As filed with the Securities and Exchange Commission on October 29, 2003
Registration No. 333-109197
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment
NO. 1.
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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PACIFICHEALTH LABORATORIES, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 2833 22-3367588
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
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100 Matawan Road
Suite 420
Matawan, New Jersey 07747-3913
Telephone No.: (732) 739-2900
(Address and Telephone Number of Principal Executive Offices)
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Robert Portman, Ph.D
President, Chief Executive Officer and Chairman of the Board
PacificHealth Laboratories, Inc.
100 Matawan Road
Suite 420
Matawan, New Jersey 07747-3913
Telephone No.: (732) 739-2900
(Name, Address and Telephone Number of Agent for Service)
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Copy to:
Gary A. Miller, Esquire
Eckert Seamans Cherin & Mellott, LLC
1515 Market Street -- 9th Floor
Philadelphia, PA 19102
(215) 851-8472
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Approximate date of commencement of proposed sale to public:
From time to time after this registration statement becomes effective.
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If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Proposed maximum Proposed maximum
Title of each class of Number of shares offering price aggregate Amount of
securities to be registered to be registered(1) per unit(2) offering price(2) registration fee(2)
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Common Stock, par value $0.0025 per 4,999,772 $0.85 $4,249,806 $344
share
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(1) The amount to be registered hereunder consists of an aggregate of 4,999,772
shares of common stock to be sold by the selling shareholders named in this
registration statement. Of the 4,999,772 shares of common stock, 3,208,556
are currently outstanding and beneficially owned by the selling
shareholders and 1,791,216 shares are issuable upon the exercise of
warrants held by the selling shareholders.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933,
based upon the last sale of the registrant's common stock on September 23,
2003, as reported by the Over-the-Counter Bulletin Board.
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The registrant hereby amends this Registration Statement on such dates or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
Subject to Completion, dated October __, 2003
The information in this prospectus is not complete and may be changed. We may
not sell securities until the Securities and Exchange Commission declares our
registration statement effective. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
PROSPECTUS
PacificHealth Laboratories, Inc.
4,967,687 Shares
Common Stock
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Selling shareholders of PacificHealth Laboratories, Inc. are offering
4,967,687 shares of our common stock. PacificHealth will not receive any
proceeds from the sale of shares offered by the selling shareholders.
The shares of common stock offered will be sold as described under the
heading "Plan of Distribution," beginning on page 13.
Our common stock is quoted on the Over-the-Counter Bulletin Board under the
symbol "PHLI." On October 17, 2003, the last reported sale price of our common
stock on the OTC Bulletin Board was $.$1.10 per share.
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The common stock offered involves a high degree of risk. We refer you to
"Risk Factors," beginning on page 5.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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The date of this prospectus is , 2003
TABLE OF CONTENTS
Page
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SUMMARY 1
RISK FACTORS 5
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS 11
USE OF PROCEEDS 12
DIVIDEND POLICY 12
SELLING SHAREHOLDERS 12
PLAN OF DISTRIBUTION 14
PRICE RANGE OF COMMON STOCK 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 16
CHANGE IN CERTIFYING ACCOUNTANTS 19
BUSINESS 20
MANAGEMENT 26
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 29
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT 29
DESCRIPTION OF CAPITAL STOCK 31
LEGAL MATTERS 34
EXPERTS 34
WHERE YOU CAN FIND MORE INFORMATION 34
INDEX TO FINANCIAL STATEMENTS F-1
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In this prospectus, references to "PacificHealth," the or our "company,"
"we," "our" or "us," unless the context otherwise requires, refer to
PacificHealth Laboratories, Inc.
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You should rely only on the information contained in this prospectus. We have
not authorized any other person to provide you with different information. This
prospectus may only be used where it is legal to sell these securities. The
information in this prospectus is accurate as of the date on the front cover.
You should not assume that the information contained in this prospectus is
accurate as of any other date.
i
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SUMMARY
The items in the following summary are described in more detail later in
this prospectus. This summary provides an overview of selected information and
does not contain all the information you should consider. Therefore, you should
also read the more detailed information contained in this prospectus, including
the financial statements.
About This Offering
We are registering shares of our common stock for resale by the selling
shareholders. The shares include shares that are presently outstanding and
shares that are issuable upon the exercise of warrants. The selling shareholders
purchased the shares and warrants in a private placement or received them as
compensation.
The selling shareholders and the specific number of shares that they each
may resell through this prospectus are listed beginning on page 12. The shares
offered for resale by this prospectus include the following:
o 3,208,556 shares that are presently outstanding and owned by the selling
shareholders; and
o 1,759,131 shares that may be acquired by the selling shareholders upon
the exercise of warrants.
This prospectus may only be used where it is legal to offer and sell the
shares covered by this prospectus. We have not taken any action to register or
obtain permission for this offering or the distribution of this prospectus in
any country other than the United States.
The number of shares outstanding before and after this offering are set
forth below:
o Common stock outstanding before the offering ........... 9,324,259 shares
o Common stock to be outstanding after the offering.......11,084,935 shares
The number set forth above for the shares of our common stock outstanding
before this offering is the number of shares outstanding on October 17, 2003.
The number of shares of common stock outstanding after this offering is based on
the number of shares outstanding before the offering plus 1,759,131 shares that
are issuable to the selling shareholders upon the exercise of warrants purchased
in the private placement.
About Our Company
We are a nutrition technology company that researches, develops and
commercializes unique and proprietary nutritional products. Our current revenues
are substantially derived from nutritional products for sports performance,
although we are in the research and development stage with various products in
the weight loss and Type 2 diabetes segments and have received revenues from
weight loss products in prior years. Our products can be marketed without prior
Food and Drug Administration approval under current regulatory guidelines.
Sports Performance
Our sports performance products are targeted to serious athletes who engage
in competitive athletics or whose exercise regimen is comparable to that of a
competitive athlete. Through our new ready-to-drink sports drink, we intend to
expand the target market for our products to the casual athlete and mass market.
Our sports performance products are based on the benefits of protein in
conjunction with carbohydrates to improve muscle energy restoration during
exercise and muscle recovery after exercise. Our current products include our
sports drinks, ENDUROX R4(R), ACCELERADE(R) and ACCELERADE RTD(R), and dietary
supplements, ENDUROX(R) and ENDUROX EXCEL(R) caplets.
We launched our patented ENDUROX R4(R) carbohydrate/protein recovery drink
in 1999. ENDUROX R4(R) is a powdered drink targeted to serious and professional
athletes as a recovery drink taken post-exercise. The technology is based on a 4
to 1 ratio of carbohydrates to protein to speed the movement of carbohydrate
from the blood into muscles during exercise. Studies funded by us demonstrated
that when tested against the nation's leading sports drink, ENDUROX R4(R):
o delivered equal hydration effectiveness while enhancing performance and
extending endurance;
o decreased post-exercise muscle stress;
1
o reduced free radical build-up; and
o increased insulin levels.
Based on market acceptance of ENDUROX R4(R) and targeting the need for a
sports drink for use during exercise, we introduced our powdered version of
ACCELERADE(R) in 2001. ACCELERADE(R), like ENDUROX R4(R), is targeted to
athletes looking to increase endurance and strength while exercising. Research
studies funded by us and performed at the University of Texas showed that
ACCELERADE(R) increases endurance performance during exercise compared to
conventional sports drinks containing the same amount of carbohydrates.
ACCELERADE(R) incorporates the patented ENDUROX R4(R) technology.
In order to increase the market potential for ACCELERADE(R), we developed a
ready-to-drink version of ACCELERADE(R). In November 2002, we entered into a
strategic alliance with Cargill, Incorporated to help develop and launch
ACCELERADE(R) ready-to-drink. An important ingredient in our formulation is
Cargill's new Trehalose branded ingredient, ASCEND(TM). Cargill has agreed to
provide distribution and manufacturing resources to us for the test-marketing
launch. We believe our formulation, which has undergone considerable consumer
taste tests, overcomes the inherent taste problems of protein-based drinks. In
March 2003, we launched a test market for the ready-to-drink form of
ACCELERADE(R) in 7-Eleven stores in San Diego and Colorado Springs with
Cargill's support. Three weeks into the test, we discovered a discoloration of
the product under certain conditions. We immediately and unilaterally suspended
the test market and retrieved the product. In May 2003, we slightly modified the
formulation and switched to a hot-fill bottling process, which we believe will
resolve the color quality issue. As of June 2, 2003, we re-initiated the test
market in 7-Eleven stores in Colorado Springs with television, radio, newspaper,
and billboard advertising. Following a successful test market, we would
anticipate a regional product launch in 2004.
Our initial product launched in 1996 is ENDUROX, a dietary supplement in
caplet form. Studies funded by us demonstrated that ENDUROX is effective in
improving exercise performance. In 1997, we introduced ENDUROX EXCEL, an
enhanced version of the original ENDUROX.
Weight Loss
In the weight loss area, we have focused our research and development
efforts on nutritional compositions that stimulate the body's major peptide,
cholecystokinin or CCK, responsible for satiety, or feeling of fullness. In
2000, we introduced our first weight loss product, SATIETROL(R), a natural
appetite control product. Clinical studies funded and performed by us
demonstrated that SATIETROL, a pre-meal beverage, can reduce hunger. We
introduced SATIETROL COMPLETE(R) in 2001, a 220-calorie meal-replacement product
that incorporates the patented SATIETROL technology. The patent for SATIETROL
covers uses for Type 2 diabetes, as well as conjunctive use with other products
for treatment of bulimia.
We signed an exclusive worldwide Licensing Agreement with GlaxoSmithKline
in 2001 for the SATIETROL technology. At that point, we stopped marketing
SATIETROL as it had been licensed to GlaxoSmithKline. In 2002, GlaxoSmithKline
decided not to move forward with SATIETROL and therefore we reacquired all
rights to the technology in accordance with our agreement with GlaxoSmithKline.
Subsequently, in 2002, we wrote off $1.3 million of SATIETROL inventory. Since
reacquiring SATIETROL from GlaxoSmithKline, we have initiated efforts to make
SATIETROL more consumer-friendly, including developing a pill formulation. In
fact, we have conducted additional studies that demonstrated that a modified
formulation of SATIETROL increased effectiveness in reducing caloric intake.
Revenues for our weight loss products were $1.6 million in 2000, $1.3
million in 2001, $0.1 million in 2002 and no material revenue in the first six
months of 2003.
Type 2 Diabetes
Our research for Type 2 diabetes is focused in the development of
nutritional products that can help diabetics lose weight by controlling appetite
while improving glucose regulation. Type 2 diabetes has become the fastest
growing chronic condition in the U.S. and obesity and poor glucose regulation
appear to be the primary characteristics of Type 2 diabetes. We expect to
initiate studies on products for use by Type 2 diabetics in the future.
Through the first six months of 2003, no material revenues have resulted in
the Type 2 diabetes segment.
Recent Developments
As of August 20, 2003, our common stock was delisted by the Nasdaq Stock
Market, Inc. because we failed to meet its minimum stockholders' equity
requirement of $2,500,000.
2
In August and September 2003, we issued in a private placement an aggregate
of 3,208,556 shares of common stock, together with warrants exercisable for an
aggregate of 1,604,278 shares of common stock. The shares and warrants were
issued in units of two shares and one warrant. Each warrant is exercisable for
one share of common stock. Investors paid $.935 for each unit, which price
represented a 15% discount from the market price of two shares, calculated over
a ten day period as of the initial closing. We received net cash proceeds after
broker and finder's fees of approximately $1,345,000 from the private placement.
These proceeds were used for working capital and general corporate purposes.
Our company was incorporated under the laws of the State of Delaware in
April 1995. Our principal executive offices are located at 100 Matawan Road,
Suite 420, Matawan, New Jersey 07747, and our telephone number is (732)
739-2900. Our web site is located at www.pacifichealthlabs.com. Our web site and
the information contained on that site, or connected to that site, are not
incorporated into and do not constitute part of this prospectus.
3
Summary Financial Data
The summary statement of operations data shown below for the years ended
December 31, 2000, 2001 and 2002 and the balance sheet data as of December 31,
2001 and 2002 are derived from our audited financial statements included
elsewhere in this prospectus. The summary statement of operations data for the
six months ended June 30, 2002 and 2003 and the balance sheet data as of June
30, 2003 has been derived from our unaudited financial statements included
elsewhere in this prospectus, which, in the opinion of management, include all
adjustments, consisting solely of normal recurring adjustments, necessary for a
fair presentation of the financial information shown in these statements. The
results for the six months ended June 30, 2002 and 2003 are not necessarily
indicative of the results to be expected for the full year or for any future
period. When you read this summary financial data, it is important that you also
read the historical financial statements and related notes included in this
prospectus, as well as "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Historical results are not necessarily
indicative of future results.
Six Months Six Months
Ended Ended
Fiscal Years Ended December 31, June 30, June 30,
Consolidated Statement of Operations 2000 2001 2002(1) 2002 2003
---- ---- ----- ---- ----
(Unaudited) (Unaudited)
Revenue:
Product Sales............................... $ 3,841,387 $4,895,527 $ 5,120,353 $2,975,026 $2,918,831
Licensing Revenue........................... - 1,250,000 - -- --
----------- ---------- ----------- ---------- ----------
Total Revenue............................ 3,841,387 6,145,527 5,120,353 2,975,026 2,918,831
Gross Profit................................... 2,074,318 3,554,680 1,355,260 1,604,102 1,461,338
Selling, General and Administrative Expenses 3,063,210 3,108,914 3,772,557 1,842,317 2,026,922
Research and Development Expenses.............. 222,728 106,085 165,514 18,574 27,472
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Operating Income (Loss)........................ (1,211,620) 339,681 (2,582,811)
Net Interest Income (Expense).................. 47,977 (54,055) 12,359 (8,299) (8,480)
----------- ---------- ----------- ---------- ----------
Income (Loss) before Income Taxes.............. (1,163,643) 285,626 (2,570,452) (295,850) (727,076)
Income Taxes................................... (206,078) - - - -
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Net Income (Loss).............................. ($957,565) $ 285,626 ($2,570,452) (295,850) (727,076)
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NET INCOME (LOSS) PER SHARE - BASIC
AND DILUTED.................................... $ (0.21) $ 0.05 $ (0.42) $ (0.05) $ (0.12)
=========== ========== =========== ========== ==========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES - BASIC
AND DILUTED.................................... 4,592,517 5,467,742 6,081,753 6,050,313 6,115,438
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(1) Includes the cost of a $1.3 million write-off to cost of goods of SATIETROL
inventory in fiscal 2002.
