U. S. 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, 1996
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
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 disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form and no disclosure will 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.
[ X ]
The registrant's operating revenues for its most recent fiscal year were
$1,489,250.
The number of shares outstanding on December 31, 1996 was 108,369,929 shares
of Common Stock, .00003 par value.
Continued...
<PAGE>
The aggregate market value of the voting Common Stock held by non-affiliates (1)
of the registrant based on the average of the high and low bid prices ($.02) of
the Company's Common Stock, as of March 20, 1997 , is approximately $1,750,022
based upon the 87,501,114 shares of Registrant's Common Stock held by
non-affiliates.
(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, 1996
TABLE OF CONTENTS
PART I PAGE
- ------ ----
Item 1. Business 4
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
- -------
Item 5. Market for Company's Common Equity and Related Stockholder
Matters. 9
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 10
Item 7. Financial Statements F1 - F14
Item 8. Changes in or Disagreement with Accountants on Accounting
and Financial Disclosure. 11
PART III
- --------
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act. 11
Item 10. Executive Compensation 13
Item 11. Security Ownership of Certain Beneficial Owners and Management 13
Item 12. Certain Relationships and Related Transaction 15
PART IV
- -------
Item 13. Exhibits and Reports on Form 8-K 15
Signatures
Supplemental Information
3
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PART 1
ITEM 1. BUSINESS
THE COMPANY
PhaseOut of America, Inc., (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.
During the last three years, the Company has been concentrating its
efforts in two areas: (1) test marketing the product domestically through
various channels of distribution and (2) entering into international
distribution agreements utilizing television infomercials and commercials.
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 South Korea. A
second manufacturing source in China is going on-line in mid 1997. These two
sources of supply will be able to produce all future PhaseOut units required for
sale.
The Company had received a "warning letter" from the Food and Drug
Administration "FDA" in mid 1993, stating that the PhaseOut product was a
medical device and subject to the provisions of the FDA. The Company responded
through legal counsel, taking the position that the PhaseOut product is not a
medical device within the meaning of the Food, Drug and Cosmetics Act "FDCA"
(see Item 3, Legal Proceedings).
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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. 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.
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 PhaseOut 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.
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ADDITIONAL STUDIES
The Company conducted a scientific study at Ameritech Laboratories to
demonstrate the condensation of nicotine and tars within the filter of
cigarettes due to the use of the PhaseOut device. This study demonstrated an
increase of nicotine content within the filter, porportionate to the number of
PhaseOut perforations in the cigarette. The study concluded that the increased
weight of the filter was due to the condensation of nicotine due to the cooling
effect of the external air introduced through the wholes pierced into the
cigarette filters by the PhaseOut device.
The Company is in the initial stages of a clinical study taking place at
the University of Miami, which will gauge the effective quit rate of smokers
using the PhaseOut device in conjunction with behavior modification. This study
will also measure the effectiveness of the PhaseOut device as a cigarette toxin
reduction technology in an natural environment. Previous studies were machine
studies or human studies in a tightly controlled laboratory environment.
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). The Company has received patents in China,
Taiwan and Japan. In addition, the Company has applied for patents in fifteen
(15) foreign countries, including England, France, Germany and Italy.
MARKETING (DOMESTIC)
The focus of the Company's marketing to date has been 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).
During the second half of 1996, the Company's marketing activities
domestically, were curtailed due to the negotiations with the Federal Trade
Commission as to what advertising claims could be made to describe the PhaseOut
product (see Legal Proceedings). Once advertising claims are approved,
management intends to aggressively enter the U.S. retail market under the
category of smoke cessation products.
MARKETING (INTERNATIONAL)
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 and Japan has 35 million smokers.
PhaseOut has started distribution through television infomercials and
commercials in the following countries: Greece, Portugal, Spain, Uruguay,
Brazil, South Africa, Phillippines, Argentina, Romania, Moldavia, Hungary,
Chile, Columbia, Australia and Zimbabwe.
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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. Limited distribution
of this new product began this year through an agreement with a direct (network)
marketing company.
The PhaseOut Support Group Product Line. The Company recently developed a
line of consumable products specifically formulated for smokers and former
smokers. Limited 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.
To date, only nominal amounts of these products have been sold.
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
7
<PAGE>
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 seven employees, including the
Company's three officers and directors and four administrative and secretarial
personnel.
ITEM 2. PROPERTIES
The Company leases approximately 2,600 square feet of office space at 6900
Jericho Turnpike, Syosset, New York 11719.
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 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.
On August 20, 1996, a consent order was agreed to with the FTC which
settled charges that various advertising claims for the PhaseOut device ("the
device") were unsubstantiated or false. The order requires the Company to send a
postcard to identifiable past purchasers of the device notifying them of the
commission's action and advising them that the device has not been proven to
reduce the risk of smoking related diseases or make cigarettes "safer". The
order also prohibits the Company from making certain claims in its current
8
<PAGE>
advertising. The Company estimated that the cost to comply with this order is
$35,000, representing the cost of identifying each purchaser and to mail the
post cards.
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 $39,000. 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. Based on the Award of Arbitrator dated October 28, 1996 which
disposed of all claims by both parties, the Company paid $123,157 to On-Air and
issued a note for $20,940 which was paid after December 31, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
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, 1997. 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
- ------ ---- ---
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
Quarter Ended June 30, 1996 .05 .03
Quarter Ended September 30, 1996 .05 .03
Quarter Ended December 31, 1996 .02 .01
(b) Holders -- As of December 31, 1996, the approximate number of the Company's
shareholders was 390.
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(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
RESULTS OF OPERATIONS
During 1996, the Company's domestic marketing activities were curtailed
due to the ongoing negotiations with the FTC. As a result, total sales decreased
by approximately $43,000 from $1,532,000 in 1995 to $1,489,000 in 1996. Of this
amount, approximately $641,000 was due to a decrease in domestic sales which was
offset by a $598,000 increase in the Company's wholesale international sales.
The number of units shipped during 1996 increased by 46,950 to 107,970, but the
average selling price dropped by $11.00 to $14.00 per unit. Once advertising
claims are approved, the Company intends to re-enter the domestic retail market.
Cost of sales increased by approximately $110,000 from $265,000 in 1995 to
$375,000 in 1996. Of this amount, approximately $204,000 was due to increased
volume offset by approximately $94,000 due to decreased average unit cost.
Selling expenses decreased by approximately $290,000 from $1,322,000 in
1995 to $1,032,000 in 1996. This decrease is attributed to the curtailment of
television direct response marketing in mid 1996 during the ongoing FTC
negotiations.
General and administrative expenses increased by approximately $111,000
from $665,000 in 1995 to $776,000 in 1996. This increase is primarily
attributable to a $105,000 increase in legal fees in connection with the ongoing
FTC negotiations and a $35,000 accrual for the estimated cost to comply with the
FTC consent order offset by a $29,000 reduction in salary and other expenses.
Interest expense increased by approximately $58,000 from $50,000 in 1995
to $108,000 in 1996 due to increased borrowing and interest being charged by a
major vendor.
LIQUIDITY AND CAPITAL RESOURCES
Cash of $546,646 was used for operations for the year ended December 31,
1996 as compared to $282,390 used last year. Cash increases principally were
from proceeds of sales of common stock and borrowing during the year ended
December 31, 1996.
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 officers and directors have been repaid as has $32,500 of
the principal to the individual investor with the balance to be paid in
installments over 67 months.
The Company currently has no established sources of financing or available
lines of credit. The Company may seek additional financing. It has not been
determined whether it be debt or equity. There have been no commitments made to
provide financing of any kind. There is no assurance that the Company will be
able to obtain additional financing.
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ITEM 7. FINANCIAL STATEMENTS
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, 1996, and the related statements of operations, shareholders'
(deficit), and cash flows for the years ended December 31, 1996 and 1995. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide 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, 1996, and the results of its operations and its cash flows for
the years ended December 31, 1996 and 1995 in conformity with generally accepted
accounting principles.
As discussed in Note 10 to the financial statements, the Company has been
subject to certain governmental regulatory matters by the U.S. Food and Drug
Administration. At present time, neither the Company nor its legal counsel can
predict the ultimate outcome of the matters addressed by this agency. These
matters, if pursued by this agency, 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, 1996, current liabilities exceed current
assets by $436,465. 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
March 20, 1997
- F1 -
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PHASE-OUT OF AMERICA, INC.
BALANCE SHEET
DECEMBER 31, 1996
================================================================================
Assets
CURRENT ASSETS
Cash $260,372
Accounts receivable - net of allowance for doubtful
accounts of $1,000 4,287
Inventory 127,413
Advances for clinical study 25,000
Prepaid expenses 5,414
--------
422,486
--------
FURNITURE AND EQUIPMENT - at cost - net of accumulated
depreciation of $16,639 26,276
PATENTS - at cost - net of accumulated
amortization of $6,733 40,267
SECURITY DEPOSITS 4,137
--------
70,680
--------
$493,166
========
See notes to financial statements.
- F2 -
<PAGE>
PHASE-OUT OF AMERICA, INC.
BALANCE SHEET
DECEMBER 31, 1996
================================================================================
Liabilities and Shareholders' (Deficit)
CURRENT LIABILITIES
1992 convertible debentures - including accrued interest
of $4,900 $ 14,900
Note payable - vendor 20,940
Shareholder's loan - current portion 32,939
Taxes payable 4,297
Accounts payable 614,327
Accrued officer and director's compensation 60,000
Loans from directors 33,169
Accrued expenses 78,379
-----------
858,951
-----------
SHAREHOLDER'S LOAN - net of current portion 137,500
-----------
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 -
108,369,929 shares issued and
outstanding 3,251
Capital in excess of par 3,080,051
Accumulated (deficit) (3,586,587)
-----------
(503,285)
-----------
$493,166
===========
See notes to financial statements.
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PHASE-OUT OF AMERICA, INC.
STATEMENS OF OPERATIONS
================================================================================
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
1996 1995
================================
SALES - net $1,489,250 $1,532,405
COST OF SALES 374,520 264,566
------------ ------------
1,114,730 1,267,839
------------ ------------
SELLING EXPENSES 1,032,492 1,322,199
GENERAL AND ADMINISTRATIVE EXPENSES 775,718 664,648
------------ ------------
1,808,210 1,986,847
------------ ------------
(LOSS) BEFORE OTHER INCOME (EXPENSES) (693,480) (719,008)
------------ ------------
OTHER INCOME (EXPENSES)
Interest income 5,694 89
Interest (expense) (107,748) (49,742)
------------ ------------
(102,054) (49,653)
------------ ------------
NET (LOSS) $(795,534) $(768,661)
============ ============
(LOSS) PER SHARE $ (0.01) $ (0.02)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (to nearest 1,000,000) 90,000,000 68,000,000
============ ============
See notes to financial statements.
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PHASE-OUT OF AMERICA, INC.
STATEMENTS OF SHAREHOLDERS' (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
================================================================================
<TABLE>
<CAPTION>
Number Of
Common Stock Amount Capital In
Shares $.00003 Excess Of Accumulated
(Post-Split) Par Value Par Value (Deficit)
================================================
<S> <C> <C> <C> <C>
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)
Proceeds from sales of stock 20,045,592 601 514,881 --
Bond and accrued interest conversions to
stock 210,517 6 10,520 --
Senior subordinated convertible debentures
and accrued interest
conversions to stock 8,700,000 261 434,739 --
Shareholder's loan converted to stock 125,000 4 7,496 --
Stock issued for accrued services rendered:
Officers and directors 3,857,143 116 160,294 --
Outside services 560,000 17 14,433 --
Net (loss) -- -- -- (795,534)
----------- ------ ---------- -----------
BALANCE - December 31, 1996 108,369,929 $3,251 $3,080,051 $(3,586,587)
=========== ====== ========== ===========
</TABLE>
See notes to financial statements.
- F5 -
<PAGE>
PHASE-OUT OF AMERICA, INC.
