SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 0R 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to ____________
Commission File Number: 33-18099-NY and 33-23169-NY
PHASE-OUT OF AMERICA, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 11-2873662
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
140 Broadway, Lynbrook, New York 11563
(Address of principal executive offices)
Issuer's telephone number, including area code: (516) 599-1900
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 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 ___
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the last practicable date.
Class Outstanding at September 30, 1995
- ----------------------- ---------------------------------
Common Stock, par value
$.00003 per share 68,897,905
<PAGE>
PHASE-OUT OF AMERICA, INC.
FINANCIAL STATEMENTS (Unaudited)
September 30, 1995
Financial Statements
Accountant's Disclaimer of Opinion ............................. F2
Balance Sheets ................................................. F3 to F4
Statements of Operations and Deficit ........................... F5
Statements of Cash Flows ....................................... F6
Schedules of General and Administrative Expenses ............... F7
Financial Data Schedule ........................................ F8
Notes to Financial Statements .................................. F9 to F13
-F1-
<PAGE>
Stewart W. Robinson
Certified Public Accountant
450 Seventh Avenue, Suite 1009
New York, NY 10123
Tel. 212-629-7323
Fax 212-629-7052
PART 1 FINANCIAL INFORMATION
Item 1, financial statements
ACCOUNTANT'S DISCLAIMER OF OPINION
Shareholders and
Board of Directors
Phase-Out of America, Inc.
Lynbrook, New York
The accompanying balance sheet of Phase-Out of America, Inc. as of September 30,
1995 and the related statements of operations and deficit, cash flows, and
schedule of general and administrative expenses for the nine and three months
ended September 30, 1995 and 1994 were not audited by me and, accordingly, I do
not express an opinion or any other form of assurance on them.
I previously examined, in accordance with generally accepted auditing standards,
the balance sheet as of December 31, 1994, and the related statements of
operations and deficit, and cash flows for the year then ended (not presented
herein); and in my report dated March 25, 1995, I expressed an unqualified
opinion on those financial statements, but I have not performed any auditing
procedures since that date.
/s/ STEWART W. ROBINSON
Stewart W. Robinson
New York, New York
October 26, 1995
-F2-
<PAGE>
PHASE-OUT OF AMERICA, INC.
BALANCE SHEETS (Unaudited)
September 30, December 31,
1995 1994
------------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $151,263 $ 24,541
Accounts receivable 66,706 2,084
Inventory -- stated at the lower of cost
or market - first-in first-out 190,839 182,229
Prepaid expenses 18,169 13,363
-------- --------
TOTAL CURRENT ASSETS 426,977 222,217
FIXED ASSETS, at cost, net of accumulated
depreciation of $12,939 (1995),
$9,649 (1994) 8,586 9,886
SECURITY DEPOSITS 3,434 3,434
PATENTS - at cost, net of accumulated
amortization of $3,060 and $857 43,940 46,143
BOND DISCOUNT 108 408
-------- --------
$483,045 $282,088
======== ========
(continued on next page . . . )
See accountant's disclaimer and notes to financial statements
-F3-
<PAGE>
PHASE-OUT OF AMERICA, INC.
