<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
***
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year ended December 31, 1999
-----------------
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 000-22803
---------
PROLONG INTERNATIONAL CORPORATION
---------------------------------
(Exact name of Registrant as specified in its charter)
Nevada 74-2234246
------ ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6 Thomas, Irvine, California 92618
-----------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (949) 587-2700
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
----------------------------------------
(Title of Class)
___________________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
---------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sales price of the Common Stock as of
March 20, 2000, was approximately $15,930,000.
The number of outstanding shares of the Registrant's Common Stock as of
March 20, 2000 was 28,445,835.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on June 14, 2000, are incorporated by reference into
Part III.
Page 1 of 56
Exhibit Index on Sequentially Numbered Page 28
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
This Annual Report on Form 10-K contains forward-looking statements relating
to future events or the future financial performance of the Registrant,
including but not limited to statements contained in "Business," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Factors Which May Affect Future Operating Results." Readers are cautioned that
such statements, which may be identified by words including "anticipates,"
"believes," "intends," "estimates," "expects," and similar expressions, are only
predictions or estimations and are subject to known and unknown risks and
uncertainties. In evaluating such statements, readers should consider the
various factors identified in this Annual Report on Form 10-K, including matters
set forth in "Factors Which May Affect Future Operating Results," which could
cause actual events, performance or results to differ materially from those
indicated by such statements.
PART I
ITEM 1. Business
- ------- --------
General Description of Business
Prolong International Corporation (the "Registrant" or "PIC") is a Nevada
corporation that was incorporated on August 24, 1981 as Giguere Industries,
Incorporated ("Giguere"). On September 14, 1981, Giguere consummated a merger
with Medical International, Inc., a Utah corporation, pursuant to which Giguere
was the surviving entity. Prior to the merger with Giguere, Medical
International, Inc. had completed an offering of its common stock which was
exempt from registration under the Securities Act of 1933, as amended, by reason
of Regulation A thereunder. All of the outstanding shares of Medical
International, Inc. common stock were exchanged for shares of Giguere as part of
the plan of merger. Subsequent to the merger, Giguere conducted operations for
several years until it liquidated its assets in order to satisfy its creditors
and discontinued operations in 1987. Giguere was inactive and held no
significant assets from 1987 to June 21, 1995.
On June 21, 1995, Giguere acquired all of the outstanding common stock of
Prolong Super Lubricants, Inc., a Nevada corporation ("PSL"), in a share
exchange with PSL's then existing shareholders (the "Reorganization") and
changed its name from Giguere to Prolong International Corporation. Since the
Reorganization, PIC has changed its focus from being a company without
operations, a business or significant assets, to that of a holding company for
its wholly-owned operating subsidiary, PSL. On December 4, 1998, PIC formed
Prolong International Holdings Ltd. ("PIHL"), a Cayman Islands company, as a
wholly-owned subsidiary. On the same day, PIHL formed Prolong International
Ltd. ("PIL"), a Cayman Islands company, as its wholly-owned operating
subsidiary. PIC, through PSL, PIHL and PIL (referred to collectively in the
operational context with PIC as "Prolong"), is engaged in the manufacture, sale
and worldwide distribution of a line of high performance lubrication and
automotive appearance products, several of which are based on a patented extreme
pressure lubricant additive for use in metal lubrication, commonly referred to
as anti-friction metal treatment ("AFMT").
On February 5, 1998, PIC entered into a definitive agreement with EPL Pro-
Long, Inc., a California Corporation ("EPL"), under which PIC purchased the
business assets of EPL. Under the terms of the agreement, PIC purchased the
principal assets and assumed certain liabilities of EPL for approximately
2,981,035 shares of PIC's common stock, $0.001 par value per share (the "PIC
Common Stock"). With the purchase, PIC acquired the patents for the AFMT
technology and related trademarks and, as a result, currently owns the
exclusive, worldwide rights to manufacture, sell and distribute lubrication and
other products based on AFMT and to use the "Prolong" name. Prior to this
transaction, PIC, through PSL, held an exclusive license from EPL to use AFMT
and the "Prolong" name. This transaction closed on November 20, 1998. On
November 25, 1998, the U.S. District Court in San Diego, California (the
"Court") granted a temporary restraining order without a hearing in response to
a purported class action filed by a group of plaintiffs representing less than
2% of the outstanding shares of EPL's common stock against PIC, PSL, EPL and
their respective former and current officers and directors. Following a hearing
on December 30, 1998, the Court entered a preliminary injunction, which enjoins
the further consummation of the asset purchase transaction and prevents EPL from
completing its liquidation and dissolution until further notice from the Court.
In December 1999, plaintiffs' counsel was disqualified from the matter on the
grounds of an unwaivable conflict of interest. Plaintiffs have not yet selected
new counsel. The Ninth Circuit Court of Appeal did not, however, set aside the
preliminary injunction. PIC, PSL, and their respective current officers and
directors believe there is no merit to the plaintiffs' claims. At this time,
due to plaintiffs lack of legal counsel, there are no
Page 2
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
mediation conferences scheduled. Therefore, final resolution of the matter
cannot presently be determined. See "Legal Proceedings".
Prior to 1996, Prolong's activities generated losses. However, due, in
part, to PSL's successful marketing campaign based primarily on an infomercial,
Prolong's activities generated a profit in 1996. Prolong anticipates that its
sales will continue to grow in the future as it takes advantage of the worldwide
market for its current products and the development of new products. Prior to
fiscal 1996, PIC raised capital primarily through the issuance of PIC Common
Stock in private placements. During 1997 and 1998, working capital was
generated primarily through operations. During 1999, Prolong suffered a net
loss of approximately $6,600,000. Working capital for 1999 was generated
through operations and the utilization of the Company's line of credit with a
bank. In 2000, Prolong anticipates seeking additional financing in the form of
subordinated debt or equity to finance its activities and the execution of its
strategic plan.
Products
Prolong markets a variety of products which are based on AFMT. AFMT is a
patented formula which can be blended with many other lubricants and
formulations to create a wide variety of individual lubricant products with
superior extreme pressure friction fighting characteristics. AFMT can also be
blended with other constituents to create additional products which may be added
to Prolong's product line such as gun oil and brake cleaner. AFMT bonds to the
metal surfaces with which it comes into contact, resulting in reduced friction,
wear and heat buildup when subjected to pressure. Prolong believes that AFMT is
most effective in extreme pressure applications, where metal-to-metal contact,
and the resulting wear, can be severe such as: gears (at the contact point where
the teeth of the gear touch each other - for example in hypoid gears); engines
(at the contact points where metal to metal pressure squeezes out the normal
boundary lubrication - for example where the camshaft contacts the lifters;
where the main bearings contact the crankshaft; where the rod bearings contact
the rod and the bearing cap); and machinery (at the metal to metal contact
points where surface or boundary lubrication breaks down metal contacts under
heavy loads - for example in a steel mill where rolling steel contacts steel
rollers).
AFMT is composed of petroleum distillates and other chemicals and contains
no solid particles. Typically, performance enhancing lubrication additive
formulations contain solid particles such as lead, molybdenum disulphides, PTFE
resins, Teflon, fluorocarbon resins or fluorocarbon micropowder. Prolong
believes that the primary disadvantage to particulate material in lubricant
additives is that it tends to distribute unevenly and can result in excessive
particulate build-up. Because AFMT contains no solid particles, Prolong
believes that there is no risk of excessive build-up, and the lubrication "film
coat" is uniform and microscopically thin.
The friction fighting characteristics of AFMT have been documented by The
Foundation for Scientific and Industrial Research at the Norwegian Institute of
Technology, Trondheim, Norway. This independent testing laboratory was
commissioned in 1987 by the principals of Prolong Technology of Canada, Inc.
d.b.a. Prolong International, the entity from which EPL acquired the patented
AFMT formula. The tests were conducted at the expense of Prolong Technology of
Canada, Inc. and at the request of customers for in-depth scientific data. The
friction fighting characteristics are further documented in U.S. Patent No.
4,844,825, which outlines various tests conducted on AFMT precedent to the
issuance of the patent.
AFMT exhibits both the "hydrostatic" and "boundary" principles of
lubrication. Specifically, all surfaces tend to attract some substances from
the environment. Such substances or films may be only a few molecules thick,
and are absorbed into the surface. The strength of the absorption depends upon
the electronic structure of "polarized" molecules, which tend to absorb
perpendicularly to the surface. Warren Prince, Ph.D., a registered mechanical
engineer and machine and product design specialist was commissioned and retained
by Prolong to analyze and test its product formulation and found that AFMT
operates by attaching to the metal at the microscopic level, evenly and
uniformly. Prolong believes that once this chemical/electrical action takes
place through absorption, only very extreme heat, grinding away of the surface
area, or the introduction of material with a stronger molecular adhesion will
alter the surface bonding. As a result, third party tests performed on AFMT
have demonstrated that it is impervious to many elements and chemicals and its
benefits continue beyond the initial application.
Page 3
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
Prolong believes that the use of AFMT in lubrication products provides many
advantages for its users. For example, in clinical testing by third parties,
the use of AFMT resulted in reduced friction in mechanical devices. This, in
turn, caused the operating temperatures of the machinery to drop due to the
reduction in heat-generating friction. Prolong believes that in the long term,
this combination of friction and temperature reduction leads to a longer
operating life for the machinery and lower repair bills. Given the foregoing
advantages demonstrated by AFMT, Prolong has identified a broad market for its
lubricant products.
Prolong believes that the following are examples of some of the
applications of AFMT-based lubricant products:
<TABLE>
<S> <C>
. Internal Combustion Engines . Automatic and Manual Transmissions
. Agricultural Equipment . Computer Numerically Controlled
. Airline Ground Equipment Machine Tools
. Marine Equipment . Milling Equipment
. Railroad Equipment . Trucks, Buses
. Mining Equipment . Differentials, Gears
. Bearing Journals . Compressors
. Pumps and Generators . Hydraulic Systems
</TABLE>
Prolong markets the following lubricant products, each of which can be
utilized in multiple applications:
Prolong Anti-Friction Metal Treatment "AFMT"
This is Prolong's fundamental lubricating oil which is made according to a
patented formula for use as an extreme pressure lubricant. It is packaged in
concentrate form and is designed to be added by the customer to the lubrication
oils in engines, gears, and other machinery.
Prolong Engine Treatment
Formulated for use in the lubrication of internal combustion engines,
Prolong believes that this product helps mitigate friction, heat and wear under
extreme pressure conditions in engines. Prolong Engine Treatment is suitable for
use in both gasoline and diesel engines.
Prolong Transmission Treatment
Formulated for use in both automatic and manual transmissions and for other
applications, such as heavy duty industrial gear boxes where metal gears are
operated under high pressure, this product is designed to improve lubrication
where metal meets metal.
Prolong Gas/Diesel Fuel System Treatment
This product is formulated to help optimize fuel efficiency by lubricating
the "top end" of internal combustion engines and by helping clean and maintain
fuel injectors and other fuel system components. This product is designed to
help maintain peak engine performance and optimize overall mileage. The formula
is EPA registered and is suitable for both gasoline and diesel fuel systems.
Prolong High Performance Multi-Purpose EP-2 Grease
This product is formulated to provide a wide range of lubricating benefits
to industrial equipment under extreme pressure, high and low temperature
extremes, and potential water washout conditions. Prolong believes that this
product represents a substantial improvement in lubrication performance relative
to other products on the market in applications benefiting from an extreme
pressure grease formulation.
Page 4
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
Prolong "SPL100" Super Penetrating Lubricant
This product is formulated to lubricate, penetrate, and prevent corrosion,
free sticky mechanisms, displace moisture, stop squeaks, and reduce friction and
wear. This product can also serve as a light duty machining, tapping and
drilling fluid.
Prolong "Ultra-Cut 1" Water Soluble Cutting Fluid
This product is formulated to lubricate and cool metal tools and parts
during machining operations. This product can be used in Computer Numerically
Controlled ("CNC") metal turning and machining operations. Prolong believes
that the use of this product will provide higher feed rates and operating
speeds, finer surface finishes, and improved cutting tool life.
Prolong Multi-Purpose Precision Oil
This product is formulated as a fine, light oil for use in lubricating
precision tools and equipment. This product is designed to provide smooth
lubrication, which Prolong believes results in optimal operation of precision
equipment and tools and extension of useful life.
Despite PSL's current variety of lubricant products, there are other
lubricant products which Prolong believes could be successfully and beneficially
formulated in the future using AFMT technology and derivatives thereof that
would result in products with improved lubrication performance. Although there
can be no assurances that Prolong will have the financial or other resources to
develop, manufacture and market any such additional lubricant products, the
following is a partial list of such additional lubricant products:
High Performance Motor Oil
High Performance Synthetic Motor Oil
Motorcycle Engine & Transmission Treatment
Gun Oil & Cleaner
Gear/Differential Treatment
Heavy Duty Diesel Fuel Conditioner
Hydraulic System Treatment
Chain Oil
2-Cycle Engine Oil
Power Steering Treatment
Radiator Treatment
Compressor Treatment
Shock Absorber Lubricants
Brake Cleaner
Assembly Lube
In addition to the development of the above-referenced AFMT-based lubricant
products, Prolong is also engaged in efforts to expand its lubricant
formulations beyond its current AFMT-based technology.
During 1998, Prolong introduced and began to market the following line of
products designed to enhance and protect a vehicle's appearance (collectively
referred to as the "appearance products").
Prolong Paint Sealant
Prolong Paint Sealant is designed to give durable shine and protection to a
vehicle's paint. The wipe on, wipe off formula is easily applied with the
patented Prolong refillable applicator.
Page 5
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
Prolong Waterless Wash
This product is designed to both wash and shine a vehicle in as little as
15 minutes through a simple spray and wipe technique, without using water.
Special lubricating agents encapsulate and lift dirt particles to clean safely
without scratching, leaving a smooth, shiny, protected finish. The product
removes bugs, tar, tree sap, road film and bird droppings.
Prolong Super Protectant
This product is formulated to provide durable protection to vinyl, rubber
and plastic surfaces. An easy-to-use patented applicator is included with this
product.
Prolong Super Cleaner
This product combines a multi-purpose cleaner, degreaser and stain remover
into one product. It is designed to be strong enough to degrease an engine,
remove brake dust and clean whitewalls, yet gentle enough to remove food stains
and ground-in dirt from carpets and fabric seats without damaging the underlying
fabric.
Prolong Super Glass Cleaner
Unlike household cleaners, Prolong Super Glass Cleaner is designed
specifically for road grime, oily film, bugs and dirt found on car windows.
This product is designed to leave windows clean and streak-free and has been
formulated without ammonia to be safe for tinted windows.
Current Markets For Prolong's Products
PIC's strategy is to successfully direct Prolong's product line to a number
of different markets, each of which is currently large, representing significant
future revenue potential for PIC. Although PIC is currently actively addressing
both the consumer automotive and consumer household markets described below,
PIC's strategy is to adapt Prolong's product line and address the industrial and
governmental markets also described below:
Consumer Automotive
The consumer automotive market consists of automobiles, light trucks,
motorhomes, motorcycles, snowmobiles, jetskis, and other fuel burning vehicles.
The owners of these vehicles represent a significant source of customers for
Prolong's lubricants, fuel conditioners, appearance products and other future
additions to the Prolong product line. Recognizing this fact, this market has
been the primary target of Prolong's marketing efforts to date.
Consumer Household
The consumer household lubrication market is a potentially lucrative
segment of the industry which could prove receptive to Prolong's products for
uses as varied as fishing reels, guns, windows, sliding doors, garage doors,
sewing machines, electric hair clippers, bicycles, tricycles, scooters,
skateboards, garage door openers, lawn mowers, snow blowers, drills, saws, door
locks, hinges, rusted bolts, and virtually anything made of metal that must be
lubricated in order to maintain performance. Prolong currently manufactures
"SPL100 Super Penetrating Lubricant" and "Prolong Multi-Purpose Precision Oil"
for this market.
Industrial
The industrial market encompasses an enormous variety of major and minor
manufacturers. This market includes businesses such as steel mills, automobile
manufacturers, aircraft manufacturers, paper mills, electric motor
manufacturers, petrochemical manufacturers, oil refineries, mining operations
and electrical generating facilities, all of which require lubricants and
Prolong believes would benefit from the increased performance of Prolong's
products. Even more numerous are the smaller industrial facilities, such as
machine shops and other fabrication
Page 6
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
businesses throughout the world. Prolong further believes that businesses
engaged in stamping, molding, die casting, boring, drilling, honing and a number
of other similar operations could realize significant cost savings by using the
full line of Prolong's products.
Prolong anticipates pursuing the industrial market through a network of
manufacturer's sales representatives and through established industrial
distributors.
Federal, State, & Local Governments
The government market is not only very large, but Prolong believes it is
also extremely varied. It includes cities, counties, states and all of the
federal government agencies. Prolong believes that these agencies collectively
purchase, operate, and maintain a significant investment in trucks, automobiles,
buses, tanks, airplanes, helicopters, boats, ships, radar equipment, guns,
miscellaneous equipment and tools, as well as many other mechanisms, all of
which require adequate lubrication.
Federal Government. The federal government represents potential sales by
Prolong to many different agencies such as the Department of Defense, NASA,
Department of Energy, Department of Transportation and other federal
governmental agencies.
Military Sales. Procurement procedures require that products used in or on
military equipment must be manufactured according to certain military
specifications ("MIL Specs"). Prolong intends to apply for and receive United
States MIL Specs for certain of its products, and to market products not only to
the United States military, but to foreign militaries as well. Prolong plans to
develop the military market, both here and abroad, through the utilization of
specialists who are familiar with military procurement procedures and with the
special needs of the military services.
State Government. Potential sales to state governments include users such
as the National Guard, highway patrol, state police and other state agencies.
County and City Government. Both county and city governments are potential
Prolong customers for use by police, fire, water, gas, waste management and
other local departments.
Public Transportation. Public transportation entities are major potential
customers for Prolong's products, and Prolong intends to focus its efforts to
market products to these entities at the various levels of government. Prolong
believes that rapid transit districts throughout the country are facing a
serious problem with noisy and polluting diesel buses. The Los Angeles Rapid
Transit District, for example, has 3,300 buses and is currently under heavy
public and regulatory pressure to reduce emissions. In addition to diesel
buses, there are a significant number of other vehicles currently operated by
county and city public transportation agencies which Prolong believes, if
treated with its products, could run cleaner, quieter, last longer and would
burn less fuel.
Future Markets For Prolong's Products
Prolong believes the following to be significant opportunities for
expansion of its marketing efforts into diverse niches of the lubricant market.
There can be no assurances that Prolong will be successful at penetrating any of
these potential markets.
Commercial Trucking
Prolong has developed the product line and has begun to develop a market
for these products in the long-haul trucking industry. A substantial portion of
the distribution of goods in this country occurs via truck shipments.
Consequently, large quantities of oil and diesel fuel are consumed by trucks
operated in this industry. Prolong believes that the use of its products in the
long-haul trucking industry may provide an economic advantage to truck operators
because of the increased operating efficiency demonstrated by engines treated
with AFMT-based products. Prolong believes that this increased efficiency may
directly result in a reduction in fuel costs and overall
Page 7
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
transportation costs. Further, the use of AFMT-based products may provide
additional savings to this industry in the form of reduced service and repair
costs over the useful life of the trucks due to AFMT's propensity to reduce
engine wear and the wear of other "treated" components.
Agricultural Applications
The agricultural industry represents another potentially significant market
for Prolong's products. Modern agricultural machinery and equipment tend to be
highly complex and are often subjected to harsh working environments. As a
result of the harsh environments, the machinery and equipment operates
inefficiently and results in increased fuel consumption and a decreased
productive life-cycle due to increased mechanical wear. Prolong believes that
the use of its products could save the agriculture industry substantial sums by
reducing these industry wide losses caused by friction and contaminants.
Marine Applications
The marine market includes both freshwater and salt water boats and ships,
from outboard fishing skiffs to pleasure boats, yachts and other marine vessels.
Prolong has the ability to formulate special products for the harsh marine
environments, including marine grease and a special 2-cycle oil for small
outboard motors. Prolong believes that in diesel powered boats and ships,
Prolong Gas/Diesel Fuel System Treatment can provide benefits similar to those
attained from use in diesel truck engines.
Railroads
The railroad industry is currently a large user of lubrication products.
Prolong would have to obtain certain mandatory product certifications prior to
being able to market its products to the railroad industry. Prolong is not
actively pursuing such certifications for its products at this time, but may do
so in the future.
Geographic Markets
Prolong currently markets its products in the United States, Canada, China,
Japan, Hong Kong, Sub-Saharan Africa, Brazil, Chile, Mexico, Hungary/Slovakia
and Puerto Rico and intends to continue developing distributor relationships in
other foreign countries. Prolong's current focus is to identify distributors
that possess the expertise and industry relationships necessary to assist it in
further penetrating retail sales channels in the various markets identified
above, with a primary focus on the consumer automotive and industrial lubricant
markets. Prolong intends to selectively grant distributorships to established
companies on a country by country basis. Prolong intends to build on this
relationship and continue to expand sales and revenues in the international
marketplace. There can be no assurance that Prolong will be able to
successfully penetrate any foreign markets.
International sales comprised 3.5%, 6.5%, and 4.7% of PIC's revenues in
1997, 1998 and 1999, respectively. Prolong consummates such sales through
independent distributors and, as such, has no assets attributable to its
international sales.
If it is economically feasible, Prolong intends to grant distributorships
throughout Europe. Consistent with this goal, Prolong is analyzing the
economics of the industry, competitive aspects, regulatory matters, and methods
of distribution on a country by country basis in Europe. Prolong has also
obtained patent protection on its products in several of the EEC member
countries.
Marketing And Distribution Of The Products
Prolong currently distributes its products through automotive aftermarket
chain stores, mass merchandisers, independent distributors, direct response
television sales and via the internet. Currently, Prolong has approximately 430
distributors in the United States. Additionally, Prolong has ten international
distributors located in Europe, Asia, Africa and South America. Prolong
maintains a direct sales force of 17 persons to service its distributors.
Page 8
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
Prolong distributes its products through both national and regional
automotive retail stores, traditional automotive aftermarket stores, through
mass merchandisers, independent distributors, and directly to consumer end
users.
Prolong's automotive retailers include Autozone, Advance Auto, CSK, Pep
Boys, Discount Auto, O'Reilly Auto, HalArt/Trak Auto, Strauss Discount Auto,
Murray's Discount Auto, ACO Auto, VIP Discount, Parts Depot, Parts Plus, and a
number of other regional and independent automotive retailers.
In the traditional automotive aftermarket arena, Prolong distributes
through General Parts, Inc./CarQuest, Genuine Parts Company/NAPA and hundreds
of additional traditional automotive aftermarket locations.
Prolong's mass retailers include Wal-Mart, Target, Ames and Fred Meyer.
Additionally, Prolong products are distributed through approximately 500 car
dealerships throughout the United States.
Prolong's distribution expanded sharply during 1999 and included the
addition of Advance, Autozone, Genuine Parts Company/NAPA, Automotive Parts
Warehouse, Bennett Auto, Knecht's Discount Auto, Wal-Mart, Target and in March
of 2000, Ames.
The Company utilizes contract warehouses to store and ship its products.
For fulfillment of direct sales to consumers, the Company utilizes independent
contractors with warehouses based in Burbank, California and New Jersey. The
direct response fulfillment center stores inventory, packs and ships orders, and
handles customer service inquires related to direct sales to consumers through
television and the Internet.
The products offered by Prolong have been marketed through endorsements by
well-known spokespersons, event sponsorships, print and electronic media, trade
shows, motorsports, direct response television advertisements, radio, press
releases, public relations, in-store point of sale materials and promotions,
sweepstakes, and through the Internet on Prolong's website, www.prolong.com.
In the area of endorsements, Prolong has entered into an agreement in which
it retained the services of Al Unser to endorse and promote Prolong's products.
Mr. Unser has agreed to make certain appearances to assist in marketing the
products and has agreed to license his name and likeness in connection with the
marketing of Prolong's products. Prolong has also entered into an agreement
with Smokey Yunick pursuant to which it retained the services of Mr. Yunick to
promote Prolong's products and to act as a spokesman for, and technical
consultant to, Prolong. Mr. Yunick has agreed to make certain appearances to
assist in marketing Prolong's products and has agreed to license his name and
likeness in connection with the marketing of Prolong's products.
In the area of motorsports sponsorships, Prolong executed an associate
sponsorship agreement with King Entertainment, Inc. and Kenneth D. Bernstein
pursuant to which Mr. Bernstein will provide promotional services and
appearances and will recognize "Prolong Super Lubricants" as an associate
sponsor of the "Budweiser King Top Fuel Dragster" through the year 2000 in all
National Hot Rod Association (the ""NHRA") events. The agreement calls for the
display of the Prolong name and logo on the dragster and related racing
components in all races and other events in which the dragster appears.
An additional motorsports sponsorship agreement has been executed between
Prolong and Galles/ECR Racing, LLC whereby Prolong has been granted associate
sponsorship and promotional rights for race cars to be entered into competition
during the 2000 Indy Racing League season by Galles/ECR Racing, LLC. Such race
cars will be driven by Al Unser, Jr.
Page 9
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
Prolong has an associate sponsorship agreement with Team Sabco relating to
sponsorship of two race cars for all NASCAR Winston Cup Series races during the
1999 racing season and one car during the 2000 racing season. The arrangement
with Team Sabco provides for display of the Prolong name and logo on the cars,
equipment and uniforms and for promotional services and appearances. Prolong's
car is driven by two-time Daytona 500 winner Sterling Marlin. In addition,
Prolong will also be an associate sponsor through Team Sabco on a Busch Grand
National car driven in the NASCAR series by Kenny Irwin, Jr. in a number of, but
not all, the races in the Busch Grand National series during 2000.
Prolong will be the title rights sponsor in two nationally televised
national drag racing events during 2000. Prolong Super Lubricants has agreed to
be the title rights sponsor at the NHRA sanctioned Prolong Super Lubricants
Northwest Nationals to be held in early August in the Seattle area. The
agreement calls for primary signage and prominent recognition in all racing
promotions including television advertising to promote the event, tickets,
trophies, print ads and all NHRA printed material relating to the NHRA's
national schedule throughout the year. Prolong is also the title rights sponsor
to the International Hot Rod Association (IHRA) Winter Nationals held in
Darlington, South Carolina which is the season opening event for that
sanctioning body. The television coverage on the IHRA event is through TNN and
includes similar promotional rights as the NHRA event described above.
