<PAGE>
As filed with the Securities and Exchange Commission on May 4, 1998
Registration No. 33-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------
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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<CAPTION>
<S> <C> <C>
NEVADA 2990 74-2234246
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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. [_]
-------------------
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<CAPTION>
CALCULATION OF REGISTRATION FEE
=========================================================================================================
Amount Proposed Maximum Proposed Maximum Amount of
Title of Each Class of to be Offering Price Aggregate Registration
Securities to be Registered Registered per Share (1) Offering Price (1) Fee (1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value 2,993,035 $2.565 $7,677,135 $2,265
shares
=========================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c), using the average of the high and low bid
price for the Common Stock as reported on the system of the National
Association of Securities Dealers, Inc., known as the OTC Bulletin Board on
May 1, 1998, which was $2.565 per share.
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
<TABLE>
<CAPTION>
Location or Caption in
Item No. Caption Proxy Statement/Prospectus
- -------- ------- --------------------------
<S> <C>
A. INFORMATION ABOUT THE TRANSACTION
---------------------------------
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 Available Information; Table of Contents;
Pages of Prospectus Incorporation of Certain Documents by
Reference
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;
Acquired Legal 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.
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
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 Not Applicable
Registrants
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 Available Information; Incorporation of
Other Than S-2 or S-3 Registrants Certain Documents by Reference; Summary; The
Transaction; 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; Changes in and
Disagreements with PIC's Accountants on
Accounting and Financial Disclosure; 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
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
17. Information With Respect to Companies Available Information; Incorporation of
Other Than S-2 or S-3 Companies Certain Documents by Reference; Summary; The
Transaction; 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; Management's Discussion and Analysis
of Financial Condition 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; Incorporation of Certain Documents
by Reference; 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; 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
</TABLE>
4
<PAGE>
EPL PRO-LONG, INC.
245 FISCHER AVENUE, SUITE A-1
COSTA MESA, CALIFORNIA 92626
______________, 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 ___________, 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
exchangeable or exercisable for or convertible into shares of the
capital stock of PIC or
2
<PAGE>
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 COUNSEL AND/OR OBTAIN INDEPENDENT
3
<PAGE>
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
<PAGE>
EPL PRO-LONG, INC.
245 Fischer Avenue, Suite A-1
COSTA MESA, CALIFORNIA 92626
----------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be Held _____________, 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 _______________, 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 ___________, 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
- ------------------
, 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
<PAGE>
EPL PRO-LONG, INC.
[LOGO OF PIC APPEARS HERE] PROXY STATEMENT [LOGO OF EPL APPEARS HERE]
----------
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 ______________, 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
_____________, 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 8 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 May___ , 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.
INCORPORATION OF DOCUMENTS BY REFERENCE
PIC hereby incorporates by reference into this Proxy Statement/Prospectus
the following documents previously filed with the Commission pursuant to the
Exchange Act:
1. PIC's Annual Report on Form 10-K for the year ended December 31, 1997;
and
2. The description of the PIC Common Stock set forth in PIC's Registration
Statement on Form 10 filed with the Commission on July 3, 1997 (File
No. 000-22803), and any amendment or report filed for the purpose of
updating any such description.
In addition, all reports and other documents filed by PIC pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Proxy Statement/Prospectus and prior to the EPL Special Meeting shall be
deemed to be incorporated by reference herein and to be a part hereof from the
date of filing of such reports and documents. Any statement included or
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this Proxy
Statement/Prospectus to the extent that a statement contained herein, or in any
other subsequently filed document that also is incorporated or deemed to be
incorporated by reference herein, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Proxy Statement/Prospectus.
2
<PAGE>
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE
NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST
FROM NICHOLAS M. ROSIER, CHIEF FINANCIAL OFFICER, 6 THOMAS, IRVINE, CALIFORNIA
92618. TELEPHONE NUMBER (949) 587-2700. IN ORDER TO ENSURE TIMELY DELIVERY OF
THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY _________________, 1998.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN OR INCORPORATED BY REFERENCE 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 OR INCORPORATED BY REFERENCE 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
<PAGE>
TABLE OF CONTENTS
Page
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
Certain 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.................................................................. 9
Federal Income Tax Risks Relating to the Transaction..................... 9
Managing Growth..........................................................10
Need to Raise Capital for Growth.........................................10
Historic Reliance on Direct Response Sales...............................10
Dependence on Key Management.............................................11
Risk of Product Liability................................................11
Competition..............................................................11
Market Volatility; Regulation as a Penny Stock...........................12
Costs of Components......................................................12
Limited Operating History................................................13
Dependence on Third Party Supply Relationships...........................13
Product Concentration....................................................13
Risk of Declining Selling Prices.........................................14
Dependence on International Sales for Future Growth......................14
Environmental Compliance.................................................14
Control by Management and Existing Shareholders..........................15
Risks Associated With Potential "Year 2000" Problems of Third Parties....15
Effects of Preferred Stock on the Rights of Common Stock.................16
Residual Liability.......................................................16
EPL SPECIAL MEETING...........................................................17
Time, Date, Place and Purpose............................................17
Record Date and Shares Entitled to Vote..................................17
Recommendation of EPL Board of Directors.................................17
Proxies..................................................................17
THE TRANSACTION...............................................................19
General..................................................................19
Terms of the Agreement...................................................19
The Dissolution..........................................................21
Reasons for the Transaction..............................................22
Description Of PIC's Securities To Be Registered.........................23
Regulatory Approvals.....................................................23
i
<PAGE>
Interests of Certain Persons in the Transaction..........................23
Accounting Treatment.....................................................23
Certain Federal Income Tax Consequences..................................23
Opinion of EPL's Financial Advisor.......................................25
Dissenters' Rights.......................................................29
Resales of PIC Common Stock..............................................31
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS...................33
BUSINESS OF PIC...............................................................38
General..................................................................38
Products.................................................................38
Current Markets for Prolong's Products...................................42
Future Markets for Prolong's Products....................................43
Geographic Markets.......................................................44
Marketing and Distribution of the Products...............................45
Competition..............................................................46
Production...............................................................47
Customers................................................................48
Intellectual Property....................................................48
Royalty Agreements.......................................................48
Employees................................................................49
PROPERTIES OF PIC.............................................................50
LEGAL PROCEEDINGS INVOLVING PIC...............................................50
MARKET PRICE OF AND DIVIDENDS ON PIC'S COMMON EQUITY..........................51
COMMON STOCK OWNERSHIP BY MANAGEMENT AND PRINCIPLE
STOCKHOLDERS OF PIC.........................................................52
DIRECTORS AND EXECUTIVE OFFICERS OF PIC.......................................54
EXECUTIVE COMPENSATION........................................................56
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................61
SELECTED FINANCIAL DATA - PIC.................................................62
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF PIC..................................63
BUSINESS OF EPL...............................................................67
MARKET PRICE OF AND DIVIDENDS ON EPL'S COMMON EQUITY..........................67
COMMON STOCK OWNERSHIP BY MANAGEMENT AND
PRINCIPLE SHAREHOLDERS OF EPL...............................................67
SELECTED FINANCIAL DATA - EPL.................................................69
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF EPL..................................70
ii
<PAGE>
CERTAIN DIFFERENCES IN THE RIGHTS OF PIC AND EPL SHAREHOLDERS................73
Authorized Capital Stock................................................73
Removal of Directors....................................................73
Annual Meetings.........................................................74
Notice of Nominations...................................................74
Special Meetings........................................................74
Proxies.................................................................75
Quorum..................................................................75
Voting Rights...........................................................75
Amendment of Articles of Incorporation and Bylaws.......................76
Exculpation and Indemnification.........................................76
Dissolution.............................................................77
EXPERTS......................................................................77
LEGAL MATTERS................................................................77
STOCKHOLDER PROPOSALS........................................................77
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
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 or incorporated by reference 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 OTC Bulletin Board under the symbol
"PROL." 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.
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.
1
<PAGE>
EPL SPECIAL MEETING
Time, Place and Date. The EPL Special Meeting will be held on
_______________, 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 __________, 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 June 30, 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.
CERTAIN 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 -- Certain 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 OTC Bulletin Board under the
symbol "PROL." 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 on the OTC Bulletin Board 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 May 1, 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 N/A(2) $1.41
May 1, 1998 $2.66 N/A(2) $1.33
- -----------------
</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) Historical closing price information for shares of EPL Common Stock is not
available because there is no public trading market for EPL Common Stock.
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.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1997
----
Statement of Operations Data
<S> <C>
Net revenues.......................................... $29,846,795
Net income............................................ 2,368,759
Net income per common share:
Basic.............................................. $0.08
Diluted............................................ $0.08
Weighted average number of common shares outstanding:
Basic.............................................. 28,501,070
Diluted............................................ 28,683,809
Balance Sheet Data
Total assets.......................................... $20,001,738
Total liabilities..................................... 4,456,814
Total stockholders' equity............................ 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
Year ended December 31, 1997............ $0.08 $0.08 $ 0.38 $ 0.38
PIC - Pro Forma Combined
Year ended December 31, 1997............ $0.09 $0.09 $ 0.55 $ 0.54
EPL - Historical (3)
Year ended April 30, 1997............... $0.11 $0.11 $(0.01) $(0.01)
Eight Months Ended December 31, 1997.... 0.09 0.09 0.08 0.08
EPL - Equivalent Pro Forma Combined (4)
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 December 31, 1997 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.
(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.
8
<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
9
<PAGE>
significant net value and that EPL shareholders are required to recognize
taxable gain. See "THE TRANSACTION -- "Certain 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."
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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(TM)) and Quaker State (Slick 50(TM)), both of which market engine
oil treatments. Prolong's competitors also include major oil companies such as
Shell Oil Company, Castrol, Pennzoil, and other companies who manufacture
lubrication products, such as WD40 Corp. Further, Prolong believes that major
oil companies not presently offering products that compete directly with those
offered by Prolong may enter its markets in the future. Increased competition
could result in price reductions, reduced gross margins, and a loss of market
share, any of which could have a material adverse effect on 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 can be no assurance that Prolong will be
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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; REGULATION AS A PENNY STOCK
The market prices of PIC Common Stock have been and may continue to be
highly volatile. Announcements of new products by Prolong or its competitors,
developments concerning or general conditions in the automotive or related
industries, or the economy in general, may have a significant adverse effect on
PIC's business and on the market price of PIC's securities. Purchases or sales
of a substantial number of shares of PIC Common Stock by existing security
holders could also have a material adverse effect on the market price of PIC's
securities.
PIC Common Stock is reported on the OTC Bulletin Board. PIC Common Stock is
not currently listed on any exchange or the Nasdaq Stock Market ("Nasdaq").
Because PIC Common Stock is not listed on an exchange or Nasdaq, it is subject
to the regulations regarding trading in penny stocks (i.e. those securities
trading for less than $5.00 per share). Such regulations require that broker-
dealers affecting transactions in penny stocks (i) prior to the sale of a penny
stock by such broker-dealer to a new purchaser, must make an informed
determination as to whether the purchaser is suitable to invest in penny stocks,
taking into account the purchaser's financial condition and investment
experience and objectives, furnishing the purchaser with a written statement
setting forth the basis of the suitability finding; (ii) must obtain from the
purchaser a written agreement to purchase the security until the purchaser
becomes an "established customer;" (iii) must provide the purchaser with a "risk
disclosure document" that contains, among other things, a description of the
penny stock market and how it functions and the risks associated with such
investments; and (iv) must send a customer of a penny stock security a written
account statement including prescribed information relating to the security.
As a result of the lack of listing of PIC's securities on an exchange or
Nasdaq and because of the rules regarding transactions in penny stocks, the
liquidity and salability of PIC's securities may be substantially impaired.
There is no assurance that PIC's current market-makers will continue to make a
market in PIC's securities, or that any market for PIC's securities will
continue. PIC is currently contemplating making application to have PIC Common
Stock listed for trading on either Nasdaq or a national securities exchange
following effectiveness of this Registration Statement and as soon as it meets
applicable listing requirements with respect thereof. Each national securities
exchange and Nasdaq has its own respective listing and maintenance requirements
which PIC must satisfy in order to have PIC Common Stock listed for trading
thereon. There can be no assurances that PIC will be able to satisfy any of such
listing or maintenance requirements or that PIC Common Stock will be accepted
for trading by a national securities exchange or Nasdaq in a timely manner, if
at all.
COSTS OF COMPONENTS
Prolong depends upon its suppliers for the supply of the primary components
for its AFMT formula. Such components are subject to significant price
volatility beyond the control or influence of Prolong. Prices for the
components of the quality sought by Prolong are dependent on the origin, supply
and demand at the time of purchase. Prices can be affected by multiple factors
in the producing countries, including weather and political and economic
conditions. Additionally, petroleum products, which comprise AFMT, have been
affected in the past, and may be affected in the future, by the
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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."
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
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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."
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
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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."
CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS
As of March 2, 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.
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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."
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,
____________, 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 accordance with
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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 June 30, 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 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
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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 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; (h) 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; (i) 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; and (j) certain other
conditions as specifically set forth in 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.
Termination. Either party shall be entitled to terminate the Agreement at
any time after June 30, 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.
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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.
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.
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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.
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 trading price of PIC Common Stock; and (e) the alternative of EPL retaining
its assets and distributing its net income from royalties to its shareholders as
dividends.
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. The PIC Board believes that
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the acquisition of EPL will (a) secure its rights to continue to use the AFMT
formula in its products and the related trademarks; (b) increase the market
value of PIC Common Stock; (c) provide the opportunity to lower overall selling
costs by eliminating the payment of royalties to EPL under the AFMT license
agreement; and (d) provide beneficial accounting treatment.
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 April 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.
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 April 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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of certain 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
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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.
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
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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 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.
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
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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 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 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 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,
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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 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 $5.6 million
and $6.3 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
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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 $5.6 million to $7.4
million with a mean value of $6.4 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. 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.
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
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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.
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.
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
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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 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
30
<PAGE>
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 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
31
<PAGE>
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.
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 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.
32
<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 December 31, 1997. 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 fiscal year ended December 31, 1997 and of EPL for the eight months
ended December 31, 1997 and the 4 months ended April 30, 1997.
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.
33
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
As of December 31, 1997
<TABLE>
<CAPTION>
Pro Forma
Prolong
International Acquisition
Corporation EPL Pro-Long, Inc. Adjustments Combined
------------------- --------------------- ------------- --------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 6,180,983 $ 42,170 $ 0 $ 6,223,153
Accounts receivable, net 3,880,571 538,795 0 4,419,366
Inventories 1,300,691 0 0 1,300,691
Prepaid expenses 711,242 5,625 0 716,867
Prepaid television time 1,022,144 0 0 1,022,144
Advances to employees 227,896 0 0 227,896
------------------- --------------------- ------------- --------------
Total current assets 13,323,527 586,590 0 13,910,117
Property and equipment, net 219,683 0 0 219,683
Patents, trademarks,
tradenames, etc. 0 309,712 5,356,786 (1)(2) 5,666,498
Other assets 82,724 0 0 82,724
Deposits 122,716 0 0 122,716
------------------- --------------------- ------------- --------------
Total assets $ 13,748,650 $ 896,302 $ 5,356,786 $ 20,001,738
=================== ===================== ============= ==============
Accounts payable $ 1,074,098 $ 310,540 $ 0 $ 1,384,638
Accrued expenses 1,663,321 0 0 1,663,321
Income taxes payable 1,278,684 0 0 1,278,684
Other current liabilities 0 3,776 0 3,776
Deferred income taxes 23,693 0 0 23,693
------------------- --------------------- ------------- --------------
Total current liabilities 4,039,796 314,316 0 4,354,112
Loan payable 0 102,702 0 102,702
Common stock 25,465 135,473 (132,480) (3) 28,458
Additional paid-in capital 7,393,451 1,516,553 4,316,524 (3)(4) 13,226,528
Retained earnings (deficit) 2,289,938 (1,172,742) 1,172,742 (5) 2,289,938
------------------- --------------------- ------------- --------------
Total stockholders' equity 9,708,854 479,284 5,356,786 15,544,924
------------------- --------------------- ------------- --------------
Total liabilities and
stockholders' equity $ 13,748,650 $ 896,302 $ 5,356,786 $ 20,001,738
=================== ===================== ============= ==============
</TABLE>
34
<PAGE>
NOTES TO COMBINED CONDENSED BALANCE SHEET
(1) The unaudited estimated fair value of assets acquired and liabilities
assumed is summarized as follows:
<TABLE>
<S> <C>
Fair value of PIC stock to be given up $ 5,986,070
Fair value of liabilities assumed 417,018
Other acquisition costs 159,712
Fair value of tangible and identifiable assets acquired (896,302)
Patents acquired (5,666,498)
----------------
Excess of costs over identifiable assets acquired $ 0
================
</TABLE>
(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. and the elimination of EPL Common Stock.
(4) Adjustment to properly state the combined additional paid-in capital
balance and the elimination of EPL Pro-Long, Inc.'s additional paid-in
capital.
(5) Adjustment to eliminate the retained deficit account balance of EPL
Pro-Long, Inc.
35
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
Fiscal Year Ended December 31, 1997
<TABLE>
<CAPTION>
Pro Forma
Prolong
International
Corporation For EPL Pro-Long, Inc.
the Fiscal Year For the Twelve
Ended December Months Ended
31, 1997 December 31, 1997 (1) 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
(expense), net 241,029 (98) 0 240,931
------------------- ------------------- -------------- -----------------
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
=================== =================== ============== =================
<CAPTION>
Pro Forma
-----------------
<S> <C> <C>
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>
36
<PAGE>
NOTES TO COMBINED CONDENSED STATEMENTS OF OPERATIONS
(1) 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.
(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%.
37
<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.
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
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,
38
<PAGE>
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(TM), fluorocarbon resins or fluorocarbon micropowder. Prolong
believes that the primary disadvantage to particulate material in lubricant
additives is that it tends to distribute unevenly and can result in excessive
particulate build-up. Because AFMT contains no solid particles, Prolong
believes that there is no risk of excessive build-up, and the lubrication "film
coat" is uniform and microscopically thin.
The friction fighting characteristics of AFMT have been documented by The
Foundation for Scientific and Industrial Research at the Norwegian Institute of
Technology, Trondheim, Norway. This independent testing laboratory was
commissioned in 1987 by the principals of Prolong Technology of Canada, Inc.
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. 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.
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
39
<PAGE>
oils, improves the oxidization resistance of metals. Given the foregoing
advantages demonstrated by AFMT, Prolong has identified a broad market for its
lubricant products.
Prolong believes that the following are examples of some of the
applications of AFMT-based products:
. Internal Combustion Engines . Automatic and Manual Transmissions
. Agricultural Equipment . Computer Numerically Controlled
. 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.
Prolong Gas/Diesel Fuel System Treatment
This product is formulated to increase fuel efficiency, lubricate the "top
end" of internal combustion engines, and clean and maintain fuel injectors and
other fuel system components. This product is also designed to help maintain
peak engine performance and overall mileage. The formula is EPA registered and
is suitable for both gasoline and diesel fuel systems.
Prolong High Performance Multi-Purpose EP-2 Grease
This product is formulated to provide a wide range of lubricating benefits
to industrial equipment under extreme pressure, high and low temperature
extremes, and potential water washout conditions. Prolong believes that this
product represents a substantial improvement in lubrication
40
<PAGE>
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. Prolong believes
that the use of this product will provide higher feed rates and operating
speeds, finer surface finishes, and improved cutting tool life.
Prolong Multi-Purpose Precision Oil
This product is formulated as a fine, light oil for use in lubricating
precision tools and equipment. This product is designed to provide smooth
lubrication, which Prolong believes results in optimal operation of precision
equipment and tools and extension of useful life.
Despite PSL's current variety of products, there are other products which
Prolong believes could be successfully and beneficially formulated in the future
using AFMT technology and derivatives thereof that would result in products with
improved lubrication performance. Although there can be no assurances that
Prolong will have the financial or other resources to develop, manufacture and
market any such additional products, the following is a partial list of such
additional products:
High Performance Motor Oil
High Performance Synthetic Motor Oil
Motorcycle Engine & Transmission Treatment
Gun Oil & Cleaner
Gear/Differential Treatment
Heavy Duty Diesel Fuel Conditioner
Hydraulic System Treatment
Chain Oil
2-Cycle Engine Oil
Power Steering Treatment
Radiator Treatment
Compressor Treatment
Shock Absorber Lubricants
Brake Cleaner
Assembly Lube
In addition to the development of the above-referenced AFMT-based products,
Prolong is also engaged in efforts to expand its lubricant formulations beyond
its current AFMT-based technology.
41
<PAGE>
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. Although PIC is currently actively addressing
both the consumer automotive and consumer household markets described below,
PIC's strategy is to adapt Prolong's product line and address the industrial and
governmental markets also described below:
Consumer Automotive
The consumer automotive market consists of automobiles, light trucks,
motorhomes, motorcycles, snowmobiles, jetskis, and other fuel burning vehicles.
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, 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 anticipates pursuing the industrial market through a network of
manufacturer's sales representatives and through established industrial
distributors.
Federal, State, & Local Governments
The government market is not only very large, but Prolong believes it is
also extremely varied. It includes cities, counties, states and all of the
federal government agencies. Prolong believes that these agencies collectively
purchase, operate, and maintain a significant investment in trucks, automobiles,
buses, tanks, airplanes, helicopters, boats, ships, radar equipment, guns,
miscellaneous equipment and tools, as well as many other mechanisms, all of
which require adequate lubrication.
42
<PAGE>
Federal Government. The federal government represents potential sales by
Prolong to many different agencies such as the Department of Defense, NASA,
Department of Energy, Department of Transportation and other federal
governmental agencies.
Military Sales. Procurement procedures require that products used in or on
military equipment must be manufactured according to certain military
specifications ("MIL Specs"). Prolong intends to apply for and receive United
States MIL Specs for certain of its products, and to market products not only to
the United States military, but to foreign militaries as well. Prolong plans to
develop the military market, both here and abroad, through the utilization of
specialists who are familiar with military procurement procedures and with the
special needs of the military services.
State Government. Potential sales to state governments include users such
as the National Guard, highway patrol, state police and other state agencies.
County and City Government. Both county and city governments are potential
Prolong customers for use by police, fire, water, gas, waste management and
other local departments.
Public Transportation. Public transportation entities are major potential
customers for Prolong's products, and Prolong intends to focus its efforts to
market products to these entities at the various levels of government. Prolong
believes that rapid transit districts throughout the country are facing a
serious problem with noisy and polluting diesel buses. The Los Angeles Rapid
Transit District, for example, has 3,300 buses and is currently under heavy
public and regulatory pressure to reduce emissions. In addition to diesel
buses, there are a significant number of other vehicles currently operated by
county and city public transportation agencies which Prolong believes, if
treated with its products, could run cleaner, quieter, last longer and would
burn less fuel.
FUTURE MARKETS FOR PROLONG'S PRODUCTS
Although not being directly addressed by 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.
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 Mr. Bernstein will
provide promotional services and appearances and will recognize "Prolong Super
Lubricants" as a co-sponsor of the "Budweiser King Prolong Top Fuel Dragster."
The agreement calls for the display of the PSL name and logo on the dragster and
related racing components in all races and other events in which the dragster
appears. 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.
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 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.
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<PAGE>
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(TM)) and Quaker State (Slick 50(TM)), both of which market
engine oil treatments. Prolong's competitors also include major oil companies
such as Shell Oil Company, Castrol, Pennzoil, Quaker State and others who
manufacture lubrication products, such as WD40 Corp. Further, Prolong believes
that major oil companies not presently offering products that compete directly
with those offered by Prolong may enter Prolong's markets in the future.
Increased competition could result in price reductions, reduced gross
margins, and a loss of market share, any of which could have a material adverse
effect on 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.
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
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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, 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.
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<PAGE>
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.
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."
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
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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 April 30, 1998, PIC and PSL collectively employ 51 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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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. 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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MARKET PRICE OF AND DIVIDENDS ON PIC'S COMMON EQUITY
PIC Common Stock is currently trading 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 period has been furnished by the OTC Bulletin Board.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions.
