SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
FORM 10-KSB/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
PACIFICHEALTH LABORATORIES, INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 22-3367588
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(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1480 Route 9 North - Suite 204
Woodbridge, NJ 07095
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(Address of principal executive offices)
732/636-6141
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(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par
value $.0025 per share.
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. |_|
The issuer's revenues for its most recent fiscal year were $ 6,145,525.
The aggregate market value of the common equity held by non-affiliates based on
the closing sale price of Common stock as of February 28, 2002, was
$15,832,936.
The number of shares outstanding of each class of the issuer's common equity, as
of February 28, 2002, was as follows: Common Stock - 6,039,203 shares.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
1
PACIFICHEALTH LABORATORIES, INC.
FORM 10-KSB
Fiscal Year Ended December 31, 2001
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS...........................................................................................3
ITEM 2. DESCRIPTION OF PROPERTY...........................................................................14
ITEM 3. LEGAL PROCEEDINGS.................................................................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............................................15
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........................................15
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...............................................................17
ITEM 7. FINANCIAL STATEMENTS..............................................................................22
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...............................................................22
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A)
OF THE EXCHANGE ACT...............................................................................22
ITEM 10. EXECUTIVE COMPENSATION............................................................................26
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................29
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................................31
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.......................................................................................32
2
PART I
ITEM 1. BUSINESS.
1(a) Business Development
PacificHealth Laboratories, Inc. (hereinafter referred to as the
"Company") is a research based Company incorporated in the State of Delaware in
April 1995 as a nutrition technology company that researches, develops, and
commercializes functionally unique proprietary products for sports performance,
weight loss, and Type 2 diabetes which can be marketed without prior Food and
Drug Administration approval under current regulatory guidelines.
1(b) Business of the Issuer
The Company is a nutrition technology company strongly committed to
research and development of dietary and nutritional supplements that can enhance
health and well being. The Company's three primary areas of research to date
have been sports performance, weight loss and Type 2 diabetes.
Sports Performance
Our first sports performance product, ENDUROX(R), was introduced in
March 1996 with commercial sales beginning in May 1996. In March 1997, we
extended the ENDUROX line of products with ENDUROX EXCEL(R). In February 1999,
we introduced ENDUROX(R) R(4)(R) Performance/Recovery Drink to be taken
following exercise. In clinical studies performed or funded by the Company,
ENDUROX R(4) has demonstrated a number of exercise-related benefits including
enhanced performance, extended endurance, and decreased post-exercise muscle
damage. In June 2001, we introduced ACCELERADE(R) Sports Drink, to be taken
during exercise using the same patented technology as ENDUROX R(4). Research
studies funded by the Company have shown that ACCELERADE is significantly better
than conventional sports drinks in improving endurance during exercise.
Weight Loss
In weight loss, the Company has focused its research and development
efforts on development of novel nutritional compositions that stimulate the
body's major satiety peptide, or cholecystokinin (CCK). In April 2000, we
introduced our first weight loss product, SATIETROL(R), a natural appetite
control product based on this research. Clinical studies performed or funded by
the Company have shown that Satietrol, a pre meal beverage, can reduce hunger up
to 43% 3 1/2 hours after eating. In January 2001, we extended our weight loss
product line with the introduction of SATIETROL COMPLETE(R), a 220-calorie meal
replacement product that incorporates the patented SATIETROL technology. In June
2001, the Company signed an exclusive worldwide Licensing Agreement with
GlaxoSmithKline ("GSK") for its SATIETROL technology.
3
Type 2 Diabetes
Type 2 diabetes has become the fastest growing chronic condition in the
United States. Obesity and poor glucose regulation appear to be primary
characteristics of this condition. Research has suggested that cholecystokinin
(CCK) may play a role in insulin release and glucose regulation. The Company's
research in this area is to develop a nutritional product that can help Type 2
diabetics lose weight by controlling appetite while improving glucose
regulation. The Company expects to initiate clinical trials on a product for use
by Type 2 diabetics in 2002.
All of the Company's existing products, and its proposed products, are
expected to be manufactured in the United States by third parties. See Item
1(b)(i) below.
1(b)(i) Principal Products and Markets
(a) ENDUROX(R) Product Line-Dietary Supplements
The Company's initial product, ENDUROX(R), is a dietary supplement of
which the principal ingredient is the herb ciwujia. Laboratory tests and trials
funded by the Company during 1995 at the University of North Texas in Fort
Worth, Texas and the Institute of Nutrition and Food in China, have demonstrated
that ENDUROX is effective in improving exercise performance. The Company
introduced ENDUROX in March 1996 and commenced commercial sales of the product
in May 1996. In December 1996, the Company was issued patent #5,585,101 for its
ENDUROX product. ENDUROX is sold in caplet form.
ENDUROX EXCEL(R) was introduced in March 1997. ENDUROX EXCEL contains
50% more ciwujia than regular ENDUROX, plus vitamin E. It is targeted to
"serious" athletes, i.e., individuals who engage in competitive athletics or
whose exercise regimen is comparable to that of a competitive athlete.
(b) ENDUROX(R)R(4)(TM) Recovery / Performance Drink
The Company launched ENDUROX R(4) Performance / Recovery Drink in March
1999. Clinical trials funded by the Company during 1998 at the University of
North Texas Health Science Center in Fort Worth, Texas and the Human Performance
Lab at St. Cloud University in St. Cloud, Minnesota showed that when tested
against the nation's leading sports drink, ENDUROX R(4) delivered equal
hydration effectiveness while enhancing performance and extending endurance by
55%, decreasing post-exercise muscle stress by 36%, reducing free radical
build-up by 69%, and increasing insulin levels by 70%. The results of these
trials were presented at the American College of Sports Medicine's national
meeting in 1999.
4
The Company advertises ENDUROX R(4) nationally in such magazines as
Bicycling, Running Times, Fitness Swimmer, Inside Triathlon, Triathlete, and
numerous other publications. At the present time, this product is being sold in
over 5,000 retail outlets including General Nutrition Centers, health food
stores and bicycle retailers, as well as through catalog and Internet companies.
In April 2000, the Company was issued patent #6,051,236 for ENDUROX
R(4) covering all 77 claims made in the application, including claims that the
product (a) increases endurance, (b) reduces post-exercise muscle damage, and
(c) speeds the replenishment of muscle carbohydrate stores. Patent office
acceptance of these claims does not necessarily permit the Company to make any
specific claims to the public regarding this product. The Company's ability to
make those claims is governed by Food and Drug Administration, Federal Trade
Commission, and other federal government agency regulations and guidelines.
(c) SATIETROL(R)
SATIETROL, the Company's appetite control product, is based on the use
of nutritional ingredients to stimulate cholecystokinin (CCK), a protein
released after eating which has shown to be an important satiety signal in
humans.
In the early 1980's, researchers at Columbia University demonstrated
that CCK was an important satiety signal in humans. CCK causes individuals to
feel fuller even without eating. These studies have shown that an injection of
CCK reduced food intake by 16-22%. The release of CCK was shown to be stimulated
by the ingestion of protein and fat. When CCK is stimulated by ingestion of
food, it activates two negative feedback loops that inhibit continued release of
CCK. One mechanism involves the pancreas and the second involves the gall
bladder. When CCK is stimulated, the pancreas secretes protease enzymes, which
inactivates a protein called CCK Releasing Peptide (CCKRP). When this protein is
inactivated, release of CCK is halted. The second mechanism that controls CCK
release is the gall bladder. CCK stimulates the gall bladder to release bile
salts. Bile salts are powerful inhibitors of further CCK release. A major
problem with the direct use of CCK as a supplement is that it must be given by
injection since stomach enzymes activate it.
The Company's research efforts have focused on developing a calorically
efficient nutritional formula that can be taken orally which would stimulate CCK
release and extend its duration of action. Such a product would be highly useful
in control of weight by helping overweight individuals feel fuller or more
satiated while eating less food. This formulation became the basis for the
Company's first weight loss product, SATIETROL. The Company has developed a
number of SATIETROL formulas that stimulate and extend the action of CCK and has
filed a number of patents regarding this unique technology.
5
Clinical studies funded by the Company conducted in 2000 by the
Company's President, Dr. Portman, Abe Bakal of ABIC International, and Dr.
Steven Peikin, Professor of Medicine, Robert Wood Johnson Medical School at
Camden Cooper Hospital/University Medical Center, Camden, NJ have shown that,
when taken as a pre meal beverage 10-15 minutes before eating, SATIETROL can
reduce hunger up to 40% 3 1/2 hours after eating and reduce caloric consumption
in a subsequent meal by 43%. These studies were presented at the North American
Association for the Study of Obesity (NAASO) 1999 national meeting. In March
2001, the Company was issued patent #6,207,638 for all 72 claims made for
SATIETROL, including its use for Type 2 diabetes as well as conjunctive use with
other products for treatment of bulimia. Studies conducted or funded by the
Company on CCK have also suggested that this agent may be effective for treating
Type 2 diabetes, one of the fastest growing chronic diseases in the United
States. The Company intends to conduct studies to determine if SATIETROL would
be of value in Type 2 diabetes.
The Company's objective is to develop a patent portfolio to protect its
proprietary technology involving the use of nutritional ingredients to stimulate
and extend the action of CCK. The Company has the following patents pending:
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PATENT STATUS
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Nutritional Intervention Composition for Enhancing and Extending Satiety (International) Pending
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Nutritional Intervention Composition for Enhancing and Extending Satiety (Method-DIV) Pending
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A Method for Extending the Satiety of Food by Adding a Nutritional Composition Designed to Pending
Stimulate Cholecystokinin (CCK)
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Composition Containing Protease Inhibitor Extends Post Meal Satiety Pending
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Nutritional Composition for Improving the Efficacy of a Lipase Inhibitor Pending
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Use of a Bile Acid Sequestrant to Extend Satiety Pending
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In April 2000, the Company launched its first SATIETROL product.
SATIETROL is a powder that is mixed with 6-8 oz of water and taken 10-15 minutes
before a meal. It is the first weight loss product commercially available that
is designed to stimulate CCK, the body's own satiety mechanism. The market for
all types of weight loss products and services in the US exceeds $50 billion a
year and government figures estimate that 55% of adult Americans are overweight.
SATIETROL is available in chocolate and vanilla flavors.
In January 2001, the Company introduced SATIETROL COMPLETE, a 220
calorie meal replacement product that incorporates the SATIETROL technology.
Clinical studies funded by the Company and conducted in 2000 by Dr. Portman,
President of the Company, Abe Bakal of ABIC International, and Dr. Steven
Peikin, Professor of Medicine, Robert Wood Johnson Medical School at Camden
Cooper Hospital/University Medical Center, Camden, NJ have shown that, versus
the leading meal replacement product, SATIETROL COMPLETE was more effective in
reducing hunger over 5 hours and reducing caloric consumption in a subsequent
meal. These studies were presented at the NAASO national meeting in 2000. The
meal replacement market segment in the United States exceeds $900 million.
SATIETROL COMPLETE is a powder mixed with skim, soy, or rice milk and is
available in chocolate and vanilla flavors.
6
On June 1, 2001, the Company entered into an exclusive license
agreement with GSK, one of the world's largest pharmaceutical companies, for
SATIETROL, the Company's appetite control product. The agreement provides GSK
with worldwide rights to the trademarks, technology, patents, and know how for
SATIETROL for the duration of the patents which is currently 16 years.
Under the agreement, PHLI received an initial payment of $1,000,000,
has received a subsequent milestone payment of $250,000, will receive additional
milestone payments over the next two years provided GSK meets certain
development goals, and will receive ongoing product royalties upon launch of the
product by GSK. The agreement does not set a specific time by which GSK must
launch the product, but does set a specific time for launch after GSK has met
some of the intermediate milestones. GSK is permitted to terminate the license
agreement at any time for any reason, provided that it pays all milestone
payments earned prior to termination. In this event, all rights to the product
will revert to the Company.
The license agreement grants GSK a right of first refusal to obtain an
exclusive license on any new product developments in appetite suppression,
weight loss, weight management, or meal replacement for weight loss. The right
of first refusal only applies if the Company intends to use a third party to
further develop or commercialize the new product, and not if the Company will
commercialize the product itself. The right of first refusal will lapse if the
Company undergoes a change in control.
The Company can continue to sell the SATIETROL line of products until
GSK launches their SATIETROL product. At that time, the Company can continue to
market the powdered meal replacement product, currently sold under the name
SATIETROL COMPLETE(R), without using the SATIETROL name, in the current health
food store channels of distribution. GSK will be responsible for future
manufacturing, marketing, and sales upon launch by GSK of any products it
launches.
