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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
***
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year ended December 31, 2000
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 000-22803
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PROLONG INTERNATIONAL CORPORATION
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(Exact name of Registrant as specified in its charter)
Nevada 74-2234246
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6 Thomas, Irvine, California 92618
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(Address of principal executive offices)
Registrant's telephone number, including area code: (949) 587-2700
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
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(Title of Class)
___________________________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[_]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sales price of the Common Stock as of March
12, 2001, was approximately $4,550,000.
The number of outstanding shares of the Registrant's Common Stock as of March
12, 2001 was 28,438,903.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the Annual Meeting of Stockholders
to be held on June 20, 2001, are incorporated by reference into Part III.
Page 1 of 57
Exhibit Index on Sequentially Numbered Page 29
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
This Annual Report on Form 10-K contains forward-looking statements
relating to future events or the future financial performance of the Registrant,
including but not limited to statements contained in "Business," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Factors Which May Affect Future Operating Results." Readers are cautioned that
such statements, which may be identified by words including "anticipates,"
"believes," "intends," "estimates," "expects," and similar expressions, are only
predictions or estimations and are subject to known and unknown risks and
uncertainties. In evaluating such statements, readers should consider the
various factors identified in this Annual Report on Form 10-K, including matters
set forth in "Factors Which May Affect Future Operating Results," which could
cause actual events, performance or results to differ materially from those
indicated by such statements.
PART I
ITEM 1. Business
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General Description of Business
Prolong International Corporation (the "Registrant" or "PIC") is a Nevada
corporation that was incorporated on August 24, 1981 as Giguere Industries,
Incorporated ("Giguere"). On September 14, 1981, Giguere consummated a merger
with Medical International, Inc., a Utah corporation, pursuant to which Giguere
was the surviving entity. Prior to the merger with Giguere, Medical
International, Inc. had completed an offering of its common stock which was
exempt from registration under the Securities Act of 1933, as amended, by reason
of Regulation A thereunder. All of the outstanding shares of Medical
International, Inc. common stock were exchanged for shares of Giguere as part of
the plan of merger. Subsequent to the merger, Giguere conducted operations for
several years until it liquidated its assets in order to satisfy its creditors
and discontinued operations in 1987. Giguere was inactive and held no
significant assets from 1987 to June 21, 1995.
On June 21, 1995, Giguere acquired all of the outstanding common stock of
Prolong Super Lubricants, Inc., a Nevada corporation ("PSL"), in a share
exchange with PSL's then existing shareholders (the "Reorganization") and
changed its name from Giguere to Prolong International Corporation. Since the
Reorganization, PIC has changed its focus from being a company without
operations, a business or significant assets, to that of a holding company for
its wholly-owned operating subsidiary, PSL. On December 4, 1998, PIC formed
Prolong International Holdings Ltd. ("PIHL"), a Cayman Islands company, as a
wholly-owned subsidiary. On the same day, PIHL formed Prolong International
Ltd. ("PIL"), a Cayman Islands company, as its wholly-owned operating
subsidiary. PIC, through PSL, PIHL and PIL (referred to collectively in the
operational context with PIC as "Prolong" or "the Company"), is engaged in the
manufacture, sale and worldwide distribution of a line of high performance
lubrication and automotive appearance products, several of which are based on a
patented extreme pressure lubricant additive for use in metal lubrication,
commonly referred to as anti-friction metal treatment ("AFMT").
On February 5, 1998, PIC entered into a definitive agreement with EPL Pro-
Long, Inc., a California Corporation ("EPL"), under which PIC purchased the
business assets of EPL. Under the terms of the agreement, PIC purchased the
principal assets and assumed certain liabilities of EPL for approximately
2,981,035 shares of PIC's common stock, $0.001 par value per share (the "PIC
Common Stock"). With the purchase, PIC acquired the patents for the AFMT
technology and related trademarks and, as a result, currently owns the
exclusive, worldwide rights to manufacture, sell and distribute lubrication and
other products based on AFMT and to use the "Prolong" name. Prior to this
transaction, PIC, through PSL, held an exclusive license from EPL to use AFMT
and the "Prolong" name. This transaction closed on November 20, 1998. On
November 25, 1998, the U.S. District Court in San Diego, California (the
"Court") granted a temporary restraining order without a hearing in response to
a purported class action filed by a group of plaintiffs representing less than
2% of the outstanding shares of EPL's common stock against PIC, PSL, EPL and
certain of their respective former and current officers and directors.
Following a hearing on December 30, 1998, the Court entered a preliminary
injunction, which enjoins the further consummation of the asset purchase
transaction and prevents EPL from completing its liquidation and dissolution
until further notice from the Court. In December 1999, plaintiffs' counsel was
disqualified from the matter on the grounds of an unwaivable conflict of
interest. Plaintiffs subsequently selected new counsel. PIC, PSL, and their
respective current officers and directors believe there is no merit to the
plaintiffs' claims. In December 2000, the
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parties agreed to and engaged in a mediation conference in an attempt to resolve
the dispute. The mediator is still involved with the parties. While substantive
progress was made toward settling the litigation, final resolution of the matter
cannot presently be determined. See "Legal Proceedings".
Prior to fiscal 1996, PIC raised capital primarily through the issuance of
PIC Common Stock in private placements. During 1997 and 1998, working capital
was generated primarily through operations. Working capital for 1999 and 2000
was generated through operations, the utilization of the Company's line of
credit with a bank and new financing in the form of subordinated debt. In 2001,
Prolong anticipates to generate a positive cash flow from operations and will
continue to seek additional financing in the form of subordinated debt or equity
to finance its activities and the execution of its strategic plan.
Products
Prolong markets a variety of products which are based on AFMT. AFMT is a
patented formula which can be blended with many other lubricants and
formulations to create a wide variety of individual lubricant products with
superior extreme pressure friction fighting characteristics. AFMT can also be
blended with other constituents to create additional products which may be added
to Prolong's product line such as gun oil and brake cleaner. AFMT bonds to the
metal surfaces with which it comes into contact, resulting in reduced friction,
wear and heat buildup when subjected to pressure. Prolong believes that AFMT is
most effective in extreme pressure applications, where metal-to-metal contact,
and the resulting wear, can be severe such as: gears (at the contact point where
the teeth of the gear touch each other - for example in hypoid gears); engines
(at the contact points where metal to metal pressure squeezes out the normal
boundary lubrication - for example where the camshaft contacts the lifters;
where the main bearings contact the crankshaft; where the rod bearings contact
the rod and the bearing cap); and machinery (at the metal to metal contact
points where surface or boundary lubrication breaks down metal contacts under
heavy loads - for example in a steel mill where rolling steel contacts steel
rollers).
AFMT is composed of petroleum distillates and other chemicals and contains
no solid particles. Typically, performance enhancing lubrication additive
formulations contain solid particles such as lead, molybdenum disulphides, PTFE
resins, Teflon, fluorocarbon resins or fluorocarbon micropowder. Prolong
believes that the primary disadvantage to particulate material in lubricant
additives is that it tends to distribute unevenly and can result in excessive
particulate build-up. Because AFMT contains no solid particles, Prolong
believes that there is no risk of excessive build-up, and the lubrication "film
coat" is uniform and microscopically thin.
The friction fighting characteristics of AFMT have been documented by The
Foundation for Scientific and Industrial Research at the Norwegian Institute of
Technology, Trondheim, Norway. This independent testing laboratory was
commissioned in 1987 by the principals of Prolong Technology of Canada, Inc.
d.b.a. Prolong International, the entity from which EPL acquired the patented
AFMT formula. The tests were conducted at the expense of Prolong Technology of
Canada, Inc. and at the request of customers for in-depth scientific data. The
friction fighting characteristics are further documented in U.S. Patent No.
4,844,825, which outlines various tests conducted on AFMT precedent to the
issuance of the patent.
AFMT exhibits both the "hydrostatic" and "boundary" principles of
lubrication. Specifically, all surfaces tend to attract some substances from
the environment. Such substances or films may be only a few molecules thick,
and are absorbed into the surface. The strength of the absorption depends upon
the electronic structure of "polarized" molecules, which tend to absorb
perpendicularly to the surface. Warren Prince, Ph.D., a registered mechanical
engineer and machine and product design specialist was commissioned and retained
by Prolong to analyze and test its product formulation and found that AFMT
operates by attaching to the metal at the microscopic level, evenly and
uniformly. Prolong believes that once this chemical/electrical action takes
place through absorption, only very extreme heat, grinding away of the surface
area, or the introduction of material with a stronger molecular adhesion will
alter the surface bonding. As a result, third party tests performed on AFMT
have demonstrated that it is impervious to many elements and chemicals and its
benefits continue beyond the initial application.
Prolong believes that the use of AFMT in lubrication products provides many
advantages for its users. For example, in clinical testing by third parties,
the use of AFMT resulted in reduced friction in mechanical devices.
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This, in turn, caused the operating temperatures of the machinery to drop due to
the reduction in heat-generating friction. Prolong believes that in the long
term, this combination of friction and temperature reduction leads to a longer
operating life for the machinery and lower repair bills. Given the foregoing
advantages demonstrated by AFMT, Prolong has identified a broad market for its
lubricant products.
Prolong believes that the following are examples of some of the
applications of AFMT-based lubricant products:
. Internal Combustion Engines . Automatic and Manual Transmissions
. Agricultural Equipment . Computer Numerically Controlled
. Airline Ground Equipment Machine Tools
. Marine Equipment . Milling Equipment
. Railroad Equipment . Trucks, Buses
. Mining Equipment . Differentials, Gears
. Bearing Journals . Compressors
. Pumps and Generators . Hydraulic Systems
Prolong markets the following lubricant products, each of which can be
utilized in multiple applications:
Prolong Anti-Friction Metal Treatment "AFMT"
This is Prolong's fundamental lubricating oil which is made according to a
patented formula for use as an extreme pressure lubricant. It is packaged in
concentrate form and is designed to be added by the customer to the lubrication
oils in engines, gears, and other machinery.
