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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
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
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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 Identification No.)
of incorporation or (Address of principal executive offices) (Zip Code)
organization)
(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 10, 2001.
Page 1 of 18 pages
Exhibit Index on Sequentially Numbered Page 17
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PROLONG INTERNATIONAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART 1 FINANCIAL INFORMATION Page
Item 1: Financial Statements
Consolidated Condensed Balance Sheets -
June 30, 2001 and December 31, 2000................................. 3
Consolidated Condensed Statements of Operations - Three months
and Six months ended June 30, 2001 and 2000......................... 4
Consolidated Condensed Statements of Cash Flows -
Six months ended June 30, 2001 and 2000............................. 5
Notes to Consolidated Condensed Financial Statements................ 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 12
Item 3: Quantitative and Qualitative Disclosures About Market Risk.......... 15
PART II OTHER INFORMATION
Item 1: Legal Proceedings................................................... 17
Item 4: Submission of Matters to a Vote of Security Holders................. 17
Item 6: Exhibits and Reports on Form 8-K.................................... 18
Signatures.......................................................... 18
2
Item 1. Financial Statements
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
June 30, December 31,
2001 2000
-----------
(Unaudited)
-----------
CURRENT ASSETS:
Cash and cash equivalents $ 114,268 $ 126,917
Accounts receivable, net of allowance for doubtful accounts
of $211,214 at June 30, 2001 and $168,775 at December 31, 2000, respectively 4,824,252 3,245,892
Inventories, net 858,804 970,236
Prepaid expenses, net 157,376 360,227
Income taxes receivable 12,000 87,002
Prepaid television time 10,583 5,583
Advances to employees, current portion 59,492 57,525
Deferred tax asset 578,231 943,177
----------- -----------
Total current assets 6,615,006 5,796,559
Property and equipment, net 3,037,904 3,193,109
Intangible assets, net 6,276,644 6,529,986
Deferred tax asset, noncurrent 2,235,477 1,972,387
Investment in affiliate 120,539 ---
Other assets, net 117,227 223,159
----------- -----------
TOTAL ASSETS $18,402,797 $17,715,200
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,482,499 $ 2,183,482
Accrued expenses 572,847 937,618
Line of credit 2,804,381 2,050,716
Notes payable, current 727,087 725,442
----------- -----------
Total current liabilities 6,586,814 5,897,258
Notes payable, noncurrent 2,250,181 2,277,130
----------- -----------
Total liabilities 8,836,995 8,174,388
COMMITMENTS AND CONTINGENCIES (Note 7 & 8)
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 28,439 28,439
Additional paid-in capital 15,035,261 15,035,261
Accumulated deficit (5,497,898) (5,522,888)
----------- -----------
Total stockholders' equity 9,565,802 9,540,812
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,402,797 $17,715,200
=========== ===========
See notes to consolidated condensed financial statements
3
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- --------------------------
2001 2000 2001 2000
---- ---- ---- ----
NET REVENUES $ 3,929,116 $ 5,219,521 $ 8,081,061 $12,976,720
COST OF GOODS SOLD 1,164,630 1,367,184 2,471,881 3,094,095
----------- ----------- ----------- -----------
GROSS PROFIT 2,764,486 3,852,337 5,609,180 9,882,625
OPERATING EXPENSES:
Selling and marketing 1,759,720 3,178,945 3,329,647 6,491,496
General and administrative 914,033 1,266,933 1,891,189 2,695,086
----------- ----------- ----------- -----------
Total operating expenses 2,673,753 4,445,878 5,220,836 9,186,582
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) 90,733 (593,541) 388,344 696,043
OTHER INCOME (EXPENSE), net:
Interest (expense) (145,916) (128,460) (269,383) (282,716)
Interest income 2,928 2,936 9,485 5,271
----------- ----------- ----------- -----------
Total other (expense), net (142,988) (125,524) (259,898) (277,445)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (52,255) (719,065) 128,446 418,598
PROVISION (BENEFIT) FOR INCOME TAXES (32,685) (207,985) 103,456 288,858
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (19,570) $ (511,080) $ 24,990 $ 129,740
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE
Basic ($0.00) ($0.02) $0.00 $0.00
=========== =========== =========== ===========
Diluted ($0.00) ($0.02) $0.00 $0.00
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
Basic 28,438,903 28,445,835 28,438,903 28,445,835
Diluted options outstanding 0 0 0 74,361
----------- ----------- ----------- -----------
Diluted 28,438,903 28,445,835 28,438,903 28,520,196
=========== =========== =========== ===========
