<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission File No. 0-22803
-------------------
PROLONG INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 6 Thomas 74-2234246
(State or other jurisdiction Irvine, CA 92618 (IRS Employer
of incorporation or (Address of principal Identification No.)
organization) executive offices) (Zip Code)
(949) 587-2700
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes [X] No [_]
(2) Yes [X] No [_]
There were 28,438,903 shares of the registrant's common stock ($0.001 par value)
outstanding as of August 9, 2000.
Page 1 of 17 pages
Exhibit Index on Sequentially Numbered Page 16
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<PAGE>
PROLONG INTERNATIONAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART 1 FINANCIAL INFORMATION Page
Item 1: Financial Information
Consolidated Condensed Balance Sheets -
June 30, 2000 and December 31, 1999............................... 3
Consolidated Condensed Statements of Operations - Three months
and Six months ended June 30, 2000 and 1999....................... 4
Consolidated Condensed Statements of Cash Flows -
Six months ended June 30, 2000 and 1999........................... 5
Notes to Consolidated Condensed Financial Statements.............. 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 11
Item 3: Quantitative and Qualitative Disclosures About Market Risk........ 15
PART II OTHER INFORMATION
Item 1: Legal Proceedings................................................. 16
Item 4: Submission of Matters to a Vote of Security Holders............... 16
Item 6: Exhibits and Reports on Form 8-K.................................. 16
Signatures................................................................. 17
See notes to consolidated condensed financial statements
2
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 398,870 $ 1,094,779
Accounts receivable, net of allowance for
doubtful accounts of $398,000 at June 30,
2000 and $390,000 at December 31, 1999 4,084,663 2,747,459
Inventories, net 2,319,072 2,171,728
Prepaid expenses, net 650,592 182,646
Income taxes receivable --- 94,275
Prepaid television time 118,917 ---
Advances to employees 200,786 218,523
Deferred tax asset 1,376,988 1,617,442
----------- -----------
Total current assets 9,149,888 8,126,852
Property and equipment, net 3,369,352 3,554,176
Intangible assets, net 6,783,328 7,036,670
Deferred tax asset, noncurrent 895,227 2,545,238
Other assets, net 88,338 116,712
----------- -----------
TOTAL ASSETS $20,286,133 $21,379,648
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,375,201 $ 2,843,843
Accrued expenses 1,502,155 1,210,126
Line of credit from bank 2,867,276 3,985,000
Income taxes payable 51,107 ---
Notes payable, current 21,376 46,446
----------- -----------
Total current liabilities 6,817,115 8,085,415
Notes payable, noncurrent 2,329,559 2,327,048
----------- -----------
Total liabilities 9,146,674 10,412,463
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value;
50,000,000 shares authorized; no shares
issued or outstanding
Common stock, $0.001 par value; 150,000,000
shares authorized; 28,438,903 shares
issued and outstanding at June 30, 2000 28,439 28,446
Additional paid-in capital 14,851,890 14,809,349
Accumulated deficit (3,740,870) (3,870,610)
----------- -----------
Total stockholders' equity 11,139,459 10,967,185
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $20,286,133 $21,379,648
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements
3
<PAGE>
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET REVENUES $ 5,219,521 $12,001,207 $12,976,720 $21,751,079
COST OF GOODS SOLD 1,367,184 3,029,505 3,094,095 5,687,444
----------- ----------- ----------- -----------
GROSS PROFIT 3,852,337 8,971,702 9,882,625 16,063,635
OPERATING EXPENSES:
Selling and marketing 3,178,945 9,113,702 6,491,496 14,687,597
General and administrative 1,266,933 2,150,561 2,695,086 3,815,576
----------- ----------- ----------- -----------
Total operating expenses 4,445,878 11,264,263 9,186,582 18,503,173
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (593,541) (2,292,561) 696,043 (2,439,538)
OTHER INCOME (EXPENSE), net:
Interest (expense) (128,460) (104,902) (282,716) (158,520)
Interest income 2,936 1,961 5,271 6,665
----------- ----------- ----------- -----------
Total other (expense), net (125,524) (102,941) (277,445) (151,855)
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (719,065) (2,395,502) 418,598 (2,591,393)
PROVISION (BENEFIT) FOR INCOME TAXES (207,985) (839,000) 288,858 (907,000)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (511,080) $(1,556,502) $ 129,740 $(1,684,393)
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE
Basic ($0.02) ($0.06) $0.00 ($0.06)
=========== =========== =========== ===========
Diluted ($0.02) ($0.06) $0.00 ($0.06)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
Basic 28,445,835 28,445,835 28,445,835 28,445,835
Diluted options outstanding 0 0 74,361 0
----------- ----------- ----------- -----------
Diluted 28,445,835 28,445,835 28,520,196 28,445,835
=========== =========== =========== ===========
</TABLE>
See notes to consolidated condensed financial statements
4
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PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 129,740 $(1,684,393)
Adjustments to reconcile net income (loss) to
net cash provided by (used) in operating activities:
Depreciation and amortization 447,760 415,818
Provision for doubtful accounts 8,271 (289,875)
