SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
PACIFICHEALTH LABORATORIES, INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 22-3367588
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(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1480 Route 9 North - Suite 204
Woodbridge, NJ 07095
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(Address of principal executive offices)
732/636-6141
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(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par
value $.001 per share.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|
The issuer's revenues for its most recent fiscal year were $2,112,399.
The aggregate market value of the common equity held by non-affiliates based on
the closing sale price of Common stock as of February 29, 2000, was $11,620,466.
The number of shares outstanding of each class of the issuer's common equity, as
of February 29, 2000, was as follows: Common Stock - 4,554,367 shares.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
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PACIFICHEALTH LABORATORIES, INC.
FORM 10-KSB
FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
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PART I
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ITEM 1. BUSINESS...............................................................................3
ITEM 2. DESCRIPTION OF PROPERTY...............................................................13
ITEM 3. LEGAL PROCEEDINGS.....................................................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..............................14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................................................18
ITEM 7. FINANCIAL STATEMENTS..................................................................23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................................................23
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT............................................... 24
ITEM 10. EXECUTIVE COMPENSATION................................................................28
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................30
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................32
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K...........................................................................32
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PART I
ITEM 1. BUSINESS.
1(a) BUSINESS DEVELOPMENT:
PacificHealth Laboratories, Inc. (hereinafter referred to as the "Company")
is a research based Company that was incorporated in the State of Delaware in
April 1995 to develop and market innovative nutritional and natural products
which have demonstrable benefits to improve health and well being and which can
be marketed without prior Food and Drug Administration approval under current
regulatory guidelines.
1(b) BUSINESS OF THE ISSUER
The Company is a nutrition and natural product company strongly committed
to research and development of dietary supplements that can enhance health and
well being. The Company selects product categories in which it believes: (1)
there has been little prior innovation, (2) market potential justifies broad
scale consumer advertising and (3) a proprietary position can be established and
maintained. The Company's three primary areas of research to date have been
sports nutrition, weight loss and diabetes.
The Company's first product, ENDUROX(R) was introduced in March 1996, and
commercial sales began in May 1996. In March 1997, we extended the ENDUROX line
of products with ENDUROX ProHeart(R) and ENDUROX EXCEL(R). Prosol Plus(TM), a
product marketed to sustain emotional balance and promote a positive frame of
mind, was introduced in December 1997. In February 1999, the Company introduced
ENDUROX(R)R4(TM) Performance/Recovery Drink, the latest in our ENDUROX line of
products, which demonstrated a number of exercise related benefits in clinical
studies, including enhanced performance, extended endurance, decreased
post-exercise muscle stress and reduced free radical build-up. In April the
Company expects to launch a new weight loss product, Satietrol(R), that will
compete in the approximately $10 billion market for weight loss and weight
control products.
The Company's business activities have been financed primarily with
proceeds from private placements in 1995 and 1996, and an initial public
offering of Common Stock that was completed in December 1997. The Company's
revenues since its first year of operations are as follows:
Year $ Amount
---- --------
1996 3,085,726.
1997 3,356,725
1998 1,000,019
1999 2,112,399
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All of the Company's existing products, and its proposed products, are
expected to be manufactured in the United States by third parties. See Item
1(b)(i) below.
1(b)(i) PRINCIPAL PRODUCTS AND MARKETS
(a) ENDUROX(R) PRODUCT LINE-DIETARY SUPPLEMENTS
The Company's initial product, ENDUROX(R), is a dietary supplement of which
the principal ingredient is the herb ciwujia. Laboratory tests and trials have
demonstrated that ENDUROX changes the way the body fuels a workout by shifting
the fuel source from carbohydrate to fat, thereby increasing fat metabolism;
builds endurance by slowing the lactic acid buildup that causes muscle soreness
and fatigue; raises the anaerobic threshold during workout; and speeds recovery
following workout, as measured by heart rate and lactic acid levels. The Company
introduced ENDUROX in March 1996 and commenced commercial sales of the product
in May 1996. In December 1996, the Company was issued patent #5,585,101 for its
ENDUROX product.
ENDUROX EXCEL(R) and ENDUROX ProHeart(R) 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, which contains vitamins E and C and folic acid, is
targeted to heart conscious consumers who exercise regularly.
(b) ENDUROX(R)R4(TM) RECOVERY/PERFORMANCE DRINK
The Company launched ENDUROX R(4) Performance/Recovery Drink in March 1999.
Clinical trials of this product had been conducted during 1998 at the University
of North Texas Health Science Center in Fort Worth, Texas and the Human
Performance Lab at St. Cloud University in St. Cloud, Minnesota. In these
trials, the Company's product was tested against the nation's leading sports
drink and shown to deliver equal hydration effectiveness, while enhancing
performance and extending endurance by 55%, decreasing post-exercise muscle
stress by 36%, reducing free radical build-up by 69%, and increasing insulin
levels by 70%. The results of these trials were presented at the American
College of Sports Medicine's national meeting in 1999.
The Company advertises ENDUROX R(4) nationally in such magazines as,
Bicycling, Runner's World, Running Times, Fitness Swimmer, Inside Triathlon,
Triathlete and numerous other publications. At the present time, this product is
being sold in over 5,000 retail outlets including General Nutrition Centers,
health food stores and bicycle retailers, as well as through catalog and
Internet companies. ENDUROX R(4) was introduced as a 2.28 lb. canister
(14-serving) Fruit Punch flavor, and is now available in a Tangy Orange flavor,
as well as an economy size 4.56 lb. canister in both flavors.
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The Company has applied for a patent for ENDUROX R(4) covering numerous
claims, including claims that the product (a) increases endurance, (b) reduces
post-exercise muscle damage, and (c) speeds the replenishment of muscle
carbohydrate stores, just to name a few. The Company recently received a Notice
of Allowance of Claims from the US Patent & Trademark Office for all the claims.
(c) SATIETROL(R)
Satietrol, the Company's new weight loss product is based on the use of
nutritional ingredients to stimulate cholecystokinin (CCK), a protein released
after eating which has shown to be an important satiety signal in humans.
Researchers have shown that the release of CCK can decrease food intake
and, thus, provide a novel approach to weight loss using the body's natural
appetite control mechanisms. When CCK is stimulated by ingestion of food it also
activates two negative feedback mechanisms which inhibit the continued release
of CCK. One mechanism involves the pancreas and the second involves the gall
bladder. When CCK is stimulated, the pancreas secretes protease enzymes, which
inactivates it. In 1985 an investigator received a use patent for a protein
found in potatoes, called POT-2, which inhibited pancreatic protease enzymes
thereby continuing the effect of CCK. Purification of this protein was not
commercially feasible until recently, when researchers developed a proprietary
method of purifying POT-2, which made it feasible to produce a product that
could be taken orally.
The Company has entered into a licensing agreement with the company that
developed the purification method for POT-2 and which has licensed the original
use patent on the protein. As part of its license agreement, the Company
conducted further formulation work and also completed two trials on a
formulation that enhanced the effectiveness of the protease inhibitor. One study
was conducted at Columbia University's Obesity Center, and the second was
conducted at Cooper Hospital, part of the Robert Wood Johnson Medical School in
New Jersey. Both studies were presented at the North American Association for
the Study of Obesity in September 1999. The studies showed that a formulation
containing purified protease inhibitor could reduce hunger up to 3.5 hours
following a meal. The Company filed a Provisional Patent for a new formulation
of POT-2 in August 1999.
In the interim, the Company also continued its efforts to find calorically
efficient nutritive compositions that could stimulate CCK. The research effort
focused on bile acids from the gall bladder, which are released by
cholecystokinin and have been shown to be powerful inhibitors of CCK. Using this
approach the Company developed a new formulation that has been shown in three
trials to be equivalent to the POT-2 formulation. This new formulation offered
additional advantages in terms of cost and in terms of permitting the Company to
establish a unique proprietary position. In February 2000, the Company submitted
a patent application for the new formulation, which includes a claim that the
formulation can extend the satiation qualities of food to which it is added.
This new formulation will be used in the commercial version of Satietrol.
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Satietrol is a powder, which is mixed with 6-8 oz of water and taken 10-15
minutes before a meal. It is the first weight loss product commercially
available that is designed to stimulate cholecystokinin, the body's own satiety
mechanism. The market for all types of weight loss products and services in the
US exceeds $50 billion a year and government figures estimate that 60% of adult
Americans are overweight.
Studies on CCK have also suggested that this agent may be effective for
treating Type 2 diabetes, one of the fastest growing chronic diseases in the
United States. The Company intends to conduct studies to determine if Satietrol
would be of value in Type 2 diabetes.
Initially Satietrol will be sold over the Company's Internet site at
www.hungeroff.com, as well as through Internet retailers and select health food
chains. The Company is also exploring television direct response sales. Initial
channels of distribution are planned for electronic media, such as television
sales-type programs, direct sales over the Company's Internet site at
hungeroff.com, other Internet retailers and selected health food distributors.
