......................... 14
Product Concentration.................................................. 15
Risk of Declining Selling Prices....................................... 15
Dependence on International Sales for Future Growth.................... 16
Environmental Compliance............................................... 16
Control by Management and Existing Stockholders........................ 17
Risks Associated With Potential "Year 2000" Problems of Third Parties.. 17
Effects of Preferred Stock on the Rights of Common Stock............... 17
Residual Liability..................................................... 18
EPL SPECIAL MEETING...................................................... 19
Time, Date and Place................................................... 19
Record Date and Shares Entitled to Vote................................ 19
Recommendation of the EPL Board of Directors........................... 19
Proxies................................................................ 19
THE TRANSACTION.......................................................... 21
General................................................................ 21
Terms of the Agreement................................................. 21
The Dissolution........................................................ 23
Reasons for the Transaction............................................ 24
Description of PIC's Securities to be Registered....................... 25
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Regulatory Approvals...................................................... 25
Interests of Certain Persons in the Transaction........................... 26
Accounting Treatment...................................................... 26
Federal Income Tax Consequences........................................... 26
Opinion of EPL's Financial Advisor........................................ 28
Dissenters' Rights........................................................ 36
Resales of PIC Common Stock............................................... 37
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS................. 40
BUSINESS OF PIC............................................................. 46
General................................................................... 46
Products.................................................................. 46
Current Markets for Prolong's Products.................................... 50
Future Markets for Prolong's Products..................................... 51
Geographic Markets........................................................ 53
Marketing and Distribution of the Products................................ 54
Competition............................................................... 55
Production................................................................ 56
Customers................................................................. 57
Intellectual Property..................................................... 57
Royalty Agreements........................................................ 58
Employees................................................................. 58
PROPERTIES OF PIC........................................................... 59
LEGAL PROCEEDINGS INVOLVING PIC............................................. 59
MARKET PRICE OF AND DIVIDENDS ON PIC'S COMMON EQUITY........................ 60
COMMON STOCK OWNERSHIP BY MANAGEMENT AND PRINCIPAL
STOCKHOLDERS OF PIC........................................................ 61
DIRECTORS AND EXECUTIVE OFFICERS OF PIC..................................... 63
EXECUTIVE COMPENSATION...................................................... 66
PIC BOARD REPORT ON EXECUTIVE COMPENSATION.................................. 71
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................. 73
SELECTED FINANCIAL DATA - PIC............................................... 74
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF PIC................................. 75
BUSINESS OF EPL............................................................. 81
MARKET PRICE OF AND DIVIDENDS ON EPL'S COMMON EQUITY........................ 81
COMMON STOCK OWNERSHIP BY MANAGEMENT AND
PRINCIPAL SHAREHOLDERS OF EPL.............................................. 82
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
SELECTED FINANCIAL DATA--EPL.............................................. 83
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF EPL............................... 84
CERTAIN DIFFERENCES IN THE RIGHTS OF PIC AND EPL SHAREHOLDERS............. 87
Authorized Capital Stock................................................ 87
Removal of Directors.................................................... 87
Annual Meetings......................................................... 88
Notice of Nominations................................................... 88
Special Meetings........................................................ 88
Proxies................................................................. 89
Quorum.................................................................. 89
Voting Rights........................................................... 89
Amendment of Articles of Incorporation and Bylaws....................... 90
Exculpation and Indemnification......................................... 90
Dissolution............................................................. 91
EXPERTS................................................................... 92
LEGAL MATTERS............................................................. 92
STOCKHOLDER PROPOSALS..................................................... 92
ANNEX A -- AGREEMENT AND PLAN OF REORGANIZATION........................... A-1
ANNEX B -- EPL PLAN OF DISSOLUTION........................................ B-1
ANNEX C -- FAIRNESS OPINION OF NORTH AMERICAN CAPITAL PARTNERS............ C-1
ANNEX D -- CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW
DISSENTERS' RIGHTS....................................................... D-1
INDEX TO FINANCIAL STATEMENTS............................................. F-1
</TABLE>
iii
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto included in this Proxy Statement/Prospectus. The Agreement is set
forth in Annex A to this Proxy Statement/Prospectus and reference is hereby made
thereto for a complete description of the terms of the Acquisition. The EPL
Plan of Dissolution is set forth in Annex B to this Proxy Statement/Prospectus,
and reference is hereby made thereto for a complete description of the
Dissolution. Shareholders of EPL are urged to read carefully this Proxy
Statement/Prospectus and the attached Annexes in their entirety, and in
particular the section entitled "Risk Factors."
PARTIES TO THE ACQUISITION
PIC. PIC 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 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, PIC 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. PIC, through PSL (referred to
collectively in the operational context with PIC 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 and to
use the "Prolong" name. This license was acquired from EPL in 1993.
PIC Common Stock is traded on the American Stock Exchange (the "AMEX")
under the symbol "PRL." PIC's principal executive offices are located at 6
Thomas, Irvine, California, 92618, and its telephone number is (949)
587-2700.
EPL. EPL is a California corporation that was incorporated on July 27,
1988. EPL owns an AFMT patent. EPL licenses the right to use the AFMT formula
and the "Prolong" name exclusively to PSL. Aside from actions taken with
respect to its patent ownership, such as receiving royalty payments from PSL,
EPL conducts no significant business activities.
1
<PAGE>
EPL Common Stock has no established public trading market. EPL's principal
executive offices are located at 245 Fischer Avenue, Suite A-1, Costa Mesa,
California 92626, and its telephone number is (949) 751-8505.
EPL SPECIAL MEETING
Time, Place and Date. The EPL Special Meeting will be held on August 3,
1998, at 7:30 p.m., local time, at the Atrium Hotel (formerly The Airporter),
located at 18700 MacArthur Blvd., Irvine, California 92612.
Purpose of the EPL Special Meeting. At the EPL Special Meeting,
shareholders will consider and vote upon a proposal to approve the Transaction
and transact such other business as may properly come before the EPL Special
Meeting. See "EPL SPECIAL MEETING."
Record Date; Votes Required; Security Ownership of Management. Only
shareholders of record at the close of business on July 1, 1998 are entitled to
notice of and to vote at the EPL Special Meeting (the "Record Date"). As of the
close of business on the Record Date, there were six million six hundred eighty-
six thousand seventy (6,686,070) shares of EPL Common Stock issued and
outstanding held by approximately two hundred ninety-one (291) holders of
record. Holders of EPL Common Stock on the Record Date are entitled to one vote
per share on each matter considered and voted on at the EPL Special Meeting.
The affirmative vote and written consent of the holders of a majority of the
outstanding shares of EPL Common Stock entitled to vote at the EPL Special
Meeting is required to approve the Transaction. As of the Record Date,
directors and executive officers of EPL beneficially owned in the aggregate
three million nine hundred two thousand five hundred thirty-five (3,902,535)
shares of EPL Common Stock (or approximately 58% of the issued and outstanding
EPL Common Stock). Each of the directors and executive officers of EPL has
advised EPL that he intends to vote his shares of EPL Common Stock to approve
the Transaction.
Recommendation of the EPL Board of Directors. The Board of Directors of
EPL (the "EPL Board") has determined that the Transaction is in the best
interests of EPL and its shareholders and has unanimously approved the
Transaction. Accordingly, the EPL Board unanimously recommends that the
shareholders of EPL vote FOR approval of the Transaction. In deciding to
approve the Transaction, the EPL Board considered a number of factors. See "THE
TRANSACTION -- Reasons for the Transaction."
Proxies. The proxy accompanying this Proxy Statement/Prospectus is
solicited on behalf of the EPL Board for use at the EPL Special Meeting. All
shares of EPL Common Stock represented by properly executed proxies will, unless
such proxies have been previously revoked, be voted in accordance with the
instructions indicated on such proxies. If no instructions are indicated, such
shares will be voted against approval of the Transaction and, in the discretion
of the proxy holder, voted for any other matter which may properly come before
the EPL Special Meeting.
PIC CORPORATE ACTION
The Board of Directors of PIC (the "PIC Board") has unanimously determined
that the Acquisition is in the best interests of PIC and its stockholders and
has approved the Acquisition. The stockholders of PIC are not required to take
any action in connection with the Acquisition.
2
<PAGE>
THE ACQUISITION
General. The Agreement provides that PIC will purchase substantially all
of the assets (the "Assets") and assume certain of the liabilities of EPL (the
"Assumed Liabilities") and, in consideration thereof, issue and deliver to EPL
at the closing of the Acquisition (the "Closing") one certificate representing
two million nine hundred ninety-three thousand thirty-five (2,993,035) shares of
PIC Common Stock. The Transaction is intended to qualify as a tax-free
reorganization under Sections 368(a)(1)(C) and (a)(2)(G) of the Internal Revenue
Code of 1986, as amended (the "Code") and, accordingly, EPL will be required to
consummate the Dissolution following consummation of the Acquisition. Pursuant
to the Dissolution, EPL will distribute all of its assets, including the shares
of PIC Common Stock issued to EPL pursuant to the Agreement, to its
shareholders. See "THE TRANSACTION -- The Dissolution."
Conditions to the Acquisition. Consummation of the Acquisition is subject
to various conditions, including, among others, (a) the approval of the
Transaction by the requisite vote of the holders of EPL Common Stock and (b) the
effectiveness of the Registration Statement of which this Proxy Statement/
Prospectus is a part. See "THE TRANSACTION -- Terms of the Agreement
Conditions to Each Party's Obligation to Effect the Acquisition; -- Conditions
to PIC's Obligation to Effect the Acquisition; -- Conditions to EPL's Obligation
to Effect the Acquisition."
Amendment. The Agreement may be amended by mutual agreement of the parties
thereto. Any amendment to the Agreement must be in writing and signed by the
parties to the Agreement.
Termination. The Agreement may be terminated at any time prior to the date
of the Closing (the "Closing Date") (a) by mutual agreement of EPL and PIC or
(b) by PIC or EPL if the Closing has not occurred on or before 5:00 p.m. Pacific
Standard Time on December 31, 1998.
Fees and Expenses. EPL will bear all federal, state and local income taxes
and franchise taxes arising in connection with the transactions contemplated by
the Agreement, if any. All other costs and expenses, including legal and
accounting fees, will be borne by the party incurring such costs and expenses.
See "THE TRANSACTION -- Terms of the Agreement -- Fees and Expenses."
Indemnification. Under the Agreement, EPL has agreed to indemnify PIC for
losses resulting from (a) the breach of any warranty or any inaccuracy of any
representation made by EPL or (b) the breach of any covenant or agreement made
by EPL pursuant to the Agreement or any ancillary documents thereto. PIC has
agreed in the Agreement to indemnify EPL for losses relating to (a) the breach
of any warranty or any inaccuracy of any representation made by PIC or (b) the
breach of any covenant or agreement made by PIC pursuant to the Agreement or any
ancillary documents thereto. With certain exceptions, EPL will not be liable to
PIC for indemnification except to the extent that such party's indemnifiable
losses exceed an individual indemnification deductible of twenty-five thousand
dollars ($25,000) in amount unless and until the total of all claims and
liabilities covered by indemnification under the Agreement exceeds the aggregate
indemnification deductible of one hundred fifty thousand dollars ($150,000). In
addition, the liability of EPL for indemnification of PIC shall be limited to an
aggregate amount equal to the value of the PIC Common Stock issued to EPL
pursuant to the Agreement. See "THE TRANSACTION -- Terms of the Agreement --
Indemnification."
3
<PAGE>
OPINION OF EPL'S FINANCIAL ADVISOR
North American Capital Partners ("NACP") has delivered its written opinion
to the EPL Board of Directors to the effect that as of April 27, 1998, the date
of such opinion, the terms of the Acquisition are fair, from a financial point
of view, to the holders of EPL Common Stock. A copy of the NACP's opinion,
which sets forth the assumptions made, matters considered and limitations on the
review undertaken by NACP, is attached as Annex C to this Proxy
Statement/Prospectus. Shareholders of EPL are urged to read the written opinion
carefully and in its entirety. See "THE TRANSACTION Opinion of EPL's Financial
Advisor."
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
In considering the Transaction contemplated by the Agreement, shareholders
of EPL should be aware that Gary C. Wykidal, legal counsel to EPL in connection
with the Transaction, is also a shareholder of EPL. See "THE TRANSACTION
Interests of Certain Persons in the Transaction."
THE DISSOLUTION
The Transaction is intended to qualify as a tax-free reorganization under
Sections 368(a)(1)(C) and (a)(2)(G) of the Code. In order to qualify, among
other things, "substantially all of the properties" of EPL must be transferred
to PIC and EPL must be liquidated and dissolved. Therefore, the Dissolution
pursuant to the EPL Plan of Dissolution is an integral part of the Transaction.
See "THE TRANSACTION -- The Dissolution."
GOVERNMENT APPROVALS REQUIRED
Other than the filing with the Commission of the Registration Statement and
this Proxy Statement/Prospectus and compliance with applicable state securities
laws and regulations, PIC and EPL are not aware of any federal, state or foreign
regulatory requirements that must be complied with or approvals that must be
obtained in connection with the Transaction.
FEDERAL INCOME TAX CONSEQUENCES
The Transaction is intended to qualify as a tax-free reorganization under
Sections 368(a)(1)(C) and (a)(2)(G) of the Code. If the Transaction does so
qualify, neither EPL nor the shareholders of EPL will recognize taxable gain or
loss upon the receipt of shares of PIC Common Stock in connection with the
Acquisition or Dissolution, respectively. EPL, however, will recognize gain in
the Dissolution upon the sale or distribution of any appreciated assets that are
not acquired by PIC in the Acquisition. Furthermore, the shareholders of EPL
will recognize gain in the Dissolution in an amount equal to the lesser of (i)
the fair market value of the property other than PIC Common Stock (including any
cash payment in lieu of a fractional share of PIC Common Stock) distributed to
him or her and (ii) the gain realized by the shareholders in the Transaction.
See "THE TRANSACTION -- Federal Income Tax Consequences."
4
<PAGE>
ACCOUNTING TREATMENT
For financial accounting purposes, the Acquisition will be accounted for by
PIC using the purchase method of accounting in accordance with generally
accepted accounting principles. See "THE TRANSACTION -- Accounting Treatment."
DISSENTERS' RIGHTS
Under Chapter 13 of the California Corporations Code ("Chapter 13"), the
full text of which is attached to this Proxy Statement/Prospectus as Annex D,
holders of record of EPL Common Stock are entitled to dissenters' rights in
connection with the Transaction. If the Transaction is approved by the EPL
shareholders and consummated, any EPL shareholder who did not vote to approve
the Transaction, subject to compliance with certain procedures, has rights as a
dissenting shareholder to have his or her shares purchased at fair market value.
The amount of cash to which any EPL shareholder who perfects dissenters' rights
may become entitled to receive may be more or less than the value of the PIC
Common Stock provided in the Agreement. The required procedures must be
followed exactly or dissenters' rights, if available, may be forfeited. For a
summary of these rights see "THE TRANSACTION Dissenters' Rights." Pursuant to
the terms of the Agreement, if greater than 5% of all shares of EPL Common Stock
outstanding immediately prior to the date of the Closing demand that EPL
purchase their respective shares under Chapter 13, PIC has the right to
terminate the Agreement.
COMPARISON OF SHAREHOLDER RIGHTS
The rights of EPL's shareholders currently are determined by reference to
the California Corporations Code (the "CCC"), EPL's Articles of Incorporation,
as amended to date (the "EPL Articles") and Bylaws (the "EPL Bylaws").
Following the Transaction, EPL shareholders will become shareholders of PIC, and
their rights as shareholders will be determined by the Nevada General
Corporation Law (the "NGCL"), PIC's Articles of Incorporation, as amended to
date (the "PIC Articles") and Bylaws (the "PIC Bylaws"). See "CERTAIN
DIFFERENCES IN THE RIGHTS OF PIC AND EPL SHAREHOLDERS."
5
<PAGE>
COMPARATIVE MARKET VALUE
PIC Common Stock is currently trading on the AMEX under the symbol "PRL."
There is no established public trading market for EPL Common Stock. The
following table sets forth the closing prices per share of PIC Common Stock and
the equivalent per share prices of EPL Common Stock on February 10, 1998, the
last trading day preceding the public announcement of the proposed Transaction
and on June 30, 1998, the latest practicable trading day before the printing of
this Proxy Statement/Prospectus. EPL shareholders are advised to obtain current
market quotations for PIC Common Stock prior to making any decision with respect
to the Transaction. See "MARKET PRICE OF AND DIVIDENDS ON PIC'S COMMON EQUITY,"
"MARKET PRICE OF AND DIVIDENDS ON EPL'S COMMON EQUITY."
<TABLE>
<CAPTION>
PIC EPL EPL
Common Stock COMMON STOCK EQUIVALENT(1)
--------------- --------------- -------------
<S> <C> <C> <C>
February 10, 1998 $2.81(2) N/A(3) $1.41
June 30, 1998 $2.94(4) N/A(3) $1.47
</TABLE>
_________________
(1) Represents the equivalent of one share of EPL Common Stock calculated by
multiplying the closing sales price per share of PIC Common Stock on such
date by the implied exchange ratio of PIC Common Stock for EPL Common
Stock, which is 1:2.
(2) Represents the per share price as quoted on the OTC Bulletin Board prior to
PIC's listing on the AMEX.
(3) Historical closing price information for shares of EPL Common Stock is not
available because there is no public trading market for EPL Common Stock.
(4) Represents the per share price as quoted on the AMEX on the date
indicated.
6
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following summary Unaudited Pro Forma Combined Financial Data should be
read in conjunction with the Unaudited Pro Forma Combined Financial Statements
and related notes included elsewhere in this Proxy Statement/Prospectus. This
pro forma financial information should not be regarded as indicative of the
results of operations or financial condition of PIC for any future period or at
any future date. See "UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS."
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, DECEMBER 31,
1998 1997
---------------- ----------------
Statement of Operations Data
<S> <C> <C>
Net revenues.................................................. $10,848,742 $29,846,795
Net income.................................................... 1,489,444 2,368,759
Net income per common share:
Basic...................................................... $ 0.05 $ 0.08
Diluted.................................................... $ 0.05 $ 0.08
Weighted average number of common shares outstanding:
Basic...................................................... 28,457,535 28,501,070
Diluted.................................................... 28,883,290 28,683,809
Balance Sheet Data
Total assets.................................................. $22,342,456 $20,001,738
Total liabilities............................................. 5,173,016 4,456,814
Total stockholders' equity.................................... 17,169,440 15,544,924
</TABLE>
7
<PAGE>
COMPARATIVE PER SHARE INFORMATION
The following table sets forth certain per share data of PIC and EPL on
both historical and pro forma combined bases (giving effect to the Acquisition
using the purchase method of accounting) and certain information on equivalent
pro forma combined basis for each share of EPL Common Stock. The following
information should be read in conjunction with and is qualified by reference to
the selected financial data, consolidated financial statements and accompanying
notes of PIC and EPL. The pro forma combined financial information is not
necessarily indicative of the operating results that would have been achieved
had the transaction been in effect as of the beginning of the period presented
and should not be construed as representative of future operations. Comparative
per share information regarding PIC's and EPL's respective cash dividends has
been omitted as neither company has paid any cash dividends in the past.
<TABLE>
<CAPTION>
PER SHARE OF COMMON STOCK
--------------------------------------
Income (1) BOOK VALUE (2)
------------------- -----------------
Basic Diluted Basic Diluted
------- ---------- -------- -------
<S> <C> <C> <C> <C>
PIC - Historical
Three months ended March 31, 1998................................. $0.06 $0.06 $ 0.44 $ 0.44
Year ended December 31, 1997...................................... $0.08 $0.08 $ 0.38 $ 0.38
PIC - Pro Forma Combined
Three months ended March 31, 1998................................. $0.05 $0.05 $ 0.60 $ 0.59
Year ended December 31, 1997...................................... $0.08 $0.08 $ 0.55 $ 0.54
EPL - Historical (3)
Eleven months ended March 31, 1998................................ $0.09 $0.09 $ 0.08 $ 0.08
Year ended April 30, 1997......................................... $0.11 $0.11 $(0.01) $(0.01)
EPL - Equivalent Pro Forma Combined (4)
Three months ended March 31, 1998................................. $0.03 $0.03 $ 0.30 $ 0.30
Year ended December 31, 1997...................................... $0.04 $0.04 $ 0.27 $ 0.27
</TABLE>
_________________________
(1) Pro Forma combined income represents income from continuing operations as
if the Acquisition had been consummated on January 1, 1997.
(2) Basic historical book value per share information for PIC and EPL as of the
end of each period presented is computed by dividing historical
stockholders' equity for each respective company by the number of shares of
PIC Common Stock and EPL Common Stock, as the case may be, outstanding at
the end of each period presented, excluding common stock equivalents.
Diluted historical book value per share information for PIC and EPL
includes common stock equivalents in the calculation. Basic pro forma
combined book value per share information as of March 31, 1998 and December
31, 1997, respectively, is computed by dividing pro forma stockholders'
equity by the number of shares of PIC Common Stock outstanding as of such
date, excluding common stock equivalents, plus the shares of PIC Common
Stock to be issued in the Acquisition. Diluted pro forma combined book
value per share information includes common stock equivalents in the
calculation.
(3) EPL historical per share information is computed on the basis of 5,986,070
outstanding shares of EPL Common Stock, which gives effect to the surrender
for cancellation of 700,000 shares of EPL Common Stock by Michael R. Davis
in connection with the Acquisition.
8
<PAGE>
(4) Equivalent pro forma per share information for EPL is determined by
multiplying PIC's pro forma per share information by the implied exchange
ratio of PIC Common Stock for EPL Common Stock, which is 1:2.
9
<PAGE>
RISK FACTORS
In addition to the other information in this Proxy Statement/Prospectus,
the following factors should be carefully considered by EPL shareholders in
evaluating the proposed Transaction and the shares of PIC Common Stock to be
issued pursuant to the Agreement. This Proxy Statement/Prospectus 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 - PIC" and in this
Proxy Statement/Prospectus generally. PIC'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 Proxy Statement/Prospectus. These forward-looking
statements are made as of the date of this Proxy Statement/Prospectus and PIC
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.
FEDERAL INCOME TAX RISKS RELATING TO THE TRANSACTION
There are material income tax risks associated with the Transaction.
Neither EPL nor PIC has obtained a ruling from the Internal Revenue Service (the
"IRS") as to whether the Transaction qualifies as a tax-free reorganization
under Sections 368(a)(1)(C) and (a)(2)(G) of the Code (a "C-Reorganization"), or
with respect to any other tax matter regarding the Transaction, and no such
ruling will be sought or obtained from the IRS. EPL and PIC have received an
opinion of Gary C. Wykidal & Associates, counsel to EPL, to the effect that the
Transaction qualifies as a C-Reorganization for federal income tax purposes and
as to certain other matters. Such opinion of counsel is qualified in certain
significant respects and will not be binding on the IRS. Accordingly, there can
be no assurance that the Transaction will not at some later date be found not to
qualify as a C-Reorganization, in which case both EPL and the shareholders of
EPL will incur taxable gains upon the receipt of PIC Common Stock. Moreover,
the opinion of counsel is based on current law and administrative regulations,
which could change without notice and with retroactive effect. There can be no
assurance that the IRS will allow, on audit, the Transaction to be treated as a
C-Reorganization. If the C-Reorganization is disallowed by the IRS and such
disallowance is upheld by the courts, corresponding adjustments will be made in
the federal income tax returns of EPL and its shareholders for their affected
taxable years, with the result that both EPL and its shareholders will incur
additional taxes, interest and other costs, and possibly penalties. In
addition, audit of EPL's federal income tax returns may result in an examination
and audit of the individual shareholders' returns that would not otherwise
occur.
Even if the Transaction qualifies as a C-Reorganization for federal income
tax purposes, EPL shareholders may be required to recognize gain for federal
income tax purposes upon the distribution by EPL of any assets (other than
shares of PIC Common Stock) to its shareholders. Management of EPL believes
that gain is unlikely to be recognized pursuant to the above because the net
value of assets so distributed in each case is likely to be zero or de minimis.
There can be no assurance, however, that the actual value of any assets so
distributed will be in accordance with EPL management's belief or that the IRS
will not take the position that such distributed assets have a
10
<PAGE>
significant net value and that EPL shareholders are required to recognize
taxable gain. See "THE TRANSACTION -- "Federal Income Tax Consequences."
MANAGING GROWTH
PIC currently contemplates a period of rapid growth that will place a
significant strain on its financial, management and other resources. PIC'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
PIC's executives are unable to manage growth effectively, PIC's business,
operating results, financial position and cash flows could be adversely
affected. See "BUSINESS OF PIC."
NEED TO RAISE CAPITAL FOR GROWTH
Although PIC does not have plans to raise additional capital in the next
twelve months, PIC does expect that its capital requirements will increase
significantly in the future. There can be no assurance that PIC will be
successful in meeting such capital requirements on satisfactory terms, if at
all. PIC'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. PIC may seek
additional funds through debt or equity financing. Issuance of additional
equity securities by PIC could result in substantial dilution to its present or
future stockholders. If adequate funds are not available on acceptable terms,
PIC 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 PIC's business, operating
results, financial position and cash flows. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PIC."
HISTORIC RELIANCE ON DIRECT RESPONSE SALES
Approximately 77.7% ($12,287,000) of PIC's revenues in 1996 and 49.4%
($14,758,000) of PIC's revenues in 1997 have been generated from sales in direct
response to Prolong's 30 minute television commercial. Prolong's plans for
future growth contemplate the expansion of sales to retail,
industrial/commercial and international customers. To date, sales to such
customers have constituted only a limited portion of PIC's revenues. Prolong
typically consummates sales to retail, industrial/commercial and the
international markets through independent distributors. Prolong 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 retail, industrial/commercial
and international markets. See "BUSINESS OF PIC Geographic Markets; --
Marketing and Distribution of the Products; -- Customers; MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
PIC."
11
<PAGE>
DEPENDENCE ON KEY MANAGEMENT PERSONNEL
PIC's success depends, in large part, upon the contributions, experience
and expertise of its key management personnel. None of PIC's personnel is
subject to an employment agreement with PIC. PIC maintains a key-man life
insurance policy in the amount of $2,000,000 on the life of Elton Alderman,
President of PIC. There can be no assurance, however, that PIC's key-man
insurance is adequate. In addition, PIC's success will depend upon its ability
to attract and retain additional highly qualified management personnel. The
loss of the services of any key management personnel or the inability to attract
and retain such management personnel could have a material adverse effect on
PIC's business, operating results, financial position and cash flows. See
"DIRECTORS AND EXECUTIVE OFFICERS OF PIC."
RISK OF PRODUCT LIABILITY
The nature of Prolong's business exposes it to risk from product liability
claims. PIC 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 PIC's current coverage will be adequate to cover future product
liability claims. PIC 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 PIC 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 PIC's business, operating results,
financial position and cash flows. See "BUSINESS OF PIC Products; LEGAL
PROCEEDINGS INVOLVING PIC."
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) and Quaker State (Slick 50), 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 PIC's business,
operating results, financial position and cash flows. 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
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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 PIC's business, operating results,
financial position and cash flows. See "BUSINESS OF PIC Competition."
MARKET VOLATILITY
The market prices of PIC Common Stock have been, and in the future could
be, subject to wide fluctuations in response to variations in quarterly
operating results of PIC and its customers and competitors, changes in
management, announcements of technological innovations or new product
developments by PIC or its competitors, changes in analysts' estimates of PIC's
financial performance, changes in the lubricant industry standards, legislative
or regulatory changes, general industry trends, worldwide economic and financial
conditions and other events or factors. In addition, the stock market has
experienced extreme price and volume fluctuations which have often been
unrelated to the operating performance of a particular company. These broad
market fluctuations and other factors may adversely affect the market price of
PIC Common Stock. See "MARKET PRICE OF AND DIVIDENDS ON PIC'S COMMON
EQUITY."
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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 PIC's business, operating
results, financial position and cash flows. See "BUSINESS OF PIC Production."
LIMITED OPERATING HISTORY
PIC, under its current management, has been an independent operating
company only since June 1995. Prior to such time, PIC had become dormant,
without significant assets or operations for approximately 8 years. There can
be no assurance that PIC will be successful in continuing to expand its
operations and access markets so as to continue its growth.
From the Reorganization through December 1995, PIC generated revenues of
approximately $391,000 and incurred operating losses of approximately $416,000.
Since such time, PIC has been successful in generating net income from its
operations. There can be no assurance that PIC will continue to be successful
in generating net income from operations in the future. See "BUSINESS OF PIC --
General."
DEPENDENCE ON THIRD PARTY SUPPLY RELATIONSHIPS
To date, Prolong has been able to obtain adequate supplies of the
components required for its AFMT formula from its existing sources to meet its
current manufacturing schedule. Prolong does not foresee any shortages of
supply in the near future. However, Prolong has recently increased production
and plans further increases to meet increases in demand. These increases could
eventually place a strain on the production capacity of its existing suppliers.
While Prolong is working actively with each of its suppliers to increase
production of the components, there can be no assurance that each supplier will
be able to increase its production in time to satisfy Prolong's increasing
requirements or that alternative suppliers will be able to meet any such
deficiency on an ongoing basis. If Prolong is unable to obtain sufficient
quantities of the components, or if such components do not meet Prolong's
quality standards, delays or reductions in product shipments may result which
would have a material adverse effect on PIC's business, operating results,
financial position and cash flows. See "BUSINESS OF PIC Production."
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PRODUCT CONCENTRATION
PIC 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 PIC'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 PIC's business, operating results, financial position and cash flows.
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. See
"BUSINESS OF PIC Products."
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 PIC's business, operating results, financial position and cash
flows. See "BUSINESS OF PIC Competition."
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DEPENDENCE ON INTERNATIONAL SALES FOR FUTURE GROWTH
International sales comprised 10.3% and 3.5% of PIC's revenues in 1996 and
1997, respectively, resulting in approximately 34.0% and 5.0% of PIC'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 PIC's
business, operating results, financial position and cash flows 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, PIC's overall business, operating
results, financial position and cash flows. See "BUSINESS OF PIC Geographic
Markets."
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 Prolong to
notify the EPA of any changes in the chemical composition of such conditioners
or other information contained in such registration. Prolong is not aware of
any additional governmental approvals required for its products nor does Prolong
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 its business. Prolong has attempted to minimize its economic risk
from violations by its manufacturers or bottlers by qualifying alternate sources
of such services. Prolong believes that its activities and those of its
contract manufacturers conform to present governmental regulations applicable to
each such entities' operations. Additionally, Prolong believes that its current
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 process 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 Prolong to
future liability or could cause its operations or those of its contract
manufacturers to be curtailed, relocated or suspended. See "BUSINESS OF PIC
Production."
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CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS
As of June 30, 1998, the present directors, executive officers and
principal stockholders of PIC beneficially own, in the aggregate, approximately
42.7% of the outstanding PIC Common Stock. These stockholders, acting together,
will have the ability to exert significant influence on the election of PIC's
directors and most other stockholders' actions and, as a result, direct PIC's
affairs and business. Such concentration may have the effect of delaying or
preventing certain actions that can be taken by PIC including, but not limited
to, a change in control of PIC. See "COMMON STOCK OWNERSHIP BY MANAGEMENT AND
PRINCIPLE STOCKHOLDERS OF PIC."
RISKS ASSOCIATED WITH POTENTIAL "YEAR 2000" PROBLEMS OF THIRD PARTIES
It is possible that the currently installed computer systems, software
products or other business systems of PIC's suppliers, manufacturers,
distributors or customers, working either alone or in conjunction with other
software or systems, will not accept input of, store, manipulate and output
dates in the year 2000 or thereafter without error or interruption (commonly
known as the "Year 2000 Problem"). PIC's business systems, including its
computer systems, are not subject to the Year 2000 Problem; however, PIC is
querying its suppliers, manufacturers, distributors and customers as to their
progress in identifying and addressing problems that their computer systems may
face in correctly processing date information as the year 2000 approaches and is
reached. However, there can be no assurance that PIC will identify all such
Year 2000 Problems in the computer systems of its suppliers, manufacturers,
distributors or customers in advance of their occurrence or that they will be
able to successfully rectify any problems that are discovered. The expenses of
PIC's efforts to identify and address such problems, or the expenses or
liabilities to which PIC may become subject as a result of such problems, are
not expected to have a material adverse effect on PIC's business, operating
results, financial position and cash flows. In addition, the purchasing
patterns of existing and potential customers may be affected by the Year 2000
Problem, which could cause fluctuations in PIC's sales volumes.
EFFECTS OF PREFERRED STOCK ON THE RIGHTS OF COMMON STOCK
PIC's Board of Directors is authorized to issue, without stockholder
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 PIC Common
Stock and that could adversely effect the voting power or other rights of the
holders of PIC 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 PIC, which
may not be in the best interests of certain of its stockholders. PIC 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 PIC Common Stock in the future. See "MARKET PRICE
OF AND DIVIDENDS ON PIC'S COMMON EQUITY."
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RESIDUAL LIABILITY
The shareholders of EPL may have certain residual liabilities after the
Transaction. The shareholders of EPL may be liable under Section 2009 of the
California Corporations Code to the remaining unsatisfied creditors of EPL, if
any, following the Dissolution. Under Section 2009, suit may be brought in the
name of EPL to enforce any outstanding debts or liabilities against any or all
of the EPL shareholders by any one or more unsatisfied creditors of EPL. The
EPL shareholders may be required to return their respective ratable shares of
the amount needed to pay the debts and liabilities of EPL pursuant to Section
2009. The liability of an EPL shareholder under Section 2009 is limited to the
value of the property each shareholder receives in connection with the
Dissolution. See "THE TRANSACTION."
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EPL SPECIAL MEETING
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies from shareholders of EPL by the EPL Board for use at the
EPL Special Meeting. At the EPL Special Meeting, shareholders of EPL will
consider, vote upon and give their written consent to a proposal to approve the
Transaction and transact such other business as may properly come before the EPL
Special Meeting.
TIME, DATE AND PLACE
The EPL Special Meeting will be held at 7:30 p.m., local time, on, August
3, 1998, at the Atrium Hotel (formerly The Airporter), located at 18700
MacArthur Blvd., Irvine, California 92612.
RECORD DATE AND SHARES ENTITLED TO VOTE
Only shareholders of record as of the close of business on the Record Date
are entitled to receive notice of and to vote at the EPL Special Meeting. As of
the close of business on the Record Date, there were six million six hundred
eighty-six thousand seventy (6,686,070) shares of EPL Common Stock issued and
outstanding held by two hundred ninety-one (291) holders of record. Holders of
EPL Common Stock on the Record Date are entitled to one vote per share on each
matter considered and voted on at the EPL Special Meeting.
The presence in person or by proxy of the holders of a majority of the
shares of EPL Common Stock issued and outstanding on the Record Date is
necessary to constitute a quorum at the EPL Special Meeting. The affirmative
vote of the holders of a majority of the EPL Common Stock entitled to vote at
the EPL Special Meeting is necessary to approve the Transaction. Abstentions
will be counted as shares that are present and entitled to vote for purposes of
determining the presence of a quorum at the EPL Special Meeting. Abstentions
with respect to the proposal to approve the Transaction will count as votes
against such proposal at the EPL Special Meeting.
As of the Record Date, directors and executive officers of EPL beneficially
owned in the aggregate three million nine hundred two thousand five hundred
thirty-five (3,902,535) shares of EPL Common Stock (or approximately 58% of the
issued and outstanding EPL Common Stock). Each of the directors and executive
officers of EPL has advised EPL that he intends to vote his or her shares of EPL
Common Stock to approve the Transaction.
RECOMMENDATION OF THE EPL BOARD OF DIRECTORS
The EPL Board has determined that the Transaction is in the best interests
of EPL and its shareholders and has unanimously approved the Transaction.
Accordingly, the EPL Board unanimously recommends that the shareholders of EPL
vote FOR approval of the Transaction.
PROXIES
The proxy accompanying this Proxy Statement/Prospectus is solicited on
behalf of the EPL Board for use at the EPL Special Meeting. All shares of EPL
Common Stock represented by properly executed proxies will, unless such proxies
have been previously revoked, be voted in
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accordance with the instructions indicated on such proxies. If no instructions
are indicated, such shares will be voted against approval of the Transaction
and, in the discretion of the proxy holder, voted for any other matter which may
properly come before the EPL Special Meeting.
An EPL shareholder who has given a proxy may revoke it at any time prior to
its exercise at the EPL Special Meeting by (i) giving written notice of
revocation to the Secretary of EPL, (ii) properly submitting to EPL a duly
executed proxy bearing a later date, or (iii) voting in person at the EPL
Special Meeting. All written notices of revocation and other communications
with respect to revocation of proxies should be addressed to EPL as follows:
EPL Pro-Long, Inc., 245 Fischer Avenue, Suite A-1, Costa Mesa, California
92626, Attention: Michael R. Davis, President. A proxy appointment will not be
revoked by death or supervening incapacity of the shareholder executing the
proxy unless, before the shares are voted, notice of such death or incapacity is
filed with EPL's Secretary or other person responsible for tabulating votes on
behalf of EPL.
All expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement/Prospectus, will be borne by EPL. In addition to
solicitation by use of the mails, proxies may be solicited by directors and
officers of EPL in person or by telephone, telegram, facsimile transmission or
other means of communication. Such directors and officers will not be
additionally compensated, but may be reimbursed for reasonable out-of-pocket
expenses in connection with such solicitation. Arrangements will also be made
with custodians, nominees and fiduciaries for reasonable expenses incurred in
connection therewith.
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THE TRANSACTION
The following is a summary of the material features of the proposed
Transaction. This description does not purport to be complete and is qualified
in its entirety by reference to the Annexes hereto, including the Agreement, a
copy of which is set forth in Annex A to this Proxy Statement/Prospectus and
incorporated herein by reference, and the EPL Plan of Dissolution, a copy of
which is set forth in Annex B to this Proxy Statement/Prospectus and
incorporated herein by reference. All EPL shareholders are urged to read the
Annexes in their entirety.
GENERAL
The Agreement provides that PIC will purchase the Assets and assume the
Assumed Liabilities and, in consideration thereof, issue and deliver to EPL at
the Closing (as defined in the Agreement) one certificate representing two
million nine hundred ninety-three thousand thirty-five (2,993,035) shares of PIC
Common Stock. The Transaction is intended to qualify as a tax-free
reorganization under Sections 368(a)(1)(C) and (a)(2)(G) of the Code and,
accordingly, EPL will be required to consummate the Dissolution following
consummation of the Acquisition. Pursuant to the Dissolution, EPL will
distribute all of its assets, including the shares of PIC Common Stock issued to
EPL pursuant to the Agreement, to its shareholders.
TERMS OF THE AGREEMENT
Consideration. On the Closing Date PIC shall deliver to EPL one
certificate representing two million nine hundred ninety-three thousand thirty-
five (2,993,035) shares of PIC Common Stock.
Conditions to Each Party's Obligation to Effect the Acquisition. The
obligations of EPL and PIC to consummate the Acquisition shall be subject to the
fulfillment at or prior to the Closing of certain conditions, including: (a)
there shall be no suit, investigation, action or proceeding challenging the
transactions contemplated by the Agreement; (b) the Registration Statement shall
have become effective and no stop order suspending the effectiveness of the
Registration Statement shall be in effect nor any proceedings for such purpose
or under the proxy rules shall be pending, and all applicable state securities
laws shall have been complied with, and no stop order suspending the
effectiveness of any qualification or registration of the PIC Common Stock under
such state securities laws shall be issued and pending or threatened by the
authorities of any such state; and (c) the Closing of the Transaction
contemplated by the Agreement shall have taken place on or before December 31,
1998.
Conditions to PIC's Obligation to Effect the Acquisition. The obligations
of PIC under the Agreement are further subject to the satisfaction at or prior
to Closing of certain additional conditions, including: (a) the Purchased
Assets (as defined in the Agreement) shall be free and clear of all liens and
encumbrances, except liens and encumbrances specifically disclosed on the
schedules thereto and specifically assumed by PIC; (b) the representations and
warranties of EPL in the Agreement and the EPL Ancillary Documents (as defined
in the Agreement) shall be true and correct on and as of the Closing Date as
though such representations and warranties were made on and as of such date and
EPL shall have performed and complied with all covenants, obligations and
conditions of the Agreement required to be performed and complied with by it;
(c) EPL shall have
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delivered to PIC the opinion of its legal counsel addressed to PIC on and as of
the Closing Date with respect to certain corporate matters; (d) the Transaction
shall have been duly authorized by the shareholders of EPL; (e) PIC shall be
provided with an officer's certificate executed by the President of EPL as to
certain factual matters; (f) by voting in favor of the Transaction, the EPL
shareholders shall have agreed that the PIC Common Stock to be received at the
Closing shall be subject to the transfer restriction in the form attached
thereto as Exhibit D (the "Transfer Restriction"); (g) EPL shall have furnished
PIC with a certificate executed by the Secretary of EPL with respect to certain
corporate matters; (h) EPL shall have delivered to PIC tax clearance
certificates with respect to EPL issued by the appropriate tax authorities of
the State of California, with dates reasonably close to the Closing Date; (i)
except as disclosed to PIC in the schedules or exhibits to the Agreement, no
material adverse condition shall exist with respect to the financial condition,
assets, properties, goodwill, earnings or business of EPL; (j) all requisite
corporate and other action in order to consummate the transactions contemplated
by the Agreement shall have been taken by EPL and its shareholders; (k) EPL
shall have received consents and waivers of rights to terminate or modify rights
or obligations of EPL from any person from whom such consent or waiver is
required under any material instrument or agreement being assumed by PIC, or
who, as a result of the Agreement, would have such rights to terminate or modify
such instruments or agreements either by the terms of any material contract,
lease or agreement, or as a matter of law; (l) the consummation of the
transactions contemplated by the Agreement shall not violate any applicable
federal or state securities law with respect to the offering and the issuance of
the PIC Common Stock; (m) EPL and PSL shall have entered into an Amendment to
Exclusive License Agreement, amending the terms of the Exclusive License
Agreement dated November 10, 1993, by and between EPL and PSL; (n) EPL shall not
have received notice of an adverse judgment regarding the outcome of the
litigation set forth in Schedule 6.13 attached thereto; (o) the aggregate number
of shares of EPL Common Stock owned by EPL shareholders that have demanded that
EPL purchase their shares under Chapter 13 shall not constitute more than 5% of
all shares of EPL Common Stock outstanding immediately prior to the Closing
Date; (p) EPL shall have furnished PIC with a termination statement duly
executed by Edward E. Jay that fully releases his security interest in any
properties of EPL; and (q) EPL and Michael R. Davis, President of EPL, shall
have entered into a Cancellation Agreement, in the form attached thereto as
Exhibit F, that provides for the cancellation of seven hundred thousand
(700,000) shares of EPL Common Stock held by Michael R. Davis in consideration
for PIC entering into the Agreement.
Conditions to EPL's Obligation to Effect the Acquisition. The obligations
of EPL under the Agreement are further subject to the satisfaction at or prior
to the Closing of certain additional conditions, including: (a) the
representations and warranties of PIC in the Agreement and the PIC Ancillary
Documents (as defined in the Agreement) shall be true in all material respects
on and as of the Closing Date as though such representations and warranties were
made on and as of such date and that PIC shall have performed and complied in
all material respects with all covenants, obligations and conditions of the
Agreement required to be performed and complied with by it; (b) PIC shall have
delivered to EPL the opinion of its legal counsel, addressed to EPL, on and as
of the Closing Date with respect to certain corporate matters; and (c) EPL shall
be provided with an officer's certificate executed by the President of PIC as to
certain factual matters.
Amendment. The Agreement may be amended by mutual agreement of the parties
thereto. Any amendment to the Agreement must be in writing and signed by the
parties to the Agreement.
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Termination. Either party shall be entitled to terminate the Agreement at
any time after December 31, 1998 if by that date the conditions precedent to the
terminating party's obligations to proceed to the Closing set forth above have
not been satisfied or properly waived. In the event of such termination, other
than due to a breach or default of a party, the Agreement shall terminate and
neither party shall have any liability to the other under the Agreement, except
for PIC's and EPL's obligations of confidentiality. In the event of such
termination due to breach or default of either party, the nonbreaching party
shall have all rights and remedies available at law or in equity.
Fees and Expenses. EPL will bear 100% of any federal, state and local
income taxes and franchise taxes arising in connection with the Transaction.
All other costs and expenses will be borne by the party incurring such costs and
expenses.
Indemnification. Under the Agreement, and subject to the limitations
listed below, prior to the liquidation of EPL's assets pursuant to the EPL Plan
of Dissolution EPL is required to defend, indemnify and hold PIC, its officers,
directors, employees and Affiliated Persons (as defined in the Agreement) from
and against any and all losses, claims, judgments, liabilities, demands,
charges, suits, penalties, costs or expenses, including court costs and
attorneys' fees ("Claims and Liabilities") with respect to or arising from (a)
the breach of any warranty or any inaccuracy of any representation made by EPL;
or (b) the breach of any covenant or agreement made by EPL in the Agreement or
the EPL Ancillary Documents.
Anything to the contrary notwithstanding, (i) the obligation of EPL shall
be limited solely to the agreements, representations or warranties made by EPL;
(ii) PIC shall not be indemnified and held harmless in respect of any Claims and
Liabilities which are covered by insurance owned by EPL and assigned to PIC to
the extent that any net loss is reduced by such insurance; (iii) PIC shall not
be indemnified and held harmless in respect of any liability or claim that does
not exceed an individual indemnification deductible of twenty-five thousand
dollars ($25,000) in amount unless and until the total of all Claims and
Liabilities covered by indemnification under this section exceeds the aggregate
indemnification deductible of one hundred fifty thousand dollars ($150,000), at
which point all Claims and Liabilities (including amounts less than twenty-five
thousand dollars ($25,000)) are covered; and (iv) the liability of EPL shall be
limited to an aggregate amount equal to the value of the PIC Common Stock
received by EPL.
Under the Agreement, PIC is required to defend, indemnify and hold harmless
EPL, its officers, directors, employees and shareholders against and in respect
to all claims and liabilities with respect to or arising from (a) the breach of
any warranty or any inaccuracy of any representation made by PIC; or (b) the
breach of any covenant or agreement made by PIC in the Agreement or the PIC
Ancillary Documents.
THE DISSOLUTION
The Transaction is intended to qualify as a tax-free reorganization under
Sections 368(a)(1)(C) and (a)(2)(G) of the Code. In order to so qualify, among
other things, "substantially all of the properties" of EPL must be transferred
to PIC and EPL must be liquidated and dissolved in pursuance of the plan of
reorganization. Therefore, the Dissolution pursuant to the EPL Plan of
Dissolution is an integral part of the Transaction.
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The EPL Plan of Dissolution provides for (i) the sale and liquidation of
EPL's assets, (ii) payment of certain liabilities (which will occur at the
closing of the Acquisition with respect to such items as payment of
transactional expenses, and all other amounts which are then due) and (iii) a
liquidating distribution to the EPL shareholders of the PIC Common Stock to be
received by EPL pursuant to the Agreement and any other EPL assets not acquired
by PIC. Liquidating distributions to EPL's shareholders and formal dissolution
under applicable corporate statutes will occur as soon as possible, and in any
event within six (6) months of the Closing.
REASONS FOR THE TRANSACTION
EPL. EPL was organized in 1988 under the laws of the State of California
for the purpose of acquiring, developing and marketing lubricants and
formulations to create a wide variety of lubricant products with superior
friction fighting characteristics. From its inception until mid-1993, EPL, using
the tradename Prolong, developed a number of high performance lubrication
products based on a patented extreme pressure lubricant additive for use in
metal lubrication commonly referred to as anti-friction metal treatment. During
this time, EPL incurred substantial organizational and research and development
costs associated with the development of its products, and also incurred
substantial legal fees arising from civil litigation brought by EPL against
certain of its shareholders.
In an effort to protect the investments of the shareholders of EPL, EPL
licensed the use of the Prolong name and other proprietary technology to PSL in
November 1993 pursuant to an exclusive licensing arrangement with PSL
(hereinafter the "License Agreement"). The License Agreement provides for a
three and one-half percent (3.5%) royalty to be paid to EPL by PSL on gross
revenue derived by PSL using the Prolong name and proprietary technology. The
License Agreement provides that it shall remain in effect so long as PSL does
not commit a material breach thereunder.
In early 1997, discussions between EPL and PIC (PSL's parent corporation)
began relating to the sale of the assets of EPL to PIC. The EPL Board
considered PIC's interest in acquiring EPL and EPL's prospects as an independent
entity. The EPL Board noted that PIC had available to it substantial capital
resources to continue the development and marketing of EPL's performance
lubrication products. Commencing in approximately November 1997,
representatives of EPL and PIC negotiated a proposed form of acquisition
agreement. On January 12, 1998, the EPL Board met and reviewed, among other
things, a draft form of acquisition agreement between PIC and EPL. In addition,
the executives of PIC provided the EPL Board with financial information about
PIC including stock price information. During this period of discussions and
negotiations between EPL and PIC, neither company considered any merger,
acquisition or joint venture opportunities with others in the lubricant products
industry.
At a meeting of the EPL Board on January 12, 1998, the EPL Board discussed
the merits and fairness of the Transaction. The EPL Board determined that the
Transaction was in the best interests of the shareholders of EPL and voted to
approve the Transaction. In making its determination, the EPL Board considered
a number of factors including the following (none of which was assigned any
relative weight): (a) EPL's historical and projected results of operations and
financial condition and business prospects; (b) PIC's historical results of
operations and financial condition and business prospects; (c) the desirability
of providing access to the public securities markets to EPL's shareholders; (d)
the current trading price of PIC Common Stock and the risk that such trading
price could drop prior to the consummation of the Transaction, thereby reducing
the value of the consideration paid to
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<PAGE>
EPL; and (e) the alternative of EPL retaining its assets and distributing its
net income from royalties to its shareholders as dividends and the possibility
that EPL and its shareholders could derive greater long-term value from such
alternative.
BASED ON THE FOREGOING, THE EPL BOARD HAS DETERMINED THAT THE TRANSACTION IS IN
THE BEST INTERESTS OF EPL AND ITS SHAREHOLDERS FROM A FINANCIAL POINT OF VIEW.
ACCORDINGLY, THE EPL BOARD UNANIMOUSLY RECOMMENDS THAT EPL'S SHAREHOLDERS VOTE
"FOR" APPROVAL OF THE TRANSACTION.
PIC. At a meeting of the PIC Board on January 12, 1998, the PIC Board
discussed the merits of the Transaction. The PIC Board determined that the
Transaction was in the best interests of the shareholders of PIC and voted
unanimously to approve the Transaction. In making its determination, the PIC
Board considered a number of factors including the following (none of which was
assigned any relative weight): (a) the potential benefits of owning the AFMT
patent, the "Prolong" name and other proprietary information which PIC currently
licenses from EPL, including the opportunity to lower overall selling costs by
eliminating the payment of royalties to EPL under the AFMT license agreement;
(b) the possibility that there will be future claims made by individuals or
entities contesting the ownership or alleging infringement of the AFMT patent;
(c) the risk that the market value of PIC Common Stock could increase prior to
the consummation of the Transaction, thereby increasing the value of the
consideration paid to EPL; and (d) the potential appreciation in the market
value of PIC Common Stock following the Closing of the Transaction.
DESCRIPTION OF PIC'S SECURITIES TO BE REGISTERED
The capital stock which PIC is registering consists of 2,993,035 shares of
PIC Common Stock, par value $0.001 per share. As of June 30, 1998, PIC had
25,464,500 shares of PIC Common Stock issued and outstanding.
Each of the holders of record of PIC Common Stock is entitled to one (l)
vote per share thereof in the election of PIC's directors and all other matters
submitted to each such holder for a vote of stockholders; to share ratably in
all dividends, when, as, and if declared by PIC's Board 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 PIC's directors, and no conversion rights or sinking fund provisions
applicable to its capital stock.
REGULATORY APPROVALS
Other than the filing with the Commission of the Registration Statement and
this Proxy Statement/Prospectus and compliance with applicable state securities
laws and regulations, PIC and EPL are not aware of any federal, state or foreign
regulatory requirements that must be complied with or approvals that must be
obtained in connection with the Transaction.
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<PAGE>
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
In considering the Transaction contemplated by the Agreement, shareholders
of EPL should be aware that Gary C. Wykidal, legal counsel to EPL in connection
with the Transaction, is also a shareholder of EPL. As of June 30, 1998, Mr.
Wykidal held 50,000 shares of EPL Common Stock.
ACCOUNTING TREATMENT
For financial reporting purposes, the Acquisition will be accounted for by
PIC using the purchase method of accounting in accordance with generally
accepted accounting principles. Accordingly, the purchase price will be
allocated to the assets and liabilities of EPL acquired based on their estimated
fair values as of the date on which the Acquisition is consummated with the
excess of cost over the net assets acquired being allocated to goodwill.
FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material federal income tax
consequences of the Transaction to EPL shareholders who are individuals and
citizens and residents of the United States of America and who hold their shares
of EPL Common Stock as capital assets. The discussion is based upon the Code,
Treasury Regulations, rulings of the IRS and administrative and judicial
decisions in effect as of the date hereof. All are subject to change and any
such changes may have retroactive effect. Neither PIC nor EPL has requested the
IRS to issue a ruling with respect to whether the Transaction qualifies as a
reorganization under Sections 368(a)(1)(C) and (a)(2)(G) of the Code.
Accordingly, the treatment of the Transaction as a C-Reorganization may be
challenged by the IRS on audit. See "RISK FACTORS -- Federal Income Tax Risks
Relating to the Transaction."
Based upon the foregoing, and subject to the qualifications set forth
therein, EPL and PIC have received an opinion from Gary C. Wykidal & Associates
("GCWA") stating, subject to significant conditions, assumptions and
reservations, that the Transaction will qualify as a "reorganization" described
by Sections 368(a)(1)(C) and (a)(2)(G) of the Code. GCWA's opinion was based on
the following significant assumptions and representations, each of which serve
as a condition to the validity of the opinion: (a) EPL will transfer to PIC (i)
assets having a value of at least seventy percent (70%) of the fair market value
of EPL's total assets, (ii) assets having a value of at least ninety percent
(90%) of the fair market value of EPL's net assets, and (iii) assets having a
net value of at least ninety percent (90%) of the fair market value of EPL's net
assets; (b) none of the shares of PIC Common Stock issued to EPL will be given
as consideration for services of any employee of EPL; (c) as soon as practicable
after the receipt of the PIC Common Stock, EPL will distribute the PIC Common
Stock on a pro rata basis to each EPL shareholder; and (d) following the
Closing, EPL will cease to conduct business and dissolve. Further, GCWA's
opinion is reserved to the extent that neither PIC nor EPL sought a ruling from
the IRS with respect to the qualification of the Transaction as a reorganization
under the Code and the IRS may challenge such characterization at a future date.
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<PAGE>
Qualification of the Transaction as a "reorganization" will have the
following consequences:
1. EPL shareholders will not be required to recognize federal taxable
income or gain with respect to the receipt of PIC Common Stock in exchange for
the shares of EPL Common Stock surrendered. Further, EPL shareholders will not
be entitled to deduct for federal income tax purposes any loss realized in the
exchange.
2. Upon the liquidation of EPL and the distribution of property other
than PIC Common Stock (including any cash distributed in lieu of fractional
shares of PIC Common Stock) to the EPL shareholders, each EPL shareholder will
recognize income for federal income tax purposes in an amount equal to the
lesser of (i) the fair market value of the property, including any cash
distributed in lieu of fractional shares of stock but not including shares of
PIC Common Stock, distributed to him or her, and (ii) the gain realized by the
shareholder in the Transaction.
3. The aggregate tax basis of the shares of PIC Common Stock received by
the EPL shareholders in the Transaction will be the same as the aggregate tax
basis of the EPL Common Stock surrendered in exchange therefore, decreased by
the fair market value of any other property or money received in the Transaction
and any loss recognized by the EPL shareholders in the Transaction, and
increased by any gain recognized by the EPL shareholders in the Transaction.
4. The holding period of the PIC Common Stock received by the EPL
shareholders in the Transaction will include the period for which the EPL Common
Stock surrendered in exchange therefor was held.
5. EPL will not be required to recognize federal taxable income or gain
with respect to the receipt of PIC Common Stock in exchange for substantially
all of its assets. Further, EPL will not be entitled to deduct for federal
income tax purposes any loss realized in the exchange.
6. Upon the liquidation of EPL and the distribution of property other
than PIC Common Stock to the EPL shareholders, EPL will recognize income for
federal income tax purposes in an amount equal to the excess of the fair market
value of the property over its adjusted tax basis.
A successful IRS challenge to the reorganization status of the Transaction
would result in the holders of EPL Common Stock recognizing gain or loss with
respect to each share of EPL Common Stock surrendered equal to the difference
between the shareholder's basis in such share and the fair market value, as of
the date of the liquidating distribution, of the shares of PIC Common Stock
received in exchange therefor. In such event, a shareholder's holding period
for such stock would begin the day after the liquidating distribution. In
addition, EPL would recognize gain or loss on the Transaction equal to the
difference between EPL's basis in the assets transferred and the fair market
value, as of the date of the Transaction, of the shares of PIC Common Stock
received in exchange therefor.
THE FOREGOING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF CERTAIN UNITED STATES
FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION AND DOES NOT PURPORT TO BE A
COMPLETE ANALYSIS OF ALL POTENTIAL TAX EFFECTS RELEVANT TO A DECISION AS TO
WHETHER EPL SHAREHOLDERS SHOULD VOTE IN FAVOR OF THE TRANSACTION. THE DISCUSSION
DOES NOT ADDRESS THE TAX CONSEQUENCES THAT MAY BE RELEVANT TO A PARTICULAR
27
<PAGE>
EPL SHAREHOLDER SUBJECT TO SPECIAL TREATMENT UNDER FEDERAL INCOME TAX LAWS SUCH
AS FINANCIAL INSTITUTIONS, TAX EXEMPT ENTITIES AND RETIREMENT PLANS AND DOES NOT
ADDRESS ANY CONSEQUENCES ARISING UNDER THE TAX AND OTHER LAWS OF ANY STATE,
LOCALITY OR FOREIGN JURISDICTION. EPL SHAREHOLDERS ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES OF THE TRANSACTION TO THEM.
OPINION OF EPL'S FINANCIAL ADVISOR
NACP has acted as financial advisor to EPL in connection with the
Transaction. As part of its role as financial advisor to EPL, NACP was engaged
to render to the EPL Board an opinion as to the fairness of the financial terms
of the Acquisition to the shareholders of EPL. On April 27, 1998, NACP rendered
a written opinion that, as of that date, and subject to certain assumptions,
factors and limitations set forth in such opinion as described below, the
financial terms of the Acquisition are fair to EPL's shareholders.
THE FULL TEXT OF THE WRITTEN OPINION OF NACP, DATED APRIL 27, 1998, WHICH
SETS FORTH ASSUMPTIONS MADE, FACTORS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN BY NACP, IS ATTACHED AS ANNEX C TO THIS PROXY STATEMENT/PROSPECTUS.
NACP HAS CONSENTED TO THE USE OF ITS WRITTEN OPINION IN CONNECTION WITH THIS
PROXY STATEMENT/PROSPECTUS. EPL SHAREHOLDERS ARE URGED TO READ SUCH WRITTEN
OPINION CAREFULLY IN ITS ENTIRETY.
No limitations were imposed by the EPL Board on the scope of NACP's
investigation or the procedures to be followed by NACP in rendering its opinion.
NACP was not requested to and did not make any recommendation to the EPL Board
as to the form or amount of consideration to be offered to EPL in the
Acquisition, which was determined through arm's-length negotiations between EPL
and PIC. In arriving at its opinion, NACP did not ascribe a specific range of
value to EPL, but made its determination as to the fairness, from a financial
point of view, of the terms of the Acquisition on the basis of financial and
comparative analyses described below. NACP's opinion is for the use and benefit
of the EPL Board and does not constitute a recommendation to any EPL shareholder
as to how such shareholder should vote with respect to the Transaction at the
EPL Special Meeting. NACP was not requested to opine as to, and its opinion
does not in any manner address, the underlying business decision of the EPL
Board to proceed with or effect the Acquisition.
In connection with its opinion, the scope of NACP's analysis included, but
was not limited to, the following: (i) review of the Agreement and other
related acquisition documents (collectively, the "Acquisition Agreements"); (ii)
discussions with PIC and EPL's respective management regarding such
corporation's history, structure, products, markets, competition and prospects
for the future; (iii) examination of all available documentation relating to PIC
and EPL, respectively, their assets, operations and financial results including
PIC's audited financial statements and EPL's unaudited financial statements for
the fiscal years ended December 31, 1995, 1996 and 1997, respectively, and PIC's
1997 Annual Report on Form 10-K; (iv) review of certain estimates of cost
savings, synergistic and other combination benefits; (v) review of the pro forma
financial impact of the Acquisition on each of PIC and EPL; (vi) review and
comparison, with PIC and EPL, respectively, of certain publicly available
financial information and stock market data of other similar publicly traded
companies; (vii) review and comparison, with the Acquisition of the
financial
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<PAGE>
terms of certain recent acquisitions of similar companies; (ix) review and
analysis of historical market prices and trading activity for shares of PIC
Common Stock; and (x) preparation of such other studies, analyses, inquiries and
investigations as NACP deemed appropriate.
In evaluating the cost savings, synergistic and other combination benefits,
NACP relied on the following analysis. EPL is a holding company which owns
certain intellectual property. Its sole source of revenue is the royalty
payment due from PIC which licenses its property, and there are virtually no
operations or costs other than some very minor administrative and accounting
functions. First, by combining the two entities, the combined company's cash
flow will increase due to cessation of the 3.5% gross revenue royalty payment.
This will provide better overall liquidity for the post-acquisition company.
Second, there will be an elimination of some minor accounting and administrative
fees, but which are less than $30,000 per year. Lastly, there are some
intangible benefits to the post-acquisition company, although not quantifiable,
by owning versus licensing the intellectual property. For example, the capital
markets may more favorably perceive the post-acquisition company in that it is
no longer vulnerable to an outside party for its core technology. That is, the
post-acquisition company will no longer be subject to the possible default
provisions contained within the License Agreement. Beyond this, there is a
general perception that combining two entities creates a "cleaner" company that
is easier to manage, finance, and which is more favorably perceived by outside
investors.
In arriving at its opinion, NACP relied upon the accuracy and completeness
of all of the financial and other information reviewed by it and assumed the
accuracy and completeness thereof in all material respects. In that regard,
NACP assumed, with the consent of EPL, that the financial forecasts prepared by
EPL and PIC, including without limitation, the synergies resulting from the
Acquisition, have been reasonably prepared on a basis reflecting the best
currently available judgments and estimates of each company and that such
forecasts will be realized in all material respects in the amounts and at the
times contemplated thereby. NACP did not make an independent evaluation or
appraisal of the assets and liabilities of EPL or PIC or any of their respective
subsidiaries and NACP was not furnished with any such evaluation or appraisal.
NACP's advisory services and opinion were provided for the information and
assistance of the EPL Board in connection with its consideration of the
Acquisition.
NACP does not express any opinion as to the price at which the PIC Common
Stock to be distributed to EPL's shareholders will trade if and when it is
issued. The following is a summary of certain of the financial analyses used by
NACP in connection with providing its written opinion.
(1) Selected Companies Analysis. NACP reviewed certain financial
information, ratios and public market multiples for two (2) publicly-traded
corporations: WD-40 Company and Quaker Chemical Corporation (collectively, the
"Selected Companies"). NACP conducted an extensive review of several companies
operating in the lubricant industry, and the Selected Companies were chosen
because they are publicly-traded companies with operations that for purposes of
analysis may be considered similar to PIC's operations. NACP calculated and
compared various financial multiples and ratios. With respect to the Selected
Companies, NACP considered levered market
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<PAGE>
capitalization (i.e., market value of common equity plus estimated market value
of debt) as a multiple of latest trailing twelve month earnings before interest,
taxes, depreciation and amortization ("EBITDA"), and trailing twelve month
earnings before interest and taxes ("EBIT"). Furthermore, NACP considered stock
price as a multiple of latest trailing twelve months earnings per share ("EPS")
and stock price as a multiple of latest trailing twelve month gross cash flow.
The levered market capitalizations were based on closing stock prices as of
April 27, 1998 for both Selected Companies and balance sheet data as of February
28, 1998 (unaudited) for WD-40 Company and December 31, 1997 for Quaker Chemical
Corporation. April 27, 1998 represented the most recent closing stock prices and
February 28, 1998 and December 31, 1997 represented the most recent available
balance sheet information for the Selected Companies at the time the analysis
was performed. The EBITDA and EBIT multiples for each of the Selected Companies
were based on NACP research as of April 27, 1998. The price/earnings ("P/E")
multiples and price/gross cash flow multiples were based on stock prices as of
April 27, 1998. NACP's analysis of the Selected Companies indicated levered
market capitalization multiples of EBITDA ranging from 7.5x to 12.1x with a mean
of 9.8x and market capitalization multiples of EBIT ranging from 10.5x to 12.8x
with a mean of 11.7x. The analysis also indicated for the Selected Companies P/E
multiples, which ranged from 13.8x to 20.5x with a mean of 17.5x, and price to
gross cash flow multiples, which ranged from 8.8x to 18.6x with a mean of 13.7x.
These multiples were then adjusted for differences and similarities between the
companies and applied to the PIC pro forma results as of December 31, 1997. The
analysis indicated a value range for the EPL share of post-Acquisition PIC
(10.5%) of $5.3 million to $6.7 million with a mean of $6.0 million.