In order to support the thousands of retail establishments that carry
Prolong's products, Prolong provides and/or participates in a number of
marketing programs with retailers related to promoting and advertising its
products, which expenditures are commonly known as Marketing Fund Allowances.
The expenditures include, but are not limited to, in store point-of-sale
materials, placement in high traffic areas, printing of fliers and brochures, in
store promotions and sweepstakes, and various other marketing tools that are
traditionally used to promote products at the retail level.
Prolong utilizes direct response television advertising, commonly called
infomercials, in order to educate the public about the benefits and features of
Prolong products, to promote the brand, and to sell products directly to
consumer end users. To date, Prolong has premiered three separate infomercials
including the "Prolong World Challenge" (debuted January 1996), which is an
infomercial promoting Prolong's lubricant line of products, "Prolong Across
America" (debuted April 1999), which is Prolong's newest lubricant related
television program and the "Ultimate Car Care Challenge" (debuted February
1999), which introduces and demonstrates the company's line of appearance
products including its new Prolong Paint Sealant and Prolong Waterless Wash &
Shine. Results through the infomercials vary from program to program and from
time slot to time slot but in general have been beneficial to Prolong due to the
fact that they provide television exposure at reduced costs from traditional
television spot advertising, as well as fill the market demand for mail order
purchases. In general, Prolong believes that no more than 5 to 10% of its
customers will buy Prolong products through infomercials and mail order
delivery, but Prolong does believe that there is a wide viewing audience that is
exposed to its products through the infomercials and ultimately purchases
Prolong products at a retail establishment. Prolong intends to keep its
infomercials running so long as they continue to be a economically viable, help
to build the brand throughout the marketplace, and drive retail sales.
During 1999, Prolong premiered its website located at www.prolong.com by
---------------
means of a sweepstakes contest advertised in the September issue of "Motor
Trend" magazine. The website has e-commerce capabilities as well as general
product and company information. Prolong intends to continue to develop its
website in the future and to further utilize the Internet as a means of
marketing and distributing its products to the public.
Competition
The market for Prolong's products is highly competitive and is expected to
remain so in the future. The basic formula of Prolong's lubricant products has
not changed materially since its development in 1986. The formula was granted a
United States patent on July 4, 1989. The market for Prolong's products is
characterized by rapid technological advances, frequent new product
introductions and evolving industry standards. Some of Prolong's principal
competitors include other providers of specialized lubrication products, such as
The Clorox Company (STP) and Pennzoil-Quaker State Company (Slick 50), both of
which market engine treatments. Prolong's competitors also include major oil
companies such as Shell Oil Company, Chevron Corporation, Castrol,
Page 10
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
and other companies that manufacture lubrication products, such as WD40 Corp.
Competition for appearance products comes principally from companies such as
Turtle Wax, Inc., Meguiar's, Inc., Pennzoil-Quaker State Company and The Clorox
Company. Further, Prolong believes that major oil and consumer products
companies not presently offering products that compete directly with those
offered by Prolong may enter Prolong's markets in the future.
Increased competition could result in price reductions, reduced gross
margins, and a loss of market share, any of which could have a material adverse
effect on PIC's business, financial condition and results of operations. In
addition, many of Prolong's competitors have significantly greater financial,
technical, research and product development, marketing and other resources and
greater market recognition than Prolong. Several of Prolong's competitors also
currently have, or may develop or acquire, substantial customer bases in the
automotive and other related industries. As a result of these factors,
Prolong's competitors may be able to respond more quickly than Prolong to new or
emerging technologies and changes in customer requirements or to devote greater
resources to the development, promotion and sale of their products.
Additionally, other dealers and distributors may offer similar lubrication and
appearance products at prices below those offered by Prolong, appealing to the
price-sensitive segment of the market. While Prolong believes that the prices
for Prolong lubrication and appearance products are competitive for the level of
quality obtained by the customer, Prolong relies on PSL's brand name recognition
for selling high quality, state of the art products. There can be no assurance
that Prolong will be able to compete successfully against current and future
competitors or that competitive pressures faced by Prolong will not materially
adversely effect PIC's business, financial condition and results of operations.
Prolong believes that its current competitive edge lies solely with the
superior lubrication performance of its products relative to that of its
competitors. In order for Prolong to draw attention to the superior performance
of its products, Prolong is treating and marketing its products as a unique
specialty line of high performance products as opposed to a high volume product
line.
A key marketing strategy for Prolong's continued growth is to use direct
response television ("DRTV") to generate sales, build brand name recognition,
educate consumers about the features and benefits of Prolong's products and lay
the foundation for other, more conventional forms of advertising and marketing.
For example, Prolong believes that its television programs have resulted in the
development of brand name recognition. This broad public exposure generated by
the television commercials may permit Prolong to position itself favorably among
larger companies competing in both the national and international lubricant and
appearance markets.
Production
The AFMT formula contained in certain of Prolong's products and the
formulas for such products themselves are comprised of petroleum-based
components which are readily available from several suppliers. Prolong does not
foresee any shortages of supply in the near future. While Prolong is working
actively with each of its suppliers to increase production of the components,
there can be no assurance that each supplier will be able to meet its production
in time to satisfy Prolong's requirements or that alternative suppliers will be
able to meet any such deficiency on an ongoing basis. If Prolong is unable to
obtain sufficient quantities of the components, or if such components do not
meet Prolong's quality standards, delays or reductions in product shipments
could occur which would have a material adverse effect on PIC's business,
financial condition and results of operations.
In addition to the potential deficiency in supply of the AFMT components,
such components are also subject to significant price volatility beyond the
control or influence of Prolong. Prices for the components of the quality
sought by Prolong are dependent on the origin, supply and demand at the time of
purchase. Prices can be affected by multiple factors in the producing
countries, including weather and political and economic conditions.
Additionally, petroleum products, upon which Prolong relies for its AFMT
formula, have been affected in the past, and may be affected in the future, by
the actions of certain organizations and associations, such as the Organization
of Petroleum Exporting Countries ("OPEC"), that have historically attempted to
establish price controls on petroleum products through agreements establishing
export quotas or restricting petroleum supplies worldwide. No assurance can be
given that OPEC (or others) will not succeed in raising the price of petroleum
components or that, in such event, Prolong will be able or choose to maintain
its gross margins quickly by raising its prices without effecting demand.
Increases in the prices for the components, whether due to the failure of its
suppliers to perform,
Page 11
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
conditions affecting the component-producing countries, or otherwise, could have
a material adverse effect on PIC's results of operations.
The production of Prolong's products is comprised of contract manufacturers
mixing the components pursuant to the AFMT and other proprietary formulas and
bottling the resulting mixtures in packaging specified by Prolong. Prolong's
current contract manufacturers have the capacity to produce its products in
relatively high volumes. By utilizing existing third party manufacturing
facilities, Prolong avoids the large capital expenditures associated with mixing
and packaging operations, as well as costly management of human resources. At
present, there are facilities located throughout the world that are capable of
mixing and packaging the components into finished products. However, Prolong's
increased volume production and continued expansion may result in shortages or
restrictions in supply and manufacturing capabilities in the future. Prolong
has not entered into any long term contracts with respect to the supply or
production of its products, preferring to intermittently review quotations
provided by interested parties in order to take advantage of competition among
suppliers and manufacturers.
Customers
In 1999, Prolong's sales to automotive aftermarket retail chain stores,
mass merchandisers, and independent distributors comprised approximately 80.8%
of its revenues while sales to commercial, industrial and other customers
comprised 7.8% of total revenues. Approximately 11.4% of Prolong's 1999 sales
resulted as a response to the airing of the infomercials. Such sales were made
to large numbers of individual consumers and, accordingly, Prolong does not
consider itself dependent on any particular customers in this market segment. In
1999, one retail customer comprised approximately 13.3% of its revenues. In
1998, two retail customers comprised approximately 31.7% of its revenues. No
customers accounted for more than 10% of Prolong's aggregate sales in 1997.
Intellectual Property
On February 5, 1998 PIC entered into a definitive agreement with EPL under
which PIC purchased the business assets of EPL. Under the terms of the
agreement, PIC purchased the principal assets and assumed certain liabilities of
EPL for approximately 2,981,035 shares of PIC Common Stock. With the closing of
the acquisition on November 20, 1998, PIC acquired the U.S. and foreign patents
owned by EPL pertaining to the AFMT technology and related U.S. and foreign
trademarks. Prior to this transaction, PIC, through PSL, held an exclusive
license from EPL to use AFMT and the "Prolong" name. As a result of the
transaction, PIC, currently owns the exclusive rights to manufacture,
distribute and sell products based on the patented technology in the U.S. and in
certain foreign countries, and to use the "Prolong" trade name and trademarks.
See "Legal Proceedings."
The U.S. patent relating to the AFMT technology (U.S. Patent No. 4,844,825,
hereinafter "the `825 patent") expires on November 18, 2007. There are a number
of foreign patents corresponding to the `825 patent as well. In addition, PSL
has obtained a federally registered patent in the United States for a "Sponge
Applicator Device" (U.S. Patent No. 6,010,268), which applicator is currently
included in the various appearance product packages marketed by Prolong. PSL
has obtained or applied for trademark registration protection in numerous
countries for various trademarks utilized in the marketing and promotion of
Prolong lubricant products. Currently, PSL holds the following federally
registered trademarks in the United States: PROLONG and the related design (U.S.
Reg. Nos. 2,136,672 and 2,136,576), PROLONG SUPER LUBRICANTS (U.S. Reg. No.
2,136,577), NO EQUAL IN THE WORLD & DESIGN (U.S. Reg. No. 2,129,784), SPL100
(U.S. Reg. No. 2,022,220), THE ULTIMATE IN PROTECTION & PERFORMANCE (U.S. Reg.
No. 2,129,785) and PSL's Oil Drop Logo (U.S. Reg. No. 2,136,576).
Royalty Agreements
Prolong has entered into a memorandum agreement with the producer (The 2M
Group, Inc.) of its lubricant infomercial entitled the "Prolong World Challenge"
whereby Prolong has agreed to pay 1.5% of gross sales, net of returned product,
generated from direct response television sales made via a toll-free telephone
number which utilize the "Prolong World Challenge" video footage. The term of
this agreement is dependent upon the life cycle of the
Page 12
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
"Prolong World Challenge." During 1999, Prolong expended $12,319 in royalties
under this agreement. This agreement terminated in May 1999.
Prolong entered into another memorandum agreement with The 2M Group, Inc.
whereby Prolong agreed to pay 1/2% of all gross sales, net of returned product,
from any and all direct response television campaigns which utilize footage from
its second lubricant infomercial entitled "Prolong Across America." During
1999, Prolong expended $2,444 in royalties under this agreement.
Prolong entered into a third memorandum agreement with The 2M Group, Inc.
whereby Prolong agreed to pay 1.5% of gross sales, net of product returns, of
the appearance product kit generated from its appearance product infomercial
entitled "The Ultimate Car Care Challenge". Additionally, Prolong agreed to pay
5%, 4% and 3%, respectively, for each year of a three-year arrangement of any
and all net retail sales of the paint sealant product. During 1999, Prolong
expended $42,156 in royalties under this agreement.
Prolong entered into a personal service agreement with Al Unser whereby
Prolong agreed to pay Mr. Unser 1.0% of gross sales resulting from direct
response television sales from the "Prolong World Challenge." Royalties earned
commence with the first airing of the "Prolong World Challenge" and continue for
three years and 120 days. During 1999, Prolong paid Mr. Unser $20,330 under this
agreement.
Further, Prolong has entered into a service and endorsement contract with
Al Unser whereby Prolong has agreed to pay royalties on all net retail sales of
its products according to the following rates: 1.5% from November 1, 1996
through October 31, 1997; 1.25% from November 1, 1997 through October 31, 1998;
and 1% from November 1, 1998 through October 31, 1999. Earnings maximums under
the arrangement are as follows: $100,000 in year 1; $125,000 in year 2; and
$150,000 in year 3. The option to extend this agreement for an additional four
years was exercised. For the four years under the extension, the Company has
agreed to pay royalties at the rate of 1% on all net retail sales. For each of
these years, the Company pays a guaranteed minimum payment of $75,000. Maximum
payments are $175,000 in the first year of the renewal period and increase
$25,000 each year thereafter, to a maximum of $250,000 in the last year of the
agreement. During 1999, Prolong paid Mr. Unser $150,000 under this agreement.
Employees
As of March 20, 2000, PIC and its subsidiaries collectively employ 55 full-
time employees, including 3 executive officers, and no part-time employees.
None of Prolong's employees are represented by a labor organization and PIC
considers the relationships with its employees to be good.
ITEM 2. Properties
- ------- ----------
At its headquarters, Prolong Super Lubricants, Inc. owns approximately
29,442 square feet of office and warehouse space in a two-story building located
at 6 Thomas in Irvine, California. PSL purchased this facility from Huck
International, Inc. (a subsidiary of Thiokol Corporation, PSL's former lessor)
pursuant to the exercise of its lease option on February 23, 1998. The
consideration paid by PSL for the facility was $2,690,000. PSL utilized
$248,000 in cash on hand and borrowed funds in the amounts of $1,692,000 and
$750,000, respectively, from Bank of America and from CDC Small Business Finance
Corp. Escrow closed on the purchase and sale on April 30, 1998. The
outstanding loans from Bank of America and CDC Small Business Finance Corp. are
collateralized by the purchased land and building. See "Management's Discussion
and Analysis Of Financial Condition and Results of Operations - Liquidity and
Capital Resources." PIC considers its present facilities to be adequate for
Prolong's current operations and for those reasonably expected to be conducted
during the next twelve months. Further, PIC believes that any additional space,
if required, will be available on commercially reasonable terms.
ITEM 3. Legal Proceedings
- ------- -----------------
The AFMT patent on which Prolong's products are based, has been the subject
of litigation, primarily suits contesting the ownership thereof. Should any
litigation result in an adverse ruling precluding Prolong's continued use
Page 13
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
of the AFMT patent, PIC's business, operating results, financial condition and
cash flows would be materially adversely effected. In July 1993, the trial court
ruled in favor of Prolong's former licensor, EPL, awarding EPL damages in excess
of $15.5 million, and made findings of fact that the defendants had signed
certain key documents which evidenced EPL's ownership of the intellectual
property. The defendants appealed the trial court's findings, arguments relating
to which were heard in June 1997. In January 1998, the court of appeal affirmed
the trial court's decision in favor of EPL. The defendants subsequently appealed
the court of appeals affirmation to the California Supreme Court. In June 1998,
the California Supreme Court denied a review of the appeal, thereby
extinguishing the right to any further appeals and rendering the judgment final.
In another matter, 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 otherwise dismissed. The Court ordered the
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 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 change venue and, effective March 15,
1999, the case was 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. Plaintiffs have not yet selected new counsel.
The Ninth Circuit Court of Appeal did not, however, set aside the preliminary
injunction. At this time, due to plaintiffs lack of legal counsel, there are no
mediation conferences scheduled. Therefore, final resolution of the matter
cannot presently be determined. 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.
In a third matter, the U.S. District Court heard a case against PIC whereby
the plaintiffs alleged a variety of business torts, including copyright
infringement and false advertising. PIC denied the allegations and counter-
claimed against the plaintiffs and multiple other parties, alleging copyright
infringement, false advertising, product disparagement, misappropriation of
trade secrets and unfair trade practices. The plaintiffs and defendants settled
this matter in 1999 pursuant to a confidential settlement agreement. Prolong's
obligations under the settlement agreement were fully accrued in 1998.
PIC and its subsidiaries are subject to 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.
ITEM 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.
Page 14
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------- ---------------------------------------------------------------------
Price Range of Common Stock
PIC Common Stock is currently trading on AMEX under the symbol "PRL."
Prior to June 12, 1998, PIC Common Stock was traded on the OTC Bulletin Board
under the symbol "PROL." PIC Common Stock resumed trading (after approximately
8 years of dormancy) in January 1996. High and low sales prices for each
quarter during 1998 and 1999 are as indicated below.
<TABLE>
<CAPTION>
Quarter Ended: High Low
-------------- ----- -----
<S> <C> <C>
March 31, 1998 $4.63 $2.00
June 30, 1998 $3.44 $2.44
September 30, 1998 $2.94 $1.50
December 31, 1998 $2.19 $1.38
March 31, 1999 $2.00 $1.13
June 30, 1999 $1.69 $1.13
September 30, 1999 $1.25 $0.56
December 31, 1999 $0.69 $0.25
</TABLE>
Information during the period has been furnished by AMEX and the OTC
Bulletin Board. The quotations furnished by the OTC Bulletin Board reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
PIC has authorized 150,000,000 shares of PIC Common Stock, having a par
value of $0.001 per share. As of March 20, 2000, the number of holders of
record of PIC Common Stock is approximately 488 and the high and low sales
prices as reported by AMEX, were $0.56 and $0.50, respectively. PIC has not
declared any cash dividends since inception, and does not intend to do so in the
foreseeable future. PIC currently intends to retain its earnings for the
operation and expansion of its business. PIC does not have any restrictions on
its ability to pay dividends on common equity. In addition to PIC Common Stock,
PIC's Board of Directors is authorized to issue up to 50,000,000 shares of
Preferred Stock with such rights, preferences and privileges as may be
determined by PIC's Board of Directors. No such shares of Preferred Stock have
been issued to date.
Recent Sales of Unregistered Securities
On October 5, 1999, Prolong issued a warrant to purchase 800,000 shares of
Common Stock to Thomas G. Iwanski, in connection with Mr. Iwanski's employment
as an officer of Prolong. The warrant is immediately exercisable at the purchase
price per share equal to: (a) $2.00 for the first 200,000 shares; (b) $3.00 for
the next 200,000 shares; (c) $4.00 for the next 200,000 shares; and (d) $5.00
for the last 200,000 shares. The $2.00 and $3.00 warrants expire on February 28,
2001 and the $4.00 and $5.00 warrants expire on December 31, 2000.
The sale of the warrant was made in reliance upon the exemption from the
registration provisions of the Securities Act of 1933, as amended, set forth in
Section 4(2) thereof. Based upon representations made by Mr. Iwanski, Prolong
has reason to believe that he was acquiring the warrant for investment and not
with a view to distribution. At the time of issuance, the warrant and
underlying shares of Common Stock were deemed restricted securities for purposes
of the Securities Act of 1933, as amended, and all shares of Common Stock issued
upon exercise of the warrant shall bear a legend to that effect.
Page 15
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
ITEM 6. Selected Financial Data
- ------- -----------------------
The following selected financial data is qualified by reference to, and
should be read in conjunction with the consolidated financial statements,
related notes and other information included elsewhere in this Annual Report on
Form 10-K as well as "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations." The financial data for the year ended
December 31, 1995 is derived from the consolidated financial statements of the
Company that have been audited by Corbin & Wertz. The financial data set forth
below for the years ended December 31, 1996, 1997, 1998 and 1999, respectively,
is derived from the consolidated financial statements of the Company that have
been audited by Deloitte & Touche, LLP.
<TABLE>
<CAPTION>
Year ended
December 31,
------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Net revenues........................................ $ 390,506 $15,813,493 $29,846,795 $35,032,689 $ 34,470,915
Net profit (loss)................................... (415,740) 721,178 2,132,553 419,513 (6,580,061)
Net profit (loss) per share:
Basic............................................ $ (0.02) $ 0.03 $ 0.08 $ 0.02 $ (0.23)
Diluted.......................................... $ (0.02) $ 0.03 $ 0.08 $ 0.02 $ (0.23)
Weighted average common shares:
Basic............................................ 17,156,501 23,463,620 25,508,035 25,807,618 28,445,835
Diluted.......................................... 17,156,501 23,463,620 25,690,774 26,011,767 28,445,835
Balance Sheet Data
Total assets........................................ $ 730,760 9,023,317 $13,748,650 $23,210,872 $21,379,648
Total liabilities................................... 88,218 1,732,467 4,039,796 5,756,537 10,412,463
Total stockholders' equity.......................... 642,542 7,290,850 9,708,854 17,454,335 10,967,185
________________________
</TABLE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
-------------
The following discussion and analysis of the Registrant's financial
condition and results of operations should be read in conjunction with the
Financial Statements and the notes thereto included elsewhere in this Annual
Report on Form 10-K.
General
Since the Reorganization in June 1995, management of Prolong has
concentrated a significant portion of its efforts and resources on the marketing
and sale of Prolong's consumer oriented products, through traditional retail
distribution and through direct response television advertising. Management now
believes that it has attained a significant level of brand and product
identification and Prolong has now begun efforts to expand sales of its consumer
lubrication products into commercial and industrial channels, as well as
international markets.
The lubricant business is extremely competitive. Prolong's business
requires that it compete with larger, better financed entities, most of which
have brand names which are well established in the marketplace. Although
Prolong, in the opinion of management, has unique products which have superior
performance characteristics relative to the well known products available in the
marketplace, Prolong remains at a distinct disadvantage and will be required to
expend substantial sums in order to promote brand name identity and product
acceptance among its prospective customers. In order to establish brand name
identity, Prolong has relied primarily on its direct response television
programs and intends to continue to utilize this means to gain product
recognition for purposes of directly increasing sales as well as increasing
retail, commercial and industrial and governmental sales resulting from broader
public knowledge of its products.
Page 16
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
Results of Operations
The following table sets forth certain financial data as a percentage of
net sales for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
-------------------------------------------------------------------
1997 1998 1999
--------------------- ---------------------- ------------------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Cost of goods sold 19.2 21.5 30.5
----- ----- -----
Gross profit 80.8 78.5 69.5
Selling and marketing expenses 57.8 56.6 75.0
General and administrative expenses 11.8 17.2 22.2
Research and development 2.0 .8
----- ----- -----
Operating (loss) income 11.2 2.7 (28.5)
Interest expense 0.0 (0.4) (1.3)
Interest income 0.8 0.3 -
----- ----- -----
Income (loss) before income taxes 12.0 2.6 (29.8)
(Benefit) provision for income taxes 4.8 1.4 (10.7)
----- ----- -----
Net (loss) income 7.2 1.2 (19.1)
===== ===== =====
</TABLE>
Comparison of the Years Ended December 31, 1999 and December 31, 1998
Net revenues for the year ended December 31, 1999 were $34,470,915 as
compared to $35,032,689 for the year ended December 31, 1998, a decrease of
$561,774 or 1.6%. Revenues for 1999 were derived from the following sources:
direct response infomercial sales of $3,941,000 ($2,796,000 of appearance
products and $1,145,000 of lubricants); retail sales of $27,857,000 ($4,230,000
of appearance products and $23,627,000 of lubricants); industrial sales of
$599,000; international sales of $1,606,000; and other sales and revenues of
$468,000. Revenues for 1998 were derived from the following sources; direct
response infomercial sales of $5,602,000 (all lubricants); retail sales of
$25,389,000 (all lubricants); industrial sales of $1,045,000, international
sales of $2,274,000 and other sales and revenues of $723,000. Revenues for the
year ended December 31, 1999 were flat as compared to the year ended December
31, 1998, and fell below expectations. Direct response lubricant infomercial
sales continued to decline from 1998, decreasing $4,457,000 due to the fact that
the initial infomercial, "Prolong World Challenge", reached the end of the
marketing life. The new lubricant infomercial, "Prolong Across America", was
supported with limited airtime expenditures due to: 1) delayed completion of
the infomercial, and; 2) weaker return results than expected. Direct response
appearance infomercial sales contributed $2,796,000 in 1999 from the launch of
the new "The Ultimate Car Care Challenge" television show, but performed below
expectations. The direct response infomercials for both product lines performed
at lower levels than expected due to debuts occurring late in the selling season
and due to the availability of products in retail stores conveniently located to
end-users. Retail sales increased $2,468,000 during 1999 mainly due to the
launch of the new appearance products into the retail distribution outlets which
amounted to increased sales of $4,230,000 in 1999, but fell below expectations.
Lubricant product retail sales decreased $1,762,000 during 1999 mainly due to
the fact that the supporting infomercial was aired only on a limited basis
during 1999. All other sales decreased $1,369,000 during the year mainly in
industrial and international sales due to the Company's concentrated focus on
the launch of the appearance product line.
Cost of goods sold for the year ended December 31, 1999 was $10,500,586 as
compared to $7,527,361 for the year ended December 31, 1998, an increase of
$2,973,225 or 39.5%. As a percentage of sales, cost of goods sold for the year
ended December 31, 1999 was 30.5% as compared to 21.5% for the prior year. This
increase was attributable to a shift in product mix with the appearance products
yielding lower gross margin than the lubricants products. The appearance product
sales amounted to approximately 20% of total revenues for the year ended
December 31, 1999. Another factor in the increase of the cost of goods sold
pertains to the strategic decision during the fourth quarter of 1999 to focus
future selling efforts on core products thereby requiring an increase in the
inventory obsolescence reserve for non-performing or slow moving inventory
items, such as C.D's, flush machines and special label international products.
Page 17
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
Selling and marketing expenses were $25,850,474 for the year ended December
31, 1999 as compared to $19,838,689 for the year ended December 31, 1998, an
increase of $6,011,785 or 30.3%. This increase was primarily the result of
increased expenditures for television airtime related to the launch of the new
appearance products, production costs to produce the new infomercials, one time
marketing and slotting allowances to retail customers to expand the distribution
channels and promotional activities to promote product awareness. As a
percentage of sales, selling and marketing expenses increased to 75.0% for 1999
versus 56.6% in 1998. A major factor was the increased expenditures associated
with the Company's strategic program to expand its distribution channels while
diversifying its product offerings. These expenditures included substantial one
time sales slotting allowances and marketing commitments to premier automotive
aftermarket retailers, expenses that are a necessary part of gaining shelf space
in an intensely competitive market place. Also, the higher than anticipated
expenditures associated with the launch of the new automotive appearance
products were necessary, but costly, to support the introduction to the retail
markets during a short spring season. These costs were associated with
producing and airing an infomercial that did not perform to expectations. It is
anticipated that the selling and marketing expenses will decline in the future
as a percentage of sales due to nonrecurring expenses recorded in 1999.