BALANCE SHEETS (Unaudited) -- Continued
September 30, December 31,
1995 1994
------------- ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Senior secured notes payable, including
accrued interest of $5,208 $ 130,208
Accounts payable and accrued expense $ 662,016 165,986
Taxes payable 10,134 4,807
Current portion of long term debt 31,955 48,466
Loan from director / shareholder -- 20,000
Amounts due to affiliate -- 319,197
Accrued officer compensation 231,798 125,715
Loans from Officer/Shareholder 5,897 5,897
----------- -----------
TOTAL CURRENT LIABILITIES 941,800 820,276
----------- -----------
SENIOR SUBORDINATED
CONVERTIBLE DEBENTURES 410,000
CAPITAL LEASES, net of current portion -- 586
STOCKHOLDERS' DEFICIENCY
Series A Convertible Preferred Stock,
par value $.001 per share --
authorized 600,000 shares --
no shares issued and outstanding
Series B Convertible Preferred Stock,
par value $.001 per share --
authorized 5,000,000 shares --
no shares issued and outstanding
Common stock, $0.00003 par value:
Authorized shares -- 100,000,000
Issued and outstanding shares --
68,897,905 at September 30, 1995
60,284,333 at December 31, 1994 2,067 1,809
Capital in excess of par 1,828,557 1,481,809
Accumulated deficit (2,699,379) (2,022,392)
----------- -----------
(868,755) (538,774)
----------- -----------
Related party transactions -- Note 5
Commitments and other comments -- Note 8
$ 483,045 $ 282,088
=========== ===========
See accountant's disclaimer and notes to financial statements
-F4-
<PAGE>
PHASE-OUT OF AMERICA, INC.
STATEMENTS OF OPERATIONS AND DEFICIT - UNAUDITED
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------------- ----------------------------
1995 1994 1995 1994
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales -- net - Note 2 $ 1,007,312 $ 288,017 $ 550,332 $ 73,647
Royalty income -- 2,930
----------- ---------- ---------- ----------
1,007,312 290,947 550,332 73,647
Cost of sales 166,667 110,571 87,902 23,111
----------- ---------- ---------- ----------
Gross Profit 840,645 180,376 462,430 50,536
OTHER INCOME AND EXPENSES:
Interest expense (35,122) (4,210) (22,572) (1,225)
Other income 22,518 6,294
Interest and dividend income 66 382 213
----------- ---------- ---------- ----------
828,107 176,548 446,152 49,524
Selling, general and
administrative 1,505,094 434,210 660,154 146,229
----------- ---------- ---------- ----------
Net loss (676,987) $ (257,662) $ (214,002) $ (96,705)
========== ========== ==========
Deficit - January 1, 1995 (2,022,392)
-----------
Deficit -
September 30, 1995 $(2,699,379)
===========
Loss per share $ (0.01) NIL NIL NIL
=========== ========== ========== ==========
Weighted average number
of shares outstanding 67,000,000 55,000,000 68,000,000 54,000,000
=========== ========== ========== ==========
</TABLE>
See accountant's disclaimer and notes to financial statements
-F5-
<PAGE>
PHASE-OUT OF AMERICA, INC.
STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------ ------------------------
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(676,987) $(257,662) $(214,002) $ (96,705)
Adjustments to reconcile net income
to cash used for operating activities:
Depreciation and amortization 4,303 3,483 1,433 2,203
Decrease (increase) in accounts receivable (64,622) 34,181 (14,253) 13,415
(Increase) in inventories (8,610) 110,571 (87,375) 23,111
(Increase) in prepaid and other current (4,806) 1,873 (5,687) (15,982)
(Increase) in accrued officer compensation 106,083 66,043 39,000 25,581
(Decrease) increase in accounts payable and
accrued expenses 496,030 (13,499) 446,799 (10,057)
(Decrease) increase in taxes payable 5,327 (12,533) 317 882
Bond discount 300 85 100
(Decrease) increase in due to affiliate (319,197) (48,011) (257,009) (36,000)
Expenses paid through the issuance
of restricted common stock 220,570 28,524 420 8,450
--------- --------- --------- ---------
CASH USED FOR OPERATING ACTIVITIES (241,609) (86,945) (90,257) (85,102)
INVESTING ACTIVITIES
Acquisition of fixed assets (800) (2,113) (800) (2,113)
Increase in security deposits
--------- --------- --------- ---------
CASH PROVIDED BY (USED FOR)
INVESTING ACTIVITIES (800) (2,113) (800) (2,113)
--------- --------- --------- ---------
FINANCING ACTIVITIES
Debt and capital lease payments (7,097) (4,441) (5,546) (1,628)
Sales of Common Stock 115,000 65,000
Proceeds from senior secured notes payable -- 125,000 125,000
Advances from officer/stockholder
Repayment of loans from officer/stockholder (20,000) (8,000) (20,000)
Proceeds from debentures 279,792 95,000
Conversion on bond interest to common 1,436
--------- --------- --------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES 369,131 112,559 134,454 123,372
--------- --------- --------- ---------
INCREASE (DECREASE) IN CASH 126,722 23,501 43,397 36,157
Cash at beginning of period 24,541 18,719 107,866 6,063
--------- --------- --------- ---------
Cash at end of period $ 151,263 $ 42,220 $ 151,263 $ 42,220
========= ========= ========= =========
Supplemental information:
Interest paid during the period $ 11,808 $ 675 $ 11,358 $ 450
========= ========= ========= =========
</TABLE>
See accountant's disclaimer and notes to financial statements
-F6-
<PAGE>
PHASE-OUT OF AMERICA, INC.
