SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal year ended December 31, 2003
COMMISSION FILE NO. 01-21617
THE QUIGLEY CORPORATION
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(Exact name of registrant as specified in its charter)
NEVADA 23-2577138
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
(MAILING ADDRESS: PO Box 1349, Doylestown, PA 18901)
KELLS BUILDING, 621 SHADY RETREAT ROAD, DOYLESTOWN, PA 18901
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(Address of principle executive offices) (Zip Code)
(215) 345-0919
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(Registrant's telephone number, including area code)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT: COMMON STOCK
($.0005 PAR
VALUE) COMMON
SHARE PURCHASE
RIGHTS
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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. |X| Yes |_| No
Indicate by the check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-X is not contained herein, and will not 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-K or any amendments to
this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). |_| Yes |X| No
The aggregate market value of the registrant's common stock held by
non-affiliates was $59,305,107 as of June 30, 2003, based on the closing price
of the common stock on the Nasdaq National Stock Market.
Number of shares of each of the Registrant's classes of securities (all of one
class of $.0005 par value Common Stock) outstanding on March 12, 2004:
11,512,755.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in this Report
on Form 10-K:
1. Information set forth in Part III of this report is incorporated by
reference from the Registrant's Proxy Statement for the 2004 Annual
Meeting of Stockholders.
THE EXHIBIT INDEX IS LOCATED ON PAGES 23-24.
TABLE OF CONTENTS
Part I Page
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Item 1. Description of Business 3 - 10
2. Description of Properties 10
3. Legal Proceedings 10 - 12
4. Submission of Matters to a Vote by Security Holders 12
Part II
5. Market for the Company's Common Equity and Related
Stockholder Matters 12 - 13
6. Selected Financial Data 14
7. Management's Discussion and Analysis of Results of
Operations and Financial Condition 15 - 20
7A. Quantitative and Qualitative Disclosure About Market
Risk 20
8. Financial Statements 21
9. Change in and Disagreements with Accountants on
Accounting and Financial Disclosure 22
9A. Controls and Procedures 22
Part III
10. Directors and Executive Officers of the Registrant 22
11. Executive Compensation 22
12. Security Ownership of Certain Beneficial
Owners and Management 22
13. Certain Relationships and Related Transactions 22
14. Principal Accountant Fees and Services 22
Part IV
15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 23 - 24
Signatures 25
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this Report contains forward-looking
statements. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in these forward-looking statements. Factors that might cause such a
difference include, but are not limited to, management of growth, competition,
pricing pressures on the Company's product, industry growth and general economic
conditions. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date hereof. The Company undertakes no obligation to revise or publicly release
the results of any revision to these forward-looking statements.
CERTAIN RISK FACTORS
The Quigley Corporation makes no representation that the US Food and Drug
Administration or any other regulatory agency will grant an Investigational New
Drug ("IND") or take any other action to allow its formulations to be studied or
marketed. Furthermore, no claim is made that potential medicine discussed herein
is safe, effective, or approved by the Food and Drug Administration.
Additionally, data that demonstrates activity or effectiveness in animals or in
vitro tests do not necessarily mean the formula test compound, referenced herein
will be effective in humans. Safety and effectiveness in humans will have to be
demonstrated by means of adequate and well controlled clinical studies before
the clinical significance of the formula test compound is known. Readers should
carefully review the risk factors described in other sections of the filing as
well as in other documents the Company files from time to time with the
Securities and Exchange Commission.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
The Quigley Corporation (WWW.QUIGLEYCO.COM, hereinafter referred to as the
"Company") is a Nevada corporation which was organized on August 24, 1989 and
commenced business operations in October 1989.
The Company's business is the manufacture and distribution of cold-remedy
products to the consumer through the over-the-counter market place together with
the sale of proprietary health and wellness products through its direct selling
subsidiary. The Company's key product Cold-Eeze(R), a zinc gluconate glycine
lozenge, is proven in two double-blind clinical studies to reduce the duration
and severity of the common cold symptoms by nearly half. Cold-Eeze(R) is now an
established product in the health care and cold-remedy market.
Darius International Inc., ("Darius"), the Health and Wellness segment, a wholly
owned subsidiary of the Company, was formed in January 2000 to introduce new
products to the marketplace through a network of independent distributors.
Darius is a direct selling organization specializing in proprietary health and
wellness products, which commenced shipping product to customers in the third
quarter of 2000. On January 2, 2001, the Company acquired certain assets and
assumed certain liabilities of a privately held company involved in the direct
marketing and distribution of health and wellness products.
The formation of Darius has provided diversification to the Company in both the
method of product distribution and the broader range of products available to
the marketplace serving as a balance to the seasonal revenue cycles of the
Cold-Eeze(R) branded products.
In January 2001, the Company formed an Ethical Pharmaceutical Unit, Pharma, the
Ethical Pharmaceutical segment, that is under the direction of its Executive
Vice President and Chairman of its Medical Advisory Committee. The formation of
Pharma follows the Patent Office of The United States Commerce Department
confirming the assignment to the Company of a Patent Application for the "Method
and Composition for the Topical Treatment of Diabetic Neuropathy" which was
issued and extends through December 21, 2020. The establishment of a dedicated
pharmaceutical subsidiary may enable the Company to diversify into the
prescription drug market and to ensure safe and effective distribution of these
important potential new products currently under development. At this time,
three patents have been issued and assigned to the Company resulting from
research activity of Pharma.
During 2000, the Company acquired a 60% ownership position in Caribbean Pacific
Natural Products, Inc. ("CPNP"), a leading developer and marketer of all-natural
sun-care and skincare products for luxury resorts, theme parks and spas. In
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December 2002, the Board of Directors of the Company approved a plan to sell
CPNP. On January 22, 2003, the Company completed the sale of the Company's 60%
equity interest in CPNP to Suncoast Naturals, Inc. ("Suncoast"). See discussion
in Notes to Financial Statements, Note 3 - Discontinued Operations.
DESCRIPTION OF BUSINESS OPERATIONS
Since its inception, the Company has continued to conduct research and
development into various types of health-related food supplements and
homeopathic cold remedies. Initially, the Company's business was the marketing
and distribution of a line of nutritious health supplements (hereinafter
"Nutri-Bars"). During 1995, the Company reduced the emphasis in the marketing of
the Nutri-Bars and commenced focusing its marketing and research and development
resources towards the Company's patented Cold-Eeze(R) zinc gluconate glycine
cold relief products.
Prior to the fourth quarter 1996, the Company had minimal revenues and as a
result suffered continued losses due to ongoing research and development and
operating expenses. However, 1997 resulted in significant revenue increases as a
result of the Company's nationwide marketing campaign and the increased public
awareness through media public service announcements of the Cold-Eeze(R) lozenge
product.
Since June 1996, the cold-remedy segment has concentrated its business
operations on the manufacturing, marketing and development of its proprietary
Cold-Eeze(R) cold-remedy lozenge products and on development of various product
extensions. These products are based upon a proprietary zinc gluconate glycine
formula, which in two double-blind clinical studies has shown to reduce the
duration and severity of the common cold symptoms. The Quigley Corporation
acquired worldwide manufacturing and distribution rights to this formulation in
1992 and commenced national marketing in 1996. The demand for the Company's
cold-remedy products is seasonal, where the third and fourth quarters generally
represent the largest sales volume for cold-remedy.
Darius is a direct selling organization specializing in proprietary health and
wellness products, which commenced shipping product to customers in the third
quarter of 2000.
Pharma was formed for the purpose of developing naturally derived prescription
drugs, cosmeceuticals, and dietary supplements. Pharma is currently undergoing
research and development activity in compliance with regulatory requirements.
The Company is at the initial stages of what may be a lengthy process to develop
these patent applications into commercial products.
During 2003, approximately 97% of the Company's revenues from Cold-Eeze(R) and
Darius originated in the United States with the remainder being attributable to
international trade.
Financial information regarding the Company's operating segments is set forth in
Item 8, Notes to Financial Statements, Note 4 - Segment Information.
PRODUCTS
COLD-REMEDY PRODUCTS
Cold-Eeze(R), a zinc gluconate glycine formulation (ZIGG(TM)) is an
over-the-counter consumer product used to reduce the duration and severity of
the common cold and is sold in lozenge, sugar-free tablet and nasal spray forms.
During 2003 the Company launched a Cold-Eeze(R) nasal spray and Kidz-Eeze(TM)
Sore Throat Pops. The nasal spray product, a nasal spray containing the active
ingredient Zinc Gluconate and also containing Aloe Vera, began shipping to
retail during the second half of 2003.
In May 1992, the Company entered into an exclusive agreement for worldwide
representation, manufacturing, marketing and distribution rights to a zinc
gluconate glycine lozenge formulation which was patented in the United States,
United Kingdom, Sweden, France, Italy, Canada, Germany, and is pending in Japan.
This product and extensions, are presently being marketed by the Company and
also through independent brokers and marketers in the United States under the
trade name Cold-Eeze(R). A randomized double-blind placebo-controlled study,
conducted at Dartmouth College of Health Science, Hanover, New Hampshire,
concluded that the lozenge formulation treatment, initiated within 48 hours of
symptom onset, resulted in a significant reduction in the total duration of the
common cold.
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On May 22, 1992, "ZINC AND THE COMMON COLD, A CONTROLLED CLINICAL STUDY," was
published in England, in the "Journal of International Medical Research", Volume
20, Number 3, Pages 234-246. According to this publication, (a) flavorings used
in other Zinc lozenge products (citrate, tartrate, separate, orotate,
picolinate, mannitol or sorbitol) render the Zinc inactive and unavailable to
the patient's nasal passages, mouth and throat, where cold symptoms have to be
treated, (b) this patented zinc gluconate glycine formulation delivers
approximately 93% of the active Zinc to the mucosal surfaces and (c) the patient
has the same sequence of symptoms as in the absence of treatment, but goes
through the phases at an accelerated rate and with reduced symptom severity.
On July 15, 1996, results of a new randomized double-blind placebo-controlled
study on the common cold were published, which commenced at the CLEVELAND CLINIC
FOUNDATION on October 3, 1994. The study called "ZINC GLUCONATE LOZENGES FOR
TREATING THE COMMON COLD" was completed and published in THE ANNALS OF INTERNAL
MEDICINE - VOL. 125 NO. 2. Using a 13.3mg lozenge (almost half the strength of
the lozenge used in the Dartmouth Study), the result still showed a 42%
reduction in the duration of the common cold symptoms.
In April 2002, the Company announced the statistical results of a retrospective
clinical study that suggests that Cold-Eeze(R) is also an effective means of
preventing the common cold. This adolescent study indicated that when taken
daily, Cold-Eeze(R) statistically lessens the number of colds an individual
suffers per year, reducing the median from 1.5 to zero. These findings are the
result of analyzing three years of clinical data at the Heritage School facility
in Provo, Utah. The study also found that the use of Cold-Eeze(R) to treat a
cold statistically reduces the use of antibiotics for respiratory illnesses from
39.3% to 3.0% when Cold-Eeze(R) is administered as a first line treatment
approach to the common cold. Additionally, the study reinforces the original
clinical trials, concluding that Cold-Eeze(R) reduces the median duration of a
cold by four days. In April 2002, the Company was assigned a Patent Application
which was filed with the Patent Office of the United States Commerce Department
for the use of Cold-Eeze(R) as a prophylactic for cold prevention. The new
patent application follows the results of the adolescent study at the Heritage
School facility. In May 2003, the Company announced the study findings of a
prospective study, conducted at the Heritage School facility in Provo, Utah, in
which 178 children ages 12 to 18 years were given Cold-Eeze(R) lozenges both
symptomatically and prophylactically from October 5, 2001 to May 30, 2002. The
study found a 54% reduction in the most frequently observed cold duration. Those
subjects not receiving treatment most frequently experienced symptom duration at
11 days compared with 5 days when lozenges were administered, a reduction of 6
days.
In the second half of 1998, the Company launched Cold-Eeze(R) in a sugar free
version of the product to benefit diabetics and other consumers concerned with
their sugar intake.
The business of the Company is subject to federal and state laws and regulations
adopted for the health and safety of users of the Company's products.
Cold-Eeze(R) is a homeopathic remedy that is subject to regulations by various
federal, state and local agencies, including the FDA and the Homeopathic
Pharmacopoeia of the United States.
The Company competes with suppliers varying in range and size in the cold-remedy
products arena. Cold-Eeze(R), which has been clinically proven, offers a
significant advantage over other suppliers in the over-the-counter cold-remedy
market. The management of the Company believes there should be no future
impediment on the ability to compete in the marketplace now, or in the immediate
future, since factors concerning the product, such as price, product quality,
availability, reliability, credit terms, name recognition, delivery and support
are all properly positioned. The Company has several Broker, Distributor and
Representative Agreements, both nationally and internationally and the product
is distributed through numerous independent, chain drug, food and discount
stores throughout the United States.
The Company continues to use the resources of independent national and
international brokers complementing its own in-house personnel to represent the
Company's over-the-counter products, thereby saving capital and other ongoing
expenditures that would otherwise be incurred.
ETHICAL PHARMACEUTICAL PRODUCTS
Pharma's current activity is the development of naturally-derived prescription
drugs with the goal to improve the quality of life and health of those in need
through scientific research and development. Research and development will focus
on the identification, isolation and direct use of active medicinal substances.
One aspect of Pharma's research will focus on the combination of isolated active
constituents and whole plant components. The search for new natural sources of
medicinal substances will focus not only on world plants, fungi, and other
natural substances, but an intense investigation into traditional medicinals and
historic therapeutics.
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Pharma is currently undergoing research and development activity in compliance
with regulatory requirements. During the course of its research and development,
certain formulas have led to three patents and several patent applications,
which the Patent Office of the United States Commerce Department has confirmed
the assignment to the Company. The Company, through Pharma, is at the initial
stages of what may be a lengthy process to develop these patents and patent
applications into commercial products.
The pre-clinical development, clinical trials, product manufacturing and
marketing of Pharma's potential new products are subject to federal and state
regulation in the United States and other countries. Obtaining FDA regulatory
approval for these pharmaceutical products can require substantial resources and
take several years. The length of this process depends on the type, complexity
and novelty of the product and the nature of the disease or other indications to
be treated. If the Company cannot obtain regulatory approval of these new
products in a timely manner or if the patents are not granted or if the patents
are subsequently challenged, these possible events could have a material effect
on the business and financial condition of the Company. The strength of the
Company's patent position may be important to its long-term success. There can
be no assurance that these patents and patent applications will effectively
protect the Company's products from duplication by others.
In April 2002, the Company initiated a Phase II proof of concept study in France
for treatment of diabetic neuropathy, which was concluded in 2003. It indicated
that subjects using this formulation had 67% of their symptoms improve,
suggesting efficacy. Because the Company's formulation for relief of
diabetes-related pain is a topical treatment and its ingredients are GRAS listed
(Generally Regarded As Safe) as identified in the Code of Federal Regulations,
FDA approval could potentially be obtained earlier than what is normally
required in the FDA process.
In July 2002, the Company announced the commencement of testing on a new
formulation being developed by the Company to relieve Sialorrhea (excess
secretions of the salivary glands, causing drooling) in patients suffering from
diseases including Amyotrophic Lateral Sclerosis (ALS), otherwise known as Lou
Gehrig's Disease, Cerebral Palsy, Parkinson's Disease, and Muscular Dystrophy.
In September 2003, the Company announced its intention to file for permission to
study its patent pending potential treatment for psoriasis and other skin
disorders. Continued testing will therefore have to be conducted under an
Investigational New Drug (IND) application following positive preliminary
results.
In December 2003, the Company announced positive test results of a preliminary
independent in vitro study indicating that a Quigley test compound previously
tested on the Influenza virus showed "significant virucidal activity against a
strain of the Severe Acute Respiratory Syndrome (SARS) virus."
HEALTH AND WELLNESS PRODUCTS
Darius, through Innerlight Inc., its wholly owned subsidiary, is a direct
selling company specializing in the development and distribution of proprietary
health and wellness products primarily within the United States with the
commencement of international business activity during the second quarter of
2003. The Company develops and markets products that are suitable for
distribution within a direct selling business environment. The products marketed
and sold by Darius are herbal vitamins and dietary supplements for the human
condition.
Within the framework of a direct selling business environment, Darius sells its
products through a network of independent representatives, who are not employees
of Darius. These purchases by the independent representatives may be used for
personal consumption or used for resale to consumers. The independent
representatives receive compensation for sales achieved by means of a commission
structure or compensation plan based on their product sales and those of
personnel within their down-line independent representative network. As the
independent representatives pay for product by credit card for shipments made,
the accounts receivable balances at any time are negligible.
The continued success of this segment is dependent upon, amongst other things,
the Company's ability:
o To maintain existing independent representatives and recruit
additional successful independent representatives.
