UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Commission File No. 333-36379
PACIFICHEALTH LABORATORIES, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 22-3367588
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Matawan Road, - Suite 420
Matawan, NJ 07747
(Address of principal executive offices)
732/739-2900
(Issuer's telephone number)
Internet Website: www.pacifichealthlabs.com
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par
value $.0025 per share.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|
The issuer's revenues for its most recent fiscal year were $6,807,271.
As of April 14, 2005, the aggregate market value of the common stock held by
non-affiliates based on the closing sale price of Common Stock was $4,530,748.
As of April 14, 2005, the issuer had 10,237,045 shares of common stock
outstanding.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
PACIFICHEALTH LABORATORIES, INC.
FORM 10-KSB
Fiscal Year Ended December 31, 2004
TABLE OF CONTENTS
Note Concerning Forward Looking Information ................................. 1
PART I
ITEM 1. BUSINESS ......................................................... 4
ITEM 2. PROPERTY ......................................................... 11
ITEM 3. LEGAL PROCEEDINGS ................................................ 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .............. 11
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ......... 12
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .............................. 13
ITEM 7. FINANCIAL STATEMENTS ............................................. 17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE .............................. 17
ITEM 8A. CONTROLS AND PROCEDURES .......................................... 17
ITEM 8B. OTHER INFORMATION ................................................ 17
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT ................ 17
ITEM 10. EXECUTIVE COMPENSATION ........................................... 21
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS .................................. 24
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................... 26
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K .. 27
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES .......................... 27
2
NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This Report 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 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 "Item 6 - Management's Discussion and Analysis of Financial Conditions
and Results of Operations" and "Item 1 - 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
those stated in this Report.
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. Cautionary language in this
Report provides 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. . Such factors include, among other things, risks
and uncertainties discussed throughout Item 1 - Business and Item 6 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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.
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PART I
ITEM 1. BUSINESS.
1(a) Business Development
PacificHealth Laboratories, Inc. (hereinafter referred to as the
"Company") is a nutrition technology company that was incorporated in the State
of Delaware in April 1995. The Company researches, develops, and commercializes
functionally unique proprietary products for sports performance, weight loss,
and Type 2 diabetes which can be marketed without prior Food and Drug
Administration ("FDA") approval under current regulatory guidelines.
1(b) Business of the Issuer
The Company is a nutrition technology company strongly committed to
research and development of dietary and nutritional supplements that can enhance
health and well-being. The Company's three primary areas of research to date
have been sports performance, weight loss and Type 2 diabetes.
Sports Performance
The Company's first sports performance product, ENDUROX(R), was introduced
in March 1996 with commercial sales beginning in May 1996. In March 1997, the
Company extended the ENDUROX line of products with ENDUROX EXCEL(R). In February
1999, the Company introduced ENDUROX(R) R(4) (R) Performance/Recovery Drink to
be taken following exercise. In clinical studies performed or funded by the
Company, ENDUROX R(4) has demonstrated a number of exercise-related benefits
including enhanced performance, extended endurance, and decreased post-exercise
muscle damage. In June 2001, the Company introduced ACCELERADE(R) Sports Drink,
to be taken during exercise using the same, patented technology as ENDUROX R(4)
. Research studies funded by the Company have shown that ACCELERADE is
significantly better than conventional sports drinks in improving endurance
during exercise. In 2003, the Company introduced a ready-to-drink form of
ACCELERADE. In December 2003, the Company acquired all of the outstanding shares
of Strong Research Corp. ("STRONG"), a research-based educational sports
nutrition company, in exchange for 150,000 shares of the Company's common stock.
STRONG had no material revenues but is actively involved in the scientific
education of athletes on proper nutrition utilizing leading Ph.D.-level
scientists in sports nutrition. Greg Horn, a former Director of the Company, was
the principal shareholder of STRONG. In March 2004, the Company introduced The
NUTRIENT TIMING SYSTEM ("NTS"), the first suite of products specifically
engineered for during, immediate post-workout, and subsequent use by
strength-training athletes. See Section 1 (b)(i)(e) below for more information
on NTS.
Weight Loss
In weight loss, the Company has focused its research and development
efforts on development of novel nutritional compositions that stimulate the
body's major satiety peptide, or cholecystokinin (CCK). In April 2000, the
Company introduced our first weight loss product, SATIETROL(R), a natural
appetite control product based on this research. Clinical studies performed or
funded by the Company have shown that SATIETROL, a pre meal beverage, can reduce
hunger up to 43% three and one-half hours after eating. In January 2001, the
Company extended our weight loss product line with the introduction of SATIETROL
COMPLETE(R), a 220-calorie meal replacement product that incorporates the
patented SATIETROL technology. In June 2001, the Company signed an exclusive
worldwide Licensing Agreement with GlaxoSmithKline ("GSK") for its SATIETROL
technology. Under the Agreement, the Company received an initial payment of
$1,000,000 and received a subsequent milestone payment of $250,000. GSK
subsequently terminated the Licensing Agreement in September 2002 with all
rights reverting back to the Company. In the third quarter of 2003, the Company
funded clinical studies performed at a private research firm that showed a
statistically significant reduction in caloric intake in overweight individuals
using a new improved form of SATIETROL in both beverage and tablet form. The
Company will conduct additional studies on SATIETROL in 2005.
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
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cholecystokinin (CCK) may play a role in insulin release and glucose regulation.
The Company's research in this area has focused upon the development of
nutritional products that can help Type 2 diabetics lose weight by controlling
appetite while improving glucose regulation. The Company will initiate clinical
trials in the Type 2 diabetes area in 2005.
All of the Company's existing products, and its proposed products, are
expected to be manufactured in the United States by third parties. See Item
1(b)(i) below.
1(b)(i) Principal Products and Markets
(a) ENDUROX(R) Product Line-Dietary Supplements
The Company's initial product, ENDUROX(R), is a dietary supplement of
which the principal ingredient is the herb ciwujia. Laboratory tests and trials
funded by the Company during 1995 at the University of North Texas Health
Science Center in Fort Worth, Texas and the Institute of Nutrition and Food in
China, have demonstrated that ENDUROX is effective in improving exercise
performance. The Company introduced ENDUROX in March 1996 and commenced
commercial sales of the product in May 1996. In December 1996, the Company was
issued patent #5,585,101 for its ENDUROX product. ENDUROX is sold in caplet
form.
ENDUROX EXCEL(R) was introduced in March 1997. ENDUROX EXCEL contains 50%
more ciwujia than regular ENDUROX, plus vitamin E. It is targeted to "serious"
athletes, i.e., individuals who engage in competitive athletics or whose
exercise regimen is comparable to that of a competitive athlete.
(b) ENDUROX(R)R(4) (TM) Recovery / Performance Drink
The Company launched ENDUROX R(4) Performance / Recovery Drink in March
1999. Clinical trials funded by the Company during 1998 at the University of
North Texas Health Science Center in Fort Worth, Texas and the Human Performance
Lab at St. Cloud University in St. Cloud, Minnesota showed that when tested
against the nation's leading sports drink, ENDUROX R(4) delivered equal
hydration effectiveness while enhancing performance and extending endurance by
55%, decreasing post-exercise muscle stress by 36%, reducing free radical
build-up by 69%, and increasing insulin levels by 70%. The results of these
trials were presented at the American College of Sports Medicine's national
meeting in 1999.
In April 2000, the Company was issued patent #6,051,236 for ENDUROX R(4)
covering all 77 claims made in the application, including claims that the
product (a) increases endurance, (b) reduces post-exercise muscle damage, and
(c) speeds the replenishment of muscle carbohydrate stores. Patent office
acceptance of these claims does not necessarily permit the Company to make any
specific claims to the public regarding this product. The Company's ability to
make those claims is governed by the FDA, Federal Trade Commission, and other
federal government agency regulations and guidelines.
(c) SATIETROL(R)
SATIETROL, the Company's appetite control product, is based on the use of
nutritional ingredients to stimulate cholecystokinin (CCK), a protein released
after eating which has shown to be an important satiety signal in humans.
The Company's research efforts have focused on developing a calorically
efficient nutritional formula that can be taken orally which would stimulate CCK
release and extend its duration of action. Such a product would be highly useful
in control of weight by helping overweight individuals feel fuller or more
satiated while eating less food. This formulation became the basis for the
Company's first weight loss product, SATIETROL. The Company has developed a
number of SATIETROL formulas that stimulate and extend the action of CCK and has
filed a number of patents regarding this unique technology.
The Company's objective is to develop a patent portfolio to protect its
proprietary technology involving the use of nutritional ingredients to stimulate
and extend the action of CCK. The Company has already received several patents
for SATIETROL and has several more patents pending (see 1(b)(vii) Patents and
Trademarks below).
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The Company plans to develop new forms of delivery for the SATIETROL
technology in 2005 for commercialization in the latter part of 2005 or in 2006.
(d) ACCELERADE(R)
In June 2001, the Company introduced ACCELERADE Sports Drink, to be taken
during exercise, using the same, patented technology as ENDUROX R(4) . Research
studies funded by the Company and conducted in 2001 by Dr. John Ivy at the
University of Texas Department of Kinesiology and Health Education, Austin,
Texas have shown that ACCELERADE is significantly better than conventional
sports drinks in improving endurance during exercise. These studies showed that
subjects taking ACCELERADE increased endurance performance by 24% compared to
subjects drinking a conventional sports drink containing the same amount of
carbohydrates. ACCELERADE uses the ENDUROX R(4) technology that features the
patented 4-1 ratio of carbohydrate to protein to speed the movement of
carbohydrate from the blood into the muscle during exercise. By increasing the
energy efficiency of every gram of carbohydrate an athlete consumes, ACCELERADE
spares muscle glycogen and improves endurance capacity. In 2003, the Company
introduced a ready-to-drink form of ACCELERADE in a test market in convenience
stores in Colorado. The test market ended in 2004, as we did not have the
resources to continue to market this product in the competitive convenience
store channel of distribution and meet the minimum sales thresholds required of
convenience stores. The product is now sold in General Nutrition Corporation
("GNC") stores and other bike retailers. In 2004, the Company introduced ACCEL
GEL(R), the first carbohydrate-protein sports gel.
(e) NUTRIENT TIMING STSYEM(R)
As a result of its acquisition of STRONG in December 2003, the Company has
placed special emphasis on developing a line of products that focus on infusing
the body with certain critical nutrients at specific times during the day to
increase strength, endurance, and muscle mass. In March 2004, the Company
introduced COUNTDOWN(R), the first product specifically engineered for immediate
post workout intake by strength-training athletes. Independent researchers have
shown that the right combination of nutrients taken within 45 minutes after a
workout can turn on the cellular processes to rebuild and repair muscles,
resulting in greater gains in muscle strength and power. Independent and
Company-funded studies conducted at various research facilities show the
COUNTDOWN formula increases protein synthesis 38% more than a conventional
protein drink, increases muscle glycogen levels 2.2 fold greater than a
conventional recovery drink and decreases muscle damage by 36%. In August of
2004, the Company introduced two additional products for strength-training
athletes to complete the suite of products known as The NUTRIENT TIMING SYSTEM:
MUSCLEADE(R), a protein sparing muscle fuel, and NTS PROTEIN(R), a protein
growth stimulator.
These products were launched in GNC in March 2004 and were sold
exclusively in GNC locations through January 2005. In March 2005, the Company
was informed by representatives of GNC that GNC would discontinue the Company's
Nutrient Timing System ("NTS") line of strength training products.
Sales of NTS products to GNC were approximately $824,000 in 2004 before
taking into account any potential returns as specified below. GNC has
approximately $33,000 of NTS inventory in its warehouses and distribution
centers and approximately $436,000 of inventory within its retail stores. The
Company and GNC have agreed to an aggressive discount program in the 2nd quarter
of 2005 to sell through as much of the retail inventory as possible. It is
likely that the Company will absorb a large portion of the discount. While the
Company's agreements with GNC gives GNC the right to return product if certain
minimum sales are not met, the Company does not believe a significant amount of
inventory is subject to this right of return. Given the on-going significant
business relationship between the Company and GNC, the Company may accept
returns of product from GNC after a period of special promotion and discounting,
if other alternatives are not agreed to.
The Company will seek to market this line of products through alternate
channels such as gyms and specialty retailers as well as pursue potential
licensing agreements with other sports nutrition companies. However, given the
uncertainty of selling the product in other channels of distribution, the
Company, as of March 8, 2005, has determined that it is required to write off
the value of its own inventory of NTS products. The inventory of NTS products at
December 31, 2004, was approximately $679,000.
6
In addition, the Company has determined to write off the value of the
patents it holds for this line of products in the amount of $137,138.
The Company does not believe that the impairment of its inventory or
patents will result in any future cash expenditures.
1(b)(ii) Distribution Methods
The Company has pursued a "multi-channel" distribution strategy in
marketing its ENDUROX, ENDUROX R(4) and ACCELERADE lines of products. At the
present time, these products are being sold in over 9,000 retail outlets
including General Nutrition Centers ("GNC"), sports specialty stores,
independent health food retailers, independent bike retailers, health clubs,
catalogs, and Internet sites. The NUTRIENT TIMING SYSTEM line of products was
launched exclusively in GNC stores in 2004 and is now available in a limited
number of gyms and health food stores.
The Company began distribution of ENDUROX in Canada in 1997 through an
independent distributor with the first retail sales made in April 1997. In 1998,
the Company began selling its ENDUROX products in South Africa with an
independent distributor on a non-exclusive basis. The Company now sells all of
its products in various foreign countries through independent distributors on a
non-exclusive basis.
