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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year ended December 31, 1997
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OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 000-22803
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PROLONG INTERNATIONAL CORPORATION
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(Exact name of Registrant as specified in its charter)
Nevada 74-2234246
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6 Thomas, Irvine, California 92618
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(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 587-2700
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
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(Title of Class)
___________________________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sales price of the Common Stock as of March
2,1998, was approximately $59,204,142.
The number of outstanding shares of the Registrant's Common Stock as of March 2,
1998 was 25,464,500.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the Annual Meeting of Stockholders
to be held on June 15, 1998, are incorporated by reference into Part III.
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Exhibit Index on Sequentially Numbered Page 26
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This Annual Report on Form 10-K contains forward-looking statements
relating to future events or the future financial performance of the Registrant,
including but not limited to statements contained in "Business," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Factors Which May Affect Future Operating Results." Readers are cautioned that
such statements, which may be identified by words including "anticipates,"
"believes," "intends," "estimates," "expects," and similar expressions, are only
predictions or estimations and are subject to known and unknown risks and
uncertainties. In evaluating such statements, readers should consider the
various factors identified in this Annual Report on Form 10-K, including matters
set forth in "Factors Which May Affect Future Operating Results," which could
cause actual events, performance or results to differ materially from those
indicated by such statements.
PART I
ITEM 1. BUSINESS
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GENERAL DESCRIPTION OF BUSINESS
Prolong International Corporation (the "Registrant" or "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 of 1933, as amended, by reason
of Regulation A thereunder. All of the outstanding shares of Medical
International, Inc. common stock were exchanged for shares of Giguere as part of
the plan of merger. Subsequent to the merger, Giguere conducted operations for
several years until it liquidated its assets in order to satisfy its creditors
and discontinued operations in 1987. Giguere was inactive and held no
significant assets from 1987 to June 21, 1995.
On June 21, 1995, Giguere acquired all of the outstanding common stock of
Prolong Super Lubricants, Inc., a Nevada corporation ("PSL"), in a share
exchange with PSL's then existing shareholders (the "Reorganization") and
changed its name from Giguere to Prolong International Corporation. Since the
Reorganization, 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 Pro-Long, Inc., a California corporation
("EPL"), the holder of the patent for AFMT, in 1993. On February 5, 1998 PIC
entered into a definitive agreement with EPL under which PIC will purchase the
business assets of EPL. Under the terms of the agreement, PIC will purchase the
principal assets and assume certain liabilities of EPL for approximately
2,993,035 shares of PIC's common stock, $0.001 par value per share (the "PIC
Common Stock"). With the purchase, PIC will acquire the patents for the AFMT
technology and related trademarks. The close of the purchase is still pending
review by state and federal securities regulators and majority approval by EPL's
shareholders.
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.
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PRODUCTS
Prolong markets a variety of products which are based on AFMT. AFMT is a
patented formula which can be blended with many other lubricants and
formulations to create a wide variety of individual lubricant products with
superior friction fighting characteristics. AFMT can also be blended with other
constituents to create additional products which may be added to Prolong's
product line such as gun oil and brake cleaner. AFMT bonds to the metal
surfaces with which it comes into contact, resulting in reduced friction, wear
and heat buildup when subjected to pressure. Prolong believes that AFMT is most
effective in extreme pressure applications, where metal-to-metal contact, and
the resulting wear, can be severe such as: gears (at the contact point where the
teeth of the gear touch each other - for example in hypoid gears); engines (at
the contact points where metal to metal pressure squeezes out the normal
boundary lubrication - for example where the camshaft contacts the lifters;
where the main bearings contact the crankshaft; where the rod bearings contact
the rod and the bearing cap); and machinery (at the metal to metal contact
points where surface or boundary lubrication breaks down metal contacts under
heavy loads - for example in a steel mill where rolling steel contacts steel
rollers).
AFMT is composed of petroleum distillates and other chemicals and contains
no solid particles. Typically, performance enhancing lubrication additive
formulations contain solid particles such as lead, molybdenum disulphides, PTFE
resins, Teflon, fluorocarbon resins or fluorocarbon micropowder. Prolong
believes that the primary disadvantage to particulate material in lubricant
additives is that it tends to distribute unevenly and can result in excessive
particulate build-up. Because AFMT contains no solid particles, Prolong
believes that there is no risk of excessive build-up, and the lubrication "film
coat" is uniform and microscopically thin.
The friction fighting characteristics of AFMT have been documented by The
Foundation for Scientific and Industrial Research at the Norwegian Institute of
Technology, Trondheim, Norway. This independent testing laboratory was
commissioned in 1987 by the principals of Prolong Technology of Canada, Inc.
d.b.a. Prolong International, the entity from which EPL acquired the patented
AFMT formula. The tests were conducted at the expense of Prolong Technology of
Canada, Inc. and at the request of customers for in-depth scientific data. The
friction fighting characteristics are further documented in U.S. Patent No.
4,844,825, which outlines various tests conducted on AFMT precedent to the
issuance of the patent.
AFMT exhibits both the "hydrostatic" and "boundary" principles of
lubrication. 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 oils, improves the oxidization
resistance of metals. Given the foregoing advantages demonstrated by AFMT,
Prolong has identified a broad market for its lubricant products.
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Prolong believes that the following are examples of some of the
applications of AFMT-based products:
<TABLE>
<CAPTION>
<S> <C>
. 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
</TABLE>
Prolong markets the following products, each of which can be utilized in
multiple applications:
Prolong Anti-Friction Metal Treatment "AFMT"
This is Prolong's fundamental lubricating oil which is made according to a
patented formula for use as an extreme pressure lubricant. It is packaged in
concentrate form and is designed to be added by the customer to the lubrication
oils in engines, gears, and other machinery.
Prolong Engine Treatment
Formulated for use in the lubrication of internal combustion engines,
Prolong believes that this product reduces friction, heat and wear. As a result
of enhanced lubrication of the engine, Prolong believes that there is increased
useful life of moving metallic parts. Prolong Engine Treatment is suitable for
use in both gasoline and diesel engines.
Prolong Transmission Treatment
Formulated for use in both automatic and manual transmissions and for other
applications, such as heavy duty industrial gear boxes where metal gears are
operated under high pressure, this product is designed to improve overall
transmission performance.
Prolong Gas/Diesel Fuel System Treatment
This product is formulated to increase fuel efficiency, lubricate the "top
end" of internal combustion engines, and clean and maintain fuel injectors and
other fuel system components. This product is also designed to help maintain
peak engine performance and overall mileage. The formula is EPA registered and
is suitable for both gasoline and diesel fuel systems.
Prolong High Performance Multi-Purpose EP-2 Grease
This product is formulated to provide a wide range of lubricating benefits
to industrial equipment under extreme pressure, high and low temperature
extremes, and potential water washout conditions. Prolong believes that this
product represents a substantial improvement in lubrication performance relative
to other products on the market in applications requiring an extreme pressure
grease formulation.
Prolong "SPL100" Super Penetrating Lubricant
This product is formulated to lubricate, penetrate, and prevent corrosion,
free sticky mechanisms, displace moisture, stop squeaks, and reduce friction and
wear. This product can also serve as a light duty machining, tapping and
drilling fluid.
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Prolong "Ultra-Cut 1" Water Soluble Cutting Fluid
This product is formulated to lubricate and cool metal tools and parts
during machining operations. This product can be used in Computer Numerically
Controlled ("CNC") metal turning and machining operations. Prolong believes
that the use of this product will provide higher feed rates and operating
speeds, finer surface finishes, and improved cutting tool life.
Prolong Multi-Purpose Precision Oil
This product is formulated as a fine, light oil for use in lubricating
precision tools and equipment. This product is designed to provide smooth
lubrication, which Prolong believes results in optimal operation of precision
equipment and tools and extension of useful life.
Despite PSL's current variety of products, there are other products which
Prolong believes could be successfully and beneficially formulated in the future
using AFMT technology and derivatives thereof that would result in products with
improved lubrication performance. Although there can be no assurances that
Prolong will have the financial or other resources to develop, manufacture and
market any such additional products, the following is a partial list of such
additional products:
High Performance Motor Oil
High Performance Synthetic Motor Oil
Motorcycle Engine & Transmission Treatment
Gun Oil & Cleaner
Gear/Differential Treatment
Heavy Duty Diesel Fuel Conditioner
Hydraulic System Treatment
Chain Oil
2-Cycle Engine Oil
Power Steering Treatment
Radiator Treatment
Compressor Treatment
Shock Absorber Lubricants
Brake Cleaner
Assembly Lube
In addition to the development of the above-referenced AFMT-based products,
Prolong is also engaged in efforts to expand its lubricant formulations beyond
its current AFMT-based technology.
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.
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Consumer Household
The consumer household lubrication market is a potentially lucrative
segment of the industry which could prove receptive to Prolong's products for
uses as varied as fishing reels, guns, windows, sliding doors, garage doors,
sewing machines, electric hair clippers, bicycles, tricycles, scooters,
skateboards, garage door openers, lawn mowers, snow blowers, drills, saws, door
locks, hinges, rusted bolts, and virtually anything made of metal that must be
lubricated in order to maintain performance. Prolong currently manufactures
"SPL100 Super Penetrating Lubricant" and "Prolong Multi-Purpose Precision Oil"
for this market.
Industrial
The industrial market encompasses an enormous variety of major and minor
manufacturers. This market includes businesses such as steel mills, automobile
manufacturers, aircraft manufacturers, paper mills, electric motor
manufacturers, petrochemical manufacturers, oil refineries, mining operations
and electrical generating facilities, all of which require lubricants and
Prolong believes would benefit from the increased performance of Prolong's
products. Even more numerous are the smaller industrial facilities, such as
machine shops and other fabrication businesses throughout the world. Prolong
further believes that businesses engaged in stamping, molding, die casting,
boring, drilling, honing and a number of other similar operations could realize
significant cost savings by using the full line of Prolong's products.
Prolong anticipates pursuing the industrial market through a network of
manufacturer's sales representatives and through established industrial
distributors.
Federal, State, & Local Governments
The government market is not only very large, but Prolong believes it is
also extremely varied. It includes cities, counties, states and all of the
federal government agencies. Prolong believes that these agencies collectively
purchase, operate, and maintain a significant investment in trucks, automobiles,
buses, tanks, airplanes, helicopters, boats, ships, radar equipment, guns,
miscellaneous equipment and tools, as well as many other mechanisms, all of
which require adequate lubrication.
Federal Government. The federal government represents potential sales by
Prolong to many different agencies such as the Department of Defense, NASA,
Department of Energy, Department of Transportation and other federal
governmental agencies.
Military Sales. Procurement procedures require that products used in or on
military equipment must be manufactured according to certain military
specifications ("MIL Specs"). Prolong intends to apply for and receive United
States MIL Specs for certain of its products, and to market products not only to
the United States military, but to foreign militaries as well. Prolong plans to
develop the military market, both here and abroad, through the utilization of
specialists who are familiar with military procurement procedures and with the
special needs of the military services.
State Government. Potential sales to state governments include users such
as the National Guard, highway patrol, state police and other state agencies.
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
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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.
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.
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International sales comprised 10.3% and 3.5% of PIC's revenues in 1996 and
1997, respectively, resulting in approximately 34% and 5% of its 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.
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, Prolong executed a co-sponsorship agreement
with King Entertainment and Kenneth D. Bernstein pursuant to which Mr. Bernstein
will provide promotional services and appearances and will recognize "Prolong
Super Lubricants" as a co-sponsor of the "Budweiser King Prolong Top Fuel
Dragster." The agreement calls for the display of the PSL name and logo on the
dragster and related racing components in all races and other events in which
the dragster appears. Prolong 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, Prolong has entered into a separate agreement
in which it retained the services of Al Unser to endorse and promote Prolong's
products. Mr. Unser has agreed to make certain appearances to assist in
marketing the products and has agreed to license his name and likeness in
connection with the marketing of Prolong's products. Prolong has 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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In the area of magazine advertising, Prolong has entered into advertising
contracts with Motor Trend, Hot Rod and various other magazines for print ads
during 1998. In addition to motorsports sponsorship, endorsements and magazine
advertising, Prolong is engaging experienced marketing personnel to commence
concentrated marketing efforts in order to increase retail, commercial,
industrial, governmental and international sales. Prolong believes that the
foregoing advertising and marketing efforts, which began with the production of
its Infomercial in 1995, have resulted in recognition of the product line as a
superior alternative to other conventional lubricants available within the
lubricant industry.
COMPETITION
The market for Prolong's products is highly competitive and is expected to
increase in the future. The basic formula of Prolong's products has not changed
materially since its development in 1986. The formula was granted a United
States patent on July 4, 1986. The market for Prolong's products is
characterized by rapid technological advances, frequent new product
introductions and evolving industry standards. Some of Prolong's principal
competitors include other providers of specialized lubrication products, such as
First Brands (STP) and Quaker State (Slick 50), both of which market engine oil
treatments. Prolong's competitors also include major oil companies such as
Shell Oil Company, Castrol, Pennzoil, Quaker State and others who manufacture
lubrication products, such as WD40 Corp. Further, Prolong believes that major
oil companies not presently offering products that compete directly with those
offered by Prolong may enter Prolong's markets in the future.
Increased competition could result in price reductions, reduced gross
margins, and a loss of market share, any of which could have a material adverse
effect on PIC's business, financial condition and results of operations. In
addition, many of Prolong's competitors have significantly greater financial,
technical, research and product development, marketing and other resources and
greater market recognition than Prolong. Several of Prolong's competitors also
currently have, or may develop or acquire, substantial customer bases in the
automotive and other related industries. As a result of these factors,
Prolong's competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements or to devote greater resources
to the development, promotion and sale of their products than Prolong.
Additionally, other dealers and distributors may offer similar lubrication
products at prices below those offered by Prolong, appealing to the price-
sensitive segment of the market. While Prolong believes that the prices for
Prolong lubrication products are competitive for the level of quality obtained
by the customer, Prolong relies on PSL's brand name recognition for selling high
quality, state of the art products. There can be no assurance that Prolong will
be able to compete 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 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
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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 the Organization
of Petroleum Exporting Countries ("OPEC"), that have historically attempted to
establish price controls on petroleum products through agreements establishing
export quotas or restricting petroleum supplies worldwide. No assurance can be
given that OPEC (or others) will not succeed in raising the price of petroleum
components or that, in such event, Prolong will be able or choose to maintain
its gross margins quickly by raising its prices without effecting demand.
Increases in the prices for the components, whether due to the failure of its
suppliers to perform, conditions affecting the component-producing countries, or
otherwise, could have a material adverse effect on 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.
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
Prolong currently 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 Prolong 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.
During 1997, Prolong expended $1,023,869 in royalties under this agreement. The
license is perpetual absent a major breach of Prolong's obligations thereunder,
effectively a failure to pay royalties due under the license. There can be no
assurance that Prolong will be able to meet all financial obligations under the
license in the future and, consequently, may not be able to retain the license
indefinitely.
Page 10
<PAGE>
On February 5, 1998 PIC entered into a definitive agreement with EPL under
which PIC will purchase the business assets of EPL. Under the terms of the
agreement, PIC will purchase the principal assets and assume certain liabilities
of EPL for approximately 2,993,035 shares of PIC Common Stock. With the
purchase, PIC will acquire the patents for the AFMT technology and related
trademarks. The close of the purchase is still pending review by state and
federal securities regulators and majority approval by EPL's shareholders.
Further, 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. Should Prolong be unable to
continue as a licensee or successfully purchase the rights from EPL, Prolong
could not continue to manufacture its current AFMT-based products or use the
"Prolong" name, which would result in a material adverse effect on PIC's
business, operating results and financial condition.