Additionally, the loss of key high-level distributors could
negatively impact future growth and revenues;
o To continue to develop and make available new and desirable
products at an acceptable cost;
o To maintain safe and reliable multiple-location sources for
product and materials;
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o To maintain a reliable information technology system and
internet capability. The Company has expended significant
resource on systems enhancements in the past and will continue
to do so to ensure prompt customer response times, business
continuity and reliable reporting capabilities. Any
interruption to computer systems for an extended period of
time could be harmful to the business;
o To execute conformity with various federal, state and local
regulatory agencies both within the United States and abroad.
With the commencement of international business, difficulties
with foreign regulatory requirements could have a significant
negative impact on future growth. Any inquiries from
government authorities relating to our business and compliance
with laws and regulations could be harmful to the Company;
o To compete with larger more mature organizations operating
within the same market and to remain competitive in terms of
product relevance and business opportunity;
o To successfully implement methods for progressing the direct
selling philosophy internationally; and
o To plan strategically for general economic conditions.
Any or all of the above risks could result in significant reductions in revenues
and profitability of the Health and Wellness segment.
PATENTS, TRADEMARKS, ROYALTY AND COMMISSION AGREEMENTS
The Company currently owns no patents for cold-remedy products. However, the
Company has been assigned patent applications which are hereinafter discussed
and has been granted an exclusive agreement for worldwide representation,
manufacturing, marketing and distribution rights to a zinc gluconate glycine
lozenge formulation, which are patented as follows:
United States: No. 4 684 528 (August 4, 1987) Sweden: No. 0 183 840 (March 2, 1994)
No. 4 758 439 (July 19, 1988) Canada: No. 1 243 952 (November 1, 1988)
Germany: No. 3,587,766 (March 2, 1994) Great Britain: No. 2 179 536 (December 21, 1988)
Japan: Pending France & Italy: No. EP 0 183 840 B1 (March 2, 1994)
The following patents have been assigned to the Company in relation to Pharma:
United States: No. 6 555 573 B2 (April 29, 2003)
No. 6 592 896 B2 (July 15, 2003)
No. 6 596 313 B2 (July 22, 2003)
In 1996, the Company also acquired an exclusive license for a United States ZINC
GLUCONATE USE PATENT NUMBER RI 33,465 from the patent holder. This use patent
gives the Company exclusive rights to both the use and formulation patents on
zinc gluconate for reducing the duration and severity of the common cold
symptoms. This patent and exclusive license expired in March 2002. The Company
does not anticipate any material impact on the financial statements from the
expiration of the patent.
The Cold-Eeze(R) product is manufactured for the Company by a contract
manufacturer and marketed by the Company in accordance with the terms of a
licensing agreement (between the Company and the developer). The contract is
assignable by the Company with the developer's consent. Throughout the duration
of the agreement, the developer is to receive a three percent (3%) royalty on
sales collected, less certain deductions. A separate consulting agreement
between the parties referred to directly above was similarly entered into on May
4, 1992, whereby the developer is to receive a consulting fee of two percent
(2%) on sales collected, less certain deductions, for consulting services to the
Company with respect to such product.
Pursuant to the License Agreement entered into between the Company and the
patent holder, which expired in March 2002, the Company has paid a royalty fee
to the patent holder of three percent (3%) on sales collected, less certain
deductions.
During 1997, the Company obtained a trademark for the major components of its
lozenge, ZIGG(TM) (denoting zinc gluconate glycine), to set Cold-Eeze(R) apart
from the imitations proliferating the marketplace.
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An agreement between the Company and its founders was entered into on June 1,
1995. The founders, both officers and stockholders of the Company, in
consideration of the acquisition of the Cold-Eeze(R) cold therapy product, are
to receive a total commission of five percent (5%), on sales collected, less
certain deductions until the termination of this agreement on May 31, 2005.
In August 2003, the Company entered into a licensing agreement with a patent
holder relating to utilizing a nasal spray product in the treatment of symptoms
of the common cold. The Company has agreed to pay the patent holder a two
percent royalty on net sales of nasal spray products, less certain deductions,
throughout the term of this agreement, expiring no later than April 2014.
During 2003 the following patents were granted to the Company relating to the
areas of focus of the Ethical Pharmacutical segment:
o A Patent (No. 6,555,573 B2) entitled "Method and Composition for the
Topical Treatment of Diabetic Neuropathy." The patent extends
through December 21, 2020.
o A Patent (No. 6,592,896 B2) entitled "Medicinal Composition and
Method of Using It" (for Treatment of Sialorrhea and other
Disorders) for a product to relieve sialorrhea (drooling) in
patients suffering from Amyotrophic Lateral Sclerosis (ALS),
otherwise known as Lou Gehrig's Disease. The patent extends through
August 6, 2021.
o A Patent (No. 6,596,313 B2) entitled "Nutritional Supplement and
Method of Using It" for a product to relieve sialorrhea (drooling)
in patients suffering from Amyotrophic Lateral Sclerosis (ALS),
otherwise known as Lou Gehrig's Disease. The patent extends through
April 15, 2022.
PRODUCT DISTRIBUTION AND CUSTOMERS
The Company has several Broker, Distributor and Representative Agreements, both
nationally and internationally, which provide for commission compensation based
on sales performance.
The Cold-Eeze(R) products are distributed through numerous food, chain drug and
mass merchandisers throughout the United States, including Walgreens, Ahold,
Albertsons, CVS, RiteAid, Publix, Eckerd Drug Company, B.J's Wholesale Club,
Inc., Sam's Club, Winn-Dixie Stores, Inc., Wal-Mart, Target, The Kroger Company,
Safeway Inc., Costco Wholesale, Kmart Corporation, and wholesale distributors
including, AmerisourceBergen, Cardinal Distribution and McKesson Supply
Solutions.
The Company is not dependent on any single customer as the broad range of
customers includes many large wholesalers, mass merchandisers, and multi-outlet
pharmacy chains, five of which account for a significant percentage of sales
volume. The top five customers of the Company represent 23%, 23%, and 35% of its
continuing consolidated gross revenues for the years ended December 31, 2003,
2002 and 2001, respectively.
Darius is a direct selling organization specializing in proprietary health and
wellness products and the introduction of new products to the marketplace
through a network of independent distributors. This method of distribution is in
contrast to traditional distribution channels using independent and chain drug
and discount stores as utilized by the Company in the promotion of the
cold-remedy products.
Pharma currently has no sales since it is undergoing research and development
activity in compliance with regulatory requirements and is at the initial stages
of what may be a lengthy process to develop commercial products.
RESEARCH AND DEVELOPMENT
The Company's research and development costs for the years ended December 31,
2003, 2002 and 2001 were $3,365,698, $2,663,291, and $1,331,639, respectively.
Future research and development expenditures are anticipated in order to develop
extensions of the Cold-Eeze(R) product, including potential unrelated new
products in the consumer health care industry, that are primarily supported by
clinical studies, for efficacious long-term products that can be coupled with
possible line extension derivatives for a family of products. Clinical studies
and testing are anticipated in connection with Pharma, such as the formulation
of products for diabetic use, radiation dermatitis and sialorrhea and
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other disorders. Principally, the increase of research and development costs in
2003 was due to expenses incurred as part of the product research costs related
to Pharma and study costs associated with Cold-Eeze(R). Pharma is currently
involved in research activity following patent applications that the Company has
acquired and research and development costs, relating to potential products, are
expected to increase significantly over time as product research and testing
continues.
REGULATORY MATTERS
The business of the Company is subject to federal and state laws and regulations
adopted for the health and safety of users of the Company's products. The
Company's Cold-Eeze(R) product is a homeopathic remedy, which is subject to
regulation by various federal, state and local agencies, including the FDA and
the Homeopathic Pharmacopoeia of the United States. These regulatory authorities
have broad powers, and the Company is subject to regulatory and legislative
changes that can affect the economics of the industry by requiring changes in
operating practices or by influencing the demand for, and the costs of,
providing its products. Management believes that the Company is in compliance
with all such laws, regulations and standards currently in effect including the
Food, Drug and Cosmetics Act of 1938 and the Homeopathic Pharmacopoeia
Regulatory Service. Although it is possible that future results of operations
could be materially affected by the future costs of compliance, management
believes that the future costs will not have a material adverse effect on the
Company's financial position or competitive position.
The pre-clinical development, clinical trials, product manufacturing and
marketing of Pharma's potential new products are subject to federal and state
regulation in the United States and other countries. Obtaining FDA regulatory
approval for these pharmaceutical products can require substantial resources and
take several years. The length of this process depends on the type, complexity
and novelty of the product and the nature of the disease or other indications to
be treated. If the Company cannot obtain regulatory approval of these new
products in a timely manner or if the patents are not granted or if the patents
are subsequently challenged, these possible events could all have a material
effect on the business and financial condition of the Company. The strength of
the Company's patent position may be important to its long-term success. There
can be no assurance that these patents and patent applications will effectively
protect the Company's products from duplication by others.
COMPETITION
The Company competes with other suppliers of cold-remedy and health and wellness
products. These suppliers range widely in size. Some of the Company's
competitors have significantly greater financial, technical or marketing
resources than the Company. Management believes that its Cold-Eeze(R) product,
which has been clinically proven in two double-blind studies to reduce the
severity and duration of the common cold symptoms, offers a significant
advantage over many of its competitors in the over-the-counter cold-remedy
market. Management further believes that Darius' direct marketing distribution
methods offer a significant advantage over many of its competitors. The Company
believes that its ability to compete depends on a number of factors, including
price, product quality, availability and reliability, credit terms, name
recognition, delivery time and post-sale service and support.
EMPLOYEES
At December 31, 2003 the Company employed 63 full-time persons, primarily all of
whom were involved in an executive, marketing or administrative capacity. None
of the Company's employees are covered by a collective bargaining agreement or
is a member of a union.
SUPPLIERS
The Company currently uses separate suppliers to produce Cold-Eeze(R) in
lozenge, sugar-free tablet and nasal spray form. The Cold-Eeze(R) lozenge
product is manufactured by a contract manufacturer, a significant amount of
whose revenues are from the Company. Should these relationships terminate or
discontinue for any reason, the Company has formulated a contingency plan
necessary in order to prevent such discontinuance from materially affecting the
Company's operations. Any such termination may, however, result in a temporary
delay in production until the replacement facility is able to meet the Company's
production requirements.
Raw materials used in the production of the cold-remedy products are available
from numerous sources. Currently, they are being procured from a single vendor
in order to secure purchasing economies. In a situation where this one vendor is
not able to supply the contract manufacturer with the ingredients, other sources
have been identified. Any situation where the vendor is not able to supply the
contract manufacturer with the ingredients may result in a temporary delay in
production until replacement supplies are obtained to meet the Company's
production requirements.
-9-
Darius' products for resale are sourced from several suppliers. In the event
that such sources were no longer in a position to supply Darius with product,
other vendors have been identified as reliable alternatives with minimal adverse
loss of business.
ITEM 2. DESCRIPTION OF PROPERTY
The corporate office of The Quigley Corporation is located at 621 Shady Retreat
Road, Doylestown, Pennsylvania. This property, with an area of approximately
13,000 square feet, was purchased in November 1998 and refurbished during 1999.
The Company occupies warehouse space in Las Vegas, Nevada at a current monthly
cost of $2,396. This Nevada location has a three-year lease that expires in July
2006. In addition to storage facilities at the contract manufacturers'
locations, the Company also stores product in a number of additional warehouses
in Pennsylvania with storage charges based upon the quantities of product being
stored.
The Darius business in Utah is located at 867 East 2260 South, Provo, Utah, with
an area of approximately 24,700 square feet. The current monthly lease cost of
this office and warehouse space is $10,713 with the leases that are set to
expire in September 2005 and July 2007, respectively. The Company expects that
these leases will be renewed or that alternative spaces will be obtained.
The Company believes that its existing facilities are adequate at this time.
ITEM 3. LEGAL PROCEEDINGS
TESAURO AND ELEY
In September, 2000, the Company was sued by two individuals (Jason Tesauro and
Elizabeth Eley, both residents of Georgia), on behalf of a "nationwide class" of
"similarly situated individuals," in the Court of Common Pleas of Philadelphia
County, Pennsylvania. The Complaint alleges that the Plaintiffs purchased
certain Cold-Eeze(R) products between August, 1996, and November, 1999, based
upon cable television, radio and internet advertisements which allegedly
misrepresented the qualities and benefits of the Company's products. The
Complaint requests an unspecified amount of damages for violations of
Pennsylvania's consumer protection law, breach of warranty and unjust
enrichment, as well as a judicial determination that the action be maintained as
a class action.
In October, 2000, the Company filed Preliminary Objections to the Complaint
seeking dismissal of the action. The Court sustained certain objections thereby
narrowing Plaintiffs' Complaint. In May, 2001, Plaintiffs filed a Motion to
Certify the Alleged Class. The Company opposed the Motion. In November, 2001,
the Court held a hearing on Plaintiffs' Motion for Class Certification. In
January, 2002, the Court denied in part and granted in part the Plaintiffs'
Motion. The Court denied Plaintiffs' Motion to Certify a Class based on
Plaintiffs' claim under the Pennsylvania Consumer Protection Law; however, the
Court certified the class based on Plaintiffs' breach of warranty and unjust
enrichment claims.
Discovery has been completed and trial has been scheduled to commence in May
2004. The Company is vigorously defending this lawsuit and believes that the
action lacks merit. Based upon the information the Company has at this time, it
believes the action will not have a material impact to the Company. However, at
this time no prediction as to the outcome can be made.
GOLDBLUM AND WAYNE
A Special Meeting of the Quigley stockholders was held on October 15, 1999, at
which a majority of the shares entitled to vote adopted a Corrective Action
Proposal (initially reported in the Company's Form 10-Q for the quarter ending
June 30, 1999) to ratify actions previously taken by the Company relating to the
1990 1 for 2.74 reverse split, the 1995 1 for 10 reverse split (the "Reverse
Splits") and the 1997 1 for 2 forward split (the "Forward Split"). Pursuant to
the October 15, 1999 Special Meeting, the Company authorized the filing of a
declaratory judgment action in Nevada to determine the effectiveness of the
Corrective Action.
In August 2000, the District Court of Clark County, Nevada, held that it had
jurisdiction to decide the Company's declaratory judgment action filed in April,
2000, against two putative shareholders (Thomas Goldblum and Alan Wayne), in
which the Company seeks a judicial declaration that, based on stockholder
approval of the Corrective Action Proposal, the Reverse Splits and Forward Split
satisfy and/or comply with Nevada law and that the capitalization of Quigley
evidenced by the issued and outstanding shares of common stock and common stock
warrants is as reflected on Quigley's stock transfer ledger on September 10,
1999, the record date of the Special Meeting. The District Court of Clark County
held a hearing on this matter on March 19, 2002 and ruled in favor of The
Quigley Corporation. A final judgment has been entered of record by the Court on
June 21, 2002. The period for appeal of this order to the Nevada Supreme Court
has expired.
-10-
An underlying claim filed by Goldblum and Wayne in the Court of Common Pleas of
Montgomery County, Pennsylvania on March 17, 1996 alleging that the plaintiffs
became owners of 500,000 shares each of the Company's common stock in or about
1990 and requested damages in excess of $100,000 for breach of contract and
conversion.
The Company believed that the plaintiffs' claims were without merit, barred by
the applicable statutes of limitations, and that the plaintiffs were, in any
event, limited to claims for approximately 36,000 shares.
The Company vigorously defended this lawsuit through trial during January 2004,
when a jury returned a unanimous verdict in favor of the Company. Thereafter,
the plaintiffs filed a motion for post-trial relief as a first step toward an
appeal, which the Company regards as without merit and will oppose. Although the
Company regards any effort by plaintiffs to pursue an appeal as lacking merit
and based upon the information the Company has at this time, it believes the
action will not have a material impact to the Company. However, at this time no
prediction as to the outcome of this appeal can be made.
LITIGATION - FORMER EMPLOYEE
On April 12, 2002, the Company commenced a complaint in Equity in the Court of
Common Pleas of Bucks County, PA against the former President of Darius
International Inc., its wholly owned subsidiary, following termination of such
President. The allegations in the complaint include, but are not limited to, an
alleged breach of fiduciary duty owed to the Company. The Company is seeking
both injunctive and monetary relief. On or about May 1, 2002, the defendant
filed a counterclaim requesting that the Court declare him the lawful owner of
55,000 stock options, unspecified damages relating to an alleged breach of an
oral contract and for commissions allegedly owed. In addition, the Defendant
requests the return of certain intellectual property used to commence and
continue Darius' operations.
The Corporation believes Defendant's claims are without merit, is vigorously
defending the counterclaims and is prosecuting its action on its complaint.
Based upon the information the Company has at this time, it believes the action
will not have a material impact to the Company. However, at this time no
prediction as to the outcome can be made.
