UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual Report Pursuant to SectionFOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 orOR 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 ofOF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscalfiscal year ended December 31, 2003
COMMISSION FILE NO.2005
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 01-21617
THE QUIGLEY CORPORATION
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(Exact nameName of registrantRegistrant as specifiedSpecified in its charter)Its Charter)
NEVADA 23-2577138
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(State or other jurisdictionOther Jurisdiction (I.R.S. Employer
of (IRS Employer
incorporationIncorporation or organization)Organization) Identification Number)
(MAILING ADDRESS: PO Box 1349, Doylestown, PA 18901)No.)
KELLS BUILDING, 621 SHADY RETREAT ROAD, P.O. BOX 1349, DOYLESTOWN, PA 18901
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(Address of principle executive offices)Principal Executive Offices) (Zip Code)
(215) 345-0919
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(Registrant'sRegistrant's telephone number, including area code)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:code (215) 345-0919
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
COMMON STOCK, ($.0005$.0005 PAR VALUE)VALUE PER SHARE NASDAQ NATIONAL MARKET
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COMMON SHARE PURCHASE RIGHTS NOT APPLICABLE
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Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
Indicate by check mark whether the Registrantregistrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes |_|[X] No [ ]
Indicate by the check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-XS-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 amendmentsamendment to this Form 10-K. |_|[ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Exchange Act of 1934)Act).
|_| Yes |X|[ ] No [X]
The aggregate market value of the registrant's common stock held by
non-affiliates was $59,305,107$66,267,472 as of June 30, 2003,2005, based on the closing price
of the common stock on the NasdaqThe NASDAQ National Stock Market.
Number of shares of each of the Registrant'sregistrant's classes of securities (all of one
class ofoutstanding
on March 23, 2006:
Common stock, $.0005 par value per share: 11,678,478.
Common Stock) outstanding on March 12, 2004:
11,512,755.share purchase rights: 0
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in this Report
on Form 10-K:
1.
Information set forth in Part III of this report is incorporated by reference
from the Registrant's Proxy Statementregistrant's proxy statement for the 2004 Annual
Meeting2006 annual meeting of
Stockholders.
THE EXHIBIT INDEX IS LOCATED ON PAGES 23-24.stockholders.
TABLE OF CONTENTS
Part I Page
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Item 1. Description of Business 32 - 109
1A. Risk Factors 9 - 14
1B. Unresolved Staff Comments 14
2. Description of Properties 1015
3. Legal Proceedings 1015 - 1220
4. Submission of Matters to a Vote byof Security Holders 1220
Part II
5. Market for the Company'sRegistrant's Common Equity, and Related Stockholder
Matters 12and Issuer Purchases of Equity Securities 21 - 1322
6. Selected Financial Data 1422 - 23
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations and Financial Condition 15Operation 23 - 2029
7A. Quantitative and Qualitative DisclosureDisclosures About Market Risk 2029
8. Financial Statements 21and Supplementary Data 30
9. ChangeChanges in and Disagreements with Accountants on
Accounting and Financial Disclosure 2231
9A. Controls and Procedures 2231
9B. Other Information 32
Part III
10. Directors and Executive Officers of the Registrant 2232
11. Executive Compensation 2232
12. Security Ownership of Certain Beneficial Owners and
Management 22and Related Stockholder Matters 32
13. Certain Relationships and Related Transactions 2232
14. Principal Accountant Fees and Services 2232
Part IV
15. Exhibits and Financial Statement Schedules and Reports
on Form 8-K 2332 - 2434
Signatures 25
-2-35
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this Report contains forward-looking
statements. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in these forward-looking statements. Factors that might cause such a
difference include, but are not limited to, management of growth, competition,
pricing pressures on the Company's product,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 USUnited 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 thesuch 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.Commission ("SEC").
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
The Quigley Corporation (WWW.QUIGLEYCO.COM, hereinafter referred to as the
"Company")Company, headquartered in Doylestown, Pennsylvania, is a Nevada corporationleading
manufacturer, marketer and distributor of a diversified range of homeopathic and
health products which was organized on August 24, 1989comprise the Cold Remedy, Health and commenced business operationsWellness and Contract
Manufacturing segments. The Company is also involved in October 1989.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
cold-remedyover the counter (OTC) cold remedy products, to the consumer through the over-the-counter market place together with
the sale of proprietary health and wellness
products through its direct selling subsidiary. Thesubsidiary and the research and development
of natural-source derived pharmaceuticals.
Cold-Eeze(R) is one of the Company's key product Cold-Eeze(R), acold remedy OTC products whose benefits
are derived from its proprietary zinc gluconate glycine
lozenge, is provenformulation. The product's effectiveness
has been substantiated in two double-blind clinical studies to reduceproving 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 now an
established productrepresented, is
reviewed regularly to realize any new consumer opportunities in flavor,
convenience and packaging to help improve market share for the health careCold-Eeze(R)
product. Additionally, the Company is constantly active in exploring and
cold-remedy market.
Darius Internationaldeveloping 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. ("Darius"QMI"), the Health and Wellness segment, a wholly owned subsidiary of the Company, will
continue to produce lozenge product along with performing such operational tasks
as warehousing and shipping the Company's Cold-Eeze(R) products. In addition,
QMI produces a variety of hard and organic candy for sale to third party
customers in addition to performing contract manufacturing activities for
non-related entities.
Our Health and Wellness segment is operated through Darius International Inc.
("Darius"), a wholly owned subsidiary of the Company which was formed in January
2000 to introduce new products to the marketplace through a network of
independent distributors.distributor representatives. Darius is a direct selling organization
specializing in proprietary healthnutritional and wellness products, which commenced shipping product to customers in the third
quarter of 2000. On January 2, 2001, the Company acquired certain assets and
assumed certain liabilities of a privately held company involved in the direct
marketing and distribution ofdietary supplement based health and
wellness products. The formation of Darius has provided diversification to the
Company in both the method of product distribution and the broader range of
products available to the marketplace, serving as a balance to the seasonal
revenue cycles of the Cold-Eeze(R) branded products.
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In January 2001, the Company formed an Ethical Pharmaceutical Unit,segment, Quigley
Pharma the
Ethical Pharmaceutical segment,Inc. ("Pharma"), that is under the direction of its Executive Vice
President and Chairman of its Medical Advisory Committee. The formation of
Pharma follows the Patent Office of The United States Commerce Department
confirming the assignment to the Company of a Patent Applicationwas formed for
the "Methodpurpose of developing naturally derived prescription drugs. Pharma is
currently undergoing research and Composition for the Topical Treatment of Diabetic Neuropathy" which was
issued and extends through December 21, 2020. The establishment of a dedicated
pharmaceutical subsidiary may enable the Company to diversify into the
prescription drug market and to ensure safe and effective distribution of these
important potential new products currently under development.development activity in compliance with
regulatory requirements. At this time, threefive patents have been issued and
assigned to the Company resulting from research activity of Pharma. During 2000,In certain
instances where a critical mass of positive scientific data has been established
for compounds that the Company acquired a 60% ownership position in Caribbean Pacific
Natural Products, Inc. ("CPNP"), a leading developer and marketer of all-natural
sun-care and skincare products for luxury resorts, theme parks and spas. In
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December 2002, the Board of Directors of the Company approved a plandoes not envision bringing to market, it may
decide to sell CPNP. On January 22, 2003, the Company completed the sale of the Company's 60%
equity interest in CPNP to Suncoast Naturals, Inc. ("Suncoast"). See discussion
in Notes to Financial Statements, Note 3 - Discontinued Operations.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 food supplements and homeopathic
cold remedies. Initially, the Company's business was the marketing and
distribution of a line of nutritious health supplements (hereinafter
"Nutri-Bars"). During 1995, the Company reduced the marketing emphasis in the marketing of
the
Nutri-Bars and commenced focusing its marketing and research and development and marketing
resources towardson 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-remedyCold Remedy segment has concentrated its business
operations on the manufacturing, marketing and development of its proprietary
Cold-Eeze(R) cold-remedy lozenge products and on development of various product
extensions. These products are based upon a proprietary zinc gluconate glycine
formula, which in two double-blind clinical studies has shownbeen proven to reduce the duration and severity of the common
cold symptoms. The Quigley Corporation acquired worldwide manufacturing and
distribution rights to this formulation in 1992 and commenced national marketing
in 1996. The demand for the Company's cold-remedy products is seasonal, where
the third and fourth quarters generally represent the largest sales volume for cold-remedy.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 was formed for the purpose of developing naturally derived prescription
drugs, cosmeceuticals, and dietary supplements. Pharma is currently undergoinginvolved in the lengthy process of conducting research and
development activityon certain of its patented formulations in compliance with regulatory requirements.FDA
regulations required for bringing prescriptions and botanical drugs to market.
The Company is atin the initial stages of what may be a lengthy process to develop
these patent applications into potential commercial products.
During 2003,2005, approximately 97%92% of the Company's revenues from Cold-Eeze(R) and
Darius originatedwere generated in the
United States with the remainder being attributable to international trade.trade
compared to 93% in 2004.
Financial information regarding the Company's operating segments is set forth in
Item 8, Notes to Financial Statements, Note 416 - 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 soldavailable in lozenge, sugar-free tablet and nasal spray forms.
During 2003gum form. The
Company has substantiated the Company launchedeffectiveness of Cold-Eeze(R) through a Cold-Eeze(R) nasal spray and Kidz-Eeze(TM)
Sore Throat Pops. The nasal spray product, a nasal spray containing the active
ingredient Zinc Gluconate and also containing Aloe Vera, began shipping to
retail during the second halfvariety of
2003.
In May 1992, the Company entered into an exclusive agreement for worldwide
representation, manufacturing, marketing and distribution rights to a zinc
gluconate glycine lozenge formulation which was patented in the United States,
United Kingdom, Sweden, France, Italy, Canada, Germany, and is pending in Japan.
This product and extensions, are presently being marketed by the Company and
also through independent brokers and marketers in the United States under the
trade name Cold-Eeze(R).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.
-4-
On May 22, 1992, "ZINC AND THE COMMON COLD, A CONTROLLED CLINICAL STUDY," was
published in England in the "Journal of International Medical Research",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 zinc gluconate glycine formulation delivers approximately 93% of the active
Zinc to the mucosal surfaces and (c) the patient has the same sequence of
symptoms as in the absence of treatment but goes through the phases at an
accelerated rate and with reduced symptom severity.
On July 15, 1996, results of a new randomized double-blind placebo-controlled
study on the common cold, were published, which commenced at the CLEVELAND CLINIC FOUNDATION on
October 3, 1994.1994, 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 the 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. This adolescent study indicated that when taken
daily, Cold-Eeze(R)cold and statistically (a) lessens the number of colds an individual suffers per
year, reducing the median from 1.5 to zero. These findings are the
result of analyzing three years of clinical data at the Heritage School facility
in Provo, Utah. The study also found that the use of Cold-Eeze(R) to treat a
cold statisticallyzero 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. Additionally, the study reinforces the original
clinical trials, concluding that Cold-Eeze(R) reduces the median duration of a
cold by four days.
In April 2002, the Company was assigned a Patent Application which was filed
with the Patent Office of the United States Commerce Department for the use of
Cold-Eeze(R) as a prophylactic for cold prevention. The new patent application
follows the results of the adolescent study at the Heritage School facility.
In May 2003, the Company announced the study 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 atof 11 days
compared with 5 days when Cold-Eeze(R) lozenges were administered, a reduction
of 6 days.
In the second half of 1998, the Company launched Cold-Eeze(R) in a sugar free
version of the product to benefit diabetics and other consumers concerned with
their sugar intake.
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 FDAUnited 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 competes with suppliers varying in range and sizehas expended significant resources on systems
enhancements in the cold-remedy
products arena. Cold-Eeze(R), which has been clinically proven, offerspast 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 advantage over other suppliersnegative 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 over-the-counter cold-remedy
market. The managementdirect 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, believes there should be no future
impediment on the abilityhas continued to compete in the marketplace now, or in the immediate
future, since factors concerning theproduce lozenge product along with
performing such operational tasks as price, product quality,
availability, reliability, credit terms, name recognition, deliverywarehousing and support
are all properly positioned. The Company has several Broker, Distributor and
Representative Agreements, both nationally and internationally and the product
is distributed through numerous independent, chain drug, food and discount
stores throughout the United States.
The Company continues to use the resources of independent national and
international brokers complementing its own in-house personnel to representshipping the Company's
over-the-counter products, thereby saving capitalCold-Eeze(R) products. In addition to that function, QMI produces a variety of
hard and other ongoing
expenditures that would otherwise be incurred.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 PRODUCTS
Pharma's current activity is the research and development of naturally-derived
prescription drugs with the goal to improveof improving the quality of life and health of
those in need
through scientific research and development.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 combinationpotential synergistic benefits of combining isolated
active constituents and whole plant components. The Company will search for new
natural sources of medicinal substances will focus not only onfrom plants and fungi from around the
world plants, fungi,while also investigating the use of traditional and other
natural substances, but an intense investigation into traditionalhistoric medicinals
and historic therapeutics.
-5-
Pharma is currently undergoing research and development activity in compliance
with regulatory requirements. During the course of its research and development,
certain formulas have led to three patents and several patent applications,
which the Patent Office of the United States Commerce Department has confirmed
the assignment to the Company. The Company, through Pharma, is at the initial
stages of what may be a lengthy process to develop these patents and patent
applications into commercial products.
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.
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. It indicated
that subjects using this formulation had 67% of their symptoms improve,
suggesting efficacy. Because the Company's formulation for relief of
diabetes-related pain is a topical treatment and its ingredients are GRAS listed
(Generally Regarded As Safe) as identified in the Code of Federal Regulations,
FDA approval could potentially be obtained earlier than what is normally
required in the FDA process.
In July 2002, the Company announced the commencement of testing on a new
formulation being developed by the Company to relieve Sialorrhea (excess
secretions of the salivary glands, causing drooling) in patients suffering from
diseases including Amyotrophic Lateral Sclerosis (ALS), otherwise known as Lou
Gehrig's Disease, Cerebral Palsy, Parkinson's Disease, and Muscular Dystrophy.
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
Investigational New Drug (IND) application following positive preliminary
results.
In December 2003, the Company announced positive test results of a preliminary
independent in vitro study indicating that a Quigley test compound previously
tested on the Influenza virus showed "significant virucidal activity against a
strain of the Severe Acute Respiratory Syndrome (SARS) virus."
HEALTH AND WELLNESS PRODUCTS
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 primarily within the United States with the
commencement of international business activity during the second quarter of
2003. The Company develops and markets products that are suitable for
distribution within a direct selling business environment. The products marketed
and sold by Darius are herbal vitamins and dietary supplements for the human
condition.
Within the framework of a direct selling business environment, Darius sells its
products through a network of independent representatives, who are not employees
of Darius. These purchases by the independent representatives may be used for
personal consumption or used for resale to consumers. The independent
representatives receive compensation for sales achieved by means of a commission
structure or compensation plan based on their product sales and those of
personnel within their down-line independent representative network. As the
independent representatives pay for product by credit card for shipments made,
the accounts receivable balances at any time are negligible.
The continued success of this segment is dependent upon, amongst other things,
the Company's ability:
o To maintain existing independent representatives and recruit
additional successful independent representatives.
Additionally, the loss of key high-level distributors could
negatively impact future growth and revenues;
o To continue to develop and make available new and desirable
products at an acceptable cost;
o To maintain safe and reliable multiple-location sources for
product and materials;
-6-
o To maintain a reliable information technology system and
internet capability. The Company has expended significant
resource 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 commencement of international business, difficulties
with foreign regulatory requirements could have a significant
negative impact on future growth. Any inquiries from
government authorities relating to our business and compliance
with laws and regulations could be harmful to the Company;
o To compete with larger more mature organizations operating
within the same market and to remain competitive in terms of
product relevance and business opportunity;
o To successfully implement methods for progressing the direct
selling philosophy internationally; and
o To plan strategically for general economic conditions.
Any or all of the above risks could result in significant reductions in revenues
and profitability of the Health and Wellness segment.
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) Sweden: No. 0 183 840 (March 2, 1994)
No. 4 758 439 (July 19, 1988) Canada: No. 1 243 952 (November 1, 1988)
Germany: No. 3,587,766 (March 2, 1994) Great Britain: No. 2 179 536 (December 21, 1988)
Japan: Pending France & Italy: No. EP 0 183 840 B1 (March 2, 1994)
The following patents have been assigned to the Company in relation to Pharma:
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)
In 1996, the Company also acquired an exclusive license for a United States ZINC
GLUCONATE USE PATENT NUMBER RI 33,465 from the patent holder. This use patent
gives the Company exclusive rights to both the use and formulation patents on
zinc gluconate for reducing the duration and severity of the common cold
symptoms. This patent and exclusive license expired in March 2002. The Company
does not anticipate any material impact on the financial statements from the
expiration of the patent.
The Cold-Eeze(R) product is manufactured for the Company by a contract
manufacturer and marketed by the Company in accordance with the terms of a
licensing agreement (between the Company and the developer). The contract is
assignable by the Company with the developer's consent. Throughout the duration
of the agreement, the developer is to receive a three percent (3%) royalty on
sales collected, less certain deductions. A separate consulting agreement
between the parties referred to directly above was similarly entered into on May
4, 1992, whereby the developer is to receive a consulting fee of two percent
(2%) on sales collected, less certain deductions, for consulting services to the
Company with respect to such product.
Pursuant to the License Agreement entered into between the Company and the
patent holder, which expired in March 2002, the Company has paid a royalty fee
to the patent holder of three percent (3%) on sales collected, less certain
deductions.
During 1997, the Company obtained a trademark for the major components of its
lozenge, ZIGG(TM) (denoting zinc gluconate glycine), to set Cold-Eeze(R) apart
from the imitations proliferating the marketplace.
-7-
An agreement between the Company and its founders was entered into on June 1,
1995. The founders, both officers and stockholders of the Company, in
consideration of the acquisition of the Cold-Eeze(R) cold therapy product, are
to receive a total commission of five percent (5%), on sales collected, less
certain deductions until the termination of this agreement on May 31, 2005.
In August 2003, the Company entered into a licensing agreement with a patent
holder relating to utilizing a nasal spray product in the treatment of symptoms
of the common cold. The Company has agreed to pay the patent holder a two
percent royalty on net sales of nasal spray products, less certain deductions,
throughout the term of this agreement, expiring no later than April 2014.
During 2003 the following patents were granted to the Company relating to the areas of focus of the Ethical Pharmacutical segment:are:
o A Patent (No. 6,555,573 B2) entitled "Method and Composition for the
Topical Treatment of Diabetic Neuropathy." The patent extends through
December 21, 2020.March 27, 2021.
o A Patent (No. 6,592,896 B2) entitled "Medicinal Composition and Method
of Using It" (for Treatment of Sialorrhea and other Disorders) for a
product to relieve sialorrhea (drooling) in patients suffering from
Amyotrophic Lateral Sclerosis (ALS), otherwise known as Lou Gehrig's
Disease. The patent extends through August 6, 2021.
o A Patent (No. 6,596,313 B2) entitled "Nutritional Supplement and
Method of Using It" for a product to relieve sialorrhea (drooling) in
patients suffering from Amyotrophic Lateral Sclerosis (ALS), otherwise
known as Lou Gehrig's Disease. The patent extends through April 15,
2022.
o A Patent (No. 6,753,325 B2) entitled "Composition and Method for
Prevention, Reduction and Treatment of Radiation Dermatitis," a
composition for preventing, reducing or treating radiation dermatitis.
The patent extends through November 5, 2021.
o A Patent (No. 6,827,945 B2) entitled "Nutritional Supplement and
Method of Using It" for a method for treating at least one symptom of
arthritis. The patent extends through April 22, 2023.
o In September 2002, the Company filed a foreign patent application
entitled "Method and Composition for the Topical Treatment of Diabetic
Neuropathy" in Europe and other foreign markets.
-5-
In April 2002, the Company initiated a Phase II Proof of Concept Study in France
for treatment of diabetic neuropathy, which was concluded in 2003. In April
2003, the Company announced that an independently monitored analysis of the
Phase II Proof of Concept Study concluded that subjects using this formulation
had 67% of their symptoms improve, suggesting efficacy. In March 2004, the
Company announced that it had completed its first meeting at the FDA prior to
submitting the Company's Investigational New Drug ("IND") application for the
relief of symptoms of diabetic symmetrical peripheral neuropathy. The FDA's
pre-IND meeting programs are designed to provide sponsors with advance guidance
and input on drug development programs. In September 2005, the Company announced
that a preliminary report of its topical compound for the treatment of diabetic
neuropathy was recently featured in the JOURNAL OF DIABETES AND ITS
COMPLICATION. Authored by Dr. C. LeFante and Dr. P. Valensi, the article
appeared in the June 1, 2005 issue, and included findings that showed the
compound reduced the severity of numbness, and irritation from baseline values.
In October 2005, the Company announced the results of pre-clinical toxicology
studies that showed no irritation, photo toxicity, contact hypersensitivity or
photo allergy when applied topically to hairless guinea pigs and another study
that showed no difference in the dermal response of the compound or placebo when
applied to Gottingen Minipigs. (Both animal models are suggested for the
evaluation of topical drugs, by the FDA).
In March 2006, the Company and Pharma announced their filing of an IND
application with the FDA for its topical compound for the treatment of Diabetic
Peripheral Neuropathy. This filing allows Pharma to begin human clinical trials
following a 30-day review period. If the FDA has no further comments, studies
with human subjects will commence as soon as possible pending the availability
of study drug. This application includes a compilation of all of the supporting
development data and regulatory documentation required to file an IND
application with the FDA.
In September 2003, the Company announced its intention to file for permission to
study its patent pending potential treatment for psoriasis and other skin
disorders. Continued testing will therefore have to be conducted under an IND
application following positive preliminary results.
In December 2003, the Company announced positive test results of a preliminary
independent in vitro study indicating that a test compound of the Company
previously tested on the Influenza virus showed "significant virucidal activity
against a strain of the Severe Acute Respiratory Syndrome (SARS) virus."
In January 2004, the Company announced that it would conduct two further studies
evaluating the compound which had shown activity against Influenza and SARS. The
first study was intended to repeat the previously announced results, which
demonstrated the compound to be 100 percent effective in preventing non-infected
ferrets in close proximity to an infected ferret from becoming infected with the
Influenza A virus. The second study was a dose ranging study on the test
compound. Upon dosage determination and confirmation results from these
forthcoming animal model studies, a human proof of concept study using a virus
challenge with Influenza A virus in a quarantine unit would be a viable next
step.
At this time, the Company also reported that its compound, which was
demonstrating antiviral activity, had shown virucidal and virustatic activity
against the strain 3B of the Human Immunodeficiency Virus Type 1 (HIV-1) in an
in-vitro study. Additionally, the Company decided that the derivative compound
of the anti-viral formulation previously found to be effective for treating
Sialorrhea would probably postpone further development on the Sialorrhea
indication and concentrate on further qualification and development of the
anti-viral capabilities of the compound in humans.
In May 2004, the Company announced that an intranasal spray application of the
anti-viral test compound demonstrated efficacy by significantly reducing the
severity of illness in ferrets that had been infected with the Influenza A
virus.
In November 2005, the Company was assigned nine Investigational New Animal
Drugs, ("INADs"), a broad anti-viral agent by the Center for Veterinary Medicine
of the FDA. Eight of the INAD's are for investigating the compound use against
avain flu H5N1virus in chickens, turkeys, ducks, pigs, horses, dogs, cats and
non-food birds. In January 2006, a ninth INAD was assigned for investigating its
compound for treating arthritis in dogs.
In April 2004, the Company announced the results of a preliminary, pre-clinical
animal study which measured the effect of its proprietary patent applied for
formulation against ionizing (nuclear) radiation. This study determined that
parenteral (injection) administration of the study compound was protective
against the effects of a lethal, whole body ionizing radiation dose in a mouse
model. This compound is being investigated to potentially reduce the effects of
radiation exposure on humans.
-6-
PATENTS, TRADEMARKS, ROYALTY AND COMMISSION AGREEMENTS
The Company currently owns no patents for cold-remedy products. However, the
Company has been assigned patent applications which are hereinafter discussed
and has been granted an exclusive agreement for worldwide representation,
manufacturing, marketing and distribution rights to a zinc gluconate glycine
lozenge formulation, which are patented as follows:
United States: No. 4 684 528 (August 4, 1987, expired August 2004)
No. 4 758 439 (July 19, 1988, expired August 2004)
Canada: No. 1 243 952 (November 1, 1988, expired June 2005)
Great Britain: No. 2 179 536 (December 21, 1988, expired June 2005)
Germany: No. 3,587,766 (March 2, 1994, expired June 2005)
Sweden: No. 0 183 840 (March 2, 1994, expired June 2005)
France & Italy: No. EP 0 183 840 B1 (March 2, 1994, expired June 2005)
Japan: Pending
The following patents have been assigned to the Company in relation to Pharma,
together with issue date:
United States: No. 6 555 573 B2 (April 29, 2003)
No. 6 592 896 B2 (July 15, 2003)
No. 6 596 313 B2 (July 22, 2003)
No. 6 753 325 B2 (June 22, 2004)
No. 6 827 945 B2 (December 7, 2004)
The Cold-Eeze(R) products are marketed by the Company in accordance with the
terms of a licensing agreement (between the Company and the developer). The
contract is assignable by the Company with the developer's consent. In return
for exclusive distribution rights, the Company must pay the developer a 3%
royalty and a 2% consulting fee based on sales collected, less certain
deductions, throughout the term of this agreement, which is due to expire in
2007. However, the Company and the developer are in litigation and as such no
potential offset from such litigation for these fees has been recorded.
During 1997, the Company obtained a trademark for the major components of its
lozenge, ZIGG(TM) (denoting zinc gluconate glycine), to set Cold-Eeze(R) apart
from the imitations then proliferating the marketplace.
An agreement between the Company and its founders was entered into on June 1,
1995. The founders, both officers and stockholders of the Company, in
consideration of the acquisition of the Cold-Eeze(R) cold therapy product, have
received a total commission of five percent (5%), on sales collected, less
certain deductions. This agreement expired on May 31, 2005.
PRODUCT DISTRIBUTION AND CUSTOMERS
The Company has several Broker, Distributor and Representative Agreements, both
nationally and internationally, which provide for commission compensation based
on sales performance.
The Cold-Eeze(R) products are distributed through numerous food, chain drug and
mass merchandisers throughout the United States, including Walgreens,Walgreen Co., Ahold,
Albertsons, CVS, RiteAid, Publix, EckerdBrooks Drug, Company, B.J's Wholesale Club, Inc., Sam's
Club, Winn-Dixie Stores, Inc., Wal-Mart, Target, The Kroger Company, Safeway
Inc., Costco Wholesale, Kmart Corporation, and wholesale distributors including,
AmerisourceBergen and Cardinal Distribution and McKesson Supply
Solutions.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 23%29%, 23%27%, and 35%23% of its
continuing consolidated gross revenues for the years ended December 31, 2005,
2004 and 2003, 2002 and 2001, respectively.
-7-
Darius is a direct selling organization specializing in proprietary health and
wellness products and the introduction of new products to the marketplace
through a network of independent distributors. This method of distribution is in
contrast to traditional distribution channels using independent and chain drug
and discount stores as utilized by the Company in the promotion of the
cold-remedy products.
Pharma currently has no sales since it is undergoing research and development
activity in compliance with regulatory requirements and is at the initial stages
of what may be a lengthy process to develop commercial products.
RESEARCH AND DEVELOPMENT
The Company's research and development costs for the years ended December 31,
2005, 2004 and 2003 2002were $3,784,221, $3,232,569 and 2001 were $3,365,698, $2,663,291, and $1,331,639, 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 sialorrhea and
-8-
other disorders. Principally, the increase of research and development costs in
2003 was due to expenses incurred as part of the product research costs related
to Pharma and study costs associated with Cold-Eeze(R). Pharma is currently involved in research activity following
patent applications that have been assigned to the Company has
acquired and researchCompany. Research and
development costs, relating to potential products, are expected to increase
significantly over time as product researchmilestones in the development and testing
continues.regulatory process
may be achieved.
REGULATORY MATTERS
The business of the Company is subject to federal and state laws and regulations
adopted for the health and safety of users of the Company's products. The
Company's Cold-Eeze(R) product is a homeopathic remedy, which is subject to
regulation by various federal, state and local agencies, including the FDA and
the Homeopathic Pharmacopoeia of the United States. These regulatory authorities
have broad powers, and the Company is subject to regulatory and legislative
changes that can affect the economics of the industry by requiring changes in
operating practices or by influencing the demand for, and the costs of,
providing its products. Management believes that the Company is in compliance
with all such laws, regulations and standards currently in effect including the
Food, Drug and Cosmetics Act of 1938 and the Homeopathic Pharmacopoeia
Regulatory Service. Although it is possible that future results of operations
could be materially affected by the future costs of compliance, management
believes that the future costs will not have a material adverse effect on the
Company's financial position or competitive position.
The pre-clinical development, clinical trials, product manufacturing and
marketing of Pharma's potential new products are subject to federal and state
regulation in the United States and other countries. Obtaining FDA regulatory
approval for these pharmaceutical products can require substantial resources and
take several years. The length of this process depends on the type, complexity
and novelty of the product and the nature of the disease or other indications to
be treated. If the Company cannot obtain regulatory approval of these new
products in a timely manner or if the patents are not granted or if the patents
are subsequently challenged, these possible events could all have a material
effect on the business and financial condition of the Company. The strength of
the Company's patent position may be important to its long-term success. There
can be no assurance that these patents and patent applications will effectively
protect the Company's products from duplication by others.
COMPETITION
The Company competes with other suppliers of cold-remedy and health and wellness
products. These suppliers range widely in size. Some of the Company's
competitors have significantly greater financial, technical or marketing
resources than the Company. Management believes that its Cold-Eeze(R) product,
which has been clinically proven in two double-blind studies to reduce the
severity and duration of the common cold symptoms, offers a significant advantage
over many of its competitors in the over-the-counter cold-remedy market.
Management further believes that Darius' direct marketing distribution methods
offer a significant advantage over many of its competitors. The Company believes
that its ability to compete depends on a number of factors, including price,
product quality, availability, andspeed to market, reliability, credit terms, name
recognition, delivery time and post-sale service and support. Effective October
1, 2004, a subsidiary of the Company commenced manufacturing the Cold-Eeze(R)
lozenge product. This subsidiary assures future production capabilities of the
lozenge product which constitutes primarily all of the cold remedy revenue.
-8-
EMPLOYEES
At December 31, 20032005 the Company employed 63150 full-time persons, primarily allthe majority of
whomwhich 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 is a memberare 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 Company currently uses separate suppliersother forms of
Cold-Eeze(R) and remaining products of both the cold remedy and health and
wellness segments continue to produce Cold-Eeze(R) in
lozenge, sugar-free tablet and nasal spray form. The Cold-Eeze(R) lozenge
product isbe manufactured by a contract manufacturer, a significant amount of
whose revenues are from the Company.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.economies and qualitative security. In a situation
where this one vendor is not able to supply the contract manufacturer with the ingredients, other sources have
been identified. Any situation where the vendor is not able to supply the
contract manufacturer with the ingredients may result in a temporary delay in
production until replacement supplies are obtained to meet the Company's
production requirements.
ITEM 1A. RISK FACTORS
WE HAVE A HISTORY OF LOSSES AND LIMITED WORKING CAPITAL AND WE EXPECT TO
INCREASE OUR SPENDING.
We have experienced net losses for three of our past seven fiscal years.
Although we earned net income of approximately $3,217,000, $453,000 and
$675,000, respectively, in our most recent fiscal years ended December 31, 2005,
December 31, 2004 and 2003, we incurred net losses of $6,454,000, $5,196,000 and
$4,204,000, respectively, in the fiscal years ended December 31, 2002, December
31, 2000 and December 31, 1999. In the fiscal year ended December 31, 2001, we
earned net income of $216,000, but that amount included net settled litigation
payments paid to us of approximately $700,000 related to licensing fees. As of
December 31, 2005, we had working capital of approximately $20,682,000. Since we
continue to increase our spending on research and development in connection with
Pharma's product development, we are uncertain whether we will generate
sufficient revenues to meet expenses or to operate profitably in the future.
WE HOLD PATENTS WHICH WE MAY NOT BE ABLE TO DEVELOP INTO PHARMACEUTICAL MEDICATIONS.
