SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
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 (IRS 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer (1) 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
Check if no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B 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-KSB or any amendment to
this Form 10-KSB or any amendment to this Form 10-KSB.
The registrant's operating revenues for its most recent fiscal year were
$1,532,405.
The number of shares outstanding on March 31, 1996 was 74,859,319 shares of
Common Stock, .00003 par value.
Continued...
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The aggregate market value of the voting Common Stock held by non-affiliates (1)
of the registrant based on the average of the high and low bid prices ($.04) of
the Company's Common Stock, as of May 31, 1996, is approximately $2,058,462
based upon the 51,461,555 shares of Registrant's Common Stock held by
non-affiliates.
The number of shares outstanding of each of the Registrant's classes of Common
Stock, as of December 31, 1995 is 74, 859,319 shares all of one class of $.00003
par value common stock.
(1) "Affiliates" solely for purposes of this item refers to those persons who,
during the three months preceding the filing of this Form 10-KSB were officers
or directors of the Company and/or beneficial owners of 5% or more of the
Company's outstanding stock.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business Disclosure Format: (check one) Yes_______ No X
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PHASEOUT OF AMERICA, INC.
Form 10-KSB
Fiscal Year Ended December 31, 1995
Table of Contents
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PART I PAGE
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Item 1. Business 4
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
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Item 5. Market for Company's Common Equity and Related Stockholder Matters. 11
Item 6. Management's Discussion and Analysis of Financial Condition and Results 11
of Operations.
Item 7. Financial Statements F3 to F15
Item 8. Changes in or Disagreement with Accountants on Accounting and Financial 15
Disclosure.
PART III
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Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with 16
Section 16(a) of the Exchange Act.
Item 10. Executive Compensation 18
Item 11. Security Ownership of Certain Beneficial Owners and Management 19
Item 12. Certain Relationships and Related Transactions 20
PART IV
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Item 13. Exhibits and Reports on Form 8-K 20
Signatures
Supplemental Information
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PART 1
ITEM 1. Business
The Company
The Company is a corporation organized under the laws of Delaware on July
17, 1987, has a limited operating history and has operated at a loss since
inception. Since the completion of its initial public offering in April 1989,
the Company had primarily concentrated its efforts in two areas: the
establishment of medical credibility through clinical trials performed at an
independent testing facility and the test marketing of PHASEOUT (also referred
to as the "Product" or the "device') throughout the United States and
internationally via various channels of distribution.
The Company's primary product, PHASEOUT, is a patented device developed to
help a person quit smoking without the use of any drugs, chemicals or
attachments. The device was designed to gradually reduce the amounts of
nicotine, tar and carbon monoxide consumed from cigarette smoke.
Prior to 1994, the Company, concentrated its efforts in two areas: (1)
establishing medical credibility through clinical trials on human subjects,
performed at independent testing facilities to validate the scientific findings,
(the device has been scientifically tested by the U.S. Testing Company using
Federal Trade Commission ("FTC") methods and guidelines and clinically tested on
smokers by independent researchers under controlled laboratory conditions at the
Johns Hopkins University School of Medicine); and (2) test-marketing the product
throughout the U.S. through various channels of distribution. Market testing
took place in selected catalogs and on television via a half-hour infomercial
producing a greater number of orders in 1995, when promotional expenses were
increased.
The Product
The PHASEOUT device is a simple, easy to use, mechanical, light-weight
instrument that allows the smoker to continue to smoke their preferred brand
cigarettes and at the same time, gradually and sequentially reduce their
nicotine intake by over 80%. This weaning process is the same type of
detoxification methodology that has proved successful with many other addictive
substances. Once the smoker has been weaned, their chances to quit for good are
greatly enhanced. PHASEOUT's weaning methodology has an important additional
psychological benefit for all smokers. It allows the smoker to continue to smoke
their preferred brand until they are ready to quit. Of course, to achieve these
results under normal smoking conditions, smokers must avoid compensatory
practices, such as smoking more cigarettes and blocking the ventilation holes
created by the PHASEOUT device.
The PHASEOUT system works without the use of any drugs, chemicals or
attachments The average retail price to consumers is $39.95 plus shipping and
handling. The average wholesale price is $10.00 - $12.00.
The Company is currently having the product manufactured in Taiwan. The
Company's primary source of supply is capable of producing over 30,000 PHASEOUT
units per week. A second manufacturing source in South Korea is going on-line in
mid 1996. In addition, the Company's management is studying the feasibility of
having the product manufactured domestically.
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How PhaseOut Works
A smoker inserts their entire unopened pack of cigarettes (filtered or
unfiltered - soft pack or box) into the PHASEOUT device. With a simple press and
release that takes just seconds, PHASEOUT processes all of the cigarettes within
the pack.
The device strategically creates from one to four microfine perforations in
the lip end of each cigarette. These perforations filter and ventilate the smoke
drawn through the cigarette, thereby reducing the amount of nicotine and other
toxins inhaled by the smoker.
One miniature filter (perforation) is created in Phase one, filtering out
up to 26% of the nicotine, and similar amounts of other toxins such as carbon
monoxide and tar. Additional perforations are created as the smoker proceeds
through each of the four Phases. With each additional perforation there is a
progressive reduction of nicotine and other harmful substances based upon
controlled laboratory studies. By Phase IV, 80.7% of the nicotine, 91.6% of the
tar, 89.2% of carbon monoxide and 90% of all other tobacco constituents (Total
Particulate Matter) have been eliminated. As discussed above, these reductions
under normal smoking conditions depend upon proper use of the product and the
treated cigarettes by smokers. The suggested period on each phase is two weeks
(eight week total), however, smokers can tailor the program to their own
individual liking and proceed at their own pace, under their own timetable. The
smoker is in control. There is no pressure, no fear of failure. Importantly, any
change in the taste, flavor or draw of the cigarette is lessened as the smoker
proceeds through the program due to the gradual transition from phase to phase.
The Smoking Cessation Market
Cigarette smoking is the number one cause of preventable illness and death
in the United States. In excess of 450,000 deaths were directly attributed to
cigarette smoking last year. A study published in the Journal of American
College of Cardiology stated that 47,000 additional lives were lost this year
due to secondhand smoke. More than one of every six deaths in the U.S. is caused
by cigarette smoking. Of the country's total health care budget, approximately
25% ($65 billion) is spent for smoking related illness and disease. This does
not include an additional $35 billion in lost productivity and higher insurance
costs.
In the United States, there are currently reported to be approximately 46
million smokers and worldwide the number of smokers is estimated to be 1.2
billion. A report released in December 1994 by the CDC stated that, among the 46
million smokers in the United States, 70% said they wanted to quit smoking
"completely", but only 34% actually tried, and of those, only 8% succeeded.
According to Dr. Michael Erikson, Director of CDC's office on Smoking and
Health, these figures clearly confirm how addictive nicotine really is.
On July 14, 1995, The American Medical Association (AMA), in its sharpest
attack ever on the tobacco industry, stated that cigarette makers "duped" the
public by concealing decades of research on the harmful effects of tobacco. The
AMA called for banning tobacco advertising and exports and says politicians and
researchers should refuse to accept tobacco industry funds.
Internationally, it is reported that there are 1.2 billion smokers
excluding certain developing third world countries.
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Scientific and Clinical Testing
Scientific
The United States Testing Company, Inc., an independent testing facility
which tests cigarettes in accordance with government standards for major
cigarette manufacturers, conducted laboratory tests on the use of PHASEOUT on
cigarettes. These tests were based upon the F.T.C. method, which is used to rate
the tar, nicotine and carbon monoxide yields of cigarettes sold in the United
States. Their findings were reported in Determination of Percent Reduction of
Tar, Nicotine and Carbon Monoxide of Cigarettes with the Use of Phase-Out device
for Perforating Packaged Cigarettes/U.S. Patent #4,231,378 . This report showed
reductions of tar, nicotine and carbon monoxide yields ranging from 26% in Phase
I to 92% in Phase IV using the PHASEOUT method.
Clinical
Independent researchers at the Johns Hopkins University School of Medicine
conducted clinical research on PHASEOUT in a controlled laboratory setting. The
study, entitled Phase-Out Filter Perforation: Effects on Human Tobacco Smoke
Exposure, was published in the April 30, 1992, issue of the international
medical journal PHARMACOLOGY, BIOCHEMISTRY AND BEHAVIOR , thus supporting the
scientific machine studies conducted previously by U. S.
Testing Company. Some excerpts follow:
o "Use of the PhaseOut filter perforation device may allow smokers
to continue smoking their usual preferred brand of cigarettes
while reducing their exposure to tobacco smoke constituents. This
could have beneficial health effects and could be particularly
useful as a weaning method prior to smoking cessation."
o "Percentage decrements in nicotine delivery observed in humans
were strikingly similar to reductions observed in smoking machine
testing. The concordance between human and machine testing data
supports the conclusion that the PhaseOut device works as
expected to dilute the smoke stream and reduce constituent
exposure."
o "In conclusion, this study showed that filter perforation
achieved with the PhaseOut device significantly reduced human
exposure to tobacco smoke constituents when tested in an acute
smoking protocol under controlled laboratory smoking conditions.
Exposure reductions of 30-80% were observed for both nicotine and
CO. Percentage reductions in constituent exposure generally
corresponded well to those anticipated from machine testing,
indicating that the controlled smoking technology was valid and
that the PhaseOut device operates as expected in a human smoking
assay."
Field Studies
A field study was conducted by Louise Leonhardt, a nutritional consultant
who teaches adult education at a local Long Island high school. She conducted
two studies, one with fifteen students and the other with forty students. Out of
the fifty-five participants, forty smokers (or 73%) quit and the balance
continue to use PhaseOut.
Another field study was conducted by Dr. Robert D. Brandstetter, M.D.,
Pulmonary Medicine, Associate Director of Medicine and Chief of Critical Care at
New Rochelle Medical Center in New York. Dr. Brandstetter
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had limited success with acupuncture, psychotherapy, nicotine gum and the
nicotine patch on his patients. Dr. Brandstetter then supplied PhaseOut to 35 of
his patients who smoked from one to two packs per day. 22 smokers (63%) quit and
still have not smoked for over a year. Dr. Brandstetter had stated that he
observed decreases of coughing, shortness of breath and sputum production in
smokers using PhaseOut.
Although these field studies are not scientifically controlled studies, the
results are promising since the current average quit success rate of all other
products including the nicotine patch and gum is less than 10%. The Company
intends to conduct further research and studies researching the effectiveness of
the product in helping people to quit smoking.
Patents
The United States Patent Office has issued two patents for the PhaseOut
System (Patent Number 4,231,378 issued November 4, 1980 and Patent number
5,218,976 issued June 15, 1993). In addition, the Company has applied for
patents in eighteen (18) foreign countries, including China, Taiwan, Japan,
England, France, Germany and Italy.
Marketing (Domestic)
The focus of the Company's marketing is to create an awareness for the
product through the use of various direct response marketing venues. Some of
these are: the use of a thirty minute television infomercial, short form
television commercials, sixty second radio commercials, mail order catalogs,
print advertising and through credit card mailings (syndication).
The Company, in December 1994, entered into a contract with a direct
response television production and marketing company. As part of the agreement,
this company was responsible to edit the existing infomercial using Jackie Mason
as host and create one and two minute spot commercials. To insure the success of
these commercials ,the direct response company committed to invest a minimum of
$200,000 for initial TV airings. Once they expended a minimum of $200,000, they
would qualify for a "reverse" royalty from the Company on sales made in other
marketing venues. The agreement called for specific minimum quarterly purchase
quotas (73,000 units per year). The Company initiated an arbitration action
against the direct response company for failure to perform under the terms of
the agreement (see Legal Proceedings). As a result of this, the Company formed a
relationship with another direct response media buying agency.
On June 8, 1995, the Company entered into an agreement with an
international marketing representative firm. This agreement compensates the
representative on a commission basis for all export business that results from
their efforts.
On October 17, 1995, the Company entered into a marketing agreement with a
network marketing organization utilizing independent distributors that sell to
individuals on a one to one basis. They are focusing their efforts on the
marketing of the Company's Total Quit Smoking Program and the Company's Support
Group line of consumable products (see New Products).
Marketing (International)
On June 9, 1995, the Company entered into a preliminary one year agreement
with an international Japanese trading company for the incubation of the
Japanese smoking market consisting of 35 million smokers.