The U.S. patent on AFMT expires July 4, 2006. There are a number of other
patents and patent applications covering Prolong's products in other countries
worldwide. Additionally, Prolong has obtained or applied for the exclusive
rights to the use of a number of trademarks which it utilizes in the marketing
of its products. Currently, 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 currently due to EPL as described above, Prolong
has entered into a memorandum agreement with the producer of its Infomercial
whereby Prolong has agreed to pay The 2M Group, Inc. 1.5% of gross sales
generated from DRTV promotions made via a toll-free telephone number, which
utilize the Infomercial video footage. The term of this agreement is dependent
upon the life cycle of the Infomercial. During 1997, Prolong expended $174,266
in royalties under this agreement.
Prolong has also entered into a personal service agreement with Al Unser
whereby Prolong has agreed to pay Mr. Unser 1.0% of gross sales resulting from
DRTV sales from the Infomercial, with guaranteed annual minimum royalties of
$40,000, $50,000 and $60,000 during the first, second and third years of the
agreement, respectively, following an initial 120-day test period. Royalties
earned are to commence with the first airing of the Infomercial and continue for
three years and 120 days, contingent upon (i) the continued airing of the
Infomercial after the 120 day test period and; (ii) after each one-year period
thereafter. The maximum term of this agreement is until May, 1999. During
1997, Prolong paid Mr. Unser $116,177 under this agreement.
Further, Prolong has entered into a service and endorsement contract with
Al Unser whereby Prolong has agreed to pay royalties on all net retail sales of
its products according to the following rates: 1.5% from November 1, 1996
through October 31, 1997; 1.25% from November 1, 1997 through October 31, 1998;
and 1% from November 1, 1998 through October 31, 1999. For each of the years
included in the arrangement, Prolong must pay a guaranteed minimum amount of
$15,000. Earnings maximums under the arrangement are as follows: $100,000 in
year 1; $125,000 in year 2; and $150,000 in year 3. Either party has the option
to extend the arrangement for an additional 4 years. If the option to extend is
exercised by either party, the agreement terminates on October 31, 2003. During
1997, Prolong paid Mr. Unser $134,753 under this agreement.
EMPLOYEES
As of February 28, 1998, PIC and PSL collectively employ 43 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.
Page 11
<PAGE>
ITEM 2. PROPERTIES
- ------- ----------
Neither PIC nor its subsidiaries own any real property. At its
headquarters, Prolong leases approximately 29,442 square feet of office and
warehouse space in a two- story building located at 6 Thomas in Irvine,
California. The term of the lease is seven (7) years commencing November 1,
1997 and expiring October 31, 2004. The base rent for this property is
$22,081.50 per month, with adjustments in the base rent following the expiration
of each twelve (12) month period thereafter. On February 23, 1998 PIC exercised
its option to purchase this facility and entered into a related agreement with
Huck International, Inc. (a subsidiary of Thiokol Corporation). The transaction
is currently pending in escrow. 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.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
Neither PIC nor PSL is a party to any pending or threatened legal,
governmental, administrative or judicial proceedings that Prolong believes will
have a material adverse effect upon PIC's or PSL's financial condition or
operations. The AFMT patent on which Prolong's products are based, has been the
subject of litigation, primarily suits contesting the ownership thereof. In
July 1993, the trial court ruled in favor of Prolong's licensor, EPL, awarding
EPL damages in excess of $15.5 million, and made findings of fact that the
defendants had signed certain key documents which evidenced EPL's ownership of
the intellectual property. The defendants appealed the trial court's findings,
arguments relating to which were heard in June 1997. In January 1998, the court
of appeal affirmed the trial court's decision in favor of EPL. Should any other
litigation against EPL result in an adverse ruling precluding PIC's continued
use of the AFMT patent under the license agreement, PIC's business, operating
results and financial condition would be materially adversely effected.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
Page 12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------- ---------------------------------------------------------------------
Price Range of Common Stock
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 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
</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.
PIC has authorized 150,000,000 shares of PIC Common Stock, having a par
value of $0.001 per share. As of March 19, 1998, the number of holders of
record of PIC Common Stock is approximately 479. 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, PIC's Board of
Directors is authorized to issue up to 50,000,000 shares of Preferred Stock with
such rights, preferences and privileges as may be determined by PIC's Board of
Directors. No such shares of Preferred Stock have been issued to date.
RECENT SALES OF UNREGISTERED SECURITIES
The following consists of information relating to unregistered securities
sold by the Company during the year ended December 31, 1997.
1. On January 30, 1997, PIC sold 5,000 shares of PIC Common Stock to one
accredited investor for gross proceeds of $12,500.
2. On March 10, 1997, PIC issued 12,500 shares of PIC Common Stock to
Kenneth D. Bernstein pursuant to an Associate Sponsorship Agreement between PSL,
King Entertainment, Inc. and Kenneth D. Bernstein, dated May 9, 1996, in
exchange for services valued at $12,500.
3. On March 10, 1997, PIC issued 25,000 shares of PIC Common Stock to
Michael A. McGahee pursuant to a Memorandum of Agreement between PSL and 2M
Corporation, dated April 24, 1995, as amended March 4, 1996, in exchange for
services valued at $6,250.
4. On August 22, 1997, PIC issued 37,500 shares of PIC Common Stock to
Kenneth D. Bernstein pursuant to an Associate Sponsorship Agreement between PSL,
King Entertainment, Inc. and Kenneth D. Bernstein, dated May 9, 1996, in
exchange for services valued at $37,500.
5. On August 22, 1997, PIC issued 25,000 shares of PIC Common Stock to one
accredited investor in exchange for services valued at $50,000.
Page 13
<PAGE>
6. On December 22, 1997, PIC issued an aggregate of 80,000 shares of PIC
Common Stock to three accredited investors in exchange for services valued at
$123,200.
The foregoing sales of securities were made in reliance upon the exemption
from the registration provisions of the Securities Act of 1933, as amended, set
forth in Section 4(2) thereof as transactions by an issuer not involving any
public offering. Each of the foregoing purchasers represented that it was an
"accredited investor" within the meaning of Rule 501 promulgated under the
Securities Act of 1933, as amended. PIC has reason to believe that all of the
foregoing purchasers were familiar with or had access to information concerning
the operations and financial condition of PIC, and each of the foregoing
purchasers represented that it was acquiring the shares for investment and not
with a view to the distribution thereof. At the time of issuance, all of the
foregoing shares of PIC Common Stock were deemed to be restricted securities for
purposes of the Securities Act of 1933, as amended, and the certificates
representing such securities bear legends to that effect.
Page 14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
The following selected financial data is qualified by reference to, and
should be read in conjunction with the consolidated financial statements,
related notes and other information included elsewhere in this Annual Report on
Form 10-K as well as "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations." The financial data for the years ended
December 31, 1994 and 1995, respectively, is derived from the consolidated
financial statements of PIC and PSL that have been audited by Corbin & Wertz.
The financial data set forth below for the years ended December 31, 1996 and
1997, respectively, is derived from the consolidated financial statements of PIC
and PSL that have been audited by Deloitte & Touche, LLP. 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 profit (loss)............................................ (134,285) (415,740) 721,178 2,132,553
Net profit (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 Common Stock outstanding
information for the year ended December 31, 1994 have not been provided as
such period preceded PIC's merger with PSL in June 1995 and, therefore,
such information would not be meaningful.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ---------- --------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
- -----------------------------------
The following discussion and analysis of the Registrant's financial
condition and results of operations should be read in conjunction with the
Financial Statements and the notes thereto included elsewhere in this Annual
Report on Form 10-K.
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
direct response television 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.
Page 15
<PAGE>
RESULTS OF OPERATIONS
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>
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.
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.
Page 16
<PAGE>
General and administrative expenses for the year ended December 31, 1997
were $3,523,200 as compared to $2,041,102 for the year ended December 31, 1996,
an increase of $1,482,098 or 72.6%. This increase was primarily attributable to
salaries for new employees, employee benefits, professional services and other
administrative costs required to build the infrastructure necessary to support
the increased level of sales. As a percentage of sales, general and
administrative expenses were 11.8% in 1997 versus 12.9% in 1996. The
administrative infrastructure buildup took place in late 1996 and early 1997 in
anticipation of the increase in sales. An extensive administrative increase,
relative to sales, is not anticipated in the future.
For the year ended December 31, 1997, PIC generated interest and dividend
income, net of interest expense, of $241,029 as compared to $35,437 for the year
ended December 31, 1996. During 1997, PIC maintained an average cash balance of
approximately $5.6 million as compared to approximately $2.6 million during
1996. Additionally, in the third quarter of 1997, PIC transferred its cash
reserves to higher yielding accounts.
Net income for the year ended December 31, 1997 was $2,132,553 as compared
to $721,178 for the year ended December 31, 1996, an increase of $1,411,375 or
195.7%. This increase was a result of the factors discussed above.
Comparison of the Years Ended December 31, 1996 and December 31, 1995
Net revenues for the year ended December 31, 1996 were $15,813,493 as
compared to $390,506 for the year ended December 31, 1995, an increase of
$15,422,987. Of Prolong's 1996 sales, $12,287,000 were attributable to direct
response to the Infomercial which was debuted in January 1996. Additionally,
1996 sales included approximately $1,629,000 of international sales resulting
from initial stocking orders to customers and distributors which were shipped in
the fourth quarter of 1996. Because of the nature of such orders, PIC does not
believe that the level of such sales will be indicative of future international
sales levels.
Cost of goods sold for the year ended December 31, 1996 was $4,660,926 as
compared to $211,220 for the year ended December 31, 1995, an increase of
$4,449,706. As a percentage of sales, cost of goods sold decreased from 54.1%
in 1995 to 29.5% in 1996. This decrease was mainly attributable to the
commencement of higher volumes of purchases of raw materials and outside
production throughput resulting in lower per unit costs to meet the demands for
product generated by the Infomercial. Management expects that the decreases, as
a percentage of sales, will begin to level out as maximum purchase and
production volumes are reached.
For the year ended December 31, 1995, PIC had no selling and marketing
expenses as it had not yet begun to develop its sales and marketing efforts.
During 1996, the majority of selling and marketing expenses related to the
purchase of television air time for the Infomercial. Additional 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.
Page 17
<PAGE>
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 its 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 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.
Page 18
<PAGE>
FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS
In addition to the information set forth elsewhere in this Annual Report on
Form 10-K, the following factors should be considered carefully in evaluating
PIC and its business.
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. In light of the important factors that can
materially affect results, including those set forth in this paragraph and
below, the inclusion of forward-looking information herein should not be
regarded as a representation by PIC or any other person that the objectives or
plans for PIC will be achieved. PIC may encounter competitive, technological,
financial and business challenges making it more difficult than expected to
continue to sell specialty lubricant products; PIC may be unable to retain
existing key sales, technical and management personnel; there may be other
material adverse changes in the lubricant industry or in PIC's operations or
business, and any or all of these factors may affect PIC's ability to continue
its current rate of sales growth or may result in lower sales volume than
currently experienced. Certain important factors affecting the forward-looking
statements made herein include, but are not limited to (i) the ability of PIC to
manage its growth effectively, (ii) a significant portion of the Registrant's
sales continuing to be direct response sales and (iii) downward pricing
pressures due to increasing competition in the specialized lubrication market.
Assumptions relating to budgeting, marketing, and other management decisions are
subjective in many respects and thus susceptible to interpretations and periodic
revisions based on actual experience and business developments, the impact of
which may cause PIC to alter its marketing, capital expenditure or other
budgets, which may in turn affect PIC's business, financial position, results of
operations and cash flows. The reader is therefore cautioned not to place undue
reliance on forward-looking statements contained herein, which speak as of the
date of this Annual Report on Form 10-K.
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 and financial condition could be adversely affected.
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 shareholders. 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 and financial condition.
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 to retail
customers in response to Prolong's 30 minute direct response television
commercial. Prolong's plans for future growth contemplate the expansion of
sales to both industrial/commercial and international customers. To date, sales
to such customers have constituted only a limited portion of PIC's revenues.
Prolong typically consummates sales to both 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
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<PAGE>
assurance that Prolong will be successful in locating and engaging qualified
distributors for its products, either in the United States or abroad, or that it
will be successful in increasing its sales in the industrial/commercial and
international markets.
Dependence on Key Management 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, however, there can be no assurance that PIC's 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 and financial condition.
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, financial condition and
results of operations.
Competition
The market for Prolong's products is highly competitive and is expected to
be increasingly competitive in the future. Prolong's principal competitors
include other providers of specialized lubrication products, such as First
Brands (STP) and Quaker State (Slick 50), both of which market engine oil
treatments. Prolong's competitors also include major oil companies such as
Shell Oil Company, Castrol, Pennzoil, and other companies who manufacture
lubrication products, such as WD40 Corp. Further, Prolong believes that major
oil companies not presently offering products that compete directly with those
offered by Prolong may enter its markets in the future. Increased competition
could result in price reductions, reduced gross margins, and a loss of market
share, any of which could have a material adverse effect on PIC's business,
financial condition and results of operations. In addition, many of Prolong's
competitors have significantly greater financial, technical, product
development, marketing and other resources and greater market recognition than
Prolong. Several of Prolong's competitors also currently have, or may develop
or acquire, substantial customer bases in the automotive and other related
industries. As a result of these factors, Prolong's competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development, promotion and
sale of their products than Prolong. Additionally, other dealers and
distributors may offer similar lubrication products at prices below those
offered by Prolong, appealing to the price-sensitive segment of the market.
While Prolong believes that the prices for its lubrication products are
competitive for the level of quality obtained by the customer, Prolong relies on
its brand name recognition and reputation for selling quality products supported
by strong customer service. There can be no assurance that Prolong will be able
to compete successfully against current and future competitors or that
competitive pressures faced by Prolong will not materially adversely effect
PIC's business, financial condition and results of operations.
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
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<PAGE>
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 listed on any exchange or the Nasdaq Stock Market ("Nasdaq"). Because
PIC Common Stock is not listed on 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, (iv) 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 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
recently submitted an application to Nasdaq to have PIC Common Stock listed on
The Nasdaq SmallCap Market. The Nasdaq SmallCap Market has specific listing
requirements which PIC must satisfy in order to have PIC Common Stock listed for
trading, such as financial thresholds or either net tangible assets, market
capitalization or net income, $5 million in market value of public float and a
minimum bid price of $4 per share. There can be no assurances that PIC will be
able to satisfy the listing requirements which relate to The Nasdaq SmallCap
Market or that PIC Common Stock will be accepted for trading by Nasdaq or any
other exchange in a timely manner, if at all.
Costs of Components
Prolong depends upon its suppliers for the supply of the primary components
for its AFMT formula. Such components are subject to significant price
volatility beyond the control or influence of Prolong. Prices for the
components of the quality sought by Prolong are dependent on the origin, supply
and demand at the time of purchase. Prices can be affected by multiple factors
in the producing countries, including weather and political and economic
conditions. Additionally, petroleum products, which comprise AFMT, have been
affected in the past, and may be affected in the future, by the actions of
certain organizations and associations, such as the Organization of Petroleum
Exporting Countries ("OPEC"), that have historically attempted to establish
price controls on petroleum products through agreements establishing export
quotas or restricting petroleum supplies worldwide. No assurance can be given
that OPEC (or others) will not succeed in raising the price of petroleum
components or that, in such event, Prolong will be able or choose to maintain
its gross margins by quickly raising its prices without affecting demand.
Increases in the prices for the components, whether due to the failure of its
suppliers to perform, conditions affecting the component-producing countries, or
otherwise, could have a material adverse effect on PIC's business, operating
results and financial condition.
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
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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.