Prolong Engine Treatment and Engine Treatment Booster
Formulated for use in the lubrication of internal combustion engines,
Prolong believes that this product helps mitigate friction, heat and wear under
extreme pressure conditions in engines. Prolong Engine Treatment is suitable
for use in both gasoline and diesel engines.
Prolong Transmission Treatment
Formulated for use in both automatic and manual transmissions and for other
applications, such as heavy duty industrial gear boxes where metal gears are
operated under high pressure, this product is designed to improve lubrication
where metal meets metal.
Prolong Fuel System Treatment
This product is formulated to help optimize fuel efficiency by lubricating
the "top end" of internal combustion engines and by helping clean and maintain
fuel injectors and other fuel system components. This product is designed to
help maintain peak engine performance and optimize overall mileage. The formula
is EPA registered and is compatible with all grades of gasoline.
Prolong "Fast-Fuel"(TM) Octane Power Boost
This product is a specially formulated gasoline additive that is designed
to help boost octane, help restore lost horsepower, help improve fuel mileage
and help mitigate knocks, pings and engine hesitation.
Page 4
Prolong "Fast-Fuel"(TM) Injector Cleaner
This product is formulated as a fuel additive designed to help remove
deposits on clogged fuel injectors and intake valves, to help clean dirty fuel
injectors, to help keep carburetors, combustion chambers, manifolds and ports
clean, and consequently help maintain optimum engine performance and optimum
mileage.
Prolong High Performance Multi-Purpose EP-2 Grease
This product is formulated to provide a wide range of lubricating benefits
to industrial equipment under extreme pressure, high and low temperature
extremes, and potential water washout conditions. Prolong believes that this
product represents a substantial improvement in lubrication performance relative
to other products on the market in applications benefiting from an extreme
pressure grease formulation.
Prolong "SPL100" Super Penetrating Lubricant
This product is formulated to lubricate, penetrate, and prevent corrosion,
free sticky mechanisms, displace moisture, stop squeaks, and reduce friction and
wear. This product can also serve as a light duty machining, tapping and
drilling fluid.
Prolong "Ultra-Cut 1" Water Soluble Cutting Fluid
This product is formulated to lubricate and cool metal tools and parts
during machining operations. This product can be used in Computer Numerically
Controlled ("CNC") metal turning and machining operations. Prolong believes
that the use of this product will provide higher feed rates and operating
speeds, finer surface finishes, and improved cutting tool life.
Prolong Multi-Purpose Precision Oil
This product is formulated as a fine, light oil for use in lubricating
precision tools and equipment. This product is designed to provide smooth
lubrication, which Prolong believes results in optimal operation of precision
equipment and tools and extension of useful life.
Along with PSL's current variety of lubricant products, there are other
lubricant products, which Prolong believes could be successfully and
beneficially formulated in the future using AFMT technology and derivatives
thereof that would result in products with improved lubrication performance.
Although there can be no assurances that Prolong will have the financial or
other resources to develop, manufacture and market any such additional lubricant
products, the following is a partial list of such additional lubricant products:
High Performance Motor Oil
High Performance Synthetic Motor Oil
Motorcycle Engine & Transmission Treatment
Gun Oil & Cleaner
Gear/Differential Treatment
Heavy Duty Diesel Fuel Conditioner
Hydraulic System Treatment
Chain Oil
2-Cycle Engine Oil
Power Steering Treatment
Radiator Treatment
Compressor Treatment
Shock Absorber Lubricants
Brake Cleaner
Assembly Lube
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In addition to the development of the above-referenced AFMT-based lubricant
products, Prolong is also engaged in efforts to expand its lubricant
formulations beyond its current AFMT-based technology.
During 1998, Prolong introduced and began to market the following line of
products designed to enhance and protect a vehicle's appearance (collectively
referred to as the "appearance products").
Prolong Paint Sealant
Prolong Paint Sealant is designed to give durable shine and protection to a
vehicle's paint. The wipe on, wipe off formula is easily applied with the
patented Prolong refillable applicator.
Prolong Waterless Wash
This product is designed to both wash and shine a vehicle in as little as
15 minutes through a simple spray and wipe technique, without using water.
Special lubricating agents encapsulate and lift dirt particles to clean safely
without scratching, leaving a smooth, shiny, protected finish. The product
removes bugs, tar, tree sap, road film and bird droppings.
Prolong Super Protectant
This product is formulated to provide durable protection to vinyl, rubber
and plastic surfaces. An easy-to-use patented applicator is included with this
product.
Prolong Super Cleaner
This product combines a multi-purpose cleaner, degreaser and stain remover
into one product. It is designed to be strong enough to degrease an engine,
remove brake dust and clean whitewalls, yet gentle enough to remove food stains
and ground-in dirt from carpets and fabric seats without damaging the underlying
fabric.
Prolong Super Glass Cleaner
Unlike household cleaners, Prolong Super Glass Cleaner is designed
specifically for road grime, oily film, bugs and dirt found on car windows.
This product is designed to leave windows clean and streak-free and has been
formulated without ammonia to be safe for tinted windows.
Current Markets For Prolong's Products
PIC's strategy is to successfully direct Prolong's product line to a number
of different markets, each of which is currently large, representing significant
future revenue potential for PIC. Although PIC is currently actively addressing
both the consumer automotive and consumer household markets described below,
PIC's strategy is to adapt Prolong's product line and address the industrial and
governmental markets also described below:
Consumer Automotive
The consumer automotive market consists of automobiles, light trucks,
motorhomes, motorcycles, snowmobiles, jetskis, and other fuel burning vehicles.
The owners of these vehicles represent a significant source of customers for
Prolong's lubricants, fuel conditioners, appearance products and other future
additions to the Prolong product line. Recognizing this fact, this market has
been the primary target of Prolong's marketing efforts to date.
Consumer Household
The consumer household lubrication market is a potentially lucrative
segment of the industry which could prove receptive to Prolong's products for
uses as varied as fishing reels, guns, windows, sliding doors, garage
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doors, sewing machines, electric hair clippers, bicycles, tricycles, scooters,
skateboards, garage door openers, lawn mowers, snow blowers, drills, saws, door
locks, hinges, rusted bolts, and virtually anything made of metal that must be
lubricated in order to maintain performance. Prolong currently manufactures
"SPL100 Super Penetrating Lubricant" and "Prolong Multi-Purpose Precision Oil"
for this market.
Industrial
The industrial market encompasses an enormous variety of major and minor
manufacturers. This market includes businesses such as steel mills, automobile
manufacturers, aircraft manufacturers, paper mills, electric motor
manufacturers, petrochemical manufacturers, oil refineries, mining operations
and electrical generating facilities, all of which require lubricants and
Prolong believes would benefit from the increased performance of Prolong's
products. Even more numerous are the smaller industrial facilities, such as
machine shops and other fabrication businesses throughout the world. Prolong
further believes that businesses engaged in stamping, molding, die casting,
boring, drilling, honing and a number of other similar operations could realize
significant cost savings by using the full line of Prolong's products.
Prolong anticipates pursuing the industrial market through a network of
manufacturer's sales representatives and through established industrial
distributors.
Federal, State, & Local Governments
The government market is not only very large, but Prolong believes it is
also extremely varied. It includes cities, counties, states and all of the
federal government agencies. Prolong believes that these agencies collectively
purchase, operate, and maintain a significant investment in trucks, automobiles,
buses, tanks, airplanes, helicopters, boats, ships, radar equipment, guns,
miscellaneous equipment and tools, as well as many other mechanisms, all of
which require adequate lubrication.
Federal Government. The federal government represents potential sales by
Prolong to many different agencies such as the Department of Defense, NASA,
Department of Energy, Department of Transportation and other federal
governmental agencies.
Military Sales. Procurement procedures require that products used in or on
military equipment must be manufactured according to certain military
specifications ("MIL Specs"). Prolong intends to apply for and receive United
States MIL Specs for certain of its products, and to market products not only to
the United States military, but to foreign militaries as well. Prolong plans to
develop the military market, both here and abroad, through the utilization of
specialists who are familiar with military procurement procedures and with the
special needs of the military services.
State Government. Potential sales to state governments include users such
as the National Guard, highway patrol, state police and other state agencies.
County and City Government. Both county and city governments are potential
Prolong customers for use by police, fire, water, gas, waste management and
other local departments.
Public Transportation. Public transportation entities are major potential
customers for Prolong's products, and Prolong intends to focus its efforts to
market products to these entities at the various levels of government. Prolong
believes that rapid transit districts throughout the country are facing a
serious problem with noisy and polluting diesel buses. The Los Angeles Rapid
Transit District, for example, has 3,300 buses and is currently under heavy
public and regulatory pressure to reduce emissions. In addition to diesel
buses, there are a significant number of other vehicles currently operated by
county and city public transportation agencies which Prolong believes, if
treated with its products, could run cleaner, quieter, last longer and would
burn less fuel.
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Future Markets For Prolong's Products
Prolong believes the following to be significant opportunities for
expansion of its marketing efforts into diverse niches of the lubricant market.
There can be no assurances that Prolong will be successful at penetrating any of
these potential markets.
Commercial Trucking
Prolong has developed a product line and has begun to develop a market for
these products in the long-haul trucking industry. A substantial portion of the
distribution of goods in this country occurs via truck shipments. Consequently,
large quantities of oil and diesel fuel are consumed by trucks operated in this
industry. Prolong believes that the use of its products in the long-haul
trucking industry may provide an economic advantage to truck operators because
of the increased operating efficiency demonstrated by engines treated with AFMT-
based products. Prolong believes that this increased efficiency may directly
result in a reduction in fuel costs and overall transportation costs. Further,
the use of AFMT-based products may provide additional savings to this industry
in the form of reduced service and repair costs over the useful life of the
trucks due to AFMT's propensity to reduce engine wear and the wear of other
"treated" components.
