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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal year ended December 31, 2001
Commission File No. 01-21617
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THE QUIGLEY CORPORATION
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(Exact name of registrant as specified in its charter)
NEVADA 23-2577138
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
(MAILING ADDRESS: PO Box 1349, Doylestown, PA 18901)
KELLS BUILDING, 621 SHADY RETREAT ROAD, DOYLESTOWN, PA 18901
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(Address of principle executive offices) (Zip Code)
(215) 345-0919
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(Registrant'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: COMMON STOCK ($.0005 PAR VALUE)
COMMON SHARE PURCHASE RIGHTS
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
/X/ Yes / / No
Indicate by the check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-X contained in this form, and no disclosure
will 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 amendments to this Form 10-K.
[X]
As of February 22, 2002, the aggregate market value of the voting stock (all of
one class $.0005 par value Common Stock) held by non-affiliates of the
Registrant was $37,363,036 based upon the closing price of the Common Stock on
that date as reported on the NASDAQ National Market.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Number of shares of each of the Registrant's classes of securities (all of one
class of $.0005 par value Common Stock) outstanding on February 22, 2002:
10,675,153.
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 to the Registrant's Proxy Statement for the 2002 Annual Meeting
of Stockholders.
THE EXHIBIT INDEX IS LOCATED ON PAGES 19-20.
Page 1 of 22
TABLE OF CONTENTS
Part I
Page
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Item 1. Description of Business 3-8
2. Description of Properties 8
3. Legal Proceedings 9-10
4. Submission of Matters to a Vote by Security Holders 10
Part II
5. Market for the Company's Common Equity and Related
Stockholder Matters 10-11
6. Selected Financial Data 11-12
7. Management's Discussion and Analysis of Results of
Operations and Financial Condition 12-17
8. Financial Statements 18
9. Change in and Disagreements with Accountants on
Accounting and Financial Disclosure 19
Part III
10. Directors and Executive Officers of the Registrant 19
11. Executive Compensation 19
12. Security Ownership of Certain Beneficial
Owners and Management 19
13. Certain Relationships and Related Transactions 19
Part IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 20-21
2
FORWARD-LOOKING STATEMENTS
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In addition to historical information, this Annual 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, 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. Readers should carefully review the risk factors described in other
documents the Company files from time to time with the Securities and Exchange
Commission.
PART 1
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ITEM 1. DESCRIPTION OF BUSINESS
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BUSINESS DEVELOPMENT
- --------------------
The Quigley Corporation (hereinafter referred to as the "Company") is a Nevada
corporation which was organized on August 24, 1989 and commenced business
operations in October 1989.
The Company's current primary business is the manufacture and distribution of
cold remedy products to the consumer through the over-the-counter market place.
Its key product Cold-Eeze(R) is a zinc gluconate glycine lozenge 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.
In January 2000, Darius International Inc., a wholly owned subsidiary of The
Quigley Corporation, was formed as a means of introducing new products to the
marketplace. On January 2, 2001, the Company acquired certain assets and assumed
certain liabilities of a privately held company involved in the direct marketing
and distribution of health and wellness products, this entity is a wholly owned
subsidiary of Darius International Inc. and is based in Alpine, Utah.
Additionally, effective July 1, 2000, the Company acquired a 60% ownership
position in Caribbean Pacific Natural Products, Inc., based in Orlando, Florida.
DESCRIPTION OF BUSINESS OPERATIONS
- ----------------------------------
Since its inception, the Company has continued to conduct research and
development into various types of health-related food supplements and
homeopathic cold remedies. Initially, the Company's business was the marketing
and distribution of a line of nutritious health supplements (hereinafter
"Nutri-Bars"). During 1995, the Company reduced the emphasis in the marketing of
the Nutri-Bars and commenced focusing its marketing and research and development
resources towards the Company's patented Cold-Eeze(R) zinc gluconate glycine
cold relief products.
Prior to the fourth quarter 1996, the Company had minimal revenues and as a
result suffered continued losses due to ongoing research and development and
operating expenses. However, 1997 resulted in significant revenue increases as a
result of the Company's nationwide marketing campaign and the increased public
awareness through media public service announcements of the Cold-Eeze(R) lozenge
product.
Since June 1996, the Company has concentrated its business operations on the
manufacturing, marketing and development of its proprietary Cold-Eeze(R) and
Cold-Eezer Plus cold-remedy lozenge products and on development of various
product extensions. These products are based upon a proprietary zinc gluconate
glycine formula, which in two double-blind clinical studies has shown to reduce
the duration and severity of the common cold symptoms. The Quigley Corporation
acquired worldwide manufacturing and distribution rights to this formulation in
1992 and commenced national marketing in 1996. The demand for the Company's cold
remedy products and sun-care and skincare products is seasonal,
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where the third and fourth quarters generally represent the largest sales volume
for Cold remedy products and the first and second quarters generally represent
the largest sales volume for the sun-care and skincare products. During 2001,
approximately 99% of the Company's revenues originated in the United States with
the remainder being attributable to international trade.
As referred to earlier, the Company formed Darius International Inc., a wholly
owned subsidiary, in January 2000 for the purpose of introducing new products to
the marketplace through a network of independent distributors. Darius is a
direct selling organization specializing in proprietary health and wellness
products. The Company commenced shipping product to customers in the third
quarter of 2000. Additionally, on January 2, 2001, the Company acquired certain
assets and assumed certain liabilities of a privately held company involved in
the direct marketing and distribution of health and wellness products. This
entity is a wholly owned subsidiary of Darius International Inc.
Effective July 1, 2000, The Quigley Corporation acquired a 60% ownership
position of Caribbean Pacific Natural Products, Inc., a leading developer and
marketer of all-natural sun and skin products for luxury resorts, theme parks
and spas. Caribbean Pacific Natural Products, Inc., is headquartered in Orlando,
Florida.
The formation of Darius International Inc., and the majority ownership position
in Caribbean Pacific Natural Products, Inc., provide diversification to the
Company in both the method of product distribution and the broader range of
products available to the marketplace.
In January 2001, the Company formed an Ethical Pharmaceutical Unit which is now
Quigley Pharma Inc., a wholly-owned subsidiary of the Company that is under the
direction of its Executive Vice President and Chairman of its Medical Advisory
Committee. The launch of the Company's Ethical Pharmaceutical Unit follows the
Patent Office of The United States Commerce Department confirming the assignment
to the Company of a Patent Application for the "Method and Composition for the
Topical Treatment of Diabetic Neuropathy". In September 2001, the Patent Office
confirmed the assignment to the Company of a Patent Application entitled the
"Medicinal Composition and Method of Using it" (for Treatment of Sialorrhea and
other Disorders) for a prescription product to relieve sialorrhea (drooling) in
patients suffering from Amyotrophic Lateral Sclerosis (ALS), otherwise known as
Lou Gehrig's Disease. In November 2001, the Company was assigned a Patent
Application entitled "Composition and Method for Prevention, Reduction and
Treatment of Radiation Dermatitis" with the Patent Office of The United States
Commerce Department. The establishment of a dedicated pharmaceutical subsidiary
will 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.
PRODUCTS
- --------
Cold Remedy Products
- --------------------
Cold-Eeze(R), a zinc gluconate glycine formulation (ZIGG(TM)) representing 68.4%
of the Company's sales for 2001, is sold in lozenge, bubble gum and sugar-free
tablet forms. 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 pending in
Japan. This product is presently being marketed by the Company and also through
independent brokers and marketers in the United States under the trade names
Cold-Eeze(R), Cold-Eeze(R) Sugar Free, and Cold-Eeze(R) Bubble Gum and in Canada
under the trade name Zigg-Eeze(TM).
In 1996, the Company also acquired an exclusive license to a zinc gluconate use
patent, thereby assuring the Company exclusivity in the manufacturing and
marketing of zinc gluconate glycine lozenge formulated cold relief products.
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. Late in the fourth quarter of 1998, the Company launched a
bubble gum version of Cold-Eeze(R).
Under a Food and Drug Administration ("FDA") approved Investigational New Drug
Application, filed by Dartmouth College, a randomized double-blind
placebo-controlled study, conducted at Dartmouth College of Health Science,
4
Hanover, New Hampshire, concluded that the lozenge formulation treatment,
initiated within 48 hours of symptom onset, resulted in a significant reduction
in the total duration of the common cold.
On May 22, 1992, ZINC AND THE COMMON COLD, A CONTROLLED CLINICAL STUDY, was
published in England, in the "Journal of International Medical Research", Volume
20, Number 3, Pages 234-246. According to this publication, (a) flavorings used
in other Zinc lozenge products (citrate, tartrate, separate, orotate,
picolinate, mannitol or sorbitol) render the Zinc inactive and unavailable to
the patient's nasal passages, mouth and throat, where cold symptoms have to be
treated, (b) this patented pleasant-tasting formulation delivers approximately
93% of the active Zinc to the mucosal surfaces and (c) the patient has the same
sequence of symptoms as in the absence of treatment, but goes through the phases
at an accelerated rate and with reduced symptom severity.
On July 15, 1996, results of a new randomized double-blind placebo-controlled
study on the common cold were published, which commenced at the CLEVELAND CLINIC
FOUNDATION on October 3, 1994. 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.
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. Cold-Eeze(R), which has been clinically proven, offers a
significant advantage over other suppliers in the over-the-counter cold remedy
market. The management of the Company believes there should be no future
impediment on the ability to compete in the marketplace now, or in the immediate
future, since factors concerning the product, such as price, product quality,
availability, reliability, credit terms, name recognition, delivery 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 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 personnel to represent the Company's
over-the-counter products, thereby saving capital and other ongoing expenditures
that would otherwise be incurred.
Health And Wellness Products
- ----------------------------
Darius International Inc., a wholly owned subsidiary with sales representing 23%
of the Company's sales in 2001, was formed in January 2000 for the purpose of
introducing new products to the marketplace through a network of independent
distributors. On January 2, 2001, the Company acquired certain assets and
assumed certain liabilities of a privately held company involved in the direct
marketing and distribution of health and wellness products. Darius is a direct
selling organization specializing in proprietary health and wellness products.
The products marketed and sold by Darius are designed to improve the human
condition, in the area of health, immunity, energy, pain and the common cold.
Sun-care and Skincare Products
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Caribbean Pacific Natural Products, Inc., is a leading developer and marketer of
all-natural sun-care and skincare products for luxury resorts, theme parks and
spas with sales representing 8.6% of the Company's sales in 2001.