GSK also purchased approximately 9% of PHLI's common stock for $1.5
million under a contemporaneous stock purchase agreement. As of December 31,
2001, the Company has received an aggregate $2,750,000 from GSK from the
combined licensing and stock purchase agreements.
(d) ACCELERADE(R)
In June 2001, the Company introduced ACCELERADE(R) Sports Drink, to be
taken during exercise, using the same patented technology as ENDUROX R(4).
Research studies funded by the Company and conducted in 2001 by Dr. John Ivy at
the University of Texas Department of Kinesiology and Health Education, Austin,
Texas have shown that ACCELERADE is significantly better than conventional
sports drinks in improving endurance during exercise. These studies showed that
subjects taking ACCELERADE increased endurance performance by 24% compared to
subjects drinking a conventional sports drink containing the same amount of
carbohydrate. ACCELERADE uses the ENDUROX R(4) technology that features the
patented 4-1 ratio of carbohydrate to protein to speed the movement of
carbohydrate from the blood into the muscle during exercise. By increasing the
energy efficiency of every gram of carbohydrate an athlete consumes, ACCELERADE
spares muscle glycogen and improves endurance capacity. We will launch
additional sizes and flavors in 2002 including the development of a
ready-to-drink ACCELERADE product.
7
1(b)(ii) Distribution Methods
The Company has pursued a "multi-channel" distribution strategy in
marketing its ENDUROX line of products. These products are sold through the
General Nutrition Centers ("GNC") chain, independent health food retailers,
sports specialty stores, health clubs, catalogs, and on the Internet.
The Company began distribution of ENDUROX in Canada in 1997 through an
independent distributor with the first retail sales made in April 1997. In 1998,
the Company began selling its ENDUROX products in South Africa with an
independent distributor on a non-exclusive basis. In 2000, the Company began
selling its ENDUROX products in Brazil, Hong Kong, and Singapore through
independent distributors on a non-exclusive basis.
SATIETROL is sold through Internet retailers, select health food
chains, and over the Company's Internet site at www.hungeroff.com.
To support its marketing efforts, the Company advertises in trade and
consumer health food and sports magazines that are intended to reach its
targeted consumer. In addition, the Company attends trade shows and exhibitions,
sponsors promotional programs/events and in-store promotions, and engages in an
extensive public relations effort that has resulted in articles in numerous
health, fitness, trade and natural product publications, newspaper coverage, and
television spots. In addition, the Company utilizes a number of paid endorsers
to promote its sports nutrition line of products, including several well-known
athletes and a number of professional coaches who specialize in bicycling,
running, swimming and triathlete disciplines.
In the twelve-month periods ended December 31, 2001 and December 31,
2000, the Company's expenditures for product advertising and promotion were
approximately $557,000 and $1,126,000, respectively.
1(b)(iii) Status of Publicly Announced New Products
The status of all products which have been the subjects of or mentioned
in public announcements by the company in the past year are discussed above
under the caption "Principal Products and Markets".
8
1(b)(iv) Competition
Depending on the product category, the Company's competition varies.
The sports drink market in which Endurox R(4) and Accelerade compete is
dominated by such brands as Gatorade and Powerade who sell ready-to-drink
products, as well as smaller companies such as Cytosport (Cytomax), Champion
Nutrition (Revenge), and Twin Labs (Ultrafuel) who sell powdered, ready-to-mix
products. In addition, there are a number of new foreign entries such as Enervit
and Extran that have introduced sports drinks into the U.S. focusing on the
endurance athlete. Increased competitive activity from such companies could make
it more difficult for the Company to increase or keep market share since such
companies have greater financial and other resources available to them and
possess far more extensive manufacturing, distribution and marketing
capabilities than the Company.
The competitive market for weight loss products is divided into four
basic segments: herbal supplements (e.g., Metabolite), meal replacement products
(e.g., Slim Fast), food plans (e.g., Weight Watchers) and prescription products
(e.g., Xenical). Today, weight loss products are manufactured by dietary
supplement manufacturers, pharmaceutical manufacturers, diet food companies
(e.g. Slim?Fast Foods Company), and over-the-counter drug companies. Intense
competitive activity in this market could make it difficult for the Company to
increase or keep market share, as most of the companies who have products in
this category have greater financial, marketing, sales, manufacturing, and
distribution resources than the Company.
Since the Company's products are based upon natural ingredients, its
competitors have access to the same ingredients and will be able to develop and
market products the same as or similar to the Company's products. Except to the
limited extent that the Company may obtain patent protection for certain uses of
ingredients in its products, its competitors' products may make the same claims
of benefits from use of the products that the Company makes.
The Company believes that long term success in the marketplace for any
of the Company's products is likely to be less dependent on the novelty of the
product than on such factors as distribution and marketing capabilities, and
whether or not the product enjoys some proprietary advantage, such as patent
protection, an established brand name, etc.
1(b)(v) Suppliers of Raw Materials
The Company does not have manufacturing facilities and has no present
intention to manufacture any products itself. It fulfills product needs through
relationships with independent manufacturers. The Company generally does not
have longany termwritten contracts or oral agreements with any of these
manufacturers other than individual purchase orders. The individual purchase
orders are for current quantities and do not contain any terms other than those
related to current quantities. Therefore, the Company does not have any
assurances as to the terms or availability of future orders. The Company uses at
least six contract manufacturers for various aspects of the manufacturing
process. The Company believes that these are all small privately held firms.
Because the processes performed by these manufacturers are fairly standard in
the industry, the Company believes that other manufacturers could easily be
substituted if any of the current manufacturers were no longer available or did
not offer reasonable terms. Competitors who do their own manufacturing may have
an advantage over the company with respect to pricing, availability of product
and in other areas through their control of the manufacturing process.
9
Generally, our contract manufacturers obtain raw materials necessary
for the manufacture of our products from numerous sources. The Company generally
does not have contracts with suppliers of materials required for the production
of its products. The Company obtains ciwujia for its ENDUROX caplet line of
products from suppliers in the Peoples Republic of China. At the present time,
the Company obtains all of its needs from one supplier in the People's Republic
of China, but believes that the Company could switch to a number of alternative
suppliers without significant effect. The Company uses a single supplier because
its agents believe that this is the best way to ensure the best quality from the
Chinese suppliers. The Company's agents believe that there are at least five
reputable producers of ciwujia able to meet the Company's needs, and that there
are likely a large number of smaller producers who could be identified if
required. The Company's agent has visited four other producers to evaluate their
ability to meet the Company's volume and quality needs, and has identified one
of these as a reliable back-up source. The Company has not entered into any long
term supply agreements with thisthe current supplier other than individual
purchase orders. The Company's weight loss product, SATIETROL, is composed of
numerous ingredients, most of which are available from multiple sources. One
ingredient of SATIETROL is available only from a single source, a large
FrenchEuropean company, Lyckeby Starkelsen. The Company does not have any
written or oral supply agreements with this supplier. While the ingredient is
currently available from a single source, the raw materials for this ingredient
are commodity products readily available. If this supplier were to become
unavailable to us, we would be able to eventually substitute suppliers, but
there would be a material delay caused by having another supplier process this
ingredient to our specifications. In addition, all other raw materials used in
the Company's existing products are available from multiple sources.
There is no assurance that suppliers will provide the raw materials
needed by the Company in the quantities requested or at a price the Company is
willing to pay. Because the Company does not control the source of these raw
materials, it is also subject to delays caused by interruption in production of
materials based on conditions outside of its control.
1(b)(vi) Dependence on Major Customers
General Nutrition Centers and Performance, Inc. accounted for
approximately 37% and 12%, respectively, of net sales in fiscal 2001. The loss
of these customers, a significant reduction in purchase volume by these
customers, or the financial difficulty of such customers, for any reason, could
significantly reduce our revenues. The Company has no agreement with or
commitment from either of these customers with respect to future purchases.
During 2001, GNC discontinued the sale of SATIETROL in its corporate stores. Net
revenues from the sale of SATIETROL to GNC in 2001 were $476,559.
10
1(b)(vii) Patents and Trademarks
The Company received United States Patent No. 5,585,101 in December
1996 covering the use of ciwujia, the principal active herb in ENDUROX, to
improve physical performance and stamina during exercise, and for enhancing
recovery after exercise is completed. This patent expires in December 2013. The
Company has applied for foreign patents on ciwujia in Canada, Mexico, all
Western European countries, and in 51 other principal European, South American
and Asian countries.
The Company received a composition of matter patent, United States
Patent No. 6,051,236, in April 2000 for ENDUROX R(4) covering all 77 claims
submitted including claims that the product (a) increases endurance, (b) reduces
post-exercise muscle damage, and (c) speeds the replenishment of muscle
carbohydrate stores. (see section 1(b)(i)(b)). This patent expires in April
2017.
The Company received a composition of matter patent, United States
Patent No. 6,207,638, in March 2001 covering all 72 claims for the formulation
of SATIETROL and has filed additional patents for this technology (see section
1(b)(i)(c)). This patent expires in March 2018.
The patent holder for all patents is the Company's President, Dr.
Robert Portman, and all patents are assigned to the Company. To the extent the
Company does not have patents on its products, there can be no assurance that
another company will not replicate one or more of the Company's products, nor is
there any assurance that patents which are obtained will provide meaningful
protection or significant competitive advantages over competing products. For
example, the Company's use patent on ciwujia would not prevent the sale of a
product containing that herb with a claim or for a use that was not covered by
the Company's patent.
The Company has federal trademark registrations for ENDUROX, ENDUROX
EXCEL, ENDUROX ProHeart, ENDUROX R(4), SATIETROL, SATIETROL COMPLETE, and
ACCELERADE. The Company also has filed its trademarks in most Western European
countries, Canada, Mexico and Japan. The Company's policy is to pursue
registrations for all of the trademarks associated with its key products, and to
protect its legal rights concerning the use of its trademarks. The Company
relies on common law trademark rights to protect its unregistered trademarks.
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1(b)(viii) and (ix) Governmental Regulation
We market products that fall under two types of Food and Drug
Administration regulations: dietary supplements and nutritional supplements. A
dietary supplement:
o is a product (other than tobacco) that is intended to supplement the
diet that bears or contains one or more of the following dietary
ingredients: a vitamin, a mineral, an herb or other botanical, an amino
acid, a dietary substance for use by man to supplement the diet by
increasing the total daily intake, or a concentrate, metabolite,
constituent, extract, or combinations of these ingredients.
o is intended for ingestion in pill, capsule, tablet, or liquid form.
o is not represented for use as a conventional food or as the sole item of
a meal or diet.
o is labeled as a "dietary supplement."
Dietary Supplements is a classification of products resulting from the
enactment of the Dietary Supplement Health and Education Act of 1994 (the
"DSHEA") in October 1994. The DSHEA amended and modified the application of
certain provisions of the Federal Food, Drug and Cosmetics Act (the "FFDC Act")
as they relate to dietary supplements, and required the FDA to promulgate
regulations consistent with the DSHEA. Under the DSHEA, companies that
manufacture and distribute dietary supplements are limited in the statements
that they are permitted to make about nutritional support on the product label
without FDA approval. In addition, a manufacturer of a dietary supplement must
have substantiation for any such statement made and must not claim to diagnose,
mitigate, treat, cure or prevent a specific disease or class of disease. The
product label must also contain a prominent disclaimer. These restrictions may
restrict our flexibility in marketing our product.
Nutritional supplements are food products and contain Generally
Regarded As Safe (GRAS) ingredients.
The Company has determined that all of its existing and proposed
products, as described above, are nutritional or dietary supplements as defined
under federal statutes and regulations of the FDA. Nutritional supplements and
dietary supplements must follow labeling guidelines outlined by the FDA. Neither
nutritional supplements nor dietary supplements require FDA or other government
approval or notification to market in the United States.
We believe that all of our existing and proposed products are
nutritional supplements or dietary supplements that do not require governmental
approvalapprovals to market in the United States. No governmental agency or
other third party makes a determination as to whether our products qualify as
nutritional supplements, dietary supplements, or neither. The Company makes this
determination based on the ingredients contained in the products and the claims
made for the Our current products. are classified as follows:
Dietary Supplements
ENDUROX(R) Natural Workout Supplement
ENDUROX EXCEL(R) Natural Training Supplement
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Nutritional Supplements
ENDUROX(R) R(4) Performance/Recovery Drink
ACCELERADE(R) Sports Drink
SATIETROL(R) Natural Appetite Control
SATIETROL COMPLETE(R) Meal Replacement
The processing, formulation, packaging, labeling and advertising of
such products, however, are subject to regulation by one or more federal
agencies including the Food and Drug Administration ("FDA"), the Federal Trade
Commission, the Consumer Products Safety Commission, the Department of
Agriculture and the Environmental Protection Agency. The Company'sOur activities
also are subject to regulation by various agencies of the states and localities
in which itsour products are sold. Among other things, such regulation puts a
burden on our ability to bring products to market. Any changes in the current
regulatory environment could impose requirements that would make bringing new
products to market more expensive or restrict the ways we can market our
products.