Agricultural Applications
The agricultural industry represents another potentially significant market
for Prolong's products. Modern agricultural machinery and equipment tend to be
highly complex and are often subjected to harsh working environments. As a
result of the harsh environments, the machinery and equipment operates
inefficiently and results in increased fuel consumption and a decreased
productive life-cycle due to increased mechanical wear. Prolong believes that
the use of its products could save the agriculture industry substantial sums by
reducing these industry wide losses caused by friction and contaminants.
Marine Applications
The marine market includes both freshwater and salt water boats and ships,
from outboard fishing skiffs to pleasure boats, yachts and other marine vessels.
Prolong has the ability to formulate special products for the harsh marine
environments, including marine grease and a special 2-cycle oil for small
outboard motors. Prolong believes that in diesel powered boats and ships,
Prolong Fuel System Treatment can provide benefits similar to those attained
from use in diesel truck engines.
Railroads
The railroad industry is currently a large user of lubrication products.
Prolong would have to obtain certain mandatory product certifications prior to
being able to market its products to the railroad industry. Prolong is not
actively pursuing such certifications for its products at this time, but may do
so in the future.
Geographic Markets
Prolong currently markets its products in the United States, Canada,
Mexico, Puerto Rico, Central America, China, Hong Kong, Japan, Thailand, Sub-
Saharan Africa, Brazil, Chile, Turkey, Hungary/Slovakia and intends to continue
developing distributor relationships in other foreign countries. Prolong's
current focus is to identify distributors that possess the expertise and
industry relationships necessary to assist it in further penetrating retail
sales channels in the various markets identified above, with a primary focus on
the consumer automotive and industrial lubricant markets. Prolong intends to
selectively grant distributorships to established companies on a country by
country basis. Prolong intends to build on this relationship and continue to
expand sales and revenues in the international marketplace. There can be no
assurance that Prolong will be able to successfully penetrate any foreign
markets. Prolong has patent protection on its AFMT technology in several of the
EEC member countries.
Page 8
International sales comprised 6.5%, 4.7%, and 7.8% of PIC's revenues in
1998, 1999, and 2000, respectively. Prolong consummates such sales through
independent distributors and, as such, has nominal assets attributable to its
international sales.
Marketing And Distribution Of The Products
Prolong distributes its products through both national and regional
automotive aftermarket stores, traditional automotive aftermarket stores, mass
merchandisers, installers, independent distributors, and directly to consumer
end-users via direct response television sales and the internet. Currently,
Prolong has approximately 450 distributors in the United States. Additionally,
Prolong has ten international distributors located in Europe, Asia, Africa and
South America. Prolong currently employs a direct sales force of 10 people to
service its distributors.
Prolong's automotive retailers include Autozone, Advance Auto, CSK, Pep
Boys, Discount Auto, O'Reilly Auto, Restoration (Trak Auto, Forest City, Twin B,
Grundy), Strauss Discount Auto, Murray's Discount Auto, VIP Discount, and a
number of other regional and independent automotive retailers.
In the traditional automotive aftermarket arena, Prolong distributes
through General Parts, Inc./CarQuest, Genuine Parts Company/NAPA and hundreds of
additional traditional automotive aftermarket locations.
Prolong's mass retailers include Wal-Mart, Target, and Meijers.
Additionally, Prolong products are distributed through approximately 500 car
dealerships and approximately 600 professional installers throughout the United
States.
The Company utilizes contract warehouses located in Southern California to
store and ship its lubricant products. For fulfillment of direct sales to
consumers, the Company utilizes an independent contractor located in Southern
California with a warehouse based in Burbank, California. The direct response
fulfillment center stores inventory, packs and ships orders, and handles
customer service inquires related to direct sales to consumers through
television and the Internet.
The products offered by Prolong have been marketed through endorsements by
well-known spokespersons, event sponsorships, print and electronic media, trade
shows, motorsports, direct response television advertisements, radio, press
releases, public relations, in-store point of sale materials and promotions,
sweepstakes, and through the Internet on Prolong's website, www.prolong.com.
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In the area of endorsements, Prolong has an ongoing agreement by which it
retained the services of Al Unser to endorse and promote Prolong's products.
Mr. Unser has agreed to make certain appearances to assist in marketing the
products and has agreed to license his name and likeness in connection with the
marketing of Prolong's products. Prolong has also entered into an agreement
with Smokey Yunick pursuant to which it retained the services of Mr. Yunick to
promote Prolong's products and to act as a spokesman for, and technical
consultant to, Prolong. Mr. Yunick has agreed to make certain appearances to
assist in marketing Prolong's products and has agreed to license his name and
likeness in connection with the marketing of Prolong's products.
In the area of motorsports sponsorships, Prolong executed an associate
sponsorship agreement with King Entertainment, Inc. and Kenneth D. Bernstein
pursuant to which Mr. Bernstein will provide promotional services and
appearances and will recognize "Prolong Super Lubricants" as a sponsor of the
"Budweiser King Top Fuel Dragster" through the year 2001 in all National Hot Rod
Association (the "NHRA") events. The agreement calls for the display of the
Prolong name and logo on the dragster and related racing components in all races
and other events in which the dragster appears.
Prolong was the title rights sponsor in two nationally televised national
drag racing events during 2000. Prolong Super Lubricants was the title rights
sponsor at the NHRA sanctioned Prolong Super Lubricants Northwest Nationals held
in early August in the Seattle area. The agreement provided for primary signage
and prominent recognition in all racing promotions including television
advertising to promote the event, tickets, trophies, print ads and all NHRA
printed material relating to the NHRA's national schedule throughout the year.
Prolong was also the title rights sponsor to the International Hot Rod
Association ("IHRA") Winter Nationals held in Darlington, South
Page 9
Carolina which was the season opening event for that sanctioning body. The
television coverage on the IHRA event was through TNN and included similar
promotional rights as the NHRA event described above. At this time, the Company
has not entered into any definitive agreements to act as the title rights
sponsor at any NHRA or IHRA sanctioned events during 2001.
In order to support the thousands of retail establishments that carry
Prolong's products, Prolong provides and/or participates in a number of
marketing programs with retailers related to promoting and advertising its
products, which expenditures are commonly known as Marketing Fund Allowances.
The expenditures include, but are not limited to, in store point-of-sale
materials, placement in high traffic areas, printing of fliers and brochures, in
store promotions and sweepstakes, and various other marketing tools that are
traditionally used to promote products at the retail level.
From time to time, Prolong utilizes direct response television advertising,
commonly called infomercials, in order to educate the public about the benefits
and features of Prolong products, to promote the brand, and to sell products
directly to consumer end users. To date, Prolong has premiered three separate
infomercials. Results through the infomercials vary from program to program and
from time slot to time slot but in general have been beneficial to Prolong due
to the fact that they provide television exposure at reduced costs from
traditional television spot advertising, as well as fill the market demand for
mail order purchases. In general, Prolong believes that no more than 5 to 10%
of its customers will buy Prolong products through infomercials and mail order
delivery, but Prolong does believe that there is a wide viewing audience that is
exposed to its products through the infomercials and ultimately purchases
Prolong products at a retail establishment. Prolong intends to air infomercials
from time to time so long as they are economically viable, help to build the
brand throughout the marketplace, and drive retail sales.
During 2000, Prolong operated its website located at www.prolong.com. The
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Prolong website has e-commerce capabilities as well as general product and
company information. Prolong intends to continue to develop its website during
2001 and to further utilize the Internet as a means of marketing and
distributing its products directly to the public, as well as communicating with
its shareholders and the public in general.
Competition
The market for Prolong's products is highly competitive and is expected to
remain so in the future. The basic formula of Prolong's lubricant products has
not changed materially since its development in 1986. The formula was granted a
United States patent on July 4, 1989. The market for Prolong's products is
characterized by rapid technological advances, frequent new product
introductions and evolving industry standards. Some of Prolong's principal
competitors include other providers of specialized lubrication products, such as
The Clorox Company (STP(R)) and Pennzoil-Quaker State Company (Slick 50(R)),
both of which market engine treatments. Other competitive engine treatment
brands include Duralube(R), Motor Up(R) and Z-MAX(TM). Prolong's competitors
also include major oil companies such as Shell Oil Company, Chevron Corporation,
Castrol, and other companies that manufacture lubrication products, such as WD-
40 Company. Competition for appearance products comes principally from companies
such as Turtle Wax, Inc., Meguiar's, Inc., Pennzoil-Quaker State Company and The
Clorox Company. Further, Prolong believes that major oil and consumer products
companies not presently offering products that compete directly with those
offered by Prolong may enter Prolong's markets in the future.
Increased competition could result in price reductions, reduced gross
margins, and a loss of market share, any of which could have a material adverse
effect on PIC's business, financial condition and results of operations. In
addition, many of Prolong's competitors have significantly greater financial,
technical, research and product development, marketing and other resources and
greater market recognition than Prolong. Several of Prolong's competitors also
currently have, or may develop or acquire, substantial customer bases in the
automotive and other related industries. As a result of these factors,
Prolong's competitors may be able to respond more quickly than Prolong to new or
emerging technologies and changes in customer requirements or to devote greater
resources to the development, promotion and sale of their products.
Additionally, other dealers and distributors may offer similar lubrication and
appearance products at prices below those offered by Prolong, appealing to the
price-sensitive segment of the market. While Prolong believes that the prices
for Prolong lubrication and appearance products are competitive for the level of
quality obtained by the customer, Prolong relies on PSL's brand name
Page 10
recognition for selling high quality, state of the art products. There can be no
assurance that Prolong will be able to compete successfully against current and
future competitors or that competitive pressures faced by Prolong will not
materially adversely effect PIC's business, financial condition and results of
operations.
Prolong believes that its current competitive edge lies solely with the
superior lubrication performance of its products relative to that of its
competitors. In order for Prolong to draw attention to the superior performance
of its products, Prolong is treating and marketing its products as a unique
specialty line of high performance products as opposed to a high volume product
line.