These products are all-natural, eco-safe, and organic, meaning that the need for
petro-chemical, synthetic, and chemical additives used by most competitors has
been eliminated. All-natural ingredients such as aloe vera, rose hip oil,
squalane, Vitamin E, tea tree oil and other natural oils and extracts are used
instead of many synthetic preservatives, fillers and softeners which may have
side-effects.
Caribbean Pacific currently has three distinct product lines: Virgin Sol, Coral
Sol and Sport Sol and is currently developing a spa line called Sabate and has
recently test marketed a dry-grip golf product.
Caribbean Pacific markets a line of natural protectors, or "Sol Cremes" that
provide dual protection against the damaging effects of the sun. This product is
available in differing Sun Protection Factors (SPF). Caribbean Pacific also
markets a
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sunscreen product called "Karibbean Kidz" especially for children, again
containing all natural ingredients found in nature.
Additionally, Caribbean Pacific markets various products rich in essential
nutrients and vitamins necessary for the skin. Products available in this
category are: Black Pearl Ultra Oil, Diamond Rose Dry Tanning Oil and Emerald
Rose Tanning Oil.
Caribbean Pacific has developed an effective combination of natural ingredients
for moisture that include the Aloe Rose Body Creme, a moisturizing lotion, and
the Tea Tree Burn Relief, which cools the skin to sooth the discomfort
associated with burns, insect bites and itching.
Caribbean Pacific also has the capability to make available customized
merchandise, such as beach bags, beach towels etc., which complement the range
of sun-care and skincare products marketed and sold by Caribbean Pacific.
PATENTS, TRADEMARKS, ROYALTY AND COMMISSION AGREEMENTS
- ------------------------------------------------------
The Company currently owns no patents. However, the Company has recently been
assigned three 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)
France & Italy: No. EP 0 183 840 B1 (March 2, 1994) Japan: Pending
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 will expire in March 2002. The
Company does not anticipate any material impact on the financial statements.
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, the Company pays a royalty fee to the patent holder of three
percent (3%) on sales collected, less certain deductions which expires in March
2002.
During 1997, the Company instituted a trademark for the major components of its
lozenge, ZIGG(TM) (denoting zinc gluconate glycine), to set Cold-Eeze(R) apart
from the imitations proliferating the marketplace.
An agreement between the Company and the founders was entered into on June 1,
1995. The founders, 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.
The trademarks and formulations for the natural skin care products sold by
Caribbean Pacific Natural Products, Inc. are owned by Caribbean Pacific
International, Inc., which has a 40% ownership position in Caribbean Pacific
Natural Products. The trademarks and formulations are assigned to Caribbean
Pacific Natural Products, Inc. for a twenty-five year period. Caribbean Pacific
Natural Products pays Caribbean Pacific International a royalty of five percent
(5%) on sales collected less certain deductions, for a four year term, which
terminates in May 2004.
In December 2000, the Patent Office of The United States Commerce Department
confirmed the filing and assignment to the Company of a Patent Application for
the "Method and Composition for the Topical Treatment of Diabetic
6
Neuropathy." In September 2001, the Patent Office confirmed the assignment to
the Company of a Patent Application entitled the "Medicinal Composition and
Method of Using it" (for Treatment of Sialorrhea and other Disorders) for a
prescription product to relieve sialorrhea (drooling) in patients suffering from
Amyotrophic Lateral Sclerosis (ALS), otherwise known as Lou Gehrig's Disease. In
November 2001, the Company was assigned a Patent Application entitled
"Composition and Method for Prevention, Reduction and Treatment of Radiation
Dermatitis" with the Patent Office of The United States Commerce Department.
PRODUCT DISTRIBUTION AND CUSTOMERS
The Company has several Broker, Distributor and Representative Agreements, both
nationally and internationally, which are sales performance-based. Additionally,
prior to 1998, the Company issued incentive common stock purchase options to its
Brokers, Distributors and Representatives.
The Cold-Eeze(R) products are distributed through numerous food, chain drug and
mass merchandisers throughout the United States, including the Walgreen Company,
Albertsons, CVS, Rite-Aid, Eckerd Drug Company, Phar-Mor Inc., Wal-Mart, Target,
The Kroger Company, Safeway Inc., Costco Wholesale, K-Mart Corporation, and
wholesale distributors including, AmeriSource-Bergen Brunswig Drug Company,
Cardinal Health and the McKesson Drug Company.
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 33%, 44%, and 39% of its
consolidated revenue for the years ended December 31, 2001, 2000 and 1999,
respectively.
Darius is a direct selling organization specializing in proprietary health and
wellness products and the introduction of new products to the marketplace
through a network of independent 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.
Caribbean Pacific Natural Products are sold exclusively through partnership
marketing agreements at over 100 premier resorts, theme parks, and spas
throughout the U.S., Mexico and the Caribbean. They include
Anheuser-Busch-Entertainment, Biltmore, Resort Hyatt, Marriott, Ritz Carlton,
Westin and Wyndham resorts. In Mexico, Caribbean Pacific Natural Products has
exclusive marketing rights at such Eco-archeological Parks as Xcaret and Xelha,
as well as the Allegro and Melia resorts.
RESEARCH AND DEVELOPMENT
- ------------------------
The Company's research and development costs for the years ended December 31,
2001, 2000 and 1999 were $1,331,639, $1,185,750, and $297,650, 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 extensions derivatives for a family of products. Clinical studies
and testing are anticipated in connection with Quigley Pharma, Inc., a
wholly-owned subsidiary of the Company established in 2001, such as the
formulation of products for diabetic use, radiation dermatitis and sialorrhea
and other disorders. Principally, the increase of Research and Development in
2001 and 2000 was due to expenses incurred as part of the costs related to the
application for a pharmacy drug license in the United Kingdom, together with
research costs related to Quigley Pharma.
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
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could be materially affected by the future costs of compliance, management
believes that the future costs will not have a material adverse effect on our
financial position or on our competitive position.
COMPETITION
- -----------
The Company competes with other suppliers of cold remedy products 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 and reliability, credit terms, name
recognition, delivery time and post-sale service and support.
The main competition in the sun-care and skincare industry comes primarily from
names such as Australian Gold(R), California Tan(R), Panama Jack(TM), Hawaiian
Tropic(R), Banana Boat(R) and Coppertone(R). Each takes a somewhat different
position in how they promote their products. Caribbean Pacific Natural Products'
range of products are distinguishable from the competition due to their
all-natural and eco-friendly characteristic.
EMPLOYEES
- ---------
At December 31, 2001 the Company employed 44 full-time persons, primarily all of
whom 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 member of a union. Additionally, the Orlando location included 4 persons
that were engaged by the Company through an outside employer organization.
SUPPLIERS
- ---------
The Company currently uses three separate suppliers to produce Cold-Eeze(R) in
lozenge, bubble gum, and sugar-free tablet form. The Cold-Eeze(R) lozenge
product is manufactured by a third party manufacturer that produces exclusively
for the Company. Should these 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
with the exception of bubble gum, which cannot be duplicated. Any such
termination may, however, result in a temporary delay in production until the
replacement facility is able to meet the Company's production requirements.
Raw materials used in the production of the cold remedy products are available
from numerous sources. Currently, they are being procured from a single vendor
in order to secure purchasing economies. In a situation where this one vendor is
not able to supply the 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.
Darius' products for resale are sourced from several suppliers. In the event
that such sources were no longer in a position to supply Darius with product,
other vendors have been identified as reliable alternatives with minimal adverse
loss of business.
Currently, the principal finished products relating to Caribbean Pacific Natural
Products are being manufactured and blended by a single vendor. In the event of
there being difficulties with the current sources of raw material or finished
product, other suppliers have been identified whose use may result in a
temporary delay in production.
ITEM 2. DESCRIPTION OF PROPERTY
-----------------------
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 total cost of acquisition and refurbishment has been approximately $1.6
million. The Company occupies warehouse space in Las Vegas, Nevada at a monthly
cost of $2,193. This Nevada location has a three-year lease that expires in July
8
2003. In addition to storage facilities at the Manufacturers' locations, the
Company also stores product in four additional warehouses in Pennsylvania with
storage charges based upon the quantities of product being stored.
The Darius business in Utah is located at 80 West Canyon Crest Road, Alpine,
Utah, with an office area of approximately 3,000 square feet. The current
monthly lease cost of this office space is $4,080 with the lease expiring in
March 2002. The Company also occupies a warehouse at Lehi, Utah, which
approximates 5,700 square feet, with a monthly lease cost of $2,500 and this
lease expires in November 2002. The Company expects that these leases will be
renewed or that alternative spaces will be obtained.
Caribbean Pacific Natural Products is located at 5244 Carrier Drive, Suite 309,
Orlando, Florida, covering a total area of approximately 5,100 square feet. The
lease on the premises is for a period of five years, commencing January 2001, at
a monthly lease cost of $6,845. Additionally, Caribbean Pacific Natural Products
is leasing office space in Hawaii and Mexico at a monthly cost of $1,000 and
$1,035 per month, respectively, these leases are for periods of six months and
one year, respectively.
The Company believes that its existing facilities are adequate.
ITEM 3. LEGAL PROCEEDINGS
-----------------
TESAURO AND ELEY
In September, 2000, the Company was sued by two individuals (Jason Tesauro and
Elizabeth Eley, both residents of Georgia), on behalf of a "nationwide class" of
"similarly situated individuals," in the Court of Common Pleas of Philadelphia
County, Pennsylvania. The Complaint alleges that the Plaintiffs purchased
certain Cold-Eeze(R) products between August, 1996, and November, 1999, based
upon cable television, radio and internet advertisements which allegedly
misrepresented the qualities and benefits of the Company's products. The
Complaint requests an unspecified amount of damages for violations of
Pennsylvania's consumer protection law, breach of warranty and unjust
enrichment, as well as a judicial determination that the action be maintained as
a class action.
In October, 2000, the Company filed Preliminary Objections to the Complaint
seeking dismissal of the action. The Court sustained certain objections thereby
narrowing Plaintiffs' Complaint. In May, 2001, Plaintiffs filed a Motion to
Certify the Alleged Class. The Company opposed the Motion. In November, 2001,
the Court held a hearing on Plaintiffs' 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. The Company is filing for a Motion for
Clarification/Reconsideration of this ruling. The Company is vigorously
defending this lawsuit although the Company believes that the action lacks
merit. The case is at a stage where no discovery has been taken and no
prediction can be made as to the outcome of this case.
