================================================================================
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 March 31, 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
--------
PROLONG INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 6 Thomas 74-2234246
(State or other jurisdiction of Irvine, CA 92618 (IRS Employer Identification No.)
incorporation or organization) (Address of principal executive offices) (Zip Code)
(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 May 3, 2001.
Page 1 of 16 pages
Exhibit Index on Sequentially Numbered Page 16
================================================================================
PROLONG INTERNATIONAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART 1 FINANCIAL INFORMATION Page
Item 1: Financial Statements
Consolidated Condensed Balance Sheets -
March 31, 2001 and December 31, 2000................................3
Consolidated Condensed Statements of Operations - Three months
ended March 31, 2001 and 2000.......................................4
Consolidated Condensed Statements of Cash Flows -
Three months ended March 31, 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.........14
PART II OTHER INFORMATION
Item 1: Legal Proceedings..................................................16
Item 6: Exhibits and Reports on Form 8-K...................................16
Signatures.........................................................16
2
Item 1. Financial Statements
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
March 31, December 31,
2001 2000
----------- ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 124,380 $ 126,917
Accounts receivable, net of allowance for doubtful
accounts of $168,775 at March 31, 2001 and at
December 31, 2000, respectively 4,119,891 3,245,892
Inventories, net 1,031,122 970,236
Prepaid expenses, net 302,898 360,227
Income taxes receivable --- 87,002
Prepaid television time 120,149 5,583
Advances to employees, current portion 74,235 57,525
Deferred tax asset 858,453 943,177
----------- ------------
Total current assets 6,631,128 5,796,559
Property and equipment, net 3,114,244 3,193,109
Intangible assets, net 6,403,315 6,529,986
Deferred tax asset, noncurrent 1,925,750 1,972,387
Other assets 165,944 223,159
----------- ------------
TOTAL ASSETS $18,240,381 $17,715,200
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,682,360 $ 2,183,482
Accrued expenses 889,856 937,618
Line of credit 2,088,157 2,050,716
Notes payable, current 724,118 725,442
Income taxes payable 4,780 ---
----------- ------------
Total current liabilities 6,389,271 5,897,258
Notes payable, noncurrent 2,265,738 2,277,130
----------- ------------
Total liabilities 8,655,009 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 (5,478,328) (5,522,888)
----------- ------------
Total stockholders' equity 9,585,372 9,540,812
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,240,381 $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
March 31,
----------------------------------------------------------------------------
2001 2000
----------- -----------
NET REVENUES $ 4,151,945 $ 7,757,199
COST OF GOODS SOLD 1,307,251 1,726,911
----------- -----------
GROSS PROFIT 2,844,694 6,030,288
OPERATING EXPENSES:
Selling and marketing 1,569,927 3,312,551
General and administrative 977,156 1,428,153
----------- -----------
Total operating expenses 2,547,083 4,740,704
OPERATING INCOME 297,611 1,289,584
OTHER INCOME (EXPENSE), net:
Interest (expense) (123,467) (154,256)
Interest income 6,557 2,335
----------- -----------
Total other (expense) net (116,910) (151,921)
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 180,701 1,137,663
PROVISION FOR INCOME TAXES 136,141 496,843
----------- -----------
NET INCOME $ 44,560 $ 640,820
=========== ===========
NET INCOME PER SHARE:
Basic $ 0.00 $ 0.02
=========== ===========
Diluted $ 0.00 $ 0.02
=========== ===========
WEIGHTED AVERAGE COMMON SHARES:
Basic 28,438,903 28,445,835
Diluted options outstanding 0 128,219
----------- -----------
Diluted 28,438,903 28,574,054
=========== ===========
See notes to consolidated condensed financial statements
4
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
--------------------------------------------------------------------------------------------------
2001 2000
--------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 44,560 $ 640,820
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 210,830 225,004
Provision for doubtful accounts --- 30,000
Deferred taxes 131,361 2,078,947
Reserve for inventory obsolescence (118,837) (100,002)
Compensation costs related to options --- 22,999
Amortization of warrants issued to lender 42,093 ---
Changes in assets and liabilities:
Accounts receivable (873,999) (2,590,753)
Inventories 57,951 (135,899)
Prepaid expenses 15,236 (130,307)
Income taxes receivable 87,002 ---
Prepaid television time (114,566) (226,868)
Other assets 54,340 (40,632)
Accounts payable 498,878 283,259
Accrued expenses (47,762) 237,055
Income taxes payable 4,780 256,431
--------- -----------
Net cash (used in) provided by operating activities (8,133) 550,054
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,419) ---
Employee advances (16,710) 3,073
--------- -----------
Net cash (used in) provided by investing activities (19,129) 3,073
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (12,716) (10,786)
Net proceeds (payments) from line of credit 37,441 (885,000)
--------- -----------
Net cash provided by (used in) financing activities 24,725 (895,786)
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,537) (342,659)
CASH AND CASH EQUIVALENTS, beginning of period 126,917 1,094,779
--------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 124,380 $ 752,120
========= ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ --- $ ---
========= ===========
Interest paid $ 123,467 $ 154,256
========= ===========
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
During the first quarter of 2000, the Company completed the following
transaction:
Recorded $22,999 to additional paid-in capital for compensation costs related
to stock options.
