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 Ddecember 31, 2006
-----------------
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
-----------------------
(Exact Name of Registrant as Specified in Its Charter)
Nevada 23-2577138
------ ----------
(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
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (215) 345-0919
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
COMMON STOCK, $.0005 PAR VALUE PER SHARE NASDAQ NATIONAL MARKET
- ---------------------------------------- ---------------------------------
COMMON SHARE PURCHASE RIGHTS NOT APPLICABLE
- ---------------------------------------- ---------------------------------
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 [X] Non-accelerated filer [ ]
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 $79,250,060 as of June 30, 2006, 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 December 31, 2006:
Common stock, $.0005 par value per share: 12,684,633.
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 2007 annual meeting of
stockholders.
TABLE OF CONTENTS
Page
----
Part I PAGE
Item 1. Business 2 -11
1A. Risk Factors 11- 18
1B. Unresolved Staff Comments 18
2. Properties 18
3. Legal Proceedings 18 - 26
4. Submission of Matters to a Vote of Security Holders 26
Part II
5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities 26 - 28
6. Selected Financial Data 28
7. Management's Discussion and Analysis of Financial
Condition and Results of Operation 29 - 35
7A. Quantitative and Qualitative Disclosures About
Market Risk 35
8. Financial Statements and Supplementary Data 36
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 37
9A. Controls and Procedures 37
9B. Other Information 38
Part III
10. Directors and Executive Officers of the Registrant 38
11. Executive Compensation 38
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 38
13. Certain Relationships and Related Transactions 38
14. Principal Accountant Fees and Services 38
Part IV
15. Exhibits and Financial Statement Schedules 39 - 40
-1-
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 ("IND") or take any other action to allow its
formulations to be studied or marketed. Furthermore, no claim is made that
potential medicine discussed herein is safe, effective, or approved by the Food
and Drug Administration. Additionally, data that demonstrates activity or
effectiveness in animals or in vitro tests do not necessarily mean 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.
The 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.
-2-
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, eight U.S. and ten foreign 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, or is unable to fund ongoing research, 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.
In 2006, 2005 and 2004, approximately 9%, 8% and 7%, respectively, of the
Company's net sales were related to international markets.
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
-3-
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;
-4-
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 5, 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 14, 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 Supplements and
Method of Using Same" for a method for treating at least one symptom
of arthritis. The patent extends through April 22, 2023.
o A Patent (No. 7,083,813 B2) entitled "Methods for The Treatment of
Peripheral Neural and Vascular Ailments." The patent extends through
August 4, 2023.
-5-
o A Patent (No. 7,166,435 B2) entitled "Compositions and Methods for
Reducing the Tranmissivity of Illnesses." This patent will provide
additional protection to an existing composition patent (number
6,592,896), which the Company received in July 2003 and will support
on-going investigations and potential commercialization
opportunities. The Company will be continuing its studies to test
the effects of the referenced compound against avian flu and human
influenza. The patent extends through November 5, 2021.
o A Patent (No. 7,175,987 B2) entitled "Compositions and Methods for
The Treatment of Herpes." The patent extends through November 5,
2021.
o A Mexican Patent (No. 236311) entitled "Method and Composition for
the Treatment of Diabetic Neuropathy." The patent extends through
December 18, 2020.
o A New Zealand Patent (No. 533439) entitled "Methods for The
Treatment of Peripheral Neural and Vascular Ailments." The patent
extends through November 6, 2022.
o A New Zealand Patent (No. 526041) entitled "Method and Composition
for the Treatment of Diabetic Neuropathy." The patent extends
through December 18, 2021.
o An Australian Patent (No. 2002231095) entitled "Method and
Composition for the Treatment of Diabetic Neuropathy." The patent
extends through December 18, 2021.
o A South African Patent (No. 2003/4247) entitled "Methods and
Composition for the Treatment of Diabetic Neuropathy." The patent
extends through December 18, 2021.
o A South African Patent (No. 2003/9802) entitled "Nutritional
Supplements and Methods of Using Same" for a method for treating at
least one symptom of arthritis. The patent extends through August 5,
2022.
o A South African Patent (No. 2004/4614) entitled "Methods for The
Treatment of Peripheral Neural and Vascular Ailments." The patent
extends through November 5, 2022.
o A South African Patent (No. 2005/0517) entitled "Anti-Microbial
Compositions & Methods for Using Same," the patent extends through
July 23, 2023.
o A South African Patent (No. 2004/3365) "Topical Compositions and
Methods for Treatment of Adverse Effects of Ionizing Radiation," the
patent extends through November 5, 2022.
o An Israeli Patent (No. 159357) entitled "Nutritional Supplements and
Methods of Using Same," the patent extends through August 6, 2022.
QR-333 - 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 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 announced
the filing of an IND application with the FDA for its topical compound for the
treatment of Diabetic Peripheral Neuropathy. This filing allowed the Company to
begin human clinical trials following a 30-day review period. If no further
comments were forthcoming from the FDA, studies with human subjects could
commence pending the availability of study drug. This application included a
compilation of all of the supporting development data and regulatory
documentation required to file an IND application with the FDA. In April 2006,
upon FDA approval for its IND, the Company announced it's intent to commence
human studies on its formulation.
-6-
The Company also announced that in anticipation of receiving this IND, it had
previously held its investigators meeting to organize its multi-center phase
2(b) trials. This would allow the Company to begin these trials as soon as study
drug is available.
In May 2006, the Company announced that it had begun screening patients to start
testing their investigational new drug QR-333 and patients suffering from
diabetic peripheral neuropathy would be given doses in an escalating fashion to
provide pharmacokinetics data.
In September 2006, the Company announced that the results from its human study,
titled "Single Center, Dose Escalating, Safety, Tolerability, And
Pharmacokinetics Study Of QR-333 In Subjects With Diabetic Peripheral
Neuropathy", demonstrated that QR-333 can be administered safely to patients
suffering from diabetic peripheral neuropathy and it would proceed to conducting
Phase IIb clinical trials. The essential CMC (Chemistry Manufacturing and
Controls) stage would provide the Company with the necessary information needed
to produce larger quantities of drug for the Phase IIb trial involving close to
200 patients.
The pharmacokinetics trial was the first study in the U.S. conducted under the
FDA issued IND. The positive data showed that QR-333 is safe, it is not
systemically absorbed and it is well tolerated after multiple doses. These
findings are consistent with prior animal toxicity data and the human proof of
concept study performed in France.
In November 2006, the Company announced that patient enrollment in a Phase IIb
multi center clinical study of QR-333 for the treatment of symptomatic Diabetic
Peripheral Neuropathy (DPN) had commenced. The Phase IIb trial will evaluate the
safety and efficacy of QR-333 applied three times daily compared to
placebo-treated patients over 12 weeks. Efficacy will be determined by Symptom
Assessment Scores, a Visual Analogy Scale (VAS), Quality of Life and Sleep
Questionnaires. Safety will be determined by medical history, physical
examination, vital signs, 12-lead ECG, laboratory tests and nerve conduction
studies. The study will involve 150-200 randomized male and female patients with
Type 1 & 2 diabetes, as defined by the ADA (American Diabetes Association) and
distal symmetric diabetic polyneuropathy.
The Study Chairman is Dr. Philip Raskin, Professor of Medicine University of
Texas Southwestern Medical Center at Dallas Texas. The study protocol was
approved by the FDA as a part of Quigley Pharma's IND submission and has been
approved by the required Investigational Review Boards. The completion of the
study is dependent upon enrollment rates that may affect the overall length of
the study and the communication of its results.
QR-336 - 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.
In April 2006, the Company announced that it signed an agreement with Dr.
William H. McBride, the Vice Chair of Research, Department of Oncology at UCLA
to help develop an appropriate animal model radio protective research program
for QR-336 to comply with New Food and Drug Administration animal efficacy rules
for radio-protective pharmacological compounds.
In October 2006, the Company announced that it had received significant data
identifying 50 microliters as the least toxic and most effective radiation
protection dose in mice when administered ip (intraperitoneal), po (by mouth) or
sc (under the skin) prior to radiation exposure. These experiments were
essential for providing the Company with data to optimize the formulation for
efficacy and route of administration, which is required for filing under the
FDA's "Animal Efficacy Rule".
QR-337 - 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.
QR-435 - 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 pre-clinical studies, the antiviral formulation demonstrates antiviral
activity against Ocular and Genital Herpes, indicating a new research and
development path for the versatile compound. The Company is pleased with the
progress and indicated that continued research is required to confirm the
compound's safety and efficacy profiles.
-7-
In May 2006, the Company announced that it would begin a series of studies to
evaluate the ocular antiviral efficacy and toxicity of its naturally-derived
topical compound QR-435. Studies will be completed at The Campbell Ophthalmic
Microbiology Laboratory at the University of Pittsburgh in the same lab where
previous successful in vitro studies of QR-435 were performed.
In December 2006, the Company announced that a series of studies were conducted
on the advice of Campbell Laboratories, University of Pittsburgh, to assess
QR-435 (Quigley Pharma's broad spectrum anti-viral) potential for treating
Herpes Keratitis. While the in-vitro studies were very successful at killing the
herpes virus on direct contact, the HSV-1/NZW rabbit keratitis model study
showed that the compound, in its aqueous form, did not remain in the eye long
enough to penetrate the corneal epithelial cells where the virus resides in an
infection. The HSV-1/NZW rabbit keratitis model is a recognized standard for
evaluating potential therapeutic agents in this class and is only utilized based
on prior positive experimentation, as was the case.
Quigley Pharma will continue to pursue research and development objectives of
this compound in the treatment of respiratory viruses on the strength of prior
successful in-vitro and ferret model in-vivo studies. The company's naturally
derived formula has shown significant antiviral properties against various
strains of H3N2 and H5N1 Influenza viruses in these studies.
QR-437 - In January 2004, the Company 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.
QR-439 - 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.
QR-440 (a) - The Company received an additional Investigational New Animal Drug
(INAD) number from the Center for Veterinary Medicine of the FDA. In previous
studies, QR-440 has been shown to reduce inflammation and also suggests possible
disease-modifying potential.
QR-441(a) - In November 2005, the Company was assigned nine INADs for a broad
anti-viral agent by the Center for Veterinary Medicine of the FDA. Eight of the
INADs are for investigating the compound use against avian 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 March 2006, the Company announced that it is
planning a series of controlled experiments designed to test its all natural
broad spectrum anti-viral compound in poultry stocks. The Company also announced
that Dr. Timothy S. Cummings, MS, DVM, ACPV Clinical Poultry Professor at the
College of Veterinary Medicine at Mississippi State University and Thomas G.
Voss, Ph.D. Assistant Professor Tulane University School of Medicine will be
assisting the Company in the development of the INAD bird challenge studies.
In July 2006, the Company announced that it has obtained positive results that
support Quigley Pharma's continued progress in developing the natural broad
spectrum anti-viral QR441(a) for use in preventing the spread of avian flu in
poultry stocks. The results of the healthy chicken medical feed study confirmed
that food or water dose forms provide an opportunity for potential
commercialization if the compound demonstrates efficacy within these dose forms.
The results clearly showed that the chickens tolerated and consumed all
concentrations of QR441 (a) in the medicated feed. They also tolerated and
consumed the low concentration of drug in the medicated water.
In January 2007, the Company announced positive results from a study evaluating
its anti-viral compound QR-441(a) in embryonating egg and VERO E6 cell test
models. The preliminary study demonstrated QR-441(a) as a potential antiviral
agent in reducing Infectious Bronchitis and New Castle Disease, two viral
poultry diseases that have a significant economic impact to the poultry industry
on an annual basis. Previous in vitro studies have demonstrated that QR-441(a)
to be a potent antiviral agent against H5N1 (Avian Flu).
In February 2007, the Company announced that it had signed an agreement with the
State of Israel Ministry of Agriculture & Rural Development (MOAG) and the
-8-
Kimron Veterinary Institute to conduct a clinical trial testing the anti-viral
capacity of the Quigley compound QR-441(a) administered as a medical feed and
water to chickens exposed to HPAI (Highly Pathogenic Avian Influenza) H5N1.
If successful this study could potentially provide data on the efficacy of
QR-441(a) in preventing the infection of food grade poultry through the use of
formulated feed and water. Positive data could be used to continue the
development of the compound in the U.S with guidance from the FDA under the
INAD's issued to Quigley in 2005 and might also be useful for development
outside the United States, where the impact of disease has already been felt.
QR-443 - In August 2006, the Company announced that it had obtained positive
results for its QR-443 compound for the treatment of Cachexia, a debilitating
and life threatening muscle wasting condition. The results of an animal study
found a 75% efficacy rate in the treatment of mice with this condition.
In January 2007, the Company announced that it had completed a preliminary
follow up Cachexia study, evaluating weight loss in mice. The tumor burden
Cachexia model study concluded that QR-443 was as effective in delaying the
progression of Cachexia when given orally as it had been shown to be when
administered intra-peritoneally in a previous study.
The new data compliments the previous study results demonstrating a correlation
between effectiveness and the frequency of administration of the QR-443
compound. Cachexia is an extremely debilitating and life threatening, wasting
syndrome associated with chronic diseases such as cancer, AIDs, chronic renal
failure, COPD and rheumatoid arthritis, where inflammation has a significant
impact and patients experience loss of weight, muscle atrophy, fatigue, weakness
and decreased appetite.
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) No. 7,083,813 B2 (August 1, 2006)
No. 7,166,435 B2 (January 23, 2007) No. 7,175,987 B2 (February 13, 2007)
Mexico No. 236311 (April 28, 2006) South Africa No. 2003/4247 (July 28, 2004)
South Africa No. 2003/9802 (July 28, 2004)
New Zealand No. 533439 (October 12, 2006) South Africa No. 2004/4614 (October 28, 2005)
New Zealand No. 526041 (May 12, 2005) South Africa No. 2005/0517 (December 28, 2005)
South Africa No. 2004/3365 (May 31, 2006)
Australia No. 2002231095 (November 24, 2005) Israel No. 159357 (November 21, 2006)
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
-9-
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 for these fees from such litigation 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.,
Wal-Mart, Ahold, Albertsons, CVS, RiteAid, Publix, Sam's Club, Winn-Dixie
Stores, Inc., 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 31%, 29%, and 27% of its
continuing consolidated gross revenues for the years ended December 31, 2006,
2005 and 2004, respectively.
Darius is a direct selling organization specializing in proprietary health and
wellness products and the introduction of new products to the marketplace
through a network of independent distributor representatives. 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,
2006, 2005 and 2004 were $3,820,071, $3,784,221 and $3,232,569 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.
-10-
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.
EMPLOYEES
At December 31, 2006 the Company employed 132 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
THE COMPANY HAS A HISTORY OF LOSSES AND LIMITED WORKING CAPITAL AND EXPECTS TO
INCREASE SPENDING.
The Company has experienced net losses for three of the past seven fiscal years.
Although the Company earned net income of approximately $3,217,000, $453,000 and
$675,000, respectively, in the fiscal years ended December 31, 2005, December
31, 2004 and 2003, it incurred net losses of $1,748,000, $6,454,000, and
$5,196,000, respectively, in the fiscal years ended December 31, 2006, December
31, 2002, December 31, 2000. In the fiscal year ended December 31, 2001, the
Company earned net income of $216,000, but that amount included net settled
litigation payments received of approximately $700,000 related to licensing
fees. As of December 31, 2006, The Company had working capital of approximately
$20,541,000. Since the Company continues to increase its spending on research
and development in connection with Pharma's product development, it is uncertain
whether the Company will generate sufficient revenues to meet expenses or to
operate profitably in the future.
