<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 8-K
CURRENT REPORT
----------
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 20, 1998
--------------------------------
PROLONG INTERNATIONAL CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Nevada 000-22803 74-2234246
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
6 Thomas, Irvine, California 92618
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (949) 587-2700
-----------------------------
Not Applicable
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
Exhibit Index on Page 5
<PAGE>
Item 2. Acquisition Or Disposition Of Assets
On November 20, 1998, pursuant to the terms of an Agreement and Plan of
Reorganization dated February 5, 1998, as amended on June 29, 1998 (the
"Agreement"), Prolong International Corporation, a Nevada corporation (the
"Company"), acquired from EPL Pro-Long, Inc., a California corporation ("EPL"),
substantially all of EPL's assets (the "Assets") and assumed certain of its
liabilities. The Assets consist primarily of the intellectual property of EPL
relating to a patented extreme pressure lubricant additive for use in metal
lubrication, commonly referred to as anti-friction metal treatment ("AFMT").
Prior to the acquisition, the Company, through its wholly-owned operating
subsidiary Prolong Super Lubricants, Inc. ("PSL"), held an exclusive, worldwide
license from EPL to manufacture, sell and distribute lubrication products based
on AFMT.
In exchange for EPL's Assets, the Company issued 2,981,035 shares of its
common stock (the "Shares") to EPL. The Shares were issued pursuant to an
effective registration statement on Form S-4. The amount and nature of the
consideration were determined by arms-length negotiations between the parties.
A copy of the Agreement and the amendment to the Agreement are incorporated by
reference to Exhibits 2.2 and 2.3, respectively, of the registration statement
on Form S-4. A copy of the press release issued by the Company concerning this
acquisition is attached hereto as Exhibit 99.1. The Agreement, the amendment to
the Agreement and the press release are incorporated herein by this reference.
On or about November 17, 1998, Michael Walczak et al., on behalf of
themselves and other similarly situated shareholders of EPL, filed a class
action in the U.S. District Court in San Diego, California (the "Court") against
the Company, PSL, EPL and their respective former and current officers and
directors. The plaintiffs allege breach of contract, fraud, civil RICO, breach
of fiduciary duty and conversion, and seek monetary damages. On November 25,
1998, the Court granted a temporary restraining order without a hearing in
connection with such action. A hearing on whether a preliminary injunction
should be issued is scheduled for December 14, 1998. The plaintiffs in the
action are allegedly current EPL shareholders that hold less than two percent
(2%) of the outstanding shares of EPL's common stock, in the aggregate. The
plaintiffs in the application for the preliminary injunction seek to rescind the
sale of the Assets to the Company and to prevent the dissolution of EPL. The
Company and PSL and their respective current officers and directors believe that
there is no merit to the plaintiffs' claims as to any of the defendants and plan
to vigorously defend against such claims.
Item 7. Financial Statements, Pro Forma Financial Information And Exhibits
(a) Financial Statements of Business Acquired. The following financial
-----------------------------------------
statements of EPL are attached hereto as Exhibit 99.2:
-- Unaudited Balance Sheets as of September 30, 1998, and April 30,
1998, 1997 and 1996.
-- Unaudited Statements of Operations and Retained Deficit for the
Five Months Ended September 30, 1998 and 1997.
-- Unaudited Statements of Operations and Retained Deficit for the
Eight Months Ended December 31, 1997 and 1996.
-- Unaudited Statements of Operations and Retained Deficit for the
Years Ended April 30, 1998, 1997, 1996 and 1995.
2
<PAGE>
-- Unaudited Statements of Cash Flows for the Five Months Ended
September 30, 1998 and 1997.
-- Unaudited Statements of Cash Flows for the Years Ended April 30,
1998, 1997, 1996 and 1995.
-- Notes to Unaudited Financial Statements.
(b) Pro Forma Financial Information. The following pro forma financial
-------------------------------
information is attached hereto as Exhibit 99.3:
-- Unaudited Pro Forma Combined Condensed Balance Sheet as of
September 30, 1998.
-- Notes to Combined Condensed Balance Sheet.
-- Pro Forma Combined Condensed Statements of Operations for the Nine
Months Ended September 30, 1998.
-- Pro Forma Combined Condensed Statements of Operations for the
Fiscal Year Ended December 31, 1997.
-- Notes to Combined Condensed Statements of Operations
(c) Exhibits.
