SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
Commission File Number: 33-18099-NY and 33-23169-NY
PHASE-OUT OF AMERICA, INC.
(Exact Name of small business issuer as specified in its charter)
DELAWARE 11-2873662
(State or other jurisdiction of (IRS Employer I.D. No.)
Incorporation or organization)
140 Broadway, Lynbrook, New York 11563
(Address of principal executive offices)
Issuer's telephone number, including area code: (516) 599-1900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934, during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES _X_ NO___
Check if no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not contained herein, and will not be contained to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB or any amendment to this Form 10-KSB.
The registrant's operating revenues for its most recent fiscal year were
$1,532,405.
The number of shares outstanding on March 31, 1996 was 74,859,319 shares of
Common Stock, .00003 par value.
Continued...
<PAGE>
The aggregate market value of the voting Common Stock held by non-affiliates (1)
of the registrant based on the average of the high and low bid prices ($.04) of
the Company's Common Stock, as of May 31, 1996, is approximately $2,058,462
based upon the 51,461,555 shares of Registrant's Common Stock held by
non-affiliates.
The number of shares outstanding of each of the Registrant's classes of Common
Stock, as of December 31, 1995 is 74, 859,319 shares all of one class of $.00003
par value common stock.
(1) "Affiliates" solely for purposes of this item refers to those persons who,
during the three months preceding the filing of this Form 10-KSB were officers
or directors of the Company and/or beneficial owners of 5% or more of the
Company's outstanding stock.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business Disclosure Format: (check one) Yes___ No_X_
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PHASEOUT OF AMERICA, INC.
Form 10-KSB
Fiscal Year Ended December 31, 1995
Table of Contents
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PART I PAGE
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Item 1. Business 4
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters. 10
Item 6. Management's Discussion and Analysis of Financial Condition and Results 11
of Operations.
Item 7. Financial Statements F3 - F15
Item 8. Changes in or Disagreement with Accountants on Accounting and Financial 15
Disclosure.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with 16
Section 16(a) of the Exchange Act.
Item 10. Executive Compensation 18
Item 11. Security Ownership of Certain Beneficial Owners and Management 19
Item 12. Certain Relationships and Related Transactions 20
PART IV
Item 13. Exhibits and Reports on Form 8-K 20
</TABLE>
Signatures
Supplemental Information
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PART 1
ITEM 1. Business
The Company
The Company is a corporation organized under the laws of Delaware on July
17, 1987, has a limited operating history and has operated at a loss since
inception. Since the completion of its initial public offering in April 1989,
the Company had primarily concentrated its efforts in two areas: the
establishment of medical credibility through clinical trials performed at an
independent testing facility and the test marketing of PHASEOUT (also referred
to as the "Product" or the "device') throughout the United States and
internationally via various channels of distribution.
The Company's primary product, PHASEOUT, is a patented device developed to
help a person quit smoking without the use of any drugs, chemicals or
attachments. The device was designed to gradually reduce the amounts of
nicotine, tar and carbon monoxide consumed from cigarette smoke.
Prior to 1994, the Company, concentrated its efforts in two areas: (1)
establishing medical credibility through clinical trials on human subjects,
performed at independent testing facilities to validate the scientific findings,
(the device has been scientifically tested by the U.S. Testing Company using
Federal Trade Commission ("FTC") methods and guidelines and clinically tested on
smokers by independent researchers under controlled laboratory conditions at the
Johns Hopkins University School of Medicine); and (2) test-marketing the product
throughout the U.S. through various channels of distribution. Market testing
took place in selected catalogs and on television via a half-hour infomercial
producing a greater number of orders in 1995, when promotional expenses were
increased.
The 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). There is no assurance that the FDA will alter
its position that the product is a medical device subject to the FDA.
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.
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The Company is currently having the product manufactured in Taiwan. The
Company's primary source of supply is capable of producing over 30,000 PHASEOUT
units per week. A second manufacturing source in South Korea is going on-line in
mid 1996. In addition, the Company's management is studying the feasibility of
having the product manufactured domestically.
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
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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.
Clinical
Independent researchers at the Johns Hopkins University School of Medicine
conducted clinical research on PHASEOUT in a controlled laboratory setting. The
study, entitled Phase-Out Filter Perforation: Effects on Human Tobacco Smoke
Exposure, was published in the April 30, 1992, issue of the international
medical journal PHARMACOLOGY, BIOCHEMISTRY AND BEHAVIOR , thus supporting the
scientific machine studies conducted previously by U. S. Testing Company. Some
excerpts follow:
o "Use of the PhaseOut filter perforation device may allow smokers to
continue smoking their usual preferred brand of cigarettes while reducing
their exposure to tobacco smoke constituents. This could have beneficial
health effects and could be particularly useful as a weaning method prior
to smoking cessation."
o "Percentage decrements in nicotine delivery observed in humans were
strikingly similar to reductions observed in smoking machine testing. The
concordance between human and machine testing data supports the conclusion
that the PhaseOut device works as expected to dilute the smoke stream and
reduce constituent exposure."
o "In conclusion, this study showed that filter perforation achieved with the
PhaseOut device significantly reduced human exposure to tobacco smoke
constituents when tested in an acute smoking protocol under controlled
laboratory smoking conditions. Exposure reductions of 30-80% were observed
for both nicotine and CO. Percentage reductions in constituent exposure
generally corresponded well to those anticipated from machine testing,
indicating that the controlled smoking technology was valid and that the
PhaseOut device operates as expected in a human smoking assay."
Field Studies
A field study was conducted by Louise Leonhardt, a nutritional consultant
who teaches adult education at a local Long Island high school. She conducted
two studies, one with fifteen students and the other with forty students. Out of
the fifty-five participants, forty smokers (or 73%) quit and the balance
continue to use PhaseOut.
Another field study was conducted by Dr. Robert D. Brandstetter, M.D.,
Pulmonary Medicine, Associate Director of Medicine and Chief of Critical Care at
New Rochelle Medical Center in New York. Dr. Brandstetter had limited success
with acupuncture, psychotherapy, nicotine gum and the nicotine patch on his
patients. Dr. Brandstetter then supplied PhaseOut to 35 of his patients who
smoked from one to two packs per day. 22 smokers (63%) quit and still have not
smoked for over a year. Dr. Brandstetter had stated that he observed decreases
of coughing, shortness of breath and sputum production in smokers using
PhaseOut.
Although these field studies are not scientifically controlled studies, the
results are promising since the
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current average quit success rate of all other products including the nicotine
patch and gum is less than 10%. The Company intends to conduct further research
and studies researching the effectiveness of the product in helping people to
quit smoking.
Patents
The United States Patent Office has issued two patents for the PhaseOut
System (Patent Number 4,231,378 issued November 4, 1980 and Patent number
5,218,976 issued June 15, 1993). In addition, the Company has applied for
patents in eighteen (18) foreign countries, including China, Taiwan, Japan,
England, France, Germany and Italy.