As of December 31, As of June 30,
Selected Balance Sheet Data 2000 2001 2002 2003
---- ---- ---- ----
(Unaudited)
Cash and Cash Equivalents...................... $ 170,491 $1,848,847 $ 628,436 $ 210,616
Accounts Receivable, Net....................... 441,396 192,628 335,219 768,698
Other Current Assets........................... 1,815,159 2,799,351 1,680,649 1,480,738
Long-Term Assets............................... 128,034 171,031 70,826 76,534
Current Liabilities............................ 783,118 336,554 444,596 984,157
Shareholders' Equity........................... 1,771,962 4,675,303 2,270,534 1,552,069
4
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks and uncertainties described below in addition to the other information
contained in this prospectus, including the section entitled "Cautionary
Statement Concerning Forward-Looking Statements" before deciding whether to
invest in shares of our common stock. If any of the following risks actually
occur, our business, financial condition or operating results could be harmed.
In that case, the trading price of our common stock could decline, and you may
lose part or all of your investment. These risks and uncertainties described
below are not the only ones facing PacificHealth. Additional risks and
uncertainties not currently known to us or that we currently deem immaterial may
also impair our business operations and adversely affect the market price of our
common stock.
Risks Relating to Our Company
Our revenues and results of operations for the second quarter of 2003 did not
meet our expectations and we have a history of operating deficits and anticipate
a net loss in fiscal year 2003.
Our revenues for the fiscal quarter ending June 30, 2003 did not meet our
original expectations. In addition, we will have a net loss for the quarter
versus a small profit as originally anticipated. This will continue our history
of operating deficits. The second quarter is historically our best seasonal
quarter.
Through the end of calendar year 2000, and again in 2002 and 2003 to date,
we were not able to sustain our operations from revenues provided by operations,
and were required to rely on the proceeds of our 1997 initial public offering
and subsequent private placements of securities. At December 31, 2002, we had an
accumulated deficit of approximately $11,600,000. Based on our internal
projections, we anticipate a loss for the fiscal year ending December 31, 2003.
We cannot assure investors that we will be profitable in the future.
We may need additional capital, which may not be available to us.
We may require funds in excess of our existing cash resources to fund
operating deficits, develop new products, establish and expand our manufacturing
capabilities, and finance general and administrative and research activities. In
particular, we may need additional capital to:
o fund marketing expenses and inventory for a full commercial launch of
ACCELERADE RTD(R);
o increase distribution of our other sports performance products;
o complete research and development of, and potentially launch, our new
version of our weight loss products; and
o fund general working capital requirements if we continue to experience
deficits.
Due to market conditions at the time we may need additional funding, or due
to our own financial condition at that time, it is possible that we will be
unable to obtain additional funding as and when we need it. If we are able to
obtain capital it may be on unfavorable terms or terms which excessively dilute
existing shareholders or otherwise negatively affect the interests of existing
shareholders. If we were unable to obtain additional funding as and when needed,
we could be forced to delay our development, marketing and expansion efforts
and, if we continue to experience losses, potentially cease operations.
We have had delays in the test market of our ready-to-drink version of
ACCELERADE(R), and do not yet know whether the test market will be ultimately
successful.
In March 2003, we launched a test market of the ready-to-drink form of
ACCELERADE(R) in 7-Eleven stores in San Diego and Colorado Springs. Three weeks
into the test we discovered a discoloration of the product under certain
conditions. Upon suspension of the test market and retrieval of the product, in
May 2003, we slightly modified the formulation and switched to a hot-fill
bottling process, which we believe will resolve the color quality issue. The
requirement to suspend and restart the test market required us to expend greater
resources for production, distribution and marketing than we expected. Our
prospects for revenue growth will be materially diminished if this problem
recurs and causes us to terminate the test market, or if the test market for our
ready-to-drink ACCELERADE(R) product is unsuccessful for any reason.
5
We have no prior experience in marketing a ready-to-drink product.
Even if we successfully complete our test of the ready-to drink
ACCELERADE(R), we cannot be sure we will ever successfully market the product.
We have never before manufactured, marketed or distributed a ready-to-drink
product. Our ready-to-drink products will require marketing and manufacturing
resources and involve distribution channels different in type and scope than
those we have dealt with in the past. In addition, we will be required to
compete against large, established brands with significant funding and
experience in marketing consumer products in the mass market. A commercial
launch of the ready to drink product will require resources far greater than are
available to us, and will likely require us enter into arrangements with one or
more partners to distribute and fund the marketing and manufacturing of the
product. Such a partner is likely to have significant bargaining power, and
would be expected to receive a substantial share of our revenues from this
product. We cannot be sure we will be able to find such a partner, or otherwise
fund the launch of this product. If we cannot launch our ready to drink product,
our prospects for growth will be diminished.
Our accounts receivable credit facility is secured by substantially all of our
assets.
On June 1, 2003, we entered into an accounts receivable purchase agreement
under which we may sell our accounts receivable at a percentage of their face
value, subject to a reserve of 20% of the outstanding purchased receivables. If
the receivables are not paid within a specified period of time, we must
repurchase them for the full face value. We are able to obtain a maximum of
$750,000 of financing under this agreement. Although substantially all of our
assets are pledged as collateral for the funds advanced to us, we receive no
credit for our inventory or other assets. We are unlikely to obtain any other
commercial debt financing while this agreement is in place. Our inability to
meet our obligations to repurchase defaulted accounts, or to perform any other
substantial obligation under this agreement, could cause the lender to foreclose
on substantially all of our assets, which would render our company unable to
operate.
We are dependent on a few significant customers and may be adversely affected if
those customers discontinue their relationships with us.
Our largest customer, General Nutrition Centers, accounted for
approximately 44% of net sales in 2000, 37% of net sales in 2001, 30% of net
sales in 2002, and 22% of net sales in the first six months of 2003. Another
customer, Performance, Inc., accounted for approximately 12% of sales in 2001,
23% of net sales in 2002, and 23% of net sales in the first six months of 2003.
The loss of General Nutrition Centers or Performance, Inc. as customers, the
loss of a significant number of other major customers, or a significant
reduction in purchase volume by or financial difficulty of such customers could
significantly reduce our revenues. We have no agreement with or commitment from
any customer to make future purchases. Because we have no agreements with
General Nutrition Centers or Performance, Inc., we cannot be certain that
General Nutrition Centers or Performance, Inc. will continue as a major
customer. In addition, a significant change in the financial or competitive
position of our major customers could affect us. During the fourth quarter of
2001, General Nutrition Centers discontinued the sale of SATIETROL in its
corporate stores. Although we did not receive any official communication from
General Nutrition Centers, we believe that the product was discontinued because
it did not meet General Nutrition Center's target sales projections. In the year
ended December 31, 2000, SATIETROL accounted for 43% of our sales to General
Nutrition Centers and, in 2001, after considering returns, SATIETROL accounted
for 26% of our sales to General Nutrition Centers.
We face substantial competition.
The dietary and nutritional supplement industry is highly competitive. It
is relatively easy for new companies to enter the industry due to the
availability of numerous contract manufacturers, a ready availability of natural
ingredients and a relatively relaxed regulatory environment. Numerous companies
compete with us in the development, manufacture and marketing of supplements as
their sole or principal business. Generally, these companies are well funded and
sophisticated in their marketing approaches.
Depending on the product category, our competition varies. The sports drink
market in which ENDUROX R4(R) and ACCELERADE(R) compete is dominated by
companies selling brands such 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 recently introduced sports drinks
into the United States focusing on the endurance athlete. Increased competitive
activity from such companies could make it more difficult for us 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 we do.
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 more difficult for us 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 we do.
6
We have no manufacturing capabilities and we are dependent upon other companies
to manufacture our products.
We have no manufacturing facilities and have no present intention to
manufacture any of our products. We are dependent upon relationships with
independent manufacturers to fulfill our product needs. We use at least five
manufacturers for various parts of the manufacturing processes for our products.
We believe these are small privately held firms. We have no contracts, oral or
written, with these manufacturers other than individual purchase orders for
current quantities which do not contain any terms other than those related to
the current quantities. Because the manufacturing processes, which our contract
manufacturers perform, are fairly standard in the industry, we believe that
there are a large number of manufacturers who could provide us with these
services if our current contract manufacturers are unavailable for any reason or
seek to impose unfavorable terms. Our ability to market and sell our products
requires that such products be manufactured in commercial quantities and in
compliance with applicable federal and state regulatory requirements. In
addition, we must be able to manufacture our products at a cost that permits us
to charge a price acceptable to the customer while also accommodating
distribution costs and third-party sales compensation. Competitors who do own
their own manufacturing may have an advantage over us with respect to pricing,
availability of product and in other areas through their control of the
manufacturing process.
Government regulation of the processing, formulation, packaging, labeling and
advertising of our products can impact our ability to market products.
We market products that fall under two types of Food and Drug
Administration regulations: dietary supplements and nutritional supplements. A
dietary supplement is:
o a product (other than tobacco) that is intended to supplement the diet
that bears or contains one or more of the following dietary
ingredients: a vitamin, a mineral, an herb or other botanical, an amino
acid, a dietary substance for use by man to supplement the diet by
increasing the total daily intake, or a concentrate, metabolite,
constituent, extract, or combinations of these ingredients;
o intended for ingestion in pill, capsule, tablet, or liquid form;
o not represented for use as a conventional food or as the sole item of a
meal or diet; and o labeled as a "dietary supplement."
Nutritional supplements are food products and contain Generally Regarded As
Safe (GRAS) ingredients. Nutritional supplements and dietary supplements must
follow labeling guidelines outlined by the FDA. Neither nutritional supplements
nor dietary supplements require FDA or other government approval or notification
to market in the United States.
Under the Dietary Supplement Health and Education Act of 1994, companies
that manufacture and distribute dietary supplements are limited in the
statements that they are permitted to make about nutritional support on the
product label without FDA approval. In addition, a manufacturer of a dietary
supplement must have substantiation for any such statement made and must not
claim to diagnose, mitigate, treat, cure or prevent a specific disease or class
of disease. The product label must also contain a prominent disclaimer. These
restrictions may restrict our flexibility in marketing our product.
We believe that all of our existing and proposed products are nutritional
supplements or dietary supplements that do not require governmental approvals to
market in the United States. Our current products are classified as follows:
Dietary Supplements
o ENDUROX Natural Workout Supplement
o ENDUROX EXCEL Natural Training Supplement
Nutritional Supplements
o ENDUROX R4(R) Performance/Recovery Drink
o ACCELERADE(R) Sports Drink
o SATIETROL Natural Appetite Control
o SATIETROL COMPLETE Meal Replacement
The processing, formulizing, 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. Our activities also are subject to regulation by various agencies of the
states and localities in which our products are sold. Among other things, such
regulation puts a burden on our ability to bring products to market. Any changes
in the current regulatory environment could impose requirements which would make
bringing new products to market more expensive or restrict the ways we can
market our products.
No governmental agency or other third party makes a determination as to
whether our products qualify as nutritional supplements, dietary supplements or
neither. We make this determination based on the ingredients contained in the
products and the claims we make for the products.
7
We are dependent upon our President and the loss of his services could have a
material adverse impact on us.
We have relied extensively on the services of Dr. Robert Portman. Dr.
Portman will continue to play a key role in our management and the loss of his
services would materially and adversely affect us and our prospects. We have
obtained a $2,000,000 "key man" life insurance policy covering Dr. Portman, but
it is unlikely that the proceeds from such policy would be adequate to fully
compensate us for the loss of Dr. Portman's services.
We may be subject to product liability claims and may not have adequate
insurance to cover such claims.
Like other retailers, distributors and manufacturers of products that are
designed to be ingested, we face an inherent risk of exposure to product
liability claims in the event that the use of our products results in injury.
With respect to product liability claims, we have coverage of $5,000,000 per
occurrence and in the aggregate. Because our policies are purchased on a year to
year basis, industry conditions or our own claims experience could make it
difficult for us to secure the necessary insurance at a reasonable cost. In
addition, we may not be able to secure insurance that will be adequate to cover
liabilities. We generally do not obtain contractual indemnification from parties
supplying raw materials or marketing our products. In any event, any such
indemnification is limited by its terms and, as a practical matter, to the
creditworthiness of the other party. In the event that we do not have adequate
insurance or contractual indemnification, liabilities relating to defective
products could require us to pay the injured parties' damages which are
significant compared to our net worth or revenues.
We may be adversely affected by unfavorable publicity relating to our product or
similar products manufactured by our competitors.
We believe that the dietary and nutritional supplement market is affected
by national media attention regarding the consumption of these products. Future
scientific research or publicity may be unfavorable to the dietary and
nutritional supplement market generally or to any particular product and may be
inconsistent with earlier favorable research or publicity. Adverse publicity
associated with illness or other adverse effects resulting from the consumption
of products distributed by other companies that are similar to our products
could reduce consumer demand for our products and consequently our revenues.
This may occur even if the publicity did not relate to our products. Adverse
publicity directly concerning our products could be expected to have an
immediate negative effect on the market for that product.
We depend on patents and other proprietary technologies that we may not be able
to obtain, and the patents we hold may not protect our position.
Our long-term success will substantially depend upon protecting our
technology from infringement, misappropriation, discovery and duplication. To
the extent we do not have patents on our products, a competitor could replicate
our products. Patents which we do obtain may not provide meaningful protection
or significant competitive advantages over competing products, due to the
complexity of the legal and scientific issues involved in patent defense and
litigation. For example, our use patent on ciwujia might not prevent sale of a
product using this herb with a claimed benefit or use that was not covered by
our patent.
Because of the complexity of the legal and scientific issues involved in
patent prosecutions, we cannot be sure that any future patent applications for
new products will be granted, and we cannot be sure that any of our pending
patent applications will be granted. We cannot be sure our patent rights will
provide meaningful protection against other duplicating our products because of
the complexity of the legal and scientific issues that could arise in litigation
over these issues. Furthermore, patent applications are maintained in secrecy in
the United States until the patents are approved, and in most foreign countries
for a period of time following the date from which priority is claimed. A third
party's pending patent applications may cover any technology that we currently
are developing.
We have limited the liability of our directors and officers for breaches of the
duty of care.
