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, 2002
PACIFICHEALTH LABORATORIES, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 22-3367588
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1480 Route 9 North - Suite 204
Woodbridge, NJ 07095
(Address of principal executive offices)
732/636-6141
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par
value $.0025 per share.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $5,120,353.
The aggregate market value of the common equity held by non-affiliates based on
the closing sale price of Common stock as of February 28, 2003, was $9,950,967.
The number of shares outstanding of each class of the issuer's common equity, as
of February 28, 2003, was as follows: Common Stock - 6,115,703 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PACIFICHEALTH LABORATORIES, INC.
FORM 10-KSB
Fiscal Year Ended December 31, 2002
TABLE OF CONTENTS
PART I
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.............13
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................15
ITEM 7. FINANCIAL STATEMENTS.................................................19
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..................................20
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT....................20
ITEM 10. EXECUTIVE COMPENSATION...............................................24
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......28
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................30
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K..........................................................31
ITEM 14. CONTROLS AND PROCEDURES..............................................31
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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 incorporated in the State of Delaware in
April 1995 as a nutrition technology company that researches, develops, and
commercializes functionally unique proprietary products for sports performance,
weight loss, and Type 2 diabetes which can be marketed without prior Food and
Drug Administration ("FDA") approval under current regulatory guidelines.
1(b) Business of the Issuer
The Company is a nutrition technology company strongly committed to
research and development of dietary and nutritional supplements that can enhance
health and well being. The Company's three primary areas of research to date
have been sports performance, weight loss and Type 2 diabetes.
Sports Performance
Our first sports performance product, ENDUROX(R), was introduced in
March 1996 with commercial sales beginning in May 1996. In March 1997, we
extended the ENDUROX line of products with ENDUROX EXCEL(R). In February 1999,
we introduced ENDUROX(R) R4(R) Performance/Recovery Drink to be taken following
exercise. In clinical studies performed or funded by the Company, ENDUROX R4 has
demonstrated a number of exercise-related benefits including enhanced
performance, extended endurance, and decreased post-exercise muscle damage. In
June 2001, we introduced ACCELERADE(R) Sports Drink, to be taken during exercise
using the same patented technology as ENDUROX R4. Research studies funded by the
Company have shown that ACCELERADE is significantly better than conventional
sports drinks in improving endurance during exercise. In the first quarter of
2003, we commenced test marketing of our ready-to-drink form of ACCELERADE in
the San Diego and Colorado Springs areas.
Weight Loss
In weight loss, the Company has focused its research and development
efforts on development of novel nutritional compositions that stimulate the
body's major satiety peptide, or cholecystokinin (CCK). In April 2000, we
introduced our first weight loss product, SATIETROL(R), a natural appetite
control product based on this research. Clinical studies performed or funded by
the Company have shown that Satietrol, a pre meal beverage, can reduce hunger up
to 43% 3 1/2 hours after eating. In January 2001, we extended our weight loss
product line with the introduction of SATIETROL COMPLETE(R), a 220-calorie meal
replacement product that incorporates the patented SATIETROL technology. In June
2001, the Company signed an exclusive worldwide Licensing Agreement with
GlaxoSmithKline ("GSK") for its SATIETROL technology. Under the Agreement, the
Company received an initial payment of $1,000,000 and received a subsequent
milestone payment of $250,000. GSK subsequently terminated the Licensing
Agreement in September 2002 with all rights reverting back to the
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Company. In the third quarter of 2002, clinicals studies funded by the Company
showed that the efficacy of SATIETROL could be improved. Further studies will be
conducted in 2003.
Type 2 Diabetes
Type 2 diabetes has become the fastest growing chronic condition in the
United States. Obesity and poor glucose regulation appear to be the primary
characteristics of Type 2 diabetes. Research has suggested that cholecystokinin
(CCK) may play a role in insulin release and glucose regulation. The Company's
research in this area has focused upon the development of nutritional products
that can help Type 2 diabetics lose weight by controlling appetite while
improving glucose regulation. The Company expects to initiate clinical trials on
a product for use by Type 2 diabetics in the future.
All of the Company's existing products, and its proposed products, are
expected to be manufactured in the United States by third parties. See Item
1(b)(i) below.
1(b)(i) Principal Products and Markets
(a) ENDUROX(R) Product Line-Dietary Supplements
The Company's initial product, ENDUROX(R), is a dietary supplement of
which the principal ingredient is the herb ciwujia. Laboratory tests and trials
funded by the Company during 1995 at the University of North Texas Health
Science Center in Fort Worth, Texas and the Institute of Nutrition and Food in
China, have demonstrated that ENDUROX is effective in improving exercise
performance. The Company introduced ENDUROX in March 1996 and commenced
commercial sales of the product in May 1996. In December 1996, the Company was
issued patent #5,585,101 for its ENDUROX product. ENDUROX is sold in caplet
form.
ENDUROX EXCEL(R) was introduced in March 1997. ENDUROX EXCEL contains
50% more ciwujia than regular ENDUROX, plus vitamin E. It is targeted to
"serious" athletes, i.e., individuals who engage in competitive athletics or
whose exercise regimen is comparable to that of a competitive athlete.
(b) ENDUROX(R)R/4/(TM) Recovery / Performance Drink
The Company launched ENDUROX R/4/ Performance / Recovery Drink in March
1999. Clinical trials funded by the Company during 1998 at the University of
North Texas Health Science Center in Fort Worth, Texas and the Human Performance
Lab at St. Cloud University in St. Cloud, Minnesota showed that when tested
against the nation's leading sports drink, ENDUROX R/4/ delivered equal
hydration effectiveness while enhancing performance and extending endurance by
55%, decreasing post-exercise muscle stress by 36%, reducing free radical
build-up by 69%, and increasing insulin levels by 70%. The results of these
trials were presented at the American College of Sports Medicine's national
meeting in 1999.
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In April 2000, the Company was issued patent #6,051,236 for ENDUROX
R/4/ covering all 77 claims made in the application, including claims that the
product (a) increases endurance, (b) reduces post-exercise muscle damage, and
(c) speeds the replenishment of muscle carbohydrate stores. Patent office
acceptance of these claims does not necessarily permit the Company to make any
specific claims to the public regarding this product. The Company's ability to
make those claims is governed by the FDA, Federal Trade Commission, and other
federal government agency regulations and guidelines.
(c) SATIETROL(R)
SATIETROL, the Company's appetite control product, is based on the use
of nutritional ingredients to stimulate cholecystokinin (CCK), a protein
released after eating which has shown to be an important satiety signal in
humans.
In the early 1980's, researchers at Columbia University demonstrated
that CCK was an important satiety signal in humans. CCK causes individuals to
feel fuller even without eating. These studies have shown that an injection of
CCK reduced food intake by 16-22%. The release of CCK was shown to be stimulated
by the ingestion of protein and fat. When CCK is stimulated by ingestion of
food, it activates two negative feedback loops that inhibit continued release of
CCK. One mechanism involves the pancreas and the second involves the gall
bladder. When CCK is stimulated, the pancreas secretes protease enzymes, which
inactivates a protein called CCK Releasing Peptide (CCKRP). When this protein is
inactivated, release of CCK is halted. The second mechanism that controls CCK
release is the gall bladder. CCK stimulates the gall bladder to release bile
salts. Bile salts are powerful inhibitors of further CCK release. A major
problem with the direct use of CCK as a supplement is that it must be given by
injection since stomach enzymes activate it.
The Company's research efforts have focused on developing a calorically
efficient nutritional formula that can be taken orally which would stimulate CCK
release and extend its duration of action. Such a product would be highly useful
in control of weight by helping overweight individuals feel fuller or more
satiated while eating less food. This formulation became the basis for the
Company's first weight loss product, SATIETROL. The Company has developed a
number of SATIETROL formulas that stimulate and extend the action of CCK and has
filed a number of patents regarding this unique technology.
Clinical studies funded by the Company conducted in 2000 by the
Company's President, Dr. Portman, Abe Bakal of ABIC International, and Dr.
Steven Peikin, Professor of Medicine, Robert Wood Johnson Medical School at
Camden Cooper Hospital/University Medical Center, Camden, NJ have shown that,
when taken as a pre meal beverage 10-15 minutes before eating, SATIETROL can
reduce hunger up to 40% 3 1/2 hours after eating and reduce caloric consumption
in a subsequent meal by 43%. These studies were presented at the North American
Association for the Study of Obesity (NAASO) 1999 national meeting. In March
2001, the Company was issued patent #6,207,638 for all 72 claims made for
SATIETROL, including its use for Type 2 diabetes as well as conjunctive use with
other products for treatment of bulimia.
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Studies conducted or funded by the Company on CCK have also suggested that this
agent may be effective for treating Type 2 diabetes, one of the fastest growing
chronic diseases in the United States. The Company intends to conduct studies to
determine if SATIETROL would be of value in Type 2 diabetes.
Additional studies funded by the Company and conducted in the 4th
quarter of 2002 by the Company's President Dr. Portman, and Abe Bakal of ABIC
International have shown that we can significantly improve both the efficacy and
versatility of SATIETROL. These new studies show that the improved formulation
of SATIETROL was, on average, 38% more effective in reducing caloric intake than
our existing product. In addition, we have been able to reduce the caloric
content from 80 calories to 15 calories, which is important for individuals who
are on a calorie-restricted diet. By reducing the caloric content of SATIETROL
and enhancing its efficacy, we believe that SATIETROL can now be added to a
variety of foods and beverages without modifying their flavor profile. We also
feel that we now may be able to develop a tablet or capsule form of SATIETROL.
The Company's objective is to develop a patent portfolio to protect its
proprietary technology involving the use of nutritional ingredients to stimulate
and extend the action of CCK. The Company has already received several patents
for SATIETROL and has several more patents pending (See 1(b)(vii) Patents and
Trademarks below)
In April 2000, the Company launched its first SATIETROL product.
SATIETROL is a powder that is mixed with 6-8 oz of water and taken 10-15 minutes
before a meal. It is the first weight loss product commercially available that
is designed to stimulate CCK, the body's own satiety mechanism. The market for
all types of weight loss products and services in the US exceeds $50 billion a
year and government figures estimate that 55% of adult Americans are overweight.
SATIETROL is available in chocolate and vanilla flavors.
In January 2001, the Company introduced SATIETROL COMPLETE, a 220
calorie meal replacement product that incorporates the SATIETROL technology.
Clinical studies funded by the Company and conducted in 2000 by Dr. Portman,
President of the Company, Abe Bakal of ABIC International, and Dr. Steven
Peikin, Professor of Medicine, Robert Wood Johnson Medical School at Camden
Cooper Hospital/University Medical Center, Camden, NJ have shown that, versus
the leading meal replacement product, SATIETROL COMPLETE was more effective in
reducing hunger over 5 hours and reducing caloric consumption in a subsequent
meal. These studies were presented at the NAASO national meeting in 2000. The
meal replacement market segment in the United States exceeds $900 million.
SATIETROL COMPLETE is a powder mixed with skim, soy, or rice milk and is
available in chocolate and vanilla flavors.
On June 1, 2001, the Company entered into an exclusive license
agreement with GlaxoSmithKline ("GSK"), one of the world's largest
pharmaceutical companies, for SATIETROL, the Company's appetite control product.
The agreement provided GSK with worldwide rights to the trademarks, technology,
patents, and know how for SATIETROL for the duration of the patents which expire
in 2017. Under the agreement, the Company received an initial payment of
$1,000,000 and received a subsequent milestone payment of $250,000. The
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agreement permitted GSK to terminate the license agreement at any time for any
reason, provided that it pays all milestone payments earned prior to
termination. In the event the agreement was terminated, all rights to the
product would revert to the Company. GSK also purchased approximately 9% of the
Company's common stock for $1.5 million under a contemporaneous stock purchase
agreement. As of December 31, 2002, the Company has received an aggregate
$2,750,000 from GSK from the combined licensing and stock purchase agreements.
