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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________to______________________
Commission File No. 0-22803
PROLONG INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 6 Thomas
(State or other jurisdiction of Irvine, CA 92618 74-2234246
incorporation or organization) (Address of principal executive offices) (Zip Code) (IRS Employer Identification No.)
(949) 587-2700
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes [X] No [ ]
(2) Yes [X] No [ ]
There were 28,438,903 shares of the registrant's common stock ($0.001 par value)
outstanding as of November 13, 2001.
Page 1 of 16 pages
Exhibit Index on Sequentially Numbered Page 16
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PROLONG INTERNATIONAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART 1 FINANCIAL INFORMATION Page
Item I: Financial Statements
Consolidated Condensed Balance Sheets -
September 30, 2001 and December 31, 2000.........................3
Consolidated Condensed Statements of Operations - Three months
and Nine months ended September 30, 2001 and 2000................4
Consolidated Condensed Statements of Cash Flows -
Nine months ended September 30, 2001 and 2000....................5
Notes to Consolidated Condensed Financial Statements.............6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................11
Item 3: Quantitative and Qualitative Disclosures About Market Risk......14
PART II OTHER INFORMATION
Item 1: Legal Proceedings...............................................16
Item 6: Exhibits and Reports on Form 8-K................................16
Signatures......................................................16
2
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
September 30, December 31,
2001 2000
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 33,792 $ 126,917
Accounts receivable, net of allowance for doubtful accounts
of $230,853 at September 30, 2001 and $168,775 at
December 31, 2000, respectively 3,827,820 3,245,892
Inventories, net 734,371 970,236
Prepaid expenses, net 239,284 360,227
Income taxes receivable 12,000 87,002
Prepaid television time -- 5,583
Advances to employees, current portion 43,865 57,525
Deferred tax asset 347,662 943,177
------------ ------------
5,238,794 5,796,559
Total current assets
Property and equipment, net 2,955,030 3,193,109
Intangible assets, net 6,149,973 6,529,986
Deferred tax asset, noncurrent 2,576,586 1,972,387
Investment in affiliate 150,000 --
Other assets, net 129,155 223,159
------------ ------------
TOTAL ASSETS $ 17,199,538 $ 17,715,200
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,553,364 $ 2,183,482
Accrued expenses 603,104 937,618
Line of credit 1,932,551 2,050,716
Notes payable, current 728,019 725,442
------------ ------------
Total current liabilities 5,817,038 5,897,258
Notes payable, noncurrent 2,236,794 2,277,130
------------ ------------
Total liabilities 8,053,832 8,174,388
COMMITMENTS AND CONTINGENCIES (Note 7 & 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value; 50,000,000 shares authorized; no
shares issued or outstanding -- --
Common stock, $0.001 par value; 150,000,000 shares authorized;
28,438,903 shares issued and outstanding 28,439 28,439
Additional paid-in capital 15,035,261 15,035,261
Accumulated deficit (5,917,994) (5,522,888)
------------ ------------
Total stockholders' equity 9,145,706 9,540,812
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,199,538 $ 17,715,200
============ ============
See notes to consolidated condensed financial statements
3
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2001 2000 2001 2000
---- ---- ---- ----
NET REVENUES $ 2,858,222 $ 3,651,886 $ 10,939,283 $ 16,628,606
COST OF GOODS SOLD 929,751 1,046,648 3,401,632 4,140,743
------------ ------------ ------------ ------------
GROSS PROFIT 1,928,471 2,605,238 7,537,651 12,487,863
OPERATING EXPENSES:
Selling and marketing 1,397,081 2,224,341 4,726,728 8,715,837
General and administrative 908,713 979,547 2,799,902 3,674,633
------------ ------------ ------------ ------------
Total operating expenses 2,305,794 3,203,888 7,526,630 12,390,470
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) (377,323) (598,650) 11,021 97,393
OTHER INCOME (EXPENSE), net:
Interest (expense) (147,656) (122,522) (417,039) (405,238)
Interest income (1,509) 3,512 7,976 8,783
------------ ------------ ------------ ------------