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, financial condition and
results of operations.
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, financial condition and results of operations.
Prolong has recently expanded its product line and intends to continue such
expansion in the future, but there can be no assurance that these new AFMT-based
products introduced by Prolong will receive widespread acceptance.
Risk of Declining Selling Prices
Prolong may experience declining average sales prices for its products.
Specialty lubricant suppliers have come under increasing price pressure from
competitors and consumers, which in turn could result in downward pricing
pressure on Prolong's products. In addition, average sales prices are affected
by price discounts negotiated for large volume purchases by certain customers.
To offset the potential for declining average sales prices, Prolong believes
that in the near term it must achieve manufacturing cost reductions, and in the
longer term Prolong must develop new AFMT-based products that can be
manufactured at lower cost or sold at higher average sales prices. If, however,
Prolong is unable to achieve such cost reductions or product diversification,
Prolong's gross margins could decline, and such decline could have a material
adverse effect on PIC's business, results of operations and financial condition.
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% and 5% 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
and financial condition could be materially adversely affected. In addition, as
Prolong expands its international operations, a portion of the revenues
generated from such international sales may be subject to taxation by such
jurisdictions at rates higher than those to which Prolong is subject to in the
United States. Prolong's worldwide sales are currently denominated in United
States dollars. An increase in the value of the United States dollar relative
to foreign currencies would make Prolong's products more expensive and,
therefore, potentially less competitive in those markets. Additional risks
inherent in Prolong's worldwide business activities generally include unexpected
changes in regulatory requirements, tariffs and other trade barriers, costs of
localizing products in foreign countries, longer accounts receivable payment
cycles, difficulties in operations management, potentially adverse tax
consequences, including restrictions on the
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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 and financial condition.
Environmental Compliance
Federal, state and local regulations impose various controls on the
storage, handling, discharge and disposal of substances used in Prolong's
manufacturing process and on the facilities leased by Prolong. Prolong has
registered its fuel conditioners with the United States Environmental Protection
Agency ("EPA"). Such EPA registrations have no term but require Prolong to
notify the EPA of any changes in the chemical composition of such conditioners
or other information contained in such registration. Prolong is not aware of
any additional governmental approvals required for its products nor does Prolong
know of any existing or probable governmental regulations which would have any
material adverse effect on its current business. Because Prolong does not
manufacture or store any significant quantity of its products, direct costs of
compliance with environmental laws have been nominal and have had no material
effect on its business. Prolong has attempted to minimize its economic risk
from violations by its manufacturers or bottlers by qualifying alternate sources
of such services. Prolong believes that its activities and those of its
contract manufacturers conform to present governmental regulations applicable to
each such entities' operations. Additionally, Prolong believes that its current
facilities conform to present governmental regulations relating to
environmental, land use, public utility utilization and fire code matters.
There can be no assurance that such governmental regulations will not in the
future impose additional process requirements upon Prolong or restrict Prolong's
ability to expand its operations. The adoption of such measures or any failure
by Prolong to comply with the applicable environmental and land use regulations
or to restrict the discharge of hazardous substances could subject Prolong to
future liability or could cause its operations or those of its contract
manufacturers to be curtailed, relocated or suspended.
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.
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 and financial condition. 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 shareholder approval,
up to 50,000,000 shares of Preferred Stock with voting, conversion and other
rights and preferences that may be superior to those of the 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 shareholders. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
Consolidated balance sheets of PIC as of December 31, 1997 and 1996,
respectively, statements of income and cash flows for each of the three years in
the period ended December 31, 1997, and the reports of independent auditors
thereon are referenced in ITEM 14 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
PIC's financial statements for the years ended December 31, 1995 and 1994
were audited by Corbin & Wertz, independent accountants. In February 1997, PIC
dismissed Corbin & Wertz and engaged Deloitte & Touche, LLP as its independent
accountants. The change in PIC's independent accountants was the result of a
mutual agreement between PIC and Corbin & Wertz. There were no disagreements
with Corbin & Wertz on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure during such
period, which disagreements, if not resolved to the satisfaction of Corbin &
Wertz, would have caused it to make a reference to the subject matter of the
disagreements in connection with its records. The report of Corbin & Wertz on
PIC's financial statements for the years ended December 31, 1995 and 1994
contained an explanatory paragraph regarding PIC's ability to continue as a
going concern.
The decision to engage Deloitte & Touche, LLP was approved by the Board of
Directors of PIC.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
There is hereby incorporated by reference the information appearing under
the captions "Election of Directors" and "Compliance with Section 16(a) of the
--------------------- ------------------------------------
Securities Exchange Act of 1934" from the Registrant's definitive proxy
- -------------------------------
statement for the 1998 Annual Meeting of the Stockholders to be filed with the
Commission within 120 days of December 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
There is hereby incorporated by reference information appearing under the
caption "Executive Compensation" from the Registrant's definitive proxy
----------------------
statement for the 1998 Annual Meeting of Stockholders to be filed with the
Commission within 120 days of December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
There is hereby incorporated by reference the information appearing under
the caption "Security Ownership of Certain Beneficial Owners and Management"
--------------------------------------------------------------
from the Registrant's definitive proxy statement for the 1998 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of December 31,
1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
There is hereby incorporated by reference the information appearing under
the captions "Executive Compensation" and "Certain Transactions" from the
---------------------- --------------------
Registrant's definitive proxy statement for the 1998 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of December 31,
1997.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------- ----------------------------------------------------------------
(A) The following documents are filed as part of this report:
(1) Financial Statements
Consolidated Financial Statements for the Years Ended December 31,
1997, 1996 and 1995 with Notes and Independent Auditors' Reports
(2) Financial Statement Schedules
All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(3) Exhibits
The exhibits set forth below are filed as part of this Annual
Report on Form 10-K:
<TABLE>
<C> <S>
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.,
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. *
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).
10.15 Sponsorship Letter of Intent between PSL and Joe Nemechek dba
Nemco Motorsports, dated February 13, 1997. **
</TABLE>
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<PAGE>
<TABLE>
<C> <S>
10.16 Sponsorship Agreement between PSL and Sabco Racing, Inc., dated
December 19, 1997.**
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.
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.**
10.19 Service and Endorsement Contract between PSL and Smokey Yunick,
dated November 1, 1996.**
16.1 Letter from Corbin & Wertz acknowledging the change in the
Registrant's certifying accountant. *
21.1 Subsidiaries of the Registrant. *
23.1 Consent of Corbin & Wertz, with respect to the financial
statements of the Registrant.
23.2 Consent of Deloitte & Touche, LLP, with respect to the financial
statements of the Registrant.
24.1 Power of Attorney (included as part of the signature page of
this Annual Report on Form 10-K).
27.1 Financial Data Schedule.
</TABLE>
--------------------------
* 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) Reports on Form 8-K.
The Registrant filed no Current Reports on Form 8-K during the last
quarter of the period covered by this Report.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PROLONG INTERNATIONAL CORPORATION
By: /s/ Elton Alderman
--------------------------------------
Elton Alderman,
President, Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
By: /s/ Nicolas M. Rosier
--------------------------------------
Nicholas M. Rosier,
Chief Financial Officer
(Principal Financial Officer)
POWER OF ATTORNEY
We, the undersigned directors and officers of Prolong International
Corporation. do hereby constitute and appoint Elton Alderman and Nicholas M.
Rosier, or either of them, with full power of substitution and resubstitution,
our true and lawful attorneys and agents, to do any and all acts and things in
our name and behalf in our capacities as directors and officers and to execute
any and all instruments for us and in our names in the capacities indicated
below, which said attorneys and agents, or either of them, or their substitutes,
may deem necessary or advisable to enable said corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission in connection with this
Annual Report on Form 10-K, including specifically, but without limitation,
power and authority to sign for us or any of us in our names and in the
capacities indicated below, any and all amendments; and we do hereby ratify and
confirm all that the said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Elton Alderman President, Chief Executive Officer and March 23, 1998
- ------------------------------------- Chairman of the Board
Elton Alderman (Principal Executive Officer)
/s/ Thomas C. Billstein Vice President, Secretary and Director March 23, 1998
- -------------------------------------
Thomas C. Billstein
/s/ Tom T. Kubota Vice President, Investor Relations and March 23, 1998
- ------------------------------------- Director
Tom T. Kubota
/s/ Nicholas M. Rosier Chief Financial Officer March 23, 1998
- ------------------------------------- (Principal Financial Officer)
Nicholas M. Rosier
/s/ Melanie A. McCaffery Director March 23, 1998
- -------------------------------------
Melanie A. McCaffery
</TABLE>
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<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
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<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 AND
INDEPENDENT AUDITORS' REPORT
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
Page 30
<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.
Page 31
<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.
Page 32
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
Page 33
<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
COMMON STOCK SUBSCRIBED
-----------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
BALANCES, December 31, 1994 500,000 $ 500 13,767,500 $ 13,768
Shares issued for cash, net of costs of $48,000 1,700,000 1,700
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
Shares issued for cash, net of costs of $33,000 1,980,000 1,980
Shares subscribed for receivable, net of costs
of $8,000 320,000 320
Shares issued for services 445,000 445
Contributed services
Net loss
---------- ------- ----------- --------
BALANCES, December 31, 1995 19,182,035 19,182 320,000 320
Shares issued for cash 4,891,665 4,892
Shares issued for services 730,000 730
Issuance of shares previously subscribed 320,000 320 (320,000) (320)
Shares subscribed 155,800 156
Shares issued in exchange for a note receivable 330,000 330
Net income
---------- ------- ----------- --------
BALANCES, December 31, 1996 25,453,700 25,454 155,800 156
Shares issued for cash 5,000 5
Shares issued for services 180,000 180
Issuance of shares previously subscribed 155,800 156 (155,800) (156)
Cancellation of shares previously issued (330,000) (330)
Charge to bring options to fair value
Net income
---------- ------- ----------- --------
BALANCES, December 31, 1997 25,464,500 $25,465 -- $ --
========== ======= =========== ========
</TABLE>
<TABLE>
<CAPTION>
(ACCUMULATED
ADDITIONAL DEFICIT) TOTAL
PAID-IN RETAINED NOTE STOCKHOLDERS'
CAPITAL EARNINGS RECEIVABLE EQUITY
<S> <C> <C> <C> <C>
BALANCES, December 31, 1994 $ 261,317 $ (148,053) $ -- $ 127,532
Shares issued for cash, net of costs of $48,000 325,300 327,000
Shares issued for common stock subscribed
Issuance of shares to effect reverse acquisition (789)
Shares issued for cash, net of costs of $33,000 394,520 396,500
Shares subscribed for receivable, net of costs
of $8,000 71,680 72,000
Shares issued for services 110,805 111,250
Contributed services 24,000 24,000
Net loss (415,740) (415,740)
----------- ----------- ---------- ----------
BALANCES, December 31, 1995 1,186,833 (563,793) 642,542
Shares issued for cash 5,317,738 5,322,630
Shares issued for services 394,270 395,000
Issuance of shares previously subscribed
Shares subscribed 209,344 209,500
Shares issued in exchange for a note receivable 659,670 (660,000)
Net income 721,178 721,178
----------- ----------- ---------- ----------
BALANCES, December 31, 1996 7,767,855 157,385 (660,000) 7,290,850
Shares issued for cash 12,495 12,500
Shares issued for services 229,270 229,450
Issuance of shares previously subscribed
Cancellation of shares previously issued (659,670) 660,000
Charge to bring options to fair value 43,501 43,501
Net income 2,132,553 2,132,553
----------- ----------- ---------- ----------
BALANCES, December 31, 1997 $7,393,451 $2,289,938 $ -- $9,708,854
========== =========== ========== ==========
</TABLE>
Page 34
<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.
Page 35
<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
receivavle 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.
Page 36
<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.
Page 37
<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.
Page 38
<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.
Page 39
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
3. INVENTORIES
Inventories at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
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
========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 consists of the
following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Computer equipment $135,164 $ 60,823
Office equipment 24,319 16,669
Furniture and fixtures 11,649 11,649
Automotive equipment 35,925 42,626
Exhibit equipment 19,813
---------- -----------
226,870 131,767
Less accumulated depreciation (63,443) (14,009)
---------- -----------
163,427 117,758
Building improvements in progress 56,256
---------- -----------
$219,683 $117,758
========== ==========
</TABLE>
5. LICENSE AGREEMENT
The Company entered into a license agreement which requires the Company to
pay royalties of 3.5% of sales (as defined) of the Company's products that
utilize certain proprietary technology, trademarks and copyrights. The
royalty expense under this arrangement for the years ended December 31,
1997, 1996 and 1995 approximated $1,023,869, $553,900 and $0, respectively.
The agreement also called for an initial one-time license fee of $106,190,
which the Company capitalized and is amortizing over
Page 40
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
a five-year period. The Company amortized $21,238, $21,238 and $21,240 for
the years ended December 31, 1997, 1996 and 1995, respectively, resulting in
accumulated amortization balances of $63,716 and $42,478 as of December 31,
1997 and 1996, respectively. The agreement shall remain in effect as long
as the Company has not committed any breach of the terms and provisions of
the agreement (Note 13).
6. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Accrued royalties payable $ 630,113 $354,889
Sales taxes payable 8,406 93,727
Payroll and payroll taxes payable 567,341 235,430
Accrued commissions payable 212,338 19,176
Other 245,123
----------
$1,663,321 $703,222
========== ========
</TABLE>
7. LINE OF CREDIT
In July 1997, the Company entered into a $4,000,000 line of credit
arrangement with a bank. Such line is collateralized by receivables and
inventories. Borrowings against the line bear interest at either the bank's
reference rate or the LIBOR rate plus 2.25%, at the Company's option. The
line expires on July 31, 1999, unless renewed, and is subject to an unused
commitment fee of .25% per year of the unused balance. The line contains
certain financial covenants including a minimum quick ratio and tangible net
worth. As of December 31, 1997, there were no borrowings outstanding under
this line.
8. STOCKHOLDERS' EQUITY
On June 21, 1995, PIC issued 15,967,500 shares of its common stock in
exchange for 100% of the common stock of PSL. In addition to these shares,
the existing stockholders of PIC at that date held 789,535 shares of common
stock.
During fiscal 1996, the Company issued 4,891,665 shares of restricted
unregistered common stock in exchange for $5,322,630, at prices ranging from
$.25 to $2.70 per share.
Page 41
<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 cancelation 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.
Page 42
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
Stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE
UNDER PRICE
OPTION PER SHARE
<S> <C> <C>
OUTSTANDING, December 31, 1995 - $ -
Granted 30,000 $ 5.38
---------
OUTSTANDING, December 31, 1996 30,000 $ 5.38
Granted 1,358,688 $ 2.10
Canceled (33,310) $(5.04)
---------
OUTSTANDING, December 31, 1997 1,355,378 $ 2.10
=========
</TABLE>
All but 30,000 of the outstanding options at December 31, 1997 vest over a
five-year period. The remaining 30,000 vest in one year. During 1997, the
Company issued 256,500 options with a fair value of $582,434 to outside
consultants. During 1997, the Company recorded $43,501 in compensation
costs related to the partial vesting of these options.
As of December 31, 1997 and 1996, no options were exercisable.
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations to account for stock options. Had
compensation cost for the stock option been determined based on the fair
value at the grant date consistent with the method of SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net income would have
been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net income, as reported $2,132,553 $721,178
Net income, pro forma $1,888,150 $657,630
Pro forma earnings per share:
Basic $ 0.07 $ 0.03
Diluted $ 0.07 $ 0.03
</TABLE>
The fair value of options granted was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: no dividend yield, expected volatility range of 113% to 148%,
risk-free interest rate of 6.9% and an expected life of 7 1/2 years.
