<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 19, 1997.
REGISTRATION NO. 333-36379
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
PACIFICHEALTH LABORATORIES, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5122 22-3367588
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
1460 ROUTE 9 NORTH
WOODBRIDGE, NJ 07095
732/636-6141
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
JONATHAN D. RAHN, EXECUTIVE VICE PRESIDENT
1460 ROUTE 9 NORTH
WOODBRIDGE, NJ 07095
TELEPHONE 732/636-6141
FACSIMILE 732/636-7410
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
Copies of communications to:
JOSEPH CHICCO, ESQUIRE VICTOR J. DIGIOIA, ESQUIRE
CONNOLLY EPSTEIN CHICCO FOXMAN BRIAN C. DAUGHNEY, ESQUIRE
ENGELMYER & EWING GOLDSTEIN & DIGIOIA, LLP
1515 MARKET STREET - 9TH FLOOR 369 LEXINGTON AVENUE
PHILADELPHIA, PA 19102 NEW YORK, NY 10036
TELEPHONE 215/851-8410 TELEPHONE 212/599-3322
FACSIMILE 215/851-8383 FACSIMILE 212/557-0295
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO ITEM 502(f) OF REGULATION S-B
BETWEEN REGISTRATION STATEMENT AND FORM OF PROSPECTUS
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<CAPTION>
ITEM NUMBER AND HEADING CAPTION IN PROSPECTUS
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<S> <C> <C>
1. Front of Registration Statement and Outside
Front Cover of Prospectus.................. Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus................................. Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information and Risk Factors......... Prospectus Summary - The Company, - Risk
Factors, - Summary Financial Information
4. Use of Proceeds.............................. Use of Proceeds
5. Determination of Offering Price.............. Outside Front Cover Page of Prospectus;
Underwriting
6. Dilution..................................... Dilution
7. Selling Security Holders..................... Not Applicable
8. Plan of Distribution......................... Inside Front Cover; Underwriting
9. Legal Proceedings............................ Business of the Company - Legal Proceedings
10. Directors, Executive Officers, Promoters and
Control Persons............................ Management
11. Security Ownership of Certain Beneficial
Owners and Management...................... Management; Principal Stockholders
12. Description of Securities.................... Description of Securities
13. Interests of Named Experts and Counsel....... Not Applicable
14. Disclosure of Commission Position on
Indemnification............................ Description of Securities
15. Organization With Last Five Years............ Certain Relationships and Related
Transactions
16. Description of Business...................... Business of the Company
17. Management's Discussion and Analysis or
Plan....................................... Management's Discussion and Analysis
18. Description of Property...................... Business of the Company - Offices and Other
Facilities
19. Certain Relationships and Related
Transactions............................... Certain Relationships and Related
Transactions
20. Market for Common Equity and Related
Stockholder Matters........................ Outside Front Cover of Prospectus; Risk
Factors
21. Executive Compensation....................... Management - Executive Compensation
22. Financial Statements......................... Financial Statements
23. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..... Not Applicable
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 19, 1997
PROSPECTUS
1,200,000 SHARES
PACIFICHEALTH LABORATORIES, INC.
COMMON STOCK
PacificHealth Laboratories, Inc. (the "Company") is hereby offering
1,200,000 shares (the "Shares") of its common stock, par value $.0025 per share
(the "Common Stock"). Prior to this offering, there has been no public market
for the Common Stock, and there can be no assurance such a market will develop
or be sustained. It is currently estimated that the initial public offering
price will be $6.00 per Share. The initial public offering price of the Shares
has been arbitrarily determined by negotiation between the Company and First
Montauk Securities Corp. (the "Underwriter") and is not necessarily related to
the Company's assets, book value, results of operations, or any other
established criteria of value. The Company has applied to have the Common Stock
approved for quotation on the SmallCap Market of the Nasdaq Stock Market, Inc.
("Nasdaq") under the proposed symbol "____".
------------------------
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL
DILUTION. PURCHASERS SHOULD CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER "RISK
FACTORS" BEGINNING ON PAGE 4 AND "DILUTION".
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
===================================================================================================
UNDERWRITING
DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS (1) COMPANY (2)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................. $6.00 $.60 $5.40
- ---------------------------------------------------------------------------------------------------
Total(3).............................. $7,200,000 $720,000 $6,480,000
===================================================================================================
</TABLE>
(1) Does not include additional compensation to be paid to the Underwriter
consisting of (a) a non-accountable expense allowance of 3% of the gross
proceeds of this offering, or $.18 per Share, of which $30,000 has been paid
to date (b) warrants to purchase 120,000 additional shares of the Company's
Common Stock (the "Underwriter's Warrants") exercisable over a period of
four years commencing one year from the date hereof at an exercise price
equal to 145% of the initial public offering price of the Shares, and (c)
the retention of the Underwriter as the Company's investment banker and
financial consultant for a period of two years at a monthly fee of $2,000 or
an aggregate of $48,000. In addition, the Company has agreed to indemnify
the Underwriter against certain liabilities including liabilities under the
Securities Act of 1933, as amended. See "Underwriting".
(2) Before deduction of expenses payable by the Company (excluding the
Underwriter's Commissions but including the non-accountable expense
allowance) estimated at $380,000 or $.32 per Share ($412,400 or
approximately $.30 per Share if the Underwriter's over-allotment is
exercised). See "Use of Proceeds".
(3) The Company has granted to the Underwriter a 45-day option to purchase up to
180,000 additional Shares (15% of the number initially offered to the
public) upon the same terms as set forth above to cover over-allotments. If
the option is fully exercised the Totals for Price to Public, Underwriting
Discounts and Commissions and Proceeds to the Company will be $8,280,000,
$828,000 and $7,452,000, respectively. See "Underwriting".
The Shares are being offered by the Underwriter, when, as and if delivered
to and accepted by the Underwriter and subject to the approval of certain legal
matters by its counsel. The Underwriter reserves the right to reject any order
either in whole or in part. It is expected that delivery of the certificates for
the Shares will be made in against payment therefor at the offices of the
Underwriter on or about _______, 1997.
[LOGO]
The date of this Prospectus is __________, 1997
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
AVAILABLE INFORMATION
The Company is not subject to the informational and reporting requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Upon
completion of this offering, the Company will become subject to such
requirements and, in accordance therewith, will file reports, proxy statements
and other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information filed with
the Commission by the Company may be inspected and copied at the public
reference facilities maintained by the Commission at its principal offices at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511, and 7 World Trade Center,
Suite 1300, New York, New York 10048. Such reports, proxy statements and other
information may also be obtained from the web site that the Commission maintains
at http://www.sec.gov. Copies of these materials can also be obtained at
prescribed rates from the Public Reference Section of the Commission at its
principal offices in Washington, D.C., set forth above.
The Company intends to distribute to its shareholders Annual Reports
containing audited financial statements and Quarterly Reports containing
unaudited financial information. The Company's fiscal year end is December 31.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET
PRICE, PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN
THE COMMON STOCK MAINTAINED BY THE UNDERWRITER AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with more detailed information and financial statements, and notes
relating thereto, appearing elsewhere in this Prospectus. Effective as of the
date of this Prospectus, the President of the Company, who also is its largest
single shareholder, has agreed to contribute 200,000 shares of Common Stock back
to the Company for cancellation. Unless otherwise indicated, all references in
this Prospectus, apart from the financial statements, to numbers of shares of
Common Stock outstanding and any related per share data give retroactive effect
to this cancellation. Unless otherwise specified in this Prospectus, all
information in this Prospectus assumes an initial offering price of $6.00 per
Share, and no exercise of the over-allotment granted to the Underwriter.
THE COMPANY
PacificHealth Laboratories, Inc. (hereinafter referred to as the "Company")
was incorporated in April 1995 to engage in the development and sale of products
based upon natural ingredients that have demonstrable health benefits and can be
marketed without prior Food and Drug Administration approval under current
regulatory guidelines, and to promote and market those products aggressively
through mass and health food channels of distribution using, among other things,
marketing claims based upon Company-conducted research and testing.
The Company has focused its efforts since inception on developing a limited
number of products and the infrastructure to support its initial activities. The
Company's first product, ENDUROX(Registered), a dietary supplement marketed in
the sports performance and recovery category, was introduced in March 1996.
Commercial shipments of the product commenced in May 1996. Extensions on the
ENDUROX product line (ENDUROX EXCEL(Trademark) and ENDUROX ProHeart(Trademark))
were introduced in March 1997. From inception through September 30, 1997, the
Company's sales of the original ENDUROX formulation were $5,333,674, and the
combined sales of ENDUROX EXCEL and ENDUROX ProHeart were $971,883.
Management believes that the use of natural products as dietary supplements
to improve and promote health and well being is gaining increasing acceptance by
American consumers. The Company's primary strategy for growth is to develop new
brands and products, and to continue to expand its distribution network. The
Company has pursued a "multi-channel" distribution strategy in marketing its
line of ENDUROX products, and intends to follow a similar strategy with future
products. The ENDUROX line is sold in over 34,000 retail outlets in all 50
states, including mass merchandisers such as WalMart, KMart and Target; chain
drug stores such as CVS, Walgreens, Eckerds and Rite Aid; and grocery
supermarkets such as Pathmark and Albertsons. The Company distributes its
products to the health food segment through General Nutrition Centers, a chain
with over 2,800 outlets, and independent health food retailers. The Company also
sells through other channels, including sports specialty stores such as The
Sports Authority and health clubs. The nature of the product and its target
market dictate the channels of distribution in which a product is launched, and
the level of effort directed to each channel of distribution.
The Company has additional proprietary products in various stages of
development, including products which use natural ingredients that have
demonstrated effectiveness in muscle nutrition and sports recovery, in treating
the symptoms of mild to moderate depression, in reducing the pain and
inflammation of arthritis, in appetite control and in accelerating recovery from
strains and sprains. The proceeds from this offering will be used primarily to
develop and market these products.
The Company is a Delaware corporation with executive offices located at
1460 Route 9 North, Woodbridge, New Jersey 07095 (telephone 732/636-6141).
3
<PAGE>
THE OFFERING
Shares offered.................... 1,200,000 shares of Common Stock, par value
$.0025 ("Shares")
Shares outstanding:
Before the offering.......... 2,985,672 shares(1)
After the offering........... 4,185,672 shares(1)(2)
Use of proceeds................... The Company intends to use the proceeds of
this offering, after payment of costs
associated with the offering, to pay
advertising, marketing and manufacturing
costs, including costs associated with the
introduction of new products, for research
and development, to retain additional
personnel, and for general operating and
administrative expenses. See "Use of
Proceeds".
Risk factors...................... A purchase of Shares is a highly speculative
investment and subject to substantial
dilution and a high degree of risk,
including risks relating to a limited
operating history, recent losses, dependence
on new products, and dependence on certain
significant customers. See "Risk Factors"
and "Dilution".
- ------------------
(1) Does not include 359,740 shares of Common Stock reserved for issuance upon
conversion of outstanding 10% Convertible Preferred Stock, 945,200 shares of
Common Stock issuable upon the exercise of outstanding options, and 255,500
shares of Common Stock issuable upon the exercise of outstanding warrants.
See "DESCRIPTION OF SECURITIES -- Preferred Stock" and "--Stock Options and
Warrants".
(2) Assumes no exercise of the Underwriter's option to purchase 180,000
additional shares of Common Stock to satisfy overallotments in the offering
(the Underwriter's "Over-allotment Option"), and does not include shares of
Common Stock reserved for issuance upon the exercise of the Underwriter's
Warrant.
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial information presented below for the fiscal years
ended December 31, 1996 and 1995 was derived from the audited financial
statements of the Company appearing elsewhere herein. The summary financial
information as of September 30, 1997 for the nine-month periods ended September
30, 1997 and 1996 was derived from the unaudited financial statements of the
Company. The unaudited financial statements include all adjustments, consisting
of normal recurring adjustments, which the Company considers necessary for a
fair presentation of its financial position and results of operations for those
periods. Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1997. The summary should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the financial statements of the Company and the related notes to the
financial statements, each appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
--------------------- -----------------------
1996 1995(1) 1997 1996
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues............................................... $3,085,726 $ -0- $3,219,831 $1,043,082
Net Operating Income (Loss)............................ 53,156 (210,647) (4,263,634) (557,877)
Other Income (Expense)................................. 53,583 14,026 36,442 41,028
Net Income (Loss)...................................... 144,751 (196,621) (4,265,404) (517,139)
Net Income (Loss) per Share
Primary(2)........................................... .05 (.12) (1.23) (.20)
Fully Diluted(2)..................................... .04 (.12) (1.23) (.20)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
DECEMBER 31, AS
1996 ACTUAL ADJUSTED(3)
------------ ---------- -----------
<S> <C> <C> <C>
Balance Sheet Data:
Current Assets............................................ $4,006,474 $1,673,190 $7,773,190
Current Liabilities....................................... 669,227 1,585,943 1,585,943
Working Capital........................................... 3,337,247 87,247 6,187,247
Total Assets.............................................. 4,195,281 1,840,182 7,940,182
Total Long Term Liabilities............................... -0- -0- -0-
Stockholders' Equity...................................... 3,526,054 254,239 6,354,239
</TABLE>
- ------------------
(1) Fiscal 1995 reflects operations from inception in April 1995 through
December 31, 1995.
(2) See Note 1 of Notes to Financial Statements concerning the computation of
"primary" and "fully diluted" earnings per share.
(3) Adjusted to give effect to the receipt of the net proceeds of the offering.
Assumes that the Underwriter's over-allotment option is not exercised.
5
<PAGE>
RISK FACTORS
Before deciding whether to purchase Shares in this offering, prospective
investors should carefully consider all of the information contained in this
Prospectus and, in particular, the factors discussed below. Information
contained in this Prospectus contains "forward-looking statements," including,
without limitation, statements containing the words "believes," "expects,"
"intends," "seeks to," "may," "will," "should," "anticipates" and similar words,
or the negative thereof, other variations thereon, comparable terminology or by
discussions of strategy. There is no assurance that future results or events
which are covered by forward-looking statements will be achieved. The following
paragraphs of this section of the Prospectus identify factors with respect to
certain forward-looking statements that could cause actual results to vary
materially from future results to which such forward-looking statements refer.
Other factors which are not discussed in this section also could cause actual
results to vary materially from future results referred to in forward-looking
statements.
Accumulated Deficit; Recent Losses; Limited Operating History. The Company
has a limited operating history and has accumulated losses since its inception,
with an accumulated deficit of $4,545,826 at September 30, 1997, primarily
attributable to operations in the nine month period then ended in which the
Company incurred a net loss of $4,265,404. The Company anticipates a loss in the
fourth quarter of 1997, primarily as a result of continuing marketing and
advertising costs, development costs and general and administrative expenses.
The Company does not have a history of operations from which investors could
draw reasonable conclusions as to its future performance, and there can be no
assurance that the Company will operate profitably in the future. The
implementation of the Company's current business plan, including the
introduction of new products, is materially dependent upon the receipt of
additional capital from this offering. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Substantially all of the Company's revenues to date have resulted from sale
of its original product, ENDUROX(Registered), which was introduced in May 1996,
and extensions of the ENDUROX product line which were introduced in March 1997.
The Company intends to utilize a substantial portion of proceeds from this
offering to complete the development and to commence marketing new products, and
remains subject to all of the risks inherent in the establishment of a new
business enterprise. The likelihood that the Company will be successful should
be considered in light of the problems, expenses, difficulties, complications
and delays frequently encountered in establishing a new business in a
competitive environment such as the environment in which the Company operates.
Dependence on New Products. The Company believes that its ability to grow
and succeed in the future will be significantly dependent upon its ability to
introduce new and innovative products and market those products successfully.
Although the Company intends to introduce several new products over the next 18
months, there can be no assurance that these products will be launched on
schedule, or at all, that the Company's efforts to develop additional products
will be successful, or that any of the Company's new products will be
commercially successful, either initially or over time. See "Business of the
Company -- Proposed Products."
Dependence on Significant Customers. The Company's largest customer,
General Nutrition Centers, accounted for approximately 45% of net sales in
fiscal 1996. In the nine month period ended September 30, 1997, GNC accounted
for 26%, and WalMart and KMart accounted for 13% and 10%, respectively, of net
sales. The loss of any of these customers, or a significant reduction in
purchase volume by or financial difficulty of such customers, for any reason,
could have a material adverse effect on the Company's results of operations or
financial condition. The Company has no agreements with or commitments from
these customers with respect to future purchases, and there can be no assurance
that any of the these companies will continue as major customers of the Company.
See "Business of the Company -- Marketing and Distribution."
Dependence Upon Key Personnel. Prior to this offering, the Company has
relied extensively on the services of its founders and principal shareholders.
These individuals will continue to play key roles in the Company's management,
and the loss of services of one or more of them could, and in the
6
<PAGE>
case of Robert Portman, the Company's President, would, materially and adversely
affect the Company and its prospects. See "Management -- Executive Officers and
Directors." The Company has obtained a $2,000,000 "key man" life insurance
policy covering Dr. Portman, but it is unlikely that the proceeds from such
policy would be adequate to fully compensate the Company for the loss of Dr.
Portman's services. The Company has no such insurance on any other person.
The Company has a three year employment agreement with Dr. Portman, which
contains terms limiting his ability to engage in activities competitive with the
Company following the termination of his employment. Dr. Portman, together with
other founders and principal shareholders, is a party to a Shareholders
Agreement which contains restrictions against most activities that could be
considered competitive with the Company so long as that agreement is in force.
Competition. The natural dietary supplement industry is highly
competitive. The availability of numerous contract manufacturers and a ready
availability of natural ingredients, coupled with a relatively relaxed
regulatory environment, result in a fairly low barrier to begin business.
Numerous companies compete with the Company in the development, manufacture and
marketing of supplements as their sole or principal business, and the Company
estimates that there are approximately 20 large national companies that
manufacture or distribute herbal products and medicinals. Generally, these
companies are well funded and sophisticated in their marketing approaches.
Examples are Weider Nutrition International, Nature's Way, Nature's Herbs and
Solaray, Inc. In addition, there are a number of large, multilevel marketers
such as Shaklee, Herbalife and Amway that sell encapsulated herbs, diet
products, herbal supplement formulas and vitamin supplements. See "Business of
the Company -- Competition."
No Manufacturing Capabilities. The Company has no manufacturing
facilities, and does not presently intend to manufacture any of its products.
Thus, the Company is dependent upon contractual relationships with manufacturers
to fulfill its product needs. The Company's ability to market and sell its
products requires that such products be manufactured in commercial quantities,
in compliance with applicable federal and state regulatory requirements, and at
an acceptable cost to enable the Company to arrive at a price structure which
will not inhibit sales while accommodating distribution costs and third party
sales compensation. Competitors who do their own manufacturing may obtain an
advantage over the Company with respect to pricing, availability of product and
in other areas through their control of the manufacturing process. See "Business
of the Company -- Manufacturing."
In addition to competitors whose primary business is in the natural dietary
supplement industry, large pharmaceutical companies and packaged food and
beverage companies to which the dietary supplement marketplace represents a
relatively small part of their total marketing effort and sales, participate in
the industry on a limited basis. Increased competition from such companies could
have a material adverse effect on the Company as they have financial and other
resources available to them, and possess manufacturing, distribution and
marketing capabilities, which are far greater than those of the Company. See
"Business of the Company -- Competition."
Absence of Conclusive Clinical Studies. Although the ingredients in the
Company's products are vitamins, minerals, herbs and other substances for which
there is a long history of human consumption, and the Company believes all of
its products to be safe when taken as directed by the Company, no assurance can
be given that the Company's products, even when used as directed, will have the
effects intended or will not have adverse effects associated with long term
consumption in the combinations and dosages provided in the products. Although
the Company tests the ingredients, formulations and production of its products
to verify safety and to establish efficacy to support its marketing claims, they
have not sponsored clinical studies on the long-term effect of human
consumption. See "-- Effect of Unfavorable Publicity" and "-- Product Liability"
below.
No Long-Term Contracts for Supply of Raw Materials. The Company obtains
from other sources all of its raw materials for the manufacture of its products.
The Company generally does not have contracts with any entities or persons
committing such suppliers to provide the materials required for the production
of its products. There can be 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
7
<PAGE>
pay. Because the Company does not control the actual production of these raw
materials, it is also subject to delays caused by interruption in production of
materials based on conditions not wholly within its control. Such conditions
include job actions or strikes by employees of suppliers, weather, crop
conditions, transportation interruptions and natural disasters or other
catastrophic events. The inability of the Company to obtain adequate supplies of
raw materials for its products at favorable prices, or at all, as a result of
any of the foregoing factors or otherwise could have a material adverse effect
on the Company. See "Business -- Manufacturing."
Effect of Unfavorable Publicity. The Company believes the dietary
supplement market is affected by national media attention regarding the
consumption of such products. There can be no assurance that future scientific
research or publicity will not be unfavorable to the dietary supplement market
generally, or to any particular product, or inconsistent with earlier favorable
research or publicity. Because of the Company's dependence upon consumer
perceptions, adverse publicity associated with illness or other adverse effects
resulting from the consumption of products distributed by other companies which
are similar to the Company's products, could have a material adverse impact on
the Company, even if the publicity did not relate to the Company's products.
Adverse publicity directly concerning the Company's products could be expected
to have an immediate negative effect on the market for that product. See
"Business of the Company -- Marketing and Distribution."
Dependence on Chinese Relationships and Supplies. The Company has entered
into a number of licensing and cooperation agreements with institutions and
individuals located in the People's Republic of China ("China") in order to gain
access to products, research and manufacturing "know how" relating to herbs and
other natural ingredients used in "traditional" Chinese medicine. The Company's
ENDUROX line of products is based upon a Chinese herb, ciwujia, as the primary
active ingredient. There can be no assurance that circumstances beyond the
ability of the Company to control, such as political or economic conditions in
China, will not interfere with its supplies of this herb. While China has
encouraged commercial relationships with United States and other Western
businesses in recent years and, to a limited extent, has implemented a "free
enterprise" or "market" economy domestically, it remains ruled by a communist
dictatorship which could, at any time, for internal or international political
or economic reasons, curtail all such business and economic relationships. In
addition, the Company has not received an opinion of either U.S. or Chinese
counsel as to the enforceability of its licensing and cooperation agreements in
China or the United States, or, to the extent enforceable, the term during which
agreements, none of which has a fixed termination date, may be enforced. See
"Business of the Company -- The China Relationship."
Intellectual Property Protection. The Company has received a United States
patent 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. 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. 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, including the ciwujia
patent, will provide meaningful protection or significant competitive advantages
over competing products.
The Company has federal trademark registrations for ENDUROX(Registered) and
has trademark applications pending to register ARNICYN(Trademark),
PROSOL(Trademark), ENDUROX(Registered) ProHeart(Trademark) and
ENDUROX(Registered) EXCEL(Trademark) pending with the United States Patent and
Trademark Office. See "BUSINESS -- Proposed Products." The Company also has
filed the ENDUROX trademark in all 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. Common law trademark rights do
not provide the Company with the same level of protection as afforded by a
United States federal registration of a trademark. For example, unlike a
registered trademark, common law trademark rights are limited to the geographic
area in which the trademark is actually used.
8
<PAGE>
There can be no assurance that any patent and trademark protection that the
Company obtains will be effective to protect the Company's products from
duplication by other manufacturers. In addition, while the Company believes that
its products do not and will not infringe upon the patents or violate the
proprietary rights of others, it is possible that such infringement or violation
has occurred or may occur. In the event that products sold by the Company are
determined to infringe upon the patents or proprietary rights of others, the
Company could be required to modify its products or obtain a license for the
manufacture and/or sale of such products, or could be prohibited from selling
such products. There can be no assurance that, in such an event, the Company
would be able to do so in a timely manner, upon acceptable terms and conditions,
or at all, and the failure to do any of the foregoing could have a material
adverse effect upon the Company. Nor can there be any assurance that the Company
will be able to afford the expense of any litigation which may be necessary to
enforce its intellectual property rights, or to defend an action charging the
Company with patent infringement or the violation of the intellectual property
rights of others. Further, if the Company's products or proposed products were
found to infringe upon the intellectual property rights of others, the Company
could, under certain circumstances, become liable for damages, which could also
have a material adverse effect on the Company. See "Business of the Company --
Patents and Trademarks."
Control by Management and Principal Stockholders. Following the completion
of this offering, the Company's executive officers and directors will own, in
the aggregate, approximately 29.6% of the outstanding Common Stock and
immediately exercisable options to acquire an additional 417,500 shares of the
Company's Common Stock which, if exercised in full, would give management an
additional 6.4% of the outstanding Common Stock. Accordingly, the Company's
existing management can be expected to be able to significantly influence or
control the election of the Board of Directors and the business affairs of the
Company following the offering. See "Principal Stockholders."
No Prior Public Market for Common Stock; Determination of Offering
Price. Prior to this offering, there has been no market for the Common Stock of
the Company. While the Company has applied to list the Common Stock on the
Nasdaq SmallCap Market, there can be no assurance that an active trading market
for the Common Stock will be established, or if so established, sustained. The
initial offering price for the Shares has been arbitrarily determined through
negotiation between the Company and the Underwriter based on such factors as the
business potential and earnings prospects of the Company and prevailing market
conditions. Such price may not be indicative of the market price of the Shares
after this offering has been consummated. See "Underwriting."
Substantial and Immediate Dilution. Purchasers of the Shares offered
hereby will incur an immediate and substantial dilution in the net tangible book
value of the Shares of approximately $4.83 per share (approximately 80.5%) from
the public offering price of $6.00. See "Dilution."
Broad Discretion of Management in Application of Proceeds. The anticipated
uses of the net proceeds of this offering have been allocated only generally,
and a significant portion (approximately 25%) of the net proceeds will be added
to working capital. The Company reserves the right to reallocate the proceeds
among the categories specified under the caption "Use of Proceeds" as well as
using the proceeds for purposes not specified. Accordingly, the Company's
management will have broad discretion in the application of the net proceeds of
this offering. See "Use of Proceeds."