-11-
THE COMPANY HOLDS PATENTS WHICH IT MAY NOT BE ABLE TO DEVELOP INTO
PHARMACEUTICAL MEDICATIONS.
Future success depends in part on Pharma's ability to research and develop
prescription medications based on patents, which currently 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 5, 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 14, 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 Supplements and
Method of Using Same" for a method for treating at least one symptom
of arthritis. The patent extends through April 22, 2023.
o A Patent (No. 7,083,813 B2) entitled "Methods for The Treatment of
Peripheral Neural and Vascular Ailments." The patent extends through
August 4, 2023.
o A Patent (No. 7,166,435 B2) entitled "Compositions and Methods for
Reducing the Tranmissivity of Illnesses." This patent will provide
additional protection to an existing composition patent (number
6,592,896), which the Company received in July 2003 and will support
on-going investigations and potential commercialization
opportunities. The Company will be continuing its studies to test
the effects of the referenced compound against avian flu and human
influenza. The patent extends through November 5, 2021.
o A Patent (No. 7,175,987 B2) entitled "Compositions and Methods for
The Treatment of Herpes." The patent extends through November 5,
2021.
o A Mexican Patent (No. 236311) entitled "Method and Composition for
the Treatment of Diabetic Neuropathy." The patent extends through
December 18, 2020.
o A New Zealand Patent (No. 533439) entitled "Methods for The
Treatment of Peripheral Neural and Vascular Ailments." The patent
extends through November 6, 2022.
o A New Zealand Patent (No. 526041) entitled "Method and Composition
for the Treatment of Diabetic Neuropathy." The patent extends
through December 18, 2021.
o An Australian Patent (No. 2002231095) entitled "Method and
Composition for the Treatment of Diabetic Neuropathy." The patent
extends through December 18, 2021.
o A South African Patent (No. 2003/4247) entitled "Methods and
Composition for the Treatment of Diabetic Neuropathy." The patent
extends through December 18, 2021.
o A South African Patent (No. 2003/9802) entitled "Nutritional
Supplements and Methods of Using Same" for a method for treating at
least one symptom of arthritis. The patent extends through August 5,
2022.
o A South African Patent (No. 2004/4614) entitled "Methods for The
Treatment of Peripheral Neural and Vascular Ailments." The patent
extends through November 5, 2022.
o A South African Patent (No. 2005/0517) entitled "Anti-Microbial
Compositions & Methods for Using Same," the patent extends through
July 23, 2023.
-12-
o A South African Patent (No. 2004/3365) "Topical Compositions and
Methods for Treatment of Adverse Effects of Ionizing Radiation," the
patent extends through November 5, 2022.
o An Israeli Patent (No. 159357) entitled "Nutritional Supplements and
Methods of Using Same," the patent extends through August 6, 2022.
These potential new products are in the development stage and no assurances can
be given that commercially viable products will be developed from these patent
applications. Prior to any new product being ready for sale, substantial
resources will have to be committed for research, development, preclinical
testing, clinical trials, manufacturing scale-up and regulatory approval. The
Company faces significant technological risks inherent in developing these
products. The Company may abandon some or all of the proposed new products
before they become commercially viable. Even if the Company develops and obtains
approval of a new product, if the Company cannot successfully commercialize it
in a timely manner, its business and financial condition may be materially
adversely affected.
THE COMPANY WILL NEED TO OBTAIN ADDITIONAL CAPITAL TO SUPPORT LONG-TERM PRODUCT
DEVELOPMENT AND COMMERCIALIZATION PROGRAMS.
The Company's ability to achieve and sustain operating profitability depends in
large part on the 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. There is no assurance
that the Company will ever obtain such approvals or achieve significant levels
of sales. The current sales levels of Cold-Eeze(R) products and health and
wellness products may not generate all the funds the Company anticipates will be
needed to support current plans for product development. The Company may need to
obtain additional financing to support its long-term product development and
commercialization programs. Additional funds may be sought through public and
private stock offerings, arrangements with corporate partners, borrowings under
lines of credit or other sources.
The amount of capital that may be needed 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 the Company elects to establish partnering arrangements for
development, sales, manufacturing and marketing of such products;
o the level of future sales of Cold-Eeze(R) and health and wellness
products, and expense levels for international sales and marketing
efforts;
o whether the Company can establish and maintain strategic
arrangements for development, sales, manufacturing and marketing of
its products; and
o whether any or all of the outstanding options and warrants are
exercised and the timing and amount of these exercises.
Many of the foregoing factors are not within the Company's control. If
additional funds are required and such funds are not available on reasonable
terms, the Company may have to reduce its capital expenditures, scale back its
development of new products, reduce its workforce and out-license to others
products or technologies that the Company otherwise would seek to commercialize
itself. Any additional equity financing will be dilutive to stockholders, and
any debt financing, if available, may include restrictive covenants.
THE COMPANY'S PRODUCTS AND POTENTIAL NEW PRODUCTS ARE SUBJECT TO EXTENSIVE
GOVERNMENTAL REGULATION.
The Company's business is regulated by various agencies of the states and
localities where its products are sold. Governmental regulations in foreign
countries where the Company plans 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 its products. In addition, no prediction can be
made as to whether new domestic or foreign legislation regulating our activities
will be enacted. Any new legislation could have a material adverse effect on its
business, financial condition and operations. Non-compliance with any applicable
requirements may subject the Company or the manufacturers of its products to
sanctions, including warning letters, fines, product recalls and seizures.
-13-
COLD REMEDY AND HEALTH AND WELLNESS PRODUCTS. The manufacturing, processing,
formulation, packaging, labeling and advertising of the 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");
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, the 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 the Company's
activities. If regulatory approval of new products is not obtained in a timely
manner or not at all the Company could be materially adversely affected. Even if
regulatory approval of new products is obtained, such approval may impose
limitations on the indicated uses for which the products may be marketed which
could also materially adversely affect the business, financial condition and
future operations of the Company.
THE COMPANY'S BUSINESS IS VERY COMPETITIVE AND INCREASED COMPETITION COULD HAVE
A SIGNIFICANT IMPACT ON EARNINGS.
Both the non-prescription healthcare product and pharmaceutical industries are
highly competitive. Many of the Company's competitors have substantially greater
capital resources, research and development staffs, facilities and experience
than it does. These and other entities may have or may develop new technologies.
These technologies may be used to develop products that compete with the
Company.
The Company believes that the 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.
The Company believes that 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 the Company's 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 the Company will be able to compete successfully in the future.
If the Company is unable to compete, its earnings may be significantly impacted.
-14-
THE COMPANY'S FUTURE SUCCESS IS DEPENDENT ON THE CONTINUED SERVICES OF KEY
PERSONNEL INCLUDING THE CHAIRMAN OF THE BOARD OF DIRECTORS, PRESIDENT AND CHIEF
EXECUTIVE OFFICER.
The Company's future success depends in large part on the continued service of
key personnel. In particular, the loss of the services of Guy J. Quigley,
Chairman of the Board, President and Chief Executive Officer could have a
material adverse effect on operations. The Company had an employment agreement
with Mr. Quigley which expired on December 31, 2005. Future success and growth
also depends on the Company's ability to continue to attract, motivate and
retain highly qualified employees. If the Company is unable to attract, motivate
and retain qualified employees, our business and operations could be materially
adversely affected.
THE COMPANY'S 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 the
Company's product development and future operations.
THE COMPANY'S FUTURE SUCCESS IS DEPENDENT ON THE CONTINUED ACCEPTANCE OF THE
DIRECT SELLING PHILOSOPHY, THE MAINTENANCE OF THE 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 the Company's future growth and profitability.
THE COMPANY'S FUTURE SUCCESS DEPENDS ON THE CONTINUED SALES OF ITS PRINCIPAL
PRODUCT.
For the fiscal year ended December 31, 2006, the Cold-Eeze(R) products
represented approximately 59% of the Company's total sales. While the Company
has diversified into health and wellness products, the line of Cold-Eeze(R)
products continues to be a major part of its business. Accordingly, the Company
has to depend on the continued acceptance of Cold-Eeze(R) products by its
customers. However, there can be no assurance that the 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 the financial condition, prospects and ability to continue
operations of the Company.
THE COMPANY HAS A CONCENTRATION OF SALES TO AND ACCOUNTS RECEIVABLE FROM SEVERAL
LARGE CUSTOMERS.
Although the Company has a broad range of customers that includes many large
wholesalers, mass merchandisers and multiple outlet pharmacy chains, the five
largest customers account for a significant percentage of sales. These five
customers accounted for 31% of total sales for the fiscal year ended December
31, 2006 and 29% of total sales for the fiscal year ended December 31, 2005. In
addition, customers comprising the five largest accounts receivable balances
represented 56% and 47% of total accounts receivable balances at December 31,
2006 and 2005, respectively. Credit is extended to customers based upon an
evaluation of their financial condition and credit history, and collateral is
not generally required. If one or more of these large customers cannot pay, the
write-off of their accounts receivable would have a material adverse effect on
the Company's 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
the operations and financial condition of the Company..
THE COMPANY IS DEPENDENT ON THIRD-PARTY MANUFACTURERS AND SUPPLIERS FOR THE
HEALTH AND WELLNESS PRODUCTS AND THIRD-PARTY SUPPLIERS FOR CERTAIN OF THE COLD
REMEDY PRODUCTS.
The Company does not manufacture any of the Health and Wellness products, nor
manufacture any of the ingredients in these products. In addition, all active
ingredients that are raw materials used in connection with the Cold-Eeze(R)
product are purchased from a single unaffiliated supplier. Should any of these
relationships terminate, the Company believes that the contingency plans which
have been formulated would prevent a termination from materially affecting its
operations. However, if any of these relationships are terminated, there may be
delays in production of the Company's products until an acceptable replacement
-15-
facility is located. The Company continues to look for safe and reliable
multiple-location sources for products and raw materials so that it can continue
to obtain products and raw materials in the event of a disruption in its
business relationship with any single manufacturer or supplier. While secondary
sources have been identified for some of the Company's products and raw
materials, its inability to find other sources for some of its other products
and raw materials may have a material adverse effect on its 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 the Company's
success.
THE COMPANY IS UNCERTAIN AS TO WHETHER IT CAN PROTECT ITS PROPRIETARY RIGHTS.
The strength of the Company's patent position may be important to its long-term
success. The Company currently owns eight U.S. and ten foreign patents in
connection with products that are being developed by Pharma. In addition, the
Company has 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 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 the Company's exclusive license
will effectively protect its products from duplication by others. In addition,
the Company may not be able to afford the expense of any litigation which may be
necessary to enforce its rights under any of the patents. Although the Company
believes that current and future products do not and will not infringe upon the
patents or violate the proprietary rights of others, if any of the current or
future products do infringe upon the patents or proprietary rights of others,
the Company may have to modify the products or obtain an additional license for
the manufacture and/or sale of such products. The Company could also be
prohibited from selling the infringing products. If the Company is found to
infringe on the proprietary rights of others, it is uncertain whether the
Company 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 its business, financial condition and operations.
The Company also use non-disclosure agreements with its employees, suppliers,
consultants and customers to establish and protect the ideas, concepts and
documentation of its 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 the Company's technologies, know-how,
ideas, concepts and documentation, which could have a material adverse effect on
the Company's financial condition.
THE SALES OF THE COMPANY'S PRIMARY PRODUCT FLUCTUATES BY SEASON.
A significant portion of the Company's 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 the cold remedy
products. There can be no assurance that the Company will be able to manage its
working capital needs and its inventory to meet the fluctuating demand for these
products. Failure to accurately predict and respond to consumer demand may
result in the production of excess inventory. Conversely, if products achieve
greater success than anticipated for any given quarter, this may result in
insufficient inventory to meet customer demand.
THE COMPANY'S EXISTING PRODUCTS AND NEW PRODUCTS UNDER DEVELOPMENT EXPOSE THE
COMPANY TO POTENTIAL PRODUCT LIABILITY CLAIMS.
The Company's business results in exposure to an inherent risk of potential
product liability claims, including claims for serious bodily injury or death
caused by the sales of the Company's existing products and the clinical trials
of products which are being developed. These claims could lead to substantial
damage awards. The Company currently maintains product liability insurance in
the amount of, and with a maximum payout of, $25 million. A successful claim
brought against us in excess of, or outside of, existing insurance coverage
could have a material adverse effect on the Company's results of operations and
financial condition. Claims against the Company, regardless of their merit or
eventual outcome, may also have a material adverse effect on the consumer demand
for its products.
THE COMPANY IS INVOLVED IN LAWSUITS REGARDING CLAIMS RELATING TO CERTAIN OF THE
COLD-EEZE(R) PRODUCTS AND OTHER BUSINESS MATTERS.
The Company is, 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 that the Company has adequate insurance
coverage and, if applicable, accrued loss contingencies for all known matters,
there is no assurance that the outcome of all current or future litigation will
not have a material adverse effect on the Company.
-16-
A SUBSTANTIAL AMOUNT OF THE COMPANY'S OUTSTANDING COMMON STOCK IS OWNED BY THE
CHAIRMAN OF THE BOARD AND PRESIDENT AND EXECUTIVE OFFICERS AND DIRECTORS, AS A
GROUP CAN SIGNIFICANTLY INFLUENCE ALL MATTERS VOTED ON BY STOCKHOLDERS.
Guy J. Quigley, Chairman of the Board, President and Chief Executive Officer,
through his beneficial ownership, has the power to vote approximately 27.0% of
The Company's common stock. Mr. Quigley and the other executive officers and
directors collectively beneficially own approximately 41.2% of the 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 major decisions which
could prevent a change of control of the Company.
THE COMPANY'S STOCK PRICE IS VOLATILE.
The market price of the Company's common stock has experienced significant
volatility. From January 1, 2003 to January 31, 2007, the per share bid price
has ranged from a low of approximately $4.75 to a high of approximately $16.94.
There are several factors which could affect the price of the common stock, some
of which are announcements of technological innovations for new commercial
products by us or competitors, developments concerning propriety rights, new or
revised governmental regulation or general conditions in the market for the
Company's products. Sales of a substantial number of shares by existing
stockholders could also have an adverse effect on the market price of the common
stock.
FUTURE SALES OF SHARES OF THE COMPANY'S COMMON STOCK IN THE PUBLIC MARKET COULD
ADVERSELY AFFECT THE TRADING PRICE OF SHARES OF THE COMMON STOCK AND THE
COMPANY'S ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS.
Future sales of substantial amounts of shares of the Company's common stock in
the public market, or the perception that such sales are likely to occur, could
affect prevailing trading prices of the common stock and, as a result, the value
of the notes. As of December 31, 2006, the Company had 12,684,633 shares of
common stock outstanding.
The Company also has outstanding options to purchase an aggregate of 3,047,000
shares of common stock at an average exercise price of $7.58 per share and
outstanding warrants to purchase an aggregate of 550,000 shares of common stock
at an average exercise price of $10.00 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 the 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
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 the Company to sell equity or equity-related securities in the
future at a time and price that it deems appropriate.
THE COMPANY DOES NOT INTEND TO PAY CASH DIVIDENDS IN THE FORESEEABLE FUTURE.
The Company has not paid cash dividends on its common stock since inception. The
intention of the Company is to retain earnings, if any, for use in the business
and does not anticipate paying any cash dividends to stockholders in the
foreseeable future.