Our certificate of incorporation limits the liability of our directors for
monetary damages for breaches of directors' fiduciary duty of care. This
provision may reduce the likelihood of derivative litigation against directors
and may discourage or deter shareholders or management from suing directors for
breaches of their duty of care, even though such an action, if successful, might
otherwise benefit our shareholders and us. In addition, our bylaws provide for
the indemnification of directors and officers in connection with civil,
criminal, administrative or investigative proceedings when acting in their
capacities as agents for us.
8
Risks Related to this Offering
Because our common stock is traded on the OTC Bulletin Board, your ability to
sell your shares in the secondary trading market may be limited.
Our common stock currently is traded on the over-the-counter market on the
OTC Bulletin Board. Consequently, the liquidity of our common stock is limited,
not only in the number of shares that are bought and sold, but also through
delays in the timing of transactions, and coverage by security analysts and the
news media, if any, of our company. As a result, prices for shares of our common
stock may be lower than might otherwise prevail if our common stock was quoted
on the Nasdaq Stock Market or traded on a national securities exchange, like The
New York Stock Exchange or American Stock Exchange.
Because our shares are "penny stocks," you may have difficulty selling them in
the secondary trading market.
Federal regulations under the Securities Exchange Act of 1934 regulate the
trading of so-called "penny stocks," which are generally defined as any security
not listed on a national securities exchange or Nasdaq, priced at less than
$5.00 per share and offered by an issuer with limited net tangible assets and
revenues. Since our common stock currently trades on the OTC Bulletin Board at
less than $5.00 per share, our common stock is a "penny stock" and may not be
traded unless a disclosure schedule explaining the penny stock market and the
risks associated therewith is delivered to a potential purchaser prior to any
trade.
In addition, because our common stock is not listed on Nasdaq or any
national securities exchange and currently trades at less than $5.00 per share,
trading in our common stock is subject to Rule 15g-9 under the Exchange Act.
Under this rule, broker-dealers must take certain steps prior to selling a
"penny stock," which steps include:
o obtaining financial and investment information from the investor;
o obtaining a written suitability questionnaire and purchase agreement
signed by the investor; and
o providing the investor a written identification of the shares being
offered and the quantity of the shares.
If these penny stock rules are not followed by the broker-dealer, the
investor has no obligation to purchase the shares. The application of these
comprehensive rules will make it more difficult for broker-dealers to sell our
common stock and our shareholders, therefore, may have difficulty in selling
their shares in the secondary trading market.
Sales of a substantial number of shares of our common stock in the public
market, including the shares offered under this prospectus and under other
registration statements, could lower our stock price and impair our ability to
raise funds in new stock offerings.
Future sales of a substantial number of shares of our common stock in the
public market, including the shares offered under this prospectus, under other
registration statements and shares available for resale under Rule 144(k) under
the Securities Act of 1933 or the perception that such sales could occur, could
adversely affect the prevailing market price of our common stock and could make
it more difficult for us to raise additional capital through the sale of equity
securities. We filed this registration statement pursuant to an investor rights
agreement with the holders of the common stock and warrants purchased in our
August and September 2003 private placement. [We are required under this
investor rights agreement to use our reasonable best efforts to cause this
registration statement to remain effective until the earlier of (1) the sale of
all the shares of our common stock covered by this registration statement; or
(2) such time as the selling shareholders named in this registration statement
become eligible to resell the shares of PacificHealth common stock and the
shares of PacificHealth common stock issuable upon exercise of warrants pursuant
to Rule 144(k) under the Securities Act.]
Our stock price may be volatile and your investment in our common stock
could suffer a decline in value.
The market price of our common stock may fluctuate significantly in
response to a number of factors, some of which are beyond our control. These
factors include:
o announcements of research activities and technology innovations or new
products by us or our competitors;
o changes in market valuation of companies in our industry generally;
o variations in operating results;
o changes in governmental regulations;
o results of research studies of our products or our competitors' products;
o regulatory action or inaction on our products or our competitors'
products;
o changes in our financial estimates by securities analysts;
o general market conditions for companies in our industry;
o broad market fluctuations; and
o economic conditions in the United States or abroad.
9
The market for our stock has not been liquid.
Prior to the date of this prospectus, the average daily trading volume for
our common stock during the previous three months has been less than 10,000
shares. Therefore, holders of our common stock may have difficulty selling their
shares in the public markets, and one or more investors seeking to sell a
substantial number of shares purchased in this offering could significantly
depress the market price for our common stock.
We may incur significant costs from class action litigation due to our expected
stock volatility.
In the past, following periods of large price declines in the public market
price of a company's stock, holders of that stock occasionally have instituted
securities class action litigation against the company that issued the stock. If
any of our shareholders were to bring this type of lawsuit against us, even if
the lawsuit is without merit, we could incur substantial costs defending the
lawsuit. The lawsuit also could divert the time and attention of our management,
which would hurt our business. Any adverse determination in litigation could
also subject us to significant liabilities.
Provisions in our charter documents and Delaware law could discourage or prevent
a takeover, even if an acquisition would be beneficial to our shareholders.
Provisions of our certificate of incorporation and bylaws, as well as
provisions of Delaware law, could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our shareholders. These
provisions include:
o authorizing the issuance of "blank check" preferred that could be issued
by our Board of Directors without shareholder approval to increase the
number of outstanding shares and thwart a takeover attempt;
We refer you to the section of this prospectus entitled "Description of
Capital Stock" for more information on the specific provisions of our
certificate of incorporation, our bylaws and Delaware law that could discourage,
delay or prevent a change of control of our company.]
Our directors and executive officers own a significant number of shares of our
capital stock to control our company, which could discourage or prevent a
takeover, even if an acquisition would be beneficial to our shareholders.
Our directors and executive officers own or control approximately 39.5% of
our outstanding voting power. Accordingly, these shareholders, individually and
as a group, may be able to influence the outcome of shareholder votes, involving
votes concerning the election of directors, the adoption or amendment of
provisions in our certificate of incorporation and bylaws and the approval of
certain mergers or other similar transactions, such as a sale of substantially
all of our assets. Such control by existing shareholders could have the effect
of delaying, deferring or preventing a change in control of our company.
Exercise of outstanding options and warrants will dilute shareholders and could
decrease the market price of our common stock.
As of October 17, 2003, we had issued and outstanding 9,324,259 shares of
common stock and outstanding options and warrants to purchase 2,248,575
additional shares of common stock, in addition to the 1,759,131 shares issuable
upon exercise of warrants that may be resold under this prospectus. The
existence of the outstanding options and warrants may adversely affect the
market price of our common stock and the terms under which we could obtain
additional equity capital.
We do not pay cash dividends, so any return on your investment must come from
appreciation.
We do not intend to pay any cash dividends in the foreseeable future and,
therefore, any return on your investment in our common stock must come from
increases in the fair market value and trading price of our common stock.
We likely will issue additional equity securities which will dilute your share
ownership.
We likely will issue additional equity securities to raise capital and
through the exercise of options and warrants that are outstanding or may be
outstanding. These additional issuances will dilute your share ownership.
10
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements concerning our
financial condition, results of operations and business, including, without
limitation, statements pertaining to:
o the development of new products and the expansion of the market for our
current products;
o implementing aspects of our business plans;
o financing goals and plans;
o our expectations regarding actions to be taken by parties other than us.
o our existing cash and whether and how long these funds will be sufficient
to fund our operations; and
o our raising of additional capital through future equity financings.
These and other forward-looking statements are primarily in the sections
entitled "Risk Factors," "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" and "Business." Generally, you can
identify these statements because they use phrases like ["anticipates,"
"believes," "expects," "future," "intends," "plans,"] and similar terms. These
statements are only predictions. Although we do not make forward-looking
statements unless we believe we have a reasonable basis for doing so, we cannot
guarantee their accuracy, and actual results may differ materially from those we
anticipated due to a number of uncertainties, many of which are unforeseen. You
should not place undue reliance on these forward-looking statements, which apply
only as of the date of this prospectus. Our actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons, including, among others, the risks we face as described in the section
entitled "Risk Factors" and elsewhere in this prospectus.
We believe it is important to communicate our expectations to our
investors. There may be events in the future, however, that we are unable to
predict accurately or over which we have no control. The risk factors listed in
the section entitled "Risk Factors," as well as any cautionary language in this
prospectus, provide examples of risks, uncertainties and events that may cause
our actual results to differ materially from the expectations we describe in our
forward-looking statements. Before you invest in our common stock, you should be
aware that the occurrence of the events described in the section entitled "Risk
Factors" and elsewhere in this prospectus could negatively impact our business,
operating results, financial condition and common stock price.
We are not obligated to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise,
except as otherwise required by law. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this prospectus and other
statements made from time to time from us or our representatives, might not
occur. For these statements, we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares offered
under this prospectus by the selling shareholders. This offering is intended to
satisfy our obligations to register, under the Securities Act of 1933, the
resale of the shares of our common stock, including shares of our common stock
that will be issued to the selling shareholders upon the exercise of warrants
held by them, that we issued to the selling shareholders in a private placement.
DIVIDEND POLICY
We never have declared or paid cash dividends on our common stock. We
currently intend to retain all future earnings for the operation and expansion
of our business. We do not anticipate declaring or paying cash dividends on our
common stock in the foreseeable future. Any payment of cash dividends on our
common stock will be at the discretion of our Board of Directors and will depend
upon our results of operations, earnings, capital requirements, contractual
restrictions and other factors deemed relevant by our Board of Directors.
SELLING SHAREHOLDERS
All of the selling shareholders named below acquired or have the right to
acquire upon the exercise of warrants the shares of our common stock being
offered under this prospectus directly from us in a private transaction. The
following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of September 26, 2003 by the selling
shareholders as provided by the selling shareholders. In accordance with the
rules of the SEC, beneficial ownership includes the shares issuable pursuant to
warrants and options that are exercisable within 60 days of September 26, 2003.
Shares issuable pursuant to warrants and options are considered outstanding for
computing the percentage of the person holding the warrants and options but are
not considered outstanding for computing the percentage of any other person.
11
The percentage of beneficial ownership for the following table is based on
9,324,259 shares of common stock outstanding as of September 26, 2003. To our
knowledge, except as indicated in the footnotes to this table, each person named
in the table has sole voting and investment power with respect to all shares of
common stock shown in the table to be beneficially owned by such person.
Except as indicated in the footnote to this table, none of the selling
shareholders has had any position, office or other material relationship with us
within the past three years. The table assumes that the selling shareholders
will sell all of the shares offered by them in this offering. However, we are
unable to determine the exact number of shares that will actually be sold or
when or if these sales will occur. We will not receive any of the proceeds from
the sale of the shares offered under this prospectus.
Shares Beneficially
Owned Prior to the Offering
--------------------------------------------------------------
Shares Beneficially Owned
After Completion of the
Offering
Shares ----------------------
Subject to
Options and
Warrants
Exercisable Total Shares Number of
within 60 days of Beneficially Shares
Selling Shareholder September 26, 2003 Owned Percentage Being Offered (1) Number Percentage
--------------------- ------------------ ------------ ---------- ----------------- --------- ----------
Robert Portman (2)(3) 1,520,428 3,061,051 28.23 481,284 2,579,767 20.68
David Portman (3)(4) 178,476 473,928 5.00 160,428 318,500 2.83
Stephen P. Kuchen (5) 63,548 74,244 * 16,044 60,000 *
R & R Opportunity Fund, LP 26,738 80,214 * 80,214 0 0
William E. Bierlin, Jr. 26,738 80,214 * 80,214 0 0
Hartzmark Investment, LLC 21,390 64,170 64,170 0 0
*
Lawrence Kaplan 26,738 80,214 80,214 0 0
Marian Heiser 26,043 78,129 * 78,129 0 0
Andrew E. & Anita Sandor 16,043 48,129 * 48,129 0 0
Gerald Richter 10,695 32,085 * 32,085 0 0
Richter Homes, Inc. 10,695 32,085 * 32,085 0 0
Bedford Square Apartments 10,695 32,085 * 32,085 0 0
Kenneth M. Reichle, Jr. 26,043 78,129 * 78,129 0 0
Marvin & Muriel Kugood 16,043 48,129 * 48,129 0 0
Richard Grobman 21,390 64,170 * 64,170 0 0
Frank Colen 43,785 97,261 * 97,261 0 0
Hymie Akst 16,043 48,129 * 48,129 0 0
Joseph C. & Joyce A. Pignotti 16,043 48,129 * 48,129 0 0
Edward L. Ruch 16,043 48,129 * 48,129 0 0
Howard J. Synenberg 32,085 96,255 * 96,255 0 0
Mark Radzik 10,695 32,085 * 32,085 0 0
Steven Salaman 26,738 80,214 * 80,214 0 0
Lawrence J. & Camille S. 59,463 164,329 * 134,329 30,000 *
Rubinstein
12
Shares Beneficially Owned
After Completion of the
Offering
Shares ----------------------
Subject to
Options and
Warrants
Exercisable Total Shares Number of
within 60 days of Beneficially Shares
Selling Shareholder September 26, 2003 Owned Percentage Being Offered (1) Number Percentage
--------------------- ------------------ ------------ ---------- ----------------- --------- ----------
Robert S. Lowenthal 26,738 80,214 * 80,214 0 0
Yvonne K. Briggs 10,388 21,084 * 21,084 0 0
Georgie Stanley II Trust 53,476 80,214 * 80,214 0 0
Michael Brett Stanley Trust 26,738 80,214 * 80,214 0 0
Estate of Georgie W. Stanley 53,476 160,428 * 160,428 0 0
Gregory Thomas Horn(6) 213,904 651,710 6.83 641,710 10,000 *
Marsha Kay Horn Alford 26,738 80,214 * 80,214 0 0
Phyllis Cohen 10,000 30,000 * 30,000 0 0
Cherie Mintz 10,000 30,000 * 30,000 0 0
Robert Castille 10,000 30,000 * 30,000 0 0
Oscar Zimmerman 10,000 30,000 * 30,000 0 0
Marvin Kogod 10,000 30,000 * 30,000 0 0
Jack Klatell 10,695 32,085 * 32,085 0 0
Stephen M. & Regena W. Bragin 10,000 30,000 * 30,000 0 0
Lynn Taussig 10,695 32,085 * 32,085 0 0
Matthew Smith 318,048 954,144 9.80 954,144 0 0
Ira Smith 53,476 160,428 * 160,428 0 0
Jeffery Finkle 26,738 80,214 * 80,214 0 0
Shawn Kreloff 26,738 80,214 * 80,214 0 0
Greenwich Investment Partners,
L.P. 56,685 170,054 * 170.054 0 0
Michael C. Esposito 12,834 38,502 * 38,502 0 0
Christopher T. and Amy S. Hagar 7,409 12,147 * 12,147 0 0
Henry P. Williams 12,720 24,720 * 24,720 0 0
Oppenheimer & Co., Inc. 86,976 86,976 * 86,976 0 0
Hartzmark Investment LLC for 10,800 10,800 * 10,800 0 0
Delores Hartzmark
Bruce Hartzmark 1,200 1,200 * 1,200 0 0
-------------------------------
(1) One third of number of shares being offered by each selling shareholder may
be acquired by the selling shareholder upon the exercise of outstanding
warrants.