--------
Exhibit
Number
- -------
2.2 Agreement and Plan of Reorganization, dated as of February 5, 1998, by
and among the Company and EPL Pro-Long, Inc., including the following
exhibits: (i) Form of Employee Invention and Confidentiality Agreement,
(ii) Form of Rule 145 Agreement, (iii) Form of Confidentiality
Agreement, (iv) Form of Transfer Restriction, (v) Form of Amendment to
Exclusive License Agreement, and (vi) Form of Cancellation Agreement
(incorporated by reference to the same numbered Exhibit to the
Company's Registration Statement on Form S-4 filed May 4, 1998).
2.3 Amendment to Agreement and Plan of Reorganization, dated as of June 29,
1998, by and among the Company and EPL Pro-Long, Inc. (incorporated by
reference to the same numbered Exhibit to the Company's Registration
Statement on Form S-4 filed May 4, 1998).
99.1 Press Release dated November 23, 1998.
99.2 Financial Statements of the Business described in Item 7(a) above.
99.3 Pro Forma Financial Statements described in Item 7(b) above.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PROLONG INTERNATIONAL CORPORATION
Date: December 7, 1998 By: /s/ Nicholas Rosier
--------------------------------
Nicholas Rosier
Chief Financial Officer
4
<PAGE>
EXHIBIT INDEX
The following exhibits are attached hereto and incorporated herein by
reference:
Exhibit Sequentially
Number Description Numbered Page
- ------- ----------- -------------
2.2 Agreement and Plan of Reorganization, dated as of
February 5, 1998, by and among the Company and EPL
Pro-Long, Inc., including the following exhibits:
(i) Form of Employee Invention and Confidentiality
Agreement, (ii) Form of Rule 145 Agreement, (iii) Form
of Confidentiality Agreement, (iv) Form of Transfer
Restriction, (v) Form of Amendment to Exclusive License
Agreement, and (vi) Form of Cancellation Agreement
(incorporated by reference to the same numbered Exhibit
to the Company's Registration Statement on Form S-4
filed May 4, 1998). ---
2.3 Amendment to Agreement and Plan of Reorganization, dated
as of June 29, 1998, by and among the Company and EPL
Pro-Long, Inc. (incorporated by reference to the same
numbered Exhibit to the Company's Registration Statement
on Form S-4 filed May 4, 1998). ---
99.1 Press Release dated November 23, 1998. 6
99.2 Financial Statements of the Business described in Item
7(a) above. 7
99.3 Pro Forma Financial Statements described in Item 7(b)
above. 17
5
<PAGE>
Exhibit 99.1
------------
Prolong International Corp. Announces Completion of EPL Pro-Long Inc.
Acquisition
IRVINE, Calif.--Nov. 23, 1998--Prolong International Corp. (AMEX:PRL) Monday
announced that the company has closed the purchase of the net assets of EPL Pro-
Long Inc. (EPL) for approximately 2.9 million shares of the company's common
stock.
With the purchase, Prolong has acquired the patents for the unique lubrication
technology contained in its line of trademarked-brand Prolong Super
Lubricants(R). Formerly, the patented technology was exclusively licensed to
Prolong International's operating subsidiary, Prolong Super Lubricants Inc.
Said Prolong President and Chief Executive Officer Elton Alderman: "We are very
pleased to have completed this acquisition. Ultimately, we expect the purchase
to reduce SG&A expenses and improve future profitability."
"Gaining ownership of the U.S. and international patents solidifies our strong
proprietary position with respect to existing Prolong patented-formula products
and the revolutionary lubrication technology they contain, as well as future
plans for new product introductions. This transaction has added value for the
shareholders of Prolong International, who now include the nearly 300 former
shareholders of EPL Pro-Long Inc," added Alderman.
Under terms of the agreement, Prolong purchased the principal assets and assumed
certain liabilities of EPL Prolong. The transaction increases the company's
total number of common shares outstanding by 2,981,035. EPL's principal assets
consisted primarily of its lubrication technology patents, which expire at the
end of 2007, and the exclusive long-term product licenses it holds with Prolong
Super Lubricants.
Said EPL Chairman and President Michael Davis, "This transaction has tremendous
benefit to EPL and its shareholders. It is an outstanding opportunity for our
shareholders to gain a substantial ownership position in a dynamic and rapidly
growing public company."
Prolong International Corp., through its Prolong Super Lubricants operating
subsidiary, markets and distributes premium lubricants and appearance products
formulated with its patented technology for automotive, industrial and consumer
applications. The company's products are marketed and sold under the
trademarked brand names, "Prolong Super Lubricants (R)," and "Prolong Appearance
Products (TM)" throughout the U.S. and in selected international markets.