Deferred taxes 1,890,465 (907,000)
Reserve for obsolescence (108,668) 20,000
Compensation costs related to options 46,000 44,001
Exchange of common stock for accounts receivable (3,466) ---
Changes in assets and liabilities:
Accounts receivable (1,345,475) (3,376,988)
Inventories (38,676) (1,821,855)
Prepaid expenses (467,946) (177,230)
Prepaid income taxes --- 341,018
Prepaid television time (118,917) 77,578
Deposits 22,624 (65,890)
Accounts payable (468,642) 2,574,170
Accrued expenses 292,029 724,688
Income taxes payable 145,382 ---
----------- ------------
Net cash provided by (used in) operating activities 430,481 (4,125,958)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,844) (414,117)
Employee advances 17,737 56,390
----------- ------------
Net cash provided by (used in) investing activities 13,893 (357,727)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (22,559) (22,388)
Proceeds (payments) on line of credit from bank, net (1,117,724) 3,735,000
----------- ------------
Net cash provided by (used in) financing activities (1,140,283) 3,712,612
NET DECREASE IN CASH AND CASH EQUIVALENTS (695,909) (771,073)
CASH AND CASH EQUIVALENTS, beginning of period 1,094,779 1,127,861
----------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 398,870 $ 356,788
=========== ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 92,000 $ ---
=========== ============
Interest paid $ 282,716 $ 158,520
=========== ============
</TABLE>
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
During 1999, the Company completed the following transactions:
Recorded $44,001 to additional paid-in capital for compensation costs related to
stock options.
During 2000, the Company completed the following transactions:
Recorded $46,000 to additional paid-in capital for compensation costs related to
stock options.
Recorded the exchange of 6,932 shares of common stock for relief of accounts
receivable.
See notes to consolidated condensed financial statements
5
<PAGE>
PROLONG INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS
Prolong International Corporation (PIC) is a Nevada corporation originally
organized on August 24, 1981. In June 1995, PIC acquired 100% of the
outstanding stock of Prolong Super Lubricants, Inc. (PSL), a Nevada
corporation. In 1997, Prolong Foreign Sales Corporation was formed as a
wholly-owned subsidiary of PIC. In 1998, Prolong International Holdings Ltd.
was formed as a wholly-owned subsidiary of PIC. At the same time, Prolong
International Ltd. was formed as a wholly-owned subsidiary of Prolong
International Holdings Ltd. PIC, through its subsidiaries, is engaged in the
manufacture, sale and worldwide distribution of a patented complete line of
high-performance and high-quality lubricants and appearance products.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
include the accounts of PIC and its wholly-owned subsidiaries, PSL, Prolong
Foreign Sales Corporation, Prolong International Holdings Ltd. and its
wholly-owned subsidiary, Prolong International Ltd. (collectively, the
Company or Prolong). All significant intercompany accounts have been
eliminated in consolidation. These financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments,
including normal recurring accruals, considered necessary for a fair
presentation have been included. Operating results for the three months and
the six months ended June 30, 2000 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000. For
further information, refer to the Form 10-K for the year ended December 31,
1999 filed by the Company with the Securities and Exchange Commission.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ----------
<S> <C> <C>
(Unaudited)
Raw materials $ 336,280 $ 985,785
Finished goods 1,982,792 1,185,943
---------- ----------
$2,319,072 $2,171,728
========== ==========
</TABLE>
6
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Building and improvements $2,280,783 $2,280,783
Computer equipment 276,729 276,729
Office equipment 55,753 55,753
Furniture and fixtures 585,168 581,324
Automotive equipment 35,925 35,925
Exhibit equipment 115,143 115,143
Machinery and equipment 17,953 17,953
Molds and dies 206,961 206,961
---------- ----------
3,574,415 3,570,571
Less accumulated depreciation (743,063) (554,395)
---------- ----------
2,831,352 3,016,176
Land 538,000 538,000
---------- ----------
$3,369,352 $3,554,176
========== ==========
</TABLE>
5. LINE OF CREDIT
As of May 8, 2000, the Company entered into a new $6,000,000 credit facility
with a financial institution, expiring in May 2003. Such facility is
collateralized by eligible accounts receivable and inventories. Interest is
payable monthly at the rate of the financial institution's prime rate
(9.50%) at June 30, 2000, plus 1% subject to a minimum interest charge of
$50,000 per quarter. The credit facility contains certain defined net income
and tangible net worth financial covenants. At June 30, 2000, the Company
was not in compliance with certain financial covenants under the credit
agreement. The Company is in discussions with the lender and expects to
receive a waiver for such covenant compliance, however there are no
assurances that the Company will receive the waiver. As of June 30, 2000,
$2,867,276 was outstanding and approximately $50,000 was available under the
terms of the line of credit. Additionally, the Company is currently seeking
new financing arrangements through subordinated debt and/or equity
providers.
