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, 2002
Commission File No. 01-21617
THE QUIGLEY CORPORATION
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(Exact name of registrant as specified in its charter)
Nevada 23-2577138
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
(MAILING ADDRESS: PO Box 1349, Doylestown, PA 18901)
Kells Building, 621 Shady Retreat Road, Doylestown, PA 18901
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(Address of principle executive offices) (Zip Code)
(215) 345-0919
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(Registrant's telephone number, including area code)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK ($.0005 Par Value)
COMMON SHARE PURCHASE RIGHTS
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by the check mark if 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act 12b-2).
[ ] Yes [X] No
The aggregate market value of the registrant's common stock held by
non-affiliates was $49,939,701 as of June 28, 2002, based on the closing price
of the common stock on the Nasdaq National Market System. For purposes of this
calculation, only executive officers and directors are deemed to be the
affiliates of the registrant.
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 14, 2003:
11,456,617.
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 form the Registrant's Proxy Statement for the 2003 Annual Meeting
of Stockholders.
THE EXHIBIT INDEX IS LOCATED ON PAGES 22-23.
Page 1 of 29
TABLE OF CONTENTS
Part I Page
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Item 1. Description of Business 3-9
2. Description of Properties 9
3. Legal Proceedings 9-11
4. Submission of Matters to a Vote by Security Holders 11
Part II
5. Market for the Company's Common Equity and Related
Stockholder Matters 11-12
6. Selected Financial Data 13
7. Management's Discussion and Analysis of Results of
Operations and Financial Condition 14-19
8. Financial Statements 20
9. Change in and Disagreements with Accountants on
Accounting and Financial Disclosure 21
Part III
10. Directors and Executive Officers of the Registrant 21
11. Executive Compensation 21
12. Security Ownership of Certain Beneficial
Owners and Management 21
13. Certain Relationships and Related Transactions 21
Part IV
14. Disclosure Controls and Procedures 21
15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 22-23
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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. No claims are being made for the potential medicine discussed in
this filing to be safe, effective, or approved by the Federal Food and Drug
Administration (FDA).
PART 1
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
The Quigley Corporation (www.quigleyco.com, hereinafter referred to as the
"Company") is a Nevada corporation which was organized on August 24, 1989 and
commenced business operations in October 1989.
The Company's business is the manufacture and distribution of cold remedy
products to the consumer through the over-the-counter market place together with
the sale of proprietary health and wellness products through its direct selling
subsidiary. The Company's key product Cold-Eeze(R), a zinc gluconate glycine
lozenge, is proven in two double-blind clinical studies to reduce the duration
and severity of the common cold symptoms by nearly half. Cold-Eeze(R) is now an
established product in the health care and cold remedy market.
In January 2000, Darius International Inc., a wholly owned subsidiary of the
Company, was formed as a means of introducing new products to the marketplace.
On January 2, 2001, the Company acquired certain assets and assumed certain
liabilities of a privately held company involved in the direct marketing and
distribution of health and wellness products, this entity is a wholly owned
subsidiary of Darius International Inc. and is based in Provo, Utah.
In January 2001, the Company formed an Ethical Pharmaceutical Unit which is now
Quigley Pharma Inc., a wholly-owned subsidiary of the Company, that is under the
direction of its Executive Vice President and Chairman of its Medical Advisory
Committee. The establishment of a dedicated pharmaceutical subsidiary may enable
the Company to diversify into the prescription drug market and to ensure safe
and effective distribution of these important potential new products currently
under development.
Additionally, effective July 1, 2000, the Company acquired a 60% ownership
position in Caribbean Pacific Natural Products, Inc. ("CPNP"), based in Orlando,
Florida. In December 2002, the Board of Directors of the Company approved a plan
to sell CPNP. On January 22, 2003, the Board of Directors of the Company
completed the sale of the Company's 60% equity interest in CPNP. This business
segment is presented as discontinued operations in the Consolidated Statements
of Operations and as assets held for sale and as liabilities associated with
assets for sale in the Consolidated Balance Sheets. See further discussion of
this disposition in Item 8, Notes to Financial Statements, Note 3 - Discontinued
Operations.
DESCRIPTION OF BUSINESS OPERATIONS
Since its inception, the Company has continued to conduct research and
development into various types of health-related food supplements and
homeopathic cold remedies. Initially, the Company's business was the marketing
and distribution of a line of nutritious health supplements (hereinafter
"Nutri-Bars"). During 1995, the Company reduced the emphasis in the marketing of
the Nutri-Bars and commenced focusing its marketing and research and development
resources towards the Company's patented Cold-Eeze(R) zinc gluconate glycine
cold relief products.
Prior to the fourth quarter 1996, the Company had minimal revenues and as a
result suffered continued losses due to ongoing research and development and
operating expenses. However, 1997 resulted in significant revenue increases as a
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result of the Company's nationwide marketing campaign and the increased public
awareness through media public service announcements of the Cold-Eeze(R) lozenge
product.
Since June 1996, the cold-remedy segment has concentrated its business
operations on the manufacturing, marketing and development of its proprietary
Cold-Eeze(R) and Cold-Eezer Plus cold-remedy lozenge products and on development
of various product extensions. These products are based upon a proprietary zinc
gluconate glycine formula, which in two double-blind clinical studies has shown
to reduce the duration and severity of the common cold symptoms. The Quigley
Corporation acquired worldwide manufacturing and distribution rights to this
formulation in 1992 and commenced national marketing in 1996. The demand for the
Company's cold remedy products is seasonal, where the third and fourth quarters
generally represent the largest sales volume for cold remedy.
Darius International Inc., a wholly owned subsidiary, was formed in January 2000
for the purpose of introducing new products to the marketplace through a network
of independent distributors. Darius is a direct selling organization
specializing in proprietary health and wellness products. The Company commenced
shipping product to customers in the third quarter of 2000. On January 2, 2001,
the Company acquired certain assets and assumed certain liabilities of a
privately held company involved in the direct marketing and distribution of
health and wellness products. This entity is a wholly owned subsidiary of Darius
International Inc.
During 2002, approximately 99% of the Company's revenues from Cold-Eeze(R) and
Darius originated in the United States with the remainder being attributable to
international trade.
The formation of Darius International Inc., provides diversification to the
Company in both the method of product distribution and the broader range of
products available to the marketplace.
In January 2001, the Company formed an Ethical Pharmaceutical Unit which is now
Quigley Pharma Inc., a wholly-owned subsidiary of the Company, that is under the
direction of its Executive Vice President and Chairman of its Medical Advisory
Committee. The formation of the Company's Ethical Pharmaceutical Unit follows
the Patent Office of The United States Commerce Department confirming the
assignment to the Company of a Patent Application for the "Method and
Composition for the Topical Treatment of Diabetic Neuropathy." In September
2001, the Patent Office confirmed the assignment to the Company of a Patent
Application entitled the "Medicinal Composition and Method of Using it" (for
Treatment of Sialorrhea and other Disorders) for a prescription product to
relieve sialorrhea (drooling) in patients suffering from Amyotrophic Lateral
Sclerosis (ALS), otherwise known as Lou Gehrig's Disease. In November 2001, the
Company was assigned a Patent Application entitled "Composition and Method for
Prevention, Reduction and Treatment of Radiation Dermatitis" with the Patent
Office of The United States Commerce Department. In September 2002, the Company
filed a foreign patent application for "Method and Composition for the Topical
Treatment of Diabetic Neuropathy" in Europe and other foreign markets. The
establishment of a dedicated pharmaceutical subsidiary may enable the Company to
diversify into the prescription drug market and to ensure safe and effective
distribution of these important potential new products currently under
development.
Financial information regarding the Company's operating segments is set forth in
Item 8, Notes to Financial Statements, Note 4 - Segment Information.
PRODUCTS
COLD REMEDY PRODUCTS
Cold-Eeze(R), a zinc gluconate glycine formulation (ZIGG(TM)) is an
over-the-counter consumer product used to reduce the duration and severity of
the common cold and is sold in lozenge, bubble gum and sugar-free tablet forms.
In addition, during 2003 the Company plans to launch a Cold-Eeze(R) nasal spray.
This product, a moisturizing nasal spray containing the active ingredient Zinc
Gluconate and also containing Aloe Vera gel, is expected to begin shipping to
retail in July 2003.
In May 1992, the Company entered into an exclusive agreement for worldwide
representation, manufacturing, marketing and distribution rights to a zinc
gluconate glycine lozenge formulation which was patented in the United States,
United Kingdom, Sweden, France, Italy, Canada, Germany, and is pending in Japan.
This product 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. Under a Food
and Drug Administration ("FDA")
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approved Investigational New Drug Application, filed by Dartmouth College, a
randomized double-blind placebo-controlled study, conducted at Dartmouth College
of Health Science, Hanover, New Hampshire, concluded that the lozenge
formulation treatment, initiated within 48 hours of symptom onset, resulted in a
significant reduction in the total duration of the common cold.
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 formulation delivers approximately 93% of the active
Zinc to the mucosal surfaces and (c) the patient has the same sequence of
symptoms as in the absence of treatment, but goes through the phases at an
accelerated rate and with reduced symptom severity.
On July 15, 1996, results of a new randomized double-blind placebo-controlled
study on the common cold were published, which commenced at the Cleveland Clinic
Foundation on October 3, 1994. The study called "ZINC GLUCONATE LOZENGES FOR
TREATING THE COMMON COLD" was completed and published in THE ANNALS OF INTERNAL
MEDICINE - VOL. 125 NO. 2. Using a 13.3mg lozenge (almost half the strength of
the lozenge used in the Dartmouth Study), the result still showed a 42%
reduction in the duration of the common cold symptoms.
In April 2002, the Company announced the statistical results of a retrospective
clinical study that suggests that Cold-Eeze(R) is also an effective means of
preventing the common cold. This adolescent study indicated that when taken
daily, Cold-Eeze(R) statistically lessens the number of colds an individual
suffers per year, reducing the median from 1.5 to zero. These findings are the
result of analyzing three years of clinical data at the Heritage School facility
in Provo, Utah. The study also found that the use of Cold-Eeze(R) to treat a
cold statistically reduces the use of antibiotics for respiratory illnesses from
39.3% to 3.0% when Cold-Eeze(R) is administered as a first line treatment
approach to the common cold. Additionally, the study reinforces the original
clinical trials, concluding that Cold-Eeze(R) reduces the median duration of a
cold by four days. In April 2002, the Company was assigned a Patent Application
which was filed with the Patent Office of the United States Commerce Department
for the use of Cold-Eeze(R) as a prophylactic for cold prevention. The new
patent application follows the results of the adolescent study at the Heritage
School facility.
In the second half of 1998, the Company launched Cold-Eeze(R) in a sugar free
version of the product to benefit diabetics and other consumers concerned with
their sugar intake. Late in the fourth quarter of 1998, the Company launched a
bubble gum version of Cold-Eeze(R).
The business of the Company is subject to federal and state laws and regulations
adopted for the health and safety of users of the Company's products.
Cold-Eeze(R) is a homeopathic remedy that is subject to regulations by various
federal, state and local agencies, including the FDA and the Homeopathic
Pharmacopoeia of the United States.
The Company competes with suppliers varying in range and size in the cold remedy
products arena. Cold-Eeze(R), which has been clinically proven, offers a
significant advantage over other suppliers in the over-the-counter cold remedy
market. The management of the Company believes there should be no future
impediment on the ability to compete in the marketplace now, or in the immediate
future, since factors concerning the product, such as price, product quality,
availability, reliability, credit terms, name recognition, delivery and support
are all properly positioned. The Company has several Broker, Distributor and
Representative Agreements, both nationally and internationally and the product
is distributed through numerous independent and chain drug and discount stores
throughout the United States.
The Company continues to use the resources of independent national and
international brokers complementing its own personnel to represent the Company's
over-the-counter products, thereby saving capital and other ongoing expenditures
that would otherwise be incurred.
ETHICAL PHARMACEUTICAL PRODUCTS
The establishment of an ethical pharmaceutical subsidiary may enable the Company
to diversify into the prescription drug market and to ensure safe and effective
distribution of these important potential new products currently under
development. Quigley Pharma is currently undergoing research and development
activity in compliance with regulatory requirements. The Company is at the
initial stages of what may be a lengthy process to develop these patent
applications into commercial products.
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The formation of the Company's Ethical Pharmaceutical Unit follows the Patent
Office of The United States Commerce Department confirming the assignment to the
Company of the following patent applications:
o A Patent Application entitled "Method and Composition for the Topical
Treatment of Diabetic Neuropathy."
o A Patent Application entitled "Medicinal Composition and Method of
Using It" (for Treatment of Sialorrhea and other Disorders) for a
product to relieve sialorrhea (drooling) in patients suffering from
Amyotrophic Lateral Sclerosis (ALS), otherwise known as Lou Gehrig's
Disease.
o A Patent Application entitled "Composition and Method for Prevention,
Reduction and Treatment of Radiation Dermatitis" with the Patent
Office of The United States Commerce Department.
In September 2002, the Company filed a foreign patent application entitled
"Method and Composition for the Topical Treatment of Diabetic Neuropathy" in
Europe and other foreign markets.
The pre-clinical development, clinical trials, product manufacturing and
marketing of Quigley Pharma's potential new products are subject to federal and
state regulation in the United States and other countries. Obtaining FDA
regulatory approval for these pharmaceutical products can require substantial
resources and take several years. The length of this process depends on the
type, complexity and novelty of the product and the nature of the disease or
other indications to be treated. If the Company cannot obtain regulatory
approval of these new products in a timely manner or if the patents are not
granted or if the patents are subsequently challenged, these possible events
could all have a material effect on the business and financial condition of the
Company. The strength of the Company's patent position may be important to its
long-term success. There can be no assurance that these patents and patent
applications will effectively protect the Company's products from duplication by
others.
In April 2002, the Company initiated a Phase II proof of concept study in France
for treatment of diabetic neuropathy. Because the Company's formulation for
relief of diabetes-related pain is a topical treatment and its ingredients are
GRAS listed (Generally Regarded As Safe) as identified in the Code of Federal
Regulations, FDA approval could potentially be obtained earlier than what is
normally required in the FDA process.
In July 2002, the Company announced the commencement of a Phase II clinical
trial on a new formulation being developed and tested by the Company to relieve
Sialorrhea (excess secretions of the salivary glands, causing drooling) in
patients suffering from diseases including Amyotrophic Lateral Sclerosis (ALS),
otherwise known as Lou Gehrig's Disease, Cerebral Palsy, Parkinson's Disease,
and Muscular Dystrophy.
HEALTH AND WELLNESS PRODUCTS
Darius International Inc., a wholly owned subsidiary, was formed in January 2000
for the purpose of introducing new products to the marketplace through a network
of independent distributors. On January 2, 2001, the Company acquired certain
assets and assumed certain liabilities of a privately held company involved in
the direct marketing and distribution of health and wellness products. Darius is
a direct selling organization specializing in proprietary health and wellness
products. The products marketed and sold by Darius are herbal vitamins and
dietary supplements for the human condition, in the areas of health, immunity,
energy and pain.