STATEMENTS OF CASH FLOWS PAGE 1 OF 2
================================================================================
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
1996 1995
-----------------------------
Cash Flows from Operating Activities
Net (loss) $(795,534) $(768,661)
Adjustments to reconcile net (loss) to net cash
(used for) operating activities:
Depreciation and amortization 5,602 6,074
Expenses paid through the issuance of
restricted common stock 30,700 159,086
(Increase) decrease in:
Accounts receivable 67,680 (69,883)
Inventories (28,113) 256,186
Advances for clinical study (25,000) --
Prepaid expenses 4,438 3,511
Other current assets 18,592 (18,592)
Increase (decrease) in:
Accrued bond interest -- 25,968
Accounts payable 32,168 46,269
Accrued officer compensation 60,000 144,160
Taxes payable (3,780) 3,270
Amounts due to affiliate -- (91,488)
Accrued expenses 86,601 21,710
--------- ---------
(546,646) (282,390)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of equipment (21,390) (800)
Payment of security deposits (595) --
Return of security deposits -- 300
--------- ---------
(21,985) (500)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sales of debentures -- 290,000
Repayments of debentures (29,297) --
Proceeds from sales of common stock 515,482 120,000
Payments of capital leases -- (586)
Loans from directors 56,000 25,753
Repayments to directors (65,000) --
Loan from shareholder 200,000 --
Repayments to shareholder (25,000) --
--------- ---------
652,185 435,167
--------- ---------
See notes to financial statements.
- F6 -
<PAGE>
PHASE-OUT OF AMERICA, INC.
STATEMENTS OF CASH FLOWS PAGE 2 OF 2
================================================================================
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
1996 1995
-----------------------------
NET INCREASE IN CASH $ 83,554 $ 152,277
CASH - beginning 176,818 24,541
--------- ---------
CASH - end $ 260,372 $ 176,818
========= =========
SUPPLEMENTAL DISCLOSURES
CASH PAID FOR:
Interest $ 83,463 $ 23,880
========= =========
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Bond and accrued interest conversions to
common stock $ 445,526 $ 34,014
========= =========
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 $ 144,160 $ 125,715
========= =========
Shareholder loan converted to common stock $ 7,500 $ --
========= =========
See notes to financial statements.
- F7 -
<PAGE>
PHASE-OUT OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
================================================================================
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 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") as discussed in
Note 10c. Once advertising claims are approved, the Company intends to
reenter the domestic retail market. The Company also distributes the
product overseas.
2 - Summary of Significant Accounting Policies
a. INVENTORY - Inventory is valued at cost (on a first-in, first-out
basis) which is not in excess of market value. Inventory is
comprised entirely of finished goods.
b. FURNITURE AND EQUIPMENT - Furniture and equipment are carried at
cost. Depreciation is computed on the straight-line method over the
estimated useful lives (three to seven years) 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 dates 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 acquisition 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 response advertising and marketing will have
measurable future benefit.
Continued
- F8 -
<PAGE>
Advertising and marketing expense was $364,381 and $739,660 for 1996
and 1995, respectively.
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 reclassifications had no impact upon the results
of operations.
i. STOCK OVERSUBSCRIPTION - As of December 31, 1996, the common stock
issued by the Company exceeded the authorized limit by 8,369,929
shares. Subsequent to the year-end, the Board of Directors
authorized a 30,000,000 share increase in the authorized shares.
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, 1996, current liabilities exceed
current assets by $436,465. 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
- F9 -
<PAGE>
4 - Warrants and Convertible Debentures
a. WARRANTS -
<TABLE>
<CAPTION>
PRICE PER EXPIRATION
SHARES SHARE TOTAL DATES
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE - December 31, 1994 3,034,000 $ .25 $ 758,500 1997
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
Issued with purchase of
common stock 250,000 .10 25,000 1999
Issued for services 23,057,950 .05 - .075 1,190,398 2000 - 2001
------------ -------------
BALANCE - December 31, 1996 31,248,011 $ 2,639,807
============ ============
</TABLE>
b. 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%. All
of the debentures were converted to common stock during 1996.
c. 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, $107,500 has been paid back or
converted into stock. As of December 31, 1996, $10,000 of principal
and $4,900 of interest remain unpaid or unconverted on these
debentures.
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
- F10 -
<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 DIRECTOR - A former officer/shareholder, who is still a
director of the Company, is owed $33,169 by the Company. The amount
is payable on demand with a stated interest rate of 11%.
c. 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 one officer position. The two individuals will each
receive a consulting fee of $60,000 per annum for their management
duties ($30,000 each for 1996). The 1996 fees of $60,000 remain
unpaid as of December 31, 1996.
d. OTHER - The Company's general counsel is a relative of a director.
The Company incurred approximately $57,518 of legal fees with this
firm in 1996 and $25,000 in 1995, of which $18,205 remained unpaid
as of December 31, 1996.
6 - Shareholder's Loan
During 1996, the Company received $200,000 from an individual as a loan in
connection with the Company's media campaign. Repayments of $25,000 were
made in cash and $7,500 in stock. The $167,500 of remaining principal at
December 31, 1996 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.
7 - Income Taxes
The Company has available net operating loss carryforwards of
approximately $3,200,000, which expire in 2002 until 2011. Deferred income
taxes reflect the net tax effects of net operating loss carryforwards and
result in deferred tax assets of approximately $960,000 and $780,000 at
December 31, 1996 and 1995, respectively, which were fully offset by
valuation allowances due to uncertainties surrounding the ultimate
realization of this asset.
Continued
- F11 -
<PAGE>
8 - Leases
The Company is obligated under a lease for office space through November,
2001. Rental expense was $15,080 and $23,413 for 1996 and 1995,
respectively. The future minimum lease payments required under this lease
are as follows:
1997 $ 56,323
1998 58,354
1999 60,448
2000 61,849
2001 50,739
The Company currently receives sublease payments of $1,800 per month for a
portion of their office space, but there is no formal sublease agreement.
9 - Economic Dependence
The Company purchased 100% of its products in 1996 and 1995 from two
vendors.
10 - Commitments and Contingencies
a. DIRECT RESPONSE MARKETING AGREEMENT - In 1994, the Company entered
into certain agreements with On-Air Infonetwork, Inc. ("On-Air")
relating to the Company's direct response marketing campaign during
1995 and 1996.
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. Based on the
Award of Arbitrator dated October 28, 1996, which disposed of all
claims by both parties, the Company paid $123,157 to On-Air and gave
them a note for $20,940 which was paid after December 31, 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.
Continued
- F12 -
<PAGE>
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 FDC 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.
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.
On August 20, 1996, a consent order was agreed to with the FTC which
settled charges that various advertising claims for the product were
unsubstantiated or false. The order requires the Company to send a
postcard to identifiable past-purchasers of the product notifying
them of the FTC's action and advising them that the product has not
been proven to reduce the risk of smoking-related diseases or make
cigarettes safer. The order also prohibits the Company from making
certain claims in its current advertising. The Company estimates
that the cost to comply with this order is $35,000, representing the
cost to find identifiable past-purchasers and mail the postcards and
has accrued this amount.
d. OTHER - 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 $39,000. 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
- F13 -
<PAGE>
11- Disclosure About Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable and
other current assets and liabilities approximate fair value because of the
short maturity of these items.
The carrying amounts of various loans payable exceed the fair value by
approximately $14,000, based on an estimated borrowing rate of 10.5%.
These fair value estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, can not
be determined with precision. Changes in assumptions could significantly
affect these estimates.
- F14 -
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
NONE
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:
Name Age Position(s) with the Company
- ---- --- ----------------------------
Burton A. Goldstein 61 Chairman of the Board of Directors
Co-Chief Executive Officer
Irwin Pearl 55 President, Co-Chief Executive Officer
Director
Herbert M. Reichlin 55 Secretary-Treasurer, Chief
Operating Officer
Director
Bernard Gutman 70 Director
James F. Leary 67 Director
Luther H. Hodges, Jr. 60 Director
Milton J. Walters 57 Director
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:
BURTON A. GOLDSTEIN has been Chairman of the Board of Directors of the
Company since March 10, 1997. Mr. Goldstein is President of American Employer
Services Corp., a provider of employee benefit consulting services to industry
and associations. A chartered Life Underwriter, Mr. Goldstein is also active in
estate preservation for business owners and wealthy individuals.
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
11
<PAGE>
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.
HERBERT M. REICHLIN has been a Director and Secretary-Treasurer of the
Company since July 30, 1996. Mr. Reichlin is a practicing Certified Public
Accountant and is also the President of Program Resource Organization, a
consulting company to the health industry.
BERNARD GUTMAN has been a Director of the Company since inception. From
inception, Mr. Gutman was President of the Company until September 14, 1987 and
was Chairman of the Board of Directors until March 10, 1997. 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.
JAMES F. LEARY has been a Director 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 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.
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 Fe,
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
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
12
<PAGE>
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.
MILTON J. WALTERS has been a Director of the Company since March 10, 1997.
Mr. Walters is President of Tri-River Capital Group that serves the specialized
investment banking needs of the financial service industry. His more than twenty
five years of investment banking experience has been dedicated to serving this
industry sector. He has represented clients in a wide variety of liquidity and
capital financings, conversions of mutual savings and loans, acquisitions,
sales., divestitures, recapitalization and captive finance company formations.
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
former Chairman and Chief Executive Officer for services rendered in all
capacities by him to the Company during fiscal years 1996, 1995 and 1994.
Summary Compensation Table
Name and
Principal Positions Year Salary
- ------------------- ---- ------ Other
Cash Non Cash Compensation
---- -------- ------------
Bernard Gutman
(Former Chairman and
Chief Executive 1996 $47,780 -0- $40,004
Officer) 1995 $49,932 $52,000 $43,676
1994 $5,739 $53,103 $17,574
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:
13
<PAGE>
Name and Address Shares of Common
Of Beneficial Owner Beneficially Owned Percent Owned (1)
- ------------------- ------------------ -----------------
Burton A. Goldstein 9,778,976 (2) 7.5%
6900 Jericho Turnpike
Syosset, New York 11791
Irwin Pearl 2,250,000 1.7%
6900 Jericho Turnpike
Syosset, New York 11791
Herbert M. Reichlin 9,778,975 (2) 7.5%
6900 Jericho Turnpike
Syosset, New York 11791
Bernard Gutman 16,208,019 (3) 12.5%
6900 Jericho Turnpike
Syosset, New York 11791
James F. Leary 998,653 .8%
6900 Jericho Turnpike
Syosset, New York 11791
Luther H. Hodges, Jr. 1,412,143 1.1%
6900 Jericho Turnpike
Syosset, New York 11791
Milton J. Walters 2,000,000 (2) 1.5%
6900 Jericho Turnpike
Syosset, New York 11791
Products & Patents, Ltd.("P&P") 1,867,906 1.4%
6900 Jericho Turnpike
Syosset, New York 11791
All Directors and Officers 42,426,766 32.7%
as a group (seven persons)
- ----------
(1) Based upon 129,927,880 shares and warrants issued as of December 31, 1996.
(2) Represents warrants issued and owned.
(3) Includes 1,867,906 shares held by P&P inasmuch as Bernard Gutman is an
officer and director of P&P. Mr. Gutman has sole discretionary power of
these shares. P&P currently has no active business operations.
14
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1994, an 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.
Bernard Gutman, the Director and former 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 June 1996, the Board of Directors approved a revision of the existing
employment contracts with management providing for salaries of $50,000 each
until September 1997 (aggregate $100,000 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
3.1 Articles of Incorporation (2)
3.2 By-laws (2)
10.01 Agreement dated August 21, 1995 with J&R Intercontinental (1).
10.02 Consulting Agreement dated July 9, 1996 between the Company and
Herbert M. Reichlin
10.03 Consulting Agreement dated July 9, 1996 between the Company and
American Employer Service Corporation
10.04 Warrant Agreement dated July 9, 1996 between the Company and
Herbert M. Reichlin
10.05 Warrant Agreement dated July 9, 1996 between the Company and
Burton A. Goldstein
10.06 Warrant Agreement dated July 9, 1996 between the Company and
Milton J. Walters
10.07 Securities Purchase Agreement dated July 9, 1996
1) Incorporated by reference to Exhibits to Form 10K for fiscal
year ended December 31, 1995.
