SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 33-18099-NY and 33-23169-NY
PHASEOUT OF AMERICA, INC.
(Exact Name of small business issuer as specified in its charter)
DELAWARE 11-2873662
State or other jurisdiction of (IRS Employer I.D. No.)
Incorporation or organization)
6900 Jericho Turnpike, Syosset, New York 11791
(Address of principal executive offices)
Issuer's telephone number, including area code: (516)364-3500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934, during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES __X__ NO _____
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the last practicable date.
Class Outstanding at June 30, 1997
Common Stock, par value 115,536,595
$.00003 per share
<PAGE>
PART 1 FINANCIAL INFORMATION
Item 1, financial statements
PHASEOUT OF AMERICA, INC.
FINANCIAL STATEMENTS (Unaudited)
June 30, 1997
Financial Statements Page
----
Balance Sheet 3 - 4
Statements Operations 5 - 6
Statements of Shareholders' (Deficit) 7
Statements of Cash Flows 8 - 11
Notes to Financial Statements 12 - 13
Management's Discussion and Analysis 14 - 16
Other Information 17
Signatures 18
2
<PAGE>
PHASEOUT OF AMERICA, INC.
Balance Sheet
June 30, 1997
(Unaudited)
Assets
Current Assets
Cash $ 67,921
Inventory 106,601
Advances for clinical study 25,000
Advances to Automotive Marketing, Inc. 18,200
Prepaid expenses 5,414
--------
223,136
Furniture and Equipment - at cost - net of accumulated
depreciation of $17,979 30,436
Patents - at cost - net of accumulated amortization of
$8,203 41,232
Deferred preoperating and developmental costs 20,828
Security Deposits 4,137
--------
$319,269
========
See notes to financial statements.
3
<PAGE>
PHASEOUT OF AMERICA, INC.
Balance Sheet
June 30, 1997
(Unaudited)
Liabilities and Shareholders' (Deficit)
Current Liabilities
1992 convertible debentures - including accrued
interest of $7,350 $ 17,350
Shareholder's loan - current portion 41,014
Taxes payable 4,405
Accounts payable 600,711
Accrued officer and director's compensation 45,000
Loans from directors 34,415
Accrued expenses 29,134
-----------
772,029
-----------
Shareholder's Loan - net of current portion 127,500
-----------
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 130,000,000 shares
- 115,536,595 shares issued and outstanding 3,466
Capital in excess of par 3,188,586
Accumulated (deficit) (3,772,312)
------------
( 580,260)
-----------
$ 319,269
===========
See notes to financial statements.
4
<PAGE>
PHASEOUT OF AMERICA, INC.
Statements of Operations
(Unaudited)
For the Six Months Ended
June 30,
-----------------------------
1997 1996
------------- -------------
Sales - net $ 186,241 $ 1,082,047
------------- -------------
Cost of Sales 72,769 187,636
------------- -------------
113,472 894,411
------------- -------------
Selling Expenses 45,939 903,362
General and Administrative Expenses 294,690 408,275
------------- -------------
340,629 1,311,637
(Loss) Before Other Income (Expenses) (227,157) (417,226)
------------- -------------
Other Income (Expenses)
Interest income 3,736 125
Interest (expense) (23,304) (56,260)
Forgiveness of indebtedness 61,000 --
------------- -------------
41,432 (56,135)
------------- -------------
Net (Loss) $ (185,725) $ (473,361)
============= =============
(Loss) Per Share $ NIL $ NIL
============= =============
Weighted Average Number of Shares
Outstanding (to nearest 1,000,000) 112,000,000 77,000,000
============= =============
See notes to financial statements.
5
<PAGE>
PHASEOUT OF AMERICA, INC.
Statements of Operations
(Unaudited)
For the Quarter Ended
June 30,
--------------------------------
1997 1996
------------- -------------
Sales - net $ 83,281 $ 454,203
Cost of Sales 31,622 79,432
------------- -------------
51,659 374,771
------------- -------------
Selling Expenses 24,324 363,613
General and Administrative Expenses 153,927 197,969
------------- -------------
178,251 561,582
------------- -------------
(Loss) Before Other Income (Expenses) (126,592) (186,811)
------------- -------------
Other Income (Expenses)
Interest income 1,503 113
Interest (expense) (8,684) (34,459)
Forgiveness of indebtedness 61,000 --
------------- -------------
53,819 (34,346)
------------- -------------
Net (Loss) $ (72,773) $ (221,157)
============= =============
(Loss) Per Share $ NIL $ NIL
============= =============
Weighted Average Number of Shares
Outstanding (to nearest 1,000,000) 116,000,000 80,000,000
============= =============
See notes to financial statements.