SCHEDULE OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SCHEDULE 1 (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------------ -------------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SELLING EXPENSES:
Television marketing expense $ 481,515 $ -- $ 283,669 $ --
Advertising and promotion 218,644 27,736 62,097 3,538
Fulfillment and credit card 163,747 16,664 103,418 6,378
Commissions and royalties 65,554 37,128 15,476 17,559
Travel and entertainment 36,964 49,615 15,729 10,845
Auto lease 14,873 17,240 3,889 4,661
Auto expense 18,373 6,797 11,327 3,145
Postage and shipping - net 446 8,475 (7,977) 3,516
GENERAL AND ADMINISTRATIVE EXPENSES:
Officers' compensation 230,845 102,517 95,800 33,781
Salaries 59,049 31,050 23,487 13,996
Consulting fees 65,241 11,275 (630) 2,450
Insurance expense 29,790 29,853 10,850 6,821
Professional fees 20,304 20,739 7,498 7,771
Telephone 18,594 20,998 7,199 9,680
Payroll taxes 16,532 10,781 9,176 5,265
Financing costs 15,549 -- 1,562 --
Office supplies and expense 13,145 9,283 2,747 4,039
Rent 12,750 13,500 6,000 4,500
Miscellaneous 8,624 5,793 5,790 4,358
Depreciation and amortization 4,303 3,483 1,434 2,203
Utilities 3,704 7,177 1,083 511
Equipment rental 2,989 -- -- --
Repairs and maintenance 1,601 2,313 410 563
Stock transfer fees 1,515 1,793 120 649
State Franchise Taxes 443 -- -- --
---------- ---------- ---------- ----------
$1,505,094 $ 434,210 $ 660,154 $ 146,229
========== ========== ========== ==========
</TABLE>
See accountant's disclaimer and notes to financial statements.
-F7-
<PAGE>
PHASE-OUT OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited) -- see accountant's disclaimer
September 30, 1995
NOTE 1 -- BACKGROUND AND BASIS OF PRESENTATION
Phase-Out of America, Inc. (the Company) incorporated in Delaware on July 17,
1987 for the purpose of obtaining scientific and clinical validation of the
Phase-Out System smoking cessation product (the "Product") and to develop a
marketing and distribution network in the United States. The Company emerged
from the development stage in 1993.
The financial statements have been prepared assuming that the Company will
continue as a going concern. The Company has suffered recurring losses from
operations ($676,987 in 1995 and $257,662 in 1994), and has had limited
liquidity causing difficulty in meeting its current operating expense
obligations and debt service requirements. Additionally, the Company is
preparing a response to a complaint by the Division of Advertising Practices of
the FTC, the outcome of which cannot be determined at this time (see note 8).
The Company is commencing a wide range of direct marketing activities to help
improve revenues and is attempting to secure additional financing through
private placement of debt and securities.
There is no assurance that a larger market can be developed for the product or
that profitable operations will be achieved.
The financial statements do not include any adjustments that might result should
the continued existence of the Company be threatened by any continued losses or
the failure of the above factors to influence the financial viability of the
Company.