Certain statements in this news release that relate to projections, future
plans, events, or performance, are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and involve significant risks and
uncertainties, including but not limited to the following: growth in sales of
the new line of Prolong Appearance Products, competition, cost of components,
product concentration and risk of declining selling prices. The company's
actual results could differ materially from those anticipated in such forward-
looking statements as a result of a number of factors. These risks and
uncertainties, and certain other related factors are discussed in the company's
Form 10-K, Form 10-Q and other filings with the Securities and Exchange
Commission. These forward-looking statements are made as of the date of this
release, and the company assumes no obligation to update such forward-looking
statements.
<PAGE>
Exhibit 99.2
------------
EPL PRO-LONG, INC.
UNAUDITED FINANCIAL STATEMENTS AS OF AND FOR
THE FIVE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997,
THE EIGHT MONTHS ENDED DECEMBER 31, 1997 AND 1996,
AND THE YEARS ENDED APRIL 30, 1998, 1997, 1996 AND 1995
The accompanying financial statements of EPL Pro-Long, Inc. as of and for the
five months ended September 30, 1998 and 1997, the eight months ended December
31, 1997 and 1996 and the years ended April 30, 1998, 1997, 1996 and 1995 were
prepared by the management of EPL Pro-Long, Inc. and are unaudited. In the
opinion of EPL Pro-Long, Inc.'s management, such financial statements include
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation of the financial position, results of operations and
cash flows as of the dates and for the periods presented.
<PAGE>
EPL PRO-LONG, INC.
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
Sept. 30, April 30,
1998 1998 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash $ 18,019 $ 10,633 $ 56,708 $ 0
Accounts receivable 4,152 324,152 313,274 0
Inventories 0 0 0 0
Prepaid expenses 4,484 5,284 0 0
----------- ----------- ----------- -----------
Total current assets 26,655 340,069 369,982 0
Property and equipment 0 0 0 0
Patents, net 271,964 290,837 336,135 381,432
----------- ----------- ----------- -----------
Total assets $ 298,619 $ 630,906 $ 706,117 $ 381,432
=========== =========== =========== ===========
CURRENT LIABILITIES:
Accounts payable $ 0 $ 164,250 $ 579,020 $ 663,780
Advance from customer 0 0 0 0
Loan payable-current portion 0 22,710 0 3,722
Accrued interest payable 0 0 0 124,045
Other current liabilities 12,000 0 0 0
----------- ----------- ----------- -----------
Total current liabilities 12,000 186,960 579,020 791,547
Loan payable 0 0 188,603 280,000
----------- ----------- ----------- -----------
Total liabilities 12,000 186,960 767,623 1,071,547
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 (1,365,407) (1,208,080) (1,713,532) (2,342,141)
----------- ----------- ----------- -----------
Total stockholders' equity (deficit) 286,619 443,946 (61,506) (690,115)
----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity $ 298,619 $ 630,906 $ 706,117 $ 381,432
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
EPL PRO-LONG, INC.
STATEMENTS OF OPERATIONS AND RETAINED DEFICIT
FOR THE FIVE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net royalty revenue $ 0 $ 419,220
Cost of goods sold 0 0
------------ ------------
Gross profit 0 419,220
Selling, general and administrative expenses 156,123 147,821
------------ ------------
Operating profit (loss) (156,123) 271,399
Other (income) and expense:
Other (income)/expense (86) 0
Interest expense 1,290 25,211
------------ ------------
Other (income) and expense 1,204 25,211
Income (loss) before provision for income taxes (157,327) 246,188
Provision for income taxes 0 0
------------ ------------
Net income (loss) (157,327) 246,188
Retained deficit at beginning of period (1,208,080) (1,713,532)
------------ ------------
Retained deficit at end of period $ (1,365,407) $ (1,467,344)
============ ============
</TABLE>
See notes to financial statements.
<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.
<PAGE>
EPL PRO-LONG, INC.