6
<PAGE>
PHASEOUT OF AMERICA, INC.
Statement of Shareholders' (Deficit)
For the Six Months Ended June 30, 1997
(Unaudited)
<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, 1996 108,369,929 $ 3,251 $ 3,080,051 $(3,586,587)
Stock issued for accrued services rendered:
Officers and Directors 7,166,666 215 108,535 --
Net (Loss) -- -- -- (185,725)
----------- ----------- ----------- -----------
Balance- June 30, 1997 115,536,595 $ 3,466 $ 3,188,586 ($3,772,312)
=========== =========== =========== ===========
</TABLE>
See notes to financial statements
7
<PAGE>
PHASEOUT OF AMERICA, INC.
Statements of Cash Flows Page 1 of 2
(Unaudited)
For the Six Months Ended
June 30,
-----------------------
1997 1996
--------- ---------
Cash Flows from Operating Activities
Net (loss) $(185,725) $(473,361)
Adjustments to reconcile net (loss) to net cash
(used for) operating activities:
Depreciation and amortization 2,810 3,070
Expenses paid through the issuance of
restricted common stock 108,750 43,700
(Increase) decrease in:
Accounts receivable 4,287 23,895
Inventories 20,812 (25,224)
Advances to Automotive Marketing,Inc (18,200) --
Funds placed in escrow -- (111,359)
Accrued interest on debentures and bonds 10,525 (4,339)
Prepaid expenses -- 23,479
Deferred preoperating and developmental costs (20,328) --
Increase (decrease) in:
Notes payable-vendor (20,940) --
Accounts payable (13,616) 306,158
Accrued officers' and directors' compensation (15,000) --
Taxes payable 108 597
Loans from directors 1,246 --
Accrued expenses (49,245) --
--------- ---------
(174,516) (213,384)
--------- ---------
Cash Flows from Investing Activities
Acquisition of equipment (5,500) (168)
Patent payments (2,435) --
--------- ---------
(7,935) (168)
--------- ---------
Cash Flows from Financing Activities
Repayment of advances from officer/stockholder -- (9,000)
Temporary media funds received, net of repayments
and client fund account balances -- 170,000
Repayments to shareholder (10,000) --
--------- ---------
(10,000) 161,000
--------- ---------
Net Decrease in Cash (192,451) (52,552)
Cash - beginning 260,372 176,818
--------- ---------
Cash - end $ 67,921 $ 124,266
========= =========
See notes to financial statements.
8
<PAGE>
PHASEOUT OF AMERICA, INC. Page 2 of 2
Statements of Cash Flows
(Unaudited)
For the Six Months Ended
June 30,
------------------------
1997 1996
-------- --------
Supplemental Disclosures
Interest paid $ -- $ 35,560
======== ========
Temporary media funds received $ -- $265,000
======== ========
Debt conversions to common stock $ -- $383,000
======== ========
Conversion of accrued officer salary
to common stock $ 8,750 $144,160
======== ========
Stock issued for accrued services rendered $100,000 $ --
======== ========
See notes to financial statements.
9
<PAGE>
PHASEOUT OF AMERICA, INC.
Statements of Cash Flows Page 1 of 2
(Unaudited)
For the Quarter Ended
June 30,
------------------------
1997 1996
--------- ---------
Cash Flows from Operating Activities
Net (loss) $ (72,773) $(221,157)
--------- ---------
Adjustments to reconcile net (loss) to net cash
(used for) operating activities:
Depreciation and amortization 1,405 1,535
Expenses paid through the issuance of
restricted common stock 100,000 43,700
(Increase) decrease in:
Accounts receivable 1,767 17,527
Inventories (13,918) (90,344)
Advances to Automotive Marketing,Inc (14,920) --
Funds placed in escrow -- (111,359)
Accrued interest on debentures and bonds 5,150 4,060
Prepaid expenses -- 16,201
Deferred preoperating and developmental costs (12,549) --
Increase (decrease) in:
Accounts payable (3,746) 164,625
Accrued officers' and directors' compensation (57,500 --
Taxes payable 2,006 (1,219)
Loans from directors 623 --
Accrued expenses (31,200) --
--------- ---------
(95,655) (176,431)
--------- ---------
Cash Flows from Investing Activities
Acquisition of equipment (5,500) --
Patent payments (1,000) --
--------- ---------
(6,500) --
--------- ---------
Cash Flows from Financing Activities
Repayment of advances from officer/stockholder -- (31,250)
Temporary media funds received, net of repayments
and client fund account balances -- 170,000
Repayments to shareholder (2,500) --
--------- ---------
(2,500) 138,750
--------- ---------
Net Decrease in cash (104,655) (37,681)
Cash - beginning 172,576 161,947
--------- ---------
Cash - end $ 67,921 $ 124,266
========= =========
See notes to financial statements.