GOLDBLUM AND WAYNE
A Special Meeting of the Quigley stockholders was held on October 15, 1999, at
which a majority of the shares entitled to vote adopted a Corrective Action
Proposal (initially reported in the Company's Form 10-Q for the quarter ending
June 30, 1999) to ratify actions previously taken by the Company 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 of a
declaratory judgment action in Nevada to determine the effectiveness of the
Corrective Action.
In August 2000, the District Court of Clark 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), in
which the Company seeks a judicial declaration that, based on stockholder
approval of the Corrective Action Proposal, 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. This action is scheduled for trial
in Clark County, Nevada, during the week of March 25, 2002. No prediction can be
made as to the outcome of this case.
9
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 each of the Company's common stock in or about
1990 and requested damages in excess of $100,000 for breach of contract and
conversion.
The Company is vigorously defending this lawsuit and has denied any liability to
the plaintiffs. The Company also believes that the plaintiffs' claims are barred
by the applicable statutes of limitations, and that the plaintiffs are, in any
event, limited to claims for approximately 36,000 shares. The Company continues
to believe that the plaintiffs' claims are without merit but certain pre-trial
discovery remains incomplete and no prediction can be made as to the outcome of
this case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None
PART II
-------
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
-------------------
Market Information
- ------------------
The Company's Common Stock, $.0005 par value, is currently traded on the NASDAQ
National Market under the trading symbol "QGLY". The price set forth in the
following table represents the high and low sale prices for the Company's common
stock.
COMMON STOCK
--------------
2001 2000
----------------- ------------------
QUARTER ENDED HIGH LOW HIGH LOW
------------- ---- --- ---- ---
March 31 $1.531 $0.813 $3.250 $1.500
June 30 $1.960 $0.750 $2.031 $1.125
September 30 $1.600 $0.800 $1.969 $1.156
December 31 $2.390 $0.830 $1.750 $0.656
Such quotations reflect inter-dealer prices, without mark-up, mark-down or
commission and may not represent actual transactions.
From July 1997 to May 1998, the Company's securities were traded on the NASDAQ
SmallCap Market. Since May 1998, the Company's securities are traded on the
NASDAQ National Market and consequently stock prices are available daily as
generated by the National Market established quotation system.
Holders
- -------
As of December 31, 2001, there were approximately 389 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 would exceed the number of record owners indicated above.
Dividends
- ---------
The Company has not declared, nor paid, any cash dividends on its Common Stock.
At this time the Company intends to retain its earnings to finance future growth
and maintain liquidity.
Warrants and Options
- --------------------
In addition to the Company's aforesaid outstanding Common Stock, there are, as
of December 31, 2001, 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:
10
Description Number Exercise Price Expiration Date
----------- ------ -------------- ---------------
CLASS "E" 1,150,000 $1.7500 June 30, 2006
CLASS "F" 225,000 $2.5000 November 4, 2006
CLASS "G" 360,000 $10.0000 May 5, 2002
CLASS "G" 585,000 $10.0000 May 5, 2007
Option Plan 506,500 $9.6800 December 1, 2007
Option Plan 383,500 $5.1250 April 6, 2009
Option Plan 25,000 $2.0625 January 13, 2010
Option Plan 379,000 $0.8125 December 20, 2010
Option Plan 400,000 $1.2600 December 10, 2011
At December 31, 2001, there were 4,014,000 unexercised and vested options and
warrants of the Company's stock available for exercise.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The Company changed its fiscal year-end from September 30 to December 31 on
January 2, 1997. The following table sets forth the selected financial data of
the Company for, and at the end of the years ended December 31, 2001, 2000,
1999, 1998 and 1997.
The data presented below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's financial statements and notes thereto appearing elsewhere herein.
(AMOUNTS IN THOUSANDS, EXCEPT YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
PER SHARE DATA) DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999 1998 1997
--------------------------------------------------------------------
STATEMENT OF INCOME DATA:
Sales $25,224 $19,364 $24,820 $36,354 $70,173
Co-operative advertising promotions 2,101 2,559 2,499 1,619 775
Net Sales 23,123 16,805 22,321 34,735 69,398
Gross Profit 15,054 10,921 14,441 23,858 47,970
Net Income (Loss) 216 (5,196) (4,204) 6,809 20,967
Basic earnings (loss) per
common share $0.02 ($0.49) ($0.37) $0.51 $1.72
Diluted earnings (loss) per
common share $0.02 ($0.49) ($0.37) $0.46 $1.43
Weighted average common
shares outstanding:
Basic 10,675 10,551 11,352 13,335 12,181
Diluted 10,751 10,551 11,352 14,944 14,634
11
AS OF AS OF AS OF AS OF AS OF
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999 1998 1997
----------------------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital $18,626 $18,622 $23,621 $43,024 $41,141
Total assets 24,756 26,056 33,271 48,611 49,847
Stockholders' equity $21,200 $20,971 $26,216 $44,607 $41,748
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
- --------
The Quigley Corporation, (the Company), headquartered in Doylestown,
Pennsylvania, is a leading marketer and distributor of a diversified range of
health and homeopathic products.
The Company has developed and markets the Cold-Eeze(R) range of products in
lozenge, bubblegum and sugar-free tablet form. Cold-Eeze(R) is the only zinc
gluconate glycine product clinically proven in two double blind studies to
reduce the severity and duration of common cold symptoms. The efficacy of the
product was established following the publication of the second double blind
study in July 1996. The sugar-free product is especially beneficial to diabetics
and other consumers concerned about their sugar intake.
Cold-Eeze(R) is distributed through numerous independent, chain drug and
discount stores throughout the United States. During 2001, the industry in which
the Company's products are distributed continued to experience further mergers
and consolidations. This contraction within the industry had the impact of
reducing sell-in opportunities of previous years. During the later part of 2001,
the economic downturn became more pronounced, our customers strove to achieve
greater efficiencies by means of better managing inventory and therefore carried
lower levels of inventory with the effect of reduced ordering activity.
The inclusion of Darius and Caribbean Pacific Natural Products in 2001 provided
diversification for the Company with Cold-Eeze(R) contributing 68.4% of sales in
2001 compared to 95.6% in 2000.
The revenue for 2001 was $24,669,667 compared to $16,805,093 and $22,320,451 for
2000 and 1999 respectively. The increase in revenue is accounted for by the
continued development of both the Darius and Caribbean Pacific Natural Products
businesses in 2001, which had combined revenue of $7,965,049 compared to
$850,166 for the year of 2000. Cold-Eeze(R) revenues declined slightly in 2001
due to the effects of continued industry consolidations and the pursuit of
inventory efficiencies by our customers. However, independent market data
indicates that the rate of decrease in consumer purchasing of Cold-Eeze(R) has
slowed significantly. Additionally, in 2001 revenues were assisted by the
settlement in the infringement suit against Gel Tech, LLC, the developer of
Zicam(TM), and Gum Tech International, Inc., its distributor. Under the
agreement, Gum Tech will pay the Company $1,137,500 for a limited license on the
use of zinc gluconate for the treatment of the duration and symptoms of the
common cold. Gum Tech is also required to pay the Company an ongoing royalty of
5.5 percent from April 1, 2001 through March 5, 2002 on all Zicam cold relief
sales. In addition, Gum Tech has guaranteed to pay a minimum of $500,000 in
ongoing royalties regardless of sales through March 5, 2002. Legal and other
expenses associated with this lawsuit in 2001 approximated $700,000.
Advertising costs in 2001 were approximately $3,400,000 compared to
approximately $9,300,000 in 2000. During 2001 the Company continued the strategy
initiated in late 2000 of focusing less on television and radio advertising and
more on promoting the product with our customers and occasionally directly with
the consumer. This commitment to the Cold-Eeze(R) product was further
strengthened during 2001 with the hiring of a Vice President of Sales and
Marketing and also the contracting with a large geographically diverse brokerage
company to promote and represent the product at the retail level.
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.
In January 2000, the Company formed Darius International Inc., a direct selling
organization specializing in proprietary health and wellness products. Darius
International was formed to implement Company strategy as a means of introducing
new products to the marketplace through alternative distribution channels by
utilizing a network of independent distributors. On January 2, 2001, the Company
acquired certain assets and assumed certain liabilities of a privately held
company involved in the direct marketing and distribution of health and wellness
products. This entity, which is a wholly owned subsidiary of Darius
International Inc., is based in Utah.
In July 2000, the Company acquired a 60% ownership position in Caribbean Pacific
Natural Products, Inc., an Orlando, Florida based company. Caribbean Pacific
Natural Products is a leading developer and marketer of all-natural sun-care and
skincare
12
products for luxury resorts, theme parks and spas. Caribbean Pacific Natural
Products has developed markets for its products both domestic and international.
Manufacturing for all the Company's products is done by outside sources. The
manufacturer of the Cold-Eeze(R) lozenge product manufactures exclusively for
the Company, with the bubblegum and the sugar-free products being produced by
different manufacturers.
During 2001, the Company continued to make progress with the registration of the
Cold-Eeze(R) products in the United Kingdom as a pharmacy drug and incurred
approximately $650,000 in related expenses.
Future revenues, costs, margins, and profits will continue to be influenced by
the Company's ability to maintain its manufacturing availability and capacity
together with its marketing and distribution capabilities in order to continue
to compete on a national and international level.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
- ------------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 138,
is effective for fiscal years beginning after June 15, 2000. The standard
requires that all derivative instruments be recorded on the balance sheet at
fair value. Changes in the fair value of derivatives are recorded in earnings or
other comprehensive income, based on whether the instrument is designated as
part of a hedge transaction and, if so, the type of hedge transaction. The
adoption of this pronouncement did not have a material impact on the Company's
financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". The SAB summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition in the financial
statements. As the Company's current revenue recognition policy meets the
standards set forth in SAB 101, the Company was not required to change its
revenue recognition policy based on the interpretation of SAB 101.
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-14,
"Accounting for Coupons, Rebates and Discounts" that addressed accounting for
sales incentives. The Task Force concluded that in accounting for cash sales
incentives a manufacturer should recognize the incentive as a reduction of
revenue on the later date of the manufacturer's sale or the date the offer is
made to the public. The reduction of revenues should be measured based on the
estimated amount of incentives to be claimed by the ultimate customers. This
pronouncement was adopted in the first quarter of fiscal 2001.
