SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 1997
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)
6900 Jericho Turnpike, Syosset, New York 11791
(Address of principal executive offices)
Issuer's telephone number, including area code: (516) 364 - 3500
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, 1997
Common Stock, par value 108,869,929
$.00003 per share
<PAGE>
PART 1 FINANCIAL INFORMATION
Item 1, financial statements
PHASEOUT OF AMERICA, INC.
FINANCIAL STATEMENTS (Unaudited)
March 31, 1997
Financial Statements Page
----
Balance Sheet 3 - 4
Statements of Operations 5
Statement of Shareholders' (Deficit) 6
Statements of Cash Flows 7 - 8
Notes to Financial Statements 9 - 10
Management's Discussion and Analysis 11 - 13
Other Information 14
Signatures 15
2
<PAGE>
PHASEOUT OF AMERICA, INC.
Balance Sheet
March 31, 1997
(Unaudited)
Assets
Current Assets
Cash $172,576
Accounts receivable-net of allowance for doubtful
accounts of $1,000 1,767
Inventory 92,683
Advances for clinical study 25,000
Advances to Automotive Marketing, Inc. 3,280
Prepaid expenses 5,414
--------
300,720
Furniture and Equipment - at cost - net of accumulated
depreciation of $17,309 25,606
Patents - at cost - net of accumulated amortization of
$7,468 40,967
Deferred preoperating and developmental costs 7,779
Security Deposits 4,137
--------
$379,209
========
See notes to financial statements.
3
<PAGE>
PHASEOUT OF AMERICA, INC.
Balance Sheet
March 31, 1997
(Unaudited)
<TABLE>
<S> <C>
Liabilities and Shareholders' (Deficit)
Current Liabilities
1992 convertible debentures - including accrued interest
of $6,150 $ 16,150
Shareholder's loan - current portion 37,064
Taxes payable 2,399
Accounts payable 604,457
Accrued officer and director's compensation 102,500
Loans from directors 33,792
Accrued expenses 60,334
-----------
856,696
-----------
Shareholder's Loan - net of current portion 130,000
-----------
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 130,000,000 shares - 108,869,929 shares issued and
outstanding 3,266
Capital in excess of par 3,088,786
Accumulated (deficit) (3,699,539)
-----------
(607,487)
$ 379,209
===========
</TABLE>
See notes to financial statements.
4
<PAGE>
PHASEOUT OF AMERICA, INC.
Statements of Operations
(Unaudited)
For the Three Months Ended
March 31,
--------------------------
1997 1996
---- ----
Sales - net $ 102,960 $ 627,844
Cost of Sales 41,147 108,203
------------ ------------
61,813 519,641
------------ ------------
Selling Expenses 21,615 539,748
General and Administrative Expenses 140,763 210,305
------------ ------------
162,378 750,053
------------ ------------
(Loss) Before Other Income (Expenses) (100,565) (230,412)
------------ ------------
Other Income (Expenses)
Interest income 2,233 11
Interest (expense) (14,620) (21,801)
------------ ------------
(12,387) (21,790)
------------ ------------
Net (Loss) $ (112,952) $ (252,202)
============ ============
(Loss) Per Share $ NIL $ NIL
============ ============
Weighted Average Number of Shares
Outstanding (to nearest 1,000,000) 90,000,000 75,000,000
============ ============
See notes to financial statements.
5
<PAGE>
PHASEOUT OF AMERICA, INC.
Statement of Shareholders' (Deficit)
For the Three Months Ended March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Number of
Common Stock Amount Capital in
Shares $.00003 Excess Accumulated
(Post-split) Par Value Par Value Deficit
------------------------------------------------------
<S> <C> <C> <C> <C>
Balance - December 31, 1996 108,369,929 $ 3,251 $ 3,080,051 $(3,586,587)
Stock issued for accrued services rendered:
Officers and Directors 500,000 15 8,735 --
Net (Loss) -- -- -- (112,952)
----------- ----------- ----------- -----------
Balance- March 31, 1997 108,869,929 $ 3,266 $ 3,088,786 ($3,699,539)
=========== =========== =========== ===========
</TABLE>
See notes to financial statements
6
<PAGE>
PHASEOUT OF AMERICA, INC.
