SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal year ended December 31, 1997
Commission File No. 01-21617
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THE QUIGLEY CORPORATION
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(Exact name of registrant as specified in its charter)
Nevada 23-2577138
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
(MAILING ADDRESS: PO Box 1349, Doylestown, PA 18901.)
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)
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. [XX] Yes [ ] No
Indicate by the check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B 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-KSB or any amendments to this Form 10-KSB. [ ]
The Registrant's revenues for its most recent year (1997) were $70,172,563.
As of March 16, 1998, 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 $144,350,957 based upon the closing price of the Common Stock on
that date as reported on the NASDAQ SmallCap Issues 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 16, 1998:
13,427,996.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in this
Report on Form 10-KSB:
1. Information set forth in Part III of this report is incorporated by
reference to the Registrant's 1997 Proxy Statement.
THE EXHIBIT INDEX IS LOCATED ON PAGES 14-15.
Page 1 of 30
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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. Management's Discussion and Analysis of Results of
Operations and Financial Condition 8 - 11
7. Financial Statements 12
8. Change in and Disagreements with Accountants on
Accounting and Financial Disclosure 13
Part III
9. Directors and Executive Officers of the Registrant 13
10. Executive Compensation 13
11. Security Ownership of Certain Beneficial Owners
and Management 13
12. Certain Relationships and Related Transactions 13
Part IV
13. Exhibits, Finanical Statement Schedules and Reports
on Form 8-K 14 - 30
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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 1998.
PART 1
ITEM 1. DESCRIPTION OF BUSINESS
Business Development
The Quigley Corporation (hereinafter referred to as the "Company") is a
Nevada corporation which was organized on August 24, 1989 and commenced
business operations in October, 1989.
The Company's current business is the manufacture and distribution of the
Cold-Eeze(R) product. Cold-Eeze(R) is zinc gluconate glycine lozenge proven in
a study conducted by the Cleveland Clinic Foundation to reduce the duration and
severity of the common cold symptoms by nearly half. Cold-Eeze(C) is now an
established product in the health care and cold remedy market.
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 current year, the Company has had minimal revenues from
operations and as a result had suffered continuing losses due to research and
development and operations expenses. However, the Company's product line has
been developed, and during the most recent year ended December 31, 1997, the
Company has had increasing and significant revenues 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 cold relief lozenge product.
Since June 1996, the Company has concentrated its business operations
exclusively 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 a clinical
study conducted by The Cleveland Clinic has been shown to reduce the severity
and duration of the common cold symptoms. The Quigley Corporation acquired
world-wide manufacturing and distribution rights to this formulation in 1992
and commenced national marketing in 1996.
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Product
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-name Cold-Eeze(R).
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 (randomized study), conducted at Dartmouth College
Health Science, Hanover, New Hampshire, concluded that the lozenge formulation
treatment, initiated within 48 hours of symptom onset, resulted in a
significant reduction in the total duration of the common cold.
On May 22, 1992, ZINC AND THE COMMON COLD, A CONTROLLED CLININAL 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.
Patents and Trademarks, Royalty and Employment Agreements
The Company currently owns no patents. However, the Company has been
granted an exclusive agreement for world-wide 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) AND
No. 4 758 439 (July 19, 1988)
Germany: No. 3,587,766 (March 2, 1994)
France & Italy: No. EP 0 183 840 B1 (March 2, 1994)
Sweden: No. 0 183 840 (March 2, 1994)
Canada: No. 1 243 952 (November 1, 1988)
Great Britain: No. 2 179 536 (December 21, 1988)
Japan: Pending.
In 1996, the 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.
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
all gross sales (subsequent to the Company receiving payment upon such gross
sales, less certain deductions). A separate consulting agreement between the
parties referred to directly above was
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similarly entered into on May 4, 1992, whereby the developer is to receive a
consulting fee of two percent (2%) of gross sales of the lozenge by the Company
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 all gross sales (subsequent to the Company receiving payment
upon such gross sales, 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 employment agreement between the Company and the founders was entered
into on June 1, 1995. The founders, in consideration of the acquisition of the
cold therapy product, are to receive a total royalty of five percent (5%) of
gross sales of the lozenge, less certain deductions, by the Company until the
termination of said agreement on May 31, 2005. These royalty amounts are in
addition to the normal considerations of an Executive Employment Agreement.
Product Distribution and Customers
The Company has several Broker, Distributor and Representative Agreements,
both Nationally and Internationally which are sales performance based.
Additionally, 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, BindleyWestern Drug Company, Revco, American
Drug Stores, CVS, RiteAid, 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, 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 68% of sales revenue 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. As the customer base broadens still further, it
is expected that this percentage will begin to reduce.
Research and Development
The Company's research and development costs for the year ended December
31, 1997, three months ended December 31, 1996, and year ended September 30,
1996 were $79,784, $20,777 and $41,856, respectively. The increase in research
and development costs is attributable to the Company's completion of its
current research and development projects with respect to the Cold-Eeze(R)
product. Future research and development expenditures to develop extensions of
the lozenge product, including potential pediatric Cold-Eeze(R), along with
chewing gum and mouthwash formulations of the Cold-Eeze(R) product will be
evaluated on an ongoing basis.
