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, 2005
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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 ______
Commission file number 01-21617
THE QUIGLEY CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
NEVADA 23-2577138
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(State or Other Jurisdiction (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:
Title of each class Name of each exchange on which registered
COMMON STOCK, $.0005 PAR VALUE PER SHARE NASDAQ NATIONAL MARKET
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COMMON SHARE PURCHASE RIGHTS NOT APPLICABLE
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Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
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 (ss. 229.405 of this chapter) 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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes [ ] No [X]
The aggregate market value of the registrant's common stock held by
non-affiliates was $66,267,472 as of June 30, 2005, 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, 2006:
Common stock, $.0005 par value per share: 11,678,478.
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 2006 annual meeting of
stockholders.
TABLE OF CONTENTS
Part I PAGE
Item 1. Business 2 - 9
1A. Risk Factors 9 - 14
1B. Unresolved Staff Comments 14
2. Properties 15
3. Legal Proceedings 15 - 20
4. Submission of Matters to a Vote of Security Holders 20
Part II
5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 21 - 22
6. Selected Financial Data 22 - 23
7. Management's Discussion and Analysis of Financial Condition
and Results of Operation 23 - 29
7A. Quantitative and Qualitative Disclosures About Market Risk 29
8. Financial Statements and Supplementary Data 30
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 31
9A. Controls and Procedures 31
9B. Other Information 32
Part III
10. Directors and Executive Officers of the Registrant 32
11. Executive Compensation 32
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 32
13. Certain Relationships and Related Transactions 32
14. Principal Accountant Fees and Services 32
Part IV
15. Exhibits and Financial Statement Schedules 32 - 34
Signatures 35
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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 ("FDA") 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 such 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 ("SEC").
PART I
ITEM 1. BUSINESS
BUSINESS DEVELOPMENT
The Company, headquartered in Doylestown, Pennsylvania, is a leading
manufacturer, marketer and distributor of a diversified range of homeopathic and
health products which comprise the Cold Remedy, Health and Wellness and Contract
Manufacturing segments. The Company is also involved in the research and
development of potential prescription products that comprise the Ethical
Pharmaceutical segment.
The Company's business is the development, manufacture, sale and distribution of
over the counter (OTC) cold remedy products, proprietary health and wellness
products through its direct selling subsidiary and the research and development
of natural-source derived pharmaceuticals.
Cold-Eeze(R) is one of the Company's key cold remedy OTC products whose benefits
are derived from its proprietary zinc formulation. The product's effectiveness
has been substantiated in two double-blind clinical studies proving that
Cold-Eeze(R) reduces the duration and severity of the common cold symptoms by
nearly half. The Cold Remedy segment, where Cold-Eeze(R) is represented, is
reviewed regularly to realize any new consumer opportunities in flavor,
convenience and packaging to help improve market share for the Cold-Eeze(R)
product. Additionally, the Company is constantly active in exploring and
developing new products consistent with its brand image and standard of proven
consumer benefit.
Effective October 1, 2004, the Company acquired substantially all of the assets
of JoEl, Inc., the previous manufacturer of the Cold-Eeze(R) lozenge product
assuring a 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 performing contract manufacturing activities for
non-related entities.
Our Health and Wellness segment is operated through Darius International Inc.
("Darius"), a wholly owned subsidiary of the Company which was formed in January
2000 to introduce new products to the marketplace through a network of
independent distributor representatives. Darius is a direct selling organization
specializing in proprietary nutritional and dietary supplement based 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.
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In January 2001, the Company formed an Ethical Pharmaceutical segment, Quigley
Pharma Inc. ("Pharma"), that is under the direction of its Executive Vice
President and Chairman of its Medical Advisory Committee. Pharma was formed for
the purpose of developing naturally derived prescription drugs. Pharma is
currently undergoing research and development activity in compliance with
regulatory requirements. At this time, five patents have been issued and
assigned to the Company resulting from research activity of Pharma. In certain
instances where a critical mass of positive scientific data has been established
for compounds that the Company does not envision bringing to market, it may
decide to sell or license its technology.
DESCRIPTION OF BUSINESS OPERATIONS
Since its inception, the Company has continued to conduct research and
development into various types of health-related 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 marketing emphasis of
Nutri-Bars and commenced focusing its research and development and marketing
resources on 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 has been proven to reduce the duration and severity of 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 manufacture of the lozenge form of Cold-Eeze(R)
was outsourced. Since that date, the lozenge form of Cold-Eeze(R) has been
manufactured by a subsidiary of the Company.
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 is currently involved in the lengthy process of conducting research and
development on certain of its patented formulations in compliance with FDA
regulations required for bringing prescriptions and botanical drugs to market.
The Company is in the initial stages of what may be a lengthy process to develop
these patent applications into potential commercial products.
During 2005, approximately 92% of the Company's revenues were generated in the
United States with the remainder being attributable to international trade
compared to 93% in 2004.
Financial information regarding the Company's operating segments is set forth in
Item 8, Notes to Financial Statements, Note 16 - Segment Information.
PRODUCTS
COLD-REMEDY PRODUCTS
In May 1992, the Company entered into an exclusive agreement for worldwide
representation, manufacturing, marketing of Cold-Eeze(R) products in the United
States. 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 available in lozenge, sugar-free tablet and gum form. The
Company has substantiated the effectiveness of Cold-Eeze(R) through a variety of
studies. 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
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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.
The continued success of this segment is dependent, among other things, on the
Company's ability:
o To maintain existing independent distributor representatives and
recruit additional successful independent distributor representatives.
Additionally, the loss of key high-level distributors or business
contributors as a result of business disagreements, litigation or
otherwise could negatively impact future growth and revenues;
o To continue to develop and make available new and desirable products
at an acceptable cost;
o To maintain safe and reliable multiple-location sources for product
and materials;
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;
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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
From October 1, 2004, this manufacturing entity, now called 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
performing contract manufacturing activities for non-related entities. QMI is an
FDA-approved facility.
ETHICAL PHARMACEUTICAL
Pharma's current activity is the research and development of naturally-derived
prescription drugs with the goal of improving the quality of life and health of
those in need. 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 potential synergistic benefits of combining isolated
active constituents and whole plant components. The Company will search for new
natural sources of medicinal substances from plants and fungi from around the
world while also investigating the use of traditional and historic medicinals
and 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.
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.
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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 2005, the Company announced
that a preliminary report of its topical compound for the treatment of diabetic
neuropathy was recently featured in the JOURNAL OF DIABETES AND ITS
COMPLICATION. Authored by Dr. C. LeFante and Dr. P. Valensi, the article
appeared in the June 1, 2005 issue, and included findings that showed the
compound reduced the severity of numbness, and irritation from baseline values.
In October 2005, the Company announced the results of pre-clinical toxicology
studies that showed no irritation, photo toxicity, contact hypersensitivity or
photo allergy when applied topically to hairless guinea pigs and another study
that showed no difference in the dermal response of the compound or placebo when
applied to Gottingen Minipigs. (Both animal models are suggested for the
evaluation of topical drugs, by the FDA).
In March 2006, the Company and Pharma announced their filing of an IND
application with the FDA for its topical compound for the treatment of Diabetic
Peripheral Neuropathy. This filing allows Pharma to begin human clinical trials
following a 30-day review period. If the FDA has no further comments, studies
with human subjects will commence as soon as possible pending the availability
of study drug. This application includes a compilation of all of the supporting
development data and regulatory documentation required to file an IND
application with the FDA.
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 would conduct two further studies
evaluating the compound which had shown activity against Influenza and SARS. The
first study was 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 was a dose ranging study on the test
compound. Upon dosage determination and confirmation results from these
forthcoming animal model studies, a human proof of concept study using a virus
challenge with Influenza A virus in a quarantine unit would be a viable next
step.
At this time, the Company also reported that its compound, which was
demonstrating antiviral activity, had shown virucidal and virustatic activity
against the strain 3B of the Human Immunodeficiency Virus Type 1 (HIV-1) in an
in-vitro study. Additionally, the Company decided that the derivative compound
of the anti-viral formulation previously found to be effective for treating
Sialorrhea would probably postpone further development on the Sialorrhea
indication and concentrate on further qualification and development of the
anti-viral capabilities of the compound in humans.
In May 2004, the Company announced that an intranasal spray application of the
anti-viral test compound demonstrated efficacy by significantly reducing the
severity of illness in ferrets that had been infected with the Influenza A
virus.
In November 2005, the Company was assigned nine Investigational New Animal
Drugs, ("INADs"), a broad anti-viral agent by the Center for Veterinary Medicine
of the FDA. Eight of the INAD's are for investigating the compound use against
avain flu H5N1virus in chickens, turkeys, ducks, pigs, horses, dogs, cats and
non-food birds. In January 2006, a ninth INAD was assigned for investigating its
compound for treating arthritis in dogs.
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.
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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)
No. 4 758 439 (July 19, 1988, expired August 2004)
Canada: No. 1 243 952 (November 1, 1988, expired June 2005)
Great Britain: No. 2 179 536 (December 21, 1988, expired June 2005)
Germany: No. 3,587,766 (March 2, 1994, expired June 2005)
Sweden: No. 0 183 840 (March 2, 1994, expired June 2005)
France & Italy: No. EP 0 183 840 B1 (March 2, 1994, expired June 2005)
Japan: Pending
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)
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 then 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, have
received a total commission of five percent (5%), on sales collected, less
certain deductions. This agreement expired on May 31, 2005.
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 29%, 27%, and 23% of its
continuing consolidated gross revenues for the years ended December 31, 2005,
2004 and 2003, 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,
2005, 2004 and 2003 were $3,784,221, $3,232,569 and $3,365,698, 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 have been assigned to the Company. Research and
development costs, relating to potential products, are expected to increase
significantly over time as milestones in the development and regulatory process
may be achieved.
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, speed to market, reliability, credit terms, name
recognition, delivery time and post-sale service and support. Effective October
1, 2004, a subsidiary of the Company commenced manufacturing the Cold-Eeze(R)
lozenge product. This subsidiary assures future production capabilities of the
lozenge product which constitutes primarily all of the cold remedy revenue.
-8-
EMPLOYEES
At December 31, 2005 the Company employed 150 full-time persons, the majority of
which were employed at the Company's manufacturing facility 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 manufacturing of the lozenge form of Cold-Eeze(R)
was outsourced, but is now 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 and qualitative security. 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 1A. RISK FACTORS
WE HAVE A HISTORY OF LOSSES AND LIMITED WORKING CAPITAL AND WE EXPECT TO
INCREASE OUR SPENDING.
We have experienced net losses for three of our past seven fiscal years.
Although we earned net income of approximately $3,217,000, $453,000 and
$675,000, respectively, in our most recent fiscal years ended December 31, 2005,
December 31, 2004 and 2003, we incurred net losses of $6,454,000, $5,196,000 and
$4,204,000, respectively, in the fiscal years ended December 31, 2002, December
31, 2000 and December 31, 1999. In the fiscal year ended December 31, 2001, we
earned net income of $216,000, but that amount included net settled litigation
payments paid to us of approximately $700,000 related to licensing fees. As of
December 31, 2005, we had working capital of approximately $20,682,000. Since we
continue to increase our spending on research and development in connection with
Pharma's product development, we are uncertain whether we will generate
sufficient revenues to meet expenses or to operate profitably in the future.
WE HOLD PATENTS WHICH WE MAY NOT BE ABLE TO DEVELOP INTO PHARMACEUTICAL MEDICATIONS.
Our success depends in part on Pharma's ability to research and develop
prescription medications based on our patents which 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.
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 the preventing, reducing or treating radiation
dermatitis. The patent extends through November 5, 2021.
o A Patent (No. 6,827,945 B2) entitled "Nutritional Supplement & Methods
of Using Same" for a naturally derived compound developed for the
treatment of arthritis and related inflammatory disorders. The patent
extends through August 22, 2023.
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These potential new products are in the development stage and we cannot give any
assurances that we can develop commercially viable products from these patent
applications. Prior to any new product being ready for sale, we will have to
commit substantial resources for research, development, preclinical testing,
clinical trials, manufacturing scale-up and regulatory approval. We face
significant technological risks inherent in developing these products. We may
abandon some or all of our proposed new products before they become commercially
viable. Even if we develop and obtain approval of a new product, if we cannot
successfully commercialize it in a timely manner, our business and financial
condition may be materially adversely affected.
WE WILL NEED TO OBTAIN ADDITIONAL CAPITAL TO SUPPORT LONG-TERM PRODUCT
DEVELOPMENT AND COMMERCIALIZATION PROGRAMS.
Our ability to achieve and sustain operating profitability depends in large part
on our ability to commence, execute and complete clinical programs for, and
obtain additional regulatory approvals for, prescription medications developed
by Pharma, particularly in the U.S. and Europe. We cannot assure you that we
will ever obtain such approvals or achieve significant levels of sales. Our
current sales levels of Cold-Eeze(R) products and health and wellness products
may not generate all the funds we anticipate will be needed to support our
current plans for product development. We may need to obtain additional
financing to support our long-term product development and commercialization
programs. We may seek additional funds through public and private stock
offerings, arrangements with corporate partners, borrowings under lines of
credit or other sources.
The amount of capital we may need to complete product development of Pharma's
products will depend on many factors, including;
o the cost involved in applying for and obtaining FDA and international
regulatory approvals;
o whether we elect to establish partnering arrangements for development,
sales, manufacturing and marketing of such products;
o the level of future sales of our Cold-Eeze(R) and health and wellness
products, expense levels for our international sales and marketing
efforts;
o whether we can establish and maintain strategic arrangements for
development, sales, manufacturing and marketing of our products; and
o whether any or all of our outstanding options and warrants are
exercised and the timing and amount of these exercises.
Many of the foregoing factors are not within our control. If we need to raise
additional funds and such funds are not available on reasonable terms, we may
have to reduce our capital expenditures, scale back our development of new
products, reduce our workforce and out-license to others products or
technologies that we otherwise would seek to commercialize ourselves. Any
additional equity financing will be dilutive to stockholders, and any debt
financing, if available, may include restrictive covenants.
OUR CURRENT PRODUCTS AND POTENTIAL NEW PRODUCTS ARE SUBJECT TO EXTENSIVE
GOVERNMENTAL REGULATION.
Our business is regulated by various agencies of the states and localities where
our products are sold. Governmental regulations in foreign countries where we
plan to commence or expand sales may prevent or delay entry into a market or
prevent or delay the introduction, or require the reformulation, of certain of
our products. In addition, we cannot predict whether new domestic or foreign
legislation regulating our activities will be enacted. Any new legislation could
have a material adverse effect on our business, financial condition and
operations. Non-compliance with any applicable requirements may subject us or
the manufacturers of our products to sanctions, including warning letters,
fines, product recalls and seizures.
COLD REMEDY AND HEALTH AND WELLNESS PRODUCTS. The manufacturing, processing,
formulation, packaging, labeling and advertising of our cold remedy and health
and wellness products are subject to regulation by several federal agencies,
including:
o the FDA;
o the Federal Trade Commission ("FTC");
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o the Consumer Product Safety Commission;
o the United States Department of Agriculture;
o the United States Postal Service;
o the United States Environmental Protection Agency; and
o the Occupational Safety and Health Administration.