(2) Selected Transactions Analysis. NACP analyzed certain information
relating to two (2) transactions in the lubricant industry, or more
specifically, to transactions falling within SIC codes 2992, 2911, 2899 and 2842
occurring over the past 36 months (listed by acquirer/target): (1) Milastar
Corporation/New England Metal Treating, Inc. and, (2) Specialty Chemical
Resources, Inc./Hysan Corporation (collectively, the "Selected Transactions").
The search yielded no companies with a primary SIC code of 2992 (i.e.,
establishments primarily engaged in blending, compounding, and refining
lubricating oils and greases from purchased mineral, animal, and vegetable
materials). The only SIC code that provided a match was that of SIC code 2899
(i.e., establishments primarily engaged in manufacturing miscellaneous chemical
preparations...sizes, bluing, laundry sours, writing and stamp pad ink,
industrial compounds...metal, oil, and water treating compounds, water treating
compounds and chemical supplies for foundries). Based upon the criteria
described within the analysis, and an evaluation of the companies, it was the
judgement of NACP that the Selected Transaction companies were sufficiently
dissimilar to the activities and financial characteristics of PIC so as to
justify rejecting the approach.
(3) Discounted Cash Flow Analysis of EPL. NACP was provided with a
discounted cash flow analysis prepared by EPL's management wherein the present
value of EPL's projected net free cash flow was determined by discounting those
cash flows by a rate of return that was considered to be commensurate with the
inherent risk within the business. NACP performed an independent review of this
analysis and found that it assumed that EPL's sole source of revenue was
expected to arise from the 3.5% royalty payment due from PIC under the terms of
the license agreement. The analysis began by considering revenue projections
for PIC through the year 2002 which were incorporated into an income statement
projection over the same period. The projected income statement was normalized
(i.e., adjusted for extraordinary and non-operating items) to represent the
expected future net income after taxes and net free cash flow. The analysis
calculated the net
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<PAGE>
present value of the cash flows of EPL as of January 1, 1998 using discount
rates from 21.1% to 27.1% based upon various assumptions underlying the
forecast. The discount rate was determined using the build-up method which
incorporates the financial theory of the Capital Asset Pricing Model and is
based upon determining a risk-free rate and adding to it various premia to
reflect market and company specific risk. This rate is then incorporated into a
weighted average cost of capital analysis and is contrast against expected
internal rates of return for EPL as well as for other companies in the specialty
lubricant industry. The terminal values of EPL were calculated at year-end 2002
using a capitalization rate which is the discount rate derived above minus an
expected long-term growth rate of 5.0%. The terminal values were then discounted
to present value as of January 1, 1998 using the discount rates above. This
analysis indicated a range of values for EPL between $5.8 million and $6.7
million. NACP was informed that this analysis provided the basis for negotiating
the Acquisition. NACP then performed an independent analysis of EPL's projected
net free cash flow and found a similar range of values.
(4) Discounted Cash Flow Analysis of Post-Acquisition PIC. NACP performed
a discounted cash flow analysis of the pro forma projected net free cash flow of
post-Acquisition PIC. The analysis began by using PIC's projections through the
year 2002 for revenue, expense and balance sheet accounts as they would be "as
if" the Acquisition had occurred. NACP calculated the net present value of the
cash flows as of January 1, 1998 using discount rates between 18.0% and 22.0%.
The basis for determining after-tax net income, net free cash flow and the
discount rates followed the methodology outlined in the prior section. NACP
calculated the terminal values based on a capitalization rate using a projected
steady growth rate of 5.0%. The terminal values were then discounted to present
value as of January 1. 1998 using the discount rates above. This analysis
indicated a range of values from $5.97 million to $9.1 million with a mean value
of $7.4 million for the 10.5% share of PIC which EPL's shareholders will own
post-Acquisition.
(5) Historical Trading Analysis of PIC Common Stock. NACP performed a
review and analysis of the historical market prices and trading activity for the
shares of PIC Common Stock on April 27, 1998, the date of NACP's written
opinion, and over various periods within 30, 60, 90, and 180 days preceding such
date. NACP found that PIC Common Stock is reported on the OTC Bulletin Board
and is traded by approximately 12 market makers with little or no research
coverage. As such, it is relatively volatile and is subject to regulations
regarding trading in penny stocks (i.e., those securities trading for less than
$5.00 per share). On April 27, 1998, PIC Common Stock closed at a price of
$2.625 and over the 30-day period preceding that date ranged in price from $2.56
to $3.38 with a mean price of $2.96 and a standard deviation of $0.22. For the
period from January 2, 1998, the first trading day of the year, to April 27,
1998, PIC Common Stock ranged in price from $2.00 to $4.63 with a mean price of
$3.04 and a standard deviation of $0.67 per share. NACP then examined the
securities to be issued to EPL in the Acquisition and found that at the closing
of the Acquisition, one certificate representing two million nine hundred
ninety-three thousand thirty-five (2,993,035) shares of PIC Common Stock, $0.001
par value per share ("New Shares") will be delivered to EPL. Additionally, the
New Shares will be subject to a transfer restriction whereby all PIC Common
Stock received by EPL's shareholders in the Dissolution may not be sold,
distributed, or otherwise disposed of for a period of 365 days following the
date of the Acquisition without the prior written consent of PIC. NACP
considered the price of PIC Common Stock as of the date of the written opinion
and over the 30 days immediately preceding that date to be most relevant to the
analysis. Considering this information along with the number of New Shares to
be distributed, the analysis indicated a range of values between $7.9 million
and $8.9 million for the EPL share in PIC.
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<PAGE>
NACP then applied a 30.0% discount based upon various studies to account for the
1 year restriction on resale. The analysis indicated an adjusted value range of
$5.5 million to $6.2 million with a mean of $5.9 million.
(6) Pro Forma Trading Analysis of PIC Common Stock. NACP performed a pro
forma analysis of the financial impact of the Acquisition using earnings
estimates for PIC prepared by its management for the fiscal year ending December
31, 1998. NACP compared the EPS of PIC Common Stock, on a stand-alone basis, to
the EPS of the common stock of the combined companies on a pro forma basis and
found no expected dilution. NACP performed this analysis based on an estimated
P/E ratio of 25 times pro forma projected EPS of $0.19 per share to arrive at a
price of $4.75. The P/E ratio was determined based upon an analysis of
comparable public companies adjusted for the similarities and differences
between those companies and PIC. NACP then applied a 30.0% discount to reflect
the 1 year holding period restriction. The analysis indicated an adjusted value
of approximately $10 million for the EPL share in PIC.
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<PAGE>
EPL DOES NOT, AS A MATTER OF COURSE, MAKE PUBLIC FORECASTS AS TO FUTURE SALES,
EARNINGS OR OTHER RESULTS. THE FOLLOWING SUMMARY PROJECTIONS WERE PREPARED BY
NACP IN CONNECTION WITH THE RENDERING OF ITS WRITTEN OPINION AND ARE PROVIDED
FOR ILLUSTRATIVE PURPOSES ONLY. SUCH SUMMARY PROJECTIONS ARE INHERENTLY
UNCERTAIN AND, THOUGH CONSIDERED REASONABLE BY THE MANAGEMENT OF EPL AND PIC,
RESPECTIVELY, AS OF THE DATE HEREOF, ARE SUBJECT TO A WIDE VARIETY OF
SIGNIFICANT BUSINESS, ECONOMIC AND COMPETITIVE RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED.
ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT PROJECTED RESULTS ARE INDICATIVE OF
THE FUTURE PERFORMANCE OR THAT ACTUAL RESULTS WILL NOT BE MATERIALLY HIGHER OR
LOWER THAN THOSE FORECASTED. INCLUSION OF THE SUMMARY PROJECTIONS IN THIS PROXY
STATEMENT/PROSPECTUS SHOULD NOT BE REGARDED AS A REPRESENTATION BY ANY PERSON
THAT THE PROJECTED RESULTS WILL BE ACHIEVED. NEITHER PIC'S INDEPENDENT AUDITORS,
NOR ANY OTHER INDEPENDENT ACCOUNTANTS OR FINANCIAL ADVISORS, HAVE COMPILED,
EXAMINED, OR PERFORMED ANY PROCEDURES WITH RESPECT TO THE SUMMARY PROJECTIONS
CONTAINED HEREIN, NOR HAVE THEY EXPRESSED ANY OPINION OR ANY FORM OF ASSURANCE
ON SUCH INFORMATION OR ITS ACHIEVABILITY, AND ASSUME NO RESPONSIBILITY FOR, AND
DISCLAIM ANY ASSOCIATION WITH, THE SUMMARY PROJECTIONS.
EPL- VALUATION SCENARIO ANALYSIS
<TABLE>
<CAPTION>
Optimistic Forecast
Terminal
1998 1999 2000 2001 2002 Year
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Debt Free Net Cash Flow $746,152 $959,059 $1,231,640 $1,580,286 $2,025,877 $2,127,171
Terminal Growth Rate Value 5.0% $9,625,208
Present Value Factor 27.1% 0.8870 0.6980 0.5493 0.4322 0.3401
------------------------------------------------------
Present Values $661,895 $669,467 $ 676,536 $ 683,070 $3,962,534
Sum of Present Values $6,653,502
Less Interest Bearing Debt $0.0
Indicated Equity Value $6,653,502
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Conservative Forecast
Terminal
1998 1999 2000 2001 2002 Year
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Debt Free Net Cash Flow $746,152 $842,142 $963,132 $1,008,556 $1,056,367 $1,109,186
Terminal Growth Rate Value 5.0% $6,889,354
Present Value Factor 21.1% 0.9087 0.7506 0.6199 0.5119 0.4228
------------------------------------------------------
Present Values $678,096 $663,611 $597,042 $516,353 $3,359,451
Sum of Present Values $5,814,553
Less Interest Bearing Debt $0.0
Indicated Equity Value $5,814,553
</TABLE>
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<PAGE>
PIC - DISCOUNTED CASH FLOW ANALYSIS
<TABLE>
<CAPTION>
FISCAL YEAR ENDING DECEMBER 31,
----------------------------------------------------------------------
PRO FORMA TERMINAL
ASSUMPTIONS/1/ 1997(1) 1998 1999 2000 2001 2002 YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT ASSUMPTIONS
Revenue Growth 88.7% 50.0% 33.0% 25.0% 25.0% 15.0% 5.0%
Revenue $29,846.8 $44,770.2 $59,544.4 $74,430.4 $93,038.1 $106,993.8 $112,343.5
Net Income (%) 8.1% 11.2% 11.9% 12.0% 12.0% 12.1% 12.3%
Net Income/2,3/ $2,404.6 $5,036.6 $7,064.7 $8,894.9 $11,191.3 $12,913.8 $13,818.2
WORKING CAPITAL ASSUMPTIONS/4/
Avg. Current Assets $11,327.9 $16,291.9 $22,965.1 $32,271.1 $43,745.3 $57,052.2 $31,949.8
Avg. Current Liabilities $3,043.3 $4,155.6 $4,532.1 $5,530.5 $6,702.7 $7,737.7 $4,012.0
Net Working Capital $8,284.6 $12,136.3 $18,433.1 $26,740.8 $37,042.7 $49,314.6 27,937. 8
Change in Net Working Capital ($4,550.7) ($3,851.7) ($6,296.8) ($8,307.7) ($10,301.9) ($12,271.9) $21,376.7
CAPITAL EXPENDITURE ASSUMPTIONS
Capital Expenditures $1.0 $0.0 $0.0 $0.0 $0.0 $0.0 $1.0
Depreciation Expense $0.2 $492.5 $491.7 $433.5 $420.6 $410.7 $410.7
DISCOUNTED CASH FLOW ANALYSIS
Net Income $5,036.6 $7,064.7 $8,894.9 $11,191.3 $12,913.8 $13,818.2
plus: After-tax Interest Expense (2) 0.0 0.0 0.0 0.0 0.0 0.0
plus: Depreciation & Amort. 492.5 491.7 433.5 420.6 410.7 410.7
GROSS CASH FLOW $5,529.1 $7,556.4 $9,328.3 $11,611.9 $13,324.5 $14,229.0
Dec./(Inc.) in Working Capital ($3,851.7) ($6,296.8) ($8,307.7) ($10,301.9) ($12,271.9) $21,376.7
Dec./(Inc.) in Capex 0.0 0.0 0.0 0.0 0.0 (1.0)
NET FREE CASH FLOW - DEBT FREE $1,677.4 $1,259.5 $1,020.7 $1,310.0 $1,052.6 $35,604.7
Terminal Growth Rate/Value/5/ 5.0% 231,199.3
Present Value Factor/6/ 20.4% 0.8306 0.6898 0.5730 0.4759 0.3952
Present Values $1,393.2 $868.9 $584.8 $623.4 $91,796.7
Sum of Present Values $95,267.0
Less: Interest Bearing Debt/7/ $0.0
Indicated Equity Value - Marketable, Minority Basis $95,267.0
Less: Discount for Lack of Marketability 30.0%
ADJUSTED EQUITY VALUE - NON-MARKETABLE, MINORITY BASIS $66,686.9
</TABLE>
/1/ All data and assumptions provided by PIC management without further
verification by NACP.
/2/ Reflects additional of after-tax interest expense; discounted cash flow
analysis prepared on an invested capital, or debt-free basis.
/3/ Reflects combined state & federal tax rate of 40%.
/4/ Working capital assumption for years 2002 through terminal year have been
developed as a percentage of sales based on historical rates.
/5/ Whereas sales growth is not expected to stabilize within the forecast
period, we have assumed long-term growth of 5.0%.
/6/ Weighted average cost of capital of 20.4% assumes debt to equity ratio of
5%, cost of equity of 21.15%, cost of debt of 10.75% and tax rate of 40%.
/7/ PIC carries no interest bearing debt and is not expected to incur
indebtedness during the forecast period. It is assumed that working capital
& capital expenditures will be funded from gross cash flow as illustrated
above.
<TABLE>
<S> <C> <C>
ANALYSIS OF EPL PRO RATA SHARE
Pro Forma Weighted Shares Outstanding 28,501.1
EPL Stockholders' Interest in PIC 2,993.0
EPL Percentage Interest in PIC 10.5%
Indicated Equity Value of PIC $66,687
EPL Pro Rata Value in PIC - DCF Approach $7,003
</TABLE>
34
<PAGE>
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analysis as a whole, could create an incomplete view of the processes
underlying NACP's written opinion. In arriving at its fairness determination,
NACP considered the results of all such analyses. NACP reaches a single
conclusion as to fairness based on its experience and professional judgment and
its analysis as a whole. NACP does not, as part of its process, isolate the
various analyses and reach separate conclusions with respect thereto. No
company or transaction used in the above analyses as a comparison is directly
comparable to PIC or EPL, or the contemplated Transaction. The analyses were
prepared solely for purposes of NACP providing its opinion to the EPL Board as
to the fairness of the terms of the Acquisition, from a financial point of view,
to the shareholders of EPL and do not purport to be appraisals or necessarily
reflect the prices at which businesses or securities actually may be sold.
Analyses based upon forecasts of future results are not necessarily indicative
of actual future results, which may be significantly more or less favorable than
suggested by such analyses. Because such analyses are inherently subject to
uncertainty, being based upon numerous factors or events beyond the control of
the parties or their respective advisors, the companies, NACP or any other
person assumes no responsibility if future results are materially different from
those forecast.
THE FOREGOING SUMMARY DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF THE
ANALYSIS PERFORMED BY NACP AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
NACP'S WRITTEN OPINION ATTACHED AS ANNEX C TO THIS PROXY STATEMENT/PROSPECTUS.
NACP, as part of its investment banking business, is continually engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions, private financing transactions and valuations for estate,
corporate and other purposes. NACP professionals are members of the American
Society of Appraisers and the Association for Investment Management and
Research. EPL selected NACP as its financial advisor based, in part, on NACP's
substantial experience in transactions similar to the proposed Acquisition and
the cost of rendering the opinion initially quoted by NACP. NACP is familiar
with the automotive aftermarket having provided certain investment banking
services to other companies within that industry.
Pursuant to a letter agreement dated April 14, 1998, (the "Engagement
Letter"), EPL engaged NACP to render an opinion as to whether the terms of the
proposed Acquisition are fair, from a financial point of view, to the holders of
EPL Common Stock. Pursuant to the terms of the Engagement Letter, EPL has
agreed to pay NACP a fee and has agreed to reimburse NACP for its reasonable
out-of-pocket expenses, including the reasonable fees and disbursements of its
attorneys, and to indemnify NACP against certain liabilities, including, certain
liabilities under the U.S. federal securities laws. Such fee is payable
irrespective of whether the Acquisition is consummated.
35
<PAGE>
DISSENTERS' RIGHTS
General. If the Transaction is approved and consummated, dissenters'
rights will be available to holders of EPL Common Stock who exercise such rights
in accordance with Chapter 13. THE REQUIRED PROCEDURE SET FORTH IN CHAPTER 13
MUST BE FOLLOWED EXACTLY OR ANY DISSENTERS' RIGHTS MAY BE LOST. Pursuant to the
terms of the Agreement, if greater than 5% of all shares of EPL Common Stock
outstanding immediately prior to the date of the Closing demand that EPL
purchase their respective shares under Chapter 13, PIC has the right to
terminate the Agreement.
The information set forth below is a general summary of dissenters' rights
and is qualified in its entirety by reference to Chapter 13, a copy of which is
attached hereto as Annex D. EPL shareholders should read Annex D in its
entirety for more complete information concerning dissenters' rights.
Each holder of shares of EPL Common Stock which were outstanding as of the
Record Date who follows the procedures set forth in Chapter 13 and who does not
vote in favor of the proposal to approve the Agreement will be entitled to
demand the purchase of such holder's shares of EPL Common Stock for a cash
purchase price equal to the fair market value of such holder's shares, so long
as demands for such payment are properly and timely filed by such EPL
shareholders. The fair market value of shares of EPL Common Stock will be
determined as of February 10, 1998, the day before the public announcement of
the Agreement, excluding any appreciation or depreciation as a consequence of
the proposed Transaction, but adjusted for any stock split, reverse stock split
or share dividend which becomes effective thereafter.
In order to be entitled to exercise dissenters' rights, a shareholder of
EPL must not vote in favor of the Agreement and the Transaction contemplated
thereby. Thus, any shareholder who wishes to dissent and executes and returns a
proxy in the accompanying form must specify that such holder's shares are to be
voted "AGAINST" or to "ABSTAIN" on the proposal to approve the Agreement and the
Transaction. If the shareholder returns a proxy with instructions to vote "FOR"
the proposal to approve the Agreement and the Transaction the shareholder will
lose its dissenters' rights. Any proxies returned by EPL shareholders without
voting instructions will be voted "AGAINST" the proposal to approve the
Agreement and the Transaction.
If the Agreement and Transaction are approved by the EPL shareholders at
the EPL Special Meeting, EPL shall mail to each shareholder who did not vote to
approve the Agreement and the Transaction a notice of approval of such Agreement
and Transaction (the "Notice") within ten (10) days after the date of such
approval, accompanied by copies of Sections 1300 through 1304 of the CCC. The
Notice shall state the price determined by EPL to represent the fair market
value of the dissenting shares as of February 10, 1998 and a brief description
of the procedure to be followed if the shareholder desires to exercise his or
her dissenters' rights. Such statement of fair market value constitutes an
offer by EPL to purchase at the price stated any dissenting shares.
A shareholder of EPL electing to exercise dissenters' rights must make
written demand upon EPL for the purchase of dissenting shares and payment to
such shareholder in cash of their fair market value within thirty (30) days
following the mailing of the Notice. The demand should specify the number of
shares held of record by such shareholder which the shareholder demands to be
purchased and a statement of what the shareholder claims to be the fair market
value of those
36
<PAGE>
shares as of February 10, 1998, the day before the announcement of the proposed
Transaction. Such statement of the fair market value of the shares of EPL Common
Stock constitutes an offer by the shareholder to sell the shares at that price.
Within thirty (30) days after the date on which the Notice is mailed, the
dissenting shareholder must surrender to EPL, at its principal office, the
certificates representing the dissenting shares to be stamped or endorsed with a
statement that they are dissenting shares or to be exchanged for certificates of
appropriate denomination so stamped or endorsed. Any shares of EPL Common Stock
that are transferred prior to their submission for endorsement lose their status
as dissenting shares.
If EPL and the dissenting shareholder agree that the surrendered shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder will be entitled to the agreed price with interest thereon at the
legal rate on judgments from the date of such agreement (set by law in
California at 10% per annum). Subject to the restrictions imposed under the CCC
on the ability of EPL to purchase its outstanding shares, payment of the fair
market value of the dissenting shares shall be made within thirty (30) days
after the amount thereof has been agreed upon or thirty (30) days after any
statutory or contractual conditions to the Transaction have been satisfied,
whichever is later, subject to the surrender of the certificates therefor,
unless provided otherwise by agreement.
If EPL denies that the shares surrendered are dissenting shares, or if EPL
and the dissenting shareholder fail to agree upon a fair market value of such
shares of EPL Common Stock, then the dissenting shareholder must, within six (6)
months after the Notice is mailed, file a complaint in the superior court of the
proper county requesting the court to make such determinations or intervene in
any pending action brought by any other dissenting shareholder. If the
complaint is not filed or intervention in a pending action is not made within
the specified six-month period, the dissenter's rights will be lost. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is at
issue, the court will determine, or will appoint one or more impartial
appraisers to determine, such fair market value. Any such determination of the
fair market value of any dissenting shares of EPL may be more than, less than or
equal to the fair market value of the shares of EPL Common Stock as of the date
of the EPL Special Meeting or as of the Closing of the Transaction.
No dissenting shareholder who has elected to proceed under Chapter 13 may
withdraw his or her dissent or demand for payment unless EPL consents to such
withdrawal.
EPL'S SHAREHOLDERS WILL NOT HAVE DISSENTERS' RIGHTS UNLESS DEMANDS FOR PURCHASE
AND PAYMENT ARE RECEIVED BY EPL ON OR PRIOR TO THE EXPIRATION OF THIRTY (30)
DAYS FOLLOWING THE DATE OF THE MAILING OF THE NOTICE.
RESALES OF PIC COMMON STOCK
There are important restrictions on the ability of the EPL shareholders to
realize immediately the value of PIC Common Stock which they will receive in the
Dissolution. IF THE TRANSACTION IS APPROVED BY A MAJORITY OF THE SHARES OF EPL
COMMON STOCK, EACH SHAREHOLDER OF EPL IS AGREEING THAT ALL PIC COMMON STOCK TO
BE RECEIVED BY EPL IN CONNECTION WITH THE ACQUISITION
37
<PAGE>
AND BY EACH EPL SHAREHOLDER IN THE DISSOLUTION SHALL BE SUBJECT TO THE TRANSFER
RESTRICTION SET FORTH AS EXHIBIT D TO THE AGREEMENT WHICH IS SET FORTH AS ANNEX
A TO THE PROXY STATEMENT/PROSPECTUS (THE "TRANSFER RESTRICTION"). All PIC Common
Stock shall be issued with a restrictive legend referencing the Transfer
Restriction. The Transfer Restriction provides that, for a period of 365 days
following the date of the Closing (as defined in the Agreement), each
shareholder of EPL will not, without the prior written consent of PIC, directly
or indirectly:
[S]ell, offer to sell, solicit an offer to sell, contract or grant any
option or warrant to sell (including, without limitation, any short sale),
register, pledge, transfer, establish an open "put equivalent position"
within the meaning of Rule 16a-1(h) under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or otherwise transfer or dispose of
any shares of the capital stock of PIC, options or warrants to acquire
shares of the capital stock of PIC, securities exchangeable or exercisable
for or convertible into shares of the capital stock of PIC or any rights to
purchase or acquire capital stock of PIC or enter into any hedging
transaction that is likely to result in a transfer of capital stock of PIC
currently or hereafter owned either of record or beneficially (as defined
in Rule 13d-3 under the Exchange Act) by such shareholder, including
capital stock which may be deemed to be beneficially owned by such
shareholder in accordance with the rules and regulations of the Securities
and Exchange Commission, otherwise than (i) as a bona fide gift or gifts,
including, without limitation, transfers to beneficiaries or trusts for
estate planning purposes, provided the donee or donees thereof agree in
writing to be bound by the terms of this restriction and deliver a copy of
such donee's assumption to PIC, or (ii) as a distribution to affiliates of
such shareholder, if any, provided that distributees thereof agree in
writing to be bound by the terms of this restriction and deliver a copy of
such distributee's assumption to PIC, or publicly announce such
shareholder's intention to do any of the foregoing.
PIC has no present intent to waive such Transfer Restriction for EPL
shareholders during the period of the Transfer Restriction. However, PIC
reserves the right to grant consents on a case-by-case basis upon a bona fide
demonstration by such requesting EPL shareholder of economic hardship and
provided that the aggregate number of shares subject to requests for waiver of
the Transfer Restriction would not have a material adverse effect on the trading
volume of shares of PIC Common Stock.
Subject to the one-year restriction on transferability imposed by the
Transfer Restriction, shares of PIC Common Stock issued in connection with the
Acquisition will be freely transferable under the Securities Act following the
expiration of such one-year period, except for shares distributed to any
shareholder in connection with the Dissolution who may be deemed to be an
"affiliate" of EPL (which generally includes directors and executive officers of
EPL, and beneficial owners of 10% or more of the EPL Common Stock) for purposes
of Rule 145 under the Securities Act as of the date of the EPL Special Meeting.
Such affiliates may not sell shares of PIC Common Stock received in connection
with the Dissolution except (i) pursuant to an effective registration statement
under the Securities Act, (ii) pursuant to an applicable exemption from the
registration requirements of the Securities Act, or (iii) pursuant to Rule 144
under the Securities Act in accordance with the volume and manner of sale
restrictions set forth therein. PIC may place restrictive legends on
certificates representing PIC Common Stock received by all persons for a
38
<PAGE>
period of one year following the Dissolution. PIC may place additional
restrictive legends on certificates of PIC Common Stock received by all persons
who are deemed to be "affiliates" of EPL under Rule 145. This Proxy
Statement/Prospectus does not cover resales of PIC Common Stock.
39
<PAGE>
UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
The pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the operating results or financial position
that would have occurred if the Acquisition had been consummated, nor is it
necessarily indicative of future operating results or financial position. The
unaudited pro forma combined financial statements have been derived from the
historical consolidated financial statements of PIC and EPL and give effect to
the Acquisition of EPL by PIC under the purchase method of accounting.
The unaudited pro forma combined balance sheet gives effect to the
combination as if it had occurred on January 1, 1997 using the consolidated
balance sheets of PIC and EPL as of March 31, 1998. The unaudited pro forma
combined statements of operations give effect to the combination as if it had
occurred on January 1, 1997 using the consolidated statements of operations of
PIC for the three months ended March 31, 1998 and for the fiscal year ended
December 31, 1997, respectively, and of EPL for the three months ended March 31,
1998, the eight months ended December 31, 1997 and the 4 months ended April 30,
1997, respectively.
The pro forma adjustments are based on preliminary estimates, that are
expected to be finalized by the end of the quarter in which the transaction is
approved by regulatory authorities, available information and certain
assumptions that management deems appropriate. Management does not anticipate
any material differences between the estimates and final adjustments. The pro
forma financial information does not purport to represent what the combined
company's financial position or results of operations would actually have been
if the Acquisition in fact had occurred on such date or to project the combined
company's financial position or results of operations for any future period. The
unaudited pro forma combined financial statements should be read in conjunction
with PIC's and EPL's consolidated financial statements and the notes thereto
included elsewhere herein.
40
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
As of March 31, 1998
<TABLE>
<CAPTION>
Pro Forma
Prolong
International Acquisition
Corporation EPL Pro-Long, Inc. Adjustments Combined
--------------------- ---------------------- -------------- ---------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 3,329,077 $ 8,057 $ 0 $ 3,337,134
Accounts receivable, net 7,927,142 444,152 0 8,371,294
Inventories 2,711,185 0 0 2,711,185
Prepaid expenses 991,126 5,378 0 996,504
Prepaid television time 367,039 0 0 367,039
Advances to employees 245,570 0 0 245,570
--------------------- ---------------------- -------------- ---------------
Total current assets 15,571,139 457,587 0 16,028,726
Property and equipment, net 433,004 0 0 433,004
Patents, trademarks,
tradenames, etc. 0 294,612 5,353,938 (1)(2) 5,648,550
Other assets 74,540 0 0 74,540
Deposits 154,787 0 0 154,787
--------------------- ---------------------- -------------- ---------------
Total assets $ 16,233,470 $ 752,200 $ 5,353,938 $ 22,339,607
===================== ====================== ============== ===============
Accounts payable $ 1,868,936 $ 220,540 $ 0 $ 2,089,476
Accrued expenses 1,727,735 0 0 1,727,735
Income taxes payable 1,297,684 0 0 1,297,684
Loan Payable 0 34,428 0 34,428
Other current liabilities 0 0 0 0
Deferred income taxes 23,693 0 0 23,693
--------------------- ---------------------- -------------- ---------------
Total current 4,918,048 254,968 0 5,173,016
liabilities
Loan payable 0 0 0 0
Common stock 25,465 135,473 (132,480) (3) 28,458
Additional paid-in capital 7,393,451 1,516,553 4,331,623 (3)(4) 13,241,627
Retained earnings (deficit) 3,896,506 (1,154,794) 1,154,794 (5) 3,896,506
--------------------- ---------------------- -------------- ---------------
Total stockholders' equity 11,315,422 497,232 5,353,938 17,166,591
--------------------- ---------------------- -------------- ---------------
Total liabilities and
stockholders' equity $ 16,233,470 $ 752,200 $ 5,353,938 $ 22,339,607
===================== ====================== ============== ===============
</TABLE>
41
<PAGE>
NOTES TO COMBINED CONDENSED BALANCE SHEET
(1) The purchase price of the net assets, as negotiated between the two
independent parties, was determined by adding the value of the PIC
Common Stock to be given up of $5,986,070 to the liabilities assumed
less certain costs. The purchase price was then allocated to the
tangible assets and liabilities and the residual amount was allocated
to the patents, trademarks and other intangibles. NACP then provided a
written fairness opinion on the Transaction. The unaudited estimated
fair value of assets acquired and liabilities assumed is summarized as
follows:
<TABLE>
<S> <C>
Fair value of PIC Common Stock to be given up $
5,986,070
Fair value of liabilities assumed 254,967
Other acquisition costs 159,712
Fair value of tangible and identifiable assets acquired (752,199)
Patents acquired (5,648,550)
==========================
Excess of costs over identifiable assets acquired $ 0
==========================
</TABLE>
The fair value of PIC Common Stock to be given up was determined by the
closing market price of the PIC Common Stock on the OTC Bulletin Board
on the date that the parties entered into the Agreement, February 5,
1998, which was $2.81 per share. Due to the one year transfer
restriction and the lack of marketability of the large block of shares
to be issued under the Agreement, a 30% discount was applied to the PIC
Common Stock resulting in a fair value of approximately $2.00 per
share. With the anticipated issuance of 2,993,035 shares, the fair
value of the shares of PIC Common Stock given up is $5,986,070. PIC
believes that the determination of the measurement date is consistent
with EITF 95-19 because during the period beginning a few days before
the signing of the Agreement and extending through the date of the
public announcement of the proposed Transaction, the closing market
prices of PIC Common Stock did not vary significantly.
(2) Adjustment to eliminate the account balance of intangibles of EPL Pro-
Long, Inc.
(3) Adjustment to reflect the issuance of PIC Common Stock in exchange for
the net assets of EPL Pro-Long, Inc. and the subsequent dissolution of
EPL Pro-Long, Inc.
(4) Adjustment to properly state the combined additional paid-capital
balance.
(5) Adjustment to eliminate the retained deficit account balance of EPL Pro
-Long, Inc.
42
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
Quarter Ended March 31, 1998
<TABLE>
<CAPTION>
Pro Forma
Prolong
International EPL Pro-Long, Inc.
Corporation For For the Quarter
the Quarter Ended Ended March 31,
March 31, 1998 1998(1) Adjustments Combined
-------------------- --------------------- --------------- -----------------
<S> <C> <C> <C> <C>
Net revenues $ 10,848,742 $ 125,357 ($ 125,357) (2) $ 10,848,742
Cost of goods sold 2,005,414 0 0 2,005,414
-------------------- --------------------- --------------- -----------------
Gross profit 8,843,328 125,357 (125,357) 8,843,328
Selling expenses 4,740,601 0 (125,357) (3) 4,615,244
General and
administrative expenses 1,342,704 109,495 94,442 (4) 1,546,641
-------------------- --------------------- --------------- -----------------
Total operating expenses 6,083,305 109,495 (30,915) 6,161,885
-------------------- --------------------- --------------- -----------------
Operating income 2,760,023 15,862 (94,442) 2,681,443
-------------------- --------------------- --------------- -----------------
Other income, net:
Other income 0 0 0 0
Interest expense (977) 3,593 0 2,616
Interest income 60,522 0 0 60,522
-------------------- --------------------- --------------- -----------------
Total other income 59,545 3,593 0 63,138
(expense), net
-------------------- --------------------- --------------- -----------------
Income before provision
for income taxes 2,819,568 19,455 (94,442) 2,744,581
Provision for income taxes 1,213,000 1,507 40,630 (5) 1,255,137
-------------------- --------------------- --------------- -----------------
Net income $ 1,606,568 $ 17,948 ($ 135,072) $ 1,489,444
==================== ===================== =============== =================
Pro Forma
-----------------
Earnings per common share:
Basic $0.06 $0.05
==================== =================
Diluted $0.06 $0.05
==================== =================
Weighted average shares
used to calculate net
income per share:
Basic 25,464,500 28,457,535
==================== =================
Diluted 25,890,255 28,883,290
==================== =================
</TABLE>
43
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
Fiscal Year Ended December 31, 1997
<TABLE>
<CAPTION>
Pro Forma
Prolong
International EPL Pro-Long, Inc.
Corporation For For the Twelve
the Fiscal Year Months Ended
Ended December 31, December 31, 1997
1997 (6) Adjustments Combined
-------------------- -------------------- --------------- -----------------
<S> <C> <C> <C> <C>
Net revenues $ 29,846,795 $ 984,959 $ (984,959) (2) $ 29,846,795
Cost of goods sold 5,735,238 298 0 5,735,536
-------------------- -------------------- --------------- -----------------
Gross profit 24,111,557 984,661 (984,959) 24,111,259
Selling expenses 17,259,469 0 (984,959) (3) 16,274,510
General and
administrative expenses 3,523,200 229,034 377,515 (4) 4,129,749
-------------------- -------------------- --------------- -----------------
Total operating expenses 20,782,669 229,034 (607,444) 20,404,259
-------------------- -------------------- --------------- -----------------
Operating income 3,328,888 755,627 (377,515) 3,707,000
-------------------- -------------------- --------------- -----------------
Other income, net:
Other income 0 25,221 0 25,221
Interest expense (8,185) (25,319) 0 (33,504)
Interest income 249,214 0 0 249,214
-------------------- -------------------- --------------- -----------------
Total other income 241,029 (98) 0 240,931
(expense), net
-------------------- -------------------- --------------- -----------------
Income before provision 3,569,917 755,529 (377,515) 3,947,931
for income taxes
Provision for income taxes 1,437,364 5,202 136,606 (5) 1,579,172
-------------------- -------------------- --------------- -----------------
Net income $ 2,132,553 $ 750,327 ($514,121) $ 2,368,759
==================== ==================== =============== =================
Pro Forma
-----------------
Earnings per common share:
Basic $ 0.08 $ 0.08
==================== =================
Diluted $ 0.08 $ 0.08
==================== =================
Weighted average shares
used to calculate net
income per share:
Basic 25,508,035 28,501,070
==================== =================
Diluted 25,690,774 28,683,809
==================== =================
</TABLE>
44
<PAGE>
NOTES TO COMBINED CONDENSED STATEMENTS OF OPERATIONS
(1) EPL Pro-Long, Inc.'s results for the quarter ended March 31, 1998 are
calculated based on the unaudited financial information for the eleven
months ended March 31, 1998 included elsewhere herein less the results for
the eight months ended December 31, 1997 included elsewhere herein.
(2) Adjustment to eliminate royalty revenue estimated to be received from PIC.
(3) Adjustment to eliminate royalties estimated to be paid by PIC at the rate
of 3.5% of PIC's revenues.
(4) Adjustment to recognize amortization of patents, trademarks, tradenames,
etc. over a period of fifteen years.
(5) Adjustment to reflect the combined tax rate of 40%.
(6) EPL Pro-Long, Inc.'s results for the year ended December 31, 1997 are
calculated based on the unaudited financial information for the eight
months ended December 31, 1997 included elsewhere herein plus the results
for the four months ended April 30,1997 which were derived from the
unaudited financial information for the year ended April 30,1997 included
elsewhere herein.
45
<PAGE>
BUSINESS OF PIC
GENERAL
PIC is a Nevada corporation that was incorporated on August 24, 1981 as
Giguere Industries, Incorporated. 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 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
PSL, in a share exchange with PSL's then existing shareholders and changed its
name from Giguere to Prolong International Corporation. Since the
Reorganization, PIC 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. PIC, through PSL, 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 AFMT.
PSL currently holds an exclusive, worldwide license to manufacture, sell
and distribute lubrication products based on AFMT and to use the "Prolong" name.
This license was acquired from EPL, the holder of the patent for AFMT, in 1993.
As part of the license arrangement, PSL is obligated to pay royalties to EPL
based on the gross sales of its AFMT-based products or any other products
utilizing the name "Prolong." However, in connection with the execution of the
Agreement, EPL and PSL amended their license arrangement to immediately cease
further accrual and payment of royalties thereunder. In the event that the
Transaction contemplated by the Agreement is not consummated by December 31,
1998, a penalty will be imposed approximating the suspended royalty payments and
the license arrangement will be reinstated and continue in full force and effect
under the same terms and conditions set forth therein.
Prior to 1996, Prolong's activities generated losses. However, due, in
part, to PSL's successful marketing campaign based primarily on an infomercial,
Prolong's activities generated a profit in 1996. Prolong 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, PIC raised capital primarily
through the issuance of PIC Common Stock in private placements. During 1997,
working capital was generated primarily through operations.
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
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product line such as gun oil and brake cleaner. AFMT bonds to the metal surfaces
with which it comes into contact, resulting in reduced friction, wear and heat
buildup when subjected to pressure. Prolong believes that AFMT is most effective
in extreme pressure applications, where metal-to-metal contact, and the
resulting wear, can be severe such as: gears (at the contact point where the
teeth of the gear 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 metal contacts under
heavy loads - for example in a steel mill where rolling steel contacts steel
rollers).
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, fluorocarbon resins or fluorocarbon micropowder. Prolong
believes that the primary disadvantage to particulate material in lubricant
additives is that it tends to distribute unevenly and can result in excessive
particulate build-up. Because AFMT contains no solid particles, Prolong
believes that there is no risk of excessive build-up, and the lubrication "film
coat" is uniform and microscopically thin.
The friction fighting characteristics of AFMT have been documented by The
Foundation for Scientific and Industrial Research at the Norwegian Institute of
Technology, Trondheim, Norway. This independent testing laboratory was
commissioned in 1987 by the principals of Prolong Technology of Canada, Inc.
d.b.a. Prolong International, the entity from which EPL acquired the patented
AFMT formula. The tests were conducted at the expense of Prolong Technology of
Canada, Inc. and at the request of customers for in-depth scientific data. The
friction fighting characteristics are further documented in U.S. Patent No.
4,844,825, which outlines various tests conducted on AFMT precedent to the
issuance of the patent.
AFMT exhibits both the "hydrostatic" and "boundary" principles of
lubrication. Hydrostatic lubrication is a system of lubrication in which the
lubricant is supplied under sufficient external pressure to separate the
opposing surfaces. Boundary lubrication is a form of lubrication between two
rubbing surfaces without development of a full-fluid lubricating film (where the
rubbing parts being lubricated actually come into contact with each other).
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
and test its product formulation 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.
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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. Oxidation of metals by exposure to chemicals causes
acceleration of metal wear. The benefit of reducing the exposure of metals to
oxidizing chemicals (by increasing the metal's resistance to corrosive
chemicals) is an increase in the life of the metal. 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 . Automatic and Manual Transmissions
Engines
. Agricultural Equipment . Computer Numerically Controlled
. Airline Ground Equipment Machine Tools
. Marine Equipment . Milling Equipment
. Railroad Equipment . Trucks, Buses
. Mining Equipment . Differentials, Gears
. Bearing Journals . Compressors
. Pumps and Generators . Hydraulic Systems
Prolong markets the following products, each of which can be utilized in
multiple applications:
Prolong Anti-Friction Metal Treatment "AFMT"
This is Prolong's fundamental lubricating oil which is made according to a
patented formula for use as an extreme pressure lubricant. It is packaged in
concentrate form and is designed to be added by the customer to the lubrication
oils in engines, gears, and other machinery.
Prolong Engine Treatment
Formulated for use in the lubrication of internal combustion engines,
Prolong believes that this product reduces friction, heat and wear. As a result
of enhanced lubrication of the engine, Prolong believes that there is increased
useful life of moving metallic parts. Prolong Engine Treatment is suitable for
use in both gasoline and diesel engines.
Prolong Transmission Treatment
Formulated for use in both automatic and manual transmissions and for other
applications, such as heavy duty industrial gear boxes where metal gears are
operated under high pressure, this product is designed to improve overall
transmission performance.
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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. The "top end" of an engine refers to those
internal areas of an engine that are situated above the piston oil rings. It
includes areas of the engine where the engine motor oil is not designed to
circulate, such as areas of fuel and air mixture, combustion chambers, and the
non oil-lubricated parts of the valve assemblies. 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.
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. CNC is a reference
label used in the machine tool industry. Machine tools, such as vertical
machining centers, custom metal coil processing equipment, and lathes, for
example, have their respective motions controlled by motors and pumps. The
motors and pumps are given instructions for operating by a computer. In the
parlance of the machine tool industry, a metal working machine that is
instructed by computer is commonly known as a "CNC Machine" (a computer
numerically controlled machine tool). 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,
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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. To date, Prolong has developed formulas based
on the same chemical lubrication techniques, but that utilize different formulas
from the patented formula. Such developed formulas have not yet been field
tested and there can be no assurances that such new formulas will be successful
or accepted in the marketplace.
CURRENT MARKETS FOR PROLONG'S PRODUCTS
PIC'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 PIC. PIC is currently actively addressing the
consumer automotive, the consumer household and the industrial markets described
below. See "RISK FACTORS - Limited Operating History."
Consumer Automotive
The consumer automotive market consists of automobiles, light trucks,
motorhomes, motorcycles, snowmobiles, jetskis, and other fuel burning vehicles.
The owners of these vehicles represent a significant source of customers for
Prolong's lubricants, fuel conditioners and other future additions to the
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 area
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,
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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
"Prolong 'SPL100' Super Penetrating Lubricant" and "Prolong Multi-Purpose
Precision Oil" for this market.
Industrial
The industrial market encompasses an enormous variety of major and minor
manufacturers. This market includes businesses such as steel mills, automobile
manufacturers, aircraft manufacturers, paper mills, electric motor
manufacturers, petrochemical manufacturers, oil refineries, mining operations
and electrical generating facilities, all of which require lubricants and
Prolong believes would benefit from the increased performance of Prolong's
products. Even more numerous are the smaller industrial facilities, such as
machine shops and other fabrication businesses throughout the world. Prolong
further believes that businesses engaged in stamping, molding, die casting,
boring, drilling, honing and a number of other similar operations could realize
significant cost savings by using the full line of Prolong's products.
Prolong currently manufactures "Prolong High Performance Multi-Purpose EP-2
Grease," "Prolong 'SPL100' Super Penetrating Lubricant," "Prolong Gas/Diesel
Fuel System Treatment," and "Prolong 'Ultra-Cut 1' Water Soluble Cutting Fluid"
for this market.
FUTURE MARKETS FOR PROLONG'S PRODUCTS
Although not being directly addressed by Prolong at the present, Prolong
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.
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
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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.
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.
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.
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Agricultural Applications
The agricultural industry represents another potentially significant market
for Prolong's products. Modern agricultural machinery and equipment tend to be
highly complex and are often subjected to harsh working environments. As a
result of the harsh environments, the machinery and equipment operates
inefficiently and results in increased fuel consumption and a decreased
productive life-cycle due to increased mechanical wear. Prolong believes that
the use of its products could save the agriculture industry substantial sums by
reducing these industry wide losses caused by friction and contaminants.
Marine Applications
The marine market includes both freshwater and salt water boats and ships,
from outboard fishing skiffs to pleasure boats, yachts and other marine vessels.
Prolong has the ability to formulate special products for the harsh marine
environments, including marine grease and a special 2-cycle oil for small
outboard motors. Prolong believes that in diesel powered boats and ships,
"Prolong Gas/Diesel Fuel System Treatment" can provide benefits similar to those
attained from use in diesel truck engines.
Railroads
The railroad industry is currently a large user of lubrication products.
Prolong would have to obtain certain mandatory product certifications prior to
being able to market its products to the railroad industry. Prolong is not
actively pursuing such certifications for its products at this time, but may do
so in the future.
GEOGRAPHIC MARKETS
Prolong currently markets its products in the United States, Canada, Japan,
Hong Kong, Thailand, India, Sub-Saharan Africa, Brazil, Chile, Kuwait, Mexico
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 3.5% of PIC's revenues in 1996 and
1997, respectively, resulting in approximately 34.0% and 5.0% of PIC's net
income, respectively. Prolong consummates such sales through independent
distributors and, as such has no assets attributable to its international sales.
Prior to 1996 Prolong had no significant amount of international sales.
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.
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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 217 distributors in the United
States and eight international distributors located in Asia, Africa and South
America.
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, PSL executed a co-sponsorship agreement with
King Entertainment and Kenneth D. Bernstein pursuant to which PSL has agreed to
pay Mr. Bernstein $400,000 in 1998 ($425,000 in 1999), plus a performance bonus
of 5% if Mr. Bernstein wins the "Top Fuel Championship" for the season, in
exchange for promotional services and appearances and recognition of "Prolong
Super Lubricants" as a co-sponsor of the "Budweiser King Prolong Top Fuel
Dragster." The agreement calls for the display of the PSL name and logo on the
dragster and related racing components in all races and other events in which
the dragster appears. The agreement expires on December 31, 1999.
PSL has also executed an associate sponsorship agreement with Team Sabco
relating to sponsorship of three race cars for all NASCAR Winston Cup Series
races during the 1998, 1999 and 2000 racing seasons and a sponsorship letter of
intent with Nemco Motorsports and Joe Nemechek relating to sponsorship of the
Nemco Motorsports car for up to fifteen (15) 1998 NASCAR Busch Grand National
events. The arrangements with Team Sabco and Nemco Motorsports provide for
display of the PSL name and logo on the cars, equipment and uniforms and for
promotional services and appearances. The Team Sabco and Nemco Motorsports
agreements expire on November 30, 2000 and December 31, 1998, respectively.
In the area of endorsements, PSL has entered an 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
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connection with the marketing of Prolong's products. PSL has also 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.
In the area of magazine advertising, PSL has entered into advertising
contracts with Motor Trend, Hot Rod and various other magazines for print ads
during 1998. In addition to motorsports sponsorship, endorsements and magazine
advertising, Prolong is engaging experienced marketing personnel to commence
concentrated marketing efforts in order to increase retail, commercial,
industrial, governmental and international sales. Prolong believes that the
foregoing advertising and marketing efforts, which began with the production of
its Infomercial in 1995, have resulted in recognition of the product line as a
superior alternative to other conventional lubricants available within the
lubricant industry.
COMPETITION
The market for Prolong's products is highly competitive and is expected to
increase in the future. The basic formula of Prolong's products has not changed
materially since its development in 1986. The formula was granted a United
States patent on July 4, 1986. The market for Prolong's products is
characterized by rapid technological advances, frequent new product
introductions and evolving industry standards. Some of Prolong's principal
competitors include other providers of specialized lubrication products, such as
First Brands (STP) and Quaker State (Slick 50), 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 PIC'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 its brand name recognition for selling high quality, state of the art
products. 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 PIC's business,
financial condition and results of operations.
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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 PIC'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 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 PIC's
results of operations.
The production of Prolong's products is comprised of contract manufacturers
mixing the components pursuant to the AFMT and other proprietary formulas and
bottling the resulting mixtures in packaging specified by Prolong. Prolong's
current contract manufacturers have the capacity to produce its products in high
volumes, having been designed to meet the production requirements of major oil
companies. By utilizing existing third party manufacturing facilities,
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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 1997, approximately 49.4% of Prolong's sales resulted as a response to
the airing of its Infomercial. Such sales are made to large numbers of
individual consumers and, accordingly, Prolong does not consider itself
dependent on any particular customers in this market segment. In 1997, Prolong's
sales to retail customers, which are derived through independent manufacturers
representatives and distributors, comprised approximately 38.3% of its revenues
while sales to commercial and industrial customers comprised 6.5% of total
revenues. None of such customers accounted for more than 10% of Prolong's
aggregate sales in 1997. Consequently, PIC does not consider itself to be
dependent on these customers or any of its other customers.
INTELLECTUAL PROPERTY
PSL holds the exclusive worldwide license to manufacture and sell products
based on AFMT, which PSL acquired from the patent holder, EPL, in 1993. This
agreement calls for PSL to pay to EPL 3.5% of gross sales of any products which
utilize AFMT technology or bear the "Prolong" name. This agreement calls for
minimum royalties of $3,000 per month beginning in 1995. The license is
perpetual absent a major breach of PSL's obligations thereunder, effectively a
failure to pay royalties due under the license. During 1997, Prolong expended
$1,023,869 in royalties under this agreement. In connection with the execution
of the Agreement, EPL and PSL amended their license arrangement to immediately
cease further accrual and payment of royalties thereunder. In the event that the
Transaction contemplated by the Agreement is not consummated by December 31,
1998, a penalty will be imposed approximating the suspended royalty payments and
the license arrangement will be reinstated and continue in full force and effect
under the same terms and conditions set forth therein. There can be no assurance
that Prolong will be able to meet all financial obligations under the license in
the future and, consequently, PSL may not be able to retain the license
indefinitely. Should PSL 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 or use the name "Prolong," which would result in a
material adverse effect on PIC's business, operating results, financial position
and cash flows.
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, PSL holds the following registered trademarks in the
United States: PSL's oil drop logo; "Prolong" and the related design; "Prolong
Super Lubricants;" "No Equal in the World" and the related design; "The Ultimate
in Protection & Performance" and "SPL100."
57
<PAGE>
ROYALTY AGREEMENTS
Aside from the royalties due to EPL as described above, PSL has entered
into a memorandum agreement with the producer of its Infomercial whereby PSL 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 1997, Prolong expended $174,266 in royalties under this
agreement.
PSL has also entered into a personal service agreement with Al Unser
whereby PSL 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 1997, Prolong paid Mr.
Unser $116,177 under this agreement.
Further, PSL has entered into a service and endorsement contract with Al
Unser whereby PSL 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, PSL 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
1997, Prolong paid Mr. Unser $134,753 under this agreement.
EMPLOYEES
As of June 19, 1998, PIC and PSL collectively employ 52 full-time
employees, including 4 executive officers, and no part-time employees. None of
Prolong's employees are represented by a labor organization and PIC considers
the relationships with its employees and those of PSL to be good.
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<PAGE>
PROPERTIES OF PIC
At its headquarters, Prolong owns approximately 29,442 square feet of
office and warehouse space in a two-story building located at 6 Thomas in
Irvine, California. PSL purchased this facility from Huck International, Inc. (a
subsidiary of Thiokol Corporation, PSL's former lessor) pursuant to the exercise
of its lease option on February 23, 1998. The consideration paid by PSL for the
facility was $2,690,000. PSL utilized $269,000 in cash on hand and borrowed
funds in the amounts of $1,692,000 and $729,000, respectively, from Bank of
America. Such loans are secured by the purchased land and building. Escrow
closed on the purchase and sale on April 30, 1998. The loan from Bank of America
in the amount of $729,000 is intended to be repaid by PSL in mid-July
1998 with the proceeds of a loan from the United States Small Business
Administration which PSL is currently in the process of finalizing. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF PIC--Liquidity and Capital Resources." PIC considers its present
facilities to be adequate for Prolong's current operations and for those
reasonably expected to be conducted during the next twelve months. Further, PIC
believes that any additional space, if required, will be available on
commercially reasonable terms.
LEGAL PROCEEDINGS INVOLVING PIC
Neither PIC 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 PIC's or PSL's financial condition,
operations or cash flows. The AFMT patent, on which Prolong's products are
based, has been the subject of litigation, primarily suits contesting the
ownership thereof. Should any litigation result in an adverse ruling precluding
Prolong's continued use of the AFMT patent under the license agreement, PIC's
business, operating results, financial position and cash flows would be
materially adversely effected.
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<PAGE>
MARKET PRICE OF AND DIVIDENDS ON PIC'S COMMON EQUITY
PIC Common Stock is currently trading on the AMEX under the symbol "PRL."
Prior to June 12, 1998 PIC Common Stock was traded on the OTC Bulletin Board
under the symbol "PROL." PIC Common Stock resumed trading (after approximately
8 years of dormancy) in January 1996. High and low bids for each quarter during
1996 and 1997, and for the first quarter of 1998, 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 $2.88
June 30, 1997 $3.19 $1.50
September 30, 1997 $3.25 $2.25
December 31, 1997 $2.44 $1.50
March 31, 1998 $4.63 $2.00
</TABLE>
Information during the periods referenced above 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.
On February 10, 1998, immediately prior to the press release concerning the
Transaction, the high and low bids for PIC Common Stock was $2.81 and $2.63,
respectively. As of June 30, 1998 the high and low bids for PIC Common Stock
was $3.00 and $2.94, respectively.
PIC has authorized 150,000,000 shares of PIC Common Stock, having a par
value of $0.001 per share. As of June 30, 1998, the number of holders of
record of PIC Common Stock is approximately 473. PIC has not declared any cash
dividends since inception, and does not intend to do so in the foreseeable
future. PIC currently intends to retain its earnings for the operation and
expansion of its business. PIC does not have any restrictions on its ability to
pay dividends on common equity. In addition to PIC Common Stock, the PIC Board
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 PIC Board. No
such shares of Preferred Stock have been issued to date.
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<PAGE>
COMMON STOCK OWNERSHIP BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS OF PIC
The following table sets forth certain information concerning the
beneficial ownership of the outstanding shares of PIC Common Stock as of June
19, 1998 and immediately subsequent to the consummation of the Transaction for
(i) person(s) who are known by PIC to be the beneficial owner of more than five
percent of PIC Common Stock, (ii) each director and executive officer of PIC and
(iii) all current directors and executive officers as a group.
<TABLE>
<CAPTION>
PRIOR TO TRANSACTION Subsequent to Transaction
-------------------- -------------------------
SHARES SHARES
NAME AND ADDRESS OF BENEFICIALLY PERCENT OF BENEFICIALLY PERCENT OF
BENEFICIAL OWNER OWNED(1) CLASS OWNED(1) CLASS
---------------- ----- ----- ----- -----
<S> <C> <C> 15.6 <C> <C>
Elton Alderman
6 Thomas 3,996,600(2) 3,996,600(2) 14.0
Irvine, California 92618
14.7
Carol Auld
6 Thomas 3,744,999(3) 3,744,999(3) 13.2
Irvine, California 92618
7.2
Tom T. Kubota
6 Thomas 1,830,000(4) 1,830,000(4) 6.4
Irvine, California 92618
5.8
Thomas C. Billstein
6 Thomas 1,481,600(5) 1,481,600(5) 5.2
Irvine, California 92618
Melanie A. McCaffery
6 Thomas 5,000(6) * 5,000(6) *
Irvine, California 92618
Nicolas M. Rosier
6 Thomas 14,000(7) * 14,000(7) *
Irvine, California 92618
28.6
All officers and directors as a group
(5 persons) (8) 7,327,200(9) 7,327,200(9) 25.6
============ ============
</TABLE>
__________________________________
* Less than 1%.
(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. Shares of PIC Common Stock subject to options currently
exercisable, or exercisable within 60 days of the date hereof, are deemed
outstanding for
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<PAGE>
computing the percentage of the person holding such options but are not deemed
outstanding for computing the percentage of any other person. Except as
indicated by footnote and subject to community property laws where applicable,
the persons named in the table have sole voting and investment power with
respect to all shares of PIC Common Stock shown as beneficially owned by them.
(2) Includes 100,000 shares of PIC Common Stock subject to options
exercisable within 60 days of the date hereof.
(3) Carol Auld obtained beneficial ownership of 3,744,999 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.
(4) Includes 40,000 shares of PIC Common Stock subject to options
exercisable within 60 days of the date hereof.
(5) Includes 40,000 shares of PIC Common Stock subject to options
exercisable within 60 days of the date hereof.
(6) Consists of shares subject to options exercisable within 60 days of
the date hereof.
(7) Includes 4,000 shares of PIC Common Stock subject to options
exercisable within 60 days of the date hereof.
(8) Includes shares held by Messrs. Alderman, Kubota, Billstein and Rosier
and Ms. McCaffery who collectively served as PIC's directors and executive
officers as of June 19, 1998.
(9) Includes 189,000 shares of PIC Common Stock subject to options
exercisable within 60 days of the date hereof.
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<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF PIC
The following table sets forth certain information with respect to each of
the directors and executive officers of PIC as of June 30, 1998:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <S> <C>
Elton Alderman (2) 59 President, Chief Executive
Officer and Director
Thomas C. Billstein (1) 45 Vice-President, Secretary and
Director
Tom T. Kubota (2) 58 Vice President, Investor
Relations and Director
Nicholas M. Rosier 52 Chief Financial Officer
Melanie A. McCaffery (1) (3) 44 Director
</TABLE>
(1) Member of the Compensation Committee.
(2) Member of the Nominating Committee.
(3) Member of the Audit Committee.
Elton Alderman has served as the Chairman of the Board of Directors,
President and Chief Executive Officer of PIC 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. Prior to joining PSL,
Mr. Alderman served as the President and Chief Executive Officer of EPL from
July 1988 until October 1993.
Thomas C. Billstein has served as a director of PIC since the
Reorganization in June 1995. Mr. Billstein has also served as PIC'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 from August 1992 until October
1993. From November 1991 to August 1992, Mr. Billstein provided independent
financial and legal consulting services to various small companies located in
Southern California. Since commencing his employment with PIC 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 PIC since the Reorganization in
June 1995. Between June 1995 and April 1997, Mr. Kubota served as PIC's Vice
President, Finance. In June 1997, Mr. Kubota was promoted to Vice President,
Investor Relations. From October 1993 to the
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<PAGE>
present, Mr. Kubota has also served as a director of PSL. Prior to joining PSL,
Mr. Kubota served as an independent consultant for EPL from March 1992 to
October 1993. Since the date of Mr. Kubota's employment with PIC 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. and a senior vice
president and director of Steriodogenesis Inhibitors International, both of
which are publicly-traded companies.
Nicholas M. Rosier has served as Controller of PSL since March 1997 and was
promoted to Chief Financial Officer of PIC 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 Bachelor's degree in accounting and
finance from H.B.S. in Holland.
Melanie A. McCaffery has served as a director of both PIC and PSL since
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. Mrs. McCaffery received a Bachelor's 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 stockholders
and until their successors have been duly elected and qualified. Officers are
elected by and serve at the discretion of the PIC Board. There are no family
relationships among any of the directors or officers of PIC.
COMMITTEES OF THE PIC BOARD
Compensation Committee. The Compensation Committee is currently comprised
of Melanie A. McCaffery and Thomas C. Billstein. The functions of the
Compensation Committee include reviewing and approving executive compensation
policies and practices, reviewing salaries and bonuses for certain officers of
PIC, administering PIC's 1997 Stock Incentive Plan, subject to the provisions
set forth in such plan, and considering such other matters as may be referred to
the Compensation Committee by the PIC Board from time to time.
Audit Committee. The Audit Committee is currently comprised solely of
Melanie A. McCaffery. The functions of the Audit Committee include recommending
to the PIC Board the retention of the independent auditors, reviewing the scope
of the annual audit undertaken by PIC's independent auditors and the progress
and results of their work, and reviewing the financial statements of PIC and its
internal accounting and auditing procedures.
Nominating Committee. The Nominating Committee is currently comprised of
Elton Alderman and Tom T. Kubota. The principal function of the Nominating
Committee is
64
<PAGE>
identifying and screening candidates for membership on PIC's Board of Directors.
65
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation of the named executive
officers paid by PIC and PSL for the last three fiscal years. The information
presented below represents compensation in all capacities in which each
identified individual served PIC and PSL, as applicable.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
------------------- ----------------------
<TABLE>
<CAPTION>
Name and Year Salary($) Bonus($) Restricted Option All Other
Principal Position --------- ------------ ------------ Stock Grants(#) Compensation ($)
- -------------------- Awards($)(1) ------------- -----------------
------------
<S> <C> <C> <C> <C> <C> <C>
--- --- 61,250
Elton Alderman 1995 --- 45,419(2) --- ---
President and Chief 1996 93,337 90,000(3)(4) 500,000 ---
Executive Officer 1997 134,000 --- ---
--- --- --- 53,008
Thomas C. Billstein 1995 --- 36,850(2)
Vice-President and 1996 90,256 60,000(3)(5) --- 200,000 ---
Secretary 1997 120,000 ---
--- --- --- ---
Nicholas M. Rosier 1995 --- --- --- ---
Chief Financial 1996 61,993 20,000(6) --- 20,000 ---
Officer 1997 --- ---
--- --- --- --- 65,250
Tom T. Kubota 1995 90,000 --- --- 118,500
Vice President 1996 61,393 45,000(3) --- 200,000 35,000(7)
Investor Relations 1997 62,500
---
</TABLE>
____________________________
(1) At December 31, 1997, the above-named individuals collectively held
approximately 7,159,200 shares of Common Stock with a value of $14,103,624
in the aggregate, based on the closing share price of $1.97 per share on
such date.
(2) Represents an amount paid to the named individual in 1997 for his
performance in 1996.
(3) Represents an amount paid to the named individual in 1998 for his
performance in 1997.
(4) In addition to the foregoing amount, Mr. Alderman received advances from
the Company on his annual bonus in the amount of $107,477. It is intended
that the Company will offset such advances against bonuses to be paid to
Mr. Alderman in fiscal 1998 and fiscal 1999.
(5) In addition to the foregoing amount, Mr. Billstein received advances from
the Company on his annual bonus in the amount of $80,890. It is intended
that the Company will offset such advances against bonuses to be paid to
Mr. Billstein in fiscal 1998 and fiscal 1999.
(6) Includes $12,500 paid to Mr. Rosier in 1998 for his performance in 1997.
(7) Represents fees paid to Mr. Kubota in his capacity as an independent
consultant to the Company prior to June 1997.
66
<PAGE>
OPTION MATTERS
Option Grants in Last Fiscal Year
---------------------------------
<TABLE>
<CAPTION>
PERCENT POTENTIAL REALIZABLE
NUMBER OF OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS EXERCISE ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO OR BASE PRICE APPRECIATION FOR
OPTIONS EMPLOYEES IN PRICE EXPIRATION OPTION TERM (3)
NAME GRANTED (#) FISCAL YEAR (1) ($/SH) DATE (2) 5%() $10%($)
- ------ ---------- -------------- -------- ---------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Elton Alderman 500,000 45.4% $2.00 6/4/2007 $628,894 $1,593,742
Thomas C. Billstein 200,000 18.1% $2.00 6/4/2007 $251,557 $ 637,497
Nicholas M. Rosier 20,000 1.8% $2.00 6/4/2007 $ 25,156 $ 63,750
Tom T. Kubota 200,000 18.1% $2.00 6/4/2007 $251,557 $ 637,497
</TABLE>
(1) Options to purchase an aggregate of 1,102,188 shares of PIC Common Stock
were granted to employees, including the Named Executive Officers, during
the year ended December 31, 1997.
(2) The Option granted has a term of ten years, subject to earlier termination
on certain events related to termination of employment or service to the
Company.
(3) The potential realizable value is calculated based on the term of the
option at its time of grant (10 years). It is calculated by assuming that
the stock price appreciates at the indicated annual rate compounded
annually for the entire term of the option and that the option is exercised
and sold on the last day of its term for the appreciated stock price. No
gain to the option holder is possible unless the stock price increases over
the option term.
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<PAGE>
Option Exercises and Fiscal Year-End Values. The following table sets forth
certain information regarding option exercises during the fiscal year ended
December 31, 1997 by each of the Named Executive Officers:
Aggregated Option Exercises in Last Fiscal Year
-----------------------------------------------
and Fiscal Year-End Option Values
---------------------------------
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES VALUE UNEXERCISED OPTIONS IN-THE-MONEY
ACQUIRED ON REALIZED AT FISCAL YEAR-END (# ) OPTIONS AT FISCAL YEAR END($)(1)
NAME EXERCISE # ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------ ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Elton Alderman 0 0 0 500,000 0 0
Thomas C. Billstein 0 0 0 200,000 0 0
Nicholas M. Rosier 0 0 0 20,000 0 0
Tom T. Kubota 0 0 0 200,000 0 0
</TABLE>
_____________________
(1) Value is based on the average of the high and low bid price for the PIC
Common Stock as reported on the system of the National Association of
Securities Dealers, Inc., known as the OTC Bulletin Board on December 31,
1997 (the "Fair Market Value") minus the exercise price or base price of
"in-the-money" options. The Fair Market Value of the PIC Common Stock as of
December 31, 1997 was $1.97 per share.
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<PAGE>
COMPENSATION OF DIRECTORS
The members of the PIC Board do not receive any cash compensation for
attendance at PIC Board or committee meetings, but may be reimbursed for certain
expenses in connection with attendance at PIC Board and committee meetings.
