<PAGE>
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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 June 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 of Irvine, CA 92618 (IRS Employer Identification No.)
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 August 11, 1999.
Page 1 of 18 pages
Exhibit Index on Sequentially Numbered Page 17
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PROLONG INTERNATIONAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART 1 FINANCIAL INFORMATION Page
<S> <C>
Item 1: Financial Information
Consolidated Condensed Balance Sheets -
June 30, 1999 and December 31, 1998................................. 3
Consolidated Condensed Statements of Operations - Three months
and Six months ended June 30, 1999 and 1998......................... 4
Consolidated Condensed Statements of Cash Flows -
Six months ended June 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
PART II OTHER INFORMATION
Item 1: Legal Proceedings................................................... 17
Item 4: Submission of Matters to a Vote of Security Holders................. 17
Item 6: Exhibits and Reports on Form 8-K.................................... 17
Signatures.......................................................... 18
</TABLE>
2
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 356,788 $ 1,127,861
Accounts receivable, net 8,616,918 4,950,055
Inventories 4,717,104 2,915,249
Prepaid expenses 1,493,673 1,316,443
Prepaid Income taxes 103,353 444,371
Prepaid television time 549,472 627,050
Advances to employees 252,240 308,630
Deferred tax asset 970,645 63,645
------------- -------------
Total current assets 17,060,193 11,753,304
Property and equipment, net 3,629,901 3,372,509
Intangible assets, net 7,290,011 7,543,354
Deferred tax asset, noncurrent 439,791 439,791
Other assets 162,054 101,914
------------- -------------
TOTAL ASSETS $ 28,581,950 $ 23,210,872
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,452,588 $ 1,878,418
Accrued expenses 2,184,851 1,460,163
Loans payable to bank 3,735,000 -
Notes payable, current 42,372 41,951
------------- -------------
Total current liabilities 10,414,811 3,380,532
Notes payable, noncurrent 2,353,196 2,376,005
------------- -------------
Total liabilities 12,768,007 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 14,760,439 14,716,438
Retained earnings 1,025,058 2,709,451
------------- -------------
Total stockholders' equity 15,813,943 17,454,335
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 28,581,950 $ 23,210,872
============= =============
</TABLE>
See notes to consolidated condensed financial statements
-3-
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PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET REVENUES $ 12,001,207 $ 8,399,828 $ 21,751,079 $ 19,248,570
COST OF GOODS SOLD 3,029,505 1,641,800 5,687,444 3,647,214
------------- ------------- ------------- -------------
GROSS PROFIT 8,971,702 6,758,028 16,063,635 15,601,356
OPERATING EXPENSES:
Selling expenses 9,113,702 5,158,486 14,687,597 9,899,087
General and administrative expenses 2,150,561 1,383,109 3,815,576 2,725,813
------------- ------------- ------------- -------------
Total operating expenses 11,264,263 6,541,595 18,503,173 12,624,900
------------- ------------- ------------- -------------
OPERATING INCOME (LOSS) (2,292,561) 216,433 (2,439,538) 2,976,456
OTHER INCOME (EXPENSE), net:
Interest (expense) (104,902) (35,732) (158,520) (36,709)
Interest income 1,961 28,023 6,665 88,545
------------- ------------- ------------- -------------
Total other income (expense), net (102,941) (7,709) (151,855) 51,836
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (2,395,502) 208,724 (2,591,393) 3,028,292
PROVISION (BENEFIT) FOR INCOME TAXES (839,000) 93,000 (907,000) 1,306,000
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ (1,556,502) $ 115,724 $ (1,684,393) $ 1,722,292
============= ============= ============= =============
NET INCOME (LOSS) PER SHARE
Basic ($0.06) $0.01 ($0.06) $0.07
============= ============= ============= =============
Diluted ($0.06) $0.01 ($0.06) $0.07
============= ============= ============= =============
WEIGHTED AVERAGE COMMON SHARES
Basic 28,445,835 25,464,500 28,445,835 25,464,500
Diluted options outstanding 0 292,329 0 362,625
------------- ------------- ------------- -------------
Diluted 28,445,835 25,756,829 28,445,835 25,827,125
============= ============= ============= =============
</TABLE>
See notes to consolidated condensed financial statements
-4-
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,684,393) $ 1,722,292
Adjustments to reconcile net income to net cash provided by
(used) in operating activities :
Depreciation and amortization 415,818 65,283
Provision for doubtful accounts (289,875) 178,571
Deferred taxes (907,000) -
Reserve for obsolesence 20,000 45,000
Compensation costs related to options 44,001 -
Changes in assets and liabilities, net of effects of acquisition :
Accounts receivable (3,376,988) (1,555,834)
Inventories (1,821,855) (2,603,991)
Prepaid expenses (177,230) (429,662)
Prepaid income taxes 341,018 -
Prepaid television time 77,578 347,971
Deposits (65,890) (215,897)
Accounts payable 2,574,170 861,198
Accrued expenses 724,688 (211,598)