In particular, the FDA regulates the safety, labeling and distribution of
dietary supplements, including vitamins, minerals and herbs, food additives,
food supplements, over-the-counter and prescription drugs and cosmetics. The FTC
also has overlapping jurisdiction with the FDA to regulate the promotion and
advertising of vitamins, over-the-counter drugs, cosmetics and foods. In
addition, our cold remedy products are homeopathic remedies which are regulated
by the Homeopathic Pharmacopoeia of the United States ("HPUS"). HPUS sets the
standards for source, composition and preparation of homeopathic remedies which
are officially recognized in the Federal Food, Drug and Cosmetics Act of 1938.
PHARMA. The preclinical 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. Clinical trials and product
marketing and manufacturing are subject to the rigorous review and approval
processes of the FDA and foreign regulatory authorities. Obtaining FDA and other
required regulatory approvals is lengthy and expensive. Typically, obtaining
regulatory approval for pharmaceutical products requires substantial resources
and takes 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
indication to be treated. Preclinical studies must comply with FDA regulations.
Clinical trials must also comply with FDA regulations and may require large
numbers of test subjects, complex protocols and possibly lengthy follow-up
periods. Consequently, satisfaction of government regulations may take several
years, may cause delays in introducing potential new products for considerable
periods of time and may require imposing costly procedures upon our activities.
If we cannot obtain regulatory approval of new products in a timely manner or at
all we could be materially adversely affected. Even if we obtain regulatory
approval of new products, such approval may impose limitations on the indicated
uses for which the products may be marketed which could also materially
adversely affect our business, financial condition and future operations.
OUR BUSINESS IS VERY COMPETITIVE AND INCREASED COMPETITION COULD HAVE A
SIGNIFICANT IMPACT ON OUR EARNINGS.
Both the non-prescription healthcare product and pharmaceutical industries are
highly competitive. Many of our competitors have substantially greater capital
resources, research and development staffs, facilities and experience than we
do. These and other entities may have or may develop new technologies. These
technologies may be used to develop products that compete with ours.
We believe that our primary cold remedy product, Cold-Eeze(R), has a competitive
advantage over other cold remedy products because it has been clinically proven
to reduce the severity and duration of common cold symptoms. We believe Darius
has an advantage over its competitors because it directly sells its proprietary
health and wellness products through its extensive network of independent
distributors. Competition in Pharma's expected product areas would most likely
come from large pharmaceutical companies as well as other companies,
universities and research institutions, many of which have resources far in
excess of our resources.
The Company believes that its ability to compete depends on a number of factors,
including price, product quality, availability, reliability and name recognition
of its cold remedy, health and wellness products and Pharma's ability to
successfully develop and market prescription medications. There can be no
assurance that we will be able to compete successfully in the future. If we are
unable to compete, our earnings may be significantly impacted.
OUR FUTURE SUCCESS IS DEPENDENT ON THE CONTINUED SERVICES OF KEY PERSONNEL
INCLUDING OUR CHAIRMAN OF THE BOARD OF DIRECTORS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER.
Our future success depends in large part on the continued service of our key
personnel. In particular, the loss of the services of Guy J. Quigley, our
Chairman of the Board, President and Chief Executive Officer could have a
material adverse effect on our operations. We have an employment agreement with
Mr. Quigley which expired on December 31, 2005. Our future success and growth
also depends on our ability to continue to attract, motivate and retain highly
qualified employees. If we are unable to attract, motivate and retain qualified
employees, our business and operations could be materially adversely affected.
-11-
OUR FUTURE SUCCESS DEPENDS ON THE CONTINUED EMPLOYMENT OF RICHARD A. ROSENBLOOM,
M.D., PH.D., WITH PHARMA.
Pharma's potential new products are being developed through the efforts of Dr.
Rosenbloom. The loss of his services could have a material adverse effect on our
product development and future operations.
OUR FUTURE SUCCESS IS DEPENDENT ON THE CONTINUED ACCEPTANCE OF THE DIRECT
SELLING PHILOSOPHY, THE MAINTENANCE OF OUR NETWORK OF EXISTING INDEPENDENT
DISTRIBUTOR REPRESENTATIVES AND THE RECRUITMENT OF ADDITIONAL SUCCESSFUL
INDEPENDENT DISTRIBUTOR REPRESENTATIVES.
Darius markets and sells herbal vitamins and dietary supplements for the human
condition through its network of independent distributor representatives. Its
products are sold to independent distributor representatives who either use the
products for their own personal consumption or resell them to consumers. The
independent distributor representatives receive compensation for sales achieved
by means of a commission structure or compensation plan on certain product sales
of certain personnel within their downstream independent distributor
representative network. Since the independent distributor representatives are
not employees of Darius, they are under no obligation to continue buying and
selling Darius' products and the loss of key high-level distributors could
negatively impact our future growth and profitability.
OUR FUTURE SUCCESS DEPENDS ON THE CONTINUED SALES OF OUR PRINCIPAL PRODUCT.
For the fiscal year ended December 31, 2005, our Cold-Eeze(R) products
represented approximately 55% of our total sales. While we have diversified into
health and wellness products, our line of Cold-Eeze(R) products continues to be
a major part of our business. Accordingly, we have to depend on the continued
acceptance of Cold-Eeze(R) products by our customers. However, there can be no
assurance that our Cold-Eeze(R) products will continue to receive market
acceptance. The inability to successfully commercialize Cold-Eeze(R) in the
future, for any reason, would have a material adverse effect on our financial
condition, prospects and ability to continue operations.
WE HAVE A CONCENTRATION OF SALES TO AND ACCOUNTS RECEIVABLE FROM SEVERAL LARGE
CUSTOMERS.
Although we have a broad range of customers that includes many large
wholesalers, mass merchandisers and multiple outlet pharmacy chains, our five
largest customers account for a significant percentage of our sales. These five
customers accounted for 29% of total sales for the fiscal year ended December
31, 2005 and 29% of total sales for the fiscal year ended December 31, 2004. In
addition, customers comprising the five largest accounts receivable balances
represented 47% and 48% of total accounts receivable balances at December 31,
2005 and 2004, respectively. We extend credit to our customers based upon an
evaluation of their financial condition and credit history, and we do not
generally require collateral. If one or more of these large customers cannot pay
us, the write-off of their accounts receivable would have a material adverse
effect on our operations and financial condition. The loss of sales to any one
or more of these large customers would also have a material adverse effect on
our operations and financial condition.
WE ARE DEPENDENT ON THIRD-PARTY MANUFACTURERS AND SUPPLIERS FOR OUR HEALTH AND
WELLNESS PRODUCTS AND THIRD-PARTY SUPPLIERS FOR CERTAIN OF OUR COLD REMEDY
PRODUCTS.
We do not manufacture any of our Health and Wellness products, nor do we
manufacture any of the ingredients in these products. In addition, we purchase
all active ingredients that are raw materials used in connection with our
Cold-Eeze(R) product from a single unaffiliated supplier. Should any of these
relationships terminate, we believe that the contingency plans which we have
formulated would prevent a termination from materially affecting our operations.
However, if any of these relationship is terminated, there may be delays in
production of our products until an acceptable replacement facility is located.
We continue to look for safe and reliable multiple-location sources for products
and raw materials so that we can continue to obtain products and raw materials
in the event of a disruption in our business relationship with any single
manufacturer or supplier. While we have identified secondary sources for some of
our products and raw materials, our inability to find other sources for some of
our other products and raw materials may have a material adverse effect on our
operations. In addition, the terms on which manufacturers and suppliers will
make products and raw materials available to us could have a material effect on
our success.
WE ARE UNCERTAIN AS TO WHETHER WE CAN PROTECT OUR PROPRIETARY RIGHTS.
The strength of our patent position may be important to our long-term success.
We currently own five patents in connection with products that are being
developed by Pharma. In addition, we have been granted an exclusive agreement
for worldwide representation, manufacturing, marketing and distribution rights
to a zinc/gluconate/glycine lozenge formulation. That formulation has been
patented in the United States, Germany, France, Italy, Sweden, Canada and Great
-12-
Britain and a patent is pending in Japan. However, this patent in the United
States expired in August 2004 and expired in June 2005 in all countries except
Japan.
There can be no assurance that these patents and our exclusive license will
effectively protect our products from duplication by others. In addition, we may
not be able to afford the expense of any litigation which may be necessary to
enforce our rights under any of our patents. Although we believe that our
current and future products do not and will not infringe upon the patents or
violate the proprietary rights of others, if any of our current or future
products do infringe upon the patents or proprietary rights of others, we may
have to modify our products or obtain an additional license for the manufacture
and/or sale of such products. We could also be prohibited from selling the
infringing products. If we are found to infringe on the proprietary rights of
others, we are uncertain whether we will be able to take corrective actions in a
timely manner, upon acceptable terms and conditions, or at all, and the failure
to do so could have a material adverse effect upon our business, financial
condition and operations.
We also use non-disclosure agreements with our employees, suppliers, consultants
and customers to establish and protect the ideas, concepts and documentation of
our confidential non-patented and non-copyright protected proprietary technology
and know-how. However, these methods may not afford complete protection. There
can be no assurance that third parties will not obtain access to or
independently develop our technologies, know-how, ideas, concepts and
documentation, which could have a material adverse effect on our financial
condition.
THE SALES OF OUR PRIMARY PRODUCT FLUCTUATES BY SEASON.
A significant portion of our business is highly seasonal, which causes major
variations in operating results from quarter to quarter. The third and fourth
quarters generally represent the largest sales volume for our cold remedy
products. There can be no assurance that we will be able to manage our working
capital needs and our inventory to meet the fluctuating demand for our products.
Failure to accurately predict and respond to consumer demand may cause us to
produce excess inventory. Conversely, if products achieve greater success than
anticipated for any given quarter, we may not have sufficient inventory to meet
customer demand.
OUR EXISTING PRODUCTS AND OUR NEW PRODUCTS UNDER DEVELOPMENT EXPOSE US TO
POTENTIAL PRODUCT LIABILITY CLAIMS.
Our business exposes us to an inherent risk of potential product liability
claims, including claims for serious bodily injury or death caused by the sales
of our existing products and the clinical trials of our products which are being
developed. These claims could lead to substantial damage awards. We currently
maintain product liability insurance in the amount of, and with a maximum payout
of, $15 million. A successful claim brought against us in excess of, or outside
of, our insurance coverage could have a material adverse effect on our results
of operations and financial condition. Claims against us, regardless of their
merit or eventual outcome, may also have a material adverse effect on the
consumer demand for our products.
WE ARE INVOLVED IN LAWSUITS REGARDING CLAIMS RELATING TO CERTAIN OF OUR
COLD-EEZE(R) PRODUCTS.
We are, from time to time, subject to various legal proceedings and claims,
either asserted or unasserted. Any such claims, including those contained in
Item 3 of this report, whether with or without merit, could be time-consuming
and expensive to defend and could divert management's attention and resources.
While management believes we have adequate insurance coverage and, if
applicable, accrued loss contingencies for all known matters, we cannot assure
that the outcome of all current or future litigation will not have a material
adverse effect on us.
A SUBSTANTIAL AMOUNT OF OUR OUTSTANDING COMMON STOCK IS OWNED BY OUR CHAIRMAN OF
THE BOARD AND PRESIDENT AND OUR EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP CAN
SIGNIFICANTLY INFLUENCE ALL MATTERS VOTED ON BY OUR STOCKHOLDERS.
Guy J. Quigley, our Chairman of the Board, President and Chief Executive
Officer, through his beneficial ownership, has the power to vote approximately
33.2% of our common stock. Mr. Quigley and our other executive officers and
directors collectively beneficially own approximately 48.7% of our common stock.
These individuals have significant influence over the outcome of all matters
submitted to stockholders for approval, including election of directors.
Consequently, they exercise substantial control over all of our major decisions
which could prevent a change of control of us.
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OUR STOCK PRICE IS VOLATILE.
The market price of our common stock has experienced significant volatility.
From January 1, 2002 to March 10, 2006, our per share bid price has ranged from
a low of approximately $2.03 to a high of approximately $16.94. There are
several factors which could affect the price of our common stock, some of which
are announcements of technological innovations for new commercial products by us
or our competitors, developments concerning propriety rights, new or revised
governmental regulation or general conditions in the market for our products.
Sales of a substantial number of shares by existing stockholders could also have
an adverse effect on the market price of our common stock.
FUTURE SALES OF SHARES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD ADVERSELY
AFFECT THE TRADING PRICE OF SHARES OF OUR COMMON STOCK AND OUR ABILITY TO RAISE
FUNDS IN NEW STOCK OFFERINGS.
Future sales of substantial amounts of shares of our common stock in the public
market, or the perception that such sales are likely to occur, could affect
prevailing trading prices of our common stock and, as a result, the value of the
notes. As of March 10, 2006, we had 11,678,478 shares of common stock
outstanding.
We also have outstanding options to purchase an aggregate of 3,068,750 shares of
common stock at an average exercise price of $7.58 per share and outstanding
warrants to purchase an aggregate of 1,555,000 shares of common stock at an
exercise price of $4.76 per warrant. If the holders of these shares, options or
warrants were to attempt to sell a substantial amount of their holdings at once,
the market price of our common stock would likely decline. Moreover, the
perceived risk of this potential dilution could cause stockholders to attempt to
sell their shares and investors to "short" the stock, a practice in which an
investor sells shares that he or she does not own at prevailing market prices,
hoping to purchase shares later at a lower price to cover the sale. As each of
these events would cause the number of shares of our common stock being offered
for sale to increase, the common stock's market price would likely further
decline. All of these events could combine to make it very difficult for us to
sell equity or equity-related securities in the future at a time and price that
we deem appropriate.
WE DO NOT INTEND TO PAY CASH DIVIDENDS IN THE FORESEEABLE FUTURE.
We have not paid cash dividends on our common stock since our inception. We
currently intend to retain earnings, if any, for use in our business and do not
anticipate paying any cash dividends to our stockholders in the foreseeable
future.
OUR ARTICLES OF INCORPORATION AND BY-LAWS CONTAIN CERTAIN PROVISIONS THAT MAY BE
BARRIERS TO A TAKEOVER.
Our Articles of Incorporation and By-laws contain certain provisions which may
deter, discourage, or make it difficult to assume control of us by another
corporation or person through a tender offer, merger, proxy contest or similar
transaction or series of transactions. These provisions may deter a future
tender offer or other takeover attempt. Some stockholders may believe such an
offer to be in their best interest because it may include a premium over the
market price of our common stock at the time. In addition, these provisions may
assist our current management in retaining its position and place it in a better
position to resist changes which some stockholders may want to make if
dissatisfied with the conduct of our business.
WE HAVE AGREED TO INDEMNIFY OUR OFFICERS AND DIRECTORS FROM LIABILITY.
Sections 78.7502 and 78.751 of the Nevada General Corporation Law allow us to
indemnify any person who is or was made a party to, or is or was threatened to
be made a party to, any pending, completed, or threatened action, suit or
proceeding because he or she is or was a director, officer, employee or agent of
ours or is or was serving at our request as a director, officer, employee or
agent of any corporation, partnership, joint venture, trust or other enterprise.