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 May 1, 1998 the high and low bids for PIC Common Stock was
$2.63 and $2.50, respectively.
PIC has authorized 150,000,000 shares of PIC Common Stock, having a par
value of $0.001 per share. As of May 1, 1998, the number of holders of record of
PIC Common Stock is approximately 471. 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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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 May 1,
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
-------------------- -------------------------
NAME AND ADDRESS OF SHARES PERCENT OF SHARES PERCENT OF
BENEFICIAL OWNER BENEFICIALLY CLASS BENEFICIALLY CLASS
---------------- OWNED(1) ----- OWNED(1) -----
----- --------
<S> <C> <C> <C> <C>
Elton Alderman
6 Thomas 3,995,600(2) 15.6 3,995,600(2) 14.0
Irvine, California 92618
Carol Auld
6 Thomas 3,744,999(3) 14.7 3,744,999(3) 13.2
Irvine, California 92618
Tom T. Kubota
6 Thomas 1,830,000(4) 7.2 1,830,000(4) 6.4
Irvine, California 92618
Thomas C. Billstein
6 Thomas 1,481,600(5) 5.8 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
All officers and directors as a group
(5 persons) (8) 7,326,200(9) 28.6 7,326,200(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 computing the percentage of the person holding such options but
are not deemed outstanding for computing the
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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 May 1, 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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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 March 31, 1998:
Name Age Position
---- --- --------
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
(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 present, Mr. Kubota has also
served as a director of PSL. Prior to joining PSL, Mr. Kubota served as
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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.
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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
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Restricted All Other
Name and Stock Option Compen-
Principal Position Year Salary($) Bonus($) Awards($)/(1)/ Grants(#) sation ($)
- ------------------ ---- --------- -------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Elton Alderman 1995 --- --- --- --- 61,250
President and Chief 1996 93,337 45,419/(2)/ --- --- ---
Executive Officer 1997 134,000 90,000/(3)(4)/ --- 500,000 ---
Thomas C. Billstein 1995 --- --- --- --- 53,008
Vice-President and 1996 90,256 36,850/(2)/ --- --- ---
Secretary 1997 120,000 60,000/(3)(5)/ --- 200,000 ---
Nicholas M. Rosier 1995 --- --- --- --- ---
Chief Financial Officer 1996 --- --- --- --- ---
1997 61,993 20,000/(6)/ --- 20,000 ---
Tom T. Kubota 1995 --- --- --- --- 65,250
Vice President Investor 1996 90,000 --- 62,500 --- 118,500
Relations 1997 61,393 45,000/(3)/ --- 200,000 35,000/(7)/
</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 $12,500 paid to Mr. Rosier in 1998 for his performance in 1997.
/(7)/ Represents fees paid to Mr. Kubota in his capacity as an independent
consultant to the Company prior to June 1997.
56
<PAGE>
Option Matters
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
---------------------------------
Potential Realizable
Percent Value at Assumed
Number of of Total Annual Rates of Stock
Securities Options Exercise Price Appreciation for
Underlying Granted to or Base Option Term/(3)/
Options Employees in Price Expiration -----------------------
Name Granted (#) Fiscal Year/(1)/ ($/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.
57
<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
Unexercised Options In-The-Money
Shares Value at Fiscal Year-End (#) Options at Fiscal Year End($)/(1)/
Acquired on Realized ---------------------- ----------------------------------
Name Exercise # ($) 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.
58
<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 is 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. Presently, the PIC Board 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 PIC Board, 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 PIC Board. 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 the Company (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 PIC Board has the authority to
determine the time or times at which options granted under the Plan become
exercisable, provided that incentive options must expire no later than ten years
from the date of grant, or five years in the case of a 10% Holder. Options are
not assignable and are nontransferable, other than upon death by will and the
laws of descent and distribution, and generally may be exercised only by an
employee while employed by 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 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
59
<PAGE>
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.
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 board of directors
determined executive officer compensation but did not participate in proceedings
or decisions of the board of directors regarding their respective compensation.
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.
60
<PAGE>
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 a sponsorship agreement 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 contemplated transaction 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.
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.
61
<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 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
DECEMBER 31,
------------
1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statement of Operations Data
Net revenues........................................................ $ $ 390,506 $15,813,493 $29,846,795
Net income (loss)................................................... (134,285) (415,740) 721,178 2,132,553
Net income (loss) per share:
Basic............................................................ N/A(1) $ (0.02) $ 0.03 $ 0.08
Diluted.......................................................... N/A(1) $ (0.02) $ 0.03 $ 0.08
Weighted average common shares:
Basic............................................................ N/A(1) 17,156,501 23,463,620 25,508,035
Diluted.......................................................... N/A(1) 17,156,501 23,463,620 25,690,774
Balance Sheet Data
Total assets........................................................ $ 139,984 $ 730,760 $ 9,023,317 $13,748,650
Total liabilities................................................... 12,452 88,218 1,732,467 4,039,796
Total stockholders' equity.......................................... 127,532 642,542 7,290,850 9,708,854
</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.
62
<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 DECEMBER 31,
--------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net revenues......................... 100.0% 100.0% 100.0%
Cost of goods sold................... 54.1 29.5 19.2
------------ ------------ ------------
Gross profit.................... 45.9 70.5 80.8
Selling and marketing expenses....... 0.0 52.0 57.8
General and administrative expenses.. 152.4 12.9 11.8
------------ ------------ ------------
Operating income................ (106.5) 5.6 11.2
Interest expense..................... 0.0 (0.3) 0.0
Interest and dividend income......... 0.4 0.6 0.8
------------ ------------ ------------
Income before income taxes...... (106.1) 5.9 12.0
Provision for income taxes........... 0.4 1.3 4.8
------------ ------------ ------------
Net income...................... (106.5) 4.6 7.2
============ ============ ============
</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 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.
63
<PAGE>
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, 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.
64
<PAGE>
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 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 March
2, 1998, Prolong had commitments for capital
65
<PAGE>
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. 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 $6,181,000 at December 31, 1997 compared
to $5,064,000 at December 31, 1996. Working capital was $9,284,000 at December
31, 1997 as compared to $7,013,000 at December 31, 1996, representing an
increase of $2,271,000.
Operating activities generated $1,320,000 during 1997 as compared to a
usage of cash from operations during 1996 of $317,000. This increase of
$1,637,000 resulted primarily from higher net income and increases in accounts
payable, accrued expenses and income taxes payable which were partially offset
by increases in accounts receivable caused by the transition to retail
customers, prepaid television time and other prepaid expenses.
Cash flows used for investing activities totaled $375,000 in 1997. This
was comprised of property and equipment acquisitions of $151,000 and employee
advances of $224,000. Cash flows from financing activities totaled $173,000 in
1997, comprised primarily of collections of common stock subscriptions.
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. 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
The FASB issued SFAS No. 130, Reporting Comprehensive Income, during 1997.
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. The disclosures prescribed by SFAS No. 130 are effective
beginning with the first quarter of calendar 1998.
Also 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. 130 and SFAS No. 131 in the 1998 year-end consolidated financial
statements.
66
<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 April 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.
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 May 1, 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 3,700,000 55.3%
245 Fischer Avenue, Suite A-1
Costa Mesa, California 92626
Lois Miller 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) (2)
</TABLE>
67
<PAGE>
- ----------
(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) Includes shares held by Messrs. Davis and Wykidal and Ms. Miller who
collectively served as EPL's directors and executive officers as of May 1,
1998.
68
<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 EIGHT MONTHS ENDED
APRIL 30, DECEMBER 31,
--------- ------------
1993 1994 1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data
Net royalty revenues.................... $ $ $ 2,414 $ 199,610 $ 766,274 $ 203,000 $ 729,534
Net sales............................... 823,569 508,604 252,703 2,589
Net profit (loss)....................... (175,792) (365,935) (246,476) 32,218 628,609 (76,294) 540,790
Net profit (loss) per share:
Basic................................. $ (0.03) $ (0.05) $ (0.04) $ 0.01 $ 0.09 $ (0.01) $ 0.08
Diluted............................... $ (0.03) $ (0.05) $ (0.04) $ 0.01 $ 0.09 $ (0.01) $ 0.08
Weighted average common shares:
Basic................................. 6,686,070 6,686,070 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 6,686,070 6,686,070
Balance sheet data
Total assets............................ $ 754,268 $ 601,504 $ 417,316 $ 381,432 $ 706,117 $ 413,407 $ 896,302
Total liabilities....................... 818,092 1,126,683 1,139,648 1,071,546 767,622 1,179,816 417,017
Total stockholders' equity (deficit).... (63,824) (525,179) (722,332) (690,114) (61,506) (766,409) 479,285
</TABLE>
- -----------
69
<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 Eight-Month Period Ended December 31, 1997 and December
31, 1996
Net revenues for the eight months ended December 31, 1997 were $729,534 as
compared to $203,000 for the eight months ended December 31, 1996, an increase
of $526,534 or 259.4%. 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 eight months ended
December 31, 1997 were $167,662 as compared to $253,805 for the eight months
ended December 31, 1996, a decrease of $86,143 or 51.4%. This decrease was
primarily attributable to legal and professional fees necessary to pursue and
resolve lawsuits and negotiate creditor claims in 1996 that were greatly reduced
in 1997. As a percentage of revenues, selling, general and administrative
expenses decreased to 23.0% in 1997 from 125.0% in 1996.
Other expense for the eight months ended December 31, 1997 was $15,880 as
compared to $24,595 for the comparable period of the prior year, a decrease of
$8,715 or 54.9%. The decrease was attributable to the reduction of interest
expense as a result of the paydown of the outstanding loan balance.
Net profit for the eight months ended December 31, 1997 was $540,790 as
compared to a loss of $76,294 for the eight months ended December 31, 1996, an
increase of $617,084. This increase was a result of the factors discussed
above.
Comparison of the Years Ended April 30, 1997 and April 30, 1996
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.
70
<PAGE>
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.
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.
71
<PAGE>
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 $56,708 at April 30, 1997 as compared to
a zero balance at April 30, 1996. Working capital was at a deficit of $209,036
at April 30, 1997 as compared to a deficit of $791,546 at April 30, 1996.
72
<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
March 31, 1998, PIC had issued and outstanding 25,464,500 shares of PIC Common
Stock held by approximately 487 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 March 31, 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 to vote were voted,
and the entire number of directors authorized at the time of the director's
73
<PAGE>
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.
74
<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.
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<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 expressly provides may not be limited or eliminated. 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.
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.
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<PAGE>
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.
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 and incorporated by reference in this Proxy
Statement/Prospectus, have been audited by Deloitte & Touche, LLP , independent
auditors, as stated in their reports which are included and incorporated herein
by reference and have been so included and incorporated 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."
77
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ANNEX A
-------
AGREEMENT AND PLAN OF REORGANIZATION
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
------------------------------------
This Agreement and Plan of Reorganization (this "Agreement"), dated as
of February 5, 1998, is between EPL Pro-Long, Inc., a California corporation
("EPL"), and Prolong International Corporation, a Nevada corporation ("PIC").
BACKGROUND
----------
EPL wishes to transfer and PIC wishes to purchase substantially all of
EPL's assets, as more particularly described in this Agreement, solely in
exchange for voting common stock of PIC in a transaction intended to qualify as
a tax-free reorganization within the meaning of Sections 368(a)(1)(C) and
(a)(2)(G) of the Internal Revenue Code of 1986, as amended (the "Code").
SECTION 1
---------
Sale and Transfer of Assets
---------------------------
1.1 Transfer of EPL Assets. On the date of closing specified in
----------------------
Section 4.1 ("Closing Date"), except for those assets, properties and rights
excluded in Section 1.2, EPL shall grant, sell, transfer, assign and deliver to
PIC and PIC will purchase and acquire from EPL, all right, title and interest of
EPL in and to the properties and assets owned by EPL referred to as the
"Purchased Assets" by appropriate instruments in a form satisfactory to PIC.
Such Purchased Assets shall include but not be limited to:
(a) all of the intellectual property of EPL including, but not
limited to, that listed in Schedule 1.1(a) attached hereto and any trade
---------------
secrets, processes and know-how, licenses, patents, patent rights, patent
applications, unpatented inventions, patent licenses, trademarks, service marks,
secret formulas, business and marketing plans, copyrights and applications
therefor; and all rights of EPL to sue any third parties for relief for past
infringement or encroachment of said intellectual property rights;
(b) all of the office furniture, furnishings, fixtures,
machinery, equipment and motor vehicles of EPL ("Equipment");
(c) all of EPL's beneficial and legal right, title and interest
in and to receivables, credits, bank accounts, prepaid expenses (but only with
respect to items transferred to PIC);
(d) all of EPL's beneficial and legal right, title and
interest in and to cash and cash equivalents;
(e) all of EPL's beneficial and legal right, title and interest
in and to those contracts or arrangements listed in Schedule 1.1(e) (the
---------------
"Assumed Contracts");
(f) all computer software of EPL;
(g) the right to use EPL's corporate and trade names and all
variations thereof; and
-1-
<PAGE>
(h) all other assets and properties of EPL, including without
limitation all books, records and related work papers and all licenses,
judgments, causes of action, permits and registrations, except the Excluded
Assets as defined in Section 1.2 below.
1.2 Excluded Assets. Notwithstanding anything to the contrary set
---------------
forth herein, the term "Purchased Assets" expressly excludes the following
(collectively, the "Excluded Assets"):
(a) the stock books, corporate minute books and corporate
seal of EPL; and
(b) EPL's rights under this Agreement.
1.3 Liens and Encumbrances. All of the Purchased Assets shall be
----------------------
free and clear of any and all judgments, liens, mortgages, deeds of trust,
security interests, financing statements and encumbrances of any nature
whatsoever other than those being assumed by PIC hereunder.
SECTION 2
---------
Assumption of Certain Liabilities
---------------------------------
2.1 Liabilities Assumed. Except as expressly provided in this
-------------------
Section, PIC shall not assume any claims, liabilities or obligations of EPL,
whether or not related to the Purchased Assets. As the sole exception to the
foregoing PIC shall assume and agree to discharge when due the following
liabilities of EPL as of the opening of business on the Closing Date,
(collectively, the "Assumed Liabilities"):
(a) trade accounts payable not to exceed $315,000, as
identified on Schedule 2.1 attached hereto; and
------------
(b) liabilities of EPL which are to be performed under the
Assumed Contracts, but only to the extent such liabilities are in the ordinary
course of EPL's business.
2.2 Excluded Liabilities. It is understood and agreed that PIC
--------------------
does not assume and shall not be responsible for any liability or obligation of
or created by EPL with respect to the Purchased Assets or Excluded Assets or any
other matter, whether arising prior to, at or following the Closing Date, other
than the Assumed Liabilities set forth in Section 2.1. Without limiting the
foregoing, the following liabilities and obligations are expressly excluded from
the Assumed Liabilities (collectively, the "Excluded Liabilities"):
(a) all liabilities for federal, state and local income taxes
and franchise taxes arising in connection with the transactions contemplated
hereby;
(b) any liability of EPL whose existence, or that portion of any
liability of EPL which by virtue of its extent constitutes or results in a
breach of a representation, warranty or covenant made by EPL herein, or makes
the information contained in any closing document delivered by EPL incorrect;
(c) all liabilities of EPL under those leases, contracts,
insurance policies and commitments which are not assigned to PIC pursuant to the
provisions hereof; and
-2-
<PAGE>
(d) any liability (whether asserted before or after the
Closing Date) for any breach of a representation, warranty or covenant, or for
any claim for indemnification, contained in any contract or other document
referred to in Section 2.1(b) agreed to be performed pursuant hereto by PIC,
which arose out of or by virtue of EPL's performance thereunder prior to the
Closing Date.
SECTION 3
---------
Consideration
-------------
3.1 Payment at the Closing. 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 common stock, $0.001 par value per
share, of PIC ("PIC Common Stock"). The certificate evidencing such PIC Common
Stock as well as any certificates that PIC issues after the surrender of such
certificate by EPL may contain any legend that PIC deems appropriate to comply
with resale restrictions applicable to "affiliates" under Rule 145(d) under the
Securities Act of 1933, as amended (the "Securities Act") and stop transfer
orders may be placed against such certificates and will be subject to the terms
of the Transfer Restriction required pursuant to Section 9.6 hereof.
SECTION 4
---------
Closing
-------
4.1 Closing. The Closing of the transaction contemplated by this
-------
Agreement shall occur within 5 business days after fulfillment or permitted
waiver of the conditions precedent specified in Sections 9 and 10, but not later
than June 30, 1998 unless the Closing Date is extended by mutual written
agreement of the parties hereof. The Closing shall take place at the offices of
Stradling Yocca Carlson & Rauth, 660 Newport Center Drive, Suite 1600, Newport
Beach, California, or at such other place as EPL and PIC shall agree.
4.2 Delivery at Closing by EPL. At the Closing, EPL shall deliver
--------------------------
or cause to be delivered to PIC: (i) an Assignment and Bill of Sale, duly
executed by EPL; (ii) an assignment of the patents, patent applications, patent
licenses, trademarks and copyrights of EPL, in recordable form, duly executed by
EPL; (iii) any and all registrations, evidence or other documents or instruments
of EPL evidencing or pertaining to EPL's use, ownership or transfer of the
Purchased Assets; (iv) the opinion of EPL's counsel described in Section 9.3
hereof; (v) such other good and sufficient instruments of conveyance and
transfer reasonably requested by PIC's counsel as shall be effective to vest in
PIC good and marketable title to all of the Purchased Assets; (vi) all
termination statements, releases, reconveyances and any other documents or
instruments legally sufficient to release fully any security interests, liens,
encumbrances or other interests in the Purchased Assets and (vii) such other
documents and instruments required to be delivered pursuant to the provisions of
Section 9 hereof.
4.3 Delivery of Possession of Purchased Assets. Immediately upon
------------------------------------------
consummation of the Closing, EPL shall put PIC into possession of all of the
Purchased Assets.
4.4 Termination. Either party shall be entitled to terminate this
-----------
Agreement at any time after June 30, 1998 if by that date the conditions
precedent to the terminating party's obligations to proceed to the Closing set
forth in Sections 9 and 10 have not been satisfied or properly waived. In the
event of such termination, other than due to a breach or default of a party,
this Agreement shall terminate and neither party
-3-
<PAGE>
shall have any liability to the other under this 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.
SECTION 5
---------
Shareholder Approval; Proxy Statement and Registration Statement
----------------------------------------------------------------
5.1 Shareholder Approval. This Agreement and the transaction
--------------------
contemplated hereby have been approved by the board of directors of EPL. The
board of directors of EPL shall call a special meeting of EPL's shareholders to
be held as soon as practicable after the date hereof.
The purpose of the special meeting of shareholders shall be to approve
the terms and provisions of this Agreement and the transactions contemplated
hereby, including a pro rata distribution of the PIC Common Stock to EPL
shareholders.
5.2 Proxy Statement and Registration Statement. PIC and EPL shall
------------------------------------------
cooperate and promptly prepare and PIC shall file as soon as reasonably
practicable after EPL has reviewed and approved, with the Securities and
Exchange Commission (the "SEC"), a registration statement on Form S-4 relating
to the shares of PIC Common Stock to be issued in the transactions contemplated
hereby (the "Registration Statement"), and PIC and EPL shall use all reasonable
efforts to have the Registration Statement declared effective by the SEC as
promptly as practicable. PIC also shall take any action required to be taken
under state blue sky or securities laws in connection with the issuance of PIC
Common Stock pursuant to the transactions contemplated hereunder. PIC and EPL
will cooperate and furnish each other with (and shall cause its respective
accountants to cooperate in the furnishing and preparation of) all information
concerning themselves, their subsidiaries, directors, officers and shareholders
and such other matters as may be necessary or advisable for the Registration
Statement, the Proxy Statement (as defined in Section 6.32), filings under state
blue sky or securities laws, and any other statement or application made by or
on behalf of PIC or EPL to any governmental body in connection with the
transactions contemplated hereunder. The Proxy Statement shall include the
recommendation of the board of directors of EPL contemplated by Section 8.23.
SECTION 6
---------
Representations and Warranties of EPL
-------------------------------------
EPL makes the representations and warranties set forth below as of the
date of this Agreement and as of the date of Closing. Except as otherwise
provided to the contrary, EPL makes the representations and warranties without
qualification as to knowledge.
6.1 Corporate Organization. EPL is a corporation duly organized,
----------------------
validly existing and in good standing under the laws of the State of California,
with all requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted. EPL is
qualified to do business and is in good standing in every jurisdiction, domestic
and foreign, in which its operations or ownership of properties require such
qualification where the failure to be so qualified would have a material adverse
effect on its business or the Purchased Assets.
-4-
<PAGE>
6.2 Subsidiaries. EPL has no subsidiaries and owns no securitis of,
------------
or any interest in, any other corporation, joint venture or entity.
6.3 Authority of Company. EPL has full power and authority to
--------------------
make, execute, deliver and perform this Agreement and any other certificate,
agreement, document or other instrument to be executed and delivered by it in
connection with the transactions contemplated hereby (collectively, the "EPL
Ancillary Documents"). This Agreement and the transactions contemplated hereby
have been duly authorized by all necessary corporate action. The board of
directors of EPL has (and, as of the Closing Date, the shareholders of EPL will
have) approved the execution, delivery and performance of this Agreement and the
EPL Ancillary Documents and the transactions contemplated hereby and thereby.
This Agreement constitutes a valid and legally binding obligation of EPL
enforceable in accordance with its terms.
6.4 Charter and Bylaws. True and accurate copies of the EPL's
------------------
Articles of Incorporation, with all amendments, if any, and the current Bylaws
of EPL have been provided to PIC.
6.5 Officers and Directors. Schedule 6.5 contains a complete and
---------------------- ------------
correct list of all officers and directors of EPL. Other than such officers,
EPL has no employees.
6.6 Financial Statements; Capitalization. (a) Schedule 6.6
------------------------------------ ------------
contains complete and correct copies of EPL's (i) unaudited balance sheets as at
April 30, 1997 and December 31, 1997; (ii) unaudited statement of income and
expenses for the fiscal year ended April 30, 1997; and (iii) unaudited statement
of income and expenses for the eight months ended December 31, 1997. Items (i)
through (iii) shall be collectively referred to as the "Financial Statements."
The Financial Statements have been and will be prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods represented. The balance sheets fairly present the financial
condition, assets and liabilities of EPL as of their respective dates and the
statements of income and expenses fairly present the results of EPL's operation
for the periods indicated. (b) As of the date hereof, the authorized capital
stock of EPL is 25,000,000 shares of common stock, and there are issued and
outstanding 5,986,070 shares of common stock. All such issued and outstanding
shares have been duly authorized and validly issued, are fully paid and
nonassessable. There are no outstanding rights, options, warrants, conversion
rights, commitments or agreements for the purchase or acquisition from EPL of
any shares of its capital stock or any securities convertible into, or
exercisable or exchangeable for, or evidencing the right to subscribe for, any
shares of its capital stock.
6.7 No Material Adverse Change. Since the December 31, 1997
--------------------------
Financial Statements of EPL (except as disclosed in Schedule 6.7), there has not
------------
been:
(a) any material adverse change (or any event which is
reasonably likely to result in a material adverse change) in the business
condition, assets, liabilities, net worth or obligations of EPL;
(b) any material loss, damage or destruction to any
properties of EPL, whether or not covered by insurance;
(c) any change in the compensation payable by EPL as compared
to preceding years other than in the ordinary course of business, nor any
increase in the compensation payable or to become payable to any of the officers
or agents of EPL other than in the ordinary course of business;
-5-
<PAGE>
(d) any dispute or disturbance, litigation or event materially
adversely affecting the business or future prospects of EPL;
(e) any distribution of assets or commitment to distribute
assets by EPL, either by way of dividends, repurchase of outstanding shares or
otherwise;
(f) any mortgage, pledge, lien or encumbrance made on any of
the properties or assets of EPL;
(g) any sale, transfer or other disposition of assets of EPL
except in the normal course of business;
(h) any loans, borrowings or guaranties by or to EPL; or
(i) any agreement to do any of the foregoing.
