<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 September 30, 1999
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
------------------
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 92816 (IRS Employer Idenfication No.)
of incorporation or organization) (Address of principal executive 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 28,445,835 shares of the registrant's common stock ($0.001 par value)
outstanding as of November 8, 1999.
Page 1 of 15 pages
Exhibit Index on Sequentially Numbered Page 15
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<PAGE>
PROLONG INTERNATIONAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PART 1 FINANCIAL INFORMATION Page
Item 1: Financial Information
Consolidated Condensed Balance Sheets -
September 30, 1999 and December 31, 1998......................... 3
Consolidated Condensed Statements of Operations - Three months
and Nine months ended September 30, 1999 and 1998................ 4
Consolidated Condensed Statements of Cash Flows -
Nine months ended September 30, 1999 and 1998.................... 5
Notes to Consolidated Condensed Financial Statements............. 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 10
Item 3: Quantitative and Qualitative Disclosures About Market Risk....... 14
PART II OTHER INFORMATION
Item 1: Legal Proceedings................................................ 15
Item 6: Exhibits and Reports on Form 8-K................................. 15
Signatures....................................................... 15
</TABLE>
2
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,228,845 $ 1,127,861
Accounts receivable, net 7,030,572 4,950,055
Inventories, net 3,078,345 2,915,249
Prepaid expenses 831,423 1,316,443
Prepaid income taxes - 444,371
Prepaid television time - 627,050
Advances to employees 252,145 308,630
Deferred tax asset 1,297,997 63,645
----------- ------------
Total current assets 13,719,327 11,753,304
Property and equipment, net 3,557,610 3,372,509
Intangible assets, net 7,163,341 7,543,354
Deferred tax asset, noncurrent 439,791 439,791
Other assets 784,273 101,914
----------- ------------
TOTAL ASSETS $25,664,342 $23,210,872
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,756,640 $ 1,878,418
Accrued expenses 1,118,228 1,460,163
Loans payable to bank 3,985,000 -
Notes payable, current 42,372 41,951
----------- ------------
Total current liabilities 7,902,240 3,380,532
Notes payable, noncurrent 2,342,432 2,376,005
----------- ------------
Total liabilities 10,244,672 5,756,537
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;
28,445,835 shares issued and outstanding 28,446 28,446
Additional paid-in capital 14,782,438 14,716,438
Retained earnings 608,786 2,709,451
----------- ------------
Total stockholders' equity 15,419,670 17,454,335
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,664,342 $23,210,872
=========== ============
</TABLE>
See notes to consolidated condensed financial statements.
-3-
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- -----------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET REVENUES $ 9,758,596 $ 9,662,580 $31,509,675 $28,911,150
COST OF GOODS SOLD 2,482,588 2,460,591 8,170,032 6,107,805
----------- ------------ ----------- -----------
GROSS PROFIT 7,276,008 7,201,989 23,339,643 22,803,345
OPERATING EXPENSES:
Selling and marketing 6,400,017 4,990,880 21,087,614 14,889,967
General and administrative 1,379,843 1,337,663 5,195,419 4,063,476
----------- ------------ ----------- -----------
Total operating expenses 7,779,860 6,328,543 26,283,033 18,953,443
----------- ------------ ----------- -----------
OPERATING INCOME (LOSS) (503,852) 873,446 (2,943,390) 3,849,902
OTHER INCOME (EXPENSE), net:
Interest (expense) (138,599) (42,777) (297,119) (79,486)
Interest income 2,179 16,482 8,844 105,027
----------- ------------ ----------- -----------
Total other income (expense), net (136,420) (26,295) (288,275) 25,541
----------- ------------ ----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (640,272) 847,151 (3,231,665) 3,875,443
PROVISION (BENEFIT) FOR INCOME TAXES (224,000) 363,020 (1,131,000) 1,669,020
----------- ------------ ----------- -----------
NET INCOME (LOSS) $ (416,272) $ 484,131 $(2,100,665) $ 2,206,423
=========== ============ =========== ===========
NET INCOME (LOSS) PER SHARE
Basic ($0.01) $ 0.02 ($0.07) $ 0.09
=========== ============ =========== ===========
Diluted ($0.01) $ 0.02 ($0.07) $ 0.09
=========== ============ =========== ===========
WEIGHTED AVERAGE COMMON SHARES
Basic 28,445,835 25,464,575 28,445,835 25,464,525
Diluted options outstanding 0 97,289 0 397,603
----------- ------------ ----------- -----------
Diluted 28,445,835 25,561,864 28,445,835 25,862,128
=========== ============ =========== ===========
</TABLE>
See notes to consolidated condensed financial statements
-4-
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,100,665) $ 2,206,423
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 631,343 106,963
Provision for doubtful accounts (274,875) 288,571
Deferred taxes (789,981) -
Reserve for obsolesence 25,891 67,500
Compensation costs related to options 66,000 -
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable (1,805,642) (3,644,746)
Inventories (188,987) (1,898,659)
Prepaid expenses (14,980) (779,050)
Prepaid television time 627,050 549,232
Deposits (190,984) (91,939)
Accounts payable 878,222 20,180
Accrued expenses (341,935) (377,850)
Income taxes payable - (1,074,553)
------------ -----------
Net cash used in operating activities (3,479,543) (4,627,928)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (427,806) (646,481)
Prepaid advances 56,485 (30,112)
------------ -----------
Net cash used in investing activities (371,321) (676,593)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (33,152) 7,141
Proceeds from bank loans 3,985,000 -
Proceeds from issuance of common stock - 600
------------ -----------
Net cash provided by financing activities 3,951,848 7,741
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 100,984 (5,296,780)
CASH AND CASH EQUIVALENTS, beginning of period 1,127,861 6,180,983
------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,228,845 $ 884,203
============ ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ - $ 2,743,576
============ ===========
Interest paid $ 297,119 $ 79,486
============ ===========
</TABLE>
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1998, the Company completed the following transactions:
Financed the purchase of the office and warehouse facility with $2,421,000
in long-term notes payable.
During 1999, the Company completed the following transactions:
Recorded in aggregate of $66,000 to additional paid-in capital for compensation
costs related to stock options.
See notes to consolidated condensed financial statements
-5-
<PAGE>
PROLONG INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS
Prolong International Corporation (PIC) is a Nevada corporation originally
organized on August 24, 1981. In September 1995, PIC acquired 100% of the
outstanding stock of Prolong Super Lubricants, Inc. (PSL), a Nevada
corporation. In 1997, Prolong Foreign Sales Corporation was formed as a
wholly-owned subsidiary of PIC. In 1998, Prolong International Holdings
Ltd. was formed as a wholly-owned subsidiary of PIC. At the same time,
Prolong International Ltd. was formed as a wholly-owned subsidiary of
Prolong International Holdings Ltd. PIC, through its subsidiaries, is
engaged in the manufacture, sale and distribution of a line of high
performance and high quality lubricants and car care appearance products
under the brand names Prolong(R) and Prolong Super Lubricants(R).
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
include the accounts of PIC and its wholly-owned subsidiaries, PSL, Prolong
Foreign Sales Corporation, Prolong International Holdings Ltd. and its
wholly-owned subsidiary, Prolong International Ltd. (collectively, the
Company or Prolong). 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 and
the nine months ended September 30, 1999 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1999. For
further information, refer to the Form 10-K for the year ended December 31,
1998 filed by the Company with the Securities and Exchange Commission.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Raw materials $1,475,327 $ 936,451
Finished goods 806,793 1,430,797
Promotional items 796,225 548,001
---------- ----------
$3,078,345 $2,915,249
========== ==========
</TABLE>
6
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Building $2,285,089 $2,268,559
Computer equipment 276,729 230,264
Office equipment 55,753 54,073
Furniture and fixtures 557,571 255,669
Automotive equipment 35,925 35,925
Exhibit equipment 115,143 115,143
Molds and dies 118,643 63,193
Machinery and equipment 17,953 12,174
---------- ----------
3,462,806 3,035,000
Less accumulated depreciation (443,196) (200,491)
---------- ----------
3,019,610 2,834,509
Land 538,000 538,000
---------- ----------
$3,557,610 $3,372,509
========== ==========
</TABLE>
5. LOANS PAYABLE TO BANK
As of October 1, 1999, the Company had $4,000,000 available from the bank
line of credit facility of which $3,985,000 was outstanding. As of
September 30, 1999, the Company was in compliance or has received waivers
for all financial covenants.
6. NOTES PAYABLE
Notes payable consist of the following as of September 30, 1999:
<TABLE>
<S> <C>
Note payable to a bank bearing interest at 7.875% per annum to be
repaid in monthly principal and interest payments of $13,050 with a
final payment of all remaining unpaid principal and interest due on
May 1, 2008. $1,659,883
Loan from CDC Small Business Finance Corporation bearing interest at
7.65% per annum to be repaid in monthly principal and interest
payments of $6,376 each through July 1, 2018. 724,921
----------
2,384,804
Less current maturities (42,372)
----------
$2,342,432
==========
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Schedule of principal payments for year ending December 31,
1999 $ 11,247
2000 46,444
2001 50,256
2002 53,971
2003 57,969
Thereafter 2,164,917
----------
$2,384,804
==========
</TABLE>
7. CONTINGENCIES
On or about November 17, 1998, Michael Walczak et al, on behalf of himself
and other similarly situated shareholders of EPL filed a purported class
action in the U.S. District Court (the "Court") in San Diego, California
against PIC, PSL, EPL and their respective former and current officers and
directors. The named plaintiffs allege breach of contract, certain fraud
claims, civil RICO, breach of fiduciary duty and conversion and seek
monetary damages. The named plaintiffs in the action are allegedly current
EPL shareholders who hold less than two percent (2%) of the outstanding
shares of EPL's common stock, in the aggregate. The plaintiffs applied for
a preliminary injunction to halt the sale of the assets of EPL to PIC and
to prevent the dissolution of EPL.