Marketing (Domestic)
The focus of the Company's marketing is to create an awareness for the
product through the use of various direct response marketing venues. Some of
these are: the use of a thirty minute television infomercial, short form
television commercials, sixty second radio commercials, mail order catalogs,
print advertising and through credit card mailings (syndication).
The Company, in December 1994, entered into a contract with a direct
response television production and marketing company. As part of the agreement,
this company was responsible to edit the existing infomercial using Jackie Mason
as host and create one and two minute spot commercials. To insure the success of
these commercials ,the direct response company committed to invest a minimum of
$200,000 for initial TV airings. Once they expended a minimum of $200,000, they
would qualify for a "reverse" royalty from the Company on sales made in other
marketing venues. The agreement called for specific minimum quarterly purchase
quotas (73,000 units per year). The Company initiated an arbitration action
against the direct response company for failure to perform under the terms of
the agreement (see Legal Proceedings). As a result of this, the Company formed a
relationship with another direct response media buying agency.
On June 8, 1995, the Company entered into an agreement with an
international marketing representative firm. This agreement compensates the
representative on a commission basis for all export business that results from
their efforts.
On October 17, 1995, the Company entered into a marketing agreement with a
network marketing organization utilizing independent distributors that sell to
individuals on a one to one basis. They are focusing their efforts on the
marketing of the Company's Total Quit Smoking Program and the Company's Support
Group line of consumable products (see New Products).
Marketing (International)
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.
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PhaseOut has started distribution through television infomercials and
commercials in the following countries: Greece, Portugal, Spain, Uruguay,
Brazil, South Africa, Phillippines, Argentina, United Arab Emirates, Tahiti,
France, Hong Kong, Romania, Moldavia.
New Products
The Total Quit Smoking Program. A comprehensive, self-help smoking
cessation program to combine the use of the patented PhaseOut device with the
latest behavior modification techniques. This program addresses both the
physiological and the psychological addictions to smoking. 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
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most commonly prescribed. However, management expects to counter the initial
success of the patch program because there are stirrings of adverse publicity
regarding patches due to their side effects and usage limitations.
In addition to the nicotine patch, other pharmaceutical companies are in
the process of introducing alternate nicotine delivery methods in the form of a
nasal spray, which will have many of the same side effects as the nicotine patch
and will most probably require a prescription when first brought to the market.
Recently, the FDA has allowed the nicotine gum, which was formerly only
available by prescription, to be sold over-the-counter.
Employees
At the present time, the Company has eight employees, including the
Company's four officers and directors and four administrative and secretarial
personnel.
Item 2. Properties
The Company office is located in approximately 2,000 square feet at 140
Broadway, Lynbrook, New York 11563, telephone number (516) 599-1900 in premises
rented on a month to month basis at a monthly rent of $1,500.00.
Item 3. Legal Proceedings
In June, 1993, the Company received a "Warning Letter" from the FDA in
which the FDA stated its belief that the Product is a "medical device", and is,
therefore, subject to the provisions of the FDA. Since the Company has been
marketing the product without seeking or obtaining pre-marketing approval from
the FDA, if the FDA's position is correct, the Company's activities are in
violation of the Food Drug and Cosmetics Act and the FDA would have the right to
enjoin further marketing by the Company of the product. The Company does not
believe that the product is a medical device within the meaning of the FDCA and
has advised the FDA of its position through the Company's Washington, D.C.
counsel, Hyman, Phelps & McNamara, specializing in FDA matters. The answer
submitted on July 7, 1993, by the Company counsel took the position that
PHASEOUT is a mechanical device that treats just the cigarette (not the smoker)
by creating additional internal filters within the existing filter or cigarette.
However, in an effort to cooperate with the FDA, the Company proposed to make
substantial revisions to the promotional statements for the product to make it
clearer to the public that the product is not intended to be used as a medical
device. Neither the Company nor its counsel has received any written or oral
response from the FDA since that time. However, no assurance can be given that
the FDA will not in the future seek to enjoin the Company from marketing the
product without complying with the FDCA and seeking other remedies against the
Company. Management believes that the FDA letter came as a result of the FDA's
investigation of the smoke cessation industry. As a result of that
investigation, the FDA banned the sale of certain over-the-counter smoke
cessation product using active ingredients as of December, 1993. PHASEOUT was
not affected by this ban.
The Company was advised by the FTC by letter dated October 20, 1993, that
the FTC was conducting a non-public, informal inquiry to determine whether the
Company had engaged in deceptive or unfair practices in violation of the Federal
Trade Commission Act (the "FTC Act") in connection with certain of the Company's
advertising claims. In that connection, the FTC requested that the Company
provide it with certain information and documents and also requested a meeting
on June 9. 1994, with the Company's officers. The Company supplied the FTC with
all the information they requested. Subsequently, the FTC canceled the meeting
stating
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that they had sufficient information. Management believed that the FTC was
apparently satisfied with the Company's response to their inquiry and its
willingness to cooperate. However, on August 3, 1995, the FTC submitted to the
Company a draft administrative complaint and a proposed consent agreement
outlining the terms of a possible settlement of the FTC's claims. In response,
the Company has submitted a counter-proposal and has engaged in extensive
dialogue with FTC staff to negotiate a resolution of the FTC's claims.
The draft administrative complaint, which has not to date been filed by the
Commission, alleges that certain statements and claims contained in the
Company's print and broadcast advertisements for the sale of the PHASEOUT device
are false and misleading in that they are not reasonably substantiated and,
therefore, violate Sections 5 and 12 of the FTC Act. The Company denies the
material allegations in the draft administrative complaint and will vigorously
defend such an action in the event that a settlement cannot be reached and a
complaint is actually filed. The Company has made and continues to make all
reasonable efforts to resolve the FTC's concerns without resort to litigation.
In the event that the FTC institutes an administrative proceeding against
the Company, it could have an adverse effect on the operations of the Company.
Regardless of the ultimate outcome of any such action, the Company would likely
incur substantial expenses in defense.
In February 1995, the Company's former attorney, John B. Lowy, brought an
action against the Company in New York State Supreme Court, New York County for
unpaid attorneys fees and disbursements of approximately $36,000. Management
intends to vigorously defend all, but approximately $16,000 of the claim. The
financial statements include a liability for $16,000 payable to this party.
Legal counsel has not rendered an opinion as to the ultimate outcome of this
matter.
In March 1996, the Company made a demand for arbitration before a
commercial panel of the American Arbitration Association against the direct
response TV and marketing company ("On-Air Infonetwork") that was purchasing
television time for the Company's thirty minute infomercial, to seek damages
sustained as a result of their failure to perform pursuant to an agreement with
the Company. In April, 1996, in connection with the proceedings commenced by the
Company, On-Air Infonetwork obtained a temporary restraining order against the
Company. The temporary restraining order was vacated when the Company agreed to
set aside $75,000 and a percentage of sales up to an additional $25,000 (total
$100,000), in a special escrow account with the Company's legal counsel. Hearing
dates have been scheduled in the arbitration for July, 1996. The Company's
maximum exposure in the event the arbitration is lost is approximately $150,000
and the reinstatement of the reverse royalties on sales made in other marketing
venues domestically.