6.8 No Undisclosed Liabilities. Except as disclosed in Schedule
-------------------------- --------
6.8, EPL does not have any liabilities or obligations, contingent or otherwise
- ---
which are not adequately reflected or provided for in the Financial Statements,
except liabilities and obligations incurred since the date of the Financial
Statements in the ordinary course of business, or those disclosed on other
Schedules hereto and not being assumed by PIC.
6.9 Taxes. Except as disclosed in Schedule 6.9, all federal,
----- ------------
state, county and local income, ad valorem, excise, sales, use, property,
withholding, employment and other taxes and assessments applicable to EPL,
including taxes levied by territories and countries outside of the United
States, have been duly and properly computed and reported and all taxes which
are due and payable have been fully paid and discharged by EPL; there are no
unpaid taxes of EPL which are or could become a lien on the properties and
assets of EPL except for taxes not yet due and payable which have been properly
accrued on the books of account of EPL; and there are no known, or to the best
of EPL's knowledge, proposed deficiency assessments in respect to federal income
tax returns or other tax returns filed by EPL.
6.10 Title to Properties. EPL has good and marketable title to all
-------------------
of its assets, business and properties, including, without limitation, all
assets and properties reflected in its most recent unaudited balance sheet
forming a part of the Financial Statements, or subsequently acquired (except
assets or properties disposed of in the ordinary course of business since the
date of such most recent EPL balance sheet), free and clear of any mortgage,
lien, pledge, charge, claim or encumbrance, except as specifically disclosed on
said balance sheet or in Schedule 6.10.
-------------
6.11 Compliance with Law. Since the date of its incorporation, EPL
-------------------
has conducted its business in accordance with the requirements of all federal,
state, county, local or other governmental laws and in accordance with the rules
and regulations of each governmental agency applicable to it except where the
failure to so conduct its business would have a material adverse effect on the
business of EPL or the Purchased Assets. EPL has obtained all permits,
franchises, licenses and authorizations required by any governmental authority
for the conduct of its business and filed all reports and returns except where
the failure to obtain any such permit, franchise, license or authorization would
not have a material adverse effect on the business of EPL or the Purchased
Assets. EPL has not received any notice of alleged violation of any statute,
order, rule or regulation of any governmental authority except as set forth in
Schedule 6.11. EPL knows of no facts which would impair the operation of the
- -------------
business as now being conducted. All audit
-6-
<PAGE>
reports, whether done by any governmental authority, an external consultant or
internal personnel have been disclosed to PIC and are listed in Schedule 6.11.
-------------
6.12 Environmental Matters. EPL is not in violation of, and has
---------------------
not violated, in connection with the conduct of its business, any applicable
federal, state, county or local statutes, laws, regulations, rules, ordinances,
codes, licenses and permits of all governmental authorities relating to
environmental matters, including by way of illustration and not by way of
limitation, (i) the Clean Air Act, the Federal Water Pollution Control Act of
1972, the Resource Conservation and Recovery Act of 1976, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (and any
amendments or extensions thereof), and the Toxic Substances Control Act, (ii)
California environmental laws, and (iii) all other applicable environmental
requirements where such violation would have a material adverse effect on the
business of EPL or the Purchased Assets.
6.13 Litigation. Except as disclosed in the Schedule 6.13, there
---------- -------------
are no legal, administrative or other proceedings, investigations,
administrative inquiries or complaints, notices of violations or similar
processes, or other overtly asserted claims, judgments, injunctions or
restrictions, pending, outstanding or overtly threatened against or involving
EPL or any of its properties (including patents, licenses and similar
proprietary interests) assets or business or against or involving any of the
officers, directors or shareholders of EPL which could materially and adversely
affect PIC or the Purchased Assets.
6.14 Employee Benefit Plans.
----------------------
As of the date hereof, EPL does not have, and has never had, any
employment or consulting agreements or any employee welfare benefit plans within
the meaning of ERISA. EPL has not communicated to any of its current or former
employees or consultants any right to participate in any employee welfare
benefit plans.
6.15 Patents, Trademarks and Similar Rights. Schedule 6.15
-------------------------------------- -------------
accurately lists, identifies and describes the interest of EPL in all patent
applications, patent rights, trademark and service mark applications, registered
trademarks and service marks, and registered copyrights ("Intellectual
Property") which EPL owns or has a right or title to, or interest in. EPL has
delivered to PIC a copy of each patent application and trademark and service
mark application. EPL has delivered to PIC information showing a chain of title
to all patent applications and patent rights. Unless otherwise disclosed in the
Schedule 6.15 or Schedule 6.16 with respect to any of the Intellectual Property:
- ------------- -------------
(a) no other person or entity owns any right, title or
interest therein;
(b) no other person or entity has any right to a royalty or
payment of any kind from EPL;
(c) EPL has not granted any license or made any assignment
thereof;
(d) there has been no asserted claim or litigation challenging
or threatening to challenge any right, title or interest therein claimed by EPL;
(e) all license agreements with respect thereto and
assignments thereof are in full force and effect and neither EPL nor to the best
of EPL's knowledge any other party to any such license agreement or assignment
is in default thereof; and
-7-
<PAGE>
(f) EPL is not aware of any infringement by anyone of EPL's
right, title or interest therein.
The operations of EPL have not, to the knowledge of EPL, infringed or violated
any enforceable rights of others in any Intellectual Property and do not require
any further licenses with respect thereto not included in Schedule 6.15. Except
-------------
as disclosed in Schedule 6.15, EPL has not received any notification that any of
-------------
its operations or products are covered by patent rights owned or controlled by
other parties nor that the operations of EPL or any of its subsidiaries violate
such rights. No officer, director, employee, shareholder, agent or consultant
of EPL owns or controls, directly or indirectly, in whole or in part, any
invention, patent, proprietary right, trade name or similar right or application
therefor, which relates to or could affect the business of EPL or pertains to
the art in which EPL is engaged except as disclosed in Schedule 6.15.
-------------
6.16 Contracts and Other Disclosures. All contracts listed in
-------------------------------
Schedule 6.16 are correct and enforceable according to their terms and EPL has
- -------------
no knowledge of facts or events which would cause such contracts to be
unenforceable. Schedule 6.16 sets forth a list of:
-------------
(a) all contracts (i) to which EPL is a party, or (ii) which
are known to EPL and to which any shareholder, officer or director is a party,
which could affect the assets, business or properties of EPL;
(b) all leases, financing or loan agreements, mortgages or
similar agreements, to which EPL is a party, and which create a lien, security
interest or other charge or encumbrance, or any other type of preferential
arrangement, upon or with respect to the Purchased Assets;
(c) all regulatory filings, approvals and registrations,
foreign and domestic of EPL which are currently in effect; and
(d) a list of all of the bank accounts and safe deposit boxes
of EPL with the names of the persons who are authorized signers thereof, or who
have access thereto.
EPL has delivered to PIC true and correct copies of the contracts listed in
Schedule 6.16.
- -------------
6.17 Accounts or Notes Receivable. All accounts and notes
----------------------------
receivable of EPL (net of reserves for doubtful accounts) as shown on the books
of account as of the date of the most recent balance sheet of EPL forming a part
of the Financial Statements and as incurred in the ordinary course of business
since that date, are collectible in the ordinary course of business.
6.18 Default. Except as set forth in Schedule 6.18, EPL is not in
------- -------------
nor has received notice of being in breach or default nor has knowledge of' any
condition that is likely to cause a breach or default under any lease, license,
contract, agreement, commitment, instrument or obligation to which EPL is a
party. Except as set forth in Schedule 6.18, EPL does not know of any other
-------------
party to any lease, license, contract, agreement, commitment, instrument or
obligation to which EPL is a party, which is in default thereunder. EPL is not
aware of any condition or event which, after notice or lapse of time or both
would constitute a default of EPL or of any other party to any lease, license,
commitment, contract, agreement, instrument or obligation.
-8-
<PAGE>
6.19 Brokers, Finders and Investment Bankers. Neither EPL nor any of
---------------------------------------
its officers, directors or employees has employed any broker, finder or
investment banker or incurred any liability for any investment banking fees,
financial advisory fees, brokerage fees or finder's fees in connection with the
transactions contemplated herein.
6.20 Absence of Restrictions and Conflicts. The execution,
-------------------------------------
delivery and performance of this Agreement and the EPL Ancillary Documents, the
consummation of the transactions contemplated by this Agreement and the EPL
Ancillary Documents and the fulfillment of and compliance with the terms and
conditions of this Agreement and the EPL Ancillary Documents does not or will
not (as the case may be), with the passing of time or the giving of notice or
both, violate or conflict with, constitute a breach of or default under, result
in the loss of any benefit under, or permit the acceleration of any obligation
under, (a) any term or provision of the Articles of Incorporation or Bylaws of
EPL, as amended to date, (b) any Assumed Contract, (c) any judgment, decree or
order of any court or governmental authority or agency to which EPL is a party
or by which EPL or any of its properties is bound or (d) any statute, law, rule
or regulation applicable to EPL or its business. Except for compliance with the
applicable requirements of the Securities Act, the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and applicable state securities and
environmental laws, no consent, approval, order or authorization of, or
registration, declaration or filing with, any governmental agency or public or
regulatory unit, agency, body or authority with respect to EPL is required in
connection with the execution, delivery or performance of this Agreement or the
EPL Ancillary Documents by EPL or the consummation of the transactions
contemplated hereby or thereby.
6.21 Conflict of Interest. Except as disclosed in Schedule 6.21,
-------------------- -------------
EPL has no knowledge that any officer or director of EPL or any member of the
immediate family of any such person:
(a) has any direct or indirect interest in (i) any entity
which does business with EPL, or (ii) any property, asset or right which is used
by EPL in the conduct of its business;
(b) has any contractual relationship with EPL other than with
respect to the performance of services as an officer or director; or
(c) has been involved in any transaction with EPL during the
past three (3) years other than with respect to the performance of services as
an officer or director or the issuance of securities of EPL.
6.22 Transfer Restrictions; Affiliates. Schedule 6.22 identifies
--------------------------------- -------------
all persons who are "affiliates" of EPL for purposes of Rule 145 under the
Securities Act; and EPL shall advise PIC in writing if there is any change in
the identities of such persons on or prior to the date the Agreement is
submitted for approval to the shareholders of EPL. EPL shall use all reasonable
efforts to cause each such person to deliver to PIC on or prior to the Closing
Date a written agreement, substantially in the form attached hereto as Exhibit
-------
B.
- -
6.23 Indemnification. No officer, director, shareholder, employee
---------------
or agent of EPL, individually or jointly, in any capacity, has any right of
indemnification by EPL except as set forth in Schedule 6.23.
-------------
-9-
<PAGE>
6.24 Confidentiality. Since November 1, 1993, EPL has taken
---------------
adequate steps necessary to maintain the continuing protection of EPL's
proprietary, confidential and trade secret information. Such protections
include but are not limited to having every EPL employee who has access to
proprietary or confidential information sign an Employee Invention and
Confidential Information Agreement containing provisions substantially the same
as those contained in the form as set forth in Exhibit A.
---------
6.25 Illegal or Improper Payments. Since November 1, 1993, neither
----------------------------
EPL nor any of EPL's directors, officers or employees have, in connection with
the operation of the business: made any illegal political contributions from
assets; been involved in the disbursement or receipt of corporate funds outside
the normal internal control systems of accountability; made or received
payments, whether direct or indirect, to or from foreign or domestic
governments, officials, employees or agents for purposes other than the
satisfaction of lawful obligations, or been involved in any transaction that has
or had as its intended effect the transfer of funds or assets in the manner
described; or been involved in the improper or inaccurate recording of payments
and receipts on the books of EPL or any other matters of a similar nature
involving disbursements of funds or assets.
6.26 Sale of Shares. EPL has no preexisting plan or present
--------------
intention to sell the PIC Common Stock received pursuant to this Agreement;
provided, however, EPL intends to promptly liquidate and distribute the PIC
Common Stock to its shareholders, subject to the terms of the Transfer
Restrictions required pursuant to Section 9.6 hereof.
6.27 Proxy Statement and Registration Statement. The information
------------------------------------------
with respect to EPL and each of its respective officers, directors and
affiliates in the definitive proxy statement to be furnished to the shareholders
of EPL (the "Proxy Statement") that will form part of the Registration Statement
or in the Registration Statement itself will not, in the case of the Proxy
Statement, on the date the Proxy Statement is first mailed to shareholders of
EPL or on the date of the shareholders' meeting (as set forth in the Proxy
Statements contemplated by Section 9.4 hereof), or, in the case of the
Registration Statement, at the time it becomes effective and at such effective
time, as such Proxy Statement or Registration Statement is then amended or
supplemented, contain any untrue statement of a material fact, or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
6.28 Omissions. No representation, statement or information made
---------
or furnished by or on behalf of EPL to PIC, including but not limited to those
contained in this Agreement and the other statements, schedules, listings or
other information previously furnished by EPL taken as a whole, contain or shall
contain any statement of material fact that was untrue when made or omits or
shall omit any material fact necessary to make the information contained in such
representation, statement or information not misleading.
6.29 Necessary Assets. EPL owns and controls all those assets and
----------------
property, intangible and intangible, necessary to conduct its business as it is
now conducted.
-10-
<PAGE>
SECTION 7
---------
Representations, Warranties and Covenants of PIC
------------------------------------------------
PIC hereby represents and warrants to EPL as of the date of this
Agreement and as of the Closing Date as follows:
7.1 Organization of PIC. PIC is a corporation duly organized,
-------------------
validly existing and in good standing under the laws of the state of Nevada.
PIC is qualified to do business and is in good standing in every jurisdiction,
domestic and foreign, in which its operations or ownership of properties require
such qualification where the failure to be so qualified would have a material
adverse effect on its business.
7.2 Authority of PIC. PIC has full power and authority to carry
----------------
out the transactions contemplated by this Agreement and any other certificate,
agreement, document or other instrument to be executed and delivered by it in
connection with the transactions contemplated hereby (collectively, the "PIC
Ancillary Documents") and has taken all necessary and proper corporate action
authorizing it to execute and deliver this Agreement and the PIC Ancillary
Documents, to consummate the same, and to perform all of the respective terms
and conditions hereunder on its part to be performed. The board of directors of
PIC has approved the execution, delivery and performance of this Agreement and
the PIC Ancillary Documents and the consummation of the transactions
contemplated hereby and thereby (other than with respect to the issuance of the
PIC Common Shares, which will be approved prior to the Closing Date) and the
consent of the stockholders of PIC is not required. This Agreement and the PIC
Ancillary Documents constitute valid obligations of PIC and are legally binding
upon it in accordance with each of their respective terms.
7.3 Brokers. PIC has not engaged, consented to or authorized any
-------
broker, investment banker or third party to act on its behalf, directly or
indirectly, as a broker or finder in connection with the transactions
contemplated herein.
7.4 No Conflicts. The execution, delivery and performance of this
------------
Agreement and the PIC Ancillary Documents will not conflict with or result in
the breach of the Articles of Incorporation or Bylaws of PIC, any court decree
or administrative decision, or any material contract or other agreement to which
PIC is a party or by which PIC is bound.
7.5 PIC Common Stock. The PIC Common Stock to be delivered to EPL
----------------
will be, at the time of delivery, duly authorized, validly issued, fully paid
and nonassessable.
7.6 PIC SEC Reports. PIC has made available to EPL copies of all
---------------
of the reports of PIC filed with the Securities and Exchange Commission. Said
reports are accurate and complete in all material respects and do not; omit any
material information required to be set forth therein. PIC has timely filed
with the Securities and Exchange Commission all Exchange Act reports required to
be filed by it during the last twelve months. Since the respective dates as of
which information is given in the latest report filed by PIC with the Securities
and Exchange Commission, except as otherwise stated therein or contemplated
thereby, (i) there has not been any material adverse change in the condition,
financial or otherwise, of PIC and its subsidiaries considered as a whole, or in
the earnings or the ability to continue to conduct business in the usual and
ordinary course of PIC and its subsidiaries considered as a whole, whether or
not arising in the ordinary course of business; and (ii) there has not been any
material transaction entered into by PIC or any of its subsidiaries other than
transactions in the ordinary course of business or transactions which are not
material in relation to PIC and its subsidiaries considered as a whole.
-11-
<PAGE>
7.7 Proxy Statement and Registration Statement. The information
------------------------------------------
with respect to PIC and its subsidiaries and each of their respective officers,
directors and affiliates in the Proxy Statement or in the Registration Statement
will not, in the case of the Proxy Statement, on the date the Proxy Statement is
first mailed to the shareholders of EPL or on the date of the shareholders'
meeting contemplated by Section 9.4 hereof, or, in the case of the Registration
Statement, at the time it becomes effective and at the effective time, as such
Proxy Statement or Registration Statement is then amended or supplemented,
contain any untrue statement of material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
SECTION 8
---------
Covenants of EPL
----------------
From the date hereof to and including the Closing Date, EPL shall:
8.1 Ordinary Course. Diligently carry out EPL's business and use
---------------
its best efforts to retain present officers and directors including putting in
place appropriate reasonable incentive programs approved in advance by PIC to
keep such officers and directors, all in the ordinary course and in
substantially the same manner as heretofore conducted. During the period from
the date of this Agreement to the Closing Date, the parties shall confer on a
regular and frequent basis with one or more designated representatives of the
other to report operational matters of materiality and to report the general
status of ongoing operations.
8.2 Incurrence of Liabilities. Refrain from incurring or agreeing
-------------------------
to incur, without the prior written consent of PIC in each instance which shall
not be unreasonably withheld, any liability, indebtedness or obligation
(absolute or contingent) in excess of $25,000 in any one instance or in excess
of $50,000 in the aggregate, except for reasonable legal and consulting fees
incurred by EPL in connection with the transactions contemplated by this
Agreement as approved by PIC.
8.3 Payment of Obligations and Defense of Claims. Pay all
--------------------------------------------
obligations of EPL consistent with EPL's customary practices (except such
obligations as EPL contests in good faith) and diligently pursue and defend all
actions, suits, claims and proceedings in which EPL or property of EPL is now,
or may become involved.
8.4 Prosecution of Permits and Third Party Consents. Prosecute and
-----------------------------------------------
obtain all permits, licenses, consents and other authorizations, or assignments
thereof, from foreign, federal, state and local authorities as may be necessary
to conduct the business of EPL from and after the consummation of the
transaction contemplated by this Agreement as the business of EPL is now
conducted, and all consents, assignments, approvals, and other authorizations
from all other persons as may be necessary for PIC to obtain all of the rights
and privileges of EPL whether under leases, licenses, contracts, financing
agreements, loans or otherwise from and after the consummation of the
transaction contemplated by this Agreement. Deliver all such licenses, permits,
consents, authorizations, assignments and approvals to PIC.
8.5 Representations and Warranties. Not perform any act which, if
------------------------------
performed, or omit to perform any act which, if omitted to be performed, would
prevent or excuse the consummation of the transactions contemplated by this
Agreement or which would cause any of the representations and warranties
contained herein, in the Schedules, in any Exhibit hereto or in any document
delivered or to be
-12-
<PAGE>
delivered in connection with the transactions contemplated by this Agreement to
be materially inaccurate, untrue or incomplete.
8.6 Prompt Notification. Promptly notify PIC of any and all
-------------------
information which may indicate that any covenant contained herein, in the
schedules, in any exhibit hereto or in any document delivered or to be delivered
in connection with the transactions contemplated by this Agreement, has been
breached and of such information which may indicate that any representation and
warranty contained herein, in the schedules, in any exhibit hereto or in any
document delivered or to be delivered in connection with the transactions
contemplated by this Agreement is inaccurate, untrue or incomplete.
8.7 Access. Make immediately available to and allow PIC and its
------
authorized agents and accountants access to all of the assets, properties,
books, contracts, technical information, documents and records of EPL for
examination, and cause all agents, accountants, attorneys, consultants,
employees and directors of EPL to cooperate fully with said examination and
fully disclose to and discuss with PIC any and all information pertaining to
EPL's financial condition and business operations; provided, however, that PIC
shall conduct any such investigation or review in a manner to minimize the
disruption of business to EPL. To that end, EPL shall waive any accountant's
privilege or other doctrine of accountant's confidentiality. EPL will further
supply to PIC copies of all EPL tax returns including the tax returns for the
tax period ending subsequent to the Closing Date.
8.8 Confidentiality. Access under the foregoing paragraph shall be
---------------
subject to the terms of the confidentiality agreement signed by the parties and
attached hereto as Exhibit C.
---------
8.9 No Encumbrance or Disposition. Not pledge, lease, mortgage,
-----------------------------
encumber or dispose of any of EPL's business, properties or assets, including
the Intellectual Property, other than sales in the ordinary course of business,
without the prior written consent of PIC which shall not be unreasonably
withheld.
8.10 Contracts. Not enter into any contract other than contracts
---------
in the ordinary course of business, without the prior written approval of PIC
which shall not be unreasonably withheld.
8.11 Distribution of Assets. Not make any distribution of assets
----------------------
to the holders of its capital stock by way of dividends or otherwise.
8.12 Redemption or Issuance of Shares. Not acquire by redemption
--------------------------------
or otherwise any of its securities, nor issue, sell, dispose of or incur any
obligation to sell any of its securities.
8.13 Litigation. Promptly notify PIC of any lawsuits, proceedings,
----------
investigations or claims that may be threatened, brought, asserted or commenced
against EPL or any of its officers, directors, employees, agents, consultants or
shareholders involving in any way EPL's business, properties, assets or
goodwill.
8.14 Reports. Provide PIC promptly with interim monthly Financial
-------
Statements and any other management reports as and when they are available.
8.15 Brokers. Assist and cooperate with PIC in resisting, and
-------
resist any claim of any broker, investment banker or third party to any
brokerage, finder's fee or commission in connection with the transactions
contemplated herein.
-13-
<PAGE>
8.16 Maintenance of Properties. Maintain its business, properties
-------------------------
and assets in as good a state of operating condition and repair as they are on
the date of this Agreement.
8.17 Articles of Incorporation; Bylaws. Not change or amend its
---------------------------------
Articles of Incorporation or Bylaws.
8.18 Loans. Not make any loan or advance to any person or entity
-----
without the prior written consent of PIC which shall not be unreasonably
withheld.
8.19 Change of Name. Change its corporate name as soon as
--------------
practicable after the Closing.
8.20 Registration Statement. Assist PIC in the preparation and
----------------------
completion of the Registration Statement required in connection with the
issuance of PIC Common Stock pursuant to the transactions contemplated
hereunder.
8.21 EPL Shareholders' Meeting. Call a special meeting of its
-------------------------
shareholders to be held as soon as practicable after the date hereof for the
purpose of voting to approve this Agreement and the transactions contemplated
hereby, including adopting of a plan of liquidation of EPL. EPL will use its
good faith reasonable efforts to hold such shareholders' meeting as promptly as
practicable. The board of directors of EPL shall recommend to EPL's
shareholders approval of this Agreement and the transactions contemplated hereby
at the shareholders' meeting and EPL shall take all lawful action to solicit
such approval, including, without limitation, timely preparation and mailing of
the Proxy Statement.
8.22 Tax Returns. Promptly file all EPL tax returns to be filed
-----------
after the Closing Date.
8.23 Affiliates. Provide PIC with a list of those people who may
----------
receive shares of PIC Common Stock who may be deemed "affiliates" of PIC or EPL,
as that term is used in Rule 145(d) under the Securities Act.
8.24 Supplements to Schedules. Promptly supplement or amend the
------------------------
schedules which EPL has delivered pursuant to this Agreement with respect to
facts or circumstances first existing or occurring after the date hereof which,
if existing or occurring on or prior to the date of this Agreement, would have
been required to be set forth or described in such schedules or which is
necessary to correct any information in such schedules which has been rendered
inaccurate thereby.