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On August 14, 1995, the Company entered into an agreement with the Chinese
Association on Smoking and Health. They plan to conduct clinical tests of the
PhaseOut product in China. The Company has been invited to participate in the
World Conference on Smoking and Health to be held in Beijing in 1997. China
currently has in excess of 300 million smokers.
On August 21, 1995, the Company entered into an agreement with a South
Korean trading company for the distribution and manufacture of a modified
(design) PhaseOut product in South Korea. Because of the improved design and
reduced size of this PhaseOut device, it will be utilized in the Japanese market
as well. South Korea has 10 million smokers.
PhaseOut is in initial stages of distribution in other countries including:
Greece, Portugal, Spain, Uruguay, Brazil, South Africa, Phillippines, Argentina,
United Arab Emirates, Tahiti, France, Hong Kong, Romania, Moldavia.
New Products
The Total Quit Smoking Program. A comprehensive, self-help smoking
cessation program to combine the use of the patented PhaseOut device with the
latest behavior modification techniques. This program addresses both the
physiological and the psychological addictions to smoking. Distribution of this
new product began this year through an agreement with a direct (network)
marketing company. The agreement with this marketing company gives it the
exclusive distribution rights in the United States and Canada subject to
quarterly purchase quotas.
The PhaseOut Support Group Product Line. The Company recently introduced a
line of consumable products specifically developed for smokers and former
smokers. Distribution of this new product line began this year through an
agreement with a direct (network) marketing company. The initial "PhaseOut
Support Group" product line consists of:
PhaseOut ReNewal - A gentle alpha hydroxy glycolic acid, antioxidant
facial cream to help reduce accelerated skin aging sometimes
experienced by smokers.
PhaseOut WhyTen - An extra strength oxidizing tooth gel to help remove
tobacco stains.
PhaseOut Breath Sweet - A natural, fast acting breath sweetener
formulated for smokers.
PhaseOut HeartSmart - A coated, low dosage aspirin.
PhaseOut ConTrol - A natural comprehensive weight management system to
help maintain desired weight.
PhaseOut ReStore - A high potency antioxidant and herbal nutritional
supplement.
PhaseOut DenSity - A calcium rich mineral and herbal nutritional
supplement.
PhaseOut StressBuster - A dietary supplement with relaxants derived
from traditional herbs and herbal extracts.
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Competition
The Company competes with numerous products and techniques designed to aid
smokers to stop smoking. Many of the companies promoting these products have
been in existence for longer periods of time, are better established than the
Company, have financial resources substantially greater than the Company and
have more extensive facilities than those which now or in the foreseeable future
will become available to the Company. In addition, other firms may enter into
competition with the Company in the near future.
One type of significant competitive product is the nicotine patch, which
requires a prescription by licensed physicians for treatment of nicotine
withdrawal. This appears to be the quit smoking method that is now most commonly
prescribed. However, management expects to counter the initial success of the
patch program because there are stirrings of adverse publicity regarding patches
due to their side effects and usage limitations.
In addition to the nicotine patch, other pharmaceutical companies are in
the process of introducing alternate nicotine delivery methods in the form of a
nasal spray, which will have many of the same side effects as the nicotine patch
and will most probably require a prescription when first brought to the market.
Recently, the FDA has allowed the nicotine gum, which was formerly only
available by prescription, to be sold over-the-counter.
Employees
At the present time, the Company has eight employees, including the
Company's four officers and directors and four administrative and secretarial
personnel.
Item 2. Properties
The Company office is located in approximately 2,000 square feet at 140
Broadway, Lynbrook, New York 11563, telephone number (516) 599-1900 in premises
rented on a month to month basis at a monthly rent of $1,500.00.
Item 3. Legal Proceedings
In June, 1993, the Company received a "Warning Letter" from the FDA in
which the FDA stated its belief that the Product is a "medical device", and is,
therefore, subject to the provisions of the FDA. Since the Company has been
marketing the product without seeking or obtaining pre-marketing approval from
the FDA, if the FDA's position is correct, the Company's activities are in
violation of the Food Drug and Cosmetics Act and the FDA would have the right to
enjoin further marketing by the Company of the product. The Company does not
believe that the product is a medical device within the meaning of the FDCA and
has advised the FDA of its position through the Company's Washington, D.C.
counsel, Hyman, Phelps & McNamara, specializing in FDA matters. The answer
submitted on July 7, 1993, by the Company counsel took the position that
PHASEOUT is a mechanical device that treats just the cigarette (not the smoker)
by creating additional internal filters within the existing filter or cigarette.
However, in an effort to cooperate with the FDA, the Company proposed to make
substantial revisions to the promotional statements for the product to make it
clearer to the public that the product is not intended to be used as a medical
device. Neither the Company nor its counsel has received any written or oral
response from the FDA since that time. However, no assurance can be given that
the FDA will not in the future seek to enjoin the Company from marketing the
product without complying with the FDCA and seeking other remedies against the
Company. Management believes that the FDA letter came as a
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result of the FDA's investigation of the smoke cessation industry. As a result
of that investigation, the FDA banned the sale of certain over-the-counter smoke
cessation product using active ingredients as of December, 1993. PHASEOUT 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. The Company supplied the FTC with
all the information they requested. Subsequently, the FTC canceled the meeting
stating that they had sufficient information. Management believed that the FTC
was apparently satisfied with the Company's response to their inquiry and its
willingness to cooperate. However, on August 3, 1995, the FTC submitted to the
Company a draft administrative complaint and a proposed consent agreement
outlining the terms of a possible settlement of the FTC's claims. In response,
the Company has submitted a counter-proposal and has engaged in extensive
dialogue with FTC staff to negotiate a resolution of the FTC's claims.
The draft administrative complaint, which has not to date been filed by the
Commission, alleges that certain statements and claims contained in the
Company's print and broadcast advertisements for the sale of the PHASEOUT device
are false and misleading in that they are not reasonably substantiated and,
therefore, violate Sections 5 and 12 of the FTC Act. The Company denies the
material allegations in the draft administrative complaint and will vigorously
defend such an action in the event that a settlement cannot be reached and a
complaint is actually filed. The Company has made and continues to make all
reasonable efforts to resolve the FTC's concerns without resort to litigation.
In the event that the FTC institutes an administrative proceeding against
the Company, it could have an adverse effect on the operations of the Company.
Regardless of the ultimate outcome of any such action, the Company would likely
incur substantial expenses in defense.
In February 1995, the Company's former attorney, John B. Lowy, brought an
action against the Company in New York State Supreme Court, New York County for
unpaid attorneys fees and disbursements of approximately $36,000. Management
intends to vigorously defend all, but approximately $16,000 of the claim. The
financial statements include a liability for $16,000 payable to this party.
Legal counsel has not rendered an opinion as to the ultimate outcome of this
matter.
In March 1996, the Company made a demand for arbitration before a
commercial panel of the American Arbitration Association against the direct
response TV and marketing company ("On-Air Infonetwork") that was purchasing
television time for the Company's thirty minute infomercial, to seek damages
sustained as a result of their failure to perform pursuant to an agreement with
the Company. In April, 1996, in connection with the proceedings commenced by the
Company, On-Air Infonetwork obtained a temporary restraining order against the
Company. The temporary restraining order was vacated when the Company agreed to
set aside $75,000 and a percentage of sales up to an additional $25,000 (total
$100,000), in a special escrow account with the Company's legal counsel. Hearing
dates have been scheduled in the arbitration for July, 1996. The Company's
maximum exposure in the event the arbitration is lost is approximately $150,000
and the reinstatement of the reverse royalties on sales made in other marketing
venues domestically.
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Item 4. Submission of Matters to a Vote of Security Holders
For the fourth quarter of the fiscal year ended December 31, 1995, no
matters whatsoever were submitted to a vote of security holders through the
solicitation of proxies or otherwise.
Item 5. Market for Company's Common Equity and Related Stockholder Matters
(a) Market information - The principal U.S. market in which the Company's
Units (each unit consisting of two shares of Common Stock and one Class A Common
Stock Purchase Warrant to purchase an additional share and a Class B Common
Stock Purchase Warrant), Common Shares (all of which are one class, $.00003 par
value Common Stock) and Class A and Class B Warrants, were tradable is in the
over-the-counter market. The Class A Warrants expired on November 2, 1993 and
the Class B Warrants were extended to December 31, 1996. The aforesaid
securities are not traded or quoted on any automated quotation system. The OTC
Bulletin Board symbol for the Company's Common Stock is "POUT". The following
table sets forth the range of high and low bid quotes of the Company's Common
Stock per quarter as provided by the National Quotation Bureau (which reflect
inter-dealer prices without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions).
Bid Price
Period High Low
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Quarter Ended March 31, 1994 .03 .01
Quarter Ended June 30, 1994 .065 .05
Quarter Ended September 30, 1994 .09 .03
Quarter Ended December 31, 1994 .0725 .05
Quarter Ended March 31, 1995 .105 .075
Quarter Ended June 30, 1995 .09 .08
Quarter Ended September 30, 1995 .08 .075
Quarter Ended December 31, 1995 .05 .03
Quarter Ended March 31, 1996 .05 .04
(b) Holders -- As of December 31, 1995, the approximate number of the Company's
shareholders was 305.
c) Dividends -- The Company has not paid or declared any dividends upon its
Common Stock since its inception and, by reason of its present financial status
and its contemplated financial requirements, does not contemplate or anticipate
paying any dividends upon its Common Stock in the foreseeable future.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations Year Ended December 31, 1995 Compared to Year Ended
December 31, 1994
The Company incurred a net loss of $768,661 for the year ended December 31,
1995 as compared to a loss of $484,507 for the year ended December 31, 1994.
During fiscal 1995, the Company sought to create an increased awareness for
its product using television direct response marketing methods. As a result,
sales for fiscal 1995 increased by $1,203,000 from 1994 sales of $329,000 to
1995 sales of $1,532,000. This increase in sales reflects an increase in units
sold of
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approximately 28,000 units, from approximately 33,000 units in 1994 to
approximately 61,000 in 1995 and an increase in average selling price of $15,
from $10 in 1994 to $25 in 1995. In 1994, substantially all sales were at a
wholesale price of $10, whereas in 1995 approximately 23,600 units were sold
through television direct response methods at a retail price of approximately
$45.95 including shipping and handling. Additional revenue is obtained from
"upsells" of a smoker's vitamin and/or a smoker's toothpaste.
Cost of sales increased by $108,000, from $157,000 in 1994, to $265,000 in
1995. Of this amount, approximately $135,000 of the increase is attributable to
the increased number of units sold, offset by approximately $27,000 in savings
from a decrease in average unit cost during 1995.
Selling expenses increased by approximately $1,099,000, from $223,000 in
1994, to $1,322,000 in 1995. Of this amount, approximately $1,044,000 is
attributed to increased costs relating to the television direct response
marketing, $41,000 to radio marketing costs, and the remaining $14,000 to
increases in existing costs.
General and administrative costs increased by approximately $240,000, from
$425,000 in 1994, to $665,000 in 1995. Of this amount, approximately $177,000 is
attributable to increases in payroll and related taxes, $50,000 to increases in
professional fees, and the remaining $13,000 to increases in existing costs.
Liquidity and Capital Resources
Cash of $282,390 was used for operations for the year ended December 31,
1995 as compared to $134,126 used last year. Cash increases principally were
from proceeds of sales of common stock and convertible subordinated debentures
during the year ended December 31, 1995.
In order to meet short-term marketing goals, the Company borrowed $200,000
from an individual and $65,000 from officers and directors in March, 1996 to
continue to finance the airing of the Company's television infomercial through
September 1996.
The Company currently has no established sources of financing or unused
lines of credit.
Management believes but cannot assure that the levels of 1995 revenue will
continue throughout 1996. In this regard, first quarter 1996 revenues were
approximately $650,000 as compared with first quarter 1995 revenues of less than
$50,000.
In addition to revenues, the Company will need to supplement its working
capital needs through the use of debt and equity financing.
Distribution and Marketing
During 1995 the Company's increased television media exposure for the
PHASEOUT device which helped marketing efforts in other marketing venues such as
catalogs, radio, syndication and export sales. The Company has entered into
marketing agreements in several countries already and is in discussion with many
more. Management is of the opinion that international sales will represent a
significant portion of the Company's overall revenues in the future.