Regulatory Matters
The business of the Company is subject to federal and state laws and
regulations adopted for the health and safety of users of the Company's
products. The Company's Cold-Eeze(R) product is a homeopathic remedy which is
subject to regulation by various federal, state and local agencies, including
the FDA and the Homeopathic Pharmacopoeia of the United States. These
regulatory authorities have broad powers, and the Company is subject to
regulatory and legislative changes that can affect the economics of the
industry by requiring changes in operating practices or by influencing the
demand for, and the costs of providing its products. Management believes that
the Company is in compliance with all such laws, regulations and standards
currently in effect including the Food, Drug and Cosmetics Act of 1938 and the
Homeopathic Pharmacopoeia Regulatory Service. 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.
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Competition
The Company competes with other suppliers of cold remedy products. These
suppliers range widely in size. Some of the Company's competitors have
significantly greater financial, technical or marketing resources than the
Company. Many of the products offered by the Company's competitors may only
temporarily relieve the symptoms of the common cold symptoms. Management
believes that its product, which has been clinically proven 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. The Company believes that its ability to compete depends on a number of
factors, including price, product quality, availability and reliability, credit
term, name recognition, delivery time and post-sale service and support.
Employees
At December 31, 1997 the Company had 10 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 a single supplier to provide its zinc gluconate
glycine finished product. The product is manufactured by a third party
manufacturer, that produces exclusively for the Company. Should this
relationship terminate or discontinue for any reason, the Company has
formulated a contingency plan necessary in order to prevent such discontinuance
from materially affecting the Company's operations. Any such termination may,
however, result in a temporary delay in production until the replacement
facility is able to meet the Company's production requirements.
Raw 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.
ITEM 2. Description of Property
(a) The Company currently maintains its executive offices in Doylestown,
Pennsylvania, where it occupies approximately 2,500 square feet of
office space pursuant to a 2-year lease agreement expiring December
1998. 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 $4,476. The Company believes that its
existing warehousing facilities are adequate. The Company has reached
an agreement in principle to purchase a building, including
improvements, approximating 14,000 square feet that will be used as
corporate offices as well as laboratory facilities, at a cost
approximating $1 million dollars.
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
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PART II
ITEM 5. Market for Company's Common Equity and Related Stockholder Matters
Market Information
From July 1997 the Company's Common Stock, $.0005 par value, has traded on
the NASDAQ SmallCap Market under the trading symbol "QGLY." Prior to this, the
stock was reported on the NASD Bulletin Board. The following table sets forth
the average range of bid and ask quotations for each full quarterly period
presented.
By Quarter, Calendar 1996 & 1997
Common Stock
1997 1996
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Quarter Ended High Low High Low
December 31, 1995 $0.687 $0.437
March 31 $18.500 $8.375 $0.687 $0.437
June 30 $11.250 $7.687 $1.125 $0.312
September 30 $20.125 $9.187 $5.250 $0.812
December 31 $23.000 $14.000 $10.750 $4.187
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. Since July 1997,
the Company's securities have traded on the NASDAQ SmallCap Market and
consequently stock prices are available daily as generated by the SmallCap
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, 1997, there were approximately 411 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 1997 and 1996. 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.
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Warrants and Options
In addition to the Company's aforesaid outstanding Common Stock, there
are, as of December 31, 1997, 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 1,232,600 $0.50-$1.75 December 1, 2000 to April 2, 2002
ITEM 6. Management's Discussion and Analysis of Financial Condition And Results
of Operations
Overview
The trend continued in 1997 that started during the last three months of
1996 with the Company focusing exclusively on the manufacture and marketing of
the patented Cold-Eeze(R) cold relief lozenge. During 1997, 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 the Cleveland Clinical 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 has
greatly increased the public awareness of the product, along with various
independent television programs highlighting the product's desirability as a
common cold remedy. The culmination of these efforts can be seen when comparing
the twelve months sales revenue ending December 31, 1997 and 1996 of $70.2
million and $5.0 million respectively. It is anticipated that this momentum
generated over the past fifteen months will continue in 1998. This product
serves the cold remedy market. The demand for the product is seasonal, with the
first and fourth quarters representing the largest sales volume.
The Company continues to use the resources of independent national and
international brokers to represent the Company's Cold-Eeze(R) lozenge product,
thereby saving capital and other ongoing expenditures, that would otherwise be
incurred.
On the manufacturing side, 1997 saw the introduction of various efficiency
measures by the manufacturing company, in terms of new equipment, improved
purchasing procedures and pricing, and improved production availability thereby
achieving greater output in order to satisfy consumer demand. In addition the
manufacturer commenced manufacturing exclusively for the Company in 1997,
thereby boosting their output further. 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, when all orders were
being met despite heavy demand.
One of the reasons for the delay in marketing the product internationally
was this manufacturing output constraint. During 1997 the domestic market
continued to grow to establish the product. It is anticipated 1998 will be when
the Company introduces the product to the international market. In February
1998, the Company reached an agreement with Merck KGaA, Darmstadt, Germany for
exclusive distribution of Cold-Eeze(R) in the Canadian market. Ongoing, future
revenues, costs, margins and profits will continue to be influenced by the
Company's ability to maintain and increase its manufacturing capacity together
with its marketing and distribution capabilities in order to compete on a
national and international level.
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Results of Operations
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 the 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 $13,506,252 from
$2,155,646 in the comparable period 1996. This was as 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 $13,506,252 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.