SECTION 9
---------
Conditions Precedent to the Obligations of PIC
----------------------------------------------
The obligations of PIC under this Agreement are subject to the
satisfaction of each of the following conditions (which, at the option of PIC,
may be waived):
9.1 Purchased Assets. The Purchased Assets shall be free and clear
----------------
of all liens and encumbrances, except liens and encumbrances specifically
disclosed on EPL's Financial Statements contained in Schedule 6.6 and
------------
specifically assumed by PIC.
-14-
<PAGE>
9.2 Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of EPL in this Agreement and the EPL Ancillary Documents 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 this Agreement
required to be performed and complied with by it.
9.3 Opinion of Counsel. EPL shall have delivered to PIC the
------------------
opinion of its legal counsel addressed to PIC on and as of the Closing Date to
the effect that:
(a) EPL is a corporation duly organized validly existing and
in good standing under the laws of the State of California and is duly qualified
and in good standing as a corporation in every jurisdiction in which its
operation or ownership of property requires such qualification and where the
failure to be so qualified would have a material adverse effect on EPL's
business or the Purchased Assets.
(b) EPL has full corporate power to make, execute, deliver and
perform this Agreement and each of the EPL Ancillary Documents; this Agreement
and each of the EPL Ancillary Documents and the consummation of the transactions
contemplated hereby and thereby have been duly authorized approved or consented
to by the board of directors and shareholders of EPL in accordance with all
applicable laws rules and regulations; this Agreement and each of the EPL
Ancillary Documents constitutes a valid and legally binding obligation of EPL
enforceable in accordance with its terms subject to bankruptcy, insolvency and
laws applicable to creditors generally and subject to the availability of
equitable remedies; the consummation of the transactions contemplated hereby and
thereby and the performance of all of the terms and conditions hereof and
thereof by EPL will not violate any provision of the Articles of Incorporation
or Bylaws of EPL, as currently in effect; no contract, mortgage, indenture or
agreement to which EPL is a party, or by which it or he is bound, of which such
counsel has knowledge, will be violated by the consummation of this Agreement or
any EPL Ancillary Agreement, the violation of which would have a material
adverse impact on the ability of EPL to execute, deliver and perform its
obligations under this Agreement or any such EPL Ancillary Agreement, and to the
best of counsel's knowledge such consummation would not violate any restriction
or limitation of any kind or character to which EPL is subject.
(c) To the best of such counsel's knowledge no authorization,
consent or approval of any regulatory authority of the federal or any state
government is necessary in connection with the consummation of the transactions
contemplated by this Agreement except for approval by the SEC of the
Registration Statement, which Registration Statement shall be effective prior to
the Closing, and compliance with applicable state securities laws and
regulations.
(d) Such counsel has no knowledge of any threatened, pending
or outstanding legal, administrative or other proceedings, investigations or ,
inquiries, product liability or other claims, judgments, or injunctions against
or involving EPL or its assets, properties or business except as disclosed in
Schedule 6.13. Such counsel shall also have opined as to other matters,
- -------------
including tax matters, as shall be reasonably requested by PIC. In giving the
foregoing opinions, such counsel may rely upon opinion of other counsel,
certificates of officers and directors of EPL (as to factual matters but not
legal conclusions), certified copies of original corporate documents and
certificates of governmental agencies.
9.4 Shareholder Approval. The transaction contemplated herein
--------------------
have been duly authorized by the shareholders of EPL, as set forth in Section
8.21.
-15-
<PAGE>
9.5 Officer's Certificate. PIC shall be provided with an officers'
---------------------
certificate executed by the President of EPL to the effect that, as of the
Closing Date:
(a) all representations and warranties made by EPL under this
Agreement, the schedules, exhibits hereto, or documents given or delivered to
PIC pursuant to this Agreement are accurate, true and complete;
(b) all of the covenants, obligations and conditions to be
performed on the part of EPL under this Agreement have been so performed; and
(c) EPL has no knowledge of any fact which has not been
disclosed to PIC in writing which would or could have any material adverse
effect on the value of the assets, properties, business or goodwill of EPL.
9.6 Shareholder Transfer Restriction. The parties hereby expressly
--------------------------------
agree that, notwithstanding the effectiveness of the Registration Statement, the
PIC Common Stock to be issued at the Closing pursuant to Section 3 hereof shall
be subject to the transfer restriction set forth on Exhibit D hereto (the
---------
"Transfer Restriction"). By voting in favor of the transaction contemplated
hereby, the EPL shareholders shall have agreed that the PIC Common Stock to be
received at the Closing shall be subject to the Transfer Restriction. All PIC
Common Stock shall be issued with a restrictive legend referencing the Transfer
Restriction and the Proxy Statement shall disclose the terms of the Transfer
Restriction to the EPL shareholders in connection with the shareholder vote
related to this transaction.
9.7 Secretary's Certificate. EPL shall have furnished PIC with a
-----------------------
certificate executed by the Secretary of EPL: (a) certifying that the Articles
of Incorporation and Bylaws of EPL have not been amended since the date of this
Agreement; and (b) certifying appropriate resolutions of the board of directors
of EPL and actions of the shareholders of EPL authorizing the execution of this
Agreement and the EPL Ancillary Documents and the consummation of the
transactions contemplated hereby and thereby.
9.8 Suit Challenging Transaction. No suit, investigation, action
----------------------------
or proceeding challenging the transactions contemplated by this Agreement shall
have been threatened or commenced; provided however that in the case of such
suit investigation action or proceeding brought by a person other than a
governmental body the condition set forth in this Section 9.8 shall be deemed to
have been satisfied if PIC shall have been provided with an opinion of counsel
that it is probable that the relief sought in the proceeding will not be
granted.
9.9 Closing. The Closing of the transaction contemplated by this
-------
Agreement shall have taken place on or before June 30, 1998.
9.10 Tax Clearance Certificates. 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.
9.11 No Material Adverse Condition. Except as disclosed to PIC in
-----------------------------
with respect to the financial condition, assets, properties, goodwill, earnings
or business of EPL; there shall have been no material adverse federal, state or
local legislative or regulatory change affecting the business of EPL; and the
properties and assets of EPL shall not have been materially damaged by fire,
flood, casualty, act of God or the public enemy or other
-16-
<PAGE>
cause regardless of insurance coverage for such damage so as to materially
impair the ability of EPL to carry on its business as presently conducted.
9.12 Proper Action. All requisite corporate and all other action
-------------
in order to consummate the transactions contemplated by this Agreement shall
have been taken by EPL and its shareholders.
9.13 Assignment of Contracts. 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 this
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.
9.14 Securities Laws. The consummation of the transactions
---------------
contemplated by this Agreement shall not violate any applicable federal or state
securities laws with respect to the offering and issuance of the PIC Common
Stock.
9.15 Effectiveness of Registration Statement. At or prior to the
---------------------------------------
Closing, the Registration Statement shall be effective under the Securities Act,
and no stop order suspending the effectiveness of the Registration Statement
shall be in effect and no proceedings for such purpose, or under the proxy rules
of the Exchange Act and with respect to the transactions contemplated hereby,
shall be pending before or threatened by the SEC. All applicable state
securities laws shall have been complied with in connection with the issuance of
PIC Common Stock to be issued pursuant to the transactions contemplated hereby,
and no stop order suspending the effectiveness of any qualification or
registration of such PIC Common Stock under such state securities laws shall
have been issued and pending or threatened by the authorities of any such state.
9.16 Amendment to Exclusive License Agreement. EPL and PIC's
----------------------------------------
wholly-owned subsidiary, Prolong Super Lubricants, Inc., a Nevada corporation
("PSL"), shall have entered into an Amendment to Exclusive License Agreement
(the "Amendment"), amending the terms of the Exclusive License Agreement dated
November 10, 1993, by and between EPL and PSL. The Amendment shall be in the
form set forth on Exhibit E attached hereto.
----------
9.17 Pending Litigation. EPL shall not have received notice of an
------------------
adverse judgment from any court regarding the outcome of the litigation set
forth on Schedule 6.13 attached hereto.
-------------
9.18 Dissenting Shareholders. The aggregate number of shares of
-----------------------
Common Stock owned by EPL shareholders that have demanded that EPL purchase
their shares under Chapter 13 of the California Corporations Code shall not
constitute more than 5% of all shares of EPL Common Stock outstanding
immediately prior to the Closing Date.
9.19 Payment of Edward E. Jay Promissory Note. EPL shall have paid
----------------------------------------
to Edward E. Jay all principal and interest payable under that certain
Promissory Note & Security Agreement (the "Note") dated November 1, 1991.
Further, EPL shall deliver to PIC a termination statement duly executed by
Edward E. Jay that fully releases his security interest in any properties of
EPL.
-17-
<PAGE>
9.20 Agreement Regarding EPL Common Stock Held by Michael R. Davis.
-------------------------------------------------------------
EPL and Michael R. Davis, President of EPL, shall have entered into a
Cancellation Agreement (the "Cancellation Agreement") 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 this Agreement. The
Cancellation Agreement shall be in the form set forth on Exhibit F attached
---------
hereto.
SECTION 10
----------
Conditions Precedent to the Obligations of EPL
----------------------------------------------
The obligations of EPL under this Agreement are subject to the
satisfaction of each of the following conditions (which, at the option of EPL,
may be waived):
10.1 Representations, Warranties and Covenants. The
-----------------------------------------
representations and warranties of PIC in this Agreement and the PIC Ancillary
Documents 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 this Agreement required to be performed
and complied with by it.
10.2 Opinion of Counsel.
------------------
(a) PIC shall have delivered to EPL the opinion of its legal
counsel, addressed to EPL, on and as of the Closing Date to the effect that:
(i) PIC is a corporation duly organize
validly existing and in good standing under the laws of the state of Nevada.
(ii) PIC has full power and authority to make, execute,
deliver and perform this Agreement; PIC has taken all action necessary to
authorize the execution, delivery and performance of this Agreement and the
transactions contemplated hereby; this Agreement constitutes the valid and
legally binding obligation of PIC enforceable in accordance with its terms; the
consummation of the transactions contemplated hereby and the performance of all
the terms and conditions hereof by PIC will not violate any provision of the
PIC's Articles of Incorporation or Bylaws (as currently in effect) any court
decree or administrative decision or any material contract or other agreements
to which PIC is a party, or any corporate resolution of PIC.
(iii) The shares of PIC Common Stock to be delivered
pursuant to this Agreement are, or will be, when issued, duly authorized,
alidly issued, fully paid and nonassessable.
In giving the foregoing opinions, such counsel may rely upon opinions
of other counsel, certificates of officers and directors of PIC (as to factual
matters but not legal conclusions), certified copies of original corporate
documents and certificates of government agencies.
-18-
<PAGE>
10.3 Officer's Certificate. EPL shall be provided with an
---------------------
officer's certificate executed by the President of PIC to the effect that, as of
the Closing Date to the best knowledge of such officer:
(a) all of the representations and warranties made by PIC
under this Agreement, the schedules, exhibits hereto, or documents given or
delivered to EPL pursuant to this Agreement are accurate, true and complete in
all respects; and
(b) all of the covenants, obligations and conditions to be
performed on the part of PIC under this Agreement have been so performed in all
respects.
10.4 Closing. The Closing of the transaction contemplated by this
-------
Agreement shall have taken place on or before June 30, 1998.
10.5 Suit Challenging Transaction. No suit or proceeding
----------------------------
challenging the transaction contemplated by this Agreement shall have been
threatened or commenced; provided, however, that in the case of such suit,
investigation, action or proceeding brought by a person other than a
governmental body, the condition set forth in this Section 10.5 shall be deemed
to have been satisfied if EPL shall have been provided with an opinion of
counsel that it is probable that the relief sought in the proceeding will not be
granted.
10.6 Effectiveness of Registration Statement. At or prior to the
---------------------------------------
Closing, the Registration Statement shall be effective under the Securities Act,
and no stop order suspending the effectiveness of the Registration Statement
shall be in effect and no proceedings for such purpose, or under the proxy rules
of the Exchange Act and with respect to the transactions contemplated hereby,
shall be pending before or threatened by the SEC. All applicable state
securities laws shall have been complied with in connection with the issuance of
PIC Common Stock to be issued pursuant to the transactions contemplated hereby,
and no stop order suspending the effectiveness of any qualification or
registration of such PIC Common Stock under such state securities laws shall
have been issued and pending or threatened by the authorities of any such state.
SECTION 11
----------
Post Closing Agreements
-----------------------
11.1 Collections. From and after the Closing, PIC shall have full
-----------
power and authority to collect for the account of PIC all accounts receivable
and such other items as shall be assigned, transferred and delivered to PIC in
accordance with the terms hereof, and to endorse without recourse, in the name
of EPL, any checks or other instruments of payment received on account of
payment of any such accounts receivable or other such items; provided. however,
that if EPL shall receive any payment on account of any such account receivable
or other item, EPL shall transfer and deliver (endorsed where necessary) to PIC,
immediately upon receipt, any checks or other instruments of payment, cash or
property which EPL may receive in payment, as aforesaid, of any such accounts
receivable or such other items.
11.2 Non-Disclosure. EPL shall not communicate or divulge to, or
--------------
use for the benefit of, any person, firm or corporation other than PIC, its
agents and representatives, any of the trade secrets, customer lists, methods,
formulas, businesses or marketing plans, processes or any other proprietary
information used by EPL in the conduct of its business.
-19-
<PAGE>
11.3 Discharge of Liabilities. EPL shall discharge, promptly when
------------------------
due with the proceeds from this transaction, all liabilities of EPL not
expressly assumed by PIC at the Closing Date. PIC shall discharge, promptly
when due, all liabilities expressly assumed by PIC pursuant to this Agreement.
SECTION 12
----------
Indemnity
---------
12.1 Indemnification of PIC. Subject to the limitations contained
----------------------
in this section, EPL shall defend, indemnify and hold PIC, its officers,
directors, employees and Affiliated Persons 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 this Agreement or the EPL Ancillary Documents.
12.2 Limitations. 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 common stock of PIC received by EPL.
12.3 Indemnification of EPL. PIC shall 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 this Agreement or the
PIC Ancillary Documents.
12.4 Claims Procedure. As a condition to the ability of any party
----------------
to seek indemnity under Section 12 or otherwise to assert a claim for damages,
the indemnified party shall promptly, upon obtaining knowledge thereof, notify
the indemnifying party or parties of any claim or demand which has given or
could give rise to a right to indemnity under this Agreement, and the
indemnifying party or parties shall. have reasonable time to contest any such
claim or demand. If such claim or demand relates to a claim or demand asserted
by a third party against the indemnified party, the indemnifying party or
parties shall have the right to employ counsel reasonably acceptable to the
indemnified party to defend any such claim or demand asserted against the
indemnified party and the indemnified party shall have the right to participate
in the defense of any such claim or demand at its sole cost and expense. So
long as the indemnifying party or parties are defending in good faith any such
claim or demand, the indemnified party will not admit liability for, settle or
compromise such claim or demand. Whether or not the indemnifying party or
parties so elect to defend any such claim or demand, the indemnified party shall
have no obligation to do so apart from its obligation to cooperate in the
defense thereof.
-20-
<PAGE>
SECTION 13
----------
General Conditions
------------------
13.1 Survival of Representations and Warranties. All
------------------------------------------
representations and warranties made by the parties shall fully survive the
closing and delivery of all documents to PIC for a period of two years following
the Closing and after two years shall be fully extinguished, except insofar as
the damaged party shall have asserted in writing a specific claim setting forth
the specific facts and circumstances relating thereto with respect to such
representations, warranties, covenants and agreements prior to the expiration of
such rights, in which event the party liable shall remain liable with respect to
such claim.
13.2 Reliance on Representations and Warranties. Notwithstanding
------------------------------------------
any right of PIC to fully investigate the affairs of EPL hereunder and
notwithstanding any knowledge of facts determined or determinable by PIC
pursuant to such investigation or right of investigation, PIC has the right to
fully rely upon the representations, warranties and covenants of EPL contained
in this Agreement and on the accuracy of the schedules and any documents,
certificate or exhibit given or delivered to PIC pursuant to this Agreement.
Further, knowledge by PIC of any facts so determined or determinable shall not
constitute a defense by EPL for any claim for loss or damage made by PIC against
it for any misrepresentation, breach of warranty or breach of covenant made by
EPL.
13.3 Assignment, Successors and Assigns.
----------------------------------
(a) This Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns.
(b) This Agreement may not be assigned by EPL whether by
operation of law or otherwise, without the prior written consent of PIC and any
such attempted assignment shall be void and unenforceable. PIC may assign this
Agreement to an Affiliated Person of PIC without the prior written consent of
EPL. Nothing herein shall be construed to limit the ability of EPL to liquidate
and distribute the PIC Common Stock to the shareholders of EPL.
(c) If any contract, claim, license or other agreement
intended to be transferred and assigned hereunder cannot be assigned without the
consent of another party thereto, EPL and PIC agree to use their best efforts to
obtain such consent. This Agreement shall not constitute an agreement to assign
any claim, contract, license, sales or purchase order if an attempted assignment
thereof without the consent of a third party thereto would constitute a breach
thereof or in any way affect the rights of EPL thereunder. If such consent is
not obtained, or if an attempted assignment would be ineffective or would affect
EPL's rights thereunder so that PIC would not receive all such rights, EPL will
cooperate with PIC in any reasonable arrangement designed to provide for PIC the
benefits under such claim, contract, license, lease or purchase order, including
enforcement for the benefit of PIC of any and all rights to EPL against the
other parties thereto arising out of the breach or cancellation thereof by such
other parties or otherwise.
-21-
<PAGE>
13.4 Notices. All notices which are required or may be given
-------
to the terms of this Agreement shall be in writing and shall be sufficient upon
receipt if given in writing and delivered personally or by registered or
certified mail, postage prepaid, as follows:
If to EPL: With a copy to:
- ---------- ---------------
EPL Pro-Long, Inc. Gary C. Wykidal, Esq.
c/o Michael R. Davis, President Gary C.Wykidal & Associates
22681 Sweet Meadow 245 Fischer Avenue, Suite A-1
Mission Viejo, California 92692 Costa Mesa, California 92626
If to PIC: With a copy to:
- ---------- ---------------
Prolong International Corporation Michael E. Flynn, Esq.
c/o Elton Alderman, President Stradling Yocca Carlson & Rauth
6 Thomas 660 Newport Center Drive, Suite 1600
Irvine, California 92618 Newport Beach, California 92660-6441
Any of the addresses set forth above may be changed from time to time by written
notice in the manner prescribed herein from the party requesting the change.
Notice not given in writing shall be effective only if acknowledged in writing
by a duly authorized representative of the party to whom it was given.
13.5 Governing Law; Forum. This Agreement shall be construed,
--------------------
governed and enforced in accordance with the laws of the State of California,
excluding any choice of law rules which may direct the application of the laws
of any other jurisdiction. The parties agree that the judicial forum for any
actions or proceedings brought relating to this Agreement shall be the State of
California.
13.6 Expenses. Each party shall bear its own expenses incident to
--------
this Agreement and the transactions contemplated hereby unless otherwise
specifically provided herein, including, without limitation, all fees of its
counsel, accountants and consultants, whether or not such transactions are
consummated.
13.7 Integration/Entire Agreement. This Agreement and the
----------------------------
schedules and exhibits which are a part hereof set forth the entire
understanding between the parties and supersede all previous and contemporaneous
written or oral negotiations, commitments, understandings and agreements
relating to the subject matter contained herein and merge all prior and
contemporaneous discussions between the parties. No party shall be bound by any
definition, condition, representation, warranty, covenant or provision other
than as is expressly stated in or contemplated by this Agreement.
13.8 Modification and Amendment. No supplement, modification or
--------------------------
amendment of this Agreement shall be binding unless executed in writing by both
parties.
-22-
<PAGE>
13.9 Waiver. All waivers hereunder must be made in writing, and
------
failure of any party at any time to require another party's performance of any
obligation under this Agreement shall not affect, limit or waive a party's right
at any time to require strict performance of that obligation thereafter. Any
waiver of any breach of any provision of this Agreement shall not be construed
in any way as a waiver of any continuing or succeeding breach of such provision
or waiver or modification of the provision.
13.10 Counterparts/Headings. For the convenience of the parties,
---------------------
this Agreement may be executed in one or more counterparts, each of which shall
be deemed an original, but all. of which together shall constitute one and the
same document. All headings, captions, the cover page and the index in this
Agreement are inserted for convenience of reference only and shall not affect
its meaning or interpretation.
13.11 Severability. In the event any court, administrative agency
------------
or other governmental entity with appropriate jurisdiction and authority
determines that any term or part of this Agreement is invalid or unenforceable,
the remainder of this Agreement shall remain in full force and effect.
13.12 Schedules. The schedules and exhibits referred to herein are
---------
incorporated herein by reference as if fully set forth in the text hereof.
13.13 Public Announcement. No public announcement of this
-------------------
transaction or the terms of this Agreement shall be made by any party without
the prior written approval of all parties.
13.14 Gender and Number. The masculine, feminine or neuter
-----------------
pronouns used herein shall be interpreted without regard to gender, and use of
the singular or plural shall be deemed to include the other whenever the context
so requires.
13.15 Additional Documents and Further Assistance. Any party
-------------------------------------------
hereto, at the request of another party hereto, shall execute and deliver such
other instruments and do and perform such other acts and things as may be, in
the opinion of counsel for such party, necessary or desirable for affecting
completely the consummation of this Agreement and the transactions contemplated
herein.
13.16 Tax Treatment. The parties intend this transaction to
-------------
qualify as a tax-free reorganization within the meaning of Sections 368(a)(1)(C)
and (a)(2)(G) of the Code. However, neither PIC nor any of its agents or
employees has made any representations as to the tax treatment of this
transaction and shall not be held responsible for any decision by any taxing
authority to treat this transaction as taxable. EPL hereby fully releases PIC,
its officers, directors, employees and Affiliated Persons, from any claims,
liability, cost or expense resulting from any adverse characterization for tax
purposes.
13.17 Definition. "Affiliated Person" for purposes of this
----------
Agreement shall be defined as meaning an individual or entity that directly or
indirectly through one or more intermediaries controls, is controlled by, or is
under control of PIC.
-23-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first hereinabove written.
EPL PRO-LONG, INC.
By: /s/ Michael R. Davis
-----------------------------------------
Title: President
--------------------------------------
PROLONG INTERNATIONAL CORPORATION
By: /s/ Elton Alderman
-----------------------------------------
Title: President
--------------------------------------
<PAGE>
<TABLE>
<CAPTION>
SCHEDULES
---------
<S> <C>
Schedule 1.1(a) Intellectual Property
- ---------------
Schedule 1.1(e) Assumed Contracts
- ---------------
Schedule 2.1 Assumed Liabilities
- ------------
Schedule 6.5 Officers and Directors
- ------------
Schedule 6.6 Financial Statements
- ------------
Schedule 6.7 Material Adverse Changes
- ------------
Schedule 6.8 Undisclosed Liabilities
- ------------
Schedule 6.9 Taxes
- ------------
Schedule 6.10 Title of Properties
- -------------
Schedule 6.11 Compliance with Laws
- -------------
Schedule 6.13 Litigation
- -------------
Schedule 6.15 Intellectual Property
- -------------
Schedule 6.16 Contracts
- -------------
Schedule 6.18 Defaults
- -------------
Schedule 6.21 Conflicts of Interest
- -------------
Schedule 6.22 Affiliates
- -------------
Schedule 6.23 Indemnification
- -------------
</TABLE>
<PAGE>
EXHIBIT INDEX
-------------
Exhibit A Form of Employee Invention and Confidentiality Agreement
- ---------
Exhibit B Form of Rule 145 Agreement
- ---------
Exhibit C Form of Confidentiality Agreement
- ---------
Exhibit D Form of Transfer Restriction
- ---------
Exhibit E Form of Amendment to Exclusive License Agreement
- ---------
Exhibit F Form of Cancellation Agreement
- ---------
<PAGE>
EXHIBIT A
---------
FORM OF EMPLOYEE INVENTION AND CONFIDENTIALITY AGREEMENT
A-1
<PAGE>
EPL PRO-LONG, INC.