2) Incorporated by reference to Exhibits to Form 10K for the
year ended December 31, 1989.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of 1996.
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: March 26, 1997 By:/s/ Irwin Pearl
--------------------------
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.
SIGNATURES AND TITLE DATE
- -------------------- ----
/s/ Burton A. Goldstein
- --------------------------
Burton A. Goldstein
Chairman of the Board of
Directors, Co-Chief Executive
Officer March 26, 1997
/s/ Irwin Pearl
- --------------------------
Irwin Pearl
President & Co-Chief Executive
Officer, Director March 26, 1997
/s/ Herbert M. Reichlin
- --------------------------
Herbert M. Reichlin
Secretary-Treasurer, Chief
Operating Officer, Director March 26, 1997
/s/Bernard Gutman
- --------------------------
Bernard Gutman
Director March 26, 1997
/s/ James F. Leary
- --------------------------
James F. Leary
Director March 26, 1997
/s/ Luther H. Hodges, Jr.
- --------------------------
Luther H. Hodges, Jr.
Director March 26, 1997
/s/ Milton J. Walters
- --------------------------
Milton J. Walters
Director March 26, 1997
<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
Consulting Agreement dated July 9, 1996 between Phase-Out of America,
Inc. (the "Company") having an office at 140 Broadway, Lynbrook, New York 11563
and Herbert M. Reichlin ("Reichlin"), having an address at 6800 Jericho Turnpike
- -Suite 214E, Syosset, NY 11791.
WHEREAS, the Company has effected a private placement of $500,000 of
securities (the "Placement") for the Company pursuant to that certain Securities
Purchase Agreement dated of even date hereof between the Company and certain
persons denominated "Buyers" therein;
WHEREAS, the Company wishes to retain Reichlin on the terms and
conditions hereinafter stated;
NOW, THEREFORE, the parties agree as follows:
1. The Company hereby engages Reichlin to render consulting services
to it commencing on the first day of the first month commencing after the
closing date of the Placement. The consulting services for the Company shall
include advice and assistance with respect to the Company's capital structure,
cash management and financing alternatives and business development, including
marketing.
2. The Company shall pay Reichlin (a) at the rate of $30,000 per annum
during 1996 and (b) at the rate of $60,000 per annum during 1997 and thereafter,
provided that such fees shall be accrued and not paid until the Company is
profitable. Subject to the foregoing, such fees shall be paid monthly on the
last business day of each month.
3. Reichlin shall also be entitled to reimbursement of expenses
incurred in connection with the performance of services hereunder in accordance
with policies established by the Company.
4. Consultant shall render services hereunder on a nonexclusive basis.
5. This Agreement shall have a term of five years.
6. This Agreement (i) constitutes the entire agreement between the
parties with respect to its subject matter, (ii) shall be governed by the laws
of the State of New York applicable to agreements made and to be wholly
performed in the State of New York, and (iii) may be changed only by a document
signed by both parties.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the date first above stated.
PHASE-OUT of America, Inc.
By:/s/ ILLEGIBLE /s/Herbert M. Reichlin
---------------- -----------------------
Herbert M. Reichlin
Consulting Agreement dated July 9, 1996 between Phase-Out of America, Inc.
(the "Company") having an office at 140 Broadway, Lynbrook, New York 11563 and
American Employer Services Corporation ("AESC"), having an address at 6800
Jericho Turnpike Suite 214E, Syosset, NY 11791.
WHEREAS, the Company has effected a private placement of $500,000 of
securities (the "Placement") for the Company pursuant to that certain Securities
Purchase Agreement dated of even date hereof between the Company and certain
persons denominated "Buyers" therein;
WHEREAS, the Company wishes to retain AESC on the terms and conditions
hereinafter stated;
NOW, THEREFORE, the parties agree as follows:
1. The Company hereby engages AESC to render consulting services to it
commencing on the first day of the first month commencing after the closing date
of the Placement. The consulting services for the Company shall include advice
and assistance with respect to the Company's capital structure, cash management
and financing alternatives and business development, including marketing.
2. The Company shall pay AESC (a) at the rate of $30,000 per annum
during 1996 and (b) at the rate of $60,000 per annum during 1997 and thereafter,
provided that such fees shall be accrued and not paid until the Company is
profitable. Subject to the foregoing, such fees shall be paid monthly on the
last business day of each month.
3. AESC shall also be entitled to reimbursement of expenses incurred
in connection with the performance of services hereunder in accordance with
policies established by the Company.
4. Consultant shall render services hereunder on a non exclusive
basis.
5. This Agreement shall have a term of five years.
6. This Agreement (i) constitutes the entire agreement between the
parties with respect to its subject matter, (ii) shall be governed by the laws
of the State of New York applicable to agreements made and to be wholly
performed in the State of New York, and (iii) may be changed only by a document
signed by both parties.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the date first above stated.
PHASE-OUT of America, Inc.
By: /s/ ILLEGIBLE
--------------
American Employer Services
Corporation
/s/ Burton A. Goldstein
-----------------------
By: Burton A. Goldstein
WARRANT AGREEMENT dated as of June , 1996 by and between Phase-Out of
America, Inc., a Delaware corporation (the "Company"), and Herbert M. Reichlin
(the "Purchaser").
WITNESSETH:
WHEREAS, the Company proposes to issue to Purchaser a warrant (the
"Warrant") to purchase shares (the "Warrant Shares") of the Company's Common
Stock, par value $.0003 per share (the "Common Stock"); and
NOW, THEREFORE, in consideration of the premises, the agreements
herein set forth and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Grant. On the terms and subject to the conditions set forth herein,
and unless this agreement is terminated prior to exercise in accordance with
Section 15 hereof, Purchaser is hereby granted the right to purchase, at any
time from June , 1996 until 5:00 P.M., New York time, on June , 2001 (the
"Warrant Exercise Term"), up to 9,778,975 Warrant Shares at an exercise price
per share (subject to adjustment as provided in Article 7 hereof) equal to $.05
per share.
2. Warrant Certificate. The warrant certificate (the "Warrant
Certificate") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions and other variations as
required or permitted by this Agreement.
3. Exercise of Warrant. The Warrant is exercisable with respect to
some or all of the Warrant Shares (but not as to any fractional shares) by
payment of the applicable Exercise Price per share on the date of exercise in
cash or by check to the order of the Company, or any combination of cash or
check. Upon surrender of the Warrant Certificate with the annexed Form of
Election to Purchase duly executed, together with payment of the Exercise Price
(as hereinafter defined) for the Warrant Shares purchased, at the Company's
principal offices (currently located at 140 Broadway, Lynbrook, New York 11563)
Purchaser (or other registered holder of the Warrant Certificate) (the "Holder")
shall be entitled to receive a certificate or certificates for the Warrant
Shares so purchased. The purchase rights represented by each Warrant Certificate
are exercisable at the option of the Holder, in whole or in part (but not as to
fractional Warrant Shares). In the case of the purchase of less than all the
Warrant Shares purchasable under any Warrant Certificate, the Company shall
cancel said Warrant Certificate upon the surrender thereof and
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shall execute and deliver a new Warrant Certificate of like tenor for the
balance of the Warrant Shares purchasable thereunder.
4. Issuance of Certificates.
Upon the exercise of the Warrants, the issuance of certificates for
the Warrant Shares purchased shall be made forthwith (and in any event within
five business days thereafter) without charge to the Holder thereof including,
without limitations any tax which may be payable in respect of the issuance
thereof, and such certificates shall (subject to the provisions of Article 5
hereof) be issued in the name of, or in such names as may be directed by, the
Holder thereof; provided, however, that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the issuance
and delivery of any such certificates in a name other than that of the Holder
and the Company shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
The Warrant Certificate and the certificates representing the Warrant
Shares shall be executed on behalf of the Company by the manual or facsimile
signature of the present or any future Chairman or Vice Chairman of the Board of
Directors of President or Vice President of the Company under its corporate seal
reproduced thereon, attested to by the manual or facsimile signature of the
present or any future Secretary or Assistant Secretary of the Company. The
Warrant Certificate and certificates representing the Warrant Shares shall be
dated the date of execution by the Company upon initial issuance, division,
exchange, substitution or transfer.
Upon exercise, in part or in whole, of the Warrants, certificates
representing the Warrant Shares shall bear a legend substantially similar to the
following:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the "Act"),
and may not be offered or sold except (i) pursuant to an effective
registration statement under the Act, (ii) to the extent applicable,
pursuant to Rule 144 under the Act (or any similar rule under such Act
relating to the disposition of securities), or (iii) upon the delivery
by the holder to the Company of an opinion of counsel, reasonably
satisfactory to counsel to the issuer, stating that an exemption from
registration under such Act is available."
5. Restrictions on Transfer of warrants and Warrant Shares.
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(a) Purchaser, by his acceptance thereof, covenants and agrees
that the Warrant is being acquired as an investment and not with a view to the
distribution thereof.
(b) The Company agrees on request at its expense to register
the Warrants and the Warrant Shares in a registration statement filed under the
Securities Act of 1933, as amended (the "Act"). The Company shall also provide
the holder(s) of the Warrants and the Warrant Shares the opportunity to include
these Warrants and Warrant Shares in a registration statement under the Act.
6. Price.
6.1 Initial and Adjusted Exercise Price. The initial exercise price of
the Warrant shall be equal to five cents ($.05) per share. The adjusted exercise
price shall be the price which may result from time to time from any and all
adjustments of the initial exercise price in accordance with the provisions of
Article 7 hereof, if any such adjustments are required by Article 7.
6.2 Exercise Price. The term "Exercise Price" herein shall mean the
initial exercise price or the adjusted exercise price.
7. Adjustments of Exercise Price and Number of Warrant Shares.
7.1 Adjustment in Number of Warrant Shares. Upon each adjustment of
the Exercise Price pursuant to the provisions of this Article 7, the number of
Warrant Shares issuable upon the exercise of the Warrant shall be adjusted to
the nearest full Warrant Share by multiplying a number equal to the Exercise
Price in effect immediately prior to such adjustment by the number of Warrant
Shares issuable upon exercise of the Warrant immediately prior to such
adjustment and dividing the product so obtained by the adjusted Exercise Price.
7.2 Subdivision and Combination. In case the Company shall at any time
subdivide or combine the outstanding shares of Common Stock, the Exercise Price
shall forthwith be proportionately decreased in the case of subdivision or
increased in the case of combination.
7.3 Reclassification; Consolidation. Merger. etc. In case of any
reclassification or change of the outstanding shares of Common Stock (other than
a change in par value to no par value, or form no par value to par value, or as
a result of a subdivision or combination), or in the case of any consolidation
of the Company with, or merger of the Company into, another corporation (other
3
<PAGE>
than a consolidation or merger in which the Company is the surviving corporation
and which does not result in any reclassification or change of the outstanding
shares of Common Stock, except a change as a result of a subdivision or
combination of such shares or a change in par value, as aforesaid), or the case
of a sale or conveyance to another corporation of the property of the Company as
an entirety, the Holders shall thereafter have the right to purchase the kind
and number of shares of stock and other securities and property receivable upon
such reclassification, change, consolidation, merger, sale or conveyance as if
the Holders were the owners of the Warrant Shares underlying the Warrant at a
price equal to the product of (x) the number of shares of Common Stock issuable
upon conversion of the Warrant Shares and (y) the Exercise Price prior to the
record date for such reclassification, change, consolidation, merger, sale or
conveyance as if such Holders had exercised the Warrant.
7.4 Redemption of Warrant; Redemption of Warrant Shares.
Notwithstanding anything to the contrary contained in the Warrant to elsewhere,
the Warrant cannot be redeemed by the Company under any circumstances.