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.
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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 $1,493,794 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.
Material Commitments and Significant Agreements
Since the Cold-Eeze(R) lozenge product is manufactured for the Company by
an outside source, capital expenditures during 1998 are not anticipated to be
material. The Company has reached an agreement in principle to purchase a
building, including improvements, approximating 14,000 square feet that will be
used as corporate offices as well as laboratory facilities, at a cost
approximating $1 million dollars.
There are significant royalty agreements between the Company and the
developer and patent holder of the Company's cold-relief product. The Company
has entered into royalty agreements with the patent holder that require
payments of 6% of gross sales and with the founders who share a royalty of 5%
of gross sales. Additionally, the developer receives a consulting fee of 2% of
gross sales. All such royalty and consulting arrangements are subject to
certain adjustments, and payments are required of the Company only after funds
are remitted from such sales.
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.
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Liquidity and Capital Resources
The Company had working capital of $41,140,547 and $5,205,531 at December
31, 1997 and 1996, respectively. The increase in working capital is due to the
proceeds received by the Company from the sale or exchange of common stock and
options for cash or services and increased sales of $65,179,067. Total Cash
balances at December 31, 1997 were $25,498,359, as compared to $2,455,973 at
December 31, 1996.
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, will result in significantly
increased revenues in 1998. These revenues will 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.
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 or 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 1998. However, should the
Company's business expand significantly, the Company obtained, in September
1997, a $5,000,000 revolving line of credit facility 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, 1997.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income," requiring more detailed disclosure of specific areas of
income and expenses. The Statement establishes standards for the reporting and
display of comprehensive income and its components in a full set of financial
statements. The impact of its adoption by the Company is expected to be
insignificant. This new standard is effective for periods beginning after
December 15, 1997.
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 disclosure requirements are required
within financial statements for fiscal years beginning after December 15, 1997.
During 1998, the Company expects to commence international activities which may
require additional disclosures.
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
Management believes no material commitments or contingencies exist
relating to computer operations as the computer system utilized by the company
in its operation has been deemed "Year 2000" compliant by the system vendor.
-11-
<PAGE>
ITEM 7 FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS Page
------
Balance Sheets as of December 31, 1997 and 1996 F-1
Statements of Income for the year ended December 31,
1997, three months ended December 31, 1996 and year
ended September 30, 1996 F-2
Statements of Stockholders' Equity for the year ended
December 31, 1997, three months ended December 31, 1996
and year ended September 30, 1996 F-3
Statements of Cash Flows for for the year ended
December 31, 1997, three months ended December 31, 1996
and year ended September 30, 1996 F-4 to F-5
Notes to Financial Statements F-6 to F-14
Responsibility for Financial Statements F-15
Report of Independent Accountants F-16
Report of Independent Certified Public Accountant F-17
-12-
<TABLE>
<CAPTION>
THE QUIGLEY CORPORATION
BALANCE SHEETS
ASSETS December 31, December 31,
------ 1997 1996
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................... $ 25,498,359 $ 2,455,973
Accounts receivable, net .................... 10,851,573 2,200,824
Due from attorney's escrow account .......... -- 260,000
Inventory ................................... 7,726,757 300,732
Prepaid income taxes ........................ 3,548,057 430,558
Prepaid expenses and other current assets ... 1,023,628 544,609
Deferred income taxes ....................... 591,245 419,628
------------ ------------
TOTAL CURRENT ASSETS .................... 49,239,619 6,612,324
------------ ------------
EQUIPMENT - Less accumulated depreciation ..... 162,189 66,599
------------ ------------
OTHER ASSETS:
Patent rights - Less accumulated amortization 372,986 267,985
Other assets ................................. 72,296 3,389
------------ ------------
TOTAL OTHER ASSETS ....................... 445,282 271,374
------------ ------------
TOTAL ASSETS ................................... $ 49,847,090 $ 6,950,297
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................. $ 1,115,620 $ 131,797
Accrued royalties and sales commissions ...... 4,730,856 630,645
Accrued freight .............................. 468,577 4,470
Other current liabilities .................... 1,784,019 639,881
------------ ------------
TOTAL CURRENT LIABILITIES ................ 8,099,072 1,406,793
------------ ------------
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: 13,791,358 and 12,099,192 shares ...... 6,896 6,049
Additional paid-in capital .................... 23,046,551 7,010,244
Retained earnings(Deficit) .................... 19,839,929 (1,126,933)
Less: Treasury stock, 486,862 at cost ......... (1,145,358) --
Stock subscription receivable ........... -- (345,856)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ................ 41,748,018 5,543,504
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...... $ 49,847,090 $ 6,950,297
============ ============
</TABLE>
See accompanying notes to financial statements
F-1
<PAGE>
<TABLE>
<CAPTION>
THE QUIGLEY CORPORATION
STATEMENTS OF INCOME
Three
Year Ended Months Ended Year Ended
December 31, December 31, September 30,
1997 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES ........................... $70,172,563 $ 4,091,653 $ 1,049,561
----------- ----------- -----------
COST OF SALES ....................... 21,427,888 1,374,327 283,967
----------- ----------- -----------
GROSS PROFIT ........................ 48,744,675 2,717,326 765,594
----------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing .............. 7,741,428 585,202 647,782