7
<PAGE>
6. NOTES PAYABLE
Notes payable consist of the following as of June 30, 2000:
<TABLE>
<CAPTION>
<S> <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 with a final payment of all remaining
unpaid principal and interest due on May 1, 2008. $1,641,806
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. 709,129
----------
2,350,935
Less current maturities (21,376)
----------
$2,329,559
==========
Year ending December 31,
2000 $ 21,376
2001 50,256
2002 53,974
2003 57,969
2004 61,909
Thereafter 2,105,451
----------
$2,350,935
==========
</TABLE>
7. CONTINGENCIES
On or about November 17, 1998, Michael Walczak et al, on behalf of himself
and other similarly situated shareholders of EPL filed a purported class
action and derivative suit in the U.S. District Court (the "Court") in San
Diego, California against PIC, PSL, EPL and certain of their respective
former and current officers and directors (the "Prolong defendants"). The
named plaintiffs allege breach of contract, certain fraud claims, civil RICO,
breach of fiduciary duty and conversion and seek monetary damages. The named
plaintiffs in the action are allegedly current EPL shareholders who hold less
than two per cent (2%) of the outstanding shares of EPL's common stock, in
the aggregate. The plaintiffs applied for a preliminary injunction to halt
the sale of the assets of EPL to PIC and to prevent the dissolution of EPL.
On November 25, 1998, the Court granted a temporary restraining order without
a hearing and before opposition could be submitted. On December 30, 1998, the
Court held a hearing on whether a preliminary injunction should be issued in
connection with such action. The Court entered a preliminary injunction based
on the plaintiffs' (a) alleged claim for fraudulent conveyance in connection
with PSL's license agreement with EPL and (b) alleged claim for breach of
fiduciary duty. The preliminary injunction enjoins the further consummation
of the asset purchase transaction and prevents EPL from completing its
8
<PAGE>
liquidation and dissolution until further notice from the Court. The
preliminary injunction will last until the case is tried on its merits or
until the preliminary injunction is otherwise dismissed. The Court ordered the
Walczak plaintiffs to post a bond in the amount of $100,000, which bond has
been posted. PIC appealed the Court's preliminary injunction ruling, which
appeal was subsequently denied.
The Prolong defendants successfully moved to change venue and the case was
ordered transferred to the federal court in Orange County, California, where
PIC's principal office is located. In December 1999, plaintiffs' counsel was
disqualified from the matter on the grounds of unwaivable conflict of
interest. Most of the plaintiffs have selected new counsel, however at this
time, due to the delay regarding counsel, there are no mediation conferences
scheduled. Therefore, final resolution of the matter cannot presently be
determined. The Prolong defendants have each filed and served motions to
dismiss the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil
Procedure. There have been no rulings to date on those motions or on the
Walczak plaintiffs' request to certify the class as a class action. PIC and
PSL and their respective current officers and directors continue to believe
that there is no merit to the plaintiffs' claims and plan to vigorously defend
against the claims.
On February 15, 1999, PSL entered into an agreement containing a consent order
with the Federal Trade Commission (FTC). Without admitting any of the
allegations, the Company agreed that it will not make advertising claims
without having adequate scientific substantiation for such claims. No monetary
redress was paid the FTC in connection with the agreement. Subsequently,
however, four purported class action lawsuits, each of which are based on the
FTC allegations, have been brought against PIC and/or PSL. These suits are
further identified as follows:
Kachold et al v PSL was filed November 19, 1999 and is pending in the U.S.
