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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________to______________________
Commission File No 0-22803
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PROLONG INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Nevada 6 Thomas 74-2234246
(State or other jurisdiction Irvine, CA 92618 (IRS Employer Identification No.)
of incorporation or (Address of principal executive
organization) offices) (Zip Code)
</TABLE>
(949) 587-2700
(Registrant's telephone number,
including area code)
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.
(1) Yes [X] No [_]
(2) Yes [X] No [_]
There were 25,464,500 shares of the registrant's common stock ($0.001 par
----------
value) outstanding as of June 30, 1998.
Page 1 of 13 pages
Exhibit Index on Sequentially Numbered Page 11
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<PAGE>
PROLONG INTERNATIONAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART 1 FINANCIAL INFORMATION Page
<S> <C> <C>
Item 1: Financial Information
Consolidated Condensed Balance Sheets -
March 31, 1998 and December 31, 1997........................................ 3
Consolidated Condensed Statements of Income - Three months
ended March 31, 1998 and 1997............................................... 4
Consolidated Condensed Statements of Cash Flows -
Three months ended March 31, 1998 and 1997.................................. 5
Notes to Consolidated Condensed Financial Statements........................ 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................... 7
PART II OTHER INFORMATION
Item 1: Legal Proceedings........................................................... 11
Item 6: Exhibits and Reports on Form 8-K............................................ 11
Signatures.................................................................. 13
</TABLE>
2
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Item 1. Financial Information
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,329,077 $ 6,180,983
Accounts receivable, net 7,927,142 3,880,571
Inventories 2,711,185 1,300,691
Prepaid expenses 991,126 711,242
Prepaid television time 367,039 1,022,144
Advances to employees 245,570 227,896
----------- -----------
Total current assets 15,571,139 13,323,527
PROPERTY AND EQUIPMENT, net 433,004 219,683
OTHER ASSETS 74,540 82,724
DEPOSITS 154,787 122,716
----------- -----------
TOTAL ASSETS $16,233,470 $13,748,650
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,868,936 $ 1,074,098
Accrued expenses 1,727,735 1,663,321
Income taxes payable 1,297,684 1,278,684
Deferred income taxes 23,693 23,693
----------- -----------
Total current liabilities 4,918,048 4,039,796
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 shares issued and outstanding 25,465 25,465
Additional paid-in capital 7,393,451 7,393,451
Retained earnings 3,896,506 2,289,938
----------- -----------
Total stockholders' equity 11,315,422 9,708,854
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $16,233,470 $13,748,650
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
3
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PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
NET REVENUES $10,848,742 $ 5,784,089
COST OF GOODS SOLD 2,005,414 1,419,024
----------- -----------
GROSS PROFIT 8,843,328 4,365,065
OPERATING EXPENSES:
Selling expenses 4,740,601 3,343,242
General and administrative expenses 1,342,704 591,560
----------- -----------
Total operating expenses 6,083,305 3,934,802
----------- -----------
OPERATING INCOME 2,760,023 430,263
OTHER INCOME, net:
Interest expense (977) (750)
Interest income 60,522 52,179
----------- -----------
Total other income, net 59,545 51,429
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,819,568 481,692
PROVISION FOR INCOME TAXES 1,213,000 202,044
----------- -----------
NET INCOME $ 1,606,568 $ 279,648
=========== ===========
NET INCOME PER SHARE:
Basic $ 0.06 $ 0.01
=========== ===========
Diluted $ 0.06 $ 0.01
=========== ===========
WEIGHTED AVERAGE COMMON SHARES:
Basic 25,464,500 25,479,728
=========== ===========
Diluted options outstanding 425,755 -
Diluted 25,890,255 25,479,728
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements
4
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PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1998 1997
----------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,606,568 $ 279,648
Adjustments to reconcile net income to net cash provided by (used)
in operating activities :
Depreciation and amortization 20,535 17,521
Provision for doubtful accounts 88,571 (38,730)
Reserve for obsolesence 22,500 88,271
Common stock issued in exchange for services 18,750
Changes in assets and liabilities:
Accounts receivable (4,135,142) 71,669
Inventories (1,432,994) (1,224,710)
Prepaid expenses (279,884) (145,000)
Prepaid television time 655,105 62,253
Deposits (32,071)
Accounts payable 794,838 (91,580)
Accrued expenses 64,414 (134,366)
Income taxes payable 19,000 (42,356)
----------- ------------
Net cash used in operating activities (2,608,560) (1,138,630)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (225,672) (22,979)
Employee advances (17,674) (18,841)
----------- ------------
Net cash used in investing activities (243,346) (41,820)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable - (713)
Proceeds from subscriptions receivable - 150,000
Proceeds from issuance of common stock - 12,500
----------- ------------
Net cash provided by financing activities - 161,787
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,851,906) (1,018,663)
CASH AND CASH EQUIVALENTS, beginning of period 6,180,983 5,063,585
----------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 3,329,077 $ 4,044,922
=========== ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 1,194,000 $ 245,000
=========== ============
Interest paid $ 977 $ 750
=========== ============
</TABLE>
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
During the first quarter of 1997, the Company completed the following
transactions: Issued 37,500 shares of common stock in exchange for services
valued at $18,750. Issued 60,000 shares of common stock previously committed.