On November 25, 1998, the Court granted a temporary restraining order
without a hearing and before opposition could be submitted. On December 30,
1998, the Court held a hearing on whether a preliminary injunction should
be issued in connection with such action. The Court entered a preliminary
injunction based on the plaintiffs' (a) alleged claim for fraudulent
conveyance in connection with PSL's license agreement with EPL and (b)
alleged claim for breach of fiduciary duty. The preliminary injunction
enjoins the further consummation of the asset purchase transaction and
prevents EPL from completing its liquidation and dissolution until further
notice from the Court. The preliminary injunction will last until the case
is tried on its merits or until the preliminary injunction is vacated. The
Court ordered the plaintiffs to post a bond in the amount of $100,000,
which bond has been posted. PIC has appealed the Court's preliminary
injunction ruling to the Ninth Circuit.
PIC and PSL and their respective current officers and directors continue to
believe that there is no merit to the plaintiff's claims and plan to
vigorously defend against the claims. The defendants have each filed and
served motions to dismiss the complaint pursuant to Rule 12(b)(6) of the
Federal Rules of Civil Procedure. The defendants successfully moved to
transfer venue to the federal court in Orange County, California, where
PIC's principal office is located.
8
<PAGE>
8. COMMITMENTS
The Company has outstanding non-cancelable inventory purchase commitments
with a contract packager of approximately $1,200,000 as of September 30,
1999. Under the terms of the agreement, the packager purchases components,
manufactures, warehouses and distributes certain car care products for the
Company. When inventories held by the packager exceed approximately 75 days
from the date of production the Company may be obligated to pay a storage
handling fee and/or purchase these inventories at the option of the
packager.
9. EMPLOYMENT CONTRACTS
In October 1999, the Company entered into an employment agreement with an
officer of the Company for a period of 4 years. The terms of the contract
include base salary, signing bonus, 800,000 warrants with exercise prices
ranging from $2-$5 per share, stock options, various performance
incentives, and one year severance payment in the event of early
termination.
9
<PAGE>
ITEM 2:
- -------
PROLONG INTERNATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Percentage of Net Revenues
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1999 1998 1999 1998
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Net revenues 100.0 100.0 100.0 100.0
Cost of goods sold 25.4 25.5 25.9 21.1
-------------------------- -------------------------
Gross profit 74.6 74.5 74.1 78.9
Selling expenses 65.6 51.6 66.9 51.5
General and administrative expenses 14.1 13.8 16.5 14.1
-------------------------- -------------------------
Operating income (loss) (5.1) 9.1 (9.3) 13.3
Other income (expense) (1.4) (0.3) (0.9) 0.1
-------------------------- -------------------------
Income (loss) before income taxes (6.5) 8.8 (10.2) 13.4
Provision (benefit) for income taxes (2.3) 3.8 (3.6) 5.8
-------------------------- -------------------------
Net income (loss) (4.2) 5.0 (6.6) 7.6
========================== =========================
</TABLE>
Three Months Ended September 30, 1999 vs. Three Months Ended September 30, 1998
Net revenues for the three months ended September 30, 1999 were approximately
$9,759,000 as compared to approximately $9,663,000 for the comparable period of
the prior year, an increase of $96,000 or 1%. Revenues for the three month
period ended September 30, 1999 were derived from the following sources: Direct
response infomercial sales of $811,000 ($629,000 of appearance products and
$182,000 of lubricants); retail sales of $8,406,000 ($407,000 of appearance
products and $7,999,000 of lubricants); industrial sales of $92,000; and,
international and other sales of $450,000. Revenues for the three month period
ended September 30, 1998 were derived from the following sources: Direct
response infomercial sales of $1,270,000 (all lubricant products); retail sales
of $6,739,000 (all lubricant products); industrial sales of $257,000; and,
international and other sales of $1,397,000. The increase in sales is mainly
attributable to the launch of the new automotive appearance products.
Cost of goods sold for the three months ended September 30, 1999 was
approximately $2,483,000 as compared to $2,461,000 for the comparable period of
the prior year, an increase of $22,000 or 0.9%. As a percentage of sales, cost
of goods sold decreased from
10
<PAGE>
25.5% in 1998 to 25.4% in 1999. This decrease was mainly attributable to a shift
in product mix and distribution channels.
Selling expenses of approximately $6,400,000 for the three months ended
September 30, 1999 represented an increase of $1,409,000 over the comparable
period of the prior year. This 28.2% increase was primarily the result of
additional marketing allowances to retail customers to continue to build brand
awareness and distribution. Selling expenses as a percentage of sales were
65.6% for the three months ended September 30, 1999 versus 51.6% for the
comparable period of the previous year. Selling expenses as a percentage of
sales increased largely due to the factors described above.
General and administrative expenses for the three months ended September 30,
1999 were approximately $1,380,000 as compared to $1,338,000 for the three
months ended September 30, 1998, an increase of $42,000 or 3.1%. This increase
is primarily attributable to higher legal expenses.
Interest expense of approximately $139,000 for the three months ended September
30, 1999 represented an increase of $96,000 over the comparable period of the
prior year. The increase is attributable to the increase in bank loans payable.
Net income (loss) for the three months period ended September 30, 1999 was
approximately $(416,000) as compared to approximately $484,000 for the
comparable period in the prior year, a decrease of $900,000. The decrease is a
result of the factors described above.
Nine Months Ended September 30, 1999 vs. Nine Months Ended September 30, 1998
Net revenues for the nine months ended September 30, 1999 were approximately
$31,510,000 as compared to approximately $28,911,000 for the comparable period
in the prior year, an increase of $2,599,000 or 9.0%. Revenues for the nine
month period ended September 30, 1999 were derived from the following sources:
Direct response infomercial sales of $3,879,000 ($2,776,000 of appearance
products and $1,103,000 of lubricants); retail sales of $25,624,000 ($4,652,000
of appearance products and $20,972,000 of lubricants); industrial sales of
$483,000; and, international and other sales of $1,524,000. Revenues for the
nine month period ended September 30, 1998 were derived from the following
sources: direct response infomercial sales of $4,612,000 (all lubricants);
retail sales of $20,945,000 (all lubricants); industrial sales of $870,000; and,
international and other sales of $2,484,000. The increase in sales is mainly
attributable to sales of approximately $7,400,000 of the new automotive
appearance products which was partially offset by a decrease in lubricant sales
of approximately $4,800,000. The decrease in lubricant sales was attributable
to a reduction in direct response television sales resulting from reduced
purchases of air time as the lubricant television show is reaching the end of
its effective life.
Cost of goods sold for the nine months ended September 30, 1999 was
approximately $8,170,000 as compared to $6,108,000 for the comparable period of
the prior year, an increase of $2,062,000 or 33.8%. Cost of goods sold, as a
percentage of sales, increased from 21.1% for the nine month period ended
September 30, 1998 to 25.9% for the comparable period in 1999. The increase was
mainly attributable to the higher cost of new packaging (introduced toward the
end of the second quarter of 1998) for the lubricant
11
<PAGE>
products and a shift in product mix with the appearance products yielding lower
gross margin than the lubricant products.
Selling expenses of $21,088,000 for the nine months ended September 30, 1999
represented an increase of $6,198,000 over the comparable period of the prior
year. This 41.6% increase was primarily the result of salaries and benefits for
new employees, marketing allowances to retail customers, one time sales slotting
fees to new retailers, promotional activities, expenditures for print and media
advertising, and increased telemarketing expenses and television air-time
purchases relating to the launch of the new appearance product line. Selling
expenses as a percentage of sales were 66.9% for the nine months ended September
30, 1999 versus 51.5% for the comparable period of the previous year. Selling
expenses as a percentage of sales increased largely due to the high level of
air-time purchases required to introduce the appearance line of products to the
marketplace during the beginning of the buying season for these products.
Additionally, large one time slotting fees were paid during the nine month
period in order to obtain large new sources of product distribution. Other
contributing factors to the increase as a percentage of sales were significant
promotional activities and telemarketing expenses to continue to build brand
awareness.
General and administrative expenses for the nine months ended September 30, 1999
were approximately $5,195,000 as compared to $4,063,000 for the nine months
ended September 30, 1998, an increase of $1,132,000 or 27.9%. This increase is
primarily attributable to salaries and benefits for new employees, increases in
legal expenses, general insurance expenses, and costs related to the design of
the Company's new e-commerce web-site. As a percentage of sales, general and
administrative expenses increased from 14.1% for the nine months ended September
30, 1998 to 16.5% for the same period in 1999. This increase was largely
attributable to higher than normal legal fees required to handle outstanding
legal matters and the development costs for the Company's e-commerce web-site.
Interest expense of approximately $297,000 for the nine months ended September
30, 1999 represented an increase of $218,000 over the comparable period of the
prior year. The increase is attributable to the financing related to the
purchase of the Company's facility in Irvine, California and interest expenses
related to the outstanding bank loan.
Net income (loss) for the nine month period ended September 30, 1999 was
approximately $(2,101,000) as compared to approximately $2,206,000 for the
comparable period in the prior year, a decrease of $4,307,000. The decrease is
a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had net working capital of $5,817,000 as
compared to $8,373,000 at December 31, 1998 or a decrease of $2,556,000. During
the nine months ended September 30, 1999, the Company used approximately
$3,480,000 in operating activities largely to fund a $1,806,000 increase in
accounts receivable, a $189,000 increase in inventories, $342,000 decrease in
accrued expenses, and $2,101,000 of losses during the period. These uses of
cash were partially offset by a $878,000 increase in accounts payable and a
decrease in prepaid television time of $627,000. Additionally, the Company used
approximately $428,000 for investing activities which were primarily purchases
of property and equipment. These uses of cash were funded during the nine
months ended September 30,
12
<PAGE>
1999 primarily by existing cash reserves and proceeds from the Company's bank
credit line in the amount of $3,985,000.
The Company, as of October 1, 1999, had $4,000,000 available from the bank line
of credit facility, of which $3,985,000 was outstanding. During the second
quarter of 1999 and continuing in the third quarter, the Company has implemented
certain measures to reduce expenditures including such strategies as evaluating
the purchase of television air time, a reallocation of advertising dollars, a
review of sponsorship payments and motorsports promotional activities, a
curtailment of legal expenses and reductions in general and administrative
expenses. Additionally, the Company is evaluating strategies to convert assets
to cash on a more efficient basis and reviewing other strategies to optimize the
generation of cash flow.