PATENTS, TRADEMARKS, ROYALTY AND COMMISSION AGREEMENTS
The Company currently owns no patents. However, the Company has been assigned
patent applications which are hereinafter discussed and has been granted an
exclusive agreement for worldwide representation, manufacturing, marketing and
distribution rights to a zinc gluconate glycine lozenge formulation, which are
patented as follows:
United States: No. 4 684 528 (August 4, 1987) Sweden: No. 0 183 840 (March 2, 1994)
No. 4 758 439 (July 19, 1988) Canada: No. 1 243 952 (November 1, 1988)
Germany: No. 3,587,766 (March 2, 1994) Great Britain: No. 2 179 536 (December 21, 1988)
France & Italy: No. EP 0 183 840 B1 (March 2, 1994) Japan: Pending
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In 1996, the Company also acquired an exclusive license for a United States ZINC
GLUCONATE USE PATENT NUMBER RI 33,465 from the patent holder. This use patent
gives the Company exclusive rights to both the use and formulation patents on
zinc gluconate for reducing the duration and severity of the common cold
symptoms. This patent and exclusive license expired in March 2002. The Company
does not anticipate any material impact on the financial statements from the
expiration of the patent.
The Cold-Eeze(R) product is manufactured for the Company by a contract
manufacturer and marketed by the Company in accordance with the terms of a
licensing agreement (between the Company and the developer). The contract is
assignable by the Company with the developer's consent. Throughout the duration
of the agreement, the developer is to receive a three percent (3%) royalty on
sales collected, less certain deductions. A separate consulting agreement
between the parties referred to directly above was similarly entered into on May
4, 1992, whereby the developer is to receive a consulting fee of two percent
(2%) on sales collected, less certain deductions, for consulting services to the
Company with respect to such product.
Pursuant to the License Agreement entered into between the Company and the
patent holder, which expired in March 2002, the Company has paid a royalty fee
to the patent holder of three percent (3%) on sales collected, less certain
deductions.
During 1997, the Company obtained a trademark for the major components of its
lozenge, ZIGG(TM) (denoting zinc gluconate glycine), to set Cold-Eeze(R) apart
from the imitations proliferating the marketplace.
An agreement between the Company and its 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 this agreement
on May 31, 2005.
In December 2000, the Patent Office of The United States Commerce Department
confirmed the filing and assignment to the Company of a Patent Application for
the "Method and Composition for the Topical Treatment of Diabetic Neuropathy."
In September 2001, the Patent Office confirmed the assignment to the Company of
a Patent Application entitled the "Medicinal Composition and Method of Using it"
(for Treatment of Sialorrhea and other Disorders) for a product to relieve
sialorrhea (drooling) in patients suffering from Amyotrophic Lateral Sclerosis
(ALS), otherwise known as Lou Gehrig's Disease. In November 2001, the Company
was assigned a Patent Application entitled "Composition and Method for
Prevention, Reduction and Treatment of Radiation Dermatitis" with the Patent
Office of The United States Commerce Department. In September 2002, the Company
filed a foreign patent application entitled "Method and Composition for the
Topical Treatment of Diabetic Neuropathy" in Europe and other foreign markets.
PRODUCT DISTRIBUTION AND CUSTOMERS
The Company has several Broker, Distributor and Representative Agreements, both
nationally and internationally, which provide for commission compensation based
on sales performance.
The Cold-Eeze(R) products are distributed through numerous food, chain drug and
mass merchandisers throughout the United States, including Walgreens,
Albertsons, CVS, RiteAid, Eckerd Drug Company, B.J's Wholesale Club, Inc.,
Winn-Dixie Stores, Inc., Wal-Mart, Target, The Kroger Company, Safeway Inc.,
CostCo Wholesale, KMart Corporation, and wholesale distributors including,
AmeriSource-Bergen Drug Company, Cardinal Health and the McKesson Drug Company.
The Company is not dependent on any single customer as the broad range of
customers includes many large wholesalers, mass merchandisers, and multi-outlet
pharmacy chains, five of which account for a significant percentage of sales
volume. The top five customers of the Company represent 23%, 35%, and 40% of its
continuing consolidated gross revenues for the years ended December 31, 2002,
2001 and 2000, respectively. During 2001 and 2000, one customer, Walgreens
exceeded 10% of the Company's sales volume.
Darius is a direct selling organization specializing in proprietary health and
wellness products and the introduction of new products to the marketplace
through a network of independent distributors. This method of distribution is in
contrast to traditional distribution channels using independent and chain drug
and discount stores as utilized by the Company in the promotion of the cold
remedy products.
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Quigley Pharma currently has no sales since it is undergoing research and
development activity in compliance with regulatory requirements and is at the
initial stages of what may be a lengthy process to develop commercial products.
RESEARCH AND DEVELOPMENT
The Company's research and development costs for the years ended December 31,
2002, 2001 and 2000 were $2,663,291, $1,331,639, and $1,185,750, respectively.
Future research and development expenditures are anticipated in order to develop
extensions of the Cold-Eeze(R) product, including potential unrelated new
products in the consumer health care industry, that are primarily supported by
clinical studies, for efficacious long-term products that can be coupled with
possible line extension derivatives for a family of products. Clinical studies
and testing are anticipated in connection with Quigley Pharma Inc., a
wholly-owned subsidiary of the Company established in 2001, such as the
formulation of products for diabetic use, radiation dermatitis and sialorrhea
and other disorders. Principally, the increase of research and development costs
in 2002 was due to expenses incurred as part of the product research costs
related to Quigley Pharma and study costs associated with Cold-Eeze(R). Quigley
Pharma is currently involved in research activity following patent applications
that the Company has acquired and such research and development costs relating
to potential products are expected to increase significantly over time as
product research and testing progresses.
REGULATORY MATTERS
The business of the Company is subject to federal and state laws and regulations
adopted for the health and safety of users of the Company's products. The
Company's Cold-Eeze(R) product is a homeopathic remedy, which is subject to
regulation by various federal, state and local agencies, including the FDA and
the Homeopathic Pharmacopoeia of the United States. These regulatory authorities
have broad powers, and the Company is subject to regulatory and legislative
changes that can affect the economics of the industry by requiring changes in
operating practices or by influencing the demand for, and the costs of,
providing its products. Management believes that the Company is in compliance
with all such laws, regulations and standards currently in effect including the
Food, Drug and Cosmetics Act of 1938 and the Homeopathic Pharmacopoeia
Regulatory Service. Although it is possible that future results of operations
could be materially affected by the future costs of compliance, management
believes that the future costs will not have a material adverse effect on the
Company's financial position or competitive position.
The pre-clinical development, clinical trials, product manufacturing and
marketing of Quigley Pharma's potential new products are subject to federal and
state regulation in the United States and other countries. Obtaining FDA
regulatory approval for these pharmaceutical products can require substantial
resources and take several years. The length of this process depends on the
type, complexity and novelty of the product and the nature of the disease or
other indications to be treated. If the Company cannot obtain regulatory
approval of these new products in a timely manner or if the patents are not
granted or if the patents are subsequently challenged, these possible events
could all have a material effect on the business and financial condition of the
Company. The strength of the Company's patent position may be important to its
long-term success. There can be no assurance that these patents and patent
applications will effectively protect the Company's products from duplication by
others.
COMPETITION
The Company competes with other suppliers of cold remedy and health and wellness
products. These suppliers range widely in size. Some of the Company's
competitors have significantly greater financial, technical or marketing
resources than the Company. Management believes that its Cold-Eeze(R) product,
which has been clinically proven in two double-blind studies to reduce the
severity and duration of the common cold symptoms, offers a significant
advantage over many of its competitors in the over-the-counter cold remedy
market. Management further believes that Darius' direct marketing distribution
methods offer a significant advantage over many of its competitors. The Company
believes that its ability to compete depends on a number of factors, including
price, product quality, availability and reliability, credit terms, name
recognition, delivery time and post-sale service and support.
EMPLOYEES
At December 31, 2002 the Company employed 59 full-time persons, primarily all of
whom were involved in an executive, marketing or administrative capacity. None
of the Company's employees are covered by a collective bargaining agreement or
is a member of a union.
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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
product is manufactured by a third party manufacturer whose majority of revenues
are from the Company. Should these relationships terminate or discontinue for
any reason, the Company has formulated a contingency plan necessary in order to
prevent such discontinuance from materially affecting the Company's operations
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 cold remedy products are available
from numerous sources. Currently, they are being procured from a single vendor
in order to secure purchasing economies. In a situation where this one vendor is
not able to supply the contract manufacturer with the ingredients, other sources
have been identified. Any situation where the vendor is not able to supply the
contract manufacturer with the ingredients may result in a temporary delay in
production until replacement supplies are obtained to meet the Company's
production requirements.
Darius' products for resale are sourced from several suppliers. In the event
that such sources were no longer in a position to supply Darius with product,
other vendors have been identified as reliable alternatives with minimal adverse
loss of business.
ITEM 2. DESCRIPTION OF PROPERTY
The corporate office of The Quigley Corporation is located at 621 Shady Retreat
Road, Doylestown, Pennsylvania. This property, with an area of approximately
13,000 square feet, was purchased in November 1998 and refurbished during 1999.
The Company occupies warehouse space in Las Vegas, Nevada at a monthly cost of
$2,326. This Nevada location has a three-year lease that expires in July 2003.
In addition to storage facilities at the manufacturers' locations, the Company
also stores product in three additional warehouses in Pennsylvania with storage
charges based upon the quantities of product being stored.
The Darius business in Utah is located at 867 East 2260 South, Provo, Utah, with
an area of approximately 17,650 square feet. The current monthly lease cost of
this office space is $7,955 with the lease expiring in July 2007. The Company
expects that these leases will be renewed or that alternative spaces will be
obtained.
The Company believes that its existing facilities are adequate.
ITEM 3. LEGAL PROCEEDINGS
TESAURO AND ELEY
In September, 2000, the Company was sued by two individuals (Jason Tesauro and
Elizabeth Eley, both residents of Georgia), on behalf of a "nationwide class" of
"similarly situated individuals," in the Court of Common Pleas of Philadelphia
County, Pennsylvania. The Complaint alleges that the Plaintiffs purchased
certain Cold-Eeze(R) products between August, 1996, and November, 1999, based
upon cable television, radio and internet advertisements which allegedly
misrepresented the qualities and benefits of the Company's products. The
Complaint requests an unspecified amount of damages for violations of
Pennsylvania's consumer protection law, breach of warranty and unjust
enrichment, as well as a judicial determination that the action be maintained as
a class action.
In October, 2000, the Company filed Preliminary Objections to the Complaint
seeking dismissal of the action. The Court sustained certain objections thereby
narrowing Plaintiffs' Complaint. In May, 2001, Plaintiffs filed a Motion to
Certify the Alleged Class. The Company opposed the Motion. In November, 2001,
the Court held a hearing on Plaintiffs' Motion for Class Certification. In
January, 2002, the Court denied in part and granted in part the Plaintiffs'
Motion. The Court denied Plaintiffs' Motion to Certify a Class based on
Plaintiffs' claim under the Pennsylvania Consumer Protection Law; however, the
Court certified the class based on Plaintiffs' breach of warranty and unjust
enrichment claims.
The Company believes Plaintiffs' claim is completely without merit, and is
vigorously defending the lawsuit and has denied any liability to the Plaintiffs.
No assessment as to the outcome of this action can be made at this time.
-9-
GOLDBLUM AND WAYNE
A Special Meeting of the Quigley stockholders was held on October 15, 1999, at
which a majority of the shares entitled to vote adopted a Corrective Action
Proposal (initially reported in the Company's Form 10-Q for the quarter ending
June 30, 1999) to ratify actions previously taken by the Company relating to the
1990 1 for 2.74 reverse split, the 1995 1 for 10 reverse split (the "Reverse
Splits") and the 1997 1 for 2 forward split (the "Forward Split"). Pursuant to
the October 15, 1999 Special Meeting, the Company authorized the filing of a
declaratory judgment action in Nevada to determine the effectiveness of the
Corrective Action.
In August 2000, the District Court of Clark County, Nevada, held that it had
jurisdiction to decide the Company's declaratory judgment action filed in April,
2000, against two putative shareholders (Thomas Goldblum and Alan Wayne), in
which the Company seeks a judicial declaration that, based on stockholder
approval of the Corrective Action Proposal, the Reverse Splits and Forward Split
satisfy and/or comply with Nevada law and that the capitalization of Quigley
evidenced by the issued and outstanding shares of common stock and common stock
warrants is as reflected on Quigley's stock transfer ledger on September 10,
1999, the record date of the Special Meeting. The District Court of Clark County
held a hearing on this matter on March 19, 2002 and ruled in favor of The
Quigley Corporation. A final judgment has been entered of record by the Court on
June 21, 2002. The period for appeal of this order to the Nevada Supreme Court
has expired.
An underlying claim filed by Goldblum and Wayne in the Court of Common Pleas of
Montgomery County, Pennsylvania on March 17, 1996 alleging that the plaintiffs
became owners of 500,000 shares each of the Company's common stock in or about
1990 and requested damages in excess of $100,000 for breach of contract and
conversion.
The Company is vigorously defending this lawsuit and has denied any liability to
the plaintiffs. The Company also believes that the plaintiffs' claims are barred
by the applicable statutes of limitations, and that the plaintiffs are, in any
event, limited to claims for approximately 36,000 shares. The Company continues
to believe that the plaintiffs' claims are without merit. No assessment as to
the outcome of this action can be made at this time.
INTERVENTION, INC.
An action was filed by Intervention, Inc. on July 2, 2002 in Contra Costa County
Superior Court under the California Unfair Competition Law, Business and
Professions Code, Section 17200. The Complaint claims that COLD-EEZE(R) does not
contain ionic zinc and therefore does not have the unique quality the Company
asserts for it. The Complaint purports to attack The Cleveland Clinic Study
titled Zinc Gluconate Lozenges for Treating the Common Cold and the Dartmouth
Study, Zinc Gluconate and The Common Cold: A Controlled Clinical Study. The
plaintiff claims that the Dartmouth Study is not double-blind and is not
randomized. The plaintiff also claims that The Cleveland Clinic Study is untrue
and deceptive because it did not conclude that patients "starting treatments"
with zinc had a 42% reduction in duration of the common cold and, also, because
the 42% reduction in common cold duration is not a reference to average of cold
duration but rather is a reference to the reduction in median duration. There is
also a claim by the plaintiff that there is an implied claim that the results in
the studies have been confirmed by repetition which plaintiff contests.
The plaintiff is requesting attorney's fees and costs, corrective equitable
relief including restitution and an injunction.
The Company believes plaintiff's claim is completely without merit, has no
scientific basis and is vigorously defending the lawsuit and has denied any
liability to the plaintiff. Certain pre-trial discovery and motions remain to be
completed and no prediction can be made as to the outcome of this case.