TERMINATED PROCEEDINGS
MIKE FORAN VS. INNERLIGHT, INC.,
DARIUS INTERNATIONAL, INC., AND
THE QUIGLEY CORPORATION
On August 1, 2003, an action was filed with the American Arbitration Association
by Mike Foran against Innerlight Inc., a wholly owned subsidiary of Darius
International Inc., which is a wholly owned subsidiary of the Company. After a
hearing before the United States District Court for the District of Utah,
Central Division, Foran withdrew his complaint against The Quigley Corporation
and the matter was remanded to arbitration. Discovery began on December 1, 2003
and was completed on December 22, 2003. Based on the discovery of all of
defendants' documents and defendants' depositions and after interviewing
Innerlight Inc.'s witnesses, the Company upon advice of counsel settled the
action for $290,000 and reinstated Foran as an independent representative.
Negotiations leading to settlement were completed by December 31, 2003 and a
Settlement Agreement was entered effective January 18, 2004. As part of the
Settlement Agreement, Mr. Foran completely released Innerlight, Inc. and The
Quigley Corporation from any claim arising out of the action instituted by him
on August 1, 2003 and also any claim he may have asserted against Innerlight
Inc. or The Quigley Corporation.
INTERVENTION INC.
An action was filed by Intervention, Inc. on July 2, 2002 in Contra Costa County
Superior Court under the California Unfair Competition Law, Business and
Professions Code, Section 17200. The Complaint claims that COLD-EEZE(R) does not
contain ionic zinc and therefore does not have the unique quality the Company
asserts for it. The Complaint purports to attack The Cleveland Clinic Study
titled ZINC GLUCONATE LOZENGES FOR TREATING THE COMMON COLD and the Dartmouth
Study, ZINC AND THE COMMON COLD, A CONTROLLED CLINICAL STUDY. The plaintiff
claims that the Dartmouth Study is not double-blind and is not randomized. The
plaintiff also claims that The Cleveland Clinic Study is untrue and deceptive
because it did not conclude that patients "starting treatments" with zinc had a
42% reduction in duration of the common cold and, also, because the 42%
reduction in common cold duration is not a reference to average of cold duration
but rather is a reference to the reduction in median duration. There is also a
claim by the plaintiff that there is an implied claim that the results in the
studies have been confirmed by repetition which plaintiff contests.
-11-
On the 3rd day of July, 2003, the Contra Costa County Superior Court upon Motion
of The Quigley Corporation issued a Summary Judgment in favor of The Quigley
Corporation. On October 24, 2003, Intervention Inc. filed an appeal to the
California Court of Appeals from the Summary Judgment issued in favor of The
Quigley Corporation. In March 2004, the appeal was withdrawn, with prejudice.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock, $.0005 par value, is currently traded on the NASDAQ
National Market under the trading symbol "QGLY". The price set forth in the
following table represents the high and low bid prices for the Company's common
stock.
Common Stock
------------
2003 2002
---------------- -------------------
Quarter Ended High Low High Low
------------- ---- --- ---- ---
March 31 $7.76 $4.71 $7.20 $2.03
June 30 $8.22 $5.39 $8.82 $5.40
September 30 $10.51 $6.75 $8.00 $3.05
December 31 $11.12 $7.32 $7.05 $2.40
Such quotations reflect inter-dealer prices, without mark-up, mark-down or
commission and may not represent actual transactions.
The Company's securities are traded on the NASDAQ National Market and
consequently stock prices are available daily as generated by the National
Market established quotation system.
HOLDERS
As of December 31, 2003, there were approximately 360 holders of record of the
Company's Common Stock, including brokerage firms, clearing houses, and/or
depository firms holding the Company's securities for their respective clients.
The exact number of beneficial owners of the Company's securities is not known
but exceeds 400.
DIVIDENDS
The Company has not declared, nor paid, any cash dividends on its Common Stock.
At this time the Company intends to retain its earnings to finance future growth
and maintain liquidity.
-12-
WARRANTS AND OPTIONS
In addition to the Company's outstanding Common Stock, there are, as of December
31, 2003, issued and outstanding Common Stock Purchase Warrants and Options that
are exercisable at the price-per-share stated and expire on the date indicated,
as follows:
Description Number Exercise Price Expiration Date
----------- ------ -------------- ---------------
Warrants 250,000 $8.5000 March 7, 2004
Warrants 250,000 $9.5000 March 7, 2004
Warrants 250,000 $11.5000 March 7, 2004
CLASS "E" 850,000 $1.7500 June 30, 2006
CLASS "F" 225,000 $2.5000 November 4, 2006
CLASS "G" 585,000 $10.0000 May 5, 2007
Option Plan 396,500 $9.6800 December 1, 2007
Option Plan 331,000 $5.1250 April 6, 2009
Option Plan 263,000 $0.8125 December 20, 2010
Option Plan 324,500 $1.2600 December 10, 2011
Option Plan 350,000 $5.1900 July 30, 2012
Option Plan 102,000 $5.4900 December 17, 2012
Option Plan 424,000 $8.1100 October 29, 2013
At December 31, 2003, there were 4,601,000 unexercised and vested options and
warrants of the Company's stock available for exercise.
SECURITIES AUTHORIZED UNDER EQUITY COMPENSATION
The following table sets forth certain information regarding stock option and
warrant grants made to employees, directors and consultants:
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Weighted
Number of Average Number of Securities
Securities to be Exercise Remaining Available for
Issued Upon Price of Future Issuance Under
Exercise of Outstanding Equity Compensation Plans
Plan Category Outstanding Options & (Excluding Securities
Options & Warrants Warrants Reflected in Column A)
(A) (B) ( C )
-------------------------------------------------------------------------------------------------------------------
Equity Plans Approved by Security Holders (1) 2,191,000 $5.46 700,000
Equity Plans Not Approved by Security Holders (2) 2,410,000 $6.34 --
Total 4,601,000 $5.92 700,000
(1) An incentive stock option plan was instituted in 1997, (the "1997 Stock
Option Plan") and approved by the stockholders in 1998. Options pursuant
to the 1997 Stock Option Plan have been granted to directors, executive
officers, and employees.
(2) Other grants of warrants are specific and not part of a plan. These
specific grants were to executive officers, employees and consultants for
services.
-13-
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the selected financial data of the Company for,
and at the end of the years ended December 31, 2003, 2002, 2001, 2000 and 1999.
The data presented below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's financial statements and notes thereto appearing elsewhere herein.
(Amounts in thousands, except Year Ended Year Ended Year Ended Year Ended Year Ended
Per share data) December 31, December 31, December 31, December 31, December 31,
2003 2002 2001 2000 1999
------------------------------------------------------------------------
STATEMENT OF INCOME DATA:
Net Sales $41,499 $29,272 $21,226 $15,527 $21,574
Total Revenue 41,499 29,421 22,772 15,527 21,574
Gross Profit 20,011 12,212 12,551 9,411 13,240
Income (Loss) - continuing operations 729 (5,132) 934 (5,059) (4,204)
Loss - discontinued operations (1) (54) (1,322) (718) (137) --
Net Income (Loss) 675 (6,454) 216 (5,196) (4,204)
Basic earnings (Loss) per share:
Continuing operations $0.06 ($0.47) $0.09 ($0.48) ($0.37)
Discontinued operations -- ($0.12) ($0.07) ($0.01) --
Net income (Loss) $0.06 ($0.59) $0.02 ($0.49) ($0.37)
Diluted earnings (Loss) per share:
Continuing operations $0.05 ($0.47) $0.09 ($0.48) ($0.37)
Discontinued operations -- ($0.12) ($0.07) ($0.01) --
Net income (Loss) $0.05 ($0.59) $0.02 ($0.49) ($0.37)
Weighted average shares outstanding:
Basic 11,467 10,894 10,675 10,551 11,352
Diluted 14,910 10,894 10,751 10,551 11,352
As of As of As of As of As of
December 31, December 31, December 31, December 31, December 31,
2003 2002 2001 2000 1999
(Restated -
Note 15) (2)
------------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital $18,257 $16,662 $18,626 $18,622 $23,621
Total assets 26,270 24,935 24,756 26,056 33,271
Stockholders' equity $20,787 $19,121 $21,200 $20,971 $26,216
(1) In December 2002, the Board of Directors of the Company approved a plan to
sell Caribbean Pacific Natural Products, Inc. ("CPNP"). On January 22, 2003, the
Board of Directors of the Company completed the sale of the Company's 60% equity
interest in CPNP to Suncoast Naturals, Inc. The sale of this segment has been
treated as discontinued operations and all periods presented have been
reclassified.
(2) As further discussed in Note 15, the Company has restated its 2002
consolidated financial statements in order to properly reflect the accounting
for certain warrants issued in 2002.
-14-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Quigley Corporation, (the "Company"), headquartered in Doylestown,
Pennsylvania, is a leading marketer and distributor of a diversified range of
health and homeopathic products.
The Company's business interests comprise three segments, being cold-remedy,
health and wellness and ethical pharmaceutical.
The Cold-Eeze(R) product continues to be the primary product of the cold-remedy
segment and is available in lozenge, sugar-free tablet and nasal spray form. The
Cold-Eeze(R) Nasal Spray and the Kidz-Eeze(TM) Sore Throat products were both
launched in the third quarter of 2003 in preparation for the cold season. The
efficacy of the Cold-Eeze(R) product was established following the publication
of the second double blind study in July 1996. A 2002 study also found that the
use of Cold-Eeze(R) to treat a cold statistically reduced the use of antibiotics
for respiratory illnesses by 92% when Cold-Eeze(R) is administered as a first
line treatment approach to the common cold. In May 2003, the Company announced
the findings of a prospective study, conducted at the Heritage School facility
in Provo, Utah, in which 178 children ages 12 to 18 years were given
Cold-Eeze(R) lozenges both symptomatically and prophylactically from October 5,
2001 to May 30, 2002. The study found a 54% reduction in the most frequently
observed cold duration. Those subjects not receiving treatment most frequently
experienced symptom duration at 11 days compared with 5 days when lozenges were
administered, a reduction of 6 days.
Cold-Eeze(R) is distributed through numerous independent, chain drug, food and
discount stores throughout the United States. Net sales of the cold-remedy
segment increased 46% in 2003 over the prior year, resulting in net sales in
2003 of $20,474,969 compared to $14,050,967 in 2002. This increase reflects the
strategic decision by management to provide improved support to the segment
through increased media advertising and co-operative advertising promotions with
our customer base. Additionally, revenues were assisted by media attention
afforded to potential cold and influenza outbreaks that were expected during the
2003/2004 cold season.
The Company continues to use the resources of independent national and
international brokers to represent the Company's Cold-Eeze(R) products, which
provides cost efficiencies that benefit the Company.
During 2003, the Company continued the process of the registration of the
Cold-Eeze(R) products in the United Kingdom as a pharmacy drug and incurred
approximately $400,000 in related expenses.
Darius, through Innerlight Inc., is a direct selling company specializing in the
development and distribution of proprietary health and wellness products
primarily within the United States with the commencement of international
business activity during the second quarter of 2003. Net sales of the health and
wellness segment in 2003 were $21,024,194 an increase of 38% over the 2002 net
sales of $15,220,813. The growth of this segment in 2003 was attributable to the
recruitment of increasing numbers of active independent representatives along
with the Company commencing international business during the second quarter of
2003.
The establishment of an ethical pharmaceutical subsidiary, Pharma, may enable
the Company to diversify into the prescription drug market and to ensure safe
and effective distribution of these important potential new products currently
under development. During the course of 2003, the Company was assigned three
patents and filed three patent applications, two with the Patent Office of the
United States Commerce Department and one within the European Community.
Research and development costs relating to projects being undertaken by Pharma
increased in 2003 over the prior year as a result of increased study activity in
various areas of interest.
Manufacturing for all the Company's products is done by outside sources. The
lozenge form of Cold-Eeze(R) is manufactured by a contract manufacturer, a
significant amount of whose revenues are from the Company, with other forms and
products produced by different manufacturers.
Operating expenses during 2003 increased over those of 2002 due to increased
advertising and increased research and development costs related to the study
activities of Pharma.
Future revenues, costs, margins, and profits will continue to be influenced by
the Company's ability to maintain its manufacturing availability and capacity
together with its marketing and distribution capabilities in order to continue
to
-15-
compete on a national and international level.
In December 2002, the Board of Directors of the Company approved a plan to sell
Caribbean Pacific Natural Products, Inc. ("CPNP"). On January 22, 2003, the
Board of Directors of the Company completed the sale of the Company's 60% equity
interest in CPNP to Suncoast Naturals, Inc. ("Suncoast"). In exchange for its
60% equity interest in CPNP, the Company shall receive: (i) 750,000 shares of
Suncoast's common stock, which Suncoast has agreed, at its cost and within 60
days from the closing, to register for public resale through an appropriate
registration statement (this registration statement has not been declared
effective by the Securities and Exchange Commission) and (ii) 100,000 shares of
Suncoast's Series A Redeemable Preferred Stock, which bears interest at a rate
of 4.25% per annum and which is redeemable from time to time after March 31,
2003 in such amounts as is equal to 50% of the free cash flow reported by
Suncoast in the immediately preceding quarterly financial statements divided by
the redemption price of $10.00 per share. The Company owns 19.5% of Suncoast's
issued and outstanding capital stock, which investment is accounted for on the
cost basis method.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
FIN 46R, CONSOLIDATION OF VARIABLE INTEREST ENTITIES -- AN INTERPRETATION OF ARB
51 (REVISED DECEMBER 2003)
In December, 2003 the Financial Accounting Standards Board (FASB or the "Board")
issued FASB Interpretation No. 46 (revised December 2003), CONSOLIDATION OF
VARIABLE INTEREST ENTITIES (FIN 46R), to address certain implementation issues.
FIN 46R varies significantly from FASB Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES (FIN 46), which it supersedes. FIN 46R requires the
application of either FIN 46 or FIN 46R by "Public Entities" to all Special
Purpose Entities ("SPEs") at the end of the first interim or annual reporting
period ending after December 15, 2003. FIN 46R is applicable to all non-SPEs
created prior to February 1, 2003 by Public Entities that are not small business
issuers at the end of the first interim or annual reporting period ending after
March 15, 2004. The Company has determined that Scandasystems, a related party
(See note 14), may qualify as a variable interest entity and we may initially
consolidate Scandasystems beginning with our quarter ending March 31, 2004. Due
to the fact that the company has no long-term contractual commitments or
guarantees, our maximum exposure to loss is insignificant.
SFAS NO. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS
OF BOTH LIABILITIES AND EQUITY." (SFAS NO. 150)
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). The provisions of SFAS No.
150 are effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have
an impact on its financial position or results of operations.
CRITICAL ACCOUNTING POLICIES
As previously described, the Company is engaged in the development,
manufacturing, and marketing of health and homeopathic products that are being
offered to the general public and is also involved in the research and
development of potential prescription products. Certain key accounting policies
that may affect the results of the Company are the timing of revenue recognition
and sales incentives (including coupons, rebates, co-operative advertising and
discounts); the classification of advertising expenses; and the fact that all
research and development costs are expensed as incurred. Notes to Financial
Statements, Note 1, Organization and Business, describes the Company's other
significant accounting policies.
REVENUE RECOGNITION
Cold-remedy sales are recognized at the time ownership and risk of loss is
transferred to the customer, which is primarily the time the shipment is
received by the customer. In the case of the health and wellness segment sales
are recognized at the time goods are shipped to the customer. Sales returns and
allowances are provided for in the period that the related sales are recorded.
Provisions for these reserves are based on historical experience.
ADVERTISING
Advertising costs are expensed within the period to which they relate.
Advertising expense is made up of media advertising, presented as part of sales
and marketing expense; co-operative advertising, which is accounted for as a
deduction from sales; and bonus product, which is accounted for as part of cost
of sales. The level of advertising expense
-16-
to be incurred is determined each period to coincide with management's sales and
marketing strategies. Advertising costs incurred for the years ended December
31, 2003, 2002 and 2001 were $5,483,465, $4,794,955 and $3,402,006,
respectively. This expense item increased in 2003 due to active media and
in-market advertising necessary to promote and support the Cold-Eeze(R) product.
Included in prepaid expenses and other current assets was $68,000 and $236,875
at December 31, 2003 and December 31, 2002, respectively, relating to prepaid
advertising expenses.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the year incurred.
Expenditures for the years ended December 31, 2003, 2002 and 2001 were
$3,365,698, $2,663,291, and $1,331,639, respectively. Principally, research and
development is part of the product research costs related to Pharma and study
costs associated with Cold-Eeze(R). Expenditure for 2003 also includes study
costs relating to Cold-EEZE(R) Cold Remedy Nasal Spray. Pharma is currently
involved in research activity that is expected to increase significantly over
time as product research and testing progresses. The Company is at the initial
stages of what may be a lengthy process to develop potential commercial
prescription products.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 2003 COMPARED WITH SAME PERIOD 2002
The Company has restated its 2002 consolidated financial statements herein, in
order to properly reflect the accounting for certain warrants issued in 2002.
See Note 15 to the Consolidated Financial Statements.
