SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 33-18099-NY and 33-23169-NY
PHASEOUT 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
Indicate by check mark whether the registrant (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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the last practicable date.
Class Outstanding at March 31, 1996
- ----------------------------- -----------------------------
Common Stock, par value
$.00003 per share 74,859,319
<PAGE>
PART 1 FINANCIAL INFORMATION
Item 1, financial statements
PHASE-OUT OF AMERICA, INC.
FINANCIAL STATEMENTS (Unaudited)
March 31, 1996
Financial Statements
Accountant's Disclaimer of Opinion F2
Balance Sheets F3 to F4
Statements of Operations F5
Statements of Cash Flows F6
Schedules of General and Administrative Expenses F7
Notes to Financial Statements F8 to F10
Management's Discussion and Analysis F11 to F12
-F1-
<PAGE>
Stewart W. Robinson
Certified Public Accountant
450 Seventh Ave., Suite 1009
New York, NY 10123
Tel (212) 629-7323 Fax (212) 629-7052
ACCOUNTANT'S DISCLAIMER OF OPINION
Shareholders and
Board of Directors
Phase-Out of America, Inc.
Lynbrook, New York
The accompanying balance sheet of Phase-Out of America, Inc. as of March 31,
1996 and the related statements of operations, and cash flows, and schedule of
general and administrative expenses for the three months ended March 31, 1996
and 1996 were not audited by me and, accordingly, I do not express an opinion or
any other form of assurance on them.
STEWART W. ROBINSON
New York, New York
July 19, 1996
-F2-
<PAGE>
PHASE-OUT OF AMERICA, INC.
BALANCE SHEETS (Unaudited)
March 31, December 31,
1996 1995
---------- ----------
ASSETS (Unaudited)
CURRENT ASSETS
Cash $161,947 $176,818
Restricted cash balances and escrow funds
(see Temporary media funding) 40,000
Accounts receivable-net of allowance for doubt-
ful accounts of $0 (1996) and $0 (1995) 65,599 71,967
Inventory -- stated at the lower of cost
or market - first-in first-out 34,180 99,300
Prepaid expenses 21,058 9,852
Other current assets -- 18,592
-------- --------
TOTAL CURRENT ASSETS 322,784 376,529
FIXED ASSETS, at cost, net of accumulated
depreciation of $14,775 (1996), $13,975 (1995) 6,750 7,550
SECURITY DEPOSITS 3,710 3,542
PATENTS - at cost, net of accumulated
amortization of $4,530 (1996) and $3,795 (1995) 42,470 43,205
BOND DISCOUNT 108
-------- --------
$375,822 $430,826
======== ========
(continued on next page . . . )
See accountant's disclaimer and notes to financial statements
-F3-
<PAGE>
PHASE-OUT OF AMERICA, INC.
BALANCE SHEETS (Unaudited) -- Continued
March 31, December 31,
1996 1995
---------- ----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Temporary media funding (see restricted cash) $ 40,000 $ --
Senior subordinated convertible debentures, including
accrued interest of $16,083 (1996) and $24,958 (1995) 451,083 459,958
1992 convertible debentures - including accrued
interest of $8,741 (1996) and $8,265 (1995) 30,241 29,765
Accounts payable and accrued expenses 749,866 582,159
Taxes payable 9,893 8,077
Accrued officer compensation 144,160 144,160
Loans from Officer/Shareholder 53,900 31,650
Other current liabilities -- 26,176
---------- ----------
TOTAL CURRENT LIABILITIES 1,479,143 1,281,945
---------- ----------
STOCKHOLDERS' DEFICIENCY
Series A Convertible Preferred Stock, par
value $.001 per share -- authorized 600,000
shares -- no shares issued and outstanding
Series B Convertible Preferred Stock, par
value $.001 per share -- authorized 5,000,000
shares -- no shares issued and outstanding
Common stock, $0.00003 par value:
Authorized shares -- 100,000,000
Issued and outstanding shares --
74,859,319 at March 31, 1996
74,859,319 at December 31, 1995 2,246 2,246
Capital in excess of par 1,937,688 1,937,688
Accumulated deficit (3,043,255) (2,791,053)
---------- ----------
(1,103,321) (851,119)
---------- ----------
Related party transactions -- Note 4
Commitments and other comments -- Note 6
Subsequent events -- Note 7
$ 375,822 $ 430,826
=========== ===========
See accountant's disclaimer and notes to financial statements
-F4-
<PAGE>
PHASE-OUT OF AMERICA, INC.