Possible Delisting; Penny Stock Regulation. Upon completion of this
offering, the Company anticipates that its Common Stock will be listed on the
Nasdaq SmallCap Market. Under Nasdaq rules, in order to maintain a listing on
the Nasdaq SmallCap Market, a company must have, among other things, $2,000,000
in net tangible assets, or either (i) a market capitalization of $35,000,000 or
more, or (ii) $500,000 net income in its last fiscal year or two of its last
three fiscal years. In addition, the listed security must have a minimum bid
price of $1.00 per share. Further, Nasdaq reserves the right to withdraw or
terminate a listing on the Nasdaq SmallCap Market at any time and for any reason
in its discretion. If the Company were unable to maintain a listing on the
Nasdaq SmallCap Market, quotations, if any, for "bid" and "asked" prices of the
Common Stock would be in the over-the-counter market, either in the "pink
sheets" published by the National Quotation Bureau, Inc. or on the National
Association of Securities Dealers OTC Electronic Bulletin Board. In such event,
an investor
9
<PAGE>
could find it more difficult to dispose of or to obtain accurate quotations of
prices for the Common Stock.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a penny stock. Securities and Exchange Commission
regulations generally define a penny stock to be an equity security that has a
price of less than $5.00 per share, subject to certain exceptions. Unless an
exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith. In addition, if the
Company's securities do not meet an exception to the penny stock regulations,
trading in the Company's securities would be covered by Rule 15g-9 promulgated
under the Securities Exchange Act of 1934 (the "Exchange Act") for non-Nasdaq
and non-national securities exchange listed securities. Under such rule,
broker/dealers who recommend such securities to persons other than established
customers and accredited investors (generally, individuals with net worth in
excess of $1,000,000 or annual incomes exceeding $200,000 or $300,000 together
with their spouses) must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale. Securities whose market price is at least $5.00 per share are
exempt from this rule.
If the Company's securities become subject to the regulations applicable to
penny stocks, the market liquidity for the Shares could be adversely affected
because the regulations on penny stocks could limit the ability of
broker/dealers to sell the Company's securities and thus the ability of
purchasers of the Company's securities to sell their securities in the secondary
market.
Government Regulation. The manufacturing, packaging, labeling,
advertising, distribution and sale of the Company's products are subject to
regulation by one or more governmental agencies. Failure by the Company to
comply with governmental regulations applicable to its business could result in
limitations or prohibitions on the sale of certain products, fines or other
sanctions.
The Company believes that the most significant governmental regulations
applicable to its business are those promulgated by the Food and Drug
Administration (the "FDA") under the Federal Food, Drug and Cosmetic Act (the
"FFDC Act"), and the Federal Trade Commission under the Federal Trade Commission
Act, which prohibits unfair or deceptive trade practices, including false or
misleading advertising. The Company's products and activities also are subject
to regulation by the Consumer Product Safety Commission, the United States
Department of Agriculture, the Environmental Protection Agency, and by various
agencies of the states, localities and foreign countries in which the Company's
products are sold. See "Business of the Company -- Government Regulation."
With respect to its application to dietary supplements, the FFDC Act has
been amended several times, most recently by the Nutrition Labeling and
Education Act of 1990 and the Dietary Supplement Health and Education Act of
1994 (the "DSHEA"). The Company's products are generally classified and
regulated as dietary supplements under the FFDC Act, as amended, and are
therefore not subject to premarket approval by the FDA. However, these products
are subject to extensive labeling regulation by the FDA and can be removed from
the market if shown to be unsafe. Moreover, if the FDA determines, on the basis
of labeling or advertising claims by the Company, that the "intended use" of any
of the Company's products is for the diagnosis, cure, mitigation, treatment or
prevention of disease, it can regulate those products as drugs and require
premarket clearance for safety and effectiveness, and if the FDA determines that
the requirements of DSHEA for making claims that a dietary supplement product
affects the "structure or function" of the body have not been met, such
non-complying claims could result in the regulation of the product as a drug.
See "Business of the Company -- Regulation."
Governmental regulations in foreign countries in which the Company wishes
to distribute its products may prevent or delay entry into the market, or
require the reformulation, of the Company's products. At the present time, the
only foreign country in which the Company's products are sold is
10
<PAGE>
Canada. Compliance with Canadian governmental regulations is controlled by the
Company's distributor for Canada, an independent contractor over whom the
Company has limited control.
In the future, the Company may be subject to additional laws or regulations
administered by the FDA or other federal, state or foreign regulatory
authorities, the repeal of laws or regulations which the Company considers
favorable, such as the DSHEA, or more stringent interpretations of current laws
or regulations. New laws or regulations could, for example, require the
reformulation of certain products to meet new standards, the recall or
discontinuance of certain products not able to be reformulated, imposition of
additional recordkeeping requirements, expanded documentation of the properties
of certain products, expanded or different labeling and scientific
substantiation. Any or all of such requirements could have a material adverse
effect on the Company's results of operations and financial condition. The
Company cannot predict the nature of such future laws, regulations,
interpretations or applications, nor can it predict what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on its business.
Product Liability. The Company, like other retailers, distributors and
manufacturers of products that are designed to be ingested, faces an inherent
risk of exposure to product liability claims in the event that the use of its
products results in injury. With respect to product liability claims, the
Company has coverage of $5,000,000 per occurrence and in the aggregate, subject
to a self-insurance retention or "deductible" of $2,500. However, there can be
no assurance, however, that such insurance will continue to be available at a
reasonable cost, or, if available, will be adequate to cover liabilities which
the Company could incur. The Company generally does not obtain contractual
indemnification from parties supplying raw materials or marketing its products
and, in any event, any such indemnification is limited by its terms and, as a
practical matter, to the creditworthiness of the indemnifying party. In the
event that the Company does not have adequate insurance or contractual
indemnification, product liabilities relating to defective products could have a
material adverse effect on the Company.
Factors Inhibiting Takeover. Certain provisions of the Company's Amended
and Restated Certificate of Incorporation and Bylaws may be deemed to have
anti-takeover effects and may delay, defer or prevent a takeover attempt that a
stockholder might consider in the Company's or the stockholder's best interest.
The Company's Amended and Restated Certificate of Incorporation authorizes the
Board of Directors to determine the rights, preferences, privileges and
restrictions of unissued series of preferred stock and the designation of any
such series, without any vote or action by the Company's stockholders. Thus, the
Board of Directors can authorize and issue shares of preferred stock with voting
or conversion rights that could adversely affect the voting or other rights of
holders of the Company's Common Stock. In addition, the issuance of preferred
stock may have the effect of delaying, deferring or preventing a change of
control of the Company, since the terms of any preferred stock which might be
issued could contain terms which could contain special voting rights or increase
the costs of acquiring the Company. See "Description of Securities -- 10%
Convertible Preferred Stock."
The Company is subject to Section 203 of the Delaware General Corporation
Law which prevents transactions between the Company and an "interested
stockholder" unless certain conditions are satisfied. The applicability of
Section 203 may have the effect of delaying, deferring or preventing "changes in
control" of the Company, even if such event would be beneficial to the then
existing shareholders. See "Description of Capital Stock" for additional
information concerning Section 203 and other provisions of the Delaware General
Corporation Law.
Future Sales of Common Stock. Upon completion of this offering, there will
be 4,185,672 shares of Common Stock outstanding, assuming the over-allotment
option is not exercised, and 143,896 shares of 10% Convertible Preferred Stock,
each of which presently is convertible into 2.5 shares of Common Stock or a
total of 359,740 shares ("Conversion Shares"). See "Description of Securities --
10% Convertible Preferred Stock." Shares sold in this offering will be tradeable
without restriction by persons other than "affiliates" of the Company. The
shares of Common Stock presently outstanding are, and Conversion Shares if
issued would be, "restricted securities" as that term is defined in
11
<PAGE>
Rule 144 promulgated under the Securities Act of 1933 (the "Securities Act").
Such securities are eligible for sale without registration under Rule 144 upon
satisfaction of certain conditions, including a minimum "holding period" of one
year from the time the securities are purchased from the Company or an affiliate
of the Company. All of the Company's outstanding Common Stock, and Conversion
Shares when issued, will be saleable under Rule 144 within ninety days following
completion of this offering, subject to the "lock up" agreements described in
the following paragraph in the case of shares owned by executive officers,
directors and certain other shareholders.
All of the Company's directors and executive officers, and certain of its
shareholders have entered into a "lock up" agreement with the Underwriter
pursuant to which they have agreed that, for a period of one year from the date
of this Prospectus, they will not offer, sell, contract to sell, pledge or
otherwise dispose of shares of the Company's Common Stock without the prior
written consent of the Underwriter. Holders of 2,440,222 shares of Common Stock
have entered into such agreements. Holders of ______ shares of Common Stock and
______ shares of 10% Convertible Preferred Stock have entered into similar
agreements in which the "lock up" period is six months. In addition, the Company
has agreed not to issue additional securities without the prior consent of the
Underwriter for a period of one year from the initial sale of Shares, except for
additional shares of 10% Convertible Preferred Stock as dividends to holders of
outstanding shares of 10% Convertible Preferred Stock, and additional shares of
Common Stock upon the exercise of outstanding options and warrants and the
exercise of the Underwriter's Overallotment Option or Underwriter's Warrants.
No prediction can be made as to the effect, if any, that future sales, or
the availability of Common Stock for future sales, will have on the market price
of the Common Stock from time to time. Sales of substantial amounts of Common
Stock by the Company or by stockholders who hold restricted securities, or the
perception that such sales may occur, could adversely affect market prices for
the Common Stock.
For additional information on possible future sales of restricted
securities in accordance with Rule 144, see "Shares Available for Future Sale."
Underwriter's Influence on the Market. A significant number of the Shares
may be sold to customers of the Underwriter. Such customers subsequently may
engage in transactions for the sale or purchase of such securities through or
with the Underwriter. Although it has no obligation to do so, the Underwriter
intends to make a market in the Common Stock and may otherwise effect
transactions in such securities. If it participates in such market, the
Underwriter may exert a dominating influence on the market, if one develops, for
the Common Stock. Such market-making activity, if commenced, may be discontinued
at any time. Moreover, if the Underwriter exercises the Underwriter's Warrants,
it may be required under Regulation M promulgated under the Exchange Act to
temporarily suspend its market-making activities. The price and liquidity of the
Common Stock may be significantly affected by the degree, if any, of the
Underwriter's participation in such market. See "Underwriting."
Limited Experience of Underwriter. Although the Underwriter was formed and
first registered as a broker-dealer in 1983, current management has operated the
Underwriter only since 1986. The Underwriter has, to date, manageed only one
public offering prior to this offering but has participated in more than _____
public offerings as a selling group member. Prospective purchasers of the Shares
offered hereby should consider this limited experience in evaluating the
securities offered hereby.
Future Issuances of Stock by the Company. Following this offering, the
Company will have 10,000,000 shares of Common Stock authorized, of which
4,185,672 shares will be issued and outstanding, assuming that the
over-allotment option has not been exercised, and an additional 1,200,700 shares
of Common Stock will be reserved for issuance upon the exercise of outstanding
options and warrants, and upon conversion of outstanding shares of 10%
Convertible Preferred Stock. The Company also will have 650,000 shares of
preferred stock, $.01 par value per share (the "Preferred Stock"), authorized
but unissued and undesignated. The balance of the Company's authorized shares of
Common Stock and 650,000 shares of the Preferred Stock are not reserved for any
purpose and may be issued without any action or approval by the Company's
stockholders. See "Description of Securities."
12
<PAGE>
Limitations on Liability of Directors and Officers. The Company's
Certificate of Incorporation limits the liability of directors of the Company
for monetary damages for breaches of directors' fiduciary duty of care. This
provision may reduce the likelihood of derivative litigation against directors
and may discourage or deter shareholders or management from suing directors for
breaches of their duty of care, even though such an action, if successful, might
otherwise benefit the Company and its shareholders. In addition, the Company's
Bylaws provide for the indemnification of directors and officers in connection
with civil, criminal, administrative or investigative proceedings when acting in
their capacities as agents for the Company. See "Disclosure of Commission
Position on Indemnification for Securities Act Liabilities."
Non-payment of Dividends. The Company has not paid dividends on Common
Stock in the past, and has no intention of paying dividends on Common Stock in
the foreseeable future.
13
<PAGE>
DILUTION
The stockholders' equity of the Company at September 30, 1997, was
$254,239. Giving effect to the sale of the Shares and payment of offering
expenses, but to no other post-September 30, 1997, transactions or operations,
and assuming no exercise of the over-allotment option, the Company's
stockholders' equity immediately following the offering would be approximately
$6,354,239. The net tangible book value of Common Stock would be approximately
$1.17 per share, or approximately 80.5% less than the price paid by purchasers
of Shares in this offering. The difference between the net tangible book value
of the Common Stock following this offering and the initial offering price of
the Shares represents dilution in the tangible book value of the investment of
purchasers in the offering. The Company's present holders of Common Stock would
benefit from an increase in the present tangible book value of their investment,
from a negative $.40 per share to $1.17.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per Share........... $6.00
Tangible book value per share of Common Stock before
this offering........................................ $(0.40)
Increase in net tangible book value per share
attributable to the sale of the Shares offered
hereby............................................... $ 1.57
------
Net tangible book value per share of Common Stock after
this offering.......................................... $1.17
-----
Dilution per share to new stockholders.................... $4.83
=====
</TABLE>
The following table sets forth the number of shares of Common Stock
purchased from the Company and the total consideration and the average price
paid by (a) present holders of Common Stock or their predecessors, and (b)
purchasers of Shares in this offering.
<TABLE>
<CAPTION>
SHARES OF PERCENTAGE TOTAL PERCENTAGE OF AVERAGE
COMMON OF CLASS CONSIDERATION TOTAL PRICE
STOCK OUTSTANDING PAID CONSIDERATION PER SHARE
--------- ----------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Present holders................. 2,985,672 71.3% $ 3,946,519 35.4% $1.32
Purchasers in this
offering (1)................. 1,200,000 28.7% $ 7,200,000 64.6% $6.00
--------- ---- ----------- ---- -----
Totals..................... 4,185,672 100% $11,146,519 100% $2.66
========= ==== =========== ==== =====
</TABLE>
- ------------------
(1) Assumes no exercise of the over-allotment option.
The Company also has outstanding 143,896 shares of 10% Convertible
Preferred Stock for which the holders of such shares or their predecessors paid
$1,200,000. Each share of the 10% Convertible Preferred Stock outstanding
presently is convertible into 2.5 shares of Common Stock, or 359,740 shares in
total. Conversion of outstanding 10% Convertible Preferred Stock would result in
an imputed purchase price of $3.34 per share of Common Stock issued in
conversion. The net tangible book value of the 10% Convertible Preferred Stock
at September 30, 1997, was approximately $1.77 per share. Giving retroactive
effect to the receipt of the proceeds from this offering, the net tangible book
value of shares of the 10% Convertible Preferred Stock would be $10.00 per
share. See "Description of Capital Stock -- 10% Convertible Preferred Stock."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from this offering, after deducting sales
commissions (10% of gross proceeds) and the non-accountable expense allowance
(3% of gross proceeds) payable to the Underwriter, and other offering expenses
such as legal and accounting expenses, registration and filing fees, printing
and other miscellaneous offering expenses, are estimated to be $6,100,000
($7,039,600 if the Underwriter's over-allotment option is exercised). The
Company intends to use the net proceeds of the offering as follows:
<TABLE>
<CAPTION>
PERCENTAGES
OF TOTAL
DESCRIPTION AMOUNT PROCEEDS
- ----------- ---------- -----------
<S> <C> <C>
Marketing and advertising(1)........................... $2,640,000 43.3%
Inventory and manufacturing costs(2)................... 1,015,000 16.6%
Research and development............................... 610,000 10%
Added personnel costs(3)............................... 305,000 5%
Working Capital(4)..................................... 1,530,000 25.1%
---------- ----
Totals......................................... $6,100,000 100%
========== ====
</TABLE>
- ------------------
(1) Both in connection with the launch of new products (approximately 80%) and
in support of existing products.
(2) New product inventory and costs associated with the start up of manufacture
for new products.
(3) The Company expects to increase its staff following this offering by hiring
five individuals, principally for sales and marketing purposes.
(4) Funds allocated for working capital may be used for any corporate purpose,
including payments relating to the Company's reserve for product
replacement. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Section (b)(i)."
The above amounts represent management's present estimates based upon
current operating plans and certain strategic assumptions, including those
relating to the Company's future revenue levels and expenditures, and industry
and general economic and other conditions. Although the Company does not
contemplate any material changes in the proposed use of proceeds, since the
proposed uses of proceeds are based on assumptions concerning future events and
conditions, many of which are not in the Company's control, the amounts shown
may be adjusted among the uses indicated above or, if business conditions make
it necessary or advisable, in management's opinion, to do so, certain portions
of the net proceeds may be used for other corporate purposes. By way of
illustration only, if the Company's revenues in future periods were less than
anticipated, management might increase its allocation of funds to marketing and
advertising in an effort to increase sales. Alternatively, management might
decrease the allocation of funds for that purpose if, in the circumstances,
management believed that reduced sales levels would not support previously
budgeted marketing and advertising expenses. In the latter case, funds
previously allocated for marketing and advertising might be reallocated to
research and development to pursue the identification and development of new
products, or to accelerate ongoing research and development activities. By way
of further illustration, if manufacturing and inventory costs associated with
new products were higher than anticipated, management might be required to scale
back operations in the areas affected, or to reallocate funds to manufacturing
and inventory which previously had been allocated to other uses.
The Company anticipates that it will commence the application of the
proceeds upon completion of this offering and that such proceeds will be applied
over the next twelve months. The Company believes that the net proceeds of this
offering will be sufficient to satisfy its requirements to implement its
business plans over such period. Pending such use, the net proceeds of this
offering will be invested in short term, interest bearing deposits or in United
States government securities. The Company reserves the right to enter into short
term borrowing in the future as business conditions or the Company's needs may
require.
To the extent the over-allotment option is exercised, any proceeds from
such exercise will be added to working capital.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997, and as adjusted to give effect to the issuance and sale of
1,200,000 Shares, the receipt of net proceeds therefrom, and the application of
net proceeds as set forth under the caption "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------
PRO FORMA
ACTUAL(1) AS ADJUSTED(1)
----------- --------------
(UNAUDITED)
<S> <C> <C>
Current liabilities............................... $1,585,943 $ 1,585,943
---------- -----------
Long term debt and other liabilities (excluding
current maturities)............................. $ -0- $ -0-
---------- -----------
Common Stock, authorized 10,000,000 shares, par
value $.0025 per share, 2,985,672 shares
outstanding (4,185,672 shares outstanding as
adjusted)....................................... $ 7,464(2) $ 10,464(2)
---------- -----------
10% Convertible Preferred Stock, authorized
250,000 shares, par value $.01 per share,
143,896 shares outstanding...................... $ 1,439 $ 1,439
---------- -----------
Additional paid in capital........................ $4,791,162(2) $10,888,162(2)(3)
---------- -----------
Accumulated deficit............................... $4,545,826(4) $ 4,545,826(4)
---------- -----------
Total Stockholder Equity.......................... $ 254,239 $ 6,354,239
---------- -----------
</TABLE>
- ------------------
(1) Does not include Common Stock reserved for issuance upon exercise of
outstanding options and warrants (1,200,200 shares), the over-allotment
option (180,000 shares) or the Underwriter's Warrants (120,000 shares), or
upon conversion of outstanding shares of 10% Convertible Preferred Stock
(359,470 shares based upon the present conversion ratio).
(2) Giving effect to the cancellation, effective as of the date of this
Prospectus, of 200,000 shares issued to the Company's President in
connection with the organization of the Company.
(3) After deduction of the Underwriter's commission (10%), unaccountable expense
allowance (3%), and other offering expenses (primarily legal and accounting
fees, and printing costs) estimated at $164,000.
(4) Includes dividends paid on 10% Convertible Preferred Stock ($102,765)
through September 30, 1997.
16
<PAGE>
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 Prospectus.
(a) Introduction
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(Registered), was introduced in March 1996, and commercial sales began in
May 1996. Prior to that time, the Company was engaged in organizational and
financing activities, product research and development, and preliminary
marketing and distribution activities. In March 1997, the Company extended the
ENDUROX line of products with ENDUROX ProHeart(Trademark) and ENDUROX
EXCEL(Trademark). The Company has identified and developed a number of new
products which are scheduled to be introduced beginning in the fourth quarter of
1997.
(b) Results of Operations
(i) Nine Months Ended September 30, 1997 versus September 30, 1996
The Company incurred a loss of $4,265,404 or $1.23 per share for the period
ended September 30, 1997, compared to a loss of $517,139 or $.20 per share for
the period ended September 30, 1996. In most respects, operations in these
periods cannot be meaningfully compared since the Company did not begin
commercial operations until May 1996.
In the nine months ended September 30, 1997, revenues increased to
$3,219,831, from $1,043,082 for the same period in 1996. The increase is
attributable to the fact that sales of the Company's initial product, ENDUROX,
and extensions to the ENDUROX line of products introduced in March 1997, were
placed into existing channels of distribution that had only begun to be
established in the comparable 1996 period, with the first sales of product
occurring in May 1996. A portion of sales in the first nine months of 1997 can
be attributed to retailer customer purchases of opening inventory, or "pipe-line
fill", for ENDUROX EXCEL and ENDUROX ProHeart, sales of which represented
$971,883 or approximately 30.2% of total sales in the nine month period.
Substantially all sales of the Company in the first nine months of 1996 were
attributed to "pipe-line fill" for the original ENDUROX product. Once the
distribution pipeline for a retail product is filled, sales result only from
reorders from retailers as they replenish inventory sold to their customers,
from the expansion of the distribution network to new channels, or from adding
retailers in existing distribution channels. As a result, sales in the initial
months of a product's distribution may not be indicative of sales levels that
will be achieved in later periods.
The loss of $517,139 incurred by the Company in the nine months ended
September 30, 1996 was attributable primarily to the fact that revenues derived
from ENDUROX in and after May 1996 were insufficient to offset the selling,
general and administrative expenses which were incurred throughout the entire
nine month period. The Company's gross profit margin in the nine months ended
September 30, 1997 (76.0%) was slightly higher than the margins in the nine
months ended September 30, 1996 (73.1%), primarily as a result of efficiencies
related to the increased scale of operations in 1997, notwithstanding lower
gross profit margins on ENDUROX ProHeart and ENDUROX EXCEL than on the original
ENDUROX product.
The Company's substantial loss in the nine months ended September 30, 1997
was attributable primarily to a non-recurring charge of $1,674,440 and to a
substantial increase in selling, general and administrative expenses, from
$1,278,681 in the first nine months of 1996 to $4,923,936 in the nine months
ended September 30, 1997. The non-recurring charge of $1,674,440 was incurred in
connection with the replacement by the Company of its customers' inventory of
ENDUROX in encapsulated form with a caplet form of the product, and includes a
reserve of $1,056,246 at September 30, 1997, which management believes is
adequate to cover future returns of retailers' capsule inventory. This
replacement of inventory was required because the active herbal ingredient in
ENDUROX is highly water absorbent, which resulted in the capsules changing color
and/or size in conditions of high heat and humidity, even though the product was
encapsulated in a gel capsule and
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sealed in a blister package. To rectify this problem, the Company decided to
switch to a caplet form of product, in which the ingredients are compressed and
coated, from the more porous gelatin capsule filled with ingredients in powdered
form. ENDUROX is now sold by the Company only in caplet form. ENDUROX EXCEL and
ENDUROX ProHeart were introduced in caplet form, but the introduction of these
products was delayed as a result of the capsule problem with the original
ENDUROX product, and the volume of original ENDUROX sales in the nine months
ended September 30, 1997 was substantially below the Company's projections based
upon the distribution which the Company had either obtained for the product or
which was anticipated.
The increase in selling, general and administrative expenses in the nine
months ended September 30, 1997, was attributable primarily to increased
expenditures for advertising and promotion. The promotional and advertising
expenses incurred in 1997 were committed well in advance in order to obtain mass
distribution in the case of television advertising and to obtain publication
dates in the case of print advertising, and the level of such expenditures in
the nine month period ended September 30, 1997 ($4,109,414) was in excess of
sales revenues for the period. The remaining increases in selling, general and
administration expense in the first nine months of 1997, as compared to the year
earlier period, was primarily a function of increased staff and related expense
as the Company progressed from the development stage to full operating status.
(ii) Fiscal Year Ended December 31, 1996 Versus December 31, 1995
In 1996, operating, selling, general and administrative expenses all
increased dramatically over fiscal 1995 levels, primarily as a result of
expenses incurred in development and marketing activities related to ENDUROX.
Personnel related costs increased, from $54,237 in fiscal 1995 to $310,934 in
fiscal 1996, primarily as a result of increases in staffing as the Company
progressed from a development stage company in 1995 to full commercial
operations in May 1996.
Approximately 90% of the Company's sales in 1996 were in the second half of
the year, with a majority occurring in the fourth quarter. Much of this sales
volume was the result of "pipe-line fill", i.e., as the Company expanded its
distribution network for ENDUROX, retailer purchases of opening inventory
represented a substantial portion of sales. The Company had no sales in 1995.
(c) Liquidity and Capital Resources
(i) September 30, 1997
At September 30, 1997, the Company's current assets exceeded its current
liabilities by $87,247, with a ratio of current assets to liabilities of
approximately 1.06 to 1 versus a ratio of approximately 5.99 to 1 at December
31, 1996. The change in current ratio was attributable primarily to the
Company's operating losses in the nine months ended September 30, 1997, the
decrease in accounts receivable ($1,427,580) being reflective of the decrease in
sales in August and September 1997 compared to November and December 1996,
ameliorated somewhat by the sale of Common Stock in the first quarter of 1997.