Administration ................... 5,764,824 217,621 839,131
----------- ----------- -----------
TOTAL OPERATING EXPENSES ............ 13,506,252 802,823 1,486,913
----------- ----------- -----------
INCOME BEFORE TAXES ................. 35,238,423 1,914,503 (721,319)
----------- ----------- -----------
INCOME TAXES ........................ 14,271,561 238,189 (27,050)
----------- ----------- -----------
NET INCOME .......................... $20,966,862 $ 1,676,314 $ (694,269)
=========== =========== ===========
Earnings per common share:
Basic ............................ $ 1.72 $ 0.15 ($0.08)
=========== =========== ===========
Diluted .......................... $ 1.43 $ 0.12 ($0.08)
=========== =========== ===========
Weighted average common shares outstanding:
Basic ............................ 12,181,020 11,087,279 8,131,178
=========== =========== ===========
Diluted .......................... 14,633,999 13,611,295 8,131,178
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-2
<PAGE>
<TABLE>
<CAPTION>
THE QUIGLEY CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Common Additional Retained Stockholders
Stock Issued Paid-in- Treasury Earnings Subscription
Shares Amount Capital Stock (Deficit) Receivable Total
------------ ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
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 ........ 9,145 9,145
receivable
Proceeds from stock,
options, warrants ..... 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 exercise ..... 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
Proceeds from options and
warrants exercised .... 1,653,228 828 2,844,974 2,845,802
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
=========== ============ ============ =========== ============ =========== ============
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
THE QUIGLEY CORPORATION
STATEMENTS OF CASH FLOWS
Three Months
Year Ended Ended Year Ended
December 31, December 31, September 30,
1997 1996 1996
------------ ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ................................. $20,966,862 $ 1,676,314 $ (694,269)
------------ ------------ ------------
Adjustments to reconcile net income (loss)
to net cash provided by operations:
Depreciation and amortization .................. 133,323 18,807 17,461
Expenditures paid with common stock ............ 1,131,025 142,814 894,586
Deferred income taxes .......................... (171,617) (363,107) (27,050)
(Increase) decrease in assets:
Accounts receivable ......................... (8,650,749) (1,593,746) (471,095)
Inventory ................................... (7,426,025) (242,393) 24,098
Prepaid expenses and current assets ......... (1,001,045) (544,609) (11,633)
Prepaid income tax .......................... (3,117,499) (430,558) --
Increase in liabilities:
Accounts payable ............................ 983,823 68,658 8,576
Accrued royalties and sales commissions ..... 4,100,211 630,645 --
Accrued freight ............................. 464,107 4,470 --
Other current liabilities ................... 1,582,639 618,767 --
------------ ------------ ------------
Total adjustments ........................ (11,971,807) (1,690,252) 434,943
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............ 8,995,055 (13,938) (259,326)
------------ ------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures ............................. (121,008) (6,212) (42,757)
Other assets ..................................... (68,907) (11) --
------------ ------------ ------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES ...... (189,915) (6,223) (42,757)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Tax benefits from stock options, warrants
and common stock 11,148,083 1,031,854 --
Proceeds from exercises of options and warrants .. 2,407,300 1,591,600 515,346
Proceeds from common stock issued ................ 76,007 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
------------ ------------ ------------
NET CASH FLOWS FROM FINANCING ACTIVITIES ......... 14,237,246 2,105,987 539,491
------------ ------------ ------------
NET INCREASE IN CASH ............................. 23,042,386 2,085,826 237,408
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD ........ 2,455,973 370,147 132,739
------------ ------------ ------------
CASH & CASH EQUIVALENTS, END OF PERIOD .............. $ 25,498,359 $ 2,455,973 $ 370,147
============ ============ ============
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
THE QUIGLEY CORPORATION
STATEMENTS OF CASH FLOWS (continued)
Supplemental disclosure of cash flow information
- ------------------------------------------------
Three
Year Ended Months Ended Year Ended
December 31, December 31, September 30,
1997 1996 1996
$ $ $
------------------------------------------------
Income taxes paid 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-5
<PAGE>
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 first and fourth quarters representing the largest sales volume.
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 1997 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 comprised of finished goods only.
Equipment
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:
furniture - seven years; machinery and equipment - five to seven years;
computer software - three years; and vehicles - five years.
Patent Rights
Patent rights are amortized on a straight-line basis over the period of
the related licensing agreements, approximating 67 months. Amortization cost
incurred for the year ended December 31, 1997, three months ended December 31,
1996 and year ended September 30, 1996, were $100,000, $13, 881 and $3,134
respectively. Accumulated amortization at December 31, 1997, December 31, 1996
and September 30, 1996 is $117,015, $17,015 and $3,134 respectively.
F-6
<PAGE>
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, which represents 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 a single supplier to provide its zinc gluconate
glycine finished product. The product is manufactured by a third party
manufacturer, that produces exclusively for the Company. Should this
relationship terminate or discontinue for any reason, the Company has
formulated a contingency plan necessary in order to prevent such discontinuance
from materially affecting the Company's operations. Any such termination may,
however, result in a temporary delay in production until the replacement
facility is able to meet the Company's production requirements.
Raw 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
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long Lived Assets to be Disposed of." The provisions
of SFAS No. 121 require the Company to review 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 recognizes royalties paid as increases in cost of products
sold.