Statements of Cash Flows Page 1 of 2
(Unaudited)
For the Three Months
Ended March 31,
--------------------
1997 1996
----- ----
Cash Flows from Operating Activities
Net (loss) $(112,952) $(252,202)
Adjustments to reconcile net (loss) to net cash
(used for) operating activities:
Depreciation and amortization 1,405 1,535
Expenses paid through the issuance of
restricted common stock 8,750 --
(Increase) decrease in:
Accounts receivable 2,520 6,368
Inventories 34,730 65,120
Advances to Automotive Marketing,Inc (3,280) --
Prepaid expenses -- 7,278
Deferred preoperating and developmental costs (7,779) --
Increase (decrease) in:
Notes payable-vendor (20,940) --
Accrued interest on debentures 5,375 --
Accounts payable (9,870) 141,531
Accrued officers' and directors' compensation 42,500 --
Taxes payable (1,898) 1,816
Loans from directors 623 --
Accrued expenses (18,045) --
--------- ---------
(78,861) (36,953)
--------- ---------
Cash Flows from Investing Activities
Acquisition of equipment -- (168)
Patent payments (1,435) --
--------- ---------
(1,435) (168)
--------- ---------
Cash Flows from Financing Activities
Repayment of advances from officer/stockholder -- 22,250
Repayments to shareholder (7,500) --
--------- ---------
(7,500) 22,250
--------- ---------
Net Decrease in Cash $ (87,796) $ (14,871)
Cash - beginning 260,372 176,818
--------- ---------
Cash - end $ 172,576 $ 161,947
========= =========
See notes to financial statements.
7
<PAGE>
PHASEOUT OF AMERICA, INC. Page 2 of 2
Statements of Cash Flows
(Unaudited)
For the Three Months
Ended March 31
--------------------
1997 1996
---- ----
Supplemental Disclosures
Interest paid $ -- $20,750
========= =======
Temporary media funds received $ -- $40,000
========= =======
See notes to financial statements.
8
<PAGE>
PHASEOUT OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
March 31, 1997
1. BACKGROUND AND BASIS OF PRESENTATION
PhaseOut 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 had primarily marketed the product in the United States through
direct response marketing including radio, television spots and
infomercials. This domestic marketing was curtailed due to the ongoing
negotiations with the Federal Trade Commission ("FTC"). Once advertising
claims are approved, the Company intends to reenter the domestic retail
market. The Company also distributes the product overseas.
The financial statements have been prepared assuming that the Company will
continue as a going concern. The Company has suffered recurring losses from
operations ($112,952 in 1997 and $252,202 in 1996), 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 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, 1996. 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, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Changes in significant accounting policies - There were no changes in
significant accounting policies during the current period.
3. STOCKHOLDERS' EQUITY
Stock Issued to Officers, Consultants and Employees - Through March 31,
1997, the Company issued 500,000 shares to officers and directors.
9
<PAGE>
4. RELATED PARTY TRANSACTIONS
Loan from Director - A former officer/shareholder, who is still a director
of the Company, is owed $33,792 by the Company. The amount is payable on
demand with a stated interest rate of 11%.
Accrued Officer and Director's Compensation - During 1996, an investor
group consisting of two individuals, which acquired an 18% ownership
interest for $500,000, was awarded two seats on the Board of Directors and
two officer positions. The two individuals each receive a consulting fee of
$60,000 per annum for their management duties.
5. SHAREHOLDER'S LOAN
During 1996, the Company received $200,000 from a shareholder as a loan in
connection with the Company's media campaign. The loan is to be paid at the
rate of $2,500 per month. Interest accrues at 10% and will be paid with a
final balloon payment. The shareholder agreed to a moratorium on the
monthly $2,500 payments from May 1997 through August 31, 1997.
6. COMMITMENTS, CONTINGENCIES AND OTHER COMMENTS.
Dependence on Major Customers and Suppliers - Export sales represent
approximately 100% of sales with only one export customer representing more
than 10% of total sales.
The Company is currently purchasing 100% of its products from three
vendors.
Regulatory Matters - There have been no changes in the status of regulatory
inquiries by the Food and Drug Administration (FDA) and the Federal Trade
Commission (FTC).
Litigation - In July 1997, the Company's former attorney, who is a relative
of a Director, brought an action against the Company in New York State
Supreme Court, New York County for unpaid attorney fees and disbursements
of approximately $18,000. Legal counsel has not rendered an opinion as to
the ultimate outcome of this matter.
10
<PAGE>
PHASEOUT OF AMERICA, INC.