7.5 Dividends and Other Distributions with Respect to Outstanding
Securities. In the event that the Company shall at any time prior to the
exercise of the Warrant declare a dividend (other than a dividend consisting
solely of shares of Common Stock or a cash dividend or distribution payable out
of current or retained earnings) or otherwise distribute to its shareholders any
monies, assets, property, rights, evidences of indebtedness, securities (other
than shares of Common Stock), whether issued by the Company or by another person
or entity, or any other thing of value, the Holder of the Warrant shall
thereafter be entitled, in addition to the securities receivable upon the
exercise thereof, to receive, upon the exercise of such Warrant, the same
monies, property, assets, rights, evidences of indebtedness, securities or any
other thing of value that he would have been entitled to receive at the time of
such dividend or distribution. At the time of any such dividend or distribution,
the Company shall make appropriate reserves to ensure the timely performance of
the provisions of this Subsection 7.5.
7.6 Subscription Rights for Shares of Common Stock or Other
Securities. In the case that the Company or an affiliate of the Company shall at
any time after the date hereof and prior to the exercise of the Warrant issue
any rights to subscribe for shares of Common Stock or any other securities of
the Company or of such affiliate to all the shareholders of the Company, the
Holder of the unexercised Warrant shall be entitled, in addition to the
securities receivable upon the exercise of the Warrant, to receive such rights
at the time such rights are distributed to the other shareholders of the
Company.
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7.7 Additional Adjustment. In the event that during the term of this
Warrant the Company raises additional funds through the issuance of equity
(other than through an offering registered under the Securities Act of 1933, as
amended) the number of shares of-Common Stock acquired upon issuance of this
Warrant shall be increased by 9% of the number of additional shares of Common
Stock of the Company being issued in such financing.
8. Exchange and Replacement of Warrant Certificates.
The Warrant Certificate is exchangeable without expense, upon the
surrender hereof by the registered Holder at the principal executive office of
the Company, for a new Warrant Certificate of like tenor and date representing
in the aggregate the right to purchase the same number of Warrant Shares in such
denominations as shall be designated by the Holder thereof at the time of such
surrender.
Upon receipt by the Company of evidence reasonably satisfactory to if
of the loss, theft, destruction or mutilation of the Warrant Certificate, and,
in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expense
incidental thereto, and upon surrender and cancellation of the Warrant, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
9. Elimination of Fractional Interests.
The Company shall not be required to issue certificates representing
fractions of Warrant Shares upon the exercise of the Warrant, nor shall it be
required to issue scrip or pay cash in lieu of fractional interests, it being
the intent of the parties that all fractional interests shall be eliminated by
rounding any fraction up to the nearest whole number of Warrant Shares.
10. Reservation and Listing of Securities.
The Company shall at all times reserve and keep available out of its
authorized shares of Common Stock, solely for the purpose of issuance upon the
exercise of the Warrant, such number of shares of Common Stock as shall be
issuable upon such exercise. The Company covenants and agrees that, upon
exercise of the Warrant and payment of the Exercise Price therefor, all shares
of Common Stock issuable upon such exercise shall be duly and validly issued,
fully paid, non-assessable and not subject to the preemptive rights of any
shareholder. The Company shall take all actions within its control to cause all
Warrant Shares to be listed on or quoted by NASDAQ or listed on such national
securities exchanges as the Company's Common Stock is listed.
11. Notices to Warrant Holder.
5
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Nothing contained in this Agreement shall be construed as conferring
upon the Holder the right to vote or to consent or to receive notice as a
shareholder in respect of any meetings of shareholders for the election of
directors or any other matter, or archiving any rights whatsoever as a
shareholder of the Company. If, however, at any time prior to the expiration of
the Warrants and their exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders of its
shares of Common Stock for the purpose of entitling them to receive a
dividend or distribution payable otherwise than in cash, or a cash
dividend or distribution payable otherwise than out of current or
retained earnings, as indicated by the accounting treatment of such
dividend or distribution on the books of the Company; or
(b) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or
securities convertible into or exchangeable for shares of capital
stock of the Company, or any option, right or warrant to subscribe
therefor; or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of
all or substantially all of its property, assets and business as an
entirety shall be proposed;
then, in any one or more of said events, the Company shall give
written notice to the Holder of such event at least fifteen (15) days prior to
the date fixed as a record date or the date of closing the transfer books for
the determination of the shareholders entitled to such dividend, distribution,
convertible or exchangeable securities or subscription rights, options or
warrants, or entitled to vote on such proposed dissolution, liquidation, winding
up or sale. Such notice shall specify such record date or the date of closing
the transfer books, as the case may be. Failure to give such notice or any
defect therein shall not affect the validity of any action taken in connection
with the declaration or payment of any such dividend or distribution, or the
issuance of any convertible or exchangeable securities or subscription rights,
options, or warrants, or any proposed dissolution, liquidation, winding up or
sale.
12. Notices.
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been duly made when delivered,
or mailed by registered or certified mail, return receipt requested:
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(a) If to the registered Holder of the Warrant, to the
address of such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3
of this Agreement or to such other address as the Company may
designate by notice to the Holder.
13. Supplements and Amendments.
The Company and Purchaser may from time to time supplement or amend
this Agreement without the approval of any Holder of the Warrant and/or
securities underlying the Warrant in order to cure any ambiguity, to correct or
supplement any provision contained herein which may be defective or inconsistent
with any provisions herein, or to make any other provisions in regard to matters
of questions arising hereunder which the Company and Purchaser may deem
necessary or desirable and which the Company and Purchaser not to adversely
affect the interests of the Holder of the Warrant.
14. Successors.
All the covenants and provisions of this Agreement by or for the
benefit of the Company and the Holder inure to the benefit of their respective
successors and assigns hereunder.
15. Termination.
This Agreement shall terminate at the close of business on June ,
2001. Notwithstanding the foregoing, this Agreement will terminate on any
earlier date when the Warrant has been exercised and all securities underlying
the Warrant have been resold to the public.
16. Governing Law.
This Agreement and the Warrant Certificate issued hereunder shall be
deemed to be a contract made under the laws of the State of New York and for all
purposes shall be construed in accordance with the laws of said State.
17. Benefits of This Agreement.
Nothing in this Agreement shall be construed to give to any person or
corporation other than the Company and Purchaser and any other registered Holder
of the Warrant or any securities underlying the Warrant any legal or equitable
right, remedy or claim under this Agreement; and this Agreement shall be for the
sole and exclusive benefit of the Company and Purchaser and any such other
Holder.
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18. Counterparts.
This Agreement may be executed in any number of counterparts and each
of such counterparts shall for all purposes be deemed to be an original, and
such counterparts shall together constitute but one and the same instrument.
8
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year above written.
Phase-Out of America, Inc.
By------------------------
--------------------------
Herbert M. Reichlin
9
WARRANT AGREEMENT dated as of June , 1996 by and between Phase-Out of
America, Inc., a Delaware corporation (the "Company"), and Burton A. Goldstein
(the "Purchaser").
WITNESSETH:
WHEREAS, the Company proposes to issue to Purchaser a warrant (the
"Warrant") to purchase shares (the "Warrant Shares") of the Company's Common
Stock, par value $.0003 per share (the "Common Stock"); and
NOW, THEREFORE, in consideration of the premises, the agreements
herein set forth and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Grant. On the terms and subject to the conditions set forth herein,
and unless this agreement is terminated prior to exercise in accordance with
Section 15 hereof, Purchaser is hereby granted the right to purchase, at any
time from June , 1996 until 5:00 P.M., New York time, on June , 2001 (the
"Warrant Exercise Term"), up to 9,778,975 Warrant Shares at an exercise price
per share (subject to adjustment as provided in Article 7 hereof) equal to $.05
per share.
2. Warrant Certificate. The warrant certificate (the "Warrant
Certificate") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions and other variations as
required or permitted by this Agreement.
3. Exercise of Warrant. The Warrant is exercisable with respect to
some or all of the Warrant Shares (but not as to any fractional shares) by
payment of the applicable Exercise Price per share on the date of exercise in
cash or by check to the order of the Company, or any combination of cash or
check. Upon surrender of the Warrant Certificate with the annexed Form of
Election to Purchase duly executed, together with payment of the Exercise Price
(as hereinafter defined) for the Warrant Shares purchased, at the Company's
principal offices (currently located at 140 Broadway, Lynbrook, New York 11563)
Purchaser (or other registered holder of the Warrant Certificate) (the "Holder")
shall be entitled to receive a certificate or certificates for the Warrant
Shares so purchased. The purchase rights represented by each Warrant Certificate
are exercisable at the option of the Holder, in whole or in part (but not as to
fractional Warrant Shares). In the case of the purchase of less than all the
Warrant Shares purchasable under any Warrant Certificate, the Company shall
cancel said Warrant Certificate upon the surrender thereof and
1
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shall execute and deliver a new Warrant Certificate of like tenor for the
balance of the Warrant Shares purchasable thereunder.
4. Issuance of Certificates.
Upon the exercise of the Warrants, the issuance of certificates for
the Warrant Shares purchased shall be made forthwith (and in any event within
five business days thereafter) without charge to the Holder thereof including,
without limitation, any tax which may be payable in respect of the issuance
thereof, and such certificates shall (subject to the provisions of Article 5
hereof) be issued in the name of, or in such names as may be directed by, the
Holder thereof; provided, however, that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the issuance
and delivery of any such certificates in a name other than that of the Holder
and the Company shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
The Warrant Certificate and the certificates representing the Warrant
Shares shall be executed on behalf of the Company by the manual or facsimile
signature of the present or any future Chairman or Vice Chairman of the Board of
Directors of President or Vice President of the Company under its corporate seal
reproduced thereon, attested to by the manual or facsimile signature of the
present or any future Secretary or Assistant Secretary of the Company. The
Warrant Certificate and certificates representing the Warrant Shares shall be
dated the date of execution by the Company upon initial issuance, division,
exchange, substitution or transfer.
Upon exercise, in part or in whole, of the Warrants, certificates
representing the Warrant Shares shall bear a legend substantially similar to the
following:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the "Act"),
and may not be offered or sold except (i) pursuant to an effective
registration statement under the Act, (ii) to the extent applicable,
pursuant to Rule 144 under the Act (or any similar rule under such Act
relating to the disposition of securities), or (iii) upon the delivery
by the holder to the Company of an opinion of counsel, reasonably
satisfactory to counsel to the issuer, stating that an exemption from
registration under such Act is available."
5. Restrictions on Transfer of Warrants and Warrant Shares.
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(a) Purchaser, by his acceptance thereof, covenants and
agrees that the Warrant is being acquired as an investment and not with a view
to the distribution thereof.
(b) The Company agrees on request at its expense to
register the Warrants and the Warrant Shares in a registration statement
filed under the Securities Act of 1933, as amended (the "Act"). The Company
shall also provide the holder(s) of the Warrants and the Warrant Shares the
opportunity to include these Warrants and Warrant Shares in a registration
statement under the Act.
6. Price.
6.1 Initial and Adjusted Exercise Price. The initial exercise price of
the Warrant shall be equal to five cents ($.05) per share. The adjusted exercise
price shall be the price which may result from time to time from any and all
adjustments of the initial exercise price in accordance with the provisions of
Article 7 hereof, if any such adjustments are required by Article 7.
6.2 Exercise Price. The term "Exercise Price" herein shall mean the
initial exercise price or the adjusted exercise price.
7. Adjustments of Exercise Price and Number of Warrant Shares.
7.1 Adjustment in Number of Warrant Shares. Upon each adjustment of
the Exercise Price pursuant to the provisions of this Article 7, the number of
Warrant Shares issuable upon the exercise of the Warrant shall be adjusted to
the nearest full Warrant Share by multiplying a number equal to the Exercise
Price in effect immediately prior to such adjustment by the number of Warrant
Shares issuable upon exercise of the Warrant immediately prior to such
adjustment and dividing the product so obtained by the adjusted Exercise Price.
7.2 Subdivision and Combination. In case the Company shall at any time
subdivide or combine the outstanding shares of Common Stock, the Exercise Price
shall forthwith be proportionately decreased in the case of subdivision or
increased in the case of combination.