Advertising
Advertising costs are generally expensed within the period to which they
relate. Advertising cost incurred for the year ended December 31, 1997, three
months ended December 31, 1996 and year ended September 30, 1996, were
$3,050,210, $124,371, and $121,385, respectively.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Standards No. 109 "Accounting for Income Taxes." This statement is 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
F-7
<PAGE>
tax returns. In estimating future tax consequences, SFAS 109 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 expected to be 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 disclosure requirements are required
within financial statements for fiscal years beginning after December 15, 1997.
During 1998, the Company expects to commence international activities which may
require additional disclosures.
NOTE 2 - EQUIPMENT
Equipment consisted of the following as of December 31, 1997 and 1996:
December 31, 1997 December 31, 1996
Machinery & equipment $155,430 $66,020
Computer software 36,264 -
Vehicles 22,089 22,089
Furniture & fixtures 14,991 11,752
----------------- -------------------
228,774 99,861
Less: Accumulated depreciation 66,585 33,262
----------------- -------------------
Equipment, net $162,189 $66,599
================= ===================
Depreciation expense for the year ended December 31, 1997, three months
ended December 31, 1996 and year ended September 30, 1996, was $33,323, $4,926
and $14,327 respectively.
NOTE 3 - 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, less certain deductions, to the patent holder
based on gross receipts on the sale of the product, 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 gross receipts on
the sale of the product, less certain deductions, over the term of the
agreement, expiring in 2007. Additionally, a founder's royalty totaling 5%, on
gross receipts on the sale of the product less certain deductions, is paid to
two of the officers whose agreements expire in 2005.
All of the aforementioned individuals receiving royalties are also
stockholder's of the Company. The royalty expense for the respective periods
relating to these agreements amounted to $8,870,828, $592,003 for the year
ended 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 royalties at December 31, 1997 and 1996 were $3,388,920 and
$485,844 respectively.
F-8
<PAGE>
NOTE 4 - SHORT TERM BORROWINGS
In September 1997, the Company obtained a $5,000,000 revolving line of
credit facility for general corporate purposes. 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 year ended December 31, 1997.
NOTE 5 - INCOME TAXES
The provision (benefit) for income taxes, consists of the following:
Year Ended Three Months Ended Year Ended
December 31, December 31, September 30,
1997 1996 1996
------------- ------------------ -------------
Current:
Federal $12,161,445 $454,580 -
State 2,281,733 146,716 -
------------- ------------ -------------
14,443,178 601,296 -
------------- ------------ -------------
Deferred:
Federal (180,601) (260,718) ($27,050)
State 8,984 (102,389) -
------------- ------------ -------------
(171,617) (363,107) (27,050)
============= ============ =============
Total $14,271,561 $238,189 ($27,050)
============= ============= =============
A reconciliation of the statutory federal income tax expense (benefit) to the
effective tax is as follows:
Statutory rate $12,333,448 $650,931 ($108,198)
State taxes net of federal benefit 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 $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 $234,000 - -
Other 357,245 - -
------------ ------------ ------------
Total $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 $11,148,083 for the year ended December 31,
1997 and $1,031,854 for the three months ended December 31, 1996. These
reductions are "permanent differences" and do not affect the provisions for
deferred or current income tax expense.
NOTE 6 - EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standard No. 128, "Earnings Per Share," which simplifies earnings
per share calculations and requires presentation of both basic and diluted
earnings per share on the face of the statement of income. Per this statement,
basic earnings per share "EPS" excludes dilution and is computed by dividing
income available to common stockholders by the weighted - average number of
F-9
<PAGE>
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):
<TABLE>
<CAPTION>
Year Ended Three Months Ended Year Ended
December 31, 1997 December 31, 1996 September 30, 1996
Income Shares EPS Income Shares EPS Loss Share EPS
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS $21.0 12.2 $1.72 $1.7 11.1 $0.15 ($0.7) 8.1 ($0.08)
Dilutives:
Options/Warrants -- 2.4 -- 2.5 -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Diluted EPS $21.0 14.6 $1.43 $1.7 13.6 $0.12 ($0.7) 8.1 ($0.08)
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
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 7 - 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. As shareholder approval of the Plan is
required, no options were granted under this Plan during the year ended
December 31, 1997.
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 year ended
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:
Year Ended Three Months Ended Year Ended
December 31, December 31, September 30,
1997 1996 1996
----------------------------------------------------
Pro forma net income $20,194,062 $1,501,314 ($1,243,769)
Pro forma earnings per share:
Basic $1.66 $0.14 ($0.15)
Diluted $1.38 $0.11 ($0.15)
F-10
<PAGE>
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 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, 1997, December
31, 1996 and September 30, 1996 and changes during the periods then ended is
presented below:
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-11
<PAGE>
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
` -------------------------------------------------
Option/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-12
<PAGE>
The following table summarizes information about stock options outstanding and
stock options exercisable as granted to both employees and non-employees at
December 31, 1997, December 31, 1996 and September 30, 1996, respectively:
December 31, December 31, September 30,
1997 1996 1996
- --------------------------------------------------------------------------------
Employees:
Range of exercise prices $.50 - $10.00 $.50 - $2.50 $.50 - $1.75
Share (thousands) 2,030 1,820 1,570
Weighted average remaining
in Contractual life 3.5 4.3 4.5
Weighted average exercise price $2.86 $1.39 $1.22
Non-Employees:
Range of exercise prices $.50 - $10.00 $.50 - $2.50 $.50 - $1.75
Share (thousands) 2,388 3,240 4,355
Weighted average remaining in
in Contractual life 3.7 4.4 4.2
Weighted average exercise price $3.61 $1.36 $.76
Totals:
Range of exercise prices $.50 - $10.00 $.50 - $2.50 $.50 - $1.75
Share (thousands) 4,418 5,060 5,925
Weighted average remaining in
Contractual life 3.6 4.4 4.3
Weighted average exercise price $3.27 $1.37 $.88
Options outstanding as of 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 8 - 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.
