<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, 2000
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 28,438,903 shares of the registrant's common stock ($0.001 par value)
outstanding as of November 14, 2000.
Page 1 of 16 pages
Exhibit Index on Sequentially Numbered Page 16
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<PAGE>
PROLONG INTERNATIONAL CORPORATION
FORM 10-Q
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PART 1 FINANCIAL INFORMATION Page
<S> <C>
Item 1: Financial Information
Consolidated Condensed Balance Sheets -
September 30, 2000 and December 31, 1999.............................................. 3
Consolidated Condensed Statements of Operations - Three months
and Nine months ended September 30, 2000 and 1999..................................... 4
Consolidated Condensed Statements of Cash Flows -
Nine months ended September 30, 2000 and 1999......................................... 5
Notes to Consolidated Condensed Financial Statements.................................. 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................. 11
Item 3: Quantitative and Qualitative Disclosures About Market Risk............................ 15
PART II OTHER INFORMATION
Item 1: Legal Proceedings..................................................................... 16
Item 6: Exhibits and Reports on Form 8-K...................................................... 16
Signatures............................................................................ 16
</TABLE>
See notes to consolidated condensed financial statements
2
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
2000 1999
----
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 321,191 $ 1,094,779
Accounts receivable, net of allowance for doubtful accounts
of $140,000 at September 30, 2000 and $389,732 at December 31, 1999 3,742,713 2,747,459
Inventories, net 1,642,690 2,171,728
Prepaid expenses, net 717,010 182,646
Income taxes receivable --- 94,275
Prepaid television time 63,843 ---
Advances to employees 184,161 218,523
Deferred tax asset 1,228,621 1,617,442
----------- -----------
Total current assets 7,900,229 8,126,852
Property and equipment, net 3,284,138 3,554,176
Intangible assets, net 6,656,657 7,036,670
Deferred tax asset, noncurrent 1,256,718 2,545,238
Other assets, net 118,640 116,712
----------- -----------
TOTAL ASSETS $19,216,382 $21,379,648
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,620,938 $ 2,843,843
Accrued expenses 1,066,364 1,210,126
Line of credit from bank 2,484,044 3,985,000
Income taxes payable 55,754 ---
Notes payable, current 49,369 46,446
----------- ------------
Total current liabilities 6,276,469 8,085,415
Notes payable, noncurrent 2,289,990 2,327,048
----------- ------------
Total liabilities 8,566,459 10,412,463
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; 28,438,903
shares issued and outstanding at September 30, 2000 28,439 28,446
Additional paid-in capital 14,866,890 14,809,349
Accumulated deficit (4,245,406) (3,870,610)
------------ ------------
Total stockholders' equity 10,649,923 10,967,185
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,216,382 $ 21,379,648
=========== ============
</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,
---------------------------- -----------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET REVENUES $3,651,886 $9,758,596 $16,628,606 $ 31,509,675
COST OF GOODS SOLD 1,046,648 2,482,588 4,140,743 8,170,032
---------- ---------- ----------- ------------
GROSS PROFIT 2,605,238 7,276,008 12,487,863 23,339,643
OPERATING EXPENSES:
Selling and marketing 2,224,341 6,400,017 8,715,837 21,087,614
General and administrative 979,547 1,379,843 3,674,633 5,195,419
---------- ---------- ------------ ------------
Total operating expenses 3,203,888 7,779,860 12,390,470 26,283,033
OPERATING INCOME (LOSS) (598,650) (503,852) 97,393 (2,943,390)
OTHER INCOME (EXPENSE), net:
Interest (expense) (122,522) (138,599) (405,238) (297,119)
Interest income 3,512 2,179 8,783 8,844
---------- ---------- ------------ ------------
Total other (expense), net (119,010) (136,420) (396,455) (288,275)
(LOSS) BEFORE PROVISION FOR INCOME TAXES (717,660) (640,272) (299,062) (3,231,665)
PROVISION (BENEFIT) FOR INCOME TAXES (213,124) (224,000) 75,734 (1,131,000)
---------- ---------- ------------ ------------
NET (LOSS) $(504,536) $ (416,272) $ (374,796) $ (2,100,665)
========= ========== ============ ============
NET (LOSS) PER SHARE
Basic ($0.02) ($0.01) ($0.01) ($0.07)
========= ========== ============ ============
Diluted ($0.02) ($0.01) ($0.01) ($0.07)
========= ========== ============ ============
WEIGHTED AVERAGE COMMON SHARES
Basic 28,438,903 28,445,835 28,443,507 28,445,835
Diluted options outstanding 0 0 0 0
========== ========== =========== =============
Diluted 28,438,903 28,445,835 28,443,507 28,445,835
