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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, 1998
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 Identification Number)
incorporation or organization)
(MAILING ADDRESS: PO Box 1349, Doylestown, PA 18901.)
Landmark Building, 10 South Clinton Street, 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.
[ ]
As of March 15, 1999, 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 $61,587,053 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 March 15, 1999:
12,016,986
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 1999 Annual Meeting of
Stockholders
THE EXHIBIT INDEX IS LOCATED ON PAGES 17-18.
Page 1 of 22
TABLE OF CONTENTS
Part I Page
----
Item 1. Business 3-6
2. Properties 6
3. Legal Proceedings 6
4. Submission of Matters to a Vote by Security Holders 6
Part II
5. Market for the Registrant's Common Equity and
Related Stockholders Matters 7-8
6. Selected Financial Data 8
7. Management's Discussion and Analysis of Results
of Operations and Financial Condition 9-14
8. Financial Statements 15
9. Change in and Disagreements with Accountants on
Accounting and Financial Disclosure 16
Part III
10. Directors and Executive Officers of the Registrant 16
11. Executive Compensation 16
12. Security Ownership of Certain Beneficial
Owners and Management 16
13. Certain Relationships and Related Transactions 16
Part IV
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 17-22
-2-
Forward-Looking Statements
- --------------------------
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 including Quarterly Reports on Form 10-Q to be filed by the Company
in fiscal year 1999.
PART 1
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ITEM 1. DESCRIPTION OF BUSINESS
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Business Development
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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
the Cold-Eeze(R) and Bodymate(TM) products to the consumer through the
over-the-counter market place. 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. Bodymate(TM) is a dietary
supplement and weight management program competing in the nutrition and weight
management marketplace.
Description of Business Operations
- ----------------------------------
Since its inception, the Company has conducted research and development into
various types of health-related food supplements and homeopathic cold remedies.
Prior to the three months ended December 31, 1996, the Company had minimal
revenues from operations and as a result suffered continuing losses due to
research and development and operations expenses. However, the Company's
product line has been developed, and during the year ended December 31, 1997,
significant revenues materialized from its national marketing program and
increased public awareness of its Cold-Eeze(R) lozenge product.
The Company's initial business was the marketing and distribution of a line of
nutritious health supplements (hereinafter "Nutri-Bars"). Beginning in 1995,
the Company minimized its marketing of the Nutri-Bars and focused its efforts
on the development and marketing of the Company's patented Cold-Eeze(R) zinc
gluconate glycine cold relief 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. The Company's lozenge 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. By the end
of 1998, Bodymate(TM), a new product line was launched to enter the nutrition
and weight management program industry.
-3-
Products
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Cold-Eeze(R), a zinc gluconate glycine formulation (ZIGG(TM)), is sold in a
lozenge, bubble gum and sugar free tablet form. 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 under the trade names Cold-Eeze(R), Cold-Eeze(R) Sugar Free, and
Kids-Eeze(TM) Bubble Gum.
In 1996, the Company also acquired an exclusive license to a zinc gluconate use
patent, thereby assuring the Company of exclusivity in the manufacturing and
marketing of zinc gluconate glycine lozenge formulated cold relief products.
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 Health Science,
Hanover, New Hampshire, concluded that the lozenge formulation treatment,
initiated within 48 hours of symptom onset, resulted in a significant reduction
in the total duration of the common cold.
On May 22, 1992, ZINC AND THE COMMON COLD, A CONTROLLED CLINICAL STUDY, was
published in England, in the "Journal of International Medical Research",
Volume 20, Number 3, Pages 234-246. According to this publication, (a)
flavorings used in other Zinc lozenge products (citrate, tartrate, separate,
orotate, picolinate, mannitol or sorbitol) render the Zinc inactive and
unavailable to 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 3rd, 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 our Dartmouth Study), the result still
showed a 42% reduction in the duration of the common cold symptoms.
At the very end of 1998, the first product of the Bodymate(TM) line was
launched in a test market to enter the nutrition and weight management program
industry. The unique proprietary delivery system and naturalness of this
product, with the main ingredients of Garcinia Cambogia and chromium, offers
instant satisfaction and gratification to those attempting to loose weight. It
is believed that the ingredients in this product may block an enzyme necessary
for the formation of fats from carbohydrates, and affects the appetite to bring
about a feeling of fullness.
Patents, Trademarks, Royalty and Commission Agreements
- ---------------------------------------------------------
The Company currently owns no patents. However, the Company 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)
No. 4 758 439 (July 19, 1988)
Sweden: No. 0 183 840 (March 2, 1994)
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 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.
-4-
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.
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 said agreement
on May 31, 2005.
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 has issued incentive common stock
purchase options to its Brokers, Distributors and Representatives.
The Cold-Eeze(R) lozenge products are distributed through numerous independent
and chain drug and discount stores throughout the United States, including the
Walgreen Company, Bindley-Western Drug Company, Revco, American Drug Stores,
CVS, Rite-Aid, Eckerd Drug Company, Phar-Mor Inc., Drug Emporium, K-Mart
Corporation, and wholesale distributors including McKesson Drug Company, Bergen
Brunswig Drug Company, US Health Distributors, and AmeriSource.
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. These five represent 38% and 68% of sales revenue for the years ended
December 31, 1998 and 1997, 76% for the three months ended December 31, 1996,
and 62% for the year ended September 30, 1996.
Research and Development
- ------------------------
The Company's research and development costs for the years ended December 31,
1998, 1997, three months ended December 31, 1996, and year ended September 30,
1996 were $256,492, $79,784, $20,777 and $41,856, respectively. Future research
and development expenditures to develop extensions of the Cold-Eeze(R) product,
including potential unrelated new products in the consumer health care
industry, 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.
Regulatory Matters
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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. Management further believes that
the cost of compliance with such laws, regulations and standards have not and
will not have a material adverse effect on the Company's financial position,
operations or cash flows in future years.
-5-
Competition
- -----------
The Company competes with other suppliers of cold remedy, nutrition and weight
management 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. Bodymate(TM) at this time, has the same competition challenges to gain
acceptance by the consumer. 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.
Employees
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At December 31, 1998 the Company had 16 full-time employees, of whom all 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.
Suppliers
- ---------
The Company currently uses three separate suppliers to produce Cold-Eeze(R) in
lozenge, bubble gum, and sugar free tablet form. The lozenge form 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 material used in the production of the products are 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.
ITEM 2. Description of Property
-----------------------
The Company currently maintains its executive offices in Doylestown,
Pennsylvania, where it occupies approximately 2,500 square feet of office space
pursuant to a month to month lease agreement. In December 1998 the purchase of
a building, approximating 14,000 square feet, was completed, which will be used
as corporate offices as well as laboratory facilities, that with planned
improvements will cost approximately $1.5 million dollars. The Company also
occupies warehouse space, in Las Vegas, Nevada and in New Britain,
Pennsylvania. The Nevada location has a three-year lease, occupying
approximately 5,400 square feet, with the New Britain location having a month
to month ongoing arrangement, occupying 2,600 square feet. The Company also
stores its product in three additional warehouses in Pennsylvania with storage
charges based upon the quantities of product being stored. The monthly
aggregate lease payments are $4,796. The Company believes that its existing
warehousing facilities are adequate.
ITEM 3. Legal Proceedings
-----------------
The Company is subject to legal proceedings and claims which have arisen in the
ordinary course of its business. Although there can be no assurance as to the
ultimate disposition of these matters, it is the opinion of the Company's
management based upon the information available at this time, that the expected
outcome of these matters, individually or in the aggregate, will not have a
material adverse effect on the financial position, results of operations or
cash flows of the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
-6-
PART II
ITEM 5. Market for Company's Common Equity and Related Stockholder Matters
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Market Information
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The Company's Common Stock, $.0005 par value, is currently traded on the NASDAQ
National Market under the trading symbol "QGLY."
By Quarter, Calendar 1998 & 1997
- --------------------------------
Common Stock
------------
1998 1997
----------- ----------- ----------- -----------
Quarter Ended High Low High Low
- ------------- ---- --- ---- ---
March 31 $16.438 $9.500 $18.500 $8.375
June 30 $13.250 $6.250 $11.250 $7.687
September 30 $9.750 $6.625 $20.125 $9.187
December 31 $7.750 $4.938 $23.000 $14.000
Prior to July 1997, trading transactions in the Company's securities had been
limited to the over-the-counter market. The over-the-counter market quotes,
dated before July 1997, indicated above, reflect inter-dealer prices, without
retail mark-up or commissions, and may not necessarily represent actual
transactions. Accordingly, an "established public trading market" for such
securities existed for more than sixty business days before July 1997. All
prices indicated herein relating to periods before July 1997, had been reported
to the Registrant by broker-dealer(s) making a market in its securities. Bid
and asked quotations at fixed prices had appeared regularly in the established
quotation systems on at least one-half of such business days. 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.