The interim statements were prepared pursuant to the requirements for reporting
on Form 10-QSB. The December 31, 1994 balance sheet was derived from audited
financial statements but does not include all disclosures required by generally
accepted accounting principles. The interim financial statements and notes
thereto should be read in conjunction with the financial statements and notes
included in the Company's latest Annual Report on Form 10-KSB for the year ended
December 31, 1994. In the opinion of management, the interim financial
statements reflect all adjustments of a normal recurring nature necessary for a
fair statement of the results for interim periods. The current period results of
operations are not necessarily indicative of the results for the entire year
ending December 31, 1995.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Changes in significant accounting policies:
Management implemented a change in accounting for revenues from sales made
through television infomercials. This is a change only from the methods used in
the immediately preceding quarter of the current year. Since the Company owns
and is responsible for storing inventory until sold (title is retained by
Company until merchandise is shipped to the retail consumer), taking orders,
shipping and collections on all sales made via this medium (some activities
delegated to outside fulfillment entities), the gross sales amount is now
reported as sales.
Originally, in the quarter ended June 30, 1995, sales of this type were recorded
net of all fulfillment and commission costs. The results of this change in
presentation are substantial increases in sales, as well as expenses for
fulfillment, credit card services and, commissions. This change in accounting
and presentation has no effect on net loss.
-F8-
<PAGE>
PHASE-OUT OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited) -- see accountant's disclaimer
September 30, 1995
NOTE 3 -- STOCKHOLDERS' EQUITY
Stock Issued to Officers, Consultants, Affiliates and Employees:
In 1995, the Company issued 793,653 shares to officers and directors, 2,900,000
to Products & Patents and 2,922,705 shares to consultants. The 2,900,000 shares
to P&P were issued to P&P for funding of certain public relations activities on
behalf of the Company and for securing the international distribution rights
(see Note 4).
Sales of common stock:
In April and July 1995, the Company sold 606,000 and 1,000,000 shares of
restricted common stock to unrelated individuals for aggregate gross proceeds of
$115,000.
Bond conversion:
In April 1995, two holders of $2,500 each in subordinated debenture bonds
exercised the conversion right for 96,120 shares of restricted common stock. In
July 1995, the Company issued 195,238 shares in conversion of certain
subordinated debentures currently in default (face amount $10,000).
Common stock purchase warrants:
In June 1995, the board approved the extension of the Company's B warrants to
December 31, 1995.
Registration of consultant securities:
In June 1995, a Form S-8 registration statement was filed with the Securities
and Exchange Commission covering consultant shares.
Options:
The Company granted options to directors providing for $.075 share price. The
options vest in February 1996, and are exercisable for five years thereafter.
NOTE 4 -- AMOUNTS DUE TO AND FROM AFFILIATED COMPANY
Amounts due to affiliated company, Products & Patents, Ltd. (P&P), a company
related by common management and control, consisted of intercompany trade
payables and bore no interest.
In August 1995, the relationship with P&P was terminated. Consequently, the
Company's obligation to pay royalties has been discontinued. Pursuant to the
termination of the relationship with P&P, all debt due to P&P was canceled in
exchange for assumption of certain trade liabilities. In connection with this
transaction, the Company assumed P&P's obligation to its supplier of
approximately $401,000 and took title to 53,000 units of inventory.
-F9-
<PAGE>
PHASE-OUT OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited) -- see accountant's disclaimer
September 30, 1995
NOTE 5 -- RELATED PARTY TRANSACTIONS
Officers' Compensation
Compensation and expense reimbursements and allowances for the Secretary /
Treasurer, President and Chairman / CEO were as follows:
Nine Months Ended September 30,
-------------------------------
1995 1994
---- ----
Cash compensation $215,095(a) $ 96,517
Bonuses paid by issuance
of restricted common stock 15,750 6,000
-------- --------
$230,845 $102,517
-------- --------
Automobile lease $ 14,873 $ 17,240
Automobile expenses 8,594 6,797
Entertainment expenses 36,964 49,615
Telephone expenses 2,668 2,250
(a) $231,798 accrued and unpaid as of September 30, 1995.