7.3 Reclassification. Consolidation. Merger etc. In case of any
reclassification or change of the outstanding shares of Common Stock (other than
a change in par value to no par value, or form no par value to par value, or as
a result of a subdivision or combination), or in the case of any consolidation
of the Company with, or merger of the Company into, another corporation (other
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than a consolidation or merger in which the Company is the surviving corporation
and which does not result in any reclassification or change of the outstanding
shares of Common Stock, except a change as a result of a subdivision or
combination of such shares or a change in par value, as aforesaid), or the case
of a sale or conveyance to another corporation of the property of the Company as
an entirety, the Holders shall thereafter have the right to purchase the kind
and number of shares of stock and other securities and property receivable upon
such reclassification, change, consolidation, merger, sale or conveyance as if
the Holders were the owners of the Warrant Shares underlying the Warrant at a
price equal to the product of (x) the number of shares of Common Stock issuable
upon conversion of the Warrant Shares and (y) the Exercise Price prior to the
record date for such reclassification, change, consolidation, merger, sale or
conveyance as if such Holders had exercised the Warrant.
7.4 Redemption of Warrant: Redemption of Warrant Shares.
Notwithstanding anything to the contrary contained in the Warrant to
elsewhere, the Warrant cannot be redeemed by the Company under any
circumstances.
7.5 Dividends and Other Distributions with Respect to Outstanding
Securities. In the event that the Company shall at any time prior to the
exercise of the Warrant declare a dividend (other than a dividend consisting
solely of shares of Common Stock or a cash dividend or distribution payable out
of current or retained earnings) or otherwise distribute to its shareholders any
monies, assets, property, rights, evidences of indebtedness, securities (other
than shares of Common Stock), whether issued by the Company or by another person
or entity, or any other thing of value, the Holder of the Warrant shall
thereafter be entitled, in addition to the securities receivable upon the
exercise thereof, to receive, upon the exercise of such Warrant, the same
monies, property, assets, rights, evidences of indebtedness, securities or any
other thing of value that he would have been entitled to receive at the time of
such dividend or distribution. At the time of any such dividend or distribution,
the Company shall make appropriate reserves to ensure the timely performance of
the provisions of this Subsection 7.5.
7.6 Subscription Rights for Shares of Common Stock or Other
Securities. In the case that the Company or an affiliate of the Company shall at
any time after the date hereof and prior to the exercise of the Warrant issue
any rights to subscribe for shares of Common Stock or any other securities of
the Company or of such affiliate to all the shareholders of the Company, the
Holder of the unexercised Warrant shall be entitled, in addition to the
securities receivable upon the exercise of the Warrant, to receive such rights
at the time such rights are distributed to the other shareholders of the
Company.
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7.7 Additional Adjustment. In the event that during the term of this
Warrant the Company raises additional funds through the issuance of equity
(other than through an offering registered under the Securities Act of 1933, as
amended) the number of shares of Common Stock acquired upon issuance of this
Warrant shall be increased by 9\of the number of additional shares of Common
Stock of the Company being issued in such financing.
8. Exchange and Replacement of Warrant Certificates.
The Warrant Certificate is exchangeable without expense, upon the
surrender hereof by the registered Holder at the principal executive office of
the Company, for a new Warrant Certificate of like tenor and date representing
in the aggregate the right to purchase the same number of Warrant Shares in such
denominations as shall be designated by the Holder thereof at the time of such
surrender.
Upon receipt by the Company of evidence reasonably satisfactory to if
of the loss, theft, destruction or mutilation of the Warrant Certificate, and,
in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expense
incidental thereto, and upon surrender and cancellation of the Warrant, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
9. Elimination of Fractional Interests.
The Company shall not be required to issue certificates representing
fractions of Warrant Shares upon the exercise of the Warrant, nor shall it be
required to issue scrip or pay cash in lieu of fractional interests, it being
the intent of the parties that all fractional interests shall be eliminated by
rounding any fraction up to the nearest whole number of Warrant Shares.
10. Reservation and Listing of Securities.
The Company shall at all times reserve and keep available out of its
authorized shares of Common Stock, solely for the purpose of issuance upon the
exercise of the Warrant, such number of shares of Common Stock as shall be
issuable upon such exercise. The Company covenants and agrees that, upon
exercise of the Warrant and payment of the Exercise Price therefor, all shares
of Common Stock issuable upon such exercise shall be duly and validly issued,
fully paid, non-assessable and not subject to the preemptive rights of any
shareholder. The Company shall take all action within its control to cause all
Warrant Shares to be listed on or quoted by NASDAQ or listed on such national
securities exchanges as the Company's Common Stock is listed.
11. Notices to Warrant Holder.
11
<PAGE>
Nothing contained in this Agreement shall be construed as conferring
upon the Holder the right to vote or to consent or to receive notice as a
shareholder in respect of any meetings of shareholders for the election of
directors or any other matter, or as having any rights whatsoever as a
shareholder of the Company. If, however,-at any time prior to the expiration of
the Warrants and their exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders of its
shares of Common Stock for the purpose of entitling them to receive a
dividend or distribution payable otherwise than in cash, or a cash
dividend or distribution payable otherwise than out of current or
retained earnings, as indicated by the accounting treatment of such
dividend or distribution on the books of the Company; or
(b) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or
securities convertible into or exchangeable for shares of capital
stock of the Company, or any option, right or warrant to subscribe
therefor; or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of
all or substantially all of its property, assets and business as an
entirety shall be proposed;
then, in any one or more of said events, the Company shall give written notice
to the Holder of such event at least fifteen (15) days prior to the date fixed
as a record date or the date of closing the transfer books for the determination
of the shareholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, options or warrants, or entitled
to vote on such proposed dissolution, liquidation, winding up or sale. Such
notice shall specify such record date or the date of closing the transfer books,
as the case may be. Failure to give such notice or any defect therein shall not
affect the validity of any action taken in connection with the declaration or
payment of any such dividend or distribution, or the issuance of any convertible
or exchangeable securities or subscription rights, options, or warrants, or any
proposed dissolution, liquidation, winding up or sale.
12. Notices.
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been duly made when delivered,
or mailed by registered or certified mail, return receipt requested:
6
<PAGE>
(a) If to the registered Holder of the Warrant, to the
address of such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3
of this Agreement or to such other address as the Company may
designate by notice to the Holder.
13. Supplements and Amendments.
The Company and Purchaser may from time to time supplement or amend
this Agreement without the approval of any Holder of the Warrant and/or
securities underlying the Warrant in order to cure any ambiguity, to correct or
supplement any provision contained herein which may be defective or inconsistent
with any provisions herein, or to make any other provisions in regard to matters
of questions arising hereunder which the Company and Purchaser may deem
necessary or desirable and which the Company and Purchaser not to adversely
affect the interests of the Holder of the Warrant.
14. Successors.
All the covenants and provisions of this Agreement by or for the
benefit of the Company and the Holder inure to the benefit of their respective
successors and assigns hereunder.
15. Termination.
This Agreement shall terminate at the close of business on June ,
2001. Notwithstanding the foregoing, this Agreement will terminate on any
earlier date when the Warrant has been exercised and all securities underlying
the Warrant have been resold to the public.
16. Governing Law.
This Agreement and the Warrant Certificate issued hereunder shall be
deemed to be a contract made under the laws of the State of New York and for all
purposes shall be construed in accordance with the laws of said State.
17. Benefits of This Agreement.
Nothing in this Agreement shall be construed to give to any person or
corporation other than the Company and Purchaser and any other registered Holder
of the Warrant or any securities underlying the Warrant any legal or equitable
right, remedy or claim under this Agreement; and this Agreement shall be for the
sole and exclusive benefit of the Company and Purchaser and any such other
Holder.
7
<PAGE>
18. Counterparts.
This Agreement may be executed in any number of counterparts and each
of such counterparts shall for all purposes be deemed to be an original, and
such counterparts shall together constitute but one and the same instrument.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year above written.
Phase-Out of America, Inc.
By------------------------
Burton A. Goldstein
9
EXHIBIT B
WARRANT AGREEMENT dated as of June , 1996 by and between Phase-Out of
America, Inc., a Delaware corporation (the "Company"), and Milton Walters (the
"Purchaser").
WITNESSETH:
WHEREAS, the Company proposes to issue to Purchaser a warrant (the
"Warrant") to purchase shares (the "Warrant Shares") of the Company's Common
Stock, par value $.0003 per share (the "Common Stock"); and
NOW, THEREFORE, in consideration of the premises, the agreements
herein set forth and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Grant. On the terms and subject to the conditions set forth herein,
and unless this agreement is terminated prior to exercise in accordance
with-Section 15 hereof, Purchaser is hereby granted the right to purchase, at
any time from June , 1996 until 5:00 P.M., New York time, on June , 2001 (the
"Warrant Exercise Term"), up to 2,000,000 Warrant Shares at an exercise price
per share (subject to adjustment as provided in Article 7 hereof) equal to $.05
per share.
2. Warrant Certificate. The warrant certificate (the "Warrant
Certificate") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions and other variations as
required or permitted by this Agreement.
3. Exercise of Warrant. The Warrant is exercisable with respect to
some or all of the Warrant Shares (but not as to any fractional shares) by
payment of the applicable Exercise Price per share on the date of exercise in
cash or by check to the order of the Company, or any combination of cash or
check. Upon surrender of the Warrant Certificate with the annexed Form of
Election to Purchase duly executed, together with payment of the Exercise Price
(as hereinafter defined) for the Warrant Shares purchased, at the Company's
principal offices (currently located at 140 Broadway, Lynbrook, New York 11563)
Purchaser (or other registered holder of the Warrant Certificate) (the "Holder")
shall be entitled to receive a certificate or certificates for the Warrant
Shares so purchased. The purchase rights represented by each Warrant Certificate
are exercisable at the option of the Holder, in whole or in part (but not as to
fractional Warrant Shares). In the case of the purchase of less than all the
Warrant Shares purchasable under any Warrant Certificate, the Company shall
cancel said Warrant Certificate upon the surrender thereof and shall execute and
deliver a new Warrant Certificate of like tenor for the balance of the Warrant
Shares purchasable thereunder.
<PAGE>
4. Issuance of Certificates.
Upon the exercise of the Warrants, the issuance of certificates for
the Warrant Shares purchased shall be made forthwith (and in any event within
five business days thereafter) without charge to the Holder thereof including,
without limitation, any tax which may be payable in respect of the issuance
thereof, and such certificates shall (subject to the provisions of Article 5
hereof) be issued in the name of, or in such names as may be directed by, the
Holder thereof; provided, however, that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the issuance
and delivery of any such certificates in a name other than that of the Holder
and the Company shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
The Warrant Certificate and the certificates representing the Warrant
Shares shall be executed on behalf of the Company by the manual or facsimile
signature of the present or any future Chairman or Vice Chairman of the Board of
Directors of President or Vice President of the Company under its corporate seal
reproduced thereon, attested to by the manual or facsimile signature of the
present or any future Secretary or Assistant Secretary of the Company. The
Warrant Certificate and certificates representing the Warrant Shares shall be
dated the date of execution by the Company upon initial issuance, division,
exchange, substitution or transfer.
Upon exercise, in part or in whole, of the Warrants, certificates
representing the Warrant Shares shall bear a legend substantially similar to the
following:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the "Act"),
and may not be offered or sold except (i) pursuant to an effective
registration statement under the Act, (ii) to the extent applicable,
pursuant to Rule 144 under the Act (or any similar rule under such Act
relating to the disposition of securities), or (iii) upon the delivery
by the holder to the Company of an opinion of counsel, reasonably
satisfactory to counsel to the issuer, stating that an exemption from
registration under such Act is available."
5. Restrictions on Transfer of Warrants and Warrant Shares.
(a) Purchaser, by his acceptance thereof, covenants
2
<PAGE>
and agrees that the Warrant is being acquired as an investment and not with a
view to the distribution thereof.