Production
The AFMT formula contained in certain of Prolong's products and the
formulas for such products themselves are comprised of petroleum-based
components which are readily available from several suppliers. Prolong does not
foresee any shortages of supply in the near future. While Prolong is working
actively with each of its suppliers to increase production of the components,
there can be no assurance that each supplier will be able to meet its production
in time to satisfy Prolong's requirements or that alternative suppliers will be
able to meet any such deficiency on an ongoing basis. If Prolong is unable to
obtain sufficient quantities of the components, or if such components do not
meet Prolong's quality standards, delays or reductions in product shipments
could occur which would have a material adverse effect on PIC's business,
financial condition and results of operations.
In addition to the potential deficiency in supply of the AFMT components,
such components are also subject to significant price volatility beyond the
control or influence of Prolong. Prices for the components of the quality
sought by Prolong are dependent on the origin, supply and demand at the time of
purchase. Prices can be affected by multiple factors in the producing
countries, including weather and political and economic conditions.
Additionally, petroleum products, upon which Prolong relies for its AFMT
formula, have been affected in the past, and may be affected in the future, by
the actions of certain organizations and associations, such as the Organization
of Petroleum Exporting Countries ("OPEC"), that have historically attempted to
establish price controls on petroleum products through agreements establishing
export quotas or restricting petroleum supplies worldwide. No assurance can be
given that OPEC (or others) will not succeed in raising the price of petroleum
components or that, in such event, Prolong will be able or choose to maintain
its gross margins quickly by raising its prices without effecting demand.
Increases in the prices for the components, whether due to the failure of its
suppliers to perform, conditions affecting the component-producing countries, or
otherwise, could have a material adverse effect on PIC's results of operations.
The production of Prolong's products is comprised of contract manufacturers
mixing the components pursuant to the AFMT and other proprietary formulas and
bottling the resulting mixtures in packaging specified by Prolong. Prolong's
current contract manufacturers have the capacity to produce its products in
relatively high volumes. By utilizing existing third party manufacturing
facilities, Prolong avoids the large capital expenditures associated with mixing
and packaging operations, as well as costly management of human resources. At
present, there are facilities located throughout the world that are capable of
mixing and packaging the components into finished products. Prolong has not
entered into any long term contracts with respect to the supply or production of
its lubricant products, preferring to take advantage of competition among
suppliers and manufacturers.
Customers
In 2000, Prolong's sales to automotive aftermarket retail chain stores,
mass merchandisers, and independent distributors comprised approximately 85.8%
of its revenues while sales to commercial, industrial and other customers
comprised 10.8% of total revenues. Approximately 3.4% of Prolong's 2000 sales
resulted as a response to the airing of the infomercials. In 2000, two retail
customers comprised approximately 27.5% of its revenues.
Page 11
Intellectual Property
On February 5, 1998, PIC entered into a definitive agreement with EPL under
which PIC purchased the business assets of EPL. Under the terms of the
agreement, PIC purchased the principal assets and assumed certain liabilities of
EPL for approximately 2,981,035 shares of PIC Common Stock. With the closing of
the acquisition on November 20, 1998, PIC acquired the U.S. and foreign patents
owned by EPL pertaining to the AFMT technology and related U.S. and foreign
trademarks. Prior to this transaction, PIC, through PSL, held an exclusive
license from EPL to use AFMT and the "Prolong" name. As a result of the
transaction, PIC, currently owns the exclusive rights to manufacture, distribute
and sell products based on the patented technology in the U.S. and in certain
foreign countries, and to use the "Prolong" trade name and trademarks. See
"Legal Proceedings."
The U.S. patent relating to the AFMT technology (U.S. Patent No. 4,844,825,
hereinafter "the `825 patent") expires on November 18, 2007. There are a number
of foreign patents corresponding to the `825 patent as well. In addition, PSL
has obtained a federally registered patent in the United States for a "Sponge
Applicator Device" (U.S. Patent No. 6,010,268) and SPONGE APPLICATOR (U.S.
Design Patent No. 414005), which applicator is currently included in the various
appearance product packages marketed by Prolong. PSL has obtained or applied
for trademark registration protection in numerous countries for various
trademarks utilized in the marketing and promotion of Prolong lubricant
products. Currently, PSL holds the following federally registered trademarks in
the United States: PROLONG and the related design (U.S. Reg. Nos. 2,136,672 and
2,136,576), PROLONG SUPER LUBRICANTS (U.S. Reg. No. 2,136,577), NO EQUAL IN THE
WORLD & DESIGN (U.S. Reg. No. 2,129,784), NO EQUAL IN THE WORLD (Word Mark)
(U.S. Reg. No. 2,270,653), SPL100 (U.S. Reg. No. 2,022,220), THE ULTIMATE IN
PROTECTION & PERFORMANCE (U.S. Reg. No. 2,129,785), PSL's Oil Drop Logo (U.S.
Reg. No. 2,135,230), TRIGGER SPRAY BOTTLE CONFIGURATION (U.S. Reg. No.
2,376,247), and TRIGGER SPRAY BOTTLE BLUE COLOR (U.S. Reg. No. 2,376,248).
Royalty Agreements
Prolong entered into a memorandum agreement with the producer of its
infomercial, The 2M Group, Inc., whereby Prolong agreed to pay 0.5% of all gross
sales, net of returned product, from any and all direct response television
campaigns which utilize footage from its second lubricant infomercial entitled
"Prolong Across America." During 2000, Prolong expended $915 in royalties under
this agreement.
Prolong entered into another memorandum agreement with The 2M Group, Inc.
whereby Prolong agreed to pay 1.5% of gross sales, net of product returns, of
the appearance product kit generated from its appearance product infomercial
entitled "The Ultimate Car Care Challenge". Additionally, Prolong agreed to pay
5%, 4% and 3%, respectively, for each year of a three-year arrangement of any
and all net retail sales of the paint sealant product. During 2000, Prolong
expended $13,600 in royalties under this agreement.
Further, Prolong has entered into a service and endorsement contract with
Al Unser whereby Prolong has agreed to pay royalties on all net lubricant retail
sales according to the following rates: 1.5% from November 1, 1996 through
October 31, 1997; 1.25% from November 1, 1997 through October 31, 1998; and 1%
from November 1, 1998 through October 31, 1999. Maximum payments under this
arrangement are: $100,000 in year one, $125,000 in year two and $150,000 in year
three. The option to extend this agreement for an additional five years was
exercised. For the five years under the extension, the Company has agreed to
pay royalties at the rate of 0.5% from November 1, 1999 through October 31, 2000
and 0.6% from November 1, 2000 through October 31, 2004 on all net lubricant
retail sales. For each of these years, the Company pays a guaranteed minimum
payment of $75,000. Maximum payments are $100,000 in the first year of the
renewal period and $125,000 each year thereafter. During 2000, Prolong expended
$74,379 under this agreement.
Page 12
Employees
As of March 5, 2001, PIC and its subsidiaries collectively employed 40
full-time employees, including 4 executive officers, and no part-time employees.
None of Prolong's employees are represented by a labor organization and PIC
considers the relationships with its employees to be good.
ITEM 2. Properties
- ------- ----------
At its headquarters, Prolong Super Lubricants, Inc. owns approximately
29,442 square feet of office and warehouse space in a two-story building located
at 6 Thomas in Irvine, California. PSL purchased this facility from Huck
International, Inc. (a subsidiary of Thiokol Corporation, PSL's former lessor)
pursuant to the exercise of its lease option on February 23, 1998. The
consideration paid by PSL for the facility was $2,690,000. PSL utilized
$248,000 in cash on hand and borrowed funds in the amounts of $1,692,000 and
$750,000, respectively, from Bank of America and from CDC Small Business Finance
Corp. Escrow closed on the purchase and sale on April 30, 1998. The
outstanding loans from Bank of America and CDC Small Business Finance Corp. are
collateralized by the purchased land and building. On October 30, 2000 the
Company entered into a loan agreement with a lender for a $675,000 loan. The
loan is collateralized by a Third Priority Trust Deed lien against the Company's
real property in Irvine, California. See "Management's Discussion and Analysis
Of Financial Condition and Results of Operations - Liquidity and Capital
Resources." PIC considers its present facilities to be adequate for Prolong's
current operations and for those reasonably expected to be conducted during the
next twelve months. Further, PIC believes that any additional space, if
required, will be available on commercially reasonable terms.
ITEM 3. Legal Proceedings
- ------- -----------------
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.
Page 13
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 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, 275/th/ Judicial District, file No. C-
292-00-E. The case is a purported class action alleging breach of
contract and breach of express and implied warranty. A special
appearance and motion to dismiss was filed by PIC and an answer and plea
in abatement was 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.
Minidis v PSL and PIC et al
- ---------------------------
Minidis v PSL and PIC et al was filed on February 1, 2000, in the Los
Angeles County Superior Court. Plaintiff has alleged breach of contract and
fraud in connection with an agreement to design a product applicator for
defendant. Plaintiff's deposition and completion of discovery is scheduled
during the second quarter of 2001.
Page 14
Settlement negotiations have been held. A mandatory settlement conference is
pending. Trial is scheduled for April 16, 2001. PIC and PSL and their respective
officers and directors believe that there is no merit to the plaintiff's
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
operations or cash flows.
ITEM 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2000.
Page 15
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------- ---------------------------------------------------------------------
Price Range of Common Stock
PIC Common Stock is currently trading on AMEX under the symbol "PRL." High
and low sales prices as furnished by AMEX for each quarter during 1999 and 2000
are as indicated below.