EMPLOYEE INVENTION AND
CONFIDENTIAL INFORMATION AGREEMENT
In consideration and as a condition of my employment, or continued
employment, by EPL PRO-LONG, INC. and/or by companies which it owns, controls,
or is affiliated with, or their successors in business (hereafter referred to as
"the Company"), and the compensation paid therefor:
1. CONFIDENTIALITY.
I agree to keep confidential, except as the Company may otherwise
consent in writing, and not to disclose or make any use of except for the
benefit of the Company, at any time, either during or subsequent to my
employment, any trade secrets, confidential information, knowledge, data or
other information of or known by the Company relating to products, processes,
know-how, designs, formulas, data, inventions (as defined below), customer
lists, business plans, marketing plans and strategies, pricing strategies or
other subject matter pertaining to any business of the Company or any of its
clients, customers, consultants, licensees or affiliates, which I may produce,
obtain, have access to or otherwise acquire during the course of my employment,
except as herein provided (collectively referred to herein as "proprietary
information"). I understand that my employment creates a relationship of
confidence and trust between me and the Company with respect to proprietary
information. I further agree not to deliver, reproduce or in any way allow any
such proprietary information, or any documentation relating thereto, to be
delivered or used by any third parties without specific direction or consent of
a duly authorized representative of the Company. All proprietary information
and all title, patents, patent rights, copyrights, mask work rights, trade
secret rights, and other intellectual property and rights anywhere in the world
(collectively "Rights") in connection therewith shall be the sole property of
the Company. I hereby assign to the Company any Rights I may have or acquire in
such proprietary information.
2. CONFLICTING EMPLOYMENT/RETURN OF CONFIDENTIAL MATERIAL.
I agree that during my employment with the Company I will not engage
in any other employment, occupation, consulting or other activity relating to
the business in which the Company is now or may hereafter become engaged or
which would otherwise conflict with my obligations to the Company. In the event
of my termination of employment with the Company for any reason whatsoever, I
agree to promptly surrender and deliver to the Company all records, materials,
equipment, drawings, documents and data of any nature pertaining to any
invention, trade secret or confidential or proprietary information of the
Company or to my employment (collectively the "Company Materials"), and I will
not take with me any description containing or pertaining to any of the Company
Materials which I may produce or obtain during the course of my employment. I
agree that during my employment by the Company, I will not remove any Company
Materials from the business premises of the Company or deliver any Company
Materials to any person or entity outside the Company, except as I am required
to do in connection with performing the duties of my employment. In the event
of the termination of my employment for any reason whatsoever, I agree to sign
and deliver the "Termination Certificate" attached hereto as Exhibit A.
<PAGE>
3. ASSIGNMENT OF INVENTIONS.
I hereby assign and transfer to the Company my entire right, title and
interest in and to all inventions (as used in the Agreement, "inventions" shall
include but not be limited to ideas, improvements, designs, computer programs,
trade secrets, works of authorship, data and discoveries) whether or not
patentable and whether or not reduced to practice, made or conceived by me
(whether made solely by me or jointly with others) during the period of my
employment with the Company, which relate in any manner to the actual or
demonstrably anticipated business, work or research and development of the
Company or its subsidiaries, or result from or are suggested by any task
assigned to me or any work performed by me for or on behalf of the Company or
its subsidiaries. I agree that all such inventions are the sole property of the
Company; provided, however, that this Agreement does not require assignment of
an invention which qualifies fully for protection under Section 2870 of the
California Labor Code (hereafter referred to as "Section 2870"). A copy of
Section 2870 is attached as Exhibit B. I agree that all computer programs,
documentation and other copyrightable materials to which I contribute during my
employment shall be considered "works made for hire" and shall be the sole
property of the Company.
4. MORAL RIGHTS.
Any assignment of copyright hereunder includes all rights of
paternity, integrity, disclosure and withdrawal and any other rights that may be
known as or referred to as "moral rights" (collectively "Moral Rights"). To the
extent such Moral Rights cannot be assigned under applicable law and to the
extent the following is allowed by the laws in the various countries where Moral
Rights exist, I hereby waive such Moral Rights and consent to any action of the
Company that would violate such Moral Rights in the absence of such consent. I
will confirm any such waivers and consents from time to time as requested by the
Company.
5. DISCLOSURE OF INVENTIONS AND PATENTS.
I agree that in connection with any "invention" as defined in
Paragraph 3 above (a) I will disclose all inventions promptly, but in any case
within at least thirty (30) days after creation, in writing to my immediate
superior at the Company, with a copy to the President, regardless of whether I
believe the invention is protected by Section 2870, in order to permit the
Company to claim rights to which it may be entitled under this Agreement. Such
disclosure shall be received in confidence by the Company; (b) I will, at the
Company's request, promptly execute a written assignment of title to the Company
for any invention required to be assigned by Paragraph 3 ("assignable
invention"), and I will preserve any such assignable invention as confidential
information of the Company; and (c) upon request, I agree to assist the Company
or its nominee (at its expense) during and at any time subsequent to my
employment in every reasonable way to obtain for its own benefit patents and
copyrights for such assignable inventions in any and all countries, which
inventions shall be and remain the sole and exclusive property of the Company or
its nominee whether or not patented or copyrighted. I agree to execute such
papers and perform such lawful acts as the Company deems to be necessary to
allow it to exercise all right, title, and interest in such patents and
copyrights.
6. EXECUTION OF DOCUMENTS; POWER OF ATTORNEY.
I further agree to execute, acknowledge and deliver to the Company or
its nominee upon request and at its expense all such documents, including
applications for patents and copyrights and
2
<PAGE>
assignments of inventions, patents and copyrights to be issued therefore, as the
Company may determine necessary or desirable to apply for and obtain letters,
patents and copyrights on such assignable inventions in any and all countries
and/or to protect the interest of the Company or its nominee in such inventions,
patents and copyrights, and to vest title thereto in the Company or its nominee.
Such acts may include, but are not limited to, execution of documents and
assistance or cooperation in legal proceedings. I hereby irrevocably designate
and appoint the Company and its duly authorized officers and agents, as my
agents and attorneys-in-fact to act for and in my behalf and instead of me, to
execute and file any documents and to do all other lawfully permitted acts to
further the above purposes with the same legal force and effect as if executed
by me.
7. MAINTENANCE OF RECORDS.
I agree to keep and maintain adequate and current written records of
all inventions made by me (in the form of notes, sketches, drawings and as may
be specified by the Company), which records shall be available to and remain the
sole property of the Company at all times.
8. PRIOR INVENTIONS.
It is understood that all inventions if any, patented or unpatented,
which I made prior to my employment by the Company are excluded from the scope
of this Agreement. To preclude any possible uncertainty, I have set forth on
Exhibit C attached hereto a complete list of all my prior inventions, including
numbers of all patents and patent applications, and a brief description of all
unpatented inventions which are not the property of a previous employer. I
represent and covenant that the list is complete and that, if no items are on
the list, I have no such prior inventions. I agree to notify the Company in
writing before I make any disclosure or perform any work on behalf of the
Company which appears to threaten or conflict with proprietary rights I claim in
any invention or idea. In the event of my failure to give such notice, I agree
that I will make no claim against the Company with respect to any such
inventions or ideas.
9. OTHER OBLIGATIONS.
I acknowledge that the Company from time to time may have agreements
with other persons or with the U.S. Government or governments of other
countries, or agencies thereof, which impose obligations or restrictions on the
Company regarding inventions made during the course of work thereunder or
regarding the confidential nature of such work. I agree to be bound by all such
obligations and restrictions and to take all action necessary to discharge the
obligations of the Company thereunder. I further agree to sign any
confidentiality or other agreements required by third parties with respect to
inventions or products developed or sold by the Company for such parties.
10. TRADE SECRETS OF OTHERS.
I represent that my performance of all the terms of this Agreement and
as an employee of the Company does not and will not breach any agreement to keep
in confidence proprietary information, knowledge or data acquired by me in
confidence or in trust prior to my employment with the Company, and I will not
disclose to the Company or induce the Company to use any confidential or
proprietary information or material belonging to any previous employer or
others. I agree not to enter into any agreement either written or oral in
conflict herewith.
3
<PAGE>
11. NONSOLICITATION OF EMPLOYEES AND CONSULTANTS.
During the term of my employment and for one (1) year thereafter, I
will not encourage or solicit any employee or consultant of the Company to leave
the Company for any reason. However, this obligation shall not affect any
responsibility I may have as an employee of the Company with respect to the bona
fide hiring and firing of Company personnel.
12. MODIFICATION.
This Agreement may not be changed, modified, released, discharged,
abandoned or otherwise amended, in whole or in part, except by an instrument in
writing, signed by me and the Company. I agree that any subsequent change or
changes in my duties, salary, or compensation shall not affect the validity or
scope of this Agreement.
13. ENTIRE AGREEMENT.
I acknowledge receipt of this Agreement and agree that with respect to
the subject matter thereof it is my entire agreement with the Company,
superseding any previous oral or written communications, representations,
understandings or agreements with the Company or any officers or representative
thereof. The headings in this Agreement are used for convenience only and are
not to be considered a part of this Agreement or be used to interpret the
meaning of any part of this Agreement.
14. SEVERABILITY.
In the event that any paragraph or provision of this Agreement shall
be held to be illegal or unenforceable, such paragraph or provision shall be
adjusted and reformed, if possible, in order to achieve the intent of the
parties, and if such paragraph or provision cannot be adjusted and reformed,
such paragraph or provision shall be voided and severed from this Agreement, and
the entire Agreement shall not fail on account thereof but shall otherwise
remain in full force and effect.
15. SURVIVAL.
I agree that my obligations under this Agreement shall continue in
effect after termination of my employment, regardless of the reason or reasons
for termination, and whether such termination is voluntary or involuntary on my
part, and that the Company is entitled to communicate my obligations under this
Agreement to any future employer or potential employer of mine.
16. SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon my heirs, executors,
administrators or other legal representative and is for the benefit of the
Company, its successors and assigns.
17. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of
California without regard to the conflict of laws provisions thereof.
4
<PAGE>
18. NO EMPLOYMENT AGREEMENT IMPLIED.
I agree that this Agreement is not an employment contract and that I
have the right to resign and the Company has the right to terminate my
employment at any time, for any reason, with or without cause. I agree that
this Agreement does not purport to set forth all of the terms and conditions of
my employment, and that as an employee of the Company I have obligations to the
Company which are not set forth in this Agreement.
19. COUNTERPARTS.
This Agreement may be signed in two counterparts, each shall be deemed
an original and both of which shall together constitute one agreement.
I HAVE READ THIS AGREEMENT CAREFULLY AND I UNDERSTAND AND ACCEPT THE
OBLIGATIONS WHICH IT IMPOSES UPON ME WITHOUT RESERVATION. NO PROMISES
OR REPRESENTATIONS HAVE BEEN MADE TO ME TO INDUCE ME TO SIGN THIS
AGREEMENT. I SIGN THIS AGREEMENT VOLUNTARILY AND FREELY, IN DUPLICATE,
WITH THE UNDERSTANDING THAT ONE COUNTERPART WILL BE RETAINED BY THE
COMPANY AND THE OTHER COUNTERPART WILL BE RETAINED BY ME.
EMPLOYEE
----------------------------------------
(Employee's Signature)
----------------------------------------
(Print Name)
Date:
-----------------------------------
EPL PRO-LONG, INC.
By:
-------------------------------------
Its:
------------------------------------
Date:
-----------------------------------
5
<PAGE>
EXHIBIT A
TERMINATION CERTIFICATE
This is to certify that I do not have in my possession, nor have I
failed to return any records, documents, computer disks, tapes or printouts,
sound recordings, customer lists, photographs, data, specifications, drawings,
blueprints, reproductions, sketches, notes, reports, proposals, or copies of
them, or other documents or materials, equipment, samples, prototypes, models or
other property belonging to EPL PRO-LONG, INC., its successors and assigns
(hereafter referred to as "the Company").
I further certify that I have complied with and will continue to
comply with all the terms of the Employee Invention and Confidential Information
Agreement signed by me with the Company, including the reporting of any
inventions (as defined therein) conceived or made by me covered by the
Agreement.
I further agree that in compliance with the Employee Invention and
Confidential Information Agreement, I will preserve as confidential all trade
secrets, confidential or proprietary information (as defined therein),
knowledge, data, or other information relating to products, inventions,
processes, know-how, designs, formulas, test data, customer lists, or other
subject matter pertaining to any business of the Company or any of its clients,
customers, consultants, licensees, or affiliates.
----------------------------------
Employee's Signature
----------------------------------
Print Name
----------------------------------
Date
A-1
<PAGE>
EXHIBIT B
SECTION 2870
CALIFORNIA LABOR CODE
(a) Any provision in an employment agreement which provides that an
employee shall assign or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facility, or trade secret information except for those
inventions that either:
(1) relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer; or
(2) result from any work performed by the employee for the employer.
(b) To the extent that a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
B-1
<PAGE>
EXHIBIT C
LIST OF PRIOR INVENTIONS
<TABLE>
<CAPTION>
Identifying Number
Title Date or Brief Description
- -------- ---- --------------------
<S> <C> <C>
</TABLE>
C-1
<PAGE>
EXHIBIT B
---------
Form of Rule 145 Agreement
B-1
<PAGE>
RULE 145 AGREEMENT
------------------
Prolong International Corporation
6 Thomas
Irvine, California 92618
Gentlemen:
1. In connection with the acquisition by the undersigned of _________
______________________________ (__________) shares of the Common Stock of
Prolong International Corporation, a Nevada corporation (the "Company"), which
were issued pursuant to an effective registration statement under the Securities
Act of 1933, as amended (the "Act") (the "Registered Shares"), the undersigned
represents that:
(a) the undersigned understands that the Registered Shares may only
be sold or transferred in compliance with Rule 145 under the Act, and the
undersigned agrees to comply with all the terms and conditions of Rule 145, a
copy of which has been furnished to the undersigned; and
(b) the undersigned understands that the certificates evidencing the
Registered Shares may bear any legend that the Company deems appropriate to
comply with the resale restrictions applicable to "affiliates" under Rule 145(d)
of the Act and stop transfer orders may be placed against such certificates.
Dated: _____________, 1998
-------------------------------------
Signature
-------------------------------------
Print Name
<PAGE>
EXHIBIT C
---------
FORM OF CONFIDENTIALITY AGREEMENT
C-1
<PAGE>
EPL PRO-LONG, INC.
February 5, 1998
Prolong International Corporation
6 Thomas
Irvine, California 92618
Gentlemen:
In connection with the proposed transaction (the "Transaction")
between EPL Pro-Long, Inc. ("EPL") and Prolong International Corporation
("Prolong") pursuant to the Agreement and Plan of Reorganization entered into by
the parties on February 5, 1998 (the "Agreement"), EPL expects to make available
to Prolong certain information concerning EPL's business, financial condition,
operations, assets and liabilities (herein collectively referred to as the
"Evaluation Material.") As a condition to such information being furnished to
Prolong and its directors, officers, employees, agents or advisors (including,
without limitation, attorneys, accountants, consultants, bankers and financial
advisors) (collectively, the "Prolong Representatives"), Prolong agrees to treat
any information concerning EPL that is furnished hereunder as proprietary and
confidential in accordance with the provisions of this letter agreement.
Prolong's agreement to treat the Evaluation Material as proprietary and
confidential will apply to all such information disclosed hereunder, whether it
is written or oral, whether it is delivered now or in the future, whether it is
prepared by EPL or any of EPL's directors, officers, employees, agents or
advisors (including, without limitation, attorneys, accountants, consultants,
bankers and financial advisors) (collectively, the "EPL Representatives"), and
whether it is received by Prolong or any of the Prolong Representatives. In
addition, Prolong agrees to take or abstain from taking certain other actions
all as more specifically set forth below.
(1) Evaluation Material. The term "Evaluation Material" shall be
-------------------
deemed to include all notes, analyses, compilations, studies, interpretations or
other documents prepared by EPL or the EPL Representatives which contain,
reflect or are based upon, in whole or in part, Evaluation Material furnished to
Prolong or the Prolong Representatives pursuant to this letter agreement. The
term "Evaluation Material" does not include information which (i) is or becomes
generally available to the public other than as a result of a disclosure by
Prolong or the Prolong Representatives or (ii) is or becomes available to
Prolong on a non-confidential basis from a source other than EPL or any of the
EPL Representatives, provided that such source is not bound by a
<PAGE>
confidentiality agreement with or other contractual, legal or fiduciary
obligation of confidentiality to EPL or any other party with respect to such
information.
(2) Purpose of Disclosure of Evaluation Material. Prolong agrees that
--------------------------------------------
any exchange of information under this letter agreement shall be solely for the
purpose of evaluating the Transaction between the parties hereto. It is further
agreed that the information to be disclosed to Prolong shall only be that
information which is reasonably necessary to the Transaction and that
information which is not reasonably necessary for such purposes shall not be
disclosed.
(3) Use of Evaluation Material. Prolong agrees that it and its
--------------------------
Representatives shall use the Evaluation Material solely for the purpose of
evaluating the Transaction, and that EPL's Evaluation Material will be kept
confidential and Prolong and its Representatives will not disclose or use for
purposes other than the evaluation of the Transaction any of EPL's Evaluation
Material in any manner whatsoever; provided, however, that (i) Prolong may make
any disclosure of such information to which EPL gives its prior written consent
and (ii) any of such information may be disclosed to the Prolong Representatives
who need to know such information for the sole purpose of evaluating the
Transaction.
(4) Non-Disclosure. In addition, Prolong agrees that, without the
--------------
prior written consent of EPL, neither Prolong nor any of its Representatives
will make a press release or publicly disclose the fact that any Evaluation
Material has been made available under this letter agreement, that discussions
or negotiations are taking place concerning the Transaction or any of the terms,
conditions or facts with respect to the Transaction (including the status of the
Transaction); provided, however, that Prolong may make such disclosure if in the
written opinion of Prolong's counsel, such disclosure is necessary to avoid a
violation of law. In such event, Prolong shall give advance notice to EPL of
the intended disclosure.
(5) Required Disclosure. If Prolong or any of its Representatives is
-------------------
requested or required (by oral questions, interrogatories, requests for
information or documents in legal proceedings, subpoena, civil investigative
demand or other similar process) to disclose any of EPL's Evaluation Material,
Prolong and those Representatives requested or required to make the disclosure
shall provide EPL with prompt notice of any such request or requirement so that
EPL may seek a protective order or other appropriate remedy and/or waive
compliance with the provisions of this letter agreement.
(6) Termination of the Agreement. If the Agreement is terminated in
----------------------------
accordance with the provisions thereof, or at any time upon the request of EPL
for any reason, Prolong will promptly deliver to EPL all Evaluation Material
(and all copies thereof) furnished to Prolong or its Representatives by or on
behalf of EPL pursuant to this letter agreement. Notwithstanding the return of
the Evaluation Material, Prolong and its Representatives will continue to be
bound by its obligations of confidentiality and other obligations under this
letter agreement for a period of five (5) years from the date of termination of
the Agreement.
(7) No Representation of Accuracy. Prolong understands and
-----------------------------
acknowledges that neither EPL nor any of its Representatives makes any
representation or warranty, express or implied, as to the accuracy or
completeness of the Evaluation Material made available by it.
-2-
<PAGE>
Prolong agrees that neither EPL nor any of its Representatives shall have any
liability to Prolong or to any of its Representatives relating to or resulting
from any inaccuracy or errors in the Evaluation Material or omissions therefrom.
(8) Waiver. No failure or delay by either party in exercising any
------
right, power or privilege under this letter agreement shall operate as a waiver
of such right, power or privilege; nor shall any single or partial exercise of
that right, power or privilege preclude any other or future exercise thereof.
(9) Breach by Representatives. Prolong shall be responsible for any
-------------------------
breach of this letter agreement by any of its Representatives. If any provision
of this letter agreement shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions of the letter
agreement shall not in any way be affected or impaired thereby.
(10) Injunctive Relief. Prolong agrees that money damages would not
-----------------
be a sufficient remedy for any breach of this letter agreement by Prolong or any
of its Representatives and that EPL shall be entitled to equitable relief,
including injunction and specific performance, as a remedy for any such breach.
Such remedies shall not be deemed to be the exclusive remedies for a breach of
this letter agreement but shall be in addition to all other remedies available
at law or equity. If litigation under this letter agreement is commenced and a
court of competent jurisdiction determines that Prolong has breached this letter
agreement, then Prolong shall pay to EPL reasonable expenses, including legal
fees incurred in connection with such litigation and any appeal therefrom.
Please confirm your acceptance of this letter agreement by signing and
returning one copy of it to the undersigned, whereupon this letter agreement
shall become a binding agreement between us.
Very truly yours,
EPL Pro-Long, Inc.,
a California corporation
By: /s/ Michael R. Davis
----------------------
Its: PRESIDENT
----------------------
Accepted and agreed as of the
date first written above:
PROLONG INTERNATIONAL CORPORATION
By: /s/ Elton Alderman
-------------------
Its: President
-------------------
-3-
<PAGE>
EXHIBIT D
---------
FORM OF TRANSFER RESTRICTION
This Transfer Restriction applies to each beneficial owner of record
of shares of common stock of EPL Pro-Long, Inc. ("EPL") or securities
convertible into, exchangeable or exercisable for common stock (collectively,
the "EPL Common Stock"). Prolong International Corporation ("PIC") proposes to
acquire substantially all of the assets of EPL (the "Acquisition") in exchange
for shares of common stock of PIC (the "PIC Common Stock") registered pursuant
to a Registration Statement on Form S-4. Immediately following the Acquisition,
EPL shall commence liquidation of its assets pursuant to a plan of liquidation
whereby each EPL shareholder shall receive its pro rata share of the PIC Common
Stock received by EPL in the Acquisition (the "Liquidating Distribution"). Each
such shareholder recognizes that the Acquisition and Liquidating Distribution
will be of benefit to it.
In consideration of the execution of the Registration Statement by
PIC, and by approving the transaction, each shareholder agrees that it will not,
during the "Restricted Period" (as defined below), without the prior written
consent of PIC (which consent may be withheld in its sole discretion), directly
or indirectly, sell, 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 the 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. As used herein, the term "Restricted Period" shall mean the period
commencing on the closing date of the Acquisition and continuing to a date 365
days thereafter.
Each such shareholder also agrees and consents to the entry of stop
transfer instructions with PIC's transfer agent and registrar against the
transfer of shares of PIC Common Stock or securities convertible into or
exchangeable or exercisable for PIC Common Stock held by such shareholder except
in compliance with the foregoing restrictions.
D-1
<PAGE>
EXHIBIT E
---------
AMENDMENT TO EXCLUSIVE LICENSE
------------------------------
THIS AMENDMENT TO EXCLUSIVE LICENSE AGREEMENT (this "Amendment") is entered
into as of February 5, 1998 by and between EPL Pro-Long, Inc., a California
corporation ("EPL" or "Owner") and Prolong Super Lubricants, Inc., a Nevada
corporation ("PSL" or "Licensee").
BACKGROUND
----------
EPL and PSL entered into an Exclusive License Agreement on November 10, 1993
whereby PSL acquired from EPL an exclusive license to, among other things,
manufacture, distribute, market and sell products using the patented "Anti-
Friction Metal Treatment" ("AFMT") formula and to utilize the name "ProLong"
(and derivatives thereof) in connection with the manufacture and sale of such
products. Concurrently herewith, EPL is entering into an Agreement and Plan of
Reorganization (the "Agreement and Plan of Reorganization") with PSL's parent
corporation, Prolong International Corporation, a Nevada corporation ("PIC"),
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. As a
condition for PIC to consummate the transactions contemplated under the
Agreement and Plan of Reorganization, EPL and PSL have agreed to enter into this
Amendment regarding the payment of royalties to EPL under the Exclusive License
Agreement.