To support its marketing efforts, the Company advertises in trade and
consumer sports and health food magazines that are intended to reach its
targeted consumer. In addition, the Company attends trade shows and exhibitions,
sponsors promotional programs/events and in-store promotions, and engages in an
extensive public relations effort that has resulted in articles in numerous
sports, health, fitness, trade and natural product publications, newspaper
coverage, and television spots. In addition, the Company utilizes a number of
paid endorsers to promote its sports nutrition line of products, including
several well-known athletes and a number of professional coaches from bicycling,
running, swimming, triathlete, hockey, and basketball.
In the twelve-month periods ended December 31, 2004 and December 31, 2003,
the Company's expenditures for product advertising and promotion were
approximately $1,045,000 and $727,000, respectively.
1(b)(iii) Status of Publicly Announced New Products
The status of all products that have been the subject of or mentioned in
public announcements by the company in the past year are discussed above under
the caption "1(b)(ii) - Principal Products and Markets".
1(b)(iv) Competition
Depending on the product category, the Company's competition varies.
The sports drink market in which ENDUROX R(4) and ACCELERADE compete is
dominated by such brands as Gatorade and Powerade who sell ready-to-drink
products, as well as smaller companies such as Cytosport (Cytomax), which sell
powdered, ready-to-mix products. In addition, there are a number of new foreign
entries such as Enervit and Extran that have introduced sports drinks into the
U.S. focusing on the endurance athlete. Increased competitive activity from such
companies could make it more difficult for the Company to increase or keep
market share since such companies have greater financial and other resources
available to them and possess far more extensive manufacturing, distribution and
marketing capabilities than the Company. In addition, in the market for ready to
drink sports drinks, the Company must compete with large companies whose
products enjoy substantial name recognition. As a result, it may be more
difficult for the Company to earn market share in the market for ready-to-drink
sports drinks than in other markets.
The strength-training powder market in which the NUTRIENT TIMING SYSTEM
products competes is dominated by brands from much larger companies such as
MET-RX, EAS, and Optimum Nutrition. Increased competitive activity from such
companies could make it more difficult for the Company to increase or keep
market
7
share since such companies have greater financial and other resources available
to them and possess far more extensive manufacturing, distribution and marketing
capabilities than the Company.
The competitive market for weight loss products is divided into four basic
segments: herbal supplements (e.g., Metabolite), meal replacement products
(e.g., Slim Fast), food plans (e.g., Weight Watchers) and prescription products
(e.g., Xenical). Today, weight loss products are manufactured by dietary
supplement manufacturers, pharmaceutical manufacturers, diet food companies
(e.g. Slim Fast Foods Company), and over-the-counter drug companies. Intense
competitive activity in this market could make it difficult for the Company to
increase or keep market share, as most of the companies that have products in
this category have greater financial, marketing, sales, manufacturing, and
distribution resources than the Company.
Because the Company's products are based upon natural ingredients, its
competitors have access to the same ingredients and will be able to develop and
market products the same as or similar to the Company's products. Except to the
limited extent that the Company may obtain patent protection for certain uses of
ingredients in its products, its competitors' products may make the same claims
of benefits from use of the products that the Company makes.
The Company believes that long term success in the marketplace for any of
the Company's products is likely to be less dependent on the novelty of the
product than on such factors as distribution and marketing capabilities, and
whether or not the product enjoys some proprietary advantage, such as patent
protection, an established brand name, etc.
1(b)(v) Suppliers of Raw Materials
The Company does not have manufacturing facilities and has no present
intention to manufacture any products itself. It fulfills product needs through
relationships with independent manufacturers. The Company generally does not
have long-term contracts with any of these manufacturers. Competitors that do
their own manufacturing may have an advantage over the Company with respect to
pricing, availability of product and in other areas because of their control of
the manufacturing process.
On January 28, 2005, the Company entered into an Exclusive Custom
Manufacturing Agreement (the "Manufacturing Agreement") with an affiliate of
Hormel. The Manufacturing Agreement provides for the exclusive manufacturing and
processing of the Company's powered sports drinks at fixed prices. The initial
term of the Manufacturing Agreement is one year.
Generally, the Company's contract manufacturers obtain raw materials
necessary for the manufacture of our products from numerous sources. The Company
generally does not have contracts with suppliers of materials required for the
production of its products. The Company obtains ciwujia for its ENDUROX caplet
line of products from suppliers in the Peoples Republic of China. At the present
time, the Company obtains all of its needs from one supplier in the People's
Republic of China, but believes that the Company could switch to a number of
alternative suppliers without significant effect. The Company has not entered
into any long-term supply agreements with this supplier. In addition, all other
raw materials used in the Company's existing products are available from
multiple sources.
There is no assurance that suppliers will provide the raw materials needed
by the Company in the quantities requested or at a price the Company is willing
to pay. Because the Company does not control the source of these raw materials,
it is also subject to delays caused by interruption in production of materials
based on conditions outside of its control.
1(b)(vi) Dependence on Major Customers
GNC and Performance, Inc. accounted for approximately 33% and 17%,
respectively, of net sales in fiscal 2004 and 23% and 13%, respectively, of net
accounts receivable at December 31, 2004. Advanced payments for consigned
inventory at GNC were $376,000 as of December 31, 2004. 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
8
significantly reduce our revenues. The Company has no agreement with or
commitment from either of these customers with respect to future purchases.
1(b)(vii) Patents and Trademarks
The Company received a use patent, United States Patent No. 5,585,101 in
December 1996 covering the use of ciwujia, the principal active herb in ENDUROX
and ENDUROX EXCEL caplets, entitled Method to Improve Performance During
Exercise Using the Ciwujia Plant. This patent expires in December 2013.
The Company received a composition of matter patent, United States Patent
No. 6,051,236, in April 2000 entitled Composition for Optimizing Muscle
Performance During Exercise (see section 1(b)(i)(b)). This patent expires in
April 2017.
The Company received a composition of matter patent, United States Patent
No. 6,207,638, in March 2001 entitled Nutritional Intervention Composition for
Enhancing and Extending Satiety (see section 1(b)(i)(c)). This patent expires in
March 2018.
The Company received a use patent, United States Patent No. 6,429,190, in
August 2002 entitled Method For Extending The Satiety Of Food By Adding A
Nutritional Composition Designed To Stimulate Cholecystokinin (CCK). This patent
expires in August 2019.
The Company received a composition of matter patent, United States Patent
No. 6,436,899, in August 2002 entitled Nutritional Intervention Composition for
Enhancing and Extending Satiety. This patent expires in August 2019.
The Company received a composition of matter patent, United States Patent
No. 6,468,962, in October 2002 entitled Nutritional Intervention Composition for
Enhancing and Extending Satiety. This patent expires in October 2019.
The Company received a composition of matter patent, United States Patent
No. 6,558,690, in May 2003 entitled Nutritional Intervention Composition for
Improving Efficacy of a Lipase Inhibitor. This patent expires in May 2020.
The Company received a composition of matter patent, United States Patent
No. 6,716,815, in April 2004 entitled Nutritional Intervention Composition for
Enhancing and Extending Satiety. This patent expires in April 2021.
The Company received a composition of matter patent, United States Patent
No. 6,838,431, in January 2005 entitled Nutritional Intervention Composition
Containing Protease Inhibitor Extending Post Meal Satiety. This patent expires
in January 2022.
The Company also has the following patents pending for its technology:
--------------------------------------------------------------------------------
DATE
PATENTS PENDING SUBMITTED
--------------------------------------------------------------------------------
Sports Drink Composition For Enhancing Glucose Uptake and
Extending Endurance During Physical Exercise August 2003
--------------------------------------------------------------------------------
Composition for Reducing Caloric Intake October 2002
--------------------------------------------------------------------------------
In October 2003, STRONG, now a subsidiary of the Company, filed a
provisional U.S. patent application entitled Composition for Increasing Muscle
Protein Synthesis.
The patent holder for all patents other than the patent held by STRONG is
the Company's President, Dr. Robert Portman, and all patents are assigned to the
Company. To the extent the Company does not have patents on
9
its products, there can be no assurance that another company will not replicate
one or more of the Company's products, nor is there any assurance that patents
that are obtained will provide meaningful protection or significant competitive
advantages over competing products. For example, the Company's use patent on
ciwujia would not prevent the sale of a product containing that herb with a
claim or for a use that was not covered by the Company's patent.
The Company has federal trademark registrations for ENDUROX, ENDUROX
EXCEL, ENDUROX PROHEART, ENDUROX R(4) , SATIETROL, SATIETROL COMPLETE,
ACCELERADE, ACCEL GEL, DCOUNTDOWN, and MUSCLEADE among others. We have also
filed five trademark registration applications on names relating to STRONG and
its potential products. The Company also has filed its trademarks in most
Western European countries, Canada, Mexico and Japan. The Company's policy is to
pursue registrations for all of the trademarks associated with its key products,
and to protect its legal rights concerning the use of its trademarks. The
Company relies on common law trademark rights to protect its unregistered
trademarks.
1(b)(viii) and (ix) Governmental Regulation
The Company has determined that all of its existing and proposed products,
as described above, are nutritional or dietary supplements as defined under
federal statutes and regulations of the FDA. Neither nutritional supplements nor
dietary supplements require FDA or other governmental approval prior to their
marketing in the United States. No governmental agency or other third party
makes a determination as to whether our products qualify as nutritional
supplements, dietary supplements, or neither. The Company makes this
determination based on the ingredients contained in the products and the claims
made for the products. The processing, formulation, packaging, labeling and
advertising of such products, however, are subject to regulation by one or more
federal agencies including the FDA, the Federal Trade Commission, the Consumer
Products Safety Commission, the Department of Agriculture and the Environmental
Protection Agency. The Company's activities also are subject to regulation by
various agencies of the states and localities in which its products are sold.
The Company markets products that are covered under two types of FDA
regulations, Nutritional Supplements and Dietary Supplements. Nutritional
Supplements contain food and GRAS (Generally Regarded as Safe) ingredients and
do not require FDA approval or notification. Such products must follow labeling
guidelines outlined by the FDA.
Dietary Supplements is a classification of products resulting from the
enactment of the Dietary Supplement Health and Education Act of 1994 (the
"DSHEA") in October 1994. The DSHEA amended and modified the application of
certain provisions of the Federal Food, Drug and Cosmetics Act (the "FFDC Act")
as they relate to dietary supplements, and required the FDA to promulgate
regulations consistent with the DSHEA.
The DSHEA defines a dietary supplement to include (i) any product intended
to supplement the diet that bears or contains a vitamin, mineral, herb or other
botanical, an amino acid, a substance to supplement the diet by increasing the
total dietary intake, or any concentrate, 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,
(ii) 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, and (iii) is
labeled as a dietary supplement. The practical effect of such an expansive
definition is to ensure that the new protections and requirements of the DSHEA
will apply to a wide class of products.
Under the DSHEA, companies that manufacture and distribute dietary
supplements are allowed to make any of the following four types of statements
with regard to nutritional support on labeling without FDA approval: (i) a
statement that claims a benefit related to a classical nutrient deficiency
disease and discloses the prevalence of such disease in the United States; (ii)
a statement that describes the role of a nutrient or dietary ingredient intended
to affect structure or function in humans; (iii) a statement that characterizes
the documented mechanism by which a nutrient or dietary ingredient acts to
maintain or function; or (iv) a statement that "describes general well-being"
from consumption of a nutrient or dietary ingredient. In addition to making sure
that a statement meets one of these four criteria, a manufacturer of the dietary
supplement must have substantiation that such statement is truthful and not
misleading, must not claim to diagnose, mitigate, treat, cure, or prevent a
specific disease or class of diseases, and must contain the following
disclaimer, prominently displayed in boldface type: "This statement has not been
10
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 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 affects the
structure and function of the body. As now defined, dietary supplements can make
a claim for ordinary weight loss rather than as a treatment for obesity.
Furthermore, these regulations also permit the use of appetite suppressant as a
structure/function claim under DSHEA. The issuance of these regulations will
give SATIETROL greater latitude in the types of claims the product can make as
long as such claims are substantiated by the necessary studies.
1(b)(x) Expenditures for Research and Development
The Company's research and development expenditures in the past two fiscal
years, exclusive of market research and marketing related expenditures, were as
follows: 2004 - $145,000; 2003 - $232,000. The primary reason for the decrease
in research and development expenses is due to expenses associated with the test
market of the ready-to-drink form of ACCELERADE incurred in the first quarter of
2003.
1(b)(xi) Compliance with Environmental Laws
The Company is not aware of any administrative or other costs that it
incurs which are directly related to compliance with environmental laws, and has
not experienced any other significant effect from the impact of environmental
laws.
1(b)(xii) Employees
At the present time, the Company has sixteen (16) full time employees. Of
these, three employees are executive, eight are in sales and marketing, and five
are in accounting, operations and administrative. The Company employs a number
of consultants who devote limited portions of their time to the Company's
business. None of the Company's employees are represented by a union and the
Company believes that its employee relations are good.
ITEM 2. DESCRIPTION OF PROPERTY
In July 2003, the Company moved its headquarters from Woodbridge, NJ to
larger facilities located in Matawan, NJ. At this time, the Company entered into
a four-year (48-month) lease for approximately 5,500 square feet at a price of
$22.50 per square foot, including utilities, for an annual rent expense of
$123,750 for the first thirty-three (33) months. During the last fifteen (15)
months of the lease, the rent increases to $25.50 per square foot, including
utilities, for an aggregate annual rent expense of $140,250.