See notes to consolidated condensed financial statements
4
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
--------------------------------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 24,990 $ 129,740
Adjustments to reconcile net income to net cash provided by
(used) in operating activities:
Depreciation and amortization 426,450 447,760
Provision for doubtful accounts 42,439 8,271
Deferred taxes 101,856 1,890,465
Reserve for inventory obsolescence --- (108,668)
Compensation costs related to options --- 46,000
Amortization of warrants issued to lender 84,186 ---
Loss on exchange of common stock for accounts receivable --- (3,466)
Changes in assets and liabilities:
Accounts receivable (1,620,799) (1,345,475)
Inventories 111,432 (38,676)
Prepaid expenses 118,665 (467,946)
Income taxes receivable 75,002 ---
Prepaid television time (5,000) (118,917)
Other assets 100,182 22,624
Accounts payable 299,017 (468,642)
Accrued expenses (364,771) 292,029
Income taxes payable --- 145,382
---------------- ----------------
Net cash (used in) provided by operating activities (606,351) 430,481
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (12,153) (3,844)
Employee advances (1,967) 17,737
Investment in affiliate (120,539) ---
---------------- ----------------
Net cash (used in) provided by investing activities (134,659) 13,893
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (25,304) (22,559)
Net proceeds (payments) on line of credit from bank 753,665 (1,117,724)
---------------- ----------------
Net cash provided by (used in) financing activities 728,361 (1,140,283)
NET DECREASE IN CASH AND CASH EQUIVALENTS (12,649) (695,909)
CASH AND CASH EQUIVALENTS, beginning of period 126,917 1,094,779
---------------- ----------------
CASH AND CASH EQUIVALENTS, end of period $ 114,268 $ 398,870
================ ================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 13,600 $ 92,000
================ ================
Interest paid $ 269,383 $ 282,716
================ ================
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
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
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.
Management's Plans Regarding Financial Results and Liquidity - At June 30,
2001, the Company had an accumulated deficit of approximately $5,498,000. 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 2001 and beyond. There
are also continued efforts to convert certain assets to cash on an
accelerated basis which may include the sale and/or sale and leaseback of
the current facility in Irvine, CA. Management will also continue to
vigorously defend the litigation described in Note 7 of Notes to
Consolidated Condensed Financial Statements. Management believes that these
plans, if successfully executed, will provide adequate financial resources
to sustain the Company's operations and enable the Company to continue as a
going concern.
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 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, 2001 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2001. For further information,
refer to the Form 10-K for the year ended December 31, 2000 filed by the
Company with the Securities and Exchange Commission.
-6-
3. INVENTORIES
Inventories consist of the following:
June 30, December 31,
2001 2000
---- ----
(Unaudited)
Raw materials $393,577 $330,641
Finished goods 465,227 639,595
-------- --------
$858,804 $970,236
======== ========
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
June 30, December 31,
2001 2000
---- ----
(Unaudited)
Building and improvements $ 2,280,783 $2,280,783
Computer equipment 265,965 272,978
Office equipment 55,753 55,753
Furniture and fixtures 585,168 585,168
Automotive equipment 35,925 35,925
Exhibit equipment 115,143 115,143
Machinery and equipment 17,953 17,953
Molds and dies 233,117 213,951
----------- ----------
3,589,807 3,577,654
Less accumulated depreciation (1,089,903) (922,545)
----------- ----------
2,499,904 2,655,109
Land 538,000 538,000
----------- ----------
$ 3,037,904 $3,193,109
=========== ==========
5. LINE OF CREDIT
The Company has a $5,000,000 credit facility with a financial institution,
expiring in May 2003. Such facility is collateralized by eligible accounts
receivable and inventories. Interest is currently payable monthly at the
rate of the financial institution's prime rate (6.75% at June 30, 2001),
plus 4% subject to a minimum interest charge of $50,000 per quarter, and the
credit facility contains certain defined net income and net equity financial
covenants for the Year 2001. At June 30, 2001, the Company was in compliance
with or had received a waiver which is dependent upon the Company and the
financial institution executing an amendment to the credit agreement by
August 15, 2001, for all financial covenants. As of June 30, 2001,
$2,804,381 was outstanding and approximately $169,000 was available under
the terms of the line of credit.