During the third quarter of 2002, GSK terminated the license agreement. As a
result, the Company is now free to explore other options for the SATIETROL
technology with other potential partners.
(d) ACCELERADE(R)
In June 2001, the Company introduced ACCELERADE Sports Drink, to be
taken during exercise, using the same patented technology as ENDUROX R/4/.
Research studies funded by the Company and conducted in 2001 by Dr. John Ivy at
the University of Texas Department of Kinesiology and Health Education, Austin,
Texas have shown that ACCELERADE is significantly better than conventional
sports drinks in improving endurance during exercise. These studies showed that
subjects taking ACCELERADE increased endurance performance by 24% compared to
subjects drinking a conventional sports drink containing the same amount of
carbohydrate. ACCELERADE uses the ENDUROX R/4/ technology that features the
patented 4-1 ratio of carbohydrate to protein to speed the movement of
carbohydrate from the blood into the muscle during exercise. By increasing the
energy efficiency of every gram of carbohydrate an athlete consumes, ACCELERADE
spares muscle glycogen and improves endurance capacity. In the first quarter of
2003, we commenced test marketing of our ready-to-drink form of ACCELERADE in
the San Diego and Colorado Springs areas.
1(b)(ii) Distribution Methods
The Company has pursued a "multi-channel" distribution strategy in
marketing its ENDUROX, ENDUROX R/4/ and ACCELERADE lines of products. At the
present time, these products are being sold in over 9,000 retail outlets
including General Nutrition Centers ("GNC"), sports specialty stores,
independent health food retailers, independent bike retailers, health clubs,
catalogs, and Internet sites. ACCELERADE ready-to-drink will be primarily sold
through the convenience store channels of distribution. The Company does not
sell any of its other products through convenience stores and does not have any
experience in distributing products through convenience stores. As a result,
distribution of ACCELERADE through convenience stores may initially not be as
effective as other means of distribution used by the Company.
The Company began distribution of ENDUROX in Canada in 1997 through an
independent distributor with the first retail sales made in April 1997. In 1998,
the Company began selling its ENDUROX products in South Africa with an
independent distributor on a non-exclusive basis. In 2000, the Company began
selling its ENDUROX products in Brazil, Hong Kong, and Singapore through
independent distributors on a non-exclusive basis.
SATIETROL is sold through Internet retailers, select health food
chains, and over the Company's Internet site at www.hungeroff.com.
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To support its marketing efforts, the Company advertises in trade and
consumer sports and health food magazines that are intended to reach its
targeted consumer. In addition, the Company attends trade shows and exhibitions,
sponsors promotional programs/events and in-store promotions, and engages in an
extensive public relations effort that has resulted in articles in numerous
sports, health, fitness, trade and natural product publications, newspaper
coverage, and television spots. In addition, the Company utilizes a number of
paid endorsers to promote its sports nutrition line of products, including
several well-known athletes and a number of professional coaches from bicycling,
running, swimming, triathlete, hockey, and basketball.
In the twelve-month periods ended December 31, 2002 and December 31,
2001, the Company's expenditures for product advertising and promotion were
approximately $900,000 and $557,000, respectively.
1(b)(iii) Status of Publicly Announced New Products
The status of all products which have been the subjects of or mentioned
in public announcements by the company in the past year are discussed above
under the caption "Principal Products and Markets".
1(b)(iv) Competition
Depending on the product category, the Company's competition varies.
The sports drink market in which Endurox R/4/ and ACCELERADE compete is
dominated by such brands as Gatorade and Powerade who sell ready-to-drink
products, as well as smaller companies such as Cytosport (Cytomax) who sell
powdered, ready-to-mix products. In addition, there are a number of new foreign
entries such as Enervit and Extran that have introduced sports drinks into the
U.S. focusing on the endurance athlete. Increased competitive activity from such
companies could make it more difficult for the Company to increase or keep
market share since such companies have greater financial and other resources
available to them and possess far more extensive manufacturing, distribution and
marketing capabilities than the Company. In addition, in the market for ready to
drink sports drinks, the Company must compete with large companies whose
products enjoy substantial name recognition. As a result, it may be more
difficult for the Company to earn market share in the market for ready to drink
sports drinks than in other markets in which the Company faces competition.
The competitive market for weight loss products is divided into four
basic segments: herbal supplements (e.g., Metabolite), meal replacement products
(e.g., Slim Fast), food plans (e.g., Weight Watchers) and prescription products
(e.g., Xenical). Today, weight loss products are manufactured by dietary
supplement manufacturers, pharmaceutical manufacturers, diet food companies
(e.g. Slim Fast Foods Company), and over-the-counter drug companies. Intense
competitive activity in this market could make it difficult for the Company to
increase or keep market share, as most of the companies who have products in
this category have greater financial, marketing, sales, manufacturing, and
distribution resources than the Company.
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Since the Company's products are based upon natural ingredients, its
competitors have access to the same ingredients and will be able to develop and
market products the same as or similar to the Company's products. Except to the
limited extent that the Company may obtain patent protection for certain uses of
ingredients in its products, its competitors' products may make the same claims
of benefits from use of the products that the Company makes.
The Company believes that long term success in the marketplace for any
of the Company's products is likely to be less dependent on the novelty of the
product than on such factors as distribution and marketing capabilities, and
whether or not the product enjoys some proprietary advantage, such as patent
protection, an established brand name, etc.
1(b)(v) Suppliers of Raw Materials
The Company does not have manufacturing facilities and has no present
intention to manufacture any products itself. It fulfills product needs through
relationships with independent manufacturers. The Company generally does not
have long term contracts with any of these manufacturers. Competitors who do
their own manufacturing may have an advantage over the company with respect to
pricing, availability of product and in other areas through their control of the
manufacturing process.
Generally, our contract manufacturers obtain raw materials necessary
for the manufacture of our products from numerous sources. The Company generally
does not have contracts with suppliers of materials required for the production
of its products. The Company obtains ciwujia for its ENDUROX caplet line of
products from suppliers in the Peoples Republic of China. At the present time,
the Company obtains all of its needs from one supplier in the People's Republic
of China, but believes that the Company could switch to a number of alternative
suppliers without significant effect. The Company has not entered into any long
term supply agreements with this supplier. The Company's weight loss product,
SATIETROL, is composed of numerous ingredients, most of which are available from
multiple sources. In addition, all other raw materials used in the Company's
existing products are available from multiple sources.
There is no assurance that suppliers will provide the raw materials
needed by the Company in the quantities requested or at a price the Company is
willing to pay. Because the Company does not control the source of these raw
materials, it is also subject to delays caused by interruption in production of
materials based on conditions outside of its control.
In 2002, the Company entered into an agreement with Cargill, Inc. to
purchase $57,500 of trehalose in 2003. This ingredient will be used in both the
powder and ready-to-drink forms of our ACCELERADE product. In connection with
this agreement, the Company will receive marketing support, distribution, and
manufacturing resources under this agreement in 2003.
1(b)(vi) Dependence on Major Customers
General Nutrition Centers and Performance, Inc. accounted for
approximately 30% and 23%, respectively, of net sales in fiscal 2002. The loss
of these customers, a significant reduction in purchase volume by these
customers, or the financial difficulty of such customers, for any
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reason, could significantly reduce our revenues. The Company has no agreement
with or commitment from either of these customers with respect to future
purchases.
1(b)(vii) Patents and Trademarks
The Company received a use patent, United States Patent No. 5,585,101
in December 1996 covering the use of ciwujia, the principal active herb in
ENDUROX, entitled Method to Improve Performance During Exercise Using the
Ciwujia Plant. This patent expires in December 2013.
The Company received a composition of matter patent, United States
Patent No. 6,051,236, in April 2000 for ENDUROX R/4/ entitled Composition for
Optimizing Muscle Performance During Exercise (see section 1(b)(i)(b)). This
patent expires in April 2017.
The Company received a composition of matter patent, United States
Patent No. 6,207,638, in March 2001 for SATIETROL entitled Nutritional
Intervention Composition for Enhancing and Extending Satiety (see section
1(b)(i)(c)). This patent expires in March 2018.
The Company received a use patent, United States Patent No. 6,429,190,
in August 2002 for SATIETROL entitled Method For Extending The Satiety Of Food
By Adding A Nutritional Composition Designed To Stimulate Cholecystokinin (CCK).
This patent expires in August 2019.
The Company received a composition of matter patent, United States
Patent No. 6,436,899, in August 2002 for SATIETROL entitled Nutritional
Intervention Composition for Enhancing and Extending Satiety. This patent
expires in August 2019.
The Company received a composition of matter patent, United States
Patent No. 6,468,962, in October 2002 for SATIETROL entitled Nutritional
Intervention Composition for Enhancing and Extending Satiety. This patent
expires in October 2019.
The Company received a Notice of Allowance on a composition of matter
patent in February 2003 for SATIETROL entitled Nutritional Intervention
Composition for Improving Efficacy of a Lipase Inhibitor.
The Company also has the following patents pending for its SATIETROL
technology:
PATENTS PENDING DATE
SUBMITTED
--------------------------------------------------------------------------------
Composition Containing Protease Inhibitor Extends
Post Meal Satiety June 2001
Nutritional Intervention Composition for Enhancing
and Extending Satiety June 2002
Composition for Reducing Caloric Intake October 2002
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The patent holder for all patents is the Company's President, Dr.
Robert Portman, and all patents are assigned to the Company. To the extent the
Company does not have patents on its products, there can be no assurance that
another company will not replicate one or more of the Company's products, nor is
there any assurance that patents which are obtained will provide meaningful
protection or significant competitive advantages over competing products. For
example, the Company's use patent on ciwujia would not prevent the sale of a
product containing that herb with a claim or for a use that was not covered by
the Company's patent.
The Company has federal trademark registrations for ENDUROX, ENDUROX
EXCEL, ENDUROX ProHeart, ENDUROX R/4/, SATIETROL, SATIETROL COMPLETE, and
ACCELERADE. The Company also has filed its trademarks in most Western European
countries, Canada, Mexico and Japan. The Company's policy is to pursue
registrations for all of the trademarks associated with its key products, and to
protect its legal rights concerning the use of its trademarks. The Company
relies on common law trademark rights to protect its unregistered trademarks.
1(b)(viii) and (ix) Governmental Regulation
The Company has determined that all of its existing and proposed
products, as described above, are nutritional or dietary supplements as defined
under federal statutes and regulations of the FDA. Neither nutritional
supplements nor dietary supplements require FDA or other governmental approval
to market in the United States. No governmental agency or other third party
makes a determination as to whether our products qualify as nutritional
supplements, dietary supplements, or neither. The Company makes this
determination based on the ingredients contained in the products and the claims
made for the products. The processing, formulation, packaging, labeling and
advertising of such products, however, are subject to regulation by one or more
federal agencies including the 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 Company markets products that are covered under two types of FDA
regulations, Nutritional Supplements and Dietary Supplements. Nutritional
Supplements contain food and GRAS (Generally Regarded as Safe) ingredients and
do not required FDA approval or notification. Such products must follow labeling
guidelines outlined by the FDA.
Dietary Supplements is a classification of products resulting from the
enactment of the Dietary Supplement Health and Education Act of 1994 (the
"DSHEA") in October 1994. The DSHEA amended and modified the application of
certain provisions of the Federal Food, Drug and Cosmetics Act (the "FFDC Act")
as they relate to dietary supplements, and required the FDA to promulgate
regulations consistent with the DSHEA.