(2) Robert Portman is a director and the President, Chief Executive Office and
Chairman of the Board of PacificHealth.
(3) Robert Portman and David Portman are siblings.
(4) David Portman is a director and the Secretary of PacificHealth.
(5) Stephen Kuchen is a director and the Chief Financial Officer, Vice
President-Finance, Treasurer and Assistant Secretary of PacificHealth.
(6) Gregory T. Horn is a director of PacificHealth
* Less than 2%
13
PLAN OF DISTRIBUTION
We are registering the shares of common stock on behalf of the selling
shareholders. Sales of shares may be made by selling shareholders, including
their respective donees, transferees, pledgees or other successors-in-interest,
directly to purchasers or to or through underwriters, broker-dealers or through
agents. Sales may be made from time to time on the over-the-counter market or
otherwise, at market prices prevailing at the time of sale, at prices related to
market prices, or at negotiated or fixed prices. The shares may be sold by one
or more of, or a combination of, the following:
o a block trade in which the broker-dealer so engaged will attempt to sell
the shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction (including crosses in which the
same broker acts as agent for both sides of the transaction);
o purchases by a broker-dealer as principal and resale by such
broker-dealer, including resales for its account, pursuant to this
prospectus;
o ordinary brokerage transactions and transactions in which the broker
solicits purchases;
o through options, swaps or derivatives;
o in privately negotiated transactions;
o in making short sales or in transactions to cover short sales; and
o put or call option transactions relating to the shares.
The selling shareholders may effect these transactions by selling shares
directly to purchasers or to or through broker-dealers, which may act as agents
or principals. These broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling shareholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principals, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions). The selling
shareholders have advised us that they have not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding
the sale of their securities.
The selling shareholders may enter into hedging transactions with
broker-dealers or other financial institutions. In connection with those
transactions, the broker-dealers or other financial institutions may engage in
short sales of the shares or of securities convertible into or exchangeable for
the shares in the course of hedging positions they assume with the selling
shareholders. The selling shareholders may also enter into options or other
transactions with broker-dealers or other financial institutions which require
the delivery of shares offered by this prospectus to those broker-dealers or
other financial institutions or loan or pledge shares of common stock to a
broker-dealer, who may sell the loaned shares or, in the event of default, sell
the pledged shares. The broker-dealer or other financial institution may then
resell the shares pursuant to this prospectus (as amended or supplemented, if
required by applicable law, to reflect those transactions).
The selling shareholders and any broker-dealers that act in connection with
the sale of shares may be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act of 1933, and any commissions received by
broker-dealers or any profit on the resale of the shares sold by them while
acting as principals may be deemed to be underwriting discounts or commissions
under the Securities Act. The selling shareholders may agree to indemnify any
agent, dealer or broker-dealer that participates in transactions involving sales
of the shares against liabilities, including liabilities arising under the
Securities Act. We have agreed to indemnify each of the selling shareholders and
each selling shareholder has agreed, severally and not jointly, to indemnify us
against some liabilities in connection with the offering of the shares,
including liabilities arising under the Securities Act.
The selling shareholders and any other persons participating in a
distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934 and the rules and regulations thereunder,
including Regulation M, which may restrict certain activities of, and limit the
timing of purchases and sales of the shares by the selling shareholders and
other persons participating in a distribution of the shares. Furthermore, under
Regulation M, persons engaged in a distribution of the shares are prohibited
from simultaneously engaging in market making and certain other activities with
respect to the shares for a specified period of time prior to the commencement
of such distributions subject to specified exceptions or exemptions. All of the
foregoing may affect the marketability of the shares offered hereby. We have
notified the selling shareholders that they will be subject to applicable
provisions of the Securities Exchange Act and its rules and regulations,
including, among others, Rule 102 under Regulation M. These provisions may limit
the timing of purchases and sales of any of the shares of our common stock by
the selling shareholders. Rule 102 under Regulation M provides, with some
exceptions, that it is unlawful for the selling shareholders or their affiliated
purchasers to, directly or indirectly, bid for or purchase, or attempt to induce
any person to bid for or purchase, for an account in which the selling
shareholders or affiliated purchasers have a beneficial interest, any securities
that are the subject of the distribution during the applicable restricted period
under Regulation M. All of the above may affect the marketability of the shares
of our common stock. To the extent required by law, we may require the selling
shareholders, and their brokers, if applicable, to provide a letter that
acknowledges compliance with Regulation M under the Securities Exchange Act
before authorizing the transfer of the selling shareholders' shares of common
stock.
14
Selling shareholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act, provided
they meet the criteria and conform to the requirements of Rule 144.
Upon being notified by a selling shareholder that a material arrangement
has been entered into with a broker-dealer for the sale of shares through a
block trade, special offering, exchange distribution or secondary distribution
or a purchase by a broker or dealer, we will file a supplement to this
prospectus, if required pursuant to Rule 424(b) under the Securities Act,
disclosing:
o the name of each such selling security holder and of the participating
broker-dealer(s);
o the number of shares involved;
o the initial price at which the shares were sold;
o the commissions paid or discounts or concessions allowed to the
broker-dealer(s), where applicable;
o that such broker-dealer(s) did not conduct any investigation to verify
the information set out in this prospectus; and
o other facts material to the transactions.
In addition, if required under applicable law or the rules or regulations
of the SEC, we will file a supplement to this prospectus when a selling
shareholder notifies us that a donee or pledgee intends to sell more than 500
shares of common stock.
We are paying all expenses and fees customarily paid by an issuer in
connection with the registration of the shares. The selling shareholders will
bear all brokerage or underwriting discounts or commissions paid to
broker-dealers in connection with the sale of the shares.
PRICE RANGE OF COMMON STOCK
Our common stock is currently traded on the over-the-counter market on the
OTC Bulletin Board, under the symbol "PHLI" and was traded on the Nasdaq
SmallCap Market, under the symbol "PHLIC" prior to August 20, 2003.
The following table sets forth, in dollars and cents (in lieu of
fractions), the high and low sales prices of our common stock since August 20,
2003, as reported by the OTC Bulletin Board. The prices in the table may not
represent actual transactions. These quotations reflect inter-dealer prices,
without retail mark up, mark down or commissions and may not represent actual
transactions.
High Low
---- ---
August 20, 2003 to October 17, 2003 $1.10 $0.55
The following table sets forth, for the periods indicated, the high and low
reported sales prices per share of the common stock as reported on the NASDAQ
SmallCap Market for the applicable periods.
High Low
---- ---
Year ended December 31, 2001
----------------------------
First Quarter $1.47 $0.28
Second Quarter $4.94 $0.63
Third Quarter $8.38 $3.36
Fourth Quarter $6.02 $2.76
Year ended December 31, 2002
----------------------------
First Quarter $5.00 $2.51
Second Quarter $5.15 $3.61
Third Quarter $4.78 $0.91
Fourth Quarter $4.10 $0.93
Year ending December 31, 2003
-----------------------------
First Quarter $2.90 $0.74
Second Quarter $1.38 $0.65
July 1 to August 20 $1.13 $0.55
On November 17, 2003, the closing price of our common stock as reported
by the OTC Bulletin Board was $1.10 per share. As of October 17, 2003, there
were approximately 120 holders of record of our common stock. We believe that
there are significantly more beneficial holders of our common stock as many
beneficial holders have their stock in "street name".
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the results of the operations and financial
condition of PacificHealth should be read in conjunction with our financial
statements and the related notes thereto.
Overview
We are a nutrition technology company that researches, develops, and
commercializes functionally unique proprietary products for 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 R4(R) Performance/Recovery Drink to be taken following exercise. In
clinical studies that we performed or funded, ENDUROX R4(R) 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(R). Research studies that we funded have
shown that ACCELERADE(R) is significantly better than conventional sports drinks
in improving endurance during exercise. In the first six months of 2003, we
commenced test marketing of our ready-to-drink form of ACCELERADE(R) in the San
Diego and Colorado Springs areas. The test market is expected to continue
through the 3rd quarter of 2003 in Colorado Springs.
Weight Loss
In weight loss, we have focused our research and development efforts on
development of novel nutritional compositions that stimulate the body's major
satiety peptide, cholecystokinin or CCK. In April 2000, we introduced our first
weight loss product, SATIETROL(R), a natural appetite control product based on
this research. Clinical studies that we performed or funded 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, we signed an
exclusive worldwide Licensing Agreement with GlaxoSmithKline for our SATIETROL
technology. Under the agreement, we received an initial payment of $1,000,000
and received a subsequent milestone payment of $250,000. GlaxoSmithKline
subsequently canceled the Licensing Agreement in September 2002 with all rights
reverting to us. In the third quarter of 2002, we funded clinical studies that
confirmed an improvement in the efficacy of SATIETROL. We are conducting further
studies on SATIETROL 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 primary
characteristics of this condition. Research has suggested that cholecystokinin
(CCK) may play a role in insulin release and glucose regulation. Our research in
this area is to develop a nutritional product that can help Type 2 diabetics
lose weight by controlling appetite while improving glucose regulation. We
expect to initiate clinical trials on a product for use by Type 2 diabetics in
the future.
Critical Accounting Policies
Our 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 A to our financial statements. We have not adopted any significant new
accounting policies during the period ended December 31, 2002.
In preparing financial statements in conformity with generally accepted
accounting principles in the United States of America, we are required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses for the reporting period
covered thereby. Actual results could differ from those estimates.
16
Among such estimates made by management in the preparation of our financial
statements are the determinations of the allowance for doubtful accounts,
inventory valuations, and revenue recognition as it relates to customer returns.
The allowance for doubtful accounts is determined by assessing the realizability
of accounts receivable by taking into consideration the value of past due
accounts and collectability based on credit worthiness of such customers. The
Company assesses the realizability of inventories by reviewing inventory to
determine the value of items that are slow moving, lack marketability, and by
analysis of the shelf life of products. Estimates are made for sales returns
based on historical experience with actual returns.
Results of Operations
Three and Six Months Ended June 30, 2003 Compared to Three and Six Months Ended
June 30, 2002
We recorded a net loss of ($305,973), or ($0.05) per share, for the second
quarter ended June 30, 2003 compared to a net loss of ($44,526), or ($0.01) per
share, for the second quarter ended June 30, 2002. We recorded a net loss of
($727,076), or ($0.12) per share, for the six-month period ended June 30, 2003,
compared to a net loss of ($295,850), or ($0.05) per share, for the six-month
period ended June 30, 2002. The increase in the net loss for the three-month
period ended June 30, 2003 as compared to the same period in 2002 is due
primarily to a decrease in revenues. The increase in the net loss for the
six-month period ended June 30, 2003 as compared to the same periods in 2002 is
due primarily to increases in marketing expenses and research and development
expenses as detailed below.
Revenues in the quarter ended June 30, 2003 were $1,520,552 compared to
$1,818,096 for the same period in 2002. Revenues in the six-month period ended
June 30, 2003 were $2,918,331 compared to revenues of $2,975,026 for the same
period in 2002. We believe revenues decreased in the second quarter of 2003 due
to the seasonally poor weather experienced across the United States during this
period. The users of our sports drinks tend to be serious outdoor athletes such
as bicyclists, runners, and triathletes. Inclement weather forces such athletes
to workout less, thereby lessening the demand for our sports drinks. For the
six-month period ending June 30, 2003, sales of our ACCELERADE(R) Sports Drink
increased 22% over the same period in 2002.
Gross profit was $783,280 for the three months ended June 30, 2003 compared
to $1,010,911 for the three months ended June 30, 2002. Gross profit was
$1,461,338 for the six months ended June 30, 2003 compared to $1,604,102 for the
six months ended June 30, 2002. Gross profit margin on product sales was 51.5%
for the three months ended June 30, 2003 compared to 55.6% for the three months
ended June 30, 2002. Our gross profit margin on product sales was 50.1% for the
six-month period ended June 30, 2003 versus 53.9% for the six-month period ended
June 30, 2002. The reasons for the decrease in gross profit margins are
increases in warehouse costs as we bring on additional warehouses, increases in
freight costs, and slotting fees paid in the first quarter of 2003 in the form
of product for getting our ACCELERADE(R) product sold in 990 Rite-Aid drug
stores that feature a special nutrition section.
Our selling, general, and administrative expenses were $1,029,219 for the
three-month period ended June 30, 2003 compared to $1,024,723 for the
three-month period ended June 30, 2002. Our selling, general, and administrative
expenses increased to $2,026,922 for the six-month period ended June 30, 2003
from $1,842,317 for the six-month period ended June 30, 2002. The primary reason
for the increase in selling, general, and administrative expenses in the
six-month period ended June 30, 2003, compared to the same period in 2002 was an
increase in salaries and employee benefits as we expanded our marketing and
sales team.
Research and development expenses were $43,248 for the three months ended
June 30, 2003 versus $24,523 for the three months ended June 30, 2002. Research
and development expenses were $130,539 for the six months ended June 30, 2003
versus $47,360 for the six months ended June 30, 2002. Research and development
expenses increased during the second quarter of 2003 compared to the same period
in 2002 due to a study we conducted to further enhance our SATIETROL weight-loss
technology. In addition, research and development expenses increased in the
six-month period ended June 30, 2003 compared to the same period in 2002 due to
research and development expenses associated with the test market of the
ready-to-drink form of our ACCELERADE(R) product in the first quarter of 2003.
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.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
We 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 versus
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
GlaxoSmithKline.
17
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 GlaxoSmithKline (see below) 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, General
Nutrition Center, who discontinued selling the product in its corporate stores.
There was no legal requirement for us 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 General Nutrition Center in
2001 after these returns were $476,559.
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 GlaxoSmithKline. 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 General Nutrition Center 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. 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.
We 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.