7
NOTES PAYABLE
Notes payable consist of the following as of June 30, 2001:
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. $1,615,360
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. 686,908
c) Loan from ABQ Dolphin LP; interest is payable monthly
at the rate of the Prime Rate (6.75% at June 30, 2001)
plus 2.5%. The loan has a maturity date of October 30,
2001 and includes an option to extend for one additional
year. In connection with this loan, the Company issued a
warrant to purchase 900,000 shares of common stock at an
exercise price of $0.1875. If the loan is paid in full on
or before October 30, 2001, the Company may repurchase up
to an aggregate of 300,000 of the shares subject to the
warrant at a price of $0.05 per share. 675,000
----------
2,977,268
Less current maturities (727,087)
----------
$2,250,181
==========
Year ending December 31,
2001 $ 700,138
2002 53,974
2003 57,969
2004 61,909
2005 66,856
Thereafter 2,036,422
----------
$2,977,268
==========
8
7. CONTINGENCIES
Litigation - Michael Walczak et al - On or about November 17, 1998, Michael
---------------------
Walczak et al (Walczak), 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 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 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 for
$100,000, which bond was 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. Plaintiffs have selected new counsel, except for three of the
plaintiffs who withdrew from the case. The Prolong defendants each filed and
served motions to dismiss the complaint pursuant to Rule 12(b)(6) of the
Federal Rules of Civil Procedure. The motion has been granted in part and
denied in part. There has been no ruling to date on the Walczak plaintiffs'
request to certify the class as a class action. A mediation conference has
been held and concluded and substantial settlement discussions have been
undertaken. However, final resolution cannot presently be determined. PIC
and PSL and their respective current officers and directors believe that the
settlement, if approved, will not result in a material adverse affect on the
Company's financial statements. If the settlement as proposed is not
consummated, the Company will continue to vigorously defend against the
claims.
Federal Trade Commission - On February 15, 1999, PSL entered into a
------------------------
negotiated Consent Order with the Federal Trade Commission (FTC) based upon
concerns of the commission related to inadequate substantiation of certain
advertising claims for Prolong Engine Treatment. Without admitting any of
the allegations, the Company agreed that it would not make advertising
claims without having adequate scientific substantiation for such claims. No
fine or monetary redress was levied in connection with the FTC action.
9
Four purported class action lawsuits based on the FTC action have been
brought against PIC and/or PSL. Although meaningful settlement discussions
are proceeding, final resolution of the below referenced FTC based lawsuits
cannot presently be determined. The suits are 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 for damages. Prolong successfully filed a
motion to dismiss the complaint, and plaintiff thereafter filed an
amended complaint. PSL's officers and directors believe that there is no
merit to the plaintiffs' complaint and are vigorously defending against
the claims. The parties are presently involved in meaningful settlement
discussions.
. 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, fraud, deceit, negligent
misrepresentation and for equitable relief. PSL's officers and directors
believe that there is no merit to the plaintiffs' complaint and are
vigorously defending against the claims. The parties are presently
involved in meaningful settlement discussions.
. 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. PSL's officers and
directors believe that there is no merit to the plaintiffs' complaint and
are vigorously defending against the claims. The parties are presently
involved in meaningful settlement discussions.
. 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 based upon the prior filed
Bowland case. PSL's officers and directors believe that there is no merit
to the plaintiffs' complaint and are vigorously defending against the
claims. The parties are presently involved in meaningful settlement
discussions.
Helman et al v PSL and PIC et al - On April 8, 1997, prior to the filing of
--------------------------------
the Walczak complaint, the attorney who was disqualified from representing
the plaintiffs in Walczak filed Helman et al v PSL and PIC et al in the
Court of Common Pleas, Columbiana County, Ohio. The case was filed as a
purported class action alleging breach of fiduciary duty, breach of oral and
written contract, and fraud, in 13 original causes of action. The court
subsequently denied plaintiff's motion to certify the case as a class
action. The appellate court in Ohio largely affirmed a series of orders by
the trial judge in favor of PSL, the effect of which was to reduce the
number of complaining parties from approximately one hundred, to seven.
Trial of the remaining plaintiffs' matters is set for January 15, 2002.
PSL's officers and directors believe that there is no merit to the
plaintiffs' complaint and are vigorously defending against the claims.
10
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 affect on PIC's consolidated financial position, results of
operation or cash flows.