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,
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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 the new
protections and requirements of the DSHEA will apply to a wide class of
products.
Under the DSHEA, companies that manufacture and distribute dietary
supplements are allowed to make any of the following four types of statements
with regard to nutritional support on labeling without FDA approval: (i) a
statement that claims a benefit related to a classical nutrient deficiency
disease and discloses the prevalence of such disease in the United States; (ii)
a statement that describes the role of a nutrient or dietary ingredient intended
to affect structure or function in humans; (iii) a statement that characterizes
the documented mechanism by which a nutrient or dietary ingredient acts to
maintain or function; or (iv) a statement that "describes general well-being"
from consumption of a nutrient or dietary ingredient. In addition to making sure
that a statement meets one of these four criteria, a manufacturer of the dietary
supplement must have substantiation that such statement is truthful and not
misleading, must not claim to diagnose, mitigate, treat, cure, or prevent a
specific disease or class of diseases, and must contain the following
disclaimer, prominently displayed in boldface type: "This statement has not been
evaluated by the Food and Drug Administration. This product is not intended to
diagnose, treat, cure, or prevent any disease."
On February 6, 2000, the FDA issued new guidelines concerning
statements made for dietary supplements. These new regulations have important
implications for the marketing of weight loss products such as SATIETROL.
Previously the regulations made it clear that a product that made a claim for
obesity must be treated as a drug. Under the new regulations the FDA now makes a
distinction between obesity and overweight. Overweight is no longer considered a
disease but rather a natural life process. Overweight is considered a condition
that effects the structure and function of the body. As now defined, dietary
supplements can make a claim for ordinary weight loss rather than as a treatment
for obesity. Furthermore, these regulations also permit the use of appetite
suppressant as a structure/function claim under DSHEA (Dietary Supplement Health
Education Act of 1994). The issuance of these regulations will give SATIETROL
greater latitude in the types of claims the product can make as long as such
claims are substantiated by the necessary studies.
1(b)(x) Expenditures for Research and Development
The Company's research and development expenditures in the past two
fiscal years, exclusive of market research and marketing related expenditures,
were as follows: 2002 - $166,000; 2001 - $106,000.
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.
12
1(b)(xii) Employees
At the present time, the Company has fourteen full time employees. Of
these, three employees are executive, seven are in sales and marketing, and four
are in accounting, operations and administrative. The Company employs a number
of consultants who devote limited portions of their time to the Company's
business. None of the Company's employees are represented by a union and the
Company believes that its employee relations are good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company entered into a new five-year lease in February 1998 for
approximately 3,684 square feet at $14.50 per square foot, including utilities,
for an annual rent expense of $53,418 for the first three years. In the fourth
and fifth years of the lease, the rent increases to $16.50 per square foot,
including utilities, for an aggregate annual rental of $60,780. The Company is
looking to expand its office facilities and believes that it will be able to
obtain larger office space in the vicinity at favorable rental rates.
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
The Company did not submit any matters to a vote of security holders in
the fourth quarter of the fiscal year ended December 31, 2002.
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:
13
HIGH LOW
-------- --------
01/01/01 - 03/31/01 $1.46875 $0.28125
04/01/01 - 06/30/01 $4.94 $0.625
07/01/01 - 09/30/01 $8.38 $3.36
10/01/01 - 12/31/01 $6.02 $2.76
01/01/02 - 03/31/02 $5.00 $2.51
04/01/02 - 06/30/02 $5.15 $3.61
07/01/02 - 09/30/02 $4.78 $0.91
10/01/02 - 12/31/02 $4.10 $0.93
01/01/03 - 02/28/03 $2.90 $1.70
The closing price of the Company's Common Stock on February 28, 2003,
as reported by Nasdaq, was $2.11.
5(b) Holders.
As of February 28, 2003, there were approximately 74 holders of record
of the Company's Common Stock. The Company believes that there are significantly
more beneficial holders of the Company's stock as many beneficial holders have
their stock in "street name".
5(c) Dividends.
The Company has never paid or declared dividends upon its Common Stock
and does not contemplate or anticipate paying any dividends on its Common Stock
in the foreseeable future.
5(d) Recent Sales of Unregistered Securities; Use of Proceeds from the Sale
of Registered Securities
5(d)(i) Recent Sales of Unregistered Securities.
As of January 1, 2001, the Company granted options to purchase 460,000
shares of its common stock to its President, Robert Portman. These options were
granted under the Company's Year 2000 Stock Option Plan. These options have an
exercise price of $0.313 per share. One-half of these options become exercisable
on January 2, 2002 and the other half become exercisable on January 2, 2003. The
options expire on December 31, 2006. During the quarter ended June 30, 2001, Dr.
Portman exercised options for 475,000 shares of Common Stock at $0.313 per
share. The issuance of these securities was exempt from registration under the
Securities Act of 1933, pursuant to Section 4(2), as the grantee is an executive
officer of the Company. Subsequent to the grant of the 460,000 options as of
January 1, 2001, the Company filed a registration statement on Form S-8 relating
to the Year 2000 Stock Option Plan, which would cover the issuance of shares
upon exercise of these options.
14
On June 1, 2001, the Company sold 541,711 shares of the Company's
Common Stock for and aggregate $1,500,000 to Glaxo Wellcome International B.V.,
a Netherlands limited liability company affiliated with Smithkline Beecham, PLC.
The issuance of these shares was exempt from registration under the Securities
Act of 1933 under Section 4(2). Certificates for the shares bear restrictive
legends, the purchaser represented that it was acquiring the shares for
investment purposes, and the purchaser was an "accredited investor" as that term
is defined in Regulation D. No public solicitation was employed in connection
with this transaction.
In April, 2001, the Company issued an aggregate $300,000 in principal
amount of its 10% Promissory Notes Due 2002, together with warrants exercisable
for 300,000 shares of the Company's Common Stock at $0.875 per share to a total
of six accredited investors. The warrants expire three years from issuance. The
entire principal of the Notes was repaid in June 2001, and warrants for 150,000
shares were exercised in June 2001 and 50,000 shares were exercised in August
2001. The issuance of these securities was exempt from registration under the
Securities Act of 1933 under Section 4(2). Certificates for the securities bear
restrictive legends, the purchasers represented that they were acquiring the
shares for investment purposes, and the purchasers were "accredited investors"
as that term is defined in Regulation D. No public solicitation was employed in
connection with this transaction.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's financial statements, including the notes thereto, appearing
elsewhere in this Report.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-KSB contains statements relating to
future results of the Company (including certain projections and business
trends) that are "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. These statements can be identified by
introductory words such as "expects", "plans", "intends", "believes", "will",
"estimates", "forecasts", "projects" or words of similar meaning, and by the
fact that they do not relate strictly to historical or current facts. Actual
outcomes and results may differ materially from what is expressed or implied in
our forward-looking statements. Among the factors that affect future results are
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.
We expressly disclaim any obligation or undertaking to update or revise
forward-looking statements made in this Annual Report to reflect changes in
management's expectations resulting from future events or changes in the
conditions or circumstances upon which such expectations are based.
(a) Introduction
PacificHealth Laboratories, Inc. was incorporated in April 1995 to
develop and market dietary and nutritional supplements that improve and promote
health and well being and can be offered for sale without prior approval by the
FDA in compliance with current regulatory guidelines. Our first product, ENDUROX
was introduced in March 1996, and commercial sales
15
began in May 1996. In March 1997, the Company extended the ENDUROX line of
products with ENDUROX EXCEL. In March 1999, the Company launched ENDUROX R/4/
Performance/Recovery Drink, the latest in our ENDUROX line of products, which
demonstrated a number of exercise related benefits in clinical studies,
including enhanced performance and extended endurance, decreased post-exercise
muscle stress, and reduced free radical build-up. In April 2000, the Company
introduced a new product, SATIETROL, that will compete in the approximately $50
billion market for weight loss and weight control products, goods and services.
In May of 2001, the Company launched ACCELERADE, a new generation of sports
drink products to be used during exercise that uses the ENDUROX R/4/ patented
technology.
(b) Results of Operations - Years Ended December 31, 2002 and 2001
The Company generated a net loss of ($2,570,452) or ($0.42) per share
for the year ended December 31, 2002 compared to net income of $285,626 or $0.04
per fully diluted share for the year ended December 31, 2001. The net loss for
2002 vs. the net income for the same period in 2001 is due primarily to a
$1,297,485 write-off of SATIETROL inventory in 2002 (see below), an increase in
advertising expenses in 2002, and the receipt of $1,250,000 in licensing fees in
2001 from GSK.
Revenues for the year ended December 31, 2002 were $5,120,353 compared
to $6,145,527 for the same period in 2001. Although total revenues decreased,
revenues from our sports performance products were up 40% for the year ended
December 31, 2002 versus the same period in 2001. Sales decreased overall in
2002 from 2001 as in 2001 we had $1,250,000 in licensing revenues from a
licensing agreement with GSK (see above) and we also had significant SATIETROL
revenues in 2001 as we received strong editorial exposure in several national
women's magazines. Typically, products in the SATIETROL category do not receive
this type of independent exposure. The following table provides additional
information concerning our revenues in 2002 and 2001:
Revenues/1/
-----------------------------------------------------------------
Sports Weight
Year Ended Performance Loss Licensing Total
-----------------------------------------------------------------------------------------------
December 31, 2002 $5,007,513 $ 112,840 $ -0- $5,120,353
========== =========== =========== ==========
December 31, 2001 $3,578,189 $ 1,317,338 $ 1,250,000 $6,145,527
========== =========== =========== ==========
/1/Sales revenues reported for the year ended December 31, 2001 are net
of credits of $451,137 for SATIETROL returned from our largest customer, GNC,
who discontinued selling the product in its corporate stores. There was no legal
requirement for the Company to accept these credits and returns but these
credits and returns were allowed to enhance ongoing customer relations with our
largest customer. Net sales of SATIETROL to GNC in 2001 after these returns were
$476,559.
16
Gross profit for the year ended December 31, 2002 was $1,355,260, which
includes a $1,297,485 write off of excess SATIETROL inventory. Before this write
off, gross profit was $2,652,745. This compares to gross profit of $3,554,680
for the same period in 2001 that includes $1,250,000 of licensing revenue from
our SATIETROL licensing agreement with GSK. Without the licensing revenue, gross
profit for the year ended December 31, 2001 was $2,304,680. In the third quarter
of 2002, we chose to focus our resources on developing our sports drink business
resulting in reduced SATIETROL sales. The decision to write off the SATIETROL
inventory was made in accordance with generally accepted accounting principles.
Our gross profit margin on product sales (before the inventory write
off) increased to 51.8% for the year ended December 31, 2002 from 47.1% for the
year ended December 31, 2001 (excluding the licensing revenue.) The primary
reason for the increase in gross margin in 2002 compared to 2001 is the
previously mentioned return of products from GNC in 2001. Without these returns,
our gross profit margin for the year ended December 31, 2001 would have been
50.6%.
Our selling, general, and administrative expenses increased to
$3,725,512 for the year ended December 31, 2002 from $3,065,336 for the year
ended December 31, 2001. The primary reasons for the increase was an increase in
advertising expenses and marketing personnel.
Research and development expenses increased to $165,514 for the year
ended December 31, 2002 from $106,085 for the year ended December 31, 2001. The
primary reason for the increase in research and development expenses is due to
the clinical work conducted on our SATIETROL technology as discussed in Item
1(c) above. We anticipate research and development expenses will increase as
additional clinical trials and studies are conducted on all of our products as
we continue to seek out additional patents and claims for our products.
The Company incurred interest expense of $93,477 for the year ended
December 31, 2001 primarily as a result of debt issue costs associated with the
issuance of the 10% Promissory Notes Due 2002. These costs were expensed as
interest expense when full repayment was made in June 2001.