STATEMENTS OF OPERATIONS AND DEFICIT (Unaudited)
Quarter Ended March 31,
1996 1995
------------ ------------
REVENUES:
Sales -- net $ 627,844 $ 44,682
Cost of sales 108,203 12,810
------------ ------------
Gross Profit 519,641 31,872
Selling expenses 539,748 107,588
General and administrative 210,305 192,608
------------ ------------
750,053 300,196
------------ ------------
(230,412) (268,324)
OTHER INCOME AND EXPENSES:
Interest expense (21,801) (5,171)
Other income -- 16,223
Interest income 11 54
------------ ------------
(21,790) 11,106
------------ ------------
Net loss (252,202) $ (257,218)
============
Deficit at beginning of year (2,791,053)
------------
Deficit at end of quarter $ (3,043,255)
============
Loss per share $ NIL $ NIL
============ ============
Weighted average number
of shares outstanding 75,000,000 60,000,000
============ ============
See accountant's disclaimer and notes to financial statements
-F5-
<PAGE>
PHASE-OUT OF AMERICA, INC.
STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1996 1995
--------- ---------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $(252,202) $(257,218)
Adjustments to reconcile net income to cash
used for operating activities:
Depreciation and amortization 1,535 1,434
(Increase) decrease in accounts receivable 6,368 (15,738)
Decrease in inventories 65,120 12,811
Decrease (increase) in prepaid and other current 7,278 (646)
Increase (decrease) in accounts payable
accrued expenses and other current liabilities 141,531 1,191
(Decrease) increase in taxes payable 1,816 5,304
Increase in accrued officer compensation 41,000
Bond discount amortization -- 100
(Decrease) increase in amounts due affiliate (16,891)
Accrued interest on debentures and bonds (8,399)
Expenses paid through the issuance of
restricted common stock 108,691
--------- ---------
CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES (36,953) (119,962)
Acquisition of fixed and other assets (168)
--------- ---------
INVESTING ACTIVITIES (168)
--------- ---------
FINANCING ACTIVITIES
Payments on capital leases -- (750)
Proceeds of sales of Common Stock
Proceeds from senior subordinated debentures 134,792
Repayment of advances from officer/stockholder 22,250
Proceeds of bond sales net of conversions
Loan to affiliated company
--------- ---------
CASH PROVIDED (USED FOR) BY FINANCING ACTIVITIES 22,250 134,042
--------- ---------
(DECREASE) INCREASE IN CASH (14,871) 14,080
Cash at beginning of year 176,818 824,541
--------- ---------
Cash at end of quarter $ 161,947 $ 38,621
========= =========
SUPPLEMENTAL INFORMATION
Interest paid during the quarter $ 20,750 $ 200
========= =========
Temporary media funds received $ 40,000 $ --
========= =========
</TABLE>
See notes to financial statements
-F6-
<PAGE>
PHASE-OUT OF AMERICA, INC.