EMPLOYEE BENEFIT PLANS
1997 Stock Incentive Plan
PIC's 1997 Stock Incentive Plan (the "Plan") was adopted by PIC's
stockholders and the PIC Board 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 PIC Common Stock. Under the Plan, shares of PIC Common Stock may be granted
to directors, officers, employees, consultants and other service providers of
PIC, except that incentive stock options may not be granted to non-employee
directors. The Plan may be administered by the PIC Board or a committee
appointed by the PIC 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. Provided, however, that members of
the PIC Board (or the Committee appointed by the PIC Board) shall not
participate in proceedings or decisions regarding their respective option
grants. Presently, the Compensation Committee administers the Plan. As of
December 31, 1997, there were 1,355,378 options outstanding under the Plan at a
weighted average exercise price of $2.10 per share. Officers and directors hold
options to purchase 945,000 shares of PIC Common Stock, none of which were
exercisable as of December 31, 1997. In the event of a merger of PIC with or
into another corporation or the sale of substantially all of the assets of PIC,
all outstanding unvested options of the Plan shall be accelerated.
The exercise price under the Plan is determined by the Compensation
Committee, provided that, generally in the case of an incentive stock option,
the exercise price shall be equal to the fair market value of PIC Common Stock
as of the date of grant, as determined by the Compensation Committee. 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 PIC or any parent or subsidiary
of PIC (a "10% Holder"), the exercise price may be no less than 110% of the fair
market value of PIC Common Stock on the date the option is granted. The
Compensation Committee 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 PIC or within 30 days after termination of employment.
In the event of a "change in control" of PIC, all outstanding options and
rights to purchase PIC Common Stock will become fully vested and immediately
exercisable. A change in control
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<PAGE>
means generally (i) the acquisition by a person or group of more than 50% of the
outstanding securities of PIC, (ii) a merger or consolidation in which PIC is
not the survivor, (iii) the sale or disposition of substantially all of the
assets of PIC, (iv) a liquidation or dissolution of PIC, or (v) a reverse merger
in which more than 50% of the combined voting power of PIC's outstanding
securities are transferred.
The PIC Board may, in its discretion, amend or terminate the 1997 Stock
Incentive Plan. However, no amendment or termination may adversely affect a
participant's rights as to prior grants. The Plan shall terminate in any event
in June 2007.
EMPLOYMENT AGREEMENTS
PIC does not have employment agreements with any of its executive officers.
Compensation of the executive officers is evaluated, from time to time, by the
PIC Board 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.
70
<PAGE>
PIC BOARD REPORT ON EXECUTIVE COMPENSATION
During the year ended December 31, 1997, all of the members of the PIC
Board determined executive officer compensation but did not participate in
proceedings or decisions of the PIC Board regarding their respective
compensation and option grants. Effective January 1998, the PIC Board appointed
a Compensation Committee comprised of Melanie A. McCaffery and Thomas C.
Billstein.
GENERAL COMPENSATION POLICY
PIC's compensation policy is designed to attract and retain qualified key
executives critical to PIC's success and to provide such executives with
performance-based incentives tied to the achievement of PIC milestones. One of
the PIC Board's primary objectives is to have a substantial portion of each
executive officer's total compensation contingent upon PIC's performance as well
as upon the individual's contribution to PIC's success as measured by his
personal performance. Accordingly, each executive officer's compensation
package is comprised primarily of three elements: (i) base salary which
reflects individual performance and expertise and is designed to be competitive
with salary levels in the industry; (ii) variable performance awards payable in
cash and tied to PIC's achievement of certain goals; and (iii) long-term stock-
based incentive awards which strengthen the mutuality of interests between the
executive officers and PIC's stockholders.
FACTORS
The principal factors which the PIC Board considered in establishing the
components of each executive officer's compensation package for the 1997 fiscal
year are summarized below. However, the Compensation Committee may in its
discretion apply different factors, particularly different measures of financial
performance, in setting executive compensation in future fiscal years.
BASE SALARY
The base salary levels for the executive officers were established by the PIC
Board for the 1997 fiscal year on the basis of the following factors: personal
performance, the estimated salary levels in effect for similar positions at a
select group of companies with which PIC competes for executive talent, and
internal comparability considerations. Although the PIC Board reviewed various
compensation surveys, the PIC Board did not rely upon any specific survey for
comparative compensation purposes. Instead, the PIC Board made its decisions as
to the appropriate market level of base salary for each executive officer on the
basis of its understanding of the salary levels in effect for similar positions
at those companies with which PIC competes for executive talent. Base salaries
will be reviewed by the Compensation Committee on an annual basis, and
adjustments will be made in accordance with the factors indicated above.
ANNUAL INCENTIVE COMPENSATION
Executive officers have an opportunity to earn annual incentives based upon
71
<PAGE>
performance targets. The PIC Board may also award bonuses in cases where such
performance targets are not met if it determines that the circumstances warrant
such action. For fiscal year 1997, the performance targets for the executive
officers included revenues, pre-tax profits and earnings per share. The weight
given to each factor varied from individual to individual. Additionally, each
executive officer has a discretionary portion of the annual incentive linked to
achievement of non-financial goals, which differ depending upon the
responsibilities of the executive officer in question.
LONG-TERM INCENTIVE COMPENSATION
The 1997 Stock Incentive Plan also provides the PIC Board with the ability
to align the interests of the executive officer with those of the stockholders
and provide each individual with a significant incentive to manage PIC from the
perspective of an owner with an equity stake in the business. The number of
shares subject to each option grant is based upon the executive officer's
tenure, level of responsibility and relative position in PIC. Stock options
totaling 1,102,188 shares were granted to employees, including the executive
officers, during 1997. The exercise price for the stock options is the fair
market value of the stock on the date of the grant. Options generally vest at a
rate of 20% per year starting on the anniversary date of the option grant and
are contingent upon the officer's continued employment with PIC. Accordingly,
the option will provide a return to the executive officer only if he or she
remains in PIC's employ and the market price of PIC Common Stock appreciates
over the option term.
CEO COMPENSATION
The Chief Executive Officer participates in the compensation program
discussed above. The PIC Board set the base salary for Mr. Elton Alderman, the
Company's Chief Executive Officer for the 1997 fiscal year, at a level which is
designed to provide him with a salary competitive with salaries paid to chief
executive officers of similarly-sized companies in the industry and commensurate
with Mr. Alderman's experience. The PIC Board awarded an incentive payment
totaling $90,000 based upon the fact that PIC had achieved record sales and
profitability levels and that Mr. Alderman had achieved certain non-financial
goals determined by the PIC Board prior to the beginning of the year. Mr.
Alderman also received option grants totaling 500,000 shares as long-term
incentive compensation.
Respectfully submitted,
Elton Alderman, Chairman
Thomas C. Billstein
Tom T. Kubota
Melanie A. McCaffery
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1997, PIC did not have a compensation
committee or any other board committee that performed equivalent functions.
However, during such year, all of the members of the PIC Board determined
executive officer compensation but
72
<PAGE>
did not participate in proceedings or decisions of the PIC Board regarding their
respective compensation and option grants. As discussed in the section entitled
"DIRECTORS AND EXECUTIVE OFFICERS OF PIC," Messrs. Alderman, Billstein, Kubota
and Rosier all serve concurrently as officers and/or directors of both PIC and
PSL.
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 PIC or PSL would purchase an equity interest in the IHRA. In
February 1997, the PIC Board formally considered purchasing an equity interest
in the 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, PIC is a party to several sponsorship agreements with the IHRA.
During 1997, PIC 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 transactions with the IHRA, as of March
31, 1998, PIC has advanced the IHRA approximately $280,000 in the aggregate as a
prepayment for sponsorship and title rights of nationally televised national
events to occur in 1998 and 1999 and for advertisements in certain IHRA
publications.
From the date of the Reorganization and continuing to June 1997, Tom Kubota
has served as an independent consultant for PIC. In the fiscal year ended
December 31, 1997, receipts from PIC amounted to $35,000.
Messrs. Alderman, Billstein, Rosier and Kubota all hold concurrent
positions as officers and/or directors of both PIC and PSL. See "DIRECTORS AND
EXECUTIVE OFFICERS OF PIC."
From January 1996 and continuing through the present, Melanie McCaffery has
served as an independent consultant for PIC. In the fiscal year ended December
31, 1997, receipts from PIC amounted to approximately $73,000.
Other than the related transactions disclosed above, PIC is not aware of
any transactions or proposed transactions to which PIC 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.
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<PAGE>
SELECTED FINANCIAL DATA - PIC
The following selected financial data for PIC for the years ended December
31, 1994, 1995, 1996 and 1997, respectively, is derived from the audited
consolidated financial statements of PIC and PSL. The selected financial data
for the three-month periods ended March 31, 1998 and 1997 are derived from the
unaudited consolidated financial statements of PIC. The unaudited consolidated
financial statements include all adjustments, consisting of normal recurring
accruals and eliminating entries, which PIC considers necessary for a fair
presentation of the financial position and results of operations for these
periods. The information set forth below is qualified by reference to, and
should be read in conjunction with the audited 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 OF PIC." There is no available
financial data concerning PIC's activities in the year ended December 31, 1993
as prior to the Reorganization PIC was inactive during such period within the
meaning of Rule 3-11 of Regulation S-X.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1997
------------ ------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data
Net revenues................................ $ $ 390,506 $15,813,493 $29,846,795 $10,848,742 $ 5,784,089
Net income (loss)........................... (134,285) (415,740) 721,178 2,132,553 1,606,568 279,648
Net income (loss) per share:
Basic.................................... N/A(1) $ (0.02) $ 0.03 $ 0.08 $ 0.06 $ 0.01
Diluted.................................. N/A(1) $ (0.02) $ 0.03 $ 0.08 $ 0.06 $ 0.01
Weighted average common shares:
Basic.................................... N/A(1) 17,156,501 23,463,620 25,508,035 25,464,500 25,479,728
Diluted.................................. N/A(1) 17,156,501 23,463,620 25,690,774 25,890,255 25,479,728
Balance Sheet Data
Total assets................................ $ 139,984 $ 730,760 $ 9,023,317 $13,748,650 $16,233,470 $ 9,065,201
Total liabilities........................... 12,452 88,218 1,732,467 4,039,796 4,918,048 1,463,452
Total stockholders' equity.................. 127,532 642,542 7,290,850 9,708,854 11,315,422 7,601,749
</TABLE>
__________
(1) Net loss per share and weighted average shares of PIC Common Stock
outstanding information for the year ended December 31, 1994 have not been
provided as such period preceded the Reorganization in June 1995 and,
therefore, such information would not be meaningful.
74
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PIC
The following table sets forth certain financial data as a percentage of
net sales for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
-----------------
DECEMBER 31, MARCH 31,
---------------------------------------------------------------
1995 1996 1997 1998 1997
----------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Net revenues................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold........................... 54.1 29.5 19.2 18.5 24.5
---- ---- ---- ---- ----
Gross profit............................ 45.9 70.5 80.8 81.5 75.5
Selling and marketing expenses............... 0.0 52.0 57.8 43.7 57.8
General and administrative expenses.......... 152.4 12.9 11.8 12.4 10.2
----- ---- ---- ---- ----
Operating income........................ (106.5) 5.6 11.2 25.4 7.5
Interest expense............................. 0.0 (0.3) 0.0 0.0 0.0
Interest and dividend income................. 0.4 0.6 0.8 0.6 0.8
--- --- --- --- ---
Income before income taxes..............
(106.1) 5.9 12.0 26.0 8.3
Provision for income taxes................... 0.4 1.3 4.8 11.2 3.5
--- --- --- ---- ---
Net income.............................. (106.5) 4.6 7.2 14.8 4.8
====== === === ==== ===
</TABLE>
General
Since the Reorganization, management of PIC and PSL has concentrated a
significant portion of its efforts and resources on the marketing and sale of
Prolong's consumer oriented products, principally the Car Care Kit, through DRTV
advertising. Management now believes that it has attained a significant level
of brand and product identification and Prolong has now begun efforts to expand
sales of its consumer lubrication products into retail, commercial and
industrial 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 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 Three Months Ended March 31, 1998 and the Three Months
Ended March 31, 1997
Net revenues for the three months ended March 31, 1998 were approximately
$10,849,000 as compared to approximately $5,784,000 for the comparable period
of the prior year, an increase of $5,065,000 or 87.6%. Revenues for the three
months period ended March
75
<PAGE>
31, 1998 were derived from the following sources: Direct response infomercial
sales of $1,957,000; retail sales of $8,055,000; industrial sales of $316,000;
and, international and other sales of $521,000. Revenues for the three month
period ended March 31, 1997 were derived from the following sources: Direct
response infomercial sales of $3,757,000; retail sales of $1,354,000; industrial
sales of $444,000; and, international and other sales of $229,000.
During the first quarter of 1998, retail sales were 74.2% of total revenues
while direct response infomercial sales comprised 18.0% of total revenues.
During the first quarter of 1997, direct response infomercial sales comprised
65.0% of total revenues while retail sales were 23.4%. This shift in the mix of
sales resulted from the 1998 strategy to aggressively pursue sales to retail
chain stores, while continuing to air the direct response infomercial, albeit
less frequently.
The increase in retail sales as a percentage of total revenues resulted in
a significant increase in accounts receivable during the first quarter of 1998.
The majority of retail sales accounts are sold on extended terms ranging from 60
to 120 days. Further, inventory increased during the first quarter of 1998 as a
result of PIC's planned build-up in inventory for the anticipated increase in
sales.
Cost of goods sold for the three months ended March 31, 1998 was
approximately $2,005,000 as compared to $1,419,000 for the comparable period of
the prior year, an increase of $586,000 or 41.3%. This increase was mainly
attributable to the increase in sales. As a percentage of sales, cost of goods
sold decreased from 24.5% in 1997 to 18.5% in 1998. This decrease was mainly
attributable to increased efficiencies in the outside production processes and
volume discounts in the applicable period in 1998 relative to the higher costs
of goods associated with lower volumes of production in 1997. Management does
not anticipate that further significant reductions are likely in the
future.
Selling expenses of $4,741,000 for the three months ended March 31, 1998
represented an increase of $1,398,000 over the comparable period of the prior
year. This 41.8% increase was primarily the result of marketing allowances to
retail customers, increased endorsement and sponsorship payments, royalties and
commissions as a result of increased sales, promotional activities to promote
product awareness and expenditures for print advertising. Selling expenses as a
percentage of sales were 43.7% for the three months ended March 31, 1998 versus
57.8% for the comparable period of the previous year. In 1997, selling expenses
consisted primarily of purchases of television air time, royalties and
commissions. The 1998 expenditures for selling costs included a reduced amount
of air time purchases and a full array of other expenditures discussed above.
However, some of these endorsement, sponsorship and advertising expenditures are
being spread over a larger sales volume in 1998, thereby reducing selling
expenses as a percentage of revenues.
General and administrative expenses for the three months ended March 31,
1998 were approximately $1,343,000 as compared to $592,000 for the three months
ended March 31, 1997, an increase of $751,000 of 126.9%. This increase is
primarily attributable to salaries for new employees, employee benefits, costs
associated with the facility relocation, and other administrative costs
necessary to build the support resulting from the increased volume of
sales.
76
<PAGE>
For the three months ended March 31, 1998, the Company generated net
interest income of approximately $60,000 as compared to approximately $51,000
for the comparable period in 1997. This increase is attributable to slightly
higher yields in the first quarter of 1998 versus 1997 on cash balances in
interest bearing accounts.
Net income for the three month period ended March 31, 1998 was
approximately $1,607,000 as compared to approximately $280,000 for the
comparable period in the prior year, an increase of $1,327,000. The increase is
a result of the factors discussed above.
Comparison of the Years Ended December 31, 1997 and December 31, 1996
Net revenues for the year ended December 31, 1997 were $29,846,795 as
compared to $15,813,493 for the year ended December 31, 1996, an increase of
$14,033,302 or 88.7%. Revenues for 1997 were derived from the following
sources: direct response infomercial sales of $14,758,000; retail sales of
$11,439,000; industrial sales of $1,739,000; international sales of $1,058,000;
and, other sales and revenues of $853,000. Revenues for 1996 were derived from
the following sources: direct response infomercial sales of $12,287,000; retail
sales of $951,000; industrial and commercial sales of $946,000; and,
international sales of $1,629,000. Direct response infomercial sales increased
$2,471,000 in 1997 due to increased air-time expenditures and subsequently
additional air-time exposures. Retail sales increased $10,488,000 in 1997 due
to the fact that the nationwide retail store product roll-out began in the
fourth quarter of 1996 with 500 stores and continued to gain momentum during
1997 to more than 8,000 outlets by the end of 1997. Increases and/or decreases
in the industrial, international and other categories were not significant.
Prolong expects that retail and other sales categories will continue to
increase as a percentage of total sales relative to direct response infomercial
sales as Prolong continues to gain momentum in these other markets following the
initiation of the retail sales effort in the fourth quarter of 1996.
Infomercial sales have begun to demonstrate a slight decline in 1997 of return
relative to air time expenditures.
Cost of goods sold for the year ended December 31, 1997 was $5,735,238 as
compared to $4,660,926 for the year ended December 31, 1996, an increase of
$1,074,312 or 23%. The increase in absolute dollars was attributable to the
higher volume of purchases to meet the increasing sales demand. As a percentage
of sales, cost of goods sold for the year ended December 31, 1997 was 19.2% as
compared to 29.5% for the prior year. This favorable decrease was attributable
to increased efficiencies in the outside production processes and volume
discounts available in 1997 that were not available in 1996 due to the
relatively higher costs associated with start-up levels of production.
Management does not anticipate that further significant reductions are likely in
the future.
Selling and marketing expenses were $17,259,469 for the year ended December
31, 1997 as compared to $8,218,450 for the year ended December 31, 1996, an
increase of $9,041,019 or 110%. This increase was primarily the result of
marketing allowances to retail customers, increased endorsement and sponsorship
payments, royalties and commissions as a result of increased sales,
77
<PAGE>
promotional activities to promote product awareness and expenditures for print
advertising. Selling and marketing expenses as a percentage of sales were 57.8%
for 1997 versus 52.0% in 1996. In 1996, selling and marketing expenses consisted
primarily of purchases of television air time, royalties and commissions. The
1997 expenditures included air time purchases as well as the full array of other
expenditures discussed above. These other expenditures were not included in 1996
as the initiation of retail sales did not occur until the fourth quarter of
1996.
General and administrative expenses for the year ended December 31, 1997
were $3,523,200 as compared to $2,041,102 for the year ended December 31, 1996,
an increase of $1,482,098 or 72.6%. This increase was primarily attributable to
salaries for new employees, employee benefits, professional services and other
administrative costs required to build the infrastructure necessary to support
the increased level of sales. As a percentage of sales, general and
administrative expenses were 11.8% in 1997 versus 12.9% in 1996. The
administrative infrastructure buildup took place in late 1996 and early 1997 in
anticipation of the increase in sales. An extensive administrative increase,
relative to sales, is not anticipated in the future.
For the year ended December 31, 1997, PIC generated interest and dividend
income, net of interest expense, of $241,029 as compared to $35,437 for the year
ended December 31, 1996. During 1997, PIC maintained an average cash balance of
approximately $5.6 million as compared to approximately $2.6 million during
1996. Additionally, in the third quarter of 1997, PIC transferred its cash
reserves to higher yielding accounts.
Net income for the year ended December 31, 1997 was $2,132,553 as compared
to $721,178 for the year ended December 31, 1996, an increase of $1,411,375 or
195.7%. This increase was a result of the factors discussed above.
Comparison of the Years Ended December 31, 1996 and December 31, 1995
Net revenues for the year ended December 31, 1996 were $15,813,493 as
compared to $390,506 for the year ended December 31, 1995, an increase of
$15,422,987. Of Prolong's 1996 sales, $12,287,000 were attributable to direct
response to the Infomercial which was debuted in January 1996. Additionally,
1996 sales included approximately $1,629,000 of international sales resulting
from initial stocking orders to customers and distributors which were shipped in
the fourth quarter of 1996. Because of the nature of such orders, PIC does not
believe that the level of such sales will be indicative of future international
sales levels.
Cost of goods sold for the year ended December 31, 1996 was $4,660,926 as
compared to $211,220 for the year ended December 31, 1995, an increase of
$4,449,706. As a percentage of sales, cost of goods sold decreased from 54.1%
in 1995 to 29.5% in 1996. This decrease was mainly attributable to the
commencement of higher volumes of purchases of raw materials and outside
production throughput resulting in lower per unit costs to meet the demands for
product generated by the Infomercial. Management expects that the decreases, as
a percentage of sales, will begin to level out as maximum purchase and
production volumes are reached.
For the year ended December 31, 1995, PIC had no selling and marketing
expenses as it had not yet begun to develop its sales and marketing efforts.
During 1996, the majority of selling and marketing expenses related to the
purchase of television air time for the Infomercial. Additional
78
<PAGE>
selling and marketing costs in 1996 related to royalties and commissions
associated with product sales.
General and administrative expenses for the year ended December 31, 1996
were $2,041,102 as compared to $595,015 for the year ended December 31, 1995, an
increase of $1,446,087 or 243%. The increase was primarily attributable to
salaries and benefits for new employees, professional services and other
administrative costs required to build the infrastructure necessary to support
the increased level of sales. As a percentage of sales, general and
administrative expenses were 12.9% in 1996 versus 152.4% in 1995. This decrease
is the result of the increased sales volume being spread over the administrative
base.
For the year ended December 31, 1996, PIC generated interest and dividend
income, net of interest expense, of $35,437 as compared to $1,589 for the year
ended December 31, 1995, an increase of $33,848. During 1996, PIC maintained an
average cash balance of approximately $2.6 million as compared to a balance of
less than $100,000 during 1995.
Net income for the year ended December 31, 1996 was $721,178 as compared to
a net loss of $415,740 for the year ended December 31, 1995. The increase was a
result of the factors discussed above.
Liquidity and Capital Resources
Prior to the fiscal year ended December 31, 1996, PIC had not generated
sufficient revenues to finance its operations and was able to remain in business
primarily with the proceeds from the issuances of PIC Common Stock in private
placements. Currently, PIC has sufficient revenues to meet its current expenses
and does not currently anticipate the need to raise additional capital in the
next twelve months. However, PIC believes that it may need to obtain additional
financing in the future to fund its anticipated period of growth. As of June
19, 1998, Prolong had commitments for capital equipment acquisitions in the
amount of approximately $692,000 to furnish its new facilities and to provide
necessary computer and office equipment to its new employees. See "PROPERTIES
OF PIC." Prolong anticipates no immediate future need for any material
production-related capital expenditures. Prolong 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, PIC 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.
Cash and cash equivalents totaled $3,329,000 at March 31, 1998 compared to
$4,045,000 at March 31, 1997. Working capital was $10,653,000 at March 31, 1998
as compared to $9,284,000 at December 31, 1997, representing an increase of
$1,369,000.
Operating activities used $2,609,000 during the three months ended March
31, 1998 as compared to a usage of cash from operations during the same period
in 1997 of $1,139,000. This increased usage of $1,470,000 resulted primarily
from
79
<PAGE>
increases in receivables and inventories.
Cash flows used for investing activities totaled $243,000 during the three
months ended March 31, 1998. This was comprised of property and equipment
acquisitions of $225,000 and employee advances of $18,000. There were no cash
flows from financing activities during the three months ended March 31,
1998.
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 inventories 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. As of June 19, 1998 PSL
had no outstanding balance under the Bank of America credit line. In addition,
PSL currently has outstanding an aggregate of $2,421,000 owed to Bank of America
pursuant to two loans which were obtained in order to purchase the Company's
facility in Irvine, CA. The first loan, in the amount of $1,692,000, is required
to be repaid in 119 monthly installments of $13,050.32 each, and bears interest
at a rate of 7.875% per year. The second loan, in the amount of $729,000,
requires monthly interest only payments at a rate equal to Bank of America's
Reference Rate plus 1.75% until maturity on August 1, 1998. The loan of $729,000
is intended to be repaid by PSL in mid-July 1998 with the proceeds of a loan
from the United States Small Business Administration which PSL is currently in
the process of finalizing. PIC 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 1998. PIC 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 PIC, if at all.
Recently Issued Accounting Standards
Effective January 1, 1998 PIC adopted SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 requires the reporting of comprehensive income and its
components in a financial statement that is displayed with the same prominence
as other financial statements. Comprehensive income, as defined, includes all
changes in equity (net assets) during a period from nonowner sources. Examples
of items to be included in comprehensive income, which are excluded from net
income, include foreign currency translation adjustments and unrealized
gain/loss on available-for-sale securities. During the periods presented, PIC
had no changes in equity from non-owner sources. Accordingly, a statement of
comprehensive income has not been provided as comprehensive income applicable to
common stockholders equals net income applicable to common stockholders for all
periods presented.
During 1997, the FASB issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. This statement requires the reporting
of financial and descriptive information about reportable operating segments, as
well as information about major customers. PIC will adopt the provisions of SFAS
No. 131 in the 1998 year-end consolidated financial statements.
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<PAGE>
BUSINESS OF EPL
EPL is a California corporation that was incorporated on July 27, 1988 for
the purpose of acquiring, developing and marketing lubricants and formulations
to create a wide variety of lubricant products with superior friction fighting
characteristics. From its inception until mid-1993, EPL, using the tradename
Prolong, developed a number of high performance lubrication products based on a
patented extreme pressure lubricant additive for use in metal lubrication
commonly referred to as AFMT. In November 1993, EPL entered into an exclusive
license agreement with PSL regarding the right to use the AFMT formula and the
Prolong name. The license agreement provides for a three and one-half percent
(3.5%) royalty to be paid to EPL by PSL on gross revenue derived by PSL using
the Prolong name and proprietary technology. Aside from actions taken with
respect to its patent ownership, such as receiving royalty payments from PSL,
EPL conducts no significant business activities.
MARKET PRICE OF AND DIVIDENDS ON EPL'S COMMON EQUITY
EPL has authorized 25,000,000 shares of EPL Common Stock, having no par
value per share. The EPL Common Stock has no established public trading market.
As of June 30, 1998 there were approximately 291 holders of record of the EPL
Common Stock. EPL has paid no dividends on EPL Common Stock since its
inception.
81
<PAGE>
COMMON STOCK OWNERSHIP BY MANAGEMENT
AND PRINCIPAL SHAREHOLDERS OF EPL
The following table sets forth certain information concerning the
beneficial ownership of EPL's outstanding common stock as of June 19, 1998 for
(i) person(s) who are known by EPL to be the beneficial owner of more than five
percent of EPL Common Stock, (ii) each director and executive officer of EPL 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>
Michael R. Davis (2) 3,700,000 55.3%
245 Fischer Avenue, Suite A-1
Costa Mesa, California 92626
Lois M. Miller (3) 152,535 2.3%
245 Fischer Avenue, Suite A-1
Costa Mesa, California 92626
Gary C. Wykidal 50,000 0.8%
245 Fischer Avenue, Suite A-1
Costa Mesa, California 92626
All officers and directors as a group 3,902,535 58.4%
(3 persons) (4)
</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 EPL'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) Mr. Davis serves as the President and Treasurer of EPL.
(3) Ms. Miller serves as the Secretary of EPL.
(4) Includes shares held by Messrs. Davis and Wykidal and Ms. Miller who
collectively served as EPL's directors and executive officers as of June 19,
1998.
82
<PAGE>
SELECTED FINANCIAL DATA--EPL
The following selected financial data is qualified by reference to, and
should be read in conjunction with the 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 OF EPL." The financial data presented below is derived from the
unaudited financial statements of EPL. The unaudited financial statements
include all adjustments, consisting of normal recurring accruals and eliminating
entries, which EPL considers necessary for a fair presentation of the financial
position and results of operations for these periods.
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30,
---------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Net royalty revenues....................... $ $ $ 2,414 $ 199,610 $ 766,274
Net sales.................................. 823,569 508,604 252,703 2,589
Net profit (loss).......................... (175,792) (365,935) (246,476) 32,218 628,609
Net profit (loss) per share:
Basic................................... $ (0.03) $ (0.05) $ (0.04) $ 0.01 $ 0.09
Diluted................................. $ (0.03) $ (0.05) $ (0.04) $ 0.01 $ 0.09
Weighted average common shares:
Basic................................... 6,686,070 6,686,070 6,686,070 6,686,070 6,686,070
Diluted................................. 6,686,070 6,686,070 6,686,070 6,686,070 6,686,070
Balance sheet data
Total assets.............................. $ 754,268 $ 601,504 $ 417,316 $ 381,432 $ 706,117
Total liabilities.......................... 818,092 1,126,683 1,139,648 1,071,546 767,622
Total stockholders' equity (deficit)....... (63,824) (525,179) (722,332) (690,114) (61,506)
<CAPTION>
ELEVEN MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
---------- -----------
<S> <C> <C>
Statement of Operations Data
Net royalty revenues....................... $ 854,892 $ 368,000
Net sales..................................
Net profit (loss).......................... 558,738 238,532
Net profit (loss) per share:
Basic................................... $ 0.08 $ 0.04
Diluted................................. $ 0.08 $ 0.04
Weighted average common shares:
Basic................................... 6,686,070 6,686,070
Diluted................................. 6,686,070 6,686,070
Balance sheet data
Total assets.............................. $ 752,200 $ 440,249
Total liabilities.......................... 254,968 891,833
Total stockholders' equity (deficit)....... 497,232 (451,584)
</TABLE>
______________
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF EPL
General
EPL's licensee, PSL, has focused on the marketing and sale of Prolong's
consumer oriented products through DRTV advertising since January 1996. Since
EPL derives its sole revenues from the royalties it receives from PSL's sales of
products using the AFMT formula or the "Prolong" name, its revenues very closely
follow PSL's sales growth during the past three years.
Management believes that PSL has developed unique products using the AFMT
formula and has begun to market them successfully in the consumer marketplace.
Further, management believes that PSL has created brand name recognition within
the United States for the Prolong Car Care Kit and each of its four key
components. Given the extremely competitive nature of the lubricant business,
management believes that PSL is using its best resources and efforts to maximize
its revenues and, consequently, EPL's revenues as well.
Comparison of the Eleven-Month Period Ended March 31, 1998 and the Eleven-
Month Period Ended March 31, 1997
Net revenues for the eleven months ended March 31, 1998 were $854,892 as
compared to $368,000 for the eleven months ended March 31, 1997, an increase of
$486,892. Revenues for both years were derived solely from royalty payments
received from PSL based on its total revenues generated from patented technology
sales.
Selling, general and administrative expenses for the eleven months ended
March 31, 1998 were $277,157 as compared to $107,997 for the eleven months ended
March 31, 1997, an increase of $169,160. This increase was primarily
attributable to larger consulting and professional services fees as well as
legal and professional fees necessary to pursue and resolve lawsuits and
negotiate creditor claims in 1998 in excess of those in 1997. As a percentage
of revenues, selling, general and administrative expenses were 32.4% in 1998
versus 29.3% in 1997.
Other expense for the eleven months ended March 31, 1998 was $12,287 as
compared to $20,578 for the comparable period of the prior year, a decrease of
$8,291 or 67.5%. The decrease was attributable to lower interest expense due to
the paydown of loans.
Net profit for the eleven months ended March 31, 1998 was $558,738 as
compared to $238,532 for the eleven months ended March 31, 1997, an increase of
$320,206. This increase was a result of the factors discussed above.
Comparison of the Years Ended April 30, 1997 and April 30, 1996
84
<PAGE>
Net royalty revenues for the year ended April 30, 1997 were $766,274 as
compared to $202,199 for the year ended April 30, 1996, an increase of $564,075
or 279.0%. Revenues for both years were derived primarily from royalty payments
received from PSL based on its total revenues generated from patented technology
sales.
Cost of goods sold for the year ended April 30, 1997 was $894 as compared
to $35,086 for the comparable period of the prior year, a decrease of $34,192.
The decrease represents the shift from product sales to royalty revenue.
Selling, general and administrative expenses for the year ended April 30,
1997 were $184,115 as compared to $159,146 for the year ended April 30, 1996, an
increase of $24,969 or 15.7%. This increase was primarily attributable to legal
fees necessary to pursue and resolve legal matters. As a percentage of
revenues, selling, general and administrative expenses decreased to 24.0% in
1997 from 78.7% in 1996.
Other income for the year ended April 30, 1997 was $47,344 as compared to
$26,355 for the comparable period of the prior year, an increase of $20,985 or
79.6%. In 1996, EPL had other income of $100,000 as compared to $75,662 in
1997. Other income for both years was comprised primarily of claim settlements.
Interest expense in 1996 was $73,645 as compared to $28,340 in 1997. The
decrease resulted from the paydown of the outstanding loan balance.
Net income for the year ended April 30, 1997 was $628,609 as compared to
$34,322 for the year ended April 30, 1996, an increase of $594,287. This
increase was a result of the factors discussed above.
Comparison of the Years Ended April 30, 1996 and April 30, 1995
Net revenues for the year ended April 30, 1996 were $202,199 as compared to
$255,117 for the year ended April 30, 1995, a decrease of $52,918 or 26.2%.
Revenues for 1996 were derived primarily from royalty payments received from PSL
based on its total revenues generated from patented technology sales. Revenues
for 1995 were derived primarily from product sales generated directly by EPL.
Cost of goods sold for the year ended April 30, 1996 was $35,086 as
compared to $83,151 for the comparable period of the prior year, a decrease of
$48,065. The decrease represents the shift from product sales to royalty
revenue.
Selling, general and administrative expenses for the year ended April 30,
1996 were $159,146 as compared to $325,395 for the year ended April 30, 1995, a
decrease of $166,245. This decrease was primarily attributable to the reduction
of expenses due to a shift in strategy from direct product sales to royalties.
As a percentage of revenues, selling, general and administrative expenses
decreased to 78.7% in 1996 from 127.5% in 1995.
Other income for the year ended April 30, 1996 was $26,355 as compared to
other expense for the year ended April 30, 1995 of $92,929. In 1996, other
income of $100,000 resulted from claim settlements as compared to other income
of $4,000 for 1995. Interest expense was $73,645 in 1996 as compared to $96,929
in 1995. The decrease was attributable to the paydown of the outstanding loan
balance.
85
<PAGE>
Net income for the year ended April 30, 1996 was $32,218 as compared to a
net loss of $246,476 for the year ended April 30, 1995, an increase of $278,694.
The increase was a result of the factors discussed above.
Liquidity and Capital Resources
Prior to the fiscal year ended April 30, 1995, EPL had not generated
sufficient revenues to finance its operations and promptly pay off its
creditors. Currently, EPL has sufficient cash, receivables and expected
revenues to meet its current obligations and does not anticipate raising
additional capital in the next twelve months.
Cash and cash equivalents totaled $8,057 at March 31, 1998 as compared to a
zero balance at April 30, 1997. Working capital was $202,619 at March 31, 1998
as compared to a deficit of $209,038 at April 30, 1997.
86
<PAGE>
CERTAIN DIFFERENCES IN THE RIGHTS OF PIC
AND EPL SHAREHOLDERS
Following the Transaction, shareholders of EPL will become stockholders of
PIC, and their rights as stockholders will be determined by the PIC Articles and
the PIC Bylaws. In addition, PIC is a Nevada corporation governed by the NGCL,
and EPL is a California corporation governed by the CCC. The following is a
summary of the material differences in the rights of shareholders of PIC and
EPL. The following is a discussion only of those material differences between
the rights of a PIC stockholder under PIC's Articles and Bylaws and the NGCL, on
the one hand, and the rights of an EPL shareholder under EPL's Articles and
Bylaws and the CCC, on the other hand. This summary does not purport to be a
complete discussion of, and is qualified in its entirety by reference to, the
NGCL and the CCC, as the case may be, and the Articles and Bylaws of each
corporation. Copies of the Articles and Bylaws of each corporation are on file
at PIC's and EPL's respective principal executive offices.
AUTHORIZED CAPITAL STOCK
PIC. PIC is authorized to issue 150 million shares of PIC Common Stock and
50 million shares of Preferred Stock, par value of $0.001 per share. As of June
30, 1998, PIC had issued and outstanding 25,464,500 shares of PIC Common Stock
held by approximately 473 holders of record and no shares of Preferred
Stock.
The PIC Board is empowered by the PIC Articles to designate and issue from
time to time one or more series of Preferred Stock without stockholder approval.
The PIC Board may fix and determine the preferences, limitations and relative
rights of each series of Preferred Stock so issued. Because the PIC Board has
the power to establish the preferences and rights of each series of Preferred
Stock, it may afford the holders of any series of Preferred Stock preferences,
powers and rights, voting or otherwise, senior to the rights of holders of PIC
Common Stock. The issuance of Preferred Stock could have the effect of delaying
or preventing a change in control of PIC. The PIC Board has no present plans to
issue any shares of Preferred Stock.
EPL. EPL is authorized to issue 25,000,000 shares of EPL Common Stock, no
par value per share. As of June 30, 1998, EPL had issued and outstanding
6,686,070 shares of EPL Common Stock held by 291 holders of record.
REMOVAL OF DIRECTORS
PIC. The PIC Bylaws provide that any director, other than a director
elected by holders of preferred stock of the corporation voting as a class, may
be removed at any time upon the vote of stockholders representing two-thirds of
the voting power of all of the then-outstanding shares of voting stock of the
corporation, voting together as a single class.
EPL. The EPL Bylaws provide that the entire EPL Board or any individual
director may be removed from office without cause by approval of the holders of
at least a majority of the shares provided, that unless the entire EPL Board is
removed, an individual director cannot be removed when the votes cast against
such removal, or not consenting in writing to such removal, would be sufficient
to elect such director if voted cumulatively at an election of directors at
which time the same total number of votes were cast, or, if such action is taken
by written consent in lieu of a meeting, all shares entitled
87
<PAGE>
to vote were voted, and the entire number of directors authorized at the time of
the director's most recent election were then being elected. If any or all
directors are so removed, new directors may be elected at the same meeting or by
such written consent. The EPL Board may declare vacant the office of any
director who has been declared of unsound mind by an order of court or convicted
of a felony.
ANNUAL MEETINGS
PIC. The PIC Bylaws provide that at an annual meeting of the stockholders,
only such business shall be conducted as shall have been brought before the
meeting by or at the direction of the PIC Board or by any PIC stockholder who
complies with certain notice procedures. For business to be properly brought
before an annual meeting by a stockholder, the stockholder must have given
timely notice thereof in writing to the Secretary of PIC. A stockholder's
notice to the Secretary shall set forth as to each matter the stockholder
proposes to bring before the annual meeting certain specified information,
including a brief description of the business proposed to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, the name and address of the stockholder proposing such business, the
number of shares of PIC Common Stock which are beneficially owned by the
stockholder, and any material interest of the stockholder in such business. If
the foregoing provisions are not complied with, the business not properly
brought before the meeting shall not be transacted.
EPL. The EPL Bylaws provide that any matter relating to the affairs of the
corporation, whether or not stated in the notice of the meeting, may be brought
up for action except for certain specified matters which the CCC requires to be
stated in the notice of the meeting.
NOTICE OF NOMINATIONS
PIC. The PIC Bylaws provide that nominations for the election of directors
may be made by the PIC Board or by any stockholder entitled to vote for the
election of directors generally. However, a stockholder entitled to vote in the
election of directors generally may nominate one or more persons for election as
directors at a meeting only if written notice of such stockholder's intent to
make such nomination or nominations has been delivered to or mailed to the
Secretary of PIC at the principal executive offices of PIC not later than 7 days
prior to the date of such stockholders' meeting.
EPL. Neither the EPL articles, EPL Bylaws nor the CCC provide for similar
procedures in respect of nominations of directors by shareholders.
SPECIAL MEETINGS
PIC. Under the PIC Bylaws, special meetings of its stockholders may be
called only by a majority of the then authorized number of directors.
EPL. Under the EPL Bylaws, special meetings of its shareholders may be
called by a majority of the EPL Board, the Chairman of the Board, if any, Vice
Chairman of the Board, if any, the President, if any, the Secretary, or by any
officer instructed by the EPL Board to call the meeting. Additionally, special
meetings may be called in a like manner by the holders of shares entitled to
cast not less than 10% of the votes at a meeting being called.
88
<PAGE>
PROXIES
PIC. Under the PIC Bylaws, voting by proxy is allowed so long as the proxy
complies with the NGCL and is filed with the Secretary of the corporation. The
NGCL specify that no such proxy shall be valid after the expiration of six (6)
months from the date of its execution, unless coupled with an interest, or
unless the person executing the proxy specifies the length of time for which the
proxy shall remain in force (which in no case may exceed seven (7) years from
the date of its execution). Any proxy duly executed is not revoked and
continues in force until revoked by another instrument or a duly executed proxy
bearing a later date filed with or transmitted to the Secretary of PIC or
another person or persons appointed by the corporation to count the votes of the
stockholders and determine the validity of proxies and ballots.
EPL. Under the EPL Bylaws, voting by proxy is similarly allowed. However,
no proxy is valid after the expiration of eleven (11) months from the date of
its execution unless otherwise provided in the proxy. Any such duly executed
proxy continues in force until revoked by the person executing it prior to the
vote or written action thereto.
QUORUM
PIC. The PIC Bylaws specify that the holders of a majority of the stock
issued and outstanding and entitled to vote in person or by proxy shall
constitute a quorum at all meetings. The stockholders present at a duly called
or held meeting at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough stockholders to leave less
than a quorum. If, however, a quorum is not present or represented at any
meeting of the stockholders, the stockholders entitled to vote at such meeting
have the power to adjourn the meeting from time to time, but not for a period of
more than thirty (30) days, until a quorum is present at which time any business
which might have been transacted at the meeting as originally notified may be
conducted at such adjourned meeting.
EPL. The EPL Bylaws specify that a majority of the shares entitled to vote
at any meeting constitutes a quorum. The shareholders present at a meeting at
which a quorum is present may continue to do business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum if any action taken is approved by at least a majority of the shares
required to constitute a quorum. If, however, a quorum is not present, no
business other than adjournment of the meeting may be conducted.
VOTING RIGHTS
PIC. The PIC Bylaws provide that each outstanding share, regardless of
class, is entitled to one vote on each matter submitted to vote at a meeting,
except as limited by the PIC Articles or the NGCL. No cumulative voting is
permitted.
EPL. The EPL Bylaws, subject to the CCC, permit cumulative voting at any
election of directors provided the name of the candidate or candidates has been
placed in nomination prior to the voting and the shareholder has given notice of
the intention to cumulate the shareholder's votes. If any one shareholder has
given such notice, all shareholders may cumulate their votes for such candidates
in nomination.
89
<PAGE>
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS
PIC. The NGCL provides that, in order to amend the articles of
incorporation, a corporation's board of directors must call a meeting, special
or annual, of the stockholders to approve the amendment. The amendment to the
articles of incorporation must be recommended to the stockholders by the board
of directors and, the amendment must be approved by a majority of the voting
power of the corporation by an affirmative vote.
The PIC Bylaws provide that, except as provided in the PIC Articles, the
PIC Bylaws may be altered, amended or repealed by the affirmative vote of a
majority of all directors then holding office at any meeting of the PIC Board.
In addition, any bylaws may be altered, amended, repealed or any new bylaws be
adopted by the stockholders at an annual or special meeting called for such a
purpose.
EPL. The CCC provides that, in order to amend the articles of
incorporation, a corporation's board of directors must call a meeting, special
or annual, of the shareholders to approve the amendment. The amendment to the
articles of incorporation must be recommended to the shareholders by the board
of directors and, the amendment must be approved by a majority of the voting
power of the corporation by an affirmative vote. The CCC also permits a
majority of the shareholders to initiate such action, subject to subsequent
approval by the board of directors.
The EPL Bylaws provide that such Bylaws may be altered, amended or repealed
by the affirmative vote of a majority of all directors then holding office at
any meeting of the EPL Board or by the shareholders entitled to exercise a
majority of the voting power; provided, however, that the EPL Board does not
have control over any provision in the EPL Bylaws which fixes or changes the
authorized number of directors of EPL; provided, further, that any control over
the EPL Bylaws vested in the EPL Board is subject to the authority of the
aforesaid shareholders to amend or repeal such Bylaws or to adopt new Bylaws.
EXCULPATION AND INDEMNIFICATION
PIC. The PIC Articles provide that no director or officer of PIC shall be
personally liable to PIC or its stockholders for damages for breach of duty of
care or other duty as a director or officer, except for liabilities that the
NGCL provides may not be limited or eliminated, including intentional
misconduct, fraud or knowing violation of law. The Nevada courts have
interpreted such exceptions to include a prohibition on the limitation or
elimination of liability for violations of federal and state securities laws.
Additionally, the PIC Articles and Bylaws provide that the corporation shall
indemnify to the fullest extent permitted by the NGCL, any individual made a
party to a proceeding, because he is or was a director or officer of PIC or a
director, officer, employee or representative of another entity at PIC's
request, against liability if such person acted in a manner he believed in good
faith to be in or not opposed to the best interests of PIC and, in the case of
any criminal proceeding, if he had no reasonable cause to believe his conduct
was unlawful. The PIC Bylaws give the PIC Board discretion to provide indemnity
to its employees and agents with the same scope and effect as the foregoing
indemnification of officers and directors.
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<PAGE>
EPL. The EPL Articles provide that liability of its directors for monetary
damages shall be eliminated to the fullest extent permissible under the CCC.
Additionally, the EPL Articles and Bylaws provide that EPL may indemnify to the
fullest extent permitted by the CCC, any individual made a party to a
proceeding, because he is or was an agent of EPL, against liability if such
person acted in a manner he believed in good faith to be in or not opposed to
the best interests of EPL and, in the case of any criminal proceeding, if he had
no reasonable cause to believe his conduct was unlawful. The California courts
have generally taken the position that indemnification is not available for
violations of federal and state securities laws.
DISSOLUTION
PIC. The NGCL provides that a corporation's board of directors may propose
dissolution for submission to the stockholders and that for a proposal to be
adopted, the stockholders entitled to vote must approve the proposal to
dissolve, unless the articles of incorporation or the board of directors
requires a greater vote or a vote by voting groups, by a majority of all the
votes entitled to be cast on that proposal.
EPL. The CCC provides that any corporation may elect voluntarily to wind
up and dissolve by the vote of the shareholders holding a majority of the voting
power.
91
<PAGE>
EXPERTS
The consolidated financial statements of PIC for the year ended December
31, 1995 appearing in this Proxy Statement/Prospectus and Registration Statement
have been audited by Corbin & Wertz , independent auditors, as set forth in
their reports thereon appearing elsewhere herein. Such consolidated financial
statements are included herein in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of PIC as of and for the years ended
December 31, 1996 and 1997, included in this Proxy Statement/Prospectus, have
been audited by Deloitte & Touche, LLP, independent auditors, as stated in
their reports which are included herein and have been so included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
The fairness opinion regarding the terms of the Acquisition, incorporated
by reference in this Proxy Statement/Prospectus and Registration Statement, has
been prepared by North American Capital Partners. Such opinion is included
herein on reliance upon the authority of such firm as experts in financial
advisory services.
LEGAL MATTERS
The legality of the shares of PIC Common Stock being offered hereby is
being passed upon for PIC by Stradling Yocca Carlson & Rauth, a Professional
Corporation, Newport Beach, California. The federal income tax treatment of the
Transaction is being passed upon for PIC and EPL by Gary C. Wykidal &
Associates, Costa Mesa, California.
STOCKHOLDER PROPOSALS
In order to be eligible for inclusion in PIC's proxy solicitation materials
for its 1999 annual meeting of stockholders, any stockholder proposal to be
considered at such meeting must have been received by PIC on or before January
16, 1999. Any such proposal will be subject to the requirements contained in
the PIC Bylaws relating to stockholder proposals and the proxy rules under the
Exchange Act. See "CERTAIN DIFFERENCES IN THE RIGHTS OF PIC AND EPL
SHAREHOLDERS."
92
<PAGE>
ANNEX A
-------
AGREEMENT AND PLAN OF REORGANIZATION
<PAGE>
ANNEX B
-------
PLAN OF LIQUIDATION AND DISSOLUTION
<PAGE>
ANNEX B
PLAN OF LIQUIDATION AND DISSOLUTION
OF EPL PRO-LONG, INC.,
A CALIFORNIA CORPORATION
This Plan of Liquidation and Dissolution (the "Plan") of EPL Pro-Long,
Inc., a California corporation ("EPL"), is for the purpose of effecting the
complete liquidation and dissolution of EPL in accordance with Sections 336 and
368(a)(1)(C) and (a)(2)(G) of the Internal Revenue Code of 1986, as amended (the
"Code"), Chapters 19 and 20 of the California Corporations Code (the "CCC"), and
in accordance with the terms and provisions of the Agreement and Plan of
Reorganization between EPL and Prolong International Corporation ("PIC"), dated
as of February 5, 1998 (the "Agreement"), pursuant to the following steps:
A. The Plan shall be adopted by the vote of the holders of a majority of
the outstanding shares of EPL entitled to vote thereon at a duly authorized
meeting of EPL's shareholders, and shall become effective upon the Closing Date
of the transaction described in and contemplated by the Agreement.
B. EPL, through its officers and directors, shall take the following
action:
1. Sell substantially all of its assets to PIC solely for common
stock of PIC, as set forth in the Agreement, and otherwise sell or liquidate its
remaining assets into cash to the extent deemed necessary by the officers and
the directors of EPL (subject to Section 2001(g) of the CCC).
2. Immediately cease doing business as a going concern and continue
its activities merely for the purpose of winding up its affairs.
3. Within 30 days of the date of adoption of the Plan, the officers
of EPL shall file with the Internal Revenue Service duly completed and executed
original copies of IRS Form 966, Corporate Dissolution or Liquidation, together
with any attachments or exhibits required for filing such forms as required by
the applicable provisions of the Code.
4. The officers of EPL shall cause EPL to pay all fixed liabilities
of EPL known to the officers through and including the close of EPL's final
fiscal year, including but not limited to property, income and other applicable
taxes, legal and accounting fees and costs of winding up, distribution and
dissolution of EPL.
5. As soon as is practicable following the payment of EPL's known
liabilities in accordance with subparagraph 4, and in all events within six (6)
months of the adoption of this Plan in accordance with paragraph A hereof,
distribute all of its remaining assets, including its shares of common stock of
PIC to its shareholders, on a pro rata basis by one or more liquidating
distributions, in full and complete cancellation and redemption of all of the
outstanding shares of stock of EPL. The distribution of the assets of EPL shall
be made to its shareholders on the following conditions:
B-1
<PAGE>
(a) that on demand made by the EPL Board of Directors, each
shareholder shall surrender, for cancellation, the certificate or certificates
evidencing his or her ownership of common stock of EPL; and
(b) that the officers of EPL shall file or cause to be filed with
the Internal Revenue Service duly completed and executed copies of IRS Form
1099DIV reporting liquidating distributions to the shareholders as required
pursuant to the Code.
6. The officers of EPL shall cause EPL to obtain a tax clearance
certificate from the California Franchise Tax Board pursuant to filing
California Form 3555.
7. The officers of EPL shall prepare or cause to be prepared, and
shall cause to be filed the final income tax returns of EPL with the California
Franchise Tax Board and the IRS, and shall cause EPL to pay any applicable
taxes.
8. The officers of EPL shall close any outstanding bank or brokerage
accounts, credit card accounts and charge accounts of EPL and shall pay any
outstanding balances on such accounts.
9. The officers and the directors of EPL shall also file such
documents and do any and all acts and things necessary to carry out, perform,
implement and consummate the Plan and to wind up corporate affairs and dissolve
EPL, including, but not limited to:
(a) the election of officers and employment of agents and
attorneys to liquidate and wind up the affairs of EPL;
(b) the continued conduct of the business of EPL, insofar as is
necessary for the disposal or winding up thereof;
(c) the performance under contracts of EPL and the collection,
payment, compromise and settlement of debts and claims for and against EPL;
(d) the defense of suits brought against EPL;
(e) the filing of suits, in the name of EPL, for all sums due or
owing to EPL and to recover any of its property;
(f) the collection of any amounts remaining unpaid on
subscriptions to shares and to recover unlawful distributions;
(g) the execution of bills of sale and deeds of conveyance in the
name of EPL; and
(h) the execution of contracts in the name of EPL and the
performance of all acts which may be proper or convenient for purposes of
winding up, settling and liquidating the affairs of EPL.
B-2
<PAGE>
10. After completion of the items described above in Paragraphs 1
through 9, inclusive, the Directors of EPL shall prepare, execute and verify a
Certificate of Dissolution on behalf of EPL pursuant to the provisions of
Section 1905 of the California Corporations Code, and shall file or cause the
Certificate to be filed in the Office of the Secretary of State of California.
C. The directors and officers of EPL shall have the power to adopt all
resolutions, execute all documents, and file all necessary papers, and take all
other action they may deem necessary or desirable for the purpose of effecting
the complete liquidation and dissolution of EPL under Sections 336 and
368(a)(1)(C) and (a)(2)(G) of the Code, and Chapters 19 and 20 of the CCC.
B-3
<PAGE>
ANNEX C
-------
FAIRNESS OPINION OF NORTH AMERICAN CAPITAL PARTNERS
<PAGE>
April 27, 1998
Board of Directors
EPL Prolong, Inc.
22681 Sweet Meadow
Mission Viejo, CA 92692
Members of the Board:
North American Capital Partners, a California corporation ("NACP") was retained
by EPL Prolong, Inc. ("EPL" or the "Company") to render an opinion as to whether
the terms of the proposed asset purchase transaction (the "Transaction") between
EPL and Prolong International Corporation ("PIC"), is fair, from a financial
point of view, to the holders of EPL common stock (the "Opinion). The Opinion
of NACP does not address any other aspect of the proposed Transaction and does
not constitute a recommendation to any stockholder as to whether such
stockholder should consent to the approval of the Transaction.
We understand that EPL and PIC have entered into the Agreement pursuant to which
PIC will purchase substantially all of the assets and assume certain of the
liabilities of EPL and, in consideration thereof, issue and deliver to EPL at
the closing of the Transaction one certificate representing two million nine
hundred ninety-three thousand thirty-five (2,993,035) shares of PIC Common
Stock, $0.001 par value per share ("New Shares"). The Transaction is intended
to qualify as a tax-free reorganization under Sections 368(a)(1)C and (a)(2)(G)
of the Internal Revenue Code of 1986, as amended and, accordingly, EPL will be
required to consummate a dissolution following consummation of the Transaction.
EPL will distribute all of its assets, including the shares of PIC Common Stock
issued to EPL pursuant to the Agreement, to its shareholders (the
"Dissolution"). As of March 31, 1998, PIC had 25,464,500 shares of common stock
issued and outstanding and options outstanding for the purchase of 1,355,378
additional common shares which were issued under a Stock Incentive Plan.
Following the Transaction, PIC will have 28,457,535 shares issued and
outstanding. The New Shares will thus represent approximately ten and one-half
percent (10.5%) of the economic value of PIC immediately following the
Transaction. Each of the holders of record of PIC common stock is entitled to
one (1) vote per share thereof in the election of PIC's directors and all other
matters submitted to each such holder for a vote of stockholders. There are no
cumulative voting rights with respect to the election of PIC's directors, and no
conversion rights or sinking fund provisions applicable to its capital stock.
Further, there are important restrictions on the ability of the EPL shareholders
to realize immediately the value of PIC common stock which they will receive in
the Dissolution. Upon approval of the Transaction, each EPL shareholder in the
Dissolution shall be subject to a transfer restriction whereby all PIC common
stock may not be sold, distributed, or otherwise disposed of for a period of 365
days following the date of the Closing without the prior written consent of PIC.
Furthermore, we understand that the Transaction is expected to be considered by
the shareholders of EPL at a special meeting to be held after regulatory
approval, tax ruling and satisfaction of other closing conditions and to be
consummated shortly thereafter. NACP has performed an analysis and evaluation
of all relevant information as described below in its determination as to
whether the terms of the Transaction are fair, from a financial point of view,
to holders of EPL stock.
The scope of our analysis included, but was not limited to, the following: (i)
review of the Agreement and Plan of Reorganization, and other related
acquisition documents to be entered into by the parties in connection with the
Transaction (collectively the "Transaction Agreements"), in substantially final
form as provided to us by each company, (ii) discussions with each company's
management regarding the company's history, structure, products, markets,
competition, and prospects for the future; (iii) examination of all available
documentation relating to the companies, their assets, operations, and financial
results including PIC's audited financial statements for fiscal years ended
December 31, 1995,
C-1
<PAGE>
1996, & 1997 and its 1997 Form 10k and EPL's unaudited financial statements for
the same years; (iv) review of certain estimates of cost savings, synergistic
and other combination benefits, (v) review of the pro forma financial impact of
the Transaction on each entity, (vi) review and comparison with certain publicly
available financial information and stock market data of other similar publicly
traded companies, (vii) review and comparison of the financial terms of certain
recent acquisitions of similar companies, (viii) review of discounted cash flow
analyses provided by the companies, (ix) review and analysis of historical
market prices and trading activity for the common shares of PIC, and (x)
preparation of such other studies, analyses, inquiries and investigations as we
deemed appropriate.
In the course of our review, we have relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other information provided to us, or reviewed for us, by the companies. With
respect to the projected financial results of such business and the projected
benefits, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available information, estimates, and judgments of
the respective senior management's of EPL and PIC as to the anticipated future
performance of their respective companies and as to the anticipated projected
benefits within the time frames forecast therein. We have not assumed any
responsibility for independent verification of such information and have relied
upon the assurances of the management of EPL and PIC that they are unaware of
any facts that would make the information provided to, or reviewed by, us
incomplete or misleading. In arriving at our opinion, we have not performed or
obtained any independent appraisal of the assets or liabilities of EPL or PIC
nor have we been furnished with any such appraisals. We note that the
transaction is intended to qualify as a reorganization within the meaning of
Section 368 of the IRC, and we have assumed that it will so qualify. In
addition, we have assumed that the Transaction agreements in the form finally
entered into will not differ in any material respect from the drafts furnished
to us, and that the Transaction will be consummated on the terms set forth in
the Transaction Agreements with waiver or amendment or any of the terms thereof.
Our Opinion is necessarily based on the economic, market, competitive and other
conditions, and governmental policies and practices in the lubrication industry,
as in effect on, and the information made available to us as of, the date
hereof. No opinion is expressed herein as to the price which the new securities
of PIC to be issued to the shareholders of EPL may trade at anytime.
We have acted as a financial advisor to EPL in connection with the Transaction
by provision of this Opinion, and will receive a fee for such advisory services,
payment of which is not contingent upon consummation of the Transaction.
It is understood that this letter is intended for the benefit and use of the
Board of Directors of EPL and is not, subject to provisions within our
engagement letter dated April 14, 1998, to be reproduced, disseminated, quoted
or referred to at any time, in whole or in part, in any manner without our prior
written consent, which shall not be unreasonably withheld. This Opinion does
not address either company's underlying decision to effect the Transaction and
does not constitute a recommendation to any shareholder as to how any such
shareholder should vote on the Transaction.
Based on and subject to the foregoing, it is our opinion that, as of the date
hereof, the financial terms of the Transaction are fair, from a financial point
of view, to the shareholders of EPL.
Best regards,
NORTH AMERICAN CAPITAL PARTNERS
Raymond L. Clark
Managing Director
C-2
<PAGE>
ANNEX D
-------
CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW
<PAGE>
ANNEX D
-------
CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW
DISSENTERS' RIGHTS
SECTION 1300. RIGHT TO REQUIRE PURCHASE--"DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-
form merger either (A) listed on any national securities exchange certified
by the Commissioner of Corporations under subdivision (o) of Section 25100
or (B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the
corporation purchase at their fair market value, in accordance with Section
1301.
(4) Which the dissenting shareholder has submitted for endorsement,
in accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of
D-1
<PAGE>
dissenting shares and includes a transferee of record.
SECTION 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such price.
SECTION 1302. ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
D-2
<PAGE>
SECTION 1303. AGREED PRICE--TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
SECTION 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT
(a) If the corporation denies that the shares are dissenting shares, or
the corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be
joined as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SECTION 1305. APPRAISERS' REPORT--PAYMENT--COSTS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed
by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the
D-3
<PAGE>
corporation for payment of an amount equal to the fair market value of each
dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
SECTION 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SECTION 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
SECTION 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
SECTION 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
D-4
<PAGE>
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement
in accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SECTION 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
SECTION 1311. EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
SECTION 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or short-
form merger, or to have the reorganization or short-form merger set aside or
rescinded, except in an action to test whether the number of shares required to
authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or
D-5
<PAGE>
to have the reorganization or short-form merger set aside or rescinded, the
shareholder shall not thereafter have any right to demand payment of cash for
the shareholder's shares pursuant to this chapter. The court in any action
attacking the validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded shall not restrain or
enjoin the consummation of the transaction except upon 10 days' prior notice to
the corporation and upon a determination by the court that clearly no other
remedy will adequately protect the complaining shareholder or the class of
shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
D-6
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Prolong International Corporation and Subsidiaries
- --------------------------------------------------
<TABLE>
<S> <C>
Independent Auditors' Report for the Years Ended December 31,
1997 and 1996............................................................ F-2
Independent Auditors' Report for the Year Ended December 31, 1995............. F-3
Consolidated Balance Sheets as of March 31, 1998 (unaudited),
December 31, 1997 and December 31, 1996.................................. F-4
Consolidated Statements of Operations for the Three Months Ended
March 31, 1998 and March 31, 1997 (unaudited) and for the Years
Ended December 31, 1997, 1996 and 1995................................... F-6
Consolidated Statements of Stockholders' Equity for the Three Months
Ended March 31, 1998 (unaudited) and for the Years Ended
December 31, 1997, 1996 and 1995......................................... F-7
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1998 and March 31, 1997 (unaudited) and for the Years
Ended December 31, 1997, 1996 and 1995................................... F-8
Notes to Consolidated Financial Statements.................................... F-10
EPL Pro-Long, Inc.
- ---------------------
Unaudited Balance Sheets as of March 31, 1998
and April 30, 1997 and 1996.............................................. F-22
Unaudited Statements of Operations and Retained Deficit for
the Eleven Months Ended March 31, 1998 and 1997.......................... F-23
Unaudited Statements of Operations and Retained Deficit for
the Years Ended April 30, 1997, 1996 and 1995............................ F-24
Unaudited Statements of Cash Flows for the Eleven Months
ended March 31, 1998 and 1997............................................ F-25
Unaudited Statements of Cash Flows for the Years Ended
April 30, 1997, 1996 and 1995............................................ F-26
Notes to Unaudited Financial Statements....................................... F-27
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Prolong International Corporation:
We have audited the accompanying consolidated balance sheets of Prolong
International Corporation and subsidiaries (the Company) as of December 31, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 present fairly, in all
material respects, the financial position of Prolong International Corporation
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 4, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Prolong International Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Prolong International Corporation and
subsidiary for the year 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 consolidated 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, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Prolong International Corporation and subsidiary for the year ended December 31,
1995, in conformity with generally accepted accounting principles.
/s/ Corbin & Wertz
CORBIN & WERTZ
Irvine, California
February 23, 1996
F-3
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997 1996
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,329,077 $ 6,180,983 $ 5,063,585
Accounts receivable, net of allowance for
doubtful accounts of $331,295, $242,724
and $94,282 in 1998, 1997 and 1996,
respectively 7,927,142 3,880,571 1,361,878
Subscriptions receivable 189,500
Inventories 2,711,185 1,300,691 1,534,938
Prepaid expenses 991,126 711,242 180,609
Prepaid television time 367,039 1,022,144 367,161
Advances to employees 245,570 227,896 3,675
Deferred tax asset 44,289
------------ ------------ -----------
Total current assets 15,571,139 13,323,527 8,745,635
PROPERTY AND EQUIPMENT, net 433,004 219,683 117,758
OTHER ASSETS 74,540 82,724 115,462
DEPOSITS 154,787 122,716 44,462
------------ ------------ -----------
TOTAL ASSETS $ 16,233,470 $ 13,748,650 $ 9,023,317
============ ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997 1996
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,868,936 $ 1,074,098 $ 748,870
Accrued expenses 1,727,735 1,663,321 703,222
Income taxes payable 1,297,684 1,278,684 251,563
Deferred income taxes 23,693 23,693
Other current liabilities 28,812
----------- ----------- ----------
Total current liabilities 4,918,048 4,039,796 1,732,467
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;
25,464,500, 25,464,500 and 25,453,700 shares issued and
outstanding in 1998, 1997
and 1996, respectively 25,465 25,465 25,454
Common stock subscribed 156
Additional paid-in capital 7,393,451 7,393,451 7,767,855
Retained earnings 3,896,506 2,289,938 157,385
Note receivable issued for common stock (660,000)
----------- ----------- ----------
Total stockholders' equity 11,315,422 9,708,854 7,290,850
----------- ----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$16,233,470 $13,748,650 $9,023,317
=========== =========== ==========
</TABLE>
F-5
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1998 1997 1997 1996 1995
------------- ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET REVENUES $10,848,742 $ 5,784,089 $29,846,795 $15,813,493 $ 390,506
COST OF GOODS SOLD 2,005,414 1,419,024 5,735,238 4,660,926 211,220
----------- ----------- ----------- ----------- -----------
GROSS PROFIT 8,843,328 4,365,065 24,111,557 11,152,567 179,286
OPERATING EXPENSES:
Selling expenses 4,740,601 3,343,242 17,259,469 8,218,450
General and administrative expenses 1,342,704 591,560 3,523,200 2,041,102 595,015
----------- ----------- ----------- ----------- -----------
Total operating expenses 6,083,305 3,934,802 20,782,669 10,259,552 595,015
----------- ----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) 2,760,023 430,263 3,328,888 893,015 (415,729)
OTHER INCOME (EXPENSE), net:
Interest expense (977) (750) (8,185) (51,666)
Interest income 60,522 52,179 249,214 15,224 1,589
Dividend income 71,879
----------- ----------- ----------- ----------- -----------
Total other income, net 59,545 51,429 241,029 35,437 1,589
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 2,819,568 481,692 3,569,917 928,452 (414,140)
PROVISION FOR INCOME TAXES 1,213,000 202,044 1,437,364 207,274 1,600
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 1,606,568 $ 279,648 $ 2,132,553 $ 721,178 $ (415,740)
=========== =========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE:
Basic $0.06 $0.01 $0.08 $0.03 $(0.02)
=========== =========== =========== =========== ===========
Diluted $0.06 $0.01 $0.08 $0.03 $(0.02)
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES:
Basic 25,464,500 25,479,728 25,508,035 23,463,620 17,156,501
Dilutive Options Outstanding 425,755 182,739
----------- ----------- ----------- ----------- -----------
Diluted 25,890,255 25,479,728 25,690,774 23,463,620 17,156,501
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
See notes to consolidated financial statements.