LITIGATION - FORMER EMPLOYEE
On April 12, 2002, the Company commenced a complaint in Equity in the Court of
Common Pleas of Bucks County, PA against the former President of Darius
International Inc., its wholly owned subsidiary, following termination of such
President. The allegations in the complaint include, but are not limited to, an
alleged breach of fiduciary duty owed to the Company. The Company is seeking
both injunctive and monetary relief. On or about May 1, 2002, the defendant
filed a counterclaim requesting that the Court declare him the lawful owner of
55,000 stock options, unspecified damages relating to an alleged breach of an
oral contract and for commissions allegedly owed. In addition, the Defendant
requests the return of certain intellectual property used to commence and
continue Darius' operations.
-10-
The Corporation believes Defendant's claims are without merit, is vigorously
defending the counterclaims and is prosecuting its action on its complaint. No
assessment as to the outcome of this action can be made at this time.
TERMINATED PROCEEDINGS
FORRESTER FINANCIAL LLC
On December 7, 2002, Forrester Financial LLC commenced an action by a Writ of
Summons filed in the Court of Common Pleas of Bucks County, PA against The
Quigley Corporation. No Complaint was filed detailing the claim of Forrester
Financial LLC against The Quigley Corporation. This action was terminated with
prejudice by Forrester Financial LLC as part of its agreement with The Quigley
Corporation on February 2, 2003 whereby certain warrants were scheduled to
expire on March 7, 2003 were extended to March 7, 2004 (warrants to purchase
250,000 shares at $8.50; warrants to purchase 250,000 shares at $11.50). As an
additional part of this agreement, Forrester Financial LLC was granted warrants
to purchase 250,000 shares at any time until March 7, 2004 at the price of $9.50
a share.
HERBERT KRACKOW
On or about December 16, 2002, Herbert Krackow commenced an action in the First
Circuit Court of the Ninth Judicial Circuit in and for Orange County, Florida
against The Quigley Corporation, Caribbean Pacific International, and Caribbean
Pacific Natural Products, Inc. asking that the Asset Sale Agreement between The
Quigley Corporation and Caribbean Pacific International be set aside and that
the plaintiff be made whole on an alleged Consulting Agreement for a four-year
period ending on June 30, 2001. This action has been discontinued by the
plaintiff with prejudice and the plaintiff has waived his right for any past or
future claim against the Corporation in a Release executed by him in favor of
The Quigley Corporation and Caribbean Pacific Natural Products. The Quigley
Corporation entered into the Joint Mutual Release with the plaintiff without
payment of any funds under the Uniform Consideration Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock, $.0005 par value, is currently traded on the NASDAQ
National Market under the trading symbol "QGLY". The price set forth in the
following table represents the high and low sale prices for the Company's common
stock.
Common Stock
------------------
2002 2001
--------------------- -------------------------
Quarter Ended High Low High Low
- ------------- ---- --- ---- ---
March 31 $7.280 $2.030 $1.531 $0.813
June 30 $8.849 $5.400 $1.960 $0.750
September 30 $8.050 $3.050 $1.600 $0.800
December 31 $7.090 $2.400 $2.390 $0.830
Such quotations reflect inter-dealer prices, without mark-up, mark-down or
commission and may not represent actual transactions.
The Company's securities are traded on the NASDAQ National Market and
consequently stock prices are available daily as generated by the National
Market established quotation system.
-11-
HOLDERS
As of December 31, 2002, there were approximately 367 holders of record of the
Company's Common Stock, including brokerage firms, clearing houses, and/or
depository firms holding the Company's securities for their respective clients.
The exact number of beneficial owners of the Company's securities is not known
but exceeds 400.
DIVIDENDS
The Company has not declared, nor paid, any cash dividends on its Common Stock.
At this time the Company intends to retain its earnings to finance future growth
and maintain liquidity.
WARRANTS AND OPTIONS
In addition to the Company's outstanding Common Stock, there are, as of December
31, 2002, issued and outstanding Common Stock Purchase Warrants and Options that
are exercisable at the price-per-share stated and expire on the date indicated,
as follows:
Description Number Exercise Price Expiration Date
----------- ------ -------------- ---------------
Warrants 250,000 $ 8.5000 March 7, 2004
Warrants 250,000 $11.5000 March 7, 2004
CLASS "E" 850,000 $ 1.7500 June 30, 2006
CLASS "F" 225,000 $ 2.5000 November 4, 2006
CLASS "G" 585,000 $10.0000 May 5, 2007
Option Plan 496,500 $ 9.6800 December 1, 2007
Option Plan 381,000 $ 5.1250 April 6, 2009
Option Plan 368,000 $ 0.8125 December 20, 2010
Option Plan 380,000 $ 1.2600 December 10, 2011
Option Plan 375,000 $ 5.1900 July 30, 2012
Option Plan 102,000 $ 5.4900 December 17, 2012
At December 31, 2002, there were 4,262,500 unexercised and vested options and
warrants of the Company's stock available for exercise.
SECURITIES AUTHORIZED UNDER EQUITY COMPENSATION
The following table sets forth certain information regarding stock option and
warrant grants made to executive officers, directors and consultants:
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Number of Securities to Weighted Average
be Issued Upon Exercise Exercise Price of
of Outstanding Options & Outstanding Options
Warrants & Warrants
Plan Category (A) (B)
- ---------------------------------------------------- --------------------------- ----------------------
Equity Plans Approved by Security Holders(1) 2,102,500 $4.78
Equity Plans Not Approved by Security Holders(2) 2,160,000 $5.97
Total 4,262,500 $5.38
Number of Securities Remaining
Available for Future Issuance Under
Equity Compensation Plans (Excluding
Securities Reflected in Column A)
Plan Category (C)
- ------------------------------------------------ --------------------------------------
Equity Plans Approve by Security Holders(1) 839,000
Equity Plans Not Approved by Security Holders (1) -
Total 839,000
(1) An incentive stock option plan was instituted in 1997, (the "1997 Stock
Option Plan") and approved by the stockholders in 1998. Options pursuant to
the 1997 Stock Option Plan have been granted to directors, executive
officers, and employees.
(2) Other grants of warrants are specific and not part of a plan. These
specific grants were to executive officers, employees and consultants for
services.
-12-
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the selected financial data of the Company for,
and at the end of the years ended December 31, 2002, 2001, 2000, 1999 and 1998.
The data presented below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's financial statements and notes thereto appearing elsewhere herein.
(Amounts in thousands, except Year Ended Year Ended Year Ended Year Ended Year Ended
per share data) December 31, December 31, December 31 December 31, December 31,
2002 2001 2000 1999 1998
------------------------------------------------------------------
Statement of Income Data:
Sales $ 31,286 $ 23,048 $ 18,565 $ 24,820 $ 36,354
Co-operative advertising promotions 2,014 1,822 3,038 3,246 2,024
Total Revenue 29,421 22,772 15,527 21,574 34,330
Gross Profit 12,212 12,551 9,411 13,240 23,411
Income (Loss) - continuing operations (5,132) 934 (5,059) (4,204) 6,809
Loss - discontinued operations (1,322) (718) (137) -- --
Net Income (Loss) (6,454) 216 (5,196) (4,204) 6,809
Basic earnings (Loss) per share:
Continuing operations ($ 0.47) $ 0.09 ($ 0.48) ($ 0.37) $ 0.51
Discontinued operations ($ 0.12) ($ 0.07) ($ 0.01) -- --
Net income (Loss) ($ 0.59) $ 0.02 ($ 0.49) ($ 0.37) $ 0.51
Diluted earnings (Loss) per share:
Continuing operations ($ 0.47) $ 0.09 ($ 0.48) ($ 0.37) $ 0.46
Discontinued operations ($ 0.12) ($ 0.07) ($ 0.01) -- --
Net income (Loss) ($ 0.59) $ 0.02 ($ 0.49) ($ 0.37) $ 0.46
Weighted average shares outstanding:
Basic 10,894 10,675 10,551 11,352 13,335
Diluted 10,894 10,751 10,551 11,352 14,944
As of As of As of As of As of
December 31, December 31, December 31, December 31, December 31,
2002 2001 2000 1999 1998
-------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital $15,964 $18,626 $18,622 $23,621 $43,024
Total assets 24,935 24,756 26,056 33,271 48,611
Stockholders' equity $18,423 $21,200 $20,971 $26,216 $44,607
In December 2002, the Board of Directors of the Company approved a plan to sell
Caribbean Pacific Natural Products, Inc. ("CPNP"). On January 22, 2003, the
Board of Directors of the Company completed the sale of the Company's 60% equity
interest in CPNP to Suncoast Naturals, Inc. The sale of this segment has been
treated as discontinued operations and all periods presented have been
reclassified.
-13-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Quigley Corporation, (the "Company"), headquartered in Doylestown,
Pennsylvania, is a leading marketer and distributor of a diversified range of
health and homeopathic products.
The Company's primary product continues to be Cold-Eeze(R), which is marketed in
lozenge, bubblegum and sugar-free tablet form. Cold-Eeze(R) is the only zinc
gluconate glycine product clinically proven in two double blind studies to
reduce the severity and duration of common cold symptoms. The efficacy of the
product was established following the publication of the second double blind
study in July 1996. A 2002 study also found that the use of Cold-Eeze(R) to
treat a cold statistically reduced the use of antibiotics for respiratory
illnesses by 92% when Cold-Eeze(R) is administered as a first line treatment
approach to the common cold. This study also reinforces the original clinical
trials, concluding that Cold-Eeze(R) reduces the median duration of a cold by
four days along with suggesting that Cold-Eeze(R) is an effective means of
preventing the common cold.
Cold-Eeze(R) is distributed through numerous independent, chain drug and
discount stores throughout the United States. Cold-Eeze(R) sales were reduced in
2002 over the previous year reflecting the compressed nature of the cold remedy
category as a whole during 2002. Additionally, the weak economy continues to be
an influence on the level of buying activity within the industry.
During 2002 Darius International made a significant contribution to the Company
with sales of $15,220,813 demonstrating the success of the Company's
diversification strategy initiated in 2000. The range of health and wellness
products sold by Darius International serves as a balance to the seasonal
revenue cycles of Cold-Eeze(R).
The establishment of an ethical pharmaceutical subsidiary, Quigley Pharma Inc.,
may enable the Company to diversify into the prescription drug market and to
ensure safe and effective distribution of these important potential new products
currently under development. During 2002 Quigley Pharma Inc. continued clinical
trials and study activities in various areas of interest.
The Company continues to use the resources of independent national and
international brokers to represent the Company's Cold-Eeze(R) products, which
provides cost efficiencies that benefit the Company.
Manufacturing for all the Company's products is done by outside sources. The
lozenge form is manufactured by a third party manufacturer whose majority of
revenues are from the Company, with the bubblegum and the sugar-free products
being produced by different manufacturers.
During 2002, the Company continued the process of the registration of the
Cold-Eeze(R) products in the United Kingdom as a pharmacy drug and incurred
approximately $500,000 in related expenses.
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.
In December 2002, the Board of Directors of the Company approved a plan to sell
Caribbean Pacific Natural Products, Inc. ("CPNP"). On January 22, 2003, the
Board of Directors of the Company completed the sale of the Company's 60% equity
interest in CPNP to Suncoast Naturals, Inc. ("Suncoast"). In exchange for its
60% equity interest in CPNP, the Company shall receive: (i) 750,000 shares of
Suncoast's common stock, which Suncoast has agreed, at its cost and within 60
days from the closing, to register for public resale through an appropriate
registration statement; and (ii) 100,000 shares of Suncoast's Series A
Redeemable Preferred Stock, which bears interest at a rate of 4.25% per annum
and which is redeemable from time to time after March 31, 2003 in such amounts
as is equal to 50% of the free cash flow reported by Suncoast in the immediately
preceding quarterly financial statements divided by the redemption price of
$10.00 per share. The Company owns 19.5% of Suncoast's issued and outstanding
capital stock.
-14-
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
148 "Accounting for Stock-Based Compensation - Transition and Disclosure an
amendment of FASB Statement No. 123" (SFAS 148) which amends SFAS 123 to provide
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation. It
also amends the disclosure provisions of SFAS 123 to require prominent
disclosure about the effects on reported net income of an entity's accounting
policy decisions with respect to stock-based employee compensation. It also
amends APB Opinion No. 28, "Interim Financial Reporting", to require disclosure
about those effects in interim financial information. The Company has adopted
the disclosure requirements of SFAS 148 in this Form 10-K for the fiscal year
ended December 31, 2002.
In November 2002, the FASB issued FIN 45 "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" (FIN 45), which elaborates on the disclosures to be made by a guarantor
about its obligations under certain guarantees that it has issued. It also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN 45 are effective for
financial statements for periods ending after December 15, 2002. The initial
recognition and initial measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. The
adoption of this statement did not have a material impact on the Company's
consolidated financial position or results of operations.
In June 2002, the FASB issued Statement of Financial Accounting Standards, or
SFAS, No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." This Statement addresses financial accounting and reporting for
costs associated with exit or disposal activities and supercedes Emerging Issues
Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity including Certain Costs
Incurred in a Restructuring." The Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF 94-3, a liability for an exit cost was recognized at the
date of commitment to an exit or disposal plan. This Statement also establishes
that fair value is the objective for initial measurement of the liability. The
Company must adopt SFAS No. 146 for all exit or disposal activities that are
initiated after December 31, 2002. Management does not believe that adopting
this pronouncement will have a material impact on the Company's consolidated
financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The statement retains the previously existing accounting
requirements related to the recognition and measurement of the impairment of
long-lived assets to be held and used while expanding the measurement
requirements of long-lived assets to be disposed of by sale to include
discontinued operations. It also expands the previously existing reporting
requirements for discontinued operations to include a component of an entity
that either has been disposed of or is classified as held for sale. The Company
adopted SFAS No. 144 on January 1, 2002. The adoption of this statement did not
have a material impact on the Company's consolidated financial position or
results of operations.
In June 2001, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 141, "Business Combinations." SFAS No. 141 requires that the purchase method
of accounting be used for all business combinations initiated after June 30,
2001. This statement specifies that certain acquired intangible assets in a
business combination be recognized as assets separately from goodwill and
existing intangible assets and goodwill be evaluated for these new separation
requirements. Goodwill and intangible assets determined to have indefinite
useful lives will not be amortized. The adoption of this statement did not have
a material impact on the Company's consolidated financial position or results of
operations.
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was issued by
the FASB. SFAS No. 142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. Amortization of goodwill, including
goodwill recorded in past business combinations, ceased upon adoption of this
statement. The Company adopted SFAS No. 142 on January 1, 2002. The adoption of
this statement did not have a material impact on the Company's consolidated
financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company is required to implement SFAS No.
143 on January 1, 2003. The adoption of this statement did not have a material
impact on the Company's consolidated financial position or results of
operations.
-15-
CRITICAL ACCOUNTING POLICIES
As previously described, the Company is engaged in the development,
manufacturing, and marketing of health and homeopathic products that are being
offered to the general public. Due to the nature of the business, it is unlikely
that any accounting policies, that are subject to estimations, could have a
material effect on the Company's results of operations. Certain key accounting
policies that may affect the results of the Company are the timing of revenue
recognition and sales incentives (including coupons, rebates and discounts); the
classification of advertising expenses; and the fact that all research and
development costs are expensed as incurred. Item 8. Notes to Financial
Statements, Note 1 Organization and Business describes the Company's other
significant accounting policies.