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 material manufacturing
infrastructure investment. The Company anticipates that its activities will be
funded by working capital and existing and/or new credit facilities in addition
to the strategies discussed above. The Company is currently seeking additional
financing, but there is no assurance that appropriate financing can be obtained.
YEAR 2000 READINESS DISCLOSURE
PIC has developed and is well into implementing a company-wide Year 2000 plan
(the "Plan") with the intent to ensure that its computer equipment and
operations are "Year 2000 compliant". PIC has formed a Year 2000 response team
comprised of key members from various business areas to review and respond
quickly to Year 2000 issues as they occur. The response team is expected to be
on call during the millennium change to monitor and provide solutions to any
issues that arise. PIC's Year 2000 Plan is directed to four major areas:
products, internal systems (including information technology (IT) and non-IT
systems), suppliers and dealers. PIC's Year 2000 Plan includes a series of
initiatives to ensure that all of the computer hardware, software and
communications systems will function without incident at the turn of the
millennium and beyond. To date, the cost to identify, assess and remediate
PIC's Year 2000 issues is not expected to be material to PIC's financial
condition or impact business operations. None of PIC's other information
technology projects have been delayed or deferred as a result of Year 2000
assessment and remediation. PIC is progressing with replacement or enhancement
to internal IT systems and functions.
During the assessment and remediation phase of the Year 2000 Plan, PIC
identified and corrected problems involving calculations or data manipulation
based on date values. PIC upgraded to software products with proven versions of
Year 2000 compliant products. The use of Year 2000 certified software and
product upgrades has further strengthened PIC's Year 2000 transition position.
In addition, PIC has also assessed and remediated non-IT support systems such as
phone switches, copier/facsimile machines and facility security systems. With
regard to the outside supplier portion of the Plan, PIC is currently assessing
Year 2000 readiness of production and distribution suppliers based on projected
severity levels of Year 2000 outage issues. Suppliers have been asked to
respond to a compliance questionnaire and initial responses to these
questionnaires have been received. Based on the
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response thus far, PIC believes that the worst case scenario with respect to
Year 2000 issues is the failure of a supplier to become Year 2000 compliant in
time. It is projected that such a failure by a supplier would result in
disruption of manufacturing and distribution functions and the implementation of
manual systems and processes until such time as the failure is cured. At the
present time, PIC expects to be fully Year 2000 compliant by the November 30,
1999.
The Company presently believes it has an effective Plan to anticipate and
resolve any potential internal Year 2000 issues in a timely manner. In
addition, the Company has reviewed potential Year 2000 failure points and
implemented corrective action to resolve any issues in addition to providing
manual systems and procedures to ensure business needs are being serviced until
such time as Year 2000 automated system failures can be remediated and
corrected. The Company plans to have its contingency plan in place by November
30, 1999.
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, 1998 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, 1998, 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.
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.
ITEM 3:
- -------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PIC's financial instruments include cash and long-term debt. At September 30,
1999 and December 31, 1998, the carrying values of PIC's financial instruments
approximated their fair values based on current market prices and rates. It is
PIC's policy not to enter into derivative financial instruments. PIC does not
currently have any significant foreign currency exposure since it does not
transact business in foreign currencies. Due to this, PIC did not have
significant overall currency exposure at September 30, 1999 and December 31,
1998.
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PROLONG INTERNATIONAL CORPORATION
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 7 of the notes to consolidated condensed financial
statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.24 Employment Agreement, dated October 5, 1999, by and among the
Company, Prolong Super Lubricants, Inc. and Thomas G. Iwanski,
including the following exhibits: (i) Warrant Agreement, dated
October 5, 1999, and (ii) Form of Stock Option Agreement
(incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form 10 filed July 3, 1997).
10.25 Registration Rights Agreement, dated October 5, 1999, between the
Company and Thomas G. Iwanski.
27.1 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Company during the
quarterly period ended September 30, 1999.
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: November 12, 1999 /s/ Nicholas Rosier
--------------------------------
Nicholas Rosier
Chief Financial Officer
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EXHIBIT 10.24
EMPLOYMENT AGREEMENT
--------------------
This EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into this
5th day of October, 1999 , by and between PROLONG INTERNATIONAL CORPORATION, a
Nevada corporation ("PIC"), and its wholly-owned subsidiary, PROLONG SUPER
LUBRICANTS, INC., a Nevada corporation ("PSL," and collectively referred to with
PIC as the "Company"), and THOMAS G. IWANSKI, an individual (the "Executive").
R E C I T A L
- - - - - - -
The Company desires to employ Executive in the capacity hereinafter stated,
and the Executive desires to enter into the employ of the Company in that
capacity for the period and pursuant to the terms and conditions set forth
herein.
A G R E E M E N T
- - - - - - - - -
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements set forth herein, the Company, and the Executive, intending to be
legally bound, hereby agree as follows:
1. Employment. The Company hereby employs the Executive as Senior Vice
President of Corporate Development and Chief Operating Officer of PIC, reporting
directly to the Chief Executive Officer, and the Executive accepts such
employment and agrees to devote substantially all his business time and efforts
and skills diligently and on such basis as shall be assigned to him by the
Company as provided herein in performing his duties hereunder for the benefit of
the Company. The Company hereby agrees to use its best efforts to appoint the
Executive to its Board of Directors as soon as reasonably practicable following
the date of this Agreement.
2. Term. The initial term of the Executive's employment hereunder shall
be for a period of four (4) years, commencing on the date of this Agreement (the
"Effective Date"), and shall continue until the fourth anniversary of this
Agreement (the "Initial Term"); provided, however, that Executive's employment
is subject to earlier termination as hereafter specified. This Agreement shall
be renewed automatically for successive one-year periods following the Initial
Term unless either party gives written notice to the other party of non-renewal
at least 180 days in advance of any successive anniversary of the Effective
Date.
3. Position and Duties.
3.1 Service with the Company. During the term of this Agreement, the
Executive agrees to perform such duties and on such basis as shall be assigned
to him from time to time by the Company's Board of Directors and Chief Executive
Officer; such duties, however, to be commensurate with the Executive's position
as Senior Vice President of Corporate Development and Chief Operating Officer of
the Company.
<PAGE>
3.2 No Conflicting Duties. During the term of this Agreement, the
Executive agrees to devote substantially all of his productive time, ability and
attention to the above duties and obligations. The Executive hereby confirms
that he is under no contractual commitments inconsistent with his obligations
set forth in this Agreement, and agrees that during the term of this Agreement
he will not render or perform services, or enter into any contract to do so, for
any other corporation, firm, entity or person which are inconsistent with the
provisions of this Agreement.
4. Compensation.
4.1 Base Salary. As compensation for all services to be rendered by
the Executive under this Agreement, the Company shall pay to the Executive a
base annual salary of One Hundred Thirty-Two Thousand Dollars ($132,000) ("Base
Salary"), which shall be paid on a regular basis in accordance with the
Company's normal payroll procedures and policies. The amount of the Base Salary
shall be reviewed annually by the Board of Directors (or the Compensation
Committee), which shall determine, in its sole discretion, whether Executive's
Base Salary shall be increased, such determination to be made on the basis of an
evaluation of the Executive's performance, the performance of the Company and
such other factors as the Board of Directors (or the Compensation Committee)
shall deem appropriate.
4.2 Signing Bonus. As an additional incentive for Executive to enter
into this Agreement, a one-time signing bonus in the amount of Twenty Thousand
Dollars ($20,000) ("Signing Bonus") shall be paid to Executive on or before
December 31, 1999; provided, however, that the Signing Bonus shall not be
payable unless Executive remains an employee of the Company as of such date. In
the event that Executive's employment is terminated pursuant to Sections 5.1 or
5.2 below after December 31, 1999 but prior to the first anniversary of the
Executive's start date, Executive shall reimburse the Company a pro rata portion
of the Signing Bonus within thirty (30) days of such termination.
4.3 Warrant. Concurrently with the entering into of this Agreement
by the Company and the Executive, the Executive shall be issued a warrant to
purchase up to 800,000 shares of the Common Stock of the Company at an exercise
price equal to: (i) $2.00 per share for the first 200,000 shares, (ii) $3.00
per share for the next 200,000 shares, (iii) $4.00 per share for the next
200,000 shares, and (iv) $5.00 per share for the last 200,000 shares,
substantially in the form attached hereto as Exhibit A (the "Warrant").
4.4 Stock Options. Concurrently with the entering into of this
Agreement by the Company and the Executive, the Executive shall be granted
incentive stock options to purchase (i) 100,000 shares of the Common Stock of
the Company at an exercise price equal to the Fair Market Value (as such term is
defined in the Company's 1997 Stock Incentive Plan) on the date hereof and (ii)
100,000 shares of the Common Stock of the Company at an exercise price equal to
the Fair Market Value plus fifty cents ($0.50) on the date hereof (collectively,
the "Options"). The terms of the Options, which shall be governed by the
Company's 1997 Stock Incentive Plan and the stock option agreements issued in
connection therewith, shall be substantially in accordance with the terms
contained in the form of option agreement attached hereto as Exhibit B (the
"Option Agreement").
2
<PAGE>
4.5 Incentive Compensation Plans. In addition to the foregoing,
Executive shall become eligible to participate in any management incentive
compensation plans approved by the Company's Board of Directors, such
participation to be on terms comparable to those afforded to other key executive
employees with the Company. All amounts to which Executive may be entitled
under any incentive compensation plans approved by the Board of Directors,
including without limitation, any stock option or purchase plan, and any bonus
plan, adopted by the Company (collectively the "Incentive Bonus") shall be
subject to the provisions of Section 5.4 below with respect to the effect of any
termination of employment on compensation of the Executive and to the
provisions, rules and regulations of any such plan. In addition, any such plan,
if adopted, may provide for deferral of the receipt of any Incentive Bonus that
is awarded and may require Executive to remain in the Company's employ for a
specified period or periods of time as a condition to receipt of any such
Incentive Bonus.