Based on current activities and assuming successful completion of the
offering, management expects the Company to be able to satisfy its cash
requirements during the remainder of fiscal 1997 and in fiscal 1998 from the
proceeds of this offering, from cash on hand and, if necessary, from a bank line
of credit, secured by accounts receivable, which enables the Company to borrow
up to 80% of the amount of current accounts receivable (defined as 90 days or
less), to a maximum of $1,000,000. At September 30, 1997, the Company had not
made any borrowings against this line of credit. The Company is in the second
year of a three year promotional contract which requires annual payments of
$300,000. Apart from this contract, the Company has no commitments for
advertising or promotion expenditures beyond the fourth quarter of 1997.
Commitments in the fourth quarter are approximately $80,000.
(ii) December 31, 1996 and 1995
At year end 1996 and 1995, the Company's cash resources were adequate for
its immediate working capital needs. A need for additional funds in 1996 in
order to begin marketing ENDUROX was anticipated, and this need was met through
private offerings of 10% Convertible Preferred Stock in the fourth quarter of
1995 and first quarter of 1996 ($1,200,000), and of Common Stock in the second
and third quarters of 1996 ($1,968,750). Total offering costs incurred in
connection with these capital
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transactions were approximately $463,000, exclusive of non-cash compensation
paid to the Underwriter for services relating to the transactions.
Additional capital was raised through the sale of Common Stock to
institutional investors in August 1996 ($525,000) and February 1997 ($999,999),
and to two individual investors in December 1996 ($60,000) and April 1997
($45,000). Total offering costs incurred in connection with these capital
transactions were approximately $113,000, exclusive of non-cash compensation
paid to the Underwriter for services relating to the August 1996 transaction.
(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
Nutritional supplement sales tend to be somewhat seasonal, with lower sales
typically realized during the first and second fiscal quarters, and higher sales
typically realized during the third and fourth fiscal quarters. The Company
believes such fluctuations in sales are the result of greater marketing and
promotional activities toward the end of each fiscal year, customer buying
patterns, and consumer spending patterns related primarily to the consumers'
interest in achieving personal health and fitness goals after the beginning of
each new calendar year and before the summer fashion season. Some classes of
products, however, differ in seasonality. For example, January typically is the
best month for sales of products for weight loss and control. In any event, at
this stage and for the foreseeable future, 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 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which provides guidance on how to measure impairment of long-lived assets,
certain intangibles and goodwill related to those assets to be held and used,
and for long-lived assets and certain identifiable intangibles to be disposed
of. The Company adopted this statement effective June 1, 1996, and expects that
it will have no material effect on its financial position and results of
operations.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation", which defines a fair value based
method of accounting for stock based employee compensation plans. Under SFAS No.
123, companies are encouraged, but are not required, to adopt the fair value
method for fiscal years beginning after December 15, 1995 for all employee
awards granted after the beginning of such year. Companies are permitted to
continue to account for such transactions under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), but, in
future years, must disclose, in a note to the financial statements, pro forma
net income and earnings per share as if SFAS No. 123 had been applied. The
Company has determined that it will not adopt the fair value method, but will
continue to account for stock-based compensation under APB No. 25 and provide
the requisite disclosure under SFAS No. 123.
In February 1997, the Financial Accountant Standards Board issued SFAS No.
128 (SFAS No. 128), "Earnings per Share", which supersedes Accounting Principles
Board Opinion No. 15 "Earnings per Share" and replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and provides guidance on other computational
changes. SFAS No. 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. The Company does not expect the adoption of SFAS No. 128 to have a
material impact on the financial position and results of operations of the
Company.
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BUSINESS OF THE COMPANY
GENERAL
The Company was incorporated in April 1995 to develop and market natural
products based upon herbs and other botanicals with a demonstrated ability to
improve and promote health and well being. Management of the Company believes
that recent growth in the natural health product industry will continue, driven
by the public's heightened awareness of the benefits of such products and a more
favorable regulatory climate following the passage of the Dietary Supplement
Health & Education Act of 1994. See "Government Regulation" below.
From its organization in April 1995 until it introduced its first
commercial product, ENDUROX(Registered), in March 1996, the Company was engaged
primarily in organizational and financing activities, product research, and
preliminary marketing and distribution activities. During this period, the
Company developed a master broker network for ENDUROX and future products, and
obtained distribution for its products in mass channels (mass merchandisers,
chain drug and supermarkets) and through health food chains and individual
stores.
The product formulation for ENDUROX is based on a Chinese herb, ciwujia,
which has been shown to enhance athletic performance, stamina and recovery, and
was identified by the Company and the Institute of Nutrition and Food Hygiene of
the Chinese Academy of Preventative Medicine (the "INFH") in Beijing, China. See
" -- The China Relationship" below. In addition to ciwujia, the Company has
identified other herbs and botanicals through its relationship with the INFH.
The Company also has sought to identify products utilizing botanicals of
non-Chinese origin and, where possible, to license products conceived or
developed by others which have some level of market protection (e.g., through a
patent, patent claim, manufacturing technology etc.) Most of the proposed new
products discussed below are based on herbs and other natural ingredients which
are not of Chinese origin.
The Company's business strategy is to identify novel and safe natural
products that have demonstrable health benefits and can be marketed without
prior FDA approval under current regulatory guidelines, and to promote and
market those products aggressively through mass and health food channels of
distribution using, among other things, marketing claims based upon Company-
conducted research and testing.
OVERVIEW OF THE NATURAL HEALTH PRODUCT MARKET
According to industry sources, sales of natural products and supplements
through all outlets were approximately $15 billion in 1996. Chain drug stores,
mass merchandising and grocery outlets, which represent the bulk of sales of
natural products and supplements, grew at a rate of 20% in 1996 over the
previous year. The Company believes that this growth is being driven by
information in the mass media which continues to highlight problems with the
American diet; the fact that American consumers are becoming increasingly
disenchanted with and skeptical about many conventional medical approaches to
disease treatment; and, finally, recent clarifications and changes of food and
drug laws that have eased significantly the regulatory burdens associated with
the introduction and sale of dietary supplements.
Public awareness of the positive effects of nutritional supplements on
health has been heightened by widely publicized reports and medical research
findings indicating a correlation between the consumption of a wide variety of
nutrients and the reduced incidence of certain diseases. Reports have indicated
that the United States government and universities generally have increased
sponsorship of research relating to nutritional supplements. In addition,
Congress has established the Office of Alternative Medicine within the National
Institutes of Health to foster research into alternative medical treatment
modalities, which may include natural remedies. Congress has also recently
established the Office of Dietary Supplements in the National Institutes of
Health to conduct and coordinate research into the role of dietary supplements
in maintaining health and preventing disease.
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According to Congressional findings that accompanied the passage of the
Dietary Supplement Health & Education Act of 1994, national surveys reveal that
almost 43% of Americans regularly consume vitamins, minerals and herbal
supplements and 80% consume these products at some time during their lives. The
35-and-older age group of consumers, which is expected to continue to grow over
the next two decades, represents 78% of the regular users of vitamin and mineral
supplements. Based on data provided by the United States Bureau of the Census,
from 1990 to 2010, the 35-and-older age group of the United States population is
projected to increase by 32%, a significantly greater increase than the 20%
projected increase for the United States population in general.
The Company believes that the aging of the United States population,
together with a corresponding increased focus on preventative health care
measures, will continue to result in increased demand for certain nutritional
supplement products. Also, the Company believes that the continuing shift to
managed healthcare delivery systems will place greater emphasis on disease
prevention and/or health maintenance, areas with which natural health products
are most identified.
With respect to the distribution of natural health products, while
distribution through small to large sized natural food stores remain a
significant factor, the bulk of the growth is found in the mass merchandisers
and health food chains such as General Nutrition Centers which now represent the
majority of sales, and represent the fastest growing channels of distribution.
INITIAL PRODUCTS -- ENDUROX(REGISTERED)
The Company's initial product, ENDUROX(Registered), is a dietary supplement
the principal ingredient of which is the herb ciwujia. Laboratory tests
conducted by the INFH compared the endurance of laboratory animals to which
ciwujia was administered to groups using other herbs (ginseng, cordyceps and
wolfberry) and to a control group. Test results showed that ciwujia
significantly improved the test animals' endurance. Human trials, in which test
subjects underwent aerobic and other measurements and assessments following
various exercise routines with and without administering ENDUROX, were conducted
in the exercise physiology laboratories at the Academy of Preventive Medicine,
Institute of Food Hygiene, in Beijing, and the University of North Texas Health
Science Center in Fort Worth, Texas. On the basis of these studies, researchers
and the Company concluded that ENDUROX changed the way the body fuels a workout
by shifting the fuel source from carbohydrate to fat, thereby increasing fat
metabolism; built endurance by slowing the lactic acid buildup that causes
muscle soreness and fatigue; raised the anaerobic threshold during workout; and
sped recovery following workout, as measured by heart rate and lactic acid
levels.
The Company also conducted extensive qualitative and quantitative marketing
research to measure consumer receptivity to a natural product that could improve
exercise performance. The research showed, among other things, that almost 52
million consumers exercise more than 100 times per year ("frequent exercisers"),
that the average household income of frequent exercisers exceeded $45,000 per
year in 1995 and, in that year, frequent exercisers had spent over $5.3 billion
on exercise equipment.
Based on its market research, management decided to launch ENDUROX in both
health food and mass consumer distribution channels, using a master broker for
chain drug, grocery, and mass merchandisers and a separate master broker for the
health food segments. The Company formally introduced ENDUROX on March 15, 1996,
at the Natural Product Expo West in Anaheim, California. See "Marketing and
Distribution" below.
The first extensions to the ENDUROX line of products, ENDUROX
EXCEL(Trademark) and ENDUROX ProHeart(Trademark), were 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. ENDUROX ProHeart is targeted to the heart conscious consumers who
exercise regularly. In addition to ciwujia, ENDUROX ProHeart contains vitamins E
and C and folic acid. Sales of ENDUROX EXCEL and ENDUROX ProHeart were $407,831
and $564,052, respectively, in the nine months ended September 30, 1997.
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PROPOSED PRODUCTS
ENDUROX(Registered) RECOVER(Trademark) is a new sports drink in the
development stage. The Company expects to obtain data from trials to be
conducted for the Company at a number of institutions with well known exercise
physiology departments to support its marketing claims. These trials are
expected to be completed in December 1997.
The market for sports drinks currently exceeds $1.5 billion a year. This
market is dominated by Gatorade, which is manufactured by Quaker Foods. In
addition, there are a number of sports drink products primarily marketed through
health food stores. These include MetRx, products from Weider Nutrition
International, Champion Nutrition, and house brands sold by General Nutrition
Centers. Sports drinks sold through health food channels, which is the market
which the Company intends to target, represent approximately $300 million in
sales, with the balance of sales being made in mass channels of distribution.
The Company expects to initiate sales of this product in the first quarter of
1998.
PROSOL(Trademark) is a new product based on the herb hypericum (St. John's
Wort). Hypericum has been shown to be effective in treating the symptoms of mild
to moderate depression in numerous clinical studies. In Germany, where the
expense of hypericum use is reimbursed by government sponsored health insurance,
it outsells Prozac, the leading US product for treating depression, by a
substantial margin. Under the Dietary Supplement Health and Supplement Act of
1994, PROSOL cannot be marketed for the treatment of depression, as such, but
can be marketed to improve emotional well-being. "See Government Regulation"
below.
The Company has filed a trademark application for the name PROSOL, and
expects to launch the product in the fourth quarter of 1997.
ARNICYN(Trademark) is a topical analgesic stick that contains a combination
of natural ingredients which have demonstrated effectiveness in reducing the
pain and inflammation of arthritis. The four herbal components in ARNICYN are
capsaicin, menthol, arnica and boswellia serrata.
The total market for topical analgesics in mass channels of distribution in
1997 exceeded $350 million. Some of the major brand names in this category
include Bengay and Zostrix. Products containing capsaicin represent the fastest
growing segment of the market. ARNICYN will be targeted to the estimated 40
million Americans who have arthritis. The Company intends to launch ARNICYN in
the fourth quarter of 1997 or the first quarter of 1998, through direct response
TV, and then expand distribution into chain drug and mass merchandisers.
PO 2 is the Company's working name for a proposed new product based on a
protein which, when ingested, stimulates the body's release of cholecystokinin,
a peptide which is involved in the human digestive process. Research has shown
that the release of cholecystokinin in humans increase satiety resulting in
decreased food intake and, thus, provides an approach to weight loss and control
using the body's natural appetite control mechanism.
The proteins which stimulate cholecystokinin are called protease inhibitors
and are found in soy and potatoes. Only the protease inhibitors obtained from
potatoes, however, have been shown to be effective in humans. The investigator
who showed that the protease inhibitor from potatoes stimulated the release of
cholecystokinin received a use patent on the enzyme in 1985. However,
purification of the enzyme was not commercially feasible until recently, when
researchers developed a proprietary method of purifying the protein. This
purified protease inhibitor (PO 2) has been found effective to stimulate the
release of cholecystokinin in numerous studies, including studies published by
researchers at the University of Texas Health Science Center and unpublished
studies by the same researchers.
The Company has signed a license agreement with the licensor of the patent
covering the potato-derived protease inhibitor and the developer of the
proprietary purification process. This agreement grants to the Company the
exclusive world wide right to market and develop a number of weight loss
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products incorporating the purified protein ingredient, which would be supplied
to the Company by the licensors.
The Company expects the product, which is as yet unnamed, to be introduced
as a powder drink that would be taken one hour prior to meals. The Company
estimates that the product will be launched in limited distribution in the third
quarter of 1998, with a full marketing and distribution to begin in January
1999. This schedule is intended to capitalize on the fact that approximately 30%
of the annual sales of diet products and services typically occur in January.
Industry data indicates a national market of approximately $3 billion for weight
loss and weight control products, including prescription drugs, OTC products,
diet foods and nutritional supplements.
SPORTS ANALGESIC: Strains and sprains resulting from sports injuries are
usually treated with a topical analgesic, an oral analgesic or a combination of
both agents. There currently are no non-prescription products that can
accelerate recovery from a sports injury in the sprain/strain category. The
Company has formulated a product with both an internal and external component
that it expects to launch in June 1998. Management believes that a combination
internal/external sports analgesic would represent a unique product in a
category which has lacked innovation in the last ten years. The Company intends
to work with professional trainers both in evaluating the product and also using
their endorsements to promote the product. This product would be distributed
through health food stores and selected mass merchandisers.
THE CHINA RELATIONSHIP
In connection with its organization, the Company entered into an Exclusive
Technology Sharing and Strategic Alliance Agreement and a Licensing Agreement
with the Institute of Nutrition & Food Hygiene of the Chinese Academy of
Preventive Medicine (the "INFH") in Beijing, People's Republic of China. The
purpose of these agreements and relationships to obtain access to agents derived
from natural sources proven effective in China, where the use of herbs in health
and healing has been an integral part of "traditional" Chinese medicine for over
4,000 years, as well as to Chinese research and manufacturing "know how" in this
area.
INFH is the most prestigious nutritional organization in China, reporting
directly to the Ministry of Health. The INFH has worked closely with the World
Health Organization and is involved in on-going research concerning the
relationship of nutrition with health and disease from a mechanistic and
epidemiological perspective, and the role of natural products in maintaining and
preventing disease. Under its agreements with the Company, the INFH has granted
to the Company the exclusive right to commercialize within and outside of China
all natural TCM herbs and other natural agents in nine specified areas: obesity
management, sports recovery/anti-fatigue, female health (PMS and estrogen
supplementation), health teas, arthritis, diabetes mellitus and cholesterol
lowering. The INFH also has agreed to seek out and enter into licensing
agreements with other Chinese institutions for other natural constituents that
can be used in products for the treatment of disease and maintenance of health
and well being, and either to assign such licenses to the Company or give the
Company a right of first refusal to license the product. The Company has agreed,
after the Company achieves a defined level of profitability, to pay a royalty
(starting at 2% on annual net sales under $25 million, and declining to 0.5% on
annual net sales in excess of $200 million) to the INFH based upon sales of
products utilizing natural constituents exported from China or developed in
China, or based in whole or in part on such constituents. The level of
profitability which the Company must achieve in any annual period before a
royalty must be paid is such that the Company's pre-tax profits in the period,
less 50% of the Company's accumulated loss carry forward, less taxes, and less
royalties payable to the INFH must be greater that zero. Prior to the date of
this Prospectus, the Company has not paid any royalties to the INFH pursuant to
this agreement, and the Company does not anticipate incurring any obligation to
pay royalties until the year ended December 31, 1998, at the earliest. See
"Certain Relationships and Related Transactions -- Certain Other Transactions".
None of the aforementioned agreements has a fixed termination date,
although the agreements may be terminated by either party upon ninety (90) days
notice in the event of a material breach.
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MANUFACTURING
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 has identified and worked with a
number of manufacturers who have sufficient manufacturing capacity to meet the
short and intermediate-term production needs of the Company, and who will assist
the Company in its development work, as in the case of ENDUROX.
The Company has used the services of a number of companies to assist in the
manufacture of its ENDUROX line of products. Ciwujia is harvested and extracted
in China under the supervision of quality control scientists from the INFH.
Every lot of ciwujia extract is standardized and undergoes a broad range of
quality assurance tests. The extract is then shipped to a processor in the
United States, where it is spray dried. Following the spray dry procedure the
product is shipped to an encapsulator and, from the encapsulator, to a packager
where it is blister packed and packaged. The product is then shipped to a
distribution center in Cincinnati, Ohio.
The Company has no existing contractual commitments or other arrangements
for the future manufacture of its products. Rather, it places orders for
manufacturing services as required based upon price quotations and other terms
obtained from selected manufacturers.
ENDUROX is, and future products of the Company are expected to be,
manufactured in the United States.
MARKETING AND DISTRIBUTION
The Company's first product, ENDUROX(Registered), a dietary supplement in
the sports performance and recovery market segment, was introduced in March
1996, and commercial shipments of the product were begun in May 1996. Extensions
on the ENDUROX product line (ENDUROX EXCEL(Trademark) and ENDUROX
ProHeart(Trademark)) were introduced in March 1997.
The Company has pursued a "multi-channel" distribution strategy in
marketing its line of ENDUROX products, and intends to follow a similar strategy
with future products. The ENDUROX line of products is sold in retail outlets in
all 50 states, with customers in the mass channels of distribution including
mass merchandisers such as WalMart, KMart and Target; chain drug stores such as
CVS, Walgreens, Eckerds and Rite Aid; and grocery supermarkets such as Pathmark
and Albertsons. The Company distributes its products to the health food market
through General Nutrition Centers, a chain with over 2,800 outlets (see "Risk
Factors -- Dependence Upon Significant Customers"), and independent health food
retailers. The Company also sells through other channels, such as sports
specialty stores such as The Sports Authority and health clubs. The nature of
the product and its target market dictate the channels of distribution in which
a product is launched, and the level of effort directed to each channel of
distribution.
ENDUROX ProHeart presently is distributed through leading health food
stores and General Nutrition Centers. The Company plans to expand distribution
of ENDUROX ProHeart into mass channels, specifically chain drug and mass
merchandisers, in the fourth quarter of 1997. Advertising for this product will
commence in February 1998, which is National Heart Month, primarily in magazines
that reach the over 50 age bracket. The product also will be supported by an
extensive public relations campaign creating awareness on the importance of
exercise, antioxidants and folic acid in helping protect and maintain heart
health.
The Company uses two master brokers in its distribution network, one for
mass volume retailers and the other for the health food market. Both master
brokers receive a fixed monthly payment plus a commission on sales under
agreements that are terminable at will by either party on relatively short
notice. Most of the Company's customers are sold direct through its broker
networks, although large drug wholesalers are used to reach smaller chains and
independents. General Nutrition Centers, which is the Company's largest
customer, is a "house account" which the Company sells directly outside its
broker network. The Company also is considering the use of electronic media such
as direct response TV, "home shopping" networks and, possibly, TV infomercials
to market one or more of its new
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products. The Company believes that electronic media can serve as a means of
gaining immediate sales volume while laying a foundation for broader
distribution through mass channels.
The Company began distribution of ENDUROX in Canada in 1997 through an
independent distributor, with the first retail sales made in April 1997. At the
present time, this represents the Company's sole non-US marketing channel. The
Company is seeking regulatory clearances to distribute ENDUROX in Europe, South
America and Asia, but there is no assurance that the Company will obtain these
clearances, and, in any event, the Company does not expect to be in a position
to begin significant distribution outside the United States until the end of
1998 at the earliest.
To support its marketing efforts, the Company advertises in trade and
consumer health food and sports magazines and on television, attends trade shows
and exhibitions, sponsors promotional programs and events and in-store
promotions, and engages in an extensive public relations effort that has
included television, that has resulted in articles in numerous health, fitness,
trade and natural products publications, which the Company also uses to promote
its products. In September 1996, the Company entered into a three year
endorsement contract with former professional football player Joe Montana. Mr.
Montana receives an annual fee, and also received an option to purchase 25,000
shares of Common Stock upon execution of the endorsement contract. See
"Description of Capital Stock -- Other Options and Warrants". The Company has
made extensive use of television and other media advertising featuring Mr.
Montana, and Mr. Montana also has been featured in a number of the Company's
promotional and public relations activities. Other paid endorsers for the
Company include Frank Shorter (two-time Olympic medalist), Jeff Galloway (former
Olympian and author of the leading running book sold in North America), Debbi
Lawrence (two-time Olympian and considered America's greatest racewalker), Dave
Scott (six-time winner of the "Ironman" competition) and Grete Waitz (nine-time
winner of the New York City Marathon).
In the twelve-month period December 31, 1996 and the nine months ended
September 30, 1997, the Company's expenditures for product advertising and
promotion were approximately $1,303,880 and $4,109,414, respectively.
COMPETITION
Dietary supplements are distributed in variety of ways, including
independent health food suppliers, such as the Company, who focus on vitamins
and dietary supplements; mass volume retail suppliers; gym and health club
product suppliers; direct sale and mail order vendors; and private label
manufacturers. The Company estimates that there are approximately 20 large
national companies that manufacture or distribute herbal products and
medicinals. Generally, these companies are well funded and sophisticated in
their marketing approaches. Examples are Weider Nutrition International,
Nature's Way, Nature's Herbs and Solaray, Inc. In addition, there are a number
of large, multilevel marketers such as Shaklee, Herbalife and Amway that sell
encapsulated herbs, diet products, herbal supplement formulas and vitamin
supplements.
As the market for herbal products and medicinals has increased, major
retailers such as GNC have introduced house brands to take advantage of their
retailing strength, a trend that is likely to continue. Although major retailers
generally have not introduced innovative products in the past, the Company
believes that house brands represent a competitive threat once a product has
become established. Large pharmaceutical companies and packaged food and
beverage companies also participate in the nutritional supplement market on a
limited basis. Increased competitive activity from such companies could have a
material, adverse effect on the Company and other participants in the industry
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 and its other competitors.
As the nutritional supplement industry grows and matures, it can be
expected that retailers will favor suppliers that can provide innovative and
high margin products, who are financially stable and who aggressively market and
promote a wide line of products. Independent companies which have a limited
product line, and who fail to develop new, innovative products and support them
with strong marketing efforts will be unlikely to succeed in that environment.
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GOVERNMENT REGULATION
The Company believes that all of its existing and proposed products, as
described above, are dietary supplements which do not require governmental
approvals to market in the United States. 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. See "RISK FACTORS -- Government Regulation". The Company's
activities also are subject to regulation by various agencies of the states and
localities in which its products are sold.
The FDA traditionally has been the main agency regulating the types of
products sold by nutritional supplement firms such as the Company, but much of
that authority stemmed from the FDA's treatment of dietary supplements as food
additives and drugs. The FDA's role in this area was reduced mainly to policing
the activities of makers of dietary supplements by 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, established an Office of Dietary Supplements at the National
Institute of Health in order to coordinate and conduct scientific research into
the health benefits of dietary supplements, established a presidential
commission to study and make recommendations on the regulation of label claims
and statements for dietary supplements, and required the FDA to promulgate
regulations consistent with the DSHEA and the recommendations of the
presidential commission.
Prior to the enactment of the DSHEA, the FDA had required nutrition
labeling on all dietary supplements and prohibited the making of any health
claim on a dietary supplement unless the supplement was consumed as a food, its
components were demonstrated to be safe, and the health claim was supported by
significant scientific agreement and approved by the FDA. Passage of the DSHEA
impacted the FDA's ability to issue and implement regulations with respect to
dietary supplements by exempting such products from classification as "food
additives" or, in most circumstances, "drugs". Although the DSHEA is generally
viewed as a positive development for companies that sell dietary supplements
such as vitamins, minerals, herbs, botanicals, amino acids and similar
substances, the legislation imposed significant requirements that must be
adhered to in order for a product to qualify for the safe harbors established by
the DSHEA.
The DSHEA defines a dietary supplement to include (i) any product intended
to supplement the diet that bears or contains a vitamin, mineral, herb or other
botanical, an amino acid, a substance to supplement the diet by increasing the
total dietary intake, or any concentrate, constituent, extract, or combination
of any such ingredient, provided that such product is either intended for
ingestion in tablet, capsule, powder, softgel, gelcap, or liquid droplet form
or, if not intended to be ingested in such form, is not represented for use as a
conventional food or as a sole item of a meal or the diet, (ii) is not
represented for use as a conventional food or as a sole item of a meal or the
diet, and (iii) is labeled as a dietary supplement. The definition also includes
highly technical provisions dealing with a dietary supplement that contains an
ingredient that also has been approved by the FDA as a drug. The practical
effect of such an expansive definition is to ensure that the new protections and
requirements of the DSHEA will apply to a wide class of products.