8. COMMITMENTS
The Company has outstanding noncancelable inventory purchase commitments
with a contract packager of approximately $397,000 as of June 30, 2001.
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 1.5% per month, and/or purchase these inventories at the
option of the packager.
9. INVESTMENT IN AFFILIATE
On March 31, 2001 the Company entered into an Organization Agreement with
Prolong Environmental Energy Corporation (PEEC), a California Corporation,
whereby the Company agrees to contribute up to $150,000 to PEEC as required
to meet the operating working capital obligations for PEEC. The Company
contribution shall be considered a capital contribution for PEEC in return
for 5% of the issued and outstanding common stock of PEEC.
10. NEW ACCOUNTING PRONOUNCEMENT
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires that the
purchase method of accounting be used for all business combinations
initiated after June 30, 2001 and prohibits the use of pooling-of-interests
method. SFAS 142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. The amortization for goodwill from
past business combinations will cease upon adoption of this Statement on
December 30, 2001. Goodwill and intangible assets acquired in business
combinations completed after June 30, 2001 must comply with the provisions
of this Statement. Also under this Statement, companies will be required to
evaluate all existing goodwill for impairment within six months of adoption
by comparing the fair value of each reporting unit to its carrying value at
the date of adoption. Any transitional impairment losses will be recognized
in the first interim period in the year of adoption and will be recognized
as the effect of a change in accounting principle.
The Company is evaluating the potential impact of adopting these
pronouncements on the results of operations and financial position of the
Company.
11
ITEM 2:
-------
PROLONG INTERNATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Percentage of Net Revenues
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -----------------------
2001 2000 2001 2000
--------------------- -----------------------
Net revenues 100.0 100.0 100.0 100.0
Cost of goods sold 29.6 26.2 30.6 23.9
--------------------- -----------------------
Gross profit 70.4 73.8 69.4 76.1
Selling and marketing expenses 44.8 60.9 41.2 50.0
General and administrative expenses 23.3 24.3 23.4 20.8
--------------------- -----------------------
Operating income (loss) 2.3 (11.4) 4.8 5.3
Other income (expense) (3.6) (2.4) (3.2) (2.1)
--------------------- -----------------------
Income (loss) before income taxes (1.3) (13.8) 1.6 3.2
Provision (benefit) for income taxes (0.8) (4.0) 1.3 2.2
--------------------- -----------------------
Net income (loss) (0.5) (9.8) 0.3 1.0
===================== =======================
Three Months Ended June 30, 2001 vs. Three Months Ended June 30, 2000
Net revenues for the three months ended June 30, 2001 were approximately
$3,929,000 as compared to approximately $5,220,000 for the comparable period of
the prior year, a decrease of $1,291,000 or 24.7%. Revenues for the three month
period ended June 30, 2001 were derived from the following sources: Retail sales
of $3,732,000; international and other sales of $100,000; direct response
television sales of $33,000 and, industrial sales of $64,000. Revenues for the
three month period ended June 30, 2000 were derived from the following sources:
Retail sales of $4,176,000; international and other sales of $678,000; direct
response television sales of $277,000, and industrial sales of $89,000.
During the second quarter of 2001, retail sales were 95.0% of total revenues
while international and other sales comprised 2.5% of total revenues. During
the second quarter of 2000, retail sales were 80.0% of total revenues while
international and other sales comprised 13.0% of total revenues. The lower
retail sales for the period ended June 30, 2001 versus the same period a year
ago is attributable to a continuing soft market for specialty lubricants,
competitive factors and also due to the decision to discontinue the direct
response infomercial for lubricants in lieu of an ongoing evaluation of more
cost effective means of promoting the line. International sales decreased due
to a slower demand in South Africa and Asia.
12
Cost of goods sold for the three months ended June 30, 2001 was approximately
$1,165,000 as compared to $1,367,000 for the comparable period of the prior
year, a decrease of $202,000 or 14.8%. As a percentage of sales, cost of goods
sold increased from 26.2% for the three months ended June 30, 2000 to 29.6% for
the three months ended June 20, 2001. The increase was mainly attributable to a
shift in product mix in the retail lubricants sales and the added cost of
special promotional items.
Selling and marketing expenses of $1,760,000 for the three months ended June 30,
2001 represented a decrease of $1,419,000 over the comparable period of the
prior year. This 44.7% decrease was primarily the result of decreased expenses
for endorsement and sponsorship payments, promotional activities to promote
product awareness, expenditures for television air-time purchases and salaries.
