UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 01-21617
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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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)
KELLS BUILDING, 621 SHADY RETREAT ROAD, P.O. BOX 1349, DOYLESTOWN, PA 18901
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (215) 345-0919
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0005 PAR VALUE PER SHARE
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(Title of Class)
COMMON SHARE PURCHASE RIGHTS
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(Title of Class)
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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the registrant's common stock held by
non-affiliates was $74,708,630 as of June 30, 2004, based on the closing price
of the common stock on The Nasdaq National Market.
Number of shares of each of the registrant's classes of securities outstanding
on March 23, 2005:
Common stock, $.0005 par value per share: 11,659,655.
Common share purchase rights: 0
DOCUMENTS INCORPORATED BY REFERENCE
Information set forth in Part III of this report is incorporated by reference
from the registrant's proxy statement for the 2005 annual meeting of
stockholders.
Page 1 of 34
TABLE OF CONTENTS
Part I Page
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Item 1. Business 3 - 10
2. Properties 10
3. Legal Proceedings 10 - 13
4. Submission of Matters to a Vote of Security Holders 13
Part II
5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 13 - 14
6. Selected Financial Data 15
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16 - 22
7A. Quantitative and Qualitative Disclosures About Market Risk 22
8. Financial Statements and Supplementary Data 23
9. Change in and Disagreements with Accountants on
Accounting and Financial Disclosure 24
9A. Controls and Procedures 24
9B. Other Information 24
Part III
10. Directors and Executive Officers of the Registrant 24
11. Executive Compensation 24
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 24
13. Certain Relationships and Related Transactions 24
14. Principal Accountant Fees and Services 25
Part IV
15. Exhibits and Financial Statement Schedules 25 - 27
Signatures 28
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this Report contains forward-looking
statements. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in these forward-looking statements. Factors that might cause such a
difference include, but are not limited to, management of growth, competition,
pricing pressures on the Company's products, industry growth and general
economic conditions. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date hereof. The Company undertakes no obligation to revise or publicly release
the results of any revision to these forward-looking statements.
CERTAIN RISK FACTORS
The Quigley Corporation makes no representation that the United States Food and
Drug Administration or any other regulatory agency will grant an Investigational
New Drug or take any other action to allow its formulations to be studied or
marketed. Furthermore, no claim is made that potential medicine discussed herein
is safe, effective, or approved by the Food and Drug Administration.
Additionally, data that demonstrates activity or effectiveness in animals or in
vitro tests do not necessarily mean the formula test compound, referenced
herein, will be effective in humans. Safety and effectiveness in humans will
have to be demonstrated by means of adequate and well controlled clinical
studies before the clinical significance of the formula test compound is known.
Readers should carefully review the risk factors described in other sections of
the filing as well as in other documents the Company files from time to time
with the Securities and Exchange Commission.
PART I
ITEM 1. 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 marketplace together with
the sale of proprietary health and wellness products through its direct selling
subsidiary. One of the Company's key products of its cold remedy segment is
Cold-Eeze(R), a zinc gluconate glycine product, 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. Prior to October 1, 2004, the lozenge form of
Cold-Eeze(R) was manufactured by JoEl, Inc, then the Company's contract
manufacturer for this product. On October 1, 2004, the Company completed the
purchase of certain assets and assumed certain liabilities of JoEl, Inc.,
assuring future manufacturing capability necessary to support the business of
the cold remedy segment. This manufacturing entity, now called Quigley
Manufacturing Inc. ("QMI"), a wholly owned subsidiary of the Company, will
continue to produce lozenge product along with performing such operational tasks
as warehousing and shipping the Company's Cold-Eeze(R) products. In addition,
QMI produces a variety of hard and organic candy for sale to third party
customers in addition to contract manufacturing activities for non-related
entities. (See Note 3 for further information on this asset acquisition).
Darius International Inc. ("Darius"), the Health and Wellness segment, a wholly
owned subsidiary of the Company, was formed in January 2000 to introduce new
products to the marketplace through a network of independent distributors.
Darius is a direct selling organization specializing in proprietary health and
wellness products, which commenced shipping product to customers in the third
quarter of 2000. On January 2, 2001, the Company acquired certain assets and
assumed certain liabilities of a privately held company involved in the direct
marketing and distribution of health and wellness products.
The formation of Darius has provided diversification to the Company in both the
method of product distribution and the broader range of products available to
the marketplace, serving as a balance to the seasonal revenue cycles of the
Cold-Eeze(R) branded products.
In January 2001, the Company formed an Ethical Pharmaceutical Unit, Quigley
Pharma Inc. ("Pharma"), the Ethical Pharmaceutical segment, that is under the
direction of its Executive Vice President and Chairman of its Medical Advisory
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Committee. The formation of Pharma followed the Patent Office of the United
States Commerce Department's confirmation of the assignment to the Company of a
Patent Application for the "Method and Composition for the Topical Treatment of
Diabetic Neuropathy" which was issued and extends through March 27, 2021. The
establishment of a dedicated pharmaceutical subsidiary may enable the Company to
diversify into the prescription drug market and to ensure safe and effective
distribution of these important potential new products currently under
development. At this time, five patents have been issued and assigned to the
Company resulting from research activity of Pharma.
During 2000, the Company acquired a 60% ownership position in Caribbean Pacific
Natural Products, Inc. ("CPNP"), a developer and marketer of all-natural
sun-care and skincare products for luxury resorts, theme parks and spas. In
December 2002, the Board of Directors of the Company approved a plan to sell
CPNP. On January 22, 2003, the Company completed the sale of the Company's 60%
equity interest in CPNP to Suncoast Naturals, Inc. ("Suncoast"). See Note 5 -
Discontinued Operations.
DESCRIPTION OF BUSINESS OPERATIONS
Since its inception, the Company has continued to conduct research and
development into various types of health-related food supplements and
homeopathic cold remedies. Initially, the Company's business was the marketing
and distribution of a line of nutritious health supplements (hereinafter
"Nutri-Bars"). During 1995, the Company reduced the emphasis in the marketing of
the Nutri-Bars and commenced focusing its marketing and research and development
resources towards the Company's patented Cold-Eeze(R) zinc gluconate glycine
cold relief products.
Prior to the fourth quarter 1996, the Company had minimal revenues and as a
result suffered continued losses due to ongoing research and development and
operating expenses. However, 1997 resulted in significant revenue increases as a
result of the Company's nationwide marketing campaign and the increased public
awareness through media public service announcements of the Cold-Eeze(R) lozenge
product.
Since June 1996, the cold-remedy segment has concentrated its business
operations on the manufacturing, marketing and development of its proprietary
Cold-Eeze(R) cold-remedy lozenge products and on development of various product
extensions. These products are based upon a proprietary zinc gluconate glycine
formula, which in two double-blind clinical studies has shown to reduce the
duration and severity of the common cold symptoms. The Quigley Corporation
acquired worldwide manufacturing and distribution rights to this formulation in
1992 and commenced national marketing in 1996. The demand for the Company's
cold-remedy products is seasonal, where the third and fourth quarters generally
represent the largest sales volume. Prior to October 1, 2004, the lozenge form
of Cold-Eeze(R) was manufactured by JoEl, Inc. On October 1, 2004 the Company
completed the purchase of certain assets and assumed certain liabilities of
JoEl, Inc., assuring a future manufacturing capability necessary to support the
business of the cold remedy segment. (see Note 3 for further information on this
net asset acquisition).
Darius is a direct selling organization specializing in proprietary health and
wellness products, which commenced shipping product to customers in the third
quarter of 2000.
Pharma was formed for the purpose of developing naturally derived prescription
drugs, cosmeceuticals, and dietary supplements. Pharma is currently undergoing
research and development activity in compliance with regulatory requirements.
The Company is in the initial stages of what may be a lengthy process to develop
these patent applications into commercial products.
During 2004, approximately 93% of the Company's revenues were generated in the
United States with the remainder being attributable to international trade.
Financial information regarding the Company's operating segments is set forth in
Item 8, Notes to Financial Statements, Note 17 - 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 currently sold in lozenge, sugar-free tablet and gum
form. During 2003, the Company launched Cold-Eeze(R) Nasal Spray and
Kidz-EEZE(TM) Sore Throat Pops. In September 2004, the Company notified its
customers of its decision to discontinue the Cold-Eeze(R) Cold Remedy Nasal
Spray product within its line of cold remedy products. The decision was made
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because the product had not developed into a viable entry in the nasal spray
cold remedy category. Since its launch in September 2003, the product had not
met either the Company's sales expectations or its return on investment
projections.
In May 1992, the Company entered into an exclusive agreement for worldwide
representation, manufacturing, marketing of Cold-Eeze(R) products in the United
States. 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, which commenced at the CLEVELAND CLINIC FOUNDATION on
October 3, 1994, were published. 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 common cold symptoms.
In April 2002, the Company announced the statistical results of a retrospective
clinical adolescent study at the Heritage School facility in Provo, Utah that
suggests that Cold-Eeze(R) is also an effective means of preventing the common
cold and statistically (a) lessens the number of colds an individual suffers per
year, reducing the median from 1.5 to zero and (b) 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.
In April 2002, the Company was assigned a Patent Application which was filed
with the Patent Office of the United States Commerce Department for the use of
Cold-Eeze(R) as a prophylactic for cold prevention. The new patent application
follows the results of the adolescent study at the Heritage School facility.
In May 2003, the Company announced the findings of a prospective study,
conducted at the Heritage School facility in Provo, Utah, in which 178 children,
ages 12 to 18 years, were given Cold-Eeze(R) lozenges both symptomatically and
prophylactically from October 5, 2001 to May 30, 2002. The study found a 54%
reduction in the most frequently observed cold duration. Those subjects not
receiving treatment most frequently experienced symptom duration of 11 days
compared with 5 days when Cold-Eeze(R) lozenges were administered, a reduction
of 6 days.
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 United States Food and Drug
Administration ("FDA") and the Homeopathic Pharmacopoeia of the United States.
HEALTH AND WELLNESS
Darius, through Innerlight Inc., its wholly owned subsidiary, is a direct
selling company specializing in the development and distribution of proprietary
health and wellness products, including herbal vitamins and dietary supplements
for the human condition, primarily within the United States and since the second
quarter of 2003, internationally. During the fourth quarter of 2004, Darius
launched an exclusive skin care line under the Beverly Sassoon brand name to
diversify this segment's product range.
The continued success of this segment is dependent, among other things, on the
Company's ability:
o To maintain existing independent representatives and recruit
additional successful independent representatives. Additionally,
the loss of key high-level distributors could negatively impact
future growth and revenues;
o To continue to develop and make available new and desirable
products at an acceptable cost;
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o To maintain safe and reliable multiple-location sources for
product and materials;
o To maintain a reliable information technology system and internet
capability. The Company has expended significant resources on
systems enhancements in the past and will continue to do so to
ensure prompt customer response times, business continuity and
reliable reporting capabilities. Any interruption to computer
systems for an extended period of time could be harmful to the
business;
o To execute conformity with various federal, state and local
regulatory agencies both within the United States and abroad.
With the growth of international business, difficulties with
foreign regulatory requirements could have a significant negative
impact on future growth. Any inquiries from government
authorities relating to the Company's business and compliance
with laws and regulations could be harmful to the Company;
o To compete with larger more mature organizations operating within
the same market and to remain competitive in terms of product
relevance and business opportunity;
o To successfully implement methods for progressing the direct
selling philosophy internationally; and
o To plan strategically for general economic conditions.
Any or all of the above risks could result in significant reductions in revenues
and profitability of the Health and Wellness segment.
CONTRACT MANUFACTURING
On October 1, 2004, the Company purchased certain assets and assumed certain
liabilities of JoEl, Inc. Prior to October 1, 2004, JoEl, Inc., was the contract
manufacturer to the Company for the Cold-Eeze(R) lozenge form of the product.
From October 1, 2004, this manufacturing entity, now called Quigley
Manufacturing Inc. ("QMI"), a wholly owned subsidiary of the Company, has
continued to produce lozenge product along with performing such operational
tasks as warehousing and shipping the Company's Cold-Eeze(R) products. In
addition to that function, QMI produces a variety of hard and organic candy for
sale to third party customers in addition to contract manufacturing activities
for non-related entities.
ETHICAL PHARMACEUTICAL
Pharma's current activity is the development of naturally-derived prescription
drugs with the goal to improve the quality of life and health of those in need
through scientific research and development. Research and development will focus
on the identification, isolation and direct use of active medicinal substances.
One aspect of Pharma's research will focus on the combination of isolated active
constituents and whole plant components. The search for new natural sources of
medicinal substances will focus not only on world plants, fungi, and other
natural substances, but an intense investigation into traditional medicinals and
historic therapeutics.
The pre-clinical development, clinical trials, product manufacturing and
marketing of Pharma's potential new products are subject to federal and state
regulation in the United States and other countries. Obtaining FDA regulatory
approval for these pharmaceutical products can require substantial resources and
take several years. The length of this process depends on the type, complexity
and novelty of the product and the nature of the disease or other indications to
be treated. If the Company cannot obtain regulatory approval of these new
products in a timely manner or if the patents are not granted or if the patents
are subsequently challenged, these possible events could have a material effect
on the business and financial condition of the Company. The strength of the
Company's patent position may be important to its long-term success. There can
be no assurance that these patents and patent applications will effectively
protect the Company's products from duplication by others.
The areas of focus are:
o A Patent (No. 6,555,573 B2) entitled "Method and Composition for
the Topical Treatment of Diabetic Neuropathy." The patent extends
through March 27, 2021.
o A Patent (No. 6,592,896 B2) entitled "Medicinal Composition and
Method of Using It" (for Treatment of Sialorrhea and other
Disorders) for a product to relieve sialorrhea (drooling) in
patients suffering from Amyotrophic Lateral Sclerosis (ALS),
otherwise known as Lou Gehrig's Disease. The patent extends
through August 6, 2021.
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o A Patent (No. 6,596,313 B2) entitled "Nutritional Supplement and
Method of Using It" for a product to relieve sialorrhea
(drooling) in patients suffering from Amyotrophic Lateral
Sclerosis (ALS), otherwise known as Lou Gehrig's Disease. The
patent extends through April 15, 2022.
o A Patent (No. 6,753,325 B2) entitled "Composition and Method for
Prevention, Reduction and Treatment of Radiation Dermatitis," a
composition for preventing, reducing or treating radiation
dermatitis. The patent extends through November 5, 2021.
o A Patent (No. 6,827,945 B2) entitled "Nutritional Supplement and
Method of Using It" for a method for treating at least one
symptom of arthritis. The patent extends through April 22, 2023.
o 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.
In April 2002, the Company initiated a Phase II Proof of Concept Study in France
for treatment of diabetic neuropathy, which was concluded in 2003. In April
2003, the Company announced that an independently monitored analysis of the
Phase II Proof of Concept Study concluded that subjects using this formulation
had 67% of their symptoms improve, suggesting efficacy. In March 2004, the
Company announced that it had completed its first meeting at the FDA prior to
submitting the Company's Investigational New Drug ("IND") application for the
relief of symptoms of diabetic symmetrical peripheral neuropathy. The FDA's
pre-IND meeting programs are designed to provide sponsors with advance guidance
and input on drug development programs.
In September 2003, the Company announced its intention to file for permission to
study its patent pending potential treatment for psoriasis and other skin
disorders. Continued testing will therefore have to be conducted under an IND
application following positive preliminary results.
In December 2003, the Company announced positive test results of a preliminary
independent in vitro study indicating that a test compound of the Company
previously tested on the Influenza virus showed "significant virucidal activity
against a strain of the Severe Acute Respiratory Syndrome (SARS) virus." In
January 2004 the Company announced that it intends to conduct two further
studies. The first study is intended to repeat the previously announced results,
which demonstrated the compound to be 100 percent effective in preventing
non-infected ferrets in close proximity to an infected ferret from becoming
infected with the Influenza A virus. The second study is a dose ranging study on
the test compound. Upon dosage determination and confirmation results from this
forthcoming animal model study, a human proof of concept study using a virus
challenge with Influenza A virus in a quarantine unit can be the next step. In
January 2004, the Company also reported that its compound has shown virucidal
and virustatic activity against the strain 3B of the Human Immunodeficiency
Virus Type 1 (HIV-1) in an in-vitro study.
In January 2004, a broad anti-viral compound was determined to be effective in
in-vitro and in-vivo studies for applications such as Influenza A&B, SARS, and
Herpes Simplex 1, and since this Sialorrhea formulation is a derivative compound
of the anti-viral formulation, ongoing testing for this Sialorrhea compound is
being reconsidered and probably will be discontinued.
In April 2004, the Company announced the results of a preliminary, pre-clinical
animal study which measured the effect of its proprietary patent applied for
formulation against ionizing (nuclear) radiation. This study determined that
parenteral (injection) administration of the study compound was protective
against the effects of a lethal, whole body ionizing radiation dose in a mouse
model. This compound is being investigated to potentially reduce the effects of
radiation exposure on humans.