General and administrative expenses for the year ended December 31, 1999
were $7,645,321 as compared to $6,022,201 for the year ended December 31, 1998,
an increase of $1,623,120 or 27.0%. This increase was primarily attributable to
unanticipated increases in legal expenses, general insurance expenses, a full
year of amortization expenses from the EPL acquisition in November 1998,
depreciation expense increases relating to building improvements and computer
equipment and costs related to the design of the Company's new e-commerce web-
site. As a percentage of sales, general and administrative expenses were 22.2%
in 1999 versus 17.2% in 1998 mainly due to the factors discussed above. It is
anticipated that the general and administrative expenses will decline in the
future as a percentage of sales due to nonrecurring expenses recorded in 1999.
Research and development expenses for the year ended December 31, 1999 were
$305,297 as compared to $710,531 for the year ended December 31, 1998, a
decrease of $405,234 or 57.0%. In 1999, these expenses were primarily
attributable to continued testing and market research of the new appearance
products, while in 1998, the expenses were related to the research, development
and testing of the new appearance and truck fleet products.
For the year ended December 31, 1999, PIC incurred interest expense, net of
interest income, of $443,224 as compared to $16,504 for the year ended December
31, 1998. During 1999, PIC maintained an average outstanding balance in
borrowings against its line of credit of approximately $2,900,000 million
compared to no borrowings at any time in 1998, resulting in an increase in
interest expense. Also, the Company incurred a full year of interest expense on
the loans related to the purchase of Prolong's facility in Irvine, California in
April of 1998. PIC maintained an average cash balance of approximately $0.8
million in 1999 as compared to approximately $3.6 million during 1998, resulting
in lower interest income for the year.
Net loss for the year ended December 31, 1999 was $6,580,061 as compared to
net income of $419,513 for the year ended December 31, 1998, a decrease of
$6,999,574. This decrease was a result of the factors discussed above. It is
anticipated that selling, marketing, general and administrative expenses will
decline in the future due to an extensive review and cost reduction program
which should yield an overall expense reduction by almost a third compared to
last year. With this program in place, the Company believes that it will be
profitable in the first quarter of 2000.
Comparison of the Years Ended December 31, 1998 and December 31, 1997
Net revenues for the year ended December 31, 1998 were $35,032,689 as
compared to $29,846,795 for the year ended December 31, 1997, an increase of
$5,185,894 or 17.4%. Revenues for 1998 were derived from the following sources:
direct response infomercial sales of $5,602,000; retail sales of $25,389,000;
industrial sales of $1,045,000; international sales of $2,274,000; and, other
sales and revenues of $723,000. Revenues for 1997 were derived from the
following sources: direct response infomercial sales of $14,758,000; retail
sales of $11,439,000, industrial sales of $1,739,000; international sales of
$1,058,000; and other sales and revenues of $853,000.
Page 18
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
Prolong expects that retail and other sales categories will continue to
increase as a percentage of total sales relative to direct response infomercial
sales as Prolong continues to gain momentum in these other markets following the
initiation of the retail sales effort in the fourth quarter of 1996.
Infomercial sales demonstrated a decline in 1998 of return relative to air time
expenditures due to the availability of products in retail stores conveniently
located to end users and the fact that the initial infomercial began to reach
the end of its marketing life.
Cost of goods sold for the year ended December 31, 1998 was $7,527,361 as
compared to $5,735,238 for the year ended December 31, 1997, an increase of
$1,792,123 or 31.2%. The increase in absolute dollars was attributable to the
higher volume of purchases to meet the increasing sales demand accompanied by a
more expensive package design change, the cost of which was not passed through
to the consumer as a product price increase. As a percentage of sales, cost of
goods sold for the year ended December 31, 1998 was 21.5% as compared to 19.2%
for the prior year. This increase was attributable to the more expensive
package design and product mix due to higher retail and international sales,
which carry a lower gross margin than direct response infomercial sales.
Selling and marketing expenses were $19,838,689 for the year ended December
31, 1998 as compared to $17,259,469 for the year ended December 31, 1997, an
increase of $2,579,220 or 14.9%. This increase was primarily the result of
marketing allowances to retail customers, increased endorsement and sponsorship
payments, commissions as a result of increased sales, promotional activities to
promote product awareness, expenditures for print and media advertising,
salaries and benefits for new employees and increases in travel and trade show
expenses. These increases were partially offset by a reduction in air time
purchases and certain royalties. As a percentage of sales, selling and marketing
expenses however remained relatively constant at 56.6% for 1998 versus 57.8% in
1997. In 1997, selling and marketing expenses consisted primarily of purchases
of television air time, royalties and commissions.
General and administrative expenses for the year ended December 31, 1998
were $6,022,201 as compared to $3,523,200 for the year ended December 31, 1997,
an increase of $2,499,001 or 70.9%. This increase was primarily attributable to
salaries for new employees, employee benefits, professional services, computer
related expenses, bad debts, legal expenses, and other administrative costs
required to build the infrastructure necessary to support the increased level of
sales. As a percentage of sales, general and administrative expenses were 17.2%
in 1998 versus 11.8% in 1997 mainly due to the factors discussed above.
Research and development expenses for the year ended December 31, 1998 were
$710,531. There were no comparable expenses in the prior year. The expenses
were related to the research, development and testing of the new appearance and
truck fleet products.
For the year ended December 31, 1998, PIC incurred interest expense, net of
interest income, of $16,504 as compared to net interest income of $241,029 for
the year ended December 31, 1997. During 1998, PIC maintained an average cash
balance of approximately $3.6 million as compared to approximately $5.6 million
during 1997, resulting in lower interest income for the year. During 1998, PIC
recorded interest expense of $132,102 compared to $8,185 for 1997. The increase
is attributable to the financing related to the purchase of Prolong's new
facility in Irvine, California.
Net income for the year ended December 31, 1998 was $419,513 as compared to
$2,132,553 for the year ended December 31, 1997, a decrease of $1,713,040. This
decrease was a result of the factors discussed above.
Liquidity and Capital Resources
At December 31, 1999, the Company had net working capital of $41,000 as
compared to $8,373,000 at December 31, 1998 representing a decrease of
$8,332,000. Operating activities used $3,528,000 during 1999, primarily from
$6,580,000 of losses during the period, a $3,659,000 increase in deferred taxes,
a $1,275,000 increase in reserves, and a $965,000 increase in accounts payable
which were partially offset by decreases in accounts receivable of $2,393,000,
prepaid expenses of $552,000 and prepaid television time of $627,000.
Additionally, the Company used $445,000 for investing activities which were
primarily purchases of property and
Page 19
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
equipment. These uses of cash were funded during the year ended December 31,
1999 primarily by proceeds from the Company's bank credit line in the amount of
$3,985,000.
In July 1997, PSL entered into a $4 million line of credit, as amended,
with Bank of America National Trust and Savings Association ("Bank of America")
which is collateralized by PSL's inventories and receivables. This line expires
on April 30, 2000. Bank of America has informed the Company that it does not
intend to renew the existing line of credit facility. As of March 20, 2000, PSL
had an outstanding balance under the credit line of $3,200,000, which is the
maximum available under the current amendment to the line of credit. In
addition, PSL has outstanding an aggregate of $1,650,051 as of March 20, 2000
owed to Bank of America pursuant to a loan which was obtained in order to
purchase Prolong's facility in Irvine, California. Such loan is required to be
repaid in monthly installments of approximately $13,050 each, and bears interest
at a rate of 7.875% per year. Further, in connection with the purchase of
Prolong's facility, PSL has outstanding a United States Small Business
Administration loan from CDC Small Business Finance Corp. with a remaining
balance of $714,474 as of March 20, 2000. Such loan is required to be repaid in
monthly installments of approximately $6,376 each, and bears interest at a rate
of 7.65% per year. The Company has no commitments for capital expenditures as of
March 20, 2000. On April 12, 2000, the Company received a commitment letter from
a lender for a $6 million credit facility which will be utilizable based upon
eligible amounts of inventories and receivables. Management signed this lending
commitment letter effective April 12, 2000. Closing of the loan is subject to
the completion and execution of the loan documents. Additionally, the Company is
currently seeking new financing arrangements through subordinated debt and/or
equity providers. The Company has engaged an outside consulting firm to assist
with the establishment of subordinated debt and/or equity relationships. As
discussed in Note 1 of Notes to Consolidated Financial Statements, the Company
incurred a net loss of approximately $6.6 million in 1999 and, at December 31,
1999, had an accumulated deficit of approximately $3.9 million. As a result,
the Company has strictly evaluated all expenditures, improved its credit and
collection functions and revised vendor payment terms to the extent possible.
There are also continued efforts to convert certain assets to cash on an
accelerated basis. Management will also continue to vigorously defend the
litigation described in Note 15 of Notes to Consolidated Financial Statements.
Management believes that these plans will provide adequate financial resources
to sustain the Company's operations and enable the Company to continue as a
going concern.
Year 2000 Update
As described in the Form 10-K for the year ended December 31, 1998, Prolong
had developed plans to address the possible exposures related to the impact on
its computer systems of the Year 2000. Since entering the Year 2000, Prolong
has not experienced any major disruptions to its business nor is it aware of any
significant Year 2000-related disruptions impacting its customers and suppliers.
Furthermore, Prolong did not experience any material impact on inventories at
calendar year end. Prolong will continue to monitor its critical systems along
with customer sites to ensure that no Year 2000-related disruptions occur.
However, there can be no assurance that issues regarding Year 2000 compliance
will not surface, but we expect these issues if any, to be relatively
insignificant.
Costs incurred to achieve Year 2000 readiness, which include contractor
costs to modify existing systems and costs of internal resources dedicated to
achieving Year 2000 compliance, were charged to expense as incurred and were not
material in 1999.
Page 20
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
Factors Which May Affect Future Operating Results
In evaluating our business, you should carefully consider the following
risk factors and other information contained in this Annual Report on Form 10-K.
Some of the statements contained in this Annual Report on Form 10-K are
forward-looking. These forward-looking statements are based on our current
expectations that involve risks and uncertainties which may affect, among other
things, our ability to maintain our current sales growth rate or may cause sales
to decline. Such risks and uncertainties include, but are not limited to, the
following:
. Competitive, technological, financial and business challenges may make
it more difficult for us to continue to sell specialty lubricant
products.
. We may be unable to retain our existing key sales, technical and
management personnel.
. Increased competition in the specialized lubrication or appearance
product markets may cause downward pressure on our prices.
. We may be unable to manage our growth effectively.
. Sales to customers who respond to our direct response television
commercials may decrease significantly.
. The lubricant or appearance products industries or our operations or
business may face other unforeseen material adverse changes.
Our current expectations, which impact our budgeting, marketing, and other
management decisions, are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience and business
developments. Revisions to our current expectations may cause us to change our
marketing, capital expenditures or other budgets, which may in turn affect our
business, financial position, results of operations and cash flows. Although we
believe that our current expectations are reasonable, we make no representation
regarding their accuracy. Therefore, you should avoid placing undue reliance on
the forward-looking statements contained in this Annual Report on Form 10-K.
Our Failure to Manage Growth Could Adversely Affect Us
We expect to grow rapidly. This rapid growth will place a significant
strain on our management and financial and other resources. Our ability to
effectively manage our growth will largely depend on our success at:
. Improving our operational, financial and management information systems.
. Attracting, training, motivating, managing and retaining our key
employees.
If we fail to manage our growth effectively, our operating results,
financial condition and ultimately our business could be adversely affected.
We May Need to Raise Additional Funds in the Future
We expect that our need for additional funds will increase significantly in
the future as our business grows. We cannot guarantee that we will be able to
obtain adequate funds when we need them or on acceptable terms, if at all. Our
future need for additional funds will depend on numerous factors including the
following:
Page 21
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
. The success of our product development programs.
. The commercial success of our products.
. The rate of growth of our business.
. The availability of cash from our operations and other sources.
We are currently seeking additional funds through public or private sales
of our stock or through borrowing. The issuance of additional shares of stock
could result in a substantial dilution to the ownership interests of our present
or future stockholders. If we are unable to obtain adequate funds on terms
acceptable to us, we may need to delay or scale back our product development and
the manufacture of our current products. Any inability to obtain funds when we
need them would have a material adverse effect on our business, operating
results and financial condition.
Direct Response Sales Will Not Remain Our Key Source of Sales Growth
Sales to retail customers who responded to our 30 minute direct response
television commercial, or direct response sales, represented approximately 11.4%
($3,941,000) of our revenues in 1999 compared with 16.0% ($5,602,000) of our
revenues in 1998. In the past, sales to industrial/commercial and international
customers constituted only a limited portion of our revenues. However, we
expect most of our future sales growth to come from both industrial/commercial
and international customers and less from direct response sales. We typically
sell to industrial/commercial and international customers through independent
distributors. We will need to significantly expand our distributor network in
order to increase sales in the industrial/commercial and international markets.
We cannot guarantee that we will successfully locate and engage qualified
distributors for our products, either domestically or internationally, or that
our sales to industrial/commercial and international customers will grow as
expected.
We Depend on Our Key Management Personnel
We depend on our key management personnel and our future success will
depend in large part upon their contributions, experience and expertise. We
have entered into employment agreements with 2 of our senior executives for
periods ranging from 4 to 5 years. In addition, our future success will depend
upon our ability to attract and retain other highly qualified management
personnel. The loss of any key management personnel or our failure to attract
and retain other qualified management personnel could have a material adverse
effect on our business, operating results and financial condition.
Our Business Is Subject to the Risk of Product Liability Claims
The nature of our business exposes us to risk from product liability
claims. We currently maintain product liability insurance with maximum coverage
limits of $11,000,000 for each occurrence and an aggregate limit of $12,000,000
per year. Product liability coverage is becoming increasingly expensive and we
cannot guarantee that our current coverage will adequately cover future product
liability claims. Currently, we have no plans to increase our coverage.
However, we will reevaluate our product liability coverage from time to time in
the future. Any losses that we may suffer from future liability claims,
including the effect that any product liability litigation may have upon our
reputation and marketability of our products, may have a material adverse effect
on our business, financial condition, cash flows and results of operations.
The Market in Which We Operate is Highly Competitive
The current market for our products is highly competitive and we expect
competition to increase in the future. Our principal competitors include other
providers of specialized lubrication products, such as The Clorox Company
(STP(TM)) and Pennzoil-Quaker State Corporation (Slick 50(TM)), both of which
market engine oil treatments. Our competitors also include major oil companies
such as Shell Oil Company, Chevron Corporation, Castrol, and
Page 22
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
other companies that manufacture lubrication products, such as WD40 Corp.
Further, we believe that major oil companies not presently offering products
that compete directly with our products may enter our markets in the future.
With respect to our appearance products, major competitors include such
companies as Turtle Wax, Inc., Meguiar's, Inc., Pennzoil-Quaker State Company,
and The Clorox Company. Increased competition could result in any or all of the
following, which could have a material adverse effect on our business, financial
condition, cash flows and results of operations:
. Price reductions
. Reduced gross margins
. Loss of market share
In addition, many of our competitors have significantly greater financial,
technical, product development, marketing and other resources and greater market
recognition than we do. Several of our competitors also have, or may develop or
acquire, substantial customer bases in the automotive and other related
industries. As a result, our competitors may respond quicker to new or emerging
technologies and changes in customer requirements or devote more resources to
the development, promotion and sale of their products. Additionally, other
dealers and distributors may appeal to the price-sensitive segment of the market
by offering similar lubrication and appearance products at prices below ours.
While we believe that our prices are competitive for the level of quality of our
products, we rely on our brand name recognition and reputation for selling
quality products supported by strong customer service.
We cannot guarantee that we will be able to compete successfully against
current and future competitors or that the competitive pressures that we face
will not have a material adverse effect on our business, financial condition,
cash flows and results of operations.
The Prices of Many of Our Components are Highly Volatile
We depend upon our suppliers to provide us with the primary components for
our AFMT formula. The price of such components is extremely volatile and beyond
our control or influence. Prices for the quality of components we desire depend
on the origin, supply and demand at the time of purchase. Component prices
typically depend on multiple factors within the producing countries, including
weather and political and economic conditions. Additionally, petroleum
products, which form our AFMT formula, have been affected in the past, and may
be affected in the future, by the actions of certain organizations and
associations, such as the Organization of Petroleum Exporting Countries
("OPEC"), that have historically attempted to control prices of petroleum
products through agreements establishing export quotas or restricting petroleum
supplies worldwide. We cannot guarantee that OPEC (or others) will be
unsuccessful in raising the prices of petroleum components or that, if prices
increase, we will be able or choose to maintain our gross margins by raising our
prices without affecting demand. Increases in component prices, for whatever
reason, could have a material adverse effect on our business, operating results
and financial condition.
We Have Operated as an Independent Company Only Since 1995
We have only been an independent operating company since June 1995. Prior
to such time, our company was essentially dormant for approximately 8 years,
with few assets or operations. We cannot guarantee that we will be able to
successfully continue our growth through the expansion of our operations, by
accessing new markets or otherwise.
From the Reorganization through December 1995, we generated revenues of
approximately $391,000 and operating losses of approximately $416,000. From
December 1995 through December 1998, our operations have generated net income.
In 1999, we suffered a net loss of approximately $6,600,000. We cannot
guarantee our operating success and ability to generate net income in the
future.
Page 23
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
We Depend on Third Party Suppliers
To date, we have succeeded in obtaining enough components from existing
suppliers to produce our AFMT formula in order to meet our current manufacturing
needs. We also believe that adequate supplies will continue to be available in
the near future. However, we recently increased production and plan to further
increase production to meet an increase in demand. Such production increases
could put strain on the production capacity of our existing suppliers. While we
continue to work actively with each supplier in order to increase production of
our components, we cannot guarantee that each supplier will increase its
production in time to satisfy our increased demand or that alternate suppliers
will be able to meet any supply deficiency. If we fail to obtain enough
components, or if such components fall below our quality standards, shipments
and sales of our products may be delayed or reduced. This would have a material
adverse effect on our business, financial condition and results of operations.
Most of Our Revenue Comes From A Limited Number Of Products
We currently generate substantially all of our revenues from sales of our
AFMT-based products and we expect this trend will continue in the foreseeable
future. Because our revenues are concentrated in lubricants and appearance
products, a decline in the demand for, or in the prices of, our AFMT-based
products as a result of competition, technological advances or otherwise, could
have a material adverse effect on our business, financial condition, cash flows
and operating results. We recently expanded our product line to diversify our
limited product mix and we plan to continue such expansion in the future.
However, we cannot guarantee that our new AFMT-based products will be widely
accepted by our customers.
Our Average Selling Prices May Decline
The average sales prices for our products may decline. Recently,
competitors and consumers have pressured specialty lubricant suppliers to reduce
pricing, which in turn could result in downward pricing pressure on our
products. In addition, our average sales prices decline when we negotiate large
volume price discounts with certain customers. In the short term, we plan to
lower our manufacturing costs in order to offset the possibility of declining
average sales prices. In the long term, we plan to develop new AFMT-based
products that can be manufactured at lower cost or sold at higher average sales
prices. If, however, we fail to achieve such manufacturing cost reductions or
diversify our product mix, our gross margins could decline. Such a decline
could have a material adverse effect on our business, results of operations,
cash flows and financial condition.
We Depend on International Sales for Future Growth and Are Subject to Risks
Associated with Operating in International Markets
International sales comprised 4.7% of revenues in 1999 as compared to 6.5%
of revenues in 1998. We plan to expand international sales in the future. This
will require significant financial resources and management attention. In order
to expand sales on a worldwide basis, we plan to do the following:
. Establish additional marketing and sales operations.
. Hire additional employees.
. Recruit additional international distributors.
To the extent we fail to do any of the above, our growth may suffer and our
business, operating results, cash flows and financial condition could be
materially adversely affected. In addition, we run the risk that revenues from
our expanding international operations will be taxed by foreign authorities at
rates higher than our domestic tax rates.
Page 24
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
Currently, our worldwide sales are denominated in United States dollars.
An increase in the value of the United States dollar relative to foreign
currencies would make our products more expensive and, therefore, potentially
less competitive in those markets. Additional risks inherent in our worldwide
business activities include:
. Unexpected changes in regulatory requirements, tariffs and other trade
barriers.
. Costs of localizing products in foreign countries.
. Longer accounts receivable collection cycles.
. Difficulties in managing foreign operations.
. Potential for adverse tax consequences, including restrictions on
repatriating our earnings.
. The burdens of complying with a wide variety of foreign laws.
We cannot guarantee that our international sales and, consequently, our
overall business, operating results, cash flows and financial condition will be
free from any material adverse effect caused by any of the above factors.
Our Business Is Subject to the Risk of Litigation
We are subject to various legal proceedings from time to time as part of our
business. In November 1998, a lawsuit was filed by certain EPL shareholders
against PIC, PSL, EPL and each of our former and current officers and directors.
The plaintiffs in the lawsuit allege breach of contract, certain fraud claims,
civil RICO, breach of fiduciary duty and conversion, and seek monetary damages.
We, along with PSL and each of our directors and officers, deny the allegations
of wrongdoing and intend to vigorously defend the lawsuit, although we cannot
presently determine the ultimate outcome of this proceeding. Such claims or
litigation, or other claims or litigation, could result in a decision that is
adverse to us. A decision adverse to us in this or any other matter could have
a material adverse effect on our business, financial condition, cash flows and
results of operations. In addition, litigation, regardless of its merits, could
result in substantial costs to us and divert management's attention from our
operations.
We Could Be Subject to Environmental Liabilities or Regulatory Compliance Costs
Federal, state and local regulations impose various controls on the
storage, handling, discharge and disposal of substances we use in the
manufacture of our products and on our facilities. We have registered our fuel
conditioners with the United States Environmental Protection Agency ("EPA").
Such EPA registrations have no term but require us to notify the EPA of any
changes in the chemical composition of such conditioners or other information
contained in such registration. We are unaware of any additional governmental
approvals required for our products. We are also unaware of any existing or
probable governmental regulations which would have a material adverse effect on
our business.
Because we do not manufacture or store significant quantities of our
products, any direct costs incurred in complying with environmental laws have
been minimal and have not materially affected our business. We have tried to
minimize our economic risk from environmental violations by our manufacturers or
bottlers by locating alternative sources of such services. We believe that our
activities and those of our contract manufacturers conform to present
governmental regulations that apply to each such entities' operations.
Additionally, we believe that our current facilities conform to present
governmental regulations relating to environmental, land use, public utility
utilization and fire code matters.
Government regulations could be changed to impose additional requirements
on us which could restrict our ability to expand our operations or have an
adverse effect on our business. The adoption of these types of governmental
regulations or our failure to comply with the applicable environmental and land
use regulations or restrictions on the discharge of hazardous substances could
subject us to future liability or could cause our operations or those of our
contract manufacturers to be curtailed, relocated or suspended.
Page 25
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
We Are Controlled by Management and Certain Stockholders
As of March 20, 2000, our directors, executive officers and principal
stockholders collectively held approximately 38.3% of our outstanding shares of
common stock. These stockholders, acting together, have the ability to
significantly influence the election of our directors and most other
stockholders' actions and, as a result, can direct our business affairs. Such
concentration of voting power could delay or prevent our company from taking
certain actions including, but not limited to, a change in our company's
control.
Issuances of Our Preferred Stock May Effect the Price of Our Common Stock
Our Board of Directors is authorized to issue, without stockholder
approval, up to 50,000,000 shares of preferred stock with voting, conversion and
other rights and preferences superior to those of our common stock. Such
issuances could adversely affect the voting power or other rights of the holders
of our common stock. Issuing preferred stock provides flexibility with possible
acquisitions and other corporate purposes. However, an issuance of preferred
stock could make it more difficult for a third party to acquire a majority of
our voting stock and this may not be in the best interests of some of our
stockholders. We do not currently plan to issue any shares of our preferred
stock. However, we cannot guarantee that the issuance of shares of our preferred
stock will not have a material adverse effect on the market value of our common
stock in the future.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------- ----------------------------------------------------------
PIC's financial instruments include cash and long-term debt. At 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 December 31, 1999.
ITEM 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
Consolidated balance sheets of PIC as of December 31, 1999 and 1998,
respectively, statements of income and cash flows for each of the three years in
the period ended December 31, 1999, and the reports of independent auditors
thereon are referenced in ITEM 14 herein.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
Page 26
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
There is hereby incorporated by reference the information appearing under
the captions "Election of Directors" and "Compliance with Section 16(a) of the
--------------------- ------------------------------------
Securities Exchange Act of 1934" from the Registrant's definitive proxy
- -------------------------------
statement for the 2000 Annual Meeting of the Stockholders to be filed with the
Commission within 120 days of December 31, 1999.
ITEM 11. Executive Compensation
- -------- ----------------------
There is hereby incorporated by reference information appearing under the
caption "Executive Compensation" from the Registrant's definitive proxy
----------------------
statement for the 2000 Annual Meeting of Stockholders to be filed with the
Commission within 120 days of December 31, 1999.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
There is hereby incorporated by reference the information appearing under
the caption "Security Ownership of Certain Beneficial Owners and Management"
--------------------------------------------------------------
from the Registrant's definitive proxy statement for the 2000 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of December 31,
1999.
ITEM 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
There is hereby incorporated by reference the information appearing under
the captions "Executive Compensation" and "Certain Transactions" from the
---------------------- --------------------
Registrant's definitive proxy statement for the 2000 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of December 31,
1999.
Page 27
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------- ----------------------------------------------------------------
(a) The following documents are filed as part of this report:
(1) Financial Statements
Consolidated Financial Statements for the Years Ended December 31,
1999, 1998 and 1997 with Notes and Independent Auditors' Reports
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(3) Exhibits
The exhibits set forth below are filed as part of this Annual Report
on Form 10-K:
2.1 Exchange Agreement between Stockholders of PSL and the Registrant
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3,
1997).
2.2 Agreement and Plan of Reorganization, dated as of February 5,
1998, by and among the Registrant and EPL Pro-Long, Inc.,
including the following exhibits: (i) Form of Employee Invention
and Confidentiality Agreement, (ii) Form of Rule 145 Agreement,
(iii) Form of Confidentiality Agreement, (iv) Form of Transfer
Restriction, (v) Form of Amendment to Exclusive License
Agreement, and (vi) Form of Cancellation Agreement (incorporated
by reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form S-4 filed May 4, 1998).
2.3 Amendment to Agreement and Plan of Reorganization, dated as of
June 29, 1998, by and among the Registrant and EPL Pro-Long, Inc.
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form S-4 filed May 4,
1998).
3.1 Amended and Restated Articles of Incorporation of the Registrant
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3,
1997).