Item 4. Submission of Matters to a Vote of Security Holders
For the fourth quarter of the fiscal year ended December 31, 1995, no
matters whatsoever were submitted to a vote of security holders through the
solicitation of proxies or otherwise.
Item 5. Market for Company's Common Equity and Related Stockholder Matters
(a) Market information - The principal U.S. market in which the Company's Units
(each unit consisting of two shares of Common Stock and one Class A Common Stock
Purchase Warrant to purchase an additional share and a Class B Common Stock
Purchase Warrant), Common Shares (all of which are one class, $.00003 par value
Common Stock) and Class A and Class B Warrants, were tradable is in the
over-the-counter market. The Class A Warrants expired on November 2, 1993 and
the Class B Warrants were extended to December 31, 1996. The
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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, 1994 .03 .01
Quarter Ended June 30, 1994 .065 .05
Quarter Ended September 30, 1994 .09 .03
Quarter Ended December 31, 1994 .0725 .05
Quarter Ended March 31, 1995 .105 .075
Quarter Ended June 30, 1995 .09 .08
Quarter Ended September 30, 1995 .08 .075
Quarter Ended December 31, 1995 .05 .03
Quarter Ended March 31, 1996 .05 .04
(b) Holders -- As of December 31, 1995, the approximate number of the Company's
shareholders was 305.
c) Dividends -- The Company has not paid or declared any dividends upon its
Common Stock since its inception and, by reason of its present financial status
and its contemplated financial requirements, does not contemplate or anticipate
paying any dividends upon its Common Stock in the foreseeable future.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations Year Ended December 31, 1995 Compared to Year Ended
December 31,1994
The Company incurred a net loss of $768,661 for the year ended December
31, 1995 as compared to a loss of $484,507 for the year ended December 31, 1994.
During fiscal 1995, the Company sought to create an increased awareness for
its product using television direct response marketing methods. As a result,
sales for fiscal 1995 increased by $1,203,000 from 1994 sales of $329,000 to
1995 sales of $1,532,000. This increase in sales reflects an increase in units
sold of approximately 28,000 units, from approximately 33,000 units in 1994 to
approximately 61,000 in 1995 and an increase in average selling price of $15,
from $10 in 1994 to $25 in 1995. In 1994, substantially all sales were at a
wholesale price of $10, whereas in 1995 approximately 23,600 units were sold
through television direct response methods at a retail price of approximately
$45.95 including shipping and handling. Additional revenue is obtained from
"upsells" of a smoker's vitamin and/or a smoker's toothpaste.
Cost of sales increased by $108,000, from $157,000 in 1994, to $265,000 in
1995. Of this amount, approximately $135,000 of the increase is attributable to
the increased number of units sold, offset by approximately $27,000 in savings
from a decrease in average unit cost during 1995.
Selling expenses increased by approximately $1,099,000, from $223,000 in
1994, to $1,322,000 in 1995. Of this amount, approximately $1,044,000 is
attributed to increased costs relating to the television direct
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response marketing, $41,000 to radio marketing costs, and the remaining $14,000
to increases in existing costs.
General and administrative costs increased by approximately $240,000, from
$425,000 in 1994, to $665,000 in 1995. Of this amount, approximately $177,000 is
attributable to increases in payroll and related taxes, $50,000 to increases in
professional fees, and the remaining $13,000 to increases in existing costs.
Liquidity and Capital Resources
Cash of $282,390 was used for operations for the year ended December 31,
1995 as compared to $134,126 used last year. Cash increases principally were
from proceeds of sales of common stock and convertible subordinated debentures
during the year ended December 31, 1995.
In order to meet short-term marketing goals, the Company borrowed $200,000
from an individual and $65,000 from officers and directors in March, 1996 to
continue to finance the airing of the Company's television infomercial through
September 1996. The officers have been repaid as has $30,000 of the principal to
the individual investor with the balance to be paid in installments over 72
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.
Management believes but cannot assure that the levels of 1995 revenue will
continue throughout 1996. In this regard, first quarter 1996 revenues were
approximately $650,000 as compared with first quarter 1995 revenues of less than
$50,000.
Distribution and Marketing
During 1995 the Company's increased television media exposure for the
PHASEOUT device which helped marketing efforts in other marketing venues such as
catalogs, radio, syndication and export sales. The Company has entered into
marketing agreements in several countries already and is in discussion with many
more. Management is of the opinion that international sales will represent a
significant portion of the Company's overall revenues in the future. There would
be a material adverse effect if a number of the marketing relationships were
canceled.
The Company introduced two new product lines this year. The first was a
comprehensive self-help quit smoking program targeting corporations, insurance
companies, HMO's and consumers. This program combines the PhaseOut device with
the latest behavior modification techniques. The second product line consists of
eight consumable products for smokers and former smokers. These initial eight
products are: a stain fighting toothpaste, a breath mint, a weight loss
supplement, a smoker's vitamin, a calcium supplement, an anti-stress product, a
one a day coated aspirin and a alpha-hydroxy skin cream.
To date, only nominal sales of these products have been made.
The Company, in cooperation with our South Korean distributor, has
developed an upgraded PHASEOUT unit, which was designed primarily for the
Japanese market and for use in South Korea.
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Item 7. Financial Statements
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PHASE-OUT OF AMERICA, INC.
Balance Sheets
December 31, 1995
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<TABLE>
<CAPTION>
<S> <C>
Assets
Current Assets
Cash $176,818
Accounts receivable - net of allowance for doubtful
accounts of $-0- 71,967
Inventory - stated at the lower of cost or market -
first-in, first-out 99,300
Prepaid expenses 9,852
Other current assets 18,592
--------
376,529
Property and Equipment - at cost - net of accumulated
depreciation of $13,975 7,550
Patents - at cost - net of accumulated amortization of
$3,795 43,205
Other Assets 3,542
54,297
$430,826
=========
</TABLE>
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PHASE-OUT OF AMERICA, INC.
Balance Sheets
December 31, 1995
================================================================================
<TABLE>
<CAPTION>
<S> <C>
Liabilities and Shareholders' (Deficit)
Current Liabilities
Senior subordinated convertible debentures - including
accrued interest of $24,958 $ 459,958
1992 convertible debentures - including accrued interest
of $8,265 29,765
Taxes payable 8,077
Accounts payable 582,159
Accrued officer compensation 144,160
Loans from officer/shareholder 31,650
Other current liabilities 26,176
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1,281,945
-----------
Shareholders' (Deficit)
Series A Convertible Preferred Stock - par value $.001-
authorized 600,000 shares - no shares issued and
outstanding
Series B Convertible Preferred Stock - par value$.001-
authorized 5,000,000 shares - no shares issued and
outstanding
Common Stock - par value $.00003 - authorized
100,000,000 shares - 74,859,319 shares issued and
outstanding 2,246
Capital in excess of par 1,937,688
Accumulated (deficit) (2,791,053)
-----------
(851,119)
-----------
$ 430,826
===========
</TABLE>
See notes to financial statements.