In January 1997, there was a two for one share split, benefiting each
stockholder on record as of January 15, 1997.
Holders
- -------
As of December 31, 1998, there were approximately 413 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 necessarily exceed the number of record owners indicated above.
Dividends
- ---------
No cash dividends were paid during 1998 and 1997. The Company has not paid or
declared any dividends upon its Common Stock since its inception. Future
dividends are dependent upon cash needs for international expansion.
-7-
Warrants and Options
- --------------------
In addition to the Company's aforesaid outstanding Common Stock, there are, as
of December 31, 1998, issued and outstanding Common Stock Purchase Warrants and
Options which are exercisable at the price-per-share indicated and which expire
on the date indicated, as follows:
Description Number Exercise Price Expiration Date
----------- ------ -------------- ---------------
CLASS "D" 740,000 $0.50 December 14, 2000
CLASS "E" 1,175,000 $1.75 June 30, 2001
CLASS "F" 325,000 $2.50 November 4, 2001
CLASS "G" 945,000 $10.00 May 5, 2002
Options/Warrants 614,900 $0.50-$1.75 December 1, 2000
to October 1, 2001
Option Plan 550,500 $9.68 December 2, 2007
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 (i) the years ended September 30, 1994, 1995
and 1996, (ii) the three months ended December 31, 1996 and (iii) the years
ended December 31, 1997 and 1998.
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 the notes thereto appearing elsewhere
herein.
Three Months
(Amounts in thousands, Year ended Year ended ended Year ended Year ended Year ended
except per share data) December 31, December 31, December 31, September 30, September 30, September 30,
1998 1997 1996 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ------------
.......................................
Statement of Income Data:
Net Sales ................................. $36,354 $70,173 $ 4,092 $ 1,050 $ 502 $ 77
Gross Profit .............................. 25,477 48,745 2,717 766 390 50
Net Income (loss) ......................... 6,809 20,967 1,676 (694) (153) (74)
Basic earnings per
common share ............................ $ 0.51 $ 1.72 $ 0.15 ($ 0.08) ($ 0.02) ($ 0.01)
Diluted earnings per
common share ............................ $ 0.46 $ 1.43 $ 0.12 ($ 0.08) ($ 0.02) ($ 0.01)
Weighted average common shares outstanding:
Basic ................................ 13,335 12,181 11,087 8,131 6,723 5,850
Diluted .............................. 14,944 14,634 13,611 8,131 6,723 5,850
As of As of As of As of As of As of
December 31, December 31, December 31, September 30, September 30, September 30,
1998 1997 1996 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ------------
Balance Sheet Data:
Working capital ........................... $ 43,024 $41,141 $ 5,206 $ 911 $ 287 ($ 60)
Total Assets .............................. 48,611 49,847 6,950 1,368 437 58
Stockholders' equity (deficit) ............ 44,607 41,748 5,544 1,243 299 (69)
-8-
ITEM 7. Management's Discussion and Analysis of Financial Condition And
---------------------------------------------------------------
Results of Operations
---------------------
Overview
- --------
During 1998, the Company continued to apply its resources to the manufacture
and marketing of the patented Cold-Eeze(R) cold relief lozenge. In the
preceding year, Cold-Eeze(R) established itself as the dominant remedy
available to counteract the effects of the common cold symptoms. The uniqueness
of the product was established following the publication of a second
double-blind study in July 1996, showing that Cold-Eeze(R) significantly
reduced both the duration and severity of the common cold symptoms. Continued
advertising and promotional activity during 1998 has increased the public
awareness of the product, along with various independent television programs
highlighting the product's desirability as a common cold remedy. The 1998 sales
revenue was $36.4 million compared to $70.2 million for the same period in 1997
and $5.0 million for 1996. The main reasons for reduced sales in 1998 are an
exceptionally mild cold season, higher than usual inventory levels at our
customer level, new herbal cold treatments promulgated through national news
media announcements, and the consumer awareness that the product is now widely
available, which contributes to the reduced demand and ultimate sell-through of
Cold-Eeze(R) at the consumer level. During the second half of 1998, the Company
commenced selling the product internationally with sales to Canada, and the
Peoples Republic of China. The demand for the product is seasonal, with the
third and fourth quarters representing the largest sales volume.
In the last 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, the Company launched a bubble
gum version of Cold-Eeze(R) and in a different therapeutic area, an all-natural
nutrition and weight management program called Bodymate(TM).
The Company continues to use the resources of independent national and
international brokers to represent the Company's Cold-Eeze(R) and Bodymate(TM)
products, thereby saving capital and other ongoing expenditures that would
otherwise be incurred.
Different manufacturing sources are used for the production of the Cold-Eeze(R)
bubble gum and sugarfree products and the same manufacturer produces the
Cold-Eeze(R) lozenge and Bodymate(TM) products. In addition, the lozenge and
Bodymate(TM) manufacturer commenced manufacturing exclusively for the Company
in 1997, thereby increasing their output and the availability of the product.
At the end of 1996, as a result of unexpected demand and inadequate
manufacturing availability, there was a significant order backlog, in contrast
at the end of 1997 and 1998, when all orders were being fulfilled in a timely
manner. All three manufacturing sites have the capacity to respond quickly to
market requirements.
The change in manufacturing availability has allowed the Company to commence
selling internationally in 1998. In February 1998, the Company reached an
agreement with Merck KGaA, Darmstadt, Germany for exclusive distribution of
Cold-Eeze(R) in the Canadian market. In December 1998, the Company reached an
agreement with a Hong Kong based Chinese distribution company for the exclusive
distribution of Cold-Eeze(R) in the Peoples Republic of China. This exclusivity
is predicated on minimum sales levels being met each year, that in total must
attain at least $52 million over the 7-year life of the agreement. Both
agreements during 1998 have resulted in approximately $2 million in revenues.
Ongoing, 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.
Results of Operations
- ---------------------
Twelve months ended December 1998 compared with same period 1997
- -----------------------------------------------------------------
1998 produced revenues of $36,354,155 and net income of $6,809,526 compared to
revenues of $70,172,563 and net income of $20,966,862 for the comparable period
in 1997. The reasons for the slow down in sales in 1998 included mild weather
conditions which are reflected in lower incidence of consumers' colds and new
herbal cold treatments promulgated through national news media announcements.
Additionally, due to greater output availability at the manufacturing site,
product lead-time has reduced from six or more weeks in 1997 to two weeks in
1998 resulting in the customer being able to order product closer to their
needs. Cold-Eeze(R) is now a formidable force in the market place as a unique
remedy to reduce the severity and duration of the common cold symptoms.
-9-
Cost of Goods Sold, as a percentage of net sales, decreased by 0.6%, down to
29.9% in 1998 from 30.5% in 1997. The reduction in 1998 resulted from
efficiencies implemented by the manufacturer in 1997 continued to be beneficial
in 1998 and a change in accounting estimates. These gains were offset by a
repackaging charge of approximately 0.5% of net sales, higher cost margins for
different product configurations and international sales.
1998 operating expenses were $15,762,598 compared to $13,798,827 in the
comparable period 1997. The increase over 1997 is primarily as a result of
advertising and marketing spending to further establish and grow the product.
During 1998, the Company's major operating expenses of delivery, salaries,
brokerage commissions, promotion, advertising, and legal costs accounted for
approximately $13,805,588 (88%) of the total of $15,762,598.
The total assets of the Company at December 31, 1998 and 1997 were $48,610,644
and $49,847,090 respectively. Working capital increased by $1,883,938 to
$43,024,485 at December 31, 1998. The significant movements in these categories
are, the slowdown in sales in 1998, the reduction in the components of current
liabilities and changes in funds or paid-in-capital as a result of the sale or
exercise of the Company's Common Stock, options and warrants. Additionally,
during the course of 1998, the Company repurchased a quantity of the Company's
Common Stock to treasury.