4.6 Participation in Benefit Plans. Executive shall be entitled to
participate in all employee benefit plans or programs (including vacation time,
sick leave and holidays) generally available to employees of the Company, to the
extent that his position, title, tenure, salary, age, health and other
qualifications make him eligible to participate therein. The Executive's
participation in any such plan or program shall be subject to the provisions,
rules and regulations thereof that are generally applicable to all participants
therein; provided, however, that all stock options and/or restricted stock
granted to Executive shall be subject to acceleration as set forth in Section
5.5 below; provided further, however, that in lieu of providing coverage under
the Company's health plan, at the Executive's option, the Company agrees to
either pay the Executive's COBRA payments under his current health plan for the
duration of this Agreement so long as the amount of such payments does not
exceed the amount paid by the Company for its other executive officers under its
health plan or pay such payments directly to the Executive. With respect to
vacations, Executive will be entitled to two (2) weeks of fully-vested vacation
on the date hereof and the annual vacation grant will be increased by one (1)
week on each anniversary of the date hereof, up to a maximum of four (4) weeks
of vacation per year (e.g. three weeks granted on the first anniversary and four
weeks granted on the second anniversary of the date of this Agreement).
4.7 Expenses. In accordance with the Company's policies established
from time to time, the Company will pay or reimburse the Executive for all
reasonable and necessary out-of-pocket expenses incurred by him in the
performance of his duties under this Agreement.
4.8 Cash Bonus on Sale of Company. In the event that during the term
of this Agreement a "Change in Control" (as defined in Section 5.3 below) shall
have occurred in a transaction in which the Company's Common Stock shall have
been acquired by a third party for at least [$6.00] per share, the Executive
shall receive a cash bonus in an amount equal to two (2) times his then-current
annual salary; provided, however, that in the event that the per share price in
such Change in Control equals or exceeds [$7.50], the Executive shall receive a
cash bonus in an amount equal to three (3) times his then-current Base Salary.
Payment of the cash bonus set forth in this Section 4.8 shall be made by the
Company at the closing of the transaction constituting a Change in Control.
5. Termination.
3
<PAGE>
5.1 Termination by the Company for Cause. Any of the following acts
or omissions shall constitute grounds for the Company to terminate the
Executive's employment pursuant to this Agreement for "cause":
(a) The continued, unreasonable refusal or omission by the
Executive to perform any material duties required of him by this Agreement or as
reasonably requested by the Board of Directors of the Company if consistent with
the terms of this Agreement;
(b) Any material act or omission by the Executive involving
gross negligence or willful misconduct in the performance of the Executive's
duties to, or material deviation from any of the policies or directives of, the
Company;
(c) Conduct on the part of the Executive which constitutes the
breach of any statutory or common law duty of loyalty to the Company; or
(d) Any illegal act by the Executive which materially and
adversely affects the business of the Company or any felony committed by
Executive, as evidenced by conviction thereof, provided that the Company may
suspend the Executive with pay while any allegation of such illegal or felonious
act is investigated.
Termination by the Company for cause shall be accomplished by written
notice to the Executive and shall be preceded by a written notice providing a
reasonable opportunity for the Executive to correct his conduct. Any such
termination shall be without prejudice to any other remedy to which the Company
may be entitled either at law, in equity, or under this Agreement.
5.2 Termination for Death or Disability. In addition to termination
for cause pursuant to Section 5.1 above, the Executive's employment pursuant to
this Agreement shall be immediately terminated without notice by the Company (i)
upon the death of the Executive or (ii) upon the Executive becoming totally
disabled. For purposes of this Agreement, the term "totally disabled" means an
inability of Executive, due to a physical or mental illness, injury or
impairment, to perform a substantial portion of his duties for a period of one
hundred eighty (180) or more consecutive days, as determined by the Company's
Board of Directors following such one hundred eighty (180) day period.
5.3 Termination for Good Reason. Executive's employment pursuant to
this Agreement may be terminated by the Executive for "good reason" if the
Executive voluntarily terminates his employment as a result of any of the
following:
(a) Without the Executive's prior written consent, a reduction
in his then current Base Salary;
(b) The taking of any action by the Company that would
substantially diminish the aggregate value of the benefits provided the
Executive under the Executive's medical, health, accident, disability insurance,
life insurance, thrift and retirement plans in which he was participating on the
date of this Agreement, if any, other than any such reduction which is (i)
required by law, (ii) implemented in connection with a general concessionary
arrangement affecting all employees or affecting the group of employees (senior
management) of which the Executive is a member or (iii) generally applicable to
all beneficiaries of such plans;
4
<PAGE>
(c) Without Executive's prior written consent, a relocation of
the Executive's place of employment outside of Orange County, California;
(d) Resignation as a result of unlawful discrimination, as
evidenced by a final court order;
(e) A reduction in duties and responsibilities which results in
the Executive no longer having duties customary for a Senior Vice President of
Corporate Development and Chief Operating Officer;
(f) The President, Chief Executive Officer or Chairman of the
Company is replaced for any reason;
(g) The Company materially breaches any provision of this
Agreement and such breach continues uncorrected for a period of thirty (30) days
after written notice of the occurrence thereof from Executive to the Board of
Directors; or
(h) A Change of Control shall have occurred.
A "Change in Control" shall be deemed to have occurred if (i) there
shall be consummated (x) any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or pursuant to which
shares of the Company's Common Stock would be converted into cash, securities or
other property, other than a merger of the Company in which the holders of the
Company's Common Stock immediately prior to the merger have substantially the
same proportionate ownership of at least 80% of common stock of the surviving
corporation immediately after the merger, or (y) any sale, lease, exchange or
other transfer (in one transaction or a series of related transactions) of all,
or substantially all, of the assets of the Company, (ii) the stockholders of the
Company approve any plan or proposal for the liquidation or dissolution of the
Company, (iii) any person (as such term is used in Sections 13(d) and 14(d)(2)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), shall
become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange
Act) of 20% or more of the Company's outstanding shares of Common Stock (other
than any such person who had record or beneficial ownership of at least 20% of
the Company's outstanding shares of Common Stock on the date hereof), or (iv)
during any period of two consecutive years during the term of this Agreement,
individuals who at the beginning of the two year period constituted the entire
Board of Directors do not for any reason constitute a majority thereof unless
the election, or the nomination for election by the Company's stockholders, of
each new director was approved by a vote of at least two-thirds of the directors
then still in office who were directors at the beginning of the period.
5.4 Payments Upon Removal or Termination. If during the term of this
Agreement, the Company terminates the Executive's service, except as provided in
Sections 2, 5.1 or 5.2 hereof, or the Executive resigns for one of the reasons
stated in Section 5.3 above, Executive shall be entitled to the following
compensation: (i) the portion of his then current Base Salary which has accrued
through his date of termination, (ii) any vested Incentive Bonus to which
Executive is entitled as of the date of termination pursuant to any bonus or
incentive compensation plan in which he is then participating, provided the
payment thereof is not contingent or conditional on Executive's continued
employment with the Company or the satisfaction of any other condition which has
not been satisfied, (iii) any payments for unused vacation and reimbursement
expenses, which are due, accrued or payable at the date of Executive's
termination, and (iv) a severance payment in an amount
5
<PAGE>
(the "Severance Amount") equal to the result obtained by multiplying his then
current monthly Base Salary by twelve (12) months (the "Severance Period").
During the Severance Period, the Company shall further provide Executive with
health and disability insurance as otherwise provided in this Agreement. All
payments required to be made by the Company to the Executive pursuant to this
Section 5.4 shall be paid on a regular basis in accordance with the Company's
normal payroll procedures and policies, including, without limitation, the
Severance Amount which shall be paid at such times and in such amounts
consistent with the Company's normal payroll procedures and policies over the
number of months immediately succeeding the date of termination that is equal to
the number of months comprising the Severance Period. As used in this Agreement,
the term "monthly Base Salary" shall refer to an amount equal to one-twelfth
(1/12) of Executive's then current annual Base Salary. If the Company terminates
the Executive's employment pursuant to Sections 2, 5.1 or 5.2, or if Executive
voluntarily resigns (except as provided in Section 5.3), then Executive shall be
entitled to the compensation set forth in items (i), (ii) and (iii) above.
5.5 Acceleration of Vesting. If during the term of this Agreement,
the Company terminates the Executive's service, except as provided in Sections
2, 5.1 or 5.2 hereof, or the Executive resigns for one of the reasons stated in
Section 5.3, all of Executive's stock options and/or restricted stock shall be
immediately vested so that all stock options shall be fully exercisable, and all
restricted stock shall be no longer be subject to repurchase. Additionally, all
vested stock options and/or restricted stock shall be exercisable for a period
of one (1) year following the date of termination of the Executive's employment
or consulting relationship with the Company; provided, however, that in the
event that Executive's service is terminated in connection with a Change in
Control, all vested stock options and/or restricted stock shall be exercisable
for a period of two (2) years following the date of the consummation of such
Change in Control. The foregoing supersedes any contradictory provision of any
plan or arrangement under which such stock options are granted, and/or such
restricted stock is issued.
6. Confidential Information. Executive will hold in strict confidence and
not disclose to any person or entity without the express prior authorization of
the Company, any confidential information of the Company or its affiliates,
including, without limitations, financial, manufacturing or marketing data
(including, without limitation, financial statements of the Company), technique,
process, formula, developmental or experimental work, work in progress, business
methods, trade secrets (including, without limitation, any customer list or
lists of customer sources), marketing techniques or plans, or any other secret
or confidential information relating to the products, services, customers, sales
or business affairs of the Company or its Affiliates. Executive agrees that he
will not make use of any of the above at any time for a period of three (3)
years after termination of his employment. Upon termination of employment,
Executive shall deliver to the Company all documents, records, work papers and
all similar repositories containing any information concerning the Company or
any Affiliate, whether prepared by Executive, the Company or anyone else.
Executive may keep his daily notebook. The foregoing restrictions shall not
apply to (i) information which is or becomes, other than as a result of a breach
of this Agreement, generally available to the public or (ii) the disclosure of
information required pursuant to a subpoena or other legal process; provided
that the Executive shall notify the Company, in writing, of the receipt of any
such subpoena or other legal process requiring such disclosure immediately after
receipt thereof and the Company shall have a reasonable opportunity to quash
such subpoena or other legal process prior to any disclosure by the Executive.