========== ========== =========== =============
</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,
------------------------------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (374,796) $(2,100,665)
Adjustments to reconcile net income (loss) to net cash provided by
(used) in operating activities:
Depreciation and amortization 669,510 631,343
Provision for doubtful accounts (249,732) (274,875)
Deferred taxes 1,677,341 (789,981)
Reserve for obsolescence (101,712) 25,891
Compensation costs related to options 61,000 66,000
Exchange of common stock for accounts receivable (3,466) ---
Changes in assets and liabilities:
Accounts receivable (745,522) (1,805,642)
Inventories 630,750 (188,987)
Prepaid expenses (534,364) (14,980)
Prepaid television time (63,843) 627,050
Deposits (10,553) (190,984)
Accounts payable (222,905) 878,222
Accrued expenses (143,762) (341,935)
Income taxes payable 150,029 ---
----------- -----------
Net cash provided by (used in) operating activities 737,975 (3,479,543)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (10,834) (427,806)
Employee advances 34,362 56,485
----------- -----------
Net cash provided by (used in) investing activities 23,528 (371,321)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (34,135) (33,152)
Proceeds (payments) on line of credit from bank, net (1,500,956) 3,985,000
----------- -----------
Net cash provided by (used in) financing activities (1,535,091) 3,951,848
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (773,588) 100,984
CASH AND CASH EQUIVALENTS, beginning of period 1,094,779 1,127,861
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 321,191 $ 1,228,845
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 92,000 $ ---
=========== ===========
Interest paid $ 405,238 $ 297,119
=========== ===========
</TABLE>
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
During 1999, the Company completed the following transactions:
Recorded $66,000 to additional paid-in capital for compensation costs related to
stock options.
During 2000, the Company completed the following transactions:
Recorded $61,000 to additional paid-in capital for compensation costs related to
stock options. Recorded the exchange of 6,932 shares of common stock for relief
of accounts receivable.
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 worldwide distribution of a patented
complete line of high-performance and high-quality lubricants and
appearance products.
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, 2000 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2000. For
further information, refer to the Form 10-K for the year ended December 31,
1999 filed by the Company with the Securities and Exchange Commission.
3. INVENTORIES
Inventories consist of the following:
September 30, December 31,
2000 1999
---- ----
(Unaudited)
Raw materials $ 701,580 $ 985,785
Finished goods 941,110 1,185,943
---------- ----------
$1,642,690 $2,171,728
========== ==========
6
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Building and improvements $2,280,783 $2,280,783
Computer equipment 276,729 276,729
Office equipment 55,753 55,753
Furniture and fixtures 585,168 581,324
Automotive equipment 35,925 35,925
Exhibit equipment 115,143 115,143
Machinery and equipment 17,953 17,953
Molds and dies 213,951 206,961
---------- ----------
$3,581,405 3,570,571
Less accumulated depreciation (835,267) (554,395)
---------- ----------
2,746,138 3,016,176
Land 538,000 538,000
---------- ----------
$3,284,138 $3,554,176
========== ==========
</TABLE>
5. LINE OF CREDIT
As of May 8, 2000, the Company entered into a new $6,000,000 credit
facility with a financial institution, expiring in May 2003. Such facility
is collateralized by eligible accounts receivable and inventories. Interest
is payable monthly at the rate of the financial institution's prime rate
(9.50% at September 30, 2000), plus 1% subject to a minimum interest charge
of $50,000 per quarter. The credit facility contains certain defined net
income and tangible net worth financial covenants. At September 30, 2000,
the Company was in compliance or had received waivers for all financial
covenants. Effective October 1, 2000, the interest rate was changed to the
current Floating Rate plus 2%. As of September 30, 2000, $2,484,044 was
outstanding and approximately $130,000 was available under the terms of the
line of credit. For additional information, please refer to the "Liquidity
and Capital Resources" section on page 14.
7
<PAGE>
6. NOTES PAYABLE
Notes payable consist of the following as of September 30, 2000:
a) 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. $1,635,658
b) Loan from CDC Small Business Finance Corporation
bearing interest at 7.65% per annum to be repaid
in monthly principal and interest payments of 703,701
----------
$6,376 each through July 1, 2018.