Twelve months ended December 1997 compared with same period 1996
- ----------------------------------------------------------------
For 1997, the Company reported revenues of $70,172,563 and net income of
$20,966,862, as compared with revenues of $4,993,496 and net income of $986,392
for the comparable period ended December 31, 1996. This substantial increase in
revenue is primarily attributable to the market acceptance of the Cold-Eeze(R)
lozenge product. The year 1997 saw Cold-Eeze(R) become a formidable force in
the marketplace as a unique remedy to reduce the severity and duration of the
common cold symptoms. This resulted from the release of the results of The
Cleveland Clinic Study in July 1996, a national marketing program that
commenced in the fourth quarter of 1996 together with national exposure in the
media, such as NBC's PrimeTime network national news program and "20/20" on ABC
in January 1997. Sales in the transition quarter ended December 31, 1996 were
$4,091,653, thereby commencing the current trend of Cold-Eeze(R) being a major
player in the cold remedy market.
Cost of Goods Sold, as a percentage of net sales, decreased by 2.35%, down to
30.5% for 1997 from 32.85% for 1996. This decrease in cost of goods is
primarily due to efficiencies resulting from the manufacturer utilizing
improved equipment such as fully automated production lines. In addition, the
higher volume of production brought economies of scale resulting in the lower
purchase cost of raw materials and packaging, thereby, reducing the cost of the
finished product. During 1997, operating expenses increased to $13,798,827 from
$2,155,646 in the comparable period 1996. This was a result of increased costs
associated with a national marketing and advertising program and other variable
costs associated with bringing the sales volume to the level achieved.
During 1997, the Company's major operating expenses of delivery, salaries,
brokerage commissions, promotion, advertising and legal costs accounted for
approximately $12,562,060 (93%) of the $13,798,827 total operating costs
incurred by the Company. Other operating costs for this period maintained their
fixed attributes, in that they did not follow sales volume but maintained a
relative constant dollar value for 1997. During 1996, these expenses amounted
to $1,826,651 (85%) of the total of $2,155,646. For future periods, a normal
profitable relationship should develop for all costs and operating expenses as
they relate to sales.
The total assets of the Company at December 31, 1997 and 1996 were $49,847,090
and $6,950,297 respectively. Working capital increased to $41,140,547 from
$5,205,531 for the respective periods. These significant increases are
primarily due to increased sales volume, and funds or paid in capital generated
from the sale, exercise or exchange for services of the Company's Common Stock,
options and warrants. Additionally, inventory has increased from $300,732 at
December 31, 1996 to $7,726,757 at December 31, 1997.
-10-
Three months ended December 1996 compared with same period 1995
- ---------------------------------------------------------------
For the three months ended December 31, 1996, the Company reported revenues of
$4,091,653 and net income of $1,676,314, as compared with revenues of $147,718
and a net loss of ($4,347) for the comparable period ended December 31, 1995.
This substantial increase in revenue and profits was primarily due to the
Company's national marketing program coupled with the publication of a clinical
trial study in a medical journal during 1996, proving the effectiveness of
Cold-Eeze(R) as a remedy for the common cold. Prior to the release of this
study, financial information reported was not comparable to the financial
relationships that were present in the three month period ended December 31,
1996. The gross profit rate of 66.4% was lower because of manufacturing
inefficiencies associated with the set up of larger production volume.
Operating expenses, such as delivery, brokerage commissions, promotion, and
advertising costs, increased significantly over the prior comparable period due
to the national marketing efforts for the Cold-Eeze(R) product. These expenses
accounted for approximately $585,202 of the total operating costs of $802,823
for the three months ended December 31, 1996 as compared to total operating
costs of $134,090 for the prior comparable period.
Total assets of $6,950,297, working capital of $5,205,531 and shareholders'
equity of $5,543,504 for the period ended December 31, 1996, increased
dramatically from the period ended September 30, 1996. This occurred primarily
from significant sales increases, which thereby increased accounts receivable
by $1,593,746 and inventories by $242,393. Also, issuance of common stock
related transactions totaling $1,815,795 contributed to the balance sheet
increases.
Twelve months ended September 1996 compared with same period 1995
- -----------------------------------------------------------------
For 1996, the Company reported revenues of $1,049,561 and a net loss of
($694,269), as compared with revenues of $501,903 and a net loss of ($152,556)
for the comparable period ended September 30, 1995. This substantial increase
in revenue was primarily attributable to gradual market acceptance of the
Cold-Eeze(R) lozenge products. The gradual market acceptance of the
Cold-Eeze(R) product resulted from a national marketing program commenced in
1996 and the release of the results of The Cleveland Clinic Study in July 1996.
Sales in 1995 were $501,903, most of which resulted following the Company's
marketing shift from health food bars to cold-relief products.
Cost of Goods Sold, as a percentage of net sales, increased to 27.1% for 1996
from 22.3% for 1995. The slight increase was similarly caused by the Company's
change in its product mix toward developing and marketing the Cold-Eeze(R)
products instead of health food bars. During 1996, operating expenses similarly
increased to $1,486,913 from $552,696 in 1995. This was primarily a result of
increased costs associated with a national marketing program and the increased
sales volume from the Cold-Eeze(R) product during 1996.
During 1996, the Company's major operating expenses included $558,281 for
salaries and $570,752 for advertising which collectively accounted for
$1,129,033 or approximately 75.6% of the Company's operating expenses. Other
operating costs for this period maintained their fixed attributes, in that they
did not follow sales volume but maintained a relative constant dollar value for
1995. During 1995, these expenses included $106,660 for salaries and $93,931
for advertising. If these two categories of expenses maintained the same
relationship to net sales from 1995, then the net loss for 1996 would have
changed to basically a break even.
The total assets of the Company at September 30, 1996 and September 30, 1995
were $1,368,301 and $437,076 respectively. Working capital increased to
$910,970 from $287,281 for the respective periods. These significant increases
are due primarily to increased sales volume, the acquisition of the use patent,
and funds or paid in capital generated from the sale, exercise or exchange for
services of the Company's Common Stock, options and warrants.
At September 30, 1996, the Company's sales order backlog was approximately $2
million as compared to no backlog at September 30, 1995. The backlog increase
was attributable to a growth in sales of the Company's Cold-Eeze(R) lozenge
products and shortfalls in the manufacturing capabilities.
-11-
Material Commitments and Significant Agreements
- -----------------------------------------------
As a result of all of the Company's products being manufactured by outside
sources any capital expenditure expected to be incurred during 1999 is not
anticipated to be material. The Company has agreements in place with these
manufacturers, which insures a reliable source of product for the future. The
facility producing the Cold-Eeze(R) lozenge and the Bodymate product
manufactures exclusively for the Company.
The Company has agreements in place with independent brokers whose function it
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, which is a percentage on 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 holder and the developer expire on March 5, 2002
and May 4, 2007, respectively and with the founders on May 31, 2005.
Liquidity and Capital Resources
- -------------------------------
The Company had working capital of $43,024,485 and $41,140,547 at December 31,
1998 and 1997, respectively. The increase in working capital is due to the
decrease in the components of current liabilities, strong cash collection
procedures and proceeds received by the Company from the exercise of options
and warrants. Total Cash balances at December 31, 1998 were $28,331,765 as
compared to $25,498,359 at December 31, 1997.
The Company believes that its increased marketing efforts and increased
national publicity concerning the Cold-Eeze(R) product, together with the
Company's increased manufacturing availability, newly available products and
further growth in international sales should provide an internal source of
capital to fund the Company's business operations. In addition to anticipated
earnings from operations, the Company may continue to raise capital through the
issuance of equity securities to finance anticipated growth.
In October 1998 the Company's Board of Directors approved an additional buy
back of up to 2,000,000 shares of the Company's Common Stock, which will be
based on market conditions.
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, (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.
Management believes that its present cash balances and future cash provided by
operating activities will be sufficient to support current working capital
requirements and planned expansion through 1999. However, in the event of the
Company expanding significantly in the near future, the Company has an
available line of credit. This was put in place in September 1997 and was
increased to $10,000,000 in September 1998 to be used, if required, for general
corporate purposes. This facility is collateralized by accounts receivable and
inventory, and renews in one year, with interest accruing at the Wall Street
Journal prime rate, or 275 basis points above the Euro-Dollar Rate, each to
move with the respective base rate. There were no borrowings under this line
during the year ended December 31, 1998 or 1997.
-12-
New Accounting Standards
- ------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income," requiring more detailed disclosure of
specific areas of income and expenses. This new standard is effective for
periods beginning after December 15, 1997. The effect of its adoption by the
Company is insignificant.