The Company does not intend to develop its own manufacturing capabilities,
because management believes that the availability of manufacturing services from
third parties on a contract basis is more than adequate to meet the Company's
needs in the foreseeable future.
The Company does not own any real property nor does it have any real
estate investments.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, or involved in, any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of its security holders
in the fourth quarter of the fiscal year ended December 31, 2004.
11
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND COMPANY
PURCHASES OF EQUITY SECURITIES.
5(a) Market Information.
The Company's 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 the Company's 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
---- ---
Second Quarter through April 14, 2005 $0.63 $0.40
First Quarter 2005 $0.92 $0.40
Year ended December 31, 2004 High Low
---------------------------- ---- ---
First Quarter $0.75 $0.45
Second Quarter $0.85 $0.56
Third Quarter $1.50 $0.65
Fourth Quarter $0.95 $0.70
Year ending December 31, 2003 High Low
----------------------------- ---- ---
August 20 to September 30 $1.01 $0.55
Fourth Quarter $1.18 $0.56
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.
Year ending December 31, 2003 High Low
----------------------------- ---- ---
First Quarter $2.90 $0.74
Second Quarter $1.38 $0.65
July 1 to August 19 $1.13 $0.55
On April 14, 2005, the closing price of our common stock as reported by
the OTC Bulletin Board was $0.54 per share.
5(b) Holders.
As of April 14, 2005, there were approximately 114 holders of record of
the Company's common stock. However, the Company believes that there are
significantly more beneficial holders of the Company's stock as many beneficial
holders have their stock in "street name".
12
5(c) Dividends.
The Company has never paid or declared dividends upon its common stock and
does not contemplate or anticipate paying any dividends on its common stock in
the foreseeable future.
5(d) Recent Sales of Unregistered Securities
5(d)(i) Recent Sales of Unregistered Securities
Subsequent to the end of 2004, the Company issued 90,909 shares of its
newly created Series A Convertible Preferred Stock to Hormel Health Labs, LLC. A
description of this transaction is contained in the Company's Current report on
Form 8-K, dated January 24, 2005 and filed January 28, 2005.
Company Repurchases
The Company did not repurchase any shares of its common stock in the
fourth quarter of 2004.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's financial statements, including the notes thereto, appearing
elsewhere in this Report.
6(a) Introduction
The Company was incorporated in April 1995 to develop and market dietary
and nutritional supplements that improve and promote health and well-being and
can be offered for sale without prior approval by the FDA in compliance with
current regulatory guidelines. Our first product, ENDUROX was introduced in
March 1996, and commercial sales began in May 1996. In March 1997, the Company
extended the ENDUROX line of products with ENDUROX EXCEL. In March 1999, the
Company launched ENDUROX R(4) Performance/Recovery Drink, the latest in our
ENDUROX line of products, which demonstrated a number of exercise related
benefits in clinical studies, including enhanced performance and extended
endurance, decreased post-exercise muscle stress, and reduced free radical
build-up. In April 2000, the Company introduced a new product, SATIETROL, that
will compete in the weight loss and weight control products market. In May of
2001, the Company launched ACCELERADE, a new generation of sports drink products
to be used during exercise that uses the ENDUROX R(4) patented technology. In
2003, the Company introduced a ready-to-drink form of ACCELERADE in test market
in the State of Colorado. In December 2003, the Company acquired all of the
outstanding shares of Strong Research Corp., a research-based educational sports
nutrition company actively involved in the scientific education of athletes on
proper nutrition useful in the marketing of new sports nutrition products geared
towards the strength-training athlete. In March 2004, the Company introduced the
NUTRIENT TIMING SYSTEM, the first suite of products specifically engineered for
during, immediate post-workout, and subsequent use by strength-training
athletes.
6(b) Results of Operations - Years Ended December 31, 2004 and 2003
The Company generated a net loss of ($2,521,096) or ($0.25) per share for
the year ended December 31, 2004 compared to net loss of ($1,451,274) or ($0.20)
per share for the year ended December 31, 2003. The increase in net loss is
primarily attributed to the write-off of inventory and patents associated with
our NTS line of products as detailed in section 1(b)(i)(e) above.
Revenues for the year ended December 31, 2004 were $6,807,271 compared to
$5,453,571 for the same period in 2003. The increase in revenues in 2004 as
compared to 2003 was due primarily to sales of new products such as ACCEL GEL
and the NUTRIENT TIMING SYSTEM suite of products. Sports performance included
$824,000 of NTS revenues to GNC in 2004. Because GNC has discontinued these
products, we do not anticipate significant sales of NTS products in 2005 See
section 1(b)(i)(e) above.
13
In the fourth quarter of 2004, based on a comparison between the retail
sell-through minimums and actual retail sell-through information provided by a
certain customer, the Company has adjusted its estimate and reversed
approximately $376,000 in sales of its products that had been recorded as sales
during the first nine-months of 2004.
The following table provides additional information concerning our
revenues in 2004 and 2003:
Revenues
--------------------------------------------
Sports Weight
Year Ended Performance Loss Total
--------------------------------------------------------------------------------
December 31, 2004 $6,787,955 $19,316 $6,807,271
========== ======= ==========
December 31, 2003 $5,393,296 $60,275 $5,453,571
========== ======= ==========
Our gross profit margin on product sales (before the inventory write-off,
see section 1(b)(i)(e) above) decreased to 47.1% in 2004 from 48.7% in 2003. The
decrease in gross profit margin in 2004 compared to 2003 is primarily due to
lower gross profit margins on new products and promotional expenses paid to
promote the Company's new product line for strength-training athletes that are
deducted from revenues. From time to time, the Company may incur additional
promotional expenses in connection with the sale of its products. These
promotional expenses should result in higher unit volumes of sales of these
products. In 2004, the Company sold $19,316 of previously written-off SATIETROL
inventory with zero cost as compared to $60,275 of such sales in 2003.
Our selling, general, and administrative expenses ("S, G, & A") increased
$836,466 to $4,620,389 for the year ended December 31, 2004 from $3,783,923 for
the year ended December 31, 2003. S, G, & A expenses increased due primarily to
increases in advertising and marketing expenses associated with the launch of
the NUTRIENT TIMING SYSTEM suite of products.
Research and development expenses decreased $86,690 to $144,961 for the
year ended December 31, 2004 from $231,651 for the year ended December 31, 2003.
The primary reason for the decrease in research and development expenses is due
to expenses associated with the test market of the ready-to-drink form of
ACCELERADE incurred in the first quarter of 2003. We anticipate research and
development expenses will increase as additional clinical trials and studies are
conducted on all current and newly proposed products as we continue to seek out
additional patents and claims.
Interest expense increased $37,027 to $95,735 for the year ended December
31, 2004 versus interest expense of $58,709 for the year ended December 31,
2003. The increase is due to our accounts receivable funding described in the
Liquidity section below that commenced on June 1, 2003.
The loss on patent impairment of $137,138 for the year ended December 31,
2004 was due to the write-off of patents associated with our NTS line of
products which have been discontinued by GNC as noted in section 1(b)(i)(e)
above.
6(c) Liquidity and Capital Resources
The Company's cash balance as of the date of this filing was approximately
$535,000. Based on this, without any additional financing, the Company can
continue to operate for 60-90 days from the date of this filing. As a result of
its current liquidity position, the Company's auditors have expressed doubt that
the Company can continue as a going concern. The Company's financial statements
do not include any adjustments related to this uncertainty.
Management has responded to the aforementioned risks by raising $1 million
in cash from the sale of its Series A Convertible Preferred Stock in January
2005. See the description of the Series A Preferred Stock below and the
description of the transaction in Item 12(d) below and the Company's Current
Report on Form 8-K filed January 28, 2005. The Company continues to seek
additional financing. The Company may engage an investment banker to assist in
raising capital and exploring other strategic alternatives. In addition, the
Company is considering reducing
14
operating expenses. The Company has also been able to finance its operations
through an increase in accounts payable by negotiating extended terms from its
vendors. While the Company is aggressively pursuing the opportunities and
actions described above, there can be no assurance that the Company will be
successful in its efforts.
At December 31, 2004, the Company's current assets exceeded its current
liabilities by approximately $101,692 with a ratio of current assets to current
liabilities of approximately 1.04 to 1. At December 31, 2004, cash on hand was
$25,832, a decrease of $1,772,872 from December 31, 2003, primarily as a result
of the net loss as well as an increase in inventories of $1,022,002 at December
31, 2004 offset by a decrease in accounts receivable of $238,720 and an increase
in accounts payable/accrued expenses of $1,203,402 at December 31, 2004 from
December 31, 2003. Accounts receivable decreased at December 31, 2004 from
December 31, 2003 due to lower revenues in the 4th quarter of 2004 as compared
to the 4th quarter of 2003. Inventory (net of the write-off of NTS products as
outlined in section 1(b)(i)(e) above) and accounts payable increased from
December 31, 2003 in support of projected increases in revenues.
Notes payable decreased $96,364 to $373,781 at December 31, 2004 primarily
as a result of the decreased use of our accounts receivable funding from USA
Funding due to lower 4th quarter sales in 2004. During the second quarter of
2003, the Company secured a $750,000 asset-based credit facility from USA
Funding of Dallas, TX. This facility was for one year commencing on June 1,
2003. This credit facility has been increased to $1,000,000 and has been renewed
for 2 years commencing June 1, 2004. The amount of available credit is based on
the value of the Company's eligible receivables from time to time. This credit
facility bears interest at a rate of prime plus 1.75% as well as a 0.75%
discount rate on all advances. At December 31, 2004 we had approximately $50,000
of availability under this credit facility and as of April 14, 2005 we had
approximately $ - 0 - of availability under this credit facility.
As of April 14, 2005, the Company had outstanding 90,909 shares of its
Series A Preferred Stock outstanding. In the event of a liquidation of the
Company, sale of substantially all of its assets, and certain mergers and
consolidations involving the Company, the holders of the Series A Preferred
Stock are entitled to be paid an amount equal to the greater of: (i) the
original purchase price for the Series A Preferred Stock ($11 per share) plus
accrued dividends, if any, or (ii) the amount they would have received as
holders of the number of shares of commons stock into which the Series A
Preferred Stock is then convertible (the "Series A Liquidation Amount"). In the
event of the sale of substantially all of the Company's assets and certain
mergers and consolidations involving the Company, if the Company does not effect
a dissolution of the Company under the General Corporation Law of the State of
Delaware within 60 days after such event, then the holders of a majority of the
shares of the Series A Preferred Stock then outstanding will have the right to
require the redemption of such shares at a price per share equal to the Series A
Liquidation Amount. There are no sinking fund provisions applicable to the
Series A Preferred Stock. Cumulative annual dividends will accrue at the rate of
$.022 on each share of Series A Preferred Stock outstanding. The Company is not
required to pay accrued dividends except in connection with liquidation, merger
or sale of the Company and certain other events. However, no dividends may be
paid on common stock unless all accrued dividends on the Series A Preferred
Stock have been paid. The holders of the Series A Preferred Stock are also
entitled to participate in any dividends paid to the holders of common stock on
an as-converted basis. The holders of outstanding shares of Series A Preferred
Stock shall be entitled to cast the number of votes equal to the number of whole
shares of Common Stock into which the shares of Series A Preferred Stock held by
such holder are convertible as of the record date for determining stockholders
entitled to vote on such matter. Subject to certain adjustments, each share of
the Series A Preferred Stock is convertible at the option of the holder into ten
shares of common stock. The number of shares of common stock issuable upon
conversion of the Series A Preferred Stock will increase, pursuant to a weighted
average formula in the event that the Company issues common stock at a price
below $1.10 per share, with certain exceptions.
The Company has no material commitments for capital expenditures.
6(d) Impact of Inflation
The Company expects to be able to pass inflationary increases for raw
materials and other costs on to its customers through price increases, as
required, and does not expect inflation to be a significant factor in its
business.
15
However, the Company's operating history is very limited, and this expectation
is based more on observations of its competitors' historic operations than its
own experience.
6(e) Seasonality
Sports nutrition products tend to be seasonal, especially in the colder
climates. Lower sales are typically realized during the first and fourth
quarters and higher sales are typically realized during the second and third
fiscal quarters. We also plan our advertising and promotional campaigns for the
ENDUROX R(4) and ACCELERADE products around these seasonal demands. Weight loss
products also have seasonality with greater sales seen in the first and second
quarters following New Year's resolutions and people getting in shape for the
summer. Similarly, advertising and promotional expenditures for SATIETROL are
designed to take advantage of this seasonality. The Company believes that the
impact of new product introductions and marketing expenses associated with the
introduction of new products will have a far greater impact on its operations
than industry and product seasonality.
6(f) Impact of Recently Issued Financial Accounting Standards
FASB Statement 123 (Revision 2004), "Share-Based Payment," was issued in
December 2004 and is effective for reporting periods beginning after December
15, 2005. The new statement requires all share-based payments to employees to be
recognized in the financial statements based on their fair values. The Company
currently accounts for its share-based payments to employees under the intrinsic
value method of accounting set forth in Accounting Principles Board Opinion No.
25, `Accounting for Stock Issued to Employees." Additionally, the Company
complies with the stock-based employer compensation disclosure requirements of
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of FASB Statement No. 123."