These provisions permit us to advance expenses to an indemnified party in
connection with defending any such proceeding, upon receipt of an undertaking by
the indemnified party to repay those amounts if it is later determined that the
party is not entitled to indemnification. These provisions may also reduce the
likelihood of derivative litigation against directors and officers and
discourage or deter stockholders from suing directors or officers for breaches
of their duties to us, even though such an action, if successful, might
otherwise benefit us and our stockholders. In addition, to the extent that we
expend funds to indemnify directors and officers, funds will be unavailable for
operational purposes.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable
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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 $2,537. 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 the Company are located in each of Elizabethtown
and Lebanon, Pennsylvania. The facilities were purchased effective October 1,
2004. 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 28,350 square feet. The current monthly lease cost of
this office and warehouse space is $11,772 with the leases set to expire in July
2007. The Company expects that these leases will be renewed or that alternative
spaces will be obtained.
The Company believes that its existing facilities are adequate at this time.
ITEM 3. LEGAL PROCEEDINGS
TESAURO AND ELEY VS. THE QUIGLEY CORPORATION
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 which have been argued and briefed and have been
pending before the Court for determination since March 2005. The Company is
vigorously defending this lawsuit and believes that the action lacks merit.
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. 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. Defense counsel takes
the position that the science proposed in the litigation appears to be more
advanced than the science which exists in peer reviewed medical journals.
Whether the court will admit the testimony relating to the science behind
plaintiff's claims, is not a matter which we can predict at this time.
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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. On September 17, 2004, the Company removed the case to the
United States District Court for the District of Minnesota. 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. Discovery should be completed in
this matter within 120 days and trial is scheduled for October 2006.
The Company has investigated the claims and believes that they are without
merit. 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.
Defense counsel takes the position that the science proposed in the litigation
appears to be more advanced than the science which exists in peer reviewed
medical journals. Whether the court will admit the testimony relating to the
science behind plaintiff's claims, is not a matter which we can predict at this
time.
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 Company. 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 Company 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. Defense counsel takes
the position that the science proposed in the litigation appears to be more
advanced than the science which exists in peer reviewed medical journals.
Whether the court will admit the testimony relating to the science behind
plaintiffs' claims, is not a matter which we can predict at this time.
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 relating to the Cold-Eeze
formulations and manufacturing methods; injunctive relief for breach of the duty
of loyalty; and declaratory judgment pending the Company's payment of
commissions to defendants. 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 meritless.
At the present time, discovery is being conducted by the Company on its claims
and on the counterclaims brought by John C. Godfrey, et al.
The Company believes Defendant's claims are without merit, and it is vigorously
defending the counterclaims 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.
-16-
AXIS SPECIALTY INSURANCE CO. VS. THE QUIGLEY CORPORATION
This action, filed in January 2005, 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 concerning certain product
liability claims related to the Company's nasal spray product. 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.
The Company denied the material allegations of the carrier's complaint, and
asserted its own counterclaim also seeking declaratory relief to establish the
extent of its excess liability coverage. Thereafter, the parties engaged in
discovery to establish a record upon which the court could decide the matter
based on summary judgment motions on the carrier's claims and the Company's
counterclaims. Both parties sought summary judgment in motions submitted to the
court in the fall of 2005. On February 16, 2006, the court handed down its
ruling, in which the court granted in part and denied in part both the carrier's
motion and the Company's motion. The effect of the court's ruling is that the
plaintiff insurer's responsibility for excess coverage is limited to claims for
damages for bodily injury or property damage that occurred on or after April 6,
2004, but leaves uncertain coverage for claims filed after April 6, 2004 by
persons who contacted the Company before then. Although the Company is
evaluating grounds for appeal, and cannot rule out an appeal by the carrier, the
court's ruling both clarifies the Company's potential exposure as well as
establishes a basis for the Company to seek redress against parties liable for
any lack of adequate excess insurance coverage for this exposure.
Based upon the information the Company has at this time relative to the defense
of claims occurring before April 6, 2004, the Company believes that the claims
are without merit and is fully defending those claims through insurance counsel.
However, at this time no prediction as to the outcome can be made of these
claims and whether insurance coverage from the period prior to April 6, 2004 is
adequate for coverage of all claims.
CYNTHIA AARON VS. THE QUIGLEY CORPORATION, ET AL
On March 15, 2005, a complaint was filed in the Superior Court for San Diego
County, California. This complaint was served on the Company on April 21, 2005.
The plaintiff's complaint consists of causes of action sounding in negligence,
negligent products liability, breach of warranty of merchantability, breach of
express warranty, strict products liability and failure to warn. The action
alleges that the plaintiff suffered certain losses and injuries as a result of
using the Company's nasal spray product. Discovery in this case will be
completed within 120 days and trial is scheduled for September 18, 2006.
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 on the Company. However,
at this time no prediction as to the outcome can be made. Insurance defense
counsel has informed the Company that counsel is unable to evaluate the
likelihood of an unfavorable outcome at this time. Defense counsel takes the
position that the science proposed in the litigation appears to be more advanced
than the science which exists in peer reviewed medical journals. Whether the
court will admit the testimony relating to the science behind plaintiff's
claims, is not a matter which we can predict at this time.
DOLORES SMITH VS. THE QUIGLEY CORPORATION
On May 25, 2005, a complaint was filed in the Court of Common Pleas of Bucks
County, Pennsylvania. The complaint was served on the Company on or about June
14, 2005. The plaintiff's complaint consists of counts of negligence, strict
product liability, breach of express warranty, breach of implied warranty, and
violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law
and other Consumer Protection Statutes relating to the use of the Company's
COLD-EEZE Nasal Spray Product.
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 on the Company. However,
at this time no prediction as to the outcome can be made. Defense counsel takes
the position that the science proposed in the litigation appears to be more
advanced than the science which exists in peer reviewed medical journals.
Whether the court will admit the testimony relating to the science behind
plaintiff's claims, is not a matter which we can predict at this time.
RICHARD FLYNN VS. THE QUIGLEY CORPORATION, ET AL
On May 20, 2005, a complaint was filed in the Superior Court of Orange County,
California. This complaint was served on the Company on June 2, 2005. The action
-17-
alleges that the plaintiff suffered certain losses and injuries as a result of
using the Company's nasal spray product. The complaint consists of causes of
action sounding in negligence, products liability, and punitive damages.
The Company believes plaintiff's claims are without merit and is vigorously
defending those claims. In particular, much of the complaint references acts of
the Company during a period of time when it did not offer for sale the COLD-EEZE
Nasal Spray Product which is the basis of the plaintiff's claim. Based upon the
information the Company has at this time, it believes the action will not have a
material impact on the Company. However, at this time no prediction as to the
outcome can be made. Defense counsel takes the position that the science
proposed in the litigation appears to be more advanced than the science which
exists in peer reviewed medical journals. Whether the court will admit the
testimony relating to the science behind plaintiff's claims, is not a matter
which we can predict at this time.
KEITH J. KOCHIE VS. THE QUIGLEY CORPORATION, ET AL
On August 2, 2005, a complaint was filed in the United States District Court for
the Eastern District of New York. The complaint was served on the Company on or
about September 1, 2005. The plaintiff's complaint consists of counts for
negligence, strict product liability, breach of express warranty, breach of
implied warranties, fraudulent misrepresentation, fraudulent concealment,
negligent misrepresentation, and fraud and deceit relating to the use of the
Company's COLD-EEZE Nasal Spray Product.
The Company believes plaintiff's claims are without merit and is vigorously
defending those actions. Based upon the information the Company has at this
time, it believes the action will not have a material impact on the Company.
However, at this time no prediction as to the outcome can be made. Defense
counsel takes the position that the science proposed in the litigation appears
to be more advanced than the science which exists in peer reviewed medical
journals. Whether the court will admit the testimony relating to the science
behind plaintiff's claims, is not a matter which we can predict at this time.
DOMINIC DOMINIJANNI, SONJA FORSBERG-WILLIAMS, VINT PAYNE,
MURRAY LOU ROGERS, AND RANDY STOVER
VS. THE QUIGLEY CORPORATION
On January 6, 2006, five (5) plaintiffs filed an action in the Court of Common
Pleas of Bucks County, Pennsylvania, against the Company. The action alleges
that the plaintiff suffered certain losses and injuries as a result of using the
Company's nasal spray product. The complaint was served on the Company on
January 31, 2006. Plaintiffs' complaint consists of counts for negligence,
strict products liability (failure to warn), strict products liability
(defective design), breach of express and implied warranties, and a claim of
violations under the Pennsylvania Unfair Trade Practices and Consumer Protection
Law and other consumer protection statutes.
The Company believes plaintiffs' claims are without merit and is vigorously
defending those actions. Based upon the information the Company has at this
time, it believes the action will not have a material impact on the Company.
However, at this time no prediction as to the outcome can be made. Defense
counsel takes the position that the science proposed in the litigation appears
to be more advanced than the science which exists in peer reviewed medical
journals.
Whether the court will admit the testimony relating to the science behind
plaintiffs' claims, is not a matter which we can predict at this time.
GREG SCRAGG VS THE QUIGLEY CORPORATION, ET AL
On November 30, 2005, an action was brought in the Colorado District Court in
Denver, Colorado. The complaint was served on the Company soon thereafter. The
action alleges that the plaintiff suffered certain losses and injuries as a
result of using the Company's nasal spray product. The complaint consists of
counts for fraud and deceit (fraudulent concealment), negligent
misrepresentation, strict liability (failure to warn), and strict product
liability (design defect). On January 13, 2006, the case was removed to Federal
District Court.
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 on the Company. However,
at this time no prediction as to the outcome can be made. Defense counsel takes
the position that the science proposed in the litigation appears to be more
advanced than the science which exists in peer reviewed medical journals.
Whether the court will admit the testimony relating to the science behind
plaintiff's claims, is not a matter which we can predict at this time.
-18-
GARRY KOMINAKIS VS. THE QUIGLEY CORPORATION, ET AL
On December 13, 2005, an action was brought in the Superior Court of the State
of California (Western Division - Los Angeles). The complaint was served on the
Company on December 27, 2005. The case was removed to Federal District Court on
January 25, 2006. The action alleges that the plaintiff suffered certain losses
and injuries as a result of using the Company's nasal spray product. The
complaint consists of counts for strict liability (products liability),
negligence, and breach of implied and express warranties.
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 on the Company. However,
at this time no prediction as to the outcome can be made. Defense counsel takes
the position that the science proposed in the litigation appears to be more
advanced than the science which exists in peer reviewed medical journals.
Whether the court will admit the testimony relating to the science behind
plaintiff's claims, is not a matter which we can predict at this time.
DARIUS INTERNATIONAL INC., AND INNERLIGHT INC., F/K/A DARIUS
MARKETING INC. VS. ROBERT O. YOUNG AND SHELLEY R. YOUNG
(FEDERAL DISTRICT COURT - EASTERN DISTRICT, PA)
In this action, the Company seeks injunctive relief and monetary damages against
two individuals for violation of a non-competition agreement between a wholly
owned subsidiary of the Company, Innerlight Inc., and the defendants, each of
whom are also under agreement to serve as consulting to the Company.
In late November, 2005, the Company learned that the defendants had launched a
line of nutritional supplement products that competed with Innerlight products.
Defendants promoted their line of products by a website, among other means. The
Company moved for a temporary restraining order against the defendants, which
the court denied; however, the court ordered expedited discovery and scheduled a
preliminary injunction hearing. Before the hearing, the Company amended its
complaint to add counts against defendants for unfair competition, trademark
infringement and other causes, which the court allowed. In response, defendants
initially moved to dismiss the case. While not ruling on defendants' motion
formally, the court stated that it was inclined to deny the motion. Defendants
answered the complaint and asserted nine counterclaims, including: breach of
contract; breach of covenant of good faith and fair dealing; unjust enrichment;
conversion; common law trademark infringement; common law violation of the right
to publicity; violation of abuse of personal identity act; injunctive relief;
and declaratory relief.
After the preliminary injunction hearing, the parties briefed the court on the
significance of the hearing evidence in relation to the parties' respective
claims. On February 17, 2006, the court held oral argument on the motion for
preliminary injunction. A ruling is expected by mid-March, 2006.
The Company believes that the defendants' counterclaims are without merit and is
vigorously defending those counterclaims and is prosecuting its action on its
complaint. Based upon the information the Company has at this time, it believes
the counterclaim actions are without merit. However, at this time no prediction
as to the outcome can be made.
ROBERT O. AND SHELLEY YOUNG VS. DARIUS INTERNATIONAL INC.
AND INNERLIGHT INC., (UTAH THIRD PARTY COMPLAINTS)
On September 14, 2005, a third-party complaint was filed by Shelley R. Young in
Fourth District Court in Provo, Utah against Innerlight Inc. and its parent
company, Darius. Robert O. Young has filed a motion to intervene to join as a
third-party plaintiff with Shelley R. Young. On November 3, 2005, Shelley and
Robert Young filed a parallel suit also in Fourth District Court in Provo, Utah.
The allegations in both complaints include, but are not limited to, an alleged
breach of contract by Innerlight Inc. for alleged failures to make certain
payments under an asset purchase agreement entered into by all parties.
Additional allegations stem from this alleged breach of contract including
unjust enrichment, trademark infringement and alleged violation of rights of
publicity. The plaintiffs are seeking both monetary and injunctive relief.
Innerlight Inc. has objected to the complaint in the third-party action based on
procedural deficiencies and other grounds. In the second action the Court has
granted Innerlight Inc. and Darius permission to defer answering until the court
can determine whether or not Provo, Utah, is the proper venue to hear these
allegations.
In connection with the Utah actions the Company has sued the Youngs in Equity in
the Court of Common Pleas of Philadelphia County, PA, and in United States
District Court for the Eastern District of Pennsylvania. The Company has alleged
breach of contract, including but not limited to breach of non-competition
provisions in a consulting agreement between the parties and is seeking
unspecified damages and injunctive relief. The Company believes the plaintiff's
-19-
allegations against Innerlight Inc. and Darius in Provo, Utah are without merit
and it is vigorously defending against these claims. Innerlight Inc. and Darius
have filed motions to stay both actions filed in Utah pending resolution of the
litigation in PA. Further, the Company is actively prosecuting its state and
federal actions in PA. However, at this time no prediction as to the outcome can
be made.
BRIGITTE YVON & KLAUS YVON VS. THE QUIGLEY CORPORATION, ET AL
On October 12, 2005, the Plaintiffs instituted an action against Caribbean
Pacific Natural Products, Inc. and other defendants for personal injuries as a
result of being hit by a chair on the pool deck of Waikoloa Beach Marriott Hotel
d/b/a Outrigger Enterprises, Inc. in Honolulu, Hawaii. On December 9, 2005, the
Company was added as an additional defendant without notice to this case. The
main defendant in the case is Caribbean Pacific Natural Products, Inc. in which
the Company formerly held stock. On January 22, 2003, all Caribbean Pacific
Natural Products Inc. shares owned by the Company were sold to Suncoast
Naturals, Inc. in return for stock of Suncoast Naturals, Inc. At the time of the
accident, the Company had no ownership interest in Caribbean Pacific Natural
Products, Inc.