THE COMPANY'S ARTICLES OF INCORPORATION AND BY-LAWS CONTAIN CERTAIN PROVISIONS
THAT MAY BE BARRIERS TO A TAKEOVER.
The Company's Articles of Incorporation and By-laws contain certain provisions
which may deter, discourage, or make it difficult to assume control of the
Company 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 the common stock at the time. In addition,
these provisions may assist 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 the Company's business.
THE COMPANY HAS AGREED TO INDEMNIFY ITS OFFICERS AND DIRECTORS FROM LIABILITY.
Sections 78.7502 and 78.751 of the Nevada General Corporation Law allow the
Company 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
-17-
agent of the Company or is or was serving at the Company's request as a
director, officer, employee or agent of any corporation, partnership, joint
venture, trust or other enterprise. These provisions permit the Company 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 the Company,
even though such an action, if successful, might otherwise benefit the Company
or its stockholders. In addition, to the extent that the Company expends funds
to indemnify directors and officers, funds will be unavailable for operational
purposes.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable
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 $2,613. This Nevada location has a three-year lease that expires in July
2009. 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
international locations in Singapore and Taiwan, having a combined area of
approximately 30,400 square feet. The current monthly lease cost of these
offices and warehouse space is $23,336 with current leases set to expire no
later than July 2009. 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, ET AL. VS. THE QUIGLEY CORPORATION
(CCP OF PHILA., AUGUST TERM 2000, NO. 001011)
In September, 2000, the Company was sued by two individuals (Jason Tesauro and
Elizabeth Eley, both residents of Georgia), allegedly on behalf of a "nationwide
class" of "similarly situated individuals," in the Court of Common Pleas of
Philadelphia County, Pennsylvania. The Complaint further alleges that the
plaintiffs purchased certain Cold-Eeze 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, as pleaded originally, requested an unspecified amount
of damages for violations of Pennsylvania's consumer protection law, breach of
implied warranty of merchantability 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' claims.
In May 2001, plaintiffs filed a motion to certify the putative 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 plaintiffs' motion. The court denied plaintiffs'
motion to certify a class based on plaintiffs' claims under Pennsylvania's
consumer protection law, under which plaintiffs sought treble damages,
effectively dismissing this cause of action; however, the court certified a
class based on plaintiffs' secondary breach of implied warranty and unjust
enrichment claims. In August, 2002, the court issued an order adopting a form of
Notice of Class Action to be published nationally. The form of Notice approved
by the court included a provision which limits the potential class members who
may potentially recover damages in this action to those persons who present a
proof of purchase of Cold-Eeze during the period August 1996 and November 1999.
Afterward, a series of pre-trial motions were filed raising issues concerning
trial evidence and the court's jurisdiction over the subject matter of the
action. In March, 2005, the court held oral argument on these motions.
-18-
On November 8, 2006, the Court entered an Order dismissing the case in its
entirety on the basis that the action was preempted by federal law. The
plaintiffs appealed the Court's decision in December, 2006. Presently, no
scheduling order has been entered by the appellate court, which presumably will
hear argument later this year.
For the reasons stated by the Court in dismissing the case, as well as for other
reasons, the Company believes that plaintiffs' case on appeal lacks merit;
however, no prediction as to the outcome of the appeal can be made.
THE QUIGLEY CORPORATION VS. JOHN C. GODFREY, ET AL
(BUCKS CO. CCP, NO. 04-07776)
In this action, which was commenced in November 2004, 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 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 believes that the defendants' counterclaims are without merit and is
vigorously defending those counterclaims and is prosecuting its action on its
complaint. The deposition phase of pre-trial discovery is about to commence. At
this time no prediction as to the outcome of this action can be made.
DARIUS INTERNATIONAL INC., ET AL. VS. ROBERT O. YOUNG ET AL.
(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. The court denied 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, held in January, 2006, 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.
On April 20, 2006, the Court entered an Order enjoining defendants from
competing against the Company. Thereafter, the parties engaged in pre-trial
discovery.
A trial on the merits of the case was held before the Court, without a jury,
during November 2006. Following the presentation of evidence, the Company
renewed its claim for a permanent injunction and monetary damages against the
defendants. Based upon the evidence presented at trial, the Company believes the
counterclaim actions are without merit.
The Court has not entered its ruling at this point, and at this time no
prediction as to the outcome can be made.
-19-
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
Quigley Corporation 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 Quigley Corporation formerly held stock. On January 22, 2003 all
shares of The Quigley Corporation stock were sold to Suncoast Naturals, Inc. in
return for stock of Suncoast Naturals, Inc. At the time of the accident, The
Quigley Corporation had no ownership interest in Caribbean Pacific Natural
Products, Inc.
The Corporation 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 in Honolulu, Hawaii. At this time no
prediction as to the outcome can be made.
NICODROPS, INC. VS. QUIGLEY MANUFACTURING, INC.
On January 30, 2006, Quigley Manufacturing, Inc., a wholly-owned subsidiary of
The Quigley Corporation, 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.
THE QUIGLEY CORPORATION VS. WACHOVIA INSURANCE SERVICES, INC. AND FIRST UNION
INSURANCE SERVICES AGENCY, INC.
The Quigley Corporation instituted a Writ of Summons against Wachovia Insurance
Services, Inc. and First Union Insurance Services Agency, Inc. on December 8,
2005. The purpose of this suit was to maintain an action and toll the statute of
limitation against The Quigley Corporation's insurance broker who failed to
place excess limits coverage for the Company for the period from November 29,
2003 until April 6, 2004. As a result of the defendant's failure to place
insurance and to notify Quigley of its actions, certain pending actions covered
by Quigley's underlying insurance at the present time many result in certain
-20-
cases presently being defended by insurance counsel and the underlying insurance
carrier to cause an exhaustion of the underlying insurance for the policy
periods ending November 29, 2004 and November 29, 2005. Any case in which an
alleged action arose by the use of Cold-Eeze Nasal Spray from November 29, 2003
to April 6, 2004 is not covered by excess insurance.
The Company's claim against Wachovia Insurance Services, Inc. and First Union
Insurance Services Agency, Inc. is for negligence and for equitable insurance
for these claims in the event that Quigley's underlying policy limits are
exhausted. As of the date of this letter there is no exhaustion of underlying
coverage and the action against Wachovia Insurance Services, Inc. and First
Union Insurance Services Agency, Inc. cannot be prosecuted until such time as
actual damages can be measured. At this time no prediction as to the outcome of
the cases covered by insurance can be made and no prediction can be made as to
the outcome of any action against Wachovia Insurance Services, Inc. and First
Union Insurance Services Agency, Inc.
MONIQUE FONTENOT DOYLE VS. THE QUIGLEY
CORPORATION (U.S.D.C., W.D. LA.
DOCKET NO.: 6:06CV1497)
On August 31, 2006, the plaintiff filed an action against the Company in the
United States District Court for the Western District of Louisiana
(Lafayette-Opelousas Division). The action alleges the plaintiff suffered
certain losses and injuries as a result of the Company's nasal spray product.
Among the allegations of plaintiff are breach of express warranties and damages
pursuant to the Louisiana products liability act.
A trial date has been set for January 7, 2008. Discovery is not yet complete.
The Company believes the plaintiff's claims are without merit and is vigorously
defending this lawsuit.
At the present time this matter is being defended by the Company's liability
insurance carrier. 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.
ZANG ANGELFIRE, TRACEY ARVIN, RAYMOND BELL, JEFFREY BROWN, SHANE HOHNSTEIN,
TAMMY LAURENT, KRISTI MARTIN, LARRY RICHARDSON, LARRY RIGSBY, BARBARA SEOANE,
DONNA SMALLEY, MARJORIE VAN BENTHEM AND JOHN WILLIAMS VS. THE QUIGLEY
CORPORATION
(PA. C.C.P., BUCKS COUNTY, DOCKET NO.: 2004-07364-27-2)
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. Subsequently, two plaintiffs dismissed their suit, leaving thirteen (13)
plaintiffs remaining. The action alleges the plaintiffs suffered certain losses
and injuries as a result of using the Company's nasal spray product. The
plaintiffs claim the Company is liable to them based on the following
allegations: negligence, strict products liability (failure to warn and
defective design), breach of express warranty, breach of implied warrant, and a
violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law
and other consumer protection statutes.
A trial date has been set for September 24, 2007. Discovery is not yet complete.
The Company is vigorously defending this lawsuit and believes that the action
lacks merit.
At the present time this matter is being defended by the Company's liability
insurance carrier. 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.
HOWARD POLSKI AND SHERYL POLSKI VS. THE QUIGLEY CORPORATION, ET
AL. (U.S.D.C., D. MINN. DOCKET NO.: 04-4199 PJS/JJG)
On August 12, 2004, plaintiffs filed an action against the Company 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 plaintiffs suffered certain losses and injuries as a result of the
Company's nasal spray product. Among the allegations of plaintiffs are
negligence, products liability, breach of express and implied warranties, and
breach of the Minnesota Consumer Fraud Statute.
-21-
The Company believes the plaintiffs' claims are without merit and is vigorously
defending this lawsuit.
At the present time this matter is being defended by the Company's liability
insurance carrier. 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.
DOMINIC DOMINIJANNI, SONJA FORSBERG-WILLIAMS, VINT PAYNE,
MURRAY LOU ROGERS, AND RANDY STOVER VS. THE QUIGLEY CORPORATION
(PA. C.C.P., BUCKS COUNTY, DOCKET NO.: 060013427-1;
CONSOLIDATED UNDER DOCKET NO.: 2004-07364-27-2)
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 the
plaintiffs 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 violations
under the Pennsylvania Unfair Trade Practices and Consumer Protection Law and
other consumer protection statutes.
Discovery is not yet complete. The Company believes the plaintiffs' claims are
without merit and is vigorously defending this lawsuit.
At the present time this matter is being defended by the Company's liability
insurance carrier. 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.
GREG SCRAGG VS. THE QUIGLEY CORPORATION, ET AL.
(U.S.D.C, D. COLO. DOCKET NO.: 06- 00061 LTB-CBS)
On November 30, 2005, an action was brought in the District Court of Denver,
Colorado. The complaint was served on the Company soon thereafter. The action
alleges 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).
A trial date has been set for August 27, 2007. Discovery is not yet complete.
The Company believes the plaintiff's claims are without merit and is vigorously
defending this lawsuit.
At the present time this matter is being defended by the Company and the
Company's liability insurance carrier. 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.
BONNIE L. HURD. VS. THE QUIGLEY CORPORATION
(PA. C.C.P., BUCKS COUNTY, DOCKET NO.: 06-10055-13-2)
On October 31, 2006, plaintiff filed an action in the Court of Common Pleas of
Bucks County, Pennsylvania. The complaint was served on the Company soon
thereafter. The action alleges the plaintiff suffered certain losses and
injuries as a result of using the Company's nasal spray product. Plaintiff's
complaint consists of counts for negligence, strict products liability (failure
to warn), strict products liability (defective design), breach of express and
implied warranties, and violations under the Pennsylvania Unfair Trade Practices
and Consumer Protection Law and other consumer protection statutes.
Discovery is not yet complete. The Company believes the plaintiff's claims are
without merit and is vigorously defending this lawsuit.
At the present time this matter is being defended by the Company's liability
insurance carrier. 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.
-22-
CAROLYN HENRY BAYNHAM VS. THE QUIGLEY CORPORATION, ET AL.
(U.S.D.C, E.D. TEX. DOCKET NO.: 1:07CV0010)
On January 8, 2007, plaintiff filed an action in the United States District
Court for the Eastern District of Texas-Beaumont Division. The complaint was
served on the Company on January 15, 2007. The action alleges the plaintiff
suffered certain losses and injuries as a result of using the Company's nasal
spray product. Plaintiff's complaint consists of counts for negligence, strict
products liability (failure to warn), strict products liability (defective
design), and breach of express and implied warranties.
Discovery is not yet complete. The Company believes the plaintiff's claims are
without merit and is vigorously defending this lawsuit.
At the present time this matter is being defended by the Company's liability
insurance carrier. 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.
CAROLYN SUNDERMEIER VS. THE QUIGLEY CORPORATION
(PA. C.C.P., BUCKS COUNTY, DOCKET NO.: 07-01324-26-2)
On February 16, 2007, plaintiff filed an action in the Court of Common Pleas of
Bucks County, Pennsylvania. The complaint was served on the Company on February
20, 2007. The action alleges the plaintiff suffered certain losses and injuries
as a result of using the Company's nasal spray product. Plaintiff's complaint
consists of counts for negligence, strict products liability (failure to warn),
strict products liability (defective design), breach of express and implied
warranties, and violations under the Pennsylvania Unfair Trade Practices and
Consumer Protection Law and other consumer protection statutes.
Discovery is not yet complete. The Company believes the plaintiff's claims are
without merit and is vigorously defending this lawsuit.
At the present time this matter is being defended by the Company's liability
insurance carrier. 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.
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.
The Fourth District Court of Utah has stayed both the September 14, 2005 and
November 3, 2005 actions pending the adjudication of the Federal District Court
action referenced above and has ordered that all disputes be determined in the
Federal District Court action in the Eastern District of Pennsylvania.
In connection with the Utah actions the Company has sued the Youngs 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.
-23-
INNERLIGHT INC. VS. THE MATRIX GROUP, LLC
(FOURTH JUDICIAL DISTRICT COURT, UTAH COUNTY, STATE OF UTAH)
On March 13, 2006 Innerlight Inc. filed a declaratory judgment action in the
Fourth Judicial District, Utah County, State of Utah, requesting a declaration
that there is no valid contract between the parties. The Matrix Group, LLC has
alleged there is a contract between the parties obligating Innerlight Inc. to
purchase $750,000 of products for the 12-month period commencing October 18,
2004 and ending October 17, 2005, $1,500,000 for the period commencing October
18, 2005 and ending October 17, 2006, and for each 12-month period thereafter,
through and including October 17, 2013, at least $4,000,000 of products from The
Matrix Group, LLC. The document on which Matrix relies was drafted by Matrix and
states that the acceptance of the appointment by distributor (Innerlight Inc.)
is conditioned upon distributor's written acceptance of the Company's product
price list. No written acceptance of the product price list was ever made by
Innerlight Inc.
The Matrix Group, LLC filed a Utah Rule of Civil Procedure 12(b)(3) motion
asking that the complaint be dismissed. On July 13, 2006 the Court for the
Fourth Judicial District, Utah County, State of Utah, entered an order denying
defendant's motion to dismiss under Rule 12(b)(3) based on Innerlight's
assertion that a material condition precedent remains to be satisfied to
establish an enforceable agreement between the parties. The Utah County Court
has maintained jurisdiction of this action to make a final determination on the
merits of Innerlight's claim.
Thereafter, Matrix filed a counterclaim alleging that a contract did exist and
that Innerlight had breached this contract. Both parties then agreed to stay
discovery, concluding that discovery was not necessary and both filed motions
for summary judgment to resolve the case.
On January 17, 2007, arguments were presented to the Court on the parties' cross
motions for summary judgment and the Court ruled in Innerlight's favor, finding
that no contract existed between the parties and that Innerlight was entitled to
return over $150,000 in product to Matrix for reimbursement. The wording of the
final Order granting Innerlight's motion and rejecting Matrix's claims is
currently being exchanged and has yet to be entered by the Court. When the Order
is entered by the Court, Matrix has the right to appeal.
THE MATRIX GROUP, LLC VS. INNERLIGHT, INC.