3.3 Bylaws of the Registrant, as amended and restated on April 27,
1998 (incorporated by reference to the same numbered Exhibit to
the Registrant's Registration Statement on Form S-4 filed May 4,
1998).
4.2 Specimen Certificate of Registrant's Common Stock (incorporated
by reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form S-4 filed May 4, 1998).
10.1 Form of Indemnification Agreement for Executive Officers and
Directors (incorporated by reference to the same numbered Exhibit
to the Registrant's Registration Statement on Form 10 filed July
3, 1997).
10.2 Exclusive License Agreement between PSL and EPL Pro-Long, Inc.,
d.b.a. Prolong International, dated November 10, 1993
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3,
1997).
10.4 Agreement between PSL and Al Unser, dated July 28, 1995
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3,
1997).
10.5 Service Agreement between PSL and Tylie Jones & Associates, Inc.,
dated October 24,
Page 28
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
1995 (incorporated by reference to the same numbered Exhibit to
the Registrant's Registration Statement on Form 10 filed July 3,
1997).
10.6 Telemarketing Agreement between PSL and West Telemarketing
Corporation, dated October 24, 1995 (incorporated by reference to
the same numbered Exhibit to the Registrant's Registration
Statement on Form 10 filed July 3, 1997).
10.7 Service and Endorsement Contract between PSL and Al Unser, dated
April 29, 1996 (incorporated by reference to the same numbered
Exhibit to the Registrant's Registration Statement on Form 10
filed July 3, 1997).
10.8 Associate Sponsorship Agreement between PSL, King Entertainment,
Inc. and Kenneth D. Bernstein, dated May 9, 1996 (incorporated by
reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form 10 filed July 3, 1997).
10.10 Major Associate Sponsorship Agreement between PSL, Norris Racing,
Inc. and Barnes Dyer Marketing, Inc., dated December 15, 1996
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3,
1997).
10.12 The Registrant's 1997 Stock Incentive Plan and form of Stock
Option Agreement (incorporated by reference to the same numbered
Exhibit to the Registrant's Registration Statement on Form 10
filed July 3, 1997).
10.13 The Registrant's Revolving Credit Agreement with Bank of America
National Trust and Savings Association, dated July 14, 1997
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3,
1997).
10.15 Sponsorship Letter of Intent between PSL and Joe Nemechek dba
Nemco Motorsports, dated February 13, 1997 (incorporated by
reference to the same numbered Exhibit to the Registrant's Annual
Report on Form 10-K filed March 23, 1998). *
10.16 Sponsorship Agreement between PSL and Sabco Racing, Inc., dated
December 19, 1997 (incorporated by reference to the same numbered
Exhibit to the Registrant's Annual Report on Form 10-K filed
March 23, 1998). *
10.17 Purchase and Sale Agreement between Huck International, Inc. (a
subsidiary of Thiokol Corporation) and PSL for the property
located at 6 Thomas, Irvine, California, dated February 23, 1998
(incorporated by reference to the same numbered Exhibit to the
Registrant's Annual Report on Form 10-K filed March 23, 1998).
10.18 Sponsorship Agreement between PSL and Commonwealth Service &
Supply Corp. T/A Jim Yates Racing, dated November 22, 1997;
Addendum dated December 17, 1997 (both documents incorporated by
reference to the same numbered Exhibit to the Registrant's Annual
Report on Form 10-K filed March 23, 1998). *
10.19 Service and Endorsement Contract between PSL and Smokey Yunick,
dated November 1, 1996 (incorporated by reference to the same
numbered Exhibit to the Registrant's Annual Report on Form 10-K
filed March 23, 1998). *
10.20 Standing Loan Agreement between PSL and Bank of America Community
Development Bank, dated April 1, 1998; Promissory Note; Deed of
Trust, Assignment of Rents and Fixture Filing; Payment Guaranty;
and Secured and Unsecured Indemnity Agreement (incorporated by
reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form S-4 filed May 4, 1998).
Page 29
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
10.22 Authorization for Debenture Guarantee 504 Program between the
United States Small Business Administration, CDC Small Business
Finance Corp. and PSL, dated February 2, 1998, as amended March
3, 1998, as amended again on April 10, 1998; "504" Note; Deed of
Turst and Assignment of Rents; Development Company 504 Debenture;
and Servicing Agent Agreement (incorporated by reference to the
same numbered Exhibit to the Registrant's Registration Statement
on Form S-4 filed May 4, 1998).
10.23 Contract Packaging Agreement between PSL and Premier Packaging,
Inc., dated September 11, 1998. (incorporated by reference to the
same numbered Exhibit to the Registrant's annual Report on Form
10-K filed March 25, 1999).
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 the same numbered Exhibit to the
Registrant's Quarterly Report on Form 10-Q filed November 12,
1999).
10.25 Registration Rights Agreement, dated October 5, 1999, between the
Company and Thomas G. Iwanski (incorporated by reference to the
same numbered Exhibit to the Registrant's Quarterly Report on
Form 10-Q filed November 12, 1999).
10.26 Associate Sponsorship Agreement between PSL, King Entertainment,
Inc. and Kenneth D. Bernstein, dated December 17, 1999.*
10.27 Employment Agreement, dated January 21, 2000, between PSL and
Elton Alderman.
10.28 Employment Agreement, dated January 21, 2000, between PSL and
Thomas C. Billstein.
10.29 Sponsorship Agreement between PSL and Sabco Racing, Inc. dated
February 15, 2000.*
10.30 Sponsorship Agreement between PSL and Galles/ECR Racing, LLC,
dated March 10, 2000.*
10.31 Service and Endorsement Contract between PSL and Smokey Yunick,
dated January 11, 2000.*
21.1 Subsidiaries of the Registrant (incorporated by reference to the
same numbered Exhibit to the Registrant's Annual Report on Form
10-K filed March 25, 1999.
23.1 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney (included as part of the signature page of this
Annual Report).
27.1 Financial Data Schedule.
- ------------------
* Portions of this Exhibit are omitted and were filed separately with the
Secretary of the Commission pursuant to the Registrant's application
requesting confidential treatment under Rule 24b-2 of the Securities
Exchange Act of 1934.
(b) Reports on Form 8-K.
There were no Form 8-K's filed during the fourth quarter of 1999.
Page 30
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PROLONG INTERNATIONAL CORPORATION
By: /s/ Elton Alderman
-------------------
Elton Alderman,
President, Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
By: /s/ Nicholas M. Rosier
-----------------------
Nicholas M. Rosier,
Chief Financial Officer
(Principal Financial Officer)
Page 31
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
POWER OF ATTORNEY
We, the undersigned directors and officers of Prolong International
Corporation. Do hereby constitute and appoint Elton Alderman and Nicholas M.
Rosier, or either of them, with full power of substitution and resubstitution,
our true and lawful attorneys and agents, to do any and all acts and things in
our name and behalf in our capacities as directors and officers and to execute
any and all instruments for us and in our names in the capacities indicated
below, which said attorneys and agents, or either of them, or their substitutes,
may deem necessary or advisable to enable said corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission in connection with this
Annual Report on Form 10-K, including specifically, but without limitation,
power and authority to sign for us or any of us in our names and in the
capacities indicated below, any and all amendments; and we do hereby ratify and
confirm all that the said attorneys and agents, or either of them, shall do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------- ----------------------------------- -------------
<S> <C> <C>
/s/ Elton Alderman President, Chief Executive April 14, 2000
- -------------------------- Officer and Chairman of the Board
Elton Alderman (Principal Executive Officer)
/s/ Thomas C. Billstein Vice President, Secretary April 14, 2000
- -------------------------- and Director
Thomas C. Billstein
/s/ Nicholas M. Rosier Chief Financial Officer April 14, 2000
- -------------------------- (Principal Financial Officer)
Nicholas M. Rosier
/s/ Bruce F. Barnes Director April 14, 2000
- --------------------------
Bruce F. Barnes
/s/ William J. Howell Director April 14, 2000
- --------------------------
William J. Howell
/s/ Tom T. Kubota Director April 14, 2000
- --------------------------
Tom T. Kubota
</TABLE>
Page 32
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Prolong International Corporation:
We have audited the accompanying consolidated balance sheets of Prolong
International Corporation and subsidiaries (the Company) as of December 31, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. Our audits also included the financial statement schedule listed in
the Index at Item 14(a)(2). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Prolong International Corporation
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 8, 2000, except for notes 1 and 8, as to
which the date is April 12, 2000
Page 33
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,094,779 $ 1,127,861
Accounts receivable, net of allowance for doubtful accounts
of $390,000 and $580,000 in 1999 and 1998, respectively 2,747,459 4,950,055
Inventories 2,171,728 2,915,249
Prepaid expenses 182,646 1,316,443
Income taxes receivable 94,275 444,371
Prepaid television time ---- 627,050
Advances to employees 218,523 308,630
Deferred tax asset 1,617,442 63,645
----------- -----------
Total current assets 8,126,852 11,753,304
Property and equipment, net 3,554,176 3,372,509
Intangible assets, net 7,036,670 7,543,354
Deferred tax asset, non-current 2,545,238 439,791
Other assets 116,712 101,914
----------- -----------
TOTAL ASSETS $21,379,648 $23,210,872
=========== ===========
</TABLE>
See notes to consolidated fnancial statements.
Page 34
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998 (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,843,843 $ 1,878,418
Accrued expenses 1,210,126 1,460,163
Line of credit 3,985,000
Notes payable, current 46,446 41,951
----------- -----------
Total current liabilities 8,085,415 3,380,532
Notes payable, noncurrent 2,327,048 2,376,005
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 in 1999
and 1998 28,446 28,446
Additional paid-in capital 14,809,349 14,716,438
Retained earnings (Accumulated deficit) (3,870,610) 2,709,451
----------- -----------
Total stockholders' equity 10,967,185 17,454,335
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $21,379,648 $23,210,872
=========== ===========
</TABLE>
See notes to consolidated fnancial statements.
Page 35
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
NET REVENUES $ 34,470,915 $35,032,689 $29,846,795
COST OF GOODS SOLD 10,500,586 7,527,361 5,735,238
------------ ----------- -----------
GROSS PROFIT 23,970,329 27,505,328 24,111,557
OPERATING EXPENSES:
Selling and marketing expenses 25,850,474 19,838,689 17,259,469
General and administrative expenses 7,645,321 6,022,201 3,523,200
Research and development 305,297 710,531 _________
------------ -----------
Total operating expenses 33,801,092 26,571,421 20,782,669
------------ ----------- -----------
OPERATING (LOSS) INCOME (9,830,763) 933,907 3,328,888
OTHER INCOME (EXPENSE), net:
Interest expense (454,142) (132,102) (8,185)
Interest income 10,918 115,598 249,214
------------ ----------- -----------
Total other income (expense) (443,224) (16,504) 241,029
------------ ----------- -----------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION
FOR INCOME TAXES (10,273,987) 917,403 3,569,917
(BENEFIT) PROVISION FOR INCOME TAXES (3,693,926) 497,890 1,437,364
------------ ----------- -----------
NET (LOSS) INCOME $ (6,580,061) $ 419,513 $ 2,132,553
============ =========== ===========
NET (LOSS) INCOME PER SHARE:
Basic $(0.23) $0.02 $0.08
============ =========== ===========
Diluted $(0.23) $0.02 $0.08
============ =========== ===========
WEIGHTED AVERAGE COMMON SHARES:
Basic 28,445,835 25,807,618 25,508,035
============ =========== ===========
Diluted 28,445,835 26,011,767 25,690,774
============ =========== ===========
</TABLE>
See notes to consolidated fnancial statements.
Page 36
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common stock (Accumulated
Common stock Subscribed Additional Deficit) Total
------------------------------------------ paid-in Retained Note stockholders'
Shares Amount Shares Amount capital Earnings receivable equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1996 25,453,700 $25,454 155,800 $ 156 $ 7,767,855 $ 157,385 $(660,000) $ 7,290,850
Shares issued for cash 5,000 5 12,495 12,500
Shares issued for services 180,000 180 229,270 229,450
Issuance of shares previously
subscribed 155,800 156 (155,800) (156)
Cancellation of shares
previously issued (330,000) (330) (659,670) 660,000
Compensation costs related
to options 43,501 43,501
Net income 2,132,553 2,132,553
---------- ------- -------- ----- ----------- ----------- --------- ----------
BALANCES, December 31, 1997 25,464,500 25,465 -- -- 7,393,451 2,289,938 -- 9,708,854
Shares issued for cash 300 600 600
Compensation costs related to
options 133,312 133,312
Issuance of common stock in
exchange for the
net assets of EPL 2,981,035 2,981 7,189,075 7,192,056
Net income 419,513 419,513
---------- ------ -------- ----- ----------- ----------- --------- ----------
BALANCES, December 31, 1998 28,445,835 28,446 14,716,438 2,709,451 17,454,335
---------- ------ -------- ----- ----------- ----------- --------- ----------
Compensation costs related
to options 92,911 (6,580,061) 92,911
Net loss (6,580,061)
---------- ------ -------- ----- ----------- ----------- --------- -----------
BALANCES, December 31, 1999 28,445,835 $28,446 --- $---- $14,809,349 $(3,870,610) $ ---- $10,967,185
========== ======= ======== ===== =========== =========== ========= ===========
</TABLE>
See notes to consolidated fnancial statements.
Page 37
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(6,580,061) $ 419,513 $ 2,132,553
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization 872,088 247,937 82,172
Provision for doubtful accounts (190,268) 337,276 148,442
Deferred taxes (3,659,244) (527,129) 67,982
Reserve for obsolescence 884,024 25,000 100,000
Reserve for other assets 581,713 --- ---
Common stock issued in exchange for services --- --- 229,450
Compensation costs related to options 92,911 133,312 43,501
Changes in assets and liabilities, net of effects of
acquisition:
Accounts receivable 2,392,864 (1,472,608) (2,667,135)
Inventories (140,503) (1,639,558) 134,247
Prepaid expenses 552,084 (600,584) (530,633)
Prepaid television time 627,050 395,094 (654,983)
Deposits (26,298) 49,552 (78,254)
Accounts payable 965,425 804,320 325,228
Accrued expenses (250,037) (203,158) 960,099
Income taxes 350,096 (1,723,055) 1,027,121
----------- ----------- -----------
Net cash (used in) provided by operating activities (3,528,156) (3,754,088) 1,319,790
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (535,571) (847,874) (151,359)
Employee advances 90,107 (80,734) (224,221)
----------- ----------- -----------
Net cash used in investing activities (445,464) ( 928,608) (375,580)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on other current liabilities --- --- (28,812)
Payments on notes payable (44,462) (24,044)
Proceeds from line of credit 3,985,000 --- ---
Proceeds from issuance of common stock --- 600 12,500
Proceeds from subscriptions receivable --- --- 189,500
Registration costs --- (346,982) ---
----------- ----------- -----------
Net cash provided by (used in) financing activities 3,940,538 (370,426) 173,188
----------- ----------- -----------
</TABLE>
See notes to consolidated fnancial statements.
Page 38
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS $ (33,082) $(5,053,122) $1,117,398
CASH AND CASH EQUIVALENTS,
Beginning of year 1,127,861 6,180,983 5,063,585
---------- ----------- ----------
CASH AND CASH EQUIVALENTS, end of year $1,094,779 $ 1,127,861 $6,180,983
========== =========== ==========
SUPPLEMENTAL DISCLOSURES -
Cash paid during the year for:
Income taxes $ --- $ 2,748,076 $ 366,000
========== =========== ==========
Interest $ 454,142 $ 132,102 $ 8,186
========== =========== ==========
</TABLE>
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1999, the Company completed the following transaction:
Recorded $92,911 to additional paid-in capital for compensation costs related
to options.
During 1998, the Company completed the following transaction:
Financed the purchase of the office and warehouse facility with $2,442,000 in
long term notes payable.
Recorded $133,312 to additional paid-in-capital for compensation costs related
to options.
Issued 2,981,035 shares of common stock valued at $7,539,038, in exchange for
the fair value of assets acquired of EPL in the amount of $7,604,886 and
liabilities assumed of $65,848.
During 1997, the Company completed the following transactions:
Issued 180,000 shares of common stock in exchange for services valued at
$229,450.
Issued 155,800 shares of common stock previously committed.
Canceled 330,000 previously issued shares of common stock and a related note
receivable of $660,000.
Recorded $43,501 to additional paid-in capital for compensation costs related
to options.
See notes to Consolidated Financial Statements
Page 39
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1. BUSINESS
Prolong International Corporation (PIC) is a Nevada corporation organized on
August 24, 1981 as Giguere Industries Incorporated (Giguere). PIC remained
dormant from 1987 to June 21, 1995, when, pursuant to a stockholders'
action, it acquired 100% of the outstanding stock of Prolong Super
Lubricants, Inc., a Nevada corporation (PSL), then changed its name to
Prolong International Corporation. The transaction was treated as a reverse
acquisition and was accounted for under the purchase method of accounting;
however, there were no material assets acquired or liabilities assumed. In
1997, Prolong Foreign Sales Corporation was formed as a wholly-owned
subsidiary of PIC. 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.
Managements' Plans Regarding Financial Results and Liquidity - During 1999,
the Company incurred a net loss of approximately $6.6 million and, at
December 31, 1999, had an accumulated deficit of approximately $3.9 million.
The Company incurred significant expenses in 1999 to launch its new
appearance products and to expand its distribution to premier automotive
aftermarket retailers. Additionally, the Company incurred significant legal
expenses and recorded reserves for inventory, other assets and accounts
receivable. As discussed in Note 8, the Company's existing bank line of
credit expires on April 30, 2000 and the lender has informed the Company
that it does not intend to renew the existing credit facility. On April 12,
2000, the Company signed a commitment letter from another lender for a $6
million credit facility which will be utilizable based upon eligible amounts
of inventories and receivables. Closing of the loan is subject to the
completion and execution of the loan documents. Additionally, management is
pursuing financing through subordinated debt and/or equity providers.
Internally, the Company has strictly evaluated all expenditures, improved
its credit and collection functions and revised vendor payment terms to the
extent possible. There are also continued efforts to convert certain assets
to cash on an accelerated basis. Management will also continue to vigorously
defend the litigation described in Note 12. Management believes that the
plans will provide adequate financial resources to sustain the Company's
operations and enable the Company to continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of PIC and its wholly-owned subsidiaries,
PSL, 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.
Cash and Cash Equivalents - Cash and cash equivalents consist of all highly-
liquid, short-term investments with an original maturity of three months or
less.
Accounts Receivable - The Company reviews a potential customer's credit
history before extending credit and generally does not require collateral.
The Company establishes an allowance for doubtful accounts based on factors
surrounding the credit risk of specific customers, historical trends and
other information.
Inventories - Inventories are valued at the lower of cost (determined on the
first-in, first-out basis) or market.
Prepaid Expenses - Prepaid expenses includes $78,641 and $162,978 at
December 31, 1999 and 1998, respectively, in advance promotions paid to an
entity previously affiliated with officers of the Company. Amounts are
expensed when promotional activities occur.
Capitalized Infomercial Production Costs - The Company capitalizes certain
incremental direct costs and payroll-related costs associated with its
infomercial production. Capitalized amounts related thereto are expensed
over the lesser of six months or the estimated economic life beginning at
the time of the first public showing of the infomercial. $529,942 and $0
were expensed in 1999 and 1998.
Prepaid Television Time - The Company capitalizes the cost of purchasing a
time slot for the airing of infomercials. Upon the airing of the
infomercial, the related cost is expensed. During 1999, 1998 and 1997, the
total amounts expensed for television time were $5,668,818, $4,220,093 and
$7,095,400, respectively. As of December 31, 1999 and 1998, prepaid
television time was $0 and $627,050 respectively.
Property and Equipment - Property and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives
of the assets, which are as follows:
Page 40
<PAGE>
Automotive equipment 5 years
Building improvements 7 years
Building 30 years
Computer equipment 3 years
Exhibit equipment 3 years
Furniture and fixtures 7 years
Machinery equipment 7 years
Molds and dies 3 years
Office equipment 5 years
When assets are retired or otherwise disposed of, the cost and the related
accumulated depreciation are removed from the accounts and any resulting
gain or loss is recognized in operations for the period. Renewals and
betterments, which extend the life of an existing asset are capitalized
while normal repairs and maintenance costs are expensed as incurred.
Intangible Assets - Intangible assets are comprised of the patents,
licenses, trade secrets, trademarks, service marks and other such assets
acquired from EPL Pro-Long, Inc. (Note 5). These assets are being amortized
over a period of fifteen years.
Other Assets - Other assets are comprised of trademarks, which are being
amortized over five years, and deposits.
Research and Development Expenses - Research and development expenses
consist primarily of salaries, contract labor and lab testing fees to
develop new products. All such costs are expensed in the year incurred.
Fair Value of Financial Instruments - Statement of Financial Accounting
Standards (SFAS) No. 107, Disclosures About Fair Value of Financial
Instruments, requires management to disclose the estimated fair value of
certain assets and liabilities defined by SFAS No. 107 as financial
instruments. Financial instruments are generally defined by SFAS No. 107 as
cash and cash equivalents, evidence of ownership interest in equity, or a
contractual obligation that both conveys to one entity a right to receive
cash or other financial instruments from another entity and imposes on the
other entity the obligation to deliver cash or other financial instruments
to the first entity. At December 31, 1999 and 1998, management believes
that the carrying amounts of cash and cash equivalents, accounts
receivable, subscriptions receivable, notes receivable, accounts payable,
other current liabilities, and notes payable approximate fair value because
of the short maturity of these financial instruments.
Accounting For Income Taxes - The Company follows SFAS No. 109, Accounting
for Income Taxes, which requires the recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the differences
between the financial statements and the tax bases of assets and liabilities
using enacted rates in effect for the year in which the differences are
expected to reverse. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
Revenue Recognition - Revenue is recognized as products are shipped.
Revenue is also recognized under an arrangement whereby customers responding
to television infomercials agree to an upsell. An upsell is a transaction
where the customer purchases the advertised product and also purchases one
or more additional items, all in one transaction. Revenue from products
sold under the upsell arrangement is recognized upon shipment of the related
products. For the years ended December 31, 1999, 1998 and 1997, revenues
under this arrangement were $189,380, $347,771 and $593,388, respectively.
Comprehensive Income - The Company has adopted SFAS No. 130, Reporting
Comprehensive Income. This statement establishes standards for the
reporting of comprehensive income and its components.
Page 41
<PAGE>
Comprehensive income, as defined, includes all changes in equity (net
assets) during a period from non-owner sources. For each of the years ended
December 31, 1999, 1998 and 1997, there was no difference between net income
and comprehensive income.
Net Income (Loss) Per Share - The Company has adopted SFAS No. 128, Earnings
per Share, which replaces the presentation of "primary" earnings per share
with "basic" earnings per share and the presentation of "fully diluted"
earnings per share with "diluted" earnings per share. All previously
reported earnings per share amounts have been restated based on the
provisions of the new standard. Basic earnings per share are based upon the
weighted average number of common shares outstanding. Diluted earnings per
share amounts are based upon the weighted average number of common and
common equivalent shares for each period presented. Common equivalent
shares include stock options assuming conversion under the treasury stock
method.
For the year ended December 31, 1999, no options or warrants were included
as common stock equivalents as their effect would be antidilutive. For the
years ended December 31, 1998 and 1997, the diluted weighted average common
shares outstanding included 204,149 and 182,739, respectively, of dilutive
options.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Stock-Based Compensation - SFAS No. 123, Accounting for Stock-Based
Compensation, which requires the determination and disclosure of
compensation costs implicit in stock option grants or other stock rights.
The Company has adopted certain required provisions of this standard for
nonemployee transactions. Under the employee transaction provisions,
companies are encouraged, but not required, to adopt the fair value of
accounting for employee stock-based transactions. Companies are also
permitted to continue to account for such transactions under Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, but are required to disclose in a note to the financial
statements pro forma net income and income per share as if the Company had
adopted SFAS No. 123. The Company will continue to account for employee
stock-based compensation under APB Opinion No. 25.
3. INVENTORIES
Inventories at December 31, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Raw materials $ 985,785 $ 936,451
Finished goods 1,185,943 1,430,797
Promotional items -0- 548,001
---------- ----------
$2,171,728 $2,915,249
========== ==========
</TABLE>
Page 42
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and 1998 consists of the
following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Building and improvements $2,280,783 $2,268,559
Computer equipment 276,729 230,264
Office equipment 55,753 54,073
Furniture and fixtures 581,324 255,669
Automotive equipment 35,925 35,925
Exhibit equipment 115,143 115,143
Machinery and equipment 17,953 12,174
Molds and dies 206,961 63,193
---------- ----------
3,570,571 3,035,000
Less accumulated depreciation (554,395) (200,491)
---------- ----------
3,016,176 2,834,509
Land 538,000 538,000
---------- ----------
$3,554,176 $3,372,509
========== ==========
</TABLE>
5. ACQUISITION OF EPL PRO-LONG, INC.
Prior to February 5, 1998, the Company was subject to a license agreement,
which required the Company to pay royalties of 3.5% of sales (as defined) of
the Company's products that utilized certain proprietary technology,
trademarks and copyrights. The royalty expense under this arrangement for
the years ended December 31, 1999, 1998 and 1997 approximated $0, $122,450
and $1,023,869, respectively. The agreement also called for an initial one-
time license fee of $106,190, which the Company capitalized and was
amortizing over a five-year period. The Company amortized $19,468, and
$21,238 for the years ended December 31, 1998 and 1997, respectively,
resulting in an accumulated amortization balance of $63,716 as of December
31, 1997. As of the closing date of the acquisition of EPL Pro-Long, Inc.,
the Company wrote off the remaining unamortized balance of $23,006.
On February 5, 1998, the Company entered into a definitive agreement to
purchase the assets of EPL Pro-Long, Inc. (EPL), which includes the patents
for lubrication technology previously under license to the Company, in
exchange for 2,981,035 shares of the Company's common stock and the
assumption of certain liabilities. The total purchase price ascribed to the
transaction was $7,604,886 (See Note 12). Following regulatory and EPL
shareholder approval, the transaction closed on November 20, 1998. This
business combination was accounted for as a purchase.
The $7,604,886 purchase price was assigned to the net assets acquired based
on the fair values of such assets and liabilities at the date of closing.