Liquidity and Capital Resources
At June 30, 2003, our current assets exceeded our current liabilities by
approximately $1.475 million with a ratio of current assets to current
liabilities of approximately 2.5 to 1. At June 30, 2003, cash on hand was
$210,616, a decrease of $417,820 from December 31, 2002, primarily because of
our net loss for the first six months of 2003 as well as an increase of $433,749
in accounts receivable from December 31, 2002 that was offset by an increase in
notes payable of $195,075 and an increase in accounts payable/accrued expenses
of $413,112. Inventory levels decreased by $328,512 at June 30, 2003 as compared
to December 31, 2002, as we more efficiently turned our inventory in 2003.
During the second quarter of 2003, we secured a $750,000 asset-based credit
facility from USA Funding of Dallas, TX. The amount of available credit is based
on the value of our eligible receivables from time to time. This credit facility
bears interest at a rate of prime plus 2% as well as a 0.75% discount rate on
all advances. At June 30, 2003, we had approximately $400,000 of availability
under this credit facility and as of September 24, 2003, we had approximately
$175,000 of availability under this credit facility.
In August and September 2003, we issued in a private placement an aggregate
of 3,208,556 shares of common stock, together with warrants exercisable for an
aggregate of 1,604,278 shares of common stock. The shares and warrants were
issued in units of two shares and one warrant. Each warrant is exercisable for
one share of common stock. Investors paid $.935 for each unit, which price
represented a 15% discount from the market price of two shares, calculated over
a ten day period as of the initial closing. We received net cash proceeds of
approximately $1,345,000 from the private placement, after brokerage commissions
and finders' fees. We are using the proceeds of the private placement for
working capital and general corporate purposes.
18
We anticipate significantly reducing our advertising and marketing
expenditures in the second half of 2003 since our primary advertising season is
generally in the second quarter of our fiscal year. We also have the ability to
borrow against our credit facility as described above. We believe we have
sufficient cash availability to fund all of our planned activities for at least
the next twelve months.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements between us and any other entity
that have, or are reasonably likely to have, a current or future effect on our
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures, or capital resources.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Accounting for Business Combinations and SFAS No. 142, Accounting for Goodwill
and other Intangible Assets 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 our
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 ("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
our financial statements.
CHANGE IN CERTIFYING ACCOUNTANTS
Effective April 1, 2002, we dismissed Larson, Allen, Weishair & Co., LLP
and engaged Richard A. Eisner & Co. (now Eisner LLP) to serve as the independent
public accountants to audit our financial statements for the fiscal year ending
December 31, 2002.
The appointment of Eisner as independent public accountants replacing
Larson, Allen, Weishair & Co. was recommended by our the Board of Directors.
Larson, Allen, Weishair & Co. did not decline to stand for re-election and
Larson, Allen, Weishair & Co.'s reports on our financial statements for fiscal
years 2000 and 2001 did not contain an adverse opinion or a disclaimer of
opinion, and were not qualified or modified as to uncertainty, audit scope or
accounting principles.
During fiscal years 2000 and 2001, we had no disagreements with Larson,
Allen, Weishair & Co. of the nature required to be reported under Item
304(a)(1)(iv) of Regulation S-B.
Effective April 1, 2002, we engaged Eisner as our independent public
accountants. During fiscal years 2000 and 2001, we had no consultations with
Eisner concerning:
o the application of accounting principles to a specific transaction or the
type of opinion that might be rendered on our financial statements as to which a
written report was provided to us or as to which we received oral advice that
was an important factor in reaching a decision on any accounting, auditing or
financial reporting issue; or
o any disagreements, as defined in Item 304(a)(1)(iv) of Regulation S-B.
19
BUSINESS
Business Development
We research, develop and commercialize functionally unique proprietary
products for sports performance, weight loss, and Type 2 diabetes which can be
marketed without prior Food and Drug Administration approval under current
regulatory guidelines. We are strongly committed to research and development of
dietary and nutritional supplements that can enhance health and well being. Our
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 R4(R) Performance/Recovery Drink to be taken following exercise. In
clinical studies performed or funded by us, ENDUROX R4(R) 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(R). Research studies we funded have shown
that ACCELERADE(R) 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(R) in the San Diego and
Colorado Springs areas.
Weight Loss
In weight loss, we have has focused our research and development efforts on
development of novel nutritional compositions that stimulate the body's major
satiety peptide, cholecystokinin or CCK. In April 2000, we introduced our first
weight loss product, SATIETROL(R), a natural appetite control product, based on
this research. Clinical studies we performed or funded 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, we signed an
exclusive worldwide Licensing Agreement with GlaxoSmithKline for our SATIETROL
technology. Under the agreement, we received an initial payment of $1,000,000
and received a subsequent milestone payment of $250,000. GlaxoSmithKline
subsequently terminated the Licensing Agreement in September 2002 with all
rights reverting back to us. In the third quarter of 2002, clinical studies we
funded showed that the efficacy of SATIETROL could be improved. Further studies
will be conducted in 2003 and early 2004.
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. Our 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. We expect to initiate clinical trials on a product for use by Type 2
diabetics in the future.
All of our existing products, and our proposed products, are expected to be
manufactured in the United States by third parties.
Principal Products and Markets
ENDUROX(R) Product Line-Dietary Supplements
Our initial product, ENDUROX, is a dietary supplement of which the
principal ingredient is the herb ciwujia. Laboratory tests and trials we funded
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. We introduced
ENDUROX in March 1996 and commenced commercial sales of the product in May 1996.
In December 1996, we were issued patent #5,585,101 for our ENDUROX product.
ENDUROX is sold in caplet form.
ENDUROX EXCEL 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.
20
ENDUROX R4(R) Recovery / Performance Drink
We launched ENDUROX R4(R) Performance / Recovery Drink in March 1999.
Clinical trials we funded 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 R4(R) 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.
In April 2000, we were issued patent #6,051,236 for ENDUROX R4(R) 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 us to make any specific claims to the public
regarding this product. Our ability to make those claims is governed by the FDA,
Federal Trade Commission, and other federal government agency regulations and
guidelines.
SATIETROL(R)
SATIETROL, our 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.
Our 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 our first weight
loss product, SATIETROL. We have developed a number of SATIETROL formulas that
stimulate and extend the action of CCK and have filed a number of patents
regarding this unique technology.
Clinical studies funded by us and conducted in 2000 by our 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 1999 national meeting. In March 2001, we were issued patent
#6,207,638 for all 72 claims made for SATIETROL, including its use for Type 2
diabetes as well as conjunctive use with other products for treatment of
bulimia. Studies we conducted or funded 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. We intend to conduct studies to determine
if SATIETROL would be of value in Type 2 diabetes.
Additional studies funded by us and conducted in the fourth quarter of 2002
by our 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.
Our objective is to develop a patent portfolio to protect our proprietary
technology involving the use of nutritional ingredients to stimulate and extend
the action of CCK. We have already received several patents for SATIETROL and
have several more patents pending. ("Patents and Trademarks" below.)
21
In April 2000, we launched our 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 United States 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, we introduced SATIETROL COMPLETE, a 220 calorie
meal-replacement product that incorporates the SATIETROL technology. Clinical
studies funded by us and conducted in 2000 by Dr. Portman, our President, 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, we entered into an exclusive License Agreement with
GlaxoSmithKline, one of the world's largest pharmaceutical companies, for
SATIETROL, our appetite control product. The agreement provided GlaxoSmithKline
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, we received an initial payment of $1,000,000 and received a
subsequent milestone payment of $250,000. The agreement permitted
GlaxoSmithKline 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
us. GlaxoSmithKline also purchased approximately 9% of our common stock for $1.5
million under a contemporaneous stock purchase agreement. As of December 31,
2002, we had received an aggregate $2,750,000 from GlaxoSmithKline from the
combined licensing and stock purchase agreement. During the third quarter of
2002, GlaxoSmithKline terminated the license agreement. As a result, we are now
free to explore other options for the SATIETROL technology with other potential
partners.
ACCELERADE(R)
In June 2001, we introduced ACCELERADE(R) Sports Drink, to be taken during
exercise, using the same patented technology as ENDUROX R4(R). Research studies
funded by us 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(R) is significantly better than conventional sports drinks in
improving endurance during exercise. These studies showed that subjects taking
ACCELERADE(R) increased endurance performance by 24% compared to subjects
drinking a conventional sports drink containing the same amount of carbohydrate.
ACCELERADE(R) uses the ENDUROX R4(R) 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(R) 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(R) in the San
Diego and Colorado Springs areas.
Distribution Methods
We have pursued a "multi-channel" distribution strategy in marketing our
ENDUROX, ENDUROX R4(R) and ACCELERADE(R) lines of products. At the present time,
these products are being sold in over 9,000 retail outlets including General
Nutrition Centers, sports specialty stores, independent health food retailers,
independent bike retailers, health clubs, catalogs, and Internet sites. We
expect that ACCELERADE(R) ready-to-drink products will be primarily sold through
the convenience store channels of distribution. We do not sell any of our other
products through convenience stores and do not have any experience in
distributing products through convenience stores. As a result, distribution of
ACCELERADE(R) through convenience stores may initially not be as effective as
other means of distribution we use.
We began distribution of ENDUROX in Canada in 1997 through an independent
distributor with the first retail sales made in April 1997. In 1998, we began
selling our ENDUROX products in South Africa with an independent distributor on
a non-exclusive basis. In 2000, we began selling our 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 our Internet site at www.hungeroff.com.
To support our marketing efforts, we advertises in trade and consumer
sports and health food magazines that are intended to reach our targeted
consumer. In addition, we attend trade shows and exhibitions, sponsor
promotional programs and events and in-store promotions, and engage 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, we utilize a number of paid
endorsers to promote our sports nutrition line of products, including several
well-known athletes and a number of professional coaches from bicycling,
running, swimming, triathlete, hockey, and basketball.
22
In the twelve-month periods ended December 31, 2001 and December 31, 2002
and the six-month period ended June 30, 2003, our expenditures for product
advertising and promotion were approximately $557,000, $900,000 and $414,000,
respectively.
Status of Publicly Announced New Products
The status of all products which have been the subjects of or mentioned in
public announcements by us in the past year are discussed above under the
caption "Principal Products and Markets".
Competition
Depending on the product category, our competition varies.
The sports drink market in which ENDUROX R4(R) and ACCELERADE(R) compete is
dominated by companies selling brands such 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 United States focusing on the endurance athlete.
Increased competitive activity from such companies could make it more difficult
for us 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 we do. In addition,
in the market for ready-to-drink sports drinks, we must compete with large
companies whose products enjoy substantial name recognition. As a result, it may
be more difficult for us to earn market share in the market for ready-to-drink
sports drinks than in other markets in which we face 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 us 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 we do.
Since our products are based upon natural ingredients, our competitors have
access to the same ingredients and will be able to develop and market products
the same as or similar to our products. Except to the limited extent that we may
obtain patent protection for certain uses of ingredients in out products, our
competitors' products may make the same claims of benefits from use of the
products that we make.
We believe that long term success in the marketplace for any of our
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 or an
established brand name.
Suppliers of Raw Materials
We do not have manufacturing facilities and have no present intention to
manufacture any products ourselves. We fulfill product needs through
relationships with independent manufacturers. We generally do not have long term
contracts with any of these manufacturers. Competitors who do their own
manufacturing may have an advantage over us 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. We generally do not have
contracts with suppliers of materials required for the production of our
products. We obtain ciwujia for our ENDUROX caplet line of products from
suppliers in the Peoples Republic of China. At the present time, we obtain all
of our needs from one supplier in the People's Republic of China, but believe
that we could switch to a number of alternative suppliers without significant
effect. We have not entered into any long term supply agreements with this
supplier. Our 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 our existing products are available from multiple
sources.
There is no assurance that suppliers will provide the raw materials needed
by us in the quantities requested or at a price we are willing to pay. Because
we do not control the source of these raw materials, we are is also subject to
delays caused by interruption in production of materials based on conditions
outside of our control.
In 2002, we 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(R) product. In connection with this
agreement, we will receive marketing support, distribution, and manufacturing
resources under this agreement in 2003.
23
Dependence on Major Customers
General Nutrition Centers and Performance, Inc. accounted for approximately
30% and 23%, respectively, of our 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 reason, could significantly
reduce our revenues. We have no agreement with or commitment from either of
these customers with respect to future purchases.
Patents and Trademarks
We 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.
We received a composition of matter patent, United States Patent No.
6,051,236, in April 2000 for ENDUROX R4(R) entitled Composition for Optimizing
Muscle Performance During Exercise. This patent expires in April 2017.
We 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. This patent expires in March
2018.
We 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.
We 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.
We 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.
We 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.
We also have the following patents pending for our 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
The patent holder for all patents is our President, Dr. Robert Portman, and
he assigns all patents to us. To the extent we do not have patents on our
products, we can give you no assurance that another company will not replicate
one or more of our products, nor can we give you any assurance that patents
which we do obtained will provide meaningful protection or significant
competitive advantages over competing products. For example, our 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 our patent.
We have federal trademark registrations for ENDUROX, ENDUROX EXCEL, ENDUROX
ProHeart, ENDUROX R4(R), SATIETROL, SATIETROL COMPLETE, and ACCELERADE(R). We
also have filed our trademarks in most Western European countries, Canada,
Mexico and Japan. Our policy is to pursue registrations for all of the
trademarks associated with our key products, and to protect our legal rights
concerning the use of our trademarks. We rely on common law trademark rights to
protect our unregistered trademarks.
Governmental Regulation
We have determined that all of our 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. We make 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. Our activities also are
subject to regulation by various agencies of the states and localities in which
our products are sold.
24
We market 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 in October
1994. This Act amended and modified the application of certain provisions of the
Federal Food, Drug and Cosmetics Act as they relate to dietary supplements, and
required the FDA to promulgate regulations consistent with the Dietary
Supplement Health and Education Act.
The Dietary Supplement Health and Education Act defines a dietary
supplement to include:
o any product intended to supplement the diet that bears or contains a
vitamin, mineral, herb or other botanical, an amino acid, a substance to
supplement the diet by increasing the total dietary intake, or any
concentrate, constituent, extract, or combination of any such ingredient,
provided that such product is either intended for ingestion in tablet,
capsule, powder, softgel, gelcap, or liquid droplet form or, if not
intended to be ingested in such form, is not represented for use as a
conventional food or as a sole item of a meal or the diet,
o is not represented for use as a conventional food or as a sole item of a
meal or the diet, and
o 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 Dietary Supplement Health and Education
Act will apply to a wide class of products.