PATENTS, TRADEMARKS, ROYALTY AND COMMISSION AGREEMENTS
The Company currently owns no patents for cold-remedy products. However, the
Company has been assigned patent applications which are hereinafter discussed
and has been granted an exclusive agreement for worldwide representation,
manufacturing, marketing and distribution rights to a zinc gluconate glycine
lozenge formulation, which are patented as follows:
United States: No. 4 684 528 (August 4, 1987, expired August 2004) Sweden: No. 0 183 840 (March 2, 1994)
No. 4 758 439 (July 19, 1988) Canada: No. 1 243 952 (November 1, 1988)
Great Britain: No. 2 179 536 (December 21, 1988) Germany: No. 3,587,766 (March 2, 1994)
France & Italy: No. EP 0 183 840 B1 (March 2, 1994) Japan: Pending
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The following patents have been assigned to the Company in relation to Pharma,
together with issue date:
United States: No. 6 555 573 B2 (April 29, 2003)
No. 6 592 896 B2 (July 15, 2003)
No. 6 596 313 B2 (July 22, 2003)
No. 6 753 325 B2 (June 22, 2004)
No. 6 827 945 B2 (December 7, 2004)
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 common cold symptoms.
Pursuant to the License Agreement entered into between the Company and the
patent holder, the Company paid a royalty fee to the patent holder of three
percent (3%) on sales collected, less certain deductions. 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) products are 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. 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, which is due to expire in
2007. However, the Company and the developer are in litigation and as such no
potential offset from such litigation for these fees has been recorded.
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, both officers and stockholders of the Company, in
consideration of the acquisition of the Cold-Eeze(R) cold therapy product, are
to receive a total commission of five percent (5%), on sales collected, less
certain deductions until the expiration of this agreement on May 31, 2005.
In August 2003, the Company entered into a licensing agreement with a patent
holder relating to the utilization of a nasal spray product in the treatment of
symptoms of the common cold. The Company agreed to pay the patent holder a two
percent royalty on net sales of nasal spray products, less certain deductions,
throughout the term of this agreement, expiring no later than April 2014. As the
nasal spray product has now been discontinued, no further obligations are
expected to materialize in relation to this agreement.
During 2004 the following patents were granted to the Company relating to the
areas of focus of Pharma:
o A Patent (No. 6,753,325 B2) entitled "Composition and Method for
Prevention, Reduction and Treatment of Radiation Dermatitis," a
composition for preventing, reducing or treating radiation
dermatitis. The patent extends through November 5, 2021.
o A Patent (No. 6,827,945 B2) entitled "Nutritional Supplement and
Method of Using It" for a method for treating at least one
symptom of arthritis. The patent extends through April 22, 2023.
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 Walgreen Co., Ahold,
Albertsons, CVS, RiteAid, Publix, Brooks Drug, B.J's Wholesale Club, Inc., Sam's
Club, Winn-Dixie Stores, Inc., Wal-Mart, Target, The Kroger Company, Safeway
Inc., Costco Wholesale, Kmart Corporation, and wholesale distributors including,
AmerisourceBergen and Cardinal Distribution.
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 27%, 23%, and 23% of its
continuing consolidated gross revenues for the years ended December 31, 2004,
2003 and 2002, respectively.
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Darius is a direct selling organization specializing in proprietary health and
wellness products and the introduction of new products to the marketplace
through a network of independent distributors. This method of distribution is in
contrast to traditional distribution channels using independent and chain drug
and discount stores as utilized by the Company in the promotion of the
cold-remedy products.
Pharma currently has no sales since it is undergoing research and development
activity in compliance with regulatory requirements and is at the initial stages
of what may be a lengthy process to develop commercial products.
RESEARCH AND DEVELOPMENT
The Company's research and development costs for the years ended December 31,
2004, 2003 and 2002 were $3,232,569, $3,365,698 and $2,663,291, respectively.
Future research and development expenditures are anticipated in order to develop
extensions of the Cold-Eeze(R) product, including potential unrelated new
products in the consumer health care industry, that are primarily supported by
clinical studies, for efficacious long-term products that can be coupled with
possible line extension derivatives for a family of products. Clinical studies
and testing are anticipated in connection with Pharma, such as the formulation
of products for diabetic use, radiation dermatitis, influenza A, arthritis and
other disorders. Pharma is currently involved in research activity following
patent applications that the Company has acquired, and research and development
costs, relating to potential products, are expected to increase significantly
over time as product research and testing continues.
REGULATORY MATTERS
The business of the Company is subject to federal and state laws and regulations
adopted for the health and safety of users of the Company's products. The
Company's Cold-Eeze(R) product is a homeopathic remedy, which is subject to
regulation by various federal, state and local agencies, including the FDA and
the Homeopathic Pharmacopoeia of the United States. These regulatory authorities
have broad powers, and the Company is subject to regulatory and legislative
changes that can affect the economics of the industry by requiring changes in
operating practices or by influencing the demand for, and the costs of,
providing its products. Management believes that the Company is in compliance
with all such laws, regulations and standards currently in effect including the
Food, Drug and Cosmetics Act of 1938 and the Homeopathic Pharmacopoeia
Regulatory Service. Although it is possible that future results of operations
could be materially affected by the future costs of compliance, management
believes that the future costs will not have a material adverse effect on the
Company's financial position or competitive position.
The pre-clinical development, clinical trials, product manufacturing and
marketing of Pharma's potential new products are subject to federal and state
regulation in the United States and other countries. Obtaining FDA regulatory
approval for these pharmaceutical products can require substantial resources and
take several years. The length of this process depends on the type, complexity
and novelty of the product and the nature of the disease or other indications to
be treated. If the Company cannot obtain regulatory approval of these new
products in a timely manner or if the patents are not granted or if the patents
are subsequently challenged, these possible events could all have a material
effect on the business and financial condition of the Company. The strength of
the Company's patent position may be important to its long-term success. There
can be no assurance that these patents and patent applications will effectively
protect the Company's products from duplication by others.
COMPETITION
The Company competes with other suppliers of cold-remedy and health and wellness
products. These suppliers range widely in size. Some of the Company's
competitors have significantly greater financial, technical or marketing
resources than the Company. Management believes that its Cold-Eeze(R) product,
which has been clinically proven in two double-blind studies to reduce the
severity and duration of 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. On October 1, 2004 the Company
acquired certain assets and assumed certain liabilities of JoEl, Inc., the prior
contract manufacturer of the Cold-Eeze(R) lozenge product. This new subsidiary,
Quigley Manfacturing Inc., assures future production capabilities of the lozenge
product which constitutes primarily all of the cold remedy revenue.
-9-
EMPLOYEES
At December 31, 2004 the Company employed 131 full-time persons, the majority of
which were employed at the Company's manufacturing facility, Quigley
Manufacturing Inc., in a production function. The remainder were involved in an
executive, marketing or administrative capacity. None of the Company's employees
are covered by a collective bargaining agreement or are members of a union.
SUPPLIERS
Prior to October 1, 2004, the lozenge form of Cold-Eeze(R) was manufactured by
JoEl, Inc. On October 1, 2004 the Company completed the purchase of certain
assets and assumed certain liabilities of JoEl, Inc., thereby bringing the
manufacturing process of the lozenge product under the control of the Company.
The other forms of Cold-Eeze(R) and remaining products of both the cold remedy
and health and wellness segments continue to be manufactured by contract
manufacturers. Should these third party relationships terminate or discontinue
for any reason, the Company has formulated a contingency plan necessary in order
to prevent such discontinuance from materially affecting the Company's
operations. Any such termination may, however, result in a temporary delay in
production until the replacement facility is able to meet the Company's
production requirements.
Raw materials used in the production of the cold-remedy products are available
from numerous sources. Currently, they are being procured from a single vendor
in order to secure purchasing economies. In a situation where this one vendor is
not able to supply the ingredients, other sources have been identified. Any
situation where the vendor is not able to supply the contract manufacturer with
ingredients may result in a temporary delay in production until replacement
supplies are obtained to meet the Company's production requirements.
ITEM 2. PROPERTIES
The corporate office of The Quigley Corporation is located at 621 Shady Retreat
Road, Doylestown, Pennsylvania. This property, with an area of approximately
13,000 square feet, was purchased in November 1998 and refurbished during 1999.
The Company occupies warehouse space in Las Vegas, Nevada at a current monthly
cost of $2,396. This Nevada location has a three-year lease that expires in July
2006. In addition to storage facilities at the manufacturing subsidiary's
locations, the Company also stores product in a number of additional warehouses
in Pennsylvania with storage charges based upon the quantities of product being
stored.
The manufacturing facilities of Quigley Manufacturing Inc. are located in each
of Elizabethtown and Lebanon, Pennsylvania. The facilities were purchased by The
Quigley Corporation effective October 1, 2004 as part of the Company's
acquisition of certain assets and assuming certain liabilities of JoEl, Inc. In
total, the facilities have a total area of approximately 73,000 square feet,
combining both manufacturing and office space.
The Darius business in Utah is located at 867 East 2260 South, Provo, Utah, with
an area of approximately 24,700 square feet. The current monthly lease cost of
this office and warehouse space is $10,694 with the leases set to expire in
September 2005 and July 2007, respectively. The Company expects that these
leases will be renewed or that alternative spaces will be obtained.
The Company believes that its existing facilities are adequate at this time.
ITEM 3. LEGAL PROCEEDINGS
TESAURO AND ELEY
In September 2000, the Company was sued by two individuals (Jason Tesauro and
Elizabeth Eley, both residents of Georgia), on behalf of a "nationwide class" of
" similarly situated individuals," in the Court of Common Pleas of Philadelphia
County, Pennsylvania. The Complaint alleges that the Plaintiffs purchased
certain Cold-Eeze(R) products between August, 1996, and November, 1999, based
upon cable television, radio and internet advertisements which allegedly
misrepresented the qualities and benefits of the Company's products. The
Complaint requests an unspecified amount of damages for violations of
Pennsylvania's consumer protection law, breach of warranty and unjust
enrichment, as well as a judicial determination that the action be maintained as
a class action.
In October 2000, the Company filed Preliminary Objections to the Complaint
seeking dismissal of the action. The Court sustained certain objections thereby
narrowing Plaintiffs' Complaint. In May 2001, Plaintiffs filed a Motion to
Certify the Alleged Class. The Company opposed the Motion. In November 2001, the
Court held a hearing on Plaintiffs'
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Motion for Class Certification. In January 2002, the Court denied in part and
granted in part the Plaintiffs' Motion. The Court denied Plaintiffs' Motion to
Certify a Class based on Plaintiffs' claim under the Pennsylvania Consumer
Protection Law; however, the Court certified the class based on Plaintiffs'
breach of warranty and unjust enrichment claims
Discovery has been completed and trial that was originally scheduled for May
2004 has been continued pending determination of certain dispositive pre-trial
motions filed by the Company.
The Corporation believes Defendant's claims are without merit, and it is
vigorously defending the claims. Based upon the information the Company has at
this time, it believes the action will not have a material impact to the
Company. However, at this time no prediction as to the outcome can be made.
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, and it is
vigorously defending the counterclaims and is prosecuting its action on its
complaint. Based upon the information the Company has at this time, it believes
the action will not have a material impact to the Company. However, at this time
no prediction as to the outcome can be made.
PAIGE D. DAVISON VS. THE QUIGLEY CORPORATION
On February 26, 2004, the plaintiff filed an action against The Quigley
Corporation (the "Company"), which was not served until April 5, 2004. The
action alleges that the plaintiff suffered certain losses and injuries as a
result of using the Company's nasal spray product. Among the allegations of the
plaintiff are that the nasal spray was defective and unreasonably dangerous,
lacked proper and adequate warnings and/or instructions, and was not fit for the
purposes and uses intended.
The Company has investigated the claims and believes they are without merit. At
the present time, the matter is being defended by the Company's liability
insurance carrier.
The Company believes plaintiff's claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact to the Company. However,
at this time no prediction as to the outcome can be made.
POLSKI VS. THE QUIGLEY CORPORATION
On August 12, 2004, plaintiff filed an action against The Quigley Corporation in
the District Court for Hennepin County, Minnesota, which was not served until
September 2, 2004. The action alleges that plaintiff suffered certain losses and
injuries as a result of the Company's nasal spray product. Among the allegations
of plaintiff are negligence, products liability, alleged breach of express and
implied warranties, and an alleged breach of the Minnesota Consumer Fraud
Statute.
The Company has investigated the claims and believes that they are without
merit. At the present time, the matter is being defended by the Company's
insurance carrier.
The Company believes plaintiff's claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact to the Company. However,
at this time no prediction as to the outcome can be made.
ANGELFIRE, ARVIN, BELL, BROWN, EDWARDS, HOHNSTEIN, HOFFMAN, LAURENT,
MARTIN, RICHARDSON, RIGSBY, SEONE, SMALLEY,
VAN BENTHEM AND WILLIAMS VS. THE QUIGLEY CORPORATION
On November 4, 2004, seven (7) plaintiffs filed an action in the Court of Common
Pleas of Bucks County, Pennsylvania, against The Quigley Corporation. The
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complaint was amended on March 11, 2005 to add an additional eight (8)
plaintiffs in the action. The action alleges that plaintiffs suffered certain
losses and injuries as a result of using the Company's nasal spray product.
Among the allegations of plaintiffs are claims that The Quigley Corporation is
liable to them based on alleged negligence, alleged strict products liability
(failure to warn and defective design), alleged breach of express warranty,
alleged breach of implied warrant, and an alleged violation of the Pennsylvania
Unfair Trade Practices and Consumer Protection Law and other Consumer Protection
Statutes.
At the present time, the matter is being defended by the Company's insurance
carrier. An answer stating affirmative defenses has been filed. Pre-trial
discovery is being scheduled.
The Company believes plaintiffs' claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact to the Company. However,
at this time no prediction as to the outcome can be made.
THE QUIGLEY CORPORATION VS. JOHN C. GODFREY, ET AL.
This action was commenced in November 2004 in the Court of Common Pleas of Bucks
County, Pennsylvania. In that action, the Company is seeking declaratory and
injunctive relief against John C. Godfrey, Nancy Jane Godfrey, and Godfrey
Science and Design, Inc. requesting injunctive relief regarding the Cold-Eeze(R)
trade name and trademark; injunctive relief regarding the Cold-Eeze(R)
formulations and manufacturing methods and injunctive relief for breach of the
duty of loyalty. The Company's Complaint is based in part upon the Exclusive
Representation and Distribution Agreement and the Consulting Agreement (together
the "Agreements") entered into between the defendants and the Company. The
Company terminated the Agreements for the defendants' alleged material breaches
of the Agreements. Defendants have answered the complaint and asserted
counterclaims against the Company seeking remedies relative to the Agreements.
The Company has moved to dismiss portions of defendant's counterclaims on the
grounds that they are without merit.
The Corporation believes Defendant's claims are without merit, and it is
vigorously defending the counterclaims and is prosecuting its action on its
complaint. Based upon the information the Company has at this time, it believes
the action will not have a material impact to the Company. However, at this time
no prediction as to the outcome can be made.
AXIS SPECIALTY INSURANCE CO. VS. THE QUIGLEY CORPORATION
This action, filed in January 2005 in the Federal Eastern District Court for
Pennsylvania, stems from a dispute between the Company and one of its excess
liability insurance carriers, who seeks a judicial declaration of its insurance
coverage obligations under a policy which terminates in March 2005. The
carrier's action follows a complaint by the Company filed in December 2004 with
the Pennsylvania Insurance Commission, which ultimately sided with the Company
in determining that the carrier failed to observe proper notification procedures
when it first sought to limit, or alternatively, to insure at a substantially
higher premium, its coverage obligations. This action seeks to deny insurance
coverage for certain product liability claims based on occurrences prior to
April 6, 2004.
The Company has filed a counterclaim requesting a declaration of insurance
coverage under the insurance policy referenced above. The litigation potentially
affects the amount of the Company's liability coverage for the nasal spray
personal injury litigation described above.
The Company believes plaintiffs' claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact to the Company. However,
at this time no prediction as to the outcome can be made.
TERMINATED LEGAL PROCEEDINGS
GOLDBLUM AND WAYNE
An action was commenced on March 17, 1996 by Goldblum and Wayne in the Court of
Common Pleas of Montgomery County 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
vigorously defended this lawsuit through trial during January 2004 when the jury
returned a unanimous verdict in favor of the Company. Plaintiffs filed a Motion
for Post Trial Relief with the Court of Common Pleas of Montgomery County but
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failed to produce a record or file a Brief in Support of their Motion within the
timelines called for by the Pennsylvania Rules of Civil Procedure. The Quigley
Corporation has taken judgment on the verdict in its favor and the appeal period
has expired. This action is now concluded.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
The Company's Common Stock, $.0005 par value, is currently traded on The NASDAQ
National Market under the trading symbol "QGLY." The price set forth in the
following table represents the high and low bid prices for the Company's common
stock.
Common Stock
------------
2004 2003
--------------------- ---------------------
Quarter Ended High Low High Low
------------- ---- --- ---- ---
March 31 $ 10.89 $ 8.50 $ 7.76 $ 4.71
June 30 $ 10.29 $ 6.92 $ 8.22 $ 5.39
September 30 $ 9.94 $ 7.35 $ 10.51 $ 6.75
December 31 $ 9.92 $ 7.56 $ 11.12 $ 7.32
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 NASDAQ
National Market established quotation system.