Revenues from continuing operations for 2003 were $41,499,163 compared to
$29,420,646 for 2002, reflecting an increase of 41% in 2003. Revenues for 2003
comprised $20,474,969 relating to the cold-remedy segment, primarily the
Cold-Eeze(R) product and $21,024,194 from the health and wellness segment,
compared to 2002 revenues of $14,199,833 and $15,220,813, by respective segment.
The 2002 cold-remedy revenues included an amount of $148,866 as a result of the
settlement of the infringement suit against Gel Tech, LLC, the developer of
Zicam(TM), and Gum Tech International, Inc., its distributor. The 2003 increase
in the revenues of the cold-remedy segment may be attributable to management's
strategy in supporting the Cold-Eeze(R) product in the marketplace by way of
media advertising and ongoing co-operative advertising initiatives with the
Company's customer base. The segment may also have been influenced by media
attention to the possibility of increased cold and influenza incidences during
the 2003/2004 cold season. The health and wellness segment reported
significantly increased revenues in 2003 of $5,803,380 over the prior year,
primarily due to the continued recruitment by the Company of active independent
representatives along with the Company entering the international market during
the second quarter of 2003.
Cost of sales from continuing operations for 2003 as a percentage of net sales
was 51.8%, compared to 58.8% for 2002. The cost of sales percentage for the
cold-remedy segment was reduced in 2003 by 8.2% due to decreased costs of
product bonus promotions and considerably reduced royalty charges attributable
to the nasal and throat pop products, and also the 2002 amount included charges
for inventory obsolescence. The cost of sales percentage for the health and
wellness segment decreased in 2003 by 5.2% largely attributable to fluctuations
in the commission expense payable to the independent representatives along with
charges in 2002 as a result of obsolete inventory on hand.
Selling, marketing and administrative expenses from continuing operations for
2003 were $16,010,164 compared to $14,832,935 in 2002. The increase in 2003 was
primarily due to increased media advertising of $845,055 necessary to support
the Cold-Eeze(R) product along with increased costs associated with the health
and wellness segment of approximately $2,161,000 primarily related to the
generation of increased revenues. The 2002 expenses included a non-cash charge
of $2,100,000 for warrants granted in connection with consulting services with
no comparable charge in 2003.
Research and development costs from continuing operations in 2003 and 2002 were
$3,365,698 and $2,663,291, respectively. Principally, the increase of research
and development in 2003 was due to increased expenses associated with the
ongoing research and clinical activity of Pharma in the amount of $642,983.
During 2003, the Company's major operating expenses of salaries, brokerage
commissions, promotion, advertising, and legal costs accounted for approximately
$11,328,608 (58%) of the total operating expenses of $19,375,862, an increase of
2% over the 2002 amount of $11,143,588. The selling, general and administrative
expenses related to Darius for 2003 and 2002 were $5,396,696 and $3,235,793,
respectively.
-17-
Revenues of CPNP (discontinued operations) for the twelve months periods ended
December 31, 2003 and 2002 were $59,824, and $2,040,312, respectively, net
losses for the same periods were $54,349 and $1,322,355. The results of CPNP are
represented as discontinued operations in the Statements of Operations and
Balance Sheets.
Total assets of the Company at December 31, 2003 and 2002 were $26,269,759 and
$24,934,956, respectively. Working capital increased by $1,595,405 to
$18,257,354 at December 31, 2003. The primary influences on working capital
during 2003 were: the decrease in cash balances, increased account receivable
balances due to increased revenues, reductions in inventory on hand as a result
of increased revenues and management control; other current liabilities and
accrued royalty and sales commissions both increased due to improved sales
activity in 2003.
TWELVE MONTHS ENDED DECEMBER 31, 2002 COMPARED WITH SAME PERIOD 2001
Revenues from continuing operations for 2002 were $29,420,646 compared to
$22,772,214 for 2001, reflecting an increase of 29%. 2002 revenues comprised
$14,199,833 relating to the Cold-Eeze(R) product (cold-remedy segment) and
$15,220,813 from Darius (health and wellness segment), compared to 2001 revenues
of $16,983,635 and $5,788,579, by respective segment. The 2001 Cold-Eeze(R)
revenues included an amount of $1,546,592 as a result of the settlement of the
infringement suit against Gel Tech, LLC, the developer of Zicam(TM), and Gum
Tech International, Inc., its distributor as compared to $148,866 in 2002. 2002
revenues report a reduction in Cold-Eeze(R) sales of $2,783,802 due to the
compression of the cold-remedy category in general despite the increase in the
incidences of the common cold. In addition, the weak economic conditions
resulted in lower carrying amounts of inventory by our customers and reduced
order size and frequency. The health and wellness segment reported significantly
increased revenues in 2002 primarily due to strong marketing and promotion
programs effected throughout 2002.
Cost of sales from continuing operations for 2002 as a percentage of net sales
was 58.8%, compared to 48.2% for 2001. The 2002 increase is primarily due to the
effects of the significantly increased revenues from the health and wellness
segment whose cost of sales as a percentage of sales were 71% and 67% for 2002
and 2001, respectively, reflecting this segment's lower profit margin compared
to that of Cold-Eeze(R) cold-remedy segment.
Selling, marketing and administrative expenses from continuing operations for
2002 were $14,832,935 compared to $10,650,555 in 2001. The increase in 2002 was
primarily due to increased advertising of $1,392,952 necessary to support the
Cold-Eeze(R) product and a non-cash charge of $2,100,000 in 2002 for warrants
granted in connection with consulting services.
Research and development costs from continuing operations in 2002 and 2001 were
$2,663,291 and $1,331,639, respectively. Principally, the increase of research
and development in 2002 was due to expenses associated with the ongoing research
and clinical activity of Pharma in the amount of $1,096,492.
During 2002, the Company's major operating expenses of salaries, brokerage
commissions, promotion, advertising, and legal costs accounted for approximately
$11,143,588 (64%) of the total operating expenses of $17,496,226, an increase of
60% over the 2001 amount of $6,983,346. The selling, general and administrative
expenses related to Darius for 2002 and 2001 were $3,235,793 and $2,457,236,
respectively.
Revenues of Caribbean Pacific Natural Products, Inc. (discontinued operations)
for the twelve months ended December 31, 2002 and 2001 were $2,040,312, and
$2,176,470, respectively, net losses for the same periods were $1,322,355 and
$718,156. The loss relating to 2002 includes an amount of $633,233 relating to
the asset impairment. The results of Caribbean Pacific Natural Products are
represented as discontinued operations in the statements of operations with
balance sheet items being represented as assets held for sale and liabilities
associated with assets held for sale.
Total assets of the Company at December 31, 2002 and 2001 were $24,934,956 and
$24,755,795, respectively. Working capital decreased by $1,963,872 to
$16,661,949 at December 31, 2002. The primary influences on working capital
during 2002 were: the increase in cash balances, which was assisted by exercises
of warrants and options during 2002; reductions in inventory on hand; increased
advertising accruals due to increased activity; and increased liabilities
resulting from the fair value of warrants granted associated with consulting
services.
MATERIAL COMMITMENTS AND SIGNIFICANT AGREEMENTS
The Company's products are manufactured by outside sources. The Company has
agreements in place with these manufacturers, which ensure a reliable source of
product for the future. A significant amount of the revenues received by the
facility producing the Cold-Eeze(R) lozenge is from the Company.
-18-
The Company has agreements in place with independent brokers whose function is
to represent the Company's Cold-Eeze(R) products, in a product sales and
promotion capacity, throughout the United States and internationally. The
brokers are remunerated through a commission structure, based on a percentage of
sales collected, less certain deductions.
There are significant royalty and commission agreements between the Company and
the developer of the Company's Cold-Eeze(R) zinc gluconate glycine lozenge
products. The Company has entered into royalty and consulting agreements with
the developer that requires payment of 5% on sales collected, less certain
deductions, and with the founders, who are officers, directors and stockholders
of the Company, who share a commission of 5% on sales collected, less certain
deductions. The agreements with the developers expire in 2007, and with the
founders in 2005.
The Company has an agreement with the former owners of the Utah based direct
marketing and selling company, whereby they receive payments, currently totaling
5% of net sales collected, for use of product formulations, consulting,
confidentiality and non-compete agreements. Amounts paid or payable under such
agreement during 2003 and 2002 were $880,091 and $678,454, respectively. Amounts
payable under such agreement at December 31, 2003 and 2002 were $68,388 and
$63,866, respectively.
In August 2003, the Company entered into a licensing agreement with a patent
holder relating to utilizing a nasal spray product in the treatment of symptoms
of the common cold. The Company agreed to pay the patent holder a two percent
royalty on net sales of nasal spray products, less certain deductions,
throughout the term of this agreement, expiring no later than April 2014.
Amounts paid or payable under such agreement during the twelve month period
ended December 31, 2003 were $26,613, with zero in the 2002 comparable period.
An amount of $1,613 relating to this agreement was accrued or payable at
December 31, 2003.
Certain operating leases for office and warehouse space maintained by the
Company resulted in rent expense for the years ended December 31, 2003, 2002 and
2001, of $255,078, $236,304 and $218,456, respectively. The future minimum lease
obligations under these operating leases are approximately $565,000.
The Company has approximate future obligations relating to research and
development and property leases, over the next five years, as follows:
Research and Property
Year Development Leases Total
-----------------------------------------------------------
2004 $1,500,000 $212,000 $1,712,000
2005 -- 198,000 198,000
2006 -- 98,000 98,000
2007 -- 57,000 57,000
2008 -- -- --
-----------------------------------------------------------
Total $1,500,000 $565,000 $2,065,000
-----------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $18,257,354 and $16,661,949 at December 31,
2003 and 2002, respectively. Changes in working capital overall have been
primarily due to the following items: cash balances have decreased by
$1,504,991, account receivable balances increased by $3,673,760 due to increased
revenues in 2003, particularly the fourth quarter, inventory decreased by
$773,858 due to increased sales activity and the management of inventory levels.
Total cash balances at December 31, 2003 were $11,392,089 compared to
$12,897,080 at December 31, 2002.
Management believes that its revised strategy to establish Cold-Eeze(R) as a
recognized brand name, its broader range of products, its diversified
distribution methods as it relates to the health and wellness business segment,
adequate manufacturing capacity, growth in international sales together with its
current working capital should provide an internal source of capital to fund the
Company's business operations. The cold-remedy and health and wellness segments
contribute current expenditure support in relation to the ethical pharmaceutical
segment. In addition to anticipated funding from operations, the Company and its
subsidiaries may in the short and long term raise capital through the issuance
of equity securities to finance anticipated growth.
Management is not aware of any trends, events or uncertainties that have or are
reasonably likely to have a material negative impact upon the Company's (a)
short-term or long-term liquidity, or (b) net sales, revenues or income from
continuing operations. Any challenge to the Company's patent rights could have a
material adverse effect on future liquidity of the Company; however, the Company
is not aware of any condition that would make such an event probable.
-19-
Management believes that cash generated from operations along with its current
cash balances will be sufficient to finance working capital and capital
expenditure requirements for at least the next twelve months.
IMPACT OF INFLATION
The Company is subject to normal inflationary trends and anticipates that any
increased costs should be passed on to its customers.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's operations are not subject to risks of material foreign currency
fluctuations, nor does it use derivative financial instruments in its investment
practices. The Company places its marketable investments in instruments that
meet high credit quality standards. The Company does not expect material losses
with respect to its investment portfolio or exposure to market risks associated
with interest rates. The impact on the Company's results of one percentage point
change in short-term interest rates would not have a material impact on the
Company's future earnings, fair value, or cash flows related to investments in
cash equivalents or interest earning marketable securities.
-20-
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
----
Balance Sheets as of December 31, 2003 and 2002 F-1
Statements of Operations for the years ended December 31, 2003,
2002, and 2001 F-2
Statements of Stockholders' Equity for the years ended December 31,
2003, 2002, and 2001 F-3
Statements of Cash Flows for the years ended December 31, 2003,
2002, and 2001 F-4
Notes to Financial Statements F-5 to F-21
Responsibility for Financial Statements F-22
Report of Independent Auditors F-23
-21-
THE QUIGLEY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS December 31, 2003 December 31, 2002
(Restated-Note 15)
----------------- ------------------
CURRENT ASSETS:
Cash and cash equivalents $ 11,392,089 $ 12,897,080
Accounts receivable (net of doubtful accounts of $808,812 and $737,782) 7,861,883 4,188,123
Inventory 3,752,903 4,526,761
Prepaid expenses and other current assets 733,597 490,117
Assets of discontinued operations -- 374,007
------------ ------------
TOTAL CURRENT ASSETS 23,740,472 22,476,088
------------ ------------
PROPERTY, PLANT AND EQUIPMENT - NET 2,418,159 2,336,736
------------ ------------
OTHER ASSETS:
Goodwill 30,763 30,763
Other assets 80,365 1,000
Assets of discontinued operations -- 90,369
------------ ------------
TOTAL OTHER ASSETS 111,128 122,132
------------ ------------
TOTAL ASSETS $ 26,269,759 $ 24,934,956
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 524,136 $ 394,675
Accrued royalties and sales commissions 1,594,457 1,146,495
Accrued advertising 1,354,536 1,559,575
Accrued consulting -- 975,000
Other current liabilities 2,009,989 1,353,383
Liabilities of discontinued operations -- 385,011
------------ ------------
TOTAL CURRENT LIABILITIES 5,483,118 5,814,139
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 12)
STOCKHOLDERS' EQUITY:
Common stock, $.0005 par value; authorized 50,000,000;
Issued: 16,149,079 and 16,102,670 shares 8,074 8,051
Additional paid-in-capital 34,281,449 33,290,222
Retained earnings 11,685,277 11,010,703
Less: Treasury stock, 4,646,053 and 4,646,053 shares, at cost (25,188,159) (25,188,159)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 20,786,641 19,120,817
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,269,759 $ 24,934,956
============ ============
See accompanying notes to consolidated financial statements
F-1
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
December 31, 2003 December 31, 2002 December 31, 2001
----------------- ------------------ -----------------
NET SALES $ 41,499,163 $ 29,271,780 $ 21,225,622
LICENSING FEES -- 148,866 1,546,592
------------ ------------ ------------
TOTAL REVENUE 41,499,163 29,420,646 22,772,214
------------ ------------ ------------
COST OF SALES 21,487,763 17,208,836 10,220,849
------------ ------------ ------------
GROSS PROFIT 20,011,400 12,211,810 12,551,365
------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing 6,166,318 4,941,174 3,220,789
Administration 9,843,846 9,891,761 7,429,766
Research and development 3,365,698 2,663,291 1,331,639
------------ ------------ ------------
TOTAL OPERATING EXPENSES 19,375,862 17,496,226 11,982,194
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 635,538 (5,284,416) 569,171
INTEREST AND OTHER INCOME 93,385 152,313 364,949
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES
728,923 (5,132,103) 934,120
------------ ------------ ------------
INCOME TAXES -- -- --
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 728,923 (5,132,103) 934,120
------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations (54,349) (689,122) (718,156)
Loss on impairment related to investment in sun-care and
skincare Operations -- (633,233) --
------------ ------------ ------------
NET INCOME (LOSS) $ 674,574 ($ 6,454,458) $ 215,964
============ ============ ============
BASIC EARNINGS PER COMMON SHARE:
Income (loss) from continuing operations $ 0.06 ($ 0.47) $ 0.09
Loss from discontinued operations -- (0.12) (0.07)
------------ ------------ ------------
Net Income (loss) $ 0.06 ($ 0.59) $ 0.02
============ ============ ============
DILUTED EARNINGS PER COMMON SHARE:
Income (loss) from continuing operations $ 0.05 ($ 0.47) $ 0.09
Loss from discontinued operations -- (0.12) (0.07)
------------ ------------ ------------
Net Income (loss) $ 0.05 ($ 0.59) $ 0.02
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 11,467,087 10,893,944 10,675,153
============ ============ ============
Diluted 14,910,246 10,893,944 10,750,687
============ ============ ============
See accompanying notes to consolidated financial statements
F-2
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(RESTATED-NOTE 15)
Common Additional
Stock Issued Paid-in- Treasury Retained
Shares Amount Capital Stock Earnings Total
---------------------------------------------------------------------------------------------
BALANCE JANUARY 1, 2001 10,655,153 $7,636 $28,871,887 ($25,158,028) $17,249,197 $20,970,692
---------------------------------------------------------------------------------------------
Treasury stock (30,000) (30,131) (30,131)
Shares issued for net assets
acquired 50,000 25 43,725 43,750
Net income 215,964 215,964
---------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2001 10,675,153 7,661 28,915,612 (25,188,159) 17,465,161 21,200,275
---------------------------------------------------------------------------------------------
Tax benefits from options,
warrants & common stock 828,177 828,177
Tax benefit allowance (828,177) (828,177)
Warrants issued for service -
(Restated-Note 15) 1,125,000 1,125,000
Proceeds from options and warrants
exercised 781,464 390 3,249,610 3,250,000
Net loss (6,454,458) (6,454,458)
---------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2002 -
(Restated-Note 15) 11,456,617 8,051 33,290,222 (25,188,159) 11,010,703 19,120,817
---------------------------------------------------------------------------------------------
Tax benefits from options,
warrants & common stock 133,014 133,014
Tax benefit allowance (133,014) (133,014)
Warrants issued for service 975,000 975,000
Proceeds from options and warrants
exercised 46,409 23 16,227 16,250
Net income 674,574 674,574
---------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2003 11,503,026 $8,074 $34,281,449 ($25,188,159) $11,685,277 $20,786,641
=============================================================================================
See accompanying notes to consolidated financial statements
F-3
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2003 2002 2001
------------ ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 674,574 ($ 6,454,458) $ 215,964
------------ ------------ ------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS:
Loss from discontinued operations 54,349 689,122 718,156
Loss on impairment related to discontinued operations -- 633,233 --
Depreciation and amortization 473,593 409,068 458,741
Compensation satisfied with common stock warrants -- 2,100,000 --
Bad debts provision 71,030 18,472 183,014
(INCREASE) DECREASE IN ASSETS:
Accounts receivable (3,744,790) (31,201) (448,426)
Inventory 773,858 1,564,459 862,832
Prepaid expenses and other current assets (243,480) 958,040 (328,528)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable 129,461 (424,130) 11,769
Accrued royalties and sales commissions 447,962 277,874 (541,126)
Accrued advertising (205,041) 890,783 (1,069,081)
Other current liabilities 656,608 508,922 (412,175)
------------ ------------ ------------
TOTAL ADJUSTMENTS (1,586,450) 7,594,642 (564,824)
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (911,876) 1,140,184 (348,860)
------------ ------------ ------------
INVESTING ACTIVITIES:
Capital expenditures (555,016) (580,861) (343,614)
Cost of net assets acquired -- -- (30,763)
------------ ------------ ------------
NET CASH FLOWS USED IN INVESTING
ACTIVITIES (555,016) (580,861) (374,377)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from exercises of options and warrants 16,250 3,250,000 --
Repurchase of common stock -- -- (30,131)
------------ ------------ ------------
NET CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES 16,250 3,250,000 (30,131)
------------ ------------ ------------
NET CASH USED IN DISCONTINUED
OPERATIONS (54,349) (596,548) (844,911)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH (1,504,991) 3,212,775 (1,598,279)
CASH & CASH EQUIVALENTS, BEGINNING OF
PERIOD 12,897,080 9,684,305 11,282,584
------------ ------------ ------------
CASH & CASH EQUIVALENTS,
END OF PERIOD $ 11,392,089 $ 12,897,080 $ 9,684,305
============ ============ ============
See accompanying notes to consolidated financial statements
F-4
THE QUIGLEY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
The Quigley Corporation (the "Company"), organized under the laws of the state
of Nevada, is engaged in the development, manufacturing, and marketing of health
and homeopathic products that are being offered to the general public, and the
research and development of potential prescription products. The Company is
organized into three business segments, which are, Cold-Remedy, Health and
Wellness, and Ethical Pharmaceutical. For the fiscal periods presented, the
Company's revenues have come from the Company's Cold-Remedy business segment and
the Health and Wellness business segment.