REVENUE RECOGNITION
Sales are recognized at the time ownership is transferred to the customer, which
is primarily the time the shipment is received by the customer. Sales returns
and allowances are provided for in the period that the related sales are
recorded. Provisions for these reserves are based on historical experience.
ADVERTISING
Advertising costs are expensed within the period to which they relate.
Advertising expense is made up of media advertising, presented as part of sales
and marketing expense; co-operative advertising, which is accounted for as a
deduction from sales; and free product, which is accounted for as part of cost
of sales. The level of advertising expense to be incurred is determined each
period to coincide with management's sales and marketing strategies. Advertising
costs incurred for the years ended December 31, 2002, 2001 and 2000 were
$4,794,955, $3,402,006 and $9,296,483, respectively. Included in prepaid
expenses and other current assets was $236,875 and $419,000 at December 31, 2002
and 2001, 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, 2002, 2001 and 2000 were
$2,663,291, $1,331,639 and $1,185,750, respectively. Principally, the
progressive increase of research and development costs was due to expenses
incurred as part of the product research costs related to Quigley Pharma and
study costs associated with Cold-Eeze(R). Quigley Pharma is currently involved
in research activity following patent applications that the Company has acquired
and such research and development costs relating to potential products are
expected to increase significantly over time as product research and testing
progresses. The Company is at the initial stages of what may be a lengthy
process to develop these patent applications into commercial products.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 2002 COMPARED WITH SAME PERIOD 2001
Revenues from continuing operations for 2002 were $29,420,646 compared to
$22,772,214 for 2001, reflecting an increase of 29%. 2002 revenues comprised
$14,199,833 relating to the Cold-Eeze(R) product (cold remedy segment) and
$15,220,813 from the Darius International (health and wellness segment),
compared to 2001 revenues of $16,983,635 and $5,788,579, by respective segment.
The 2001 Cold-Eeze(R) revenues included an amount of $1,546,592 as a result of
the settlement of the infringement suit against Gel Tech, LLC, the developer of
Zicam(TM), and Gum Tech International, Inc., its distributor as compared to
$148,866 in 2002. 2002 revenues report a reduction in Cold-Eeze(R) sales of
$2,783,802 due to the compression of the cold remedy category in general despite
the increase in the incidences of the common cold. In addition, the weak
economic conditions resulted in lower carrying amounts of inventory by our
customers and reduced order size and frequency. The health and wellness segment
reported significantly increased revenues in 2002 primarily due to strong
marketing and promotion programs effected throughout 2002.
Cost of sales from continuing operations for 2002 as a percentage of sales was
55%, compared to 44% for 2001. The 2002 increase is primarily due to the effects
of the significantly increased revenues from the health and wellness segment
whose cost of sales as a percentage of sales were 71% and 67% for 2002 and 2001,
respectively, reflecting this segment's lower profit margin compared to that of
Cold-Eeze(R) cold remedy segment.
-16-
Selling, general and administrative expenses from continuing operations for 2002
were $14,832,935 compared to $10,650,555 in 2001. The increase in 2002 was
primarily due to increased advertising of $1,392,952 necessary to support the
Cold-Eeze(R) product and a non-cash charge of $2,100,000 in 2002 for warrants
granted in connection with consulting services.
Research and Development costs from continuing operations in 2002 and 2001 were
$2,663,291 and $1,331,639, respectively. Principally, the increase of Research
and Development in 2002 was due to expenses associated with the ongoing research
and clinical activity of Quigley Pharma in the amount of $1,096,492.
During 2002, the Company's major operating expenses of salaries, brokerage
commissions, promotion, advertising, and legal costs accounted for approximately
$11,143,588 (64%) of the total operating expenses of $17,496,226, an increase of
60% over the 2001 amount of $6,983,346. The selling, general and administrative
expenses related to Darius for 2002 and 2001 were $3,235,793 and $2,457,236,
respectively
Revenues of Caribbean Pacific Natural Products, Inc. (discontinued operations)
for the twelve months ended December 31, 2002 and 2001 were $2,040,312, and
$2,176,470, respectively, net losses for the same periods were $1,322,355 and
$718,156. The loss relating to 2002 includes an amount of $633,233 relating to
the asset impairment. The results of Caribbean Pacific Natural Products are
represented as discontinued operations in the statements of operations with
balance sheet items being represented as assets held for sale and liabilities
associated with assets held for sale.
Total assets of the Company at December 31, 2002 and 2001 were $24,934,956 and
$24,755,795, respectively. Working capital decreased by $2,661,872 to
$15,963,949 at December 31, 2002. The primary influences on working capital
during 2002 were: the increase in cash balances, which was assisted by exercises
of warrants and options during 2002; reductions in inventory on hand; increased
advertising accruals due to increased activity; and increased liabilities
resulting from the fair value of warrants granted associated with consulting
services.
TWELVE MONTHS ENDED DECEMBER 31, 2001 COMPARED WITH SAME PERIOD 2000
For the year ended December 31, 2001, the Company had revenues from continuing
operations of $22,772,214, an increase of 46.7% over 2000 revenues of
$15,526,953. In 2001, net income from continuing operations of $934,120 compared
to a loss from continuing operations of $5,058,713 in 2000.
Revenues for 2001 included amounts of $5,788,579 relating to Darius
International (health and wellness segment) compared to $51,300 for 2000. The
Cold-Eeze(R) product (cold remedy segment) was adversely affected by continued
industry consolidations in which the Company's products are distributed, and the
effects of the economic downturn which was evident in the latter part of 2001.
However, independent market data indicates that the rate of decrease in consumer
purchasing of Cold-Eeze(R) had slowed. Additionally, in 2001 revenues were
assisted by the settlement in the infringement suit against Gel Tech, LLC, the
developer of Zicam(TM), and Gum Tech International, Inc., its distributor. Under
the agreement, Gum Tech paid the Company $1,137,500 for a limited license for
the use of zinc gluconate for the treatment of the duration and symptoms of the
common cold. Gum Tech was also required to pay the Company an ongoing royalty of
5.5 percent from April 1, 2001 through March 5, 2002 on all Zicam cold relief
sales. In addition, Gum Tech guaranteed to pay a minimum of $500,000 in ongoing
royalties regardless of sales through March 5, 2002. Legal and other expenses
associated with this lawsuit in 2001 approximated $700,000.
The Company's cost of sales from continuing operations as a percentage of sales
increased to 44.3% in 2001 from 32.9% in 2000. The primary reason for the
increase in 2001 was the higher proportion of sales attributable to Darius in
2001 (25%) compared to 2000 (0.3%). Darius products carry a higher a cost of
goods compared to Cold-Eeze(R) products.
Selling, general and administrative expenses from continuing operations for 2001
were $10,650,555 compared to $13,930,435 in 2000. Advertising costs in 2001
decreased by approximately $6,000,000, however this reduction in costs was
partially offset by increased operating costs of Darius which was due to limited
operations in 2000.
Research and Development costs from continuing operations in 2001 and 2000 were
$1,331,639 and $1,185,750, respectively. Principally, the increase of Research
and Development in 2001 and 2000 was due to expenses incurred as part of the
costs related to the application for a pharmacy drug license in the United
Kingdom, together with the research costs related to Quigley Pharma.
-17-
During 2001, the Company's major operating expenses from continuing operations
of salaries, brokerage commissions, promotion, advertising, and legal costs
accounted for approximately $6,983,346 (58%) of the total of $11,982,194, a
decrease of 37% over the 2000 amount of $11,030,430. The selling, general and
administrative expenses related to Darius for 2001 and 2000 were $2,457,236 and
$609,984, respectively.
Revenues of Caribbean Pacific Natural Products, Inc. for the twelve months ended
December 31, 2001 and 2000 were $2,176,470 and $798,866, respectively, net
losses for the same periods were $718,156 and $137,760. The results of Caribbean
Pacific Natural Products are represented as discontinued operations in the
statement of operations with balance sheet items being represented as assets
held for sale and liabilities associated with assets held for sale.
Total assets of the Company at December 31, 2001 and 2000 were $24,755,795 and
$26,055,601, respectively. Working capital increased by $3,694 to $18,625,821 at
December 31, 2001. The primary influences on working capital during 2001 were
the reductions in accrued expenses relating to advertising and royalties and
sales commissions with the related reduction in cash balances.
MATERIAL COMMITMENTS AND SIGNIFICANT AGREEMENTS
The Company's products are manufactured by outside sources. The Company has
agreements in place with these manufacturers, which insure a reliable source of
product for the future. The majority of revenues received by the facility
producing the Cold-Eeze(R) lozenge is from the Company.
The Company has agreements in place with independent brokers whose function is
to represent the Company's Cold-Eeze(R) products, in a product sales and
promotion capacity, throughout the United States and internationally. The
brokers are remunerated through a commission structure, based on a percentage of
sales collected, less certain deductions.
There are significant royalty and commission agreements between the Company and
patent holders of the Company's cold remedy products. The Company has entered
into royalty and consulting agreements with the patent holders that require
payments of 8% on sales collected, less certain deductions, and with the
founders who share a commission of 5% on sales collected, less certain
deductions. The agreement with one patent holder expired on March 5, 2002. The
agreements with the other patent holder expire on May 4, 2007, and with the
founders on May 31, 2005.
The Company has an agreement with the former owners of the Utah based direct
marketing and selling company, whereby they receive payments, currently totaling
5% of net sales collected, for use of product formulations, consulting,
confidentiality and non-compete agreements. Amounts paid or payable under such
agreement during 2002 and 2001 were $448,647 and $678,454, respectively. Amounts
payable under such agreement at December 31, 2002 and 2001 were $63,866 and
$54,941, respectively.
Certain operating leases for office and warehouse space maintained by the
Company resulted in rent expense for the years ended December 31, 2002, 2001 and
2000, of $236,304, $218,456 and $133,127, respectively. The future minimum lease
obligations under these operating leases are approximately $717,000.
The Company has committed to advertising costs approximating $130,000 relating
to 2003. Additional advertising cost is expected to be incurred for the
remainder of 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $15,963,949 and $18,625,821 at December 31,
2002 and 2001, respectively. Changes in working capital overall have been
primarily due to the following items: cash balances have increased by $3,212,775
due partly to remittances resulting from the exercise of options and warrants
during the year; inventory has decreased by $1,564,459 due to the management of
inventory levels; accrued advertising has increased by $890,783 as a result of
increased outside advertising activity in 2002 compared to 2001; remaining
current liabilities have increased in 2002 due to the increased business
activity of the health and wellness segment and also due to an accrued liability
in 2002 resulting from warrants granted associated with consulting services.
Total cash balances at December 31, 2002 were $12,897,080 compared to $9,684,305
at December 31, 2001.
Management believes that its revised strategy to establish Cold-Eeze(R) as a
recognized brand name, its broader range of products, its diversified
distribution methods as it relates to the health and wellness business segment,
adequate manufacturing capacity, growth in international sales together with its
current working capital should provide an internal source of capital to fund the
Company's business operations. In addition to anticipated funding from
operations, the Company and its subsidiaries may in the short and long term
raise capital through the issuance of equity securities to finance anticipated
growth.
-18-
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.
Management believes that cash generated from operations along with its current
cash balances will be sufficient to finance working capital and capital
expenditure requirements for at least the next twelve months.
IMPACT OF INFLATION
The Company is subject to normal inflationary trends and anticipates that any
increased costs should be passed on to its customers.