In September 2000, the EITF reached a final consensus on issue EITF No. 00-10,
"Accounting for Shipping and Handling Revenues and Costs." The Task Force
concluded that amounts billed to customers related to shipping and handling
should be classified as revenue. Further, the Task Force stated that shipping
and handling cost related to this revenue should either be recorded in costs of
goods sold or the Company should disclose where these costs are recorded and the
amount of these costs. We adopted this principle during the fourth quarter of
fiscal year 2000. The adoption of this pronouncement did not have a material
impact on the Company's financial statements.
In March 2000, FASB Interpretation, or FIN, No. 44, "Accounting for Certain
Transactions Involving Stock Compensation - An Interpretation of APB Opinion No.
25," was issued. FIN 44 clarifies the application of APB No. 25 for certain
issues. FIN 44 clarifies the definition of employee for purposes of applying APB
No. 25, the criteria for determining whether a plan qualifies as a
non-compensatory plan, the accounting consequences of various modifications to
the terms of a previously fixed option or award, and the accounting for an
exchange of share compensation awards in a business combination, among others.
FIN 44 was effective July 1, 2000 but certain conclusions in this interpretation
cover specific events that occurred after either December 15, 1998 or January
12, 2000. FIN 44 did not have a significant effect on our financial position or
results of operations.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations." SFAS
No. 141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. This statement specifies that
certain acquired intangible assets in a business combination be recognized as
assets separately from goodwill and existing intangible assets and goodwill be
evaluated for these new separation requirements. Goodwill and intangible assets
13
determined to have indefinite useful lives will not be amortized. Management
does not expect this statement to have a material impact on the Company's
consolidated financial position or results of operations.
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was issued by
the FASB. SFAS No. 142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. Amortization of goodwill, including
goodwill recorded in past business combinations, will cease upon adoption of
this statement. The Company is required to implement SFAS No. 142 on January 1,
2002. Management does not expect this statement to have a material impact on the
Company's consolidated financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company is required to implement SFAS No.
143 on January 1, 2002. Management does not expect this statement to have a
material impact on the Company's consolidated financial position or results of
operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The statement retains the previously existing accounting
requirements related to the recognition and measurement of the impairment of
long-lived assets to be held and used while expanding the measurement
requirements of long-lived assets to be disposed of by sale to include
discontinued operations. It also expands the previously existing reporting
requirements for discontinued operations to include a component of an entity
that either has been disposed of or is classified as held for sale. The Company
is required to implement SFAS No. 144 on January 1, 2002. Management does not
expect this statement to have a material impact on the Company's consolidated
financial position or results of operations.
RESULTS OF OPERATIONS
- ---------------------
TWELVE MONTHS ENDED DECEMBER 31, 2001 COMPARED WITH SAME PERIOD 2000
- --------------------------------------------------------------------
For the year ended December 31, 2001, the Company had revenues of $24,669,667,
an increase of 46.7% over 2000 revenues of $16,805,093. The results of 2001 show
a net income of $215,964 compared to a loss of ($5,196,473) for 2000.
Revenues for 2001 included amounts of $5,788,579 and $2,176,470 relating to
Darius and Caribbean Pacific Natural Products, compared to $51,300 and $798,866,
respectively for 2000. The Cold-Eeze(R) product was adversely affected by
continued industry consolidations in which the Company's products are
distributed, and the effects of the economic downturn which was evident in the
latter part of 2001. However, independent market data indicates that the rate of
decrease in consumer purchasing of Cold-Eeze(R) has slowed significantly.
Additionally, in 2001 revenues were assisted by the settlement in the
infringement suit against Gel Tech, LLC, the developer of Zicam(TM), and Gum
Tech International, Inc., its distributor. Under the agreement, Gum Tech will
pay the Company $1,137,500 for a limited license for the use of zinc gluconate
for the treatment of the duration and symptoms of the common cold. Gum Tech is
also required to pay the Company an ongoing royalty of 5.5 percent from April 1,
2001 through March 5, 2002 on all Zicam cold relief sales. In addition, Gum Tech
has guaranteed to pay a minimum of $500,000 in ongoing royalties regardless of
sales through March 5, 2002. Legal and other expenses associated with this
lawsuit in 2001 approximated $700,000.
The Company's cost of goods sold increased to 38.1% in 2001 from 30.4% in 2000.
The primary reason for the increase in 2001 was the higher proportion of sales
attributable to Darius and Caribbean Pacific in 2001 (31.6%) compared to 2000
(4.4%). Both Darius and Caribbean Pacific's products carry a higher a cost of
goods compared to Cold-Eeze(R) products.
Selling, general and administrative expenses for 2001 were $14,148,814 compared
to $15,669,787 in 2000. Advertising costs in 2001 decreased by approximately
$6,000,000, however this reduction in costs was partially offset by increased
operating costs of Darius and Caribbean Pacific, which was due to limited
operations in 2000. During 2001, the Company's major operating expenses of
delivery, salaries, brokerage commissions, promotion, advertising, and legal
costs accounted for approximately $9,325,876 (66%) of the total of $14,148,814,
14
a decrease of 25% over the 2000 amount of $12,378,717. The selling, general and
administrative expenses related to Darius and Caribbean Pacific for 2001 and
2000 were $4,902,480 and $1,495,142, respectively.
Research and Development costs in 2001 and 2000 were $1,331,639 and $1,185,750,
respectively. Principally, the increase of Research and Development in 2001 and
2000 was due to expenses incurred as part of the costs related to the
application for a pharmacy drug license in the United Kingdom, together with the
research costs related to Quigley Pharma.
Total assets of the Company at December 31, 2001 and 2000 were $24,755,795 and
$26,055,601, respectively. Working capital decreased by $3,692 to $18,625,819 at
December 31, 2001. The primary influences on working capital during 2001 were
the reductions in accrued expenses relating to advertising and royalties and
sales commissions with the related reduction in cash balances.
TWELVE MONTHS ENDED DECEMBER 31, 2000 COMPARED WITH SAME PERIOD 1999
- --------------------------------------------------------------------
Revenues for the year ended December 31, 2000 were $16,805,093, which was a
decrease of 25% over 1999 revenues of $22,320,451. The net loss for 2000 was
($5,196,473) compared to a net loss in 1999 of ($4,203,785). The 2000 net loss
did not reflect any tax benefit whereas the 1999 net loss was reduced by a tax
benefit of $1,902,615. A tax benefit was not available in 2000 because of a net
operating loss carry-forward for tax purposes that occurred during the fourth
quarter of 1999.
2000 revenues were adversely affected by changes in the industry. Customer
consolidations continued throughout the year which had the effect of reducing
the opportunities for pipeline fill. The industry consolidation also meant the
adoption of just-in-time inventory systems and as a result product lead time was
lessened and inventories had been reduced. Also the occurrence of store private
labeling of zinc products increased during 2000, which has not only the effect
of greater competition, but without proven clinical efficacy these products
impact on the credibility of a proven product such as Cold-Eeze(R).
Independent data indicates that, overall, the 2000 cough/sore throat drops
consumption rate was decreased by 9% over 1999, due to less incidences of colds
and flues.
Revenues during 2000 from Darius International Inc., and Caribbean Pacific
Natural Products, Inc. contributed $850,166, with both of these companies being
largely in their developmental stage.
The Company's cost of goods sold decreased from 31.7% in 1999 to 30.4% in 2000.
The decrease in 2000 was primarily the result of shifts in the product mix of
sales. Bubblegum sales in 2000 represented a lesser percentage of sales compared
to 1999. Additionally, the margin associated with Caribbean Pacific Natural
Products, which commenced activity in July 2000, was higher than that of the
Cold-Eeze(R) products.
Selling, general and administrative expenses for 2000 were $15,669,787 compared
to $21,131,172 in 1999. The decrease in 2000 is primarily accounted for by the
reduction in television and radio advertising. This reflects a change to focus
on shared advertising initiatives with the independent and chain drug stores and
wholesalers. During 2000, the Company's major operating expenses of delivery,
salaries, brokerage commissions, promotion, advertising, and legal costs
accounted for approximately $12,378,717 (79%) of the total of $15,669,787, a
decrease of 34% over the 1999 amount of $18,762,240. The selling, general and
administrative expenses related to Darius International Inc., and Caribbean
Pacific Natural Products, Inc. for 2000 were $1,495,142 with zero costs in 1999.
Research and Development costs in 2000 and 1999 were $1,185,750 and $297,650,
respectively. The increase in 2000 was primarily due to the expense associated
with the Cold-Eeze(R) regulatory process being conducted in the United Kingdom.
Total assets of the Company at December 31, 2000 and 1999 were $26,055,601 and
$33,271,056, respectively. Working capital decreased by $4,998,542 to
$18,622,127 at December 31, 2000. The main factors contributing to the reduction
was the loss incurred for the year of ($5,196,473) with the related reduction in
accounts receivable and cash.
15
TWELVE MONTHS ENDED DECEMBER 31, 1999 COMPARED WITH SAME PERIOD 1998
- --------------------------------------------------------------------
For the year ended December 31, 1999, the Company had revenues of $22,320,451
and a net loss of ($4,203,785), compared to revenues of $34,735,167 and net
income of $6,809,526 for the comparable period in 1998. 1999 experienced a slow
down in sales for various reasons. During the course of the year, a large number
of zinc products left the market leading to the lowering of prices by these
competitors, resulting in these zinc products being sold at non competitive
prices. Additionally, the marketplace experienced the influx of herbal remedies
and nutritional supplements, resulting in consumer confusion. The high inventory
levels that were being held by customers from previous years, along with the
consolidation of customers, all reduced sales for the year. The 1999 results
were adversely affected by the change in the effective tax rate from 39% to 31%,
due to the provision of a valuation allowance equaling the total deferred tax
asset, thereby not reducing the loss for related tax benefits.
Cost of Goods Sold, as a percentage of sales in 1999, was 31.7%, up 1.8% from
the 1998 level of 29.9%. The increase in 1999 was attributable to the
contribution to sales made by Bodymate(TM) and the bubble gum form of
Cold-Eeze(R), both of which carry a higher unit cost of goods percentage. The
Cold-Eeze(R) lozenge product continued to be manufactured in an efficient and
cost effective manner and accounts for a majority of the sales activity.
Total operating costs for 1999, including research and development, were
$21,428,822 compared to $14,143,610 for 1998. The main reason for the increase
was the necessity to promote the unique, proven properties of the Cold-Eeze(R)
products in light of the influx of competing new products into the marketplace.