In June 1997, the "FASB" issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," requiring public companies report certain
information about operating segments within their financial statements.
Additionally, it requires that such entities report certain information about
their products and services, the geographic areas in which they operate, and
their major customers. These additional disclosures are required within
financial statements for fiscal years beginning after December 15, 1997. During
1998, the Company commenced international activities. Because minimum
thresholds have not been reached, no additional disclosures are required.
Impact of Inflation
- -------------------
The Company is subject to normal inflationary trends and anticipates that any
increased costs should be passed on to its customers.
Year 2000 Compliant
- -------------------
The Year 2000 issue relates to the way the computer systems and programs define
calendar dates; they could fail or make miscalculations due to interpreting a
date including "00" to mean 1900, not 2000. Also, many systems and equipment
that are not typically thought of as "computer-related" (referred to as
"non-IT") contain embedded hardware or software that may have a time element.
The Company began work on the Year 2000 compliance issue in the later part of
1996. The scope of the project includes: ensuring the compliance of all
applications, operating systems and hardware on the Company's computer network;
addressing issues to non-IT embedded software and equipment; and addressing the
compliance of key business partners.
The project has four phases: assessment of the systems and equipment affected
by the Year 2000 issue; definition of strategies to address affected systems
and equipment; remediation of affected systems and equipment; and certification
that each is Year 2000 compliant. To certify that all IT systems (internally
developed, purchased, or licensed) are Year 2000 compliant, each system is
tested using a standard testing methodology which includes regression testing,
millennium testing, millennium leap year testing and cross over year testing.
Certification testing is performed on each system as soon as remediation is
completed.
The most significant category of key business partners is financial
institutions. Their critical functions include safeguarding and management of
investment portfolios, processing of the Company's operating bank accounts,
sales and distribution funds transfers. Other partner categories include
suppliers of communication services, utilities, materials and supplies. Based
on the importance of each relationship, the Company is defining a strategy to
determine compliance.
The target for completion of all phases is the third quarter of 1999. The
Company has completed the assessment and strategy phases for its computer PC
applications, operating systems and hardware.
The majority of the Company's non-IT related systems and equipment are
currently Year 2000 compliant, based primarily on verbal or written
communication with vendors. Compilation of written documentation regarding
compliance is underway and is scheduled to be completed by the third quarter of
1999. With respect to key business partners, the assessment and strategy phases
are in the preliminary stages, with the Company in the process of compiling a
compliance list. The Company has and continues to conduct surveys of all its
software and hardware vendors, and testing is underway.
-13-
For business partners with whom the Company engages in electronic transfer of
information, sample testing is and will be conducted until full compliance is
achieved.
The Company has investments with financial institutions and could in the future
have loans. The Company may be exposed to credit risk to the extent that
related borrowers are materially adversely impacted by the Year 2000 issue.
The Company has not had an independent review of its Year 2000 risk or
estimates. However, experts have been engaged to assist in developing estimates
and to complete remediation work on specific portions of the project.
Since the inception of the project, the Company has not incurred any material
external cost with respect to the Year 2000 issue. Internal cost and current
estimates based on actual experience to date, project a total expense for the
project of less than $50,000. To date, costs of $30,000 have been incurred. The
remaining internal cost is not expected to exceed beyond the cost of normal
operating expenses. Current year costs are expensed as those costs are
incurred. There has not been a material adverse impact on the Company's
operations or financial condition as a result of IT projects caused by the Year
2000 project.
With respect to contingency plans for critical systems, the Company has long
recognized that there is no viable alternative if these systems are
non-compliant. Certification of these systems as compliant remains on schedule.
For non-IT systems and equipment and key business partners, the Company will
continue to reassess the need for formal contingency plans, based on progress
of the Year 2000 efforts by the Company and third parties.
Although the Company's critical systems are Year 2000 compliant, there is no
guarantee that compliance by third parties whose systems and operation impact
the Company will be completed by the end of 1999. A reasonably possible worst
case scenario might include one or more of the Company's key business partners
being non-compliant. Such an event could result in a material disruption of the
Company's operations. Specifically, the Company could experience an
interruption in its ability to collect and process receipts, broadcast
commercial advertising, safeguard and manage its invested assets and operating
cash accounts, accurately maintain customer information, accurately maintain
accounting records, and/or perform adequate customer service. Should the worst
case scenario occur, it could, depending on its duration, have a material
impact on the Company's results of operations and financial position.
-14-
ITEM 8 FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS Page
----
Balance Sheets as of December 31, 1998, and 1997 F-1
Statements of Income for the years ended December 31,
1998, 1997, three months ended December 31, 1996 and
year ended September 30, 1996 F-2
Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997, three months ended December 31,
1996 and year ended September 30, 1996 F-3 to F-4
Statements of Cash Flows for the years ended December 31,
1998, 1997, three months ended December 31, 1996 and year
ended September 30, 1996 F-5 to F-6
Notes to Financial Statements F-7 to F-17
Responsibility for Financial Statements F-18
Report of Independent Accountants F-19
Report of Independent Certified Public Accountant F-20
-15-
THE QUIGLEY CORPORATION
BALANCE SHEETS
ASSETS December 31, December 31,
1998 1997
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents.................... $28,331,765 $25,498,359
Accounts receivable (less doubtful 7,575,366 10,851,573
accounts of $182,079 and $96,598)..........
Inventory.................................... 6,522,612 7,726,757
Prepaid income taxes......................... 2,565,321 3,548,057
Prepaid expenses and other current assets.... 1,635,099 1,023,628
Deferred income taxes........................ 397,489 591,245
------------ ------------
TOTAL CURRENT ASSETS....................... 47,027,652 49,239,619
------------ ------------
PROPERTY, PLANT AND EQUIPMENT - net............ 1,041,386 162,189
------------ ------------
OTHER ASSETS:
Patent rights-Less accumulated amortization.. 285,224 372,986
Other assets................................. 256,382 72,296
------------ ------------
TOTAL OTHER ASSETS......................... 541,606 445,282
------------ ------------
TOTAL ASSETS................................... $48,610,644 $49,847,090
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................. $758,033 $1,115,620
Accrued royalties and sales commissions...... 2,085,446 4,730,856
Accrued advertising.......................... 561,266 202,756
Accrued freight.............................. 37,082 468,577
Other current liabilities.................... 561,340 1,581,263
------------ ------------
TOTAL CURRENT LIABILITIES.................. 4,003,167 8,099,072
------------ ------------
COMMITMENT AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value;
authorized 1,000,000; no shares issued.... - -
Common stock, $.0005 par value; authorized
50,000,000; Issued: 14,409,058 and
13,791,358 shares.......................... 7,205 6,896
Additional paid-in capital.................... 28,207,208 23,046,551
Retained earnings............................. 26,649,455 19,839,929
Less: Treasury stock, 1,665,022 and
486,862, at cost........................... (10,256,391) (1,145,358)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY................. 44,607,477 41,748,018
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..... $48,610,644 $49,847,090
=========== ============
See accompanying notes to financial statements
F-1
THE QUIGLEY CORPORATION
STATEMENTS OF INCOME
Three
Year Ended Year Ended Months Ended Year Ended
December 31, December 31, December 31, September 30,
1998 1997 1996 1996
----------- ----------- ----------- -----------
NET SALES..................... $36,354,155 $70,172,563 $ 4,091,653 $ 1,049,561
----------- ----------- ----------- ------------
COST OF SALES................. 10,877,594 21,427,888 1,374,327 283,967
----------- ----------- ----------- ------------
GROSS PROFIT.................. 25,476,561 48,744,675 2,717,326 765,594