$2,339,359
(49,369)
Less current maturities ----------
$2,289,990
==========
Year ending December 31,
2000 $ 9,800
2001 50,256
2002 53,974
2003 57,969
2004 61,909
Thereafter 2,105,451
----------
$2,339,359
==========
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 and derivative suit in the U.S. District Court (the "Court") in San
Diego, California against PIC, PSL, EPL and certain of their respective
former and current officers and directors (the "Prolong defendants"). 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 per cent (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
8
<PAGE>
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 otherwise dismissed. The
Court ordered the Walczak plaintiffs to post a bond in the amount of
$100,000, which bond has been posted. PIC appealed the Court's preliminary
injunction ruling, which appeal was subsequently denied.
The Prolong defendants successfully moved to change venue and the case was
ordered transferred to the federal court in Orange County, California,
where PIC's principal office is located. In December 1999, plaintiffs'
counsel was disqualified from the matter on the grounds of unwaivable
conflict of interest. Most of the plaintiffs have selected new counsel,
however at this time, due to the delay regarding counsel, there are no
mediation conferences scheduled. Therefore, final resolution of the matter
cannot presently be determined. The Prolong defendants have each filed and
served motions to dismiss the complaint pursuant to Rule 12(b)(6) of the
Federal Rules of Civil Procedure. On September 29, 2000, the judge
dismissed certain of the causes of action in the complaint. As a result,
defendants are preparing to refile a motion to lift the preliminary
injunction. Settlement negotiations are pending. There has been no ruling
to date on the Walczak plaintiffs' request to certify the class as a class
action. PIC and PSL and their respective current officers and directors
continue to believe that there is no merit to the plaintiffs' claims and
plan to vigorously defend against the claims.
On February 15, 1999, PSL entered into an agreement containing a consent
order with the Federal Trade Commission (FTC). Without admitting any of the
allegations, the Company agreed that it will not make advertising claims
without having adequate scientific substantiation for such claims. No
monetary redress was paid to the FTC in connection with the agreement.
Subsequently, however, four purported class action lawsuits, each of which
are based on the FTC allegations, have been brought against PIC and/or PSL.
These suits are further identified as follows:
Kachold et al v PSL was filed November 19, 1999 and is pending in the U.S.
District Court, Northern District of Illinois, File No. 99-CV-08349. The
case is a purported class action and individual action alleging violation
of the Illinois Consumer Fraud Act, Magnuson Moss Consumer Products
Warranty Act, and seeks damages. Settlement negotiations are pending.
Fernandes et al v PSL was filed January 5, 2000, in Los Angeles County
Superior Court, File No. BC222712. The case is a purported class action
alleging false advertising, unfair competition, violation of the California
Consumer Legal Remedies Act, and for equitable relief, fraud, deceit and
negligent misrepresentation. Settlement negotiations are pending.
Bowland et al v PSL was filed January 21, 2000 in County Court at Law No.
4, Nueces County, Texas, File No. 00-60119-4. The case is a purported class
action alleging breach of contract, breach of express warranty and
violations of the Texas Deceptive Trade Practices Act. Settlement
negotiations are pending.
Mata et al v PSL and PIC was filed February 18, 2000 in the District Court
of Hidalgo County, Texas, 275/th/ Judicial District, File No. C-292-00-E.
The case is a purported class action alleging breach of contract and breach
of express and implied warranty. A special appearance and motion to dismiss
was filed by PIC and an answer and plea in abatement was
9
<PAGE>
filed by PSL in order to stay this matter due to the previously filed
Bowland case. Settlement negotiations are pending.
The four above referenced lawsuits are still in discovery stages and
therefore final resolution of these matters cannot be presently determined.
PIC and PSL and their respective current officers and directors believe
that there is no merit to the plaintiffs' claims and are vigorously
defending against the claims.
PIC and its subsidiaries are subject to other legal proceedings, claims and
litigation arising in the ordinary course of business. PIC's management
does not expect that the ultimate costs to resolve these matters will have
a material adverse effect on PIC's consolidated financial position, results
of operations or cash flows.
8. COMMITMENTS
The Company has outstanding noncancelable inventory purchase commitments
with a contract packager of approximately $637,000 as of September 30,
2000. 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 of 1 1/2 % per month, and/or purchase these inventories at the
option of the packager.