(d) OTHER PRODUCTS
The Company sells Prosol Plus(TM), a unique product that combines hypericum
(St. John's Wort), ginkgo biloba and four essential vitamins and which is used
to maintain and promote a positive mental and emotional state. In addition, the
Company has identified and developed to varying degrees products for the topical
relief of arthritis pain (Arnicyn(TM)), wound healing and a sports analgesic.
However, the Company decided to defer further development or marketing of these
products in order to concentrate its limited financial resources on other
products, which in the opinion of management, have greater market potential and
offer better opportunities to generate immediate revenues.
1(b)(ii) DISTRIBUTION METHODS
The Company has pursued a "multi-channel" distribution strategy in
marketing its ENDUROX line of products. These products are sold nationally in
retail outlets including mass merchandisers, chain drug stores and grocery
supermarkets. The Company also distributes its products to the health food
market through General Nutrition Centers ("GNC"), independent health food
retailers, sports specialty stores, health clubs, military installations,
catalogs and on the Internet. 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.
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The Company began distribution of ENDUROX in Canada in 1997 through an
independent distributor with the first retail sales made in April 1997. In 1998,
the Company began selling its ENDUROX product in South Africa with an
independent distributor on a non-exclusive basis. At the present time, these two
countries represent the Company's principal non-US direct marketing channels.
To support its marketing efforts, the Company advertises in trade and
consumer health food and sports magazines that are intended to reach its
targeted consumer. In addition, the Company attends trade shows and exhibitions,
sponsors promotional programs and events and in-store promotions, and engages in
an extensive public relations effort that has resulted in articles in numerous
health, fitness, trade and natural products publications, newspaper coverage and
some television spots. In addition, the Company utilizes a number of paid
endorsers to promote its sports nutrition line of products, including several
well-known athletes and a number of professional coaches who specialize in
bicycling, running, swimming and triathlete disciplines.
In the twelve-month periods ended December 31, 1999 and December 31, 1998,
the Company's expenditures for product advertising and promotion were
approximately $1,533,108 and $1,655,274, respectively.
1(b)(iii) STATUS OF PUBLICLY ANNOUNCED NEW PRODUCTS
The status of all products which has been the subject of or mentioned in
public announcements by the company in the past year are discussed above under
the caption "Principal Products and Markets".
1(b)(iv) COMPETITION
Depending on the product category, the Company's competition varies. Today
dietary supplements are distributed in all channels of distribution including
independent and chain health food stores, mass channels including chain drug,
mass merchandisers, specialty sports retailers, and even health food clubs. As a
result, the Company competitors include traditional manufacturers of herbal
products such. Twinlab Corp., Rexall Sundown, NBTY, Inc., Weider Nutrition
International Inc., Nature's Sunshine, and Herbalife International. In addition,
there are a number of major pharmaceutical companies such as Warner Lambert,
American Home Products and Smithkline Beecham that have launched proprietary
brands of supplements.
The sports drink market is dominated by large companies such as Quaker Oats
(i.e. Gatorade), Coke (i.e. Powerade) who sell ready-to-drink products as well
as smaller companies such as Cytosport (i.e. Cytomax), and Power Foods (i.e.
PowerBar Perform) who sell powder versions. In addition, a number of the dietary
supplement manufacturers listed above market their own versions of powder sports
drinks. 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
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resources available to them and possess far more extensive manufacturing,
distribution and marketing capabilities than the Company and many of its other
competitors.
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 becomes
established.
Since the Company's products are based upon natural ingredients, its
competitors have access to the same ingredients and will be able to develop and
market products the same as or similar to the Company's products. Except to the
limited extent that the Company may obtain patent protection for certain uses of
ingredients in its products, its competitors' products may make the same claims
of benefits from use of the products that the Company makes. For example, GNC,
the Company's largest customer, began offering a "generic" product based on
ciwujia, the natural ingredient on which the Company's ENDUROX line of products
is based, soon after the Company began commercial sales of its original ENDUROX
product.
With the introduction of Satietrol, the Company will face competition from
a broader spectrum of companies. Today weight loss products are manufactured by
dietary supplement manufacturers, pharmaceutical manufacturers, diet food
companies (e.g. Slim?Fast Foods Company), and over-the-counter drug companies.
Competitive activity in this arena is intense and most of the companies who have
products in this category have greater financial, marketing, sales,
manufacturing, and distribution resources than the Company.
The Company believes that long term success in the marketplace for any of
the Company's products is likely to be less dependent on the novelty of the
product than on such factors as distribution and marketing capabilities, and
whether or not the product enjoys some proprietary advantage, such as patent
protection, an established brand name, etc.
1(b)(v) SUPPLIERS OF RAW MATERIALS
The Company obtains all of the raw materials necessary for the manufacture
of its products from independent sources. 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. The Company obtains
ciwujia for its ENDUROX line of products from suppliers in the Peoples Republic
of China. At the present time, the Company obtains all of its needs from one
supplier, but believes that adequate alternative suppliers are available if
needed. The Company's newest product, Satietrol, is composed of numerous
ingredients most of which are available from multiple sources. For those
ingredients available only from a single source, the Company intends to enter
into long
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term supply agreements. In addition, all the other herbs, vitamins, etc. used in
the Company's existing products are available from multiple sources.
There is no assurance that suppliers will provide the raw materials needed
by the Company in the quantities requested or at a price the Company is willing
to pay. Because the Company does not control the source of these raw materials,
it is also subject to delays caused by interruption in production of materials
based on conditions outside of its control.
1(b)(vi) DEPENDENCE ON MAJOR CUSTOMER
General Nutrition Centers accounted for approximately 55% of net sales in
fiscal 1999. The loss of this customer, or a significant reduction in purchase
volume by or financial difficulty of such customer, for any reason, could have a
material adverse effect on the Company's results of operations and financial
condition. The Company has no agreement with or commitment from this customer
with respect to future purchases.
1(b)(vii) 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.
Also, as previously noted:
o Prosol Plus, for which the Company is the exclusive distributor under
license from the developer of the product, is the subject of a pending
patent application.
o The Company recently received a "Notice of Allowance of Claims" from
the U.S. Patent & Trademark Office for ENDUROX R(4) covering all 77
claims that were submitted.
o In February 2000 the Company applied for a patent covering a new
formulation of Satietrol.
To the extent the Company does not have patents on its products, there can
be no assurance that another company will not replicate one or more of the
Company's products, nor is there any assurance that patents which are obtained
will provide meaningful protection or significant competitive advantages over
competing products. For example, the Company's use patent on ciwujia would not
prevent sale of the herb with a claim or for a use that was not covered by the
Company's patent.
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The Company has federal trademark registrations for ENDUROX, ENDUROX EXCEL,
ENDUROX ProHeart, ENDUROX R(4), and Satietrol and has trademark applications
pending to register Prosol Plus and Arnicyn with the United States Patent and
Trademark Office. The Company also has filed its trademarks in most Western
European countries, Canada, Mexico and Japan. The Company's policy is to pursue
registrations for all of the trademarks associated with its key products, and to
protect its legal rights concerning the use of its trademarks. The Company
relies on common law trademark rights to protect its unregistered trademarks.
1(b)(viii) AND (ix) GOVERNMENTAL REGULATION
The Company believes that all of its existing and proposed products, as
described above, are dietary supplements that 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. 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.
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 practical effect of such
an expansive definition is to ensure that
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the new protections and requirements of the DSHEA will apply to a wide class of
products.
The DSHEA imposes additional requirements for dietary supplements, which
contain a "new" dietary ingredient, i.e., one that was not marketed in the
United States before October 15, 1994. A dietary supplement that contains 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.
Under the DSHEA, 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", which is subject to FDA regulation,
and may be used in connection with the sale of a dietary supplement to consumers
if 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 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.
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."
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
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regulations for food. Since the manufacturers that 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.
On March 23, 1999, a new labeling format for dietary supplements went into
effect which necessitated the Company's abandonment of approximately $18,000
worth of packaging materials that were in the old format.
On February 6, 2000, the Food and Drug Administration issued new guidelines
concerning statements made for dietary supplements. These new regulations have
important implications for the marketing of weight loss products such as
Satietrol. Previously the Regulations made it clear that a product that made a
claim for obesity must be treated as a drug. Under the new regulations the FDA
now makes a distinction between obesity and overweight. Overweight is no longer
considered a disease but rather a natural life process. Overweight is considered
a condition that effects the structure and function of the body. As now defined,
dietary supplements can make a claim for ordinary weight loss rather than as a
treatment for obesity. Furthermore, these Regulations also permit the use of
appetite suppressant as a structure/function claim under DSHEA (Dietary
Supplement Health Education Act of 1994). The issuance of these Regulations will
give Satietrol greater latitude than the types of claims the product can make as
long as such claims are substantiated by the necessary studies.