----------- ----------- ----------- ------------
OPERATING EXPENSES:
Sales and marketing......... 10,476,030 7,741,428 585,202 647,782
Administration.............. 5,286,568 6,057,399 217,621 839,131
----------- ----------- ----------- ------------
TOTAL OPERATING EXPENSES...... 15,762,598 13,798,827 802,823 1,486,913
----------- ----------- ----------- ------------
INCOME FROM OPERATIONS........ 9,713,963 34,945,848 1,914,503 (721,319)
INTEREST INCOME............... 1,449,194 292,575 - -
----------- ----------- ----------- ------------
INCOME BEFORE TAXES........... 11,163,157 35,238,423 1,914,503 (721,319)
----------- ----------- ----------- ------------
INCOME TAXES.................. 4,353,631 14,271,561 238,189 (27,050)
----------- ----------- ----------- ------------
NET INCOME.................... $6,809,526 $20,966,862 $1,676,314 ($694,269)
=========== =========== =========== ============
Earnings per common share:
Basic $0.51 $1.72 $0.15 ($0.08)
=========== =========== =========== ============
Diluted $0.46 $1.43 $0.12 ($0.08)
=========== =========== =========== ============
Weighted average common
shares outstanding:
Basic 13,334,684 12,181,020 11,087,279 8,131,178
=========== =========== =========== ===========
Diluted 14,944,172 14,633,999 13,611,295 8,131,178
=========== =========== =========== ===========
See accompanying notes to financial statements
F-2
THE QUIGLEY CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Common Additional Stockholders
Stock Issued Paid-in- Treasury Retained Subscription
Shares Amount Capital Stock Earnings Receivable Total
(Deficit)
-------------------------------------------------------------------------------------------
Balance October 1, 1995 6,722,828 $ 3,361 $2,466,632 ($2,108,978) ($ 61,875) $ 299,140
Conversion of options 84,000 42 44,058 44,100
Shares issued to officers 1,060,000 530 313,220 313,750
Shares issued for services 674,386 337 790,499 790,836
Proceeds from warrants
exercised 4,140 2 2,068 2,070
Partial receipt of receivable 9,145 9,145
Proceeds from stock, options,
& warrants exercised 994,174 497 512,779 513,276
Issue of notes (35,000) (35,000)
Net loss year ended
September 30, 1996 (694,269) (694,269)
---------------------------------------------------------------------------------------------
Balance September 30, 1996 9,539,528 4,769 4,129,256 (2,803,247) (87,730) 1,243,048
---------------------------------------------------------------------------------------------
Shares issued for services 140,000 70 217,745 217,815
Proceeds from common
stock issued 54,664 27 40,973 41,000
Shares issued for
subscription receivable (258,126) (258,126)
Proceeds from options &
warrants exercised 2,365,000 1,183 1,590,416 1,591,599
Tax benefits from options,
warrants, & stock 1,031,854 1,031,854
Net income period ended
December 31, 1996 1,676,314 1,676,314
---------------------------------------------------------------------------------------------
Balance December 31, 1996 12,099,192 6,049 7,010,244 (1,126,933) (345,856) 5,543,504
---------------------------------------------------------------------------------------------
Shares issued for services 21,054 11 212,894 212,905
Subscription sales 17,884 8 75,998 76,006
Shares for subscription
receivable 345,856 345,856
Warrants issued for contract
termination costs 609,000 609,000
Treasury stock (486,862) 1,145,358 ($1,145,358)
-
Tax benefits from options,
warrants & common stock 11,148,083 11,148,083
Exercise of options and
warrants issued for
services 438,501 438,501
Proceeds from options and
warrants exercised 1,653,228 828 2,406,473 2,407,301
Net income year ended
December 31, 1997 20,966,862 20,966,862
---------------------------------------------------------------------------------------------
Balance December 31, 1997 13,304,496 6,896 23,046,551 (1,145,358) 19,839,929 - 41,748,018
---------------------------------------------------------------------------------------------
See accompanying notes to financial statements
F-3
THE QUIGLEY CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
Common Additional Stockholders
Stock Issued Paid-in- Treasury Retained Subscription
Shares Amount Capital Stock Earnings Receivable Total
(Deficit)
---------------------------------------------------------------------------------------------
Treasury stock (1,178,160) (9,111,033) (9,111,033)
Tax benefits from options,
warrants & common stock 3,512,205 3,512,205
Exercise of options and
warrants issued for
services 981,785 981,785
Proceeds from options and
warrants exercised 617,700 309 666,667 666,976
Net income year ended
December 31, 1998 6,809,526 6,809,526
-----------------------------------------------------------------------------------------------
Balance December 31, 1998 12,744,036 $7,205 $28,207,208 ($10,256,391) $26,649,455 - $44,607,477
===============================================================================================
See accompanying notes to financial statements
F-4
THE QUIGLEY CORPORATION
STATEMENTS OF CASH FLOWS
Three Months
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, September 30,
1998 1997 1996 1996
----------- ----------- ----------- ------------
OPERATING ACTIVITIES:
Net income (loss) ................................ $ 6,809,526 $20,966,862 $ 1,676,314 $ (694,269)
----------- ----------- ----------- -----------
Adjustments to reconcile net income (loss) to
net cash provided by operations:
Depreciation and amortization .............. 206,640 133,323 18,807 17,461
Expenditures paid with common stock ........ 981,785 1,131,025 142,814 894,586
Deferred income taxes ...................... 193,756 (171,617) (363,107) (27,050)
(Increase) decrease in assets:
Accounts receivable ................... 3,276,207 (8,650,749) (1,593,746) (471,095)
Inventory ............................. 1,204,145 (7,426,025) (242,393) 24,098
Prepaid expenses and current assets ... (621,471) (1,001,045) (544,609) (11,633)
Prepaid income tax .................... 982,736 (3,117,499) (430,558) -
Increase (decrease) in liabilities:
Accounts payable ...................... (357,587) 983,823 68,658 8,576
Accrued royalties and sales commissions (2,645,410) 4,100,211 630,645 -
Accrued advertising ................... 358,510 202,756 - -
Accrued freight ....................... (431,495) 464,107 4,470 -
Other current liabilities ............. (1,009,923) 1,379,883 618,767 -
----------- ----------- ----------- ----------
Total adjustments ................ 2,137,893 (11,971,807) (1,690,252) 434,943
----------- ----------- ----------- ----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES ........................................ 8,947,419 8,995,055 (13,938) (259,326)
----------- ----------- ----------- ----------
CASH FLOWS USED IN INVESTING
ACTIVITIES:
Capital expenditures ............................. (998,075) (121,008) (6,212) (42,757)
Other assets ..................................... (184,086) (68,907) (11)
------------ ------------ ----------- ----------
NET CASH FLOWS USED IN INVESTING
ACTIVITIES ........................................ (1,182,161) (189,915) (6,223) (42,757)
----------- ----------- ----------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Tax benefits from stock options, warrants & stock 3,512,205 11,148,083 1,031,854 -
Proceeds from exercises of options and warrants .. 666,976 2,407,301 1,591,600 515,346
Proceeds from common stock issued - 76,006 41,000 -
Due from attorney's escrow account ............... - 260,000 (260,000) 9,000
Change in stock subscription receivable .......... - 345,856 (298,467) 15,145
Repurchase of Common Stock ....................... (9,111,033) - - -
----------- ----------- ----------- ----------
NET CASH FLOWS FROM FINANCING
ACTIVITIES ..................................... (4,931,852) 14,237,246 2,105,987 539,491
----------- ----------- ----------- ----------
NET INCREASE IN CASH ............................. 2,833,406 23,042,386 2,085,826 237,408
CASH & CASH EQUIVALENTS,
BEGINNING OF PERIOD .............................. 25,498,359 2,455,973 370,147 132,739
----------- ----------- ---------- ----------
CASH & CASH EQUIVALENTS,
END OF PERIOD .................................... $ 28,331,765 $25,498,359 $ 2,455,973 $ 370,147
=========== =========== =========== ==========
See accompanying notes to financial statements
F-5
THE QUIGLEY CORPORATION
STATEMENTS OF CASH FLOWS (continued)
Supplemental disclosure of cash flow information
Three Months
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, September 30,
1998 1997 1996 1996
$ $ $ $
----------- ----------- ----------- ------------
.................................................
Income taxes paid 283,669 6,650,000 - -
----------------------------------------------------------------------------------------------------------------
Non cash investing and financing:
Conversion of put option into equity - - - (44,100)
Capital expenditures - (7,905) - -
Patent rights - (205,000) (75,000) (210,000)
Common stock issued for services performed - 1,358,263 75,000 254,100
Treasury stock cost - (1,145,358) - -
See accompanying notes to financial statements
F-6
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 in the
promotion of a product known as "Cold-Eeze(R)" in the United States. This
product serves the cold remedy market. The demand for the product is seasonal,
with the third and fourth quarters representing the largest sales volume. In
December 1998 the Company launched a nutrition and weight management program
called Bodymate(TM).
Principles of Accounting
The preparation of the 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.
