UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB/A Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended September 30, 1996 COMMISSION FILE NO. 01-21617 ---------------------------- THE QUIGLEY CORPORATION ----------------------- (Exact name of registrant as specified in its charter) Nevada 23-2577138 - -------------------------------------------------------------------------------- (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) LANDMARK BUILDING, PO BOX 1349, DOYLESTOWN, PA 18901 ------------------------------------------------- (Address of principal executive offices) 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: COMMON STOCK ($.001 PAR VALUE) 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/ / As of December 31, 1996, the aggregate market value of the voting stock (all of one class $.001 par value Common Stock) held by non-affiliates of the Registrant was $74,674,850 based upon the average of the closing Bid and Asked prices of the Common Stock on that date as reported on the OTC Bulletin Board. Number of shares of each of the Registrant's classes of securities (all of one class of $.001 par value Common Stock) outstanding on December 31, 1996: 6,049,596. PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL DEVELOPMENT OF BUSINESS The Quigley Corporation (hereinafter referred to as "the Registrant") is a Nevada corporation which was organized on August 24, 1989 and commenced business operations in October, 1989. Pursuant to a Registration Statement filed in accordance with the Securities Act of 1933, as amended, and declared effective by the Securities and Exchange Commission on February 7, 1991, the Registrant in August of 1991 sold 2,113,433 Units of its securities to the public. The Registrant's offices are located at Landmark Building, PO Box 1349, Doylestown, PA 18901. The telephone number is (215) 345-0919. The Registrant maintains a home page on the Internet at http://www.quigleyco.com and can be reached by e-mail at quigley@quigleyco.com. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS SEE, Consolidated Financial Statements. NARRATIVE DESCRIPTION OF BUSINESS OPERATIONS Since its inception, the Registrant has conducted research and development into various types of health-related food supplements and homeopathic cold remedies. Prior to the current fiscal year, the Registrant has had minimal revenues from operations and as a result had suffered continuing losses due to research and development and operations expenses. However, the Registrant's product line has been developed, and during the most recent fiscal year ended September 30, 1996 ("Fiscal 1996"), the Registrant has had increasing and significant revenues from its national marketing program and increasing public awareness of its Cold-Eeze(TM) lozenge product. The Registrant's initial business was the marketing and distribution of a line of nutritious health supplements (hereinafter "Nutri-Bars"). Beginning in 1995, the Registrant minimized its marketing of the Nutri-Bars and focused its efforts on the development and marketing of the Registrant's patented Cold-Eeze(TM) zinc gluconate cold relief lozenge product. Since June, 1996, the Registrant has concentrated its business operations exclusively on the manufacturing, marketing and development of its proprietary Cold-Eeze(TM) and Cold-Eezer Plus cold-remedy lozenge products and on development of various product extensions. The Registrant's lozenge products are based upon a proprietary zinc gluconate formula which in a clinical study conducted by The Cleveland Clinic has been shown to reduce the severity and duration of the common cold. The Quigley Corporation acquired world-wide manufacturing and distribution rights to this formulation in 1992 from Dr. John Godfrey and commenced national marketing in 1996. PRODUCTS THE COLD-EEZE(TM) COLD REMEDY LOZENGE In May, 1992, the Registrant entered into an exclusive agreement for worldwide representation, manufacturing, marketing and distribution rights to a zinc gluconate/glycine lozenge formulation developed by Dr. John C. Godfrey, Ph.D., and patented in the United States, United Kingdom, Sweden, France, Italy, Canada, Germany, and pending in Japan. This product is presently being marketed by the Registrant under the tradename Cold-Eeze(TM) by the Registrant directly and also through independent brokers and marketers, and is a featured product on the QVC Cable TV shopping network. -2- In 1996, the Registrant also acquired an exclusive license to a zinc gluconate use patent which had been patented by George Eby III, thereby assuring the Registrant of exclusivity in the manufacturing and marketing of zinc gluconate formulated cold relief products. Under an FDA approved Investigational New Drug Application, filed by Dartmouth College, a randomized double- blind placebo-controlled study (randomized study), conducted at Dartmouth College Health Science, Hanover, New