1(b)(x) EXPENDITURES FOR RESEARCH AND DEVELOPMENT
The Company's research and development expenditures in the past two fiscal
years, exclusive of market research and marketing related expenditures, were as
follows: 1999 - $179,873; 1998 - $92,516.
1(b)(xi) COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company is not aware of any "administrative" or other costs, which it
incurs which are directly related to compliance with environmental laws.
1(b)(xii) EMPLOYEES
At the present time, the Company has ten full time employees at its
Woodbridge, NJ offices. Of these, two employees are executive, six are in sales
and marketing, and two are in accounting and operations. The Company employs a
number of consultants who devote limited portions of their time to the Company's
business. None of the Company's employees are represented by a union, and the
Company believes that its employee relations are good.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company entered into a new five-year lease in February 1998 for
approximately 3,684 square feet at $14.50 per square foot, including utilities,
for an annual rent expense of $53,418 for the first three years. In the fourth
and fifth years of the lease, the rent increases to $16.50 per square foot,
including utilities. The Company believes that its new facilities will be
adequate for its present needs.
The Company does not intend to develop its own manufacturing capabilities,
since management believes that the availability of manufacturing services from
third parties on a contract basis is more than adequate to meet the Company's
needs in the foreseeable future.
The Company does not have any real estate investments.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, or involved in, any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On October 25, 1999, the Company held its Annual Meeting of
Stockholders, pursuant to information contained in the Company's Notice of
Annual Meeting of Stockholders and Proxy Statement that were mailed to
stockholders on September 27, 1999.
(b) One of the matters listed in the Company's Proxy for the meeting was
the annual election of directors. There were five nominees for election, who
were elected by the shareholders to serve for a one-year term. The results of
the balloting were as follows: (Shares voting 4,100,307 of 4,554,367)
Nominee For Against Abstain
------- --- ------- -------
Robert Portman 4,058,125 -0- 42,182
Jonathan D. Rahn 4,058,125 -0- 42,182
David Portman 4,058,125 -0- 42,182
T. Colin Campbell 4,058,025 -0- 42,282
Irving Tabachnick 4,058,025 -0- 42,282
(c) In addition to the election of directors, the only other matter to be
voted upon by
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the stockholders was ratification of the appointment of Schiffman Hughes Brown,
P.C., as independent auditors for the Company for the fiscal year ending
December 31, 1999. The results of that balloting are as follows:
For: 4,064,632 shares
Against: 19,825 shares
Abstain: 15,850 shares
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
5(a) MARKET INFORMATION.
Since December 19, 1997, the Company's Common Stock has been quoted on the
SmallCap Market of the Nasdaq Stock Market, Inc. ("Nasdaq") under the symbol
"PHLI". The following sets forth certain information with respect to the high
and low bid prices reported by The Nasdaq Stock Market for the Common Stock
during the periods shown:
14
<PAGE>
- -------------------------------------------------------
HIGH LOW
- -------------------------------------------------------
1997
(12/19/97 - 12/31/97) $6.25 $6.00
- -------------------------------------------------------
1998
(1/1/98 - 3/31/98) $6.25 $4.125
- -------------------------------------------------------
1998
(4/1/98 - 6/30/98) $5.00 $3.125
- -------------------------------------------------------
1998
(7/1/98 - 9/30/98) $4.75 $1.50
- -------------------------------------------------------
1998
(10/1/98 - 12/31/98) $4.50 $2.125
- -------------------------------------------------------
1999
(1/1/99 - 3/31/99) $3.50 $1.50
- -------------------------------------------------------
1999
(4/1/99 - 6/30/99) $3.50 $0.875
- -------------------------------------------------------
1999
(7/1/99 - 9/30/99) $3.625 $1.75
- -------------------------------------------------------
1999
(10/1/99 - 12/31/99) $3.625 $1.25
- -------------------------------------------------------
2000
(1/1/00 - 2/29/00) $4.75 $1.875
- ------------------------------------------------------------------------------
The closing price of the Company's Common Stock on February 29, 2000, as
reported by Nasdaq, was $3.625.
5(b) HOLDERS.
As of February 29, 2000, there were approximately 81 record holders of the
Company's Common Stock.
5(c) DIVIDENDS.
The Company has never paid or declared dividends upon its Common Stock and
does not contemplate or anticipate paying any dividends on its Common Stock in
the foreseeable future.
Prior to December 31, 1998, the Company had a class of Preferred Stock
outstanding on which it paid dividends in kind. All outstanding shares of
Preferred Stock were converted into Common Stock effective December 31, 1997.
15
<PAGE>
5(d) RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM THE SALE OF
REGISTERED SECURITIES
5(d)(i) RECENT SALES OF UNREGISTERED SECURITIES.
There were no sales of unregistered securities by the Company in the
year ended December 31, 1999.
5(d)(ii) USE OF PROCEEDS FROM THE SALE OF REGISTERED SECURITIES
5(d)(ii)(a) The Registration Statement to which the following disclosures
pertain is Registration Statement on Form SB-2 (Registration No. 333-36379)
effective December 18, 1997 (the "Registration Statement").
5(d)(ii)(b) The offering pursuant to the Registration Statement (the "Offering")
commenced on December 19, 1997. The classes of securities registered were Common
Stock and Underwriters Warrants. The Managing Underwriter of the Offering was
First Montauk Securities Corp. (the "Underwriter").
5(d)(ii)(c) The Offering has been terminated. All securities registered were
sold with the exception of (1) 180,000 shares of Common Stock registered for
issuance upon the exercise of the Underwriter's overallotment option, and (2)
120,000 shares of Common Stock reserved for issuance upon the exercise of
Underwriter's Warrants.
5(d)(ii)(d) The expenses incurred for the Company's account in connection with
the issuance and distribution of securities sold in the Offering were as
follows:
Underwriting discount and commissions - $720,000
Finder's Fees - 0
Expenses paid to or for the account of
Underwriter - 276,951
Other expenses (including legal, account-
ing, printing and transfer agent's expenses) - 224,623
---------
Total expenses $1,221,574
==========
None of the foregoing expenses ("Offering Expenses") represent payments to
directors, officers or general partners of the Company, any associate of any
such persons, any
16
<PAGE>
person owning 10% or more of any class of equity securities of the Company, or
any affiliate of the Company (collectively, "Designated Persons").
5(d)(ii)(e) The net proceeds to the Company from the Offering (i.e., gross
offering proceeds of $7,200,120 less Offering Expenses of $1,221,574) were
$5,978,546.
5(d)(ii)(f) From the effective date of the Registration Statement through
December 31, 1999, net Offering proceeds were applied as follows:
(1) Construction of plant, building and facilities $ -0-
(2) Purchase and installation of machinery and
equipment 73,059
(3) Purchase of real estate -0-
(4) Acquisition of other businesses -0-
(5) Repayment of debt 156,922
(6) Research & Development 272,389
(7) Working capital 4,076,065
(8) Temporary investments* 1,400,111
(9) Any other purpose expected to involve $100,000
or more -0-
----------
Total applied through 12/31/99 $5,978,546
==========
* Short term commercial paper.
5(d)(ii)(g) None of the expenditures described in sub-section 5(d)(ii)(F) were
made directly or indirectly to any Designated Person.
5(d)(ii)(h) The application of net Offering proceeds described above does not
represent a material change in the use of proceeds described in the Prospectus
included in the Registration Statement.
17
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's financial statements, including the notes thereto, appearing
elsewhere in this Report.
FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS STATEMENTS RELATING TO FUTURE
RESULTS OF THE COMPANY (INCLUDING CERTAIN PROJECTIONS AND BUSINESS TRENDS) THAT
ARE "FORWARD-LOOKING STATEMENTS" AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED AS
A RESULT OF CERTAIN RISKS AND UNCERTAINTIES, INCLUDING BUT NOT LIMITED TO
CHANGES IN POLITICAL AND ECONOMIC CONDITIONS; DEMAND FOR AND MARKET ACCEPTANCE
OF NEW AND EXISTING PRODUCTS, AS WELL AS OTHER RISKS AND UNCERTAINTIES DETAILED
FROM TIME TO TIME IN THE FILINGS OF THE COMPANY WITH THE SECURITIES AND EXCHANGE
COMMISSION.
(a) INTRODUCTION
PacificHealth Laboratories, Inc. 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. Our first
product, ENDUROX was introduced in March 1996, and commercial sales began in May
1996. In March 1997, we extended the ENDUROX line of products with ENDUROX
ProHeart and ENDUROX EXCEL. Prosol Plus, a product marketed to sustain emotional
balance and promote a positive frame of mind, was introduced in December 1997.