No governmental agency or other third party makes a determination as to
whether our products qualify as nutritional supplements, dietary supplements or
neither. We make this determination based on the ingredients contained in the
products and the claims we make for the products.
Under the DSHEA, companies that manufacture and distribute dietary
supplements are allowed to make any of the following four types of statements
with regard to nutritional support on labeling without FDA approval: (i) a
statement that claims a benefit related to a classical nutrient deficiency
disease and discloses the prevalence of such disease in the United States; (ii)
a statement that describes the role of a nutrient or dietary ingredient intended
to affect structure or function in humans; (iii) a statement that characterizes
the documented mechanism by which a nutrient or dietary ingredient acts to
maintain or function; or (iv) a statement that "describes general well-being"
from consumption of a nutrient or dietary ingredient. In addition to making sure
that a statement meets one of these four criteria, a manufacturer of the dietary
supplement must have substantiation that such statement is truthful and not
misleading, must not claim to diagnose, mitigate, treat, cure, or prevent a
specific disease or class of diseases, and must contain the following
disclaimer, prominently displayed in boldface type: "This statement has not been
evaluated by the Food and Drug Administration. This product is not intended to
diagnose, treat, cure, or prevent any disease."
13
On February 6, 2000, the Food and Drug Administration issued new
guidelines concerning statements made for dietary supplements. These new
regulations have important implications for the marketing of weight loss
products such as SATIETROL. Previously the Regulations made it clear that a
product that made a claim for obesity must be treated as a drug. Under the new
regulations the FDA now makes a distinction between obesity and overweight.
Overweight is no longer considered a disease but rather a natural life process.
Overweight is considered a condition that effects the structure and function of
the body. As now defined, dietary supplements can make a claim for ordinary
weight loss rather than as a treatment for obesity. Furthermore, these
Regulations also permit the use of appetite suppressant as a structure/function
claim under DSHEA (Dietary Supplement Health Education Act of 1994). The
issuance of these Regulations will give SATIETROL greater latitude in the types
of claims the product can make as long as such claims are substantiated by the
necessary studies.
1(b)(x) Expenditures for Research and Development
The Company's research and development expenditures in the past two
fiscal years, exclusive of market research and marketing related expenditures,
were as follows: 2001 - $106,085; 2000 - $222,728.
1(b)(xi) Compliance with Environmental Laws
The Company is not aware of any "administrative" or other costs, which
it incurs which are directly related to compliance with environmental laws.
1(b)(xii) Employees
At the present time, the Company has twelve full time employees. Of
these, two employees are executive, seven are in sales and marketing, and three
are in accounting, operations and administrative. The Company employs a number
of consultants who devote limited portions of their time to the Company's
business. None of the Company's employees are represented by a union and the
Company believes that its employee relations are good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company entered into a new five-year lease in February 1998 for
approximately 3,684 square feet at $14.50 per square foot, including utilities,
for an annual rent expense of $53,418 for the first three years. In the fourth
and fifth years of the lease, the rent increases to $16.50 per square foot,
including utilities for an aggregate annual rental of $60,780. The Company
believes that its facilities are adequate for its present needs.
The Company does not intend to develop its own manufacturing
capabilities, since management believes that the availability of manufacturing
services from third parties on a contract basis is more than adequate to meet
the Company's needs in the foreseeable future.
The Company does not have any real estate investments.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, or involved in, any legal proceedings.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On August 22, 2001, the Company held its Annual Meeting of
Stockholders, pursuant to information contained in the Company's Notice
of Annual Meeting of Stockholders and Proxy Statement that were mailed
to stockholders on July 27, 2001.
(b) One of the matters listed in the Company's Proxy for the meeting was
the annual Election of Directors. There were five nominees for
election, who were elected by the shareholders to serve for a one-year
term. The results of the balloting were as follows (Shares voting:
5,120,071 of 5,835,828):
Nominee For Against Abstain
------- --- ------- -------
Robert Portman 5,099,595 -0- 20,476
Stephen P. Kuchen 4,918,595 -0- 201,476
David Portman 5,099,595 -0- 20,476
T. Colin Campbell 4,919,095 -0- 200,976
Irving Tabachnick 5,102,595 -0- 17,476
(c) In addition to the election of directors, other matters voted upon by
the stockholders were the approval to increase the number of authorized
shares of Common Stock from 10,000,000 to 50,000,000 and the
ratification of the appointment of Larson, Allen, Weishair & Co., LLP
as independent auditors for the Company for the fiscal year ending
December 31, 2001. Both matters were approved. The results of the
balloting for these matters are as follows:
Matter For Against Abstain
------ --- ------- -------
Increase in shares of Common Stock 4,846,601 269,615 3,855
Appointment of auditors 4,974,452 139,100 6,519
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
5(a) Market Information.
Since December 19, 1997, the Company's Common Stock has been quoted on
the SmallCap Market of the Nasdaq Stock Market, Inc. ("Nasdaq") under the symbol
"PHLI". The following sets forth certain information with respect to the high
and low bid prices reported by The Nasdaq Stock Market for the Common Stock
during the periods shown:
15
HIGH LOW
---- ---
01/01/00 - 03/31/00 $4.75 $1.875
04/01/00 - 06/30/00 $7.625 $2.25
07/01/00 - 09/30/00 $3.625 $1.375
10/01/00 - 12/31/00 $2.25 $0.25
01/01/01 - 03/31/01 $1.46875 $0.28125
04/01/01 - 06/30/01 $4.94 $0.625
07/01/01 - 09/30/01 $8.38 $3.36
10/01/01 - 12/31/01 $6.02 $2.76
01/01/02 - 02/28/02 $3.64 $2.51
The closing price of the Company's Common Stock on February 28, 2002,
as reported by Nasdaq, was $3.55.
5(b) Holders.
As of February 28, 2002, there were approximately 74 holders of record
of the Company's Common Stock. The Company believes that there are significantly
more beneficial holders of the Company's stock as many beneficial holders have
their stock in "street name".
5(c) Dividends.
The Company has never paid or declared dividends upon its Common Stock
and does not contemplate or anticipate paying any dividends on its Common Stock
in the foreseeable future.
5(d) Recent Sales of Unregistered Securities; Use of Proceeds from the Sale
of Registered Securities
5(d)(i) Recent Sales of Unregistered Securities.
As of January 1, 2001, the Company granted options to purchase 460,000
shares of its common stock to its President, Robert Portman. These options were
granted under the Company's Year 2000 Stock Option Plan. These options have an
exercise price of $0.313 per share. One-half of these options become exercisable
on January 2, 2002 and the other half become exercisable on January 2, 2003. The
options expire on December 31, 2006. During the quarter ended June 30, 2001, Dr.
Portman exercised options for 475,000 shares of Common Stock at $0.313 per
share. The issuance of these securities was exempt from registration under the
Securities Act of 1933, pursuant to Section 4(2), as the grantee is an executive
officer of the Company. Subsequent to the grant of the 460,000 options as of
January 1, 2001, the Company filed a registration statement on Form S-8 relating
to the Year 2000 Stock Option Plan, which would cover the issuance of shares
upon exercise of these options.
16
On June 1, 2001, the Company sold 541,711 shares of the Company's
Common Stock for and aggregate $1,500,000 to Glaxo Wellcome International B.V.,
a Netherlands limited liability company affiliated with Smithkline Beecham, PLC.
The issuance of these shares was exempt from registration under the Securities
Act of 1933 under Section 4(2). Certificates for the shares bear restrictive
legends, the purchaser represented that it was acquiring the shares for
investment purposes, and the purchaser was an "accredited investor" as that term
is defined in Regulation D. No public solicitation was employed in connection
with this transaction.
In April, 2001, the Company issued an aggregate $300,000 in principal
amount of its 10% Promissory Notes Due 2002, together with warrants exercisable
for 300,000 shares of the Company's Common Stock at $0.875 per share to a total
of six accredited investors. The warrants expire three years from issuance. The
entire principal of the Notes was repaid in June 2001, and warrants for 150,000
shares were exercised in June 2001 and 50,000 shares were exercised in August
2001. The issuance of these securities was exempt from registration under the
Securities Act of 1933 under Section 4(2). Certificates for the securities bear
restrictive legends, the purchasers represented that they were acquiring the
shares for investment purposes, and the purchasers were "accredited investors"
as that term is defined in Regulation D. No public solicitation was employed in
connection with this transaction.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's financial statements, including the notes thereto, appearing
elsewhere in this Report.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-KSB contains statements relating to
future results of the Company (including certain projections and business
trends) that are "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those projected as a result of certain risks and uncertainties, including
but not limited to changes in political and economic conditions; demand for and
market acceptance of new and existing products, as well as other risks and
uncertainties detailed from time to time in the filings of the Company with the
Securities and Exchange Commission.
17
(a) Introduction
PacificHealth Laboratories, Inc. was incorporated in April 1995 to
develop and market dietary and nutritional supplements that improve and promote
health and well being and can be offered for sale without prior approval by The
Food and Drug Administration in compliance with current regulatory guidelines.
Our first product, ENDUROX was introduced in March 1996, and commercial sales
began in May 1996. In March 1997, the Company extended the ENDUROX line of
products with ENDUROX EXCEL. In March 1999, the Company launched ENDUROX R(4)
Performance/Recovery Drink, the latest in our ENDUROX line of products, which
demonstrated a number of exercise related benefits in clinical studies,
including enhanced performance and extended endurance, decreased post-exercise
muscle stress, and reduced free radical build-up. In April 2000, the Company
introduced a new product, SATIETROL, that will compete in the approximately $50
billion market for weight loss and weight control products, goods and services.
In May of 2001, the Company launched ACCELERADE, a new generation of sports
drink products to be used during exercise that uses the ENDUROX R(4) patented
technology.
(b) Results of Operations - Years Ended December 31, 2001 and 2000
The Company generated net income of $285,626 or $0.05 per share for the
year ended December 31, 2001, compared to a net loss of ($957,565) or ($0.21)
per share for the year ended December 31, 2000. The net income for 2001 vs. the
net loss for the same period in 2000 is due primarily to increased revenues. The
Company's net losses were reduced by $115,573 in the year ended December 31,
2000 by the reduction of our reserve for the return or exchange of certain of
our original ENDUROX line of products. Net losses were also reduced by the sale
of certain tax benefits for $206,078 in the year ended December 31, 2000. Per
share, the effect of the last two items above was to reduce our net loss for
2000 by $0.07 in the aggregate. These two items are described in greater detail
below.
Revenues for the year ended December 31, 2001 were $6,145,527 compared
to $3,841,387 for the same period in 2000. Revenue increases during 2001 were
due to a 45% increase in sales of our ENDUROX R(4) Performance/Recovery Drink,
the introduction of ACCELERADE Sports Drink, and milestone payments under the
GSK licensing agreement for our SATIETROL product. The following table provides
additional information concerning our revenues in 2001 and 2000:
Revenues
------------------------------------------------------------------------
Sports Weight
Year Ended Performance Loss Licensing Total
-------------------------------------------------------------------------------------------------------------
December 31, 2001 $3,578,189 $1,317,338 $1,250,000 $6,145,527
========== ========== ========== ==========
December 31, 2000 $2,212,590 $1,628,797 $ - 0 - $3,841,387
========== ========== ========== ==========
18
Sales revenues reported for the years ended December 31, 2001 and
December 31, 2000 are net of credits of $451,137 and $97,618, respectively, for
the return of certain products. Returns in 2001 consisted of SATIETROL returned
from our largest customer, GNC, who discontinued selling the product in its
corporate stores. These sales were principally recorded in the second quarter of
2001 with the credits recorded in the 4th quarter. Returned product with a cost
to us of $50,151, representing a sales credit of $129,360, was returned to
inventory. The remainder of the returned product, representing a sales credit of
$321,777, was not returned to inventory and is not represented in the inventory
amount on our balance sheet. There was no legal requirement for the Company to
accept these credits and returns but these credits and they were not anticipated
at time of sale. These returns were allowed to enhance ongoing customer
relations with our largest customer. The Company does not intend to accept
returns from GNC on the products currently sold by GNC. Net sales of SATIETROL
to GNC in 2001 were $476,559. Returns in 2000 consisted of ENDUROX ProHeart and
PROSOL PLUS. The Company discontinued marketing ENDUROX ProHeart and PROSOL
PLUSthese products in 1999 because we believed that our advertising dollars
would be better used promoting new products that compete in categories having
greater sales potential.