6(g) Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements between the Company and any
other entity that have, or are reasonably likely to have, a current or future
effect on the Company's financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures, or capital resources.
6(h) 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, 2004.
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.
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. Starting
in 2004, certain of the Company's products were subject to minimum sales
thresholds by a significant retail customer. These sales thresholds are based on
quantities sold through at the retail level. The Company records revenue with
respect to these products at the time the goods are shipped. The Company
analyzes retail sell-through data provided by the customer and the Company's
expectations of future customer sell-through trends. Based upon this
information, the Company determines if any reserves for returns are necessary.
The Company's financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America.
Certain accounting policies have a
16
significant impact on amounts reported in financial statements. A summary of
those significant accounting policies can be found in Note A to the Company's
financial statements.
ITEM 7. FINANCIAL STATEMENTS
Financial information required in response to this Item of Form 10-KSB is
set forth at pages F-1 through F-17 of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Based on their evaluation of the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date
within 90 days of the filing date of this Annual Report on Form 10-KSB, the
Company's chief executive officer and chief financial officer have concluded
that the Company's disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms and are
operating in an effective manner.
(b) Changes in Internal Controls Over Financial Reporting
During the fiscal quarter ended December 31, 2004, there were no changes
in the Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
9(a) Directors and Executive Officers
The directors and executive officers of the Company as of the date of this
Report are as follows:
Name Position with the Company
---- -------------------------
Robert Portman, Ph.D. Chairman of the Board of Directors and Chief
Scientific Officer
David Mastroianni President and Chief Executive Officer, and
Director
Stephen P. Kuchen Chief Financial Officer, Chief Operating
Officer, Treasurer, Secretary, and Director
David Portman Director
Michael Cahr Director (1),(2)
(1) Member of Audit Committee
(2) Member of Compensation Committee
A former director of the Company, Gregory Horn, resigned from the Board of
Directors effective March 3, 2005 and a former director of the Company, Joseph
Harris, resigned from the Board of Directors effective April 11,
17
2005. A former director of the Company, T. Colin Campbell, Ph.D., resigned from
the Board of Directors effective March 1, 2004.
MANAGEMENT AND DIRECTORS
DR. ROBERT PORTMAN, age 60, has served as Chairman of the Board of
Directors of the Company and Chief Scientific Officer since September 2004.
Prior to that, Dr. Portman served as President, Chief Executive Officer, and
Chairman of the Board of Directors of the Company since its inception. Dr.
Portman has a Ph.D. in Biochemistry and worked as a senior scientist at Schering
Laboratories before co-founding M.E.D. Communications in 1974 with his brother,
David Portman. In 1987, Dr. Portman started a consumer agency and, in 1993, he
merged both agencies to form C&M Advertising. C&M Advertising, with billings in
excess of $100 million, handled national advertising for such diverse accounts
as Berlex Laboratories, Ortho-McNeil Laboratories, Tetley Tea, Radisson Hotels,
and HIP of New Jersey. Effective June 1, 1995, Dr. Portman relinquished his
responsibilities as Chairman of C&M Advertising (which since has been renamed
"The Sawtooth Group") to assume his present positions with the Company on a full
time basis, and, in September 1996, Dr. Portman sold his interest in that
company.
DAVID MASTROIANNI, age 46, was named President, Chief Executive Officer,
and a member of the Board of Directors in September 2004. Mr. Mastroianni, who
has a B.S. in Nutritional Science from The University of Arizona and has worked
in this field since graduating in 1981, held various executive positions for
Weider Nutrition, a major branded consumer nutrition products company, from 1991
to 1998 including his last responsibility there as Executive Vice President of
Sales and Marketing. During this time, Weider grew from revenues of $47 million
to over $320 million and executed a successful IPO in May 1997. From 1999 to
2003, Mr. Mastroianni was President of Unicity Network (created from the merger
of Enrich International and Rexall Showcase), a global network marketing
division of Royal Numico, where revenues increased from $118 million to over
$300 million during that time. Unicity sold and distributed nutritional and
personal care products through independent distributors worldwide. Most
recently, Mr. Mastroianni was President of NaturalGrowth, a company he founded
to consult with senior management of natural health companies in developing all
aspects of their business.
STEPHEN P. KUCHEN, age 44, has served as Chief Financial Officer, Chief
Operating Officer, Treasurer, Secretary and a Director, of the Company since
September 2004. Prior to that, Mr. Kuchen served as the Vice President -
Finance, Chief Financial Officer, Treasurer, Assistant Secretary and a Director,
of the Company since June 2000. Mr. Kuchen initially joined the Company in
February of 2000 as Controller. Prior to joining the Company, Mr. Kuchen was
employed from 1996 to 1999 as the Controller of Able Laboratories, a public
company located in South Plainfield, New Jersey that manufactures and sells
generic pharmaceuticals. Prior to his employment by Able Laboratories, Mr.
Kuchen was the Controller of Jerhel Plastics, a privately owned manufacturer of
women's compact cases from 1993 to 1996. Mr. Kuchen is a graduate of Seton Hall
University in South Orange, NJ, and is a Certified Management Accountant.
DAVID I. PORTMAN, age 64, has served as a Director of the Company from its
inception. Mr. Portman has a BS in Pharmacy and an MBA. He worked as a sales
representative and marketing manager for Eli Lilly, Beecham-Massengill, Winthrop
Laboratories and Sandoz Pharmaceuticals before co-founding M.E.D. Communications
in 1974. In 1988, Mr. Portman sold his interest in M.E.D. Communications to
Robert Portman, and became President of TRIAD Development, a real estate company
that has numerous commercial and rental properties in New Jersey, a position
that he still holds. Mr. Portman served as a director of First Montauk
Securities Corp. from 1993 through December 31, 2002.
MICHAEL CAHR, age 65, was appointed to the Board of Directors in April
2002. Since April 1999, Mr. Cahr has served as President of Saxony Consultants,
a company that provides financial and marketing expertise to organizations in
the United States and abroad. Mr. Cahr was Chairman of Allscripts, Inc., the
leading developer of hand-held devices that provide physicians with real-time
access to health, drug and other critical information from September 1997
through March 1999 and President, CEO and Chairman from June 1994 to September
1997. Prior to Allscripts, Mr. Cahr was Venture Group Manager for Allstate
Venture Capital where he oversaw investments in technology, healthcare services,
biotech and medical services from October 1987 to June 1994. Mr. Cahr serves as
a director of Lifecell Corporation, a Branchburg, New Jersey-based, publicly
traded tissue engineering company
18
where he has been a board member since 1991. He is also a director of Truswal
Systems, an Arlington, Texas-based software engineering firm.
All directors hold office until the next annual meeting of stockholders
and until their successors have been elected and qualified. Officers serve at
the discretion of the Board of Directors.
Under the Investors' Rights Agreement dated January 28, 2005, by and
between the Company and Hormel Health Labs, LLC, as long as at least 50% of the
original shares of the Series A Preferred Stock remain outstanding, Hormel has a
right to designate a nominee to the Company's Board of Directors, provided that
such nominee would be considered an independent director under the Exchange Act.
Hormel Health Labs, LLC has not yet indicated whether it will exercise this
right or the identities of proposed nominees.
9(b) Scientific Advisory Boards
The Company has established a Scientific Advisory Board to provide it with
on-going advice and counsel regarding research direction, product development,
analysis of data, and general counseling. As the need arises, the Company
consults with individual members of this board on a non-scheduled basis.
9(c) Family Relationships
Robert Portman and David Portman are brothers. There are no other family
relationships among the Company's directors, executive officers or persons
nominated or chosen to become directors or executive officers of the Company.
9(d) Involvement in Certain Legal Proceedings
No events have occurred during the past five years that are required to be
disclosed pursuant to Item 401(d) of Regulation S-B.
9(e) Audit Committee Financial Expert
Joseph Harris, a former director and former member of the Company's Audit
Committee of the Board of Directors, was the "Audit Committee Financial Expert"
as that term is defined in Item 401 of Regulation S-B. In addition, Mr. Harris
is "independent" as that term is defined in Item 7(d)(3)(iv) of Schedule 14A
under the Exchange Act.
9(f) Audit Committee
The Board of Directors of the Company has established a separately
designated, standing Audit Committee. The Audit Committee met five times during
fiscal year ended December 31, 2004. The Audit Committee performs the role
described in section 3(a)(58)(A) of the Securities Exchange Act of 1934, and
reviews and discusses with the Company's management and its independent auditors
the audited and unaudited financial statements contained in the Company's Annual
Reports on Form 10-KSB and Quarterly reports on Form 10-QSB, respectively.
Although the Company's management has the primary responsibility for the
financial statements and the reporting process, including the system of internal
controls and disclosure controls and procedures, the Audit Committee reviews and
discusses the reporting process with management on a regular basis. The Audit
Committee also discusses with the independent auditor their judgments as to the
quality of the Company's accounting principles, the reasonableness of
significant judgments reflected in the financial statements and the clarity of
disclosures in the financial statements as well as such other matters as are
required to be discussed with the Audit Committee under generally accepted
auditing standards. The Audit Committee amended its written charter on March 16,
2004. The Audit Committee Charter is available on the Company's website -
www.pacifichealthlabs.com.
During fiscal 2004, the Audit Committee was composed of Mr. Harris, (who
was the chairman of the Audit Committee,) and Mr. Cahr, each of whom meet the
criteria for independence set forth in Rule 10A-3(b)(1) of the Securities and
Exchange Act of 1934, as amended.
19
9(g) Nomination of Directors
The Company's Nominating Committee was formed on March 16, 2004. The
Nominating Committee will be responsible for identifying and recommending
qualified candidates to serve as directors of the Company, considering nominees
for director recommended by stockholders and other Board members and to
recommend selection and qualification criteria for directors. Joseph Harris and
Michael Cahr are the members of the Nominating Committee and are independent
under relevant NASDAQ rules, although the NASDAQ rules are not directly
applicable to the Company. Prior to formation of the Nominating Committee,
nominations for the election of directors at annual meetings have generally been
handled by the full Board of Directors. Other than Messrs. Harris and Cahr, no
other members of the Board of Directors are deemed to be independent.
The Nominating Committee does not have a charter. Generally, the Company
and the Nominating Committee believe nominees for director should possess the
highest personal and professional ethics, integrity and values, and must be
committed to representing the long-term interests of the stockholders. The
Nominating Committee will seek candidates having experience in business,
management, marketing, finance, regulatory matters, the sports nutrition and
nutritional and dietary supplement industries, the pharmaceutical industry and
in other areas that are relevant to the Company's activities. Additionally,
director nominees should have sufficient time to effectively carry out their
duties.
The Nominating Committee will consider candidates that are put forward by
Company stockholders. The proposed candidate's name, and the information
described below, should be sent to Stephen Kuchen, Chief Financial Officer and
Secretary, at the Company's principal executive offices located at 100 Matawan
Road, Suite 420, Matawan, New Jersey, 07747-3913. Mr. Kuchen will then submit
such information to the Nominating Committee for review and consideration. The
process for determining whether to nominate a director candidate put forth by a
stockholder is the same as that used for reviewing candidates developed
internally. Other than candidates submitted by its directors and executive
officers, the Company has not, in the past 5 years, received a proposed
candidate for nomination from any large long-term shareholder.
Under the Company's bylaws, notice of a proposed candidate must be
received at the principal executive offices of the Company not less than 60 days
nor more than 90 days prior to the meeting; provided, however, that in the event
that less than 70 days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice must be received by the Company
not later than the close of business on the 10th day following the day on which
notice of the date of the meeting was mailed or made public. The stockholder's
notice must state
o the name, age, business address and residence address of the
candidate;
o the principal occupation or employment of the candidate;
o the class and number of shares of the Company which are
beneficially owned by the candidate;
o any other information relating to the Candidate that is
required to be disclosed under the SEC's proxy rules
(including without limitation such persons' written consent to
being named in any proxy statement as a nominee and to serving
as a Director if elected);
o the name and address, as they appear on the Company's books,
of the stockholder making the proposal; and
o the class and number of shares of the Company which are
beneficially owned by the stockholder making the proposal. .
Although the Company is not currently required to have a majority of
independent directors on its Board of Directors, the Company continues to search
for additional, highly qualified, individuals, who would be deemed independent,
to appoint to its Board of Directors.
As a small company, the Company has generally used an informal process to
identify and evaluate director candidates. Although the Company believes that
identifying and nominating highly skilled and experienced director candidates is
critical to its future, the Company has not engaged, nor does it believe that it
is necessary at this time to engage, any third party to assist it in identifying
director candidates. The Company has encouraged both independent
20
directors and directors that are not independent to identify nominees for the
Board of Directors. The Company believes that as a result, it is presented with
a more diverse and experienced group of candidates for discussion and
consideration.
9(h) Compensation Committee
The Board of Directors of the Company has established a separately
designated standing Compensation Committee. The Compensation Committee, which
was formed in June 2002, took action by unanimous consent one time during the
fiscal year ended December 31, 2004. The Compensation Committee was formed to
set policies for compensation of the Chief Executive Officer and the other
executive officers of the Company. The Compensation Committee periodically
compares the Company's executive compensation levels with those of companies
with which the Company believes that it competes for attraction and retention of
senior caliber personnel. The Compensation Committee either determines or
recommends to the Board of Directors the compensation of all executive officers.
During fiscal 2004, the Compensation Committee was composed of Mr. Harris
and Mr. Cahr, each of whom are deemed independent.