The Company introduced two new product lines this year. The first was a
comprehensive self-help quit smoking program targeting corporations, insurance
companies, HMO's and consumers. This program combines
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the PhaseOut device with the latest behavior modification techniques. The second
product line consists of eight consumable products for smokers and former
smokers. These initial eight products are: a stain fighting toothpaste, a breath
mint, a weight loss supplement, a smoker's vitamin, a calcium supplement, an
anti-stress product, a one a day coated aspirin and a alpha-hydroxy skin cream.
The Company, in cooperation with our South Korean distributor, has
developed an upgraded PHASEOUT unit, which was designed primarily for the
Japanese market and for use in South Korea.
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Item 7. Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
On January 12, 1996, the Company informed Stewart W. Robinson ("Robinson"),
certified public accountants, that effective January 1, 1996, the Board of
Directors of the Company (including the Audit Committee thereof) had determined
not to continue the engagement of Robinson as the registrant's independent
certified public accountant. Effective January 15, 1996, the registrant engaged
Raich Ende Malter Lerner & Company ("Raich") as the Company's new independent
certified public accountants to audit the registrant's financial statements
(beginning with the fiscal year ended December 31, 1995).
Robinson's reports on the financial statements for each of the past two
fiscal years of the Company ended December 31, 1993 and December 31, 1994
respectively ("Applicable Fiscal Years"), did not contain an adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles except as follows: The accountant's report
of Stewart W. Robinson on the financial statements of PhaseOut of America, Inc.,
as of and for the two years ended December 31, 1993 and 1994 was modified to
refer to the ultimate outcome of matters raised by two Federal regulatory
agencies and to the ability of the Company to continue as a going concern as
discussed in note 1 and note 8 of the notes to the financial statement in the
Form 10KSB filed with the SEC on May 3, 1995. During the Applicable Fiscal Years
and during the interim period since December 31, 1994, there was no disagreement
between the Company and Robinson on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of Robinson would have caused
it to make a reference to the subject matter of the disagreement in connection
with its reports.
During the Applicable Fiscal Years and during the Interim Period from
December 31, 1994 to January 12, 1996, Robinson did not (A) advise the Company
that the internal controls necessary for the Company to develop reliable
financial statements did not exist; (B) advise the Company that information had
come to the attention of Robinson that led it to no longer be able to rely on
the representation of the Company's management or that had made Robinson
unwilling to be associated with the Company's financial statements; C) advise
the Company of the need to expand significantly the scope of its audit or that
information had come to the attention of Robinson during the Applicable Fiscal
Years and during such interim period that if further investigated, (1) might
materially impact the fairness or the reliability of either a previously issued
audit report to the underlying financial statements, or the financial statement
issued (or to be issued) covering the fiscal periods(s) subsequent to the date
of the most recent financial statements covered by an audit report or (2) cause
Robinson to be unwilling to rely on representations of the Company's management
or be associated with the Company's financial statements and (D) advise the
Company that information had come to the attention of Robinson that Robinson
concluded materially impacts the fairness or reliability of either, (1) a
previously issued audit report or the underlying financial statements or, (2)
the financial statements issued (or to be issued) covering the fiscal period(s)
subsequent to the date of the most recent financial statements covered by an
audit report.
As stated above, the Company has engaged, effective as of January 15, 1996,
Raich as its new principal independent accountant to audit the Company's
financial statements (beginning with the fiscal year ended December 31, 1995).
Prior to such engagement, the Company (including any of its representatives or
agents) did not consult with representatives of Raich regarding the application
of accounting principles to a specified transaction (either completed or
proposed): or the type of audit opinion that might be rendered on the Company's
financial statements and neither a written report was provided to the Company
nor oral advice was provided that Raich concluded was an important factor
considered by the Company in reaching a decision as to the accounting,
14
<PAGE>
auditing or financial reporting issue.
Item 9. Directors, Executive Officers, Promoters and Control Persons:
Compliance with Section 16 (a) of the Exchange Act.
The following table sets forth certain information concerning the directors
and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position(s) with the Company
- ---- --- ----------------------------
<S> <C> <C>
Bernard Gutman 69 Chairman of the Board of Directors
Chief Executive Officer
James F. Leary 66 Vice Chairman of the Board
Chief Financial Officer, Director
Irwin Pearl 54 President, Chief Operating Officer
Director
Drew A. Gutman 36 Secretary-Treasurer, Director
Daniel Silkiss 72 Director
Luther H. Hodges, Jr. 59 Director
</TABLE>
Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and have qualified.
Officers are appointed to serve until the meeting of the Board of Directors
following the next annual meeting of stockholders and until their successors
have been elected and have qualified.
A summary of the business experience of each officer and director of the
Company is as follows:
BERNARD GUTMAN has been Chairman of the Board of Directors of the Company
since inception. From inception to September 14, 1987, Mr. Gutman was President
of the Company. He has also been an officer, director and principal shareholder
of Products & Patents, a publicly held company since its inception on December
11, 1981. From 1978 to February 1982, Mr. Gutman served as President and
Chairman of the Board of Directors of National Vitamin Corporation, a
publicly-held corporation involved in the marketing and distribution of
vitamins. From 1981 to 1983, Mr. Gutman was President of the Gutman Consulting
Company, which was wholly owned by Mr. Gutman and which provided financial and
marketing consulting services to various companies. From 1955 to 1978, Mr.
Gutman was Chairman of Delco Corporation, a publicly-held corporation engaged in
the home improvement business. He is the father of Drew Gutman, a Director of
the Company.
JAMES F. LEARY has been a Director and Chief Financial Officer of the
Company since August 1994. Mr. Leary the President and Founder of Sunwestern
Management, Inc., Dallas, Texas, engaged in venture capital investing through
two limited partnerships. Prior to Sunwestern's inception in 1981, Mr. Leary was
Senior Executive Vice President, Chief Financial Officer and Director of the
Associates Corporation of North America, Dallas, Texas. Prior to his tenure with
Associates, he served as Senior Vice President of The
15
<PAGE>
National Bank of North America (now National Westminster Bank USA) and as an
Assistant Treasurer of CIT Financial Corporation. Mr. Leary is Vice Chairman of
Finance of Search Capital Group, Inc., Dallas, TX (NASDAQ) and is a director of
MaxServ, Inc. (NASDAQ), several open-end mutual stock funds under the management
of Capstone Asset Management Company, and Anthem Financial Services, Inc. Mr.
Leary has a B.A. degree in Business Administration from Gerogetown University
1951, an MBA in Banking and Finance from New York University 1953, and is also a
graduate of the Advanced Management Program of the Harvard University Graduate
School of Business in 1956.
IRWIN PEARL has been a director of the Company since August 1987 and became
its President in September 1994. Mr. Pearl had been Chief Executive Officer and
Chairman of the Board of Directors of AquaSciences International, Inc. ("AQSI"),
a publicly-owned company, from January 1987-1992 when he resigned. AQSI is
engaged in water treatment technologies for home, commercial and industrial use.
From 1981 to 1985, Mr. Pearl was a director of Crystin Management Company, a
private management consulting firm in New York. From 1971 to 1981, Mr. Pearl was
the President and principal shareholder of Business Concepts Marketing
Corporation, a private company engaged in the development and distribution of a
proprietary hotel guest directory. From 1971 to 1981, he was also the President
and principal shareholder of Promotional Media Incorporated, a private company
engaged in the publication of traffic-building promotions for the supermarket
industry.
DREW GUTMAN has been the Secretary-Treasurer of the Company since September
1987. He has been a director of the Company since inception. Mr. Gutman had been
an officer and director of Products & Patents from April 1986 until August 1993.
From July 1983 to May 1984, he was an accountant with Eisner & Lubin, a public
accounting firm. From June 1984 to August 1985, Mr. Gutman was an accountant for
Merrill Lynch Hubbard, Inc., a real estate syndication company. Mr. Gutman
graduated from Hofstra University in May 1983 with a B.S. degree in accounting.
He is the son of Bernard Gutman, Chairman of the Board of the Company.
DANIEL SILKISS has been a Director of the Company since August 1994. Mr.
Silkiss is currently President of LCD International Group, Ltd. ("LCD") and has
been a technical consultant to the Company since 1987. LCD is engaged in
licensing, consulting and distribution. Other services include market research,
direct sales, product registration and joint ventures in the fields of
chemicals, pharmaceutical, cosmetics, biotechnology, telecommunications,
foodstuffs, botanicals and smoke cessation devices and programs. Mr. Silkiss has
coordinated clinical investigations at prestigious hospitals and medical schools
including Mt. Sinai, New York/Cornell, NYU, and Albert Einstein in New York; UC
San Diego, UCLA and Stanford in California; Children's New England Medical
Center in Massachusetts; University of Chicago in Illinois; and many others in
both the United States and Canada, interacting with the FDA and other
governmental agencies. He has initiated seminars in conjunction with hospitals
and international congresses, obtained NDA (New Drug Approval) for DDAVP
(Desmopressin Acetate) and IND (Investigational New Drug) for Gutron (Midodrin),
an alpha adrenergic; and has marketed drugs in the U.S. and overseas. Mr.
Silkiss has been a guest speaker at the FDA as well as a consultant to and
participant in the United Nations Development Program for developing countries.
LUTHER H. HODGES, JR. has been a Director of the Company since April 1995.
He currently serves as a member of the faculty of the Anderson Schools of
Management, the University of New Mexico; Chairman of the Board of the Santa
Fean, LLC and is a Director of Search Capital Corporation, Dallas, Texas; and a
director of Safety Floor International, Bethesda, MD., Zomeworks Corporation,
Albuquerque, and CWF Energy Company, Dallas, Texas. Additionally, Mr. Hodges
manages two closely held investment partnerships and operates the Santa Fe
Buyers Brokerage Company, a licensed real estate broker in New Mexico. He serves
16
<PAGE>
on the Governor's Economic Development Commission and the State Treasurer's
Investment committee in New Mexico. Mr. Hodges is also a trustee of the North
American Institute in Santa Fe and the National Symphony Orchestra in
Washington, D.C. Previously, Mr. Hodges was Chairman and Chief Executive Officer
of Washington Bancorporation (1983-89), a regional bank holding company, and The
National Bank of Washington (1981-89) and served as Chairman of the Board of
Starlight Publishing Company, Albuquerque, N.M. He served as Undersecretary of
the U.S. Department of Commerce (1979) and as the first Deputy Secretary of
Commerce (1980). He had been a democratic candidate for the United States Senate
from North Carolina (1978) and from 1962-1977 served in various management
positions at the North Carolina National Bank (presently Nations Bank),
including Chairman of the Board (1974-77). Mr. Hodges has long been active on
the Board of Directors of numerous community, educational and corporate
organizations. Mr. Hodges was educated at the University of North Carolina
(1957) and at the Harvard Graduate School of Business Administration (1961). He
served to the rank of Lieutenant, United States Navy.
Compliance With Section 16(a) of The Securities Exchange Act of 1934
The Company does not have any securities registered under Section 12 of the
Securities Exchange Act of 1934, and, accordingly, compliance with Section 16(a)
thereof is not required or applicable.
Item 10. Executive Compensation
The following Summary Compensation Table sets forth certain information
concerning total annual compensation paid to Bernard Gutman, the Company's
Chairman and Chief Executive Officer, Irwin Pearl, the Company's President and
Chief Operating Officer and Drew Gutman, the Company's Secretary/Treasurer (the
"named Executive Officers") for services rendered in all capacities by them to
the Company during fiscal years 1995 and 1994.
Summary Compensation Table
<TABLE>
<CAPTION>
Name and
Principal Positions Year Salary
- ------------------- ---- ------ Other
Cash Non Cash Compensation
---- -------- ------------
<S> <C> <C> <C> <C>
Bernard Gutman
(Chairman and
Chief Executive
Officer) 1995 $49,932 $52,000 $43,676
1994 $ 5,739 $53,103 $17,574
1993 $40,000 $52,903
Irwin Pearl
(President, Chief
Operating Officer) 1995 $49,250 $59,875 $32,297
1994 $22,250 $30,000 $ 0
1993 $ 0 $ 0 $ 0
Drew Gutman
(Secretary/
Treasurer) 1995 $38,000 $41,083 $44,486
1994 $15,180 $43,249 $18,378
1993 $ 0 $40,000 $52,903
</TABLE>
17
<PAGE>
The category "Other Compensation" includes the leasing of an automobile, any
automobile expenses, telephone expenses and entertainment expenses.