Total other (expense), net (149,165) (119,010) (409,063) (396,455)
------------ ------------ ------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (526,488) (717,660) (398,042) (299,062)
PROVISION (BENEFIT) FOR INCOME TAXES (106,392) (213,124) (2,936) 75,734
------------ ------------ ------------ ------------
NET LOSS $ (420,096) $ (504,536) $ (395,106) $ (374,796)
============ ============ ============ ============
NET LOSS PER SHARE
Basic ($0.01) ($0.02) ($0.01) ($0.01)
============ ============ ============ ============
Diluted ($0.01) ($0.02) ($0.01) ($0.01)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
Basic 28,438,903 28,438,903 28,438,903 28,443,507
Diluted options outstanding
0 0 0 0
------------ ------------ ------------ ------------
Diluted 28,438,903 28,438,903 28,438,903 28,443,507
============ ============ ============ ============
See notes to consolidated condensed financial statements
4
PROLONG INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
---------------------------
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (395,106) $ (374,796)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 635,995 669,510
Provision for doubtful accounts 62,078 (249,732)
Deferred taxes (8,684) 1,677,341
Reserve for inventory obsolescence -- (101,712)
Compensation costs related to options -- 61,000
Amortization of warrants issued to lender 126,279 --
Loss on exchange of common stock for accounts receivable -- (3,466)
Changes in assets and liabilities:
Accounts receivable (644,006) (745,522)
Inventories 235,865 630,750
Prepaid expenses (5,336) (534,364)
Income taxes receivable 75,002 --
Prepaid television time 5,583 (63,843)
Other assets 88,254 (10,553)
Accounts payable 369,882 (222,905)
Accrued expenses (334,514) (143,762)
Income taxes payable -- 150,029
----------- -----------
Net cash provided by operating activities 211,292 737,975
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (12,153) (10,834)
Employee advances 13,660 34,362
Investment in affiliate (150,000) --
----------- -----------
Net cash (used in) provided by investing activities (148,493) 23,528
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (37,759) (34,135)
Net payments on line of credit from bank (118,165) (1,500,956)
----------- -----------
Net cash used in financing activities (155,924) (1,535,091)
NET DECREASE IN CASH AND CASH EQUIVALENTS (93,125) (773,588)
CASH AND CASH EQUIVALENTS, beginning of period 126,917 1,094,779
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 33,792 $ 321,191
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 13,600 $ 92,000
=========== ===========
Interest paid $ 417,039 $ 405,238
=========== ===========
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
During 2000, the Company completed the following transactions:
Recorded $61,000 to additional paid-in capital for compensation costs related to
stock options. Recorded the exchange of 6,932 shares of common stock for relief
of accounts receivable.
See notes to consolidated condensed financial statements
5
PROLONG INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS
Prolong International Corporation (PIC) is a Nevada corporation originally
organized on August 24, 1981. In September 1995, PIC acquired 100% of the
outstanding stock of Prolong Super Lubricants, Inc. (PSL), a Nevada
corporation. In 1997, Prolong Foreign Sales Corporation was formed as a
wholly-owned subsidiary of PIC. In 1998, Prolong International Holdings
Ltd., was formed as a wholly-owned subsidiary of PIC. At the same time,
Prolong International Ltd., was formed as a wholly-owned subsidiary of
Prolong International Holdings Ltd. PIC, through its subsidiaries, is
engaged in the manufacture, sale and worldwide distribution of a patented
complete line of high-performance and high-quality lubricants and
appearance products.
Management's Plans Regarding Financial Results and Liquidity - At
September 30, 2001, the Company had a negative net working capital of
$578,000 and an accumulated deficit of approximately $5,918,000. As a
result, the Company is vigorously continuing to evaluate further
reductions in operating expenses and manpower requirements, and revise
vendor payment terms to the extent possible. We cannot guarantee that the
timing of further reductions in operating expenses will be adequate to
return to profitability for the remainder of the Year 2001 and beyond.