Income taxes payable - (1,436,197)
-------------- --------------
Net cash (used in) operating activities (4,125,958) (3,232,864)
CASH FLOWS FROM INVESTING ACTIVITIES :
Purchases of property and equipment (414,117) (532,630)
Prepaid advances 56,390 (34,336)
-------------- --------------
Net cash (used in) investing activities (357,727) (566,966)
CASH FLOWS FROM FINANCING ACTIVITIES :
Payments on notes payable (22,388) (3,533)
Proceeds from bank loans 3,735,000 -
-------------- --------------
Net cash provided by financing activities 3,712,612 (3,533)
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (771,073) (3,803,363)
CASH AND CASH EQUIVALENTS, beginning of period 1,127,861 6,180,983
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period $ 356,788 $ 2,377,620
============== ==============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ - $ 2,742,200
============== ==============
Interest paid $ 104,902 $ 36,709
============== ==============
</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 $44,001 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 June 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 six months ended June 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:
June 30, December 31,
1999 1998
---- ----
(Unaudited)
Raw materials $1,368,483 $ 936,451
Finished goods 2,552,396 1,430,797
Promotional items 796,225 548,001
---------- ----------
$4,717,104 $2,915,249
========== ==========
6
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4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
June 30, December 31,
1999 1998
---- ----
(Unaudited)
Building $2,280,014 $2,268,559
Computer equipment 277,523 230,264
Office equipment 55,753 54,073
Furniture and fixtures 571,964 255,669
Automotive equipment 35,925 35,925
Exhibit equipment 115,143 115,143
Molds and dies 99,445 63,193
Machinery and equipment 13,350 12,174
---------- ----------
3,449,117 3,035,000
Less accumulated depreciation (357,216) (200,491)
---------- ----------
3,091,901 2,834,509
Land 538,000 538,000
---------- ----------
$3,629,901 $3,372,509
========== ==========
5. LOANS PAYABLE TO BANK
The bank increased the line of credit available to the Company from $4
million to $6.5 million on June 8, 1999. As of October 1, 1999, the credit
line reverts to $4 million until January 31, 2000, at which time the line
is subject to renewal. In conjunction with the credit line increase, the
bank revised certain financial covenants. As of June 30, 1999, the Company
was in default with respect to four of the financial covenants.
On August 13, 1999, the Company received a verbal notification of
forbearance from the bank. Conditions attached to this forbearance notice
are currently pending negotiations.
6. NOTES PAYABLE
Notes payable consist of the following as of June 30, 1999:
1) 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. $1,667,990
7
<PAGE>
2) 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 . 727,578
----------
2,395,568
Less current maturities (42,372)
----------
$2,353,196
==========
Year ending December 31,
1999 $ 22,011
2000 46,444
2001 50,256
2002 53,971
2003 57,969
Thereafter 2,164,917
----------
$2,395,568
==========
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 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
8
<PAGE>
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.
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 Six Months Ended
June 30, June 30,
-------------------- ------------------
1999 1998 1999 1998
--------------------- ------------------
<S> <C> <C> <C> <C>
Net revenues 100.0 100.0 100.0 100.0
Cost of goods sold 25.2 19.5 26.1 18.9
------------------- ------------------
Gross profit 74.8 80.5 73.9 81.1
Selling expenses 75.9 61.4 67.6 51.4
General and administrative expenses 17.9 16.5 17.5 14.2
------------------- ------------------
Operating income (loss) (19.0) 2.6 (11.2) 15.5
Other income (expense) (0.9) (0.1) (0.7) 0.3
------------------- ------------------
Income (loss) before income taxes (19.9) 2.5 (11.9) 15.8
Provision (benefits) for income taxes (7.0) 1.1 (4.2) 6.8
------------------- ------------------
Net income (loss) (12.9) 1.4 (7.7) 9.0
=================== ==================
</TABLE>
Three Months Ended June 30, 1999 vs. Three Months Ended June 30, 1998
Net revenues for the three months ended June 30, 1999 were approximately
$12,000,000 as compared to approximately $8,400,000 for the comparable period of
the prior year, an increase of $3,600,000 or 42.9%. Revenues for the three month
period ended June 30, 1999 were derived from the following sources: Direct
response infomercial sales of $2,017,000 ($1,807,000 of appearance products and
$210,000 of lubricants); retail sales of $9,202,000 ($1,994,000 of appearance
products and $7,208,000 of lubricants); industrial sales of $191,000; and,
international and other sales of $590,000. Revenues for the three month period
ended June 30, 1998 were derived from the following sources: Direct response
infomercial sales of $1,385,000 (all lubricant products); retail sales of
$6,151,000 (all lubricant products); industrial sales of $297,000; and,
international and other sales of $567,000. The increase in sales is mainly
attributable to the launch of the new automotive appearance products.