One important provision of the DSHEA exempts the dietary ingredients in
dietary supplements from being treated as "food additives". Any substance that
is added to a food product that is not "generally recognized as safe" by experts
whose opinion is based on published scientific literature is subject to being
regulated as a food additive by the FDA. Under the FFDC Act, a substance that is
a food additive may not be added to food products unless explicitly permitted by
the FDA by issuance of a regulation. Petitioning the FDA for such a regulation
is a process that could take five years or more, and involve the expenditure of
hundreds of thousands of dollars or more to test a product and participate in
any ensuing proceedings. Prior to enactment of the DSHEA, dietary supplement
ingredients were often alleged to have "food additive" status.
26
<PAGE>
Although dietary supplements are now exempted from treatment as food
additives by the FDA, the DSHEA imposed significant new safety standards
regulating dietary supplements to prevent the sale of dietary supplements that
are unsafe, toxic, unsanitary or adulterated. The DSHEA provides that a dietary
supplement will be deemed to be an adulterated food if it presents a significant
or unreasonable risk of illness or injury when used in accordance with its
labeling or, if no conditions of use are suggested or recommended in the
labeling, under ordinary conditions of use. Generally, the FFDC Act prohibits
the introduction or delivery of adulterated food into interstate commerce so a
dietary supplement that is deemed adulterated may not be sold or distributed
through interstate commerce. The FDA has the burden of proof in establishing
that a dietary supplement is adulterated under such a standard, thereby reducing
the FDA's role from one of preapproval of dietary supplements to that of
policing those substances that present a significant or unreasonable risk of
illness or injury.
The DSHEA also imposes additional requirements that must be adhered to for
dietary supplements which contain a "new" dietary ingredient. Under the DSHEA, a
"new" dietary ingredient is one that was not marketed in the United States
before October 15, 1994. A dietary supplement that contains such a new dietary
ingredient will be deemed to be adulterated unless either (a) all ingredients
contained in the dietary supplement have been present in the food supply as an
article used for food in a form in which the food has not been chemically
altered, or (b) there is a history of use or other evidence of safety
establishing that the new dietary ingredient, when used under the conditions
recommended or suggested in the labeling, will reasonably be expected to be
safe. In order to qualify for the safe harbor under the second condition, a
manufacturer/distributor of the new dietary ingredient or supplement must
provide, at least 75 days before introducing or delivering for introduction such
substance into interstate commerce, information to the FDA that forms the basis
on which the manufacturer/distributor has concluded that a dietary supplement
containing the new dietary ingredient is reasonably expected to be safe.
Finally, the DSHEA provided non-delegable authority to the Secretary of the
Department of Health and Human Services to declare that a dietary supplement
poses an imminent hazard to public health or safety. Following such declaration,
it is immediately illegal to market such a product, although the Secretary must
thereafter promptly hold a formal hearing in order to determine whether to
affirm or withdraw the declaration.
The DSHEA also has increased the ability of sellers of dietary supplements
to provide information about their products to consumers. Prior to the enactment
of the DSHEA, the FDA position was that any publication used in connection with
the sale of a dietary supplement could be regulated by the FDA as "labeling".
Further, if the publication in question contained information claiming or
suggesting that an ingredient present in a dietary supplement might be used in
the cure, mitigation, treatment or prevention of any disease, such supplement
would be subject to regulation under the FDA Act as a drug. Under the DSHEA,
however, a publication, including an article, a book or chapter in a book, or an
official abstract of a peer reviewed scientific publication that appears in an
article and was prepared by the authors or the editors of a publication, is not
considered labeling and may be used in connection with the sale of a dietary
supplement to consumers if such publication is reprinted and it (i) is not false
or misleading; (ii) does not promote a particular manufacture or brand of a
dietary supplement; (iii) is displayed or presented with other items on the same
subject matter so as to present a balanced view of the available scientific
information; (iv) is physically separate from dietary supplements if displayed
in an establishment where such products are sold; and (v) does not have appended
to it any information by sticker or any other method. The United States has the
burden of proof to establish that a publication is false or misleading if a
proceeding is established to prevent a publication. The DSHEA specifically
provides that it does not restrict a retailer or wholesaler of dietary
supplements in any way whatsoever from selling books or other publications as a
part of its business. These provisions of the DSHEA may indirectly affect the
Company because they will make it easier for retailers and wholesalers that sell
the Company's products to display and sell publications that are related to the
Company's business and discuss the benefits of dietary supplements such as the
ones that the Company manufactures and distributes.
27
<PAGE>
FDA regulations published prior to the enactment of the DSHEA and pursuant
to the Nutrition Labeling and Education Act prohibit the use of any health claim
in the labeling of any food products, including brochures, unless the claim of
such labeling is first approved by the FDA by regulation. 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."
Additionally, the manufacturer must notify the Secretary of Health and Human
Services no later than 30 days after the first marketing of the dietary
supplement to which such statement relates. In addition, a dietary supplement
must list the name and quantity of each ingredient and the total weight of a
proprietary blend, be identified as a "dietary supplement", and identify the
part of a plant from which any herb or botanical ingredient is derived. Special
rules for branding apply if there is an official FDA monograph covering the
class of product in which the dietary supplement is classified.
The DSHEA did not limit the FDA's ability to regulate manufacturing but
authorized the FDA to prescribe good manufacturing practice regulations for
dietary supplements which are to be modeled after current good manufacturing
practice regulations for food. Since the manufacturers which are involved in
manufacturing the Company's products are experienced in producing products
subject to FDA manufacturing standards, the Company does not believe that new
regulations regarding manufacture of dietary supplements will adversely affect
the Company or its suppliers.
The effect of new federal regulations and standards is that, although the
authority of the FDA to regulate dietary supplements has been limited, it and
other government agencies, particularly the Department of Health and Human
Services, have been granted substantial new policing authority to stop the
distribution of a dietary supplement if government personnel believe they can
show that the product is not safe. The Company is not able to predict with
certainty the long term impact of this regulatory scheme on its activities.
PATENTS AND TRADEMARKS
The Company received a United States patent 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. 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. 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, including the ciwujia patent, will
provide meaningful protection or significant competitive advantages over
competing products.
The Company believes that certain of its proposed products also may be
eligible for "use" patents, and patent coverage will be considered in seeking to
license products developed by others. There is no assurance, however, that the
Company will receive any additional patents, or that any patents which it does
have or may obtain will provide meaningful protection. The Company does not
believe that patent protection will be as significant to its growth as such
factors as product selection and the extent and effectiveness of its advertising
and other marketing and promotional activities.
28
<PAGE>
The Company has federal trademark registrations for ENDUROX(Registered) and
has trademark applications pending to register ARNICYN(Trademark),
PROSOL(Trademark), ENDUROX(Registered) ProHeart(Trademark) and
ENDUROX(Registered) EXCEL(Trademark) pending with the United States Patent and
Trademark Office. See "BUSINESS -- Proposed Products". The Company also has
filed the ENDUROX trademark in all 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.
EMPLOYEES
At the present time, the Company has seven full time employees at its
Woodbridge, NJ offices. Of these, two employees are executive and
administrative, two are in sales and marketing, and two are in accounting and
operations. The Company also employs two persons on a part-time basis in its
Beijing, People's Republic of China, office in research and development, and
employs a number of consultants who devote limited portions of their time to the
Company's business. The Company intends to expand its staff following this
offering, through the addition of five individuals, principally for sales and
marketing purposes.
OFFICES AND OTHER FACILITIES
The Company presently leases approximately 2,645 square feet of office
space from CSC Associates, a company owned by Robert Portman, President and a
Director, and David Portman, Secretary and a Director, of the Company at a
monthly rental of $2,645, plus utilities. The Company's lease with CSC
Associates expires January 31, 2000. See "Organizational and Other Transactions
- --Certain Other Transactions".
The Company also leases laboratory and office space from the INFH at 29 Nan
Wei Road, Beijing, at a yearly cost of $4,000.
The Company believes that its facilities are adequate for its present
needs.
LEGAL PROCEEDINGS
The Company is not a party to, or involved in, any legal proceedings.
29
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of the Company are as follows:
<TABLE>
<S> <C>
Robert Portman, PhD............... President and Chief Executive Officer, Treasurer
and Chairman of the Board of Directors
Jonathan D. Rahn.................. Executive Vice President, Chief Financial Officer
and Director
David I. Portman.................. Secretary and Director
T. Colin Campbell, PhD............ Director
</TABLE>
DR. ROBERT PORTMAN, age 53, has served as President, Treasurer and Chairman
of the Board of Directors of the Company since its inception. Dr. Portman has a
PhD 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. Dr. Portman is a minority stockholder (less than 2%) of the
Underwriter.
In April 1988, Dr. Portman incorporated a company to develop and market a
patented dental device. A prototype of the device was developed in conjunction
with researchers at the University of Pennsylvania. In 1993, Dr. Portman
determined that the investment of additional funds for the purpose of marketing
and advertising the product was not warranted, and the Company, HydroDent
Laboratories, Inc., of which Dr. Portman then was the President and principal
stockholder and creditor, was liquidated in the U.S. Bankruptcy Court for the
District of New Jersey.
JONATHAN D. RAHN, age 53, is the Executive Vice President and Chief
Financial Officer, as well as a director, of the Company. From the inception of
the Company to his employment by the Company in July 1996, Mr. Rahn served as a
consultant to the Company in financial and certain operational matters. Mr.
Rahn, a certified public accountant, has over 30 years experience in accounting
and financial analysis, and has held various executive positions for a number of
diverse businesses, both public and private. For approximately three years
immediately preceding his employment by the Company, he was a self-employed
consultant involved in the evaluation, due diligence and structuring of
investments in and acquisitions of development-stage companies. Mr. Rahn has
served as Secretary and a director of World Wireless Communications, Inc., a
publicly held company engaged primarily in the design, development and
manufacture of wireless communication products and devices, since November 1995.
Mr. Rahn's service in those capacities does not interfere with his devoting full
time to his employment by the Company.
DAVID I. PORTMAN, age 56, 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 the Underwriter since 1993, and is a minority
stockholder (less than 1%) of the Underwriter.
Robert Portman and David Portman are brothers.
DR. T. COLIN CAMPBELL, age 63, 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
30
<PAGE>
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.
In connection with a private placement of 10% Convertible Preferred Stock,
completed in January 1996 for which the Underwriter acted as placement agent,
the Company agreed to use its best efforts to elect to its Board of Directors
one nominee designated by the Underwriter and as to whom the Company had no
reasonable objection, and a second nominee mutually selected by the Company and
the Underwriter. Jonathan D. Rahn is the designee mutually selected by the
Company and the Underwriter. To date, the Underwriter has not designated its
selection for a second director. Pursuant to the underwriting arrangements for
this offering, the Company has agreed for a period of five years from the date
of this Prospectus to cause a person designated by the Underwriter to be elected
to the Company's Board of Directors. See "Underwriting." This agreement
supersedes earlier agreements between the Company and the Underwriter relating
to election of persons designated by the Underwriter to the Company's Board of
Directors.
Under corporate governance rules applicable to issuers with securities
listed on the Nasdaq SmallCap Market, the issuer must have a minimum of two
independent directors and an audit committee with a majority of independent
directors. At the present time, the Company considers T. Colin Campbell to be
"independent" of management of the Company. The Company expects to add at least
one additional "independent" director to its Board, and to comply with the
aforementioned corporate governance rules prior to the effective date of the
Registration Statement of which this Prospectus is a part.
OTHER KEY ADVISORS AND CONSULTANTS
In addition to its executive officers, the Company considers Dr. Junshi
Chen to be a key advisor. Dr. Chen, age 62, is Chairman of the Company's Chinese
Scientific Advisory Board, and is a Professor and Deputy Director of the INFH.
Besides directing the research activities of the INFH, Dr. Chen is a recognized
expert in China on nutritional status and cancer mortality and the antioxidant
properties of various dietary constituents. Dr. Chen also is a member of the
Political Consultative Group of China, a select group of individuals who serve
as advisors to the government and the People's Congress, and a member of the
government committee which reviews and approves new drug applications in China.
COMPENSATION OF EXECUTIVE OFFICERS
Robert Portman is the only executive officer of the Company with a
fixed-term employment agreement. Under this agreement, Dr. Portman is employed
for a three year term commencing November __, 1997, at an annual salary of
$150,000 for the first two years, and at a salary to be determined by the
Compensation Committee of the Company's Board of Directors during the third
year.
In addition to salary, Dr. Portman is entitled to receive a bonus of
$25,000 if the Company's net, pre-tax income in the fiscal year ending December
31, 1998, exceeds $25,000, and a further bonus equal to five percent of the
amount, if any, by which the Company's net, pre-tax income exceeds $1,000,000 in
the fiscal years ending December 31, 1998 and 1999.
Dr. Portman's employment agreement also grants to him the right to purchase
up to 475,000 shares of Common Stock at a price of $6.00 per share. This option
vests as to one-third of the shares issuable upon full exercise of the option as
of the first, second and third anniversaries of the signing 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.
31
<PAGE>
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 payment of an
amount equal to the lesser of full salary for one year or for the remaining term
of the agreement.
The table below sets forth information concerning compensation paid to Dr.
Portman in 1996. No other executive officer of the Company received compensation
of $100,000 or more in fiscal 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------------------
AWARDS PAYOUTS
------------------------ -----------------
SECURITIES ALL
RESTRICTED UNDER- OTHER
ANNUAL COMPENSATION OTHER ANNUAL STOCK LYING LTIP COMPEN-
NAME AND PRINCIPAL ---------------------- COMPENSATION AWARD(S) OPTIONS/ PAYOUTS SATION
POSITION YEAR SALARY ($) BONUS ($) ($) ($) SARS (#) ($) ($)
------------------ ---- ---------- --------- ------------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert Portman........ 1996 162,500(1) -0- (2) -0- 225,000 -0- -0-
</TABLE>
- ------------------
(1) Includes $37,500 accrued in respect of 1995 salary which was paid in 1996.
(2) Less than 10% of annual salary and bonus.
The following table sets forth certain information regarding the options
granted to Dr. Portman in fiscal 1996:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE
---- ------------ ---------------- -------- ----------
<S> <C> <C> <C> <C>
Robert Portman....................................... 225,000 32% 3.75 3/31/01
</TABLE>
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
Dr. Portman at December 31, 1996.
AGGREGATED OPTION/SAR EXERCISES IN 1996 LAST FISCAL YEAR AND
OPTION/SAR VALUES AT 12/31/96
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
ACQUIRED OPTIONS/SARS AT FISCAL THE-MONEY OPTIONS/SARS
ON YEAR-END (#) AT DECEMBER 31, 1996 ($)
EXERCISE VALUE --------------------------- ---------------------------
NAME (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert Portman................. -0- -0- 100,000 425,000 200,000 456,250
</TABLE>
For the purpose of computing the value of "in-the-money" options at
December 31, 1996, in the above table, the fair market value of the Common Stock
at December 31, 1996, is deemed to be $4.00 per share, as determined by the
Board of Directors of the Company and equal to the last price at which the
Company sold its Common Stock in 1996.
DIRECTORS' COMPENSATION
None of the Company's directors received compensation for their services as
directors in 1996. T. Colin Campbell, a director of the Company, received an
option to purchase 5,000 shares of Common Stock pursuant to the Company's 1995
Incentive Stock Option Plan in recognition of his services as Chairman of the
Company's U.S. Scientific Advisory Board. The option is exercisable at a price
of $3.75 per share, and expires March 1, 2001.
32
<PAGE>
STOCK OPTION PLANS
1995 Plan: In August 1995, the Company adopted an Incentive Stock Option
Plan (the "1995 Plan") and reserved 582,000 shares of Common Stock for issuance
upon the exercise of options granted under the 1995 Plan. The number of shares
reserved for issuance under the 1995 Plan subsequently was increased to
1,500,000 shares. Options under the 1995 Plan are not designed to qualify for
special tax treatment as statutory "incentive stock options" under Section 422
of the Internal Revenue Code of 1986. As a result, persons who exercise options
under the 1995 Plan are subject to federal income taxation on the difference
between the exercise price of the option and the fair market value of the shares
purchased upon exercise as of the date of exercise, and the Company is eligible
for a corresponding deduction in computing its income for tax purposes.
The 1995 Plan is administered by the Board of Directors, or a committee of
the Board if it elects to delegate administration of the 1995 Plan to a
committee. To date, the Board has not done so.
The Board has full discretion to determine the persons or entities to
receive options under the Plan, including non-employee consultants and advisors
to the Company. The Board also has substantial discretion as to the terms and
duration of the options granted, provided that the exercise price of options may
not be less than the lower of (i) "market value" of the Common Stock, as
determined by the Board, on the date the option is granted, or (ii) 50% of the
then current conversion price of the Company's 10% Convertible Preferred Stock.
Unless sooner terminated, the 1995 Plan terminates on December 31, 2004. There
presently are outstanding options to purchase 920,200 shares of Common Stock at
prices ranging from $2.00 to $4.50 granted under the 1995 Plan.
Bonus Option Program: In July 1996, the Company adopted a Bonus Stock
Option Award Program (the "Bonus Option Program") expressly for Robert Portman.
The Bonus Option Program provided for the grant to Dr. Portman of options to
purchase 25,000 shares of Common Stock for each $1,000,000 increase in the
Company's valuation, as defined in the Program, between June 30, 1996 and
December 31, 1996, December 31, 1996 and December 31, 1997, and December 31,
1997 and December 31, 1998. Any options granted were to be exercisable for a
period of five years from the date of grant at a price equal to the fair market
value of the Common Stock at the date of grant.
The Bonus Option Program was cancelled in November 1997 in connection with
Dr. Portman entering into a new employment agreement with the Company. See
"Compensation of Executive Officers" above.
SCIENTIFIC ADVISORY BOARDS
The Company has established U.S. and Chinese Scientific Advisory Boards to
provide it with on-going advice and counsel regarding research direction,
product development, analysis of data and general counseling. As a need rises,
the Company consults with individual members of these Boards on a non-scheduled
basis. A brief description of the backgrounds of the Advisory Boards' member are
set forth below.
U.S. Scientific Advisory Board:
T. Colin Campbell, a Director of the Company, is Chairman of the Company's
U.S. Advisory Board. Its other members are:
David Kritchevsky, PhD, 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.
33
<PAGE>
William Pryor, PhD, 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.
David J. Jenkins, PhD, 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.
Chinese Scientific Advisory Board:
Professor Junshi Chen, MD, is Deputy Director of the Institute of Nutrition
& Food Hygiene at the Chinese Academy of Preventive Medicine and a Director of
the Company. Professor Chen is the Chair of the Chinese Scientific Advisory
Board.
Professor Boping Wu, Former Director of Medicine Information, Research
Institute, Academy of Traditional Chinese Medicine; Member, Expert Committee,
Academy of Traditional Chinese Medicine ("TCM"); Advisory, Chinese
Administration of TCM. Dr. Wu is one of the leading experts on Traditional
Chinese Medicine. Although his professional expertise concerns treatment of
immune function disorders, he was responsible for creating a comprehensive
database on medicinal herbs. Dr. Wu is a member of Chinese AIDS prevention
committee and has developed TCM anti-AIDS formulas that are being tested in
Africa and England.
Professor Weiyi Yang, Chair, Department of Clinical Research, Beijing
University of TCM; Advisor, Chinese Administration of TCM; Consultant, World
Health Organization. Professor Yang's research interests are in the theory and
mechanism of TCM. His research program has focused on explaining the
effectiveness of TCM using modern technology. His work also involves expanded
application of TCM. Recently Professor Yang was asked to coordinate a nationwide
effort to identify herb combinations that could increase performance of Chinese
athletes.
Professor Ganzhong Liu, Director, Department of Pharmacological Research,
Beijing Sino-Japan Hospital; Secretary General, Chinese Society of Pharmacology;
Professor, Department of Pharmacology, Beijing Medical College. Dr. Liu's
research interests concern neuro-pharmacology and toxicology of agents used in
TCM. He has published 20 articles and edited several books including Recent
Advances in Chinese Herb Drugs-Actions and Uses and TCM Pharmacology and
Clinical Research. As Secretary General of the Society of Pharmacology, Dr. Liu
remains extremely current in TCM research conducted throughout China.
Professor Mingzhi Xie, Department of Phytopharmacology, Institute of
Materia Medica, Chinese Academy of Medical Sciences. Dr. Xie has worked in
phytopharmacology for more than 30 years. She is a member of the Review Board
for New Drugs. Her current research interests focus on the mechanism of TCM
compounds in treating obesity and diabetes.
34
<PAGE>
PRINCIPAL SHAREHOLDERS
As of November 17, 1997, the Company had outstanding 2,985,672 shares of
Common Stock, giving effect to the cancellation effective as of the date of this
Prospectus of 200,000 shares issued in connection with the organization of the
Company. The Company also had outstanding 143,896 shares of 10% Convertible
Preferred Stock, each share of which presently is convertible into 2.5 shares of
Common Stock.
The following table sets forth information concerning the present ownership
of the Company's Common Stock and 10% Convertible Preferred 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, and the beneficial ownership of these securities by such
persons following the offering.
<TABLE>
<CAPTION>
COMMON 10% CONVERTIBLE COMMON STOCK
STOCK PREFERRED STOCK AS ADJUSTED(1)(3)
NAME AND ADDRESS (% OF CLASS)(1) (% OF CLASS)(2) (% OF TOTAL)
---------------- --------------- --------------- -----------------
<S> <C> <C> <C>
Robert Portman (4) .................................... 942,500) -0- 942,500)
President, Chief Executive Officer and a Director (28.6%) (21.0%)
188 Igoe Road
Morganville, NJ 07751
Jonathan D. Rahn (5) .................................. 343,000) 343,000)
Executive Vice President, Chief Financial Officer and (11.1%) (8.0%)
a Director
413 Gatewood Road
Cherry Hill, NJ 08003
David I. Portman ...................................... 185,000) -0- 185,000)
Secretary and a Director (6.2%) (4.4%)
19 Pal Drive
Wayside, NJ 07712
T. Colin Campbell (6) ................................. 185,545) -0- 185,545)
Director (6.2%) (4.4%)
26 Beckett Way
Ithaca, NY 14850
Jemeson Investment Co. (7) ............................ 222,222) -0- 222,222)
320 Park Place (7.4%) (5.3%)
Birmingham, AL 35203
Junshi Chen ........................................... 154,225 154,225
Institute of Nutrition & Food Hygiene 5.2% 3.7%
CAPM 29 Nan Wei Road
Beijing, PRC
T. Nelson Campbell .................................... 154,225 154,225
707 Emory Road 5.2% 3.7%
Chapel Hill, NC 27514
Mark M. Carter, M.D. .................................. 105,220(8) 42,088 105,220(9)
105 Lantern Wick Place (3.4%) (29.2%) (2.5%)
Ponte Verda Beach, FL 32082
Ronald & Alberta Weinisch, JTWROS ..................... 45,458(8) 18,183 45,458(9)
902 East 8th Street (1.5%) (12.6%) (1.1%)
Brooklyn, NY 11230
Grumet Partners LP .................................... 29,725(8) 11,890 29,725(9)
Jack Grumet, General Partner (1.0%) (8.3%) (0.7%)
19 Seven Oaks Drive
Holmdel, NJ 07733
Officers and Directors as a group (4 persons) ......... 1,656,045 -0- 1,656,045
(48.7%) (36.0%)
</TABLE>
(footnotes on following page)
35
<PAGE>
(footnotes from previous page)
- ------------------
(1) Common Stock which is issuable (a) upon the exercise of a stock option which
is presently exercisable or which becomes exercisable within sixty days, or
(b) upon conversion of outstanding 10% Convertible Preferred Stock, is
considered outstanding for the purpose of computing the percentage ownership
(x) of persons holding such options or Preferred Stock, and (y) of officers
and directors as a group with respect to all options and Preferred Stock
held by officers and directors. Gives effect to the cancellation of 200,000
shares contributed back to the Company and cancelled effective as of the
date of this Prospectus.
(2) The 143,896 shares of 10% Convertible Preferred Stock outstanding are
convertible into Common Stock on the basis of two and one-half (2 1/2)
shares of Common Stock per share of 10% Convertible Preferred. The number of
shares of Common Stock into which shares of Preferred Stock can be converted
will be reduced to 1.667 shares (i.e., a "conversion price" of $6.00)
effective January 1, 1998, and remain at that ratio until December 31, 2000.
Thereafter the conversion price will remain $6.00 unless the Company's
Common Stock is traded in The Nasdaq Stock Market or on a national
securities exchange, in which case the conversion price will be 90% of the
then current market value of the Common Stock. Holders of outstanding 10%
Convertible Preferred are entitled to vote on all matters as a single class
with holders of Common Stock, with each shares of Preferred Stock
representing a number of votes equal to the shares of Common Stock into
which such share of Preferred Stock is then convertible.
(3) Assumes that all Shares are sold, and that the Over-allotment Option is not
exercised. Represents shares of Common Stock and percentage ownership of
Common Stock only. Percentages do not reflect total voting power since the
voting power of the Company's capital stock is divided between holders of
Common Stock (89.2% at September 30, 1997) and 10% Convertible Preferred
Stock (10.8% at September 30, 1997). See "Description of Securities."
(4) Includes (i) 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 $2.00 per share, (ii) a presently-exercisable 1995 Plan
Option to acquire an additional 112,500 shares at a price of $3.75 per
share. Does not include (x) 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, (y)
a 1995 Plan Option to purchase an additional 212,500 shares which is not
vested and does not vest within sixty days, or (z) options to purchase
475,000 shares granted to Dr. Portman pursuant to his employment agreement
with the Company, none of which is vested.
(5) Includes a 1995 Plan Option to acquire 100,000 shares at a price of $3.75
per share. Does not include a 1995 Plan Option to purchase 100,000 shares
which is not vested and does not vest within sixty days.
(6) Includes a 1995 Plan Option to acquire 5,000 shares at a price of $3.75 per
share. Does not include 46,680 shares of Common Stock owned by Dr.
Campbell's wife or 186,225 shares of Common Stock owned by Dr. Campbell's
adult children, as to which he disclaims beneficial ownership.