(c) Liquidity and Capital Resources
At December 31, 2002, the Company's current assets exceeded its current
liabilities by approximately $2.2 million with a ratio of current assets to
current liabilities of approximately 6.0 to 1. At December 31, 2002 Cash on hand
was $628,436, a decrease of $1,220,411 from December 31, 2001, primarily because
of our net loss for 2002 as well as an increase of $142,590 in accounts
receivable from December 31, 2001 that was offset by an increase in accounts
payable/accrued expenses of $11,122. Inventory levels decreased by $1,096,488 at
December 31, 2002 as compared to December 31, 2001, predominantly because of the
write off of excess SATIETROL inventory as discussed above.
17
At our current level of operations, the Company believes it has
sufficient working capital to meet its obligations as they become due. However,
we intend to raise additional working capital to fund the launch of the
ACCELERADE ready-to-drink 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
Sports nutrition products tend to be seasonal, especially in the colder
climates. Lower sales are typically realized during the first and fourth
quarters and higher sales are typically realized during the second and third
fiscal quarters. We also plan our advertising and promotional campaigns for the
ENDUROX R4 and ACCELERADE products around these seasonal demands. Weight loss
products also have seasonality with greater sales seen in the first and second
quarters following New Year's resolutions and people getting in shape for the
summer. Similarly, advertising and promotional expenditures for SATIETROL are
designed to take advantage of this seasonality. The Company believes that the
impact of new product introductions and marketing expenses associated with the
introduction of new products will have a far greater impact on its operations
than industry and product seasonality.
(f) Impact of Recently Issued Financial Accounting Standards
In June 2001, the Financial Accounting Standards Board issued No. 141,
Accounting for Business Combinations and SFAS No. 142, Accounting for Goodwill
and other Intangible Assets effective for fiscal years beginning after December
15, 2001. Under SFAS No. 141, a company must use the purchase method of
accounting for all business acquisitions. Under SFAS No. 142, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests in accordance with the
statements. The adoption of these standards is expected to have no effect on the
Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement superseded SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of and addresses financial accounting and reporting for
impairment of long-lived assets to be held and used, and long-lived assets and
components of an entity to be disposed of. We adopted this statement on January
1, 2002.
In November 2002, the FASB issued Interpretation No. 45 (the "FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others. FIN 45 clarifies the requirements
of SFAS No. 5, Accounting for
18
Contingencies, relating to a guarantor's accounting for, and disclosure of, the
issuance of certain types of guarantees. For certain guarantees issued after
December 31, 2002, FIN 45 requires a guarantor to recognize, upon issuance of a
guarantee, a liability for the fair value of the obligations it assumes under
the guarantee. Guarantees issued prior to January 1, 2003 are not subject to
liability recognition, but are subject to expended disclosure requirements. We
do not believe that the adoption of this Interpretation will have a material
impact on our financial position or statement of operations.
In January 2003, FASB issued FIN 46, an interpretation of Accounting
Research Bulletin No. 51. FIN 46, requires us to consolidate variable interest
entities for which we are deemed to be the primary beneficiary and disclose
information about variable interest entities in which we have a significant
variable interest. FIN 46 became effective immediately for variable interest
entities formed after January 31, 2003 and will become effective in the third
quarter of 2003 for any variable interest entities formed prior to February 1,
2003. The adoption of this standard is expected to have no material effect on
the Company's financial statements.
(g) Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements between the Company and any
other entity that have, or are reasonably likely to have, a current or future
effect on the Company's financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures, or capital resources.
(h) Critical Accounting Policies
The Company's financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
Certain accounting policies have a significant impact on amounts reported in
financial statements. A summary of those significant accounting policies can be
found in Note B to the Company's financial statements. The Company has not
adopted any significant new accounting policies during the period ended December
31, 2002.
Among the significant judgments made by management in the preparation
of the Company's financial statements are the determinations of the allowance
for doubtful accounts and inventory evaluation. These adjustments are made each
period in the ordinary course of accounting.
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.
19
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 8, 2002, the Company filed a Current Report on Form 8-K dated
April 1, 2002, reporting, under Item 4, a change in our independent auditors
from Larson, Allen, Weishair & Co., LLP to Eisner, LLP to serve as the
independent public accountants to audit the financial statements for the fiscal
year ended December 31, 2002.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
9(a) Directors and Executive Officers
The directors and executive officers of the Company as of the date of
this Report are as follows:
Name Position with the Company
---- -------------------------
Robert Portman, Ph.D. President and Chief Executive Officer, and Chairman
of the Board of Directors
Stephen P. Kuchen Vice President - Finance, Chief Financial Officer,
Treasurer, Assistant Secretary, and Director
Bruce Bollinger Executive Vice-President of Marketing
David I. Portman Secretary and Director
T. Colin Campbell, Ph.D. Director*
Michael Cahr Director*,#
Joseph Harris Director*,#
*Member of Audit Committee
#Member of Compensation Committee
DR. ROBERT PORTMAN, age 58, has served as President and Chairman of the
Board of Directors of the Company since its inception. Dr. Portman has a Ph.D.
in Biochemistry and worked as a senior scientist at Schering Laboratories before
co-founding M.E.D. Communications in 1974 with his brother, David Portman. In
1987, Dr. Portman started a consumer agency and, in 1993, he merged both
agencies to form C&M Advertising. C&M Advertising, with billings in excess of
$100 million, handled national advertising for such
20
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.
STEPHEN P. KUCHEN, age 42, is the Vice President - Finance, Chief
Financial Officer, Treasurer, Assistant Secretary as well as a Director, of the
Company. Mr. Kuchen joined the Company in February of 2000 as Controller, and
was appointed to his current positions in June 2000 to fill a vacancy. Prior to
joining the Company, Mr. Kuchen was employed from 1996 to 1999 as the Controller
of Able Laboratories, a South Plainfield, New Jersey public company that
manufactures and sells generic pharmaceuticals. Prior to his employment by Able
Laboratories, Mr. Kuchen was the Controller of Jerhel Plastics, a privately
owned manufacturer of women's compact cases from 1993 to 1996. Mr. Kuchen is a
graduate of Seton Hall University in South Orange, NJ, and is a Certified
Management Accountant.
BRUCE BOLLINGER, age 43, has served as Executive Vice-President of
Marketing since November 2002. Mr. Bollinger most recently served as Vice
President of Marketing for Snapple Beverage Group, a division of Cadbury
Schweppes PLC, since November of 1999. At Snapple, he was instrumental in
greatly increasing the market share, revenues, and brand awareness for such
well-known brands as Orangina(TM), Yoo-hoo(TM), Mistic(TM) juices, and
Stewart's(TM) sodas. He brings to the Company more than 18 years of advertising,
brand management, marketing, and promotion experience from other consumer
products companies including Campbell Soup, Arm & Hammer - a division of Church
& Dwight, and Nabisco - a division of R.J. Reynolds Tobacco.
DAVID I. PORTMAN, age 62, 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 served as
a director of First Montauk Securities Corp. from 1993 through December 31,
2002.
DR. T. COLIN CAMPBELL, age 69, 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.
21
MICHAEL CAHR, age 63, was appointed to the Board of Directors in April
2002. Since April 1999, Mr. Cahr has served as President of Saxony Consultants,
a company that provides financial and marketing expertise to organizations in
the United States and abroad. Mr. Cahr was Chairman of Allscripts, Inc., the
leading developer of hand-held devices that provide physicians with real-time
access to health, drug and other critical information from September 1997
through March 1999 and President, CEO and Chairman from June 1994 to September
1997. Prior to Allscripts, Mr. Cahr was Venture Group Manager for Allstate
Venture Capital where he oversaw investments in technology, healthcare services,
biotech and medical services from October, 1987 to June 1994. Mr. Cahr serves as
a director of Lifecell Corporation, a Branchburg, New Jersey-based, publicly
traded tissue engineering company where he has been a board member since 1991.
He is also a director of Truswal Systems, an Arlington, Texas-based software
engineering firm.
JOSEPH HARRIS, age 56, was appointed to the Board of Directors in April
2002. Mr. Harris currently serves as Managing Partner of Conestoga Capital
Partners, LLC, a venture capital company primarily making investments in early
stage technology companies. From 2000 until 2002, Mr. Harris was Senior
Vice-President - Corporate Development of Cantel Medical Corporation, a
Nasdaq-listed medical device company. He was a Senior Vice-President and
Director - Corporate Strategy and Development for SmithKline Beecham plc, a
major pharmaceutical and healthcare company listed on both the New York Stock
Exchange and London Stock Exchange, from 1996 to 2000. From 1986 to 1996, Mr.
Harris served as Managing Director - Business Development and Director-Licensing
and Technology Development for Eastman Kodak Company. He served as General
Counsel, Secretary and Treasurer for Acme Electric Corporation, a New York Stock
Exchange company that manufactures electrical and electronic equipment. Mr.
Harris is licensed to practice law and is a certified public accountant in New
York. In these capacities, he has worked as an attorney for Mackenzie Lewis
Michelle & Hughes, a Syracuse, New York law firm and as an accountant on the tax
and audit staff for Coopers & Lybrand, an International Public Accounting Firm
based in Syracuse, New York.
Under the Company's Stock Purchase Agreement with Glaxo Wellcome
International, BV (an affiliate of GSK), Glaxo Wellcome has a right to designate
a nominee to the Company's board of directors, and, thereafter, so long as Glaxo
Wellcome and its affiliates own 10% or more of the Company's outstanding common
stock, it has the right to require the Company to include its designee as a
nominee in all elections of directors. The shares purchased under the Stock
Purchase Agreement constitute less than 10% of the outstanding shares of the
Company's common stock
9(b) Scientific Advisory Boards
The Company has established a Scientific Advisory Board to provide it
with on-going advice and counsel regarding research direction, product
development, analysis of data, and general counseling. As a need arises, the
Company consults with individual members of this Board on a non-scheduled basis.
A brief description of the backgrounds of the Advisory Boards' members are set
forth below:
22
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.
Steven R. Peikin, MD, Professor of Medicine, Head, Division of
Gastroenterology and Liver Diseases at Robert Wood Johnson Medical School at
Camden Cooper Hospital/University Medical Center. Dr. Peikin has published
extensively on the impact of cholecystokinin (CCK) on appetite. He is also a
recognized authority on the use of weight loss products. He is the author of two
books.
John L. Ivy, Ph.D., Professor and Head of the Department of Kinesiology
and Health Education at the University of Texas at Austin. He is also Adjunct,
Professor, Cardiovascular Research Institute, University of North Texas Health
Science Center, Ft. Worth, Texas. Dr. Ivy is one of the world's foremost
exercise physiologists. He has published over 300 papers and chapters on the
topic. He is a member of The American College of Sports Medicine. Dr. Ivy has
performed much of the fundamental research that has furthered our understanding
of the role of nutrition in improving muscle performance during and after
exercise.
Don Kirkendall, Ph.D., Assistant Professor in the Department of
Orthopaedics at the University of North Carolina. Dr. Kirkendall also holds
secondary appointments in the Department of Exercise and Sports Sciences and the
Division of Physical Therapy. Prior to this,
23
Dr. Kirkendall served on the faculty of Illinois State University and the
University of Wisconsin-Lacrosse and a staff appointment at the Cleveland Clinic
Foundation. Dr. Kirkendall earned his BS Ed from Ohio University, MA at Ball
State University and PhD at Ohio State University.
John Seifert, Ph.D., Associate Professor of Exercise Science at St.