The Company generally does not make contractual allowances for returns
or otherwise accept returns. On occasion, the Company does make contractual
provision for rebates, return allowances, discounts and other adjustments. In
2001, the Company made this type of contractual provision in purchase orders
representing less than 1% of sales. On the occasions the Company does make these
provisions, the Company records the full amount of these adjustment in the same
period the sale is recorded. Except for our recent experience with Satietrol, we
have had very limited returns. Consequently, we believe that we do not have
sufficient exposure for returns to require significant reserves.
Any new product we launch is generally sold through the same
distribution channels as our existing products. In addition, the new products we
launched in 2001 were similar to our existing products. Therefore, we make
estimates of future returns of new products based on our general experience with
our existing products. We believe that this permits us to make reasonable
estimates of future returns of new products for the purpose of establishing
reserves. As stated above, we do not believe our experience generally requires
establishing significant reserves for returns. We established small reserves for
returns of all of our new products launched in 2000 or 2001.
Occasionally the Company will deliver product to a customer on a
consignment basis. Consignment sales are not recorded until the product is
resold and the Company has received payment. There were no outstanding consigned
sales at December 31, 2000 or December 31, 2001.
Our gross profit margin on product sales decreased to 47.0% for the
year ended December 31, 2001 from 54.0% for the year ended December 31, 2000
because of the previously mentioned return of products from GNC. Without these
returns, our gross profit margin for the year ended December 31, 2001 would have
been 50.6%.
19
Our selling, general, and administrative expenses decreased to
$3,065,336 for the year ended December 31, 2001 from $3,137,661 for the year
ended December 31, 2000. The primary reason for the decrease was a reduction in
advertising expenses.
Research and development expenses decreased to $106,085 for the year
ended December 31, 2001 from $222,728 for the year ended December 31, 2000. The
primary reason for the reduction in research and development expenses was that
in 2000 we conducted several SATIETROL, SATIETROL COMPLETE, and ACCELERADE
clinical trials in support of the product launches of these products. No such
clinical trials were conducted in 2001. We anticipate research and development
expenses will increase and exceed the levels of 2000 as additional clinical
trials are conducted on all of our products as we continue to seek out
additional patents and claims for our products.
The Company incurred interest expense of $93,477 for the year ended
December 31, 2001 primarily as a result of debt issue costs associated with the
issuance of the 10% Promissory Notes Due 2002. These costs were expensed as
interest expense when full repayment was made in June 2001.
As previously noted in paragraph (b) in this Item, our net losses for
2000 were reduced as a result of a reduction in our reserve for the return or
exchange of certain products. These adjustments were based upon our estimates of
our future costs for product replacement at year-end 2000. We reduced our
reserve by $115,573 for the year ended December 31, 2000 and offset our net loss
by taking back into income that amounts. As of December 31, 2000, we believed
circumstances no longer required a product replacement reserve and therefore
eliminated this reserve as of December 31, 2000. In addition, during 1999, the
New Jersey Economic Development Authority established the Tax Benefit Transfer
Program. Pursuant to this program, the Company was qualified by the state to
sell a portion of its unused New Jersey net operating loss deductions to other
corporations having taxable income in New Jersey. In December 2000 we received
$206,078 as payment for the sale of these New Jersey tax deductions. These
payments were included in income and therefore offset our net loss for the year
ended December 31, 2000.
(c) Liquidity and Capital Resources
At December 31, 2001, the Company's current assets exceeded its current
liabilities by approximately $4.5 million with a ratio of current assets to
current liabilities of approximately 14.4 to 1 versus a ratio of approximately
3.1 to 1 at December 31, 2000. The increase in current ratio was attributable
primarily to the net income for the year ended December 31, 2001 as well as the
purchase of 9% of our common stock by GSK. Accounts receivable was lower at
December 31, 2001 compared to December 31, 2000 due to the aforementioned return
of inventory by GNC. Inventory levels were substantially higher at December 31,
2001 compared to December 31, 2000 as a result of these returns as well as
primarily to support both actual and anticipated increased sales levels of other
our sports performance products. Inventory, including the GNC SATIETROL returns,
is stated at the lower of cost or market and a reserve for obsolescence is
recorded when deemed appropriate. Management believes that all inventories at
December 31, 2001, including SATIETROL inventories, are saleable at a price
above cost, subject to ordinary obsolescence reserves. The reserve for
obsolescence at December 31, 2001 is $3,305.
20
At December 31, 2001, total inventory included approximately $1,200,000
of SATIETROL. On that date, the SATIETROL inventory had an average remaining
shelf life of approximately 2 years. The inventory cost of sales, net of
returns, of this product was $752,371 for 2001 and $674,258 for 2000. The
Company is identifying additional sales outlets for this inventory, and is
confident that it will be able to sell this inventory for at least its cost by
the end of 2002.
Based on our current plans and level of operations, we do not see a
need for additional cash in the next twelve months.
(d) Impact of Inflation
The Company expects to be able to pass inflationary increases for raw
materials and other costs on to its customers through price increases, as
required, and does not expect inflation to be a significant factor in its
business. However, the Company's operating history is very limited, and this
expectation is based more on observations of its competitors' historic
operations than its own experience.
(e) Seasonality
Sports nutrition products tend to be seasonal, especially in the colder
climates. Lower sales are typically realized during the first and fourth
quarters and higher sales are typically realized during the second and third
fiscal quarters. We also plan our advertising and promotional campaigns for the
Endurox R(4) and ACCELERADE products around these seasonal demands. Weight loss
products also have seasonality with greater sales seen in the first and second
quarters following New Year's resolutions and people getting in shape for the
summer. Similarly, advertising and promotional expenditures for Satietrol are
designed to take advantage of this seasonality. The Company believes that the
impact of new product introductions and marketing expenses associated with the
introduction of new products will have a far greater impact on its operations
than industry and product seasonality.
(f) Impact of Recently Issued Financial Accounting Standards
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, Accounting for Business Combinations and SFAS No. 142, Accounting for
Goodwill and Other Intangible Assets. The provisions of SFAS No. 141 apply to
business combination transactions that occur after June 30, 2001. SFAS No. 141
will not effect the financial statements of the Company.
21
The provisions of SFAS No. 142 shall be applied to fiscal years
beginning after December 31, 2001. The provisions of SFAS No. 142 eliminated
goodwill amortization and provide for standards on testing the impairment of
goodwill and other intangible assets at least annually. The adoption of this
standard is expected to have no effect on the Company's financial statements.
ITEM 7. FINANCIAL STATEMENTS
Financial information required in response to this Item of Form 10-KSB
is set forth at pages F-1 through F-21 of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
9(a) Directors and Executive Officers
The directors and executive officers of the Company as of the date of
this Report are as follows:
Name Position with the Company
---- -------------------------
Robert Portman, Ph.D. President and Chief Executive Officer, and Chairman
of the Board of Directors
Stephen P. Kuchen Vice President - Finance, Chief Financial Officer,
Treasurer, Assistant Secretary, and Director*
David I. Portman Secretary and Director
T. Colin Campbell, Ph.D. Director*
Irving I.A. Tabachnick, Ph.D. Director*
*Member of Audit Committee
DR. ROBERT PORTMAN, age 57, has served as President and Chairman of the
Board of Directors of the Company since its inception. Dr. Portman has a Ph.D.
in Biochemistry and worked as a senior scientist at Schering Laboratories before
co-founding M.E.D. Communications in 1974 with his brother, David Portman. In
1987, Dr. Portman started a consumer agency and, in 1993, he merged both
agencies to form C&M Advertising. C&M Advertising, with billings in excess of
$100 million, handled national advertising for such diverse accounts as Berlex
Laboratories, Ortho-McNeil Laboratories, Tetley Tea, Radisson Hotels and HIP of
New Jersey. Effective June 1, 1995, Dr. Portman relinquished his
responsibilities as Chairman of C&M Advertising (which since has been renamed
"The Sawtooth Group") to assume his present positions with the Company on a full
time basis, and, in September 1996, Dr. Portman sold his interest in that
company.
22
STEPHEN P. KUCHEN, age 41, is the Vice President - Finance, Chief
Financial Officer, Treasurer, Assistant Secretary as well as a Director, of the
Company. Mr. Kuchen joined the Company in February of 2000 as Controller, and
was appointed to his current positions in June 2000 to fill a vacancy. Prior to
joining the Company, Mr. Kuchen was employed from 1996 to 1999 as the Controller
of Able Laboratories, a South Plainfield, New Jersey public company that
manufactures and sells generic pharmaceuticals. Prior to his employment by Able
Laboratories, Mr. Kuchen was the Controller of Jerhel Plastics, a privately
owned manufacturer of women's compact cases from 1993 to 1996. Mr. Kuchen is a
graduate of Seton Hall University in South Orange, NJ, and is a Certified
Management Accountant.
DAVID I. PORTMAN, age 61, has served as Secretary and a Director of the
Company from its inception. Mr. Portman has a BS in Pharmacy and an MBA. He
worked as a sales representative and marketing manager for Eli Lilly,
Beecham-Massengill, Winthrop Laboratories and Sandoz Pharmaceuticals before
co-founding M.E.D. Communications in 1974. In 1988, Mr. Portman sold his
interest in M.E.D. Communications to Robert Portman, and became President of
TRIAD Development, a real estate company that has numerous commercial and rental
properties in New Jersey, a position that he still holds. Mr. Portman also has
served as a director of First Montauk Securities Corp. since 1993.
DR. T. COLIN CAMPBELL, age 68, has served as a Director of the Company
since its inception. Dr. Campbell also serves as Chairman of the Company's U.S.
Scientific Advisory Board. Dr. Campbell has been Jacob Gould Schurman Professor
of Nutritional Biochemistry of Cornell University since 1985. Over the past
three decades, Dr. Campbell has been directing research correlating diet,
lifestyle and disease. In 1979, Dr. Campbell, with the encouragement of the
Chinese government, initiated the largest epidemiological study ever undertaken
focusing on the relationship between nutrition and disease. The China-Cornell
Research Project is expected to continue well into the 21st Century. Dr.
Campbell is an honorary professor at the Chinese Academy of Preventive Medicine.
DR. IRVING I.A. TABACHNICK, age 77, was elected a director of the
Company in December 1997. Dr. Tabachnick has served as a consultant to Schering
Plough Corporation, a New York Stock Exchange listed company, since 1989. Prior
to 1989, he was employed by Schering Plough Corporation in a number of
positions, including Vice President -- Drug Safety and Metabolism, Senior
Director -- Biological Research and Development, and Director -- Biological
Sciences and Director -- Physiology and Biochemistry.
23
In connection with its initial public offering of Common Stock,
completed in December 1997, for which First Montauk Securities Corp. ("First
Montauk") acted as underwriter, the Company agreed for a period of five years
from December 19, 1997 to cause a person designated by First Montauk to be
elected to the Company's Board of Directors. First Montauk has not advised the
Company of any designee to serve on the Board of Directors and, further, has
advised the Company that it does not intend to exercise its right to designate a
nominee for election as a Director in the near future.
Under the Company's Stock Purchase Agreement with Glaxo Wellcome
International, BV (an affiliate of GSK), Glaxo Wellcome has a right to designate
a nominee to the Company's board of directors, and, thereafter, so long as Glaxo
Wellcome and its affiliates own 10% or more of the Company's outstanding common
stock, it has the right to require the Company to include its designee as a
nominee in all elections of directors. The shares purchased under the Stock
Purchase Agreement constitute less than 10% of the outstanding shares of the
Company's common stock
9(b) Other Key Advisors and Consultants
None
9(c) Scientific Advisory Boards
The Company has established a Scientific Advisory Board to provide it
with on-going advice and counsel regarding research direction, product
development, analysis of data, and general counseling. As a need arises, the
Company consults with individual members of this Board on a non-scheduled basis.
A brief description of the backgrounds of the Advisory Boards' members are set
forth below:
T. Colin Campbell, a Director of the Company, is Chairman of the
Company's U.S. Advisory Board. Its other members are:
David Kritchevsky, Ph.D., Institute Professor, Wistar Institute,
Professor of Biochemistry in Surgery. Dr. Kritchevsky is an expert in lipid
biochemistry, atherosclerosis, and the relationship between nutrition and aging
and nutrition and cancer. He has published on the effects of dietary fiber on
colon cancer, circulating cholesterol and the effects of dietary fat and energy
on experimental carcinogenesis. He was a member of the 1982 National Academy of
Sciences Committee on Diet, Nutrition and Cancer, is a member of numerous
professional societies, serves as editor of several professional annuals and was
Western Hemisphere Editor of the journal, Atherosclerosis.