-19-
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
----
Balance Sheets as of December 31, 2002 and 2001 F-1
Statements of Operations for the years ended December 31, 2002, 2001, and 2000 F-2
Statements of Stockholders' Equity for the years ended December 31, 2002, 2001,
and 2000 F-3
Statements of Cash Flows for the years ended December 31, 2002, 2001, and 2000 F-4
Notes to Financial Statements F-5 to F-19
Responsibility for Financial Statements F-20
Report of Independent Accountants F-21
-20-
THE QUIGLEY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS December 31, 2002 December 31, 2001
----------------- -----------------
CURRENT ASSETS:
Cash and cash equivalents $ 12,897,080 $ 9,684,305
Accounts receivable (less doubtful accounts of $737,782 and $719,310) 4,188,123 4,175,394
Inventory 4,526,761 6,091,220
Prepaid expenses and other current assets 490,117 1,448,157
Assets held for sale 374,007 782,265
------------ ------------
TOTAL CURRENT ASSETS 22,476,088 22,181,341
------------ ------------
PROPERTY, PLANT AND EQUIPMENT - net 2,336,736 2,120,055
------------ ------------
OTHER ASSETS:
Patent rights - Less accumulated amortization -- 21,940
Goodwill, net 30,763 30,763
Other assets 1,000 1,000
Assets held for sale 90,369 400,696
------------ ------------
TOTAL OTHER ASSETS 122,132 454,399
------------ ------------
TOTAL ASSETS $ 24,934,956 $ 24,755,795
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 394,675 $ 818,805
Accrued royalties and sales commissions 1,146,495 868,621
Accrued advertising 1,559,575 668,792
Accrued consulting 1,673,000 --
Other current liabilities 1,353,383 844,461
Liabilities associated with assets held for sale 385,011 354,841
------------ ------------
TOTAL CURRENT LIABILITIES 6,512,139 3,555,520
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.0005 par value; authorized 50,000,000;
Issued: 16,102,670 and 15,321,206 shares 8,051 7,661
Additional paid-in-capital 32,592,222 28,915,612
Retained earnings 11,010,703 17,465,161
Less: Treasury stock, 4,646,053 and 4,646,053 shares, at cost (25,188,159) (25,188,159)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 18,422,817 21,200,275
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,934,956 $ 24,755,795
============ ============
See accompanying notes to financial statements
F-1
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
December 31, 2002 December 31, 2001 December 31, 2000
----------------- ----------------- -----------------
SALES:
Sales $ 31,285,394 $ 23,047,894 $ 18,565,319
Co-operative advertising promotions 2,013,614 1,822,272 3,038,366
------------ ------------ ------------
NET SALES 29,271,780 21,225,622 15,526,953
LICENCING FEES 148,866 1,546,592 --
------------ ------------ ------------
TOTAL REVENUE 29,420,646 22,772,214 15,526,953
------------ ------------ ------------
COST OF SALES 17,208,836 10,220,849 6,116,204
------------ ------------ ------------
GROSS PROFIT 12,211,810 12,551,365 9,410,749
------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing 4,941,174 3,220,789 8,225,242
Administration 9,891,761 7,429,766 5,705,193
Research and development 2,663,291 1,331,639 1,185,750
------------ ------------ ------------
TOTAL OPERATING EXPENSES 17,496,226 11,982,194 15,116,185
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (5,284,416) 569,171 (5,705,436)
INTEREST AND OTHER INCOME 152,313 364,949 646,723
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES
(5,132,103) 934,120 (5,058,713)
------------ ------------ ------------
INCOME TAXES -- -- --
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (5,132,103) 934,120 (5,058,713)
------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations (689,122) (718,156) (137,760)
Loss on impairment related to investment in sun-care and skincare
operations (633,233) -- --
------------ ------------ ------------
NET INCOME (LOSS) ($ 6,454,458) $ 215,964 ($ 5,196,473)
============ ============ ============
Basic earnings per common share:
Income (loss) from continuing operations ($ 0.47) $ 0.09 ($ 0.48)
Loss from discontinued operations (0.12) (0.07) (0.01)
------------ ------------ ------------
Net Income (loss) ($ 0.59) $ 0.02 ($ 0.49)
============ ============ ============
Diluted earnings per common share:
Income (loss) from continuing operations ($ 0.47) $ 0.09 ($ 0.48)
Loss from discontinued operations (0.12) (0.07) (0.01)
------------ ------------ ------------
Net Income (loss) ($ 0.59) $ 0.02 ($ 0.49)
============ ============ ============
Weighted average common shares outstanding:
Basic 10,893,944 10,675,153 10,551,027
============ ============ ============
Diluted 10,893,944 10,750,687 10,551,027
============ ============ ============
See accompanying notes to financial statements
F-2
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Additional
Stock Issued Paid-in-
Shares Amount Capital
----------------- -------------------- ---------------------
Balance January 1, 2000 10,349,731 $7,415 $28,807,108
----------------- -------------------- ---------------------
Treasury stock (134,400)
Tax benefits from options,
warrants & common stock 230,998
Tax valuation allowance (230,998)
Proceeds from options and
warrants exercised 439,822 221 64,779
Net loss year ended
December 31, 2000
----------------- -------------------- ---------------------
Balance December 31, 2000 10,655,153 7,636 28,871,887
----------------- -------------------- ---------------------
Treasury stock (30,000)
Shares issued for net assets acquired
50,000 25 43,725
Net Income year ended
December 31, 2001
----------------- -------------------- ---------------------
Balance December 31, 2001 10,675,153 7,661 28,915,612
----------------- -------------------- ---------------------
Tax benefits from options, 828,177
warrants & common stock
Tax valuation allowance (828,177)
Warrants issued for service 427,000
Proceeds from options and warrants exercised
781,464 390 3,249,610
Net loss year ended
December 31, 2002
----------------- -------------------- ---------------------
Balance December 31, 2002 11,456,617 $8,051 $32,592,222
================= ==================== =====================
Treasury Retained
Stock Earnings Total
----------------------- -------------------- ----------------------
Balance January 1, 2000 ($25,044,584) $22,445,670 $26,215,609
----------------------- -------------------- ----------------------
Treasury stock (113,444) (113,444)
Tax benefits from options,
warrants & common stock 230,998
Tax valuation allowance (230,998)
Proceeds from options and
warrants exercised 65,000
Net loss year ended
December 31, 2000 (5,196,473) (5,196,473)
----------------------- ------------------- -----------------------
Balance December 31, 2000 (25,158,028) 17,249,197 20,970,692
----------------------- ------------------- -----------------------
Treasury stock (30,131) (30,131)
Shares issued for net assets acquired
43,750
Net Income year ended
December 31, 2001 215,964 215,964
----------------------- ------------------- -----------------------
Balance December 31, 2001 (25,188,159) 17,465,161 21,200,275
----------------------- ------------------- -----------------------
Tax benefits from options, 828,177
warrants & common stock
Tax valuation allowance (828,177)
Warrants issued for service 427,000
Proceeds from options and warrants exercised
3,250,000
Net loss year ended
December 31, 2002 (6,454,458) (6,454,458)
----------------------- ------------------- -----------------------
Balance December 31, 2002 ($25,188,159) $11,010,703 $18,422,817
======================= =================== =======================
See accompanying notes to financial statements
F-3
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2002 2001 2000
------------ ------------ ------------
OPERATING ACTIVITIES:
($6,454,458) $215,964 ($5,196,473)
------------ ------------ ------------
Adjustments to reconcile net income (loss) to
net cash provided by (used in) continuing operations:
Loss from discontinued operations 689,122 718,156 137,760
Loss on impairment related to discontinued operations 633,233 -- --
Depreciation and amortization 409,068 458,741 355,172
Compensation satisfied with common stock warrants 2,100,000 -- --
Other assets -- -- 453,164
Bad debts provision 18,472 183,014 306,001
(Increase) decrease in assets:
Accounts receivable (31,201) (448,426) 2,471,491
Inventory 1,564,459 862,832 (399,337)
Prepaid expenses and other current assets 958,040 (328,528) 313,973
Prepaid income taxes -- -- 2,485,247
Increase (decrease) in liabilities:
Accounts payable (424,130) 11,769 287,271
Accrued royalties and sales commissions 277,874 (541,126) (312,968)
Accrued advertising 890,783 (1,069,081) (2,786,028)
Other current liabilities 508,922 (412,175) 551,974
------------ ------------ ------------
Total adjustments 7,594,642 (564,824) 3,863,720
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 1,140,184 (348,860) (1,332,753)
------------ ------------ ------------
INVESTING ACTIVITIES:
Capital expenditures (580,861) (343,614) (375,778)
Net cost of net assets acquired -- (30,763) --
------------ ------------ ------------
NET CASH FLOWS USED IN INVESTING
ACTIVITIES (580,861) (374,377) (375,778)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from exercises of options and warrants 3,250,000 -- 65,000
Repurchase of common stock -- (30,131) (113,444)
------------ ------------ ------------
NET CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES 3,250,000 (30,131) (48,444)
------------ ------------ ------------
NET CASH USED IN DISCONTINUED
OPERATIONS (596,548) (844,911) (950,916)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 3,212,775 (1,598,279) (2,707,891)
CASH & CASH EQUIVALENTS, BEGINNING OF
PERIOD 9,684,305 11,282,584 13,990,475
------------ ------------ ------------
CASH & CASH EQUIVALENTS,
END OF PERIOD $ 12,897,080 $ 9,684,305 $ 11,282,584
============ ============ ============
See accompanying notes to financial statements
F-4
THE QUIGLEY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
The Quigley Corporation (the "Company"), organized under the laws of the state
of Nevada, is engaged in the development, manufacturing, and marketing of health
and homeopathic products that are being offered to the general public. For the
fiscal periods presented, the Company's revenues have come from the Company's
proprietary "Cold-Eeze(R)" products and the Health and Wellness business
segment.
Darius International Inc., a wholly owned subsidiary of the Company, was formed
in January 2000 to introduce new products to the marketplace through a network
of independent distributors. Darius is a direct selling organization
specializing in proprietary health and wellness products, which commenced
shipping product to customers in the third quarter of 2000.
The formation of Darius International Inc., has provided diversification to the
Company in both the method of product distribution and the broader range of
products available to the marketplace serving as a balance to the seasonal
revenue cycles of the Cold-Eeze(R) branded products.
During 2000, the Company acquired a 60% ownership position in Caribbean Pacific
Natural Products, Inc., ("CPNP") which is a leading developer and marketer of
all-natural sun-care and skincare products for luxury resorts, theme parks and
spas. In December 2002, the Board of Directors of the Company approved a plan to
sell CPNP. On January 22, 2003, the Board of Directors of the Company completed
the sale of the Company's 60% equity interest in CPNP to Suncoast Naturals, Inc.
("Suncoast"). See discussion in Notes to Financial Statements, Note 3 -
Discontinued Operations.
In January 2001, the Company formed an Ethical Pharmaceutical Unit which is now
Quigley Pharma Inc., a wholly-owned subsidiary of the Company, that is under the
direction of its Executive Vice President and Chairman of its Medical Advisory
Committee. The formation of the Company's Ethical Pharmaceutical Unit follows
the Patent Office of The United States Commerce Department confirming the
assignment to the Company of a Patent Application for the "Method and
Composition for the Topical Treatment of Diabetic Neuropathy." In September
2001, the Patent Office confirmed the assignment to the Company of a Patent
Application entitled the "Medicinal Composition and Method of Using it" (for
Treatment of Sialorrhea and other Disorders) for a product to relieve sialorrhea
(drooling) in patients suffering from Amyotrophic Lateral Sclerosis (ALS),
otherwise known as Lou Gehrig's Disease. In November 2001, the Company was
assigned a Patent Application entitled "Composition and Method for Prevention,
Reduction and Treatment of Radiation Dermatitis" with the Patent Office of The
United States Commerce Department. In September 2002, the Company filed a
foreign patent application for "Method and Composition for the Topical Treatment
of Diabetic Neuropathy" in Europe and other foreign markets. The establishment
of a dedicated pharmaceutical subsidiary will enable the Company to diversify
into the prescription drug market and to ensure safe and effective distribution
of these important potential new products currently under development.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of the Company and
its wholly owned subsidiaries. All inter-company transactions and balances have
been eliminated. In the opinion of management, all adjustments necessary to
present fairly the consolidated financial position, consolidated results of
operations and consolidated cash flows, for the periods indicated, have been
made. Certain prior period amounts have been reclassified to conform with the
2002 presentation.
During 2000, the Company acquired a 60% ownership position in Caribbean Pacific
Natural Products, Inc., ("CPNP"), which is a leading developer and marketer of
all-natural sun-care and skincare products for luxury resorts, theme parks and
spas. In December 2002, the Board of Directors of the Company approved a plan to
sell CPNP. On January 22, 2003, the Board of Directors of the Company completed
the sale of the Company's 60% equity interest in CPNP to Suncoast Naturals, Inc.
("Suncoast"). In exchange for its 60% equity interest in CPNP, the Company shall
receive: (i) 750,000 shares of Suncoast's common stock, which Suncoast has
agreed, at its cost and within 60 days from the closing, to register for public
resale through an appropriate registration statement; and (ii) 100,000 shares of
Suncoast's Series A Redeemable Preferred Stock, which bears interest at a rate
of 4.25% per annum and which is redeemable from time to time after March 31,
2003 in such amounts as is equal to 50% of the free cash flow reported by
Suncoast in the immediately preceding quarterly financial statements divided by
F-5
the redemption price of $10.00 per share. The Company owns 19.5% of Suncoast's
issued and outstanding capital stock. Results of CPNP are presented as
discontinued operations in the Consolidated Statements of Operations with the
balance sheet items classified as "assets held for sale" and "liabilities
associated with assets held for sale" in the Consolidated Balance Sheets.
On January 2, 2001, the Company acquired certain assets and assumed certain
liabilities of a privately held company, located in Utah, involved in the direct
marketing and distribution of health and wellness products. This acquisition
required cash payments that approximated $110,000 and 50,000 shares of the
Company's stock issued to the former owners of the assets acquired. The net
assets acquired at acquisition principally consisted of intangibles with no
recorded value, inventory, accounts receivable, bank balances and fixed assets
totaling $536,000 and liabilities assumed approximating $416,000. Also required
are continuous payments for the use of product formulations; consulting;
confidentiality and non-compete fees that total up to 12% on net sales collected
until $540,000 is paid, when such fees become 5% on net sales collected for the
continuous applications of these arrangements. This acquisition is accounted for
by the purchase method of accounting and accordingly, the operating results have
been included in the Company's Consolidated Statements of Operations from the
date of acquisition. Prior to January 1, 2002, the excess of cost over net
assets acquired had been subject to amortization on a straight-line basis over a
period of 15 years. Subsequent to 2001, the account will only be reduced if the
value becomes impaired.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an initial maturity of
three months or less at the time of purchase to be cash equivalents. Cash
equivalents include cash on hand and monies invested in money market funds. The
carrying amount approximates the fair market value due to the short-term
maturity of these investments.
INVENTORIES
Inventories are stated at the lower of cost or market. The Company uses the
first-in, first-out ("FIFO") method of determining cost for all inventories.
Inventories 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 in accordance with the following ranges of estimated asset lives:
building and improvements - twenty years; machinery and equipment - five to
seven years; computer software - three years; and furniture and fixtures - seven
years.
INTANGIBLE ASSETS
Patent rights have been amortized on a straight-line basis over the period of
the related licensing agreements, which approximated 67 months and were fully
amortized as of March 2002. Amortization costs incurred for the years ended
December 31, 2002, 2001 and 2000, were $21,940, $87,761 and $87,761,
respectively. Accumulated amortization at December 31, 2002 and 2001 was
$490,000 and $468,000, respectively.
As of December 31, 2002, intangible assets consist principally of goodwill.
Goodwill is not amortized but reviewed for impairment when events and
circumstances indicate the carrying amount may not be recoverable or on an
annual basis if operations of a reporting unit have materially changed from the
prior year. In 2002, the Company realized an impairment loss of $296,047 from
its investment in CPNP, which is reflected in discontinued operations. The
effects of adopting FASB 142 was immaterial to net income and did not change
basic or diluted earnings per share for the years ended December 31, 2002, 2001
and 2000.
F-6
CONCENTRATION OF RISKS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and trade
accounts receivable.
The Company maintains cash and cash equivalents with four major financial
institutions. Since the Company maintains amounts in excess of guarantees
provided by the Federal Depository Insurance Corporation, the Company performs
periodic evaluations of the relative credit standing of these financial
institutions and limits the amount of credit exposure with any one institution.
Trade accounts receivable potentially subjects the Company to credit risk. The
Company extends credit to its customers based upon an evaluation of the
customer's financial condition and credit history and generally does not require
collateral. The Company has historically incurred minimal credit losses. The
Company's broad range of customers includes many large wholesalers, mass
merchandisers and multi-outlet pharmacy chains, five of which account for a
significant percentage of sales volume, representing 23% for the year ended
December 31, 2002, 35% for the year ended December 31, 2001, and 40% for the
year ended December 31, 2000. Customers comprising the five largest accounts
receivable balances represented 44% and 45% of total trade receivable balances
at December 31, 2002 and 2001, respectively. During 2002, approximately 99% 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. A large proportion of the
Company's revenues are currently generated from the sale of the Cold-Eeze(R)
product with the remaining revenue coming from the health and wellness segment.
The lozenge form is manufactured by a third party manufacturer whose majority of
revenues are from the Company. The other forms are manufactured by third parties
that produce a variety of other products for other customers. Should these
relationships terminate or discontinue for any reason, the Company has
formulated a contingency plan in order to prevent such discontinuance from
materially affecting the Company's operations. Any such termination may,
however, result in a temporary delay in production until the replacement
facility is able to meet the Company's production requirements.
Raw material used in the production of the product is available from numerous
sources. Currently, it is being procured from a single vendor in order to secure
purchasing economies. In a situation where this one vendor is not able to supply
the contract manufacturer with the ingredients, other sources have been
identified.
Darius' product for resale is sourced from several suppliers. In the event that
such sources were no longer in a position to supply Darius with product, other
vendors have been identified as reliable alternatives with minimal adverse loss
of business.
LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment on an exception basis
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable through future cash flows. If it is determined
that an impairment loss has occurred based on the expected cash flows, a loss is
recognized in the Statement of Operations. In 2002, the Company realized an
impairment loss of $337,186 from its investment in CPNP, which is reflected in
discontinued operations.
REVENUE RECOGNITION
Sales are recognized at the time ownership is transferred to the customer, which
is primarily the time the shipment is received by the customer. Sales returns
and allowances are provided for in the period that the related sales are
recorded. Provisions for these reserves are based on historical experience.