Selling and marketing expenses as a percentage of sales were 44.8% for the three
months ended June 30, 2001 versus 60.9% for the comparable period of the
previous year.
General and administrative expenses for the three months ended June 30, 2001
were approximately $914,000 as compared to $1,267,000 for the three months ended
June 30, 2000, a decrease of $353,000 or 27.9%. This decrease is primarily
attributable to a decrease in legal expenses and salaries (headcount). The
decrease in legal expenses was partially due to a $50,000 reduction in the
accrual reserve for legal settlements. As a percentage of sales, general and
administrative expenses decreased from 24.3% in 2000 to 23.3% in 2001.
Net interest expense of $146,000 for the three months ended June 30, 2001
represented an increase of $17,000 over the comparable period in 2000. The
increase is attributable to the additional interest expense from the ABQ Dolphin
LP note during the period.
Net loss for the three month period ended June 30, 2001 was approximately
$(20,000) as compared to a net loss of approximately $(511,000) for the
comparable period in the prior year, a decrease of $491,000. The decrease is a
result of the factors discussed above.
Six Months Ended June 30, 2001 vs. Six Months Ended June 30, 2000
Net revenues for the six months ended June 30, 2001 were approximately
$8,081,000 as compared to approximately $12,977,000 for the comparable period in
the prior year, a decrease of $4,896,000 or 37.7%. Revenues for the six month
period ended June 30, 2001 were derived from the following sources: Retail
sales of $7,102,000; international and other sales of $733,000; direct response
television sales of $101,000 and, industrial sales of $145,000. Revenues for
the six month period ended June 30, 2000 were derived from the following
sources: Retail sales of $11,076,000; international and other sales of
$1,294,000; direct response television sales of $445,000, and industrial sales
of $162,000.
For the six-month period ended June 30, 2001, retail sales were 87.9% of total
revenues while international and other sales comprised 9.1% of total revenues.
During the six months of 2000, retail sales were 85.3% of total revenues while
international and other sales comprised 10.0% of total revenues. The lower
retail sales for the six month period ended June 30, 2001 versus the same period
a year ago are attributable to a decrease in lubricant sales of approximately
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$3,974,000. The lubricant sales decline is attributable to a continuing soft
market for specialty lubricants, higher than expected store inventory levels at
major retailers, competitive factors and also due to the decision to discontinue
the direct response infomercial for lubricants in lieu of an ongoing evaluation
of more cost effective means of promoting the line. International sales for the
period decreased $561,000 due to a slower demand in Asia and South Africa.
Cost of goods sold for the six months ended June 30, 2001 was approximately
$2,472,000 as compared to $3,094,000 for the comparable period of the prior
year, a decrease of $622,000 or 20.1%. As a percentage of sales, cost of goods
sold increased from 23.9% for the six months ended June 30, 2000 to 30.6% for
the six months ended June 30, 2001. The increase was mainly attributable to the
shift in product mix in the retail lubricants sales, the added cost of special
promotional items and product component price increases.
Selling and marketing expenses of $3,330,000 for the six months ended June 30,
2001 represented a decrease of $3,161,000 over the comparable period of the
prior year. This 48.7% decrease was primarily the result of decreased expenses
for endorsement and sponsorship payments, promotional activities to promote
product awareness, expenditures for television air-time purchases and salaries.
Selling and marketing expenses as a percentage of sales were 41.2% for the six
months ended June 30, 2001 versus 50.0% for the comparable period of the
previous year.
General and administrative expenses for the six months ended June 30, 2001 were
approximately $1,891,000 as compared to $2,695,000 for the six months ended June
30, 2000, a decrease of $804,000 or 29.8%. This decrease is primarily
attributable to a decrease in legal expenses and salaries (headcount). The
decrease in legal expenses was partially due to a $50,000 reduction in the
accrual reserve for legal settlements. As a percentage of sales, general and
administrative expenses increased from 20.8% in 2000 to 23.4% in 2001. Even
though the aggregate expenses declined during the period, the ratio of expenses
as a percentage of sales increased due to the more than expected decline in
sales during the period.
Net interest expense of $269,000 for the six months ended June 30, 2001
represented a decrease of $14,000 over the comparable period in 2000. The
decrease is attributable to lower average balances in the credit line for the
current period versus last year.