Under the Dietary Supplement Health and Education Act, 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:
o a statement that claims a benefit related to a classical nutrient
deficiency disease and discloses the prevalence of such disease in the
United States;
o a statement that describes the role of a nutrient or dietary ingredient
intended to affect structure or function in humans;
o a statement that characterizes the documented mechanism by which a
nutrient or dietary ingredient acts to maintain or function; or
o 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 the Dietary Supplement Health Education Act. 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.
Expenditures for Research and Development
Our research and development expenditures in fiscal years 2002 and 2001,
exclusive of market research and marketing related expenditures, were $166,000
and $106,000, respectively.
Compliance with Environmental Laws
We are not aware of any "administrative" or other costs, which we incur
which are directly related to compliance with environmental laws.
25
Employees
As of October 17, 2003, we have 12 full time employees. Of these, 3
employees are executive, 5 are in sales and marketing, and 4 are in accounting,
operations and administrative. We employ a number of consultants who devote
limited portions of their time to our business. None of our employees are
represented by a union and we believe that our employee relations are good.
Properties
We currently lease our office space in Matawan, New Jersey. In June, 2003,
we entered into a lease that expires on June 30, 2007 for approximately 5,500
gross square feet with an annual base rent through March 31, 2006 of
$123,750.00, plus a proportionate share of increases in operating costs, such as
utilities and insurance, and taxes From April 1, 2006 through June 30, 2007, the
annual base rent will increase to $140,250.00, plus our proportionate share of
increases in operating costs and taxes.
We do not intend to develop our 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 our needs in the
foreseeable future.
We do not have any real estate investments.
Legal Proceedings
We are not a party to any material, threatened or pending legal
proceedings.
MANAGEMENT
Executive Officers and Directors
Set forth below is information concerning our executive officers, directors
and key employees, including their ages, as of September 26, 2003:
Name Age Position with Pacific Health
Robert Portman, Ph.D. 58 President and Chief Executive Officer, and
Chairman of the Board of Directors
Stephen P. Kuchen 42 Vice President - Finance, Chief Financial
Officer, Treasurer, Assistant Secretary, and
Director
Bruce Bollinger 43 Executive Vice-President of Marketing
David I. Portman 62 Secretary and Director
T. Colin Campbell, Ph.D. 69 Director*
Michael Cahr 63 Director*,#
Joseph Harris 56 Director*,#
Gregory T. Horn Director
*Member of Audit Committee
#Member of Compensation Committee
DR. ROBERT PORTMAN has served as our President and Chairman of the Board of
Directors since its inception. Dr. Portman has a Ph.D. in Biochemistry and
worked as a senior scientist at Schering Laboratories before co-founding M.E.D.
Communications in 1974 with his brother, David Portman. In 1987, Dr. Portman
started a consumer agency and, in 1993, he merged both agencies to form C&M
Advertising. C&M Advertising, with billings in excess of $100 million, handled
national advertising for such diverse accounts as Berlex Laboratories,
Ortho-McNeil Laboratories, Tetley Tea, Radisson Hotels and HIP of New Jersey.
Effective June 1, 1995, Dr. Portman relinquished his responsibilities as
Chairman of C&M Advertising (which since has been renamed "The Sawtooth Group")
to assume his present positions with PacificHelath on a full time basis, and, in
September 1996, Dr. Portman sold his interest in that company.
STEPHEN P. KUCHEN is our Vice President - Finance, Chief Financial Officer,
Treasurer and Assistant Secretary as well as a Director of PacificHealth. Mr.
Kuchen joined us in February of 2000 as Controller, and was appointed to his
current positions in June 2000 to fill a vacancy. Prior to joining
PacificHealth, 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.
26
BRUCE BOLLINGER 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 us 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 has served as Secretary and a Director of PacificHealth
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 has served as a Director of PacificHealth since its
inception. Dr. Campbell also serves as Chairman of our 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.
MICHAEL CAHR was appointed to our 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 was appointed to our 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.
Gregory T. Horn was appointed to our Board of Directors in September 2003.
Mr. Horn currently serves as partner and managing director of Lyric Capital, a
venture capital firm From 1991 through , 2001, Mr. Horn was an executive with
General Nutrition, Inc., most recently as Chief Executive Officer. General
Nutrition, Inc. is a specialty retailer that has been our largest customer for
several years. After the purchase of General Nutrition by Royal Numico, Mr. Horn
served as Group Director of Nutritional Supplements and an Executive Board
member of Royal Numico; a $4.5 billion global specialty nutrition company where
he developed and led the U.S. and European launch of innovative nutritional
supplements. Mr. Horn received an MBA from the University of California, Los
Angeles in 1989 and a B.A., Summa Cum Laude, in Management and Psychology from
University of Redlands in 1987.
27
Summary of Cash and Other Compensation
The following table provides summary information concerning cash and
non-cash compensation paid to or earned by our Chief Executive Officer and our
executive officers, who received or earned cash and non-cash salary and bonus of
more than $100,000 for the fiscal year ended December 31, 2002. Mr. Bollinger
currently receives compensation of $150,000 annually. He is not included in the
table as he received only $25,250 of compensation in 2002.
------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
----------------------------------------- -----------------------------------------
Awards Payouts
-----------------------------------------
Securities
Other Under-
Annual Restricted lying All Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Salary Bonus sation Award(s) SARs Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
-------------------- -------- --------------- --------- --------------- ------------- ---------------- ---------- ------------
Robert Portman, 2002 275,000 -0- (1) -0- 300,000 -0- -0-
President, Chief ---------------------------------------------------------------------------------------------------------
Executive 2001 275,000 111,120 217,075 (2) -0- 1,160,000 (3) -0- -0-
Officer and ---------------------------------------------------------------------------------------------------------
Chairman of the 2000 200,000 -0- (1) -0- 275,000 -0- -0-
Board
-------------------- -------- --------------- --------- --------------- ------------- ---------------- ---------- ------------
Stephen Kuchen, 2002 100,000 500 (1) -0- -0- -0- -0-
[Chief Financial ---------------------------------------------------------------------------------------------------------
Officer,] Vice 2001 92,500 3,000 (1) -0- 25,000 -0- -0-
President[, ---------------------------------------------------------------------------------------------------------
Treasurer and 2000 72,452 (4) -0- (1) -0- 35,000 -0- -0-
Assistant
Secretary]
------------------------------------------------------------------------------------------------------------------------------
(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 Pacific Health in February 2000.
Option Grants in Last Fiscal Year
The following table summarizes option grants during the fiscal year ended
December 31, 2002 to or by each of the executive officers named in the Summary
Compensation Table above.
--------------------------------------- -------------------- -------------------- ----------------- ------------------
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
--------------------------------------- -------------------- -------------------- ----------------- ------------------
Robert Portman 300,000(1) 66.8% $2.79 12/31/07
--------------------------------------- -------------------- -------------------- ----------------- ------------------
Stephen Kuchen - 0 - - 0 - --- ---
--------------------------------------- -------------------- -------------------- ----------------- ------------------
(1) 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.
28
Aggregated Option Exercises In Last Fiscal Year and Fiscal Year-End Option
Values
The following table summarizes the number and value of options held by each
of the executive officers named in the Summary Compensation Table above at
December 31, 2002.
------------------------------ ------------ ----------- ------------------------------- ------------------------------
Number of Securities $ Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Options At 12/31/02 At 12/31/02
On Value Exercisable/ Exercisable/
Exercise Realized Unexercisable Unexercisable
Name (#) ($) (#) ($)
------------------------------ ------------ ----------- -------------- ---------------- -------------- ---------------
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-
------------------------------ ------------ ----------- -------------- ---------------- -------------- ---------------
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.
Employment Agreements and Change in Control Provisions
Currently, Dr. Portman is employed by us 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 our 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 our common stock under our 2000 Stock Option Plan priced at $2.79 per
share (the market price of our 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 us
at such dates. To the extent not previously vested, the options also will vest
if Dr. Portman's employment is terminated by us 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 us. Dr.
Portman has the right to terminate the 2003 Employment Agreement without cause
(as defined in the 2003 Employment Agreement) on thirty days prior written
notice, or with cause. We have the right to terminate the 2003 Employment
Agreement for cause (as defined in the 2003 Employment Agreement). We have an
employment agreement with Dr. Portman, which expires December 31, 2004. Among
other terms, this agreement provides:
o If we terminate Dr. Portman's employment without cause, or he
terminates his employment with cause, his options to purchase our
common stock will immediately vest and will be retained by him,
notwithstanding his termination.
o In the event Dr. Portman's employment is terminated by us without cause
or by him with cause, he is entitled to receive a lump sum payment of
an amount equal to his salary for the lesser of one year or the
remaining term of the agreement.
o Upon Dr. Portman's termination for any reason, including his voluntary
termination, Dr. Portman will not be bound by any non-competition
agreement unless we continue to pay his salary, in which case he will
be subject to a one year non-competition agreement.
Under our arrangement with Mr. Bollinger, in the event of sale, merger or
change in control of the Company, if Mr. Bollinger is subsequently terminated,
his compensation substantially changed, or certain other aspects of his
employment materially affected, Mr. Bollinger would be entitled to double his
ordinary severance of three months' salary, and all of his options would become
immediately vested.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the last two fiscal years, we have 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 our capital stock had a direct or indirect material
interest, nor are any such transactions presently proposed, except as follows:
29
In an August and September 2003 private placement, we issued an aggregate
of 3,208,556 shares of common stock, together with warrants exercisable for an
aggregate of 1,604,278 shares of common stock. The shares and warrants were
issued in units of two shares and one warrant. Each warrant is exercisable for
one share of common stock. Investors paid $.935 for each unit, which price
represented a 15% discount from the market price of two shares, calculated over
a ten day period as of the initial closing. Certain of our executive officers
and directors participated in this transaction. Robert Portman, David Portman
and Stephen Kuchen, respectively, purchased 320,856, 106,952 and 10,696 shares,
together with 160,428, 53,476 and 5,348 warrants, in this private placement, on
the same price and terms as non-affiliated investors. In addition, Mr. Horn, our
new director, purchased 427,807 shares and 213,903 warrants on the same terms as
other investors. Mr. Horn committed to the purchase of such shares at
approximately the same time as he was elected director.
In April 2001, the Company issued an aggregate of $100,000 in principal amount
of its 10% Promissory Notes due in 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 GlaxoSmithKline PLC.
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
As of September 26, 2003, we had 9,324,259 shares of common stock
outstanding. The following table sets forth information as of September 26, 2003
concerning the ownership of our common stock by our directors, executive
officers and each person known to us to be the beneficial owner of more than
five percent of our common stock 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) 3,061,051 28.2%
President, Chief Executive Officer
and a Director and Chairman of the Board
Stephen P. Kuchen (4) 74,244 *%
Vice President, Chief Financial
Officer, Treasurer, Assistant
Secretary and a Director
Bruce Bollinger (5) - 0 - *
Executive Vice President- Marketing
David I. Portman (6) 473,928 5..0%
Secretary and a Director
T. Colin Campbell (7) 185,954 2.0%
Director
Michael Cahr (8) 20,000 *
Director
Joseph Harris (9) 21,000 *
Director
Gregory T. Horn (10) 651,710 6.8
Director
Executive Officers and Directors as a 4,487,887 39.5%
group (7 persons)
30
Common Stock (2) Common Stock (2)
Name and Address (1) Amount Beneficially Owned Percentage of Class
------------------------- -------------------
GlaxoSmithKline PLC 541,711 5.8%
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., 100 Matawan Road,
Suite 420, Matawan, New Jersey 07747-39123.
(2) Common stock which is issuable upon the exercise of a stock option or
warrant which is presently exercisable or which becomes exercisable within
sixty days is considered outstanding for the purpose of computing the
number of shares beneficially owned and the percentage ownership of persons
holding such options and warrants, and of officers and directors as a group
with respect to all options held by officers and directors.
(3) Includes 1,520,428 shares issuable upon exercise of options and warrants.
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 63,548 shares issuable upon exercise of options and warrants.
(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 178,476 shares issuable upon exercise of options and warrants.
(7) Includes 25,000 shares issuable upon exercise of options. 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 20,000 shares issuable upon exercise of options.
(9) Includes 20,000 issuable upon exercise of options.
(10) Includes 223,903 shares issuable upon exercise of options and warrants.
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue up to 50,000,000 shares of common stock, par
value $0.0025 per share and 1,00,000 shares of preferred stock, no par value. As
of the date of this prospectus, there are 9,324,259 shares of common stock and
no shares of preferred stock outstanding. We also have outstanding options and
warrants to purchase an aggregate of outstanding options and warrants to
purchase 2,248,575 additional shares of common stock, in addition to the
1,759,131 shares issuable upon exercise of warrants that may be resold under
this prospectus. The options and warrants do not confer upon holders any voting,
dividend or other rights as shareholders of PacificHealth.
The following is a summary of the material terms of our common stock and
our preferred stock. This summary does not purport to be complete or to contain
all the information that may be important to you and is qualified in its
entirety by reference to our certificate of incorporation, as amended, and
bylaws, as amended. We encourage you to read the provisions of these documents
to the extent they relate to your individual investment strategy. Our
certificate of incorporation and bylaws, as amended, are filed as exhibits to
our Registration Statement on Form SB-2 (Registration No.333-36379) filed on
September 25, 1997. An amendment increasing the authorized number of shares of
common stock is filed as an exhibit to our annual report on Form 10-KSB for the
year ended December 31, 2002. See the section of this prospectus entitled "Where
You Can Find More Information."
31
Subject to preferences that may be applicable to any preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available therefore at such
time and in such amounts as the Board of Directors may, from time to time,
determine in its sole discretion. Holders of common stock are also entitled to
one vote for each share of common stock held of record on all matters submitted
to a vote of shareholders. The common stock is not entitled to preemptive rights
and is not subject to redemption. Upon the liquidation, dissolution or winding
up of PacificHealth, the assets legally available for distribution to
shareholders are distributable ratably among the holders of the common stock and
of any participating preferred stock outstanding at that time after payment of
the liquidation preferences, if any, on all outstanding preferred stock and
payment of creditors' claims. Each outstanding share of common stock is fully
paid and non-assessable.
Our certificate of incorporation authorizes the issuance of preferred stock
with such designations, rights and preferences as may be determined from time to
time by our Board of Directors. Accordingly, the Board of Directors is
empowered, without shareholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of the common stock. As of the date
hereof, we have no shares of preferred stock outstanding. Issuance of the
preferred stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of PacificHealth.