Page 43
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
10. INCOME TAXES
The provision for income taxes consists of the following for the years ended
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
Current:
<S> <C> <C> <C>
Federal $1,063,979 $178,816 $ -
State 301,725 72,747 1,600
Foreign 3,678
---------- -------- ------
1,369,382 251,563 1,600
Deferred:
Federal 52,462 (34,027)
State 15,520 (10,262)
---------- -------- ------
67,982 (44,289)
---------- -------- ------
$1,437,364 $207,274 $1,600
========== ======== ======
</TABLE>
The provision for income taxes differs from the amount that would result
from applying the federal statutory rate, as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Federal statutory income tax rate $1,213,772 $ 315,674 $(140,808)
State income taxes, net of federal benefit 209,381 41,241 1,600
Change in valuation allowance (112,900) 94,808
Other 14,211 (36,741) 46,000
---------- --------- ---------
$1,437,364 $ 207,274 $ 1,600
========== ========= =========
</TABLE>
Page 44
<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
Deferred tax liabilities:
<S> <C> <C>
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.
Page 45
<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.
Page 46
<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>
<CAPTION>
<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.
Page 47
<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-ProLong, 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. 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>
Page 48
<PAGE>
PROLONG INTERNATIONAL CORPORATION
FORM 10-K
Exhibit Index
-------------
<TABLE>
<CAPTION>
Sequential
Page Number
-----------
<S> <C>
2.2 Agreement and Plan of Reorganization, dated as of February 5, 1998,
by and among the Registrant and EPL Pro-Long, Inc., including
the following exhibits: (i) Form of Employee Invention and Confidentiality
Agreement, (ii) Form of Rule 145 Agreement, (iii) Form of Confidentiality
to Agreement, (iv) Form of Transfer Restriction, (v) Form of Amendment
Exclusive License Agreement, and (vi) Form of Cancellation Agreement. 50
10.15 Sponsorship Letter of Intent between PSL and Joe Nemechek dba Nemco
Motorsports, dated February 13, 1997. ** 131
10.16 Sponsorship Agreement between PSL and Sabco Racing, Inc., dated
December 19, 1997. ** 132
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. 137
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. ** 169
10.19 Service and Endorsement Contract between PSL and Smokey Yunick,
dated November 1, 1996. ** 172
23.1 Consent of Corbin & Wertz 181
23.2 Consent of Deloitte & Touche, LLP 182
24.1 Power of Attorney (Incorporated by Reference) 26
27.1 Financial Data Schedule (Article 5 of Regulation S-X) 183
</TABLE>
- -------------------------------------
** The Registrant has sought confidential treatment pursuant to Rule 24b-2 for a
portion of the referenced exhibit.
Page 49
<PAGE>
EXHIBIT 2.2
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>
SUPER LUBRICANTS
EXHIBIT 10.15
CONFIDENTIAL PORTIONS OMITTED
SPONSORSHIP LETTER OF INTENT
This document shall represent a letter of mutual intent entered between Prolong
Super Lubricants, Inc. and Joe Nemechek dba Nemco Motorsports. It is further
agreed that this document shall serve as an interim binding agreement, with a
complete and formal contract accurately reflecting the terms herein forthcoming.
It is agreed that Prolong Super Lubricants shall be an associate sponsor for Joe
Nemechek/Nemco Motorsports up to fifteen (15) 1998 NASCAR Busch Grand National
---------------------------------------------
events.
- -------
In exchange for the above, the following is further agreed:
- -----------------------------------------------------------
Prolong Super Lubricants to provide:
- ------------------------------------
. $[ * ] payable in two (2) installments
. $[ * ] (retail value) in Prolong Super Lubricants products
. Performance bonus for race finishes in positions One through Three.
NOTE: Monetary terms negotiable, to be mutually determined
Joe Nemechek/Nemco Motorsports to provide:
- ------------------------------------------
. Logo signage in area behind door and in front of rear tire opening, both sides
of car
. Color logo signage in one (1) other location (rear spoiler or other, TBD)
. Driver and team uniform logo identity
. One (1) free personal appearance, additionals, if any, @ $[ * ]
. Logo identity on dashboard visible to in-car camera (if applicable)
. Right to feature driver, race car likeness in Prolong Super Lubricants
advertisements
. Prolong logo identity on team transporter, pit equipment
/s/ Jerry Grant /s/ Joe Nemechek 2-13-97
- ----------------------------- --------------------------- -------
Jerry Grant, Prolong Super Joe Nemchek, Nemco Date
Lubricants Motorsports
Vice President, Motorsports Owner/Driver
Joe Nemechek
Brian Pattie
Crew Chief
P.O. Box 177
Mooresville, NC 28115 Shipping Address
(704) 664-4287 S. Iredell Ind. Park Rd. #7
FAX (704) 664-9587 Mooresville, NC 28115
6 THOMAS IRVINE, CA 92618 PHONE: 714-587-2700 FAX: 714-587-2701
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH
THE COMMISSION.
<PAGE>
CONFIDENTIAL PORTIONS OMITTED
EXHIBIT 10.16
[LOGO OF TEAM SABCO APPEARS HERE]
SPONSORSHIP AGREEMENT
THIS SPONSORSHIP AGREEMENT (hereinafter the "Agreement) is made and entered into
this 19th day of December 1997, by and between SABCO RACING, INC., a North
Carolina corporation with a place of business in Iredell County, North Carolina
(hereinafter Sabco), and Prolong Super Lubricants, Anaheim, Calif. (Hereinafter
to be referred to as "Prolong");
WITNESSETH:
WHEREAS, Sabco is engaged in the business of operating NASCAR Winston Cup
Series race cars and wishes to provide advertising space and advertising,
promotional and marketing assistance to Prolong; and
WHEREAS, Prolong desires to become a major associate sponsor of all three
Sabco entries during the 1998, 1999 and year-2000 NASCAR Winston Cup Series
racing seasons. These entries shall mean the Sabco No. 40, all NASCAR Winston
Cup Series races during this three-year period; the Sabco No. 42, all NASCAR
Winston Cup Series races during this three-year period; and Sabco No. 46, all
NASCAR Winston Cup Series races during this three-year period. Prolong shall use
its sponsorship of the Sabco entries for advertising, promoting and marketing
itself.
WHEREAS, the parties desire to set forth in this Agreement their respective
rights and obligations;
NOW, THEREFORE, in consideration of the mutual promises and agreements set
forth herein, and for other good and valuable consideration, the parties hereto
agree as follows:
1. Term. The term of this Agreement shall commence with the first race
-----
of the 1998 Winston Cup season and shall continue until the final race of the
year-2000 Winston Cup season.
2. Services to be provided by Sabco. Sabco shall perform the following
---------------------------------
services for Prolong during the term hereof:
A. Drivers. The drivers for the 33 Winston Cup events to be held
--------
during the 1998 season in which Prolong is an associate sponsor shall be
Sterling Marlin (40), Joe Nemechek (42) and Wally Dallenbach Jr. (46), unless
due to injury or for some unforeseeable reason, either is unable to drive, in
which event Sabco shall choose a substitute driver to drive their respective
Sabco/Prolong-sponsored entry. For the duration of this agreement, Sabco
reserves the right to substitute or replace any of the aforementioned drivers
listed without prior notice to Prolong or prior approval from Prolong.
B. Decal location. Sabco will designate Prolong as an associate sponsor
---------------
on its No. 40, No. 42 and No. 46 Winston Cup race cars in the aforementioned 33
events. Sabco shall cause each car to be painted with paint schemes approved by
each's primary sponsor and shall cause to display Prolong associate sponsor
decal signage upon the middle side panel (between car number and rear tire; both
sides of car) with dimensions of approximately 6
<PAGE>
inches high by 16 inches long. In addition, Sabco shall provide, subject to
Prolong's approval, drive, pit crew, team uniforms, team pit equipment, team
race car transporter, show car and show car transporter bearing prominent
Prolong associate sponsor identification as well as team pit equipment with
size and placement commensurate with level of sponsorship
3. Driver Appearances. Sabco shall provide unto Prolong five aggregate
------------------
driver appearances (2) two-hours each at no fee. Prolong shall be responsible
for all first class travel expenses relating to each driver appearance, i.e.
hotel, airfare, meals, etc. Additional appearances by Sabco drivers shall be at
the discounted rate of [ * ] ($[ * ]) Dollars per day per driver, [ * ].
Sabco shall further provide the services of each driver for one free day
for commercial use (up to six hours each) for still photo shoot, TV and
radio/commercial production. Prolong shall be responsible for all first class
travel expenses relating to each driver appearance, i.e. hotel, airfare, meals,
etc.
All Sabco drivers, while under contract with Team SABCO, shall allow
their likeness, voice, picture and signature to be used for commercial purposes
endorsing Prolong at no additional costs during the term of this agreement.
4. Compensation. Prolong agrees to pay unto Sabco the sum [ * ] [ * ]
------------
Dollars ($[ * ]) for services to be provided by Sabco over this three year
period of 1998, 1999 and year-2000. This sponsorship fee of $ [ * ] shall be
paid to Sabco in the following installments: Year One (1998): $ [ * ] (four
equal installments of $ [ * ] to be paid on 3/15/98, 6/15/98, 8/15/98 and
10/15/98); Year Two (1999): $ [ * ] (four equal installments of $ [ * ] to be
paid on 3/15/99, 6/15/99, 8/15/99 and 10/15/99); Year Three (year-2000): $ [ * ]
(four equal installments of $ [ * ] to be paid on 3/15/2000, 6/15/2000,8/15/2000
and 10/15/2000).
5. Show Car. Sabco agrees to provide at no expense to Prolong for its use
--------
in promoting its sponsorship, five (5) free show car appearance days whereas
Prolong can deem which of the Sabco show cars to use. This shall mean that
Prolong may schedule any combination of Sabco's three show cars (based on
availability) not to exceed a total of five show days (travel days are
considered a "show date"). Sabco will provide transportation of show car and
will provide an attendant to stay with the car during its display period. For
any show car appearance requested by Prolong over and above the five (5) free
appearances, Sabco will make available unto Prolong a show car at a discounted
rate of [ * ] Dollars ($ [ * ]) per day. All travel days to and from the site of
a show car appearance, as well as the actual day upon which show car is on
display will be charged as a "show date". It is further understood that the
parties will agree in advance upon a schedule of places and events for the show
car to be displayed at such times as will not interfere with Sabco's racing
schedule.
6. Media, Public Relations and Sponsor Communications. Sabco will use its
--------------------------------------------------
best efforts to obtain favorable exposure for Prolong and will be available to
assist Prolong with public relations activities to a reasonable extent. This
shall include making members of Sabco available for media interviews, press
conferences or other public relations activity, as reasonably requested by
Prolong, at or near race sites on dates Sabco is at race sites pursuant to their
obligations hereunder. Sabco shall provide at its expense a staff member to
handle race team's media and public relations needs and shall cause Prolong to
receive prominent mention and display within press kits featuring the Sabco No.
40, 42 and 46 race cars. In each of the 1998, 1999 and year-2000 races in which
Prolong is designated as an associate sponsor, Sabco shall fax to Prolong
officers on the Monday following the race, race results and a summary of the
prior weekend activities.
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION.
<PAGE>
7. Exclusivity. During the term of this Agreement, Sabco will not
-----------
represent or accept as a primary, secondary, or associate sponsor any other
company reasonably deemed to be competitive with Prolong products.
8. Confidentiality. During and after the term of this Agreement, each
---------------
party hereto, its employees and agents agree not to disclose any business
results, trade practices or other business information of the other party, its
employees or agents, which they may learn as a result of the performance of this
Agreement.
9. Indemnification.
---------------
A. Sabco shall indemnify, defend and hold harmless Prolong, its
officers, directors, employees and representatives from and against any
and all losses, claims, suits, damages, liabilities, costs and expenses,
including attorney fees and count costs incurred by any of them arising
out of:
(i) Any breach of any warrant made by Sabco herein;
(ii) Any acts done or words spoken
(iii) Any claims by any persons arising from acts or omissions of any
nature by Sabco, its employees or agents, including but not limited
to, claims arising during the court of competition or practice in the
performance of this Agreement.
B. Prolong shall indemnify, defend and hold harmless Sabco, its
officers, directors, employees and representatives, from and against any and all
losses, claims, suits, damages, liabilities, costs and expenses, including
attorney fees and court costs incurred by any of them, arising out of:
(i) The use of any logo, design or materials furnished to Sabco by
Prolong hereunder;
(ii) Any breach of any warranty made by Prolong herein;
(iii) Any acts done or words spoken by Prolong, its officers, directors,
agents, employees and representatives;
(iv) Any claims by any persons arising from acts of omissions of any
nature by Prolong, its officers, directors, agents, employees or
representatives, including, but not limited to, claims arising under any
product liability theory with respect to Prolong's products.
10. Nature of Relationship. The parties expressly acknowledge and agree
----------------------
that Sabco is acting as an independent contractor. Each party is responsible for
all taxes relating to its operation, including payroll taxes for its employees,
and nothing in this Agreement is intended to create a relationship, express or
implied, of employer-employee between Sabco and Prolong. Except as expressly
authorized herein, neither party may contract for or otherwise obligate the
other party without the party's prior express written consent.
<PAGE>
11. Insurance. Sabco shall provide at its expense and maintain throughout
---------
the term of this Agreement and any option period spectator liability insurance
in an amount not less than $1 million single limit coverage with respect to any
liability relating to the activities of Sabco in the performance of this
Agreement. Sabco shall, within 90 days of the execution of this Agreement,
supply Prolong with a copy of such policy of insurance or a certificate thereof,
and such policies shall be cancelable only upon 10 days written notice to
Prolong.
12. Notices, Statements and Payments. All notices, statements and
--------------------------------
payments required under this Agreement shall be sent to the parties at the
following addresses:
SABCO RACING, INC.
114 Meadow Hill Circle
Mooresville, North Carolina 28115
Attn: Felix Sabates
PROLONG SUPER LUBRICANTS
1210 North Barsten Way
Anaheim, California 92806
Attn: Jerry Grant
All notices, statements and payments shall be deemed delivered when deposited
in the United States mail postage prepaid, when hand delivered if delivered
personally, when telecopied if the sender's telecopier confirms transmission
(with respect to notices and statements) or when wire transferred in federal
funds (with respect to payments).
13. Waivers. A waiver of any provision of this Agreement shall be
--------
enforceable only if the waiver is in writing signed by the party against whom
the waiver is sought to be enforced. A failure by a party at any time to
exercise any rights hereunder shall not constitute a waiver of such rights at
another time.
14. Entire Agreement. This Agreement contains the entire agreement and
----------------
understanding between the parties with respect to the subject matter hereof and
supersedes all prior written or oral agreements between them with respect to the
subject matter hereof.
15. Assignment. This Agreement may not be assigned by either party
----------
without the prior written consent of the other party.
16. Significance of Headings. Paragraph headings contained herein are
------------------------
solely for the purpose of aiding the speedy location of subject matter and are
not in any sense to be given weight in the construction of this Agreement.
Accordingly, in case of any question with respect to the construction of this
Agreement, it is to be construed as though paragraph headings had been omitted.
17. Governing Law, Jurisdiction and Venue. This Agreement shall be
-------------------------------------
governed by and construed in accordance with the substantive laws of the State
of North Carolina. The parties hereto hereby submit to jurisdiction and venue
in any state or federal court located in North Carolina as well as any other
jurisdiction having venue and competent jurisdiction of any law suit arising out
of or relating to this Agreement; provided, however, if any
<PAGE>
proceedings are instituted in a jurisdiction other than North Carolina, any
party may remove such proceeding to any State or Federal Court in North
Carolina.