The excess of cost and liabilities assumed over tangible assets acquired,
which includes the patents, trademarks, secret marks and other such assets,
was recorded as intangible assets. The intangible assets are being
amortized over fifteen years from the date of the close of the transaction
using a straight-line method. Amortization expense for 1999 and 1998 was
$506,684 and $56,915, respectively, resulting in accumulated amortization of
$563,599 and $56,915 as of December 31, 1999 and 1998, respectively.
Page 43
<PAGE>
The following unaudited combined pro forma information shows the results of
the Company's operations as if the transaction had occurred on January 1:
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Net revenues $29,846,795 $35,032,689
Net income $ 2,301,856 $ 155,197
Net income per common share:
Basic $ 0.08 $ 0.01
Diluted $ 0.08 $ 0.01
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Accrued royalties $ 18,090 $ 46,748
Accrued legal expenses 363,984 573,000
Payroll and payroll taxes 296,880 482,620
Accrued commissions 124,353 280,610
Purchase commitments 301,509 ---
Other 105,310 77,185
---------- ----------
$1,210,126 $1,460,163
========== ==========
</TABLE>
Page 44
<PAGE>
7. NOTES PAYABLE
During 1998, the Company obtained loans for the financing of the purchase of
its office and warehouse facility. The terms of the loans and outstanding
balances as of December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
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 each with a final payment of
all remaining unpaid principal and
interest due on May 1, 2008. $1,653,757 $1,677,954
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 $6,376 each
through July 1, 2018. 719,737 740,002
---------- ----------
2,373,494 2,417,956
Less current maturities (46,446) (41,951)
---------- ----------
$2,327,048 $2,376,005
========== ==========
Borrowings have the following
scheduled maturities:
Year ending December 31,
2000 $ 46,446
2001 50,256
2002 53,974
2003 57,969
2004 61,909
Thereafter 2,102,940
----------
$2,373,494
==========
</TABLE>
8. LINE OF CREDIT
In July 1997, the Company entered into a $4,000,000 line of credit
arrangement, as amended, with a bank. Such line is collateralized by
accounts receivable and inventories. The line contains certain financial
covenants including a minimum quick ratio and tangible net worth. As of
December 31, 1999, $3,985,000 was outstanding which was the maximum
available under the current amendment to the line of credit. As of December
31, 1999, the Company was in compliance or has received waivers for all
financial convenants. The effective interest rate was 10% at December 31,
1999. The line expires on April 30, 2000 and the bank has informed the
Company that it does not intend to renew its existing credit facility. On
April 12, 2000, the Company received a commitment letter from a lender for a
$6 million credit facility which will be utilizable based upon eligible
amounts of inventories and receivables. Management signed this commitment
letter effective April 12, 2000. Closing of the loan is subject to the
completion and execution of the loan documents. Additionally, the Company is
currently seeking new financing arrangements through subordinated debt
and/or equity providers.
9. STOCKHOLDERS' EQUITY
In 1996, the Company received subscriptions receivable aggregating $209,500
for the sale of 155,800 shares of restricted unregistered common stock.
Subscriptions of $20,000 were collected in fiscal 1996, with the balance of
$189,500 being collected in the first quarter of 1997. During 1997, the
Company issued these 155,800 shares of restricted unregistered common stock.
In January 1997, the Company issued 5,000 shares of restricted unregistered
common stock in exchange for cash of $12,500 or $2.50 per share.
During 1997, the Company issued 180,000 shares of restricted unregistered
common stock for services performed by outside consultants. Consulting
expense was recorded at share prices ranging from $1.00 to $2.00 per share.
The charge is recorded as a component of selling, general and administrative
expenses.
Page 45
<PAGE>
During 1998, the Company issued 2,981,035 shares of common stock in exchange
for the business assets of EPL at a per share price of $2.529. Registration
costs totaling $346,982 were charged against additional paid-in capital.
(See Note 5)
10. STOCK OPTIONS
Effective June 4, 1997, the Company adopted the Prolong International
Corporation 1997 Stock Incentive Plan (the Plan). Under the Plan, the
Company may grant nonqualified or incentive stock options for the benefit of
qualified employees, officers, directors, and consultants and other service
providers. A total of 2,500,000 shares of the Company's common stock may be
issued under the Plan. The term of the option is fixed by the administrator
of the Plan, but no option may be exercisable more than 10 years after the
date of grant.
In October 1996, the Company granted an option to an employee to purchase
30,000 shares of the common stock of the Company at an exercise price of
$5.38 per share, which represented the market value at the date of grant.
This option was canceled in 1997 and reissued under the Plan.
Stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted
average
Shares under exercise price
option per share
<S> <C> <C>
OUTSTANDING, December 31, 1996 30,000 $ 5.38
Granted 1,358,688 $ 2.10
Canceled (33,310) $(5.04)
---------
OUTSTANDING, December 31, 1997 1,355,378 $ 2.10
Granted 160,000 $ 2.19
Canceled (109,834) $(2.57)
Exercised (300) $(2.00)
---------
OUTSTANDING, December 31, 1998 1,405,244 $ 2.07
Granted 827,000 $ 0.65
Canceled (2,876) $(2.00)
Exercised --- ----
---------
OUTSTANDING, December 31, 1999 2,229,368 $ 1.55
=========
</TABLE>
Outstanding options vest over periods ranging from one to five years.
During 1999, the Company issued 74,000 options with fair values ranging from
$.44 to $2.00 to outside consultants. During 1999, the Company recorded
$92,911 in compensation costs related to the partial vesting of options
granted to outside consultants with vesting periods during 1999.
As of December 31, 1999 and 1998, options to purchase 581,038 and 301,806
respectively, shares of common stock were exercisable.
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations to account for stock options. Had
compensation cost for the stock options been determined based on the fair
value at the grant date consistent with the method of SFAS No. 123,
Accounting for Stock-
Page 46
<PAGE>
Based Compensation, the Company's net income (loss) would have been the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net (loss) income, as reported $(6,580,061) $419,513 $2,132,553
Net (loss) income, pro forma $(7,031,336) $(19,148) $1,888,150
Net (loss) per share, as reported:
Basic $ (0.23) $ 0.02 $ 0.08
Diluted $ (0.23) $ 0.02 $ 0.08
Pro forma net (loss) income per share:
Basic $ (0.25) $ 0.00 $ 0.07
Diluted $ (0.25) $ 0.00 $ 0.07
</TABLE>
The fair value of options granted was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: no dividend yield, expected volatility range of 71.46% to
253.79%, risk-free interest rates of 6.0% in 1999 and 1998, and 6.9% in
1997, and an expected life of 7 1/2 years.
11. INCOME TAXES
The (benefit) provision for income taxes consists of the following for the
years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current:
Federal $ (21,990) $ 814,550 $1,063,979
State (12,692) 210,469 301,725
Foreign --- --- 3,678
----------- ---------- ----------
(34,682) 1,025,019 1,369,382
Deferred:
Federal (3,406,716) (432,316) 52,462
State (252,528) (94,813) 15,520
----------- ---------- ----------
(3,659,244) (527,129) 67,982
----------- ---------- ----------
$(3,693,926) $ 497,890 $1,437,364
=========== ========== ==========
</TABLE>
Page 47
<PAGE>
The provision for income taxes differs from the amount that would result
from applying the federal statutory rate, as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Federal statutory income tax rate $(3,595,895) $321,091 $1,213,772
State income taxes, net of federal
benefit (172,394) 75,176 209,381
Other 74,363 101,623 14,211
----------- -------- ----------
$(3,693,926) $497,890 $1,437,364
=========== ======== ==========
</TABLE>
Temporary differences which give rise to deferred tax assets and liabilities
are as follows at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax liabilities:
Prepaid television time $ --- $(274,899)
State taxes (119,729) (31,344)
Fixed assets (38,745) (36,759)
Deferred tax assets:
Accrued vacation 42,340 33,662
Allowance for doubtful accounts 71,459 254,272
Inventory reserve 442,356 54,800
Accrued expenses 1,061,287 371,956
Net operating loss 2,560,864
Other 142,848 131,748
---------- ---------
$4,162,680 $ 503,436
========== =========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some or all of the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities and tax planning strategies in making this
assessment. However, there can be no assurance that the Company will meet its
expectations of future income. As a result, the amount of deferred tax assets
considered realizable could be reduced in the near and long term if estimates of
future taxable income are reduced. Such an occurrence could materially adversely
affect the Company's results of operations and financial conditions. The Company
will continue to evaluate the realizability of the deferred tax assets quarterly
by assessing the need for and the amount of a valuation allowance.
As of December 31, 1999, the Company estimated federal and state net operating
loss carryforwards, which are available to offset future taxable income through
2019, of approximately $6.8 million and $4.0 million, respectively.
12. COMMITMENTS AND CONTINGENCIES
Leases - The Company leases certain office equipment under operating leases
over lease terms ranging from one to four years. Lease expense was
approximately $75,758, $115,171 and $137,500 for the years ended December
31, 1999, 1998 and 1997, respectively.
Royalties - The Company is obligated to pay royalties to the producer of a
one-half hour, direct-response television commercial entitled "Prolong World
Challenge" (infomercial) at the rate of 1.5% of gross sales (as defined)
generated from direct-response television sales of lubricant products made
via an 800 telephone number which utilizes the infomercial video footage.
The term of this agreement is dependent upon the life cycle of the "Prolong
World Challenge." For the years ended December 31, 1999, 1998 and 1997, the
Company expensed $12,319, $63,661 and $174,266 respectively, under this
arrangement. The agreement terminated in May 1999.
In connection with this direct response television commercial, the Company
is obligated to pay royalties to another individual at the rate of 1% of
gross sales (as defined) resulting from direct-response sales from the
infomercial. The agreement has a term of three years and four months
beginning in January 1996. The Company expensed $20,330, $42,105 and
$116,177 under this arrangement for the years ended December 31, 1999, 1998
and 1997, respectively. The agreement terminated in May 1999.
Page 48
<PAGE>
The Company is obligated to pay royalties to the same producer at the rate
of 1/2% of the gross sales, net of returned product, from any and all
direct response television campaigns which utilize footage from the direct
response television commercial entitled "Prolong Across America." For the
years ended December 31, 1999, 1998 and 1997, the Company expensed $2,444,
$0 and $0, respectively, under this arrangement.
The Company is obligated to pay royalties to the same producer at the rate
of 1.5% of gross sales, net of product returns, of the appearance product
kit generated from any and all direct response television campaigns.
Additionally, the Company will pay 5% in the first year, 4% in the second
year, and 3% in the third year of any and all net retail sales of the paint
sealant product. For the years ended December 31, 1999, 1998 and 1997, the
Company expensed $42,156, $0 and $0, respectively, under this arrangement.
The Company has an arrangement with an individual whereby it has agreed to
pay royalties on all net retail sales according to the following rates: 1.5%
from November 1, 1996 through October 31, 1997; 1.25% from November 1, 1997
through October 31, 1998; and 1% from November 1, 1998 through October 31,
1999. Maximum payments under this arrangement are: $100,000 in year one,
$125,000 in year two and $150,000 in year three. The option to extend this
agreement for an additional four years was exercised. For the four years
under the extension, the Company has agreed to pay royalties at the rate of
1% on all net retail sales. For each of these years, the Company pays a
guaranteed minimum payment of $75,000. Maximum payments are $175,000 in the
first year of the renewal period and increase $25,000 each year thereafter,
to a maximum of $250,000 in the last year of the agreement. For the years
ended December 31, 1999, 1998 and 1997, the Company expensed approximately
$150,000, $114,931 and $134,753, respectively, under this arrangement.
Endorsement and Sponsorship Agreements - The Company has entered into
endorsement and sponsorship agreements with various automotive and racing
personalities for product marketing and promotion purposes. The remaining
terms for individual agreements range from one to three years. The Company
is committed to aggregate future payments under these agreements as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
2000 $855,000
2001 100,000
--------
$955,000
========
</TABLE>
Endorsement and sponsorship expenses charged to operations related to these
agreements was approximately $2,082,000, $1,904,000, and $956,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
Purchase Commitments - The Company has outstanding noncancelable inventory
purchase commitments with a contract packager of approximately $1,270,000 as
of December 31, 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 of 1 1/2% per month, and /or
purchase these inventories at the option of the packager.
Employment Contracts - In October, 1999, the Company entered into an
employment agreement with an officer and director of the Company for a
period of 4 years. In March 2000, the agreement was terminated. Under the
terms of the related separation agreement, the officer and director resigned
from both positions. Additionally, all warrants and stock options became
immediately exercisable at the exercise prices in the original agreement,
which are: i) 200,000 warrants at an exercise price of $2.00 per share; ii)
200,000 warrants at an exercise price of $3.00 per share; iii) 200,000
warrants at an exercise price of $4.00 per share; iv) 200,000 warrants at an
exercise price of $5.00 per share; v) 100,000 incentive stock options at an
exercise price of $.056 per share; and, vi) 100,000 incentive stock options
at an exercise price of $1.06 per share. All warrants and stock options
expire on December 31, 2000. The individual will continue as a business
consultant to the Company through October 4, 2000. In January 2000, the
Company entered into employment agreements with two officers of the Company
for periods ranging from 4 to 5 years. The terms
Page 49
<PAGE>
of the contracts include base salary, stock options, various performance
incentives, and severance payments ranging from 2 to 3 years of base salary
in the event of early termination.
Litigation - The AFMT patent on which Prolong's products are based, has been
the subject of litigation, primarily suits contesting the ownership thereof.
Should any litigation result in an adverse ruling precluding Prolong's
continued use of the AFMT patent, PIC's business, operating results,
financial condition and cash flows would be materially adversely effected.
In July 1993, the trial court ruled in favor of Prolong's licensor, EPL,
awarding EPL damages in excess of $15.5 million, and made findings of fact
that the defendants had signed certain key documents which evidenced EPL's
ownership of the intellectual property. The defendants appealed the trial
court's findings, arguments relating to which were heard in June 1997. In
January 1998, the court of appeal affirmed the trial court's decision in
favor of EPL. The defendants subsequently appealed the court of appeals
affirmation to the California Supreme Court. In June 1998, the California
Supreme Court denied a review of the appeal, thereby extinguishing any
further appeals and rendering the judgment final.
In another matter, 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 otherwise
dismissed. 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, which appeal was subsequently denied. 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 change venue and the case has just been
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. Plaintiffs have not yet selected new counsel. The Ninth Circuit
Court of Appeal, however, set aside the preliminary injunction. At this
time, due to plaintiffs lack of counsel, there are no mediation conferences
scheduled. Therefore, final resolution of the matter cannot presently be
determined. 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.
In a third matter, the U.S. District Court heard a case against PIC whereby
the plaintiffs alleged a variety of business torts, including copyright
infringement and false advertising. The Company denied the allegations and
counter-claimed against the plaintiffs and multiple other parties, alleging
copyright infringement, false advertising, product disparagement,
misappropriation of trade secrets and unfair trade practices. The
plaintiffs and defendants settled this matter in 1999 pursuant to a
confidential settlement agreement. Prolong's obligations under the
settlement agreement were accrued in 1998.
Page 50
<PAGE>
PIC and its subsidiaries are subject to 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.
13. SEGMENT REPORTING AND CUSTOMER INFORMATION
The Company engages in business activities in only one operating segment
which entails the development, manufacture and sale of lubricant and
appearance products. While the Company offers a wide range of products for
sale, many are manufactured at common production facilities. In addition,
the Company's products are marketed through a common sales organization and
are sold to a similar customer base. During 1999, one customer accounted
for 13.3% of net revenues. During 1998, two customers accounted for 17.2%
and 14.5%, respectively, of net revenues. During 1997, no single customer
accounted for 10% of net revenues. As of December 31, 1999 and 1998, one
customer each year accounted for 32.8% and 33.0% respectively, of the
balance of accounts receivable.
Page 51
<PAGE>
14. QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
Net Net Income
Net Gross Income (Loss) per Share
Revenues Profit (Loss) Basic Diluted
----------- ----------- ----------- ------ -------
<S> <C> <C> <C> <C> <C>
Quarter ended:
March 31, 1998 $10,848,742 $ 8,843,328 $ 1,606,568 $ 0.06 $ 0.06
June 30, 1998 8,399,828 6,758,028 115,724 0.01 0.01
September 30, 1998 9,662,580 7,201,989 484,131 0.02 0.02
December 31, 1998 6,121,539 4,701,983 (1,786,910) (0.07) (0.07)
----------- ----------- ----------- ------ ------
$35,032,689 $27,505,328 $ 419,513 $ 0.02 $ 0.02
=========== =========== =========== ====== ======
Quarter ended:
March 31, 1999 $ 9,749,872 $ 7,091,933 $ (127,891) $(0.00) $(0.00)
June 30, 1999 12,001,207 8,971,702 (1,556,502) (0.06) (0.06)
September 30, 1999 9,758,596 7,276,008 (416,272) (0.01) (0.01)
December 31, 1999 2,961,240 630,686 (4,479,396) (0.16) (0.16)
----------- ----------- ----------- ------ ------
$34,470,915 $23,970,329 $(6,580,061) $(0.23) $(0.23)
=========== =========== =========== ====== ======
</TABLE>
Fourth Quarter Adjustments
- --------------------------
1999 - The net loss for the fourth quarter of 1999 includes the following: 1) a
reserve of approximately $893,000 for excess inventory quantities and
discontinued products; 2) a reserve of approximately $582,000 against an
other asset; 3) a reserve of approximately $326,000 against certain
accounts receivable; and, 4) a reserve of approximately $400,000 for
estimated sales returns. Each of these reserves was recorded based on
information which became available or changes in strategic direction
which were made during the fourth quarter of 1999.
Page 52
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
------------------- Balance
Balance at Charged to Charged of End
Beginning of Costs and to Other of
Description Period Expenses Accounts Deductions Period
----------- ------------ ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1999:
Allowance for doubtful
accounts receivable $580,000 $ 325,637 $---- 515,905 $ 389,732
Inventory reserves 125,000 892,895 ---- 8,871 1,009,024
Other assets reserve --- 581,713 ---- ---- 581,713
-------- ---------- ----- -------- ----------
Total $705,000 $1,800,245 $---- $524,776 $1,980,469
======== ========== ===== ======== ==========
Year ended December 31,
1998:
Allowance for doubtful
accounts receivable $242,724 $ 372,020 $---- $ 34,744 $ 580,000
Inventory reserves 100,000 25,000 ---- ---- 125,000
-------- ---------- ----- -------- ----------
Total $342,724 $ 397,020 $---- $ 34,744 $ 705,000
======== ========== ===== ======== ==========
Year ended December 31,
1997:
Allowance for doubtful
accounts receivable $ 94,282 $ 241,751 $---- $ 93,309 $ 242,724
Inventory reserves ---- 100,000 ---- ---- 100,000
-------- ---------- ------ -------- ----------
$ 94,282 $ 341,751 $---- $ 93,309 $ 342,724
======== ========== ====== ======== ==========
</TABLE>
Page 53
<PAGE>
PROLONG INTERNATIONAL CORPORATION
FORM 10-K
Exhibit Index
-------------
Sequential
Page Number
-----------
2.1 Exchange Agreement between Stockholders of PSL and the
Registrant (incorporated by reference to the same numbered
Exhibit to the Registrant's Registration Statement on Form 10
filed July 3, 1997). ---
2.2 Agreement and Plan of Reorganization, dated as of February 5,
1998, by and among the Registrant and EPL Pro-Long, Inc.,
including the following exhibits: (i) Form of Employee
Invention and Confidentiality Agreement, (ii) Form of Rule 145
Agreement, (iii) Form of Confidentiality Agreement, (iv) Form of
Transfer Restriction, (v) Form of Amendment to Exclusive License
Agreement, and (vi) Form of Cancellation Agreement (incorporated
by reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form S-4 filed May 4, 1998). ---
2.3 Amendment to Agreement and Plan of Reorganization, dated as of
June 29, 1998, by and among the Registrant and EPL Pro-Long,
Inc. (incorporated by reference to the same numbered Exhibit to
the Registrant's Registration Statement on Form S-4 filed
May 4, 1998). ---
3.1 Amended and Restated Articles of Incorporation of the Registrant
(incorporated by reference to the same numbered Exhibit to
the Registrant's Registration Statement on Form 10 filed
July 3, 1997). ---
3.3 Bylaws of the Registrant, as amended and restated on April 27,
1998 (incorporated by reference to the same numbered Exhibit
to the Registrant's Registration Statement on Form S-4 filed
May 4, 1998). ---
4.2 Specimen Certificate of Registrant's Common Stock (incorporated
by reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form S-4 filed May 4, 1998). ---
10.1 Form of Indemnification Agreement for Executive Officers and
Directors (incorporated by reference to the same numbered Exhibit
to the Registrant's Registration Statement on Form 10 filed July 3,
1997). ---
10.2 Exclusive License Agreement between PSL and EPL Pro-Long, Inc.,
d.b.a. Prolong International, dated November 10, 1993
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3,
1997). ---
10.4 Agreement between PSL and Al Unser, dated July 28, 1995
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3,
1997). ---
10.5 Service Agreement between PSL and Tylie Jones & Associates, Inc.,
dated October 24, 1995 (incorporated by reference to the same
numbered Exhibit to the Registrant's Registration Statement on
Form 10 filed July 3, 1997). ---
10.6 Telemarketing Agreement between PSL and West Telemarketing
Corporation, dated October 24, 1995 (incorporated by reference
to the same numbered Exhibit to the Registrant's Registration
Statement on Form 10 filed July 3, 1997). ---
Page 54
<PAGE>
10.7 Service and Endorsement Contract between PSL and Al Unser,
dated April 29, 1996 (incorporated by reference to the same
numbered Exhibit to the Registrant's Registration Statement on
Form 10 filed July 3, 1997). ---
10.8 Associate Sponsorship Agreement between PSL, King Entertainment,
Inc. and Kenneth D. Bernstein, dated May 9, 1996 (incorporated
by reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form 10 filed July 3, 1997). ---
10.10 Major Associate Sponsorship Agreement between PSL, Norris Racing,
Inc. and Barnes Dyer Marketing, Inc., dated December 15, 1996
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3,
1997). ---
10.12 The Registrant's 1997 Stock Incentive Plan and form of Stock
Option Agreement (incorporated by reference to the same numbered
Exhibit to the Registrant's Registration Statement on Form 10
filed July 3, 1997). ---
10.13 The Registrant's Revolving Credit Agreement with Bank of
America National Trust and Savings Association, dated July 14,
1997 (incorporated by reference to the same numbered Exhibit to
the Registrant's Registration Statement on Form 10 filed
July 3, 1997). ---
10.15 Sponsorship Letter of Intent between PSL and Joe Nemechek dba
Nemco Motorsports, dated February 13, 1997 (incorporated by
reference to the same numbered Exhibit to the Registrant's
Annual Report on Form 10-K filed March 23, 1998). * ---
10.16 Sponsorship Agreement between PSL and Sabco Racing, Inc.,
dated December 19, 1997 (incorporated by reference to the same
numbered Exhibit to the Registrant's Annual Report on Form 10-K
filed March 23, 1998). * ---
10.17 Purchase and Sale Agreement between Huck International, Inc. (a
subsidiary of Thiokol Corporation) and PSL for the property
located at 6 Thomas, Irvine, California, dated February 23, 1998
(incorporated by reference to the same numbered Exhibit to the
Registrant's Annual Report on Form 10-K filed March 23, 1998). ---
10.18 Sponsorship Agreement between PSL and Commonwealth Service &
Supply Corp. T/A Jim Yates Racing, dated November 22, 1997;
Addendum dated December 17, 1997 (both documents incorporated by
reference to the same numbered Exhibit to the Registrant's
Annual Report on Form 10-K filed March 23, 1998). * ---
10.19 Service and Endorsement Contract between PSL and Smokey Yunick,
dated November 1, 1996 (incorporated by reference to the same
numbered Exhibit to the Registrant's Annual Report on Form 10-K
filed March 23, 1998). * ---
10.20 Standing Loan Agreement between PSL and Bank of America
Community Development Bank, dated April 1, 1998; Promissory
Note; Deed of Trust, Assignment of Rents and Fixture Filing;
Payment Guaranty; and Secured and Unsecured Indemnity Agreement
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form S-4 filed May 4,
1998). ---
10.22 Authorization For Debenture Guarantee 504 Program between the
United States Small Business Administration, CDC Small Business
Finance Corp. and PSL, dated February 2, 1998, as amended
March 3, 1998, as amended again on April 10, 1998; "504" Note;
Deed of Trust and Assignment of Rents; Development Company
504 Debenture; and Servicing Agent Agreement (incorporated by
reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form S-4 filed May 4, 1998). ---
10.23 Contract Packaging Agreement between PSL and Premiere Packaging,
Inc., dated September 11, 1998. ---
10.24 Employment Agreement, dated October 5, 1989, 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
Page 55
<PAGE>
Stock Option Agreement (incorporated by reference to the same
numbered Exhibit to the Registrant's Quarterly Report on
Form 10-Q filed November 12, 1999). ---
10.25 Registration Rights Agreement, dated October 5, 1999, between
the Company and Thomas G. Iwanski (incorporated by reference to
the same numbered Exhibit to the Registrant's Quarterly Report
on Form 10-Q filed November 12, 1999). ---
10.26 Associate Sponsorship Agreement between PSL, King Entertainment, 57
Inc. and Kenneth D. Bernstein, dated December 17, 1999.* ---
10.27 Employment Agreement, dated January 21, 2000, between PSL and 67
Elton Alderman. ---
10.28 Employment Agreement, dated January 21, 2000, between PSL and 78
Thomas C. Billstein. ---
10.29 Sponsorship Agreement between PSL and Sabco Racing, Inc. dated 88
February 15, 2000.* ---
10.30 Sponsorship Agreement between PSL and Galles/ECR Racing, LLC, 93
dated March 10, 2000.* ---
10.31 Service and Endorsement Contract between PSL and Smokey Yunick, 100
dated January 11, 2000.* ---
21.1 Subsidiaries of the Registrant (incorporated by reference to the
same numbered Exhibit to the Registrant's Annual Report on
Form 10-K filed March 25, 1999). ---
23.1 Consent of Deloitte & Touche LLP. 108
24.1 Power of Attorney (included as part of the signature page of
this Annual Report). ---
27.1 Financial Data Schedule (Article 5 of Regulation S-X). 109
- -----------
* Portions of this Exhibit are omitted and were filed separately with the
Secretary of the Commission pursuant to the Registrant's application
requesting confidential treatment under Rule 24b-2 of the Securities
Exchange Act of 1934.