9(i) Code of Ethics
The Board of Directors of the Company has adopted a code of ethics, which
applies to all directors, officers and employees of the Company. The Company's
code of ethics is intended to comply with the requirements of newly adopted SEC
rules and regulations.
The Company's code of ethics is posted on the Company's Internet website
at www.pacifichealthlabs.com. The Company will provide its code of ethics in
print without charge to any stockholder who makes a written request to:
Corporate Secretary, PacificHealth Laboratories, Inc., 100 Matawan Road, Suite
420, Matawan, NJ 07747. Any waivers of the application, and any amendments to,
the Company's code of ethics must be made by the Company's Board of Directors.
Any waivers of, and any amendments to, the Company's code of ethics will be
disclosed promptly on the Company's Internet website, www.pacifichealthlabs.com.
ITEM 10. EXECUTIVE COMPENSATION
Dr. Portman is employed by the Company under a 2003 Employment Agreement
that was effective as of January 1, 2003. Under the 2003 Employment Agreement,
Dr. Portman receives a salary of $275,000 per year. The 2003 Employment
Agreement also provides that Dr. Portman may request the Compensation Committee
of the Board of Directors to renegotiate his salary if the Company's financial
situation improves. In addition, Dr. Portman is entitled to a discretionary
bonus upon the recommendation of the Compensation Committee. Also pursuant to
the 2003 Employment Agreement, Dr. Portman received options to purchase up to
300,000 shares of Common Stock under the Company's 2000 Stock Option Plan priced
at $2.79 per share (the market price of the Company's common stock at December
24, 2002). One-third of the options vested on January 1, 2003, and one-third
vested on January 1, 2004. The remaining one-third vests on January 1, 2005,
provided that Dr. Portman is employed by the Company at such dates. To the
extent not previously vested, the options also will vest if Dr. Portman's
employment is terminated by the Company without cause or by Dr. Portman with
cause. The 2003 Employment Agreement has a term of two years, and will terminate
on December 31, 2004 unless terminated earlier by either Dr. Portman or the
Company. Dr. Portman has the right to terminate the 2003 Employment Agreement
without cause on thirty days prior written notice, or with cause (as defined in
the 2003 Employment Agreement). The Company has the right to terminate the 2003
Employment Agreement for cause (as defined in the 2003 Employment Agreement). In
addition, if Dr. Portman's employment is terminated for any reason whatsoever
(except by the Company with cause), Dr. Portman will be entitled to receive a
lump sum payment of an amount equal to the base salary which would have been
paid during the period beginning on the date of termination of employment and
ending on the earlier of (1) the scheduled termination date or (2) the first
anniversary date of the termination date. 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.
21
Mr. Mastroianni is employed by the Company under a 2004 Employment
Agreement that was effective as of September 1, 2004. Under the 2004 Employment
Agreement, Mr. Mastroianni receives a salary of $275,000 per year. In addition,
Mr. Mastroianni is entitled to a bonus of 5% of the Company's pre-tax annual net
income. Also pursuant to the 2004 Employment Agreement, Mr. Mastroianni received
options to purchase up to 550,000 shares of Common Stock not covered under any
Stock Option Plan priced at $0.65 per share (the market price of the Company's
common stock at September 1, 2004). One-fourth of the options vested
immediately; one-fourth vest on September 1, 2005; one-fourth vest on September
1, 2006; and one-fourth vest on September 1, 2007, provided that Mr. Mastroianni
is employed by the Company at such dates. To the extent not previously vested,
the options also will vest if Mr. Mastroianni's employment is terminated by the
Company without cause or by Mr. Mastroianni with cause or if there is a change
in control of the Company. The 2004 Employment Agreement has a term of two
years, and will terminate on August 31, 2006 unless terminated earlier by either
Mr. Mastroianni or the Company. Mr. Mastroianni has the right to terminate the
2004 Employment Agreement without cause on thirty days prior written notice, or
with cause (as defined in the 2004 Employment Agreement). The Company has the
right to terminate the 2004 Employment Agreement for cause (as defined in the
2004 Employment Agreement). In addition, if Mr. Mastroianni's employment is
terminated for any reason whatsoever (except by the Company with cause), Mr.
Mastroianni will be entitled to receive a lump sum payment of an amount equal to
the base salary which would have been paid during the period beginning on the
date of termination of employment and ending on the earlier of (1) the scheduled
termination date or (2) the first anniversary date of the termination date. Upon
Mr. Mastroianni's termination for any reason, including his voluntary
termination, Mr. Mastroianni 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 the Company's arrangement with Mr. Kuchen, in the event of a sale,
merger or change in control of the Company, Mr. Kuchen will receive one-half of
his annual salary and all of his options would become immediately vested. If Mr.
Kuchen were subsequently terminated, Mr. Kuchen would receive one-half of his
annual salary as severance.
The table below sets forth information concerning compensation paid to Dr.
Robert Portman, David Mastroianni, Stephen Kuchen, and Bruce Bollinger in 2004,
2003, and 2002. No executive officers of the Company other than Dr. Portman, Mr.
Kuchen, and Mr. Bollinger received compensation of $100,000 or more in fiscal
2004, 2003, and 2002.
Summary Compensation Table
---------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
-----------------------------------------------------------------------------
Awards Payouts
------------------------------------
Securities
Other Under-
Annual Restricted lying All Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Salary Bonus sation Award(s) SARs Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
---------------------------------------------------------------------------------------------------------------
Dr. Robert Portman, 2004 275,000 -0- (1) -0- 450,000 -0- -0-
Chairman and Chief --------------------------------------------------------------------------------------
Scientific Officer 2003 275,000 -0- (1) -0- -0- -0- -0-
--------------------------------------------------------------------------------------
2002 275,000 -0- (1) -0- 300,000 -0- -0-
---------------------------------------------------------------------------------------------------------------
David Mastroianni,
President and CEO 2004 91,667(2) -0- (1) -0- 550,000 -0- -0-
---------------------------------------------------------------------------------------------------------------
Stephen Kuchen, 2004 119,192 -0- (1) -0- 120,000 -0- -0-
VP - Finance & CFO --------------------------------------------------------------------------------------
2003 115,000 500 (1) -0- 20,000 -0- -0-
--------------------------------------------------------------------------------------
2002 100,000 500 (1) -0- -0- -0- -0-
---------------------------------------------------------------------------------------------------------------
Bruce Bollinger, 2004 123,160(3) -0- (1) -0- -0- -0- -0-
Executive VP- --------------------------------------------------------------------------------------
Marketing 2003 150,000 500 (1) -0- -0- -0- -0-
--------------------------------------------------------------------------------------
2002 25,000(4) 250 (1) -0- 105,000 -0- -0-
---------------------------------------------------------------------------------------------------------------
(1) Less than 10% of annual salary and bonus.
(2) Mr. Mastroianni joined the Company in September 2004.
(3) Mr. Bollinger left the Company in June 2004 and this amount includes
severance pay.
(4) Mr. Bollinger joined the Company in November 2002.
22
The following table sets forth certain information regarding options granted in
fiscal 2004:
Option/SAR Grants in Fiscal-Year 2004
(Individual Grants)
----------------------------------------------------------------------------------------------
Number of Percent Of Total
Securities Options/SARs
Underlying Granted to Exercise Or
Options/SARs Employees In Base Price
Name Granted (#) Fiscal Year ($/Share) Expiration Date
(a) (b) (c) (d) (e)
----------------------------------------------------------------------------------------------
Dr. Robert Portman 450,000(1) 35.2% $ 0.65 09/01/09
----------------------------------------------------------------------------------------------
David Mastroianni 550,000(2) 43.1% $ 0.65 09/01/09
----------------------------------------------------------------------------------------------
Stephen Kuchen 120,000(3) 9.4% $ 0.70 10/01/09
----------------------------------------------------------------------------------------------
(1) Dr. Portman's options vest as to 150,000 shares at September 1, 2004;
150,000 shares at September 1, 2005; and 150,000 shares at September 1,
2006.
(2) Mr. Mastroianni's options vest as to 137,500 shares at September 1, 2004;
137,500 shares at September 1, 2005; 137,500 shares at September 1, 2006;
and 137,500 shares at September 1, 2007.
(3) Mr. Kuchen's options vest as to 30,000 shares at October 1, 2004; 30,000
shares at October 1, 2005; 30,000 shares at October 1, 2006; and 30,000
shares at October 1, 2007.
The following table sets forth information with respect to the number of
unexercised options and the value of unexercised "in-the-money" options held by
Dr. Robert Portman, David Mastroianni, and Stephen Kuchen at December 31, 2004.
Aggregated Option/SAR Exercises in Fiscal-Year 2004 and
Option/SAR Values at 12/31/04
-------------------------------------------------------------------------------------------------------------------------------
Number of Securities $ Value of Unexercised In-
Shares Underlying Unexercised the-Money Options/SARs
Acquired Options/SARs At 12/31/04 At 12/31/04
On Value Exercisable/ Exercisable/
Exercise Realized Unexercisable Unexercisable
Name (#) ($) (#) ($)
(a) (b) (c) (d) (e)
-------------------------------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
-------------------------------------------------------------------------------------------------------------------------------
Robert Portman -0- -0- 1,460,000 100,000 $ 322,870 -0-
-------------------------------------------------------------------------------------------------------------------------------
David Mastroianni -0- -0- 137,500 412,500 $ 4,125 $ 12,375
-------------------------------------------------------------------------------------------------------------------------------
Stephen Kuchen -0- -0- 60,000 20,000 $ 6,970 -0-
-------------------------------------------------------------------------------------------------------------------------------
23
For the purpose of computing the value of "in-the-money" options at
December 31, 2004, in the above table, the fair market value of the Company's
common stock at such date is deemed to be $0.68 per share, the closing sale
price of the Common Stock on such date as reported by the OTC Bulletin Board.
Long Term Incentive Plans
The Company has no long-term incentive plans for its executive officers.
Directors' Compensation in Fiscal-Year 2004
For the year ended December 31, 2004, the Company compensated independent
directors and committee members Cahr and Harris by granting each options to
purchase 50,000 shares at $0.72 per share in lieu of cash director's fees. For
the year ended December 31, 2004, the Company compensated independent directors
D. Portman and Horn by granting each options to purchase 15,000 shares at $0.72
per share in lieu of cash director's fees.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's directors and executive officers, and any persons who own more than
ten percent of the Company's common stock, file with the Securities and Exchange
Commission ("SEC") initial reports of ownership and reports of changes in
ownership of the common stock and other equity securities of the Company. Such
persons are required by SEC regulations to furnish the Company with copies of
all such reports that they file. To the knowledge of the Company, based upon its
review of these reports, all Section 16 reports required to be filed by
directors, executive officers and beneficial owners of the Company during the
fiscal year ended December 31, 2003 were filed on a timely basis.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of April 14, 2005, the Company had 10,237,045 shares of common stock
and 90,909 shares of its Series A Preferred Shares (909,091 equivalent common
stock shares) outstanding. The following table sets forth information concerning
the present ownership of the Company's common stock by the Company's directors,
executive officers and each person known to the Company to be the beneficial
owner of more than five percent of the outstanding shares of the Company's
common stock.
Common Stock (2) Common Stock (2)
Name and Address (1) Amount Beneficially Owned Percentage of Class
-------------------- ------------------------- -------------------
Robert Portman (3) 3,111,051 24.5%
Chairman of the Board and Chief
Scientific Officer
David Mastroianni (4) 137,500 1.2%
President, Chief Executive Officer
and a Director
Stephen P. Kuchen (5) 116,044 1.0%
Vice President, Chief Financial
Officer and a Director
David I. Portman (6) 376,841 3.4%
Secretary and a Director
24
Common Stock (2) Common Stock (2)
Name and Address (1) Amount Beneficially Owned Percentage of Class
-------------------- ------------------------- -------------------
Michael Cahr (7) 58,194 *
Director
Executive Officers and Directors as 3,799,630 29.0%
a group (5 persons)
Matthew Smith (8) 1,081,644 9.3%
241 Central Park West
New York, NY 10024
Hormel Health Labs, LLC (9) 909,091 8.2%
1 Hormel Place
Austin, MN 55912
----------
* 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, NJ 07747.
(2) Common Stock which is issuable upon the exercise of a stock option which
is presently exercisable or which becomes exercisable within sixty days is
considered outstanding for the purpose of computing the percentage
ownership (x) of persons holding such options, and (y) of officers and
directors as a group with respect to all options held by officers and
directors.
(3) Includes 500,000 shares issuable upon the exercise of options granted
under the Company's 1995 Incentive Stock Option Plan ("1995 Plan");
760,000 shares issuable upon the exercise of options granted under the
Company's 2000 Incentive Stock Option Plan ("2000 Plan"); 150,000 shares
issuable upon the exercise of options granted under his 2004 Employment
Contract Amendment not under any Incentive Stock plan ("NON-ISO"); and
160,428 shares issuable upon the exercise of warrants issued pursuant to a
2003 Private Placement. 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 137,500 shares issuable upon the exercise of options granted
under his 2004 Employment Contract not under any Incentive Stock plan
("NON-ISO").
(5) Includes 55,000 shares issuable upon the exercise of options granted under
the 1995 Plan; 15,000 shares issuable upon the exercise of options granted
under the 2000 Plan; 30,000 shares issuable upon the exercise of options
granted not covered under any Plan ("NON-ISO") and 5,348 shares issuable
upon the exercise of warrants issued pursuant to a 2003 Private Placement.