F-7
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
COMMON STOCK SUBSCRIBED PAID-IN
-----------------------------------------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL
<S> <C> <C> <C> <C> <C>
BALANCES, December 31, 1994 500,000 $ 500 13,767,500 $ 13,768 $ 261,317
Shares issued for cash, net of costs of $48,000 1,700,000 1,700 325,300
Shares issued for common stock subscribed 13,767,500 13,768 (13,767,500) (13,768)
Issuance of shares to effect reverse acquisition 789,535 789 (789)
Shares issued for cash, net of costs of $33,000 1,980,000 1,980 394,520
Shares subscribed for receivable, net of costs
of $8,000 320,000 320 71,680
Shares issued for services 445,000 445 110,805
Contributed services 24,000
Net loss
----------- ------- ----------- -------- ----------
BALANCES, December 31, 1995 19,182,035 19,182 320,000 320 1,186,833
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
----------- ------- ----------- -------- ----------
BALANCES, December 31, 1996 25,453,700 25,454 155,800 156 7,767,855
Shares issued for cash 5,000 5 12,495
Shares issued for services 180,000 180 229,270
Issuance of shares previously subscribed 155,800 156 (155,800) (156)
Cancellation of shares previously issued (330,000) (330) (659,670)
Charge to bring options to fair value 43,501
----------- ------- ----------- -------- ----------
25,464,500 25,465 -- -- 7,393,451
=========== ======= =========== ======== ==========
<CAPTION>
(ACCUMULATED
DEFICIT) TOTAL
RETAINED NOTE STOCKHOLDERS'
EARNINGS RECEIVABLE EQUITY
<S> <C> <C> <C>
BALANCES, December 31, 1994 $ (148,053) $ -- $ 127,532
Shares issued for cash, net of costs of $48,000 327,000
Shares issued for common stock subscribed
Issuance of shares to effect reverse acquisition
Shares issued for cash, net of costs of $33,000 396,500
Shares subscribed for receivable, net of costs
of $8,000 72,000
Shares issued for services 111,250
Contributed services 24,000
Net loss (415,740) (415,740)
---------- --------- -----------
BALANCES, December 31, 1995 (563,793) 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 721,178 721,178
---------- --------- -----------
BALANCES, December 31, 1996 157,385 (660,000) 7,290,850
Shares issued for cash 12,500
Shares issued for services 229,450
Issuance of shares previously subscribed
Cancellation of shares previously issued 660,000
Charge to bring options to fair value 43,501
Net income 2,132,553 2,132,553
---------- --------- ------------
BALANCES, December 31, 1997 2,289,938 -- 9,708,854
========== ========= ============
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Net income
----------- ------- ----------- -------- ----------
BALANCES, December 31, 1997 25,464,500 $25,465 -- $ -- 7,393,451
=========== ======= =========== ======== ==========
<CAPTION>
<S> <C> <C> <C>
Net income (unaudited) 1,606,568 1,606,568
---------- --------- ------------
BALANCES, March 31, 1998 (unaudited) $3,896,506 $ -- $ 11,315,422
========== ========= ============
</TABLE>
F-9
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,606,568 $ 279,648 $ 2,132,553 $ 721,178 $ (415,740)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 20,535 17,521 82,172 42,874 23,116
Provision for doubtful accounts 88,571 (38,730) 148,442 89,504 4,778
Expense recorded upon subscription of shares 111,250
Contributed services 24,000
Deferred taxes 67,982 (44,289)
Reserve for obsolescence 22,500 88,271 100,000 (2,432)
Common stock issued in exchange for services 18,750 229,450 395,000
Compensation costs related to options 43,501
Changes in assets and liabilities:
Accounts receivable (4,135,142) 71,669 (2,667,135) (1,418,855) (30,064)
Inventories (1,432,994) (1,224,710) 134,247 (1,486,298) (46,208)
Prepaid expenses (279,884) (145,000) (530,633) 162,669 (328,702)
Prepaid television time 655,105 62,253 (654,983) (367,161)
Deposits (32,071) (78,254) (25,000)
Accounts payable 794,838 (91,580) 325,228 673,252 66,375
Accrued expenses 64,414 (134,366) 960,099 692,222
Income taxes payable 19,000 (42,356) 1,027,121 249,963
Other liabilities 1,391
----------- ----------- ----------- ----------- ----------
Net cash provided by (used in) operating (2,608,560) (1,138,630) 1,319,790 (317,373) (589,804)
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (225,672) (22,979) (151,359) (97,489)
Increase in other assets (57,500) (19,053)
Employee advances (17,674) (18,841) (224,221) (3,313)
----------- ----------- ----------- ----------- ----------
Net cash used in investing activities (243,346) (41,820) (375,580) (158,302) (19,053)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on other current liabilities (713) (28,812) (5,466)
Proceeds from issuance of common stock 12,500 12,500 5,322,630 723,500
Proceeds from subscriptions receivable 150,000 189,500 100,000
----------- ----------- ----------- ----------- ----------
Net cash provided by financing activities 161,787 173,188 5,417,164 723,500
----------- ----------- ----------- ----------- ----------
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1998 1997 1997 1996 1995
------------- ------------- ----------- ----------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $(2,851,906) $(1,018,663) $ 1,117,398 $4,941,489 $ 114,643
------------ ----------- ----------- ---------- ---------
CASH AND CASH EQUIVALENTS,
beginning of period 6,180,983 5,063,585 5,063,585 122,096 7,453
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<S> <C> <C> <C> <C> <C>
CASH AND CASH EQUIVALENTS, end of period $ 3,329,077 $ 4,044,922 $ 6,180,983 $ 5,063,585 $ 122,096
SUPPLEMENTAL DISCLOSURES -
Cash paid during the period for:
Income taxes $ 1,194,000 $ 245,000 $ 366,000 $ 800 $ --
Interest $ 977 $ 750 $ 8,186 $ 51,666 $ --
</TABLE>
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
During the first quarter of 1997, the Company completed the following
transactions:
Issued 37,500 shares of common stock in exchange for services valued at
$18,750.
Issued 60,000 shares of common stock previously committed.
During the first quarter of 1997, the Company completed the following
transactions:
Issued 37,500 shares of common stock in exchange for services valued at
$18,750.
Issued 60,000 shares of common stock previously committed.
Canceled 330,000 previously issued shares of common stock and a related note
receivable of $660,000.
Recorded $43,501 to additional paid-in capital to bring options to fair value.
During 1996, the Company completed the following transactions:
Issued 730,000 shares of common stock in exchange for services valued at
$395,000.
Issued 320,000 shares of common stock previously committed.
Issued 330,000 shares of common stock in exchange for a note receivable of
$660,000.
Issued subscriptions receivable of $209,500 in exchange for 155,800 shares of
common stock subscribed.
Purchased automotive equipment for $34,278 in exchange for a note payable.
During 1995, the Company completed the following transactions:
Issued 13,767,500 shares of common stock previously subscribed.
Issued subscriptions receivable of $80,000 net of costs of $8,000, in exchange
for 320,000 shares of common stock subscribed.
Issued 445,000 shares of common stock in exchange for services valued at
$111,250.
Recorded compensation expense and contributed capital of $24,000 for services
provided by two key employees.
See notes to consolidated financial statements.
F-12
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 stockholders' 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. In 1997, Prolong Foreign
Sales Corporation was formed as a wholly-owned subsidiary of PIC.
PIC, through PSL, is engaged in the manufacture, sale and worldwide
distribution (under license - Notes 5, 11 and 13) 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 subsidiaries, PSL
and Prolong Foreign Sales Corporation (collectively, the Company or Prolong).
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 on 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.
Prepaid Expenses - Prepaid expenses includes $280,337 in advance promotions
paid to an entity controlled by officers of the Company. Amounts are expensed
when promotional activities occur.
Capitalized Infomercial Production Costs - The Company capitalizes certain
incremental direct costs and payroll-related costs associated with its
infomercial production. Capitalized amounts related thereto are expensed over
the lesser of six months or the estimated economic life beginning at the time
of the first public showing of the infomercial. Amounts expensed in 1997,
1996 and 1995 were $0, $223,748 and $0, respectively.
F-13
<PAGE>
Prepaid Television Time - The Company capitalizes the cost of purchasing a
time slot for the airing of infomercials. Upon the airing of the infomercial,
the related cost is expensed. During 1997, 1996 and 1995, the total amounts
expensed for television time were $7,095,400, $5,227,091 and $0, respectively.
As of December 31, 1997 and 1996, prepaid television time was $1,022,144 and
$367,161, respectively.
Property and Equipment - Property and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets, which are as follows:
Computer equipment 3 years
Office equipment 5 years
Furniture and fixtures 7 years
Automotive equipment 5 years
Exhibit equipment 3 years
When assets are retired or otherwise disposed of, the cost and the related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in operations for the period. Renewals and betterments
which extend the life of an existing asset are capitalized while normal
repairs and maintenance costs are expensed as incurred.
Other Assets - Other assets are comprised of licensed technology and
trademarks, which are being amortized over five years.
Fair Value of Financial Instruments - Statement of Financial Accounting
Standards (SFAS) No. 107, Disclosures About Fair Value of Financial
Instruments, requires management to disclose the estimated fair value of
certain assets and liabilities defined by SFAS No. 107 as financial
instruments. Financial instruments are generally defined by SFAS No. 107 as
cash and cash equivalents, evidence of ownership interest in equity, or a
contractual obligation that both conveys to one entity a right to receive cash
or other financial instruments from another entity and imposes on the other
entity the obligation to deliver cash or other financial instruments to the
first entity. At December 31, 1997 and 1996, management believes that the
carrying amounts of cash and cash equivalents, accounts receivable,
subscriptions receivable, notes receivable, accounts payable, other current
liabilities, and notes payable approximate fair value because of the short
maturity of these financial instruments.
Accounting For Income Taxes - The Company follows SFAS No. 109, Accounting for
Income Taxes, which requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the differences
between the financial statements and the tax bases of assets and liabilities
using enacted rates in effect for the year in which the differences are
expected to reverse. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized.
F-14
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
Revenue Recognition - Revenue is recognized as products are shipped.
Revenue is also recognized under an arrangement whereby customers responding
to television infomercials agree to an upsell. For the year ended December
31, 1997, revenues under this arrangement were $593,388. There was no such
revenue for the years ended December 31, 1996 and 1995.
Net Income (Loss) Per Share - The Company has adopted SFAS No. 128, Earnings
per Share, which replaces the presentation of "primary" earnings per share
with "basic" earnings per share and the presentation of "fully diluted"
earnings per share with "diluted" earnings per share. All previously reported
earnings per share amounts have been restated based on the provisions of the
new standard. Basic earnings per share are based upon the weighted average
number of common shares outstanding. Diluted earnings per share amounts are
based upon the weighted average number of common and common equivalent shares
for each period presented. Common equivalent shares include stock options
assuming conversion under the treasury stock method.
For the year ended December 31, 1997, the diluted weighted average common
shares outstanding included 182,739 of dilutive options. There were no
dilutive securities for the years ended December 31, 1996 and 1995.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Stock-Based Compensation - In October 1995, the Financial Accounting Standards
Board (FASB) issued SFAS No. 123, Accounting for Stock-Based Compensation,
which requires the determination and disclosure of compensation costs implicit
in stock option grants or other stock rights. The Company adopted certain
required provisions of this standard for nonemployee transactions during
fiscal 1996. Under the employee transaction provisions, companies are
encouraged, but not required, to adopt the fair value of accounting for
employee stock-based transactions. Companies are also permitted to continue
to account for such transactions under Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, but are required to
disclose in a note to the financial statements pro forma net income and income
per share as if the Company had adopted SFAS No. 123. The Company will
continue to account for employee stock-based compensation under APB Opinion
No. 25.
Unaudited Interim Financial Statements - The interim financial data as of and
for the three months ended March 31, 1998 and 1997 is unaudited; however, in
the opinion of management, all adjustments, including normal recurring
accruals, considered necessary for a fair presentation of the results for the
interim period have been included.
F-15
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
3. INVENTORIES
Inventories at March 31, 1998 (unaudited) and December 31, 1997 and 1996
consist of the following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Raw materials $ 494,465 $ 415,073 $ 416,223
Finished goods 1,838,811 744,595 1,044,776
Promotional items 377,909 141,023 73,939
---------- ---------- ----------
$2,711,185 $1,300,691 $1,534,938
========== ========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 consists of the
following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Computer equipment $135,164 $ 60,823
Office equipment 24,319 16,669
Furniture and fixtures 11,649 11,649
Automotive equipment 35,925 42,626
Exhibit equipment 19,813
-------- --------
226,870 131,767
Less accumulated depreciation (63,443) (14,009)
-------- --------
163,427 117,758
Building improvements in progress 56,256
-------- --------
$219,683 $117,758
======== ========
</TABLE>
5. LICENSE AGREEMENT
The Company entered into a license agreement which requires the Company to pay
royalties of 3.5% of sales (as defined) of the Company's products that utilize
certain proprietary technology, trademarks and copyrights. The royalty expense
under this arrangement for the years ended December 31, 1997, 1996 and 1995
approximated $1,023,869, $553,900 and $0, respectively. The agreement also
called for an initial one-time license fee of $106,190, which the Company
capitalized and is amortizing over
F-16
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
a five-year period. The Company amortized $21,238, $21,238 and $21,240 for the
years ended December 31, 1997, 1996 and 1995, respectively, resulting in
accumulated amortization balances of $63,716 and $42,478 as of December 31,
1997 and 1996, respectively. The agreement shall remain in effect as long as
the Company has not committed any breach of the terms and provisions of the
agreement (Note 13).
6. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Accrued royalties payable $ 630,113 $ 354,889
Sales taxes payable 8,406 93,727
Payroll and payroll taxes payable 567,341 235,430
Accrued commissions payable 212,338 19,176
Other 245,123
---------- ---------
$1,663,321 $ 703,222
========== =========
</TABLE>
7. LINE OF CREDIT
In July 1997, the Company entered into a $4,000,000 line of credit arrangement
with a bank. Such line is collateralized by receivables and inventories.
Borrowings against the line bear interest at either the bank's reference rate
or the LIBOR rate plus 2.25%, at the Company's option. The line expires on
July 31, 1999, unless renewed, and is subject to an unused commitment fee of
.25% per year of the unused balance. The line contains certain financial
covenants including a minimum quick ratio and tangible net worth. As of
December 31, 1997, there were no borrowings outstanding under this line.
8. STOCKHOLDERS' EQUITY
On June 21, 1995, PIC issued 15,967,500 shares of its common stock in exchange
for 100% of the common stock of PSL. In addition to these shares, the existing
stockholders of PIC at that date held 789,535 shares of common stock.
During fiscal 1996, the Company issued 4,891,665 shares of restricted
unregistered common stock in exchange for $5,322,630, at prices ranging from
$.25 to $2.70 per share.
F-17
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
The Company issued 730,000 shares of restricted unregistered common stock for
services performed by outside consultants during the year ended December 31,
1996. Consulting expense was recorded at share prices ranging from $.25 to
$2.00 per share and is included in selling and general and administrative
expenses.
During 1996, the Company issued 320,000 shares of restricted unregistered
common stock which had been subscribed for $80,000 in fiscal 1995. The
$80,000 was collected in the first quarter of 1996.
In September 1996, the Company entered into an agreement whereby it issued
330,000 shares of restricted unregistered common stock in exchange for a note
receivable of $660,000. In September 1997, the common stock was surrendered
to the Company in exchange for the cancellation of the note.
In 1996, the Company received subscriptions receivable aggregating $209,500
for the sale of 155,800 shares of restricted unregistered common stock.
Subscriptions of $20,000 were collected in fiscal 1996, with the balance of
$189,500 being collected in the first quarter of 1997. During 1997, the
Company issued these 155,800 shares of restricted unregistered common stock.
In January 1997, the Company issued 5,000 shares of restricted unregistered
common stock in exchange for cash of $12,500 or $2.50 per share.
During 1997, the Company issued 180,000 shares of restricted unregistered
common stock for services performed by outside consultants. Consulting
expense was recorded at share prices ranging from $1.00 to $2.00 per share.
The charge is recorded as a component of selling, general and administrative
expenses.
9. STOCK OPTIONS
Effective June 4, 1997, the Company adopted the Prolong International
Corporation 1997 Stock Incentive Plan (the Plan). Under the Plan, the Company
may grant nonqualified or incentive stock options for the benefit of qualified
employees, officers, directors, and consultants and other service providers.
A total of 2,500,000 shares of the Company's common stock may be issued under
the Plan. The term of the option is fixed by the administrator of the Plan,
but no option may be exercisable more than 10 years after the date of grant.
In October 1996, the Company granted an option to an employee to purchase
30,000 shares of the common stock of the Company at an exercise price of $5.38
per share, which represented the market value at the date of grant. This
option was canceled in 1997 and reissued under the Plan.
F-18
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
Stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE
UNDER PRICE
OPTION PER SHARE
<S> <C> <C>
OUTSTANDING, December 31, 1995 - $ -
Granted 30,000 $ 5.38
---------
OUTSTANDING, December 31, 1996 30,000 $ 5.38
Granted 1,358,688 $ 2.10
Canceled (33,310) $(5.04)
---------
OUTSTANDING, December 31, 1997 1,355,378 $ 2.10
=========
</TABLE>
All but 30,000 of the outstanding options at December 31, 1997 vest over a
five-year period. The remaining 30,000 vest in one year. During 1997, the
Company issued 256,500 options with a fair value of $582,434 to outside
consultants. During 1997, the Company recorded $43,501 in compensation costs
related to the partial vesting of these options.
As of December 31, 1997 and 1996, no options were exercisable.
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations to account for stock options. Had
compensation cost for the stock option been determined based on the fair value
at the grant date consistent with the method of SFAS No. 123, Accounting for
Stock-Based Compensation, the Company's net income would have been the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net income, as reported $2,132,553 $721,178
Net income, pro forma $1,888,150 $657,630
Pro forma earnings per share:
Basic $ 0.07 $ 0.03
Diluted $ 0.07 $ 0.03
</TABLE>
The fair value of options granted was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: no dividend yield, expected volatility range of 113% to 148%,
risk-free interest rate of 6.9% and an expected life of 7 1/2 years.
F-19
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
10. INCOME TAXES
The provision for income taxes consists of the following for the years ended
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current:
Federal $1,063,979 $178,816 $ -
State 301,725 72,747 1,600
Foreign 3,678
---------- -------- ------
1,369,382 251,563 1,600
Deferred:
Federal 52,462 (34,027)
State 15,520 (10,262)
---------- -------- ------
67,982 (44,289)
---------- -------- ------
$1,437,364 $207,274 $1,600
========== ======== ======
</TABLE>
The provision for income taxes differs from the amount that would result from
applying the federal statutory rate, as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Federal statutory income tax rate $1,213,772 $ 315,674 $(140,808)
State income taxes, net of federal benefit 209,381 41,241 1,600
Change in valuation allowance (112,900) 94,808
Other 14,211 (36,741) 46,000
---------- --------- ---------
$1,437,364 $ 207,274 $ 1,600
========== ========= =========
</TABLE>
F-20
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
Temporary differences which give rise to deferred tax assets and liabilities
are as follows at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax liabilities:
Prepaid television time $ (437,886) $ -
State taxes (3,489)
Deferred tax assets:
Accrued vacation 22,374 1,325
Allowance for doubtful accounts 103,983 40,824
Inventory reserve 52,322 5,629
Accrued expenses 233,725
Other 1,789
---------- --------
$ (23,693) $ 44,289
========== ========
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
Leases - The Company leased its office facilities, located in three adjacent
buildings, under month-to-month operating leases during 1997, 1996 and 1995.
Additionally, it leases some office equipment under operating leases. In
October 1997, the Company executed a seven-year lease agreement for building
and warehouse space of approximately 29,000 square feet located in Irvine,
California. The lease agreement calls for monthly lease payments of $22,081,
subject to a 4% annual increase, commencing on November 1, 1997. For the
months of December 1997 through April 1998, there is no requirement for lease
payments, with the lease payments then commencing again in May 1998. The
Company recorded an imputed rent expense for one month in the 1997 income
statement. The lease also carries an option to purchase the land and building
on or before April 30, 1998. Qualified tenant improvements of $100,000 will
be paid by the lessor.
Future minimum rental commitments under noncancelable operating leases are as
follows:
<TABLE>
<S> <C>
Year ending December 31:
1998 $ 200,443
1999 299,149
2000 307,547
2001 315,248
2002 320,932
Thereafter 597,542
----------
$2,040,861
==========
</TABLE>
Lease expense was approximately $137,500, $61,900 and $67,500 for the years
ended December 31, 1997, 1996 and 1995, respectively.
Guarantee - The Company is a guarantor on a note wherein a stockholder of the
Company is the lender and the company from which the technology is licensed
(Note 5) is the promissor. The maximum guarantee is $36,000.
F-21
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
Royalties - The Company is obligated to pay royalties to the producer of a
one-half hour, direct-response television commercial (infomercial) at the rate
of 1.5% of gross sales (as defined) generated from direct-response television
sales made via an 800 telephone number which utilizes the infomercial video
footage. For the years ended December 31, 1997, 1996 and 1995, the Company
expensed approximately $174,266, $151,400 and $87,084, respectively, under
this arrangement.
In connection with this infomercial, the Company is obligated to pay royalties
to another individual at the rate of 1% of gross sales resulting from direct-
response sales from the infomercial. The agreement has a term of three years
beginning in January 1996. Guaranteed minimum payments are: $40,000 in 1996;
$50,000 in 1997; and $60,000 in 1998. The Company expensed approximately
$116,177 and $100,900 under this arrangement for the years ended December 31,
1997 and 1996, respectively.
The Company has an arrangement with an individual whereby it has agreed to pay
royalties on all net retail sales according to the following rates: 1.5% from
November 1, 1996 through October 31, 1997; 1.25% from November 1, 1997 through
October 31, 1998; and 1% from November 1, 1998 through October 31, 1999. For
each of the years included in the arrangement, the Company must pay a
guaranteed minimum amount of $15,000. Earnings maximums under this
arrangement are: $100,000 in year one, $125,000 in year two and $150,000 in
year three. Either party has the option to extend this arrangement for an
additional four years. For the years ended December 31, 1997 and 1996, the
Company expensed approximately $134,753 and $7,800, respectively, under this
arrangement.
Endorsement and Sponsorship Agreements - The Company has entered into
endorsement and sponsorship agreements with various automotive and racing
personalities for product marketing and promotion purposes. The remaining
terms for individual agreements range from one to three years. The Company is
committed to aggregate future payments under these agreements as follows:
<TABLE>
<S> <C>
Year ending December 31:
1998 $ 1,874,000
1999 1,170,000
2000 600,000
------------
$ 3,644,000
============
</TABLE>
Endorsement and sponsorship expense charged to operations related to these
agreements was approximately $956,000, $87,500 and $0 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Litigation - The Company is subject to certain litigation which arises in the
normal course of business. Management does not believe that the outcome of
any of these matters will have a material adverse effect on the Company's
financial position or results of operations.
12. RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 1998 the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 requires the reporting of comprehensive
income and its components in a financial statement that is displayed with the
same prominence as other financial statements. Comprehensive income, as
defined, includes all changes in equity (net assets) during a period from
nonowner sources. Examples of items to be included in comprehensive income,
which are excluded from net income, include foreign currency translation
adjustments and unrealized gain/loss on available-for-sale securities. During
the periods presented, the Company had no changes in equity from non-owner
sources. Accordingly, a statement of comprehensive income has not been
provided as comprehensive income applicable to common stockholders equals net
income applicable to common stockholders for all periods presented.
F-22
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
During 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. This statement requires the reporting
of financial and descriptive information about reportable operating segments,
as well as information about major customers. The Company will adopt the
provisions of SFAS No. 131 in the 1998 year-end consolidated financial
statements.
13. SUBSEQUENT EVENTS
On February 5, 1998, the Company entered into a definitive agreement to
purchase the assets of EPL Pro-Long, Inc. (EPL), which includes the patents
for lubrication technology currently under license to the Company, for
2,993,035 shares of the Company's common stock and the assumption of certain
liabilities. The close of this transaction is pending review by state and
federal securities regulators and a majority approval by EPL stockholders.
The transaction, if consummated, will be accounted for under the purchase
method. Unaudited pro forma information as if the transaction had occurred on
January 1, 1997 is as follows:
<TABLE>
<CAPTION>
BEFORE AFTER
TRANSACTION TRANSACTION
<S> <C> <C>
Net revenues $ 29,846,795 $ 29,846,795
Net income 2,132,553 2,532,827
Net income per common share:
Basic $ 0.08 $ 0.09
Diluted $ 0.08 $ 0.09
</TABLE>
F-23
<PAGE>
EPL PRO-LONG, INC.
UNAUDITED FINANCIAL STATEMENTS AS OF AND FOR
THE ELEVEN MONTHS ENDED MARCH 31, 1998 AND 1997 AND
THE YEARS ENDED APRIL 30, 1997, 1996 AND 1995
The accompanying financial statements of EPL Pro-Long, Inc. as of and for the
eleven months ended March 31, 1998 and 1997 and the years ended April 30, 1997,
1996 and 1995 were prepared by the management of EPL Pro-Long, Inc. and are
unaudited. In the opinion of EPL Pro-Long, Inc.'s management, such financial
statements include all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the financial position, results
of operations and cash flows as of the dates and for the periods presented.
F-24
<PAGE>
<TABLE>
<CAPTION>
EPL PRO-LONG, INC.
BALANCE SHEETS
(UNAUDITED)
March 31, April 30,
1998 1997 1996
---------------- -------------------------------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 8,057 $ 56,708 $ 0
Accounts receivable 444,152 313,274 0
Inventories 0 0 0
Prepaid expenses 5,378 0 0
---------------- -------------------------------------
TOTAL CURRENT ASSETS 457,587 369,982 0
Property and equipment 0 0 0
Patents, net 294,612 336,135 381,432
---------------- -------------------------------------
TOTAL ASSETS $ 752,199 $ 706,117 $ 381,432
================ =====================================
CURRENT LIABILITIES:
Accounts payable $ 220,539 $ 579,020 $ 663,780
Advance from customer 0 0 0
Loan payable-current portion 0 0 3,722
Accrued interest payable 0 0 124,044
Other current liabilities 0 0 0
---------------- -------------------------------------
TOTAL CURRENT LIABILITIES 220,539 579,020 791,546
</TABLE>
F-25
<PAGE>
<TABLE>
<S> <C> <C> <C>
Loan payable 34,428 188,603 280,000
------------- ---------------------------------
TOTAL LIABILITIES 254,967 767,622 1,071,546
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock 135,473 135,473 135,473
Contributed capital 1,516,553 1,516,553 1,516,553
Retained deficit (1,154,794) (1,713,532) (2,342,141)
------------- ---------------------------------
TOTAL STOCKHOLDERS' EQUITY 497,232 (61,506) (690,114)
(DEFICIT) ------------- ---------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 752,199 $ 706,117 $ 381,432
============= =================================
</TABLE>
See notes to financial statements.
F-26
<PAGE>
EPL PRO-LONG, INC.
STATEMENTS OF OPERATIONS AND RETAINED DEFICIT
FOR THE ELEVEN MONTHS ENDED MARCH 31,
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------------------------------
<S> <C> <C>
Net royalty revenue $ 854,892 $ 368,000
Cost of goods sold 0 894
------------------------------------
Gross profit 854,892 367,106
Selling, general and administrative expenses 257,556 107,997
------------------------------------
Operating profit (loss) 597,336 259,109
OTHER (INCOME) AND EXPENSE:
Other (income)/expense 0 (1,022)
Interest expense 31,888 21,599
------------------------------------
Other (income) and expense 31,888 20,577
Income (loss) before provision for income taxes 565,448 238,532
Provision for income taxes 6,710 0
------------------------------------
Net income (loss) 558,738 238,532
Retained deficit at beginning of period (1,713,532) (2,342,141)
Retained deficit at end of period ($1,154,794) ($2,103,609)
====================================
</TABLE>
See notes to financial statements.
F-27
<PAGE>
EPL PRO-LONG, INC.
STATEMENTS OF OPERATIONS AND RETAINED DEFICIT
FOR THE YEARS ENDED APRIL 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------
<S> <C> <C> <C>
Net royalty revenue $ 766,274 $ 199,610 $ 2,414
Net sales 0 2,589 252,703
Cost of goods sold 894 35,086 83,151
-------------------------------------------------
Gross profit 765,380 167,113 171,967
Selling, general and administrative expenses 184,115 159,146 325,395
-------------------------------------------------
Operating profit 581,265 7,967 (153,428)
OTHER (INCOME) AND EXPENSE:
Other (income) (75,662) (100,000) (4,000)
Interest income (22) 0 0
Interest expense 28,340 73,645 96,929
-------------------------------------------------
Other (income) and expense (47,344) (26,355) 92,929
Income (loss) before provision for income taxes 628,609 34,322 (246,357)
Provision for income taxes 0 2,104 119
-------------------------------------------------
Net income (loss) 628,609 32,218 (246,476)
Retained deficit at beginning of period (2,342,141) (2,374,359) (2,127,883)
-------------------------------------------------
Retained deficit at end of period ($1,713,532) ($2,342,141) ($2,374,359)
=================================================
</TABLE>
See notes to financial statements.
F-28
<PAGE>
EPL PRO-LONG, INC.
STATEMENTS OF CASH FLOWS
FOR THE ELEVEN MONTHS ENDED MARCH 31,
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 558,738 $ 238,532
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 41,523 --
Changes in assets and liabilities:
Accounts receivable (130,878) --
Inventories -- (27,237)
Prepaid expenses (5,378) --
Accounts payable (358,481) (130,149)
Accrued expenses -- (137,299)
Advance from customer -- 15,299
---------------------------------
Net cash provided by (used in) operating activities 105,524 (40,854)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans -- 72,434
Repayments on loans (154,175) --
---------------------------------
Net cash provided by (used in) financing activities (154,175) 72,434
---------------------------------
</TABLE>
F-29
<PAGE>
<TABLE>
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH (48,651) 31,580
CASH, BEGINNING OF PERIOD 56,708 --
---------------------
CASH, END OF PERIOD $ 8,057 $ 31,580
=====================
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 6,710 $ --
=====================
Interest $ 31,888 $ 21,599
=====================
</TABLE>
See notes to financial statements.
F-30
<PAGE>
EPL PRO-LONG, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30,
(Unaudited)
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 628,609 $ 32,218 ($246,476)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 45,297 47,631 52,374
Changes in assets and liabilities:
Accounts receivable (313,274) 11,223 29,441
Inventories 0 26,944 36,168
Prepaid expenses 0 0 13,071
Accounts payable (84,761) (27,755) 23,104
Accrued expenses (124,044) 38,319 85,725
Advance from customer 0 (45,410) 45,410
----------------------------------------
Net cash provided by operating activities 151,827 83,170 38,817
CASH FLOWS FROM FINANCING ACTIVITIES:
Return of contributed capital 0 0 (9,000)
Repayments on loans (95,119) (83,170) (33,036)
----------------------------------------
Net cash (used in) financing activities (95,119) (83,170) (42,036)
NET INCREASE (DECREASE) IN CASH 56,708 0 (3,219)
CASH, BEGINNING OF PERIOD 0 0 3,219
========================================
CASH, END OF PERIOD $ 56,708 $ 0 $ 0
========================================
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 0 $ 2,104 $ 119
========================================
Interest $ 28,340 $ 20,256 $ 11,204
========================================
</TABLE>
See notes to financial statements.
F-31
<PAGE>
EPL PRO-LONG, INC.
NOTES TO FINANCIAL STATEMENTS
_______________
1. Business and Management's Plans:
EPL Pro-Long, Inc. (the "Company") was incorporated in the state of
California in July 1988. The Company owns a patent for an extreme pressure
lubricant additive for use in metal lubrication, commonly referred to as
anti-friction metal treatment ("AFMT"). The Company licenses the right to
use the AFMT formula and the "Prolong" name exclusively to Prolong Super
Lubricants, Inc. Aside from actions taken with respect to its patent
ownership, such as receiving royalty payments from Prolong Super
Lubricants, Inc., the Company conducts no significant business activities.
2. Summary of Significant Accounting Policies:
Cash and Cash Equivalents:
-------------------------
Cash and cash equivalents consist of all highly liquid investments with an
original maturity of three months or less.
Inventories:
-----------
Inventories are valued at the lower of cost (determined on a first-in,
first-out basis) or market.
Property and Equipment:
----------------------
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is computed using the straight line method over the assets'
lives, which range from five to seven years, whichever is shorter. When
assets are retired or otherwise disposed of, the cost and the related
accumulated depreciation are removed from the accounts and any resulting
gain or loss is recognized in operations for the period. Renewals and
betterments which extend the life of an existing asset are capitalized
while normal repairs and maintenance costs are expensed as incurred.
Patents:
-------
Patents are recorded at cost and are being amortized over a period of
fifteen years. The Company assesses the recoverability of the patents on a
periodic basis using an undiscounted cash flow analysis on its margins for
the sale of the related products.
F-32
<PAGE>
EPL PRO-LONG, INC.
NOTES TO FINANCIAL STATEMENTS
________________________________________________________________________________
2. Summary of Significant Accounting Policies, continued:
Advance From Customer:
---------------------
Advance from customer represents a royalty payment received from Prolong
Super Lubricants, Inc. prior to its being earned by the Company.
Accounting For Income Taxes:
---------------------------
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting For Income Taxes," which requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax returns.
Under this method, deferred tax liabilities and assets are determined based
on the differences between the financial statements and the tax bases of
assets and liabilities using enacted rates in effect for the year in which
the differences are expected to reverse. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. The provision for income taxes represents the tax
payable for the period and the change during the period in deferred tax
assets and liabilities.
Revenue Recognition
-------------------
Revenue is recognized as products are shipped. Royalties are recognized as
products are shipped from Prolong Super Lubricants, Inc. to third party
purchasers.
Accounting Estimates:
--------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to provide estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
3. License Agreement:
The Company entered into a license agreement whereby the Company is
entitled to receive royalties of 3.5% of sales (as defined) of products
sold by Prolong Super Lubricants, Inc. that utilize certain proprietary
technology, trademarks and copyrights. This agreement shall remain in
effect as long as a breach of the terms and provisions of the agreement has
not been committed.
F-33
<PAGE>
EPL PRO-LONG, INC.
NOTES TO FINANCIAL STATEMENTS
________________________________________________________________________________
4. Loans Payable:
Several loans are payable to various shareholders of the Company. The loans
carry various interest rates and are payable as the Company has funds. The
largest loan is collateralized by all of the Company's assets.
5. Income Taxes:
At April 30, 1997, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $1,725,000 and
$529,000, respectively, which begin to expire in 2004. The utilization of
net operating loss carryforwards may be limited under the provisions of
Internal Revenue Code Section 382.
6. Subsequent Event:
On February 5, 1998, the Company entered into a definitive agreement to
sell its assets and certain liabilities to Prolong Super Lubricants, Inc.
in exchange for 2,993,035 shares of common stock of Prolong International
Corporation. The close of this transaction is pending the review by state
and federal securities regulators and a majority approval of the
shareholders of the Company.
F-34
<PAGE>
PART II
INFORMATION NOT REQUIRED IN A PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VII of the PIC Articles provides that, subject to any restrictions
set forth in the PIC Bylaws, it shall indemnify and hold its directors,
officers, others serving at the request of PIC as a director or officer of
another corporation and those individuals serving as PIC'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 PIC. Additionally, Article IX of the PIC Bylaws gives
PIC the ability to provide indemnification for each of its employees and agents
to the same extent as its directors and officers upon action by the PIC Board.
Article IX also permits PIC to enter into indemnity agreements with any
director, officer, employee, fiduciary or agent of PIC. PIC 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 PIC
against any and all expenses, judgments, fines, penalties and amounts paid in
settlement, to the fullest extent permitted by law. Lastly, Article IX permits
PIC to maintain indemnification insurance for its directors, officers,
employees, fiduciaries or agents. PIC does not currently maintain
indemnification insurance.
Section 78.751 of the NGCL allows PIC 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 PIC as a director, officer, employee or agent of any corporation,
partnership, joint venture, trust or other enterprise. PIC 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 PIC.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of PIC pursuant to the foregoing, PIC has been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy and is, therefore, unenforceable.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
Exhibit No.
-----------
2.1 Exchange Agreement between Stockholders of PSL and the Registrant.
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3, 1997).
2.2 Agreement and Plan of Reorganization, dated as of February 5, 1998,
by and among the Registrant and EPL Pro-Long, Inc., including the
following exhibits: (i) Form of Employee Invention and
Confidentiality Agreement, (ii) Form of Rule 145 Agreement, (iii)
Form of Confidentiality Agreement, (iv) Form of Transfer
Restriction, (v) Form of Amendment to Exclusive License Agreement,
and (vi) Form of Cancellation Agreement. *
2.3 Amendment to Agreement and Plan of Reorganization, dated as of June
29, 1998, by and among the Registrant and EPL Pro-Long, Inc.
3.1 Amended and Restated Articles of Incorporation of the Registrant
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3, 1997).
3.3 Bylaws of the Registrant, as amended and restated on April 27,
1998.
4.2 Specimen Certificate of Registrant's Common Stock.
5.1 Opinion of Stradling Yocca Carlson & Rauth, a Professional
Corporation, Counsel to the Registrant.
8.1 Tax Opinion of Gary C. Wykidal & Associates, Counsel to EPL Pro-
Long, Inc.
10.1 Form of Indemnification Agreement for Executive Officers and
Directors (incorporated by reference to the same numbered Exhibit
to the Registrant's Registration Statement on Form 10 filed July 3,
1997).
10.2 Exclusive License Agreement between PSL and EPL Pro-Long, Inc.,
d.b.a. Prolong International, dated November 10, 1993 (incorporated
by reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form 10 filed July 3, 1997).
10.3 Memorandum of Agreement between PSL and 2M Corporation, dated April
24, 1995; Amendment dated March 4, 1996 (incorporated by reference
to the same numbered Exhibit to the Registrant's Registration
Statement on Form 10 filed July 3, 1997).
10.4 Agreement between PSL and Al Unser, dated July 28, 1995
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3,
1997).
10.5 Service Agreement between PSL and Tylie Jones & Associates, Inc.,
dated October 24, 1995 (incorporated by reference to the same
numbered Exhibit to the Registrant's Registration Statement on Form
10 filed July 3, 1997).
10.6 Telemarketing Agreement between PSL and West Telemarketing
Corporation, dated October 24, 1995 (incorporated by reference to
the same numbered Exhibit to the Registrant's Registration
Statement on Form 10 filed July 3, 1997).
II-2
<PAGE>
10.7 Service and Endorsement Contract between PSL and Al Unser, dated
April 29, 1996 (incorporated by reference to the same numbered
Exhibit to the Registrant's Registration Statement on Form 10 filed
July 3, 1997).
10.8 Associate Sponsorship Agreement between PSL, King Entertainment,
Inc. and Kenneth D. Bernstein, dated May 9, 1996 (incorporated by
reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form 10 filed July 3, 1997).
10.9 Sponsorship Agreement between PSL, Pikes Peak Auto Hill Climb
Educational Museum, Inc. and Barnes Dyer Marketing, Inc., dated
February 21, 1997 (incorporated by reference to the same numbered
Exhibit to the Registrant's Registration Statement on Form 10 filed
July 3, 1997).
10.10 Major Associate Sponsorship Agreement between PSL, Norris Racing,
Inc. and Barnes Dyer Marketing, Inc., dated December 15, 1996
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3, 1997).
10.12 The Registrant's 1997 Stock Incentive Plan and form of Stock Option
Agreement (incorporated by reference to the same numbered Exhibit
to the Registrant's Registration Statement on Form 10 filed July 3,
1997).
10.13 The Registrant's Revolving Credit Agreement with Bank of America
National Trust and Savings Association, dated July 14, 1997
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3, 1997).
10.15 Sponsorship Letter of Intent between PSL and Joe Nemechek dba Nemco
Motorsports, dated February 13, 1997 (incorporated by reference to
the same numbered Exhibit to the Registrant's Annual Report on Form
10-K filed March 23, 1998). **
10.16 Sponsorship Agreement between PSL and Sabco Racing, Inc., dated
December 19, 1997 (incorporated by reference to the same numbered
Exhibit to the Registrant's Annual Report on Form 10-K filed March
23, 1998). **
10.17 Purchase and Sale Agreement between Huck International, Inc. (a
subsidiary of Thiokol Corporation) and PSL for the property located
at 6 Thomas, Irvine, California, dated February 23, 1998
(incorporated by reference to the same numbered Exhibit to the
Registrant's Annual Report on Form 10-K filed March 23, 1998).
10.18 Sponsorship Agreement between PSL and Commonwealth Service & Supply
Corp. T/A Jim Yates Racing, dated November 22, 1997; Addendum dated
December 17, 1997 (both documents incorporated by reference to the
same numbered Exhibit to the Registrant's Annual Report on Form 10-
K filed March 23, 1998). **
10.19 Service and Endorsement Contract between PSL and Smokey Yunick,
dated November 1, 1996 (incorporated by reference to the same
numbered Exhibit to the Registrant's Annual Report on Form 10-K
filed March 23, 1998). **
10.20 Standing Loan Agreement between PSL and Bank of America Community
Development Bank, dated April 1, 1998; Promissory Note; Deed of
Trust,
II-3
<PAGE>
Assignment of Rents and Fixture Filing; Payment Guaranty; and
Secured and Unsecured Indemnity Agreement.
10.21 Agreement for Bridge Loan between PSL and Bank of America Community
Development Bank, dated April 1, 1998; Promissory Note; Deed of
Trust, Assignment of Rents and Fixture Filing; Payment Guaranty;
and Secured and Unsecured Indemnity Agreement.
21.1 Subsidiaries of the Registrant (incorporated by reference to the
same numbered Exhibit to the Registrant's Registration Statement on
Form 10 filed July 3, 1997).
23.1 Consent of Stradling Yocca Carlson & Rauth, a Professional
Corporation (included in the Opinion filed as Exhibit 5.1).
23.2 Consent of Gary C. Wykidal & Associates (included in the Opinion
filed as Exhibit 8.1).
23.3 Consent of Corbin & Wertz, with respect to the financial statements
of the Registrant.
23.4 Consent of Deloitte & Touche LLP, with respect to the financial
statements of the Registrant.
23.5 Consent of North American Capital Partners.
24.1 Power of Attorney (included as part of the signature page of this
Registration Statement). *
99.1 Form of Proxy Card for use in connection with the EPL Special
Meeting.*
- ----------------------
* Previously filed.
** Portions of this Exhibit are omitted and were filed separately with the
Secretary of the Commission pursuant to the Registrant's application
requesting confidential treatment under Rule 24b-2 of the Securities
Exchange Act of 1934.
(b) Financial Statement Schedules:
All financial statement schedules are omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.
(c) The fairness opinion of North American Capital Partners (attached as Annex
C to the Proxy Statement/Prospectus included in this Registration
Statement).
II-4
<PAGE>
ITEM 22: UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being
made, a post-effective amendment to the Registration Statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in the
Registration Statement;
(2) that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof;
(3) to remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering;
(4) that, for purposes of determining any liability under the
Securities Act, each filing of the Registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Exchange Act (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof;
(5) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of the Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form;
(6) That every prospectus (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof;
II-5
<PAGE>
(7) to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this
Form S-4, within one business day of receipt of such request, and to send
the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to
the effective date of this Registration Statement through the date of
responding to the request; and
(8) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in this Registration Statement
when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions described under Item 20 above, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-6
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 1 to Registration Statement to be signed on its behalf
---------------
by the undersigned, thereunto duly authorized, in the City of Irvine, State of
California, on the 1st day of July, 1998.
PROLONG INTERNATIONAL CORPORATION
By: /s/ Elton Alderman
--------------------------------------
Elton Alderman
President, Chief Executive Officer and
Chairman of the Board
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Elton Alderman
- ----------------------------- President, Chief Executive July 1, 1998
Elton Alderman Officer (Principal Executive
Officer) and Chairman of the
Board
Thomas C. Billstein *
- ----------------------------- Vice-President, Secretary July 1, 1998
Thomas C. Billstein and Director
II-7
<PAGE>
Tom T. Kubota *
- ----------------------------- Vice-President, Investor July 1, 1998
Tom T. Kubota Relations and Director
Nicholas M. Rosier *
- ----------------------------- Chief Financial Officer July 1, 1998
Nicholas M. Rosier (Principal Financial Officer)
Melanie A. McCaffery *
- ----------------------------- Director July 1, 1998
Melanie A. McCaffery
* By: /s/ Elton Alderman
-------------------------------------
Elton Alderman,
-------------------------------------
as Attorney-In-Fact
-------------------------------------
II-8
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
Exhibit No.
-----------
2.1 Exchange Agreement between Stockholders of PSL and the Registrant.
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3, 1997).
2.2 Agreement and Plan of Reorganization, dated as of February 5, 1998,
by and among the Registrant and EPL Pro-Long, Inc., including the
following exhibits: (i) Form of Employee Invention and
Confidentiality Agreement, (ii) Form of Rule 145 Agreement, (iii)
Form of Confidentiality Agreement, (iv) Form of Transfer
Restriction, (v) Form of Amendment to Exclusive License Agreement,
and (vi) Form of Cancellation Agreement. *
2.3 Amendment to Agreement and Plan of Reorganization, dated as of June
29, 1998, by and among the Registrant and EPL Pro-Long, Inc.
3.1 Amended and Restated Articles of Incorporation of the Registrant
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3, 1997).
3.3 Bylaws of the Registrant, as amended and restated on April 27,
1998.
4.2 Specimen Certificate of Registrant's Common Stock.
5.1 Opinion of Stradling Yocca Carlson & Rauth, a Professional
Corporation, Counsel to the Registrant.
8.1 Tax Opinion of Gary C. Wykidal & Associates, Counsel to EPL Pro-
Long, Inc.
10.1 Form of Indemnification Agreement for Executive Officers and
Directors (incorporated by reference to the same numbered Exhibit
to the Registrant's Registration Statement on Form 10 filed July 3,
1997).
10.2 Exclusive License Agreement between PSL and EPL Pro-Long, Inc.,
d.b.a. Prolong International, dated November 10, 1993 (incorporated
by reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form 10 filed July 3, 1997).
10.3 Memorandum of Agreement between PSL and 2M Corporation, dated April
24, 1995; Amendment dated March 4, 1996 (incorporated by reference
to the same numbered Exhibit to the Registrant's Registration
Statement on Form 10 filed July 3, 1997).
10.4 Agreement between PSL and Al Unser, dated July 28, 1995
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3,
1997).
10.5 Service Agreement between PSL and Tylie Jones & Associates, Inc.,
dated October 24, 1995 (incorporated by reference to the same
numbered Exhibit to the Registrant's Registration Statement on Form
10 filed July 3, 1997).
10.6 Telemarketing Agreement between PSL and West Telemarketing
Corporation, dated October 24, 1995 (incorporated by reference to
the same numbered Exhibit to the Registrant's Registration
Statement on Form 10 filed July 3, 1997).
<PAGE>
10.7 Service and Endorsement Contract between PSL and Al Unser, dated
April 29, 1996 (incorporated by reference to the same numbered
Exhibit to the Registrant's Registration Statement on Form 10 filed
July 3, 1997).
10.8 Associate Sponsorship Agreement between PSL, King Entertainment,
Inc. and Kenneth D. Bernstein, dated May 9, 1996 (incorporated by
reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form 10 filed July 3, 1997).
10.9 Sponsorship Agreement between PSL, Pikes Peak Auto Hill Climb
Educational Museum, Inc. and Barnes Dyer Marketing, Inc., dated
February 21, 1997 (incorporated by reference to the same numbered
Exhibit to the Registrant's Registration Statement on Form 10 filed
July 3, 1997).
10.10 Major Associate Sponsorship Agreement between PSL, Norris Racing,
Inc. and Barnes Dyer Marketing, Inc., dated December 15, 1996
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3, 1997).
10.12 The Registrant's 1997 Stock Incentive Plan and form of Stock Option
Agreement (incorporated by reference to the same numbered Exhibit
to the Registrant's Registration Statement on Form 10 filed July 3,
1997).
10.13 The Registrant's Revolving Credit Agreement with Bank of America
National Trust and Savings Association, dated July 14, 1997
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3, 1997).
10.15 Sponsorship Letter of Intent between PSL and Joe Nemechek dba Nemco
Motorsports, dated February 13, 1997 (incorporated by reference to
the same numbered Exhibit to the Registrant's Annual Report on Form
10-K filed March 23, 1998). **
10.16 Sponsorship Agreement between PSL and Sabco Racing, Inc., dated
December 19, 1997 (incorporated by reference to the same numbered
Exhibit to the Registrant's Annual Report on Form 10-K filed March
23, 1998). **
10.17 Purchase and Sale Agreement between Huck International, Inc. (a
subsidiary of Thiokol Corporation) and PSL for the property located
at 6 Thomas, Irvine, California, dated February 23, 1998
(incorporated by reference to the same numbered Exhibit to the
Registrant's Annual Report on Form 10-K filed March 23, 1998).
10.18 Sponsorship Agreement between PSL and Commonwealth Service & Supply
Corp. T/A Jim Yates Racing, dated November 22, 1997; Addendum dated
December 17, 1997 (both documents incorporated by reference to the
same numbered Exhibit to the Registrant's Annual Report on Form 10-
K filed March 23, 1998). **
10.19 Service and Endorsement Contract between PSL and Smokey Yunick,
dated November 1, 1996 (incorporated by reference to the same
numbered Exhibit to the Registrant's Annual Report on Form 10-K
filed March 23, 1998). **
10.20 Standing Loan Agreement between PSL and Bank of America Community
Development Bank, dated April 1, 1998; Promissory Note; Deed of
Trust,
<PAGE>
Assignment of Rents and Fixture Filing; Payment Guaranty; and
Secured and Unsecured Indemnity Agreement.
10.21 Agreement for Bridge Loan between PSL and Bank of America Community
Development Bank, dated April 1, 1998; Promissory Note; Deed of
Trust, Assignment of Rents and Fixture Filing; Payment Guaranty;
and Secured and Unsecured Indemnity Agreement.
21.1 Subsidiaries of the Registrant (incorporated by reference to the
same numbered Exhibit to the Registrant's Registration Statement on
Form 10 filed July 3, 1997).
23.1 Consent of Stradling Yocca Carlson & Rauth, a Professional
Corporation (included in the Opinion filed as Exhibit 5.1).
23.2 Consent of Gary C. Wykidal & Associates (included in the Opinion
filed as Exhibit 8.1).
23.3 Consent of Corbin & Wertz, with respect to the financial statements
of the Registrant.
23.4 Consent of Deloitte & Touche LLP, with respect to the financial
statements of the Registrant.
23.5 Consent of North American Capital Partners.
24.1 Power of Attorney (included as part of the signature page of this
Registration Statement). *
99.1 Form of Proxy Card for use in connection with the EPL Special
Meeting.*
- ----------------------
* Previously filed.
** Portions of this exhibit are omitted and were filed separately with the
secretary of the commission pursuant to the registrant's application
requesting confidential treatment under Rule 24b-2 of the Securities
Exchange Act of 1934.
(b) Financial Statement Schedules:
All financial statement schedules are omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.
(c) The fairness opinion of North American Capital Partners (attached as Annex
C to the Proxy Statement/Prospectus included in this Registration
Statement).
<PAGE>
EXHIBIT 2.3
AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION
-------------------------------------------------
THIS AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION (this "Amendment")
is entered into as of June 29, 1998 by and between EPL Pro-Long, Inc., a
California corporation ("EPL") and Prolong International Corporation, a Nevada
corporation ("PIC").
BACKGROUND
EPL and PIC entered into an Agreement and Plan of Reorganization on
February 5, 1998 (the "Agreement") whereby PIC will acquire substantially all of
the assets and assume certain of the liabilities of EPL in exchange for shares
of PIC common stock. One of the conditions to both parties' obligations to
close the transaction contemplated by the Agreement is that such closing takes
place by June 30, 1998. EPL and PIC mutually desire to extend the expiration
date of such condition to December 31, 1998.
AGREEMENT
NOW THEREFORE, in consideration of the foregoing, EPL hereby agrees with
PIC to amend the Agreement as follows:
1. Sections 9.9 and 10.4, respectively, shall be amended to read as
follows:
"Closing. The Closing of the transaction contemplated by this
-------
Agreement shall have taken place on or before December 31, 1998."
2. This Amendment may be executed in any number of counterparts, each of
which shall be an original as against any party whose signature appears thereon
and all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first hereinabove written.
EPL PRO-LONG, INC. PROLONG INTERNATIONAL CORPORATION
/s/ Michael R. Davis /s/ Elton Alderman
- ------------------------------ ---------------------------------
Michael R. Davis, President George Elton Alderman, President
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
PROLONG INTERNATIONAL CORPORATION
A NEVADA CORPORATION
(AS AMENDED AND RESTATED ON APRIL 27, 1998)
<PAGE>
BYLAWS
OF
PROLONG INTERNATIONAL CORPORATION
A NEVADA CORPORATION
(AS AMENDED AND RESTATED ON APRIL 27, 1998)
- --------------------------------------------------------------------------------
ARTICLE I
STOCKHOLDERS' MEETING
SECTION 1.1 PLACE OF MEETINGS.
-----------------
All meetings of the stockholders shall be held at the principal office of
the corporation in the State of California ("Principal Office"), or at any other
place within or without the State of Nevada as may be designated for that
purpose from time to time by the Board of Directors.
SECTION 1.2 ANNUAL MEETINGS.
---------------
The annual meeting of the stockholders shall be held not later than 210
days after the close of the fiscal year, on the date and at the time set by the
Board of Directors, at which time the stockholders shall elect directors,
consider reports of the affairs of the Corporation, and transact such other
business as may properly be brought before the meeting.
SECTION 1.3 SPECIAL MEETINGS.
----------------
Except as otherwise required by law, special meetings of stockholders of
the Corporation may be called only by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously authorized directorships
at the time any such resolution is presented to the Board of Directors for
adoption).
SECTION 1.4 NOTICE OF MEETINGS.
------------------
1.4.1 Notice of each meeting of stockholders, whether annual or special,
shall be given at least 10 and not more than 60 days before the meeting by the
Secretary or any Assistant Secretary causing to be delivered or mailed to each
stockholder of record entitled to vote at the meeting a written notice stating
the time and place of the meeting and the purpose or purposes for which the
meeting is called. The notice shall be signed by the Chairman of the Board, the
Vice Chairman of the Board, the President, the Secretary or any Assistant
Secretary and shall be delivered or mailed postage prepaid to each stockholder
at such stockholder's address as it appears on the stock books of the
corporation. If any stockholder has failed to supply an address, notice shall
be deemed to have been given if mailed to the address of the Principal Office,
or published at least once in a newspaper having general circulation in the
county in which the Principal Office is located.
1
<PAGE>
1.4.2 It shall not be necessary to give any notice of the adjournment of
or the business to be transacted at an adjourned meeting other than by
announcement at the meeting at which such adjournment is taken. However, when a
meeting is adjourned for 30 days or more, notice of the adjourned meeting must
be given as in the case of an original meeting.
SECTION 1.5 CONSENT BY STOCKHOLDERS.
-----------------------
Stockholders of the Corporation shall not be permitted to take any actions
by written consent.
SECTION 1.6 QUORUM.
------
1.6.1 The presence in person or by proxy of the persons entitled to vote
a majority of the voting stock at any meeting constitutes a quorum for the
transaction of business. Particular shares of stock shall not be counted in
determining the number of shares of stock represented or required for quorum or
in any vote at a meeting, if the voting of such shares at the meeting has been
enjoined or for any reason such shares cannot be lawfully voted at the meeting.
1.6.2 The stockholders present at a duly called or held meeting at which
a quorum is present may continue to do business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.
1.6.3 In the absence of a quorum, the holders of a majority of the shares
of stock present in person or by proxy and entitled to vote may adjourn any
meeting from time to time, but not for a period of more than 30 days at any one
time, until a quorum is in attendance.
SECTION 1.7 VOTING RIGHTS.
-------------
1.7.1 Except as otherwise provided by law or pursuant to the Articles of
Incorporation or any amendment thereto, every stockholder of record of the
Corporation entitled to vote is entitled at each meeting of the stockholders to
one vote for each share of stock standing in the stockholder's name on the books
of the Corporation. Except as otherwise provided by law or by the Articles of
Incorporation or any amendment thereto or by these Bylaws, if a quorum is
present, the vote of the holders of a majority of votes cast on a particular
matter is binding upon all stockholders of the Corporation.
1.7.2 The Board of Directors may designate a day not more than 60 days
before any meeting of the stockholders as the day as of which stockholders
entitled to notice of and to vote at the meeting is determined.
SECTION 1.8 PROXIES.
-------
Every stockholder entitled to vote or to execute consents may do so either
in person or by written proxy executed in accordance with the provisions of
Chapter 78 of the Nevada Revised Statutes and filed with the Secretary of the
Corporation.
2
<PAGE>
SECTION 1.9 MANNER OF CONDUCTING MEETINGS.
-----------------------------
To the extent not in conflict with the provisions of law relating thereto,
the Articles of Incorporation or any amendment thereto, or these Bylaws,
meetings must be conducted pursuant to such rules as may be adopted by the
chairman presiding at, or the holders of a majority of the shares of stock
represented at, the meeting.
SECTION 1.10 BUSINESS BROUGHT BEFORE MEETINGS.
--------------------------------
At any annual meeting of stockholders, the only business which may be
conducted must have been brought before the meeting (i) by or at the direction
of the Board of Directors or (ii) by any stockholder of the Corporation who is
entitled to vote with respect to the matter and who complies with the notice
procedures set forth in this Section 1.10. For business to be properly brought
before an annual meeting by a stockholder, the stockholder must give timely
notice thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be delivered or mailed by first class United States
mail, postage prepaid, to the Secretary of the Corporation not less than 120
days before the date of the Corporation's proxy statement released to
stockholders in connection with the previous year's annual meeting of
stockholders, except that if the date of the annual meeting has been changed by
more than 30 calendar days from the date contemplated at the time of the
previous year's proxy statement, a stockholder's notice shall be received by the
Corporation a reasonable time before the solicitation is made. A stockholder's
notice to the Secretary must set forth details of each matter the stockholder
proposes to bring before the annual meeting as follows: (i) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (ii) the name and address,
as they appear on the books of the Corporation, of the stockholder of the
Corporation proposing such business, (iii) the class and number of shares of the
stock of the Corporation that are beneficially owned by the stockholder and (iv)
any material interest of the stockholder in such business. Notwithstanding
anything in these Bylaws to the contrary, no business shall be brought before or
conducted at an annual meeting except in accordance with the foregoing
procedures. The officer of the Corporation or other person presiding over the
annual meeting ("Presiding Person") shall, if the facts so warrant, determine
and declare to the meeting that business was not properly brought before the
meeting in accordance with the provisions of this Section 1.10. If the
Presiding Person determines that a matter was not properly brought before the
meeting, the Presiding Person shall so declare to the meeting and the business
shall not be transacted. Except as otherwise provided in this Bylaws, at any
special meeting of the stockholders, the only business which shall be conducted
must have been brought before the meeting by or at the direction of the Board of
Directors.
SECTION 1.11 NOTICE OF NOMINATIONS.
---------------------
1.11.1 Nominations for the election of directors may be made by the Board
of Directors or by any stockholder entitled to vote for the election of
directors. A notice of the intent of a stockholder to make a nomination must be
made in writing, delivered or mailed by first class United States mail, postage
prepaid, to the Secretary of the Corporation not less than 7 days before the
annual meeting or a special meeting of stockholders at which the election of a
director or directors will take place.
3
<PAGE>
ARTICLE II
DIRECTORS - MANAGEMENT
SECTION 2.1 POWERS.
------
Subject to any limitation contained in the laws of the State of Nevada, the
Articles of Incorporation or any amendment thereto, or these Bylaws, or as to
action to be authorized or approved by the stockholders, all corporate powers
shall be exercised by or under authority of, and the business and affairs of the
Corporation shall be controlled by, the Board of Directors.
SECTION 2.2 NUMBER AND QUALIFICATION.
------------------------
The number of directors which shall constitute the whole Board of Directors
shall be no less than 3 nor more than 9. The number of directors shall be fixed
from time to time within this range exclusively by the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors, whether or not any vacancies exist in previously authorized
directorships at the time any such resolution is presented to the Board of
Directors for adoption.
SECTION 2.3 CLASSES OF DIRECTORS AND TERM OF OFFICE.
---------------------------------------
2.3.1 The Board of Directors shall be divided into three (3) classes, as
nearly equal in number as possible, designated Class I, Class II and Class III.
The number of directors constituting each Class shall be fixed from time to time
by a resolution duly adopted by the Board of Directors, provided, however, that
at least one-fourth (1/4) of the Board of Directors shall be elected annually.
Class I directors shall hold office for an initial term expiring at the annual
meeting of stockholders in 1999. Class II directors shall hold office for an
initial term expiring at the annual meeting of stockholders in 2000, and Class
III directors shall hold office for an initial term expiring at the annual
meeting of stockholders in 2001. At each annual meeting of stockholders held
thereafter, directors shall be elected for a three-year term to succeed the
directors of the Class whose terms then expire.
2.3.2 In the event of vacancy, either by death, resignation, or removal
of a director, or by reason of an increase in the number of directors, each
replacement or new director shall serve for the balance of the term of the class
of the director he or she succeeds or, in the event of an increase in the number
of directors, of the class to which he or she is assigned. All directors elected
for a term shall continue in office until the election and qualification of
their respective successors, their death, their resignation in accordance with
Section 2.6, their removal in accordance with Section 2.5, of if there has been
a reduction in the number of directors and no successor is to be elected, until
the end of the term.
4
<PAGE>
SECTION 2.4 ELECTION OF DIRECTORS.
---------------------
2.4.1 At each annual meeting of stockholders, the class of directors to
be elected at the meeting shall be chosen by a plurality of the votes cast by
the holders of shares entitled to vote in the election at the meeting, provided
a quorum is present. The election of directors by the stockholders shall be by
written ballot if directed by the chairman of the meeting or if the number of
nominees exceeds the number of directors to be elected.
2.4.2 Any vacancy on the Board of Directors shall be filled by the
affirmative vote of a majority of the remaining directors, or a sole remaining
director, though less than a quorum.
2.4.3 If the holders of Preferred Stock voting as a class are entitled to
elect directors, those directors shall be elected by a plurality of the votes
cast by the holders of shares of preferred stock of the Corporation entitled to
vote, voting separately as a class.
SECTION 2.5 REMOVAL OF DIRECTORS.
--------------------
Any director, other than a director elected by holders of preferred stock
of the Corporation voting as a class, may be removed from office at any time but
only upon the affirmative vote of the holders of at least 66-2/3% of the voting
power of all of the then-outstanding shares of voting stock of the Corporation,
voting together as a single class.
SECTION 2.6 RESIGNATIONS.
------------
Any director of the Corporation may resign at any time either by oral
tender of resignation at any meeting of the Board of Directors or by giving
written notice thereof to the Chairman of the Board, the Vice Chairman of the
Board, the President or the Secretary of the Corporation. Such resignation
shall take effect at the time it specifies, and the acceptance of such
resignation shall not be necessary to make it effective.
SECTION 2.7 PLACE OF MEETINGS.
-----------------
Meetings of the Board of Directors shall be held at the Principal Office or
at such other place within or without the State of Nevada as may be designated
for that purpose by the Board of Directors.
SECTION 2.8 MEETINGS AFTER ANNUAL STOCKHOLDERS' MEETING.
-------------------------------------------
The first meeting of the Board of Directors held after the annual
stockholders meeting shall be held at such time and place within or without the
State of Nevada as is fixed by announcement of the Chairman of the Board, the
Vice Chairman of the Board or the President of the Corporation given at the
annual stockholders' meeting, and no other notice of such meeting shall be
necessary, provided a majority of the Board of Directors is present.
Alternatively, such meeting may be held at the time and place fixed in a notice
given under other provisions of these Bylaws.
SECTION 2.9 OTHER REGULAR MEETINGS.
----------------------
2.9.1 Regular meetings of the Board of Directors shall be held at such
time and place within or without the State of Nevada as may be agreed upon from
time to time by the Board.
5
<PAGE>
2.9.2 No notice need be given of regular meetings, except that each
director must be given written notice of the specific meeting dates or regular
meeting dates, and the day of the month, the time, and the place of the meeting.
SECTION 2.10 SPECIAL MEETINGS.