HOLDERS
As of December 31, 2004, there were approximately 350 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. In September 2004, the Company declared a
dividend-in-kind of an aggregate 499,282 shares of Suncoast's common stock to
its stockholders.
SALES OF UNREGISTERED SECURITIES TO JOEL, INC.
In connection with the closing of the Company's acquisition of certain assets
and assumption of certain liabilities of JoEl, Inc. on October 1, 2004, the
Company issued an aggregate of 113,097 unregistered shares of its Common Stock
as part of the purchase price to the shareholders of JoEl, Inc. pursuant to an
asset purchase and sale agreement by and between JoEl, Inc. and the Company
dated as of August 18, 2004. The issuance of the 113,097 shares was deemed to be
exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance on Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
-13-
WARRANTS AND OPTIONS
In addition to the Company's outstanding Common Stock, there are, as of December
31, 2004, 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
----------- ------ -------------- ---------------
CLASS "E" 850,000 $1.7500 June 30, 2006
CLASS "F" 225,000 $2.5000 November 4, 2006
CLASS "G" 585,000 $10.0000 May 5, 2007
Option Plan 396,500 $9.6800 December 1, 2007
Option Plan 331,000 $5.1250 April 6, 2009
Option Plan 262,000 $0.8125 December 20, 2010
Option Plan 304,000 $1.2600 December 10, 2011
Option Plan 345,000 $5.1900 July 30, 2012
Option Plan 102,000 $5.4900 December 17, 2012
Option Plan 424,000 $8.1100 October 29, 2013
Option Plan 500,000 $9.5000 October 26, 2014
At December 31, 2004, there were 4,324,500 unexercised and vested options and
warrants of the Company's Common Stock available for exercise.
SECURITIES AUTHORIZED UNDER EQUITY COMPENSATION
The following table sets forth certain information regarding stock option and
warrant grants made to employees, directors and consultants:
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Number of Weighted Number of Securities
Securities to be Average Remaining Available for
Issued Upon Exercise Price Future Issuance Under Equity
Exercise of Outstanding Compensation Plans
Plan Category Outstanding Options & (Excluding Securities
Options & Warrants Warrants Reflected in Column A)
(A) (B) ( C )
- --------------------------------------------------------------------------------------------------------------
Equity Plans Approved by Security Holders(1) 2,664,500 $6.26 200,000
Equity Plans Not Approved by Security Holders(2) 1,660,000 $4.76 -
Total 4,324,500 $5.68 200,000
(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 in 1996 and 1997.
-14-
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, 2004, 2003, 2002, 2001 and 2000.
The data presented below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operation" 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,
2004 2003 2002 2001 2000
--------------------------------------------------------------------
STATEMENT OF INCOME DATA:
Net sales $43,948 $41,499 $29,272 $21,226 $15,527
Total revenue 43,948 41,499 29,421 22,772 15,527
Gross profit 20,375 20,011 12,212 12,551 9,411
Income (loss) - continuing operations 453 729 (5,132) 934 (5,059)
Loss - discontinued operations (1) -- (54) (1,322) (718) (137)
Net income (loss) 453 675 (6,454) 216 (5,196)
Basic earnings (loss) per share:
Continuing operations $0.04 $0.06 ($0.47) $0.09 ($0.48)
Discontinued operations -- -- ($0.12) ($0.07) ($0.01)
Net income (loss) $0.04 $0.06 ($0.59) $0.02 ($0.49)
Diluted earnings (loss) per share:
Continuing operations $0.03 $0.05 ($0.47) $0.09 ($0.48)
Discontinued operations -- -- ($0.12) ($0.07) ($0.01)
Net income (loss) $0.03 $0.05 ($0.59) $0.02 ($0.49)
Weighted average shares outstanding:
Basic 11,541 11,467 10,894 10,675 10,551
Diluted 14,449 14,910 10,894 10,751 10,551
AS OF AS OF AS OF AS OF AS OF
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2002 2001 2000
--------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital $17,853 $18,257 $16,662 $18,626 $18,622
Total assets 31,530 26,270 24,935 24,756 26,056
Debt 2,893 -- -- -- --
Stockholders' equity $21,902 $20,787 $19,121 $21,200 $20,971
(1) In December 2002, the Board of Directors of the Company approved a plan to
sell Caribbean Pacific Natural Products, Inc. ("CPNP"). On January 22, 2003, the
Board of Directors of the Company completed the sale of the Company's 60% equity
interest in CPNP to Suncoast Naturals, Inc. The sale of this segment has been
treated as discontinued operations and all periods presented have been
reclassified.
-15-
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 manufacturer, marketer and distributor of a
diversified range of health and homeopathic products.
The Company's business interests comprise four segments, namely cold-remedy,
health and wellness, contract manufacturing and ethical pharmaceutical.
The Cold-Eeze(R) product continues to be the primary product of the cold-remedy
segment and is available in lozenge, gum and sugar-free tablet form. The
Kidz-Eeze(TM) Sore Throat product was launched during the third quarter of 2003
in preparation for the cold season. A nasal spray product launched at the same
time has since been discontinued due to the product's failure to meet either the
Company's sales expectations or its return on investment projections. The
efficacy of the Cold-Eeze(R) product was established following the publication
of the second double blind study in July 1996. A 2002 study also found that the
use of Cold-Eeze(R) to treat a cold statistically reduced the use of antibiotics
for respiratory illnesses by 92% when Cold-Eeze(R) is administered as a first
line treatment approach to the common cold. In May 2003, the Company announced
the findings of a prospective study, conducted at the Heritage School facility
in Provo, Utah, in which 178 children ages 12 to 18 years were given
Cold-Eeze(R) lozenges both symptomatically and prophylactically from October 5,
2001 to May 30, 2002. The study found a 54% reduction in the most frequently
observed cold duration. Those subjects not receiving treatment most frequently
experienced symptom duration at 11 days compared with 5 days when Cold-Eeze(R)
lozenges were administered, a reduction of 6 days.
In October 2004, the Company acquired certain assets and assumed certain
liabilities of JoEl, Inc., the contract manufacturer of the Cold-Eeze(R) lozenge
since its inception. This is now the contract manufacturing business segment,
Quigley Manufacturing Inc. ("QMI"), a wholly owned subsidiary of the Company. In
addition to manufacturing the lozenge form of the Cold-Eeze(R) product, this
subsidiary will continue to warehouse and ship all products related to the cold
remedy segment. QMI also manufactures a variety of hard candies including
organic and seasonal candy products under its own brand names along with other
such products in the capacity of contract manufacturing for third party
customers. QMI is an FDA approved facility. The acquisition was executed to
ensure that the integrity and formulation of the Cold-Eeze(R) products remained
under the control of the Company and the assurances of a continued supply of
Cold-Eeze(R) to the marketplace. The asset acquisition was financed by way of
internal working capital, approximating $1,200,000, the issuance of stock of the
Company, in the value of approximately $1,000,000, and a bank loan of
$3,000,000.
Cold-Eeze(R) is distributed through numerous independent, chain drug, food and
discount stores throughout the United States. Net sales of the cold-remedy
segment increased 11.5% in 2004 over the prior year, resulting in net sales in
2004 of $22,834,249 compared to $20,474,969 in 2003. The increase in sales may
be attributable to expanded media advertising and continued product support at
retail level through broad co-operative advertising programs and also promotion
events beneficial to the consumer. Additionally, the cold remedy segment may
have benefited from the media attention afforded to the scarcity of flu vaccine
and the resulting media attention. Net sales in 2004 of this segment were
negatively impacted by approximately $680,000 as a result of the discontinuation
of the nasal spray product in September 2004, and cost of sales were increased
by approximately $672,000 due to obsolete product and materials, together
combining to a reduction to gross margin of approximately $1,400,000 due to this
discontinuation.
The Company continues to use the resources of independent national and
international brokers to represent the Company's Cold-Eeze(R) products, which
provides cost efficiencies that benefit the Company.
During 2004, 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 $431,000 in related expenses.
Darius, through Innerlight Inc., is a direct selling company specializing in the
development and distribution of proprietary health and wellness products
primarily within the United States, with the commencement of international
business activity during the second quarter of 2003. Net sales of the health and
wellness segment in 2004 were $20,361,391 a decrease of $662,803 or 3.2% over
the 2003 net sales of $21,024,194. While net sales within the United States
slowed in 2004 compared to 2003, international sales increased by 135%. The
formation of Darius has provided diversification to the Company in both the
method of product distribution and the broader range of products available to
the marketplace serving as a balance to the seasonal revenue cycles of the
Cold-Eeze(R) branded products.
-16-
The establishment of an ethical pharmaceutical subsidiary, Pharma, may enable
the Company to diversify into the prescription drug market and ensure safe and
effective distribution of these important potential new products currently under
development. At this time, the Company has been assigned five patents following
the filing of patent applications with the Patent Office of the Unites States
Commerce Department and has filed one patent application within the European
Community. Clinical study costs associated with Pharma projects in 2004 were
approximately $3,100,000 related to development work being undertaken by Pharma,
an increase of approximately $201,000 over the prior year as a result of
increased study activity in various areas of interest.
With the exception of the Cold-Eeze(R) lozenge product and the products
manufactured by QMI under its own brand of hard, organic and seasonal candy, the
manufacturing of all of the Company's remaining products is carried out by
outside sources.
Operating expenses during 2004 increased over those of 2003 largely due to
increased media advertising focused on the initial stages of the cold season.
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. The formation of QMI,
following the acquisition of certain assets and assuming certain liabilities of
JoEl, Inc., serves to protect the future availability and integrity of the
Cold-Eeze(R) product and also makes available to the Company the operations of
an FDA approved facility for any future product development and manufacture.
In December 2002, the Board of Directors of the Company approved a plan to sell
CPNP, which was originally acquired in July 2000. On January 22, 2003, the Board
of Directors of the Company completed the sale of the Company's 60% equity
interest in CPNP to Suncoast. In exchange for its 60% equity interest in CPNP,
the Company received 750,000 shares of Suncoast's common stock and 100,000
shares of Suncoast's Series A Redeemable Preferred Stock, which bear 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. Following the purchase by Suncoast of
the Company's 60% equity interest in CPNP, the Company owned 19.5% of Suncoast's
issued and outstanding capital stock valued at $79,365, which investment is
accounted for on the cost basis method, representing the Company's share of the
fair value of Suncoast at the time the transaction was recorded. In September
2004, the Company declared a dividend-in-kind of an aggregate of 499,282 shares
of Suncoast's common stock to its stockholders and accordingly the investment
value has been reduced to $26,455 at December 31, 2004. Following the stock
dividend, the Company's holding in Suncoast is approximately 5%.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board (FASB or the "Board")
issued FASB INTERPRETATION NO. 46 (REVISED DECEMBER 2003), CONSOLIDATION OF
VARIABLE INTEREST ENTITIES (FIN 46R), to address certain implementation issues.
FIN 46R varies significantly from FASB Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES (FIN 46), which it supersedes. FIN 46R requires the
application of either FIN 46 or FIN 46R by "Public Entities" to all Special
Purpose Entities ("SPEs") at the end of the first interim or annual reporting
period ending after December 15, 2003. FIN 46R is applicable to all non-SPEs
created prior to February 1, 2003 by Public Entities that are not small business
issuers at the end of the first interim or annual reporting period ending after
March 15, 2004. The Company has determined that Scandasystems, a related party
(see Notes 4 and 16), qualifies as a variable interest entity and was initially
consolidated beginning with the quarter ended March 31, 2004. Due to the fact
that the Company has no long-term contractual commitments or guarantees, the
maximum exposure to loss is insignificant.
On December 16, 2004, the FASB issued STATEMENT NO. 123 (REVISED 2004),
SHARE-BASED PAYMENT (STATEMENT 123(R)), which replaces Statement No. 123,
"Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Statement 123 (R) requires all
companies to measure compensation cost for all share-based payments (including
employee stock options) at fair value and recognize the cost in the financial
statements beginning with the first interim or annual reporting period that
begins after June 15, 2005. The pro forma disclosures previously permitted under
Statement 123 will no longer be an alternative to financial statement
recognition. The Company is required to adopt Statement 123(R) beginning July 1,
2005. This statement applies to all awards granted after the date of adoption
and to awards modified, repurchased, or cancelled after that date. The
cumulative effect of initially applying Statement 123(R), if any, will be
recognized as of the date of adoption.
-17-
The Company is required to apply Statement 123(R) using a modified version of
prospective application. Under that transition method, compensation cost is
recognized on or after the date of adoption for the portion of outstanding
awards, for which the requisite service has not yet been rendered, based on the
grant-date fair value of those awards calculated under Statement 123 for pro
forma disclosures. For periods before the date of adoption, the Company may
elect to apply a modified version of retrospective application under which
financial statements for prior periods are adjusted on a basis consistent with
the pro forma disclosures required for those periods by Statement 123. The
Company is currently evaluating the impact of the statement, but does not plan
to retrospectively apply this statement.
In November 2004, the FASB issued SFAS No. 151, "INVENTORY COSTS" ("SFAS 151").
SFAS 151 amends the guidance in Chapter 4 of Accounting Research Bulletin No.
43, "Inventory Pricing" to clarify the accounting for amounts of idle facility
expense, freight, handling costs and wasted material. SFAS 151 requires that
these types of items be recognized as current period charges as they occur. The
provisions of SFAS 151 are effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. The adoption of this standard is not
expected to have an impact on the Company's consolidated financial position,
results of operations or cash flows.
CRITICAL ACCOUNTING POLICIES
As previously described, the Company is engaged in the development,
manufacturing, and marketing of health and homeopathic products that are being
offered to the general public and is also involved in the research and
development of potential prescription products. Certain key accounting policies
that may affect the results of the Company are the timing of revenue recognition
and sales incentives particularly co-operative advertising; the classification
of royalties and commissions; the classification of advertising expenses; and
the fact that all research and development costs are expensed as incurred. Note
1, Organization and Business, describes the Company's other significant
accounting policies.
REVENUE RECOGNITION
Cold-remedy sales are recognized at the time ownership and risk of loss is
transferred to the customer, which is primarily the time the shipment is
received by the customer. In the case of the health and wellness segment sales
and third party sales from the contract manufacturing segment, sales are
recognized at the time goods are shipped to the customer. Sales returns and
allowances are provided for in the period that the related sales are recorded.
Provisions for these reserves are based on historical experience. The 2004
results include a returns provision of approximately $626,000 in the event of
future product returns following the discontinuation of the Cold-Eeze(R) Cold
Remedy Nasal Spray product in September 2004.
ROYALTIES AND COMMISSIONS
The Company includes royalties and founders' commissions incurred as cost of
sales for the Cold Remedy segment and in administration expenses for the Health
and Wellness segment based on agreement terms. The Health and Wellness segment
expense relates to the Company's 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 with such expense being
expensed as incurred. Commission expense related to independent brokers
associated with the cold remedy and contract manufacturing segments is included
in administration expenses. Independent representative commissions incurred by
the Health and Wellness segment are included in cost of sales.
ADVERTISING
Advertising costs are expensed within the period in which they are utilized.
Advertising expense is made up of media advertising, presented as part of sales
and marketing expense; co-operative advertising, which is accounted for as a
deduction from sales; and bonus product, which is accounted for as part of cost
of sales. The level of advertising expense 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, 2004, 2003 and 2002 were
$6,584,600, $5,483,465 and $4,794,955, respectively. This expense item increased
in 2004 due to management's decision to advertise during the initial stages of
the 2004/2005 cold season in contrast to the prior year. Included in prepaid
expenses and other current assets were $41,375 and $68,000 at December 31, 2004
and December 31, 2003, respectively, related to prepaid advertising expenses.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the period incurred.
Expenditures for the years ended December 31, 2004, 2003 and 2002 were
$3,232,569, $3,365,698, $2,663,291, respectively. The primary reason for the
-18-
decrease in expenditure in 2004 was reduced Cold-Eeze(R) related costs
accompanied by a partial offset as a result of increased Pharma costs. Pharma is
currently involved in research activity following patent applications that the
Company has acquired. Research and development costs, relating to potential
products, are expected to increase significantly over time as product research
and testing continues.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 2004 COMPARED WITH SAME PERIOD 2003
Revenues from continuing operations for 2004 were $43,947,995 compared to
$41,499,163 for 2003, reflecting an increase of 5.9% in 2004. Revenues, by
segment, for 2004 were cold-remedy, $22,834,249; health and wellness,
$20,361,391; and contract manufacturing, $752,355, as compared to 2003 when the
revenues for each respective segment were $20,474,969, $21,024,194 and zero. The
contract manufacturing segment refers to the third party sales generated by QMI.
In addition to the manufacture of the Cold-Eeze(R) product, QMI also
manufactures a variety of hard and organic candies under its own brand names
along with other products on a contract manufacturing basis for other customers.