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.
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 ended March 31, 2001 are not necessarily indicative of the results
that may be expected for the year ending 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.
3. INVENTORIES
Inventories consist of the following:
March 31, December 31,
2001 2000
---- ----
(Unaudited)
Raw materials $ 519,752 $330,641
Finished goods 511,370 639,595
---------- --------
$1,031,122 $970,236
========== ========
6
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
March 31, 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 223,383 213,951
----------- ----------
3,580,073 3,577,654
Less accumulated depreciation (1,003,829) (922,545)
----------- ----------
2,576,244 2,655,109
Land 538,000 538,000
----------- ----------
$ 3,114,244 $3,193,109
=========== ==========
5. LINE OF CREDIT
On May 8, 2000, the Company entered into a new $6,000,000 credit facility
with a financial institution, expiring in May 2003. Effective November 21,
2000, the credit facility was reduced to $5,000,000. 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 (8.0% at March 31, 2001), plus 4% subject to a minimum interest charge
of $50,000 per quarter, and the credit facility contains certain revised
defined net income and net equity financial covenants for the Year 2001. At
March 31, 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 May 31, 2001, for all financial
covenants. As of March 31, 2001, $2,088,157 was outstanding and
approximately $180,000 was available under the terms of the line of credit.
7
6. NOTES PAYABLE
Notes payable consist of the following as of March 31, 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. $1,622,264
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. 692,592
c) Loan from ABQ Dolphin LP; interest is payable monthly
at the rate of the Prime Rate (8.0% at March 31, 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
----------
2,989,856
Less current maturities (724,118)
----------
$2,265,738
==========
Year ending December 31,
2001 $ 712,726
2002 53,974
2003 57,969
2004 61,909
2005 66,856
Thereafter 2,036,422
----------
$2,989,856
==========
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
8
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.
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
9
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.
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.
10
8. COMMITMENTS
The Company has outstanding noncancelable inventory purchase commitments
with a contract packager of approximately $406,000 as of March 31, 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.
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
March 31,
------------------------
2001 2000
------------------------
Net revenues 100.0 100.0
Cost of goods sold 31.5 22.3
------------------------
Gross profit 68.5 77.7
Selling and marketing expenses 37.8 42.7
General and administrative expenses 23.5 18.4
------------------------
Operating income 7.2 16.6
Other income (expense) (2.8) (1.9)
------------------------
Income before income taxes 4.4 14.7
Provision for income taxes 3.3 6.4
------------------------
Net income 1.1 8.3
------------------------
Three Months Ended March 31, 2001 vs. Three Months Ended March 31, 2000
Net revenues for the three months ended March 31, 2001 were approximately
$4,152,000 as compared to approximately $7,760,000 for the comparable period of
the prior year, a decrease of $3,608,000 or 46.5%. Revenues for the three month
period ended March 31, 2001 were derived from the following sources: Retail
sales of $3,371,000 ($3,356,100 of lubricant products and $14,900 of
appearance); international and other sales of $636,000; direct response
television sales of $64,000 and, industrial sales of $81,000. Revenues for the
three month period ended March 31, 2000 were derived from the following sources:
Retail sales of $6,900,000 ($6,393,000 of lubricant products and $507,000 of
appearance); international and other sales of $619,000; direct response
television sales of $168,000, and industrial sales of $73,000.