Item 11. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners -- The persons set forth on
the charts below are known to the Company to be the beneficial owners of
more than 5% of the Company's outstanding voting Common Stock as of the
date hereof.
(b) Security Ownership of Management -- Information concerning the number and
percentage of shares of voting Common Stock of the Company owned of record
and beneficially by management, is set forth on the charts below:
<TABLE>
<CAPTION>
Name and Address Shares of Common
Of Beneficial Owner Beneficially Owned Percent Owned (1)
- ------------------- ------------------ -----------------
<S> <C> <C>
Bernard Gutman 15,097,486 (2) 20%
140 Broadway
Lynbrook, New York 11563
Drew Gutman 3,346,425 4.5%
140 Broadway
Lynbrook, New York 11563
Irwin Pearl 1,350,000 2.0%
140 Broadway
Lynbrook, New York 11563
Daniel Silkiss 1,800,000 2.4%
140 Broadway
Lynbrook, New York 11563
James F. Leary 998,853 1.3%
140 Broadway
Lynbrook, New York 11563
Luther H. Hodges, Jr. 805,000 1.0%
140 Broadway
Lynbrook, New York 11563
Products & Patents, Ltd. 2,807,373 3.8%
140 Broadway
Lynbrook, New York 11563
All Directors and Officers 23,397,764 31.5%
as a group (six persons)
</TABLE>
18
<PAGE>
(1) Based upon 74, 859,319 shares issued as of December 31, 1995.
(2) Includes 2,807,373 shares held by P&P inasmuch as. Bernard Gutman is an
officer and director of P&P.
Item 12. Certain Relationships and Related Transactions
In October 1994, the agreement with P&P was amended to provide for:
transfer of patents, worldwide marketing and manufacturing rights for 5,000,000
shares of Common Stock and; reduction of $100,000 in the sum owed to P&P for
1,000,000 shares of Common Stock.
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 approximately 53,000 units of
inventory.
The Chairman/CEO is an officer, director and significant (approximately
22%) shareholder of P&P and P&P, which is now inactive, is a shareholder of the
Company.
In September 1994, the Board of Directors approved employment contracts
with management providing for salaries of $100,000 each for a three year period
(aggregate $300,000 per year). Additionally, these agreements provide for
certain benefits and perquisites. As of the date of this report, the contracts
have not been reduced to writing.
Item 13. Exhibits and Reports on Form 8-K
(A) Exhibits
10.01 Agreement dated September 20,1995 with Integrity International
10.02 Agreement dated June 9, 1995 with Tokyo Boeki
10.03 Agreement dated August 21, 1995 with J&R Intercontinental
10.04 Agreement dated August 1995 with Products & Patents
(B) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1995.
19
<PAGE>
Independent Auditors' Report
To the Board of Directors and Shareholders
Phase-Out of America, Inc.
We have audited the accompanying balance sheet of Phase-Out of America, Inc. as
of December 31, 1995, and the related statements of operations, shareholders'
(deficit), and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Phase-Out of America, Inc. as
of December 31, 1995, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
As discussed in Note 9 to the financial statements, the Company has been subject
to certain governmental regulatory matters by the U.S. Food and Drug
Administration and the Federal Trade Commission. At present time, neither the
Company nor its legal counsel can predict the ultimate outcome of the matters
addressed by these agencies. These matters, if pursued by the agencies, may have
a material adverse effect on the operations of the Company.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has had recurring net operating losses since
its inception, has relied upon debt and equity financing to provide funds for
operations and, as of December 31, 1995, current liabilities exceed current
assets by $905,416. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
RAICH ENDE MALTER LERNER & CO.
East Meadow, New York
May 2, 1996
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITOR
Board of Directors and Shareholders
Phase-Out of America., Inc.
Lynbrook, New York
I have audited the accompanying statements of operations, changes in
shareholders' deficit and cash flows of Phase-Out of America., Inc. for the year
ended December 31, 1994. These financial statements are the responsibility of
the Company's management. My responsibility is to express an opinion on these
financial statements and the related schedules based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements and the related schedule are
free of material misstatement. An audit includes examining on a test basis
evidence supporting the amounts and disclosures in the financial statements and
the related schedule. An audit also includes an assessment of the accounting
principles used and significant estimates made by management, as well as an
evaluation of the overall financial statement presentation. I believe that my
audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the results of operations, changes in shareholders' deficit
and cash flows of Phase-Out of America Inc. for the year ended December 31, 1994
in conformity with generally accepted accounting principles.
As discussed in Note 9 to the financial statements, the Company has been subject
to certain governmental regulatory matters by the U.S. Food and Drug
Administration and the Federal Trade Commission. At the present time, neither
the Company nor its legal counsel can predict the ultimate outcome of the
matters addressed by these agencies. These matters, if pursued by the agencies,
may have a material adverse effect on the operations of the Company.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations
and has a working capital deficiency, both of which raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result should the Company
be unable to continue as a going concern.
STEWART W. ROBINSON
New York, New York
March 27, 1995
F-2
<PAGE>
PHASE-OUT OF AMERICA, INC.
Balance Sheets
December 31, 1995
================================================================================
Assets
Current Assets
Cash $176,818
Accounts receivable - net of allowance for doubtful
accounts of $-0- 71,967
Inventory - stated at the lower of cost or market -
first-in, first-out 99,300
Prepaid expenses 9,852
Other current assets 18,592
--------
376,529
--------
Property and Equipment - at cost - net of accumulated
depreciation of $13,975 7,550
Patents - at cost - net of accumulated amortization of
$3,795 43,205
Other Assets 3,542
--------
54,297
--------
$430,826
========
F-3
<PAGE>
PHASE-OUT OF AMERICA, INC.
Balance Sheets
December 31, 1995
================================================================================
Liabilities and Shareholders' (Deficit)
Current Liabilities
Senior subordinated convertible debentures - including
accrued interest of $24,958 $ 459,958
1992 convertible debentures - including accrued interest
of $8,265 29,765
Taxes payable 8,077
Accounts payable 582,159
Accrued officer compensation 144,160
Loans from officer/shareholder 31,650
Other current liabilities 26,176
----------
1,281,945
----------
Shareholders' (Deficit)
Series A Convertible Preferred Stock - par value $.001 -
authorized 600,000 shares - no shares issued and
outstanding
Series B Convertible Preferred Stock - par value $.001 -
authorized 5,000,000 shares - no shares issued and
outstanding
Common Stock - par value $.00003 - authorized
100,000,000 shares - 74,859,319 shares issued and
outstanding 2,246
Capital in excess of par 1,937,688
Accumulated (deficit) (2,791,053)
----------
(851,119)
----------
$ 430,826
==========
See notes to financial statements.
F-4
<PAGE>
PHASE-OUT OF AMERICA, INC.
Statements of Operations
================================================================================
For the Years Ended
December 31,
------------------------------
1995 1994
------------ ------------
Sales - net $ 1,532,405 $ 328,686
Cost of Sales 264,566 157,209
------------ ------------
1,267,839 171,477
------------ ------------
Selling Expenses 1,322,199 223,042
General and Administrative Expenses 664,648 425,363
------------ ------------
1,986,847 648,405
------------ ------------
(719,008) (476,928)
------------ ------------
Other Income (Expenses)
Interest income 89 570
Royalty income -- 2,930
Interest (expense) (49,742) (11,079)
------------ ------------
(49,653) (7,579)
------------ ------------
Net (Loss) $ (768,661) $ (484,507)
============ ============
(Loss) Per Share $ (0.02) $ (0.01)
============ ============
Weighted Average Number of Shares
Outstanding (to nearest 1,000,000) 68,000,000 57,000,000
============ ============
See notes to financial statements.
F-5
<PAGE>
PHASE-OUT OF AMERICA, INC.
Statement of Shareholders' (Deficit)
For the Year Ended December 31, 1995
================================================================================
<TABLE>
<CAPTION>
Number of
Common Stock Amount Capital in
Shares $.00003 Excess of Accumulated Deferred
(Post-Split) Par Value Par Value (Deficit) Compensation
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1994 53,494,288 $ 1,605 $ 1,352,597 $(1,537,885) $ 68,750
Bond conversions to stock 50,045 2 4,999 -- --
Shares issued to Products &
Patents, Ltd. for patent rights
and reduction of accounts
payable 6,000,000 180 146,820 -- --
Stock issued for accrued
services rendered:
Officers 1,500,000 45 16,455 -- --
Consultants and employees 1,940,000 57 27,107 -- --
Proceeds from sales of stock 50,000 2 2,499 -- --
Return of escrow shares (2,750,000) (82) (68,668) -- (68,750)
Net (loss) -- -- -- (484,507) --
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1994 60,284,333 1,809 1,481,809 (2,022,392) --
Proceeds from sales of stock 2,006,061 60 119,940 -- --
Bond and accrued interest
conversions to stock 624,245 19 33,996 -- --
Stock issued to supplier 1,000,000 30 17,470 -- --
Stock issued for accrued services rendered:
Officers and directors 4,022,038 121 161,353 -- --
Consultants 6,935,000 207 123,120 -- --
Net (loss) -- -- -- (768,661) --
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1995 74,871,677 $ 2,246 $ 1,937,688 $(2,791,053) $ --
=========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
PHASE-OUT OF AMERICA, INC.
Statements of Cash Flows Page 1 of 2
================================================================================
For the Years Ended
December 31,
----------------------
1995 1994
--------- ---------
Cash Flows from Operating Activities
Net (loss) $(768,661) $(484,507)
Adjustments to reconcile net (loss) to cash
(used for) operating activities:
Depreciation and amortization 6,074 3,417
(Increase) decrease in:
Accounts receivable (69,883) 50,085
Inventories 256,186 150,326
Prepaid expenses and other current assets (15,081) (638)
Increase (decrease) in:
Accrued bond interest 25,968 --
Accounts payable 46,269 47,307
Accrued officer compensation 144,160 125,715
Taxes payable 3,270 (18,485)
Amounts due to affiliate (91,488) (51,011)
Other current liabilities 21,710 --
Expenses paid through the issuance of
restricted common stock 159,086 43,665
--------- ---------
(282,390) (134,126)
--------- ---------
Cash Flows from Investing Activities
Acquisition of fixed assets (800) (550)
Decrease in other assets 300 85
Acquisition of patent rights from affiliate through
issuance of common stock -- (47,000)
--------- ---------
(500) (47,465)
--------- ---------
Cash Flows from Financing Activities
Proceeds from sales of debentures 290,000 --
Advances from officer/shareholder 25,753 (8,000)
Payments of capital leases (586) (7,287)
Proceeds of sales of common stock 120,000 2,500
Common stock to affiliate for patent rights -- 47,000
Proceeds from senior secured short-term note -- 125,000
Loan from director/shareholder -- 20,000
Loans to officers -- 8,200
--------- ---------
435,167 187,413
--------- ---------
See notes to financial statements.
F-7
<PAGE>
PHASE-OUT OF AMERICA, INC.
Statements of Cash Flows Page 2 of 2
================================================================================
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------
1995 1994
-------- --------
<S> <C> <C>
Net Increase in Cash $152,277 $ 5,822
Cash - beginning 24,541 18,719
-------- --------
Cash - end $176,818 $ 24,541
======== ========
Supplemental Disclosures
Cash paid for:
Interest $ 23,880 $ 886
======== ========
Non-cash investing and financing transactions:
Debt due to affiliate paid through the issuance
of common stock $ -- $100,000
======== ========
Bond and accrued interest conversions to common stock $ 34,014 $ 5,000
======== ========
Assumption of accounts payable:
In exchange for inventory $173,257 $ --
======== ========
In payment of amounts due to affiliate $227,709 $ --
======== ========
Loan from director/shareholder converted to debentures $ 20,000 $ --
======== ========
Senior secured notes payable converted to senior
subordinated convertible debentures $125,000 $ --
======== ========
Stock issued to supplier $ 17,500 $ --
======== ========
Stock issued for accrued services rendered $125,715 $ --
======== ========
</TABLE>
See notes to financial statements.
F-8
<PAGE>
PHASE-OUT OF AMERICA, INC.
Notes to Financial Statements
December 31, 1995
================================================================================
1 - The Company
Phase-Out of America, Inc. (the "Company") was organized as a Delaware
Corporation on July 17, 1987 and operated as a development stage company
through 1993. The Company's purpose is to market and distribute its
patented phase-out system smoking cessation device (the "product").