District Court, Northern District of Illinois, File No. 99-CV-08349. The case
is a purported class action and individual action alleging violation of the
Illinois Consumer Fraud Act, Magnuson Moss Consumer Products Warranty Act, and
seeks damages. Motions to dismiss and for more definite statement are pending.
Fernandes et al v PSL was filed January 5, 2000, in Los Angeles County
Superior Court, File No. BC222712. The case is a purported class action
alleging false advertising, unfair competition, violation of the California
Consumer Legal Remedies Act, and for equitable relief, fraud, deceit and
negligent misrepresentation. A demurrer to the complaint is pending.
Bowland et al v PSL was filed January 21, 2000 in County Court at Law No. 4,
Nueces County, Texas, File No. 00-60119-4. The case is a purported class
action alleging breach of contract, breach of express warranty and violations
of the Texas Deceptive Trade Practices Act. An answer to the complaint is
pending.
Mata et al v PSL and PIC was filed February 18, 2000 in the District Court of
Hidalgo County, Texas, 275th Judicial District, File No. C-292-00-E. The case
is a purported class action alleging breach of contract and breach of express
and implied warranty. A special appearance and motion to dismiss was filed by
PIC and an answer and plea in abatement was filed by PSL in order to stay this
matter due to the previously filed Bowland case.
9
<PAGE>
The four above referenced lawsuits are still in discovery stages and
therefore final resolution of these matters cannot be presently determined.
PIC and PSL and their respective current officers and directors believe that
there is no merit to the plaintiffs' claims and are vigorously defending
against the claims.
PIC and its subsidiaries are subject to other legal proceedings, claims and
litigation arising in the ordinary course of business. PIC's management does
not expect that the ultimate costs to resolve these matters will have a
material adverse effect on PIC's consolidated financial position, results of
operations or cash flows.
8. COMMITMENTS
The Company has outstanding noncancelable inventory purchase commitments
with a contract packager of approximately $714,000 as of June 30, 2000.
Under the terms of the agreement, the packager purchases components,
manufactures, warehouses and distributes certain car care products for the
Company. When inventories held by the packager exceed approximately 75 days
from the date of production, the Company may be obligated to pay a storage-
handling fee of 1 1/2 % per month, and/or purchase these inventories at the
option of the packager.
9. EMPLOYMENT CONTRACT
In June 2000, the Company entered into an employment agreement with an
officer of the Company for a period of 3 years. The terms of the contract
include base salary, stock options, various performance incentives and a
severance payment of six months in the event of early termination.
10. NEW ACCOUNTING PRONOUNCEMENT
In December 1999, the Securities and Exchange Commission issued Staff
accounting Bulletin #101, Revenue Recognition in Financial Statements ("SAB
101"). The Company will be required to adopt SAB 101 by the fourth quarter
of fiscal year 2000. The Company has not completed its determination of the
impact of SAB 101 on its consolidated financial position or results of
operations.
10
<PAGE>
ITEM 2:
-------
PROLONG INTERNATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Percentage of Net Revenues
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
-------------------- --------------------
<S> <C> <C> <C> <C>
Net revenues 100.0 100.0 100.0 100.0
Cost of goods sold 26.2 25.2 23.9 26.1
-------------------- --------------------
Gross profit 73.8 74.8 76.1 73.9
Selling expenses 60.9 75.9 50.0 67.6
General and administrative expenses 24.3 17.9 20.8 17.5
-------------------- --------------------
Operating income (loss) (11.4) (19.0) 5.3 (11.2)
Other income (expense) (2.4) (0.9) (2.1) (0.7)
-------------------- --------------------
Income (loss) before income taxes (13.8) (19.9) 3.2 (11.9)
Provision (benefit) for income taxes (4.0) (7.0) 2.2 (4.2)
-------------------- --------------------
Net income (loss) (9.8) (12.9) 1.0 (7.7)
==================== ====================
</TABLE>
Three Months Ended June 30, 2000 vs. Three Months Ended June 30, 1999
Net revenues for the three months ended June 30, 2000 were approximately
$5,220,000 as compared to approximately $12,000,000 for the comparable period of
the prior year, a decrease of $6,780,000 or 56.5%. Revenues for the three month
period ended June 30, 2000 were derived from the following sources: Direct
response infomercial sales of $277,000 ($202,150 of appearance products and
$74,850 of lubricants); retail sales of $4,176,000 ($113,000 of appearance
products and $4,063,000 of lubricants); industrial sales of $89,000; and,
international and other sales of $678,000. Revenues for the three month period
ended June 30, 1999 were derived from the following sources: Direct response
infomercial sales of $2,017,000 ($1,807,000 of appearance products and $210,000
of lubricants); retail sales of $9,202,000 ($1,994,000 of appearance products
and $7,208,000 of lubricants); industrial sales of $191,000; and, international
and other sales of $590,000.