(U.S. DISTRICT COURT FOR THE SOUTHERN DISTRICT OF FLORIDA)
On July 6, 2006 The Matrix Group, LLC commenced an action against Innerlight,
Inc. in the United States District Court for the Southern District of Florida.
The action brought by The Matrix Group, LLC relates to the same facts and
circumstances as the action commenced in March of 2006 by Innerlight, Inc.
against The Matrix Group, LLC in Utah County, Utah. The Matrix Group, LLC is
claiming that according to the terms of the alleged contract, Innerlight has the
obligation to purchase $28,750,000 of additional product from April 6, 2006
through October 17, 2013 and that The Matrix Group, LLC is entitled to a
judgment against Innerlight, Inc. for alleged obligations to purchase product in
the amount of $744,050 from the period of October 18, 2005 through April 17,
2006. The United States District Court for the Southern District of Florida has
stayed the action pending the outcome of the previously referenced Utah action
between Innerlight Inc. and The Matrix Group, LLC.
The Company believes that the plaintiff's (The Matrix Group, LLC) claims are
without merit and is vigorously defending those claims and is prosecuting its
action on its complaint in Utah. Based upon the information the Company has at
this time, it believes that the plaintiff's actions are without merit. However,
at this time no prediction as to the outcome can be made.
TERMINATED LEGAL PROCEEDINGS
ROBERT CAFFREY AND SUE ANNE CAFFREY, H/W VS. THE QUIGLEY
CORPORATION, ET AL.
(U.S.D.C., D.N.J. DOCKET NO.: 05-05608-KSH-PS)
On October 12, 2005, the plaintiffs filed an action against The Quigley
Corporation (the "Company") in the Superior Court of New Jersey, Essex County,
which was not served until November 9, 2005. On November 28, 2005, the Company
removed the case to the United States District Court for the District of New
Jersey (Newark Vicinage). The complaint was amended on July 21, 2006 to add an
additional defendant, DPT Laboratories, Ltd. The action alleges that the
plaintiff suffered certain losses and injuries as a result of the Company's
nasal spray product. Among the allegations of plaintiffs are strict products
liability, breach of express warranties, violation of New Jersey's Consumer
Fraud Act and a loss consortium claim.
This case was recently settled at the direction of the insurance carrier out of
insurance proceeds.
-24-
DOLORES SMITH VS. THE QUIGLEY CORPORATION
(PA. C.C.P., BUCKS COUNTY, DOCKET NO.: 0503401-18-1)
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 plaintiff has recently agreed to dismiss her complaint with prejudice and
the appropriate court filings are currently being finalized.
RICHARD FLYNN VS. THE QUIGLEY CORPORATION, ET AL
On May 20, 2005, a complaint was filed in the Superior Court of Orange County,
California. The action alleged that the plaintiff suffered certain losses and
injuries as a result of using the Company's nasal spray product. The complaint
consisted of causes of action sounding in negligence, products liability, and
punitive damages. The lawsuit has been resolved in exchange for the payment of a
nominal sum out of insurance proceeds at the direction of the insurance carrier.
The case was recently settled at the direction of the insurance carrier out of
insurance proceeds.
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 consisted 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.
This case was recently settled at the direction of the insurance carrier out of
insurance proceeds.
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 alleged that the plaintiff suffered certain losses
and injuries as a result of using the Company's nasal spray product. The
complaint consisted of counts for strict liability (products liability),
negligence, and breach of implied and express warranties.
This case was recently settled at the direction of the insurance carrier out of
insurance proceeds.
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 alleged 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 were 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.
This case was recently settled at the direction of the insurance carrier out of
insurance proceeds.
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 consisted 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
alleged that the plaintiff suffered certain losses and injuries as a result of
using the Company's nasal spray product.
This case was recently settled at the direction of the insurance carrier out of
insurance proceeds.
AXIS SPECIALTY INSURANCE CO. VS. THE QUIGLEY CORPORATION
(E.D. PA CIVIL NO. 05-CV-195)
This action, filed in January 2005 in the Federal Eastern District Court for
Pennsylvania, stems from a dispute between the Company and one of its excess
liability insurance carriers, who seeks a judicial declaration of its insurance
coverage obligations under a policy which terminates in March 2005. The
carrier's action follows a complaint by the Company filed in December 2004 with
-25-
the Pennsylvania Insurance Commission, which ultimately sided with the Company
in determining that the carrier failed to observe proper notification procedures
when it first sought to limit, or alternatively, to insure at a substantially
higher premium, its coverage obligations. This action seeks to deny insurance
coverage for certain product liability claims based on occurrences prior to
April 6, 2004.
The Company filed a counterclaim requesting a declaration of insurance coverage
under the insurance policy referenced above. The litigation potentially affects
the amount of the Company's liability coverage for the nasal spray personal
injury litigation described above. An order dated February 16, 2006 found that
Axis has no obligation to extend coverage for certain product liability claims
based on occurrences prior to April 6, 2004 but does cover occurrences after
that date through November 29, 2006. The Company has purchased extended
reporting coverage for claims after April 6, 2004 through November 29, 2006 for
occurrences between April 4, 2004 and November 29, 2005. The Court granted the
Company's motion that a "claim" within the meaning of the Axis policy must be a
claim for damages for personal injury or property damages.
Based upon the information the Company has at this time relative to the defense
of claims occurring before April 6, 2004, the Company believes 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 cases
and whether insurance coverage from the period prior to April 6, 2004 is
adequate for coverage of all claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
PERFORMANCE CHART
The following graph reflects a five-year comparison, calculated on a dividend
reinvested basis, of the cumulative total stockholder return on the Common Stock
of the Company, a "peer group" index classified as drug related products by
Hemscott Group Ltd., ("Hemscott Group Index") and the NASDAQ Market Index. The
comparisons utilize an investment of $100 on December 31, 2001 for the Company
and the comparative indices, which then measure the values for each group at
December 31 of each year presented. There can be no assurance that the Company's
stock performance will continue with the same or similar trends depicted in the
following performance graph.
COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE
COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKET
Company/Index/Market 2001 2002 2003 2004 2005 2006
THE QUIGLEY CORPORATION 100.00 239.13 462.61 366.43 600.87 247.39
HEMSCOTT GROUP INDEX 100.00 100.19 185.17 204.06 162.93 225.23
NASDAQ MARKET INDEX 100.00 69.75 104.88 113.70 116.19 128.12
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
------------
2006 2005
-------------- ---------------
Quarter Ended High Low High Low
------------- ---- --- ---- ---
March 31 $15.95 $8.02 $8.85 $7.27
June 30 $12.35 $8.19 $9.28 $7.79
September 30 $9.50 $7.00 $10.50 $8.41
December 31 $7.99 $5.31 $16.94 $7.25
Such quotations reflect inter-dealer prices, without mark-up, mark-down or
commission and may not represent actual transactions.
-26-
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, 2006, there were approximately 310 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, 2006, 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 "G" 550,000 $10.0000 May 5, 2007
Option Plan 396,500 $9.6800 December 1, 2007
Option Plan 331,000 $5.125 April 6, 2009
Option Plan 260,750 $0.8125 December 20, 2010
Option Plan 277,000 $1.2600 December 10, 2011
Option Plan 311,250 $5.1900 July 30, 2012
Option Plan 62,500 $5.4900 December 17, 2012
Option Plan 404,000 $8.1100 October 29, 2013
Option Plan 484,000 $9.5000 October 26, 2014
Option Plan 520,000 $13.8000 December 11, 2015
At December 31, 2006, there were 3,597,000 unexercised and vested options and
warrants of the Company's Common Stock available for exercise.
SECURITIES AUTHORIZED UNDER EQUITY COMPENSATION
The following table sets forth certain information regarding stock option and
warrant grants made to employees, directors and consultants:
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Number of
Securities
Remaining
Number of Available for
Securities Weighted Future Issuance
to be Issued Average Under Equity
Upon Exercise Compensation Plans
Exercise of Price of (Excluding
Outstanding Outstanding Securities
Options & Options & Reflected in
Plan Category Warrants Warrants Column A)
(A) (B) (C)
- --------------------------------------------------------------------------------
Equity Plans Approved by Security
Holders (1) 3,047,000 $7.58 1,198,750
Equity Plans Not Approved by
Security Holders (2) 550,000 $10.00 --
Total 3,597,000 $7.95 1,198,750
(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.
-27-
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, 2006, 2005, 2004, 2003 and 2002.
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,
2006 2005 2004 2003 2002
------------ ------------ ------------ ------------ ------------
STATEMENT OF INCOME DATA:
Net sales $ 42,125 $ 53,658 $ 43,948 $ 41,499 $ 29,272
Total revenue $ 42,125 $ 53,658 $ 43,948 $ 41,499 $ 29,421
Gross profit $ 22,878 $ 27,834 $ 20,375 $ 20,011 $ 12,212
Income (loss) - continuing operations ($ 1,748) $ 3,217 $ 453 $ 729 ($ 5,132)
Loss - discontinued operations (1) -- -- -- ($ 54) ($ 1,322)
Net income (loss) ($ 1,748) $ 3,217 $ 453 $ 675 ($ 6,454)
Basic earnings (loss) per share:
Continuing operations ($ 0.14) $ 0.28 $ 0.04 $ 0.06 ($ 0.47)
Discontinued operations -- -- -- -- ($ 0.12)
Net income (loss) ($ 0.14) $ 0.28 $ 0.04 $ 0.06 ($ 0.59)
Diluted earnings (loss) per share:
Continuing operations ($ 0.14) $ 0.24 $ 0.03 $ 0.05 ($ 0.47)
Discontinued operations -- -- -- -- ($ 0.12)
Net income (loss) ($ 0.14) $ 0.24 $ 0.03 $ 0.05 ($ 0.59)
Weighted average shares outstanding:
Basic 12,245 11,661 11,541 11,467 10,894
Diluted 12,245 13,299 14,449 14,910 10,894
As of As of As of As of As of
December 31, December 31, December 31, December 31, December 31,
2006 2005 2004 2003 2002
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Working capital $ 20,541 $ 20,682 $ 17,853 $ 18,257 $ 16,662
Total assets $ 34,845 $ 35,976 $ 31,530 $ 26,270 $ 24,935
Debt -- $ 1,464 $ 2,893 -- --
Stockholders' equity $ 25,529 $ 25,320 $ 21,902 $ 20,787 $ 19,121
(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.
-28-
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 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 a decline in sales in 2006 compared to 2005.
This decline may be the result of less than expected incidences of colds and
upper respiratory aliments during 2006; continued shifts in our customers'
buying patterns possibly due to their higher inventory levels, and the
introduction to the market of numerous branded Immume Booster products which may
have had the result of Cold-Eeze customers temporarily migrating to these brands
in an effort at prevention rather than treating the cold. During 2006, the
margin of the Cold Remedy segment was favorably impacted as a result of the
effects of Cold-Eeze(R) now being produced by the manufacturing subsidiary and
forming part of the consolidated results of the Company, and also the
discontinuation of the Founders' royalty commission during 2005. 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.
The 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 reported a decline in sales during 2006 primarily due to
the reduction in the number of active independent distributor representatives
and litigation with the sponsor of the Company's product line in this segment,
which directly affects the segment's net sales. Corrective action was
implemented during 2006 in regard to expanding international markets and the
appointment of a new president of the segment.
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. Of particular interest during 2006 was
the announcement in November 2006 by the Company that patient enrollment in a
phase IIb multi center clinical study of QR-333 for the treatment of symptomatic
Diabetic Peripheral Neuropathy (DPN) had commenced.
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 business
development 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.
-29-
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board issued Interpretation No.
48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS Statement No. 109, ACCOUNTING FOR
INCOME TAXES. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 will be effective for the
Company beginning January 1, 2007. 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 September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 157, "Fair Value
Measurements". SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (GAAP) and
expands disclosures about fair value measurements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007 and interim periods within those
fiscal years. The Company has not yet evaluated the effect SFAS 157 will have on
its financial statements and related disclosures.
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 incentive promotion 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").
At December 31, 2006 and 2005 the Company included reductions to accounts
receivable for sales returns and allowances of $534,000 and $635,000,
respectively, and cash discounts of $154,000 and $178,000, respectively.
Additionally, current liabilities at December 31, 2006 and 2005 include $861,186
and $1,067,072, respectively for cooperative incentive promotion costs.
The roll-forward of the sales returns and allowance reserve ending at December
31 is as follows:
Account - Sales Returns & Allowances 2006 2005
- ----------------------------------------------------------------------------- ----------- -----------
Beginning balance $ 634,580 $ 1,109,171
Provision made for future charges relative to sales for each period presented 1,061,640 678,127
Current provision related to discontinuation of Cold-Eeze(R) nasal spray 113,067 183,716
Actual returns & allowances recorded in the current period presented (1,275,111) (1,336,434)
----------- -----------
Ending balance $ 534,176 $ 634,580
=========== ===========
The increase in the 2006 provision was principally due to non-routine returns of
obsolete product and product mix realignment by certain of our customers. Also,
the Company applies specific limits on product returns from customers, and
evaluates 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.
-30-
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, 2006, 2005 and 2004 would affect net sales by approximately
$483,000, $599,000 and $481,000, respectively. A one percent deviation for
cooperative incentive promotions reserve provisions for the years ended December
31, 2006, 2005 and 2004 could affect net sales by approximately $298,000,
$352,000 and $275,000, respectively.
The reported results include a remaining returns provision of approximately
$113,000 and $184,000 at December 31, 2006 and December 31, 2005, 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, 2006 COMPARED WITH SAME PERIOD 2005
Net sales for 2006 were $42,124,969 compared to $53,658,043 for 2005, reflecting
a decrease of 21.5% in 2006. Revenues, by segment, for 2006 were Cold Remedy,
$24,815,850, Health and Wellness, $15,274,940; and Contract Manufacturing,
$2,034,179, as compared to 2005 when the revenues for each respective segment
were $29,284,651, $20,473,050 and $3,900,342.
The Cold Remedy segment reported a sales decrease in 2006 of $4,468,801 or
15.3%. Sales in 2006 were negatively impacted by higher than expected inventory
levels being carried by our customers resulting in a shift in their buying
patterns; lower than expected incidences of colds and upper respiratory ailments
which was reflected in reduced unit consumption of the product as measured by
Information Resources Incorporated (IRI) of 8.5% in the twelve months to
December 2006. The sales performance of Cold-Eeze in 2006 may also have been
influenced by the introduction of six nationally branded Immune Booster products
by competitors possibly causing temporary migration to these brands in search of
a product to help them avoid catching a cold as against treating a cold. The
Company is continuing to strongly support Cold-Eeze as a clinically proven cold
remedy through in-store promotion, media advertising and the introduction of new
flavors.
The Health and Wellness segment's net sales decreased in 2006 by $5,198,110 or
25.4%. This decrease reflects a reduction in the number of active independent
distributor representatives and litigation with the sponsor of the Company's
product line in this segment, which directly affects the segment's net sales.
Corrective action to remediate this segment was implemented in 2006 with the
appointment of a new president for this segment knowledgeable in the network
marketing business along with the Company investing in and expanding its
Singapore and Taiwan markets.
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 2006 decreased by $1,866,163 or 47.8%, largely
attributable to a customer's discontinuation of a significant product during
2006 which was manufactured by QMI.