There are also continued efforts to convert certain assets to cash on an
accelerated basis which may include the sale and/or sale and leaseback of
the current facility in Irvine, CA. The Company is also currently seeking
additional new financing arrangements through subordinated debt and/or
equity providers. We cannot guarantee that we will be able to obtain funds
when we need them or on acceptable terms, if at all. Any inability to
obtain funds when we need them would have a material adverse effect on our
financial condition. Management believes that these plans, if successfully
executed, will provide adequate financial resources to sustain the
Company's operations and enable the Company to continue as a going
concern.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
include the accounts of PIC and its wholly-owned subsidiaries, PSL,
Prolong Foreign Sales Corporation, Prolong International Holdings Ltd.,
and its wholly-owned subsidiary, Prolong International Ltd. (collectively,
the Company or Prolong). All intercompany accounts have been eliminated in
consolidation. These financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments,
including normal recurring accruals, considered necessary for a fair
presentation have been included. Operating results for the three months
and the nine months ended September 30, 2001 are not necessarily
indicative of the results that may be expected for the year ended December
31, 2001. For further information, refer to the Form 10-K for the year
ended December 31, 2000 filed by the Company with the Securities and
Exchange Commission.
6
3. INVENTORIES
Inventories consist of the following:
September 30, December 31,
2001 2000
---- ----
(Unaudited)
Raw materials $ 440,278 $ 330,641
Finished goods 294,093 639,595
----------- -----------
$ 734,371 $ 970,236
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4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
September 30, December 31,
2001 2000
---- ----
(Unaudited)
Building and improvements $ 2,280,783 $ 2,280,783
Computer equipment 265,965 272,978
Office equipment 55,753 55,753
Furniture and fixtures 585,168 585,168
Automotive equipment 35,925 35,925
Exhibit equipment 115,143 115,143
Machinery and equipment 17,953 17,953
Molds and dies 233,117 213,951
----------- -----------
3,589,807 3,577,654
Less accumulated depreciation (1,172,777) (922,545)
----------- -----------
2,417,030 2,655,109
Land 538,000 538,000
----------- -----------
$ 2,955,030 $ 3,193,109
=========== ===========
5. LINE OF CREDIT
The Company has a $5,000,000 credit facility with a financial institution,
expiring in May 2003. Such facility is collateralized by eligible accounts
receivable and inventories. Interest is currently payable monthly at the
rate of the financial institution's prime rate (6.00% at September 30,
2001), plus 4% subject to a minimum interest charge of $50,000 per
quarter, and the credit facility contains certain defined net income and
net equity financial covenants for the Year 2001. At September 30, 2001,
the Company was not in compliance with certain financial covenants under
the credit agreement. The Company is currently discussing remedies with
the lender. As of September 30, 2001, $1,932,551 was outstanding and
approximately $165,000 was available under the terms of the line of
credit.
7
6. NOTES PAYABLE
Notes payable consist of the following as of September 30, 2001:
a) Note payable to a bank bearing interest at 7.875% per annum to
be repaid in monthly principal and interest payments of $13,050
with a final payment of all remaining unpaid principal and
interest due on May 1, 2008. $ 1,608,676
b) Loan from CDC Small Business Finance Corporation bearing
interest at 7.65% per annum to be repaid in monthly principal
and interest payments of $6,376 each through July 1, 2018. 681,137
c) Loan from ABQ Dolphin LP; interest is payable monthly at the
rate of the Prime Rate (6.00% at September 30, 2001) plus 2.5%.
On October 8, 2001 the loan maturity date was extended to
November 3, 2002. In connection with this loan, the Company
issued a warrant to purchase 900,000 shares of common stock at
an exercise price of $0.1875. 675,000
-----------
2,964,813
Less current maturities 728,019
-----------
$ 2,236,794
===========
The following are annual minimum principal payments due under notes
payable.