----------------
Special meetings of the Board of Directors must be held whenever called by
the Chairman of the Board, the Vice Chairman of the Board or the President of
the Corporation or any two other directors, except that when the Board of
Directors consists of one director, then the one director may call a special
meeting. Notice of any special meeting must be mailed to each director not
later than 3 days before the day on which the meeting is to be held, or shall be
sent to him or her by telecopy, or delivered personally or by telephone, not
later than midnight of the day before the day of the meeting. Any meeting of
the Board of Directors shall be a legal meeting, without any notice thereof
having been given, if each director consents to the holding thereof or waives
notice in the manner specified in Section 2.11. Except as otherwise provided in
these Bylaws or as may be indicated in the notice thereof, any and all business
may be transacted at any special meeting.
SECTION 2.11 WAIVER OF NOTICE.
----------------
Anything herein to the contrary notwithstanding, notice of any meeting of
directors shall not be required as to any director who waives notice in writing
(including telecopy) before or after the meeting, which waiver shall be filed
with the Secretary of the Corporation. Attendance of a director at a meeting is
equivalent to a written waiver of notice of the meeting if the director's oral
consent is entered in the minutes or the director takes part in the
deliberations of the meeting without objection.
SECTION 2.12 NOTICE OF ADJOURNMENT.
---------------------
Notice of the time and place of holding an adjourned meeting need not be
given to absent directors if the time and place is fixed at the meeting
adjourned.
SECTION 2.13 QUORUM.
------
A majority of the number of directors as fixed by the Articles of
Incorporation or any amendment thereto, or pursuant to these Bylaws, shall be
necessary to constitute a quorum for the transaction of business, and the action
of a majority of the directors present at any meeting at which there is a
quorum, when duly assembled, is valid as a corporate act. However, a minority of
the directors, in the absence of a quorum, may adjourn from time to time or fill
vacant directorships in accordance with Section 2.4 but may not transact any
other business. When the Board of Directors consists of one or two directors,
then the one or two directors, respectively, constitute a quorum.
SECTION 2.14 ACTION BY UNANIMOUS WRITTEN CONSENT.
-----------------------------------
Any action required or permitted to be taken at any meeting of the Board of
Directors may be taken without a meeting, if all members of the Board
individually or collectively consent in writing to the meeting. The written
consent must be filed with the minutes of the proceedings of the Board and has
the same force and effect as a unanimous vote of the directors.
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SECTION 2.15 COMPENSATION.
------------
The directors may be paid their expenses of attendance at each meeting of
the Board of Directors. Additionally, the Board of Directors may from time to
time, in its discretion, pay to directors either or both a fixed sum for
attendance at each meeting of the Board of Directors or a stated salary for
services as a director. No such payment precludes any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like reimbursement and
compensation for attending committee meetings.
SECTION 2.16 TRANSACTIONS INVOLVING INTERESTS OF DIRECTORS.
---------------------------------------------
In the absence of fraud, no contract or other transaction of the
corporation is affected or invalidated by the fact that any of the directors of
the corporation are in any way interested in, or connected with, any other party
to, such contract or transaction, provided that such transaction satisfies the
applicable provisions of Chapter 78 of the Nevada Revised Statutes. Each and
every person who becomes a director of the Corporation is hereby relieved, to
the extent permitted by law, from any liability that might otherwise exist from
contracting in good faith with the Corporation for the benefit of himself or
herself or any person in which he or she may be in any way interested or with
which he or she may be in any way connected. Any director of the Corporation
may vote and act upon any matter, contract or transaction between the
Corporation and any other person without regard to the fact that he or she is
also a stockholder, director or officer of, or has any interest in, such other
person.
ARTICLE III
OFFICERS
SECTION 3.1 EXECUTIVE OFFICERS.
------------------
The executive officers of the Corporation shall be a Chief Executive
Officer (who may be the Chairman of the Board, the Vice Chairman of the Board or
the President), a Deputy Chief Executive Officer (who may be the Chairman of the
Board, the Vice Chairman of the Board or the President), a President, one or
more Executive Vice Presidents, one or more Senior Vice Presidents, a Secretary
and a Treasurer. Any person may hold two or more offices. The executive
officers of the Corporation must be elected annually by the Board of Directors
and hold office for one year or until their respective successors are elected
and qualify.
SECTION 3.2 APPOINTED OFFICERS: TITLES.
---------------------------
3.2.1 The Chief Executive Officer or a person designated by such
officer, or the Secretary in the case of assistant secretaries or the Treasurer
in the case of assistant treasurers, may appoint one or more assistant
secretaries or one or more assistant treasurers, each of whom shall hold such
title at the pleasure of the appointing officer, have such authority and perform
such duties as are provided in these Bylaws, or as the Chief Executive Officer
or other appointing officer may determine from time to time. Any person
appointed under this Section 3.2.1 to serve in any of the foregoing positions is
deemed by reason of such appointment or service in such capacity to be an
"officer" of the Corporation.
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3.2.2 The Chief Executive Officer or a person designated by such officer
may also appoint one or more vice presidents and one or more assistant vice
presidents for each corporate staff function and a corporate controller and one
or more assistant controllers. Each of these persons hold such title at the
pleasure of the Chief Executive Officer and have authority to act for and shall
perform duties with respect to only the staff function for which the person is
appointed. Any person appointed under this Section 3.2.2 to serve in any of the
foregoing positions is not deemed by reason of such appointment or service in
such capacity to be an "officer" of the Corporation.
SECTION 3.3 REMOVAL AND RESIGNATION.
-----------------------
3.3.1 Any officer may be removed, either with or without cause, by a
majority of the directors at the time in office, at any regular or special
meeting of the Board of Directors. Any appointed person may be removed from such
position at any time by the person making such appointment or such person's
successor.
3.3.2 Any officer may resign at any time, by giving written notice to the
Board of Directors, the Chief Executive Officer, the Deputy Chief Executive
Officer, the President or the Secretary of the Corporation. Any such
resignation takes effect at the date of the receipt of such notice, or at any
later time specified in the notice. Unless otherwise specified, the acceptance
of the resignation is not necessary to make it effective.
SECTION 3.4 VACANCIES.
---------
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these Bylaws for regular appointments to such office.
SECTION 3.5 CHAIRMAN OF THE BOARD AND VICE CHAIRMAN OF THE BOARD.
----------------------------------------------------
The Chairman of the Board shall preside at all meetings of the Board of
Directors and shall exercise and perform such other powers and duties as may be
from time to time assigned to him or her by the Board of Directors or these
Bylaws. The Vice Chairman of the Board shall, in the absence of the Chairman,
preside at all meetings of the Board of Directors and shall exercise and perform
such other powers and duties as may be from time to time assigned to him or her
by the Board of Directors or these Bylaws.
SECTION 3.6 CHIEF EXECUTIVE OFFICER.
-----------------------
The Chief Executive Officer shall, subject to the control of the Board of
Directors, have general supervision, direction and control of the business and
affairs of the Corporation. The Chief Executive Officer shall preside at all
meetings of the stockholders and, in the absence of the Chairman of the Board
and the Vice Chairman of the Board, at all meetings of the Board of Directors.
The Chief Executive Officer is ex officio a member of the Executive Committee
and has the general powers and duties of management usually vested in the office
of chief executive officer of a corporation and such other powers and duties as
may be prescribed by the Board of Directors or these Bylaws.
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SECTION 3.7 DEPUTY CHIEF EXECUTIVE OFFICER.
------------------------------
In the absence or disability of the Chief Executive Officer, the Deputy
Chief Executive Officer shall perform all of the duties of the Chief Executive
Officer and when so acting has all the powers and is subject to all the
restrictions upon the Chief Executive Officer, including the power to sign all
instruments and to take all actions which the chief Executive Officer is
authorized to perform by the Board of Directors or these Bylaws. The Deputy
Chief Executive Officer has such other powers and duties as may be prescribed by
the Chief Executive Officer or the Board of Directors or these Bylaws.
SECTION 3.8 PRESIDENT.
---------
In the absence or disability of the chief Executive Officer and Deputy
Chief Executive Officer, the President shall perform all of the duties of the
Chief Executive Officer and when so acting has all the powers and is subject to
all the restrictions upon the Chief Executive Officer, including the power to
sign all instruments and to take all actions which the Chief Executive Officer
is authorized to perform by the Board of Directors or these Bylaws. The
President has the general powers and duties usually vested in the office of
president of a corporation and such other powers and duties as may be prescribed
by the Chief Executive Officer, the Deputy Chief Executive Officer or the Board
of Directors or these Bylaws.
SECTION 3.9 EXECUTIVE VICE PRESIDENT, SENIOR VICE PRESIDENT AND VICE PRESIDENT
------------------------------------------------------------------
In the absence or disability of the Chief Executive Officer, the Deputy
Chief Executive Officer and the President, an Executive Vice President or a
Senior Vice President in the order of his or her rank and seniority shall
perform all of the duties of the Chief Executive Officer, and when so acting has
all the powers of and is subject to all the restrictions upon the Chief
Executive Officer, including the power to sign all instruments and to take all
actions which the Chief Executive Officer is authorized to perform by the Board
of Directors or these Bylaws. The Executive Vice Presidents, Senior Vice
Presidents and Vice Presidents have the general powers and duties usually vested
in the office of a vice president of a corporation and each of them has such
other powers and perform such other duties as from time to time may be
prescribed for them respectively by the Board of Directors, the Executive
Committee of the Board of Directors, the Chief Executive Officer or these
Bylaws.
SECTION 3.10 SECRETARY AND ASSISTANT SECRETARIES.
-----------------------------------
3.10.1 The Secretary shall (1) attend all meetings of the Board of
Directors and all meetings of the stockholders; and (2) record and keep, or
cause to be kept, all votes and the minutes of all proceedings in a book or
books to be kept for that purpose at the Principal Office, or at such other
place as the Board of Directors may from time to time determine, specifying
therein (i) the time and place of holding, (ii) whether regular or special, and
if special, how authorized, (iii) the notice thereof given, (iv) the names of
those present at directors' meetings, (v) the number of shares of stock the
holders of which are present or represented at stockholders' meetings, and (vi)
the proceedings thereof; and (3) perform like duties for the Executive and other
standing committees, when required. In addition, the Secretary must keep or
cause to be kept, at the office of the Corporation's resident agent in Nevada,
those documents required to be kept at such office by Section 5.2 of these
Bylaws and the applicable provisions of Chapter 78 of the Nevada Revised
Statutes.
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3.10.2 The Secretary shall give, or cause to be given, notice of meetings
of the stockholders and special meetings of the Board of Directors, and has such
other powers and perform such other duties as may be prescribed by these Bylaws
or by the Board of Directors or the Chief Executive Officer, the Deputy Chief
Executive Officer or the President, under whose supervision he or she shall be.
The Secretary must keep in safe custody the seal of the Corporation (if any) and
affix it to any instrument requiring it, and when so affixed, it shall be
attested by his or her signature or by the signature of the Treasurer or an
Assistant Secretary. The Secretary is hereby authorized to issue certificates,
to which the corporate seal may be affixed, attesting to the incumbency of
officers of this Corporation or to action taken by the Board of Directors or any
committee of officers or directors or the stockholders.
3.10.3 In the absence or disability of the Secretary, the Assistant
Secretaries, in the order of their seniority, shall perform the duties and
exercise the powers of the Secretary, and shall perform such other duties as the
Chief Executive Officer, the Deputy Chief Executive Officer or the President or
the Secretary prescribe.
SECTION 3.11 TREASURER AND ASSISTANT TREASURERS.
----------------------------------
3.11.1 The Treasurer shall deposit all moneys and other valuables in the
name and to the credit of the Corporation, with such depositories as may be
ordered by the Board of Directors. The Treasurer shall disburse the funds of
the Corporation as may be ordered by the Board of Directors, shall render to the
Chief Executive Officer, the Deputy Chief Executive Officer or the President or
directors, whenever they request it, an account of all his or her transactions
as Treasurer, and of the financial condition of the Corporation, as may be
prescribed by these Bylaws or by the Board of Directors or the Chief Executive
Officer, the Deputy Chief Executive Officer or the President, under whose
supervision he or she shall be.
3.11.2 In the absence or disability of the Treasurer, the Assistant
Treasurers, in the order of their seniority shall perform the duties and
exercise the powers of the Treasurer and shall perform such other duties as the
Chief Executive Officer, the Deputy Chief Executive Officer or the President or
the Treasurer prescribe.
SECTION 3.12 ADDITIONAL POWERS, SENIORITY AND SUBSTITUTION OF OFFICERS.
---------------------------------------------------------
In addition to the foregoing powers and duties specifically prescribed for
the respective officers, the Board of Directors may from time to time by
resolution (i) impose or confer upon any of the officers such additional duties
and powers as the Board of Directors may see fit, (ii) determine the order of
seniority among the officers, and/or (iii) except as otherwise provided above,
provide that in the absence of any officer or officers, any other officer or
officers shall substitute for and assume the duties, powers and authority of the
absent officer or officers. Any such resolution may be final, subject only to
further action by the Board of Directors, or the resolution may grant such
discretion, as the Board of Directors deems appropriate, to the Chief Executive
Officer (or in his or her absence the executive officer serving in his or her
place) to impose or confer additional duties and powers, to determine the order
of seniority among officers, and/or provide for substitution of officers as
above described.
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SECTION 3.13 COMPENSATION.
------------
The officers of the Corporation shall receive such compensation as is fixed
from time to time by the Board of Directors or a standing committee appointed by
the Board of Directors. No officer is prohibited from receiving such salary by
reason of the fact that the officer is also a director of the Corporation.
SECTION 3.14 TRANSACTION INVOLVING INTEREST OF OFFICER.
-----------------------------------------
In the absence of fraud, no contract or other transaction of the
Corporation shall be affected or invalidated by the fact that any of the
officers of the Corporation are in any way interested in, or connected with, any
other party to such contract or transaction, or are themselves parties to such
contract or transaction, provided that the transaction complies with the
applicable provisions of Chapter 78 of the Nevada Revised Statutes. Each and
every person who is or may become an officer of the Corporation is hereby
relieved, to the extent permitted by law, when acting in good faith, from any
liability that might otherwise exist from contracting with the Corporation for
the benefit of such officer or any person in which he or she may be in any way
interested or with which he or she may be in any way connected.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
SECTION 4.1 STANDING.
--------
The Board of Directors may appoint an Executive Committee, an Audit
Committee and/or a Compensation Committee, consisting of such number of its
members as it may designate, consistent with the laws of the State of Nevada,
the Articles of Incorporation or any amendment thereto, or these Bylaws,
including, if deemed desirable, alternate members who, in the order specified by
the Board of Directors, may replace any absent or disqualified member at any
meeting of the Committee.
4.1.1 The Executive Committee shall have and may exercise, when the
Board of Directors is not in session, all of the powers of the Board of
Directors in the management of the business and affairs of the Corporation, but
the Executive Committee shall not have the power to fill vacancies on the Board
of Directors, or to change the membership of or to fill vacancies in the
Executive Committee or any other committee of the Board of Directors, or to
adopt, amend or repeal the Bylaws, or to declare dividends.
4.1.2 The Audit Committee shall select and engage on behalf of the
Corporation, and fix the compensation of a firm of certified public accountants
whose duty it shall be to audit the books and accounts of the Corporation and
its subsidiaries for the fiscal year in which they are appointed, and who shall
report to the Audit Committee. The Audit Committee shall confer with the
auditors and shall determine, and from time to time shall report to the Board of
Directors upon, the scope of the auditing of the books and accounts of the
Corporation and its subsidiaries. The Audit Committee shall also be responsible
for determining that the business practices and conduct of employees and other
representatives of the Corporation and its subsidiaries comply with the policies
and procedures of the Corporation. A majority of the members of the Audit
Committee shall not be officers or employees of the Corporation or any of its
subsidiaries.
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4.1.3.1 The Compensation Committee shall establish a general compensation
policy for the Corporation and shall have responsibility for the approval of
increases in directors' fees, if any, and in salaries paid to officers and
senior employees earning in excess of an annual salary to be determined by the
Committee. The Compensation Committee also shall evaluate and make
recommendations to the Board of Directors with respect to the adoption,
substantive modification to or termination of any benefit plan of this
Corporation, and with respect to employee benefit plans of the Corporation has
such additional responsibilities as are described in Section 4.1.3.2 hereof.
4.1.3.2 To assist the Corporation in fulfilling its business goals, the
Board of Directors may from time to time establish or adopt those benefit plans,
which it shall designate as constituting a Level 1 plan (which designation
generally shall connote a compensatory plan in which participation is designed
solely for directors or senior management employees, or involves stock of this
Corporation, or is an incentive compensation plan that includes senior
management) or as constituting a Level 2 plan (which designation generally shall
connote a compensatory plan which is a savings plan or a corporate-wide capital
accumulation plan in which participation is broader than senior management
employees). The Board of Directors may modify or terminate any such plan.
However, the Compensation Committee is authorized to take action to adopt non-
substantive amendments to any Level 1 or Level 2 plan as it deems necessary or
appropriate, unless such plan involves the issuance of stock of the Corporation.
The Chief Executive Officer, or his designee, may take any and all actions to
establish or adopt any Level 3 plan (which would include medical plans, dental
plans, insurance plans, welfare plans and other benefit plans and any other plan
which is not a Level 1 or Level 2 plan) which he deems necessary or convenient
to the management of the Corporation, or to modify or terminate such Level 3
plan, so long as such action is not primarily for the benefit of directors or
senior management employees of the Corporation, either individually or
collectively.
Notwithstanding the foregoing, the Compensation Committee is responsible
for the control and management of the operation and administration (which shall
exclude ministerial activities) of the benefit plans of the Corporation, subject
to the limitations of this section. The Compensation Committee is responsible
for the control and management of the operation and administration (which shall
exclude ministerial activities) of those plans designated by the Board of
Directors as Level 1 plans. The Compensation Committee's responsibilities with
respect to the control and management of the operation and administration (which
shall exclude ministerial activities) of those plans designated by the Board of
Directors as Level 2 plans, is limited to the appointment of members of any
committee as may be constituted under such plans, and such periodic oversight as
the Compensation Committee deems prudent under the circumstances then prevailing
in order to evaluate the prudence of the continued appointment of such members.
The Compensation Committee has no responsibility with respect to the control and
management of the operation and administration of any Level 3 plan.
SECTION 4.2 OTHER COMMITTEES.
----------------
Subject to any limitations in the laws of the State of Nevada, the Articles
of Incorporation or any amendment thereto, or these Bylaws as to action to be
authorized or approved by the stockholders, or duties not delegable by the Board
of Directors, any or all of the corporate powers may be exercised by or under
authority of, and the business and affairs of this Corporation may be controlled
by, such other committee or committees as may be appointed by the Board of
Directors. The powers to be exercised by any such committee shall be designated
by the Board of Directors.
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SECTION 4.3 PROCEDURES.
----------
Subject to any limitations in the laws of the State of Nevada, the Articles
of Incorporation or any amendment thereto or these Bylaws regarding the conduct
of business by the Board of Directors and its appointed committees, any
committee created under this Article may use any procedures for conducting its
business and exercising its powers, including but not limited to, actions by the
unanimous written consent of its members in the manner set forth in Section
2.14. A majority constitutes a quorum unless the Committee consists of one or
two directors, then the one or two directors, respectively, constitute a quorum.
Notices of meetings may be sent to a committee's members in any reasonable
manner and may be waived as for meetings of directors.
ARTICLE V
CORPORATE RECORDS AND REPORTS - INSPECTION
SECTION 5.1 RECORDS.
-------
The Corporation shall maintain adequate and correct accounts books and
records of its business and properties. All of such books, records and accounts
shall be kept at its Principal Office as fixed by the Board of Directors from
time to time.
SECTION 5.2 ARTICLES, BYLAWS AND STOCK LEDGER.
---------------------------------
The Corporation shall maintain and keep the following documents at the
office of its resident agent in the State of Nevada: (i) a certified copy of the
Articles of Incorporation and all amendments thereto; (ii) a certified copy of
the Bylaws and all amendments thereto; and (iii) a statement setting forth the
following: "The Corporation's transfer agent, whose address is Continental Stock
Transfer Company, 2 Broadway, New York, New York 10004, is the custodian of the
duplicate stock ledger of the Corporation."
SECTION 5.3 INSPECTION.
----------
Any person who has been a stockholder of record for at least six months
immediately before such stockholder's demand, or any person holding, or
thereunto authorized in writing by the holders of, at least five percent of all
of the Corporation's outstanding stock, upon at least five days' written demand,
or any judgment creditor without prior demand, has the right to inspect in
person or by agent or attorney, during usual business hours, the duplicate stock
ledger of the Corporation and to make extracts therefrom. However, such
inspection may be denied to any stockholder or other person upon his or her
refusal to furnish to the Corporation an affidavit that such inspection is not
desired for a purpose which is in the interest of a business or object other
than the business of the Corporation and that he or she has not at any time sold
or offered for sale any list of stockholders of any corporation or aided or
abetted any person in procuring any such record of stockholders for any such
purpose.
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SECTION 5.4 CHECKS, DRAFTS, ETC.
-------------------
All checks, drafts or other orders for payment of money, notes or other
evidences of indebtedness, issued in the name of, or payable to, the
Corporation, shall be signed or endorsed by such person or persons, and in such
manner as shall be determined from time to time by resolution of the Board of
Directors.
ARTICLE VI
OTHER AUTHORIZATIONS
SECTION 6.1 EXECUTION OF CONTRACTS.
----------------------
The Board of Directors, except as these Bylaws otherwise provide, may
authorize any officer or officers or agent or agents to enter into any contract
or execute any instrument in the name of and on behalf of the Corporation. Such
authority may be general, or confined to specific instances. Unless so
authorized by the Board of Directors, no officer, agent or employee shall have
any power or authority, except in the ordinary course of business, to bind the
Corporation by any contract or engagement or to pledge its credit, or to render
it liable for any purpose or in any amount.
SECTION 6.2 REPRESENTATION OF OTHER CORPORATIONS.
------------------------------------
All stock of any other corporation, standing in the name of the
Corporation, shall be voted, represented and all rights incidental thereto
exercised as directed by written consent or resolution of the Board of Directors
expressly referring thereto. In general, such rights shall be delegated by the
Board of Directors under express instructions from time to time as to each
exercise thereof to the Chief Executive Officer, the Deputy Chief Executive
Officer, the President, any Executive Vice President, any Senior Vice President,
and Vice President, the Treasurer or the Secretary of this Corporation, or any
other person expressly appointed by the Board of Directors. Such authority may
be exercised by the designated officers in person, or by any other person
authorized to do so by proxy, or power of attorney, duly executed by such
officers.
SECTION 6.3 DIVIDENDS.
---------
The Board of Directors may from time to time declare, and the Corporation
may pay, dividends on its outstanding stock in the manner and on the terms and
conditions provided by the laws of the State of Nevada, and the Articles of
Incorporation or any amendment thereto, subject to any contractual restrictions
to which the Corporation is then subject.
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ARTICLE VII
CERTIFICATES FOR TRANSFER OF STOCK
SECTION 7.1 CERTIFICATES FOR STOCK.
----------------------
7.1.1 Certificates for stock shall be of such form and device as the
Board of Directors may designate and shall be numbered and registered as they
are issued. Each shall state the name of the record holder of the stock
represented thereby; its number and date of issuance; the number of shares of
stock for which it is issued; the par value; a statement of the rights,
privileges, preferences and restrictions, if any; a statement as to rights of
redemption or conversion, if any; and a statement of liens or restrictions upon
transfer or voting, if any, or, alternatively, a statement upon certificates
specifying such matters may be obtained from the Secretary of the Corporation.
7.1.2 Every certificate for stock must be signed by the Chief Executive
Officer, the Deputy Chief Executive Officer or the President and the Secretary
or an Assistant Secretary, or must be authenticated by facsimile signatures of
the Chief Executive Officer, the Deputy Chief Executive Officer or the President
and the Secretary or an Assistant Secretary. Before it becomes effective, every
certificate for stock authenticated by a facsimile or a signature must be
countersigned by a transfer agent or transfer clerk, and must be registered by
an incorporated bank or trust company, either domestic or foreign, as registrar
of transfers.
7.1.3 Even though an officer who signed, or whose facsimile signature has
been written, printed or stamped on a certificate for stock ceases, by death,
resignation or otherwise, to be an officer of the Corporation before the
certificate is delivered by the Corporation, the certificate shall be as valid
as though signed by a duly elected, qualified and authorized officer, if it is
countersigned by the signature or facsimile signature of a transfer agent or
transfer clerk and registered by an incorporated bank or trust company, as
registrar of transfers.
7.1.4 Even though a person whose signature as, or on behalf of, the
transfer agent or transfer clerk has been written, printed or stamped on a
certificate for stock ceases, by death, resignation or otherwise, to be a person
authorized to so sign such certificate before the certificate is delivered by
the Corporation, the certificate shall be deemed countersigned by the signature
of a transfer agent or transfer clerk for purposes of meeting the requirements
of this section.
SECTION 7.2 TRANSFER ON THE BOOKS.
---------------------
Upon surrender to the Secretary of the Corporation or transfer agent of the
Corporation of a certificate for stock duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
SECTION 7.3 LOST OR DESTROYED CERTIFICATES.
------------------------------
The Board of Directors may direct, or may authorize the Secretary of the
Corporation to direct, a new certificate or certificates to be issued in place
of any certificate or certificates theretofore issued by the Corporation alleged
to have been lost or destroyed, upon the making of an affidavit of that fact by
the person claiming the certificate for stock so lost or destroyed. When
authorizing such issue of a
15
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new certificate or certificates, the Board of Directors or Secretary may in its
or his or her discretion, and as a condition precedent to the issuance thereof,
require the owner of such lost or destroyed certificate or certificates, or his
or her legal representative, to advertise the same in such manner as it shall
require and/or give the Corporation a bond in such sum as it may direct as
indemnity against any claims that may be made against the Corporation with
respect to the certificate alleged to have been lost or destroyed.
SECTION 7.4 TRANSFER AGENTS AND REGISTRARS.
------------------------------
The Board of Directors may appoint one or more transfer agents or transfer
clerks, and one or more registrars, who may be the same person, and may be the
Secretary of the Corporation, or an incorporated bank or trust company, either
domestic or foreign, who shall be appointed at such times and places as the
requirements of the corporation may necessitate and the Board of Directors may
designate.
SECTION 7.5 FIXING RECORD DATE FOR DIVIDENDS, ETC.
--------------------------------------
The Board of Directors may fix a time, not exceeding 60 days before the
date fixed for the payment of any dividend or distribution, or for the allotment
of rights, or when any change or conversion or exchange of stock shall go into
effect, as a record date for determining the stockholders entitled to receive
any such dividend or distribution, or any such allotment of rights, or to
exercise the rights with respect to any such change, conversion, or exchange of
stock, and, in such case, only stockholders of record on the date so fixed are
entitled to receive such dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares of stock on the books of the Corporation after any record date fixed as
provided in this Section 7.5.
SECTION 7.6 RECORD OWNERSHIP.
----------------
The Corporation is entitled to recognize the exclusive right of a person
registered as such on the books of the Corporation as the owner of shares of the
Corporation's stock to receive dividends, and to vote as such owner, and is not
bound to recognize any equitable or other claim to or interest in such shares on
the part of any other person, whether or not the Corporation has express or
other notice thereof, except as otherwise provided by law.
ARTICLE VIII
AMENDMENTS TO BYLAWS
SECTION 8.1 BY STOCKHOLDERS.
---------------
Except as otherwise required by the provisions of the Articles of
Incorporation or any amendments thereto and subject to the right of the Board of
Directors to adopt, amend or repeal by laws as provided in Section 8.2, new or
restated bylaws may be adopted, or these Bylaws may be repealed or amended at
the annual stockholders' meeting or at any other meeting of the stockholders
called for that purpose, by a vote of stockholders entitled to exercise at least
66-2/3% of the voting power of the Corporation.
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SECTION 8.2 BY DIRECTORS.
------------
Except as otherwise required by the Articles of Incorporation and subject
to the right of the stockholders to adopt, amend, or repeal bylaws as provided
in Section 8.1, the Board of Directors may adopt, amend or repeal any of these
Bylaws by the affirmative vote of a majority of the directors present at any
organizational, regular or special meeting of the Board of Directors. This
power may not be delegated to any committee appointed in accordance with these
Bylaws.
SECTION 8.3 RECORD OF AMENDMENTS.
--------------------
Whenever an amendment or a new Bylaw is adopted, it shall be copied in the
book of minutes with the original Bylaws, in the appropriate place. If any
Bylaw is repealed, the fact of repeal, with the date of the meeting at which the
repeal was enacted, or written assent was filed, shall be stated in the book of
minutes.
ARTICLE IX
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 9.1 INDEMNIFICATION FOR EXPENSES IN PROCEEDINGS.
-------------------------------------------
Each person who was or is a party or is threatened to be made a party to or
is involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "proceeding"), by reason of the
fact that such person, or a person of whom such person is the legal
representative, is or was a director or officer of the Corporation or is or
was serving at the request of the Corporation as a director, officer, employee,
fiduciary or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, whether the basis of such proceeding is alleged action or inaction in a
official capacity or in any other capacity while serving as a director, officer,
employee, fiduciary or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent permitted by the laws of Nevada, as the same
exist or may hereafter by amended, against all costs, charges, expenses
liabilities and losses (including attorneys' fees, judgments, fines, employee
benefit plan excise taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by such person in connection
therewith, and such indemnification shall continue as to a person who has ceased
to be a director, officer, employee, fiduciary or agent and shall inure to the
benefit of such person's heirs, executors and administrators. However, except
as provided in Section 9.2, the Corporation shall indemnify any such person
seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the Board of Directors. The right to indemnification conferred in
this Article IX shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition; provided, however, that, if so required by Chapter 78 of the Nevada
Revised Statues, the payment of such expenses incurred by a director or officer
in such person's capacity as a director or officer (and not in any other
capacity in which service was or is rendered by such person while a director or
officer, including, without limitation, service to any employee benefit plan) in
advance of the final disposition of a proceeding shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such director
or officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this Section 9.1 or otherwise. The Corporation may, by
17
<PAGE>
action of the Board of Directors, provide indemnification to employees and
agents of the Corporation with the same scope and effect as the foregoing
indemnification of directors and officers.
SECTION 9.2 RIGHT TO BRING SUIT FOR UNPAID CLAIMS.
-------------------------------------
If a claim under Section 9.1 is not paid in full by the Corporation within
thirty (30) days after a written claim has been received by the Corporation, the
claimant may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim and, if successful in whole or in part,
the Corporation shall also pay the expense of prosecuting such claim. It is a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any is required, has been
tendered to the Corporation) that the claimant has failed to meet a standard of
conduct which makes it permissible under Nevada law for the Corporation to
indemnify the claimant for the amount claimed. Neither the failure of the
Corporation (including the Board of Directors, independent legal counsel, or its
stockholders) to have made a determination before the commencement of such
action that indemnification of the claimant is permissible in the circumstances
because he or she has met such standard of conduct, nor an actual determination
by the Corporation (including the Board of Directors, independent legal counsel,
or its stockholders) that the claimant has not met such standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
failed to meet such standard of conduct.
SECTION 9.3 ADVANCEMENT OF EXPENSES.
-----------------------
The right to indemnification and the payment of expenses incurred in
defending a proceeding in advance of its final disposition conferred in this
Article IX is not exclusive of any other right which any person may have or
hereafter acquire under any provision of law, the Articles of Incorporation or
any amendment thereto, or these Bylaws, or of any agreement or vote of
stockholders or disinterested directors, or otherwise.
SECTION 9.4 INDEMNIFICATION INSURANCE.
-------------------------
The Corporation may maintain insurance, at its expense, to protect itself
and any director, officer, employee, fiduciary or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprises
against any such expense, liability or loss, whether or not the Corporation
would have the power to indemnify such person against such expense, liability or
loss under Nevada law.
SECTION 9.5 INDEMNIFICATION EXPENSES OF WITNESSES.
-------------------------------------
To the extent that any director, officer, employee, fiduciary or agent of
the Corporation is by reason of such position, or a position with another entity
at the request of the Corporation, a witness in any action, suit or proceeding,
the Corporation shall indemnify such person against all costs and expenses
actually and reasonably incurred by such person or on such person's behalf in
connection thereto.
18
<PAGE>
SECTION 9.6 INDEMNIFICATION AGREEMENTS.
--------------------------
The Corporation may enter into agreements with any director, officer,
employee, fiduciary or agent of the Corporation providing for indemnification to
the fullest extent permitted by Nevada law.
SECTION 9.7 SEVERABILITY.
------------
If any provision of this Article IX shall for any reason be determined to
be invalid, the remaining provisions hereof shall not be affected thereby but
shall remain in full force and effect.
SECTION 9.8 FEDERAL ELECTION CAMPAIGN ACT.
-----------------------------
The rights provided by this Article IX shall be applicable to the officers
(including without limitation the Chief Executive Officer, the Deputy Chief
Executive Officer, the President, the Treasurer and any Assistant Treasurer)
appointed from time to time by the Chief Executive Officer or the Treasurer of
the Corporation or the designee of either of them to service in the
administration and management of any separate, segregated fund established for
purposes of collecting and distributing voluntary employee political
contributions to federal election campaigns pursuant to the Federal Election
Campaign Act of 1971, as amended.
ARTICLE X
CORPORATION SEAL
The Corporation Seal shall be circular in form and shall have inscribed
thereon the name of the Corporation, and the date of its incorporation, and the
word "Nevada."
ARTICLE XI
INTERPRETATION
Reference in these Bylaws to any provision of Chapter 78 of the Nevada
Revised Statutes shall be deemed to include all amendments thereto and the
effect of the construction and determination of validity thereof by the Nevada
Supreme Court.
19
<PAGE>
CERTIFICATE OF SECRETARY
------------------------
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of PROLONG
INTERNATIONAL CORPORATION, a Nevada corporation; and
2. That the attached bylaws, comprising 20 pages, including this page,
constitute the Amended and Restated Bylaws of said Corporation as duly adopted
by the Board of Directors of the Corporation pursuant to the Unanimous Written
Consent of the Board of Directors dated April 27, 1998.
IN WITNESS WHEREOF, I have executed this Certificate as Secretary to the
Corporation this 29th day of April, 1998.
/s/ Thomas C. Billstein
------------------------------------
Thomas C. Billstein, Secretary
20
<PAGE>
EXHIBIT 4.2
________________________ ________________________
NUMBER SHARES
PIC
________________________ ________________________
SEE REVERSE FOR CERTAIN DEFINITIONS
INCORPORATED UNDER THE LAWS CUSIP 74311 10 0
OF THE STATE OF AMERICA
________________________________________________________________________________
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
________________________________________________________________________________
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.001 PAR
VALUE PER SHARE, OF
PROLONG INTERNATIONAL CORPORATION, transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney
upon the surrender of this Certificate properly endorsed. This Certificate
is not valid unless countersigned by the Transfer Agent and registered by
the Registrar.
Witness the facsimile seal and signatures of its duly authorized
officers.
Dated:
/s/ Thomas C. Billstein /s/ Elton Alderman
(SEAL)
SECRETARY PRESIDENT, CHIEF EXECUTIVE
OFFICER AND CHAIRMAN OF
THE BOARD OF DIRECTORS
<PAGE>
PROLONG INTERNATIONAL CORPORATION
The Corporation is authorized to issue Common Stock. The Board of Directors
of the Corporation has authority to fix the number of shares and the designation
of any series of Preferred Stock and to determine or alter the rights,
reference, privileges and restrictions granted to or imposed upon any unissued
series of Preferred Stock.
The Corporation will furnish to any stockholder, upon request and without
charge, a statement of the powers, designations, preferences, and relative
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights, insofar as the same shall have been fixed, and of the authority
of the Board of Directors to designate and fix any preferences, rights and
limitations of any wholly unissued series. Any such request should be addressed
to the Secretary of the Corporation at its principal office.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED
THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE
OF A REPLACEMENT CERTIFICATE.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
TEN ENT - as tenants by the entireties ---------------- --------------------
JT TEN - as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants under Uniform Gifts to Minors
in common Act
----------------------------------------
(State)
UNIF TRF MIN ACT - Custodian (until age
---------------- --------------)
(Cust)
under Uniform Transfers
----------------------
(Minor)
to Minors Act
-----------------------------
(State)
</TABLE>
Additional abbreviations may also be used through not in the above list.
FOR VALUE RECEIVED, __________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING OR ASSIGNEE
- ---------------------------------------
- ---------------------------------------
________________________________________________________________________________
(PLEASE PRINT OR TYPE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated______________________________________
X __________________________________
X __________________________________
THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND WITH
THE NAMES(S) AS WRITTEN UPON THE
NOTICE: FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER
Signature(s) Guaranteed
By______________________________________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP
IN AN APPROVED MEDALLION SIGNATURE GUARANTEE PROGRAM), PURSUANT TO S.E.C. RULE
17Ad-15.
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF STRADLING YOCCA CARLSON & RAUTH APPEARS HERE]
July 6, 1998
Prolong International Corporation
6 Thomas
Irvine, California 92618
RE: Registration Statement on Form S-4
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-4,
Registration No. 333-51751, filed by Prolong International Corporation, a Nevada
corporation (the "Company"), with the Securities and Exchange Commission (the
"Commission") on May 1, 1998 (as amended by Amendment No. 1 thereto filed on
July 6, 1998, as such may be amended or supplemented, the "Registration
Statement"), in connection with the registration under the Securities Act of
1933, as amended, of 2,993,035 shares of common stock, $0.001 par value per
share, of the Company (the "Common Stock"), to be issued and sold by the
Company. The Registration Statement relates to 2,993,035 shares of the Company's
Common Stock which are to be issued to EPL Pro-Long, Inc., a California
corporation ("EPL"), in exchange for substantially all of EPL's assets pursuant
to the terms of that certain Agreement and Plan of Reorganization (the
"Agreement") entered into by the Company and EPL on February 5, 1998.
We have reviewed the corporate actions of the Company in connection with
this matter and have examined such documents, corporate records and other
instruments as we have deemed necessary for the purpose of this opinion. Based
upon the foregoing and upon such issues of law as we deem relevant, it is our
opinion that the 2,993,035 shares of Common Stock to be issued to EPL pursuant
to the terms of the Agreement have been duly and validly authorized and, when
issued, will be validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of our name in the Registration Statement, including
the Prospectus constituting a part thereof and any amendment thereto.
Very truly yours,
STRADLING YOCCA CARLSON & RAUTH
/s/ Stradling Yocca Carlson & Rauth
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF GARY C. WYKIDAL & ASSOCIATES APPEARS HERE]
July 1, 1998
EPL PRO-LONG, INC.
c/o Mike Davis
6 Thomas
Irvine, CA 92618
Dear Mr. Davis:
We have acted as counsel to EPL Pro-Long, Inc., a California corporation
("EPL") in connection with the sale of substantially all of EPL's assets (the
"Transaction") to Pro-Long International Corporation, a Nevada corporation
("PIC") pursuant to an agreement and plan of reorganization dated February 5,
1998 (the "Merger Agreement"). Pursuant to the terms of the Merger Agreement,
EPL has agreed to sell to PIC substantially all of EPL's assets and assume
certain liabilities in exchange for voting common stock of PIC in a transaction
intended to qualify a tax-free reorganization within the meaning of Sections
368(a)(1)(C) and (a)(2)(G) of the Internal Revenue Code of 1968, as amended (the
"Code"). You have requested our opinion as to whether the Transaction will
qualify as a tax-free reorganization under the aforesaid Code Sections.
In connection with rendering this opinion, we have assumed, without
conducting any independent investigation, and have relied on the following
facts:
1. EPL is a corporation organized and in good standing under the laws
of the State of California. It is the owner of certain intellectual
property including trade secrets, trademarks and patents which it
has licensed the exclusive use of to PIC. EPL's primary business
consists of collecting revenue from the license agreement and
administering outstanding debt.
2. PIC is a company organized and in good standing under the laws of
the State of Nevada with its principle place of business at 6
Thomas, Irvine, California 92618. PIC is in the business of the
manufacturing, marketing and production of high performance
lubrication products under the tradename "Prolong".
3. The terms of the Transaction, as set forth in the Merger Agreement,
provide for the issuance of two million nine hundred and ninety-
three thousand thirty-five (2,993.035) shares of PIC common stock,
$0.001 par value in exchange for substantially all of the assets of
EPL and assumption by PIC of virtually all of the liabilities of
EPL.
<PAGE>
Mike Davis
July 1, 1998
Page 2
5. As soon as practical after the receipt of the PIC common stock, EPL
will distribute the PIC common stock on a pro rata basis to each EPL
shareholder. EPL currently has 291 shareholders and 6,686,070 shares
of outstanding common stock.
6. Following the closing, EPL will cease to conduct business and
dissolve.
We also have relied upon the following representations and assumptions,
whether or not such representations and assumptions are expressed in the Merger
Agreement:
1. EPL will transfer to PIC (i) assets having a value of at least
seventy percent (70%) of the fair market value of EPL's total
assets, (ii) assets having a value of at least ninety percent (90%)
of fair market value of EPL's net assets, and (iii) assets having a
net value of at least ninety percent (90%) of the fair market value
of EPL's net assets.
2. None of the common stock shares of PIC issued to EPL will be given
as consideration for services of any employee of EPL.
On the basis of the assumptions and representations made above, and
subject to the qualifications, if any, stated herein, we are of the opinion that
the Transaction will qualify as a tax-free reorganization described in Section
368(a)(1)(C) and (a)(2)(G) of the Code.
We have not independently verified any factual matters relating to the
Transaction in connection with, or apart from, our preparation of this opinion
and, accordingly, our opinion does not take into account any matters not set
forth herein which might have been disclosed by independent verification.
Our opinion is given as of July 1, 1998. It is conditioned upon all
assumptions made herein and representations relied upon remaining true on the
date of the Closing and after the Closing to the extent relevant to the federal
tax treatment of the Transaction.
No ruling has been sought from the Service with respect to the
qualification of the Transaction as a reorganization under the Code. In part,
our opinion is based upon certain assumptions and representations made by the
parties to the reorganization and others and the qualifications and reservations
set forth in this opinion. Some of these assumptions and representations are
those that the Service requires to be made as a condition of issuing a favorable
ruling that a transaction qualifies as a reorganization under the Code. Such
assumptions and representations, however, even if true, are necessary but not
sufficient conditions
<PAGE>
Mike Davis
July 1, 1998
Page 3
for a favorable Service ruling and do not assure that the requirements of a
reorganization under the Code have been met.
Our opinion is limited to the foregoing federal income tax consequences of
the Transaction. We do not address any other federal income tax consequences of
the Transaction or other matters of federal law or any tax or other consequence
of the Transaction arising under state, local or foreign law.
This opinion has been delivered to you solely for the purpose of being
included as an exhibit to PIC's Registration Statement on Form S-4, as
amended (the "Registration Statement"). It may not be relied upon for any other
purpose or by any person other than the addressee, without our prior written
consent. We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use or our name under the heading "Federal
Income Tax Consequences" and "Legal Matters" in the Registration Statement.
Very truly yours,
/s/ Gary C. Wykidal
GARY C. WYKIDAL & ASSOCIATES
<PAGE>
EXHIBIT 10.20
================================================================================
[LOGO OF BANK OF AMERICA APPEARS HERE] STANDING LOAN AGREEMENT
________________________________________________________________________________
This Standing Loan Agreement dated as of April 1, 1998, is between Prolong Super
------------- -------------
Lubricants, Inc., a Nevada corporation ("Borrower") and Bank of America
- --------------------------------------
Community Development Bank and its successors and assigns ("Bank").
AGREEMENT
I. Loan Terms
----------
1.1 Amount and Purpose
------------------
Bank shall make a loan to Borrower in the principal amount of One
---
Million Six Hundred Ninety Two Thousand and No/100 Dollars
--------------------------------------------------
($1,692,000.00) (the "Loan") to be used for the following purpose: to
--------------- --
finance the purchase of real property. The Loan will be evidenced by a
-------------------------------------
promissory note (the "Note") payable to Bank in the original principal
amount of the Loan and will be secured by a Deed of Trust with
Assignment of Rents and Fixture Filing ("Deed of Trust") covering
certain real property commonly known as 6 Thomas, Irvine, California,
-----------------------------
92618 (together with all improvements now or hereafter located
-----
thereon, the "Property") and certain personal property and other
collateral. Prolong International Corporation, a Nevada corporation
-------------------------------------------------------
("Guarantor") will guaranty Borrower's obligations under this
Agreement pursuant to a Payment Guaranty of even date herewith (the
----------------
"Guaranty") (If "Not Applicable" is indicated in the previous
sentence, the Loan will not be guaranteed and all references to
"Guaranties" and "Guarantors" in this Agreement may be disregarded.)
In addition, Borrower has agreed to indemnify Bank against certain
------------------------------------------------------------------
environmental hazards pursuant to a Secured and Unsecured Indemnity
-------------------------------------------------------------------
Agreement. The term "Guarantor" shall include this party and the term
---------------------------------------------------------------------
"Guaranty" shall include this indemnity agreement. This Agreement, the
-------------------------------------------------
Note, the Deed of Trust, the Guaranties, if any, and all other
documents evidencing, securing or otherwise pertaining to the Loan
will be referred to as the "Loan Documents."
1.2 Documentation
-------------
At the closing of this transaction, Borrower will deliver the
following documents and other items, executed and acknowledged as
appropriate, all in form and substance satisfactory to Bank: (a) this
Agreement; (b) the Note; (c) the Deed of Trust; (d) a UCC-1 Financing
Statement perfecting a first. position lien on all personal property
collateral, if any; (e) the Guaranties, if any; (f) an ALTA title
insurance policy insuring Bank that the Deed of Trust constitutes a
valid and enforceable lien on the Property subject and subordinate
only to such liens or other matters as Bank has approved in writing;
(g) if the Deed of Trust is to be junior to any other lien or deed of
trust on the Property, a Beneficiary's Statement from the holder of
such prior lien or deed of trust; (h) evidence of the casualty and
other insurance coverage required under this Agreement; (i) if
Borrower is anything other than a natural person, evidence of
Borrower's due formation and good standing, as well as due
authorization and execution of the Loan Documents; (j) if applicable,
Subordination Agreements and Estoppels from tenants leasing space in
the Property; (k) if the Property is to be leased to third parties,
Borrower's pro forma lease form; (1) an SBA participation fee in the
amount of $25,380.00; (m) the Environmental Questionnaire - Real
----------
Estate Secured Loans prepared and certified by Borrower, and, if Bank
requires, an environmental survey of the Property prepared by an
environmental consultant satisfactory to Bank; and (n) such other
documents, Property information and other assurances as Bank may
require.
1.3 Disbursement Procedures
-----------------------
Bank shall disburse the Loan proceeds as follows:
On or about April 15, 1998, we will federal wire transfer an amount
not to exceed $2,421,000.00 (the "Loan Proceeds") to Commonwealth Land
Title Company, 200 West Santa Ana Boulevard, Santa Ana, California,
92701 through Union Bank of California, 500 S. Main Street, Orange,
California, 92667 (the "Holder"), ABA 122-000-496; Account No.91
20008304; In the name of Commonwealth
________________________________________________________________________________
-1-
<PAGE>
Land Title Company - Escrow Trust Account; Escrow 111013.SC; ATTN:
Sharon Cramm, Escrow Officer.
II. Covenants of the Borrower
-------------------------
Borrower promises to keep each of the following covenants:
2.1 Compliance with Law
-------------------
Borrower shall comply with all existing and future laws, regulations,
orders, building restrictions and requirements of, and all agreements
with and commitments to, all governmental, judicial or legal
authorities having jurisdiction over the Property and Borrower's
business.
2.2 Conditional Sales Contracts
---------------------------
Without Bank's prior written consent, Borrower shall not purchase any
materials, equipment, furnishings or fixtures to be installed on the
Property under any agreement where the seller reserves title or the
right of removal or repossession after such items are installed on the
Property.
2.3 Site Visits
-----------
Borrower shall allow Bank access to the Property at any reasonable
time for the purposes of performing an appraisal, inspecting the
Property, taking soil or groundwater samples, and conducting tests,
among other things, to investigate for the presence of Hazardous
Substances, as defined in Article IV. Borrower shall also allow Bank
to examine, copy and audit its books and records. Bank is under no
duty to visit or observe the Property, or to examine any books or
records. Any site visit, observation or examination by Bank shall be
solely for the purpose of protecting Bank's security and preserving
Bank's rights under the Loan Documents. Bank owes no duty of care to
protect Borrower or any other party against, or to inform Borrower or
any other party of, any adverse condition affecting the Property,
including any defects in the design or construction of any
improvements on the Property or the presence of any Hazardous
Substances on the Property.
2.4 Insurance
---------
Borrower shall maintain the following insurance:
(a) All risk property damage insurance in nonreporting form on the
Property, with a policy limit in an amount not less than the full
insurable value of the Property on a replacement cost basis,
including tenant improvements, if any. The policy shall include a
business interruption (or rent loss, if more appropriate)
endorsement, taxes and insurance premiums, a lender's loss
payable endorsement (438 BFU) in favor of Bank, and any other
endorsements required by Bank.
(b) Comprehensive General Liability coverage with such limits as Bank
may require. This policy shall name Bank as an additional
insured. Coverage shall be written on an occurrence basis, not
claims made.
(c) Such other insurance as Bank may reasonably require, which may
include earthquake, if available at commercially reasonably rates
and flood.
All policies of insurance required by Bank must be issued by companies
approved by Bank and otherwise be acceptable to Bank as to amounts,
forms, risk coverages and deductibles. In addition, each policy
(except workers' compensation) must provide Bank at least thirty (30)
days' prior notice of cancellation, non-renewal or modification. If
Borrower fails to keep any such coverage in effect while the Loan is
outstanding, Bank may procure the coverage at Borrower's expense.
Borrower shall reimburse Bank, on demand, for all premiums advanced by
Bank, which advances shall be considered to be additional loans to
Borrower secured by the Deed of Trust and bearing interest at the
default rate provided in the Note.
2.5 Payment of Expenses
-------------------
Borrower shall pay all costs and expenses incurred by Bank in
connection with the making, disbursement and administration of the
Loan, as well as any revisions, extensions, renewals or "workouts" of
the Loan, and in the exercise of any of Bank's rights or remedies
under this
________________________________________________________________________________
-2-
<PAGE>
Agreement. Such costs and expenses include title insurance, recording
and escrow charges, fees for appraisal, environmental services, legal
fees and expenses of Bank's counsel and any other reasonable fees and
costs for services, regardless of whether such services are furnished
by Bank's employees or by independent contractors. Borrower
acknowledges that the Loan fee does not include amounts payable by
Borrower under this section. All such sums incurred by Bank and not
immediately reimbursed by Borrower shall be considered an additional
loan to Borrower secured by the Deed of Trust and bearing interest at
the default rate provided in the Note.
2.6 Financial and Other Information
-------------------------------
If Borrower or any Guarantor is other than a natural person or a
trust, Borrower shall provide Bank, its and each such Guarantor's
annual CPA-audited financial statements, including a year-end balance
------
sheet and annual profit and loss statement within 90 days of fiscal
year-end and shall provide copies of its and each such Guarantor's tax
returns, together with all supporting schedules within 30 days of
filing. Borrower shall also provide an annual operating statement
on the Property in form and substance satisfactory to Bank. On
request, Borrower shall promptly provide Bank with any other financial
or other information concerning its and each Guarantor's affairs and
properties as Bank may request.
2.7 Notices
-------
Borrower shall promptly notify Bank in writing of:
(a) any litigation affecting Borrower, any Guarantor or the Property,
and, if Borrower or any Guarantor is other than a natural person
or trust, any general partner or controlling shareholder of
Borrower or such Guarantor;
(b) any notice that the Property or Borrower's or Guarantor's
business fails in any respect to comply with any applicable law,
regulation or court order; and
(c) any material adverse change in the physical condition of the
Property or Borrower's or any Guarantor's financial condition or
operations or other circumstance that adversely affects
Borrower's intended use of the Property or Borrower's ability to
repay the Loan.
2.8 Indemnity
---------
Borrower agrees to indemnify, defend with counsel acceptable to Bank,
and hold Bank harmless from and against all liabilities, claims,
actions, damages, costs and expenses (including all legal fees and
expenses of Bank's counsel) arising out of or resulting from the
ownership, operation, or use of the Property, whether such claims are
based on theories of derivative liability, comparative negligence or
otherwise. Notwithstanding anything to the contrary in any other Loan
Document, the provisions of this Section 2.8 shall not be secured by
the Deed of Trust, and shall survive the termination of this
Agreement, repayment of the Loan and foreclosure of the Deed of Trust
or similar proceedings.
2.9 Preservation of Rights; Maintenance of Properties
-------------------------------------------------
Borrower shall obtain and preserve all rights, privileges and
franchises necessary or desirable for the operation of the Property
and the conduct of Borrower's business. Borrower shall maintain all
its properties in good condition.
2.10 Transfer of Assets
------------------
Borrower will not transfer assets to a trust unless the trust
agreement is reviewed by the Bank and judged acceptable and the
trustee issues a guarantee of payment.
2.11 Negative Covenants
------------------
Without Bank's prior written consent, Borrower shall not:
(a) engage in any business activities substantially different
from Borrower's present business;
(b) liquidate or dissolve Borrower's business;
________________________________________________________________________________
-3-
<PAGE>
(c) lease or dispose of all or a substantial part of Borrower's
business or Borrower's assets;
(d) sell any assets for less than fair market price; or
(e) enter into any consolidation, merger, pool, joint venture,
syndicate or other combination.
2.12 Performance of Acts
-------------------
Upon request by Bank, Borrower shall perform all acts which may be
necessary or advisable to perfect any lien or security interest
provided for in the Loan Documents or to carry out the intent of the
Loan Documents.
2.13 Keeping Guarantor Informed
--------------------------
Borrower shall keep each Guarantor, and any third party executing the
Deed of Trust or any other security instrument securing the Loan,
informed of Borrower's financial condition and business operations
and all other circumstances which may affect Borrower's ability to
pay and perform its obligations under the Loan Documents. In
addition, Borrower shall deliver to each such person all of the
financial information required to be furnished to Bank hereunder.
III. Use or Leasing of the Property
------------------------------
3.1 Use of the Property
-------------------
(a) Borrower shall occupy the Property for the conduct of its
regular business. Borrower shall not change its intended use of
the Property without Bank's prior written approval.
3.2 Income from Property
--------------------
Borrower shall first apply all income derived from the Property,
including all income from leases, to pay costs and expenses
associated with the ownership, maintenance, operation and leasing of
the Property, including all amounts then required to be paid under
the Loan Documents, before using or applying such income for any
other purpose. No such income shall be distributed or paid to any
partner, shareholder or, if Borrower is a trust, to any beneficiary
or trustee, unless all such costs and expenses which are then due
have been paid in full.
IV. Hazardous Substances
--------------------
Notwithstanding any provision in the Deed of Trust or any other Loan
Document, the provisions of this Article IV shall not be secured by the
Deed of Trust and shall survive termination of this Agreement, repayment of
the Loan, and foreclosure of the Deed of Trust or similar proceedings.
4.1 Definition of Hazardous Substance
---------------------------------
For purposes of this Agreement, a "Hazardous Substance" is defined to
mean any substance, material or waste, including asbestos and
petroleum (including crude oil or any fraction thereof), which is or
becomes designated, classified or regulated as "toxic," "hazardous," a
"pollutant" or similar designation under any federal, state or local
law, regulation or ordinance.
4.2 Indemnity Regarding Hazardous Substances
----------------------------------------
Borrower agrees to indemnify, defend with counsel acceptable to Bank,
and hold Bank, its parent and affiliated companies, and their
respective officers, directors, employees and agents, harmless from
and against all actual or threatened liabilities, claims, actions,
damages (including foreseeable and unforeseeable consequential
damages), penalties, costs, expenses (including attorney's fees) and
losses directly or indirectly arising out of or resulting from the
presence of any Hazardous Substance in or around any part of the
Property or in the soil or groundwater under the Property, including
(1) any expenses incurred in connection with any investigation of site
conditions or any clean-up, remedial, removal or restoration work, and
(2) any resulting damages or injuries to the person or
________________________________________________________________________________
-4-
<PAGE>
property of any third parties or to any natural resources. In
addition, Borrower shall similarly indemnify, defend and hold harmless
any persons purchasing the Property through a foreclosure sale or
following a foreclosure sale, and any persons purchasing the Loan or
any portion of or interest in it.
4.3 Representation and Warranty
---------------------------
Before signing this Agreement, Borrower researched and inquired into
the previous, current and contemplated uses and ownership of the
Property. Based on that due diligence, Borrower represents and
warrants that, to the best of its knowledge, no Hazardous Substance
has been or will be disposed of, released onto or otherwise exists in,
on, or under the Property, except as Borrower has disclosed to Bank in
writing.
4.4 Compliance with Law; Notices
----------------------------
Borrower has complied, and shall comply and cause all occupants of the
Property to comply, with all laws, regulations and ordinances
governing or applicable to Hazardous Substances as well as the
recommendations of any qualified environmental engineer or other
expert. Borrower shall promptly notify Bank if it knows or suspects
there may be any Hazardous Substance in or around the Property, or in
the soil or groundwater under the Property, or if any action or
investigation by any governmental agency or third party pertaining to
Hazardous Substances is pending or threatened.
V. Representations and Warranties
------------------------------
Borrower promises that each representation and warranty set forth below is
true, accurate and correct.
5.1 Formation; Authority
--------------------
If Borrower is anything other than a natural person, it has complied
with all laws and regulations concerning its organization, existence
and the transaction of its business, and is in good standing in each
state in which it conducts its business. Borrower is authorized to
execute, deliver and perform its obligations under each of the Loan
Documents.
5.2 No Violation
------------
Neither Borrower nor the Property is in violation of, nor do the terms
of this Agreement conflict with, any regulation or ordinance, any
order of any court or governmental entity, or any covenant or
agreement affecting Borrower or the Property. There are no claims,
actions, proceedings or investigations pending or threatened against
Borrower or affecting the Property except for those previously
disclosed by Borrower to Bank in writing.
5.3 Financial Information
---------------------
All financial information which has been and will be delivered to
Bank, including all information relating to the financial condition of
Borrower, any of its partners, shareholders, or other principals, any
Guarantor, and the Property, does and will fairly and accurately
represent the financial condition being reported on. All such
information was and will be prepared in accordance with generally
accepted accounting principles consistently applied, unless otherwise
noted. As of the date hereof, there has been no material adverse
change in any financial condition reported at any time to Bank.
5.4 Borrower Not a "Foreign Person"
------------------------------
Borrower is not a "foreign person" within the meaning of Section
1445(f)(3) of the Internal Revenue Code of 1986, as amended from time
to time.
5.5 Disclosure to Guarantor
-----------------------
Before each Guarantor, and, if applicable, each third party executing
the Deed of Trust or other instrument securing the Loan, became
obligated in connection with the Loan, Borrower made full disclosure
to that person regarding Borrower's financial condition and business
operations and all other circumstances bearing upon Borrower's ability
to pay and perform its obligations under the Loan Documents.
VI. Default and Remedies
--------------------
________________________________________________________________________________
-5-
<PAGE>
6.1 Events of Default
-----------------
Borrower will be in default under this Agreement upon the occurrence
of any one or more of the following events ("Event of Default"):
(a) Borrower fails to make any payment due under the Note, or fails
to make any payment demanded by Bank under any Loan Document,
within ten (10) days after the date due or demanded; or
(b) Borrower fails to comply with any covenant contained in this
Agreement other than those referred to in clause (a), and does
not either cure that failure within thirty (30) days after
written notice from Bank, or, if the default cannot be cured in
thirty days, within a reasonable time; or
(c) Borrower or any Guarantor, or Borrower's managing general partner
if it is a partnership or its majority shareholder if it is a
corporation, becomes insolvent or the subject of any bankruptcy
or other voluntary or involuntary proceeding, in or out of court,
for the adjustment of debtor-creditor relationships; or
(d) Borrower or any Guarantor dissolves or liquidates, or any of
these events happens to Borrower's managing general partner if it
is a partnership or to its chief executive or majority
shareholder if it is a corporation, or, if Borrower or any
Guarantor is a trust, the trust is revoked or materially modified
or there is a change or substitution of the trustee; or
(e) Borrower or any Guarantor dies or becomes permanently disabled,
or any of these events happens to Borrower's or any Guarantor's
managing general partner, if it is a partnership, its chief
executive officer, if it is a corporation, or its trustee, if it
is a trust; or
(f) Any representation or warranty made or given in any of the Loan
Documents proves to be false or misleading in any material
respect; or
(g) Any Guarantor revokes its Guaranty or any Guaranty becomes
ineffective for any reason; or
(h) An event of default occurs under any of the Loan Documents; or
(i) Bank fails to have an enforceable first lien on or security
interest in any property given as security for the Loan (except
as approved by Bank in writing); or
(j) A lawsuit or suits are filed against Borrower or any Guarantor,
or a judgment or judgments are entered against Borrower or any
Guarantor, or any government authority takes action that
materially adversely affects Borrower's intended use of the
Property or Borrower's or any Guarantor's ability to repay the
Loan; or
(k) Borrower, any Guarantor or any person affiliated with Borrower or
any Guarantor fails to meet the conditions of, or fails to
perform any obligation under, any other agreement Borrower has
with Bank or any affiliate of Bank, including without limitation
that certain loan made by Bank in the amount of $729,000.00
secured by a junior deed of trust on the Property. For the
purposes of this section, "affiliated with" means in control of,
controlled by or under common control with; or
(l) Borrower, any Guarantor or any person affiliated with Borrower or
any Guarantor defaults in connection with any credit such person
has with any lender, if the default consists of the failure to
make a payment when due or gives the other lender the right to
accelerate the obligation, or if the obligation is secured by a
lien on the Property. For the purposes of this section,
"affiliated with" means in control of, controlled by or under
common control with; or
(m) There is a material adverse change in Borrower's or any
Guarantor's financial condition, or event or condition that
materially impairs Borrower's intended use of the Property or
Borrower's or any Guarantor's ability to repay the Loan.
6.2 Remedies
--------
________________________________________________________________________________
-6-
<PAGE>
If an Event of Default occurs under this Agreement.
(a) Bank may exercise any right or remedy which it has under any of
the Loan Documents, or which is otherwise available at law or in
equity or by statute, and all of Bank's rights and remedies shall
be cumulative. All of borrower's obligations under the Loan
Documents shall become immediately due and payable without notice
of default, presentment or demand for payment, protest or notice
of nonpayment or dishonor, or other notices or demands of any
kind or character, all at Bank's option, exercisable in its sole
discretion.
(b) Bank shall have the right in its sole discretion to enter the
Property and take possession of it, whether in person, by agent
or by court-appointed receiver, collect rents and otherwise
protect its collateral. If Bank exercises any of the rights or
remedies provided in this clause (b), that exercise shall not
make Bank a partner or joint venturer of Borrower. All sums which
are expended by Bank in preserving its collateral shall be
considered an additional loan to Borrower secured by the Deed of
Trust and bearing interest at the default rate provided in the
Note.
VII. Reference and Arbitration
-------------------------
7.1 Judicial Reference
------------------
In any judicial action between or among the parties, including but not
limited to any action or cause of action arising out of or relating to
this Agreement or the Loan Documents or based on or arising from an
alleged tort, all decisions of fact and law shall at the request of
any party be referred to a referee in accordance with California Code
of Civil Procedure Sections 638 et seq. The parties shall designate to
-- ---
the court a referee or referees selected under the auspices of the
American Arbitration Association ("AAA") in the same manner as
arbitrators are selected in AAA-sponsored proceedings. The presiding
referee of the panel, or the referee if there is a single referee,
shall be an active attorney or retired judge. Judgment upon the award
rendered by such referee or referees shall be entered in the court in
which such proceeding was commenced in accordance with California Code
of Civil Procedure Sections 644 and 645.
7.2 Mandatory Arbitration
---------------------
After the Deed of Trust has been released, fully reconveyed, or
extinguished, any controversy or claim between or among the parties,
including those arising out of or relating to this Agreement or the
Loan Documents and any claim based on or arising from an alleged tort,
shall at the request of any party be determined by arbitration. The
arbitration shall be conducted in accordance with the United States
Arbitration Act (Title 9, U.S. Code), notwithstanding any choice of
law provision in this Agreement, and under the Commercial Rules of the
AAA. The arbitrator(s) shall give effect to statutes of limitation in
determining any claim. Any controversy concerning whether an issue is
arbitrable shall be determined by the arbitrator(s). Judgment upon the
arbitration award may be entered in any court having jurisdiction. The
institution and maintenance of an action for judicial relief or
pursuit of a provisional or ancillary remedy shall not constitute a
waiver of the right of any party, including the plaintiff, to submit
the controversy or claim to arbitration if any other party contests
such action for judicial relief.
7.3 Real Property Collateral
------------------------
Notwithstanding the provisions of Section 7.2, no controversy or claim
shall be submitted to arbitration without the consent of all parties
if, at the time of the proposed submission, such controversy or claim
arises from or relates to an obligation to Bank which is secured by
real property collateral. If all parties do not consent to submission
of such a controversy or claim to arbitration, the controversy or
claim shall be determined as provided in Section 7.1.
7.4 Provisional Remedies, Self-Help and Foreclosure
-----------------------------------------------
No provision of this Article VII shall limit the right of any party to
this Agreement to exercise self-help remedies such as setoff,
foreclosure against or sale of any real or personal property
collateral or security, or obtaining provisional or ancillary remedies
from a court of competent jurisdiction before, after, or during the
pendency of any arbitration or other proceeding. The exercise of a
remedy does not waive the right of either party to resort to
arbitration or reference. At Bank's option, foreclosure
________________________________________________________________________________
-7-
<PAGE>
under a deed of trust or mortgage may be accomplished either by
exercise of power of sale under the deed of trust or mortgage or by
judicial foreclosure.