Quarter Ended: High Low
-------------- ---- ---
March 31, 1999 $2.00 $1.13
June 30, 1999 $1.69 $1.13
September 30, 1999 $1.25 $0.56
December 31, 1999 $0.69 $0.25
March 31, 2000 $0.75 $0.30
June 30, 2000 $0.63 $0.31
September 30, 2000 $0.50 $0.13
December 31, 2000 $0.22 $0.02
PIC has authorized 150,000,000 shares of PIC Common Stock, having a par
value of $0.001 per share. As of March 12, 2001, the number of holders of record
of PIC Common Stock is approximately 460 and the high and low sales prices as
reported by AMEX, were $0.17 and $0.13, respectively. PIC has not declared any
cash dividends since inception, and does not intend to do so in the foreseeable
future. PIC currently intends to retain its earnings for the operation and
expansion of its business. PIC does not have any restrictions on its ability to
pay dividends on common equity. In addition to PIC Common Stock, PIC's Board of
Directors is authorized to issue up to 50,000,000 shares of Preferred Stock with
such rights, preferences and privileges as may be determined by PIC's Board of
Directors. No such shares of Preferred Stock have been issued to date.
Recent Sales of Unregistered Securities
On November 2, 2000 Prolong issued a warrant to purchase 900,000 shares of
Common Stock to ABQ Dolphin, LP, a California limited partnership, in connection
with a certain loan agreement, dated October 30, 2000. The warrant is
exercisable at $0.1875 per share (the market value of the Company's Common Stock
when the warrants were issued) and shall expire on the seventh anniversary of
the date of the original issuance of the warrant.
The sales and issuance of the warrant was made in reliance upon the
exemption from the registration provisions of the Securities Act of 1933 set
forth in Section 4(2) thereof as transactions by an issuer not involving any
public offering. The Company has reason to believe that the purchaser was
familiar with or had access to information concerning the operations and
financial condition of the Company, and the purchaser represented that it was
acquiring the warrant and the underlying shares of Common Stock for investment
and not with a view to the distribution thereof. At the time of the issuance,
the warrant was deemed to be a restricted security for purposes of the
Securities Act of 1933 and the certificate representing the warrant (and the
shares issued upon exercise) bear legends to that effect.
Page 16
ITEM 6. Selected Financial Data
- ------- -----------------------
The following selected financial data is qualified by reference to, and
should be read in conjunction with, the consolidated financial statements,
related notes and other information included elsewhere in this Annual Report on
Form 10-K as well as "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations." The financial data for the year ended
December 31, 1996 is derived from the consolidated financial statements of the
Company that have been audited by Corbin & Wertz. The financial data set forth
below for the years ended December 31, 1997, 1998, 1999 and 2000, respectively,
is derived from the consolidated financial statements of the Company that have
been audited by Deloitte & Touche LLP.
Year ended
December 31,
------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Statement of Operations Data
Net revenues.............................................. $15,813,493 $29,846,795 $35,032,689 $34,470,915 $19,080,218
Net income (loss)......................................... 721,178 2,132,553 419,513 (6,580,061) (1,652,278)
Net income (loss) per share:
Basic.................................................. $ 0.03 $ 0.08 $ 0.02 $ (0.23) $ (0.06)
Diluted................................................ $ 0.03 $ 0.08 $ 0.02 $ (0.23) $ (0.06)
Weighted average common shares:
Basic.................................................. 23,463,620 25,508,035 25,807,618 28,445,835 28,442,341
Diluted................................................ 23,463,620 25,690,774 26,011,767 28,445,835 28,442,341
Balance Sheet Data
Total assets.............................................. $ 9,023,317 $13,748,650 $23,210,872 $21,379,648 $17,715,200
Total liabilities......................................... 1,732,467 4,039,796 5,756,537 10,412,463 8,174,388
Total stockholders' equity................................ 7,290,850 9,708,854 17,454,335 10,967,185 9,540,812
________________________
ITEM 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
- ---------------------
The following discussion and analysis of the Registrant's financial
condition and results of operations should be read in conjunction with the
Financial Statements and the notes thereto included elsewhere in this Annual
Report on Form 10-K.
General
Since the Reorganization in June 1995, management of Prolong has
concentrated a significant portion of its efforts and resources on the marketing
and sale of Prolong's consumer oriented products, through traditional retail
distribution and through direct response television advertising. Management now
believes that it has attained a significant level of brand and product
identification and Prolong has now begun efforts to expand sales of its consumer
lubrication products into commercial and industrial channels, as well as
international markets.
The lubricant business is extremely competitive. Prolong's business
requires that it compete with larger, better financed entities, most of which
have brand names which are well established in the marketplace. Although
Prolong, in the opinion of management, has unique products which have superior
performance characteristics relative to the well known products available in the
marketplace, Prolong remains at a distinct disadvantage and will be required to
expend substantial sums in order to promote brand name identity and product
acceptance among its prospective customers. In order to establish brand name
identity, Prolong has relied primarily on its direct response television
programs and intends from time to time to utilize this means to gain product
recognition for purposes of directly increasing sales as well as increasing
retail, commercial and industrial and governmental sales resulting from broader
public knowledge of its products.
Page 17
Results of Operations
The following table sets forth certain financial data as a percentage of
net sales for the periods indicated:
Fiscal Year Ended December 31,
-------------------------------------------------------------------
1998 1999 2000
----- ----- -----
Net revenues 100.0% 100.0% 100.0%
Cost of goods sold 21.5 30.5 27.6
----- ----- -----
Gross profit 78.5 69.5 72.4
Selling and marketing expenses 56.6 75.0 55.7
General and administrative expenses 17.2 22.2 24.7
Research and development 2.0 .8 0.5
----- ----- -----
Operating income (loss) 2.7 (28.5) (8.5)
Interest expense (0.4) (1.3) (2.8)
Interest income 0.3 --- ---
----- ----- -----
Income (loss) before income taxes 2.6 (29.8) (11.3)
Provision (benefit) for income taxes 1.4 (10.7) (2.6)
----- ----- -----
Net income (loss) 1.2 (19.1) (8.7)
===== ===== =====
Comparison of the Years Ended December 31, 2000 and December 31, 1999
Net revenues for the year ended December 31, 2000 were approximately
$19,080,200 as compared to approximately $34,471,000 for the year ended December
31, 1999, a decrease of $15,390,800 or 44.6%. Revenues for the year ended
December 31, 2000 were derived from the following sources: Direct response
infomercial sales of $654,100 ($347,200 of appearance products and $306,900 of
lubricants); retail sales of $16,362,400 ($317,000 of appearance products and
$16,045,400 of lubricants); industrial sales of $298,300; and, international and
other sales of $1,765,400. Revenues for the year ended December 31, 1999 were
derived from the following sources: direct response infomercial sales of
$3,941,000 ($2,796,000 of appearance products and $1,145,000 of lubricants);
retail sales of $27,857,000 ($4,230,000 of appearance products and $23,627,000
of lubricants); industrial sales of $599,000; and, international and other sales
of $2,074,000.
For the year ended December 31, 2000, retail sales were 85.8% of total
revenues while direct response infomercial sales comprised 3.4% of total
revenues. For the year ended December 31, 1999, direct response infomercial
sales comprised 11.4% of total revenues while retail sales were 80.8%. The
decrease in the direct response sales of approximately $3,286,900 is a direct
result of a strategic decision to evaluate other cost-effective advertising
programs. The lower retail sales for the year ended December 31, 2000 versus
the same period a year ago are attributable to a decrease in appearance sales of
$3,913,000 and lubricants sales of $7,581,600. The appearance products were
launched during the spring and summer of 1999 when initial stocking orders were
filled at several major retailers and were supported by an aggressive television
and print advertising campaign. Revenues for the appearance products declined
in part as a result of a shift in advertising strategies to accommodate the
realities of a marketplace in which the Company was not able to spend as much as
it would like on cost-effective promotional activities and also due to decreased
demand and acceptance of the appearance products in Year 2000 and higher then
anticipated product returns. The Company is continuing an ongoing evaluation in
Year 2001 of the market acceptance of the appearance product line. The
lubricants sales decline is attributable to a soft market for specialty
lubricants, higher than expected store inventory levels at major retailers,
competitive factors and also the decision to discontinue the direct response
infomercial for lubricants in lieu of an ongoing evaluation of more cost-
effective means of promoting the line. Industrial, international and other
sales decreased approximately $609,300. The decrease is attributable to a large
stocking order shipped in 1999 to a new international distributor, which was not
repeated in Year 2000.
Cost of goods sold for the year ended December 31, 2000 was approximately
$5,257,600 as compared to $10,501,000 for the comparable period of the prior
year, a decrease of $5,243,400 or 49.9%. As a percentage of sales, cost of
goods sold decreased from 30.5% for the year ended December 31, 1999 to 27.6%
for the year ended December 31, 2000. This decrease was mainly attributable to
the shift in product mix with the lubricant products
Page 18
yielding higher gross margins than the appearance products. Also the fourth
quarter of 1999 included an increase in the inventory obsolescence reserve for
non-performing or slow moving inventory items.
Selling expenses of $10,632,000 for the year ended December 31, 2000
represented a decrease of $15,218,000 over the comparable period of the prior
year. This 58.9% decrease was primarily the result of decreased expenses for
endorsement and sponsorship payments, slotting fees, commissions, salaries
(reduced headcount), 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 55.7% for the year ended
December 31, 2000 versus 75.0% for the comparable period of the previous year.
General and administrative expenses for the year ended December 31, 2000
were approximately $4,710,000 as compared to $7,645,000 for the year ended
December 31, 1999, a decrease of $2,935,000 or 38.4%. This decrease is
primarily attributable to a decrease in legal expenses, consulting, website
development, bad debt and general insurance expenses. As a percentage of sales,
general and administrative expenses increased from 22.2% in 1999 to 24.7% in
2000. Even though the aggregate expenses declined during the period, the ratio
of expenses as a percentage of sales increased due to the more than expected
decline in sales during the period. The Company continues to evaluate further
reductions in the general and administrative expenses.
Research and development expenses for the year ended December 31, 2000 were
$104,100 as compared to $305,300 for the year ended December 31, 1999, a
decrease of $201,200. In 2000, these expenses were attributable to market
research of the appearance products, while in 1999, these expenses were related
to continued testing and research.