Management's Discussion and Analysis
Results of Operations
Three Months Ended March 31, 1997 Compared
to Three Months Ended March 31, 1996
The Company incurred a net loss of $112,952 for the three months ended
March 31, 1997 as compared to the loss of $252,202 for the three months ended
March 31, 1996. Three-month sales decreased $524,884. The decrease in sales
resulted from no retail sales in 1997 of the product through television direct
response methods which results in substantially higher unit selling prices as
well as increases in unit volume. The Company's domestic marketing activities
were curtailed due to the ongoing negotiations with the FTC. Once advertising
claims are approved, the Company intends to reenter the domestic retail market.
Selling expenses decreased from $539,748 to $21,615 as a result of the
elimination in 1997 of the substantial additional costs associated with the
distribution of the product through television response channels.
General and administrative expenses decreased from $210,305 to $140,763 as
a result of a decrease in officer salaries ($33,322) and a decrease in
professional fees ($56,736).
The gross profit margin decreased to 60% from 83%, due to the elimination
of the high volume of direct response television sales.
The Company maintains a $500,000 liability insurance policy.
11
<PAGE>
PHASEOUT OF AMERICA, INC.
Management's Discussion and Analysis
Liquidity and Capital Resources
Cash of $78,861 was used for operations for the 3 months ended March 31, 1997 as
compared to $36,953 used in the same period of last year. Cash decreased during
the 3 months ended March 31, 1997 by $87,796.
The Company's working capital has deteriorated due to the use of current assets
for operations. Working capital and current ratios were:
March 31, December 31, March 31,
1997 1996 1996
---- ---- ----
Working capital
(deficiency) $(555,976) $(436,465) $(1,156,359)
Current ratios 0.35:1 0.49:1 0.22:1
In order to meet short-term marketing goals, in July 1997 certain officers and
directors agreed to acquire an aggregate of 10,000,000 shares of the Company's
common stock (representing 8% of total shares outstanding) for an aggregate
purchase price of $100,000. The Company is also seeking an additional $200,000
of financing under the same terms and conditions as offered to the officers and
directors. There is no assurance that the Company will be able to obtain
additional financing.
Distribution and Marketing
Marketing (Domestic)
During the second half of 1996, the Company's domestic marketing activities
were curtailed due to the negotiations with the Federal Trade Commission as to
what advertising claims could be made to describe the PhaseOut product. Once
advertising claims are approved, management intends to aggressively enter the
U.S. retail market under the category of smoke cessation products.
Marketing (International)
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 and Japan has 35 million smokers.
Distribution in South Korea is expected to begin in the 1st quarter of 1998.
PhaseOut has started distribution through television infomercials and
commercials in the following countries: Portugal, Spain, South Africa, Romania,
Hungary, Australia, Italy and Germany.
12
<PAGE>
PHASEOUT OF AMERICA, INC.
Management's Discussion and Analysis
New Products
In February 1997, the Company executed a letter of intent with Andrea
Eyewear, Inc, (Andrea) whereby the Company agreed to fund the pre-operating and
developmental costs of a patented sunglass product owned by Andrea. In
consideration for the funding, the Company will receive an exclusive license to
commercialize the sunglass product worldwide. As of March 31, 1997, the Company
has incurred $7,779 of pre-operating and developmental costs.
In May 1997, the Company entered into a joint venture with Automotive
Marketing, Inc. to manufacture and distribute aftermarket automobile products.
As of March 31, 1997, the Company has made advances of $3,280 to the joint
venture with the understanding that any such advances will be reimbursed when
revenue-producing operations commence.
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).
13
<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 $18,000. Legal counsel
has not rendered an opinion as to the ultimate outcome of this matter.
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
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHASEOUT OF AMERICA, INC.
Dated: September 5, 1997
/s/ Herbert M. Reichlin
----------------------------------------
Herbert M. Reichlin
Chief Operating Officer and Treasurer
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 172,576
<SECURITIES> 0
<RECEIVABLES> 2,767
<ALLOWANCES> (1,000)
<INVENTORY> 92,683
<CURRENT-ASSETS> 300,720
<PP&E> 91,350
<DEPRECIATION> (24,777)
<TOTAL-ASSETS> 379,209
<CURRENT-LIABILITIES> 856,696
<BONDS> 0
0
0
<COMMON> 3,266
<OTHER-SE> (610,753)
<TOTAL-LIABILITY-AND-EQUITY> 379,209
<SALES> 102,960
<TOTAL-REVENUES> 105,193
<CGS> 41,147
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 162,378
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (112,952)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