William Pryor, Ph.D., Thomas and David Boyd Professor, Departments of
Chemistry and Biochemistry; Director, Biodynamics Institute, Louisiana State
University. Dr. Pryor is an authority in free radical chemistry and biology. He
has published on the role that various reactive oxygen species play in the
production of degenerative tissue damage, such as cancer and atherosclerotic
diseases. His publications number over 500. Dr. Pryor wrote the first textbook
on free radicals (McGraw-Hill 1966) and was the founder and first editor of the
journal, Free Radical Biology & Medicine.
24
David J. Jenkins, Ph.D., Dsc, Professor of Medicine & Nutritional
Sciences, University of Toronto; Director, Clinical Nutrition & Risk Factor
Modification Center, St. Michael's Hospital. Dr. Jenkins has extensively
researched the effects of soluble and insoluble dietary fiber upon various
biochemical factors associated with, or predictive of, cardiovascular disease,
diabetes and colorectal and prostate cancers. Dr. Jenkins is a member of several
professional nutrition societies, in Canada, Great Britain and the United
States. He has served on a number of international committees involved in the
treatment and prevention of diabetes.
Steven R. Peikin, MD, Professor of Medicine, Head, Division of
Gastroenterology and Liver Diseases at Robert Wood Johnson Medical School at
Camden Cooper Hospital/University Medical Center. Dr. Peikin has published
extensively on the impact of cholecystokinin (CCK) on appetite. He is also a
recognized authority on the use of weight loss products. He is the author of two
books.
John L. Ivy, Ph.D., Professor and Head of the Department of Kinesiology
and Health Education at the University of Texas at Austin. He is also Adjunct,
Professor, Cardiovascular Research Institute, University of North Texas Health
Science Center, Ft. Worth, Texas. Dr. Ivy is one of the world's foremost
exercise physiologists. He has published over 300 papers and chapters on the
topic. He is a member of The American College of Sports Medicine. Dr. Ivy did
much of the fundamental research, which have furthered our understanding on the
role nutrition plays in improving muscle performance during and after exercise.
Edmund R Burke, Ph.D., Professor of Exercise Physiology, at the
University of Colorado at Colorado Springs, CO. Dr. Burke is a member of the
American College of Sports Medicine and is a leading authority in the area of
sports nutrition. Dr. Burke is the author of over 18 books and has been an
advisory to two US Olympic Cycling Teams.
Don Kirkendall, Ph. D., Assistant Professor in the Department of
Orthopaedics at the University of North Carolina. Dr Kirkendall also holds
secondary appointments in the Department of Exercise and Sports Sciences and the
Division of Physical Therapy. Prior to this, Dr. Kirkendall served on the
faculty of Illinois State University and the University of Wisconsin-Lacrosse
and a staff appointment at the Cleveland Clinic Foundation. Dr. Kirkendall
earned his BS Ed from Ohio University, MA at Ball State University and PhD at
Ohio State University.
25
9(d) Family Relationships
Robert Portman and David Portman are brothers. There are no other
family relationships among our directors, executive officers or persons
nominated or chosen to become directors or executive officers.
9(e) Involvement in Certain Legal Proceedings
No events have occurred during the past five years that are required to
be disclosed pursuant to Item 401(d) of Regulation S-B.
ITEM 10. EXECUTIVE COMPENSATION
Robert Portman is the only executive officer of the Company with a
fixed-term employment agreement. Under his 1998 Employment Agreement, Dr.
Portman was employed for a three-year term commencing January 1, 1998, at an
annual salary of $150,000 for the first two years (i.e., through December 31,
1999) and at an annual salary of $200,000 for the final year ending December 31,
2000. Dr. Portman's $200,000 salary for 2000 was not set in the Employment
Agreement but was determined by a Compensation Committee of the Company's Board
of Directors as specified in the Employment Agreement. Under a new 2001
Employment Agreement, Dr. Portman is employed for a two-year term commencing
January 1, 2001, at an annual salary of $200,000. The new Employment Agreement
also provides that Dr. Portman may request the Compensation Committee of the
Board renegotiate his salary if the Company's financial situation improves. The
Board subsequently voted to increase his 2001 salary to $275,000 and issue a
bonus in the amount of $111,120.
Dr. Portman's 2001 Employment Agreement provides for a re-pricing of
the grant of options issued under his 1998 Employment Agreement to purchase up
to 475,000 shares of Common Stock, from $6.00 to $0.313 per share, the market
price of the stock at December 31, 2000. These options are fully vested and were
exercised in full during the second quarter of 2001 and were determined to have
a value of $217,075. Dr. Portman's 2001 Employment Agreement also provides for a
grant of options under the Company's 2000 Incentive Stock Option Plan to
purchase up to an additional 460,000 shares of Common Stock priced at $0.313 per
share, the market price of stock at December 31, 2000. These options vest as to
one-half of the shares issuable upon full exercise of the option as of the first
and second anniversaries of the effective date of the employment agreement,
provided that Dr. Portman is employed by the Company at such dates. To the
extent not previously vested, the option also will vest if Dr. Portman's
employment is terminated by the Company without cause or by Dr. Portman with
cause. In addition, if Dr. Portman's employment is terminated by the Company
without cause, or by Dr. Portman with cause, Dr. Portman will be entitled to
receive a lump sum payment of an amount equal to the lesser of full salary for
one year or for the remaining term of the agreement.
26
The table below sets forth information concerning compensation paid to
Dr. Portman, Jonathan D. Rahn, Former Executive Vice President of the Company,
and Stephen Kuchen, Vice President in 2001, 2000, and 1999. No executive
officers of the Company other than Dr. Portman and Mr. Rahn received
compensation of $100,000 or more in fiscal 2001, 2000, and 1999.
Summary Compensation Table
------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
----------------------------------------- -----------------------------------------
Awards Payouts
-----------------------------------------
Securities
Other Under-
Annual Restricted lying All Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Salary Bonus sation Award(s) SARs Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
-------------------- -------- --------------- --------- --------------- ------------- ---------------- ---------- ------------
Robert Portman, 2001 275,000 111,120 217,075 (1) -0- 1,160,000 (2) -0- -0-
President -------- --------------- --------- --------------- ------------- ---------------- ---------- ------------
2000 200,000 -0- (3) -0- 275,000 -0- -0-
-------- --------------- --------- --------------- ------------- ---------------- ---------- ------------
1999 150,000 -0- (3) -0- 300,000 -0- -0-
-------------------- -------- --------------- --------- --------------- ------------- ---------------- ---------- ------------
Stephen Kuchen, 2001 92,500 3,000 (3) -0- 25,000 -0- -0-
Vice President -------- --------------- --------- --------------- ------------- ---------------- ---------- ------------
2000 72,452 (4) -0- (3) -0- 35,000 -0- -0-
-------------------- -------- --------------- --------- --------------- ------------- ---------------- ---------- ------------
Jonathan Rahn, 2000 35,417 (5) -0- 27,500 (6) -0- -0- -0- -0-
Executive Vice -------- --------------- --------- --------------- ------------- ---------------- ---------- ------------
President 1999 103,333 -0- (3) -0- 50,000 -0- -0-
------------------------------------------------------------------------------------------------------------------------------
(1) Value of re-priced options on date of exercise by Dr. Portman.
(2) 475,000 of these options were re-priced options issued to Dr. Portman
prior to 1999, as discussed above and 225,000 of these options were
replacements for options that expired in 2001.
(3) Less than 10% of annual salary and bonus.
(4) Mr. Kuchen joined the Company in February 2000.
(5) Jonathan Rahn resigned from the Company effective May 31, 2000.
(6) Jonathan Rahn was engaged as a consultant to the Company from June 1,
2000 through October 31, 2000.
27
The following table sets forth certain information regarding options
granted in fiscal 2001:
Option/SAR Grants in Fiscal Year 2001
(Individual Grants)
----------------------------------------------------------------------------------------------------------------------
Number of Percent Of Total
Securities Options/SARs
Underlying Granted to Exercise Or
Options/SARs Employees In Base Price
Name Granted (#) Fiscal Year ($/Share) Expiration Date
(a) (b) (c) (d) (e)
--------------------------------------- -------------------- -------------------- ----------------- ------------------
Robert Portman 475,000 32.8% $0.313 12/18/02
--------------------------------------- -------------------- -------------------- ----------------- ------------------
Robert Portman 460,000 31.8% $0.313 12/31/06
--------------------------------------- -------------------- -------------------- ----------------- ------------------
Robert Portman 225,000 15.6% $1.00 03/31/06
--------------------------------------- -------------------- -------------------- ----------------- ------------------
Stephen P. Kuchen 10,000 0.7% $0.313 01/03/06
--------------------------------------- -------------------- -------------------- ----------------- ------------------
Stephen P. Kuchen 15,000 1.0% $1.00 04/01/06
----------------------------------------------------------------------------------------------------------------------
475,000 of Dr. Portman's options were a re-pricing of options issued
prior to 1999, as discussed above, and were fully exercised during the second
quarter of 2001; 460,000 options vest over a period of two years as discussed
above, pursuant to Dr. Portman's 2001 Employment Agreement; and 225,000 of these
options vested immediately as these options were replacements for options that
expired in 2001. Mr. Kuchen's options vest over a period of one year.
The following table sets forth information with respect to the number
of unexercised options and the value of unexercised "in-the-money" options held
by Robert Portman and Stephen Kuchen at December 31, 2001.
Aggregated Option/SAR Exercises in Fiscal Year 2001 and
Option/SAR Values at 12/31/01
----------------------------------------------------------------------------------------------------------------------
Number of Securities $ Value of Unexercised
Underlying Unexercised In-the-Money Options/SARs
Shares Options/SARs At 12/31/01 At 12/31/01
Acquired Value Exercisable/ Exercisable/
On Exercise Realized Unexercisable Unexercisable
Name (#) ($) (#) ($)
(a) (b) (c) (d) (e)
------------------------------ ------------ ----------- ------------------------------- ------------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------------------------ ------------ ----------- -------------- ---------------- -------------- ---------------
Robert Portman 475,000 217,075 800,000 460,000 1,478,500 1,590,220
------------------------------ ------------ ----------- -------------- ---------------- -------------- ---------------
Stephen Kuchen -0- -0- 35,000 25,000 40,075 76,120
------------------------------ ------------ ----------- -------------- ---------------- -------------- ---------------
For the purpose of computing the value of "in-the-money" options at
December 31, 2001, in the above table, the fair market value of the Common Stock
at such date is deemed to be $3.77 per share, the closing sale price of the
Common Stock on such date as reported by Nasdaq.
28
Directors' Compensation in Fiscal Year 2001
For the year ended December 31, 2001, the Company did not compensate
any of its two independent Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Each of David Portman and Irving Tabachnick had one transaction in the
Company's shares in 2001 that should have been reported on Form 4 and was not,
but was subsequently reported on Form 5. Mr. Portman's transaction involved the
sale of 4,500 shares and Mr. Tabachnick's transaction involved the exercise of
an option for 10,000 shares. Colin Campbell engaged in two transactions in the
Company's shares, sales of 1,500 shares and 5,500 shares, which should have been
reported on Form 4 and were not, but were subsequently reported on Form 5.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of February 28, 2002, the Company had 6,039,203 shares of Common
Stock outstanding. The following table sets forth information concerning the
present ownership of the Company's Common Stock by the Company's directors,
executive officers and each person known to the Company to be the beneficial
owner of more than five percent of either of such classes of the capital stock,
the beneficial ownership of these securities by such persons following the
offering, and the total voting power represented by the securities owned by such
persons.
Common Stock (2) Common Stock (2)
---------------- ----------------
Name and Address (1) Amount Beneficially Owned Percentage of Class
-------------------- ------------------------- -------------------
Robert Portman (3) 2,249,767 31.8%
President, Chief Executive Officer and
a Director
Stephen P. Kuchen (4) 45,000 *
Vice President, Chief Financial
Officer and a Director
David I. Portman (5) 303,500 4.9%
Secretary and a Director
T. Colin Campbell (6) 180,954 3.0%
Director
Irving Tabachnick (7) 25,000 *
Director
Executive Officers and Directors as a 2,804,221 38.6%
group (5 persons)
GlaxoSmithKline PLC 541,711 9.0%
Glaxo Wellcome House
Berkeley Avenue
Greenford, Middlesex
England UB6 0NN
Jemison Investment Co. 320,922 5.3%
2001 Park Place, Suite 320
Birmingham, AL 35203
29
* Less than one percent
(1) Except as otherwise indicated, the address of each person named in the
above table is c/o PacificHealth Laboratories, Inc., 1480 Route 9
North, Suite 204, Woodbridge, NJ 07095.
(2) Common Stock which is issuable upon the exercise of a stock option
which is presently exercisable or which becomes exercisable within
sixty days is considered outstanding for the purpose of computing the
percentage ownership (x) of persons holding such options, and (y) of
officers and directors as a group with respect to all options held by
officers and directors.