7. Proprietary Rights. All work performed by Executive and all materials
and products developed or prepared for the Company by Executive pursuant to this
Agreement are the
6
<PAGE>
property of the Company, and all title and interest therein shall vest in the
Company and shall be deemed to be a work made for hire in the course of the
services rendered hereunder. Executive shall also execute any employee
proprietary rights or invention assignment agreement reasonably requested by the
Company.
8. Assignment. This Agreement shall not be assignable, in whole or in
part, by either party without the written consent of the other party, except
that the Company may, without the consent of the Executive, assign its rights
and obligations under this Agreement to an Affiliate or to any corporation, firm
or other business entity (i) with or into which the Company may merge or
consolidate, or (ii) to which the Company may sell or transfer all or
substantially all of its assets; provided, however, that such assuming party
agrees to be bound by all of the terms and conditions of this Agreement. After
any such assignment by the Company, the Company shall be discharged from all
further liability hereunder and such assignee shall thereafter be deemed to be
the Company for the purposes of all provisions of this Agreement including this
Section 8.
9. Successors. This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive should die while any amounts are still payable to him hereunder, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Executive's devisee, legatee, or other
designee or, if there be no such designee, to the Executive's estate.
10. Injunctive Relief. The Executive agrees that it would be difficult to
compensate the Company fully for damages for any violation of the provisions of
this Agreement, including, without limitation, the provisions of Sections 6 and
7. Accordingly, the Executive specifically agrees that the Company shall be
entitled to temporary and permanent injunctive relief to enforce the provisions
of this Agreement, to the extent that such relief is provided by law for such
violation. This provision with respect to injunctive relief shall not, however,
diminish the right of the Company to claim and recover damages in addition to
injunctive relief.
11. Arbitration. Except as provided in Section 10, all disputes between
the parties hereto shall be determined solely and exclusively by arbitration
under, and in accordance with the rules then in effect of, the American
Arbitration Association, or any successors thereto ("AAA"), in Orange County,
California, unless the parties otherwise agree in writing. The parties shall
jointly select an arbitrator. In the event the parties fail to agree upon an
arbitrator within ten (10) days, then the Company shall select an arbitrator and
Executive shall select an arbitrator and such arbitrators shall then select a
third arbitrator to serve as the sole arbitrator, provided that if either the
Company or Executive, in such event, fails to select an arbitrator within seven
(7) days, such arbitrator shall be selected by the AAA upon application of
either the Company or Executive. Judgment upon the award of the agreed upon
arbitrator or the so chosen third arbitrator, as the case may be, shall be
binding and shall be entered into by a court of competent jurisdiction.
12. Opportunity to Engage Legal Counsel. The Executive acknowledges that
it is aware that it is entitled to consult independent legal counsel and/or
other advisors in connection with the negotiation or execution of this
Agreement, and represents and warrants to the Company and to Stradling Yocca
Carlson & Rauth, a professional corporation, that it has had full and adequate
opportunity to do so, and has either done so or has freely and knowingly
relinquished such right, and has the capacity and experience to understand this
Agreement, and fully understands all of the terms of this Agreement. The
parties acknowledge that Stradling Yocca Carlson & Rauth, which assisted
7
<PAGE>
in the drafting of this Agreement, represents only the Company, and is not
advising or representing the Executive concerning the effects of this Agreement
upon its individual interests or otherwise, and in drafting has made no effort
to balance or mutually satisfy these interests. The Executive and the Company
also acknowledge that this Agreement creates circumstances in which each of the
parties has opposing individual interests.
13. Miscellaneous.
13.1 Governing Law. This Agreement is made under and shall be
governed by and construed in accordance with the laws of the State of
California.
13.2 Prior Agreements. This Agreement contains the entire agreement
of the parties relating to the subject matter hereof and supersedes all prior
agreements and understanding with respect to such subject matter, and the
parties hereto have made no agreements, representations or warranties relating
to the subject matter of this Agreement which are not set forth herein.
13.3 Notices. All notices, requests, demands and other
communications (collectively, "Notices") given or made pursuant to this
Agreement shall be in writing and sent by mail, courier, personal delivery or
facsimile, to the following addresses:
(i) If to the Company, to:
Prolong International Corporation
6 Thomas
Irvine, California 92618
Attn: President
(ii) If to Executive, to:
Thomas G. Iwanski
1541 Amberwood Drive
Santa Ana, California 92705
13.4 Withholding Taxes. The Company may withhold from any salary and
benefits payable under this Agreement all federal, state, city or other taxes or
amounts as shall be required to be withheld pursuant to any law or governmental
regulation or ruling.
13.5 Amendments. No amendment or modification of this Agreement
shall be deemed effective unless made in writing signed by the parties hereto.
13.6 No Waiver. No term or condition of this Agreement shall be
deemed to have been waived nor shall there be any estoppel to enforce any
provisions of this Agreement, except by a statement in writing signed by the
party against whom enforcement of the waiver or estoppel is sought. Any written
waiver shall not be deemed a continuing waiver unless specifically stated, shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
13.7 Severability. To the extent any provision of this Agreement
shall be invalid or unenforceable, it shall be considered deleted herefrom and
the remainder of such provision and of this Agreement shall be unaffected and
shall continue in full force and effect.
8
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13.8 Definition. As used in this Agreement, the term "Affiliate"
means any corporation, association or other business entity of which more than
50% of the total voting power of shares of stock entitled to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by the Company.
13.9 Section Headings. The section headings used in this Agreement
are inserted for reference purposes only and shall not in any way affect the
meaning or interpretation of this Agreement.
13.10 Attorneys' Fees. If either party sues the other to enforce any
of the terms of this Agreement, the prevailing party shall, in addition to all
other damages, be entitled to recover its costs and reasonable attorneys' fees.
13.11 Counterpart Execution. This Agreement may be executed by
facsimile and in counterparts, each of which shall be deemed an original and all
of which when taken together shall constitute but one and the same instrument.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Employment Agreement as
of the day and year set forth above.
"Company"
PROLONG INTERNATIONAL CORPORATION,
a Nevada corporation
By: /s/ Elton Alderman
-------------------------
Its: President
-------------------------
PROLONG SUPER LUBRICANTS, INC.,
a Nevada corporation
By: /s/ Elton Alderman
-------------------------
Its:
-------------------------
"Executive"
/s/ Thomas Iwanski
-----------------------------
Thomas G. Iwanski
10
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Exhibit A
---------
Form of Warrant
<PAGE>
Exhibit B
---------
Form of Stock Option Agreement
<PAGE>
PROLONG INTERNATIONAL CORPORATION
WARRANT AGREEMENT
-----------------
This Warrant Agreement (the "Warrant Agreement") is entered into as of
October 5th, 1999, by and between PROLONG INTERNATIONAL CORPORATION, a Nevada
corporation (the "Company"), and THOMAS G. IWANSKI (the "Warrant Holder"). This
Warrant Agreement is entered into pursuant to that certain employment agreement
between the Company and Warrant Holder of even date herewith (the "Employment
Agreement").
1. Grant of Warrant. The Company hereby grants to Warrant Holder an
----------------
option (the "Warrant") to purchase all or any portion of a total of Eight
Hundred Thousand (800,000) shares (the "Shares") of the Common Stock of the
Company at a purchase price equal to: (a) Two Dollars ($2.00) per share for the
first 200,000 shares, (b) Three Dollars ($3.00) per share for the next 200,000
shares, (c) Four Dollars ($4.00) per share for the next 200,000 shares, and (d)
Five Dollars ($5.00) per share for the last 200,000 shares (collectively, the
"Exercise Price"), subject to the terms and conditions set forth herein.
2. Term of Warrant. Warrant Holder's right to exercise this Warrant shall
---------------
terminate upon the earlier to occur of the following: (i) one (1) year following
the date of termination of Warrant Holder's employment or consulting
relationship with the Company (as set forth in the Employment Agreement), unless
such termination occurs in connection with a "Change in Control" (as defined in
Section 5.3 of the Employment Agreement), in which case such period shall be two
(2) years following the consummation of the Change in Control; or (ii) the
expiration of six (6) years from the date of this Warrant.
3. Exercise of Warrant. At any time during the period from the date
-------------------
hereof until termination of the right to exercise this Warrant in accordance
with Section 2 above, this Warrant may be exercised in whole or in part by the
Warrant Holder (or by the person designated in Section 4 below) upon delivery of
the following to the Company at its principal executive offices:
(a) a written notice of exercise which identifies this Warrant
Agreement and states the number of Shares then being purchased (but no
fractional Shares may be purchased);
(b) a check or cash in the amount of the Exercise Price;
(c) a check or cash in the amount reasonably requested by the Company
to satisfy the Company's withholding obligations under federal, state or other
applicable tax laws with respect to the taxable income, if any, recognized by
the Warrant Holder in connection with the exercise of this Warrant (unless the
Company and Warrant Holder shall have made other arrangements for deductions or
withholding from Warrant Holder's wages, bonus or other compensation payable to
Warrant Holder, or by the withholding of Shares issuable upon exercise of this
Warrant, provided such arrangements satisfy the requirements of applicable tax
laws); and
(d) a letter, if requested by the Company, in such form and substance
as the Company may require, setting forth the investment intent of the Warrant
Holder, or person designated in Section 4 below, as the case may be.