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.
F-13
<PAGE>
NOTE 9 - STATUS OF NUTRITIONAL FOODS CORPORATION 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 10 - 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, 1997, three
months ended December 31, 1996 and year ended September 30, 1996 of $92,464,
$7,410, $28,265, respectively. The future minimum lease obligations under these
operating leases are $49,783 for 1998, $25,100 for 1999, and $14,903 for 2000.
Management believes no material commitments or contingencies exist
relating to computer operations as the computer system utilized by the company
in its operation has been deemed "Year 2000" compliant by the system vendor.
The Company has committed to advertising costs approximating $5,500,000.
Additional advertising costs are expected to be incurred for the remainder of
1998.
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.
NOTE 11 - SUBSEQUENT EVENTS
On January 8, 1998, the Company's Board of Directors authorized a plan to
reacquire up to 250,000 of the Company's issued and outstanding common stock
shares during the period ended December 31, 1998. The schedule and amount of
shares re-purchased will be based upon market conditions. As of March 3, 1998,
115,000 shares have been repurchased.
The Company has reached an agreement in principle to purchase a building,
including improvements, approximating 14,000 square feet that will be used as
corporate offices as well as laboratory facilities, at a cost approximating $1
million dollars.
F-14
<PAGE>
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.
Coopers & Lybrand L.L.P., the Company's independent accountants, performed
an audit for the year ended December 31, 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 March 30, 1998
- ------------------- --------------
Guy J. Quigley, Date
Chairman of the Board,
President, Chief Executive Officer
/s/ George J. Longo March 30, 1998
- ------------------- --------------
George J. Longo, Date
Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
F-15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Stockholders of the The Quigley Corporation
We have audited the accompanying balance sheet of The Quigley Corporation
as of December 31, 1997 and the related statements of income, stockholders'
equity, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Quigley Corporation as
of December 31, 1997, and the results of its operations, cash flows, and
stockholders' equity for the year then ended in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
- ----------------------------
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 20, 1998
F-16
<PAGE>
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-17
<PAGE>
ITEM 8 Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
On January 29, 1997, the Company engaged the independent accounting firm
of Coopers & Lybrand L.L.P. 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 9. Directors and Executive Officers of the Registrant
The information required under this item is incorporated by reference to
the Company's 1997 Proxy Statement.
ITEM 10. Executive Compensation
The information required under this item is incorporated by reference to
the Company's 1997 Proxy Statement.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The information required under this item is incorporated by reference to
the Company's 1997 Proxy Statement.
ITEM 12. Certain Relationships and Related Transactions
The information required under this item is incorporated by reference to
the Company's 1997 Proxy Statement.
-13-
<PAGE>
PART IV
ITEM 13 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 Stock Option Plan for Consultants, Advisors and Non-Employee
Directors (incorporated by reference to Exhibit 10.1 of Form 10-KSB/A dated
April 4, 1997)
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 From 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, included 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 From 10-KSB/A dated April 4, 1997)
10.10 Employment Agreement dated November 5, 1996 between the Company and
George J. Longo (filed herewith)
10.11 Employment Agreement dated January 1, 1997 between the Company and
Eric H. Kaytes (filed herewith)
-14-
<PAGE>
23.1 Consent of Coopers & Lybrand L.L.P., Auditors, dated March 30, 1998
(filed herewith)
23.2 Consent of Nachum Blumenfrucht, CPA dated March 30, 1998 (filed
herewith)
25.0 Power of Attorney, (included by reference to Exhibit 25.0 of Form
SB-2 dated September 29, 1997)
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, 1997.
-15-
<PAGE>
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 30, 1998
- ------------------- --------------
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, March 30, 1998
- ------------------ President, Chief Executive --------------
Guy J. Quigley Officer and Director
/s/ George J. Longo Vice President, Chief Financial March 30, 1998
- ------------------- Officer and Director (Principal --------------
George J. Longo Financial and Accounting Officer)
/s/ Charles A. Phillips Executive Vice President, March 30, 1998
- ----------------------- Chief Operating Officer --------------
Charles A. Phillips and Director
/s/ Eric H. Kaytes Vice President, March 30, 1998
- ------------------ Chief Information Officer, --------------
Eric H. Kaytes Secretary, Treasurer and
Director
/s/ Gurney P. Sloan Director March 30, 1998
- ------------------- --------------
Gurney P. Sloan
/s/ Jacqueline F. Lewis Director March 30, 1998
- ----------------------- --------------
Jacqueline F. Lewis
-16-
<PAGE>
EXHIBIT 10.10
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT, made this 5th day of November, 1996, between THE QUIGLEY
CORPORATION, a Nevada Corporation (hereinafter "Company"), and GEORGE J. LONGO,
a resident of Pennsylvania (hereinafter "Employee")
W I T N E S S E T H:
WHEREAS, the Company agrees to hire and employ Employee according to the terms
and conditions stated herein; and,
WHEREAS, the Employee agrees to render Company services according to the terms
and conditions stated herein;
NOW, THEREFORE, in consideration of the mutual promises herein contained and
intending to be legally bound hereby, the parties hereto agree as follows:
1. Employee's Duties and Title. The Company hereby employs Employee to render
services to the Company in the capacity of Chief Financial Officer with
assigned duties and tasks as specified by the President and Chief Executive
Officer of the Company, including, by way of example only and without
limitation, responsibility for the Company's day-to-day financial operations
and affairs. Employee's title and job description may be changed from time to
time at the absolute and exclusive discretion of the Company's President and
Chief Executive Officer. The Employee hereby accepts such employment for the
period stated in Paragraph 2, and agrees to devote his full time and attention
and his best talents and expertise to the duties of employment hereby accepted
by him.