(3) Includes (a) a presently-exercisable option issued pursuant to the
Company's 1995 Incentive Stock Option Plan (a "1995 Plan Option") to
acquire 200,000 shares at a price of $2.25 per share, (b) a
presently-exercisable 1995 Plan Option to acquire 100,000 shares at a
price of $1.75 per share, (c) a presently-exercisable 1995 Plan Option
to acquire 275,000 shares at a price of $2.50 per share, (d) a
presently-exercisable 1995 Plan Option to acquire 225,000 shares at a
price of $1.00 per share, and (e) a 2001 Employment Contract Option
issued pursuant to the Company's 2000 Incentive Stock Option Plan (a
"2000 Plan Option") to acquire an additional 460,000 shares at a price
of $0.313 per share. Does not include 200,000 shares of Common Stock
owned by Jennifer Portman, Dr. Portman's wife, individually and as
Trustee for his and her minor children, as to which Dr. Portman
disclaims beneficial ownership.
(4) Includes (a) a 1995 Plan Option to acquire 10,000 shares at a price of
$3.25 per share, (b) a 1995 Plan Option to acquire 25,000 shares at a
price of $2.375 per share, and (c) a 2000 Plan Option to acquire 10,000
shares at a price of $0.313 per share
30
(5) Includes (a) a 1995 Plan Option to acquire 5,000 shares at a price of
$2.25 per share, (b) a 1995 Plan Option to acquire 10,000 shares at a
price of $0.313 per share and (c) 100,000 warrants exercisable at
$0.875 per share issued pursuant to a second quarter 2001 debt
financing.
(6) Includes (a) a 1995 Plan Option to acquire 5,000 shares at a price of
$2.25 per share, (b) a 1995 Plan Option to acquire 10,000 shares at a
price of $0.313 per share and (c) a 1995 Plan Option to acquire 5,000
shares at a price of $2.00 per share. Does not include 38,900 shares of
Common Stock owned by Dr. Campbell's wife or 162,521 shares of Common
Stock owned by Dr. Campbell's adult children, as to which he disclaims
beneficial ownership.
(7) Includes (a) a 1995 Plan Option to acquire 5,000 shares at a price of
$2.25 per share and (b) a 1995 Plan Option to acquire 10,000 shares at
a price of $0.313 per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the last two fiscal years, the Company has not entered into any
material transactions or series of transactions which, in the aggregate, would
be considered material in which any officer, director or beneficial owner of 5%
or more of any class of capital stock of the Company had a direct or indirect
material interest, nor are any such transactions presently proposed, except as
follows:
(a) In April 2001, the Company issued an aggregate of $100,000 in
principal amount of its 10% Promissory Notes due 2002, together with warrants
exercisable for 100,000 shares of the Company's common stock at $0.875 per
share, to David Portman. The warrants expire three years from issuance. This
issuance was part of a private placement of an aggregate of $300,000 in
principal amount of such notes and warrants for 300,000 shares of the Company's
common stock. The principal of this Note was repaid in June 2001 with the
proceeds from the Company's transaction with GSK.
(b) The Company's license agreement with GSK is described above in Part
I, Item 1(c). At the time the Company entered into the license agreement, GSK
was not the beneficial owner of 5% or more of any class of the Company's capital
stock, but became the holder of approximately 9% at the time the license
agreement was executed.
31
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) A list of the financial statements and financial statement schedule
filed as a part of this report is set forth on page F-1 hereof. A list
of the exhibits filed as a part of this report is set forth in the
Exhibit Index starting after page F-17 hereof.
(b) Reports on Form 8-K
During the last quarter of the period covered by this report, the
Company did not file any Current Reports on Form 8-K.
SUPPLEMENTAL INFORMATION
The Issuer has not sent an annual report or proxy statement to security
holders in respect of the fiscal year ending December 31, 2001. Such report and
proxy statement will be furnished to security holders in connection with the
Company's Annual Meeting, scheduled to be held in the third quarter of 2002.
Copies of such material will be furnished to the Commission when it is sent to
security holders.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this amendment to the report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PacificHealth Laboratories, Inc.
By: /s/ Robert Portman
----------------------------------------------------------------------------
Robert Portman, President, Chief Executive Officer
Date: May 13, 2002
In accordance with the Securities Exchange Act of 1934 and the requirements of
Form 10-KSB, this Report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dated indicated.
/s/ Robert Portman Director and Chief May 13, 2002
--------------------------- Executive Officer
Robert Portman
/s/ Stephen P. Kuchen Director and Principal May 13, 2002
---------------------------- Financial and Accounting Officer
Stephen P. Kuchen
/s/ T. Colin Campbell Director May 13, 2002
----------------------------
T. Colin Campbell
/s/ Michael Cahr Director May 13, 2002
----------------------------
Michael Cahr
32
EXHIBIT INDEX
Incorporated
Exhibit No. Description by Reference
----------- ----------- ------------
3.1 -- Certificate of Incorporation of the Company and
all amendments thereto A
3.2 -- Amended and Restated Bylaws of the Company C
4.1 -- Specimen Common Stock Certificate C
4.2 -- Stock Purchase Agreement dated June 1, 2001
between Pacific Health Laboratories, Inc. and
Glaxo Wellcome International B.V. E
4.3 -- Underwriter's Warrant Agreement and Form of
Warrant C
10.1 -- Incentive Stock Option Plan of 1995 A
10.2 -- Employment Agreement between the Company
and Robert Portman effective January 1, 1998 C
10.3 -- Strategic Alliance Agreement between the Company
and the Institute of Nutrition and Food Hygiene A
10.4 -- Exclusive Licensing Agreement between the
Company and the INFH A
10.5 -- Shareholders Agreement A
10.6 -- 2000 Incentive Stock Option Plan D
10.7 -- Employment Agreement between the Company
and Robert Portman effective January 1, 2001 F
10.8 -- License Agreement dated June 1, 2001 between
Pacific Health Laboratories, Inc. and SmithKline
Beecham PLC (d/b/a/ GlaxoSmithKline), redacted
to omit trade secret and confidential commercial
and financial information G
23.1 -- Consent of Larson, Allen, Weishair & Co., LLP *
-----------------------
* Filed herewith
33
A Filed with Registration Statement on Form SB-2 (Registration No.
333-36379) (the "1997 SB-2") on September 25, 1997
B Filed with Amendment No. 1 to the 1997 SB-2 on October 23, 1997
C Filed with Amendment No. 3 to the 1997 SB-2 on December 17, 1997
D Filed with Definitive Proxy Statement (Schedule 14A) for annual meeting
held on August 16, 2000, filed on July 11, 2000.
E Filed with Current Report on Form 8-K dated June 1, 2001, filed on
June 14, 2001.
F Filed with Annual Report on Form 10-KSB for the year ended December 31,
2001
G Filed with Amendment to Current Report on Form 8-K dated June 1, 2001,
filed July 5, 2001.
34
PACIFICHEALTH LABORATORIES, INC.
FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITOR'S REPORT
DECEMBER 31, 2001 AND 2000
PACIFICHEALTH LABORATORIES, INC.
TABLE OF CONTENTS
DECEMBER 31, 2001 AND 2000
Page
Number
------
INDEPENDENT AUDITOR'S REPORT 1
BALANCE SHEETS 2
STATEMENTS OF OPERATIONS 3
STATEMENTS OF STOCKHOLDERS' EQUITY 4
STATEMENTS OF CASH FLOWS 5
NOTES TO FINANCIAL STATEMENTS 6
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of PacificHealth Laboratories, Inc.
We have audited the accompanying balance sheets of PacificHealth Laboratories,
Inc. as of December 31, 2001 and 2000, and the related statements of operations,
stockholders' equity and cash flows for the years 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 audits in accordance with U.S. 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PacificHealth Laboratories,
Inc. as of December 31, 2001 and 2000, and the results of its operations and its
cash flows for the years then ended, in conformity with U.S. generally accepted
accounting principles.
LARSON, ALLEN, WEISHAIR & CO., LLP
Blue Bell, Pennsylvania
January 29, 2002
(1)
PACIFICHEALTH LABORATORIES, INC.
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
2001 2000
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,848,847 $ 170,491
Accounts receivable, net 192,628 441,396
Inventories 2,634,272 1,652,693
Prepaid expenses 165,079 162,466
---------- ----------
Total current assets 4,840,826 2,427,046
---------- ----------
PROPERTY AND EQUIPMENT, NET 62,709 74,043
OTHER ASSETS
Deposits 108,322 53,991
---------- ----------
$5,011,857 $2,555,080
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 45,048 $ 47,741
Accounts payable and accrued expenses 291,506 735,377
---------- ----------
Total current liabilities 336,554 783,118
---------- ----------
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock, $.0025 par value, authorized 50,000,000 shares;
issued and outstanding 6,039,203 shares at December 31, 2001
and 4,646,367 shares at December 31, 2000 15,098 11,616
Additional paid-in capital 13,674,479 11,060,246
---------- ----------
Accumulated deficit (9,014,274) (9,299,900)
---------- ----------
Total stockholders' equity 4,675,303 1,771,962
---------- ----------
$5,011,857 $2,555,080
========== ==========
See accompanying notes to financial statements
(2)
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
---------- ----------
REVENUES
Products $4,895,527 $3,841,387
Licensing revenues 1,250,000 --
---------- ----------
6,145,527 3,841,387
---------- ----------
COST OF GOODS SOLD 2,590,847 1,767,069
---------- ----------
GROSS PROFIT 3,554,680 2,074,318
OPERATING EXPENSES:
Selling, general and administrative 3,065,336 3,137,660
Research and development 106,085 222,728
Depreciation 43,578 41,123
Provision for replacement of product -- (115,573)
---------- ----------
3,214,999 3,285,938
---------- ----------
NET OPERATING INCOME(LOSS) 339,681 (1,211,620)
---------- ----------
OTHER INCOME(EXPENSE)
Interest income 39,422 47,977
Interest expense (93,477) --
---------- ----------
(54,055) 47,977
---------- ----------
INCOME(LOSS) BEFORE INCOME TAXES 285,626 (1,163,643)
PROVISION (BENEFIT) FOR INCOME TAXES -- (206,078)
---------- ----------
NET INCOME(LOSS) $ 285,626 $ (957,565)
========== ==========
BASIC NET INCOME (LOSS) PER SHARE OF COMMON STOCK $ 0.05 $ (0.21)
========== ==========
DILUTED NET INCOME (LOSS) PER SHARE OF COMMON STOCK $ 0.04 $ (0.21)
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 5,467,742 4,592,517
========== ==========
Diluted 6,477,640 4,831,116
========== ==========
See accompanying notes to financial statements
(3)
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Paid-in
Common Stockholders' Accumulated Total
Stock Capital Deficit Equity
------- ----------- ----------- ----------
Balance, January 1, 2000 $11,386 $10,803,085 $(8,342,335) $2,472,136
Common stock issued 230 159,770 160,000
Non-employee stock options 55,180 55,180
Issuance of stock warrants 42,211 42,211
Net loss for the year ended
December 31, 2000 (957,565) (957,565)
------- ----------- ----------- ----------
Balance, December 31, 2000 11,616 11,060,246 (9,299,900) 1,771,962
Common stock issued 3,482 2,191,591 2,195,073
Re-pricing of employee stock options 217,075 217,075
Non-employee stock options 105,525 105,525
Issuance of stock warrants 100,042 100,042
Net income for the year ended
December 31, 2001 285,626 285,626
------- ----------- ----------- ----------
Balance, December 31, 2001 $15,098 $13,674,479 $(9,014,274) $4,675,303
======= =========== =========== ==========
See accompanying notes to financial statements
(4)
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 285,626 $ (957,565)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Noncash items included in net income (loss):
Depreciation 43,578 40,195
Fair value of nonemployee stock options and warrants 422,642 97,391
Changes in assets and liabilities:
Decrease in accounts receivable 248,769 97,442
Increase in prepaid expenses (2,612) (73,161)
Increase in inventory (981,579) (1,267,266)
Increase in deposits (54,331) (50,000)
Increase (decrease) in accounts payable and accrued expenses (443,871) 524,316
Decrease in reserve for product replacement -- (161,062)
---------- ----------
Net cash used in operating activities (481,778) (1,749,710)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (32,246) (29,900)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 1,500,000 --
Common stock options exercised 695,073 160,000
Proceeds of note payable 70,577 47,741
Repayment of note payable (73,270) --
---------- ----------
Net cash provided by financing activities 2,192,380 207,741
---------- ----------
Net increase (decrease) in cash and cash equivalents 1,678,356 (1,571,869)
CASH AND CASH EQUIVALENTS, BEGINNING 170,491 1,742,360
CASH AND CASH EQUIVALENTS, ENDING $1,848,847 $ 170,491
---------- ----------
Supplemental disclosure of cash flow information of cash paid:
Interest $ 7,377 $ --
========== ==========
See accompanying notes to financial statements
(5)
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 1 BUSINESS
PacificHealth Laboratories, Inc. (the Company) was incorporated in
April 1995 to develop and market dietary supplements that improve and
promote health and well being and can be offered for sale without prior
approval by The Food and Drug Administration in compliance with current
regulatory guidelines. The Company's first product, ENDUROX(R) was
introduced in March 1996, and commercial sales began in May 1996. In
March 1997, the Company extended the ENDUROX line of products with
ENDUROX EXCEL(R). In February 1999, the Company introduced
ENDUROX(R)R(4)(TM) Performance/Recovery Drink, which demonstrated a
number of exercise related benefits in clinical studies, including
enhanced performance and extended endurance, decreased post-exercise
muscle stress, and reduced free radical build-up. During 2000 the
Company introduced a new product, SATIETROL(R), an appetite control
product which is based on the use of nutritional ingredients to
stimulate cholecystokinin (CCK), a protein released after eating which
has shown to be an important satiety signal in humans. This product
competes in the market for weight loss and weight control products. In
June 2001 the Company introduced ACCELERADE(R) Sports Drink which uses
the same patented technology as ENDUROX R(4) to improve endurance
during exercise.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents
For purposes of reporting cash flows, the Company considers all cash
accounts and money market funds, which are not subject to withdrawal
restrictions or penalties, and certificates of deposit and commercial
paper with original maturities of 90 days or less to be cash or cash
equivalents.