- F4 -
<PAGE>
PHASE-OUT OF AMERICA, INC.
Statements of Operations
================================================================================
For the Years Ended
December 31,
-------------------------------
1995 1994
===============================
Sales - net $ 1,532,405 $ 328,686
Cost of Sales 264,566 157,209
------------ ------------
1,267,839 171,477
------------ ------------
Selling Expenses 1,322,199 223,042
General and Administrative Expenses 664,648 425,363
------------ ------------
1,986,847 648,405
------------ ------------
(719,008) (476,928)
------------ ------------
Other Income (Expenses)
Interest income 89 570
Royalty income -- 2,930
Interest (expense) (49,742) (11,079)
------------ ------------
(49,653) (7,579)
------------ ------------
Net (Loss) $ (768,661) $ (484,507)
============ ============
(Loss) Per Share $ (0.02) $ (0.01)
============ ============
Weighted Average Number of Shares
Outstanding (to nearest 1,000,000) 68,000,000 57,000,000
============ ============
See notes to financial statements.
- F5 -
<PAGE>
PHASE-OUT OF AMERICA, INC.
Statement of Shareholders' (Deficit)
For the Year Ended December 31, 1995
================================================================================
<TABLE>
<CAPTION>
Number of
Common Stock Amount Capital in
Shares $.00003 Excess of Accumulated Deferred
(Post-Split) Par Value Par Value (Deficit) Compensation
==================================================================================
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1994 53,494,288 $ 1,605 $ 1,352,597 $(1,537,885) $ 68,750
Proceeds from sales of stock 50,045 2 4,999 -- --
Shares issued to Products &
Patents, Ltd. for patent rights
and reduction of accounts
payable 6,000,000 180 146,820 -- --
Stock issued for accrued
services rendered:
Officers 1,500,000 45 16,455 -- --
Consultants and employees 1,940,000 57 27,107 -- --
Bond conversions to stock 50,000 2 2,499 -- --
Return of escrow shares (2,750,000) (82) (68,668) -- (68,750)
Net (loss) -- -- -- (484,507) --
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1994 60,284,333 1,809 1,481,809 (2,022,392) --
Proceeds from sales of stock 2,006,061 60 119,940 -- --
Bond and accrued interest
conversions to stock 624,245 19 33,996 -- --
Stock issued to supplier 1,000,000 30 17,470 -- --
Stock issued for accrued
services rendered:
Officers and directors 4,022,038 121 161,353 -- --
Consultants 6,935,000 207 123,120 -- --
Net (loss) -- -- -- (768,661) --
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1995 74,871,677 $ 2,246 $ 1,937,688 $(2,791,053) $ --
=========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
- F6 -
<PAGE>
PHASE-OUT OF AMERICA, INC.
Statements of Cash Flows Page 1 of 2
================================================================================
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------------------
1995 1994
===================================
<S> <C> <C>
Cash Flows from Operating Activities
Net (loss) $(768,661) $(484,507)
Adjustments to reconcile net (loss) to cash
(used for) operating activities:
Depreciation and amortization 6,074 3,417
(Increase) decrease in:
Accounts receivable (69,883) 50,085
Inventories 256,186 150,326
Prepaid expenses and other current assets (15,081) (638)
Increase (decrease) in:
Accrued bond interest 25,968 --
Accounts payable 46,269 47,307
Accrued officer compensation 144,160 125,715
Taxes payable 3,270 (18,485)
Amounts due to affiliate (91,488) (51,011)
Other current liabilities 21,710 --
Expenses paid through the issuance of
restricted common stock 159,086 43,665
--------- ---------
(282,390) (134,126)
Cash Flows from Investing Activities
Acquisition of fixed assets (800) (550)
Decrease in other assets 300 85
--
--------- ---------
(500) (465)
--------- ---------
Cash Flows from Financing Activities
Proceeds from sales of debentures 290,000 --
Advances from officer/shareholder 25,753 (8,000)
Payments of capital leases (586) (7,287)
Proceeds of sales of common stock 120,000 2,500
Proceeds from senior secured short-term note -- 125,000
Loan from director/shareholder -- 20,000
Loans to officers -- 8,200
--------- ---------
435,167 140,413
--------- ---------
</TABLE>
See notes to financial statements.
- F7 -
<PAGE>
PHASE-OUT OF AMERICA, INC.
Statements of Cash Flows Page 2 of 2
================================================================================
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------------
1995 1994
=============================
<S> <C> <C>
Net Increase in Cash $152,277 $ 5,822
Cash - beginning 24,541 18,719
-------- --------
Cash - end $176,818 $ 24,541
======== ========
Supplemental Disclosures
Cash paid for:
Interest $ 23,880 $ 886
======== ========
Non-cash investing and financing transactions:
Acquisition of patent rights from affiliate through
issuance of common stock $ -- $ 47,000
-------- ========
Debt due to affiliate paid through the issuance
of common stock $ -- $100,000
======== ========
Bond and accrued interest conversions to common stock $ 34,014 $ 5,000
======== ========
Assumption of accounts payable:
In exchange for inventory $173,257 $ --
======== ========
In payment of amounts due to affiliate $227,709 $ --
======== ========
Loan from director/shareholder converted to debentures $ 20,000 $ --
======== ========
Senior secured notes payable converted to senior
subordinated convertible debentures $125,000 $ --
======== ========
Stock issued to supplier $ 17,500 $ --
======== ========
Stock issued for accrued services rendered $125,715 $ --
======== ========
</TABLE>
See notes to financial statements.
- F8 -
<PAGE>
PHASE-OUT OF AMERICA, INC.
Notes to Financial Statements
December 31, 1995
================================================================================
1 - The Company
Phase-Out of America, Inc. (the "Company") was organized as a Delaware
Corporation on July 17, 1987 and operated as a development stage company
through 1993. The Company's purpose is to market and distribute its
patented phase-out system smoking cessation device (the "product").
The Company has primarily marketed the product in the United States through
direct response marketing including radio, television spots and
infomercials and is beginning to foreign distribution.
2 - Summary of Significant Accounting Policies
a. Inventory - Inventory is valued at cost (specifically identified)
which is not in excess of market value. Inventory is comprised
entirely of finished goods.
b. Property and Equipment - Property and equipment are carried at cost.
Depreciation is computed on the straight-line method over the
estimated useful lives of the assets.
c. Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
d. Patents - Patents represent a patent dated June 15, 1993 that was
acquired by the Company on October 25, 1994. The acquisitions cost has
been capitalized and amortized (straight-line method) over the life of
16 years.
e. Advertising Costs - All costs relating to direct response advertising
and marketing have been expensed in the period incurred. The Company's
direct response advertising costs do not qualify for capitalization
under the American Institute of Certified Public Accountants Statement
of Position 93-7 Reporting on Advertising Costs guidelines because
there is no historical data to provide a basis that the direct market
will have measurable future benefit. Advertising costs during 1995 and
1994 were $216,937 and $65,572, respectively.