In March 1999, we launched ENDUROX R4 Performance/Recovery Drink, the latest in
our ENDUROX line of products, which demonstrated a number of exercise related
benefits in clinical studies, including enhanced performance and extended
endurance, decreased post-exercise muscle stress, and reduced free radical
build-up. In April 2000, we expect to introduce a new product, Satietrol, that
will compete in the approximately $50 billion market for weight loss and weight
control products, goods and services.
(b) RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1999 AND 1998
The Company incurred a net loss of $1,225,381 or $.27 per share for the
year ended December 31, 1999, compared to a net loss of $2,463,054 or $.54 per
share for the year ended December 31, 1998. The reduction in our net loss for
year ended December 31, 1999, is due primarily to increased sales, a reduction
of $162,285 in our reserve for the return or exchange of certain of our original
ENDUROX line of products, and the sale of certain tax benefits for $283,527. The
per share effect of the last two items above was to reduce our net loss for 1999
by $0.10 in the aggregate. These two items are described in greater detail
below.
18
<PAGE>
Revenues for the year ended December 31, 1999 were $2,112,399 compared to
$1,000,019 for the same period in 1998. Revenue increases during 1999 were due
to sales of our ENDUROX R4 Performance/Recovery Drink, which was introduced in
March 1999. The following table provides additional information concerning our
revenues in 1999 and 1998:
Revenues
-------------------------------------------------
Original Endurox R(4)
Endurox Performance
Product Recovery Prosol
Line Drink Plus(1)
------------ ------------- -----------
1999
----
First Quarter $139,984 $ 173,127 $ 9,683
Second Quarter 242,588 268,956 15,821
Third Quarter 178,538 443,880 4,028
Fourth Quarter 205,318 422,309 8,167
-------- ---------- --------
Total $766,428 $1,308,272 $37,699
======== ========== =======
1998
----
First Quarter $260,415 $ - $78,979
Second Quarter 318,762 - -
Third Quarter 176,051 - -
Fourth Quarter 165,200 - 612
-------- ----------- -------
Total $920,428 $ - $79,591
======== =========== =======
(1) We are not actively marketing Prosol Plus because we believe our
advertising dollars will be better used promoting new products that compete
in categories that have greater sales potential.
Sales revenues reported for the year ended December 31, 1999 are net of a
credit of $84,474 for the return of certain products. There was no comparable
adjustment in the 1998 period.
We expect that sales in the first quarter of 2000 will be approximately the
same as those in the first quarter of 1999, but lower than the fourth quarter of
1999. We believe that the fourth quarter 1999 to first quarter 2000 sales
reduction is primarily due to the decreased demand of our workout/exercise
products as the users of our products tend to reduce exercise activity in the
colder winter months. In addition, we lower our advertising and promotional
expenditures during these slower seasonal months.
19
<PAGE>
However, beginning in the second quarter of 2000, we expect sales to increase
again as the temperatures rise, users resume their exercise regimens, and we
increase our advertising and promotional spending.
Our gross profit margin increased from 38.5% for the year ended December
31, 1998 to 58.9% for the year ended December 31, 1999, because in 1998, we
decided to write-off obsolete inventory. The write-off was charged to cost of
goods sold in the amount of $350,706, which lowered the margin from 73.6% to
38.5%. Excluding the write-off in 1998, the gross profit margin decreased from
73.6% for the year ended December 31, 1998 to 58.9% for the same period 1999,
primarily as a result of our product sales mix. The ENDUROX R4
Performance/Recovery Drink, which was sold solely in 1999, has a higher cost of
goods sold than the original ENDUROX line of products.
Our selling, general and administrative expenses decreased from $2,940,002
for the year ended December 31, 1998 to $2,798,873 for the year ended December
31, 1999. The approximate $141,000 net decrease in S,G & A for this comparable
period is presented by major identifiable areas in the following table:
S, G & A expense category $ change from 1998 to 1999
- ------------------------- --------------------------
Print advertising - original line of
Endurox products Decrease of $300,000
Print advertising - ENDUROX R4 Increase of $400,000
Promotional expenses Decrease of $355,000
Masterbroker fees Decrease of $ 65,000
Investor Relations fees Decrease of $ 35,000
ENDUROX R(4) launch costs Increase of $250,000
Other Decrease of $ 36,000
--------
Net decrease for the year ended 1998 to 1999: $141,000
========
Additional detail concerning these changes in expenses are as follows:
o Print advertising expenses for the original line of ENDUROX products
declined approximately $300,000 and increased $400,000 for the ENDUROX
R4 as we decided to spend our print advertising dollars on the new
product line.
o We reduced our promotion expense by spending less on conventions and
events, and by lowering cooperative expenditures. Cooperative fees are
required in order to gain distribution in the mass merchant stores,
but in 1999, we switched our distribution focus from the mass market
primarily to health, specialty sports shops, the Internet and
catalogues. We also reduced payments to spokespersons that promote our
products.
o As we switched our distribution away from the mass market, we were
able to reduce masterbroker fees, which were needed to support the
mass merchant accounts.
20
<PAGE>
o We reduced investor relation expenses by taking this function
in-house.
o We increased S, G & A expense with costs related to the initial launch
of the ENDUROX R4 product line. A majority of these launch costs
resulted from the hiring of employees and print ad and packaging
development expenditures.
We anticipate a reduction in S, G & A expense levels for the first quarter
of 2000, as advertising and promotional expenses are lower. For the remainder of
2000, we expect S, G & A expense to rise as the advertising and promotional
campaigns are executed. While our current level of selling, general and
administrative expenses is still high relative to present sales levels, we
believe that the effectiveness of our advertising and promotional campaign for
the ENDUROX R4 , the line extensions of this product that were introduced in the
third quarter of 1999, and its widening acceptance will lead to increased sales
of this product without corresponding increases in S, G & A.
As previously noted in paragraph (b) in this Item, our net loss for 1999
was reduced as a result of a reduction in our reserve for the return or exchange
of certain products. This adjustment, which was made at the end of our second
fiscal quarter, was based upon our estimate that our future costs for product
replacement at June 30, 1999 would not exceed $178,303. Therefore, we reduced
our reserve by $162,285 and offset our net loss by taking back into income this
amount. We believe that our reserve following this adjustment remains adequate
to cover the costs of future exchanges or replacements of this product. In
addition, during 1999 the New Jersey Economic Development Authority established
the Tax Benefit Transfer Program. Pursuant to this program, the Company was
qualified by the state to sell a portion of its unused New Jersey net operating
loss deductions to other corporations having taxable income in New Jersey. In
December 1999, we received $283,527 as payment for the transfer of these New
Jersey tax deductions. This payment was included in income and therefore offset
our net loss during the fourth quarter of 1999 and for the year ended December
31, 1999.
21
<PAGE>
(c) LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company's current assets exceeded its current
liabilities by approximately $2.38 million with a ratio of current assets to
current liabilities of approximately 7.4 to 1 versus a ratio of approximately
6.2 to 1 at December 31, 1998. The change in current ratio was attributable
primarily to the more than doubling of sales during 1999 from 1998, combined
with the same level of S, G & A expenses for the two years. Based on current
activities, management expects the Company to be able to satisfy its cash
requirements in fiscal 2000 from its internal cash reserves.
The Company projects an advertising and promotional budget for its ENDUROX
line of products of $700,000 for the year ending December 31, 2000, including
commitments of approximately $170,000 for consumer and trade print media.
Management believes that once the effectiveness of its advertising and
promotional campaign can be determined, appropriate measures can be taken to
either reduce or increase its level of expenditures in this area. The largest
expenditures now contemplated (apart from current levels of sales, general and
administrative costs) are associated with the introduction of our weight control
product, Satietrol, in April 2000. These expenditures presently are projected in
the range of $400,000 over the remainder of the year, excluding the initial cost
of inventory for the product.
(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
Workout supplement sales tend to be somewhat seasonal, with lower sales
typically realized during the first and second fiscal quarters due to the cold
winter months and decreased exercise activity, and higher sales typically
realized during the third and fourth fiscal quarters (warmer temperatures). We
also plan our advertising and promotional campaigns around these seasonal
demands, which tends to amplify or solidify differing product demand. 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.
22
<PAGE>
(f) IMPACT OF RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133,
which is effective, as amended, for all quarters in fiscal years beginning after
June 15, 2000, establishes accounting and reporting standards for derivative
financial instruments and hedging activities related to those instruments, as
well as other hedging activities. As the Company does not currently engage in
derivative or hedging activities, the adoption of this standard is not expected
to have a significant impact on the Company's financial statements.