The Company has primarily marketed the product in the United States through
direct response marketing including radio, television spots and
infomercials and is beginning to foreign distribution.
2 - Summary of Significant Accounting Policies
a. Inventory - Inventory is valued at cost (specifically identified)
which is not in excess of market value. Inventory is comprised
entirely of finished goods.
b. Property and Equipment - Property and equipment are carried at cost.
Depreciation is computed on the straight-line method over the
estimated useful lives of the assets.
c. Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
d. Patents - Patents represent a patent dated June 15, 1993 that was
acquired by the Company on October 25, 1994. The acquisitions cost has
been capitalized and amortized (straight-line method) over the life of
16 years.
e. Advertising Costs - All costs relating to direct response advertising
and marketing have been expensed in the period incurred. The Company's
direct response advertising costs do not qualify for capitalization
under the American Institute of Certified Public Accountants Statement
of Position 93-7 Reporting on Advertising Costs guidelines because
there is no historical data to provide a basis that the direct market
will have measurable future benefit. Advertising costs during 1995 and
1994 were $216,937 and $65,572, respectively.
Continued
F-9
<PAGE>
f. Earnings (Loss) Per Share - Loss per share is computed by dividing the
net loss by the weighted average number of shares outstanding during
the year. Common stock equivalents have not been included in the
earnings per share computation because of their anti-dilutive effect.
g. Stock-Based Compensation - The Company occasionally issues stock to
employees and non-employees in lieu of cash as compensation for
services rendered. The Company has adopted Financial Accounting
Standard #123 which requires those transactions to be accounted for
based on the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably
measurable.
h. Reclassifications - Various accounts in the prior year's Statement of
Operations have been reclassified for comparative purposes to conform
with the presentation in the current year's financial statements.
These reclassifcations had no impact upon the results of operations.
3 - Status of the Company
The financial statements have been prepared on a going-concern basis, which
contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business over a reasonable length of time.
The Company has had recurring net operating losses since its inception and
has made use of privately-placed debt and equity financing to provide funds
for operations. As of December 31, 1995, current liabilities exceed current
assets by $905,416. Those factors, as well as the Company's relatively
recent entry into the marketplace, create an uncertainty about the
Company's ability to continue as a going concern.
The Company has intentions of expanding and refining its marketing efforts
to improve the efficiency of these efforts and to increase revenues. In
addition, the Company is continuing its efforts to obtain long-term
financing through the issuance of long-term debt and equity securities.
The financial statements do not include any adjustments that might be
necessary should the above or other factors affect the Company's ability to
continue as a going concern.
Continued
F-10
<PAGE>
4 - Warrants and Convertible Debentures
a. Warrants -
Price Per Expiration
Shares Share Total Dates
================================================
Balance - December 31, 1994 3,034,000 $.25 $ 758,500 1996
Issued with purchase of
common stock 2,900,000 .15 435,000 1998
Issued for services 2,006,061 .10 - .15 230,909 1996 - 1998
--------- ----------
Balance - December 31, 1995 7,940,061 $1,424,409
========= ==========
b 1992 Convertible Debentures - In 1992, the Company initiated a series
of private placement offerings of two and three Subordinated
Convertible Debentures with an annual interest rate of 10% and with
variable conversion rates (ranging from $.05 to $.10 per share). These
offerings raised a total of $117,500. The Company is in default on
interest payments and is in violation of covenants. Of the original
$117,500 raised, $96,000 has been converted into stock. As of December
31, 1995, $21,500 of principal and $8,266 of interest remain unpaid or
unconverted on these debentures.
c. Senior Secured Notes Payable - In 1994, the Company issued one-year
Senior Secured Notes Payable for $125,000, which were converted into
the Company's 1995 Private Placement of Senior Subordinated
Convertible Debentures.
d. Senior Subordinated Convertible Debentures - In 1995, the Company
conducted a private placement of Senior Subordinated Convertible
Debentures (due 1998), in which $310,000 was obtained from private
lenders, $125,000 was converted from the 1994 Senior Secured Notes and
$20,000 was converted from a 1994 directors/shareholders loan for a
total of $435,000. The debentures are convertible at $.075 per share
through 1998 and, in certain circumstances, are mandatorily
convertible. The debentures bear an annual interest rate of 10%. The
Company is technically in default because the December 17, 1995
interest payments, totaling $19,750, were paid between one and four
days after the 30-day grace period.
5 - Related Party Transactions
a. Licensing Agreements - The Company had licensing agreements with
Products & Patents, Ltd. ("P&P"), a company related by management and
control.
Continued
F-11
<PAGE>
In August, 1995, the relationship with P&P was terminated and the
Company's obligation to pay royalties was discontinued. In connection
with this transaction, the Company agreed to assume a $400,966
liability to one of P&P's suppliers in exchange for the elimination of
the liability owed to P&P of $227,709 and inventory valued at
$173,257. There was no gain or loss recognized as a result of this
transaction.
b. Loan from Officer/Shareholder - An officer/shareholder of the Company
is owed $31,650 by the Company. The amount is payable on demand and
there is no stated rate of interest.
c. Other - The Company's general counsel is a relative of certain of the
officers. The Company incurred approximately $25,000 of legal fees
with this firm in 1995 and $9,000 in 1994, of which $21,780 remained
unpaid as of December 31, 1995.
6 - Income Taxes
The Company has available net operating loss carryforwards of approximately
$2,600,000, which expire in 2002 until 2010. Deferred income taxes reflect
the net tax effects of net operating loss carryforwards and result in
deferred tax assets of approximately $780,000 and $600,000 at December 31,
1995 and 1994, respectively, which were fully offset by valuation
allowances due to uncertainties surrounding the ultimate realization of
this asset.
7 - Leases
The Company leases automobiles for its officers, none of which have
purchase or renewal options. Rental expense was $23,413 and $22,404 for
1995 and 1994, respectively. The future minimum rental payments required
under these leases are as follows:
1996 $29,100
1997 13,044
1998 5,856
The Company is currently in negotiations for the lease of office space.
8 - Economic Dependence
The Company purchased 100% of its products in 1995 and 1994 from one
vendor.
Continued
F-12
<PAGE>
9 - Other Commitments and Contingencies
a. Direct Response Marketing Agreement - By agreement dated December 30,
1994, and subsequently amended on July 13, September 21, and December
22, 1995, the Company granted to On-Air Infonetwork, Inc. ("On-Air")
the exclusive television direct response marketing rights for the
product in the United States and Canada. In addition to agreeing to
spend $50,000 on production, talent and editing costs in conjunction
with the production of the Company's infomercial and other television
commercials, On-Air agreed to generate certain minimum sales and to
expend substantial monies on broadcast media time. Once On-Air has
expended a minimum total on media, the Company is liable for reverse
royalties on units sold excluding those sold through On-Air's direct
response marketing campaign.
In March, 1996, the Company made a demand for arbitration before a
commercial panel of the American Arbitration Association against
On-Air, to seek damages sustained as a result of their failure to
perform pursuant to an agreement with the Company. In April, 1996, in
connection with the proceedings commenced by the Company, On-Air
obtained a temporary restraining order against the Company. The
temporary restraining order was removed when the Company agreed to set
aside $75,000 and a percentage of sales up to an additional $25,000
(total $100,000), in a special escrow account with the Company's legal
counsel. No hearing dates have been scheduled in the arbitration. The
Company's maximum exposure in the event the arbitration is lost is
approximately $150,000 and the reinstatement of the reverse royalties
on sales made in other marketing venues domestically. As of December
31, 1995, there was a liability of approximately $101,000 included in
accounts payable relating to this agreement which will be increased
based upon sales in 1996.
b. Other Marketing Agreements - The Company has entered into various
marketing agreements both domestically and abroad. Those agreements
generally have sales quotas which the other parties must achieve in
order to maintain exclusivity but generally do not bind the Company to
any purchase commitments.
c. Regulatory Matters - On June 1, 1993, the U.S. Food and Drug
Administration (FDA) sent a warning letter to the Company. The letter
stated that due to the Company's marketing and promotional materials
used at the time for the product, the FDA believed the product was
being sold as a medical device and should be subject to regulation as
a medical device under the Federal Food, Drug and Cosmetic Act (FDC
Act), and that the product was in violation of certain provisions of
that Act.
The Company believes that the product is not a medical device within
the meaning of the FDA Act and has advised the FDA of its position.
However, in an act of cooperation with the FDA, the Company
volunteered to make revisions in its promotional material in order to
make it clearer to the public that the product is not intended to be
used as a medical device.
Continued
F-13
<PAGE>
Since these revisions have been made, the Company has not received any
communications from the FDA about this matter. However, no assurance
can be given that the FDA will not in the future continue its
investigation and prohibit the Company from marketing the product or
invoke other remedies without the Company complying with medical
device status requirements of the FDC Act.
On October 20, 1993, the Federal Trade Commission ("FTC") advised the
Company that they were 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 ("FTC Act")
in connection with certain advertising claims made by the Company. The
Company provided certain information and documents requested by the
FTC.
Management believed that the FTC was apparently satisfied with the
Company's response to their inquiry and its willingness to cooperate.
However, on August 3, 1995, the Company received a complaint from the
FTC Division for Advertising Practices with regard to the ongoing
investigation.
The FTC submitted to the Company a draft administrative complaint and
a proposed consent agreement outlining the terms of a possible
settlement of the FTC's claims. In response, the Company has submitted
a counter-proposal and has engaged in extensive dialogue with FTC
staff to negotiate a resolution of the FTC's claims.
The draft administrative complaint, which has not to date been filed
by the FTC, alleges that certain statements and claims contained in
the Company's print and broadcast advertisements for the sale of the
product are false and misleading in that they are not reasonably
substantiated and, therefore, violate Sections 5 and 12 of the FTC
Act. The Company denies the material allegations in the draft
administrative complaint and will vigorously defend such an action in
the event that a settlement cannot be reached and a complaint is
actually filed. The Company has made, and continues to make, all
reasonable efforts to resolve the FTC's concerns without resort to
litigation.
In the event that the FTC institutes an administrative proceeding
against the Company, it could have an adverse effect on the operations
of the Company. Regardless of the ultimate outcome of any such action,
the Company would likely incur substantial expenses in defense which,
in the aggregate, would exceed the applicable materiality standard.
In February, 1995, the Company's former attorney, John B. Lowy,
brought an action against the Company in New York State Supreme Court,
New York County for unpaid attorney fees and disbursements of
approximately $36,000. Management intends to vigorously defend all but
approximately $16,000 of the claim. The financial statements include a
liability for $16,000 payable to this party. Legal counsel has not
rendered an opinion as to the ultimate outcome of this matter.
Continued
F-14
<PAGE>
10 - Subsequent Event
In March, 1996, the Company borrowed $200,000 from an individual
investor to finance the airing of the Company's television
infomercial. The Company has agreed to use the money for a period of
six months and to pay a fee of 2 1/2% per month. The Company's
Chairman, President and a Director have also loaned money to the
Company for the financing of the infomercial. Each individual may
withdraw their funds at any time upon 60 days' written notification to
the Company.
F-15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PHASE-OUT OF AMERICA, INC.
Dated: June _____, 1996 By: _____________________________
Irwin Pearl, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
- ---------------------
Bernard Gutman Chairman of the Board of Directors June _____, 1996
Chief Executive Officer
- ---------------------
James F. Leary Vice Chairman of the Board &
Chief Financial Officer June _____, 1996
- ---------------------
Irwin Pearl President & Chief Operating
Officer June_____, 1996
- ---------------------
Drew A. Gutman Secretary-Treasurer & Director June _____, 1996
- ---------------------
Daniel Silkiss Director June _____, 1996
- ---------------------
Luther H. Hodges, Jr. Director June _____, 1996
</TABLE>
<PAGE>
SUPPLEMENTAL INFORMATION
Supplemental Information to be Furnished with Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Pursuant to
Section 12 of the Act.
NONE
MARKETING AGREEMENT
This Marketing Agreement (the "Agreement") is made and entered into this
20th of September, 1995, by and between Phase Out of America, Inc., a Delaware
corporation, ("Manufacturer") and Integrity international, Inc., a Pennsylvania
corporation (the "Company").