This was addressed through increased radio and television advertising at
appropriate times during the year. During 1999, the Company's major operating
expenses of delivery, salaries, brokerage commissions, promotion, advertising,
and legal costs accounted for approximately $18,762,240 (88%) of the total of
$21,428,822.
Total assets of the Company at December 31, 1999 and 1998 were $33,271,056 and
$48,610,644, respectively. Working capital decreased by $19,403,816 to
$23,620,669 at December 31, 1999. The main factors contributing to the reduction
in these two categories were the cash expended in the repurchase of Company
stock to treasury totaling $14,788,193, during the course of the year, as
reflected in total stockholders' equity, together with losses incurred during
the year, offset by the increase in current liabilities.
MATERIAL COMMITMENTS AND SIGNIFICANT AGREEMENTS
- -----------------------------------------------
The Company's products are manufactured by outside sources. The Company has
agreements in place with these manufacturers, which insure a reliable source of
product for the future. The facility producing the Cold-Eeze(R) lozenge product
manufactures exclusively for the Company.
The Company has agreements in place with independent brokers whose function is
to represent the Company, 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 and commission agreements between the Company,
patent holders and the developer of the Company's cold-relief products. The
Company has entered into royalty agreements with the patent holders that require
payments of 6% on sales collected, less certain deductions, and with the
founders who share a commission of 5% on sales collected, less certain
deductions. Additionally, the developer of the Cold-Eeze(R) product formulation
receives a consulting fee of 2% on sales collected, less certain deductions. The
agreements with the patent holders and the developer expire on March 5, 2002 and
May 4, 2007, respectively and with the founders on May 31, 2005.
The trademarks and formulations for the natural skin care products sold by
Caribbean Pacific Natural Products, Inc. are owned by Caribbean Pacific
International, Inc., which has a 40% ownership position in Caribbean Pacific
Natural Products. The trademarks and formulations rights are assigned to
Caribbean Pacific Natural Products, Inc. for a twenty-five year period.
Caribbean Pacific Natural Products pays Caribbean Pacific International a
royalty of five percent (5%) on sales collected less certain deductions, which
terminates in May 2004.
The Company has committed to advertising costs approximating $35,000 relating to
2002. Additional advertising cost is expected to be incurred for the remainder
of 2002.
16
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company and its subsidiaries had working capital of $18,625,819 and
$18,622,127 at December 31, 2001 and 2000, respectively. While the movement in
working capital overall has not been significant during 2001, cash balances have
decreased by $1,625,003, accrued royalties and sales commissions have decreased
by $444,048 and accrued advertising has decreased by $1,069,081. Total cash
balances at December 31, 2001 were $9,740,840 compared to $11,365,843 at
December 31, 2000.
Management believes that its revised strategy to establish Cold-Eeze(R) as a
recognized brand name, its broader range of products, newly adopted diversified
distribution methods, adequate manufacturing capacity, growth in international
sales together with its current working capital should provide an internal
source of capital to fund the Company's business operations. 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.
During 2001 the Company repurchased a total of 30,000 shares at a cost of
$30,131.
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.
IMPACT OF INFLATION
- -------------------
The Company is subject to normal inflationary trends and anticipates that any
increased costs should be passed on to its customers.
17
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
----
Balance Sheets as of December 31, 2001 and 2000 F-1
Statements of Operations for the years ended December 31, 2001, 2000,
and 1999 F-2
Statements of Stockholders' Equity for the years ended December 31,
2001, 2000, and 1999 F-3
Statements of Cash Flows for the years ended December 31, 2001, 2000,
and 1999 F-4
Notes to Financial Statements F-5 to F-17
Responsibility for Financial Statements F-18
Report of Independent Accountants F-19
18
THE QUIGLEY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS December 31, 2001 December 31, 2000
----------------- -----------------
CURRENT ASSETS:
Cash and cash equivalents $9,740,840 $11,365,843
Accounts receivable (less doubtful accounts
of $719,310 and $536,297) 4,425,291 4,062,703
Inventory 6,507,746 6,917,889
Prepaid expenses and other current assets 1,507,462 1,123,275
---------- -----------
TOTAL CURRENT ASSETS 22,181,339 23,469,710
---------- -----------
PROPERTY, PLANT AND EQUIPMENT - NET 2,201,309 2,139,727
---------- -----------
OTHER ASSETS:
Patent rights - Less accumulated amortization 21,940 109,702
Excess cost over net assets acquired less
accumulated amortization 327,014 329,166
Other assets 24,193 7,296
----------- -----------
TOTAL OTHER ASSETS 373,147 446,164
----------- -----------
TOTAL ASSETS $24,755,795 $26,055,601
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $911,813 $763,527
Accrued royalties and sales commissions 1,005,594 1,449,642
Accrued advertising 668,792 1,737,873
Other current liabilities 969,321 896,541
----------- -----------
TOTAL CURRENT LIABILITIES 3,555,520 4,847,583
----------- -----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN CONSOLIDATED AFFILIATES - 237,326
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.0005 par value; authorized 50,000,000;
Issued: 15,321,206 and 15,271,206 shares 7,661 7,636
Additional paid-in-capital 28,915,612 28,871,887
Retained earnings 17,465,161 17,249,197
Less: Treasury stock, 4,646,053 and 4,616,053 shares,
at cost (25,188,159) (25,158,028)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 21,200,275 20,970,692
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $24,755,795 $26,055,601
=========== ===========
See accompanying notes to financial statements
F-1
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
December 31, 2001 December 31, 2000 December 31, 1999
----------------- ----------------- -----------------
SALES:
Sales $25,224,362 $19,364,186 $24,819,942
Co-operative advertising promotions 2,101,287 2,559,093 2,499,491
----------- ----------- -----------
NET SALES 23,123,075 16,805,093 22,320,451
SETTLED LITIGATION 1,546,592 - -
----------- ----------- -----------
TOTAL REVENUE 24,669,667 16,805,093 22,320,451
----------- ----------- -----------
COST OF SALES 9,615,211 5,884,592 7,879,303
----------- ----------- -----------
GROSS PROFIT 15,054,456 10,920,501 14,441,148
----------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing 5,772,832 9,453,277 15,438,511
Administration 8,375,982 6,216,510 5,692,661
Research and Development 1,331,639 1,185,750 297,650
----------- ----------- -----------
TOTAL OPERATING EXPENSES 15,480,453 16,855,537 21,428,822
----------- ----------- -----------
(LOSS) FROM OPERATIONS (425,997) (5,935,036) (6,987,674)
INTEREST AND OTHER INCOME 404,632 646,723 881,274
----------- ----------- -----------
(LOSS) BEFORE TAXES (21,365) (5,288,313) (6,106,400)
----------- ----------- -----------
INCOME TAXES (BENEFIT) - - (1,902,615)
MINORITY INTEREST IN LOSS
OF CONSOLIDATED AFFILIATE (237,329) (91,840) -
----------- ----------- -----------
NET INCOME (LOSS) $215,964 ($5,196,473) ($4,203,785)
=========== ============ ============
EARNINGS (LOSS) PER COMMON SHARE:
Basic $0.02 ($0.49) ($0.37)
=========== ============ ============
Diluted $0.02 ($0.49) ($0.37)
=========== ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 10,675,153 10,551,027 11,351,960
=========== =========== ===========
Diluted 10,750,687 10,551,027 11,351,960
=========== =========== ===========
See accompanying notes to financial statements
F-2
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON ADDITIONAL
STOCK ISSUED PAID-IN- TREASURY RETAINED
SHARES AMOUNT CAPITAL STOCK EARNINGS TOTAL
------------------------------------------------------------------------------------------
BALANCE JANUARY 1, 1999 12,744,036 $7,205 $28,207,208 ($10,256,391) $26,649,455 $44,607,477
-------------------------------------------------------------------------------------------
Treasury stock (2,816,631) (14,788,193) (14,788,193)
Tax benefits from options,
warrants & common stock 697,208 697,208
Tax valuation allowance (697,208) (697,208)
Warrants issued for services 202,975 202,975
Proceeds from options and
warrants exercised 422,326 210 427,289 427,499
Other (30,364) (30,364)
Net loss year ended
December 31, 1999 (4,203,785) (4,203,785)
-------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1999 10,349,731 7,415 28,807,108 (25,044,584) 22,445,670 26,215,609
-------------------------------------------------------------------------------------------
Treasury stock (134,400) (113,444) (113,444)
Tax benefits from options,
warrants & common stock 230,998 230,998
Tax valuation allowance (230,998) (230,998)
Proceeds from options and
warrants exercised 439,822 221 64,779 65,000
Net loss year ended
December 31, 2000 (5,196,473) (5,196,473)
------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2000 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 year ended
December 31, 2001 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
==========================================================================================
See accompanying notes to financial statements
F-3
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------- ------------
OPERATING ACTIVITIES:
Net income (loss) $ 215,964 ($ 5,196,473) ($ 4,203,785)
------------ ------------ ------------
ADJUSTMENT TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED BY OPERATIONS:
Depreciation and amortization 490,241 364,924 229,812
Expenditure paid with common stock -- -- 202,975
Minority interest share of loss in consolidated
subsidiary (237,326) (91,840) --
Deferred income taxes -- -- 397,489
Other assets (16,897) 446,868 --
(INCREASE) DECREASE IN ASSETS:
Accounts receivable (314,801) 2,576,984 935,679
Inventory 794,852 (515,069) 352,607
Prepaid expenses and other current assets (341,287) 267,427 41,422
Prepaid income taxes -- 2,485,247 80,074
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable 24,299 367,749 (362,255)
Accrued royalties and sales commissions (444,048) (273,073) (362,731)
Accrued advertising (1,069,081) (2,786,028) 3,962,635
Other current liabilities (218,829) 483,488 (12,758)
------------ ------------ ------------
TOTAL ADJUSTMENTS (1,332,877) 3,326,677 5,464,949
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
(1,116,913) (1,869,796) 1,261,164
------------ ------------ ------------
CASH FLOWS USED IN INVESTING
ACTIVITIES:
Capital expenditures (368,320) (393,477) (1,043,978)
Net cost of net assets acquired (109,639) (312,915) --
Other assets -- -- (197,782)
------------ ------------ ------------
NET CASH FLOWS USED IN INVESTING
ACTIVITIES (477,959) (706,392) (1,241,760)
------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from exercises of options and warrants -- 65,000 427,499
Repurchase of common stock (30,131) (113,444) (14,788,193)
------------ ------------ ------------
NET CASH FLOWS FROM FINANCING
ACTIVITIES (30,131) (48,444) (14,360,694)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH (1,625,003) (2,624,632) (14,341,290)
CASH & CASH EQUIVALENTS, BEGINNING
OF PERIOD
11,365,843 13,990,475 28,331,765
------------ ------------ ------------
CASH & CASH EQUIVALENTS,
END OF PERIOD $ 9,740,840 $ 11,365,843 $ 13,990,475
============ ============ ============
See accompanying notes to financial statements
F-4
THE QUIGLEY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Quigley Corporation (the "Company") was organized under the laws of the
State of Nevada on August 24, 1989. The Company started business October 1, 1989
and has been engaged in the business of marketing health products. The products
are fully developed and are being offered to the general public. For the most
recent fiscal periods, the Company has concentrated its efforts on the promotion
of "Cold-Eeze(R)", a cold remedy product, in the United States. The demand for
the Company's cold remedy products and sun-care and skincare products is
seasonal, where the third and fourth quarters generally represent the largest
sales volume for the cold remedy products and the first and second quarters
generally represent third largest sales volume for the sun-care and skincare
products.