STATEMENTS OF OPERATIONS AND RETAINED DEFICIT
FOR THE YEARS ENDED APRIL 30,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net royalty revenue $ 854,892 $ 766,274 $ 199,610 $ 2,414
Net sales 0 0 2,589 252,703
Cost of goods sold 0 894 35,086 83,150
----------- ----------- ----------- -----------
Gross profit 854,892 765,380 167,113 171,967
Selling, general and administrative expenses 314,182 184,115 159,146 325,395
----------- ----------- ----------- -----------
Operating profit 540,710 581,265 7,967 (153,428)
Other (income) and expense:
Other (income) 0 (75,662) (100,000) (4,000)
Interest income 0 (22) 0 0
Interest expense 32,171 28,340 73,645 96,929
----------- ----------- ----------- -----------
Other (income) and expense 32,171 (47,344) (26,355) 92,929
Income (loss) before provision for income taxes 508,539 628,609 34,322 (246,357)
Provision for income taxes 3,087 0 2,104 119
----------- ----------- ----------- -----------
Net income (loss) 505,452 628,609 32,218 (246,476)
Retained deficit at beginning of period (1,713,532) (2,342,141) (2,374,359) (2,127,883)
----------- ----------- ----------- -----------
Retained deficit at end of period $(1,208,080) $(1,713,532) $(2,342,141) $(2,374,359)
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
EPL PRO-LONG, INC.
STATEMENTS OF CASH FLOWS
FOR THE FIVE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(157,327) $ 246,188
Adjustments to reconcile net income (loss) to
net cash provided by (used in)
operating activities:
Depreciation and amortization 18,873 18,874
Changes in assets and liabilities:
Accounts receivable 320,000 (79,220)
Prepaid expenses 800 3,999
Accounts payable (152,250) (159,825)
--------- ---------
Net cash provided by operating activities 30,096 30,016
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans -- --
Repayments on loans (22,710) (63,888)
--------- ---------
Net cash (used in) financing activities (22,710) (63,888)
--------- ---------
NET INCREASE (DECREASE) IN CASH 7,386 (33,872)
CASH, BEGINNING OF PERIOD 10,633 56,708
--------- ---------
CASH, END OF PERIOD $ 18,019 $ 22,836
========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 0 $ 0
========= =========
Interest $ 1,290 $ 5,200
========= =========
</TABLE>
See notes to financial statements.
<PAGE>
EPL PRO-LONG, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997 1996 1995
--------- --------- -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 505,452 $ 628,609 $ 32,218 $(246,476)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 45,298 45,297 47,631 52,374
Changes in assets and liabilities:
Accounts receivable (10,878) (313,274) 11,223 29,441
Inventories 0 0 26,944 36,168
Prepaid expenses (5,284) 0 0 13,071
Accounts payable (414,770) (84,761) (27,755) 23,104
Accrued expenses 0 (124,044) 38,319 85,725
Advance from customer 0 0 (45,410) 45,410
--------- --------- -------- ---------
Net cash provided by operating activities 119,818 151,827 83,170 38,817
CASH FLOWS FROM FINANCING ACTIVITIES:
Return of contributed capital 0 0 0 (9,000)
Repayments on loans (165,893) (95,119) (83,170) (33,036)
--------- --------- -------- ---------
Net cash (used in) financing activities (165,893) (95,119) (83,170) (42,036)
NET INCREASE (DECREASE) IN CASH (46,075) 56,708 0 (3,219)
CASH, BEGINNING OF PERIOD 56,708 0 0 3,219
--------- --------- -------- ---------
CASH, END OF PERIOD $ 10,633 $ 56,708 $ 0 $ 0
========= ========= ======== =========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 3,087 $ 0 $ 2,104 $ 119
========= ========= ======== =========
Interest $ 32,171 $ 28,340 $ 20,256 $ 11,204
========= ========= ======== =========
</TABLE>
See notes to financial statements.
<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.
<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.
<PAGE>
EPL PRO-LONG, INC.
NOTES TO FINANCIAL STATEMENTS
________________________________________________________________________________
3. License Agreement, continued:
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 shares of common stock of Prolong International Corporation. The
close of this transaction occurred on November 20, 1998 when 2,981,035 shares
of common stock of Prolong International Corporation were issued to the
Company. Pursuant to this agreement, royalty payments have been discontinued
beginning on February 5, 1998.
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, 1998, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $1,200,000 and
$270,000, 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.
<PAGE>
EXHIBIT 99.3
------------
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 Prolong International
Corporation ("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 September 30, 1998 using the consolidated
balance sheets of PIC and EPL as of September 30, 1998. The unaudited pro forma
combined statements of operations give effect to the combination as if it had
occurred on January 1, 1997 using the consolidated statements of operations of
PIC for the nine months ended September 30, 1998 and for the fiscal year ended
December 31, 1997, respectively, and of EPL for the five months ended September
30, 1998, the year ended April 30, 1998 and the four months ended April 30,
1997, respectively.