See notes to consolidated condensed financial statements
5
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PROLONG INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS
Prolong International Corporation (PIC) is a Nevada corporation organized on
August 24, 1981 as Giguere Industries Incorporated (Giguere). Giguere
remained dormant from 1987 to June 21, 1995, when, pursuant to stockholders'
action, it acquired 100% of the outstanding stock of Prolong Super
Lubricants, Inc., a Nevada corporation (PSL), then changed its name to
Prolong International Corporation. 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 a
license agreement, of a patented line of high-performance lubricants.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
include the accounts of PIC and its wholly-owned subsidiaries, PSL and
Prolong Foreign Sales Corporation. All significant intercompany accounts
have been eliminated in consolidation. These financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments, including normal recurring accruals, considered necessary
for a fair presentation have been included. Operating results for the three
months ended March 31, 1998 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1998. For further
information, refer to the Form 10-K for the year ended December 31, 1997
filed by the Company with the Securities and Exchange Commission.
3. CONTINGENCIES
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.
4. SUBSEQUENT EVENT
On February 23, 1998, PSL exercised its option to purchase the office and
warehouse facility currently under lease and entered into a related purchase
agreement with the facility owner. The purchase price is $2,690,000 and the
transaction closed on April 30, 1998. PSL utilized $269,000 in cash on hand
and borrowed funds in the amounts of $1,692,000 and $729,000, respectively,
from Bank of America. Such loans are secured by the purchased land and
building. The loan from Bank of America in the amount of $729,000 is
intended to be repaid by the Company in mid-July 1998 with the proceeds of a
loan from the United States Small Business Administration which the Company
is currently in the process of finalizing. The loan in the amount of
$1,692,000 is required to be repaid in 119 monthly installments of
$13,050.32 each, and bears interest at a rate of 7.875% per year.
6
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ITEM 2:
- -------
PROLONG INTERNATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
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<CAPTION>
Percentage of
Net Revenues
Three Months Ended
March 31,
------------------
1998 1997
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<S> <C> <C>
Net revenues 100.0 100.0
Cost of goods sold 18.5 24.5
------------------
Gross profit 81.5 75.5
Selling expenses 43.7 57.8
General and administrative expenses 12.4 10.2
------------------
Operating income 25.4 7.5
Other income .6 .8
------------------
Income before income taxes 26.0 8.3
Provision for income taxes 11.2 3.5
------------------
Net income 14.8 4.8
==================
</TABLE>
Three Months Ended March 31, 1998 vs. Three Months Ended March 31, 1997
Net revenues for the three months ended March 31, 1998 were approximately
$10,849,000 as compared to approximately $5,784,000 for the comparable period of
the prior year, an increase of $5,065,000 or 87.6%. Revenues for the three month
period ended March 31, 1998 were derived from the following sources: Direct
response infomercial sales of $1,957,000; retail sales of $8,055,000; industrial
sales of $316,000; and, international and other sales of $521,000. Revenues for
the three month period ended March 31, 1997 were derived from the following
sources: Direct response
7
<PAGE>
infomercial sales of $3,757,000; retail sales of $1,354,000; industrial sales of
$444,000; and, international and other sales of $229,000.
During the first quarter of 1998, retail sales were 74.2% of total revenues
while direct response infomercial sales comprised 18.0% of total revenues.
During the first quarter of 1997, direct response infomercial sales comprised
65.0% of total revenues while retail sales were 23.4%. This shift in the mix of
sales resulted from the 1998 strategy to aggressively pursue sales to retail
chain stores, while continuing to air the direct response infomercial, albeit
less frequently.
Cost of goods sold for the three months ended March 31, 1998 was approximately
$2,005,000 as compared to $1,419,000 for the comparable period of the prior
year, an increase of $586,000 or 41.3%. This increase was mainly attributable
to the increase in sales. As a percentage of sales, cost of goods sold
decreased from 24.5% in 1997 to 18.5% in 1998. This decrease was mainly
attributable to increased efficiencies in the outside production processes and
volume discounts in the applicable period in 1998 relative to the higher costs
of goods associated with lower volumes of production in 1997. Management does
not anticipate that further significant reductions are likely in the future.