Fiscal Year
On January 2, 1997, the Board of Directors approved the change of the Company's
fiscal year from September 30 to December 31 to reflect the fiscal year that
has been generally adopted by the pharmaceutical industry. The three-month
transition period ended December 31, 1996 represents the bridge between the
Company's old and new fiscal year-ends. Certain prior period amounts have been
reclassified to conform with the 1998 presentation.
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, monies invested in money market funds and
savings accounts. 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 only.
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 building improvements - twenty years; machinery and
equipment - five to seven years; computer software - three years; vehicles -
five years; and furniture & fixtures - seven years.
Patent Rights
Patent rights are amortized on a straight-line basis over the period of the
related licensing agreements, approximating 67 months. Amortization costs
incurred for the year ended December 31, 1998, year ended December 31, 1997,
three months ended December 31, 1996 and year ended September 30, 1996, were
$87,762, $100,000, $13,881 and $3,134 respectively. Accumulated amortization at
December 31, 1998, December 31, 1997, December 31, 1996 and September 30, 1996
is $204,777, $117,015, $17,015 and $3,134 respectively.
F-7
International Licenses
Included in other assets, are amounts that have been capitalized relating to
the Company's development of international licenses. Such amounts are to be
amortized using the straight-line method over the estimated benefit period.
These costs will be expensed should future benefits become 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.
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 38% for the year ended
December 31, 1998, 68% for the year ended December 31, 1997, 76% for the three
months ended December 31, 1996, and 62% for the year ended September 30, 1996.
The Company currently uses three separate suppliers to produce Cold-Eeze(R) in
lozenge, bubble gum, and sugar free tablet form. The lozenge form is
manufactured by a third party manufacturer that produces exclusively for the
Company. Substantially all of the Company's revenues are currently generated
from the sale of the Cold-Eeze(R) lozenge product. 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.
Long-lived assets
The Company reviews its long-lived assets for impairment on an exception basis
whenever events or changes in circumstances indicate that the carrying amount
of the assets may not be recoverable through future cash flows. If it is
determined that an impairment loss has occurred based on the expected cash
flows, a loss is recognized in the income statement.
Revenue Recognition
Sales are recognized at the time a shipment is received by the customer.
Royalties
The Company includes royalties and founders commissions incurred as cost of
products sold.
F-8
Advertising
Advertising costs are generally expensed within the period to which they
relate. Advertising cost incurred for the year ended December 31, 1998,
December 31, 1997, three months ended December 31, 1996 and year ended
September 30, 1996, were $9,221,225, $3,050,210, $124,371, and $121,385,
respectively. Included in prepaid expenses and other current assets was
$998,370 and $558,740 at December 31, 1998 and 1997, respectively, 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 year ended December 31, 1998, December 31, 1997, three
months ended December 31, 1996, and year ended September 30, 1996 were
$256,492, $79,784, $20,777 and $41,856, respectively.
Reclassifications
Certain prior period amounts have been reclassified to conform with 1998
presentation.
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.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income," requiring more detailed disclosure of
specific areas of income and expenses. This new standard is effective for
periods beginning after December 15, 1997. The effect of its adoption by the
Company is insignificant.
In June 1997, the "FASB" issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," requiring public companies report certain
information about operating segments within their financial statements. These
additional disclosures are required within financial statements for fiscal
years beginning after December 15, 1997. During 1998, the Company commenced
international activities. Because minimum thresholds have not been reached, no
additional disclosures are required.
NOTE 2 - CHANGES IN ACCOUNTING ESTIMATES
During 1998, the company made certain changes in accounting estimates totaling
$1,243,677, after tax, as a result of new information becoming available.
Included in this amount was a provision for contingencies, which is no longer
necessary, and reductions in operating expenses that are not expected to
materialize.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Consisted of the following as of: December 31, 1998 December 31, 1997
----------------- -----------------
Land $152,203 -
Construction in Progress 558,077 -
Machinery & equipment 238,129 $155,430
Computer software 42,442 36,264
Vehicles 207,165 22,089
Furniture & fixtures 16,686 14,991
----------------- -------------------
1,214,702 228,774
Less: Accumulated depreciation 173,316 66,585
----------------- -------------------
Property, Plant and Equipment, net $1,041,386 $162,189
================= ===================
F-9
Depreciation expense for the year ended December 31, 1998, December 31, 1997,
three months ended December 31, 1996 and year ended September 30, 1996, were
$118,878, $33,323, $4,926 and $14,327 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 which expires in March 2002. The Company is required to pay
a 3% royalty of 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.
All of the aforementioned individuals receiving royalties and commissions are
also stockholders of the Company. These expenses for the respective periods
relating to such agreements amounted to $3,784,340, $8,870,828, $592,003 for
the year ended December 31, 1998, December 31, 1997 and the three months ended
December 31, 1996, respectively, and no amounts were paid for the year ended
September 30, 1996. Amounts accrued for these expenses at December 31, 1998,
December 31, 1997 and 1996 were $1,592,917, $3,388,920 and $485,844
respectively.
NOTE 5- SHORT TERM BORROWINGS
In September 1997, the Company obtained a $5,000,000 revolving line of credit
facility for general corporate purposes. This line was increased to $10,000,000
in September 1998. This facility is collateralized by accounts receivable and
inventory, renews in one year, with interest accruing at the Wall Street
Journal prime rate, or 275 basis points above the Euro-Dollar Rate, each to
move with the respective base rate. There were no borrowings under this line
during the years ended December 31, 1998 or 1997.
NOTE 6 - INCOME TAXES
The provision (benefit) for income taxes, consists of the following:
Three Months
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, September 30,
1998 1997 1996 1996
------------ ----------- ------------ ------------
Current:
Federal $3,537,579 $12,161,445 $454,580 -
State 622,296 2,281,733 146,716 -
---------- ----------- ----------- -----------
4,159,875 14,443,178 601,296 -
---------- ----------- ----------- -----------
Deferred:
Federal 163,147 (180,601) (260,718) ($27,050)
State 30,609 8,984 (102,389) -
---------- ----------- ----------- -----------
193,756 (171,617) (363,107) (27,050)
---------- ----------- ----------- -----------
Total $4,353,631 $14,271,561 $238,189 ($27,050)
========== =========== =========== ===========
F-10
A reconciliation of the statutory federal income tax expense (benefit) to the
effective tax is as follows:
Three Months
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, September 30,
1998 1997 1996 1996
------------ ----------- ------------ ------------
Statutory rate $3,907,105 $12,333,448 $650,931 ($108,198)
State taxes net of
federal benefit 446,526 1,937,029 125,094 -
Net operating loss
carry-forward - - (594,357) (56,521)
Other - 1,084 - (1,339)
Valuation allowance - - 56,521 168,479
Cumulative effect
adjustment - - - (29,471)
---------- ----------- --------- ---------
Total $4,353,631 $14,271,561 $238,189 ($27,050)
========== =========== ========= ==========
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:
Net operating loss
carry-forward - - $419,628 $56,521
Contract termination
costs $378,554 $234,000 - -
Other 18,935 357,245 - -
---------- ----------- --------- ---------
Total $397,489 $591,245 $419,628 $56,521
========== ========== ========= =========
Certain exercises of options and warrants, and restricted stock issued for
services that became unrestricted during the period, resulted in reductions to
taxes currently payable and a corresponding increase to
additional-paid-in-capital totaling $3,512,205 for the year ended December 31,
1998, $11,148,083 for the year ended December 31, 1997 and $1,031,854 for the
three months ended December 31, 1996.
NOTE 7 - 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 varying 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
amount):
Year Ended Year Ended Three Months Ended Year Ended
December 31, 1998 December 31, 1997 December 31, 1996 September 30, 1996
------------------------ ------------------------- ------------------------ --------------------------
Income Shares EPS Income Shares EPS Income Shares EPS Loss Shares EPS
-------- -------- ------ --------- ------- ------- -------- -------- ------- -------- -------- --------
Basic EPS $6.8 13.3 $0.51 $21.0 12.2 $1.72 $1.7 11.1 $0.15 ($0.7) 8.1 ($0.08)
Dilutives:
Options and
Warrants -- 1.6 -- 2.4 -- 2.5 -- --
-------- -------- ------- -------- ------- ------- -------- -------- ------- -------- -------- --------
Diluted EPS $6.8 14.9 $0.46 $21.0 14.6 $1.43 $1.7 13.6 $0.12 ($0.7) 8.1 ($0.08)
======== ======== ======= ======== ======= ======= ======== ======== ======= ======== ======== ========
F-11
The weighted average number of shares used in the computations for the three
months ended December 31, 1996 and the year ended September 30, 1996 reflect
the retroactive effect of the two-for-one stock split which was effective
January 23, 1997. The Diluted EPS computations for the year ended September 30,
1996, exclude 4,355,000 shares relating to stock options as their effect would
have been anti-dilutive.