ITEM 7. FINANCIAL STATEMENTS
Financial information required in response to this Item of Form 10-KSB is
set forth at pages F-1 through F-17 of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
9(A) DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company as of the date of this
Report are as follows:
NAME POSITION WITH THE COMPANY
Robert Portman, Ph.D. President and Chief Executive Officer,
Treasurer and Chairman of the Board of
Directors
Jonathan D. Rahn, CPA Executive Vice President, Chief Financial
Officer and Director*
David I. Portman Secretary and Director
T. Colin Campbell, Ph.D. Director*
Irving I.A. Tabachnick, Ph.D. Director*
*Member of Audit Committee
DR. ROBERT PORTMAN, age 55, has served as President, Treasurer and Chairman
of the Board of Directors of the Company since its inception. Dr. Portman has a
Ph.D. in Biochemistry and worked as a senior scientist at Schering Laboratories
before co-founding M.E.D. Communications in 1974 with his brother, David
Portman. In 1987, Dr. Portman started a consumer agency and, in 1993, he merged
both agencies to form C&M Advertising. C&M Advertising, with billings in excess
of $100 million, handled national advertising for such diverse accounts as
Berlex Laboratories, Ortho-McNeil Laboratories, Tetley Tea, Radisson Hotels and
HIP of New Jersey. Effective June 1, 1995, Dr. Portman relinquished his
responsibilities as Chairman of C&M Advertising (which since has been renamed
"The Sawtooth Group") to assume his present positions with the Company on a full
time basis, and, in September 1996, Dr. Portman sold his interest in that
company.
JONATHAN D. RAHN, age 56, 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
24
<PAGE>
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.
DAVID I. PORTMAN, age 59, has served as Secretary and a Director of the
Company from its inception. Mr. Portman has a BS in Pharmacy and an MBA. He
worked as a sales representative and marketing manager for Eli Lilly,
Beecham-Massengill, Winthrop Laboratories and Sandoz Pharmaceuticals before
co-founding M.E.D. Communications in 1974. In 1988, Mr. Portman sold his
interest in M.E.D. Communications to Robert Portman, and became President of
TRIAD Development, a real estate company that has numerous commercial and rental
properties in New Jersey, a position that he still holds. Mr. Portman also has
served as a director of First Montauk Securities Corp. since 1993.
DR. T. COLIN CAMPBELL, age 66, has served as a Director of the Company
since its inception. Dr. Campbell also serves as Chairman of the Company's U.S.
Scientific Advisory Board. Dr. Campbell has been Jacob Gould Schurman Professor
of Nutritional Biochemistry of Cornell University since 1985. Over the past
three decades, Dr. Campbell has been directing research correlating diet,
lifestyle and disease. In 1979, Dr. Campbell, with the encouragement of the
Chinese government, initiated the largest epidemiological study ever undertaken
focusing on the relationship between nutrition and disease. The China-Cornell
Research Project is expected to continue well into the 21st Century. Dr.
Campbell is an honorary professor at the Chinese Academy of Preventive Medicine.
DR. IRVING I.A. TABACHNICK, age 75, was elected a director of the Company
in December 1997. Dr. Tabachnick has served as a consultant to Schering Plough
Corporation, a New York Stock Exchange listed company, since 1989. Prior to
1989, he was employed by Schering Plough Corporation in a number of positions,
including Vice President -- Drug Safety and Metabolism, Senior Director --
Biological Research and Development, and Director -- Biological Sciences and
Director -- Physiology and Biochemistry.
In connection with its initial public offering of Common Stock, completed
in December 1997, for which First Montauk Securities Corp. ("First Montauk")
acted as underwriter, the Company agreed for a period of five years from
December 19, 1997 to cause a person designated by First Montauk to be elected to
the Company's Board of Directors. First Montauk has not advised the Company of
any designee to serve on the Board of Directors and, further, has advised the
Company that it does not intend to exercise its right to designate a nominee for
election as a director in the near future.
9(b) 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 64, is Chairman of the Company's Chinese
Scientific Advisory Board, and is a Professor and Deputy Director of the INFH.
Besides directing
25
<PAGE>
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 that reviews and approves new drug applications in China.
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, Ph.D., Institute Professor, Wistar Institute, Professor
of Biochemistry in Surgery. Dr. Kritchevsky is an expert in lipid biochemistry,
atherosclerosis and the relationship between nutrition and aging and nutrition
and cancer. He has published on the effects of dietary fiber on colon cancer,
circulating cholesterol and the effects of dietary fat and energy on
experimental carcinogenesis. He was a member of the 1982 National Academy of
Sciences Committee on Diet, Nutrition and Cancer, is a member of numerous
professional societies, serves as editor of several professional annuals and was
Western Hemisphere Editor of the journal, Atherosclerosis.
William Pryor, Ph.D., Thomas and David Boyd Professor, Departments of
Chemistry and Biochemistry; Director, Biodynamics Institute, Louisiana State
University. Dr. Pryor is an authority in free radical chemistry and biology. He
has published on the role that various reactive oxygen species play in the
production of degenerative tissue damage, such as cancer and atherosclerotic
diseases. His publications number over 500. Dr. Pryor wrote the first textbook
on free radicals (McGraw-Hill 1966) and was the founder and first editor of the
journal, Free Radical Biology & Medicine.
David J. Jenkins, Ph.D., Dsc, Professor of Medicine & Nutritional Sciences,
University of Toronto; Director, Clinical Nutrition & Risk Factor Modification
Center, St. Michael's Hospital. Dr. Jenkins has extensively researched the
effects of soluble and insoluble dietary fiber upon various biochemical factors
associated with, or predictive of, cardiovascular disease, diabetes and
colorectal and prostate cancers. Dr. Jenkins is a member of several professional
nutrition societies, in Canada, Great Britain and the United States. He has
served on a number of international committees involved in the treatment and
prevention of diabetes.
26
<PAGE>
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 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.
9(c) FAMILY RELATIONSHIPS
Robert Portman and David Portman are brothers. There are no other family
relationships among our directors, executive officers or persons nominated or
chosen to become directors or executive officers.
9(d) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
No events have occurred during the past five years that are required to be
disclosed pursuant to Item 401(d) of Regulation S-B.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The following directors failed to file on a timely basis the reports indicated
below:
<TABLE>
<CAPTION>
Director No. of Late Reports No. of Transactions Comment
-------- ------------------- ------------------- -------
<S> <C> <C> <C>
Robert Portman 1 (Form 4) 1 (Purchase of Reported on
5,000 shares) Form 4 on
May 7, 1999
David Portman 1 (Form 4) 1 (Purchase of Reported on
8,000 shares) Form 5 on
Feb. 14, 2000
</TABLE>
27
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
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 January 1, 1998, at an annual salary of
$150,000 for the first two years (i.e., through December 31, 1999) and at a
salary to be determined by a Compensation Committee of the Company's Board of
Directors in the current and final year.
Dr. Portman's employment agreement also provided for a grant of options
under the Company's Incentive Stock Option Plan, to purchase up to 475,000
shares of Common Stock at a price of $6.00 per share, the initial public
offering price of shares in the Company's public offering in December 1997. 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 effective date of
the employment agreement, provided that Dr. Portman is employed by the Company
at such dates. To the extent not previously vested, the option also will vest if
Dr. Portman's employment is terminated by the Company without cause. In
addition, if Dr. Portman's employment is terminated by the Company without
cause, or by Dr. Portman with cause, Dr. Portman will be entitled to receive
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 and to Jonathan D. Rahn, Executive Vice President of the Company, in
1999, 1998 and 1997. No executive officers of the Company other than Dr. Portman
and Mr. Rahn received compensation of $100,000 or more in fiscal 1999, 1998 and
1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
------------------------------------ --------------------------------------
Awards Payouts
------ -------
Securities
Other Under-
Annual Restricted lying All Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Salary Bonus sation Award(s) SARs Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert Portman, 1999 150,000 -0- (1) -0- 300,000 -0- -0-
President -------------------------------------------------------------------------------------------------
1998 150,000 -0- (1) -0- -0- -0- -0-
-------------------------------------------------------------------------------------------------
1997 150,000 -0- (1) -0- 475,000 -0- -0-
- ----------------------------------------------------------------------------------------------------------------------
Jonathan Rahn, 1999 103,333 -0- (1) -0- 50,000 -0- -0-
Executive Vice -------------------------------------------------------------------------------------------------
President 1998 125,000 -0- (1) -0- -0- -0- -0-
-------------------------------------------------------------------------------------------------
1997 100,000 -0- (1) -0- -0- -0- -0-
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Less than 10% of annual salary and bonus.