Cloud State University. Dr. Seifert is a leading exercise physiologist. He is a
member of the American College of Sports Medicine. His research has focused on
physiological responses to environmental stress, the role of ergogenic aids in
sport performance, and winter sports performance. Dr. Seifert received his Ph.D.
from the University of Utah.
9(d) Family Relationships
Robert Portman and David Portman are brothers. There are no other
family relationships among our directors, executive officers or persons
nominated or chosen to become directors or executive officers.
9(e) Involvement in Certain Legal Proceedings
No events have occurred during the past five years that are required to
be disclosed pursuant to Item 401(d) of Regulation S-B.
9(f) Audit Committee Financial Expert
Joseph Harris, a current director and member of the Company's Audit
Committee of the Board of Directors, is the "Audit Committee Financial Expert"
as that term is defined in Item 401 of Regulation S-B. In addition, Mr. Harris
is "independent" as that term is defined in Item 7(d)(3)(iv) of Schedule 14A
under the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION
Robert Portman is the only executive officer of the Company with a
fixed-term employment agreement. Under his 2001 Employment Agreement, Dr.
Portman was employed for a two-year term commencing January 1, 2001, at an
annual salary of $200,000. Consistent with the terms of the 2001 Employment
Agreement, upon Dr. Portman's request and in light of the improved financial
condition of the Company, the Board of Directors subsequently voted to increase
Dr. Portman's 2001 salary to $275,000 and to issue a bonus in the amount of
$111,120.
Dr. Portman's 2001 Employment Agreement provided for a re-pricing of
the grant of options issued under a previous employment agreement to purchase up
to 475,000 shares of Common Stock, from $6.00 to $0.313 per share (the market
price of the Company's common stock at December 31, 2000). These options are
fully vested, were exercised in full during the second quarter of 2001 and were
determined to have a value of $217,075. Dr. Portman's 2001 Employment Agreement
also provided for a grant of options under the Company's 2000 Incentive Stock
Option Plan to purchase up to an additional 460,000 shares of Common Stock
priced at $0.313 per share (the market price of the Company's common stock at
December 31, 2000). These options vest as to one-half of the shares as of the
first and second anniversaries of
24
the effective date of the 2001 Employment Agreement, provided that Dr. Portman
is employed by the Company at such dates. To the extent not previously vested,
the options also will vest if Dr. Portman's employment is terminated by the
Company without cause or by Dr. Portman with cause.
Currently, Dr. Portman is employed by the Company under a 2003
Employment Agreement that was effective as of January 1, 2003. Under the 2003
Employment Agreement, Dr. Portman will receive a salary of $275,000 per year.
The 2003 Employment Agreement also provides that Dr. Portman may request the
Compensation Committee of the Board of Directors to renegotiate his salary if
the Company's financial situation improves. In addition, Dr. Portman is entitled
to a discretionary bonus upon the recommendation of the Compensation Committee.
Also pursuant to the 2003 Employment Agreement, Dr. Portman received options to
purchase up to 300,000 shares of Common Stock under the Company's 2000 Stock
Option Plan priced at $2.79 per share (the market price of the Company's common
stock at December 24, 2002). One-third of the options vested on January 1, 2003,
one-third vest on January 1, 2004 and one-third vest on January 1, 2005,
provided that Dr. Portman is employed by the Company at such dates. To the
extent not previously vested, the options also will vest if Dr. Portman's
employment is terminated by the Company without cause or by Dr. Portman with
cause.
The 2003 Employment Agreement has a term of two years, and will
terminate on December 31, 2004 unless terminated earlier by either Dr. Portman
or the Company. Dr. Portman has the right to terminate the 2003 Employment
Agreement without cause on thirty days prior written notice, or with cause (as
defined in the 2003 Employment Agreement). The Company has the right to
terminate the 2003 Employment Agreement for cause (as defined in the 2003
Employment Agreement). In addition, if Dr. Portman's employment is terminated
for any reason whatsoever (except by the Company with cause), Dr. Portman will
be entitled to receive a lump sum payment of an amount equal to the base salary
which would have been paid during the period beginning on the date of
termination of employment and ending on the earlier of (1) the scheduled
termination date or (2) the first anniversary date of the termination date.
The table below sets forth information concerning compensation paid to
Dr. Portman and Stephen Kuchen, Vice President in 2002, 2001, and 2000. No
executive officers of the Company other than Dr. Portman and Mr. Kuchen received
compensation of $100,000 or more in fiscal 2002, 2001, and 2000. Mr. Bollinger
currently receives compensation of $150,000 annually. He is not included in the
table as he received only $25,250 of compensation in 2002.
25
Summary Compensation Table
------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
--------------------------------------- ----------------------------------------
Awards Payouts
----------------------------------------
Securities
Other Under-
Annual Restricted lying All Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Salary Bonus sation Award(s) SARs Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
-------------------- -------- --------------- --------- --------------- ------------- ---------------- ---------- ------------
Robert Portman, 2002 275,000 -0- (1) -0- 300,000 -0- -0-
President 2001 275,000 111,120 217,075 (2) -0- 1,160,000 (3) -0- -0-
2000 200,000 -0- (1) -0- 275,000 -0- -0-
Stephen Kuchen, 2002 100,000 500 (1) -0- -0- -0- -0-
Vice President 2001 92,500 3,000 (1) -0- 25,000 -0- -0-
2000 72,452 (4) -0- (1) -0- 35,000 -0- -0-
-------------------- -------- --------------- --------- --------------- ------------- ---------------- ---------- ------------
(1) Less than 10% of annual salary and bonus.
(2) Value of re-priced options on date of exercise by Dr. Portman.
(3) 475,000 of these options were re-priced options issued to Dr. Portman prior
to 1999, as discussed above and 225,000 of these options were replacements
for options that expired in 2001.
(4) Mr. Kuchen joined the Company in February 2000.
The following table sets forth certain information regarding options
granted in fiscal 2002:
Option/SAR Grants in Fiscal Year 2002
(Individual Grants)
Number of Percent Of Total
Securities Options/SARs
Underlying Granted to Exercise Or
Options/SARs Employees In Base Price
Name Granted (#) Fiscal Year ($/Share) Expiration Date
(a) (b) (c) (d) (e)
--------------------------------------- -------------------- -------------------- ----------------- ------------------
Robert Portman 300,000 66.8% $2.79 12/31/07
Stephen Kuchen -0- -0- --- ---
Bruce Bollinger 105,000 23.4% $1.02 10/16/07
--------------------------------------- -------------------- -------------------- ----------------- ------------------
26
Dr. Portman's options vest as to 100,000 shares at 12/31/02, 100,000
shares at 12/31/03, and 100,000 shares at 12/31/04. Mr. Bollinger's options vest
as to 35,000 shares at 10/16/03, and 2,917 shares per month each month after
10/16/03.
The following table sets forth information with respect to the number
of unexercised options and the value of unexercised "in-the-money" options held
by Robert Portman and Stephen Kuchen at December 31, 2002.
Aggregated Option/SAR Exercises in Fiscal Year 2002 and
Option/SAR Values at 12/31/02
Number of Securities $ Value of Unexercised
Underlying Unexercised In-the-Money Options/SARs
Shares Options/SARs At 12/31/02 At 12/31/02
Acquired Value Exercisable/ Exercisable/
On Exercise Realized Unexercisable Unexercisable
Name (#) ($) (#) ($)
(a) (b) (c) (d) (e)
------------------------------ ------------ ----------- ------------------------------- ------------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------------------------ ------------ ----------- -------------- ---------------- -------------- ---------------
Robert Portman -0- -0- 1,130,000 430,000 1,671,010 724,510
Stephen Kuchen -0- -0- 60,000 -0- 79,995 -0-
Bruce Bollinger -0- -0- -0- 105,000 -0- 223,650
------------------------------ ------------ ----------- -------------- ---------------- -------------- ---------------
For the purpose of computing the value of "in-the-money" options at
December 31, 2002, in the above table, the fair market value of the Common Stock
at such date is deemed to be $3.15 per share, the closing sale price of the
Common Stock on such date as reported by Nasdaq.
Directors' Compensation in Fiscal Year 2002
For the year ended December 31, 2002, the Company compensated its four
independent Directors $3,500 each and will pay each independent Director $500
per month in 2003.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's directors and executive officers, and any persons who own more than
ten percent of the Company's Common Stock, file with the Securities and Exchange
Commission ("SEC") initial reports of ownership and reports of changes in
ownership of the common stock and other equity securities of the Company. Such
persons are required by SEC regulations to furnish the Company with copies of
all such reports that they file.
In the fiscal year ended December 31, 2002, two directors of the
Company (Michael Cahr and Joseph Harris) did not timely report on Form 3 Initial
Statement of Beneficial Ownership of Securities their initial holdings of the
Company's Common Stock. At the time the two Forms were filed, Mr. Cahr did not
own any Common Stock of the Company and Mr. Harris owned 1,000 shares of Common
Stock of the Company. To the knowledge of the Company, based on a
27
review of the Section 16 reports, no other person has failed to comply with the
Section 16 reporting requirements of the Exchange Act during the fiscal year
ended December 31, 2002.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of February 28, 2003, the Company had 6,115,703 shares of Common
Stock outstanding. The following table sets forth information concerning the
present ownership of the Company's Common Stock by the Company's directors,
executive officers and each person known to the Company to be the beneficial
owner of more than five percent of either of such classes of the capital stock,
the beneficial ownership of these securities by such persons following the
offering, and the total voting power represented by the securities owned by such
persons.
Common Stock (2) Common Stock (2)
---------------- ----------------
Name and Address (1) Amount Beneficially Owned Percentage of Class
-------------------- ------------------------- -------------------
Robert Portman (3) 2,579,767 34.5%
President, Chief Executive Officer
and a Director
Stephen P. Kuchen (4) 60,000 1.0%
Vice President, Chief Financial
Officer and a Director
Bruce Bollinger (5) -0- *
Executive Vice President- Marketing
David I. Portman (6) 303,500 4.9%
Secretary and a Director
T. Colin Campbell (7) 180,954 2.9%
Director
Michael Cahr (8) 10,000 *
Director
Joseph Harris (9) 11,000 *
Director
Executive Officers and Directors as a 3,145,221 40.9%
group (7 persons)
28
Common Stock (2) Common Stock (2)
---------------- ----------------
Name and Address (1) Amount Beneficially Owned Percentage of Class
-------------------- ------------------------- -------------------
GlaxoSmithKline PLC 541,711 8.9%
Glaxo Wellcome House
Berkeley Avenue
Greenford, Middlesex
England UB6 0NN
----------
* Less than one percent
(1) Except as otherwise indicated, the address of each person named in the
above table is c/o PacificHealth Laboratories, Inc., 1480 Route 9
North, Suite 204, Woodbridge, NJ 07095.
(2) Common Stock which is issuable upon the exercise of a stock option
which is presently exercisable or which becomes exercisable within
sixty days is considered outstanding for the purpose of computing the
percentage ownership (x) of persons holding such options, and (y) of
officers and directors as a group with respect to all options held by
officers and directors.
(3) Includes (a) an option issued pursuant to the Company's 1995 Incentive
Stock Option Plan (a "1995 Plan Option") to acquire 200,000 shares at a
price of $2.25 per share, (b) a 1995 Plan Option to acquire 100,000
shares at a price of $1.75 per share, (c) a 1995 Plan Option to acquire
275,000 shares at a price of $2.50 per share, (d) a 1995 Plan Option to
acquire 225,000 shares at a price of $1.00 per share, (e) a 2001
Employment Contract Option issued pursuant to the Company's 2000
Incentive Stock Option Plan (a "2000 Plan Option") to acquire 460,000
shares at a price of $0.313 per share, and (f) a 2003 Employment
Contract Option issued pursuant to the Company's 2000 Incentive Stock
Option Plan (a "2000 Plan Option") to acquire 100,000 shares at a price
of $2.79 per share. Does not include 200,000 shares of Common Stock
owned by Jennifer Portman, Dr. Portman's wife, individually and as
Trustee for his and her minor children, as to which Dr. Portman
disclaims beneficial ownership.