VIII. Miscellaneous Provisions
------------------------
8.1 No Waiver; Consents
-------------------
No alleged waiver by Bank shall be effective unless in writing, and
no waiver shall be construed as a continuing waiver. No waiver shall
be implied from any delay or failure by Bank to take action on
account of any default of Borrower. Consent by Bank to any act or
omission by Borrower shall not be construed as a consent to any other
or subsequent act or omission.
8.2 No Third Parties Benefited
--------------------------
This Agreement is made and entered into for the sole protection and
benefit of Bank and Borrower and their successors and assigns. No
trust fund is created by this Agreement and no other persons or
entities shall have any right of action under this Agreement or any
right to the Loan funds.
8.3 Notices
-------
All notices given under this Agreement shall be in writing and shall
be effectively served upon delivery, or if mailed, upon the first to
occur of receipt or the expiration of forty-eight hours after deposit
in first-class or certified United States mail, postage prepaid, sent
to the party at its address appearing below its signature. Those
addresses may be changed by either party by notice to the other
party.
8.4 Attorneys' Fees
---------------
If any lawsuit, reference or arbitration is commenced which arises
out of, or which relates to this Agreement, the Loan Documents or the
Loan, including any alleged tort action, regardless of which party
commences the action, the prevailing party shall be entitled to
recover from each other party such sums as the court, referee or
arbitrator may adjudge to be reasonable attorneys' fees in the action
or proceeding, in addition to costs and expenses otherwise allowed by
law. In all other situations, including any bankruptcy or other
voluntary or involuntary proceeding, in or out of court, for the
adjustment of debtor-creditor relationships, Borrower agrees to pay
all of Bank's costs and expenses, including attorneys' fees, which
may be incurred in any effort to collect or enforce the Loan or any
part of it or any term of any Loan Document. From the time(s)
incurred until paid in full to Bank, all sums shall bear interest at
the default rate provided in the Note.
8.5 Heirs, Successors and Assigns
-----------------------------
The terms of this Agreement shall bind and benefit the heirs, legal
representatives, successors and assigns of the parties; provided,
however, that Borrower may not assign this Agreement without the
prior written consent of Bank. Bank shall have the right to transfer
the Loan to any other persons or entities without the consent of or
notice to Borrower. Without the consent of or notice to Borrower,
Bank may disclose to any prospective purchaser of any securities
issued by Bank, and to any prospective or actual purchaser of any
interest in the Loan or any other loans made by Bank to Borrower, any
financial or other information relating to Borrower, the Loan or the
Property.
8.6 Interpretation
--------------
The language of this Agreement shall be construed as a whole
according to its fair meaning, and not strictly for or against any
party. The word "include(s)" means "include(s), without limitation,"
and the word "including" means "including, but not limited to."
Whenever Borrower is obligated to pay or reimburse Bank for any
attorneys' fees, those fees shall include the allocated costs for
services of in-house counsel.
8.7 Miscellaneous
-------------
This Agreement may not be modified or amended except by a written
agreement signed by the parties. The invalidity or unenforceability
of any one or more provisions of this Agreement shall in no way
affect any other provision. If Borrower consists of more than one
person or entity, each shall be
________________________________________________________________________________
-8-
<PAGE>
jointly and severally liable to Bank for the faithful performance of
this Agreement and the other Loan Documents. Time is of the essence
in the performance of this Agreement and the other Loan Documents.
This Agreement shall be governed by California law.
8.8 Integration and Relation to Loan Commitment
-------------------------------------------
The Loan Documents fully state all of the terms and conditions of the
parties' agreement regarding the matters mentioned in or incidental
to this Agreement. The Loan Documents supersede all oral negotiations
and prior writings concerning the subject matter of the Loan
Documents, including any loan commitment issued to Borrower.
8.9 Relationships with Other Bank Customers
---------------------------------------
From time to time, Bank may have business relationships with
Borrower's customers, suppliers, contractors, tenants, partners,
shareholders, officers or directors, with businesses offering
products or services similar to those of Borrower, or with persons
seeking to invest in, borrow from or lend to Borrower. Borrower
agrees that in no event shall Bank be obligated to disclose to
Borrower any information concerning any other Bank customer. Borrower
further agrees that Bank may extend credit to those parties and may
take any action it may deem necessary to collect any such credit,
regardless of any effect the extension or collection of such credit
may have on Borrower's financial condition or operations.
________________________________________________________________________________
-9-
<PAGE>
Borrower:
Prolong Super Lubricants, Inc.
a Nevada Corporation
By: /s/ Elton Alderman
----------------------------
Elton Alderman,
President
By: /s/ Thomas Billstein
-----------------------------
Thomas Billstein,
Secretary
Address of Borrower:
6 Thomas
Irvine, CA 92618
Bank:
BANK OF AMERICA COMMUNITY DEVELOPMENT BANK
By: /s/ RUSSELL G. SARDINA
----------------------
Russell G. Sardina,
Vice President
Address of Bank:
10850 White Rock Road, Suite 101
Rancho Cordova, CA 95670
________________________________________________________________________________
-10-
<PAGE>
PROMISSORY NOTE
(STANDING LOAN)
(FIXED RATE)
$1,692,000.00 Loan No.31243
April 1, 1998 Rancho Cordova, California
1. BORROWER'S PROMISE TO PAY.
-------------------------
For value received, Prolong Super Lubricants, lnc., a Nevada corporation
----------------------------------------------------
(the "Borrower") promises to pay One Million Six Hundred Ninety Two Thousand and
-----------------------------------------------
No/100 Dollars ($1,692,000.00), plus interest, to the order of BANK OF AMERICA
- ------ -------------
COMMUNITY DEVELOPMENT BANK (the "Bank") at P 0 Box 1186, Rancho Cordova,
-----------------------------
California, 95741 or at such other place as the holder of this Note may from
- -----------------
time to time require.
This Note evidences a Standing Loan (the "Loan") from Bank to Borrower made
-------------
pursuant to a Standing Loan Agreement (the "Loan Agreement") between Bank and
-----------------------
Borrower of even date herewith. This Note is secured by a deed of trust (the
"Deed of Trust") covering certain real property and other collateral.
2. INTEREST RATE AND MONTHLY PAYMENTS.
----------------------------------
A. Interest Rate. Interest shall accrue at the rate of 7.875% per year
-------------
(the "Note Rate").
B. Monthly Payments. If the Deed of Trust records on any day but the
----------------
first day of a month, Borrower will pay interest in advance from the date of
recording to the first day of the next month. Thereafter, principal and interest
shall be payable in equal monthly installments of Thirteen Thousand Fifty and
32/100 Dollars ($13,050.32), beginning on the first day of June, 1998 and
----------
continuing on the first day of each month thereafter, with a final payment of
all remaining unpaid principal, interest and other sums due under this Note due
and payable on May 1, 2008 (the "Maturity Date").
-----------
C. Interest Calculation. Interest will be computed on the basis of a
--------------------
three hundred sixty (360) day year and actual days elapsed, which results in
more interest than if a three hundred sixty~five (365) day year were used.
3. PRINCIPAL PREPAYMENTS.
---------------------
A. Prepayments. Borrower may prepay principal on the Note in whole or in
-----------
part in minimum amounts equal to or greater than twenty percent (20%) of the
face amount of this Note in accordance with the terms of this Section.
Prepayments which are less than twenty percent (20%) of the face amount of this
Note are not permitted. Borrower shall give Bank irrevocable written notice of
Borrower's intention to make the prepayment, specifying the date and amount of
the prepayment. The notice must be received by Bank at least five (5) Banking
Days in advance of the prepayment. All prepayments of principal on the Note
shall be applied to the most remote principal installment or installments then
unpaid. Each prepayment, whether voluntary, by reason of acceleration or
otherwise, must be accompanied by payment of all accrued interest on the amount
prepaid and the prepayment fee ("Prepayment Fee") described below. Bank will
submit a certificate to Borrower setting forth its determination of any
Prepayment Fee, which certificate shall be conclusive and binding in the absence
of manifest error.
B. Prepayment Fee. The Prepayment Fee will be the sum of the following:
---------------
-1-
<PAGE>
(1) $250; plus
----
(2) the sum of the fees calculated separately as of each Original
Payment Date as follows:
(a) subtract the applicable Reinvestment Rate from the Cost of
Funds Rate;
(b) divide the difference of (a) by twelve (12);
(c) multiply the quotient of (b) by the Original Loan Balance on
the Original Payment Date;
(d) determine the present value of the product from (c) using
the Reinvestment Rate.
(e) add together the amounts calculated in (d) as of each
Original Payment Date; if the prepayment is a partial prepayment,
multiply this sum by the Prepaid Percentage;
(f) If the amount determined under (e) is less than zero (0),
the component of the Prepayment Fee calculated under this subpart (2)
is zero (0); plus
----
(3) an amount equal to all costs and expenses Bank reasonably expects
to incur in liquidation and reinvestment of the prepaid funds.
C. Definitions. For purposes of this Note, the capitalized terms used
-----------
herein and not otherwise defined in the Note have the following meanings.
(1) "Banking Day" means a day, other than a Saturday or Sunday, on
which Bank is open for business for all banking functions in California.
(2) "Cost of Funds Rate" means the fixed interest rate of 5.95% per
annum.
(3) "Money Market" means one or more wholesale funding markets
available to Bank, including domestic certificates of deposit, Eurodollar
deposits, bank deposit notes or other appropriate money market instruments
selected by Bank.
(4) "Money Market Rate" means the fixed interest rate per annum,
determined solely by Bank on the date of prepayment, that Bank could obtain
by investing funds in the Money Market and that approximates a period of
time starting on the date of the prepayment and ending on the applicable
Original Payment Date.
(5) "Original Loan Balance" means the principal balance of the Loan
which would have been outstanding on a single Original Payment Date if
there had been no prepayment.
(6) "Original Payment Dates" means the dates on which principal of
the Loan would have been paid under the terms of this Note if there had
been no prepayment.
(7) "Prepaid Percentage" means the quotient derived by dividing the
amount of the prepayment by the principal amount of the Loan outstanding
immediately prior to the prepayment.
-2-
<PAGE>
(8) "Reinvestment Rate" means the Money Market Rate (if an Original
Payment Date is less than five (5) years from the date of the prepayment),
or the Treasury Rate plus one~quarter of one percentage point (0.25%) (if
an Original Payment Date is more than five (5) years from the date of the
prepayment).
(9) "Treasury Rate" means the interest rate yield which Bank
determines could be obtained by investing funds in obligations of the U.S.
Treasury from the date of prepayment through the applicable Original
Payment Date (or if a quoted rate for that term is not readily available,
Bank's reasonable approximation of the interest rate yield for that term).
D. Determination of Reinvestment Rates. Bank may adjust the Treasury Rate
-----------------------------------
and Money Market Rate to reflect the compounding, accrual basis, or other costs
of the Loan. Each of the rates is Bank's estimate only, and Bank is under no
obligation to actually reinvest any prepayment. The rates shall be based on
information from either the Telerate or Reuters information services, or other
information sources the Bank deems appropriate.
4. BORROWER'S WAIVER OF PREPAYMENT RIGHT.
-------------------------------------
By its signature below, Borrower expressly waives any right to prepay the
Loan except on the express terms set forth above. Borrower agrees to pay the
Prepayment Fee even if the prepayment is made following Bank's acceleration of
the Note due to a default by Borrower, or by reason of any transfer giving Bank
the right to accelerate the maturity of this Note pursuant to the terms of the
Deed of Trust. Borrower acknowledges that prepayment of the Loan may result in
Bank incurring additional costs (including lost opportunity costs), expenses or
liabilities. Borrower therefore agrees that the Prepayment Fee represents a
reasonable estimate of the prepayment costs, expenses or liabilities Bank may
suffer on a prepayment. Borrower agrees that Bank's willingness to offer the
interest rate described in this Note is sufficient and independent consideration
for this waiver. Borrower understands that Bank would not offer such interest
rate to Borrower absent this waiver.
Borrower:
Prolong Super Lubricants,Inc.,
a Nevada Corporation
By: /s/ Elton Alderman
----------------------------
Elton Alderman,
President
By: /s/ Thomas Billstein,
----------------------------
Thomas Billstein,
Secretary
5. DEFAULT RATE.
------------
From and after the Maturity Date, or such earlier date as all sums
owing on this Note become due and payable by acceleration or otherwise, all sums
owing on this Note, at the option of Bank, shall bear interest until paid in
full at three (3) percentage points above the rate at which interest would
otherwise accrue under this Note.
-3-
<PAGE>
6. LATE PAYMENTS.
-------------
A. Late Charge for Overdue Payments. If Bank has not received the full
--------------------------------
amount of any monthly payment by the end of ten (10) calendar days after the
date it is due, Borrower will pay a late charge to Bank in the amount of six
percent (6%) of the overdue payment. Borrower will pay this late charge only
once on any late payment.
7. MISCELLANEOUS.
-------------
A. Payments. All amounts payable under this Note are payable in lawful
--------
money of the United States. Checks constitute payment only when collected.
B. Joint and Several. If more than one person or entity are signing this
-----------------
Note as Borrower, their obligations under this Note will be joint and several.
C. Loan Agreement. This Note is subject to the terms and conditions of
--------------
the Loan Agreement, which, among other things, contains provisions for
acceleration of the maturity of this Note.
IN WITNESS WHEREOF, Borrower has duly executed and delivered this Note to
Bank as of the date first above written.
Borrower:
Prolong Super Lubricants, Inc.,
a Nevada Corporation
By: /s/ Elton Alderman
----------------------------
Elton Alderman,
President
By: /s/ Thomas Billstein
----------------------------
Thomas Billstein,
Secretary
-4-
<PAGE>
[LETTERHEAD OF BANK OF AMERICA APPEARS HERE]
________________________________________________________________________________
DEED OF TRUST, ASSIGNMENT OF RENTS
AND FIXTURE FILING
[_] If this box is checked, this document is a CONSTRUCTION TRUST DEED
securing a construction loan.
This Deed of Trust is made as of April 1, 1998, by Prolong Super Lubricants,
-------------- ------------------------
Inc., a Nevada corporation, as trustor ("Trustor"), to EQUITABLE DEED COMPANY,
- --------------------------
a California corporation, as trustee ("Trustee"), for the benefit of BANK OF
AMERICA COMMUNITY DEVELOPMENT BANK, a California state-chartered bank, as
beneficiary ("Beneficiary"). Trustee is a subsidiary of an affiliate of
Beneficiary.
1. GRANT IN TRUST
1.1 The Property. For the purpose of securing payment and performance of
the Secured Obligations defined in Section 2 below, Trustor hereby
irrevocably and unconditionally grants, conveys, transfers and assigns
to Trustee, in trust for the benefit of Beneficiary, with power of
sale and right of entry and possession, all estate, right, title and
interest which Trustor now has or may later acquire in the following
property (collectively, the "Property"):
(a) The real property located in the County of Orange, State of
California, as described in Exhibit "A" hereto;
(b) All buildings, structures, improvements, fixtures and
appurtenances now or hereafter placed on such real property, and
all apparatus and equipment now or hereafter attached in any
manner to the real property or any building on the real property,
including all pumping plants, engines, pipes, ditches and flumes,
and also all gas, electric, cooking, heating, cooling, air
conditioning, lighting, refrigeration and plumbing fixtures and
equipment, all of which shall be considered to the fullest extent
of the law to be real property for purposes of this Deed of
Trust;
(c) All easements and rights of way appurtenant to such real
property; all crops (growing or to be grown on such real
property); all standing timber upon such real property; all
development rights or credits and air rights; all water and water
rights (whether riparian, appropriative, or otherwise, and
whether or not appurtenant to such real property) and shares of
stock pertaining to such water or water rights, ownership of
which affect such real property; all minerals, oil, gas, and
other hydrocarbon substances and rights thereto in, on, under, or
upon such real property;
(d) All existing and future leases, subleases, subtenancies,
licenses, occupancy agreements and concessions relating to the
use and enjoyment of all or any part of such real property, and
any and all guaranties and other agreements relating to or made
in connection with any of the foregoing;
(e) All proceeds, including all claims to and demands for them, of
the voluntary or involuntary conversion of any of the real
property, buildings or the other property described above into
cash or liquidated claims, including proceeds of all present and
future fire, hazard or casualty insurance policies and all
condemnation awards or payments now or later to be made by any
public body or decree by any court of competent jurisdiction for
any taking or in connection with any condemnation or eminent
domain proceeding, and all causes of action and their proceeds
for any breach of warranty, misrepresentation, damage or injury
to, or defect in, the real property, buildings or the other
property described above or any part of them; and
(f) All proceeds of, additions and accretions to, substitutions and
replacements for, and changes in any of the property described
above.
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1.2 Fixture Filing. This Deed of Trust constitutes a financing statement
filed as a fixture filing under Section 9402(6) of the California
Uniform Commercial Code, as amended or recodified from time to time,
covering any Property which now is or later may become a fixture
attached to the real property described in Paragraph 1.1(a) or any
building located thereon.
2. THE SECURED OBLIGATIONS
2.1 Purpose of Securing. Trustor makes the grant, conveyance, transfer and
assignment set forth in Section 1 for the purpose of securing the
following obligations (the "Secured Obligations") in any order of
priority that Beneficiary may choose:
(a) Payment of all obligations of Trustor ("Obligor") to Beneficiary
-------
arising under the instrument(s) or agreement(s) described below (the
"Debt Instrument"):
[X] a promissory note dated as of April 1, 1998, payable by
--------------
Obligor as maker in the stated principal amount of One
---
Million Six Hundred Ninety Two Thousand and No/100 Dollars
--------------------------------------------------
($1,692,000.00) to the order of Beneficiary.
-------------
[X] a certain Standing Loan Agreement dated as of April 1, 1998,
----------------------- -------------
between Obligor and Beneficiary which provides for
extensions of credit in a principal amount not exceeding One
---
Million Six Hundred Ninety Two Thousand and No/100 Dollars
--------------------------------------------------
($1,692,000.00).
-------------
[_] a certain N/A Guaranty dated N/A, in the principal amount
--- ---
of -0- Dollars ($-O-) given by Obligor to Beneficiary in
--- ----
support of the obligations of N/A to Beneficiary.
---
[_] (Describe).
This Deed of Trust also secures payment of all obligations of
Obligor under the Debt Instrument which arise after the Debt
Instrument is extended, renewed, modified or amended pursuant to
any written agreement between Obligor and Beneficiary, and all
obligations of Obligor under any successor agreement or
instrument which restates and supersedes the Debt Instrument in
its entirety.
(b) Payment and performance of all obligations of Trustor under this
Deed of Trust; and
(c) Payment and performance of all future advances and other
obligations that Trustor (or any successor in interest to
Trustor) or Obligor (if different from Trustor) may agree to pay
and or perform (whether as principal, surety or guarantor) to or
for the benefit of Beneficiary, when a writing signed by Trustor
(or any successor in interest to Trustor) evidences said parties'
agreement that such advance or obligation be secured by this Deed
of Trust.
This Deed of Trust does not secure any obligation which expressly
states that it is unsecured, whether contained in the foregoing Debt
Instrument or in any other document, agreement or instrument.
2.2 Terms of Secured Obligations. All persons who may have or acquire an
interest in all or any part of the Property will be considered to have
notice of, and will be bound by, the terms of the Debt Instrument
described in Paragraph 2.1(a) and each other agreement or instrument
made or entered into in connection with each of the Secured
Obligations. The Debt Instrument, among other things, provides for the
following:
[_] a revolving line of credit to Obligor pursuant to which Obligor
may borrow, repay extensions of credit, and re-borrow amounts
which have been repaid. The unpaid balance of the revolving line
of credit may at certain times be zero. A zero balance does not
affect Beneficiary's agreement to make further extensions of
credit under the Debt Instrument. Beneficiary's interest under
this Deed of Trust will remain in full force and effect
notwithstanding a zero balance under the revolving line of
credit.
[_] an interest rate which may vary from time to time on one or more
of the obligations arising under the Debt Instrument.
3. ASSIGNMENT OF RENTS
3.1 Assignment. Trustor hereby irrevocably, absolutely, presently and
unconditionally assigns to Beneficiary all rents, royalties, issues,
profits, revenue, income and proceeds of the Property, whether now
due, past due or to become due, including all prepaid rents and
security deposits (collectively, the "Rents" ) and confers upon
Beneficiary the right to collect such Rents with or without taking
possession of the Property. In the event that anyone establishes and
exercises any right to develop, bore for or mine for
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any water, gas, oil or mineral on or under the surface of the
Property, any sums that may become due and payable to Trustor as bonus
or royalty payments, and any damages or other compensation payable to
Trustor in connection with the exercise of any such rights, shall also
be considered Rents assigned under this Paragraph. This is an absolute
assignment, not an assignment for security only.
3.2 Grant of License. Notwithstanding the provisions of Paragraph 3.1,
Beneficiary hereby confers upon Trustor a license ("License") to
collect and retain the Rents as they become due and payable, so long
as no Event of Default, as defined in Paragraph 5.2, shall exist and
be continuing. If an Event of Default has occurred and is continuing,
Beneficiary shall have the right, which it may choose to exercise in
its sole discretion, to terminate this License without notice to or
demand upon Trustor, and without regard to the adequacy of the
security for the Secured Obligations.
4. RIGHTS AND DUTIES OF THE PARTIES
4.1 Representations and Warranties. Trustor represents and warrants that
Trustor lawfully possesses and holds fee simple title to all of the
Property, unless Trustor's present interest in the Property is
described in Exhibit A as a leasehold interest, in which case Trustor
lawfully possesses and holds a leasehold interest in the Property as
stated in Exhibit A.
4.2 Taxes, Assessments, Liens and Encumbrances. Trustor shall pay prior to
delinquency all taxes, levies, charges and assessments, including
assessments on appurtenant water stock, imposed by any public or
quasi-public authority or utility company which are (or if not paid,
may become) a lien on all or part of the Property or any interest in
it, or which may cause any decrease in the value of the Property or
any part of it. Trustor shall immediately discharge any lien on the
Property which Beneficiary has not consented to in writing, and shall
also pay when due each obligation secured by or reducible to a lien,
charge or encumbrance which now or hereafter encumbers or appears to
encumber all or part of the Property, whether the lien, charge or
encumbrance is or would be senior or subordinate to this Deed of
Trust.
4.3 Damages and Insurance and Condemnation Proceeds.
(a) Trustor hereby absolutely and irrevocably assigns to Beneficiary,
and authorizes the payor to pay to Beneficiary, the following
claims, causes of action, awards, payments and rights to payment
(collectively, the "Claims"):
(i) all awards of damages and all other compensation payable
directly or indirectly because of a condemnation, proposed
condemnation or taking for public or private use which
affects all or part of the Property or any interest in it;
(ii) all other awards, claims and causes of action, arising out
of any breach of warranty or misrepresentation affecting
all or any part of the Property, or for damage or injury
to, or defect in, or decrease in value of all or part of
the Property or any interest in it;
(iii) all proceeds of any insurance policies payable because of
loss sustained to all or part of the Property; and
(iv) all interest which may accrue on any of the foregoing.
(b) Trustor shall immediately notify Beneficiary in writing if:
(i) any damage occurs or any injury or loss is sustained to
all or part of the Property, or any action or proceeding
relating to any such damage, injury or loss is commenced;
or
(ii) any offer is made, or any action or proceeding is
commenced, which relates to any actual or proposed
condemnation or taking of all or part of the Property.
If Beneficiary chooses to do so, it may in its own name appear in
or prosecute any action or proceeding to enforce any cause of
action based on breach of warranty or misrepresentation, or for
damage or injury to, defect in, or decrease in value of all or
part of the Property, and it may make any compromise or
settlement of the action or proceeding. Beneficiary, if it so
chooses, may participate in any action or proceeding relating to
condemnation or taking of all or part of the Property, and may
join Trustor in adjusting any loss covered by insurance.
(c) All proceeds of the Claims assigned to Beneficiary under this
Paragraph shall be paid to Beneficiary. In each instance,
Beneficiary shall apply those proceeds first toward reimbursement
of all of Beneficiary's costs and expenses of recovering the
proceeds, including attorneys' fees. Trustor further authorizes
Beneficiary, at Beneficiary's option and in Beneficiary's sole
discretion, and regardless of whether there is any impairment of
the Property, (i) to apply the balance of such proceeds, or any
portion of them, to pay or prepay some or all of the Secured
Obligations in such order or proportion as Beneficiary may
determine, or (ii) to hold the balance of such proceeds, or any
portion of them, in a non-interest-bearing account to be used for
the cost of reconstruction, repair or alteration of the Property,
or (iii) to release the balance of such proceeds, or any portion
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<PAGE>
of them, to Trustor. If any proceeds are released to Trustor, neither
Beneficiary nor Trustee shall be obligated to see to, approve or
supervise the proper application of such proceeds. If the proceeds are
held by Beneficiary to be used to reimburse Trustor for the costs of
restoration and repair of the Property, the Property shall be restored
to the equivalent of its original condition, or such other condition
as Beneficiary may approve in writing. Beneficiary may, at
Beneficiary's option, condition disbursement of the proceeds on
Beneficiary's approval of such plans and specifications prepared by an
architect satisfactory to Beneficiary, contractor's cost estimates,
architect's certificates, waivers of liens, sworn statements of
mechanics and materialmen, and such other evidence of costs,
percentage of completion of construction, application of payments, and
satisfaction of liens as Beneficiary may reasonably require.
4.4 Insurance. Trustor shall provide and maintain in force at all times all
risk property damage insurance on the Property and such other type of
insurance on the Property as may be required by Beneficiary in its
reasonable judgment. At Beneficiary's request, Trustor shall provide
Beneficiary with a counterpart original of any policy, together with a
certificate of insurance setting forth the coverage, the limits of
liability, the carrier, the policy number and the expiration date. Each
such policy of insurance shall be in an amount, for a term, and in form and
content satisfactory to Beneficiary, and shall be written only by companies
approved by Beneficiary. In addition, each policy of hazard insurance shall
include a Form 438BFU or equivalent loss payable endorsement in favor of
Beneficiary.
4.5 Maintenance and Preservation of Property.
(a) Trustor shall keep the Property in good condition and repair and shall
not commit or allow waste of the Property. Trustor shall not remove or
demolish the Property or any part of it, or alter, restore or add to
the Property, or initiate or allow any change in any zoning or other
land use classification which affects the Property or any part of it,
except with Beneficiary's express prior written consent in each
instance.
(b) If all or part of the Property becomes damaged or destroyed, Trustor
shall promptly and completely repair and/or restore the Property in a
good and workmanlike manner in accordance with sound building
practices, regardless of whether or not Beneficiary agrees to disburse
insurance proceeds or other sums to pay costs of the work of repair or
reconstruction under Paragraph 4.3.
(c) Trustor shall not commit or allow any act upon or use of the Property
which would violate any applicable law or order of any governmental
authority, whether now existing or later to be enacted and whether
foreseen or unforeseen, or any public or private covenant, condition,
restriction or equitable servitude affecting the Property. Trustor
shall not bring or keep any article on the Property or cause or allow
any condition to exist on it, if that could invalidate or would be
prohibited by any insurance coverage required to be maintained by
Trustor on the Property or any part of it under this Deed of Trust.
(d) If Trustor's interest in the Property is a leasehold interest, Trustor
shall observe and perform all obligations of Trustor under any lease
or leases and shall refrain from taking any actions prohibited by any
lease or leases. Trustor shall preserve and protect the leasehold
estate and its value.
(e) If the Property is agricultural, Trustor shall farm the Property in a
good and husbandlike manner. Trustor shall keep all trees, vines and
crops on the Property properly cultivated, irrigated, fertilized,
sprayed and fumigated, and shall replace all dead or unproductive
trees or vines with new ones. Trustor shall prepare for harvest,
harvest, remove and sell any crops growing on the Property. Trustor
shall keep all buildings, fences, ditches, canals, wells and other
farming improvements on the Property in first class condition, order
and repair.
(f) Trustor shall perform all other acts which from the character or use
of the Property may be reasonably necessary to maintain and preserve
its value.
4.6 Releases, Extensions, Modifications and Additional Security. Without
affecting the personal liability of any person, including Trustor (or
Obligor, if different from Trustor), for the payment of the Secured
Obligations or the lien of this Deed of Trust on the remainder of the
Property for the unpaid amount of the Secured Obligations, Beneficiary and
Trustee are respectively empowered as follows:
(a) Beneficiary may from time to time and without notice:
(i) release any person liable for payment of any Secured
Obligation;
(ii) extend the time for payment, or otherwise alter the terms of
payment, of any Secured Obligation;
(iii) accept additional real or personal property of any kind as
security for any Secured Obligation, whether evidenced by deeds
of trust, mortgages, security agreements or any other
instruments of security; or
(iv) alter, substitute or release any property securing the Secured
Obligations.
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<PAGE>
(b) Trustee may perform any of the following acts when requested to
do so by Beneficiary in writing:
(i) consent to the making of any plat or map of the Property
or any part of it;
(ii) join in granting any easement or creating any restriction
affecting the Property;
(iii) join in any subordination or other agreement affecting
this Deed of Trust or the lien of it; or
(iv) reconvey the Property or any part of it without any
warranty.
4.7 Reconveyance. When all of the Secured Obligations have been paid in
full and no further commitment to extend credit continues, Trustee
shall reconvey the Property, or so much of it as is then held under
this Deed of Trust, without warranty to the person or persons legally
entitled to it. In the reconveyance, the grantee may be described as
"the person or persons legally entitled thereto," and the recitals of
any matters or facts shall be conclusive proof of their truthfulness.
Neither Beneficiary nor Trustee shall have any duty to determine the
rights of persons claiming to be rightful grantees of any
reconveyance.
4.8 Compensation and Reimbursement of Costs and Expenses.
(a) Trustor agrees to pay fees in the maximum amounts legally
permitted, or reasonable fees as may be charged by Beneficiary
and Trustee when the law provides no maximum limit, for any
services that Beneficiary or Trustee may render in connection
with this Deed of Trust, including Beneficiary's providing a
statement of the Secured Obligations or Trustee's rendering of
services in connection with a reconveyance. Trustor shall also
pay or reimburse all of Beneficiary's and Trustee's costs and
expenses which may be incurred in rendering any such services.
(b) Trustor further agrees to pay or reimburse Beneficiary for all
costs, expenses and other advances which may be incurred or made
by Beneficiary or Trustee to protect or preserve the Property or
to enforce any terms of this Deed of Trust, including the
exercise of any rights or remedies afforded to Beneficiary or
Trustee or both of them under Paragraph 5.3, whether any lawsuit
is filed or not, or in defending any action or proceeding arising
uiider or relating to this Deed of Trust, including attorneys'
fees and other legal costs, costs of any sale of the Property and
any cost of evidence of title.
(c) Trustor shall pay all obligations arising under this Paragraph
immediately upon demand by Trustee or Beneficiary. Each such
obligation shall be added to, and considered to be part of, the
principal of the Secured Obligations, and shall bear interest
from the date the obligation arises at the rate provided in any
instrument or agreement evidencing the Secured Obligations. If
more than one rate of interest is applicable to the Secured
Obligations, the highest rate shall be used for purposes hereof.
If the instrument or agreement evidencing the Secured Obligations
does not state a rate of interest, interest shall accrue at the
rate of ten percent (10%) per annum.
4.9 Exculpation and lndemnification.
(a) Beneficiary shall not be directly or indirectly liable to Trustor
or any other person as a consequence of any of the following;
(i) Beneficiary's exercise of or failure to exercise any
rights, remedies or powers granted to it in this Deed of
Trust;
(ii) Beneficiary's failure or refusal to perform or discharge
any obligation or liability of Trustor under any agreement
related to the Property or under this Deed of Trust;
(iii) Beneficiary's failure to produce Rents from the Property
or to perform any of the obligations of the lessor under
any lease covering the Property;
(iv) any waste committed by lessees of the Property or any
other parties, or any dangerous or defective condition of
the Property; or
(v) any loss sustained by Trustor or any third party resulting
from any act or omission of Beneficiary in operating or
managing the Property upon exercise of the rights or
remedies afforded Beneficiary under Paragraph 5.3, unless
the loss is caused by the wilful misconduct and bad faith
of Beneficiary.
Trustor hereby expressly waives and releases all liability of the
types described above, and agrees that no such liability shall be
asserted against or imposed upon Beneficiary.
(b) Trustor agrees to indemnify Trustee and Beneficiary against and
hold them harmless from all losses, damages, liabilities, claims,
causes of action, judgments, court costs, attorneys' fees and
other legal expenses, cost of evidence of title, cost of evidence
of value, and other costs and expenses which either may suffer or
incur in performing any act required or permitted by this Deed of
Trust or by law or because of any failure of Trustor to perform
any of its obligations. This agreement by Trustor to indemnify
Trustee and Beneficiary shall survive the release and
cancellation of any or all of the Secured Obligations and the
full or partial release and/or reconveyance of this Deed of
Trust.
4.10 Defense and Notice of Claims and Actions. At Trustor's sole expense,
Trustor shall protect, preserve and defend the Property and title to
and right of possession of the Property, and the security of this
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<PAGE>
Deed of Trust and the rights and powers of Beneficiary and Trustee
created under it, against all adverse claims. Trustor shall give
Beneficiary and Trustee prompt notice in writing if any claim is
asserted which does or could affect any of these matters, or if any
action or proceeding is commenced which alleges or relates to any
such claim.
4.11 Substitution of Trustee. From time to time, Beneficiary may
substitute a successor to any Trustee named in or acting under this
Deed of Trust in any manner now or later to be provided at law, or by
a written instrument executed and acknowledged by Beneficiary and
recorded in the office of the recorder of the county where the
Property is situated. Any such instrument shall be conclusive proof
of the proper substitution of the successor Trustee, who shall
automatically upon recordation of the instrument succeed to all
estate, title, rights, powers and duties of the predecessor Trustee,
without conveyance from it.
4.12 Site Visits, Observation and Testing. Beneficiary shall have the
right at any reasonable time to enter and visit the Property for the
purposes of performing appraisals, observing the Property, taking and
removing soil or groundwater samples, and conducting tests on any
part of the Property. Beneficiary shall have no duty, however, to
visit or observe the Property or to conduct tests, and no site visit,
observation or testing by Beneficiary shall impose any liability on
Beneficiary. In no event shall any site visit, observation or testing
by Beneficiary be a representation that Hazardous Substances are or
are not present in, on or under the Property, or that there has been
or shall be compliance with any law, regulation or ordinance
pertaining to Hazardous Substances or any other applicable
governmental law. Neither Trustor nor any other party is entitled to
rely on any site visit, observation or testing by Beneficiary.
Beneficiary owes no duty of care to protect Trustor or any other
party against, or to inform Trustor or any other party of, any
Hazardous Substances or any other adverse condition affecting the
Property. Beneficiary shall give Trustor reasonable notice before
entering the Property. Beneficiary shall make reasonable efforts to
avoid interfering with Trustor's use of the Property in exercising
any rights provided in this Paragraph. For purposes of this
Paragraph, "Hazardous Substance" means any substance, material or
waste which is or becomes designated, classified or regulated as
being "toxic" or "hazardous" or which is or become similarly
designated, classified or regulated under any federal, state or local
law, regulation or ordinance.
4.13 Impound Account. At the request of Beneficiary, Trustor will monthly
pay to Beneficiary an amount equal to one-twelfth (1/12th) of the
annual costs of taxes and assessments on the Property plus the
estimated next insurance premiums on policies of insurance required
under Paragraph 4.4 of this Deed of Trust divided by the number of
months between the date of computation and the date the insurance
premiums are due. Beneficiary may release the amounts paid under this
Paragraph to Trustor for payment by Trustor of such taxes,
assessments and insurance premiums, or Beneficiary may use such
amounts to itself pay such taxes, assessments and insurance premiums,
at Beneficiary's option.
5. ACCELERATING TRANSFERS, DEFAULT AND REMEDIES
5.1 Accelerating Transfers.
(a) "Accelerating Transfer" means any sale, contract to sell,
conveyance, encumbrance, lease, or other transfer, whether
voluntary, involuntary, by operation of law or otherwise, of all
or any material part of the Property or any interest in it,
including any transfer or exercise of any right to drill for or
to extract any water (other than for Trustor's own use), oil, gas
or other hydrocarbon substances or any mineral of any kind on or
under the surface of the Property. If Trustor is a corporation,
"Accelerating Transfer" also means any transfer or transfers of
shares possessing, in the aggregate, more than fifty percent
(50%) of the voting power. If Trustor is a partnership,
"Accelerating Transfer" also means withdrawal or removal of any
general partner, dissolution of the partnership under California
law, or any transfer or transfers of, in the aggregate, more than
fifty percent (50%) of the partnership interests.
(b) Trustor agrees that Trustor shall not make any Accelerating
Transfer, unless the transfer is preceded by Beneficiary's
express written consent to the particular transaction and
transferee. Beneficiary may withhold such consent in its sole
discretion. If any Accelerating Transfer occurs, Beneficiary in
its sole discretion may declare all of the Secured Obligations to
be immediately due and payable, and Beneficiary and Trustee may
invoke any rights and remedies provided by Paragraph 5.3 of this
Deed of Trust.
5.2 Events of Default. The occurrence of any one or more of the following
events, at the option of Beneficiary, shall constitute an event of
default ("Event of Default") under this Deed of Trust:
(a) Obligor fails to make any payment, when due, under the Debt
Instrument (after giving effect to any applicable grace period),
or any other default occurs under and as defined in the Debt
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<PAGE>
Instrument or in any other instrument or agreement evidencing any
of the Secured Obligations and such default continues beyond any
applicable cure period;
(b) Trustor fails to make any payment or perform any obligation which
arises under this Deed of Trust; or
(c) Any representation or warranty made in connection with this Deed
of Trust or the Secured Obligations proves to have been false or
misleading in any material respect when made; or
(d) Any default occurs under any other deed of trust on all or any
part of the Property, or under any obligation secured by such
deed of trust, whether such deed of trust is prior to or
subordinate to this Deed of Trust.
5.3 Remedies. At any time after the occurrence of an Event of Default,
Beneficiary and Trustee shall be entitled to invoke any and all of the
rights and remedies described below, as well as any other rights and
remedies authorized by law. All of such rights and remedies shall be
cumulative, and the exercise of any one or more of them shall not
constitute an election of remedies.
(a) Beneficiary may declare any or all of the Secured Obligations to
be due and payable immediately.
(b) Beneficiary may apply to any court of competent jurisdiction for,
and obtain appointment of, a receiver for the Property.
(c) Beneficiary, in person, by agent or by court-appointed receiver,
may enter, take possession of, manage and operate all or any part
of the Property, and in its own name or in the name of Trustor
sue for or otherwise collect any and all Rents, including those
that are past due, and may also do any and all other things in
connection with those actions that Beneficiary may in its soie
discretion consider necessary and appropriate to protect the
security of this Deed of Trust. Such other things may include:
entering into, enforcing, modifying, or cancelling leases on such
terms and conditions as Beneficiary may consider proper;
obtaining and evicting tenants; fixing or modifying Rents;
completing any unfinished construction; contracting for and
making repairs and alterations; performing such acts of
cultivation or irrigation as necessary to conserve the value of
the Property; and preparing for harvest, harvesting and selling
any crops that may be growing on the property. Trustor hereby
irrevocably constitutes and appoints Beneficiary as its
attorney-in-fact to perform such acts and execute such documents
as Beneficiary in its sole discretion may consider to be
appropriate in connection with taking these measures, including
endorsement of Trustor's name on any instruments. Trustor agrees
to deliver to Beneficiary all books and records pertaining to the
Property, including computer-readable memory and any computer
hardware or software necessary to access or process such memory,
as may reasonably be requested by Beneficiary in order to enable
Beneficiary to exercise its rights under this Paragraph.
(d) Either Beneficiary or Trustee may cure any breach or default of
Trustor, and if it chooses to do so in connection with any such
cure, Beneficiary or Trustee may also enter the Property and/or
do any and all other things which it may in its sole discretion
consider necessary and appropriate to protect the security of
this Deed of Trust. Such other things may include: appearing in
and/or defending any action or proceeding which purports to
affect the security of, or the rights or powers of Beneficiary or
Trustee under, this Deed of Trust; paying, purchasing, contesting
or compromising any encumbrance, charge, lien or claim of lien
which in Beneficiary's or Trustee's sole judgment is or may be
senior in priority to this Deed of Trust, such judgment of
Beneficiary or Trustee to be conclusive as among the parties to
this Deed of Trust; obtaining insurance and/or paying any
premiums or charges for insurance required to be carried under
this Deed of Trust; otherwise caring for and protecting any and
all of the Property; and/or employing counsel, accountants,
contractors and other appropriate persons to assist Beneficiary
or Trustee. Beneficiary and Trustee may take any of the actions
permitted hereunder either with or without giving notice to any
person.
(e) Beneficiary may bring an action in any court of competent
jurisdiction to foreclose this instrument or to obtain specific
enforcement of any of the covenants or agreements of this Deed of
Trust.
(f) Beneficiary may cause the Property to be sold by Trustee as
permitted by applicable law. Before any such trustee's sale,
Beneficiary or Trustee shall give such notice of default and
election to sell as may then be required by law. When all time
periods then legally mandated have expired, and after such notice
of sale as may then be legally required has been given, Trustee
shall sell the Property, either as a whole or in separate
parcels, and in such order as Trustee may determine, at a public
auction to be held at the time and place specified in the notice
of sale. Neither Trustee nor Beneficiary shall have any
obligation to make demand on Trustor before any trustee's sale.
From time to time in accordance with then applicable law, Trustee
may, and in any event at Beneficiary's request shall, postpone
any trustee's sale by public announcement at the time and place
noticed for that sale. At any trustee's sale, Trustee shall sell
to the highest bidder at public auction for cash in lawful money
of the United States. Any person, including Trustor, Trustee or
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Beneficiary, may purchase at the trustee's sale. Trustee shall
execute and deliver to the purchaser(s) a deed or deeds conveying
the property being sold without any covenant or warranty
whatsoever, express or implied. The recitals in any such deed of
any matters or facts, including any facts bearing upon the
regularity or validity of any trustee's sale, shall be conclusive
proof of their truthfulness. Any such deed shall be conclusive
against all persons as to the facts recited in it.
5.4 Application of Sale Proceeds and Rents.
(a) Beneficiary and Trustee shall apply the proceeds of any sale of
the Property in the following manner: first, to pay the portion
of the Secured Obligations attributable to the costs, fees and
expenses of the sale, including costs of evidence of title in
connection with the sale; and, second, to pay all other Secured
Obligations in any order and proportions as Beneficiary in its
sole discretion may choose. The remainder, if any, shall be
remitted to the person or persons entitled thereto.
(b) Beneficiary shall apply any and all Rents collected by it, and
any and all sums other than proceeds of any sale of the Property
which Beneficiary may receive or collect under Paragraph 5.3, in
the following manner: first, to pay the portion of the Secured
Obligations attributable to the costs and expenses of operation
and collection that may be incurred by Trustee, Beneficiary or
any receiver; and, second, to pay all other Secured Obligations
in any order and proportions as Beneficiary in its sole
discretion may choose. The remainder, if any, shall be remitted
to the person or persons entitled thereto. Beneficiary shall have
no liability for any funds which it does not actually receive.
6. MISCELLANEOUS PROVISIONS
6.1 No Waiver or Cure.
(a) Each waiver by Beneficiary or Trustee must be in writing, and no
waiver shall be construed as a continuing waiver. No waiver shall
be implied from any delay or failure by Beneficiary or Trustee to
take action on account of any default of Trustor. Consent by
Beneficiary or Trustee to any act or omission by Trustor shall
not be construed as a consent to any other or subsequent act or
omission or to waive the requirement for Beneficiary's or
Trustee's consent to be obtained in any future or other instance.
(b) If any of the events described below occurs, that event alone
shall not cure or waive any breach, Event of Default or notice of
default under this Deed of Trust or invalidate any act performed
pursuant to any such default or notice; or nullify the effect of
any notice of default or sale (unless all Secured Obligations
then due have been paid and performed); or impair the security of
this Deed of Trust; or prejudice Beneficiary, Trustee or any
receiver in the exercise of any right or remedy afforded any of
them under this Deed of Trust; or be construed as an affirmation
by Beneficiary of any tenancy, lease or option, or a
subordination of the lien of this Deed of Trust:
(i) Beneficiary, its agent or a receiver takes possession of
all or any part of the Property;
(ii) Beneficiary collects and applies Rents, either with or
without taking possession of all or any part of the
Property;
(iii) Beneficiary receives and applies to any Secured Obligation
proceeds of any Property, including any proceeds of
insurance policies, condemnation awards, or other claims,
property or rights assigned to Beneficiary under this Deed
of Trust;
(iv) Beneficiary makes a site visit, observes the Property
and/or conducts tests thereon;
(v) Beneficiary receives any sums under this Deed of Trust or
any proceeds of any collateral held for any of the Secured
Obligations, and applies them to one or more Secured
Obligations;
(vi) Beneficiary, Trustee or any receiver performs any act
which it is empowered or authorized to perform under this
Deed of Trust or invokes any right or remedy provided
under this Deed of Trust.
6.2 Powers of Beneficiary and Trustee.
(a) Trustee shall have no obligation to perform any act which it is
empowered to perform under this Deed of Trust unless it is
requested to do so in writing and is reasonably indemnified
against loss, cost, liability and expense.
(b) Beneficiary may take any of the actions permitted under
Paragraphs 5.3(b) and/or 5.3(c) regardless of the adequacy of the
security for the Secured Obligations, or whether any or all of
the Secured Obligations have been declared to be immediately due
and payable, or whether notice of default and election to sell
has been given under this Deed of Trust.
________________________________________________________________________________
-8-
<PAGE>
(c) From time to time, Beneficiary or Trustee may apply to any court
of competent jurisdiction for aid and direction in executing the
trust and enforcing the rights and remedies created under this
Deed of Trust. Beneficiary or Trustee may from time to time
obtain orders or decrees directing, confirming or approving acts
in executing this trust and enforcing these rights and remedies.
6.3 Nonborrower Trustor.
(a) If any Trustor ("Nonborrower Trustor") is not the Obligor under
the Debt Instrument described in Paragraph 2.1(a), such
Nonborrower Trustor authorizes Beneficiary to perform any of the
following acts at any time, all without notice to Nonborrower
Trustor and without affecting Beneficiary's rights or Nonborrower
Trustor's obligations under this Deed of Trust:
(i) Beneficiary may alter any terms of the Debt Instrument or
any part of it, including renewing, compromising,
extending or accelerating, or otherwise changing the time
for payment of, or increasing or decreasing the rate of
interest on, the Debt Instrument or any part of it;
(ii) Beneficiary may take and hold security for the Debt
Instrument, accept additional or substituted security for
the Debt Instrument, and subordinate, exchange, enforce,
waive, release, compromise, fail to perfect, sell or
otherwise dispose of any such security;
(iii) Beneficiary may apply any security now or later held for
the Debt Instrument in any order that Beneficiary in its
sole discretion may choose, and may direct the order and
manner of any sale of all or any part of it and bid at any
such sale;
(iv) Beneficiary may release Obligor of its liability for the
Debt Instrument or any part of it; and
(v) Beneficiary may substitute, add or release any one or more
guarantors or endorsers of the Debt Instrument.
(b) Nonborrower Trustor waives:
(i) Any right it may have to require Beneficiary to proceed
against Obligor, proceed against or exhaust any security
held from Obligor, or pursue any other remedy in
Beneficiary's power to pursue;
(ii) Any defense based on any legal disability of Obligor, any
discharge or limitation of the liability of Obligor to
Beneficiary, whether consensual or arising by operation of
law or any bankruptcy, reorganization, receivership,
insolvency, or debtor-relief proceeding, or from any other
cause, or any claim that Nonborrower Trustor's obligations
exceed or are more burdensome than those of Obligor;
(iii) All presentments, demands for performance, notices of
nonperformance, protests, notices of protest, notices of
dishonor, notices of acceptance of this Deed of Trust and
of the existence, creation, or incurring of new or
additional indebtedness of Obligor, and demands and
notices of every kind;
(iv) Any defense based on or arising out of any defense that
Obligor may have to the payment or performance of the Debt
Instrument or any part of it; and
(v) All rights of subrogation, reimbursement, indemnification
and contribution (contractual, statutory or otherwise),
including any claim or right of subrogation under the
Bankruptcy Code (Title 11 of the U.S. Code) or any
successor statute, all rights to enforce any remedy that
the Beneficiary may have against Obligor, and all rights
to participate in any security now or later to be held by
Beneficiary for the Debt Instrument.
(c) Nonborrower Trustor assumes full responsibility for keeping
informed of Obligor's financial condition and business operations
and all other circumstances affecting Obligor's ability to pay
and perform its obligations to Beneficiary, and agrees that
Beneficiary shall have no duty to disclose to Nonborrower Trustor
any information which Beneficiary may receive about Obligor's
financial condition, business operations, or any other
circumstances bearing on its ability to perform.
(d) For purposes of this Paragraph 6.3, all references to the Debt
Instrument shall also include any instrument or agreement
executed by Obligor subsequent to the date of this Deed of Trust
which is secured by this Deed of Trust in accordance with the
provisions of Paragraph 2.1(c).
6.4 Merger. No merger shall occur as a result of Beneficiary's acquiring
any other estate in or any other lien on the Property unless
Beneficiary consents to a merger in writing.
6.5 Joint and Several Liability. If Trustor consists of more than one
person, each shall be jointly and severally liable for the faithful
performance of all of Trustor's obligations under this Deed of Trust.
6.6 Applicable Law. This Deed of Trust shall be governed by California
law.
________________________________________________________________________________
-9-
<PAGE>
6.7 Successors in Interest. The terms, covenants and conditions of this
Deed of Trust shall be binding upon and inure to the benefit of the
heirs, successors and assigns of the parties. However, this Paragraph
does not waive the provisions of Paragraph 5.1.
6.8 Interpretation. Whenever the context requires, all words used in the
singular will be construed to have been used in the plural, and vice
versa, and each gender will include any other gender. The captions of
the sections of this Deed of Trust are for convenience only and do not
define or limit any terms or provisions. The word include(s)" means
"include(s), without limitation," and the word "including" means
"including, but not limited to." The word "obligations" is used in its
broadest and most comprehensive sense, and includes all primary,
secondary, direct, indirect, fixed and contingent obligations. It
further includes all principal, interest, prepayment charges, late
charges, loan fees and any other fees and charges accruing or assessed
at any time, as well as all obligations to perform acts or satisfy
conditions. No listing of specific instances, items or matters in any
way limits the scope or generality of any language of this Deed of
Trust. The Exhibits to this Deed of Trust are hereby incorporated in
this Deed of Trust.
6.9 In-House Counsel Fees. Whenever Trustor is obligated to pay or
reimburse Beneficiary or Trustee for any attorneys' fees, those fees
shall include the allocated costs for services of in-house counsel.
6.10 Waiver of Marshaling. Trustor waives all rights, legal and equitable,
it may now or hereafter have to require marshaling of assets or to
direct the order in which any of the Property will be sold in the
event of any sale under this Deed of Trust, including any rights
provided by California Civil Code Sections 2899 and 3433, as such
Sections may be amended from time to time. Each successor and assign
of Trustor, including any holder of a lien subordinate to this Deed of
Trust, by acceptance of its interest or lien agrees that it shall be
bound by the above waiver, as if it had given the waiver itself.
6.11 Severability. If any provision of this Deed of Trust should be held
unenforceable or void, that provision shall be deemed severable from
the remaining provisions and in no way affect the validity of this
Deed of Trust except that if such provision relates to the payment of
any monetary sum, then Beneficiary may, at its option, declare all
Secured Obligations immediately due and payable.
6.12 Notices. Trustor hereby requests that a copy of notice of default and
notice of sale be mailed to it at the address set forth below. That
address is also the mailing address of Trustor as debtor under the
California Uniform Commercial Code. Beneficiary's address given below
is the address for Beneficiary as secured party under the California
Uniform Commercial Code.
[_] If this box is checked, N/A signs as Trustor solely for the
---
purpose of subjecting any potential community property interest
in the Property to this Deed of Trust.
ADDRESSES WHERE NOTICES TO TRUSTOR(S) ARE TO BE SENT:
PROLONG SUPER LUBRICANTS, INC.
6 Thomas
Irvine, CA 92618
ADDRESS WHERE NOTICES TO BENEFIClARY ARE TO BE SENT:
BANK OF AMERICA COMMUNITY DEVELOPMENT BANK
P.O. Box 1186
Rancho Cordova, CA 95741
TRUSTOR:
Prolong Super Lubricants, Inc.
A Nevada corporation
By: /s/ Elton Alderman
---------------------------------
Elton Alderman,
President
By: /s/ Thomas Billstein
---------------------------------
Thomas Billstein,
Secretary
________________________________________________________________________________
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<PAGE>
GENERAL ACKNOWLEDGMENT
(State of California )
(County of Orange )
On 04/14/98, before me, S. CRAM personally appeared Elton Alderman & Thomas
Billstein, personally known to me (or proved to me on the basis of satisfactory
evidence) to be the person(s) whose name(s) is/are subscribed to the within
instrument and acknowledged to me that he/she/they executed the same in
his/her/their authorized capacity(ies), and that by his/her/their signature(s)
on the instrument the person(s), or the entity upon behalf of which the
person(s) acted, executed the instrument.
WITNESS my hand and official seal.
(Seal)
Signature: /s/ S. CRAM
---------------------
[SEAL APPEARS HERE]
________________________________________________________________________________
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<PAGE>
EXHIBIT/ATTACHMENT
TO DOCUMENTATION
EXHIBIT "A"
(Legal Description)
EXHIBIT A, ATTACHED TO AND FORMING A PART OF THAT CERTAIN DEED OF TRUST,
- ---------
ASSIGNMENT OF RENTS AND FLXTURE FILING DATED APRIL 1, 1998, EXECUTED BY TRUSTOR
IN FAVOR OF BANK OF AMERICA COMMUNITY DEVELOPMENT BANK.
ALL THAT CERTAIN LAND SLTUATED IN THE STATE OF CALIFORNIA, COUNTY OF ORANGE,
DESCRIBED AS
FOLLOWS:
Parcel 15 in the City of Irvine, County of Orange, State of California, as shown
on a Parcel Map filed in book 112, pages 17 to 25, inclusive of Parcel Maps, in
the office of the County Recorder of said County.
Except any and all oil, oil rights, minerals, mineral rights, natural gas
rights, and other hydrocarbons by whatsoever name known, geothermal steam, and
all products derived from any of the foregoing, that may be within or under the
land, together with the perpetual right of drilling, mining, explorIng and
operating therefor and storing in and removing the same from the land or any
other land, including the right to whipstock or directionally drill and mine
from lands other than those hereby, oil or gas wells, tunnels and shafts into,
through or across the subsurface of the land, and to bottom such whipstocked or
directionally drilled wells, tunnels and shafts under and beneath or beyond the
exterior limits thereof, and to redrill, retunnel, equip, maintain, repair,
deepen and operate any such wells or mines; without however, the right to drill,
mine, store, explore and operate through the surface or the upper 500 feet of
the subsurface of the land, as reserved in the deed from The Irvine Company, a
Michigan corporation successor by merger with Irvine Industrial Complex, a
corporation, recorded August 8, 1979 in book 13260, page 763 of Official
Records.
Property Address:
6 THOMAS
Irvine, CA 92618
________________________________________________________________________________
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<PAGE>
================================================================================
[LOGO OF BANK OF AMERICA APPEARS HERE] PAYMENT GUARANTY
(COMMERICAL REAL ESTATE)
________________________________________________________________________________
This Payment Guaranty ("Guaranty") is made as of April 1, 1998 by Prolong
International Corporation, a Nevada corporation ("Guarantor") in favor of Bank
of America Community Development Bank and its successors and assigns ("Bank").
Factual Background
------------------
A. Guarantor is executing this Guaranty to induce Bank to make a standing loan
(defined in Section 2 as the "Loan") to Prolong Super Lubricants, Inc., a
Nevada corporation ("Borrower") in the principal amount of One Million Six
Hundred Ninety Two Thousand and No/100 Dollars $1,692,000.00. The Loan is
being made under a Standing Loan Agreement (the "Loan Agreement") entered
into as of April 1, 1998, between Bank and Borrower.
B. The Loan is evidenced by a promissory note (the "Note") made payable to
Bank in the principal amount of the Loan. The Note is secured by a deed of
trust ("Deed of Trust") covering certain real and personal property, as
therein described (all collectively, the "Property"). The Note may also be
secured by other collateral, as more fully explained in the Loan Agreement.
C. This Guaranty is one of several Loan Documents, as defined and designated
in the Loan Agreement. The Loan Documents also include the Loan Agreement,
the Note, the Deed of Trust and certain other specified instruments and
agreements.
Guaranty
--------
1. Guaranty of Loan. Guarantor unconditionally guaranties to Bank the full
----------------
payment of and performance of Borrower's obligations in connection with the
Loan, and unconditionally agrees to pay Bank the full amount of the Loan.
This is a guaranty of payment, not of collection. If Borrower defaults in
the payment when due of the Loan or any part of it, Guarantor shall in
lawful money of the United States pay to Bank or order, on demand, all sums
due and owing on the Loan, including all interest, charges, fees and other
sums, costs and expenses.
2. Loan. In this Guaranty, the term "Loan" is broadly defined to mean and
----
include all primary, secondary, direct, indirect, fixed and contingent
obligations of Borrower to pay principal, interest, prepayment charges,
late charges, loan fees and any other fees, charges, sums, costs and
expenses which may be owing at any time under the Note or the other Loan
Documents, as any or all of them may from time to time be modified,
amended, extended or renewed. For purposes of this Guaranty, the Loan
includes any and all such obligations which may arise in connection with
(a) Hazardous Substances, as defined in the Loan Agreement, and (b) any
advances made before recording of the Deed of Trust. If the amount
outstanding under the Loan is determined by a court of competent
jurisdiction, that determination shall be conclusive and binding on
Guarantor, regardless of whether Guarantor was a party to the proceeding in
which the determination was made or not.
3. Rights of Bank. Guarantor authorizes Bank to perform any or all of the
--------------
following acts at any time in its sole discretion, all without notice to
Guarantor and without affecting Guarantor's obligations under this
Guaranty:
(a) Bank may alter any terms of the Loan or any part of it, including
renewing, compromising, extending or accelerating, or otherwise
changing the time for payment of, or increasing or decreasing the rate
of interest on, the Loan or any part of it.
(b) Bank may take and hold security for the Loan or this Guaranty, accept
additional or substituted security for either, and subordinate,
exchange, enforce, waive, release, compromise, fail to perfect and
sell or otherwise dispose of any such security.
________________________________________________________________________________
-1-
<PAGE>
________________________________________________________________________________
(c) Bank may direct the order and manner of any sale of all or any part of
any security now or later to be held for the Loan or this Guaranty,
and Bank may also bid at any such sale.
(d) Bank may apply any payments or recoveries from Borrower, Guarantor or
any other source, and any proceeds of any security, to Borrower's
obligations under the Loan Documents in such manner, order and
priority as Bank may elect, whether or not those obligations are
guarantied by this Guaranty or secured at the time of the application.
(e) Bank may release Borrower of its liability for the Loan or any part of
it.
(f) Bank may substitute, add or release any one or more guarantors or
endorsers.
(g) In addition to the Loan, Bank may extend other credit to Borrower, and
may take and hold security for the credit so extended, all without
affecting Guarantor's liability under this Guaranty.
4. Guaranty to be Absolute. Guarantor expressly agrees that until the Loan is
-----------------------
paid and performed in full and each and every term, covenant and condition
of this Guaranty is fully performed, Guarantor shall not be released by or
because of:
(a) Any act or event which might otherwise discharge, reduce, limit or
modify Guarantor's obligations under this Guaranty;
(b) Any waiver, extension, modification, forbearance, delay or other act
or omission of Bank, or its failure to proceed promptly or otherwise
as against Borrower, Guarantor or any security;
(c) Any action, omission or circumstance which might increase the
likelihood that Guarantor may be called upon to perform under this
Guaranty or which might affect the rights or remedies of Guarantor as
against Borrower; or
(d) Any dealings occurring at any time between Borrower and Bank, whether
relating to the Loan or otherwise.
Guarantor hereby expressly waives and surrenders any defense to its
liability under this Guaranty based upon any of the foregoing acts,
omissions, agreements, waivers or matters. It is the purpose and intent of
this Guaranty that the obligations of Guarantor under it shall be absolute
and unconditional under any and all circumstances.
5. Guarantor's Waivers. Guarantor waives:
-------------------
(a) All statutes of limitations as a defense to any action or proceeding
brought against Guarantor by Bank, to the fullest extent permitted by
law;
(b) Any right it may have to require Bank to proceed against Borrower,
proceed against or exhaust any security held from Borrower, or pursue
any other remedy in Bank's power to pursue;
(c) Any defense based on any claim that Guarantor's obligations exceed or
are more burdensome than those of Borrower;
(d) Any defense based on:
(i) any legal disability of Borrower,
(ii) any release, discharge, modification, impairment or limitation
of the liability of Borrower to Bank from any cause, whether
consented to by Bank or arising by operation of law or from
any bankruptcy or other voluntary or involuntary proceeding,
in or out of court, for the adjustment of debtor-creditor
relationships ("Insolvency Proceeding") and
(iii) any rejection or disaffirmance of the Loan, or any part of it,
or any security held for it, in any such Insolvency
Proceeding;
________________________________________________________________________________
-2-
<PAGE>
________________________________________________________________________________
(e) Any defense based on any action taken or omitted by Bank in any
Insolvency Proceeding involving Borrower, including any election to
have Bank's claim allowed as being secured, partially secured or
unsecured, any extension of credit by Bank to Borrower in any
Insolvency Proceeding, and the taking and holding by Bank of any
security for any such extension of credit;
(f) All presentments, demands for performance, notices of nonperformance,
protests, notices of protest, notices of dishonor, notices of
acceptance of this Guaranty and of the existence, creation, or
incurring of new or additional indebtedness, and demands and notices
of every kind except for any demand or notice by Bank to Guarantor
expressly provided for in Section 1; and
(g) Any defense based on or arising out of any defense that Borrower may
have to the payment or performance of the Loan or any part of it.
6. Waivers of Subrogation and Other Rights.
---------------------------------------
(a) Upon a default by Borrower, Bank in its sole discretion, without prior
notice to or consent of Guarantor, may elect to:
(i) foreclose either judicially or nonjudicially against any real
or personal property security it may hold for the Loan,
(ii) accept a transfer of any such security in lieu of foreclosure,
(iii) compromise or adjust the Loan or any part of it or make any
other accommodation with Borrower or Guarantor, or
(iv) exercise any other remedy against Borrower or any security. No
such action by Bank shall release or limit the liability of
Guarantor, who shall remain liable under this Guaranty after
the action, even if the effect of the action is to deprive
Guarantor of any subrogation rights, rights of indemnity, or
other rights to collect reimbursement from Borrower for any
sums paid to Bank, whether contractual or arising by operation
of law or otherwise. Guarantor expressly agrees that under no
circumstances shall it be deemed to have any right, title,
interest or claim in or to any real or personal property to be
held by Bank or any third party after any foreclosure or
transfer in lieu of foreclosure of any security for the Loan.
(b) Regardless of whether Guarantor may have made any payments to Bank,
Guarantor forever waives:
(i) all rights of subrogation, all rights of indemnity, and any
other rights to collect reimbursement from Borrower for any
sums paid to Bank, whether contractual or arising by operation
of law (including the United States Bankruptcy Code or any
successor or similar statute) or otherwise,
(ii) all rights to enforce any remedy that Bank may have against
Borrower, and (iii) all rights to participate in any security
now or later to be held by Bank for the Loan.
7. Revival and Reinstatement. If Bank is required to pay, return or restore to
-------------------------
Borrower or any other person any amounts previously paid on the Loan
because of any Insolvency Proceeding of Borrower, any stop notice or any
other reason, the obligations of Guarantor shall be reinstated and revived
and the rights of Bank shall continue with regard to such amounts, all as
though they had never been paid.
8. Information Regarding Borrower and the Property. Before signing this
-----------------------------------------------
Guaranty, Guarantor investigated the financial condition and business
operations of Borrower, the present and former condition, uses and
ownership of the Property, and such other matters as Guarantor deemed
appropriate to assure itself of Borrower's ability to discharge its
obligations under the Loan Documents. Guarantor assumes full
responsibility for that due diligence, as well as for keeping informed of
all matters which may affect Borrower's ability to pay and perform its
obligations to Bank. Bank has no duty to disclose to Guarantor any
information which Bank may have or receive about Borrower's financial
condition or business operations, the condition or uses of the Property, or
any other circumstances bearing on Borrower's ability to perform.
________________________________________________________________________________
-3-
<PAGE>
________________________________________________________________________________
9. Subordination. Any rights of Guarantor, whether now existing or later
-------------
arising, to receive payment on account of any indebtedness (including
interest) owed to it by Borrower or any subsequent owner of the Property,
or to withdraw capital invested by it in Borrower, or to receive
distributions from Borrower, shall at all times be subordinate as to lien
and time of payment and in all other respects to the full and prior
repayment to Bank of the Loan. Guarantor shall not be entitled to enforce
or receive payment of any sums hereby subordinated until the Loan has been
paid and performed in full and any such sums received in violation of this
Guaranty shall be received by Guarantor in trust for Bank. The foregoing
notwithstanding, Guarantor is not prohibited from receiving (a) such
reasonable management fees or reasonable salary from Borrower as Bank may
find acceptable from time to time, and (b) distributions from Borrower in
an amount equal to any income taxes imposed on Guarantor which are
attributable to Borrower's income from the Property.