Year ending December 31,
2001 $ 687,683
2002 53,974
2003 57,969
2004 61,909
2005 66,856
Thereafter 2,036,422
-----------
$ 2,964,813
===========
7. CONTINGENCIES
Legal Proceedings - On November 17, 1998, Dr. Michael Walczak on behalf of
himself and other shareholders of EPL Pro-Long, Inc., ("EPL") filed a
purported class action and derivative suit in the U.S. District Court in
San Diego, California against EPL, PIC, PSL and certain of their
respective former and current officers and directors alleging breach of
contract, certain fraud claims, civil RICO, breach of fiduciary duty and
conversion and
8
sought monetary damages in connection with PIC's acquisition of the assets
of EPL Prolong, Inc. On October 12, 2001 the case was settled as a class
action, dismissing all of the claims with prejudice. In settlement, PIC
will issue approximately 1,490,500 shares of "its" common stock to EPL,
out of which one-third of these shares are to be distributed to certain of
plaintiff's attorneys and two-thirds of these shares are to be distributed
to EPL shareholders. This suit has been settled without any admission of
wrongdoing or liability on the part of the defendants. Settlement of this
suit will have no material adverse affect on the Company's financial
position or results of operation.
In February 1999, PSL entered into a negotiated Consent Order with the FTC
concerning the standards for adequate substantiation of engine treatment
advertising claims, among others items. As a follow on to the FTC matter,
four separate lawsuits were filed by individuals purporting to act as
class representatives for consumers seeking redress based variously on
allegations of false advertising, unfair competition, violation of various
state consumer laws, fraud, deceit, negligent misrepresentation, breach of
warranty and seeking equitable relief. Class counsel and the company have
entered into a stipulation of settlement on three of the suits, namely
Fernandes et al v PSL, Bowland et al v PSL and Mata et al v PSL, which
settlement is being submitted to the court for preliminary approval. In
the fourth and last of the FTC related suits, Kachold v PSL, a separate
settlement was reached with the individual plaintiff for $1,000 and $1,000
in attorney fees, with the class claims being dismissed contingent upon
court approval of the other class action settlements. The four FTC related
lawsuits have been settled without any admission of wrongdoing or
liability on the part of the Company. Settlement of these four suits will
have no material adverse affect on the Company's financial position or
results of operation.
On April 8, 1997, a lawsuit was filed by Francis Helman et al v EPL, PIC
et al in the Court of Common Pleas, Columbiana County, Ohio as a purported
class action alleging breach of fiduciary duty, breach of oral and written
contract, and fraud, in thirteen original causes of action. The appellate
court in Ohio largely affirmed a series of orders by the trial judge in
favor of EPL, PIC et al, the effect of which was to reduce the number of
complaining parties from approximately one hundred to less than twenty,
and dismissing various causes of action. The court subsequently denied
plaintiff's motion to certify the case as a class action. The remaining
Helman plaintiffs have appealed the trial court's order denying
certification of the case as a class action. Management believes that
there is no merit to the plaintiffs' complaint, is vigorously defending
against the claims, and does not believe the outcome will have a material
adverse affect on the Company's financial position or results of
operations.
PIC and its subsidiaries are subject to other legal proceedings, claims,
and litigation arising in the ordinary course of business. PIC's
management does not expect that the ultimate costs to resolve these
matters will have a material adverse affect on PIC's consolidated
financial position, results of operation or cash flows.
8. COMMITMENTS
The Company has outstanding noncancelable inventory purchase commitments
with a contract packager of approximately $242,000 as of September 30,
2001. Under the terms of the agreement, the packager purchases components,
manufactures, warehouses and distributes certain car care products for the
Company. When inventories held by the packager exceed approximately 75
days from the date of production, the Company may be
9
obligated to pay a storage handling fee of 1.5% per month, and/or purchase
these inventories at the option of the packager.
9. INVESTMENT IN AFFILIATE
On March 31, 2001 the Company entered into an Organization Agreement with
Prolong Environmental Energy Corporation (PEEC), a California Corporation,
whereby the Company agreed to contribute up to $150,000 to PEEC as
required to meet the operating working capital obligations for PEEC. The
Company contribution, which was fulfilled as of September 30, 2001, shall
be considered a capital contribution for PEEC in return for 5% of the
issued and outstanding common stock of PEEC.