(4) Includes (a) a 1995 Plan Option to acquire 10,000 shares at a price of
$3.25 per share, (b) a 1995 Plan Option to acquire 25,000 shares at a
price of $2.375 per share, (c) a 1995 Plan Option to acquire 10,000
shares at a price of $0.313 per share and, (d) a 2000 Plan Option to
acquire 15,000 shares at a price of $1.00 per share.
(5) Does not include a 2000 Plan Option to acquire 105,000 shares at a
price of $1.02 per share, which does not vest within 60 days of the
filing of this report.
(6) Includes (a) a 1995 Plan Option to acquire 5,000 shares at a price of
$2.25 per share, (b) a 1995 Plan Option to acquire 10,000 shares at a
price of $0.313 per share and (c) 100,000
29
warrants exercisable at $0.875 per share issued pursuant to a second
quarter 2001 debt financing.
(7) Includes (a) a 1995 Plan Option to acquire 5,000 shares at a price of
$2.25 per share, (b) a 1995 Plan Option to acquire 10,000 shares at a
price of $0.313 per share and (c) a 1995 Plan Option to acquire 5,000
shares at a price of $2.00 per share. Does not include 38,900 shares of
Common Stock owned by Dr. Campbell's wife or 147,000 shares of Common
Stock owned by Dr. Campbell's adult children, as to which he disclaims
beneficial ownership.
(8) Includes (a) a 1995 Plan Option to acquire 10,000 shares at a price of
$4.50 per share.
(9) Includes (a) a 1995 Plan Option to acquire 10,000 shares at a price of
$4.88 per share.
Existing Stock Compensation Plans
The following table sets forth information regarding our existing compensation
plans and individual compensation arrangements pursuant to which our equity
securities are authorized for issuance to employees or non-employees (such as
directors, consultants and advisors) in exchange for consideration in the form
of services:
Number of securities
remaining available for
Number of securities to be future issuance under
Plan Category issued upon exercise of Weighted-average exercise equity compensation plans
outstanding options, price of outstanding (excluding securities
warrants and rights options, warrants and rights reflected in column (a))
------------------------------- ----------------------------- ----------------------------- -----------------------------
(a) (b) (c)
------------------------------- ----------------------------- ----------------------------- -----------------------------
Equity compensation plans 2,238,575 $1.71 761,425
approved by security holders
Equity compensation plans not
approved by security holders -0- N/A N/A
Total 2,238,575 $1.71 761,425
------------------------------- ----------------------------- ----------------------------- -----------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the last two fiscal years, the Company has not entered into any
material transactions or series of transactions which, in the aggregate, would
be considered material in which any officer, director or beneficial owner of 5%
or more of any class of capital stock of the Company had a direct or indirect
material interest, nor are any such transactions presently proposed, except as
follows:
30
(a) In April 2001, the Company issued an aggregate of $100,000 in
principal amount of its 10% Promissory Notes due 2002, together with warrants
exercisable for 100,000 shares of the Company's common stock at $0.875 per
share, to David Portman. The warrants expire three years from issuance. This
issuance was part of a private placement of an aggregate of $300,000 in
principal amount of such notes and warrants for 300,000 shares of the Company's
common stock. The principal of this Note was repaid in June 2001 with the
proceeds from the Company's transaction with GSK.
(b) The Company's license agreement with GSK is described above
in Part I, Item 1(c). At the time the Company entered into the license
agreement, GSK was not the beneficial owner of 5% or more of any class of the
Company's capital stock, but became the holder of approximately 9% at the time
the license agreement was executed.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) A list of the financial statements and financial statement schedule
filed as a part of this report is set forth on page F-1 hereof. A list of the
exhibits filed as a part of this report is set forth in the Exhibit Index
starting after page F-17 hereof.
(b) Reports on Form 8-K
During the last quarter of the period covered by this report, the
Company did not file any Current Reports on Form 8-K.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Based on their evaluation of the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date
within 90 days of the filing date of this Annual Report on Form 10-KB, the
Company's chief executive officer and chief financial officer have concluded
that the Company's disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms and are
operating in an effective manner.
(b) Changes in Internal Controls.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their most recent evaluation.
31
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, 2002. Such report and
proxy statement will be furnished to security holders in connection with the
Company's Annual Meeting, scheduled to be held in the second quarter of 2003.
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, 2003
In accordance with the Securities Exchange Act of 1934 and the requirements of
Form 10-KSB, this Report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dated indicated.
/s/ROBERT PORTMAN Director and Chief March 28, 2003
--------------------------- Executive Officer
Robert Portman
/s/STEPHEN P. KUCHEN Director and Principal March 28, 2003
--------------------------- Financial and Accounting
Stephen P. Kuchen Officer
/s/DAVID I. PORTMAN Director and Secretary March 28, 2003
---------------------------
David I. Portman
/s/T. COLIN CAMPBELL Director March 28, 2003
---------------------------
T. Colin Campbell
/s/MICHAEL CAHR Director March 28, 2003
---------------------------
Michael Cahr
/s/JOSEPH HARRIS Director March 28, 2003
---------------------------
Joseph Harris
32
I, Robert Portman, certify that:
1. I have reviewed this annual report on Form 10-KSB of PacificHealth
Laboratories, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ ROBERT PORTMAN
-----------------------------------------------------
Robert Portman, Chief Executive Officer and President
33
I, Stephen P. Kuchen, certify that:
1. I have reviewed this annual report on Form 10-KSB of PacificHealth
Laboratories, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on ur most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ STEPHEN P. KUCHEN
----------------------------------------------------------------------
Stephen P. Kuchen, Chief Financial Officer and Vice President, Finance
34
EXHIBIT INDEX
Incorporated
Exhibit No. Description by Reference
----------- ----------- ------------
3.1 -- Certificate of Incorporation of the Company and
all amendments thereto A
3.2 -- Amended and Restated Bylaws of the Company C
3.3 -- Certificate of Amendment of Certificate of *
Incorporation of PacificHealth Laboratories, Inc.
4.1 -- Specimen Common Stock Certificate C
4.2 -- Stock Purchase Agreement dated June 1, 2001
between Pacific Health Laboratories, Inc. and
Glaxo Wellcome International B.V. E
4.3 -- Underwriter's Warrant Agreement and Form of
Warrant C
10.1 -- Incentive Stock Option Plan of 1995 A
10.2 -- Employment Agreement between the Company
and Robert Portman effective January 1, 1998 C
10.3 -- Strategic Alliance Agreement between the Company
and the Institute of Nutrition and Food Hygiene A
10.4 -- Exclusive Licensing Agreement between the
Company and the INFH A
10.5 -- Shareholders Agreement A
10.6 -- 2000 Incentive Stock Option Plan D
10.7 -- Employment Agreement between the Company
and Robert Portman effective January 1, 2001 F
10.8 -- License Agreement dated June 1, 2001 between
Pacific Health Laboratories, Inc. and SmithKline
Beecham PLC (d/b/a/ GlaxoSmithKline), redacted
to omit trade secret and confidential commercial
and financial information G
35
23.1 -- Consent of Eisner LLP *
23.2 -- Consent of Larson, Allen, Weishair, & Co., LLP *
99.1 -- Certification of chief executive officer and chief *
financial officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
---------------------
* 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
D Filed with Definitive Proxy Statement (Schedule 14A) for annual meeting
held on August 16, 2000, filed on July 11, 2000.
E Filed with Current Report on Form 8-K dated June 1, 2001, filed on June 14,
2001.
F Filed with Annual Report on Form 10-KSB for the year ended December 31,
2001
G Filed with Amendment to Current Report on Form 8-K dated June 1, 2001,
filed July 5, 2001.
36
PACIFICHEALTH LABORATORIES, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 2002 and 2001
PACIFICHEALTH LABORATORIES, INC.
Contents
Page
----
Financial Statements
Independent auditors' report F-1
Independent auditors' report F-2
Balance sheets as of December 31, 2002 and 2001 F-3
Statements of operations for the years ended
December 31, 2002 and 2001 F-4
Statements of changes in stockholders' equity for the
years ended December 31, 2002 and 2001 F-5
Statements of cash flows for the years ended
December 31, 2002 and 2001 F-6
Notes to financial statements F-7
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
PacificHealth Laboratories, Inc.
Woodbridge, New Jersey
We have audited the accompanying balance sheet of PacificHealth Laboratories,
Inc. as of December 31, 2002, and the related statements of operations, changes
in stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 enumerated above present fairly, in all
material respects, the financial position of PacificHealth Laboratories, Inc. as
of December 31, 2002, and the results of its operations and its cash flows for
the year then ended, in conformity with accounting principles generally accepted
in the United States of America.
Eisner LLP
Florham Park, New Jersey
February 12, 2003
F-1
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, 2001, and the related statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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, 2001, and the results of its operations and its cash
flows for the year then ended, in conformity with U.S. generally accepted
accounting principles.
LARSON, ALLEN, WEISHAIR & CO., LLP
Blue Bell, Pennsylvania
January 29, 2002
F-2
PACIFICHEALTH LABORATORIES, INC.
Balance Sheets
December 31,
--------------------------------
2002 2001
------------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 628,436 $ 1,848,847
Accounts receivable, net 335,219 192,628
Inventories 1,537,784 2,634,272
Prepaid expenses 142,865 165,079
------------- -----------
Total current assets 2,644,304 4,840,826
------------- -----------
Property and equipment, net 66,835 62,709
Deposits 3,991 108,322
------------- -----------
$ 2,715,130 $ 5,011,857
============= ===========
LIABILITIES
Current liabilities:
Note payable $ 64,212 $ 45,048
Accounts payable and accrued expenses 280,384 291,506
Other liabilities 100,000
------------- -----------
Total current liabilities 444,596 336,554
------------- -----------
Commitments (Note G)
STOCKHOLDERS' EQUITY
Common stock, $.0025 per value, authorized
50,000,000 shares; issued and outstanding
6,114,703 shares at December 31, 2002 and
6,039,203 shares at December 31, 2001 15,287 15,098
Additional paid-in capital 13,839,973 13,674,479
Accumulated deficit (11,584,726) (9,014,274)
------------- -----------
Total stockholders' equity 2,270,534 4,675,303
------------- -----------
$ 2,715,130 $ 5,011,857
============= ===========
See notes to financial statements
F-3
PACIFICHEALTH LABORATORIES, INC.
Statements of Operations
Year Ended
December 31,
---------------------------------
2002 2001
-------------- -------------
Revenues:
Products $ 5,120,353 $ 4,895,527
Licensing revenues 1,250,000
-------------- -------------
5,120,353 6,145,527
-------------- -------------
Cost of goods sold:
Product sales 2,467,608 2,590,847
Write-off of inventory 1,297,485
-------------- -------------
3,765,093 2,590,847
-------------- -------------
Gross profit 1,355,260 3,554,680
-------------- -------------
Operating expenses:
Selling, general and administrative 3,725,512 3,065,336
Research and development 165,514 106,085
Depreciation 47,045 43,578
-------------- -------------
3,938,071 3,214,999
-------------- -------------
Net operating (loss) income (2,582,811) 339,681
-------------- -------------
Other income (expense):
Interest income 15,378 39,422
Interest expense (3,019) (93,477)
--------------- --------------
12,359 (54,055)
-------------- --------------
Net (loss) income $ (2,570,452) $ 285,626
============== =============
Net (loss) income per share - basic $ (0.42) $ 0.05
Net (loss) income per share - diluted $ (0.42) $ 0.04
Weighted average shares outstanding:
Basic 6,081,753 5,467,742
Diluted 6,081,753 6,477,640
See notes to financial statements
F-4
PACIFICHEALTH LABORATORIES, INC.