Employment and Stock Ownership of Affiliate:
The Chairman / CEO is also an officer / director and significant shareholder of
P&P and P&P is a significant shareholder of the Company. Accordingly, there may
be conflicts of interest.
P&P is also a significant shareholder of the Company.
Loans from Officer/Stockholders:
An officer/stockholder is owed $5,897 by the Company. The loan bears interest at
10% and is payable on demand.
Other:
General Counsel to the Company is a relative of the officers. The Company
incurred approximately $8,000 of legal fees with his firm in 1995. Also in 1995,
the Company issued 100,000 shares of restricted common stock to this law firm to
reduce the balance due them.
NOTE 6 -- INCOME TAXES
The Company has experienced losses since inception. At December 31, 1994 the
Company has available net operating loss carryovers approximating $2,000,000
which begin to expire in 2002 until 2009.
The Company has provided for minimum state franchise taxes and taxes based on
capital. Such taxes are included in selling, general and administrative expenses
in the statement of operations.
NOTE 7 -- LONG TERM DEBT
Current portion of long-term debt:
Current portion of long-term debt consist of Subordinated Debentures of $29,000
and capital leases of $2,955.
-F10-
<PAGE>
PHASE-OUT OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited) -- see accountant's disclaimer
September 30, 1995
Default in subordinated debentures:
The Company is in default in payment of principal and interest with respect to
certain subordinated debentures (face amount of $29,000). No default has been
declared by the bondholders. Additionally, the Company has not complied with the
provisions of the subordinated debenture agreements with respect to the sinking
fund requirements.
Private Placement of Senior Subordinated Convertible Debentures:
In 1995, the Company received $285,000 in senior subordinated debt financing
from private lenders (in addition to the $125,000 converted from senior secured
notes).
NOTE 8--COMMITMENTS, CONTINGENCIES AND OTHER COMMENTS
Dependency on Major Customers and Suppliers:
The Company is dependent on a few major customers and marketing methods
controlled by specific outside marketers for substantially all of its revenues.
Sales of approximately $763,000 (76% of net sales) were made in response to
television infomercials controlled and promoted by one unrelated entity.
Pursuant to the amendment of the licensing agreement, the Company is no longer
dependent on P&P for its product line. However, the Company is currently
dependent on one supplier for the Phase-Out smoking cessation device. As of
September 30, 1995, the balance due to this supplier was approximately $374,000.
The Company has spent time and money on diversifying its product line by adding
the "Total Quit Smoking Program" and a group of consumable products called the
"Phase-Out Support Group". While the Company is dependent on one supplier for
its smoking cessation device, it will not be dependent on one supplier for any
of its new products.
Regulatory matters:
There has been no change in the status of the regulatory inquiry by the Food and
Drug Administration (FDA).
On August 3, 1995, the Company received a complaint from the Division of
Advertising Practices at the FTC regarding certain advertising claims. The
complaint addresses statements in the Company's infomercial and claims made in
print advertisements. Management believes the ads referred to are no longer
being used. This complaint will be responded to by the Company's attorney within
60 days.
-F11-
<PAGE>
PHASE-OUT OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited) -- see accountant's disclaimer
September 30, 1995
Operating leases:
In June 1995, the Company entered into a non-cancelable automobile lease
providing for monthly payments of $377 through September 1998, with aggregate
minimum lease payments through the term of approximately $15,000. The lease is
guaranteed by an employee who has exclusive use of the vehicle.
Marketing agreements:
On May 9, 1995 a joint venture was established with Eire Partners, a direct
response marketing firm in Chicago - Eire partners agreed to fund printing and
other related expenses for a direct mailing of Phase Out advertisements to
credit card holders. The initial test is 1,100,000 mailing pieces to Unocal
credit card holders.