4. Transfer or Assignment of Warrant. The rights of the Warrant Holder
---------------------------------
under this Warrant Agreement may be transferred, exercised, exchanged or
assigned ("transferred"), in whole or in part, subject to the provisions of this
Section 4. The Warrant Holder may only make transfers hereunder to the Warrant
Holder's children or trusts benefiting his children or upon death by will or by
the laws of descent and distribution. Additionally, any transferee hereunder
must agree to be bound by
<PAGE>
all of the terms and conditions of this Warrant Agreement and the Registration
Rights Agreement referenced in Section 12 below. Any attempt to sell, pledge,
assign, hypothecate, transfer or dispose of this Warrant in contravention of
this Warrant Agreement shall be void and shall have no effect. The Company shall
register on its books any transfer of the Warrant, upon surrender of same to the
Company with a written instrument of transfer duly executed by the registered
Warrant Holder or by a duly authorized attorney. Upon any such registration of a
transfer, new Warrant(s) shall be issued to the transferee(s) and the
surrendered Warrant shall be cancelled by the Company. A Warrant may also be
exchanged, at the option of the Warrant Holder, for one or more new Warrants
representing the aggregate number of Shares evidenced by the Warrant
surrendered. This Warrant and the Shares or any other securities ("Other
Securities") received upon exercise of this Warrant or the conversion of the
Shares shall be subject to restrictions on transferability unless registered
under the Securities Act, of 1933, as amended (the "Securities Act") or unless
an exemption from registration is available. This Warrant and the Warrant Shares
may also be subject to restrictions on transferability under applicable state
securities or blue sky laws. Until the Warrant and/or the Shares are registered
under the Securities Act, the Warrant Holder shall reimburse the Company for its
expenses, including attorneys' fees, incurred in connection with any transfer or
assignment, in whole or in part, of this Warrant or any Shares.
5. Loss of Warrant. Upon receipt by the Company of evidence reasonably
---------------
satisfactory to it of loss, theft, destruction or mutilation of this Warrant
and, in the case of loss, theft or destruction, of reasonable satisfactory
indemnification, or, in the case of mutilation, upon surrender of this Warrant,
the Company will execute and deliver, or instruct its transfer agent to execute
and deliver, a new Warrant of like tenor and date, any such lost, stolen or
destroyed Warrant thereupon shall become void.
6. Representations and Warranties of Warrant Holder.
------------------------------------------------
(a) Warrant Holder represents and warrants that this Warrant is being
acquired by Warrant Holder for Warrant Holder's personal account, for investment
purposes only, and not with a view to the distribution, resale or other
disposition thereof.
(b) Warrant Holder acknowledges that the Company may issue Shares
upon the exercise of the Warrant without registering such Shares under the
Securities Act, on the basis of certain exemptions from such registration
requirement. Accordingly, Warrant Holder agrees that his or her exercise of the
Warrant may be expressly conditioned upon his or her delivery to the Company of
an investment certificate including such representations and undertakings as the
Company may reasonably require in order to assure the availability of such
exemptions, including a representation that Warrant Holder is acquiring the
Shares for investment and not with a present intention of selling or otherwise
disposing thereof and an agreement by Warrant Holder that the certificates
evidencing the Shares may bear a legend indicating such non-registration under
the Securities Act and the resulting restrictions on transfer. Warrant Holder
acknowledges that, because Shares received upon exercise of a Warrant may be
unregistered, Warrant Holder may be required to hold the Shares indefinitely
unless they are subsequently registered for resale under the Securities Act or
an exemption from such registration is available.
7. Restrictive Legends. Warrant Holder hereby acknowledges that federal
-------------------
securities laws and the securities laws of the state in which he or she resides
may require the placement of certain restrictive legends upon the Shares issued
upon exercise of this Warrant, and Warrant Holder hereby consents to the placing
of any such legends upon certificates evidencing the Shares as the Company, or
its counsel, may deem necessary or advisable.
8. Adjustments Upon Changes in Capital Structure. In the event that the
---------------------------------------------
outstanding shares of Common Stock of the Company are hereafter increased or
decreased or changed into or exchanged for a different number or kind of shares
or other securities of the Company by reason of a
<PAGE>
recapitalization, stock split, combination of shares, reclassification, stock
dividend or other change in the capital structure of the Company, then
appropriate adjustment shall be made by the Administrator to the number of
Shares subject to the unexercised portion of this Warrant and to the Exercise
Price per share, in order to preserve, as nearly as practical, but not to
increase, the benefits of the Warrant Holder under this Warrant.
9. Change in Control. In the event of a Change in Control (as defined in
-----------------
Section 5.3 of the Employment Agreement) of the Company, the Administrator in
its discretion may take one or more of the following actions: (A) provide for
the purchase or exchange of this Warrant for an amount of cash or other property
having a value equal to the difference, or spread, between (x) the value of the
cash or other property that the Warrant Holder would have received pursuant to
such Change in Control transaction in exchange for the shares issuable upon
exercise of this Warrant had this Warrant been exercised immediately prior to
such Change in Control transaction and (y) the Exercise Price, (B) adjust the
terms of this Warrant in a manner determined by the Administrator to reflect the
Change in Control, (C) cause this Warrant to be assumed, or new rights
substituted therefor, by another entity, through the assumption of this Warrant,
or the substitution for this Warrant of a new warrant of comparable value
covering shares of a successor corporation, with appropriate adjustments as to
the number and kind of shares and Exercise Price, in which event this Warrant,
or the new warrant substituted therefor, shall continue in the manner and under
the terms so provided, or (D) make such other provision as the Administrator may
consider equitable. If the Administrator does not take any of the forgoing
actions, this Warrant shall terminate in accordance with Section 2 above.
10. No Obligation Created. Neither the granting of this Warrant nor the
---------------------
exercise hereof shall be construed as granting to the Warrant Holder any right
with respect to being retained as an employee or service provider to the Company
or any of its subsidiaries. The right of the Company or any of its subsidiaries
to terminate Warrant Holder's continuous service in accordance with the
Employment Agreement is specifically reserved.
11. Rights as Shareholder. The Warrant Holder (or permitted transferee of
---------------------
this Warrant pursuant to Section 4) shall have no rights as a shareholder with
respect to any Shares covered by this Warrant until the date of the issuance of
a stock certificate or certificates to him or her for such Shares,
notwithstanding the exercise of this Warrant.
12. "Market Stand-Off" Agreement. Warrant Holder agrees that, if requested
----------------------------
by the Company or the managing underwriter of any proposed public offering of
the Company's securities, Warrant Holder will not sell or otherwise transfer or
dispose of any Shares held by Warrant Holder without the prior written consent
of the Company or such underwriter, as the case may be, during such period of
time, not to exceed 180 days following the effective date of the registration
statement filed by the Company with respect to such offering, as the Company or
the underwriter may specify. However, Warrant Holder may be entitled to sell
Shares in accordance with the terms and conditions of that certain Registration
Rights Agreement entered into of even date herewith.
13. Interpretation. This Warrant is granted pursuant to the terms of the
--------------
Employment Agreement, and shall in all respects be interpreted in accordance
therewith. The Administrator shall interpret and construe this Warrant, and any
action, decision, interpretation or determination made in good faith by the
Administrator shall be final and binding on the Company and the Warrant Holder.
As used in this Warrant Agreement, the term "Administrator" shall refer to the
Compensation Committee of the Board of Directors of the Company, or if no such
committee has been appointed, the term Administrator shall mean the Board of
Directors. This Warrant shall be treated as a nonqualified stock option.
14. Notices. Any notice, demand or request required or permitted to be
-------
given under this Warrant Agreement shall be in writing and shall be deemed given
when delivered personally or three
<PAGE>
(3) days after being deposited in the United States mail, as certified or
registered mail, with postage prepaid, and addressed, if to the Company, at its
principal place of business, Attention: the Chief Executive Officer, and if to
the Warrant Holder, at the address set forth below or such other address as may
be provided in writing.
15. Annual and Other Periodic Reports. During the term of this Warrant
---------------------------------
Agreement, the Company will furnish to the Warrant Holder copies of all annual
and other periodic financial and informational reports that the Company
distributes generally to its shareholders.
16. Governing Law. The validity, construction, interpretation, and effect
-------------
of this Warrant shall be governed by and determined in accordance with the laws
of the State of California.
17. Severability. Should any provision or portion of this Warrant
------------
Agreement be held to be unenforceable or invalid for any reason, the remaining
provisions and portions of this Warrant Agreement shall be unaffected by such
holding.
18. Counterparts. This Warrant Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall be deemed one instrument.
19. California Corporate Securities Law. The sale of the shares that are
-----------------------------------
the subject of this Warrant Agreement has not been qualified with the
Commissioner of Corporations of the State of California and the issuance of such
shares or the payment or receipt of any part of the consideration therefor prior
to such qualification is unlawful, unless the sale of such shares is exempt from
such qualification by Section 25100, 25102 or 25105 of the California Corporate
Securities Law of l968, as amended. The rights of all parties to this Warrant
Agreement are expressly conditioned upon such qualification being obtained,
unless the sale is so exempt.
IN WITNESS WHEREOF, the parties have executed this Warrant Agreement as of
the date first above written.
PROLONG INTERNATIONAL CORPORATION
By: /s/ Elton Alderman
-----------------------
Its: President
-----------------------
WARRANT HOLDER
/s/ Thomas G. Iwanski
- ---------------------------
Thomas G. Iwanski
Address: 1541 Amberwood Drive
Santa Ana, California 92705
<PAGE>
EXHIBIT 10.25
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement (this "Agreement") is entered into
as of October 5, 1999 by and between PROLONG INTERNATIONAL CORPORATION, a Nevada
corporation (the "Company"), and THOMAS G. IWANSKI (the "Holder").
WHEREAS, in connection with the Company's issuance to the Holder of a
warrant to purchase up to 800,000 shares of the Company's Common Stock (the
"Warrant") upon the terms and conditions set forth in that certain Warrant
Agreement dated on even date herewith (the "Warrant Agreement"), the Company has
agreed to enter into this Agreement;
NOW THEREFORE, in consideration of the premises and the mutual
agreements, covenants and conditions and releases contained herein, the Company
and the Holder hereby agree as follows:
1. Registration Rights. The Company hereby grants to the Holder the
registration rights set forth in this Section 1, with respect to the Registrable
Securities (as defined below) owned by such Holder. The Company and the Holder
agree that the registration rights provided herein set forth the sole and entire
agreement on the subject matter between the Company and the Holder.
1.1 Definitions. As used in this Section 1:
(a) The term "Holder" means any person owning or having the right
to acquire Registrable Shares or any assignee thereof in accordance with Section
1.8 hereof.