Page 56
<PAGE>
[Confidential treatment is being sought for certain portions of this Exhibit, as
indicated by a "[*]" symbol and footnoted as "ommitted pursuant to Rule 406."
Such omitted portions have been filed with the Securities and Exchange
Commission.]
Exhibit 10.26
-------------
Associate Sponsorship Agreement
-------------------------------
THIS AGREEMENT is entered into as of this 17/th/ day of December , 1999 by
and between King Entertainment, Inc., a Texas corporation, and Kenneth D.
Bernstein (hereinafter collectively referred to as "Owner"), with a main place
of business at 1105 Seminole, Richardson, TX 75080 and Prolong Super Lubricants,
Inc. (hereinafter "Prolong"), with a principal office at 6 Thomas, Irvine, CA
92618, party of the second part.
WHEREAS, Owner represents that it owns sufficient equipment and has
retained all necessary personnel to enter a Top Fuel drag race vehicle in and
compete in all year 2000 national events conducted and sanctioned by the
National Hot Rod Association ("NHRA");
WHEREAS, Prolong is engaged in the business of formulating, producing and
selling lubricants and car care appearance products, which products Owner
intends to use in its Top Fuel race vehicles;
WHEREAS, the parties desire to enter into an agreement under which Prolong
will agree to provide financial sponsorship for Top Fuel drag race vehicles
owned by Owner and a race team affiliated with Owner entered in the year 2000
NHRA national events;
WHEREAS, Owner represents and warrants that it has not previously granted
the promotional and other rights herein granted for the year 2000 and that such
rights granted to Prolong will not conflict with any rights granted to Owner's
primary sponsor.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and intending to be legally bound hereby, the parties agree as follows:
1. Definitions. The following terms shall have the specified meanings
-----------
for the purposes of this Agreement.
a) "Racing Event" or "Race" shall mean all events included within the
year 2000 schedule of national events sponsored and sanctioned by NHRA, a
listing of which for 2000 is included on Exhibit A to this Agreement.
b) "Race Team" shall include the cars owned by Owner and to be entered in
the races, Kenneth D. Bernstein as the driver, and mechanics, crew chief
and all other persons retained or hired by Owner to provide services
related to participation in the races.
c) "Driver" shall mean Kenneth D. Bernstein.
d) "Race Car" shall mean a Top Fuel drag race vehicle designated as the
"Budweiser King Top Fuel Dragster", owned and operated by Owner and entered
in all Races.
2. Sponsorship. Owner hereby grants Prolong an associate sponsorship and
-----------
promotional rights for the Driver, Race Team, race cars and support vehicles,
all as more fully provided in this
1
<PAGE>
Agreement. Prolong acknowledges that Anheuser-Busch Companies, Inc.
(Budweiser) is the primary sponsor of the race car and race team, and that
Prolong's rights hereunder are subject to Budweiser's primary sponsorship
rights.
3. Racing Obligations. Owner represents and warrants that it owns sufficient
------------------
equipment, has retained or will retain the services of personnel to perform
and hereby covenants to perform the following racing responsibilities:
a) Owner shall own and make available one or more Top Fuel drag race
vehicles to compete in the Racing Events herein defined, and shall provide
garage, repair and storage facilities for the Race Car.
b) Kenneth D. Bernstein shall serve as driver for the entire year 2000
NHRA season and for other promotional services and personal appearances
necessary to carry out this Agreement. In the event Kenneth D. Bernstein
should be unable to serve as driver during the term of this Agreement due
to injury or illness or circumstances beyond the control of Kenneth D.
Bernstein, Owner shall retain a qualified substitute driver to complete the
events and provide promotional services and personal appearances over the
term of this Agreement, which substitute driver shall be acceptable to
Prolong.
c) Owner shall provide all parts, accessories, equipment, trailers and
transporters necessary to enter all Racing Events, and shall service,
maintain and repair the Race Cars so that they are in good condition and
repair suitable for use in all Races.
d) Owner will retain the services, for all Racing Events throughout the
term of this Agreement, personnel necessary to enter all Races.
e) The Race Car shall prominently display the Prolong logo in seven
locations. The exact location and size of the Prolong identification on the
Race Car shall be as agreed upon by Owner and Prolong. The race car
transporter shall display Prolong identification on both side panels and on
rear door, in sizes and locations to be mutually agreed by Owner and
Prolong. No identification of any entity which manufactures, sells or
distributes lubricants or car care appearance products shall be displayed
on the Race Car or transport vehicles, except that of Prolong's
identification, excepting that if Prolong ceases marketing car care
appearance products Owner shall be then be entitled to display another
enitity's identification in association with car care appearance products.
f) Owner shall provide crew and driver uniforms which prominently feature
Prolong identification and shall require the Driver and all crew members to
wear such uniforms during all races, and during qualifying and practice
runs on Saturdays and Sundays of race weekends. No identification or logos
shall appear on the Driver or crew uniforms that conflict with Prolong
Super Lubricants. For the year 2000, Prolong will be placed on the front of
the Driver and crew uniforms.
g) Owner shall enter, use their best efforts to qualify in and race the
Race Car in each 2000 Racing Event.
2
<PAGE>
h) Owner shall not enter any race car not sponsored by Prolong and that
does not bear the Prolong color scheme and identification in any NHRA
national drag racing event during the term of this Agreement.
Provided, however, that should Owner determine to field a second (or more)
race cars during the contract period, Owner shall afford Prolong the first
right of refusal as associate sponsor for such race cars and teams. Owner
shall notify Prolong of any such opportunity and Prolong will have 15
(fifteen) days from date of written notification to exercise its option. In
the event the parties fail to reach an agreement within the 15 (fifteen)
day period or should Prolong decline to sponsor a second (or more) race
cars, Owner may contract with another manufacturer or distributor of
lubricants or lubricant related products as either a primary or associate
sponsor of such second (or more) race cars. Kenneth D. Bernstein's name
shall not be used to promote or endorse any product that conflicts with
Prolong on any additional race cars.
4. Promotional Responsibilities of Owner. Owner and its employees shall
-------------------------------------
provide the following promotional services for Prolong.
a) Owner's car, Driver, race crew, supporting personnel and car shall be
known collectively as the "Budweiser King Race Team", and shall be thus
designated, when appropriate, in all press releases, promotional material
and all other material released to the public by Owner and all such
material shall include reference to the team's associate sponsorship by
Prolong, when appropriate.
b) The Driver shall at no additional fee, appear at 4 events each year
during the contract period as designated by Prolong, at locations other
than the race track. Such appearances shall include, but not limited to,
participation in the preparation of television, radio or magazine
advertising for Prolong Super Lubricants if requested by Prolong, public
appearances, photographic and recording sessions, sales meetings and trade
shows. Prolong shall reimburse Owner for reasonable expenses of the Driver,
and or crew, incurred in such appearances (air fare, lodging, local
transportation and meals), upon presentation of supporting documentation.
Appearances by the Driver, in excess of 4 each year, shall be at a fee of
[*] per appearance. Owner, the Driver and other team members shall not be
entitled to any additional compensation for such appearances.
All appearances by the Driver on behalf of Prolong shall be subject to the
reasonable approval of Owner, and shall be consistent with and designed to
preserve and foster the good name, reputation, and public image of Kenneth
D. Bernstein. All appearances shall be scheduled during normal business
hours unless otherwise approved by Owner, not to exceed one hour in length
and will not conflict or interfere with racing activities.
Prolong agrees to attempt to give Owner at least 10 days prior notice of
the times and places the Driver is to appear. Owner agrees to exercise its
best efforts to comply with such requests and agrees not to withhold its
consent to any appearance unreasonably, consistent with the Driver's travel
and racing schedule.
3
<PAGE>
c) Owner, the Driver and the Budweiser King Team shall not, during the
term of this Agreement, endorse, participate in the advertising of or
permit its or their names, trademarks, likenesses, logos or other
identifying marks to be used in the advertising or promotion of any
lubricant or car care appearance products, other than that of Prolong,
except as provided for in 3(h). The Driver shall not drive any race car or
wear any uniform bearing the identification of any manufacturer of
lubricants or car care appearance products other than Prolong without the
written consent of Prolong.
d) Owner or his designated delegate shall use their best efforts in and
cooperate with Prolong in other promotional activities not specified herein
at the reasonable request of Prolong.
e) The Driver and other crew members shall wear uniforms bearing Prolong
identification in the winner's circle or designated winner's area at all
race tracks, and Owner shall distribute hats bearing Prolong's
identification (furnished by Prolong) to be worn, when appropriate, by some
or all crew members and associated personnel in all such areas.
f) Owner shall have no right to use or license to third parties any of
Prolong's names, logos, trademarks or other identifying marks without the
prior consent of Prolong. Prolong consents the use of Prolong's name and
trademark as displayed on the Race Car by the primary sponsor and secondary
sponsors of the Race Car in advertising and promotional material. Prolong
also agrees that Owner may use Prolong's name and trademark for the purpose
of producing souvenir items that display the Budweiser King Top Fuel race
vehicle.
5. Other Sponsor Rights. In addition to the other rights granted to Prolong,
--------------------
Owner hereby grants Prolong the following rights and privileges:
a) During the term of the Agreement, Prolong shall be the exclusive-
lubricant sponsor of Owner (except as provided for in 3(h), the Driver,
team, and the Budweiser King Top Fuel Dragster in drag racing. No decal or
identification of any other lubricant company shall be placed on the
Budweiser King Top Fuel Dragster.
b) Prolong shall have the right at no fee or compensation to Owner or
others, to use the names "Budweiser King Race Team" and the names,
trademarks, photographs of and likenesses of Owner, Driver, other team
members and the Race Car in Prolong's advertising (including print, point
of purchase, radio and television) and promotional material during the term
of this Agreement with the prior approval of Owner, which consent will not
be unreasonably withheld. Owner warrants that it has obtained all releases
and/or consents necessary for this purpose, and will make such available to
Prolong upon request. Prolong may promote its sponsorship in any manner it
deems proper, subject to the prior approval of Owner.
It is understood between the parties that Prolong is utilizing the image
and likeness of Kenny Bernstein on it's product packaging, in printed ads,
on brochures and flyers, in television commercials and in various other
marketing media which is in wide circulation in the marketplace. Upon
expiration of this Agreement Prolong shall cease printing and producing
marketing materials that utilize Owners images, trademarks, and references.
In the event
4
<PAGE>
Owner contracts with another lubricant manufacturer or another car care
appearance manufacturer, Prolong shall expedite the phase out of Owners
images and shall make its best effort to cease using, in any material way,
Owners images prior to Owners start date under his contract with his new
sponsor. In the event this agreement expires and Owner does not contract
with a lubricant or car care appearance product manufacturer, Prolong shall
be allowed to work off its remaining inventory of printed materials,
whether on packaging or otherwise, but in any event not to exceed six
months after expiration of this agreement. In the event Prolong continues
to work off marketing inventory containing Owners image, and Owner has no
direct conflict with another current sponsor, Prolong shall pay to Owner
[*] per month, up to a maximum of six months, for each month Prolong is
using Owners image in the marketplace.
c) During the term of this Agreement, and without payment or consideration
other than the sponsorship fee and as provided in Paragraph 4 (b), Owner
and Kenneth D. Bernstein consent to the non-exclusive use (including but
not limited to reproduction, display, broadcasting, televising, publication
and distribution) in any media of Kenneth D. Bernstein's name, biographical
information, photograph and any other likeness including caricatures,
either in whole or in part and in any form, style, size and color selected
by Prolong and approved by Owner (which approval shall not be unreasonably
withheld). Kenneth D. Bernstein agrees that his name, biographical
information, and photograph or likeness and the name and photograph or
likeness of the Budweiser King Top Fuel Dragster may be used for the
aforesaid purposes alone or in conjunction with each other and/or with
sketches, cartoons, captions, films, artwork, textual matter or other
photographs. Any print or electronic advertisement involving Kenneth D.
Bernstein and or the Budweiser King Top Fuel Dragster or Team shall be
subject to the prior approval of Owner, which shall not be unreasonably
withheld.
d) During the term of this Agreement, Owner, the Driver and the Budweiser
King Race Team and crew shall not endorse, participate in the advertising
or promotion of, or permit its or their names, likenesses, logos,
trademarks or other identifying marks to be used in the advertising or
promotion of any lubricant other than that of Prolong (except as provided
for in 3(h).
e) Should Prolong desire to undertake any merchandising or souvenir
program using the Owner's logos or trademarks, the name or likeness of
Driver or Kenneth D. Bernstein (Kenny Bernstein) or the Budweiser King Top
Fuel Dragster or Team, Owner and Prolong will negotiate royalty terms for
any such program. Prolong further agrees that it shall not manufacture or
license, or authorize any third party to manufacture, souvenirs or
promotional items bearing the logo or trademarks or the name or likeness of
the Driver, Race Car or Race Team without the prior written approval of
Owner.
6. Fee. In consideration for the obligations and services of Owner and Kenneth
----
D. Bernstein and the sponsorship rights granted herein, Prolong agrees to
pay Owner a sponsorship fee for the year 2000 racing season as follows:
5
<PAGE>
[*] ([*] dollars) payable in 4 (four) equal quarterly installments and due
as follows:
February 1, 2000 [*]
April 1, 2000 [*]
July 1, 2000 [*]
October 1, 2000 [*]
Prolong further agrees to guarantee the use of the Budweiser King Pit Side
Hospitality area for a minimum of 10 (ten) days during the contract period.
The per day charge is [*] (totaling [*] for the contract period) plus cost
for catering or any additional incidentals requested by Prolong. Payment is
due to Owner no later than 30 (thirty) days from the date of each use.
Prolong agrees to pay Owner a performance bonus in which Owner is deemed by
the NHRA as the winner of the Top Fuel Championship for the season. Prolong
shall pay to Owner a cash bonus equal to [*]% of the then current years
cash sponsorship being paid by Prolong to Owner. Any bonus money due to
Owner is due on or before December 1, 2000.
In the event Owner should fail to enter a scheduled NHRA sanctioned
national event during the contract period, other than due to circumstances
beyond the Control of Owner, Prolong shall be entitled to a refund of a pro
rata portion of the applicable year's cash sponsorship fee for each race
missed, based upon the number of scheduled NHRA sanctioned national events
for the applicable year. Notwithstanding the foregoing, no refund shall be
payable for any missed event for which Owner participates in a substitute
national drag race sanctioned by the International Hot Rod Association or
in an independent drag race of comparable national prominence in Prolong's
reasonable judgment. Owner shall exercise its best efforts to participate
in a substitute race during the same calendar year as the missed event;
provided that if it is impossible for Owner to participate in a substitute
race during the same calendar year, Owner shall enter the first available
substitute race or races held in the succeeding year.
7. Lubricants. Upon request of Owner and at no charge, Prolong shall provide
----------
Owner with Prolong products as necessary for use in the Racing Events.
Owner agrees that no lubricant other than Prolong shall be used in Owner's
race cars during the term of this Agreement, except as provided for in
3(h), as long as the Prolong product is technically capable for the
application.
8. Term and Option to Renew. The term of this Agreement shall commence upon
------------------------
the date hereof and shall continue in effect through December 31, 2000,
unless earlier terminated as hereafter provided.
Prolong shall be given the first right of refusal to sponsor Owner, the
Race Car and the Race Team for the year 2001 NHRA season, on the same terms
and conditions as set forth herein other than the sponsorship fee. Should
Prolong determine to exercise its option, it shall give written notice
thereof to Owner not later than May 15, 2000. Owner shall then, prior to
June
6
<PAGE>
1, 2000, meet and negotiate in good faith a sponsorship fee for the 2001,
2002 and 2003 NHRA seasons. In the event the parties fail to reach
agreement and to enter into a written agreement prior to June 15, 2000, the
parties shall have no further rights or obligations with respect to one
another hereunder, other than to complete performance of this contract.
9. Sole Risk. Owner acknowledges and agrees that race cars entered in any
---------
Race by Owner shall be entered for Owner's sole account and risk. Neither
Owner nor its Driver, mechanics, crew, other employees or shareholders
shall make any claim against Prolong for salary or other payment except as
specifically provided herein.
Owner shall obtain from its Driver and other employees appropriate releases
in form acceptable to Prolong absolving Owner and Prolong and their
subsidiaries, affiliates, officers, employees and shareholders of all
liability for damages, injury or death suffered by the Driver or other
employees as a result of or arising out of racing related activities.
10. Liabilities and Indemnity. Owner shall be solely responsible for all
-------------------------
claims and liabilities, of whatever kind, arising out of or incidental to
its racing activities, including but not limited to, claims for personal
injury and property damage of Owner, its Driver, Owner's employees,
spectators, other racing teams and other third parties.
Owner further agrees to defend, indemnify, and save Prolong, its officers,
directors, agents and employees harmless from and against any and all
claims, actions, suits, judgments, cost and fees, including reasonable
attorney's fees, which arise from the acts and/or omissions of Owner, its
Driver, mechanics, employees, agents, contractors or third parties under
its control or which arise out of or are related to Owner's racing
activities, transportation to and from Races, and all other acts or
omissions of Owner and Owner's employees and agents. The indemnified claims
include, but are not limited to, claims of Owner, the Driver, Owner's
employees, race spectators, other racing teams and other third parties for
personal injury, death and/or property damage.
11. Insurance. Owner shall obtain and keep in force a policy or policies of
---------
insurance of the following types and limits to cover the Race Cars, Team
transport vehicles, and all activities of Owner, the Team and all of the
Owner's employees and agents during this Agreement:
a) Collision or casualty insurance covering the Race Cars and Team
transport vehicles, for their full replacement cost.
b) Commercial general and automobile liability in combined single limits
of at least $2 million.
Such policies shall provide coverage on an occurrence basis and shall
include Prolong as a named insured. No such liability insurance shall be
deemed in any way to limit Owner's obligations under Paragraph 10 of this
Agreement. Upon request of Prolong from time to time, Owner shall deliver
satisfactory proof that such insurance is in full force and effect.
c) Worker's Compensation - as required by law.
7
<PAGE>
12. Compliance with Law. Owner shall, at its sole expense, comply with all
-------------------
federal, state and local laws and regulations applicable to its business
and racing activities contemplated hereby.
13. Termination. In the event of the occurrence of any of the following,
-----------
Prolong shall have the right to terminate this Agreement by written notice
to Owner:
a) Owner should breach this Agreement in any respect, which breach shall
remain uncured for a period of 10 days following written notice thereof by
Prolong.
b) Proceedings seeking to have Owner declared bankrupt or insolvent
should be brought by or against Owner, or Owner should cease doing business
for any reason;
c) Owner should fail to enter two consecutively scheduled NHRA sanctioned
events, unless such failure is caused by matters beyond the reasonable
control of Owner;
d) If Driver fails to drive the Car in all of the Races, and such failure
is not caused by any illness or injury to Driver or by circumstances beyond
the control of Owner, then Prolong shall have the right to terminate this
Agreement forthwith. Prolong shall also have the option to terminate this
Agreement if Driver dies during the Contract period.
f) Kenneth D. Bernstein should sell, assign or otherwise transfer, his
controlling interest in the Race Team or his controlling interest in King
Entertainment, Inc.
Upon any such termination of the Agreement, Prolong shall be entitled upon
demand to an immediate refund of any unearned portion of the sponsorship
fee determined in accordance with paragraph 6 (except that Owner's right to
make up races shall not apply) and Prolong shall cease all new production
of advertising or promotional material using Owner names.
14. Remedies of Owner. In the event of the occurrence of any of the following,
-----------------
Owner shall have the rights set forth below:
a) If Prolong should breach this Agreement in any respect, which breach
shall remain uncured for a period of ten (10) days following written notice
thereof by Owner, Owner shall have the right to terminate this Agreement at
any time thereafter. In addition, after any such breach but prior to
termination by Owner, Prolong shall remain obligated to perform under this
Agreement, but Owner shall have the right to remove Prolong's name from the
car and to terminate any exhibition of Prolong's name by the Owner, until
such breach is cured.
b) If proceedings seeking to have Prolong declared bankrupt or insolvent
should be brought by or against Prolong, or Prolong should cease doing
business for any reason, Owner shall have the right to terminate this
agreement.
15. Independent Contractor. Owner's relationship to Prolong is that of an
----------------------
independent contractor, and this Agreement is not intended to and shall not
be deemed to create any agency, employment, partnership or joint venture
relationship between the parties hereto.
8
<PAGE>
Owner's Driver, mechanics, and other employees are not intended to be and
shall not be deemed to be employees or agents of Prolong.
16. Notices. Any notice required by this Agreement shall be deemed duly given
-------
if deposited by certified mail, postage prepaid, addressed as follows:
If to Owner:
King Entertainment, Inc.
1105 Seminole
Richardson, TX 75080
Attn: Kenneth D. Bernstein
If to Prolong:
Prolong Super Lubricants, Inc.
6 Thomas
Irvine, CA 92618
Attn: Thomas Iwanski
Senior Vice President Corporate Development
Chief Operating Officer
17. Entire Agreement. This Agreement incorporates the complete and final
----------------
agreement of the parties relative to the subject matter hereof, and no
covenant not set forth herein shall be binding. This Agreement may not be
amended or supplemented other than in writing signed by both parties
hereto.
18. Binding Effect. This Agreement shall be binding upon and inure to the
--------------
benefit of the parties hereto and their respective successors and assigns;
provided, however, that Owner shall have no right to assign this Agreement
or delegate the performance of any duty hereunder, by operation of law or
otherwise.
19. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of California.
20. Captions. The captions herein are inserted for convenience of reference
--------
only, and shall not be used in interpreting any of the terms of the
Agreement.
21. No Waiver. Any failure or delay in exercising any right or remedy
---------
hereunder shall not be deemed to be a waiver of such right or remedy or of
any other right or remedy.
9
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
this 17th day of December, 1999.
WITNESS:
/s/ Kenneth D. Bernstein 12/21/99
__________________________ ------------------------ --------
Kenneth D. Bernstein, Individually Date
ATTEST: KING ENTERTAINMENT, INC.
/s/ Kenneth D. Bernstein 12/22/99
__________________________ ------------------------ --------
Its: President Date
ATTEST: PROLONG SUPER LUBRICANTS, INC.
/s/ Thomas Iwanski 12/22/99
__________________________ ------------------------ --------
Thomas Iwanski Date
Senior Vice President Corporate
Development
Chief Operating Officer
10
<PAGE>
EXHIBIT 10.27
EMPLOYMENT AGREEMENT
--------------------
This EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into this
21st day of January, 2000, by and between PROLONG INTERNATIONAL CORPORATION, a
Nevada corporation, PROLONG SUPER LUBRICANTS, INC., a Nevada corporation,
(collectively referred to as the "Company"), and ELTON ALDERMAN, 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 Chief
Executive Officer of the Company, reporting directly to the Company's Board of
Directors, 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.
2. Term. The initial term of the Executive's employment hereunder shall
be for a period of five (5) years, commencing on the date of this Agreement, and
shall continue until the fifth 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 five-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 five-year anniversary of the Initial Term.
During the term of this Agreement, the Company hereby agrees to use its best
efforts to nominate the Executive as a member of its Board of Directors.
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; such duties,
however, to be commensurate with the Executive's position as Chief Executive
Officer of the Company.
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.
<PAGE>
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 Eighty Thousand Dollars ($180,000) ("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) on or before February 15 of each year, which shall determine, in its
sole discretion, the amount of the increase in Executive's Base Salary, such
determination to be made on the basis of an evaluation of Executive's
performance, the performance of the Company and such other factors as the Board
of Directors (or the Compensation Committee) shall deem appropriate; provided,
--------
however, that in no event shall the amount of the increase be less than ten
- -------
percent (10%) of Executive's then-current Base Salary.
4.2 Stock Options. Concurrently with the entering into this
Agreement by the Company and the Executive, the Executive shall be granted
incentive stock options to purchase 60,000 shares of the Common Stock of the
Company at an exercise price equal to one hundred ten percent (110%) of the Fair
Market Value (as such term is defined in the Company's 1997 Stock Incentive Plan
(the "Plan")) on the date hereof (collectively, the "Options"). The terms of
the Options, which shall be governed by the Company's Plan and the stock option
agreement issued in connection therewith, shall provide for automatic
acceleration upon a Change in Control (as defined in the Plan) and shall be
substantially in accordance with the terms contained in the form of option
agreement attached hereto as Exhibit A (the "Option Agreement").
---------
4.3 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.
4.4 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. With respect to vacations, Executive will be entitled to four (4)
weeks of fully-vested vacation on the date hereof and on each anniversary of the
date hereof, Executive shall be entitled to an additional four (4) weeks of
fully-vested vacation.
2
<PAGE>
4.5 Expenses, Automobile Allowance. 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, and shall provide
Executive with an automobile allowance of One Thousand Dollars ($1,000) per
month, as adjusted from time to time at the sole discretion of the Board of
Directors.
4.6 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 Base
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 4.6 shall be made by the
Company at the closing of the transaction constituting a Change in Control.
5. Termination.
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,
3
<PAGE>
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;
(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 Chief Executive Officer;
(f) 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
(g) 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,
4
<PAGE>
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 (the "Severance Amount")
equal to the result obtained by multiplying his then current monthly Base Salary
by thirty-six (36) months (the "Severance Period"). For a period of twelve (12)
months immediately succeeding the date of the termination, 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; provided,
--------
however, that fifty percent (50%) of the Severance Amount shall be paid to
- -------
Executive in one lump sum within fifteen (15) days of termination or
resignation, as applicable, and the balance of the Severance Amount shall be
paid in equal installments over a twelve-month period immediately succeeding the
date of termination consistent with the Company's normal payroll procedures and
policies. 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. To the extent that any or all of the
payments and benefits provided for in this Agreement (including the benefits set
forth in Section 5.5 below) constitute "parachute payments" within the meaning
of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"),
and, but for this sentence, would be subject to the excise tax imposed by
Section 4999 of the Code, the aggregate amount of such payments and benefits
shall be reduced such that the present value thereof (as determined under the
Code and applicable regulations) is equal to 2.99 times Executive's Base Amount
(as such term is defined in Section 280G of the Code). The determination of any
reduction of any payments or benefits under this Section 5.4 pursuant to the
foregoing provision shall be made by a nationally recognized public accounting
firm chosen by the Company in good faith, and such determination shall be
conclusive and binding on the Company and the Executive.
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)
5
<PAGE>
years following 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.