Statements of Changes in Stockholders' Equity
Common Stock Additional
--------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
--------- --------- ------------ ---------------- -----------
Balance, January 1, 2001 4,646,367 $ 11,616 $ 11,060,246 $ (9,299,900) $ 1,771,962
Common stock issued 1,392,836 3,482 2,191,591 2,195,073
Re-pricing of employee stock options 217,075 217,075
Non-employee stock options 105,525 105,525
Issuance of stock warrants 100,042 100,042
Net income 285,626 285,626
--------- --------- ------------ ---------------- -----------
Balance, December 31, 2001 6,039,203 15,098 13,674,479 (9,014,274) 4,675,303
Stock options exercised 75,500 189 136,562 136,751
Fair value of stock options issued to
non-employee 28,932 28,932
Net loss (2,570,452) (2,570,452)
--------- --------- ------------ ---------------- -----------
Balance, December 31, 2002 6,114,703 $ 15,287 $ 13,839,973 $ (11,584,726) $ 2,270,534
========= ========= ============ ================ ===========
See notes to financial statements
F-5
PACIFICHEALTH LABORATORIES, INC.
Statements of Cash Flows
Year Ended December 31,
-------------------------------
2002 2001
------------- -----------
Cash flows from operating activities:
Net (loss) income $ (2,570,452) $ 285,626
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation 47,045 43,578
Fair value of non-employee stock options and warrants 28,932 422,642
Write-off of inventory 1,297,485
Changes in:
Accounts receivable (142,591) 248,769
Prepaid expenses 22,214 (2,612)
Inventory (200,997) (981,579)
Deposits 104,331 (54,331)
Accounts payable and accrued expenses (11,122) (443,871)
Other liabilities 100,000
------------- -----------
Net cash used in operating activities (1,325,155) (481,778)
------------- -----------
Cash flows from investing activity:
Purchase of property and equipment (51,171) (32,246)
------------- -----------
Cash flows from financing activities:
Issuance of common stock 1,500,000
Common stock options exercised 136,751 695,073
Proceeds of note payable 118,776 70,577
Repayment of note payable (99,612) (73,270)
------------- -----------
Net cash provided by financing activities 155,915 2,192,380
------------- -----------
Net (decrease) increase in cash and cash equivalents (1,220,411) 1,678,356
Cash and cash equivalents at beginning of year 1,848,847 170,491
------------- -----------
Cash and cash equivalents at end of year $ 628,436 $ 1,848,847
============= ===========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 3,019 $ 7,377
See notes to financial statements
F-6
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2002 and 2001
NOTE A - THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
[1] The Company:
PacificHealth Laboratories, Inc. (the "Company" or the "PHLI") 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 under
current regulatory guidelines. The Company's first product, ENDUROX (R)
was introduced in March 1996, and commercial sales began in May 1996.
In March 1997, the Company extended the ENDUROX line of products with
ENDUROX EXCEL (R). In February 1999, the Company introduced ENDUROX (R)
R4 (TM) Performance/Recovery Drink, which demonstrated a number of
exercise related benefits in clinical studies, including enhanced
performance and extended endurance, decreased post-exercise muscle
stress, and reduced free radical build-up. During 2000, the company
introduced a new product, SATIETROL (R), an appetite control product
which is based on the use of nutritional ingredients to stimulate
cholecystokinin (CKK), a protein released after eating which has shown
to be an important satiety signal in humans. This product competes in
the market for weight loss and weight control products. In June 2001,
the Company introduced ACCELERADE (R) Sports Drink which uses the same
patented technology as ENDUROX R4 to improve endurance during exercise.
The Company utilizes third party contractors to manufacture all
products.
[2] Cash and cash equivalents:
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
[3] Allowance for doubtful accounts:
The Company provides an allowance for uncollectible accounts receivable
based on management's evaluation of collectibility of outstanding
accounts receivable.
[4] Inventories:
Inventories are recorded at the lower of cost or market using the
first-in, first-out (FIFO) method.
[5] Property and equipment:
Property and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives ranging from 2
to 5 years.
[6] Earnings per share:
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the year.
Diluted earnings per share gives effect to all dilutive potential
common shares outstanding during the year. The dilutive effect of the
outstanding stock warrants and options was computed using the treasury
stock method. For the years ended December 31, 2002 and 2001, diluted
earnings per share did not include the effect of 2,248,575, 122,000 and
870,677, and 120,000 of options and warrants outstanding, respectively,
at such dates as this effect would be anti-dilutive.
F-7
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2002 and 2001
NOTE A - THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[7] Revenue recognition:
Revenue from product sales is recognized upon shipment to customers,
title passing and all obligations of the Company have been satisfied.
Standard sales contracts do not provide for product returns, rebates,
discounts or other adjustments. Occasional customer contacts, while
unusual, provide for contractual discounts, rebates, return allowances
and other adjustments. A provision for these adjustments is made in the
same period the related sales are recorded. These provisions have
historically been insignificant. Except for the occasional contractual
adjustments and product recalls, the Company generally does not accept
product returns or make other adjustments. When the Company recalls or
discontinues a product, subsequent to the initial sale, an allowance is
provided when the recall or discontinuance becomes known.
Consigned sales are not recorded until the product is re-sold and
payment received. There were no outstanding consigned sales at December
31, 2002 or 2001.
Revenue from the licensing agreement is recognized upon delivery of
products or the completion of certain milestone events which reflect
the culmination of the earning process.
[8] Research and development:
Costs of research and development activities are expensed as incurred.
[9] Advertising costs:
Advertising costs are expressed as incurred. During 2002 and 2001, the
Company recorded advertising expense of $900,396 and $557,189,
respectively.
[10] Stock-based compensation:
The Company accounts for stock-based employee compensation under
Accounting Principles Board ("APB" Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations. The Company
has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", which was released in
December 2002 as an amendment of SFAS No. 123. The Company's stock
option plans are described in Note H. The following table illustrates
the effect on net (loss) income and earnings per share if the fair
value based method had been applied to all awards.
Year Ended December 31,
--------------------------------
2002 2001
--------------- -------------
Reported net (loss) income $ (2,570,452) $ 285,626
Stock-based employee compensation expense included in
reported net loss, net of related tax effects 0 217,075
Stock-based employee compensation determined under the
fair value based method, net of related tax effects (267,377) (166,418)
--------------- -------------
Pro forma net (loss) income $ (2,837,829) $ 119,208
=============== =============
Basic (loss) per share:
As reported $ (.42) $ .05
=============== =============
Pro forma $ (.47) $ .02
=============== =============
Diluted (loss) income per share:
As reported $ (.42) $ .04
=============== =============
Pro forma $ (.47) $ .02
=============== =============
F-8
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2002 and 2001
NOTE A - THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[10] Stock-based compensation: (continued)
The fair value of each option grant on the date of grant is estimated
using the Black-Scholes option-pricing model with a volatility of 132%
for 2002 and 40% for 2001, expected life of options of 5 years, risk
free interest rate of approximately 3% in 2002 and 5% in 2001 and a
dividend yield of 0%. The weighted average fair value of options
granted during the years ended December 31, 2002 and 2001 were $2.17
and $.18, respectively.
[11] Segment information:
SFAS No. 131, Segment Information, requires pubic enterprises to report
financial and descriptive information about its reportable operating
segments. Operating segments, as defined in SFAS No. 131, are
components of an enterprise for which separate financial information is
available and is evaluated regularly by the Company in deciding how to
allocate resources and in addressing performance. The financial
information is required to be reported on the basis that is used
internally for evaluating this segment performance. The Company
operates in one business segment: the design, development and marketing
of dietary and nutritional supplements that enhance health and well
being.
[12] Income taxes:
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined on the basis of the
differences between the tax basis of assets and liabilities and their
respective financial reporting amounts ("temporary differences") at
enacted tax rates in effect for the years in which the differences are
expected to reverse.
[13] Comprehensive income:
The Company has adopted SFAS No. 130, Reporting Comprehensive Income,
which requires that all components of comprehensive income, including
net income, be reported in the financial statements in the period in
which they are recognized. Comprehensive income is defined as the
change in equity during a period from transactions and other events and
circumstances from non-owner sources. Net income and other
comprehensive income shall be reported, net of their related tax
effect, to arrive at comprehensive income. The Company does not have
any comprehensive income items at December 31, 2002 and 2001.
[14] Recent accounting pronouncements:
In June 2001, the Financial Accounting Standards Board issued No. 141,
Accounting for Business Combinations and SFAS No. 142, Accounting for
Goodwill and other Intangible Assets effective for fiscal years
beginning after December 15, 2001. Under SFAS No. 141, a company must
use the purchase method of accounting for all business acquisitions.
Under SFAS No. 142, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to
annual impairment tests in accordance with the statements. The adoption
of these standards is expected to have no effect on the Company's
financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement superseded
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of and addresses financial
accounting and reporting for impairment of long-lived assets to be held
and used, and long-lived assets and components of an entity to be
disposed of. We adopted this statement on January 1, 2002.
F-9
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2002 and 2001
NOTE A - THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[14] Recent accounting pronouncements: (continued)
In November 2002, the FASB issued Interpretation No. 45 (the "FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others. FIN 45
clarifies the requirements of SFAS No. 5, Accounting for Contingencies,
relating to a guarantor's accounting for, and disclosure of, the
issuance of certain types of guarantees. For certain guarantees issued
after December 31, 2002, FIN 45 requires a guarantor to recognize, upon
issuance of a guarantee, a liability for the fair value of the
obligations it assumes under the guarantee. Guarantees issued prior to
January 1, 2003, are not subject to liability recognition, but are
subject to expended disclosure requirements. We do not believe that the
adoption of this Interpretation will have a material impact on our
financial position or statement of operations.
In January 2003, FASB issued FIN 46, an interpretation of Accounting
Research Bulletin No. 51. FIN 46, requires us to consolidate variable
interest entities for which we are deemed to be the primary beneficiary
and disclose information about variable interest entities in which we
have a significant variable interest. FIN 46 became effective
immediately for variable interest entities formed after January 31,
2003 and will become effective in the third quarter of 2003 for any
variable interest entities formed prior to February 1, 2003. The
adoption of this standard is expected to have no material effect on the
Company's financial statements.
[15] Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make certain estimates and assumptions that affect the
reported amounts of assets, liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amount of revenue and expenses during the reporting period.
Actual results may differ from these estimates.
NOTE B - ACCOUNTS RECEIVABLE
2002 2001
----------- -----------
Accounts receivable $ 335,219 $ 252,253
Less allowance for doubtful accounts 59,625
----------- -----------
$ 335,219 $ 192,628
=========== ===========
NOTE C - INVENTORIES
Inventories at consist of the following:
2002 2001
----------- -----------
Raw materials $ 3,228 $ 318,892
Packaging supplies 39,341 45,849
Finished goods 1,495,215 2,272,836
Reserve for obsolescence (3,305)
----------- -----------
$ 1,537,784 $ 2,634,272
=========== ===========
F-10
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2002 and 2001
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
2002 2001
----------- -----------
Furniture and equipment $ 270,609 $ 221,323
Molds and dies 83,735 81,850
----------- -----------
354,344 303,173
Less accumulated depreciation 287,509 240,464
----------- -----------
$ 66,835 $ 62,709
=========== ===========
Depreciation expense aggregated $47,045 and $43,578 for the years ended December
31, 2002 and 2001, respectively.