18. Further Execution; Cooperation. The parties agree to execute and
------------------------------
deliver such further agreements, instruments and other documents as the other
party may reasonably deem necessary to effectuate the purposes and provisions of
this Agreement. The parties further agree to cooperate with each other in any
manner reasonably requested by the other party to effectuate the purposes and
provisions of this Agreement.
19. Counterparts. This Agreement may be executed in counterparts and the
------------
signature page of any party, and photocopies and facsimiles thereof, may be
appended to any counterpart and when so appended shall constitute an original
signature.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly elected officers as of the day and year first above
written.
SABCO RACING, INC.
ATTEST:
BY /s/ Armando Fitz
--------------------------------
/s/ Jerry Grant Armando Fitz - Vice President Business Operations
- --------------------------
Jerry Grant - Secretary
PROLONG SUPER LUBRICANTS
ATTEST:
BY /s/ Elton Alderman
/s/ ILLEGIBLE ---------------------------------
- -------------------------- Elton Alderman - President
Secretary
<PAGE>
EXHIBIT 10.17
PURCHASE AND SALE AGREEMENT
---------------------------
THIS PURCHASE AND SALE AGREEMENT ("AGREEMENT") is made and entered into as
of February 23, 1998, by and between Huck International, Inc., a delaware
corporation ("SELLER"), and Prolong Super Lubricants, Inc., a Nevada corporation
("BUYER"). Seller and Buyer are sometimes hereinafter referred to individually
as a "PARTY" and collectively as the "PARTIES".
R E C I T A L S
- - - - - - - -
A. Seller owns that certain real property located in the City of Irvine,
County of Orange, California, and more particularly described on Exhibit "A"
attached hereto (the "REAL PROPERTY"), together with the improvements and
structures situated thereon (the "IMPROVEMENTS").
B. Seller currently leases to Buyer, and Buyer currently leases from
Seller, the Property (defined below) pursuant to that certain Standard
Industrial/Commercial Single-Tenant Lease -- Net by and between Thiokol
Corporation (the parent company of Seller), as Lessor, and Buyer, as Lessee,
dated September 22, 1997, pursuant to which lease Buyer has an option to acquire
the Property from Seller (the "OPTION").
C. Buyer has exercised the Option to purchase the Property from Seller,
and pursuant to the Option, Seller will sell the Property to Buyer, all on the
terms and conditions set forth in this Agreement.
In consideration of the mutual promises set forth in this Agreement, Seller
agrees to sell and Buyer agrees to purchase the real property described herein
on the following terms and conditions:
1. Definitions. The following capitalized terms shall have the meaning
-----------
set forth below:
a. "CONTRACTS" means all management agreements, service contracts,
equipment leases, rights to parking spaces, contract rights, transferable
warranties and guaranties relating to the operating of the Improvements.
b. "CONTRACTS AND MISCELLANEOUS INTERESTS LIST" means a list
prepared by Seller and agreed to by Buyer of all Contracts and Miscellaneous
Interests which will be transferred to Buyer at the Close of Escrow.
c. "MISCELLANEOUS INTERESTS" shall mean the goodwill of the
Property, any and all identification with respect to the
<PAGE>
Property, all telephone and facsimile numbers used at the Property as of the
date of this Agreement; originals (or copies, where appropriate) of all
financial records and files, wherever located, in connection with any of the
Real Property, the Tangible Personal Property or the operation of the
Improvements; all local, state or federal government approvals, licenses or
permits necessary to operate the Improvements as they are operated as of the
date of this Agreement; all insurance policies under which Seller is a named
insured, including all insurance policies carried by third parties which name
Seller as an additional insured, which policies are related to the ownership or
operation of the Property; and all claims against any third parties which arose
out of, or are in any way related to, the Property or the operation of the
Improvements, provided that Seller has neither settled any such claim or brought
suit thereon as of the Close of Escrow.
d. "PERSONAL PROPERTY" means, to the extent they exist:
(1) All furniture, fixtures, furnishings, appliances, works of
art, machinery, computers, facsimile machines, telephone systems, building
supplies, tools, equipment, apparatus and fittings, surveys, plans,
specifications, floor plans, and other tangible personal property and technology
now or hereafter located in, appurtenant to, or used in connection with the Real
Property or Improvements (the "Tangible Personal Property"); and
(2) All assignable intangible property relating to or used in
connection with the Real Property, Improvements or the Tangible Personal
Property (collectively, the "Intangible Property"), including, without
limitation, Contracts and Miscellaneous Interests.
e. "PROPERTY" means the Real Property, together with the
Improvements and the Personal Property but excluding utility services provided
to Seller in Seller's name and relating to the Property. Seller will arrange
discontinuance or the transfer of all such utility services effective as of the
Close of Escrow. Any costs for the transfer of such utility services shall be
paid by Buyer.
f. "REAL PROPERTY" shall have the meaning ascribed thereto in
Recital A, above.
g. "TANGIBLE PERSONAL PROPERTY LIST" means a list prepared by
Seller and agreed to by Buyer of all Tangible Personal Property which will be
transferred to Buyer at the Close of Escrow.
2
<PAGE>
2. Escrow, Title Insurance and Related Provisions.
----------------------------------------------
a. Escrow. Escrow for this transaction ("ESCROW") shall be with
------
Commonwealth Land Title Company ("ESCROW HOLDER"), which is located at 200 West
Santa Ana Boulevard, Santa Ana, California 92701 (Attn: Jim Prasch, Escrow
Oficer). Concurrent with execution of this Agreement by both Parties, the
Parties shall deposit into Escrow a fully signed original, or counterpart
originals, of this Agreement. The date of such deposit shall be referred to
herein as the "OPENING OF ESCROW" and shall be reported by letter to the Parties
by Escrow Holder. The date on which Escrow actually closes and the Property is
transferred from Seller to Buyer shall be referred to as the "CLOSE OF ESCROW".
Escrow Holder is hereby authorized and instructed to act in accordance with the
provisions of this Agreement, which Agreement, together with Escrow Holder's
standard general escrow instructions, if initialled by the Parties and attached
hereto as Exhibit "B", shall constitute Escrow Holder's escrow instructions. As
----------
between the Parties, if there is a conflict between Escrow Holder's general
instructions and this Agreement, this Agreement will control. Close of Escrow
for the Property shall be on or before April 30, 1998 ("CLOSING DATE"), unless
shortened or extended in accordance with the provisions of this Agreement.
b. Prorations. Ad valorem property taxes for the current fiscal
----------
year, the annual installment of bonded indebtedness, and maintenance assessments
imposed by a local government or public agency, if any, shall be prorated as of
the Close of Escrow.
c. Supplemental and/or Escape Assessments. Except for the
--------------------------------------
assessment installments mentioned in the preceding paragraph, all assessments,
deferred agricultural taxes, and/or special taxes, as well as supplemental taxes
with respect to improvements completed by Seller as of the date of Close of
Escrow, shall be paid by Seller. To the extent such amounts can be identified
or reasonably estimated by Escrow Holder they shall be paid (or reserved for
payment) from funds otherwise accruing to Seller at Close of Escrow.
d. Title Policy. Seller, at Seller's expense, shall furnish
------------
Buyer with a C.L.T.A. policy of title insurance in the full amount of the
purchase price issued by Commonwealth Land Title Company, subject only to those
exceptions not objected to by Buyer pursuant to Section 6(a); provided, however,
that Buyer may elect to obtain additional extended A.L.T.A. coverage. The cost
attributable to such additional extended A.L.T.A. coverage shall be paid by
Buyer.
3
<PAGE>
e. Escrow Fees. Seller shall pay documentary transfer tax and one-
-----------
half (1/2) of the escrow fee. All other fees, including recording fees, document
preparation fees, and similar costs not specifically allocated in this Agreement
shall be divided according to the usual practices of the Escrow Holder.
f. Deliveries. Seller and Buyer shall deliver into Escrow those
----------
items required in this Agreement to be delivered into Escrow prior to the Close
of Escrow, together with such other items as Escrow Holder shall reasonably
require in order to close the Escrow.
3. Purchase Price. The purchase price for the Property shall be the sum of
--------------
Two Million Six Hundred Ninety Thousand and no/100 Dollars ($2,690,000.00) (the
"UNADJUSTED PURCHASE PRICE"), which shall be paid as set forth in Section 3,
below. Seller and Buyer hereby agree that the Purchase Price (defined below)
shall be allocated among the Real Property, the Improvements, the Tangible
Personal Property and the Intangible Property in the proportion Seller and Buyer
agree upon prior to the Closing Date. Notwithstanding the foregoing, in the
event that Buyer does not, by the Close of Escrow, utilize its entire tenant
improvement allowance of $100,000 provided for in Section 50 of the Lease, the
Unadjusted Purchase Price shall be adjusted downward for the amount of such
tenant improvement allowance not yet utilized (the "TI CREDIT"). Seller and
Buyer shall provide to Escrow Holder, at least one (1) day prior to the Close of
Escrow, a joint statement settling forth the dollar amount of TI Credit.
Similarly, in the event that Seller has not completed all structural repairs
contemplated by Section 51 of the Lease prior to the Close of Escrow, the
Unadjusted Purchase Price shall be adjusted downward for the estimated amount of
such structural repairs, in an amount (the "STRUCTURAL IMPROVEMENT CREDIT") to
be jointly approved by Seller and Buyer. Seller and Buyer shall provide to
Escrow Holder, at least one (1) day prior to the Close of Escrow, a joint
statement setting forth the dollar amount of Structural Improvement Credit. The
Unadjusted Purchase Price as adjusted by this Section shall be referred to as
the "PURCHASE PRICE".
4. Payment of Purchase Price.
-------------------------
a. Deposits. Seller acknowledges prior receipt from Buyer of an
--------
initial deposit in the amount of Fifty Thousand and no/100 Dollars ($50,000.00)
(the "OPTION DEPOSIT"), which Option Deposit shall be credited against the
Purchase Price at the Close of Escrow. Buyer shall deposit into Escrow
concurrently with the Opening of Escrow a deposit of Twenty Five Thousand and
No/100 Dollars ($25,000) (the "ADDITIONAL DEPOSIT", and together with the Option
Deposit, the "DEPOSITS"). Escrow Holder shall hold the Additional Deposit in
such state or federally charted bank as
4
<PAGE>
Seller may select and in such interest-bearing account(s) as Seller deems
appropriate. The Deposits, together with interest accrued thereon on and after
the Opening of Escrow, shall be applied in full against the Purchase Price at
the Close of Escrow.
b. Balance of Purchase Price. Subject to the satisfaction of, or
-------------------------
Buyer's waiver of, the Buyer Closing Conditions, Buyer shall deposit into Escrow
on or before the Closing Date the balance of the Purchase Price.
5. Cancellation. Buyer may cancel this Agreement on or before 5:00 p.m.,
------------
PST, March 13, 1998, in Buyer's sole and complete discretion, for any or no
reason. Notwithstanding the foregoing, in the event of the failure of any of the
conditions of Buyer (set forth in Section 6, below), Buyer may either waive such
failure or terminate this Agreement, in which event Escrow shall be canceled. In
the event of cancellation or termination of this Agreement as described in this
Section 5, Escrow shall be canceled, Buyer's Additional Deposit and interest
thereon (less one-half the escrow costs) shall be returned to Buyer, and neither
Buyer nor Seller shall have any further obligation.
6. Close of Escrow and Buyer's Conditions. Close of Escrow shall be
--------------------------------------
subject to the following conditions which are for Buyer's benefit only. Buyer
may waive any or all of the conditions in its sole discretion, but only in
writing. Seller shall diligently attempt to achieve the satisfaction of these
conditions without undue delay. If any of these conditions has not been met,
then, unless waived by Buyer, Escrow Holder, upon receipt of notification from
Buyer and without further instructions from Seller, shall immediately cancel the
escrow and return the Additional Deposit to Buyer, less one-half of the escrow
costs incurred, and neither Party shall have any further obligation, rights, or
liability under this Agreement. The preliminary title report, as amended from
time to time, by the title insurer, is referred to herein as the "Title Report."
In the event of such cancellation Seller shall pay the other one-half (1/2) of
escrow costs.
a. Condition of Title.
------------------
Seller shall, at its expense, furnish Buyer with a preliminary
title report and copies of all exceptions to title referred to therein within
five (5) business days after Opening of Escrow. On or before the date (the
"Title Review Date") which is twenty (20) days after the later of (i) the
Opening of Escrow, (ii) the date on which Buyer receives the preliminary title
report and all documents referred to in it, or (iii) the date on which Buyer
receives any supplemental or amendatory report subsequently issued by the title
company and the documents
5
<PAGE>
referred to as exceptions thereto, Buyer shall give Seller notice specifying
those matters, including but not necessarily limited to, liens, easements and
encumbrances, which are not acceptable conditions of title. All exceptions in
the Title Report not specifically approved by Buyer within twenty (20) days
after its receipt of the initial submittal and/or, as applicable, supplementary
or amendatory materials shall be deemed to have been disapproved. Seller shall
use its best efforts, at its cost and expense, to remove such objectionable
items within thirty (30) days thereafter, and if Seller fails to remove such
objectionable items within said period, and/or if the Title Policy will not be
issued in the exact form approved by Buyer, Seller shall notify Buyer in writing
of such fact and Buyer shall have the election to be exercised in writing within
five (5) days after delivery to Buyer of such notice of Seller of either:
(1) Terminating this Agreement, in which event Escrow Holder shall
return the Additional Deposit to Buyer and all other funds and documents
deposited therein to the Party depositing the same;
(2) Granting Seller an extension of time in order to effect said
cure; or
(3) Accepting the Property subject to the objectionable items.
Notwithstanding anything to the contrary set forth in this Section 5(a), Buyer
acknowledges that the following title exceptions which appear in the Title
Report as item number B is deemed approved by Buyer. Seller shall cause the
Title Policy to be issued in form approved by Buyer.
b. Reconveyances. Seller shall, at its expense, cause the
-------------
reconveyance of any and all trust deeds or mortgages which may encumber the
Property and all claims which any lender may assert against the Property.
c. Documents to be Provided by Seller to Buyer. Not later than ten
-------------------------------------------
(10) days after the Opening of Escrow, Seller shall deliver, cause to be
delivered or make available to Buyer the following documents which Seller
currently has in its possession:
(1) Financial information from Property operations for the three
(3) calendar years and year-to-date, including, without limitation, income and
expense statements (if any), sales tax reports (if any), utility bills,
maintenance records, real and personal property taxes, insurance policies and
notices of corrective work;
6
<PAGE>
(2) A schedule of all permits, authorizations, licenses or
entitlements, including, without limitation, copies of notices of violations of
any kind or nature relating to the Property and delivered to Seller or the
Property within three (3) years immediately preceding the date of this
Agreement;
(3) A schedule of all management agreements, service contracts,
equipment leases, employment agreements, rights to parking spaces, franchise
agreements, patents, licenses, contract rights, transferable warranties and
guaranties, concessions, lease agreements that are known by Seller to exist and
copies of all such documents in the possession of or reasonably available to
Seller;
(4) A schedule of any Personal Property that is subject to
lease, lease purchase or purchase financing;
(5) Written evidence that Seller has obtained all necessary
approvals required under Seller's organizational documents to enter into and
consummate this Agreement;
(6) Copies of all permits, certificates of occupancy and
approvals to construct all improvements that are in Seller's possession or
reasonably available to Seller; and
(7) Copies of all environmental, structural, energy
conservation, seismic or asbestos reports, studies or tests of the Property
that are in Seller's possession and are reasonably available to Seller.