The Company believes that the plaintiffs' claims are without merit and is
vigorously defending this action. At the present time this matter is being
defended by the Company's liability insurance carrier and a motion to dismiss is
pending before the Federal District Court in Honolulu, Hawaii.
NICODROPS, INC. VS. QUIGLEY MANUFACTURING INC.
On January 30, 2006, QMI was put on notice of a claim by Nicodrops, Inc.
Nicodrops, Inc. has claimed that the packaging contained incorrect expiration
dates and caused it to lose sales through two (2) retailers. The total alleged
sales of Nicodrops was approximately $250,000 and Nicodrops is claiming
unspecified damages exceeding $2,000,000.
No suit has been filed. The Company is investigating this claim. Based on its
investigation to date, the Company believes the claim is without merit. However,
at this time no prediction can be made as to the outcome of this case.
TERMINATED LEGAL PROCEEDINGS
LITIGATION - FORMER EMPLOYEES
On April 12, 2002, the Company commenced a complaint in Equity in the Court of
Common Pleas of Bucks County, Pennsylvania, against the former President of
Darius International Inc., its wholly owned subsidiary, following termination of
such President. The allegations in the complaint included, but were not limited
to, an alleged breach of fiduciary duty owed to the Company. The Company sought
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
requested the return of certain intellectual property used to commence and
continue Darius' operations. On April 15, 2005, a Settlement Agreement and
Mutual Release was executed between the Company, its subsidiaries and the
defendants, Ronald Howell, Deborah Howell, Pro Pool, LLC, One Source, LLC, Pro
Marketing LLC, and Eric Kaytes. All of defendants' counterclaims were withdrawn
and dismissed with prejudice. In addition to the monetary consideration, Howell
surrendered to the Company for cancellation 40,993 shares of the Company's
common stock and agreed to forego any claim for any additional stock, warrants,
stock options or other securities of or interest in the Company, Darius, Darius
Marketing Inc., and Innerlight Inc. that were or could have been made in the
lawsuits. Defendant Kaytes surrendered options/warrants in the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
-20-
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
------------
2005 2004
----------------------- ---------------------------
Quarter Ended High Low High Low
------------- ---- --- ---- ---
March 31 $8.85 $7.27 $10.89 $8.50
June 30 $9.28 $7.79 $10.29 $6.92
September 30 $10.50 $8.41 $9.94 $7.35
December 31 $16.94 $7.25 $9.92 $7.56
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, 2005, there were approximately 325 holders of record of the
Company's Common Stock, including brokerage firms, clearing houses, and/or
depository firms holding the Company's securities for their respective clients.
The exact number of beneficial owners of the Company's securities is not known
but exceeds 400.
DIVIDENDS
The Company has not declared, nor paid, any cash dividends on its Common Stock.
At this time the Company intends to retain its earnings to finance future growth
and maintain liquidity.
WARRANTS AND OPTIONS
In addition to the Company's outstanding Common Stock, there are, as of December
31, 2005, 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" 805,000 $1.7500 June 30, 2006
CLASS "F" 200,000 $2.5000 November 4, 2006
CLASS "G" 550,000 $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 260,750 $0.8125 December 20, 2010
Option Plan 278,500 $1.2600 December 10, 2011
Option Plan 314,500 $5.1900 July 30, 2012
Option Plan 62,500 $5.4900 December 17, 2012
Option Plan 415,000 $8.1100 October 29, 2013
Option Plan 490,000 $9.5000 October 26, 2014
Option Plan 520,000 $13.8000 December 11, 2015
At December 31, 2005, there were 4,623,750 unexercised and vested options and
warrants of the Company's Common Stock available for exercise.
-21-
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 of Outstanding Compensation Plans
Outstanding Options & (Excluding Securities
Plan Category Options & Warrants Warrants Reflected in Column A)
(A) (B) (C)
- --------------------------------------------------- -------------------- --------------- -- -------------------------
Equity Plans Approved by Security Holders (1) 3,068,750 $7.58 1,184,000
Equity Plans Not Approved by Security Holders (2) 1,555,000 $4.76 -
Total 4,623,750 $6.63 1,184,000
(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.
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, 2005, 2004, 2003, 2002 and 2001.
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,
2005 2004 2003 2002 2001
--------------------------------------------------------------------------
STATEMENT OF INCOME DATA:
Net sales $53,658 $43,948 $41,499 $29,272 $21,226
Total revenue 53,658 43,948 41,499 29,421 22,772
Gross profit 27,834 20,375 20,011 12,212 12,551
Income (loss) - continuing operations 3,217 453 729 (5,132) 934
Loss - discontinued operations (1) -- -- (54) (1,322) (718)
Net income (loss) 3,217 453 675 (6,454) 216
Basic earnings (loss) per share:
Continuing operations $0.28 $0.04 $0.06 ($0.47) $0.09
Discontinued operations -- -- -- ($0.12) ($0.07)
Net income (loss) $0.28 $0.04 $0.06 ($0.59) $0.02
Diluted earnings (loss) per share:
Continuing operations $0.24 $0.03 $0.05 ($0.47) $0.09
Discontinued operations -- -- -- ($0.12) ($0.07)
Net income (loss) $0.24 $0.03 $0.05 ($0.59) $0.02
Weighted average shares outstanding:
Basic 11,661 11,541 11,467 10,894 10,675
Diluted 13,299 14,449 14,910 10,894 10,751
As of As of As of As of As of
December 31, December 31, December 31, December 31, December 31,
2005 2004 2003 2002 2001
-------------- ------------- ------------- -------------- -------------
BALANCE SHEET DATA:
Working capital $20,682 $17,853 $18,257 $16,662 $18,626
Total assets 35,976 31,530 26,270 24,935 24,756
Debt 1,464 2,893 -- -- --
Stockholders' equity $25,320 $21,902 $20,787 $19,121 $21,200
-22-
(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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
The Company, headquartered in Doylestown, Pennsylvania, is a leading
manufacturer, marketer and distributor of a diversified range of homeopathic and
health products which comprise the Cold Remedy, Health and Wellness and Contract
Manufacturing segments. The Company is also involved in the research and
development of potential prescription products that comprise the Ethical
Pharmaceutical segment.
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 in 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. Effective October 1, 2004, the Company acquired
substantially all of the assets of JoEl, Inc., the previous manufacturer of the
Cold-Eeze(R) lozenge product. 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, which is an FDA approved facility, produces a variety of hard and organic
candy for sale to third party customers in addition to performing contract
manufacturing activities for non-related entities. The Cold-Eeze(R) products
reported an improved sales performance in 2005 due to effective product support
by means of media and in-store advertising; the introduction of new Cold-Eeze(R)
flavors; and increased consumer demand for Cold-Eeze(R) as indicated by
Information Resources Incorporated (IRI) data. During 2005, the margin of the
Cold Remedy segment was improved as a result of the impact of the Cold-Eeze(R)
now being produced by the manufacturing subsidiary and forming part of the
consolidated results of the Company. However, these gains were offset by
substantially lower gross profit margins on the Contract Manufacturing segment's
non cold remedy sales and non-manufacturing operating costs of the manufacturing
subsidiary being included in current operations rather than being carried as
inventory and cost of sales as was the case prior to October 1, 2004.
Our Health and Wellness segment is operated through Darius International Inc.
("Darius"), a wholly owned subsidiary of the Company which was formed in January
2000 to introduce new products to the marketplace through a network of
independent distributor representatives. Darius is a direct selling organization
specializing in proprietary 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. This segment's 2005 net sales remained relatively unchanged compared
to 2004 due to a decline in the number of active domestic independent
distributor representatives, which was offset by this segment's gain in
international sales of 54.3%.
In January 2001, the Company formed an Ethical Pharmaceutical segment, Quigley
Pharma Inc. ("Pharma"), that is under the direction of its Executive Vice
President and Chairman of its Medical Advisory Committee. Pharma was formed for
the purpose of developing naturally derived prescription drugs. 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.
The Company continues to invest significantly with ongoing research and
development activities of this segment.
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 and the requirements
associated with the development of Pharma's potential prescription drugs in
order to continue to compete on a national and international level. The
continued expansion of Darius is dependent on the Company retaining existing
independent distributor representatives and recruiting additional active
representatives both internationally and within the United States, continued
conformity with government regulations, a reliable information technology system
capable of supporting continued growth and continued reliable sources for
product and materials to satisfy consumer demand.
-23-
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
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.
In December 2004, the FASB issued Statement 123 (revised 2004),"SHARE-BASED
PAYMENT." The standard eliminates the disclosure-only election under the prior
SFAS 123 and requires the recognition of compensation expense for stock options
and other forms of equity compensation based on the fair value of the
instruments on the date of grant. The standard is effective for fiscal years
beginning after June 15, 2005. In March 2005, the Securities & Exchange
Commission (the "SEC") issued Staff Accounting Bulletin No. 107, "Share-Based
Payment" ("SAB 107"). SAB 107 summarizes the views of the SEC staff regarding
the interaction between SFAS No. 123 (Revised 2004), "Share-Based Payment"
("SFAS 123R") and certain SEC rules and regulations, and is intended to assist
in the initial implementation of SFAS 123R, which for the Company is required by
the beginning of its fiscal year 2006. The Company had no unvested options as of
December 31, 2005 and therefore the adoption of this standard will not have an
impact on the Company's consolidated balance sheets and statements of
operations, shareholders' equity and cash flows.
In December 2004, the FASB issued Statement 153,"EXCHANGES OF NONMONETARY
ASSETS, AN AMENDMENT OF APB OPINION NO.29." The standard is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged and eliminates the exception under APB
Opinion No. 29 for an exchange of similar productive assets and replaces it with
an exception for exchanges of nonmonetary assets that do not have commercial
substance. The standard is effective for nonmonetary exchanges occurring in
fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 did
not have a material impact on the Company's financial position or results of
operations.
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
154, "ACCOUNTING CHANGES AND ERROR CORRECTIONS, A REPLACEMENT OF APB OPINION NO.
20 AND FASB STATEMENT NO. 3." The standard requires retrospective application to
prior periods' financial statements of a voluntary change in accounting
principle unless it is deemed impracticable. The standard states that a change
in method of depreciation, amortization or depletion for long-lived,
non-financial assets be accounted for as a change in accounting estimate that is
affected by a change in accounting principle. The standard is effective for
accounting changes and corrections of errors made occurring in fiscal years
beginning after December 15, 2005. The impact on the Company's financial
position or results of operations as a result of the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 154 cannot be determined.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
The Company is organized into four different but related business segments, Cold
Remedy, Health and Wellness, Contract Manufacturing and Ethical Pharmaceutical.
When providing for the appropriate sales returns, allowances, cash discounts and
cooperative advertising costs, each segment applies a uniform and consistent
method for making certain assumptions for estimating these provisions that are
applicable to that specific segment. Traditionally, these provisions are not
material to net income in the Health and Wellness and Contract Manufacturing
segments. The Ethical Pharmaceutical segment does not have any revenues.
The product in the Cold Remedy segment, Cold-Eeze(R), has been clinically proven
in two double-blind studies to reduce the severity and duration of common cold
symptoms. Accordingly, factors considered in estimating the appropriate sales
returns and allowances for this product include it being: a unique product with
limited competitors; competitively priced; promoted; unaffected for remaining
shelf life as there is no expiration date; monitored for inventory levels at
major customers and third-party consumption data, such as Information Resources,
Inc. ("IRI").
-24-
At December 31, 2005 and 2004 the Company included reductions to accounts
receivable for sales returns and allowances of $635,000 and $1,109,000,
respectively, and cash discounts of $178,000 and $92,000, respectively.
Additionally, current liabilities at December 31, 2005 and 2004 include
$1,067,072 and $743,000, respectively for cooperative advertising costs.
The roll-forward of the sales returns and allowance reserve ending at December
31 is as follows:
Account - Sales Returns & Allowances 2005 2004
- --------------------------------------------------------------------------------------------------------------
Beginning balance $1,109,171 $403,850
Provision made for future charges relative to sales for each period 678,127 1,414,796
presented
Current provision related to discontinuation of Cold-Eeze(R) nasal spray 183,716 625,756
Actual returns & allowances recorded in the current period presented (1,336,434) (1,335,231)
-------------- -------------
Ending balance $634,580 $1,109,171
============== =============
The reduction in the 2005 provision as compared to 2004 was principally due to
the initiation of specific limits on product returns from customers, greater
product acceptance and further enhanced evaluation of return requests from
customers relative to the Cold Remedy segment.
Management believes there are no material charges to net income in the current
period, related to sales from a prior period.
REVENUE
Provisions to reserves to reduce revenues for cold remedy products that do not
have an expiration date, include the use of estimates, which are applied or
matched to the current sales for the period presented. These estimates are based
on specific customer tracking and an overall historical experience to obtain an
effective applicable rate, which is tested on an annual basis and reviewed
quarterly to ascertain the most applicable effective rate. Additionally, the
monitoring of current occurrences, developments by customer, market conditions
and any other occurrences that could affect the expected provisions relative to
net sales for the period presented are also performed.
A one percent deviation for these consolidated reserve provisions for the years
ended December 31, 2005, 2004 and 2003 would affect net sales by approximately
$599,000, $481,000 and $455,000, respectively. A one percent deviation for
cooperative advertising reserve provisions for the years ended December 31,
2005, 2004 and 2003 could affect net sales by approximately $352,000, $275,000
and $241,000, respectively.
The reported results include a remaining returns provision of approximately
$184,000 and $626,000 at December 31, 2005 and December 31, 2004, respectively
in the event of future product returns following the discontinuation of the
Cold-Eeze(R) Cold Remedy Nasal Spray product in September 2004.
INCOME TAXES
The Company has recorded a valuation allowance against its net deferred tax
assets. Management believes that this allowance is required due to the
uncertainty of realizing these tax benefits in the future. The uncertainty
arises because the Company may incur substantial research and development costs
in its Ethical Pharmaceutical segment.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 2005 COMPARED WITH SAME PERIOD 2004
Net sales for 2005 were $53,658,043 compared to $43,947,995 for 2004, reflecting
an increase of 22.1% in 2005. Revenues, by segment, for 2005 were Cold Remedy,
$29,284,651; Health and Wellness, $20,473,050; and Contract Manufacturing,
$3,900,342, as compared to 2004 when the revenues for each respective segment
were $22,834,249, $20,361,391 and $752,355.
The Cold Remedy segment reported a sales increase in 2005 of $6,450,402 or
28.2%. During 2005 the Company continued to strongly support the Cold-Eeze(R)
product line through media and in-store advertising and the introduction of new
Cold-Eeze(R) flavors thereby increasing the profile of the product through line
extension. Cold-Eeze(R) product unit consumption increased by 27% in 2005 as
measured by Information Resources Incorporated (IRI) data.