(b) The terms "register," "registered," and "registration" refer
to a registration effected by preparing and filing a registration statement in
compliance with the Securities Act and the applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
(c) The term "Registrable Shares" means and includes (i) the
shares of Common Stock of the Company issued upon exercise of the Warrant; (ii)
any Common Stock of the Company issued, or issuable upon the conversion or
exercise of any warrant, right or other security which is issued, as a result of
a stock split, dividend or other distribution with respect to or in exchange for
or in replacement of the shares referenced in (i) above, excluding in all cases,
however, any Registrable Shares sold by a person in a transaction in which his
or her rights under Section 1 are not assigned and any Registrable Shares which
may be sold under Rule 144(k) of the Securities Act, or any successor rule
thereto.
(d) The term "Securities Act" means the Securities Act of 1933,
as amended.
1.2 "Piggy Back" Registration.
(a) If the Company shall determine to register under the
Securities Act any of its Common Stock (other than a registration relating
solely to the sale of securities to participants in a Company employee benefits
plan, a registration on any form which does not include substantially the same
information as would be required to be included in a registration statement
<PAGE>
covering the sale of the Registrable Shares or a registration in which the only
Common Stock being registered is common stock issuable upon conversion of debt
securities which are also being registered), the Company shall (i) promptly give
each Holder written notice of such registration in accordance with Section 2.5;
and (ii) use its commercially reasonable best efforts to include in such
registration statement all or any part of the Registrable Shares that such
Holder requests to be registered as specified in a written request made by such
Holder and received by the Company within 10 days after the written notice from
the Company described in clause (i) above is mailed by the Company.
(b) Notwithstanding any other provision of this Section 1.2, if
the underwriter determines that marketing factors require a limitation on the
number of shares to be underwritten, the underwriter may limit the number of
Registrable Securities to be included in the registration and underwriting, or
may exclude Registrable Securities entirely from such registration and
underwriting subject to the terms of this Section 1.2. In such event, the
Company shall so advise the Holders of securities requesting registration, and
the number of shares of such securities, including Registrable Securities that
may be included in the registration and underwriting shall be allocated in the
following manner: shares, other than Registrable Securities, requested to be
included in such registration by other stockholders shall be excluded, and if a
limitation on the number of shares is still required, the number of Registrable
Securities that may be included pursuant to this Section 1.2 shall be allocated
pro rata among the Holders requesting to sell common stock. For purposes of the
preceding apportionment, for any selling stockholder which is a holder of
Registrable Shares and which is a partnership or corporation, the partners,
retired partners and stockholders of such holder, or the estates and family
members of any such partners and retired partners and any trusts for the benefit
of any of the foregoing persons shall be deemed to be a single "selling
stockholder", and any pro rata reduction with respect to such "selling
stockholder" shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
"selling stockholder," as defined in this sentence.
1.3 Obligations of the Company. Whenever required under this Section
1 to effect the registration of any Registrable Securities, the Company shall,
as expeditiously as reasonably possible:
(a) Prepare and file with the Securities and Exchange Commission
(the "SEC") a registration statement with respect to such Registrable Securities
and use its commercially reasonable best efforts to cause such registration
statement to become effective, and, upon the request of the Holders of a
majority of the Registrable Securities registered thereunder, keep such
registration statement effective for a period of up to nine months or until the
distribution contemplated in the Registration Statement has been completed,
provided, however, that (i) such nine month period shall be extended for a
period of time equal to the period the Holder refrains from selling any
securities included in such registration at the request of an underwriter of
Common Stock (or other securities) of the Company; and (ii) in the case of any
registration of Registrable Securities on Form S-3 which are intended to be
offered on a continuous or delayed basis, such nine month period shall be
extended, if necessary, to keep the registration statement effective until the
earlier to occur of (A) 18 months following the effectiveness of the
registration statement, or (B) all such Registrable Securities are sold,
provided that Rule 415, or any successor rule under the Securities Act, permits
an offering on a continuous or delayed basis, and provided further that
applicable rules under the Securities Act governing the obligation to file a
post-effective amendment permit, in lieu of filing a post-effective amendment
which (I) includes any prospectus required by Section 10(a)(3)
2
<PAGE>
of the Securities Act or (II) reflects facts or events representing a material
or fundamental change in the information set forth in the registration
statement, the incorporation by reference of information required to be included
in (I) and (II) above to be contained in periodic reports filed pursuant to
Section 13 or 15(d) of the Exchange Act in the registration statement.
(b) Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus contained therein as and to
the extent necessary to comply with the Securities Act and any applicable state
securities statute or regulation.
(c) Furnish to the Holders such copies of each preliminary and
final prospectus, and such other documents as such Holders may reasonably
request to facilitate the disposition of Registrable Securities owned by such
Holders.
(d) Use its commercially reasonable best efforts to register and
qualify the securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions as shall be reasonably
requested by the selling Holders; provided, however, that the Company shall not
be required in connection therewith or as a condition thereto to qualify to do
business or to file a general consent to service of process in any such states
or jurisdictions except as may be required by the Securities Act.
(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect includes an untrue statement of a material fact or omits to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
(g) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed.
(h) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.
(i) Use its commercially reasonable best efforts to furnish, at
the request of any Holder requesting registration of Registrable Securities
pursuant to this Section 1, on the date that such Registrable Securities are
delivered to the underwriters for sale in connection with a registration
pursuant to this Section 1, if such securities are being sold through
underwriters, or, if such securities are not being sold through underwriters, on
the date that the registration statement with respect to such securities becomes
effective:
(i) an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, in form and
substance as is customarily given to
3
<PAGE>
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities;
and
(ii) a letter dated such date, from the independent
certified public accountants of the Company, in form and substance as is
customarily given by independent certified public accountants to underwriters in
an underwritten public offering, addressed to the underwriters, if any, and to
the Holders requesting registration of Registrable Securities; provided that the
applicable professional accounting rules and regulations permit such a letter to
be delivered.
(j) Permit each selling Holder or his counsel or other
representatives to inspect and copy such corporate documents and records as may
reasonably be requested by them; and
(k) Furnish to each selling Holder, upon request, a copy of all
documents filed and all correspondence from or to the SEC in connection with any
such offering unless confidential treatment of such information has been
requested of the SEC.
1.4 Information by the Holders. It shall be a condition precedent to
the obligations of the Company to take any action pursuant to this Section 1
with respect to the Registrable Securities of any selling Holder that such
Holder shall furnish to the Company such information regarding itself, the
Registrable Securities held by it, and the intended method of disposition of
such securities as shall be required to effect the registration of such Holder's
Registrable Securities.
1.5 Indemnification.
(a) Indemnification of Holders. In the event that the Company
registers any of the Registrable Shares under the Securities Act, to the extent
permitted by law, the Company will indemnify and hold harmless each Holder and
each underwriter of the Registrable Shares so registered (including any broker
or dealer through whom such shares may be sold) and each person, if any, who
controls such Holder or any such underwriter within the meaning of Section 15 of
the Securities Act from and against any and all losses, claims, damages,
expenses or liabilities (or any action in respect thereof), joint or several, to
which they or any of them become subject under the Securities Act or other
federal or state law or at common law or otherwise, and, except as hereinafter
provided, will reimburse each such Holder, each such underwriter and each such
controlling person, if any, for any legal or other expenses reasonably incurred
by them or any of them, as such expenses are incurred, in connection with
investigating or defending any actions whether or not resulting in any
liability, insofar as such losses, claims, damages, expenses, liabilities or
actions arise out of or are based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the registration statement, in
any preliminary or final prospectus contained therein (or the registration
statement or prospectus as from time to time amended or supplemented by the
Company); (ii) arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary in
order to make the statements therein not misleading; or (iii) any violation by
the Company of the Securities Act, the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), a state securities law or any rule or regulation
under the Securities Act, the Exchange Act or any state securities law;
provided, however, that the indemnity contained in this Section 1.5(a) will not
apply where such untrue statement or omission was made in such registration
statement, preliminary or amended, preliminary prospectus or prospectus in
4
<PAGE>
reliance upon and in conformity with information furnished in writing to the
Company in connection therewith by such Holder of Registrable Shares, any such
underwriter or any such controlling person expressly for use therein. Promptly
after receipt by any Holder of Registrable Shares, any underwriter or any
controlling person of notice of the commencement of any action in respect of
which indemnity may be sought against the Company, such Holder of Registrable
Shares, or such underwriter or such controlling person, as the case may be, will
notify the Company in writing of the commencement thereof, and, subject to the
provisions hereinafter stated, the Company shall assume the defense of such
action (including the employment of counsel, who shall be counsel reasonably
satisfactory to such Holder of Registrable Shares, such underwriter or such
controlling person, as the case may be), and the payment of expenses insofar as
such action shall relate to any alleged liability in respect of which indemnity
may be sought against the Company. Such Holder of Registrable Shares, any such
underwriter or any such controlling person shall have the right to employ
separate counsel in any such action and to participate in the defense thereof in
the event the representation of such Holder, underwriter or controlling person
by counsel retained by or on the behalf of the Company would be inappropriate
due to conflicts of interest between any such person and any other party
represented by such counsel in such proceeding or action, in which case the
Company shall pay, as incurred, the fees and expenses of such separate counsel.
The Company shall not be liable to indemnify any person under this Section
1.5(a) for any settlement of any such action effected without the Company's
consent (which consent shall not be unreasonably withheld). The Company shall
not, except with the approval of each party being indemnified under this Section
1.5(a) (which approval will not be unreasonably withheld), consent to entry of
any judgment or enter into any settlement that does not include as an
unconditional term thereof the giving by the claimant or plaintiff to the
parties being so indemnified of a release from all liability in respect to such
claim or litigation.