Darius International Inc., a wholly owned subsidiary specializing in proprietary
health and wellness products was formed in 2000 to introduce new products to the
marketplace through a network of direct selling independent distributors. 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.
During 2000, the Company acquired a 60% ownership position in Caribbean Pacific
Natural Products, Inc., which is a leading developer and marketer of all-natural
sun-care and skincare products for luxury resorts, theme parks and spas.
BASIS OF PRESENTATION
The consolidated financial Statements include the accounts of The Quigley
Corporation and its wholly and majority owned subsidiaries. All inter-company
transactions and balances have been eliminated.
Effective July 1, 2000, the Company acquired a 60 percent ownership position of
Caribbean Pacific Natural Products, Inc., which is accounted for by the purchase
method of accounting and accordingly, the operating results have been 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, secured by
inventory, accounts receivable and all other assets of Caribbean Pacific Natural
Products. The net assets of Caribbean Pacific Natural Products at the
acquisition date principally consisted of a product license and distribution
rights with no recorded value, inventory and fixed assets of $312,915 and
$510,000 of working capital with a contribution to minority interest of
$329,166.
The 40 percent ownership position representing the minority interest is
reflected in the consolidated Statements of Operations for their portion of
(losses), and the consolidated Balance Sheet for their ownership portion of
accumulated (losses), share of net assets and capital stock at acquisition date.
At December 31, 2001, accumulated losses associated with minority interest have
reduced minority interest to zero on the Balance Sheet, with excess losses
amounting to $144,866 being absorbed in the Statement of Operations in 2001 by
the majority interest.
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 assets acquired. The net
assets acquired at acquisition principally consisted of intangibles with no
recorded value, inventory, accounts receivable, bank balances and fixed assets
totaling $536,000 and liabilities assumed approximating $416,000. Also required
are continuous payments for the use of product formulations; consulting;
confidentiality and non-compete fees that total up to 12% on net sales collected
until $540,000 is paid, when such fees become 5% on net sales collected for the
continuous applications of these arrangements. This acquisition is accounted for
by the purchase method of accounting and accordingly, the operating results have
been included in the Company's consolidated Statements of Operations from the
date of acquisition. The excess of cost over net assets acquired has been
amortized 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
PRINCIPLES OF ACCOUNTING
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an initial maturity of
three months or less at the time of purchase to be cash equivalents. Cash
equivalents include cash on hand and monies invested in money market funds. The
carrying amount approximates the fair market value due to the short-term
maturity of these investments.
INVENTORIES
Inventories are stated at the lower of cost or market. The Company uses the
first-in, first-out ("FIFO") method of determining cost for all inventories.
Inventories are primarily comprised of finished goods.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is 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 principally in accordance with the following ranges of estimated asset
lives: building and improvements - twenty years; machinery and equipment - five
to seven years; computer software - three years; and furniture and fixtures -
seven years.
PATENT RIGHTS AND INTANGIBLES
Patent rights are amortized on a straight-line basis over the period of the
related licensing agreements, which approximate 67 months. Amortization costs
incurred for the years ended December 31, 2001, December 31, 2000, and December
31, 1999, were $87,761 for all years. Accumulated amortization at December 31,
2001 December 31, 2000, and December 31, 1999, was $468,060, $380,299, and
$292,538, respectively.
The excess of cost over net assets acquired has been subject to amortization on
a straight-line basis over a period of 15 years.
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was issued by
the FASB. SFAS No. 142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. Amortization of goodwill, including
goodwill recorded in past business combinations, will cease upon adoption of
this statement. The Company is required to implement SFAS No. 142 on January 1,
2002. Management does not expect this statement to have a material impact on the
Company's consolidated financial position or results of operations.
Subsequent to 2001, the account will only be reduced if the value becomes
impaired.
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 three major financial
institutions. Since the Company maintains amounts in excess of guarantees
provided by the Federal Depository Insurance Corporation, the Company performs
periodic evaluations of the relative credit standing of these financial
institutions and limits the amount of credit exposure with any one institution.
F-6
Trade accounts receivable potentially subjects the Company to credit risk. The
Company extends credit to its customers based upon an evaluation of the
customer's financial condition and credit history and generally does not require
collateral. The Company 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 33% for the year ended
December 31, 2001, 44% for the year ended December 31, 2000, and 39% for the
year ended December 31, 1999. During 2001, approximately 99% of the Company's
revenues originated in the United States with the remainder being attributable
to international trade.
The Company currently uses three separate suppliers to produce Cold-Eeze(R) in
lozenge, bubble gum, and sugar-free tablet form. Substantially all of the
Company's revenues are currently generated from the sale of the Cold-Eeze(R)
product. The lozenge form is manufactured by a third party manufacturer that
produces exclusively for the Company. The other forms are manufactured by third
parties that produce a variety of other products for other customers. Should
these relationships 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' product for resale is sourced from several suppliers. In the event that
such sources were no longer in a position to supply Darius with product, other
vendors have been identified as reliable alternatives with minimal adverse loss
of business.
Currently, the principal finished products relating to Caribbean Pacific Natural
Products are being manufactured and blended by a single vendor. In the event of
there being difficulties with the current sources of raw material or finished
product, other suppliers have been identified that may result in a temporary
delay in production.
LONG-LIVED ASSETS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The statement retains the previously existing accounting
requirements related to the recognition and measurement of the impairment of
long-lived assets to be held and used while expanding the measurement
requirements of long-lived assets to be disposed of by sale to include
discontinued operations. It also expands the previously existing reporting
requirements for discontinued operations to include a component of an entity
that either has been disposed of or is classified as held for sale. The Company
is required to implement SFAS No. 144 on January 1, 2002. Management does not
expect this statement to have a material impact on the Company's consolidated
financial position or results of operations.
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 cash flows. If it is determined
that an impairment loss has occurred based on the expected cash flows, a loss is
recognized in the Statement of Operations.
REVENUE RECOGNITION
Sales are primarily recognized at the time a shipment is received by the
customer. Provisions for estimated product returns are accrued in the period of
sale recognition. In December 1999, the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements". The SAB summarizes certain of the Staff's
views in applying generally accepted accounting principles to revenue
recognition in the financial statements. As the Company's current revenue
recognition policy meets the standards set forth in SAB 101, the Company was not
required to change its revenue recognition policy based on the interpretation of
SAB 101.
F-7
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 138,
is effective for fiscal years beginning after June 15, 2000. The standard
requires that all derivative instruments be recorded on the balance sheet at
fair value. Changes in the fair value of derivatives are recorded in earnings or
other comprehensive income, based on whether the instrument is designated as
part of a hedge transaction and, if so, the type of hedge transaction. The
adoption of this pronouncement did not have a material impact on the Company's
financial statements.
COUPONS, REBATES AND DISCOUNTS
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-14,
"Accounting for Coupons, Rebates and Discounts" that addressed accounting for
sales incentives. The Task Force concluded that in accounting for cash sales
incentives a manufacturer should recognize the incentive as a reduction of
revenue on the later date of the manufacturer's sale or the date the offer is
made to the public. The reduction of revenues should be measured based on the
estimated amount of incentives to be claimed by the ultimate customers. This
pronouncement was adopted in the first quarter of fiscal 2001.
SHIPPING AND HANDLING
In September 2000, the Emerging Issues Task Force ("EITF") reached a final
consensus on issue EITF No. 00-10, "Accounting for Shipping and Handling
Revenues and Costs." The Task Force concluded that amounts billed to customers
related to shipping and handling should be classified as revenue. Further, the
Task Force stated that shipping and handling cost related to this revenue should
either be recorded in costs of goods sold or the Company should disclose where
these costs are recorded and the amount of these costs. The Company adopted this
principle during the fourth quarter of fiscal year 2000. The adoption of this
pronouncement did not have a material impact on the Company's financial
statements.
STOCK COMPENSATION
In March 2000, FASB Interpretation, or FIN, No. 44, "Accounting for Certain
Transactions Involving Stock Compensation - An Interpretation of APB Opinion No.
25," was issued. FIN 44 clarifies the application of APB No. 25 for certain
issues. FIN 44 clarifies the definition of employee for purposes of applying APB
No. 25, the criteria for determining whether a plan qualifies as a
non-compensatory plan, the accounting consequences of various modifications to
the terms of a previously fixed option or award, and the accounting for an
exchange of share compensation awards in a business combination, among others.
FIN 44 was effective July 1, 2000 but certain conclusions in this interpretation
cover specific events that occurred after either December 15, 1998 or January
12, 2000. FIN 44 did not have a significant effect on the Company's financial
position or results of operations.
ROYALTIES
The Company includes royalties and founders commissions incurred as cost of
products sold based on agreement terms.
ADVERTISING
Advertising costs are generally expensed within the period to which they relate.
Advertising costs incurred for the year ended December 31, 2001, December 31,
2000 and December 31, 1999, were $3,417,064, $9,296,483, and $16,132,888,
respectively. Included in prepaid expenses and other current assets was $419,000
at December 31, 2001 and 2000 relating to prepaid advertising and promotion
expenses.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations in the year incurred.
Expenditures for the years ended December 31, 2001, 2000 and 1999 were
$1,331,639, $1,185,750, and $297,650, respectively. Principally, the increase of
Research and Development in 2001 and 2000 was due to expenses incurred as part
of the costs related to the application for a pharmacy drug license in the
F-8
United Kingdom, together with research costs of the products related to Quigley
Pharma.