(6) Includes 20,000 shares issuable upon the exercise of options granted under
the Company's 1995 Plan; 7,913 shares issuable upon the exercise of
options granted under the 2000 Plan; and 53,476 shares issuable upon the
exercise of warrants granted pursuant to a 2003 Private Placement.
(7) Includes 20,000 shares issuable upon the exercise of options granted under
the 1995 Plan and 38,194 shares issuable upon the exercise of options
granted under the 2000 Plan.
(8) Includes 318,048 shares issuable upon the exercise of warrants granted
pursuant to a 2003 Private Placement and 127,500 shares issuable upon the
exercise of warrants granted pursuant to consulting services pursuant to a
2003 Private Placement.
25
(9) Includes 90,909 shares of Series A Preferred Stock (representing 100% of
the issued and outstanding preferred stock) convertible into 909,091
shares of Common Stock.
Securities Authorized For Issuance Under Equity Compensation Plans
The following table sets forth information regarding our existing
compensation plans and individual compensation arrangements pursuant to which
our equity securities are authorized for issuance to employees or non-employees
(such as directors, consultants and advisors) in exchange for consideration in
the form of services:
----------------------------------------------------------------------------------------------------------------------
Number of securities
Number of securities to be remaining available for
issued upon exercise of Weighted-average exercise future issuance under
Plan Category outstanding options, price of outstanding equity compensation plans
warrants and rights options, warrants and rights (excluding securities
reflected in column (a))
----------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
----------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security 1,929,875 $ 1.57 260,500
holders
----------------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security -0- N/A N/A
holders
----------------------------------------------------------------------------------------------------------------------
Total 1,929,875 $ 1.57 260,500
----------------------------------------------------------------------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the last two fiscal years, the Company has not entered into any
material transactions or series of transactions which, in the aggregate, would
be considered material in which any officer, director or beneficial owner of 5%
or more of any class of capital stock of the Company had a direct or indirect
material interest, nor are any such transactions presently proposed, except as
follows:
(a) In December 2003, the Company acquired all of the outstanding capital
stock of Strong Research Corp. ("STRONG") from the Company's director, Gregory
T. Horn. In exchange, the Company issued to Mr. Horn 150,000 shares of the
Company's common stock. The Company also will issue an additional 150,000 shares
to Mr. Horn if certain milestones are achieved. In addition, the Company issued
52,000 shares of its common stock to satisfy obligations of STRONG for services
rendered by consultants. All of the Company's independent directors present at
the board meeting where this transaction was approved, constituting 2 of the
Company's 3 independent directors in office at the time, considered the
potential conflicts of interest and, based on information provided by the
officers, concluded that the transaction was in the best interest of the
Company, and that the terms of the transaction were fair and reasonable to the
Company and as favorable to the Company as if STRONG were controlled by an
unaffiliated party. On December 29, 2003, the Company filed with the SEC a
Current Report on form 8-K discussing this transaction.
(b) In an August and September 2003 private placement, the Company issued
an aggregate of 3,208,556 shares of its common stock, together with warrants
exercisable for an aggregate of 1,604,278 shares of its 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 $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. Certain of the
Company's executive officers and directors participated in this transaction. Dr.
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, the Company's new director,
purchased 427,807 shares and 213,903 warrants on the same terms as other
26
investors. Mr. Horn committed to the purchase of such shares at approximately
the same time as he was elected director.
(c) On January 12, 2005, six directors of the Company loaned the Company
an aggregate amount of $60,000, which amount was intended to be a bridge loan
pending financing. This amount was repaid with the proceeds of the sale of
preferred stock described below. All of the Company's directors participated in
this loan except Mr. David Portman.
(d) On January 28, 2005, the Company entered into a Series A Preferred
Stock Purchase Agreement and related agreements with Hormel Health Labs, LLC
("Hormel") pursuant to which the Company issued and sold 90,909 shares of Series
A Preferred Stock for an aggregate purchase price of $1,000,000 or $11.00 per
share. The terms of conversion and the preferences relating to the Series A
Preferred Stock are described above under Item 6(c) - Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources. The shares Series A Preferred Stock issued to Hormel are
convertible into an aggregate 909,090 shares of common stock, subject to
adjustment. In connection with the Series A Stock Purchase Agreement, the
Company and Hormel entered into an Investors' Rights Agreement on the same date.
Under the Investors Rights Agreement, the Company agreed, upon request by the
holders of the Series A Preferred Stock, and subject to customary terms and
conditions, to file a registration statement with the SEC registering for resale
the shares of common stock issuable upon conversion of the Series A Preferred
Stock. Under the Investors' Rights Agreement, the Company also agreed to include
the common stock issuable upon conversion of the Series A Preferred Stock in any
other registration statement the Company may file with the SEC. The Investors'
Rights Agreement prohibits the Company from granting registration rights
superior to those under the Investors Rights Agreement. Under the Investors'
Rights Agreement, the holders of the Series A Preferred Stock also are granted a
right to participate on a pro rata basis in future sales of equity securities
(or securities exercisable for or convertible into equity securities). As long
as at least 50% of the original shares of the Series A Preferred Stock remain
outstanding, the holders have the right to designate an individual to be
nominated to the Company Board of Directors, provided that such designee would
be considered an independent director under the Exchange Act. Hormel has not yet
indicated whether it will exercise this right or the identities of proposed
designees. Also in connection with this transaction, the Company, Hormel and Dr.
Robert Portman, the Chairman of the Company's Board of Directors and Chief
Scientific Officer, entered into a Right of First Refusal and Co-Sale Agreement
on January 28, 2005. Under this agreement, the Company and Hormel have the right
of first refusal to purchase shares of the Company's common stock, which are
held by Dr. Portman and which he wishes to sell, at the price and terms offered
by a third party. In addition, if the right of first refusal is not exercised in
connection with any sale by Dr. Portman, Hormel will have the right to require a
portion of its shares to be included with Dr. Portman's sale to a third party.
Certain sales by Dr. Portman will be exempt from these restrictions, including
public sales by Dr. Portman pursuant to Rule 144.
(e) On January 28, 2005, the Company entered into an Exclusive Custom
Manufacturing Agreement (the "Manufacturing Agreement") with an affiliate of
Hormel. The Manufacturing Agreement provides for the exclusive manufacturing and
processing of the Company's powered sports drinks at fixed prices. The initial
term of the Manufacturing Agreement is one year.
ITEM 13. EXHIBITS
(a) A list of the exhibits filed as a part of this report is set forth in
the Exhibit Index starting after page F-17 hereof.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
During the fiscal years ended December 31, 2003 and 2004, Eisner LLP, the
Company's independent auditors, billed the Company the fees set forth below in
connection with services rendered by the independent auditors to the Company:
27
Fee Category Fiscal 2003 Fiscal 2004
------------ ----------- -----------
Audit Fees(1) $44,500 $56,500
Audit-Related Fees(2) $ 1,500 $ -0-
Tax Fees(3) $ 4,000 $ 8,500
All Other Fees(4) $ -0- $ -0-
------- -------
TOTAL $50,000 $65,000
======= =======
(1) Audit fees consisted of fees for the audit of the Company's annual
financial statements and review of quarterly financial statements as well as
services normally provided in connection with statutory and regulatory filings
or engagements, comfort letters, consents and assistance with and review of
Company documents filed with the SEC.
(2) Audit-related fees consisted of fees for assurance and related
services, including primarily employee benefit plan audits, due diligence
related to acquisitions, accounting consultations in connection with
acquisitions, consultation concerning financial accounting and reporting
standards and consultation concerning matters related to Section 404 of the
Sarbanes Oxley Act of 2002.
(3) Tax fees consisted primarily of fees for tax compliance, tax advice
and tax planning services.
(4) Other fees consisted of transitional costs in connection with changing
auditors.
Policy for Pre-Approval of Audit and Non-Audit Services
The Audit Committee's policy is to pre-approve all audit services and all
non-audit services that the Company's independent auditor is permitted to
perform for the Company under applicable federal securities regulations. As
permitted by the applicable regulations, the Audit Committee's policy utilizes a
combination of specific pre-approval on a case-by-case basis of individual
engagements of the independent auditor and general pre-approval of certain
categories of engagements up to predetermined dollar thresholds that are
reviewed annually by the Audit Committee. Specific pre-approval is mandatory for
the annual financial statement audit engagement, among others.
The pre-approval policy was implemented effective as of March 16, 2004.
All engagements of the independent auditor to perform any audit services and
non-audit services since that date have been pre-approved by the Audit Committee
in accordance with the pre-approval policy. The policy has not been waived in
any instance. All engagements of the independent auditor to perform any audit
services and non-audit services prior to the date the pre-approval policy was
implemented were approved by the Audit Committee in accordance its normal
functions.
SUPPLEMENTAL INFORMATION
The Issuer has not sent an annual report or proxy statement to security
holders in respect of the fiscal year ending December 31, 2004. Such report and
proxy statement will be furnished to security holders in connection with the
Company's Annual Meeting, which is scheduled to be held in the second quarter of
2005. Copies of such material will be furnished to the Commission when it is
sent to security holders.
28
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PacificHealth Laboratories, Inc.
By: s/ David Mastroianni
-------------------------------------------
David Mastroianni, President and Chief Executive Officer
Date: April 14, 2005
In accordance with the Securities Exchange Act of 1934 and the requirements of
Form 10-KSB, this Report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dated indicated.
s/ David Mastroianni Director and Chief April 14, 2005
-------------------------- Executive Officer
David Mastroianni
s/ Robert Portman Chairman of the Board and April 14, 2005
-------------------------- Director
Robert Portman
s/ Stephen P. Kuchen Director, Principal April 14, 2005
-------------------------- Financial and Accounting
Stephen P. Kuchen Officer, Secretary
s/ David I. Portman Director April 14, 2005
--------------------------
David I. Portman
s/ Michael Cahr Director April 14, 2005
--------------------------
Michael Cahr
29
PACIFICHEALTH LABORATORIES, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 2004 and 2003
PACIFICHEALTH LABORATORIES, INC.
Contents
Page
----
Financial Statements
Report of independent registered public accounting firm F-1
Balance sheets as of December 31, 2004 and 2003 F-2
Statements of operations for the years ended December 31, 2004 and 2003 F-3
Statements of changes in stockholders' equity for the years ended December 31, 2004 and 2003 F-4
Statements of cash flows for the years ended December 31, 2004 and 2003 F-5
Notes to financial statements F-6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
PacificHealth Laboratories, Inc.
We have audited the accompanying balance sheets of PacificHealth Laboratories,
Inc. as of December 31, 2004 and 2003, and the related statements of operations,
changes in stockholders' equity and cash flows for each of the two years in the
period ended December 31, 2004. 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 audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PacificHealth Laboratories,
Inc. as of December 31, 2004 and 2003, and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 2004, in
conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements the Company has incurred significant recurring operating
losses and significant negative cash flows from operations. The Company has an
accumulated deficit of $15,557,096 as of December 31, 2004. The Company also has
a limited ability to borrow additional funds under its line of credit and is
dependent on the completion of a financing in order to continue operations.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note A. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Eisner LLP
New York, New York
February 18, 2005
With respect to Notes B[7], C and N
March 9, 2005
F-1
PACIFICHEALTH LABORATORIES, INC.
Balance Sheets
December 31,
------------------------------
2004 2003
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 25,832 $ 1,798,703
Accounts receivable, net 430,580 669,300
Inventories (including consigned inventory of $191,000 and $0) 1,760,064 738,062
Prepaid expenses 215,091 191,859
------------ ------------
Total current assets 2,431,567 3,397,924
Property and equipment, net 111,273 60,307
Other asset 155,251
Deposits 34,396 10,895
------------ ------------
$ 2,577,236 $ 3,624,377
============ ============
LIABILITIES
Current liabilities:
Notes payable $ 373,781 $ 470,145
Accounts payable and accrued expenses 1,580,094 376,693
Advance payments from customers 376,000
------------ ------------
2,329,875 846,838
------------ ------------
Commitments (Note I)
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, authorized 1,000,000 shares;
none issued and outstanding
Common stock, $0.0025 par value, authorized 50,000,000 shares; issued and
outstanding 10,237,045 shares at December 31, 2004 and
10,188,545 shares at December 31, 2003 25,592 25,471
Additional paid-in capital 15,778,865 15,788,068
Accumulated deficit (15,557,096) (13,036,000)
------------ ------------
247,361 2,777,539
------------ ------------
$ 2,577,236 $ 3,624,377
============ ============
See notes to financial statements
F-2
PACIFICHEALTH LABORATORIES, INC.
Statements of Operations
Year Ended
December 31,
------------------------------
2004 2003
------------ ------------
Revenue:
Product sales, net $ 6,807,271 $ 5,453,571
------------ ------------
Cost of goods sold:
Product sales 3,599,289 2,799,462
Write-down of inventory (see Note C) 678,933
------------ ------------
4,278,222 2,799,462
------------ ------------
Gross profit 2,529,049 2,654,109
------------ ------------
Operating expenses:
Selling, general and administrative 4,620,388 3,783,923
Research and development 144,961 231,651
Depreciation 50,951 40,785
Patent impairment 137,138
------------ ------------
4,953,438 4,056,359
------------ ------------
Loss before other income (expense) and income taxes (2,424,389) (1,402,250)
------------ ------------
Other income (expense):
Interest income 7,814 9,685
Interest expense (95,735) (58,709)
------------ ------------
(87,921) (49,024)
------------ ------------
Loss before income taxes (2,512,310) (1,451,274)
Provision for income taxes 8,786
------------ ------------
Net loss $ (2,521,096) $ (1,451,274)
============ ============
Net loss per share - basic and diluted $ (0.25) $ (0.20)
============ ============
Weighted average shares outstanding:
Basic and diluted 10,234,068 7,094,334
============ ============
See notes to financial statements
F-3
PACIFICHEALTH LABORATORIES, INC.