The Company's principal cold-remedy product, Cold-Eeze(R), a zinc gluconate
glycine formulation (ZIGG(TM)) is an over-the-counter consumer product used to
reduce the duration and severity of the common cold and is sold in lozenge,
sugar-free tablet and nasal spray forms and is proven in two double-blind
clinical studies to reduce the duration and severity of common cold symptoms by
nearly half.
Darius was formed in January 2000 to introduce new products to the marketplace
through a network of independent distributors. Darius is a direct selling
organization specializing in proprietary health and wellness products, which
commenced shipping product to customers in the third quarter of 2000. The
continued success of this segment is dependent, among other things, on the
Company's ability to recruit and maintain active independent representatives; to
continue to make available new and innovative products and services; continue to
conform with domestic and international regulatory agencies; and to maintain and
improve adequate system capabilities. The foregoing risks could result in
significant reductions in revenues and profitability of the health and wellness
segment.
The formation of Darius has provided diversification to the Company in both the
method of product distribution and the broader range of products available to
the marketplace serving as a balance to the seasonal revenue cycles of the
Cold-Eeze(R) branded products.
In January 2001, the Company formed an Ethical Pharmaceutical Unit, Pharma, a
wholly-owned subsidiary of the Company, the Ethical Pharmaceutical segment, that
is under the direction of its Executive Vice President and Chairman of its
Medical Advisory Committee. The establishment of a dedicated pharmaceutical
subsidiary may enable the Company to diversify into the prescription drug market
and to ensure safe and effective distribution of these important potential new
products currently under development. At this time, three patents have been
issued and assigned to the Company resulting from research activity of Pharma.
During 2000, the Company acquired a 60% ownership position in Caribbean Pacific
Natural Products, Inc. ("CPNP"), a leading developer and marketer of all-natural
sun-care and skincare products for luxury resorts, theme parks and spas. In
December 2002, the Board of Directors of the Company approved a plan to sell
CPNP. On January 22, 2003, the Company completed the sale of the Company's 60%
equity interest in CPNP to Suncoast Naturals, Inc. ("Suncoast"). See discussion
in Notes to Financial Statements, Note 3 - Discontinued Operations.
The business of the Company is subject to federal and state laws and regulations
adopted for the health and safety of users of the Company's products.
Cold-Eeze(R) is a homeopathic remedy that is subject to regulations by various
federal, state and local agencies, including the FDA and the Homeopathic
Pharmacopoeia of the United States.
The Company competes with suppliers varying in range and size in the cold-remedy
products arena. Because Cold-Eeze(R) has been clinically proven, it offers a
significant advantage over other suppliers in the over-the-counter cold-remedy
market. The Company has several Broker, Distributor and Representative
Agreements, both nationally and internationally and the product is distributed
through numerous independent and chain drug and discount stores throughout the
United States.
The Company continues to use the resources of independent national and
international brokers complementing its own in-house personnel to represent the
Company's over-the-counter cold-remedy products, thereby saving capital and
other ongoing expenditures that would otherwise be incurred.
Pharma, a wholly owned subsidiary of the Company, the Ethical Pharmaceutical
segment, is currently undergoing research and development activity in compliance
with regulatory requirements. The Company is at the initial stages of what may
be a lengthy process to develop these patent applications into a line of
naturally-derived patented prescription drugs.
F-5
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of the Company and
its wholly owned subsidiaries. All inter-company transactions and balances have
been eliminated. In the opinion of management, all adjustments necessary for a
fair presentation of the consolidated financial position, consolidated results
of operations and consolidated cash flows, for the periods indicated, have been
made. Prior period amounts have been reclassified to conform with this
presentation.
During 2000, the Company acquired a 60% ownership position in Caribbean Pacific
Natural Products, Inc., ("CPNP"), a leading developer and marketer of
all-natural sun-care and skincare products for luxury resorts, theme parks and
spas. In December 2002, the Board of Directors of the Company approved a plan to
sell CPNP. On January 22, 2003, the Board of Directors of the Company completed
the sale of the Company's 60% equity interest in CPNP to Suncoast Naturals, Inc.
("Suncoast"). In exchange for its 60% equity interest in CPNP, the Company shall
receive: (i) 750,000 shares of Suncoast's common stock, which Suncoast has
agreed, at its cost and within 60 days from the closing, to register for public
resale through an appropriate registration statement (this registration
statement has not been declared effective by the Securities and Exchange
Commission) and (ii) 100,000 shares of Suncoast's Series A Redeemable Preferred
Stock, which bears interest at a rate of 4.25% per annum and which is redeemable
from time to time after March 31, 2003 in such amounts as is equal to 50% of the
free cash flow reported by Suncoast in the immediately preceding quarterly
financial statements divided by the redemption price of $10.00 per share.
The Company owns 19.5% of Suncoast's issued and outstanding capital stock, which
investment is accounted for on the cost basis method. Results of CPNP are
presented as discontinued operations in the Consolidated Statements of
Operations and the Consolidated Balance Sheets.
On January 2, 2001, the Company acquired certain assets and assumed certain
liabilities of a privately held company, located in Utah, involved in the direct
marketing and distribution of health and wellness products. This acquisition
required cash payments that approximated $110,000 and 50,000 shares of the
Company's stock issued to the former owners of the net assets acquired. The net
assets acquired included assets totaling $536,000 and liabilities assumed
approximating $416,000. Also required were payments totaling $540,000 for the
use of product formulations; consulting; confidentiality and a non-compete
agreement. To maintain the continuous application of these arrangements, fees of
5% on net sales collected must be paid to the former owners which are expensed
as incurred. The operating results have been included in the Company's
Consolidated Statements of Operations from the date of acquisition. Prior to
January 1, 2002, the excess of cost over net assets acquired had been subject to
amortization on a straight-line basis over a period of 15 years. Subsequent to
2001, the account will only be reduced if the value becomes impaired.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an initial maturity of
three months or less at the time of purchase to be cash equivalents. Cash
equivalents include cash on hand and monies invested in money market funds. The
carrying amount approximates the fair market value due to the short-term
maturity of these investments.
INVENTORIES
Inventories are stated at the lower of cost or market. The Company uses the
first-in, first-out ("FIFO") method of determining cost for all inventories.
Inventories included raw material amounts of approximately $729,000 and $337,000
at December 31, 2003 and 2002, respectively.
F-6
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. The Company uses a
combination of straight-line and accelerated methods in computing depreciation
for financial reporting purposes. The annual provision for depreciation has been
computed in accordance with the following ranges of estimated asset lives:
building and improvements - twenty years; machinery and equipment - five to
seven years; computer software - three years; and furniture and fixtures - seven
years.
GOODWILL AND INTANGIBLE ASSETS
Patent rights have been amortized on a straight-line basis over the period of
the related licensing agreements, which approximated 67 months and were fully
amortized as of March 2002. Amortization costs incurred for the twelve months
periods ended December 31, 2003, 2002 and 2001, were zero and $21,940 and
$87,761, respectively.
As of December 31, 2003 and December 31, 2002, intangible assets consist of
goodwill of $30,763. Goodwill is not amortized but reviewed for impairment when
events and circumstances indicate the carrying amount may not be recoverable or
on an annual basis. In 2002, the Company realized an impairment loss of $296,047
relating to goodwill in CPNP, which was reflected in discontinued operations.
CONCENTRATION OF RISKS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and trade
accounts receivable.
The Company maintains cash and cash equivalents with four major financial
institutions. Since the Company maintains amounts in excess of guarantees
provided by the Federal Depository Insurance Corporation, the Company performs
periodic evaluations of the relative credit standing of these financial
institutions and limits the amount of credit exposure with any one institution.
Trade accounts receivable potentially subjects the Company to credit risk. The
Company extends credit to its customers based upon an evaluation of the
customer's financial condition and credit history and generally does not require
collateral. The Company has historically incurred minimal credit losses. The
Company's broad range of customers includes many large wholesalers, mass
merchandisers and multi-outlet pharmacy chains, five of which account for a
significant percentage of sales volume, representing 23% for the years ended
December 31, 2003 and 2002, and 35% for the year ended December 31, 2001.
Customers comprising the five largest accounts receivable balances represented
34% and 44% of total trade receivable balances at December 31, 2003 and 2002,
respectively. During 2003, approximately 97% of the Company's revenues
originated in the United States with the remainder being attributable to
international trade.
The Company currently uses separate suppliers to produce Cold-Eeze(R) in
lozenge, sugar-free tablet and nasal spray form. The Company's revenues are
currently generated from the sale of the Cold-Eeze(R) product with the remaining
revenue coming from the health and wellness segment. The lozenge form is
manufactured by a contract manufacturer, a significant amount of whose revenues
are from the Company. The other forms are manufactured by third parties that
produce a variety of other products for other customers. Should these
relationships terminate or discontinue for any reason, the Company has
formulated a contingency plan in order to prevent such discontinuance from
materially affecting the Company's operations. Any such termination may,
however, result in a temporary delay in production until the replacement
facility is able to meet the Company's production requirements.
Raw material used in the production of the product is available from numerous
sources. Currently, it is being procured from a single vendor in order to secure
purchasing economies. In a situation where this one vendor is not able to supply
the contract manufacturer with the ingredients, other sources have been
identified.
Darius' product for resale is sourced from several suppliers. In the event that
such sources were no longer in a position to supply Darius with product, other
vendors have been identified as reliable alternatives with minimal adverse loss
of business.
LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment on an exception basis
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable through future cash flows. If it is determined
that an impairment loss has occurred based on the expected cash flows, a loss is
recognized in the Statement
F-7
of Operations. In 2002, in addition to its goodwill impairment loss in CPNP, the
Company realized an additional impairment loss of $337,186 from its investment
in CPNP, which was reflected in discontinued operations. The total impairment
loss of $633,233 was reflected in discontinued operations.
REVENUE RECOGNITION
Sales are recognized at the time ownership is transferred to the customer, which
for the cold-remedy segment is the time the shipment is received by the customer
and for the health and wellness segment, when the product is shipped to the
customer. Sales returns and allowances are provided for in the period that the
related sales are recorded. Provisions for these reserves are based on
historical experience. Total revenues for the twelve months periods ended
December 31, 2003, 2002 and 2001 include amounts of zero, $148,866 and
$1,546,592, respectively, as a result of the settlement of the infringement
suit, related to licensing fees, against Gel Tech, LLC, the developer of
Zicam(TM), and Gum Tech International, Inc., its distributor.
SHIPPING AND HANDLING
Product sales relating to Health and Wellness products carry an additional
identifiable shipping and handling charge to the purchaser, which is classified
as revenue. For cold-remedy products, such costs are included as part of the
invoiced price. In all cases costs related to this revenue are recorded in cost
of sales.
STOCK COMPENSATION
Stock options and warrants for purchase of the Company's common stock have been
granted to both employees and non-employees since the date of the Company's
public inception. Options and warrants are exercisable during a period
determined by the Company, but in no event later than ten years from the date
granted.
The Company applies Accounting Principles Board Opinion No. 25 ("APB 25") in
accounting for its grants of options to employees. Under the intrinsic value
method prescribed by APB 25, no compensation expense relating to grants to
employees has been recorded by the Company in periods reported. If compensation
expense for awards made during the years ended December 31, 2003, 2002 and 2001
had been determined under the fair value method of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
the Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2003 2002 2001
------------ ------------------ ------------
Net income (loss)
As reported $674,574 ($6,454,458) $215,964
Compensation expense (2,026,720) (2,072,220) (244,000)
Pro forma ($1,352,146) ($8,526,678) ($28,036)
Basic earnings (loss) per share
As reported $0.06 ($0.59) $0.02
Pro forma ($0.12) ($0.78) --
Diluted earnings (loss) per share
As reported $0.05 ($0.59) $0.02
Pro forma ($0.12) ($0.78) --
Expense relating to warrants granted to non-employees has been appropriately
recorded in the periods presented based on either fair values agreed upon with
the grantees or fair values as determined by the Black Scholes pricing model
dependent upon the circumstances relating to the specific grants.
A total of 424,000, 477,000 and 400,000 stock options were granted to employees
and non-employees in 2003, 2002 and 2001, respectively.
ROYALTIES
The Company includes royalties and founders commissions incurred as cost of
sales based on agreement terms.
F-8
ADVERTISING
Advertising costs are expensed within the period in which they are utilized.
Advertising expense is comprised of media advertising, presented as part of
sales and marketing expense; co-operative advertising, which is accounted for as
part of net sales; and free product, which is accounted for as part of cost of
sales. Advertising costs incurred for the years ended December 31, 2003, 2002
and 2001 were $5,483,465, $4,794,955 and $3,402,006, respectively. Included in
prepaid expenses and other current assets was $68,000 and $236,875 at December
31, 2003 and 2002 relating to prepaid advertising and promotion expenses.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the period incurred.
Expenditures for the years ended December 31, 2003, 2002 and 2001 were
$3,365,698, $2,663,291 and $1,331,639, respectively. Principally, the increase
in research and development costs in 2003 was due to expenses incurred as part
of the product research costs related to Pharma and study costs associated with
Cold-Eeze(R). Pharma is currently involved in research activity following patent
applications that the Company has acquired and research and development costs,
relating to potential products, are expected to increase significantly over time
as product research and testing continues.
INCOME TAXES
The Company utilizes an asset and liability approach which requires the
recognition of deferred tax assets and liabilities for the future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, the Company
generally considers all expected future events other than enactments of changes
in the tax law or rates. Until sufficient taxable income to offset the temporary
timing differences attributable to operations and the tax deductions
attributable to option, warrant and stock activities are assured, a valuation
allowance equaling the total deferred tax asset is being provided. See Notes to
Financial Statements, Note 8 - Income Taxes for further discussion.