Hampshire, concluded that the lozenge formulation treatment, initiated within 48 hours of symptom onset, resulted in a significant reduction in the total duration of the common cold. On May 22, 1992, ZINC AND THE COMMON COLD, A CONTROLLED CLINICAL STUDY, by Dr. Godfrey, et al., was published in England, in the "Journal of International Medical Research", Volume 20, Number 3, Pages 234-246. According to Dr. Godfrey (a) flavorings used in other Zinc lozenge products (citrate, tartrate, separate, orotate, picolinate, mannitol or sorbitol) render the Zinc inactive and unavailable to the patient's nasal passages, mouth and throat, where cold symptoms have to be treated, (b) this new, patented pleasant-tasting formulation delivers approximately 93% of the active Zinc to the mucosal surfaces and (c) the patient has the same sequence of symptoms as in the absence of treatment, but goes through the phases at an accelerated rate and with reduced symptom severity. On July 15, 1996, results of a new randomized double-blind placebo-controlled study on the common cold, which commenced at the CLEVELAND CLINIC FOUNDATION on October 3rd, 1994 was 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 our Dartmouth Study), the results still showed a 42% reduction in the duration of the Common Cold. ROYALTY AND EMPLOYMENT AGREEMENTS The Cold-Eeze(TM) product is manufactured for the Registrant by an independent manufacturer and marketed by the Registrant in accordance with the terms of the licensing agreement (between the Registrant and Godfrey Science & Design, Inc. and John C. Godfrey, Ph.D; hereinafter "Dr. Godfrey"). The contract is assignable by the Registrant with Dr. Godfrey's consent. Throughout the duration of the agreement Dr. Godfrey is to receive a three percent (3%) royalty on all gross sales (subsequent to the Registrant receiving payment upon such gross sales). A separate consulting agreement between the parties referred to directly above was similarly entered into on May 4, 1992 whereby Dr. John C. Godfrey and Dr. Nancy J. Godfrey are to receive a consulting fee of two percent (2%) of gross sales of the lozenge by the Registrant for his consulting services to the Registrant with respect to such product. Pursuant to the License Agreement entered into between the Registrant and George Eby Research, the Registrant pays a royalty fee. Throughout the duration of the agreement George Eby of George Eby Research is to receive a three percent (3%) royalty on all gross sales (subsequent to the Registrant receiving payment upon such gross sales). An employment agreement between the Registrant and Guy J. Quigley was entered into on June 1, 1995, whereby Guy J. Quigley, along with the normal considerations of an Executive Employment Agreement, in consideration of the acquisition of the cold therapy product, is to receive a royalty of five percent (5%) of gross sales of the Lozenge by the Registrant for the termination of said agreement on May 31, 2005. An employment agreement between the Registrant and Charles A. Phillips was entered into on June 1, 1995, whereby Charles A. Phillips, along with the normal considerations of an Executive Employment Agreement, shall receive 25% (twenty five per cent) of the royalty received by Guy J. Quigley, either directly from Guy J. Quigley or, if requested, directly from the Registrant. Should Charles A. Phillips make such request upon Registrant, the said 25% (twenty five per cent) would be deducted from any royalties due to Guy J. Quigley. -3- BROKER, DISTRIBUTOR AND REPRESENTATIVE AGREEMENTS The Registrant has several Broker, Distributor and Representative Agreements, both Nationally and Internationally. These agreements are sales performance based and in addition the Registrant has also issued incentive common stock purchase options to its Brokers, Distributors and Representatives. PATENTS The Registrant currently owns no patents. However, the Registrant has been granted an exclusive agreement for worldwide representation, manufacturing, marketing and distribution rights to a zinc/gluconate/glycine lozenge formulation developed by Dr. John C. Godfrey, Ph.D., and patented as follows: UNITED STATES: No. 4 684 528 (August 4, 1987) AND No. 4 758 439 (July 19, 1988) GERMANY: No. 3,587,766 (March 2, 1994) FRANCE & ITALY: No. EP 0 183 840 B1 (March 2, 1994) SWEDEN. No. 0 183 840 (March 2, 1994) CANADA: No. 1 243 952 (November 1, 1988) GREAT BRITAIN: No. 2 179 536 (December 21, 1988) JAPAN: Pending. In 1996, the Registrant also acquired exclusive license for a United States ZINC GLUCONATE USE PATENT NUMBER RI 33,465 from the patent holder George Eby of George Eby Research. This use patent gives The Registrant the only world-wide entity with rights to both USE and FORMULATION patents on zinc gluconate for reducing the duration and severity of the common cold. RESEARCH AND DEVELOPMENT The Registrant's research and development costs for