Statements of Changes in Stockholders' Equity
Common Stock Additional
--------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------
Balance, January 1, 2003 6,114,703 $ 15,287 $ 13,839,973 $(11,584,726) $ 2,270,534
Stock options exercised 1,000 2 1,058 1,060
Fair value of stock options issued to non-employees 7,552 7,552
Stock and warrants issued in private placements, net
of issuance costs 3,922,842 9,807 1,827,360 1,837,167
Stock issued in asset acquisition 150,000 375 112,125 112,500
Net loss (1,451,274) (1,451,274)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2003 10,188,545 25,471 15,788,068 (13,036,000) 2,777,539
Fair value of stock options issued to non-employees 19,679 19,679
Issuance costs related to 2003 private placement (32,000) (32,000)
Stock issued in asset acquisition 48,500 121 3,118 3,239
Net loss (2,521,096) (2,521,096)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2004 10,237,045 $ 25,592 $ 15,778,865 $(15,557,096) $ 247,361
============ ============ ============ ============ ============
See notes to financial statements
F-4
PACIFICHEALTH LABORATORIES, INC.
Statements of Cash Flows
Year Ended December 31,
---------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Net loss $(2,521,096) $(1,451,274)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 50,951 40,785
Amortization of pending patent 15,236
Fair value of non-employee stock options 19,679 7,552
Write-off of inventory 678,933
Write-off of pending patent 137,138
Changes in:
Accounts receivable 238,720 (334,081)
Prepaid expenses (23,232) (48,994)
Inventories (1,700,935) 799,722
Other assets (17,385) (6,904)
Accounts payable and accrued expenses 1,203,402 53,558
Advance payments from customers 376,000
Other liabilities (100,000)
----------- -----------
Net cash used in operating activities (1,542,589) (1,039,636)
----------- -----------
Cash flows from investing activity:
Purchase of property and equipment (101,918) (34,257)
----------- -----------
Cash flows from financing activities:
Issuance of common stock 36,635 1,837,167
Common stock options exercised 1,060
Fees in connection with 2003 private placement (68,635)
Proceeds of note payable 6,602,172 3,095,362
Repayment of note payable (6,698,535) (2,689,429)
----------- -----------
Net cash (used in) provided by financing activities (128,363) 2,244,160
----------- -----------
Net (decrease) increase in cash and cash equivalents (1,772,870) 1,170,267
Cash and cash equivalents at beginning of year 1,798,702 628,436
----------- -----------
Cash and cash equivalents at end of year $ 25,832 $ 1,798,703
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 95,735 $ 58,709
Cash paid for income taxes $ 8,786
Noncash investing activity:
Stock-based consideration for acquisition of Strong Research, Inc. $ 3,239 $ 155,251
See notes to financial statements
F-5
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2004 and 2003
NOTE A - BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that
PacificHealth Laboratories, Inc. (the "Company") will continue as a going
concern. The Company has incurred significant recurring operating losses and
significant negative cash flows from operations. The Company has an accumulated
deficit of $15,557,096 as of December 31, 2004. The Company also has limited
ability to borrow additional funds under its line of credit and is dependent on
the completion of a financing in order to continue operations. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
The Company has raised approximately $1 million in cash from the sale of its
Series A Convertible Preferred Stock in January 2005 (see Note N). The Company
continues to seek additional financing from certain strategic partners and other
equity investors. The Company may engage an investment banker to assist in
raising capital and explore other strategic alternatives. In addition, the
Company is considering reducing operating expenses and has also been able to
negotiate extended credit terms with certain vendors, including the Company's
contract manufacturer. While the Company is aggressively pursuing the
opportunities and actions described above, there can be no assurance that the
Company will be successful in its efforts.
NOTE B - THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
[1] The Company:
The Company was incorporated in April 1995 to develop and market dietary
supplement products 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 currently
markets two lines of products that may utilize its proprietary patented
technology. 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. The Company determines the allowance for doubtful accounts by
considering a number of factors, including the length of time an invoice
is past due, the customers' credit worthiness and historical bad debt
experience.
[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.
F-6
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2004 and 2003
NOTE B - THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[6] Earnings (loss) per share:
Basic earnings (loss) per share is computed by dividing net income (loss)
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 is computed using the treasury
stock method. For the years ended December 31, 2004 and 2003, diluted loss
per share did not include the effect of 3,049,875 and 2,244,075 options
outstanding and 2,293,275 and 2,238,275 warrants outstanding,
respectively, for such years as their effect would be anti-dilutive.
[7] Revenue recognition:
Sales are recognized when all of the following criteria are met: (1)
persuasive evidence that an arrangement exists; (2) delivery has occurred
or services have been rendered; (3) the seller's price to the buyer is
fixed and determinable; and, (4) collectibility is reasonably assured.
Sales are recorded net of incentives paid to customers.
In December 2003, the Company entered into a purchasing agreement with a
significant customer for its strength training products whereby all unsold
product is subject to a right of return provision if certain minimum
levels of retail sales in a 12-month period of time from the date of
initial sale are not achieved. In April 2004, the Company entered into a
purchasing agreement with the same significant customer for all other
products sold to this customer whereby all unsold product is subject to
return provisions identical or similar to the one disclosed above. In
addition to the four criteria described above, the Company recognizes
revenue related to these products after analyzing retail sell-through data
provided by the customer and the Company's expectation of future customer
sell-through trends.
In the fourth quarter of 2004, based on a comparison between the retail
sell-through minimums defined in the purchase agreements and actual retail
sell-through information provided by the customer, the Company has
adjusted its estimate and reversed approximately $376,000 in sales of its
products that had been recorded as sales during the first nine months of
2004 (see Notes C and N).
[8] Research and development:
Costs of research and development activities are expensed as incurred.
[9] Advertising costs:
Advertising costs are expressed as incurred. During 2004 and 2003, the
Company recorded advertising expense of $1,045,361 and $727,425,
respectively.
F-7
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2004 and 2003
NOTE B - THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[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". The Company's stock option plans are described in Note J. The
following table illustrates the effect on net loss and net loss per share
if the fair value-based method had been applied to all awards.
Year Ended December 31,
---------------------------
2004 2003
----------- -----------
Reported net loss $(2,521,096) $(1,451,274)
Stock-based employee compensation determined under
the fair value-based method (419,739) (246,870)
----------- -----------
Pro forma net loss $(2,940,835) $(1,698,144)
=========== ===========
Basic and diluted net loss per share:
As reported $ (0.25) $ (0.20)
=========== ===========
Pro forma $ (0.29) $ (0.24)
=========== ===========
The fair value of each option grant on the date of grant is estimated
using the Black-Scholes option-pricing model with a volatility ranging
from 107% to 114% for 2004 and 142% for 2003, expected life of options of
5 years, risk-free interest rate of approximately 3% in 2004 and 2003 and
a dividend yield of 0%. The weighted average fair values of options
granted during the years ended December 31, 2004 and 2003 were $0.53 and
$1.68, respectively.
[11] Segment information:
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.
Any resulting deferred tax asset is reduced, if necessary, by a valuation
allowance for any tax benefits which are not expected to be realized.
F-8
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2004 and 2003
NOTE B - THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[13] Impairment of long-lived assets:
Long-lived assets, to be held and used, are reviewed for impairment
whenever events or changes in circumstances indicate that the related
carrying amounts may not be recoverable using expected future undiscounted
cash flows. When required, impairment losses on assets to be held and used
are recognized based on the excess of the assets' carrying amount over
their fair values as determined by selling prices for similar assets or
application of other appropriate valuation techniques. Long-lived assets
to be disposed of are reported at the lower of their carrying amounts or
fair values less disposal costs. In the fourth quarter of 2004, the
Company recorded an impairment charge of approximately $137,000 to
write-down the value of patents associated with certain of the Company's
products (see Note C).
[14] Comprehensive income:
Other than net loss the Company does not have any comprehensive income
items at December 31, 2004 and 2003.
[15] Recent accounting pronouncements:
FASB Statement 123 (Revision 2004), "Share-Based Payment," was issued in
December 2004 and is effective for reporting periods beginning after
December 15, 2005. The new statement requires all share-based payments to
employees to be recognized in the financial statements based on their fair
values. The Company currently accounts for its share-based payments to
employees under the intrinsic value method of accounting set forth in
Accounting Principles Board Opinion No. 25, `Accounting for Stock Issued
to Employees." Additionally, the Company complies with the stock-based
employer compensation disclosure requirements of SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure, an amendment of
FASB Statement No. 123." The Company is still evaluating the effects of
implementing FASB Statement 123 (Revision 2004).
[16] 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. The significant estimates
and assumptions made by the Company are in the area of revenue recognition
and inventory obsolescence.
NOTE C - FOURTH QUARTER ADJUSTMENT
As of December 31, 2004 the Company determined that certain products had not
reached the minimum sell-through requirements as referred to in Note B. As such,
in the fourth quarter of 2004, the Company adjusted its estimate and reversed
approximately $376,000 of sales that had been recorded in the first nine months
of 2004. As of December 31, 2004 these products have been recorded as consigned
inventory.
In March 2005, the Company was notified by its major customer that they will
discontinue carrying certain of the Company's products (see Note N). The Company
has recorded a charge of approximately $679,000 in the fourth quarter of 2004 to
write-down the value of this discontinued inventory to zero.
F-9
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2004 and 2003
NOTE D - INVENTORIES
Inventories which are held at third-party warehouses and on consignment with
customers consist of the following:
2004 2003
---------- ----------
Raw materials (at contract manufacturer) $ 104,745 $ 14,841
Work in process (at contract manufacturer) 70,020
Packaging supplies (at third party warehouse) 70,015 33,127
Finished goods (at third party warehouse) 1,324,284 690,094
Finished goods (on consignment) 191,000
---------- ----------
$1,760,064 $ 738,062
========== ==========
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
2004 2003
-------- --------
Furniture and equipment $374,693 $297,451
Molds and dies 115,825 91,150
-------- --------
490,518 388,601
Less accumulated depreciation 379,245 328,294
-------- --------
$111,273 $ 60,307
======== ========
Depreciation expense aggregated $50,951 and $40,785 for the years ended December
31, 2004 and 2003, respectively.
NOTE F - OTHER ASSET
In December 2003, the Company acquired all of the outstanding shares of Strong
Research, Inc. ("Strong"), a research-based educational sports nutrition
company, owned by one of the Company's former directors. In connection with this
transaction, the Company issued 150,000 common shares valued at $112,500 at the
date of the transaction. The Company ascribed the entire value to a pending
patent. Such patent was being amortized over an estimated useful life of three
years. Strong is a development stage company and has not commenced planned
principal operations; the acquisition was accounted for as an acquisition of
assets and not a business combination. In addition, the Company settled certain
liabilities of Strong and issued 52,000 common shares in January 2004. The
Company has recorded this additional cost of approximately $42,000 as of
December 31, 2003. As of December 31, 2004 the Company determined to write off
the unamortized value of the patent acquired in the acquisition in the amount of
$137,138 due to the discontinuance by the exclusive customer for the products
covered by this patent (see Note B[13]).
Further, the Company is contingently obligated to issue an additional 150,000
common shares to the seller if certain products developed as a result of the
acquisition reach $4 million in revenue for any twelve consecutive months. The
issuance of such shares will result in an increase to the purchase price of
assets acquired based upon the fair value of such shares at the date the
milestone is achieved.
F-10
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2004 and 2003
NOTE G - NOTES PAYABLE
Included in notes payable at December 31, 2004 and 2003 is $267,000 and $400,000
pursuant to the Company's asset based credit facility. During the second quarter
of 2003, the Company secured a $750,000 asset-based credit facility. This
facility was for one year commencing on June 1, 2003. This credit facility has
been increased to $1,000,000 and has been renewed for 2 years commencing June 1,
2004. 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 equal to or less than 45 days or have been
outstanding for less than 90 days. This credit facility bears interest at a rate
of prime plus 1.75% as well as a 0.75% discount rate on all advances. The
receivables are financed with recourse.
In addition, the Company has notes payable as follows:
2004 2003
--------- ---------
Installment note payable to insurance finance company
due in monthly installments of $8,128, including
interest at 3.84% through February 2005 $ 16,256
Installment note payable to insurance finance company
due in monthly installments of $11,505, including
interest at 4.553% through September 2005 90,073
Installment note payable to insurance finance company
due in monthly installments of $7,343, including
interest at 6% through September 2004 $ 67,318
NOTE H - 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.
During 2003, the Company issued 3,922,842 shares of common stock in two separate
private placements. The first private placement took place during August and
September 2003, in which the Company issued 1,604,278 units at $.935 per unit
with each unit consisting of 2 shares of common stock and a warrant to purchase
1 share of common stock at an exercise price of $.6325 per share. In connection
with this transaction, the Company issued 154,853 warrants to a third party for
investment banking services. The second private placement took place in December
2003 in which the Company issued 357,144 units at $1.40 per unit with each unit
consisting of 2 shares of common stock and 1 warrant to purchase 1 share of
common stock at $.85 per share.