NOTE 3 - DISCONTINUED OPERATIONS
Effective July 1, 2000, the Company acquired a 60% ownership position of CPNP
and was accounted for by the purchase method of accounting and accordingly, the
operating results were included in the Company's consolidated financial
Statements from the date of acquisition. This majority ownership position
required a cash investment that approximated $812,000 and the provision for a $1
million line of credit, collateralized by inventory, accounts receivable and all
other assets of CPNP. The net assets of CPNP at the acquisition date principally
consisted of a product license and distribution rights with no recorded value,
inventory and fixed assets of $312,915 and $510,000 of working capital with a
contribution to minority interest of $329,166.
In December 2002, the Board of Directors of the Company approved a plan to sell
CPNP. On January 22, 2003, the Board of Directors of the Company completed the
sale of the Company's 60% equity interest in CPNP to Suncoast. In exchange for
its 60% equity interest in CPNP, the Company received: (i) 750,000 shares of
Suncoast's common stock, which Suncoast has agreed, at its cost and within 60
days from the closing, to register for public resale through an appropriate
registration statement (this registration statement has not been declared
effective by the Securities and Exchange Commission) and (ii) 100,000 shares of
Suncoast's Series A Redeemable Preferred Stock, which bears interest at a rate
of 4.25% per annum and which is redeemable from time to time after March 31,
2003 in such amounts as is equal to 50% of the free cash flow reported by
Suncoast in the immediately preceding quarterly financial statements divided by
the redemption price of $10.00 per share. The Company owns 19.5% of Suncoast's
issued and outstanding capital stock valued at $79,365, which investment is
accounted for on the cost basis method, representing the Company's share of the
fair value of Suncoast at the time the transaction was recorded, this amount is
included in Other Assets in the Consolidated Balance Sheets. During August 2003,
a registration statement was filed but an effective date has not been
determined. The disposal of CPNP was completed in order to allow the Company to
focus resources on other activities and clinical research and development.
Sales of CPNP for all periods commencing on the date of acquisition on July 1,
2000 up to date of disposal on January 22, 2003, were $5,075,472, cumulative net
losses during that period were $2,232,620. The loss includes an amount of
$633,233 relating to the asset impairment, reported in 2002. Revenues of CPNP
for the twelve months periods ended December 31, 2003, 2002 and 2001 were
$59,824 and $2,040,312 and $2,176,470, respectively, net losses for the same
periods $54,349, $1,322,355 and $718,155, respectively. Results of CPNP are
presented as discontinued operations in the Consolidated Statements of
Operations and in the Consolidated Balance Sheets.
The major classes of balance sheet items of discontinued operations at December
31, 2002 were inventory, accounts receivable, property, plant and machinery and
accounts payable.
F-9
NOTE 4 - SEGMENT INFORMATION
The basis for presenting segment results generally is consistent with overall
Company reporting. The Company reports information about its operating segments
in accordance with Financial Accounting Standard Board Statement No. 131,
"Disclosure About Segments of an Enterprise and Related Information," which
establishes standards for reporting information about a company's operating
segments. All consolidating items are included in Other.
The Company has divided its operations into three reportable segments as
follows: The Quigley Corporation (Cold- Remedy), whose main product is
Cold-Eeze(R), a proprietary zinc gluconate glycine lozenge for the common cold;
Darius (Health and Wellness), whose business is the sale and direct marketing of
a range of health and wellness products and Pharma, (Ethical Pharmaceutical),
currently involved in research and development activity to develop patent
applications for potential pharmaceutical products.
As discussed in Notes to Financial Statements, Note 3 - Discontinued Operations,
the Company disposed of its Sun-care and Skincare segment.
Financial information relating to 2003, 2002 and 2001 continuing operations by
business segment follows:
----------------------------------------------------------------------------------------------------------------------
As of and for the twelve
months ended December 31, Cold Health and Ethical
2003 Remedy Wellness Pharmaceutical Other Total
----------------------------------------------------------------------------------------------------------------------
Revenues
Customers $20,474,969 $21,024,194 -- -- $41,499,163
Inter-segment -- -- -- -- --
Segment operating profit (loss) 1,699,378 1,791,454 ($2,855,294) -- 635,538
Depreciation 318,419 155,174 -- -- 473,593
Capital expenditures 414,129 140,887 -- -- 555,016
Total assets $24,892,338 $ 3,881,970 -- ($2,504,549) $26,269,759
----------------------------------------------------------------------------------------------------------------------
As of and for the twelve
months ended December 31, Cold Health and Ethical
2002 Remedy Wellness Pharmaceutical Other Total
----------------------------------------------------------------------------------------------------------------------
Revenues
Customers $14,199,833 $15,220,813 -- -- $29,420,646
Inter-segment -- -- -- -- --
Segment operating profit (loss) (4,839,359) 1,103,610 ($1,604,753) $ 56,086 (5,284,416)
Depreciation 262,724 124,404 -- -- 387,128
Capital expenditures 290,983 289,878 -- -- 580,861
Total assets $26,223,476 1,401,867 -- ($2,690,387) $24,934,956
----------------------------------------------------------------------------------------------------------------------
As of and for the twelve
months ended December 31, Cold Health and Ethical
2001 Remedy Wellness Pharmaceutical Other Total
----------------------------------------------------------------------------------------------------------------------
Revenues
Customers $16,983,635 $ 5,788,579 -- -- $22,772,214
Inter-segment 116,385 (176,412) -- $ 60,027 --
Segment operating profit (loss) 1,638,264 (729,374) ($467,436) 127,717 569,171
Depreciation 269,392 74,269 -- -- 343,661
Capital expenditures 176,282 167,332 -- -- 343.614
Total assets $26,726,729 $ 826,946 -- ($2,797,880) $24,755,795
F-10
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Consisted of the following as of: December 31, 2003 December 31, 2002
----------------- -----------------
Land $ 152,203 $ 152,203
Buildings and improvements 1,513,958 1,503,641
Machinery and equipment 1,432,818 1,061,852
Computer software 570,001 462,032
Furniture and fixtures 195,000 180,287
---------- ----------
3,863,980 3,360,015
Less: Accumulated depreciation 1,445,821 1,023,279
---------- ----------
Property, Plant and Equipment, net $2,418,159 $2,336,736
========== ==========
Depreciation expense for the years ended December 31, 2003, 2002 and 2001 was
$473,593, $387,128, and $343,661, respectively.
NOTE 6 - OTHER CURRENT LIABILITIES
Included in other current liabilities are $458,359 and $177,366 related to
accrued compensation at December 31, 2003 and 2002, respectively.
NOTE 7 - PATENT RIGHTS AND RELATED ROYALTY COMMITMENTS
During 1996, the Company entered into a licensing agreement resulting in the
utilization of the zinc gluconate patent. In return for the acquisition of this
license, the Company issued a total of 240,000 shares of common stock to the
patent holder and attorneys during 1996 and 1997. The related intangible asset,
approximating $490,000, was valued at the fair value of these shares at the date
of the grant. This asset value was amortized over the remaining life of the
patent that expired in March 2002. The Company was required to pay a 3% royalty
on sales collected, less certain deductions, to the patent holder throughout the
term of this agreement, which also expired in 2002.
The Company also maintains a separate representation and distribution agreement
relating to the development of the zinc gluconate glycine product formulation.
In return for exclusive distribution rights, the Company must pay the developer
a 3% royalty and a 2% consulting fee based on sales collected, less certain
deductions, throughout the term of this agreement, expiring in 2007.
Additionally, a founder's commission totaling 5%, on sales collected, less
certain deductions, is paid to two of the officers, who are also directors and
stockholders of the Company, and whose agreements expire in 2005.
In August 2003, the Company entered into a licensing agreement with a patent
holder relating to utilizing a nasal spray product in the treatment of symptoms
of the common cold. The Company agreed to pay the patent holder a two percent
royalty on net sales of nasal spray products, less certain deductions,
throughout the term of this agreement, expiring no later than April 2014.
The expenses for the respective periods relating to such agreements amounted to
$1,805,294, $1,421,475, and $1,399,847, for the years ended December 31, 2003,
2002, and 2001, respectively. Amounts accrued for these expenses at December 31,
2003 and 2002 were $915,109 and $603,387, respectively.
Amounts included in accrued royalties and sales commissions in the balance
sheets at December 31, 2003 and 2002, apportioned between related party and
other balances, are as follows:
2003 2002
------------------------
Related party balances $ 456,748 $ 301,695
Other non-related party balances 1,137,709 844,800
------------------------
Total accrued royalties and sales commissions $1,594,457 $1,146,495
------------------------
F-11
NOTE 8 - INCOME TAXES
The provision (benefit) for income taxes, consists of the following:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2003 2002 2001
(Restated-Note 15)
------------ ------------------ ------------
Current:
Federal -- -- --
State -- -- --
----------- ----------- -----------
-- -- --
----------- ----------- -----------
Deferred:
Federal ($ 660,321) ($ 700,798) $ 340,861
State (71,457) 133,544 (24,977)
----------- ----------- -----------
(731,778) ( 567,254) 315,884
----------- ----------- -----------
Valuation allowance 731,778 567,254 (315,884)
----------- ----------- -----------
Total -- -- --
=========== =========== ===========
A reconciliation of the statutory federal income tax expense (benefit) to the
effective tax is as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2003 2002 2001
(Restated-Note 15)
------------ ------------------ ------------
Statutory rate $ 247,834 ($1,744,916) $ 317,600
State taxes net of federal benefit (47,162) 88,139 (17,134)
Permanent differences and other (932,450) 1,089,523 15,418
----------- ----------- -----------
(731,778) (567,254) 315,884
----------- ----------- -----------
Less valuation allowance 731,778 567,254 (315,884)
----------- ----------- -----------
Total -- -- --
=========== =========== ===========
The tax effects of the primary "temporary differences" between values recorded
for assets and liabilities for financial reporting purposes and values utilized
for measurement in accordance with tax laws giving rise to the Company's
deferred tax assets are as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2003 2002 2001
(Restated-Note 15)
------------ ------------------ ------------
Net operating loss carry-forward $ 5,313,829 $ 4,459,068 $ 3,082,051
Consulting costs -- 380,250 305,019
Bad debt expense 331,849 187,992 263,654
Other 381,802 152,788 133,943
Valuation allowance (6,027,480) (5,180,098) (3,784,667)
----------- ----------- -----------
Total -- -- --
=========== =========== ===========
Certain exercises of options and warrants, and restricted stock issued for
services that became unrestricted resulted in reductions to taxes currently
payable and a corresponding increase to additional-paid-in-capital for prior
years. Certain tax benefits for option and warrant exercises totaling $1,871,986
are deferred and will be credited to additional-paid-in-capital when existing
net operating losses are used. The cumulative tax deduction attributable to
options, warrants and restricted stock is $47,520,526, which resulted in the net
operating loss carry-forwards that approximate $13.6 million for federal
purposes, of which $3.5 million will expire in 2019, $4.0 million in 2020, $6.1
million in 2022 and $13.8 million for state purposes, of which $9.7 million will
expire in 2009, $3.0 million in 2010, and $1.1 million in 2012. Until sufficient
taxable income to offset the temporary timing differences attributable to
operations and the tax deductions attributable to option, warrant and stock
activities are assured, a valuation allowance equaling the total deferred tax
asset is being provided.
F-12
NOTE 9 - EARNINGS PER SHARE
Basic earnings per share ("EPS") excludes dilution and is computed by dividing
income available to common stockholders by the weighted - average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that shared in the earnings of the entity. Diluted EPS also
utilizes the treasury stock method which prescribes a theoretical buy back of
shares from the theoretical proceeds of all options and warrants outstanding
during the period. Since there is a large number of options and warrants
outstanding, fluctuations in the actual market price can have a variety of
results for each period presented.
A reconciliation of the applicable numerators and denominators of the income
statement periods presented is as follows (millions, except earnings per share
amounts):
Year Ended Year Ended Year Ended
December 31, 2003 December 31, 2002 December 31, 2001
---------------------------------------------------------------------------------
Income Shares EPS Loss Shares EPS Income Shares EPS
---------------------------------------------------------------------------------
Basic EPS $0.7 11.5 $0.06 ($5.1) 10.9 ($0.47) $0.9 10.7 $0.09
Dilutives:
Options and
Warrants -- 3.4 -- -- -- 0.1
---------------------------------------------------------------------------------
Diluted EPS $0.7 14.9 $0.05 ($5.1) 10.9 ($0.47) $0.9 10.8 $0.09
=================================================================================
Options and warrants outstanding at December 31, 2003, 2002 and 2001 were
4,601,000, 4,262,500 and 4,014,000, respectively, but were not included in the
2002 computation of diluted earnings per share because the effect was
anti-dilutive.
NOTE 10 - STOCK COMPENSATION
Stock options for purchase of the Company's common stock have been granted to
both employees and non-employees. Options are exercisable during a period
determined by the Company, but in no event later than ten years from the date
granted.
On December 2, 1997, the Company's Board of Directors approved a new Stock
Option Plan ("Plan") which was amended in 2001 and provides for the granting of
up to three million shares to employees. Under this Plan, the Company may grant
options to employees, officers or directors of the Company at variable
percentages of the market value of stock at the date of grant. No incentive
stock option shall be exercisable more than ten years after the date of grant or
five years where the individual owns more than ten percent of the total combined
voting power of all classes of stock of the Company. Stockholders approved the
Plan in 1998. A total of 424,000, 477,000 and 400,000 options were granted under
this Plan during the years ended December 31, 2003, 2002 and 2001, respectively.
The Company applies Accounting Principles Board Opinion No. 25 ("APB 25") in
accounting for its grants of options to employees. Under the intrinsic value
method prescribed by APB 25, no compensation expense relating to grants to
employees has been recorded by the Company in periods reported. If compensation
expense for awards made during the years ended December 31, 2003, 2002 and 2001
had been determined under the fair value method of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
the Company's net income and earnings per share would have been reduced to the
pro forma amounts as displayed in Notes to Financial Statements, Note 2 -
Summary of Significant Accounting Policies.
Expense relating to options granted to non-employees has been appropriately
recorded in the periods presented based on either fair values agreed upon with
the grantees or fair values as determined by the Black-Scholes pricing model
dependent upon the circumstances relating to the specific grants.
The Company used the Black-Scholes pricing model to determine the fair value of
stock options granted during the periods presented using the following
assumptions: expected life of the option of 5 years and expected forfeiture rate
of 0%; expected stock price volatility ranging between 67.9% and 120% for the
year ended December 31, 2003, ranging between 108.0% and 119.2% for the year
ended December 31, 2002 and 58.9% for the year ended December 31, 2001; expected
dividend yield of 0% and risk-free interest rate of between 3.37% and 4.5% for
the year ended December 31, 2003, expected dividend yield of 0% and risk-free
interest rate ranging between 4.06% and 4.51% for the year ended December 31,
2002, expected dividend yield of 1.5% and risk-free interest rate of 4.36% for
the year ended December 31, 2001, based on the expected life of the option. The
impact of applying SFAS No. 123 in this pro forma disclosure is not indicative
of the impact on future years' reported net income as SFAS No. 123 does not
apply to stock options
F-13
granted prior to the beginning of fiscal year 1996 and additional stock options
awards are anticipated in future years. All options were immediately vested upon
grant.