Our success depends in part on Pharma's ability to research and develop
prescription medications based on our patents which are:
o A Patent (No. 6,555,573 B2) entitled "Method and Composition for the
Topical Treatment of Diabetic Neuropathy." The patent extends through
March 27, 2021.
o A Patent (No. 6,592,896 B2) entitled "Medicinal Composition and Method
of Using It" (for Treatment of Sialorrhea and other Disorders) for a
product to relieve Sialorrhea (drooling) in patients suffering from
Amyotrophic Lateral Sclerosis (ALS), otherwise known as Lou Gehrig's
Disease. The patent extends through August 6, 2021.
o A Patent (No. 6,596,313 B2) entitled "Nutritional Supplement and
Method of Using It" for a product to relieve Sialorrhea (drooling) in
patients suffering from Amyotrophic Lateral Sclerosis (ALS), otherwise
known as Lou Gehrig's Disease. The patent extends through April 15,
2022.
o A Patent (No. 6,753,325 B2) entitled "Composition and Method for
Prevention, Reduction and Treatment of Radiation Dermatitis," a
composition for the preventing, reducing or treating radiation
dermatitis. The patent extends through November 5, 2021.
o A Patent (No. 6,827,945 B2) entitled "Nutritional Supplement & Methods
of Using Same" for a naturally derived compound developed for the
treatment of arthritis and related inflammatory disorders. The patent
extends through August 22, 2023.
-9-
These potential new products are in the development stage and we cannot give any
assurances that we can develop commercially viable products from these patent
applications. Prior to any new product being ready for sale, we will have to
commit substantial resources for research, development, preclinical testing,
clinical trials, manufacturing scale-up and regulatory approval. We face
significant technological risks inherent in developing these products. We may
abandon some or all of our proposed new products before they become commercially
viable. Even if we develop and obtain approval of a new product, if we cannot
successfully commercialize it in a timely manner, our business and financial
condition may be materially adversely affected.
WE WILL NEED TO OBTAIN ADDITIONAL CAPITAL TO SUPPORT LONG-TERM PRODUCT
DEVELOPMENT AND COMMERCIALIZATION PROGRAMS.
Our ability to achieve and sustain operating profitability depends in large part
on our ability to commence, execute and complete clinical programs for, and
obtain additional regulatory approvals for, prescription medications developed
by Pharma, particularly in the U.S. and Europe. We cannot assure you that we
will ever obtain such approvals or achieve significant levels of sales. Our
current sales levels of Cold-Eeze(R) products and health and wellness products
may not generate all the funds we anticipate will be needed to support our
current plans for product development. We may need to obtain additional
financing to support our long-term product development and commercialization
programs. We may seek additional funds through public and private stock
offerings, arrangements with corporate partners, borrowings under lines of
credit or other sources.
The amount of capital we may need to complete product development of Pharma's
products will depend on many factors, including;
o the cost involved in applying for and obtaining FDA and international
regulatory approvals;
o whether we elect to establish partnering arrangements for development,
sales, manufacturing and marketing of such products;
o the level of future sales of our Cold-Eeze(R) and health and wellness
products, expense levels for our international sales and marketing
efforts;
o whether we can establish and maintain strategic arrangements for
development, sales, manufacturing and marketing of our products; and
o whether any or all of our outstanding options and warrants are
exercised and the timing and amount of these exercises.
Many of the foregoing factors are not within our control. If we need to raise
additional funds and such funds are not available on reasonable terms, we may
have to reduce our capital expenditures, scale back our development of new
products, reduce our workforce and out-license to others products or
technologies that we otherwise would seek to commercialize ourselves. Any
additional equity financing will be dilutive to stockholders, and any debt
financing, if available, may include restrictive covenants.
OUR CURRENT PRODUCTS AND POTENTIAL NEW PRODUCTS ARE SUBJECT TO EXTENSIVE
GOVERNMENTAL REGULATION.
Our business is regulated by various agencies of the states and localities where
our products are sold. Governmental regulations in foreign countries where we
plan to commence or expand sales may prevent or delay entry into a market or
prevent or delay the introduction, or require the reformulation, of certain of
our products. In addition, we cannot predict whether new domestic or foreign
legislation regulating our activities will be enacted. Any new legislation could
have a material adverse effect on our business, financial condition and
operations. Non-compliance with any applicable requirements may subject us or
the manufacturers of our products to sanctions, including warning letters,
fines, product recalls and seizures.
COLD REMEDY AND HEALTH AND WELLNESS PRODUCTS. The manufacturing, processing,
formulation, packaging, labeling and advertising of our cold remedy and health
and wellness products are subject to regulation by several federal agencies,
including:
o the FDA;
o the Federal Trade Commission ("FTC");
-10-
o the Consumer Product Safety Commission;
o the United States Department of Agriculture;
o the United States Postal Service;
o the United States Environmental Protection Agency; and
o the Occupational Safety and Health Administration.
In particular, the FDA regulates the safety, labeling and distribution of
dietary supplements, including vitamins, minerals and herbs, food additives,
food supplements, over-the-counter and prescription drugs and cosmetics. The FTC
also has overlapping jurisdiction with the FDA to regulate the promotion and
advertising of vitamins, over-the-counter drugs, cosmetics and foods. In
addition, our cold remedy products are homeopathic remedies which are regulated
by the Homeopathic Pharmacopoeia of the United States ("HPUS"). HPUS sets the
standards for source, composition and preparation of homeopathic remedies which
are officially recognized in the Federal Food, Drug and Cosmetics Act of 1938.
PHARMA. The preclinical development, clinical trials, product manufacturing and
marketing of Pharma's potential new products are subject to federal and state
regulation in the United States and other countries. Clinical trials and product
marketing and manufacturing are subject to the rigorous review and approval
processes of the FDA and foreign regulatory authorities. Obtaining FDA and other
required regulatory approvals is lengthy and expensive. Typically, obtaining
regulatory approval for pharmaceutical products requires substantial resources
and takes several years. The length of this process depends on the type,
complexity and novelty of the product and the nature of the disease or other
indication to be treated. Preclinical studies must comply with FDA regulations.
Clinical trials must also comply with FDA regulations and may require large
numbers of test subjects, complex protocols and possibly lengthy follow-up
periods. Consequently, satisfaction of government regulations may take several
years, may cause delays in introducing potential new products for considerable
periods of time and may require imposing costly procedures upon our activities.
If we cannot obtain regulatory approval of new products in a timely manner or at
all we could be materially adversely affected. Even if we obtain regulatory
approval of new products, such approval may impose limitations on the indicated
uses for which the products may be marketed which could also materially
adversely affect our business, financial condition and future operations.
OUR BUSINESS IS VERY COMPETITIVE AND INCREASED COMPETITION COULD HAVE A
SIGNIFICANT IMPACT ON OUR EARNINGS.
Both the non-prescription healthcare product and pharmaceutical industries are
highly competitive. Many of our competitors have substantially greater capital
resources, research and development staffs, facilities and experience than we
do. These and other entities may have or may develop new technologies. These
technologies may be used to develop products that compete with ours.
We believe that our primary cold remedy product, Cold-Eeze(R), has a competitive
advantage over other cold remedy products because it has been clinically proven
to reduce the severity and duration of common cold symptoms. We believe Darius
has an advantage over its competitors because it directly sells its proprietary
health and wellness products through its extensive network of independent
distributors. Competition in Pharma's expected product areas would most likely
come from large pharmaceutical companies as well as other companies,
universities and research institutions, many of which have resources far in
excess of our resources.
The Company believes that its ability to compete depends on a number of factors,
including price, product quality, availability, reliability and name recognition
of its cold remedy, health and wellness products and Pharma's ability to
successfully develop and market prescription medications. There can be no
assurance that we will be able to compete successfully in the future. If we are
unable to compete, our earnings may be significantly impacted.
OUR FUTURE SUCCESS IS DEPENDENT ON THE CONTINUED SERVICES OF KEY PERSONNEL
INCLUDING OUR CHAIRMAN OF THE BOARD OF DIRECTORS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER.
Our future success depends in large part on the continued service of our key
personnel. In particular, the loss of the services of Guy J. Quigley, our
Chairman of the Board, President and Chief Executive Officer could have a
material adverse effect on our operations. We have an employment agreement with
Mr. Quigley which expired on December 31, 2005. Our future success and growth
also depends on our ability to continue to attract, motivate and retain highly
qualified employees. If we are unable to attract, motivate and retain qualified
employees, our business and operations could be materially adversely affected.
-11-
OUR FUTURE SUCCESS DEPENDS ON THE CONTINUED EMPLOYMENT OF RICHARD A. ROSENBLOOM,
M.D., PH.D., WITH PHARMA.
Pharma's potential new products are being developed through the efforts of Dr.
Rosenbloom. The loss of his services could have a material adverse effect on our
product development and future operations.
OUR FUTURE SUCCESS IS DEPENDENT ON THE CONTINUED ACCEPTANCE OF THE DIRECT
SELLING PHILOSOPHY, THE MAINTENANCE OF OUR NETWORK OF EXISTING INDEPENDENT
DISTRIBUTOR REPRESENTATIVES AND THE RECRUITMENT OF ADDITIONAL SUCCESSFUL
INDEPENDENT DISTRIBUTOR REPRESENTATIVES.
Darius markets and sells herbal vitamins and dietary supplements for the human
condition through its network of independent distributor representatives. Its
products are sold to independent distributor representatives who either use the
products for their own personal consumption or resell them to consumers. The
independent distributor representatives receive compensation for sales achieved
by means of a commission structure or compensation plan on certain product sales
of certain personnel within their downstream independent distributor
representative network. Since the independent distributor representatives are
not employees of Darius, they are under no obligation to continue buying and
selling Darius' products and the loss of key high-level distributors could
negatively impact our future growth and profitability.
OUR FUTURE SUCCESS DEPENDS ON THE CONTINUED SALES OF OUR PRINCIPAL PRODUCT.
For the fiscal year ended December 31, 2005, our Cold-Eeze(R) products
represented approximately 55% of our total sales. While we have diversified into
health and wellness products, our line of Cold-Eeze(R) products continues to be
a major part of our business. Accordingly, we have to depend on the continued
acceptance of Cold-Eeze(R) products by our customers. However, there can be no
assurance that our Cold-Eeze(R) products will continue to receive market
acceptance. The inability to successfully commercialize Cold-Eeze(R) in the
future, for resaleany reason, would have a material adverse effect on our financial
condition, prospects and ability to continue operations.
WE HAVE A CONCENTRATION OF SALES TO AND ACCOUNTS RECEIVABLE FROM SEVERAL LARGE
CUSTOMERS.
Although we have a broad range of customers that includes many large
wholesalers, mass merchandisers and multiple outlet pharmacy chains, our five
largest customers account for a significant percentage of our sales. These five
customers accounted for 29% of total sales for the fiscal year ended December
31, 2005 and 29% of total sales for the fiscal year ended December 31, 2004. In
addition, customers comprising the five largest accounts receivable balances
represented 47% and 48% of total accounts receivable balances at December 31,
2005 and 2004, respectively. We extend credit to our customers based upon an
evaluation of their financial condition and credit history, and we do not
generally require collateral. If one or more of these large customers cannot pay
us, the write-off of their accounts receivable would have a material adverse
effect on our operations and financial condition. The loss of sales to any one
or more of these large customers would also have a material adverse effect on
our operations and financial condition.
WE ARE DEPENDENT ON THIRD-PARTY MANUFACTURERS AND SUPPLIERS FOR OUR HEALTH AND
WELLNESS PRODUCTS AND THIRD-PARTY SUPPLIERS FOR CERTAIN OF OUR COLD REMEDY
PRODUCTS.
We do not manufacture any of our Health and Wellness products, nor do we
manufacture any of the ingredients in these products. In addition, we purchase
all active ingredients that are sourcedraw materials used in connection with our
Cold-Eeze(R) product from several suppliers. Ina single unaffiliated supplier. Should any of these
relationships terminate, we believe that the contingency plans which we have
formulated would prevent a termination from materially affecting our operations.
However, if any of these relationship is terminated, there may be delays in
production of our products until an acceptable replacement facility is located.
We continue to look for safe and reliable multiple-location sources for products
and raw materials so that we can continue to obtain products and raw materials
in the event of a disruption in our business relationship with any single
manufacturer or supplier. While we have identified secondary sources for some of
our products and raw materials, our inability to find other sources for some of
our other products and raw materials may have a material adverse effect on our
operations. In addition, the terms on which manufacturers and suppliers will
make products and raw materials available to us could have a material effect on
our success.
WE ARE UNCERTAIN AS TO WHETHER WE CAN PROTECT OUR PROPRIETARY RIGHTS.
The strength of our patent position may be important to our long-term success.
We currently own five patents in connection with products that are being
developed by Pharma. In addition, we have been granted an exclusive agreement
for worldwide representation, manufacturing, marketing and distribution rights
to a zinc/gluconate/glycine lozenge formulation. That formulation has been
patented in the United States, Germany, France, Italy, Sweden, Canada and Great
-12-
Britain and a patent is pending in Japan. However, this patent in the United
States expired in August 2004 and expired in June 2005 in all countries except
Japan.
There can be no assurance that these patents and our exclusive license will
effectively protect our products from duplication by others. In addition, we may
not be able to afford the expense of any litigation which may be necessary to
enforce our rights under any of our patents. Although we believe that our
current and future products do not and will not infringe upon the patents or
violate the proprietary rights of others, if any of our current or future
products do infringe upon the patents or proprietary rights of others, we may
have to modify our products or obtain an additional license for the manufacture
and/or sale of such products. We could also be prohibited from selling the
infringing products. If we are found to infringe on the proprietary rights of
others, we are uncertain whether we will be able to take corrective actions in a
timely manner, upon acceptable terms and conditions, or at all, and the failure
to do so could have a material adverse effect upon our business, financial
condition and operations.
We also use non-disclosure agreements with our employees, suppliers, consultants
and customers to establish and protect the ideas, concepts and documentation of
our confidential non-patented and non-copyright protected proprietary technology
and know-how. However, these methods may not afford complete protection. There
can be no assurance that third parties will not obtain access to or
independently develop our technologies, know-how, ideas, concepts and
documentation, which could have a material adverse effect on our financial
condition.
THE SALES OF OUR PRIMARY PRODUCT FLUCTUATES BY SEASON.
A significant portion of our business is highly seasonal, which causes major
variations in operating results from quarter to quarter. The third and fourth
quarters generally represent the largest sales volume for our cold remedy
products. There can be no assurance that we will be able to manage our working
capital needs and our inventory to meet the fluctuating demand for our products.
Failure to accurately predict and respond to consumer demand may cause us to
produce excess inventory. Conversely, if products achieve greater success than
anticipated for any given quarter, we may not have sufficient inventory to meet
customer demand.
OUR EXISTING PRODUCTS AND OUR NEW PRODUCTS UNDER DEVELOPMENT EXPOSE US TO
POTENTIAL PRODUCT LIABILITY CLAIMS.
Our business exposes us to an inherent risk of potential product liability
claims, including claims for serious bodily injury or death caused by the sales
of our existing products and the clinical trials of our products which are being
developed. These claims could lead to substantial damage awards. We currently
maintain product liability insurance in the amount of, and with a maximum payout
of, $15 million. A successful claim brought against us in excess of, or outside
of, our insurance coverage could have a material adverse effect on our results
of operations and financial condition. Claims against us, regardless of their
merit or eventual outcome, may also have a material adverse effect on the
consumer demand for our products.
WE ARE INVOLVED IN LAWSUITS REGARDING CLAIMS RELATING TO CERTAIN OF OUR
COLD-EEZE(R) PRODUCTS.
We are, from time to time, subject to various legal proceedings and claims,
either asserted or unasserted. Any such claims, including those contained in
Item 3 of this report, whether with or without merit, could be time-consuming
and expensive to defend and could divert management's attention and resources.
While management believes we have adequate insurance coverage and, if
applicable, accrued loss contingencies for all known matters, we cannot assure
that the outcome of all current or future litigation will not have a material
adverse effect on us.
A SUBSTANTIAL AMOUNT OF OUR OUTSTANDING COMMON STOCK IS OWNED BY OUR CHAIRMAN OF
THE BOARD AND PRESIDENT AND OUR EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP CAN
SIGNIFICANTLY INFLUENCE ALL MATTERS VOTED ON BY OUR STOCKHOLDERS.
Guy J. Quigley, our Chairman of the Board, President and Chief Executive
Officer, through his beneficial ownership, has the power to vote approximately
33.2% of our common stock. Mr. Quigley and our other executive officers and
directors collectively beneficially own approximately 48.7% of our common stock.
These individuals have significant influence over the outcome of all matters
submitted to stockholders for approval, including election of directors.
Consequently, they exercise substantial control over all of our major decisions
which could prevent a change of control of us.
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OUR STOCK PRICE IS VOLATILE.
The market price of our common stock has experienced significant volatility.
From January 1, 2002 to March 10, 2006, our per share bid price has ranged from
a low of approximately $2.03 to a high of approximately $16.94. There are
several factors which could affect the price of our common stock, some of which
are announcements of technological innovations for new commercial products by us
or our competitors, developments concerning propriety rights, new or revised
governmental regulation or general conditions in the market for our products.
Sales of a substantial number of shares by existing stockholders could also have
an adverse effect on the market price of our common stock.
FUTURE SALES OF SHARES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD ADVERSELY
AFFECT THE TRADING PRICE OF SHARES OF OUR COMMON STOCK AND OUR ABILITY TO RAISE
FUNDS IN NEW STOCK OFFERINGS.
Future sales of substantial amounts of shares of our common stock in the public
market, or the perception that such sourcessales are likely to occur, could affect
prevailing trading prices of our common stock and, as a result, the value of the
notes. As of March 10, 2006, we had 11,678,478 shares of common stock
outstanding.
We also have outstanding options to purchase an aggregate of 3,068,750 shares of
common stock at an average exercise price of $7.58 per share and outstanding
warrants to purchase an aggregate of 1,555,000 shares of common stock at an
exercise price of $4.76 per warrant. If the holders of these shares, options or
warrants were no longerto attempt to sell a substantial amount of their holdings at once,
the market price of our common stock would likely decline. Moreover, the
perceived risk of this potential dilution could cause stockholders to attempt to
sell their shares and investors to "short" the stock, a practice in which an
investor sells shares that he or she does not own at prevailing market prices,
hoping to purchase shares later at a lower price to cover the sale. As each of
these events would cause the number of shares of our common stock being offered
for sale to increase, the common stock's market price would likely further
decline. All of these events could combine to make it very difficult for us to
sell equity or equity-related securities in the future at a time and price that
we deem appropriate.
WE DO NOT INTEND TO PAY CASH DIVIDENDS IN THE FORESEEABLE FUTURE.
We have not paid cash dividends on our common stock since our inception. We
currently intend to retain earnings, if any, for use in our business and do not
anticipate paying any cash dividends to our stockholders in the foreseeable
future.
OUR ARTICLES OF INCORPORATION AND BY-LAWS CONTAIN CERTAIN PROVISIONS THAT MAY BE
BARRIERS TO A TAKEOVER.
Our Articles of Incorporation and By-laws contain certain provisions which may
deter, discourage, or make it difficult to assume control of us by another
corporation or person through a tender offer, merger, proxy contest or similar
transaction or series of transactions. These provisions may deter a future
tender offer or other takeover attempt. Some stockholders may believe such an
offer to be in their best interest because it may include a premium over the
market price of our common stock at the time. In addition, these provisions may
assist our current management in retaining its position and place it in a better
position to supply Dariusresist changes which some stockholders may want to make if
dissatisfied with product,the conduct of our business.
WE HAVE AGREED TO INDEMNIFY OUR OFFICERS AND DIRECTORS FROM LIABILITY.
Sections 78.7502 and 78.751 of the Nevada General Corporation Law allow us to
indemnify any person who is or was made a party to, or is or was threatened to
be made a party to, any pending, completed, or threatened action, suit or
proceeding because he or she is or was a director, officer, employee or agent of
ours or is or was serving at our request as a director, officer, employee or
agent of any corporation, partnership, joint venture, trust or other vendors have been identified as reliable alternativesenterprise.
These provisions permit us to advance expenses to an indemnified party in
connection with minimal adverse
lossdefending any such proceeding, upon receipt of business.an undertaking by
the indemnified party to repay those amounts if it is later determined that the
party is not entitled to indemnification. These provisions may also reduce the
likelihood of derivative litigation against directors and officers and
discourage or deter stockholders from suing directors or officers for breaches
of their duties to us, even though such an action, if successful, might
otherwise benefit us and our stockholders. In addition, to the extent that we
expend funds to indemnify directors and officers, funds will be unavailable for
operational purposes.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable
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ITEM 2. DESCRIPTION OF PROPERTYPROPERTIES
The corporate office of The Quigley Corporation is located at 621 Shady Retreat
Road, Doylestown, Pennsylvania. This property, with an area of approximately
13,000 square feet, was purchased in November 1998 and refurbished during 1999.
The Company occupies warehouse space in Las Vegas, Nevada at a current monthly
cost of $2,396.$2,537. This Nevada location has a three-year lease that expires in July
2006. In addition to storage facilities at the contract manufacturers'manufacturing subsidiary's
locations, the Company also stores product in a number of additional warehouses
in Pennsylvania with storage charges based upon the quantities of product being
stored.
The manufacturing facilities of the Company are located in each of Elizabethtown
and Lebanon, Pennsylvania. The facilities were purchased effective October 1,
2004. In total, the facilities have a total area of approximately 73,000 square
feet, combining both manufacturing and office space.
The Darius business in Utah is located at 867 East 2260 South, Provo, Utah, with
an area of approximately 24,70028,350 square feet. The current monthly lease cost of
this office and warehouse space is $10,713$11,772 with the leases that are set to expire in September 2005 and July
2007, respectively.2007. The Company expects that these leases will be renewed or that alternative
spaces will be obtained.
The Company believes that its existing facilities are adequate at this time.
ITEM 3. LEGAL PROCEEDINGS
TESAURO AND ELEY VS. THE QUIGLEY CORPORATION
In September, 2000, the Company was sued by two individuals (Jason Tesauro and
Elizabeth Eley, both residents of Georgia), on behalf of a "nationwide class" of
"similarly situated individuals," in the Court of Common Pleas of Philadelphia
County, Pennsylvania. The Complaint alleges that the Plaintiffs purchased
certain Cold-Eeze(R) products between August, 1996, and November, 1999, based
upon cable television, radio and internet advertisements which allegedly
misrepresented the qualities and benefits of the Company's products. The
Complaint requests an unspecified amount of damages for violations of
Pennsylvania's consumer protection law, breach of warranty and unjust
enrichment, as well as a judicial determination that the action be maintained as
a class action.
In October, 2000, the Company filed Preliminary Objections to the Complaint
seeking dismissal of the action. The Court sustained certain objections thereby
narrowing Plaintiffs' Complaint. In May, 2001, Plaintiffs filed a Motion to
Certify the Alleged Class. The Company opposed the Motion. In November, 2001,
the Court held a hearing on Plaintiffs' Motion for Class Certification. In
January, 2002, the Court denied in part and granted in part the Plaintiffs'
Motion. The Court denied Plaintiffs' Motion to Certify a Class based on
Plaintiffs' claim under the Pennsylvania Consumer Protection Law; however, the
Court certified the class based on Plaintiffs' breach of warranty and unjust
enrichment claims.
Discovery has been completed and trial that was originally scheduled for May
2004 has been scheduled to commence in May
2004.continued pending determination of certain dispositive pre-trial
motions filed by the Company which have been argued and briefed and have been
pending before the Court for determination since March 2005. The Company is
vigorously defending this lawsuit and believes that the action lacks merit.
PAIGE D. DAVISON VS. THE QUIGLEY CORPORATION
On February 26, 2004, the plaintiff filed an action against The Quigley
Corporation (the "Company"), which was not served until April 5, 2004. The
action alleges that the plaintiff suffered certain losses and injuries as a
result of using the Company's nasal spray product. Among the allegations of the
plaintiff are that the nasal spray was defective and unreasonably dangerous,
lacked proper and adequate warnings and/or instructions, and was not fit for the
purposes and uses intended.
The Company has investigated the claims and believes they are without merit. The
Company believes plaintiff's claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact to the Company. However,
at this time no prediction as to the outcome can be made. GOLDBLUM AND WAYNE
A Special Meeting ofDefense counsel takes
the Quigley stockholders was held on October 15, 1999, at
which a majority ofposition that the shares entitled to vote adopted a Corrective Action
Proposal (initially reportedscience proposed in the Company's Form 10-Q forlitigation appears to be more
advanced than the quarter ending
June 30, 1999) to ratify actions previously taken byscience which exists in peer reviewed medical journals.
Whether the Companycourt will admit the testimony relating to the 1990 1 for 2.74 reverse split, the 1995 1 for 10 reverse split (the "Reverse
Splits") and the 1997 1 for 2 forward split (the "Forward Split"). Pursuant to
the October 15, 1999 Special Meeting, the Company authorized the filing ofscience behind
plaintiff's claims, is not a declaratory judgmentmatter which we can predict at this time.
-15-
POLSKI VS. THE QUIGLEY CORPORATION
On August 12, 2004, plaintiff filed an action against The Quigley Corporation in Nevada to determine the effectiveness of the
Corrective Action.
In August 2000,
the District Court of Clarkfor Hennepin County, Nevada, held that it had
jurisdiction to decide the Company's declaratory judgment action filed in April,
2000, against two putative shareholders (Thomas Goldblum and Alan Wayne), inMinnesota, which was not served until
September 2, 2004. On September 17, 2004, the Company seeks a judicial declaration that, based on stockholder
approval ofremoved the Corrective Action Proposal,case to the
Reverse Splits and Forward Split
satisfy and/or comply with Nevada law and that the capitalization of Quigley
evidenced by the issued and outstanding shares of common stock and common stock
warrants is as reflected on Quigley's stock transfer ledger on September 10,
1999, the record date of the Special Meeting. TheUnited States District Court for the District of Clark County
heldMinnesota. The action alleges
that plaintiff suffered certain losses and injuries as a hearing on this matter on March 19, 2002 and ruled in favor of The
Quigley Corporation. A final judgment has been entered of record by the Court on
June 21, 2002. The period for appeal of this order to the Nevada Supreme Court
has expired.
-10-
An underlying claim filed by Goldblum and Wayne in the Court of Common Pleas of
Montgomery County, Pennsylvania on March 17, 1996 alleging that the plaintiffs
became owners of 500,000 shares eachresult of the Company's
common stock in or about
1990 and requested damages in excessnasal spray product. Among the allegations of $100,000 forplaintiff are negligence, products
liability, alleged breach of contractexpress and conversion.implied warranties, and an alleged
breach of the Minnesota Consumer Fraud Statute. Discovery should be completed in
this matter within 120 days and trial is scheduled for October 2006.
The Company believedhas investigated the claims and believes that the plaintiffs' claims werethey are without
merit, barred by
the applicable statutes of limitations, and that the plaintiffs were, in any
event, limited to claims for approximately 36,000 shares.merit. The Company vigorously defended this lawsuit through trial during January 2004,
when a jury returned a unanimous verdict in favor of the Company. Thereafter,
the plaintiffs filed a motion for post-trial relief as a first step toward an
appeal, which the Company regards asbelieves plaintiff's claims are without merit and will oppose. Although the
Company regards any effort by plaintiffs to pursue an appeal as lacking merit
and basedis
vigorously defending those claims. Based upon the information the Company has at
this time, it believes the action will not have a material impact to the
Company. However, at this time no prediction as to the outcome of this appeal can be made.
Defense counsel takes the position that the science proposed in the litigation
appears to be more advanced than the science which exists in peer reviewed
medical journals. Whether the court will admit the testimony relating to the
science behind plaintiff's claims, is not a matter which we can predict at this
time.
ANGELFIRE, ARVIN, BELL, BROWN, EDWARDS, HOHNSTEIN, HOFFMAN, LAURENT,
MARTIN, RICHARDSON, RIGSBY, SEONE, SMALLEY,
VAN BENTHEM AND WILLIAMS VS. THE QUIGLEY CORPORATION
On November 4, 2004, seven (7) plaintiffs filed an action in the Court of Common
Pleas of Bucks County, Pennsylvania, against the Company. The complaint was
amended on March 11, 2005 to add an additional eight (8) plaintiffs in the
action. The action alleges that plaintiffs suffered certain losses and injuries
as a result of using the Company's nasal spray product. Among the allegations of
plaintiffs are claims that the Company is liable to them based on alleged
negligence, alleged strict products liability (failure to warn and defective
design), alleged breach of express warranty, alleged breach of implied warrant,
and an alleged violation of the Pennsylvania Unfair Trade Practices and Consumer
Protection Law and other consumer protection statutes.
At the present time, the matter is being defended by the Company's insurance
carrier. An answer stating affirmative defenses has been filed. Pre-trial
discovery is being scheduled.
The Company believes plaintiffs' claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact to the Company. However,
at this time no prediction as to the outcome can be made. Defense counsel takes
the position that the science proposed in the litigation appears to be more
advanced than the science which exists in peer reviewed medical journals.
Whether the court will admit the testimony relating to the science behind
plaintiffs' claims, is not a matter which we can predict at this time.
THE QUIGLEY CORPORATION VS. JOHN C. GODFREY, ET AL
This action was commenced in November 2004 in the Court of Common Pleas of Bucks
County, Pennsylvania. In that action, the Company is seeking declaratory and
injunctive relief against John C. Godfrey, Nancy Jane Godfrey, and Godfrey
Science and Design, Inc. requesting injunctive relief regarding the Cold-Eeze(R)
trade name and trademark; injunctive relief relating to the Cold-Eeze
formulations and manufacturing methods; injunctive relief for breach of the duty
of loyalty; and declaratory judgment pending the Company's payment of
commissions to defendants. The Company's Complaint is based in part upon the
Exclusive Representation and Distribution Agreement and the Consulting Agreement
(together the "Agreements") entered into between the defendants and the Company.
The Company terminated the Agreements for the defendants' alleged material
breaches of the Agreements. Defendants have answered the complaint and asserted
counterclaims against the Company seeking remedies relative to the Agreements.
The Company has moved to dismiss portions of defendant's counterclaims on the
grounds that they are meritless.
At the present time, discovery is being conducted by the Company on its claims
and on the counterclaims brought by John C. Godfrey, et al.
The Company believes Defendant's claims are without merit, and it is vigorously
defending the counterclaims prosecuting its action on its complaint. Based upon
the information the Company has at this time, it believes the action will not
have a material impact to the Company. However, at this time no prediction as to
the outcome can be made.
-16-
AXIS SPECIALTY INSURANCE CO. VS. THE QUIGLEY CORPORATION
This action, filed in January 2005, stems from a dispute between the
Company and one of its excess liability insurance carriers, who seeks a judicial
declaration of its insurance coverage obligations concerning certain product
liability claims related to the Company's nasal spray product. The carrier's
action follows a complaint by the Company filed in December 2004 with the
Pennsylvania Insurance Commission, which ultimately sided with the Company in
determining that the carrier failed to observe proper notification procedures
when it first sought to limit, or alternatively to insure at a substantially
higher premium, its coverage obligations.
The Company denied the material allegations of the carrier's complaint, and
asserted its own counterclaim also seeking declaratory relief to establish the
extent of its excess liability coverage. Thereafter, the parties engaged in
discovery to establish a record upon which the court could decide the matter
based on summary judgment motions on the carrier's claims and the Company's
counterclaims. Both parties sought summary judgment in motions submitted to the
court in the fall of 2005. On February 16, 2006, the court handed down its
ruling, in which the court granted in part and denied in part both the carrier's
motion and the Company's motion. The effect of the court's ruling is that the
plaintiff insurer's responsibility for excess coverage is limited to claims for
damages for bodily injury or property damage that occurred on or after April 6,
2004, but leaves uncertain coverage for claims filed after April 6, 2004 by
persons who contacted the Company before then. Although the Company is
evaluating grounds for appeal, and cannot rule out an appeal by the carrier, the
court's ruling both clarifies the Company's potential exposure as well as
establishes a basis for the Company to seek redress against parties liable for
any lack of adequate excess insurance coverage for this exposure.
Based upon the information the Company has at this time relative to the defense
of claims occurring before April 6, 2004, the Company believes that the claims
are without merit and is fully defending those claims through insurance counsel.
However, at this time no prediction as to the outcome can be made of these
claims and whether insurance coverage from the period prior to April 6, 2004 is
adequate for coverage of all claims.
CYNTHIA AARON VS. THE QUIGLEY CORPORATION, ET AL
On March 15, 2005, a complaint was filed in the Superior Court for San Diego
County, California. This complaint was served on the Company on April 21, 2005.
The plaintiff's complaint consists of causes of action sounding in negligence,
negligent products liability, breach of warranty of merchantability, breach of
express warranty, strict products liability and failure to warn. The action
alleges that the plaintiff suffered certain losses and injuries as a result of
using the Company's nasal spray product. Discovery in this case will be
completed within 120 days and trial is scheduled for September 18, 2006.