F-11
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2004 and 2003
NOTE I - COMMITMENTS
[1] Employment agreement:
The Company entered into a two-year employment agreement on September 1,
2004, with the CEO of the Company that provides for minimum annual
compensation of $275,000. In the event of a change in control, as defined
in the employment agreement, the CEO shall be paid, as additional
compensation, a lump sum equal to his annual base salary in effect
immediately prior to the change in control. If the CEO is terminated
without cause, as defined in the employment agreement, the Company shall
pay the CEO, at the time of termination, an amount equal to the base
salary which would have been paid during a period beginning on the date of
termination of employment and ending on the later of the scheduled
termination date, as defined in the employment agreement, or the first
anniversary of the termination date.
[2] Lease:
Effective July 1, 2003, the Company entered into a new lease agreement for
office space which expires June 2007. The lease provides for the rental of
5,500 square feet.
The future minimum lease payments due under the leases are as follows:
Year Ending
December 31,
------------
2005 $123,750
2006 136,125
2007 70,125
--------
$330,000
========
Rent expense amounted to $130,268 and $102,507 in 2004 and 2003,
respectively.
NOTE J - STOCK OPTION PLANS AND WARRANTS
The Company has two stock option plans (the "Plans") under which 1,929,875
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 by 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 at various
times through November 2009. Vesting ranges from immediate to over five years.
F-12
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2004 and 2003
NOTE J - STOCK OPTION PLANS AND WARRANTS (CONTINUED)
Stock option transactions for employees during 2004 and 2003 were as follows:
Weighted
Exercise Average
Price Per Exercise Price
Option Vested Common Per Share
Shares Shares Share Outstanding
--------- --------- -------------- --------------
Balance, January 1, 2003 1,895,700 1,178,167 $0.313 - $4.88 $ 1.68
Granted/vested during the year 106,000 488,617 $0.800 - $1.92 $ 1.15
Cancelled during the year (24,000) (24,000) $3.770 - $4.75 $ 4.38
--------- ---------
Balance, December 31, 2003 1,977,700 1,642,784 $0.313 - $4.88 $ 1.58
Granted/vested during the year 1,277,000 580,916 $0.650 - $1.11 $ 0.67
Expired during the year (422,200) (422,200) $0.980 - $3.80 $ 1.82
--------- ---------
Balance, December 31, 2004 2,832,500 1,801,500 $0.313 - $4.88 $ 1.20
========= =========
Information with respect to employee stock options outstanding and employee
stock options exercisable at December 31, 2004 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
--------------- ----------- --------------- --------- ----------- ---------
$0.31 - $2.00 2,128,000 3.59 $ 0.64 1,197,000 $ 0.61
$2.01 - $4.00 694,500 1.70 $ 2.75 594,500 $ 2.75
$4.01 - $4.34 10,000 1.81 $ 4.34 10,000 $ 4.34
--------- ---------
2,832,500 3.12 $ 1.20 1,801,500 $ 1.34
========= =========
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 $19,679 and $7,552 for such
options issued in 2004 and 2003, respectively.
F-13
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2004 and 2003
NOTE J - STOCK OPTION PLANS AND WARRANTS (CONTINUED)
Stock option transactions for non-employees during 2004 and 2003 were as
follows:
Weighted
Exercise Average
Price Per Exercise Price
Option Vested Common Per Share
Shares Shares Share Outstanding
------- ------- -------------- --------------
Balance, January 1, 2003 352,875 327,875 $0.313 - $6.30 $ 1.79
Granted/vested during the year 4,500 29,500 $0.80 - $2.15 $ 0.90
Exercised during the year (1,000) (1,000) $1.06 $ 1.06
Expired during the year (20,000) (20,000) $2.00 - $5.00 $ 3.56
Cancelled during the year (70,000) (70,000) $0.31 - $3.89 $ 1.38
------- -------
Balance, December 31, 2003 266,375 266,375 $0.31 - $6.30 $ 1.57
Granted/vested during the year 11,000 11,000 $0.83 - $0.90 $ 0.84
Expired during the year (60,000) (60,000) $1.25 - $2.25 $ 1.68
------- -------
Balance, December 31, 2004 217,375 217,375 $0.31 - $6.30 $ 2.01
======= =======
Information with respect to non-employee stock options outstanding and
non-employee stock options exercisable at December 31, 2004 is as follows:
Weighted
Average Weighted
Remaining Average
Range of Number Contractual Exercise
Exercise Prices Outstanding Life (in Years) Price
--------------- ----------- --------------- ---------
$0.31 - $2.00 103,000 1.54 $ 0.99
$2.01 - $4.00 87,875 0.24 $ 2.36
$4.01 - $6.30 26,500 2.13 $ 4.85
-------
217,375 1.02 $ 2.01
=======
Stock warrant transactions during 2004 and 2003 were as follows:
Exercise Weighted
Price Average
Per Exercise Price
Common Per
Warrants Share Common Share
-------- ------------- --------------
Balance, January 1, 2003 122,000 $0.88 - $3.48 $1.35
Issued during the year 2,116,275 $0.63 - $0.85 $0.67
---------
Balance, December 31, 2003 2,238,275 $0.63 - $3.48 $0.71
Issued during the year 155,000 $0.63 - $0.88 $0.68
Expired during the year (100,000) $0.88 $0.88
---------
Balance, December 31, 2004 2,293,575 $0.63 - $3.48 $0.70
=========
F-14
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2004 and 2003
NOTE K - 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:
2004 2003
-------------------------- --------------------------
Amount Percent Amount Percent
--------- --------- --------- ---------
U.S. federal income tax provision
(benefit) at federal statutory rate $(879,308) 35% $(507,946) 35%
Effect of state taxes, net of
federal benefit (150,739) 6%
Change in valuation allowance 940,000 (37)% 463,345 (32)
Other 90,047 (4)% 44,601 (3)
--------- --------- --------- ---------
$ 0 0% $ 0 0%
========= ========= ========= =========
At December 31, 2004, the Company has $13,746,000 in federal net operating loss
carryovers, which can be used to offset future taxable income. The net operating
loss carryforwards expire through the year 2024.
The components of the Company's deferred tax assets are as follows:
2004 2003
----------- -----------
Net operating loss carryforwards $ 5,498,000 $ 4,830,000
Inventory reserve 272,000
Valuation allowance (5,770,000) (4,830,000)
----------- -----------
Deferred tax asset $ 0 $ 0
=========== ===========
The increase in the valuation allowance is attributable to the increase in net
loss during 2004.
NOTE L - MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISKS
[1] Concentrations 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 the Federal Deposit Insurance Corporation
("FDIC") limit. 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 note
payable approximate their fair values due to the short maturity of these
instruments.
8 F-15
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2004 and 2003
NOTE L - MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISKS (CONTINUED)
[3] Major customers:
For the years ended December 31, the Company had revenue from two
customers that accounted for approximately 33% and 17% in 2004 and 23% and
21% in 2003, of total revenue. Accounts receivable outstanding related to
these customers at December 31, 2004 and 2003 were $99,843 and $58,026,
respectively. Advanced payments for consigned inventory from one of these
customers was $376,000 as of December 31, 2004.
NOTE M - SEGMENT AND RELATED INFORMATION
At 2004 and 2003, the Company has one reportable segment:
Dietary and nutritional supplements.
The following table presents revenues by region:
2004 2003
---------- ----------
United States $6,417,951 $5,174,336
Canada 175,012 108,128
Other 214,308 171,107
---------- ----------
Total $6,807,271 $5,453,571
========== ==========
Revenue by product line are as follows:
Sports Weight
Performance Loss Total
---------- ---------- ----------
2004 $6,787,955 $ 19,316 $6,807,271
2003 5,393,296 60,275 5,453,571
Product sales for the years ended December 31, 2004 and 2003 are net of credits
of $299,006 and $188,043, respectively, for marketing promotions and returns of
certain products. These credits primarily relate to the sports performance
product line.
NOTE N - SUBSEQUENT EVENT
In March 2005, the Company was informed by its major customer that they will
discontinue carrying the Company's strength training products. The Company and
the customer have agreed to a discount program in the second quarter of 2005 to
sell through as much of the retail inventory as possible. It is likely that the
Company will absorb a large portion of the discount. Given the ongoing
significant business relationship between the Company and the customer, the
Company may accept returns of product from the customer after a period of
special promotion and discounting if other alternatives are not agreed to. The
Company may be required to provide sales credits and allowances of up to
$468,000 representing product sales that could potentially be subject to return.
This amount equates to approximately $220,000 of cost-basis inventory.
F-16
PACIFICHEALTH LABORATORIES, INC.
Notes to Financial Statements
December 31, 2004 and 2003
NOTE N - SUBSEQUENT EVENTS (CONTINUED)
On January 28, 2005, the Company entered into a Series A Preferred Stock
Purchase Agreement and related agreements with an investor and potential vendor
("holders") pursuant to which the Company issued and sold 90,909 shares of
Series A Preferred Stock for an aggregate purchase price of $1,000,000 or $11.00
per share. The proceeds, net of expenses, to the Company were approximately
$950,000. The Company's stock price on the date of closing was $0.65 per share.
The shares of Series A Preferred Stock are convertible into 909,090 shares of
common stock, subject to certain anti-dilution adjustments. In connection with
the Series A Stock Purchase Agreement, the holders were granted certain demand
and piggyback registration rights. As long as at least 50% of the original
shares of the Series A Preferred Stock remain outstanding, the holders have the
right to designate an individual to be nominated to the Company's Board of
Directors, provided that such designee would be considered an independent
director under the Exchange Act. The Company is required to pay 2% annual
dividends, payable in cash or shares of the Company's common stock at the
Company's option. The Series A Preferred Stock has a liquidation provision
whereby in the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of shares of Series A Preferred Stock
then outstanding are entitled to be paid out of the assets available for
distribution to its stockholders before any payment shall be made to the holders
of common stock an amount equal to the Series A Preferred Stock's original issue
price plus any dividends declared but unpaid.
Concurrently with the sale of the Series A Preferred Stock, the Company also
entered into an Exclusive Custom Manufacturing Agreement ("Manufacturing
Agreement") with an affiliate of the investor and potential vendor. The
Manufacturing Agreement provides for the exclusive manufacturing and processing
of the Company's powdered sports drinks at fixed prices. The initial term of the
Manufacturing Agreement is one year.
F-17
EXHIBIT INDEX
Incorporated
Exhibit No. Description by Reference
----------- ----------- ------------
3.1 -- Certificate of Incorporation of the Company and
all amendments thereto A
3.2 -- Amended and Restated Bylaws of the Company C
3.3 -- Certificate of Amendment of Certificate of H
Incorporation of PacificHealth Laboratories, Inc.
3.4 Certificate of Designations For Series A Preferred Stock I
4.1 -- Specimen Common Stock Certificate C
4.2 -- Stock Purchase Agreement dated June 1, 2001
between Pacific Health Laboratories, Inc. and
Glaxo Wellcome International B.V. E
4.3 Series A Preferred Stock Purchase Agreement
dated January 28, 2005 between PacificHealth
Laboratories, Inc. and Hormel Health Labs, LLC *
4.4 Investors' Rights Agreement dated January 28, 2005
between PacificHealth Laboratories, Inc. and Hormel
Health Labs, LLC *
4.5 Right of First Refusal and Co-Sale Agreement dated
January 28, 2005 among PacificHealth Laboratories, Inc.,
Robert Portman and Hormel Health Labs, LLC *
10.1 -- Incentive Stock Option Plan of 1995 A
10.23 -- Strategic Alliance Agreement between the Company
and the Institute of Nutrition and Food Hygiene A
10.3 -- Exclusive Licensing Agreement between the
Company and the INFH A
10.4 -- Shareholders Agreement A
10.5 -- 2000 Incentive Stock Option Plan D
10.6? Employment Agreement between PacificHealth J
Laboratories, Inc. and David Mastroianni effective
September 1, 2004
10.7 Exclusive Custom Manufacturing Agreement dated *
January 28, 2005 between PacificHealth Laboratories, Inc.
and an affiliate of Hormel Health Labs, LLC (redacted, subject to
request for confidential treatment).
30
23.1 -- Consent of Eisner LLP *
31.1 -- Rule 13a-14(a) Certification of Chief Executive Officer. *
31.2 -- Rule 13a-14(a) Certification of Chief Financial Officer. *
32 -- Certifications of Chief Executive Officer and
Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. *
----------
* Filed herewith
A Filed with Registration Statement on Form SB-2 (Registration No.
333-36379) (the "1997 SB-2") on September 25, 1997.
B Filed with Amendment No. 1 to the 1997 SB-2 on October 23, 1997.
C Filed with Amendment No. 3 to the 1997 SB-2 on December 17, 1997.
D Filed with Definitive Proxy Statement (Schedule 14A) for annual meeting
held on August 16, 2000, filed on July 11, 2000.
E Filed with Current Report on Form 8-K dated June 1, 2001, filed on June
14, 2001.
F Filed with Annual Report on Form 10-KSB for the year ended December 31,
2001.
G Filed with Amendment to Current Report on Form 8-K dated June 1, 2001,
filed July 5, 2001.
H Filed with Annual Report on Form 10-KSB for the year ended December 31,
2002.
I Filed as Exhibit 3.1 to Current Report on Form 8-K, dated January 24,
2005, filed on January 28, 2005.
J Filed as Exhibit 10.1 to Current Report on Form 8-K, dated and filed on
September 9, 2004.
31