(b) The Company agrees on request at its expense to register
the Warrants and the Warrant Shares in a registration statement filed under the
Securities Act of 1933, as amended.(the "Act"). The Company shall also provide
the holder(s) of the Warrants and the Warrant Shares the opportunity to include
these Warrants and Warrant Shares in a registration statement under the Act.
6. Price.
6.1 Initial and Adjusted Exercise Price. The initial exercise price of
the Warrant shall be equal to five cents ($.05) per share. The adjusted exercise
price shall be the price which may result from time to time from any and all
adjustments of the initial exercise price in accordance with the provisions of
Article 7 hereof, if any such adjustments are required by Article 7.
6.2 Exercise Price. The term "Exercise Price" herein shall mean the
initial exercise price or the adjusted exercise price.
7. Adjustments of Exercise Price and Number of Warrant Shares.
7.1 Adjustment in Number of Warrant Shares. Upon each adjustment of
the Exercise Price pursuant to the provisions of this Article 7, the number of
Warrant Shares issuable upon the exercise of the Warrant shall be adjusted to
the nearest full Warrant Share by multiplying a number equal to the Exercise
Price in effect immediately prior to such adjustment by the number of Warrant
Shares issuable upon exercise of the Warrant immediately prior to such
adjustment and dividing the product so obtained by the adjusted Exercise Price.
7.2 Subdivision and Combination. In case the Company shall at any time
subdivide or combine the outstanding shares of Common Stock, the Exercise Price
shall forthwith be proportionately decreased in the case of subdivision or
increased in the case of combination.
7.3 Reclassification, Consolidation, Merger. etc. In case of any
reclassification or change of the outstanding shares of Common Stock (other than
a change in par value to no par value, or form no par value to par value, or as
a result of a subdivision or combination), or in the case of any consolidation
of the Company with, or merger of the Company into, another corporation (other
than a consolidation or merger in which the Company is the surviving corporation
and which does not result in any
3
<PAGE>
reclassification or change of the outstanding shares of Common Stock, except a
change as a result of a subdivision or combination of such shares or a change in
par value, as aforesaid), or the case of a sale or conveyance to another
corporation of the property of the Company as an entirety, the Holders shall
thereafter have the right to purchase the kind and number of shares of stock and
other securities and property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance as if the Holders were the owners of
the Warrant Shares underlying the Warrant at a price equal to the product of (x)
the number of shares of Common Stock issuable upon conversion of the Warrant
Shares and (y) the Exercise Price prior to the record date for such
reclassification, change, consolidation, merger, sale or conveyance as if such
Holders had exercised the Warrant.
7.4 Redemption of Warrant: Redemption of Warrant Shares.
Notwithstanding anything to the contrary contained in the Warrant to elsewhere,
the Warrant cannot be redeemed by the Company under any circumstances.
7.5 Dividends and Other Distributions with Respect to Outstanding
Securities. In the event that the Company shall at any time prior to the
exercise of the Warrant declare a dividend (other than a dividend consisting
solely of shares of Common Stock or a cash dividend or distribution payable out
of current or retained earnings) or otherwise distribute to its shareholders any
monies, assets, property, rights, evidences of indebtedness, securities (other
than shares of Common Stock), whether issued by the Company or by another person
or entity, or any other thing of value, the Holder of the Warrant shall
thereafter be entitled, in addition to the securities receivable upon the
exercise thereof, to receive, upon the exercise of such Warrant, the same
monies, property, assets, rights, evidences of indebtedness, securities or any
other thing of value that he would have been entitled to receive at the time of
such dividend or distribution. At the time of any such dividend or distribution,
the Company shall make appropriate reserves to ensure the timely performance of
the provisions of this Subsection 7.5.
7.6 Subscription Rights for Shares of Common Stock or Other
Securities. In the case that the Company or an affiliate of the Company shall at
any time after the date hereof and prior to the exercise of the Warrant issue
any rights to subscribe for shares of Common Stock or any other securities of
the Company or of such affiliate to all the shareholders of the Company, the
Holder of the unexercised Warrant shall be entitled, in addition to the
securities receivable upon the exercise of the Warrant, to receive such rights
at the time such rights are distributed to the other shareholders of the
Company.
8. Exchange and Replacement of Warrant Certificates.
4
<PAGE>
The Warrant Certificate is exchangeable without expense, upon the
surrender hereof by the registered Holder at the principal executive office of
the Company, for a new Warrant Certificate of like tenor and date representing
in the aggregate the right to purchase the same number of Warrant Shares in such
denominations as shall be designated by the Holder thereof at the time of such
surrender.
Upon receipt by the Company of evidence reasonably satisfactory to if
of the loss, theft, destruction or mutilation of the Warrant Certificate, and,
in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expense
incidental thereto, and upon surrender and cancellation of the Warrant, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
9. Elimination of Fractional Interests.
The Company shall not be required to issue certificates representing
fractions of Warrant Shares upon the exercise of the Warrant, nor shall it be
required to issue scrip or pay cash in lieu of fractional interests, it being
the intent of the parties that all fractional interests shall be eliminated by
rounding any fraction up to the nearest whole number of Warrant Shares.
10. Reservation and Listing of Securities.
The Company shall at all times reserve and keep available out of its
authorized shares of Common Stock, solely for the purpose of issuance upon the
exercise of the Warrant, such number of shares of Common Stock as shall be
issuable upon such exercise. The Company covenants and agrees that, upon
exercise of the Warrant and payment of the Exercise Price therefor, all shares
of Common Stock issuable upon such exercise shall be duly and validly issued,
fully paid, non-assessable and not subject to the preemptive rights of any
shareholder. The Company shall take all actions within its control to cause all
Warrant Shares to be listed on or quoted by NASDAQ or listed on such national
securities exchanges as the Company's Common Stock is listed.
11. Notices to Warrant Holder.
Nothing contained in this Agreement shall be construed as conferring
upon the Holder the right to vote or to consent or to receive notice as a
shareholder in respect of any meetings of shareholders for the election of
directors or any other matter, or as having any rights whatsoever as a
shareholder of the Company. If, however, at any time prior to the expiration of
the Warrants and their exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders
5
<PAGE>
of its shares of Common Stock for the purpose of entitling them to
receive a dividend or distribution payable otherwise than in cash, or
a cash dividend or distribution payable otherwise than out of current
or retained earnings, as indicated by the accounting treatment of such
dividend or distribution on the books of the Company; or
(b) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or
securities convertible into or exchangeable for shares of capital
stock of the Company, or any option, right or warrant to subscribe
therefor; or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of
all or substantially all of its property, assets and business as an
entirety shall be proposed;
then, in any one or more of said events, the Company shall give written notice
to the Holder of such event at least fifteen (15) days prior to the date fixed
as a record date or the date of closing the transfer books for the determination
of the shareholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, options or warrants, or entitled
to vote on such proposed dissolution, liquidation, winding up or sale. Such
notice shall specify such record date or the date of closing the transfer books,
as the case may be. Failure to give such notice or any defect therein shall not
affect the validity of any action taken in connection with the declaration or
payment of any such dividend or distribution, or the issuance of any convertible
or exchangeable securities or subscription rights, options, or warrants, or any
proposed dissolution, liquidation, winding up or sale.
12. Notices.
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been duly made when delivered,
or mailed by registered or certified mail, return receipt requested:
(a) If to the registered Holder of the Warrant, to the
address of such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3
of this Agreement or to such other address as the Company may
designate by notice to the Holder.
13. Supplements and Amendments
6
<PAGE>
The Company and Purchaser may from time to time supplement or amend
this Agreement without the approval of any Holder of the Warrant and/or
securities underlying the Warrant in order to cure any ambiguity, to correct or
supplement any provision contained herein which may be defective or inconsistent
with any provisions herein, or to make any other provisions in regard to matters
of questions arising hereunder which the Company and Purchaser may deem
necessary or desirable and which the Company and Purchaser not to adversely
affect the interests of the Holder of the Warrant.
14. Successors.
All the covenants and provisions of this Agreement by or for the
benefit of the Company and the Holder inure to the benefit of their respective
successors and assigns hereunder.
15. Termination.
This Agreement shall terminate at the close of business on June ,
2001. Notwithstanding the foregoing, this Agreement will terminate on any
earlier date when the Warrant has been exercised and all securities underlying
the Warrant have been resold to the public.
16. Governing Law.
This Agreement and the Warrant Certificate issued hereunder shall be
deemed to be a contract made under the laws of the State of New York and for all
purposes shall be construed in accordance with the laws of said State.
17. Benefits of This Agreement.
Nothing in this Agreement shall be construed to give to any person or
corporation other than the Company and Purchaser and any other registered Holder
of the Warrant or any securities underlying the Warrant any legal or equitable
right, remedy or claim under this Agreement; and this Agreement shall be for the
sole and exclusive benefit of the Company and Purchaser and any such other
Holder.
18. Counterparts.
This Agreement may be executed in any number of counterparts and each
of such counterparts shall for all purposes be deemed to be an original, and
such counterparts shall together constitute but one and the same instrument.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year above written.
Phase-Out of America, Inc.
By------------------------
--------------------------
Milton Walters
8
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of July,
1996 by and among Phase-Out of America, Inc., a Delaware corporation, with
headquarters located at 140 Broadway, Lynbrook, New York 11563 (the "Company"),
and each of the purchasers set forth on the signature pages hereto (the
"Buyers").
WHEREAS:
A. The Company and the Buyers are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by ss. 4(2) of the Securities Act of 1933, as amended and Rule 506 under
Regulation D ("Regulation D") as promulgated by the United States Securities and
Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "1933 Act"); and
B. The Buyers desire to purchase and the Company desires to issue and
sell, upon the terms and conditions stated in this Agreement, an aggregate of
19,557,951 shares of Common Stock, par value $.00003 per share, of the Company
(the "Common Stock") for an aggregate purchase price of $500,000;
NOW THEREFORE, the Company and the Buyers hereby agree as follows:
1. PURCHASE AND SALE OF COMMON STOCK.
a. Purchase of Common Stock. On the closing date (as defined herein),
subject to the satisfaction (or waiver) of the conditions thereto set forth in
Section 5 and Section 6 below, the Company shall issue and sell to each Buyer
and each Buyer shall purchase from the Company the number of shares of Common
Stock set forth immediately below such Buyer's name on the signature page hereto
(such shares being hereinafter collectively referred to as the "Shares") for an
aggregate price of $500,000.
The Shares shall constitute 18% of the number of shares of common stock
of the Company that would be outstanding if all of the outstanding securities of
the Company convertible into common stock of the Company were so converted. In
addition, if and when any warrants to purchase common stock of the Company that
are outstanding on the date hereof are exercised the Buyers will be issued,
without any additional payment, additional shares of common stock of the Company
pro rata so that the Buyers will own in the aggregate 18% of the then
outstanding shares of common stock of the Company.
In the event that during the period of five years after the date hereof
the Company raises additional funds through the issuance of equity (other than
through an offering registered under
<PAGE>
the Securities Act of 1933, as amended) the Buyers will be issued, without any
additional payment, additional shares of common stock of the Company pro rata so
that Buyers will own in the aggregate 18% of the then outstanding shares of
common stock of the Company.
b. Form of Payment. On the Closing Date, (i) each Buyer shall pay the
purchase price for the Shares to be issued and sold to such Buyer (the "Purchase
Price") by wire transfer to the Company, in accordance with the Company's
written wiring instruction or by check against delivery of a duly executed
certificate(s) representing such number of Shares and (ii) the Company shall
deliver such certificate(s) against delivery of such Purchase Price. The
Purchase Price payable by each Buyer is set forth immediately below such Buyer's
name of the signature page hereto.
c. Closing Date. Subject to the satisfaction (or waiver) of the
conditions thereto set forth in Section 5 and Section 6 below, the date and time
of the issuance and sale of the Shares pursuant to this Agreement (the "Closing
Date") shall be 10:00 a.m. Eastern Standard Time not later than July 12, 1996,
or, such other mutually agreed time. The closing shall occur on the Closing Date
at the offices of the Company, 140 Broadway, Lynbrook, New York 11563.