Selling expenses of $4,741,000 for the three months ended March 31, 1998
represented an increase of $1,398,000 over the comparable period of the prior
year. This 41.8% increase was primarily the result of marketing allowances to
retail customers, increased endorsement and sponsorship payments, royalties and
commissions as a result of increased sales, promotional activities to promote
product awareness and expenditures for print advertising. Selling expenses as a
percentage of sales were 43.7% for the three months ended March 31, 1998 versus
57.8% for the comparable period of the previous year. In 1997, selling expenses
consisted primarily of purchases of television air time, royalties and
commissions. The 1998 expenditures for selling costs included a reduced amount
of air time purchases and a full array of other expenditures discussed above.
However, some of these endorsement, sponsorship and advertising expenditures are
being spread over a larger sales volume in 1998, thereby reducing selling
expenses as a percentage of revenues.
General and administrative expenses for the three months ended March 31, 1998
were approximately $1,343,000 as compared to $592,000 for the three months ended
March 31, 1997, an increase of $751,000 or 126.9%. This increase is primarily
attributable to salaries for new employees, employee benefits, costs associated
with the facility relocation, and other administrative costs necessary to build
the support resulting from the increased volume of sales.
For the three months ended March 31, 1998, the Company generated net interest
income of approximately $60,000 as compared to approximately $51,000 for the
comparable period in 1997. This increase is attributable to slightly higher
yields in the first quarter of 1998 versus 1997 on cash balances in interest
bearing accounts.
8
<PAGE>
Net income for the three month period ended March 31, 1998 was approximately
$1,607,000 as compared to approximately $280,000 for the comparable period in
the prior year, an increase of $1,327,000. The increase is a result of the
factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company utilizes funds generated from operations to meet its working capital
requirements, which consist mainly of inventory purchases and to support the
increasing receivables balance which is a result of the change in the mix of
sales. At March 31, 1998, the Company had net working capital of $10,653,000 as
compared to $9,284,000 at December 31, 1997 or an increase of $1,369,000. The
Company obtained a $4,000,000 line of credit with a bank in July 1997,
collateralized by inventories and receivables. There were no borrowings
outstanding against this line of credit as of March 31, 1998.
During the three months ended March 31, 1998, the Company used $2,609,000 to
fund operations, which consisted primarily of increases in receivables and
inventories, and $243,000 to fund investing activities, primarily purchases of
property and equipment.
The Company does not anticipate the need for any material production-related
capital expenditures as it will continue with its strategy to subcontract all
future manufacturing, bypassing the need for any manufacturing infrastructure
investment. However, the Company does anticipate capital expenditures for
tenant improvements, furniture and equipment associated with its new office and
warehouse facility. Additionally, the Company 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. The
Company anticipates that all of these activities will be funded by operations,
working capital and existing credit facilities.
RISK FACTORS AND FORWARD LOOKING STATEMENTS
This report contains certain forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, that involve risks and
uncertainties. In addition, the Company may from time to time make oral forward
looking statements. Actual results are uncertain and may be impacted by the
factors discussed in more detail in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 filed with the Securities and Exchange
Commission. In particular, certain risks and uncertainties that may impact the
accuracy of the forward looking statements with respect to revenues, expenses
and operating results including without limitation, the risks set forth in the
risk factors section of the Annual Report on Form 10-K for the year ended
December 31, 1997, which risk factors are hereby incorporated into this report
by this reference. As a result, the actual results may differ materially from
those projected in the forward looking statements.
9
<PAGE>
Because of these and other factors that may affect the Company's operating
results, past financial performance should not be considered an indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods.
10
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PROLONG INTERNATIONAL CORPORATION
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 3 of the notes to consolidated condensed financial
statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Exchange Agreement between Stockholders of PSL and the Registrant
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3, 1997).
2.2 Agreement and Plan of Reorganization, dated as of February 5, 1998, by
and among the Registrant and EPL Pro-Long, Inc., including the
following exhibits: (i) Form of Employee Invention and Confidentiality
Agreement, (ii) Form of Rule 145 Agreement, (iii) Form of
Confidentiality Agreement, (iv) Form of Transfer Restriction, (v) Form
of Amendment to Exclusive License Agreement, and (vi) Form of
Cancellation Agreement (incorporated by reference to the same numbered
Exhibit to the Registrant's Annual Report on Form 10-K filed March 23,
1998).
3.1 Amended and Restated Articles of Incorporation of the Registrant
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3, 1997).
3.2 Bylaws of the Registrant (incorporated by reference to the same
numbered Exhibit to the Registrant's Registration Statement on Form 10
filed July 3, 1997).