The 2004 revenues for the cold-remedy segment were negatively affected by the
discontinuation of the nasal spray product, reducing the 2004 revenues by
approximately $680,000 as a result of actual and anticipated product returns.
Notwithstanding the discontinuation of the nasal spray product, the cold-remedy
segment reported increased revenues which may be attributable to strategic media
advertising during the early part of the cold season, strong trade and consumer
product promotions, and media attention during the fourth quarter of 2004
following the reported scarcity of flu vaccine products. The health and wellness
segment reported reduced revenues in 2004 of $662,803 over the prior year. This
segment experienced a reduction in domestic sales which were offset by increased
sales to international markets of 135%.
Cost of sales from continuing operations for 2004 as a percentage of net sales
was 53.6%, compared to 51.8% for 2003. The cost of sales percentage for the
cold-remedy segment increased in 2004 by 4.7% primarily due to the impact of the
discontinuation of the nasal spray product. The discontinuation negatively
impacted net sales by approximately $680,000 and resulted in an additional
expense to cost of sales of approximately $672,000 due to obsolete product and
materials. Remaining variations between the years is largely the result of
product mix. The cost of sales percentage for the health and wellness segment
increased in 2004 by 1.2% largely attributable to a charge of approximately
$200,000 related to a reserve for expected obsolete inventory.
Selling, marketing and administrative expenses from continuing operations for
2004 were $16,960,313 compared to $16,010,164 in 2003. The increase in 2004 was
primarily due to increased media advertising of $892,771, largely related to the
commencement of Cold-Eeze(R) advertising activity earlier in the 2004/2005 cold
season compared to prior year. Selling, marketing and administrative expenses,
by segment, in 2004 were cold remedy $11,068,726, health and wellness
$5,098,834, Pharma $492,562 and contract manufacturing $300,191, as compared to
2003 when these expenses for each respective segment were $10,061,349,
$5,396,696, $552,119 and zero.
Research and development costs from continuing operations in 2004 and 2003 were
$3,232,569 and $3,365,698, respectively. Principally, the decrease in research
and development expenditure was the result of decreased cold-remedy related
product testing costs in 2004 compared to the prior year, which were offset by
increased Pharma study costs of approximately $261,000.
During 2004, the Company's major operating expenses of salaries, brokerage
commissions, promotion, advertising, and legal costs accounted for approximately
$12,900,314 (64%) of the total operating expenses of $20,192,882, an increase of
13.9% over the 2003 amount of $11,328,608, largely the result of increased media
advertising and payroll costs in 2004.
Revenues of CPNP (discontinued operations) for the twelve months periods ended
December 31, 2004 and 2003 were zero and $59,824, respectively, and net losses
for the same periods were zero and $54,349. The results of CPNP are presented as
discontinued operations in the Statements of Operations.
Total assets of the Company at December 31, 2004 and 2003 were $31,529,756 and
$26,269,759, respectively. Working capital decreased by $404,444 to $17,852,910
at December 31, 2004. The primary influences on working capital during 2004
were: the increase in cash balances, decreased account receivable balances due
to attentive collections management, reductions in inventory on hand as a result
of increased revenues and management control; increased liabilities due to
current portion of long term debt of $428,571 related to the acquisition of
certain assets, (primarily property, plant and equipment), and assumption of
certain liabilities of the former contract manufacturer, JoEl, Inc., now Quigley
Manufacturing Inc. ("QMI") , along with the inclusion of assets and liabilities
relating to QMI at December 31, 2004, and the increase in advertising payable
balances due to increased advertising activity in the latter part of 2004.
-19-
TWELVE MONTHS ENDED DECEMBER 31, 2003 COMPARED WITH SAME PERIOD 2002
Revenues from continuing operations for 2003 were $41,499,163 compared to
$29,420,646 for 2002, an increase of 41% in 2003. Revenues for 2003 comprised
$20,474,969 relating to the cold-remedy segment, primarily the Cold-Eeze(R)
product, and $21,024,194 from the health and wellness segment, compared to 2002
revenues of $14,199,833 and $15,220,813, by each respective segment. The 2002
cold-remedy revenues included an amount of $148,866 as a result of the
settlement of the infringement suit against Gel Tech, LLC, the developer of
Zicam(TM), and Gum Tech International, Inc., its distributor. The 2003 increase
in the revenues of the cold-remedy segment may have been attributable to
management's strategy in supporting the Cold-Eeze(R) product in the marketplace
by way of media advertising and ongoing co-operative advertising initiatives
with the Company's customer base. The segment may also have been influenced by
media attention to the possibility of increased cold and influenza incidences
during the 2003/2004 cold season. The health and wellness segment reported
significantly increased revenues in 2003 of $5,803,380 over the prior year
primarily due to the recruitment by the Company of active independent
representatives along with the Company entering the international market during
the second quarter of 2003.
Cost of sales from continuing operations for 2003 as a percentage of net sales
was 51.8% compared to 58.8% for 2002. The cost of sales percentage for the
cold-remedy segment was reduced in 2003 by 8.2% due to decreased costs of
product bonus promotions and considerably reduced royalty charges attributable
to the nasal and throat pop products. The 2002 amount also included charges for
inventory obsolescence. The cost of sales percentage for the health and wellness
segment decreased in 2003 by 5.2% largely attributable to fluctuations in the
commission expense payable to the independent representatives along with charges
in 2002 as a result of obsolete inventory on hand.
Selling, marketing and administrative expenses from continuing operations for
2003 were $16,010,164 compared to $14,832,935 in 2002. The increase in 2003 was
primarily due to increased media advertising of $845,055 necessary to support
the Cold-Eeze(R) product along with increased costs associated with the health
and wellness segment of approximately $2,161,000 primarily related to the
generation of increased revenues. The 2002 expenses included a non-cash charge
of $2,100,000 for warrants granted in connection with consulting services with
no comparable charge in 2003.
Research and development costs from continuing operations in 2003 and 2002 were
$3,365,698 and $2,663,291, respectively. Principally, the increase of research
and development in 2003 was due to increased expenses associated with the
ongoing research and clinical activity of Pharma in the amount of $642,983.
During 2003, the Company's major operating expenses of salaries, brokerage
commissions, promotion, advertising, and legal costs accounted for approximately
$11,328,608 (58%) of the total operating expenses of $19,375,862, an increase of
2% over the 2002 amount of $11,143,588. The selling, general and administrative
expenses related to Darius for 2003 and 2002 were $5,396,696 and $3,235,793,
respectively.
Revenues of CPNP (discontinued operations) for the twelve months periods ended
December 31, 2003 and 2002 were $59,824, and $2,040,312, respectively, and net
losses for the same periods were $54,349 and $1,322,355. The results of CPNP are
presented as discontinued operations in the Statements of Operations and Balance
Sheets.
Total assets of the Company at December 31, 2003 and 2002 were $26,269,759 and
$24,934,956, respectively. Working capital increased by $1,595,405 to
$18,257,354 at December 31, 2003. The primary influences on working capital
during 2003 were: the decrease in cash balances, increased account receivable
balances due to increased revenues, reductions in inventory on hand as a result
of increased revenues and management control; increases in both other current
liabilities and accrued royalty and sales commissions due to improved sales
activity in 2003.
MATERIAL COMMITMENTS AND SIGNIFICANT AGREEMENTS
Effective October 1, 2004, the Company acquired certain assets and assumed
certain liabilities of JoEl, Inc., the sole manufacturer of the Cold-Eeze(R)
lozenge product. As part of the acquisition, the Company entered into a loan
obligation in the amount of $3.0 million payable to PNC Bank, N.A. The loan is
collateralized by mortgages on real property located in each of Lebanon,
Pennsylvania and Elizabethtown, Pennsylvania and was used to finance the
majority of the cash portion of the purchase price. The Company can elect
interest rate options of either the Prime Rate or LIBOR plus 200 basis points.
The loan is payable in eighty-four equal monthly principal payments of $35,714
commencing November 1, 2004, and such amounts payable are reflected in the
consolidated balance sheet as current portion of long-term debt amounting to
$428,571 and long term debt amounting to $2,464,286. The Company is in
compliance with all related loan covenants.
-20-
With the exception of the Company's Cold-Eeze(R) lozenge product, the Company's
products are manufactured by outside sources. The Company has agreements in
place with these manufacturers, which ensure a reliable source of product for
the future.
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.
The Company has maintained 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, which is due to expire in
2007. However, the Company and the developer are in litigation and as such, no
potential offset from such litigation for these fees have been recorded. A
founder's commission totaling 5%, on sales collected, less certain deductions,
is paid to two of the officers of the Company, who are also directors and
stockholders of the Company, and whose agreements expire in 2005. The expenses
for the respective periods relating to such agreements amounted to $2,058,965,
$1,805,294 and $1,421,475 for the twelve months periods ended December 31, 2004,
2003 and 2002, respectively. Amounts accrued for these expenses at December 31,
2004 and December 31, 2003 were $1,129,654 and $915,109, respectively.
The Company has an agreement with the former owners of the Utah-based direct
marketing and selling company, whereby they receive payments, currently totaling
5% of net sales collected, for use of product formulations, consulting,
confidentiality and non-compete agreements. Amounts paid or payable under such
agreement during 2004, 2003 and 2002 were $800,881, $880,091 and $678,454,
respectively. Amounts payable under such agreement at December 31, 2004 and 2003
were $60,876 and $68,388, respectively.
In August 2003, the Company entered into a licensing agreement with a patent
holder relating to the utilization of a nasal spray product in the treatment of
symptoms of the common cold. The Company agreed to pay the patent holder a two
percent royalty on net sales of nasal spray products, less certain deductions,
throughout the term of this agreement, expiring no later than April 2014. As the
nasal spray product has now been discontinued, no further obligations are
expected to materialize in relation to this agreement. Amounts paid or payable
under such agreement during the twelve month periods ended December 31, 2004,
2003 and 2002 were zero, $26,613 and zero, respectively. An amount of $4,606 was
returnable to the Company by the patent holder at December 31, 2004, while an
amount of $1,613 relating to this agreement was accrued or payable at December
31, 2003.
Certain operating leases for office and warehouse space maintained by the
Company resulted in rent expense for the years ended December 31, 2004, 2003 and
2002, of $335,226, $255,078, and $236,304, respectively. The future minimum
lease obligations under these operating leases are approximately $320,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $17,852,910 and $18,257,354 at December 31,
2004 and 2003, respectively. Changes in working capital overall have been
primarily due to the following items: cash balances have increased by
$2,974,352; account receivable balances decreased by $1,485,904 due to effective
collection practices; inventory decreased by $298,221 due to increased sales
activity and the management of inventory levels; accrued advertising increased
by $564,475 due to the rescheduling of media advertising in 2004 to earlier in
the cold season in contrast to the prior year; and an amount in current
liabilities of $428,571 relating to the current principal portion of the loan
liability due to the acquisition of JoEl, Inc. effective October 1, 2004 while
the assets acquired are presented in property, plant and equipment. Total cash
balances at December 31, 2004 were $14,366,441 compared to $11,392,089 at
December 31, 2003.
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, and growth in international sales, together
with its current working capital, should provide an internal source of capital
to fund the Company's business operations. The cold-remedy and health and
wellness segments contribute current expenditure support in relation to the
ethical pharmaceutical segment. In addition to anticipated funding from
operations, the Company and its subsidiaries may in the short and long term
raise capital through the issuance of equity securities to finance anticipated
growth.
-21-
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 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.
CONTRACTUAL OBLIGATIONS
The Company's future contractual obligations and commitments at December 31,
2004 consist of the following:
PAYMENT DUE BY PERIOD
---------------------
Less than 2-3 4-5 More than
Contractual Obligations Total 1 year years years 5 years
- -------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations (1) $2,892,857 $428,571 $857,142 $857,142 $750,002
Operating Lease Obligations 388,000 188,000 200,000 -- --
Purchase Obligations 207,000 207,000 -- -- --
Research and Development 1,100,000 1,100,000 -- -- --
Advertising 649,000 649,000 -- -- --
----------------------------------------------------------------------------------------------
Total Contractual Obligations $5,236,857 $2,572,571 $1,057,142 $857,142 $750,002
==============================================================================================
(1) See Note 8, "Long-Term Debt" to the Company's consolidated financial
statements for additional information on long-term debt obligations.
OFF-BALANCE SHEET ARRANGEMENTS
It is not the Company's usual business practice to enter into off-balance sheet
arrangements such as guarantees on loans and financial commitments and retained
interests in assets transferred to an unconsolidated entity for securitization
purposes. Consequently, the Company has no off-balance sheet arrangements that
have, or are reasonably likely to have, a material current or future effect on
its financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
IMPACT OF INFLATION
The Company is subject to normal inflationary trends and anticipates that any
increased costs would be passed on to its customers.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's operations are not subject to risks of material foreign currency
fluctuations, nor does it use derivative financial instruments in its investment
practices. The Company places its marketable investments in instruments that
meet high credit quality standards. The Company does not expect material losses
with respect to its investment portfolio or exposure to market risks associated
with interest rates. The impact on the Company's results of one percentage point
change in short-term interest rates would not have a material impact on the
Company's future earnings, fair value, or cash flows related to investments in
cash equivalents or interest-earning marketable securities. At December 31,
2004, the Company had $2.9 million of variable rate debt. If the interest rate
on the debt were to increase or decrease by 1% for the year, annual interest
expense would increase or decrease by approximately $29,000.