10. NEW ACCOUNTING PRONOUNCEMENT
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires that
the purchase method of accounting be used for all business combinations
initiated after September 30, 2001 and prohibits the use of the
pooling-of-interests method. SFAS 142 changes the accounting for goodwill
from an amortization method to an impairment-only approach. The
amortization for goodwill from past business combinations will cease upon
adoption of this Statement on December 31, 2001. Goodwill and intangible
assets acquired in business combinations completed after September 30,
2001 must comply with the provisions of this Statement. Also under this
Statement, companies will be required to evaluate all existing goodwill
for impairment within six months of adoption by comparing the fair value
of each reporting unit to its carrying value at the date of adoption. Any
transitional impairment losses will be recognized in the first interim
period in the year of adoption and will be recognized as the effect of a
change in accounting principle.
The Company is evaluating the potential impact of adopting these
pronouncements on the results of operations and financial position of the
Company.
10
ITEM 2:
------
PROLONG INTERNATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Percentage of Net Revenues
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2001 2000 2001 2000
------------------------------- -------------------------------
Net revenues 100.0 100.0 100.0 100.0
Cost of goods sold 32.5 28.7 31.1 24.9
------------------------------- -------------------------------
Gross profit 67.5 71.3 68.9 75.1
Selling and marketing expenses 48.9 60.9 43.2 52.4
General and administrative expenses 31.8 26.8 25.6 22.1
------------------------------- -------------------------------
Operating income (loss) (13.2) (16.4) 0.1 0.6
Other income (expense) (5.2) (3.2) (3.7) (2.4)
------------------------------- -------------------------------
Loss before income taxes (18.4) (19.6) (3.6) (1.8)
Provision (benefit) for income taxes (3.7) (5.8) --- 0.5
------------------------------- -------------------------------
Net loss (14.7) (13.8) (3.6) (2.3)
=============================== ===============================
Three Months Ended September 30, 2001 vs. Three Months Ended September 30, 2000
Net revenues for the three months ended September 30, 2001 were approximately
$2,858,000 as compared to approximately $3,652,000 for the comparable period of
the prior year, a decrease of $794,000 or 21.7%. Revenues for the three month
period ended September 30, 2001 were derived from the following sources: Retail
sales of $2,604,000; international and other sales of $176,000; direct response
television sales of $25,000; and industrial sales of $53,000. Revenues for the
three month period ended September 30, 2000 were derived from the following
sources: Retail sales of $3,125,000; international and other sales of $379,000;
direct response television sales of $84,000; and industrial sales of $64,000.
During the third quarter of 2001, retail sales were 91.1% of total revenues
while international and other sales comprised 6.2% of total revenues. During the
third quarter of 2000, retail sales were 85.6% of total revenues while
international and other sales comprised 10.4% of total revenues. The lower
retail sales for the period ended September 30, 2001 versus the same period a
year ago is attributable to a continuing soft market for specialty lubricants,
competitive factors, the effect from the September 11, 2001 tragedy, which
resulted in a slower consumer demand for the products and also due to the
decision to discontinue the direct response infomercial for
11
lubricants in lieu of an ongoing evaluation of more cost effective means of
promoting the line. International sales decreased due to a slower demand in
South Africa and Asia.
Cost of goods sold for the three months ended September 30, 2001 was
approximately $930,000 as compared to $1,047,000 for the comparable period of
the prior year, a decrease of $117,000 or 11.2%. As a percentage of sales, cost
of goods sold increased from 28.7% for the three months ended September 30, 2000
to 32.5% for the three months ended September 30, 2001. The increase was mainly
attributable to a shift in product mix in the retail lubricants sales and the
added cost of free new promotional products.
Selling and marketing expenses of $1,397,000 for the three months ended
September 30, 2001 represented a decrease of $827,000 over the comparable period
of the prior year. This 37.2% decrease was primarily the result of decreased
expenses for endorsement and sponsorship payments, promotional activities to
promote product awareness, expenditures for television air-time purchases and
salaries. Selling and marketing expenses as a percentage of sales were 48.9% for
the three months ended September 30, 2001 versus 60.9% for the comparable period
of the previous year.
General and administrative expenses for the three months ended September 30,
2001 were approximately $909,000 as compared to $980,000 for the three months
ended September 30, 2000, a decrease of $71,000 or 7.2%. This decrease is
primarily attributable to a decrease in legal expenses and salaries (headcount).