AGREEMENT
---------
NOW THEREFORE, in consideration of the foregoing, EPL hereby agrees with PIC
to amend the Exclusive License Agreement as follows:
1. Section 2(h) shall be added to read in its entirety as follows:
(h) Commencing on the date of execution (the "Execution Date") of that
certain Agreement and Plan of Reorganization by and between Owner and
Licensee's parent corporation, Prolong International Corporation ("PIC"),
all royalties under the Agreement shall cease to accrue and shall not
become due and payable by Licensee. Provided, however, in the event that
the Closing (as defined in the Agreement and Plan of Reorganization) does
not occur prior to December 31, 1998, then all royalty payments that would
have accrued from the Execution Date but for this Section 2(h) shall accrue
and become immediately due and payable by Licensee to Owner as liquidated
damages.
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 SUPER LUBRICANTS, INC.
/s/ Michael R. Davis /s/ Elton Alderman
- ------------------------------- --------------------------------------
Michael R. Davis, President George Elton Alderman, President
E-1
<PAGE>
EXHIBIT F
---------
CANCELLATION AGREEMENT
----------------------
THIS CANCELLATION AGREEMENT (this "Agreement") is entered into as of
February 5, 1998 by and between EPL Pro-Long, Inc., a California corporation
("EPL") and Michael R. Davis (the "Shareholder").
BACKGROUND
----------
The Shareholder currently owns approximately three million seven hundred
thousand (3,700,000) shares of common stock, no par value, of EPL (the "EPL
Common Stock"). EPL is entering into an Agreement and Plan of Reorganization
(the "Agreement and Plan of Reorganization") with Prolong International
Corporation, a Nevada corporation ("PIC"), 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. As a condition of and in consideration
for PIC to consummate the transactions contemplated under the Agreement and Plan
of Reorganization, the Shareholder has agreed to enter into this Agreement to
surrender to EPL for cancellation seven hundred thousand (700,000) of his shares
of EPL Common Stock.
AGREEMENT
---------
NOW THEREFORE, in consideration of the terms, covenants, and conditions
hereinafter set forth, EPL hereby agrees with the Shareholder as follows:
1. Cancellation of EPL Common Stock. On the Closing Date, the Shareholder
--------------------------------
shall surrender to EPL for cancellation seven hundred thousand (700,000) shares
of EPL Common Stock held by the Shareholder; provided, however, that if the
-------- -------
Closing does not occur for any reason, this Agreement shall automatically
terminate and the Shareholder shall not have any further obligations or
liability hereunder.
2. This Agreement 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.
3. All terms not defined herein shall have the meanings ascribed to such
terms in the Agreement and Plan of Reorganization.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first hereinabove written.
EPL PRO-LONG, INC. SHAREHOLDER
/s/ Michael R. Davis
- --------------------------- ----------------------------
Lois Miller, Secretary Michael R. Davis
F-1
<PAGE>
SCHEDULE 1.1 (a)
INTELLECTUAL PROPERTY
---------------------
[_] PATENTS (see Exclusive License Agreement dated 11/10/93)
EXHIBIT "A"
-----------
1. Austria
2. Belgium
3. Canada
4. France
5. Germany
6. Italy
7. Luxembourg
8. Netherlands
9. Sweden
10. Switzerland
11. United Kingdom
12. United States
[_] TRADEMARKS
Any and all trademark/tradename rights held by EPL Pro-Long, including,
but not limited to all of the following:
1. Prolong
2. Prolong Super Lubricants (the name)
3. Oil drop logo
4. "The Ultimate in Protection and Performance"
5. Prolong and design
6. Label design with integrated elements
7. 'NO EQUAL IN THE WORLD' (capital letters)
8. AFMT and design
9. AFMT and design (vertical)
10. AFMT and design (horizontal)
11. SPL100 (brand name)
12. "No Equal in the World" (design)
Schedule to Agreement and Plan of Reorganization between EPL Pro-Long, Inc. and
Prolong International Corporation.
<PAGE>
SCHEDULE 1.1 (a) (cont.)
[_] All rights of EPL to sue any third parties for relief for past
infringement or encroachment of paid intellectual property and rights,
including that property listed above; including but not limited to:
. Ronald J. Sloan and Clifford R. Sloan (Canada)
. William Hodge, et al. (Canada)
. Francis D. Helman, et al. (Ohio)
Schedule to Agreement and Plan of Reorganization between EPL Pro-Long, Inc. and
Prolong International Corporation.
<PAGE>
Schedule 1.1 (e)
ASSUMED CONTRACTS
-----------------
[_] Exclusive License Agreement dated November 10, 1993; which became active
January 1, 1995.
[_] Payment of legal fees on an account stated with Cotkins & Collins law
firm.
Schedule to Agreement and Plan of Reorganization between EPL Pro-Long, Inc. and
Prolong International Corporation.
<PAGE>
SCHEDULE 2.1
------------
EPL PROLONG INC.
ACCOUNTS PAYABLE AGED INVOICE REPORT
ALL OPEN INVOICES - AGED BY INVOICE DATE
<TABLE>
<CAPTION>
H
VENDOR/ ------DATES------ L INVOICE DISCOUNT
INVOICE NO. INVOICE DUE DSCNT D BALANCE AMOUNT CURRENT 30 DAYS 60 DAYS 90 DAYS 120 DAYS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0002075 ALPHA MAINTENANCE
AJUST 04/30/96 04/30 N 290.00- .00 290.00-
BEG BAL 04/30/96 04/30 N 1,305.00 .00 1,305.00
W/O 04/30/96 04/30 N 1,015.00- .00 1,015.00-
---------- ------- ---------- ------- ------- -------- --------
VENDOR 0002075 TOTALS: .00 .00 .00 .00 .00 .00 .00
0002117 AMERITECH
BEG BAL 04/30/96 04/30 N 621.64 .00 621.64
W/O 04/30/96 04/30 N 621.64- .00 621.64-
---------- ------- ---------- ------- ------- -------- --------
VENDOR 0002117 TOTALS: .00 .00 .00 .00 .00 .00 .00
0002175 AT & T
BEG BAL 04/30/96 04/30 N 1,492.00 .00 1,492.00
W/O 04/30/96 04/30 N 1,492.00- .00 1,492.00-
---------- ------- ---------- ------- ------- -------- --------
VENDOR 0002175 TOTALS: .00 .00 .00 .00 .00 .00 .00
0002345 CAL INDUSTRIES
BEG BAL 04/30/96 04/30 N 209.90 .00 209.90
W/O 04/30/96 04/30 N 209.90- .00 209.90-
---------- ------- ---------- ------- ------- -------- --------
VENDOR 0002345 TOTALS: .00 .00 .00 .00 .00 .00 .00
0002436 CHEMTREC
BEG BAL 04/30/96 04/30 N 375.00 .00 375.00
W/O 04/30/96 04/30 N 375.00- .00 375.00-
---------- ------- ---------- ------- ------- -------- --------
VENDOR 0002436 TOTALS: .00 .00 .00 .00 .00 .00 .00
0002512 COOPERS & LYBRAND
ADJUST 04/30/96 04/30 N 6,239.30 .00 6,239.30
AJMT 04/30/97 04/30 N 4,141.80 .00 4,141.80
AJMT 1 04/30/97 04/30 N 8,283.60- .00 8,283.60-
BEG BAL 04/30/96 04/30 N 2,097.50- .00 2,097.50-
---------- ------- ---------- ------- ------- -------- --------
VENDOR 0002512 TOTALS: .00 .00 .00 .00 .00 .00 .00
0002518 COTKINS & COLLINS
BEG BAL 12/31/97 12/31 N 287,229.31 .00 287,229.31
---------- ------- ---------- ------- ------- -------- --------
VENDOR 0002518 TOTALS: 287,229.31 .00 287,229.31 .00 .00 .00 .00
0002523 CRESCENT TRUCK
BEG BAL 04/30/96 04/30 N 309.00 .00 309.00
W/O 04/30/96 04/30 N 309.00- .00 309.00-
---------- ------- ---------- ------- ------- -------- --------
VENDOR 0002523 TOTALS: .00 .00 .00 .00 .00 .00 .00
0002590 DONWELL
</TABLE>
<PAGE>
EPL PROLONG INC.
ACCOUNTS PAYABLE AGED INVOICE REPORT
ALL OPEN INVOICES - AGED BY INVOICE DATE
<TABLE>
<CAPTION>
H
VENDOR/ ------DATES------ L INVOICE DISCOUNT
INVOICE NO. INVOICE DUE DSCNT D BALANCE AMOUNT CURRENT 30 DAYS 60 DAYS 90 DAYS 120 DAYS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REV AP0006 04/30/96 04/30 N 5,000.00 .00 5,000.00
W/O 04/30/96 04/30 N 5,000.00- .00 5,000.00-
---------- ------- ---------- ------- ------- -------- --------
VENDOR 0002590 TOTALS: .00 .00 .00 .00 .00 .00 .00
0002630 EXACTA INTERNATIONAL
BEG BAL 04/30/96 04/30 N 1,830.67 .00 1,830.67
W/O 04/30/96 04/30 N 1,830.67- .00 1,830.67-
----------- ------- ---------- ------- ------- ------- --------
VENDOR 0002630 TOTALS: .00 .00 .00 .00 .00 .00 .00
0002695 JEFFREY GARLAND
BEG BAL 04/30/96 04/30 N 5,000.00- .00 5,000.00-
EXP PPD 04/30/96 04/30 N 5,000.00 .00 5,000.00
------------ ------ ---------- -------- -------- ------- --------
VENDOR 0002695 TOTALS: .00 .00 .00 .00 .00 .00 .00
0002705 GRAND CAL LUBRICANTS
BEG BAL 04/30/96 04/30 N 548.28 .00 548.28
W/O 04/30/96 04/30 N 548.28- .00 548.28-
------------ ------ ---------- --------- --------- ------- ------
VENDOR 0002705 TOTALS: .00 .00 .00 .00 .00 .00 .00
0002860 KINKO'S
BEG BAL 04/30/96 04/30 N 46.78 .00 46.78
W/O 04/30/96 04/30 N 46.78- .00 46.78-
------------ ------ ---------- --------- --------- ------- ------
VENDOR 0002860 TOTALS: .00 .00 .00 .00 .00 .00 .00
0002900 LEASEAMERICA VENDOR
BEG BAL 04/30/96 04/30 N 1,686.89 .00 1,686.89
W/O 04/30/96 04/30 N 1,686.89- .00 1,686.89-
------------ ------ ---------- ---------- -------- ------- --------
VENDOR 0002900 TOTALS: .00 .00 .00 .00 .00 .00 .00
0002930 LIFT TRUCK REPAIR
BEG BAL 04/30/96 04/30 N 284.05 .00 284.05
W/O 04/30/96 04/30 N 284.05- .00 284.05-
------------ ------ ---------- ---------- ------- ------- --------
VENDOR 0002930 TOTALS: .00 .00 .00 .00 .00 .00 .00
0002978 MCCARTNY TETRAULT
BEG BAL 04/30/96 04/30 N 15,000.00- .00 15,000.00-
EXP PPD 04/30/96 04/30 N 15,000.00 .00 15,000.00
----------- ------ ---------- ----------- ------- ------- ---------
VENDOR 0002978 TOTALS: .00 .00 .00 .00 .00 .00 .00
0002998 METROMEDIA COMM
BEG BAL 04/30/96 04/30 N 448.40 .00 448.40
W/O 04/30/96 04/30 N 448.40- .00 448.40-
</TABLE>
<PAGE>
EPL PROLONG INC.
ACCOUNTS PAYABLE AGED INVOICE REPORT
ALL OPEN INVOICES - AGED BY INVOICE DATE
<TABLE>
<CAPTION>
H
VENDOR/ ------DATES------ L INVOICE DISCOUNT
INVOICE NO. INVOICE DUE DSCNT D BALANCE AMOUNT CURRENT 30 DAYS 60 DAYS 90 DAYS 120 DAYS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
---------- ------- ---------- ------- ------- -------- --------
VENDOR 0002998 TOTALS: .00 .00 .00 .00 .00 .00 .00
0003000 MOBIL OIL
BEG BAL 04/30/96 04/30 N 678.99 .00 678.99
W/O 04/30/96 04/30 N 678.99- .00 678.99-
---------- ------- ---------- ------- ------- -------- --------
VENDOR 0003000 TOTALS: .00 .00 .00 .00 .00 .00 .00
0003045 ROBER NEU INC.
ADJUST 04/30/96 04/30 N 671.50 .00 671.50
BEG BAL 04/30/96 04/30 N 4,091.00- .00 4,091.00-
W/O 04/30/97 04/30 N 3,419.00 .00 3,419.00
---------- ------- ---------- ------- ------- -------- --------
VENDOR 0003045 TOTALS: .00 .00 .00 .00 .00 .00 .00
0003064 LILAC CITY DECORATORS
BEG BAL 04/30/96 04/30 N 1,661.28 .00 1,661.28
W/O 04/30/96 04/30 N 1,661.28- .00 1,661.28-
---------- ------- ---------- ------- ------- -------- --------
VENDOR 0003064 TOTALS: .00 .00 .00 .00 .00 .00 .00
0003100 OMNIFAX
BEG BAL 04/30/96 04/30 N 864.35 .00 864.35
W/O 04/30/96 04/30 N 864.35- .00 864.35-
---------- ------- ---------- ------- ------- -------- --------
VENDOR 0003100 TOTALS: .00 .00 .00 .00 .00 .00 .00
0003110 CHRISTOPHER OSAKWE
BEG BAL 04/30/96 04/30 N 23,310.58 .00 23,310.58
---------- ------- ---------- ------- ------- -------- ---------
VENDOR 0003110 TOTALS: 23,310.58 .00 .00 .00 .00 .00 23,310.58
0003295 RAMON PRATT
ADJUST 04/30/96 04/30 N 3,500.00 .00 3,500.00
BEG BAL 04/30/96 04/30 N 3,500.00- .00 3,500.00-
---------- ------- ---------- ------- ------- -------- ---------
VENDOR 0003295 TOTALS: .00 .00 .00 .00 .00 .00 .00
0003427 JAMES SCHROEDER
BEG BAL 04/30/96 04/30 N 2,669.11 .00 2,669.11
W/O 04/30/96 04/30 N 2,669.11- .00 2,669.11-
---------- ------- ---------- ------- ------- -------- ---------
VENDOR 0003427 TOTALS: .00 .00 .00 .00 .00 .00 .00
0003440 SECURITY BUREAU, INC.
BEG BAL 04/30/96 04/30 N 360.00 .00 360.00
W/O 04/30/96 04/30 N 360.00- .00 360.00-
---------- ------- ---------- ------- ------- -------- ---------
VENDOR 0003440 TOTALS: .00 .00 .00 .00 .00 .00 .00
003445 SNOOBY DOOBY DUPING
</TABLE>
<PAGE>
EPL PROLONG INC.
ACCOUNTS PAYABLE AGED INVOICE REPORT
ALL OPEN INVOICES - AGED BY INVOICE DATE
<TABLE>
<CAPTION>
H
VENDOR/ ------DATES------ L INVOICE DISCOUNT
INVOICE NO. INVOICE DUE DSCNT D BALANCE AMOUNT CURRENT 30 DAYS 60 DAYS 90 DAYS 120 DAYS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BEG BAL 04/30/96 04/30 N 71.12 .00 71.12
W/O 04/30/96 04/30 N 71.12- .00 71.12-
---------- ------- ---------- ------- ------- -------- --------
VENDOR 0003445 TOTALS: .00 .00 .00 .00 .00 .00 .00
0003569 SYON CORP
BEG BAL 04/30/96 04/30 N 3,455.80 .00 3,455.80
W/O 04/30/96 04/30 N 3,455.80- .00 3,455.80-
---------- ------- ---------- ------- ------- -------- --------
VENDOR 0003569 TOTALS: .00 .00 .00 .00 .00 .00 .00
0003620 UPS
BEG BAL 04/30/96 04/30 N 477.03 .00 477.03
W/O 04/30/96 04/30 N 477.03- .00 477.03-
---------- ------- ---------- ------- ------- -------- --------
VENDOR 0003620 TOTALS: .00 .00 .00 .00 .00 .00 .00
0003658 VINPAC
BEG BAL 04/30/96 04/30 N 460.00- .00 460.00-
W/O 04/30/96 04/30 N 460.00 .00 460.00
---------- ------- ---------- ------- ------- -------- --------
VENDOR 0003658 TOTALS: .00 .00 .00 .00 .00 .00 .00
0003690 WEBER WAREHOUSE
AJST 04/30/97 04/30 N 540.00- .00 540.00-
AJST 1 04/30/97 04/30 N 1,080.00 .00 1,080.00
BEG BAL 04/30/96 04/30 N 102.50 .00 102.50
W/O 04/30/96 04/30 N 642.50- .00 642.50-
---------- ------- ---------- ------- ------- -------- --------
VENDOR 0003690 TOTALS: .00 .00 .00 .00 .00 .00 .00
0003749 RON MILINOFSKY
BEG BAL 04/30/96 04/30 N 16,000.00- .00 16,000.00-
EXP PPD 04/30/96 04/30 N 16,000.00 .00 16,000.00
---------- ------- ---------- ------- ------- -------- --------
VENDOR 0003749 TOTALS: .00 .00 .00 .00 .00 .00 .00
0003765 WITCO
BEG BAL 04/30/96 04/30 N 2,505.14- .00 2,505.14-
W/O 04/30/96 04/30 N 2,505.14 .00 2,505.14
---------- ------- ---------- ------- ------- -------- --------
VENDOR 0003765 TOTALS: .00 .00 .00 .00 .00 .00 .00
0003800 YELLOW TRUCKING
BEG BAL 04/30/96 04/30 N 271.02- .00 271.02-
W/O 04/30/96 04/30 N 271.02 .00 271.02
---------- ------- ---------- ------- ------- -------- --------
VENDOR 0003800 TOTALS: .00 .00 .00 .00 .00 .00 .00
0008888 BEGINNING BALANCE
BEG BAL 04/30/96 04/30 N 1,926.21 .00 1,926.21
---------- ------- ---------- ------- ------- -------- --------
VENDOR 0008888 TOTALS: .00 .00 .00 .00 .00 .00 .00
</TABLE>
<PAGE>
Schedule 6.5
OFFICERS AND DIRECTORS
----------------------
[_] Michael R. Davis Director, President, Treasurer
[_] Lois M. Miller Director, Secretary
[_] Gary C. Wykidal, Esq. Director
Schedule to Agreement and Plan of Reorganization between EPL Pro-Long, Inc. and
Prolong International Corporation.
<PAGE>
Schedule 6.6
------------
EPL PROLONG INC.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C> <C>
CURRENT ASSETS
CASH IN BANK - B OF A $ 42,169.80
PREPAID INCOME TAXES 5,626.00
RECEIVABLE - DSL 538,794.57
----------------
586,590.37
FIXED ASSETS
ACCUM DEPRECIATION - F & F (3,774.75)
MACHINERY & EQUIPMENT 53,853.97
ACCUM DEPRECIATION - M & E (53,853.97)
PATENTS 693,493.75
ACCUM AMORTIZATION - PATENTS (383,782.47)
----------------
TOTAL FIXED ASSETS 305,936.53
------------
TOTAL ASSETS $892,526.90
============
</TABLE>
<PAGE>
EPL PROLONG INC.
BALANCE SHEET
DECEMBER 31, 1997
LIABILITIES AND EQUITY
<TABLE>
CURRENT LIABILITIES
<S> <C> <C>
ACCOUNTS PAYABLE $ 310,539.89
-------------
TOTAL CURRENT LIABILITIES 310,539.89
LONG-TERM LIABILITIES
LOAN PAYABLE - L/T PORTION 102,702.00
-------------
TOTAL LONG-TERM LIABILITIES 102,702.00
-----------
TOTAL LIABILITIES 413,241.89
EQUITY
COMMON STOCK 135,473.35
CAPITAL CONTRIBUTED 1,516,553.22
RETAINED EARNINGS - PRIOR (1,713,532.36)
RETAINED EARNINGS-CURRENT YEAR 540,790.80
-------------
TOTAL EQUITY 479,285.01
-----------
TOTAL LIABILITIES AND EQUITY $892,526.90
===========
</TABLE>
<PAGE>
EPL PROLONG INC.
INCOME STATEMENT
FOR THE 8 PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
+---PERIOD TO DATE---+ +----YEAR TO DATE----+
ACTUAL PERCENT ACTUAL PERCENT
------------- ------- ------------- -------
<S> <C> <C> <C> <C>
GROSS PROFIT $ .00 .0 % .00 .0
EXPENSES:
GENERAL & ADMINISTRATIVE
ACCOUNTING 1,800.00 .0 7,100.00 .0
AMORTIZATION 3,774.75 .0 30,198.00 .0
CONSULTING .00 .0 (3,602.28) .0
LEGAL (20,342.62) .0 101,269.95 .0
OUTSIDE SERVICE .00 .0 1,500.00 .0
PENALTIES 156.00 .0 7,036.44 .0
RENT (3,113.36) .0 (3,113.36) .0
TAXES - FTB 4,402.00 .0 5,202.00 .0
TAXES & LICENSES 139.19 .0 634.09 .0
TRAVEL 3,591.00 .0 15,320.05 .0
------------- ------- ------------- -------
TOTAL GENERAL & ADMINISTRATIVE (9,593.04) .0 161,544.89 .0
OTHER INCOME / EXPENSES
ROYALTY INCOME (122,904.25) .0 (729,534.38) .0
INTEREST EXPENSE .00 .0 27,198.69 .0
------------- ------- ------------- -------
TOTAL OTHER INCOME / EXPENSES (122,904.25) .0 (702,335.69) .0
------------- ------- ------------- -------
TOTAL EXPENSES (132,497.29) .0 (540,790.80) .0
------------- ------- ------------- -------
NET INCOME FROM OPERATIONS 132,497.29 .0 540,790.80 .0
------------- ------- ------------- -------
EARNINGS BEFORE INCOME TAX 132,497.29 .0 540,790.80 .0
------------- ------- ------------- -------
NET INCOME (LOSS) $132,497.29 .0 % 540,790.80 .0
============= ======= ============= =======
</TABLE>
<PAGE>
EPL PROLONG INC.
BALANCE SHEET
APRIL 30, 1997
ASSETS
<TABLE>
<S> <C> <C>
CURRENT ASSETS
CASH IN BANK - B OF A $56,708.37
RECEIVABLE - PSL 313,273.69
----------
TOTAL CURRENT ASSETS 369,982.06
FIXED ASSETS
MACHINERY & EQUIPMENT 53,853.97
ACCUM DEPRECIATION - M & E (53,853.97)
PATENTS 693,493.75
ACCUM AMORTIZATION - PATENTS (357,359.22)
-----------
TOTAL FIXED ASSETS 336,134.53
-----------
TOTAL ASSETS $706,116.59
===========
</TABLE>
<PAGE>
EPL PROLONG INC.
BALANCE SHEET
APRIL 30, 1997
LIABILITIES AND EQUITY
<TABLE>
CURRENT LIABILITIES
<S> <C> <C>
ACCOUNTS PAYABLE $ 564,990.64
PAYABLE - PIC 14,029.00
---------------
TOTAL CURRENT LIABILITIES 579,019.64
LONG-TERM LIABILITIES
LOAN PAYABLE - L/T PORTION-Footnote 1 188,602.74
---------------
TOTAL LONG-TERM LIABILITIES 188,602.74
---------------
TOTAL LIABILITIES 767,622.38
EQUITY
COMMON STOCK 135,473.35
CAPITAL CONTRIBUTED 1,516,553.22
RETAINED EARNINGS - PRIOR (2,342,142.78)
RETAINED EARNINGS-CURRENT YEAR 628,610.42
---------------
(61,505.79)
---------------
TOTAL LIABILITIES AND EQUITY $706,116.59
===============
</TABLE>
Footnote 1 - Secured Promissory Note with UCC filing and lien covering all of
EPL's assets
<PAGE>
EPL PROLONG INC.