10
<PAGE>
For the three month period ended June 30, 1999, retail sales were 76.7% of total
revenues while direct response infomercial sales comprised 16.8% of total
revenues. For the three month period ended June 30, 1998, direct response
infomercial sales comprised 16.5% of total revenues while retail sales were
73.2%.
Cost of goods sold for the three months ended June 30, 1999 was approximately
$3,030,000 as compared to $1,642,000 for the comparable period of the prior
year, an increase of $1,388,000 or 84.5%. As a percentage of sales, cost of
goods sold increased from 19.5% in 1998 to 25.2% in 1999. This increase was
mainly attributable to the higher cost of new packaging (introduced toward the
end of the second quarter of 1998) for the lubricant products and a shift in
product mix with the appearance products yielding lower gross margin than the
lubricant products.
Selling expenses of approximately $9,114,000 for the three months ended June 30,
1999 represented an increase of $3,956,000 over the comparable period of the
prior year. This 76.7% increase was primarily the result of marketing allowances
to retail customers, one time sales slotting fees to new retailers, commissions
as a result of increased sales, promotional activities to promote product
awareness, and increased telemarketing expenses and television air-time
purchases relating to the continued launch of the new appearance products.
Selling expenses as a percentage of sales were 75.9% for the three months ended
June 30, 1999 versus 61.4% 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
quarter 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 three months ended June 30, 1999
were approximately $2,151,000 as compared to $1,383,000 for the three months
ended June 30, 1998, an increase of $768,000 or 55.5%. This increase is
primarily attributable to salaries and benefits for new employees, general
insurance expenses, costs related to the design of the Company's new
e-commerce website and higher legal expenses.
Interest expense of approximately $105,000 for the three months ended June 30,
1999 represented an increase of $69,000 over the comparable period of the prior
year. The increase is attributable to the increase in bank loans payable.
For the three month period ended June 30, 1999, the Company generated net
interest income of approximately $2,000 as compared to approximately $28,000 for
the comparable period in 1998. The decrease is attributable to the decrease of
cash balances in interest bearing accounts.
11
<PAGE>
Net income (loss) for the three month period ended June 30, 1999 was
approximately $(1,557,000) compared to approximately $116,000 for the comparable
period in the prior year, a decrease of $1,673,000. The decrease is a result of
the factors discussed above.
Six Months Ended June 30, 1999 vs. Six Months Ended June 30, 1998
Net revenues for the six months ended June 30, 1999 were approximately
$21,751,000 as compared to approximately $19,249,000 for the comparable period
in the prior year, an increase of $2,502,000 or 13.0%. Revenues for the six
month period ended June 30, 1999 were derived from the following sources: Direct
response infomercial sales of $3,068,000 ($2,147,000 of appearance products and
$921,000 of lubricants); retail sales of $17,218,000 ($4,245,000 of appearance
products and $12,973,000 of lubricants); industrial sales of $391,000; and,
international and other sales of $1,074,000. Revenues for the six month period
ended June 30, 1998 were derived from the following sources: Direct response
infomercial sales of $3,342,000 (all lubricants); retail sales of $14,206,000
(all lubricants); industrial sales of $613,000; and, international and other
sales of $1,088,000. The increase in sales is mainly attributable to sales of
approximately $6,400,000 of the new automotive appearance products which was
partially offset by a decrease in lubricant sales of approximately $3,700,000.
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 reached the end of its effective life.
For the six month period ended June 30, 1999, retail sales were 79.2% of total
revenues while direct response infomercial sales comprised 14.1% of total
revenues. For the six month period ended June 30, 1998, direct response
infomercial sales comprised 17.4% of total revenues while retail sales were
73.8%.
Cost of goods sold for the six months ended June 30, 1999 was approximately
$5,687,000 as compared to $3,647,000 for the comparable period of the prior
year, an increase of $2,040,000 or 55.9%. Cost of goods sold, as a percentage of
sales, increased from 18.9% for the six month period ended June 30, 1998 to
26.1% 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 products and a shift in product mix with the
appearance products yielding lower gross margin than the lubricant products.