-25-
The Health and Wellness segment's net sales increased in 2005 by $111,659 or
0.5%. International sales for this segment increased by 54.3% due to an increase
in the number of independent international distributor representatives in 2005
with offset due to a decline in the number of active domestic independent
distributor representatives.
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.
Sales for this segment in 2005 increased by $3,147,887 as the 2004 period
consisted of three months activity.
Cost of sales from continuing operations for 2005 as a percentage of net sales
was 48.1%, compared to 53.6% for 2004. The cost of sales percentage for the Cold
Remedy segment decreased in 2005 by 6.2% primarily due to the impact of the
discontinuation of the nasal spray product in 2004 and the conclusion of the
Company's royalty obligations to the founders in May 2005. The 2004 nasal
product 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 2005 by 1.6% largely attributable to costs
associated with increased international sales activity, product mix and
variations in the independent distributor representative commission cost. The
2005 consolidated cost of sales was favorably impacted as a result of the
consolidation effects of the manufacturing facility as it relates to
Cold-Eeze(R). These gross profit gains of the Cold Remedy segment were offset by
substantially lower gross profit margins for the Contract Manufacturing segment,
which is significantly lower than the other operating segments.
Selling, marketing and administrative expenses for 2005 were $21,070,307
compared to $16,960,313 in 2004. The increase in 2005 was primarily due to
increased sales brokerage commission costs of $816,000 due to significantly
improved sales performance; the addition of Quigley Manufacturing Inc., for the
whole of 2005 resulted in increased selling and administration costs of
$1,276,459; insurance costs increased by $435,920, with the remaining increase
largely due to increased payroll costs. Selling, marketing and administrative
expenses, by segment, in 2005 were Cold Remedy $13,519,967, Health and Wellness
$5,249,296, Pharma $724,394 and Contract Manufacturing $1,576,650, as compared
to 2004 of $11,068,726, $5,098,834, $492,562 and $300,191, respectively.
Research and development costs for 2005 and 2004 were $3,784,221 and $3,232,569,
respectively. Principally, the increase in research and development expenditure
was the result of decreased cold-remedy related product testing costs in 2005
compared to the prior year, offset by increased Pharma study costs of
approximately $756,000 in 2005.
During 2005, the Company's major operating expenses of salaries, brokerage
commissions, promotion, advertising, and legal costs accounted for approximately
$16,922,587 (68.1%) of the total operating expenses of $24,854,528, an increase
of 31.2% over the 2004 amount of $12,900,314 (63.9%) of total operating expenses
of $20,192,882, largely the result of increased sales brokerage commission costs
and increased payroll costs in 2005. The 2005 amounts reflect the inclusion of
QMI for the twelve months of 2005 compared to three months in 2004.
Total assets of the Company at December 31, 2005 and 2004 were $35,975,639 and
$31,529,756, respectively. Working capital increased by $2,829,352 to
$20,682,262 at December 31, 2005. The primary influences on working capital
during 2005 were: the increase in cash balances, increased account receivable
balances due to increased sales, increased inventory on hand as a result of
increased sales including international activity; increased accrued royalties
and sales commissions as a result of litigation between the Company and the
developer of Cold-Eeze(R) and increased advertising payable balances due to
increased advertising activity in the latter part of 2005 and related seasonal
factors.
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
-26-
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, reductions in inventory on hand as a result of
increased revenues; 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 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.
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 $1,035,715. The Company is in
compliance with all related loan covenants.
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.
-27-
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,
has been paid to two of the officers of the Company, who are also directors and
stockholders of the Company, and whose agreements expired in May 2005. The
expenses for the respective periods relating to such agreements amounted to
$1,745,748, $2,058,965 and $1,805,294 for the twelve months periods ended
December 31, 2005, 2004 and 2003, respectively. Amounts accrued for these
expenses at December 31, 2005 and 2004 were $2,077,411 and $1,129,654,
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 exclusivity, consulting, marketing presentations,
confidentiality and non-compete arrangements. Amounts paid or payable under such
agreement during 2005, 2004 and 2003 were $838,607, $800,881 and $880,091,
respectively. Amounts payable under such agreement at December 31, 2005 and 2004
were $58,597 and $60,876, respectively.
Certain operating leases for office and warehouse space maintained by the
Company resulted in rent expense for the years ended December 31, 2005, 2004 and
2003, of $227,701, $335,226, and $255,078, respectively. The future minimum
lease obligations under these operating leases are approximately $240,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $20,682,262 and $17,852,910 at December 31,
2005 and 2004, respectively. Changes in working capital overall have been
primarily due to the following items: cash balances increased by $2,518,729;
account receivable balances increased by $1,504,161 due to increased sales and
effective collection practices; inventory increased by $445,382 due to sales
growth and product line extensions along with increased international sales
activity; accrued advertising increased by $941,403 due to variations in media
advertising scheduling between years and seasonal factors; accrued royalties and
sales commissions increased by $1,505,517 largely due to the effects of certain
litigation in progress. Long-term debts decreased by $1,428,571 as a result of
the prepayment of $1,000,000 in April 2005 against this debt and recurring
monthly principal repayments. This item relates to the loan liability following
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, 2005 were $16,885,170 compared to $14,366,441 at December 31, 2004.
Management believes that its 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.
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.
-28-
CONTRACTUAL OBLIGATIONS
The Company's future contractual obligations and commitments at December 31,
2005 consist of the following:
Payment Due by Period
---------------------
Less than 1-3 4-5 More than
Contractual Obligations Total 1 year years years 5 years
- -------------------------------- ------------- -------------- ------------- --------------- ------------
Long-Term Debt Obligations (1) $1,464,286 $428,571 $857,142 $178,573 -
Operating Lease Obligations 271,000 180,000 91,000 - -
Purchase Obligations 62,000 62,000 - - -
Research and Development 3,230,000 3,230,000 - - -
Advertising 1,000,000 1,000,000 - - -
------------- -------------- ------------- --------------- ------------
Total Contractual Obligations $6,027,286 $4,900,571 $948,142 $178,573 -
============= ============== ============= =============== ============
(1) See Note 7, "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,
2005, the Company had $1.5 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 $15,000.
-29-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements Page
----
Balance Sheets as of December 31, 2005 and 2004 F-1
Statements of Operations for the years ended December 31, 2005, 2004, and 2003 F-2
Statements of Stockholders' Equity for the years ended December 31, 2005, 2004,
and 2003 F-3
Statements of Cash Flows for the years ended December 31, 2005, 2004, and 2003 F-4
Notes to Financial Statements F-5 to F-26
Responsibility for Financial Statements F-27
Report of Independent Registered Public Accounting Firm
Amper, Politziner & Mattia, P.C. F-28
Report of Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP F-29
-30-
THE QUIGLEY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,2005 December 31, 2004
------------------- ------------------
CURRENT ASSETS:
Cash and cash equivalents $16,885,170 $14,366,441
Accounts receivable (net of doubtful accounts of $354,972 and $311,764) 7,880,140 6,375,979
Inventory 3,900,064 3,454,682
Prepaid expenses and other current assets 1,582,851 764,359
------------------- ------------------
TOTAL CURRENT ASSETS 30,248,225 24,961,461
------------------- ------------------
PROPERTY, PLANT AND EQUIPMENT - NET 5,585,793 6,473,688
================== ==================
OTHER ASSETS:
Goodwill 30,763 30,763
Other assets 110,858 63,844
------------------- ------------------
TOTAL OTHER ASSETS 141,621 94,607
------------------- ------------------
TOTAL ASSETS $35,975,639 $31,529,756
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $428,571 $428,571
Accounts payable 771,819 978,401
Accrued royalties and sales commissions 3,301,598 1,796,081
Accrued advertising 2,860,414 1,919,011
Other current liabilities 2,203,561 1,986,487
-------------------- ------------------
TOTAL CURRENT LIABILITIES 9,565,963 7,108,551
-------------------- ------------------
LONG-TERM DEBT 1,035,715 2,464,286
MINORITY INTEREST 54,314 54,980
COMMITMENTS AND CONTINGENCIES (NOTE 9)
STOCKHOLDERS' EQUITY:
Common stock, $.0005 par value; authorized 50,000,000;
Issued: 16,360,524 and 16,285,796 shares 8,180 8,143
Additional paid-in-capital 35,404,803 35,203,816
Retained earnings 15,094,823 11,878,139
Less: Treasury stock, 4,646,053 and 4,646,053 shares, at cost (25,188,159) (25,188,159)
-------------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 25,319,647 21,901,939
-------------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $35,975,639 $31,529,756
==================== ==================
See accompanying notes to consolidated financial statements
F-1
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
December 31, 2005 December 31, 2004 December 31, 2003
------------------ ----------------- -----------------
NET SALES $53,658,043 $43,947,995 $41,499,163
------------------ ----------------- ----------------
COST OF SALES 25,824,085 23,573,126 21,487,763
------------------ ----------------- ----------------
GROSS PROFIT 27,833,958 20,374,869 20,011,400
------------------ ----------------- ----------------
OPERATING EXPENSES:
Sales and marketing 8,414,065 7,140,365 6,166,318
Administration 12,656,242 9,819,948 9,843,846
Research and development 3,784,221 3,232,569 3,365,698
------------------ ----------------- ----------------
TOTAL OPERATING EXPENSES 24,854,528 20,192,882 19,375,862
------------------ ----------------- ----------------
INCOME FROM OPERATIONS 2,979,430 181,987 635,538
------------------ ----------------- ----------------
OTHER INCOME (EXPENSE)
Interest income 402,580 104,339 93,385
Interest expense
(100,326) (32,250) -
Gain on dividend-in-kind - 198,786 -
TOTAL OTHER INCOME, NET 302,254 270,875 93,385
------------------ ----------------- ----------------
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES 3,281,684 452,862 728,923
------------------ ----------------- ----------------
INCOME TAXES 65,000 - -
------------------ ----------------- ----------------
INCOME FROM CONTINUING OPERATIONS 3,216,684 452,862 728,923
------------------ ----------------- ----------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations - - (54,349)
------------------ ----------------- ----------------
NET INCOME $3,216,684 $452,862 $674,574
================== ================= ================
BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations $0.28 $0.04 $0.06
Loss from discontinued operations
- - -
------------------ ----------------- ----------------
Net Income $0.28 $0.04 $0.06
================== ================= ================
DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations $0.24 $0.03 $0.05
Loss from discontinued operations
- - -
------------------ ----------------- ----------------
Net Income $0.24 $0.03 $0.05
================== ================= ================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 11,660,561 11,541,012 11,467,087
================== ================= ================
Diluted 13,299,162 14,449,334 14,910,246
================== ================= ================
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, 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 options exercised 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
---------------------------------------------------------------------------------------------
Tax benefits from options,
warrants & common stock
249,453 249,453
Tax benefit allowance (249,453) (249,453)
Proceeds from options exercised 74,728 37 200,987 201,024
Net Income 3,216,684 3,216,684
---------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2005 11,714,471 $8,180 $35,404,803 ($25,188,159) $15,094,823 $25,319,647
---------------------------------------------------------------------------------------------
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, 2005 December 31, 2004 December 31, 2003
------------------- ------------------- -------------------
OPERATING ACTIVITIES:
Net income $3,216,684 $452,862 $674,574
------------------- ------------------- -------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY (USED IN) CONTINUING OPERATIONS:
Loss from discontinued operations -- -- 54,349
Depreciation and amortization 1,404,107 622,348 473,593
Gain on dividend-in-kind -- (198,786) --
Gain on the sales of fixed assets (3,907) -- --
Bad debts provision 98,751 25,289 71,030
(INCREASE) DECREASE IN ASSETS:
Accounts receivable (1,602,912) 1,460,615 (3,744,790)
Inventory (445,382) 1,198,221 773,858
Prepaid expenses and other current assets (896,552) 47,298 (243,480)
Other assets 3,748 (33,611) --
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable (206,582) 454,265 129,461
Accrued royalties and sales commissions 1,505,517 201,624 447,962
Accrued advertising 941,403 564,475 (205,041)
Other current liabilities 250,614 (134,573) 656,608
------------------- ------------------- -------------------
TOTAL ADJUSTMENTS 1,048,805 4,207,165 (1,586,450)
------------------- ------------------- -------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 4,265,489 4,660,027 (911,876)
------------------- ------------------- -------------------
INVESTING ACTIVITIES:
Capital expenditures (531,213) (310,139) (555,016)
Cost of assets acquired, net of registration fees -- (4,295,380) --
Proceeds from the sale of fixed assets 12,000 -- --
------------------- ------------------- -------------------
NET CASH FLOWS USED IN INVESTING
ACTIVITIES (519,213) (4,605,519) (555,016)
------------------- ------------------- -------------------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings -- 3,000,000 --
Principal payments on long-term debt (1,428,571) (107,142) --
Stock options and warrants exercised 201,024 26,986 16,250
------------------- ------------------- -------------------
NET CASH FLOWS (USED IN) PROVIDED BY
FINANCING ACTIVITIES (1,227,547) 2,919,844 16,250
------------------- ------------------- -------------------
CASH USED IN OPERATING ACTIVITIES OF
DISCONTINUED OPERATIONS -- -- (54,349)
------------------- ------------------- -------------------
NET INCREASE (DECREASE) IN CASH 2,518,729 2,974,352 (1,504,991)
CASH & CASH EQUIVALENTS, BEGINNING OF
PERIOD 14,366,441 11,392,089 12,897,080
------------------- ------------------- -------------------
CASH & CASH EQUIVALENTS,
END OF PERIOD $16,885,170 $14,366,441 $11,392,089
=================== =================== ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
CASH PAID FOR:
Interest $100,326 $32,250 --
Taxes 65,000 -- --
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 Company, headquartered in Doylestown, Pennsylvania, is a leading
manufacturer, marketer and distributor of a diversified range of homeopathic and
health products which comprise the Cold Remedy, Health and Wellness and Contract
Manufacturing segments. The Company is also involved in the research and
development of potential prescription products that comprise the Ethical
Pharmaceutical segment.
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 in 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. Effective October 1, 2004, the Company acquired
substantially all of the assets of JoEl, Inc., the previous manufacturer of the
Cold-Eeze(R) lozenge product. 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 performing contract manufacturing activities for
non-related entities.
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 distributor
representatives. Darius is a direct selling organization specializing in
proprietary 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 segment, Quigley
Pharma Inc. ("Pharma"), that is under the direction of its Executive Vice
President and Chairman of its Medical Advisory Committee. 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.
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 and the requirements
associated with the development of Pharma's potential prescription drugs in
order to continue to compete on a national and international level. The
continued expansion of Darius is dependent on the Company retaining existing
independent distributor representatives and recruiting additional active
representatives both internationally and within the United States, continued
conformity with government regulations, a reliable information technology system
capable of supporting continued growth and continued reliable sources for
product and materials to satisfy consumer demand.
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").
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 financial statements include
consolidated variable interest entities ("VIEs") of which the Company is the
primary beneficiary (see discussion in Note 4, "Variable Interest Entity").
Certain prior period amounts have been reclassified to conform with the 2005
presentation.
F-5
USE OF ESTIMATES
The Company's consolidated financial statements are prepared in accordance with
generally accepted accounting principles (GAAP) in the United Sates of America.