INCOME STATEMENT
FOR THE 12 PERIODS ENDED APRIL 30, 1997
<TABLE>
<CAPTION>
PERIOD TO DATE YEAR TO DATE
ACTUAL PERCENT ACTUAL PERCENT
-------------- ----- -------------- -----
<S> <C> <C> <C> <C>
GROSS PROFIT $.00 .0 % .00 .0
EXPENSES:
OPERATING EXPENSES
PACKAGING & LABELS .00 .0 893.51 .0
-------------- ----- -------------- -----
TOTAL OPERATING EXPENSES .00 .0 893.51 .0
GENERAL & ADMINISTRATIVE
ACCOUNTING 2,787.50 .0 3,500.00 .0
AMORTIZATION 45,297.00 .0 45,297.00 .0
BANK CHAGES .00 .0 221.83 .0
ENTERTAINMENT .00 .0 482.44 .0
LEGAL 33,560.99 .0 137,526.81 .0
OFFICE SUPPLIES .00 .0 1,627.42 .0
OUTSIDE SERVICE .00 .0 500.00 .0
PENALTIES .00 .0 58.70 .0
STORAGE 540.00 .0 2,695.90 .0
TRAVEL .00 .0 20,542.97 .0
-------------- ----- -------------- -----
TOTAL GENERAL & ADMINISTRATIVE 82,185.49 .0 212,453.07 .0
-------------- ----- -------------- -----
OTHER INCOME / EXPENSES
ROYALTY INCOME (398,273.69) .0 (766,273.69) .0
INTEREST INCOME .00 .0 (21.72) .0
TAX REFUND .00 .0 (1,000.00) .0
MISCELLANEOUS INCOME (71,796.79) .0 (71,796.79) .0
INTEREST EXPENSE (3,364.80) .0 (2,864.80) .0
-------------- ----- -------------- -----
TOTAL OTHER INCOME / EXPENSES (473,435.28) .0 (841,957.00) .0
-------------- ----- -------------- -----
TOTAL EXPENSES (391,249.79) .0 (628,610.42) .0
-------------- ----- -------------- -----
NET INCOME FROM OPERATIONS 391,249.79 .0 628,610.42 .0
-------------- ----- -------------- -----
EARNINGS BEFORE INCOME TAX 391,249.79 .0 628,610.42 .0
-------------- ----- -------------- -----
NET INCOME (LOSS) $ 391,249.79 .0 % 628,610.42 .0
============== ===== ============== =====
</TABLE>
58
<PAGE>
EPL PROLONG INC.
BALANCE SHEET
APRIL 30, 1996
ASSETS
<TABLE>
<S> <C> <C>
CURRENT ASSETS
CASH IN BANK - B OF A $(3,489.86)
----------
TOTAL CURRENT ASSETS (3,489.86)
FIXED ASSETS
MACHINERY & EQUIPMENT 53,853.97
ACCUM DEPRECIATION - M & E (53,853.97)
PATENTS 693,493.75
ACCUM AMORTIZATION - PATENTS (312,062.22)
----------
TOTAL FIXED ASSETS 381,431.53
-----------
TOTAL ASSETS $377,941.67
===========
</TABLE>
<PAGE>
EPL PROLONG INC.
BALANCE SHEET
APRIL 30, 1996
LIABILITIES AND EQUITY
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES
ACCOUNTS PAYABLE $646,262.68
PAYABLE - PIC 14,029.00
LOAN PAYABLE - L M 3,722.00
ACCRUED INTEREST 124,044.20
------------
TOTAL CURRENT LIABILITIES 788,057.88
LONG-TERM LIABILITIES
LOAN PAYABLE - L/T PORTION - FOOTNOTE 1 280,000.00
------------
TOTAL LONG-TERM LIABILITIES 280,000.00
------------
TOTAL LIABILITIES 1,068,057.88
EQUITY
COMMON STOCK 135,473.35
CAPITAL CONTRIBUTED 1,516,553.22
RETAINED EARNINGS - PRIOR (2,374,356.70)
RETAINED EARNINGS - CURRENT YEAR 32,215.92
------------
TOTAL EQUITY (690,116.21)
------------
TOTAL LIABILITIES AND EQUITY $377,941.67
============
</TABLE>
Footnote 1 - Secured Promissory Note with UCC filing and lien covering all
of EPL's assets.
<PAGE>
EPL PROLONG INC.
INCOME STATEMENT
FOR THE PERIODS ENDED APRIL 30,1996
<TABLE>
<CAPTION>
PERIOD TO DATE YEAR TO DATE
ACTUAL PERCENT ACTUAL PERCENT
<S> <C> <C> <C> <C>
REVENUE
RETURNS & ALLOWANCES $2,588.85 100.0 % 2,588.85 100.0
------------- -------- -------------- --------
TOTAL REVENUES 2,588.85 100.0 2,588.85 100.0
------------- -------- -------------- --------
GROSS PROFIT 2,588.85 100.0 2,588.85 100.0
EXPENSES:
OPERATING EXPENSES
PURCHASES (950.66) (36.7) (950.66) (36.7)
PACKAGING & LABELS 460.00 17.8 4,971.63 192.0
FREIGHT (515.01) (19.9) 4,121.20 159.2
INVENTORY ADJUSTMENT 26,944.30 ******** 26,944.30 ********
------------- -------- -------------- --------
TOTAL OPERATING EXPENSES 25,938.63 ******** 35,086.47 ********
GENERAL & ADMINISTRATIVE
ACCOUNTING 4,274.55 165.1 8,022.05 309.9
ADVERTISING (71.12) (2.7) (71.12) (2.7)
AMORTIZATION .00 .0 45,297.00 ********
AUTOMOBILE EXPENSE .00 .0 150.00 5.8
BAD DEBT 11,223.00 433.5 11,223.00 433.5
BANK CHAGES 293.11 11.3 734.11 28.4
COMMISSIONS 14,029.00 541.9 14,029.00 541.9
DEPRECIATION .00 .0 2,334.80 90.2
LEASED EQUIPMENT (2,551.24) (98.5) (2,551.24) (98.5)
LEGAL 44,635.80 ******** 73,370.53 ********
OFFICE SUPPLIES (3,393.36) (121.1) (2,201.30) (85.0)
OUTSIDE SERVICE (4,705.39) (181.8) (4,511.89) (174.3)
PENALTIES .00 .0 199.87 7.7
POSTAGE .00 .0 15.50 .6
REPAIRS & MAINTENANCE (1,949.05) (75.3) (1,949.05) (75.3)
STORAGE (642.50) (24.8) 437.50 16.9
TAXES - PTB .00 .0 2,103.74 81.3
TAXES & LICENSES .00 .0 87.00 3.4
TELEPHONE (3,241.03) (125.2) (3,241.03) (125.2)
TRADEMARK EXPENSE 2,842.00 109.8 2,842.00 109.8
TRAVEL 4,538.00 175.3 14,930.78 576.7
------------- -------- -------------- --------
TOTAL GENERAL & ADMINISTRATIVE 65,281.77 ******** 161,251.25 ********
OTHER INCOME / EXPENSES
ROYALTY INCOME (199,609.96) ******** (199,609.96) ********
MISCELLANEOUS INCOME (100,000.00) ******** (100,000.00) ********
INTEREST EXPENSE 12,641.27 488.3 73,645.17 ********
------------- -------- -------------- --------
TOTAL OTHER INCOME / EXPENSES (286,968.69) ******** (225,964.79) ********
------------- -------- -------------- --------
TOTAL EXPENSES (195,748.29) ******** (29,627.07) ********
------------- -------- -------------- --------
NET INCOME FROM OPERATIONS 198,337.14 ******** 32,215.92 ********
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EPL PROLONG INC.
INCOME STATEMENT
FOR THE 12 PERIODS ENDED APRIL 30, 1996
PERIOD TO DATE ZYEAR TO DATE
ACTUAL PERCENT ACTUAL PERCENT
<S> <C> <C> <C> <C>
---------------- ------- ---------------- -------
EARNINGS BEFORE INCOME TA $198,337.14 ******* 32,215.92 *******
---------------- ------- ---------------- -------
NET INCOME (LOSS) $198,337.14 ******* 32,215.92 *******
================ ======= ================ =======
</TABLE>
<PAGE>
EPL PRO-LONG INC.
BALANCE SHEET
DATE POSTED : APRIL 30, 1995
PERIOD ENDING: APRIL 30, 1995
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS
<S> <C>
CASH IN BANK (4,505.01)
ACCOUNTS RECEIVABLE 11,223.00
INVENTORY 26,944.30
TOTAL CURRENT ASSETS 33,662.29
FIXED ASSETS
MACHINERY AND EQUIPMENT 53,853.97
PATENTS 693,493.75
ACCUM. DEPRECIATION F&F (9,480.00)
ACCUM. DEPRECIATION M&E (42,039.17)
ACCUM. AMORTIZATION PATENTS (266,765.22)
TOTAL FIXED ASSETS 429,063.33
OTHER ASSETS
RECEIVABLE-PL SUPER (45,409.96)
TOTAL OTHER ASSETS (45,409.96)
-----------
TOTAL ASSETS 417,315.66
===========
LIABILITIES
CURRENT LIABILITIES
ACCOUNTS PAYABLE 687,030.79
NOTE PAYABLE - C P 86,892.00
ACCRUED INTEREST 85,725.00
TOTAL CURRENT LIABILITIES 859,647.79
LONG TERM LIABILITIES
LOANS PAYABLE - Footnote 1 280,000.00
TOTAL LONG TERM LIABILITIES 280,000.00
-----------
TOTAL LIABILITIES 1,139,647.79
CAPITAL
COMMON STOCK 135,473.35
RETAINED EARNINGS (2,127,882.82)
PERIOD NET INCOME (246,475.88)
CAPITAL CONTRIBUTED 1,516,553.22
TOTAL CAPITAL (722,332.13)
-------------
TOTAL LIABILITIES & CAPITAL 417,315.66
=============
Footnote 1 - Secured Promissory Note with UCC filing and lien covering all of
EPL's assets
</TABLE>
<PAGE>
EPL PRO-LONG INC.
INCOME STATEMENT
CONSOLIDATED STATEMENT
DATE POSTED: APRIL 30, 1995
PERIOD ENDING: APRIL 30, 1995
<TABLE>
<CAPTION>
CURRENT % YEAR-TO-DATE %
<S> <C> <C> <C> <C>
INCOME
SALES (36,736.66) (100.3) 261,300.54 102.4
RETURNS & ALLOWANCES .00 .0 (154.50) (.1)
SALES DISCOUNT .00 .0 (8,877.35) (3.5)
SAMPLE ALLOWANCE .00 .0 15.00 .0
DELIVERY CHARGE INCOME .00 .0 419.54 .2
ROYALTY 121.89 .3 2,414.10 .9
---------- ----------
TOTAL INCOME (36,614.77) (100.0) 255,117.43 100.0
COST OF SALES
PURCHASES 7,620.76 20.8 79,231.78 31.1
PURCHASE DISCOUNTS .00 .0 2.00 .0
PACKAGING & LABELS (4,808.62) (13.1) 717.09 .3
FREIGHT (339.13) (.9) 1,425.91 .5
DIRECT LABOR .00 .0 1,774.00 .7
---------- ----------
TOTAL COST OF SALES 2,473.01 6.8 83,150.78 32.6
---------- ----------
GROSS PROFIT (39,087.78) (106.8) 171,966.65 67.4
EXPENSES
ACCOUNTING 879.00 2.4 6,514.00 2.6
ADVERTISING (171.12) (.5) 137.46 .1
AMORTIZATION 3,729.00 10.2 44,748.00 17.5
AUTOMOBILE .00 .0 1,029.43 .4
BAD DEBTS 62,529.88 170.8 62,529.88 24.5
BANK CHARGES 37.50 .1 1,109.44 .4
BUSINESS PROMOTION .00 .0 685.81 .3
COMMISSIONS 15,038.46 41.1 15,788.46 6.2
CONSULTING .00 .0 57,064.35 22.4
DEPRECIATION 790.00 2.2 9,480.00 3.7
DUES & SUBSCRIPTIONS (123.91) (.3) (1.02) (.0)
ENTERTAINMENT 152.88 .4 815.17 .3
INSURANCE (478.60) (1.3) (478.60) (.2)
LEASED EQUIPMENT .00 .0 817.02 .3
LEGAL 15,798.65 43.1 51,192.40 20.1
OFFICE SUPPLIES 1,134.46 3.1 3,961.62 1.6
OUTSIDE SERVICES 1,550.00 4.2 1,550.00 .6
PENALTIES .00 .0 206.26 .1
PRINTING 55.49 .2 1,234.83 .5
POSTAGE 1,006.71 2.7 2,840.76 1.1
RENT 8,714.30 23.8 45,170.30 17.7
REPAIRS & MAINTENANCE 80.00 .2 390.44 .2
SAMPLES .00 .0 660.00 .3
SHOP SUPPLIES 472.92 1.3 1,491.72 .6
STORAGE 775.00 2.1 2,260.00 .9
TAXES - PAYROLL (2,037.18) (5.6) (2,037.18) (.8)
TAXES - FTS (3,573.96) (9.8) 119.00 .0
TAXES - LICENSES .00 .0 622.65 .2
</TABLE>
<PAGE>
EPL PRO-LONG INC.
INCOME STATEMENT
CONSOLIDATED STATEMENT
DATE POSTED : APRIL 30, 1995
PERIOD ENDING: APRIL 30, 1995
<TABLE>
<CAPTION>
CURRENT % YEAR-TO-DATE %
<S> <C> <C> <C> <C>
TELEPHONE 86.14 .2 5,716.85 2.2
UTILITIES (1,302.25) (3.6) 3,218.83 1.3
TESTING 1,603.19 4.4 2,039.89 .8
TRAVEL 2,542.60 6.9 4,636.08 1.8
----------- -----------
TOTAL EXPENSES 109,289.15 298.5 325,513.85 127.6
----------- -----------
OPERATING INCOME (LOSS) (148,376.93) (405.2) (153,547.20) (60.2)
OTHER INCOME
LEASE INCOME 1,000.00 2.7 4,000.00 1.6
----------- -----------
TOTAL OTHER INCOME 1,000.00 2.7 4,000.00 1.6
OTHER EXPENSES
INTEREST EXPENSE 67,396.81 184.1 96,928.68 38.0
----------- -----------
TOTAL OTHER EXPENSES 67,396.81 184.1 96,928.68 38.0
----------- -----------
NET INCOME (LOSS) (214,773.74) (586.6) (246,475.88) (96.6)
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRO-LONG INTERNATIONAL, INC.
BALANCE SHEET
DATE POSTED : APRIL 30, 1994
PERIOD ENDING: APRIL 30, 1994
<S>
ASSETS <C> <C>
CURRENT ASSETS
CASH IN BANK 3,219.22
ACCOUNTS RECEIVABLE 26,564.31
OTHER RECEIVABLES 14,100.00
INVENTORY 63,111.50
TOTAL CURRENT ASSETS 106,995.03
FIXED ASSETS
MACHINERY AND EQUIPMENT 53,853.97
PATENTS 693,493.75
ACCUM DEPRECIATION M&E (42,039.17)
ACCUM AMORTIZATION P (223,871.22)
TOTAL FIXED ASSETS 481,437.33
OTHER ASSETS
DEPOSITS 4,357.00
PREPAID EXPENSES 8,714.30
TOTAL OTHER ASSETS 13,071.30
----------
TOTAL ASSETS 601,503.66
==========
LIABILITIES
CURRENT LIABILITIES
ACCOUNTS PAYABLE 726,754.58
NOTES PAYABLE - CURR 99,928.00
TOTAL CURRENT LIABILITIES 826,682.58
LONG TERM LIABILITIES
NOTES PAYABLE - LONG - Footnote 1 300,000.00
TOTAL LONG TERM LIABILITIES 300,000.00
----------
TOTAL LIABILITIES 1,126,682.65
CAPITAL
COMMON STOCK 135,473.35
RETAINED EARNINGS (1,820,270.23)
PERIOD NET INCOME (365,935.26)
CAPITAL CONTRIBUTED 1,525,553.22
TOTAL CAPITAL (525,178.92)
----------
TOTAL LIABILITIES & CAPITAL 601,503.66
==========
</TABLE>
Footnote 1 - Secured Promissory Note with UCC filing and lien covering all of
EPL's assets
<PAGE>
<TABLE>
<CAPTION>
PRO-LONG INTERNATIONAL, INC.
INCOME STATEMENT
CONSOLIDATED STATEMENT
DATE POSTED : APRIL 30, 1994
PERIOD ENDING: APRIL 30, 1994
CURRENT % YEAR-TO-DATE %
<S> <C> <C> <C> <C>
INCOME
SALES 9,615.51 110.9 338,254.33 105.5
SERVICE .00 .0 100.00 .0
RETURNS & ALLOWANCES .00 .0 (8,996.74) (2.8)
SALES DISCOUNT (1,384.63) (16.0) (10,732.42) (3.3)
SAMPLE ALLOWNACE (1,227.59) (14.1) .00 .0
DELIVERY CHARGE INCOME 1,674.84 19.3 1,892.66 .6
-------------- --------------
TOTAL INCOME 8,678.13 100.0 320,517.83 100.0
COST OF SALES
PURCHASES 39,518.90 455.4 149,292.43 46.5
PACKAGING & LABELS .00 .0 4,861.12 1.5
FREIGHT 3,141.50 36.2 22,500.13 7.0
-------------- --------------
TOTAL COST OF SALES 42,660.40 491.6 176,653.68 55.1
-------------- --------------
GROSS PROFIT (33,982.27) (391.6) 143,864.15 44.9
EXPENSES
SALARIES - OFFICERS .00 .0 57,318.75 17.9
SALARIES - OFFICE .00 .0 19,600.00 6.1
ACCOUNTING 725.00 8.4 16,901.98 5.3
RENT (101.73) (1.2) 54,684.00 17.1
POSTAGE 209.71 2.4 1,583.41 .5
PAYROLL TAXES .00 .0 6,249.06 1.9
LEGAL (11,258.85) 189.7 242,823.76 75.8
CONSULTING 66,187.20 762.7 72,887.20 22.7
INSURANCE 222.04 2.6 .00 .0
INSURANCE - HEALTH (222.04) (2.6) 292.94 .1
TRAVEL 12,950.49 149.2 29,365.95 9.2
ADVERTISING 346.56 4.0 1,755.33 .6
LAUNDRY AND JANITORIAL (290.00) (3.3) .00 .0
OFFICE SUPPLIES 4,558.12 52.5 10,194.25 3.2
BANK CHARGES 399.00 4.6 1,248.86 .4
DEPRECIATION EXPENSE 790.00 9.1 9,420.00 3.0
SHOP SUPPLIEES (849.85) (2.9) 520.58 .2
TAXES .00 .0 469.17 .1
LICESES .00 .0 741.26 .2
UTILITIES 302.41 3.5 4,481.95 1.4
PATENT SEARCH .00 .0 756.83 .2
REPAIRS & MAINTENANCE 380.00 3.3 2,911.30 .9
AUTOMOBILE 48.00 .6 1,482.94 .6
BUSINESS PROMOTION 290.00 3.3 4,780.88 1.5
COMMISSIONS (13,460.00) 155.1 2,340.00 .7
DUES & SUBSCRIPTIONS .00 .0 1,547.41 .5
CONTRACT LABOR 180.00 2.1 619.00 .2
STORACE 610.81 7.0 4,355.81 1.4
ENTERTAINMENT .00 .0 2,289.01 .7
TELEPHONE 725.67 8.4 10,083.51 3.1
</TABLE>
12
<PAGE>
PRO-LONG-INTERNATIONAL, INC.
INCOME STATEMENT
CONSOLIDATED STATEMENT
DATE POSTED : APRIL 30, 1994
PERIOD ENDING: APRIL 30, 1994
<TABLE>
<CAPTION>
CURRENT % YEAR-TO-DATE %
<S> <C> <C> <C> <C>
CONTRIBUTIONS 300.00 3.5 878.34 .3
OUTSIDE SERVICES 560.00 6.5 10,046.46 3.1
LEASE EQUIPMENT 490.26 5.6 1,963.48 .6
PENALTIES .00 .0 8,433.27 2.0
LATE CHARGES (69.16) (.8) .00 .0
AMORTIZATION 3,728.00 43.0 44,748.00 14.0
TESTING 469.10 5.4 .00 .0
ROYALTIES (17,480.00) (201.2) (17,460.00) (5.4)
PRINTING (3,659.38) (42.2) .00 .0
COURIER (2,297.20) (25.5) .00 .0
LODGING (1,305.13) (20.8) .00 .0
MEALS 4,045.58 46.6 8,557.44 2.7
LOAN FEES 2,150.00 24.8 2,150.00 .7
DIRECTOR'S FEES 450.00 5.2 450.00 .1
FINANCING FEES 735.00 3.5 735.00 .2
SETTLEMENT COSTS 681.00 7.3 681.00 .2
RESEARCH & DEVEL. 1,000.00 11.6 1,000.00 .3
---------- -----------
TOTAL EXPENSES 52,570.61 605.8 621,938.13 194.0
---------- -----------
OPERATING INCOME (LOSS) (86,552,88) (997.4) (478,073.98) (149.2)
OTHER INCOME
INTEREST INCOME .00 .0 86.39 .0
LICENSING INCOME 65,000.00 749.0 85,000.00 26.5
MISCELLANEOUS INCOME 103,000.00 *** 103,000.00 32.1
---------- -----------
TOTAL OTHER INCOME 168,000.00 *** 188,086.39 59.7
OTHER EXPENSES
INTEREST EXPENSE 42,420.64 488.8 75,947.67 23.7
---------- -----------
TOTAL OTHER EXPENSES 42,420.64 488.8 75,947.67 23.7
---------- -----------
NET INCOME 39,026.48 449.7 (365,935.28) (114.2)
========== ===========
</TABLE>
<PAGE>
SCHEDULE 6.7
MATERIAL ADVERSE CHANGE
------------------------
- NONE -
Schedule to Agreement and Plan of Reorganization between EPL Pro-Long, Inc. and
Prolong International Corporation.
<PAGE>
SCHEDULE 6.8
UNDISCLOSED LIABILITIES
-----------------------
-NONE-
Schedule to Agreement and Plan of Reorganization between EPL Pro-Long, Inc. and
Prolong International Corporation.
<PAGE>
SCHEDULE 6.9
UNPAID TAXES
------------
-NONE-
Schedule to Agreement and Plan of Reorganization between EPL Pro-Long, Inc. and
Prolong International Corporation.
<PAGE>
SCHEDULE 6.10
TITLE TO PROPERTIES
-------------------
-NO EXCEPTIONS-
Schedule to Agreement and Plan of Reorganization between EPL Pro-Long, Inc. and
Prolong International Corporation.
<PAGE>
SCHEDULE 6.11
NOTICE OF ALLEGED GOVERNMENT VIOLATION
--------------------------------------
-NONE RECEIVED-
Schedule to Agreement and Plan of Reorganization between EPL Pro-Long, Inc. and
Prolong International Corporation.
<PAGE>
Schedule 6.13
LITIGATION
----------
1. Prolong of Canada v. EPL, Case No. T1128-92 (Canadian Federal Court)
--------------------------------------------------------------------
This lawsuit seeks to retransfer the patents from EPL back to PLC.
2. Francis Helman, et al. v. EPL Prolong, Inc. et al., Court of Common
-------------------------------------------------------------------
Pleas, Columbiana County, Ohio, Case No. 97 CV 407
--------------------------------------------------
Was initially removed to:
Francis Helman, et al. v. EPL Prolong, Inc. et al., United States
-----------------------------------------------------------------
District Court, Northern District of Ohio, Case No. 4:97 CV 1344
----------------------------------------------------------------
Case was remanded back to State Court on November 25, 1997: Case No. 97
-----------
CV 407.
------
3. Prolong Technology of Canada v. Geoffrey C. Clark and Fetherstonbaugh &
-----------------------------------------------------------------------
Co. v. Elton Alderman, Ronald Sloan, Robert Strauss, Oren Breitman and
----------------------------------------------------------------------
EPL Prolong, Inc. Supreme Court of British Columbia, Vancouver Registry,
------------------------------------------------------------------------
Case No. C965105.