For the three-month period ended June 30, 2000, retail sales were 80.0% of total
revenues while direct response infomercial sales comprised 5.3% of total
revenues. For the three month period ended June 30, 1999, direct response
infomercial sales comprised 16.8% of total revenues while retail sales were
76.7%. The decrease in the direct response sales of approximately $1,740,000
11
<PAGE>
is a direct result of a strategic decision to evaluate other cost-effective
advertising programs. The lower retail sales for the three month period ended
June 30, 2000 versus the same period a year ago are attributable to a decrease
in appearance sales of $1,881,000 and lubricants sales of $3,145,000. The
appearance products were launched during the spring of 1999 when initial
stocking orders were filled at several major retailers. The demand for the
appearance products declined in part as a result of a shift in advertising
strategies to accommodate the realities of a marketplace in which the Company
was not able to spend as much as we would like on promotional activities. The
lubricants sales decline is attributable to a soft market for specialty
lubricants, higher than expected store inventory levels at major retailers and
also the decision to discontinue the direct response infomercial for lubricants
in lieu of an evaluation of more cost effective means of promoting the line.
Cost of goods sold for the three months ended June 30, 2000 was approximately
$1,367,000 as compared to $3,030,000 for the comparable period of the prior
year, a decrease of $1,663,000 or 54.9%. As a percentage of sales, cost of
goods sold increased from 25.2% in 1999 to 26.2% in 2000. This increase was
mainly attributable to the shift in product mix with a higher percentage of
retail and international sales.
Selling expenses of approximately $3,179,000 for the three months ended June 30,
2000 represented a decrease of $5,935,000 over the comparable period of the
prior year. This 65.1% decrease was primarily the result of decreased expenses
for endorsement and sponsorship payments, slotting fees, commissions, freight
expenses, expenditures for media and print advertising and television airtime
purchases. The Company continues to evaluate new advertising/marketing and
promotional activities to promote the brand name and the cost effectiveness of
each motorsports promotional program. Selling and marketing expenses as a
percentage of sales were 60.9% for the three months ended June 30, 2000 versus
75.9% for the comparable period of the previous year.
General and administrative expenses for the three months ended June 30, 2000
were approximately $1,267,000 as compared to $2,151,000 for the three months
ended June 30, 1999, a decrease of $884,000 or 41.1%. This decrease is primarily
attributable to a decrease in legal expenses, bonuses, bad debt and general
insurance expenses. As a percentage of sales, general and administrative
expenses increased from 17.9% in 1999 to 24.3% in 2000. Even though the
aggregate expenses declined during the period, the ratio of expenses as a % of
sales increased due to the more than expected decline in sales during the
period. The Company continues to evaluate further reductions in the general and
administrative expenses.
Interest expense of approximately $128,000 for the three months ended June 30,
2000 represented an increase of $23,000 over the comparable period of the prior
year. The increase is attributable to the increase in bank loans payable during
the period.
Net loss for the three month period ended June 30, 2000 was approximately
$(511,000) compared to a net loss of approximately $(1,557,000) for the
comparable period in the prior year, a decrease of $1,046,000. The decrease is
a result of the factors discussed above.
12
<PAGE>
Six Months Ended June 30, 2000 vs. Six Months Ended June 30, 1999
Net revenues for the six months ended June 30, 2000 were approximately
$12,977,000 as compared to approximately $21,751,000 for the comparable period
in the prior year, a decrease of $8,774,000 or 40.3%. Revenues for the six
month period ended June 30, 2000 were derived from the following sources: Direct
response infomercial sales of $445,000 ($287,450 of appearance products and
$157,550 of lubricants); retail sales of $11,076,000 ($620,000 of appearance
products and $10,456,000 of lubricants); industrial sales of $162,000; and,
international and other sales of $1,294,000. Revenues for the six month period
ended June 30, 1999 were derived from the following sources: direct response
infomercial sales of $3,068,000 ($2,147,000 of appearance products and $921,000
of lubricants, retail sales of $17,218,000 ($4,245,000 of appearance products
and $12,973,000 of lubricants); industrial sales of $391,000; and, international
and other sales of $1,074,000.