Fiscal 1996 and the fiscal year ending September 30, 1995 ("Fiscal 1995") was $41,856 and $70,711, respectively. The decrease in research and development costs is attributable to the Registrant's completion of its research and development projects with respect to the Cold-Eeze(TM) product. The clinical study conducted by The Cleveland Clinic was done at no cost to the Registrant. The Registrant will in the fiscal year ending September 30, 1997 ("Fiscal 1997") incur research and development expenditures to develop extensions of the lozenge product, including potential pediatric Cold-Eeze, along with chewing gum and mouthwash formulations of the Cold-Eeze(TM) product. [BALANCE OF PAGE INTENTIONALLY LEFT BLANK] -4- REGULATORY MATTERS The business of the Registrant is subject to federal and state laws and regulations adopted for the health and safety of users of the Registrant's products. The Registrant's Cold-Eeze(TM) 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 Registrant 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 Registrant is in compliance with all such laws, regulations and standards currently in effect including the Food, Drug and Cosmetic Act of 1938 and the Homeopathic Pharmacopoeia Regulatory Service. Management further believes that the cost of compliance with such laws, regulations and standards has not and will not have a material adverse effect on the Registrant. COMPETITION The Registrant competes with other suppliers of cold remedy products. These suppliers range widely in size. Some of the Registrant's competitors have significantly greater financial, technical or marketing resources than the Registrant. Many of the products offered by the Registrant's competitors only relieve the symptoms of the common cold and management believes that its product, which has been clinically proven to reduce the severity and duration of the common cold, offers a significant advantage over many of its competitors in the over-the-counter cold remedy market. The Registrant believes that its ability to compete depends on a number of factors, including price, product quality, availability and reliability, credit terms, name recognition, delivery time and post-sale service and support. EMPLOYEES At September 30, 1996 the Registrant had 4 full-time employees, of whom all were involved in an executive, marketing or administrative capacity. None of the Registrant's employees is covered by a collective bargaining agreement or is a member of a union. The Registrant considers its relationship with its employees to be good. CUSTOMERS AND SUPPLIERS The Cold-Eeze(TM) lozenge products are distributed through numerous independent and chain drug and discount stores throughout the United States, including Walgreen's, Revco, Osco/Sav-On, Thrift Drug, CVS, RiteAid, Eckerd, PharMor, K-Mart, and wholesale distribution including, McKesson, Bergen Brunswick, Foxmeyer, US Health Distributors. The Cold-Eezer Plus product is marketed through an exclusive sales agreement with the QVC cable shopping network. The Registrant is not dependent on any single customer. The Registrant currently uses a single supplier to provide its zinc gluconate products. Should this relationship terminate, the Registrant believes that the contingency plans which it has formulated would prevent such termination from materially affecting the Registrant's operations. Any such termination may, however, result in a temporary delay in production until a replacement facility with available production time is located. -5- ITEM 2. PROPERTIES The Registrant currently maintains its executive offices at the Landmark Building, 10 South Clinton Street, Doylestown, PA (and its alternative mailing address is P.O. Box 1349, Doylestown, PA 18901) where it occupies approximately 2,000 square feet of office space pursuant to a written 3-year lease agreement with an unaffiliated landlord. The Registrant also occupies approximately 2,500 square feet of warehouse space under a one-year lease agreement with an unaffiliated landlord. The monthly aggregate lease payments for both premises is $ 2,355. The Registrant believes that its existing facilities are adequate for its current needs and that additional facilities in its service area are available to meet future needs. ITEM 3. LEGAL PROCEEDINGS The Registrant is not presently a party to any material litigation nor, to the knowledge of management, is any material litigation threatened. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On August 19, 1995, the Registrant held its annual meeting of stockholders at Doylestown, PA, the number of shares necessary to constitute a quorum being present either in person or by proxy. At this meeting, the stockholders ratified all actions and appointments of the Board of Directors taken and made since the previous Annual Meeting of Stockholders in June, 1993. The stockholders also elected the slate of Directors nominated by the Registrant to hold such office until the next Annual Meeting, and ratified the appointment of Nachum Blumenfrucht, CPA, as independent auditor of the Registrant for Fiscal 1996. [BALANCE OF PAGE INTENTIONALLY LEFT BLANK] -6- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (A) MARKET INFORMATION The Registrant's Common Stock, $.001 par value, is traded on the over-the-counter market (Bulletin Board) under the trading symbol QUIG. The following table sets forth the average range of bid and ask quotations for the Registrant's Common Stock as reported by the NASD Bulletin Board for each full quarterly period within the two most recent fiscal years (1). Fiscal 1995 (2) BY QUARTER COMMON STOCK - ---------- ------------ QUARTER DATE HIGH LOW ------- ---- ---- --- 1st December 31, 1994 $1.25 $1.00 2nd March 31, 1995 $1.25 $1.00 3rd June 30, 1995 $1.25 $1.00 4th September 30, 1995 $1.25 $1.00 Fiscal 1996 (2) BY QUARTER COMMON STOCK - ---------- ------------ QUARTER DATE HIGH LOW ------- ---- ---- --- 1st December 31, 1995 $ 1.375 $0.875 2nd March 31, 1996 $ 1.375 $0.875 3rd June 30, 1996 $ 2.25 $0.625 4th September 30, 1996 $10.50 $1.625 (1) Trading transactions in the Registrant's securities has been limited to the over-the-counter market and, accordingly, an "established public trading market" for such securities currently exists and has existed for more than the past sixty business days. Bid and asked quotations at fixed prices have appeared regularly in the established quotation systems on at least one-half of such business days. All prices indicated herein are as reported to the Registrant by broker-dealer(s) making a market in its securities. The aforesaid securities are not traded or quoted on any automated quotation system. The over-the-counter market quotes indicated above reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. (2) Prices for Fiscal Years 1995 and 1996 have been adjusted to reflect the 10 for-One Reverse Split of Common Stock in December, 1995. -7- (B) HOLDERS. As of September 30, 1996 there were approximately 253 holders of record of Registrant's Common Stock, including brokerage firms, clearing houses, and/or depository firms holding the Registrant's securities for their respective clients. The exact number of beneficial owners of the Registrant's securities is not known but would necessarily exceed the number of record owners indicated above. (C) DIVIDENDS. No cash dividends were paid during Fiscal 1996 and Fiscal 1995. The Registrant has not paid or declared any dividends upon its Common Stock since its inception, and, by reason of its present financial status and projected financial requirements, does not anticipate paying any dividends upon its Common Stock in the foreseeable future. (D) WARRANTS. In addition to the Registrant's aforesaid outstanding Common Stock, there are as of December 26, 1996 issued and outstanding Common Stock Purchase Warrants which are exercisable at the price-per- share indicated and which expire on the date indicated, as follows: WARRANT NUMBER EXERCISE PRICE EXPIRATION DATE ------- ------ -------------- --------------- CLASS "D" 800,000 $1.00 December 31, 2000 CLASS "E" 1,550,000 $3.50 June 30, 2001 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE REGISTRANT'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THE REGISTRANT'S EXPANSION INTO NEW MARKETS, COMPETITION, TECHNOLOGICAL ADVANCES AND AVAILABILITY OF MANAGERIAL PERSONNEL. OVERVIEW During Fiscal 1996, management of the Registrant made a strategic marketing decision to change the focus and business operations of the Registrant to the manufacture and marketing of the Registrant's patented Cold-Eeze(TM) cold relief lozenge product and the development and marketing of brand extension products based upon the Registrant's proprietary zinc gluconate glycine formula. By commencing national distribution of a cold-relief product clinically proven to reduce the severity and duration of the common cold, the Registrant believes that it is offering a significant addition to the huge over-the-counter cold remedy market. Through greatly increased sales and expansion of manufacturing capacity and by holding down operation, marketing and distribution costs, the Registrant believes it will in Fiscal 1997 reverse the negative cash flow from operations associated with the product development. The Registrant also intends to continue to utilize the financial and marketing resources of independent national and international brokers and marketers to represent the Registrant's Cold-Eeze(TM) lozenge product and product extensions, thereby saving the Registrant from the expenses and capital outlays which the Registrant would otherwise be required to expend. The Registrant had not generated significant revenues from its business operations from its inception through the third quarter of Fiscal 1996. As a result of the release of the clinical study by The Cleveland