The Company believes plaintiff's claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact on the Company. However,
at this time no prediction as to the outcome can be made. Insurance defense
counsel has informed the Company that counsel is unable to evaluate the
likelihood of an unfavorable outcome at this time. Defense counsel takes the
position that the science proposed in the litigation appears to be more advanced
than the science which exists in peer reviewed medical journals. Whether the
court will admit the testimony relating to the science behind plaintiff's
claims, is not a matter which we can predict at this time.
DOLORES SMITH VS. THE QUIGLEY CORPORATION
On May 25, 2005, a complaint was filed in the Court of Common Pleas of Bucks
County, Pennsylvania. The complaint was served on the Company on or about June
14, 2005. The plaintiff's complaint consists of counts of negligence, strict
product liability, breach of express warranty, breach of implied warranty, and
violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law
and other Consumer Protection Statutes relating to the use of the Company's
COLD-EEZE Nasal Spray Product.
The Company believes plaintiff's claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact on the Company. However,
at this time no prediction as to the outcome can be made. Defense counsel takes
the position that the science proposed in the litigation appears to be more
advanced than the science which exists in peer reviewed medical journals.
Whether the court will admit the testimony relating to the science behind
plaintiff's claims, is not a matter which we can predict at this time.
RICHARD FLYNN VS. THE QUIGLEY CORPORATION, ET AL
On May 20, 2005, a complaint was filed in the Superior Court of Orange County,
California. This complaint was served on the Company on June 2, 2005. The action
-17-
alleges that the plaintiff suffered certain losses and injuries as a result of
using the Company's nasal spray product. The complaint consists of causes of
action sounding in negligence, products liability, and punitive damages.
The Company believes plaintiff's claims are without merit and is vigorously
defending those claims. In particular, much of the complaint references acts of
the Company during a period of time when it did not offer for sale the COLD-EEZE
Nasal Spray Product which is the basis of the plaintiff's claim. Based upon the
information the Company has at this time, it believes the action will not have a
material impact on the Company. However, at this time no prediction as to the
outcome can be made. Defense counsel takes the position that the science
proposed in the litigation appears to be more advanced than the science which
exists in peer reviewed medical journals. Whether the court will admit the
testimony relating to the science behind plaintiff's claims, is not a matter
which we can predict at this time.
KEITH J. KOCHIE VS. THE QUIGLEY CORPORATION, ET AL
On August 2, 2005, a complaint was filed in the United States District Court for
the Eastern District of New York. The complaint was served on the Company on or
about September 1, 2005. The plaintiff's complaint consists of counts for
negligence, strict product liability, breach of express warranty, breach of
implied warranties, fraudulent misrepresentation, fraudulent concealment,
negligent misrepresentation, and fraud and deceit relating to the use of the
Company's COLD-EEZE Nasal Spray Product.
The Company believes plaintiff's claims are without merit and is vigorously
defending those actions. Based upon the information the Company has at this
time, it believes the action will not have a material impact on the Company.
However, at this time no prediction as to the outcome can be made. Defense
counsel takes the position that the science proposed in the litigation appears
to be more advanced than the science which exists in peer reviewed medical
journals. Whether the court will admit the testimony relating to the science
behind plaintiff's claims, is not a matter which we can predict at this time.
DOMINIC DOMINIJANNI, SONJA FORSBERG-WILLIAMS, VINT PAYNE,
MURRAY LOU ROGERS, AND RANDY STOVER
VS. THE QUIGLEY CORPORATION
On January 6, 2006, five (5) plaintiffs filed an action in the Court of Common
Pleas of Bucks County, Pennsylvania, against the Company. The action alleges
that the plaintiff suffered certain losses and injuries as a result of using the
Company's nasal spray product. The complaint was served on the Company on
January 31, 2006. Plaintiffs' complaint consists of counts for negligence,
strict products liability (failure to warn), strict products liability
(defective design), breach of express and implied warranties, and a claim of
violations under the Pennsylvania Unfair Trade Practices and Consumer Protection
Law and other consumer protection statutes.
The Company believes plaintiffs' claims are without merit and is vigorously
defending those actions. Based upon the information the Company has at this
time, it believes the action will not have a material impact on the Company.
However, at this time no prediction as to the outcome can be made. Defense
counsel takes the position that the science proposed in the litigation appears
to be more advanced than the science which exists in peer reviewed medical
journals.
Whether the court will admit the testimony relating to the science behind
plaintiffs' claims, is not a matter which we can predict at this time.
GREG SCRAGG VS THE QUIGLEY CORPORATION, ET AL
On November 30, 2005, an action was brought in the Colorado District Court in
Denver, Colorado. The complaint was served on the Company soon thereafter. The
action alleges that the plaintiff suffered certain losses and injuries as a
result of using the Company's nasal spray product. The complaint consists of
counts for fraud and deceit (fraudulent concealment), negligent
misrepresentation, strict liability (failure to warn), and strict product
liability (design defect). On January 13, 2006, the case was removed to Federal
District Court.
The Company believes plaintiff's claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact on the Company. However,
at this time no prediction as to the outcome can be made. Defense counsel takes
the position that the science proposed in the litigation appears to be more
advanced than the science which exists in peer reviewed medical journals.
Whether the court will admit the testimony relating to the science behind
plaintiff's claims, is not a matter which we can predict at this time.
-18-
GARRY KOMINAKIS VS. THE QUIGLEY CORPORATION, ET AL
On December 13, 2005, an action was brought in the Superior Court of the State
of California (Western Division - Los Angeles). The complaint was served on the
Company on December 27, 2005. The case was removed to Federal District Court on
January 25, 2006. The action alleges that the plaintiff suffered certain losses
and injuries as a result of using the Company's nasal spray product. The
complaint consists of counts for strict liability (products liability),
negligence, and breach of implied and express warranties.
The Company believes plaintiff's claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact on the Company. However,
at this time no prediction as to the outcome can be made. Defense counsel takes
the position that the science proposed in the litigation appears to be more
advanced than the science which exists in peer reviewed medical journals.
Whether the court will admit the testimony relating to the science behind
plaintiff's claims, is not a matter which we can predict at this time.
DARIUS INTERNATIONAL INC., AND INNERLIGHT INC., F/K/A DARIUS
MARKETING INC. VS. ROBERT O. YOUNG AND SHELLEY R. YOUNG
(FEDERAL DISTRICT COURT - EASTERN DISTRICT, PA)
In this action, the Company seeks injunctive relief and monetary damages against
two individuals for violation of a non-competition agreement between a wholly
owned subsidiary of the Company, Innerlight Inc., and the defendants, each of
whom are also under agreement to serve as consulting to the Company.
In late November, 2005, the Company learned that the defendants had launched a
line of nutritional supplement products that competed with Innerlight products.
Defendants promoted their line of products by a website, among other means. The
Company moved for a temporary restraining order against the defendants, which
the court denied; however, the court ordered expedited discovery and scheduled a
preliminary injunction hearing. Before the hearing, the Company amended its
complaint to add counts against defendants for unfair competition, trademark
infringement and other causes, which the court allowed. In response, defendants
initially moved to dismiss the case. While not ruling on defendants' motion
formally, the court stated that it was inclined to deny the motion. Defendants
answered the complaint and asserted nine counterclaims, including: breach of
contract; breach of covenant of good faith and fair dealing; unjust enrichment;
conversion; common law trademark infringement; common law violation of the right
to publicity; violation of abuse of personal identity act; injunctive relief;
and declaratory relief.
After the preliminary injunction hearing, the parties briefed the court on the
significance of the hearing evidence in relation to the parties' respective
claims. On February 17, 2006, the court held oral argument on the motion for
preliminary injunction. A ruling is expected by mid-March, 2006.
The Company believes that the defendants' counterclaims are without merit and is
vigorously defending those counterclaims and is prosecuting its action on its
complaint. Based upon the information the Company has at this time, it believes
the counterclaim actions are without merit. However, at this time no prediction
as to the outcome can be made.
ROBERT O. AND SHELLEY YOUNG VS. DARIUS INTERNATIONAL INC.
AND INNERLIGHT INC., (UTAH THIRD PARTY COMPLAINTS)
On September 14, 2005, a third-party complaint was filed by Shelley R. Young in
Fourth District Court in Provo, Utah against Innerlight Inc. and its parent
company, Darius. Robert O. Young has filed a motion to intervene to join as a
third-party plaintiff with Shelley R. Young. On November 3, 2005, Shelley and
Robert Young filed a parallel suit also in Fourth District Court in Provo, Utah.
The allegations in both complaints include, but are not limited to, an alleged
breach of contract by Innerlight Inc. for alleged failures to make certain
payments under an asset purchase agreement entered into by all parties.
Additional allegations stem from this alleged breach of contract including
unjust enrichment, trademark infringement and alleged violation of rights of
publicity. The plaintiffs are seeking both monetary and injunctive relief.
Innerlight Inc. has objected to the complaint in the third-party action based on
procedural deficiencies and other grounds. In the second action the Court has
granted Innerlight Inc. and Darius permission to defer answering until the court
can determine whether or not Provo, Utah, is the proper venue to hear these
allegations.
In connection with the Utah actions the Company has sued the Youngs in Equity in
the Court of Common Pleas of Philadelphia County, PA, and in United States
District Court for the Eastern District of Pennsylvania. The Company has alleged
breach of contract, including but not limited to breach of non-competition
provisions in a consulting agreement between the parties and is seeking
unspecified damages and injunctive relief. The Company believes the plaintiff's
-19-
allegations against Innerlight Inc. and Darius in Provo, Utah are without merit
and it is vigorously defending against these claims. Innerlight Inc. and Darius
have filed motions to stay both actions filed in Utah pending resolution of the
litigation in PA. Further, the Company is actively prosecuting its state and
federal actions in PA. However, at this time no prediction as to the outcome can
be made.
BRIGITTE YVON & KLAUS YVON VS. THE QUIGLEY CORPORATION, ET AL
On October 12, 2005, the Plaintiffs instituted an action against Caribbean
Pacific Natural Products, Inc. and other defendants for personal injuries as a
result of being hit by a chair on the pool deck of Waikoloa Beach Marriott Hotel
d/b/a Outrigger Enterprises, Inc. in Honolulu, Hawaii. On December 9, 2005, the
Company was added as an additional defendant without notice to this case. The
main defendant in the case is Caribbean Pacific Natural Products, Inc. in which
the Company formerly held stock. On January 22, 2003, all Caribbean Pacific
Natural Products Inc. shares owned by the Company were sold to Suncoast
Naturals, Inc. in return for stock of Suncoast Naturals, Inc. At the time of the
accident, the Company had no ownership interest in Caribbean Pacific Natural
Products, Inc.
The Company believes that the plaintiffs' claims are without merit and is
vigorously defending this action. At the present time this matter is being
defended by the Company's liability insurance carrier and a motion to dismiss is
pending before the Federal District Court in Honolulu, Hawaii.
NICODROPS, INC. VS. QUIGLEY MANUFACTURING INC.
On January 30, 2006, QMI was put on notice of a claim by Nicodrops, Inc.
Nicodrops, Inc. has claimed that the packaging contained incorrect expiration
dates and caused it to lose sales through two (2) retailers. The total alleged
sales of Nicodrops was approximately $250,000 and Nicodrops is claiming
unspecified damages exceeding $2,000,000.
No suit has been filed. The Company is investigating this claim. Based on its
investigation to date, the Company believes the claim is without merit. However,
at this time no prediction can be made as to the outcome of this case.
TERMINATED LEGAL PROCEEDINGS
LITIGATION - FORMER EMPLOYEEEMPLOYEES
On April 12, 2002, the Company commenced a complaint in Equity in the Court of
Common Pleas of Bucks County, PAPennsylvania, against the former President of
Darius International Inc., its wholly owned subsidiary, following termination of
such President. The allegations in the complaint include,included, but arewere not limited
to, an alleged breach of fiduciary duty owed to the Company. The Company is seekingsought
both injunctive and monetary relief. On or about May 1, 2002, the defendant
filed a counterclaim requesting that the Court declare him the lawful owner of
55,000 stock options, unspecified damages relating to an alleged breach of an
oral contract and for commissions allegedly owed. In addition, the Defendant
requestsdefendant
requested the return of certain intellectual property used to commence and
continue Darius' operations. The Corporation believes Defendant's claims are without merit, is vigorously
defending the counterclaims and is prosecuting its action on its complaint.
Based upon the information the Company has at this time, it believes the action
will not have a material impact to the Company. However, at this time no
prediction as to the outcome can be made.
TERMINATED PROCEEDINGS
MIKE FORAN VS. INNERLIGHT, INC.,
DARIUS INTERNATIONAL, INC., AND
THE QUIGLEY CORPORATION
On August 1, 2003, an action was filed with the American Arbitration Association
by Mike Foran against Innerlight Inc., a wholly owned subsidiary of Darius
International Inc., which is a wholly owned subsidiary of the Company. After a
hearing before the United States District Court for the District of Utah,
Central Division, Foran withdrew his complaint against The Quigley Corporation
and the matter was remanded to arbitration. Discovery began on December 1, 2003
and was completed on December 22, 2003. Based on the discovery of all of
defendants' documents and defendants' depositions and after interviewing
Innerlight Inc.'s witnesses, the Company upon advice of counsel settled the
action for $290,000 and reinstated Foran as an independent representative.
Negotiations leading to settlement were completed by December 31, 2003 andApril 15, 2005, a Settlement Agreement and
Mutual Release was entered effective January 18, 2004. As partexecuted between the Company, its subsidiaries and the
defendants, Ronald Howell, Deborah Howell, Pro Pool, LLC, One Source, LLC, Pro
Marketing LLC, and Eric Kaytes. All of defendants' counterclaims were withdrawn
and dismissed with prejudice. In addition to the monetary consideration, Howell
surrendered to the Company for cancellation 40,993 shares of the Settlement Agreement, Mr. Foran completely releasedCompany's
common stock and agreed to forego any claim for any additional stock, warrants,
stock options or other securities of or interest in the Company, Darius, Darius
Marketing Inc., and Innerlight Inc. and The
Quigley Corporation from any claim arising out of the action instituted by him
on August 1, 2003 and also any claim he maythat were or could have asserted against Innerlight
Inc. or The Quigley Corporation.
INTERVENTION INC.
An action was filed by Intervention, Inc. on July 2, 2002 in Contra Costa County
Superior Court under the California Unfair Competition Law, Business and
Professions Code, Section 17200. The Complaint claims that COLD-EEZE(R) does not
contain ionic zinc and therefore does not have the unique quality the Company
asserts for it. The Complaint purports to attack The Cleveland Clinic Study
titled ZINC GLUCONATE LOZENGES FOR TREATING THE COMMON COLD and the Dartmouth
Study, ZINC AND THE COMMON COLD, A CONTROLLED CLINICAL STUDY. The plaintiff
claims that the Dartmouth Study is not double-blind and is not randomized. The
plaintiff also claims that The Cleveland Clinic Study is untrue and deceptive
because it did not conclude that patients "starting treatments" with zinc had a
42% reduction in duration of the common cold and, also, because the 42%
reduction in common cold duration is not a reference to average of cold duration
but rather is a reference to the reduction in median duration. There is also a
claim by the plaintiff that there is an implied claim that the resultsbeen made in the
studies have been confirmed by repetition which plaintiff contests.
-11-
Onlawsuits. Defendant Kaytes surrendered options/warrants in the 3rd day of July, 2003, the Contra Costa County Superior Court upon Motion
of The Quigley Corporation issued a Summary Judgment in favor of The Quigley
Corporation. On October 24, 2003, Intervention Inc. filed an appeal to the
California Court of Appeals from the Summary Judgment issued in favor of The
Quigley Corporation. In March 2004, the appeal was withdrawn, with prejudice.Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
-20-
PART II
ITEM 5. MARKET FOR COMPANY'SREGISTRANT'S COMMON EQUITY, AND RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
The Company's Common Stock, $.0005 par value, is currently traded on theThe NASDAQ
National Market under the trading symbol "QGLY"."QGLY." The price set forth in the
following table represents the high and low bid prices for the Company's common
stock.Common
Stock.
Common Stock
------------
2003 2002
---------------- -------------------2005 2004
----------------------- ---------------------------
Quarter Ended High Low High Low
------------- ---- --- ---- ---
March 31 $7.76 $4.71 $7.20 $2.03$8.85 $7.27 $10.89 $8.50
June 30 $8.22 $5.39 $8.82 $5.40$9.28 $7.79 $10.29 $6.92
September 30 $10.51 $6.75 $8.00 $3.05$10.50 $8.41 $9.94 $7.35
December 31 $11.12 $7.32 $7.05 $2.40$16.94 $7.25 $9.92 $7.56
Such quotations reflect inter-dealer prices, without mark-up, mark-down or
commission and may not represent actual transactions.
The Company's securities are traded on theThe NASDAQ National Market and
consequently stock prices are available daily as generated by theThe NASDAQ
National Market established quotation system.
HOLDERS
As of December 31, 2003,2005, there were approximately 360325 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.
-12-
WARRANTS AND OPTIONS
In addition to the Company's outstanding Common Stock, there are, as of December
31, 2003,2005, issued and outstanding Common Stock Purchase Warrants and Options that
are exercisable at the price-per-share stated and expire on the date indicated,
as follows:
Description Number Exercise Price Expiration Date
----------- ------ -------------- ---------------
Warrants 250,000 $8.5000 March 7, 2004
Warrants 250,000 $9.5000 March 7, 2004
Warrants 250,000 $11.5000 March 7, 2004
CLASS "E" 850,000805,000 $1.7500 June 30, 2006
CLASS "F" 225,000200,000 $2.5000 November 4, 2006
CLASS "G" 585,000550,000 $10.0000 May 5, 2007
Option Plan 396,500 $9.6800 December 1, 2007
Option Plan 331,000 $5.1250 April 6, 2009
Option Plan 263,000260,750 $0.8125 December 20, 2010
Option Plan 324,500278,500 $1.2600 December 10, 2011
Option Plan 350,000314,500 $5.1900 July 30, 2012
Option Plan 102,00062,500 $5.4900 December 17, 2012
Option Plan 424,000415,000 $8.1100 October 29, 2013
Option Plan 490,000 $9.5000 October 26, 2014
Option Plan 520,000 $13.8000 December 11, 2015
At December 31, 2003,2005, there were 4,601,0004,623,750 unexercised and vested options and
warrants of the Company's stockCommon Stock available for exercise.
-21-
SECURITIES AUTHORIZED UNDER EQUITY COMPENSATION
The following table sets forth certain information regarding stock option and
warrant grants made to employees, directors and consultants:
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Weighted
Number of AverageWeighted Number of Securities
Securities to be ExerciseAverage Remaining Available for
Issued Upon Exercise Price of Future Issuance Under Equity
Exercise of of Outstanding Equity Compensation Plans
Plan Category
Outstanding Options & (Excluding Securities
Plan Category Options & Warrants Warrants Reflected in Column A)
(A) (B) ( C )(C)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- -------------------- --------------- -- -------------------------
Equity Plans Approved by Security Holders (1) 2,191,000 $5.46 700,0003,068,750 $7.58 1,184,000
Equity Plans Not Approved by Security Holders (2) 2,410,000 $6.34 --1,555,000 $4.76 -
Total 4,601,000 $5.92 700,0004,623,750 $6.63 1,184,000
(1) An incentive stock option plan was instituted in 1997, (the "1997
Stock Option Plan") and approved by the stockholders in 1998. Options
pursuant to the 1997 Stock Option Plan have been granted to directors,
executive officers, and employees.
(2) Other grants of warrants are specific and not part of a plan. These
specific grants were to executive officers, employees and consultants
for services.
-13-
services in 1996 and 1997.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the selected financial data of the Company for
and at the end of the years ended December 31, 2005, 2004, 2003, 2002 2001, 2000 and 1999.2001.
The data presented below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"Operation" and the
Company's financial statements and notes thereto appearing elsewhere herein.
(Amounts in thousands, exceptThousands, Except Year Ended Year Ended Year Ended Year Ended Year Ended
Per share data)Share Data) December 31, December 31, December 31, December 31, December 31,
2005 2004 2003 2002 2001
2000 1999
--------------------------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME DATA:
Net Salessales $53,658 $43,948 $41,499 $29,272 $21,226
$15,527 $21,574
Total Revenuerevenue 53,658 43,948 41,499 29,421 22,772
15,527 21,574
Gross Profitprofit 27,834 20,375 20,011 12,212 12,551
9,411 13,240
Income (Loss)(loss) - continuing operations 3,217 453 729 (5,132) 934 (5,059) (4,204)
Loss - discontinued operations (1) -- -- (54) (1,322) (718)
(137) --
Net Income (Loss)income (loss) 3,217 453 675 (6,454) 216
(5,196) (4,204)
Basic earnings (Loss)(loss) per share:
Continuing operations $0.28 $0.04 $0.06 ($0.47) $0.09
($0.48) ($0.37)
Discontinued operations -- -- -- ($0.12) ($0.07)
($0.01) --
Net income (Loss)(loss) $0.28 $0.04 $0.06 ($0.59) $0.02
($0.49) ($0.37)
Diluted earnings (Loss)(loss) per share:
Continuing operations $0.24 $0.03 $0.05 ($0.47) $0.09
($0.48) ($0.37)
Discontinued operations -- -- -- ($0.12) ($0.07)
($0.01) --
Net income (Loss)(loss) $0.24 $0.03 $0.05 ($0.59) $0.02 ($0.49) ($0.37)
Weighted average shares outstanding:
Basic 11,661 11,541 11,467 10,894 10,675
10,551 11,352
Diluted 13,299 14,449 14,910 10,894 10,751 10,551 11,352
As of As of As of As of As of
December 31, December 31, December 31, December 31, December 31,
2005 2004 2003 2002 2001
2000 1999
(Restated -
Note 15) (2)
-------------------------------------------------------------------------------------- ------------- ------------- -------------- -------------
BALANCE SHEET DATA:
Working capital $20,682 $17,853 $18,257 $16,662 $18,626
$18,622 $23,621
Total assets 35,976 31,530 26,270 24,935 24,756
26,056 33,271Debt 1,464 2,893 -- -- --
Stockholders' equity $25,320 $21,902 $20,787 $19,121 $21,200
$20,971 $26,216-22-
(1) In December 2002, the Board of Directors of the Company approved a plan to
sell Caribbean Pacific Natural Products, Inc. ("CPNP"). On January 22, 2003, the
Board of Directors of the Company completed the sale of the Company's 60% equity
interest in CPNP to Suncoast Naturals, Inc. The sale of this segment has been
treated as discontinued operations and all periods presented have been
reclassified.
(2) As further discussed in Note 15, the Company has restated its 2002
consolidated financial statements in order to properly reflect the accounting
for certain warrants issued in 2002.
-14-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONSOPERATION
OVERVIEW
The Quigley Corporation, (the "Company"),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 homeopathic products.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 interests comprise three segments, being cold-remedy,
healthis the manufacture and wellness and ethical pharmaceutical.
The Cold-Eeze(R) product continues to be the primary productdistribution of the cold-remedy
segment and is available in lozenge, sugar-free tablet and nasal spray form. The
Cold-Eeze(R) Nasal Spray and the Kidz-Eeze(TM) Sore Throatcold remedy
products were both
launched in the third quarter of 2003 in preparation for the cold season. The
efficacy of the Cold-Eeze(R) product was established following the publication
of the second double blind study in July 1996. A 2002 study also found that the
use of Cold-Eeze(R) to treat a cold statistically reduced the use of antibiotics
for respiratory illnesses by 92% when Cold-Eeze(R) is administered as a first
line treatment approach to the common cold. In May 2003,consumer through the Company announcedover-the-counter marketplace together with
the findings of a prospective study, conducted at the Heritage School facility
in Provo, Utah, in which 178 children ages 12 to 18 years were given
Cold-Eeze(R) lozenges both symptomatically and prophylactically from October 5,
2001 to May 30, 2002. The study found a 54% reduction in the most frequently
observed cold duration. Those subjects not receiving treatment most frequently
experienced symptom duration at 11 days compared with 5 days when lozenges were
administered, a reduction of 6 days.
Cold-Eeze(R) is distributed through numerous independent, chain drug, food and
discount stores throughout the United States. Net sales of the cold-remedy
segment increased 46% in 2003 over the prior year, resulting in net sales in
2003 of $20,474,969 compared to $14,050,967 in 2002. This increase reflects the
strategic decision by management to provide improved support to the segment
through increased media advertising and co-operative advertising promotions with
our customer base. Additionally, revenues were assisted by media attention
afforded to potential cold and influenza outbreaks that were expected during the
2003/2004 cold season.
The Company continues to use the resources of independent national and
international brokers to represent the Company's Cold-Eeze(R) products, which
provides cost efficiencies that benefit the Company.
During 2003, the Company continued the process of the registration of the
Cold-Eeze(R) products in the United Kingdom as a pharmacy drug and incurred
approximately $400,000 in related expenses.
Darius, through Innerlight Inc., is a direct selling company specializing in the
development and distributionsale of proprietary health and wellness products primarily within the United States with the commencement of international
business activity during the second quarter of 2003. Net salesthrough 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 wellness segment in 2003 were $21,024,194 an increasecold remedy market. Effective October 1, 2004, the Company acquired
substantially all of 38% over the 2002 net
salesassets of $15,220,813. The growthJoEl, Inc., the previous manufacturer of this segment in 2003 was attributablethe
Cold-Eeze(R) lozenge product. This manufacturing entity, now called Quigley
Manufacturing Inc. ("QMI"), a wholly owned subsidiary of the Company, will
continue to the
recruitment of increasing numbers of active independent representativesproduce lozenge product along with performing such operational tasks
as warehousing and shipping the Company commencing international business duringCompany's Cold-Eeze(R) products. In addition,
QMI, which is an FDA approved facility, produces a variety of hard and organic
candy for sale to third party customers in addition to performing contract
manufacturing activities for non-related entities. The Cold-Eeze(R) products
reported an improved sales performance in 2005 due to effective product support
by means of media and in-store advertising; the second quarterintroduction of 2003.
The establishment of an ethical pharmaceutical subsidiary, Pharma, may enablenew Cold-Eeze(R)
flavors; and increased consumer demand for Cold-Eeze(R) as indicated by
Information Resources Incorporated (IRI) data. During 2005, the Company to diversify into the prescription drug market and to ensure safe
and effective distribution of these important potential new products currently
under development. During the course of 2003, the Company was assigned three
patents and filed three patent applications, two with the Patent Officemargin of the
United States Commerce Department and one within the European Community.
Research and development costs relating to projects being undertaken by Pharma
increased in 2003 over the prior yearCold Remedy segment was improved as a result of increased study activitythe impact of the Cold-Eeze(R)
now being produced by the manufacturing subsidiary and forming part of the
consolidated results of the Company. However, these gains were offset by
substantially lower gross profit margins on the Contract Manufacturing segment's
non cold remedy sales and non-manufacturing operating costs of the manufacturing
subsidiary being included in various areascurrent operations rather than being carried as
inventory and cost of interest.
Manufacturing for allsales as was the Company's productscase prior to October 1, 2004.
Our Health and Wellness segment is done by outside sources. The
lozenge formoperated through Darius International Inc.
("Darius"), a wholly owned subsidiary of Cold-Eeze(R) is manufactured by a contract manufacturer, a
significant amount of whose revenues are from the Company with other formswhich 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 produced by different manufacturers.
Operating expenses during 2003 increased over thoseavailable to the marketplace,
serving as a balance to the seasonal revenue cycles of 2002the Cold-Eeze(R) branded
products. This segment's 2005 net sales remained relatively unchanged compared
to 2004 due to increased
advertisinga decline in the number of active domestic independent
distributor representatives, which was offset by this segment's gain in
international sales of 54.3%.
In January 2001, the Company formed an Ethical Pharmaceutical segment, Quigley
Pharma Inc. ("Pharma"), that is under the direction of its Executive Vice
President and increasedChairman of its Medical Advisory Committee. Pharma was formed for
the purpose of developing naturally derived prescription drugs. Pharma is
currently undergoing research and development costs relatedactivity in compliance with
regulatory requirements. The Company is in the initial stages of what may be a
lengthy process to the studydevelop these patent applications into commercial products.
The Company continues to invest significantly with ongoing research and
development activities of Pharma.this segment.
Future revenues, costs, margins, and profits will continue to be influenced by
the Company's ability to maintain its manufacturing availability and capacity
together with its marketing and distribution capabilities and the requirements
associated with the development of Pharma's potential prescription drugs in
order to continue to
-15-
compete on a national and international level. In December 2002, the BoardThe
continued expansion of Directors ofDarius is dependent on the Company approved a plan to sell
Caribbean Pacific Natural Products, Inc. ("CPNP"). On January 22, 2003, the
Board of Directors of the Company completed the sale of the Company's 60% equity
interest in CPNP to Suncoast Naturals, Inc. ("Suncoast"). In exchange for its
60% equity interest in CPNP, the Company shall receive: (i) 750,000 shares of
Suncoast's common stock, which Suncoast has agreed, at its costretaining existing
independent distributor representatives and recruiting additional active
representatives both internationally and within 60
days from the closing,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 register for public resale through an appropriate
registration statement (this registration statement has not been declared
effective by the Securities and Exchange Commission) and (ii) 100,000 shares of
Suncoast's Series A Redeemable Preferred Stock, which bears interest at a rate
of 4.25% per annum and which is redeemable from time to time after March 31,
2003 in such amounts as is equal to 50% of the free cash flow reported by
Suncoast in the immediately preceding quarterly financial statements divided by
the redemption price of $10.00 per share. The Company owns 19.5% of Suncoast's
issued and outstanding capital stock, which investment is accounted for on the
cost basis method.satisfy consumer demand.
-23-
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
FIN 46R, CONSOLIDATION OF VARIABLE INTEREST ENTITIES -- AN INTERPRETATION OF ARB
51 (REVISED DECEMBER 2003)
In December, 2003 the Financial Accounting Standards Board (FASB or the "Board")
issued FASB Interpretation No. 46 (revised December 2003), CONSOLIDATION OF
VARIABLE INTEREST ENTITIES (FIN 46R), to address certain implementation issues.
FIN 46R varies significantly from FASB Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES (FIN 46), which it supersedes. FIN 46R requires the
application of either FIN 46 or FIN 46R by "Public Entities" to all Special
Purpose Entities ("SPEs") at the end of the first interim or annual reporting
period ending after December 15, 2003. FIN 46R is applicable to all non-SPEs
created prior to February 1, 2003 by Public Entities that are not small business
issuers at the end of the first interim or annual reporting period ending after
March 15, 2004. The Company has determined that Scandasystems, a related party
(See note 14), may qualify as a variable interest entity and we may initially
consolidate Scandasystems beginning with our quarter ending March 31, 2004. Due
to the fact that the company has no long-term contractual commitments or
guarantees, our maximum exposure to loss is insignificant.
SFAS NO. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS
OF BOTH LIABILITIES AND EQUITY." (SFAS NO. 150)
In May 2003,November 2004, the FASB issued SFAS NO. 151, "INVENTORY COSTS" ("SFAS 151").
SFAS 151 amends the guidance in Chapter 4 of Accounting Research Bulletin No.
150, "Accounting43, "Inventory Pricing" to clarify the accounting for Certain Financial
Instruments with Characteristicsamounts of Both Liabilitiesidle facility
expense, freight, handling costs and Equity."wasted material. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It151 requires that
an issuer classify a financial instrument that is within its scopethese types of items be recognized as a liability (or an asset in some circumstances).current period charges as they occur. The
provisions of SFAS No.
150151 are effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
periodinventory costs incurred during fiscal
years beginning after June 15, 2003.2005. The adoption of this standard is not
expected to have an impact on the Company's consolidated financial position,
results of operations or cash flows.
In December 2004, the FASB issued Statement 123 (revised 2004),"SHARE-BASED
PAYMENT." The standard eliminates the disclosure-only election under the prior
SFAS 123 and requires the recognition of compensation expense for stock options
and other forms of equity compensation based on the fair value of the
instruments on the date of grant. The standard is effective for fiscal years
beginning after June 15, 2005. In March 2005, the Securities & Exchange
Commission (the "SEC") issued Staff Accounting Bulletin No. 107, "Share-Based
Payment" ("SAB 107"). SAB 107 summarizes the views of the SEC staff regarding
the interaction between SFAS No. 123 (Revised 2004), "Share-Based Payment"
("SFAS 123R") and certain SEC rules and regulations, and is intended to assist
in the initial implementation of SFAS 123R, which for the Company is required by
the beginning of its fiscal year 2006. The Company had no unvested options as of
December 31, 2005 and therefore the adoption of this standard will not have an
impact on the Company's consolidated balance sheets and statements of
operations, shareholders' equity and cash flows.