Total revenues for December 31, 2002 and 2001 include amounts of $148,866 and
$1,546,592, respectively, as a result of the settlement of the infringement
suit, related to licensing fees, against Gel Tech, LLC, the developer of
Zicam(TM), and Gum Tech International, Inc., its distributor.
SHIPPING AND HANDLING
Product sales relating to Health and Wellness products carry an additional
identifiable shipping and handling charge to the purchaser, which is classified
as revenue. For cold remedy products, such costs are included as part of the
invoiced price. In all cases costs related to this revenue are recorded in costs
of sales.
F-7
STOCK COMPENSATION
Stock options and warrants for purchase of the Company's common stock have been
granted to both employees and non-employees since the date of the Company's
public inception. Options and warrants are exercisable during a period
determined by the Company, but in no event later than ten years from the date
granted.
The Company applies Accounting Principles Board Opinion No. 25 ("APB 25") in
accounting for its grants of options to employees. Under the intrinsic value
method prescribed by APB 25, no compensation expense relating to grants to
employees has been recorded by the Company in periods reported. If compensation
expense for awards made during the years ended December 31, 2002, 2001 and 2000
had been determined under the fair value method of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
the Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2002 2001 2000
---------------------- --------------- --------------
Net income (loss)
As reported ($6,454,458) $215,964 ($5,196,473)
Compensation expense (2,072,220) (244,000) (237,750)
Pro forma ($8,526,678) ($28,036) ($5,434,223)
Basic earnings (loss) per share
As reported ($0.59) $0.02 ($0.49)
Pro forma ($0.78) - ($0.52)
Diluted earnings (loss) per share
As reported ($0.59) $0.02 ($0.49)
Pro forma ($0.78) - ($0.52)
Expense relating to warrants granted to non-employees has been appropriately
recorded in the periods presented based on either fair values agreed upon with
the grantees or fair values as determined by the Black Scholes pricing model
dependent upon the circumstances relating to the specific grants.
ROYALTIES
The Company includes royalties and founders commissions incurred as cost of
sales based on agreement terms.
ADVERTISING
Advertising costs are expensed within the period in which they are utilized.
Advertising expense is comprised of media advertising, presented as part of
sales and marketing expense; co-operative advertising, which is accounted for as
a deduction from sales; and free product, which is accounted for as part of cost
of sales. Advertising costs incurred for the years ended December 31, 2002, 2001
and 2000 were $4,794,955, $3,402,006 and $9,296,483, respectively. Included in
prepaid expenses and other current assets was $236,875 and $419,000 at December
31, 2002 and 2001 relating to prepaid advertising and promotion expenses.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the period incurred.
Expenditures for the years ended December 31, 2002, 2001 and 2000 were
$2,663,291, $1,331,639 and $1,185,750, respectively. Principally, the increase
in research and development costs in 2002 was due to expenses incurred as part
of the product research costs related to Quigley Pharma and study costs
associated with Cold-Eeze(R). Quigley Pharma is currently involved in research
activity following patent applications that the Company has acquired and such
research and development costs relating to potential products are expected to
increase significantly over time as product research and testing progresses.
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 Notes to Financial Statements, Note 7 - Income
Taxes for further discussion.
F-8
NOTE 3 - DISCONTINUED OPERATIONS
Effective July 1, 2000, the Company acquired a 60% ownership position of
Caribbean Pacific Natural Products, Inc., ("CPNP") which is accounted for by the
purchase method of accounting and accordingly, the operating results have been
included in the Company's consolidated financial Statements from the date of
acquisition. This majority ownership position required a cash investment that
approximated $812,000 and the provision for a $1 million line of credit, secured
by inventory, accounts receivable and all other assets of Caribbean Pacific
Natural Products. The net assets of CPNP at the acquisition date principally
consisted of a product license and distribution rights with no recorded value,
inventory and fixed assets of $312,915 and $510,000 of working capital with a
contribution to minority interest of $329,166.
In December 2002, the Board of Directors of the Company approved a plan to sell
CPNP. On January 22, 2003, the Board of Directors of the Company completed the
sale of the Company's 60% equity interest in CPNP to Suncoast Naturals, Inc.
("Suncoast"). In exchange for its 60% equity interest in CPNP, the Company shall
receive: (i) 750,000 shares of Suncoast's common stock, which Suncoast has
agreed, at its cost and within 60 days from the closing, to register for public
resale through an appropriate registration statement; and (ii) 100,000 shares of
Suncoast's Series A Redeemable Preferred Stock, which bears interest at a rate
of 4.25% per annum and which is redeemable from time to time after March 31,
2003 in such amounts as is equal to 50% of the free cash flow reported by
Suncoast in the immediately preceding quarterly financial statements divided by
the redemption price of $10.00 per share. The Company owns 19.5% of Suncoast's
issued and outstanding capital stock. The disposal of CPNP was completed in
order to allow the Company to focus resources on other activities and clinical
research and development.
Sales for the twelve months ended December 31, 2002, 2001 and 2000 were
$2,040,312, $2,176,470 and $798,866, respectively, net losses for the same
periods were $1,322,355, $718,155 and $137,760, respectively. The loss relating
to 2002 includes an amount of $633,233 relating to the asset impairment. Results
of CPNP are presented as discontinued operations in the Consolidated Statements
of Operations with the balance sheet items classified as "assets held for sale"
and "liabilities associated with assets held for sale" in the Consolidated
Balance Sheets. The major classes of balance sheet items of assets held for sale
at December 31, 2002 and 2001 are inventory ($281,089 and $416,526), accounts
receivable ($358,670 and $248,897) and accounts payable ($172,867 and $93,008),
respectively.
NOTE 4 - SEGMENT INFORMATION
The basis for presenting segment results generally is consistent with overall
Company reporting. The Company reports information about its operating segments
in accordance with Financial Accounting Standard Board Statement No. 131,
"Disclosure About Segments of an Enterprise and Related Information," which
establishes standards for reporting information about a company's operating
segments. All consolidating items are included in Corporate & Other.
The Company has divided its operations into three reportable segments as
follows: The Quigley Corporation (Cold Remedy), whose main product is
Cold-Eeze(R), a proprietary zinc gluconate glycine lozenge for the common cold;
Darius (Health and Wellness), whose business is the sale and direct marketing of
a range of health and wellness products and Quigley Pharma (Ethical
Pharmaceutical), currently involved in research and development activity to
develop patent applications for potential pharmaceutical products.
As discussed in Notes to Financial Statements, Note 3 - Discontinued Operations,
the Company disposed of its Sun-care and Skincare segment.
Financial information relating to 2002, 2001 and 2000 continuing operations by
business segment follows:
- ----------------------------------------------------------------------------------------------------------------------------
As of and for the three
months ended December 31, Cold Health and Ethical Corporate and
2002 Remedy Wellness Pharmaceutical Other Total
- ----------------------------------------------------------------------------------------------------------------------------
Revenues
Customers $ 6,782,664 $4,616,637 - - $11,399,301
Inter-segment - - - - -
Segment operating profit (loss) (1,510,198) 172,362 ($485,590) $15,470 (1,807,956)
Total Assets $26,223,476 $1,401,867 - ($2,690,387) $24,934,956
F-9
- ----------------------------------------------------------------------------------------------------------------------------
As of and for the twelve
months ended December 31, Cold Health and Ethical Corporate and
2002 Remedy Wellness Pharmaceutical Other Total
- ----------------------------------------------------------------------------------------------------------------------------
Revenues
Customers $14,199,833 $15,220,813 - - $29,420,646
Inter-segment - - - - -
Segment operating profit (loss) (4,839,359) 1,103,610 ($1,604,753) $56,086 (5,284,416)
Total Assets $26,223,476 $ 1,401,867 - ($2,690,387) $24,934,956
- ----------------------------------------------------------------------------------------------------------------------------
As of and for the three
months ended December 31, Cold Health and Ethical Corporate and
2001 Remedy Wellness Pharmaceutical Other Total
- ----------------------------------------------------------------------------------------------------------------------------
Revenues
Customers $ 6,536,445 $1,763,209 - - $ 8,299,654
Inter-segment - - - - -
Segment operating profit (loss) 1,893,169 (354,104) ($161,182) - 1,377,883
Total Assets $26,726,729 $ 826,946 - ($2,797,880) $24,755,795
- ----------------------------------------------------------------------------------------------------------------------------
As of and for the twelve
months ended December 31, Cold Health and Ethical Corporate and
2001 Remedy Wellness Pharmaceutical Other Total
- ----------------------------------------------------------------------------------------------------------------------------
Revenues
Customers $16,983,635 $5,788,579 - - $22,772,214
Inter-segment 116,385 (176,412) - $60,027 -
Segment operating profit (loss) 1,638,264 (729,374) ($467,436) 127,717 569,171
Total Assets $26,726,729 $ 826,946 - ($2,797,880) $24,755,795
- ----------------------------------------------------------------------------------------------------------------------------
As of and for the three
months ended December 31, Cold Health and Ethical Corporate and
2000 Remedy Wellness Pharmaceutical Other Total
- ----------------------------------------------------------------------------------------------------------------------------
Revenues
Customers $6,501,262 $11,811 - - $6,513,073
Inter-segment 3,486 - - ($3,486) -
Segment operating profit (loss) 360,515 (173,335) - 648 187,828
Total Assets $27,005,069 $428,210 - ($2,146,880) $25,286,399
- ----------------------------------------------------------------------------------------------------------------------------
As of and for the twelve
months ended December 31, Cold Health and Ethical Corporate and
2000 Remedy Wellness Pharmaceutical Other Total
- ----------------------------------------------------------------------------------------------------------------------------
Revenues
Customers $15,475,653 $51,300 - - $15,526,953
Inter-segment 320,623 - - ($320,623) -
Segment operating profit (loss) (4,645,828) (936,534) - (123,074) (5,705,436)
Total Assets $27,005,069 $428,210 - ($2,146,880) $25,286,399
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Consisted of the following as of: December 31, 2002 December 31, 2001
----------------- -----------------
Land $ 152,203 $ 152,203
Buildings and improvements 1,503,641 1,496,293
Machinery and equipment 1,061,852 845,555
Computer software 462,032 225,241
Furniture and fixtures 180,287 171,898
---------- ----------
3,360,015 2,891,190
Less: Accumulated depreciation 1,023,279 771,135
---------- ----------
---------- ----------
Property, Plant and Equipment, net $2,336,736 $2,120,055
========== ==========
F-10
Depreciation expense for the years ended December 31, 2002, 2001 and 2000 was
$387,128, $343,661, and $267,411, respectively.
NOTE 6 - PATENT RIGHTS AND RELATED ROYALTY COMMITMENTS
During 1996, the Company entered into a licensing agreement resulting in the
utilization of the zinc gluconate patent. In return for the acquisition of this
license, the Company issued a total of 240,000 shares of common stock to the
patent holder and attorneys during 1996 and 1997. The related intangible asset,
approximating $490,000, was valued at the fair value of these shares at the date
of the grant. This asset value was amortized over the remaining life of the
patent that expired in March 2002. The Company was required to pay a 3% royalty
on sales collected, less certain deductions, to the patent holder throughout the
term of this agreement, which also expired in 2002.
The Company also maintains a separate representation and distribution agreement
relating to the development of the zinc gluconate glycine product formulation.
In return for exclusive distribution rights, the Company must pay the developer
a 3% royalty and a 2% consulting fee based on sales collected, less certain
deductions, throughout the term of this agreement, expiring in 2007.
Additionally, a founder's commission totaling 5%, on sales collected, less
certain deductions, is paid to two of the officers, who are also stockholders of
the Company, and whose agreements expire in 2005.
The expenses for the respective periods relating to such agreements amounted to
$1,421,475, $1,399,847, and $1,952,603, for the years ended December 31, 2002,
2001, and 2000, respectively. Amounts accrued for these expenses at December 31,
2002 and 2001 were $603,387 and $553,698, respectively.
NOTE 7 - INCOME TAXES
The provision (benefit) for income taxes, consists of the following:
Year Ended Year Ended Year Ended
December 31, 2002 December 31, 2001 December 31, 2000
----------------- ----------------- -----------------
Current:
Federal -- -- --
State -- -- --
----------- ----------- -----------
Deferred:
Federal ($980,638) $340,861 ($1,504,966)
State 82,664 (24,977) (183,650)
----------- ----------- -----------
(897,974) 315,884 (1,688,616)
----------- ----------- -----------
Valuation allowance 897,974 (315,884) 1,688,616
----------- ----------- -----------
Total -- -- --
=========== =========== ===========
A reconciliation of the statutory federal income tax expense (benefit) to the
effective tax is as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2002 2001 2000
------------ ------------ ------------
Statutory rate ($1,744,916) $ 317,600 ($1,719,963)
State taxes net of federal benefit 56,707 (17,134) (122,311)
Permanent differences and other 790,235 15,418 153,658
----------- ----------- -----------
(897,974) 315,884 (1,688,616)
----------- ----------- -----------
Less valuation allowance 897,974 (315,884) 1,688,616
----------- ----------- -----------
Total -- -- --
=========== =========== ===========
F-11
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,
2002 2001 2000
------------ ------------ ------------
Net operating loss carry-forward $ 4,459,068 $ 3,082,051 $ 3,387,629
Contract termination costs 710,970 305,019 378,555
Bad debt expense 187,992 263,654 196,879
Other 152,789 133,943 137,488
Valuation allowance (5,510,819) (3,784,667) (4,100,551)
----------- ----------- -----------
Total -- -- --
=========== =========== ===========
Certain exercises of options and warrants, and restricted stock issued for
services that became unrestricted resulted in reductions to taxes currently
payable and a corresponding increase to additional-paid-in-capital for prior
years. Certain tax benefits for option and warrant exercises totaling $1,756,383
are deferred because of a net operating loss carry-forward for tax purposes
("NOLs") that occurred during the fourth quarter of 1999, resulting from a
cumulative effect of deducting $42,800,364 attributed to options, warrants and
unrestricted stock deductions from taxable income. The net operating loss
carry-forwards arising from the option, warrant and stock activities approximate
$14.3 million for federal purposes, of which $3.5 million will expire in 2019,
$4.0 million in 2020, $6.8 million in 2022 and $14.3 million for state purposes,
of which $9.7 million will expire in 2009, $3.0 million in 2010, and $1.6
million in 2012. Until sufficient taxable income to offset the temporary timing
differences attributable to operations and the tax deductions attributable to
option, warrant and stock activities are assured, a valuation allowance equaling
the total deferred tax asset is being provided.
NOTE 8 - EARNINGS PER SHARE
Basic earnings per share ("EPS") excludes dilution and is computed by dividing
income available to common stockholders by the weighted - average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that shared in the earnings of the entity. Diluted EPS also
utilizes the treasury stock method which prescribes a theoretical buy back of
shares from the theoretical proceeds of all options and warrants outstanding
during the period. Since there is a large number of options and warrants
outstanding, fluctuations in the actual market price can have a variety of
results for each period presented.