Clinic in July, 1996 citing positive results of the efficacy of the Registrant's Cold-Eeze(TM) formulation, and the resultant increased national publicity concerning the Cold-Eeze(TM) product, revenue from product sales greatly increased during the fourth quarter ending September 30, 1996. For Fiscal 1996, the Registrant had a net loss of ($694,269) on revenues of $1,049,561. The dramatic increase in purchase orders for the Cold-Eeze(TM) product resulted in a significant backlog in purchase orders by the close of Fiscal 1996. -8- Based upon continuing strong consumer demand for the Cold-Eeze(TM) product, the Registrant in September, 1996 initiated a program designed to increase manufacturing capacity in several stages throughout Fiscal 1997. As a result of this program, the Registrant will have the ability to manufacture and ship in excess of $1.5 million of the Cold- Eeze(TM) product by the end of January, 1997, with additional manufacturing capacity coming on-line shortly thereafter. As of December 26, 1996, the Registrant had a purchase order backlog of approximately $7.5 million of Cold-Eeze(TM) product, and was, during the months of November, 1996 and December, 1996, manufacturing and shipping Cold- Eeze(TM) product at the rate of approximately $500,000 per week. These sales levels are significantly higher than any previous sales results of the Registrant and management expects that these sales levels will continue for the immediate future and therefore will have a materially positive effect on the Registrant's results for Fiscal 1997. Although the Registrant expects that sales levels will be highest during the peak cold season from September through March, near-term sales levels should continue to increase as the Registrant ships its backlog of orders and distributors and retailers order increasing quantities of the Cold-Eeze(TM) product to fill their distribution pipeline and meet increasing consumer demand for the product. In addition, the Registrant expects that it will during Fiscal 1997 utilize its increased manufacturing capacity to manufacture sufficient product for international distribution of Cold- Eeze(TM). Although the Registrant has begun to establish an international network of independent distributors, the current inability to meet domestic demand for the Cold-Eeze(TM) product has delayed the introduction of the Cold- Eeze(TM) product outside the United States. The Registrant believes that it has developed an effective, proprietary cold remedy product which is beginning to meet with widespread consumer acceptance. Future results of the Registrant's operations, however, will be dependent upon a number of factors, including competitive and financial pressures associated with national distribution of an over-the-counter cold remedy. Future revenues, costs, margins and profits will continue to be influenced by the Registrant's ability to increase its manufacturing capacity and marketing and distribution capabilities in order to compete on the national and international level. The following table sets forth selected financial information for the periods indicated: For the Fiscal Year Ended 1996 1995 ---- ---- Statement of Operations Summary: Net Sales $1,049,561 $501,903 Net Loss ($694,269) ($152,556) Net Loss Per Share ($.17) ($.05) Balance Sheet Summary: Total Assets $1,368,301 $437,076 Total Liabilities $125,253 $137,936 Stockholder's Equity $1,243,048 $299,140 -9- RESULTS OF OPERATIONS FISCAL 1996 COMPARED WITH FISCAL 1995 For Fiscal 1996, the Registrant reported revenues of $1,049,561 and a net loss of ($694,269), as compared with revenues of $501,903 and a net loss of ($152,556) for the comparable period ended September 30, 1995. This substantial increase in revenue is primarily attributable to gradual market acceptance of the Cold-Eeze(TM) lozenge products. The gradual market acceptance of the Cold-Eeze(TM) product resulted from a national marketing program commenced in the fourth quarter of Fiscal 1996 and the release of the results of The Cleveland Clinic Study in July, 1996. Sales in Fiscal 1995 were $501,903, most of which resulted following the Registrant's marketing shift from health food bars to cold-relief products. Cost of Goods sold, as a percentage of net sales, increased to 27.1% for Fiscal 1996 from 22.3% for Fiscal 1995. The slight increase was similarly caused by the Registrant's change in its product mix toward developing and marketing the Cold-Eeze(TM) products instead of health food bars. During Fiscal 1996, operating expenses similarly increased to $1,493,794 from $552,696 in Fiscal 1995. This was primarily a result of increased costs associated with a national marketing program and the increased sales volume from the Cold-Eeze(TM) product during Fiscal 1996. During Fiscal 1996, the Registrant's major operating expenses included $558,281 for salaries and $570,752 for advertising which collectively accounted for $1,129,033 or approximately 75.6% of the Registrant's operating expenses. Other operating costs for this period maintained their fixed attributes, in that they did not follow sales volume but maintained a relative constant dollar value for Fiscal 1995. During Fiscal 1995, these expenses included $106,660 for salaries and $93,931 for advertising. If these two categories of expenses maintained the same relationship to net sales from Fiscal 1995, then the net loss for Fiscal 1996 would have changed to basically a break even. For future periods, a normal profitable relationship should develop for all costs and operating expenses as they relate to sales. However, this will not occur until certain break even sales volume levels are achieved to absorb certain fixed costs of the Registrant. The pricing structure of the Registrant's product is designed to render the Registrant profitable after base line sales volume levels are attained. The total assets of the Registrant at September 30, 1996 and September 30, 1995 were $1,368,301 and $437,076 respectively. Working capital increased to $910,970 from $287,281 for the respective periods. These significant increases are due primarily to increased sales volume, the acquisition of the use patent, and funds or paid in capital generated from the sale, exercise or exchange for services of the Registrant's Common Stock, options, and warrants. At September 30, 1996, the Registrant's backlog was approximately $2 million as compared to no backlog at September 30, 1995. The backlog increase was attributable to a growth in sales of the Registrant's Cold-Eeze(TM) lozenge products. FISCAL 1995 COMPARED WITH FISCAL 1994 For Fiscal 1995, the Registrant reported revenues of $501,903 and a net loss of ($152,556), as compared with revenues of $76,907 and a loss of ($73,784) for the comparable period ended September 30, 1994 ("Fiscal 1994"). This dramatic change in revenue is primarily attributable to the Registrant's initial marketing efforts of its cold-relief products, through the "QVC" television shopping network, which represents approximately $261,000 or 52% of the total revenues for Fiscal 1995, and growing interest of the product by consumers in the marketplace. Cost of goods sold, as a percentage of net sales, decreased to 22.3% for Fiscal 1995 from 34.8% for Fiscal 1994. The occurred because the Registrant's change in its product mix toward developing and marketing the Cold-Eeze(TM) products primarily through QVC, which carried a lower cost of sales than health food and other cold-relief products. -10- During Fiscal 1995, the health food bars accounted for approximately 1% of total net sales as opposed to approximately 27% in Fiscal 1994. During Fiscal 1995, operating expenses increased to $552,696 from $180,015 in Fiscal 1994. However, as a percentage of net sales, operating costs decreased to 110.1% in Fiscal 1995 from 234.1% in Fiscal 1994. Even though total operating costs were lower as a percentage of net sales, certain expenses increased in Fiscal 1995 causing a greater loss from operations to be reported. During Fiscal 1995, advertising and professional expenses increased to $93,931 and $69,325, respectively, compared to $3,056 and ($8,081), respectively for Fiscal 1994. The Registrant had working capital of $287,281 for its fiscal year ended September 30, 1995, as compared to a working capital deficiency of ($59,998) for its fiscal year ended September 30, 1994. This improvement in working capital was due primarily to a significant increase in revenues to $501,903 in Fiscal 1995 from $76,907 in Fiscal 1994, combined with additional capital obtained by the Company through sale of Common Stock. As of September 30, 1995, the Registrant did not have any current material commitments for capital expenditures. FISCAL 1994 COMPARED WITH FISCAL 1993 The Registrant's operations for Fiscal 1994 produced revenues of $76,907 and a net loss of ($73,784) as compared with revenues of $35,932 and a net loss of ($219,388) for the comparable period ended September 30, 1993 ("Fiscal 1993"). This 114% improvement in revenues was due to the Registrant starting to sell a new product for the cold remedy market which accounted for approximately 73% of net sales for Fiscal 1994. Prior to Fiscal 1994, the primary source of revenues were through the sales of a line of nutritious health food supplements. Gross profits improved to $50,156, or 65.2% of net sales, for Fiscal 1994 as compared to $18,887, or 61.9% of net sales, for Fiscal 1993. This occurred because of increased sales volume and a lower cost of production associated with the cold remedy lozenge, as compared to the health food supplements products. Operating expenses decreased to $180,015, or 234.1% of net sales, for Fiscal 1994 as compared to $238,275, or 663.1% of net sales, for Fiscal 1993. The major cost associated with this reduction is that professional expenses decreased to ($8,081) during Fiscal 1994 as compared to $71,676 for Fiscal 1993. The negative amount occurred because of a settlement, with a previous attorney, waiving $17,500 of fees. By adopting FASB 109 during Fiscal 1994, an amount totaling ($21,564) was reflected as a cumulative tax credit for that period. Also, $32,500 was provided for the sale of distribution rights as compared to no provision, respectively, for Fiscal 1993. The specific preceding item changes are reflective in the net loss of the Registrant which decreased to ($73,784) for Fiscal 1994, as compared to ($219,388) for Fiscal 1993. Deferred taxes increased to $23,526 during Fiscal 1994 with no provision during the prior fiscal year, thereby accounting for the primary change in total assets to $57,635 for Fiscal 1994 as compared to $28,583 for Fiscal 1993. Working capital deficits for Fiscal 1994 and 1993 were ($59,998) and ($84,864) respectively, which remained basically unchanged as did all other significant categories with the exception of an advance during Fiscal 1993 for $20,000 for the sale of distribution rights to a Canadian corporation. As of September 30, 1994, the Registrant did not have any current material commitments for capital expenditures. MATERIAL COMMITMENTS AND SIGNIFICANT AGREEMENTS Since the Cold-Eeze(TM) lozenge product is manufactured for the Registrant by outside sources, capital expenditures for Fiscal 1997 are not anticipated to be material. -11- There are significant royalty agreements between the Registrant and the patent holders of the Registrant's cold-relief product. The Registrant has entered into royalty agreements with Godfrey Science & Design, Inc. and George Eby Research that require payments of 3% of gross sales and with Guy J. Quigley and Charles A. Phillips who share a royalty of 5% of gross sales (in a ratio of 3.75% and 1.25%, respectively). Additionally, Dr. John C. Godfrey and Dr. Nancy J. Godfrey receive a consulting fee of 2% of gross sales. All such royalty and consulting arrangements are subject to certain adjustments, and payments are required by the Registrant only after funds are remitted from such sales. See, Description of Business- Royalty and Employment Agreements. The agreements expire as follows: the agreement with George Eby Research expires on March 5, 2002; the agreements with each of Godfrey Science & Design, Dr. John C. Godfrey, and Dr. Nancy J. Godfrey expire on May 4, 2007; and the agreements with Guy J. Quigley and Charles A. Phillips expire on May 31, 2005. All costs associated with the cold-relief product, including the royalty and consulting agreements, have been built into the wholesale selling price of the product, in order to render the operations profitable after a certain base sales volume has been achieved. LIQUIDITY AND CAPITAL RESOURCES The Registrant had working capital of $910,970 and $287,281 at September 30, 1996 and 1995, respectively. The increase in working capital is due to the proceeds received by the Registrant from the sale or exchange of common stock for cash or services and increased sales of $547,658. Total cash balances at September 30, 1996 were $370,147, as compared to $132,739 at September 30, 1995. The Registrant believes that its increased marketing efforts and increased national publicity concerning the Cold- Eeze(TM) product, together with the Registrant's increased manufacturing availability, will result in significantly increased revenues in Fiscal 1997. These revenues will provide an internal source of capital to fund the Registrant's business operations. In addition to anticipated earnings from operations, the Registrant may continue to raise capital through the issuance of equity securities to finance anticipated growth. On October 1, 1996, the Registrant entered into an investment banking arrangement with Sands Brothers & Co. to raise additional capital to assist in financing an expansion of the Registrant's business. Such financing arrangements would primarily entail a private placement offering of the Registrant's equity securities. Management is not aware of any trends, events or uncertainties that have or are reasonably likely or expected to have a material negative impact upon the Registrant's (a) short term or long term liquidity, (b) net sales or revenues or income from continuing operations and (c) the Registrant's business operations may not be considered to be cyclical and/or seasonable in nature. Any challenge to the Registrant's rights under certain patents could have a material adverse effect on future liquidity of the Registrant, however, the Registrant is not aware of any condition which would make such an event probable. Management believes that its present cash balances and future cash provided by operating activities will be sufficient to support current working capital requirements and planned expansion through Fiscal 1997. However, should the Registrant's business expand