Cost of sales from continuing operations for 2006 as a percentage of net sales
was 45.7%, compared to 48.1% for 2005. The cost of sales percentage for the Cold
Remedy segment decreased in 2006 by 0.6% primarily due to the impact of the
discontinuation of the Company's royalty obligations to the founders in May 2005
and variations in product sales mix. The cost of sales percentage for the Health
and Wellness segment decreased in 2006 by 3.0% due to reduced independent
-31-
distributor representatives commission costs, reduced product cost with some
offset due to increased costs associated with international sales activity. The
2006 and 2005 consolidated cost of sales were both 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
mitigated 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 2006 were $21,449,934
compared to $21,070,307 in 2005. The increase in 2006 was primarily due to
decreased sales brokerage commission costs of $900,000 due to decreased 2006
sales; increased outside advertising, marketing and promotional costs of
$660,000, payroll costs decreased by $1,500,000, mainly due to reduced 2006
bonuses; legal costs increased by $900,000, insurance costs increased by
$600,000, 2006 included $400,000 in costs related to the international direct
selling business with no comparable 2005 costs. Selling, marketing and
administrative expenses, by segment, in 2006 were Cold Remedy $13,180,620,
Health and Wellness $5,953,277, Pharma $743,465 and Contract Manufacturing
$1,572,572, as compared to 2005 of $13,519,967, $5,249,296, $724,394 and
$1,576,650, respectively.
Research and development costs for 2006 and 2005 were $3,820,071 and $3,784,221,
respectively. Principally, the increase in research and development expenditure
was the result of increased Pharma study costs of approximately $246,000 in 2006
with offset due to decreased cold-remedy related product testing costs in 2006
compared to the prior year.
During 2006, the Company's major operating expenses of salaries, brokerage
commissions, promotion, advertising, and legal costs accounted for approximately
$16,086,896 (63.7%) of the total operating expenses of $25,270,005, a decrease
of 4.9% over the 2005 amount of $16,922,587 (68.1%) of total operating expenses
of $24,854,528, largely the result of decreased sales brokerage commission
costs, increased legal costs and decreased payroll costs in 2006.
Total assets of the Company at December 31, 2006 and 2005 were $34,845,034 and
$35,975,639, respectively. Working capital decreased by $140,989 to $20,541,273
at December 31, 2006. The primary influences on working capital during 2006
were: the increase in cash balances, decreased account receivable balances due
to reduced sales, increased inventory on hand as a result of sales shortfall;
increased accrued royalties and sales commissions as a result of litigation
between the Company and the developer of Cold-Eeze(R), the total repayment of
the debt balance, and decreased advertising payable balances due to variations
in advertising scheduling between years and related seasonal factors.
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, 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.
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 related to 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 $3,147,987 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
were 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.
-32-
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.
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 was
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 could elect
interest rate options of either the Prime Rate or LIBOR plus 200 basis points.
The loan was payable in eighty-four equal monthly principal payments of $35,714
commencing November 1, 2004, and such amounts payable were 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 at December 31, 2005. The
loan was completely repaid in 2006. During the duration of the loan, The Company
was 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.
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 for these fees from such litigation has 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
$1,153,354, $1,745,748, and $2,052,746 for the twelve months periods ended
December 31, 2006, 2005 and 2004, respectively. Amounts accrued for these
expenses at December 31, 2006 and 2005 were $3,230,765 and $2,077,411,
respectively.
-33-
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 expensed under such
agreement during 2006, 2005 and 2004 were $630,723, $838,607, and $800,881,
respectively. Amounts payable under such agreement at December 31, 2006 and 2005
were $528,990 and $58,597, respectively.
Certain operating leases for office and warehouse space maintained by the
Company resulted in rent expense for the years ended December 31, 2006, 2005 and
2004, of $336,914, $227,701, and $335,226, respectively. The future minimum
lease obligations under these operating leases are approximately $543,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $20,541,273 and $20,682,262 at December 31,
2006 and 2005, respectively. Changes in working capital overall have been
primarily due to the following items: cash balances increased by $871,589;
account receivable balances, net, decreased by $1,322,793 due to decreased sales
and effective collection practices; inventory increased by $362,040 as a result
of decreased sales and seasonal factors, accrued advertising decreased by
$710,155 due to variations in media advertising scheduling between years and
seasonal factors; accrued royalties and sales commissions increased by $451,048
largely due to the effects of certain litigation in progress. Total debt at
December 31, 2005 in the amount of $1,464,286, of which $428,571 had been
classified as current at December 31, 2005, was repaid in full during 2006. 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, 2006 were $17,756,759
compared to $16,885,170 at December 31, 2005.
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 and to
fund future research and development costs of Pharma compounds.
Management is not aware of any trends, events or uncertainties that have or are
reasonably likely to have a material negative impact upon the Company's (a)
short-term or long-term liquidity, or (b) net sales or income from continuing
operations. Any challenge to the Company's patent rights could have a material
adverse effect on future liquidity of the Company; however, the Company is not
aware of any condition that would make such an event probable.
Management believes that cash generated from operations, along with its current
cash balances, will be sufficient to finance working capital and capital
expenditure requirements for at least the next twelve months.
CONTRACTUAL OBLIGATIONS
The Company's future contractual obligations and commitments at December 31,
2006 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
- ----------------------------- ---------- ---------- ---------- ---------- ----------
Operating Lease Obligations $ 551,376 $ 248,296 $ 303,080 -- --
Purchase Obligations -- -- -- -- --
Research and Development 3,220,672 3,220,672 -- -- --
Advertising 1,815,154 1,815,154 -- -- --
---------- ---------- ---------- ---------- ----------
Total Contractual Obligations $5,587,202 $5,284,122 $ 303,080 -- --
========== ========== ========== ========== ==========
-34-
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.
-35-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
----
Balance Sheets as of December 31, 2006 and 2005 F-1
Statements of Operations for the years ended December 31, 2006, 2005, and 2004 F-2
Statements of Stockholders' Equity for the years ended December 31, 2006, 2005, and 2004 F-3
Statements of Cash Flows for the years ended December 31, 2006, 2005, and 2004 F-4
Notes to Financial Statements F-5 to F-27
Responsibility for Financial Statements F-28
Report of Independent Registered Public Accounting Firm Amper, Politziner & Mattia, P.C. F-29
-36-
THE QUIGLEY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, 2006 December 31, 2005
----------------- -----------------
CURRENT ASSETS:
Cash and cash equivalents $ 17,756,759 $ 16,885,170
Accounts receivable (net of doubtful accounts of $275,636 and $354,972) 6,557,347 7,880,140
Inventory 4,262,104 3,900,064
Prepaid expenses and other current assets 1,217,097 1,582,851
------------ ------------
TOTAL CURRENT ASSETS 29,793,307 30,248,225
------------ ------------
PROPERTY, PLANT AND EQUIPMENT - NET 4,838,076 5,585,793
------------ ------------
OTHER ASSETS 213,651 141,621
------------ ------------
TOTAL ASSETS $ 34,845,034 $ 35,975,639
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ -- $ 428,571
Accounts payable 885,648 771,819
Accrued royalties and sales commissions 3,752,646 3,301,598
Accrued advertising 2,150,259 2,860,414
Other current liabilities 2,463,481 2,203,561
------------ ------------
TOTAL CURRENT LIABILITIES 9,252,034 9,565,963
------------ ------------
LONG-TERM DEBT -- 1,035,715
MINORITY INTEREST 63,563 54,314
STOCKHOLDERS' EQUITY:
Common stock, $.0005 par value; authorized 50,000,000;
Issued: 17,330,686 and 16,360,524 shares 8,665 8,180
Additional paid-in-capital 37,362,453 35,404,803
Retained earnings 13,346,478 15,094,823
Less: Treasury stock, 4,646,053 and 4,646,053 shares, at cost
(25,188,159) (25,188,159)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 25,529,437 25,319,647
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 34,845,034 $ 35,975,639
============ ============
See accompanying notes to consolidated financial statements
F-1
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
December 31, 2006 December 31, 2005 December 31, 2004
----------------- ----------------- -----------------
NET SALES $ 42,124,969 $ 53,658,043 $ 43,947,995
COST OF SALES 19,246,604 25,824,085 23,573,126
------------ ------------ ------------
GROSS PROFIT 22,878,365 27,833,958 20,374,869
------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing 8,326,197 8,414,065 7,140,365
Administration 13,123,737 12,656,242 9,819,948
Research and development 3,820,071 3,784,221 3,232,569
------------ ------------ ------------
TOTAL OPERATING EXPENSES 25,270,005 24,854,528 20,192,882
------------ ------------ ------------
(LOSS) INCOME FROM OPERATIONS (2,391,640) 2,979,430 181,987
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 753,538 402,580 104,339
Interest expense (21,644) (100,326) (32,250)
Gain on dividend-in-kind -- -- 198,786
------------ ------------ ------------
TOTAL OTHER INCOME, NET 731,894 302,254 270,875
------------ ------------ ------------
(LOSS) INCOME BEFORE TAXES (1,659,746) 3,281,684 452,862
------------ ------------ ------------
INCOME TAXES 88,599 65,000 --
------------ ------------ ------------
NET (LOSS) INCOME ($ 1,748,345) $ 3,216,684 $ 452,862
============ ============ ============
(LOSS) EARNINGS PER COMMON SHARE:
Basic ($ 0.14) $ 0.28 $ 0.04
============ ============ ============
Diluted ($ 0.14) $ 0.24 $ 0.03
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 12,245,073 11,660,561 11,541,012
============ ============ ============
Diluted 12,245,073 13,299,162 14,449,334
============ ============ ============
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, 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 and
warrants 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
---------------------------------------------------------------------------------------------
Tax benefits from options,
warrants & common stock 2,484,330 2,484,330
Tax benefit allowance (2,484,330) (2,484,330)
Proceeds from options exercised 1,011,155 505 1,957,630 1,958,135
Stock Cancellation (40,993) (20) 20 --
Net Loss (1,748,345) (1,748,345)
---------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2006 12,684,633 $ 8,665 $37,362,453 ($25,188,159) $13,346,478 $25,529,437
---------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
F-3
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, 2006 December 31, 2005 December 31, 2004
----------------- ----------------- -----------------
OPERATING ACTIVITIES:
Net (loss) income ($ 1,748,345) $ 3,216,684 $ 452,862
------------ ------------ ------------
ADJUSTMENTS TO RECONCILE NET (LOSS) INCOME TO NET CASH
PROVIDED BY CONTINUING OPERATIONS:
Depreciation and amortization 1,326,920 1,404,107 622,348
Gain on dividend-in-kind -- -- (198,786)
Gain on the sales of fixed assets -- (3,907) --
Bad debts provision 26,358 98,751 25,289
(INCREASE) DECREASE IN ASSETS:
Accounts receivable 1,296,435 (1,602,912) 1,460,615
Inventory (362,040) (445,382) 1,198,221
Prepaid expenses and other current assets 365,754 (896,552) 47,298
Other assets (69,282) 3,748 (33,611)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable 113,829 (206,582) 454,265
Accrued royalties and sales commissions 451,048 1,505,517 201,624
Accrued advertising (710,155) 941,403 564,475
Other current liabilities 266,421 250,614 (134,573)
------------ ------------ ------------
TOTAL ADJUSTMENTS 2,705,288 1,048,805 4,207,165
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 956,943 4,265,489 4,660,027
------------ ------------ ------------
INVESTING ACTIVITIES:
Capital expenditures (697,479) (531,213) (310,139)
Cost of assets acquired, net of registration fees -- -- (4,295,380)
Proceeds from the sale of fixed assets 118,276 12,000 --
------------ ------------ ------------
NET CASH FLOWS USED IN INVESTING
ACTIVITIES (579,203) (519,213) (4,605,519)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from long-term borrowings -- -- 3,000,000
Principal payments on debt (1,464,286) (1,428,571) (107,142)
Stock options and warrants exercised 1,958,135 201,024 26,986
------------ ------------ ------------
NET CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES 493,849 (1,227,547) 2,919,844
------------ ------------ ------------
NET INCREASE IN CASH 871,589 2,518,729 2,974,352
CASH & CASH EQUIVALENTS, BEGINNING OF
PERIOD 16,885,170 14,366,441 11,392,089
------------ ------------ ------------
CASH & CASH EQUIVALENTS,
END OF PERIOD $ 17,756,759 $ 16,885,170 $ 14,366,441
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
CASH PAID FOR:
Interest $ 21,644 $ 100,326 $ 32,250
Taxes $ 88,599 $ 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 CONSOLIDATED 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.
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 2006
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, the
Company 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 incentive program 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 incentive promotion 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 incentive promotion 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 $430,926 and $369,508 as of December 31, 2006 and 2005,
respectively. Inventories included raw material, work in progress and packaging
amounts of approximately $1,077,000 and $1,340,000 at December 31, 2006 and
December 31, 2005, 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.
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.
F-6
Trade accounts receivable potentially subjects the Company to credit risk. The
Company extends credit to its customers based upon an evaluation of the
customer's financial condition and credit history and generally does not require
collateral. The Company'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 31% for the
year ended December 31, 2006, 29% for the year ended December 31, 2005, and 27%
for the year ended December 31, 2004. Customers comprising the five largest
accounts receivable balances represented 56% and 47% of total trade receivable
balances at December 31, 2006 and 2005, respectively. During 2006, 2005 and
2004, approximately 9%, 8%, and 7%, respectively, of the Company's revenues were
related to international markets.
The Company's revenues are currently generated from the sale of the Cold-Remedy
products which approximated 59%, 55% and 52% of total revenues in the twelve
month periods ended December 31, 2006, 2005 and 2004, respectively. The Health
and Wellness segment approximated 36%, 38% and 46%, for the twelve month periods
ended December 31, 2006, 2005 and 2004, respectively. The Contract Manufacturing
segment approximated 5%, 7% and 2% for the twelve month periods ended December
31, 2006, 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 would be
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 $534,176 for future sales returns and $429,546 for other
allowances as of December 31, 2006 and $634,580 and $533,250 at December 31,
2005, respectively. The 2006 and 2005 reserve balances include a remaining
returns provision at December 31, 2006 and December 31, 2005 of approximately
$113,000 and $184,000, 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 $275,636 at
December 31, 2006 and $354,972 at December 31, 2005.
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 $1,153,354, $1,745,748 and
$2,052,746, respectively, at December 31, 2006, 2005 and 2004 are presented in
the financial statements as cost of sales.
F-7
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 incentive
promotions 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 $6,433,602, $9,207,613 and
$9,053,612, respectively, at December 31, 2006, 2005 and 2004 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 2005 and 2004 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, 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. The
impact of applying SFAS No. 123R in this pro forma disclosure is not indicative
of the impact on future years' reported net income as SFAS No. 123R does not
apply to stock options granted prior to the beginning of fiscal year 2006 and
additional stock options awards may be granted in future years. All options were
immediately vested upon grant. No options or warrants were granted during the
year ended December 31, 2006.
Prior to January 1, 2006, the Company applied 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 and 2004 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:
F-8
Year Ended Year Ended
December 31, December 31,
2005 2004
------------- -------------
Net income
As reported $ 3,216,684 $ 452,862
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)
----------------------------------
Pro forma net loss ($ 667,716) ($ 1,777,138)
----------------------------------
Basic earnings (loss) per share
As reported $0.28 $0.04
Pro forma ($0.06) ($0.15)
Diluted earnings (loss) per share
As reported $0.24 $0.03
Pro forma ($0.05) ($0.15)
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 zero, 520,000, and 500,000 stock options were granted to employees
and non-employees in 2006, 2005 and 2004, respectively.
ADVERTISING AND INCENTIVE PROMOTIONS
Advertising and incentive promotion costs are expensed within the period in
which they are utilized. Advertising and incentive promotion expense is
comprised of media advertising, presented as part of sales and marketing
expense; co-operative incentive promotions, which is accounted for as part of
net sales; and free product, which is accounted for as part of cost of sales.