An agreement was entered into with Blagman Media for Phase Out to be advertised
on radio stations in major cities throughout the Country. Three versions of a
sixty second radio commercial have started to air in New York, Los Angeles,
Tampa, Chicago and Las Vegas.
On June 21, 1995 an agreement was reached with Tokyo Boeki, Ltd., a $1.7 billion
dollar (annual sales) Japanese trading company. Under the terms of the
agreement, Tokyo Boeki placed an initial test order for the Phase Out System and
has agreed to introduce and advertise the Phase Out system in Japan for a one
year period.
On September 20, 1995, an agreement was entered into with Integrity
International, Inc., a network marketing company, to market an "Anti-Smoking
Kit/Program". The agreements provides for specific quotas and initial order
amounts. Exclusivity for this means of marketing is provided in the agreement.
-F12-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Nine Months Ended September 30, 1995 Compared
to Nine Months Ended September 30, 1994
The Company incurred a net loss of $676,987 for the nine months ended September
30, 1995 as compared to the loss of $214,002 for the nine months ended September
30, 1994. Nine month revenues increased 3 1/2 times compared to the same period
last year ($1,007,312 compared to $288,017) and the third quarter sales
increased 7 1/2 times over the same quarter last year ($550,332 compared to
$73,647). The improvement in revenues resulted from retail sales of the product
through television direct response methods. This represents substantially higher
unit selling prices more than increases in unit volume. Although increased
revenues are reflected in gross profit, there are substantial additional costs
associated with distribution through this channel, substantially reducing the
net benefit of the sales increase to the Company.
Selling, general and administrative expenses more than doubled to $1,505,094
from $660,154 (128% increase). Of the total selling general & administrative
expenses, $220,150 and $20,074 was paid in the form of restricted common stock
(a non-cash item), respectively for 1995 and 1994. An additional officer was
added, as well as two more office employees. The increase in payroll was needed
to manage increased inquiries, as well as managing the increased sales volume.
Total officer salaries rose to $230,845 compared to $95,800 for 1994.
Advertising and promotion rose to $218,644 compared to $62,097 for 1994.
Consulting fees increased to $65,871 from $8,825 in 1994.
The gross profit margin increased from 63% to 84%, due to the high volume of
direct response television sales.
The Company maintains a $1 million liability insurance policy.
Liquidity and Capital Resources
Cash of $241,609 was used for operations for the nine months ended September 30,
1995 as compared to $86,945 used in the same period of last year. Cash increases
were primarily from proceeds of private placements during the nine months ended
September 30, 1995.
Short term liquidity is being affected by the need for cash to maintain a steady
flow of inventory now that sales have increased. Whereas the previous issue with
respect to liquidity was survival and meeting essential operating expenses, the
need has turned to maintaining a steady flow of inventory to replace goods
shipped and meet customer orders, as well as funding promotional activities.
The product's success depends heavily on reaching potential customers through
-F13-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
advertising and other marketing methods requiring additional cash flow for this
purpose.
The Company currently has no established sources of financing or unused lines of
credit. While the Company is in default of the repayment terms of certain
subordinated debentures, being delinquent on principal payments of $29,000 plus
interest. No default has been declared by these bondholders, and additionally,
the amount in default has been reduced by $15,000 since year end 1994 by
conversion into common stock.
In 1995, the Company received $285,000 in senior subordinated debt financing
from private lenders (added to the $125,000 converted from senior secured notes)
and $115,000 from sales of restricted common stock, which enhances the near term
outlook and ability to continue operations with increased marketing activities.
Management believes, but cannot assure that revenues will continue to rise for
the remainder of the year.
The Company's working capital has deteriorated due to the use of current assets
for operations and increases in accounts payable. Working capital and current
ratios were:
September 30, December 31 September 30,
1995 1994 1994
---- ---- ----
Working capital
(deficiency) $(514,823) $(598,059) $(474,155)
Current ratios 0.45:1 0.27:1 0.39:1
Impact of Tax Reform
The Company's liquidity is not expected to be materially affected by recent or
pending tax legislation.