28
<PAGE>
The following table sets forth certain information regarding options
granted in fiscal 1999:
OPTION/SAR GRANTS IN FISCAL YEAR 1999
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Number of Percent of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price
Name Granted (#) Fiscal Year ($/Sh) Expiration Date
(a) (b) (c) (d) (e)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert Portman 200,000 34.1% $2.25 3/2/04
- ----------------------------------------------------------------------------------------------------------------------
Robert Portman 100,000 17.1% $1.75 11/5/04
- ----------------------------------------------------------------------------------------------------------------------
Jonathan Rahn 50,000 8.5% $2.25 3/2/04
- ----------------------------------------------------------------------------------------------------------------------
</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
Robert Portman and Jonathan Rahn at December 31, 1999.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR 1999 AND
OPTION/SAR VALUES AT 12/31/99
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Number of Securities $ Value of Unexercised
Shares Underlying Unexercised In-the-Money Options/SARs
Acquired Options/SARs At 12/31/99 At 12/31/99
on Value Exercisable/ Exercisable/
Exercise Realized Unexercisable Unexercisable
Name (#) ($) (#) ($)
(a) (b) (c) (d) (e)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------------
Robert Portman -0- -0- 841,667 458,333 75,000 50,000
- ----------------------------------------------------------------------------------------------------------------------
Jonathan Rahn -0- -0- 200,000 50,000 -0- -0-
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
For the purpose of computing the value of "in-the-money" options at
December 31, 1999, in the above table, the fair market value of the Common Stock
at such date is deemed to be $2.25 per share, the closing sale price of the
Common Stock on such date as reported by Nasdaq.
29
<PAGE>
DIRECTORS' COMPENSATION IN FISCAL YEAR 1999
For the year ended December 31, 1999, the Company compensated its two
independent Directors, T. Colin Campbell and Irving I.A. Tabachnick by granting
them each 5,000 options, exercisable at $2.25 per share, vesting immediately,
and expiring on 3/2/04. The exercise price of these options was based upon the
closing price of the Company's common stock on March 2, 1999, the date of grant.
Their duties included attendance at board meetings, the annual shareholders
meeting, and meetings of the Audit Committee.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of February 29, 2000, the Company had outstanding 4,554,367 shares of
Common Stock. The following table sets forth information concerning the present
ownership of the Company's Common Stock by the Company's directors, executive
officers and each person known to the Company to be the beneficial owner of more
than five percent of either of such classes of the capital stock, the beneficial
ownership of these securities by such persons following the offering, and the
total voting power represented by the securities owned by such persons.
<TABLE>
<CAPTION>
Common Stock (1) Common Stock (1)
Name and Address Amount Beneficially Owned Percentage of Class
- ---------------- ------------------------- -------------------
<S> <C> <C>
Robert Portman (2) 1,586,434 29.4%
President, Chief Executive Officer
and a Director
188 Igoe Road
Morganville, NJ 07751
Jonathan D. Rahn (3) 443,000 9.3%
Executive Vice President, Chief
Financial Officer and a Director
413 Gatewood Road
Cherry Hill, NJ 07751
David I. Portman 198,000 4.3%
Secretary and a Director
300 Ocean Avenue-Apt. #6A
Long Branch, NJ 07740
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Common Stock (1) Common Stock (1)
Name and Address Amount Beneficially Owned Percentage of Class
- ---------------- ------------------------- -------------------
<S> <C> <C>
T. Colin Campbell (4) 177,954 3.9%
Director
26 Beckett Way
Ithaca, NY 14850
Irving Tabachnick (5) 15,000 *
Director
9 Woodland Avenue
North Caldwell, NJ 07006
2,420,388 46.9%
Executive Officers and Directors as a
group (5 persons)
</TABLE>
- ----------
* Less than one percent
(1) Common Stock which is issuable upon the exercise of a stock option which is
presently exercisable or which becomes exercisable within sixty days is
considered outstanding for the purpose of computing the percentage
ownership (x) of persons holding such options, and (y) of officers and
directors as a group with respect to all options held by officers and
directors.
(2) Includes (i) a presently-exercisable option issued pursuant to the
Company's 1995 Incentive Stock Option Plan (a "1995 Plan Option") to
acquire 300,000 shares at a price of $2.00 per share, (ii) a
presently-exercisable 1995 Plan Option to acquire an additional 225,000
shares at a price of $3.75 per share, (iii) a 1998 Employment Contract
Option to acquire an additional 316,667 shares at a price of $6.00 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, and (y) 1998 Employment Contract Options to purchase an
additional 158,333 shares which are not vested and do not vest within sixty
days.
(3) Includes a 1995 Plan Option to acquire 200,000 shares at a price of $3.75
per share.
31
<PAGE>
(4) Includes (i) a 1995 Plan Option to acquire 5,000 shares at a price of $3.75
per share and (ii) a 1999 Plan Option to acquire 5,000 shares at a price of
$2.25 per share. Does not include 38,900 shares of Common Stock owned by
Dr. Campbell's wife or 160,521 shares of Common Stock owned by Dr.
Campbell's adult children, as to which he disclaims beneficial ownership.
(5) Represents (i) an option to purchase 10,000 shares at a price of $4.75
under the Company's 1995 Option Plan, and (ii) a 1999 Plan Option to
acquire 5,000 shares at a price of $2.25 per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the last two fiscal years, the Company has not entered into any
material transactions or series of transactions which, in the aggregate, would
be considered material in which any officer, director or beneficial owner of 5%
or more of any class of capital stock of the Company had a direct or indirect
material interest, nor are any such transactions presently proposed.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) A list of the financial statements and financial statement schedule
filed as a part of this report is set forth on page F-1 hereof. A list of the
exhibits filed as a part of this report is set forth in the Exhibit Index
starting after page F-16 hereof.
(b) Reports on Form 8-K
During the last quarter of the period covered by this report, the Company
did not file any Current Reports on Form 8-K.
32
<PAGE>
SUPPLEMENTAL INFORMATION
The Issuer has not sent an annual report or proxy statement to security
holders in respect of the fiscal year ending December 31, 1999, or otherwise in
1999. Such report and proxy statement will be furnished to security holders in
connection with the Company's Annual Meeting, now scheduled to be held in the
second quarter of 2000. Copies of such material will be furnished to the
Commission when it is sent to security holders.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PacificHealth Laboratories, Inc.
By: s/Robert Portman
--------------------------------
Robert Portman, President, Chief Executive Officer
Date: March 28, 2000
In accordance with the Securities Exchange Act of 1934 and the requirements of
Form 10-KSB, this Report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dated indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
s/Robert Portman Director and Chief March 28, 2000
- --------------------------- Executive Officer
Robert Portman
s/Jonathan D. Rahn Director and Principal March 28, 2000
- --------------------------- Financial and Accounting
Jonathan D. Rahn Officer
s/David I. Portman Director March 28, 2000
- ---------------------------
David I. Portman
</TABLE>
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
F-1
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
CONTENTS
Page
----
Independent Auditor's Report.................................................3
Financial Statements:
Balance Sheets........................................................4
Statements of Operations..............................................5
Statements of Stockholders' Equity....................................6
Statements of Cash Flows..............................................7
Notes to Financial Statements.............................................8-17
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of PacificHealth Laboratories, Inc.
We have audited the accompanying balance sheet of PacificHealth Laboratories,
Inc. as of December 31, 1999, and the related statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1999. 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. The financial statements of PacificHealth Laboratories, Inc. as of
December 31, 1998 were audited by Schiffman Hughes Brown, PC (whose practice
became a part of Larson, Allen, Weishair & Co., LLP effective January 1, 2000)
whose report dated February 12, 1999 expressed an unqualified opinion on those
statements.
