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, 1999 Commission File No. 01-21617 THE QUIGLEY CORPORATION ----------------------- (Exact name of registrant as specified in its charter) Nevada 23-2577138 ------ ---------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification Number) (MAILING ADDRESS: PO Box 1349, Doylestown, PA 18901.) Kells Building, 621 Shady Retreat Road, Doylestown, PA 18901 ------------------------------------------------------------ (Address of principle executive offices) (Zip Code) (215) 345-0919 -------------- (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 there is no disclosure of delinquent filers in response to Item 405 of Regulation S-X contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X] As of March 15, 2000, the aggregate market value of the voting stock (all of one class $.0005 par value Common Stock) held by non-affiliates of the Registrant was $21,009,954 based upon the closing price of the Common Stock on that date as reported on the NASDAQ National Market. APPLICABLE ONLY TO CORPORATE REGISTRANTS 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 15, 2000: 10,349,731. 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 to the Registrant's Proxy Statement for the 2000 Annual Meeting of Stockholders. THE EXHIBIT INDEX IS LOCATED ON PAGES 16-17. Page 1 of 20 TABLE OF CONTENTS Part I Page ---- Item 1. Description of Business 3 - 6 2. Description of Properties 6 3. Legal Proceedings 6 - 7 4. Submission of Matters to a Vote by Security Holders 7 Part II 5. Market for the Company's Common Equity and Related Stockholder Matters 7 - 8 6. Selected Financial Data 9 7. Management's Discussion and Analysis of Results of Operations and Financial Condition 10 - 13 8. Financial Statements 14 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure 15 Part III 10. Directors and Executive Officers of the Registrant 15 11. Executive Compensation 15 12. Security Ownership of Certain Beneficial Owners and Management 15 13. Certain Relationships and Related Transactions 15 Part IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 16 - 20 -2- Forward-Looking Statements - -------------------------- In addition to historical information, this Annual 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. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission including Quarterly Reports on Form 10-Q to be filed by the Company in fiscal year 2000. PART 1 ------ ITEM 1. DESCRIPTION OF BUSINESS ----------------------- Business Development - -------------------- The Quigley Corporation (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 current primary business is the manufacture and distribution of the Cold-Eeze(R) and Bodymate(TM) products to the consumer through the over-the-counter market place. Cold-Eeze(R) is a zinc gluconate glycine lozenge 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. Bodymate(TM) is a dietary supplement and weight management program competing in the nutrition and weight management marketplace. Description of Business Operations - ---------------------------------- Since its inception, the Company has conducted research and development into various types of health-related food supplements and homeopathic cold remedies. Prior to the three months ended December 31, 1996, the Company had minimal revenues from operations and as a result suffered continued losses due to research and development and operations expenses. However, the Company's product line has been developed, and during the year ended December 31, 1997, significant revenues materialized from its national marketing program and increased public awareness of the Cold-Eeze(R) lozenge product. The Company's initial business was the marketing and distribution of a line of nutritious health supplements (hereinafter "Nutri-Bars"). Beginning in 1995, the Company minimized its marketing of the Nutri-Bars and focused its efforts on the development and marketing of the Company's patented Cold-Eeze(R) zinc gluconate glycine cold relief lozenge product. Since June 1996, the Company has concentrated its business operations on the manufacturing, marketing and development of its proprietary Cold-Eeze(R) and Cold-Eezer Plus cold-remedy lozenge products and on development of various product extensions. The Company's lozenge 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. By the end of 1998, Bodymate(TM), a new product line, was launched to enter the nutrition and weight management program industry. -3- Products - -------- Cold-Eeze(R), a zinc gluconate glycine formulation (ZIGG(TM)), is sold in lozenge, bubble gum and sugar-free tablet forms. 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 pending in Japan. This product is presently being marketed by the Company and also through independent brokers and marketers in the United States under the trade names Cold-Eeze(R), Cold-Eeze(R) Sugar Free, and Cold-Eeze(R) Bubble Gum and in Canada under the trade name Zigg-Eeze(TM). In 1996, the Company also acquired an exclusive license to a zinc gluconate use patent, thereby assuring the Company exclusivity in the manufacturing and marketing of zinc gluconate glycine lozenge formulated cold relief products. Under a Food and Drug Administration ("FDA") approved Investigational New Drug Application, filed by Dartmouth College, a randomized double-blind placebo-controlled study, conducted at Dartmouth College 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. 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 pleasant-tasting 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. At the very end of 1998, the first product of the Bodymate(TM) line was launched in a test market to enter the nutrition and weight management industry. The unique proprietary delivery system and naturalness of this product, with the main ingredients of Garcinia Cambogia and chromium, offers instant satisfaction and gratification to those attempting to lose weight. It is believed that the ingredients in this product may block an enzyme necessary for the formation of fats from carbohydrates, and affects the appetite to bring about a feeling of fullness. Patents, Trademarks, Royalty and Commission Agreements - ------------------------------------------------------ The Company currently owns no patents. However, the Company 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) No. 4 758 439 (July 19, 1988) Germany: No. 3,587,766 (March 2, 1994) France & Italy: No. EP 0 183 840 B1 (March 2, 1994) Sweden: No. 0 183 840 (March 2, 1994) Canada: No. 1 243 952 (November 1, 1988) Great Britain: No. 2 179 536 (December 21, 1988) Japan: Pending 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. -4- 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, the Company pays a royalty fee to the patent holder of three percent (3%) on sales collected, less certain deductions. During 1997, the Company instituted 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. An agreement between the Company and the founders was entered into on June 1, 1995. The founders, 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 said agreement on May 31, 2005. Product Distribution and Customers - ---------------------------------- The Company has several Broker, Distributor and Representative Agreements, both Nationally and Internationally, which are sales performance-based. Additionally, prior to 1998, the Company issued incentive common stock purchase options to its Brokers, Distributors and Representatives. The Cold-Eeze(R) lozenge products are distributed through numerous independent and chain drug and discount stores throughout the United States, including the Walgreen Company, Bindley-Western Drug Company, Revco, Albertsons, CVS, Rite-Aid, Eckerd Drug Company, Phar-Mor Inc., Wal-Mart, Target, The Kroger Company, Safeway Inc., SAM'S Club, BJ's Wholesale Club, Costco Wholesale, Drug Emporium, K-Mart Corporation, and wholesale distributors including McKesson Drug Company, Bergen Brunswig Drug Company, US Health Distributors, and AmeriSource. 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 represent 39%, 38% and 68% of sales revenue for the years ended December 31, 1999, 1998 and 1997, respectively. Research and Development - ------------------------ The Company's research and development costs for the years ended December 31, 1999, 1998 and 1997, were $297,650 $256,492, and $79,784, 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 extensions derivatives for a family of products. 