-22-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
----
Balance Sheets as of December 31, 2004 and 2003 F-1
Statements of Operations for the years ended December 31, 2004, 2003, and 2002 F-2
Statements of Stockholders' Equity for the years ended December 31, 2004, 2003,
and 2002 F-3
Statements of Cash Flows for the years ended December 31, 2004, 2003, and 2002 F-4
Notes to Financial Statements F-5 to F-23
Responsibility for Financial Statements F-24
Report of Independent Registered Public Accounting Firm
Amper, Politziner & Mattia, P.C. F-25
Report of Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP F-26
-23-
THE QUIGLEY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, 2004 December 31, 2003
----------------- -----------------
CURRENT ASSETS:
Cash and cash equivalents $ 14,366,441 $ 11,392,089
Accounts receivable (net of doubtful accounts of $311,764 and $808,812) 6,375,979 7,861,883
Inventory 3,454,682 3,752,903
Prepaid expenses and other current assets 764,359 733,597
----------------- -----------------
TOTAL CURRENT ASSETS 24,961,461 23,740,472
----------------- -----------------
PROPERTY, PLANT AND EQUIPMENT - NET 6,473,688 2,418,159
----------------- -----------------
OTHER ASSETS:
Goodwill 30,763 30,763
Other assets 63,844 80,365
----------------- -----------------
TOTAL OTHER ASSETS 94,607 111,128
----------------- -----------------
TOTAL ASSETS $ 31,529,756 $ 26,269,759
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 428,571 $ --
Accounts payable 978,401 524,136
Accrued royalties and sales commissions 1,796,081 1,594,457
Accrued advertising 1,919,011 1,354,536
Other current liabilities 1,986,487 2,009,989
----------------- -----------------
TOTAL CURRENT LIABILITIES 7,108,551 5,483,118
----------------- -----------------
LONG-TERM DEBT 2,464,286 --
MINORITY INTEREST 54,980 --
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY:
Common stock, $.0005 par value; authorized 50,000,000;
Issued:16,285,796 and 16,149,079 shares 8,143 8,074
Additional paid-in-capital 35,203,816 34,281,449
Retained earnings 11,878,139 11,685,277
Less: Treasury stock, 4,646,053 and 4,646,053 shares, at cost (25,188,159) (25,188,159)
----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 21,901,939 20,786,641
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 31,529,756 $ 26,269,759
================= =================
See accompanying notes to consolidated financial statements
F-1
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002
----------------- ----------------- -----------------
NET SALES $ 43,947,995 $ 41,499,163 $ 29,271,780
LICENSING FEES -- -- 148,866
----------------- ----------------- -----------------
TOTAL REVENUE 43,947,995 41,499,163 29,420,646
----------------- ----------------- -----------------
COST OF SALES 23,573,126 21,487,763 17,208,836
----------------- ----------------- -----------------
GROSS PROFIT 20,374,869 20,011,400 12,211,810
----------------- ----------------- -----------------
OPERATING EXPENSES:
Sales and marketing 7,140,365 6,166,318 4,941,174
Administration 9,819,948 9,843,846 9,891,761
Research and development 3,232,569 3,365,698 2,663,291
----------------- ----------------- -----------------
TOTAL OPERATING EXPENSES 20,192,882 19,375,862 17,496,226
----------------- ----------------- -----------------
INCOME (LOSS) FROM OPERATIONS 181,987 635,538 (5,284,416)
----------------- ----------------- -----------------
OTHER INCOME (EXPENSE)
Interest income 104,339 93,385 152,313
Interest expense (32,250) -- --
Gain on dividend-in-kind 198,786 -- --
----------------- ----------------- -----------------
TOTAL OTHER INCOME, NET 270,875 93,385 152,313
----------------- ----------------- -----------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE TAXES 452,862 728,923 (5,132,103)
----------------- ----------------- -----------------
INCOME TAXES -- -- --
----------------- ----------------- -----------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 452,862 728,923 (5,132,103)
----------------- ----------------- -----------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations -- (54,349) (689,122)
Loss on impairment related to investment in sun-care and skincare
Operations -- -- (633,233)
----------------- ----------------- -----------------
NET INCOME (LOSS) $452,862 $674,574 ($6,454,458)
================= ================= =================
BASIC EARNINGS PER COMMON SHARE:
Income (loss) from continuing operations $0.04 $0.06 ($0.47)
Loss from discontinued operations -- -- (0.12)
----------------- ----------------- -----------------
Net Income (loss) $0.04 $0.06 ($0.59)
================= ================= =================
DILUTED EARNINGS PER COMMON SHARE:
Income (loss) from continuing operations $0.03 $0.05 ($0.47)
Loss from discontinued operations -- -- (0.12)
----------------- ----------------- -----------------
Net Income (loss) $0.03 $0.05 ($0.59)
================= ================= =================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 11,541,012 11,467,087 10,893,944
================= ================= =================
Diluted 14,449,334 14,910,246 10,893,944
================= ================= =================
See accompanying notes to consolidated financial statements
F-2
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON ADDITIONAL
STOCK ISSUED PAID-IN- TREASURY RETAINED
SHARES AMOUNT CAPITAL STOCK EARNINGS TOTAL
-----------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2001 10,675,153 $7,661 $28,915,612 ($25,188,159) $17,465,161 $21,200,275
-----------------------------------------------------------------------------------------
Tax benefits from options,
warrants & common stock 828,177 828,177
Tax benefit allowance (828,177) (828,177)
Warrants issued for service 1,125,000 1,125,000
Proceeds from options and
warrants exercised 781,464 390 3,249,610 3,250,000
Net loss (6,454,458) (6,454,458)
-----------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2002 11,456,617 8,051 33,290,222 (25,188,159) 11,010,703 19,120,817
-----------------------------------------------------------------------------------------
Tax benefits from options,
warrants & common stock 133,014 133,014
Tax benefit allowance (133,014) (133,014)
Warrants issued for service 975,000 975,000
Proceeds from options and
warrants exercised 46,409 23 16,227 16,250
Net income 674,574 674,574
-----------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2003 11,503,026 8,074 34,281,449 (25,188,159) 11,685,277 20,786,641
-----------------------------------------------------------------------------------------
Tax benefits from options,
warrants & common stock 67,675 67,675
Tax benefit allowance (67,675) (67,675)
Shares issued for net asset
acquisition, net of
registration fees 113,097 58 895,392 895,450
Proceeds from option exercises 23,620 11 26,975 26,986
Dividend-in-kind (260,000) (260,000)
Net Income 452,862 452,862
-----------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2004 11,639,743 $8,143 $35,203,816 ($25,188,159) $11,878,139 $21,901,939
=========================================================================================
See accompanying notes to consolidated financial statements
F-3
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002
----------------- ----------------- -----------------
OPERATING ACTIVITIES:
Net income (loss) $ 452,862 $ 674,574 ($ 6,454,458)
------------ ------------ ------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS:
Loss from discontinued operations -- 54,349 689,122
Loss on impairment related to discontinued operations -- -- 633,233
Depreciation and amortization 622,348 473,593 409,068
Gain on dividend-in-kind (198,786) -- --
Compensation satisfied with common stock warrants -- -- 2,100,000
Bad debts provision (497,048) 71,030 18,472
(INCREASE) DECREASE IN ASSETS:
Accounts receivable 1,982,952 (3,744,790) (31,201)
Inventory 1,198,221 773,858 1,564,459
Prepaid expenses and other current assets 47,298 (243,480) 958,040
Other assets (33,611) -- --
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable 454,265 129,461 (424,130)
Accrued royalties and sales commissions 201,624 447,962 277,874
Accrued advertising 564,475 (205,041) 890,783
Other current liabilities (134,573) 656,608 508,922
------------ ------------ ------------
TOTAL ADJUSTMENTS 4,207,165 (1,586,450) 7,594,642
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES 4,660,027 (911,876) 1,140,184
------------ ------------ ------------
INVESTING ACTIVITIES:
Capital expenditures (310,139) (555,016) (580,861)
Cost of assets acquired, net of registration fees (4,295,380) -- --
------------ ------------ ------------
NET CASH FLOWS USED IN INVESTING
ACTIVITIES (4,605,519) (555,016) (580,861)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings 3,000,000 -- --
Principal payments on long-term debt (107,142) -- --
Stock options and warrants exercised 26,986 16,250 3,250,000
------------ ------------ ------------
NET CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES 2,919,844 16,250 3,250,000
------------ ------------ ------------
NET CASH USED IN DISCONTINUED
OPERATIONS -- (54,349) (596,548)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 2,974,352 (1,504,991) 3,212,775
CASH & CASH EQUIVALENTS, BEGINNING OF
PERIOD 11,392,089 12,897,080 9,684,305
------------ ------------ ------------
CASH & CASH EQUIVALENTS,
END OF PERIOD $ 14,366,441 $ 11,392,089 $ 12,897,080
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
NON-CASH INVESTING AND FINANCING:
Common stock issued for net assets acquired $ 977,158 -- --
See accompanying notes to consolidated financial statements
F-4
THE QUIGLEY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
The Quigley Corporation (the "Company"), organized under the laws of the state
of Nevada, is engaged in the development, manufacturing, and marketing of health
and homeopathic products that are being offered to the general public, and the
research and development of potential prescription products. The Company is
organized into four business segments, which are, Cold-Remedy, Health and
Wellness, Contract Manufacturing and Ethical Pharmaceutical. For the fiscal
periods presented, the Company's revenues have come primarily from the Company's
Cold-Remedy business segment and the Health and Wellness business segment.
The Company's principal cold-remedy product, Cold-Eeze(R), a zinc gluconate
glycine formulation (ZIGG(TM)) is an over-the-counter consumer product used to
reduce the duration and severity of the common cold. The lozenge form of the
product is manufactured by Quigley Manufacturing Inc., a wholly owned subsidiary
of the Company, which was formed following the acquisition of certain assets and
assuming certain liabilities of JoEl, Inc., the contract manufacturer of the
lozenge product prior to October 1, 2004.
Darius was formed in January 2000 to introduce new products to the marketplace
through a network of independent distributors. Darius is a direct selling
organization specializing in proprietary health and wellness products. The
continued success of this segment is dependent, among other things, on the
Company's ability to recruit and maintain active independent representatives; to
continue to make available new and innovative products and services; to continue
to conform with domestic and international regulatory agencies; and to maintain
and improve adequate system capabilities. The foregoing risks could result in
significant reductions in revenues and profitability of the health and wellness
segment.
On January 2, 2001, the Company acquired certain assets and assumed certain
liabilities of a privately held company involved in the direct marketing and
distribution of health and wellness products. The formation of Darius has
provided diversification to the Company in both the method of product
distribution and the broader range of products available to the marketplace
serving as a balance to the seasonal revenue cycles of the Cold-Eeze(R) branded
products.
In January 2001, the Company formed an Ethical Pharmaceutical Unit, Pharma, a
wholly-owned subsidiary of the Company, the Ethical Pharmaceutical segment, that
is under the direction of its Executive Vice President and Chairman of its
Medical Advisory Committee. The establishment of a dedicated pharmaceutical
subsidiary may enable the Company to diversify into the prescription drug market
and to ensure safe and effective distribution of these important potential new
products currently under development. The Company is at the initial stages of
what may be a lengthy process to develop the patent applications into a line of
naturally-derived patented prescription drugs.
During 2000, the Company acquired a 60% ownership position in Caribbean Pacific
Natural Products, Inc. ("CPNP"). On January 22, 2003, the Company completed the
sale of the Company's 60% equity interest in CPNP to Suncoast Naturals, Inc.
("Suncoast"). See discussion in Note 5, "Discontinued Operations."
The business of the Company is subject to federal and state laws and regulations
adopted for the health and safety of users of the Company's products.
Cold-Eeze(R) is a homeopathic remedy that is subject to regulations by various
federal, state and local agencies, including the FDA and the Homeopathic
Pharmacopoeia of the United States.
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. Effective March 31, 2004, the Company adopted FIN 46R and the
financial statements include consolidated variable interest entities "VIEs" of
which the Company is the primary beneficiary (see Note 4).
On October 1, 2004, the Company acquired certain assets and assumed certain
liabilities of JoEL, Inc, and is accounted for by the purchase method of
accounting and accordingly, the operating results are included in the Company's
consolidated financial statements from the date of acquisition (see Note 3).
F-5
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an initial maturity of
three months or less at the time of purchase to be cash equivalents. Cash
equivalents include cash on hand and monies invested in money market funds. The
carrying amount approximates the fair market value due to the short-term
maturity of these investments.
INVENTORIES
Inventories are stated at the lower of cost or market. The Company uses the
first-in, first-out ("FIFO") method of determining cost for all inventories.
Inventories included raw material, work in progress and packaging amounts of
approximately $651,000 and $729,000 at December 31, 2004 and 2003, respectively,
with the remainder comprising finished goods.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are 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 to thirty nine years; machinery and equipment
- - five to seven years; computer software - three years; and furniture and
fixtures - seven years.
GOODWILL AND INTANGIBLE ASSETS
Patent rights have been amortized on a straight-line basis over the period of
the related licensing agreements and were fully amortized as of March 2002.
Amortization cost incurred for the year ended December 31, 2002 was $21,940.
There were no amortization costs for the years ended December 31, 2004 and 2003.
Goodwill is not amortized but reviewed for impairment when events and
circumstances indicate the carrying amount may not be recoverable or on an
annual basis. In 2002, the Company realized an impairment loss of $296,047
relating to goodwill in CPNP, which was reflected in discontinued operations.
CONCENTRATION OF RISKS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and trade
accounts receivable.
The Company maintains cash and cash equivalents with five 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'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 27% for the
year ended December 31, 2004 and 23% for the years ended December 31, 2003 and
2002. Customers comprising the five largest accounts receivable balances
represented 48% and 34% of total trade receivable balances at December 31, 2004
and 2003, respectively. During 2004 and 2003, approximately 93% and 97%,
respectively, of the Company's revenues were generated in the United States with
the remainder being attributable to international trade.
The Company's revenues are currently generated from the sale of the Cold-Eeze(R)
product which approximated 52% of total revenue in 2004, with the remaining 2004
revenue coming from the health and wellness, which approximated 46%, and the
contract manufacturing segments. Should these product sources terminate or
discontinue for any reason, the Company has formulated a contingency plan in
order to prevent such discontinuance from materially affecting the
F-6
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 Cold-Eeze(R) 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 manufacturers 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 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, in addition to its goodwill impairment loss in
CPNP, the Company realized an additional impairment loss of $337,186 from its
investment in CPNP, which was reflected in discontinued operations. The total
impairment loss of $633,233 was reflected in discontinued operations.
REVENUE RECOGNITION
Sales are recognized at the time ownership is transferred to the customer, which
for the cold-remedy segment is the time the shipment is received by the customer
and for both the health and wellness segment and the contract manufacturing
segment, when the product is shipped to the customer. Sales returns and
allowances are provided for in the period that the related sales are recorded.
Provisions for these reserves are based on historical experience. The 2004
results include a returns provision at December 31, 2004 of approximately
$626,000 in the event of future product returns following the discontinuation of
the Cold-Eeze(R) Cold Remedy Nasal Spray product in September 2004. The
discontinuation negatively impacted net sales by approximately $680,000 and
resulted in an additional expense to cost of sales of approximately $672,000 due
to obsolete product and materials. Total revenues for the year ended December
31, 2002 include $148,866 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 the cold-remedy and contract manufacturing segments, such costs
are included as part of the invoiced price. In all cases costs related to this
revenue are recorded in cost of sales.
STOCK COMPENSATION
Stock options and warrants for purchase of the Company's common stock have been
granted to both employees and non-employees since the date of the Company's
public inception. Options and warrants are exercisable during a period
determined by the Company, but in no event later than ten years from the date
granted.
Expense relating to options granted to non-employees has been appropriately
recorded in the periods presented based on either fair values agreed upon with
the grantees or fair values as determined by the Black-Scholes pricing model
dependent upon the circumstances relating to the specific grants.
The Company used the Black-Scholes pricing model to determine the fair value of
stock options granted during the periods presented using the following
assumptions: expected life of the option of 5 years and expected forfeiture rate
of 0%; expected stock price volatility of 49.8% for the year ended December 31,
2004, ranging between 67.9% and 120% for the year ended December 31, 2003;
ranging between 108.0% and 119.2% for the year ended December 31, 2002; expected
dividend yield of 0% and risk-free interest rate of 3.3% for the year ended
December 31, 2004, expected dividend yield of 0% and risk-free interest rate of
between 3.37% and 4.5% for the year ended December 31, 2003, expected dividend
yield of 0% and risk-free interest rate ranging between 4.06% and 4.51% for the
year ended December 31, 2002. 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 may be granted
in future years. All options were immediately vested upon grant.
F-7
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, 2004, 2003 and 2002
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, 2004 December 31, 2003 December 31, 2002
----------------- ----------------- -----------------
Net income (loss)
As reported $ 452,862 $ 674,574 ($6,454,458)
Add: Stock-based compensation expense
included in reported net income as determined
under the intrinsic value method - - -
Deduct: Adjustment to stock-based employee
compensation expense as determined under the
fair value based method (2,230,000) (2,026,720) (2,072,220)
---------------------- ----------------------------------------
Pro forma net loss ($ 1,777,138) ($1,352,146) ($8,526,678)
---------------------- ----------------------------------------
Basic earnings (loss) per share
As reported $0.04 $0.06 ($0.59)
Pro forma ($0.15) ($0.12) ($0.78)
Diluted earnings (loss) per share
As reported $0.03 $0.05 ($0.59)
Pro forma ($0.15) ($0.12 ($0.78)
Expense relating to warrants granted to non-employees has been appropriately
recorded in the periods presented based on either fair values agreed upon with
the grantees or fair values as determined by the Black Scholes pricing model
dependent upon the circumstances relating to the specific grants.
A total of 500,000, 424,000, and 477,000 stock options were granted to employees
and non-employees in 2004, 2003 and 2002, respectively.
ROYALTIES AND COMMISSIONS
The Company includes royalties and founders' commissions incurred relating to
the Cold Remedy segment, and commission relating to the independent
representatives of the Health and Wellness segment, as part of cost of sales. An
additional Health and Wellness segment cost, which is included in administration
expense, relates to the Company's 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 with such expense being
expensed as incurred. Commission expense related to independent brokers
associated with the cold remedy and contract manufacturing segments is included
in administration expenses.
ADVERTISING
Advertising costs are expensed within the period in which they are utilized.
Advertising expense is comprised of media advertising, presented as part of
sales and marketing expense; co-operative advertising, which is accounted for as
part of net sales; and free product, which is accounted for as part of cost of
sales. Advertising costs incurred for the years ended December 31, 2004, 2003
and 2002 were $6,584,600, $5,483,465, and $4,794,955, respectively. Included in
prepaid expenses and other current assets was $41,375 and $68,000 at December
31, 2004 and 2003 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, 2004, 2003 and 2002 were
$3,232,569, $3,365,698, $2,663,291, respectively. Principally, research and
development costs are related to Pharma's study activities and costs associated
with Cold-Eeze(R).
F-8
INCOME TAXES
The Company utilizes an asset and liability approach which requires the
recognition of deferred tax assets and liabilities for the future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, the Company
generally considers all expected future events other than enactments of changes
in the tax law or rates. Until sufficient taxable income to offset the temporary
timing differences attributable to operations and the tax deductions
attributable to option, warrant and stock activities are assured, a valuation
allowance equaling the total deferred tax asset is being provided. See Note 14 -
Income Taxes for further discussion.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, accounts receivable and accounts payable are
reflected in the consolidated financial statements at carrying value which
approximates fair value because of the short-term maturity of these instruments.
The fair value of long-term debt was approximately equivalent to its carrying
value due to the fact that the interest rates currently available to the Company
for debt with similar terms are approximately equal to the interest rates for
its existing debt. Determination of the fair value of related party payables is
not practicable due to their related party nature.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the Financial Accounting Standards Board (FASB or the "Board")
issued FASB INTERPRETATION NO. 46 (REVISED DECEMBER 2003), CONSOLIDATION OF
VARIABLE INTEREST ENTITIES (FIN 46R), to address certain implementation issues.
FIN 46R varies significantly from FASB Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES (FIN 46), which it supersedes. FIN 46R requires the
application of either FIN 46 or FIN 46R by "Public Entities" to all Special
Purpose Entities ("SPEs") at the end of the first interim or annual reporting
period ending after December 15, 2003. FIN 46R is applicable to all non-SPEs
created prior to February 1, 2003 by Public Entities that are not small business
issuers at the end of the first interim or annual reporting period ending after
March 15, 2004. The Company has determined that Scandasystems, a related party
(see Notes 4 and 16), qualifies as a variable interest entity and was initially
consolidated beginning with the quarter ended March 31, 2004. Due to the fact
that the Company has no long-term contractual commitments or guarantees, the
maximum exposure to loss is insignificant.