NOTE E- NOTE PAYABLE
2002 2001
----------- -----------
Installment note payable to insurance
finance company due in monthly
installments of $7,343, including
interest at 6.95% through September
2003 $ 64,212
Installment note payable to insurance
finance company due in monthly
installments of $4,784, including
interest at 7.5% through September
2002 $ 45,048
NOTE F - STOCKHOLDERS' EQUITY
The total number of shares of all classes of stock which the Company has
authority to issue is 51,000,000 shares, consisting of (a) fifty million
(50,000,000) shares of common stock, par value $.0025 per share, and (b) one
million (1,000,000) shares of preferred stock, par value $.01 per share. The
preferred stock may be issued in one or more series, and may have such voting
powers, full or limited, or no voting powers, and such designations and
preferences as shall be stated in the resolution or resolutions providing for
the issue thereof adopted by the Board of Directors of the Company, from time to
time.
F-11
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2002 and 2001
NOTE G - COMMITMENTS
[1] Licensing agreement:
On June 1, 2001, the Company entered into an exclusive license
agreement with GlaxoSmithKline ("GSK"), one of the world's largest
pharmaceutical companies, for SATIETROL, the Company's appetite control
product. The agreement provided GSK with worldwide rights to the
trademarks, technology, patents, and know how for SATIETROL for the
duration of the patents which expire in 2017. Under the agreement, PHLI
received an initial payment of $1,000,000, has received a subsequent
milestone payment of $250,000. The agreement permitted GSK to terminate
the license agreement at any time for any reason, provided that it paid
all milestone payments earned prior to termination. In 2001, GSK also
purchased approximately 9% of PHLI's common stock for $1.5 million
under a contemporaneous stock purchase agreement. As of September 30,
2002, the Company has received an aggregate $2,750,000 from GSK from
the combined licensing and stock purchase agreement. During the third
quarter of 2002, GSK terminated the licensing agreement and therefore,
the Company will not receive any additional milestone payments. All
rights to the product under this agreement have reverted to the
Company.
[2] Employment agreement:
The Company entered into a two-year employment contract on January 1,
2003, with the Chairman and CEO that provides for minimum annual
compensation of $275,000. The Company is the beneficiary of a keyman
life insurance policy (on the Chairman's life) for $2,000,000.
[3] Lease:
The Company has a lease agreement for its office space which expires in
July 2003. The lease provides for the rental of 3,684 square feet.
Minimum annual rentals, including utilities, through July 30, 2003
amounts to $30,390. Rent expense amounted to $68,031 and $61,342 in
2002 and 2001, respectively.
[4] Purchase commitment:
During the year ending December 31, 2002, the Company entered into an
agreement with a third party to purchase raw material. The total
commitment is for $57,500.
NOTE H - STOCK OPTION PLANS
The Company has two stock option plans (the "Plans") under which 2,238,575
shares of common stock are reserved for issuance under the Plans. In 1995, the
Company established an incentive stock option plan (the "Plan") in which options
to purchase the common stock of the Company may be awarded to employees. In
2000, the Company established another stock option plan to increase the number
of options under the Plans.
Stock options may be granted as either incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or as options not qualified under Section 422 of the Code. All options
are issued with an exercise price at or above 100% of the fair market value of
the common stock on the date of grant. Incentive stock option plan awards of
restricted stock are intended to qualify as deductible performance-based
compensation under Section 162(m) of the Code. Incentive Stock Option awards of
unrestricted stock are not designed to be deductible to the Company under
Section 162(m). The Board of Directors determines the option price (not to be
less than fair market value for incentive options) at the date of grant. The
options have a maximum term of 5 years and outstanding options expire from
February 2003 through November 2011.
F-12
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2002 and 2001
NOTE H - STOCK OPTION PLANS (CONTINUED)
Stock option transactions for employees during 2002 and 2001 were as follows:
Exercise Price Weighted Average
Per Exercise Price
Option Vested Common Per Share
Shares Shares Share Outstanding
------------- ------------- ----------------- -------------------
Balance, January 1, 2001 1,558,500 1,518,500 $1.75 - $6.00 $ 3.81
Granted/vested during the year 971,500 455,000 $0.313 - $3.30 0.79
Exercised during the year (625,000) (625,000) $0.313 - $2.25 0.74
Expired during the year (227,500) (227,500) $2.25 - $3.75 3.73
Cancelled during the year (190,000) (190,000) $3.75 3.75
------------- -------------
Balance, December 31, 2001 1,487,500 931,000 $0.313 - $4.75 1.49
Granted/vested during the year 469,200 308,167 $0.98 - $4.88 2.52
Exercised during the year (61,000) (61,000) $1.00 - $2.00 1.98
------------- -------------
Balance, December 31, 2002 1,895,700 1,178,167 $0.313 - $4.88 1.68
============= =============
Information with respect to employee stock options outstanding and employee
stock options exercisable at December 31, 2002 is as follows:
Weighted
Average Weighted Weighted
Number Remaining Average Average
Range of Outstanding Contractual Exercise Number Exercise
Exercise Prices at 12/31/02 Life (in Years) Price Exercisable Price
--------------- ----------- --------------- -------- ----------- ----------
$.313 - $2.00 965,700 3.54 $0.78 623,000 $ .91
$2.01 - $4.00 897,500 3.14 $2.64 527,667 2.44
$4.01 - $4.88 32,500 4.08 $4.59 27,500 4.63
In addition to options granted to employees under the plans, the Company issued
stock options pursuant to contractual agreements to non-employees. Options
granted under these agreements are expenses when the related service or product
is provided. The Company recognized an expense of $28,932 and $105,525 for such
options issued in 2002 and 2001, respectively.
F-13
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2002 and 2001
NOTE H - STOCK OPTION PLANS (CONTINUED)
Stock option transactions for non-employees during 2002 and 2001 were as
follows:
Exercise Price Weighted Average
Per Exercise Price
Option Vested Common Per Share
Shares Shares Share Outstanding
------------ ----------- --------------- -------------------
Balance, January 1, 2001 304,200 214,200 $1.25-$6.00 $ 3.02
Granted/vested during the year 171,000 114,000 $0.313-$6.30 1.59
Exercised during the year (16,125) (16,125) $0.781-$2.25 2.01
Expired during the year (61,000) (61,000) $3.75-$4.75 4.00
Cancelled during the year (5,000) (5,000) $3.75 3.75
------------ ------------
Balance, December 31, 2001 393,075 246,075 $0.313-$6.30 2.11
Granted/vested during the year 15,500 137,000 $1.00-$3.80 1.24
Exercised during the year (15,000) (14,500) $1.00-$1.25 1.08
Expired during the year (40,700) (40,700) $4.25-$6.00 5.37
------------ -----------
Balance, December 31, 2002 352,875 327,875 $0.313-$6.00 1.79
============ ===========
Information with respect to non-employee stock options outstanding and
non-employee stock options exercisable at December 31, 2002 is as follows:
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (in Years) Price Exercisable Price
--------------- ----------- --------------- -------- ----------- ----------
$0.313 - $2.00 201,500 2.75 $ 0.21 176,500 $ 1.03
$2.01 - $4.00 134,875 2.00 0.36 134,875 2.38
$4.01 - $6.30 16,500 1.50 2.60 16,500 5.13
F-14
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2002 and 2001
NOTE H - STOCK OPTION PLANS (CONTINUED)
Stock warrant transactions during 2002 and 2001 were as follows:
Weighted Average
Exercise Price Exercise Price Per
Warrant Vested Per Vested Vested Common
Shares Shares Common Share Share
------------ ------------ ------------------ ---------------------
Balance, January 1, 2001 269,750 269,750 $3.438 - $8.70 $ 6.06
Granted/vested during the year 300,000 300,000 $0.875 0.875
Exercised during the year (210,000) (210,000) $0.875 - $3.75 1.01
Expired during the year (60,875) (60,875) $3.75 - $6.25 4.32
------------ ------------
Balance, December 31, 2001 298,875 298,875 $0.875 - $8.70 4.75
Expired during the year (176,875) (176,875) $0.875 - $3.48 7.11
------------ ------------
Balance, December 31, 2002 122,000 122,000 $0.875 - $3.48 1.35
============ ============
During 2001, the total expense recognized by the Company for these non-employee
warrants was $100,042. No expense was recognized during 2002.
Effective January 1, 2001, the Company re-priced 475,000 options of an employee
from $6.00 to $0.313 per share. All other terms of the options remained the
same. The options were subsequently exercised during 2001. As a result of
re-pricing employee options during 2001 an expense was recognized by the Company
amounting to $217,075.
NOTE I - INCOME TAXES
The difference between the statutory federal income tax rate on the Company's
pre-tax income and the Company's effective income tax rate is summarized as
follows:
2002 2001
-------------------------- ----------------------
Amount Percent Amount Percent
------------ ---------- --------- -------
U.S. Federal income tax provision (benefit)
at federal statutory rate $ (899,658) (35)% $ 99,969 35%
State tax, net of federal tax effect (231,341) (9) 28,755 10
Non-deductible options and warrants 10,126 71,948 25
Change in valuation allowance 1,076,000 42 (200,000) (70)
Other 44,873 2 (672)
------------ ---------- --------- -------
$ 0 0% $ 0 0%
============ ========== ========= =======
F-15
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2002 and 2001
NOTE I - INCOME TAXES (CONTINUED)
At December 31, 2002, the Company has $10,861,000 in federal net operating loss
carryovers, which can be used to offset future taxable income. The net operating
loss carryforwards expire through the year 2022.
The components of the Company's deferred tax assets are as follows:
2002 2001
---------------- ---------------
Net operating loss carryforwards $ 4,066,000 $ 3,035,000
Deferred charges 45,000
Valuation allowance (4,111,000) (3,035,000)
---------------- ---------------
Deferred tax asset $ 0 $ 0
================ ===============
NOTE J - MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISKS
[1] 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 which exceeded guarantee by the Federal Deposit Insurance
Corporation (FDIC) up to $100,000. The financial institution has a
strong credit rating, and management believes that credit risk relating
to these deposits is minimal.
The Company does not require collateral on its trade accounts
receivable. Historically, the Company has not suffered significant
losses with respect to trade accounts receivable.
[2] Fair value of financial instruments:
Cash, cash equivalents, accounts receivable, accounts payable and notes
payable approximate their fair values due to the short maturity of
these instruments.
[3] Major customers:
For the year ended December 31, 2002 and 2001, the Company had revenues
from two customers which accounted for approximately 53% and 49%,
respectively, of total revenue. Accounts receivable outstanding related
to these customers at December 31, 2002 and 2001 were $123,444 and
$66,261 which amounted to 37% and 34% of total receivable,
respectively.
F-16
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2002 and 2001
NOTE K - SEGMENT AND RELATED INFORMATION
In 2002 and 2001 the Company has one reportable segment:
Dietary and nutritional supplements.
The following table presents revenues by region:
2002 2001
------------- ------------
United States $ 4,947,328 $ 4,790,991
Canada 173,025 104,536
Revenues by product line are as follows:
Sports Weight
Performance Loss Licensing Total
----------- ------------ ------------ ------------
2002 $5,007,513 $ 112,840 $ 5,120,353
2001 $3,578,189 $ 1,317,338 $ 1,250,000 $ 6,145,527
Sales revenues reported for the years ended December 31, 2002 and 2001 are net
of credits of $175,319 and $451,137, respectively, for the return of certain
products. Returns in 2001 consisted of SATIETROL returned from our largest
customer who discontinued selling the product. There was no legal requirement
for the Company to accept these credits and returns, but these credits and
returns were allowed to enhance ongoing customer relations with that customer.
F-17