Advertising and incentive promotion costs incurred for the years ended December
31, 2006, 2005 and 2004 were $7,703,426, $8,688,233, and $6,584,600,
respectively. Included in prepaid expenses and other current assets was $258,215
and $96,050 at December 31, 2006 and 2005 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, 2006, 2005 and 2004 were
$3,820,071, $3,784,221 and $3,232,569, 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.
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 past periods' long-term debt was approximately equivalent to
its carrying value due to the fact that the interest rates then available to the
Company for debt with similar terms were approximately equal to the interest
rates for the Company's debt. Determination of the fair value of related party
payables is not practicable due to their related party nature.
F-9
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2006, the Financial Accounting Standards Board issued Interpretation No.
48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS Statement No. 109, ACCOUNTING FOR
INCOME TAXES. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 will be effective for the
Company beginning January 1, 2007. 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 September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 157, "Fair Value
Measurements". SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (GAAP) and
expands disclosures about fair value measurements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007 and interim periods within those
fiscal years. The Company has not yet evaluated the effect SFAS 157 will have on
its financial statements and related disclosures.
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.
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.
F-10
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,
2004
------------
(Unaudited)
AS REPORTED
Total Revenue $ 43,947,995
Income from continuing operations 452,862
Income from continuing operations - basic
earnings per common share $ 0.04
PRO FORMA
Total Revenue $ 45,784,627
(Loss)/income from continuing operations (88,368)
(Loss)/income from continuing operations -
basic (loss)/earnings per common share ($ 0.01)
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 $63,563 and $54,314 on
the Consolidated Balance Sheet in 2006 and 2005 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 $64,592 and
$61,844 in 2006 and 2005 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, 2006 December 31, 2005
----------------- -----------------
Land $ 538,791 $ 538,791
Buildings and improvements 2,562,052 2,496,536
Machinery and equipment 4,951,049 4,935,636
Computer software 528,332 520,787
Furniture and fixtures 283,583 260,277
---------- ----------
8,863,807 8,752,027
Less: Accumulated depreciation 4,025,731 3,166,234
---------- ----------
Property, Plant and Equipment, net $4,838,076 $5,585,793
========== ==========
F-11
Depreciation expense for the years ended December 31, 2006, 2005 and 2004 was
$1,326,920, $1,404,107, and $622,348, respectively. During the year ended
December 31, 2006, the Company retired equipment with an original cost of
approximately $585,699 and accumulated depreciation of approximately $467,423.
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 for these fees from such litigation has 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
$1,153,354, $1,745,748 and $2,052,746, for the years ended December 31, 2006,
2005 and 2004, respectively. Amounts accrued for these expenses at December 31,
2006 and 2005 were $3,230,765 and $2,077,411, respectively, all non related
party balances..
Amounts included in accrued royalties and sales commissions in the balance
sheets at December 31, 2006 and 2005, are all non related party balances.
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 was collateralized by mortgages on real property
located in each of Lebanon and Elizabethtown, Pennsylvania. The Company could
elect interest rate options at either the Prime Rate or LIBOR plus 200 basis
points. The loan was 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.
In April 2006, the Company prepaid the total outstanding balance of
approximately $1.3 million.
NOTE 8 - OTHER CURRENT LIABILITIES
Included in other current liabilities are $234,208 and $923,411 related to
accrued compensation at December 31, 2006 and 2005, 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, 2006, 2005 and
2004, of $336,914, $227,701, and $335,226, respectively. The Company has
approximate future obligations over the next five years as follows:
Research and Property and
Year Development Other Leases Advertising Other Total
----------------------------------------------------------------------------------------------------
2007 $3,220,672 $248,296 $1,815,154 -- $5,284,122
2008 -- 194,592 -- -- 194,592
2009 -- 108,488 -- -- 108,488
2010 -- -- -- -- --
2011 -- -- -- -- --
----------------------------------------------------------------------------------------------------
Total $3,220,672 $551,376 $1,815,154 -- $5,587,202
----------------------------------------------------------------------------------------------------
Additional advertising and research and development costs are expected to be
incurred during the remainder of 2007.
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,
2006, 2005 and 2004 were $630,723, $838,607 and $800,881, respectively. Amounts
payable under such agreement at December 31, 2006 and December 31, 2005 were
$528,990 and $58,597, respectively.
F-12
The Company has several licensing and other contractual agreements, see Note 6.
TESAURO AND ELEY, ET AL. VS. THE QUIGLEY CORPORATION
(CCP OF PHILA., AUGUST TERM 2000, NO. 001011)
In September, 2000, the Company was sued by two individuals (Jason Tesauro and
Elizabeth Eley, both residents of Georgia), allegedly on behalf of a "nationwide
class" of "similarly situated individuals," in the Court of Common Pleas of
Philadelphia County, Pennsylvania. The Complaint further alleges that the
plaintiffs purchased certain Cold-Eeze 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, as pleaded originally, requested an unspecified amount
of damages for violations of Pennsylvania's consumer protection law, breach of
implied warranty of merchantability 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' claims.
In May 2001, plaintiffs filed a motion to certify the putative 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 plaintiffs' motion. The court denied plaintiffs'
motion to certify a class based on plaintiffs' claims under Pennsylvania's
consumer protection law, under which plaintiffs sought treble damages,
effectively dismissing this cause of action; however, the court certified a
class based on plaintiffs' secondary breach of implied warranty and unjust
enrichment claims. In August, 2002, the court issued an order adopting a form of
Notice of Class Action to be published nationally. The form of Notice approved
by the court included a provision which limits the potential class members who
may potentially recover damages in this action to those persons who present a
proof of purchase of Cold-Eeze during the period August 1996 and November 1999.
Afterward, a series of pre-trial motions were filed raising issues concerning
trial evidence and the court's jurisdiction over the subject matter of the
action. In March, 2005, the court held oral argument on these motions.
On November 8, 2006, the Court entered an Order dismissing the case in its
entirety on the basis that the action was preempted by federal law. The
plaintiffs appealed the Court's decision in December, 2006. Presently, no
scheduling order has been entered by the appellate court, which presumably will
hear argument later this year.
For the reasons stated by the Court in dismissing the case, as well as for other
reasons, the Company believes that plaintiffs' case on appeal lacks merit;
however, no prediction as to the outcome of the appeal can be made.
THE QUIGLEY CORPORATION VS. JOHN C. GODFREY, ET AL
(BUCKS CO. CCP, NO. 04-07776)
In this action, which was commenced in November 2004, 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 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 believes that the defendants' counterclaims are without merit and is
vigorously defending those counterclaims and is prosecuting its action on its
complaint. The deposition phase of pre-trial discovery is about to commence. At
this time no prediction as to the outcome of this action can be made.
DARIUS INTERNATIONAL INC., ET AL. VS. ROBERT O. YOUNG ET AL.
(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.
F-13
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. The court denied 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, held in January, 2006, 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.
On April 20, 2006, the Court entered an Order enjoining defendants from
competing against the Company. Thereafter, the parties engaged in pre-trial
discovery.
A trial on the merits of the case was held before the Court, without a jury,
during November 2006. Following the presentation of evidence, the Company
renewed its claim for a permanent injunction and monetary damages against the
defendants. Based upon the evidence presented at trial, the Company believes the
counterclaim actions are without merit.
The Court has not entered its ruling at this point, and 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
Quigley Corporation 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 Quigley Corporation formerly held stock. On January 22, 2003 all
shares of The Quigley Corporation stock were sold to Suncoast Naturals, Inc. in
return for stock of Suncoast Naturals, Inc. At the time of the accident, The
Quigley Corporation had no ownership interest in Caribbean Pacific Natural
Products, Inc.
The Corporation 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 in Honolulu, Hawaii.
At this time no prediction as to the outcome can be made.
F-14
NICODROPS, INC. VS. QUIGLEY MANUFACTURING, INC.
On January 30, 2006, Quigley Manufacturing, Inc., a wholly-owned subsidiary of
The Quigley Corporation, 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.
THE QUIGLEY CORPORATION VS. WACHOVIA INSURANCE SERVICES, INC. AND FIRST
UNION INSURANCE SERVICES AGENCY, INC.
The Quigley Corporation instituted a Writ of Summons against Wachovia Insurance
Services, Inc. and First Union Insurance Services Agency, Inc. on December 8,
2005. The purpose of this suit was to maintain an action and toll the statute of
limitation against The Quigley Corporation's insurance broker who failed to
place excess limits coverage for the Company for the period from November 29,
2003 until April 6, 2004. As a result of the defendant's failure to place
insurance and to notify Quigley of its actions, certain pending actions covered
by Quigley's underlying insurance at the present time many result in certain
cases presently being defended by insurance counsel and the underlying insurance
carrier to cause an exhaustion of the underlying insurance for the policy
periods ending November 29, 2004 and November 29, 2005. Any case in which an
alleged action arose by the use of Cold-Eeze Nasal Spray from November 29, 2003
to April 6, 2004 is not covered by excess insurance.
The Company's claim against Wachovia Insurance Services, Inc. and First Union
Insurance Services Agency, Inc. is for negligence and for equitable insurance
for these claims in the event that Quigley's underlying policy limits are
exhausted. As of the date of this letter there is no exhaustion of underlying
coverage and the action against Wachovia Insurance Services, Inc. and First
Union Insurance Services Agency, Inc. cannot be prosecuted until such time as
actual damages can be measured. At this time no prediction as to the outcome of
the cases covered by insurance can be made and no prediction can be made as to
the outcome of any action against Wachovia Insurance Services, Inc. and First
Union Insurance Services Agency, Inc.
MONIQUE FONTENOT DOYLE VS. THE QUIGLEY CORPORATION (U.S.D.C., W.D. LA.
DOCKET NO.: 6:06CV1497)
On August 31, 2006, the plaintiff filed an action against the Company in the
United States District Court for the Western District of Louisiana
(Lafayette-Opelousas Division). The action alleges the plaintiff suffered
certain losses and injuries as a result of the Company's nasal spray product.
Among the allegations of plaintiff are breach of express warranties and damages
pursuant to the Louisiana products liability act.
A trial date has been set for January 7, 2008. Discovery is not yet complete.
The Company believes the plaintiff's claims are without merit and is vigorously
defending this lawsuit.
At the present time this matter is being defended by the Company's liability
insurance carrier. Based upon the information the Company has at this time, it
believes the action will not have a material impact to the Company. However, at
this time no prediction as to the outcome can be made.
F-15
ZANG ANGELFIRE, TRACEY ARVIN, RAYMOND BELL, JEFFREY BROWN,
SHANE HOHNSTEIN, TAMMY LAURENT, KRISTI MARTIN, LARRY
RICHARDSON, LARRY RIGSBY, BARBARA SEOANE, DONNA SMALLEY,
MARJORIE VAN BENTHEM AND JOHN WILLIAMS VS. THE QUIGLEY
CORPORATION
(PA. C.C.P., BUCKS COUNTY, DOCKET NO.: 2004-07364-27-2)
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. Subsequently, two plaintiffs dismissed their suit, leaving thirteen (13)
plaintiffs remaining. The action alleges the plaintiffs suffered certain losses
and injuries as a result of using the Company's nasal spray product. The
plaintiffs claim the Company is liable to them based on the following
allegations: negligence, strict products liability (failure to warn and
defective design), breach of express warranty, breach of implied warrant, and a
violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law
and other consumer protection statutes.
A trial date has been set for September 24, 2007. Discovery is not yet complete.
The Company is vigorously defending this lawsuit and believes that the action
lacks merit.
At the present time this matter is being defended by the Company's liability
insurance carrier. 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.
HOWARD POLSKI AND SHERYL POLSKI VS. THE QUIGLEY CORPORATION, ET AL.
(U.S.D.C., D. MINN. DOCKET NO.: 04-4199 PJS/JJG)
On August 12, 2004, plaintiffs filed an action against the Company 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 plaintiffs suffered certain losses and injuries as a result of the
Company's nasal spray product. Among the allegations of plaintiffs are
negligence, products liability, breach of express and implied warranties, and
breach of the Minnesota Consumer Fraud Statute.
The Company believes the plaintiffs' claims are without merit and is vigorously
defending this lawsuit.
At the present time this matter is being defended by the Company's liability
insurance carrier. 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.
DOMINIC DOMINIJANNI, SONJA FORSBERG-WILLIAMS, VINT PAYNE,
MURRAY LOU ROGERS, AND RANDY STOVER VS. THE QUIGLEY CORPORATION
(PA. C.C.P., BUCKS COUNTY, DOCKET NO.: 060013427-1;
CONSOLIDATED UNDER DOCKET NO.: 2004-07364-27-2)
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 the
plaintiffs 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 violations
under the Pennsylvania Unfair Trade Practices and Consumer Protection Law and
other consumer protection statutes.
Discovery is not yet complete. The Company believes the plaintiffs' claims are
without merit and is vigorously defending this lawsuit.
At the present time this matter is being defended by the Company's liability
insurance carrier. 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.
GREG SCRAGG VS. THE QUIGLEY CORPORATION, ET AL. (U.S.D.C,
D. COLO. DOCKET NO.: 06- 00061 LTB-CBS)
On November 30, 2005, an action was brought in the District Court of Denver,
Colorado. The complaint was served on the Company soon thereafter. The action
F-16
alleges 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).
A trial date has been set for August 27, 2007. Discovery is not yet complete.
The Company believes the plaintiff's claims are without merit and is vigorously
defending this lawsuit.
At the present time this matter is being defended by the Company and the
Company's liability insurance carrier. 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.
BONNIE L. HURD. VS. THE QUIGLEY CORPORATION
(PA. C.C.P., BUCKS COUNTY, DOCKET NO.: 06-10055-13-2)
On October 31, 2006, plaintiff filed an action in the Court of Common Pleas of
Bucks County, Pennsylvania. The complaint was served on the Company soon
thereafter. The action alleges the plaintiff suffered certain losses and
injuries as a result of using the Company's nasal spray product. Plaintiff's
complaint consists of counts for negligence, strict products liability (failure
to warn), strict products liability (defective design), breach of express and
implied warranties, and violations under the Pennsylvania Unfair Trade Practices
and Consumer Protection Law and other consumer protection statutes.
Discovery is not yet complete. The Company believes the plaintiff's claims are
without merit and is vigorously defending this lawsuit.
At the present time this matter is being defended by the Company's liability
insurance carrier. 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.
CAROLYN HENRY BAYNHAM VS. THE QUIGLEY CORPORATION, ET AL. (U.S.D.C, E.D. TEX.
DOCKET NO.: 1:07CV0010)
On January 8, 2007, plaintiff filed an action in the United States District
Court for the Eastern District of Texas-Beaumont Division. The complaint was
served on the Company on January 15, 2007. The action alleges the plaintiff
suffered certain losses and injuries as a result of using the Company's nasal
spray product. Plaintiff's complaint consists of counts for negligence, strict
products liability (failure to warn), strict products liability (defective
design), and breach of express and implied warranties.
Discovery is not yet complete. The Company believes the plaintiff's claims are
without merit and is vigorously defending this lawsuit.
At the present time this matter is being defended by the Company's liability
insurance carrier. 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.