Impact of Inflation
In general, the Company's overhead expenses would come under pressure should
inflation rates increase.
The labor used to manufacture the product is unskilled or semi-skilled. However,
increases in wages may result from inflationary pressures. Since the sole
supplier is now manufacturing the product overseas, foreign exchange rate
changes could affect product costs.
Should there be a resurgence in inflation rates, management believes, but cannot
assure that the product's selling price could be increased to maintain margins
and cover overhead increases.
-F14-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Distribution and Marketing
Over the past few years the Company has entered into test marketing, sales
representation, distribution and distributorship agreements with various
entities.
In December 1994, the Company entered into an agreement with On Air Infonetwork,
Inc., a direct response marketing firm. The agreement provides for exclusive
television direct response marketing rights in the United States and Canada. The
increase in sales in the second quarter was mainly attributable to this
agreement.
Effect of Competing Products
The Food and Drug Administration has approved nicotine patches for prescription
by licensed physicians for treatment of nicotine withdrawal. Currently, this
appears to be the most commonly prescribed smoking cessation treatment. However,
management expects to benefit from the initial success of the patch program
because there has been adverse publicity regarding the medical side effects of
patches.
Firstly, the patch program is costly, with physician fees and patch costs
totaling in excess of $300 as compared to Phase-Out's substantially lower
suggested retail price. Furthermore, initial studies have indicated that 25% of
the patch users have smoked while using the patch. This poses a severe health
threat to certain people due to the duplication of nicotine absorption.
Management expects to use these aspects of nicotine patches to the Company's
advantage in future marketing programs.
Regulatory Matters
On June 1, 1993, the Food and Drug Administration (FDA) issued a warning letter
to the Company stating its belief that the Phase-Out device was a "medical
device" and therefore subject to the provisions of the Federal Food, Drug and
Cosmetic Act (FDCA). Since the Company has been marketing the Phase-Out device
without obtaining pre-marketing approval from the FDA, if the FDA's position is
correct, the Company's activities would be in violation of the FDCA. On July 7,
1993 the Company responded with supporting evidence that it believes that the
Phase-Out device is not a medical device. No further communications have been
received from the FDA since that response. If the FDA were to resume action
against the Company, the Company will incur substantial defense costs even if it
prevailed. If the FDA were to prevail, the Company's operations could be
suspended or terminated. Management believes that the FDA letter came as a
result of the FDA's investigation of the smoke cessation industry. As a result
of that investigation, the FDA has banned the sale of over-the-counter smoke
cessation
-F15-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
products using active ingredients as of December 1993. Phase-Out was not
affected by this ban.
The Company was advised by the FTC by letter dated October 20, 1993, that the
FTC was conducting a non-public, informal inquiry to determine whether the
Company had engaged in deceptive or unfair practices in violation of the Federal
Trade Commission Act (the "FTC Act") in connection with certain of the Company's
advertising claims. In that connection, the FTC requested that the Company
provide it with certain information and documents and also requested a meeting
on June 9, 1994 with the Company's officers. On December 3, 1994, the Company
supplied the FTC with all the information they requested. Subsequently, the FTC
canceled the meeting stating that they had sufficient information.
On August 3, 1995, the Company received a complaint from the Division of
Advertising Practices at the FTC regarding certain advertising claims. The
complaint addresses statements in the Company's infomercial and claims made in
previous print advertisements. Management believes that the ads referred to are
no longer being used. This letter will be responded to by the Company's attorney
within 60 days. Discussions with the FTC are now ongoing through the Company's
legal counsel.
-F16-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
See notes to the financial statements
Item 6. Exhibits and Reports
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registration has duly caused this report to be signed on it behalf by the
undersigned thereunto duly authorized.
PHASE-OUT OF AMERICA, INC.
Dated: November 3, 1995 /S/ IRWIN PEARL
---------------------------
Irwin Pearl
President & Director
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