During the first quarter of 2001, retail sales were 81.2% of total revenues
while international and other sales comprised 15.3% of total revenues. During
the first quarter of 2000, retail sales were 88.9% of total revenues while
international and other sales comprised 8.0% of total revenues. The lower
retail sales for the period ended March 31, 2001 versus the same period a year
ago are attributable to a decrease in lubricant sales of approximately
$3,037,000 and a $492,100 decrease in appearance sales. 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
12
in lieu of an ongoing evaluation of more cost effective means of promoting the
line. Revenues for the appearance products declined due to a decreased demand
and market acceptance of the product line and limited distribution.
International sales remained steady for the quarter, and as a percentage of
sales increased to 15.3%.
Cost of goods sold for the three months ended March 31, 2001 was approximately
$1,307,000 as compared to $1,727,000 for the comparable period of the prior
year, a decrease of $420,000 or 24.3%. As a percentage of sales, cost of goods
sold increased from 22.3% for the three months ended March 31, 2000 to 31.5% for
the three months ended March 31, 2001. The increase was mainly attributable to
the shift in product mix with the international sales yielding a lower gross
margin than the domestic retail lubricant sales and the recording of an one time
sale of slow moving appearance products ($81,000), which was sold at a discount.
Selling and marketing expenses of $1,570,000 for the three months ended March
31, 2001 represented a decrease of $1,743,000 over the comparable period of the
prior year. This 52.6% 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, commissions
and salaries. Selling and marketing expenses as a percentage of sales were
37.8% for the three months ended March 31, 2001 versus 42.7% for the comparable
period of the previous year.
General and administrative expenses for the three months ended March 31, 2001
were approximately $977,000 as compared to $1,428,000 for the three months ended
March 31, 2000, a decrease of $451,000 or 31.6%. This decrease is primarily
attributable to a decrease in legal expenses and salaries (headcount). As a
percentage of sales, general and administrative expenses increased from 18.4% in
2000 to 23.5% 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 $117,000 for the three months ended March 31, 2001
represented a decrease of $35,000 over the comparable period in 2000. The
decrease is attributable to a lower average balance in bank loans during the
period.
Net income for the three month period ended March 31, 2001 was approximately
$45,000 as compared to a net income of approximately $641,000 for the comparable
period in the prior year, a decrease of $596,000. 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 March 31,
2001, the Company had a net working capital of $242,000 as compared to a
negative net working capital of $101,000 at December 31, 2000 or an increase of
$343,000. During the period ended March 31, 2001, the Company used $8,100 in
operations, which was primarily from increases in receivables and prepaid
television time which were partially offset by increases in accounts payable and
income taxes receivable. As of May 8, 2000, the Company entered into a new
$6,000,000 credit facility with a financial institution, expiring in May 2003.
Effective November 21, 2000 the credit facility was reduced to $5,000,000. Such
facility is collateralized by eligible accounts receivable.
13
and inventories. Interest is currently payable monthly at the rate of the
financial institution's prime rate (8.0% at March 31, 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 March 31, 2001, the
Company was in compliance or had received a waiver which is dependent upon the
Company and the financial institution executing an amendment to the credit
agreement by May 31, 2001, for all financial covenants. As of March 31, 2001,
$2,088,157 was outstanding and approximately $180,000 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 (8.0% at March 31,
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 March 31, 2001, the Company had an accumulated
deficit of approximately $5,478,000. 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 March 31, 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 March 31, 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
14
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.
15
PROLONG INTERNATIONAL CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 7 of the notes to consolidated condensed financial
statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Company during the Quarter.
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: May 7, 2001 /s/ Nicholas Rosier
----------- -------------------
Nicholas Rosier
Chief Financial Officer
(Principal Financial Officer)
16