As a percentage of sales, general and administrative expenses increased from
26.8% in 2000 to 31.8% in 2001. Even though the aggregate expenses declined
during the period, the ratio of expenses as a percentage of sales increased due
to the more than expected decline in sales during the period.
Net interest expense of $149,000 for the three months ended September 30, 2001
represented an increase of $30,000 over the comparable period in 2000. The
increase is attributable to the additional interest expense from the ABQ Dolphin
LP note during the period and interest charges related to settlement of vendor
balances outstanding.
Net loss for the three month period ended September 30, 2001 was approximately
$(420,000) as compared to a net loss of approximately $(505,000) for the
comparable period in the prior year, a decrease of $85,000. The decrease is a
result of the factors discussed above.
Nine Months Ended September 30, 2001 vs. Nine Months Ended September 30, 2000
Net revenues for the nine months ended September 30, 2001 were approximately
$10,939,000 as compared to approximately $16,629,000 for the comparable period
in the prior year, a decrease of $5,690,000 or 34.2%. Revenues for the nine
month period ended September 30, 2001 were derived from the following sources:
Retail sales of $9,707,000; international and other sales of $907,000; direct
response television sales of $125,000 and, industrial sales of $200,000.
Revenues for the nine month period ended September 30, 2000 were derived from
the following sources: Retail sales of $14,206,000; international and other
sales of $1,614,000; direct response television sales of $583,000, and
industrial sales of $226,000.
12
For the nine-month period ended September 30, 2001, retail sales were 88.7% of
total revenues while international and other sales comprised 8.3% of total
revenues. During the nine months of 2000, retail sales were 85.4% of total
revenues while international and other sales comprised 9.7% of total revenues.
The lower retail sales for the nine month period ended September 30, 2001 versus
the same period a year ago are mainly attributable to a decrease in lubricant
sales of approximately $4,200,000. The lubricant sales decline is attributable
to a continuing soft market for specialty lubricants, competitive factors, the
effect from the September 11, 2001 tragedy, which resulted in a slower consumer
demand for the products and also due to the decision to discontinue the direct
response infomercial for lubricants in lieu of an ongoing evaluation of more
cost effective means of promoting the line. International and other sales for
the period decreased $707,000 due to a slower demand in Asia and South Africa.
Cost of goods sold for the nine months ended September 30, 2001 was
approximately $3,402,000 as compared to $4,141,000 for the comparable period of
the prior year, a decrease of $739,000 or 17.8%. As a percentage of sales, cost
of goods sold increased from 24.9% for the nine months ended September 30, 2000
to 31.1% for the nine months ended September 30, 2001. The increase was mainly
attributable to the shift in product mix in the retail lubricants sales, the
added cost of free new promotional products and product component price
increases.
Selling and marketing expenses of $4,727,000 for the nine months ended September
30, 2001 represented a decrease of $3,989,000 over the comparable period of the
prior year. This 45.8% decrease was primarily the result of decreased expenses
for endorsement and sponsorship payments, promotional activities to promote
product awareness, expenditures for television air-time purchases and salaries.
Selling and marketing expenses as a percentage of sales were 43.2% for the nine
months ended September 30, 2001 versus 52.4% for the comparable period of the
previous year.
General and administrative expenses for the nine months ended September 30, 2001
were approximately $2,800,000 as compared to $3,675,000 for the nine months
ended September 30, 2000, a decrease of $875,000 or 23.8%. This decrease is
primarily attributable to a decrease in legal expenses and salaries (headcount).
The decrease in legal expenses was partially due to a $77,000 reduction in the
accrual reserve for legal settlements. As a percentage of sales, general and
administrative expenses increased from 22.1% in 2000 to 25.6% in 2001. Even
though the aggregate expenses declined during the period, the ratio of expenses
as a percentage of sales increased due to the more than expected decline in
sales during the period.
Net interest expense of $409,000 for the nine months ended September 30, 2001
represented an increase of $13,000 over the comparable period in 2000.