(b) Indemnification of Company. In the event that the Company
registers any of the Registrable Shares under the Securities Act, to the extent
permitted by law, each Holder of the Registrable Shares so registered will
indemnify and hold harmless the Company, each of its directors, each of its
officers who have signed the registration statement, each underwriter of the
Registrable Shares so registered (including any broker or dealer through whom
any of such shares may be sold) and each person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act from and against
any and all losses, claims, damages, expenses or liabilities (or any action in
respect thereof), joint or several, to which they or any of them may become
subject under the Securities Act or under any other statute or at common law or
otherwise, and, except as hereinafter provided, will reimburse the Company and
each such director, officer, underwriter or controlling person for any legal or
other expenses reasonably incurred by them or any of them, as such expenses are
incurred, in connection with investigating or defending any actions whether or
not resulting in any liability, insofar as such losses, claims, damages,
expenses, liabilities or actions arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
registration statement, in any preliminary or amended preliminary prospectus or
in the prospectus (or the registration statement or prospectus as from time to
time amended or supplemented) or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary in order to make the statements therein not misleading, but only
insofar as any such statement or omission was made in reliance upon and in
conformity with information furnished in writing to the Company in connection
therewith by such Holder, expressly for use therein. Promptly after receipt of
notice of the commencement of any action in respect of which indemnity may be
sought against such Holder of Registrable Shares, the Company will notify such
Holder of Registrable Shares in writing of the
5
<PAGE>
commencement thereof, and such Holder of Registrable Shares shall, subject to
the provisions hereinafter stated, assume the defense of such action (including
the employment of counsel, who shall be counsel satisfactory to the Company) and
the payment of expenses insofar as such action shall relate to the alleged
liability in respect of which indemnity may be sought against such Holder of
Registrable Shares. The Company and each such director, officer, underwriter or
controlling person shall have the right to employ separate counsel in any such
action and to participate in the defense thereof in the event the representation
of the Company, any of its officers or directors or any underwriter or
controlling person by counsel retained by or on the behalf of such Holder would
be inappropriate due to conflicts of interest between any such person and any
other party represented by such counsel in such proceeding or action, in which
case such Holder shall pay, as incurred, the fees and expenses of such separate
counsel. Notwithstanding the two preceding sentences, if the action is one in
which the Company may be obligated to indemnify any Holder of Registrable Shares
pursuant to Section 1.5, the Company shall have the right to assume the defense
of such action, subject to the right of such Holders to participate therein as
permitted by Section 1.5. Such Holder shall not be liable to indemnify any
person for any settlement of any such action effected without such Holder's
consent (which consent shall not be unreasonably withheld). Such Holder shall
not, except with the approval of the Company (which approval shall not be
unreasonably withheld), consent to entry of any judgment or enter into any
settlement that does not include as an unconditional term thereof the giving by
the claimant or plaintiff to the party being so indemnified of a release from
all liability in respect to such claim or litigation.
(c) Contribution. If the indemnification provided for in Section
1.5 is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, liability, claim, damage, or expense
referred to therein, then the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such loss, liability, claim, damage, or
expense in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and of the indemnified party on the other
in connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
1.6 Exchange Act Registration. With a view to making available to
the Holders the benefits of Rule 144 promulgated under the Securities Act and
any other rule or regulation of the SEC that may at any time permit a Holder to
sell securities of the Company to the public without registration, the Company
agrees to:
(a) use its commercially reasonable best efforts to make and keep
public information available, as those terms are understood and defined in SEC
Rule 144;
(b) file on a timely basis with the SEC all information that the
Commission may require under either of Section 13 or Section 15(d) of the
Exchange Act and, so long as it is required to file such information, take all
action that may be required as a condition to the availability of Rule 144 under
the Securities Act (or any successor exemptive rule hereinafter in effect) with
respect to the Company's common stock;
6
<PAGE>
(c) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company as to its compliance with the reporting requirements of Rule 144, (ii) a
copy of the most recent annual or quarterly report of the Company as filed with
the SEC, and (iii) any other reports and documents that a Holder may reasonably
request in availing itself of any rule or regulation of the SEC allowing a
Holder to sell any such Registrable Shares without registration.
1.7 Expenses. In the case of a registration under Section 1.2, the
Company shall bear all costs and expenses in connection with registrations,
filings or qualifications pursuant to each such registration, including, but not
limited to, printing, legal and accounting expenses, SEC filing fees and "blue
sky" fees and expenses; provided, however, that the Company shall have no
obligation to pay or otherwise bear (i) any portion of the underwriter's
commissions or discounts or stock transfer taxes attributable to the Registrable
Shares being offered and sold by the Holders of Registrable Shares, or (ii) any
of such expenses if the payment of such expenses by the Company is prohibited by
the laws of a state in which such offering is qualified and only to the extent
so prohibited.
1.8 Transfer of Registration Rights. The registration rights of a
Holder of Registrable Shares under this Agreement may be transferred to any
transferee provided (a) that the transferee receives at least 50% of the
Registrable Shares held by the Holder and thereafter continues to hold at least
400,000 Registrable Shares (excluding transfers to partners or affiliates of the
Holder which shall not be restricted as to the minimum number of shares); (b)
the transferee is bound by the terms of this Agreement; and (c) the Company is
given 30 days prior written notice of such transfer. Notwithstanding the
foregoing, the registration rights of a Holder under this Agreement may not be
transferred to an entity, or a person controlled by, under common control with
or controlling such entity, which is a direct competitor of the Company.
1.9 Market Stand-Off Agreement. Provided that all Holders are
treated equally and all officers and directors of the Company are also so bound,
no Holder shall, to the extent requested by the Company or any managing
underwriter of the Company, sell or otherwise transfer or dispose of (other than
to donees who agree to be similarly bound) any Registrable Shares during a
period (the "Stand-Off Period") equal to 180 days following the effective date
of a registration statement of the Company filed under the Securities Act (or
such shorter period as the Company or managing underwriter may authorize),
except for securities sold as part of the offering covered by such registration
statement in accordance with the provisions of this Agreement. In order to
enforce the foregoing covenant, the Company may impose stock transfer
restrictions with respect to the Registrable Shares of each Holder until the end
of the Stand-Off Period.
Notwithstanding the foregoing, the obligations described in this
Section 1.9 shall not apply to a registration relating solely to employee
benefit plans on Form S-8 or similar forms which may be promulgated in the
future, or a registration relating solely to an SEC Rule 145 transaction on Form
S-4 or similar forms which may be promulgated in the future.
1.10 Termination of Registration Rights. The obligations of the
Company to register any Holder's Registrable Shares pursuant to this Section 1
shall terminate on the earlier of (i) with respect to any Holder of registration
rights, at such time as all Registrable Securities of such Holder may be sold
within a three month period pursuant to Rule 144 or (ii) at such time as a
Holder
7
<PAGE>
holds Registrable Securities constituting less than one percent of the
outstanding voting stock of the Company.
2. Miscellaneous.
2.1 Assignability. Except as otherwise provided herein, this
Agreement shall be binding upon and inure to the benefit of the respective
heirs, successors and assigns of the parties hereto. Nothing in this Agreement
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.
2.2 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California.
2.3 Amendment. Any term of this Agreement may be amended and the
observance of any term of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the holders of 66% of the Registrable
Securities then outstanding. Any amendment or waiver effected in accordance
with this paragraph shall be binding upon each holder of any Registrable
Securities then outstanding, each future holder of all such Registrable
Securities, and the Company.
2.4 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
2.5 Notice. Unless otherwise provided, any notice required or
permitted under this Agreement shall be in writing, shall be effective upon
receipt or, if earlier, (i) five (5) days after deposit with the U.S. postal
service or other applicable postal service, if delivered by first class mail,
postage prepaid, (ii) upon delivery, if delivered by hand, (iii) one (1)
business day after the day of deposit with Federal Express or similar overnight
courier, freight prepaid, if delivered by overnight courier or (iv) one (1)
business day after the day of facsimile transmission, if delivered by facsimile
transmission with copy by first class mail, postage prepaid, and shall be
addressed as follows:
If to any Holder, to: The name and address set forth on Exhibit A hereto
If to the Company, to: Prolong International Corporation
6 Thomas
Irvine, California 92618
Telecopier: (949) 587-2704
with a copy to: Michael E. Flynn, Esq.
Stradling Yocca Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660
Telecopier: (949) 725-4100
Each of the parties herewith shall be entitled to specify another
address by giving notice as aforesaid to each of the other parties hereto.
8
<PAGE>
2.6 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
2.7 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
2.8 Aggregation of Stock. All shares of Registrable Shares held or
acquired by affiliated entities or persons shall be aggregated together for the
purpose of determining the availability of any rights under this Agreement.
2.9 Entire Agreement. This Agreement (including the Exhibits hereto,
if any) constitutes the full and entire understanding and agreement between the
parties with regard to the subjects hereof and thereof.
2.10 References. Any references to forms or schedules governed by
the Securities Act or Exchange Act means such forms or schedules under the
Securities Act and Exchange Act as in effect on the date hereof or any successor
forms or schedules subsequently adopted by the SEC.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Registration
Rights Agreement to be executed as of the date first above written.
Prolong International Corporation
/s/ Elton Alderman
----------------------------------------------
Elton Alderman,
President and Chief Executive Officer
Holder
/s/ Thomas G. Iwanski
----------------------------------------------
Thomas G. Iwanski
10
<PAGE>
EXHIBIT A
LISTING OF HOLDERS
<TABLE>
<CAPTION>
Number of
Registrable
Name and Address Shares
------------------------------ -----------
<S> <C>
Thomas G. Iwanski 800,000*
1541 Amberwood Drive
Santa Ana, California 92705
-----------
Total: 800,000
===========
</TABLE>
* Issuable upon exercise of warrant.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,228,845
<SECURITIES> 0
<RECEIVABLES> 7,335,697
<ALLOWANCES> 305,125
<INVENTORY> 3,078,345
<CURRENT-ASSETS> 13,719,327
<PP&E> 4,000,806
<DEPRECIATION> 443,196
<TOTAL-ASSETS> 25,664,342
<CURRENT-LIABILITIES> 7,902,240
<BONDS> 0
0
0
<COMMON> 28,446
<OTHER-SE> 15,391,224
<TOTAL-LIABILITY-AND-EQUITY> 25,664,342
<SALES> 9,758,596
<TOTAL-REVENUES> 9,758,596
<CGS> 2,482,588
<TOTAL-COSTS> 2,583,588
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 15,000
<INTEREST-EXPENSE> 138,599
<INCOME-PRETAX> (640,272)
<INCOME-TAX> (224,000)
<INCOME-CONTINUING> (416,272)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (416,272)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