The pro forma adjustments are based on preliminary estimates, 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 EPL's consolidated financial
statements and the notes thereto included elsewhere herein and PIC's
consolidated financial statements and the notes thereto filed in connection with
its quarterly report on Form 10-Q for the period ended September 30, 1998.
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
As of September 30, 1998
<TABLE>
<CAPTION>
Prolong Pro Forma
International Acquisition
Corporation EPL Pro-Long, Inc. Adjustments Combined
------------ ------------------ ------------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 884,203 $ 18,019 $ 0 $ 902,222
Accounts receivable, net 7,236,746 4,152 0 7,240,898
Inventories 3,131,850 0 0 3,131,850
Prepaid expenses 1,490,292 0 0 1,490,292
Prepaid income taxes 0 4,484 0 4,484
Prepaid television time 472,912 0 0 472,912
Advances to employees 258,008 0 0 258,008
------------ ----------- ---------- -----------
Total current assets 13,474,011 26,655 0 13,500,666
Property and equipment, net 3,204,754 0 0 3,204,754
Patents, trademarks,
tradenames, etc. 0 271,964 7,158,436 (1)(2) 7,430,400
Other assets 58,171 0 0 58,171
Deposits 214,655 0 0 214,655
----------- ----------- ---------- -----------
Total assets $16,951,591 $ 298,619 $7,158,436 $24,408,646
=========== =========== ========== ===========
Accounts payable $ 1,094,278 $ 0 $ 0 $ 1,094,278
Accrued expenses 1,285,471 12,000 0 1,297,471
Notes payable, current 42,555 0 0 42,555
Income taxes payable 204,131 0 0 204,131
Deferred income taxes 23,693 0 0 23,693
----------- ----------- ---------- ----------
Total current liabilities 2,650,128 12,000 0 2,662,128
Notes payable, noncurrent 2,385,586 0 0 2,385,586
Common stock 25,465 135,473 (132,480)(3) 28,458
Additional paid-in capital 7,394,051 1,516,553 5,925,509 (3)(4) 14,836,113
Retained earnings (deficit) 4,496,361 (1,365,407) 1,365,407 (5) 4,496,361
----------- ----------- ---------- ----------
Total stockholders' equity 11,915,877 286,619 7,158,436 19,360,932
----------- ----------- ---------- ----------
Total liabilities and
stockholders' equity $16,951,591 $ 298,619 $7,158,436 $24,408,646
=========== =========== ========== ===========
</TABLE>
<PAGE>
NOTES TO COMBINED CONDENSED BALANCE SHEET
(1) The purchase price of the net assets, as negotiated between the two
independent parties, was determined by adding the value of the PIC Common
Stock to be given up of $7,542,019 to the liabilities assumed less certain
costs. The purchase price was then allocated to the tangible assets and
liabilities and the residual amount was allocated to the patents,
trademarks and other intangibles. North American Capital Partners, an
independent investment banker, was engaged to provide a written fairness
opinion on the Transaction. The unaudited estimated fair value of assets
acquired and liabilities assumed is summarized as follows:
<TABLE>
<S> <C>
Fair value of PIC Common Stock to be given up $ 7,542,019
Fair value of liabilities assumed 12,000
Other acquisition costs 175,000
Fair value of tangible and identifiable assets acquired (298,619)
Patents acquired (7,430,400)
-----------
Excess of costs over identifiable assets acquired $ 0
===========
</TABLE>
The fair value of PIC Common Stock to be given up was determined by the
closing market price of the PIC Common Stock on the OTC Bulletin Board on
the date that the parties entered into the Agreement, February 5, 1998,
which was $2.81 per share. Due to the one year transfer restriction and
the lack of marketability of the large block of shares to be issued under
the Agreement, a nominal 10% discount was applied to the PIC Common Stock
resulting in a fair value of approximately $2.53 per share. With the
anticipated issuance of 2,981,035 shares, the fair value of the shares of
PIC Common Stock given up is $7,542,019. PIC believes that the
determination of the measurement date is consistent with EITF 95-19 because
during the period beginning a few days before the signing of the Agreement
and extending through the date of the public announcement of the proposed
Transaction, the closing market prices of PIC Common Stock did not vary
significantly.
(2) Adjustment to eliminate the account balance of intangibles of EPL Pro-Long,
Inc.