10
<PAGE>
PHASEOUT OF AMERICA, INC. Page 2 of 2
Statement of Cash Flows
(Unaudited)
For the Quarter Ended
June 30,
----------------------
1997 1996
-------- --------
Supplemental Disclosures
Interest paid $ -- $ 35,560
======== ========
Temporary media funds received $ -- $265,000
======== ========
Debt conversions to common stock $ -- $383,000
======== ========
Conversion of accrued officer salary to
common stock $ 8,750 $144,160
======== ========
Stock issued for accrued services rendered $100,000 $ --
======== ========
See notes to financial statements.
11
<PAGE>
PHASEOUT OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
June 30, 1997
1. BACKGROUND AND BASIS OF PRESENTATION
PhaseOut of America, Inc. (the "Company") was organized as a Delaware
Corporation on July 17, 1987 and operated as a development stage company
through 1993. The Company's purpose is to market and distribute its
patented phase-out system smoking cessation device (the "product").
The Company had primarily marketed the product in the United States through
direct response marketing including radio, television spots and
infomercials. This domestic marketing was curtailed due to the ongoing
negotiations with the Federal Trade Commission ("FTC"). Once advertising
claims are approved, the Company intends to reenter the domestic retail
market. The Company also distributes the product overseas.
The financial statements have been prepared assuming that the Company will
continue as a going concern. The Company has suffered recurring losses from
operations ($185,725 in 1997 and $473,361 in 1996), and has had limited
liquidity causing difficulty in meeting its current operating expense
obligations and debt service requirements. The Company is actively
marketing the product to help improve revenues and is planning to seek
additional financing through private placement of debt and securities. The
financial statements do not include any adjustments that might result
should the continued existence of the Company be threatened by any
continued losses or the failure of the above factors to influence the
financial viability of the Company.
The interim statements were prepared pursuant to the requirements for
reporting on Form 10- QSB. The interim financial statements and notes
thereto should be read in conjunction with the financial statements and
notes included in the Company's latest Annual Report on Form 10-KSB for the
year ended December 31, 1996. In the opinion of management, the interim
financial statements reflect all adjustments of a normal recurring nature
necessary for a fair statement of the results for interim periods. The
current period results of operations are not necessarily indicative of the
results for the entire year ending December 31, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Changes in significant accounting policies - There were no changes in
significant accounting policies during the current period.
3. STOCKHOLDERS' EQUITY
Stock Issued to Officers, Consultants and Employees - Through June 30,
1997, the Company issued 7,166,666 shares to officers and directors.
12
<PAGE>
4. RELATED PARTY TRANSACTIONS
Loan from Director - A former officer/shareholder, who is still a director
of the Company, is owed $34,415 by the Company. The amount is payable on
demand with a stated interest rate of 11%.
Accrued Officer and Director's Compensation - During 1996, an investor
group consisting of two individuals, which acquired an 18% ownership
interest for $500,000, was awarded two seats on the Board of Directors and
two officer positions. The two individuals each receive a consulting fee of
$60,000 per annum for their management duties. During the second quarter of
1997, 3,333,333 shares of stock were issued to each individual for accrued
services rendered of $50,000 each.
5. SHAREHOLDER'S LOAN
During 1996, the Company received $200,000 from a shareholder as a loan in
connection with the Company's media campaign. The loan is to be paid at the
rate of $2,500 per month. Interest accrues at 10% and will be paid with a
final balloon payment. The shareholder agreed to a moratorium on the
monthly $2,500 payments from May 1997 through August 31, 1997.
6. COMMITMENTS, CONTINGENCIES AND OTHER COMMENTS.
Dependence on Major Customers and Suppliers - Export sales represent
approximately 100% of sales with only one export customer representing more
than 10% of total sales.
The Company is currently purchasing 100% of its products from three
vendors.
Regulatory Matters - There have been no changes in the status of regulatory
inquiries by the Food and Drug Administration (FDA) and the Federal Trade
Commission (FTC).
Litigation - In July 1997, the Company's former attorney, who is a relative
of a Director, brought an action against the Company in New York State
Supreme Court, New York County for unpaid attorney fees and disbursements
of approximately $18,000. Legal counsel has not rendered an opinion as to
the ultimate outcome of this matter.
13
<PAGE>
PHASEOUT OF AMERICA, INC.