On December 16, 2004, the FASB issued STATEMENT NO. 123 (REVISED 2004),
SHARE-BASED PAYMENT (STATEMENT 123(R)), which replaces Statement No. 123,
"Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Statement 123 (R) requires all
companies to measure compensation cost for all share-based payments (including
employee stock options) at fair value and recognize the cost in the financial
statements beginning with the first interim or annual reporting period that
begins after June 15, 2005. The pro forma disclosures previously permitted under
Statement 123 will no longer be an alternative to financial statement
recognition. The Company is required to adopt Statement 123(R) beginning July 1,
2005. This statement applies to all awards granted after the date of adoption
and to awards modified, repurchased, or cancelled after that date. The
cumulative effect of initially applying Statement 123(R), if any will be
recognized as of the date of adoption.
The Company is required to apply Statement 123(R) using a modified version of
prospective application. Under that transition method, compensation cost is
recognized on or after the date of adoption for the portion of outstanding
awards, for which the requisite service has not yet been rendered, based on the
grant-date fair value of those awards calculated under Statement 123 for pro
forma disclosures. For periods before the date of adoption, the Company may
elect to apply a modified version of retrospective application under which
financial statements for prior periods are adjusted on a basis consistent with
the pro forma disclosures required for those periods by Statement 123. The
Company is currently evaluating the impact of the statement, but does not plan
to retrospectively apply this statement.
In November 2004, the FASB issued SFAS No. 151, "INVENTORY COSTS" ("SFAS 151").
SFAS 151 amends the guidance in Chapter 4 of Accounting Research Bulletin No.
43, "Inventory Pricing" to clarify the accounting for amounts of idle facility
expense, freight, handling costs and wasted material. SFAS 151 requires that
these types of items be recognized as current period charges as they occur. The
provisions of SFAS 151 are effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. The adoption of this standard is not
expected to have an impact on the Company's consolidated financial position,
results of operations or cash flows.
NOTE 3 - ACQUISITIONS
On October 1, 2004, the Company acquired certain assets of JoEL, Inc, including
inventory, land, buildings, machinery and equipment of two manufacturing
facilities located in Lebanon and Elizabethtown, Pennsylvania, and assumed
certain liabilities. The acquisition cost was approximately $5.2 million, which
consisted of $1.2 million in cash,
F-9
transaction costs of $113,671, a $3.0 million term loan (see Note 8) and the
issuance of 113,097 common shares of The Quigley Corporation in the amount of
$895,449, net of registration fees of $81,709.
The fair value of these long-lived assets were as of October 1, 2004, as
determined by accredited independent third parties.
The fair value of the common stock issued of $8.64 per share was determined by
averaging the closing price for four business days before and after the closing
date of October 1, 2004, resulting in a value to the shares issued of $977,158
less registration costs of $81,709.
The fair value of assets acquired and liabilities assumed at October 1, 2004
follow:
Allocated Unallocated
Excess Fair Excess Fair
Value Value
----------- -----------
Inventory $ 900,000 $ 900,000
Land 386,588 528,000
Buildings and improvements 982,578 1,342,000
Machinery and equipment 2,933,089 4,006,000
Furniture and fittings 58,574 80,000
----------- -----------
5,260,829 6,856,000
Liabilities assumed (70,000) (70,000)
----------- -----------
Excess of net fair value over purchase price -- (1,595,171)
----------- -----------
$ 5,190,829 $ 5,190,829
=========== ===========
The sum of the assets acquired and liabilities assumed exceeded the cost of the
acquired assets (excess fair value over cost). This excess is allocated as a pro
rata reduction of the amounts that otherwise would have been assigned to all of
the long-lived acquired assets.
The acquisition was executed in order to ensure that the integrity and
formulation of the Cold-Eeze(R) products remained under the control of the
Company and the assurance of a continued supply of Cold-Eeze(R) to the
marketplace. This is an FDA approved facility with available capacity for future
product development and manufacture.
PRO FORMA RESULTS. The following unaudited pro forma information presents the
results of operations of the Company as if the JoEl acquisition had occurred at
the beginning of the periods shown. The pro forma information, however, is not
necessarily indicative of the results of operations assuming the JoEl
acquisition had occurred at the beginning of the periods presented, nor is it
necessarily indicative of future results.
Year Ended
--------------------------------
December 31, December 31,
2004 2003
--------------------------------
(Unaudited) (Unaudited)
AS REPORTED
Total Revenue $43,947,995 $41,499,163
Income from continuing operations 452,862 728,923
Income from continuing operations - basic
earnings per common share $0.04 $0.06
PRO FORMA
Total Revenue $45,784,627 $44,987,013
(Loss)/income from continuing operations (88,368) 934,452
(Loss)/income from continuing operations -
basic (loss)/earnings per common share ($0.01) $0.08
F-10
NOTE 4 - VARIABLE INTEREST ENTITY
In December 2003, the Financial Accounting Standards Board (FASB or the "Board")
issued FASB Interpretation No. 46 (revised December 2003), CONSOLIDATION OF
VARIABLE INTEREST ENTITIES (FIN 46R), to address certain implementation issues.
FIN 46R varies significantly from FASB Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES ("VIE") (FIN 46), which it supersedes. FIN 46R
requires the application of either FIN 46 or FIN 46R by "Public Entities" to all
Special Purpose Entities ("SPEs") at the end of the first interim or annual
reporting period ending after December 15, 2003. FIN 46R is applicable to all
non-SPEs created prior to February 1, 2003 by Public Entities that are not small
business issuers at the end of the first interim or annual reporting period
ending after March 15, 2004.
Effective March 31, 2004, the Company adopted FIN 46R for VIE's formed prior to
February 1, 2003. The Company has determined that Scandasystems, a related
party, qualifies as a variable interest entity and the Company has consolidated
Scandasystems beginning with the quarter ended March 31, 2004. Due to the fact
that the Company has no long-term contractual commitments or guarantees, the
maximum exposure to loss is insignificant. As a result of consolidating the VIE
of which the Company is the primary beneficiary, the Company recognized a
minority interest of approximately $54,980 on the Consolidated Balance Sheet at
December 31, 2004 which represents the difference between the assets and the
liabilities recorded upon the consolidation of the VIE.
The liabilities recognized as a result of consolidating the VIE do not represent
additional claims on the Company's general assets. Rather, they represent claims
against the specific assets of the consolidated VIE. Conversely, assets
recognized as a result of consolidating this VIE do not represent additional
assets that could be used to satisfy claims against the Company's general
assets. Reflected on the Company's December 31, 2004 Consolidated Balance Sheet
are $96,051 of VIE assets, representing all of the assets of the VIE. The VIE
assists the Company in acquiring licenses and research and development
activities in certain countries.
NOTE 5 - DISCONTINUED OPERATIONS
In December 2002, the Board of Directors of the Company approved a plan to sell
CPNP, which was originally acquired in July 2000. On January 22, 2003, the Board
of Directors of the Company completed the sale of the Company's 60% equity
interest in CPNP to Suncoast. In exchange for its 60% equity interest in CPNP,
the Company received 750,000 shares of Suncoast's common stock and 100,000
shares of Suncoast's Series A Redeemable Preferred Stock, which bear 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. Following the purchase by Suncoast of
the Company's 60% equity interest in CPNP the Company owned 19.5% of Suncoast's
issued and outstanding capital stock valued at $79,365, which investment is
accounted for on the cost basis method, representing the Company's share of the
fair value of Suncoast at the time the transaction was recorded.
In September 2004, the Company declared a dividend-in-kind to stockholders of
499,282 shares of Suncoast's common stock (see Note 11) and accordingly the
investment value has been reduced to $26,455 at December 31, 2004, which is
included in Other Assets in the Consolidated Balance Sheet. At December 31,
2004, the Company owned approximately 5% of Suncoast's issued and outstanding
capital stock, which investment is accounted for on the cost basis method.
Sales of CPNP for all periods commencing on the date of acquisition on July 1,
2000 up to date of disposal on January 22, 2003, were $5,075,472, cumulative net
losses during that period were $2,232,620. The loss includes an amount of
$633,233 relating to the asset impairment, reported in 2002. Revenues of CPNP
for the years ended December 31, 2003 and 2002 were $59,824 and $2,040,312,
respectively, net losses for the same periods were $54,349 and $1,322,355,
respectively. Results of CPNP are presented as discontinued operations in the
Consolidated Statements of Operations.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Consisted of the following as of: December 31, 2004 December 31, 2003
----------------- -----------------
Land $ 538,791 $ 152,203
Buildings and improvements 2,496,536 1,513,958
Machinery and equipment 4,542,645 1,432,818
Computer software 459,557 570,001
Furniture and fixtures 253,574 195,000
----------------- -----------------
8,291,103 3,863,980
Less: Accumulated depreciation 1,817,415 1,445,821
----------------- -----------------
Property, Plant and Equipment, net $6,473,688 $2,418,159
================= =================
F-11
Depreciation expense for the years ended December 31, 2004, 2003 and 2002 was
$622,348, $473,593, and $387,128, respectively. During the year ended December
31, 2004, the Company retired equipment with an original cost of approximately
$152,000 and accumulated depreciation of approximately $126,000.
NOTE 7 - PATENT RIGHTS AND RELATED ROYALTY COMMITMENTS
During 1996, the Company entered into a licensing agreement resulting in the
utilization of the zinc gluconate patent. In return for the acquisition of this
license, the Company issued a total of 240,000 shares of common stock to the
patent holder and attorneys during 1996 and 1997. The related intangible asset,
approximating $490,000, was valued at the fair value of these shares at the date
of the grant. This asset value was amortized over the remaining life of the
patent that expired in March 2002. The Company was required to pay a 3% royalty
on sales collected, less certain deductions, to the patent holder throughout the
term of this agreement, which also expired in 2002.
The Company has maintained 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, which is due to expire in
2007. However, the Company and the developer are in litigation (see Note 10) and
as such no potential offset from such litigation for these fees have been
recorded. A founder's commission totaling 5%, on sales collected, less certain
deductions, is paid to two of the officers, who are also directors and
stockholders of the Company, and whose agreements expire in 2005, (see Note 16).
In August 2003, the Company entered into a licensing agreement with a patent
holder relating to utilizing a nasal spray product in the treatment of symptoms
of the common cold. The Company agreed to pay the patent holder a two percent
royalty on net sales of nasal spray products, less certain deductions,
throughout the term of this agreement, expiring no later than April 2014. As the
nasal spray product has now been discontinued, no further obligations are
expected to materialize in relation to this agreement.
The expenses for the respective periods relating to such agreements amounted to
$2,058,965, $1,805,294, and $1,421,475, for the years ended December 31, 2004,
2003 and 2002, respectively. Amounts accrued for these expenses at December 31,
2004 and 2003 were $1,129,654 and $915,109, respectively.
Amounts included in accrued royalties and sales commissions in the balance
sheets at December 31, 2004 and 2003, apportioned between related party and
other balances, are as follows:
2004 2003
----------------------
Related party balances (see Note 16) $ 459,583 $ 456,748
Other non-related party balances 1,336,498 1,137,709
----------------------
Total accrued royalties and sales commissions $1,796,081 $1,594,457
----------------------
NOTE 8 - LONG-TERM DEBT
In connection with the Company's acquisition in October 2004 (see Note 3), the
Company entered into a term-loan in the amount of $3 million payable to PNC
Bank, N.A. which is collateralized by mortgages on real property located in each
of Lebanon and Elizabethtown, Pennsylvania. The Company can elect interest rate
options at either the Prime Rate or LIBOR plus 200 basis points. The loan is
payable in eighty-four equal monthly principal payments of $35,714 commencing
November 1, 2004. The Company is in compliance with all related loan covenants.
At December 31, 2004, the entire loan balance was under a six month LIBOR rate
of 4.17%, maturing on March 31, 2005.
The schedule of principal payments of long-term debt is as follows:
December 31,
2005 $428,571
2006 428,571
2007 428,571
2008 428,571
2009 428,571
Thereafter 750,002
----------
2,892,857
Less - current portion (428,571)
----------
$2,464,286
==========
F-12
NOTE 9 - OTHER CURRENT LIABILITIES
Included in other current liabilities are $717,038 and $458,359 related to
accrued compensation at December 31, 2004 and 2003, respectively.
NOTE 10 - 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, 2004, 2003 and
2002, of $335,226, $255,078, and $236,304, respectively. The Company has
approximate future obligations over the next five years as follows:
Property
Research and and Other
Year Development Leases Advertising Other Total
-----------------------------------------------------------------------------------------------
2005 $1,100,000 $ 188,000 $ 649,000 $ 207,000 $2,144,000
2006 -- 136,000 -- -- 136,000
2007 -- 64,000 -- -- 64,000
2008 -- -- -- -- --
2009 -- -- -- -- --
-----------------------------------------------------------------------------------------------
Total $1,100,000 $ 388,000 $ 649,000 $ 207,000 $2,344,000
-----------------------------------------------------------------------------------------------
Additional advertising and research and development costs are expected to be
incurred during the remainder of 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 the twelve months periods ended December 31, 2004, 2003 and
2002 were $800,881, $880,091 and $678,454, respectively. Amounts payable under
such agreement at December 31, 2004 and December 31, 2003 were $60,876 and
$68,388, respectively.
The Company has several licensing and other contractual agreements, see Note 7.
TESAURO AND ELEY
In September 2000, the Company was sued by two individuals (Jason Tesauro and
Elizabeth Eley, both residents of Georgia), on behalf of a "nationwide class" of
"similarly situated individuals," in the Court of Common Pleas of Philadelphia
County, Pennsylvania. The Complaint alleges that the Plaintiffs purchased
certain Cold-Eeze(R) products between August, 1996, and November, 1999, based
upon cable television, radio and internet advertisements which allegedly
misrepresented the qualities and benefits of the Company's products. The
Complaint requests an unspecified amount of damages for violations of
Pennsylvania's consumer protection law, breach of warranty and unjust
enrichment, as well as a judicial determination that the action be maintained as
a class action.
In October 2000, the Company filed Preliminary Objections to the Complaint
seeking dismissal of the action. The Court sustained certain objections thereby
narrowing Plaintiffs' Complaint. In May 2001, Plaintiffs filed a Motion to
Certify the Alleged Class. The Company opposed the Motion. In November 2001, the
Court held a hearing on Plaintiffs' Motion for Class Certification. In January
2002, the Court denied in part and granted in part the Plaintiffs' Motion. The
Court denied Plaintiffs' Motion to Certify a Class based on Plaintiffs' claim
under the Pennsylvania Consumer Protection Law; however, the Court certified the
class based on Plaintiffs' breach of warranty and unjust enrichment claims
Discovery has been completed and trial that was originally scheduled for May
2004 has been continued pending determination of certain dispositive pre-trial
motions filed by the Company.
The Corporation believes Defendant's claims are without merit, and it is
vigorously defending the claims. Based upon the information the Company has at
this time, it believes the action will not have a material impact to the
Company. However, at this time no prediction as to the outcome can be made.
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
F-13
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, and it is
vigorously defending the counterclaims and is prosecuting its action on its
complaint. Based upon the information the Company has at this time, it believes
the action will not have a material impact to the Company. However, at this time
no prediction as to the outcome can be made.
PAIGE D. DAVISON VS. THE QUIGLEY CORPORATION
On February 26, 2004, the plaintiff filed an action against The Quigley
Corporation (the "Company"), which was not served until April 5, 2004. The
action alleges that the plaintiff suffered certain losses and injuries as a
result of using the Company's nasal spray product. Among the allegations of the
plaintiff are that the nasal spray was defective and unreasonably dangerous,
lacked proper and adequate warnings and/or instructions, and was not fit for the
purposes and uses intended.
The Company has investigated the claims and believes they are without merit. At
the present time, the matter is being defended by the Company's liability
insurance carrier.
The Company believes plaintiff's claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact to the Company. However,
at this time no prediction as to the outcome can be made.
POLSKI VS. THE QUIGLEY CORPORATION.
On August 12, 2004, plaintiff filed an action against The Quigley Corporation in
the District Court for Hennepin County, Minnesota, which was not served until
September 2, 2004. The action alleges that plaintiff suffered certain losses and
injuries as a result of the Company's nasal spray product. Among the allegations
of plaintiff are negligence, products liability, alleged breach of express and
implied warranties, and an alleged breach of the Minnesota Consumer Fraud
Statute.
The Company has investigated the claims and believes that they are without
merit. At the present time, the matter is being defended by the Company's
insurance carrier.
The Company believes plaintiff's claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact to the Company. However,
at this time no prediction as to the outcome can be made.
ANGELFIRE, ARVIN, BELL, BROWN, EDWARDS, HOHNSTEIN, HOFFMAN, LAURENT,
MARTIN, RICHARDSON, RIGSBY, SEONE, SMALLEY,
VAN BENTHEM AND WILLIAMS VS. THE QUIGLEY CORPORATION
On November 4, 2004, seven (7) plaintiffs filed an action in the Court of Common
Pleas of Bucks County, Pennsylvania, against The Quigley Corporation. The
complaint was amended on March 11, 2005 to add an additional eight (8)
plaintiffs in the action. The action alleges that plaintiffs suffered certain
losses and injuries as a result of using the Company's nasal spray product.