10. Financial Information. Guarantor shall keep true and correct financial
---------------------
books and records, using generally accepted accounting principles
consistently applied, or such other accounting principles as Bank in its
reasonable judgment may find acceptable from time to time. Guarantor shall
provide Bank Guarantor's annual CPA-audited financial statements, including
------
a year-end balance sheet and annual profit and loss statement within 90
days of fiscal year-end and shall provide copies of its 10K annually within
30 days of filing. Guarantor shall promptly provide Bank with any
additional audited financial information that Guarantor may obtain, as well
as signed copies of any tax returns and such other information concerning
its affairs and properties as Bank may reasonably request.
Guarantor represents and warrants that:
(a) all financial statements and other financial information furnished or
to be furnished to Bank are or will be true and correct and do or will
fairly represent the financial condition of Guarantor (including all
contingent liabilities);
(b) all financial statements were or will be prepared in accordance with
generally accepted accounting principles, or such other accounting
principles as may be acceptable to Bank at the time of their
preparation, consistently applied; and
(c) there has been no material adverse change in Guarantor's financial
condition since the dates of the statements most recently furnished to
Bank.
11. Events of Default. Bank may declare Guarantor to be in default under this
-----------------
Guaranty upon the occurrence of any of the following events ("Events of
Default"):
(a) Guarantor fails to perform any of its obligations under this Guaranty;
or
(b) Guarantor revokes this Guaranty or this Guaranty becomes ineffective
for any reason; or
(c) Any representation or warranty made or given by Guarantor to Bank
proves to be false or misleading in any material respect; or
(d) Guarantor becomes insolvent or the subject of any Insolvency
Proceeding; or
(e) Guarantor dissolves or liquidates, or any of these events happens to
any of Guarantor's general partners or to its chief executive or
majority shareholder.
________________________________________________________________________________
-4-
<PAGE>
________________________________________________________________________________
12. Reference and Arbitration.
-------------------------
(a) Judicial Reference. In any judicial action between or among the
------------------
parties, including any action or cause of action arising out of or
relating to this Guaranty or the Loan Documents or based on or arising
from an alleged tort, all decisions of fact and law shall at the
request of any party be referred to a referee in accordance with
California Code of Civil Procedure Sections 638 et seq. The parties
-- ---
shall designate to the court a referee or referees selected under the
auspices of the American Arbitration Association ("AAA") in the same
manner as, arbitrators are selected in AAA-sponsored proceedings. The
presiding referee of the panel, or the referee if there is a single
referee, shall be an active attorney or retired judge. Judgment upon
the award rendered by such referee or referees shall be entered in the
court in which such proceeding was commenced in accordance with
California Code of Civil Procedure Sections 644 and 645.
(b) Mandatory Arbitration. After the Deed of Trust has been released,
---------------------
fully reconveyed or extinguished, any controversy or claim between or
among the parties, including those arising out of or relating to this
Guaranty or the Loan Documents and any claim based on or arising from
an alleged tort, shall at the request of any party be determined by
arbitration. The arbitration shall be conducted in accordance with the
United States Arbitration Act (Title 9, U.S. Code), notwithstanding
any choice of law provision in this Guaranty, and under the Commercial
Rules of the AAA. The arbitrator(s) shall give effect to statutes of
limitation in determining any claim. Any controversy concerning
whether an issue is arbitrable shall be determined by the
arbitrator(s). Judgment upon the arbitration award may be entered in
any court having jurisdiction. The institution and maintenance of an
action for judicial relief or pursuit of a provisional or ancillary
remedy shall not constitute a waiver of the right of any party,
including the plaintiff, to submit the controversy or claim to
arbitration if any other party contests such action for judicial
relief.
(c) Real Property Collateral. Notwithstanding the provisions of subsection
------------------------
12(b), no controversy or claim shall be submitted to arbitration
without the consent of all parties if, at the time of the proposed
submission, such controversy or claim arises from or relates to an
obligation by Guarantor or Borrower to Bank which is secured by real
property collateral. If all parties do not consent to submission of
such a controversy or claim to arbitration, the controversy or claim
shall be determined by reference as provided in subsection 12(a).
(d) Provisional Remedies, Self-Help and Foreclosure. No provision of this
----------------------------------- -----------
Section 12 shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or
personal property collateral or security, or to obtain provisional or
ancillary remedies from a court of competent jurisdiction before,
after, or during the pendency of any arbitration or other proceeding.
The exercise of a remedy does not waive the right of either party to
resort to arbitration or reference. At Bank's option, foreclosure
under a deed of trust or mortgage may be accomplished either by
exercise of power of sale under the deed of trust or mortgage or by
judicial foreclosure.
13. Authorization; No Violation. Guarantor is authorized to execute, deliver
---------------------------
and perform under this Guaranty, which is a valid and binding obligation of
Guarantor. No provision or obligation of Guarantor contained in this
Guaranty violates any applicable law, regulation or ordinance, or any order
or ruling of any court or governmental agency. No such provision or
obligation conflicts with, or constitutes a breach or default under, any
agreement to which Guarantor is a party.
14. Additional and Independent Obligations. Guarantor's obligations under this
--------------------------------------
Guaranty are in addition to its obligations under any other existing or
future guaranties, each of which shall remain in full force and effect
until it is expressly modified or released in a writing signed by Bank.
Guarantor's obligations under this Guaranty are independent of those of
Borrower on the Loan. Bank may bring a separate action, or commence a
separate reference or arbitration proceeding against Guarantor without
first proceeding against Borrower, any other person or any security that
Bank may hold, and without pursuing any other remedy. Bank's rights under
this Guaranty shall not be exhausted by any action by Bank until the Loan
has been paid and performed in full.
________________________________________________________________________________
-5-
<PAGE>
________________________________________________________________________________
15. No Waiver; Consents; Cumulative Remedies. Each waiver by Bank must be in
----------------------------------------
writing, and no waiver shall be construed as a continuing waiver. No waiver
shall be implied from Bank's delay in exercising or failure to exercise any
right or remedy against Borrower, Guarantor or any security. Consent by
Bank to any act or omission by Borrower or Guarantor shall not be construed
as a consent to any other or subsequent act or omission, or as a waiver of
the requirement for Bank's consent to be obtained in any future or other
instance. All remedies of Bank against Borrower and Guarantor are
cumulative.
16. No Release. Guarantor shall not be released from its obligations under this
----------
Guaranty except by a writing signed by Bank.
17. Heirs, Successors and Assigns; Participations. The terms of this Guaranty
---------------------------------------------
shall bind and benefit the heirs, legal representatives, successors and
assigns of Bank and Guarantor; provided, however, that Guarantor may not
assign this Guaranty, or assign or delegate any of its rights or
obligations under this Guaranty, without the prior written consent of Bank
in each instance. Bank in its sole discretion may sell or assign
participations or other interests in the Loan and this Guaranty, in whole
or in part, all without notice to or the consent of Guarantor and without
affecting Guarantor's obligations under this Guaranty. Also without notice
to or the consent of Guarantor, Bank may disclose any and all information
in its possession concerning Guarantor, this Guaranty and any security for
this Guaranty to any actual or prospective purchaser of any securities
issued or to be issued by Bank, and to any actual or prospective purchaser
or assignee of any participation or other interest in the Loan and this
Guaranty.
18. Notices. All notices given under this Guaranty must be in writing and shall
-------
be effectively served upon delivery, or if mailed, upon the first to occur
of receipt or the expiration of forty-eight hours after deposit in
certified United States mail, postage prepaid, sent to the party at its
address given at the end of this Guaranty. Those addresses may be changed
by Bank or Guarantor by written notice to the other party. Service of any
notice on any one Guarantor signing this Guaranty shall be effective
service on Guarantor for all purposes.
19. Rules of Construction. In this Guaranty, the word "Borrower" includes both
---------------------
the named Borrower and any other person who at any time assumes or
otherwise becomes primarily liable for all or any part of the obligations
of the named Borrower on the Loan. The word "person" includes any
individual, company, trust or other legal entity of any kind. If this
Guaranty is executed by more than one person, the word "Guarantor" includes
all such persons. The word "include(s)" means "include(s), without
limitation," and the word "including" means "including, but not limited
to." When the context and construction so require, all words used in the
singular shall be deemed to have been used in the plural and vice versa. No
listing of specific instances, items or matters in any way limits the scope
or generality of any language of this Guaranty. All headings appearing in
this Guaranty are for convenience only and shall be disregarded in
construing this Guaranty.
20. Governing Law. This Guaranty shall be governed by, and construed in
-------------
accordance with, the laws of the State of California.
21. Costs and Expenses. If any lawsuit, reference or arbitration is commenced
------------------
which arises out of, or which relates to this Guaranty, the Loan Documents
or the Loan, the prevailing party shall be entitled to recover from each
other party such sums as the court, referee or arbitrator may adjudge to be
reasonable attorneys' fees (including allocated costs for services of in-
house counsel) in the action or proceeding, in addition to costs and
expenses otherwise allowed by law. In all other situations, including any
Insolvency Proceeding, Guarantor agrees to pay all of Bank's costs and
expenses, including attorneys' fees (including allocated costs for services
of Bank's in-house counsel) which may be incurred in any effort to collect
or enforce the Loan or any part of it or any term of this Guaranty. From
the time(s) incurred until paid in full to Bank, all sums shall bear
interest at the default rate provided in the Note.
22. Consideration. Guarantor acknowledges that it expects to benefit from
-------------
Bank's extension of the Loan to Borrower because of its relationship to
Borrower, and that it is executing this Guaranty in consideration of that
anticipated benefit.
________________________________________________________________________________
-6-
<PAGE>
________________________________________________________________________________
23. Integration; Modifications. This Guaranty (a) integrates all the terms and
--------------------------
conditions mentioned in or incidental to this Guaranty, (b) supersedes all
oral negotiations and prior writings with respect to its subject matter,
and (c) is intended by Guarantor and Bank as the final expression of the
agreement with respect to the terms and conditions set forth in this
Guaranty and as the complete and exclusive statement of the terms agreed to
by Guarantor and Bank. No representation, understanding, promise or
condition shall be enforceable against any party unless it is contained in
this Guaranty. This Guaranty may not be modified except in a writing signed
by both Bank and Guarantor.
24. Miscellaneous. The death or legal incapacity of any Guarantor shall not
-------------
terminate the obligations of such Guarantor or any other Guarantor under
this Guaranty, including its obligations with regard to future advances
under the Loan Documents. The liability of all persons who are in any
manner obligated under this Guaranty shall be joint and several. The
illegality or unenforceability of one or more provisions of this Guaranty
shall not affect any other provision. Any Guarantor who is married agrees
that Bank may look to all of his or her community property and separate
property to satisfy his or her obligations under this Guaranty. Time is of
the essence in the performance of this Guaranty by Guarantor.
GUARANTOR: Notices for Guarantor:
Prolong International Corporation. 6 Thomas
a Nevada corporation Irvine, CA 92618
By: /s/ Elton Alderman
------------------
Elton Alderman, Notices for Bank:
President
By: /s/ Thomas Billstein P.O. Box 1186
------------------- Rancho Cordova, CA 95741
Thomas Billstein
Secretary
_______________________________________________________________________________
-7-
<PAGE>
===============================================================================
SECURED AND UNSECURED
[LOGO OF BANK OF AMERICA APPEARS HERE] INDEMNITY AGREEMENT
________________________________________________________________________________
This Secured and Unsecured Indemnity Agreement ("Agreement") is made as of April
1, 1998, by Prolong Super Lubricants, Inc., a Nevada corporation ("Indemnitor")
in favor of Bank of America Community Development Bank and its successors and
assigns ("Bank").
Factual Background
------------------
A. Indemnitor is executing this Agreement to induce Bank to make a standing
loans the "Loan") to Indemnitor in the principal amount of One Million Six
Hundred Ninety Two Thousand and No/100 Dollars ($1,692,000.00). The Loan
is being made under the Standing Loan Agreement (the "Loan Agreement")
entered Into as of April 1, 1998, between Bank and Indemnitor.
B The Loan is evidenced by a promissory note (the "Note") made payable to
Bank in the principal amount of the Loan. The Loan is secured by a deed of
trust ("Deed of Trust") and may also be secured by other collateral, as
more fully explained in the Loan Agreement.
C. Because Bank is making the Loan and obtaining the Deed of Trust, Bank may
potentially become subject to certain costs, risks and liabilities. Among
other things, Bank may become subject to liabilities or alleged liabilities
relating to environmental conditions as an "owner" or "operator" under
applicable environmental law. These costs and liabilities may arise before
or after may arise before or after repayment of the loan, and before or
after foreclosure under the Deed of Trust. Because these costs and
liabilities, if they occur, will be the best result of Bank's agreement to
make the Loan, and in consideration of that agreement, Bank and Indemnitor
have agreed as set forth below.
I. Definitions
-----------
In addition to any terms defined elsewhere in this Agreement, as used in
this Agreement:
1.1 "Hazardous Substance" means any substance, material or waste
(including petroleum and petroleum products) which is or becomes
designated, classified or regulated as being "toxic" or "hazardous" or
a "pollutant," or which is or becomes similarly designated, classified
or regulated, under any federal, state or local law, regulation or
ordinance.
1.2 "Indemnified Costs" means all actual or threatened liabilities,
claims, actions, causes of action, judgments, orders, damages
(including foreseeable and unforeseeable consequential damages),
costs, expenses, fines, penalties and losses (including sums paid in
settlement of claims and all consultant, expert and legal fees and
expenses of Bank's counsel), including those incurred in connection
with any investigation of site conditions or any clean-up, remedial,
removal or restoration work (whether of the Property, as defined
below, or any other property), or any resulting damages, harm or
injuries to the person or property of any third parties or to any
natural resources.
1.3 "Indemnified Parties" means and includes Bank, its parent, subsidiary
and affiliated companies, assignees of any of Bank's interest in the
Loan or the Loan Documents, owners of participation or other interests
in the Loan or the Loan Documents, any purchasers of the Property at
any foreclosure sale or from Bank or any of its affiliates, and the
officers, directors, employees and agents of each of them.
1.4 "Loan Documents" means the agreements, instruments and documents
defined and designated as such in the Loan Agreement. This Agreement
is one of the Loan Documents.
1.5 "Property" means all property that is or was at any time encumbered by
the Deed of Trust, which may later include any and all property
previously released from it.
1.6 "Note Rate" means the rate of interest defined as such in the Note.
________________________________________________________________________________
-1-
<PAGE>
________________________________________________________________________________
II. Secured Indemnity Agreement
---------------------------
2.1 Claims Under Secured Agreement
-------------------------------
No Indemnified Party shall make any claim under this Article II
(except any rights asserted in a complaint for a deficiency judgment
in a then-pending judicial foreclosure action) after the earliest to
occur of:
(a) full and final repayment of the Loan; or
(b) the completion of a judicial or nonjudicial foreclosure sale
under the Deed of Trust; or
(c) the acquisition of the Property by Bank or an affiliate of Bank
by a conveyance in lieu of foreclosure.
2.2 Secured Recourse Obligation
---------------------------
All of the rights of the Indemnified Parties under this Article II
shall be secured by the Deed of Trust. Notwithstanding any provision
of the Loan Documents, the rights of the Indemnified Parties under
this Article II shall not be affected by any provision of the Loan
Documents limiting Bank's recourse or limiting indemnitor's liability
for the Loan.
2.3 Indemnity Regarding Hazardous Substances
----------------------------------------
Indemnitor Indemnifies and holds the Indemnified Parties harmless from
and against any and all Indemnified Costs directly or indirectly
arising out of or resulting from any Hazardous Substances being
present or released in, on or around any part of the Property, or in
the soil, groundwater or sell vapor on or under the Property,
including:
(a) any claim for such Indemnified Costs asserted by any federal,
state or local govermental agency, including the United States
Environmental Protection Agency and the California Department of
Health Services, and including any claim that any Idemnified
Party is liable for any such Indemnified Costs as an "owner" or
"operator" of the Property under any law relating to Hazardous
Substances; and
(b) any such Indemnified Costs claimed against any indemnified Party
by any such person other than a governmental agency, including
any person who may purchase or lease all or any portion of the
Property from Indemnitor, from any Indemnified Party, or from
any other purchaser or lessee; any person who may at any time
have any interest in all or any portion of the property; any
person who may at any time be responsible for any clean-up costs
or other indemnified Costs relating to the Property; and any
person claiming to have been injured in any way as a result of
exposure to any Hazardous Substance; and
(c) any such Indemnified Costs which any Indemnified Party
reasonably believes at any time must be incurred to comply with
any law, judgment, order, regulation or regulatory directive
relating to Hazardous Substances, or which any Indemnified Party
reasonably believes at any time must be incurred to protect the
public health or safety; and
(d) any such Indemnified Costs resulting from currently existing
conditions in, on or around the Property, whether known or
unknown by Indemnitor or the Indemified Parties at the time this
Agreement is executed, and any such Indemnified Costs resulting
from the activities of Indemnitor, Indemnitor's tenants, or any
other person in, on or around the Property.
2.4 Indemnity Regarding Construction and Other Risks
------------------------------------------------
Indemnitor Indemnifies and holds the Indemnified Parties harmless from
and against any and all Indemnified Costs directly or indirectly
arising out of or resulting from construction of any Improvements on
the Property, including any defective workmanship or materials; or any
failure to satisfy any requirements of any laws, regulations,
ordinances, govermental policies or standards, reports, subdivision
maps or development agreements that apply or pertain to the Property;
or breach of any representation or warranty made or given by
Indemnitor to any of the indemnified Parties or to any prospective or
actual buyer of all or any portion of the Property; or any claim or
cause of action of any kind by any party that any Indemnified Party is
liable for any act or omission of Indemnitor or any other person or
entity in connection with the ownership, sale, operation or
development of the Property.
________________________________________________________________________________
-2-
<PAGE>
________________________________________________________________________________
2.5 Defense of Indemnified Parties
------------------------------
Upon demand by any Indemnified Party, Indemnitor shall defend any
investigation, action or proceeding involving any Indemnified Costs
which is brought or commenced against any Indemnified Party, whether
alone or together with Indemnitor or any other person, all at
Indemnitor's own cost and by counsel to be approved by the Indemnified
Party in the exercise of its reasonable judgment. In the alternative,
any Indemnified Party may elect to conduct its own defense at the
expense of Indemnitor.
2.6 Representation and Warranty Regarding Hazardous Substances
----------------------------------------------------------
Before signing this Agreement, Indemnitor researched and inquired into
the previous uses and owners of the Property. Based on that due
diligence, Indemnitor represents and warrants that to the best of its
knowledge, no Hazardous Substance has been disposed of or released, or
otherwise now exists, in, on, under or around the Property, except as
Indemnitor has disclosed to Bank in writing.
2.7 Compliance Regarding Hazardous Substances
-----------------------------------------
Indemnitor has complied, and shall comply and cause all tenants and
any other persons who may come upon the Property to comply, with all
laws, regulations and ordinances governing or applicable to Hazardous
Substances, including those requiring disclosures to prospective and
actual buyers of all or any portion of the Property. Indemnitor also
has complied and shall comply with the recommendations of any
qualified environmental engineer or other expert which apply or
pertain to the Property.
2.8 Notices Regarding Hazardous Substances
--------------------------------------
Indemnitor shall promptly notify Bank if it knows, suspects or
believes there may be any Hazardous Substance in or around the
Property, or in the soil, groundwater or soil vapor on or under the
Property, or that Indemnitor or the Property may be subject to any
threatened or pending investigation by any governmental agency under
any law, regulation or ordinance pertaining to any Hazardous
Substance.
2.9 Site Visits, Observations and Testing
-------------------------------------
The Indemnified Parties and their agents and representatives shall
have the right at any reasonable time to enter and visit the Property
for the purposes of observing the Property, taking and removing soil
or groundwater samples, and conducting tests on any part of the
Property. The Indemnified Parties have no duty, however, to visit or
observe the Property or to conduct tests, and no site visit,
observation or testing by any Indemnified Party shall impose any
liability on any Indemnified Party. In no event shall any site visit,
observation or testing by any Indemnified Party be a representation
that Hazardous Substances are or are not present in, on or under the
Property, or that there has been or shall be compliance with any law,
regulation or ordinance pertaining to Hazardous Substances or any
other applicable governmental law. Neither Indemnitor nor any other
party is entitled to rely on any site visit, observation or testing by
any Indemnified Party. The Indemnified Parties owe no duty of care to
protect Indemnitor or any other party against, or to inform Indemnitor
or any other party of, any Hazardous Substances or any other adverse
condition affecting the Property. Any Indemnified Party shall give
Indemnitor reasonable notice before entering the Property. The
Indemnified Party shall make reasonable efforts to avoid interfering
with Indemnitor's use of the Property in exercising any rights
provided in this Section.
2.10 Costs and Expenses
------------------
Indemnitor agrees to pay all of the Indemnified Parties' costs and
expenses, including attorneys' fees, which may be incurred in any
effort to enforce any term of this Agreement, including all such costs
and expenses which may be incurred by any Indemnified Party in any
legal action, reference or arbitration proceeding. From the time(s)
incurred until paid in full to the Indemnified Party, those sums shall
bear interest at the Note Rate.
III Unsecured Indemnity Agreement
-----------------------------
3.1 Claims Under Unsecured Agreement
--------------------------------
No Indemnified Party shall make any claim under this Article III for
indemnity against any Indemnified
Cost:
________________________________________________________________________________
-3-
<PAGE>
________________________________________________________________________________
(a) which was actually known to the Indemnified Party prior to the
first to occur of:
(i) full and final repayment of the Loan; or
(ii) the completion of a judicial or nonjudicial foreclosure
sale under the Deed of Trust; or
(iii) the acquisition of the Property by Bank or an affiliate of
Bank by a conveyance in lieu of foreclosure; and
(b) which could have been lawfully and properly included as part of
the secured indebtedness under the Deed of Trust in proceedings
for a deficiency judgment following a judicial foreclosure sale
of the Property.
3.2 Not Secured By Deed of Trust
----------------------------
Notwithstanding any provision of the Loan Agreement, the Deed of Trust
or any of the Loan Documents, the rights of the Indemnified Parties
under this Article III shall not be secured by the Deed of Trust.
Notwithstanding any provision of the Loan Documents, the rights of the
Indemnified Parties under this Article III shall not be affected by
any provision of the Loan Documents limiting Bank's recourse or
limiting Indemnitor's liability for the Loan.
3.3 Indemnity Regarding Hazardous Substances
----------------------------------------
Indemnitor indemnifies and holds the Indemnified Parties harmless from
and against any and all Indemnified Costs directly or indirectly
arising out of or resulting from any Hazardous Substance being present
or released in, on or around any part of the Property, or in the soil,
groundwater or soil vapor on or under the Property, including:
(a) any claim for such Indemnified Costs asserted by any federal,
state or local governmental agency, including the United States
Environmental Protection Agency and the California Department of
Health Services, and including any claim that any Indemnified
Party is liable for any such Indemnified Costs as an "owner" or
"operator" of the Property under any law relating to Hazardous
Substances; and
(b) any such Indemnified Costs claimed against any Indemnified Party
by any person other than a governmental agency, including any
person who may purchase or lease all or any portion of the
Property from Indemnitor, from any Indemnified Party, or from
any other purchaser or lessee; any person who may at any time
have any interest in all or any portion of the Property; any
person who may at any time be responsible for any clean-up costs
or other Indemnified Costs relating to the Property; and any
person claiming to have been injured in any way as a result of
exposure to any Hazardous Substance; and
(c) any such Indemnified Costs which any Indemnified Party
reasonably believes at any time must be incurred to comply with
any law, judgment, order, regulation or regulatory directive
relating to Hazardous Substances, or which any Indemnified Party
reasonably believes at any time must be incurred to protect the
public health or safety; and
(d) any such Indemnified Costs resulting from currently existing
conditions in, on or around the Property, whether known or
unknown by Indemnitor or the Indemnified Parties at the time
this Agreement is executed, and any such Indemnified Costs
resulting from the activities of Indemnitor, Indemnitor's
tenants, or any other person in, on or around the Property.
3.4 Indemnity Regarding Construction and Other Risks
------------------------------------------------
Indemnitor indemnifies and holds the Indemnified Parties harmless from
and against any and all Indemnified Costs directly or indirectly
arising out of or resulting from construction of any improvements on
the Property, including any defective workmanship or materials; or any
failure to satisfy any requirements of any laws, regulations,
ordinances, governmental policies or standards, reports, subdivision
maps or development agreements that apply or pertain to the Property;
or breach of any representation or warranty made or given by
Indemnitor to any of the Indemnified Parties or to any prospective or
actual buyer of all or any portion of the Property; or any claim or
cause of action of any kind by any party that any Indemnified Party is
liable for any act or omission of Indemnitor or any other person or
entity in connection with the ownership, sale, operation or
development of the Property.
________________________________________________________________________________
-4-
<PAGE>
________________________________________________________________________________
3.5 Defense of Indemnified Parties
------------------------------
Upon demand by any Indemnified Party, Indemnitor shall defend any
investigation, action or proceeding involving any Indemnified Costs
which is brought or commenced against any Indemnified Party, whether
alone or together with Indemnitor or any other person, all at
Indemnitor's own cost and by counsel to be approved by the Indemnified
Party in the exercise of its reasonable judgment. In the alternative,
any Indemnified Party may elect to conduct its own defense at the
expense of Indemnitor.
3.6 Representation and Warranty Regarding Hazardous Substances
----------------------------------------------------------
Before signing this Agreement, Indemnitor researched and inquired into
the previous uses and owners of the Property. Based on that due
diligence, Indemnitor represents and warrants that to the best of its
knowledge, no Hazardous Substance has been disposed of or released, or
otherwise now exists, in, on, under or around the Property, except as
Indemnitor has disclosed to Bank in writing.
3.7 Compliance Regarding Hazardous Substances
-----------------------------------------
Indemnitor has complied, and shall comply and cause all tenants and
any other persons who may come upon the Property to comply, with all
laws, regulations and ordinances governing or applicable to Hazardous
Substances, including those requiring disclosures to prospective and
actual buyers of all or any portion of the Property. Indemnitor also
has complied and shall comply with the recommendations of any
qualified environmentaI engineer or other expert which apply or
pertain to the Property.
3.8 Notices Regarding Hazardous Substances
--------------------------------------
Indemnitor shall promptly notify Bank if it knows, suspects or
believes there may be any Hazardous Substance in or around the
Property, or in the soil, groundwater or soil vapor on or under the
Property, or that Indemnitor or the Property may be subject to any
threatened or pending investigation by any governmental agency under
any law, regulation or ordinance pertaining to any Hazardous
Substance.
3.9 Site Visits, Observations and Testing
-------------------------------------
The Indemnified Parties and their agents and representatives shall
have the right at any reasonable time to enter and visit the Property
for the purposes of observing the Property, taking and removing soil
or groundwater samples, and conducting tests on any part of the
Property. The Indemnified Parties have no duty, however, to visit or
observe the Property or to conduct tests, and no site visit,
observation or testing by any Indemnified Party shall impose any
liability on any Indemnified Party. In no event shall any site visit,
observation or testing by any Indemnified Party be a representation
that Hazardous Substances are or are not present in, on or under the
Property, or that there has been or shall be compliance with any law,
regulation or ordinance pertaining to Hazardous Substances or any
other applicable governmental law. Neither Indemnitor nor any other
party is entitled to rely on any site visit, observation or testing by
any Indemnified Party. The Indemnified Parties owe no duty of care to
protect Indemnitor or any other party against, or to inform Indemnitor
or any other party of, any Hazardous Substances or any other adverse
condition affecting the Property. Any Indemnified Party shall give
Indemnitor reasonable notice before entering the Property. The
Indemnified Party shall make reasonable efforts to avoid interfering
with Indemnitor's use of the Property in exercising any rights
provided in this Section.
3.10 Costs and Expenses
------------------
Indemnitor agrees to pay all of the Indemnified Parties' costs and
expenses, including attorneys' fees, which may be incurred in any
effort to enforce any term of this Agreement, including all such costs
and expenses which may be incurred by any Indemnified Party in any
legal action, reference or arbitration proceeding. From the time(s)
incurred until paid in full to the Indemnified Party, those sums
shall bear interest at the Note Rate.
________________________________________________________________________________
-5-
<PAGE>
________________________________________________________________________________
IV. General Provisions
------------------
4.1 Events of Default
-----------------
Bank may declare Indemnitor to be in default under this Agreement upon
the occurrence of any of the following events ("Events of Default"):
(a) Indemnitor fails to perform any of its obligations under this
Agreement; or
(b) Indemnitor revokes this Agreement or this Agreement becomes
ineffective for any reason.
4.2 Reservation of Other Rights and Remedies
----------------------------------------
Nothing in this Agreement shall be construed to limit any claim or
right which any Indemnified Party may otherwise have at any time
against Indemnitor or any other person arising from any source other
than this Agreement, including any claim for fraud, misrepresentation,
waste or breach of contract other than this Agreement, and any rights
of contribution or indemnity under federal or state environmental law
or any other applicable law, regulation or ordinance.
4.3 Delay; Cumulative Remedies
--------------------------
If any Indemnified Party delays in exercising or fails to exercise any
right or remedy against Indemnitor, that alone shall not be construed
as a waiver of such right or remedy. All remedies of any Indemnified
Party against Indemnitor are cumulative.
4.4 Rules of Construction
---------------------
In this Agreement, the word "person" includes any individual, company,
trust or other legal entity of any kind. If this Agreement is executed
by more than one person, the word "Indemnitor" includes all such
persons. The word "include(s)" means "include(s), without limitation,"
and the word "including" means "including, but not limited to." When
the context and construction so require, all words used in the
singular shall be deemed to have been used in the plural and vice
versa. All headings appearing in this Agreement are for convenience
only and shall be disregarded in construing this Agreement.
4.5 Reference and Arbitration
-------------------------
(a) Judicial Reference
------------------
In any judicial action between or among the parties, including
any action or cause of action arising out of or relating to this
Agreement or the Loan Documents or based on or arising from an
alleged tort, all decisions of fact and law shall at the request
of any party be referred to a referee in accordance with
California Code of Civil Procedure Sections 638 et seq. The
-- ---
parties shall designate to the court a referee or referees
selected under the auspices of the American Arbitration
Association ("AAA") in the same manner as arbitrators are
selected in AAA-sponsored proceedings. The presiding referee of
the panel, or the referee if there is a single referee, shall be
an active attorney or retired judge. Judgment upon the award
rendered by such referee or referees shall be entered in the
court in which such proceeding was commenced in accordance with
California Code of Civil Procedure Sections 644 and 645.
(b) Mandatory Arbitration
---------------------
After the Deed of Trust has been released, fully reconveyed or
extinguished, any controversy or claim between or among the
parties, including those arising out of or relating to this
Agreement or the Loan Documents and any claim based on or
arising from an alleged tort, shall at the request of any party
be determined by arbitration. The arbitration shall be conducted
in accordance with the United States Arbitration Act (Title 9,
U.S. Code), notwithstanding any choice of law provision in this
Agreement, and under the Commercial Rules of the AAA. The
arbitrator(s) shall give effect to statutes of limitation in
determining any claim. Any controversy concerning whether an
issue is arbitrable shall be determined by the arbitrator(s).
Judgment upon the arbitration award may be entered in any court
having jurisdiction. The institution and maintenance of an
action for judicial relief or pursuit of a provisional or
ancillary remedy shall not constitute a waiver of the right of
any party, including the plaintiff, to submit the controversy or
claim to arbitration if any other party contests such action for
judicial relief.
________________________________________________________________________________
-6-
<PAGE>
________________________________________________________________________________
(c) Real Property Collateral
------------------------
Notwithstanding the provisions of subsection 4.5(b), no
controversy or claim shall be submitted to arbitration without
the consent of all parties if, at the time of the proposed
submission, such controversy or claim arises from or relates to
an obligation to Bank which is secured by real property
collateral. If all parties do not consent to submission of such
a controversy or claim to arbitration, the controversy or claim
shall be determined by reference as provided in subsection
4.5(a).
(d) Provisional Remedies, Self-Help and Foreclosure
-----------------------------------------------
No provision of this Section 4.5 shall limit the right of any
party to this Agreement to exercise self-help remedies such as
setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or
ancillary remedies from a court of competent jurisdiction
before, after, or during the pendency of any arbitration or
other proceeding. The exercise of a remedy does not waive the
right of either party to resort to arbitration or reference. At
Bank's option, foreclosure under a deed of trust or mortgage may
be accomplished either by exercise of power of sale under the
deed of trust or mortgage or by judicial foreclosure.
4.6 Severability
------------
Every provision of this Agreement is intended to be severable. In the
event any term, provision, section or subsection of this Agreement is
declared to be illegal or invalid, for any reason whatsoever, by a
court of competent jurisdiction, such illegality or invalidity shall
not affect the other terms, provisions, sections or subsections of
this Agreement, which shall remain binding and enforceable.
4.7 In-House Counsel Fees
---------------------
Whenever Indemnitor is obligated to pay or reimburse any Indemnified
Party for any attorneys' fees, those fees shall include the allocated
costs for services of in-house counsel.
4.8 Integration; Modifications
--------------------------
The Loan Documents, including this Agreement, (a) integrate all the
terms and conditions mentioned in or incidental to this Agreement, (b)
supersede all oral negotiations and prior writings with respect to
their subject matter, and (c) are intended by the parties as the final
expression of the agreement with respect to the terms and conditions
set forth in the Loan Documents and as the complete and exclusive
statement of the terms agreed to by the parties. No representation,
understanding, promise or condition shall be enforceable against any
party unless it is contained in the Loan Documents. This Agreement may
not be modified except in a writing signed by both Bank and
Indemnitor.
________________________________________________________________________________
-7-
<PAGE>
________________________________________________________________________________
4.9 Miscellaneous
-------------
The provisions of this Agreement shall bind and benefit the heirs,
executors, administrators, legal representatives, successors and
assigns of Indemnitor and the Indemnified Parties; provided, however,
that Indemnitor may not assign this Agreement, or assign or delegate
any of its rights or obligations under this Agreement, without the
prior written consent of Bank in each instance. The liability of all
persons who are in any manner obligated under this Agreement shall be
joint and several. Any lndemnitor who is married agrees that any
Indemnified Party may look to all of his or her community property and
separate property to satisfy his or her obligations under this
Agreement. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California.
Indemnitor:
Prolong Super Lubricants, Inc.
a Nevada Corporation
By: /s/ Elton Alderman
------------------
Elton Alderman,
President
By: /s/ Thomas Billstein
--------------------
Thomas Billstein,
Secretary
Address where notices to lndemnitor are to be sent:
6 Thomas
Irvine, CA 92618
________________________________________________________________________________
-8-
<PAGE>
EXHIBIT 10.21
================================================================================
AGREEMENT FOR BRIDGE LOAN
[LOGO OF BANK OF AMERICA APPEARS HERE]
________________________________________________________________________________
This Agreement is entered into as of April 1, 1998 among BANK OF AMERICA
COMMUNITY DEVELOPMENT BANK and its successors and assigns ("Bank") and Prolong
Super Lubricants, Inc., a Nevada corporation ("Borrower").
Recitals
--------
A. Bank and Borrower have entered into a certain Standing Loan Agreement dated
as of April 1, 1998 (the Standing Loan Agreement").
B. Pursuant to the terms of the Standing Loan Agreement, Bank has agreed to
make a loan to Borrower in the principal amount of One Million Six Hundred
Ninety Two Thousand and No/100 Dollars $1,692,000.00 (the "Real Estate
Loan"). The Real Estate Loan will be used to finance a portion of the
purchase price of certain real property located at 6 Thomas, Irvine,
California, 92618 (together with all improvements now or hereafter located
thereon, the "Property"). The Real Estate Loan will be secured by a first
deed of trust (the First Deed of Trust") on the Property.
C. The balance of long term financing required in connection with the purchase
of the Property will be provided through the issuance of debentures (the
"Debentures") guaranteed by the U. S. Small Business Administration ("SBA")
pursuant to a Section 504 Authorization and Debenture Guaranty issued by
the SBA on February 2, 1998, as amended.
D. Pending issuance of the Debentures, Borrower has requested Bank to provide
a short term loan in the amount of Seven Hundred Twenty Nine Thousand and
No/100 Dollars $729,000.00 to finance a portion of the purchase price of
the Property. The short term loan will be repaid with the net proceeds from
the issuance of the Debentures.
E. Bank and Borrower hereby enter into this Agreement to set forth the terms
and conditions upon which Bank will make the short term loan requested by
Borrower.
Agreement
---------
1. Bank shall make a short term loan to Borrower in the principal amount of
Seven Hundred Twenty Nine Thousand and No/100 Dollars $729,000.00 (the
Bridge Loan"). Borrower shall use the Bridge Loan, in combination with the
Real Estate Loan to Borrower. The Bridge Loan will be evidenced by a
promissory note (the "Bridge Loan Note") payable to Bank in the original
principal amount of the Bridge Loan and will be secured by a second deed
of trust (the "Second Deed of Trust") on the Property. The interest rate
and payment terms applicable to the Bridge Loan are set forth in the Bridge
Loan Note.
2. Bank shall not be required to disburse the Bridge Loan to Borrower until
the following conditions are satisfied:
(a) Borrower has delivered to Bank duly executed and acknowledged, as
appropriate, originals of this Agreement, the Bridge Loan Note, and
the Second Deed of Trust.
(b) All conditions to disbursement of the Real Estate Loan set forth in
the Standing Loan Agreement have been satisfied.
(c) Borrower has provided an ALTA title insurance policy insuring Bank
that the Second Deed of Trust constitutes a valid and enforceable lien
on the Property subject and subordinate only to the First Deed of
Trust and to such liens or other matters as Bank has approved in
writing.
(d) Borrower has delivered to Bank a Payment Guaranty executed by Prolong
International Corporation, a Nevada corporation in the principal
amount of Seven Hundred Twenty Nine Thousand and No/100 Dollars
$729,000.00.
________________________________________________________________________________
-1-
<PAGE>
(e) Borrower has paid Bank a loan fee in the amount of One Thousand and
No/100 Dollars $1,000.00.
In Witness Whereof, Bank and Borrower have executed this Agreement as of the day
and year first above written.
BORROWER:
Prolong Super Lubricants Inc.
a Nevada corporation
By: /s/ Elton Alderman
---------------------------
Elton Alderman,
President
By: /s/ Thomas Billstein
---------------------------
Thomas Billstein,
Secretary
________________________________________________________________________________
-2-
<PAGE>
================================================================================
[LOGO OF BANK OF AMERICA] PROMISSORY NOTE
REFERENCE RATE RELATED
________________________________________________________________________________
$729,000.00 Loan Number: 31243
April 1, 1998 SBA Loan Number: CDC-L-GP-181-809-40-01-CA
Rancho Cordova, California
1. BORROWER'S PROMISE TO PAY
A. For value received, the undersigned ("Borrower") promises to pay to the
order of BANK OF AMERICA COMMUNITY DEVELOPMENT BANK ("Bank") at Bank's
Office at 10850 White Rock Road, Suite 101, Rancho Cordova, California,
-------------------------------------------------------------
95670 the principal sum of Seven Hundred Twenty Nine Thousand and No/100
-----
Dollars ($729,000.00), plus interest, on August 1, 1998 ("Maturity Date").
B. This Note evidences a loan from Bank to Borrower made for the purpose of
financing a portion of the purchase price of certain real property located
at 6 Thomas, Irvine, California 92618 (the "Property"), as more fully
described in an Agreement for Bridge Loan between Bank and Borrower dated
April 1, 1998. This Note will be secured by a second deed of trust on the
Property.
2. INTEREST RATE AND PAYMENT TERMS
A. Principal of this Note shall bear interest at a rate per year equal to the
rate of interest publicly announced from time to time by Bank of America
National Trust and Savings Association, an affiliate of Bank
("Affiliate"), in San Francisco, California, as its reference rate, plus
one and three-quarters percentage (1.75%) points. (The reference rate is
set by Affiliate based on various factors, including Affiliate's costs and
desired return, general economic conditions and other factors, and is used
as a reference point for pricing some loans. Loans may be priced at, above
or below the reference rate.) Any change in the interest rate of this Note
shall take effect at the opening of business on the day specified in the
public announcement of a change in said reference rate. The amount of each
year's interest on the Note will be calculated on the basis of a 360 day
year and the actual number of days principal has been outstanding. This
results in more interest than if a 365 day year is used.
B. Borrower shall make interest-only payments on June 1, 1998 and on the 1st
---
day of each month thereafter, and upon payment in full of principal of
this Note. Borrower shall pay all principal and accrued interest on or
before the Maturity Date.
3. EVENTS OF DEFAULT
If any of the following events occur, at the option of Bank, exercisable in
its sole discretion, all principal and interest of this Note shall become
immediately due and payable without notice of default, presentment or demand
for payment, protest or notice of nonpayment or dishonor, or other notices or
demands of any kind or character:
(a) Borrower fails to perform any obligation under this Note to pay principal
or interest, and does not cure that failure within ten (10) days after
the date when due; or
(b) An Event of Default occurs under (and as defined in) that certain
Standing Loan Agreement dated as of April 1, 1998 between Bank and
Borrower.
________________________________________________________________________________
-1-
<PAGE>
________________________________________________________________________________
4. DEFAULT RATE; COMPOUNDING
A. From and after the stated maturity of this Note, or such earlier date as
all sums owing on this Note become due and payable by acceleration or
otherwise, all sums owing on this Note, at the option of Bank, shall bear
interest until paid in full at three (3) percentage points above the rate
at which interest would otherwise accrue under this Note.
B. Any accrued interest under this Note, if not paid when due, shall bear
interest (payable on demand) at the rate of interest applicable to the
principal of this Note.
5. MISCELLANEOUS
A. All amounts payable under this Note are payable in lawful money of the
United States. Checks constitute payment only when collected.
B. Borrower agrees to pay or reimburse Bank immediately upon demand for all
costs incurred in collecting on this Note, including all attorneys' fees
(including allocated expenses for services of in-house attorneys). In any
action or reference or arbitration proceeding is instituted to enforce
this Note, the prevailing party shall be entitled to such sums as the
court, referee or arbitrator may adjudge to be reasonable attorneys' fees
in the action or proceeding (including allocated expenses for services of
in house attorneys), in addition to costs and expenses otherwise allowed
by law.
C. This Note is governed by the laws of the State of California.
D. This Note inures to and binds the heirs, successors and assigns of
Borrower and Bank. Bank may assign its rights under this Note. However,
Borrower may not assign any rights under this Note without Bank's prior
written consent.
E. If more than one person or entity are signing this Note, their obligations
under this Note will be joint and several.
IN WITNESS WHEREOF, Borrower has duly executed and delivered this Note to Bank
as of the date first above written.
Borrower:
Prolong Super Lubricants, Inc.
a Nevada corporation
By: /s/ Elton Alderman
------------------
Elton Alderman,
President
By: /s/ Thomas Billstein
--------------------
Thomas Billstein,
Secretary
________________________________________________________________________________
-2-
<PAGE>
[LETTERHEAD OF BANK OF AMERICA]
DEED OF TRUST, ASSIGNMENT OF RENTS
AND FIXTURE FILING
[_] If this box is checked, this document is a CONSTRUCTION TRUST DEED securing
a construction loan.
This Deed of Trust is made as of April 1, 1998, by Prolong Super Lubricants,
------------- -------------------------
Inc., a Nevada corporation, as trustor ("Trustor"), to EQUITABLE DEED COMPANY,
- --------------------------
a California corporation, as trustee ("Trustee"), for the benefit of BANK OF
AMERICA COMMUNITY DEVELOPMENT BANK, a California state-chartered bank, as
beneficiary ("Beneficiary"). Trustee is a subsidiary of an affiliate of
Beneficiary.
1. GRANT IN TRUST
1.1 The Property. For the purpose of securing payment and performance of the
Secured Obligations defined in Section 2 below, Trustor hereby
irrevocably and unconditionally grants, conveys, transfers and assigns to
Trustee, in trust for the benefit of Beneficiary, with power of sale and
right of entry and possession, all estate, right, title and interest
which Trustor now has or may later acquire in the following property
(collectively, the "Property"):
(a) The real property located in the County of Orange, State of
California, as described in Exhibit "A" hereto;
(b) All buildings, structures, improvements, fixtures and appurtenances
now or hereafter placed on such real property, and all apparatus and
equipment now or hereafter attached in any manner to the real
property or any building on the real property, including all pumping
plants, engines, pipes, ditches and flumes, and also all gas,
electric, cooking, heating, cooling, air conditioning, lighting,
refrigeration and plumbing fixtures and equipment, all of which
shall be considered to the fullest extent of the law to be real
property for purposes of this Deed of Trust;
(c) All easements and rights of way appurtenant to such real property;
all crops (growing or to be grown on such real property); all
standing timber upon such real property; all development rights or
credits and air rights, all water and water rights (whether
riparian, appropriative, or otherwise, and whether or not
appurtenant to such real property) and shares of stock pertaining to
such water or water rights, ownership of which affect such real
property; all minerals, oil, gas, and other hydrocarbon substances
and rights thereto in, on, under, or upon such real property;
(d) All existing and future leases, subleases, subtenancies, licenses,
occupancy agreements and concessions relating to the use and
enjoyment of all or any part of such real property, and any and all
guaranties and other agreements relating to or made in connection
with any of the foregoing;
(e) All proceeds, including all claims to and demands for them, of the
voluntary or involuntary conversion of any of the real property,
buildings or the other property described above into cash or
liquidated claims, including proceeds of all present and future
fire, hazard or casualty insurance policies and all condemnation
awards or payments now or later to be made by any public body or
decree by any court of competent jurisdiction for any taking or in
connection with any condemnation or eminent domain proceeding, and
all causes of action and their proceeds for any breach of warranty,
misrepresentation, damage or injury to, or defect in, the real
property, buildings or the other property described above or any
part of them; and
(f) All proceeds of, additions and accretions to, substitutions and
replacements for, and changes in any of the property described
above.
________________________________________________________________________________
-1-
<PAGE>
1.2 Fixture Filing. This Deed of Trust constitutes a financing statement
filed as a fixture filing under Section 9402(6) of the California
Uniform Commercial Code, as amended or recodified from time to time,
covering any Property which now is or later may become a fixture
attached to the real property described in Paragraph 1.1(a) or any
building located thereon.
2. THE SECURED OBLIGATIONS
2.1 Purpose of Securing. Trustor makes the grant, conveyance, transfer and
assignment set forth in Section 1 for the purpose of securing the
following obligations (the "Secured Obligations") in any order of
priority that Beneficiary may choose:
(a) Payment of all obligations of Trustor ("Obligor") to Beneficiary
-------
arising under the instrument(s) or agreement(s) described below (the
"Debt Instrument"):
[X] a promissory note dated as of April 1, 1998, payable by Obligor
-------------
as maker in the stated principal amount of Seven Hundred Twenty
--------------------
Nine Thousand and No/100 Dollars ($729,000.00) to the order of
------------------------ -----------
Beneficiary.
[X] a certain Agreement for Bridge Loan dated as of April 1, 1998,
------------------------- -------------
between Obligor and Beneficiary which provides for extensions
of credit in a principal amount not exceeding Seven Hundred
-------------
Twenty Nine Thousand and No/100 Dollars ($729,000.00).
------------------------------- -----------
[_] a certain N/A Guaranty dated N/A, in the principal amount of
--- ---
-0- Dollars ($-0-) given by Obligor to Beneficiary in
--- ---
support of the obligations of N/A to Beneficiary.
---
[_] (Describe).
This Deed of Trust also secures payment of all obligations of
Obligor under the Debt Instrument which arise after the Debt
Instrument is extended, renewed, modified or amended pursuant to any
written agreement between Obligor and Beneficiary, and all
obligations of Obligor under any successor agreement or instrument
which restates and supersedes the Debt instrument in its entirety.
(b) Payment and performance of all obligations of Trustor under this
Deed of Trust; and
(c) Payment and performance of all future advances and other obligations
that Trustor (or any successor in interest to Trustor) or Obligor
(if different from Trustor) may agree to pay and/or perform (whether
as principal, surety or guarantor) to or for the benefit of
Beneficiary, when a writing signed by Trustor (or any successor in
interest to Trustor) evidences said parties' agreement that such
advance or obligation be secured by this Deed of Trust.
This Deed of Trust does not secure any obligation which expressly states
that it is unsecured, whether contained in the foregoing Debt Instrument
or in any other document, agreement or instrument.
2.2 Terms of Secured Obligations. All persons who may have or acquire an
interest in all or any part of the Property will be considered to have
notice of, and will be bound by, the terms of the Debt Instrument
described in Paragraph 2.1(a) and each other agreement or instrument
made or entered into in connection with each of the Secured Obligations.
The Debt Instrument, among other things, provides for the following:
[_] a revolving line of credit to Obligor pursuant to which Obligor may
borrow, repay extensions of credit, and re-borrow amounts which have
been repaid. The unpaid balance of the revolving line of credit may
at certain times be zero. A zero balance does not affect
Beneficiary's agreement to make further extensions of credit under
the Debt Instrument. Beneficiary's interest under this Deed of Trust
will remain in full force and effect notwithstanding a zero balance
under the revolving line of credit.
[X] an interest rate which may vary from time to time on one or more of
the obligations arising under the Debt Instrument.
3. ASSIGNMENT OF RENTS
3.1 Assignment. Trustor hereby irrevocably, absolutely, presently and
unconditionally assigns to Beneficiary all rents, royalties, issues,
profits, revenue, income and proceeds of the Property, whether now due,
past due or to become due, including all prepaid rents and security
deposits (collectively, the "Rents"), and confers upon Beneficiary the
right to collect such Rents with or without taking possession of the
Property. In the event that anyone establishes and exercises any right
to develop, bore for or mine for
________________________________________________________________________________
-2-
<PAGE>
any water, gas, oil or mineral on or under the surface of the Property,
any sums that may become due and payable to Trustor as bonus or royalty
payments, and any damages or other compensation payable to Trustor in
connection with the exercise of any such rights, shall also be
considered Rents assigned under this Paragraph. This is an absolute
assignment, not an assignment for security only.
3.2 Grant of License. Notwithstanding the provisions of Paragraph 3.1,
Beneficiary hereby confers upon Trustor a license ("License") to collect
and retain the Rents as they become due and payable, so long as no Event
of Default, as defined in Paragraph 5.2. shall exist and be continuing.
If an Event of Default has occurred and is continuing. Beneficiary shall
have the right, which it may choose to exercise in its sole discretion,
to terminate this License without notice to or demand upon Trustor, and
without regard to the adequacy of the security for the Secured
Obligations.
4. RIGHTS AND DUTIES OF THE PARTIES
4.1 Representations and Warranties. Trustor represents and warrants that
Trustor lawfully possesses and holds fee simple title to all of the
Property, unless Trustor's present interest in the Property is described
in Exhibit A as a leasehold interest, in which case Trustor lawfully
possesses and holds a leasehold interest in the Property as stated in
Exhibit A.
4.2 Taxes, Assessments, Liens and Encumbrances. Trustor shall pay prior to
delinquency all taxes, levies, charges and assessments, including
assessments on appurtenant water stock, imposed by any public or quasi-
public authority or utility company which are (or if not paid, may
become) a lien on all or part of the Property or any interest in it, or
which may cause any decrease in the value of the Property or any part of
it. Trustor shall immediately discharge any lien on the Property which
Beneficiary has not consented to in writing, and shall also pay when due
each obligation secured by or reducible to a lien, charge or encumbrance
which now or hereafter encumbers or appears to encumber all or part of
the Property, whether the lien, charge or encumbrance is or would be
senior or subordinate to this Deed of Trust.
4.3 Damages and Insurance and Condemnation Proceeds.
(a) Trustor hereby absolutely and irrevocably assigns to Beneficiary,
and authorizes the payor to pay to Beneficiary, the following
claims, causes of action, awards, payments and rights to payment
(collectively, the "Claims"):
(i) all awards of damages and all other compensation payable
directly or indirectly because of a condemnation, proposed
condemnation or taking for public or private use which
affects all or part of the Property or any interest in it;
(ii) all other awards, claims and causes of action, arising out
of any breach of warranty or misrepresentation affecting all
or any part of the Property, or for damage or injury to, or
defect in, or decrease in value of all or part of the
Property or any interest in it;
(iii) all proceeds of any insurance policies payable because of
loss sustained to all or part of the Property; and
(iv) all interest which may accrue on any of the foregoing.
(b) Trustor shall immediately notify Beneficiary in writing if:
(i) any damage occurs or any injury or loss is sustained to all
or part of the Property, or any action or proceeding
relating to any such damage, injury or loss is commenced; or
(ii) any offer is made, or any action or proceeding is commenced,
which relates to any actual or proposed condemnation or
taking of all or part of the Property.
If Beneficiary chooses to do so, it may in its own name appear in
or prosecute any action or proceeding to enforce any cause of
action based on breach of warranty or misrepresentation, or for
damage or injury to, defect in, or decrease in value of all or part
of the Property, and it may make any compromise or settlement of
the action or proceeding. Beneficiary, if it so chooses, may
participate in any action or proceeding relating to condemnation or
taking of all or part of the Property, and may join Trustor in
adjusting any loss covered by insurance.
(c) All proceeds of the Claims assigned to Beneficiary under this
Paragraph shall be paid to Beneficiary. In each instance,
Beneficiary shall apply those proceeds first toward reimbursement
of all of Beneficiary's costs and expenses of recovering the
proceeds, including attorneys' fees. Trustor further authorizes
Beneficiary, at Beneficiary's option and in Beneficiary's sole
discretion, and regardless of whether there is any impairment of
the Property, (i) to apply the balance of such proceeds, or any
portion of them, to pay or prepay some or all of the Secured
Obligations in such order or proportion as Beneficiary may
determine, or (ii) to hold the balance of such proceeds, or any
portion of them, in a non-interest-bearing account to be used for
the cost of reconstruction, repair or alteration of the Property,
or (iii) to release the balance of such proceeds, or any portion
________________________________________________________________________________
-3-
<PAGE>
of them, to Trustor. If any proceeds are released to Trustor,
neither Beneficiary nor Trustee shall be obligated to see to,
approve or supervise the proper application of such proceeds. If
the proceeds are held by Beneficiary to be used to reimburse
Trustor for the costs of restoration and repair of the Property,
the Property shall be restored to the equivalent of its original
condition, or such other condition as Beneficiary may approve in
writing. Beneficiary may, at Beneficiary's option, condition
disbursement of the proceeds on Beneficiary's approval of such
plans and specifications prepared by an architect satisfactory to
Beneficiary, contractor's cost estimates, architect's
certificates, waivers of liens, sworn statements of mechanics and
materialmen, and such other evidence of costs, percentage of
completion of construction, application of payments, and
satisfaction of liens as Beneficiary may reasonably require.
4.4 Insurance. Trustor shall provide and maintain in force at all times all
risk property damage insurance on the Property and such other type of
insurance on the Property as may be required by Beneficiary in its
reasonable judgment. At Beneficiary's request, Trustor shall provide
Beneficiary with a counterpart original of any policy, together with a
certificate of insurance setting forth the coverage, the limits of
liability, the carrier, the policy number and the expiration date. Each
such policy of insurance shall be in an amount, for a term, and in form
and content satisfactory to Beneficiary, and shall be written only by
companies approved by Beneficiary. In addition, each policy of hazard
insurance shall include a Form 438BFU or equivalent loss payable
endorsement in favor of Beneficiary.
4.5 Maintenance and Preservation of Property.
(a) Trustor shall keep the Property in good condition and repair and shall
not commit or allow waste of the Property. Trustor shall not remove
or demolish the Property or any part of it, or alter, restore or add
to the Property, or initiate or allow any change in any zoning or
other land use classification which affects the Property or any part
of it, except with Beneficiary's express prior written consent in
each instance.
(b) If all or part of the Property becomes damaged or destroyed, Trustor
shall promptly and completely repair and/or restore the Property in a
good and workmanlike manner in accordance with sound building
practices, regardless of whether or not Beneficiary agrees to disburse
insurance proceeds or other sums to pay costs of the work of repair or
reconstruction under Paragraph 4.3.
(c) Trustor shall not commit or allow any act upon or use of the Property
which would violate any applicable law or order of any governmental
authority, whether now existing or later to be enacted and whether
foreseen or unforeseen, or any public or private covenant, condition,
restriction or equitable servitude affecting the Property. Trustor
shall not bring or keep any article on the Property or cause or allow
any condition to exist on it, if that could invalidate or would be
prohibited by any insurance coverage required to be maintained by
Trustor on the Property or any part of it under this Deed of Trust.
(d) If Trustor's interest in the Property is a leasehold interest, Trustor
shall observe and perform all obligations of Trustor under any lease
or leases and shall refrain from taking any actions prohibited by any
lease or leases. Trustor shall preserve and protect the leasehold
estate and its value.
(e) If the Property is agricultural, Trustor shall farm the Property in a
good and husbandlike manner. Trustor shall keep all trees, vines and
crops on the Property properly cultivated, irrigated, fertilized,
sprayed and fumigated, and shall replace all dead or unproductive
trees or vines with new ones. Trustor shall prepare for harvest,
harvest, remove and sell any crops growing on the Property. Trustor
shall keep all buildings, fences, ditches, canals, wells and other
farming improvements on the Property in first class condition, order
and repair.
(f) Trustor shall perform all other acts which from the character or use
of the Property may be reasonably necessary to maintain and preserve
its value.
4.6 Releases, Extensions, Modifications and Additional Security. Without
affecting the personal liability of any person, including Trustor (or
Obligor, if different from Trustor), for the payment of the Secured
Obligations or the lien of this Deed of Trust on the remainder of the
Property for the unpaid amount of the Secured Obligations, Beneficiary and
Trustee are respectively empowered as follows:
(a) Beneficiary may from time to time and without notice:
(i) release any person liable for payment of any Secured Obligation;
(ii) extend the time for payment, or otherwise alter the terms of
payment, of any Secured Obligation;
(iii) accept additional real or personal property of any kind as
security for any Secured Obligation, whether evidenced by deeds
of trust, mortgages, security agreements or any other
instruments of security; or
(iv) alter, substitute or release any property securing the Secured
Obligations.
________________________________________________________________________________
-4-
<PAGE>
(b) Trustee may perform any of the following acts when requested to do so
by Beneficiary in writing:
(i) consent to the making of any plat or map of the Property or any
part of it;
(ii) join in granting any easement or creating any restriction
affecting the Property;
(iii) join in any subordination or other agreement affecting this Deed
of Trust or the lien of it; or
(iv) reconvey the Property or any part of it without any warranty.
4.7 Reconveyance. When all of the Secured Obligations have been paid in full
and no further commitment to extend credit continues, Trustee shall
reconvey the Property, or so much of it as is then held under this Deed of
Trust, without warranty to the person or persons legally entitled to it.
In the reconveyance, the grantee may be described as "the person or
persons legally entitled thereto," and the recitals of any matters or
facts shall be conclusive proof of their truthfulness. Neither Beneficiary
nor Trustee shall have any duty to determine the rights of persons
claiming to be rightful grantees of any reconveyance.
4.8 Compensation and Reimbursement of Costs and Expenses.
(a) Trustor agrees to pay fees in the maximum amounts legally permitted,
or reasonable fees as may be charged by Beneficiary and Trustee when
the law provides no maximum limit, for any services that Beneficiary
or Trustee may render in connection with this Deed of Trust, including
Beneficiary's providing a statement of the Secured Obligations or
Trustee's rendering of services in connection with a reconveyance.
Trustor shall also pay or reimburse all of Beneficiary's and Trustee's
costs and expenses which may be incurred in rendering any such
services.
(b) Trustor further agrees to pay or reimburse Beneficiary for all costs,
expenses and other advances which may be incurred or made by
Beneficiary or Trustee to protect or preserve the Property or to
enforce any terms of this Deed of Trust, including the exercise of any
rights or remedies afforded to Beneficiary or Trustee or both of them
under Paragraph 5.3, whether any lawsuit is filed or not, or in
defending any action or proceeding arising under or relating to this
Deed of Trust, including attorneys' fees and other legal costs, costs
of any sale of the Property and any cost of evidence of title.
(c) Trustor shall pay all obligations arising under this Paragraph
immediately upon demand by Trustee or Beneficiary. Each such
obligation shall be added to, and considered to be part of, the
principal of the Secured Obligations, and shall bear interest from the
date the obligation arises at the rate provided in any instrument or
agreement evidencing the Secured Obligations. If more than one rate of
interest is applicable to the Secured Obligations, the highest rate
shall be used for purposes hereof. If the instrument or agreement
evidencing the Secured Obligations does not state a rate of interest,
interest shall accrue at the rate of ten percent (10%) per annum.
4.9 Exculpation and Indemnification.
(a) Beneficiary shall not be directly or indirectly liable to Trustor or
any other person as a consequence of any of the following:
(i) Beneficiary's exercise of or failure to exercise any rights,
remedies or powers granted to it in this Deed of Trust;
(ii) Beneficiary's failure or refusal to perform or discharge any
obligation or liability of Trustor under any agreement related
to the Property or under this Deed of Trust;
(iii) Beneficiary's failure to produce Rents from the Property or to
perform any of the obligations of the lessor under any lease
covering the Property;
(iv) any waste committed by lessees of the Property or any other
parties, or any dangerous or defective condition of the
Property; or
(v) any loss sustained by Trustor or any third party resulting from
any act or omission of Beneficiary in operating or managing the
Property upon exercise of the rights or remedies afforded
Beneficiary under Paragraph 5.3, unless the loss is caused by
the wilful misconduct and bad faith of Beneficiary.
Trustor hereby expressly waives and releases all liability of the
types described above, and agrees that no such liability shall be
asserted against or imposed upon Beneficiary.
(b) Trustor agrees to indemnify Trustee and Beneficiary against and hold
them harmless from all losses, damages, liabilities, claims, causes of
action, judgments, court costs, attorneys' fees and other legal
expenses, cost of evidence of title, cost of evidence of value, and
other costs and expenses which either may suffer or incur in
performing any act required or permitted by this Deed of Trust or by
law or because of any failure of Trustor to perform any of its
obligations. This agreement by Trustor to indemnify Trustee and
Beneficiary shall survive the release and cancellation of any or all
of the Secured Obligations and the full or partial release and/or
reconveyance of this Deed of Trust.
4.10 Defense and Notice of Claims and Actions. At Trustor's sole expense.
Trustor shall protect, preserve and defend the Property and title to and
right of possession of the Property, and the security of this
________________________________________________________________________________
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<PAGE>
Deed of Trust and the rights and powers of Beneficiary and Trustee
created under it, against all adverse claims. Trustor shall give
Beneficiary and Trustee prompt notice in writing if any claim is
asserted which does or could affect any of these matters, or if any
action or proceeding is commenced which alleges or relates to any
such claim.
4.11 Substitution of Trustee. From time to time, Beneficiary may
substitute a successor to any Trustee named in or acting under this
Deed of Trust in any manner now or later to be provided at law, or by
a written instrument executed and acknowledged by Beneficiary and
recorded in the office of the recorder of the county where the
Property is situated. Any such instrument shall be conclusive proof
of the proper substitution of the successor Trustee, who shall
automatically upon recordation of the instrument succeed to all
estate, title, rights, powers and duties of the predecessor Trustee,
without conveyance from it.
4.12 Site Visits, Observation and Testing. Beneficiary shall have the
right at any reasonable time to enter and visit the Property for the
purposes of performing appraisals, observing the Property, taking and
removing soil or groundwater samples, and conducting tests on any
part of the Property. Beneficiary shall have no duty, however, to
visit or observe the Property or to conduct tests, and no site visit,
observation or testing by Beneficiary shall impose any liability on
Beneficiary. In no event shall any site visit, observation or testing
by Beneficiary be a representation that Hazardous Substances are or
are not present in, on or under the Property, or that there has been
or shall be compliance with any law, regulation or ordinance
pertaining to Hazardous Substances or any other applicable
governmental law. Neither Trustor nor any other party is entitled to
rely on any site visit, observation or testing by Beneficiary.
Beneficiary owes no duty of care to protect Trustor or any other
party against, or to inform Trustor or any other party of, any
Hazardous Substances or any other adverse condition affecting the
Property. Beneficiary shall give Trustor reasonable notice before
entering the Property. Beneficiary shall make reasonable efforts to
avoid interfering with Trustor's use of the Property in exercising
any rights provided in this Paragraph. For purposes of this
Paragraph, "Hazardous Substance" means any substance, material or
waste which is or becomes designated, classified or regulated as
being "toxic" or "hazardous" or which is or become similarly
designated, classified or regulated under any federal, state or local
law, regulation or ordinance.
4.13 Impound Account. At the request of Beneficiary, Trustor will monthly
pay to Beneficiary an amount equal to one-twelfth (1/12th) of the
annual costs of taxes and assessments on the Property plus the
estimated next insurance premiums on policies of insurance required
under Paragraph 4.4 of this Deed of Trust divided by the number of
months between the date of computation and the date the insurance
premiums are due. Beneficiary may release the amounts paid under this
Paragraph to Trustor for payment by Trustor of such taxes,
assessments and insurance premiums, or Beneficiary may use such
amounts to itself pay such taxes, assessments and insurance premiums,
at Beneficiary's option.