Interest expense of approximately $539,000 for the year ended December 31,
2000 represented an increase of $85,000 over the comparable period of the prior
year. The increase is attributable to a higher average balance in borrowings
during the period.
Net loss for the year ended December 31, 2000 was approximately
$(1,652,000) as compared to a net loss of approximately $(6,580,000) for the
comparable period in the prior year, a decrease of $4,928,000. The decrease is
a result of the factors discussed above.
Comparison of the Years Ended December 31, 1999 and December 31, 1998
Net revenues for the year ended December 31, 1999 were $34,470,915 as
compared to $35,032,689 for the year ended December 31, 1998, a decrease of
$561,774 or 1.6%. Revenues for 1999 were derived from the following sources:
direct response infomercial sales of $3,941,000 ($2,796,000 of appearance
products and $1,145,000 of lubricants); retail sales of $27,857,000 ($4,230,000
of appearance products and $23,627,000 of lubricants); industrial sales of
$599,000; international sales of $1,606,000; and other sales and revenues of
$468,000. Revenues for 1998 were derived from the following sources; direct
response infomercial sales of $5,602,000 (all lubricants); retail sales of
$25,389,000 (all lubricants); industrial sales of $1,045,000, international
sales of $2,274,000 and other sales and revenues of $723,000. Revenues for the
year ended December 31, 1999 were flat as compared to the year ended December
31, 1998, and fell below expectations. Direct response lubricant infomercial
sales continued to decline from 1998, decreasing $4,457,000 due to the fact that
the initial infomercial, "Prolong World Challenge", reached the end of the
marketing life. The new lubricant infomercial, "Prolong Across America", was
supported with limited airtime expenditures due to: 1) delayed completion of the
infomercial, and; 2) weaker return results than expected. Direct response
appearance infomercial sales contributed $2,796,000 in 1999 from the launch of
the new "The Ultimate Car Care Challenge" television show, but performed below
expectations. The direct response infomercials for both product lines performed
at lower levels than expected due to debuts occurring late in the selling season
and due to the availability of products in retail stores conveniently located to
end-users. Retail sales increased $2,468,000 during 1999 mainly due to the
launch of the new appearance products into the retail distribution outlets which
amounted to increased sales of $4,230,000 in 1999, but fell below expectations.
Lubricant product retail sales decreased $1,762,000 during 1999 mainly due to
the fact that the supporting infomercial was aired only on a limited basis
during 1999. All other sales decreased $1,369,000 during
Page 19
the year mainly in industrial and international sales due to the Company's
concentrated focus on the launch of the appearance product line.
Cost of goods sold for the year ended December 31, 1999 was $10,500,586 as
compared to $7,527,361 for the year ended December 31, 1998, an increase of
$2,973,225 or 39.5%. As a percentage of sales, cost of goods sold for the year
ended December 31, 1999 was 30.5% as compared to 21.5% for the prior year. This
increase was attributable to a shift in product mix with the appearance products
yielding lower gross margin than the lubricants products. The appearance
product sales amounted to approximately 20% of total revenues for the year ended
December 31, 1999. Another factor in the increase of the cost of goods sold
pertains to the strategic decision during the fourth quarter of 1999 to focus
future selling efforts on core products thereby requiring an increase in the
inventory obsolescence reserve for non-performing or slow moving inventory
items, such as C.D's, flush machines and special label international products.
Selling and marketing expenses were $25,850,474 for the year ended December
31, 1999 as compared to $19,838,689 for the year ended December 31, 1998, an
increase of $6,011,785 or 30.3%. This increase was primarily the result of
increased expenditures for television airtime related to the launch of the new
appearance products, production costs to produce the new infomercials, one time
marketing and slotting allowances to retail customers to expand the distribution
channels and promotional activities to promote product awareness. As a
percentage of sales, selling and marketing expenses increased to 75.0% for 1999
versus 56.6% in 1998. A major factor was the increased expenditures associated
with the Company's strategic program to expand its distribution channels while
diversifying its product offerings. These expenditures included substantial
one-time sales slotting allowances and marketing commitments to premier
automotive aftermarket retailers, expenses that are a necessary part of gaining
shelf space in an intensely competitive market place. Also, the higher than
anticipated expenditures associated with the launch of the new automotive
appearance products were necessary, but costly, to support the introduction to
the retail markets during a short spring season. These costs were associated
with producing and airing an infomercial that did not perform to expectations.
General and administrative expenses for the year ended December 31, 1999
were $7,645,321 as compared to $6,022,201 for the year ended December 31, 1998,
an increase of $1,623,120 or 27.0%. This increase was primarily attributable to
unanticipated increases in legal expenses, general insurance expenses, a full
year of amortization expenses from the EPL acquisition in November 1998,
depreciation expense increases relating to building improvements and computer
equipment and costs related to the design of the Company's new e-commerce web-
site. As a percentage of sales, general and administrative expenses were 22.2%
in 1999 versus 17.2% in 1998 mainly due to the factors discussed above.
Research and development expenses for the year ended December 31, 1999 were
$305,297 as compared to $710,531 for the year ended December 31, 1998, a
decrease of $405,234 or 57.0%. In 1999, these expenses were primarily
attributable to continued testing and market research of the new appearance
products, while in 1998 the expenses were related to the research, development
and testing of the new appearance and truck fleet products.
For the year ended December 31, 1999, PIC incurred interest expense, net of
interest income, of $443,224 as compared to $16,504 for the year ended December
31, 1998. During 1999, PIC maintained an average outstanding balance in
borrowings against its line of credit of approximately $2,900,000 million
compared to no borrowings at any time in 1998, resulting in an increase in
interest expense. Also, the Company incurred a full year of interest expense on
the loans related to the purchase of Prolong's facility in Irvine, California in
April of 1998. PIC maintained an average cash balance of approximately $0.8
million in 1999 as compared to approximately $3.6 million during 1998, resulting
in lower interest income for the year.
Net loss for the year ended December 31, 1999 was $6,580,061 as compared to
net income of $419,513 for the year ended December 31, 1998, a decrease of
$6,999,574. This decrease was a result of the factors discussed above.
Page 20
Liquidity and Capital Resources
At December 31, 2000, the Company had a negative net working capital of
approximately $100,000 as compared to a positive working capital of $41,000 at
December 31, 1999, representing a decrease of $141,000. Operating activities
provided $295,000 during 2000, primarily from reductions in inventories and
deferred taxes, partially offset by a decrease in payables and accrued expenses
and an increase in accounts receivable. Additionally, the Company provided
$42,600 from investing activities, which were primarily decreases in employees'
advances. These additions of cash were offset by uses of cash from financing
activities, which were primarily net reductions in the line of credit of
$1,934,000, which were partially offset by net proceeds from notes payables of
$629,000.
On 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
December 31, 2000) plus 1% subject to a minimum interest charge of $50,000 per
quarter. Effective November 21, 2000 the credit facility was reduced to
$5,000,000 with interest payable monthly at the rate of the financial
institution's prime rate plus 3%. Effective January 1, 2001 interest is payable
monthly at the rate of the financial institution's prime rate plus 4%. The
credit facility contains certain defined net income and tangible net worth
covenants. At December 31, 2000, the Company was in compliance or had received
waivers for all financial covenants. As of December 31, 2000, $2,050,716 was
outstanding and approximately $205,000 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 (9.50% at December 31, 2000) plus 2.5%.
During 2000, the Company reduced headcount, discontinued certain
endorsement and sponsorship contracts, reduced spending for television airtime
and aggressively reduced other operating expenses. Additionally, the Company
improved its credit and collections function and worked with its vendors to
extend payment terms wherever possible. The Company's business plan for 2001
provides for positive cash generation. However, the Company is currently
seeking additional new financing arrangements through subordinated debt and or
equity providers. Management cannot guarantee that it will be able to obtain
adequate funds when needed or on acceptable terms, if at all. Any inability to
obtain funds when needed would have a material adverse effect on the Company's
financial condition. At December 31, 2000 the Company had an accumulated
deficit of approximately $5,523,000. Many of the expense reductions did not
realize their full affect in 2000. The Company will continue to search for
areas in which to further reduce expenses. The Company cannot guarantee that
the timing of further reductions in operating expenses will be adequate to
return to profitability for 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 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.
Year 2000 Update
As described in the Form 10-K for the year ended December 31, 1998, Prolong
had developed plans to address the possible exposures related to the impact on
its computer systems of the Year 2000. Since entering the Year 2000, Prolong
has not experienced any major disruptions to its business nor is it aware of any
significant Year 2000-related disruptions impacting its customers and suppliers.
Costs incurred to achieve Year 2000 readiness, which include contractor
costs to modify existing systems and costs of internal resources dedicated to
achieving Year 2000 compliance, were charged to expense as incurred and were not
material in 1999.
Page 21
Factors Which May Affect Future Operating Results
In evaluating our business, you should carefully consider the following
risk factors and other information contained in this Annual Report on Form 10-K.
Some of the statements contained in this Annual Report on Form 10-K are
forward-looking. These forward-looking statements are based on our current
expectations that involve risks and uncertainties which may affect, among other
things, our ability to maintain our current sales rate or may cause sales to
decline. Such risks and uncertainties include, but are not limited to, the
following:
. Competitive, technological, financial and business challenges may make
it more difficult for us to continue to sell specialty lubricant and
appearance products.
. We may be unable to retain our existing key sales, technical and
management personnel.
. Increased competition in the specialized lubrication or appearance
product markets may cause downward pressure on our prices.
. We may be unable to manage our growth effectively.
. Direct sales to customers via direct response television commercials are
likely to decrease significantly.
. The lubricant or appearance products industries or our operations or
business may face other unforeseen material adverse changes.
. We may be unable to generate either through operations, debt placements
or equity sales, sufficient cash to operate the business profitably.