In December 2004, the FASB issued Statement 153,"EXCHANGES OF NONMONETARY
ASSETS, AN AMENDMENT OF APB OPINION NO.29." The standard is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged and eliminates the exception under APB
Opinion No. 29 for an exchange of similar productive assets and replaces it with
an exception for exchanges of nonmonetary assets that do not have commercial
substance. The standard is effective for nonmonetary exchanges occurring in
fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 150153 did
not have ana material impact on itsthe Company's financial position or results of
operations.
CRITICAL ACCOUNTING POLICIES
As previously described,In May 2005, the CompanyFinancial Accounting Standards Board ("FASB") issued Statement
154, "ACCOUNTING CHANGES AND ERROR CORRECTIONS, A REPLACEMENT OF APB OPINION NO.
20 AND FASB STATEMENT NO. 3." The standard requires retrospective application to
prior periods' financial statements of a voluntary change in accounting
principle unless it is engageddeemed impracticable. The standard states that a change
in the development,
manufacturing, and marketingmethod of health and homeopathic products that are being
offered to the general public and is also involved in the research and
development of potential prescription products. Certain key accounting policies
that may affect the results of the Company are the timing of revenue recognition
and sales incentives (including coupons, rebates, co-operative advertising and
discounts); the classification of advertising expenses; and the fact that all
research and development costs are expensed as incurred. Notes to Financial
Statements, Note 1, Organization and Business, describes the Company's other
significant accounting policies.
REVENUE RECOGNITION
Cold-remedy sales are recognized at the time ownership and risk of loss is
transferred to the customer, which is primarily the time the shipment is
received by the customer. In the case of the health and wellness segment sales
are recognized at the time goods are shipped to the customer. Sales returns and
allowances are provideddepreciation, amortization or depletion for in the period that the related sales are recorded.
Provisions for these reserves are based on historical experience.
ADVERTISING
Advertising costs are expensed within the period to which they relate.
Advertising expense is made up of media advertising, presented as part of sales
and marketing expense; co-operative advertising, which islong-lived,
non-financial assets be accounted for as a deductionchange in accounting estimate that is
affected by a change in accounting principle. The standard is effective for
accounting changes and corrections of errors made occurring in fiscal years
beginning after December 15, 2005. The impact on the Company's financial
position or results of operations as a result of the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 154 cannot be determined.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the dates of the financial statements
and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from sales;those estimates.
The Company is organized into four different but related business segments, Cold
Remedy, Health and bonusWellness, Contract Manufacturing and Ethical Pharmaceutical.
When providing for the appropriate sales returns, allowances, cash discounts and
cooperative advertising costs, each segment applies a uniform and consistent
method for making certain assumptions for estimating these provisions that are
applicable to that specific segment. Traditionally, these provisions are not
material to net income in the Health and Wellness and Contract Manufacturing
segments. The Ethical Pharmaceutical segment does not have any revenues.
The product in the Cold Remedy segment, Cold-Eeze(R), has been clinically proven
in two double-blind studies to reduce the severity and duration of common cold
symptoms. Accordingly, factors considered in estimating the appropriate sales
returns and allowances for this product include it being: a unique product with
limited competitors; competitively priced; promoted; unaffected for remaining
shelf life as there is no expiration date; monitored for inventory levels at
major customers and third-party consumption data, such as Information Resources,
Inc. ("IRI").
-24-
At December 31, 2005 and 2004 the Company included reductions to accounts
receivable for sales returns and allowances of $635,000 and $1,109,000,
respectively, and cash discounts of $178,000 and $92,000, respectively.
Additionally, current liabilities at December 31, 2005 and 2004 include
$1,067,072 and $743,000, respectively for cooperative advertising costs.
The roll-forward of the sales returns and allowance reserve ending at December
31 is as follows:
Account - Sales Returns & Allowances 2005 2004
- --------------------------------------------------------------------------------------------------------------
Beginning balance $1,109,171 $403,850
Provision made for future charges relative to sales for each period 678,127 1,414,796
presented
Current provision related to discontinuation of Cold-Eeze(R) nasal spray 183,716 625,756
Actual returns & allowances recorded in the current period presented (1,336,434) (1,335,231)
-------------- -------------
Ending balance $634,580 $1,109,171
============== =============
The reduction in the 2005 provision as compared to 2004 was principally due to
the initiation of specific limits on product returns from customers, greater
product acceptance and further enhanced evaluation of return requests from
customers relative to the Cold Remedy segment.
Management believes there are no material charges to net income in the current
period, related to sales from a prior period.
REVENUE
Provisions to reserves to reduce revenues for cold remedy products that do not
have an expiration date, include the use of estimates, which are applied or
matched to the current sales for the period presented. These estimates are based
on specific customer tracking and an overall historical experience to obtain an
effective applicable rate, which is accountedtested 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 as part of cost
of sales. The level of advertising expense
-16-
to be incurred is determined eachthe period to coincide with management's sales and
marketing strategies. Advertising costs incurredpresented are also performed.
A one percent deviation for these consolidated reserve provisions for the years
ended December 31, 2005, 2004 and 2003 2002would affect net sales by approximately
$599,000, $481,000 and 2001 were $5,483,465, $4,794,955 and $3,402,006,$455,000, respectively. This expense item increased in 2003 due to active media and
in-marketA one percent deviation for
cooperative advertising necessary to promote and support the Cold-Eeze(R) product.
Included in prepaid expenses and other current assets was $68,000 and $236,875
at December 31, 2003 and December 31, 2002, respectively, relating to prepaid
advertising expenses.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the year incurred.
Expendituresreserve provisions for the years ended December 31,
2005, 2004 and 2003 2002could affect net sales by approximately $352,000, $275,000
and 2001 were
$3,365,698, $2,663,291,$241,000, respectively.
The reported results include a remaining returns provision of approximately
$184,000 and $1,331,639, respectively. Principally,$626,000 at December 31, 2005 and December 31, 2004, respectively
in the event of future product returns following the discontinuation of the
Cold-Eeze(R) Cold Remedy Nasal Spray product in September 2004.
INCOME TAXES
The Company has recorded a valuation allowance against its net deferred tax
assets. Management believes that this allowance is required due to the
uncertainty of realizing these tax benefits in the future. The uncertainty
arises because the Company may incur substantial research and development is part of the product research costs
related to Pharma and study
costs associated with Cold-Eeze(R). Expenditure for 2003 also includes study
costs relating to Cold-EEZE(R) Cold Remedy Nasal Spray. Pharma is currently
involved in research activity that is expected to increase significantly over
time as product research and testing progresses. The Company is at the initial
stages of what may be a lengthy process to develop potential commercial
prescription products.its Ethical Pharmaceutical segment.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 20032005 COMPARED WITH SAME PERIOD 2002
The Company has restated its 2002 consolidated financial statements herein, in
order to properly reflect the accounting2004
Net sales for certain warrants issued in 2002.
See Note 15 to the Consolidated Financial Statements.
Revenues from continuing operations for 20032005 were $41,499,163$53,658,043 compared to $29,420,646$43,947,995 for 2002,2004, reflecting
an increase of 41%22.1% in 2003.2005. Revenues, by segment, for 2003
comprised $20,474,969 relating2005 were Cold Remedy,
$29,284,651; Health and Wellness, $20,473,050; and Contract Manufacturing,
$3,900,342, as compared to 2004 when the cold-remedyrevenues for each respective segment
primarilywere $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 $21,024,194 fromin-store advertising and the health and wellness segment,
compared to 2002 revenuesintroduction of $14,199,833 and $15,220,813, by respective segment.
The 2002 cold-remedy revenues included an amount of $148,866 as a resultnew
Cold-Eeze(R) flavors thereby increasing the profile of the settlement of the infringement suit against Gel Tech, LLC, the developer of
Zicam(TM),product through line
extension. Cold-Eeze(R) product unit consumption increased by 27% in 2005 as
measured by Information Resources Incorporated (IRI) data.
-25-
The Health and Gum TechWellness segment's net sales increased in 2005 by $111,659 or
0.5%. International Inc., its distributor. The 2003sales for this segment increased by 54.3% due to an increase
in the revenuesnumber of independent international distributor representatives in 2005
with offset due to a decline in the cold-remedynumber of active domestic independent
distributor representatives.
The Contract Manufacturing segment may be attributablerefers to management's
strategy in supportingthe third party sales generated by
QMI. In addition to the manufacture of the Cold-Eeze(R) product, in the marketplace by wayQMI also
manufactures a variety of media advertisinghard and ongoing co-operative advertising initiatives with the
Company's customer base. The segment may also have been influenced by media
attention to the possibility of increased cold and influenza incidences during
the 2003/2004 cold season. The health and wellness segment reported
significantly increased revenues in 2003 of $5,803,380 over the prior year,
primarily due to the continued recruitment by the Company of active independent
representativesorganic candies under its own brand names
along with other products on a contract manufacturing basis for other customers.
Sales for this segment in 2005 increased by $3,147,887 as the Company entering the international market during
the second quarter2004 period
consisted of 2003.three months activity.
Cost of sales from continuing operations for 20032005 as a percentage of net sales
was 51.8%48.1%, compared to 58.8%53.6% for 2002.2004. The cost of sales percentage for the cold-remedyCold
Remedy segment was reduceddecreased in 20032005 by 8.2%6.2% primarily due to decreased coststhe impact of the
discontinuation of the nasal spray product in 2004 and the conclusion of the
Company's royalty obligations to the founders in May 2005. The 2004 nasal
product discontinuation negatively impacted net sales by approximately $680,000
and resulted in an additional expense to cost of sales of approximately $672,000
due to obsolete product and materials. Remaining variations between the years is
largely the result of product bonus promotions and considerably reduced royalty charges attributable
to the nasal and throat pop products, and also the 2002 amount included charges
for inventory obsolescence.mix. The cost of sales percentage for the healthHealth
and wellnessWellness segment decreasedincreased in 20032005 by 5.2%1.6% largely attributable to fluctuationscosts
associated with increased international sales activity, product mix and
variations in the independent distributor representative commission expense payable to the independent representatives along with
charges in 2002cost. The
2005 consolidated cost of sales was favorably impacted as a result of obsolete inventory on hand.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 from continuing operations for 20032005 were $16,010,164$21,070,307
compared to $14,832,935$16,960,313 in 2002.2004. The increase in 20032005 was primarily due to
increased media advertisingsales brokerage commission costs of $845,055 necessary$816,000 due to supportsignificantly
improved sales performance; the Cold-Eeze(R) product along withaddition of Quigley Manufacturing Inc., for the
whole of 2005 resulted in increased selling and administration costs associatedof
$1,276,459; insurance costs increased by $435,920, with the healthremaining increase
largely due to increased payroll costs. Selling, marketing and wellnessadministrative
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 approximately $2,161,000 primarily related to the
generation of increased revenues. The 2002 expenses included a non-cash charge
of $2,100,000 for warrants granted in connection with consulting services with
no comparable charge in 2003.$11,068,726, $5,098,834, $492,562 and $300,191, respectively.
Research and development costs from continuing operations in 2003for 2005 and 20022004 were $3,365,698$3,784,221 and $2,663,291,$3,232,569,
respectively. Principally, the increase ofin research and development expenditure
was the result of decreased cold-remedy related product testing costs in 2003 was due2005
compared to the prior year, offset by increased expenses associated with the
ongoing research and clinical activityPharma study costs of
Pharmaapproximately $756,000 in the amount of $642,983.2005.
During 2003,2005, the Company's major operating expenses of salaries, brokerage
commissions, promotion, advertising, and legal costs accounted for approximately
$11,328,608 (58%$16,922,587 (68.1%) of the total operating expenses of $19,375,862,$24,854,528, an increase
of 2%31.2% over the 20022004 amount of $11,143,588.$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 selling, general and administrative
expenses related to Darius for 2003 and 2002 were $5,396,696 and $3,235,793,
respectively.
-17-
Revenues2005 amounts reflect the inclusion of
CPNP (discontinued operations)QMI for the twelve months periods ended
December 31, 2003 and 2002 were $59,824, and $2,040,312, respectively, net
losses for the same periods were $54,349 and $1,322,355. The results of CPNP are
represented as discontinued operations2005 compared to three months in the Statements of Operations and
Balance Sheets.2004.
Total assets of the Company at December 31, 20032005 and 20022004 were $26,269,759$35,975,639 and
$24,934,956,$31,529,756, respectively. Working capital increased by $1,595,405$2,829,352 to
$18,257,354$20,682,262 at December 31, 2003.2005. The primary influences on working capital
during 20032005 were: the decreaseincrease in cash balances, increased account receivable
balances due to increased revenues, reductions insales, increased inventory on hand as a result of
increased revenues and management control; other current liabilities andsales including international activity; increased accrued royaltyroyalties
and sales commissions bothas a result of litigation between the Company and the
developer of Cold-Eeze(R) and increased advertising payable balances due to
improved salesincreased advertising activity in 2003.the latter part of 2005 and related seasonal
factors.
TWELVE MONTHS ENDED DECEMBER 31, 20022004 COMPARED WITH SAME PERIOD 20012003
Revenues from continuing operations for 20022004 were $29,420,646$43,947,995 compared to
$22,772,214$41,499,163 for 2001,2003, reflecting an increase of 29%. 20025.9% in 2004. Revenues, by
segment, for 2004 were Cold Remedy, $22,834,249; Health and Wellness,
$20,361,391; and Contract Manufacturing, $752,355, as compared to 2003 when the
revenues comprised
$14,199,833 relatingfor each respective segment were $20,474,969, $21,024,194 and zero. The
Contract Manufacturing segment refers to the third party sales generated by QMI.
In addition to the manufacture of the Cold-Eeze(R) product, (cold-remedy segment)QMI also
manufactures a variety of hard and $15,220,813 from Darius (health and wellness segment), compared to 2001organic candies under its own brand names
along with other products on a contract manufacturing basis for other customers.
The 2004 revenues for the Cold Remedy segment were negatively affected by the
discontinuation of $16,983,635 and $5,788,579,the nasal spray product, reducing the 2004 revenues by
respective segment. The 2001 Cold-Eeze(R)
revenues included an amount of $1,546,592approximately $680,000 as a result of actual and anticipated product returns.
Notwithstanding the settlementdiscontinuation of the infringement suit against Gel Tech, LLC,nasal spray product, the developerCold Remedy
segment reported increased revenues which may be attributable to strategic media
advertising during the early part of Zicam(TM),the cold season, strong trade and Gum
Tech International, Inc., its distributor as compared to $148,866consumer
product promotions, and media attention during the fourth quarter of 2004
-26-
following the reported scarcity of flu vaccine products. The Health and Wellness
segment reported reduced revenues in 2002. 2002
revenues report2004 of $662,803 over the prior year. This
segment experienced a reduction in Cold-Eeze(R)domestic sales which were offset by increased
sales to international markets of $2,783,802 due to the
compression of the cold-remedy category in general despite the increase in the
incidences of the common cold. In addition, the weak economic conditions
resulted in lower carrying amounts of inventory by our customers and reduced
order size and frequency. The health and wellness segment reported significantly
increased revenues in 2002 primarily due to strong marketing and promotion
programs effected throughout 2002.135%.
Cost of sales from continuing operations for 20022004 as a percentage of net sales
was 58.8%53.6%, compared to 48.2%51.8% for 2001.2003. The 2002 increase iscost of sales percentage for the Cold
Remedy segment increased in 2004 by 4.7% primarily due to the effectsimpact of the
significantly increased revenues fromdiscontinuation of the healthnasal spray product. The discontinuation negatively
impacted net sales by approximately $680,000 and wellness
segment whoseresulted in an additional
expense to cost of sales as a percentageof approximately $672,000 due to obsolete product and
materials. Remaining variations between the years is largely the result of
product mix. The cost of sales were 71%percentage for the Health and 67%Wellness segment
increased in 2004 by 1.2% largely attributable to a charge of approximately
$200,000 related to a reserve for 2002
and 2001, respectively, reflecting this segment's lower profit margin compared
to that of Cold-Eeze(R) cold-remedy segment.expected obsolete inventory.
Selling, marketing and administrative expenses from continuing operations for
20022004 were $14,832,935$16,960,313 compared to $10,650,555$16,010,164 in 2001.2003. The increase in 20022004 was
primarily due to increased media advertising of $1,392,952 necessary$892,771, largely related to support the
commencement of Cold-Eeze(R) productadvertising activity earlier in the 2004/2005 cold
season compared to prior year. Selling, marketing and a non-cash charge of $2,100,000administrative expenses,
by segment, in 20022004 were Cold Remedy $11,068,726, Health and Wellness
$5,098,834, Pharma $492,562 and Contract Manufacturing $300,191, as compared to
2003 when these expenses for warrants
granted in connection with consulting services.each respective segment were $10,061,349,
$5,396,696, $552,119 and zero.
Research and development costs from continuing operations in 20022004 and 20012003 were
$2,663,291$3,232,569 and $1,331,639,$3,365,698, respectively. Principally, the increase ofdecrease in research
and development expenditure was the result of decreased Cold Remedy related
product testing costs in 2002 was due2004 compared to expenses associated with the ongoing research
and clinical activityprior year, which were offset by
increased Pharma study costs of Pharma in the amount of $1,096,492.approximately $261,000.
During 2002,2004, the Company's major operating expenses of salaries, brokerage
commissions, promotion, advertising, and legal costs accounted for approximately
$11,143,588$12,900,314 (64%) of the total operating expenses of $17,496,226,$20,192,882, an increase of
60%13.9% over the 20012003 amount of $6,983,346. The selling, general$11,328,608, largely the result of increased media
advertising and administrative
expenses related to Darius for 2002 and 2001 were $3,235,793 and $2,457,236,
respectively.payroll costs in 2004.
Revenues of Caribbean Pacific Natural Products, Inc.CPNP (discontinued operations) for the twelve months periods ended
December 31, 20022004 and 20012003 were $2,040,312,zero and $2,176,470,$59,824, respectively, and net losses
for the same periods were $1,322,355zero and $718,156. The loss relating to 2002 includes an amount of $633,233 relating to
the asset impairment.$54,349. The results of Caribbean Pacific Natural ProductsCPNP are representedpresented as
discontinued operations in the statementsStatements of operations with
balance sheet items being represented as assets held for sale and liabilities
associated with assets held for sale.Operations.
Total assets of the Company at December 31, 20022004 and 20012003 were $24,934,956$31,529,756 and
$24,755,795,$26,269,759, respectively. Working capital decreased by $1,963,872$404,444 to $16,661,949$17,852,910
at December 31, 2002.2004. The primary influences on working capital during 20022004
were: the increase in cash balances, which was assisted by exercises
of warrants and options during 2002;decreased account receivable balances due
to attentive collections, reductions in inventory on hand;hand as a result of
increased revenues; increased liabilities due to current portion of long term
debt of $428,571 related to the acquisition of certain assets, (primarily
property, plant and equipment), and assumption of certain liabilities of the
former contract manufacturer, JoEl, Inc., now QMI, along with the inclusion of
assets and liabilities relating to QMI at December 31, 2004, and the increase in
advertising accrualspayable balances due to increased activity; and increased liabilities
resulting fromadvertising activity in the fair valuelatter
part of warrants granted associated with consulting
services.2004.
MATERIAL COMMITMENTS AND SIGNIFICANT AGREEMENTS
Effective October 1, 2004, the Company acquired certain assets and assumed
certain liabilities of JoEl, Inc., the sole manufacturer of the Cold-Eeze(R)
lozenge product. As part of the acquisition, the Company entered into a loan
obligation in the amount of $3.0 million payable to PNC Bank, N.A. The loan is
collateralized by mortgages on real property located in each of Lebanon,
Pennsylvania and Elizabethtown, Pennsylvania and was used to finance the
majority of the cash portion of the purchase price. The Company can elect
interest rate options of either the Prime Rate or LIBOR plus 200 basis points.
The loan is payable in eighty-four equal monthly principal payments of $35,714
commencing November 1, 2004, and such amounts payable are reflected in the
consolidated balance sheet as current portion of long-term debt amounting to
$428,571 and long term debt amounting to $1,035,715. The Company is in
compliance with all related loan covenants.
With the exception of the Company's Cold-Eeze(R) lozenge product, the Company's
products are manufactured by outside sources. The Company has agreements in
place with these manufacturers, which ensure a reliable source of product for
the future. A significant amount of the revenues received by the
facility producing the Cold-Eeze(R) lozenge is from the Company.
-18-
The Company has agreements in place with independent brokers whose function is
to represent the Company's Cold-Eeze(R) products, in a product sales and
promotion capacity, throughout the United States and internationally. The
brokers are remunerated through a commission structure, based on a percentage of
sales collected, less certain deductions.
There are significant royalty-27-
The Company has maintained a separate representation and commission agreements betweendistribution agreement
relating to the Company and
the developerdevelopment of the Company's Cold-Eeze(R) zinc gluconate glycine lozenge
products. Theproduct formulation.
In return for exclusive distribution rights, the Company has entered intomust pay the developer
a 3% royalty and a 2% consulting agreements with
the developer that requires payment of 5%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 with the founders,developer are in litigation and as such, no
potential offset from such litigation for these fees have been recorded. A
founder's commission totaling 5%, on sales collected, less certain deductions,
has been paid to two of the officers of the Company, who are officers,also directors and
stockholders of the Company, who share a commission of 5% on sales collected, less certain
deductions.and whose agreements expired in May 2005. The
expenses for the respective periods relating to such agreements withamounted to
$1,745,748, $2,058,965 and $1,805,294 for the developers expire in 2007,twelve months periods ended
December 31, 2005, 2004 and with the
founders in 2005.2003, respectively. Amounts accrued for these
expenses at December 31, 2005 and 2004 were $2,077,411 and $1,129,654,
respectively.
The Company has an agreement with the former owners of the Utah basedUtah-based direct
marketing and selling company, whereby they receive payments, currently totaling
5% of net sales collected, for use of product formulations,exclusivity, consulting, marketing presentations,
confidentiality and non-compete agreements.arrangements. Amounts paid or payable under such
agreement during 2005, 2004 and 2003 were $838,607, $800,881 and 2002 were $880,091, and $678,454,
respectively. Amounts payable under such agreement at December 31, 20032005 and 20022004
were $68,388$58,597 and $63,866,$60,876, respectively.
In August 2003, the Company entered into a licensing agreement with a patent
holder relating to utilizing a nasal spray product in the treatment of symptoms
of the common cold. The Company agreed to pay the patent holder a two percent
royalty on net sales of nasal spray products, less certain deductions,
throughout the term of this agreement, expiring no later than April 2014.
Amounts paid or payable under such agreement during the twelve month period
ended December 31, 2003 were $26,613, with zero in the 2002 comparable period.
An amount of $1,613 relating to this agreement was accrued or payable at
December 31, 2003.
Certain operating leases for office and warehouse space maintained by the
Company resulted in rent expense for the years ended December 31, 2005, 2004 and
2003, 2002of $227,701, $335,226, and 2001, of $255,078, $236,304 and $218,456, respectively. The future minimum
lease obligations under these operating leases are approximately $565,000.
The Company has approximate future obligations relating to research and
development and property leases, over the next five years, as follows:
Research and Property
Year Development Leases Total
-----------------------------------------------------------
2004 $1,500,000 $212,000 $1,712,000
2005 -- 198,000 198,000
2006 -- 98,000 98,000
2007 -- 57,000 57,000
2008 -- -- --
-----------------------------------------------------------
Total $1,500,000 $565,000 $2,065,000
-----------------------------------------------------------$240,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $18,257,354$20,682,262 and $16,661,949$17,852,910 at December 31,
20032005 and 2002,2004, respectively. Changes in working capital overall have been
primarily due to the following items: cash balances have decreasedincreased by $1,504,991,$2,518,729;
account receivable balances increased by $3,673,760 due to increased
revenues in 2003, particularly the fourth quarter, inventory decreased by
$773,858$1,504,161 due to increased sales activity and
effective collection practices; inventory increased by $445,382 due to sales
growth and product line extensions along with increased international sales
activity; accrued advertising increased by $941,403 due to variations in media
advertising scheduling between years and seasonal factors; accrued royalties and
sales commissions increased by $1,505,517 largely due to the managementeffects of inventory levels.certain
litigation in progress. Long-term debts decreased by $1,428,571 as a result of
the prepayment of $1,000,000 in April 2005 against this debt and recurring
monthly principal repayments. This item relates to the loan liability following
the acquisition of JoEl, Inc. effective October 1, 2004 while the assets
acquired are presented in property, plant and equipment. Total cash balances at
December 31, 20032005 were $11,392,089$16,885,170 compared to $12,897,080$14,366,441 at December 31, 2002.2004.
Management believes that its revised strategy to establish Cold-Eeze(R) as a recognized
brand name, its broader range of products, its diversified distribution methods
as it relates to the healthHealth and wellnessWellness 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-remedyCold Remedy and healthHealth and wellnessWellness
segments contribute current expenditure support in relation to the ethical pharmaceuticalEthical
Pharmaceutical segment. In addition to anticipated funding from operations, the
Company and its subsidiaries may in the short and long term raise capital
through the issuance of equity securities to finance anticipated growth.
Management is not aware of any trends, events or uncertainties that have or are
reasonably likely to have a material negative impact upon the Company's (a)
short-term or long-term liquidity, or (b) net sales revenues or income from continuing
operations. Any challenge to the Company's patent rights could have a material
adverse effect on future liquidity of the Company; however, the Company is not
aware of any condition that would make such an event probable.
-19-
Management believes that cash generated from operations, along with its current
cash balances, will be sufficient to finance working capital and capital
expenditure requirements for at least the next twelve months.
-28-
CONTRACTUAL OBLIGATIONS
The Company's future contractual obligations and commitments at December 31,
2005 consist of the following:
Payment Due by Period
---------------------
Less than 1-3 4-5 More than
Contractual Obligations Total 1 year years years 5 years
- -------------------------------- ------------- -------------- ------------- --------------- ------------
Long-Term Debt Obligations (1) $1,464,286 $428,571 $857,142 $178,573 -
Operating Lease Obligations 271,000 180,000 91,000 - -
Purchase Obligations 62,000 62,000 - - -
Research and Development 3,230,000 3,230,000 - - -
Advertising 1,000,000 1,000,000 - - -
------------- -------------- ------------- --------------- ------------
Total Contractual Obligations $6,027,286 $4,900,571 $948,142 $178,573 -
============= ============== ============= =============== ============
(1) See Note 7, "Long-Term Debt" to the Company's consolidated financial
statements for additional information on long-term debt obligations.
OFF-BALANCE SHEET ARRANGEMENTS
It is not the Company's usual business practice to enter into off-balance sheet
arrangements such as guarantees on loans and financial commitments and retained
interests in assets transferred to an unconsolidated entity for securitization
purposes. Consequently, the Company has no off-balance sheet arrangements that
have, or are reasonably likely to have, a material current or future effect on
its financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
IMPACT OF INFLATION
The Company is subject to normal inflationary trends and anticipates that any
increased costs shouldwould be passed on to its customers.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSUREDISCLOSURES 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 earninginterest-earning marketable securities. -20-At December 31,
2005, the Company had $1.5 million of variable rate debt. If the interest rate
on the debt were to increase or decrease by 1% for the year, annual interest
expense would increase or decrease by approximately $15,000.