Net loss for the nine month period ended September 30, 2001 was approximately
$(395,000) as compared to a net loss of approximately $(375,000) for the
comparable period in the prior year, an increase of $(20,000). The increase is a
result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company utilizes funds generated from operations and borrowings from an
existing credit facility to meet its working capital requirements. At September
30, 2001, the Company had a negative net working capital of $578,000 as compared
to a negative net working capital of
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$101,000 at December 31, 2000 or an increase of $477,000. During the period
ended September 30, 2001, the Company generated cash from operations of
$211,0000, which was primarily from an increase in accounts payable, income
taxes receivable and decreases in inventory and prepaid expenses which was
partially offset by an increase in accounts receivable and a decrease in accrued
expenses. The Company has a $5,000,000 credit facility with a financial
institution, expiring in May 2003. Such facility is collateralized by eligible
accounts receivable and inventories. Interest is currently payable monthly at
the rate of the financial institution's prime rate (6.00% at September 30, 2001)
plus 4% subject to a minimum interest charge of $50,000 per quarter. The credit
facility contains certain defined net income and net equity covenants. At
September 30, 2001, the Company was not in compliance with certain financial
covenants under the credit agreement. The Company is currently discussing
remedies with the lender. As of September 30, 2001, $1,932,551 was outstanding
and approximately $165,000 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. On October 8, 2001, the loan maturity date was extended to November 3,
2002. The loan is collateralized by a Third Priority Trust Deed lien against the
Company's real property in Irvine, CA. Interest is payable monthly at the rate
of the Prime Rate (6.00% at September 30, 2001) plus 2.5%.
The Company is currently seeking additional new financing arrangements through
subordinated debt and/or equity providers. We cannot guarantee that we will be
able to obtain funds when we need them or on acceptable terms, if at all. Any
inability to obtain funds when we need them would have a material adverse effect
on our financial condition. At September 30, 2001, the Company had a negative
net working capital of $578,000 and an accumulated deficit of approximately
$5,918,000. As a result, the Company is vigorously continuing to evaluate
further reductions in operating expenses and manpower requirements, and revise
vendor payment terms to the extent possible. We cannot guarantee that the timing
of further reductions in operating expenses will be adequate to return to
profitability for the remainder of the Year 2001 and beyond. There are also
continued efforts to convert certain assets to cash on an accelerated basis
which may include the sale and/or sale and leaseback of the current facility in
Irvine, CA. Management believes that these plans, if successfully executed, will
provide adequate financial resources to sustain the Company's operations and
enable the Company to continue as a going concern.
ITEM 3:
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PIC's financial instruments include cash and long-term debt. At September 30,
2001 and December 31, 2000, respectively the carrying values of PIC's financial
instruments approximated their fair values based on current market prices and
rates. It is PIC's policy not to enter into derivative financial instruments.
PIC does not currently have any significant foreign currency exposure since it
does not transact business in foreign currencies. Due to this, PIC did not have
significant overall currency exposure at September 30, 2001 and December 31,
2000.
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RISK FACTORS AND FORWARD LOOKING STATEMENTS
This report contains certain forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, that involve risks and
uncertainties. In addition, the Company may from time to time make oral forward
looking statements. Actual results are uncertain and may be impacted by the
factors discussed in more detail in the Company's Annual Report on Form 10-K for
the year ended December 31, 2000 filed with the Securities and Exchange
Commission. In particular, certain risks and uncertainties that may impact the
accuracy of the forward looking statements with respect to revenues, expenses
and operating results including without limitation, the risks set forth in the
risk factors section of the Annual Report on Form 10-K for the year ended
December 31, 2000, which risk factors are hereby incorporated into this report
by this reference. As a result, the actual results may differ materially from
those projected in the forward looking statements.
Because of these and other factors that may affect the Company's operating
results, past financial performance should not be considered an indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods.
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PROLONG INTERNATIONAL CORPORATION
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 7 of the notes to consolidated condensed financial
statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
During the third quarter of 2001 the following Form 8-K was filed:
On July 9, 2001, PIC filed a Form 8-K to disclose the resignation of
Mr. William J. Howell (Director).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROLONG INTERNATIONAL CORPORATION
Date: November 13, 2001 /s/ Nicholas Rosier
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Nicholas Rosier
Chief Financial Officer
(Principal Financial Officer)
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