Net income for the six month period ended June 30, 2001 was approximately
$25,000 as compared to a net income of approximately $130,000 for the comparable
period in the prior year, a decrease of $105,000. The decrease is a result of
the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company utilizes funds generated from operations and borrowings from an
existing credit facility to meet its working capital requirements. At June 30,
2001, the Company had a net working capital of $28,000 as compared to a negative
net working capital of $101,000 at December 31, 2000 or an increase of $129,000.
During the period ended June 30, 2001, the Company used $606,000 in operations,
which was primarily from an increase in receivables and a decrease in accrued
expenses which was partially offset by increases in accounts payable, income
taxes receivable and decreases in inventory, prepaid expenses and deferred
taxes. The Company has a $5,000,0000 credit facility with a financial
institution, expiring in May 2003.
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Such facility is collateralized by eligible accounts receivable and inventories.
Interest is currently payable monthly at the rate of the financial institution's
prime rate (6.75% at June 30, 2001) plus 4% subject to a minimum interest charge
of $50,000 per quarter. The credit facility contains certain defined net income
and net equity covenants. At June 30, 2001, the Company was in compliance with
or had received a waiver which is dependent upon the Company and the financial
institution executing an amendment to the credit agreement by August 15, 2001,
for all financial covenants. As of June 30, 2001, $2,804,381 was outstanding and
approximately $169,000 was available under the terms of the line of credit.
On October 30, 2000, the Company entered into a loan agreement with a lender for
$675,000 with proceeds of approximately $504,000, net of loan costs and other
payables. The loan has a maturity date of October 30, 2001 and includes an
option to extend for one additional year. The loan is collateralized by a Third
Priority Trust Deed lien against the Company's real property in Irvine, CA.
Interest is payable monthly at the rate of the Prime Rate (6.75% at June 30,
2001) plus 2.5%.
The Company is currently seeking additional new financing arrangements through
subordinated debt and/or equity providers. We cannot guarantee that we will be
able to obtain 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 financial condition. At June 30, 2001, the Company had an accumulated
deficit of approximately $5,498,000. 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 2001 and
beyond. There are also continued efforts to convert certain assets to cash on
an accelerated basis which may include the sale and/or sale and leaseback of the
current facility in Irvine, CA. Management will also continue to vigorously
defend the litigation described in Note 7 of Notes to Consolidated Condensed
Financial Statements. Management believes that these plans, if successfully
executed, will provide adequate financial resources to sustain the Company's
operations and enable the Company to continue as a going concern.
ITEM 3:
-------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PIC's financial instruments include cash and long-term debt. At June 30, 2001
and December 31, 2000, respectively 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, 2001 and December 31, 2000.
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
15
factors discussed in more detail in the Company's Annual Report on Form 10-K for
the year ended December 31, 2000 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, 2000, which risk factors are hereby incorporated into this report
by this reference. As a result, the actual results may differ materially from
those projected in the forward looking statements.
Because of these and other factors that may affect the Company's operating
results, past financial performance should not be considered an indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods.
16
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 20, 2001.
(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:
Number of Number of Number of Number of
Name Class # Votes Votes Votes "Non-
----- ----- ----- -----
"For" "Against" "Abstain" Votes"
----- --------- --------- ------
Elton Alderman III 22,934,419 2,260,258
Thomas C. Billstein III 22,934,419 2,260,258
Following the Annual Meeting, the Board of Directors consists of:
Class
-----
Elton Alderman III
Thomas C. Billstein III
Gregory W. Orlandella II
Gerry L. Martin II
Richard L. McDermott I
William J. Howell I
(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:
Number of Number of Number of Number of Number of
Votes "For" Votes "Against" Votes Votes "Non-Votes"
---------------- --------------- ----- ----- ----------
"Abstain" "Withheld"
--------- ----------
23,218,657 1,879,420 96,600
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
During the second quarter of 2001 the following Form 8-K's were filed:
On May 11, 2001, PIC filed a Form 8-K to disclose the resignation of Mr.
Bruce F. Barnes (Director).
On June 25, 2001, PIC filed a Form 8-K to disclose the resignation of Mr.
William J. Howell (Director).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROLONG INTERNATIONAL CORPORATION
Date: August 13, 2001 /s/ Nicholas Rosier
----------------- -----------------------
Nicholas Rosier
Chief Financial Officer
(Principal Financial Officer)
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