-29-
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTSAND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements Page
----
Balance Sheets as of December 31, 20032005 and 20022004 F-1
Statements of Operations for the years ended December 31, 2003,
2002,2005, 2004, and 20012003 F-2
Statements of Stockholders' Equity for the years ended December 31, 2003, 2002,2005, 2004,
and 20012003 F-3
Statements of Cash Flows for the years ended December 31, 2003,
2002,2005, 2004, and 20012003 F-4
Notes to Financial Statements F-5 to F-21F-26
Responsibility for Financial Statements F-22F-27
Report of Independent Auditors F-23
-21-Registered Public Accounting Firm
Amper, Politziner & Mattia, P.C. F-28
Report of Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP F-29
-30-
THE QUIGLEY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, 200331,2005 December 31, 2002
(Restated-Note 15)
-----------------2004
------------------- ------------------
CURRENT ASSETS:
Cash and cash equivalents $ 11,392,089 $ 12,897,080$16,885,170 $14,366,441
Accounts receivable (net of doubtful accounts of $808,812$354,972 and $737,782) 7,861,883 4,188,123$311,764) 7,880,140 6,375,979
Inventory 3,752,903 4,526,7613,900,064 3,454,682
Prepaid expenses and other current assets 733,597 490,117
Assets of discontinued operations -- 374,007
------------ ------------1,582,851 764,359
------------------- ------------------
TOTAL CURRENT ASSETS 23,740,472 22,476,088
------------ ------------30,248,225 24,961,461
------------------- ------------------
PROPERTY, PLANT AND EQUIPMENT - NET 2,418,159 2,336,736
------------ ------------5,585,793 6,473,688
================== ==================
OTHER ASSETS:
Goodwill 30,763 30,763
Other assets 80,365 1,000
Assets of discontinued operations -- 90,369
------------ ------------110,858 63,844
------------------- ------------------
TOTAL OTHER ASSETS 111,128 122,132
------------ ------------141,621 94,607
------------------- ------------------
TOTAL ASSETS $ 26,269,759 $ 24,934,956
============ ============$35,975,639 $31,529,756
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $428,571 $428,571
Accounts payable $ 524,136 $ 394,675771,819 978,401
Accrued royalties and sales commissions 1,594,457 1,146,4953,301,598 1,796,081
Accrued advertising 1,354,536 1,559,575
Accrued consulting -- 975,0002,860,414 1,919,011
Other current liabilities 2,009,989 1,353,383
Liabilities of discontinued operations -- 385,011
------------ ------------2,203,561 1,986,487
-------------------- ------------------
TOTAL CURRENT LIABILITIES 5,483,118 5,814,139
------------ ------------9,565,963 7,108,551
-------------------- ------------------
LONG-TERM DEBT 1,035,715 2,464,286
MINORITY INTEREST 54,314 54,980
COMMITMENTS AND CONTINGENCIES (NOTE 12)9)
STOCKHOLDERS' EQUITY:
Common stock, $.0005 par value; authorized 50,000,000;
Issued: 16,149,07916,360,524 and 16,102,67016,285,796 shares 8,074 8,0518,180 8,143
Additional paid-in-capital 34,281,449 33,290,22235,404,803 35,203,816
Retained earnings 11,685,277 11,010,70315,094,823 11,878,139
Less: Treasury stock, 4,646,053 and 4,646,053 shares, at cost (25,188,159) (25,188,159)
------------ -------------------------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 20,786,641 19,120,817
------------ ------------25,319,647 21,901,939
-------------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,269,759 $ 24,934,956
============ ============$35,975,639 $31,529,756
==================== ==================
See accompanying notes to consolidated financial statements
F-1
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
December 31, 20032005 December 31, 20022004 December 31, 20012003
------------------ ----------------- ------------------ -----------------
NET SALES $ 41,499,163 $ 29,271,780 $ 21,225,622
LICENSING FEES -- 148,866 1,546,592
------------ ------------ ------------
TOTAL REVENUE 41,499,163 29,420,646 22,772,214
------------ ------------ ------------$53,658,043 $43,947,995 $41,499,163
------------------ ----------------- ----------------
COST OF SALES 25,824,085 23,573,126 21,487,763
17,208,836 10,220,849
------------ ------------ ------------------------------ ----------------- ----------------
GROSS PROFIT 27,833,958 20,374,869 20,011,400
12,211,810 12,551,365
------------ ------------ ------------------------------ ----------------- ----------------
OPERATING EXPENSES:
Sales and marketing 8,414,065 7,140,365 6,166,318
4,941,174 3,220,789
Administration 12,656,242 9,819,948 9,843,846 9,891,761 7,429,766
Research and development 3,784,221 3,232,569 3,365,698
2,663,291 1,331,639
------------ ------------ ------------------------------ ----------------- ----------------
TOTAL OPERATING EXPENSES 24,854,528 20,192,882 19,375,862
17,496,226 11,982,194
------------ ------------ ------------------------------ ----------------- ----------------
INCOME (LOSS) FROM OPERATIONS 2,979,430 181,987 635,538
(5,284,416) 569,171
INTEREST AND------------------ ----------------- ----------------
OTHER INCOME (EXPENSE)
Interest income 402,580 104,339 93,385
152,313 364,949
------------ ------------ ------------Interest expense
(100,326) (32,250) -
Gain on dividend-in-kind - 198,786 -
TOTAL OTHER INCOME, (LOSS)NET 302,254 270,875 93,385
------------------ ----------------- ----------------
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES 3,281,684 452,862 728,923
(5,132,103) 934,120
------------ ------------ ------------------------------ ----------------- ----------------
INCOME TAXES -- -- --
------------ ------------ ------------65,000 - -
------------------ ----------------- ----------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 3,216,684 452,862 728,923
(5,132,103) 934,120
------------ ------------ ------------------------------ ----------------- ----------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations - - (54,349)
(689,122) (718,156)
Loss on impairment related to investment in sun-care and
skincare Operations -- (633,233) --
------------ ------------ ------------------------------ ----------------- ----------------
NET INCOME (LOSS) $ 674,574 ($ 6,454,458) $ 215,964
============ ============ ============$3,216,684 $452,862 $674,574
================== ================= ================
BASIC EARNINGS PER COMMON SHARE:
Income (loss) from continuing operations $ 0.06 ($ 0.47) $ 0.09$0.28 $0.04 $0.06
Loss from discontinued operations
-- (0.12) (0.07)
------------ ------------ ------------- - -
------------------ ----------------- ----------------
Net Income (loss) $ 0.06 ($ 0.59) $ 0.02
============ ============ ============$0.28 $0.04 $0.06
================== ================= ================
DILUTED EARNINGS PER COMMON SHARE:
Income (loss) from continuing operations $ 0.05 ($ 0.47) $ 0.09$0.24 $0.03 $0.05
Loss from discontinued operations
-- (0.12) (0.07)
------------ ------------ ------------- - -
------------------ ----------------- ----------------
Net Income (loss) $ 0.05 ($ 0.59) $ 0.02
============ ============ ============$0.24 $0.03 $0.05
================== ================= ================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 11,660,561 11,541,012 11,467,087
10,893,944 10,675,153
============ ============ ============================== ================= ================
Diluted 13,299,162 14,449,334 14,910,246
10,893,944 10,750,687
============ ============ ============================== ================= ================
See accompanying notes to consolidated financial statements
F-2
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(RESTATED-NOTE 15)
Common Additional
Stock Issued Paid-in- Treasury Retained
Shares Amount Capital Stock Earnings Total
---------------------------------------------------------------------------------------------
BALANCE JANUARY 1, 2001 10,655,153 $7,636 $28,871,887 ($25,158,028) $17,249,197 $20,970,692
---------------------------------------------------------------------------------------------
Treasury stock (30,000) (30,131) (30,131)
Shares issued for net assets
acquired 50,000 25 43,725 43,750
Net income 215,964 215,964
---------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2001 10,675,153 7,661 28,915,612 (25,188,159) 17,465,161 21,200,275
---------------------------------------------------------------------------------------------
Tax benefits from options,
warrants & common stock 828,177 828,177
Tax benefit allowance (828,177) (828,177)
Warrants issued for service -
(Restated-Note 15) 1,125,000 1,125,000
Proceeds from options and warrants
exercised 781,464 390 3,249,610 3,250,000
Net loss (6,454,458) (6,454,458)
---------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2002 -
(Restated-Note 15) 11,456,617 8,051 33,290,222 (25,188,159) 11,010,703 19,120,817$8,051 $33,290,222 ($25,188,159) $11,010,703 $19,120,817
---------------------------------------------------------------------------------------------
Tax benefits from options,
warrants & common stock 133,014 133,014
Tax benefit allowance
(133,014) (133,014)
Warrants issued for service 975,000 975,000
Proceeds from options and warrants
exercised 46,409 23 16,227 16,250
Net income 674,574 674,574
---------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2003 11,503,026 $8,074 $34,281,4498,074 34,281,449 (25,188,159) 11,685,277 20,786,641
---------------------------------------------------------------------------------------------
Tax benefits from options,
warrants & common stock 67,675
67,675
Tax benefit allowance (67,675)
(67,675)
Shares issued for net asset
acquisition, net of registration
fees 113,097 58 895,392 895,450
Proceeds from options exercised 23,620 11 26,975 26,986
Dividend-in-kind (260,000) (260,000)
Net Income 452,862 452,862
---------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2004 11,639,743 8,143 35,203,816 (25,188,159) 11,878,139 21,901,939
---------------------------------------------------------------------------------------------
Tax benefits from options,
warrants & common stock
249,453 249,453
Tax benefit allowance (249,453) (249,453)
Proceeds from options exercised 74,728 37 200,987 201,024
Net Income 3,216,684 3,216,684
---------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2005 11,714,471 $8,180 $35,404,803 ($25,188,159) $11,685,277 $20,786,641
=============================================================================================$15,094,823 $25,319,647
---------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
F-3
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, 2005 December 31, 2004 December 31, 2003
2002 2001
------------ ------------ ------------------------------- ------------------- -------------------
OPERATING ACTIVITIES:
Net income (loss) $ 674,574 ($ 6,454,458) $ 215,964
------------ ------------ ------------$3,216,684 $452,862 $674,574
------------------- ------------------- -------------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY (USED IN) CONTINUING OPERATIONS:
Loss from discontinued operations 54,349 689,122 718,156
Loss on impairment related to discontinued operations -- 633,233 -- 54,349
Depreciation and amortization 1,404,107 622,348 473,593
409,068 458,741
Compensation satisfied with common stock warrantsGain on dividend-in-kind -- 2,100,000(198,786) --
Gain on the sales of fixed assets (3,907) -- --
Bad debts provision 98,751 25,289 71,030 18,472 183,014
(INCREASE) DECREASE IN ASSETS:
Accounts receivable (1,602,912) 1,460,615 (3,744,790)
(31,201) (448,426)
Inventory (445,382) 1,198,221 773,858 1,564,459 862,832
Prepaid expenses and other current assets (896,552) 47,298 (243,480)
958,040 (328,528)Other assets 3,748 (33,611) --
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable (206,582) 454,265 129,461 (424,130) 11,769
Accrued royalties and sales commissions 1,505,517 201,624 447,962 277,874 (541,126)
Accrued advertising 941,403 564,475 (205,041) 890,783 (1,069,081)
Other current liabilities 250,614 (134,573) 656,608
508,922 (412,175)
------------ ------------ ------------------------------- ------------------- -------------------
TOTAL ADJUSTMENTS 1,048,805 4,207,165 (1,586,450)
7,594,642 (564,824)
------------ ------------ ------------------------------- ------------------- -------------------
NET CASH PROVIDED BY (USED IN)
PROVIDED BY
OPERATING ACTIVITIES 4,265,489 4,660,027 (911,876)
1,140,184 (348,860)
------------ ------------ ------------------------------- ------------------- -------------------
INVESTING ACTIVITIES:
Capital expenditures (531,213) (310,139) (555,016) (580,861) (343,614)
Cost of net assets acquired, net of registration fees -- (4,295,380) --
Proceeds from the sale of fixed assets 12,000 -- --
(30,763)
------------ ------------ ------------------------------- ------------------- -------------------
NET CASH FLOWS USED IN INVESTING
ACTIVITIES (519,213) (4,605,519) (555,016)
(580,861) (374,377)
------------ ------------ ------------------------------- ------------------- -------------------
FINANCING ACTIVITIES:
Proceeds from exercises oflong-term borrowings -- 3,000,000 --
Principal payments on long-term debt (1,428,571) (107,142) --
Stock options and warrants exercised 201,024 26,986 16,250
3,250,000 --
Repurchase of common stock -- -- (30,131)
------------ ------------ ------------------------------- ------------------- -------------------
NET CASH FLOWS (USED IN) PROVIDED BY
(USED IN)
FINANCING ACTIVITIES (1,227,547) 2,919,844 16,250
3,250,000 (30,131)
------------ ------------ ------------
NET------------------- ------------------- -------------------
CASH USED IN OPERATING ACTIVITIES OF
DISCONTINUED OPERATIONS -- -- (54,349)
(596,548) (844,911)
------------ ------------ ------------------------------- ------------------- -------------------
NET INCREASE (DECREASE) INCREASE IN CASH 2,518,729 2,974,352 (1,504,991) 3,212,775 (1,598,279)
CASH & CASH EQUIVALENTS, BEGINNING OF
PERIOD 14,366,441 11,392,089 12,897,080
9,684,305 11,282,584
------------ ------------ ------------------------------- ------------------- -------------------
CASH & CASH EQUIVALENTS,
END OF PERIOD $ 11,392,089 $ 12,897,080 $ 9,684,305
============ ============ ============$16,885,170 $14,366,441 $11,392,089
=================== =================== ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
CASH PAID FOR:
Interest $100,326 $32,250 --
Taxes 65,000 -- --
NON-CASH INVESTING AND FINANCING:
Common stock issued for net assets acquired -- $977,158 --
See accompanying notes to consolidated financial statements
F-4
THE QUIGLEY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
The Quigley Corporation (the "Company"), organized underCompany, headquartered in Doylestown, Pennsylvania, is a leading
manufacturer, marketer and distributor of a diversified range of homeopathic and
health products which comprise the laws of the state
of Nevada,Cold Remedy, Health and Wellness and Contract
Manufacturing segments. The Company is engagedalso involved in the development, manufacturing, and marketing of health
and homeopathic products that are being offered to the general public, and the research and
development of potential prescription products. The Company is
organized into three business segments, which are, Cold-Remedy, Health and
Wellness, andproducts that comprise the Ethical
Pharmaceutical. For the fiscal periods presented, the
Company's revenues have come from the Company's Cold-Remedy business segment and
the Health and Wellness businessPharmaceutical segment.
The Company's principal cold-remedy product,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 formulation (ZIGG(TM)) is an over-the-counter consumer product used to
reduce the duration and severity of the common cold and is sold in lozenge,
sugar-free tablet and nasal spray forms and is proven in two double-blind
clinical studies to reduce the duration and severity of the common cold symptoms
by nearly half. Cold-Eeze(R) is now an established product in the health care
and cold remedy market. 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 distributors.distributor
representatives. Darius is a direct selling organization specializing in
proprietary health and wellness products, which
commenced shipping product to customers in the third quarter of 2000. The
continued success of this segment is dependent, among other things, on the
Company's ability to recruit and maintain active independent representatives; to
continue to make available new and innovative products and services; continue to
conform with domestic and international regulatory agencies; and to maintain and
improve adequate system capabilities. The foregoing risks could result in
significant reductions in revenues and profitability of the health and wellness
segment.products. The formation of Darius has provided
diversification to the Company in both the method of product distribution and
the broader range of products available to the marketplace, serving as a balance
to the seasonal revenue cycles of the Cold-Eeze(R) branded products.
In January 2001, the Company formed an Ethical Pharmaceutical Unit,segment, Quigley
Pharma a
wholly-owned subsidiary of the Company, the Ethical Pharmaceutical segment,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 establishmentCompany is in the
initial stages of what may be a dedicated pharmaceutical
subsidiary may enablelengthy 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 diversify into the prescription drug market
and to ensure safe and effective distribution of these important potential new
products currently under development. At this time, three patents have been
issued and assigned to the Company resulting from research activity of Pharma.satisfy consumer demand.
During 2000, the Company acquired a 60% ownership position in Caribbean Pacific
Natural Products, Inc. ("CPNP"), a leading developer and marketer of all-natural
sun-care and skincare products for luxury resorts, theme parks and spas. In
December 2002, the Board of Directors of the Company approved a plan to sell
CPNP.. On January 22, 2003, the Company completed the
sale of the Company's 60% equity interest in CPNP to Suncoast Naturals, Inc.
("Suncoast"). See discussion
in Notes to Financial Statements, Note 3 - Discontinued Operations.
The business of the Company is subject to federal and state laws and regulations
adopted for the health and safety of users of the Company's products.
Cold-Eeze(R) is a homeopathic remedy that is subject to regulations by various
federal, state and local agencies, including the FDA and the Homeopathic
Pharmacopoeia of the United States.
The Company competes with suppliers varying in range and size in the cold-remedy
products arena. Because Cold-Eeze(R) has been clinically proven, it offers a
significant advantage over other suppliers in the over-the-counter cold-remedy
market. The Company has several Broker, Distributor and Representative
Agreements, both nationally and internationally and the product is distributed
through numerous independent and chain drug and discount stores throughout the
United States.
The Company continues to use the resources of independent national and
international brokers complementing its own in-house personnel to represent the
Company's over-the-counter cold-remedy products, thereby saving capital and
other ongoing expenditures that would otherwise be incurred.
Pharma, a wholly owned subsidiary of the Company, the Ethical Pharmaceutical
segment, is currently undergoing research and development activity in compliance
with regulatory requirements. The Company is at the initial stages of what may
be a lengthy process to develop these patent applications into a line of
naturally-derived patented prescription drugs.
F-5
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. InEffective March 31, 2004, the opinionfinancial statements include
consolidated variable interest entities ("VIEs") of management, all adjustments necessary for a
fair presentation ofwhich the consolidated financial position, consolidated results
of operations and consolidated cash flows, forCompany is the
periods indicated, have been
made. Priorprimary beneficiary (see discussion in Note 4, "Variable Interest Entity").
Certain prior period amounts have been reclassified to conform with thisthe 2005
presentation.
During 2000, the Company acquired a 60% ownership position in Caribbean Pacific
Natural Products, Inc., ("CPNP"), a leading developer and marketer of
all-natural sun-care and skincare products for luxury resorts, theme parks and
spas. In December 2002, the Board of Directors of the Company approved a plan to
sell CPNP. On January 22, 2003, the Board of Directors of the Company completed
the sale of the Company's 60% equity interest in CPNP to Suncoast Naturals, Inc.
("Suncoast"). In exchange for its 60% equity interest in CPNP, the Company shall
receive: (i) 750,000 shares of Suncoast's common stock, which Suncoast has
agreed, at its cost and within 60 days from the closing, to register for public
resale through an appropriate registration statement (this registration
statement has not been declared effective by the Securities and Exchange
Commission) and (ii) 100,000 shares of Suncoast's Series A Redeemable Preferred
Stock, which bears interest at a rate of 4.25% per annum and which is redeemable
from time to time after March 31, 2003 in such amounts as is equal to 50% of the
free cash flow reported by Suncoast in the immediately preceding quarterly
financial statements divided by the redemption price of $10.00 per share.
The Company owns 19.5% of Suncoast's issued and outstanding capital stock, which
investment is accounted for on the cost basis method. Results of CPNP are
presented as discontinued operations in the Consolidated Statements of
Operations and the Consolidated Balance Sheets.
On January 2, 2001, the Company acquired certain assets and assumed certain
liabilities of a privately held company, located in Utah, involved in the direct
marketing and distribution of health and wellness products. This acquisition
required cash payments that approximated $110,000 and 50,000 shares of the
Company's stock issued to the former owners of the net assets acquired. The net
assets acquired included assets totaling $536,000 and liabilities assumed
approximating $416,000. Also required were payments totaling $540,000 for the
use of product formulations; consulting; confidentiality and a non-compete
agreement. To maintain the continuous application of these arrangements, fees of
5% on net sales collected must be paid to the former owners which are expensed
as incurred. The operating results have been included in the Company's
Consolidated Statements of Operations from the date of acquisition. Prior to
January 1, 2002, the excess of cost over net assets acquired had been subject to
amortization on a straight-line basis over a period of 15 years. Subsequent to
2001, the account will only be reduced if the value becomes impaired.F-5
USE OF ESTIMATES
The preparation ofCompany's consolidated financial statements are prepared in conformityaccordance with
generally accepted accounting principles requires management(GAAP) in the United Sates of America.
In connection with the preparation of the consolidated financial statements, it
is required to make assumptions and estimates about future events, and assumptionsapply
judgments that affect the reported amounts of assets, liabilities, revenue,
expenses and liabilitiesrelated disclosures. These assumptions, estimates and disclosure of
contingent liabilitiesjudgments are
based on historical experience, current trends and other factors that management
believes to be relevant at the dates oftime 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 the reported
amounts of revenuesin accordance with GAAP. However, because future events and expenses during the reporting periods. Actualtheir
effects cannot be determined with certainty, actual results could differ from
those estimates.these assumptions and estimates, and such differences could be material.
The Company is organized into four different but related business segments,
Cold-Remedy, Health and Wellness, Contract Manufacturing and Ethical
Pharmaceutical. When providing for the appropriate sales returns, allowances,
cash discounts and cooperative advertising costs, each segment applies a uniform
and consistent method for making certain assumptions for estimating these
provisions that are applicable to each specific segment. Traditionally, these
provisions are not material to reported revenues in the Health and Wellness and
Contract Manufacturing segments and the Ethical Pharmaceutical segment does not
have any revenues.
Provisions to these reserves within the Cold Remedy segment include the use of
such estimates, which are applied or matched to the current sales for the period
presented. These estimates are based on specific customer tracking and an
overall historical experience to obtain an applicable effective rate. Estimates
for sales returns are tracked at the specific customer level and are tested on
an annual historical basis, and reviewed quarterly, as is the estimate for
cooperative advertising costs. Cash discounts follow the terms of sales and are
taken by virtually all customers. Additionally, the monitoring of current
occurrences, developments by customer, market conditions and any other
occurrences that could affect the expected provisions for any future returns or
allowances, cash discounts and cooperative advertising costs relative to net
sales for the period presented are also performed.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an initial maturity of
three months or less at the time of purchase to be cash equivalents. Cash
equivalents include cash on hand and monies invested in money market funds. The
carrying amount approximates the fair market value due to the short-term
maturity of these investments.
INVENTORIES
Inventories are statedInventory 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
Company usesconsolidated financial statements include a reserve for excess or obsolete
inventory of $369,508 and $1,388,590 as of December 31, 2005 and 2004,
respectively. The majority of the first-in, first-out ("FIFO") method2004 provision was related to the
discontinuation of determining cost for all inventories.the Cold-Eeze(R) Cold Remedy Nasal Spray product in 2004.
Inventories included raw material, work in progress and packaging amounts of
approximately $729,000$1,340,000 and $337,000$1,087,000 at December 31, 20032005 and 2002, respectively.
F-6
December 31,
2004, respectively, with the remainder comprising finished goods.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment isare recorded at cost. The Company uses a
combination of straight-line and accelerated methods in computing depreciation
for financial reporting purposes. The annual provision for depreciation has been
computed in accordance with the following ranges of estimated asset lives:
building and improvements - twenty to thirty nine years; machinery and equipment
- - five to seven years; computer software - three years; and furniture and
fixtures - seven years.
GOODWILL AND INTANGIBLE ASSETS
Patent rights have been amortized on a straight-line basis over the period of
the related licensing agreements, which approximated 67 months and were fully
amortized as of March 2002. Amortization costs incurred for the twelve months
periods ended December 31, 2003, 2002 and 2001, were zero and $21,940 and
$87,761, respectively.
As of December 31, 2003 and December 31, 2002, intangible assets consist of
goodwill of $30,763. Goodwill is not amortized but reviewed annually for impairment when events and
circumstances indicate the carrying amount may not be recoverable or on an
annual basis.
In 2002, the Company realized an impairment loss of $296,047
relating to goodwill in CPNP, which was reflected in discontinued operations.F-6
CONCENTRATION OF RISKS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and trade
accounts receivable.
The Company maintains cash and cash equivalents with fourseveral major financial
institutions. Since the Company maintains amounts in excess of guarantees
provided by the Federal Depository Insurance Corporation, the Company performs
periodic evaluations of the relative credit standing of these financial
institutions and limits the amount of credit exposure with any one institution.
Trade accounts receivable potentially subjects the Company to credit risk. The
Company extends credit to its customers based upon an evaluation of the
customer's financial condition and credit history and generally does not require
collateral. The Company has historically incurred minimal credit losses. The
Company's broad range of customers includes many large
wholesalers, mass merchandisers and multi-outlet pharmacy chains, five of which
account for a significant percentage of sales volume, representing 23% for the years ended
December 31, 2003 and 2002, and 35%29% for the
year ended December 31, 2001.2005, 27% for the year ended December 31, 2004 and 23%
for the year ended December 31, 2003. Customers comprising the five largest
accounts receivable balances represented 34%47% and 44%48% of total trade receivable
balances at December 31, 20032005 and 2002,2004, respectively. During 2005, 2004 and
2003, approximately 92%, 93% and 97%, respectively, of the Company's revenues
originatedwere generated in the United States with the remainder being attributable to
international trade.
The Company currently uses separate suppliers to produce Cold-Eeze(R) in
lozenge, sugar-free tablet and nasal spray form.markets.
The Company's revenues are currently generated from the sale of the Cold-Remedy
products which approximated 55%, 52% and 49% of total revenues in the twelve
month periods ended December 31, 2005, 2004 and 2003, respectively. The Health
and Wellness segment approximated 38%, 46% and 51%, for the twelve month periods
ended December 31, 2005, 2004 and 2003, respectively. The Contract Manufacturing
segment approximated 7% and 2% for the twelve month periods ended December 31,
2005 and 2004, respectively.
Raw materials used in the production of the products are available from numerous
sources. Raw materials for the Cold-Eeze(R) lozenge product are currently
procured from a single vendor in order to secure purchasing economies. In a
situation where this one vendor is not able to supply QMI with the remaining
revenue coming from the health and wellness segment. The lozenge form is
manufactured by a contract manufacturer, a significant amount of whose revenues
are from the Company. Theingredients,
other forms are manufactured by third parties that
produce a variety of other products for other customers.sources have been identified. Should these relationshipsproduct 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.
Raw material used in the production of the product is available from numerous
sources. Currently, it is being procured from a single vendor in order to secure
purchasing economies. In a situation where this one vendor is not able to supply
the contract manufacturer with the ingredients, other sources have been
identified.
Darius' productproducts for resale iscan be sourced from several suppliers. In the event
that such sources were no longer in a position to supply Darius with product,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 acompared to the related asset value, an impairment loss is recognized in
the Statement F-7
of Operations. In 2002, in addition to its goodwill impairment loss in CPNP, the
Company realized an additional impairment loss of $337,186 from its investment
in CPNP, which was reflected in discontinued operations. The total impairment
loss of $633,233 was reflected in discontinued operations.
REVENUE RECOGNITION
Sales are recognized at the time ownership is transferred to the customer, which
for the cold-remedyCold Remedy segment is the time the shipment is received by the customer
and for both the healthHealth and wellnessWellness segment and the Contract Manufacturing
segment, when the product is shipped to the customer. SalesRevenue is reduced for
trade promotions, estimated sales returns, cash discounts and other allowances are provided for
in the same period thatas the related sales are recorded. ProvisionsThe Company makes
estimates of potential future product returns and other allowances related to
current period revenue. The Company analyzes historical returns, current trends,
and changes in customer and consumer demand when evaluating the adequacy of the
sales returns and other allowances. The consolidated financial statements
include reserves of $634,580 for these reserves are based on
historical experience. Total revenuesfuture sales returns and $533,250 for the twelve months periods endedother
allowances as of December 31, 2005 and $1,109,171 and $404,221 at December 31,
2004, respectively. The 2005 and 2004 reserve balances include a remaining
returns provision at December 31, 2005 and December 31, 2004 of approximately
$184,000 and $626,000, respectively, in the event of future product returns
following the discontinuation of the Cold-Eeze(R) Cold Remedy Nasal Spray
product in September 2004. The reserves also include an estimate of the
uncollectability of accounts receivable resulting in a reserve of $354,972 at
December 31, 2005 and $311,764 at December 31, 2004.
F-7
COST OF SALES
For the Cold Remedy Segment, in accordance with contract terms, payments
calculated based upon net sales collected to the patent holder of the Cold-Eeze
formulation and payments to the corporation founders and developers of the final
saleable Cold-Eeze(R) product amounting to $1,745,748, $2,052,746 and
$1,805,294, respectively, at December 31, 2005, 2004 and 2003 2002are presented in
the financial statements as cost of sales.
In the Health and 2001 include amountsWellness Segment, agreements with Independent Distributor
Representatives ("IR's") require payments to them to be calculated based upon
net commissionable sales of zero, $148,866other IR's in their down-line and $1,546,592, respectively,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 resultreduction of the settlementselling price as these
payments are not offered as an allowance or as a percentage rebate of direct
purchases made, and the infringement
suit,IR's are not offered any cooperative advertising
incentives of any type. Such payments, among other factors, are related to
licensing fees, against Gel Tech, LLC,expand the developercycle of Zicam(TM),additional IR's and Gum Tech International, Inc.,for maintaining the distribution channel
for this segment's products.
Accordingly, such distribution payments amounting to $9,207,613, $9,053,612 and
$9,439,100, respectively, at December 31, 2005, 2004 and 2003 are presented in
the financial statements as cost of sales.
OPERATING EXPENSES
Agreements relating to the Cold Remedy segment with a major national sales
brokerage firm are for this firm to sell the manufactured Cold-Eeze product to
our customers. Such related costs are presented in the financial statements as
selling expenses.
In the Health and Wellness Segment, the Company includes payments in accordance
with agreements with the former owner of its distributor.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 cold-remedy products,the Cold Remedy and Contract Manufacturing segments, such costs
are included as part of the invoiced price. In all cases costs related to this
revenue are recorded in cost of sales.
STOCK COMPENSATION
Stock options and warrants for purchase of the Company's common stock have been
granted to both employees and non-employees since the date of the Company's
public inception.Company became
publicly traded. Options and warrants are exercisable during a period determined
by the Company, but in no event later than ten years from the date granted.
Expense relating to options granted to non-employees has been appropriately
recorded in the periods presented based on fair values as determined by the
Black-Scholes pricing model dependent upon the circumstances relating to the
specific grants.
The Company used the Black-Scholes pricing model to determine the fair value of
stock options granted during the periods presented using the following
assumptions: expected life of the option of 5 years and expected forfeiture rate
of 0%; expected stock price volatility of 58.3% for the year ended December 31,
2005, expected stock price volatility of 49.8% for the year ended December 31,
2004, ranging between 67.9% and 120% for the year ended December 31, 2003;
expected dividend yield of 0% and risk-free interest rate of 4.46% for the year
ended December 31, 2005; expected dividend yield of 0% and risk-free interest
rate of 3.3% for the year ended December 31, 2004, expected dividend yield of 0%
and risk-free interest rate of between 3.37% and 4.5% for the year ended
December 31, 2003. The impact of applying SFAS No. 123 in this pro forma
disclosure is not indicative of the impact on future years' reported net income
as SFAS No. 123 does not apply to stock options granted prior to the beginning
of fiscal year 1996 and additional stock options awards may be granted in future
years. All options were immediately vested upon grant.
F-8
The Company applies Accounting Principles Board Opinion No. 25 ("APB 25") in
accounting for its grants of options to employees. Under the intrinsic value
method prescribed by APB 25, no compensation expense relating to grants to
employees has been recorded by the Company in periods reported. If compensation
expense for awards made during the years ended December 31, 2003, 20022005, 2004 and 20012003
had been determined under the fair value method of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
the Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2005 2004 2003
2002 2001
------------ ------------------ ----------------------------- ---------------- --------------
Net income
(loss)
As reported $3,216,684 $452,862 $674,574
($6,454,458) $215,964
CompensationAdd: Stock-based compensation expense included in
reported net income as determined under the intrinsic
value method - - -
Deduct: Adjustment to stock-based employee
compensation expense as determined under the fair
value based method (3,884,400) (2,230,000) (2,026,720)
(2,072,220) (244,000)--------------------------------------------------------
Pro forma net loss ($667,716) ($1,777,138) ($1,352,146)
($8,526,678) ($28,036)--------------------------------------------------------
Basic earnings (loss) per share
As reported $0.28 $0.04 $0.06 ($0.59) $0.02
Pro forma ($0.06) ($0.15) ($0.12) ($0.78) --
Diluted earnings (loss) per share
As reported $0.24 $0.03 $0.05 ($0.59) $0.02
Pro forma ($0.05) ($0.15) ($0.12) ($0.78) --
Expense relating to warrants granted to non-employees has been appropriately
recorded in the periods presented based on either fair values agreed upon with
the grantees or fair values as determined by the
Black Scholes pricing model dependent upon the circumstances relating to the
specific grants.
A total of 424,000, 477,000520,000, 500,000, and 400,000424,000 stock options were granted to employees
and non-employees in 2005, 2004 and 2003, 2002 and 2001, respectively.
ROYALTIES
The Company includes royalties and founders commissions incurred as cost of
sales based on agreement terms.
F-8
ADVERTISING
Advertising costs are expensed within the period in which they are utilized.
Advertising expense is comprised of media advertising, presented as part of
sales and marketing expense; co-operative advertising, which is accounted for as
part of net sales; and free product, which is accounted for as part of cost of
sales. Advertising costs incurred for the years ended December 31, 2005, 2004
and 2003 2002were $8,688,233, $6,584,600, and 2001 were $5,483,465, $4,794,955 and $3,402,006, respectively. Included in
prepaid expenses and other current assets was $68,000$96,050 and $236,875$41,375 at December
31, 20032005 and 20022004 relating to prepaid advertising and promotion expenses.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the period incurred.
Expenditures for the years ended December 31, 2005, 2004 and 2003 2002were
$3,784,221, $3,232,569 and 2001 were
$3,365,698, $2,663,291 and $1,331,639, respectively. Principally, the increase
in research and
development costs in 2003 was due to expenses incurred as part
of the product research costsare related to PharmaPharma's study activities and study costs associated
with Cold-Eeze(R). Pharma is currently involved in research activity following patent
applications that the Company has acquired and research and development costs,
relating to potential products, are expected to increase significantly over time
as product research and testing continues.
INCOME TAXES
The Company utilizes anthe 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 Notes to
Financial Statements, Note 813 -
Income Taxes for further discussion.
NOTE 3 - DISCONTINUED OPERATIONS
Effective July 1, 2000, the Company acquired a 60% ownership position of CPNPF-9
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and was accounted for by the purchase method of accounting and accordingly, the
operating results were included in the Company's consolidated financial
Statements from the date of acquisition. This majority ownership position
required a cash investment that approximated $812,000 and the provision for a $1
million line of credit, collateralized by inventory,equivalents, accounts receivable and all
other assets of CPNP. The net assets of CPNPaccounts payable are
reflected in the consolidated financial statements at the acquisition date principally
consisted of a product license and distribution rights with no recordedcarrying value inventory and fixed assets of $312,915 and $510,000 of working capital with a
contribution to minority interest of $329,166.
In December 2002, the Board of Directorswhich
approximates fair value because of the Company approved a planshort-term maturity of these instruments.
The fair value of long-term debt was approximately equivalent to sell
CPNP. On January 22, 2003,its carrying
value due to the Board of Directors offact that the interest rates currently available to the Company
completedfor debt with similar terms are approximately equal to the sale of the Company's 60% equity interest in CPNP to Suncoast. In exchangerates for
its 60% equity interest in CPNP, the Company received: (i) 750,000 shares of
Suncoast's common stock, which Suncoast has agreed, at its cost and within 60
days from the closing, to register for public resale through an appropriate
registration statement (this registration statement has not been declared
effective by the Securities and Exchange Commission) and (ii) 100,000 shares of
Suncoast's Series A Redeemable Preferred Stock, which bears interest at a rate
of 4.25% per annum and which is redeemable from time to time after March 31,
2003 in such amounts as is equal to 50% of the free cash flow reported by
Suncoast in the immediately preceding quarterly financial statements divided by
the redemption price of $10.00 per share. The Company owns 19.5% of Suncoast's
issued and outstanding capital stock valued at $79,365, which investment is
accounted for on the cost basis method, representing the Company's shareexisting debt. Determination of the fair value of Suncoast atrelated party payables is
not practicable due to their related party nature.
RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the timeFASB issued SFAS NO. 151, "INVENTORY COSTS" ("SFAS 151").
SFAS 151 amends the transaction was recorded,guidance in Chapter 4 of Accounting Research Bulletin No.
43, "Inventory Pricing" to clarify the accounting for amounts of idle facility
expense, freight, handling costs and wasted material. SFAS 151 requires that
these types of items be recognized as current period charges as they occur. The
provisions of SFAS 151 are effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. The adoption of this amountstandard is included in Other Assets innot
expected to have an impact on the Consolidated Balance Sheets. During August 2003,
a registration statement was filed but an effective date has not been
determined.Company's consolidated financial position,
results of operations or cash flows.
In December 2004, the FASB issued Statement 123 (revised 2004),"SHARE-BASED
PAYMENT." The disposalstandard eliminates the disclosure-only election under the prior
SFAS 123 and requires the recognition of CPNP was completed in order to allowcompensation expense for stock options
and other forms of equity compensation based on the Company to
focus resources on other activities and clinical research and development.
Salesfair value of CPNP for all periods commencingthe
instruments on the date of grant. The standard is effective for fiscal years
beginning after June 15, 2005. In March 2005, the Securities & Exchange
Commission (the "SEC") issued Staff Accounting Bulletin No. 107, "Share-Based
Payment" ("SAB 107"). SAB 107 summarizes the views of the SEC staff regarding
the interaction between SFAS No. 123 (Revised 2004), "Share-Based Payment"
("SFAS 123R") and certain SEC rules and regulations, and is intended to assist
in the initial implementation of SFAS 123R, which for the Company is required by
the beginning of its fiscal year 2006. The Company has no unvested options as of
December 31, 2005 and therefore the adoption of this standard will not have an
impact on the Company's consolidated balance sheets and statements of
operations, shareholders' equity and cash flows.