Management's Discussion and Analysis
Results of Operations
Six Months Ended June 30, 1997 Compared
to Six Months Ended June 30, 1996
The Company incurred a net loss of $185,725 for the six months ended June
30, 1997 as compared to the loss of $473,361 for the six months ended June 30,
1996. Six-month sales decreased $895,806. The decrease in sales resulted from no
retail sales in 1997 of the product through television direct response methods
which results in substantially higher unit selling prices as well as increases
in unit volume. The Company's domestic marketing activities were curtailed due
to the ongoing negotiations with the FTC. Once advertising claims are approved,
the Company intends to reenter the domestic retail market.
Selling expenses decreased from $903,362 to $45,939 as a result of the
elimination in 1997 of the substantial additional costs associated with the
distribution of the product through television response channels.
General and administrative expenses decreased from $408,275 to $294,690 as
a result of a decrease in officer salaries ($71,817) and a decrease in
professional fees ($79,468).
The gross profit margin decreased to 61% from 83%, due to the elimination
of the high volume of direct response television sales.
The Company maintains a $500,000 liability insurance policy.
14
<PAGE>
PHASEOUT OF AMERICA, INC.
Management's Discussion and Analysis
Liquidity and Capital Resources
Cash of $174,516 was used for operations for the 6 months ended June 30, 1997 as
compared to $213,384 used in the same period of last year. Cash decreased during
the 6 months ended June 30, 1997 by $192,451.
The Company's working capital has deteriorated due to the use of current assets
for operations. Working capital and current ratios were:
June 30, December 31, June 30,
1997 1996 1996
---- ---- ----
Working capital
(deficiency) $(548,893) $(436,465) $(805,123)
Current ratios 0.29:1 0.49:1 0.37:1
In order to meet short-term marketing goals, in July 1997 certain officers and
directors agreed to acquire an aggregate of 10,000,000 shares of the Company's
common stock (representing 8% of total shares outstanding) for an aggregate
purchase price of $100,000. The Company is also seeking an additional $200,000
of financing under the same terms and conditions as offered to the officers and
directors. There is no assurance that the Company will be able to obtain
additional financing.
Distribution and Marketing
Marketing (Domestic)
During the second half of 1996, the Company's domestic marketing activities
were curtailed due to the negotiations with the Federal Trade Commission as to
what advertising claims could be made to describe the PhaseOut product. Once
advertising claims are approved, management intends to aggressively enter the
U.S. retail market under the category of smoke cessation products.
Marketing (International)
On August 21, 1995, the Company entered into an agreement with a South
Korean trading company for the distribution and manufacture of a modified
(design) PhaseOut product in South Korea. Because of the improved design and
reduced size of this PhaseOut device, it will be utilized in the Japanese market
as well. South Korea has 10 million smokers and Japan has 35 million smokers.
Distribution in South Korea is expected to begin in the 1st quarter of 1998.
PhaseOut has started distribution through television infomercials and
commercials in the following countries: Portugal, Spain, South Africa, Romania,
Hungary, Australia, Italy and Germany.
15
<PAGE>
PHASEOUT OF AMERICA, INC.
Management's Discussion and Analysis
New Products
In February 1997, the Company executed a letter of intent with Andrea
Eyewear, Inc, (Andrea) whereby the Company agreed to fund the pre-operating and
developmental costs of a patented sunglass product owned by Andrea. In
consideration for the funding, the Company will receive an exclusive license to
commercialize the sunglass product worldwide. As of June 30, 1997, the Company
has incurred $20,328 of pre-operating and developmental costs.
In May 1997, the Company entered into a joint venture with Automotive
Marketing, Inc. to manufacture and distribute aftermarket automobile products.
As of June 30, 1997, the Company has made advances of $18,200 to the joint
venture with the understanding that any such advances will be reimbursed when
revenue-producing operations commence.
Regulatory Matters
There have been no material changes in the status of matters pending before
the Food and Drug Administration (FDA) and the Federal Trade Commission (FTC).
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company has been sued by a former attorney for fees it alleges are
due but unpaid in the amount of approximately $18,000. Legal counsel
has not rendered an opinion as to the ultimate outcome of this matter.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
See notes to the financial statements
Item 6. Exhibits and Reports
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHASEOUT OF AMERICA, INC.
Dated: September 5, 1997
/s/ Herbert M. Reichlin
-------------------------------------
Herbert M. Reichlin
Chief Operating Officer and Treasurer
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 67,921
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 106,601
<CURRENT-ASSETS> 223,136
<PP&E> 48,415
<DEPRECIATION> (17,979)
<TOTAL-ASSETS> 319,269
<CURRENT-LIABILITIES> 772,029
<BONDS> 0
0
0
<COMMON> 3,466
<OTHER-SE> (583,726)
<TOTAL-LIABILITY-AND-EQUITY> 319,269
<SALES> 186,241
<TOTAL-REVENUES> 250,977
<CGS> 72,769
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 340,629
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,304
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (185,725)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