All items delivered pursuant to this Section 6(c) and not specifically
disapproved by Buyer within twenty (20) days after its receipt of the initial
submittal and/or, as applicable, supplementary or amendatory materials shall be
deemed to have been approved. Seller shall use its best efforts, at its cost and
expense, to remove, correct and/or address such objectionable items within
thirty (30) days thereafter to the satisfaction of Buyer, which shall not be
unreasonably withheld, and if Seller fails to remove, correct and/or address
such objectionable items within said period to the satisfaction of Buyer, Seller
shall notify Buyer in writing of such fact and Buyer shall have the election to
be exercised in writing within five (5) days after delivery to Buyer of such
notice of Seller of either:
(i) Terminating this Agreement, in which event Escrow
Holder shall return the Additional Deposit to Buyer and all other funds and
documents deposited therein to the Party depositing the same;
(ii) Granting Seller an extension of time in order to
effect said cure; or
7
<PAGE>
(iii) Accepting the Property subject to the objectionable items.
d. Personal Property. Not later than ten (10) days after the Opening of
-----------------
Escrow, Seller shall deliver to Buyer the Tangible Personal Property List, which
shall be current as of the day prior to delivery to Buyer. At Close of Escrow,
Seller shall transfer its right, title and interest in and to the Tangible List
by execution and delivery into Escrow of a bill of sale in the form attached
hereto as Exhibit "C". All Personal Property to be conveyed by Seller to Buyer
shall be free and clear from any security interest or other encumbrances.
e. Contracts and Miscellaneous Interests. Not later than ten (10) days
-------------------------------------
after the Opening of Escrow, Seller shall deliver to Buyer the Contract and
Miscellaneous Interest List, which shall be current as of the day prior to
delivery to Buyer. At Close of Escrow, Seller shall transfer and assign to Buyer
the Contracts and Miscellaneous Interests set forth on the Contract and
Miscellaneous Interest List, and Buyer shall assume all of Seller's obligations
under such Contracts and Miscellaneous Interests accruing from and after the
Closing Date by executing and delivering into Escrow an assignment and
assumption of contracts in the form attached hereto as Exhibit "D".
f. Continuing Representations and Warranties. All representations and
-----------------------------------------
warranties of Seller shall be true and accurate when made and at the time of
closing, and Seller shall not have breached any covenant or obligation herein
undertaken.
g. Seller's Other Deliveries into Escrow. Seller shall deliver into Escrow
-------------------------------------
prior to the Close of Escrow (i) a grant deed for the Real Property and
Improvements in the form attached hereto as Exhibit "E"; (ii) an affidavit sworn
to by the Seller's president to the effect that Seller is not a "foreign person"
as that term is defined in Section 1445 of the Internal Revenue Code; and (iii)
such other documents and items required by Escrow Holder to close the Escrow.
7. Liquidated Damages. BUYER RECOGNIZES THAT SELLER'S PROPERTY WILL BE
REMOVED FROM THE MARKET DURING THE EXISTENCE OF THIS AGREEMENT. BOTH PARTIES
AGREE THAT IF BUYER MATERIALLY BREACHES ITS OBLIGATIONS UNDER THIS AGREEMENT AND
SUCH BREACH RESULTS IN BUYER'S FAILURE TO CLOSE ESCROW, SELLER SHOULD BE
ENTITLED TO COMPENSATION FOR THE DETRIMENT DESCRIBED ABOVE, BUT THAT IT IS
EXTREMELY DIFFICULT AND IMPRACTICAL TO ASCERTAIN THE EXTENT OF SELLER'S ACTUAL
DAMAGE. IN PLACING THEIR INITIALS AT THE PLACES PROVIDED BELOW, THE PARTIES
AGREE THAT IN THE EVENT OF SUCH DEFAULT, SELLER SHALL RETAIN, AS ITS SOLE
REMEDY, $25,000 OUT OF BUYER'S ADDITIONAL DEPOSIT AND COPIES OF ALL ENGINEERING
AND ARCHITECTURAL WORK COMPLETED BY AND BELONGING TO BUYER AS LIQUIDATED DAMAGES
FOR SUCH DETRIMENT
/s/ James E. McNulty /s/ Elton Alderman
-------------------- ------------------
Seller's Initials Buyer's Initials
<PAGE>
8. Seller's Representations, Covenants, Warranties and Obligations.
---------------------------------------------------------------
a. Seller shall not impede any efforts of Buyer in obtaining
zoning, map, specific plan, environmental, landscape and lighting district,
capital improvements assessment district, and/or Community Facilities District
formation (including affirmative vote where necessary), and building approval
favorable to Buyer's contemplated plan of development for the Property; Seller
shall not be required to spend any money in fulfilling this obligation.
b. Seller knows of no encumbrances on title or rights not disclosed
by public record and/or the Title Report approved by Buyer, and is not aware of
the presence of any hazardous, toxic, or radioactive material on the Property.
Seller agrees Buyer and/or its agents may make all disclosures and file all
reports which may be required by law with respect to discovery of any hazardous,
toxic or radioactive materials as a result of such investigations and hereby
releases and holds Buyer harmless with respect to liability arising out of such
disclosure.
c. Seller knows of no threatened or pending condemnation or other
governmental proceedings or any litigation against or affecting any part of the
Property.
d. Seller has not made and will not make any commitments or
representations to governmental authorities, or adjoining or surrounding
property owners, which would interfere with Buyer's ability to develop and
utilize the Property.
e. Seller will not allow title to the Property to become further
encumbered or clouded.
f. Seller shall not take any action or cause to be taken any action
which will cause the Property to be in a condition materially different from its
condition at the date of this Agreement, and shall not dump or cause to be
dumped any material on the Property; in the event such occurs with Seller's
permission, Seller shall remove same prior to Close of Escrow at its own cost
and expense. Seller shall not enter into any agreement allowing any individual
or entity, at close of Escrow, to have any right to possession of the Property
except for buyer's right possession of the Property under the Lease.
g. Seller represents and warrants that the Property is not
encumbered by any obligation, written or oral, entered into by Seller, to
reimburse any party of the design, analysis, or construction of improvements to
the Property or the benefit of the Property which has occurred prior to the date
of this Agreement.
9
<PAGE>
receive its Additional Deposit, less escrow costs, or elect to proceed to
closing with an equitable reduction in the purchase price for the portion of the
Property condemned or to be taken at the rate of Buyer's purchase price per acre
or at the condemnation value, whichever is higher, lost on account of such
taking.
13. Brokers. Seller has made brokerage arrangements with CB Commercial Real
-------
Estate Group, Inc. and is responsible for those costs outside of Escrow,
together with the brokerage costs of Lee & Associates, which represents Buyer in
this transaction. Buyer is not responsible for any brokerage costs. No broker is
a third party beneficiary to this agreement. Buyer and Seller both represent to
each other that (except as recited in the preceding sentences) they did not use
the services of any other real estate broker or person that may claim a
commission or finder's fee with respect to this transaction, and each agrees to
indemnify, defend, and hold the other harmless from any liability arising out of
actions of the indemnifying Party that may be made against the other by any
person, firm, or corporation for the payment of a commission or finder's fee in
connection with this transaction.
14. Binding Effect. This Agreement shall bind and inure to the benefit of
--------------
the respective heirs, representatives, successors, and assigns of the Buyer and
Seller.
15. Notices. No notice, request, demand, instruction, or other document to
-------
be given hereunder to any Party shall be effective for any purpose unless (i)
personally delivered to the person at the appropriate address set forth below,
(ii) delivered by mail, sent by registered or certified mail, return receipt
requested, as follows, or (iii) transmitted by facsimile machine to the
facsimile number set forth below if concurrently delivered by another
permissible method set forth in this Section:
If to Buyer, to: Prolong Super Lubricants, Inc.
6 Thomas
Irvine, California 92618
Attn: Thomas C. Billstein, Esq.
Facsimile No.: 714-587-2704
If to Seller, to: Huck International, Inc.
c/o Thiokol Corporation
2475 Washington Blvd.
Ogden, Utah 84401-2398
Attn: Jeff Hall
Facsimile No.: 801-629-2420
Notices which are personally delivered as set forth above shall be deemed
effective upon such delivery. Notices which are mailed as set forth above shall
be deemed to have been given on
11
<PAGE>
the fifth day following deposit of same in any United States Post Office mailbox
in the state to which the notice is addressed or on the third day following
deposit in any such post office box other than in the state to which the notice
is addressed, postage prepaid, addressed as set forth above. Notices which are
transmitted by facsimile machine shall be deemed delivered upon telephonic
confirmation of receipt of the same.
16. Time. Time is of the essence for each provision of this Agreement of
----
which time is a factor.
17. Attorneys' Fees. In the event of any action or proceeding, including
---------------
an arbitration or a reference pursuant to Section 638 et seq., of the Code of
------
Civil Procedure brought by either Party against the other under this Agreement,
the prevailing Party shall be entitled to recover all costs and expenses
including the actual fees of its attorneys incurred for prosecution, defense,
consultation, or advice in such action or proceeding.
18. Computation of Periods. All periods of time referred to in this
----------------------
Agreement shall include all Saturdays, Sundays, and state or national holidays,
unless the period of time specifies business days, provided that if the date to
perform any act or give any notice with respect to this Agreement shall fall on
a Saturday, Sunday, or state or national holiday, such act or notice may be
timely performed or given on the next succeeding day which is not a Saturday,
Sunday, or state or national holiday.
19. Interpretation. The Parties hereto acknowledge and agree that each has
--------------
been given the opportunity to review this Agreement with legal counsel
independently, and/or has the requisite experience and sophistication to
understand, interpret, and agree to the particular language of the provisions
hereof. The Parties have equal bargaining power, and intend the plain meaning of
the provisions herein. In the event of an ambiguity in or dispute regarding the
interpretation of same, the interpretation of this Agreement shall not be
resolved by any rule of interpretation providing for interpretation against the
Party who causes the uncertainty to exist or against the draftsman. The laws of
the State of California shall be used to interpret this Agreement.
20. Survivability. All covenants of Buyer or Seller which are intended
-------------
hereunder to be performed in whole or in part after Close of Escrow and all
representations, warranties, and indemnities by either Party to the other, shall
survive Close of Escrow and delivery of the deed, and be binding upon and inure
to the benefit of the respective Parties.
12
<PAGE>
21. Authority of Parties. Any corporation signing this Agreement, and
--------------------
each agent, officer, director, or employee signing on behalf of such
corporation, but in his individual capacity, represents and warrants that said
Agreement is duly authorized by and binding upon said corporation. Any
individual signing this Agreement on behalf of a partnership or business entity
other than a corporation represents that such other entity has power and
authority to enter into this Agreement, and by such person's act is bound
hereby.
22. Incorporation of Exhibits by Reference. All exhibits referred to in
--------------------------------------
this Agreement are hereby incorporated herein and are an integral part hereof as
if set forth in the body of this Agreement.
23. Integration. This Agreement is the complete and total understanding
-----------
of the parties and all negotiations, offers, promises and other discussions
between the parties are merged herein. This Agreement may only be modified in
writing signed by both parties hereto.
[signature page follows]
<PAGE>
[signature page to Purchase and Sale Agreement]
IN WITNESS WHEREOF, Seller and Buyer have duly executed this Agreement as of the
date first above written.
"SELLER" "BUYER"
HUCK INTERNATIONAL, INC., PROLONG SUPER LUBRICANTS,
a Delaware corporation INC., a Nevada corporation
By: /s/ James E. McNulty By: /s/ Elton Alderman
-------------------------- ---------------------------
Name: James E. McNulty Name: PROLONG SUPER LUBRICANTS
------------------------ -------------------------
Its: Executive Vice President Its: PRESIDENT
------------------------ -------------------------
Thiokol Corporation
"S-1"
<PAGE>
Exhibit "A"
to the Purchase and Sale Agreement
Legal Description of Real Property
----------------------------------
(attached)
<PAGE>
Exhibit "A"
Legal Description of Real Property
------------------------------------
Parcel 15 in the City of Irvine, County of Orange, State of California, as shown
on a Parcel Map filed in book 112, pages 17 to 25 inclusive of Parcel Maps, in
the office of the County Recorder of said County.
Except any and all oil, oil rights, minerals, mineral rights, natural gas
rights, and other hydrocarbons by whatsoever name known, geothermal steam, and
all products derived from any of the foregoing, that may be within or under the
and, together with the perpetual right of drilling, mining, exploring and
operating therefor and storing in and removing the same from the land or any
other land, including the right to whipstock or directionally drill and mine
from lands other than those hereby, oil or gas wells, tunnels and shafts into,
through or across the subsurface of the land, and to bottom such whipstocked or
directionally drilled wells, tunnels and shafts under and beneath or beyond the
exterior limits thereof, and to redrill, retunnel, equip, maintain, repair,
deepen and operate any such wells or mines; without however, the right to drill,
mine, store, explore and operate through the surface or the upper 500 feet of
the subsurface of the land, as reserved in the deed from The Irvine Company, a
Michigan Corporation, successor by merger with Irvine Industrial Complex, a
Corporation, recorded August 8, 1979 in book 13260 page 763 of Official Records.
<PAGE>
Exhibit "B"
to the Purchase and Sale Agreement
Escrow Holder's General Instructions
------------------------------------
<PAGE>
Exhibit "B"
Escrow Holder's General Instructions
------------------------------------
GENERAL PROVISIONS
- ------------------
1. All prorations and adjustments called for in this escrow are to be made on
the basis of a 30 day month unless otherwise instructed in writing. You are
not responsible for any payment, adjustment or proration of Homeowner's
Association (or similar) charge, fee or unrecorded lien unless set forth in
the escrow instructions.
2. The phrase "close of escrow" (or COE or CE) as used in this escrow means the
date on which documents are recorded, unless otherwise specified.
3. Recordation of any instruments delivered through this escrow, if necessary
or proper for the issuance of the policy of title insurance called for, is
authorized.
4. You are authorized and instructed to furnish a copy of these instructions,
any amendments thereto and/or final closing statement to the Real Estate
Broker representing any of the parties in this transaction, also to any
lender holding or contemplating a loan against the subject property. You are
not required to submit any title report issued in connection with this
escrow to any party or agent unless directed to do so by written mutual
instructions. You may, however, do so without incurring liability to any
party for such submissions. You are hereby authorized to submit such reports
to any proposed lender.
5. All funds received in this escrow shall be deposited with other escrow funds
in a general escrow account or accounts of Commonwealth Land Title Company,
with any state or national bank, and may be transferred to any other such
general escrow account or accounts. All disbursements shall be made by
check of Commonwealth Land Title Company. Commonwealth Land Title Company
shall not be responsible for any delay in closing if funds received by
escrow are not available for immediate withdrawal.
6. These instructions shall become effective as an escrow only upon receipt
thereof by Escrow Holder as signed by all parties thereto and acceptance
by Escrow Holder.
7. You shall not be responsible or liable in any manner whatsoever for the
sufficiency or correctness as to form, manner of execution or validity of
any documents deposited in escrow, nor as to the identity, authority or
rights of any person executing the same, either as to documents of record or
those handled in this escrow. Your duties hereunder shall be limited to the
safekeeping of such money and documents received by you as escrow holder,
and for the disposition of the same in accordance with the written
instructions accepted by you in this escrow. You shall not be liable for any
of your acts or omissions done in good faith, nor for any claims, demands,
losses or damages made, claimed or suffered by any party to this escrow,
excepting such as may arise through or be caused by your willful (neglect)
or (gross) misconduct. You shall not be required to take any action in
connection with the collection, maturity or apparent outlaw of any
obligations deposited in this escrow, unless otherwise instructed.