Selling expenses of $14,688,000 for the six months ended June 30, 1999
represented an increase of $4,789,000 over the comparable period of the prior
year. This 48.4% 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, commissions as a result of increased sales, 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 67.6% for the six months ended June 30, 1999 versus 51.4% for the
comparable period of the previous year. Selling expenses as a percentage of
sales increased largely
12
<PAGE>
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 six 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 six months ended June 30, 1999 were
approximately $3,816,000 as compared to $2,726,000 for the six months ended June
30, 1998, an increase of $1,090,000 or 40.0%. 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 website. As a percentage of sales, general and
administrative expenses increased from 14.2% for the six months ended June 30,
1998 to 17.5% 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 website.
Interest expense of approximately $159,000 for the six months ended June 30,
1999 represented an increase of $122,000 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.
For the six months ended June 30, 1999, the Company generated net interest
income of approximately $6,700 as compared to approximately $89,000 for the
comparable period in 1998. The decrease is attributable to the decrease of cash
balances in interest bearing accounts.
Net income (loss) for the six month period ended June 30, 1999 was approximately
$(1,684,000) as compared to approximately $1,722,000 for the comparable period
in the prior year, a decrease of $3,406,000. The decrease is a result of the
factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had net working capital of $6,645,000 as compared
to $8,373,000 at December 31, 1998 or a decrease of $1,728,000. During the six
months ended June 30, 1999, the Company used approximately $4,100,000 in
operating activities largely to fund a $3,300,000 increase in accounts
receivable, a $1,800,000 increase in inventories and $1,700,000 of losses during
the period. These uses of cash were partially offset by a $3,300,000 increase in
accounts payable and accrued expenses. Additionally, the Company used
approximately $400,000 for investing activities which were primarily purchases
of property and equipment. These uses of cash were funded during the six months
ended June 30, 1999 primarily by existing cash reserves and proceeds from the
Company's bank credit line.
13
<PAGE>
In June, 1999, the bank reviewed the line of credit facility and agreed to
increase the amount available to $6,500,000 until October 1, 1999 at which time
the amount available reverts to $4,000,000. The line is subject to renewal on
January 31, 2000. As of June 30, 1999, the Company was in default with respect
to four of the financial covenants. On August 13, 1999, the Company received a
verbal notification of forbearance from the bank. Conditions attached to this
forbearance notice are currently pending negotiations. During the second quarter
of 1999, the Company began to implement 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 credit facilities. The Company may need
to seek additional financing in the future, but this is not anticipated at the
current time, nor is there any assurance that appropriate financing can be
obtained, if needed.
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 will become "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
14
<PAGE>
respond to a compliance questionnaire and initial responses to these
questionnaires have been received. Based on the 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 third quarter of 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 October 31, 1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PIC's financial instruments include cash and long-term debt. At June 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 June 30, 1999 and December 31, 1998.
15
<PAGE>
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.
16
<PAGE>
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 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of Stockholders was held on June 16, 1999.
(b) Set forth below is the name of each director elected at the meeting and the
number of votes cast for their election, the number of votes against their
election, the number of votes abstained and the number of non-votes:
<TABLE>
<CAPTION>
Number of Number of Votes Number of Votes Number of
----- -----
Name Class # Votes "For" "Against" "Abstain" "Non-Votes"
---- ------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Bruce F. Barnes I 24,326,138 124,250 0 3,995,447
William J. Howell I 24,326,138 124,250 0 3,995,447
</TABLE>
(c) Proposal Two to appoint Deloitte & Touche, LLP as the Company's independent
auditors resulted in the following number of votes for, against, abstain,
withheld and non-vote:
<TABLE>
<CAPTION>
Number of Number of Number of Number of Number of
Votes "For" Votes "Against" Votes "Abstain" Votes "Withheld" "Non-Votes"
- ---------------------- --------------------- -------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
24,401,023 5,850 43,515 0 3,995,447
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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.
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.
17
<PAGE>
PROLONG INTERNATIONAL CORPORATION
Date: August 16, 1999 /s/ Nicholas Rosier
----------------------------
Nicholas Rosier
Chief Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 356,788
<SECURITIES> 0
<RECEIVABLES> 8,907,043
<ALLOWANCES> 290,125
<INVENTORY> 4,717,104
<CURRENT-ASSETS> 17,060,193
<PP&E> 3,987,117
<DEPRECIATION> 357,216
<TOTAL-ASSETS> 28,581,950
<CURRENT-LIABILITIES> 10,414,811
<BONDS> 0
0
0
<COMMON> 28,446
<OTHER-SE> 15,785,497
<TOTAL-LIABILITY-AND-EQUITY> 28,581,950
<SALES> 12,001,207
<TOTAL-REVENUES> 12,001,207
<CGS> 3,029,505
<TOTAL-COSTS> 3,029,505
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 60,000
<INTEREST-EXPENSE> 104,902
<INCOME-PRETAX> (2,395,502)
<INCOME-TAX> (839,000)
<INCOME-CONTINUING> (1,556,502)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,556,502)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