9. NEW ACCOUNTING PRONOUNCEMENT
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin #101, Revenue Recognition in Financial Statements
("SAB101"). The Company will be required to adopt SAB101 by the fourth
quarter of fiscal year 2000. The Company determined that it is in
compliance and there has not been a material impact on its consolidated
financial position or results of operations.
10. SUBSEQUENT EVENT
On October 30, 2000 the Company entered into a loan agreement with a lender
for a $675,000 loan, with proceeds of approximately $504,000 net of loan
costs and other payables. The loan has a maturity date of October 30, 2001.
The loan is collateralized by a Third Priority Trust Deed lien against the
Company's real property in Irvine, CA. Interest is payable monthly at the
rate of the Prime Rate plus 2.5%, commencing December 1, 2000.
10
<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,
--------------------------- --------------------------
2000 1999 2000 1999
--------------------------- --------------------------
<S> <C> <C> <C> <C>
Net revenues 100.0 100.0 100.0 100.0
Cost of goods sold 28.7 25.4 24.9 25.9
------------------------ -----------------------
Gross profit 71.3 74.6 75.1 74.1
Selling expenses 60.9 65.6 52.4 66.9
General and administrative expenses 26.8 14.1 22.1 16.5
------------------------ -----------------------
Operating income (loss) (16.4) (5.1) 0.6 (9.3)
Other (expense) (3.2) (1.4) (2.4) (0.9)
------------------------ -----------------------
(Loss) before income taxes (19.6) (6.5) (1.8) (10.2)
Provision (benefit) for income taxes (5.8) (2.3) 0.5 (3.6)
------------------------ -----------------------
Net (loss) (13.8) (4.2) (2.3) (6.6)
======================== =======================
</TABLE>
Three Months Ended September 30, 2000 vs. Three Months Ended September 30, 1999
Net revenues for the three months ended September 30, 2000 were approximately
$3,652,000 as compared to approximately $9,759,000 for the comparable period of
the prior year, a decrease of $6,107,000 or 62.6%. Revenues for the three month
period ended September 30, 2000 were derived from the following sources: Direct
response infomercial sales of $84,300 ($35,200 of appearance products and
$49,100 of lubricants); retail sales of $3,124,900 ($284,500 of appearance
products and $2,840,400 of lubricants); industrial sales of $63,400; and,
international and other sales of $379,400. 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.
For the three-month period ended September 30, 2000, retail sales were 85.6% of
total revenues while direct response infomercial sales comprised 2.3% of total
revenues. For the three month period ended September 30, 1999, direct response
infomercial sales comprised 8.3% of total revenues while retail sales were
86.1%. The decrease in the direct response sales of
11
<PAGE>
approximately $726,700 is a direct result of a strategic decision to evaluate
other cost-effective advertising programs. The lower retail sales for the three
month period ended September 30, 2000 versus the same period a year ago are
attributable to a decrease in appearance sales of $691,500 and lubricants sales
of $4,589,600. The appearance products were launched during the spring and
summer of 1999 when initial stocking orders were filled at several major
retailers and were supported by an aggressive television and print advertising
campaign. Revenues for the appearance products declined in part as a result of a
shift in advertising strategies to accommodate the realities of a marketplace in
which the Company was not able to spend as much as it would like on cost
effective promotional activities. The lubricants sales decline is attributable
to a soft market for specialty lubricants, higher than expected store inventory
levels at major retailers, competitive factors and also the decision to
discontinue the direct response infomercial for lubricants in lieu of an ongoing
evaluation of more cost effective means of promoting the line. Also, lubricant
sales in the third quarter of 1999, included large re-stocking orders by some of
our retail accounts, which did not recur in 2000.
Cost of goods sold for the three months ended September 30, 2000 was
approximately $1,047,000 as compared to $2,483,000 for the comparable period of
the prior year, a decrease of $1,436,000 or 57.8%. As a percentage of sales,
cost of goods sold increased from 25.4% in 1999 to 28.7% in 2000. This increase
was mainly attributable to the shift in product mix with a higher percentage of
international sales.