Accounts receivable
The Company provides an allowance for doubtful accounts, as needed, for
accounts deemed uncollectible.
Inventory
Inventory is recorded at the lower of cost or market using the
first-in, first-out (FIFO) method.
Equipment and depreciation
Property and equipment are carried at cost. Depreciation is calculated
using the straight-line method over their estimated useful lives
ranging from 2 to 5 years. Depreciation expense for the years ended
December 31, 2001 and 2000 was $43,578 and $40,195, respectively.
Use of estimates
The preparation of the accompanying financial statements in conformity
with generally accepted accounting principles requires management to
make certain estimates and assumptions that directly affect the results
of reported assets, liabilities, revenue, and expenses. Actual results
may differ from these estimates.
(6)
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Earnings (loss) per share
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings per Share. SFAS No. 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted
earnings per share, respectively. Unlike the previously reported
primary earnings per share basic earnings per share excludes the
dilutive effects of stock options and warrants. Diluted earnings per
share is similar to the previously reported fully diluted earnings per
share. Earnings per share amounts for all periods presented have been
calculated in accordance with requirements of SFAS No. 128. For the
year ended December 31, 2000, the computation of diluted loss per share
was antidilutive; therefore, the amounts reported for basic and
dilutive loss per share were the same.
Revenue recognition
Revenue from product sales is recognized upon shipment to customers,
title passing and all obligations of the Company have been satisfied.
Standard sales contracts do not provide for product returns, rebates,
discounts or other adjustments. Occasional customer contracts, while
unusual, provide for contractual discounts, rebates, return allowances
and other adjustments. A provision for these adjustments is made in the
same period the related sales are recorded. These provisions have
historically been insignificant. Except for the occasional contractual
adjustments, and product recalls or discontinuances discussed in the
next sentence, the Company generally does not accept product returns or
make other adjustments. When the Company recalls or discontinues a
product, subsequent to the initial sale, an allowance is provided when
the recall or discontinuance becomes known.
Consigned sales are not recorded until the product is re-sold and
payment received. There were no outstanding consigned sales at December
31, 2001 or 2000.
Revenue from the licensing agreement is recognized upon delivery of
products or the completion of certain milestone events which reflects
the culmination of an earnings process.
Research and development
Research and development costs consist of expenditures incurred by the
Company during the course of planned search and investigation aimed at
the discovery of new knowledge which will be used to develop and market
natural products which improve health and well being. The Company
expenses all such research and development costs as they are incurred.
Advertising costs
Advertising costs are charged to operations in the year incurred and
totaled $557,186 and $1,125,849 in 2001 and 2000, respectively.
Shipping and handling costs
The Company includes shipping and handling costs in cost of goods sold.
(7)
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Stock-based compensation
The Company has elected to follow the measurement guidance provided by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees (APB 25), and related interpretations in accounting for
its employee stock options. Under APB 25, when the exercise price of
the Company's employee stock options is not less than the fair value
for accounting purposes of the underlying stock on the date of grant,
no compensation expense is recognized. When employee stock options are
modified, the options are considered variable whereas the difference
between the exercise price and the fair value of the common stock is
expensed through the date the option is exercised or terminated.
Options and warrants issued to non-employees are accounted for in
accordance with Statement on Financial Accounting Standard (SFAS) No.
123. These options are valued using the Black-Scholes method and
expensed in the period service is performed or product received.
Options granted under long-term service contracts are measured at the
earlier of service completion or grant date provided a disincentive for
non-performance exists.
Segment information
SFAS No. 131, Segment Information, amends the requirements for public
enterprises to report financial and descriptive information about its
reportable operating segments. Operating segments, as defined in SFAS
No. 131, are components of an enterprise for which separate financial
information is available and is evaluated regularly by the Company in
deciding how to allocate resources and in addressing performance. The
financial information is required to be reported on the basis that is
used internally for evaluating this segment performance. The Company
operates in one business segment: the design, development and marketing
of dietary and nutritional supplements that enhance health and well
being.
Income taxes
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the basis of
balance sheet items for financial and income tax reporting. The Company
provides a deferred tax valuation allowance when the realization of the
asset is unlikely.
Comprehensive Income
The Company has adopted SFAS No. 130, Reporting Comprehensive Income,
which requires that all components of comprehensive income, including
net income, be reported in the financial statements in the period in
which they are recognized. Comprehensive income is defined as the
change in equity during a period from transactions and other events and
circumstances from non-owner sources. Net income and other
comprehensive income shall be reported, net of their related tax
effect, to arrive at comprehensive income. The Company does not have
any comprehensive income items at December 31, 2001 and 2000.
(8)
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recent accounting pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, Accounting for Business Combinations and SFAS No. 142, Accounting
for Goodwill and Other Intangible Assets.
The provisions of SFAS No. 141 applies to business combination
transactions that occur after June 30, 2001. SFAS No. 141 will not
effect the financial statements of the Company.
The provisions of SFAS No. 142 shall be applied to fiscal years
beginning after December 31, 2001. The provisions of SFAS No. 142
eliminated goodwill amortization and provides for standards on testing
the impairment of goodwill and other intangible assets at least
annually. The adoption of this standard is expected to have no effect
on the Company's financial statements.
Reclassification
Certain items in the 2000 financial statements have been reclassified
to conform with the presentation in the 2001 financial statements.
There was no effect on net income or shareholders' equity.
NOTE 3 ACCOUNTS RECEIVABLE
2001 2000
---- ----
Accounts receivable $252,253 $443,671
Less: allowance for doubtful accounts 59,625 2,275
-------- --------
$192,628 $441,396
======== ========
NOTE 4 INVENTORIES
Inventories at December 31, 2001 and 2000 consisted of the following:
2001 2000
---- ----
Raw materials $ 283,140 $ 194,647
Work-in-process -- 311,475
Finished goods 2,354,437 1,266,566
Reserve for obsolescence (3,305) (119,995)
---------- ----------
$2,634,272 $1,652,693
========== ==========
(9)
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 4 INVENTORIES
In 1997, the Company reformulated the original ENDUROX product into a
caplet, rather than a capsule, because the capsule form was very
hygroscopic and became altered in size and color in conditions of high
heat and humidity. At June 30, 1997, the Company estimated a reserve
for charges resulting from exchanging its retailers' inventory of
capsules for caplets or issuing a credit refund for returned capsules.
At the end of each quarter, management compares the reserve's balance
to a current estimate of capsule exchange/credit refund exposure.
During 2000, the Company estimated that its remaining capsule exchange
for caplets and/or credit refunds would not exceed $-0-. As a result,
the Company reduced its reserve in 2000 by $115,573 and reduced the net
loss by taking that amount back into income. At December 31, 2001 and
2000, the balance in the reserve for product replacement was $-0-.
NOTE 5 PROPERTY AND EQUIPMENT
2001 2000
---- ----
Furniture and equipment $221,323 $200,553
Molds and dies 81,850 70,375
-------- --------
303,173 270,928
Less: accumulated depreciation 240,464 196,885
-------- --------
$ 62,709 $ 74,043
======== ========
NOTE 6 LONG-TERM DEBT:
2001 2000
---- ----
Installment note payable to insurance finance company due in
monthly installments of $4,784, including interest at 7.5%
through September 2002 $ 45,048 $ 47,741
Less: current portion 45,048 47,741
-------- --------
Long-term debt $ 0 $ 0
======== ========
NOTE 7 STOCK
Capital stock
The total number of shares of all classes of stock which the Company
has authority to issue is 51,000,000 shares, consisting of (a) fifty
million (50,000,000) shares of Common Stock, par value $.0025 per
share, and (b) one million (1,000,000) shares of Preferred stock, par
value $.01 per share. The preferred stock may be issued in one or more
series, and may have such voting powers, full or limited, or no voting
powers, and such designations and preferences as shall be stated in the
resolution or resolutions providing for the issue thereof adopted by
the Board of Directors of the Company, from time to time.
(10)
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 8 COMMITMENTS
Licensing agreement
On June 1, 2001, the Company entered into an exclusive license
agreement with GSK, one of the world's largest pharmaceutical
companies, for SATIETROL, the Company's appetite control product. The
agreement provides GSK with worldwide rights to the trademarks,
technology, patents, and know how for SATIETROL for the duration of the
patents, which is currently 16 years. Under the agreement, the Company
received an initial payment of $1,000,000 for the delivery of the
product formula and certain quantities of the product, will receive
additional achievement payments over the next two years provided GSK
meets certain development goals, and will receive ongoing product
royalties upon launch of the product by GSK.
The Company can continue to sell the SATIETROL line of products until
GSK launches their SATIETROL product. At that time, the Company can
continue to market the powdered meal replacement product, currently
sold under the name SATIETROL COMPLETE(R), without using the SATIETROL
name, in the current health food store channels of distribution. GSK
will be responsible for future manufacturing, marketing, and sales upon
launch of GSK. GSK also purchased approximately 9% of the Company's
common stock for $1,500,000 under a related stock purchase agreement.
GSK can terminate the license agreement at any time for any reason but
GSK is not entitled to a refund of any payments previously made.
Employment agreement
The Company entered into a two-year employment contract on January 1,
2001, with the Chairman and CEO that provides for minimum annual
compensation of $275,000. The Company is the beneficiary of a keyman
life insurance policy (on the Chairman's life) for $2,000,000.
Rent
On February 3, 1998, the Company signed a new lease agreement with the
new owners of its office building. The new lease provides for the
rental of 3,684 square feet.
Minimum annual rentals, including utilities, for each year subsequent
to December 31, 2001 are as follows:
Year Ending
December 31,
------------
2002 $60,780
2003 30,390
-------
$91,170
=======
Letter of credit
At December 31, 2001, the Company has an outstanding letter of credit
in the amount of $10,000 maturing April 4, 2002.
(11)
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 9 STOCK OPTIONS
In 1995, the Company established an incentive stock option plan (the
Plan) in which options to purchase the common stock of the Company may
be awarded to employees. In 2000, the Company established another stock
option plan to increase the number of options under the plans. At
December 31, 2001, the Company has reserved 2,266,875 shares of common
stock for issuance under the plans.
Stock options may be granted as either incentive stock options intended
to qualify under Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or as options not qualified under Section 422 of
the Code. All options are issued with an exercise price at or above 100
percent of the fair market value of the common stock on the date of
grant. Incentive stock option plan awards of restricted stock are
intended to qualify as deductible performance-based compensation under
Section 162(m) of the Code. Incentive Stock Option awards of
unrestricted stock are not designed to be deductible to the Company
under Section 162(m).