In connection with the preparation of the consolidated financial statements, it
is required to make assumptions and estimates about future events, and apply
judgments that affect the reported amounts of assets, liabilities, revenue,
expenses and related disclosures. These assumptions, estimates and judgments are
based on historical experience, current trends and other factors that management
believes to be relevant at the time the consolidated financial statements are
prepared. Management reviews the accounting policies, assumptions, estimates and
judgments on a quarterly basis to ensure the financial statements are presented
fairly and in accordance with GAAP. However, because future events and their
effects cannot be determined with certainty, actual results could differ from
these assumptions and estimates, and such differences could be material.
The Company is organized into four different but related business segments,
Cold-Remedy, Health and Wellness, Contract Manufacturing and Ethical
Pharmaceutical. When providing for the appropriate sales returns, allowances,
cash discounts and cooperative advertising costs, each segment applies a uniform
and consistent method for making certain assumptions for estimating these
provisions that are applicable to each specific segment. Traditionally, these
provisions are not material to reported revenues in the Health and Wellness and
Contract Manufacturing segments and the Ethical Pharmaceutical segment does not
have any revenues.
Provisions to these reserves within the Cold Remedy segment include the use of
such estimates, which are applied or matched to the current sales for the period
presented. These estimates are based on specific customer tracking and an
overall historical experience to obtain an applicable effective rate. Estimates
for sales returns are tracked at the specific customer level and are tested on
an annual historical basis, and reviewed quarterly, as is the estimate for
cooperative advertising costs. Cash discounts follow the terms of sales and are
taken by virtually all customers. Additionally, the monitoring of current
occurrences, developments by customer, market conditions and any other
occurrences that could affect the expected provisions for any future returns or
allowances, cash discounts and cooperative advertising costs relative to net
sales for the period presented are also performed.
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
Inventory is valued at the lower of cost, determined on a first-in, first-out
basis (FIFO), or market. Inventory items are analyzed to determine cost and the
market value and appropriate valuation reserves are established. The
consolidated financial statements include a reserve for excess or obsolete
inventory of $369,508 and $1,388,590 as of December 31, 2005 and 2004,
respectively. The majority of the 2004 provision was related to the
discontinuation of the Cold-Eeze(R) Cold Remedy Nasal Spray product in 2004.
Inventories included raw material, work in progress and packaging amounts of
approximately $1,340,000 and $1,087,000 at December 31, 2005 and December 31,
2004, 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
Goodwill is not amortized but reviewed annually for impairment when events and
circumstances indicate the carrying amount may not be recoverable or on an
annual basis.
F-6
CONCENTRATION OF RISKS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and trade
accounts receivable.
The Company maintains cash and cash equivalents with several 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 29% for the
year ended December 31, 2005, 27% for the year ended December 31, 2004 and 23%
for the year ended December 31, 2003. Customers comprising the five largest
accounts receivable balances represented 47% and 48% of total trade receivable
balances at December 31, 2005 and 2004, respectively. During 2005, 2004 and
2003, approximately 92%, 93% and 97%, respectively, of the Company's revenues
were generated in the United States with the remainder attributable to
international markets.
The Company's revenues are currently generated from the sale of the Cold-Remedy
products which approximated 55%, 52% and 49% of total revenues in the twelve
month periods ended December 31, 2005, 2004 and 2003, respectively. The Health
and Wellness segment approximated 38%, 46% and 51%, for the twelve month periods
ended December 31, 2005, 2004 and 2003, respectively. The Contract Manufacturing
segment approximated 7% and 2% for the twelve month periods ended December 31,
2005 and 2004, respectively.
Raw materials used in the production of the products are available from numerous
sources. Raw materials for the Cold-Eeze(R) lozenge product are currently
procured from a single vendor in order to secure purchasing economies. In a
situation where this one vendor is not able to supply QMI with the ingredients,
other sources have been identified. 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 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.
Darius' products for resale can be sourced from several suppliers. In the event
that such sources were no longer in a position to supply Darius with products,
other vendors have been identified as reliable alternatives with minimal adverse
loss of business.
LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment on an exception basis
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable through future undiscounted cash flows. If it
is determined that an impairment loss has occurred based on the expected cash
flows compared to the related asset value, an impairment loss is recognized in
the Statement of 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. Revenue is reduced for
trade promotions, estimated sales returns, cash discounts and other allowances
in the same period as the related sales are recorded. The Company makes
estimates of potential future product returns and other allowances related to
current period revenue. The Company analyzes historical returns, current trends,
and changes in customer and consumer demand when evaluating the adequacy of the
sales returns and other allowances. The consolidated financial statements
include reserves of $634,580 for future sales returns and $533,250 for other
allowances as of December 31, 2005 and $1,109,171 and $404,221 at December 31,
2004, respectively. The 2005 and 2004 reserve balances include a remaining
returns provision at December 31, 2005 and December 31, 2004 of approximately
$184,000 and $626,000, respectively, in the event of future product returns
following the discontinuation of the Cold-Eeze(R) Cold Remedy Nasal Spray
product in September 2004. The reserves also include an estimate of the
uncollectability of accounts receivable resulting in a reserve of $354,972 at
December 31, 2005 and $311,764 at December 31, 2004.
F-7
COST OF SALES
For the Cold Remedy Segment, in accordance with contract terms, payments
calculated based upon net sales collected to the patent holder of the Cold-Eeze
formulation and payments to the corporation founders and developers of the final
saleable Cold-Eeze(R) product amounting to $1,745,748, $2,052,746 and
$1,805,294, respectively, at December 31, 2005, 2004 and 2003 are presented in
the financial statements as cost of sales.
In the Health and Wellness Segment, agreements with Independent Distributor
Representatives ("IR's") require payments to them to be calculated based upon
net commissionable sales of other IR's in their down-line and not on any of
their individual purchases of products including not taking title to the
products that are sold by other IR's. In accordance with EITF 01-9, such
payments to the IR's do not qualify as a reduction of the selling price as these
payments are not offered as an allowance or as a percentage rebate of direct
purchases made, and the IR's are not offered any cooperative advertising
incentives of any type. Such payments, among other factors, are related to
expand the cycle of additional IR's and for maintaining the distribution channel
for this segment's products.
Accordingly, such distribution payments amounting to $9,207,613, $9,053,612 and
$9,439,100, respectively, at December 31, 2005, 2004 and 2003 are presented in
the financial statements as cost of sales.
OPERATING EXPENSES
Agreements relating to the Cold Remedy segment with a major national sales
brokerage firm are for this firm to sell the manufactured Cold-Eeze product to
our customers. Such related costs are presented in the financial statements as
selling expenses.
In the Health and Wellness Segment, the Company includes payments in accordance
with agreements with the former owner of its acquired proprietary products, to
be calculated based upon net sales collected. These agreements provide for
exclusivity, consulting, marketing presentations, confidentiality and
non-compete arrangements with such payments being classified as administration
expense.
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 the Company became
publicly traded. 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 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 58.3% for the year ended December 31,
2005, 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;
expected dividend yield of 0% and risk-free interest rate of 4.46% for the year
ended December 31, 2005; 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. 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-8
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, 2005, 2004 and 2003
had been determined under the fair value method of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
the Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2005 2004 2003
----------------- ---------------- --------------
Net income
As reported $3,216,684 $452,862 $674,574
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 (3,884,400) (2,230,000) (2,026,720)
--------------------------------------------------------
Pro forma net loss ($667,716) ($1,777,138) ($1,352,146)
--------------------------------------------------------
Basic earnings (loss) per share
As reported $0.28 $0.04 $0.06
Pro forma ($0.06) ($0.15) ($0.12)
Diluted earnings (loss) per share
As reported $0.24 $0.03 $0.05
Pro forma ($0.05) ($0.15) ($0.12)
Expense relating to warrants granted to non-employees has been appropriately
recorded in the periods presented based on fair values as determined by the
Black Scholes pricing model dependent upon the circumstances relating to the
specific grants.
A total of 520,000, 500,000, and 424,000 stock options were granted to employees
and non-employees in 2005, 2004 and 2003, respectively.
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, 2005, 2004
and 2003 were $8,688,233, $6,584,600, and $5,483,465, respectively. Included in
prepaid expenses and other current assets was $96,050 and $41,375 at December
31, 2005 and 2004 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, 2005, 2004 and 2003 were
$3,784,221, $3,232,569 and $3,365,698, respectively. Principally, research and
development costs are related to Pharma's study activities and costs associated
with Cold-Eeze(R).
INCOME TAXES
The Company utilizes the 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 13 -
Income Taxes for further discussion.
F-9
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 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.
In December 2004, the FASB issued Statement 123 (revised 2004),"SHARE-BASED
PAYMENT." The standard eliminates the disclosure-only election under the prior
SFAS 123 and requires the recognition of compensation expense for stock options
and other forms of equity compensation based on the fair value of the
instruments on the date of grant. The standard is effective for fiscal years
beginning after June 15, 2005. In March 2005, the Securities & Exchange
Commission (the "SEC") issued Staff Accounting Bulletin No. 107, "Share-Based
Payment" ("SAB 107"). SAB 107 summarizes the views of the SEC staff regarding
the interaction between SFAS No. 123 (Revised 2004), "Share-Based Payment"
("SFAS 123R") and certain SEC rules and regulations, and is intended to assist
in the initial implementation of SFAS 123R, which for the Company is required by
the beginning of its fiscal year 2006. The Company has no unvested options as of
December 31, 2005 and therefore the adoption of this standard will not have an
impact on the Company's consolidated balance sheets and statements of
operations, shareholders' equity and cash flows.
In December 2004, the FASB issued Statement 153,"EXCHANGES OF NONMONETARY
ASSETS, AN AMENDMENT OF APB OPINION NO.29." The standard is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged and eliminates the exception under APB
Opinion No. 29 for an exchange of similar productive assets and replaces it with
an exception for exchanges of nonmonetary assets that do not have commercial
substance. The standard is effective for nonmonetary exchanges occurring in
fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 did
not have a material impact on the Company's financial position or results of
operations.
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
154, "ACCOUNTING CHANGES AND ERROR CORRECTIONS, A REPLACEMENT OF APB OPINION NO.
20 AND FASB STATEMENT NO. 3." The standard requires retrospective application to
prior periods' financial statements of a voluntary change in accounting
principle unless it is deemed impracticable. The standard states that a change
in method of depreciation, amortization or depletion for long-lived,
non-financial assets be accounted for as a change in accounting estimate that is
affected by a change in accounting principle. The standard is effective for
accounting changes and corrections of errors made occurring in fiscal years
beginning after December 15, 2005. The impact on the Company's financial
position or results of operations as a result of the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 154 cannot be determined.
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, transaction costs of $113,671, a $3.0 million
term loan (see Note 7) 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.
F-10
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-11
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 INTERESTENTITIES("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 $54,314 and $54,980 on
the Consolidated Balance Sheet in 2005 and 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 Consolidated Balance Sheet are $61,844 and
$96,051 in 2005 and 2004 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 - PROPERTY, PLANT AND EQUIPMENT
Consisted of the following as of: December 31, 2005 December 31, 2004
----------------- -----------------
Land $538,791 $538,791
Buildings and improvements 2,496,536 2,496,536
Machinery and equipment 4,935,636 4,542,645
Computer software 520,787 459,557
Furniture and fixtures 260,277 253,574
----------------- -------------------
8,752,027 8,291,103
Less: Accumulated depreciation 3,166,234 1,817,415
----------------- -------------------
Property, Plant and Equipment, net $5,585,793 $6,473,688
================= ===================
Depreciation expense for the years ended December 31, 2005, 2004 and 2003 was
$1,404,107, $622,348, and $473,593, respectively. During the year ended December
31, 2005, the Company retired equipment with an original cost of approximately
$63,382 and accumulated depreciation of approximately $55,288.
NOTE 6 - PATENT RIGHTS AND RELATED ROYALTY COMMITMENTS
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 9) 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, has been paid to two of the officers, who are also directors and
stockholders of the Company, and whose agreements expired in 2005, (see Note
15).
The expenses for the respective periods relating to such agreements amounted to
$1,745,748, $2,052,746 and $1,805,294, for the years ended December 31, 2005,
2004 and 2003, respectively. Amounts accrued for these expenses at December 31,
2005 and 2004 were $2,077,411 and $1,129,654, respectively.
Amounts included in accrued royalties and sales commissions in the balance
sheets at December 31, 2005 and 2004, apportioned between related party and
other balances, are as follows:
2005 2004
--------------------------------
Related party balances (see Note 15) - $459,583
Other non-related party balances $3,301,598 1,336,498
--------------------------------
Total accrued royalties and sales commissions $3,301,598 $1,796,081
--------------------------------
F-12
NOTE 7 - LONG-TERM DEBT
In connection with the Company's acquisition of certain assets of JoEl, Inc. in
October 2004, 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 that commenced on November 1, 2004. In April 2005, the Company prepaid
an amount of $1.0 million against the outstanding balance on the long-term loan.
The Company is in compliance with all related loan covenants. The entire loan
balance is under a six-month LIBOR rate of 6.22%, this rate expires on March 31,
2006.
The schedule of principal payments of long-term debt is as follows:
December 31,
2006 $428,571
2007 428,571
2008 428,571
2009 178,573
--------------
1,464,286
Less - current portion (428,571)
--------------
$1,035,715
==============
NOTE 8 - OTHER CURRENT LIABILITIES
Included in other current liabilities are $923,411 and $717,038 related to
accrued compensation at December 31, 2005 and 2004, respectively.
NOTE 9 - 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, 2005, 2004 and
2003, of $227,701, $335,226, and $255,078, 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
------------------------------------------------------------------------------------------
2006 $3,230,000 $180,000 $1,000,000 $62,000 $4,472,000
2007 - 91,000 - - 91,000
2008 - - - - -
2009 - - - - -
2010 - - - - -
------------------------------------------------------------------------------------------
Total $3,230,000 $271,000 $1,000,000 $62,000 $4,563,000
------------------------------------------------------------------------------------------
Additional advertising and research and development costs are expected to be
incurred during the remainder of 2006.
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 product exclusivity, consulting, marketing
presentations, confidentiality and non-compete arrangements. Amounts paid or
payable under such agreement during the twelve months periods ended December 31,
2005, 2004 and 2003 were $838,607, $800,881 and 880,091, respectively. Amounts
payable under such agreement at December 31, 2005 and December 31, 2004 were
$58,597 and $60,876, respectively.
The Company has several licensing and other contractual agreements, see Note 6.
F-13
TESAURO AND ELEY VS. THE QUIGLEY CORPORATION
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 which have been argued and briefed and have been
pending before the Court for determination since March 2005. The Company is
vigorously defending this lawsuit and believes that the action lacks merit.
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. 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. Defense counsel takes
the position that the science proposed in the litigation appears to be more
advanced than the science which exists in peer reviewed medical journals.
Whether the court will admit the testimony relating to the science behind
plaintiff's claims, is not a matter which we can predict at this time.
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. On September 17, 2004, the Company removed the case to the
United States District Court for the District of Minnesota. 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. Discovery should be completed in
this matter within 120 days and trial is scheduled for October 2006.