Warrants
--------
The following is a brief summary of the Warrants held by the selling
shareholders. This summary does not purport to be complete and is qualified in
all respects by reference to the actual text of the Warrants.
Exercise Price and Terms. Each Warrant entitles the registered holder thereof to
purchase one share of Common Stock, at any time during the five-year period
commencing on the original issue date, at an exercise price equal to $.6325. The
holder of any Warrant may exercise such Warrant by surrendering the certificate
representing the Warrant to the Company, with the subscription form thereon
properly completed and executed, together with payment of the exercise price.
The Warrants may be exercised at any time in whole or in part at the applicable
exercise price until the expiration of the Warrants. No fractional shares will
be issued upon the exercise of the Warrants.
Redemption. Beginning one year after the initial Closing, the Company may redeem
any or all outstanding and unexercised Warrants at a price of $.05 per Warrant
share upon 30 days notice if both (a) during the 30 consecutive trading days
ending on the date prior to the giving of the notice (the "Determination
Period") the Market Price for at least 20 of such days is in excess of 200% of
the Warrant Exercise Price, and (b) the average daily trading volume for the
Determination Period is in excess of 30,000 shares per day.
Adjustments. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment, upon
the occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of the Common Stock. Additionally, an
adjustment will be made in the case of a reclassification or exchange of Common
Stock, consolidation or merger of the Company with or into another corporation,
sale of all or substantially all of the assets of the Company or dissolution of
the Company, in order to enable Warrantholders to acquire the kind and number of
shares of stock or other securities or property receivable in such event by a
holder of the number of shares of Common Stock that might have been purchased
upon the exercise of the Warrant.
Transfer, Exchange and Exercise. Subject to applicable securities law, the
Warrants may be presented to the Company for transfer, exchange or exercise at
any time on or prior to their expiration date, at which time the Warrants become
wholly void and of no value.
Warrantholders Not Shareholders. The Warrants do not confer upon holders any
voting, dividend or other rights as shareholders of the Company.
Certain Provisions of Our Certificate of Incorporation and Bylaws and Delaware
Anti-Takeover Law
Certificate of Incorporation and Bylaws
Certain provisions of our certificate of incorporation and bylaws could
make more difficult the acquisition of our company by means of a tender offer, a
proxy contest, or otherwise, and the removal of incumbent officers and
directors. These provisions are expected to discourage certain types of coercive
takeover practices and inadequate takeover bids and to encourage persons seeking
to acquire control of our company to first negotiate with us. We believe that
the benefits of increased protection of our potential ability to negotiate with
the proponent of an unfriendly or unsolicited proposal to acquire or restructure
our company outweighs the disadvantages of discouraging such proposals,
including proposals that are priced above the then current market value of our
common stock, because, among other things, negotiation of such proposals could
result in an improvement of their terms.
32
Issuance of Preferred Stock
As noted above, our Board of Directors, without shareholder approval, has
the authority under our certificate of incorporation to issue preferred stock
with rights superior to the rights of the holders of common stock. As a result,
preferred stock could be issued quickly and easily, could adversely affect the
rights of holders of common stock and could be issued with terms calculated to
delay or prevent a change in control of us or make removal of management more
difficult.
Number and Terms of Directors
Pursuant to our bylaws, our Board of Directors has the authority to
determine the number of directors that will constitute our Board of Directors
and the terms of office of directors. The power of the Board of Directors to
increase the number of directors to a maximum of nine and to determine
directors' terms of office could make it more difficult for shareholders to
replace a majority of the board of directors, may discourage a third party from
making a tender offer or otherwise attempting to gain control of us and may
maintain the incumbency of the Board of Directors.
Advance Notice of Nominations and Shareholder Proposals
Our bylaws generally require at least 60 but no more than 90 days' advance
notice by a shareholder of a proposal or director nomination that such
shareholder desires to present at any annual meeting or special meeting of
shareholders, which would prevent a shareholder from making a proposal or a
director nomination at a shareholder meeting without our having advance notice
of the proposal or director nomination. In the event that we give less than 70
days' notice or prior public disclosure of the date of any meeting of
shareholders, a shareholder must provide notice of a proposal or director
nomination to us no later than ten days following the day on which the notice of
such meeting was mailed or public disclosure of the date of such meeting was
made. These provisions could make a change in control more difficult by
providing the incumbent directors with more time to prepare an opposition to a
proposed change in control.
Special Meetings of Our Shareholders May Be Called Only by the Board of
Directors, the Chairman, the President or the Holders of a Majority of the
Outstanding Shares of Common Stock
Our bylaws only permit the Board of Directors, the Chairman of the Board of
Directors, the President or the holders of a majority of the outstanding shares
of common stock entitled to vote at such meeting to call a special meeting of
shareholders. This provision may prevent a shareholder with less than a majority
interest from calling a special meeting unless such shareholder first obtains
adequate support from a sufficient number of other shareholders.
Amendment of Our Bylaws
Our certificate of incorporation and our bylaws authorize the Board of
Directors to alter, amend or repeal the bylaws or adopt new bylaws by the
affirmative vote of a majority of the directors present at any regular or
special meeting of the Board of Directors at which a quorum is present. Our
bylaws permit shareholders to alter, amend or repeal the bylaws or adopt new
bylaws by the affirmative vote of the holders of two-thirds of the shares of our
common stock of entitled to vote at any regular or special meeting of
shareholders, provided that notice of such alteration, amendment, repeal or
adoption of new by-laws is stated in the notice of any such special meeting.
These provisions would prevent a shareholder with less than a two-thirds
interest from altering, amending or repealing any bylaw or adopting any new
bylaw unless such shareholder had first obtained adequate support from a
sufficient number of other shareholders, but would permit a majority of the
directors to take such action without approval of shareholders.
No Cumulative Voting in the Election of Directors
Our shareholders are not permitted to cumulate their votes in the election
of directors. As a result, shareholders owning a majority of our common stock
may elect all of the directors.
These provisions are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors and in the policies
formulated by the Board and to discourage certain types of transactions that may
involve an actual or threatened change of control of our company. These
provisions are designed to reduce our vulnerability to an unsolicited proposal
for a takeover that does not contemplate the acquisition of all of our
outstanding shares or an unsolicited proposal for the restructuring or sale of
all or part of our company. These provisions, however, could discourage
potential acquisition proposals and could complicate, delay or prevent a change
in control of our company. They may also have the effect of preventing changes
in our management. We believe that the benefits of increased protection of our
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure us outweighs the disadvantages of
discouraging these proposals, including proposals that are priced above the then
current market value of our common stock, because, among other things,
negotiation of these proposals could result in an improvement of their terms.
33
The Delaware General Corporation Law
We are not subject to Section 203 of the Delaware General Corporation Law.
This provision generally prohibits a Delaware corporation from engaging in any
business combination with any interested shareholder for a period of three years
following the date the shareholder became an interested shareholder, unless
o prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
shareholder becoming an interested shareholder,
o upon consummation of the transaction that resulted in the shareholder
becoming an interested shareholder, the interested shareholder owned at
least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining
the number of shares outstanding those shares owned by persons who are
directors and also officers and by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer, or
o on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting
of shareholders and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock that is not owned by
the interested shareholder.
Section 203 defines a business combination to include
o any merger or consolidation involving the corporation and the
interested shareholder,
o any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested shareholder,
o subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested shareholder,
o any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested shareholder, or
o the receipt by the interested shareholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by
or through the corporation.
In general, Section 203 defines an interested shareholder as any entity
or person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for PacificHealth by Eckert Seamans Cherin & Mellott, LLC, Philadelphia,
Pennsylvania.
EXPERTS
The financial statements of PacificHealth as of and for the year ended
December 31, 2002 have been included in this prospectus in reliance upon the
report of Eisner LLP, independent auditors, appearing elsewhere in this
prospectus, given upon the authority of said firm as experts in accounting and
auditing. The financial statements of PacificHealth as of and for the year ended
December 31, 2001 have been included in this prospectus in reliance upon the
report of Larson, Allen, Weishair & Co., LLP, independent auditors, appearing
elsewhere in this prospectus, and upon the authority of said firm as experts in
accounting and auditing.
34
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the Securities
and Exchange Commission. Copies of our reports, proxy statements and other
information may be inspected and copied at the public reference facility
maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of these materials also can be obtained by mail at prescribed
rates from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330. The SEC
maintains a web site that contains reports, proxy statements and other
information regarding us. The address of the SEC web site is http://www.sec.gov.
In addition, we maintain a web site that contains information regarding our
company, including copies of reports, proxy statements and other information we
file with the SEC. The address of our web site is www.pacifichealthlabs.com. Our
web site, and the information contained on that site, or connected to that site,
are not incorporated and do not constitute a part of this prospectus.
We have filed a registration statement on Form SB-2 with the SEC for the
common stock offered by the selling shareholders under this prospectus. This
prospectus does not include all of the information contained in the registration
statement. You should refer to the registration statement and its exhibits for
additional information that is not contained in this prospectus. Whenever we
make reference in this prospectus to any of our contracts, agreements or other
documents, you should refer to the exhibits attached to, or incorporate by
reference into, the registration statement for copies of the actual contract,
agreement or other document.
35
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2002 and 2001
PACIFICHEALTH LABORATORIES, INC.
INDEX TO FINANCIAL STATEMENTS
Description Page
--------------------------------------------------------------------------------------------------------------
As of and for the Period Ended June 30, 2003 (Unaudited):
Balance Sheets as of June 30, 2003 and December 31, 2002 F-2
Statements of Operations for the three and six months ended June 30, 2003 and 2002 F-3
Statements of Cash Flows for the six months ended June 30, 2003 and 2002 F-4
Notes to Financial Statements F-5
As of and for the Year Ended December 31, 2002:
Independent Auditors' Report of Eisner, LLP F-7
Independent Auditors' Report of Larson, Allen & Wesihair, LLP F-8
Balance Sheets as of December 31, 2002 and 2001 F-9
Statements of Operations for the years ended December 31, 2002 and 2001 F-10
Statements of Changes in Shareholders' Equity for the years ended December 31, 2002 and 2001 F-11
Statements of Cash Flows for the years ended December 31, 2002 and 2001 F-12
Notes to the Financial Statements
36
PACIFICHEALTH LABORATORIES, INC.
BALANCE SHEETS
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues:
Net product sales $1,520,552 $1,818,096 $2,918,331 $2,975,026
Cost of goods sold 737,272 807,185 1,456,993 1,370,924
---------- ---------- ---------- ----------
Gross Profit 783,280 1,010,911 1,461,338 1,604,102
Selling, general and administrative expenses 1,029,219 1,024,723 2,026,922 1,842.317
Research & Development 43,248 24,523 130,539 47,360
Depreciation expense 13,356 9,359 27,473 18,574
---------- ---------- ---------- ----------
1,085,823 1,058,605 2,184,934 1,908,251
---------- ---------- ---------- ----------
Net operating income (loss) (302,543) (47,694) (723,596) (304,149)
Other income (expense):
Interest income 522 4,086 1,466 9,941
Interest expense (8,952) (918) (9,946) (1,642)
Other 5,000 - 5,000 -
---------- ---------- ---------- ----------
(3,430) 3,168 (3,480) 8,299
---------- ---------- ---------- ----------
Income (loss) before income taxes (305,973) (44,526) (727,076) (295,850)
Provision for income taxes - - - -
---------- ---------- ---------- ----------
Net income (loss) $ (305,973) $ (44,526) $ (727,076) $ (295,850)
========== ========== ========== ==========
Basic income (loss) per share $ (0.05) $ (0.01) $ (0.12) $ (0.05)
========== ========== ========== ==========
Diluted income (loss) per share $ (0.05) $ (0.01) $ (0.12) $ (0.05)
========== ========== ========== ==========
Weighted average common shares:
Basic 6,115,703 6,061,302 6,115,438 6,050,313
========== ========== ========== ==========
Diluted 6,448,220 7,313,680 6,684,590 7,221,871
========== ========== ========== ==========
ASSETS
June 30, December 31,
2003 2002
(Unaudited) (Audited)
---------- ----------
Current assets:
Cash and cash equivalents $ 210,616 $ 628,436
Accounts receivable, net 768,968 335,219
Inventories 1,209,272 1,537,784
Prepaid expenses 271,196 142,865
---------- ----------
Total current assets 2,460,052 2,644,304
Property and equipment, net 59,156 66,835
Other assets:
Deposits 17,378 3,991
---------- ----------
Total assets $2,536,586 $2,715,130
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
$ 259,287 $ 64,212
Notes payable
Accounts payable and accrued expenses 693,496 280,384
Other 31,734 100,000
---------- ----------
Total current liabilities 984,517 444,596
---------- ----------
Stockholders' equity:
Common stock, $.0025 par value; authorized
50,000,000 shares; issued and outstanding:
6,115,703 shares at June 30, 2003 and
6,114,703 shares at December 31, 2002 15,289 15,287
Additional paid-in capital 13,848,583 13,839,973
Accumulated deficit (12,311,803) (11,584,726)
---------- ----------
1,552,069 2,270,534
---------- ----------
Total liabilities and stockholders' equity $2,536,586 $2,715,130
========== ==========
F-2
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues:
Net product sales $1,520,552 $1,818,096 $2,918,331 $2,975,026
Cost of goods sold 737,272 807,185 1,456,993 1,370,924
---------- ---------- ---------- ----------
Gross Profit 783,280 1,010,911 1,461,338 1,604,102
Selling, general and administrative expenses 1,029,219 1,024,723 2,026,922 1,842,317
Research & development 43,248 24,523 130,539 47,360
Depreciation expense 13,356 9,359 27,473 18,574
---------- ---------- ---------- ----------
1,085,823 1,058,605 2,184,934 1,908,251
---------- ---------- ---------- ----------
Net operating income (loss) (302,543) (47,694) (723,596) (304,149)
Other income (expense):
Interest income 522 4,086 1,466 9,941
Interest expense (8,952) (918) (9,946) (1,642)
Other 5,000 - 5,000 -
---------- ---------- ---------- ----------
(3,430) 3,168 (3,480) 8,299
---------- ---------- ---------- ----------
Income (loss) before income taxes (305,973) (44,526) (727,076) (295,850)
Provision for income taxes - - - -
---------- ---------- ---------- ----------
Net income (loss) $ (305,973) $ (44,526) $ (727,076) $ (295,850)
========== ========== ========== ==========
Basic income (loss) per share $ (0.05) $ (0.01) $ (0.12) $ (0.05)
========== ========== ========== ==========
Diluted income (loss) per share $ (0.05) $ (0.01) $ (0.12) $ (0.05)
========== ========== ========== ==========
Weighted average common shares:
Basic 6,115,703 6,061,302 6,115,438 6,050,313
========== ========== ========== ==========
Diluted 6,115,703 6,061,302 6,115,438 6,050,313
========== ========== ========== ==========
F-3
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
2003 2002
--------- ----------
Cash flows from operating activities:
Net income (loss) $(727,076) $ (295,850)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation 27,473 18,574
Intrinsic value of stock options granted 7,552 15,950
Changes in assets and liabilities:
Decrease (Increase) in accounts receivable (433,749) (605,489)
Decrease (Increase) in inventories 328,512 (223,737)
Decrease (Increase) in prepaid expenses (128,331) (105,701)
Decrease (Increase) in deposits (13,387) -
Increase (Decrease) in accounts payable/accrued expenses 413,112 345,524
Increase (Decrease) in other current liabilities (68,266) -
--------- ----------
Net cash used in operating activities (594,160) (850,729)
--------- ----------
Cash flows from investing activity:
Purchase of fixed assets (19,794) (14,946)
--------- ----------
Net cash used in investing activities (19,794) (14,946)
--------- ----------
Cash flows from financing activities:
Issuance of notes payable 254,491 52,700
Repayments of notes payable (59,417) (41,113)
Common stock options/warrants exercised 1,060 126,750
--------- ----------
Net cash provided by financing activities 196,134 138,337
--------- ----------
Net increase (decrease) in cash (417,820) (727,338)
Cash, beginning balance 628,436 1,848,847
--------- ----------
Cash, ending balance $ 210,616 $1,121,509
========= ==========
F-4
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
1. Basis of Presentation:
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the
instructions for Form 10-QSB and Item 310 of Regulation S-B. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and six months ended June 30,
2003 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2003. The unaudited financial statements
should be read in conjunction with the financial statements and footnotes
thereto included in the Company's annual report on Form 10-KSB for the year
ended December 31, 2002.