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, 1999, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
/s/ LARSON, ALLEN, WEISHAIR & CO., LLP
--------------------------------------
LARSON, ALLEN, WEISHAIR & CO., LLP
Blue Bell, Pennsylvania
February 8, 2000
F-3
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS
1999 1998
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,742,360 $3,415,120
Accounts receivable, net 538,837 270,673
Inventories 385,427 375,074
Prepaid expenses 89,305 212,645
---------- ----------
Total current assets 2,755,929 4,273,512
---------- ----------
Property and equipment 84,339 104,533
---------- ----------
Other assets:
Deposits 3,991 3,991
---------- ----------
$2,844,259 $4,382,036
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 82,264
Accounts payable and accrued expenses $ 211,061 252,262
Reserve for product replacement 161,062 344,464
Customer deposits 5,529
---------- ----------
Total current liabilities 372,123 684,519
---------- ----------
Commitments
Stockholders' equity:
Common stock, $.0025 par value; authorized
10,000,000 shares; issued and outstanding
4,554,367 shares in 1999 and 1998 11,386 11,386
Additional paid-in capital 10,803,085 10,803,085
Accumulated deficit (8,342,335) (7,116,954)
---------- -----------
2,472,136 3,697,517
---------- ----------
$2,844,259 $4,382,036
========== ==========
</TABLE>
F-4
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
Revenues $ 2,112,399 $ 1,000,019
----------- -----------
<S> <C> <C>
Cost of goods sold:
Inventories, beginning 375,074 553,098
Purchases 880,119 437,071
----------- -----------
1,255,193 990,169
Less: inventories, ending 385,427 375,074
----------- -----------
869,766 615,095
----------- -----------
Gross profit 1,242,633 384,924
----------- -----------
Selling, general and administrative expenses 2,798,873 2,940,002
Research and development 179,873 92,516
Amortization expense 3,180 3,180
Depreciation expense 36,936 53,533
Provision for replacement of product (162,285)
----------- -----------
2,856,577 3,089,231
----------- -----------
Net operating loss (1,613,944) (2,704,307)
------------ -----------
Other income:
Interest income 105,036 241,253
----------- -----------
Loss before income taxes (1,508,908) (2,463,054)
Provision (benefit) for income taxes (283,527)
----------- -----------
Net loss $(1,225,381) $(2,463,054)
=========== ===========
Basic net loss per share of common stock $ (.27) $ (.54)
=========== ===========
Diluted net loss per share of common stock $ (.27) $ (.54)
=========== ===========
Basic weighted average shares outstanding 4,554,367 4,554,367
=========== ===========
Diluted weighted average shares outstanding 4,650,906 4,718,618
=========== ===========
</TABLE>
F-5
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Paid-in
Common Stockholders' Accumulated Total
Stock Capital Deficit Equity
------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1998 $11,386 $10,803,085 $ (4,653,900) $ 6,160,571
Net loss for the year ended
December 31, 1998 (2,463,054) (2,463,054)
------- ----------- ------------ -----------
Balance, December 31, 1998 11,386 10,803,085 (7,116,954) 3,697,517
Net loss for the year ended
December 31, 1999 (1,225,381) (1,225,381)
------- ----------- ------------ -----------
Balance, December 31, 1999 $11,386 $10,803,085 $ (8,342,335) $ 2,472,136
======= =========== ============= ===========
</TABLE>
F-6
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,225,381) $(2,463,054)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 36,936 53,533
Amortization 3,180 3,180
Bad debts 135 12,268
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (268,299) 125,171
Decrease in prepaid expenses 120,160 36,043
(Increase) decrease in inventory (10,353) 178,024
Decrease in other current assets 2,906
Increase in deposits (3,991)
Decrease in accounts payable and accrued expenses (41,201) (3,368)
Decrease in reserve for product replacement (183,402) (266,027)
(Decrease) increase in customer deposits (5,529) 5,529
------------ -----------
Net cash used in operating activities (1,573,754) (2,319,786)
----------- -----------
Cash flows for investing activities:
Purchase of property and equipment (16,742) (56,317)
----------- -----------
Cash flows from financing activities:
Repayment of note payable (82,264) (74,658)
----------- -----------
Net cash used in financing activities (82,264) (74,658)
----------- -----------
Net decrease in cash (1,672,760) (2,450,761)
Cash and cash equivalents, beginning balance 3,415,120 5,865,881
----------- -----------
Cash and cash equivalents, ending balance $ 1,742,360 $ 3,415,120
=========== ===========
</TABLE>
F-7
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. Business:
PacificHealth Laboratories, Inc. (the Company or PHL) was incorporated in
April 1995 to develop and market dietary supplements that improve and
promote health and well being and can be offered for sale without prior
approval by The Food and Drug Administration in compliance with current
regulatory guidelines. The Company's first product, ENDUROX(R) was
introduced in March 1996, and commercial sales began in May 1996. In March
1997, the Company extended the ENDUROX line of products with ENDUROX
ProHeart(R) and ENDUROX EXCEL(R). Prosol Plus(TM), a product marketed to
sustain emotional balance and promote a positive frame of mind, was
introduced in December 1997. In February 1999, PHL introduced
ENDUROX(R)R4(TM) Performance/Recovery Drink, the latest in the Company's
ENDUROX line of products, which demonstrated a number of exercise related
benefits in clinical studies, including enhanced performance and extended
endurance, decreased post-exercise muscle stress, and reduced free radical
build-up. The Company expects to introduce a new product, Satietrol(R),
that will compete in the market for weight loss and weight control
products, in early 2000.
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 and commercial paper with original maturities
of 90 days or less to be cash or cash equivalents.
Accounts receivable:
The Company provides an allowance for doubtful accounts, as needed, for
accounts deemed uncollectible.
Inventory:
Inventory is recorded at the lower of cost or market using the first-in,
first-out (FIFO) method.
Equipment and depreciation:
Property and equipment are carried at cost. Depreciation is calculated
using the straight-line method over their estimated useful lives ranging
from 2 to 5 years. Depreciation expense for the years ended December 31,
1999 and 1998 was $36,936 and $53,533, respectively.
Organization cost:
Organization costs are capitalized and amortized over 5 years; during 1999
the unamortized balance was expensed.
F-8
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
2. Summary of significant accounting policies (continued):
Use of estimates:
The preparation of the accompanying financial statements in conformity with
generally accepted accounting principles requires management to make
certain estimates and assumptions that directly affect the results of
reported assets, liabilities, revenue, and expenses. Actual results may
differ from these estimates.
Earnings (loss) per share:
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings per Share. SFAS No. 128 replaced the previously reported primary
and fully diluted earnings per share with basic and diluted earnings per
share, respectively. Unlike the previously reported primary earnings per
share basic earnings per share excludes the dilutive effects of stock
options. Diluted earnings per share is similar to the previously reported
fully diluted earnings per share. Earnings per share amounts for all
periods presented have been calculated in accordance with requirements of
SFAS No. 128. For the year ended December 31, 1999 and 1998, the
computation of diluted loss per share was antidilutive; therefore, the
amounts reported for basic and dilutive loss per share were the same.
Revenue recognition:
Revenue from product sales is recognized upon shipment to customers.
Provisions for discounts and rebates to customers, and returns and other
adjustments are provided for in the same period the related sales are
recorded.
Research and development:
Research and development costs consist of expenditures incurred by the
Company during the course of planned search and investigation aimed at the
discovery of new knowledge which will be used to develop and market natural
products which improve health and well being. The Company expenses all such
research and development costs as they are incurred.
Advertising costs:
Advertising costs are charged to operations in the year incurred and
totaled $1,533,108 and $1,655,274 in 1999 and 1998, respectively.
F-9
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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. There is no difference
between the basis for financial and income tax reporting, thus no deferred
tax asset or liability was recorded.
Recent accounting pronouncement:
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133, which is effective, as
amended, for all quarters in fiscal years beginning after June 15, 2000,
establishes accounting and reporting standards for derivative financial
instruments and hedging activities related to those instruments, as well as
other hedging activities. As the Company does not currently engage in
derivative or hedging activities, the adoption of this standard is not
expected to have a significant impact on the Company's financial
statements.
Reclassification:
Certain items in the 1998 financial statements have been reclassified to
conform with the presentation in the 1999 financial statements. There was
no effect on net income or shareholders' equity.
3. Accounts receivable:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Accounts receivable $540,322 $277,825
Allowance for doubtful accounts 1,485 7,152
-------- --------
$538,837 $270,673
======== ========
</TABLE>
4. Inventories:
Inventories at December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Work-in-process $ 68,404 $141,210
Finished goods 317,023 233,864
-------- --------
$385,427 $375,074
======== ========
</TABLE>
F-10
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
4. Inventories (continued):
In 1997, the Company reformulated the original ENDUROX product into a
caplet, rather than a capsule, because the capsule form was very
hygroscopic and became altered in size and color in conditions of high heat
and humidity. At June 30, 1997, the Company estimated a reserve for charges
resulting from exchanging its retailers' inventory of capsules for caplets
or issuing a credit refund for returned capsules. At the end of each
quarter, management compares the reserve's balance to a current estimate of
capsule exchange/credit refund exposure. During 1999, the Company estimated
that its remaining capsule exchange for caplets and/or credit refunds would
not exceed $178,303. As a result, the Company reduced its reserve by
$162,285 and offset net loss by taking that amount back into income during
1999. At December 31, 1999 and 1998, the balance in the reserve for product
replacement was $161,062 and $344,464, respectively.
In December 1998, management decided to write-off a majority of its Endurox
ProHeart finished goods and work-in-process inventories due to
obsolescence. The Company determined that the product's lack of sales
movement, coupled with the timing of its product expiration dates,
indicated a high probability that the product would not be saleable into
the near future. The obsolete inventory write-off was charged to cost of
goods sold in the amount of $350,706 and the finished goods and
work-in-process inventories were reduced by $139,628 and $211,078,
respectively. In December 1999, management decided to write-off the
remaining ENDUROX ProHeart finished goods inventory due to obsolescence.
The obsolete inventory write-off was charged to cost of goods sold and the
finished goods inventory was reduced in the amount of $40,851.
5. Property and equipment:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Furniture and equipment $184,512 $169,170
Molds and dies 56,517 55,117
-------- --------
241,029 224,287
Less: accumulated depreciation 156,690 119,754
-------- --------
$ 84,339 $104,533
======== ========
6. Long-term debt:
1998
Installment note payable to insurance finance ----
company due in monthly installments of $7,222,
including interest at 9.74%
through December, 1999 $ 82,264
Less: current portion 82,264
--------
Long-term debt $ 0
========
</TABLE>
F-11
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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.