NOTE 8 - STOCK-BASED 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 five years from the date granted.
On December 2, 1997, the Company's Board of Directors approved a new Stock
Option Plan ("Plan") which would provide for the granting of up to one million
five hundred thousand 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 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. Shareholders approved the Plan in 1998 and
550,500 options were granted under this Plan during the year ended December 31,
1998.
The Company applies Accounting Principles Board Opinion 25 ("APB 25") in
accounting for its grants of options to both employees and non-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. Had compensation expense for awards made during the years ended
December 31, 1998, December 31, 1997, three months ended December 31, 1996 and
year ended September 30, 1996 been determined under the fair value method of
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:
Three Months
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, September 30,
1998 1997 1996 1996
------------ ----------- ----------- ------------
Pro forma net income $5,339,691 $20,194,062 $1,501,314 ($1,243,769)
Pro forma earnings per share:
Basic $0.40 $1.66 $0.14 ($0.15)
Diluted $0.36 $1.38 $0.11 ($0.15)
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 29%; expected dividend yield of
2.5%; and risk-free interest rate of 5.71% for the year ended December 31,
1998, 6.56% for the year ended December 31, 1997, a range of 6.03-6.39% for the
three months ended December 31, 1996 and a range of 5.55-6.49% for the year
ended September 30, 1996 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 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.
A summary of the status of the Company's stock options and warrants granted to
both employees and non-employees as of December 31, 1998, 1997, 1996 and
September 30, 1996 and changes during the periods then ended is presented
below:
F-12
Year Ended December 31, 1998:
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 2,030 $2.86 2,388 $3.61 4,418 $3.27
Additions (deductions):
Granted 530 9.68 20 9.68 550 9.68
Exercised 618 1.08 618 1.08
Expired
---------------------------------------------------------------------------------
Options/warrants outstanding
at end of period 2,560 $4.27 1,790 $4.55 4,350 $4.39
=================================================================================
Options/warrants exercisable
at end of period 2,560 1,790 4,350
=================================================================================
Weighted average fair value
of Grants $2.67 $2.67 $2.67
Price range of options/warrants
exercised $.50 - $1.75 $.50 - $1.75
Price range of options/warrants
outstanding $.50-$10.00 $.50-$10.00 $.50-$10.00
Price range of options/warrants
exercisable $.50-$10.00 $.50-$10.00 $.50-$10.00
Year Ended December 31, 1997:
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 1,820 $1.39 3,240 $1.36 5,060 $1.37
Additions (deductions):
Granted 345 10.00 675 9.82 1,020 10.00
Exercised 135 1.33 1,527 1.55 1,662 1.53
Expired
---------------------------------------------------------------------------------
Options/warrants Outstanding
at end of period 2,030 $2.86 2,388 $3.61 4,418 $3.27
---------------------------------------------------------------------------------
Options/warrants exercisable
at end of period 2,030 2,388 4,418
=================================================================================
Weighted average fair value
of grants $2.24 $2.24 $2.24
Price range of options/warrants
exercised $.50 - $2.50 $.50-$10.00 $.50-$10.00
Price range of options/warrants
outstanding $.50-$10.00 $.50-$10.00 $.50-$10.00
Price range of options/warrants
exercisable $.50-$10.00 $.50-$10.00 $.50-$10.00
F-13
Three months ended December 31, 1996:
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 1,570 $1.22 4,355 $.76 5,925 $.88
Additions (deductions):
Granted 250 2.50 1,250 1.81 1,500 1.68
Exercised 2,365 .50 2,365 .50
Expired
---------------------------------------------------------------------------------
Options/warrants outstanding at
end of period 1,820 $1.39 3,240 $1.36 5,060 $1.37
---------------------------------------------------------------------------------
Options/warrants exercisable at
end of period 1,820 3,240 5,060
=================================================================================
Weighted average fair value of grants $.70 $.52 $.56
Price range of options /warrants
exercised $.50-$2.50 $.50-$2.50
Price range of options /warrants
outstanding $.50-$2.50 $.50-$2.50 $.50-$2.50
Price range of options/warrants
exercisable $.50-$2.50 $.50-$2.50 $.50-$2.50
Year ended September 30, 1996:
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 1,570 $.08 6,525 $.08 8,095 $.08
Additions (deductions):
Granted 1,570 1.22 1,730 1.38 3,300 1.05
Exercised 851 .47 851 .47
Expired 1,570 .08 3,049 .08 4,619 .08
---------------------------------------------------------------------------------
Options/warrants outstanding at
end of period 1,570 $1.22 4,355 $.76 5,925 $.88
---------------------------------------------------------------------------------
Options/warrants exercisable at
end of period 1,570 4,355 5,925
=================================================================================
Weighted average fair value of grants $.35 $.39 $.37
Price range of options/warrants
exercised $.08 - $.50 $.08 - $.50
Price range of options/warrants
outstanding $.50-$1.75 $.50-$1.75 $.50-$1.75
Price range of options/warrants
exercisable $.50-$1.75 $.50-$1.75 $.50-$1.75
F-14
The following table summarizes information about stock options outstanding and
stock options exercisable as granted to both employees and non-employees at
December 31, 1998, December 31, 1997, December 31, 1996 and September 30, 1996,
respectively:
December 31, December 31, December 31, September 30,
1998 1997 1996 1996
--------------------------------------------------------------------------------------------------------------------
Employees:
Range of exercise prices $.50 - $10.00 $.50- $10.00 $.50 - $2.50 $.50 - $1.75
Share (thousands) 2,560 2,030 1,820 1,570
Weighted average remaining in
contractual life 4.0 3.5 4.3 4.5
Weighted average exercise price $4.27 $2.86 $1.39 $1.22
Non-Employees:
Range of exercise prices $.50 - $10.00 $.50 - $10.00 $.50 - $2.50 $.50 - $1.75
Share (thousands) 1,790 2,388 3,240 4,355
Weighted average remaining in
contractual life 3.0 3.7 4.4 4.2
Weighted average exercise price $4.55 $3.61 $1.36 $.76
Totals:
Range of exercise prices $.50 - $10.00 $.50 - $10.00 $.50 - $2.50 $.50 - $1.75
Share (thousands) 4,350 4,418 5,060 5,925
Weighted average remaining in
contractual life 3.6 3.6 4.4 4.3
Weighted average exercise price $4.39 $3.27 $1.37 $.88
Options outstanding as of December 31, 1998, December 31, 1997, December 31,
1996 and September 30, 1996 expire from December 14, 2000 through May 5, 2002,
depending upon the date of grant.
NOTE 9 - STOCKHOLDERS' EQUITY
On September 8, 1998, the Company's Board of Directors declared a dividend
distribution of Common Share Purchase Rights ("the Rights"), thereby creating a
Shareholder Rights Plan (the "Plan"). The dividend being payable to the
shareholders of record on September 25, 1998. Each Right entitles the
shareholder 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.
On October 16, 1998, the Company's Board of Directors authorized a plan to
reacquire up to 2,000,000 of the Company's issued and outstanding common
shares. The schedule and amount of shares re-purchased will be based upon
market conditions. As of February 18, 1999, an additional 503,835 shares have
been repurchased at a cost of $2,799,098 since December 31, 1998.
F-15
NOTE 10 - SERVICE CONTRACTS AND RELATED TERMINATION COSTS
In October 1996, the Company entered into a three-year agreement with Sands
Brothers & Co., Ltd. for investment banking services including private
placements. Upon commencement of the contract, Sands received 800,000 warrants
with an exercise price of $1.75 per share contingent upon services to be
provided.
During the first quarter of 1997, the Company decided not to pursue a private
placement offering. In order to terminate the agreement with Sands, the Company
issued to Sands 350,000 additional warrants to purchase the Company's stock at
$10 per share. As a result, the Company recorded an expense of approximately
$700,000 in 1997, and $462,000 in 1998.
Additionally, during September 1996, the Company contracted with Diversified
Corporate Consulting Group, L.L.C. ("Diversified") for public relations and
consulting services over a period of one year. Diversified received 350,000
stock options with an exercise price of $1.75 per share for these services.