8. You are to be concerned only with the directives specifically set forth in
the escrow instructions and amendments thereto, and are not to be concerned
or liable for items designated as "memoranda" in the within escrow
instructions. Any amendments of or supplements to any instructions
affecting this escrow must be in writing. Signatures on any documents and
instructions pertaining to this escrow indicate the signer's unconditional
approval thereof.
Page 1 of 3
<PAGE>
9. You are not to be concerned with any questions of usury in any loan or
encumbrance involved in the processing of this escrow and you are hereby
released from any responsibility or liability therefor.
10. If there is no written activity by a principal delivered to this escrow
within any six-month period after the time limit date as set forth in the
escrow instruction or written extension thereof, your agency obligation
shall terminate at your option and all documents, monies or other items
held by you shall be returned to the respective parties depositing same,
less fees and charges herein provided.
11. Upon receipt of any conflicting or unilateral instructions, other than
cancellation instructions described in paragraph 16 below, you are no
longer obligated to take any further action in connection with this
escrow until further concurring instructions are received from the
principals to this escrow.
12. In the event of failure to pay fees or expenses due you hereunder on
demand, I agree to pay a reasonable fee for any attorney's services
which may be required to collect such fees or expenses.
13. The parties hereto acknowledge that they have been advised that title
companies and Escrow Holders are not authorized to give legal advice and
that if they desire legal advice they should consult an attorney.
14. Any funds abandoned or remaining unclaimed, after good faith efforts have
been made by the escrow holder to return same to the party(ies) entitled
thereto, shall be assessed a custodian fee of $25.00 per month. After
three years the amount thereafter remaining unclaimed may escheat to the
State of California.
15. You shall have no responsibility of notifying me or any of the parties to
this escrow of any sale, resale, loan, exchange or other transaction
involving any property herein described or of any profit realized by any
person, firm or corporation in connection therewith, regardless of the
fact that such transaction(s) may be handled by you in this escrow or in
another escrow.
16. If a demand to cancel is submitted after the time limit date, any
principal so requesting you to cancel this escrow shall file notice of
demand to cancel in your office in writing. You shall within five (5)
working days thereafter mail by certified mail one copy of such notice
to each of the other principals at the addresses stated in this escrow.
Unless written objection thereto is filed in your office by a principal
within fifteen (15) calendar days after date of such mailing, you are
authorized to cancel this escrow. If written objection is filed with you,
you are authorized to hold all money and documents in this escrow and
take no further action until otherwise directed, either by the principals
mutual written instructions or by final order of a court of competent
jurisdiction. If this is a sale escrow, you may return lender's papers
and/or funds upon lender's demand.
17. In the event of cancellation of this escrow, the fees and charges due
Commonwealth Land Title Company including expenditures incurred or
authorized shall be borne by the parties hereto unless otherwise
specifically agreed to or determined by a court of competent
jurisdiction.
18. In the event of cancellation of this escrow, you are authorized to demand
payment of your charges and, on payment thereof, return documents and
monies to the respective parties depositing same or for whose benefit an
unconditional deposit was made; and to void executed instruments.
19. The principals hereto understand and acknowledge that you, as escrow
holder, have the absolute right at your election to file an action in
interpleader in a court of competent jurisdiction requiring the
principals to answer and litigate their several claims and rights among
themselves and you are authorized to deposit with the clerk of the court
all documents and funds held in this escrow. In the event such action is
filed, the principals jointly and severally agree to pay your
cancellation charges and costs, expenses, reasonable attorney's fees
which you are required to expend or incur in such interpleader action,
the amount thereof to be fixed and judgement to be rendered by the
court. Upon the filing of such action, you shall thereupon be fully
released and discharged from all obligations to further perform any
duties or obligations otherwise imposed by the terms of this escrow.
Page 2 of 3
<PAGE>
Exhibit "C"
to the Purchase and Sale Agreement
Form of Bill of Sale
--------------------
[attached]
<PAGE>
BILL OF SALE
------------
This BILL OF SALE is made as of ________________, 1998 (the "Effective
Date") by Huck International, Inc., a Delaware corporation ("Transferor"), in
favor of Prolong Super Lubricants, Inc., a Nevada corporation (the
"Transferee").
Transferor has agreed to transfer to the Transferee the tangible and
intangible personal property owned by Transferor and comprising, relating or
otherwise attendant to the real property described on Attachment "1" attached
hereto (the "Property").
For good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Transferor and the Transferee agree as follows:
Transferor does hereby transfer, assign and deliver to Transferee, all of
its right, title and interest in and to (i) all security deposits and other
refundable tenant deposits relating to the Property; (ii) the tangible personal
property owned by Transferor and located on the Property and used by it in
connection with the leasing, management, maintenance, repair and operation of
the Property, including without limitation the tangible personal property
described on Attachment "2" attached hereto; and (iii) the intangible personal
property owned by Transferor and used by it in connection with the operation of
the Property, including without limitation the intangible personal property
described on Attachment "3" attached hereto but excluding contractual rights.
This Bill of Sale shall be governed and construed in accordance with the
laws of the state in which the Property is located.
IN WITNESS WHEREOF, Transferor has executed this Bill of Sale as of the
Effective Date.
"TRANSFEROR"
HUCK INTERNATIONAL, INC.,
a Delaware corporation
By: _______________________________
Name: _____________________________
Its:_______________________________
<PAGE>
ATTACHMENT 1
TO THE BILL OF SALE
Legal Description
-----------------
<PAGE>
ATTACHMENT 2
TO THE BILL OF SALE
Tangible Personal Property
--------------------------
[TBD]
<PAGE>
ATTACHMENT 3
TO THE BILL OF SALE
Intangible Personal Property
----------------------------
[TBD]
<PAGE>
Exhibit "D"
to the Purchase and Sale Agreement
Form of Assignment and Assumption of Contracts
----------------------------------------------
[attached]
<PAGE>
ASSIGNMENT OF CONTRACTS
-----------------------
For value received, the receipt and adequacy of which is hereby
acknowledged, HUCK INTERNATIONAL, INC., a Delaware corporation ("Assignor")
hereby assigns to PROLONG SUPER LUBRICANTS, INC., a Nevada corporation
("Assignee"), all of Assignor's right, title and interest in and to the
contracts and miscellaneous interests listed on Attachment "1" attached hereto.
By such assignment, Assignor delegates to Assignee all of Assignor's duties and
obligations under such contracts arising from and after the "Effective Date"
(defined below).
By executing this assignment, Assignee agrees to assume and perform all
duties and obligations of Assignor under such contracts arising from and after
the date hereof.
Dated: , 1998 (the "Effective Date").
--------------
"ASSIGNOR"
HUCK INTERNATIONAL, INC.,
a Delaware corporation
By:
-------------------------------------
Name:
-----------------------------------
Its:
-----------------------------------
"ASSIGNEE"
PROLONG SUPER LUBRICANTS, INC.,
a Nevada corporation
By:
-------------------------------------
Name:
-----------------------------------
Its:
-----------------------------------
<PAGE>
Attachment "1"
to the Assignment of Contracts
Contracts and Miscellaneous Interests List
------------------------------------------
<PAGE>
Exhibit "E"
to the Purchase and Sale Agreement
Form of Grant Deed
------------------
[attached]
<PAGE>
RECORDING REQUESTED BY
AND WHEN RECORDED RETURN TO,
AND MAIL ALL TAX STATEMENTS TO:
Prolong Super Lubricants, Inc.
6 Thomas
Irvine, California 92618
Attn:__________________________
________________________________________________________________________________
[space above line for Recorder's Use]
GRANT DEED
----------
FOR VALUABLE CONSIDERATION, receipt of which is hereby acknowledged,
HUCK INTERNATIONAL, INC., a Delaware corporation ("Grantor"), hereby grants to
PROLONG SUPER LUBRICANTS, INC., a Nevada corporation ("Grantee"), the following
described real property in the City of Irvine, County of Orange, State of
California:
See Attachment "1" attached hereto and incorporated herein by reference.
SUBJECT TO:
1. Non-delinquent real and personal property taxes and assessments.
2. The lien of supplemental taxes, if any, assessed pursuant to Chapter
3.5 of the California Revenue and Taxation Code.
3. All covenants, conditions, restrictions, easements, liens,
encumbrances, claims, rights and other matters recorded as a matter of public
record.
<PAGE>
IN WITNESS WHEREOF, Grantor has caused its name to be affixed hereto and
this instrument to be executed by its general partner thereunto duly authorized.
Dated: ________________________, 1998
"GRANTOR"
HUCK INTERNATIONAL, INC.,
a Delaware corporation
By:__________________________________
Name:________________________________
Its:_________________________________
2
<PAGE>
Attachment "1"
to Grant Deed
Legal Description - Real Property
---------------------------------
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF ________________ )
On _____________________, 199__, before me, the undersigned, appeared
___________________________________________________, personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person(s) whose
name(s) is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies), and
that by his/her/their signature(s) on the instrument the person(s), or the
entity upon behalf of which the person(s) acted, executed the within instrument.
WITNESS my hand and official seal.
----------------------------
Notary Public
<PAGE>
EXHIBIT 10.18
CONFIDENTIAL PORTIONS OMITTED
[LETTERHEAD OF COMMONWEALTH SERVICE & SUPPLY CORP.]
22 November 1997
Mr. Fred Petrivelli
Prolong Super Lubricants
1210 North Barstien Way
Anaheim, CA 92806
Re: 1998 Sponsorship Program for Jim Yates Racing
Dear Fred:
Thanks for taking the time during Pomona to discuss the future relationship
between Prolong Super Lubricants and Commonwealth Service & Supply Corporation
T/A Jim Yates Racing. We have enjoyed a great relationship during the past year
and I truly look forward to continuing through the next three years.
To summarize what we have discussed, I have listed below our associate
sponsorship agreement for 1998, 1999, and 2000 in addition to a bonus program
for the same three years.
BASE SPONSORSHIP:
1998 $[ * ]
1999 $[ * ]
2000 $[ * ]
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE
COMMISSION.
<PAGE>
Payment:
Payment of the aforementioned base sponsorships will be due on January 15 of
each year of the agreement.
Bonus Program:
World Championship $[ * ]
Runner Up $[ * ]
Event Win $[ * ]
World Record $[ * ]
Payment:
Commonwealth Service & Supply Corporation T/A Jim Yates Racing will invoice
Prolong for bonus payments earned. Payments will be due within 15 days of the
invoice date.
Please indicate date your acceptance of this agreement by signing below. I will
then sign a copy and return it to you for your records. I look forward to
another successful racing season and appreciate your involvement in our program.
Best Regards,
/s/ Jim Yates
Jim Yates
Commonwealth Service & Supply Corporation
T/A Jim Yates Racing
/s/ Fred S. Petrivelli 12/19/97
- ---------------------------------- -------------------------
Fred S. Petrivelli, VP Date
Prolong Super Lubricants
/s/ Jim Yates 12/26/97
- ---------------------------------- -------------------------
Jim Yates Date
Commonwealth Service & Supply
Corp. T/A Jim Yates Racing
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE
COMMISSION.
<PAGE>
December 17, 1997
Jim Yates Addendum
In exchange for the 1998 sponsorship program for Jim Yates Racing, Prolong Super
Lubricants will receive:
a. Corporate Signage location per attached picture.
-----------------
b. Team Uniform/Equipment-Prolong Super Lubricants logo to be in prominent
----------------------
locations on the race vehicle and team and driver uniforms.
c. Driver Appearances-6 2-hour appearances at Prolong Super Lubricants
------------------
events, based on mutually agreed upon schedule.
d. Industry Public Relations-Jim Yates agrees to work in conjunction with
-------------------------
Prolong Super Lubricants sales to secure after-market distribution through
phone and written correspondence based on use of Prolong Super Lubricants
products with race team and marketing product through Yates Auto Parts.
e. Electronic and Print Advertising-Jim Yates Racing allows Prolong Super
--------------------------------
Lubricants to use likeness in advertising.
f. Feature Products-Yates Auto Parts will feature all Prolong Super
----------------
Lubricants products through their store distribution network.
g. Joint Marketing-Jim Yates to facilitate joint marketing efforts between
---------------
Split Fire Peak and Prolong Super Lubricants.
<PAGE>
EXHIBIT 10.19
CONFIDENTIAL PORTIONS OMITTED
PROLONG SUPER LUBRICANTS, INC.
SERVICE AND ENDORSEMENT CONTRACT
--------------------------------
This Agreement is made this 1st day of November, 1996, by and between
Prolong Super Lubricants, Inc., a Nevada corporation ("Prolong"), and Smokey
Yunick, an individual ("Yunick"). Prolong and Yunick are hereinafter at times
referred to individually as the "Party" and collectively as the "Parties".
RECITALS
--------
A) Prolong is in the business of manufacturing and marketing hydrocarbon
based lubricant products (the "Products"). The defined term "Products" shall
include all enhancements, improvements, modifications and changes to the
existing Products;
B) Yunick has obtained substantial public recognition in the automotive
racing business and is often times referred to as the "world's greatest
mechanic."
C) Prolong believes it would be in its best interest and Yunick believes
it would be in his best interest for Prolong to engage Yunick and to use
Yunick's likeness, name, photograph, voice, signature, initials and endorsements
(the "Promotional Materials") in marketing the Products.
NOW THEREFORE, in consideration of the foregoing Recitals and the terms and
conditions hereinafter set forth, the Parties hereby agree as follows:
AGREEMENT
---------
1. Services.
--------
1.1 Use of Promotional Materials. Yunick hereby grants to Prolong
----------------------------
the exclusive right and license throughout the world to use his likeness, name,
photograph, voice, signature, initials and endorsements in the promotion and
sale of the Products during the term of this Agreement. The Promotional
Materials may be used by Prolong in any advertising now existing or hereafter
used in any and all media forms during the term, and only during the term, of
this Agreement. The Promotional Materials shall be used to promote the sale of
the Products. The exclusivity of Section 1.1 shall be with respect to Products
only. Yunick shall be free to grant rights throughout the world to use his
likeness, name, photograph, voice, signature, initials and endorsements in the
promotion and sale of other products so long as such other products are not
Competitive Products as hereinafter defined in Section 9.
1.2 Personal Services. Yunick agrees to be available for not less
-----------------
than fifty (50) days during each twelve (12) month period that this Agreement is
in effect ("Service Day" or
1
<PAGE>
"Service Days"). If Yunick is required to travel on a date immediately preceding
or following the date of any personal appearance either the whole day or half of
each such day shall be counted as a Service Day. A travel day shall be counted
as half of a Service Day if Yunick's travel begins by his departure from his
home or office as the case may be after 2:00 p.m. on the date of departure or
ends by return to his home or office as the case may be prior to 2:00 p.m. on
the return date. Except as noted in the preceding sentence, travel days shall be
counted as a full Service Day. The services to be provided by Yunick shall
consist of participation in any media or promotional events, selling, taping or
any other activity reasonably related to the marketing and promotion of the
Products. Yunick agrees to act as a goodwill ambassador for Prolong and the
Products and to take advantage of opportunities to talk about and promote
Prolong and the Products during the course of his day-to-day activities. As part
of said promotional activities Yunick agrees to wear Prolong's apparel,
including shirts and jackets, but excluding hats, when such apparel would be
reasonably appropriate based on the nature of the event when Yunick is in
attendance at race car events. The duties set forth in this Section 1.2 shall
hereinafter be referred to as the "Services". Yunick shall be compensated for
the Services in accordance with the terms and conditions set forth in Section 7
below.