(7) The principal shareholders of Jemeson Investment Co., Inc. ("Jemeson") and
their respective equity ownership of Jemeson are as follows: H. Corban Day
(24%), Margaret L. Jemeson (20%) and John S. Jemeson, III (19%). The
remaining equity interest is owned in varying percentages by eight other
family members.
(8) Represents shares of Common Stock issuable upon conversion of 10%
Convertible Preferred Stock.
36
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ORGANIZATIONAL TRANSACTIONS
In connection with its organization, the Company issued a total of
1,200,000 shares of Common Stock to Robert Portman, David Portman, T. Colin
Campbell, Junshi Chen, Ming Li and T. Nelson Campbell. All of these initial
shareholders, who may be deemed founders or promoters of the Company, are
parties to a Shareholders Agreement which provided, among other things, for the
composition of the initial Board of Directors of the Company, appointment of Dr.
Portman as Chief Executive Officer, and obtaining additional financing. The
Stockholders Agreement also limits the parties' ability to engage in certain
competitive activities, and provides rights of first refusal to other parties if
any party wishes to make a transfer of shares, other than certain permitted
transfers. Robert Portman, the Company's President, has contributed back to the
Company, effective as of the date of this Prospectus, 200,000 of the shares
which he acquired in connection with the organization of the Company.
Also in connection with the Company's organization, the Company sold at par
value a total of 68,000 shares of Common Stock to Daniel Berkowitz (25,000
shares), T. George Harris (15,000 shares) and Jonathan D. Rahn (18,000 shares),
and to the four members of its U.S. Scientific Advisory Board (2,500 shares
each).
In June 1995, the Company sold to Robert Portman, David Portman, T. Colin
Campbell and Jonathan D. Rahn a total of 310,000 shares of Common Stock and
387,500 shares of Founders Preferred Stock for an aggregate cash consideration
of $325,000. In December 1995, all holders of Founders Preferred Stock converted
such shares into an aggregate 620,000 shares of Common Stock.
A portion of the Common Stock acquired by Robert Portman, T. Colin
Campbell, Junshi Chen, Ming Li and T. Nelson Campbell in the transactions
described above subsequently was transferred to their respective spouses and
children and/or certain business associates of the Company.
Junshi Chen, one of the Company's founding shareholders and Chairman of its
Chinese Scientific Advisory Board, is a Deputy Director of the INFH. The Company
has agreed, after the Company achieves a defined level of profitability
sufficient to "recapture" all organizational, administration, pre-operative and
operating expenses incurred from inception, to pay a royalty (starting at 2% and
declining to 0.5%) to the INFH based upon sales of products utilizing natural
constituents exported from China or developed in China, or based in whole or in
part on such constituents. No royalties have been paid to date, and the Company
does not believe that royalties will be payable before the fiscal year ending
December 31, 1999, at the earliest.
CERTAIN OTHER TRANSACTIONS
The Company rents approximately 2,645 square feet of office space, utilized
for executive and administrative offices, from CSC Associates, a company owned
by Robert Portman, Chairman of the Board and Chief Executive Officer of the
Company, and David Portman, Secretary and a Director of the Company, is at a
rent of $2,645 per month, plus utilities, under a three year lease which expires
January 31, 2000. The Company believes that the terms upon which it obtains its
executive offices are at least as favorable to it as could be obtained from an
unrelated party through arms-length negotiations.
37
<PAGE>
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 10,000,000 shares of
Common Stock, $.0025 par value, of which 2,985,672 shares are outstanding as of
November 17, 1997, and 1,000,000 shares of Preferred Stock, $.01 par value, of
which 350,000 shares have been designated 10% Convertible Preferred Stock,
143,896 shares of which are outstanding at November 17, 1997.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share of Common
Stock owned of record on all matters to be voted on by stockholders, including
the election of directors. Holders of Common Stock do not have cumulative voting
rights and, accordingly, the holders of more than 50% of the outstanding shares
can elect the entire Board of Directors. The holders of Common Stock are
entitled, upon liquidation or dissolution of the Company, to receive pro rata
all assets remaining available for distribution to stockholders. The Common
Stock has no preemptive or other subscription rights, and there are no
conversion rights or redemption provisions. All outstanding shares of Common
Stock are validly issued, fully paid, and nonassessable.
PREFERRED STOCK
The Company's Board of Directors has the authority by resolution to issue
up to 1,000,000 shares of preferred stock in one or more series and fix the
number of shares constituting any such series, the voting powers, designations,
preferences and relative, participating, optional or other special rights and
qualifications, limitations, or restrictions thereof, including the dividend
rights, dividend rate, terms of redemption (including sinking fund provisions),
redemption price or prices, conversion rights and liquidation preferences of the
shares constituting any series, without any further vote or action by the
stockholders. For example, the Board of Directors is authorized to issue a
series of preferred stock that would have the right to vote, separately or with
any other series of preferred stock, on any proposed amendment to the Company's
Certificate of Incorporation or any other proposed corporate action, including
business combinations and other transactions.
10% CONVERTIBLE PREFERRED STOCK
The Company has designated 350,000 shares of its Preferred Stock as "10%
Convertible Preferred Stock", 143,896 of which have been issued as of November
17, 1997. The Company has no present plans to issue additional shares of 10%
Convertible Preferred Stock (hereinafter "Convertible Preferred") except as
dividends on shares presently outstanding. If additional shares of 10%
Convertible Preferred Stock were needed for this purpose, the Company's Board of
Directors has the authority to increase the number of such shares authorized.
Holders of Convertible Preferred are entitled to annual dividends of $1.00
per share, payable quarterly to holders of record as of March 31, June 30,
September 30 and December 31 in each year. Dividends are payable, at the option
of the Company, in cash or in additional shares of 10% Convertible Preferred
valued for this purpose at $10.00 per share (i.e., the purchase price pair for
such shares). Through September 30, 1997, the Company has issued 23,896 shares
of Convertible Preferred as dividends on previously outstanding shares.
Convertible Preferred is convertible at the option of its holder into two
and one-half (2 1/2) shares of Common Stock, i.e., at a conversion price of
$4.00 per share of Common Stock based upon the original purchase price of the
Convertible Preferred, until December 31, 1997. Thereafter, until December 31,
2000, shares of Convertible preferred are convertible at a conversion price of
$6.00 per share of Common Stock. After December 31, 2000, the conversion price
will remain $6.00 per share unless the Common Stock is then admitted for trading
on The Nasdaq Stock Market (SmallCap Market or National Market System) or a
national securities exchange, in which case the conversion price will be 90% of
the then current market value of the Common Stock. Conversion prices of the
Convertible Preferred will be adjusted in the event of any stock splits,
dividends on Common Stock payable in Common Stock or similar events.
38
<PAGE>
Holders of Convertible Preferred are entitled to a number of votes per
Share in the election of directors and on all other matters submitted to
shareholders for their approval or consent equal to the number of shares of
Common Stock into which a share of Convertible Preferred is convertible at the
time of the meeting at which the vote is cast or, in the case of an action of
shareholders taken without a formal meeting, on the date of such action. Holders
of Convertible Preferred vote as a class with holders of Common Stock, except
that, without the vote or consent of the holders of at least a majority of the
shares of Convertible Preferred then outstanding, the Company may not (i) create
or issue or increase the authorized number of shares of any class or classes or
series of stock ranking prior to the Convertible Preferred upon liquidation,
(ii) amend or alter or repeal any of the provisions of the Company's Certificate
of Incorporation so as to affect adversely the preferences or rights of the
Convertible Preferred, or (iii) authorize any reclassification of the
Convertible Preferred.
The Company has the right to redeem the Convertible Preferred at any time
after December 31, 1997, at a price of $10.50 per Share, until December 31,
2002, and thereafter at a price of $10.00 per Share, in each case plus accrued
dividends, if any. Convertible Preferred not previously redeemed or converted
into Common Stock is subject to mandatory redemption by the Company on December
31, 2005. If the Company is prohibited by law from redeeming the Convertible
Preferred at that time, holders of the Convertible Preferred will be notified,
and the Company will be required to redeem the Convertible Preferred thereafter
as soon as the legal prohibition is eliminated.
STOCK OPTIONS AND WARRANTS
As described under the caption "Management -- Stock Option Plans", the
Company has adopted an incentive stock option plan (the "1995 Plan") and
reserved 1,500,000 shares of Common Stock for issuance upon the exercise of
options granted under such Plan. As of the date of this Prospectus, options to
purchase 920,200 shares at prices ranging from $2.00 to $4.50 have been granted
under the 1995 Plan. No options have been exercised to date.
As described under the caption "Management -- Compensation of the Executive
Officers", the Company has granted options to purchase 475,000 shares of Common
Stock at a price of $6.00 per share to Robert Portman, President and Chief
Executive Officer of the Company. These options vest in three equal annual
increments beginning on December 1, 1998, and expire December 1, 2002.
The Company also has granted an option to purchase 25,000 shares at the
initial offering price of the Shares to Big Sky, Inc., the Company used by Joe
Montana for his endorsement and similar contracts. Big Sky, Inc. has agreed,
however, that it will not exercise this option for a period of nine months after
the date of this Prospectus without the Company's prior written consent. This
option will expire five years after the date of this Prospectus.
The Company has outstanding Warrants to purchase 255,500 shares of Common
Stock: 227,500 shares at a price of $3.75, and 28,000 shares at a price of
$6.25. These warrants were issued to the Underwriter and certain of its officers
and employees in connection with prior financings, and expire on July 29, 2000
and August 8, 2000, respectively.
DIVIDEND POLICY
The holders of the Company's Convertible Preferred are entitled to
dividends, as described above. The holders of Common Stock are entitled to
receive such dividends, if any, as may be declared from time to time by the
Board of Directors, in its discretion, from funds legally available therefor,
but cannot be declared so long as an arrearage exists in dividend payments on
the 10% Convertible Preferred Stock. The Company does not presently anticipate
paying dividends on its Common Stock.
TRANSFER AGENT
StockTrans, Inc., 7 East Lancaster Avenue, Ardmore PA 19003-2318, serves as
the registrar and transfer agent for the Company's Common Stock.
39
<PAGE>
CERTAIN CHARTER AND DELAWARE LAW PROVISIONS
Limitation of Director Liability: The Company's Certificate of
Incorporation contains a provision permitted by Delaware law which eliminates
the personal liability of the Company's directors for monetary damages for
breach or alleged breach of their fiduciary duty of care which arises under
state law. Although this does not change the directors' duty of care, it limits
legal remedies which are available for breach of that duty to equitable
remedies, such as an injunction or rescission. This provision of the Company's
Certificate of Incorporation has no effect on directors' liability for: (1)
breach of the directors' duty of loyalty; (2) acts or omissions not in good
faith or involving intentional misconduct or known violations of law; and (3)
approval of any transactions from which the directors derive an improper
personal benefit, nor does it relieve the Company or its directors from
compliance with federal or state securities laws.
Indemnification: The Certificate of Incorporation and the Bylaws of the
Company require indemnification, to the fullest extent permitted by the Delaware
General Corporation Law, of any person who is or was involved in any manner in
any investigation, claim or other proceeding by reason of the fact that such
person is or was a director or officer of the Company, or of another corporation
serving at the request of the Company, against all expenses and liabilities
actually and reasonably incurred by such person in connection with the
investigation, claim or other proceeding. Prior to the offerings, the Company
also plans to obtain officer and director liability insurance with respect to
certain matters, including matters arising under the Securities Act.
Section 203 of the Delaware General Corporation Law: Following this
offering, the Company will be subject to Section 203 of the Delaware General
Corporation Law which, in general, prohibits a publicly held Delaware
corporation from engaging in various "business combination" transactions with
any "interested stockholder" for a period of three years after the date for the
transaction in which the person became an "interested stockholder", unless (i)
the transaction is approved by the Board of Directors of the corporation prior
to the date the interested stockholder obtained such status, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owns at least 85% of the
outstanding voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding, those shares owned, by (a) persons who are directors and
also officers and (b) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer, or (iii) on or subsequent
to such date, the business combination is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3 of the outstanding voting
stock which is not owned by the interested stockholder. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to a stockholder. An "interested stockholder" is a person who, together
with affiliates and associates, owns (or, within three years, did own) 15% or
more of the corporation's voting stock. The statute could prohibit or delay the
accomplishment of mergers or other takeover or change in control attempts with
respect to the Company and, accordingly, may discourage attempts to acquire the
Company.
40
<PAGE>
UNDERWRITING
First Montauk Securities Corp. (the "Underwriter" has agreed, subject to
the terms and conditions of the underwriting agreement between the Company and
the Underwriter (the "Underwriting Agreement") to purchase from the Company, and
the Company has agreed to sell to such Underwriter, an aggregate of 1,200,000
Shares. The Underwriter's obligations are subject to approval of certain legal
matters by counsel and various conditions.
The Underwriter has advised the Company that it proposes to offer the
Shares offered hereby to the public at the offering price set forth on the cover
of this Prospectus and that it may allow to certain dealers, who are members of
the National Association of Securities Dealers, Inc. ("NASD"), concessions of
not in excess of $._____ per Share, of which not in excess of $._____ may be
reallowed to other dealers who are members of the NASD.
The Underwriter is committed on a "firm commitment" basis to purchase all
of the Shares offered hereby, if any are purchased.
The Company has granted an option to the Underwriter, exercisable during
the 45 day period after the date of this Prospectus, to purchase up to an
aggregate of 180,000 additional Shares at the public offering price, less the
underwriting discounts and commissions. The Underwriter may purchase such Shares
only to cover over-allotments made in connection with the sale of the Shares
offered hereby.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against certain liabilities in connection with
the Registration Statement, including liabilities under the Act.
The Company has agreed to pay the Underwriter a non-accountable expense
allowance of 3% of the aggregate offering price of the Shares offered hereby
including any shares purchased pursuant to the Underwriter's over-allotment
option), of which $30,000 has been paid to date.
The Company has also agreed to sell to the Underwriter or its designees,
warrants (the "Underwriter's Warrants") to purchase 120,000 shares of Common
Stock at a price of $.001 per warrant or an aggregate of $120.00. The
Underwriter's Warrants will be exercisable for a period of four years,
commencing one year after the date of this Prospectus, at an initial per share
exercise price equal to 145% of the initial public offering price per share of
Common Stock or $8.70 per share. The Common Stock underlying the Underwriter's
Warrants are identical in all respects to the Common Stock to be issued to the
public. The Underwriter's Warrants cannot be transferred, assigned, or
hypothecated for one year from the date of their issuance, except that they may
be assigned in whole or in part, to any successor, officer or partner of the
Underwriter (or any officer or partner of any such successor or partner). The
Underwriter's Warrants will contain anti-dilution provisions providing for
appropriate adjustment upon the occurrence of certain events.
The Underwriter also owns warrants granted in August 1996 which expire July
31, 2000, to purchase 102,375 shares of Common Stock at a price of $3.75 per
share, and warrants which expire on August 9, 2000, to purchase 12,000 shares at
$6.25 per share, which warrants were issued as compensation to the Underwriter
in connection with financings completed in 1996 in which the Underwriter acted
as the Company's Placement Agent.
The Company has agreed that it will, on any one occasion during the
four-year period commencing one year from the date hereof, register the
Underwriter's Warrants and the underlying securities, at the Company's expense,
at the request of holders of a majority of the shares of Common Stock issuable
upon exercise of the Underwriter's Warrants. The Company has also agreed, during
the six year period commencing one year from the date hereof, to certain
"piggy-back" registration rights for holders of the Underwriter's Warrants and
the underlying securities.
For the life of the Underwriter's Warrants, the holders are given, at
nominal cost, the opportunity to profit from a rise in the market price for the
Common Stock of the Company without assuming the risk of ownership, with a
resulting dilution in the interest of other security holders. As long as the
Underwriter's Warrants remain unexercised, the terms under which the Company
could obtain
41
<PAGE>
additional capital may be adversely affected. Moreover, the holders of the
Underwriter's Warrants might be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain needed capital by a new
offering of its securities on terms more favorable than those provided by the
Underwriter's Warrants. Additionally, if the Underwriter should exercise its
registration rights to effect a distribution of the Underwriter's Warrants or
underlying securities, the Underwriter, prior to and during such distribution,
may be unable to make a market in the Company's securities. If the Underwriter
must cease making a market, the market and market price for such securities may
be adversely affected and holders of such securities may be unable to sell such
securities. See "Risk Factors -- Underwriter's Warrants".
The Company has agreed pursuant to the Underwriting Agreement that for a
period of one year after the completion of this offering, neither the Company
nor any of its officers, directors or "affiliate" shareholders shall offer,
issue, sell, contract to sell, grant any option for the sale of or otherwise
dispose of any securities of the Company without the Underwriter's prior written
consent, except for shares issued upon the exercise of existing options and
rights, upon exercise of the overallotment option and the Underwriter's
Warrants, and shares of 10% Convertible Preferred Stock, issued as dividends on
outstanding shares.
The Company has also agreed pursuant to the Underwriting Agreement for a
period of five years following the date of this Prospectus, to use its best
efforts to cause an individual designated by the Underwriter to be elected to
the Company's Board of Directors. This individual may be an associate or
affiliate of the Underwriter, though no individual has been designated as of the
date of this Prospectus. The Underwriter has no plans to select such individual
in the immediate future. In the alternative, if the Underwriter does not
designate an individual to be elected to the Company's Board of Directors, the
Underwriter shall have the right to designate an advisor to attend all meetings
of the Board of Directors, which advisor shall have the right to receive notice
of all Board meetings. In addition, the Company and Underwriter have agreed that
upon the consummation of the offering, they will enter into a financial
consulting agreement for a period of two years at a monthly fee of $2,000. The
agreement also entitles the Underwriter to receive 5% of the first $5,000,000,
and 2 1/2% of the excess, if any, over $5,000,000, of the consideration paid in
connection with any business transactions between the Company and a party
introduced to the Company by the Underwriter.
The foregoing does not purport to be a complete statement of the terms and
conditions of the Underwriting Agreement and related documents, copies of which
are on file at the offices of the Underwriters, the Company and the Securities
and Exchange Commission.
Prior to the offering, there has been no public market for the Shares.
Consequently, the public offering price of the Shares has been determined by
arms' length negotiation between the Company and the Underwriter and is not
necessarily related to the Company's value, net worth, or any other established
criteria of value.
The Underwriter was formed and first registered as a broker-dealer in 1983.
During the last three years, the Underwriter has been the lead underwriter in
only one public offering prior to this offering, but has participated in more
than 200 public offerings as a syndicate or selling group member. Prospective
purchasers of the Shares should consider the Underwriter's limited experience as
a lead underwriter in evaluating the securities offered hereby.
42
<PAGE>
SHARES AVAILABLE FOR FUTURE SALE
The Company has 2,985,672 shares of Common Stock issued and outstanding,
and up to 359,740 additional shares of Common Stock are issuable upon conversion
of outstanding shares of 10% Convertible Preferred Stock. These shares of Common
Stock are, or will be when issued, "restricted securities" as defined in Rule
144 promulgated under the 1933 Act.
Rule 144 governs resale of "restricted securities" for the account of any
person (other than an issuer), and restricted and unrestricted securities for
the account of an "affiliate" of the issuer (i.e., generally, officers,
directors and owners of 10% or more of the voting securities of an issuer).
Restricted securities generally include any securities such as the Company's
outstanding securities which are acquired directly or indirectly from an issuer
or its affiliates other than in connection with a public offering. Under Rule
144 unregistered resales of restricted securities cannot be made until the
securities have been held for one year from the later of acquisition from the
issuer or an affiliate of the issuer. Thereafter, restricted securities may be
resold without registration subject to compliance with Rule 144's volume
limitation, aggregation, broker transaction, notice filing requirements and
requirements concerning publicly available information about the Company ("Rule
144 Requirements"). Resales of both restricted and unrestricted securities by
affiliates of an issuer are subject to the Rule 144 Requirements. The volume
limitations provide that a person (or persons who must aggregate their sales)
cannot, within any three-month period, sell more than the greater of one percent
of the then outstanding shares, or the average weekly reported trading volume
during the four calendar weeks preceding each such sale. A non-affiliate may
resell restricted securities which have been held for two years or more free of
the Rule 144 Requirements.
With respect to the Company's presently outstanding shares of Common Stock
and shares issuable upon conversion of outstanding 10% Convertible Preferred
Stock ("Conversion Shares"), 3,345,412 outstanding shares of Common Stock, and
any Conversion Shares when issued will satisfy the "one year" holding
requirements and thus be saleable under Rule 144 upon compliance with the other
Rule 144 Requirements. The remaining shares of the Company's outstanding
restricted Common Stock will satisfy the one year holding requirement beginning
in December 1997, and all will have satisfied that requirement by May 1998.
All of the Company's directors and executive officers, and certain of its
shareholders have entered into a "lock up" agreement with the Underwriter
pursuant to which they have agreed that, for a period of one year from the date
of this Prospectus, they will not offer, sell, contract to sell, pledge or
otherwise dispose of shares of the Company's Common Stock without the prior
written consent of the Underwriter. Holders of 2,440,222 shares of Common Stock
have entered into such agreements. Holders of ______ shares of Common Stock and
______ shares of 10% Convertible Preferred Stock have entered into similar
agreements in which the "lock up" period is six months. In addition, the Company
has agreed not to issue additional securities without the prior consent of the
Underwriter for a period of one year from the initial sale of Shares, except for
additional shares of 10% Convertible Preferred Stock as dividends to holders of
outstanding shares of 10% Convertible Preferred Stock, and additional shares of
Common Stock upon the exercise of outstanding options and warrants and the
exercise of the Underwriter's Overallotment Option or Underwriter's Warrants.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Connolly Epstein Chicco Foxman Engelmyer & Ewing, Philadelphia, PA.
Certain legal matters in connection with the Common Stock will be passed upon
for the Underwriter by Goldstein & DiGioia, LLP, New York, New York.
43
<PAGE>
EXPERTS
The financial statements of the Company and its affiliates as of December
31, 1996, and for the years ending December 31, 1996 and 1995, appearing in this
Prospectus and Registration Statement have been audited by Schiffman Hughes
Brown, Blue Bell, PA, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act of
1933 with respect to the shares of Common Stock offered by this Prospectus. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto. For further information with respect to the Company and the
Common Stock, reference is made to the Registration Statement and the exhibits
and financial statement schedules filed as a part thereof. Statements made in
this Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. All of these documents may be inspected without charge at the
Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549,
or at the Regional Offices of the Commission at 210 South Dearborn Street, Room
1204, Chicago, Illinois 60604; and at 7 World Trade Center, New York, New York
10048. Copies of such material may be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549.
DISCLOSURE OF COMMISSION POSITION
ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES
Section 145 of the Delaware General Corporation Law, as amended, authorizes
the Company to indemnify any director or officer under certain prescribed
circumstances and subject to certain limitations against certain costs and
expenses, including attorneys' fees actually and reasonably incurred in
connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which such person is a party by reason of
being a director or officer of the Company if it is determined that such person
acted in accordance with the applicable standard of conduct set forth in such
statutory provisions. Article 9 of the Company's Certificate of Incorporation
provides for the indemnification of directors and officers to the full extent
permitted by Delaware law.
The Company may also purchase and maintain insurance for the benefit of any
director or officer which may cover claims for which the Company could not
indemnify such person.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore unenforceable.
44
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Independent Auditors' Report................................................ F-2
Financial Statements:
Balance Sheets............................................................ F-3
Statements of Operations.................................................. F-4
Statement of Stockholders' Equity......................................... F-5
Statements of Cash Flows.................................................. F-6
Notes to Financial Statements............................................... F-7-F-13
</TABLE>
F-1
<PAGE>
------------------------------
SCHIFFMAN
HUGHES
BROWN
------------------------------
A PROFESSIONAL CORPORATION
CERTIFIED PUBLIC ACCOUNTANTS
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, 1996 and 1995, and the related statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1996 and the
period from April 13, 1995 (inception) to December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PacificHealth Laboratories,
Inc. as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for the year ended December 31, 1996 and from April 13, 1995
(inception) to December 31, 1995, in conformity with generally accepted
accounting principles.