In December 2004, the FASB issued Statement 153,"EXCHANGES OF NONMONETARY
ASSETS, AN AMENDMENT OF APB OPINION NO.29." The standard is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged and eliminates the exception under APB
Opinion No. 29 for an exchange of similar productive assets and replaces it with
an exception for exchanges of nonmonetary assets that do not have commercial
substance. The standard is effective for nonmonetary exchanges occurring in
fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 did
not have a material impact on the Company's financial position or results of
operations.
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
154, "ACCOUNTING CHANGES AND ERROR CORRECTIONS, A REPLACEMENT OF APB OPINION NO.
20 AND FASB STATEMENT NO. 3." The standard requires retrospective application to
prior periods' financial statements of a voluntary change in accounting
principle unless it is deemed impracticable. The standard states that a change
in method of depreciation, amortization or depletion for long-lived,
non-financial assets be accounted for as a change in accounting estimate that is
affected by a change in accounting principle. The standard is effective for
accounting changes and corrections of errors made occurring in fiscal years
beginning after December 15, 2005. The impact on the Company's financial
position or results of operations as a result of the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 154 cannot be determined.
NOTE 3 - ACQUISITIONS
On October 1, 2004, the Company acquired certain assets of JoEL, Inc, including
inventory, land, buildings, machinery and equipment of two manufacturing
facilities located in Lebanon and Elizabethtown, Pennsylvania, and assumed
certain liabilities. The acquisition on Julycost 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, 2000 up to2004, 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 disposal on January 22, 2003, were $5,075,472, cumulative net
losses during that period were $2,232,620. The loss includes an amount of
$633,233 relatingOctober 1, 2004, resulting in a value to the asset impairment, reportedshares issued of $977,158
less registration costs of $81,709.
F-10
The fair value of assets acquired and liabilities assumed at October 1, 2004
follow:
Allocated Unallocated
Excess Fair Excess Fair
Value Value
----------------- ----------------
Inventory $900,000 $900,000
Land 386,588 528,000
Buildings and improvements 982,578 1,342,000
Machinery and equipment 2,933,089 4,006,000
Furniture and fittings 58,574 80,000
----------------- ----------------
5,260,829 6,856,000
Liabilities assumed (70,000) (70,000)
----------------- ----------------
Excess of net fair value over
purchase price - (1,595,171)
----------------- ----------------
$5,190,829 $5,190,829
================= ================
The sum of the assets acquired and liabilities assumed exceeded the cost of the
acquired assets (excess fair value over cost). This excess is allocated as a pro
rata reduction of the amounts that otherwise would have been assigned to all of
the long-lived acquired assets.
The acquisition was executed in 2002. Revenuesorder to ensure that the integrity and
formulation of CPNPthe Cold-Eeze(R) products remained under the control of the
Company and the assurance of a continued supply of Cold-Eeze(R) to the
marketplace. This is an FDA approved facility with available capacity for future
product development and manufacture.
PRO FORMA RESULTS. The following unaudited pro forma information presents the
twelve monthsresults of operations of the Company as if the JoEl acquisition had occurred at
the beginning of the periods endedshown. 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, 2003, 2002 and 2001 were
$59,824 and $2,040,312 and $2,176,470, respectively, net losses for the same
periods $54,349, $1,322,355 and $718,155, respectively. Results of CPNP are
presented as discontinued operations in the Consolidated Statements of
Operations and in the Consolidated Balance Sheets.
The major classes of balance sheet items of discontinued operations at December 31,
2002 were inventory, accounts receivable, property, plant and machinery and
accounts payable.
F-92004 2003
-------------------------------
(Unaudited) (Unaudited)
AS REPORTED
Total Revenue $43,947,995 $41,499,163
Income from continuing operations 452,862 728,923
Income from continuing operations - basic
earnings per common share $0.04 $0.06
PRO FORMA
Total Revenue $45,784,627 $44,987,013
(Loss)/income from continuing operations (88,368) 934,452
(Loss)/income from continuing operations -
basic (loss)/earnings per common share ($0.01) $0.08
F-11
NOTE 4 - 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 withVARIABLE INTEREST ENTITY
In December 2003, the Financial Accounting StandardStandards Board Statement(FASB or the "Board")
issued FASB Interpretation No. 131,
"Disclosure About Segments46 (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 an Enterprise and Related Information," which
establishes standardseither 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 reporting information about a company's operating
segments. All consolidating items are included in Other.VIE's
formed prior to February 1, 2003. The Company has divided its operations into three reportable segmentsdetermined that Scandasystems,
a related party, qualifies as follows: The Quigley Corporation (Cold- Remedy), whose main producta 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 Cold-Eeze(R),insignificant. As a proprietary zinc gluconate glycine lozenge forresult of
consolidating the common cold;
Darius (Health and Wellness), whose businessVIE of which the Company is the saleprimary beneficiary, the
Company recognized a minority interest of approximately $54,314 and direct marketing$54,980 on
the Consolidated Balance Sheet in 2005 and 2004 which represents the difference
between the assets and the liabilities recorded upon the consolidation of the
VIE.
The liabilities recognized as a rangeresult of healthconsolidating the VIE do not represent
additional claims on the Company's general assets. Rather, they represent claims
against the specific assets of the consolidated VIE. Conversely, assets
recognized as a result of consolidating this VIE do not represent additional
assets that could be used to satisfy claims against the Company's general
assets. Reflected on the Company's Consolidated Balance Sheet are $61,844 and
wellness products$96,051 in 2005 and Pharma, (Ethical Pharmaceutical),
currently involved2004 of VIE assets, representing all of the assets of the
VIE. The VIE assists the Company in acquiring licenses and research and
development activity to develop patent
applications for potential pharmaceutical products.
As discussedactivities in Notes to Financial Statements, Note 3 - Discontinued Operations,
the Company disposed of its Sun-care and Skincare segment.
Financial information relating to 2003, 2002 and 2001 continuing operations by
business segment follows:
- ----------------------------------------------------------------------------------------------------------------------
As of and for the twelve
months ended December 31, Cold Health and Ethical
2003 Remedy Wellness Pharmaceutical Other Total
- ----------------------------------------------------------------------------------------------------------------------
Revenues
Customers $20,474,969 $21,024,194 -- -- $41,499,163
Inter-segment -- -- -- -- --
Segment operating profit (loss) 1,699,378 1,791,454 ($2,855,294) -- 635,538
Depreciation 318,419 155,174 -- -- 473,593
Capital expenditures 414,129 140,887 -- -- 555,016
Total assets $24,892,338 $ 3,881,970 -- ($2,504,549) $26,269,759
- ----------------------------------------------------------------------------------------------------------------------
As of and for the twelve
months ended December 31, Cold Health and Ethical
2002 Remedy Wellness Pharmaceutical Other Total
- ----------------------------------------------------------------------------------------------------------------------
Revenues
Customers $14,199,833 $15,220,813 -- -- $29,420,646
Inter-segment -- -- -- -- --
Segment operating profit (loss) (4,839,359) 1,103,610 ($1,604,753) $ 56,086 (5,284,416)
Depreciation 262,724 124,404 -- -- 387,128
Capital expenditures 290,983 289,878 -- -- 580,861
Total assets $26,223,476 1,401,867 -- ($2,690,387) $24,934,956
- ----------------------------------------------------------------------------------------------------------------------
As of and for the twelve
months ended December 31, Cold Health and Ethical
2001 Remedy Wellness Pharmaceutical Other Total
- ----------------------------------------------------------------------------------------------------------------------
Revenues
Customers $16,983,635 $ 5,788,579 -- -- $22,772,214
Inter-segment 116,385 (176,412) -- $ 60,027 --
Segment operating profit (loss) 1,638,264 (729,374) ($467,436) 127,717 569,171
Depreciation 269,392 74,269 -- -- 343,661
Capital expenditures 176,282 167,332 -- -- 343.614
Total assets $26,726,729 $ 826,946 -- ($2,797,880) $24,755,795
F-10
certain countries.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Consisted of the following as of: December 31, 20032005 December 31, 20022004
----------------- -----------------
Land $ 152,203 $ 152,203$538,791 $538,791
Buildings and improvements 1,513,958 1,503,6412,496,536 2,496,536
Machinery and equipment 1,432,818 1,061,8524,935,636 4,542,645
Computer software 570,001 462,032520,787 459,557
Furniture and fixtures 195,000 180,287
---------- ----------
3,863,980 3,360,015260,277 253,574
----------------- -------------------
8,752,027 8,291,103
Less: Accumulated depreciation 1,445,821 1,023,279
---------- ----------3,166,234 1,817,415
----------------- -------------------
Property, Plant and Equipment, net $2,418,159 $2,336,736
========== ==========$5,585,793 $6,473,688
================= ===================
Depreciation expense for the years ended December 31, 2005, 2004 and 2003 2002was
$1,404,107, $622,348, and 2001 was
$473,593, $387,128,respectively. During the year ended December
31, 2005, the Company retired equipment with an original cost of approximately
$63,382 and $343,661, respectively.accumulated depreciation of approximately $55,288.
NOTE 6 - OTHER CURRENT LIABILITIES
Included in other current liabilities are $458,359 and $177,366 related to
accrued compensation at December 31, 2003 and 2002, respectively.
NOTE 7 - PATENT RIGHTS AND RELATED ROYALTY COMMITMENTS
During 1996, the Company entered into a licensing agreement resulting in the
utilization of the zinc gluconate patent. In return for the acquisition of this
license, the Company issued a total of 240,000 shares of common stock to the
patent holder and attorneys during 1996 and 1997. The related intangible asset,
approximating $490,000, was valued at the fair value of these shares at the date
of the grant. This asset value was amortized over the remaining life of the
patent that expired in March 2002. The Company was required to pay a 3% royalty
on sales collected, less certain deductions, to the patent holder throughout the
term of this agreement, which also expired in 2002.
The Company also maintainshas 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, expiringwhich is due to expire in
2007. Additionally, aHowever, the Company and the developer are in litigation (see Note 9) and
as such no potential offset from such litigation for these fees have been
recorded. A founder's commission totaling 5%, on sales collected, less certain
deductions, ishas been paid to two of the officers, who are also directors and
stockholders of the Company, and whose agreements expireexpired in 2005.
In August 2003, the Company entered into a licensing agreement with a patent
holder relating to utilizing a nasal spray product in the treatment of symptoms
of the common cold. The Company agreed to pay the patent holder a two percent
royalty on net sales of nasal spray products, less certain deductions,
throughout the term of this agreement, expiring no later than April 2014.2005, (see Note
15).
The expenses for the respective periods relating to such agreements amounted to
$1,805,294, $1,421,475,$1,745,748, $2,052,746 and $1,399,847,$1,805,294, for the years ended December 31, 2003,
2002,2005,
2004 and 2001,2003, respectively. Amounts accrued for these expenses at December 31,
20032005 and 20022004 were $915,109$2,077,411 and $603,387,$1,129,654, respectively.
Amounts included in accrued royalties and sales commissions in the balance
sheets at December 31, 20032005 and 2002,2004, apportioned between related party and
other balances, are as follows:
2003 2002
------------------------2005 2004
--------------------------------
Related party balances $ 456,748 $ 301,695(see Note 15) - $459,583
Other non-related party balances 1,137,709 844,800
------------------------$3,301,598 1,336,498
--------------------------------
Total accrued royalties and sales commissions $1,594,457 $1,146,495
------------------------
F-11
NOTE 8 - INCOME TAXES
The provision (benefit) for income taxes, consists of the following:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2003 2002 2001
(Restated-Note 15)
------------ ------------------ ------------
Current:
Federal -- -- --
State -- -- --
----------- ----------- -----------
-- -- --
----------- ----------- -----------
Deferred:
Federal ($ 660,321) ($ 700,798) $ 340,861
State (71,457) 133,544 (24,977)
----------- ----------- -----------
(731,778) ( 567,254) 315,884
----------- ----------- -----------
Valuation allowance 731,778 567,254 (315,884)
----------- ----------- -----------
Total -- -- --
=========== =========== ===========
A reconciliation of the statutory federal income tax expense (benefit) to the
effective tax is as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2003 2002 2001
(Restated-Note 15)
------------ ------------------ ------------
Statutory rate $ 247,834 ($1,744,916) $ 317,600
State taxes net of federal benefit (47,162) 88,139 (17,134)
Permanent differences and other (932,450) 1,089,523 15,418
----------- ----------- -----------
(731,778) (567,254) 315,884
----------- ----------- -----------
Less valuation allowance 731,778 567,254 (315,884)
----------- ----------- -----------
Total -- -- --
=========== =========== ===========
The tax effects of the primary "temporary differences" between values recorded
for assets and liabilities for financial reporting purposes and values utilized
for measurement in accordance with tax laws giving rise to the Company's
deferred tax assets are as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2003 2002 2001
(Restated-Note 15)
------------ ------------------ ------------
Net operating loss carry-forward $ 5,313,829 $ 4,459,068 $ 3,082,051
Consulting costs -- 380,250 305,019
Bad debt expense 331,849 187,992 263,654
Other 381,802 152,788 133,943
Valuation allowance (6,027,480) (5,180,098) (3,784,667)
----------- ----------- -----------
Total -- -- --
=========== =========== ===========
Certain exercises of options and warrants, and restricted stock issued for
services that became unrestricted resulted in reductions to taxes currently
payable and a corresponding increase to additional-paid-in-capital for prior
years. Certain tax benefits for option and warrant exercises totaling $1,871,986
are deferred and will be credited to additional-paid-in-capital when existing
net operating losses are used. The cumulative tax deduction attributable to
options, warrants and restricted stock is $47,520,526, which resulted in the net
operating loss carry-forwards that approximate $13.6 million for federal
purposes, of which $3.5 million will expire in 2019, $4.0 million in 2020, $6.1
million in 2022 and $13.8 million for state purposes, of which $9.7 million will
expire in 2009, $3.0 million in 2010, and $1.1 million in 2012. Until sufficient
taxable income to offset the temporary timing differences attributable to
operations and the tax deductions attributable to option, warrant and stock
activities are assured, a valuation allowance equaling the total deferred tax
asset is being provided.$3,301,598 $1,796,081
--------------------------------
F-12
NOTE 97 - 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, 2003 December 31, 2002 December 31, 2001
---------------------------------------------------------------------------------
Income Shares EPS Loss Shares EPS Income Shares EPS
---------------------------------------------------------------------------------
Basic EPS $0.7 11.5 $0.06 ($5.1) 10.9 ($0.47) $0.9 10.7 $0.09
Dilutives:
Options and
Warrants -- 3.4 -- -- -- 0.1
---------------------------------------------------------------------------------
Diluted EPS $0.7 14.9 $0.05 ($5.1) 10.9 ($0.47) $0.9 10.8 $0.09
=================================================================================
Options and warrants outstanding at December 31, 2003, 2002 and 2001 were
4,601,000, 4,262,500 and 4,014,000, respectively, but were not included in the
2002 computation of diluted earnings per share because the effect was
anti-dilutive.
NOTE 10 - STOCK COMPENSATION
Stock options for purchase ofLONG-TERM DEBT
In connection with the Company's common stock have been granted to
both employees and non-employees. Options are exercisable during a period
determined byacquisition of certain assets of JoEl, Inc. in
October 2004, the Company but in no event later than ten years from the date
granted.
On December 2, 1997, the Company's Board of Directors approved a new Stock
Option Plan ("Plan") which was amended in 2001 and provides for the granting of
up to three million shares to employees. Under this Plan, the Company may grant
options to employees, officers or directors of the Company at variable
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 424,000, 477,000 and 400,000 options were granted under
this Plan during the years ended December 31, 2003, 2002 and 2001, respectively.
The Company applies Accounting Principles Board Opinion No. 25 ("APB 25") in
accounting for its grants of options to employees. Under the intrinsic value
method prescribed by APB 25, no compensation expense relating to grants to
employees has been recorded by the Company in periods reported. If compensation
expense for awards made during the years ended December 31, 2003, 2002 and 2001
had been determined under the fair value method of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
the Company's net income and earnings per share would have been reduced to the
pro forma amounts as displayed in Notes to Financial Statements, Note 2 -
Summary of Significant Accounting Policies.
Expense relating to options granted to non-employees has been appropriately
recorded in the periods presented based on either fair values agreed upon with
the grantees or fair values as determined by the Black-Scholes pricing model
dependent upon the circumstances relating to the specific grants.
The Company used the Black-Scholes pricing model to determine the fair value of
stock options granted during the periods presented using the following
assumptions: expected life of the option of 5 years and expected forfeiture rate
of 0%; expected stock price volatility ranging between 67.9% and 120% for the
year ended December 31, 2003, ranging between 108.0% and 119.2% for the year
ended December 31, 2002 and 58.9% for the year ended December 31, 2001; expected
dividend yield of 0% and risk-free interest rate of between 3.37% and 4.5% for
the year ended December 31, 2003, expected dividend yield of 0% and risk-free
interest rate ranging between 4.06% and 4.51% for the year ended December 31,
2002, expected dividend yield of 1.5% and risk-free interest rate of 4.36% for
the year ended December 31, 2001, based on the expected life of the option. The
impact of applying SFAS No. 123 in this pro forma disclosure is not indicative
of the impact on future years' reported net income as SFAS No. 123 does not
apply to stock options
F-13
granted prior to the beginning of fiscal year 1996 and additional stock options
awards are anticipated in future years. All options were immediately vested upon
grant.
A summary of the status of the Company's stock options and warrants granted to
both employees and non-employees as of December 31, 2003, 2002, and 2001 and
changes during the years then ended is presented below:
YEAR ENDED DECEMBER 31, 2003:
Employees Non-Employees Total
------------------------ --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(,000) Price (,000) Price (,000) Price
----------------------------------------------------------------------------------
Options/warrants outstanding
at beginning of period 3,363 $4.45 900 $8.86 4,263 $5.38
Additions/deductions:
Granted 394 8.11 280 9.35 674 8.63
Exercised 16 0.83 35 1.00 51 0.95
Cancelled 255 5.35 30 3.25 285 5.13
----------------------------------------------------------------------------------
Options/warrants outstanding
at end of period 3,486 $4.82 1,115 $9.38 4,601 $5.92
----------------------------------------------------------------------------------
Options/warrants exercisable
at end of period 3,486 1,115 4,601
==================================================================================
Weighted average fair value of
Grants $4.78 $1.63 $3.47
Price range of options/warrants
Exercised $0.81 - $1.26 $0.81 - $1.26 $0.81 - $1.26
Price range of options/warrants
outstanding $0.81 - $10.00 $0.81 - $11.50 $0.81 - $11.50
Price range of options/warrants
exercisable $0.81 - $10.00 $0.81 - $11.50 $0.81 - $11.50
YEAR ENDED DECEMBER 31, 2002:
Employees Non-Employees Total
------------------------ --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(,000) Price (,000) Price (,000) Price
----------------------------------------------------------------------------------
Options/warrants outstanding
at beginning of period 3,009 $4.32 1,005 $6.73 4,014 $4.92
Additions/deductions:
Granted 432 5.26 1,045 8.12 1,477 7.28
Exercised 58 1.68 800 4.72 858 4.51
Cancelled 20 9.84 350 10.00 370 10.00
----------------------------------------------------------------------------------
Options/warrants outstanding
at end of period 3,363 $4.45 900 $8.86 4,263 $5.38
----------------------------------------------------------------------------------
Options/warrants exercisable
at end of period 3,363 900 4,263
==================================================================================
Weighted average fair value of
grants $4.34 $0.84 $1.87
Price range of options/warrants
Exercised $0.81 - $5.13 $1.75 - $6.50 $0.81 - $6.50
Price range of options/warrants
Outstanding $0.81 - $10.00 $0.81 - $11.50 $0.81 - $11.50
Price range of options/warrants
exercisable $0.81 - $10.00 $0.81 - $11.50 $0.81 - $11.50
F-14
YEAR ENDED DECEMBER 31, 2001:
Employees Non-Employees Total
------------------------ --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(,000) Price (,000) Price (,000) Price
----------------------------------------------------------------------------------
Options/warrants outstanding
at beginning of period 2,747 $4.68 1,370 $5.42 4,117 $4.93
Additions/deductions:
Granted 355 1.26 45 1.26 400 1.26
Exercised -- -- -- -- -- --
Cancelled 93 3.35 410 1.75 503 2.05
----------------------------------------------------------------------------------
Options/warrants outstanding
at end of period 3,009 $4.32 1,005 $6.73 4,014 $4.92
----------------------------------------------------------------------------------
Options/warrants exercisable
at end of period 3,009 1,005 4,014
==================================================================================
Weighted average fair value of
grants $0.69 $0.69 $0.69
Price range of options/warrants
Exercised -- -- --
Price range of options/warrants
outstanding $0.81 - $10.00 $0.81 - $10.00 $0.81 - $10.00
Price range of options/warrants
exercisable $0.81 - $10.00 $0.81 - $10.00 $0.81 - $10.00
The following table summarizes information about stock options outstanding and
stock options exercisable, as granted to both employees and non-employees, at
December 31, 2003:
Employees Non-Employees
--------- -------------
Weighted
Average Weighted
Range of Remaining Average Weighted
Exercise Number Contractual Weighted Average Number Remaining Average
Prices Outstanding Life Exercise Price Outstanding Contractual Life Exercise Price
- --------------------------------------------------------------------------------------------------------------------------------
$0.81 - $2.50 1,627,500 4.3 $1.62 35,000 7.4 $1.00
$5.13 - $9.68 1,523,500 7.0 $7.09 580,000 1.3 $8.70
$10.00 - $11.50 335,000 3.3 $10.00 500,000 1.8 $10.75
----------- -----------
3,486,000 1,115,000
=========== ===========
Options and warrants outstanding as of December 31, 2003, 2002 and 2001 expire
from March 7, 2004 through October 29, 2013, depending upon the date of grant.
During 1999, the Company implemented a defined contribution plan for its
employees. The Company's contribution to the plan is based on the amount of the
employee plan contributions. The Company's contribution cost to the plan in 2003
and 2002 was approximately $201,000 and $179,000, respectively.
NOTE 11 - TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY
On September 8, 1998, the Company's Board of Directors declared a dividend
distribution of Common Stock Purchase Rights (the "Rights"), thereby creating a
Stockholder Rights Plan (the "Plan"). The dividend was payable to the
stockholders of record on September 25, 1998. Each Right entitles the
stockholder of record to purchase from the Company that number of Common Shares
having a combined market value equal to two times the Rights exercise price
F-15
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, 2003, 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 either 2003 or 2002, an amount of 30,000 shares were repurchased during
2001 at a cost to the Company of $30,131.
As a result of the litigation relating to the case against Nutritional Foods
Corporation, in March of 1998, a subsequent order of the Court of Common Pleas
of Bucks County modified the decree of January 23, 1997 to provide for a return
to treasury of 604,928 shares to the Company. As payment for legal services,
118,066 of these shares were reissued with a market value of approximately
$1,145,358. This value, the cost of reacquiring these shares, then became the
value of the net treasury stock ($2.35 per share) represented by 486,862 shares
returned to treasury.
On April 9, 2002, The Quigley Corporation entered into an agreement with
Forrester Financial LLC, ("Forrester") providing for Forrester to act as a
financial consultant to the Company. The consulting agreement commenced as of
March 7, 2002 for a term of twelve months, but may be terminated by the Company
in its sole discretion at any time. As compensation for services to be provided
by Forrester to the Company, the Company granted to Forrester, or its designees,
warrants to purchase up to a total of 1,000,000 shares of the Company's common
stock. The Company's financial statements reflect a $1,125,000 (restated)
non-cash charge in 2002 resulting from the granting and exercising of these
warrants. The warrants have three exercise prices, 500,000 warrants exercisable
at $6.50 per share, which were exercised in May 2002 resulting in cash to the
Companyloan in the amount of $3,250,000, 250,000 warrants exercisable$3 million
payable to PNC Bank, N.A. which is collateralized by mortgages on real property
located in each of Lebanon and Elizabethtown, Pennsylvania. The Company can
elect interest rate options at $8.50 per
share, and 250,000 warrants exercisable at $11.50 per share.either the Prime Rate or LIBOR plus 200 basis
points. The warrants were
initially exercisable untilloan is payable in eighty-four equal monthly principal payments of
$35,714 that commenced on November 1, 2004. In April 2005, the earlier to occurCompany prepaid
an amount of (i) March 6, 2003 or (ii)$1.0 million against the terminationoutstanding balance on the long-term loan.
The Company is in compliance with all related loan covenants. The entire loan
balance is under a six-month LIBOR rate of the Consulting Agreement.
On December 7, 2002, Forrester commenced an action by a Writ of Summons filed in
the Court of Common Pleas of Bucks County, PA against The Quigley Corporation.
No Complaint was filed detailing the claim of Forrester against The Quigley
Corporation. This action was terminated with prejudice by Forrester as part of
its Amended and Restated Warrant Agreement (the "Amended Agreement) with The
Quigley Corporation on February 2, 2003 whereby certain warrants that were
scheduled to expire6.22%, this rate expires on March 7, 2003 were extended31,
2006.
The schedule of principal payments of long-term debt is as follows:
December 31,
2006 $428,571
2007 428,571
2008 428,571
2009 178,573
--------------
1,464,286
Less - current portion (428,571)
--------------
$1,035,715
==============
NOTE 8 - OTHER CURRENT LIABILITIES
Included in other current liabilities are $923,411 and $717,038 related to
March 7, 2004 (warrants to
purchase 250,000 shares at $8.50; warrants to purchase 250,000 shares at $11.50)
are no longer cancelable by the Company. As an additional part of this
agreement, Forrester was granted warrants to purchase 250,000 shares at any time
until March 7, 2004 at the price of $9.50 a share. As a result of this Amended
Agreement the Company recorded a further non-cash charge of $975,000 (restated)
in the fourth quarter of 2002, amounting to a total expense of $2,100,000,
classified as administrative expense in the Consolidated Statement of
Operations, relating to this warrant agreement in 2002. Additionally, $975,000
is reflected in the Consolidated Balance Sheetaccrued compensation at December 31, 2002, which
represented the value of the unexercised warrants2005 and is included in accrued
liabilities. On March 7, 2003 this liability was converted to equity.2004, respectively.
NOTE 129 - COMMITMENTS AND CONTINGENCIES
Certain operating leases for office and warehouse space maintained by the
Company resulted in rent expense for the years ended December 31, 2005, 2004 and
2003, 2002of $227,701, $335,226, and 2001, of $255,078, $236,304 and $218,456, respectively. The Company has
approximate future obligations over the next five years as follows:
Property
Research and Propertyand Other
Year Development Leases Advertising Other Total
-------------------------------------------------------------
2004 $1,500,000 $212,000 $1,712,000
2005 -- 198,000 198,000------------------------------------------------------------------------------------------
2006 -- 98,000 98,000$3,230,000 $180,000 $1,000,000 $62,000 $4,472,000
2007 -- 57,000 57,000- 91,000 - - 91,000
2008 -- -- --
-------------------------------------------------------------- - - - -
2009 - - - - -
2010 - - - - -
------------------------------------------------------------------------------------------
Total $1,500,000 $565,000 $2,065,000
-------------------------------------------------------------
F-16
$3,230,000 $271,000 $1,000,000 $62,000 $4,563,000
------------------------------------------------------------------------------------------
Additional advertising and research and development costs are expected to be
incurred during the remainder of 2004.
During 1996, the Company entered into a licensing agreement resulting in the
utilization of the zinc gluconate patent. In return for the acquisition of this
license, the Company issued a total of 240,000 shares of common stock to the
patent holder and attorneys during 1996 and 1997. The related intangible asset,
approximating $490,000 was amortized over the remaining life of the patent that
expired in March 2002. The Company was required to pay a 3% royalty on sales
collected, less certain deductions, to the patent holder throughout the term of
this agreement, which also expired in 2002.
The Company also maintains a separate representation and distribution agreement
relating to the development of the zinc gluconate glycine product formulation.
In return for exclusive distribution rights, the Company must pay the developer
a 3% royalty and a 2% consulting fee based on sales collected, less certain
deductions, throughout the term of this agreement, expiring in 2007.
Additionally, a founder's commission totaling 5%, on sales collected, less
certain deductions, is paid to two of the officers, who are also directors and
stockholders of the Company, and whose agreements expire in 2005.
The expenses for the respective periods relating to such agreements amounted to
$1,805,294, $1,421,475 and $1,399,847, for the twelve months periods ended
December 31, 2003, 2002 and 2001, respectively. Amounts accrued for these
expenses at December 31, 2003 and December 31, 2002 were $915,109 and $603,387,
respectively.2006.
The Company has an agreement with the former owners of the Utah based direct
marketing and selling company, whereby they receive payments, currently totaling
5% of net sales collected, for use of product formulations,exclusivity, consulting, marketing
presentations, confidentiality and non-compete agreements.arrangements. Amounts paid or
payable under such agreement during the twelve months periods ended December 31,
2005, 2004 and 2003 2002were $838,607, $800,881 and 2001 were $880,091, $678,454 and $448,647880,091, respectively. Amounts
payable under such agreement at December 31, 20032005 and December 31, 20022004 were
$68,388$58,597 and $63,866,$60,876, respectively.
In August 2003, the Company entered into a licensing agreement with a patent
holder relating to utilizing a nasal spray product in the treatment of symptoms
of the common cold.
The Company agreed to pay the patent holder a two percent
royalty on net sales of nasal spray products, less certain deductions,
throughout the term of this agreement, expiring no later than April 2014.
Amounts paid or payable under such agreement during the twelve month period
ended December 31, 2003 were $26,613,has several licensing and zero in the 2002 and 2001 comparable
periods. An amount of $1,613 relating to this agreement was accrued or payable
at December 31, 2003.other contractual agreements, see Note 6.
F-13
TESAURO AND ELEY VS. THE QUIGLEY CORPORATION
In September, 2000, the Company was sued by two individuals (Jason Tesauro and
Elizabeth Eley, both residents of Georgia), on behalf of a "nationwide class" of
"similarly situated individuals," in the Court of Common Pleas of Philadelphia
County, Pennsylvania. The Complaint alleges that the Plaintiffs purchased
certain Cold-Eeze(R) products between August, 1996, and November, 1999, based
upon cable television, radio and internet advertisements which allegedly
misrepresented the qualities and benefits of the Company's products. The
Complaint requests an unspecified amount of damages for violations of
Pennsylvania's consumer protection law, breach of warranty and unjust
enrichment, as well as a judicial determination that the action be maintained as
a class action.
In October, 2000, the Company filed Preliminary Objections to the Complaint
seeking dismissal of the action. The Court sustained certain objections thereby
narrowing Plaintiffs' Complaint. In May, 2001, Plaintiffs filed a Motion to
Certify the Alleged Class. The Company opposed the Motion. In November, 2001,
the Court held a hearing on Plaintiffs' Motion for Class Certification. In
January, 2002, the Court denied in part and granted in part the Plaintiffs'
Motion. The Court denied Plaintiffs' Motion to Certify a Class based on
Plaintiffs' claim under the Pennsylvania Consumer Protection Law; however, the
Court certified the class based on Plaintiffs' breach of warranty and unjust
enrichment claims.
Discovery has been completed and trial that was originally scheduled for May
2004 has been scheduled to commence in May
2004.continued pending determination of certain dispositive pre-trial
motions filed by the Company which have been argued and briefed and have been
pending before the Court for determination since March 2005. The Company is
vigorously defending this lawsuit and believes that the action lacks merit.
PAIGE D. DAVISON VS. THE QUIGLEY CORPORATION
On February 26, 2004, the plaintiff filed an action against The Quigley
Corporation (the "Company"), which was not served until April 5, 2004. The
action alleges that the plaintiff suffered certain losses and injuries as a
result of using the Company's nasal spray product. Among the allegations of the
plaintiff are that the nasal spray was defective and unreasonably dangerous,
lacked proper and adequate warnings and/or instructions, and was not fit for the
purposes and uses intended.
The Company has investigated the claims and believes they are without merit. The
Company believes plaintiff's claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact to the Company. However,
at this time no prediction as to the outcome can be made. GOLDBLUM AND WAYNE
A Special Meeting ofDefense counsel takes
the Quigley stockholders was held on October 15, 1999, at
which a majority ofposition that the shares entitled to vote adopted a Corrective Action
Proposal (initially reportedscience proposed in the Company's Form 10-Q forlitigation appears to be more
advanced than the quarter ending
June 30, 1999) to ratify actions previously taken byscience which exists in peer reviewed medical journals.
Whether the Companycourt will admit the testimony relating to the 1990 1 for 2.74 reverse split, the 1995 1 for 10 reverse split (the "Reverse
Splits") and the 1997 1 for 2 forward split (the "Forward Split"). Pursuant to
the October 15, 1999 Special Meeting, the Company authorized the filing ofscience behind
plaintiff's claims, is not a declaratory judgmentmatter which we can predict at this time.
POLSKI VS. THE QUIGLEY CORPORATION
On August 12, 2004, plaintiff filed an action against The Quigley Corporation in Nevada to determine the effectiveness of the
Corrective Action.