The Company has investigated the claims and believes that they are without
merit. 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.
Defense counsel takes the position that the science proposed in the litigation
appears to be more advanced than the science which exists in peer reviewed
medical journals. Whether the court will admit the testimony relating to the
science behind plaintiff's claims, is not a matter which we can predict at this
time.
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 Company. 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
F-14
plaintiffs are claims that the Company 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. Defense counsel takes
the position that the science proposed in the litigation appears to be more
advanced than the science which exists in peer reviewed medical journals.
Whether the court will admit the testimony relating to the science behind
plaintiffs' claims, is not a matter which we can predict at this time.
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 relating to the Cold-Eeze
formulations and manufacturing methods; injunctive relief for breach of the duty
of loyalty; and declaratory judgment pending the Company's payment of
commissions to defendants. 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 meritless.
At the present time, discovery is being conducted by the Company on its claims
and on the counterclaims brought by John C. Godfrey, et al.
The Company believes Defendant's claims are without merit, and it is vigorously
defending the counterclaims 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, 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 concerning certain product liability
claims related to the Company's nasal spray product. 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.
The Company denied the material allegations of the carrier's complaint, and
asserted its own counterclaim also seeking declaratory relief to establish the
extent of its excess liability coverage. Thereafter, the parties engaged in
discovery to establish a record upon which the court could decide the matter
based on summary judgment motions on the carrier's claims and the Company's
counterclaims. Both parties sought summary judgment in motions submitted to the
court in the fall of 2005. On February 16, 2006, the court handed down its
ruling, in which the court granted in part and denied in part both the carrier's
motion and the Company's motion. The effect of the court's ruling is that the
plaintiff insurer's responsibility for excess coverage is limited to claims for
damages for bodily injury or property damage that occurred on or after April 6,
2004, but leaves uncertain coverage for claims filed after April 6, 2004 by
persons who contacted the Company before then. Although the Company is
evaluating grounds for appeal, and cannot rule out an appeal by the carrier, the
court's ruling both clarifies the Company's potential exposure as well as
establishes a basis for the Company to seek redress against parties liable for
any lack of adequate excess insurance coverage for this exposure.
Based upon the information the Company has at this time relative to the defense
of claims occurring before April 6, 2004, the Company believes that the claims
are without merit and is fully defending those claims through insurance counsel.
However, at this time no prediction as to the outcome can be made of these
claims and whether insurance coverage from the period prior to April 6, 2004 is
adequate for coverage of all claims.
F-15
CYNTHIA AARON VS. THE QUIGLEY CORPORATION, ET AL
On March 15, 2005, a complaint was filed in the Superior Court for San Diego
County, California. This complaint was served on the Company on April 21, 2005.
The plaintiff's complaint consists of causes of action sounding in negligence,
negligent products liability, breach of warranty of merchantability, breach of
express warranty, strict products liability and failure to warn. The action
alleges that the plaintiff suffered certain losses and injuries as a result of
using the Company's nasal spray product. Discovery in this case will be
completed within 120 days and trial is scheduled for September 18, 2006.
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 on the Company. However,
at this time no prediction as to the outcome can be made. Insurance defense
counsel has informed the Company that counsel is unable to evaluate the
likelihood of an unfavorable outcome at this time. Defense counsel takes the
position that the science proposed in the litigation appears to be more advanced
than the science which exists in peer reviewed medical journals. Whether the
court will admit the testimony relating to the science behind plaintiff's
claims, is not a matter which we can predict at this time.
DOLORES SMITH VS. THE QUIGLEY CORPORATION
On May 25, 2005, a complaint was filed in the Court of Common Pleas of Bucks
County, Pennsylvania. The complaint was served on the Company on or about June
14, 2005. The plaintiff's complaint consists of counts of negligence, strict
product liability, breach of express warranty, breach of implied warranty, and
violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law
and other Consumer Protection Statutes relating to the use of the Company's
COLD-EEZE Nasal Spray Product.
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 on the Company. However,
at this time no prediction as to the outcome can be made. Defense counsel takes
the position that the science proposed in the litigation appears to be more
advanced than the science which exists in peer reviewed medical journals.
Whether the court will admit the testimony relating to the science behind
plaintiff's claims, is not a matter which we can predict at this time.
RICHARD FLYNN VS. THE QUIGLEY CORPORATION, ET AL
On May 20, 2005, a complaint was filed in the Superior Court of Orange County,
California. This complaint was served on the Company on June 2, 2005. The action
alleges that the plaintiff suffered certain losses and injuries as a result of
using the Company's nasal spray product. The complaint consists of causes of
action sounding in negligence, products liability, and punitive damages.
The Company believes plaintiff's claims are without merit and is vigorously
defending those claims. In particular, much of the complaint references acts of
the Company during a period of time when it did not offer for sale the COLD-EEZE
Nasal Spray Product which is the basis of the plaintiff's claim. Based upon the
information the Company has at this time, it believes the action will not have a
material impact on the Company. However, at this time no prediction as to the
outcome can be made. Defense counsel takes the position that the science
proposed in the litigation appears to be more advanced than the science which
exists in peer reviewed medical journals. Whether the court will admit the
testimony relating to the science behind plaintiff's claims, is not a matter
which we can predict at this time.
KEITH J. KOCHIE VS. THE QUIGLEY CORPORATION, ET AL
On August 2, 2005, a complaint was filed in the United States District Court for
the Eastern District of New York. The complaint was served on the Company on or
about September 1, 2005. The plaintiff's complaint consists of counts for
negligence, strict product liability, breach of express warranty, breach of
implied warranties, fraudulent misrepresentation, fraudulent concealment,
negligent misrepresentation, and fraud and deceit relating to the use of the
Company's COLD-EEZE Nasal Spray Product.
The Company believes plaintiff's claims are without merit and is vigorously
defending those actions. Based upon the information the Company has at this
time, it believes the action will not have a material impact on the Company.
However, at this time no prediction as to the outcome can be made. Defense
counsel takes the position that the science proposed in the litigation appears
to be more advanced than the science which exists in peer reviewed medical
journals. Whether the court will admit the testimony relating to the science
behind plaintiff's claims, is not a matter which we can predict at this time.
F-16
DOMINIC DOMINIJANNI, SONJA FORSBERG-WILLIAMS, VINT PAYNE,
MURRAY LOU ROGERS, AND RANDY STOVER
VS. THE QUIGLEY CORPORATION
On January 6, 2006, five (5) plaintiffs filed an action in the Court of Common
Pleas of Bucks County, Pennsylvania, against the Company. The action alleges
that the plaintiff suffered certain losses and injuries as a result of using the
Company's nasal spray product. The complaint was served on the Company on
January 31, 2006. Plaintiffs' complaint consists of counts for negligence,
strict products liability (failure to warn), strict products liability
(defective design), breach of express and implied warranties, and a claim of
violations under the Pennsylvania Unfair Trade Practices and Consumer Protection
Law and other consumer protection statutes.
The Company believes plaintiffs' claims are without merit and is vigorously
defending those actions. Based upon the information the Company has at this
time, it believes the action will not have a material impact on the Company.
However, at this time no prediction as to the outcome can be made. Defense
counsel takes the position that the science proposed in the litigation appears
to be more advanced than the science which exists in peer reviewed medical
journals.
Whether the court will admit the testimony relating to the science behind
plaintiffs' claims, is not a matter which we can predict at this time.
GREG SCRAGG VS THE QUIGLEY CORPORATION, ET AL
On November 30, 2005, an action was brought in the Colorado District Court in
Denver, Colorado. The complaint was served on the Company soon thereafter. The
action alleges that the plaintiff suffered certain losses and injuries as a
result of using the Company's nasal spray product. The complaint consists of
counts for fraud and deceit (fraudulent concealment), negligent
misrepresentation, strict liability (failure to warn), and strict product
liability (design defect). On January 13, 2006, the case was removed to Federal
District Court.
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 on the Company. However,
at this time no prediction as to the outcome can be made. Defense counsel takes
the position that the science proposed in the litigation appears to be more
advanced than the science which exists in peer reviewed medical journals.
Whether the court will admit the testimony relating to the science behind
plaintiff's claims, is not a matter which we can predict at this time.
GARRY KOMINAKIS VS. THE QUIGLEY CORPORATION, ET AL
On December 13, 2005, an action was brought in the Superior Court of the State
of California (Western Division - Los Angeles). The action alleges that the
plaintiff suffered certain losses and injuries as a result of using the
Company's nasal spray product. The complaint was served on the Company on
December 27, 2005. The case was removed to Federal District Court on January 25,
2006. The complaint consists of counts for strict liability (products
liability), negligence, and breach of implied and express warranties.
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 on the Company. However,
at this time no prediction as to the outcome can be made. Defense counsel takes
the position that the science proposed in the litigation appears to be more
advanced than the science which exists in peer reviewed medical journals.
Whether the court will admit the testimony relating to the science behind
plaintiff's claims, is not a matter which we can predict at this time.
DARIUS INTERNATIONAL INC., AND INNERLIGHT INC., F/K/A DARIUS
MARKETING INC. VS. ROBERT O. YOUNG AND SHELLEY R. YOUNG
(FEDERAL DISTRICT COURT - EASTERN DISTRICT, PA)
In this action, the Company seeks injunctive relief and monetary damages against
two individuals for violation of a non-competition agreement between a wholly
owned subsidiary of the Company, Innerlight Inc., and the defendants, each of
whom are also under agreement to serve as consulting to the Company.
In late November, 2005, the Company learned that the defendants had launched a
line of nutritional supplement products that competed with Innerlight products.
Defendants promoted their line of products by a website, among other means. The
Company moved for a temporary restraining order against the defendants, which
the court denied; however, the court ordered expedited discovery and scheduled a
preliminary injunction hearing. Before the hearing, the Company amended its
complaint to add counts against defendants for unfair competition, trademark
infringement and other causes, which the court allowed. In response, defendants
F-17
initially moved to dismiss the case. While not ruling on defendants' motion
formally, the court stated that it was inclined to deny the motion. Defendants
answered the complaint and asserted nine counterclaims, including: breach of
contract; breach of covenant of good faith and fair dealing; unjust enrichment;
conversion; common law trademark infringement; common law violation of the right
to publicity; violation of abuse of personal identity act; injunctive relief;
and declaratory relief.
After the preliminary injunction hearing, the parties briefed the court on the
significance of the hearing evidence in relation to the parties' respective
claims. On February 17, 2006, the court held oral argument on the motion for
preliminary injunction. A ruling is expected by mid-March, 2006.
The Company believes that the defendants' counterclaims are without merit and is
vigorously defending those counterclaims and is prosecuting its action on its
complaint. Based upon the information the Company has at this time, it believes
the counterclaim actions are without merit. However, at this time no prediction
as to the outcome can be made.
ROBERT O. AND SHELLEY YOUNG VS. DARIUS INTERNATIONAL INC.
AND INNERLIGHT INC., (UTAH THIRD PARTY COMPLAINTS)
On September 14, 2005, a third-party complaint was filed by Shelley R. Young in
Fourth District Court in Provo, Utah against Innerlight Inc. and its parent
company, Darius. Robert O. Young has filed a motion to intervene to join as a
third-party plaintiff with Shelley R. Young. On November 3, 2005, Shelley and
Robert Young filed a parallel suit also in Fourth District Court in Provo, Utah.
The allegations in both complaints include, but are not limited to, an alleged
breach of contract by Innerlight Inc. for alleged failures to make certain
payments under an asset purchase agreement entered into by all parties.
Additional allegations stem from this alleged breach of contract including
unjust enrichment, trademark infringement and alleged violation of rights of
publicity. The plaintiffs are seeking both monetary and injunctive relief.
Innerlight Inc. has objected to the complaint in the third-party action based on
procedural deficiencies and other grounds. In the second action the Court has
granted Innerlight Inc. and Darius permission to defer answering until the court
can determine whether or not Provo, Utah, is the proper venue to hear these
allegations.
In connection with the Utah actions the Company has sued the Youngs in Equity in
the Court of Common Pleas of Philadelphia County, PA, and in United States
District Court for the Eastern District of Pennsylvania. The Company has alleged
breach of contract, including but not limited to breach of non-competition
provisions in a consulting agreement between the parties and is seeking
unspecified damages and injunctive relief. The Company believes the plaintiff's
allegations against Innerlight Inc. and Darius in Provo, Utah are without merit
and it is vigorously defending against these claims. Innerlight Inc. and Darius
have filed motions to stay both actions filed in Utah pending resolution of the
litigation in PA. Further, the Company is actively prosecuting its state and
federal actions in PA. However, at this time no prediction as to the outcome can
be made.
BRIGITTE YVON & KLAUS YVON VS. THE QUIGLEY CORPORATION, ET AL
On October 12, 2005, the Plaintiffs instituted an action against Caribbean
Pacific Natural Products, Inc. and other defendants for personal injuries as a
result of being hit by a chair on the pool deck of Waikoloa Beach Marriott Hotel
d/b/a Outrigger Enterprises, Inc. in Honolulu, Hawaii. On December 9, 2005, the
Company was added as an additional defendant without notice to this case. The
main defendant in the case is Caribbean Pacific Natural Products, Inc. in which
the Company formerly held stock. On January 22, 2003, all Caribbean Pacific
Natural Products Inc. shares owned by the Company were sold to Suncoast
Naturals, Inc. in return for stock of Suncoast Naturals, Inc. At the time of the
accident, the Company had no ownership interest in Caribbean Pacific Natural
Products, Inc.
The Company believes that the plaintiffs' claims are without merit and is
vigorously defending this action. At the present time this matter is being
defended by the Company's liability insurance carrier and a motion to dismiss is
pending before the Federal District Court in Honolulu, Hawaii.
NICODROPS, INC. VS. QUIGLEY MANUFACTURING INC.
On January 30, 2006, QMI was put on notice of a claim by Nicodrops, Inc.
Nicodrops, Inc. has claimed that the packaging contained incorrect expiration
dates and caused it to lose sales through two (2) retailers. The total alleged
sales of Nicodrops was approximately $250,000 and Nicodrops is claiming
unspecified damages exceeding $2,000,000.
No suit has been filed. The Company is investigating this claim. Based on its
investigation to date, the Company believes the claim is without merit. However,
at this time no prediction can be made as to the outcome of this case.
F-18
TERMINATED LEGAL PROCEEDINGS
LITIGATION - FORMER EMPLOYEES
On April 12, 2002, the Company commenced a complaint in Equity in the Court of
Common Pleas of Bucks County, Pennsylvania, against the former President of
Darius International Inc., its wholly owned subsidiary, following termination of
such President. The allegations in the complaint included, but were not limited
to, an alleged breach of fiduciary duty owed to the Company. The Company sought
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
requested the return of certain intellectual property used to commence and
continue Darius' operations. On April 15, 2005, a Settlement Agreement and
Mutual Release was executed between the Company, its subsidiaries and the
defendants, Ronald Howell, Deborah Howell, Pro Pool, LLC, One Source, LLC, Pro
Marketing LLC, and Eric Kaytes. All of defendants' counterclaims were withdrawn
and dismissed with prejudice. In addition to the monetary consideration, Howell
surrendered to the Company for cancellation 40,993 shares of the Company's
common stock and agreed to forego any claim for any additional stock, warrants,
stock options or other securities of or interest in the Company, Darius, Darius
Marketing Inc., and Innerlight Inc. that were or could have been made in the
lawsuits. Defendant Kaytes surrendered options/warrants in the Company.