significantly, additional external sources of financing would be required. While the Registrant believes that such financing would be available to it, there can be no assurance in this regard. NEW ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires that certain long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Management believes that the adoption of this pronouncement will not have a significant impact on the Registrant's financial statements. -12- In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation," which requires either a change in accounting or disclosures for stock-based compensation plans. The Registrant expects to select the disclosure election of the standard. Both standards will be effective for the Registrant beginning the first quarter of Fiscal 1997. IMPACT OF INFLATION The Registrant is subject to normal inflationary trends and anticipates that any increased costs should be passed on to its customers. ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by Item 7 is included immediately following Item 13 of this Report. The Financial Statements contained herein have been prepared in accordance with the requirements of Regulation S-X and supplementary financial information, if any, has been prepared in accordance with Item 302 of Regulation S-K. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. [BALANCE OF PAGE INTENTIONALLY LEFT BLANK] -13- PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS AND EXECUTIVE OFFICERS Listed below are the names, ages and positions with the Registrant of all Directors and Executive Officers of the Registrant as of December 26, 1996. Each director's term is scheduled to expire at the next annual meeting of shareholders and when his successor is duly elected: NAME AGE POSITION YEAR FIRST ELECTED ---- --- -------- ------------------ Guy J. Quigley 55 President, CEO and 1989 Landmark Building Director 10 South Clinton Street Doylestown, PA 18901 Eric H. Kaytes 41 Vice President of 1989 Landmark Building Finance, CFO, 10 South Clinton Street Secretary-Treas. and Doylestown, PA 18901 Director Charles A. Phillips 49 Vice President, COO 1989 Landmark Building and Director 10 South Clinton Street Doylestown, PA 18901 Robert L. Pollack, Ph.D. 72 Director of Research 1993 Landmark Building and Development, 10 South Clinton Street and Director Doylestown, PA 18901 GUY J. QUIGLEY has been Chairman of the Board, President, and Chief Executive Officer of the Registrant since September 1989. Prior to this date, Mr. Quigley, an accomplished author, established and operated various manufacturing, sales, marketing and real estate companies located in the United States, Europe and the African Continent. CHARLES A. PHILLIPS has been Vice President, Chief Operations Officer and a Director of the Registrant since September 1989. Before his employment with the Registrant, Mr. Phillips founded and operated KEB Enterprises, a gold and diamond mining operation that was based in Sierra Leone, West Africa. In addition, Mr. Phillips, also served as a technical consultant for Re-Tech, Inc., Horsham, Pennsylvania, where he was responsible for full marketing and production of a prototype electrical device. ERIC H. KAYTES currently serves as Vice President of Management Information Systems, Secretary, Treasurer and Director of the Registrant. From 1989 until January 1997, Mr. Kaytes also served as the Chief Financial Officer of the Registrant. Prior to 1989 and concurrent with his responsibilities for the Registrant, Mr. Kaytes has been an independent programmer and designer of computer software. -14- ROBERT L. POLLACK, B.S., M.S., Ph.D., Professor Emeritus Department of Biochemistry, Temple University School of Medicine. Dr. Pollack is a biochemist, researcher, nutritionist, microbiologist, editor and educator having lectured (both nationally and internationally) on nutritional matters to the general public and scientific audiences. In addition to publishing several papers in scientific journals, Dr. Pollack has authored three books on the subject of nutrition and currently serves as Chairman of the Medical Advisory Board of the Registrant. TERM OF OFFICE Directors are elected to serve until the next annual meeting of shareholders and until their successors have been elected and have qualified. Officers are appointed to serve until the meeting of the Board of Directors following the next annual meeting of shareholders and until their successors have been appointed. [BALANCE OF PAGE INTENTIONALLY LEFT BLANK] -15- ITEM 10. EXECUTIVE COMPENSATION (a) CASH COMPENSATION The following table sets forth information concerning all remuneration paid or accrued by the Registrant for services rendered by the following persons in all capacities during Fiscal 1996: (i) Each of the Registrant's five most compensated executive officers whose cash compensation exceeded $100,000; and (ii) all executive officers of the Registrant as a group.