WHEREAS, Manufacturer is engaged in the business of formulating,
manufacturing, and/or distributing a patented anti-smoking device, an
anti-smoking kit/program and complementary consumable products, including
personal care/hygiene products, nutritional supplements and vitamin products;
WHEREAS, the Company desires to market certain of Manufacturer's products
and Manufacturer desires to sell the products to the Company pursuant to the
terms hereof;
NOW, THEREFORE, in consideration of the mutual covenants contained, herein
and other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties agree as follows:
1. Manufacturing/Marketing Relationship,
(a) Sale Agreement, Manufacturer hereby agrees to sell its products to the
Company under the labels and trade names agreed to between the parties. The
products to be covered by this Agreement shall be described on Exhibit A
attached hereto (the "Products"). Set forth next to each product on Exhibit A is
a description of the exclusive rights granted and/or permitted marketing efforts
of each party. Except as otherwise set forth herein, this Agreement shall apply
to the United States, its territories and Canada.
(b) Other Agents. Manufacturer represents and warrants that is has no other
agreements currently in effect with other individuals or entities that prohibit
the manufacture, sale or distribution of the Products or that may other-wise
interfere with the performance of any of the obligations of Manufacturer or any
of the rights granted to the Company as set forth herein. It is recognized and
acknowledged that Manufacturer currently has distribution relationships with
several third-parties (although no new distribution relationships not in
accordance with the terms of this Agreement will be entered into by
Manufacturer) and will within 120 days hereof use its best efforts to convert
prior relationships to the Company's Distributor business or terminate
Manufacturer's existing third party independent distributor program to assure
compliance with all of the restrictions contained herein.
(c) Formulation. The Manufacturer agrees that unless required by law, it
shall not alter or modify the formulation of the complementary consumable
products or the content of the items in the anti-smoking kit/program without the
express written consent of the Company, such consent not to be unreasonably
withheld. Furthermore, it is agreed that if any changes, modifications or
alterations are to be made to the anti-smoking device, the Company shall have
the opportunity to elect whether to market the original anti-smoking device or
the new version thereof as more fully
<PAGE>
described in Section 9 hereof.
(d) Ownership.
i.) Manufacturer. Manufacturer represents and warrants that it is the sole
legal and beneficial owner of valid United States patents for the Phase-Out
anti-smoking device. Those patent numbers are as follows: U.S. No. 4,231,378 and
U.S. No. 5,218,976. The parties agree that the trademarks, trade names, logos
and other intellectual property rights relating to the names and other products
owned and utilized@ed by the Manufacturer shall be solely and exclusively owned
by the Manufacturer.
ii.) The Company. The parties agree that by virtue of this Agreement
Manufacturer shall not obtain any right in or to any of the trade names,
trademarks, logos or other intellectual rights relating to the names and
products owned by the Company.
(e) Marketing Materials. Upon request from the Company, Manufacturer
agrees to provide all of its marketing materials for the Product to the Company
at Manufacturer's cost plus twenty percent. The Company agrees to pay for all
new duplication of such materials that the Company elects to use. If the Company
desires to purchase any marketing materials from Manufacturer, the price shall
be at Manufacturer's cost plus twenty percent (20%).
2. Pricing.
(a) Prices. The price for the products available for purchase from
Manufacturer by the Company shall be identified on Exhibit B. As set forth on
Exhibit B, the price shall be the price for the Products at the time wh are
packaged and ready to be shipped and shall not include the shipping charges for
the Products. The parties agree that the Products shall be F.O.B. Manufacturer's
facility located in the continental United States. Manufacturer agrees to
cooperate with the shipping company of the Company's choice. All charges for
delivery to the Company shall be the responsibility of the Company
(b) Adjustments. The price for the Products is fixed for at least one (1)
year from the date of the first shipment of the Products by Manufacturer to the
Company. After which time, Manufacturer may increase the price if it can
reasonably demonstrate an increase in the finished cost of the Products.
Manufacturer will give the Company at least ninety (90) days notice of any
proposed price change. Furthermore, in recognition of the Company's significant
investment in the marketing effort contemplated by the Company, Manufacturer
agrees that it will ensure that pricing for the Phase-Out anti-smoking device
will always be 4.4 times less (or 3.8 times less if the Company has elected to
market the modified anti-smoking device) than the prevailing non-sale retail
price offered directly by Manufacturer or through any of its other permitted
channels of distribution. It is agreed that any retail price offered over
television, radio or other electronic medium shall trigger the foregoing
mechanism to adjust the price offered to the Company. it is also agreed that any
sale price offered for longer than fourteen days in duration by whatever medium
or channel of retail distribution shall trigger the foregoing mechanism to
adjust the price offered to the Company. Additionally, it is agreed that the
price of the Phase-Out anti-smoking kit/program shall be based upon the device
<PAGE>
comprising 41.6 percent of the price of the Phase-Out anti-smoking kit/program
(or 48.6 percent if the Company has elected to market the modified anti-smoking
device). As such, any reduction or increase in price of the anti-smoking device
will proportionately adjust the price to the Company of the Phase-out
anti-smoking kit/program.
3. Quotas. In order for the Company to preserve and maintain the
limitations on the marketing efforts of Manufacturer, the Company must order
from Manufacturer and pay the amounts of each of the Products as set forth on
Exhibit C attached hereto. It is agreed that the Company's exclusivity and the
limitations on Manufacturer's marketing efforts shall remain in full force if
such quotas are met by the Company. All 1995 sales shall be counted towards the
satisfaction of 1996 quotas. The Company's failure to reach any quota shall not
invalidate any other provisions of this Agreement except for the Company's
marketing exclusivity and the marketing limitations on Manufacturer with respect
to the particular Product that did not reach the quota, as set forth on Exhibit
A and the grant of the right of first refusal contained in Paragraph 15 herein.
Notwithstanding anything herein which may be to the contrary, in no instance
during the term of this Agreement shall Manufacturer sell any of the Products to
another network marketing, direct sales organization or multilevel distribution
company.
4. Orders/Payment.
(a) Purchase Orders. All orders submitted to Manufacturer by the Company
for the purchase of Products hereunder shall be submitted using a Standard order
form provided by the Company (the 'Purchase Order").
(b) Delivery. Within fifteen (15) days of receipt of a Purchase Order,
Manufacturer shall ship the order via the Company's preferred method to the
delivery address designated on the Purchase Order. The target delivery date of
fifteen (15) days pertains only to Purchase Orders equal to or less than the
initial Purchase order. For Purchase Orders up to four (4) times larger than the
initial Purchase Order, Manufacturer shall have forty (40) days from the date of
receipt of a Purchase Order to meet the target delivery date. For Purchase
Orders greater than four (4) times the initial purchase order, Manufacturer
shall have seventy five (75) days from the date of receipt of the Purchase Order
to meet the target delivery date. If Manufacturer is out of stock of Products
ordered on a Purchase Order or if Manufacturer has knowledge that it will not
meet the target delivery date, Manufacturer shall contact whomever submitted the
Purchase Order to Manufacturer to get approval for a replacement for such
unavailable Products or to try to make arrangements to otherwise solve any
problem which may be impeding Manufacturer from meeting the target delivery
date. At such time, whomever submitted the Purchase Order may cancel such order
in its entirety with respect to the out of stock or delayed Products without
penalty or obligation.
(e) Initial Order. The parties agree that the initial orders of Products
shall be as follows:
i.) 1500 units of the anti-smoking kit/program to be delivered to the
Company no later than October 31, 1995,
ii.) 1500 units of the anti-smoking device to be delivered to the
Company no later
<PAGE>
than October 31, 1995.
iii.)8400 units of the complementary consumable products to be
delivered to the Company no later than January 15, 1996. The
composition of the product mix of the consumable product shall be
1200 of each of the complementary consumable products with the
exception of "Control".
(d) Payments. The placement of the initial order of the anti-smoking
kit/program and the Phase-out anti-smoking devices shall he made simultaneously
with the execution of this Agreement. The Company shall pay 50% of the purchase
price at the time of the initial order, and upon placement of each subsequent
order, with the remaining balance due upon delivery. Manufacturer shall provide
the Company a detailed invoice at the time of delivery of the Product for all
charges relating to products actually shipped and previously not invoiced by
Manufacturer (including the cost of the Products for each order, as set forth on
a per unit basis on Exhibit B),
5. Warranties.
(a) Manufacturer represents and warrants that the Products shall be free
from defects and shall be of merchantable quality for the market of anti-smoking
devices, anti-smoking kits/programs, personal care/hygiene products, nutritional
supplements, vitamins and complementary products that may be offered by
Manufacturer. Further, Manufacturer represents and warrants that it has used its
best efforts to comply with the requirements of the Federal Trade Commission
("FTCR), Federal Drug Administration ("FDA'), the United States Department of
Agriculture ('USDA') and all other applicable governmental rules and regulations
which may affect the Products. Manufacturer also warrants that title to all
Products delivered to the Company hereunder shall be free and clear of all
liens, or other claims.
(b) Manufacturer shall defend, hold harmless and indemnify the Company with
respect to any and all claims, suits, demands and proceeding ("Claims') asserted
to or instituted against the Company alleging any defects in the quality,
composition, or labeling of the Products, except to the extent that the Company
is responsible for such defects or labeling. Manufacturer shall promptly notify
the Company of any Claims and shall cooperate fully with the Company in the
defense of such Claims. Manufacturer agrees to carry and maintain appropriate
product liability insurance under terms which provide for coverage of not less
than one million dollars ($1,000,000.00) per occurrence with respect to each of
the Products. Manufacturer shall name the Company as an additional insured on
such policies of insurance. Manufacturer shall provide proof thereof within
thirty (30) days of the execution hereof. Furthermore, Manufacturer shall
provide proof that its vendors and suppliers used in the manufacture and
formulation of the Products have similar product liability insurance coverage.
Manufacturer shall bear the cost of shipping returns and replacement Products
arising out of defects in quality, composition or labeling of the Products.
(c) Approval of Materials. The Company agrees not to publish any
advertising or marketing material with respect to the Products without express
prior written approval from Manufacturer. However, Manufacturer agrees that it
will not unreasonably withhold its consent and its consent shall be deemed given
if it does not respond to the Company's request for consent within
<PAGE>
twenty four hours (Monday- Friday). Requests for consent may be made by fax or
mail.
<PAGE>
(d) Packaging. Each party grants to the other a limited right to use its
trademarks to achieve the purposes and intent of this Agreement, subject to the
written approval of the owner thereof, not to he unreasonably withheld.
Manufacturer or its vendors/suppliers shall provide the necessary nutritional
and other labeling information in accordance with applicable FTC, FDA, USDA and
other related federal or state laws which must be imprinted on the packaging.
Furthermore, Manufacturer agrees to bear the expense of design, graphics and
plates in order to change the labels of the Products to meet
labeling/nutritional information requirements. Also, it is agreed that all
packaging and marketing materials of the Products must be approved by the
Company with consent not to be unreasonably withheld. It is understood and
acknowledge that the Company's approval rights shall only extend to those
Products actually sold exclusively by the Company.
6. Intellectual Property Indemnity.
(a) Manufacturer Indemnity. Manufacturer represents and warrants that it is
the owner or licensee of certain technology used to prepare, assemble/formulate
and package the Products and the trademarks described under the terms of this
Agreement. As such, Manufacturer agrees to defend, hold harmless and indemnify
the Company with respect to any and all Claims asserted to or instituted against
the Company alleging that any Products sold pursuant to this Agreement infringe
any Letters Patent, trademarks or copyrights as a result of materials or
processes provided by Manufacturer or its vendors, suppliers or agents. The
Company shall promptly notify Manufacturer of any Claims and shall cooperate
fully with Manufacturer in the defense of such Claims.
(b) Company's Indemnity. The Company represents that it is the
owner/licensee of certain trademarks, copyrights, and/or trade secrets which
will be used to sell the Products. The Company agrees to defend, hold harmless
and indemnify Manufacturer with respect to any and all Claims asserted to or
instituted against Manufacturer alleging that any materials provided by the
Company to Manufacturer pursuant to this Agreement infringe any trademarks,
copyrights or trade secrets or against any unauthorized claims made by the
Company's independent distribution sales organization with respect to the
Products. Manufacturer shall promptly notify the Company of any Claims and shall
fully cooperate with the Company in the defense of such claims.