2. Availability. The dates and times when Yunick shall be personally
------------
available to provide the services on behalf of Prolong shall be determined by
mutual agreement between the Parties. Prolong shall make every effort to notify
Yunick no less than thirty (30) days in advance of any personal appearances and
Yunick shall not have the right to refuse said appearances so long as they do
not conflict with any items on his personal schedule. Yunick shall use his best
efforts to honor any request by Prolong to make an appearance. Prolong
acknowledges that Yunick also has commitments to American Racing Products and
may have other commitments that he is required to honor, therefore, Prolong will
use its best efforts to cooperate with Yunick in allowing him to comply with
said commitments so long as said commitments do not interfere with the ability
of Yunick to be reasonably available to provide the Services.
3. Approval by Yunick. All printed promotional materials, printed
------------------
advertising, press releases and any other communicative materials utilizing
Yunick's photographic image, name, signature, narration, endorsement or initials
shall not be derogatory to the image of Yunick as reasonably determined by
Yunick, Yunick's authorized agent, prior to release, publishing, broadcasting or
other dissemination. Prolong agrees to provide Yunick copies of all such
materials for approval no later than five (5) days before any such release or
dissemination. Yunick agrees to respond promptly to every such request for
approval, but in any case shall respond no later than five (5) days after
receipt of such request for approval. If no response is received by Prolong
within such five-day period, such non-response shall be deemed to constitute
approval. Any approval to be provided by Yunick shall not be unreasonably
withheld.
4. Professional Conduct. Yunick hereby agrees to provide the Services
--------------------
pursuant to this Agreement in a professional manner that will reflect favorably
on Prolong and others associated with Prolong, and on the Products. Yunick
agrees to use his best efforts to promote
2
<PAGE>
Prolong and the Products during the term of this Agreement and will take every
reasonable opportunity during the term of this Agreement when and where
reasonably appropriate to promote Prolong and the Products. Yunick agrees to
conduct himself with due regard to public conventions and morals and further
agrees not to do or commit any act or thing that would reasonably tend to
derogate or detract from the goodwill of Prolong or the Products.
5. Use of Promotional Materials. Use of the Promotional Materials shall
-----------------------------
be subject to approval by nick as set forth in Section 3 above. The Promotional
Materials shall not be used in any way that would diminish the goodwill
associated therewith or in any way damage the image or reputation of Yunick.
6. Term. The Promotional Materials shall be available to Prolong and the
-----
Services shall be provided to Prolong for a period of four (4) years and three
(3) three months, beginning on November 1, 1996 and ending on January 31, 2000
(the "Term"). Prolong may terminate this Agreement under the provision of
Section 13 of this Agreement prior to the end of the Term if Yunick is unable to
perform the Services for any reason or if there is a material breach of this
Agreement by Yunick. Any compensation to be paid to Yunick shall be prorated
through the date of termination subject to any damages that may be offset by
Prolong.
7. Compensation.
-------------
7.1 Compensation Amount. Prolong shall compensate Yunick for the
--------------------
right to use the Promotional Materials and the Services by paying him the
following compensation as set forth opposite each period set forth below (the
"Consideration"):
Period Amount
------ ------
11/1/96 - 1/31/97 $[ * ]
2/1/97 - 1/31/98 $[ * ]
2/1/98 - 1/31/99 $[ * ]
2/1/99 - 1/31/2000 $[ * ]
7.2 Payment Terms. The Consideration for the period from November 1,
--------------
1996 through January 31, 1997 shall be concurrent with the execution of this
Agreement. Thereafter, the annual amounts hall be paid on a semi-annual basis
as follows:
Date Payment
---- -------
2/1/97 $[ * ]
8/1/97 $[ * ]
2/1/98 $[ * ]
8/1/98 $[ * ]
2/1/99 $[ * ]
8/1/2000 $[ * ]
3
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE
COMMISSION.
<PAGE>
7.3 Additional Personal Appearance Fees. In the event that Yunick
------------------------------------
and Prolong each agree to Service Days in excess of fifty (50) days during each
twelve (12) month period during the Term, Yunick shall be compensated for the
additional days at the rate of [ * ][ * ] Dollars ($[ * ]) per day. If the
Services include radio or television advertising or promotions that will be
retelecast, Yunick shall be entitled to additional Compensation which shall be
agreed upon by the Parties prior to performance of the Services related thereto.
8. Expenses. Prolong shall pay Yunick for airfare and hotel expenses
---------
associated with his performance of the Services plus a [ * ] Dollar ($[ * ]) per
diem allowance (the "Per Diem Allowance") for food, cabs and miscellaneous
travel expenses (the "Expenses"). The Per Diem Allowance will be [ * ] for half
Service Days as defined in Section 1.2. Yunick may elect to have his wife
travel with him and Prolong shall pay for her airfare and the reasonable
additional hotel expenses (based on double occupancy) associated with said
travel. The Per Diem Allowance shall, however, be deemed to cover both the
travel of Yunick and his wife.
9. Noncompetition by Yunick. Yunick agrees that he will not endorse any
-------------------------
competitive products during the Term of this Agreement. The competitive
products shall include engine treatments, transmission treatments, fuel
conditioners, penetrant sprays, precision oils and greases.
10. Confidentiality. In the course of working with Prolong in providing
----------------
the Services as set forth in this Agreement, Yunick may have access to certain
confidential information and materials which may be disclosed verbally or in
writing to Yunick concerning Prolong and/or the Products (the "Confidential
Information"). Yunick hereby agrees not to utilize or disclose any Confidential
Information except as required in carrying out the Services and shall take
reasonable steps to protect any public disclosure of the Confidential
Information. Yunick shall, during the Term of this Agreement and at any time
thereafter, hold in confidence and not disclose to any person or entity without
the express prior written authorization of Prolong, names or addresses of any of
Prolong's customers, Prolong's past or prospective dealings with its customers;
the parties, dates or terms, if any, of Prolong's contracts; any information,
trade secrets, systems, processes or business methods, or any other secret
confidential matters relating to the customers or business affairs of Prolong or
any companies affiliated with Prolong. All written material or other property,
tangible or intangible, provided to Yunick, or developed in conjunction with
Yunick, that contain proprietary rights and materials, including copyrights
therein, arising out of or resulting from the performance of this Agreement
shall belong to Prolong and shall not be disseminated or used in any way by
Yunick except as expressly set forth herein. Upon termination of this
Agreement, all said materials shall be returned by Yunick to Prolong. Such
information and materials shall not include any general marketing information or
other materials or information that is generally known by or has been
disseminated to the public.
Prolong's rights and interests (including all rights of copyright print) in
and to the Promotional Materials bearing confidential information and the
results and proceeds of the
4
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE
COMMISSION.
<PAGE>
Services hereunder are at times referred to hereinafter as the "Proceeds". The
Proceeds are a "work made for hire" for Prolong to be used by Prolong in its
promotional and marketing materials, commercials and ads in any form of
marketing media and, therefore, are "specially ordered and commissioned" for use
as a part of the marketing activities and promotional works of Prolong.
The parties are cognizant that the information exchanged between the
parties in accordance with the performance of this Agreement is valuable
property. Accordingly, the parties agree that each shall take all reasonable
efforts to hold in confidence all such information given each party by the other
under this Agreement. This obligation shall endure permanently as to all such
information, except that which:
(a) Becomes a part of the public domain or of the public knowledge
through no fault of the party receiving such information;
(b) Was in the possession of the party to whom such information
was disclosed prior to such disclosure, and such possession by the party
receiving disclosure is documented prior to the date of the disclosure;
(c) Is received by the party to which such disclosure is made
lawfully and properly from a third party;
(d) Must be disclosed to a governmental agency or designee to
comply with laws or regulations relating to health or safety or other
governmental purpose;
(e) Is and can be shown by competent proof to have been
independently developed by one party without recourse to any proprietary
information disclosed to the other party.
11. Independent Contractor Status. Yunick hereby declares that Yunick is
-----------------------------
engaged in an independent business and Yunick will perform the Services as an
independent contractor and not as agent, employee or servant of Prolong. In no
event shall Yunick be allowed to engage any other individual to carry out the
duties of Yunick pursuant to this Agreement. Yunick shall be responsible for the
payment of any state or federal withholding tax, social security tax or other
payroll tax, and worker's compensation insurance related to the performance of
the Services.
12. Indemnification. Prolong agrees for itself and its successors and
---------------
assignors to defend, hold harmless and indemnify Yunick, his officers, agents,
employees and their successors and assigns, and anyone acting on his behalf,
from and against any and all losses, costs and damages, expenses or claims
(including attorney's fees), whether such claims are groundless or to, arising
out of any claim, including but not limited to claims of personal injury, death,
or damage to property, whether real or personal, or false advertising or
misrepresentation, unless such claims arises from Yunick's misconduct or
negligence. The
5
<PAGE>
intent of this indemnification Section it to cause Prolong to indemnify and hold
harmless Yunick from any and all third-party claims of any nature arising out
of, or related to this Agreement or performance hereunder, unless such claims
arise from the breach of this Agreement by Yunick or the misconduct or
negligence of Yunick.
13. Termination.
-----------
(a) Termination by Either Party. Either Party may, upon 30 days'
---------------------------
notice to the other of breach and a subsequent failure to correct such breach
within 30 days after such written notice, terminate further performance under
this Agreement, while maintaining the right to require performance by the other
party of those obligations occurring prior to the date of termination as
determined herein. The payment of all compensation earned by Yunick under this
Agreement will fully discharge all of Prolong's obligations hereunder.
(b) Cure. At any time that Prolong is in breach of the compensation
----
terms of this Agreement, Prolong shall have thirty (30) days to cure such breach
after 30 days' written notice from Yunick of the breach. In the event of
failure to cure within the time limits provided hereunder, in addition to such
other remedies to which Yunick may be entitled, Yunick shall have the right to
halt use of the Promotional Materials by Prolong and cease providing the
Services thereafter, in which event Prolong agrees it shall cease using in any
way the Promotional Materials as defined in Section 1.1 and agrees to recall
all outstanding Promotional Materials.
At any time that Yunick is in breach of the Serveces terms of
this Agreement, Yunick shall have thirty (30) days to cure such breach after 30
days' written notice from Prolong of the breach. In the event of failure to
cure within the time limits provided hereunder, this Agreement shall terminate
and come to an end.
14. General Provisions.
------------------
(a) Notices. All notices pertaining to this Agreement shall be in
-------
writing and shall be transmitted either by facsimile, overnight mail, personal
hand delivery or through the facilities of the United States Post Office,
certified or registered mail, return receipt requested. The addresses set
forth below for the respective Parties shall be the places where notices shall
be sent, unless written notice of a change of address is given.
Prolong Super Lubricants, Inc. Smokey Yunick
1210 North Barsten Way c/o Henry Yunick Revocable Trust
Anaheim, CA 92806 957 N. Brook Street
Daytona Beach, FL 32117
Any such notices shall be deemed to be given as of the date so
delivered.
(b) Attorneys' Fees. In the event that any legal, declaratory, self
---------------
help, or
6
<PAGE>
equitable action or arbitration or any other action not considered to be a legal
or equitable action is commenced between the Parties hereto or their personal
representatives concerning any provision of this Agreement or the rights and
duties of any person in relation thereto, the prevailing Party shall be
entitled, in addition to such other relief that may be granted, to a reasonable
sum for his or their attorney's fees and any other costs and expenses relating
thereto.
(c) Governing Law. The validity, interpretation, construction
-------------
and performance of this Agreement shall be controlled by and construed under the
laws of the State of Florida. In the event of any litigation arising out of any
dispute in connection with this Agreement, the Parties hereby consent to the
jurisdiction of the Florida courts with venue in Florida which is the agreed
upon location where the Parties entered into this Agreement.
(d) Binding Effect. Each and every covenant, term, provision
--------------
and agreement herein contained shall be binding upon and inure to the benefit of
the Parties hereto and their respective heirs, successors, assigns and legal
representatives and shall survive the termination of this Agreement where
appropriate to carry out the terms thereof.
(e) Amendments, Modifications and Waivers. No amendment or
-------------------------------------
modification of this Agreement or any exhibit or schedule hereto shall be valid
unless made in writing and signed by the party to be charged therewith. No
waiver of any provision of this Agreement shall be deemed, or shall constitute,
a waiver of any other provision, whether or not similar. No waiver shall be
binding unless executed in writing by the party making the waiver.
(f) Assignment. The interest of Yunick in this Agreement is
----------
personal and shall not be assigned, transferred, shared or divided in any manner
by Yunick.
(g) Severability. Every provision of this Agreement is
------------
intended to be severable. If any terms or provisions hereof are illegal or
invalid for any reason whatsoever, such illegality shall not affect the validity
of the remainder of the Agreement.
(h) Parties in Interest. Nothing in this Agreement shall confer
-------------------
any rights or remedies under or by reason of this Agreement on any persons other
than the Parties and their respective successors and assigns nor shall anything
in this Agreement relieve or discharge the obligation or liability of any third
person to any party to this Agreement, nor shall any provision give any third
person any right of subrogation or action over or against any party to this
Agreement.
(j) Entire Agreement. This Agreement contains the entire
----------------
Agreement between the Parties hereto, and supersedes any prior written or oral
agreement between the Parties concerning the subject matter contained herein.
There are no representations, agreements, arrangements or understandings, oral
or written between the Parties hereto, relating to the subject matter contained
in this Agreement, which are not fully expressed herein.
7
<PAGE>
This Agreement is adopted and made effective as of the date first set
forth above as evidenced by the signatures of the Parties hereto.
PROLONG SUPER LUBRICANTS, INC.
By: /s/ Elton Alderman
-------------------------
Elton Alderman, President
/s/ Smokey Yunick
- ----------------------------
Smokey Yunick
8
<PAGE>
[LETTERHEAD OF SMOKEY'S AUTOMOTIVE SERVICE]
These are the things I agree to do for Prolong regarding the contract agreement
ending 1/31/2000.
(AA) 50 days of personal services
(A) Seminars
(B) Personal appearances
(C) Autographs
(D) Sell Products
(E) Recommend Products
(F) Offer free advice to Prolong Customers
(G) Be Spokesman
(H) Offer constructive criticism or advise Prolong
(I) Try to develop new uses and markets for products.
(J) Develop a simple, accurate explanation on why Prolong works
and why it is better.
(K) Use of my name, picture & comments on products.
(L) Spend approximately 5 hours a week at shop telling the Prolong
story.
(M) Write technical articles.
(N) Work at races with Prolong Cars.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS'
To the Board of Directors
Prolong International Corporation
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (333-41567) of our report dated February 23, 1996 related
to the consolidated financial statements of Prolong International Corporation
for the year ended December 31, 1995 included in the Annual Report on Form 10-K
of Prolong International Corporation.
/s/ Corbin & Wertz
CORBIN & WERTZ
Irvine, California
March 20, 1998
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-41567 on Form S-8 of our report dated March 4, 1998, appearing in this
Annual Report on Form 10-K of Prolong International Corporation for the year
ended December 31, 1997.
/s/ DELOITTE & TOUCHE, LLP
Costa Mesa, California
March 20, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,180,983
<SECURITIES> 0
<RECEIVABLES> 4,123,295
<ALLOWANCES> 242,724
<INVENTORY> 1,300,691
<CURRENT-ASSETS> 13,323,527
<PP&E> 283,126
<DEPRECIATION> 63,443
<TOTAL-ASSETS> 13,748,650
<CURRENT-LIABILITIES> 4,039,796
<BONDS> 0
0
0
<COMMON> 25,465
<OTHER-SE> 9,683,389
<TOTAL-LIABILITY-AND-EQUITY> 13,748,650
<SALES> 29,846,795
<TOTAL-REVENUES> 29,846,795
<CGS> 5,735,238
<TOTAL-COSTS> 5,735,238
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,185
<INCOME-PRETAX> 3,569,917
<INCOME-TAX> 1,437,364
<INCOME-CONTINUING> 2,132,553
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,132,553
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