2. Term of Employment. The term of Employee's employment under this Agreement
shall commence as of November 5, 1996 with Employee's first pay period as of
January 6, 1997. ("Commencement Date") and continue until December 31, 2001,
unless sooner terminated pursuant to paragraph 5 of this Agreement.
3. Compensation. As compensation to the Employee pursuant to services rendered
under this contract, the Company shall pay to Employee and Employee shall
accept the following salary, other compensation, and benefits:
(a) From the Commencement Date through end of the 1997 calendar year, the
Company shall pay the Employee a base salary at an annual rate, of Eighty
Thousand Dollars ($80,000.00) per year, or such greater amount as the
Board of Directors may from time to time determine.
(b) The Employee's annual base salary shall, commencing with the 1998
calendar year, and for each calendar year thereafter during the term of
Employee's employment under this agreement, be increased by an amount as
shall
-17-
<PAGE>
be determined by the Company's Board of directors; provided that each
annual increase shall not be less than twenty percent (20%) of the
previous calendar year's initial base salary.
(c) The Employee shall receive from the Company, a fully vested and
unrestricted option/warrant to purchase 25,000 shares of the Company's
stock at the exercise price of Five dollars ($5.00) per share, exercisable
for a period of five (5) years from the date such option/warrant is
granted to Employee.
(d) The Employee shall be entitled to such bonuses and incentive
compensation as may be awarded in the discretion of the Board of
Directors.
(e) The Employee shall receive, at the Company's expense, family coverage
under the Company's health insurance plan, and shall be entitled to
participate in any and all of the Company's present or future employee
benefit plans, including, without limitation, pension and profit sharing
plans, and savings plans, which are generally applicable to the Company's
Employees; provided, however, that (1) the Employee's receipt of such
benefits is pursuant to and determined by the provisions of such plans,
and (2) the Company reserves the right to modify or eliminate and or all
such plans.
(f) In the event of Employee's disability (as defined below), the Company
shall continue to pay Employee his base salary in effect at the time of
such disability during the period of such disability; provided, however,
that in the event that Employee is disabled for a continuous period in
excess of eighteen (18) calendar months, the Company may, at its election,
terminate this agreement, in which event Employee shall be entitled to
receive a lump-sum termination payment of $100,000. The term "disability"
shall mean the total and complete inability of the Employee to perform his
duties under this agreement as certified by an independent physician
selected with the approval of the Company and Employee.
(g) The Employee shall be reimbursed for all reasonable business expenses
incurred by him in the performance of his duties, including CPE
requirements of the AICPA and PICPA.
4. Vacation benefits. The Employee shall be entitled to four (4) weeks paid
vacation in each calendar year during the term of his employment hereunder.
5. Termination. Employee's employment under this Agreement shall terminate upon
occurrence of any of the events described in the following subparagraphs (a)
through (e):
(a) In the event of Employee's violation of any of the covenants of this
Agreement, his employment shall automatically and immediately terminate.
No further payments or benefits whatsoever shall be due to the Employee or
any beneficiary under this Agreement as of the date of said violation.
-18-
<PAGE>
(b) The Company may terminate the employment of the Employee for cause at
any time, in which event neither the Employee nor his beneficiaries or
estate shall be entitled to any further payments hereunder. For purposes
of this Agreement, "cause" shall mean:
(i) The misappropriation of funds or property of the Company;
(ii) Any attempt to obtain personal profit from the Company by
actions that are adverse to the interests of the Company;
(iii) Unreasonable neglect or refusal to perform duties assigned to
him; or
(iv) Conviction of a felony.
(c) If the Company is sold, merged, or consolidated, Employee's employment
shall terminate; provided, however, that upon such termination, Employee
shall be entitled to forty-eight (48) months' severance pay, payable by
the Company in a lump sum within thirty (30) days following such
termination or at the settlement date of the sale, merger, or
consolidation, whichever occurs first. Said severance pay shall be
calculated by multiplying Employee's then-base monthly salary times 48
months.
(d) If the Employee dies during the term of his employment under this
Agreement, his employment shall automatically terminate, and Employee and
his Estate and Beneficiaries shall only be entitled to such benefits, if
any, as are provided under the Company's benefit plans in the event of an
employee's death.