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 our future results of operations could be materially affected by the future costs of compliance, we believe that the future costs will not have a material adverse effect on our financial position or on our competitive position. -5- Competition - ----------- The Company competes with other suppliers of cold remedy, nutrition and weight management 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. Bodymate(TM) at this time, has the same competition challenges to gain acceptance by the consumer. 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, 1999 the Company had 15 full-time employees, 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 three separate suppliers to produce Cold-Eeze(R) in lozenge, bubble gum, and sugar-free tablet form. The Cold-Eeze(R) lozenge and Bodymate(TM) products are manufactured by a third party manufacturer that produces exclusively for 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 with the exception of bubble gum, which cannot be duplicated. 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 products are 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. ITEM 2. DESCRIPTION OF PROPERTY ----------------------- During November 1999 the Company moved to its new executive office building at 621 Shady Retreat Road, Doylestown. This property, with an area of approximately 13,000 square feet, was purchased in November 1998 and refurbished during 1999. The total cost of acquisition and refurbishment to date has been approximately $1.6 million. The Company occupies warehouse space in Las Vegas, Nevada. This Nevada location has a three-year lease that expires in July 2000. The Company also stores its product in three additional warehouses in Pennsylvania with storage charges based upon the quantities of product being stored. The monthly aggregate lease payments are $2,129, the charge being reduced over prior years due to the discontinuance of the New Britain warehouse lease and the relocation from the leased Landmark Building to the Company-owned executive offices at Shady Retreat Road. The Company believes that its existing warehousing facilities are adequate. ITEM 3. LEGAL PROCEEDINGS ----------------- Goldblum and Wayne In March, 1997, the Company was sued by two individuals (Thomas Goldblum and Alan Wayne) in the Court of Common Pleas of Montgomery County, Pennsylvania. The complaint alleges that the Plaintiffs became the owners of 500,000 shares each of the Company's Common Stock in or about 1990, and requests damages in excess of $100,000 for breach of contract and conversion. During the second quarter of 1999, the Company was made aware that the Plaintiffs took the position that the Company's 1990 pre-public 1 for 2.74 reverse split and 1995 1 for 10 reverse split did not apply to the shares claimed by them. The Company is vigorously defending this lawsuit and has denied any liability to the Plaintiffs because they did not perform agreed upon services as a condition to the receipt of the shares from the Company. The Company also believes that the Plaintiffs' claims are barred by the applicable statutes of limitations, and that the Plaintiffs' claims are, in any event, limited to claims for approximately 36,000 shares each. Although the Company believes the Plaintiffs claim to be without merit, the case is still in the discovery stages and no prediction can be made as to its outcome. -6- Marjorie Durst In October 1999, the Company reached a settlement in a lawsuit by an individual named Marjorie Durst that resolved all matters between the Plaintiff and the Company. This legal proceeding was previously reported in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. The resolution of this dispute is not material to the Company's financial position, results of operations or liquidity. In addition to the foregoing litigation, the Company is subject to legal proceedings and claims which have arisen in the ordinary course of its business. Although there can be no assurance as to the ultimate disposition of these matters, it is the opinion of the Company's management based upon the information available at this time, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the financial position, results of operations or cash flows of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- A Special Meeting of Stockholders of the Company was held on October 15, 1999 with 10,337,820 shares eligible to vote. The presence of a quorum was reached and the following proposal was approved by the stockholders: To (a) ratify all actions previously taken by officers, directors and agents of the Company relating to: (i) the 1 for 2.74 reverse split of shares of its Common Stock effected by the Company between June 1990 and August 1991 (the "1990 Reverse Split"), (ii) the 1 for 10 reverse split of shares of its Common Stock effected by the Company on January 11, 1996 (the "1996 Reverse Split"), and (iii) the 2 for 1 forward split of shares of its Common Stock effected by the Company on January 23, 1997 (the "1997 Forward Split"); and (b) approve an amendment to Article IV of the Company's Articles of Incorporation required to, among other things, complete and memorialize the 1990 Reverse Split, the 1996 Reverse Split and the 1997 Forward Split. The votes were cast as follows: For 5,572,850 Against 106,529 Abstentions 54,207 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 sale prices for the Company's common stock. Common Stock ------------ 1999 1998 ----------- ----------- ------------ -------------- Quarter Ended High Low High Low March 31 $6.875 $4.906 $16.438 $9.500 June 30 $5.250 $4.688 $13.250 $6.250 September 30 $5.938 $2.906 $9.750 $6.625 December 31 $3.969 $1.563 $7.750 $4.938 -7- From July 1997 to May 1998, the Company's securities were traded on the NASDAQ SmallCap Market. Since May 1998, 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, 1999, there were approximately 368 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 would necessarily exceed the number of record owners indicated above. Dividends - --------- The Company has never declared, nor has it paid, any cash dividends on its Common Stock. At this time the Company intends to retain its earnings to finance future growth, and as a result does not anticipate paying any cash dividends on its Common Stock in the immediate future. Warrants and Options - -------------------- In addition to the Company's aforesaid outstanding Common Stock, there are, as of December 31, 1999, issued and outstanding Common Stock Purchase Warrants and Options which are exercisable at the price-per-share stated and expire on the date indicated, as follows: Description Number Exercise Price Expiration Date ----------- -------------- ----------------- CLASS "D" 590,000 $0.500 December 14, 2000 CLASS "E" 1,150,000 $1.750 June 30, 2001 CLASS "F" 225,000 $2.500 November 4, 2001 CLASS "G" 945,000 $10.000 May 5, 2002 Warrants 409,900 $1.750 September 30, 2001 Option Plan 550,500 $9.680 December 1, 2007 Option Plan 409,000 $5.125 April 6, 2009 -8- ITEM 6. SELECTED FINANCIAL DATA ----------------------- The Company changed its fiscal year-end from September 30 to December 31 on January 2, 1997. The following table sets forth the selected financial data of the Company for, and at the end of (i) the years ended September 30, 1995 and 1996, (ii) the three months ended December 31, 1996 and (iii) the years ended December 31, 1997, 1998 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 Three Months per share data) Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended December 31, December 31, December 31, December 31, September 30, September 30, 1999 1998 1997 1996 1996 1995 ------------ ------------ ------------ ----------- ------------- -------------- Statement of Income Data: Net Sales ................................... $ 24,820 $ 36,354 $ 70,173 $ 4,092 $ 1,050 $ 502 Gross Profit ................................ 16,941 25,477 48,745 2,717 766 390 Net Income (Loss) ........................... (4,204) 6,809 20,967 1,676 (694) (153) Basic earnings/(loss) per common share ............................ ($ 0.37) $ 0.51 $ 1.72 $ 0.15 ($ 0.08) ($ 0.02) Diluted earnings/(loss) per common share............................. ($ 0.37) $ 0.46 $ 1.43 $ 0.12 ($ 0.08) ($ 0.02) Weighted average common shares outstanding: Basic ....................................... 11,352 13,335 12,181 11,087 8,131 6,723 Diluted ..................................... 11,352 14,944 14,634 13,611 8,131 6,723 As of As of As of As of As of As of December 31, December 31, December 31, December 31, September 30, September 30, 1999 1998 1997 1996 1996 1995 ------------ ------------ ------------ ----------- ------------- -------------- Balance Sheet Data: Working capital ............................. $ 23,621 $ 43,024 $ 41,141 $ 5,206 $ 911 $ 287 Total assets ................................ 33,271 48,611 49,847 6,950 1,368 437 Stockholders' equity ........................ 26,216 44,607 41,748 5,544 1,243 299