-----------------
Schedule to Agreement and Plan of Reorganization between EPL Pro-Long, Inc. and
Prolong International Corporation.
<PAGE>
SCHEDULE 6.15
INTELLECTUAL PROPERTY
---------------------
[_] PATENTS (see Exclusive License Agreement dated 11/10/93)
EXHIBIT "A"
-----------
1. Austria
2. Belgium
3. Canada
4. France
5. Germany
6. Italy
7. Luxembourg
8. Netherlands
9. Sweden
10. Switzerland
11. United Kingdom
12. United States
[_] TRADEMARKS
Any and all trademark/tradename rights held by EPL Pro-Long,
including, but not limited to all of the following:
1. Prolong
2. Prolong Super Lubricants (the name)
3. Oil drop logo
4. "The Ultimate in Protection and Performance"
5. Prolong and design
6. Label design with integrated elements
7. 'NO EQUAL IN THE WORLD' (capital letters)
8. AFMT and designs
9. AFMT and design (vertical)
10. AFMT and design (horizontal)
11. SPL100 (brand name)
12. "No Equal in the World" (design)
Schedule to Agreement and Plan of Reorganization between EPL Pro-Long, Inc. and
Prolong International Corporation.
<PAGE>
Schedule 6.15 (cont.)
[_] All rights of EPL to sue any third parties for relief for past
infringement or encroachment of EPL's intellectual property rights,
including that property listed above; including but not limited to:
. Ronald J. Sloan and Clifford R. Sloan (Canada)
. William Hodge, et al. (Canada)
. Francis D. Helman, et al. (Ohio)
Schedule to Agreement and Plan of Reorganization between EPL Pro-Long, Inc. and
Prolong International Corporation.
<PAGE>
Schedule 6.16
CONTRACTS
---------
[_] Exclusive License Agreement dated November 10, 1993, which became active
January 1, 1995.
[_] Account stated with Cotkins & Collins law firm.
[_] EPL Checking Account with Bank of America; Placentia, CA Branch; Account
No. 122000661-07607.
Authorized signers: Michael R. Davis, President
[_] Any equipment or property leases in the name of EPL.
Schedule to Agreement and Plan of Reorganization between EPL Pro-Long, Inc. and
Prolong International Corporation.
<PAGE>
Schedule 6.18
NOTICES OF DEFAULT
------------------
- NONE RECEIVED -
Schedule to Agreement and Plan of Reorganization between EPL Pro-Long, Inc. and
Prolong International Corporation.
<PAGE>
Schedule 6.21
CONFLICT OF INTEREST
--------------------
[_] Gary Wykidal serves as legal counsel to EPL Pro-Long, Inc. and is a
director and shareholder.
Schedule to Agreement and Plan of Reorganization between EPL Pro-Long, Inc. and
Prolong International Corporation.
<PAGE>
Schedule 6.22
AFFILIATES
----------
Michael R. Davis
Lois M. Miller
Gary C. Wykidal
Schedule to Agreement and Plan of Reorganization between EPL Pro-Long, Inc. and
Prolong International Corporation.
<PAGE>
SCHEDULE 6.23
INDEMNIFICATION
---------------
Michael R. Davis
Lois M. Miller
Gary C. Wykidal, Esq.
Schedule to Agreement and Plan of Reorganization between EPL Pro-Long, Inc. and
Prolong International, Inc.
<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:
<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.
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.
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,
<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
<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.
D-1
<PAGE>
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of 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
D-2
<PAGE>
a like statement, together with the name of the original dissenting holder of
the shares.
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.
D-3
<PAGE>
(c) Subject to the provisions of Section 1306, judgment shall be
rendered against the 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
D-5
<PAGE>
shareholder institutes 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, 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
- --------------------------------------------------
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 December 31, 1997 and 1996......... F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995................................... F-6
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995................................... F-7
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995................................... F-8
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1997, 1996 and 1995................................... F-10
EPL Pro-Long, Inc.
- ------------------
Unaudited Balance Sheets as of December 31, 1997 and 1996
and April 30, 1997 and 1996........................................ F-23
Unaudited Statements of Operations and Retained Deficit for
the Eight Months Ended December 31, 1997 and 1996.................. F-24
Unaudited Statements of Operations and Retained Deficit for
the Years Ended April 30, 1997, 1996 and 1995...................... F-25
Unaudited Statements of Cash Flows for the Eight Months
ended December 31, 1997 and 1996................................... F-26
Unaudited Statements of Cash Flows for the Years Ended
April 30, 1997, 1996 and 1995...................................... F-27
Notes to Unaudited Financial Statements.............................. F-28
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
AS OF DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,180,983 $ 5,063,585
Accounts receivable, net of allowance for doubtful accounts
of $242,724 and $94,282 in 1997 and 1996, respectively 3,880,571 1,361,878
Subscriptions receivable 189,500
Inventories 1,300,691 1,534,938
Prepaid expenses 711,242 180,609
Prepaid television time 1,022,144 367,161
Advances to employees 227,896 3,675
Deferred tax asset 44,289
----------- -----------
Total current assets 13,323,527 8,745,635
PROPERTY AND EQUIPMENT, net 219,683 117,758
OTHER ASSETS 82,724 115,462
DEPOSITS 122,716 44,462
----------- -----------
TOTAL ASSETS $13,748,650 $ 9,023,317
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996 (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,074,098 $ 748,870
Accrued expenses 1,663,321 703,222
Income taxes payable 1,278,684 251,563
Deferred income taxes 23,693
Other current liabilities 28,812
----------- -----------
Total current liabilities 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 and
25,453,700 shares issued and outstanding in 1997 and 1996, respectively 25,465 25,454
Common stock subscribed 156
Additional paid-in capital 7,393,451 7,767,855
Retained earnings 2,289,938 157,385
Note receivable issued for common stock (660,000)
----------- -----------
Total stockholders' equity 9,708,854 7,290,850
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $13,748,650 $ 9,023,317
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1997 1996 1995
NET REVENUES $ 29,846,795 $ 15,813,493 $ 390,506
COST OF GOODS SOLD 5,735,238 4,660,926 211,220
------------ ------------ ------------
GROSS PROFIT 24,111,557 11,152,567 179,286
OPERATING EXPENSES:
Selling expenses 17,259,469 8,218,450
General and administrative expenses 3,523,200 2,041,102 595,015
------------ ------------ ------------
Total operating expenses 20,782,669 10,259,552 595,015
------------ ------------ ------------
OPERATING INCOME (LOSS) 3,328,888 893,015 (415,729)
OTHER INCOME (EXPENSE), net:
Interest expense (8,185) (51,666)
Interest income 249,214 15,224 1,589
Dividend income 71,879
------------ ------------ ------------
Total other income, net 241,029 35,437 1,589
------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 3,569,917 928,452 (414,140)
PROVISION FOR INCOME TAXES 1,437,364 207,274 1,600
------------ ------------ ------------
NET INCOME (LOSS) $ 2,132,553 $ 721,178 $ (415,740)
============ ============ ============
NET INCOME (LOSS) PER SHARE:
Basic $0.08 $0.03 $(0.02)
===== ===== =======
Diluted $0.08 $0.03 $(0.02)
===== ===== =======
WEIGHTED AVERAGE COMMON SHARES:
Basic 25,508,035 23,463,620 17,156,501
============ ============ ============
Diluted 25,690,774 23,463,620 17,156,501
============ ============ ============
See notes to consolidated financial statements.
F-6
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common stock (Accumulated
Common stock subscribed Additional deficit)
----------------------------------------------- paid-in retained
Shares Amount Shares Amount capital earnings
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1994 500,000 $ 500 13,767,500 $ 13,768 $ 261,317 $ (148,053)
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 (415,740)
----------- --------- ------------ -------- ---------- ----------
BALANCES, December 31, 1995 19,182,035 19,182 320,000 320 1,186,833 (563,793)
Shares issued for cash 4,891,665 4,892 5,317,738
Shares issued for services 730,000 730 394,270
Issuance of shares previously subscribed 320,000 320 (320,000) (320)
Shares subscribed 155,800 156 209,344
Shares issued in exchange for a note receivable 330,000 330 659,670
Net income 721,178
----------- --------- ------------ -------- ---------- ----------
BALANCES, December 31, 1996 25,453,700 25,454 155,800 156 7,767,855 157,385
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
Net income 2,132,553
----------- --------- ------------ -------- ---------- ----------
BALANCES, December 31, 1997 25,464,500 $ 25,465 -- -- $7,393,451 $2,289,938
=========== ========= ============ ======== ========== ==========
<CAPTION>
Total
Note stockholders'
receivable equity
<S> <C> <C>
BALANCES, December 31, 1994 $ -- $ 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)
---------- -----------
BALANCES, December 31, 1995 642,542
Shares issued for cash 5,322,630
Shares issued for services 395,000
Issuance of shares previously subscribed
Shares subscribed 209,500
Shares issued in exchange for a note receivable (660,000)
Net income 721,178
---------- -----------
BALANCES, December 31, 1996 (660,000) 7,290,850
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
---------- -----------
BALANCES, December 31, 1997 $ -- $ 9,708,854
========== ===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 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 82,172 42,874 23,116
Provision for doubtful accounts 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 100,000 (2,432)
Common stock issued in exchange for services 229,450 395,000
Compensation costs related to options 43,501
Changes in assets and liabilities:
Accounts receivable (2,667,135) (1,418,855) (30,064)
Inventories 134,247 (1,486,298) (46,208)
Prepaid expenses (530,633) 162,669 (328,702)
Prepaid television time (654,983) (367,161)
Deposits (78,254) (25,000)
Accounts payable 325,228 673,252 66,375
Accrued expenses 960,099 692,222
Income taxes payable 1,027,121 249,963
Other liabilities 1,391
----------- ------------ ------------
Net cash provided by (used in) operating activities 1,319,790 (317,373) (589,804)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (151,359) (97,489)
Increase in other assets (57,500) (19,053)
Employee advances (224,221) (3,313)
----------- ------------ ------------
Net cash used in investing activities (375,580) (158,302) (19,053)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on other current liabilities (28,812) (5,466)
Proceeds from issuance of common stock 12,500 5,322,630 723,500
Proceeds from subscriptions receivable 189,500 100,000
----------- ------------ ------------
Net cash provided by financing activities 173,188 5,417,164 723,500
----------- ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
NET INCREASE IN CASH AND CASH
EQUIVALENTS $ 1,117,398 $ 4,941,489 $ 114,643
CASH AND CASH EQUIVALENTS,
beginning of year 5,063,585 122,096 7,453
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, end of year $ 6,180,983 $ 5,063,585 $ 122,096
============ ============ ===========
SUPPLEMENTAL DISCLOSURES -
Cash paid during the year for:
Income taxes $ 366,000 $ 800 $ --
============ ============ ===========
Interest $ 8,186 $ 51,666 $ --
============ ============ ===========
</TABLE>
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1997, the Company completed the following transactions:
Issued 180,000 shares of common stock in exchange for services valued at
$229,450.
Issued 155,800 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-9
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
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-10
<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-11
<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.
F-12
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
3. INVENTORIES
Inventories at December 31, 1997 and 1996 consist of the following:
1997 1996
Raw materials $ 415,073 $ 416,223
Finished goods 744,595 1,044,776
Promotional items 141,023 73,939
------------ ------------
$ 1,300,691 $ 1,534,938
============ ============
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 consists of the
following:
1997 1996
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
========== ============
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-13
<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:
1997 1996
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
============ ==========
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-14
<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-15
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
Stock option activity is as follows:
Weighted
average
Shares exercise
under price
option per share
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
=========
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:
1997 1996
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
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-16
<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:
1997 1996 1995
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
============ ========== ===========
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-17
<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 interest 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.
F-18
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
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 promisor. The maximum guarantee is $36,000.
Royalties - The Company is obligated to pay royalties to the producer of a
one-half hour, direct-response television commercial (infomercial) at the
rate of 1.5% of gross sales (as defined) generated from direct-response
television sales made via an 800 telephone number which utilizes the
infomercial video footage. For the 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.
F-19
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
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
The FASB issued SFAS No. 130, Reporting Comprehensive Income, during 1997.
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. The disclosures
prescribed by SFAS No. 130 are effective beginning with the first quarter of
calendar 1998.
Also 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. 130 and SFAS No. 131 in the
1998 year-end consolidated financial statements.
F-20
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
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-21
<PAGE>
EPL PRO-LONG, INC.
UNAUDITED FINANCIAL STATEMENTS AS OF AND FOR
THE EIGHT MONTHS ENDED DECEMBER 31, 1997 AND 1996 AND
THE YEARS ENDED APRIL 30, 1997, 1996 AND 1995
F-22
<PAGE>
EPL PRO-LONG, INC.
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, April 30,
1997 1996 1997 1996
------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash $42,170 $5,031 $56,708 $0
Accounts receivable 538,795 0 313,274 0
Inventories 0 26,944 0 0
Prepaid expenses 5,626 0 0 0
------------------------------- ----------------------------------
Total current assets 586,590 31,975 369,982 0
Property and equipment 0 0 0 0
Patents, net 309,712 381,432 336,135 381,432
------------------------------- ----------------------------------
Total assets $896,302 $413,407 $706,117 $381,432
=============================== ==================================
CURRENT LIABILITIES:
Accounts payable $310,540 $556,633 $579,020 $663,780
Advance from customer 0 213,637 0 0
Loan payable-current portion 0 76,156 0 3,722
Accrued interest payable 0 53,389 0 124,044
Other current liabilities 3,775 0 0 0
------------------------------- ----------------------------------
Total current liabilities 314,315 899,816 579,020 791,546
Loan payable 102,702 280,000 188,603 280,000
------------------------------- ----------------------------------
Total liabilities 417,017 1,179,816 767,622 1,071,546
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock 135,473 135,473 135,473 135,473
Contributed capital 1,516,553 1,516,553 1,516,553 1,516,553
Retained deficit (1,172,742) (2,418,435) (1,713,532) (2,342,141)
------------------------------- ----------------------------------
Total stockholders' equity (deficit) 479,285 (766,409) (61,506) (690,114)
------------------------------- ----------------------------------
Total liabilities and stockholders' equity $896,302 $413,407 $706,117 $381,432
=============================== ==================================
</TABLE>
See notes to financial statements.
F-23
<PAGE>
EPL PRO-LONG, INC.
STATEMENTS OF OPERATIONS AND RETAINED DEFICIT
FOR THE EIGHT MONTHS ENDED DECEMBER 31,
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
-------------------------------
<S> <C> <C>
Net royalty revenue $729,534 $203,000
Cost of goods sold 0 894
-------------------------------
Gross profit 729,534 202,106
Selling, general and administrative expenses 167,662 253,805
-------------------------------
Operating profit 561,872 (51,699)
Other (income) and expense:
Other (income)/expense 0 (1,000)
Interest expense 15,880 25,595
-------------------------------
Other (income) and expense 15,880 24,595
Income (loss) before provision for income taxes 545,992 (76,294)
Provision for income taxes 5,202 0
-------------------------------
Net income (loss) 540,790 (76,294)
Retained deficit at beginning of period (1,713,532) (2,342,141)
-------------------------------
Retained deficit at end of period ($1,172,742) ($2,418,435)
===============================
</TABLE>
See notes to financial statements.
F-24
<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-25
<PAGE>
EPL PRO-LONG, INC.
STATEMENTS OF CASH FLOWS
FOR THE EIGHT MONTHS ENDED DECEMBER 31,
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
-------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $540,790 ($76,294)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 26,423 0
Changes in assets and liabilities:
Accounts receivable (225,521) 0
Inventories 0 (26,944)
Prepaid expenses (5,626) 0
Accounts payable (268,480) (107,148)
Accrued expenses 0 (70,654)
Advance from customer 0 213,637
Other liabilities 3,777 0
-------------------------------
Net cash provided by (used in) operating activities 71,363 (67,403)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans 0 72,434
Repayments on loans (85,901) 0
-------------------------------
Net cash provided by (used in) financing activities (85,901) 72,434
NET INCREASE (DECREASE) IN CASH (14,538) 5,031
CASH, BEGINNING OF PERIOD 56,708 0
-------------------------------
CASH, END OF PERIOD $42,170 $5,031
===============================
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $5,202 $0
===============================
Interest $27,199 $25,595
===============================
</TABLE>
See notes to financial statements.
F-26
<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-27
<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-28
<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-29
<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-30
<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. *
2.2 Agreement and Plan of Reorganization, dated as of February 5,
1998, by and among the Registrant and EPL Pro-Long, Inc. (attached
as Annex A to the Proxy Statement/Prospectus included in this
Registration Statement), 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.
3.1 Amended and Restated Articles of Incorporation of the Registrant. *
3.2 Bylaws of the Registrant. *
4.1 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. *
10.2 Exclusive License Agreement between PSL and EPL Pro-Long, Inc.,
d.b.a. Prolong International, dated November 10, 1993. *
10.3 Memorandum of Agreement between PSL and 2M Corporation, dated April
24, 1995; Amendment dated March 4, 1996. *
10.4 Agreement between PSL and Al Unser, dated July 28, 1995. *
10.5 Service Agreement between PSL and Tylie Jones & Associates, Inc.,
dated October 24, 1995. *
10.6 Telemarketing Agreement between PSL and West Telemarketing
Corporation, dated October 24, 1995. *
10.7 Service and Endorsement Contract between PSL and Al Unser, dated
April 29, 1996. *
10.8 Associate Sponsorship Agreement between PSL, King Entertainment,
Inc. and Kenneth D. Bernstein, dated May 9, 1996. *
10.9 Sponsorship Agreement between PSL, Pikes Peak Auto Hill Climb
Educational Museum, Inc. and Barnes Dyer Marketing, Inc., dated
February 21, 1997. *
10.10 Major Associate Sponsorship Agreement between PSL, Norris Racing,
Inc. and Barnes Dyer Marketing, Inc., dated December 15, 1996. *
10.12 The Registrant's 1997 Stock Incentive Plan and form of Stock
Option Agreement. *
10.13 The Registrant's Revolving Credit Agreement with Bank of America
National Trust and Savings Association, dated July 14, 1997. *
10.14 Standard Industrial/Commercial Single-Tenant Lease -- Net between
Thiokol Corporation and PSL for the property located at 6 Thomas,
Irvine, California, dated September 22, 1997 (incorporated by
reference to the same numbered Exhibit to the Registrant's
Quarterly Report on Form 10-Q filed November 14, 1997).
II-2
<PAGE>
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). **
21.1 Subsidiaries of the Registrant. *
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.
- ---------------------------------------
* Incorporated by reference to the same numbered Exhibit in the Registrant's
Registration Statement on Form 10 filed on July 3, 1997.
** The Registrant has sought confidential treatment pursuant to Rule 24b-2
for a portion of the referenced exhibit.
(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-3
<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-4
<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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this 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 May, 1998.
PROLONG INTERNATIONAL CORPORATION
By: /s/ Elton Alderman
---------------------------------------------
Elton Alderman
President, Chief Executive Officer and
Chairman of the Board
POWER OF ATTORNEY
We, the undersigned directors and officers of Prolong International
Corporation, do hereby make, constitute and appoint Elton Alderman and Nicholas
M. Rosier, and each of them acting individually, our true and lawful attorneys
and agents, with power to act without any other and with full power of
substitution, to do any and all acts and things in our name and behalf in our
capacities as directors and officers and to execute, deliver and file any and
all instruments for us and in our names in the capacities indicated below, which
said attorneys and agents, or either of them, may deem necessary or advisable to
enable said corporation to comply with the Securities Act of 1933, as amended,
and any rules, regulations, and requirements of the Securities and Exchange
Commission, in connection with this Registration Statement, including
specifically, but without limitation, power and authority to sign for use or any
of us, in our names and in the capacities indicated below, any and all
amendments (including post-effective amendments) to this Registration Statement,
and any and all documents in support thereof or supplemental thereto; and we do
hereby ratify and confirm all that the said attorneys and agents, or any of
them, shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this 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 May 1, 1998
- ----------------------------- Officer (Principal Executive
Elton Alderman Officer) and Chairman of the
Board
/s/ Thomas C. Billstein Vice-President, Secretary and May 1, 1998
- ----------------------------- Director
Thomas C. Billstein
II-6
<PAGE>
/s/ Tom T. Kubota Vice-President, Investor May 1, 1998
- ---------------------------- Relations and Director
Tom T. Kubota
/s/ Nicholas M. Rosier Chief Financial Officer May 1, 1998
- ---------------------------- (Principal Financial Officer)
Nicholas M. Rosier
/s/ Melanie A. McCaffery Director May 1, 1998
- ----------------------------
Melanie A. McCaffery
II-7
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF STRADLING YOCCA CARLSON & RAUTH APPEARS HERE]
May 1, 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 form of Registration Statement on
Form S-4, (the "Registration Statement"), being filed by Prolong International
Corporation, a Nevada corporation (the "Company"), with the Securities and
Exchange Commission (the "Commission") on May 1, 1998, 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]
May 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
May 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 May 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
May 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 (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 "Certain Federal Income
Tax Consequences" in the Registration Statement.
Very truly yours,
/s/ Gary C. Wykidal & Associates
GARY C. WYKIDAL & ASSOCIATES
<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 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
May 1, 1998
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Prolong International
Corporation on Form S-4 of our report dated March 4, 1998, included in the
Annual Report on Form 10K of Prolong International Corporation for the year
ended December 31, 1997, and to the use 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
April 29, 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/ North American Capital Partners
NORTH AMERICAN CAPITAL PARTNERS
Newport Beach, California
May 1, 1998
<PAGE>
EXHIBIT 99.1
PROXY EPL PRO-LONG, INC.
Proxy Solicited by the Board of Directors
Special Meeting of the Shareholders - ________,1998
The undersigned hereby (a) acknowledges receipt of the Notice of Special
Meeting of Shareholders (the "Special Meeting") of EPL Pro-Long, Inc., a
California corporation ("EPL"), and the Proxy Statement/Prospectus delivered to
the undersigned in connection therewith, and (b) appoints Elton Alderman and
Nicholas M. Rosier, and each of them, individually, as the attorney, agent and
proxy for the undersigned, with full power of substitution, for and in the name,
place and stead of the undersigned to vote, as designated below, upon and act
with respect to all of the shares of Common Stock, no par value per share (the
"Common Stock"), of EPL standing in the name of the undersigned, or with respect
to which the undersigned is entitled to vote and act, at the Special Meeting and
at any adjournment or postponement thereof.
THE DIRECTORS RECOMMEND A VOTE "FOR" ITEM 1
1. To approve and adopt (i) the Agreement and Plan of Reorganization, dated as
of February 5, 1998, by and between EPL and Prolong International
Corporation, and the Transaction contemplated therein, and (ii) the EPL Plan
of Dissolution, as described in the accompanying Proxy Statement/Prospectus.
[_] FOR [_] AGAINST [_] ABSTAIN
2. In their discretion, on such other business as may properly come before the
Special Meeting or any adjournment thereof.
IMPORTANT--PLEASE SIGN AND DATE AND RETURN PROMPTLY
<PAGE>
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE
SHAREHOLDER ON THE REVERSE SIDE OF THIS PROXY. WHERE NO DIRECTION IS GIVEN,
SUCH SHARES WILL BE VOTED "FOR" THE APPROVAL AND ADOPTION OF (i) THE AGREEMENT
AND PLAN OF REORGANIZATION, AND THE TRANSACTION CONTEMPLATED THEREIN, AND (ii)
THE EPL PLAN OF DISSOLUTION.
Date ______________, 1998
_____________________________________
(Signature of shareholder)
Please sign your name exactly as it
appears hereon. Executors,
administrators, guardians, officers of
corporations and others signing in a
fiduciary capacity should state their
full titles as such.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE URGED TO SIGN
AND RETURN THIS PROXY, WHICH MAY BE REVOKED AT ANY TIME PRIOR TO ITS USE.