Continued
- F9 -
<PAGE>
f. Earnings (Loss) Per Share - Loss per share is computed by dividing the
net loss by the weighted average number of shares outstanding during
the year. Common stock equivalents have not been included in the
earnings per share computation because of their anti-dilutive effect.
g. Stock-Based Compensation - The Company occasionally issues stock to
employees and non-employees in lieu of cash as compensation for
services rendered. The Company has adopted Financial Accounting
Standard #123 which requires those transactions to be accounted for
based on the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably
measurable.
h. Reclassifications - Various accounts in the prior year's Statement of
Operations have been reclassified for comparative purposes to conform
with the presentation in the current year's financial statements.
These reclassifcations had no impact upon the results of operations.
3 - Status of the Company
The financial statements have been prepared on a going-concern basis, which
contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business over a reasonable length of time.
The Company has had recurring net operating losses since its inception and
has made use of privately-placed debt and equity financing to provide funds
for operations. As of December 31, 1995, current liabilities exceed current
assets by $905,416. Those factors, as well as the Company's relatively
recent entry into the marketplace, create an uncertainty about the
Company's ability to continue as a going concern.
The Company has intentions of expanding and refining its marketing efforts
to improve the efficiency of these efforts and to increase revenues. In
addition, the Company is continuing its efforts to obtain long-term
financing through the issuance of long-term debt and equity securities.
The financial statements do not include any adjustments that might be
necessary should the above or other factors affect the Company's ability to
continue as a going concern.
Continued
- F10 -
<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 1996
Issued with purchase of
common stock 2,900,000 .15 435,000 1998
Issued for services 2,006,061 .10-.15 230,909 1996 - 1998
--------- -----------
Balance - December 31, 1995 7,940,061 $ 1,424,409
========= ===========
</TABLE>
b 1992 Convertible Debentures - In 1992, the Company initiated a series
of private placement offerings of two and three Subordinated
Convertible Debentures with an annual interest rate of 10% and with
variable conversion rates (ranging from $.05 to $.10 per share). These
offerings raised a total of $117,500. The Company is in default on
interest payments and is in violation of covenants. Of the original
$117,500 raised, $96,000 has been converted into stock. As of December
31, 1995, $21,500 of principal and $8,266 of interest remain unpaid or
unconverted on these debentures.
c. Senior Secured Notes Payable - In 1994, the Company issued one-year
Senior Secured Notes Payable for $125,000, which were converted into
the Company's 1995 Private Placement of Senior Subordinated
Convertible Debentures.
d. Senior Subordinated Convertible Debentures - In 1995, the Company
conducted a private placement of Senior Subordinated Convertible
Debentures (due 1998), in which $310,000 was obtained from private
lenders, $125,000 was converted from the 1994 Senior Secured Notes and
$20,000 was converted from a 1994 directors/shareholders loan for a
total of $435,000. The debentures are convertible at $.075 per share
through 1998 and, in certain circumstances, are mandatorily
convertible. The debentures bear an annual interest rate of 10%. The
Company is technically in default because the December 17, 1995
interest payments, totaling $19,750, were paid between one and four
days after the 30-day grace period.
5 - Related Party Transactions
a. Licensing Agreements - The Company had licensing agreements with
Products & Patents, Ltd. ("P&P"), a company related by management and
control.
In October 1994, the agreement with P&P was further amended to provide for:
(1) transfer of patents, worldwide marketing and manufacturing rights for
5,000,000 shares of common stock; (2) reduction of $100,000 in the sum owed
to P&P for 1,000,000 shares of common stock; (3) purchase of inventory from
P&P up to $150,000 from the proceeds of the Company's private placement at
a specified unit cost and; (4) payment of a specified per unit royalty of
purchases by the Company from outside sources after depletion of P&P's
inventory.
Continued
- F11 -
<PAGE>
In August, 1995, the relationship with P&P was terminated and the
Company's obligation to pay royalties was discontinued. In connection
with this transaction, the Company agreed to assume a $400,966
liability to one of P&P's suppliers in exchange for the elimination of
the liability owed to P&P of $227,709 and inventory valued at
$173,257. There was no gain or loss recognized as a result of this
transaction.
b. Loan from Officer/Shareholder - An officer/shareholder of the Company
is owed $31,650 by the Company. The amount is payable on demand and
there is no stated rate of interest.
c. Other - The Company's general counsel is a relative of certain of the
officers. The Company incurred approximately $25,000 of legal fees
with this firm in 1995 and $9,000 in 1994, of which $21,780 remained
unpaid as of December 31, 1995.
6 - Income Taxes
The Company has available net operating loss carryforwards of
approximately $2,600,000, which expire in 2002 until 2010. Deferred
income taxes reflect the net tax effects of net operating loss
carryforwards and result in deferred tax assets of approximately
$780,000 and $600,000 at December 31, 1995 and 1994, respectively,
which were fully offset by valuation allowances due to uncertainties
surrounding the ultimate realization of this asset.
7 - Leases
The Company leases automobiles for its officers, none of which have
purchase or renewal options. Rental expense was $23, 413 and $22,404 for
1995 and 1994, respectively. The future minimum rental payments required
under these leases are as follows:
1996 $ 29,100
1997 13,044
1998 5,856
The Company is currently in negotiations for the lease of office space.
8 - Economic Dependence
The Company purchased 100% of its products in 1995 and 1994 from one vendor.
Continued
- F12 -
<PAGE>
9 - Other Commitments and Contingencies
a. Direct Response Marketing Agreement - By agreement dated December 30,
1994, and subsequently amended on July 13, September 21, and December
22, 1995, the Company granted to On-Air Infonetwork, Inc. ("On-Air")
the exclusive television direct response marketing rights for the
product in the United States and Canada. In addition to agreeing to
spend $50,000 on production, talent and editing costs in conjunction
with the production of the Company's infomercial and other television
commercials, On-Air agreed to generate certain minimum sales and to
expend substantial monies on broadcast media time. Once On-Air has
expended a minimum total on media, the Company is liable for reverse
royalties on units sold excluding those sold through On-Air's direct
response marketing campaign.