5. ACCELERATING TRANSFERS, DEFAULT AND REMEDIES
5.1 Accelerating Transfers.
(a) "Accelerating Transfer" means any sale, contract to sell,
conveyance, encumbrance, lease, or other transfer, whether
voluntary, involuntary, by operation of law or otherwise, of all
or any material part of the Property or any interest in it,
including any transfer or exercise of any right to drill for or
to extract any water (other than for Trustor's own use), oil, gas
or other hydrocarbon substances or any mineral of any kind on or
under the surface of the Property. If Trustor is a corporation,
"Accelerating Transfer" also means any transfer or transfers of
shares possessing, in the aggregate, more than fifty percent
(50%) of the voting power. If Trustor is a partnership,
"Accelerating Transfer" also means withdrawal or removal of any
general partner, dissolution of the partnership under California
law, or any transfer or transfers of, in the aggregate, more than
fifty percent (50%) of the partnership interests.
(b) Trustor agrees that Trustor shall not make any Accelerating
Transfer, unless the transfer is preceded by Beneficiary's
express written consent to the particular transaction and
transferee. Beneficiary may withhold such consent in its sole
discretion. If any Accelerating Transfer occurs, Beneficiary in
its sole discretion may declare all of the Secured Obligations to
be immediately due and payable, and Beneficiary and Trustee may
invoke any rights and remedies provided by Paragraph 5.3 of this
Deed of Trust.
5.2 Events of Default. The occurrence of any one or more of the following
events, at the option of Beneficiary, shall constitute an event of
default ("Event of Default") under this Deed of Trust:
(a) Obligor fails to make any payment, when due, under the Debt
Instrument (after giving effect to any applicable grace period),
or any other default occurs under and as defined in the Debt
________________________________________________________________________________
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<PAGE>
Instrument or in any other instrument or agreement evidencing any
of the Secured Obligations and such default continues beyond any
applicable cure period;
(b) Trustor fails to make any payment or perform any obligation which
arises under this Deed of Trust; or
(c) Any representation or warranty made in connection with this Deed
of Trust or the Secured Obligations proves to have been false or
misleading in any material respect when made; or
(d) Any default occurs under any other deed of trust on all or any
part of the Property, or under any obligation secured by such
deed of trust, whether such deed of trust is prior to or
subordinate to this Deed of Trust.
5.3 Remedies. At any time after the occurrence of an Event of Default,
Beneficiary and Trustee shall be entitled to invoke any and all of the
rights and remedies described below, as well as any other rights and
remedies authorized by law. All of such rights and remedies shall be
cumulative, and the exercise of any one or more of them shall not
constitute an election of remedies.
(a) Beneficiary may declare any or all of the Secured Obligations to
be due and payable immediately.
(b) Beneficiary may apply to any court of competent jurisdiction for,
and obtain appointment of, a receiver for the Property.
(c) Beneficiary, in person, by agent or by court-appointed receiver,
may enter, take possession of, manage and operate all or any part
of the Property, and in its own name or in the name of Trustor sue
for or otherwise collect any and all Rents, including those that
are past due, and may also do any and all other things in
connection with those actions that Beneficiary may in its sole
discretion consider necessary and appropriate to protect the
security of this Deed of Trust. Such other things may include;
entering into, enforcing, modifying, or cancelling leases on such
terms and conditions as Beneficiary may consider proper; obtaining
and evicting tenants; fixing or modifying Rents; completing any
unfinished construction; contracting for and making repairs and
alterations; performing such acts of cultivation or irrigation as
necessary to conserve the value of the Property; and preparing for
harvest, harvesting and selling any crops that may be growing on
the property. Trustor hereby irrevocably constitutes and appoints
Beneficiary as its attorney-in-fact to perform such acts and
execute such documents as Beneficiary in its sole discretion may
consider to be appropriate in connection with taking these
measures, including endorsement of Trustor's name on any
instruments. Trustor agrees to deliver to Beneficiary all books
and records pertaining to the Property, including computer-
readable memory and any computer hardware or software necessary to
access or process such memory, as may reasonably be requested by
beneficiary in order to enable Beneficiary to exercise its rights
under this Paragraph.
(d) Either Beneficiary or Trustee may cure any breach or default of
Trustor, and if it chooses to do so in connection with any such
cure, Beneficiary or Trustee may also enter the Property and/or do
any and all other things which it may in its sole discretion
consider necessary and appropriate to protect the security of this
Deed of Trust. Such other things may include: appearing in and/or
defending any action or proceeding which purports to affect the
security of, or the rights or powers of Beneficiary or Trustee
under, this Deed of Trust; paying, purchasing, contesting or
compromising any encumbrance, charge, lien or claim of lien which
in Beneficiary's or Trustee's sole judgment is or may be senior in
priority to this Deed of Trust, such judgment of Beneficiary or
Trustee to be conclusive as among the parties to this Deed of
Trust; obtaining insurance and/or paying any premiums or charges
for insurance required to be carried under this Deed of Trust;
otherwise caring for and protecting any and all of the Property;
and/or employing counsel, accountants, contractors and other
appropriate persons to assist Beneficiary or Trustee. Beneficiary
and Trustee may take any of the actions permitted hereunder either
with or without giving notice to any person.
(e) Beneficiary may bring an action in any court of competent
jurisdiction to foreclose this instrument or to obtain specific
enforcement of any of the covenants or agreements of this Deed of
Trust.
(f) Beneficiary may cause the Property to be sold by Trustee as
permitted by applicable law. Before any such trustee's sale,
Beneficiary or Trustee shall give such notice of default and
election to sell as may then be required by law. When all time
periods then legally mandated have expired, and after such notice
of sale as may then be legally required has been given, Trustee
shall sell the Property, either as a whole or in separate parcels.
and in such order as Trustee may determine, at a public auction to
be held at the time and place specified in the notice of sale.
Neither Trustee nor Beneficiary shall have any obligation to make
demand on Trustor before any trustee's sale. From time to time in
accordance with then applicable law, Trustee may, and in any event
at Beneficiary's request shall, postpone any trustee's sale by
public announcement at the time and place noticed for that sale.
At any trustee's sale, Trustee shall sell to the highest bidder at
public auction for cash in lawful money of the United States. Any
person, including Trustor, Trustee or
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<PAGE>
Beneficiary, may purchase at the trustee's sale. Trustee shall
execute and deliver to the purchaser(s) a deed or deeds conveying
the property being sold without any covenant or warranty
whatsoever, express or implied. The recitals in any such deed of
any matters or facts, including any facts bearing upon the
regularity or validity of any trustee's sale, shall be conclusive
proof of their truthfulness. Any such deed shall be conclusive
against all persons as to the facts recited in it.
5.4 Application of Sale Proceeds and Rents.
(a) Beneficiary and Trustee shall apply the proceeds of any sale of
the Property in the following manner: first, to pay the portion of
the Secured Obligations attributable to the costs, fees and
expenses of the sale, including costs of evidence of title in
connection with the sale; and, second, to pay all other Secured
Obligations in any order and proportions as Beneficiary in its
sole discretion may choose. The remainder, if any, shall be
remitted to the person or persons entitled thereto.
(b) Beneficiary shall apply any and all Rents collected by it, and any
and all sums other than proceeds of any sale of the Property which
Beneficiary may receive or collect under Paragraph 5.3, in the
following manner: first, to pay the portion of the Secured
obligations attributable to the costs and expenses of operation
and collection that may be incurred by Trustee, Beneficiary or any
receiver; and, second, to pay all other Secured Obligations in any
order and proportions as Beneficiary in its sole discretion may
choose. The remainder, if any, shall be remitted to the person or
persons entitled thereto. Beneficiary shall have no liability for
any funds which it does not actually receive.
6. MISCELLANEOUS PROVISIONS
6.1 No Waiver or Cure.
(a) Each waiver by Beneficiary or Trustee must be in writing, and no
waiver shall be construed as a continuing waiver. No waiver shall
be implied from any delay or failure by Beneficiary or Trustee to
take action on account of any default of Trustor. Consent by
Beneficiary or Trustee to any act or omission by Trustor shall not
be construed as a consent to any other or subsequent act or
omission or to waive the requirement for Beneficiary's or
Trustee's consent to be obtained in any future or other instance.
(b) If any of the events described below occurs, that event alone
shall not cure or waive any breach, Event of Default or notice of
default under this Deed of Trust or invalidate any act performed
pursuant to any such default or notice; or nullify the effect of
any notice of default or sale (unless all Secured Obligations then
due have been paid and performed); or impair the security of this
Deed of Trust; or prejudice Beneficiary, Trustee or any receiver
in the exercise of any right or remedy afforded any of them under
this Deed of Trust; or be construed as an affirmation by
Beneficiary of any tenancy, lease or option, or a subordination of
the lien of this Deed of Trust:
(i) Beneficiary, its agent or a receiver takes possession of all
or any part of the Property;
(ii) Beneficiary collects and applies Rents, either with or
without taking possession of all or any part of the
Property;
(iii) Beneficiary receives and applies to any Secured Obligation
proceeds of any Property, including any proceeds of
insurance policies, condemnation awards, or other claims,
property or rights assigned to Beneficiary under this Deed
of Trust;
(iv) Beneficiary makes a site visit, observes the Property and/or
conducts tests thereon;
(v) Beneficiary receives any sums under this Deed of Trust or
any proceeds of any collateral held for any of the Secured
Obligations, and applies them to one or more Secured
Obligations;
(vi) Beneficiary, Trustee or any receiver performs any act which
it is empowered or authorized to perform under this Deed of
Trust or invokes any right or remedy provided under this
Deed of Trust.
6.2 Powers of Beneficiary and Trustee.
(a) Trustee shall have no obligation to perform any act which it is
empowered to perform under this Deed of Trust unless it is
requested to do so in writing and is reasonably indemnified
against loss, cost, liability and expense.
(b) Beneficiary may take any of the actions permitted under Paragraphs
5.3(b) and/or 5.3(c) regardless of the adequacy of the security
for the Secured Obligations, or whether any or all of the Secured
Obligations have been declared to be immediately due and payable,
or whether notice of default and election to sell has been given
under this Deed of Trust.
________________________________________________________________________________
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<PAGE>
(c) From time to time, Beneficiary or Trustee may apply to any court
of competent jurisdiction for aid and direction in executing the
trust and enforcing the rights and remedies created under this
Deed of Trust. Beneficiary or Trustee may from time to time obtain
orders or decrees directing, confirming or approving acts in
executing this trust and enforcing these rights and remedies.
6.3 Nonborrower Trustor.
(a) If any Trustor ("Nonborrower Trustor") is not the Obligor under
the Debt Instrument described in Paragraph 2.1(a), such
Nonborrower Trustor authorizes Beneficiary to perform any of the
following acts at any time, all without notice to Nonborrower
Trustor and without affecting Beneficiary's rights or Nonborrower
Trustor's obligations under this Deed of Trust:
(i) Beneficiary may alter any terms of the Debt Instrument or
any part of it, including renewing, compromising, extending
or accelerating, or otherwise changing the time for payment
of, or increasing or decreasing the rate of interest on,
the Debt Instrument or any part of it;
(ii) Beneficiary may take and hold security for the Debt
Instrument, accept additional or substituted security for
the Debt Instrument, and subordinate, exchange, enforce,
waive, release, compromise, fail to perfect, sell or
otherwise dispose of any such security;
(iii) Beneficiary may apply any security now or later held for
the Debt Instrument in any order that Beneficiary in its
sole discretion may choose, and may direct the order and
manner of any sale of all or any part of it and bid at any
such sale;
(iv) Beneficiary may release Obligor of its liability for the
Debt Instrument or any part of it; and
(v) Beneficiary may substitute, add or release any one or more
guarantors or endorsers of the Debt Instrument.
(b) Nonborrower Trustor waives:
(i) Any right it may have to require Beneficiary to proceed
against Obligor, proceed against or exhaust any security
held from Obligor, or pursue any other remedy in
Beneficiary's power to pursue;
(ii) Any defense based on any legal disability of Obligor, any
discharge or limitation of the liability of Obligor to
Beneficiary, whether consensual or arising by operation of
law or any bankruptcy, reorganization, receivership,
insolvency, or debtor-relief proceeding, or from any other
cause, or any claim that Nonborrower Trustor's obligations
exceed or are more burdensome than those of Obligor;
(iii) All presentments, demands for performance, notices of
nonperformance, protests, notices of protest, notices of
dishonor, notices of acceptance of this Deed of Trust and
of the existence, creation, or incurring of new or
additional indebtedness of Obligor, and demands and notices
of every kind;
(iv) Any defense based on or arising out of any defense that
Obligor may have to the payment or performance of the Debt
Instrument or any part of it; and
(v) All rights of subrogation, reimbursement, indemnification
and contribution (contractual, statutory or otherwise),
including any claim or right of subrogation under the
Bankruptcy Code (Title 11 of the U.S. Code) or any
successor statute, all rights to enforce any remedy that
the Beneficiary may have against Obligor, and all rights to
participate in any security now or later to be held by
Beneficiary for the Debt Instrument.
(c) Nonborrower Trustor assumes full responsibility for keeping
informed of Obligor's financial condition and business operations
and all other circumstances affecting Obligor's ability to pay and
perform its obligations to Beneficiary, and agrees that
Beneficiary shall have no duty to disclose to Nonborrower Trustor
any information which Beneficiary may receive about Obligor's
financial condition, business operations, or any other
circumstances bearing on its ability to perform.
(d) For purposes of this Paragraph 6.3, all references to the Debt
Instrument shall also include any instrument or agreement executed
by Obligor subsequent to the date of this Deed of Trust which is
secured by this Deed of Trust in accordance with the provisions of
Paragraph 2.1(c).
6.4 Merger. No merger shall occur as a result of Beneficiary's acquiring
any other estate in or any other lien on the Property unless
Beneficiary consents to a merger in writing.
6.5 Joint and Several Liability. If Trustor consists of more than one
person, each shall be jointly and severally liable for the faithful
performance of all of Trustor's obligations under this Deed of Trust.
6.6 Applicable Law. This Deed of Trust shall be governed by California
law.
________________________________________________________________________________
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<PAGE>
6.7 Successors in Interest. The terms, covenants and conditions of this
Deed of Trust shall be binding upon and inure to the benefit of the
heirs, successors and assigns of the parties. However, this Paragraph
does not waive the provisions of Paragraph 5.1.
6.8 Interpretation. Whenever the context requires, all words used in the
singular will be construed to have been used in the plural, and vice
versa, and each gender will include any other gender. The captions of
the sections of this Deed of Trust are for convenience only and do
not define or limit any terms or provisions. The word "include(s)"
means "include(s), without limitation," and the word "including"
means "including, but not limited to." The word "obligations" is used
in its broadest and most comprehensive sense, and includes all
primary, secondary, direct, indirect, fixed and contingent
obligations. It further includes all principal, interest, prepayment
charges, late charges, loan fees and any other fees and charges
accruing or assessed at any time, as well as all obligations to
perform acts or satisfy conditions. No listing of specific instances,
items or matters in any way limits the scope or generality of any
language of this Deed of Trust. The Exhibits to this Deed of Trust
are hereby incorporated in this Deed of Trust.
6.9 In-House Counsel Fees. Whenever Trustor is obligated to pay or
reimburse Beneficiary or Trustee for any attorneys' fees, those fees
shall include the allocated costs for services of in-house counsel.
6.10 Waiver of Marshaling. Trustor waives all rights, legal and equitable,
it may now or hereafter have to require marshaling of assets or to
direct the order in which any of the Property will be sold in the
event of any sale under this Deed of Trust, including any rights
provided by California Civil Code Sections 2899 and 3433, as such
Sections may be amended from time to time. Each successor and assign
of Trustor, including any holder of a lien subordinate to this Deed
of Trust, by acceptance of its interest or lien agrees that it shall
be bound by the above waiver, as if it had given the waiver itself.
6.11 Severability. If any provision of this Deed of Trust should be held
unenforceable or void, that provision shall be deemed severable from
the remaining provisions and in no way affect the validity of this
Deed of Trust except that if such provision relates to the payment of
any monetary sum, then Beneficiary may, at its option, declare all
Secured Obligations immediately due and payable.
6.12 Notices. Trustor hereby requests that a copy of notice of default and
notice of sale be mailed to it at the address set forth below. That
address is also the mailing address of Trustor as debtor under the
California Uniform Commercial Code. Beneficiary's address given below
is the address for Beneficiary as secured party under the California
Uniform Commercial Code.
[_] If this box is checked, N/A signs as Trustor solely for the
---
purpose of subjecting any potential community property interest
in the Property to this Deed of Trust.
ADDRESSES WHERE NOTICES TO TRUSTOR(S) ARE TO BE SENT:
PROLONG SUPER LUBRICANTS, INC.
6 Thomas
Irvine, CA 92618
ADDRESS WHERE NOTICES TO BENEFICIARY ARE TO BE SENT:
BANK OF AMERICA COMMUNITY DEVELOPMENT BANK
P.O. Box 1186
Rancho Cordova, CA 95741
TRUSTOR:
Prolong Super Lubricants, Inc.
a Nevada corporation
By: /s/ Elton Alderman
-------------------------
Elton Alderman,
President
By: /s/ Thomas Billstein
-------------------------
Thomas Billstein,
Secretary
________________________________________________________________________________
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GENERAL ACKNOWLEDGMENT
(State of California )
(County of Orange )
On 04/14/98, before me, S. CRAM personally appeared Elton Alderman & Thomas
Billstein, personally known to me (or proved to me on the basis of satisfactory
evidence) to be the person(s) whose name(s) is/are subscribed to the within
instrument and acknowledged to me that he/she/they executed the same in
his/her/their authorized capacity(ies), and that by his/her/their signature(s)
on the instrument the person(s), or the entity upon behalf of which the
person(s) acted, executed the instrument.
WITNESS my hand and official seal.
(SEAL)
Signature /s/ S. CRAM
---------------------------
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________________________________________________________________________________
EXHIBIT/ATTACHMENT
TO DOCUMENTATION
EXHIBIT "A"
(Legal Description)
EXHIBIT A, ATTACHED TO AND FORMING A PART OF THAT CERTAIN DEED OF TRUST,
- ---------
ASSIGNMENT OF RENTS AND FIXTURE FILING DATED APRIL 1, 1998, EXECUTED BY TRUSTOR
IN FAVOR OF BANK OF AMERICA COMMUNITY DEVELOPMENT BANK.
ALL THAT CERTAIN LAND SITUATED IN THE STATE OF CALIFORNIA, COUNTY OF ORANGE,
DESCRIBED AS FOLLOWS:
Parcel 15 in the City of Irvine, County of Orange, State of California, as shown
on a Parcel Map filed in book 112, pages 17 to 25, inclusive of Parcel Maps, in
the office of the County Recorder of said County.
Except any and all oil, oil rights, minerals, mineral rights, natural gas
rights, and other hydrocarbons by whatsoever name known, geothermal steam, and
all products derived from any of the foregoing, that may be within or under the
land, together with the perpetual right of drilling, mining, exploring and
operating therefor and storing in and removing the same from the land or any
other land, including the right to whipstock or directionally drill and mine
from lands other than those hereby, oil or gas wells, tunnels and shafts into,
through or across the subsurface of the land, and to bottom such whipstocked or
directionally drilled wells, tunnels and shafts under and beneath or beyond the
exterior limits thereof, and to redrill, retunnel, equip, maintain, repair,
deepen and operate any such wells or mines; without however, the right to drill,
mine, store, explore and operate through the surface or the upper 500 feet of
the subsurface of the land, as reserved in the deed from The Irvine Company, a
Michigan corporation, successor by merger with Irvine Industrial Complex, a
corporation, recorded August 8, 1979 in book 13260, page 763 of Official
Records.
Property Address:
6 Thomas
Irvine, CA 92618
"This Deed of Trust, Assignment of Rents and Fixture Filing is second and
subordinate subject to the first Deed of Trust, Assignment of Rents and Fixture
Filing in the amount of $1,692,000.00, dated of even date herewith and recording
------------
concurrently herewith"
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===============================================================================
[LOGO OF BANK OF AMERICA APPEARS HERE] PAYMENT GUARANTY
(Commercial Real Estate)
_______________________________________________________________________________
This Payment Guaranty ("Guaranty") is made as of April 1, 1998 by Prolong
International Corporation, a Nevada corporation ("Guarantor") in favor of Bank
of America Community Development Bank and its successors and assigns ("Bank").
Factual Background
------------------
A. Guarantor is executing this Guaranty to induce Bank to make a bridge loan
(defined in Section 2 as the "Loan") to Prolong Super Lubricants, Inc., a
Nevada corporation ("Borrower") in the principal amount of Seven Hundred
Twenty Nine Thousand and No/100 Dollars $729,000.00. The Loan is being made
under an Agreement for Bridge Loan (the "Loan Agreement") entered into as
of April 1, 1998, between Bank and Borrower.
B. The Loan is evidenced by a promissory note (the "Note") made payable to
Bank in the principal amount of the Loan. The Note is secured by a deed of
trust ("Deed of Trust") covering certain real and personal property, as
therein described (all collectively, the "Property"). The Note may also be
secured by other collateral, as more fully explained in the Loan Agreement.
C. This Guaranty is one of several Loan Documents, as defined and designated
in the Loan Agreement. The Loan Documents also include the Loan Agreement,
the Note, the Deed of Trust and certain other specified instruments and
agreements.
Guaranty
--------
1. Guaranty of Loan. Guarantor unconditionally guaranties to Bank the full
----------------
payment of and performance of Borrower's obligations in connection with the
Loan, and unconditionally agrees to pay Bank the full amount of the Loan.
This is a guaranty of payment, not of collection. If Borrower defaults in
the payment when due of the Loan or any part of it, Guarantor shall in
lawful money of the United States pay to Bank or order, on demand, all sums
due and owing on the Loan, including all interest, charges, fees and other
sums, costs and expenses.
2. Loan. ln this Guaranty, the term "Loan" is broadly defined to mean and
----
include all primary, secondary, direct, indirect, fixed and contingent
obligations of Borrower to pay principal, interest, prepayment charges,
late charges, loan fees and any other fees, charges, sums, costs and
expenses which may be owing at any time under the Note or the other Loan
Documents, as any or all of them may from time to time be modified,
amended, extended or renewed. For purposes of this Guaranty, the Loan
includes any and all such obligations which may arise in connection with
(a) Hazardous Substances, as defined in the Loan Agreement, and (b) any
advances made before recording of the Deed of Trust. If the amount
outstanding under the Loan is determined by a court of competent
jurisdiction, that determination shall be conclusive and binding on
Guarantor, regardless of whether Guarantor was a party to the proceeding in
which the determination was made or not.
3. Rights of Bank. Guarantor authorizes Bank to perform any or all of the
--------------
following acts at any time in its sole discretion, all without notice to
Guarantor and without affecting Guarantor's obligations under this
Guaranty:
(a) Bank may alter any terms of the Loan or any part of it, including
renewing, compromising, extending or accelerating, or otherwise
changing the time for payment of, or increasing or decreasing the rate
of interest on, the Loan or any part of it.
(b) Bank may take and hold security for the Loan or this Guaranty, accept
additional or substituted security for either, and subordinate,
exchange, enforce, waive, release, compromise, fail to perfect and
sell or otherwise dispose of any such security.
________________________________________________________________________________
-1-
<PAGE>
________________________________________________________________________________
(c) Bank may direct the order and manner of any sale of all or any part of
any security now or later to be held for the Loan or this Guaranty,
and Bank may also bid at any such sale.
(d) Bank may apply any payments or recoveries from Borrower, Guarantor or
any other source, and any proceeds of any security, to Borrower's
obligations under the Loan Documents in such manner, order and
priority as Bank may elect, whether or not those obligations are
guarantied by this Guaranty or secured at the time of the application.
(e) Bank may release Borrower of its liability for the Loan or any part of
it.
(f) Bank may substitute, add or release any one or more guarantors or
endorsers.
(g) In addition to the Loan, Bank may extend other credit to Borrower, and
may take and hold security for the credit so extended, all without
affecting Guarantor's liability under this Guaranty.
4. Guaranty to be Absolute. Guarantor expressly agrees that until the Loan is
-----------------------
paid and performed in full and each and every term, covenant and condition
of this Guaranty is fully performed, Guarantor shall not be released by or
because of:
(a) Any act or event which might otherwise discharge, reduce, limit or
modify Guarantor's obligations under this Guaranty;
(b) Any waiver, extension, modification, forbearance, delay or other act
or omission of Bank, or its failure to proceed promptly or otherwise
as against Borrower, Guarantor or any security;
(c) Any action, omission or circumstance which might increase the
likelihood that Guarantor may be called upon to perform under this
Guaranty or which might affect the rights or remedies of Guarantor as
against Borrower; or
(d) Any dealings occurring at any time between Borrower and Bank, whether
relating to the Loan or otherwise.
Guarantor hereby expressly waives and surrenders any defense to its
liability under this Guaranty based upon any of the foregoing acts,
omissions, agreements, waivers or matters. It is the purpose and intent of
this Guaranty that the obligations of Guarantor under it shall be absolute
and unconditional under any and all circumstances.
5. Guarantor's Waivers. Guarantor waives:
-------------------
(a) All statutes of limitations as a defense to any action or proceeding
brought against Guarantor by Bank, to the fullest extent permitted by
law;
(b) Any right it may have to require Bank to proceed against Borrower,
proceed against or exhaust any security held from Borrower, or pursue
any other remedy in Bank's power to pursue;
(c) Any defense based on any claim that Guarantor's obligations exceed or
are more burdensome than those of Borrower;
(d) Any defense based on:
(i) any legal disability of Borrower,
(ii) any release, discharge, modification, impairment or limitation
of the liability of Borrower to Bank from any cause, whether
consented to by Bank or arising by operation of law or from any
bankruptcy or other voluntary or involuntary proceeding, in or
out of court, for the adjustment of debtor-creditor
relationships ("Insolvency Proceeding") and
(iii) any rejection or disaffirmance of the Loan, or any part of it,
or any security held for it, in any such Insolvency Proceeding;
_______________________________________________________________________________
-2-
<PAGE>
________________________________________________________________________________
(e) Any defense based on any action taken or omitted by Bank in any
Insolvency Proceeding involving Borrower, including any election to
have Bank's claim allowed as being secured, partially secured or
unsecured, any extension of credit by Bank to Borrower in any
Insolvency Proceeding, and the taking and holding by Bank of any
security for any such extension of credit;
(f) All presentments, demands for performance, notices of nonperformance,
protests, notices of protest, notices of dishonor, notices of
acceptance of this Guaranty and of the existence, creation, or
incurring of new or additional indebtedness, and demands and notices
of every kind except for any demand or notice by Bank to Guarantor
expressly provided for in Section 1; and
(g) Any defense based on or arising out of any defense that Borrower may
have to the payment or performance of the Loan or any part of it.
6. Waivers of Subrogation and Other Rights.
---------------------------------------
(a) Upon a default by Borrower, Bank in its sole discretion, without prior
notice to or consent of Guarantor, may elect to:
(i) foreclose either judicially or nonjudicially against any real
or personal property security it may hold for the Loan,
(ii) accept a transfer of any such security in lieu of foreclosure,
(iii) compromise or adjust the Loan or any part of it or make any
other accommodation with Borrower or Guarantor, or
(iv) exercise any other remedy against Borrower or any security. No
such action by Bank shall release or limit the liability of
Guarantor, who shall remain liable under this Guaranty after
the action, even if the effect of the action is to deprive
Guarantor of any subrogation rights, rights of indemnity, or
other rights to collect reimbursement from Borrower for any
sums paid to Bank, whether contractual or arising by operation
of law or otherwise. Guarantor expressly agrees that under no
circumstances shall it be deemed to have any right, title,
interest or claim in or to any real or personal property to be
held by Bank or any third party after any foreclosure or
transfer in lieu of foreclosure of any security for the Loan.
(b) Regardless of whether Guarantor may have made any payments to Bank,
Guarantor forever waives:
(i) all rights of subrogation, all rights of indemnity, and any
other rights to collect reimbursement from Borrower for any
sums paid to Bank, whether contractual or arising by operation
of law (including the United States Bankruptcy Code or any
successor or similar statute) or otherwise,
(ii) all rights to enforce any remedy that Bank may have against
Borrower, and (iii) all rights to participate in any security
now or later to be held by Bank for the Loan.
7. Revival and Reinstatement. If Bank is required to pay, return or restore to
-------------------------
Borrower or any other person any amounts previously paid on the Loan
because of any Insolvency Proceeding of Borrower, any stop notice or any
other reason, the obligations of Guarantor shall be reinstated and revived
and the rights of Bank shall continue with regard to such amounts, all as
though they had never been paid.
8. Information Regarding Borrower and the Property. Before signing this
-----------------------------------------------
Guaranty, Guarantor investigated the financial condition and business
operations of Borrower, the present and former condition, uses and
ownership of the Property, and such other matters as Guarantor deemed
appropriate to assure itself of Borrower's ability to discharge its
obligations under the Loan Documents. Guarantor assumes full
responsibility for that due diligence, as well as for keeping informed of
all matters which may affect Borrower's ability to pay and perform its
obligations to Bank. Bank has no duty to disclose to Guarantor any
information which Bank may have or receive about Borrower's financial
condition or business operations, the condition or uses of the Property, or
any other circumstances bearing on Borrower's ability to perform.
______________________________________________________________________________
-3-
<PAGE>
________________________________________________________________________________
9. Subordination. Any rights of Guarantor, whether now existing or later
-------------
arising, to receive payment on account of any indebtedness (including
interest) owed to it by Borrower or any subsequent owner of the Property,
or to withdraw capital invested by it in Borrower, or to receive
distributions from Borrower, shall at all times be subordinate as to lien
and time of payment and in all other respects to the full and prior
repayment to Bank of the Loan. Guarantor shall not be entitled to enforce
or receive payment of any sums hereby subordinated until the Loan has been
paid and performed in full and any such sums received in violation of this
Guaranty shall be received by Guarantor in trust for Bank. The foregoing
notwithstanding, Guarantor is not prohibited from receiving (a) such
reasonable management fees or reasonable salary from Borrower as Bank may
find acceptable from time to time, and (b) distributions from Borrower in
an amount equal to any income taxes imposed on Guarantor which are
attributable to Borrower's income from the Property.
10. Financial Information. Guarantor shall keep true and correct financial
---------------------
books and records, using generally accepted accounting principles
consistently applied, or such other accounting principles as Bank in its
reasonable judgment may find acceptable from time to time. Guarantor shall
provide Bank Guarantor's annual CPA-audited financial statements, including
------
a year-end balance sheet and annual profit and loss statement within 90
days of fiscal year-end and shall provide copies of its 10K annually within
30 days of filing. Guarantor shall promptly provide Bank with any
additional audited financial information that Guarantor may obtain, as well
as signed copies of any tax returns and such other information concerning
its affairs and properties as Bank may reasonably request.
Guarantor represents and warrants that:
(a) all financial statements and other financial information furnished or
to be furnished to Bank are or will be true and correct and do or will
fairly represent the financial condition of Guarantor (including all
contingent liabilities);
(b) all financial statements were or will be prepared in accordance with
generally accepted accounting principles, or such other accounting
principles as may be acceptable to Bank at the time of their
preparation, consistently applied; and
(c) there has been no material adverse change in Guarantor's financial
condition since the dates of the statements most recently furnished to
Bank.
11. Events of Default. Bank may declare Guarantor to be in default under this
-----------------
Guaranty upon the occurrence of any of the following events ("Events of
Default"):
(a) Guarantor fails to perform any of its obligations under this Guaranty;
or
(b) Guarantor revokes this Guaranty or this Guaranty becomes ineffective
for any reason; or
(c) Any representation or warranty made or given by Guarantor to Bank
proves to be false or misleading in any material respect; or
(d) Guarantor becomes insolvent or the subject of any Insolvency
Proceeding; or
(e) Guarantor dissolves or liquidates, or any of these events happens to
any of Guarantor's general partners or to its chief executive or
majority shareholder.
________________________________________________________________________________
-4-
<PAGE>
________________________________________________________________________________
12. Reference and Arbitration.
-------------------------
(a) Judicial Reference. ln any judicial action between or among the
------------------
parties, including any action or cause of action arising out of or
relating to this Guaranty or the Loan Documents or based on or arising
from an alleged tort, all decisions of fact and law shall at the
request of any party be referred to a referee in accordance with
California Code of Civil Procedure Sections 638 et seq. The parties
------
shall designate to the court a referee or referees selected under the
auspices of the American Arbitration Association ("AAA") in the same
manner as arbitrators are selected in AAA-sponsored proceedings. The
presiding referee of the panel, or the referee if there is a single
referee, shall be an active attorney or retired judge. Judgment upon
the award rendered by such referee or referees shall be entered in the
court in which such proceeding was commenced in accordance with
California Code of Civil Procedure Sections 644 and 645.
(b) Mandatory Arbitration. After the Deed of Trust has been released,
---------------------
fully reconveyed or extinguished, any controversy or claim between or
among the parties, including those arising out of or relating to this
Guaranty or the Loan Documents and any claim based on or arising from
an alleged tort, shall at the request of any party be determined by
arbitration. The arbitration shall be conducted in accordance with the
United States Arbitration Act (Title 9, U.S. Code), notwithstanding
any choice of law provision in this Guaranty, and under the Commercial
Rules of the AAA. The arbitrator(s) shall give effect to statutes of
limitation in determining any claim. Any controversy concerning
whether an issue is arbitrable shall be determined by the
arbitrator(s). Judgment upon the arbitration award may be entered in
any court having jurisdiction. The institution and maintenance of an
action for judicial relief or pursuit of a provisional or ancillary
remedy shall not constitute a waiver of the right of any party,
including the plaintiff, to submit the controversy or claim to
arbitration if any other party contests such action for judicial
relief.
(c) Real Property Collateral. Notwithstanding the provisions of subsection
------------------------
12(b), no controversy or claim shall be submitted to arbitration
without the consent of all parties if, at the time of the proposed
submission, such controversy or claim arises from or relates to an
obligation by Guarantor or Borrower to Bank which is secured by real
property collateral. If all parties do not consent to submission of
such a controversy or claim to arbitration, the controversy or claim
shall be determined by reference as provided in subsection 12(a).
(d) Provisional Remedies, Self-Help and Foreclosure. No provision of this
----------------------------------- -----------
Section 12 shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or
personal property collateral or security, or to obtain provisional or
ancillary remedies from a court of competent jurisdiction before,
after, or during the pendency of any arbitration or other proceeding.
The exercise of a remedy does not waive the right of either party to
resort to arbitration or reference. At Bank's option, foreclosure
under a deed of trust or mortgage may be accomplished either by
exercise of power of sale under the deed of trust or mortgage or by
judicial foreclosure.
13. Authorization; No Violation. Guarantor is authorized to execute, deliver
---------------------------
and perform under this Guaranty, which is a valid and binding obligation of
Guarantor. No provision or obligation of Guarantor contained in this
Guaranty violates any applicable law, regulation or ordinance, or any order
or ruling of any court or governmental agency. No such provision or
obligation conflicts with, or constitutes a breach or default under, any
agreement to which Guarantor is a party.
14. Additional and Independent Obligations. Guarantor's obligations under this
--------------------------------------
Guaranty are in addition to its obligations under any other existing or
future guaranties, each of which shall remain in full force and effect
until it is expressly modified or released in a writing signed by Bank.
Guarantor's obligations under this Guaranty are independent of those of
Borrower on the Loan. Bank may bring a separate action, or commence a
separate reference or arbitration proceeding against Guarantor without
first proceeding against Borrower, any other person or any security that
Bank may hold, and without pursuing any other remedy. Bank's rights under
this Guaranty shall not be exhausted by any action by Bank until the Loan
has been paid and performed in full.
_______________________________________________________________________________
-5-
<PAGE>
________________________________________________________________________________
15. No Waiver; Consents; Cumulative Remedies. Each waiver by Bank must be in
----------------------------------------
writing, and no waiver shall be construed as a continuing waiver. No waiver
shall be implied from Bank's delay in exercising or failure to exercise any
right or remedy against Borrower, Guarantor or any security. Consent by
Bank to any act or omission by Borrower or Guarantor shall not be construed
as a consent to any other or subsequent act or omission, or as a waiver of
the requirement for Bank's consent to be obtained in any future or other
instance. All remedies of Bank against Borrower and Guarantor are
cumulative.
16. No Release. Guarantor shall not be released from its obligations under this
----------
Guaranty except by a writing signed by Bank.
17. Heirs, Successors and Assigns; Participations. The terms of this Guaranty
---------------------------------------------
shall bind and benefit the heirs, legal representatives, successors and
assigns of Bank and Guarantor; provided, however, that Guarantor may not
assign this Guaranty, or assign or delegate any of its rights or
obligations under this Guaranty, without the prior written consent of Bank
in each instance. Bank in its sole discretion may sell or assign
participations or other interests in the Loan and this Guaranty, in whole
or in part, all without notice to or the consent of Guarantor and without
affecting Guarantor's obligations under this Guaranty. Also without notice
to or the consent of Guarantor, Bank may disclose any and all information
in its possession concerning Guarantor, this Guaranty and any security for
this Guaranty to any actual or prospective purchaser of any securities
issued or to be issued by Bank, and to any actual or prospective purchaser
or assignee of any participation or other interest in the Loan and this
Guaranty.
18. Notices. All notices given under this Guaranty must be in writing and shall
-------
be effectively served upon delivery, or if mailed, upon the first to occur
of receipt or the expiration of forty-eight hours after deposit in
certified United States mail, postage prepaid, sent to the party at its
address given at the end of this Guaranty. Those addresses may be changed
by Bank or Guarantor by written notice to the other party. Service of any
notice on any one Guarantor signing this Guaranty shall be effective
service on Guarantor for all purposes.
19. Rules of Construction. In this Guaranty, the word "Borrower" includes both
---------------------
the named Borrower and any other person who at any time assumes or
otherwise becomes primarily liable for all or any part of the obligations
of the named Borrower on the Loan. The word "person" includes any
individual, company, trust or other legal entity of any kind. If this
Guaranty is executed by more than one person, the word "Guarantor" includes
all such persons. The word "include(s)" means "include(s), without
limitation," and the word "including" means "including, but not limited
to." When the context and construction so require, all words used in the
singular shall be deemed to have been used in the plural and vice versa. No
listing of specific instances, items or matters in any way limits the scope
or generality of any language of this Guaranty. All headings appearing in
this Guaranty are for convenience only and shall be disregarded in
construing this Guaranty.
20. Governing Law. This Guaranty shall be governed by, and construed in
-------------
accordance with, the laws of the State of California.
21. Costs and Expenses. If any lawsuit, reference or arbitration is commenced
------------------
which arises out of, or which relates to this Guaranty, the Loan Documents
or the Loan, the prevailing party shall be entitled to recover from each
other party such sums as the court, referee or arbitrator may adjudge to be
reasonable attorneys' fees (including allocated costs for services of in-
house counsel) in the action or proceeding, in addition to costs and
expenses otherwise allowed by law. In all other situations, including any
Insolvency Proceeding, Guarantor agrees to pay all of Bank's costs and
expenses, including attorneys' fees (including allocated costs for services
of Bank's in-house counsel) which may be incurred in any effort to collect
or enforce the Loan or any part of it or any term of this Guaranty. From
the time(s) incurred until paid in full to Bank, all sums shall bear
interest at the default rate provided in the Note.
22. Consideration. Guarantor acknowledges that it expects to benefit from
-------------
Bank's extension of the Loan to Borrower because of its relationship to
Borrower, and that it is executing this Guaranty in consideration of that
anticipated benefit.
_____________________________________________________________________________
-6-
<PAGE>
________________________________________________________________________________
23. Integration; Modifications. This Guaranty (a) integrates all the terms and
--------------------------
conditions mentioned in or incidental to this Guaranty, (b) supersedes all
oral negotiations and prior writings with respect to its subject matter,
and (c) is intended by Guarantor and Bank as the final expression of the
agreement with respect to the terms and conditions set forth in this
Guaranty and as the complete and exclusive statement of the terms agreed to
by Guarantor and Bank. No representation, understanding, promise or
condition shall be enforceable against any party unless it is contained in
this Guaranty. This Guaranty may not be modified except in a writing signed
by both Bank and Guarantor.
24. Miscellaneous. The death or legal incapacity of any Guarantor shall not
-------------
terminate the obligations of such Guarantor or any other Guarantor under
this Guaranty, including its obligations with regard to future advances
under the Loan Documents. The liability of all persons who are in any
manner obligated under this Guaranty shall be joint and several. The
illegality or unenforceability of one or more provisions of this Guaranty
shall not affect any other provision. Any Guarantor who is married agrees
that Bank may look to all of his or her community property and separate
property to satisfy his or her obligations under this Guaranty. Time is of
the essence in the performance of this Guaranty by Guarantor.
GUARANTOR: Notices for Guarantor:
Prolong International Corporation, 6 Thomas
a Nevada Corporation Irvine, CA 92618
By: /s/ Elton Alderman
------------------
Elton Alderman, Notices for Bank:
President
By: /s/ Thomas Billstein, P.O. Box 1186
-------------------- Rancho Cordova, CA 95741
Thomas Billstein,
Secretary
________________________________________________________________________________
-7-
<PAGE>
- --------------------------------------------------------------------------------
Secured and Unsecured
[LOGO OF BANK OF AMERICA] Indemnity Agreement
- --------------------------------------------------------------------------------
This Secured and Unsecured Indemnity Agreement ("Agreement") is made as of April
1, 1998, by Prolong Super Lubricants, Inc., a Nevada corporation ("Indemnitor")
in favor of Bank of America Community Development Bank and its successors and
assigns ("Bank").
Factual Background
------------------
A. Indemnitor is executing this Agreement to induce Bank to make a bridge loan
(the "Loan") to Indemnitor in the principal amount of Seven Hundred Twenty
Nine Thousand and No/100 Dollars ($729,000.00). The loan is being made
under the Agreement for Bridge Loan (the "Loan Agreement") entered into as
of April 1, 1998, between Bank and Indemnitor.
B. The Loan is evidenced by a promissory note (the "Note") made payable to
Bank in the principal amount of the Loan. The Loan is secured by a deed of
trust ("Deed of Trust") and may also be secured by other collateral, as
more fully explained in the Loan Agreement.
C. Because Bank is making the Loan and obtaining the Deed of Trust, Bank may
potentially become subject to certain costs, risks and liabilities.
Among other things, Bank may become subject to liabilities or alleged
liabilities relating to environmental conditions as an "owner" or
"operator" under applicable environmental law. These costs and liabilities
may arise before or after repayment of the Loan, and before or after
foreclosure under the Deed of Trust. Because these costs and liabilities,
if they occur, will be the result of Bank's agreement to make the Loan, and
in consideration of that agreement, Bank and Indemnitor have agreed as set
forth below.
1. Definitions
-----------
In addition to any terms defined elsewhere in this Agreement, as used in
this Agreement:
1.1 "Hazardous Substance" means any substance, material or waste
(including petroleum and petroleum products) which is or becomes
designated, classified or regulated as being "toxic" or "hazardous"
or a "pollutant," or which is or becomes similarly designated,
classified or regulated, under any federal state or local law,
regulation or ordinance.
1.2 "Indemnified Costs" means all actual or threatened liabilities,
claims, actions, causes of action, judgments, orders, damages
(including foreseeable and unforeseeable consequential damages),
costs, expenses, fines, penalties and losses (including sums paid
in settlement of claims and all consultant, expert and legal fees and
expenses of Bank's counsel), including those incurred in connection
with any investigation of site conditions or any clean-up, remedial,
removal or restoration work (whether of the Property, as defined
below, or any other property), or any resulting damages, harm or
injuries to the person or property of any third parties or to any
natural resources.
1.3 "Indemnified Parties" means and includes Bank, its parent, subsidiary
and affiliated companies, assignees of any of Bank's interest in the
Loan or the Loan Documents, owners of participation or other
interests in the Loan or the Loan Documents, any purchasers of the
Property at any foreclosure sale or from Bank or any of its
affiliates, and the officers, directors, employees and agents of each
of them.
1.4 "Loan Documents" means the agreements, instruments and documents
defined and designated as such in the Loan Agreement. This Agreement
is one of the Loan Documents.
1.5 "Property" means all property that is or was at any time encumbered
by the Deed of Trust, which may later include any and all property
previously released from it.
1.6 "Note Rate" means the rate of interest defined as such in the Note.
- --------------------------------------------------------------------------------
Bank of America Community Development Bank
IndeM1 CAR (rev 001 09 95) -1- RLD-107911
1.
1.1
<PAGE>
- --------------------------------------------------------------------------------
II. Secured Indemnity Agreement
---------------------------
2.1 Claims Under Secured Agreement
------------------------------
No Indemnified Party shall make any claim under this Article II
(except any rights asserted in a complaint for a deficiency judgment
in a then-pending judicial foreclosure action) after the earliest to
occur of:
(a) full and final repayment of the Loan; or
(b) the completion of a judicial or nonjudicial foreclosure sale
under the Deed of Trust; or
(c) the acquisition of the Property by Bank or an affiliate of Bank
by a conveyance in lieu of foreclosure.
2.2 Secured Recourse Obligation
---------------------------
All of the rights of the Indemnified Parties under this Article II
shall be secured by the Deed of Trust. Notwithstanding any provision
of the Loan Documents, the rights of the Indemnified Parties under
this Article II shall not be affected by any provision of the Loan
Documents limiting Bank's recourse or limiting Indemnitor's liability
for the Loan.
2.3 Indemnity Regarding Hazardous Substances
----------------------------------------
Indemnitor indemnifies and holds the Indemnified parties harmless
from and against any and all Indemnified Costs directly or indirectly
arising out of or resulting from any Hazardous Substance being
present or released in, on or around any part of the Property, or in
the soil, groundwater or soil vapor on or under the Property,
including:
(a) any claim for such Indemnified Costs asserted by any federal,
state or local governmental agency, including the United States
Environmental Protection Agency and the California Department
of Health Services, and including any claim that any
Indemnified Party is liable for any such Indemnified Costs as
an "owner" or "operator" of the Property under any law relating
to Hazardous Substances; and
(b) any such Indemnified Costs claimed against any Indemnified
Party by any person other than a governmental agency, including
any person who may purchase or lease all or any portion of the
Property from Indemnitor, from any Indemnified Party, or from
any other purchaser or lessee; any person who may at any time
have any interest in all or any portion of the Property; any
person who may at any time be responsible for any clean-up
costs or other Indemnified Costs relating to the Property; and
any person claiming to have been injured in any way as a result
of exposure to any Hazardous Substance; and
(c) any such Indemnified Costs which any Indemnified Party
reasonably believes at any time must be incurred to comply with
any law, judgment, order, regulation or regulatory directive
relating to Hazardous Substances, or which any Indemnified
Party reasonably believes at any time must be incurred to
protect the public health or safety; and
(d) any such Indemnified Costs resulting from currently existing
conditions in, on or around the Property, whether known or
unknown by Indemnitor or the Indemnified Parties at the time
this Agreement is executed, and any such Indemnified Costs
resulting from the activities of Indemnitor, Indemnitor's
tenants, or any other person in, on or around the Property.
2.4 Indemnity Regarding Construction and Other Risks
------------------------------------------------
Indemnitor indemnifies and holds the Indemnified Parties harmless
from and against any and all Indemnified Costs directly or indirectly
arising out of or resulting from construction of any improvements on
the Property, including any defective workmanship or materials; or
any failure to satisfy any requirements of any laws, regulations,
ordinances, governmental policies or standards, reports, subdivision
maps or development agreements that apply or pertain to the Property;
or breach of any representation or warranty made or given by
Indemnitor to any of the Indemnified Parties or to any prospective or
actual buyer of all or any portion of the Property; or any claim or
cause of action of any kind by any party that any Indemnified Party
is liable for any act or omission of Indemnitor or any other person
or entity in connection with the ownership, sale, operation or
development of the Property.
- --------------------------------------------------------------------------------
Bank of America Community Development Bank
IndeM1 CAR (rev 001 09 95) -2- RLD-107911
<PAGE>
2.5 Defense of Indemnified Parties
------------------------------
Upon demand by an Indemnified Party, Indemnitor shall defend any
investigation, action or proceeding involving any Indemnified Costs
which is brought or commenced against any Indemnified Party, whether
alone or together with Indemnitor or any other person, all at
Indemnitor's own cost and by counsel to be approved by the
Indemnified Party in the exercise of its reasonable judgment. In the
alternative, any Indemnified Party may elect to conduct its own
defense at the expense of Indemnitor.
2.6 Representation and Warranty Regarding Hazardous Substances
----------------------------------------------------------
Before signing this Agreement, Indemnitor researched and inquired
into the previous uses and owners of the Property. Based on that due
diligence, Indemnitor represents and warrants that to the best of
its knowledge, no Hazardous Substance has been disposed of or
released, or otherwise now exists, in, on, under or around the
Property, except as Indemnitor has disclosed to Bank in writing.
2.7 Compliance Regarding Hazardous Substances
-----------------------------------------
Indemnitor has complied, and shall comply and cause all tenants and
any other persons who may come upon the Property to comply, with all
laws, regulations and ordinances governing or applicable to
Hazardous Substances, including those requiring disclosures to
prospective and actual buyers of all or any portion of the Property.
Indemnitor also has complied and shall comply with the
recommendations of any qualified environmental engineer or other
expert which apply or pertain to the Property.
2.8 Notices Regarding Hazardous Substances
--------------------------------------
Indemnitor shall promptly notify Bank if it knows, suspects or
believes there may be any Hazardous Substance in or around the
Property, or in the soil, groundwater or soil vapor on or under the
Property, or that Indemnitor or the Property may be subject to any
threatened or pending investigation by any governmental agency under
any law, regulation or ordinance pertaining to any Hazardous
Substance.
2.9 Site Visits, Observations and Testing
-------------------------------------
The Indemnified Parties and their agents and representatives shall
have the right at any reasonable time to enter and visit the
Property for the purposes of observing the Property, taking and
removing soil or groundwater samples, and conducting tests on any
part of the Property. The Indemnified Parties have no duty, however,
to visit or observe the Property or to conduct tests, and no site
visit, observation or testing by any Indemnified Party shall impose
any liability on any Indemnified Party. In no event shall any site
visit, observation or testing by an Indemnified Party be a
representation that Hazardous Substances are or are not present in,
on or under the Property, or that there has been or shall be
compliance with any law, regulation or ordinance pertaining to
Hazardous Substances or any other applicable governmental law.
Neither Indemnitor nor any other party is entitled to rely on any
site visit, observation or testing by any Indemnified Party. The
Indemnified Parties owe no duty of care to protect Indemnitor or any
other party against, or to inform Indemnitor or any other party of,
any Hazardous Substances or any other adverse condition affecting
the Property. Any Indemnified Party shall give Indemnitor reasonable
notice before entering the Property. The Indemnified Party shall
make reasonable efforts to avoid interfering with Indemnitor's use
of the Property in exercising any rights provided in this Section.
2.10 Costs and Expenses
------------------
Indemnitor agrees to pay all of the Indemnified Parties' costs and
expenses, including attorneys' fees, which may be incurred in any
effort to enforce any term of this Agreement, including all such
costs and expenses which may be incurred by any Indemnified Party in
any legal action, reference or arbitration proceeding. From the
time(s) incurred until paid in full to the Indemnified Party, those
sums shall bear interest at the Note Rate.
III. Unsecured Indemnity Agreement
-----------------------------
3.1 Claims Under Unsecured Agreement
--------------------------------
No Indemnified Party shall make any claim under this Article III for
indemnity against any Indemnified Cost:
-3-
<PAGE>
(a) which was actually known to the Indemnified Party prior
to the first to occur of:
(i) full and final repayment of the Loan; or
(ii) the completion of a judicial or nonjudicial
foreclosure sale under the Deed of Trust; or
(iii) the acquisition of the Property by Bank or an
affiliate of Bank by a conveyance in lieu of
foreclosure; and
(b) which could have been lawfully and properly included as
part of the secured indebtedness under the Deed of Trust
in proceedings for a deficiency judgment following a
judicial foreclosure sale of the Property.
3.2 Not Secured By Deed of Trust
----------------------------
Notwithstanding any provision of the Loan Agreement, the Deed
of Trust or any of the Loan Documents, the rights of the
Indemnified Parties under this Article III shall not be secured
by the Deed of Trust. Notwithstanding any provision of the Loan
Documents, the rights of the Indemnified Parties under this
Article III shall not be affected by any provision of the Loan
Documents limiting Bank's recourse or limiting Indemnitor's
liability for the Loan.
3.3 Indemnity Regarding Hazardous Substances
----------------------------------------
Indemnitor indemnifies and holds the Indemnified Parties
harmless from and against any and all Indemnified Costs
directly or indirectly arising out of or resulting from any
Hazardous Substance being present or released in, on or around
any part of the Property, or in the soil, groundwater or soil
vapor on or under the Property, including:
(a) any claim for such Indemnified Costs asserted by any
federal, state or local governmental agency, including
the United States Environmental Protection Agency and
the California Department of Health Services, and
including any claim that any Indemnified Party is liable
for any such Indemnified Costs as an "owner" or
"operator" of the Property under any law relating to
Hazardous Substances; and
(b) any such Indemnified Costs claimed against any
Indemnified Party by any person other than a
governmental agency, including any person who may
purchase or lease all or any portion of the Property
from Indemnitor, from any Indemnified Party, or from any
other purchaser or lessee; any person who may at any
time have any interest in all or any portion of the
Property; any person who may at any time be responsible
for any clean-up costs or other Indemnified Costs
relating to the Property; and any person claiming to
have been injured in any way as a result of exposure to
any Hazardous Substance; and
(c) any such Indemnified Costs which any Indemnified Party
reasonably believes at any time must be incurred to
comply with any law, judgment, order, regulation or
regulatory directive relating to Hazardous Substances,
or which any Indemnified Party reasonably believes at
any time must be incurred to protect the public health
or safety; and
(d) any such Indemnified Costs resulting from currently
existing conditions in, on or around the Property,
whether known or unknown by Indemnitor or the
Indemnified Parties at the time this Agreement is
executed, and any such Indemnified Costs resulting from
the activities of Indemnitor, Indemnitor's tenants, or
any other person in, on or around the Property.
3.4 Indemnity Regarding Construction and Other Risks
------------------------------------------------
Indemnitor indemnifies and holds the Indemnified Parties harmless
from and against any and all Indemnified Costs directly or indirectly
arising out of or resulting from construction of any improvements on
the Property, including any defective workmanship or materials; or
any failure to satisfy any requirements of any laws, regulations,
ordinances, governmental policies or standards, reports, subdivision
maps or development agreements that apply or pertain to the Property;
or breach of any representation or warranty made or given by
Indemnitor to any of the Indemnified Parties or to any prospective or
actual buyer of all or any portion of the Property; or any claim or
cause of action of any kind by any party that any Indemnified Party
is liable for any act or omission of Indemnitor or any other person
or entity in connection with the ownership sale, operation or
development of the Property.
- --------------------------------------------------------------------------------
-4-
<PAGE>
3.5 Defense of Indemnified Parties
------------------------------
Upon demand by any Indemnified Party, Indemnitor shall defend any
investigation, action or proceeding involving any Indemnified Costs
which is brought or commenced against any Indemnified Party, whether
alone or together with Indemnitor or any other person, all at
Indemnitor's own cost and by counsel to be approved by the
Indemnified Party in the exercise of its reasonable judgment. In the
alternative, any Indemnified Party may elect to conduct its own
defense at the expense of Indemnitor.
3.6 Representation and Warranty Regarding Hazardous Substances
----------------------------------------------------------
Before signing this Agreement, Indemnitor researched and inquired
into the previous uses and owners of the Property. Based on that due
diligence, Indemnitor represents and warrants that to the best of its
knowledge, no Hazardous Substance has been disposed of or released,
or otherwise now exists, in, on, under or around the Property, except
as Indemnitor has disclosed to Bank in writing.
3.7 Compliance Regarding Hazardous Substances
-----------------------------------------
Indemnitor has complied, and shall comply and cause all tenants and
any other persons who may come upon the Property to comply, with all
laws, regulations and ordinances governing or applicable to Hazardous
Substances, including those requiring disclosures to prospective and
actual buyers of all or any portion of the Property. Indemnitor also
has complied and shall comply with the recommendations of any
qualified environmental engineer or other expert which apply or
pertain to the Property.
3.8 Notices Regarding Hazardous Substances
--------------------------------------
Indemnitor shall promptly notify Bank if it knows, suspects or
believes there may be any Hazardous Substance in or around the
Property, or in the soil, groundwater or soil vapor on or under the
Property, or that Indemnitor or the Property may be subject to any
threatened or pending investigation by any governmental agency under
any law, regulation or ordinance pertaining to any Hazardous
Substance.
3.9 Site Visits, Observations and Testing
-------------------------------------
The Indemnified Parties and their agents and representatives shall
have the right at any reasonable time to enter and visit the Property
for the purposes of observing the Property, taking and removing soil
or groundwater samples, and conducting tests on any part of the
Property. The Indemnified Parties have no duty, however, to visit or
observe the Property or to conduct tests, and no site visit,
observation or testing by any Indemnified Party shall impose any
liability on any Indemnified Party. In no event shall any site visit,
observation or testing by any Indemnified Party be a representation
that Hazardous Substances are or are not present in, on or under the
Property, or that there has been or shall be compliance with any law,
regulation or ordinance pertaining to Hazardous Substances or any
other applicable governmental law. Neither Indemnitor nor any other
party is entitled to rely on any site visit, observation or testing
by any Indemnified Party. The Indemnified Parties owe no duty of care
to protect Indemnitor or any other party against, or to inform
Indemnitor or any other party of, any Hazardous Substances or any
other party against, or to inform Indemnitor or any other party of,
any Hazardous Substances or any other adverse condition affecting the
Property. Any Indemnified Party shall give Indemnitor reasonable
notice before entering the Property. The Indemnified Party shall make
reasonable efforts to avoid interfering with Indemnitor's use of the
Property in exercising any rights provided in this Section.
3.10 Costs and Expenses
------------------
Indemnitor agrees to pay all of the Indemnified Parties' costs and
expenses, including attorneys' fees, which may be incurred in any
effort to enforce any term of this Agreement, including all such
costs and expenses which may be incurred by any Indemnified Party in
any legal action, reference or arbitration proceeding. From the
time(s) incurred until paid in full to the Indemnified Party, those
sums shall bear interest at the Note Rate.
-5-
<PAGE>
IV. General Provisions
------------------
4.1 Events of Default
-----------------
Bank may declare Indemnitor to be in default under this Agreement
upon the occurrence of any of the following events ("Events of
Default"):
(a) Indemnitor fails to perform any of its obligations under this
Agreement; or
(b) Indemnitor revokes this Agreement or this Agreement becomes
ineffective for any reason.
4.2 Reservation of Other Rights and Remedies
----------------------------------------
Nothing in this Agreement shall be construed to limit any claim or
right which any Indemnified Party may otherwise have at any time
against Indemnitor or any other person arising from any source
other than this Agreement, including any claim for fraud,
misrepresentation, waste or breach of contract other than this
Agreement, and any rights of contribution or indemnity under
federal or state environmental law or any other applicable law,
regulation or ordinance.
4.3 Delay; Cumulative Remedies
--------------------------
If any Indemnified Party delays in exercising or fails to exercise
any right or remedy against Indemnitor, that alone shall not be
construed as a waiver of such right or remedy. All remedies of any
Indemnified Party against Indemnitor are cumulative.
4.4 Rules of Construction
---------------------
In this Agreement, the word "person" includes any individual,
company, trust or other legal entity of any kind. If this Agreement
is executed by more than one person, the word "Indemnitor" includes
all such persons. The word "include(s)" means "include(s), without
limitation," and the word "including" means "including, but not
limited to." When the context and construction so require, all
words used in the singular shall be deemed to have been used in the
plural and vice versa. All headings appearing in this Agreement are
for convenience only and shall be disregarded in construing this
Agreement.
4.5 Reference and Arbitration
-------------------------
(a) Judicial Reference
------------------
In any judicial action between or among the parties,
including any action or cause of action arising out of or
relating to this Agreement or the Loan Documents or based on
or arising from an alleged tort, all decisions of fact and
law shall at the request of any party be referred to a
referee in accordance with California Code of Civil Procedure
Sections 638 et seq. The parties shall designate to the court
-- ---
a referee or referees selected under the auspices of the
American Arbitration Association ("AAA") in the same manner
as arbitrators are selected in AAA-sponsored proceedings. The
presiding referee of the panel, or the referee if there is a
single referee, shall be an active attorney or retired judge.
Judgment upon the award rendered by such referee or referees
shall be entered in the court in which such proceeding was
commenced in accordance with California Code of Civil
Procedure Sections 644 and 645.
(b) Mandatory Arbitration
---------------------
After the Deed of Trust has been released, fully reconveyed
or extinguished, any controversy or claim between or among
the parties, including those arising out of or relating to
this Agreement or the Loan Documents and any claim based on
or arising from an alleged tort, shall at the request of any
party be determined by arbitration. The arbitration shall be
conducted in accordance with the United States Arbitration
Act (Title 9, U.S. Code), notwithstanding any choice of law
provision in this Agreement, and under the Commercial Rules
of the AAA. The arbitrator(s) shall give effect to statutes
of limitation in determining any claim. Any controversy
concerning whether an issue is arbitrable shall be determined
by the arbitrator(s). Judgment upon the arbitration award may
be entered in any court having jurisdiction. The institution
and maintenance of an action for judicial relief or pursuit
of a provisional or ancillary remedy shall not constitute a
waiver of the right of any party, including the plaintiff, to
submit the controversy or claim to arbitration if any other
party contests such action for judicial relief.
<PAGE>
(c) Real Property Collateral
------------------------
Notwithstanding the provisions of subsection 4.5(b), no controversy
or claim shall be submitted to arbitration without the consent of
all parties if, at the time of the proposed submission, such
controversy or claim arises from or relates to an obligation to Bank
which is secured by real property collateral. If all parties do not
consent to submission of such a controversy or claim to arbitration,
the controversy or claim shall be determined by reference as
provided in subsection 4.5(a).
(d) Provisional Remedies, Self-Help and Foreclosure
-----------------------------------------------
No provision of this Section 4.5 shall limit the right of any party
to this Agreement to exercise self-help remedies such as setoff,
foreclosure against or sale of any real or personal property
collateral or security, or to obtain provisional or ancillary
remedies from a court of competent jurisdiction before, after, or
during the pendency of any arbitration or other proceeding. The
exercise of a remedy does not waive the right of either party to
resort to arbitration or reference. At Bank's option, foreclosure
under a deed of trust or mortgage may be accomplished either by
exercise of power of sale under the deed of trust or mortgage or by
judicial foreclosure.
4.6 Severability
------------
Every provision of this Agreement is intended to be severable. In the
event any term, provision, section or subsection of this Agreement is
declared to be illegal or invalid, for any reason whatsoever, by a court
of competent jurisdiction, such illegality or invalidity shall not
affect the other terms, provisions, sections or subsections of this
Agreement, which shall remain binding and enforceable.
4.7 In-House Counsel Fees
---------------------
Whenever Indemnitor is obligated to pay or reimburse any Indemnified
Party for any attorneys' fees, those fees shall include the allocated
costs for services of in-house counsel.
4.8 Integration; Modifications
--------------------------
The Loan Documents, including this Agreement, (a) integrate all the terms
and conditions mentioned in or incidental to this Agreement, (b)
supersede all oral negotiations and prior writings with respect to their
subject matter, and (c) are intended by the parties as the final
expression of the agreement with respect to the terms and conditions set
forth in the Loan Documents and as the complete and exclusive statement
of the terms agreed to by the parties. No representation, understanding,
promise or condition shall be enforceable against any party unless it is
contained in the Loan Documents. This Agreement may not be modified
except in a writing signed by both Bank and Indemnitor.
<PAGE>
4.9 Miscellaneous
-------------
The provisions of this Agreement shall bind and benefit the heirs,
executors, administrators, legal representatives, successors and
assigns of Indemnitor and the Indemnified Parties; provided,
however, that Indemnitor may not assign this Agreement, or assign or
delegate any of its rights or obligations under this Agreement,
without the prior written consent of Bank in each instance. The
liability of all persons who are in any manner obligated under this
Agreement shall be joint and several. Any Indemnitor who is married
agrees that any Indemnified Party may look to all of his or her
community property and separate property to satisfy his or her
obligations under this Agreement. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of
California.
Indemnitor:
Prolong Super Lubricants, Inc.
a Nevada corporation
By: /s/ ELTON ALDERMAN
------------------
Elton Alderman,
President
By: /s/ THOMAS BILLSTEIN
--------------------
Thomas Billstein,
Secretary
Address where notices to Indemnitor are to be sent:
6 Thomas
Irvine, CA 92618
-8-
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors
Prolong International Corporation
We hereby consent to the inclusion in the Registration Statement on Amendment
No. 1 to Form S-4 of our report dated February 23, 1996 related to the
consolidated financial statements of Prolong International Corporation for the
year ended December 31, 1995 and to the reference to our firm as "Experts".
/s/ Corbin & Wertz
CORBIN & WERTZ
Irvine, California
June 30, 1998
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-51751 of Prolong International Corporation on Form S-4 of our report dated
March 4, 1998 appearing in the Prospectus, which is part of this Registration
Statement. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
/s/ Deloitte + Touche LLP
Deloitte & Touche LLP
Costa Mesa, California
July 6, 1998
<PAGE>
EXHIBIT 23.5
The Board of Directors
EPL Pro-Long, Inc.:
We consent to the inclusion of our written fairness opinion, dated April 27,
1998, in the Proxy Statement/Prospectus to be issued in connection with the EPL
Special Meeting. We also consent to the reference to us under the headings
"Opinion of EPL's Financial Advisor" and "Experts" in such Proxy
Statement/Prospectus.
/s/ Ray Clark
NORTH AMERICAN CAPITAL PARTNERS
Newport Beach, California
July 1, 1998