-9- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ----------------------------------------------------------------------- OF OPERATIONS ------------- Overview - -------- During 1999, the Company continued to manufacture, market and promote its Cold-Eeze(R) and Bodymate(TM) products through numerous independent and chain drug and discount stores throughout the United States. In 1998 the Company commenced selling internationally and is continuously looking for additional opportunities. Toward the end of 1998 the Company launched Cold-Eeze(R) in both the sugar-free and bubble gum form along with Bodymate(TM), a weight management program. The Cold-Eeze(R) sugar-free form is especially beneficial to diabetics and other consumers concerned with their sugar intake. Currently, Cold-Eeze(R) is the only zinc gluconate glycine product clinically proven to reduce the severity and duration of the common cold symptoms, the efficacy of the product having been established following the publication of a second double-blind study in July 1996. The Company continued supplying international markets in 1999, with sales to the Peoples Republic of China and Israel. The demand for the product is seasonal, with the third and fourth quarters of 1999 providing the largest sales volume, with the first quarter having experienced a longer than usual selling season. The 1999 sales revenue was $24,819,942 compared to $36,354,155 and $70,172,563 for 1998 and 1997, respectively. The decrease in sales in 1999 is attributable to increased competition with the addition of herbal and zinc remedies that have not been clinically proven to counteract the symptoms of the common cold. Some unproven zinc products were discontinued in 1999 resulting in clearance selling at severely discounted prices. This increased activity and incessant marketing resulted in consumer confusion with the distinction between what products claim they can achieve and what they have been proven to achieve becoming unclear. Additionally, during 1999, Cold-Eeze(R) has been subject to various inaccurate media reports appearing to discredit its proven efficacy. In common with other markets, 1999 experienced increased consolidation between retail chains resulting in reduced pipeline inventories and subsequent reorders of Cold-Eeze(R). The Company increased its advertising effort in order to clarify and establish Cold-Eeze(R) as a branded cold remedy clinically proven to significantly reduce the duration and severity of the common cold symptoms. The Company continues to use the resources of independent national and international brokers to represent the Company's Cold-Eeze(R) and Bodymate(TM) products, thereby saving capital and other ongoing expenditures that would otherwise be incurred. Manufacturing of the products is currently being carried out at three separate independent locations, with different manufacturers being used for the Cold-Eeze(R) bubble gum and sugarfree products and the same manufacturer producing the Cold-Eeze(R) lozenge and the Bodymate(TM) Nutrition and Weight Management Program. The lozenge and Bodymate(TM) manufacturer commenced manufacturing exclusively for the Company in 1997, thereby increasing their output and the availability of the product and, as a result, eliminating the occurrence of backorders. All three manufacturing sites have the capacity to respond quickly to market requirements. The change in manufacturing availability allowed the Company to commence selling internationally in 1998. In February 1998, the Company reached an agreement with GenPharm, Inc., a wholly-owned subsidiary of Merck KGaA of Germany for exclusive distribution of Cold-Eeze(R) in the Canadian market. In December 1998, the Company reached an agreement with a Hong Kong-based Chinese distribution company for the exclusive distribution of Cold-Eeze(R) in the Peoples Republic of China. This exclusivity is predicated on minimum sales levels being met each year, that in total must reach at least $52 million over the 7-year life of the agreement. 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 compete on a national and international level. -10- Results of Operations - --------------------- Twelve months ended December 1999 compared with same period 1998 - ---------------------------------------------------------------- For the year ended December 31, 1999, the Company had revenues of $24,819,942 and a net loss of ($4,203,785), compared to revenues of $36,354,155 and net income of $6,809,526 for the comparable period in 1998. 1999 experienced a slow down in sales for various reasons. During the course of the year a large number of zinc products left the market leading to the lowering of prices by these competitors, resulting in these zinc products catching the attention of the consumer. Additionally, the marketplace experienced the influx of herbal remedies and nutritional supplements resulting in consumer confusion. The high inventory levels that were being held by our customers from previous years, along with the consolidation of customers, all reduced sales for the year. The 1999 results were adversely affected by the change in the effective tax rate from 39% to 31% due to the provision of a valuation allowance equaling the total deferred tax asset. Cost of Goods Sold, as a percentage of sales in 1999, was 31.7%, up 1.8% from the 1998 level of 29.9%. The increase in 1999 is attributable to the contribution to sales made by Bodymate(TM) and the bubble gum form of Cold-Eeze(R), both of which carry a higher unit cost of goods percentage. The Cold-Eeze(R) lozenge product continues to be manufactured in an efficient and cost effective manner, with this making up the majority of the sales activity. Total operating costs for 1999 were $23,928,313 compared to $15,762,598 for 1998. The main reason for the increase was the necessity to promote the unique, proven properties of the Cold-Eeze(R) products in light of the influx of competing new products into the marketplace. This was addressed through increased radio and television advertising at appropriate times during the year. During 1999, the Company's major operating expenses of delivery, salaries, brokerage commissions, promotion, advertising, and legal costs accounted for approximately $21,368,130 (90%) of the total of $23,928,313. Total assets of the Company at December 31, 1999 and 1998 were $33,271,056 and $48,610,644 respectively. Working capital decreased by $19,403,816 to $23,620,669 at December 31, 1999. The main factors contributing to the reduction in these two categories were the cash expended in the repurchase of Company stock to treasury totaling $14,788,193, during the course of the year, as reflected in total shareholders' equity, together with losses incurred during the year, offset by the increase in current liabilities. Twelve months ended December 31, 1998 compared with same period 1997 - -------------------------------------------------------------------- The year ended December 31,1998 produced revenues of $36,354,155 and net income of $6,809,526 compared to revenues of $70,172,563 and net income of $20,966,862 for the comparable period in 1997. The reasons for the slow down in sales in 1998 included mild weather conditions which are reflected in lower incidence of consumers' colds combined with the effect of new herbal cold treatments promulgated through national news media announcements. Additionally, due to greater output availability at the manufacturing site, product lead-time was reduced from six or more weeks in 1997 to two weeks in 1998 resulting in the customer being able to order product closer to their needs. Cost of Goods Sold, as a percentage of net sales, decreased by 0.6%, down to 29.9% in 1998 from 30.5% in 1997. The reduction in 1998 resulted from efficiencies implemented by the manufacturer in 1997 that continued to be beneficial in 1998 and combined with effect of a change in accounting estimates. These gains were offset by a repackaging charge of approximately 0.5% of net sales, higher cost margins for different product configurations and international sales. The year 1998 operating expenses were $15,762,598 compared to $13,798,827 in the comparable period of 1997. The increase over 1997 is primarily as a result of advertising and marketing spending to further establish and grow the product. During 1998, the Company's major operating expenses of delivery, salaries, brokerage commissions, promotion, advertising, and legal costs accounted for approximately $13,805,588 (88%) of the total of $15,762,598. -11- The total assets of the Company at December 31, 1998 and 1997 were $48,610,644 and $49,847,090 respectively. Working capital increased by $1,883,938 to $43,024,485 at December 31, 1998. The significant movements in these categories represent a slowdown in sales in 1998, the reduction in the components of current liabilities and changes in funds or paid-in-capital as a result of the sale or exercise of the Company's Common Stock, options and warrants. Additionally, during the course of 1998, the Company repurchased a quantity of the Company's Common Stock. Twelve months ended December 31, 1997 compared with same period 1996 - -------------------------------------------------------------------- For 1997, the Company reported revenues of $70,172,563 and net income of $20,966,862, as compared with revenues of $4,993,496 and net income of $986,392 for the comparable period ended December 31, 1996. This substantial increase in revenue is primarily attributable to the market acceptance of the Cold-Eeze(R) lozenge product. The year 1997 saw Cold-Eeze(R) become a formidable force in the marketplace as a unique remedy to reduce the severity and duration of the common cold symptoms. This resulted from the release of the results of The Cleveland Clinic Study in July 1996, a national marketing program that commenced in the fourth quarter of 1996 together with national exposure in the media, such as NBC's PrimeTime network national news program and "20/20" on ABC in January 1997. Sales in the transition quarter ended December 31, 1996 were $4,091,653. Cost of Goods Sold, as a percentage of net sales, decreased by 2.35%, down to 30.5% for 1997 from 32.85% for 1996. This decrease in cost of goods is primarily due to efficiencies resulting from the manufacturer utilizing improved equipment such as fully automated production lines. In addition, the higher volume of production brought economies of scale resulting in the lower purchase cost of raw materials and packaging, thereby, reducing the cost of the finished product. During 1997, operating expenses increased to $13,798,827 from $2,155,646 in the comparable period 1996. This was a result of increased costs associated with a national marketing and advertising program and other variable costs associated with bringing the sales volume to the level achieved. During 1997, the Company's major operating expenses of delivery, salaries, brokerage commissions, promotion, advertising and legal costs accounted for approximately $12,562,060 (93%) of the $13,798,827 total operating costs incurred by the Company. Other operating costs for this period maintained their fixed attributes, in that they did not follow sales volume but maintained a relative constant dollar value for 1997. During 1996, these expenses amounted to $1,826,651 (85%) of the total of $2,155,646. Material Commitments and Significant Agreements - ----------------------------------------------- As a result of all of the Company's products being manufactured by outside sources, any capital expenditure expected to be incurred during 2000 is not anticipated to be material. The Company has agreements in place with these manufacturers, which insure a reliable source of product for the future. The facility producing the Cold-Eeze(R) lozenge and the Bodymate product manufactures exclusively for the Company. The Company has agreements in place with independent brokers whose function it is to represent the Company, 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, patent holders and the developer of the Company's cold-relief products. The Company has entered into royalty agreements with the patent holders that require payments of 6% on sales collected, less certain deductions, and with the founders who share a commission of 5% on sales collected, less certain deductions. Additionally, the developer of the Cold-Eeze(R) product formulation receives a consulting fee of 2% on sales collected, less certain deductions. The agreements with the patent holder and the developer expire on March 5, 2002 and May 4, 2007, respectively and with the founders on May 31, 2005. The Company has committed to advertising costs approximating $5,100,000 relating to 2000. Additional advertising costs are expected to be incurred for the remainder of 2000. -12- Liquidity and Capital Resources - ------------------------------- The Company had working capital of $23,620,669 and $43,024,485 at December 31, 1999 and 1998, respectively. The decrease in working capital is due, primarily, to the increase in the components of current liabilities together with the cash used in the repurchase of Company Common stock during 1999. Total cash balances at December 31, 1999 were $13,990,475 as compared to $28,331,765 at December 31, 1998. The Company believes that its increased marketing efforts and increased national publicity concerning the Cold-Eeze(R) products, the Company's increased manufacturing availability, newly available products, further growth in international sales together with its current working capital should provide an internal source of capital to fund the Company's business operations. In addition to anticipated funding from operations, the Company may raise capital through the issuance of equity securities to finance anticipated growth. Throughout 1999 the Company repurchased a total of 2,816,631 shares at a cost of $14,788,193. 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. The Company has a revolving line of credit with a commercial bank for $10 million to be used for general corporate purposes. This facility is collateralized by accounts receivable and inventory, and renews in May 2000, with interest accruing at the Prime Rate, or 225 basis points above the Eurodollar Rate, each to move with the respective base rate. There were no borrowings under available lines during the twelve-month periods ended December 31, 1999 or 1998. Impact of Inflation - ------------------- The Company is subject to normal inflationary trends and anticipates that any increased costs should be passed on to its customers. Year 2000 Compliance - -------------------- At this time no year 2000 issues have become apparent and management is not currently aware of any items that would have a material impact on the Company's results of operations and financial position. -13- ITEM 8 FINANCIAL STATEMENTS -------------------- INDEX TO FINANCIAL STATEMENTS Page ---- Balance Sheets as of December 31, 1999 and 1998 F-1 Statements of Income for the years ended December 31, 1999, 1998 and 1997 F-2 Statements of Stockholders' Equity for the years ended December 31, 1999, 1998, and 1997 F-3 Statements of Cash Flows for the years ended December 31, 1999, 1998, and 1997 F-4 to F-5 Notes to Financial Statements F-6 to F-15 Responsibility for Financial Statements F-16 Report of Independent Accountants F-17 -14-
THE QUIGLEY CORPORATION BALANCE SHEETS ASSETS December 31, December 31, 1999 1998 ------------ ------------- CURRENT ASSETS: Cash and cash equivalents ......................... $13,990,475 $28,331,765 Accounts receivable (less doubtful accounts of $239,065 and $182,079) .............. 6,639,687 7,575,366 Inventory ......................................... 6,170,005 6,522,612 Prepaid income taxes .............................. 2,485,247 2,565,321 Prepaid expenses and other current assets ........................... 1,390,702 1,635,099 Deferred income taxes ............................ -- 397,489 ----------- ----------- TOTAL CURRENT ASSETS ................... 30,676,116 47,027,652 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT - net ............... 1,943,313 1,041,386 ----------- ----------- OTHER ASSETS: Patent rights - Less accumulated amortization...... 197,463 285,224 Other assets ...................................... 454,164 256,382 ----------- ----------- TOTAL OTHER ASSETS ..................... 651,627 541,606 ----------- ----------- TOTAL ASSETS ...................................... $33,271,056 $48,610,644 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ............................... $ 395,778 $ 758,033 Accrued royalties and sales commissions ........ 1,722,715 2,085,446 Accrued advertising ............................ 4,523,901 561,266 Accrued freight ................................ 104,263 37,082 Other current liabilities ...................... 308,790 561,340 ------------ ------------ TOTAL CURRENT LIABILITIES ........... 7,055,447 4,003,167 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $.0005 par value; authorized 50,000,000; Issued 14,831,384 and 14,409,058 shares...... 7,415 7,205 Additional paid-in-capital ..................... 28,807,108 28,207,208 Retained earnings .............................. 22,445,670 26,649,455 Less: Treasury stock, 4,481,653 and 1,665,022 shares, at cost.................... (25,044,584) (10,256,391) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY .......... 26,215,609 44,607,477 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..... $ 33,271,056 $ 48,610,644 ============ ============