For the six-month period ended June 30, 2000, retail sales were 85.3% of total
revenues while direct response infomercial sales comprised 3.4% of total
revenues. For the six month period ended June 30, 1999, direct response
infomercial sales comprised 14.1% of total revenues while retail sales were
79.2%. The decrease in the direct response sales of approximately $2,623,000 is
a direct result of a strategic decision to evaluate other cost-effective
advertising programs. The lower retail sales for the six-month period ended June
30, 2000 versus the same period a year ago are attributable to a decrease in
appearance sales of $3,625,000 and lubricants sales of $2,517,000. The
appearance products were launched during the spring of 1999 when initial
stocking orders were filled at several major retailers. The demand for the
appearance products declined in part as a result of a shift in advertising
strategies to accommodate the realities of a marketplace in which the Company
was not able to spend as much as we like on promotional activities. The
lubricants sales decline is attributable to a soft market for specialty
lubricants, higher than expected store inventory levels at major retailers and
also the decision to discontinue the direct response infomercial for lubricants
in lieu of an evaluation of more cost effective means of promoting the line.
Cost of goods sold for the six months ended June 30, 2000 was approximately
$3,094,000 as compared to $5,687,000 for the comparable period of the prior
year, a decrease of $2,593,000 or 45.6%. As a percentage of sales, cost of goods
sold decreased from 26.1% for the six months ended June 30, 1999 to 23.9% for
the six months ended June 30, 2000. This decrease was mainly attributable to the
shift in product mix with the lubricant products yielding higher gross margins
than the appearance products.
Selling expenses of $6,491,000 for the six months ended June 30, 2000
represented a decrease of $8,197,000 over the comparable period of the prior
year. This 55.8% decrease was primarily the result of decreased expenses for
endorsement and sponsorship payments, slotting fees, commissions, freight
expenses, expenditures for media and print advertising and television airtime
purchases. The Company continues to evaluate new advertising/marketing and
promotional activities to promote the brand name and the cost effectiveness of
each motorsports promotional program. Selling and marketing expenses as a
percentage of sales were 50.0% for the six months ended June 30, 2000 versus
67.6% for the comparable period of the previous year.
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General and administrative expenses for the six months ended June 30, 2000 were
approximately $2,695,000 as compared to $3,816,000 for the six months ended June
30, 1999, a decrease of $1,121,000 or 29.4%. This decrease is primarily
attributable to a decrease in legal expenses, bonuses, bad debt and general
insurance expenses. As a percentage of sales, general and administrative
expenses increased from 17.5% in 1999 to 20.8% in 2000. Even though the
aggregate expenses declined during the period, the ratio of expenses as a % of
sales increased, due to the more than expected decline in sales during the
period. The Company continues to evaluate further reductions in the general and
administrative expenses.
Interest expense of approximately $283,000 for the six months ended June 30,
2000 represented an increase of $124,000 over the comparable period of the prior
year. The increase is attributable to the increase in bank loans payable during
the period.
Net income for the six month period ended June 30, 2000 was approximately
$130,000 as compared to a net loss of approximately $(1,684,000) for the
comparable period in the prior year, an increase of $1,814,000. The increase is
a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company utilizes funds generated from operations and borrowings from an
existing credit facility to meet its working capital requirements. At June 30,
2000, the Company had net working capital of $2,333,000 as compared to $41,000
at December 31, 1999 or an increase of $2,292,000.