INCOME TAXES
The Company utilizes an asset and liability approach which requires the
recognition of deferred tax assets and liabilities for the future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, the Company
generally considers all expected future events other than enactments of changes
in the tax law or rates. See Note 5 for further discussion.
NOTE 2 - SEGMENT INFORMATION
The basis for presenting segment results generally is consistent with overall
Company reporting. The primary difference relates to presentation of
partially-owned operations, which are presented as if owned 100% in the
operating segments. The adjustment to ownership basis is included in Corporate
& Other. In the third quarter of 2000, the Company qualified for the
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.
The Company has divided its operations into three reportable segments: The
Quigley Corporation (Cold Remedy Products), 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 and Caribbean Pacific Natural Products, Inc.
(Sun-care and Skincare Products), a leading developer and marketer of
all-natural sun-care and skincare products for luxury resorts, theme parks and
spas.
Financial information relating to 2001 and 2000 by business segment follows:
AS OF AND FOR THE THREE
MONTHS ENDED DECEMBER 31, Sun-care
2001 Cold and
Remedy Health and Skincare Corporate and
Products Wellness Products Other Total
- ------------------------------------------------------------------------------------------------------------------
Revenues
Customers $ 6,491,652 $ 1,763,209 $ 274,060 -- $ 8,528,921
Inter-segment -- -- -- -- --
Segment operating profit (loss) 1,731,987 (354,104) (503,623) $ 4,729 878,989
Total Assets $26,726,729 $ 826,946 $ 882,710 ($3,680,590) $24,755,795
- --------------------------------------------------------------------------------------------------------------------
AS OF AND FOR THE TWELVE
MONTHS ENDED DECEMBER 31, Sun-care
2001 Cold and
Remedy Health and Skincare Corporate and
Products Wellness Products Other Total
- ------------------------------------------------------------------------------------------------------------------
Revenues
Customers $16,704,618 $5,788,579 $2,176,470 -- $24,669,667
Inter-segment 116,385 (176,412) - $60,027 -
Segment operating profit (loss) 1,170,828 (729,374) (995,156) 127,705 (425,997)
Total Assets $26,726,729 $826,946 $882,710 ($3,680,590) $24,755,795
F-9
- -------------------------------------------------------------------------------------------------------------------
AS OF AND FOR THE THREE
MONTHS ENDED DECEMBER 31, Sun-care
2000 Cold and
Remedy Health and Skincare Corporate and
Products Wellness Products Other Total
- -----------------------------------------------------------------------------------------------------------------
Revenues
Customers $ 6,639,075 $ 11,811 $ 455,348 -- $ 7,106,234
Inter-segment 3,486 -- -- ($ 3,486) --
Segment operating profit (loss) 360,515 (173,335) (152,065) 648 35,763
Total Assets $27,005,069 $ 428,210 $ 769,202 ($2,146,880) $26,055,601
- -------------------------------------------------------------------------------------------------------------------
AS OF AND FOR THE TWELVE
MONTHS ENDED DECEMBER 31, Sun-care
2000 Cold and
Remedy Health and Skincare Corporate and
Products Wellness Products Other Total
- -----------------------------------------------------------------------------------------------------------------
Revenues
Customers $ 15,954,927 $ 51,300 $ 798,866 -- $ 16,805,093
Inter-segment 320,623 -- -- ($ 320,623) --
Segment operating (loss) (4,645,828) (936,534) (229,600) (123,074) (5,935,036)
Total Assets $ 27,005,069 $ 428,210 $ 769,202 ($ 2,146,880) $ 26,055,601
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Consisted of the following as of: December 31, 2001 December 31, 2000
----------------- -----------------
Land $ 152,203 $ 152,203
Buildings and improvements 1,526,292 1,515,090
Machinery and equipment 872,130 669,401
Computer software 241,096 122,715
Furniture and fixtures 221,974 200,648
---------- ----------
3,013,695 2,660,057
Less: Accumulated depreciation 812,386 520,330
---------- ----------
Property, Plant and Equipment, net $2,201,309 $2,139,727
========== ==========
Depreciation expense for the years ended December 31, 2001, December 31, 2000
and December 31, 1999 was $367,368, $277,163, and $142,051, respectively.
NOTE 4 - 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, has been valued at the fair value of these shares at the
date of the grant. This asset value is being amortized over the remaining life
of the patent that expires in March 2002. The Company is required to pay a 3%
royalty on sales collected, less certain deductions, to the patent holder
throughout the term of this agreement, which also expires 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 whose agreements expire in 2005.
F-10
The founders receiving commissions are also stockholders of the Company.
The trademarks and formulations for the natural skin care products sold by
Caribbean Pacific Natural Products, Inc. are owned by Caribbean Pacific
International, Inc., which has a 40% ownership position in Caribbean Pacific
Natural Products. The trademark and formulations are assigned to Caribbean
Pacific Natural Products, Inc. for a twenty-five year period. Caribbean Pacific
Natural Products pays Caribbean Pacific International a royalty of five percent
(5%) on sales collected less certain deductions for a four-year term, which
terminates in May 2004.
The expenses for the respective periods relating to such agreements amounted to
$1,506,525, $1,992,497, and $2,638,727, for the years ended December 31, 2001,
December 31, 2000, and December 31, 1999 respectively. Amounts accrued for these
expenses at December 31, 2001 and December 31, 2000 were $690,670 and
$1,037,610, respectively.
NOTE 5 - INCOME TAXES
The provision (benefit) for income taxes, consists of the following:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2001 2000 1999
-------------- ------------ ------------
Current:
Federal -- -- ($1,181,327)
State -- -- --
----------- ----------- -----------
-- -- (1,181,327)
----------- ----------- -----------
Deferred:
Federal $ 39,771 ($1,701,186) (1,285,077)
State (76,134) (223,095) (605,998)
----------- ----------- -----------
(36,363) (1,924,281) (1,891,075)
----------- ----------- -----------
Valuation allowance 36,363 1,924,281 1,169,787
----------- ----------- -----------
Total -- -- ($1,902,615)
=========== =========== ===========
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,
2001 2000 1999
------------ ------------ ------------
Statutory rate ($7,264) ($1,798,027) ($2,076,176)
State taxes net of federal benefit (32,893) (148,804) (403,022)
Permanent differences and Other 3,794 22,550 (593,204)
----------- ----------- -----------
(36,363) (1,924,281) (3,072,402)
----------- ----------- -----------
Less valuation allowance 36,363 1,924,281 1,169,787
----------- ----------- -----------
Total -- -- ($1,902,615)
=========== =========== ===========
F-11
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,
2001 2000 1999
---- ---- ----
Net operating loss carry-forward $ 4,090,077 $ 3,730,923 $ 1,751,199
Contract termination costs 305,019 378,555 378,555
Bad debt expense 263,654 196,879 54,164
Other 133,943 137,488 104,648
Valuation allowance (4,792,693) (4,443,845) (2,288,566)
----------- ----------- -----------
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 years
prior to 1999. The tax benefit effect of option and warrant exercises during
2000 and 1999 were $230,998 and $697,208, respectively. However, these benefits
were deferred because of a net operating loss carry-forward for tax purposes
("NOLs") that occurred during the fourth quarter of 1999, resulting from a
cumulative effect of deducting a total value of $42,800,364 attributed to these
options, warrants and unrestricted stock deductions from taxable income during
the tax years 1997 and 1998. The net operating loss carry-forwards arising from
the option, warrant and stock activities approximate $8.7 million for federal
purposes, of which $3.5 million will expire in 2019, $5.2 million in 2020 and
$13.9 million for state purposes, of which $9.7 million will expire in 2009,
$3.3 million in 2010 and $900,000 in 2011. 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.
NOTE 6 - 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 then 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, 2001 December 31, 2000 December 31, 1999
-------------------------------------------------------------------------------------
Income Shares EPS Loss Shares EPS Loss Shares EPS
-------------------------------------------------------------------------------------
Basic EPS $ 0.2 10.7 $ 0.02 ($ 5.2) 10.5 ($0.49) ($ 4.2) 11.4 ($0.37)
Dilutives:
Options and
Warrants -- 0.1 -- -- -- --
------ ------ --------- ------ ---- --------- ------ ---- --------
Diluted EPS $ 0.2 10.8 $ 0.02 ($ 5.2) 10.5 ($0.49) ($ 4.2) 11.4 ($0.37)
====== ====== ========= ======= ==== ========= ====== ===== ========
At December 31, 2001, there were 4,014,000 options and warrants outstanding.
Their impact on future diluted earnings per share is dependent on the market
price of the Company's common stock.
F-12
NOTE 7 - STOCK COMPENSATION
Stock options for purchase of the Company's common stock have been granted to
both employees and non-employees since the date of the Company's public
inception. Options are exercisable during a period determined by the Company,
but in no event later than ten years from the date granted.
On December 2, 1997, the Company's Board of Directors approved a new Stock
Option Plan ("Plan") which was amended in 2001 and provides for the granting of
up to three million shares to employees. Under this Plan, the Company may grant
options to employees, officers or directors of the Company at variable
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 400,000, 480,000, and 409,000 options were granted
under this Plan during the years ended December 31, 2001, 2000 and 1999,
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, 2001, 2000 and 1999
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,
2001 2000 1999
----------------------------------------------
Pro forma net (loss) ($28,036) ($5,434,223) ($5,246,735)
Pro forma earnings (loss) per share:
Basic $0.00 ($0.52) ($0.46)
Diluted $0.00 ($0.52) ($0.46)
Expense relating to options granted to non-employees has been appropriately
recorded in the periods presented based on either fair values agreed upon with
the grantees or fair values as determined by the Black-Scholes pricing model
dependent upon the circumstances relating to the specific grants.
The Company used the Black-Scholes pricing model to determine the fair value of
stock options granted during the periods presented using the following
assumptions: expected life of the option of 5 years and expected forfeiture rate
of 0%; expected stock price volatility of 58.9% for 2001, ranging between 92.8%
and 110% for the year ended December 31, 2000 and 59.5% for the year ended
December 31, 1999; expected dividend yield of 1.5% and risk-free interest rate
of 4.36% for the year ended December 31, 2001, expected dividend yield of 1.5%
and risk-free interest rate of between 4.94% and 6.59% for the year ended
December 31, 2000; expected dividend yield of 1.5% and risk-free interest rate
of 5.10% for the year ended December 31, 1999, 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 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.