A reconciliation of the applicable numerators and denominators of the income
statement periods presented is as follows (millions, except earnings per share
amounts):
Year Ended Year Ended Year Ended
December 31, 2002 December 31, 2001 December 31, 2000
-------------------------------------------------------------------------------------
Loss Shares EPS Income Shares EPS Loss Shares EPS
-------------------------------------------------------------------------------------
Basic EPS ($ 5.1) 10.9 ($ 0.47) $ 0.9 10.7 $ 0.09 ($ 5.1) 10.5 ($ 0.48)
Dilutives:
Options and
Warrants -- -- -- -- 0.1 -- -- -- --
------ ----- -------- ------ ------ -------- ------- ------- ---------
Diluted EPS ($ 5.1) 10.9 ($ 0.47) $ 0.9 10.8 $ 0.09 ($ 5.1) 10.5 ($ 0.48)
====== ===== ======== ====== ====== ======== ======= ======= =========
Options and warrants outstanding at December 31, 2002, 2001 and 2000 were
4,262,500, 4,014,000 and 4,042,400, respectively, but were not included in the
computation of diluted earnings per share because the effect was antidilutive.
NOTE 9 - STOCK COMPENSATION
Stock options for purchase of the Company's common stock have been granted to
both employees and non-employees. Options are exercisable during a period
determined by the Company, but in no event later than ten years from the date
granted.
F-12
On December 2, 1997, the Company's Board of Directors approved a new Stock
Option Plan ("Plan") which was amended in 2001 and provides for the granting of
up to three million shares to employees. Under this Plan, the Company may grant
options to employees, officers or directors of the Company at variable
percentages of the market value of stock at the date of grant. No incentive
stock option shall be exercisable more than ten years after the date of grant or
five years where the individual owns more than ten percent of the total combined
voting power of all classes of stock of the Company. Stockholders approved the
Plan in 1998. A total of 477,000, 400,000 and 480,000 options were granted under
this Plan during the years ended December 31, 2002, 2001 and 2000, 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, 2002, 2001 and 2000
had been determined under the fair value method of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
the Company's net income and earnings per share would have been reduced to the
pro forma amounts as displayed in Notes to Financial Statements, Note 2 -
Summary of Significant Accounting Policies.
Expense relating to options granted to non-employees has been appropriately
recorded in the periods presented based on either fair values agreed upon with
the grantees or fair values as determined by the Black-Scholes pricing model
dependent upon the circumstances relating to the specific grants.
The Company used the Black-Scholes pricing model to determine the fair value of
stock options granted during the periods presented using the following
assumptions: expected life of the option of 5 years and expected forfeiture rate
of 0%; expected stock price volatility ranging between 108.0% and 119.2% for the
year ended December 31, 2002, 58.9% for 2001, and ranging between 92.8% and 110%
for the year ended December 31, 2000; expected dividend yield of 0% and
risk-free interest rate ranging between 4.06% and 4.51% for the year ended
December 31, 2002, expected dividend yield of 1.5% and risk-free interest rate
of 4.36% for the year ended December 31, 2001, expected dividend yield of 1.5%
and risk-free interest rate of between 4.94% and 6.59% for the year ended
December 31, 2000, 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, 2002, 2001, and 2000 and
changes during the years then ended is presented below:
YEAR ENDED DECEMBER 31, 2002:
Employees Non-Employees Total
-------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(,000) Price (,000) Price (,000) Price
----------------------------------------------------------------------------
Options/warrants outstanding
at beginning of period 3,009 $4.32 1,005 $6.73 4,014 $4.92
Additions/deductions:
Granted 432 5.26 1,045 8.12 1,477 7.28
Exercised 58 1.68 800 4.72 858 4.51
Cancelled 20 9.84 350 10.00 370 10.00
----------------------------------------------------------------------------
Options/warrants outstanding
at end of period 3,363 $4.45 900 $8.86 4,263 $5.38
----------------------------------------------------------------------------
Options/warrants exercisable
at end of period 3,363 900 4,263
============================================================================
Weighted average fair value of
grants $5.26 $8.12 $7.28
Price range of options/warrants
exercised $0.81-$5.13 $1.75-$6.50 $0.81-$6.50
Price range of options/warrants
outstanding $0.81-$10.00 $0.81-$11.50 $0.81-$11.50
Price range of options/warrants
exercisable $0.81-$10.00 $0.81-$11.50 $0.81-$11.50
F-13
YEAR ENDED DECEMBER 31, 2001:
Employees Non-Employees Total
-------------------- --------------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(,000) Price (,000) Price (,000) Price
----------------------------------------------------------------------------------
Options/warrants outstanding
at beginning of period 2,747 $4.68 1,370 $5.42 4,117 $4.93
Additions/deductions:
Granted 355 1.26 45 1.26 400 1.26
Exercised - - - - - -
Cancelled 93 3.35 410 1.75 503 2.05
----------------------------------------------------------------------------------
Options/warrants outstanding
at end of period 3,009 $4.32 1,005 $6.73 4,014 $4.92
----------------------------------------------------------------------------------
Options/warrants exercisable
at end of period 3,009 1,005 4,014
==================================================================================
Weighted average fair value of
grants $1.26 $1.26 $1.26
Price range of options/warrants
exercised - - -
Price range of options/warrants
outstanding $0.81-$10.00 $0.81-$10.00 $0.81-$10.00
Price range of options/warrants
exercisable $0.81-$10.00 $0.81-$10.00 $0.81-$10.00
YEAR ENDED DECEMBER 31, 2000:
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 2,799 $4.59 1,480 $5.14 4,279 $4.78
Additions/deductions:
Granted 440 1.10 40 0.81 480 1.07
Exercised 460 0.50 130 0.50 590 0.50
Cancelled 32 7.83 20 7.40 52 7.67
----------------------------------------------------------------------------------
Options/warrants outstanding
at end of period 2,747 $4.68 1,370 $5.42 4,117 $4.93
----------------------------------------------------------------------------------
Options/warrants exercisable
at end of period 2,747 1,370 4,117
==================================================================================
Weighted average fair value of
grants $0.69 $0.55 $0.68
Price range of options/warrants
exercised $0.50 $0.50 $0.50
Price range of options/warrants
outstanding $0.81-$10.00 $0.81-$10.00 $0.81-$10.00
Price range of options/warrants
exercisable $0.81-$10.00 $0.81-$10.00 $0.81-$10.00
F-14
The following table summarizes information about stock options outstanding and
stock options exercisable, as granted to both employees and non-employees, at
December 31, 2002:
Employees Non-Employees
--------- -------------
Weighted Weighted
Average Average
Range of Remaining Weighted Remaining Weighted
Exercise Number Contractual Average Number Contractual Average
Prices Outstanding Life Exercise Price Outstanding Life Exercise Price
- ------------------------------------------------------------------------------------------------------------------------
$0.81-$2.50 1,738,000 5.4 $1.58 85,000 8.5 $1.05
$5.13-$9.68 1,289,500 6.9 $6.89 315,000 2.7 $7.96
$10.00-$11.50 335,000 4.3 $10.00 500,000 2.8 $10.75
--------- -------
3,362,500 900,000
========= =======
Options and warrants outstanding as of December 31, 2002, 2001 and 2000 expire
from March 7, 2004 through December 17, 2012, depending upon the date of grant.
In February 2003, 250,000 warrants with an exercise price of $9.50 per share and
an expiration date of March 2004 were issued, and the exercise date for 500,000
existing warrants were extended by one year. See discussion in Notes to
Financial Statements, Note 10 - Stockholders' Equity.
During 1999, the Company implemented a defined contribution plan for its
employees. The Company's contribution to the plan is based on the amount of the
employee plan contributions. The Company's contribution cost to the plan in 2002
and 2001 was approximately $179,000 and $140,000, respectively.
NOTE 10 - 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 five occasions, for a total
authorized buy-back of 5,000,000 shares or approximately 38% of the previous
shares outstanding. Such shares are reflected as treasury stock and will be
available for general corporate purposes. From the initiation of the plan until
December 31, 2002, 4,159,191 shares have been repurchased at a cost of
$24,042,801 or an average cost of $5.78 per share. No shares were repurchased
during 2002.
As a result of the litigation relating to the case against Nutritional Foods
Corporation, in March of 1998, a subsequent order of the Court of Common Pleas
of Bucks County modified the decree of January 23, 1997 to provide for a return
to treasury of 604,928 shares to the Company. As payment for legal services,
118,066 of these shares were reissued with a market value of approximately
$1,145,358. This value, the cost of reacquiring these shares, then became the
value of the net treasury stock ($2.35 per share) represented by 486,862 shares
returned to treasury.
F-15
On April 9, 2002, The Quigley Corporation entered into an agreement with
Forrester Financial LLC, ("Forrester") providing for Forrester to act as a
financial consultant to the Company. The consulting agreement commenced as of
March 7, 2002 for a term of twelve months, but may be terminated by the Company
in its sole discretion at any time. As compensation for services to be provided
by Forrester to the Company, the Company granted to Forrester, or its designees,
warrants to purchase up to a total of 1,000,000 shares of the Company's common
stock. The warrants have three distinct exercise prices, they being, 500,000
warrants are exercisable at $6.50 per share, these were exercised in May 2002,
250,000 warrants are exercisable at $8.50 per share, and 250,000 warrants are
exercisable at $11.50 per share. The warrants were exercisable until the earlier
to occur of (i) March 6, 2003 or (ii) the termination of the Consulting
Agreement.
Pursuant to an agreement dated February 2, 2003, the Company entered into an
Amended and Restated Warrant Agreement (the "Amended Agreement") with Forrester
Financial, LLC ("Forrester"). The amended Agreement extended by one year, until
March 7, 2004, the exercise period with respect to (a) warrants to purchase
250,000 shares of common stock at $8.50 per share and (b) warrants to purchase
250,000 shares of common stock at $11.50 per share. The Amended Agreement also
granted to Forrester additional warrants to purchase, at any time prior to March
7, 2004, an additional 250,000 shares of common stock at $9.50 per share. As a
result of this Amended Agreement the Company recorded a further expense of
$1,400,000 in the fourth quarter of 2002, amounting to a total expense of
$2,100,000, classified as administrative expense in the Consolidated Statement
of Operations, relating to this warrant agreement in 2002. Additionally,
$1,673,000 is reflected in the Consolidated Balance Sheet at December 31, 2002,
which represents the value of the unexercised warrants.
On December 7, 2002, Forrester Financial LLC commenced an action by a Writ of
Summons filed in the Court of Common Pleas of Bucks County, PA against The
Quigley Corporation. No Complaint was filed detailing the claim of Forrester
Financial LLC against The Quigley Corporation. This action was terminated with
prejudice by Forrester Financial LLC as part of its agreement with The Quigley
Corporation on February 2, 2003 whereby certain warrants were scheduled to
expire on March 7, 2003 were extended to March 7, 2004 (warrants to purchase
250,000 shares at $8.50; warrants to purchase 250,000 shares at $11.50). As an
additional part of this agreement, Forrester Financial LLC was granted warrants
to purchase 250,000 shares at any time until March 7, 2004 at the price of $9.50
a share.
NOTE 11 - 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, 2002, 2001 and
2000, of $236,304, $218,456 and $133,127, respectively. The future minimum lease
obligations under these operating leases are approximately $717,000.
The Company has committed to advertising costs approximating $130,000 relating
to 2003. Additional advertising cost is expected to be incurred for the
remainder of 2003.
TESAURO AND ELEY
In September, 2000, the Company was sued by two individuals (Jason Tesauro and
Elizabeth Eley, both residents of Georgia), on behalf of a "nationwide class" of
"similarly situated individuals," in the Court of Common Pleas of Philadelphia
County, Pennsylvania. The Complaint alleges that the Plaintiffs purchased
certain Cold-Eeze(R) products between August, 1996, and November, 1999, based
upon cable television, radio and internet advertisements which allegedly
misrepresented the qualities and benefits of the Company's products. The
Complaint requests an unspecified amount of damages for violations of
Pennsylvania's consumer protection law, breach of warranty and unjust
enrichment, as well as a judicial determination that the action be maintained as
a class action.
In October, 2000, the Company filed Preliminary Objections to the Complaint
seeking dismissal of the action. The Court sustained certain objections thereby
narrowing Plaintiffs' Complaint. In May, 2001, Plaintiffs filed a Motion to
Certify the Alleged Class. The Company opposed the Motion. In November, 2001,
the Court held a hearing on Plaintiffs' Motion for Class Certification. In
January, 2002, the Court denied in part and granted in part the Plaintiffs'
Motion. The Court denied Plaintiffs' Motion to Certify a Class based on
Plaintiffs' claim under the Pennsylvania Consumer Protection Law; however, the
Court certified the class based on Plaintiffs' breach of warranty and unjust
enrichment claims.
The Company believes Plaintiffs' claim is completely without merit, and is
vigorously defending the lawsuit and has denied any liability to the Plaintiffs.
No assessment as to the outcome of this action can be made at this time.
F-16
GOLDBLUM AND WAYNE
A Special Meeting of the Quigley stockholders was held on October 15, 1999, at
which a majority of the shares entitled to vote adopted a Corrective Action
Proposal (initially reported in the Company's Form 10-Q for the quarter ending
June 30, 1999) to ratify actions previously taken by the Company relating to the
1990 1 for 2.74 reverse split, the 1995 1 for 10 reverse split (the "Reverse
Splits") and the 1997 1 for 2 forward split (the "Forward Split"). Pursuant to
the October 15, 1999 Special Meeting, the Company authorized the filing of a
declaratory judgment action in Nevada to determine the effectiveness of the
Corrective Action.
In August 2000, the District Court of Clark County, Nevada, held that it had
jurisdiction to decide the Company's declaratory judgment action filed in April,
2000, against two putative shareholders (Thomas Goldblum and Alan Wayne), in
which the Company seeks a judicial declaration that, based on stockholder
approval of the Corrective Action Proposal, the Reverse Splits and Forward Split
satisfy and/or comply with Nevada law and that the capitalization of Quigley
evidenced by the issued and outstanding shares of common stock and common stock
warrants is as reflected on Quigley's stock transfer ledger on September 10,
1999, the record date of the Special Meeting. The District Court of Clark County
held a hearing on this matter on March 19, 2002 and ruled in favor of The
Quigley Corporation. A final judgment has been entered of record by the Court on
June 21, 2002. The period for appeal of this order to the Nevada Supreme Court
has expired.
An underlying claim filed by Goldblum and Wayne in the Court of Common Pleas of
Montgomery County, Pennsylvania on March 17, 1996 alleging that the plaintiffs
became owners of 500,000 shares each of the Company's common stock in or about
1990 and requested damages in excess of $100,000 for breach of contract and
conversion.
The Company is vigorously defending this lawsuit and has denied any liability to
the plaintiffs. The Company also believes that the plaintiffs' claims are barred
by the applicable statutes of limitations, and that the plaintiffs are, in any
event, limited to claims for approximately 36,000 shares. The Company continues
to believe that the plaintiffs' claims are without merit. No assessment as to
the outcome of this action can be made at this time.
INTERVENTION, INC.