In March, 1996, the Company made a demand for arbitration before a
commercial panel of the American Arbitration Association against
On-Air, to seek damages sustained as a result of their failure to
perform pursuant to an agreement with the Company. In April, 1996, in
connection with the proceedings commenced by the Company, On-Air
obtained a temporary restraining order against the Company. The
temporary restraining order was removed when the Company agreed to set
aside $75,000 and a percentage of sales up to an additional $25,000
(total $100,000), in a special escrow account with the Company's legal
counsel. No hearing dates have been scheduled in the arbitration. The
Company's maximum exposure in the event the arbitration is lost is
approximately $150,000 and the reinstatement of the reverse royalties
on sales made in other marketing venues domestically. As of December
31, 1995, there was a liability of approximately $101,000 included in
accounts payable relating to this agreement which will be increased
based upon sales in 1996.
b. Other Marketing Agreements - The Company has entered into various
marketing agreements both domestically and abroad. Those agreements
generally have sales quotas which the other parties must achieve in
order to maintain exclusivity but generally do not bind the Company to
any purchase commitments.
c. Regulatory Matters - On June 1, 1993, the U.S. Food and Drug
Administration (FDA) sent a warning letter to the Company. The letter
stated that due to the Company's marketing and promotional materials
used at the time for the product, the FDA believed the product was
being sold as a medical device and should be subject to regulation as
a medical device under the Federal Food, Drug and Cosmetic Act (FDC
Act), and that the product was in violation of certain provisions of
that Act.
The Company believes that the product is not a medical device within
the meaning of the FDA Act and has advised the FDA of its position.
However, in an act of cooperation with the FDA, the Company
volunteered to make revisions in its promotional material in order to
make it clearer to the public that the product is not intended to be
used as a medical device.
Continued
- F13 -
<PAGE>
Since these revisions have been made, the Company has not received any
communications from the FDA about this matter. However, no assurance
can be given that the FDA will not in the future continue its
investigation and prohibit the Company from marketing the product or
invoke other remedies without the Company complying with medical
device status requirements of the FDC Act.
On October 20, 1993, the Federal Trade Commission ("FTC") advised the
Company that they were conducting a non-public, informal inquiry to
determine whether the Company had engaged in deceptive or unfair
practices in violation of the Federal Trade Commission Act ("FTC Act")
in connection with certain advertising claims made by the Company. The
Company provided certain information and documents requested by the
FTC.
Management believed that the FTC was apparently satisfied with the
Company's response to their inquiry and its willingness to cooperate.
However, on August 3, 1995, the Company received a complaint from the
FTC Division for Advertising Practices with regard to the ongoing
investigation.
The FTC submitted to the Company a draft administrative complaint and
a proposed consent agreement outlining the terms of a possible
settlement of the FTC's claims. In response, the Company has
submitted a counter-proposal and has engaged in extensive dialogue
with FTC staff to negotiate a resolution of the FTC's claims.
The draft administrative complaint, which has not to date been filed
by the FTC, alleges that certain statements and claims contained in
the Company's print and broadcast advertisements for the sale of the
product are false and misleading in that they are not reasonably
substantiated and, therefore, violate Sections 5 and 12 of the FTC
Act. The Company denies the material allegations in the draft
administrative complaint and will vigorously defend such an action in
the event that a settlement cannot be reached and a complaint is
actually filed. The Company has made, and continues to make, all
reasonable efforts to resolve the FTC's concerns without resort to
litigation.
In the event that the FTC institutes an administrative proceeding
against the Company, it could have an adverse effect on the
operations of the Company. Regardless of the ultimate outcome of any
such action, the Company would likely incur substantial expenses in
defense which, in the aggregate, would exceed the applicable
materiality standard.
In February, 1995, the Company's former attorney, John B. Lowy,
brought an action against the Company in New York State Supreme
Court, New York County for unpaid attorney fees and disbursements of
approximately $36,000. Management intends to vigorously defend all
but approximately $16,000 of the claim. The financial statements
include a liability for $16,000 payable to this party. Legal counsel
has not rendered an opinion as to the ultimate outcome of this
matter.
Continued
- F14 -
<PAGE>
10 - Subsequent Event
In March, 1996, the Company borrowed $200,000 from an individual investor
to finance the airing of the Company's television infomercial. The Company
has agreed to use the money for a period of six months and to pay a fee of
2 1/2% per month. The Company's Chairman, President and a Director have
also loaned money to the Company for the financing of the infomercial. Each
individual may withdraw their funds at any time upon 60 days' written
notification to the Company.
- F15 -
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
On January 12, 1996, the Company informed Stewart W. Robinson ("Robinson"),
certified public accountants, that effective January 1, 1996, the Board of
Directors of the Company (including the Audit Committee thereof) had determined
not to continue the engagement of Robinson as the registrant's independent
certified public accountant. Effective January 15, 1996, the registrant engaged
Raich Ende Malter Lerner & Company ("Raich") as the Company's new independent
certified public accountants to audit the registrant's financial statements
(beginning with the fiscal year ended December 31, 1995).
Robinson's reports on the financial statements for each of the past two
fiscal years of the Company ended December 31, 1993 and December 31, 1994
respectively ("Applicable Fiscal Years"), did not contain an adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles except as follows: The accountant's report
of Stewart W. Robinson on the financial statements of PhaseOut of America, Inc.,
as of and for the two years ended December 31, 1993 and 1994 was modified to
refer to the ultimate outcome of matters raised by two Federal regulatory
agencies and to the ability of the Company to continue as a going concern as
discussed in note 1 and note 8 of the notes to the financial statement in the
Form 10KSB filed with the SEC on May 3, 1995. During the Applicable Fiscal Years
and during the interim period since December 31, 1994, there was no disagreement
between the Company and Robinson on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of Robinson would have caused
it to make a reference to the subject matter of the disagreement in connection
with its reports.
During the Applicable Fiscal Years and during the Interim Period from
December 31, 1994 to January 12, 1996, Robinson did not (A) advise the Company
that the internal controls necessary for the Company to develop reliable
financial statements did not exist; (B) advise the Company that information had
come to the attention of Robinson that led it to no longer be able to rely on
the representation of the Company's management or that had made Robinson
unwilling to be associated with the Company's financial statements; C) advise
the Company of the need to expand significantly the scope of its audit or that
information had come to the attention of Robinson during the Applicable Fiscal
Years and during such interim period that if further investigated, (1) might
materially impact the fairness or the reliability of either a previously issued
audit report to the underlying financial statements, or the financial statement
issued (or to be issued) covering the fiscal periods(s) subsequent to the date
of the most recent financial statements covered by an audit report or (2) cause
Robinson to be unwilling to rely on representations of the Company's management
or be associated with the Company's financial statements and (D) advise the
Company that information had come to the attention of Robinson that Robinson
concluded materially impacts the fairness or reliability of either, (1) a
previously issued audit report or the underlying financial statements or, (2)
the financial statements issued (or to be issued) covering the fiscal period(s)
subsequent to the date of the most recent financial statements covered by an
audit report.
As stated above, the Company has engaged, effective as of January 15, 1996,
Raich as its new principal independent accountant to audit the Company's
financial statements (beginning with the fiscal year ended December 31, 1995).