Among the allegations of plaintiffs are claims that The Quigley Corporation is
liable to them based on alleged negligence, alleged strict products liability
(failure to warn and defective design), alleged breach of express warranty,
alleged breach of implied warrant, and an alleged violation of the Pennsylvania
Unfair Trade Practices and Consumer Protection Law and other Consumer Protection
Statutes.
At the present time, the matter is being defended by the Company's insurance
carrier. An answer stating affirmative defenses has been filed. Pre-trial
discovery is being scheduled.
The Company believes plaintiffs' claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact to the Company. However,
at this time no prediction as to the outcome can be made.
F-14
THE QUIGLEY CORPORATION VS. JOHN C. GODFREY, ET AL.
This action was commenced in November 2004 in the Court of Common Pleas of Bucks
County, Pennsylvania. In that action, the Company is seeking declaratory and
injunctive relief against John C. Godfrey, Nancy Jane Godfrey, and Godfrey
Science and Design, Inc. requesting injunctive relief regarding the Cold-Eeze(R)
trade name and trademark; injunctive relief regarding the Cold-Eeze(R)
formulations and manufacturing methods and injunctive relief for breach of the
duty of loyalty. The Company's Complaint is based in part upon the Exclusive
Representation and Distribution Agreement and the Consulting Agreement (together
the "Agreements") entered into between the defendants and the Company. The
Company terminated the Agreements for the defendants' alleged material breaches
of the Agreements. Defendants have answered the complaint and asserted
counterclaims against the Company seeking remedies relative to the Agreements.
The Company has moved to dismiss portions of defendant's counterclaims on the
grounds that they are without merit.
The Corporation believes Defendant's claims are without merit, and it is
vigorously defending the counterclaims and is prosecuting its action on its
complaint. Based upon the information the Company has at this time, it believes
the action will not have a material impact to the Company. However, at this time
no prediction as to the outcome can be made.
AXIS SPECIALTY INSURANCE CO. VS. THE QUIGLEY CORPORATION
This action, filed in January 2005 in the Federal Eastern District Court for
Pennsylvania, stems from a dispute between the Company and one of its excess
liability insurance carriers, who seeks a judicial declaration of its insurance
coverage obligations under a policy which terminates in March 2005. The
carrier's action follows a complaint by the Company filed in December 2004 with
the Pennsylvania Insurance Commission, which ultimately sided with the Company
in determining that the carrier failed to observe proper notification procedures
when it first sought to limit, or alternatively, to insure at a substantially
higher premium, its coverage obligations. This action seeks to deny insurance
coverage for certain product liability claims based on occurrences prior to
April 6, 2004.
The Company has filed a counterclaim requesting a declaration of insurance
coverage under the insurance policy referenced above. The litigation potentially
affects the amount of the Company's liability coverage for the nasal spray
personal injury litigation described above.
The Company believes plaintiffs' claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact to the Company. However,
at this time no prediction as to the outcome can be made.
TERMINATED LEGAL PROCEEDINGS - GOLDBLUM AND WAYNE
An action was commenced on March 17, 1996 by Goldblum and Wayne in the Court of
Common Pleas of Montgomery County 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
vigorously defended this lawsuit through trial during January 2004 when the jury
returned a unanimous verdict in favor of the Company. Plaintiffs filed a Motion
for Post Trial Relief with the Court of Common Pleas of Montgomery County but
failed to produce a record or file a Brief in Support of their Motion within the
timelines called for by the Pennsylvania Rules of Civil Procedure. The Quigley
Corporation has taken judgment on the verdict in its favor and the appeal period
has expired. This action is now concluded.
NOTE 11 - TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY
On September 8, 1998, the Company's Board of Directors declared a dividend
distribution of Common Stock Purchase Rights (the "Rights"), thereby creating a
Stockholder Rights Plan (the "Plan"). The dividend was payable to the
stockholders of record on September 25, 1998. Each Right entitles the
stockholder of record to purchase from the Company that number of Common Shares
having a combined market value equal to two times the Rights exercise price 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.
F-15
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, 2004, 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 2004, 2003 or 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.
On April 9, 2002, The Quigley Corporation entered into an agreement with
Forrester Financial LLC, ("Forrester") providing for Forrester to act as a
financial consultant to the Company. The consulting agreement commenced as of
March 7, 2002 for a term of twelve months, but may be terminated by the Company
in its sole discretion at any time. As compensation for services to be provided
by Forrester to the Company, the Company granted to Forrester, or its designees,
warrants to purchase up to a total of 1,000,000 shares of the Company's common
stock. The Company's financial statements reflect a $1,125,000 non-cash charge
in 2002 resulting from the granting and exercising of these warrants. The
warrants have three exercise prices, 500,000 warrants exercisable at $6.50 per
share, which were exercised in May 2002 resulting in cash to the Company in the
amount of $3,250,000, 250,000 warrants exercisable at $8.50 per share, and
250,000 warrants exercisable at $11.50 per share. The warrants were initially
exercisable until the earlier to occur of (i) March 6, 2003 or (ii) the
termination of the Consulting Agreement.
On December 7, 2002, Forrester commenced an action by a Writ of Summons filed in
the Court of Common Pleas of Bucks County, PA against The Quigley Corporation.
No Complaint was filed detailing the claim of Forrester against The Quigley
Corporation. This action was terminated with prejudice by Forrester as part of
its Amended and Restated Warrant Agreement (the "Amended Agreement) with The
Quigley Corporation on February 2, 2003 whereby certain warrants that were
scheduled to expire on March 7, 2003 were extended to March 7, 2004 (warrants to
purchase 250,000 shares at $8.50; warrants to purchase 250,000 shares at $11.50)
are no longer cancelable by the Company. As an additional part of this
agreement, Forrester was granted warrants to purchase 250,000 shares at any time
until March 7, 2004 at the price of $9.50 a share. As a result of this Amended
Agreement the Company recorded a further non-cash charge of $975,000 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.
In July 2004, the Company announced that its Board of Directors had approved a
distribution-in-kind to its stockholders of approximately 500,000 shares of
common stock of Suncoast Naturals, Inc. (OTCBB: SNTL), which it acquired through
a sale of the Company's 60% equity interest in Caribbean Pacific Natural
Products, Inc. These shares were distributed on the basis of approximately .0434
shares of Suncoast common stock for each share of the Company's common stock
owned of record on September 1, 2004, with fractional shares paid in cash. As a
result of the Company's dividend-in-kind to stockholders and the issuance of
499,282 shares of common stock of Suncoast in September 2004 (see Note 5),
representing approximately two-thirds of its common stock ownership, the
remaining 250,718 shares, owned by the Company are valued at $26,455 and such
amount is included in Other Assets in the Consolidated Balance Sheet at December
31, 2004. This transaction was completed in September 2004 resulting in a
dividend-in-kind distribution of $260,000 which represents the fair value of the
asset transferred and is reflected as a reduction of retained earnings and a
related gain on the dividend of stock of $198,786 which is reflected on the
Statement of Operations.
On October 1, 2004, the Company issued 113,097 shares of its common stock to the
stockholders of JoEL, Inc., in order to satisfy the common stock component of
acquiring certain assets and assuming certain liabilities of JoEl, Inc. (see
Note 3)
NOTE 12 - STOCK COMPENSATION
Stock options for purchase of the Company's common stock have been granted to
both employees and non-employees. Options are exercisable during a period
determined by the Company, but in no event later than ten years from the date
granted.
On December 2, 1997, the Company's Board of Directors approved a new Stock
Option Plan ("Plan") which was amended in 2001 and provides for the granting of
up to three million shares to employees. Under this Plan, the Company may grant
options to employees, officers or directors of the Company at variable
F-16
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 500,000, 424,000 and 477,000 options were granted under
this Plan during the years ended December 31, 2004, 2003 and 2002, respectively.
A summary of the status of the Company's stock options and warrants granted to
both employees and non-employees as of December 31, 2004, 2003 and 2002 and
changes during the years then ended is presented below:
YEAR ENDED DECEMBER 31, 2004:
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 3,486 $ 4.82 1,115 $ 9.38 4,601 $ 5.92
Additions/deductions:
Granted 420 9.50 80 9.50 500 9.50
Exercised 26 1.98 -- -- 26 1.98
Cancelled -- -- 750 9.83 750 9.83
-----------------------------------------------------------------------------------
Options/warrants outstanding
at end of period 3,880 $ 5.35 445 $ 8.64 4,325 $ 5.68
-----------------------------------------------------------------------------------
Options/warrants exercisable
at end of period 3,880 445 4,325
===================================================================================
Weighted average fair value of
Grants $4.46 $4.46 $4.46
Price range of options/warrants:
Exercised $0.81-$5.19 -- $0.81-$5.19
Outstanding $0.81-$10.00 $0.81-$10.00 $0.81-$10.00
Exercisable $0.81-$10.00 $0.81-$10.00 $0.81-$10.00
YEAR ENDED DECEMBER 31, 2003:
EMPLOYEES NON-EMPLOYEES TOTAL
---------------------------- --------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(,000) Price (,000) Price (,000) Price
-----------------------------------------------------------------------------------
Options/warrants outstanding
at beginning of period 3,363 $ 4.45 900 $ 8.86 4,263 $ 5.38
Additions/deductions:
Granted 394 8.11 280 9.35 674 8.63
Exercised 16 0.83 35 1.00 51 0.95
Cancelled 255 5.35 30 3.25 285 5.13
-----------------------------------------------------------------------------------
Options/warrants outstanding
at end of period 3,486 $ 4.82 1,115 $ 9.38 4,601 $ 5.92
-----------------------------------------------------------------------------------
Options/warrants exercisable
at end of period 3,486 1,115 4,601
===================================================================================
Weighted average fair value of
Grants $4.78 $1.63 $3.47
Price range of options/warrants:
Exercised $0.81-$1.26 $0.81-$1.26 $0.81-$1.26
Outstanding $0.81-$10.00 $0.81-$11.50 $0.81-$11.50
Exercisable $0.81-$10.00 $0.81-$11.50 $0.81-$11.50
F-17
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 0.00
----- ---------- ----- ---------- ----- ---------
Options/warrants outstanding
at end of period 3,363 $ 4.45 900 $ 8.86 4,263 $ 5.38
----- ---------- ----- ---------- ----- ---------
Options/warrants exercisable
at end of period 3,363 900 4,263
===== ========== ===== ========== ===== =========
Weighted average fair value of
grants $4.34 $0.84 $1.87
Price range of options/warrants:
Exercised $0.81-$ 5.13 $1.75-$6.50 $0.81-$6.50
Outstanding $0.81-$10.00 $0.81-$11.50 $0.81-$11.50
Exercisable $0.81-$10.00 $0.81-$11.50 $0.81-$11.50
The following table summarizes information about stock options outstanding and
stock options exercisable, as granted to both employees and non-employees, at
December 31, 2004:
EMPLOYEES NON-EMPLOYEES
--------- -------------
Weighted Weighted
Average Average
Remaining Weighted Remaining Weighted
Range of Number Contractual Average Number Contractual Average
Exercise Outstanding Life Exercise Price Outstanding Life Exercise Price
Prices
- ------------------------------------------------------------------------------------------------------------
$0.81 - $2.50 1,606,000 3.2 $ 1.63 35,000 6.4 $ 1.00
$5.13 - $10.00 2,273,500 6.2 $ 7.97 410,000 4.8 $ 9.29
--------- -------
3,879,500 445,000
========= =======
Options and warrants outstanding as of December 31, 2004, 2003 and 2002 expire
from June 30, 2006 through October 26, 2014, depending upon the date of grant.
NOTE 13 - DEFINED CONTRIBUTION PLANS
During 1999, the Company implemented a 401(K) defined contribution plan for its
employees. The Company's contribution to the plan is based on the amount of the
employee plan contributions and compensation. The Company's contribution cost to
the plan in 2004, 2003 and 2002 was approximately $283,000, $201,000, and
$179,000, respectively. The plan was amended in October 2004 to accommodate the
participation of employees of Quigley Manufacturing Inc.
F-18
NOTE 14 - INCOME TAXES
The provision (benefit) for income taxes, consists of the following:
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002
----------------- ----------------- -----------------
Current:
Federal -- -- --
State -- -- --
--------- --------- ---------
-- -- --
--------- --------- ---------
Deferred:
Federal $ 436,353 ($660,321) ($700,798)
State 129,453 (71,457) 133,544
--------- --------- ---------
565,806 (731,778) (567,254)
--------- --------- ---------
Valuation allowance (565,806) 731,778 567,254
--------- --------- ---------
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, 2004 December 31, 2003 December 31, 2002
----------------- ----------------- -----------------
Statutory rate $ 153,973 $ 247,834 ($1,744,916)
State taxes net of federal benefit 85,439 (47,162) 88,139
Permanent differences and other 326,394 (932,450) 1,089,523
----------------- ----------------- -----------------
565,806 (731,778) (567,254)
----------------- ----------------- -----------------
Less valuation allowance (565,806) 731,778 567,254
----------------- ----------------- -----------------
Total -- -- --
================= ================= =================
The tax effects of the primary "temporary differences" between values recorded
for assets and liabilities for financial reporting purposes and values utilized
for measurement in accordance with tax laws giving rise to the Company's
deferred tax assets are as follows:
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002
----------------- ----------------- -----------------
Net operating loss carry-forward $ 4,758,315 $ 5,313,829 $ 4,459,068
Consulting costs -- -- 380,250
Bad debt expense 121,588 331,849 187,992
Other 666,857 381,802 152,788
Valuation allowance (5,546,760) (6,027,480) (5,180,098)
----------------- ----------------- -----------------
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 $3,847,675
are deferred and will be credited to additional-paid-in-capital when existing
net operating losses are used. The cumulative tax deduction attributable to
options, warrants and restricted stock is $47,456,315 which resulted in the net
operating loss carry-forwards that approximate $12.2 million for federal
purposes, of which $3.5 million will expire in 2019, $4.0 million in 2020, $4.7
million in 2022 and $14.9 million for state purposes, of which $9.7 million will
expire in 2009, $3.0 million in 2010, and $2.2 million in 2012. Until sufficient
taxable income to offset the temporary timing differences attributable to
operations and the tax deductions attributable to option, warrant and stock
activities are assured, a valuation allowance equaling the total deferred tax
asset is being provided.
F-19
NOTE 15 - 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, 2004 December 31, 2003 December 31, 2002
-----------------------------------------------------------------------------------------------------------
Income Shares EPS Income Shares EPS Loss Shares EPS
-----------------------------------------------------------------------------------------------------------
Basic EPS $ 0.5 11.5 $ 0.04 $ 0.7 11.5 $ 0.06 ($ 5.1) 10.9 ($ 0.47)
Dilutives:
Options and
Warrants -- 2.9 -- 3.4 -- --
-----------------------------------------------------------------------------------------------------------
Diluted EPS $ 0.5 14.4 $ 0.03 $ 0.7 14.9 $ 0.05 ($ 5.1) 10.9 ($ 0.47)
===========================================================================================================
Options and warrants outstanding at December 31, 2004, 2003 and 2002 were
4,324,500, 4,601,000 and 4,262,500, respectively, but were not included in the
2002 computation of diluted earnings per share because the effect was
anti-dilutive. Stock options and warrants with exercise prices above average
market price in the amount of 1,481,500, 2,155,500 and 1,683,500 shares for the
years ended December 31, 2004, 2003 and 2002, respectively, were not included in
the computation of diluted earnings per share as they are anti-dilutive. In
addition, stock options and warrants with exercise prices below average market
price in the amount of 2,579,000 for the year ended December 31, 2002 were not
included in the computation of diluted earnings per share as they were
anti-dilutive as a result of net losses for the period.
NOTE 16 - RELATED PARTY TRANSACTIONS
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 expiration
of this agreement on May 31, 2005. For the years ended December 31, 2004, 2003
and 2002, amounts of $1,043,346, $889,340 and $692,766, respectively, were paid
or payable under such founder's commission agreements. Amounts payable under
such agreements at December 31, 2004 and 2003 were $459,583 and $456,748,
respectively.
The Company is in the process of acquiring licenses in certain countries through
related party entities whose stockholders include Mr. Gary Quigley, a relative
of the Company's Chief Executive Officer. Fees amounting to $369,000, $369,000
and $309,493 have been paid to a related entity during 2004, 2003 and 2002,
respectively to assist with the regulatory aspects of obtaining such licenses.
The Company has sales brokerage and other arrangements with entities whose major
stockholders are also stockholders of The Quigley Corporation, or are related to
a major stockholder, officer and director of the Company. Commissions and other
items expensed under such arrangements for the years ended December 31, 2004,
2003 and 2002 were zero, zero and $36,979, and are included in sales and
marketing, and administration expense classifications in the Consolidated
Statements of Operations. There were no amounts payable under such agreements at
December 31, 2004 and 2003.
NOTE 17 - 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.