During May 1997, the Company made the decision to terminate this contract. As a
result, the Company recorded an expense of approximately $91,000.
NOTE 11 - SETTLED LITIGATION
During 1992, the Company authorized litigation against Nutritional Foods
Corporation ("NFC") in which the Company sought to cancel the 729,928
restricted shares issued to NFC for international marketing services, as a
result of certain false and misleading representations made by it to the
Company including, but not limited to, NFC's failure to act as the Company's
international sales agent under an Agreement between NFC and the Company.
Pursuant to a final decree issued in the Court of Common Pleas of Bucks County,
Pennsylvania dated January 23, 1997, the Company received an order to return to
treasury these outstanding shares. In November of 1997, NFC challenged the
validity of the decree. 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 12 - COMMITMENTS AND CONTINGENCIES
Certain operating leases for office and warehouse space maintained by the
Company resulted in rent expense for the year ended December 31, 1998, December
31, 1997, three months ended December 31, 1996 and year ended September 30,
1996 of $153,594, $92,464, $7,410, $28,265, respectively. The future minimum
lease obligations under these operating leases are $41,112 for 1999, and
$25,545 for 2000.
The Company has committed to advertising costs approximating $3,551,000.
Additional advertising costs are expected to be incurred for the remainder of
1999.
The Company is subject to legal proceedings and claims which have arisen in the
ordinary course of its business. Although there can be no assurance as to the
ultimate disposition of these matters, it is the opinion of the Company's
management based upon the information available at this time, that the expected
outcome of these matters, individually or in the aggregate, will not have a
material adverse effect on the financial position, results of operations or
cash flows of the Company.
F-16
NOTE 13 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has sales brokerage and other
arrangements with entities whose major shareholders are also shareholders of
The Quigley Corporation, or are related to major shareholders of the Company.
Commissions and other items expensed under such arrangements for the years
ended December 31, 1998, December 31, 1997, three months ended December 31,
1996, and year ended September 30, 1996 amounted to approximately $270,113,
$274,154, $6,890 and $0 respectively. Management believes these transactions
were under terms no less favorable to the Company than those arranged by other
parties. Amounts payable under such agreements at December 31, 1998 and 1997
were approximately $70,634 and $117,685 respectively.
The Company is in the process of acquiring licenses in certain countries
through affiliated entities. During 1998, fees have been paid to a related
entity to obtain such licenses amounting to $40,000.
NOTE 14 - QUARTERLY INFORMATION (UNAUDITED)
Quarter Ended
-----------------------------------------------------------------
March 31, June 30, September 30, December 31,
-----------------------------------------------------------------
Fiscal 1998
Net Sales $ 7,271,819 $1,317,872 $10,747,978 $17,016,486
Gross Profit 5,060,523 919,530 7,572,872 11,923,636
Net Income 1,266,933 $1,235 3,014,056 2,527,302
Basic earnings per common share $0.10 $0.00 $0.22 $0.19
Diluted earnings per common share $0.08 $0.00 $0.20 $0.18
Fiscal 1997
Net Sales $22,182,007 $4,083,736 $14,698,350 $29,208,470
Gross Profit 15,293,184 2,858,362 10,375,786 20,217,343
Net Income 6,489,815 1,057,365 4,368,025 9,051,657
Basic earnings per common share $0.54 $0.09 $0.36 $0.71
Diluted earnings per common share $0.44 $0.08 $0.29 $0.60
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 judgements
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, 1998 and 1997, and Nachum Blumenfrucht,
CPA performed an audit of the three months ended December 31, 1996 and year
ended September 30, 1996, 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 18, 1999
-------------- -----------------
Guy J. Quigley, Chairman of the Board, Date
President, Chief Executive Officer
/s/ George J. Longo February 18, 1999
--------------- -----------------
George J. Longo, Vice President, Date
Chief Financial Officer
(Principal Financial and Accounting Officer)
F-18
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Shareholders of The Quigley Corporation
In our opinion, the accompanying balance sheets and the related statements of
income, shareholders' equity and cash flows present fairly, in all material
respects, the financial position of The Quigley Corporation at December 31,
1998 and 1997, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
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
generally accepted auditing standards 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 the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
--------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 18, 1999
F-19
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
------------------------------------------------
Stockholders of the The Quigley Corporation
I have audited the accompanying balance sheets of the Quigley Corporation
as of December 31, 1996 and September 30, 1996 and the related statements of
income, stockholders' equity, and cash flows for the three months ended
December 31, 1996 and the year ended September 30, 1996. These financial
statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audit.
I conducted an audit in accordance with generally accepted auditing
standards. Those standards require that I 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that my audit provides reasonable basis for
my opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Quigley Corporation as
of December 31, 1996 and September 30, 1996 and the results of its operations,
cash flows, and stockholders' equity for the three months ended December 31,
1996 and the year ended September 30, 1996, in conformity with generally
accepted accounting principles.
/S/ Nachum Blumenfrucht
-------------------
Nachum Blumenfrucht
Certified Public Accountant
Brooklyn, New York
February 11, 1998
F-20
ITEM 9 Changes in and Disagreements With Accountants on Accounting and
----------------------------------------------------------------------
Financial Disclosure
--------------------
On January 29, 1997, the Company engaged the independent accounting firm of
PricewaterhouseCoopers LLP to audit the Company's financial statements for the
calendar year 1997. The replacement of the previous certifying accountant,
Nachum Blumenfrucht, CPA, was made by approval of the Board of Directors of the
Company and with the agreement of Mr. Blumenfrucht. This change was due to the
dramatic expansion of business operations undertaken by the Company since the
close of the prior fiscal year. There have been no disagreements with the
former accountant on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope of procedure, nor any
reportable event required to be disclosed.
PART III
--------
ITEM 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
The information required under this item is incorporated by reference to the
Company's Proxy Statement for the 1999 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 1999 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 1999 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 1999 Annual Meeting of Stockholders.
-16-
PART IV
-------
ITEM 14 Exhibits, Financial Statements, 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 Certificate to increase the number of authorized shares of the Company
(incorporated by reference to Exhibit 3.2 of Form 10-KSB/A dated April 4, 1997)
3.3 Bylaws of the Company as currently in effect (incorporated by reference to
Exhibit 3.2 of Form 10-KSB/A dated April 4, 1997)
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 Regristration Statement on Form S-8 (File No. 333-61313) filed with
the Commission on August 13, 1998)
10.2 Exclusive Representation and Distribution Agreement dated May 4, 1992
between the Company and Godfrey Science and Design, Inc. et al (incorporated by
reference to Exhibit 10.2 of Form 10-KSB/A 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 (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)
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 between the Company and
George J. Longo (incorporated by reference to Exhibit 10.10 of Form 10-KSB
dated March 30, 1998)
10.11 Employment Agreement dated January 1, 1997 between the Company and Eric
H. Kaytes (incorporated by reference to Exhibit 10.11 of Form 10-KSB dated
March 30, 1998)
-17-
10.12 Rights Agreement dated as of September 15, 1998 between the Company and
American Stock Transfer and Trust Company (incorporated be reference to Exhibit
1. to the Company's Regristration Statement on Form 8-A filed with the
Commission on September 18, 1998
23.1 Consent of PricewaterhouseCoopers LLP, Auditors, dated March 15, 1999
(filed herewith)
23.2 Consent of Nachum Blumenfrucht, CPA dated March 17, 1999 (filed herewith)
27.1 Financial Data Schedule.
------------------------------------------------------------------------------
(a) Reports on Form 8-K
No reports were filed on Form 8-K in the quarter ended December 31, 1998.
-18-
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 March 19, 1999
-------------- --------------
Guy J. Quigley, Chairman of the Board, Date
President, 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, March 19, 1999
-------------- Chief Executive Officer and Director
Guy J. Quigley
/s/ George J. Longo Vice President, Chief Financial March 19, 1999
--------------- Officer and Director (Principal
George J. Longo Financial and Accounting Officer)
/s/ Charles A. Phillips Executive Vice President, March 19, 1999
------------------- Chief Operating
Charles A. Phillips Officer and Director
/s/ Eric H. Kaytes Vice President, March 19, 1999
-------------- Chief Information Officer,
Eric H. Kaytes Secretary, Treasurer and Director
/s/ Gurney P. Sloan Director March 19, 1999
---------------
Gurney P. Sloan
/s/ Jacqueline F. Lewis Director March 19, 1999
-------------------
Jacqueline F. Lewis
-19-