Our current expectations, which impact our budgeting, marketing, and other
management decisions, are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience and business
developments. Revisions to our current expectations may cause us to change our
marketing, capital expenditures or other budgets, which may in turn affect our
business, financial position, results of operations and cash flows. Although we
believe that our current expectations are reasonable, we make no representation
regarding their accuracy. Therefore, you should avoid placing undue reliance on
the forward-looking statements contained in this Annual Report on Form 10-K.
We May Need to Raise Additional Funds in the Future
We expect that our need for additional funds will increase in the future as
our business grows. We cannot guarantee that we will be able to obtain adequate
funds when we need them or on acceptable terms, if at all. Our future need for
additional funds will depend on numerous factors including the following:
. The success of our product development programs.
. The commercial success of our products.
. The rate of growth of our business.
. The availability of cash from our operations and other sources.
Page 22
We are currently seeking additional funds through public or private sales
of our stock or through borrowing. The issuance of additional shares of stock
could result in a substantial dilution to the ownership interests of our present
or future stockholders. If we are unable to obtain adequate funds on terms
acceptable to us, we may need to delay or scale back our product development and
the manufacture of our current products. Any inability to obtain funds when we
need them would have a material adverse effect on our business, operating
results and financial condition.
Direct Response Sales Will Not Remain Our Key Source of Sales Growth
Sales to retail customers who responded to our 30 minute direct response
television commercial, or direct response sales, represented approximately 3.4%
($654,100) of revenues in 2000 compared with 11.4% ($3,941,000) of revenues in
1999. In the past, sales to industrial/commercial and international customers
constituted only a limited portion of revenues. However, we expect most of our
future sales growth to come from domestic consumers, industrial/commercial
resellers and end-users and international customers and less from direct
response sales. We typically sell to industrial/commercial and international
customers through independent distributors. We will need to significantly
expand our distributor network in order to increase sales in the
industrial/commercial and international markets. We cannot guarantee that we
will successfully locate and engage qualified distributors for our products,
either domestically or internationally, or that our sales to
industrial/commercial and international customers will grow as expected.
We Depend on Our Key Management Personnel
We depend on our key management personnel and our future success will
depend in large part upon their contributions, experience and expertise. We
have entered into employment agreements with 6 of our senior executives for
periods ranging from 3 to 4 years. In addition, our future success will depend
upon our ability to attract and retain other highly qualified management
personnel. The loss of any key management personnel or our failure to attract
and retain other qualified management personnel could have a material adverse
effect on our business, operating results and financial condition.
Our Business Is Subject to the Risk of Product Liability Claims
The nature of our business exposes us to risk from product liability
claims. We currently maintain product liability insurance with maximum coverage
limits of $11,000,000 for each occurrence and an aggregate limit of $12,000,000
per year. Product liability coverage is becoming increasingly expensive and we
cannot guarantee that our current coverage will adequately cover future product
liability claims. Currently, we have no plans to increase our coverage.
However, we will reevaluate our product liability coverage from time to time in
the future. Any losses that we may suffer from future liability claims,
including the effect that any product liability litigation may have upon our
reputation and marketability of our products, may have a material adverse effect
on our business, financial condition, cash flows and results of operations.
The Market in Which We Operate is Highly Competitive
The current market for our products is highly competitive and we expect
competition to increase in the future. Our principal competitors include other
providers of specialized lubrication products, such as The Clorox Company
(STP(TM)) and Pennzoil-Quaker State Corporation (Slick 50(TM)), both of which
market engine treatments. Other competitive engine treatment brands include
Duralube(R), MotorUp(R) and Z-Max(TM). Our competitors also include major oil
companies such as Shell Oil Company, Chevron Corporation, Castrol, and other
companies that manufacture lubrication products, such as WD-40 Company. Further,
we believe that major oil companies, well established consumer products and new
start-up companies not presently offering products that compete directly with
our products, may enter our markets in the future. With respect to our
appearance products, major competitors include such companies as Turtle Wax,
Inc., Meguiar's, Inc., Mothers, Pennzoil-Quaker State Company, and The Clorox
Company. Increased competition could result in any or all of the following,
which could have a material adverse effect on our business, financial condition,
cash flows and results of operations:
Page 23
. Price reductions
. Reduced gross margins
. Loss of market share
. Loss of shelf space
In addition, many of our competitors have significantly greater financial,
technical, product development, marketing and other resources and greater market
recognition than we do. Several of our competitors also have, or may develop or
acquire, substantial customer bases in the automotive and other related
industries. As a result, our competitors may respond quicker to new or emerging
technologies and changes in customer requirements or devote more resources to
the development, promotion and sale of their products. Additionally, other
dealers and distributors may appeal to the price-sensitive segment of the market
by offering similar lubrication and appearance products at prices below ours.
While we believe that our prices are competitive for the level of quality of our
products, we rely on our brand name recognition and reputation for selling
quality products supported by strong customer service.
We cannot guarantee that we will be able to compete successfully against
current and future competitors or that the competitive pressures that we face
will not have a material adverse effect on our business, financial condition,
cash flows and results of operations.
The Prices of Many of Our Components are Highly Volatile
We depend upon our suppliers to provide us with the primary components for
our AFMT formula. The price of such components is extremely volatile and beyond
our control or influence. Prices for the quality of components we desire depend
on the origin, supply and demand at the time of purchase. Component prices
typically depend on multiple factors within the producing countries, including
weather and political and economic conditions. Additionally, petroleum
products, which form our AFMT formula, have been affected in the past, and may
be affected in the future, by the actions of certain organizations and
associations, such as the Organization of Petroleum Exporting Countries
("OPEC"), that have historically attempted to control prices of petroleum
products through agreements establishing export quotas or restricting petroleum
supplies worldwide. We cannot guarantee that OPEC (or others) will be
unsuccessful in raising the prices of petroleum components or that, if prices
increase, we will be able or choose to maintain our gross margins by raising our
prices without affecting demand. Increases in component prices, for whatever
reason, could have a material adverse effect on our business, operating results
and financial condition.
We Have Operated as an Independent Company Only Since 1995
We have only been an independent operating company since June 1995. Prior
to such time, our company was essentially dormant for approximately 8 years,
with few assets or operations. We cannot guarantee that we will be able to
successfully continue our growth through the expansion of our operations, by
accessing new markets or otherwise.
From the Reorganization through December 1995, we generated revenues of
approximately $391,000 and operating losses of approximately $416,000. From
December 1995 through December 1998, our operations have generated net income.
In 1999 and 2000, we suffered net losses of approximately $6,600,000 and
$1,652,000. We cannot guarantee our operating success and ability to generate
net income in the future.
We Depend on Third Party Suppliers
To date, we have succeeded in obtaining enough components from existing
suppliers to produce our AFMT formula in order to meet our current manufacturing
needs. We also believe that adequate supplies will continue to be available in
the near future. However, we recently increased production and plan to further
increase
Page 24
production to meet an increase in demand. Such production increases could put
strain on the production capacity of our existing suppliers. While we continue
to work actively with each supplier in order to sustain and at times increase
production of our components, we cannot guarantee that each supplier will be
able to sustain or increase its production in time to satisfy our demand or that
alternate suppliers will be able to meet any supply deficiency. If we fail to
obtain enough components, or if such components fall below our quality
standards, shipments and sales of our products may be delayed or reduced. This
would have a material adverse effect on our business, financial condition and
results of operations.
Most of Our Revenue Comes From A Limited Number of Products
We currently generate substantially all of our revenues from sales of our
AFMT-based products and we expect this trend will continue in the foreseeable
future. Because our revenues are concentrated in lubricant products, a decline
in the demand for, or in the prices of, our AFMT-based products as a result of
competition, technological advances or otherwise, could have a material adverse
effect on our business, financial condition, cash flows and operating results.
We recently contracted our appearance product line to a limited product mix and
at this time we plan to maintain that strategy.
Our Average Selling Prices May Decline
The average sales prices for our products may decline. Recently,
competitors and consumers have pressured specialty lubricant suppliers to reduce
pricing, which in turn could result in downward pricing pressure on our
products. In addition, our average sales prices decline when we negotiate large
volume price discounts with certain customers. In the short term, we plan to
work at lowering our manufacturing costs in order to offset the possibility of
declining average sales prices. In the long term, we plan to develop new AFMT-
based products and product mixes that can be manufactured at lower cost or sold
at higher average sales prices. If, however, we fail to achieve such
manufacturing cost reductions or diversify our product mix, our gross margins
could decline. Such a decline could have a material adverse effect on our
business, results of operations, cash flows and financial condition.
We Depend on International Sales for Future Growth and Are Subject to Risks
Associated with Operating in International Markets
International sales comprised 7.8% of revenues in 2000 as compared to 4.7%
of revenues in 1999. We plan to expand international sales in the future. This
will require significant financial resources and management attention. In order
to expand sales internationally, we plan to do the following:
. Establish additional marketing and sales operations.
. Hire additional employees.
. Recruit additional international distributors.
. Investment in international protection of our trademarks.
To the extent we fail to do any of the above, our growth may suffer and our
business, operating results, cash flows and financial condition could be
materially adversely affected. In addition, we run the risk that revenues from
our expanding international operations will be taxed by foreign authorities at
rates higher than our domestic tax rates.
Currently, our worldwide sales are denominated in U.S. dollars. An
increase in the value of the United States dollar relative to foreign currencies
would make our products more expensive and, therefore, potentially less
competitive in those markets. Additional risks inherent in our worldwide
business activities include:
. Unexpected changes in regulatory requirements, tariffs and other trade
barriers.
Page 25
. Costs of localizing products in foreign countries.
. Longer accounts receivable collection cycles.
. Difficulties in managing foreign operations.
. Potential for adverse tax consequences, including restrictions on
repatriating our earnings.
. The burdens of complying with a wide variety of foreign laws.
. Currency crisis in foreign countries that interrupt or terminate the
ability of our international customers to settle their accounts in U.S.
dollars.