A summary of the status of the Company's stock options and warrants granted to
both employees and non-employees as of December 31, 2003, 2002, and 2001 and
changes during the years then ended is presented below:
YEAR ENDED DECEMBER 31, 2003:
Employees Non-Employees Total
------------------------ --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(,000) Price (,000) Price (,000) Price
----------------------------------------------------------------------------------
Options/warrants outstanding
at beginning of period 3,363 $4.45 900 $8.86 4,263 $5.38
Additions/deductions:
Granted 394 8.11 280 9.35 674 8.63
Exercised 16 0.83 35 1.00 51 0.95
Cancelled 255 5.35 30 3.25 285 5.13
----------------------------------------------------------------------------------
Options/warrants outstanding
at end of period 3,486 $4.82 1,115 $9.38 4,601 $5.92
----------------------------------------------------------------------------------
Options/warrants exercisable
at end of period 3,486 1,115 4,601
==================================================================================
Weighted average fair value of
Grants $4.78 $1.63 $3.47
Price range of options/warrants
Exercised $0.81 - $1.26 $0.81 - $1.26 $0.81 - $1.26
Price range of options/warrants
outstanding $0.81 - $10.00 $0.81 - $11.50 $0.81 - $11.50
Price range of options/warrants
exercisable $0.81 - $10.00 $0.81 - $11.50 $0.81 - $11.50
YEAR ENDED DECEMBER 31, 2002:
Employees Non-Employees Total
------------------------ --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(,000) Price (,000) Price (,000) Price
----------------------------------------------------------------------------------
Options/warrants outstanding
at beginning of period 3,009 $4.32 1,005 $6.73 4,014 $4.92
Additions/deductions:
Granted 432 5.26 1,045 8.12 1,477 7.28
Exercised 58 1.68 800 4.72 858 4.51
Cancelled 20 9.84 350 10.00 370 10.00
----------------------------------------------------------------------------------
Options/warrants outstanding
at end of period 3,363 $4.45 900 $8.86 4,263 $5.38
----------------------------------------------------------------------------------
Options/warrants exercisable
at end of period 3,363 900 4,263
==================================================================================
Weighted average fair value of
grants $4.34 $0.84 $1.87
Price range of options/warrants
Exercised $0.81 - $5.13 $1.75 - $6.50 $0.81 - $6.50
Price range of options/warrants
Outstanding $0.81 - $10.00 $0.81 - $11.50 $0.81 - $11.50
Price range of options/warrants
exercisable $0.81 - $10.00 $0.81 - $11.50 $0.81 - $11.50
F-14
YEAR ENDED DECEMBER 31, 2001:
Employees Non-Employees Total
------------------------ --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(,000) Price (,000) Price (,000) Price
----------------------------------------------------------------------------------
Options/warrants outstanding
at beginning of period 2,747 $4.68 1,370 $5.42 4,117 $4.93
Additions/deductions:
Granted 355 1.26 45 1.26 400 1.26
Exercised -- -- -- -- -- --
Cancelled 93 3.35 410 1.75 503 2.05
----------------------------------------------------------------------------------
Options/warrants outstanding
at end of period 3,009 $4.32 1,005 $6.73 4,014 $4.92
----------------------------------------------------------------------------------
Options/warrants exercisable
at end of period 3,009 1,005 4,014
==================================================================================
Weighted average fair value of
grants $0.69 $0.69 $0.69
Price range of options/warrants
Exercised -- -- --
Price range of options/warrants
outstanding $0.81 - $10.00 $0.81 - $10.00 $0.81 - $10.00
Price range of options/warrants
exercisable $0.81 - $10.00 $0.81 - $10.00 $0.81 - $10.00
The following table summarizes information about stock options outstanding and
stock options exercisable, as granted to both employees and non-employees, at
December 31, 2003:
Employees Non-Employees
--------- -------------
Weighted
Average Weighted
Range of Remaining Average Weighted
Exercise Number Contractual Weighted Average Number Remaining Average
Prices Outstanding Life Exercise Price Outstanding Contractual Life Exercise Price
--------------------------------------------------------------------------------------------------------------------------------
$0.81 - $2.50 1,627,500 4.3 $1.62 35,000 7.4 $1.00
$5.13 - $9.68 1,523,500 7.0 $7.09 580,000 1.3 $8.70
$10.00 - $11.50 335,000 3.3 $10.00 500,000 1.8 $10.75
----------- -----------
3,486,000 1,115,000
=========== ===========
Options and warrants outstanding as of December 31, 2003, 2002 and 2001 expire
from March 7, 2004 through October 29, 2013, depending upon the date of grant.
During 1999, the Company implemented a defined contribution plan for its
employees. The Company's contribution to the plan is based on the amount of the
employee plan contributions. The Company's contribution cost to the plan in 2003
and 2002 was approximately $201,000 and $179,000, respectively.
NOTE 11 - TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY
On September 8, 1998, the Company's Board of Directors declared a dividend
distribution of Common Stock Purchase Rights (the "Rights"), thereby creating a
Stockholder Rights Plan (the "Plan"). The dividend was payable to the
stockholders of record on September 25, 1998. Each Right entitles the
stockholder of record to purchase from the Company that number of Common Shares
having a combined market value equal to two times the Rights exercise price
F-15
of $45. The Rights are not exercisable until the distribution date, which will
be the earlier of a public announcement that a person or group of affiliated or
associated persons has acquired 15% or more of the outstanding common shares, or
the announcement of an intention to make a tender or exchange offer resulting in
the ownership of 15% or more of the outstanding common shares by a similarly
constituted party. The dividend has the effect of giving the stockholder a 50%
discount on the share's current market value for exercising such right. In the
event of a cashless exercise of the Right, and the acquirer has acquired less
than a 50% beneficial ownership of the Company, a stockholder may exchange one
Right for one common share of the Company. The Final Expiration of the Plan is
September 25, 2008.
Since the inception of the stock buy-back program in January 1998, the Board has
subsequently increased the authorization on five occasions, for a total
authorized buy-back of 5,000,000 shares or approximately 38% of the previous
shares outstanding. Such shares are reflected as treasury stock and will be
available for general corporate purposes. From the initiation of the plan until
December 31, 2003, 4,159,191 shares have been repurchased at a cost of
$24,042,801 or an average cost of $5.78 per share. No shares were repurchased
during either 2003 or 2002, an amount of 30,000 shares were repurchased during
2001 at a cost to the Company of $30,131.
As a result of the litigation relating to the case against Nutritional Foods
Corporation, in March of 1998, a subsequent order of the Court of Common Pleas
of Bucks County modified the decree of January 23, 1997 to provide for a return
to treasury of 604,928 shares to the Company. As payment for legal services,
118,066 of these shares were reissued with a market value of approximately
$1,145,358. This value, the cost of reacquiring these shares, then became the
value of the net treasury stock ($2.35 per share) represented by 486,862 shares
returned to treasury.
On April 9, 2002, The Quigley Corporation entered into an agreement with
Forrester Financial LLC, ("Forrester") providing for Forrester to act as a
financial consultant to the Company. The consulting agreement commenced as of
March 7, 2002 for a term of twelve months, but may be terminated by the Company
in its sole discretion at any time. As compensation for services to be provided
by Forrester to the Company, the Company granted to Forrester, or its designees,
warrants to purchase up to a total of 1,000,000 shares of the Company's common
stock. The Company's financial statements reflect a $1,125,000 (restated)
non-cash charge in 2002 resulting from the granting and exercising of these
warrants. The warrants have three exercise prices, 500,000 warrants exercisable
at $6.50 per share, which were exercised in May 2002 resulting in cash to the
Company in the amount of $3,250,000, 250,000 warrants exercisable at $8.50 per
share, and 250,000 warrants exercisable at $11.50 per share. The warrants were
initially exercisable until the earlier to occur of (i) March 6, 2003 or (ii)
the termination of the Consulting Agreement.
On December 7, 2002, Forrester commenced an action by a Writ of Summons filed in
the Court of Common Pleas of Bucks County, PA against The Quigley Corporation.
No Complaint was filed detailing the claim of Forrester against The Quigley
Corporation. This action was terminated with prejudice by Forrester as part of
its Amended and Restated Warrant Agreement (the "Amended Agreement) with The
Quigley Corporation on February 2, 2003 whereby certain warrants that were
scheduled to expire on March 7, 2003 were extended to March 7, 2004 (warrants to
purchase 250,000 shares at $8.50; warrants to purchase 250,000 shares at $11.50)
are no longer cancelable by the Company. As an additional part of this
agreement, Forrester was granted warrants to purchase 250,000 shares at any time
until March 7, 2004 at the price of $9.50 a share. As a result of this Amended
Agreement the Company recorded a further non-cash charge of $975,000 (restated)
in the fourth quarter of 2002, amounting to a total expense of $2,100,000,
classified as administrative expense in the Consolidated Statement of
Operations, relating to this warrant agreement in 2002. Additionally, $975,000
is reflected in the Consolidated Balance Sheet at December 31, 2002, which
represented the value of the unexercised warrants and is included in accrued
liabilities. On March 7, 2003 this liability was converted to equity.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Certain operating leases for office and warehouse space maintained by the
Company resulted in rent expense for the years ended December 31, 2003, 2002 and
2001, of $255,078, $236,304 and $218,456, respectively. The Company has
approximate future obligations over the next five years as follows:
Research and Property
Year Development Leases Total
-------------------------------------------------------------
2004 $1,500,000 $212,000 $1,712,000
2005 -- 198,000 198,000
2006 -- 98,000 98,000
2007 -- 57,000 57,000
2008 -- -- --
-------------------------------------------------------------
Total $1,500,000 $565,000 $2,065,000
-------------------------------------------------------------
F-16
Additional advertising and research and development costs are expected to be
incurred during the remainder of 2004.
During 1996, the Company entered into a licensing agreement resulting in the
utilization of the zinc gluconate patent. In return for the acquisition of this
license, the Company issued a total of 240,000 shares of common stock to the
patent holder and attorneys during 1996 and 1997. The related intangible asset,
approximating $490,000 was amortized over the remaining life of the patent that
expired in March 2002. The Company was required to pay a 3% royalty on sales
collected, less certain deductions, to the patent holder throughout the term of
this agreement, which also expired in 2002.
The Company also maintains a separate representation and distribution agreement
relating to the development of the zinc gluconate glycine product formulation.
In return for exclusive distribution rights, the Company must pay the developer
a 3% royalty and a 2% consulting fee based on sales collected, less certain
deductions, throughout the term of this agreement, expiring in 2007.
Additionally, a founder's commission totaling 5%, on sales collected, less
certain deductions, is paid to two of the officers, who are also directors and
stockholders of the Company, and whose agreements expire in 2005.
The expenses for the respective periods relating to such agreements amounted to
$1,805,294, $1,421,475 and $1,399,847, for the twelve months periods ended
December 31, 2003, 2002 and 2001, respectively. Amounts accrued for these
expenses at December 31, 2003 and December 31, 2002 were $915,109 and $603,387,
respectively.
The Company has an agreement with the former owners of the Utah based direct
marketing and selling company, whereby they receive payments, currently totaling
5% of net sales collected, for use of product formulations, consulting,
confidentiality and non-compete agreements. Amounts paid or payable under such
agreement during the twelve months periods ended December 31, 2003, 2002 and
2001 were $880,091, $678,454 and $448,647 respectively. Amounts payable under
such agreement at December 31, 2003 and December 31, 2002 were $68,388 and
$63,866, respectively.
In August 2003, the Company entered into a licensing agreement with a patent
holder relating to utilizing a nasal spray product in the treatment of symptoms
of the common cold. The Company agreed to pay the patent holder a two percent
royalty on net sales of nasal spray products, less certain deductions,
throughout the term of this agreement, expiring no later than April 2014.
Amounts paid or payable under such agreement during the twelve month period
ended December 31, 2003 were $26,613, and zero in the 2002 and 2001 comparable
periods. An amount of $1,613 relating to this agreement was accrued or payable
at December 31, 2003.
TESAURO AND ELEY
In September, 2000, the Company was sued by two individuals (Jason Tesauro and
Elizabeth Eley, both residents of Georgia), on behalf of a "nationwide class" of
"similarly situated individuals," in the Court of Common Pleas of Philadelphia
County, Pennsylvania. The Complaint alleges that the Plaintiffs purchased
certain Cold-Eeze(R) products between August, 1996, and November, 1999, based
upon cable television, radio and internet advertisements which allegedly
misrepresented the qualities and benefits of the Company's products. The
Complaint requests an unspecified amount of damages for violations of
Pennsylvania's consumer protection law, breach of warranty and unjust
enrichment, as well as a judicial determination that the action be maintained as
a class action.
In October, 2000, the Company filed Preliminary Objections to the Complaint
seeking dismissal of the action. The Court sustained certain objections thereby
narrowing Plaintiffs' Complaint. In May, 2001, Plaintiffs filed a Motion to
Certify the Alleged Class. The Company opposed the Motion. In November, 2001,
the Court held a hearing on Plaintiffs' Motion for Class Certification. In
January, 2002, the Court denied in part and granted in part the Plaintiffs'
Motion. The Court denied Plaintiffs' Motion to Certify a Class based on
Plaintiffs' claim under the Pennsylvania Consumer Protection Law; however, the
Court certified the class based on Plaintiffs' breach of warranty and unjust
enrichment claims.
Discovery has been completed and trial has been scheduled to commence in May
2004. The Company is vigorously defending this lawsuit and believes that the
action lacks merit. Based upon the information the Company has at this time, it
believes the action will not have a material impact to the Company. However, at
this time no prediction as to the outcome can be made.
GOLDBLUM AND WAYNE
A Special Meeting of the Quigley stockholders was held on October 15, 1999, at
which a majority of the shares entitled to vote adopted a Corrective Action
Proposal (initially reported in the Company's Form 10-Q for the quarter ending
June 30, 1999) to ratify actions previously taken by the Company relating to the
1990 1 for 2.74 reverse split, the 1995 1 for 10 reverse split (the "Reverse
Splits") and the 1997 1 for 2 forward split (the "Forward Split"). Pursuant to
the October 15, 1999 Special Meeting, the Company authorized the filing of a
declaratory judgment action in Nevada to determine the effectiveness of the
Corrective Action.
F-17
In August 2000, the District Court of Clark County, Nevada, held that it had
jurisdiction to decide the Company's declaratory judgment action filed in April,
2000, against two putative shareholders (Thomas Goldblum and Alan Wayne), in
which the Company seeks a judicial declaration that, based on stockholder
approval of the Corrective Action Proposal, the Reverse Splits and Forward Split
satisfy and/or comply with Nevada law and that the capitalization of Quigley
evidenced by the issued and outstanding shares of common stock and common stock
warrants is as reflected on Quigley's stock transfer ledger on September 10,
1999, the record date of the Special Meeting. The District Court of Clark County
held a hearing on this matter on March 19, 2002 and ruled in favor of The
Quigley Corporation. A final judgment has been entered of record by the Court on
June 21, 2002. The period for appeal of this order to the Nevada Supreme Court
has expired.
An underlying claim filed by Goldblum and Wayne in the Court of Common Pleas of
Montgomery County, Pennsylvania on March 17, 1996 alleging that the plaintiffs
became owners of 500,000 shares each of the Company's common stock in or about
1990 and requested damages in excess of $100,000 for breach of contract and
conversion.
The Company believed that the plaintiffs' claims were without merit, barred by
the applicable statutes of limitations, and that the plaintiffs were, in any
event, limited to claims for approximately 36,000 shares.
The Company vigorously defended this lawsuit through trial during January 2004,
when a jury returned a unanimous verdict in favor of the Company. Thereafter,
the plaintiffs filed a motion for post-trial relief as a first step toward an
appeal, which the Company regards as without merit and will oppose. Although the
Company regards any effort by plaintiffs to pursue an appeal as lacking merit
and based upon the information the Company has at this time, it believes the
action will not have a material impact to the Company. However, at this time no
prediction as to the outcome of this appeal can be made.
LITIGATION - FORMER EMPLOYEE
On April 12, 2002, the Company commenced a complaint in Equity in the Court of
Common Pleas of Bucks County, PA against the former President of Darius
International Inc., its wholly owned subsidiary, following termination of such
President. The allegations in the complaint include, but are not limited to, an
alleged breach of fiduciary duty owed to the Company. The Company is seeking
both injunctive and monetary relief. On or about May 1, 2002, the defendant
filed a counterclaim requesting that the Court declare him the lawful owner of
55,000 stock options, unspecified damages relating to an alleged breach of an
oral contract and for commissions allegedly owed. In addition, the Defendant
requests the return of certain intellectual property used to commence and
continue Darius' operations.
The Corporation believes Defendant's claims are without merit, is vigorously
defending the counterclaims and is prosecuting its action on its complaint.
Based upon the information the Company has at this time, it believes the action
will not have a material impact to the Company. However, at this time no
prediction as to the outcome can be made.
NOTE 13 - TERMINATED LEGAL PROCEEDINGS
MIKE FORAN VS. INNERLIGHT, INC.,
DARIUS INTERNATIONAL, INC., AND
THE QUIGLEY CORPORATION
On August 1, 2003, an action was filed with the American Arbitration Association
by Mike Foran against Innerlight Inc., a wholly owned subsidiary of Darius
International Inc., which is a wholly owned subsidiary of the Company. After a
hearing before the United States District Court for the District of Utah,
Central Division, Foran withdrew his complaint against The Quigley Corporation
and the matter was remanded to arbitration. Discovery began on December 1, 2003
and was completed on December 22, 2003. Based on the discovery of all of
defendants' documents and defendants' depositions and after interviewing
Innerlight Inc.'s witnesses, the Company upon advice of counsel settled the
action for $290,000 and reinstated Foran as an independent representative.
Negotiations leading to settlement were completed by December 31, 2003 and a
Settlement Agreement was entered effective January 18, 2004. As part of the
Settlement Agreement, Mr. Foran completely released Innerlight, Inc. and The
Quigley Corporation from any claim arising out of the action instituted by him
on August 1, 2003 and also any claim he may have asserted against Innerlight
Inc. or The Quigley Corporation.
F-18
INTERVENTION, INC.
An action was filed by Intervention, Inc. on July 2, 2002 in Contra Costa County
Superior Court under the California Unfair Competition Law, Business and
Professions Code, Section 17200. The Complaint claims that COLD-EEZE(R) does not
contain ionic zinc and therefore does not have the unique quality the Company
asserts for it. The Complaint purports to attack The Cleveland Clinic Study
titled Zinc Gluconate Lozenges for Treating the Common Cold and the Dartmouth
Study, Zinc Gluconate and The Common Cold, A Controlled Clinical Study. The
plaintiff claims that the Dartmouth Study is not double-blind and is not
randomized. The plaintiff also claims that The Cleveland Clinic Study is untrue
and deceptive because it did not conclude that patients "starting treatments"
with zinc had a 42% reduction in duration of the common cold and, also, because
the 42% reduction in common cold duration is not a reference to average of cold
duration but rather is a reference to the reduction in median duration. There is
also a claim by the plaintiff that there is an implied claim that the results in
the studies have been confirmed by repetition which plaintiff contests.