SCHEDULE OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Unaudited)
Quarter Ended
March 31,
1996 1995
-------- --------
SELLING EXPENSES:
Television marketing expense $ 47,505 $ --
Advertising and promotion 19,670 71,270
Fulfillment and credit card 89,107 3,429
Commissions and royalties 262,969 13,304
Travel and entertainment 21,597 7,946
Auto lease 8,490 5,242
Auto expense 2,783 2,310
Postage and shipping - net 29,570 4,087
Radio marketing expense 34,852 --
Royalty expense 23,205 --
-------- --------
$539,748 $107,588
======== ========
GENERAL AND ADMINISTRATIVE EXPENSES:
Officers' compensation $ 52,000 $ 87,750
Salaries 24,944 17,760
Consulting fees 600 42,401
Insurance expense 16,046 10,418
Professional fees 64,807 12,150
Telephone 9,374 4,887
Payroll taxes and employee benefits 9,674 1,673
Financing costs -- 1,563
Office and printing 17,577 2,314
Rent 4,500 5,250
Miscellaneous 4,265 814
Depreciation and amortization 1,535 1,434
Utilities 1,399 1,233
Equipment rental -- 1,527
Repairs and maintenance 1,959 441
Stock transfer fees 1,268 993
State Franchise Taxes 357 --
======== ========
$210,305 $192,608
See notes to financial statements
-F7-
<PAGE>
PHASE-OUT OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited) -- see accountant's disclaimer
March 31, 1996
NOTE 1 -- BACKGROUND AND BASIS OF PRESENTATION
Phase-Out of America, Inc. (the Company) incorporated in Delaware on July 17,
1987 for the purpose of marketing and distributing the Phase-Out System smoking
cessation product (the "Product") nationally after obtaining scientific and
clinical credibility through testing.
The financial statements have been prepared assuming that the Company will
continue as a going concern. The Company has, suffered recurring losses from
operations ($252,202 in 1996 and $257,218 in 1995), and has had limited
liquidity causing difficulty in meeting its current operating expense
obligations and debt service requirements. The Company is actively marketing the
product to help improve revenues and is planning to seek additional financing
through private placement of debt and securities. The financial statements do
not include any adjustments that might result should the continued existence of
the Company be threatened by any continued losses or the failure of the above
factors to influence the financial viability of the Company.
The interim statements were prepared pursuant to the requirements for reporting
on Form 10-QSB. The December 31, 1995 balance sheet was derived from audited
financial statements but does not include all disclosures required by generally
accepted accounting principles. The interim financial statements and notes
thereto should be read in conjunction with the financial statements and notes
included in the Company's latest Annual Report on Form 10-KSB for the year ended
December 31, 1995. In the opinion of management, the interim financial
statements reflect all adjustments of a normal recurring nature necessary for a
fair statement of the results for interim periods. The current period results of
operations are not necessarily indicative of the results for the entire year
ending December 31, 1996.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Changes in significant accounting policies:
There were no changes in significant accounting policies during the current
period.
Inventories:
The Company has possession and control (but not title) over a sufficient
quantity of Phase-Out devices to meet foreseeable near term customer orders.
Upon shipment of each item by the fulfillment house, payment is due to the
manufacturer at the agreed upon unit price plus $1.00 per unit to be applied to
old invoices.
NOTE 3 -- STOCKHOLDERS' EQUITY
Stock Issued to Officers, Consultants and Employees:
Through March 31, 1996, the Company issued 0 shares to officers and 0 shares to
consultants.
-F8-
<PAGE>
PHASE-OUT OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited) -- see accountant's disclaimer
March 31, 1996
NOTE 4 -- RELATED PARTY TRANSACTIONS
Officers' Compensation:
Compensation and expense reimbursements and allowances for the President and
Vice President were as follows:
Quarter Ended March 31,
1996 1995
------- -------
Cash compensation $52,000 72,000
Bonuses paid by issuance
of restricted common stock -- 15,750
------- -------
$52,000 $87,750
------- -------
Automobile lease 7,390 5,242
Automobile expenses 2,783 2,310
Entertainment expenses 21,597 7,946
Telephone expenses 2,047 2,250
Loans from Officer/Stockholders:
An officer/stockholder is owed $53,900 by the Company. The amount is payable on
demand.
Other:
General Counsel to the Company is a relative an officer. The Company incurred
approximately $40,000 of legal fees with his firm in 1996.