8. Commitments:
Strategic Alliance Agreement:
In connection with its organization in 1995, the company entered into an
exclusive relationship with the Institute of Nutrition & Food Hygiene
(INFH) of the Chinese Academy of Preventative Medicine in Beijing, People's
Republic of China. Under this relationship, in exchange for a royalty on
net sales of products utilizing natural constituents exported from China or
developed in China, the INFH granted to the Company the right to
commercialize within and outside of China all products identified and
developed by the Company and the INFH based upon natural Traditional
Chinese Medicine herbs and other natural agents. The Company's royalty
obligations to the INFH are conditioned upon the Company first achieving a
specified level of profits. To date, the Company has not incurred any
obligation for royalties to the INFH.
Employment agreement:
The Company entered into a three-year employment contract on January 1,
1998, 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.
Rent:
On February 3, 1998, the Company signed a new lease agreement with the new
owners of its office building. The new lease provides for the rental of
3,684 square feet.
Minimum annual rentals, including utilities, for each year subsequent to
December 31, 1999 are as follows:
F-12
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
8. Commitments (continued):
Year Ending
December 31,
------------
2000 $ 53,418
2001 60,166
2002 60,780
2003 5,065
--------
$179,429
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. In addition to the Plan, the Company issued
500,000 stock options pursuant to contractual agreements. Options granted
pursuant to the Plan and contractual agreements at December 31, 1996 were
879,500, 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 1999, 1998 and
1997, 586,000, 21,500 and 490,700 options, respectively, were granted to
certain officers, spokespersons and/or consultants to the Company. Exercise
prices on the options granted in 1997 range from $4.25 to $6.00 per common
share, and vest over varying periods of time. Exercise prices on the
options granted in 1998 range from $4.75 to $5.00 per common share and
vested immediately. Exercise prices on the options granted in 1999 range
from $1.25 to $2.25 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 December 31, 1999, no options have been
exercised.
F-13
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
9. Incentive stock option plan (continued):
Transactions 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, December 31, 1995 300,000 0
Activity during the year
ended December 31, 1996 579,500 144,500 $2.00 - $4.00 $2.57
--------- ---------
Balance, December 31, 1996 879,500 144,500
Activity during the year
ended December 31, 1997 490,700 388,200 $2.00 - $6.00 $3.49
--------- ---------
Balance, December 31, 1997 1,370,200 532,700
Activity during the year
ended December 31, 1998 21,500 517,334 $2.00 - $6.00 $4.16
--------- ---------
Balance, December 31, 1998 1,391,700 1,050,034
Activity during the year
ended December 31, 1999 586,000 242,833 $1.25 - $6.00 $4.84
--------- ---------
Balance, December 31, 1999 1,977,700 1,292,867 $3.91
========= =========
</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.
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 loss
and net loss per common share would have been reduced to the pro forma
amounts indicated below.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net loss:
As reported $(1,225,381) $(2,463,054)
Pro forma $(1,640,332) $(2,838,557)
Net loss per common share:
As reported (.27) (.54)
Pro forma (.36) (.62)
</TABLE>
F-14
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
9. Incentive stock option plan (continued):
Significant assumptions used to calculate the above fair value of the
awards are as follows:
Risk free interest rates of return 5.00%
Expected option life 60 months
Volatility 20%
Expected dividends $ 0
10. Warrants:
At December 31, 1999, 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 (227,500 warrants exercisable at $3.75 per
share) and August 8, 2000 (28,000 warrants exercisable at $6.25 per share).
As of December 31, 1999, no warrants have been exercised.
On December 24, 1997, the Underwriter for the Company's initial public
offering was issued warrants to buy 120,000 shares of the Company's common
stock at an exercise price of $8.70 per share. These warrants will be
exercisable for a period of four years, commencing December 19, 1998. As of
December 31, 1999, no warrants have been exercised.
11. Income taxes:
Income tax provision (benefit) consists of the following:
1999 1998
---- ----
Current:
Federal $ 0 $ 0
State (283,527) 0
-------- --------
$(283,527) $ 0
-------- --------
Deferred:
Federal $ 0 $ 0
State 0 0
--------- --------
$ 0 $ 0
========= ========
The Company has $8,071,834 in Federal net operating loss carryovers, which
can be used to offset future taxable income. The net operating loss
carryforwards expire in the year 2010.
F-15
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
11. Income taxes (continued):
During 1999, the New Jersey Economic Development Authority established the
Tax Benefit Transfer Program. This program permits new or expanding
emerging technology and biotechnology corporations located in New Jersey to
"sell" unused New Jersey net operating loss (NOL) deductions to other
corporations who have taxable income in New Jersey for at least 75% of
their tax benefit value. The State established a maximum amount of
allowable NOL's that could be sold during 1999 and allocated this sum among
all of the qualifying companies.
In 1999, the Company received its certification under this program and was
able to sell $4,200,400 worth of its New Jersey NOL's for 75% of their tax
benefit value ($378,036) for a total of $283,527. The Company has
$3,870,884 of state net operating loss carryovers which can be used to
offset future taxable income. The net operating loss carryforwards expire
in the year 2013.
The components of the Company's deferred tax assets are as follows:
1999 1998
---- ----
Net operating loss carryforwards $2,890,000 $2,740,000
Valuation allowance (2,890,000) (2,740,000)
---------- ----------
Deferred tax asset $ 0 $ 0
========== ==========
12. Research and development costs:
For the year ended December 31, 1999 and 1998, research and development
costs expensed were $179,873 and $92,516, respectively.
13. Financial instruments:
Concentration of credit risk:
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash, cash equivalents
and trade accounts receivable.
The Company has concentrated its credit risk for cash by maintaining
substantially all of its depository accounts in a single financial
institution. Accounts in the bank are guaranteed by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000. At various times throughout
the year the Company had cash balances in this financial institution that
exceeded the FDIC limit. The financial institution has a strong credit
rating, and management believes that credit risk relating to these deposits
is minimal.
F-16
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
13. Financial instruments (continued):
Cash equivalents consists of commercial paper with maturities not longer
than 90 days and are maintained in an account with the investment division
of the above financial institution. The financial institution has a strong
credit rating and management believes that credit risk relating to these
cash equivalents is minimal.
While the Company does not require collateral on its trade accounts
receivable, credit risk is limited due to major retailers in the health and
well being industry comprising the Company's customer base. Historically,
the Company has not suffered significant losses with respect to trade
accounts receivable.
Cash, cash equivalents and accounts receivable approximate their fair
values due to the short maturity of these instruments.
14. Significant customers:
For the year ended December 31, 1999, the Company had revenues from one
customer which accounted for approximately 55% of total revenue.
For the year ended December 31, 1998, the Company had revenues from one
customer, which accounted for approximately 19% of total revenue.
F-17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Incorporated
Exhibit No. Description by Reference
- ----------- ----------- ------------
<S> <C> <C> <C>
3.1 -- Certificate of Incorporation of the Company and
all amendments thereto A
3.2 -- Amended and Restated Bylaws of the Company C
4.1 -- Specimen Common Stock Certificate C
4.2 -- Underwriter's Warrant Agreement and Form of
Warrant C
10.1 -- Incentive Stock Option Plan of 1995 A
10.2 -- Employment Agreement between the Company
and Robert Portman effective January 1, 1998 C
10.3 -- Strategic Alliance Agreement between the Company
and the Institute of Nutrition and Food Hygiene A
10.4 -- Exclusive Licensing Agreement between the
Company and the INFH A
10.5 -- Shareholders Agreement A
27 -- Financial Data Schedule *
</TABLE>
- ----------------
* Filed herewith
A Filed with Registration Statement on Form SB-2 (Registration No. 333-36379)
(the "1997 SB-2") on September 25, 1997
B Filed with Amendment No. 1 to the 1997 SB-2 on October 23, 1997
C Filed with Amendment No. 3 to the 1997 SB-2 on December 17, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,742,360
<SECURITIES> 0
<RECEIVABLES> 540,322
<ALLOWANCES> 1,485
<INVENTORY> 385,427
<CURRENT-ASSETS> 2,755,002
<PP&E> 84,339
<DEPRECIATION> 36,936
<TOTAL-ASSETS> 2,844,259
<CURRENT-LIABILITIES> 372,123
<BONDS> 0
0
0
<COMMON> 11,386
<OTHER-SE> 2,460,750
<TOTAL-LIABILITY-AND-EQUITY> 2,844,259
<SALES> 2,112,399
<TOTAL-REVENUES> 2,379,585
<CGS> 869,766
<TOTAL-COSTS> 3,888,493
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,508,908)
<INCOME-TAX> (283,527)
<INCOME-CONTINUING> (1,225,381)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,225,381)
<EPS-BASIC> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