2. BUYERS' REPRESENTATIONS AND WARRANTIES
Each Buyer, severally and not jointly, represents and warrants to the
Company solely with respect to such Buyer that:
a. Investment Purpose. The Buyer is purchasing the Shares for its
own account, not as nominee or agent, for investment only and not with
a present view towards the public sale or distribution thereof, except
pursuant to sales registered under the 1933 Act.
b. Accredited Investor Status. The Buyer is an "accredited
investor" as that term is defined in Rule 501(a) of Regulation D.
c. Reliance on Exemptions. The Buyer understands that the Shares are
being offered and sold to it in reliance upon specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Company is relying upon the truth and accuracy of, and the Buyer's
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of the Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of the Buyer to acquire the
Shares.
d. Information. The Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Shares which
have been requested by the Buyer or its advisors. The Buyer and its advisors, if
any, have
<PAGE>
been afforded the opportunity to ask questions of the Company and have received
what the Buyer believes to be satisfactory answers to any such inquiries.
Neither such inquiries nor any other due diligence investigation conducted by
Buyer or any of its advisors or representatives shall modify, amend or affect
Buyer's right to rely on the Company's representations and warranties contained
in Section 3 below. The Buyer understands that its investment in the Shares
involves a high degree of risk.
e. Governmental Review. The Buyer understands that no United
States federal or state agency or any other government or
governmental agency has passed upon or made any recommendation or
endorsement of the Shares.
f. Transfer or Resale. The Buyer understands that (i) the Shares have
not been and are not being registered under the 1933 Act or any state securities
laws, and may not be transferred unless (a) subsequently registered thereunder,
or (b) the Buyer shall have delivered to the Company an opinion of counsel, in
form, substance and scope reasonably acceptable to the Company, to the effect
that the Shares to be sold or transferred pursuant to an exemption from such
registration or (c) sold pursuant to Rule 144 promulgated under the 1933 Act (or
a successor rule); (ii) any sale of such Shares made in reliance on Rule 144 may
be made only in accordance with the terms of said Rule and further, if said Rule
is not applicable, any resale of such Shares under circumstances in which the
seller (or the person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the 1933 Act) may require compliance
with some other exemption under the 1933 Act or the rules and regulations of the
SEC thereunder; and (iii) neither the Company nor any other person is under any
obligation to register such Shares under the 1933 Act or any state securities
laws or to comply with the terms and conditions of any exemption thereunder.
The Company agrees on request at its expense to register the Shares in
a registration statement filed under the Securities Act of 1933, as amended (the
"Act"). The Company shall also offer the Buyers the opportunity to include the
Shares in a registration statement filed by the Company under the Act on a form
which permits inclusion of such Shares.
g. Legends. The Buyer understands that the Shares, may bear a
restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of the certificates for such Shares):
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The
securities have been acquired for investment and may not be
sold,transferred or assigned in the absence of an effective
registration statement for the securities under said Act, or
<PAGE>
an opinion of counsel, in form, substance and scope reasonably
acceptable to the Company, that registration is not required under
said Act or unless sold pursuant to Rule 144 under said Act."
The legend set forth above shall be removed and the Company shall
issue a certificate without such legend to the holder of any Shares upon which
it is stamped, if, unless otherwise required by state securities laws, (a) the
sale of such Shares is registered under the 1933 Act, or (b) such holder
provides the Company with an opinion of counsel, in form, substance and scope
reasonably acceptable to the Company, to the effect that a public sale or
transfer of such Shares may be made without registration under the 1933 Act or
(c) such holder provides the Company with reasonable assurances that such Shares
can be sold pursuant to Rule 144 under the 1933 Act (or a successor rule
thereto) without any restrictions as to the number of shares acquired as of a
particular date that can then be immediately sold. The Buyer agrees to sell all
Shares, including those represented by a certificate(s) from which the legend
has been removed, in compliance with applicable securities law.
h. Authorization: Enforcement. This Agreement has been duly and
validly authorized, executed and delivered on behalf of the Buyer and is a valid
and binding agreement of the Buyer enforceable in accordance with their terms.
i. Residency. The Buyer is a resident of the jurisdiction set forth
immediately below such Buyer's name on the signature page hereto.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to each Buyer that:
a. Organization and Qualification: Subsidiaries. The Company is a
corporation duly organized and existing in good standing under the laws of the
State of Delaware, and has the requisite corporate power to own its properties
and to carry on its business as now being conducted. The Company is duly
qualified as a foreign corporation to do business and is in good standing in
every jurisdiction in which the nature of the business conducted by it makes
such qualification necessary and where the failure so to qualify would have a
Material Adverse Effect. "Material Adverse Effect" means any material adverse
effect on the operations, properties, financial condition or prospects of the
Company or on the transactions contemplated hereby. None of the Company's
subsidiaries are engaged in any activities which are material to the operations
of the Company and its subsidiaries taken as a whole.
b. Authorization: Enforcement. (i) The Company has the
4
<PAGE>
requisite corporate power and authority to enter into and perform this Agreement
and to issue the Shares in accordance with the terms hereof, (ii) the execution
and delivery of this Agreement by the Company and the consummation by it of the
transactions contemplated hereby (including without limitation the issuance of
the Shares) have been duly authorized by the Company's Board of Directors and no
further consent or authorization of the Company, its Board or Directors, or its
stockholders is required, (iii) this Agreement has been duly executed and
delivered by the Company, and (iv) this Agreement constitutes a valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms.
c. Capitalization. The Shares constitute not less than 18% of the
fully diluted common stock of the Company after giving effect to the conversion
of all outstanding convertible securities of the Company and the Buyers shall
retain such percentage ownership as stated in section 1.
d. Issuance of Shares. The Shares are duly authorized and, upon
issuance in accordance with the terms of this Agreement shall be validly issued,
fully paid and non-assessable, and free from all taxes, liens and charges with
respect to the issue thereof and shall not be subject to preemptive rights or
other similar rights of stockholders of the Company.
e. No Conflicts. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby (including without limitation, the issuance of the Shares),
will not (i) result in a violation of the Certificate of Incorporation or
By-laws or (ii) conflict with, or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Company or any of its
subsidiaries is a party, or result in a violation of any law, rule, regulation,
order, judgment or decree (including federal and state securities laws and
regulations) applicable to the Company or any of its subsidiaries or by which
any property or asset of the Company or any of its subsidiaries is bound or
affect (except for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually or in the
aggregate, have a Material Adverse Effect). The Company is not in violation of
its Certificate of Incorporation or By-laws and is not in default (and no event
has occurred which with notice or lapse of time of both would put the Company in
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which
the Company or any of its subsidiaries is a party, except for possible defaults
as would not, individually or in the aggregate, have a Material Adverse Effect.
The business of the Company is not being conducted, and shall not be conducted
so long as a Buyer owns any of the Shares,
<PAGE>
in violation of any law, ordinance or regulation of any governmental entity,
except for possible violations which either singly or in the aggregate do not
have a Material Adverse Effect. Except as specifically contemplated by this
Agreement and as required under the 1933 Act any applicable state securities
laws, the Company is not required to obtain any consent, authorization or order
of, or make any filing or registration with, any court or governmental agency or
any regulatory or self regulatory agency in order for it to execute, deliver or
perform any of its obligations under this Agreement in accordance with the terms
hereof.
f. SEC Documents. Financial Statements. Since December 31, 1994, the
Company has filed all reports, schedules, forms, statements and other documents
required to be filed by it with the SEC pursuant to the reporting requirements
of the Exchange Act of 1934, as amended (the "1934 Act")(all of the foregoing
filed prior to the date hereof and all exhibits included therein and financial
statements and schedules thereto and documents (other than exhibits)
incorporated by reference therein, being hereinafter referred to herein as the
"SEC Documents"). The Company has delivered to each Buyer true and complete
copies of the SEC Documents, except for such exhibits, schedules and
incorporated documents. As of their respective dates, the SEC Documents complied
in all material respects with the requirements of the 1934 Act and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and none of the SEC Documents, at the time they were filed with the SEC,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. As of their respective dates, the financial statements of the
Company included in the SEC Documents complied as to form in all material
respect with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. Such financial statements have been
prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may not include
footnotes or may be condensed or summary statements) and fairly present in all
material respects the consolidated financial position of the Company and its
consolidated subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments). Except as
set forth in the financial statements of the Company included in the SEC
documents, the Company has no liabilities, contingent or otherwise, other than
(i) liabilities incurred in the ordinary course of business subsequent to
December 31, 1995 and (ii) obligations under contracts and commitments incurred
in the ordinary course of business and not required under generally
<PAGE>
accepted accounting principles to be reflected in such financial statements,
which, individually or in the aggregate, are not material to the financial
condition or operating results of the Company. The Company has not provided to
any Buyer or its representatives any information which, according to applicable
law, rule or regulation, should have been disclosed publicly by the Company but
which has not been so disclosed.
g. Absence of Certain Chances. Since December 31, 1995 there has been
no material adverse change and no material adverse development in the business,
properties, operations, financial condition, results of operations or prospects
of the Company.
h. Absence of Litigation. Except as disclosed in the SEC documents,
there is no action, suit, proceeding, inquiry or investigation before or by any
court, public board, government agency, self-regulatory organization or body
pending or, to the knowledge of the Company or any of its subsidiaries,
threatened against or affecting the Company, the Common Stock or any of the
Company's subsidiaries.
i. Disclosure. All information relating to or concerning the Company
set forth in this Agreement and provided to the Buyers pursuant to Section 2(d)
hereof and otherwise in connection with the transactions contemplated hereby is
true and correct in all material respects and the Company has not omitted to
state any material fact necessary in order to make the statements made herein or
therein, in light of the circumstances under which they were made, not
misleading. No event or circumstance has occurred or exists with respect to the
Company or its business, properties, operations or financial conditions, which,
under applicable law, rule or regulation, requires public disclosure or
announcement by the Company but which has not been so publicly announced or
disclosed.
j. Acknowledgment Regarding Buyers' Purchase of the Shares. The
Company acknowledges and agrees that Buyers are acting solely in the capacity of
arm's length purchasers with respect to this Agreement and the transactions
contemplated hereby. The Company further acknowledges that no Buyer is acting as
a financial advisor or fiduciary of the Company (or in any similar capacity)
with respect to this Agreement and the transactions contemplated hereby and any
advice given by any Buyer or any of their respective representatives or agents
in connections with this Agreement and the transactions contemplated hereby is
merely incidental to the Buyers' purchase of the Shares. The Company further
represents to each Buyer that the Company's decision to enter into this
Agreement has been based solely on the independent evaluation of the Company and
its representatives.
k. No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has
<PAGE>
7
directly or indirectly made any offers or sales in any security or solicited any
offers to buy any security under circumstances that would require registration
of the issuance of the Shares to the Buyers under the 1933 Act.
1. No Brokers. The Company has taken no action which would give rise
to any claim by any person for brokerage commissions, finder's fees or similar
payments by any Buyer relating to this Agreement or the transactions
contemplated hereby except for 2,000,000 warrants being issued by the Company to
Milton Walters.