F-17
In August 2000,
the District Court of Clarkfor Hennepin County, Nevada, held that it had
jurisdiction to decide the Company's declaratory judgment action filed in April,
2000, against two putative shareholders (Thomas Goldblum and Alan Wayne), inMinnesota, which was not served until
September 2, 2004. On September 17, 2004, the Company seeks a judicial declaration that, based on stockholder
approval ofremoved the Corrective Action Proposal,case to the
Reverse Splits and Forward Split
satisfy and/or comply with Nevada law and that the capitalization of Quigley
evidenced by the issued and outstanding shares of common stock and common stock
warrants is as reflected on Quigley's stock transfer ledger on September 10,
1999, the record date of the Special Meeting. TheUnited States District Court for the District of Clark County
heldMinnesota. The action alleges
that plaintiff suffered certain losses and injuries as a hearing on this matter on March 19, 2002 and ruled in favor of The
Quigley Corporation. A final judgment has been entered of record by the Court on
June 21, 2002. The period for appeal of this order to the Nevada Supreme Court
has expired.
An underlying claim filed by Goldblum and Wayne in the Court of Common Pleas of
Montgomery County, Pennsylvania on March 17, 1996 alleging that the plaintiffs
became owners of 500,000 shares eachresult of the Company's
common stock in or about
1990 and requested damages in excessnasal spray product. Among the allegations of $100,000 forplaintiff are negligence, products
liability, alleged breach of contractexpress and conversion.implied warranties, and an alleged
breach of the Minnesota Consumer Fraud Statute. Discovery should be completed in
this matter within 120 days and trial is scheduled for October 2006.
The Company believedhas investigated the claims and believes that the plaintiffs' claims werethey are without
merit, barred by
the applicable statutes of limitations, and that the plaintiffs were, in any
event, limited to claims for approximately 36,000 shares.merit. The Company vigorously defended this lawsuit through trial during January 2004,
when a jury returned a unanimous verdict in favor of the Company. Thereafter,
the plaintiffs filed a motion for post-trial relief as a first step toward an
appeal, which the Company regards asbelieves plaintiff's claims are without merit and will oppose. Although the
Company regards any effort by plaintiffs to pursue an appeal as lacking merit
and basedis
vigorously defending those claims. Based upon the information the Company has at
this time, it believes the action will not have a material impact to the
Company. However, at this time no prediction as to the outcome of this appeal can be made.
Defense counsel takes the position that the science proposed in the litigation
appears to be more advanced than the science which exists in peer reviewed
medical journals. Whether the court will admit the testimony relating to the
science behind plaintiff's claims, is not a matter which we can predict at this
time.
ANGELFIRE, ARVIN, BELL, BROWN, EDWARDS, HOHNSTEIN, HOFFMAN, LAURENT,
MARTIN, RICHARDSON, RIGSBY, SEONE, SMALLEY,
VAN BENTHEM AND WILLIAMS VS. THE QUIGLEY CORPORATION
On November 4, 2004, seven (7) plaintiffs filed an action in the Court of Common
Pleas of Bucks County, Pennsylvania, against the Company. The complaint was
amended on March 11, 2005 to add an additional eight (8) plaintiffs in the
action. The action alleges that plaintiffs suffered certain losses and injuries
as a result of using the Company's nasal spray product. Among the allegations of
F-14
plaintiffs are claims that the Company is liable to them based on alleged
negligence, alleged strict products liability (failure to warn and defective
design), alleged breach of express warranty, alleged breach of implied warrant,
and an alleged violation of the Pennsylvania Unfair Trade Practices and Consumer
Protection Law and other consumer protection statutes.
At the present time, the matter is being defended by the Company's insurance
carrier. An answer stating affirmative defenses has been filed. Pre-trial
discovery is being scheduled.
The Company believes plaintiffs' claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact to the Company. However,
at this time no prediction as to the outcome can be made. Defense counsel takes
the position that the science proposed in the litigation appears to be more
advanced than the science which exists in peer reviewed medical journals.
Whether the court will admit the testimony relating to the science behind
plaintiffs' claims, is not a matter which we can predict at this time.
THE QUIGLEY CORPORATION VS. JOHN C. GODFREY, ET AL.
This action was commenced in November 2004 in the Court of Common Pleas of Bucks
County, Pennsylvania. In that action, the Company is seeking declaratory and
injunctive relief against John C. Godfrey, Nancy Jane Godfrey, and Godfrey
Science and Design, Inc. requesting injunctive relief regarding the Cold-Eeze(R)
trade name and trademark; injunctive relief relating to the Cold-Eeze
formulations and manufacturing methods; injunctive relief for breach of the duty
of loyalty; and declaratory judgment pending the Company's payment of
commissions to defendants. The Company's Complaint is based in part upon the
Exclusive Representation and Distribution Agreement and the Consulting Agreement
(together the "Agreements") entered into between the defendants and the Company.
The Company terminated the Agreements for the defendants' alleged material
breaches of the Agreements. Defendants have answered the complaint and asserted
counterclaims against the Company seeking remedies relative to the Agreements.
The Company has moved to dismiss portions of defendant's counterclaims on the
grounds that they are meritless.
At the present time, discovery is being conducted by the Company on its claims
and on the counterclaims brought by John C. Godfrey, et al.
The Company believes Defendant's claims are without merit, and it is vigorously
defending the counterclaims prosecuting its action on its complaint. Based upon
the information the Company has at this time, it believes the action will not
have a material impact to the Company. However, at this time no prediction as to
the outcome can be made.
AXIS SPECIALTY INSURANCE CO. VS. THE QUIGLEY CORPORATION
This action, filed in January 2005, stems from a dispute between the Company and
one of its excess liability insurance carriers, who seeks a judicial declaration
of its insurance coverage obligations concerning certain product liability
claims related to the Company's nasal spray product. The carrier's action
follows a complaint by the Company filed in December 2004 with the Pennsylvania
Insurance Commission, which ultimately sided with the Company in determining
that the carrier failed to observe proper notification procedures when it first
sought to limit, or alternatively to insure at a substantially higher premium,
its coverage obligations.
The Company denied the material allegations of the carrier's complaint, and
asserted its own counterclaim also seeking declaratory relief to establish the
extent of its excess liability coverage. Thereafter, the parties engaged in
discovery to establish a record upon which the court could decide the matter
based on summary judgment motions on the carrier's claims and the Company's
counterclaims. Both parties sought summary judgment in motions submitted to the
court in the fall of 2005. On February 16, 2006, the court handed down its
ruling, in which the court granted in part and denied in part both the carrier's
motion and the Company's motion. The effect of the court's ruling is that the
plaintiff insurer's responsibility for excess coverage is limited to claims for
damages for bodily injury or property damage that occurred on or after April 6,
2004, but leaves uncertain coverage for claims filed after April 6, 2004 by
persons who contacted the Company before then. Although the Company is
evaluating grounds for appeal, and cannot rule out an appeal by the carrier, the
court's ruling both clarifies the Company's potential exposure as well as
establishes a basis for the Company to seek redress against parties liable for
any lack of adequate excess insurance coverage for this exposure.
Based upon the information the Company has at this time relative to the defense
of claims occurring before April 6, 2004, the Company believes that the claims
are without merit and is fully defending those claims through insurance counsel.
However, at this time no prediction as to the outcome can be made of these
claims and whether insurance coverage from the period prior to April 6, 2004 is
adequate for coverage of all claims.
F-15
CYNTHIA AARON VS. THE QUIGLEY CORPORATION, ET AL
On March 15, 2005, a complaint was filed in the Superior Court for San Diego
County, California. This complaint was served on the Company on April 21, 2005.
The plaintiff's complaint consists of causes of action sounding in negligence,
negligent products liability, breach of warranty of merchantability, breach of
express warranty, strict products liability and failure to warn. The action
alleges that the plaintiff suffered certain losses and injuries as a result of
using the Company's nasal spray product. Discovery in this case will be
completed within 120 days and trial is scheduled for September 18, 2006.
The Company believes plaintiff's claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact on the Company. However,
at this time no prediction as to the outcome can be made. Insurance defense
counsel has informed the Company that counsel is unable to evaluate the
likelihood of an unfavorable outcome at this time. Defense counsel takes the
position that the science proposed in the litigation appears to be more advanced
than the science which exists in peer reviewed medical journals. Whether the
court will admit the testimony relating to the science behind plaintiff's
claims, is not a matter which we can predict at this time.
DOLORES SMITH VS. THE QUIGLEY CORPORATION
On May 25, 2005, a complaint was filed in the Court of Common Pleas of Bucks
County, Pennsylvania. The complaint was served on the Company on or about June
14, 2005. The plaintiff's complaint consists of counts of negligence, strict
product liability, breach of express warranty, breach of implied warranty, and
violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law
and other Consumer Protection Statutes relating to the use of the Company's
COLD-EEZE Nasal Spray Product.
The Company believes plaintiff's claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact on the Company. However,
at this time no prediction as to the outcome can be made. Defense counsel takes
the position that the science proposed in the litigation appears to be more
advanced than the science which exists in peer reviewed medical journals.
Whether the court will admit the testimony relating to the science behind
plaintiff's claims, is not a matter which we can predict at this time.
RICHARD FLYNN VS. THE QUIGLEY CORPORATION, ET AL
On May 20, 2005, a complaint was filed in the Superior Court of Orange County,
California. This complaint was served on the Company on June 2, 2005. The action
alleges that the plaintiff suffered certain losses and injuries as a result of
using the Company's nasal spray product. The complaint consists of causes of
action sounding in negligence, products liability, and punitive damages.
The Company believes plaintiff's claims are without merit and is vigorously
defending those claims. In particular, much of the complaint references acts of
the Company during a period of time when it did not offer for sale the COLD-EEZE
Nasal Spray Product which is the basis of the plaintiff's claim. Based upon the
information the Company has at this time, it believes the action will not have a
material impact on the Company. However, at this time no prediction as to the
outcome can be made. Defense counsel takes the position that the science
proposed in the litigation appears to be more advanced than the science which
exists in peer reviewed medical journals. Whether the court will admit the
testimony relating to the science behind plaintiff's claims, is not a matter
which we can predict at this time.
KEITH J. KOCHIE VS. THE QUIGLEY CORPORATION, ET AL
On August 2, 2005, a complaint was filed in the United States District Court for
the Eastern District of New York. The complaint was served on the Company on or
about September 1, 2005. The plaintiff's complaint consists of counts for
negligence, strict product liability, breach of express warranty, breach of
implied warranties, fraudulent misrepresentation, fraudulent concealment,
negligent misrepresentation, and fraud and deceit relating to the use of the
Company's COLD-EEZE Nasal Spray Product.
The Company believes plaintiff's claims are without merit and is vigorously
defending those actions. Based upon the information the Company has at this
time, it believes the action will not have a material impact on the Company.
However, at this time no prediction as to the outcome can be made. Defense
counsel takes the position that the science proposed in the litigation appears
to be more advanced than the science which exists in peer reviewed medical
journals. Whether the court will admit the testimony relating to the science
behind plaintiff's claims, is not a matter which we can predict at this time.
F-16
DOMINIC DOMINIJANNI, SONJA FORSBERG-WILLIAMS, VINT PAYNE,
MURRAY LOU ROGERS, AND RANDY STOVER
VS. THE QUIGLEY CORPORATION
On January 6, 2006, five (5) plaintiffs filed an action in the Court of Common
Pleas of Bucks County, Pennsylvania, against the Company. The action alleges
that the plaintiff suffered certain losses and injuries as a result of using the
Company's nasal spray product. The complaint was served on the Company on
January 31, 2006. Plaintiffs' complaint consists of counts for negligence,
strict products liability (failure to warn), strict products liability
(defective design), breach of express and implied warranties, and a claim of
violations under the Pennsylvania Unfair Trade Practices and Consumer Protection
Law and other consumer protection statutes.
The Company believes plaintiffs' claims are without merit and is vigorously
defending those actions. Based upon the information the Company has at this
time, it believes the action will not have a material impact on the Company.
However, at this time no prediction as to the outcome can be made. Defense
counsel takes the position that the science proposed in the litigation appears
to be more advanced than the science which exists in peer reviewed medical
journals.
Whether the court will admit the testimony relating to the science behind
plaintiffs' claims, is not a matter which we can predict at this time.
GREG SCRAGG VS THE QUIGLEY CORPORATION, ET AL
On November 30, 2005, an action was brought in the Colorado District Court in
Denver, Colorado. The complaint was served on the Company soon thereafter. The
action alleges that the plaintiff suffered certain losses and injuries as a
result of using the Company's nasal spray product. The complaint consists of
counts for fraud and deceit (fraudulent concealment), negligent
misrepresentation, strict liability (failure to warn), and strict product
liability (design defect). On January 13, 2006, the case was removed to Federal
District Court.
The Company believes plaintiff's claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact on the Company. However,
at this time no prediction as to the outcome can be made. Defense counsel takes
the position that the science proposed in the litigation appears to be more
advanced than the science which exists in peer reviewed medical journals.
Whether the court will admit the testimony relating to the science behind
plaintiff's claims, is not a matter which we can predict at this time.
GARRY KOMINAKIS VS. THE QUIGLEY CORPORATION, ET AL
On December 13, 2005, an action was brought in the Superior Court of the State
of California (Western Division - Los Angeles). The action alleges that the
plaintiff suffered certain losses and injuries as a result of using the
Company's nasal spray product. The complaint was served on the Company on
December 27, 2005. The case was removed to Federal District Court on January 25,
2006. The complaint consists of counts for strict liability (products
liability), negligence, and breach of implied and express warranties.
The Company believes plaintiff's claims are without merit and is vigorously
defending those claims. Based upon the information the Company has at this time,
it believes the action will not have a material impact on the Company. However,
at this time no prediction as to the outcome can be made. Defense counsel takes
the position that the science proposed in the litigation appears to be more
advanced than the science which exists in peer reviewed medical journals.
Whether the court will admit the testimony relating to the science behind
plaintiff's claims, is not a matter which we can predict at this time.
DARIUS INTERNATIONAL INC., AND INNERLIGHT INC., F/K/A DARIUS
MARKETING INC. VS. ROBERT O. YOUNG AND SHELLEY R. YOUNG
(FEDERAL DISTRICT COURT - EASTERN DISTRICT, PA)
In this action, the Company seeks injunctive relief and monetary damages against
two individuals for violation of a non-competition agreement between a wholly
owned subsidiary of the Company, Innerlight Inc., and the defendants, each of
whom are also under agreement to serve as consulting to the Company.
In late November, 2005, the Company learned that the defendants had launched a
line of nutritional supplement products that competed with Innerlight products.
Defendants promoted their line of products by a website, among other means. The
Company moved for a temporary restraining order against the defendants, which
the court denied; however, the court ordered expedited discovery and scheduled a
preliminary injunction hearing. Before the hearing, the Company amended its
complaint to add counts against defendants for unfair competition, trademark
infringement and other causes, which the court allowed. In response, defendants
F-17
initially moved to dismiss the case. While not ruling on defendants' motion
formally, the court stated that it was inclined to deny the motion. Defendants
answered the complaint and asserted nine counterclaims, including: breach of
contract; breach of covenant of good faith and fair dealing; unjust enrichment;
conversion; common law trademark infringement; common law violation of the right
to publicity; violation of abuse of personal identity act; injunctive relief;
and declaratory relief.
After the preliminary injunction hearing, the parties briefed the court on the
significance of the hearing evidence in relation to the parties' respective
claims. On February 17, 2006, the court held oral argument on the motion for
preliminary injunction. A ruling is expected by mid-March, 2006.
The Company believes that the defendants' counterclaims are without merit and is
vigorously defending those counterclaims and is prosecuting its action on its
complaint. Based upon the information the Company has at this time, it believes
the counterclaim actions are without merit. However, at this time no prediction
as to the outcome can be made.
ROBERT O. AND SHELLEY YOUNG VS. DARIUS INTERNATIONAL INC.
AND INNERLIGHT INC., (UTAH THIRD PARTY COMPLAINTS)
On September 14, 2005, a third-party complaint was filed by Shelley R. Young in
Fourth District Court in Provo, Utah against Innerlight Inc. and its parent
company, Darius. Robert O. Young has filed a motion to intervene to join as a
third-party plaintiff with Shelley R. Young. On November 3, 2005, Shelley and
Robert Young filed a parallel suit also in Fourth District Court in Provo, Utah.
The allegations in both complaints include, but are not limited to, an alleged
breach of contract by Innerlight Inc. for alleged failures to make certain
payments under an asset purchase agreement entered into by all parties.
Additional allegations stem from this alleged breach of contract including
unjust enrichment, trademark infringement and alleged violation of rights of
publicity. The plaintiffs are seeking both monetary and injunctive relief.
Innerlight Inc. has objected to the complaint in the third-party action based on
procedural deficiencies and other grounds. In the second action the Court has
granted Innerlight Inc. and Darius permission to defer answering until the court
can determine whether or not Provo, Utah, is the proper venue to hear these
allegations.
In connection with the Utah actions the Company has sued the Youngs in Equity in
the Court of Common Pleas of Philadelphia County, PA, and in United States
District Court for the Eastern District of Pennsylvania. The Company has alleged
breach of contract, including but not limited to breach of non-competition
provisions in a consulting agreement between the parties and is seeking
unspecified damages and injunctive relief. The Company believes the plaintiff's
allegations against Innerlight Inc. and Darius in Provo, Utah are without merit
and it is vigorously defending against these claims. Innerlight Inc. and Darius
have filed motions to stay both actions filed in Utah pending resolution of the
litigation in PA. Further, the Company is actively prosecuting its state and
federal actions in PA. However, at this time no prediction as to the outcome can
be made.
BRIGITTE YVON & KLAUS YVON VS. THE QUIGLEY CORPORATION, ET AL
On October 12, 2005, the Plaintiffs instituted an action against Caribbean
Pacific Natural Products, Inc. and other defendants for personal injuries as a
result of being hit by a chair on the pool deck of Waikoloa Beach Marriott Hotel
d/b/a Outrigger Enterprises, Inc. in Honolulu, Hawaii. On December 9, 2005, the
Company was added as an additional defendant without notice to this case. The
main defendant in the case is Caribbean Pacific Natural Products, Inc. in which
the Company formerly held stock. On January 22, 2003, all Caribbean Pacific
Natural Products Inc. shares owned by the Company were sold to Suncoast
Naturals, Inc. in return for stock of Suncoast Naturals, Inc. At the time of the
accident, the Company had no ownership interest in Caribbean Pacific Natural
Products, Inc.
The Company believes that the plaintiffs' claims are without merit and is
vigorously defending this action. At the present time this matter is being
defended by the Company's liability insurance carrier and a motion to dismiss is
pending before the Federal District Court in Honolulu, Hawaii.
NICODROPS, INC. VS. QUIGLEY MANUFACTURING INC.
On January 30, 2006, QMI was put on notice of a claim by Nicodrops, Inc.
Nicodrops, Inc. has claimed that the packaging contained incorrect expiration
dates and caused it to lose sales through two (2) retailers. The total alleged
sales of Nicodrops was approximately $250,000 and Nicodrops is claiming
unspecified damages exceeding $2,000,000.
No suit has been filed. The Company is investigating this claim. Based on its
investigation to date, the Company believes the claim is without merit. However,
at this time no prediction can be made as to the outcome of this case.
F-18
TERMINATED LEGAL PROCEEDINGS
LITIGATION - FORMER EMPLOYEEEMPLOYEES
On April 12, 2002, the Company commenced a complaint in Equity in the Court of
Common Pleas of Bucks County, PAPennsylvania, against the former President of
Darius International Inc., its wholly owned subsidiary, following termination of
such President. The allegations in the complaint include,included, but arewere not limited
to, an alleged breach of fiduciary duty owed to the Company. The Company is seekingsought
both injunctive and monetary relief. On or about May 1, 2002, the defendant
filed a counterclaim requesting that the Court declare him the lawful owner of
55,000 stock options, unspecified damages relating to an alleged breach of an
oral contract and for commissions allegedly owed. In addition, the Defendant
requestsdefendant
requested the return of certain intellectual property used to commence and
continue Darius' operations. The Corporation believes Defendant's claims are without merit, is vigorously
defending the counterclaimsOn April 15, 2005, a Settlement Agreement and
is prosecuting its action on its complaint.
Based upon the informationMutual Release was executed between the Company, its subsidiaries and the
defendants, Ronald Howell, Deborah Howell, Pro Pool, LLC, One Source, LLC, Pro
Marketing LLC, and Eric Kaytes. All of defendants' counterclaims were withdrawn
and dismissed with prejudice. In addition to the monetary consideration, Howell
surrendered to the Company for cancellation 40,993 shares of the Company's
common stock and agreed to forego any claim for any additional stock, warrants,
stock options or other securities of or interest in the Company, Darius, Darius
Marketing Inc., and Innerlight Inc. that were or could have been made in the
lawsuits. Defendant Kaytes surrendered options/warrants in the Company.
NOTE 10 - TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY
On September 8, 1998, the Company's Board of Directors declared a dividend
distribution of Common Stock Purchase Rights (the "Rights"), thereby creating a
Stockholder Rights Plan (the "Plan"). The dividend was payable to the
stockholders of record on September 25, 1998. Each Right entitles the
stockholder of record to purchase from the Company that number of Common Shares
having a combined market value equal to two times the Rights exercise price of
$45. The Rights are not exercisable until the distribution date, which will be
the earlier of a public announcement that a person or group of affiliated or
associated persons has acquired 15% or more of the outstanding common shares, or
the announcement of an intention to make a tender or exchange offer resulting in
the ownership of 15% or more of the outstanding common shares by a similarly
constituted party. The dividend has the effect of giving the stockholder a 50%
discount on the share's current market value for exercising such right. In the
event of a cashless exercise of the Right, and the acquirer has acquired less
than a 50% beneficial ownership of the Company, a stockholder may exchange one
Right for one common share of the Company. The Final Expiration of the Plan is
September 25, 2008.
Since the inception of the stock buy-back program in January 1998, the Board has
subsequently increased the authorization on five occasions, for a total
authorized buy-back of 5,000,000 shares or approximately 38% of the previous
shares outstanding. Such shares are reflected as treasury stock and will be
available for general corporate purposes. From the initiation of the plan until
December 31, 2005, 4,159,191 shares have been repurchased at this time, it believesa cost of
$24,042,801 or an average cost of $5.78 per share. No shares were repurchased
during 2005, 2004 or 2003.
As a result of the action
will not havelitigation relating to the case against Nutritional Foods
Corporation, in March of 1998, a material impactsubsequent order of the Court of Common Pleas
of Bucks County modified the decree of January 23, 1997 to provide for a return
to treasury of 604,928 shares to the Company. However, at this time no
predictionAs payment for legal services,
118,066 of these shares were reissued with a market value of approximately
$1,145,358. This value, the cost of reacquiring these shares, then became the
value of the net treasury stock ($2.35 per share) represented by 486,862 shares
returned to treasury.
On April 9, 2002, The Quigley Corporation entered into an agreement with
Forrester Financial LLC, ("Forrester") providing for Forrester to act as a
financial consultant to the outcome canCompany. The consulting agreement commenced as of
March 7, 2002 for a term of twelve months, but may be made.terminated by the Company
in its sole discretion at any time. As compensation for services to be provided
by Forrester to the Company, the Company granted to Forrester, or its designees,
warrants to purchase up to a total of 1,000,000 shares of the Company's common
stock. The Company's financial statements reflected a $1,125,000 non-cash charge
in 2002 resulting from the granting and exercising of these warrants. The
warrants have three exercise prices, 500,000 warrants exercisable at $6.50 per
share, which were exercised in May 2002 resulting in cash to the Company in the
amount of $3,250,000, 250,000 warrants exercisable at $8.50 per share, and
250,000 warrants exercisable at $11.50 per share. The warrants were initially
exercisable until the earlier to occur of (i) March 6, 2003 or (ii) the
termination of the Consulting Agreement.
On December 7, 2002, Forrester commenced an action by a Writ of Summons filed in
the Court of Common Pleas of Bucks County, PA against The Quigley Corporation.
No Complaint was filed detailing the claim of Forrester against The Quigley
Corporation. This action was terminated with prejudice by Forrester as part of
its Amended and Restated Warrant Agreement (the "Amended Agreement") with The
Quigley Corporation on February 2, 2003 whereby certain warrants that were
scheduled to expire on March 7, 2003 were extended to March 7, 2004 (warrants to
purchase 250,000 shares at $8.50; warrants to purchase 250,000 shares at $11.50)
F-19
are no longer cancelable by the Company. As an additional part of this
agreement, Forrester was granted warrants to purchase 250,000 shares at any time
until March 7, 2004 at the price of $9.50 a share. As a result of this Amended
Agreement the Company recorded a further non-cash charge of $975,000 in the
fourth quarter of 2002, amounting to a total expense of $2,100,000, classified
as administrative expense in the Consolidated Statement of Operations, relating
to this warrant agreement in 2002.
In July 2004, the Company announced that its Board of Directors had approved a
distribution-in-kind to its stockholders of approximately 500,000 shares of
common stock of Suncoast Naturals, Inc. (OTCBB: SNTL), which it acquired through
a sale of the Company's 60% equity interest in Caribbean Pacific Natural
Products, Inc. These shares were distributed on the basis of approximately .0434
shares of Suncoast common stock for each share of the Company's common stock
owned of record on September 1, 2004, with fractional shares paid in cash. As a
result of the Company's dividend-in-kind to stockholders and the issuance of
499,282 shares of common stock of Suncoast in September 2004, representing
approximately two-thirds of its common stock ownership, the remaining 250,718
shares, owned by the Company are valued at $26,455 and such amount is included
in Other Assets in the Consolidated Balance Sheet at December 31, 2004. This
transaction was completed in September 2004 resulting in a dividend-in-kind
distribution of $260,000 which represents the fair value of the asset
transferred and is reflected as a reduction of retained earnings and a related
gain on the dividend of stock of $198,786 which is reflected on the Statement of
Operations. On October 1, 2004, the Company issued 113,097 shares of its common
stock to the stockholders of JoEL, Inc., in order to satisfy the common stock
component of acquiring certain assets and assuming certain liabilities of JoEl,
Inc. (see Note 3)
NOTE 11 - STOCK COMPENSATION
Stock options for purchase of the Company's common stock have been granted to
both employees and non-employees. Options are exercisable during a period
determined by the Company, but in no event later than ten years from the date
granted.
On December 2, 1997, the Company's Board of Directors approved a new Stock
Option Plan ("Plan") which was amended in 2005 and provides for the granting of
up to four million five hundred thousand shares of which 1,184,000 remain
available for grant at December 31, 2005. Under this Plan, the Company may grant
options to employees, officers or directors of the Company at variable
percentages of the market value of stock at the date of grant. No incentive
stock option shall be exercisable more than ten years after the date of grant or
five years where the individual owns more than ten percent of the total combined
voting power of all classes of stock of the Company. Stockholders approved the
Plan in 1998. A total of 520,000, 500,000 and 424,000 options were granted under
this Plan during the years ended December 31, 2005, 2004 and 2003, respectively.
A summary of the status of the Company's stock options and warrants granted to
both employees and non-employees as of December 31, 2005, 2004 and 2003 and
changes during the years then ended is presented below:
YEAR ENDED DECEMBER 31, 2005:
EMPLOYEES NON-EMPLOYEES TOTAL
-------------------------- ------------------------ --------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(,000) Price (,000) Price (,000) Price
-----------------------------------------------------------------------------------
Options/warrants outstanding
at beginning of period 3,880 $5.35 445 $8.64 4,325 $5.68
Additions/deductions:
Granted 440 13.80 80 13.80 520 13.80
Exercised 112 4.87 - - 112 4.87
Cancelled 109 4.80 - - 109 4.80
-----------------------------------------------------------------------------------
Options/warrants outstanding
at end of period 4,099 $6.28 525 $9.42 4,624 $6.64
-----------------------------------------------------------------------------------
Options/warrants exercisable
at end of period 4,099 525 4,624
===================================================================================
Weighted average fair value of
Grants $7.47 $7.47 $7.47
Price range of options/warrants:
Exercised $0.81 - $9.50 - $0.81 - $ 9.50
Outstanding $0.81 - $13.80 $0.81 - $13.80 $0.81 - $13.80
Exercisable $0.81 - $13.80 $0.81 - $13.80 $0.81 - $13.80
F-20
YEAR ENDED DECEMBER 31, 2004:
EMPLOYEES NON-EMPLOYEES TOTAL
-------------------------- ------------------------ --------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(,000) Price (,000) Price (,000) Price
-----------------------------------------------------------------------------------
Options/warrants outstanding
at beginning of period 3,486 $4.82 1,115 $9.38 4,601 $5.92
Additions/deductions:
Granted 420 9.50 80 9.50 500 9.50
Exercised 26 1.98 - - 26 1.98
Cancelled - - 750 9.83 750 9.83
-----------------------------------------------------------------------------------
Options/warrants outstanding
at end of period 3,880 $5.35 445 $8.64 4,325 $5.68
-----------------------------------------------------------------------------------
Options/warrants exercisable
at end of period 3,880 445 4,325
===================================================================================
Weighted average fair value of
Grants $4.46 $4.46 $4.46
Price range of options/warrants:
Exercised $0.81 - $5.19 - $0.81 - $5.19
Outstanding $0.81 - $10.00 $0.81 - $10.00 $0.81 - $10.00
Exercisable $0.81 - $10.00 $0.81 - $10.00 $0.81 - $10.00
YEAR ENDED DECEMBER 31, 2003:
EMPLOYEES NON-EMPLOYEES TOTAL
-------------------------- ------------------------ --------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(,000) Price (,000) Price (,000) Price
-----------------------------------------------------------------------------------
Options/warrants outstanding
at beginning of period 3,363 $4.45 900 $8.86 4,263 $5.38
Additions/deductions:
Granted 394 8.11 280 9.35 674 8.63
Exercised 16 0.83 35 1.00 51 0.95
Cancelled 255 5.35 30 3.25 285 5.13
-----------------------------------------------------------------------------------
Options/warrants outstanding
at end of period 3,486 $4.82 1,115 $9.38 4,601 $5.92
-----------------------------------------------------------------------------------
Options/warrants exercisable
at end of period 3,486 1,115 4,601
===================================================================================
Weighted average fair value of
grants $4.78 $1.63 $3.47
Price range of options/warrants:
Exercised $0.81 - $1.26 $0.81 - $1.26 $0.81 - $1.26
Outstanding $0.81 - $10.00 $0.81 - $11.50 $0.81 - $11.50
Exercisable $0.81 - $10.00 $0.81 - $11.50 $0.81 - $11.50
F-21
The following table summarizes information about stock options outstanding and
stock options exercisable, as granted to both employees and non-employees, at
December 31, 2005:
EMPLOYEES NON-EMPLOYEES
Weighted Weighted
Average Average
Range of Remaining Weighted Remaining Weighted
Exercise Number Contractual Average Number Contractual Average
Prices Outstanding Life Exercise Price Outstanding Life Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
$0.81 - $2.50 1,509,250 2.2 $1.61 35,000 5.4 $1.00
$5.13 - $13.80 2,589,500 6.0 $8.99 490,000 4.8 $10.02
-------------- -----------------
4,098,750 525,000
============== =================
Options and warrants outstanding as of December 31, 2005, 2004 and 2003 expire
from June 30, 2006 through December 11, 2015, depending upon the date of grant.
NOTE 12 - DEFINED CONTRIBUTION PLANS
During 1999, the Company implemented a 401(k) defined contribution plan for its
employees. The Company's contribution to the plan is based on the amount of the
employee plan contributions and compensation. The Company's contribution to the
plan in 2005, 2004 and 2003 was approximately $414,000, $283,000, and $201,000,
respectively. The plan was amended in October 2004 to accommodate the
participation of employees of Quigley Manufacturing Inc.