CAROLYN SUNDERMEIER VS. THE QUIGLEY CORPORATION (PA. C.C.P.,
BUCKS COUNTY, DOCKET NO.: 07-01324-26-2)
On February 16, 2007, plaintiff filed an action in the Court of Common Pleas of
Bucks County, Pennsylvania. The complaint was served on the Company on February
20, 2007. The action alleges the plaintiff suffered certain losses and injuries
as a result of using the Company's nasal spray product. Plaintiff's complaint
consists of counts for negligence, strict products liability (failure to warn),
strict products liability (defective design), breach of express and implied
warranties, and violations under the Pennsylvania Unfair Trade Practices and
Consumer Protection Law and other consumer protection statutes.
Discovery is not yet complete. The Company believes the plaintiff's claims are
without merit and is vigorously defending this lawsuit.
At the present time this matter is being defended by the Company's liability
insurance carrier. Based upon the information the Company has at this time, it
believes the action will not have a material impact to the Company. However, at
this time no prediction as to the outcome can be made.
F-17
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.
The Fourth District Court of Utah has stayed both the September 14, 2005 and
November 3, 2005 actions pending the adjudication of the Federal District Court
action referenced above and has ordered that all disputes be determined in the
Federal District Court action in the Eastern District of Pennsylvania.
In connection with the Utah actions the Company has sued the Youngs 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.
INNERLIGHT INC. VS. THE MATRIX GROUP, LLC
(FOURTH JUDICIAL DISTRICT COURT, UTAH COUNTY, STATE OF UTAH)
On March 13, 2006 Innerlight Inc. filed a declaratory judgment action in the
Fourth Judicial District, Utah County, State of Utah, requesting a declaration
that there is no valid contract between the parties. The Matrix Group, LLC has
alleged there is a contract between the parties obligating Innerlight Inc. to
purchase $750,000 of products for the 12-month period commencing October 18,
2004 and ending October 17, 2005, $1,500,000 for the period commencing October
18, 2005 and ending October 17, 2006, and for each 12-month period thereafter,
through and including October 17, 2013, at least $4,000,000 of products from The
Matrix Group, LLC. The document on which Matrix relies was drafted by Matrix and
states that the acceptance of the appointment by distributor (Innerlight Inc.)
is conditioned upon distributor's written acceptance of the Company's product
price list. No written acceptance of the product price list was ever made by
Innerlight Inc.
The Matrix Group, LLC filed a Utah Rule of Civil Procedure 12(b)(3) motion
asking that the complaint be dismissed. On July 13, 2006 the Court for the
Fourth Judicial District, Utah County, State of Utah, entered an order denying
defendant's motion to dismiss under Rule 12(b)(3) based on Innerlight's
assertion that a material condition precedent remains to be satisfied to
establish an enforceable agreement between the parties. The Utah County Court
has maintained jurisdiction of this action to make a final determination on the
merits of Innerlight's claim.
Thereafter, Matrix filed a counterclaim alleging that a contract did exist and
that Innerlight had breached this contract. Both parties then agreed to stay
discovery, concluding that discovery was not necessary and both filed motions
for summary judgment to resolve the case.
On January 17, 2007, arguments were presented to the Court on the parties' cross
motions for summary judgment and the Court ruled in Innerlight's favor, finding
that no contract existed between the parties and that Innerlight was entitled to
return over $150,000 in product to Matrix for reimbursement. The wording of the
final Order granting Innerlight's motion and rejecting Matrix's claims is
currently being exchanged and has yet to be entered by the Court. When the Order
is entered by the Court, Matrix has the right to appeal.
F-18
THE MATRIX GROUP, LLC VS. INNERLIGHT, INC.
(U.S. DISTRICT COURT FOR THE SOUTHERN DISTRICT OF FLORIDA)
On July 6, 2006 The Matrix Group, LLC commenced an action against Innerlight,
Inc. in the United States District Court for the Southern District of Florida.
The action brought by The Matrix Group, LLC relates to the same facts and
circumstances as the action commenced in March of 2006 by Innerlight, Inc.
against The Matrix Group, LLC in Utah County, Utah. The Matrix Group, LLC is
claiming that according to the terms of the alleged contract, Innerlight has the
obligation to purchase $28,750,000 of additional product from April 6, 2006
through October 17, 2013 and that The Matrix Group, LLC is entitled to a
judgment against Innerlight, Inc. for alleged obligations to purchase product in
the amount of $744,050 from the period of October 18, 2005 through April 17,
2006. The United States District Court for the Southern District of Florida has
stayed the action pending the outcome of the previously referenced Utah action
between Innerlight Inc. and The Matrix Group, LLC.
The Company believes that the plaintiff's (The Matrix Group, LLC) claims are
without merit and is vigorously defending those claims and is prosecuting its
action on its complaint in Utah. Based upon the information the Company has at
this time, it believes that the plaintiff's actions are without merit. However,
at this time no prediction as to the outcome can be made.
TERMINATED LEGAL PROCEEDINGS
ROBERT CAFFREY AND SUE ANNE CAFFREY, H/W VS. THE QUIGLEY
CORPORATION, ET
AL.
(U.S.D.C., D.N.J. DOCKET NO.: 05-05608-KSH-PS)
On October 12, 2005, the plaintiffs filed an action against The Quigley
Corporation (the "Company") in the Superior Court of New Jersey, Essex County,
which was not served until November 9, 2005. On November 28, 2005, the Company
removed the case to the United States District Court for the District of New
Jersey (Newark Vicinage). The complaint was amended on July 21, 2006 to add an
additional defendant, DPT Laboratories, Ltd. The action alleges that the
plaintiff suffered certain losses and injuries as a result of the Company's
nasal spray product. Among the allegations of plaintiffs are strict products
liability, breach of express warranties, violation of New Jersey's Consumer
Fraud Act and a loss consortium claim.
This case was recently settled at the direction of the insurance carrier out of
insurance proceeds.
DOLORES SMITH VS. THE QUIGLEY CORPORATION
(PA. C.C.P., BUCKS COUNTY, DOCKET NO.: 0503401-18-1)
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 plaintiff has recently agreed to dismiss her complaint with prejudice and
the appropriate court filings are currently being finalized.
RICHARD FLYNN VS. THE QUIGLEY CORPORATION, ET AL
On May 20, 2005, a complaint was filed in the Superior Court of Orange County,
California. The action alleged that the plaintiff suffered certain losses and
injuries as a result of using the Company's nasal spray product. The complaint
consisted of causes of action sounding in negligence, products liability, and
punitive damages. The lawsuit has been resolved in exchange for the payment of a
nominal sum out of insurance proceeds at the direction of the insurance carrier.
This case was recently settled at the direction of the insurance carrier out of
insurance proceeds.
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 consisted of counts for
F-19
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.
This case was recently settled at the direction of the insurance carrier out of
insurance proceeds.
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 alleged that the plaintiff suffered certain losses
and injuries as a result of using the Company's nasal spray product. The
complaint consisted of counts for strict liability (products liability),
negligence, and breach of implied and express warranties.
This case was recently settled at the direction of the insurance carrier out of
insurance proceeds.
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 alleged 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 were 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.
This case was recently settled at the direction of the insurance carrier out of
insurance proceeds.
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 consisted 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
alleged that the plaintiff suffered certain losses and injuries as a result of
using the Company's nasal spray product.
This case was recently settled at the direction of the insurance carrier out of
insurance proceeds.
AXIS SPECIALTY INSURANCE CO. VS. THE QUIGLEY CORPORATION
(E.D. PA CIVIL NO. 05-CV-195)
This action, filed in January 2005 in the Federal Eastern District Court for
Pennsylvania, stems from a dispute between the Company and one of its excess
liability insurance carriers, who seeks a judicial declaration of its insurance
coverage obligations under a policy which terminates in March 2005. The
carrier's action follows a complaint by the Company filed in December 2004 with
the Pennsylvania Insurance Commission, which ultimately sided with the Company
in determining that the carrier failed to observe proper notification procedures
when it first sought to limit, or alternatively, to insure at a substantially
higher premium, its coverage obligations. This action seeks to deny insurance
coverage for certain product liability claims based on occurrences prior to
April 6, 2004.
The Company filed a counterclaim requesting a declaration of insurance coverage
under the insurance policy referenced above. The litigation potentially affects
the amount of the Company's liability coverage for the nasal spray personal
injury litigation described above. An order dated February 16, 2006 found that
Axis has no obligation to extend coverage for certain product liability claims
based on occurrences prior to April 6, 2004 but does cover occurrences after
that date through November 29, 2006. The Company has purchased extended
reporting coverage for claims after April 6, 2004 through November 29, 2006 for
occurrences between April 4, 2004 and November 29, 2005. The Court granted the
Company's motion that a "claim" within the meaning of the Axis policy must be a
claim for damages for personal injury or property damages.
Based upon the information the Company has at this time relative to the defense
of claims occurring before April 6, 2004, the Company believes 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 cases
and whether insurance coverage from the period prior to April 6, 2004 is
adequate for coverage of all claims.
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 2004 to 2006.
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
F-20
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, 2006. 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 1,198,750 remain
available for grant at December 31, 2006. 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 zero, 520,000 and 500,000 options were granted under
this Plan during the years ended December 31, 2006, 2005 and 2004, 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, 2006, 2005 and 2004 and
changes during the years then ended is presented below:
YEAR ENDED DECEMBER 31, 2006:
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 4,099 $6.28 525 $9.42 4,624 $6.64
at beginning of period
Additions/deductions:
Granted -- -- -- -- -- --
Exercised 1,012 1.94 -- -- 1,012 1.94
Cancelled 15 7.24 -- -- 15 7.24
---------------------------------------------------------------------------------
Options/warrants outstanding
at end of period 3,072 $7.71 525 $9.42 3,597 $7.96
---------------------------------------------------------------------------------
Options/warrants exercisable
at end of period 3,072 525 3,597
=================================================================================
Weighted average fair value of -- -- -- -- -- --
grants for the year
Price range of options/warrants:
Exercised $1.75 - $ 9.50 - $1.75 - $ 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-21
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 3,880 $5.35 445 $8.64 4,325 $5.68
at beginning of period
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 $7.47 $7.47 $7.47
grants for the year
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
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 3,486 $4.82 1,115 $9.38 4,601 $5.92
at beginning of period
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 $4.46 $4.46 $4.46
grants for the year
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
F-22
The following table summarizes information about stock options outstanding and
stock options exercisable, as granted to both employees and non-employees, at
December 31, 2006:
Employees Non-Employees
--------- -------------
Weighted
Average Weighted
Remaining Average Weighted
Range of Exercise Number Contractual Weighted Average Number Remaining Average
Prices Outstanding Life Exercise Price Outstanding Contractual Life Exercise Price
- -------------------------------------------------------------------------------------------------------------------------
$0.81 - $5.49 1,167,500 4.2 $3.40 75,000 4.6 $3.23
$8.11 - $13.80 1,904,500 5.3 $10.34 450,000 3.7 $10.45
----------- -----------
3,072,000 525,000
=========== ===========
Options and warrants outstanding as of December 31, 2006 expire from May 5, 2007
through December 11, 2015, depending upon the date of grant.
The total intrinsic value of options exercised during the year ended December
31, 2006 was $6,371,138. The aggregate intrinsic value of options outstanding
and exercisable at December 31, 2006 was approximately $2,854,000.
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 2006, 2005 and 2004 was approximately $490,000, $414,000, and $283,000,
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, 2006 December 31, 2005 December 31, 2004
----------------- ----------------- -----------------
Current:
Federal $ 45,270 $ 65,000 --
State 43,329 -- --
----------- ----------- -----------
$ 88,599 $ 65,000 --
----------- ----------- -----------
Deferred:
Federal (1,331,679) $ 815,738 $ 436,353
State 106,030 192,107 129,453
----------- ----------- -----------
(1,225,649) 1,007,845 565,806
----------- ----------- -----------
Change in valuation allowance 1,225,649 (1,007,845) (565,806)
----------- ----------- -----------
Total $ 88,599 $ 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, 2006 December 31, 2005 December 31, 2004
----------------- ----------------- -----------------
Statutory rate - Federal ($ 564,314) $ 1,115,773 $ 153,973
State taxes net of federal benefit (98,577) 126,791 85,439
Permanent differences and other (474,159) (169,719) 326,394
----------- ----------- -----------
(1,137,050) 1,072,845 565,806
----------- ----------- -----------
Less change in valuation allowance 1,225,649 (1,007,845) (565,806)
----------- ----------- -----------
Total $ 88,599 $ 65,000 --
=========== =========== ===========
F-23
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, 2006 December 31, 2005 December 31, 2004
----------------- ----------------- -----------------
Net operating loss carry-forward $ 6,314,828 $ 4,034,746 $ 4,758,315
Consulting-royalty costs 1,457,076 317,850 --
Bad debt expense 138,439 121,588
107,498
Other 297,331 666,857
618,943
Valuation allowance (8,498,345) (4,788,366) (5,546,760)
----------- ----------- -----------
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 $6,581,458 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 $16.6
million for federal purposes will be expiring through 2026. Additionally, there
are net operating loss carry-forwards of $16.9 million for state purposes that
will be expiring through 2016. 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 $110,270 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, 2006 December 31, 2005 December 31, 2004
------------------------------------------------------------------------------------------------
Loss Shares EPS Income Shares EPS Income Shares EPS
------------------------------------------------------------------------------------------------
Basic EPS ($1.7) 12.3 ($0.14) $ 3.2 11.7 $0.28 $ 0.5 11.5 $0.04
Dilutives:
Options and
Warrants -- -- -- 1.6 (0.04) -- 2.9 (0.01)
------------------------------------------------------------------------------------------------
Diluted EPS ($1.7) 12.3 ($0.14) $ 3.2 13.3 $0.24 $ 0.5 14.4 $0.03
================================================================================================
Options and warrants outstanding at December 31, 2006, 2005 and 2004 were
3,597,000, 4,623,750, and 4,324,500 respectively. Stock options and warrants
with exercise prices above average market price in the amount of 520,000 and
1,481,500 shares for the years ended December 31, 2005 and 2004, respectively,
were not included in the computation of diluted earnings per share as they are
anti-dilutive. No options and warrants were included in the 2006 computation of
diluted earnings because the effect would be anti-dilutive due to loss.
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
F-24
Cold-Eeze(R) cold therapy product, shared a total commission of five percent
(5%), on sales collected, less certain deductions until this agreement expired
on May 31, 2005. For the years ended December 31, 2005 and 2004, amounts of
$366,788 and $1,043,346, respectively, were paid or payable under such founder's
commission agreements. Amounts payable under such agreements at December 31,
2006 and 2005 were zero.
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 $145,500, $266,882
and $369,000 have been paid to a related entity during 2006, 2005 and 2004,
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's operations are divided 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 2006, 2005 and 2004 continuing operations by
business segment follows:
- -------------------------------------------------------------------------------------------------------------------------------
As of and for the year ended Health and Contract Ethical Corporate &
December 31, 2006 Cold Remedy Wellness Manufacturing Pharmaceutical Other Total
- -------------------------------------------------------------------------------------------------------------------------------
Revenues
Customers-domestic $ 24,815,850 $ 11,378,290 $ 2,034,179 $ -- $ -- $ 38,228,319
Customers-international $ -- $ 3,896,650 $ -- $ -- -- $ 3,896,650
Inter-segment $ -- $ -- $ 6,596,371 $ -- $ (6,596,371) $ --
Segment operating profit
(loss) $ 3,588,285 ($ 1,227,604) ($ 432,911) ($ 4,309,183) ($ 10,227) ($ 2,391,640)
Depreciation $ 449,580 $ 181,128 $ 696,212 $ -- $ -- $ 1,326,920
Capital expenditures $ 562,144 $ 109,837 $ 25,499 $ -- $ -- $ 697,480
Total assets $ 38,125,367 $ 4,169,565 $ 6,065,104 $ -- ($ 13,515,002) $ 34,845,034
- -------------------------------------------------------------------------------------------------------------------------------
As of and for the year ended Health and Contract Ethical Corporate &
December 31, 2005 Cold 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
F-25
- -------------------------------------------------------------------------------------------------------------------------------
As of and for the year ended Health and Contract Ethical Corporate &
December 31, 2004 Cold 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 ended December 31, 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.