See accompanying notes to financial statements F-1
THE QUIGLEY CORPORATION STATEMENTS OF INCOME Year Ended Year Ended Year Ended December 31, December 31, December 31, 1999 1998 1997 ------------ ----------- ------------ NET SALES ................................. $ 24,819,942 $36,354,155 $ 70,172,563 ------------ ----------- ------------ COST OF SALES ............................. 7,879,303 10,877,594 21,427,888 ------------ ----------- ------------ GROSS PROFIT .............................. 16,940,639 25,476,561 48,744,675 ------------ ----------- ------------ OPERATING EXPENSES: Sales and marketing ................. 17,938,002 10,476,030 7,741,428 Administration ...................... 5,990,311 5,286,568 6,057,399 ------------ ----------- ------------ TOTAL OPERATING EXPENSES .................. 23,928,313 15,762,598 13,798,827 ------------ ----------- ------------ INCOME (LOSS) FROM OPERATIONS ............. (6,987,674) 9,713,963 34,945,848 INTEREST INCOME ........................... 881,274 1,449,194 292,575 ------------ ----------- ------------ INCOME (LOSS) BEFORE TAXES ................ (6,106,400) 11,163,157 35,238,423 ------------ ----------- ------------ INCOME TAXES EXPENSE (BENEFIT) ............ (1,902,615) 4,353,631 14,271,561 ------------ ----------- ------------ NET INCOME (LOSS) ......................... ($ 4,203,785) $ 6,809,526 $ 20,966,862 ============ =========== ============ Earnings/(Loss) per common share: Basic ............................... ($ 0.37) $ 0.51 $ 1.72 ============ =========== ============ Diluted ............................. ($ 0.37) $ 0.46 $ 1.43 ============ =========== ============ Weighted average common shares outstanding: Basic ............................... 11,351,960 13,334,684 12,181,020 ============ =========== ============ Diluted ............................. 11,351,960 14,944,172 14,633,999 ============ =========== ============
See accompanying notes to financial statements F-2
THE QUIGLEY CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY Common Additional Retained Stockholders' Stock Issued Paid-in- Treasury Earnings Subscription Shares Amount Capital Stock (Deficit) Receivable Total ---------- ------------ ------------ ------------ ------------- ------------ ------------ Balance January 1, 1997 .... 12,099,192 $ 6,049 $ 7,010,244 ($ 1,126,933) ($ 345,856) $ 5,543,504 Shares issued for services . 21,054 11 212,894 212,905 Subscription sales ......... 17,884 8 75,998 76,006 Shares for subscription receivable ............. 345,856 345,856 Warrants issued for contract termination costs 609,000 609,000 Treasury stock ............. (486,862) 1,145,358 ($ 1,145,358) -- Tax benefits from options, warrants & common stock 11,148,083 11,148,083 Exercise of options and warrants issued for services................ 438,501 438,501 Proceeds from options and warrants exercised ..... 1,653,228 828 2,406,473 2,407,301 Net income year ended December 31, 1997 ...... 20,966,862 20,966,862 ----------- ------------ ------------ ------------ ------------ ------------ ----------- Balance December 31, 1997 .. 13,304,496 6,896 23,046,551 (1,145,358) 19,839,929 -- 41,748,018 ----------- ------------ ------------ ------------ ------------ ------------ ----------- Treasury stock ............. (1,178,160) (9,111,033) (9,111,033) Tax benefits from options, warrants & common stock 3,512,205 3,512,205 Exercise of options and warrants issued for services................ 981,785 981,785 Proceeds from options and warrants exercised ..... 617,700 309 666,667 666,976 Net income year ended December 31, 1998 ...... 6,809,526 6,809,526 ----------- ------------ ------------ ------------ ------------ ------------ ----------- Balance December 31, 1998 .. 12,744,036 7,205 28,207,208 (10,256,391) 26,649,455 -- 44,607,477 ----------- ------------ ------------ ------------ ------------ ------------ ----------- Treasury stock ............. (2,816,631) (14,788,193) (14,788,193) Tax benefits from options, warrants & common stock 697,208 697,208 Tax valuation allowance (697,208) (697,208) Warrants issued for services 202,975 202,975 Proceeds from options and warrants exercised ..... 422,326 210 427,289 427,499 Other ...................... (30,364) (30,364) Net loss year ended December 31, 1999 ...... (4,203,785) (4,203,785) ----------- ------------ ------------ ------------ ------------ ------------ ----------- Balance December 31, 1999 .. 10,349,731 $ 7,415 $ 28,807,108 ($25,044,584) $ 22,445,670 -- $ 26,215,609 ----------- ------------ ------------ ------------ ------------ ------------ -----------
See accompanying notes to financial statements F-3
THE QUIGLEY CORPORATION STATEMENTS OF CASH FLOWS Year Ended Year Ended Year Ended December 31, December 31, December 31, 1999 1998 1997 ------------ ------------ ------------ OPERATING ACTIVITIES: Net income (loss) ....................................... ($ 4,203,785) $ 6,809,526 $ 20,966,862 ------------ ------------ ------------ Adjustments to reconcile net income (loss) to net cash provided by operations: Depreciation and amortization ..................... 229,812 206,640 133,323 Expenditures paid with common stock ............... 202,975 981,785 1,131,025 Deferred income taxes ............................. 397,489 193,756 (171,617) (Increase) decrease in assets: Accounts receivable .......................... 935,679 3,276,207 (8,650,749) Inventory .................................... 352,607 1,204,145 (7,426,025) Prepaid expenses and other current assets .... 41,422 (621,471) (1,001,045) Prepaid income taxes ......................... 80,074 982,736 (3,117,499) Increase (decrease) in liabilities: Accounts payable ............................. (362,255) (357,587) 983,823 Accrued royalties and sales commissions ...... (362,731) (2,645,410) 4,100,211 Accrued advertising .......................... 3,962,635 358,510 202,756 Accrued freight .............................. 67,181 (431,495) 464,107 Other current liabilities .................... (79,939) (1,009,923) 1,379,883 ------------ ------------ ------------ Total adjustments ....................... 5,464,949 2,137,893 (11,971,807) ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES ....................................... 1,261,164 8,947,419 8,995,055 ------------ ------------ ------------ CASH FLOWS USED IN INVESTING ACTIVITIES: Capital expenditures ............................ (1,043,978) (998,075) (121,008) Other assets .................................... (197,782) (184,086) (68,907) ------------ ------------ ------------ NET CASH FLOWS USED IN INVESTING ACTIVITIES ....................................... (1,241,760) (1,182,161) (189,915) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Tax benefits from stock options, warrants & stock -- 3,512,205 11,148,083 Proceeds from exercises of options and warrants . 427,499 666,976 2,407,301 Proceeds from common stock issued ............... -- -- 76,006 Due from attorney's escrow account .............. -- -- 260,000 Change in stockholders' subscription receivable . -- -- 345,856 Repurchase of common stock ...................... (14,788,193) (9,111,033) -- ------------ ------------ ------------ NET CASH FLOWS FROM FINANCING ACTIVITIES: (14,360,694) (4,931,852) 14,237,246 ------------ ------------ ------------ NET INCREASE/(DECREASE) IN CASH ................. (14,341,290) 2,833,406 23,042,386 CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD ............................. 28,331,765 25,498,359 2,455,973 ------------ ------------ ------------ CASH & CASH EQUIVALENTS, END OF PERIOD ................................... $ 13,990,475 $ 28,331,765 $ 25,498,359 ============ ============ ============