Prior to such engagement, the Company (including any of its representatives or
agents) did not consult with representatives of Raich regarding the application
of accounting principles to a specified transaction (either completed or
proposed): or the type of audit opinion that might be rendered on the Company's
financial statements and neither a written report was provided to the Company
nor oral advice was provided that Raich concluded was an important factor
considered by the Company in reaching a decision as to the accounting,
14
<PAGE>
auditing or financial reporting issue.
Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
with Section 16 (a) of the Exchange Act.
The following table sets forth certain information concerning the directors
and executive officers of the Company:
Name Age Position(s) with the Company
- ---- --- ----------------------------
Bernard Gutman 69 Chairman of the Board of Directors
Chief Executive Officer
James F. Leary 66 Vice Chairman of the Board
Chief Financial Officer, Director
Irwin Pearl 54 President, Chief Operating Officer
Director
Drew A. Gutman 36 Secretary-Treasurer, Director
Daniel Silkiss 72 Director
Luther H. Hodges, Jr. 59 Director
Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and have qualified.
Officers are appointed to serve until the meeting of the Board of Directors
following the next annual meeting of stockholders and until their successors
have been elected and have qualified.
A summary of the business experience of each officer and director of the
Company is as follows:
BERNARD GUTMAN has been Chairman of the Board of Directors of the Company
since inception. From inception to September 14, 1987, Mr. Gutman was President
of the Company. He has also been an officer, director and principal shareholder
of Products & Patents, a publicly held company since its inception on December
11, 1981. From 1978 to February 1982, Mr. Gutman served as President and
Chairman of the Board of Directors of National Vitamin Corporation, a
publicly-held corporation involved in the marketing and distribution of
vitamins. From 1981 to 1983, Mr. Gutman was President of the Gutman Consulting
Company, which was wholly owned by Mr. Gutman and which provided financial and
marketing consulting services to various companies. From 1955 to 1978, Mr.
Gutman was Chairman of Delco Corporation, a publicly-held corporation engaged in
the home improvement business. He is the father of Drew Gutman, a Director of
the Company.
JAMES F. LEARY has been a Director and Chief Financial Officer of the
Company since August 1994. Mr. Leary the President and Founder of Sunwestern
Management, Inc., Dallas, Texas, engaged in venture capital investing through
two limited partnerships. Prior to Sunwestern's inception in 1981, Mr. Leary was
Senior Executive Vice President, Chief Financial Officer and Director of the
Associates Corporation of North America, Dallas, Texas. Prior to his tenure with
Associates, he served as Senior Vice President of The
15
<PAGE>
National Bank of North America (now National Westminster Bank USA) and as an
Assistant Treasurer of CIT Financial Corporation. Mr. Leary is Vice Chairman of
Finance of Search Capital Group, Inc., Dallas, TX (NASDAQ) and is a director of
MaxServ, Inc. (NASDAQ), several open-end mutual stock funds under the management
of Capstone Asset Management Company, and Anthem Financial Services, Inc. Mr.
Leary has a B.A. degree in Business Administration from Gerogetown University
1951, an MBA in Banking and Finance from New York University 1953, and is also a
graduate of the Advanced Management Program of the Harvard University Graduate
School of Business in 1956.
IRWIN PEARL has been a director of the Company since August 1987 and became
its President in September 1994. Mr. Pearl had been Chief Executive Officer and
Chairman of the Board of Directors of AquaSciences International, Inc. ("AQSI"),
a publicly-owned company, from January 1987-1992 when he resigned. AQSI is
engaged in water treatment technologies for home, commercial and industrial use.
From 1981 to 1985, Mr. Pearl was a director of Crystin Management Company, a
private management consulting firm in New York. From 1971 to 1981, Mr. Pearl was
the President and principal shareholder of Business Concepts Marketing
Corporation, a private company engaged in the development and distribution of a
proprietary hotel guest directory. From 1971 to 1981, he was also the President
and principal shareholder of Promotional Media Incorporated, a private company
engaged in the publication of traffic-building promotions for the supermarket
industry.
DREW GUTMAN has been the Secretary-Treasurer of the Company since September
1987. He has been a director of the Company since inception. Mr. Gutman had been
an officer and director of Products & Patents from April 1986 until August 1993.
From July 1983 to May 1984, he was an accountant with Eisner & Lubin, a public
accounting firm. From June 1984 to August 1985, Mr. Gutman was an accountant for
Merrill Lynch Hubbard, Inc., a real estate syndication company. Mr. Gutman
graduated from Hofstra University in May 1983 with a B.S. degree in accounting.
He is the son of Bernard Gutman, Chairman of the Board of the Company.
DANIEL SILKISS has been a Director of the Company since August 1994. Mr.
Silkiss is currently President of LCD International Group, Ltd. ("LCD") and has
been a technical consultant to the Company since 1987. LCD is engaged in
licensing, consulting and distribution. Other services include market research,
direct sales, product registration and joint ventures in the fields of
chemicals, pharmaceutical, cosmetics, biotechnology, telecommunications,
foodstuffs, botanicals and smoke cessation devices and programs. Mr. Silkiss has
coordinated clinical investigations at prestigious hospitals and medical schools
including Mt. Sinai, New York/Cornell, NYU, and Albert Einstein in New York; UC
San Diego, UCLA and Stanford in California; Children's New England Medical
Center in Massachusetts; University of Chicago in Illinois; and many others in
both the United States and Canada, interacting with the FDA and other
governmental agencies. He has initiated seminars in conjunction with hospitals
and international congresses, obtained NDA (New Drug Approval) for DDAVP
(Desmopressin Acetate) and IND (Investigational New Drug) for Gutron (Midodrin),
an alpha adrenergic; and has marketed drugs in the U.S. and overseas. Mr.
Silkiss has been a guest speaker at the FDA as well as a consultant to and
participant in the United Nations Development Program for developing countries.
LUTHER H. HODGES, JR. has been a Director of the Company since April 1995.
He currently serves as a member of the faculty of the Anderson Schools of
Management, the University of New Mexico; Chairman of the Board of the Santa
Fean, LLC and is a Director of Search Capital Corporation, Dallas, Texas; and a
director of Safety Floor International, Bethesda, MD., Zomeworks Corporation,
Albuquerque, and CWF Energy Company, Dallas, Texas. Additionally, Mr. Hodges
manages two closely held investment partnerships and operates the Santa Fe
Buyers Brokerage Company, a licensed real estate broker in New Mexico. He serves
16
<PAGE>
on the Governor's Economic Development Commission and the State Treasurer's
Investment committee in New Mexico. Mr. Hodges is also a trustee of the North
American Institute in Santa Fe and the National Symphony Orchestra in
Washington, D.C. Previously, Mr. Hodges was Chairman and Chief Executive Officer
of Washington Bancorporation (1983-89), a regional bank holding company, and The
National Bank of Washington (1981-89) and served as Chairman of the Board of
Starlight Publishing Company, Albuquerque, N.M. He served as Undersecretary of
the U.S. Department of Commerce (1979) and as the first Deputy Secretary of
Commerce (1980). He had been a democratic candidate for the United States Senate
from North Carolina (1978) and from 1962-1977 served in various management
positions at the North Carolina National Bank (presently Nations Bank),
including Chairman of the Board (1974-77). Mr. Hodges has long been active on
the Board of Directors of numerous community, educational and corporate
organizations. Mr. Hodges was educated at the University of North Carolina
(1957) and at the Harvard Graduate School of Business Administration (1961). He
served to the rank of Lieutenant, United States Navy.