Stock option transactions for employees during 2001 and 2000 were as
follows:
Exercise Price Weighted Average
Option Vested Per Exercise Price Per Share
Shares Shares Common Share Outstanding
------ ------ -------------- ------------------------
Balance, December 31, 1999 1,772,000 1,126,667 $1.625 - $6.00 $3.58
Granted/vested during the year 312,500 831,167 $2.25 - $3.25 $2.51
Exercised during the year (90,000) (90,000) $1.625 - $4.00 $3.60
Expired during the year (300,000) (300,000) $2.00 $2.00
Cancelled during the year (136,000) (49,334) $1.625 - $3.75 $1.97
--------- ---------
Balance, December 31, 2000 1,558,500 1,518,500 $1.75 - $6.00 $3.81
Granted/vested during the year 971,500 455,000 $0.313 - $3.30 $0.79
Exercised during the year (625,000) (625,000) $0.313 - $2.25 $0.74
Expired during the year (227,500) (227,500) $2.25 - $3.75 $3.73
Cancelled during the year (190,000) (190,000) $3.75 $3.75
--------- ---------
Balance, December 31, 2001 1,487,500 931,000 $0.313 - $4.75 $1.49
========= =========
Information with respect to employee stock options outstanding and
employee stock options exercisable at December 31, 2001 is as follows:
Employee Options Outstanding
----------------------------------------------------
Range of Number Outstanding Weighted Average Remaining Weighted Average
Exercise Prices at 12/31/01 Contractual Life Exercise Price
--------------- ------------------ -------------------------- ----------------
$0.00-$2.00 914,000 4.17 years $0.83
$2.01-$4.00 561,000 3.06 years $2.49
$4.01-$6.30 12,500 4.75 years $4.42
(12)
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 9 STOCK OPTIONS
Employee Options Exercisable
----------------------------------------------------------------------------
Range of Number Outstanding Weighted Average
Exercise Prices at 12/31/01 Exercise Price
--------------- ------------------ ----------------
$0.00-$2.00 420,000 $1.40
$2.01-$4.00 511,000 $2.41
In addition to options granted to employees under the plans, the
Company issued stock options pursuant to contractual agreements to
non-employees. Options granted under these agreements are expensed when
the related service or product is provided.
Stock option transactions for non-employees during 2001 and 2000 were
as follows:
Exercise Price Weighted Average
Option Vested Per Exercise Price Per Share
Shares Shares Common Share Outstanding
------ ------ -------------- ------------------------
Balance, December 31, 1999 205,700 166,200 $1.25 - $6.00 $3.37
Granted/vested during the year 100,500 50,000 $2.00 - $3.50 $2.25
Exercised during the year (2,000) (2,000) $2.1875 $2.19
Expired during the year 0 0 N/A N/A
Cancelled during the year 0 0 N/A N/A
------- -------
Balance, December 31, 2000 304,200 214,200 $1.25 - $6.00 $3.02
Granted/vested during the year 171,000 114,000 $0.313 - $6.30 $1.59
Exercised during the year (16,125) (16,125) $0.781 - $2.25 $2.01
Expired during the year (61,000) (61,000) $3.75 - $4.75 $4.00
Cancelled during the year (5,000) (5,000) $3.75 $3.75
------- -------
Balance, December 31, 2001 393,075 246,075 $0.313-$6.30 $2.11
======= =======
Information with respect to non-employee stock options outstanding and
non-employee stock options exercisable at December 31, 2001 is as
follows:
Non-Employee Options Outstanding
----------------------------------------------------
Range of Number Outstanding Weighted Average Remaining Weighted Average
Exercise Prices at 12/31/01 Contractual Life Exercise Price
--------------- ------------------ -------------------------- ----------------
$0.00-$2.00 202,500 3.70 years $1.03
$2.01-$4.00 133,375 2.97 years $2.37
$4.01-$6.30 57,200 1.19 years $5.30
(13)
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 9 STOCK OPTIONS
Non-Employee Options Exercisable
----------------------------------------------------------------------------
Range of Number Outstanding Weighted Average
Exercise Prices at 12/31/01 Exercise Price
--------------- ------------------ ----------------
$0.00-$2.00 92,000 $1.28
$2.01-$4.00 103,375 $2.42
$4.01-$6.30 50,700 $5.30
The Company accounts for stock-based compensation in accordance with
SFAS No. 123, Accounting for Stock-Based Compensation which permits the
use of the intrinsic value method described in APB Opinion No. 25,
Accounting for Stock Issued to Employees, and requires the Company to
disclose the pro forma effects of accounting for stock-based
compensation using the fair value method as described in the optional
accounting requirements of SFAS No. 123. As permitted by SFAS No. 123,
the Company will continue to account for stock-based compensation under
APB Opinion No. 25, under which the Company has recognized no
compensation expense for fixed employee granted options during 2001 and
2000 and recognized an expense for non-employee granted options by the
Company during 2001 and 2000. Total expense recognized for non-employee
granted options was $105,525 and $55,180, respectively.
Effective January 1, 2001, the Company re-priced 475,000 options of an
employee from $6.00 to $0.313 per share. All other terms of the options
remained the same. The options were subsequently exercised during 2001.
As a result of re-pricing employee options during 2001 an expense was
recognized by the Company amounting to $217,075.
Had compensation cost for the Company's stock option plan been
determined based on the fair value of the Company's common stock at the
dates of awards under the fair value method of SFAS No. 123, the
Company's pro forma net income (loss) and net income (loss) per common
share would have been as follows:
2001 2000
---- ----
Net income (loss):
As reported $285,626 $ (957,565)
Pro forma $119,208 $(1,611,410)
Basic net income (loss) per common share:
As reported $0.05 $ (.21)
Pro forma $0.02 $ (.35)
Diluted net income (loss) per common share:
As reported $0.04 $ (.21)
Pro forma $0.02 $ (.35)
The weighted-average fair value of options granted in 2001 and 2000 was
$.18 and $.82, respectively.
(14)
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 9 STOCK OPTIONS
Significant assumptions used in the Black Scholes option pricing model
to calculate the above fair value of the awards are as follows:
2001 2000
---- ----
Risk free interest rates of return 5.00% 6.00%
Expected option life 60 months 60 months
Volatility 40% 40%
Expected dividends $ 0 $ 0
NOTE 10 WARRANTS
Stock warrant transactions during 2001 and 2000 were as follows:
Exercise Price Weighted Average
Warrant Vested Per Exercise Price Per
Shares Shares Common Share Outstanding Share
------ ------ -------------- ----------------------
Share
Balance, January 1, 2000 375,500 375,500 $3.75 - $8.70 $5.52
Granted/vested during the year 22,000 22,000 $3.438 $3.438
Expired during the year (127,750) (127,750) $3.75 - $6.25 $4.02
---------- ----------
Balance, December 31, 2000 269,750 269,750 $3.438 - $8.70 $6.06
Granted/vested during the year 300,000 300,000 $0.875 $0.875
Exercised during the year (210,000) (210,000) $0.875 - $3.75 $1.01
Expired during the year (60,875) (60,875) $3.75 - $6.25 $4.32
----------- -----------
Balance, December 31, 2001 298,875 298,875 $0.875 - $8.70 $4.75
========= =========
The total expense recognized by the Company for these non-employee
warrants for 2001 and 2000 was $100,042 and $42,211, respectively.
NOTE 11 INCOME TAXES
The income tax provision (benefit) consists of the following:
2001 2000
---- ----
Current:
Federal $ 0 $ 0
State 0 (206,078)
---------- ---------
0 (206,078)
---------- ---------
Deferred:
Federal $ 0 $ 0
State 0 0
---------- ----------
$ 0 $ 0
========== ==========
(15)
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 11 INCOME TAXES
The following is a reconciliation of the tax derived by applying the
U.S. Federal Statutory rate of 35% to the earnings before income taxes
and comparing that to the recorded income tax provisions:
2001 2000
------------------------ ------------------------
Amount Percentage Amount Percentage
U.S. federal income tax provision
(benefit) at federal statutory rate $ 99,969 35% $(407,275) (35)%
State tax, net of federal tax effect 28,755 10 (33,725) (3)
Benefit of sale of state net
operating losses -- -- (206,078) (18)
Non-deductible options and warrants 71,948 25 34,000 3
Change in valuation allowance (200,000) (70) 407,000 35
Other (672) -- -- --
---------- ---- --------- ----
$ 0 0% $(206,078) (18)%
========== ==== ========= ====
The Company has $8,440,000 in Federal net operating loss carryovers,
which can be used to offset future taxable income. The net operating
loss carryforwards expire in the year 2030.
During 1999, the New Jersey Economic Development Authority established
the Tax Benefit Transfer Program. This program permits new or expanding
emerging technology and biotechnology corporations located in New
Jersey to "sell" unused New Jersey net operating loss (NOL) deductions
to other corporations who have taxable income in New Jersey for at
least 80% of their tax benefit value. The State established a maximum
amount of allowable NOL's that could be sold during 2000 and allocated
this sum among all of the qualifying companies.
In 2000, the Company received its certification under this program and
was able to sell $2,862,200 worth of its New Jersey NOL's for 80% of
their tax benefit value ($257,598) for a total of $206,078. The Company
has $1,375,000 of state net operating loss carryovers which can be used
to offset future taxable income. The net operating loss carryforwards
expire in the year 2014.
The components of the Company's deferred tax assets are as follows:
2001 2000
---- ----
Net operating loss carryforwards $3,035,000 $3,235,000
Valuation allowance (3,035,000) (3,235,000)
---------- ----------
Deferred tax asset $ 0 $ 0
========== ==========
(16)
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 12 FINANCIAL INSTRUMENTS
Concentration of credit risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash, cash
equivalents and trade accounts receivable.
The Company has concentrated its credit risk for cash by maintaining
substantially all of its depository accounts in a single financial
institution. Accounts in the bank are guaranteed by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000. At various times
throughout the year the Company had cash balances in this financial
institution that exceeded the FDIC limit. The financial institution has
a strong credit rating, and management believes that credit risk
relating to these deposits is minimal.
Cash equivalents consist of money market funds maintained in an account
with the investment division of the above financial institution. The
financial institution has a strong credit rating and management
believes that credit risk relating to these cash equivalents is
minimal.
The Company does not require collateral on its trade accounts
receivable. Historically, the Company has not suffered significant
losses with respect to trade accounts receivable.
Fair value of financial instruments
Cash, cash equivalents, accounts receivable, accounts payable and
long-term debt approximate their fair values due to the short maturity
of these instruments.
NOTE 13 SIGNIFICANT CUSTOMERS
For the year ended December 31, 2001, the Company had sales to two
customers that accounted for approximately 49% of total product sales.
Product sales to General Nutrition Centers and Performance, Inc. were
approximately $1,800,000 and $575,000, respectively. Accounts
receivable outstanding related to these customers at December 31, 2001
were $66,261, which amounted to 34% of total receivables.
For the year ended December 31, 2000, the Company had product sales
from General Nutrition Centers that accounted for approximately
$1,700,000 or 44% of total product sales. Accounts receivable
outstanding related to these customers at December 31, 2000 were
$316,663, which amounted to 72% of total receivables.
(17)
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 14 SEGMENT AND RELATED INFORMATION
In fiscal 2001 and 2000, the Company has one reportable segment:
dietary and nutritional supplements.
The following table presents revenues by region:
2001 2000
---- ----
United States $4,790,991 $3,774,455
Canada $104,536 $66,932
Revenues by product line are as follows:
Sports Weight
Performance Loss Licensing Total
----------- ---------- ---------- ----------
2001 $3,578,189 $1,317,338 $1,250,000 $6,145,527
2000 $2,212,590 $1,628,797 $ 0 $3,841,387
Sales revenues reported for the years ended December 31, 2001 and
December 31, 2000 are net of credits of $451,137 and $97,618,
respectively, for the return of certain products. Returns in 2001
consisted of SATIETROL returned from our largest customer who
discontinued selling the product. These sales were principally recorded
in the second quarter of 2001 with the credit recorded in the fourth
quarter. There was no legal requirement for the Company to accept these
credits and returns and were not anticipated at time of sale. These
credits and returns were allowed to enhance ongoing customer relations
with that customer. Returns in 2000 consisted of two products in which
marketing was discontinued.
NOTE 15 FIRST QUARTER 2001 ADJUSTMENT
In connection with the preparation of the December 31, 2001 annual
financial statements, the Company discovered that variable stock
options should have been expensed in the first quarter of the year
ended December 31, 2001. Accordingly, a $217,075 expense was recorded
for those options.
The effect of this restatement for the quarter ended March 31, 2001 is
as follows:
As Previously
Reported As Restated
------------- -----------
Balance Sheet:
Stockholders equity:
Common stock and additional paid in
capital $11,089,019 $11,306,094
Accumulated deficit $(9,577,234) $(9,794,309)
(18)
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 15 FIRST QUARTER 2001 ADJUSTMENT
Statement of Operations:
Selling, general and administrative
expense $ 539,905 $ 756,980
Net loss $(277,334) $(494,409)
Basic loss per share $ (.06) $ (.11)
Diluted loss per share $ (.06) $ (.11)
(19)