Schiffman Hughes Brown
August 29, 1997
- --------------------------------------------------------------------------------
790 Penllyn Pike, Suite 302, Blue Bell, PA 19422
(215) 646-2000 -- Fax (215) 646-1937
F-2
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1995 1997
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 2)............................ $ 743,313 $ 1,071,850 $ 112,020
Accounts receivable, net (Note 3)............................. 2,020,545 592,965
Inventories (Note 4).......................................... 905,950 118,592 700,179
Prepaid expenses.............................................. 268,800 19,100 261,100
Other......................................................... 29,854 6,750 6,926
Deferred tax asset............................................ 38,012
------------- ------------- -----------
Total current assets....................................... 4,006,474 1,216,292 1,673,190
------------- ------------- -----------
Property and equipment, net (Note 5)............................ 178,339 2,223 115,161
------------- ------------- -----------
Other assets:
Deferred offering costs....................................... 43,748
Organization costs, net of accumulated amortization
(Note 6)................................................... 10,468 13,647 8,083
------------- ------------- -----------
$ 10,468 $ 13,647 $ 51,831
------------- ------------- -----------
$ 4,195,281 $ 1,232,162 $ 1,840,182
============= ============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses......................... $ 669,227 $ 116,221 $ 529,697
Reserve for product replacement (Note 4)...................... 1,056,246
------------- ------------- -----------
Total current liabilities.................................. 669,227 116,221 1,585,943
------------- ------------- -----------
Commitments (Notes 8 and 15)
Stockholders' equity:
10% convertible preferred stock, $.01 par value; authorized
1,000,000 shares; issued and outstanding 133,666 shares in
1996, 119,903 shares in 1995 and 143,896 shares at
September 30, 1997......................................... 1,337 1,199 1,439
Common stock, $.0025 par value; authorized 10,000,000 shares;
issued and outstanding 2,953,450 shares in 1996, 2,198,000
shares in 1995 and 3,185,672 shares at September 30, 1997.. 7,384 5,495 7,964
Additional paid-in capital.................................... 3,694,990 1,305,879 4,790,662
Accumulated deficit........................................... (177,657) (196,632) (4,545,826)
------------- ------------- -----------
3,526,054 1,115,941 254,239
------------- ------------- -----------
$ 4,195,281 $ 1,232,162 $ 1,840,182
============= ============= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-3
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE PERIOD FROM APRIL 13, 1995 (INCEPTION) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1997 1996
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................................. $ 3,085,726 $ -0- $ 3,219,831 $ 1,043,082
------------- ------------- ----------- -----------
Cost of goods sold:
Inventory, beginning............................... 118,592 905,950 118,592
Purchases.......................................... 1,537,670 118,592 580,098 887,681
------------- ------------- ----------- -----------
1,656,262 118,592 1,486,048 1,006,273
Less: inventory, ending............................ (905,950) (118,592) (700,179) (725,838)
------------- ------------- ----------- -----------
750,312 -0- 785,869 280,435
------------- ------------- ----------- -----------
Gross profit......................................... 2,335,414 -0- 2,433,962 762,647
------------- ------------- ----------- -----------
Selling, general and administrative expenses......... 2,224,683 186,892 4,923,936 1,278,681
Research and development (Note 12)................... 25,331 21,502 39,637 23,729
Amortization expense................................. 3,180 2,253 2,385 2,385
Depreciation expense................................. 29,064 57,198 15,729
Provision for replacement of product (Note 4)........ 1,674,440
------------- ------------- ----------- -----------
2,282,258 210,647 6,697,596 1,320,524
------------- ------------- ----------- -----------
Net operating income (loss).......................... 53,156 (210,647) (4,263,634) (557,877)
Other income (expense):
Interest income.................................... 53,583 14,026 36,442 41,028
------------- ------------- ----------- -----------
Income (loss) before income taxes.................... 106,739 (196,621) (4,227,192) (516,849)
Provision (benefit) for income taxes
(Note 11).......................................... (38,012) -0- 38,212 290
------------- ------------- ----------- -----------
Net income (loss).................................... $ 144,751 $ (196,621) (4,265,404) (517,139)
============= ============= =========== ===========
Primary net income (loss) per share of common
stock.............................................. $ .05 $ (.12) $ (1.23) $ (.20)
============= ============= =========== ===========
Fully diluted net income (loss) per share of common
stock.............................................. $ .04 $ (.12) $ (1.23) $ (.20)
============= ============= =========== ===========
Primary weighted average shares outstanding.......... 2,689,063 1,630,420 3,454,878 2,620,702
============= ============= =========== ===========
Fully diluted weighted average shares outstanding.... 3,447,050 1,806,421 4,697,229 3,215,472
============= ============= =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-4
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE PERIOD FROM APRIL 13, 1995 (INCEPTION) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
TOTAL
PREFERRED COMMON PAID IN ACCUMULATED STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT EQUITY
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, April 13, 1995 (inception).............. $ -0- $ -0- $ -0- $ -0- $ -0-
Issuance of 387,500 shares of Founder's preferred
stock.......................................... 3,875 212,792 216,667
Conversion of 387,500 shares of Founder's
preferred stock for 620,000 shares of common
stock.......................................... (3,875) 1,550 2,325 -0-
Issuance of 3,945,000 shares of common stock
(subsequently reduced to 1,578,000 shares after
reverse stock split)........................... 3,945 107,558 111,503
Issuance of 118,750 shares of 10% convertible
preferred stock................................ 1,188 983,204 984,392
Issuance of 1,153 shares of 10% convertible
preferred stock as a dividend.................. 11 (11) -0-
Net loss for the period ended December 31,
1995........................................... (196,621) (196,621)
--------- --------- ------------ ------------ ----------
Balance, December 31, 1995....................... 1,199 5,495 1,305,879 (196,632) 1,115,941
Issuance of 755,000 shares common stock.......... 1,888 2,249,820 2,251,708
Issuance of 450 shares of common stock for
services....................................... 1 1,799 1,800
Issuance of 1,250 shares of 10% convertible
preferred stock................................ 13 12,487 12,500
Issuance of 12,513 shares of 10% convertible
preferred stock as a dividend.................. 125 125,005 (125,130)
Cash dividends................................... (646) (646)
Net income for the year ended December 31,
1996........................................... 144,751 144,751
--------- --------- ------------ ------------ ----------
Balance, December 31, 1996....................... 1,337 7,384 3,694,990 (177,657) 3,526,054
Issuance of 232,222 shares of common stock....... 580 993,474 994,054
Issuance of 10,230 shares of 10% convertible
preferred stock as a dividend.................. 102 102,198 (102,300)
Cash dividend.................................... (465) (465)
Net loss for the period ended September 30,
1997........................................... (4,265,404) (4,265,404)
--------- --------- ------------ ------------ ----------
Balance, September 30, 1997 (Unaudited).......... $ 1,439 $ 7,964 $ 4,790,662 $ (4,545,826) $ 254,239
========= ========= ============ ============ ==========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-5
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE PERIOD FROM APRIL 13, 1995 (INCEPTION) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1997 1996
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ 144,751 $ (196,621) $(4,265,404) $ (517,139)
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Loss on retirement of fixed assets.............. 58,061
Depreciation.................................... 29,064 57,198 15,729
Amortization.................................... 3,180 2,253 2,385 2,385
Deferred taxes.................................. (38,012) 38,012
Issuance of common stock for services........... 1,800
Deferred offering............................... (43,748)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable...... (2,020,545) 1,427,580 (533,956)
(Increase) decrease in prepaid expenses......... (249,700) (19,100) 7,700 (122,381)
(Increase) decrease in inventory................ (787,358) (118,592) 205,771 (607,246)
(Increase) decrease in other current assets..... (23,104) (6,750) 22,928 (10,371)
Increase in accounts payable and accrued
expenses...................................... 553,006 116,221 (139,530) 288,694
Increase in reserve for product replacement..... 1,056,246
------------ ------------ ----------- -----------
Net cash used by operating activities.................. (2,386,918) (222,589) (1,572,801) (1,484,285)
------------ ------------ ----------- -----------
Cash flows for investing activities:
Purchase of fixed assets............................. (151,928) (52,082) (98,927)
Incurred organizational costs........................ (15,900)
Purchase of furniture and fixtures................... (53,252) (2,223)
------------ ------------ ----------- -----------
Net cash used in investing activities.................. (205,180) (18,123) (52,082) (98,927)
------------ ------------ ----------- -----------
Cash flows from financing activities:
Issuance of common stock............................. 2,251,707 111,503 994,055 2,191,707
Issuance of preferred stock.......................... 12,500 1,201,059 12,500
Dividends paid....................................... (646) (465) (531)
------------ ------------ ----------- -----------
Net cash provided by financing activities.............. 2,263,561 1,312,562 993,590 2,203,676
------------ ------------ ----------- -----------
Net increase (decrease) in cash........................ (328,537) 1,071,850 (631,293) 620,464
Cash, beginning balance................................ 1,071,850 -0- 743,313 1,071,850
------------ ------------ ----------- -----------
Cash, ending balance................................... $ 743,313 $ 1,071,850 $ 112,020 $ 1,692,314
============ ============ =========== ===========
Supplemental disclosure of cash flow information:
Taxes paid........................................... $ 150 $ -0- $ -0- $ 290
============ ============ =========== ===========
Non-cash financing activity:
Preferred stock dividend............................. $ 125,130 $ 115 $ 102,300 $ 92,640
============ ============ =========== ===========
Issuance of common stock for services................ $ 1,800 $ -0- $ -0- $ -0-
============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-6
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. BUSINESS:
PacificHealth Laboratories, Inc. (the Company) (PHL) was organized on April
13, 1995 to develop and market innovative natural products that have been
clinically shown to improve health and well being. At the present time, the
Company's ENDUROX line of products represents 100% of revenues.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and cash equivalents:
For purposes of reporting cash flows, the Company considers all cash
accounts which are not subject to withdrawal restrictions or penalties, and
certificates of deposit 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 3
to 10 years. Depreciation expense for the years ended December 31, 1996 and 1995
was $29,064 and $0, respectively. Depreciation expense for the nine months ended
September 30, 1997 and 1996 was $57,198 and $15,729, respectively.
Organization costs:
Organization costs are capitalized and amortized over 5 years.
Earnings per share:
Primary earnings per share are computed by dividing net income (loss) by
the weighted average number of shares of common stock and the equivalent number
of common shares of convertible preferred stock. Fully diluted earnings per
share reflect the dilutive effect of stock options and warrants. For the year
ended December 31, 1995 and the nine months ended September 30, 1997 and 1996,
the computation of fully diluted loss per share was antidilutive; therefore, the
amounts reported for primary and fully dilutive loss per share were the same.
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.
F-7
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 only difference between the basis for
financial and income tax reporting was the booking of tax benefit for the net
operating loss carryforward.
3. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1995 1997
------------- --------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable....................................... $ 2,020,545 $ -0- $ 614,465
Less: allowance for
doubtful accounts....................................... -0- -0- 21,500
------------- --------- -----------
$ 2,020,545 $ -0- $ 592,965
============= ========= ===========
</TABLE>
4. INVENTORIES:
Inventories at December 31, 1996, 1995 and September 30, 1997 consisted of
the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1995 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials............................................. $ 112,734 $ 118,592 $ 95,065
Work-in-process........................................... 223,675 258,373
Finished goods............................................ 569,541 346,741
---------- ---------- -----------
$ 905,950 $ 118,592 $ 700,179
========== ========== ===========
</TABLE>
At the beginning of 1997, the Company decided to reformulate its ENDUROX
product into a caplet rather than a capsule, because the capsule form was very
hydroscopic and became altered in size and color in conditions of high heat and
humidity. As a result, the Company abandoned its inventory of capsules, and
whenever necessary, exchanged its retailers' inventory of capsules with caplets
or issued a credit for returned capsules. As of September 30, 1997, the Company
recorded a provision for replacement of product in the amount of $1,674,440. Of
this amount, $1,056,246 of unreturned retailers' capsule inventory has been
recorded in a reserve account on the balance sheet. Both ENDUROX EXCEL and
ENDUROX ProHeart were introduced in a caplet form.
5. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1995 1997
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and equipment................................... $ 111,158 $ 2,223 $ 119,554
Molds and dies............................................ 96,245 48,417
---------- --------- -----------
207,403 2,223 167,971
Less:
Accumulated depreciation................................ 29,064 52,810
---------- --------- -----------
$ 178,339 $ 2,223 $ 115,161
========== ========= ===========
</TABLE>
F-8
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
6. ORGANIZATION COSTS:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1995 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Cost...................................................... $ 15,900 $ 15,900 $ 15,900
Less:
Accumulated amortization................................ 5,432 2,223 7,817
---------- ---------- -----------
$ 10,468 $ 13,647 $ 8,083
========== ========== ===========
</TABLE>
7. STOCK:
Capital stock:
The total number of shares of all classes of stock which the Company has
authority to issue is 11,000,000 shares, consisting of (a) ten million
(10,000,000) 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, preferences
and relative, participating, optional or other special rights and
qualifications, limitations or restrictions 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.
Common stock:
In 1995, 3,945,000 shares were issued and subsequently reduced to 1,578,000
by a 2.5 for 1 reverse split. In 1996, the Company issued 680,000 shares of
common stock for $2,453,750 and 450 shares for $1,800 in services. Also in 1996
under the terms of the Placement Agency Agreement relating to the sale of 10%
convertible preferred stock described below, the Company sold 75,000 shares of
common stock to the placement agent for $18,000. During the nine months ended
September 30, 1997, the Company issued 232,222 shares of common stock for
$1,044,999.
Founders preferred stock:
In 1995, 387,500 shares of Founder's preferred stock were issued. Each
share of Founders preferred stock entitled its holder to receive an annual cash
dividend of $.06 per share (payable from retained earnings). Each share of the
Founder's preferred stock is convertible into 4 shares of common stock. The
Founder's preferred stock was converted into 620,000 shares of the Company's
common stock after giving effect to a subsequent 2.5 for 1 reverse split in
August 1995.
10% convertible preferred stock:
In 1996 and 1995, the Company sold a total of 120,000 shares of its 10%
convertible preferred stock for $1,200,000.
Holders of shares of the 10% convertible preferred stock are entitled to
receive an annual dividend of $1.00 per share, payable in quarterly installments
of $.25 per share. Dividends may be paid in cash or in additional shares at the
discretion of the Board of Directors of the Company. Each share of preferred
stock may be converted into two and one half shares of common stock through
December 31, 1997 and, thereafter each share of 10% convertible preferred stock
may be converted into one and two-thirds shares of the Company's common stock.
F-9
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
7. STOCK (CONTINUED):
Activity for the periods ended is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1995 1997
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Stock dividends
(shown as shares)....................................... 12,513 1,153 10,230
========== ========= ===========
Cash dividends............................................ $ 646 $ -0- $ 465
========== ========= ===========
</TABLE>
8. COMMITMENTS:
Strategic Alliance Agreement:
The Company entered into an exclusive relationship with the Institute of
Nutrition & Food Hygiene (INFH), an institution located in The People's Republic
of China, for the purpose of commercializing various products, know how and/or
intellectual property outside of China. Per the Agreement, the INFH will attempt
to locate and enter into exclusive licensing agreements with other institutions
located in China to supply the Company with an array of herbs, non-prescription
drugs, nutritional supplements, intellectual property and technology for
developing products derived from natural sources which can be used in the
maintenance of health and well being. Any future products licensed by the INFH
will be assigned to the Company subject to terms and conditions of the
Agreement.
When the Company has achieved profitability on a cumulative basis it shall
pay royalties to the INFH applicable to the net revenues of any products
exported from China, developed in China or products which are based on extracts
from China. The royalties to be paid are as follows:
NET REVENUES ROYALTY
------------ -------
$0 - 25 million.............................................. 2%
$25 - 100 million............................................ 1 1/2%
$100 - 200 million........................................... 1%
Over $200 million............................................ 1/2%
For all royalties which are earned by INFH in excess of $25 million but
less than $100 million, PHL shall receive a 30% credit. This credit shall be
escrowed by PHL and be applied to "Special Services" performed by the INFH,
institutions or individuals with whom the INFH has entered into a licensing
agreement. Unused credits shall carry over beyond the year in which it was
earned. For purposes of the Agreement, Special Services shall be defined as:
(1) Clinical studies/research
(2) Laboratory studies/research
(3) Toxicology studies/research
(4) Formulation and/or product development
(5) Quality control studies/services
(6) Payment to Chinese consultants for work including, but not limited
to, clinical and/or research design, product development, quality
control, manufacturing and/or sourcing.
F-10
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
8. COMMITMENTS (CONTINUED):
Line of credit:
In May, 1997, the Company entered into a line of credit agreement with its
bank which enables the Company to borrow up to 80% of their current accounts
receivable (defined as less than 90 days old), up to a maximum of $1,000,000. At
September 30, 1997, the Company had not borrowed any monies from this line of
credit.
Employment and consulting agreements:
The Company has entered into an employment contract with the Chairman and
CEO that provides for minimum annual compensation of $150,000. The Company is
the beneficiary of a keyman life insurance policy (on the Chairman's life) for
$2,000,000. It also has consulting agreements with certain shareholders and
others who have expertise of value to the Company.
9. INCENTIVE STOCK OPTION PLAN:
In 1995, the Company established an incentive stock option plan (the Plan)
and presently has reserved 1,500,000 shares of the Company's common stock for
issuance under the Plan. Options granted pursuant to the Plan at December 31,
1996 were 904,500, and those options were granted to certain officers, key
employees and/or consultants to the Company. Exercise prices range from $2 to $4
per common share, and vest over varying periods of time. In the first nine
months of 1997, 15,700 options were granted to certain officers, key employees
and/or consultants to the Company. Exercise prices on the options granted in
1997 range from $4.25 to $4.50 per common share, and vest over varying periods
of time. All issuances were granted at the fair market value of the Company's
common stock at time of grant. As of September 30, 1997, no options have been
exercised.
Transactions in the Plan since inception are as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE WEIGHTED AVERAGE
GRANTED VESTED PER VESTED EXERCISE PRICE PER
SHARES SHARES COMMON SHARE VESTED COMMON SHARE
----------- --------- ---------------- ---------------------
<S> <C> <C> <C> <C>
Balance, April 13, 1995............. -0- -0-
Activity during period.............. 300,000 -0-
----------- ---------
Balance, December 31, 1995.......... 300,000 -0-
----------- ---------
Activity during the year ended
December 31, 1996................. 604,500 144,500 $2.00 - $4.00 $2.57
----------- ---------
Balance, December 31, 1996.......... 904,500 144,500
----------- ---------
Activity during the nine months
ended September 30, 1997.......... 15,700 388,200 $2.00 - $4.50 $3.36
----------- ---------
Balance, September 30, 1997......... 920,200 532,700 $3.14
=========== =========
</TABLE>
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.
F-11
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
9. INCENTIVE STOCK OPTION PLAN (CONTINUED):
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 net income and net
income per common share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1995 1997
------------ ------------ --------------
<S> <C> <C> <C>
Net income:
As reported............................................ $ 144,751 $ (196,621) $ (4,265,404)
Pro forma.............................................. (92,305) (229,934) (4,531,075)
Net income per common share:
As reported............................................ .05 (.12) (1.23)
Pro forma.............................................. (.03) (.14) (1.31)
</TABLE>
Significant assumptions used to calculate the above fair value of the
awards are as follows:
Risk free interest rates of return.................................. 5.75%
Expected option life................................................ 60 months
Expected dividends.................................................. $-0-
10. WARRANTS:
At September 30, 1997, the Company has warrants outstanding for the
purchase of 255,500 shares of the Company's common stock at exercise prices
ranging between $3.75 to $6.25 per common share. The warrants expire at the
close of business on July 31, 2000 (112,375 warrants exercisable at $3.75 per
share) and August 8, 2000 (12,000 warrants exercisable at $6.25 per share). As
of September 30, 1997, no warrants have been exercised.
11. INCOME TAXES:
Income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------ --------------------
1996 1995 1997 1996
------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Current:
Federal................................................... $ -0- $ -0- $ -0- $ -0-
State..................................................... -0- -0- 200 290
------------- --------- --------- ---------
-0- -0- 200 290
------------- --------- --------- ---------
Deferred:
Federal................................................... (30,067) -0- 30,067 -0-
State..................................................... (7,945) -0- 7,945 -0-
------------- --------- --------- ---------
(38,012) -0- 38,012 -0-
------------- --------- --------- ---------
$ (38,012) $ -0- $ 38,212 $ 290
============= ========= ========= =========
</TABLE>
F-12
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
11. INCOME TAXES (CONTINUED):
The Company has $88,432 in Federal and state net operating loss carryovers
which can be used to offset future taxable income. The net operating loss
carryforwards expire in the year 2010. In 1996, management of the Company
assessed its then current earnings along with the then existing sales backlog
and budgeted sales for 1997 and had determined that it was more likely than not
that the net operating loss carryforwards would be utilized in 1997 thus a
deferred tax asset of $38,012 was recorded on the books. This deferred tax asset
was calculated using effective tax rates for federal and state. However, as a
result of reassessment by the Company at September 30, 1997, it appears that net
operating loss carryforwards will not be recognized in 1997 and has thus
reversed the deferred tax asset recorded at December 31, 1996.
12. RESEARCH AND DEVELOPMENT COSTS:
For the year ended December 31, 1996 and for the period from April 13, 1995
to December 31, 1995, research and development costs were $25,331 and $21,502,
respectively. Research and development costs for the nine months ended September
30, 1997 and 1996 were $39,637 and $23,729, respectively.
13. FINANCIAL INSTRUMENTS:
Cash accounts are secured by the Federal Deposit Insurance Corporation up
to $100,000. At December 31, 1996 and September 30, 1997, cash deposits exceeded
federally insured limits by approximately $400,000 and $12,020, respectively.
14. SIGNIFICANT CUSTOMERS:
For the year ended December 31, 1996, the Company had revenues from one
customer which accounted for approximately 45% of total revenue. During the nine
months ended September 30, 1997, the Company had three customers with billings
in excess of 10% of total revenues. These three customers accounted for
approximately 49% of total revenues.
15. RELATED PARTY:
The Company leases its offices from a company owned equally by the
president and secretary of PacificHealth Laboratories, Inc. The three year lease
starting February 1, 1997 requires monthly payments of $2,645, plus a monthly
charge for the Company's portion of certain common area costs. Rent expense for
the nine months ended September 30, 1997 was $30,308.
F-13
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS, OR AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IS
UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE OF THE PROSPECTUS.
------------------
TABLE OF CONTENTS
PAGE
---------
Prospectus Summary............................. 3
Risk Factors................................... 6
Dilution....................................... 14
Use of Proceeds................................ 15
Capitalization................................. 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 17
Business of the Company........................ 20
Management..................................... 30
Principal Shareholders......................... 35
Certain Relationships and Related
Transactions................................. 37
Description of Securities...................... 38
Underwriting................................... 41
Shares Available for Future Sale............... 43
Legal Matters.................................. 43
Experts........................................ 44
Additional Information......................... 44
Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.................................. 44
Index to Financial Statements.................. F-1
------------------
UNTIL _________, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
1,200,000 SHARES
PACIFICHEALTH
LABORATORIES, INC.
COMMON STOCK
-------------------
PROSPECTUS
-------------------
[LOGO]
, 1997
================================================================================
<PAGE>
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated amount of various expenses in
connection with the sale and distribution of the securities being registered:
<TABLE>
<S> <C>
SEC registration fee...................................................................... $ 2,771
NASD filing fee........................................................................... 1,414
Underwriter's nonaccountable expense allowance (assuming no exercise of Over-allotment
Option)................................................................................. 216,000*
Printing and engraving expenses........................................................... 35,000*
Legal fees and expenses (including blue sky fees and expenses)............................ 100,000*
Accounting fees and expenses.............................................................. 10,000*
Transfer agent fees....................................................................... 5,000*
Miscellaneous............................................................................. 9,815*
-----------
Total................................................................................... $ 380,000*
===========
</TABLE>
- ------------------
* Estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Sales of unregistered securities within the two years preceding the date of
the Registration Statement are as follows:
In an offering completed in January 1996, the Company sold 120,000
shares of 10% Convertible Preferred Stock at a price of $10 per share
(aggregate $1,200,000.00) to 29 investors, of which 25 were accredited
investors. Through September 30, 1997, the Company has issued an additional
23,896 shares of 10% Convertible Preferred Stock as dividends upon the
outstanding shares of 10% Convertible Preferred Stock, as permitted, at its
option, pursuant to the terms of the 10% Convertible Preferred Stock. These
offers and sales were made by the Company in reliance upon the exemption
from securities registration provided by Regulation D, Rule 506,
promulgated under the Securities Act of 1933, as amended. In connection
with the offering of 10% Convertible Preferred Stock, the placement agent,
First Montauk Securities Corp. ("First Montauk") received commissions of
$120,000; entered into a Consulting Agreement with the Company pursuant to
which it received a $30,000 consulting fee; received the right to acquire
75,000 shares of the Company's Common Stock at a price of $.24 per share,
which right was exercised at the final closing of the offering; received an
nonaccountable expense allowance of $24,000; and reimbursement of certain
legal expenses in the amount of $6,000. The following persons and/or
entities were purchasers in this offering: Mark M. Carter, MD; Malcolm E.
Hawley, DDS Profit Sharing Plan; Leonard Kaplan; Delaware Charter Guarantee
& Trust Co., Trustee FBO Lawrence L. Lidfeldt SEP/IRA; T. George Harris;
Ronald Weinisch and Alberta Weinisch, JTWROS; Conrad Ellman; Charles W.
Kramer; Barbara Waingort; Elliot Marvel and Evelyn Marvel, JTWROS; Barry
Friedenberg; Delaware Charter Guarantee & Trust Co., Trustee FBO Paul
Prager IRA; Joseph Mahana; Vincent A. Ventimiglia; Charles F. Moran;
William A. Schwartz; Frank J. Vecchione; Mark L. Friedell, MD and Donna S.
Friedell, JTWROS; Delaware Charter Guarantee & Trust Co., Trustee SERP FBO
Stephen Frankel, Frankel Real Estate Inc.; Ronald Iannelli; Pulmonary &
Critical Care Associates, P.A. P/S Plan & Trust, Stuart Millstone, Trustee;
Alyse Borgersen; Joseph Buckelew; Michael Theodorobeakos; Dolores Bauer &
Anthony Bauer, JTWROS; Grumet Partners LP, Jack Grumet, General Partner;
Andrew Gennusa; Jeffrey Golden, C/F Melissa Golden UGMA/NY; Richard B.
Soldo, Sr. and Ann Soldo, JTWROS.
II-1
<PAGE>
In an offering completed in July 1996, the Company offered and sold
525,000 shares of its Common Stock at a price of $3.75 per share to 83
investors, of which 66 were accredited investors. These offers and sales
were made by the Company in reliance upon the exemption from securities
registration provided by Regulation D, Rule 506, promulgated under the
Securities Act of 1933, as amended. First Montauk acted as Placement Agent
for the offering, and received commissions of $196,750; warrants to acquire
227,500 shares of the Company's Common Stock at a price of $3.75 per share,
which expire on July 29, 2000; an nonaccountable expense allowance of
$29,531.25; and reimbursement of certain legal expenses in the amount of
$6,000. The following persons and/or entities were purchasers in this
offering: J. Allyn Simmons, Jr.; Michael C. Stanley; Delaware Charter
Guarantee & Trust, TTEE F/B/O Michael C. Stanley IRA R/O; Delaware Charter
Guarantee & Trust, TTEE F/B/O James Tobin IRA; John B. Rutzel; Delaware
Charter Guarantee & Trust, TTEE F/B/O Bruce DeSchryver IRA R/O; Delaware
Charter Guarantee & Trust, TTEE F/B/O Scott M. Browne, IRA; Jeffrey &
Sharon Golden, JTWROS; Crane B. Harris; Katherine Harris; Crane B. Harris,
C/F Elizabeth Aston Harris a Minor, Pursuant to the VA UGMA; Crane B.