4. COVENANTS.
a. Best Efforts. The parties shall use their best efforts to satisfy
each of the conditions described in Section 5 and 6 of this Agreement.
b. Reporting Status. So long as any Buyer beneficially owns any of the
Shares, the Company shall not terminate its status as an issuer required to file
reports under the 1934 Act even if the 1934 Act or the rules and regulations
thereunder would permit such termination.
c. Use of Proceeds. The Company shall use the proceeds from the sale
of the Shares substantially as set forth in Exhibit A. The Company shall not,
directly or indirectly, use such proceeds for any loan or investment in any
other corporation, partnership, enterprise or other person.
d. Expenses. Each party hereto shall be responsible for the payment of
its own expenses incurred in connection with the negotiation, preparation,
execution, delivery and performance of this Agreement and the other agreements
to be executed in connection herewith.
e. Financial Information. The Company agrees to send the following
reports to each Buyer until such Buyer transfers, assigns, or sells all of the
Shares: (i) within ten (10) days after the filing with the SEC, a copy of its
Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q and any Current
Reports on Form 8-K; and (ii) within one (1) day after release, copies of all
press releases by the Company or any of its subsidiaries.
f. Officers and Directors. The Company shall cause Herbert M. Reichlin
("Reichlin") and Burton A. Goldstein ("Goldstein") to be elected to its Board of
Directors and to its Executive Committee effective upon the closing. Reichlin
shall also be elected a member of the Company's Audit Committee and a member of
its Compensation Committee. Reichlin will also be elected Secretary Treasurer
effective upon the closing.
g. Executive Compensation. The cash salaries of Bernard
8
<PAGE>
Gutman, Irwin Pearl and Drew Gutman shall be maintained at the rate of $50,000
per annum subject to change by action of the Board of Directors after the
Company has become profitable. Each of these three persons shall receive a car
allowance of $500 per month and no additional allowances shall be made for auto
insurance, maintenance or other upkeep.
h. Employment Agreement and Consulting Agreement. The Company shall
honor the existing employment agreements with Bernard Gutman, Irwin Pearl and
Drew Gutman, which have a remaining term of approximately 18 months. At the
expiration of Bernard Gutman's employment agreement, the Company will enter into
a three-year consulting agreement with him on terms and conditions to be agreed
upon at the time.
5. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to issue and sell the Shares
to each of the Buyers at the closing is subject to the satisfaction, at or
before the Closing Date, of each of the following conditions thereto, provided
that these conditions are for the Company's sole benefit and may be waived by
the Company at any time in its sole discretion:
(i) The Buyers shall have executed this Agreement and
delivered the same to the Company.
(ii) The Buyers shall have delivered the Purchase Price in
accordance with Section l(b) above.
(iii) The representations and warranties of the Buyers shall
be true and correct in all material respects as of the date when made and as of
the Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date), and the Buyers shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Buyers at or prior to the Closing Date.
(iv) No injunction. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction or any self regulatory organization having authority over the
matters contemplated hereby which prohibits the consummation of any of the
transactions contemplated by this Agreement.
6. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.
The obligation of each Buyer hereunder to purchase the Shares at the
closing is subject to the satisfaction, at or before the
9
<PAGE>
Closing Date, of each of the following conditions, provided that these
conditions are for such Buyer's sole benefit and may be waived by such Buyer at
any time in its sole discretion:
(i) The Company shall have executed this Agreement and
delivered the same to the Buyers.
(ii) The Company shall have entered into Warrant Agreements
substantially in the form of Exhibit "B" hereto.
(iii) The Company shall have delivered duly executed
certificates (in such denominations as such Buyer shall request) representing
the Shares being so purchased to such Buyer in accordance with Section l(b)
above.
(iv) The representations and warranties of the Company shall
be true and correct in all material respects as of the date when made and as of
the date of the closing as though made at that time (except for representations
and warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Company at or prior to the date of the closing. The
Buyers shall have received a certificate, executed by the chief executive
officer of the Company, dated as of the date of the closing, to the foregoing
effect and as to such other matters as may be reasonably requested by the
Buyers.
(v) The Buyers shall have received an opinion of the
Company's counsel, dated as of the Closing Date, in form, scope and substance
reasonably satisfactory to the Buyers and in substantially the same form as
Exhibit "C" attached hereto.
(vi) The Buyers shall have received the officer's certificate
described in Section 3(c) above, dated as of the Closing Date.
7. GOVERNING LAW: MISCELLANEOUS.
a. Governing Law. This Agreement shall be governed by and interpreted
in accordance with the laws of the Delaware without regard to the principles of
conflict of laws. The parties hereto hereby submit to the exclusive jurisdiction
of the New York Supreme Court located in New York County in the State of New
York with respect to any dispute arising under this Agreement, the agreements
entered into in connection herewith or the transactions contemplated hereby or
thereby.
b. Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the
10
<PAGE>
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party.
c. Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
d. Severability. If any provision of this Agreement shall be invalid
or unenforceable in any jurisdiction, such invalidity or uneforceability shall
not affect the validity or enforceability of the remainder of this Agreement or
the validity or enforceability of this Agreement in any other jurisdiction.
e. Entire Agreements: Authority to Act for Buyers. This Agreement and
the instruments referenced herein contain the entire understanding of the
parties with respect to the matters covered herein and therein and, except as
specifically set forth herein or therein, neither the Company nor the Buyers
make any representation, warranty, covenant or undertaking with respect to such
matters. No provision of this Agreement may be waived or amended other than by
an instrument in writing signed by the party to be charged with enforcement.
f. Notices. Any notices required or permitted to be given under the
terms of this Agreement shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier and shall be effective
five days after being placed in the mail, if mailed, or upon receipt or refusal
of receipt, if delivered personally or by courier, in each case addressed to a
party. The addresses for such communications shall be:
If to the Company:
Phase-Out of America, Inc.
140 Broadway
Lynbrook, New York 11563
With copy to:
Jack H. Halperin, Esq.
711 Third Avenue, Suite 1505
New York, New York 10017
If to Buyers to:
Herbert Reichlin, CPA
6800 Jericho Turnpike-Suite 214E
Syosset, NY 11791
Each party shall provide notice to the other party of any change in
address.
11
<PAGE>
g. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and assigns. Neither
the Company nor any Buyer shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other.
Notwithstanding the foregoing, any Buyer may assign its rights hereunder to any
of its "affiliates", as that term is defined under the 1934 Act, without the
consent of the Company. The Company shall be sent written notice of any such
assignment prior to the closing.
h. Third Part Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
i. Survival. The representations and warranties of the Company and the
agreements and covenants set forth in Section 3, 4, 5 and 7 shall survive the
closing notwithstanding any due diligence investigation conducted by or on
behalf of the Buyers. The Company agrees to indemnify and hold harmless each of
the Buyers for loss or damage arising as a result of or related to any breach or
alleged breach by the Company of any of its representations set forth in Section
3 hereof.
j. Further Assurances. Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments an documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
IN WITNESS WHEREOF, the undersigned Buyers and the Company have caused
this Agreement to be duly executed as of the date first above written.
Phase-Out of America, Inc.
By:-----------------------
Name:---------------------
Its:----------------------
"BUYERS"
RESIDENCE: New York --------------------------
Subscription Amount: --------------------------
Number of Shares:
12
<PAGE>
[LOGO]
PHASEOUT. EXHIBIT A
OF AMERICA, INC
- --------------------------------------------------------------------------------
140 Broadway (800) PHASEOUT
Lynbrook, New York (516) 599-1900
Fax (516) 593-6511
Use of Proceeds
Description of Use Amount to be Used
Inventory Purchase from South Korea $ 175,000
Marketing/Media/Advertising Budget $ 225,000
To Begin Clinical Study Preparation $ 25,000
On-Air Infonetwork Settlement $ 25,000
Working Capital $ 50,000
Total Use of Proceeds $ 500,000
=========
<PAGE>
EXHIBIT C
JACK H. HALPERIN, ESQ.
------------
711 THIRD AVENUE
SUITE 1505
NEW YORK. NEW YORK 10017
TELEPHONE (212) 378-1200
TELEFAX (212) 378-1299
July , 1996
Purchasers under that
Certain Securities Purchase Agreements
Dated as of July ,1996 with
Phase-Out of America, Inc.
Re: Phase-Out of America, Inc.
Gentlemen:
I am counsel to Phase-Out of America, Inc. (the "Company") and am
rendering this opinion pursuant to those certain Securities Purchase Agreements
(the "Agreements") dated as of July , 1996 between the purchasers and the
Company. Certain capitalized terms used herein and not otherwise defined herein
shall have the respective meanings given in the Agreements.
In rendering the following opinions, I have examined the Agreements
and related agreements and documents, and I have examined and considered such
corporate records, certificates and matters of law as I have deemed appropriate
as a basis for the opinions set forth below. As to various matters of fact
material to the opinions set forth below, I have relied on the representations
and warranties contained in the Agreements and on certificates of officers of
the Company. I have also assumed the receipt by the Company of $500,000 as the
purchase price for the Shares.
Based upon the foregoing and subject to the assumptions, limitations,
qualifications and exceptions stated herein, I am of the opinion that as of the
date hereof:
(1) The Company is a corporation duly organized, validly existing and
in good standing under the laws of Delaware.
(2) (i) The Company has the requisite corporate power and authority to
enter into and perform the Agreements, and to issue the Shares in accordance
with the terms of the Agreements, (ii) the execution and delivery of the
Agreements by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by the Company's Board of
Directors and no further consent or authorization of the Company, its Board or
Directors, or its stockholders is required, (iii) the Agreements
<PAGE>
have been duly executed and delivered by the Company, and (iv) the Agreements
constitutes valid and binding obligations of the Company enforceable against the
Company in accordance with their terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to, or affecting generally, the enforcement
of creditors' rights and remedies or by other equitable principles of general
application.
(3) The Shares are duly authorized, validly issued, fully paid and
non-assessable and free from all taxes, liens and charges with respect to the
issue thereof.
(4) Based in part upon your representations, warranties and covenants
set forth in the Agreements, the Shares may be issued to you without
registration under the Securities Act of 1933, as amended.
(5) Other than necessary approvals that have been obtained, no
authorization approval or consent of any court, governmental body, regulatory
agency, self-regulatory organization or stock exchange or market, or the
stockholders of the Company, or, to my knowledge, any third party is required to
be obtained by the Company for the issuance and sale of the Shares as
contemplated by the Agreements.
These opinions are limited to the matters expressly stated herein and
are rendered solely for your benefit and may not be quoted or relied upon for
any other purpose or by another person, except that the opinions expressed in
paragraphs (3) and (4) may be relied upon by North American Transfer Company, as
Transfer Agent.
The opinions expressed herein are subject to the following
assumptions, limitations, qualifications and exceptions:
(a) I have assumed the genuineness of all signatures, the authenticity
of all Agreements submitted to me as copies, the authenticity of certificates of
public officials and the due authorization, execution and delivery of all
Agreements (except the due authorization, execution and delivery by the Company
of the Agreements).
(b) I have assumed that each of the parties to the Agreements other
than the Company (the "Other Parties") has the legal right, capacity, and power
to enter into, enforce and perform all of its obligations under the Agreements.
Furthermore, I have assumed the due authorization by each of the Other Parties
of all requisite action and the due execution and delivery of the Agreements.
My examination of law relevant to the matters covered by this opinion
is limited to the laws of New York and the federal law of the United States, and
I express no opinion as to the
<PAGE>
effect on the matters covered by this opinion of the laws of any other
jurisdiction. To the extent that the governing law with respect to any matters
covered by this opinion is the law of a jurisdiction other than the State of New
York, or federal law, I have assumed the law of such other jurisdiction is
identical to New York law.
The undersigned is a stockholder of the Company.
This opinion is given as of the date hereof and I assume no obligation
to update or supplement this opinion to reflect any facts or circumstances which
may hereafter come to my attention or any changes in laws which may hereafter
occur.
Very truly yours,
Jack H. Halperin
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 260,372
<SECURITIES> 0
<RECEIVABLES> 4,287
<ALLOWANCES> 1,000
<INVENTORY> 127,413
<CURRENT-ASSETS> 422,486
<PP&E> 26,276
<DEPRECIATION> 16,639
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<CURRENT-LIABILITIES> 858,951
<BONDS> 14,900
0
0
<COMMON> 3,251
<OTHER-SE> (506,536)
<TOTAL-LIABILITY-AND-EQUITY> 493,166
<SALES> 1,489,259
<TOTAL-REVENUES> 1,489,250
<CGS> 374,250
<TOTAL-COSTS> 1,808,210
<OTHER-EXPENSES> (5,694)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 107,748
<INCOME-PRETAX> (795,534)
<INCOME-TAX> 0
<INCOME-CONTINUING> (795,534)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (795,534)
<EPS-PRIMARY> (0.01)
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