On the 3rd day of July, 2003, the Contra Costa County Superior Court upon Motion
of The Quigley Corporation issued a Summary Judgment in favor of The Quigley
Corporation. On October 24, 2003, Intervention Inc. filed an appeal to the
California Court of Appeals from the Summary Judgment issued in favor of The
Quigley Corporation. In March 2004, the appeal was withdrawn, with prejudice.
NOTE 14 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has sales brokerage and other
arrangements with entities whose major stockholders are also stockholders of The
Quigley Corporation, or are related to a major stockholder, officer and director
of the Company. Commissions and other items expensed under such arrangements for
the twelve months periods ended December 31, 2003, 2002 and 2001 were zero and
$36,979 and $160,034, and are included in sales and marketing, and
administration expense classifications in the Consolidated Statements of
Operations. Amounts payable under such agreements at December 31, 2003 and
December 31, 2002 were zero.
An agreement between the Company and the founders Mr. Guy J. Quigley and Mr.
Charles A. Phillips, both officers and stockholders of the Company, was entered
into on June 1, 1995. The founders, in consideration of the acquisition of the
Cold-Eeze(R) cold therapy product, are to share a total commission of five
percent (5%), on sales collected, less certain deductions until the termination
of this agreement on May 31, 2005. For the years ended December 31, 2003, 2002
and 2001, amounts of $889,340, $692,766 and $651,614, respectively, were paid or
payable under such founder's commission agreements. Amounts payable under such
agreements at December 31, 2003 and 2002 were $456,748 and $301,695,
respectively.
The Company is in the process of acquiring licenses in certain countries through
related party entities whose stockholders include Mr. Gary Quigley, a relative
of the Company's Chief Executive Officer. Fees amounting to $369,000, $309,493
and $281,250 have been paid to a related entity during 2003, 2002 and 2001,
respectively to assist with the regulatory aspects of obtaining such licenses.
F-19
NOTE 15 - RESTATEMENT
During 2003, the Company changed its accounting for certain warrants issued in
2002 in exchange for services. Due to a cancellation clause in the warrant
agreement, the warrants should have been treated as contingently issuable and
subject to variable accounting, rather than the fixed accounting initially
applied. The 2002 consolidated financial statements have been restated to
reflect the accounting for these warrants. The restatement had no effect on the
net loss for the year ended December 31, 2002. The effects of this restatement
are summarized below.
As Previously
Reported As Restated
---------------------------------
BALANCE SHEET
Accrued consulting $ 1,673,000 $ 975,000
Total current liabilities 6,512,139 5,814,139
Additional paid-in-capital 32,592,222 33,290,222
Total stockholders' equity 18,422,817 19,120,817
NOTE 16 - QUARTERLY INFORMATION (UNAUDITED)
The Company has restated its 2002 consolidated financial statements in order to
properly reflect the accounting for certain warrants issued in 2002.
Quarter Ended
----------------------------------------------------------------
March 31, June 30, September 30, December 31,
----------------------------------------------------------------
2003
Net Sales $8,191,092 $7,004,580 $9,912,227 $16,391,264
Gross Profit 3,694,110 2,765,589 4,487,847 9,063,854
Administration 2,441,720 2,311,887 2,046,915 3,043,324
Operating expenses 4,616,219 3,849,747 4,372,646 6,537,250
Income (loss) from operations (922,109) (1,084,158) 115,201 2,526,604
Income (loss) from continuing operations (892,212) (1,055,141) 134,129 2,542,147
Net Income (loss) ($946,561) ($1,055,141) $134,129 $2,542,147
Basic EPS
Income (loss) from continuing operations ($0.08) ($0.09) $0.01 $0.22
Net Income (loss) ($0.08) ($0.09) $0.01 $0.22
Diluted EPS
Income (loss) from continuing operations ($0.08) ($0.09) $0.01 $0.17
Net Income (loss) ($0.08) ($0.09) $0.01 $0.17
Quarter Ended Quarter Ended
March 31 June 30
------------------------------ -----------------------------
As Previously As Previously
2002 Reported As Restated Reported As Restated
-----------------------------------------------------------------
Net Sales $4,984,532 $4,984,532 $5,053,622 $5,053,622
Gross Profit 2,438,036 2,438,036 1,627,890 1,627,890
Administration 2,514,847 3,969,847 1,735,878 1,390,878
Operating expenses 4,212,159 5,667,159 2,999,511 2,654,511
Income (loss) from operations (1,774,123) (3,229,123) (1,371,622) (1,026,622)
Income (loss) from continuing operations (1,735,759) (3,190,759) (1,333,979) (988,979)
Net Income (loss) ($1,700,768) ($3,155,768) ($1,450,220) (1,105,220)
Basic EPS
Income (loss) from continuing operations ($0.16) ($0.30) ($0.12) ($0.10)
Net Income (loss) ($0.16) ($0.30) ($0.13) ($0.10)
Diluted EPS
Income (loss) from continuing operations ($0.16) ($0.30) ($0.12) ($0.10)
Net Income (loss) ($0.16) ($0.30) ($0.13) ($0.10)
F-20
Quarter Ended Quarter Ended
September 30 December 31
------------------------------ ------------------------------
As Previously As Previously
2002 Reported As Restated Reported As Restated
-----------------------------------------------------------------
Net Sales $7,834,325 $7,834,325 $11,399,301 $11,399,301
Gross Profit 3,111,062 3,111,062 5,034,822 5,034,822
Administration 1,987,058 1,367,058 3,653,978 3,163,978
Operating expenses 3,441,779 2,821,779 6,842,777 6,352,777
Income (loss) from operations (330,717) 289,283 (1,807,954) (1,317,954)
Income (loss) from continuing operations (288,853) 331,147 (1,773,512) (1,283,512)
Net Income (loss) ($500,395) $119,605 ($2,803,075) ($2,313,075)
Basic EPS
Income (loss) from continuing operations ($0.03) $0.03 ($0.16) ($0.12)
Net Income (loss) ($0.05) $0.01 ($0.26) ($0.21)
Diluted EPS
Income (loss) from continuing operations ($0.03) 0.02 ($0.16) ($0.12)
Net Income (loss) ($0.05) 0.01 ($0.26) ($0.21)
In December 2002, the Board of Directors of the Company approved a plan to sell
Caribbean Pacific Natural Products, Inc. On January 22, 2003, the Company
completed the sale of its 60% equity interest in Caribbean Pacific Natural
Products, Inc. to Suncoast Naturals, Inc. by exchanging its 60% controlling
interest in Caribbean Pacific Natural Products, Inc. for 750,000 Shares of
Common Stock and 100,000 Shares of Redeemable Preferred Stock of Suncoast
Naturals, Inc. This transaction reflects the operation results and impairment
losses of Caribbean Pacific Natural Products, Inc. as discontinued operations of
the Company for all periods presented.
FOURTH QUARTER SEGMENT DATA (UNAUDITED)
--------------------------------------------------------------------------------------------------------------------------
As of and for the three months Health and Ethical
ended December 31, 2003 Cold Remedy Wellness Pharmaceutical Other Total
--------------------------------------------------------------------------------------------------------------------------
Revenues
Customers $11,040,653 $5,350,611 -- -- $16,391,264
Inter-segment -- -- -- -- --
Segment operating profit (loss) 3,239,962 54,325 ($767,681) -- 2,526,606
Depreciation 83,349 41,504 -- -- 124,853
Capital expenditures 98,476 46,432 -- -- 144,908
Total assets $24,892,338 $3,881,970 -- ($2,504,549) $26,269,759
--------------------------------------------------------------------------------------------------------------------------
As of and for the three months
ended December 31, 2002 Health and Ethical
(Restated Note-15) Cold Remedy Wellness Pharmaceutical Other Total
--------------------------------------------------------------------------------------------------------------------------
Revenues
Customers $6,782,664 $4,616,637 -- -- $11,399,301
Inter-segment -- -- -- -- --
Segment operating profit (loss) (1,020,196) 172,362 ($485,590) $15,470 (1,317,954)
Depreciation 72,091 40,811 -- -- 112,902
Capital expenditures 119,432 28,921 -- -- 148,353
Total assets $26,223,476 $1,401,867 -- ($2,690,387) $24,934,956
--------------------------------------------------------------------------------------------------------------------------
As of and for the three months Health and Ethical
ended December 31, 2001 Cold Remedy Wellness Pharmaceutical Other Total
--------------------------------------------------------------------------------------------------------------------------
Revenues
Customers $6,536,445 $1,763,209 -- -- $8,299,654
Inter-segment -- -- -- -- --
Segment operating profit (loss) 1,893,169 (354,104) ($161,182) -- 1,377,883
Depreciation 67,485 20,477 -- -- 87,962
Capital expenditures 21,512 34,432 -- -- 55,944
Total assets $26,726,729 $826,946 -- ($2,797,880) $24,755,795
F-21
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of The Quigley Corporation is responsible for the information and
representations contained in this report. Management believes that the financial
statements have been prepared in conformity with generally accepted accounting
principles and that the other information in this annual report is consistent
with those statements. In preparing the financial statements, management is
required to include amounts based on estimates and judgments, which it believes
are reasonable under the circumstances.
In fulfilling its responsibilities for the integrity of the data presented and
to safeguard the Company's assets, management employs a system of internal
accounting controls designed to provide reasonable assurance, at appropriate
cost, that the Company's assets are protected and that transactions are
appropriately authorized, recorded, and summarized. This system of control is
supported by the selection of qualified personnel, by organizational assignments
that provide appropriate delegation of authority and division of
responsibilities, and by the dissemination of policies and procedures.
/s/ Guy J. Quigley March 26, 2004
-------------------------------------------------------- --------------
Guy J. Quigley, Chairman of the Board, Date
(President, Chief Executive Officer)
/s/ George J. Longo March 26, 2004
-------------------------------------------------------- --------------
George J. Longo, Vice President, Chief Financial Officer Date
(Principal Financial and Accounting Officer)
F-22
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and
Stockholders of The Quigley Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity, and cash flows
present fairly, in all material respects, the financial position of The Quigley
Corporation and its subsidiaries at December 31, 2003 and 2002, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. 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 of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As further discussed in Note 15, the Company's 2002 consolidated financial
statements have been restated to revise the accounting for certain warrants.
/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 26, 2004
F-23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Based on their evaluation, as of the end of the period covered by this report,
the Company's Chief Executive Officer and Chief Financial Officer have concluded
the Company's disclosure controls and procedures (as defined in Rules 13a-14 and
15d-14 under the Securities Exchange Act of 1934) are effective. There have been
no significant changes in internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required under this item is incorporated by reference to the
Company's Proxy Statement for the 2004 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated by reference to the
Company's Proxy Statement for the 2004 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated by reference to the
Company's Proxy Statement for the 2004 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated by reference to the
Company's Proxy Statement for the 2004 Annual Meeting of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required under this item is incorporated by reference to the
Company's Proxy Statement for the 2004 Annual Meeting of Stockholders.
-22-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Articles of Incorporation of the Company (as amended),
(incorporated by reference to Exhibit 3.1 of Form 10-KSB/A
dated April 4, 1997)
3.2 By-laws of the Company as currently in effect (incorporated
by reference to Exhibit 3.2 of the Company's Registration
Statement on Form 10-KSB/A filed with the Commission on
April 4, 1997 and Exhibit 99.3 of the Company's Current
Report on Form 8-K filed with the Commission on September
21, 1998)
4.1 Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 of Form 10-KSB/A dated April 4, 1997)
10.1 1997 Stock Option Plan (incorporated by reference to Exhibit
10.1 of the Company's Registration Statement on Form S-8
(File No. 333-61313) filed with the Commission on August 13,
1998)
10.2 Exclusive Representation and Distribution Agreement dated
May 4, 1992 between the Company and Godfrey Science and
Design, Inc. et al (incorporated by reference to Exhibit
10.2 Form 10-KSB/A dated April 4, 1997)
10.3 Employment Agreement dated June 1, 1995 between the Company
and Guy J. Quigley (incorporated by reference to Exhibit
10.3 of Form 10-KSB/A dated April 4, 1997)
10.4 Employment Agreement dated June 1, 1995 between the Company
and Charles A. Phillips (incorporated by reference to
Exhibit 10.4 of Form 10-KSB/A dated April 4, 1997)
10.5 Exclusive Master Broker Wholesale Distributor and
Non-Exclusive National Chain Broker Agreement dated July 22,
1994 between the Company and Russell Mitchell (incorporated
by reference to Exhibit 10.7 of Form 10-KSB/A dated April 4,
1997)
10.6 Licensing Agreement dated August 24, 1996 between the
Company, George A. Eby III and George Eby Research
(incorporated by reference to Exhibit 10.6 of Form 10-KSB/A
dated April 4, 1997)
10.8 United States Exclusive Supply Agreement dated March 17,
1997 (Portions of this exhibit are omitted and were filed
separately with the Securities Exchange Commission pursuant
to the Company's application requesting confidential
treatment in accordance with Rule 406 of Regulation C as
promulgated under the Securities Act of 1933, incorporated
by reference to Exhibit 10.5 of Form SB-2 dated September
29, 1997). See exhibit 10.18.
10.9 Consulting Agreement dated May 4, 1992 between the Company
and Godfrey Science and Design, Inc. et al. (incorporated by
reference to Exhibit 10.5 of Form 10-KSB/A dated April 4,
1997)
10.10 Employment Agreement dated November 5, 1996, as amended,
between the Company and George J. Longo (the Employment
Agreement is incorporated by reference to Exhibit 10.10 of
Form 10-KSB dated March 30, 1998 and the amendments are
attached hereto)
10.11 Employment Agreement dated January 1, 1997, as amended,
between the Company and Eric H. Kaytes (the Employment
Agreement is incorporated by reference to Exhibit 10.11 of
Form 10-KSB dated March 30, 1998 and amendments are attached
hereto)
10.12 Rights Agreement dated September 15, 1998 between the
Company and American Stock Transfer and Trust Company
(incorporated by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A filed with the Commission
on September 18, 1998)
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10.13 Consulting agreement dated March 7, 2002 between the Company
and Forrester Financial LLC (incorporated by reference from
Exhibit 99.1 to Form 8-K filed on April 11, 2002.)
10.14 Warrant agreement dated March 7, 2002 between the Company
and Forrester Financial LLC (incorporated by reference from
Exhibit 99.2 to Form 8-K filed on April 11, 2002.)
10.15 Agreement dated February 2, 2003 between the Company and
Forrester Financial LLC (incorporated by reference from
Exhibit 99.3 to Form 8-K filed on February 18, 2003.)
10.16 Amended and Restated Warrant Agreement dated February 2,
2003 between the Company and Forrester Financial LLC
(incorporated by reference from Exhibit 99.4 to Form 8-K
filed on February 18, 2003.)
10.17 Share agreement effective as of December 31, 2002 between
the Company and Suncoast Naturals, Inc. is incorporated by
reference to Exhibit 2.1 of Form 8-K filed on February 6,
2003.
10.18* Third Amendment to Untied States Exclusive Supply Agreement.
23.1* Consent of PricewaterhouseCoopers LLP, Independent
Accountants, dated March 26, 2004.
31.1* Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of the President and Chief Executive Officer
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of the Chief Financial Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Filed herewith
(b) Reports on Form 8-K
The Company filed a report on 8-K, Item 5. On January 22, 2003, the
Board appointed Stephen W. Wouch to fill a vacancy on the Board. Mr.
Wouch is a certified public accountant with 19 years of public
accounting experience as a partner and is the Managing Partner of
Wouch, Maloney & Co., LLP, Certified Public Accountants.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
THE QUIGLEY CORPORATION
/s/ Guy J. Quigley March 30, 2004
------------------------------------------------- --------------
Guy J. Quigley, Chairman of the Board, President, Date
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Company in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Guy J. Quigley Chairman of the Board, President, March 30, 2004
Guy J. Quigley Chief Executive Officer and Director
/s/ Charles A. Phillips Executive Vice President, Chief Operating March 30, 2004
Charles A. Phillips Officer and Director
/s/ George J. Longo Vice President, Chief Financial March 30, 2004
George J. Longo Officer and Director (Principal
Financial and Accounting Officer)
/s/ Jacqueline F. Lewis Director March 30, 2004
Jacqueline F. Lewis
/s/ Rounsevelle W. Schaum Director March 30, 2004
Rounsevelle W. Schaum
/s/ Stephen W. Wouch, Director March 30, 2004
Stephen W. Wouch,
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