Selling expenses of approximately $2,224,000 for the three months ended
September 30, 2000 represented a decrease of $4,176,000 over the comparable
period of the prior year. This 65.3% decrease was primarily the result of
decreased expenses for endorsement and sponsorship payments, slotting fees,
commissions, freight expenses, expenditures for media and print advertising and
television airtime purchases. The Company continues to evaluate new
advertising/marketing and promotional activities to promote the brand name and
the cost effectiveness of each motorsports promotional program. Selling and
marketing expenses as a percentage of sales were 60.9% for the three months
ended September 30, 2000 versus 65.6% for the comparable period of the previous
year.
General and administrative expenses for the three months ended September 30,
2000 were approximately $980,000 as compared to $1,380,000 for the three months
ended September 30, 1999, a decrease of $400,000 or 29.0%. This decrease is
primarily attributable to a decrease in legal expenses, consulting, website,
bonuses, bad debt and general insurance expenses. As a percentage of sales,
general and administrative expenses increased from 14.1% in 1999 to 26.8% in
2000. Even though the aggregate expenses declined during the period, the ratio
of expenses as a percentage of sales increased due to the more than expected
decline in sales during the period. The Company continues to evaluate further
reductions in the general and administrative expenses.
Interest expense of approximately $123,000 for the three months ended September
30, 2000 represented a decrease of $16,000 over the comparable period of the
prior year. The decrease is attributable to a lower average balance in bank
loans payable during the period.
Net loss for the three month period ended September 30, 2000 was approximately
$(505,000) compared to a net loss of approximately $(416,000) for the comparable
period in the prior year, an increase of $89,000. The increase is a result of
the factors discussed above.
12
<PAGE>
Nine Months Ended September 30, 2000 vs. Nine Months Ended September 30, 1999
Net revenues for the nine months ended September 30, 2000 were approximately
$16,629,000 as compared to approximately $31,510,000 for the comparable period
in the prior year, a decrease of $14,881,000 or 47.2%. Revenues for the nine
month period ended September 30, 2000 were derived from the following sources:
Direct response infomercial sales of $583,000 ($318,000 of appearance products
and $265,000 of lubricants); retail sales of $14,206,000 ($346,000 of appearance
products and $13,860,000 of lubricants); industrial sales of $226,000; and,
international and other sales of $1,614,000. 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.
For the nine-month period ended September 30, 2000, retail sales were 85.4% of
total revenues while direct response infomercial sales comprised 3.5% of total
revenues. For the nine month period ended September 30, 1999, direct response
infomercial sales comprised 12.3% of total revenues while retail sales were
81.3%. The decrease in the direct response sales of approximately $3,296,000 is
a direct result of a strategic decision to evaluate other cost-effective
advertising programs. The lower retail sales for the nine-month period ended
September 30, 2000 versus the same period a year ago are attributable to a
decrease in appearance sales of $4,306,000 and lubricants sales of $7,112,000.
The appearance products were launched during the spring and summer of 1999 when
initial stocking orders were filled at several major retailers and were
supported by an aggressive television and print advertising campaign. Revenues
for the appearance products declined in part as a result of a shift in
advertising strategies to accommodate the realities of a marketplace in which
the Company was not able to spend as much as it would like on cost effective
promotional activities. The lubricants sales decline is attributable to a soft
market for specialty lubricants, higher than expected store inventory levels at
major retailers, competitive factors and also the decision to discontinue the
direct response infomercial for lubricants in lieu of an ongoing evaluation of
more cost effective means of promoting the line.
Cost of goods sold for the nine months ended September 30, 2000 was
approximately $4,141,000 as compared to $8,170,000 for the comparable period of
the prior year, a decrease of $4,029,000 or 49.3%. As a percentage of sales,
cost of goods sold decreased from 25.9% for the nine months ended September 30,
1999 to 24.9% for the nine months ended September 30, 2000. This decrease was
mainly attributable to the shift in product mix with the lubricant products
yielding higher gross margins than the appearance products.
Selling expenses of $8,716,000 for the nine months ended September 30, 2000
represented a decrease of $12,372,000 over the comparable period of the prior
year. This 58.7% decrease was primarily the result of decreased expenses for
endorsement and sponsorship payments, slotting fees, commissions, freight
expenses, expenditures for media and print advertising and television airtime
purchases. The Company continues to evaluate new advertising/marketing and
promotional activities to promote the brand name and the cost effectiveness of
each motorsports promotional program. Selling and marketing expenses as a
percentage of sales were 52.4% for the nine months ended September 30, 2000
versus 66.9% for the comparable period of the previous year.