5.6 Release from Personal Guaranties. If during the term of this
Agreement, the Company terminates Executive's service or Executive resigns, the
Company shall use its commercially reasonable best efforts to, within ten (10)
calendar days after the date of such termination or resignation, effect the
release of Executive from any and all personal guaranties entered into for the
benefit of the Company.
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 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. Indemnification of Executive for Personal Guaranties. Executive has
given and may continue to provide personal guaranties in connection with certain
of the Company's obligations and financial arrangements. As incentive for
Executive to enter into this Agreement, the Company hereby agrees to indemnify
and hold Executive harmless from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suites, claims,
costs, expenses and disbursements of any kind or nature (including, without
limitation, the disbursements and the reasonable fees of counsel for Executive
in connection with any proceeding), which may be imposed on, incurred by, or
asserted against, Executive in any manner relating to or arising out of any of
such personal guaranties. The provisions of this Section 8 shall survive the
termination of this Agreement until the termination, expiration or release of
Executive from all personal guaranties entered into for the benefit of the
Company.
6
<PAGE>
9. 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 9.
10. 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.
11. 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.
12. Arbitration. Except as provided in Section 11, 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.
13. 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 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.
7
<PAGE>
14. Miscellaneous.
14.1 Governing Law. This Agreement is made under and shall be
governed by and construed in accordance with the laws of the State of
California.
14.2 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.
14.3 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:
(a) If to the Company, to:
Prolong International Corporation
6 Thomas
Irvine, California 92618
Attn: President
(b) If to Executive, to:
Elton Alderman
6 Thomas
Irvine, California 92618
14.4 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.
14.5 Amendments. No amendment or modification of this Agreement shall
be deemed effective unless made in writing signed by the parties hereto.
14.6 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.
14.7 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.
14.8 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.
8
<PAGE>
14.9 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.
14.10 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.
14.11 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/ Thomas C. Billstein
--------------------------------------
Its: Director, Vice President & Secretary
-------------------------------------
PROLONG SUPER LUBRICANTS, INC., a Nevada
corporation
By: /s/ Thomas C. Billstein
--------------------------------------
Its: Director, Vice President & Secretary
-------------------------------------
"Executive"
/s/ Elton Alderman
------------------------------------------
Elton Alderman
10
<PAGE>
Exhibit A
---------
Form of Stock Option Agreement
<PAGE>
EXHIBIT 10.28
EMPLOYMENT AGREEMENT
--------------------
This EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into this
21st day of January, 2000, by and between PROLONG INTERNATIONAL CORPORATION, a
Nevada corporation, PROLONG SUPER LUBRICANTS, INC., a Nevada corporation,
(collectively referred to as the "Company"), and THOMAS C. BILLSTEIN, 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 Vice-
President and Secretary of the Company, 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.
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, 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 four-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 four-year anniversary of the Initial Term.
During the term of this Agreement, the Company hereby agrees to use its best
efforts to nominate the Executive as a member of its Board of Directors.
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 Vice-President and Secretary of the Company.
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.
<PAGE>
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 Forty-Three Thousand Dollars ($143,000) ("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) on or before February 15 of each year, which shall determine, in its
sole discretion, the amount of the increase in Executive's Base Salary, such
determination to be made on the basis of an evaluation of Executive's
performance, the performance of the Company and such other factors as the Board
of Directors (or the Compensation Committee) shall deem appropriate; provided,
--------
however, in no event shall the amount of the increase be less than five percent
- -------
(5%) of Executive's then-current base salary.
4.2 Stock Options. Concurrently with the entering into this
Agreement by the Company and the Executive, the Executive shall be granted
incentive stock options to purchase 45,000 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 (the "Plan")) on the date
hereof (collectively, the "Options"). The terms of the Options, which shall be
governed by the Plan and the stock option agreement issued in connection
therewith, shall provide for automatic acceleration upon a Change in Control (as
defined in the Plan) and shall be substantially in accordance with the terms
contained in the form of option agreement attached hereto as Exhibit A (the
---------
"Option Agreement").
4.3 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.
4.4 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. With respect to vacations, Executive will be entitled to four (4)
weeks of fully-vested vacation on the date hereof and on each anniversary of the
date hereof, Executive shall be entitled to an additional four (4) weeks of
fully-vested vacation.
2
<PAGE>
4.5 Expenses, Automobile Allowance. 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, and shall provide
Executive with an automobile allowance of One Thousand Dollars ($1,000) per
month, as adjusted from time to time at the sole discretion of the Board of
Directors.
4.6 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 Base
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 4.6 shall be made by the
Company at the closing of the transaction constituting a Change in Control.
5. Termination.
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,
3
<PAGE>
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;
(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 Vice-President and
Secretary;
(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
4
<PAGE>
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 (the "Severance Amount")
equal to the result obtained by multiplying his then current monthly Base Salary
by twenty-four (24) months (the "Severance Period"). For a period of twelve
(12) months immediately succeeding the date of termination, 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; provided,
--------
however, that fifty percent (50%) of the Severance Amount shall be paid to
- -------
Executive in one lump sum within fifteen (15) days of termination or
resignation, as applicable, and the balance of the Severance Amount shall be
paid in equal installments over a twelve-month period immediately succeeding the
date of termination consistent with the Company's normal payroll procedures and
policies. 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. To the extent that any or all of the
payments and benefits provided for in this Agreement (including the benefits set
forth in Section 5.5 below) constitute "parachute payments" within the meaning
of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"),
and, but for this sentence, would be subject to the excise tax imposed by
Section 4999 of the Code, the aggregate amount of such payments and benefits
shall be reduced such that the present value thereof (as determined under the
Code and applicable regulations) is equal to 2.99 times Executive's Base Amount
(as such term is defined in Section 280G of the Code). The determination of any
reduction of any payments or benefits under this Section 5.4 pursuant to the
foregoing provision shall be made by a nationally recognized public accounting
firm chosen by the Company in good faith, and such determination shall be
conclusive and binding on the Company and the Executive.
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
5
<PAGE>
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 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 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
6
<PAGE>
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 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:
7
<PAGE>
(a) If to the Company, to:
Prolong International Corporation
6 Thomas
Irvine, California 92618
Attn: President
(b) If to Executive, to:
Thomas C. Billstein
6 Thomas
Irvine, California 92618
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.
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.
8
<PAGE>
Exhibit 10.28
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: President
------------------------------------
"Executive"
/s/ Thomas C. Billstein
-----------------------------------------
Thomas C. Billstein
9
<PAGE>
Exhibit A
---------
Form of Stock Option Agreement
<PAGE>
[Confidential treatment is being sought for certain portions of this Exhibit, as
indicated by a "[*]" symbol and footnoted as "omitted pursuant to Rule 406."
such omitted portions have been filed with the Securities and Exchange
Commission.]
Exhibit 10.29
SPONSORSHIP AGREEMENT
---------------------
THIS SPONSORSHIP AGREEMENT (hereinafter the "Agreement) is made and entered
into this 15 day of February, 2000, by and between SABCO RACING, INC., a North
Carolina corporation with a place of business in Iredell County, North Carolina
(hereinafter Sabco), and Prolong Super Lubricants of Irvine, California
(hereinafter to be referred to as "Prolong");
W I T N E S S E T H:
WHEREAS, Sabco is engaged in the business of operating NASCAR Winston Cup
and Busch Grand National Series race cars and wishes to provide advertising
space and advertising, promotional and marketing assistance to Prolong; and
WHEREAS, Prolong desires to become an associate sponsor on two of the Sabco
entries during the 2000 NASCAR Winston Cup and Busch Grand National Series
racing season. These entries shall mean the Sabco No. 40, all NASCAR Winston
Cup Series races during this period; the Sabco No. 42, all NASCAR Busch Grand
National Series races during this period; Prolong shall use its sponsorship of
the Sabco entries for advertising, promoting and marketing itself.
WHEREAS, the parties desire to set forth in this Agreement their respective
rights and obligations;
NOW, THEREFORE, in consideration of the mutual promises and agreements set
forth herein, and for other good and valuable consideration, the parties hereto
agree as follows:
1. Term. The term of this Agreement shall commence with the first race
----
of the 2000 Winston Cup and Busch Grand National season and shall continue until
the final race of the year-2000 racing season.
2. Services to be provided by Sabco. Sabco shall perform the following
--------------------------------
services for Prolong during the term hereof:
a. Drivers. The driver for the 34 Winston Cup events to be held during
-------
the 2000 season in which Prolong is an associate sponsor shall be
Sterling Marlin (40) and the driver of the 16 Busch Grand National
events to be held during the 2000 season in which Prolong is an
associate sponsor shall be Kenny Irwin (42), unless due to injury or
for some unforeseeable reason, either is unable to drive, in which
event Sabco shall choose a substitute driver to drive their respective
Sabco/Prolong-sponsored entry. For the duration of this agreement,
Sabco reserves the right to substitute or replace any of the
aforementioned drivers listed without prior notice to Prolong or prior
approval from Prolong.
1
<PAGE>
b. Decal location. Sabco will designate Prolong as an associate sponsor
---------------
on its No. 40 Winston Cup race car in the aforementioned 34 events and
on its No. 42 Busch Grand National race car in the aforementioned 16
events. Sabco shall cause each car to be painted with paint schemes
approved by each's primary sponsor and shall cause to display Prolong
associate sponsor decal signage. Signage on the No. 40 Winston Cup
race car shall be placed upon the C-Post. Signage on the No. 42 Busch
Grand National race car shall be displayed on the rear quarter panel
(between car number and rear tire; both sides of car). In addition,
Sabco shall provide, driver, pit crew, team uniforms, team pit
equipment, team race car transporter, show car and show car
transporter bearing prominent Prolong associate sponsor identification
as well as team pit equipment with size and placement commensurate
with level of sponsorship. On the driver and crew uniforms of the No.
40 Winston Cup car, the logo shall be on the right chest of each
uniform. On the driver and crew uniforms of the No. 42 Busch Grand
National car, the logo shall be on the left sleeve of each uniform.
c. Race Credentials
----------------
(i) Prolong will receive two (2) "hard card" Annuals for the 2000
season
(ii) Prolong shall receive four (4) sponsor credentials, upon
availability
(iii) Prolong shall receive four (4) suite passes to each of the
Charlotte races
(iv) Hospitality and tickets will be made available to the
particular races requested but will be billed to Prolong at
SABCO's cost with no mark-up
3. Driver Appearances. Sabco shall provide unto Prolong three (3)
------------------
aggregate driver appearances of Sterling Marlin at no fee. Prolong shall be
responsible for all first class travel expenses relating to the driver
appearance, i.e. hotel, airfare, meals, etc. Additional appearances by Sabco
driver shall be at the discounted rate of [*] ($[*]) Dollars per day per driver,
plus expenses.
Sabco shall further provide the services of each driver for one free
day for commercial use (up to six hours each) for still photo shoot, TV and
radio/commercial production. Prolong shall be responsible for all first class
travel expenses relating to each driver appearance, i.e. hotel, airfare, meals,
etc.
Both Sabco drivers, while under contract with Team SABCO, shall allow
their likeness, voice, picture and signature to be used for commercial purposes
endorsing Prolong at no additional costs during the term of this agreement.
4. Compensation. Prolong agrees to pay unto Sabco the sum ($[*]) for
------------
services to be provided by Sabco for the 2000 season. This sponsorship fee of
$[*] shall be paid to Sabco in the following installments: four equal
installments of $[*] to be paid on 2/15/00, 5/15/00, 8/15/00 and 10/15/00.
Incremental Sales Incentive. Sponsor shall also participate with
----------------------------
team in certain Incremental Sales programs. Sponsor further agrees to compensate
team for team's assistance in developing incremental sales of sponsor's
products. Unless the parties agree otherwise in a writing executed by them,
sponsor shall pay team [*] for distribution in new sponsor accounts.
5. Show Car. Sabco agrees to provide at no expense to Prolong for its
--------
use in promoting its sponsorship, five (5) free show car appearance days whereas
Prolong can deem which of the Sabco show cars to use. This shall mean that
Prolong may schedule any combination of Sabco's two show cars (based on
availability) not to exceed a total of five show days (travel days are
considered a "show date"). Sabco will provide transportation of show car and
will provide an attendant to stay with the car during its display period. For
any show car appearance requested by Prolong over and above the five (5) free
appearances, Sabco will make available unto Prolong a show car at a discounted
rate of [*] Dollars ($[*]) per day. All travel days to and from the site of a
show car appearance, as well as the actual day upon which show car is on display
will be charged as a "show date". It is further understood that the parties will
agree in advance upon a schedule of places and events for the show car to be
displayed at such times as will not interfere with Sabco's racing schedule.
2
<PAGE>
6. Media, Public Relations and Sponsor Communications. Sabco will use
--------------------------------------------------
its best efforts to obtain favorable exposure for Prolong and will be available
to assist Prolong with public relations activities to a reasonable extent. This
shall include making members of Sabco available for media interviews, press
conferences or other public relations activity, as reasonably requested by
Prolong, at or near race sites on dates Sabco is at race sites pursuant to their
obligations hereunder. Sabco shall provide at its expense a staff member to
handle race team's media and public relations needs and shall cause Prolong to
receive prominent mention and display within press kits featuring the Sabco No.
40 Winston Cup and No. 42 Busch Grand National race cars. Sabco shall fax to
Prolong officers on the Monday following the race, race results and a summary of
the prior weekend activities.
7. Confidentiality. During and after the term of this Agreement, each
---------------
party hereto, its employees and agents agree not to disclose any business
results, trade practices or other business information of the other party, its
employees or agents, which they may learn as a result of the performance of this
Agreement.
8. Indemnification.
---------------
a. Sabco shall indemnify, defend and hold harmless Prolong, its
officers, directors, employees and representatives from and
against any and all losses, claims, suits, damages, liabilities,
costs and expenses, including attorney fees and court costs
incurred by any of them arising out of:
(i) Any breach of any warranty made by Sabco herein;
(ii) Any acts done or words spoken
(iii) Any claims by any persons arising from acts or omissions of any
nature by Sabco, its employees or agents, including but not
limited to, claims arising during the court of competition or
practice in the performance of this Agreement.
b. Prolong shall indemnify, defend and hold harmless Sabco, its
officers, directors, employees and representatives, from and
against any and all losses, claims, suits, damages, liabilities,
costs and expenses, including attorney fees and court costs
incurred by any of them, arising out of:
(i) The use of any logo, design or materials furnished to Sabco by
Prolong hereunder;
(ii) Any breach of any warranty made by Prolong herein;
(iii) Any acts done or words spoken by Prolong, its officers,
directors, agents, employees and representatives;
(iv) Any claims by any persons arising from acts of omissions of any
nature by Prolong, its officers, directors, agents, employees or
representatives, including, but not limited to, claims arising
under any product liability theory with respect to Prolong's
products.
9. Nature of Relationship. The parties expressly acknowledge and agree
------ -- ------------
that Sabco is acting as an independent contractor. Each party is responsible
for all taxes relating to its operation, including payroll taxes for its
employees, and nothing in this Agreement is intended to create a relationship,
express or implied, of employer-employee between Sabco and Prolong. Except as
expressly authorized herein, neither party may contract for or otherwise
obligate the other party without the party's prior express written consent.
10. Insurance. Sabco shall provide at its expense and maintain throughout
---------
the term of this Agreement and any option period spectator liability insurance
in an amount not less than $1 million single limit coverage with respect to any
liability relating to the activities of Sabco in the performance of this
Agreement. Sabco shall, within 90 days of the execution of this Agreement,
supply Prolong with a copy of such policy of insurance or a certificate thereof,
and such policies shall be cancelable only upon 10 days written notice to
Prolong.
3
<PAGE>
11. Notices, Statements and Payments. All notices, statements and
--------------------------------
payments required under this Agreement shall be sent to the parties at the
following addresses:
SABCO RACING, INC. PROLONG SUPER LUBRICANTS
114 Meadow Hill Circle 6 Thomas
Mooresville, North Carolina 28117 Irvine, California 92618
Attn.: Armando Fitz Attn.: Bob Abdellah
Tel.: 704/662-9642 Tel.: 949/587-2700
All notices, statements and payments shall be deemed delivered when
deposited in the United States mail postage prepaid, when hand delivered if
delivered personally, when telecopied if the sender's telecopier confirms
transmission (with respect to notices and statements) or when wire transferred
in federal funds (with respect to payments).
12. Waivers. A waiver of any provision of this Agreement shall be
-------
enforceable only if the waiver is in writing signed by the party against whom
the waiver is sought to be enforced. A failure by a party at any time to
exercise any rights hereunder shall not constitute a waiver of such rights at
another time.
13. Entire Agreement. This Agreement contains the entire agreement and
----------------
understanding between the parties with respect to the subject matter hereof and
supersedes all prior written or oral agreements between them with respect to the
subject matter hereof.
14. Assignment. This Agreement may not be assigned by either party
----------
without the prior written consent of the other party.
15. Significance of Headings. Paragraph headings contained herein are
------------------------
solely for the purpose of aiding the speedy location of subject matter and are
not in any sense to be given weight in the construction of this Agreement.
Accordingly, in case of any question with respect to the construction of this
Agreement, it is to be construed as though paragraph headings had been omitted.
16. Governing Law, Jurisdiction and Venue. This Agreement shall be
-------------------------------------
governed by and construed in accordance with the substantive laws of the State
of North Carolina. The parties hereto hereby submit to jurisdiction and venue
in any state or federal court located in North Carolina as well as any other
jurisdiction having venue and competent jurisdiction of any law suit arising out
of or relating to this Agreement; provided, however, if any proceedings are
instituted in a jurisdiction other than North Carolina, any party may remove
such proceeding to any State or Federal Court in North Carolina.
17. Further Execution; Cooperation. The parties agree to execute and
------------------------------
deliver such further agreements, instruments and other documents as the other
party may reasonably deem necessary to effectuate the purposes and provisions of
this Agreement. The parties further agree to cooperate with each other in any
manner reasonably requested by the other party to effectuate the purposes and
provisions of this Agreement.
18. Counterparts. This Agreement may be executed in counterparts and the
------------
signature page of any party, and photocopies and facsimiles thereof, may be
appended to any counterpart and when so appended shall constitute an original
signature.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly elected officers as of the day and year first above
written.
SABCO RACING, INC.
BY: /s/ Armando Fitz
-----------------------------------
Armando Fitz, VP Operations
PROLONG SUPER LUBRICANTS
BY: /s/ Thomas C. Billstein
------------------------------------
Thomas C. Billstein
Executive Vice President
5
<PAGE>
[Confidential treatment is being sought for certain portions of this Exhibit, as
indicated by a "[*]" symbol and footnoted as "omitted pursuant to Rule 406."
Such omitted portions have been filed with the Securities and Exchange
Commission.]
EXHIBIT 10.30
SPONSORSHIP AGREEMENT
This Agreement is entered into as of this 10 day of March 2000 by and
between Prolong Super Lubricants, Inc., a Nevada corporation, (hereinafter
referred to as "Prolong", with a principal office at 6 Thomas, Irvine, CA,
92618, and Galles/ECR Racing, LLC, with a principal office at 1300 Lomas Blvd.,
NE, Albuquerque, NM 87102 (hereinafter "Galles/ECR").
WHEREAS, Galles/ECR represents that it owns sufficient equipment and has
retained all necessary personnel to enter a Indy Racing League (IRL) race
vehicle in and compete in all such 2000 events.
WHEREAS, Sponsor is engaged in the business of formulating, producing and
selling lubricants and car care appearance products, which Galles/ECR intends to
use in its race vehicles.
WHEREAS, the parties desire to enter into an agreement under which Prolong
will agree to provide support for race vehicles owned by Galles/ECR and an
affiliated race Galles/ECR in 2000 racing events.
1. Sponsorship. Galles/ECR hereby grants Prolong an associate sponsorship and
-----------
promotional rights for the Driver, subject to Prolong getting approval from
Driver's attorney, Galles/ECR, race cars and support vehicles, all as more
fully provided in this Agreement.
2. Racing Obligations. Galles/ECR represents and warrants that it owns
------------------
sufficient equipment, has retained or will retain the services of personnel
to perform and hereby covenants to perform the following racing
responsibilities:
a) Galles/ECR shall own and make available one or more race vehicles to
compete in the Racing Events herein defined, and shall provide garage,
repair and storage facilities for the Race Car.
b) Galles/ECR shall provide all parts, accessories, equipment, trailers
and transporters necessary to enter all Racing Events, and shall service,
maintain and repair the Race Cars so that they are in good condition and
repair suitable for use in all Races.
c) Galles/ECR will retain the services, for all Racing Events throughout
the term of this Agreement, personnel necessary to enter all Races.
d) Galles/ECR will carry Prolong advertising prominently displayed on the
competitive vehicle mentioned in the first paragraph of this Agreement.
Three (3) decals shall be
<PAGE>
Exhibit 10.30
displayed on the vehicle; one (1) on the nose of the vehicle and one (1) on
each side of the vehicle on the mirrors (Dimensions and location of race
car decals are a follows: Nose 4 1/4" by 1 1/2"; Mirrors, both sides 3 1/2"
by 1 1/2".) Prolong patches will be worn by the driver, the team members,
and the crew on the fire suits and crew shirts in lower center "back" in
Prolong graphics and colors (dimensions as provided by Prolong). Prolong
identification will be displayed on both sides of the vehicle transporter
(dimensions 30" by 8") and on the scoring stand (dimensions 12" x 3").
Prolong will supply patches and decals to Galles/ECR. All dimensions are
approximate. Should it elect to do so, Prolong reserves the right to
allocate a portion of its signage space to another entity, providing prior
approval by Galles/ECR.
e) Galles/ECR shall provide crew and driver uniforms which feature Prolong
identification and shall require the Driver and all crew members to wear
such uniforms during all races, and during qualifying and practice runs on
Saturdays and Sundays of race weekends. No identification or logos shall
appear on the Driver or crew uniforms that conflict with Prolong Super
Lubricants. For the year 2000, Prolong will be placed on the Driver and
crew uniforms.
f) Galles/ECR shall enter, use their best efforts to qualify in and race
the Race Car in each 2000 Racing Event.
3. Promotional Responsibilities of Galles/ECR. Galles/ECR and its employees
------------------------------------------
shall provide the following promotional services for Prolong.
a) All appearances by the Driver, Al Unser, Jr., on behalf of Prolong
shall be subject to the reasonable approval of Galles/ECR, and shall be
separately negotiated with Driver's attorney, and shall be consistent with
and designed to preserve and foster the good name, reputation, and public
image of same. All appearances shall be scheduled during normal business
hours unless otherwise approved by Galles/ECR, not to exceed one hour in
length and will not conflict or interfere with racing activities.
Prolong agrees to attempt to give Galles/ECR at least 10 days prior notice
of the times and places the Driver is to appear. Galles/ECR agrees to
exercise its best efforts to comply with such requests and agrees not to
withhold its consent to any appearance unreasonably, consistent with the
Driver's travel and racing schedule.
b) Galles/ECR shall not, during the term of this Agreement, endorse,
participate in the advertising of or permit its or their names, trademarks,
likenesses, logos or other identifying marks to be used in the advertising
or promotion of any lubricant excluding motor oil, gearbox oil grease or
parts cleaner or car care appearance products, other than that of Prolong.
The Driver shall not drive any race car or wear any uniform bearing the
2
<PAGE>
identification of any manufacturer of lubricants or car care appearance
products other than Prolong without the written consent of Prolong.
c) The Driver and other crew members shall wear uniforms bearing Prolong
identification in the winner's circle or designated winner's area at all
race tracks, and Galles/ECR shall distribute hats bearing Prolong's
identification (furnished by Prolong) to be worn, when appropriate, by some
or all crew members and associated personnel in all such areas.
d) Galles/ECR shall have no right to use or license to third parties any
of Prolong's names, logos, trademarks or other identifying marks without
the prior consent of Prolong. Prolong also agrees that Galles/ECR may use
Prolong's name and trademark for the purpose of producing souvenir items
that display the Galles/ECR's race vehicle.
4. Other Sponsor Rights. In addition to the other rights granted to Prolong,
--------------------
Galles/ECR hereby grants Prolong the following rights and privileges:
a) Prolong shall have the right at no fee or compensation to Galles/ECR
or others, to use the names, trademarks, photographs of and likenesses of
Galles/ECR, other Galles/ECR members and the Race Car in Prolong's
advertising (including print, point of purchase, radio and television) and
promotional material during the term of this Agreement with the prior
written approval of Galles/ECR, which consent will not be unreasonably
withheld. Prolong will negotiate separately with Driver regarding his
approvals. Galles/ECR warrants that it has obtained all releases and/or
consents necessary for this purpose, and will make such available to
Prolong upon request. Prolong may promote its sponsorship in any manner it
deems proper, subject to the prior approval of Galles/ECR.
b) During the term of this Agreement, and without payment or
consideration other than the sponsorship consents to the non-exclusive use
(including but not limited to reproduction, display, broadcasting,
televising, publication and distribution) in any media of Galles/ECR's
biographical information, photograph and any other likeness including
caricatures, either in whole or in part and in any form, style, size and
color selected by Prolong and approved in writing by Galles/ECR (which
approval shall not be unreasonably withheld). Galles/ECR agree to
respective names, biographical information, and photographs or likenesses
and the name and photograph or likeness of its race vehicle may be used for
the aforesaid purposes alone or in conjunction with each other and/or with
sketches, cartoons, captions, films, artwork, textual matter or other
photographs.
c) During the term of this Agreement, Galles/ECR shall not endorse,
participate in the advertising or promotion of, or permit its name,
likeness, logo, trademark or other identifying marks to be used in the
advertising or promotion of any lubricant (excluding motor oil) other than
that of Prolong.
d) Prolong will provide technical and sales training to Galles/ECR
representatives, or their assigns, at a time/location of mutual
convenience.
3
<PAGE>
5. Fee. In consideration for the obligations and services of Galles/ECR and
----
the sponsorship rights granted herein, Prolong agrees to provide a sponsorship
for the year 2000 racing season as follows:
Prolong will support Galles/ECR's racing activities with a one (1)
year agreement covering 2000. The amounts and payment schedules are
as follows:
A. 2000 - $[*] Product/Cash
1) $[*] in Prolong Product (Lubricant and Appearance) at
current Wholesaler Distributor price.
. $[*] in product at current Wholesaler Distributor price
to NAPA. GALLES/ECR Racing to be compensated from
proceeds of sales. Payment by Prolong to Galles/ECR to
be made on or before June 1, 2000.