Compliance With Section 16(a) of The Securities Exchange Act of 1934
The Company does not have any securities registered under Section 12 of the
Securities Exchange Act of 1934, and, accordingly, compliance with Section 16(a)
thereof is not required or applicable.
Item 10. Executive Compensation
The following Summary Compensation Table sets forth certain information
concerning total annual compensation paid to Bernard Gutman, the Company's
Chairman and Chief Executive Officer, Irwin Pearl, the Company's President and
Chief Operating Officer and Drew Gutman, the Company's Secretary/Treasurer (the
"named Executive Officers") for services rendered in all capacities by them to
the Company during fiscal years 1995 and 1994.
Summary Compensation Table
<TABLE>
<CAPTION>
Name and
Principal Positions Year Salary
- ------------------- ---- -------------------------
Cash Non Cash Compensation
---- -------- ------------
<S> <C> <C> <C> <C>
Bernard Gutman
(Chairman and
Chief Executive
Officer) 1995 $49,932 $52,000 $43,676
1994 $ 5,739 $53,103 $17,574
1993 $ 0 $40,000 $52,903
Irwin Pearl
(President, Chief
Operating Officer) 1995 $49,250 $59,875 $32,297
1994 $22,250 $30,000 $ 0
1993 $ 0 $ 0 $ 0
Drew Gutman
(Secretary/
Treasurer) 1995 $38,000 $41,083 $44,486
1994 $15,180 $43,249 $18,378
1993 $ 0 $40,000 $52,903
</TABLE>
17
<PAGE>
The category "Other Compensation" includes the leasing of an automobile, any
automobile expenses, telephone expenses and entertainment expenses.
Item 11. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners -- The persons set forth on
the charts below are known to the Company to be the beneficial owners of
more than 5% of the Company's outstanding voting Common Stock as of the
date hereof.
(b) Security Ownership of Management -- Information concerning the number and
percentage of shares of voting Common Stock of the Company owned of record
and beneficially by management, is set forth on the charts below:
<TABLE>
<CAPTION>
Name and Address Shares of Common
Of Beneficial Owner Beneficially Owned Percent Owned (1)
- ------------------- ------------------ -----------------
<S> <C> <C>
Bernard Gutman 15,097,486(2) 20%
140 Broadway
Lynbrook, New York 11563
Drew Gutman 3,346,425 4.5%
140 Broadway
Lynbrook, New York 11563
Irwin Pearl 1,350,000 2.0%
140 Broadway
Lynbrook, New York 11563
Daniel Silkiss 1,800,000 2.4%
140 Broadway
Lynbrook, New York 11563
James F. Leary 998,853 1.3%
140 Broadway
Lynbrook, New York 11563
Luther H. Hodges, Jr 805,000 1.0%
140 Broadway
Lynbrook, New York 11563
Products & Patents, Ltd. 2,807,373 3.8%
140 Broadway
Lynbrook, New York 11563
All Directors and Officers 23,397,764 31.5%
as a group (six persons)
</TABLE>
18
<PAGE>
(1) Based upon 74, 859,319 shares issued as of December 31, 1995.
(2) Includes 2,807,373 shares held by P&P inasmuch as Bernard Gutman is an
officer and director of P&P. Mr. Gutman has sole discretionary power of
these shares. P&P currently has no active business operations.
Item 12. Certain Relationships and Related Transactions
In October 1994, the agreement with P&P was amended to provide for:
transfer of patents, worldwide marketing and manufacturing rights for 5,000,000
shares of Common Stock and; reduction of $100,000 in the sum owed to P&P for
1,000,000 shares of Common Stock.
In August 1995, the relationship with P&P was terminated. Consequently, the
Company's obligation to pay royalties has been discontinued. Pursuant to the
termination of the relationship with P&P, all debt due to P&P was canceled in
exchange for assumption of certain trade liabilities. In connection with this
transaction, the Company assumed P&P's obligation to its supplier of
approximately $401,000 and took title to approximately 53,000 units of
inventory.
The Chairman/CEO is an officer, director and significant (approximately
22%) shareholder of P&P and P&P, which is now inactive, is a shareholder of the
Company.
In September 1994, the Board of Directors approved employment contracts
with management providing for salaries of $100,000 each for a three year period
(aggregate $300,000 per year). Additionally, these agreements provide for
certain benefits and perquisites. As of the date of this report, the contracts
have not been reduced to writing.
Item 13. Exhibits and Reports on Form 8-K
(A) Exhibits
3.1 Articles of Incorporation (1)
3.2 By-Laws (1)
10.01 Agreement dated October 17,1995 with Integrity International
10.02 Agreement dated June 9, 1995 with Tokyo Boeki
10.03 Agreement dated August 21, 1995 with J&R Intercontinental
10.04 Agreement dated August 1995 with Products & Patents
(1) Incorporated by reference to Exhibits to Form 10K for
fiscal year ended December 31, 1989.
(B) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1995.
19
<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: __________________________
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
- -------------------- ----
- ---------------------
Bernard Gutman
Chairman of the Board of Directors
Chief Executive Officer * March 26, 1997
- ---------------------
James F. Leary
Vice Chairman of the Board &
Chief Financial Officer * March 26, 1997
- ---------------------
Irwin Pearl
President, Chief Operating
Officer and Director * March 26, 1997
- ---------------------
Drew A. Gutman
Secretary-Treasurer & Director * March 26, 1997
- ---------------------
Daniel Silkiss
Director March 26, 1997
- ---------------------
Luther H. Hodges, Jr.
Director March 26, 1997
* A majority of the Board of Directors.
20
<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
21
<PAGE>
Independent Auditors' Report
To the Board of Directors and Shareholders
Phase-Out of America, Inc.
We have audited the accompanying balance sheet of Phase-Out of America, Inc. as
of December 31, 1995, and the related statements of operations, shareholders'
(deficit), and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Phase-Out of America, Inc. as
of December 31, 1995, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
As discussed in Note 9 to the financial statements, the Company has been subject
to certain governmental regulatory matters by the U.S. Food and Drug
Administration and the Federal Trade Commission. At present time, neither the
Company nor its legal counsel can predict the ultimate outcome of the matters
addressed by these agencies. These matters, if pursued by the agencies, may have
a material adverse effect on the operations of the Company.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has had recurring net operating losses since
its inception, has relied upon debt and equity financing to provide funds for
operations and, as of December 31, 1995, current liabilities exceed current
assets by $905,416. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
RAICH ENDE MALTER LERNER & CO.
East Meadow, New York
May 2, 1996