NOTE 5 -- LONG TERM DEBT
See subsequent events footnote.
NOTE 6--COMMITMENTS, CONTINGENCIES AND OTHER COMMENTS
Dependence on Major Customers and Suppliers:
The Company is dependent on a few major customers and marketing methods affected
by relationships with third party marketers for substantially all of its
revenues. Direct response TV sales represented approximately 70% of of total
sales. Most of these sales were made through a marketing firm whose relationship
has terminated and that the Company is presently in litigation with. Export
sales represent 14% of sales with no export customer representing more than 10%
of total sales.
The Company is currently dependent on one supplier for their inventory. As of
March 31, 1996, the Company owed this supplier approximately $298,000 for debt
assumed from its affiliate, P&P. The Company has recently made arrangements with
this manufacturer to pay down the liability at the
-F9-
<PAGE>
PHASE-OUT OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited) -- see accountant's disclaimer
March 31, 1996
rate of $1.00 for each unit it ships, plus the unit price.
Regulatory matters:
There have been no changes in the status of regulatory inquiries by by the Food
and Drug Administration (FDA) and the Federal Trade Commission (FTC).
Temporary media funding:
In March 1996, the Company borrowed $15,000 from an individual and $25,000 from
a director to finance the airing of the Company's television infomercial.
Subsequent to March 31, 1996, an additional $250,000 was borrowed.
Litigation:
The Company is party to the following lawsuits:
A former lawyer is suing the Company for unpaid fees and disbursements
approximating $36,000. Management intends to defend vigorously all but
approximately $16,000 of the claim. The balance included in accounts payable is
approximately $16,000.
The Company is in arbitration with a former Television Marketing firm, On-Air
Infonetworks, Inc. The Company is placing funds in escrow to fund the settlement
of this matter. Legal counsel has not been able to give an opinion as to the
ultimate outcome or the amount of any potential settlement. In April 1996,
On-Air obtained a temporary restraining order which has since been lifted upon
the Company's agreement to place funds in escrow. There has been no substantial
change in this matter since the issuance of the December 31, 1995 financial
statements.
NOTE 7--SUBSEQUENT EVENTS
Private Placement of Common Stock:
In July 1996, a group of investors acquired 19,557,950 shares of the Company's
common stock (representing 18% of total shares outstanding) for $500,000. In
connection with this investment, the two leaders of this group where elected to
the Board of Directors. Additionally, one of the two leaders of the investment
group was appointed Secretary/Treasurer.
Conversion of Senior Subordinated Debentures:
In June 1996 (shares issued in July 1996) holders of Senior Subordinated
Debentures aggregating $385,000 in face amount converted the debt into 7,700,000
shares of common stock.
Common Stock Issued for Services:
In May 1996, the officers exchanged their rights for accrued salaries for an
aggregate of 3,750,000 shares of common stock. In June 1996, the Company issued
an aggregate of 467,143 shares to various consultants.
-F10-
<PAGE>
PHASE-OUT OF AMERICA, INC.
Management's Discussion and Analysis
Results of Operations
Three Months Ended March 31, 1996 Compared
to Three Months Ended March 31, 1995
The Company incurred a net loss of $252,202 for the 3 months ended March 31,
1996 as compared to the loss of $257,218 for the 3 months ended March 31, 1995.
3 month revenues increased 14 times) compared to the same period last year
(approximately 20,000 units for a total of $627,844 in 1996 as compared to
approximately 2,700 units for a total of $44,682 in 1995). The improvement in
revenues resulted from retail sales of the product through television direct
response methods. This represents substantially higher unit selling prices as
well as increases in unit volume. Although increased revenues are reflected in
gross profit, there are substantial additional costs associated with
distribution through this channel, substantially reducing the net benefit of the
sales increase to the Company.
Selling expenses increased to $539,748 from $107,588 (an increase of 402%).