See accompanying notes to financial statements F-4 THE QUIGLEY CORPORATION STATEMENTS OF CASH FLOWS (continued) Supplemental disclosure of cash flow information - ------------------------------------------------ Year Ended Year Ended Year Ended December 31, December 31, December 31, 1999 1998 1997 $ $ $ -------------------------------------- Income taxes paid . -- 283,669 6,650,000 - ------------------------------------------------------------------------------- Non-cash investing and financing: Capital expenditures -- -- (7,905) Patent rights -- -- (205,000) Common stock issued for services performed -- -- 1,358,263 Treasury stock cost -- -- (1,145,358) See accompanying notes to financial statements F-5 THE QUIGLEY CORPORATION NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Quigley Corporation (the "Company") was organized under the laws of the State of Nevada on August 24, 1989. The Company started business October 1, 1989 and has been engaged in the business of marketing health products. The products are fully developed and are being offered to the general public. For the most recent fiscal periods, the Company has concentrated its efforts on the promotion of a product known as "Cold-Eeze(R)" in the United States. This product serves the cold remedy market. The demand for the product is seasonal, with, in general, the third and fourth quarters representing the largest sales volume. In December 1998 the Company launched a nutrition and weight management program called Bodymate(TM). Principles of Accounting 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 are primarily comprised of finished goods. 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 principally 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; vehicles - five years; and furniture and fixtures - seven years. Patent Rights Patent rights are amortized on a straight-line basis over the period of the related licensing agreements, which approximate 67 months. Amortization costs incurred for the years ended December 31, 1999, December 31, 1998, and December 31, 1997 were $87,761, $87,762 and $100,000, respectively. Accumulated amortization at December 31, 1999, December 31, 1998 and December 31, 1997, is $292,538, $204,777, and $117,015, respectively. 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 three 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. F-6 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 39% for the year ended December 31, 1999, 38% for the year ended December 31, 1998, and 68% for the year ended December 31, 1997. During 1999, approximately 94% of the Company's revenues originated in the United States with the remainder being attributable to international trade. The Company currently uses three separate suppliers to produce Cold-Eeze(R) in lozenge, bubble gum, and sugar-free tablet form. Substantially all of the Company's revenues are currently generated from the sale of the Cold-Eeze(R) product. The lozenge form is manufactured by a third party manufacturer that produces exclusively for 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. 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 income statement. Revenue Recognition Sales are recognized at the time a shipment is received by the customer. Royalties The Company includes royalties and founders commissions incurred as cost of products sold based on agreement terms. Advertising Advertising costs are generally expensed within the period to which they relate. Advertising cost incurred for the year ended December 31, 1999, December 31, 1998 and December 31, 1997, was $16,132,888, $9,221,225, and $3,050,210, respectively. Included in prepaid expenses and other current assets was $448,908 and $998,370 at December 31, 1999 and 1998, respectively, relating to prepaid advertising and promotion expenses. Research and Development Research and development costs are charged to operations in the year incurred. Expenditures for the years ended December 31, 1999, December 31, 1998 and December 31, 1997 were $297,650, $256,492 and $79,784, respectively. 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. See Note 6 for further discussion. F-7 NOTE 2 - CHANGES IN ACCOUNTING ESTIMATES During 1998, the Company made certain changes in accounting estimates totaling $1,243,677, after tax, as a result of new information becoming available. Included in this amount was a provision for contingencies, which was no longer necessary, and reductions in operating expenses which did not materialize. NOTE 3 - PROPERTY, PLANT AND EQUIPMENT Consisted of the following as of: December 31, 1999 December 31, 1998 ----------------- ----------------- Land $152,203 $152,203 Buildings and improvements 1,415,771 558,077 Machinery and equipment 321,157 238,129 Computer software 48,638 42,442 Vehicles 207,165 207,165 Furniture and fixtures 113,746 16,686 ----------------- ------------------- 2,258,680 1,214,702 Less: Accumulated depreciation 315,367 173,316 ----------------- ------------------- Property, Plant and Equipment, net $1,943,313 $1,041,386 ================= =================== Depreciation expense for the years ended December 31, 1999, December 31, 1998 and December 31, 1997 was $142,051, $118,878 and $33,323, respectively. NOTE 4 - 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, has been valued at the fair value of these shares at the date of the grant. This asset value is being amortized over the remaining life of the patent which expires in March 2002. The Company is required to pay a 3% royalty on sales collected, less certain deductions, to the patent holder throughout the term of this agreement, which also expires 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 whose agreements expire in 2005. All of the aforementioned individuals receiving royalties and commissions are also stockholders of the Company. The expenses for the respective periods relating to such agreements amounted to $2,638,727, $3,784,340, $8,870,828, for the years ended December 31, 1999, December 31, 1998 and December 31, 1997, respectively. Amounts accrued for these expenses at December 31, 1999 and December 31, 1998 were $1,337,193 and $1,592,917, respectively. NOTE 5- LINE OF CREDIT The Company has a revolving line of credit with a commercial bank for $10 million to be used for general corporate purposes. This facility is collateralized by accounts receivable and inventory, and renews in May 2000, with interest accruing at the Prime Rate, or 225 basis points above the Eurodollar Rate, each to move with the respective base rate. There were no borrowings under available lines during the twelve-month period ended December 31, 1999 or 1998. F-8 NOTE 6 - INCOME TAXES The provision (benefit) for income taxes, consists of the following: Year Ended Year Ended Year Ended December 31, December 31, December 31, 1999 1998 1997 ------------ ---------- ------------ Current: Federal ($1,181,327) $3,537,579 $12,161,445 State - 622,296 2,281,733 ------------ ---------- ------------ ($1,181,327) 4,159,875 14,443,178 ------------ ---------- ------------ Deferred: Federal (1,285,077) 163,147 (180,601) State (605,998) 30,609 8,984 ------------ ---------- ------------ (1,891,075) 193,756 (171,617) ------------ ---------- ------------ Valuation allowance 1,169,787 - - ------------ ---------- ------------ Total ($1,902,615) $4,353,631 $14,271,561 ============ ========== ============ 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, 1999 1998 1997 ------------ ---------- ------------ Statutory rate ($2,076,176) $3,907,105 $12,333,448 State taxes net of federal benefit (403,022) 446,526 1,937,029 Permanent differences (593,204) - - Other - - 1,084 ------------ ----------- ----------- (3,072,402) 4,353,631 14,271,561 ------------ ----------- ----------- Less valuation allowance 1,169,787 - - ------------ ----------- ----------- Total ($1,902,615) $4,353,631 $14,271,561 ============ =========== =========== 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, 1999 1998 1997 ------------ ---------- ------------ Net operating loss carry-forward $1,751,199 - - Contract termination costs 378,555 $378,554 $234,000 Bad debt expense 54,164 - - Other 104,648 18,935 357,245 Valuation allowance (2,288,566) - - ------------ ----------- ----------- Total - $397,489 $591,245 ============ =========== =========== Certain exercises of options and warrants, and restricted stock issued for services that became unrestricted during the period, resulted in reductions to taxes currently payable and a corresponding increase to additional-paid-in-capital totaling zero, $3,512,205, and $11,148,083 for the years ended December 31, 1999, 1998, and 1997 respectively. The tax benefit effect of option and warrant exercises during 1999 was $697,208, however, this benefit is being deferred because of a net operating loss carry-forward for tax purposes ("NOLs") that occurred during the fourth quarter of 1999 from a cumulative effect of deducting a total value of $42,800,364 attributed to these options, warrants and unrestricted stock deductions from taxable income during the tax years 1997 and 1998. The net operating loss carry-forwards arising from the option, warrant and stock activities approximate $3.5 million for federal puposes, which will expire in 2019 and $9.7 million for state purposes, which will expire in 2009. Until sufficient taxable income to offset the temporary timing differences attributable to operations and the tax deductions attributable to option, warrant and stock activities are assured, a valuation allowance equaling the total deferred tax asset is being provided. F-9 NOTE 7 - EARNINGS PER SHARE Basic earnings per share ("EPS") excludes dilution and is computed by dividing income available to common stockholders by the weighted - average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS also utilizes the treasury stock method which prescribes a theoretical buy back of shares from the theoretical proceeds of all options and warrants outstanding during the period. Since there is a large number of options and warrants outstanding, fluctuations in the actual market price can have a variety of results for each period presented. A reconciliation of the applicable numerators and denominators of the income statement periods presented is as follows (millions, except earnings per share amounts): Year Ended Year Ended Year Ended December 31, 1999 December 31, 1998 December 31, 1997 -------------------------------------------------------------- Loss Shares EPS Income Shares EPS Income Shares EPS -------------------------------------------------------------- Basic EPS ($ 4.2) 11.4 ($0.37) $6.8 13.3 $0.51 $21.0 12.2 $1.72 Dilutives: Options and Warrants -- -- -- -- 1.6 -- -- 2.4 -- ----- ----- ------ ----- ----- ----- ----- ----- ----- Diluted EPS ($ 4.2) 11.4 ($0.37) $6.8 14.9 $0.46 $21.0 14.6 $1.43 ===== ===== ======= ===== ===== ===== ===== ===== ===== At December 31, 1999, there are 4,279,400 options and warrants outstanding. Their impact on future diluted earnings per share is dependent on the market price of the Company's common stock. NOTE 8 - STOCK COMPENSATION Stock options 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 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 provides for the granting of up to one million five hundred thousand 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 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 409,000 and 550,500 options were granted under this Plan during the years ended December 31, 1999 and December 31, 1998, 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, 1999, December 31, 1998 and December 31, 1997, had been determined under the fair value method of Statement of Financial Accounting Standards 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, 1999 1998 1997 ------------ ------------ ------------ Pro forma net income (loss) ($5,246,735) $5,339,691 $20,194,062 Pro forma earnings (loss) per share: Basic ($0.46) $0.40 $1.66 Diluted ($0.46) $0.36 $1.38 F-10 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 of 59.5% for the year ended December 31, 1999 and 29.0% for the years ended December 31, 1998 and 1997; expected dividend yield of 1.5%; and risk-free interest rate of 5.1% for the year ended December 31, 1999; expected dividend yield of 2.5% and risk-free interest rate of 5.71% for the year ended December 31, 1998, and expected dividend yield of 2.5% and risk-free interest rate of 6.56% for the year ended December 31, 1997, 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 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, 1999, 1998, and 1997 and changes during the years then ended is presented below: Year Ended December 31, 1999:
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 2,560 $4.27 1,790 $4.55 4,350 $4.39 Additions (deductions): Granted 389 5.125 20 5.125 409 5.125 Exercised 150 - 330 - 480 - --------------------------------------------------------------------------------- Options/warrants outstanding at end of period 2,799 $4.59 1,480 $5.14 4,279 $4.78 --------------------------------------------------------------------------------- Options/warrants exercisable at end of period 2,799 1,480 4,279 ================================================================================== Weighted average fair value of grants $1.41 $1.41 $1.41 Price range of options/warrants exercised $0.50 $0.75-$2.50 $0.50-$2.50 Price range of options/warrants outstanding $0.50-$10.00 $0.50-$10.00 $0.50-$10.00 Price range of options/warrants exercisable $0.50-$10.00 $0.50-$10.00 $0.50-$10.00
F-11 Year Ended December 31, 1998:
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 2,030 $2.86 2,388 $3.61 4,418 $3.27 Additions (deductions): Granted 530 9.68 20 9.68 550 9.68 Exercised - - 618 1.08 618 1.08 --------------------------------------------------------------------------------- Options/warrants outstanding at end of period 2,560 $4.27 1,790 $4.55 4,350 $4.39 --------------------------------------------------------------------------------- Options/warrants exercisable at end of period 2,560 1,790 4,350 ================================================================================== Weighted average fair value of grants $2.67 $2.67 $2.67 Price range of options/warrants exercised - $0.50-$1.75 $0.50-$1.75 Price range of options/warrants outstanding $0.50-$10.00 $0.50-$10.00 $0.50-$10.00 Price range of options/warrants exercisable $0.50-$10.00 $0.50-$10.00 $0.50-$10.00 Year Ended December 31, 1997: 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 1,820 $1.39 3,240 $1.36 5,060 $1.37 Additions (deductions): Granted 345 10.00 675 9.82 1,020 10.00 Exercised 135 1.33 1,527 1.55 1,662 1.53 --------------------------------------------------------------------------------- Options/warrants outstanding at end of period 2,030 $2.86 2,388 $3.61 4,418 $3.27 --------------------------------------------------------------------------------- Options/warrants exercisable at end of period 2,030 2,388 4,418 ================================================================================== Weighted average fair value of grants $2.24 $2.24 $2.24 Price range of options/warrants exercised $0.50 - $2.50 $0.50-$10.00 $0.50-$10.00 Price range of options/warrants outstanding $0.50-$10.00 $0.50-$10.00 $0.50-$10.00 Price range of options/warrants exercisable $0.50-$10.00 $0.50-$10.00 $0.50-$10.00
F-12 The following table summarizes information about stock options outstanding and stock options exercisable, as granted to both employees and non-employees, at December 31, 1999:
Employees Non-Employees ------------------------------------------------- ------------------------------------------------------ Weighted Weighted Average Average Remaining Weighted Remaining Weighted Range of Number Contractual Average Number Contractual Average Exercise Prices Outstanding Life Exercise Price Outstanding Life Exercise Price ----------------- --------------- --------------- ----------------- ----------------- ------------------ ----------------- $0.500-$5.125 1,924,000 3.0 $2.22 859,900 1.7 $1.64 $9.680-$10.000 875,500 5.8 $9.81 620,000 2.6 $9.99 --------------- ----------------- 2,799,500 1,479,900 =============== =================
Options outstanding as of December 31, 1999, December 31, 1998 and December 31, 1997, expire from December 14, 2000 through April 6, 2009, depending upon the date of grant. In early 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 1999 was approximately $94,000. NOTE 9 - 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 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 four occasions, for a total authorized buy-back of 4,000,000 shares or approximately 30% 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, 3,994,791 shares have been repurchased at a cost of $23,899,226 or an average cost of $5.98 per share. NOTE 10 - SERVICE CONTRACTS AND RELATED TERMINATION COSTS In October 1996, the Company entered into a three-year agreement with Sands Brothers & Co., Ltd. for investment banking services including private placements. Upon commencement of the contract, Sands received 800,000 warrants with an exercise price of $1.75 per share contingent upon services to be provided. During the first quarter of 1997, the Company decided not to pursue a private placement offering. In order to terminate the agreement with Sands, the Company issued to Sands 350,000 additional warrants to purchase the Company's stock at $10 per share. As a result, the Company recorded an expense of approximately $700,000 in 1997 and $462,000 in 1998. F-13 NOTE 11 - SETTLED LITIGATION During 1992, the Company authorized litigation against Nutritional Foods Corporation ("NFC") in which the Company sought to cancel the 729,928 restricted shares issued to NFC for international marketing services, as a result of certain false and misleading representations made by it to the Company including, but not limited to, NFC's failure to act as the Company's international sales agent under an agreement between NFC and the Company. Pursuant to a final decree issued in the Court of Common Pleas of Bucks County, Pennsylvania dated January 23, 1997, the Company received an order to return to treasury these outstanding shares. In November of 1997, NFC challenged the validity of the decree. 