NOTE 17 - QUARTERLY INFORMATION (UNAUDITED)
Quarter Ended
--------------------------------------------------------------
March 31, June 30, September 30, December 31,
--------------------------------------------------------------
2006
Net Sales $ 10,266,038 $ 6,182,467 $ 11,480,634 $ 14,195,830
Gross Profit $ 5,312,584 $ 2,309,415 $ 6,259,667 $ 8,996,699
Administration $ 3,705,761 $ 3,100,378 $ 3,195,182 $ 3,122,416
Operating expenses $ 6,925,209 $ 5,036,669 $ 5,369,992 $ 7,938,135
(Loss) Income from operations ($ 1,612,625) ($ 2,727,254) $ 889,675 $ 1,058,564
(Loss) Income from continuing operations ($ 1,612,625) ($ 2,727,254) $ 889,675 $ 1,058,564
Net (Loss) Income ($ 1,454,295) ($ 2,618,319) $ 1,078,634 $ 1,245,635
Basic EPS
(Loss) Income from continuing operations ($ 0.12) ($ 0.21) $ 0.09 $ 0.10
Net (Loss) Income ($ 0.12) ($ 0.21) $ 0.09 $ 0.10
Diluted EPS
(Loss) Income from continuing operations ($ 0.12) ($ 0.21) $ 0.08 $ 0.09
Net (Loss) Income ($ 0.12) ($ 0.21) $ 0.08 $ 0.09
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
(Loss) Income from operations ($ 194,931) ($ 1,860,404) $ 2,913,804 $ 2,120,961
(Loss) Income from continuing operations ($ 154,495) ($ 1,790,410) $ 2,998,503 $ 2,163,086
Net (Loss) Income ($ 154,495) ($ 1,790,410) $ 2,998,503 $ 2,163,086
Basic EPS
(Loss) Income from continuing operations ($ 0.01) ($ 0.15) $ 0.26 $ 0.19
Net (Loss) Income ($ 0.01) ($ 0.15) $ 0.26 $ 0.19
Diluted EPS
(Loss) Income from continuing operations ($ 0.01) ($ 0.15) $ 0.23 $ 0.16
Net (Loss) Income ($ 0.01) ($ 0.15) $ 0.23 $ 0.16
F-26
FOURTH QUARTER SEGMENT DATA (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------
As of and for the three Health and Contract Ethical Corporate &
months ended December 31, 2006 Cold Remedy Wellness Manufacturing Pharmaceutical Other Total
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues
Customers-domestic $ 10,697,062 $ 2,107,799 $ 527,072 $ -- $ -- $ 13,331,933
Customers-international $ -- $ 863,896 $ -- $ -- $ -- $ 863,896
Inter-segment $ -- $ -- $ 1,798,932 $ -- ($ 1,798,932) $ --
Segment operating profit
(loss) $ 2,645,269 ($ 481,188) ($ 11,639) ($ 1,420,522) $ 326,644 $ 1,058,564
Depreciation $ 97,637 $ 55,118 $ 180,249 $ -- $ -- $ 333,004
Capital expenditures $ 220,632 $ 1,883 $ 7,604 $ -- $ -- $ 230,119
- ---------------------------------------------------------------------------------------------------------------------------------
As of and for the three Health and Contract Ethical Corporate &
months ended December 31, 2005 Cold 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 three Health and Contract Ethical Corporate &
months ended December 31, 2004 Cold Remedy Wellness Manufacturing Pharmaceutical Other Total
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues
Customers-domestic $ 12,151,638 $ 4,247,088 $ 752,355 $ -- $ -- $ 17,151,081
Customers-international $ -- $ 599,257 $ -- $ -- $ -- $ 599,257
Inter-segment $ -- $ -- $ 1,975,779 $ -- ($ 1,975,779) $ --
Segment operating profit
(loss) $ 2,491,935 $ 187,979 $ 406,811 ($ 819,241) ($ 295,602) $ 1,971,882
Depreciation $ 90,102 $ 41,157 $ 112,824 $ -- $ -- $ 244,083
Capital expenditures $ 130,716 $ 6,403 $ 4,388,153 $ -- $ 202 $ 4,525,474
NOTE: The stated capital expenditure of $4,388,153 related to the Contract
Manufacturing segment for the year of 2004 is inclusive of an amount of
$4,360,829 following the acquisition by the Company of certain assets of JoEl,
Inc., on October 1, 2004.
F-27
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of The Quigley Corporation is responsible for the information and
representations contained in this report. Management believes that the financial
statements have been prepared in conformity with generally accepted accounting
principles and that the other information in this annual report is consistent
with those statements. In preparing the financial statements, management is
required to include amounts based on estimates and judgments, which it believes
are reasonable under the circumstances.
In fulfilling its responsibilities for the integrity of the data presented and
to safeguard the Company's assets, management employs a system of internal
accounting controls designed to provide reasonable assurance, at appropriate
cost, that the Company's assets are protected and that transactions are
appropriately authorized, recorded, and summarized. This system of control is
supported by the selection of qualified personnel, by organizational assignments
that provide appropriate delegation of authority and division of
responsibilities, and by the dissemination of policies and procedures.
/s/ Guy J. Quigley March 2, 2007
- -------------------------------------------------------- -----------------
Guy J. Quigley, Chairman of the Board, Date
(President, Chief Executive Officer)
/s/ George J. Longo March 2, 2007
- -------------------------------------------------------- -----------------
George J. Longo, Vice President, Chief Financial Officer Date
(Principal Financial and Accounting Officer)
F-28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of The Quigley Corporation
We have audited the accompanying balance sheets of The Quigley Corporation as of
December 31, 2006 and 2005, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2006. We also have audited management's assessment,
included in the accompanying Management's 2006 Annual Report on Internal
Controls, that The Quigley Corporation maintained effective internal control
over financial reporting as of December 31, 2006, based on criteria established
in INTERNAL CONTROL--INTEGRATED FRAMEWORK issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Quigley Corporation's
management is responsible for these financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on these financial statements, an
opinion on management's assessment, and an opinion on the effectiveness of the
company's internal control over financial reporting 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 audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of financial statements included 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. Our
audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Quigley Corporation as of
December 31, 2006 and 2005, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2006 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, management's assessment that The Quigley
Corporation maintained effective internal control over financial reporting as of
December 31, 2006 is fairly stated, in all material respects, based on criteria
established in INTERNAL CONTROL--INTEGRATED FRAMEWORK issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Furthermore, in our
opinion, The Quigley Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2006, based on
criteria established in INTERNAL CONTROL--INTEGRATED FRAMEWORK issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
As discussed in Note 1, the Company changed its method of accounting for
stock-based compensation expense in 2006.
/s/ Amper Politziner & Mattia P.C.
- --------------------------------------
Amper Politziner & Mattia P.C.
Edison, New Jersey
March 2, 2007
F-29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Controls and Procedures
As of December 31, 2006, the Company carried out an evaluation, under the
supervision and with the participation of our chief executive officer and chief
financial officer, of the effectiveness of the design and operations of our
disclosure controls and procedures, as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934.
Our chief executive officer and chief financial officer concluded that as of the
evaluation date, such disclosure controls and procedures were effective to
ensure that information required to be disclosed by us in the reports we file or
submit under the Exchange Act are recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission, and is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as
appropriate to allow timely decisions regarding required disclosure.
Management's report on our internal controls over financial reporting can be
found with the attached financial statements. The Independent Registered Public
Accounting Firm's attestation report on management's assessment of the
effectiveness of our internal control over financial reporting can also be found
with the attached financial statements.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining an adequate
system of internal control over financial reporting. Our system of internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America.
Our internal control over financial reporting includes those policies and
procedures that:
o pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect our transactions and dispositions of
our assets;
o provide reasonable assurance that our transactions are recorded as
necessary to permit preparation of our financial statements in
accordance with accounting principles generally accepted in the
United States of America, and that our receipts and expenditures are
being made only in accordance with authorizations of our management
and our directors; and
o provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of our
assets that could have a material effect on the financial
statements.
Because of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Further, because of changes in conditions, effectiveness of
internal controls over financial reporting may vary over time. Our system
contains self-monitoring mechanisms, and actions are taken to correct
deficiencies as they are identified.
Our management conducted an evaluation of the effectiveness of the system of
internal control over financial reporting based on the framework in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on this evaluation, our management concluded
that our system of internal control over financial reporting was effective as of
December 31, 2006. Our management's assessment of the effectiveness of our
internal control over financial reporting has been audited by Amper, Politziner
& Mattia, P.C., an independent registered public accounting firm, as stated in
their report which is included herein.
-37-
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required under this item is incorporated by reference to the
Company's Proxy Statement for the 2007 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 2007 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 2007 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required under this item is incorporated by reference to the
Company's Proxy Statement for the 2007 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 2007 Annual Meeting of Stockholders.
-38-
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
3.1 Articles of Incorporation of the Company, as amended,
(incorporated by reference to Exhibit 3.1 of Form 10-KSB/A
filed on April 4, 1997).
3.2 By-laws of the Company as currently in effect (incorporated by
reference to Exhibit 3.2 of Form 10-KSB/A filed on April 4,
1997 and Exhibit 99.3 of the Company's Current Report on Form
8-K filed on September 21, 1998).
4.1 Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 of Form 10-KSB/A filed on April 4, 1997).
10.1* 1997 Stock Option Plan (incorporated by reference to Exhibit
10.1 of the Company's Registration Statement on Form S-8 (File
No. 333-61313) filed on August 13, 1998).
10.2 Exclusive Representation and Distribution Agreement dated May
4, 1992 between the Company and Godfrey Science and Design,
Inc. et al (incorporated by reference to Exhibit 10.2 of Form
10-KSB/A filed on April 4, 1997).
10.3* Employment Agreement dated June 1, 1995 between the Company
and Guy J. Quigley (incorporated by reference to Exhibit 10.3
of Form 10-KSB/A filed on April 4, 1997).
10.4* Employment Agreement dated June 1, 1995 between the Company
and Charles A. Phillips (incorporated by reference to Exhibit
10.4 of Form 10-KSB/A filed on April 4, 1997).
10.5 United States Exclusive Supply Agreement dated March 17, 1997
(Portions of this exhibit are omitted and were filed
separately with the Securities Exchange Commission pursuant to
the Company's application requesting confidential treatment in
accordance with Rule 406 of Regulation C as promulgated under
the Securities Act of 1933, incorporated by reference to
Exhibit 10.5 of Form SB-2 dated September 29, 1997). See
exhibit 10.14.
10.6 Consulting Agreement dated May 4, 1992 between the Company and
Godfrey Science and Design, Inc. et al. (incorporated by
reference to Exhibit 10.5 of Form 10-KSB/A filed on April 4,
1997).
10.7* Employment Agreement dated November 5, 1996, as amended,
between the Company and George J. Longo (incorporated by
reference to Exhibit 10.10 of Form 10-KSB filed on March 30,
1998.
10.8 Rights Agreement dated September 15, 1998 between the Company
and American Stock Transfer and Trust Company (incorporated by
reference to Exhibit 1 to the Company's Registration Statement
on Form 8-A filed on September 18, 1998).
10.9 Consulting agreement dated March 7, 2002 between the Company
and Forrester Financial LLC (incorporated by reference to
Exhibit 99.1 of Form 8-K filed on April 11, 2002).
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).
-39-
10.13 Share agreement effective as of December 31, 2002 between the
Company and Suncoast Naturals, Inc. (incorporated by reference
to Exhibit 2.1 of Form 8-K filed on February 6, 2003).
10.14 Third Amendment to United States Exclusive Supply Agreement
(incorporated by reference to Exhibit 10.18 of Form 10-K filed
on April 1, 2004).
10.15 Asset Purchase and Sale Agreement dated August 18, 2004 by and
between JoEl, Inc. and the Company (incorporated by reference
to Exhibit 10.1 of Form 8-K filed on August 20, 2004).
10.16 Addendum dated October 1, 2004 by and between the Company and
JoEl, Inc. to the asset purchase and sale agreement dated
August 18, 2004 (incorporated by reference to Exhibit 10.1 of
Form 8-K filed on October 7, 2004).
10.17 Term Note dated October 1, 2004 in the amount of $3.0 million
executed by the Company in favor of PNC Bank, National
Association (incorporated by reference to Exhibit 10.2 of Form
8-K filed on October 7, 2004).
10.18 Open-End Mortgage and Security Agreement dated October 1, 2004
on real property located in Lebanon, Pennsylvania executed by
Quigley Manufacturing Inc. in favor of PNC Bank, National
Association (incorporated by reference to Exhibit 10.3 of Form
8-K filed on October 7, 2004).
10.19 Open-End Mortgage and Security Agreement dated October 1, 2004
on real property located in Elizabethtown, Pennsylvania
executed by Quigley Manufacturing Inc. in favor of PNC Bank,
National Association (incorporated by reference to Exhibit
10.4 of Form 8-K filed on October 7, 2004).
10.20 Registration Rights Agreement dated October 1, 2004 by and
among the Company and the shareholders signatory thereto
(incorporated by reference to Exhibit 10.5 of Form 8-K filed
on October 7, 2004).
10.21* Employment Agreement dated October 1, 2004 between Quigley
Manufacturing Inc. and David B. Deck (incorporated by
reference to Exhibit 10.6 of Form 8-K filed on October 7,
2004).
10.22* Employment Agreement dated October 1, 2004 between Quigley
Manufacturing Inc. and David Hess (incorporated by reference
to Exhibit 10.7 of Form 8-K filed on October 7, 2004).
14.1 Code of Ethics (incorporated by reference to Exhibit II of the
Proxy Statement on Schedule 14A filed on March 31, 2003).
16.1* PricewaterhouseCoopers LLP letter dated March 30, 2005
(incorporated by reference to Exhibit 16.1 of Form 10-K filed
on March 31, 2005).
21.1** Subsidiaries of The Quigley Corporation.
23.2** Consent of Amper, Politziner & Mattia, Independent Registered
Public Accounting Firm, dated March 12, 2007.
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
-40-
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 12, 2007
- ------------------------------------------------- --------------
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 12, 2007
- ----------------------------- Chief Executive Officer and Director
Guy J. Quigley
/s/ Charles A. Phillips Executive Vice President, Chief Operating March 12, 2007
- ----------------------------- Officer and Director
Charles A. Phillips
/s/ George J. Longo Vice President, Chief Financial March 12, 2007
- ----------------------------- Officer and Director (Principal
George J. Longo Financial and Accounting Officer)
/s/ Jacqueline F. Lewis Director March 12, 2007
- -----------------------------
Jacqueline F. Lewis
/s/ Rounsevelle W. Schaum Director March 12, 2007
- -----------------------------
Rounsevelle W. Schaum
/s/ Stephen W. Wouch Director March 12, 2007
- -----------------------------
Stephen W. Wouch
/s/ Terrence O. Tormey Director March 12, 2007
- -----------------------------
Terrence O. Tormey
-41-