General and administrative expenses remained stable at $210,305 from $192,608
(9% increase). Of the total selling general & administrative expenses, $0 and
108,691 was paid in the form of restricted common stock (a non-cash item),
respectively for 1996 and 1995. The increase in payroll was needed to manage
increased inquiries, as well as managing the increased sales volume. Total
officer salaries declined to $52,000 in 1996compared to $87,750 for 1995 because
of caps on officer compensation placed by the Board of Directors.
Television and radio marketing costs, commissions, royalties and fulfillment, in
the aggregate increased 27 times to $457,638 in 1996 form $16,733 due to the
arrangement with On-Air.
The gross profit margin increased to 83% from 71%, due to the high volume of
direct response television sales.
The Company maintains a $500,000 liability insurance policy.
Liquidity and Capital Resources
Cash of $36,953 was used for operations for the 3 months ended March 31, 1996 as
compared to $119,962 used in the same period of last year. Cash decreased during
the 3 months ended March 31, 1996.
Short term liquidity is being affected by the need for cash to maintain a steady
flow of inventory now that sales have increased. The present arrangement with
the manufacturer is that goods are presently held on consignment, with the
obligation to pay only upon shipment to customers. Additionally, the previous
liability to the manufacturer is paid down at the rate of $1 additional dollar
per unit shipped.
The product's domestic success depends heavily on reaching potential customers
through advertising and other marketing methods requiring additional cash flow
for this purpose.
In July 1996, a group of investors acquired 19,557,950 shares of the Company's
common stock (representing 18% of total shares outstanding) for $500,000. This
should alleviate any near term concerns regarding the ability of the Company to
meet its current obligations.
-F11-
<PAGE>
PHASE-OUT OF AMERICA, INC.
Management's Discussion and Analysis
The Company's working capital has deteriorated due to the use of current assets
for operations and increases in accounts payable. Working capital and current
ratios were:
March 31, December 31, March 31,
1996 1995 1995
----------- ----------- -----------
Working capital
(deficiency) $(1,156,359) $ (905,416) $ (460,638)
Current ratios 0.22:1 0.29:1 0.34:1
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 the
significant portion of the Company's overall revenues in the future.
The Company introduced two new product lines last year. The first was a
comprehensive self-help quit smoking program targeting corporations, insurance
companies, HMO's and consumers. This program combines 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.
Regulatory Matters
There have been no material changes in the status of matters pending before the
Food and Drug Administration (FDA) and the Federal Trade Commission (FTC).
-F12-
<PAGE>
PART II-OTHER INFORMATION
-------------------------
Item 1. Legal Proceedings
The Company has been sued by a former attorney for fees it alleges are
due but unpaid in the amount 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.
The Company has commenced an action against On-Air Infonetwork for
damages sustained as a result of its failure to perform under the
agreement. During the first half of 1996, in connection with this
matter, the Company set aside $111,000 in a special escrow account
with its legal counsel.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
See notes to the financial statements.
Item 6. Exhibits and Reports
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registration has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHASE-OUT OF AMERICA, INC.
Dated: August 22, 1996
----------------------------------
Irwin Pearl
President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
ART. 5 FDS FOR March 31, 1996 FORM 10-QSB
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 161,947
<SECURITIES> 0
<RECEIVABLES> 65,599
<ALLOWANCES> 0
<INVENTORY> 34,180
<CURRENT-ASSETS> 322,784
<PP&E> 21,525
<DEPRECIATION> 14,775
<TOTAL-ASSETS> 375,822
<CURRENT-LIABILITIES> 1,479,143
<BONDS> 481,324
2,246
0
<COMMON> 0
<OTHER-SE> (1,105,567)
<TOTAL-LIABILITY-AND-EQUITY> 375,822
<SALES> 627,844
<TOTAL-REVENUES> 627,844
<CGS> 108,203
<TOTAL-COSTS> 108,203
<OTHER-EXPENSES> 750,053
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,801
<INCOME-PRETAX> (252,202)
<INCOME-TAX> 0
<INCOME-CONTINUING> (252,202)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (252,202)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