F-20
The Company had divided its operations into four 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; Quigley Manufacturing (Contract Manufacturing),
which is the production facility for the Cold-Eeze(R) lozenge product and also
performs contract manufacturing services for third party customers, and Pharma,
(Ethical Pharmaceutical), currently involved in research and development
activity to develop patent applications for potential pharmaceutical products.
As discussed in Note 5 - Discontinued Operations, the Company disposed of its
Sun-care and Skincare segment.
Financial information relating to 2004, 2003 and 2002 continuing operations by
business segment follows:
- ---------------------------------------------------------------------------------------------------------------------------------
AS OF AND FOR THE TWELVE
MONTHS ENDED Cold Health and Contract Ethical Corporate &
DECEMBER 31, 2004 Remedy Wellness Manufacturing Pharmaceutical Other Total
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues
Customers-domestic $ 22,834,249 $ 17,484,246 $ 752,355 -- -- $ 41,070,850
Customers-international -- 2,877,145 -- -- -- 2,877,145
Inter-segment -- -- 1,975,779 -- ($ 1,975,779) --
Segment operating profit
(loss) 1,618,534 1,509,001 406,811 ($ 3,056,757) (295,602) 181,987
Depreciation 340,828 168,696 112,824 -- -- 622,348
Capital expenditures 250,246 32,569 4,388,153 -- -- 4,670,968
Total assets $ 31,236,129 $ 6,143,769 $ 6,806,026 -- ($12,656,168) $ 31,529,756
NOTE: The stated capital expenditure of $4,388,153 related to the Contract
Manufacturing segment for the year of 2004 is inclusive of an amount of
$4,360,829 following the acquisition by the Company of certain assets of JoEl,
Inc., on October 1, 2004.
- ---------------------------------------------------------------------------------------------------------------------------------
AS OF AND FOR THE TWELVE
MONTHS ENDED Cold Health and Contract Ethical Corporate &
DECEMBER 31, 2003 Remedy Wellness Manufacturing Pharmaceutical Other Total
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues
Customers-domestic $20,474,969 $19,801,759 -- -- -- $40,276,728
Customers-international -- 1,222,435 -- -- -- 1,222,435
Segment operating profit
(loss) 1,699,378 1,791,454 -- ($2,855,294) -- 635,538
Depreciation 318,419 155,174 -- -- -- 473,593
Capital expenditures 414,129 140,887 -- -- -- 555,016
Total assets $24,892,338 $ 3,881,970 -- -- ($2,504,549) $26,269,759
- ---------------------------------------------------------------------------------------------------------------------------------
AS OF AND FOR THE TWELVE
MONTHS ENDED Cold Health and Contract Ethical Corporate &
DECEMBER 31, 2002 Remedy Wellness Manufacturing Pharmaceutical Other Total
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues
Customers-domestic $ 14,199,833 $ 15,220,813 - - - $ 29,420,646
Customers-international - - - - - -
Segment operating profit
(loss) (4,839,359) 1,103,610 - ($ 1,604,753) $ 56,086 (5,284,416)
Depreciation 262,724 124,404 - - - 387,128
Capital expenditures 290,983 289,878 - - - 580,861
Total assets $ 26,223,476 $ 1,401,867 - - ($ 2,690,387) $ 24,934,956
F-21
NOTE 18 - QUARTERLY INFORMATION (UNAUDITED)
QUARTER ENDED
--------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------------------------------------------------------------
2004
Net Sales $ 9,605,617 $ 6,901,182 $ 9,690,858 $17,750,338
Gross Profit 4,520,243 2,776,882 3,800,112 9,277,632
Administration 2,750,499 2,054,741 2,313,609 2,701,099
Operating expenses 5,320,567 3,710,062 3,856,503 7,305,750
Income (loss) from operations (800,324) (933,180) (56,391) 1,971,882
Income (loss) from continuing operations (781,631) (912,477) 177,376 1,969,594
Net Income (loss) ($ 781,631) ($ 912,477) $ 177,376 $ 1,969,594
Basic EPS
Income (loss) from continuing operations ($0.07) ($0.08) $0.02 $0.17
Net Income (loss) ($0.07) ($0.08) $0.02 $0.17
Diluted EPS
Income (loss) from continuing operations ($0.07) ($0.08) $0.01 $0.13
Net Income (loss) ($0.07) ($0.08) $0.01 $0.13
QUARTER ENDED
--------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------------------------------------------------------------
2003
Net Sales $ 8,191,092 $ 7,004,580 $ 9,912,227 $16,391,264
Gross Profit 3,694,110 2,765,589 4,487,847 9,063,854
Administration 2,441,720 2,311,887 2,046,915 3,043,324
Operating expenses 4,616,219 3,849,747 4,372,646 6,537,250
Income (loss) from operations (922,109) (1,084,158) 115,201 2,526,604
Income (loss) from continuing operations (892,212) (1,055,141) 134,129 2,542,147
Net Income (loss) ($ 946,561) ($1,055,141) $ 134,129 $ 2,542,147
Basic EPS
Income (loss) from continuing operations ($0.08) ($0.09) $0.01 $0.22
Net Income (loss) ($0.08) ($0.09) $0.01 $0.22
Diluted EPS
Income (loss) from continuing operations ($0.08) ($0.09) $0.01 $0.17
Net Income (loss) ($0.08) ($0.09) $0.01 $0.17
FOURTH QUARTER SEGMENT DATA (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------
AS OF AND FOR THE THREE
MONTHS ENDED Cold Health and Contract Ethical Corporate &
DECEMBER 31, 2004 Remedy Wellness Manufacturing Pharmaceutical Other Total
- -------------------------------------------------------------------------------------------------------------------------
Revenues
Customers-domestic $12,151,638 $ 4,247,088 $ 752,355 - - $17,151,081
Customers-international - 599,257 - - - 599,257
Inter-segment - - 1,975,779 - ($1,975,779) -
Segment operating profit
(loss) 2,491,935 187,979 406,811 ($ 819,241) (295,602) 1,971,882
Depreciation 90,102 41,157 112,824 - - 244,083
Capital expenditures $130,716 $6,403 $ 4,388,153 - $202 $ 4,525,474
NOTE: The stated capital expenditure of $4,388,153 related to the Contract
Manufacturing segment for the year of 2004 is inclusive of an amount of
$4,360,829 following the acquisition by the Company of certain assets of JoEl,
Inc., on October 1, 2004.
F-22
- -------------------------------------------------------------------------------------------------------------------------
AS OF AND FOR THE THREE
MONTHS ENDED Cold Health and Contract Ethical Corporate &
DECEMBER 31, 2003 Remedy Wellness Manufacturing Pharmaceutical Other Total
- -------------------------------------------------------------------------------------------------------------------------
Revenues
Customers-domestic $11,040,653 $4,825,566 - - - $15,866,219
Customers-international - 525,045 - - - 525,045
Segment operating profit
(loss) 3,239,960 54,325 - ($767,681) - 2,526,604
Depreciation 83,349 41,504 - - - 124,853
Capital expenditures $98,476 $46,432 - - - 144,908
- -------------------------------------------------------------------------------------------------------------------------
AS OF AND FOR THE THREE
MONTHS ENDED Cold Health and Contract Ethical Corporate &
DECEMBER 31, 2002 Remedy Wellness Manufacturing Pharmaceutical Other Total
- -------------------------------------------------------------------------------------------------------------------------
Revenues
Customers-domestic $6,782,664 $4,616,637 - - - $ 11,399,301
Customers-international - - - - - -
Segment operating profit
(loss) (1,020,196) 172,362 - ($ 485,590) $15,470 (1,317,954)
Depreciation 72,091 40,811 - - - 112,902
Capital expenditures 119,432 $28,921 - - - $148,353
F-23
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of The Quigley Corporation is responsible for the information and
representations contained in this report. Management believes that the financial
statements have been prepared in conformity with generally accepted accounting
principles and that the other information in this annual report is consistent
with those statements. In preparing the financial statements, management is
required to include amounts based on estimates and judgments, which it believes
are reasonable under the circumstances.
In fulfilling its responsibilities for the integrity of the data presented and
to safeguard the Company's assets, management employs a system of internal
accounting controls designed to provide reasonable assurance, at appropriate
cost, that the Company's assets are protected and that transactions are
appropriately authorized, recorded, and summarized. This system of control is
supported by the selection of qualified personnel, by organizational assignments
that provide appropriate delegation of authority and division of
responsibilities, and by the dissemination of policies and procedures.
/s/ Guy J. Quigley March 4, 2005
- ------------------------------------- -------------
Guy J. Quigley, Chairman of the Board, Date
(President, Chief Executive Officer)
/s/ George J. Longo March 4, 2005
- -------------------------------------------------------- -------------
George J. Longo, Vice President, Chief Financial Officer Date
(Principal Financial and Accounting Officer)
F-24
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of The Quigley Corporation
We have audited the accompanying consolidated balance sheet of The Quigley
Corporation and subsidiaries as of December 31, 2004 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2004, and the results of its operations and its cash flows for year ended
December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
/s/Amper, Politziner & Mattia P.C.
- --------------------------------------
Edison, New Jersey
March 4, 2005
F-25
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of The Quigley Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity, and cash flows
present fairly, in all material respects, the financial position of The Quigley
Corporation and its subsidiaries at December 31, 2003, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, 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 26, 2004
F-26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
The Company filed a Form 8-K on July 8, 2004, announcing that the Company had
dismissed PricewaterhouseCoopers LLP ("PwC") as its independent registered
public accounting firm. On the same date, the Company engaged Amper, Politziner
& Mattia, P.C. as independent accountants. The dismissal of PwC and engagement
of Amper, Politziner & Mattia, P.C. were approved by the Audit Committee of the
Company.
The reports of PwC on the Company's financial statements for the past two fiscal
years did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principle,
except for the 2003 fiscal year opinion, which contained a reference for a
restatement of the 2002 consolidated financial statements to revise the
accounting for certain warrants. During the two most recent fiscal years and
through July 8, 2004, there were no disagreements with PwC on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
PwC, would have caused them to make reference to the subject matter of any such
disagreement in connection with its reports on the financial statements for such
years. During the two most recent fiscal years and through July 8, 2004, there
were no reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K).
The Company has not consulted with Amper, Politziner & Mattia, P.C. during
the last fiscal year ended December 31, 2003 or during the subsequent interim
periods from January 1, 2004 through and including July 8, 2004 on either the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Company's consolidated financial statements.
ITEM 9A. CONTROLS AND PROCEDURES
Based on their evaluation, as of the end of the period covered by this report,
the Company's Chief Executive Officer and Chief Financial Officer have concluded
the Company's disclosure controls and procedures (as defined in Rules 13a-14 and
15d-14 under the Securities Exchange Act of 1934) are effective. There have been
no significant changes in internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item is incorporated by reference to the
Company's Proxy Statement for the 2005 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 2005 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required under this item is incorporated by reference to the
Company's Proxy Statement for the 2005 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 2005 Annual Meeting of Stockholders.
-24-
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required under this item is incorporated by reference to the
Company's Proxy Statement for the 2005 Annual Meeting of Stockholders.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
3.1 Articles of Incorporation of the Company, as amended,
(incorporated by reference to Exhibit 3.1 of Form 10-KSB/A
filed on April 4, 1997).
3.2 By-laws of the Company as currently in effect (incorporated
by reference to Exhibit 3.2 of Form 10-KSB/A filed on April
4, 1997 and Exhibit 99.3 of the Company's Current Report on
Form 8-K filed on September 21, 1998).
4.1 Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 of Form 10-KSB/A filed on 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 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 of Form 10-KSB/A filed on 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 filed on 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 filed on April 4, 1997).
10.5 United States Exclusive Supply Agreement dated March 17,
1997 (Portions of this exhibit are omitted and were filed
separately with the Securities Exchange Commission pursuant
to the Company's application requesting confidential
treatment in accordance with Rule 406 of Regulation C as
promulgated under the Securities Act of 1933, incorporated
by reference to Exhibit 10.5 of Form SB-2 dated September
29, 1997). See exhibit 10.14.
10.6 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 filed on April 4,
1997).
10.7* Employment Agreement dated November 5, 1996, as amended,
between the Company and George J. Longo (incorporated by
reference to Exhibit 10.10 of Form 10-KSB filed on March 30,
1998.
10.8 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 on September 18,
1998).
10.9 Consulting agreement dated March 7, 2002 between the Company
and Forrester Financial LLC (incorporated by reference to
Exhibit 99.1 of Form 8-K filed on April 11, 2002).
-25-
10.10 Warrant agreement dated March 7, 2002 between the Company
and Forrester Financial LLC (incorporated by reference to
Exhibit 99.2 of Form 8-K filed on April 11, 2002).
10.11 Agreement dated February 2, 2003 between the Company and
Forrester Financial LLC (incorporated by reference to
Exhibit 99.3 of Form 8-K filed on February 18, 2003).
10.12 Amended and Restated Warrant Agreement dated February 2,
2003 between the Company and Forrester Financial LLC
(incorporated by reference to Exhibit 99.4 of Form 8-K filed
on February 18, 2003).
10.13 Share agreement effective as of December 31, 2002 between
the Company and Suncoast Naturals, Inc. (incorporated by
reference to Exhibit 2.1 of Form 8-K filed on February 6,
2003).
10.14 Third Amendment to United States Exclusive Supply Agreement
(incorporated by reference to Exhibit 10.18 of Form 10-K
filed on April 1, 2004).
10.15 Asset Purchase and Sale Agreement dated August 18, 2004 by
and between JoEl, Inc. and the Company (incorporated by
reference to Exhibit 10.1 of Form 8-K filed on August 20,
2004).
10.16 Addendum dated October 1, 2004 by and between the Company
and JoEl, Inc. to the asset purchase and sale agreement
dated August 18, 2004 (incorporated by reference to Exhibit
10.1 of Form 8-K filed on October 7, 2004).
10.17 Term Note dated October 1, 2004 in the amount of $3.0
million executed by the Company in favor of PNC Bank,
National Association (incorporated by reference to Exhibit
10.2 of Form 8-K filed on October 7, 2004).
10.18 Open-End Mortgage and Security Agreement dated October 1,
2004 on real property located in Lebanon, Pennsylvania
executed by Quigley Manufacturing Inc. in favor of PNC Bank,
National Association (incorporated by reference to Exhibit
10.3 of Form 8-K filed on October 7, 2004).
10.19 Open-End Mortgage and Security Agreement dated October 1,
2004 on real property located in Elizabethtown, Pennsylvania
executed by Quigley Manufacturing Inc. in favor of PNC Bank,
National Association (incorporated by reference to Exhibit
10.4 of Form 8-K filed on October 7, 2004).
10.20 Registration Rights Agreement dated October 1, 2004 by and
among the Company and the shareholders signatory thereto
(incorporated by reference to Exhibit 10.5 of Form 8-K filed
on October 7, 2004).
10.21* Employment Agreement dated October 1, 2004 between Quigley
Manufacturing Inc. and David B. Deck (incorporated by
reference to Exhibit 10.6 of Form 8-K filed on October 7,
2004).
10.22* Employment Agreement dated October 1, 2004 between Quigley
Manufacturing Inc. and David Hess (incorporated by reference
to Exhibit 10.7 of Form 8-K filed on October 7, 2004).
14.1 Code of Ethics (incorporated by reference to Exhibit II of
the Proxy Statement on Schedule 14A filed on March 31,
2003).
16.1** PricewaterhouseCoopers LLP letter dated March 30, 2005.
21.1** Subsidiaries of The Quigley Corporation.
23.1* Consent of PricewaterhouseCoopers LLP, Independent
Registered Public Accounting Firm, dated March 30, 2005.
23.2** Consent of Amper, Politziner & Mattia, Independent
Registered Public Accounting Firm, dated March 30, 2005.
31.1** Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
-26-
31.2** Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1** Certification of Chief Executive Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2** Certification of Chief Financial Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Indicates a management contract or compensatory plan or
arrangement
**Filed herewith
-27-
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant 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 31, 2005
- -------------------------------------------------- --------------
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 registrant and in the
capacities and on the dates indicated:
Signature Title Date
- --------- ----- -----
/s/ Guy J. Quigley Chairman of the Board, President, March 31, 2005
- ------------------------------------- Chief Executive Officer and Director --------------
Guy J. Quigley
/s/ Charles A. Phillips Executive Vice President, Chief Operating March 31, 2005
- ------------------------------------- Officer and Director --------------
Charles A. Phillips
/s/ George J. Longo Vice President, Chief Financial March 31, 2005
- ------------------------------------- Officer and Director (Principal --------------
George J. Longo Financial and Accounting Officer)
/s/ Jacqueline F. Lewis Director March 31, 2005
- ------------------------------------- --------------
Jacqueline F. Lewis
/s/ Rounsevelle W. Schaum Director March 31, 2005
- ------------------------------------- --------------
Rounsevelle W. Schaum
/s/ Stephen W. Wouch Director March 31, 2005
- ------------------------------------- --------------
Stephen W. Wouch
/s/ Terence O. Tormey Director March 31, 2005
- ------------------------------------- --------------
Terence O. Tormey
-28-