2. Inventories
As of June 30, 2003 and December 31, 2002, inventories consist of the
following:
06/30/03 12/31/02
Raw Materials $ 9,431 $ 3,228
Packaging supplies 41,016 39,341
Work in Process 48,605 -
Finished goods 1,110,220 1,495,215
---------- ----------
$1,209,272 $1,537,784
========== ==========
3. Stock Based Compensation
The Company granted 21,000 Incentive Stock Options (ISOs) to employees
during the first six months of 2003 with exercise prices ranging from $0.80
per share to $1.92 per share. 11,000 of these options vest during the first
quarter of 2004 and 10,000 of these options vest during the first quarter
of 2005. The exercise price for all 21,000 options was equal to the fair
market value of the common stock on the date of grant. Since the Company
accounts for its options under APB No. 25, no compensation expense was
recognized.
The Company also granted 4,500 stock options to consultants during the
first six months of 2003. All 4,500 options vested upon grant with exercise
prices ranging from $0.89 per share to $2.15 per share. These options were
determined to have a value of $4,873 for the six months ended June 30, 2003
and this amount was charged to operations and added to paid-in capital in
accordance with SFAS 123. In addition, 45,000 options issued to consultants
expired during the first six months of 2003.
F-5
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:
Six Months Ended June 30,
2003 2002
--------- ---------
Reported net (loss) income $(727,076) $(295,850)
Stock-based employee compensation expense included in
reported net loss, net of related tax effects - 0 - - 0 -
Stock-based employee compensation determined under the
fair value based method, net of related tax effects (130,271) (82,757)
--------- ---------
Pro forma net (loss) income $(857,347) $(378,607)
========= =========
Basic and diluted (loss) per share:
As reported ($0.12) ($0.05)
Pro forma ($0.14) ($0.06)
4. Income Taxes
The Company has approximately $11,588,000 in Federal net operating loss
carryovers that were generated through June 30, 2003 and are available to offset
future taxable income in calendar years 2003 through 2023.
The components of the Company's deferred tax assets as of June 30, 2003 and
December 31, 2002 are as follows:
2003 2002
Net operating loss carry forwards $ 4,270,000 $ 4,066,000
Deferred charges 45,000 45,000
Valuation allowance (4,315,000) (4,111,000)
----------- -----------
Deferred tax asset $ - $ -
5. Notes Payable
Included in notes payable at June 30, 2003 is $173,206 payable to USA
Funding. During the second quarter of 2003, the Company secured a $750,000
revolving asset-based credit facility from USA Funding of Dallas, TX. This
facility is for one year commencing on June 1, 2003. The amount of available
credit is based on the value of the Company's eligible receivables from time to
time. Eligible receivables include those receivables that have payment terms
less than net 45 days or have been outstanding for less than 90 days. The
receivables are financed with recourse. This credit facility bears interest at a
rate of prime plus 2% as well as a 0.75% discount rate on all advances.
INSERT ANNUAL FINANCIAL STATEMENTS
F-6
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.
/S/ Eisner LLP
Florham Park, New Jersey
February 12, 2003
F-7
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.
/s/ LARSON, ALLEN, WEISHAIR & CO., LLP
Blue Bell, Pennsylvania
January 29, 2002
F-8
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 par 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-9
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-10
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-11
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-12
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-13
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-14
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 public enterprises to report
financial and descriptive information about its reportable operating
segments. Operating segments, as defined in SFAS No. 131, are components
of an enterprise for which separate financial information is available
and is evaluated regularly by the Company in deciding how to allocate
resources and in addressing performance. The financial information is
required to be reported on the basis that is used internally for
evaluating this segment performance. The Company operates in one business
segment: the design, development and marketing of dietary and nutritional
supplements that enhance health and well being.
[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-15
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 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-16
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-17
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-18
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-19
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-20
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-21
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-22
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-23
4,967,687 Shares
PACIFICHEALTH LABORATORIES, INC.
Common Stock
---------------------------------
Prospectus
, 2003
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a corporation to
indemnify its directors, officers, employees or other agents in terms
sufficiently broad to permit indemnification (including reimbursement for
expenses incurred) under certain circumstances for liabilities arising under the
Securities Act of 1933.
Our certificate of incorporation, as amended, contains a provision permitted by
Delaware law which eliminates the personal liability of our directors for
monetary damages for breach or alleged breach of their fiduciary duty of care
which arises under state law. Although this does not change the directors' duty
of care, it limits legal remedies which are available for breach of that duty to
equitable remedies, such as an injunction or rescission. This provision of our
certificate of incorporation has no effect on directors' liability for: (1)
breach of the directors' duty of loyalty; (2) acts or omissions not in good
faith or involving intentional misconduct or known violations of law; and (3)
approval of any transactions from which the directors derive an improper
personal benefit.
Our amended and restated bylaws contains a provision that provides for the
indemnification of any individual who was, is, or is threatened to be made a
party, by reason of the fact that the individual is a director or officer of
ours or serves in a similar role, to any pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative. Pursuant
to this provision, the individual is indemnified against all expenses, liability
and loss actually and reasonably incurred to the extent such individual is not
otherwise indemnified and to the extent such indemnification is permitted by
law.
Insofar as indemnification for liabilities arising under the Securities Act may
be allowed to our directors, officers and controlling persons under the forgoing
provisions, or otherwise, we have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
ITEM 25. Other Expenses of Issuance and Distribution*
The following table sets forth all estimated costs and expenses other than
underwriting discounts, commissions and expense allowances, payable by us in
connection with the maximum offering for the securities included in this
registration statement:
SEC registration fee $ 344
Blue sky fees and expenses $ 5,000
Printing and shipping expenses $ 3,000
Legal fees and expenses $ 7,500
Accounting fees and expenses $ 3,500
Transfer and miscellaneous expenses $ 1,000
=======
Total $20,344
=======
-------------------
* All expenses are estimated except the Commission filing fee.
ITEM 26. Recent Sales of Unregistered Securities
We sold the following securities in the past three years in transactions not
registered under the Securities Act of 1933:
o In August and September 2003, we sold 3,208,556 shares of common stock,
together with warrants exercisable for 1,604,228 shares of common stock
to accredited investors in a private placement transaction. The shares
and warrants were sold in units of two shares and one warrant. Each
warrant is exercisable for one share of common stock. Investors paid
$0.935 for each unit, which price represented a 15% discount from the
market price of two shares, calculated over a ten day period as of the
initial closing. We raised gross proceeds of $575,000 in this
transaction. The issuance of these securities was exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2)
thereof and/or Regulation D promulgated thereunder.
o As of January 2001, we granted options to purchase 460,000 shares of
common stock to our President, Dr. Robert Portman. These options were
granted under our Year 2000 Stock Option Plan. These options have an
exercise price of $0.313 per share. One-half of these options became
exercisable on January 2, 2002 and the other half became 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) thereof, as the grantee is our executive
officer. Subsequent to the grant of the 460,000 options, as of January
1, 2001, we 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.
o In June 2001, we sold 541,711 shares of common stock for aggregate
proceeds of $1,500,000 to Glaxo Wellcome International B.V., a
Netherlands limited liability company and accredited investor
affiliated with Smithkline Beecham, PLC. The sale of these shares was
exempt from registration under the Securities Act of 1933 under Section
4(2) thereof and/or Regulation D thereunder. 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.
o In April 2001, we issued an aggregate of $300,000 in principal of our
10% Promissory Notes Due 2002, together with warrants exercisable for
300,000 shares of common stock at a price of $0.875 per share to
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 June 2001 [and] August 2001, respectively. The issuance of
these securities was exempt from registration under the Securities Act
of 1933 under Section 4(2) thereof and/or Regulation D thereunder.
Certificates for the securities bear restrictive legends, the
purchasers represented that they were acquiring the shares for
investment purposes, and the purchasers all represented that they were
"accredited investors" as that term is defined in Regulation D. No
public solicitation was employed in connection with this transaction.
ITEM 27. Exhibits
Incorporated
Exhibit No. Description by Reference
----------- ----------- ------------
3.(i)(a) Certificate of Incorporation of and A
all amendments thereto
3.(ii) Amended and Restated Bylaws C
3.(i)(b) Certificate of Amendment of Certificate of H
Incorporation
4.1 Specimen Common Stock Certificate C
4.2 Stock Purchase Agreement dated June 1, 2001 E
between PacificHealth Laboratories, Inc. and
Glaxo Wellcome International B.V.
4.3 Underwriter's Warrant Agreement and Form of C
Warrant
4.4 Form of Securities Purchase Agreement entered into *
with the Selling Shareholders dated August 26, 2003
4.5 Form of Registration Rights Agreement entered into *
with the Selling Shareholders dated August 26, 2003
4.6 Form of Warrant issued to the Selling Shareholders in *
connection with Exhibit 4.4 on August 26, 2003.
5 Opinion of Eckert Seamans Cherin & Mellott, LLC *
(including consent)
10.1 Incentive Stock Option Plan of 1995 A
10.2 Employment Agreement between PacificHealth C
Laboratories, Inc. and Robert Portman
effective January 1, 1998
10.3 Strategic Alliance Agreement between PacificHealth A
Laboratories, Inc. and the Institute of Nutrition
and Food Hygiene
10.4 Exclusive Licensing Agreement between PacificHealth A
Laboratories, Inc. and the INFH
10.5 Shareholders Agreement A
10.6 2000 Incentive Stock Option Plan D
10.7 Employment Agreement between PacificHealth F
Laboratories, Inc. and Robert Portman effective
January 1, 2001
10.8 License Agreement dated June 1, 2001 between G
PacificHealth Laboratories, Inc. and SmithKline
Beecham PLC (d/b/a/ GlaxoSmithKline), redacted
to omit trade secret and confidential commercial
and financial information
23.1 Consent of Eckert Seamans Cherin & Mellott, LLC *
(included in Exhibit 5)
23.2 Consent of Eisner LLP *
23.3 Consent of Larson, Allen, Weishair, & Co., LLP *
------------------
* Filed herewith
A Filed with the registrant's 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 registrant's Registration Statement on
Form SB-2 (Registration No. 333-36379) on October 23, 1997
C Filed with Amendment No. 3 to the registrant's Registration Statement on
Form SB-2 (Registration No. 333-36379) on December 17, 1997
D Filed with the registrant's Definitive Proxy Statement (Schedule 14A) for
its annual meeting held on August 16, 2000 (filed on July 11, 2000).
E Filed with the registrant's Current Report on Form 8-K dated June 1, 2001,
filed on June 14, 2001.
F Filed with the registrant's Annual Report on Form 10-KSB for the year ended
December 31, 2000 (filed on March 28, 2001).
G Filed with an Amendment to the registrant's Current Report on Form 8-K
dated June 1, 2001 (filed July 5, 2001).
H Filed with the registrant's Annual Report on Form 10-KSB for the year ended
December 31, 2002 (filed on March 31, 2003).
ITEM 28. Undertakings
The registrant hereby undertakes that it will:
1. File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in
the registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
2. For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
3. File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
4. Insofar as indemnification for liabilities arising under the Securities
Act may be allowed to our directors, officers and controlling persons
under the forgoing provisions, or otherwise, we have been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion
of counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment No. 1
to registration statement to be signed on its behalf by the undersigned, in the
City of Matawan, State of New Jersey, on October 28, 2003.
PACIFICHEALTH LABORATORIES, INC.
By: Robert Portman
-----------------------------
Robert Portman, President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Stephen B. Kuchen and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and resubstitution
for such person and in his name, place and stead, in any and all capacities, to
sign any and all amendments to this registration statement, and to file the same
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully and to all intents and purposes as he might or could do in person,
hereby ratifying and conforming all that said attorneys-in-fact and agents, and
any of them, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
Name Title Date
---- ----- ----
Robert Portman Director, President and CEO October 28, 2003
------------------------------------ (Principal Executive Officer)
Robert Portman
Stephen P. Kuchen Director, Vice President and CFO, October 28, 2003
------------------------------------ (Principal Financial Accounting
Stephen P. Kuchen Officer)
David I. Portman Director, Secretary October 28, 2003
------------------------------------
David I. Portman
T. Colin Campbell Director October 28, 2003
------------------------------------
T. Colin Campbell
Michael Cahr Director October 28, 2003
------------------------------------
Michael Cahr
EXHIBIT INDEX