Harris, C/F Evan H. Harris a Minor, Pursuant to the VA UGMA; Delaware
Charter Guarantee & Trust, TTEE F/B/O Douglas A. Love IRA; William A.
Schwartz; Delaware Charter Guarantee & Trust, TTEE FBO Daniel C. Dagit IRA;
David R. Walker; John M. and Mary I. Burlingame, Tenants-in-Common;
Delaware Charter Guarantee & Trust, TTEE FBO Daniel S. Berman IRA R/O;
Georgie W. Stanley; M. Brett Stanley; Peter E. S. Nichols; Herbert Talbot,
Jr. & Anne N. Talbot, JTWROS; Charlotte C. Collins; Delaware Charter
Guarantee & Trust, TTEE FBO Louis L. Scher IV IRA R/O; Lola Ambrosi;
Charles W. Kramer; Elizabeth N. Callahan; Brooks N. Hallock; Delaware
Charter Guarantee & Trust, TTEE FBO Francis Booth IRA; Andrew W. Bisset;
Catherine Cassidy; Georgie S. Powers; Lynn P. Harrington; Robert R.
Bartolini; Delaware Charter Guarantee & Trust, TTEE FBO Hillsdale Music
Inc. PS Plan; Neil Costa & Lynn Ahrens, JTWROS; Virginia L. Schmidt;
Delaware Charter Guarantee & Trust, TTEE F/B/O J. Gale Yetman IRA; Delaware
Charter Guarantee & Trust, TTEE F/B/O Richard J. Yetman IRA; Deborah Galler
and F. Michael Heinrich, Jr., JTWROS; W. Kenneth Albrecht; Delaware Charter
Guarantee & Trust, TTEE F/B/O Robert B. Williams IRA R/O; Barbara J.
Shannon; Delaware Charter Guarantee & Trust, TTEE F/B/O Glen J. Beauchamp
IRA; Marcia Paulen; Ralf Sellig; Fred R. Huettig; Delaware Charter
Guarantee & Trust, TTEE F/B/O Neil Costa IRA R/O; Sandra W. Bisset; Gemma
Moorman; Joseph Chicco and Rita A. Chicco, JTWROS; Neil G. Epstein and
Laura F. Jansen, JTWROS; John M. Krno U/W/O, Theresa V. Krno and Anita Von
Dreusche, TTEES; Adlai Wertman and Janet Ambrosi Wertman, JTWROS; Richard
H. Norwood; Path Holdings, Inc.; Delaware Charter Guarantee & Trust, TTEE
F/B/O John P. Harkrader, Jr. IRA R/O; Delaware Charter Guarantee & Trust,
TTEE F/B/O John H. Burlingame IRA R/O; Judith Golden; Delaware Charter
Guarantee & Trust, TTEE F/B/O Robert R. Bartolini IRA R/O; Elizabeth L.
Vreeland; Delaware Charter Guarantee & Trust, TTEE F/B/O David A. Lackland
IRA R/O; Robert L. Crowell Rev. Tr. UAD 4/26/91, Robert L. Crowell, TTEE;
Desmond H. O'Connell, Jr. and Roberta J. O'Connell, JTWROS; Delaware
Charter Guarantee & Trust, TTEE F/B/O Joseph J. Tulskie IRA; Anthony N.
DiCesare D.D.S., P.A. Profit Sharing Trust; Eleftherios Kougentakis; Daniel
W. and Mary H. Kiningham, JTWROS; George B. Lucas Trust #3 dtd 5/8/87,
Daniel Brainard Slack, TTEE; The Sawtooth Group; Delaware Charter Guarantee
& Trust, TTEE F/B/O Howard Greenberg IRA; Andrew Panzo; Polly Vecchione; B.
Michael Pisani; Charles H. Rose and Mindy G. Rose, JTWROS; Eric V. Malm;
Stephen S. Lancaster; Evelyn J. Busch; Richard P. Gonder; Delaware Charter
Guarantee & Trust, TTEE F/B/O Robert P. Ferris IRA; Ann Lucas Burns;
Delaware Charter Guarantee & Trust, TTEE F/B/O Carol A. Fahey IRA R/O; John
E. Madsen, Jr. and Louise B. Madsen, JTWROS; Delaware Charter Guarantee &
Trust, TTEE F/B/O Richard Kollisch IRA R/O; Carla F. Madrigal; Thelma B.
Jones; and Edmund N. Goodman, MD.
In a private transaction in August 1996, the Company sold 140,000
shares of its Common Stock to the Kaufmann Fund, New York City, NY, at a
price of $3.75 per share (aggregate $525,000.00). This sale was made by the
Company in reliance upon the exemption from securities registration
provided by Regulation D, Rule 506, promulgated under the Securities Act of
1933,
II-2
<PAGE>
as amended. In connection with this private transaction, the Company paid
First Montauk a fee of $52,500 for its services in connection with the sale
of the Common Stock, plus a nonaccountable expense allowance of $5,250
(less certain legal expenses) incurred by the Company in connection with
this sale. In connection with this financing, First Montauk and certain of
its employees received warrants to purchase an aggregate of 28,000 shares
of the Company's Common Stock at a price of $6.25 per share, expiring
August 5, 2000.
In September 1996, the Company granted an option to purchase 25,000
shares of Common Stock to Big Sky, Inc. as part of an endorsement
agreement. The exercise price of this option will equal the offering price
for the Shares. The option will expire five years from the effective date
of the Registration Statement.
In December 1996, the Company issued an aggregate 450 shares of its
Common Stock as a holiday bonus to five employees (Debbie Caponigro, Tracey
Clayton, Lisa McGuinness, Darlene Marosevitch and Leslie Steib). These
shares were issued without registration in reliance upon the fact that they
did not involve any sale of securities.
Also December 1996, the Company sold 15,000 shares of Common Stock to
one of its officers and directors, David Portman, at a price of $4.00 per
share (aggregate $60,000.00). This sale was made by the Company in reliance
upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended.
In a private transaction in February 1997, the Company sold 222,222
shares of its Common Stock to one accredited investor, Jemeson Investment
Co., Birmingham, AL, at a price of $4.50 per share (aggregate $999,999.00).
This sale was made by the Company in reliance upon the exemption from
securities registration provided by Regulation D, Rule 506, promulgated
under the Securities Act of 1933, as amended.
In April 1997, the Company sold 10,000 shares of Common Stock to a
single accredited investor, Theodore Lange, at a price of $4.50 per share.
This sale was made by the Company in reliance upon the exemption from
securities registration provided by Regulation D, Rule 506, promulgated
under the Securities Act of 1933, as amended.
All of the foregoing transactions were exempt from registration under
the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
Section 4(2) of the Securities Act.
ITEM 27. EXHIBITS.
(a) Exhibits
Except as otherwise indicated, all exhibits listed below were filed with
the Company's initial filing of Form SB-2 on September 25, 1997.
<TABLE>
<CAPTION>
EXHIBIT
NO.
- ---------
<S> <C> <C>
*1.1 -- Underwriting Agreement
*1.2 -- Selected Dealer Agreement
*3.1 -- Certificate of Incorporation of the Company and all amendments thereto
*3.2 -- Bylaws of the Company
***4.1 -- Specimen Common Stock Certificate
*4.2 -- Form of Underwriter's Warrant
*4.3 -- Designation of 10% Convertible Preferred Stock
***5 -- Opinion of Connolly Epstein Chicco Foxman Engelmyer & Ewing regarding the legality of securities
being registered
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C> <C>
*10.1 -- Incentive Stock Option Plan of 1995
*10.2 -- Employment Agreement between the Company and Robert Portman dated May 1, 1995
***10.2.1 -- Employment Agreement between the Company and Robert Portman dated November __, 1997
*10.3 -- Strategic Alliance Agreement between the Company and the Institute of Nutrition and Food Hygiene
*10.4 -- Exclusive License Agreement between the Company and the INFH
*10.5 -- Shareholders Agreement
*10.6 -- Big Sky, Inc. Endorsement Agreement
*10.7 -- Big Sky, Inc. Option Agreement
10.8 -- Financial Consulting Agreement between the Company and the Underwriter
**10.9 -- License and distribution letter agreement with Kemin Foods, L.C. dated September 22, 1997
**10.10 -- Credit Agreement with Summit Bank dated May 1, 1997
**23.1 -- Consent of Schiffman Hughes Brown
***23.2 -- Consent of Connolly Epstein Chicco Foxman Engelmyer & Ewing (included in Exhibit 5)*
*24 -- Power of Attorney (included in the signature pages of the Registration Statement)
**27 -- Financial Data Schedules
</TABLE>
- ------------------
* Previously filed
** Filed with Amendment No. 1.
*** To be filed by amendment.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Amendment No. 1
to Registration Statement No. 333-36379 to be signed on its behalf by the
undersigned, in the City of Philadelphia, on the 19th day of November, 1997.
PACIFICHEALTH LABORATORIES, INC.
By: /s/ Robert Portman
-----------------------------------------
Robert Portman
President and Chief Executive Officer
and a Director
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below on this Registration Statement hereby constitutes and appoints Robert
Portman and Jonathan D. Rahn, and each of them, with full power to act without
the other, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities (until revoked in writing) to sign any and all amendments
(including post-effective amendments and amendments thereto) to this
Registration Statement on Form SB-2 of PacificHealth Laboratories, Inc., and to
file the same with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
--------- ------------------------ ----
<S> <C> <C>
/s / JONATHAN D. RAHN Chief Financial Officer, November 19, 1997
- ---------------------------------------------- Principal Accounting Officer
Jonathan D. Rahn and a Director
/s / DAVID I. PORTMAN Director November 19, 1997
- ----------------------------------------------
David I. Portman
- ---------------------------------------------- Director , 1997
T. Colin Campbell
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL PAGE
EXHIBIT NO. DESCRIPTION NUMBER
----------- ----------- ---------------
<S> <C> <C> <C>
*1.1 -- Underwriting Agreement
*1.2 -- Selected Dealer Agreement
*3.1 -- Certificate of Incorporation of the Company and all amendments thereto
*3.2 -- Bylaws of the Company
***4.1 -- Specimen Common Stock Certificate
*4.2 -- Form of Underwriter's Warrant
*4.3 -- Designation of 10% Convertible Preferred Stock
***5 -- Opinion of Connolly Epstein Chicco Foxman Engelmyer & Ewing regarding
the legality of securities being registered*
*10.1 -- Incentive Stock Option Plan of 1995
*10.2 -- Employment Agreement between the Company and Robert Portman dated May 1,
1995
***10.2.1 -- Employment Agreement between the Company and Robert Portman dated
November __, 1997
*10.3 -- Strategic Alliance Agreement between the Company and the Institute of
Nutrition and Food Hygiene
*10.4 -- Exclusive Licensing Agreement between the Company and the INFH
*10.5 -- Shareholders Agreement
*10.6 -- Big Sky, Inc. Endorsement Agreement
*10.7 -- Big Sky, Inc. Option Agreement
*10.8 -- Financial Consulting Agreement between the Company and the Underwriter
**10.9 -- License and distribution letter agreement with Kemin Foods, L.C. dated
September 22, 1997
**10.10 -- Credit Agreement with Summit Bank dated May 1, 1997
**23.1 -- Consent of Schiffman Hughes Brown
***23.2 -- Consent of Connolly Epstein Chicco Foxman Engelmyer & Ewing (included in
Exhibit 5)
*24 -- Power of Attorney (included in the signature pages of the Registration
Statement)
***27 -- Financial Data Schedules
</TABLE>
- ------------------
* Previously filed
** Filed with this Amendment No. 1
*** To be filed by amendment
2100 Maury Street, Box 70
Des Moines, IA 50301-0070
KEMIN FAX: 515/266-2258
FOODS, L.C. Phone: 515/266-2111 or 800/777-8307
September 22,1997
Dr. Robert Portman
President
PacificHealth Laboratories, Inc.
1460 Route 9 North
Woodbridge, NJ 07095
Dear Dr. Portman:
This agreement is made on September 19,1997, between PacificHealth Laboratories,
Inc. (hereinafter "PHL"), a Delaware corporation having its main office at 1460
Route 9 North, Woodbridge, NJ 07095 and Kemin Foods, L.C. (hereinafter "Kemin"),
an Iowa corporation having its main office at 2100 Maury Street, Box 70, Des
Moines, IA 50301.
The purpose of this agreement is to outline a framework by which PHL and Kemin
can work together to create and market a FINAL PRODUCT (hereinafter "Product")
which contains a protease inhibitor researched, developed and manufactured by
Kemin and used by PHL in the formulation of a Product to be sold by PHL.
Further, this letter is intended to indicate PHL and Kemin plan to develop a
formal Exclusive Supply and Marketing Agreement between the two companies.
I. Appointment
Kemin appoints PHL as the exclusive marketer worldwide with respect to the
development of Product(s) containing protease inhibitor in various forms for
human consumption including but not limited to caplets, soil gel capsules,
tablets, drinks, bars, foods, powders, and other food forms (hereinafter the
"Protease Inhibitor"). Kemin agrees that during the term of this Agreement it
will sell to PHL on an exclusive basis all quantities of Protease Inhibitor
manufactured by Kemin to be incorporated in Product formulation(s) and form(s).
II. Responsibilities of Kemin
a. Implement at their cost those clinical studies necessary to
determine the efficacy and effective dose of protease inhibitor
alone.
<PAGE>
b. Implement at their cost a clinical trial to determine efficacy of
the protease inhibitor in combination with other ingredients that
will be incorporated into the Product for a cost not to exceed
$25,000.
c. Establish at their cost all quality control procedures necessary to
ensure that the protease inhibitor meets or exceeds all standards
under DSHEA and other standards required for the manufacture of
dietary supplements.
d. Develop the necessary manufacturing capability at their cost to meet
needs of PHL.
e. Establish all assay procedures to ensure consistency of the Protease
Inhibitor.
f. Manufacture and sell Protease Inhibitor to PHL as outlined in
Paragraph V.
g. Defend any suits based upon claims of patent infringement.
III. Responsibilities of PHIL
a. Provide direction to Kemin with regard to clinical studies.
b. Select a company to manufacture the Product(s).
c. All payments of all up front manufacturing costs as it relates to
the Product(s).
d. All quality control costs necessary in the manufacture of the
Product(s).
e. Development of marketing and advertising program.
f. Advertise and promote the Product(s) at PHL's cost.
g. Arrange distribution of the Product(s) and be responsible for all
distribution costs.
h. Implement at their costs all PR and promotional costs.
i. Develop at their costs all packaging graphics, Product(s) name, etc.
j. Pay for all legal fees as they pertain to Product(s) advertising
claims.
IV. Responsibilities of PHIL and Kemin
a. PHL and Kemin will each appoint one individual to coordinate
development of the Product(s).
b. PHL and Kemin will review the clinical protocols so that studies
will be able to be utilized in future marketing and advertising
programs.
c. PHL and Kemin will work together in developing a formula which will
form the basis of the Protease Inhibitor containing Product(s).
d. PHL and Kemin will share equally the cost over $25,000 of a clinical
trial to determine efficacy of the protease inhibitor in combination
that will be incorporated into the Product(s) as outlined in
Paragraph II, point b.
e. PHL and Kemin will share equally the data and results of the
clinical trial(s) and are granted unlimited property of the data for
any subsequent use of their own.
2
<PAGE>
V. Royalty
PHL will pay Kemin for the protease inhibitor ingredient by one of the
following methods:
a. Actual Kemin product costs plus royalty based on gross sales less
returns, credits, shipping and taxes (if applicable) or
b. Mutually agreed upon price per kilogram of protease inhibitor or
c. Mutually agreed upon price per kilogram plus royalty based on gross
sales less returns, credits, shipping and taxes (if applicable).
VI. Minimum Annual Purchase
PHL and Kemin would mutually agree on minimum annual purchases. Failure by
PHL to meet the minimal annual purchases would result in termination of
this Agreement.
VII. Trademark
a. PHL will name the Product(s) and will be responsible for all
trademark costs. The trademark for the Product(s) will be owned by
PHL.
b. All consumer packaging will have language that features "Kemin
Foods, L.C." and the trademarked name for the protease inhibitor.
VIII. Confidentiality
Both parties agree not to disclose at any time during the term of this
Agreement or for a period of three years thereafter, any confidential
information, knowledge or data, which either party may obtain or receive
except by written consent of the other party. Both parties agree that the
confidential, knowledge or data, which either party may obtain or receive
from the other, shall be used only for the purposes contemplated by this
agreement.
IX. Assignment
Agreement is not assignable by either party without the prior written
consent of the other party.
X. Legal Review
The terms outlined in this agreement will be incorporated into an
Exclusive Supply and Marketing Agreement. Any terms or conditions outlined
in the Exclusive Supply and Marketing Agreement will be subject to the
review and modification by the respective legal counsels for both Kemin
and PHL.
XI. Duration
This agreement may be terminated by either party if the other party shall
3
<PAGE>
materially breach any condition or agreement on its part under this
Agreement, which is not remedied within thirty days after mailing of a
notice specifying such default or breach. This Agreement and the
negotiations regarding the final Exclusive Supply and Marketing Agreement
may be terminated by either party if the final Exclusive Supply and
Marketing Agreement, in a form mutually satisfactory to both parties and
their respective legal counsels, is not completed by December 31, 1997 or
an alternative deadline that is mutually agreed upon in writing by Kemin
and PHL prior to December 3I, 1997. The provision of IV(e) and VII shall
survive the termination of this agreement.
XII. Entire Agreement
This Agreement constitutes the entire agreement between the parties and
supersedes any prior oral or written agreement or understanding between
them with respect to the subject matter hereof. This Agreement may not be
amended or supplemented except in writing signed by both parties.
By: By:
__________________________ _____________________________
Dr. Robert Portman E. Charles Brice
President Vice President and General Manager
PacificHealth Laboratories Kemin Foods, L.C.
Date ________________________ Date_________________________
4
<PAGE>
SUMMIT CREDIT AGREEMENT
BANK (SECURED)
AGREEMENT by and between SUMMIT BANK ("BANK") and PacificHealth Laboratories,
Inc., ("BORROWER") dated as set forth.
1. DEFINITIONS
The terms set forth below shall be defined as follows:
1.1 "Date of Agreement" is May 1, 1997.
1.2 "Borrower" means PacificHealth Laboratories, Inc.; a __X__
corporation; a ___ partnership; a limited partnership; a ____
proprietorship.
1.3 "Borrower's Address " is: 1460 Route 9 North, Woodbridge, New
Jersey 07095
1.4 "Bank's Address" is: 210 Main Street, Hackensack, New Jersey
07601
1.5 "Collateral" means all property, assets or rights that secure
the payment of the Obligations, whether no owned or existing or
hereafter created or acquired and the cash and noncash thereof.
1.6 "Event of Default" means each and every event specified in
Section 6 of this Agreement.
1.7 "Loan Document(s)" means any Credit Agreement, Note Security
agreement, Mortgage or any other document heretofore, now or
hereafter executed by Borrower to Bank, together with all
modifications, extensions and/or renewals thereof.
1.8 "Obligations" means all indebtedness, obligations and
liabilities of Borrower to Bank of every kind and descriptions,
direct or indirect, secured or unsecured, joint or several,
absolute or contingent, due including any overdrafts, whether
<PAGE>
for payments or performance, now existing or hereafter arising,
whether presently contemplated or not, regardless of how the
same arise or by what instrument, agreement or book account they
may be evidenced, or whether evidenced, or whether evidenced by
any instrument , agreement or book account, including, but not
limited to all loans (including any loan by modification,
renewal or extension), all indebtedness, all undertakings to
take or refrain from taking any action, all indebtedness,
liabilities or obligations owing from borrower to others which
Bank may have obtained by purchase, negotiation, discount,
assignment or otherwise; and all interest, taxes, fees, charges,
expenses and attorney's fees (whether or not such attorney is a
regularly salaried employee of Bank), chargeable to Borrower or
incurred by Bank under this Agreement, or any other document or
instrument delivered in connection herewith or therewith.
1.9 "Security Interest" means any transaction which creates or
provides for a lien or security interest by agreement.
1.10 "Termination Date" is March 31, 1998, unless such date is
extended on one or more occasions, then the last date of the
last such extension.
To the extent not defined in Section 1(or any other Loan Document),
unless the context otherwise requires, all other accounting terms in
this Agreement shall have the means attributed to them by the Uniform
Commercial code in force in the State of New Jersey, as of the Date of
Agreement, to the extent that same are used or defined therein. To the
extent not defined in Section 1, unless the context otherwise requires,
all other accounting terms in this Agreement shall be construed in
<PAGE>
accordance with Generally Accepted Accounting Principles as of the Date
of Agreement, to the extent that same are used or defined herein.
2. COMMITMENTS
____ If this line is checked, subject to the terms and conditions of
the Loan Documents, Bank agrees to lend to Borrower and Borrower
agrees to borrow from Bank the amount of $__________, on or
about the Date of Agreement
__X__ If this line is checked, subject to the terms and
conditions of the Loan Documents, Bank agrees to lend to
Borrower and Borrower agrees to borrow from Bank an aggregate
principal amount at any one time outstanding not to exceed
$1,000,000.00 from the Date of Agreement to the termination
Date. Within such limits the Borrower may borrow, repay and
re-borrow at any time or from time to time. Any such sums
borrowed or reborrowed must be multiples of 5% of the aggregate
principal amount. The face amount of any commercial or standby
letters of credit issued by Bank for the account of Borrower are
included in the aggregate principal amount.
3. REPRESENTATIONS AND WARRANTIES
3.1 Borrower represents and warrants to Bank, and such
representations and warranties shall be continuing so long as
any Obligations shall remain outstanding as follows:
3.1.1 Borrower has the power and authority to own the
Collateral, to enter into and perform the Loan Documents
and to incur the Obligations. If a corporation, Borrower
has been duly incorporated and organized and is validly
existing as a corporation in good standing under the
laws of its jurisdiction of incorporation and is duly
qualified as a foreign corporation in those
<PAGE>
jurisdictions where the conduct of its business or the
ownership of its properties requires qualification. If a
partnership or a limited partnership, Borrower has been
validly formed, is validly existing as a partnership in
good standing under the laws of its jurisdiction, is
legally authorized to transact business in New Jersey
and in those jurisdictions where the conduct of its
business or ownership of its properties requires
qualification, is not incorporated, and has never
changed its name or used any other name and has filed
all tradename certificates as required or appropriate.
If a proprietorship, Borrower is validly existing, is
legally authorized to transact business in New Jersey
and in those jurisdictions where the conduct of its
business or ownership of its properties requires
qualification, is not incorporated, has never changed
its name or used any other name and has filed all
tradename certificates as required or appropriate and
borrower is the sole owner of the business.
3.1.2 Borrower has not changed its name, form, identity or
structure, been the surviving entity in a merger or
acquired any business; or (if Equipment is included as
Collateral), changed the location of the Equipment; or
(if Inventory is included as Collateral), changed the
location of any of the Inventory; or (if Receivables
and/or General Intangibles are included as Collateral),
changed the location of its place of business or chief
executive office or the location of its records with
respect thereto or the location of any returns of
Inventory.
<PAGE>
3.1.3 This Agreement any other Loan Documents constitute valid
and legally binding Obligations of Borrower and are
enforceable against Borrower in accordance with their
respective terms.
3.1.4 Borrower has filed all Federal, state and local tax
returns and other reports it is required to file and has
paid or made adequate provision for payment of all such
taxes, assessments and other governmental charges.
3.1.5 All property owned or utilized by Borrower is in
compliance and will continue to be in compliance with
all requirements of all applicable environmental laws,
including, without limitation, the Industrial Site
Recovery Act f/k/a the Environmental Cleanup
Responsibility Act (N.J.S.A. 13:1K-6 et seq., as
amended) and the Spill Compensation and Control Act
(N.J.S.A. 58:10 23, 11 as amended) and the Hazardous and
Solid Waste Amendments of 1984 Pub. L98-616 (42 U.S.C.
699 et seq., as amended); and a certain statute adopted
by New Jersey for registration of underground storage
tanks (N.J.S.A. 58:10-21 et seq.); the Resource
Conservation and Recovery Act (42 U.S.C. 6901 et seq.,
as amended) and the Comprehensive Environmental
Response, Compensation and Liability Act (42 U.S.C. 9601
et seq., as amended); (all such Federal, state, county,
municipal or other laws, ordinances or regulations are
hereinafter collectively referred to as the
"Environmental Laws").
3.1.6 Borrower has good and marketable title to all of its
properties and assets. The execution and performance of
this Agreement and any Loan Document will not violate or
result in a default or in the creation or imposition of
<PAGE>
any lien or encumbrance upon any of the assets Borrower
(immediately, with the passage of time or with the
giving of notice and the passage of time) under any
other contract, agreement or instrument to which
Borrower is a party or by which Borrower is bound, no
will it result in the acceleration of any obligation
under any mortgage, lien, lease, franchise, license,
permit, agreement, instrument, order, arbitration award,
judgment, or decree, or in the termination of any
license, franchise, lease, or permit to which Borrower
is a party or by which it is bound; and it will not
violate or conflict with any other restriction of any
kind or character to which Borrower is subject.
3.1.7 Borrower incurs the Obligations herein from Bank for
business purposes only and shall not incur the
Obligations for personal, household or family purposes.
3.1.8 There is no claim, loss, contingency, litigation, or
proceeding whether or not pending, threatened or
imminent against or otherwise affecting Borrower that
involves the possibility of any judgment or liability no
fully covered by insurance or that may result in a
material adverse change in the business, properties,
prospects, operation or condition (financial or
otherwise) of Borrower.
3.1.9 Borrower has complied with all applicable statutes,
regulations, ordinances, court decrees or other
directives of the United States of America, and all
counties, municipalities and agencies with respect to
<PAGE>
the manufacture and sale of its goods, the rendition of
its services and/or the conduct of its business
3.1.10 Borrower has heretofore delivered to Bank current
financial statements, acceptable to Bank, which were
prepared by independent certified public accountants.