During the six months ended June 30, 2000, the Company generated $430,000 from
operations, which was provided primarily by net income and a reduction in
deferred taxes which were partially offset by increases in receivables,
inventories, and prepaid expenses. Approximately $1,140,000 was used to finance
activities, primarily payments on bank loans. As of May 8, 2000, the Company
entered into a new $6,000,000 credit facility with a financial institution,
expiring in May 2003. Such facility is collateralized by eligible accounts
receivable and inventories. Interest is payable monthly at the rate of the
financial institution's prime rate (9.50%) at June 30, 2000 plus 1% subject to a
minimum interest charge of $50,000 per quarter. The credit facility contains
certain defined net income and tangible net worth financial covenants. At June
30, 2000, the Company was not in compliance with certain financial covenants
under the credit agreement. The Company is in discussions with the lender and
expects to receive a waiver for such covenant compliance, however there are no
assurances that the Company will receive the waiver. As of June 30, 2000,
$2,867,276 was outstanding and approximately $50,000 was available under the
terms of the line of credit. The Company is currently seeking additional new
financing arrangements through subordinated debt and/or equity providers. The
issuance of additional shares of stock could result in a substantial dilution to
the ownership interests of our present or future stockholders. We cannot
guarantee that we will be able to obtain adequate funds when we need them or on
acceptable terms, if at all. Any inability to obtain funds when we need them
would have a material adverse effect on our business, operation results and
financial condition. At June 30, 2000, the Company had an accumulated deficit of
approximately $3,741,000. As a result, the Company is vigorously continuing to
evaluate further reductions in operating expenses and manpower requirements, and
revise vendor payment terms to the extent possible. We cannot guarantee that the
timing of further reductions in operating expenses will be adequate to return to
profitability for the remainder of the Year 2000. There are also continued
efforts to convert certain assets to cash on an accelerated basis which may
include the sale and leaseback of the current facility in Irvine, Calif.
Management will also continue to vigorously defend the litigation described in
Note 7 of Notes to Consolidated Condensed Financial Statements. Management
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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.
ITEM 3:
-------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PIC's financial instruments include cash and long-term debt. At June 30, 2000
and December 31, 1999, the carrying values of PIC's financial instruments
approximated their fair values based on current market prices and rates. It is
PIC's policy not to enter into derivative financial instruments. PIC does not
currently have any significant foreign currency exposure since it does not
transact business in foreign currencies. Due to this, PIC did not have
significant overall currency exposure at June 30, 2000 and December 31, 1999.
RISK FACTORS AND FORWARD LOOKING STATEMENTS
This report contains certain forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, that involve risks and
uncertainties. In addition, the Company may from time to time make oral forward
looking statements. Actual results are uncertain and may be impacted by the
factors discussed in more detail in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999 filed with the Securities and Exchange
Commission. In particular, certain risks and uncertainties that may impact the
accuracy of the forward looking statements with respect to revenues, expenses
and operating results including without limitation, the risks set forth in the
risk factors section of the Annual Report on Form 10-K for the year ended
December 31, 1999, which risk factors are hereby incorporated into this report
by this reference. As a result, the actual results may differ materially from
those projected in the forward looking statements.
Because of these and other factors that may affect the Company's operating
results, past financial performance should not be considered an indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods.
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PROLONG INTERNATIONAL CORPORATION
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 7 of the notes to consolidated condensed financial
statements.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of Stockholders was held on June 14, 2000.
(b) Set forth below is the name of each director elected at the meeting and the
number of votes cast for their election, the number of votes against their
election, the number of votes abstained and the number of non-votes:
<TABLE>
<CAPTION>
Number of Number of Votes Number of Votes Number of
Name Class # Votes "For" "Against" "Abstain" "Non-Votes"
----------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Bruce F. Barnes II 18,504,036 6,888,637
R. Jack Aplin II 18,529,036 6,863,637
</TABLE>
Following the Annual Meeting the Board of Directors consists of:
<TABLE>
<CAPTION>
Class
-----
<S> <C>
Elton Alderman III
Thomas C. Billstein III
R. Jack Aplin II
Bruce F. Barnes II
William J. Howell I
</TABLE>
(c) Proposal Two to appoint Deloitte & Touche, LLP as the Company's independent
auditors resulted in the following number of votes for, against, abstain,
withheld and non-vote:
<TABLE>
<CAPTION> Number of
Number of Number of Votes Number of Number of
Votes "For" Votes "Against" "Abstain" Votes "Withheld" "Non-Votes"
---------------- --------------- --------- ---------------- -----------
<S> <C> <C> <C> <C>
22,204,903 1,371,220 1,816,550
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.32 Employment Agreement, dated June 1, 2000 between PSL and Nicholas
Rosier
27.1 Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Company.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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PROLONG INTERNATIONAL CORPORATION
Date: August 11, 2000 /s/ Nicholas Rosier
---------------------------------
Nicholas Rosier
Chief Financial Officer
17