7. Term, Termination.
(a) Term. This Agreement shall commence upon execution hereof and shall
continue for a term of (10) years unless sooner terminated in accordance with
Section 7(b). After the tenth year anniversary of execution, this Agreement may
be renewed for successive one (1) year periods subject to either party's written
notice of intention to terminate which must be delivered no less than one (1)
month prior to the date of expiration.
(b) Termination. Either party may upon written notice to the other
terminate this Agreement based upon a material breach of terms or conditions.
The Agreement shall by operation of law terminate in the event that a material
breach remains, uncured after the terminating party has provided to the other
party a certified mail notice of the breach and breach remains uncured for a
period of t" (30) days from the date on which the terminating party is provided
with written notice of breach and a demand to cure. Said cure period may be
extended only in writing signed by the party
<PAGE>
claiming a material breach of this Agreement.
8. Notices. All notices, requests, consents and other communications to any
party hereunder shall be in writing delivered by certified mail and shall be
given:
If to the Company: with a copy, which shall not constitute notice, to:
ATTN: Jeffrey Haas ATTN: Anthony J. Ciaccio
President Ciaccio & Associates
Integrity International, Inc. 3403-B Main Street
Nittany Mountain Industrial Park Dallas, Texas 75226
220 Reese Rd.
State College, PA 16801
If to Manufacturer: with a copy, which shall not constitute notice, to:
ATTN: Irwin Pearl David M. Levy
President 767 Third Avenue
PhaseOut of America, Inc. New York, NY 10017
140 Broadway
Lynbrook, NY 11563
or such other address as such party may hereafter specify by notify to the other
party. Each such notice, request or other communication shall be effective upon
delivery to the person designated above.
9. Right of First Refusal to Exclusively Market Modified Device.
a.) Manufacturer hereby grants to the Company a right of first refusal to
exclusively market the modified version of the anti-smoking device by whatever
channel of distribution in the United States and its territories and in (Canada
if the Company does not desire to exercise this right, the modified device will
nevertheless be subject to the other terms and conditions of this Agreement. It
is acknowledged and agreed that the price of the anti-smoking device will be
increase approximately $1.50 per device as a result of the modifications
thereto. Furthermore, if the Company exercises the right described in this
paragraph, Manufacturer agrees to exchange the Company's then-existing inventory
of anti-smoking devices for the new modified anti-smoking devices. At the time
of such exchange, the Company agrees to pay for the increase in the price for
each new anti-smoking device.
b.) Manufacturer hereby grants to the Company a right of first refusal to
exclusively market the modified version of the anti-smoking device anywhere in
the world through network marketing, direct sales or multilevel distribution. If
within thirty (30) days of written notice of Manufacturer's intent to market the
modified device via network marketing, direct sales or multilevel distribution
Manufacturer does not receive the Company's written response indicating the
Company's
<PAGE>
desire to exercise its right and market the modified anti-smoking device in such
foreign market, Manufacturer may proceed to commence a transaction for the
particular market described in the notice to the Company.
10. Confidentiality Agreements. Both parties understand and agree that during
performing this Agreement it may come in contact with, acquire and/or to be
exposed to certain information, printed materials, trade secrets or other
proprietary information considered confidential by the other party (the
"Confidential information"). Both parties hereby agree to hold such confidential
information in strict confidence and to safeguard such confidential or
proprietary information in the manner it uses to safeguard its own confidential
or proprietary information. And, in any event, except as is necessary to achieve
the purposes of this agreement, neither party shall disclose, use or otherwise
appropriate the confidential information or information reasonably believed to
be confidential or proprietary of the other party.
11. Non-Solicitation. During the term of this Agreement and for a period of two
(2) years after the expiration or termination hereof, for any reason whatsoever,
the parties shall not, on their own behalf or on behalf of any other person,
partnership, association, corporation or other entity, hire, or solicit any
employee or independent distributor of the other Party of any of their
affiliates, or in any manner attempt to influence or induce any employee Of the
other party or any of its affiliates, to leave the employment of the other party
or it; affiliates or to after their business relationship with the other party.
The foregoing shall not be construed to apply to those distributors of
Manufacturer becoming involved in the distributor business of the Company as
contemplated herein.
12. Relationship of the Parties. Notwithstanding anything contained herein, this
Agreement does not and shall not be construed to create the relationship of
joint venture, partnership, principal/agent or any other relationship except
that of independent contractors, As such, neither party may bind the other to
any obligation nor may either party represent they possess such authority.
13. Public Appearances. Manufacturer agrees that at least six (6) time per year,
an upper management officer versed in the Products of Manufacturer shall be
available for public appearances at official functions of the Company at no
charge to the Company. The Company agrees to pay all reasonably approved
expenses related to such appearances, including reasonable food, lodging and
travel expenses. Furthermore, Manufacturer shall make an upper management
officer versed in the Products to be available for audio and video tape
production and/or conference calls at least six (6) times per year.
14. Severability. If any provision of this Agreement is held to be illegal,
invalid or unenforceable under present or future laws effective during the term
hereof, such provision shall be fully severable and this Agreement shall be
construed and enforced as if such illegal, invalid or unenforceable provision
never comprised a part of this Agreement; and the remaining provisions of this
Agreement shall remain in full force and effect and shall not be affected by the
illegal, invalid or unenforceable provision or by its severance here from.
Furthermore, in lieu of such illegal, invalid or unenforceable provision, there
shall be added automatically as part of this Agreement, a provision as similar
in its
<PAGE>
terms to such illegal, invalid or unenforceable provision as may he possible and
be legal, valid and enforceable.
15. Right of First Refusal. Manufacturer hereby grants a right of first refusal
to the Company to exclusively market any additional products acquired, created,
formulated or licensed by Manufacturer in accordance with the channels of
distribution and provisions set forth on Exhibit A attached hereto. Further,
Manufacturer hereby grants a light of first refusal to the Company with respect
to the exclusive sales of the Products outside of the U.S. and its territories
and Canada via network marketing, direct sales, or multilevel distribution.
Manufacturer shall provide written notice to the Company of any new products or
new network marketing, direct sales, or multilevel distribution markets which
shall sufficiently describe the proposed new products, the new market and the
relevant information related thereto, as applicable. The Company shall then have
thirty (30) days in which to exercise its right of first refusal by sending
written notice to Manufacturer. If Manufacturer does not receive written notice
of the Company's intention to exercise its right of first refusal then
,Manufacturer can pursue such other marketing and distribution channels in
accordance with and subject to the provisions set forth on Exhibit A attached
hereto.
16. Cross-Selling Efforts. The Company agrees to allow Manufacturer to become an
independent distributor of the Products marketed by the Company and to
participate in its Compensation Plan. Manufacturer agrees to execute a standard
form Distributor Application and Agreement and be bound by the terms contained
therein. Manufacturer agrees to use its best efforts, to retail products
marketed by the Company and to utilize its mailing lists and leads to the mutual
benefit of the parties. In addition to the compensation earned by Manufacturer
through the Company's Compensation Plan, for its efforts and performance
hereunder, the Company shall also pay to manufacturer a royalty equal to 3 % of
the Wholesale Volume of Manufacturer's sales organization, which is calculated
on a points per product basis. To help to support Manufacturer in its
Distributor business, the Company will align John Andrews of Reston, Virginia,
Donald Roi of Newark, Delaware, and William Price of Houston, Texas as upline to
the Manufacturer's Distributor business.
17. Use of InShape. Manufacturer agrees that the Company's formula for its
dietary supplement, InShape, shall be used instead of Manufacturer's product,
Control. The Company shall pay a royalty for use of Manufacturer's trademark,
Control, of $ .50 per bottle for all sales of such product by the Company.
Manufacturer agrees to provide to the Company the labels for such product which
must first be approved of by the Company. It is expressly agreed that sales
under this arrangement shall count towards satisfaction of the complementary
product quotas on Exhibit C.
18. Non-Competition. During the term of this Agreement and for a period of two
years thereafter, the Company agrees to refrain from marketing any product
competitive with the anti-smoking device and the anti-smoking kit/program and
any of the complementary products if such are labeled and targeted to the smoker
market during the duration of this Agreement. Conversely, during the term of
this Agreement and for a period of two years thereafter, Manufacturer hereby
agrees to refrain from marketing any products competitive with those marketed by
the Company except with respect to marketing the Products as contemplated by and
in accordance with this Agreement. Attached hereto as Exhibit D is a list of the
Company's products.
<PAGE>
19. Commercial/Volume Marketing Program. The Company hereby agrees to use its
best efforts to implement a commercial volume marketing program. To promote the
mutual interests of the parties, the program shall be designed to contain a
volume discount for large orders. In order to assist the Company in its efforts
to promote the mutual interests of the parties, the Company shall provide lead
sheets to Manufacturer to assure that Manufacturer does not approach or attempt
to compete with the independent distributors of the Company.
20. Miscellaneous Provisions.
(a) This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors, and permitted assigns.
(b) This Agreement may not be amended or modified in any respect except by
a written instrument signed by all parties hereto.
(c) The failure by either party to insist upon or enforce any of its rights
under this Agreement shall not constitute a waiver thereof by such party or a
waiver of any subsequent breach of the same or a different provision hereof. No
waiver of any provision of this Agreement shall be enforceable unless it is in
writing and signed by the party against which it is sought to be enforced, No
waiver by any party of any breach or any provision of this Agreement shall
operate or be construed as a waiver of any subsequent breach.
(d) Neither party shall be liable or responsible for failure or delay in
performance hereunder (other than payment of sums then due) when such failure or
delay results from or in connection with strikes, boycotts or other labor
troubles of any kind or from any cause or causes beyond the control of such
party, including, but not limited to, plant or equipment breakdowns, rulings and
regulations of any governmental authorities, shortage of transportation
facilities, shortage of labor, shortage of supplies, fires, riots, civil
commotion, embargoes, accidents, insurrections, earthquakes, explosions, or war
(declared or undeclared).
(e) Any notices, consents, demands, requests, approvals, and other
communications to be given under this Agreement by any party to the other shall
be deemed to have been duly given if given in writing and personally delivered
or sent by mail, registered or certified, postage prepaid with return receipt
requested, at the address specified by each party's signature at the end of the
Agreement. Notices delivered personally or by telegram, telex or telecopy shall
be deemed communicated as of actual receipt; mailed notices shall be deemed
communicated as of 10:00 a.m, on the third business day after mailing. Any party
may change its address for notice hereunder by giving notice of such change in
the manner provided in this paragraph.
(f) This Agreement supersedes any and all other agreements, either oral or
written, between the parties hereto with respect to the subject matter hereof
and contains all of the covenants and agreements between the parties with
respect thereto.
(g) The captions and Section headings used herein are for convenience only
and are not a part of this Agreement and shall not be used in construing this
Agreement.
<PAGE>
(h) The use of "herein", "hereof", and similar terms shall refer to this
Agreement as a whole and not to any specific provision of this Agreement, unless
the context clearly requires otherwise.
(i) This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, and such counterparts together shall
constitute one and the same document.
(j) If any action at law or in equity is necessary to enforce or interpret
the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorneys fees, costs and necessary disbursements in addition to any
other relief to which it may be entitled.
IN WITNESS WHEREOF, the parties have executed this Agreement to be
effective as of the date and year first above written.
The Company Manufacturer
INTEGRITY INTERNATIONAL, INC. PHASE-OUT OF AMERICA, INC.
a Pennsylvania corporation a Delaware corporation
By:_______________________ By: ______________________
Print Name: Jeffrey C. Haas Print Name: Irwin Pearl
Its. President Its. President
<PAGE>
EXHIBIT A
TO
MARKETING AGREEMENT
BETWEEN
MANUFACTURER AND THE COMPANY
Product Description and Marketing Rights
(a) PhaseOut Anti-Smoking Device - It is understood by the Company that the
Manufacturer has been in negotiations to market the Device and is currently
marketing the Device directly and through third parties through all forms of
direct response and direct mail marketing which include markets such as
catalogs, direct mail, credit card inserts, syndication, magazines, newspapers,
television, fax solicitation, radio, inpack offers, onpack offers, etc. That the
Manufacturer presently has exclusive agreements in the TV and credit card
syndication markets, and non-exclusive agreements in other markets, The Company
understands that the Manufacturer has been in discussions aimed to use the
Device as a premium or premium incentive for large corporations and insurance
companies. Additionally, the Manufacturer has planned to enter into the giant
retail "over the counter" market via distribution to chain stores, supermarkets,
and other mass merchandisers. Further, the Manufacturer directly at its main
office, receives repeat orders from satisfied customers, orders resulting from
radio and TV advertising, orders emanated from newspaper articles, orders
emanated from radio and TV interviews, as well as customer referrals that
purchase various quantities of the Device, That the Manufacturer has already,
started to establish a distributor network of approximately thirty (30) third
party distributors and in a few instances, some of those third-party
distributors have placed the Phase-Out Device in local retail outlets.