The financial statements were true, correct and complete
and were prepared in accordance with Generally Accepted
Accounting principles, consistently applied and present
fairly the financial position and results of operations
of Borrower as of the date and for the period involved.
The financial statements make full and adequate
provision for all obligations, liabilities and
commitments (fixed and contingent) of Borrower as of the
date of the financial statements. Since the date of the
financial statements, there has been no material adverse
changes in the business, properties, prospects,
operation or condition (financial or otherwise) of
Borrower.
3.1.11 With respect to each employee Benefit Plan maintained by
Borrower, no Prohibited Transaction or Reportable Event
(as defined in title IV of the Employee Retirement
Income Securities Act of 1974, as amended) has occurred
and is continuing; Borrower is not subject to thirty
(30) days notice to the Pension Benefit Guaranty
Corporation, and Borrower will comply with the
provisions of the Employee Retirement Income Security
Act of 1974, as amended and the Internal Revenue Code of
1986, as amended.
<PAGE>
3.1.12 Borrower is the owner of the Collateral free and clear
of all Security Interests, encumbrance or liens, except
liens which arise by operation of law with respect to
Obligations of Borrower which are not yet due and
payable; and Borrower will defend the Collateral against
all claims and demands of all persons or entities at any
time claiming an interest therein.
3.1.13 Borrower is in compliance with all requirements of the
Americans With Disabilities Act of 1990, 42 U.S.C. 12101
et seq.; including but not limited to those regulations
promulgated by the Architectural and Transportation
Barrier Compliance Board at 36 CFR 1191 et seq., and by
the Department of Justice at 28 CFR 36 et seq.
3.1.14 Borrower has not permitted any mortgage, pledge, grant,
Security Interest in or lien or encumbrance upon any of
the property, assets or rights of Borrower, other than
any mortgage, pledge, grant, Security Interest in or
lien or encumbrance granted by Borrower to Bank.
4. GENERAL COVENANTS
4.1 Borrower covenants and agrees that so long as any Obligations
shall remain outstanding:
4.1.1 Borrower shall not permit any mortgage, pledge, grant,
Security Interest in or lien or encumbrance upon any of
the property, assets or rights of borrower, other than
any mortgage, pledge, grant, Security Interest in or
lien or encumbrance granted by Borrower to Bank.
4.1.2 Borrower shall not merge or consolidate with or sell,
assign, lease or otherwise transfer or dispose of
(whether in transaction or in a series of transactions)
<PAGE>
all or substantially all of its assets (whether now
owned or hereafter acquired or arising) to, any person
or entity or acquire all or substantially) all the
assets or the business of any person or entity.
4.1.3 Borrower shall continue to engage in an efficient and
economical manner in a business of the same general type
as conducted by it on the Date of Agreement.
4.1.4 Borrower shall furnish to Bank:
4.1.4.1 Within ninety (90) days after the last day of
each fiscal year of Borrower, a certified
financial statement including a balance sheet
and statements of income, retained earnings and
changes in financial position, each prepared in
accordance with Generally Accepted Accounting
Principals consistently applied, with a report
signed by an independent certified public
accountant satisfactory to Bank;
4.1.4.2 Within forty-five (45) days after the close of
each quarter of each fiscal year of Borrower,
financial statements similar to those required
under paragraph 4.1.4.1 prepared by Borrower and
certified by the chief financial officer of
Borrower;
4.1.4.3 Within fifteen (15) days after the end of each
calendar month, if Inventory and/or Equipment
are part of the Collateral, information
concerning quantities, costs and fair market
value with respect to Inventory and/or
Equipment, as applicable; and if Receivables are
part of the collateral, an aged analysis of all
<PAGE>
outstanding receivables and a borrowing base
certificate in form and substance satisfactory
to Bank; and
4.1.4.4 Promptly and in form satisfactory to bank, such
other information as Bank may reasonably request
from time to time.
4.1.5 Borrower shall comply with all present and future laws,
rules and regulations applicable to Borrower in the
operation of its business and the ownership of its
assets, and all material agreements to which it is
subject.
4.2 Borrower further covenants and agrees to:
4.2.1 Promptly notify Bank of any condition or event which
constitutes, or would constitute with the passage of
time or giving of notice or both, an Event of Default
under this Agreement or any loan Document and promptly
inform bank of any events or change in the financial
condition of Borrower occurring since the date of the
last financial statement of Borrower delivered to Bank,
which individually or cumulatively when viewed in light
of prior financial statements, could result in a
material adverse change in the business, properties,
prospects, operation or condition (financial or
otherwise) of Borrower;
4.2.2 If a corporation, maintain in good standing its
corporate existence in its jurisdiction of incorporation
and its status of a foreign corporation qualified to do
business in those jurisdictions where Borrower is
required to be qualified; if a partnership or a limited
partnership, maintain in good standing its partnership
existence in its jurisdiction of formation and its
<PAGE>
status as a foreign limited partnership qualified to do
business in those jurisdictions where Borrower is
required to be qualified.
4.2.3 Pay or deposit promptly when due all sales, use, excise,
personal property, income, withholding, corporate,
franchise and other taxes, assessments and governmental
and, when requested by Bank, submit to bank proof
satisfactory to Bank that such payments and/or deposits
have been made;
4.2.4 Maintain casualty insurance coverage with an insurance
company on the Collateral in such amounts and of such
types as may be requested by bank, and in any event, as
are carried by similar businesses; and, in the case of
all policies insuring property in which Bank shall have
a Security Interest of any kind whatsoever all such
insurance policies shall provide that the proceeds
thereof shall be payable to Borrower and Bank, as their
respective interests may appear. Borrower shall produce
proof payment of premiums for said insurance policies as
bank may reasonably request; All said policies or
certificates thereof, including all endorsements thereof
and those required hereunder, shall be deposited with
Bank; and such policies shall contain provisions that no
such insurance may be cancelled or decreased or amended
in such manner and to such extent as prudent business
judgment would dictate. If borrower shall at any time or
times hereafter fail to obtain and/or maintain any of
the policies of insurance required herein, or fail to
pay any premium in whole or in part relating to any such
policies, Bank shall be notified within thirty (30) days
of any such failure to obtain and/or maintain said
<PAGE>
policies of insurance or the failure to pay any premium
when due, the Bank may, but shall not be obliged to,
obtain and/or cause to be maintained insurance coverage
with respect to the Collateral , including, at Bank's
option, the coverage provided by all or any of the
policies of Borrower and pay all or any part of the
premium therefore, without waiving any Event of Default
by Borrower, and any sums, including reasonable attorney
fees, court costs, expenses and other chares related
thereto, so disbursed by Bank shall be payable , on
demand, by Borrower to Bank and shall be an additional
Obligation;
4.2.5 Notify Bank in writing within ten (10) days, of any
claim, litigation, action or proceeding filed or
commenced by or against Borrower that could result in a
material adverse change in the business, properties,
prospects, operation or condition (financial or
otherwise) of Borrower; or a material adverse
occurrence.
4.2.6 Permit Bank, at Borrower's expense, through Bank's
authorized attorneys, accountants or representatives, to
inspect the Collateral and inspect, examine and audit
the books, accounts, records, ledgers and assets of
every kind and description of Borrower with respect
thereto at reasonable times;
4.2.7 At any time and from time to time upon request of bank
execute and deliver to Bank, in form and substance
satisfactory to bank, such documents as Bank shall deem
necessary or desirable to perfect or maintain perfected
the Security Interest of Bank in the Collateral or which
<PAGE>
may be necessary to comply with the provisions of the
law of the State of New Jersey or the law of any other
jurisdiction in which Borrower may then be conducting
business or in which any of the Collateral may be
located.
5. FINANCIAL COVENANTS
5.1 Borrower covenants and agrees that so long a any Obligations
shall remain outstanding Borrower shall:
5.1.1 Maintain net working capital of not less than $_N/A_ and
a current ration of, not less than 2.5/1.0
whichever is greater; (tested quarterly);
5.1.2 Maintain a tangible net worth of not less than $_N/A_;
5.1.3 Maintain collected average account balances of not less
than $_N/A_;
5.1.4 Not incur any indebtedness from any source other than
Bank, except normal trade debts and accruals in the
ordinary course of business;
5.1.5 Not incur any expenditures in excess in excess of _N/A_;
5.1.6 Not enter into lease agreements, contracts, or
obligations with annual lease payments in excess of
$_N/A_;
5.1.7 Not make or commit itself to pay a total annual
compensation (including salaries, withdrawals, fees,
bonuses, commissions, drawing accounts and other
payments whether direct or indirect, in money or
otherwise) all officers, stockholders and directors
which in the aggregate would exceed $_N/A_per annum.
5.1.8 Maintain a total liabilities to tangible net worth ratio
of, not more than 1.0/1.0 (tested annually, at
Borrower's fiscal year end).
<PAGE>
6. EVENTS OF DEFAULT AND ACCELERATION
6.1 The occurrence of any one or more of the following events shall
constitute an Event of Default hereunder:
6.1.1 Failure to pay any principal, interest or any of the
obligations as and when due;
6.1.2 Failure to perform or observe any covenant, term or
agreement herein set forth or set forth in any Loan
Document;
6.1.3 Any representation or warranty made or deemed made by
the Borrower herein or in any Loan Document or which is
contained in any certificate, document, opinion or other
statement furnished now or at any time shall prove to be
incorrect in any material respect on or as of the date
made or deemed to be made;
6.1.4 Failure to pay or perform any Obligation of any Borrower
to Bank, whether by maturity or acceleration, set forth
herein or in any Loan Document;
6.1.5 Death of any Borrower [if an individual(s)];
6.1.6 A proceeding being filed or commenced against Borrower
for dissolution or liquidation; or any Borrower
voluntarily or involuntarily terminating or dissolving
or being terminated or dissolved; insolvency of
Borrower, or Borrower, or Borrower makes an assignment
for the benefit of creditors, or a petition in
Bankruptcy or for reorganization or to effect a plan of
arrangement with creditors is filed by Borrower; or
Borrower applies for or permits the appointment of a
receiver or trustee for any or all of its property,
assets or rights, or any such receiver or trustee shall
been appointed for any or all of its property
<PAGE>
rights; or any of the above actions or proceedings
whatsoever are commenced by or against any other party
liable for the Obligations;
6.1.7 Any attachments, liens or additional Security Interest
being placed upon any of the Collateral;
6.1.8 Acquisition at any time or from time to time of title to
the whole or any part of the Collateral by any person,
partnership or corporation other than Borrower;
6.1.9 Any final judgment, order or decree rendered against
Borrower exceeding $25,000 and remaining undischarged,
unstayed or outstanding against Borrower for a period of
thirty (30) days;
6.1.10 Any investigation undertaken by any governmental entity
or if any indictment, charge or proceedings is filed or
commenced, whether criminal or civil, pursuant to
Federal or state law against Borrower for which
forfeiture of any of the property or assets of Borrower
is a penalty;
6.1.11 Any Reportable Event occurs or if any Employee Benefit
Plan is terminated or Bank reasonably believes that such
plan may be terminated pursuant to and as defined in the
Employee Retirement Income Securities Act of 1974, as
amended; or
6.1.12 Bank reasonably deems itself insecure; the occurrence of
a material adverse change in the business, properties,
prospects, operation or condition (financial or
<PAGE>
otherwise) of the Borrower; or a material adverse
occurrence.
6.2 If any Event of Default shall occur, then or at any time
thereafter, while such Event of Default shall continue, bank may
declare all Obligations to be due and payable, without notice,
protest, presentment, dishonor or demand, all of which are
hereby expressly waived by Borrower.
7. RIGHTS AND REMEDIES
Bank shall have the following rights and remedies at any time.
7.1 Bank, and any officer or agent of Bank is hereby constituted and
appointed as true and lawful attorney-in-fact of Borrower with
power:
7.1.1 To endorse the name of Borrower upon any instrument of
payment (including payments made under any policy of
insurance) that may come into possession of bank in full
or part payment of any Obligation;
7.1.2 To sign and endorse the name of Borrower upon any
invoice, freight or express bill, bill of lading,
storage or warehouse receipt, drafts against account
debtors or other obligors;
7.1.3 To notify the post office authorities to change the
address for delivery of mail of borrower to an address
designated by Bank and to receive, open and dispose of
all mail addressed to Borrower;
7.1.4 To sign the name of borrower upon any local, State or
Federal agency information release form including but
not limited to tax Information Authorization Form 8821
of the Internal Revenue Service;
<PAGE>
7.1.5 To sell, assign, sue for, collect or compromise payment
of all or any part of the Collateral in the name of
Borrower, or in its own name, or make any other
disposition of Collateral, which disposition may be for
cash, credit or any combination thereof, and bank may
purchase all or any part of the Collateral at public or,
if permitted by law, private sale, and in lieu of actual
payment of such purchase price, may set-off the amount
of such price against the Obligations;
7.1.6 Granting to Bank, as the attorney-in-fact of Borrower,
full power of substitution and full power to do any and
all things necessary to exercise its rights and remedies
as fully and effectually as Borrower might or could do
but for this appointment, and hereby ratifying all that
said attorney-in-fact shall lawfully do or cause to be
done by virtue hereof. Neither Bank nor its agents shall
be liable for any acts or omissions or for any error of
judgment or mistake of fact or law in its capacity as
such attorney-in-fact. This power of attorney is coupled
with an interest and shall be irrevocable so long as any
obligations shall remain outstanding.
7.1.7 To appraise or reappraise any property, assets, or
rights of Borrower, at Borrower's expense, in any
Federally regulated transaction as defined under Title
XI of the Financial Institution, Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and such fee (whether
or not such appraiser is a salaried employee of Bank)
shall be part of the Obligations herein, secured by the
Collateral and payable on demand.
<PAGE>
7.2 Bank shall have the right to set-off, without notice to
Borrower, any and all deposits or other sums at any time or
times credited by or due from bank to Borrower, whether in a
special account or other account or represented by a certificate
of deposit (whether or not matured) which deposits and other
sums shall at all times constitute additional security for the
Obligations and may be set-off against all or any part of the
Obligations at any time. Borrower does hereby authorize Bank and
any other member of Summit Bancorp on behalf of Bank to likewise
set-off without notice, any or all deposits or other sums on
behalf of Bank, hereby granting to all such members of Summit
Bancorp as necessary to effectuate the foregoing, a lien on a
security interest in and to such deposits or other sums.
7.3 Bank shall have, in addition to any other rights and remedies
contained herein, and in any loan Document, all of the rights an
remedies of a secured party under the Uniform Commercial Code in
force in the State of New Jersey, as of the date of Agreement,
and all rights and remedies available at law or in equity, all
of which rights and remedies shall be cumulative and non-
exclusive, to the extent permitted by law.
7.4 Any notice required to be given by Bank of a sale or other
disposition of the Collateral or other intended action by Bank
made in accordance with the terms herein or any Loan Document at
least ten (10) days prior to such proposed action, shall
constitute fair and reasonable notice to Borrower of any such
action. In the event that any of the Collateral is used in
conjunction with any real estate, the sale of the Collateral in
conjunction with and as one parcel with any such real estate of
<PAGE>
Borrower, shall be deemed to be a commercially reasonable manner
of sale. The net proceeds realized by Bank upon any such sale or
other disposition, after deduction of the expenses of retaking,
holding, preparing for sale, selling or the like and reasonable
attorney's fees and any other expenses incurred by Bank, shall
be applied toward satisfaction of the Obligations hereunder.
Bank shall account to Borrower for any surplus realized upon
such sale or other disposition and Borrower shall remain liable
for any deficiency. The commencement of any action, legal or
equitable, shall not affect the security Interest of Bank in the
Collateral until the Obligations hereunder or any judgment
therefore are fully paid.
7.5 If at any time Bank determines that any applicable law,
regulation, condition or directive, or the interpretation of any
thereof, relating to capital adequacy (including but not limited
to, any request, guideline or policy, whether or not having the
force of law and including but not limited to, any regulation
promulgated by the Board of Governors of the Federal Reserve
System as now or from time to time hereafter in effect) by any
authority charged with the administration or interpretation
thereof, or any change in any of the foregoing, has or would
have the effect of reducing the rate of return on Bank's capital
as a consequence of Bank's obligations under this Agreement to a
level below that which Bank would have achieved but for such
law, regulation, condition, directive, interpretation or change
(taking into consideration Bank's policies with respect to
capital adequacy) by an amount deemed by Bank to be material,
then from time to time Borrower shall pay to Bank on demand such
additional amount(s) as will compensate Bank for such
<PAGE>
reduction.* [HANDWRITTEN NOTE]* incurred by Bank after the date
of notice under 7.5.1.
7.5.1 Bank will promptly notify Borrower of any event of which
it has knowledge occurring after the date hereof, which
will entitle Bank to compensation pursuant to Section
7.5. A certificate or notice from Bank claiming right of
compensation under Section 7.5 and setting forth the
additional amount(s) to be paid to it hereunder shall be
conclusive in the absence of manifest error. In
determining such amount, Bank may use any reasonable
averaging and attribution methods.
7.5.2 Borrower's failure to pay such additional amount(s),
shall result in Borrower becoming liable for the
difference between the actual return achieved and what
Bank had expected to achieve and shall become a part of
Borrower's Obligations, herein secured by the
Collateral.
8. GENERAL PROVISIONS
8.1 The failure of Bank at any time or times hereafter to require
strict performance by Borrower of any of the provisions,
warranties, terms and conditions contained herein or in any Loan
Document shall not waive, affect or diminish any right of Bank
at any time or times thereafter to demand strict performance
thereof; and, no rights of Bank hereunder or in any Loan
Document shall be deemed to have been waived by any act or
knowledge of Bank, its agents, officers or employees, unless
such waiver is contained in an instrument in writing signed by
an officer of Bank and directed to Borrower specifying such
waiver. No waiver by Bank of any of its rights shall operate as
a waiver of any other of its rights or any of its rights on a
future occasion.
8.2 Any demand or notice required or permitted to be given hereunder
or in any Loan Document shall be deemed effective when deposited
in the United States mail, and sent by certified mail, return
receipt requested, postage prepaid, addressed to Bank, ATTN:
Branch Manager, at Bank's Address or to Borrower's Address, as
applicable, or to such other address as may be provided by the
party to be notified, on ten (10) days prior written notice to
the other party.
8.3 Any notice required to be given by Bank made in accordance with
the terms herein or any Loan Document at least ten (10) days
prior to such proposed action, shall constitute fair and
reasonable notice to Borrower of any such action.
8.4 This Agreement and the Loan documents contain the entire
understanding between the parties hereto with respect to the
transactions contemplated herein and such understanding shall
not be modified except in writing signed by or on behalf of the
parties hereto.
8.5 Borrower shall not hold Bank liable due to any action or failure
to act by Bank herein or under any Loan Document except as a
result of Bank's gross negligence or willful misconduct. This
provision shall survive the termination or expiration of this
Agreement or any Loan Document.
8.6 Wherever possible each provision herein or in any Loan Document
shall be interpreted in such manner as to be effective and valid
under applicable law; should any portion of this Agreement or
any Loan Document be declared invalid for any reason in any
jurisdiction, such declaration shall have no effect upon the
<PAGE>
remaining portions of this Agreement or any loan Document,
furthermore the entirety of this Agreement or any Loan Document
shall continue in full force and effect in all other
jurisdictions and said remaining portions herein or in any Loan
Document shall continue in full force and effect in the subject
jurisdiction as if this Agreement or any Loan Document had been
executed with the invalid portions thereof deleted.
8.7 In the event Bank seeks to take possession of any or all of the
Collateral by court process, borrower hereby irrevocably waives
any bonds and any surety or security relating thereto required
by any statute, court rule or otherwise as an incident to such
possession, and waives any demand for possession prior to the
commencement of any suit or action to recover.
8.8 The provisions of this Agreement or any Loan Document shall be
binding upon and shall inure to the benefit of the heirs,
personal representatives, administrators, successors and assigns
of Bank and Borrower; provided, however, Borrower may not assign
any of its rights or delegate any of its Obligations hereunder
or in any Loan Document without the prior written consent of
Bank.
8.9 This Agreement or any Loan Document is and shall be deemed to be
a contract entered into and made pursuant to the laws of the
State of New Jersey and shall in all respects be governed,
construed, applied and enforced in accordance with the laws of
said State.
8.10 If, prior hereto and/or at any time or times hereafter, Bank
shall employ counsel in connection with the execution and
consummation of the transactions contemplated herein or in any
Loan Document or to commence, defend or intervene, file a
<PAGE>
petition, complaint, answer, motion or other pleadings, or to
take any other action in or with respect to any suit or
proceeding (bankruptcy or otherwise) relating to this Agreement
or any Loan document, or to enforce any rights of Bank hereunder
or in any Loan document, whether before or after the occurrence
of any Event of Default, or to collect any of the Obligations
then, in any of such events, Borrower agrees to pay attorney
fees (whether or not such attorney is a regularly salaried
employee of Bank), not to exceed 20% of the Obligations, which
shall be deemed reasonable and any expenses, costs and charges
relating thereto, and such shall be part of the Obligations
payable on demand and secured by the Collateral.
8.11 With respect to all or any part of the Obligations, in the event
that Bank seeks to enter into a participation, intercreditor
and/or assignment agreement, then Borrower hereby authorizes
Bank to release all or part of any financial or credit
information provided by Borrower to Bank to any other bank or
financial institution without notice.
8.12 Each reference herein or in any Loan Document to Bank shall be
deemed to include its successors and assigns, and each reference
to Borrower and any pronouns referring thereto as used herein
shall be construed in the masculine, feminine, neuter, singular
or plural as the context may require, and shall be deemed to
include the heirs, personal representatives, administrators,
successors and assigns of Borrower, all of whom shall be bound
by the provisions hereof or in any Loan document. The term
"Borrower" as used herein shall, if this Agreement or any Loan
Document is signed by more than one Borrower, mean, unless this
<PAGE>
Agreement or any Loan Document otherwise provides or unless the
context otherwise requires, the "Borrower" and each of them and
each and every representation, promise, agreement and
undertaking shall be joint and several, except that the granting
of the Security Interest, right of set-off and lien shall be by
each borrower in its several respective properties.
8.13 The section headings herein are included for convenience only
and shall not be deemed to be a part of this Agreement or any
Loan Document.
9. ASSIGNMENT BANK
Bank, may from time to time, without notice to Borrower, sell, assign,
transfer or otherwise dispose of all or part of the Obligations and/or
the Collateral therefore. In such event, each and every immediate and
successive purchaser, assignee, transferee or holder of all or any part
of the Obligations and/or Collateral shall have the right to enforce
this Agreement, by legal action or otherwise, for its own benefit as
fully as if such purchaser, assignee, transferee or holder were herein
by name specifically given such rights. Bank shall have an unimpaired
right to enforce this Agreement for its benefit to that portion of the
Obligations as Bank has not sold, assigned, transferred or otherwise
disposed of.
=======================================================================
10. WAIVER OF JURY TRIAL
BORROWER WAIVES TRIAL BY JURY AND CONSENTS TO AND CONFERS PERSONAL
JURISDICTION ON COURTS OF THE STATE OF NEW JERSEY OR OF THE FEDERAL
GOVERNMENT, AND EXPRESSLY WAIVES ANY OBJECTIONS AS TO VENUE IN ANY OF
SUCH COURTS, AND AGREES THAT SERVICE OF PROCESS MAY BE MADE ON BORROWER
BY MAILING A COPY OF THE SUMMONS TO BORROWER AT BORROWER'S ADDRESS. BANK
LIKEWISE WAIVES TRIAL BY JURY.
=======================================================================
WITNESS: BORROWER
- -------- --------
- ---------------------------------- -----------------------------------
Borrower
- ---------------------------------- -----------------------------------
Borrower
ATTEST: BORROWER Pacific-Health Laboratories, Inc.
- ------- ---------
BY:
- ---------------------------------- -----------------------------------
Jonathan D. Rahn, Assistant Secretary Robert Portman, President
WITNESS: BANK Summit Bank
- -------- --------------------
BY:
- ---------------------------------- -----------------------------------
J. Kestenbaum John F. Hurley, Vice president
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE BALANCE SHEET AND RELATED STATEMENTS OF OPERATIONS, STOCKHOLDERS
EQUITY AND CASH FLOWS OF PACIFICHEALTH LABORATORIES, INC. AS AT
AND FOR THE YEAR AND NINE MONTH PERIODS ENDED DECEMBER 31, 1996 AND
SEPTEMBER 30, 1997, RESPECTIVELY, AND IS QUALIFIED IN ITS ENTIRETY
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> SEP-30-1997 DEC-31-1996
<CASH> 112,020 743,313
<SECURITIES> 0 0
<RECEIVABLES> 614,465 2,020,545
<ALLOWANCES> 21,500 0
<INVENTORY> 700,179 905,950
<CURRENT-ASSETS> 1,673,190 4,006,474
<PP&E> 167,971 207,403
<DEPRECIATION> 52,810 29,064
<TOTAL-ASSETS> 1,840,182 4,195,281
<CURRENT-LIABILITIES> 1,695,611 669,227
<BONDS> 0 0
0 0
1,439 1,337
<COMMON> 7,964 7,384
<OTHER-SE> 244,239 3,517,333
<TOTAL-LIABILITY-AND-EQUITY> 1,840,182 4,195,281
<SALES> 3,219,831 3,085,726
<TOTAL-REVENUES> 3,219,831 3,085,726
<CGS> 785,869 750,312
<TOTAL-COSTS> 785,869 785,869
<OTHER-EXPENSES> 6,661,154 2,228,675
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (4,227,192) 106,739
<INCOME-TAX> 38,212 (38,212)
<INCOME-CONTINUING> (4,265,404) 144,751
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,265,404) 144,751
<EPS-PRIMARY> (.20) .05
<EPS-DILUTED> (.20) .04
</TABLE>