An action was filed by Intervention, Inc. on July 2, 2002 in Contra Costa County
Superior Court under the California Unfair Competition Law, Business and
Professions Code, Section 17200. The Complaint claims that COLD-EEZE(R) does not
contain ionic zinc and therefore does not have the unique quality the Company
asserts for it. The Complaint purports to attack The Cleveland Clinic Study
titled Zinc Gluconate Lozenges for Treating the Common Cold and the Dartmouth
Study, Zinc Gluconate and The Common Cold: A Controlled Clinical Study. The
plaintiff claims that the Dartmouth Study is not double-blind and is not
randomized. The plaintiff also claims that The Cleveland Clinic Study is untrue
and deceptive because it did not conclude that patients "starting treatments"
with zinc had a 42% reduction in duration of the common cold and, also, because
the 42% reduction in common cold duration is not a reference to average of cold
duration but rather is a reference to the reduction in median duration. There is
also a claim by the plaintiff that there is an implied claim that the results in
the studies have been confirmed by repetition which plaintiff contests.
The plaintiff is requesting attorney's fees and costs, corrective equitable
relief including restitution and an injunction.
The Company believes plaintiff's claim is completely without merit, has no
scientific basis and is vigorously defending the lawsuit and has denied any
liability to the plaintiff. Certain pre-trial discovery and motions remain to be
completed and no prediction can be made as to the outcome of this case.
LITIGATION - FORMER EMPLOYEE
On April 12, 2002, the Company commenced a complaint in Equity in the Court of
Common Pleas of Bucks County, PA against the former President of Darius
International Inc., its wholly owned subsidiary, following termination of such
President. The allegations in the complaint include, but are not limited to, an
alleged breach of fiduciary duty owed to the Company. The Company is seeking
both injunctive and monetary relief. On or about May 1, 2002, the defendant
filed a counterclaim requesting that the Court declare him the lawful owner of
55,000 stock options, unspecified damages relating to an alleged breach of an
oral contract and for commissions allegedly owed. In addition, the Defendant
requests the return of certain intellectual property used to commence and
continue Darius' operations.
The Corporation believes Defendant's claims are without merit, is vigorously
defending the counterclaims and is prosecuting its action on its complaint. No
assessment as to the outcome of this action can be made at this time.
F-17
NOTE 12 - TERMINATED LEGAL PROCEEDINGS
On December 7, 2002, Forrester Financial LLC commenced an action by a Writ of
Summons filed in the Court of Common Pleas of Bucks County, PA against The
Quigley Corporation. No Complaint was filed detailing the claim of Forrester
Financial LLC against The Quigley Corporation. This action was terminated with
prejudice by Forrester Financial LLC as part of its agreement with The Quigley
Corporation on February 2, 2003 whereby certain warrants were scheduled to
expire on March 7, 2003 were extended to March 7, 2004 (warrants to purchase
250,000 shares at $8.50; warrants to purchase 250,000 shares at $11.50). As an
additional part of this agreement, Forrester Financial LLC was granted warrants
to purchase 250,000 shares at any time until March 7, 2004 at the price of $9.50
a share.
On or about December 16, 2002, Herbert Krackow commenced an action in the First
Circuit Court of the Ninth Judicial Circuit in and for Orange County, Florida
against The Quigley Corporation, Caribbean Pacific International, and Caribbean
Pacific Natural Products, Inc. asking that the Asset Sale Agreement between The
Quigley Corporation and Caribbean Pacific International be set aside and that
the plaintiff be made whole on an alleged Consulting Agreement for a four-year
period ending on June 30, 2001. This action has been discontinued by the
plaintiff with prejudice and the plaintiff has waived his right for any past or
future claim against the Corporation in a Release executed by him in favor of
The Quigley Corporation and Caribbean Pacific Natural Products. The Quigley
Corporation entered into the Joint Mutual Release with the plaintiff without
payment of any funds under the Uniform Consideration Act.
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 paid or payable under such arrangements for the
years ended December 31, 2002, 2001 and 2000, amounted to $36,979, $160,034, and
$466,033, respectively. Amounts payable under such agreements at December 31,
2002 and 2001 were approximately zero and $36,525, respectively.
An agreement between the Company and the founders Mr. Guy J. Quigley and Mr.
Charles A. Phillips, both officers and stockholders of the Company, was entered
into on June 1, 1995. The founders, in consideration of the acquisition of the
Cold-Eeze(R) cold therapy product, are to share a total commission of five
percent (5%), on sales collected, less certain deductions until the termination
of this agreement on May 31, 2005. For the years ended December 31, 2002, 2001
and 2000, amounts of $692,766, $651,614 and $715,800, respectively, were paid or
payable under such founder's commission agreements. Amounts payable under such
agreements at December 31, 2002 and 2001 were $301,695 and $212,961,
respectively.
The Company is in the process of acquiring licenses in certain countries through
related party entities whose stockholders include Mr. Gary Quigley, a relative
of the Company's Chief Executive Officer. Fees amounting to $309,493, $281,250
and $251,607 have been paid to a related entity during 2002, 2001 and 2000,
respectively to assist with the regulatory aspects of obtaining such licenses.
F-18
NOTE 14 - QUARTERLY INFORMATION (UNAUDITED)
Quarter Ended
---------------------------------------------------------------------
March 31, June 30, September 30, December 31,
---------------------------------------------------------------------
2002
Sales $ 5,249,171 $ 5,196,576 $ 8,548,654 $ 12,290,993
Co-operative advertising promotions 264,640 142,954 714,329 891,691
Net Sales 4,984,531 5,053,622 7,834,325 11,399,302
Gross Profit 2,438,035 1,627,890 3,111,062 5,034,823
Loss - continuing operations (1,735,761) (1,333,980) (288,854) (1,773,508)
Net Loss (1,700,768) (1,450,220) (500,395) (2,803,075)
Basic earnings (loss) per share
Continuing operations ($0.16) ($0.12) ($0.03) ($0.16)
Net loss (0.16) (0.13) (0.05) (0.26)
Diluted earnings (loss) per share
Continuing operations (0.16) (0.12) (0.03) (0.16)
Net loss (0.16) (0.13) (0.05) (0.26)
2001
Sales $ 4,554,758 $ 2,634,111 $ 6,664,935 $ 9,194,090
Co-operative advertising promotions 493,069 66,232 232,171 1,030,800
Net Sales 4,061,689 2,567,878 6,432,763 8,163,292
Gross Profit 2,337,768 2,278,352 3,262,064 4,673,181
Income (loss) - continuing operations (402,725) (573,000) 483,884 1,425,961
Net Income (Loss) (402,909) (680,443) 313,615 985,701
Basic earnings (loss) per share
Continuing operations ($0.04) ($0.05) $0.05 $0.13
Net income (loss) (0.04) (0.06) 0.03 0.09
Diluted earnings (loss) per share
Continuing operations (0.04) (0.05) 0.05 0.13
Net income (loss) (0.04) (0.06) 0.03 0.09
In December 2002, the Board of Directors of the Company approved a plan to sell
Caribbean Pacific Natural Products, Inc. On January 22, 2003, the Company
completed the sale of its 60% equity interest in Caribbean Pacific Natural
Products, Inc. to Suncoast Naturals, Inc. by exchanging its 60% controlling
interest in Caribbean Pacific Natural Products, Inc. for 750,000 Shares of
Common Stock and 100,000 Shares of Redeemable Preferred Stock of Suncoast
Naturals, Inc. This transaction reflects the operation results and impairment
losses of Caribbean Pacific Natural Products, Inc. as discontinued operations of
the Company for all periods presented.
F-19
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of The Quigley Corporation is responsible for the information and
representations contained in this report. Management believes that the financial
statements have been prepared in conformity with generally accepted accounting
principles and that the other information in this annual report is consistent
with those statements. In preparing the financial statements, management is
required to include amounts based on estimates and judgments, which it believes
are reasonable under the circumstances.
In fulfilling its responsibilities for the integrity of the data presented and
to safeguard the Company's assets, management employs a system of internal
accounting controls designed to provide reasonable assurance, at appropriate
cost, that the Company's assets are protected and that transactions are
appropriately authorized, recorded, and summarized. This system of control is
supported by the selection of qualified personnel, by organizational assignments
that provide appropriate delegation of authority and division of
responsibilities, and by the dissemination of policies and procedures.
PricewaterhouseCoopers LLP, the Company's independent accountants, performed an
audit for the years ended December 31, 2002, 2001, and 2000, in accordance with
generally accepted auditing standards. The independent accountants conducted a
review of certain internal accounting controls to the extent required by
generally accepted auditing standards and performed such substantive 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 March 17, 2003
- ------------------------------------------ --------------
Guy J. Quigley, Chairman of the Board, Date
President, Chief Executive Officer
/s/ George J. Longo March 17, 2003
- -------------------------------------------------------- --------------
George J. Longo, Vice President, Chief Financial Officer Date
(Principal Financial and Accounting Officer)
F-20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of The Quigley Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity, and cash flows
present fairly, in all material respects, the financial position of The Quigley
Corporation and its subsidiaries at December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 17, 2003
F-21
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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 2003 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 2003 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 2003 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 2003 Annual Meeting of Stockholders.
ITEM 14. DISCLOSURE CONTROLS AND PROCEDURES
Based on their evaluation, as of a date within 90 days of the filing of this
Form 10-K, the Company's Chief Executive Officer and Chief Financial Officer
have concluded the Company's disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934) are
effective. There have been no significant changes in internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
-21-
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Articles of Incorporation of the Company (as amended),
(incorporated by reference to Exhibit 3.1 of Form 10-KSB/A
dated April 4, 1997)
3.2 By-laws of the Company as currently in effect (incorporated by
reference to Exhibit 3.2 of the Company's Registration
Statement on Form 10-KSB/A filed with the Commission on April
4, 1997 and Exhibit 99.3 of the Company's Current Report on
Form 8-K filed with the Commission on September 21, 1998)
4.1 Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 of Form 10-KSB/A dated April 4, 1997)
10.1 1997 Stock Option Plan (incorporated by reference to Exhibit
10.1 of the Company's Registration Statement on Form S-8 (File
No. 333-61313) filed with the Commission on August 13, 1998)
10.2 Exclusive Representation and Distribution Agreement dated May
4, 1992 between the Company and Godfrey Science and Design,
Inc. et al (incorporated by reference to Exhibit 10.2 Form
10-KSB/A dated April 4, 1997)
10.3 Employment Agreement dated June 1, 1995 between the Company
and Guy J. Quigley (incorporated by reference to Exhibit 10.3
of Form 10-KSB/A dated April 4, 1997)
10.4 Employment Agreement dated June 1, 1995 between the Company
and Charles A. Phillips (incorporated by reference to Exhibit
10.4 of Form 10-KSB/A dated April 4, 1997)
10.5 Exclusive Master Broker Wholesale Distributor and
Non-Exclusive National Chain Broker Agreement dated July 22,
1994 between the Company and Russell Mitchell (incorporated by
reference to Exhibit 10.7 of Form 10-KSB/A dated April 4,
1997)
10.6 Licensing Agreement dated August 24, 1996 between the Company,
George A. Eby III and George Eby Research (incorporated by
reference to Exhibit 10.6 of Form 10-KSB/A dated April 4,
1997)
10.8 United States Exclusive Supply Agreement dated March 17, 1997
(Portions of this exhibit are omitted and were filed
separately with the Securities Exchange Commission pursuant to
the Company's application requesting confidential treatment in
accordance with Rule 406 of Regulation C as promulgated under
the Securities Act of 1933, incorporated by reference to
Exhibit 10.5 of Form SB-2 dated September 29, 1997)
10.9 Consulting Agreement dated May 4, 1992 between the Company and
Godfrey Science and Design, Inc. et al. (incorporated by
reference to Exhibit 10.5 of Form 10-KSB/A dated April 4,
1997)
10.10 Employment Agreement dated November 5, 1996, as amended,
between the Company and George J. Longo (the Employment
Agreement is incorporated by reference to Exhibit 10.10 of
Form 10-KSB dated March 30, 1998 and the amendments are
attached hereto)
10.11 Employment Agreement dated January 1, 1997, as amended,
between the Company and Eric H. Kaytes (the Employment
Agreement is incorporated by reference to Exhibit 10.11 of
Form 10-KSB dated March 30, 1998 and amendments are attached
hereto)
10.12 Rights Agreement dated September 15, 1998 between the Company
and American Stock Transfer and Trust Company (incorporated by
reference to Exhibit 1 to the Company's Registration Statement
on Form 8-A filed with the Commission on September 18, 1998)
-22-
10.13 Consulting agreement dated March 7, 2002 between the Company
and Forrester Financial LLC (incorporated by reference from
Exhibit 99.1 to Form 8-K filed on April 11, 2002.)
10.14 Warrant agreement dated March 7, 2002 between the Company and
Forrester Financial LLC (incorporated by reference from
Exhibit 99.2 to Form 8-K filed on April 11, 2002.)
10.15 Agreement dated February 2, 2003 between the Company and
Forrester Financial LLC (incorporated by reference from
Exhibit 99.3 to Form 8-K filed on February 18, 2003.)
10.16 Amended and Restated Warrant Agreement dated February 2, 2003
between the Company and Forrester Financial LLC (incorporated
by reference from Exhibit 99.4 to Form 8-K filed on February
18, 2003.)
10.17 Share agreement effective as of December 31, 2002 between the
Company and Suncoast Naturals, Inc. is incorporated by
reference to Exhibit 2.1 of Form 8-K filed on February 6,
2003.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants, dated March 25, 2003.
99.1 Certification of the President and Chief Executive Officer
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed a report on 8-K, Item 5. The report involved the
resignation of two directors from the Board of Directors of the Company.
-23-
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 26, 2003
- -------------------------------------- --------------
Guy J. Quigley, Chairman of the Board, President, Date
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Company in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- -----
/s/ Guy J. Quigley
- -------------------- Chairman of the Board, President, March 26, 2003
Guy J. Quigley Chief Executive Officer and Director --------------
/s/ Charles A. Phillips Executive Vice President, March 26, 2003
- ------------------------ Chief Operating --------------
Charles A. Phillips Officer and Director
/s/ George J. Longo Vice President, Chief Financial March 26, 2003
- ----------------------- Officer and Director (Principal --------------
George J. Longo Financial and Accounting Officer)
/s/ Jacqueline F. Lewis Director March 26, 2003
- ------------------------ --------------
Jacqueline F. Lewis
/s/ Rounsevelle W. Schaum Director March 26, 2003
- ------------------------- --------------
Rounsevelle W. Schaum
/s/ Stephen W. Wouch, Director March 26, 2003
- ------------------------ --------------
Stephen W. Wouch,
-24-
THE QUIGLEY CORPORATION
a Nevada corporation
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Section 302 Certification
I, Guy J. Quigley, certify that:
1. I have reviewed this annual report on Form 10-K of The Quigley Corporation, a
Nevada corporation (the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 17, 2003
By: /s/ Guy J. Quigley
-------------------------------
Guy J. Quigley
Chief Executive Officer
-25-
THE QUIGLEY CORPORATION
a Nevada corporation
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Section 302 Certification
I, George J. Longo, certify that:
1. I have reviewed this annual report on Form 10-K of The Quigley Corporation, a
Nevada corporation (the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 17, 2003
By: /s/ George J. Longo
-------------------------------
George J. Longo
Chief Financial Officer
-26-