NOTE 10 - 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.
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, 2005, 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 2005, 2004 or 2003.
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 reflected 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)
F-19
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, 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 11 - 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 2005 and provides for the granting of
up to four million five hundred thousand shares of which 1,184,000 remain
available for grant at December 31, 2005. Under this Plan, the Company may grant
options to employees, officers or directors of the Company at variable
percentages of the market value of stock at the date of grant. No incentive
stock option shall be exercisable more than ten years after the date of grant or
five years where the individual owns more than ten percent of the total combined
voting power of all classes of stock of the Company. Stockholders approved the
Plan in 1998. A total of 520,000, 500,000 and 424,000 options were granted under
this Plan during the years ended December 31, 2005, 2004 and 2003, 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, 2005, 2004 and 2003 and
changes during the years then ended is presented below:
YEAR ENDED DECEMBER 31, 2005:
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 3,880 $5.35 445 $8.64 4,325 $5.68
Additions/deductions:
Granted 440 13.80 80 13.80 520 13.80
Exercised 112 4.87 - - 112 4.87
Cancelled 109 4.80 - - 109 4.80
-----------------------------------------------------------------------------------
Options/warrants outstanding
at end of period 4,099 $6.28 525 $9.42 4,624 $6.64
-----------------------------------------------------------------------------------
Options/warrants exercisable
at end of period 4,099 525 4,624
===================================================================================
Weighted average fair value of
Grants $7.47 $7.47 $7.47
Price range of options/warrants:
Exercised $0.81 - $9.50 - $0.81 - $ 9.50
Outstanding $0.81 - $13.80 $0.81 - $13.80 $0.81 - $13.80
Exercisable $0.81 - $13.80 $0.81 - $13.80 $0.81 - $13.80
F-20
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-21
The following table summarizes information about stock options outstanding and
stock options exercisable, as granted to both employees and non-employees, at
December 31, 2005:
EMPLOYEES NON-EMPLOYEES
Weighted Weighted
Average Average
Range of Remaining Weighted Remaining Weighted
Exercise Number Contractual Average Number Contractual Average
Prices Outstanding Life Exercise Price Outstanding Life Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
$0.81 - $2.50 1,509,250 2.2 $1.61 35,000 5.4 $1.00
$5.13 - $13.80 2,589,500 6.0 $8.99 490,000 4.8 $10.02
-------------- -----------------
4,098,750 525,000
============== =================
Options and warrants outstanding as of December 31, 2005, 2004 and 2003 expire
from June 30, 2006 through December 11, 2015, depending upon the date of grant.
NOTE 12 - 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 to the
plan in 2005, 2004 and 2003 was approximately $414,000, $283,000, and $201,000,
respectively. The plan was amended in October 2004 to accommodate the
participation of employees of Quigley Manufacturing Inc.
NOTE 13 - INCOME TAXES
The provision (benefit) for income taxes, consists of the following:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2005 2004 2003
--------------- ----------------- ---------------
Current:
Federal $65,000 - -
State - - -
----------- ----------- -----------
65,000 - -
----------- ----------- -----------
Deferred:
Federal $815,738 $436,353 ($660,321)
State 192,107 129,453 (71,457)
----------- ----------- -----------
1,007,845 565,806 (731,778)
----------- ----------- -----------
Valuation allowance
(1,007,845) (565,806) 731,778
----------- ----------- -----------
Total $65,000 - -
=========== =========== ===========
A reconciliation of the statutory federal income tax expense (benefit) to the
effective tax is as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2005 2004 2003
--------------- ----------------- ---------------
Statutory rate - Federal $1,115,773 $153,973 $247,834
State taxes net of federal benefit 126,791 85,439 (47,162)
Permanent differences and other (169,719) 326,394 (932,450)
----------- ----------- -----------
1,072,845 565,806 (731,778)
----------- ----------- -----------
Less valuation allowance (1,007,845) (565,806) 731,778
----------- ----------- -----------
Total $65,000 - -
=========== =========== ===========
F-22
The tax effects of the primary "temporary differences" between values recorded
for assets and liabilities for financial reporting purposes and values utilized
for measurement in accordance with tax laws giving rise to the Company's
deferred tax assets are as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2005 2004 2003
--------------- ----------------- ---------------
Net operating loss carry-forward $4,034,746 $4,758,315 $5,313,829
Consulting-royalty costs 317,850 - -
Bad debt expense 138,439 121,588 331,849
Other 297,331 666,857 381,802
Valuation allowance (4,788,366) (5,546,760) (6,027,480)
----------- ----------- -----------
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. In addition, certain tax benefits for option and warrant exercises
totaling $4,097,128 are deferred and will be credited to
additional-paid-in-capital when the NOL's attributable to these exercises are
utilized. As a result, these NOL's will not be available to offset income tax
expense. The net operating loss carry-forwards that currently approximate $9.9
million for federal purposes, of which $3.5 million will expire in 2019, $4.0
million in 2020 and $2.4 million in 2022. Additionally, there are net operating
loss carry-forwards of $14.9 million for state purposes, of which $9.7 million
will expire in 2009, $2.1 million in 2010, $2.8 million in 2012 and $0.3 million
in 2013. Until sufficient taxable income to offset the temporary timing
differences attributable to operations, the tax deductions attributable to
option, warrant and stock activities and alternative minimum tax credits of
$65,000 are assured, a valuation allowance equaling the total deferred tax asset
is being provided.
NOTE 14 - 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, 2005 December 31, 2004 December 31, 2003
------------------------------ ------------------------ -----------------------------
Income Shares EPS Income Shares EPS Income Shares EPS
---------- -------- ---------- -------- ------- -------- --------- -------- ---------
Basic EPS $3.2 11.7 $0.28 $0.5 11.5 $0.04 $0.7 11.5 $0.06
Dilutives:
Options and
Warrants - 1.6 - 2.9 - 3.4
---------- -------- --------- -------- -------- -------- --------- ------- ---------
Diluted EPS $3.2 13.3 $0.24 $0.5 14.4 $0.03 $0.7 14.9 $0.05
========== ======== ========= ======== ======== ======== ========= ======= =========
Options and warrants outstanding at December 31, 2005, 2004 and 2003 were
4,623,750, 4,324,500 and 4,601,000, respectively. Stock options and warrants
with exercise prices above average market price in the amount of 520,000,
1,481,500 and 2,155,500 shares for the years ended December 31, 2005, 2004 and
2003, respectively, were not included in the computation of diluted earnings per
share as they are anti-dilutive.
NOTE 15 - 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, shared a total commission of five percent
(5%), on sales collected, less certain deductions until this agreement expired
F-23
on May 31, 2005. For the years ended December 31, 2005, 2004 and 2003, amounts
of $366,788, $1,043,346 and $889,340, respectively, were paid or payable under
such founder's commission agreements. Amounts payable under such agreements at
December 31, 2005 and 2004 were zero and $459,583, 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 $266,882, $369,000
and $369,000 have been paid to a related entity during 2005, 2004 and 2003,
respectively to assist with the regulatory aspects of obtaining such licenses.
NOTE 16 - SEGMENT INFORMATION
The basis for presenting segment results generally is consistent with overall
Company reporting. The Company reports information about its operating segments
in accordance with Financial Accounting Standard Board Statement No. 131,
"Disclosure About Segments of an Enterprise and Related Information," which
establishes standards for reporting information about a company's operating
segments. All consolidating items are included in Corporate & Other.
The Company 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.
Financial information relating to 2005, 2004 and 2003 continuing operations by
business segment follows:
- -------------------------------------------------------------------------------------------------------------------------
AS OF AND FOR THE TWELVE
MONTHS ENDED Cold Health and Contract Ethical Corporate &
DECEMBER 31, 2005 Remedy Wellness Manufacturing Pharmaceutical Other Total
- -------------------------------------------------------------------------------------------------------------------------
Revenues
Customers-domestic $29,284,651 $16,034,960 $3,900,342 - - $49,219,953
Customers-international - 4,438,090 - - - 4,438,090
Inter-segment - - 7,090,523 - ($7,090,523) -
Segment operating profit
(loss) 6,693,192 859,956 (80,419) ($4,044,162) (449,137) 2,979,430
Depreciation 387,840 143,726 872,541 - - 1,404,107
Capital expenditures 228,688 35,523 267,002 - - 531,213
Total assets $38,171,897 $4,918,271 $7,042,169 - ($14,156,698) $35,975,639
- -------------------------------------------------------------------------------------------------------------------------
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.
F-24
- -------------------------------------------------------------------------------------------------------------------------
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
NOTE 17 - QUARTERLY INFORMATION (UNAUDITED)
QUARTER ENDED
-----------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
-----------------------------------------------------------------
2005
Net Sales $11,753,270 $8,844,173 $15,319,980 $17,740,620
Gross Profit 5,702,972 3,033,521 8,294,204 10,803,261
Administration 2,994,769 2,986,507 2,897,941 3,777,025
Operating expenses 5,897,903 4,893,925 5,380,400 8,682,300
Income (loss) from operations (1,860,404) 2,913,804 2,120,961
(194,931)
Income (loss) from continuing operations (1,790,410) 2,998,503 2,163,086
(154,495)
Net Income (loss) ($154,495) ($1,790,410) $2,998,503 $2,163,086
Basic EPS
Income (loss) from continuing operations ($0.01) ($0.15) $0.26 $0.19
Net Income (loss) ($0.01) ($0.15) $0.26 $0.19
Diluted EPS
Income (loss) from continuing operations ($0.01) ($0.15) $0.23 $0.16
Net Income (loss) ($0.01) ($0.15) $0.23 $0.16
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 (933,180) (56,391) 1,971,882
(800,324)
Income (loss) from continuing operations (912,477) 177,376
(781,631) 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
F-25
FOURTH QUARTER SEGMENT DATA (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------
AS OF AND FOR THE TWELVE
MONTHS ENDED Cold Health and Contract Ethical Corporate &
DECEMBER 31, 2005 Remedy Wellness Manufacturing Pharmaceutical Other Total
- -------------------------------------------------------------------------------------------------------------------------
Revenues
Customers-domestic $12,144,783 $3,752,464 $694,137 - - $16,591,384
Customers-international - 1,149,236 - - - 1,149,236
Inter-segment - - 2,623,396 - ($2,623,396) -
Segment operating profit
(loss) 2,480,622 8,074 264,947 ($956,382) 323,700 2,120,961
Depreciation 99,142 35,848 225,355 - - 360,345
Capital expenditures $139,756 $1,094 $212,525 - - $353,375
- -------------------------------------------------------------------------------------------------------------------------
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 $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.
- -------------------------------------------------------------------------------------------------------------------------
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 $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
F-26
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 February 24, 2006
- -------------------------------------------------------- -----------------
Guy J. Quigley, Chairman of the Board, Date
(President, Chief Executive Officer)
/s/ George J. Longo February 24, 2006
- -------------------------------------------------------- -----------------
George J. Longo, Vice President, Chief Financial Officer Date
(Principal Financial and Accounting Officer)
F-27
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 sheets of The Quigley
Corporation and subsidiaries as of December 31, 2005 and 2004 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 2005 and 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2005 and 2004, and the results of its operations and its cash flows for years
ended December 31, 2005 and 2004, in conformity with U.S. generally accepted
accounting principles.
/s/ Amper Politziner & Mattia P.C.
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Edison, New Jersey
February 24, 2006
F-28
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of The Quigley Corporation
In our opinion, the accompanying consolidated statement of operations,
stockholders' equity, and cash flows present fairly, in all material respects,
and the results of operations and cash flows of The Quigley Corporation and its
subsidiaries for the year 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 audit. We conducted our audit 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
audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
Philadelphia, Pennsylvania
March 26, 2004
F-29
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 fiscal year
ended December 31, 2003 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 fiscal year ended
December 31, 2003 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 fiscal year ended December 31,
2003 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 material changes in internal controls or in other factors that could
materially affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the Act), beginning
with our Annual Report on Form 10-K for the fiscal year ended December 31, 2006,
we may be required to furnish a report by our management on our internal control
over financial reporting. This report will contain, among other matters, an
assessment of the effectiveness of our internal control over financial reporting
as of the end of our fiscal year, including a statement as to whether or not our
internal control over financial reporting is effective. This assessment must
include disclosure of any material weakness in our internal control over
financial reporting identified by management. If we identify one or more
material weaknesses in our internal control over financial reporting, we will be
unable to assert our internal control over financial reporting is effective.
This report will also contain a statement that our independent registered public
accountants have issued an attestation report on management's assessment of such
internal controls and a conclusion on the operating effectiveness of those
controls.
Management acknowledges its responsibility for internal controls over financial
reporting and seeks to continually improve those controls. In order to achieve
compliance with Section 404 of the Act within the prescribed period, we are
currently performing the system and process documentation and evaluation needed
to comply with Section 404, which is both costly and challenging. We believe our
process, which began in fiscal 2003 and is continuing in fiscal 2006 for
documenting, evaluating and monitoring our internal control over financial
reporting is consistent with the objectives of Section 404 of the Act.
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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 2006 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 2006 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 2006 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 2006 Annual Meeting of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required under this item is incorporated by reference to the
Company's Proxy Statement for the 2006 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).
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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).
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).
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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, 2006
(incorporated by reference to Exhibit 16.1 of Form 10-K
filed on March 31, 2005).
21.1** Subsidiaries of The Quigley Corporation.
23.1** Consent of PricewaterhouseCoopers LLP, Independent
Registered Public Accounting Firm, dated March 13, 2006.
23.2** Consent of Amper, Politziner & Mattia, Independent
Registered Public Accounting Firm, dated March 13, 2006.
31.1** Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2** Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1** Certification of the Chief Executive Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2** Certification of the Chief Financial Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Indicates a management contract or compensatory plan or arrangement
** Filed herewith
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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 23, 2006
- ------------------------------------------------- --------------
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 23, 2006
- --------------------------- --------------
Guy J. Quigley Chief Executive Officer and Director
/s/ Charles A. Phillips Executive Vice President, Chief Operating March 23, 2006
- --------------------------- --------------
Charles A. Phillips Officer and Director
/s/ George J. Longo Vice President, Chief Financial March 23, 2006
- --------------------------- --------------
George J. Longo Officer and Director (Principal
Financial and Accounting Officer)
/s/ Jacqueline F. Lewis Director March 23, 2006
- --------------------------- --------------
Jacqueline F. Lewis
/s/ Rounsevelle W. Schaum Director March 23, 2006
- --------------------------- --------------
Rounsevelle W. Schaum
/s/ Stephen W. Wouch, Director March 23, 2006
- --------------------------- --------------
Stephen W. Wouch,
/s/ Terrence O. Tormey, Director March 23, 2006
- --------------------------- --------------
Terrence O. Tormey,
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