. $[*] in additional product at current Prolong
Wholesaler Distributor price to be ordered on or before
October 1, 2000. This allotment may be diverted to sale
by NAPA, at the option of Galles/ECR (if diverted to
sale, cash to be received by Galles by October 1,
2000).
2) $[*] in cash to be paid on or before July 1, 2000.
B. Prolong will pursue additional funding for Galles/ECR through a
phone card program and a collector Galles/ECR race car program to
sponsors and their normal customer base.
1) Bonus -- When Prolong funds raised from the sale of the
Prolong/Galles/ECR/AUJ collectable phone card exceed
$[*] Prolong will further compensate Galles/ECR Racing an
additional $[*] Prolong to provide accounting records of
these sales quarterly. Prolong shall grant to Galles/ECR the
right to audit these sales. This section shall survive the
termination of this Agreement.
C. Prolong agrees to the sale of additional product to Galles/ECR or
its affiliates at current Wholesaler Distributor (WD) pricing.
D. Any re-sale of Prolong products by Galles/ECR must adhere to
applicable Prolong Manufacturers Advertised Pricing (MAP).
4
<PAGE>
In the event Galles/ECR should fail to enter a scheduled sanctioned event
during the contract period, other than due to circumstances beyond the
Control of Galles/ECR, Prolong shall be entitled to a refund of a pro rata
portion of the applicable year's sponsorship fee for each race missed,
based upon the number of scheduled sanctioned events for the applicable
year.
6. Products. Upon request of Galles/ECR and at no charge, Prolong shall
--------
provide Galles/ECR with Prolong products as necessary for use in the Racing
Events. Galles/ECR agrees that no lubricant, excluding motor oil, gearbox
oil, grease or parts cleaner, other than Prolong shall be used in
Galles/ECR's race cars during the term of this Agreement as long as the
Prolong product is technically capable for the application. Products shall
be inclusive of the full line of Prolong products, as requested, in
quantities as mutually agreed by Prolong and Galles/ECR.
7. Term and Option to Renew. The term of this Agreement shall commence upon
------------------------
the date hereof and shall continue in effect through December 31, 2000,
unless earlier terminated as hereafter provided.
Prolong shall be given the first right of refusal to sponsor Galles/ECR,
the Race Car for the year 2001 season, on similar terms and conditions, the
fee to be reasonably negotiated.
8. Sole Risk. Galles/ECR acknowledges and agrees that race cars entered in
---------
any Race by Galles/ECR shall be entered for Galles/ECR's sole account and
risk. Neither Galles/ECR nor its Driver, mechanics, crew, other employees
or shareholders shall make any claim against Prolong for salary or other
payment except as specifically provided herein.
Galles/ECR shall obtain from its Driver and other employees appropriate
releases in form acceptable to Prolong absolving Galles/ECR and Prolong and
their subsidiaries, affiliates, officers, employees and shareholders of all
liability for damages, injury or death suffered by the Driver or other
employees as a result of or arising out of racing related activities.
9. Liabilities and Indemnity. Galles/ECR shall be solely responsible for all
-------------------------
claims and liabilities, of whatever kind, arising out of or incidental to
its racing activities, including but not limited to, claims for personal
injury and property damage of Galles/ECR, its Driver, Galles/ECR's
employees, spectators, other racing teams and other third parties.
Galles/ECR further agrees to defend, indemnify, and save Prolong, its
officers, directors, agents and employees harmless from and against any and
all claims, actions, suits, judgments, cost and fees, including reasonable
attorney's fees, which arise from the acts and/or omissions of Galles/ECR,
its Driver, mechanics, employees, agents, contractors or third parties
under its control or which arise out of or are related to Galles/ECR's
racing activities, transportation to and from Races, and all other acts or
omissions of Galles/ECR and Galles/ECR's employees and agents. The
indemnified claims include, but are not limited to, claims of Galles/ECR,
the Driver, Galles/ECR's employees, race spectators, other
5
<PAGE>
racing Galles/ECRs and other third parties for personal injury, death
and/or property damage.
10. Insurance. Galles/ECR shall obtain and keep in force a policy or policies
---------
of insurance of the following types and limits to cover the Race Cars,
Galles/ECR transport vehicles, and all activities of Galles/ECR, the
Galles/ECR and all of the Galles/ECR's employees and agents during this
Agreement:
a) Collision (excluding on track) or casualty insurance covering the Race
Cars and Galles/ECR transport vehicles, for their full replacement cost.
b) Commercial general and automobile liability in combined single limits
of at least $2 million.
Such policies shall provide coverage on an occurrence basis and shall
include Prolong as a named insured. No such liability insurance shall be
deemed in any way to limit Galles/ECR's obligations under Paragraph 9 of
this Agreement. Upon request of Prolong from time to time, Galles/ECR shall
deliver satisfactory proof that such insurance is in full force and effect.
c) Worker's Compensation - as required by law.
11. Compliance with Law. Galles/ECR shall, at its sole expense, comply with
-------------------
all federal, state and local laws and regulations applicable to its
business and racing activities contemplated hereby.
12. Termination. In the event of the occurrence of any of the following,
-----------
Prolong shall have the right to terminate this Agreement by written notice
to Galles/ECR:
a) Galles/ECR should breach this Agreement in any respect, which breach
shall remain uncured for a period of 10 days following written notice
thereof by Prolong.
b) Proceedings seeking to have Galles/ECR declared bankrupt or insolvent
should be brought by or against Galles/ECR, or Galles/ECR should cease
doing business for any reason;
c) Galles/ECR should fail to enter two consecutively scheduled sanctioned
events, unless such failure is caused by matters beyond the reasonable
control of Galles/ECR;
Upon any such termination of the Agreement, Prolong shall be entitled upon
demand to an immediate refund of any unearned portion of the sponsorship
fee determined in accordance with paragraph 5
6
<PAGE>
13. Remedies of Galles/ECR. In the event of the occurrence of any of the
----------------------
following, Galles/ECR shall have the rights set forth below:
a) If Prolong should breach this Agreement in any respect, which breach
shall remain uncured for a period of ten (10) days following written notice
thereof by Galles/ECR, Galles/ECR shall have the right to terminate this
Agreement at any time thereafter. In addition, after any such breach but
prior to termination by Galles/ECR, Prolong shall remain obligated to
perform under this Agreement, but Galles/ECR shall have the right to remove
Prolong's name from the car and to terminate any exhibition of Prolong's
name by the Galles/ECR, until such breach is cured.
14. Independent Contractor. Galles/ECR's relationship to Prolong is that of an
----------------------
independent contractor, and this Agreement is not intended to and shall not
be deemed to create any agency, employment, partnership or joint venture
relationship between the parties hereto. Galles/ECR's Driver, mechanics,
and other employees are not intended to be and shall not be deemed to be
employees or agents of Prolong.
15. Notices. Any notice required by this Agreement shall be deemed duly given
-------
if deposited by certified mail, postage prepaid, addressed as follows:
If to Galles/ECR:
Galles/ECR Racing, LLC
1300 Lomas Blvd., NE
Albuquerque, NM 87102
Attn: Mr. Rick Galles
Manager
If to Prolong:
Prolong Super Lubricants, Inc.
6 Thomas
Irvine, CA 92618
Attn: Thomas C. Billstein
Executive Vice President
16. Entire Agreement. This Agreement incorporates the complete and final
----------------
agreement of the parties relative to the subject matter hereof, and no
covenant not set forth herein shall be binding. This Agreement may not be
amended or supplemented other than in writing signed by both parties
hereto.
17. Binding Effect. This Agreement shall be binding upon and inure to the
--------------
benefit of the parties hereto and their respective successors and assigns;
provided, however, that Galles/ECR shall have no right to assign this
Agreement or delegate the performance of any duty hereunder, by operation
of law or otherwise.
7
<PAGE>
18. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of New Mexico.
19. Captions. The captions herein are inserted for convenience of reference
--------
only, and shall not be used in interpreting any of the terms of the
Agreement.
20. No Waiver. Any failure or delay in exercising any right or remedy
---------
hereunder shall not be deemed to be a waiver of such right or remedy or of
any other right or remedy.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
this 10 day of March, 2000.
WITNESS:
/s/ Rhonda Baca 3-13-00
__________________________ ------------------------ ------------
Date
ATTEST: GALLES/ECR RACING, LLC
/s/ Andrew Vogt 3-13-00
__________________________ ------------------------ ------------
Andrew Vogt Date
Vice President
ATTEST: PROLONG SUPER LUBRICANTS
/s/ Thomas C. Billstein 3-10-00
__________________________ ------------------------ ------------
Thomas C. Billstein Date
Executive Vice President
8
<PAGE>
[Confidential treatment is being sought for certain portions of this Exhibit, as
indicated by a "[*]" symbol and footnoted as "omitted pursuant to Rule 406."
Such omitted portions have been filed with the Securities and Exchange
Commission.]
Exhibit 10.31
PROLONG SUPER LUBRICANTS, INC.
SERVICE AND ENDORSEMENT CONTRACT
--------------------------------
This Agreement is made this 11th day of January, 2000, by and between
Prolong Super Lubricants, Inc., a Nevada corporation ("Prolong"), and Smokey
Yunick, an individual ("Yunick"). Prolong and Yunick are hereinafter at times
referred to individually as the "Party" and collectively as the "Parties."
RECITALS
--------
A) Prolong is in the business of manufacturing and marketing hydrocarbon
based lubricant and car care appearance products (the "Products"). The defined
term "Products" shall include all enhancements, improvements, modifications and
changes to the existing Products;
B) Yunick has obtained substantial public recognition in the automotive
racing business and is often times referred to as the "world's greatest
mechanic."
C) Prolong believes it would be in its best interest and Yunick believes
it would be in his best interest for Prolong to engage Yunick and to use
Yunick's likeness, name, photograph, voice, signature, initials and endorsements
(the "Promotional Materials") in marketing the Products.
NOW, THEREFORE, in consideration of the foregoing Recitals and the terms
and conditions hereinafter set forth, the Parties hereby agree as follows:
AGREEMENT
---------
1. Services.
--------
1.1 Use of Promotional Materials. Yunick hereby grants to Prolong
----------------------------
the exclusive right and license throughout the world to use his likeness, name,
photograph, voice, signature, initials and endorsements in the promotion and
sale of the Products during the term of this Agreement. The Promotional
Materials may be used by Prolong in any advertising now existing or hereafter
used in any and all media forms during the term, and only during the term of
this agreement. The Promotional Materials shall be used to promote the sale of
the Products. The exclusivity of Section 1.1 shall be with respect to Products
only. Yunick shall be free to grant rights throughout the world to use his
likeness, name, photographs, voice, signature, initials and endorsements in the
promotion and sale of other products so long as such other products are not
competitive products as hereinafter defined in Section 9.
1
<PAGE>
1.2 Personal Services. Yunick agrees to be available for not less
-----------------
than fifty (50) days during each twelve (12) month period that this Agreement is
in effect ("Service Day" or "Service Days"). Any portion of any day used for
travel to or from an appearance shall be considered a Service Day. Any portion
of any day used for an appearance shall be considered a Service Day. The
services to be provided by Yunick shall consist of participation in any media or
promotional events, selling, taping or any other activity reasonably related to
the marketing and promotion of the Products. Yunick agrees to act as a goodwill
ambassador for Prolong and the Products and to take advantage of opportunities
to talk about and promote Prolong and the Products during the course of his day-
to-day activities. Yunick will be given a Prolong Super Lubricants, Inc. credit
card to be used to pay for previously "out of pocket" expenses incurred by
Yunick in the course of Promoting Prolong on a day to day basis. As part of
said promotional activities Yunick agrees to wear Prolong's apparel, including
shirts and jackets, but not hats, when such apparel would be reasonably
appropriate based on the nature of the event when Yunick is in attendance at
race car events. The duties set forth in this Section 1.2 shall hereinafter be
referred to as the "Services." Yunick compensation for Services in accordance
with the terms and conditions set forth in Section 7. In event of travel
delays, Yunick will be compensated as if the delay time was normal travel time.
2. Availability. The dates and times when Yunick shall be personally
------------
available to provide the services on behalf of Prolong shall be determined by
mutual agreement between the Parties. Prolong shall make every effort to notify
Yunick no less than thirty (30) days in advance of any personal appearances and
Yunick shall not have the right to refuse said appearances so long as they do
not conflict with any items on his personal schedule. Yunick shall use his best
efforts to honor any request by Prolong to make an appearance. Prolong
acknowledges that Yunick also has commitments to American Racing Products and
may have other commitments that he is required to honor, therefore, Prolong will
use its best efforts to cooperate with Yunick in allowing him to comply with
said commitments so long as said commitments do not interfere with the ability
of Yunick to be reasonably available to provide the Services.
3. Approval by Yunick. All printed promotional materials, printed
------------------
advertising, press releases and any other communicative materials utilizing
Yunick's photographic image, name, signature, endorsement or initials shall not
be derogatory to the image of Yunick as reasonably determined by Yunick,
Yunick's authorized agent, prior to release, publishing, broadcasting or other
dissemination. Prolong agrees to provide Yunick copies of all such materials
for approval no later than five (5) days before any such release or
dissemination. Yunick agrees to respond promptly to every such request for
approval, but in any case shall respond no later than five (5) days after
receipt of such request for approval. If no response is received by Prolong
within such five-day period, such non-response shall be deemed to constitute
approval. Any approval to be provided by Yunick shall not be unreasonably
withheld.
4. Professional Conduct. Yunick hereby agrees to provide the Services
--------------------
pursuant to this Agreement in a professional manner that will reflect favorably
on Prolong and others associated with Prolong, and on the Products. Yunick
agrees to use his best efforts to promote Prolong and the Products during the
term of this Agreement and will take every reasonable opportunity during the
term of this Agreement when and where reasonably appropriate to promote Prolong
and the
2
<PAGE>
Products. Yunick agrees to conduct himself with due regard to public conventions
and morals and further agrees not to do or commit any act or thing that would
reasonably tend to derogate or detract from the goodwill of Prolong or the
Products.
5. Use of Promotional Materials. Use of the Promotional Materials shall
----------------------------
be subject to approval by Yunick as set forth in Section 3 above. The
Promotional Materials shall not be used in any way that would diminish the
goodwill associated therewith or in any way damage the image or reputation of
Yunick.
Prolong shall have the right at no fee or compensation to Yunick or others,
to use the names "Smokey Yunick" and the names, trademarks, photographs of and
likeness of Yunick, and his race car(s) in Prolong's advertising (including
print, point of purchase, radio and television) and promotional material during
the term of this Agreement with the prior approval of Yunick, which consent will
not be unreasonably withheld. Prolong may promote its sponsorship in any manner
it deems proper, subject to the prior approval of Yunick.
It is understood between the parties that Prolong is utilizing the image
and likeness of Yunick on it's product packaging, in printed ads, on brochures
and flyers, in television commercials and in various other marketing media which
is in wide circulation in the marketplace. Upon expiration of this Agreement
Prolong shall be allowed to work off its remaining inventory of printed
materials, whether on packaging or otherwise, but in any event not to exceed six
(6) months after expiration of this agreement. Yunick shall be compensated $[*]
Dollars ($[*]) per month for the use of his image and likeness.
During the term of this Agreement, and without payment or consideration
other than the fee and as provided in Paragraph 7.1, Yunick consents to the non-
exclusive use (including but not limited to reproduction, display, broadcasting,
televising, publication and distribution) in any media of Yunick's name,
biographical information, photograph and any other likeness including
caricatures, either in whole or in part and in any form, style, size and color
selected by Prolong and approved by Yunick (which approval shall not be
unreasonably withheld). Yunick agrees that his name, biographical information,
and photograph or likeness and the name and photograph or likeness of the his
race car(s) may be used for the aforesaid purposes alone or in conjunction with
each other and/or with sketches, cartoons, captions, films, artwork, textual
matter or other photographs. Any print or electronic advertisement involving
Yunick shall be subject to the prior approval of Yunick, which shall not be
unreasonably withheld.
6. Term. The Promotional Materials shall be available to Prolong and the
----
Services shall be provided to Prolong for a period of twenty four (24) months,
beginning on February 1, 2000 and ending on January 31, 2002. Prolong may not
cancel this contract. Yunick give Prolong authority to insure him any way they
see fit.
3
<PAGE>
7. Compensation.
------------
7.1 Compensation Amount. Prolong shall compensate Yunick for the
-------------------
right to use the Promotional Materials and the Services by paying him the
following compensation as set forth opposite each period set forth below (the
"consideration"):
7.2 Payment Dates.
--------------
2/1/00 $[*]
8/1/00 $[*]
2/1/01 $[*]
8/1/01 $[*]
Total Amount $[*] Period: 2/1/00 - 1/31/02
7.3 Additional Personal Appearance Fees. In the event that Yunick
-----------------------------------
and Prolong each agree to Service Days in excess of fifty (50) Service Days per
twelve (12) month period, Yunick shall be compensated for the additional days at
the rate of [*] Dollars ($[*]) per day. If services include radio or television
advertising or promotions that will be telecast, Yunick shall be entitled to
additional Consideration which shall be agreed upon by the Parties prior to
performance of the Services related thereto.
8. Expenses. Prolong shall pay Yunick for airfare and hotel expenses
--------
associated with his performance of the Services plus a $[*] Dollar ($[*]) per
diem allowance (the "Per Diem Allowance") for food and expenses. Yunick may
elect to have his wife travel with him and Prolong shall pay for her airfare and
the reasonable additional hotel expenses associated with said travel.
In exchange for her assistance to Yunick in fulfilling his obligations
to Prolong during appearances, Prolong shall pay Yunick an additional $[*]
Dollars ($[*]) per appearance day as compensation Mrs. Yunick's assistance.
9. Noncompetition by Yunick. Yunick agrees that he will not endorse any
------------------------
competitive products during the Term of this Agreement. The competitive products
shall include engine treatments, transmission treatments, fuel conditioners,
penetrant sprays, precision oils, greases, dry car wash and car wax.
10. Confidentiality. In the course of working with Prolong in providing
---------------
the Services as set forth in this Agreement, Yunick may have access to certain
confidential information and materials which may be disclosed verbally or in
writing to Yunick concerning Prolong and/or the Products ("Confidential
Information"). Yunick hereby agrees not to utilize or disclose any Confidential
Information except as required in carrying out the Services and shall take
reasonable
4
<PAGE>
steps to protect any public disclosure of the Confidential Information. Yunick
shall, during the Term of this Agreement, hold in confidence and not disclose to
any person or entity without the express prior written authorization of Prolong,
names or addresses of any of Prolong's customers, Prolong's past or prospective
dealings with its customers; the parties, dates or terms, if any, of Prolong's
contracts; any information, trade secrets, systems, processes or business
methods, or any other secret confidential matters relating to the customers or
business affairs of Prolong or any companies affiliated with Prolong. All
written material or other property, tangible or intangible, provided to Yunick,
or developed in conjunction with Yunick, that contain proprietary rights and
materials, including copyrights therein, arising out of or resulting from the
performance of this Agreement shall belong to Prolong and shall not be
disseminated or used in any way by Yunick except as expressly set forth herein.
Upon termination of this Agreement, all said materials shall be returned by
Yunick to Prolong. Such information and materials shall not include any general
marketing information or other materials or information that is generally known
by or has been disseminated to the public.
Prolong's rights and interests (including all rights of copyright print) in
and to the Promotional Materials and the results and proceeds of the Services
hereunder are at times referred to hereinafter as the "Proceeds". The Proceeds
are a "work made for hire" for Prolong to be used by Prolong in its promotional
and marketing materials, commercials and ads in any form of marketing media and,
therefore, are "specially ordered and commissioned" for use as a part of the
marketing activities and promotional works of Prolong.
11. Independent Contractor Status. Yunick hereby declares that Yunick is
-----------------------------
engaged in an independent business and Yunick will perform the Services as an
independent contractor and not as agent, employee or servant of Prolong. In no
event shall Yunick be allowed to engage any other individual to carry out the
duties of Yunick pursuant to this Agreement. Yunick shall be responsible for the
payment of any state or federal withholding tax, social security tax or other
payroll tax, and worker's compensation insurance related to the performance of
the Services.
12. Indemnification. Prolong agrees for itself and its successors and
---------------
assignors to defend, hold harmless and indemnify Yunick , his officers, agents,
employees and their successors and assigns, and anyone acting on his behalf,
from and against any and all losses, costs and damages, expenses or claims
(including attorney's fees), whether such claims are groundless or to, arising
out of any claim, including but not limited to claims of personal injury, death
or damage to property, whether real or personal, or false advertising or
misrepresentation, unless such claims arises from Yunick's misconduct or
negligence. The intent of this indemnification Section is to cause Prolong to
indemnify and hold harmless Yunick from any and all third-party claims of any
nature arising out of, or related to this Agreement or performance hereunder,
unless such claims arise from the breach of this Agreement by Yunick or the
misconduct or negligence of Yunick.
13. Termination. At any time that Prolong is in breach of the
-----------
compensation terms of this Agreement, Prolong shall have thirty (30) days to
cure such breach after written notice from Yunick. In the event of failure to
cure within the time limits provided hereunder, in addition to such other
remedies to which Yunick may be entitled, Yunick shall have the right to halt
use of the Promotional Materials by Prolong and cease providing the Services
thereafter, in which event Prolong agrees it
5
<PAGE>
shall cease using in any way the Promotional Materials as defined in Section 1.1
and agrees to recall all outstanding Promotional Materials.
(14) General Provisions.
------------------
(a) Notices. All notices pertaining to this Agreement shall be in
-------
writing and shall be transmitted either by facsimile, overnight mail, personal
hand delivery or through the facilities of the United States Post Office,
certified or registered mail, return receipt requested. The addresses set forth
below for the respective Parties shall be the places where notices shall be
sent, unless written notice of a change of address is given.
Prolong Super Lubricants, Inc. Smokey Yunick
6 Thomas c/o Henry Yunick Revocable Trust
Irvine, CA 92618 957 N. Beach Street
Daytona Beach, FL 32117
Any such notices shall be deemed to be given as of the date so
delivered.
(b) Attorneys' Fees. In the event that any legal, declaratory, self
---------------
help, or equitable action or arbitration or any other action not considered to
be a legal or equitable action is commenced between the Parties hereto or their
personal representatives concerning any provision of this Agreement or the
rights and duties of any person in relation thereto, the prevailing Party shall
be entitled, in addition to such other relief that may be granted, to a
reasonable sum for their attorney's fees and any other costs and expenses
relating thereto.
(c) Governing Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be controlled by and construed under the
laws of the State of Florida. In the event of any litigation arising out of any
dispute in connection with this Agreement, the Parties hereby consent to the
jurisdiction of the Florida courts with venue in Volusia County which is the
agreed upon location where the Parties entered into this Agreement.
(d) Binding Effect. Each and every covenant, term, provision and
--------------
agreement herein contained shall be binding upon and inure to the benefit of the
Parties hereto and their respective heirs, successors, assigns and legal
representatives and shall survive the termination of this Agreement where
appropriate to carry out the terms thereof.
(e) Amendments, Modifications and Waivers. No amendment or
-------------------------------------
modification of this Agreement or any exhibit or schedule hereto shall be valid
unless made in writing and signed by the party to be charged therewith. No
waiver of any provision of this Agreement shall be deemed, or shall constitute,
a waiver of any other provision, whether or not similar. No waiver shall be
binding unless executed in writing by the party making the waiver.
(f) Assignment. The interest of Yunick in this Agreement is personal
----------
and shall not be assigned, transferred, shared or divided in any manner by
Yunick.
6
<PAGE>
(g) Severability. Every provision of this Agreement is intended to
------------
be severable. If any terms or provisions hereof are illegal or invalid for any
reason whatsoever, such illegality or invalidity shall not affect the validity
of the remainder of the Agreement.
(h) Parties in Interest. Nothing in this Agreement shall confer any
-------------------
rights or remedies under or by reason of this Agreement on any persons other
than the Parties and their respective successors and assigns nor shall anything
in this Agreement relieve or discharge the obligation or liability of any third
person to any party to this Agreement, nor shall any provision give any third
person any right of subrogation or action over or against any party to this
Agreement.
(i) Entire Agreement. This Agreement contains the entire Agreement
----------------
between the Parties hereto, and supersedes any prior written or oral agreement
between the Parties concerning the subject matter contained here. There are no
representations, agreements, arrangements or understandings, oral or written
between the Parties hereto, relating to the subject matter contained in this
Agreement, which are not fully expressed herein.
(j) Yunick will be paid in full and contract terminated if Prolong is
sold or changes hands.
(k) Mr. and Mrs. Yunick will be provided Nascar hard cards by
Prolong.
(l) Yunick to receive [*] Dollars ($[*]) per month for telephone
expenses.
(m) Yunick to receive [*] Dollars ($[*]) per month for uniform
expenses.
This Agreement is adopted and made effective as of the date first set forth
above as evidenced by the signatures of the Parties hereto.
PROLONG SUPER LUBRICANTS, INC.
By: /s/ Elton Alderman /s/ Smokey Yunick
------------------------ ---------------------------
President Smokey Yunick
7
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-41567 of Prolong International Corporation and subsidiaries on Form S-8 of
our report dated March 8, 2000, (except for Notes 1 and 8 as to which the date
is April 12, 2000) appearing in this Annual Report on Form 10-K of Prolong
International Corporation and Subsidiaries for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
Costa Mesa, California
April 12, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,094,779
<SECURITIES> 0
<RECEIVABLES> 3,137,191
<ALLOWANCES> 389,732
<INVENTORY> 2,171,728
<CURRENT-ASSETS> 8,126,852
<PP&E> 4,108,571
<DEPRECIATION> 554,395
<TOTAL-ASSETS> 21,379,748
<CURRENT-LIABILITIES> 8,085,415
<BONDS> 0
0
0
<COMMON> 28,446
<OTHER-SE> 10,938,739
<TOTAL-LIABILITY-AND-EQUITY> 21,379,748
<SALES> 34,470,915
<TOTAL-REVENUES> 34,470,915
<CGS> 10,500,586
<TOTAL-COSTS> 10,500,586
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 250,637
<INTEREST-EXPENSE> 454,142
<INCOME-PRETAX> (10,273,987)
<INCOME-TAX> (3,693,926)
<INCOME-CONTINUING> (6,580,061)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,580,061)
<EPS-BASIC> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