4.1 Specimen Certificate of Registrant's Common Stock (incorporated by
reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form 10 filed July 3, 1997).
10.1 Form of Indemnification Agreement for Executive Officers and
Directors (incorporated by reference to the same numbered Exhibit to
the Registrant's Registration Statement on Form 10 filed July 3,
1997).
10.2 Exclusive License Agreement between PSL and EPL Pro-Long, Inc., d.b.a.
Prolong International, dated November 10, 1993 (incorporated by
reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form 10 filed July 3, 1997).
10.3 Memorandum of Agreement between PSL and 2M Corporation dated April 24,
1995; Amendment dated March 4, 1996 (incorporated by reference to the
same numbered Exhibit to the Registrant's Registration Statement on
Form 10 filed July 3, 1997).
10.4 Agreement between PSL and Al Unser, dated July 28, 1995 (incorporated
by reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form 10 filed July 3, 1997).
10.5 Service Agreement between PSL and Tylie Jones & Associates, Inc.,
dated October 24, 1995 (incorporated by reference to the same
numbered Exhibit to the Registrant's Registration Statement on Form
10 filed July 3, 1997).
10.6 Telemarketing Agreement between PSL and West Telemarketing
Corporation, dated October 24, 1995 (incorporated by reference to
the same numbered Exhibit to the Registrant's Registration Statement
on Form 10 filed July 3, 1997).
10.7 Service and Endorsement Contract between PSL and Al Unser, dated April
29, 1996 (incorporated by reference to the same numbered Exhibit to
the Registrant's Registration Statement on Form 10 filed July 3,
1997).
11
<PAGE>
10.8 Associate Sponsorship Agreement between PSL, King Entertainment, Inc.
and Kenneth D. Bernstein, dated May 9, 1996 (incorporated by reference
to the same numbered Exhibit to the Registrant's Registration
Statement on Form 10 filed July 3, 1997).
10.9 Sponsorship Agreement between PSL, Pikes Peak Auto Hill Climb
Educational Museum, Inc. and Barnes Dyer Marketing, Inc., dated
February 21, 1997 (incorporated by reference to the same numbered
Exhibit to the Registrant's Registration Statement on Form 10 filed
July 3, 1997).
10.10 Major Associate Sponsorship Agreement between PSL, Norris Racing, Inc.
and Barnes Dyer Marketing, Inc., dated December 15, 1996 (incorporated
by reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form 10 filed July 3, 1997).
10.12 The Registrant's 1997 Stock Incentive Plan and form of Stock Option
Agreement (incorporated by reference to the same numbered Exhibit to
the Registrant's Registration Statement on Form 10 filed July 3,
1997).
10.13 The Registrant's Revolving Credit Agreement with Bank of America
National Trust and Savings Association, dated July 14, 1997
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3, 1997).
10.14 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 (incorporated by reference to the
same numbered Exhibit to the Registrant's Annual Report on Form 10-K
filed March 23, 1998).**
10.16 Sponsorship Agreement between PSL and Sabco Racing, Inc., dated
December 19, 1997 (incorporated by reference to the same numbered
Exhibit to the Registrant's Annual Report on Form 10-K filed March 23,
1998).**
10.17 Purchase and Sale Agreement between Huck International, Inc. (a
subsidiary of Thiokol Corporation) and PSL for the property located at
6 Thomas, Irvine, California, dated February 23, 1998 (incorporated by
reference to the same numbered Exhibit to the Registrant's Annual
Report on Form 10-K filed March 23, 1998).
10.18 Sponsorship Agreement between PSL and Commonwealth Service & Supply
Corp. T/A Jim Yates Racing, dated November 22, 1997; Addendum dated
December 17, 1997 (both documents incorporated by reference to the
same numbered Exhibit to the Registrant's Annual Report on Form 10-K
filed March 23, 1998).**
10.19 Service and Endorsement Contract between PSL and Smokey Yunick, dated
November 1, 1996 (incorporated by reference to the same numbered
Exhibit to the Registrant's Annual Report on Form 10-K filed March 23,
1998).**
27.1 Financial Data Schedule (electronic filing only).*
- -------------------------------------------------
* Previously filed.
** Portions of this Exhibit are omitted and were filed separately with the
Secretary of the Commission pursuant to the Registrant's application
requesting confidential treatment under Rule 24b-2 of the Securities
exchange Act of 1934.
(b) Reports on Form 8-K.
No reports on From 8-K have been filed by the Company.
12
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROLONG INTERNATIONAL CORPORATION
Date: July 2, 1998 /s/ Nicholas Rosier
--------------------------------------
Nicholas Rosier
Chief Financial Officer
13