The Manufacturer understands that the Company has to maintain the integrity of
each individual distributor, the Company's entire organization, and the
Company's business. Towards that end, the Manufacturer agrees not to market the
Device in retail stores or outlets (over the counter or off the shelf sales) nor
shall it permit or allow others to do so provided the Company meets its quota
requirements on the Device.
The Manufacturer understands that in certain instances a distributor will
attempt to bypass the Company and attempt by himself or herself or through a
third party attempt to purchase large quantities below the established
distributor's cost price directly from the Manufacturer. The Manufacturer
understands that the significant efforts and investment of the Company is
designed to and will increase consumer awareness, acceptance, and exposure to
the Products and Manufacturer should not be permitted to experience a windfall
due to the efforts and investment of the Company. For obvious reasons, it surely
is not in the mutual best interest of the Manufacturer or the Company to allow
this to happen. In order to prevent such an occurrence, the Manufacturer agrees
to increase the screening process of every incoming call. In addition, the
Manufacturer agrees not to sell to any person more than six (6) units of the
Device in any consecutive 90 day period. In such instance, the price for the
first unit be at full retail price, with the second through sixth units being at
not less than 75% of full retail price. Additionally, if inquiries are received
for more than six (6) units of the Device, Manufacturer agrees to sell such
units through its distributor business with the Company (as
<PAGE>
referred to in Section 16 hereof). Specifically, without limiting the foregoing,
Manufacturer agrees that the Company shall be the only network marketing, direct
sales, or multilevel distribution company that can market the Device in the
United States and its territories and Canada. The foregoing shall apply to the
Device without regard to modification, variation or alteration thereof.
Additionally, the Company will receive unsolicited calls/leads regarding the
Products. The Company agrees to diligently screen the calls to determine their
origin. If the Company determines that the calls originated as a result of the
Phase-Out Products, the Company agrees to place those calls/leads in the
Manufacture's downline sales organization.
(b) Phase-Out Anti-Smoking Kit/Program - The Phase-Out Anti-Smoking
Kit/Program shall be exclusively marketed through the Company and its sales
force of independent distributors. Manufacturer agrees that any sales of the
Kit/Program shall be conducted through its capacity as an independent
distributor of the Company or otherwise immediately directed to the Company.
Manufacturer acknowledges and agrees that the Company shall be the exclusive
network market, direct sales or multilevel distribution company for marketing
the foregoing in the United States and its territories and Canada.
c) Phase-Out Complementary Products - (BreathSweet, Control, ReStore,
DenSity, ReNewal, Whyten, Smoker's Vitamin and Heartgard) The Phase-Out
Complementary Products shall be exclusively marketed through the Company and its
sales force of independent distributors. Manufacturer agrees that any sales of
the Complementary products shall be conducted through its capacity as an
independent distributor of the Company or otherwise immediately directed to the
Company. Manufacturer acknowledges and agrees that the Company shall be the
exclusive network market, direct sales or multilevel distribution company for
marketing the foregoing in the United States and its territories and Canada.
<PAGE>
EXHIBIT B
TO
MARKETING AGREEMENT
BETWEEN
MANUFACTURER AND THE COMPANY
Product Price
------- -----
a.) Phase-Out Anti-Smoking Device $ 9.00 per Device
b.) Phase-Out Anti-Smoking Kit/Program $ 21.60 per Kit/Program
c. Phase-Out Complementary Products
I.) BreathSweet $ 2.50 per bottle
ii.) ReStore $ 5.50 per bottle
iii.) DenSity $ 4.50 per bottle
iv.) ReNewal $ 3.50 per bottle
v.) Whyten $ 2.65 per bottle
vi.) Smoker's Vitamin $ 3.65 per bottle
vii.) Heartgard $ 2.50 per bottle
<PAGE>
EXHIBIT C
TO
MARKETING AGREEMENT
BETWEEN
MANUFACTURER AND THE COMPANY
I.) Phase-Out Anti-Smoking Device -
15,000 units / January - June 1996
27,000 units / July - December 1996
45,000 units / January - June 1997
102,000 units / July - December 1997
198,000 units / January - June 1998
300,000 units / July - December 1998
After 1998, the Company must maintain an
annual purchase volume of 600,000 units.
II.) Phase-Out Complementary Products -
19,200 units / January - June 1996
30,800 units / July - December 1996
63,000 units / January - June 1997
112,000 units / July - December 1997
200,000 units / January - June 1998
300,000 units / July - December 1998
After 1999, the Company must maintain an
annual purchase volume of 600,000 units.
III.) Phase-Out Anti-Smoking Kit/Program -
4,200 units/January - June 1996
7,800 units/July - December 1996
14,400 units/January - June 1997
21,600 units/July - December 1997
36,000 units/January - June 1998
54,000 units/July - December 1999
After 1998, the Company must maintain an
annual purchase volume of 100,000 units.
TOKYO BOEKI, LTD.
60 East 42nd Street, Suite 3819
New York, NY 10165
- Letter Of Agreement
This Letter Agreement will confirm that PhaseOut of America, Inc. agrees to
give Tokyo Boeki, Ltd, exclusive marketing rights to the PhaseOut device in
Japan for a period of one (1) year from the date of this agreement.
Tokyo Boeki, Ltd. agrees to immediately place an order for no less that
1,440 PhaseOut units at $10.50 US$ per unit. These units will be purchased by
cash within 1 week after the date Tokyo Boeki, Ltd. received copy of an Airway
Bill of Lading by fax.
Tokyo Boeki will use these units as part of their previously outlined
incubation of the Japanese market. This incubation includes a public relations
and advertising campaign to create an awareness for PhaseOut In the Japanese
marketplace. This will be followed by the commencement of a marketing campaign,
via newspapers, magazines, radio and television. These marketing strategies will
be followed by retail distribution in supermarkets, department stores, vending
machines and kiosks. Tokyo Boeki Ltd. reserves the right to determine the pace
of the incubation. Progression of the incubation program will be determined
solely by customer response to the product. To aide Japanese consumers in
understanding the PhaseOut device. Tokyo Boeki will also re-print the necessary
instructions (Guide to Better Health) in Japanese.
PhaseOut will provide Tokyo Boeki Ltd. with all available information,
sales and marketing materials, and travel to Japan, if necessary, for sales and
marketing support. This support will be provided at PhaseOut's expense.
Additionally, in accordance with our previous discussions, PhaseOut will
complete the "product redesign" as described in our February, 14th meeting by
the end of 1995. If possible, we would like to receive a sample of the
redesigned product for evaluation and feedback prior to full scale manufacture.
Based upon the above mentioned plan of Tokyo Boeki, we anticipate that
additional purchased of inventory at said price (subject to volume reductions)
will be forthcoming in approximately three months. We also anticipate that upon
Tokyo Boeki's successful introduction of PhaseOut, Tokyo Boeki Ltd. and PhaseOut
of America Inc. will enter into a formal exclusive long term distribution
agreement.
Dated: June 9, 1995 Dated:
- ---------------------------- ------------------------
PhaseOut of America, Inc. Tokyo Boeki, Ltd.
Mr. Irwin Pearl Mr. Y. Yamamoto
President Managing Director
AGREEMENT
As a joint effort to promote and expand marketing of "PHASEOUT", a smoke
cessation device, PhaseOut of America, Inc. (POA), with offices located at 140
Broadway, Lynbrook, New York 11563, and J&R Intercontinental, Inc. (J&R), with
offices located at 145 East 49th Street, New York, New York 10017, agree to the
following on this 15th day of August, 1995:
POA grants the manufacturing rights of an "upgraded" version of the "PHASEOUT"
device and exclusive sales rights of "PHASEOUT in Korea to J&R. J&R agrees that
under no circumstances whatsoever will it sell "PHASEOUT" devices to any other
country, company or entity in the world outside of Korea. POA further agrees to
purchase the "upgraded" version of 'PHASEOUT' from J&R for the Japanese market
and other international markets. The price to POA from J&R will be 20% above the
actual production costs. The initial term of this agreement will be for a period
of five (5) years, and it may be extended from term to term by mutual agreement.
The patent registration for the "upgraded" version of 'PHASEOUT' in Korea will
be filed by POA, and the design and patent rights to 'PHASEOUT' will remain the
properties of POA forever. J&R will assist POA in its patent filings by
forwarding all design modifications, improvements, drawings, etc. to POA. J&R
will invest the necessary funds to develop and manufacture the "upgraded"
version of 'PHASEOUT' in Korea, and J&R will be responsible for all other
expenses to promote and market 'PHASEOUT' in Korea without any financial
cooperation of POA.
As a form of royalty fee for the first year, J&R will supply POA ten thousand
(10,000) units of 'PHASEOUT' free of charge, and the shipment will occur when
the first order of 'PHASEOUT' is shipped to POA. The "first year" as stated
herein means one (1) year from the date of actual production of 'PHASEOUT',
which shall be no later than January 15, 1996. POA's orders are to be placed
with J&R on container-load basis with the possible exception of an initial order
which shall be no less than one half a container. From the second year, J&R will
pay POA the royalty of US $1.00 for each 'PHASEOUT' sold in Korea.
It is further agreed that both POA and J&R will expend their best efforts to
fulfill their respective requirements as enumerated above. J&R and POA are
separate entities and neither one is an agent of the other with each party
liable for any losses or consequential damages by the other party in the
unlikely event that one's performance falls short of the other's expectations.
South problems arise during the course of business between the parties, the
parties hereto agree in principle to review and discuss such matters for an
amicable settlement.
J&R INTERCONTINENTAL, INC. PHASEOUT OF AMERICA, INC.
- ----------------------------- ----------------------------
Hye H. Lee Irwin Pearl
President President
Executed on the above dated at 140 Broadway, Lynbrook, New York 11563.
AGREEMENT
Agreement made as of the 14th day of August, 1995 between Products & Patents,
Ltd., a Delaware corporation with its principal place of business at 140
Broadway, Lynbrook, New York 11563 ("P&P") and PhaseOut of America, Inc., a
Delaware corporation having its principal place of business at 140 Broadway,
Lynbrook, New York 11563 ("PhaseOut").
WHEREAS, P&P and PhaseOut are parties to that certain License Agreement
dated September 18, 1987 as subsequently modified by the parties (the "License
Agreement");
WHEREAS, the parties have determined to be in their mutual est interest to
further amend the License Agreement as set forth herein and terminate the
relationship;
NOW THEREFORE, in consideration of the mutual promises and covenants
contained herein, and for good and valuable consideration as described, P&P and
PhaseOut hereby agree to emend the License Agreement in accordance with the
following terms and conditions:
1. PhaseOut hereby assumes and agrees to pay the indebtedness of P&P to
Kingdom Blind Manufacturing, Inc. ("Kingdom Blind") in the present amount of
$401,000, which includes approximately 53,000 devices owned by P&P and not
billed to PhaseOut. The payment schedule for such indebtedness shall be as
agreed by PhaseOut and Kingdom Blind.
2. There is hereby transferred to PhaseOut all inventory of the Product,
including inventory held by Kingdom Blind.
3. In consideration of PhaseOut's assumption of P&P's debt to Kingdom
Blinds and agreement contained in paragraph 1 hereof, the parties agree that the
$1.00 per unit royalty provided for in the License Agreement shall be
eliminated. All monies due and owed from PhaseOut to P&P shall be deemed
satisfied.
4. Each of P&P and PhaseOut shall execute and deliver such other documents
and take such other action as may be necessary or desirable to carry out the
provisions of this agreement.
5. This agreement shall be governed by and construed in accordance with the
laws of the State of New York applicable to agreements made and to be wholly
performed within the State of New York.
6. This agreement shall be subject to and performed in accordance with the
New York Bulk Sales Act.
PHASEOUT OF AMERICA, INC. PRODUCTS & PATENTS
By: _________________________ By: _______________________
Irwin Pearl, President Bernard Gutman, President