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General and administrative expenses for the nine months ended September 30, 2000
were approximately $3,675,000 as compared to $5,195,000 for the nine months
ended September 30, 1999, a decrease of $1,520,000 or 29.3%. This decrease is
primarily attributable to a decrease in legal expenses, consulting, website,
bonuses, bad debt and general insurance expenses. As a percentage of sales,
general and administrative expenses increased from 16.5% in 1999 to 22.1% in
2000. Even though the aggregate expenses declined during the period, the ratio
of expenses as a percentage of sales increased due to the more than expected
decline in sales during the period. The Company continues to evaluate further
reductions in the general and administrative expenses.
Interest expense of approximately $405,000 for the nine months ended September
30, 2000 represented an increase of $108,000 over the comparable period of the
prior year. The increase is attributable to a higher average balance in bank
loans payable during the period.
Net loss for the nine month period ended September 30, 2000 was approximately
$(375,000) as compared to a net loss of approximately $(2,101,000) for the
comparable period in the prior year, a decrease of $1,726,000. The decrease is a
result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company utilizes funds generated from operations and borrowings from an
existing credit facility to meet its working capital requirements. At September
30, 2000, the Company had net working capital of $1,624,000 as compared to
$41,000 at December 31, 1999 or an increase of $1,583,000.
During the nine months ended September 30, 2000, the Company generated $738,000
from operations, which was provided primarily by a reduction in deferred taxes
and inventories which were partially offset by increases in receivables and
prepaid expenses. Approximately $1,535,000 was used to finance activities,
primarily payments on bank loans. As of May 8, 2000, the Company entered into a
new $6,000,000 credit facility with a financial institution, expiring in May
2003. Such facility is collateralized by eligible accounts receivable and
inventories. Interest is payable monthly at the rate of the financial
institution's prime rate (9.50% at September 30, 2000) plus 1% subject to a
minimum interest charge of $50,000 per quarter. The credit facility contains
certain defined net income and tangible net worth financial covenants. At
September 30, 2000, the Company was in compliance or had received waivers for
all financial covenants. Effective October 1, 2000, the interest rate was
changed to the current Floating Rate plus 2%. As of September 30, 2000,
$2,484,044 was outstanding and approximately $130,000 was available under the
terms of the line of credit. On October 30, 2000 the Company entered into a loan
agreement with a lender for a $675,000 loan with proceeds of approximately
$504,000, net of loan costs and other payables. The loan has a maturity date of
October 30, 2001. The loan is collateralized by a Third Priority Trust Deed lien
against the Company's real property in IRVINE, CA. Interest is payable monthly
at the rate of the Prime Rate plus 2.5% commencing December 1, 2000 (Note:
Exhibit 10.33.) The Company is currently seeking additional new financing
arrangements through subordinated debt and/or equity providers. The issuance of
additional shares of stock could result in a substantial dilution to the
ownership interests of our present or future stockholders. We cannot guarantee
that we will be able to obtain adequate funds when we need them or on acceptable
terms, if at all. Any inability to obtain funds when we need them would have a
material adverse effect on our business, operation results and financial
condition. At September 30, 2000, the Company had an accumulated deficit of
approximately $4,245,000. As a result, the Company is vigorously continuing to
evaluate further reductions in operating expenses and manpower requirements, and
revise vendor payment terms to the extent possible. We cannot guarantee that the
timing of further reductions in operating expenses will be adequate
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to return to profitability for the remainder of the Year 2000 and beyond. There
are also continued efforts to convert certain assets to cash on an accelerated
basis which may include the sale and/or sale and leaseback of the current
facility in Irvine, CA. Management will also continue to vigorously defend the
litigation described in Note 7 of Notes to Consolidated Condensed Financial
Statements. Management believes that these plans, if successfully executed, will
provide adequate financial resources to sustain the Company's operations and
enable the Company to continue as a going concern.
ITEM 3:
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PIC's financial instruments include cash and long-term debt. At September 30,
2000 and December 31, 1999, 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, 2000 and December 31,
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, 1999 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, 1999, 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.
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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
10.33 Loan Agreement between PSL and ABQ DOLPHIN, L.P., A California
limited partnership, dated October 30, 2000; Promissory Note,
Third Priority Trust Deed and Warrant Agreement, dated
November 2, 2000.
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 Quarter.
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 14, 2000 /s/ Nicholas Rosier
------------------------ -----------------------------------
Nicholas Rosier
Chief Financial Officer
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