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. In October 1999, the Company reached a settlement in a lawsuit by an individual named Marjorie Durst that resolved all matters between the Plaintiff and the Company. This legal proceeding was previously reported in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. The resolution of this dispute is not material to the Company's financial position, results of operations or liquidity. 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, 1999, December 31, 1998 and December 31, 1997, of $137,015, $153,594 and $92,464, respectively. The future minimum lease obligations under these operating leases are $14,901 for 2000. The Company has committed to advertising costs approximating $5,100,000 relating to 2000. Additional advertising costs are expected to be incurred for the remainder of 2000. In March, 1997, the Company was sued by two individuals (Thomas Goldblum and Alan Wayne) in the court of Common Pleas of Montgomery County, Pennsylvania. The complaint alleges that the Plaintiffs became the owners of 500,000 shares each of the Company's Common Stock in or about 1990, and request damages in excess of $100,000 for breach of contract and conversion. During the second quarter of 1999, the Company was made aware that the Plaintiffs took the position that the Company's 1990 pre-public 1 for 2.74 reverse split and 1995 1 for 10 reverse split did not apply to the shares claimed by them. The Company is vigorously defending this lawsuit and has denied any liability to the Plaintiffs because they did not perform agreed upon services as a condition to the receipt of the shares from the Company. The Company also believes that the Plaintiffs' claims are barred by the applicable statues of limitations, and that the Plaintiffs' claims are, in any event, limited to claims for approximately 36,000 each. Although the Company believes the Plaintiffs' claim to be without merit, the case is still in the discovery stages and no prediction can be made as to its outcome. In addition to the foregoing litigation, the Company is subject to legal proceedings and claims which have arisen in the ordinary course of its business. Although there can be no assurance as to the ultimate disposition of these matters, it is the opinion of the Company's management based upon the information available at this time, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the financial position, results of operations or cash flows of the Company. NOTE 13 - 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 major stockholders of the Company. Commissions and other items expensed under such arrangements for the years ended December 31, 1999, December 31, 1998 and December 31, 1997, were $370,466, $270,113 and $274,154, respectively. Amounts payable under such agreements at December 31, 1999 and 1998 were approximately $89,605 and $70,634, respectively. The Company is in the process of acquiring licenses in certain countries through related party entities. During 1999, fees amounting to $110,000 have been paid to a related entity to obtain such licenses. F-14 NOTE 14 - QUARTERLY INFORMATION (UNAUDITED) Quarter Ended ----------------------------------------------------- March 31, June 30, September 30, December 31, ----------------------------------------------------- 1999 Net Sales $6,136,902 $2,063,319 $4,103,965 $12,515,756 Gross Profit 4,084,252 1,400,337 2,743,230 8,712,820 Net Income (loss) (1,855,214) (1,103,629) 18,333 (1,263,275) Basic (loss) per common share ($0.15) ($0.10) $0.00 ($0.12) Diluted (loss) per common share ($0.15) ($0.10) $0.00 ($0.12) 1998 Net Sales $7,271,819 $1,317,872 $10,747,978 $17,016,486 Gross Profit 5,060,523 919,530 7,572,872 11,923,636 Net Income 1,266,933 1,235 3,014,056 2,527,302 Basic earnings per common share $0.10 $0.00 $0.22 $0.19 Diluted earnings per common share $0.08 $0.00 $0.20 $0.18 F-15 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 judgements 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. PricewaterhouseCoopers LLP, the Company's independent accountants, performed an audit for the years ended December 31, 1999, 1998 and 1997, in accordance with generally accepted auditing standards. The independent accountants conducted a review of internal accounting controls to the extent required by generally accepted auditing standards and performed such tests and procedures, as they deem necessary to arrive at an opinion on the fairness of the financial statements presented herein. /s/ Guy J. Quigley February 18, 2000 - ------------------ ----------------- Guy J. Quigley, Date Chairman of the Board President, Chief Executive Office /s/ George J. Longo February 18, 2000 - ------------------- ----------------- George J. Longo, Date Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) F-16 REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors and Stockholders of The Quigley Corporation In our opinion, the accompanying balance sheets and the related statements of income, stockholders' equity, and cash flows present fairly, in all material respects, the financial position of The Quigley Corporation at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. 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, 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 the opinion expressed above. /s/PricewaterhouseCoopers LLP - ----------------------------- PricewaterhouseCoopers LLP Philadelphia, Pennsylvania February 18, 2000 F-17 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND ---------------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- On January 29, 1997, the Company engaged the independent accounting firm of PricewaterhouseCoopers LLP to audit the Company's financial statements for the calendar year 1997. The replacement of the previous certifying accountant, Nachum Blumenfrucht, CPA, was made by approval of the Board of Directors of the Company and with the agreement of Mr. Blumenfrucht. This change was due to the dramatic expansion of business operations undertaken by the Company since the close of the prior fiscal year. There were no disagreements with the former accountant on any matter of accounting principles or practices, financial statement disclosure, or auditing scope of procedure, nor any reportable event required to be disclosed. 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 2000 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 2000 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 2000 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 2000 Annual Meeting of Stockholders. -15- PART IV ------- ITEM 14 EXHIBITS, FINANCIAL STATEMENTS, 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) 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 between the Company and George J. Longo (incorporated by reference to Exhibit 10.10 of Form 10-KSB dated March 30, 1998) 10.11 Employment Agreement dated January 1, 1997 between the Company and Eric H. Kaytes (incorporated by reference to Exhibit 10.11 of Form 10-KSB dated March 30, 1998) -16- 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) 23.1 Consent of PricewaterhouseCoopers LLP, Auditors, dated March 15, 2000 (filed herewith) 27.1 Financial Data Schedule - -------------------------------------------------------------------------------- (b) Reports on Form 8-K No reports were filed on Form 8-K in the quarter ended December 31, 1999. -17- 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 20, 2000 ------------------ -------------- Guy J. Quigley, Chairman of the Board, Date President, 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, March 20, 2000 - ------------------ President, Chief Executive -------------- Guy J. Quigley Officer and Director /s/ Charles A. Phillips Executive Vice President, March 20, 2000 - ----------------------- Chief Operating Officer -------------- Charles A. Phillips and Director /s/ George J. Longo Vice President, Chief Financial March 20, 2000 - ------------------- Officer and Director (Principal -------------- George J. Longo Financial and Accounting Officer) /s/ Eric H. Kaytes Vice President, March 20, 2000 - ------------------ Chief Information Officer, -------------- Eric H. Kaytes Secretary, Treasurer and Director /s/ Jacqueline F. Lewis Director March 20, 2000 - ----------------------- -------------- Jacqueline F. Lewis /s/ Rounsevelle W. Schaum Director March 20, 2000 - ------------------------- -------------- Rounsevelle W. Schaum -18- EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (File Nos. 333-61313, 333-10059, 333-14687 and 333-26589) and S-3 (File No. 333-31241) of The Quigley Corporation of our report dated February 18, 2000, relating to the financial statements, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP - ------------------------------ PricewaterhouseCoopers LLP Philadelphia, Pennsylvania March 15, 2000 -19-