(3) Adjustment to reflect the issuance of PIC Common Stock in exchange for the
net assets of EPL Pro-Long, Inc. and the subsequent dissolution of EPL Pro-
Long, Inc.
(4) Adjustment to properly state the combined additional paid-capital balance.
(5) Adjustment to eliminate the retained deficit account balance of EPL Pro-
Long, Inc.
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Prolong
International EPL Pro-Long,
Corporation For the Inc. For the
Nine Months Ended Nine Months Ended Pro Forma
Sept. 30, 1998 Sept. 30, 1998(1) Adjustments Combined
------------------- ----------------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenues $28,911,150 $ 125,358 $(125,358)(2) $28,911,150
Cost of goods sold 6,107,805 0 0 6,107,805
----------- --------- --------- -----------
Gross profit 22,803,345 125,358 (125,358) 22,803,345
Selling expenses 14,889,967 0 (125,358)(3) 14,764,609
General and administrative
expenses 4,063,476 267,306 371,520 (4) 4,702,302
----------- --------- --------- -----------
Total operating expenses 18,953,443 267,306 246,162 19,466,911
----------- --------- --------- -----------
Operating income (loss) 3,849,902 (141,948) (371,520) 3,336,434
----------- --------- --------- -----------
Other income, net:
Interest expense (79,486) (17,581) 0 (97,067)
Interest income 105,027 86 0 105,113
----------- --------- --------- -----------
Total other income (expense),
net 25,541 (17,495) 0 8,046
----------- --------- --------- -----------
Income before provision for
income taxes 3,875,443 (159,443) (371,520) 3,344,480
Provision for income taxes 1,669,020 (2,116) (329,112)(5) 1,337,792
----------- --------- --------- -----------
Net income $ 2,206,423 $(157,327) $ (42,408) $ 2,006,688
=========== ========= ========= ===========
<CAPTION>
Pro Forma
-----------
<S> <C> <C>
Earnings per common share:
Basic $ 0.09 $ 0.07
=========== ===========
Diluted $ 0.09 $ 0.07
=========== ===========
Weighted average shares used to
calculate net income per share:
Basic 25,464,525 28,445,560
=========== ===========
Diluted 25,862,128 28,808,160
============ ===========
</TABLE>
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
Fiscal Year Ended December 31, 1997
<TABLE>
<CAPTION>
Prolong
International EPL Pro-Long, Inc.
Corporation For the For the Twelve
Fiscal Year Ended Months Ended Pro Forma
December 31, 1997 December 31, 1997 (6) Adjustments Combined
------------------- --------------------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenues $29,846,795 $984,959 $(984,959)(2) $29,846,795
Cost of goods sold 5,735,238 298 0 5,735,536
----------- -------- --------- -----------
Gross profit 24,111,557 984,661 (984,959) 24,111,259
Selling expenses 17,259,469 0 (984,959)(3) 16,274,510
General and administrative
expenses 3,523,200 229,034 489,020 (4) 4,244,254
----------- -------- --------- -----------
Total operating expenses 20,782,669 229,034 (495,939) 20,515,764
----------- -------- --------- -----------
Operating income 3,328,888 755,627 (489,020) 3,595,495
----------- -------- --------- -----------
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 for
income taxes 3,569,917 755,529 (489,020) 3,836,426
Provision for income taxes 1,437,364 5,202 92,004 (5) 1,534,570
----------- -------- --------- -----------
Net income $ 2,132,553 $750,327 $(581,024) $ 2,301,856
=========== ======== ========= ===========
<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>
<PAGE>
NOTES TO COMBINED CONDENSED STATEMENTS OF OPERATIONS
(1) EPL Pro-Long, Inc.'s results for the nine months ended September 30, 1998
are calculated based on the unaudited financial information for the five
months ended September 30, 1998 plus the information for the year ended
April 30, 1998 included elsewhere herein less the results for the eight
months ended December 31, 1997 included elsewhere herein.
(2) Adjustment to eliminate royalty revenue estimated to be received from PIC.
(3) Adjustment to eliminate royalties estimated to be paid by PIC at the rate
of 3.5% of PIC's revenues.
(4) Adjustment to recognize amortization of patents, trademarks, tradenames,
etc. over a period of fifteen years.
(5) Adjustment to reflect the combined tax rate of 40%.
(6) EPL Pro-Long, Inc.'s results for the year ended December 31, 1997 are
calculated based on the unaudited financial information for the eight
months ended December 31, 1997 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.