We cannot guarantee that our international sales and, consequently, our
overall business, operating results, cash flows and financial condition will be
free from any material adverse effect caused by any of the above factors.
Our Business Is Subject to the Risk of Litigation
We are subject to various legal proceedings from time to time as part of
our business. 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 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 and were granted a preliminary injunction to halt the sale of the
assets of EPL to PIC and to prevent the dissolution of EPL. Such claims or
litigation, or other claims or litigation, could result in a decision that is
adverse to us. A decision adverse to us in this or any other matter could have a
material adverse effect on our business, financial condition, cash flows and
results of operations. In addition, litigation, regardless of its merits, could
result in substantial costs to us and divert management's attention from our
operations. (see "Legal Proceedings")
We Could Be Subject to Environmental Liabilities or Regulatory Compliance Costs
Federal, state and local regulations impose various controls on the
storage, handling, discharge and disposal of substances we use in the
manufacture of our products and on our facilities. We have registered our fuel
conditioners with the United States Environmental Protection Agency ("EPA").
Such EPA registrations have no term but require us to notify the EPA of any
changes in the chemical composition of such conditioners or other information
contained in such registration. We are unaware of any additional governmental
approvals required for our products. We are also unaware of any existing or
probable governmental regulations which would have a material adverse effect on
our business.
Because we do not manufacture or store significant quantities of our
products, any direct costs incurred in complying with environmental laws have
been minimal and have not materially affected our business. We have tried to
minimize our economic risk from environmental violations by our manufacturers or
bottlers by locating alternative sources of such services. We believe that our
activities and those of our contract manufacturers conform to present
governmental regulations that apply to each such entities' operations.
Additionally, we believe that our current facilities conform to present
governmental regulations relating to environmental, land use, public utility
utilization and fire code matters.
Government regulations could be changed to impose additional requirements
on us which could restrict our ability to expand our operations or have an
adverse effect on our business. The adoption of these types of governmental
regulations or our failure to comply with the applicable environmental and land
use regulations or restrictions on the discharge of hazardous substances could
subject us to future liability or could cause our operations or those of our
contract manufacturers to be curtailed, relocated or suspended.
Page 26
We Are Controlled by Management and Certain Stockholders
As of March 5, 2001, our directors, executive officers and principal
stockholders collectively held approximately 37.3% of our outstanding shares of
common stock. These stockholders, acting together, have the ability to
significantly influence the election of our directors and most other
stockholders' actions and, as a result, can direct our business affairs. Such
concentration of voting power could delay or prevent our company from taking
certain actions including, but not limited to, a change in our company's
control.
Issuances of Our Preferred Stock May Effect the Price of Our Common Stock
Our Board of Directors is authorized to issue, without stockholder
approval, up to 50,000,000 shares of preferred stock with voting, conversion and
other rights and preferences superior to those of our common stock. Such
issuances could adversely affect the voting power or other rights of the holders
of our common stock. Issuing preferred stock provides flexibility with possible
acquisitions and other corporate purposes. However, an issuance of preferred
stock could make it more difficult for a third party to acquire a majority of
our voting stock and this may not be in the best interests of some of our
stockholders. We do not currently plan to issue any shares of our preferred
stock. However, we cannot guarantee that the issuance of shares of our preferred
stock will not have a material adverse effect on the market value of our common
stock in the future.
New Accounting Pronouncements
In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 summarizes
certain of the staff's views in applying generally accepted accounting
principles to revenue recognition and accounting for deferred costs in the
consolidated financial statements and is effective no later than the fourth
quarter of fiscal years beginning after December 15, 1999. SAB 101 did not
materially impact the Company's financial position and results of operations.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133,
as amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. Under SFAS No. 133, certain contracts
that were not formerly considered derivatives may now meet the definition of a
derivative. The Company will adopt SFAS No. 133 effective January 1, 2001.
Management does not expect the adoption of SFAS No. 133 to have a significant
impact on the financial position, results of operations, or cash flows of the
Company.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------- ----------------------------------------------------------
PIC's financial instruments include cash and long-term debt. At December
31, 2000, the carrying values of PIC's financial instruments approximated their
fair values based on current market prices and rates. It is PIC's policy not to
enter into derivative financial instruments. PIC does not currently have any
significant foreign currency exposure since it does not transact business in
foreign currencies. Due to this, PIC did not have significant overall currency
exposure at December 31, 2000.
ITEM 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
Consolidated balance sheets of PIC as of December 31, 2000 and 1999,
respectively, statements of operations and cash flows for each of the three
years in the period ended December 31, 2000, and the reports of independent
auditors thereon are referenced in ITEM 14 herein.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
Page 27
PART III
ITEM 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
There is hereby incorporated by reference the information appearing under
the captions "Election of Directors" and "Compliance with Section 16(a) of the
--------------------- ------------------------------------
Securities Exchange Act of 1934" from the Registrant's definitive proxy
- -------------------------------
statement for the 2001 Annual Meeting of the Stockholders to be filed with the
Commission within 120 days of December 31, 2000.
ITEM 11. Executive Compensation
- -------- ----------------------
There is hereby incorporated by reference information appearing under the
caption "Executive Compensation" from the Registrant's definitive proxy
----------------------
statement for the 2001 Annual Meeting of Stockholders to be filed with the
Commission within 120 days of December 31, 2000.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
There is hereby incorporated by reference the information appearing under
the caption "Security Ownership of Certain Beneficial Owners and Management"
--------------------------------------------------------------
from the Registrant's definitive proxy statement for the 2001 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of December 31,
2000.
ITEM 13. Certain Relationships and Related Transactions
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There is hereby incorporated by reference the information appearing under
the captions "Executive Compensation" and "Certain Transactions" from the
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Registrant's definitive proxy statement for the 2001 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of December 31,
2000.
Page 28
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
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(a) The following documents are filed as part of this report:
(1) Financial Statements
Consolidated Financial Statements for the Years Ended December 31,
2000, 1999 and 1998 with Notes and Independent Auditors' Report
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(3) Exhibits
The exhibits set forth below are filed as part of this Annual Report
on Form 10-K:
2.1 Exchange Agreement between Stockholders of PSL and the Registrant
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3,
1997).
2.2 Agreement and Plan of Reorganization, dated as of February 5,
1998, by and among the Registrant and EPL Pro-Long, Inc.,
including the following exhibits: (i) Form of Employee Invention
and Confidentiality Agreement, (ii) Form of Rule 145 Agreement,
(iii) Form of Confidentiality Agreement, (iv) Form of Transfer
Restriction, (v) Form of Amendment to Exclusive License
Agreement, and (vi) Form of Cancellation Agreement (incorporated
by reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form S-4 filed May 4, 1998).
2.3 Amendment to Agreement and Plan of Reorganization, dated as of
June 29, 1998, by and among the Registrant and EPL Pro-Long, Inc.
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form S-4 filed May 4,
1998).
3.1 Amended and Restated Articles of Incorporation of the Registrant
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3,
1997).
3.3 Bylaws of the Registrant, as amended and restated on April 27,
1998 (incorporated by reference to the same numbered Exhibit to
the Registrant's Registration Statement on Form S-4 filed May 4,
1998).
4.2 Specimen Certificate of Registrant's Common Stock (incorporated
by reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form S-4 filed May 4, 1998).
10.1 Form of Indemnification Agreement for Executive Officers and
Directors (incorporated by reference to the same numbered Exhibit
to the Registrant's Registration Statement on Form 10 filed July
3, 1997).
10.2 Exclusive License Agreement between PSL and EPL Pro-Long, Inc.,
d.b.a. Prolong International, dated November 10, 1993
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3,
1997).
10.4 Agreement between PSL and Al Unser, dated July 28, 1995
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3,
1997).
10.5 Service Agreement between PSL and Tylie Jones & Associates, Inc.,
dated October 24,
Page 29
1995 (incorporated by reference to the same numbered Exhibit to
the Registrant's Registration Statement on Form 10 filed July 3,
1997).
10.6 Telemarketing Agreement between PSL and West Telemarketing
Corporation, dated October 24, 1995 (incorporated by reference
to the same numbered Exhibit to the Registrant's Registration
Statement on Form 10 filed July 3, 1997).
10.7 Service and Endorsement Contract between PSL and Al Unser, dated
April 29, 1996 (incorporated by reference to the same numbered
Exhibit to the Registrant's Registration Statement on Form 10
filed July 3, 1997).
10.8 Associate Sponsorship Agreement between PSL, King Entertainment,
Inc. and Kenneth D. Bernstein, dated May 9, 1996 (incorporated
by reference to the same numbered Exhibit to the Registrant's
Registration Statement on Form 10 filed July 3, 1997).
10.10 Major Associate Sponsorship Agreement between PSL, Norris
Racing, Inc. and Barnes Dyer Marketing, Inc., dated December 15,
1996 (incorporated by reference to the same numbered Exhibit to
the Registrant's Registration Statement on Form 10 filed July 3,
1997).
10.12 The Registrant's 1997 Stock Incentive Plan and form of Stock
Option Agreement (incorporated by reference to the same numbered
Exhibit to the Registrant's Registration Statement on Form 10
filed July 3, 1997).
10.13 The Registrant's Revolving Credit Agreement with Bank of America
National Trust and Savings Association, dated July 14, 1997
(incorporated by reference to the same numbered Exhibit to the
Registrant's Registration Statement on Form 10 filed July 3,
1997).
10.15 Sponsorship Letter of Intent between PSL and Joe Nemechek dba
Nemco Motorsports, dated February 13, 1997 (incorporated by
reference to the same numbered Exhibit to the Registrant's
Annual Report on Form 10-K filed March 23, 1998). *
10.16 Sponsorship Agreement between PSL and Sabco Racing, Inc., dated
December 19, 1997 (incorporated by reference to the same
numbered Exhibit to the Registrant's Annual Report on Form 10-K
filed March 23, 1998).*
10.17 Purchase and Sale Agreement between Huck International, Inc. (a