F-13
A summary of the status of the Company's stock options and warrants granted to
both employees and non-employees as of December 31, 2001, 2000, and 1999 and
changes during the years then ended is presented below:
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 $1.26 $1.26 $1.26
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
YEAR ENDED DECEMBER 31, 2000:
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 2,799 $4.59 1,480 $5.14 4,279 $4.78
Additions/deductions:
Granted 440 1.10 40 0.81 480 1.07
Exercised 460 0.50 130 0.50 590 0.50
Cancelled 32 7.83 20 7.40 52 7.67
-------------------------------------------------------------------------
Options/warrants outstanding
at end of period 2,747 $4.68 1,370 $5.42 4,117 $4.93
-------------------------------------------------------------------------
Options/warrants exercisable
at end of period 2,747 1,370 4,117
=========================================================================
Weighted average fair value of
Grants $0.69 $0.55 $0.68
Price range of options/warrants
Exercised $0.50 $0.50 $0.50
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
F-14
YEAR ENDED DECEMBER 31, 1999:
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 2,560 $4.27 1,790 $4.55 4,350 $4.39
Additions/deductions:
Granted 389 5.13 20 5.13 409 5.13
Exercised 150 0.50 330 1.93 480 1.48
--------------------------------------------------------------------
Options/warrants outstanding
at end of period 2,799 $4.59 1,480 $5.14 4,279 $4.78
--------------------------------------------------------------------
Options/warrants exercisable
at end of period 2,799 1,480 4,279
====================================================================
Weighted average fair value of
Grants $1.41 $1.41 $1.41
Price range of options/warrants
Exercised $0.50 $0.75-$2.50 $0.50-$2.50
Price range of options/warrants
Outstanding $0.50-$10.00 $0.50-$10.00 $0.50-$10.00
Price range of options/warrants
Exercisable $0.50-$10.00 $0.50-$10.00 $0.50-$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, 2001:
EMPLOYEES NON-EMPLOYEES
Weighted Weighted
Average Average
Remaining Weighted Remaining Weighted
Range of Number Contractual Average Number Contractual Average
Exercise Prices Outstanding Life Exercise Price Outstanding Life Exercise Price
- -----------------------------------------------------------------------------------------------------------
$0.81 - $2.06 1,569,000 6.8 $1.43 385,000 5.6 $1.60
$2.50 - $5.12 598,500 6.3 $4.14 10,000 7.3 $5.12
$9.68 - $10.00 841,500 5.7 $9.81 610,000 5.3 $9.99
--------- ---------
3,009,000 1,005,000
========= =========
Options outstanding as of December 31, 2001, 2000 and 1999 expire from June 30,
2006 through December 10, 2011, 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 2001
was approximately $140,000.
F-15
NOTE 8 - 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, 2001, 4,159,191 shares have been repurchased at a cost of
$24,042,801 or an average cost of $5.78 per share.
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.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Certain operating leases for office and warehouse space maintained by the
Company resulted in rent expense for the years ended December 31, 2001, December
31, 2000 and December 31, 1999, of $336,123, $148,041, and $137,015,
respectively. The future minimum lease obligations under these operating leases
are $428,387.
The Company has committed to advertising costs approximating $35,000 relating to
2002. Additional advertising cost is expected to be incurred for the remainder
of 2002.
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. The Company is filing for a Motion for
Clarification/Reconsideration of this ruling. The Company is vigorously
defending this lawsuit although the Company believes that the action lacks
merit. The case is at a stage where no discovery has been taken and no
prediction can be made as to the outcome of this case.
A Special Meeting of the Quigley stockholders was held on October 15, 1999, at
which a majority of the shares entitled to vote adopted a Corrective Action
Proposal (initially reported in the Company's Form 10-Q for the quarter ending
June 30, 1999) to ratify actions previously taken by the Company 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 of a
declaratory judgment action in Nevada to determine the effectiveness of the
Corrective Action.
F-16
In August 2000, the District Court of Clark 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), in
which the Company seeks a judicial declaration that, based on stockholder
approval of the Corrective Action Proposal, 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. This action is scheduled for trial
in Clark County, Nevada, during the week of March 25, 2002. No prediction can be
made as to the outcome of this case.
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 each of the Company's common stock in or about
1990 and requested damages in excess of $100,000 for breach of contract and
conversion. The Company is vigorously defending this lawsuit and has denied any
liability to the plaintiffs. The Company also believes that the plaintiffs'
claims are barred by the applicable statutes of limitations, and that the
plaintiffs are, in any event, limited to claims for approximately 36,000 shares.
The Company continues to believe that the plaintiffs' claims are without merit
but certain pre-trial discovery remains incomplete and no prediction can be made
as to the outcome of this case.
NOTE 10 - 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 major stockholders of the Company.
Commissions and other items paid or payable under such arrangements for the
years ended December 31, 2001, 2000 and 1999, amounted to $160,034, $466,033,
and $370,466, respectively. Amounts payable under such agreements at December
31, 2001 and 2000 were approximately $36,525 and $195,075, respectively.
The Company is in the process of acquiring licenses in certain countries through
related party entities. During 2001, fees amounting to $281,250 have been paid
to a related entity to assist with the regulatory aspects of obtaining such
licenses.
NOTE 11 - QUARTERLY INFORMATION (UNAUDITED)
QUARTER ENDED
---------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
----------- ----------- ------------ -------------
2001
Sales $5,198,537 $3,381,951 $7,175,724 $9,468,150
Co-operative advertising promotions 394,663 42,100 588,931 1,075,593
Net Sales 4,803,874 3,339,851 6,586,793 8,392,557
Gross Profit 3,018,942 2,881,366 3,876,368 5,277,780
Net Income (loss) (402,909) (680,443) 313,615 985,701
Basic earnings (loss) per common share ($0.04) ($0.06) $0.03 $0.09
Diluted earnings (loss) per common share ($0.04) ($0.06) $0.03 $0.09
2000
Sales $6,614,786 $1,300,111 $3,765,229 $7,684,060
Co-operative advertising promotions 1,207,900 479,962 293,405 577,826
Net Sales 5,406,886 820,149 3,471,824 7,106,234
Gross Profit 3,131,958 410,922 2,277,914 5,099,707
Net Income (loss) (3,923,438) (1,652,290) 114,401 264,854
Basic earnings (loss) per common share ($0.38) ($0.16) $0.01 $0.03
Diluted earnings (loss) per common share ($0.38) ($0.16) $0.01 $0.03
F-17
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.
PricewaterhouseCoopers LLP, the Company's independent accountants, performed an
audit for the years ended December 31, 2001, 2000, and 1999, in accordance with
generally accepted auditing standards. The independent accountants conducted a
review of internal accounting controls to the extent required by generally
accepted auditing standards and performed such tests and procedures, as they
deem necessary to arrive at an opinion on the fairness of the financial
statements presented herein.
/s/ Guy J. Quigley February 28, 2002
- --------------------- -----------------
Guy J. Quigley, Chairman of the Board, Date
President, Chief Executive Officer
/s/ George J. Longo February 28, 2002
- --------------------- -----------------
George J. Longo, Vice President, Chief Financial Officer Date
(Principal Financial and Accounting Officer)
F-18
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of The Quigley Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity, and cash flows
present fairly, in all material respects, the financial position of The Quigley
Corporation and its subsidiaries at December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
- -----------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 15, 2002
F-19
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required under this item is incorporated by reference to the
Company's Proxy Statement for the 2002 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 2002 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated by reference to the
Company's Proxy Statement for the 2002 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 2002 Annual Meeting of Stockholders.
19
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) Exhibits:
3.1 Articles of Incorporation of the Company (as amended),
(incorporated by reference to Exhibit 3.1 of Form 10-KSB/A
dated 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 dated April 4, 1997)
10.1 1997 Stock Option Plan (incorporated by reference to Exhibit
10.1 of the Company's Registration Statement on Form S-8
(File No. 333-61313) filed with the Commission on August 13,
1998)
10.1(a) Amendment No. 1 to 1997 Stock Option Plan (incorporated by
reference to Exhibit 4 of the Company's Registration
Statement on Form S-8 (File No. 333-73456) filed with the
Commission on November 15, 2001
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 Form
10-KSB/A dated April 4, 1997)
10.3 Employment Agreement dated June 1, 1995 between the Company
and Guy J. Quigley (incorporated by reference to Exhibit 10.3
of Form 10-KSB/A dated April 4, 1997)
10.4 Employment Agreement dated June 1, 1995 between the Company
and Charles A. Phillips (incorporated by reference to Exhibit
10.4 of Form 10-KSB/A dated April 4, 1997)
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, as amended, (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 and the amendments to such agreement are attached
hereto)
10.9 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 dated April 4,
1997)
10.10 Employment Agreement dated November 5, 1996, as amended,
between the Company and George J. Longo (the Employment
Agreement is incorporated by reference to Exhibit 10.10 of
Form 10-KSB dated March 30, 1998 and the amendments are
attached hereto)
20
10.11 Employment Agreement dated January 1, 1997, as amended,
between the Company and Eric H. Kaytes (incorporated by
reference to Exhibit 10.11 of Form 10-KSB dated March 30,
1998 and the amendments are attached hereto)
10.12 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)
23.1 Consent of PricewaterhouseCoopers LLP, Auditors, dated
February 25, 2002
(b) Reports on Form 8-K
No reports were filed on Form 8-K in the quarter ended December 31, 2001.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
THE QUIGLEY CORPORATION
/s/ Guy J. Quigley February 28, 2002
-----------------------------------------------------------------------
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 Company in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- -----
/s/ Guy J. Quigley Chairman of the Board, President, February 28, 2002
- ------------------- Chief Executive Officer and Director -----------------
Guy J. Quigley
/s/ Charles A. Phillips Executive Vice President, February 28, 2002
- ----------------------- Chief Operating -----------------
Charles A. Phillips Officer and Director
/s/ George J. Longo Vice President, Chief Financial February 28, 2002
- ---------------------- Officer and Director (Principal -----------------
George J. Longo Financial and Accounting Officer)
/s/ Eric H. Kaytes Vice President, Chief Information February 28, 2002
- ---------------------- Officer, Secretary, Treasurer -----------------
Eric H. Kaytes and Director
/s/ Jacqueline F. Lewis Director February 28, 2002
- ----------------------- -----------------
Jacqueline F. Lewis
/s/ Rounsevelle W. Schaum Director February 28, 2002
- ------------------------- -----------------
Rounsevelle W. Schaum
/s/ Charles A. Genuardi Director February 28, 2002
- ------------------------ -----------------
Charles A. Genuardi
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