NOTE 13 - TERMINATED LEGAL PROCEEDINGS
MIKE FORAN VS. INNERLIGHT, INC.,
DARIUS INTERNATIONAL, INC., AND
THE QUIGLEY CORPORATION
On August 1,INCOME TAXES
The provision (benefit) for income taxes, consists of the following:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2005 2004 2003
an action was filed--------------- ----------------- ---------------
Current:
Federal $65,000 - -
State - - -
----------- ----------- -----------
65,000 - -
----------- ----------- -----------
Deferred:
Federal $815,738 $436,353 ($660,321)
State 192,107 129,453 (71,457)
----------- ----------- -----------
1,007,845 565,806 (731,778)
----------- ----------- -----------
Valuation allowance
(1,007,845) (565,806) 731,778
----------- ----------- -----------
Total $65,000 - -
=========== =========== ===========
A reconciliation of the statutory federal income tax expense (benefit) to the
effective tax is as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2005 2004 2003
--------------- ----------------- ---------------
Statutory rate - Federal $1,115,773 $153,973 $247,834
State taxes net of federal benefit 126,791 85,439 (47,162)
Permanent differences and other (169,719) 326,394 (932,450)
----------- ----------- -----------
1,072,845 565,806 (731,778)
----------- ----------- -----------
Less valuation allowance (1,007,845) (565,806) 731,778
----------- ----------- -----------
Total $65,000 - -
=========== =========== ===========
F-22
The tax effects of the primary "temporary differences" between values recorded
for assets and liabilities for financial reporting purposes and values utilized
for measurement in accordance with tax laws giving rise to the American Arbitration AssociationCompany's
deferred tax assets are as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2005 2004 2003
--------------- ----------------- ---------------
Net operating loss carry-forward $4,034,746 $4,758,315 $5,313,829
Consulting-royalty costs 317,850 - -
Bad debt expense 138,439 121,588 331,849
Other 297,331 666,857 381,802
Valuation allowance (4,788,366) (5,546,760) (6,027,480)
----------- ----------- -----------
Total - - -
=========== =========== ===========
Certain exercises of options and warrants, and restricted stock issued for
services that became unrestricted resulted in reductions to taxes currently
payable and a corresponding increase to additional-paid-in-capital for prior
years. In addition, certain tax benefits for option and warrant exercises
totaling $4,097,128 are deferred and will be credited to
additional-paid-in-capital when the NOL's attributable to these exercises are
utilized. As a result, these NOL's will not be available to offset income tax
expense. The net operating loss carry-forwards that currently approximate $9.9
million for federal purposes, of which $3.5 million will expire in 2019, $4.0
million in 2020 and $2.4 million in 2022. Additionally, there are net operating
loss carry-forwards of $14.9 million for state purposes, of which $9.7 million
will expire in 2009, $2.1 million in 2010, $2.8 million in 2012 and $0.3 million
in 2013. Until sufficient taxable income to offset the temporary timing
differences attributable to operations, the tax deductions attributable to
option, warrant and stock activities and alternative minimum tax credits of
$65,000 are assured, a valuation allowance equaling the total deferred tax asset
is being provided.
NOTE 14 - EARNINGS PER SHARE
Basic earnings per share ("EPS") excludes dilution and is computed by Mike Foran against Innerlight Inc.,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 wholly owned subsidiarytheoretical buy back of
Darius
International Inc., whichshares from the theoretical proceeds of all options and warrants outstanding
during the period. Since there is a wholly owned subsidiarylarge 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 Company. After a
hearing beforeapplicable numerators and denominators of the United States District Court for the District of Utah,
Central Division, Foran withdrew his complaint against The Quigley Corporation
and the matter was remanded to arbitration. Discovery began onincome
statement periods presented is as follows (millions, except earnings per share
amounts):
Year Ended Year Ended Year Ended
December 1, 2003
and was completed on31, 2005 December 22, 2003. Based on the discovery of all of
defendants' documents and defendants' depositions and after interviewing
Innerlight Inc.'s witnesses, the Company upon advice of counsel settled the
action for $290,000 and reinstated Foran as an independent representative.
Negotiations leading to settlement were completed by31, 2004 December 31, 2003
------------------------------ ------------------------ -----------------------------
Income Shares EPS Income Shares EPS Income Shares EPS
---------- -------- ---------- -------- ------- -------- --------- -------- ---------
Basic EPS $3.2 11.7 $0.28 $0.5 11.5 $0.04 $0.7 11.5 $0.06
Dilutives:
Options and
a
Settlement Agreement was entered effective January 18, 2004. As part of the
Settlement Agreement, Mr. Foran completely released Innerlight, Inc.Warrants - 1.6 - 2.9 - 3.4
---------- -------- --------- -------- -------- -------- --------- ------- ---------
Diluted EPS $3.2 13.3 $0.24 $0.5 14.4 $0.03 $0.7 14.9 $0.05
========== ======== ========= ======== ======== ======== ========= ======= =========
Options and The
Quigley Corporation from any claim arising out of the action instituted by him
on August 1,warrants outstanding at December 31, 2005, 2004 and 2003 were
4,623,750, 4,324,500 and also any claim he may have asserted against Innerlight
Inc. or The Quigley Corporation.
F-18
INTERVENTION, INC.
An action was filed by Intervention, Inc. on July 2, 2002 in Contra Costa County
Superior Court under the California Unfair Competition Law, Business4,601,000, respectively. Stock options and Professions Code, Section 17200. The Complaint claims that COLD-EEZE(R) does not
contain ionic zinc and therefore does not have the unique quality the Company
asserts for it. The Complaint purports to attack The Cleveland Clinic Study
titled Zinc Gluconate Lozenges for Treating the Common Cold and the Dartmouth
Study, Zinc Gluconate and The Common Cold, A Controlled Clinical Study. The
plaintiff claims that the Dartmouth Study is not double-blind and is not
randomized. The plaintiff also claims that The Cleveland Clinic Study is untrue
and deceptive because it did not conclude that patients "starting treatments"warrants
with zinc had a 42% reduction in duration of the common cold and, also, because
the 42% reduction in common cold duration is not a reference toexercise prices above average of cold
duration but rather is a reference to the reduction in median duration. There is
also a claim by the plaintiff that there is an implied claim that the resultsmarket price in the studies have been confirmed by repetition which plaintiff contests.
Onamount of 520,000,
1,481,500 and 2,155,500 shares for the 3rd dayyears ended December 31, 2005, 2004 and
2003, respectively, were not included in the computation of July, 2003, the Contra Costa County Superior Court upon Motion
of The Quigley Corporation issued a Summary Judgment in favor of The Quigley
Corporation. On October 24, 2003, Intervention Inc. filed an appeal to the
California Court of Appeals from the Summary Judgment issued in favor of The
Quigley Corporation. In March 2004, the appeal was withdrawn, with prejudice.diluted earnings per
share as they are anti-dilutive.
NOTE 1415 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has sales brokerage and other
arrangements with entities whose major stockholders are also stockholders of The
Quigley Corporation, or are related to a major stockholder, officer and director
of the Company. Commissions and other items expensed under such arrangements for
the twelve months periods ended December 31, 2003, 2002 and 2001 were zero and
$36,979 and $160,034, and are included in sales and marketing, and
administration expense classifications in the Consolidated Statements of
Operations. Amounts payable under such agreements at December 31, 2003 and
December 31, 2002 were zero.
An agreement between the Company and the founders Mr. Guy J. Quigley and Mr.
Charles A. Phillips, both officers and stockholders of the Company, was entered
into on June 1, 1995. The founders, in consideration of the acquisition of the
Cold-Eeze(R) cold therapy product, are to shareshared a total commission of five percent
(5%), on sales collected, less certain deductions until the termination
of this agreement expired
F-23
on May 31, 2005. For the years ended December 31, 2003, 20022005, 2004 and 2001,2003, amounts
of $889,340, $692,766$366,788, $1,043,346 and $651,614,$889,340, respectively, were paid or payable under
such founder's commission agreements. Amounts payable under such agreements at
December 31, 20032005 and 20022004 were $456,748zero and $301,695,$459,583, respectively.
The Company is in the process of acquiring licenses in certain countries through
related party entities whose stockholders include Mr. Gary Quigley, a relative
of the Company's Chief Executive Officer. Fees amounting to $266,882, $369,000
$309,493
and $281,250$369,000 have been paid to a related entity during 2003, 20022005, 2004 and 2001,2003,
respectively to assist with the regulatory aspects of obtaining such licenses.
F-19
NOTE 1516 - RESTATEMENT
DuringSEGMENT INFORMATION
The basis for presenting segment results generally is consistent with overall
Company reporting. The Company reports information about its operating segments
in accordance with Financial Accounting Standard Board Statement No. 131,
"Disclosure About Segments of an Enterprise and Related Information," which
establishes standards for reporting information about a company's operating
segments. All consolidating items are included in Corporate & Other.
The Company had divided its operations into four reportable segments as follows:
The Quigley Corporation (Cold- Remedy), whose main product is Cold-Eeze(R), a
proprietary zinc gluconate glycine lozenge for the common cold; Darius (Health
and Wellness), whose business is the sale and direct marketing of a range of
health and wellness products; Quigley Manufacturing (Contract Manufacturing),
which is the production facility for the Cold-Eeze(R) lozenge product and also
performs contract manufacturing services for third party customers, and Pharma,
(Ethical Pharmaceutical), currently involved in research and development
activity to develop patent applications for potential pharmaceutical products.
Financial information relating to 2005, 2004 and 2003 continuing operations by
business segment follows:
- -------------------------------------------------------------------------------------------------------------------------
AS OF AND FOR THE TWELVE
MONTHS ENDED Cold Health and Contract Ethical Corporate &
DECEMBER 31, 2005 Remedy Wellness Manufacturing Pharmaceutical Other Total
- -------------------------------------------------------------------------------------------------------------------------
Revenues
Customers-domestic $29,284,651 $16,034,960 $3,900,342 - - $49,219,953
Customers-international - 4,438,090 - - - 4,438,090
Inter-segment - - 7,090,523 - ($7,090,523) -
Segment operating profit
(loss) 6,693,192 859,956 (80,419) ($4,044,162) (449,137) 2,979,430
Depreciation 387,840 143,726 872,541 - - 1,404,107
Capital expenditures 228,688 35,523 267,002 - - 531,213
Total assets $38,171,897 $4,918,271 $7,042,169 - ($14,156,698) $35,975,639
- -------------------------------------------------------------------------------------------------------------------------
AS OF AND FOR THE TWELVE
MONTHS ENDED Cold Health and Contract Ethical Corporate &
DECEMBER 31, 2004 Remedy Wellness Manufacturing Pharmaceutical Other Total
- -------------------------------------------------------------------------------------------------------------------------
Revenues
Customers-domestic $22,834,249 $17,484,246 $752,355 - - $41,070,850
Customers-international - 2,877,145 - - - 2,877,145
Inter-segment - - 1,975,779 - ($1,975,779) -
Segment operating profit
(loss) 1,618,534 1,509,001 406,811 ($3,056,757) (295,602) 181,987
Depreciation 340,828 168,696 112,824 - - 622,348
Capital expenditures 250,246 32,569 4,388,153 - - 4,670,968
Total assets $31,236,129 $6,143,769 $6,806,026 - ($12,656,168) $31,529,756
NOTE: The stated capital expenditure of $4,388,153 related to the Company changed its accounting for certain warrants issued in
2002 in exchange for services. Due to a cancellation clause in the warrant
agreement, the warrants should have been treated as contingently issuable and
subject to variable accounting, rather than the fixed accounting initially
applied. The 2002 consolidated financial statements have been restated to
reflect the accounting for these warrants. The restatement had no effect on the
net lossContract
Manufacturing segment for the year ended Decemberof 2004 is inclusive of an amount of
$4,360,829 following the acquisition by the Company of certain assets of JoEl,
Inc., on October 1, 2004.
F-24
- -------------------------------------------------------------------------------------------------------------------------
AS OF AND FOR THE TWELVE
MONTHS ENDED Cold Health and Contract Ethical Corporate &
DECEMBER 31, 2002. The effects of this restatement
are summarized below.
As Previously
Reported As Restated
---------------------------------
BALANCE SHEET
Accrued consulting $ 1,673,000 $ 975,0002003 Remedy Wellness Manufacturing Pharmaceutical Other Total
current liabilities 6,512,139 5,814,139
Additional paid-in-capital 32,592,222 33,290,222- -------------------------------------------------------------------------------------------------------------------------
Revenues
Customers-domestic $20,474,969 $19,801,759 - - - $40,276,728
Customers-international - 1,222,435 - - - 1,222,435
Segment operating profit
(loss) 1,699,378 1,791,454 - ($2,855,294) - 635,538
Depreciation 318,419 155,174 - - - 473,593
Capital expenditures 414,129 140,887 - - - 555,016
Total stockholders' equity 18,422,817 19,120,817assets $24,892,338 $3,881,970 - - ($2,504,549) $26,269,759
NOTE 1617 - QUARTERLY INFORMATION (UNAUDITED)
The Company has restated its 2002 consolidated financial statements in order to
properly reflect the accounting for certain warrants issued in 2002.
Quarter Ended
----------------------------------------------------------------
MarchQUARTER ENDED
-----------------------------------------------------------------
MARCH 31, JuneJUNE 30, SeptemberSEPTEMBER 30, DecemberDECEMBER 31,
----------------------------------------------------------------
2003-----------------------------------------------------------------
2005
Net Sales $8,191,092 $7,004,580 $9,912,227 $16,391,264$11,753,270 $8,844,173 $15,319,980 $17,740,620
Gross Profit 3,694,110 2,765,589 4,487,847 9,063,8545,702,972 3,033,521 8,294,204 10,803,261
Administration 2,441,720 2,311,887 2,046,915 3,043,3242,994,769 2,986,507 2,897,941 3,777,025
Operating expenses 4,616,219 3,849,747 4,372,646 6,537,2505,897,903 4,893,925 5,380,400 8,682,300
Income (loss) from operations (922,109) (1,084,158) 115,201 2,526,604(1,860,404) 2,913,804 2,120,961
(194,931)
Income (loss) from continuing operations (892,212) (1,055,141) 134,129 2,542,147(1,790,410) 2,998,503 2,163,086
(154,495)
Net Income (loss) ($946,561)154,495) ($1,055,141) $134,129 $2,542,1471,790,410) $2,998,503 $2,163,086
Basic EPS
Income (loss) from continuing operations ($0.08)0.01) ($0.09) $0.01 $0.220.15) $0.26 $0.19
Net Income (loss) ($0.08)0.01) ($0.09) $0.01 $0.220.15) $0.26 $0.19
Diluted EPS
Income (loss) from continuing operations ($0.08)0.01) ($0.09) $0.01 $0.170.15) $0.23 $0.16
Net Income (loss) ($0.08)0.01) ($0.09) $0.01 $0.17
Quarter Ended Quarter Ended
March0.15) $0.23 $0.16
QUARTER ENDED
-----------------------------------------------------------------
MARCH 31, JuneJUNE 30, ------------------------------ -----------------------------
As Previously As Previously
2002 Reported As Restated Reported As RestatedSEPTEMBER 30, DECEMBER 31,
-----------------------------------------------------------------
2004
Net Sales $4,984,532 $4,984,532 $5,053,622 $5,053,622$9,605,617 $6,901,182 $9,690,858 $17,750,338
Gross Profit 2,438,036 2,438,036 1,627,890 1,627,8904,520,243 2,776,882 3,800,112 9,277,632
Administration 2,514,847 3,969,847 1,735,878 1,390,8782,750,499 2,054,741 2,313,609 2,701,099
Operating expenses 4,212,159 5,667,159 2,999,511 2,654,5115,320,567 3,710,062 3,856,503 7,305,750
Income (loss) from operations (1,774,123) (3,229,123) (1,371,622) (1,026,622)(933,180) (56,391) 1,971,882
(800,324)
Income (loss) from continuing operations (1,735,759) (3,190,759) (1,333,979) (988,979)(912,477) 177,376
(781,631) 1,969,594
Net Income (loss) ($1,700,768)781,631) ($3,155,768) ($1,450,220) (1,105,220)912,477) $177,376 $1,969,594
Basic EPS
Income (loss) from continuing operations ($0.16)0.07) ($0.30) ($0.12) ($0.10)0.08) $0.02 $0.17
Net Income (loss) ($0.16)0.07) ($0.30) ($0.13) ($0.10)0.08) $0.02 $0.17
Diluted EPS
Income (loss) from continuing operations ($0.16)0.07) ($0.30) ($0.12) ($0.10)0.08) $0.01 $0.13
Net Income (loss) ($0.16)0.07) ($0.30) ($0.13) ($0.10)
F-200.08) $0.01 $0.13
F-25
Quarter Ended Quarter Ended
September 30 December 31
------------------------------ ------------------------------
As Previously As Previously
2002 Reported As Restated Reported As Restated
-----------------------------------------------------------------
Net Sales $7,834,325 $7,834,325 $11,399,301 $11,399,301
Gross Profit 3,111,062 3,111,062 5,034,822 5,034,822
Administration 1,987,058 1,367,058 3,653,978 3,163,978
Operating expenses 3,441,779 2,821,779 6,842,777 6,352,777
Income (loss) from operations (330,717) 289,283 (1,807,954) (1,317,954)
Income (loss) from continuing operations (288,853) 331,147 (1,773,512) (1,283,512)
Net Income (loss) ($500,395) $119,605 ($2,803,075) ($2,313,075)
Basic EPS
Income (loss) from continuing operations ($0.03) $0.03 ($0.16) ($0.12)
Net Income (loss) ($0.05) $0.01 ($0.26) ($0.21)
Diluted EPS
Income (loss) from continuing operations ($0.03) 0.02 ($0.16) ($0.12)
Net Income (loss) ($0.05) 0.01 ($0.26) ($0.21)
In December 2002, the Board of Directors of the Company approved a plan to sell
Caribbean Pacific Natural Products, Inc. On January 22, 2003, the Company
completed the sale of its 60% equity interest in Caribbean Pacific Natural
Products, Inc. to Suncoast Naturals, Inc. by exchanging its 60% controlling
interest in Caribbean Pacific Natural Products, Inc. for 750,000 Shares of
Common Stock and 100,000 Shares of Redeemable Preferred Stock of Suncoast
Naturals, Inc. This transaction reflects the operation results and impairment
losses of Caribbean Pacific Natural Products, Inc. as discontinued operations of
the Company for all periods presented.
FOURTH QUARTER SEGMENT DATA (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------
As of and for the three months-------------------------------------------------------------------------------------------------------------------------
AS OF AND FOR THE TWELVE
MONTHS ENDED Cold Health and Contract Ethical ended DecemberCorporate &
DECEMBER 31, 2003 Cold2005 Remedy Wellness Manufacturing Pharmaceutical Other Total
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenues
Customers $11,040,653 $5,350,611 -- -- $16,391,264Customers-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) 3,239,962 54,3252,480,622 8,074 264,947 ($767,681) -- 2,526,606956,382) 323,700 2,120,961
Depreciation 83,349 41,504 -- -- 124,85399,142 35,848 225,355 - - 360,345
Capital expenditures 98,476 46,432 -- -- 144,908
Total assets $24,892,338 $3,881,970 -- ($2,504,549) $26,269,759$139,756 $1,094 $212,525 - --------------------------------------------------------------------------------------------------------------------------
As of and for the three months
ended December 31, 2002- $353,375
- -------------------------------------------------------------------------------------------------------------------------
AS OF AND FOR THE TWELVE
MONTHS ENDED Cold Health and Contract Ethical (Restated Note-15) ColdCorporate &
DECEMBER 31, 2004 Remedy Wellness Manufacturing Pharmaceutical Other Total
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenues
Customers $6,782,664 $4,616,637 -- -- $11,399,301Customers-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) (1,020,196) 172,3622,491,935 187,979 406,811 ($485,590) $15,470 (1,317,954)819,241) (295,602) 1,971,882
Depreciation 72,091 40,811 -- -- 112,90290,102 41,157 112,824 - - 244,083
Capital expenditures 119,432 28,921 -- -- 148,353
Total assets $26,223,476 $1,401,867 -- ($2,690,387) $24,934,956$130,716 $6,403 $4,388,153 - --------------------------------------------------------------------------------------------------------------------------
As$202 $4,525,474
NOTE: The stated capital expenditure of and$4,388,153 related to the Contract
Manufacturing segment for the three monthsyear of 2004 is inclusive of an amount of
$4,360,829 following the acquisition by the Company of certain assets of JoEl,
Inc., on October 1, 2004.
- -------------------------------------------------------------------------------------------------------------------------
AS OF AND FOR THE TWELVE
MONTHS ENDED Cold Health and Contract Ethical ended DecemberCorporate &
DECEMBER 31, 2001 Cold2003 Remedy Wellness Manufacturing Pharmaceutical Other Total
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Revenues
Customers $6,536,445 $1,763,209 -- -- $8,299,654
Inter-segment -- -- -- -- --Customers-domestic $11,040,653 4,825,566 - - - $15,866,219
Customers-international - 525,045 - - - 525,045
Segment operating profit
(loss) 1,893,169 (354,104)3,239,960 54,325 - ($161,182) -- 1,377,883767,681) - 2,526,604
Depreciation 67,485 20,477 -- -- 87,96283,349 41,504 - - - 124,853
Capital expenditures 21,512 34,432 -- -- 55,944
Total assets $26,726,729 $826,946 -- ($2,797,880) $24,755,795
F-21$98,476 $46,432 - - - $144,908
F-26
RESPONSIBILITY FOR FINANCIAL STATEMENTS
---------------------------------------
The management of The Quigley Corporation is responsible for the information and
representations contained in this report. Management believes that the financial
statements have been prepared in conformity with generally accepted accounting
principles and that the other information in this annual report is consistent
with those statements. In preparing the financial statements, management is
required to include amounts based on estimates and judgments, which it believes
are reasonable under the circumstances.
In fulfilling its responsibilities for the integrity of the data presented and
to safeguard the Company's assets, management employs a system of internal
accounting controls designed to provide reasonable assurance, at appropriate
cost, that the Company's assets are protected and that transactions are
appropriately authorized, recorded, and summarized. This system of control is
supported by the selection of qualified personnel, by organizational assignments
that provide appropriate delegation of authority and division of
responsibilities, and by the dissemination of policies and procedures.
/s/ Guy J. Quigley March 26, 2004February 24, 2006
- -------------------------------------------------------- -------------------------------
Guy J. Quigley, Chairman of the Board, Date
(President, Chief Executive Officer)
/s/ George J. Longo March 26, 2004February 24, 2006
- -------------------------------------------------------- -------------------------------
George J. Longo, Vice President, Chief Financial Officer Date
(Principal Financial and Accounting Officer)
F-22F-27
REPORT OF INDEPENDENT AUDITORSReport of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of The Quigley Corporation
We have audited the accompanying consolidated balance sheets of The Quigley
Corporation and subsidiaries as of December 31, 2005 and 2004 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 2005 and 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2005 and 2004, and the results of its operations and its cash flows for years
ended December 31, 2005 and 2004, in conformity with U.S. generally accepted
accounting principles.
/s/ Amper Politziner & Mattia P.C.
- ----------------------------------
Edison, New Jersey
February 24, 2006
F-28
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of The Quigley Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statementsstatement of operations,
stockholders' equity, and cash flows present fairly, in all material respects,
and the financial positionresults of operations and cash flows of The Quigley Corporation and its
subsidiaries at December 31, 2003 and 2002, andfor the results
of their operations and their cash flows for each of the three years in the
periodyear ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; ourmanagement. Our
responsibility is to express an opinion on these financial statements based on
our audits.audit. We conducted our auditsaudit of these statements in accordance with auditingthe
standards generally accepted inof the United States of America, whichPublic Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provideaudit provides a reasonable basis for our opinion.
As further discussed in Note 15, the Company's 2002 consolidated financial
statements have been restated to revise the accounting for certain warrants.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 26, 2004
F-23F-29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NoneThe Company filed a Form 8-K on July 8, 2004, announcing that the Company had
dismissed PricewaterhouseCoopers LLP ("PwC") as its independent registered
public accounting firm. On the same date, the Company engaged Amper, Politziner
& Mattia, P.C. as independent accountants. The dismissal of PwC and engagement
of Amper, Politziner & Mattia, P.C. were approved by the Audit Committee of the
Company.
The reports of PwC on the Company's financial statements for the fiscal year
ended December 31, 2003 did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle, except for the 2003 fiscal year opinion, which contained a
reference for a restatement of the 2002 consolidated financial statements to
revise the accounting for certain warrants. During the fiscal year ended
December 31, 2003 and through July 8, 2004, there were no disagreements with PwC
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of PwC, would have caused them to make reference to the
subject matter of any such disagreement in connection with its reports on the
financial statements for such years. During the fiscal year ended December 31,
2003 and through July 8, 2004, there were no reportable events (as defined in
Item 304(a)(1)(v) of Regulation S-K). The Company has not consulted with Amper,
Politziner & Mattia, P.C. during the last fiscal year ended December 31, 2003 or
during the subsequent interim periods from January 1, 2004 through and including
July 8, 2004 on either the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on The Company's consolidated financial statements.
ITEM 9A. CONTROLS AND PROCEDURES
Based on their evaluation, as of the end of the period covered by this report,
the Company's Chief Executive Officer and Chief Financial Officer have concluded
the Company's disclosure controls and procedures (as defined in Rules 13a-14 and
15d-14 under the Securities Exchange Act of 1934) are effective. There have been
no significantmaterial changes in internal controls or in other factors that could
significantlymaterially affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the Act), beginning
with our Annual Report on Form 10-K for the fiscal year ended December 31, 2006,
we may be required to furnish a report by our management on our internal control
over financial reporting. This report will contain, among other matters, an
assessment of the effectiveness of our internal control over financial reporting
as of the end of our fiscal year, including a statement as to whether or not our
internal control over financial reporting is effective. This assessment must
include disclosure of any material weakness in our internal control over
financial reporting identified by management. If we identify one or more
material weaknesses in our internal control over financial reporting, we will be
unable to assert our internal control over financial reporting is effective.
This report will also contain a statement that our independent registered public
accountants have issued an attestation report on management's assessment of such
internal controls and a conclusion on the operating effectiveness of those
controls.
Management acknowledges its responsibility for internal controls over financial
reporting and seeks to continually improve those controls. In order to achieve
compliance with Section 404 of the Act within the prescribed period, we are
currently performing the system and process documentation and evaluation needed
to comply with Section 404, which is both costly and challenging. We believe our
process, which began in fiscal 2003 and is continuing in fiscal 2006 for
documenting, evaluating and monitoring our internal control over financial
reporting is consistent with the objectives of Section 404 of the Act.
-31-
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANYREGISTRANT
The information required under this item is incorporated by reference to the
Company's Proxy Statement for the 20042006 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 20042006 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 20042006 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated by reference to the
Company's Proxy Statement for the 20042006 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 20042006 Annual Meeting of Stockholders.
-22-
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Articles of Incorporation of the Company, (as amended),as amended,
(incorporated by reference to Exhibit 3.1 of Form 10-KSB/A
datedfiled on April 4, 1997).
3.2 By-laws of the Company as currently in effect (incorporated
by reference to Exhibit 3.2 of the Company's Registration
Statement on Form 10-KSB/A filed with the Commission on April
4, 1997 and Exhibit 99.3 of the Company's Current Report on
Form 8-K filed with the Commission on September 21, 1998).
4.1 Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 of Form 10-KSB/A datedfiled on April 4, 1997)
10.1.
10.1* 1997 Stock Option Plan (incorporated by reference to Exhibit
10.1 of the Company's Registration Statement on Form S-8
(File No. 333-61313) filed with the Commission on August 13, 1998).
10.2 Exclusive Representation and Distribution Agreement dated
May 4, 1992 between the Company and Godfrey Science and
Design, Inc. et al (incorporated by reference to Exhibit
10.2 of Form 10-KSB/A datedfiled on April 4, 1997)
10.3.
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 datedfiled on April 4, 1997)
10.4.
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 datedfiled on April 4, 1997).
-32-
10.5 Exclusive Master Broker Wholesale Distributor and
Non-Exclusive National Chain Broker Agreement dated July 22,
1994 between the Company and Russell Mitchell (incorporated
by reference to Exhibit 10.7 of Form 10-KSB/A dated April 4,
1997)
10.6 Licensing Agreement dated August 24, 1996 between the
Company, George A. Eby III and George Eby Research
(incorporated by reference to Exhibit 10.6 of Form 10-KSB/A
dated April 4, 1997)
10.8 United States Exclusive Supply Agreement dated March 17,
1997 (Portions of this exhibit are omitted and were filed
separately with the Securities Exchange Commission pursuant
to the Company's application requesting confidential
treatment in accordance with Rule 406 of Regulation C as
promulgated under the Securities Act of 1933, incorporated
by reference to Exhibit 10.5 of Form SB-2 dated September
29, 1997). See exhibit 10.18.
10.910.14.
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 datedfiled on April 4,
1997)
10.10.
10.7* Employment Agreement dated November 5, 1996, as amended,
between the Company and George J. Longo (the Employment
Agreement is incorporated(incorporated by
reference to Exhibit 10.10 of Form 10-KSB datedfiled on March 30,
1998 and the amendments are
attached hereto)
10.11 Employment Agreement dated January 1, 1997, as amended,
between the Company and Eric H. Kaytes (the Employment
Agreement is incorporated by reference to Exhibit 10.11 of
Form 10-KSB dated March 30, 1998 and amendments are attached
hereto)
10.121998.
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 with the Commission
on September 18,
1998)
-23-
10.13.
10.9 Consulting agreement dated March 7, 2002 between the Company
and Forrester Financial LLC (incorporated by reference fromto
Exhibit 99.1 toof Form 8-K filed on April 11, 2002.)
10.142002).
10.10 Warrant agreement dated March 7, 2002 between the Company
and Forrester Financial LLC (incorporated by reference fromto
Exhibit 99.2 toof Form 8-K filed on April 11, 2002.)
10.152002).
10.11 Agreement dated February 2, 2003 between the Company and
Forrester Financial LLC (incorporated by reference fromto
Exhibit 99.3 toof Form 8-K filed on February 18, 2003.)
10.162003).
10.12 Amended and Restated Warrant Agreement dated February 2,
2003 between the Company and Forrester Financial LLC
(incorporated by reference fromto Exhibit 99.4 toof Form 8-K filed
on February 18, 2003.)
10.172003).
10.13 Share agreement effective as of December 31, 2002 between
the Company and Suncoast Naturals, Inc. is incorporated(incorporated by
reference to Exhibit 2.1 of Form 8-K filed on February 6,
2003.
10.18*2003).
10.14 Third Amendment to UntiedUnited States Exclusive Supply Agreement.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).
-33-
10.20 Registration Rights Agreement dated October 1, 2004 by and
among the Company and the shareholders signatory thereto
(incorporated by reference to Exhibit 10.5 of Form 8-K filed
on October 7, 2004).
10.21* Employment Agreement dated October 1, 2004 between Quigley
Manufacturing Inc. and David B. Deck (incorporated by
reference to Exhibit 10.6 of Form 8-K filed on October 7,
2004).
10.22* Employment Agreement dated October 1, 2004 between Quigley
Manufacturing Inc. and David Hess (incorporated by reference
to Exhibit 10.7 of Form 8-K filed on October 7, 2004).
14.1 Code of Ethics (incorporated by reference to Exhibit II of
the Proxy Statement on Schedule 14A filed on March 31,
2003).
16.1 PricewaterhouseCoopers LLP letter dated March 30, 2006
(incorporated by reference to Exhibit 16.1 of Form 10-K
filed on March 31, 2005).
21.1** Subsidiaries of The Quigley Corporation.
23.1** Consent of PricewaterhouseCoopers LLP, Independent
Accountants,Registered Public Accounting Firm, dated March 26, 2004.13, 2006.
23.2** Consent of Amper, Politziner & Mattia, Independent
Registered Public Accounting Firm, dated March 13, 2006.
31.1** Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2** Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1** Certification of the President and Chief Executive Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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
(b) Reports on Form 8-K
The Company filed a report on 8-K, Item 5. On January 22, 2003, the
Board appointed Stephen W. Wouch to fill a vacancy on the Board. Mr.
Wouch is a certified public accountant with 19 years of public
accounting experience as a partner and is the Managing Partner of
Wouch, Maloney & Co., LLP, Certified Public Accountants.
-24--34-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Companyregistrant 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 30, 200423, 2006
- ------------------------------------------------- --------------
Guy J. Quigley, Chairman of the Board, President, Date
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Companyregistrant and in the
capacities and on the dates indicated:
Signature Title Date
- --------- ----- ---------
/s/ Guy J. Quigley Chairman of the Board, President, March 30, 200423, 2006
- --------------------------- --------------
Guy J. Quigley Chief Executive Officer and Director
/s/ Charles A. Phillips Executive Vice President, Chief Operating March 30, 200423, 2006
- --------------------------- --------------
Charles A. Phillips Officer and Director
/s/ George J. Longo Vice President, Chief Financial March 30, 200423, 2006
- --------------------------- --------------
George J. Longo Officer and Director (Principal
Financial and Accounting Officer)
/s/ Jacqueline F. Lewis Director March 30, 200423, 2006
- --------------------------- --------------
Jacqueline F. Lewis
/s/ Rounsevelle W. Schaum Director March 30, 200423, 2006
- --------------------------- --------------
Rounsevelle W. Schaum
/s/ Stephen W. Wouch, Director March 30, 200423, 2006
- --------------------------- --------------
Stephen W. Wouch,
-25-/s/ Terrence O. Tormey, Director March 23, 2006
- --------------------------- --------------
Terrence O. Tormey,
-35-