6. Covenant not to Compete. Except as provided in paragraph (B) below:
A. Employee agrees, that during the term of his employment under Agreement and
for a period of two (2) years thereafter, that:
(1) He shall not associate with, enter into the employ of, or render any
services to any business that competes with Company or a business that
conducts similar business (as defined in subparagraph (d), below) to the
business of Company, within a twenty-five (25) mile radius of the
Company's principal place of business (currently Doylestown,
Pennsylvania).
(2) He shall not solicit, divert, or induce customers or clients of
Company to obtain similar products or services from others, including any
competitor of the Company.
(3) He shall not acquire, any financial interest, other than for full
consideration, in any competitor in a similar business to the business of
Company (including any interest in any publicly-traded entity) that
competes with Company anywhere in the United States.
-19-
<PAGE>
(4) "Similar business" as used in the foregoing subparagraphs shall
include, but not be limited to, the business of manufacture, distribution
and sale of (a) cold-relief products, (b) allergy-relief products, (c)
health and nutritional supplements, and (d) any other business conducted
by the Company.
B. The provisions of paragraphs A (1) - (4) shall not apply if Employee's
employment terminates because of a sale, merger, or consolidation of the
Company.
7. Confidentiality/Secrecy Covenants.
A. During the period of his employment hereunder, and for a period of five (5)
years thereafter, Employee agrees that he shall not:
(1) Use, divulge, or communicate to anyone, either orally, in writing, or
by electronic means, the names and/or addresses of Company's customers or
clients, or the details of any transactions or financial matters of
Company, whether or not such information was available to Employee during
his employment.
(2) Use, divulge or communicate to anyone, either orally, in writing, or
by electronic means, any company trade secrets, patents, formulas,
processes, manufacturing methods, or data supplied or available to him in
connection with his employment.
B. Employee agrees that all trade secrets, formulas, patents, processes,
manufacturing methods, data, documents, equipment, property, customer and
supplier information, financial information, sales and marketing data, and
other information provided to the Employee by the Company, or obtained by the
Employee, in the course of, or in connection with, his employment, are and
shall remain the property of the Company and shall be returned to the Company
by the Employee immediately upon termination of Employee's employment, and no
copies or reproductions thereof in any form shall be retained by Employee.
8. Injunctive Relief. In the event of a breach by Employee of any of the
covenants contained in paragraphs 6 and 7 of this Agreement, Employee agrees
that money damages shall not be an adequate remedy for such breach, and Company
shall, in addition to all other remedies for such breach provided for under
this Agreement or applicable law, have the right to request immediate and
permanent injunctive relief to enjoin and restrain such breach and any
consequences thereof.
9. Company's Proprietary Rights. Employee agrees that all his ideas,
improvements, inventions and products developed, made or discovered by the
Employee during the term of his employment under this Agreement shall be owned
by and be the exclusive property of the Company.
-20-
<PAGE>
10. Miscellaneous.
(a) This Agreement supersedes any and all prior Agreements or
understandings, oral or written, with respect to the employment of the
Employee with said Company. This Agreement may not be altered or
terminated orally, and shall be modified only by a subsequent written
Agreement executed by both the Employee and the Company.
(b) This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Pennsylvania.
(c) This Agreement shall be binding upon and shall inure to the benefit of
the Company and its successors and assigns. This Agreement shall be
binding upon and shall inure to the benefit of the Employee, his heirs,
executors and personal representatives, and shall not be assigned by the
Employee and any attempted assignment shall be in violation of this
Agreement and shall be null and void.
(d) Whenever possible, each provisions of this Agreement shall be
interpreted in such a manner as to make all provisions effective and
valid; but, if any provision in this Agreement is held to be invalid,
illegal or unenforceable, such provision will be ineffective without
invalidating the remainder of this Agreement.
(e) All notices, demands or other communications, shall be delivered to
the Company or Employee at the following addresses which may be changed
from time to time by either party within thirty (30) days written notice:
To the Company:
Guy J. Quigley, President/CEO
The Quigley Corporation
10 South Clinton Street
Doylestown, PA 18901
To the Employee:
George J. Longo
(f) All rights and remedies granted to the Company hereunder shall not be
exclusive, but shall be in addition to all rights and remedies available
to the Company at law or in equity.
(g) Unless otherwise specifically defined within this Agreement, words and
phrases shall be construed and interpreted according to their common usage
and meaning. Headings and titles are for reference purposes only and are
not to be construed as part of this Agreement.
-21-
<PAGE>
IN WITNESS WHEREOF, the Company, by its authorized representative, and
Employee, have caused this Agreement to be executed and made, all as of the day
and year first written above.
THE QUIGLEY CORPORATION
By: /S/ Guy J. Quigley
------------------
Guy J. Quigley, President
/s/ George J. Longo
-------------------
George J. Longo ("Employee")
-22-
<PAGE>
EXHIBIT 10.11
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT, made this 1st day of January, 1997, between THE QUIGLEY
CORPORATION, a Nevada Corporation (hereinafter "Company"), and ERIC H. KAYTES,
a resident of Pennsylvania (hereinafter "Employee")
W I T N E S S E T H:
WHEREAS, the Company agrees to hire and employ Employee according to the terms
and conditions stated herein; and,
WHEREAS, the Employee agrees to render Company services according to the terms
and conditions stated herein; NOW,
THEREFORE, in consideration of the mutual promises herein contained and
intending to be legally bound hereby, the parties hereto agree as follows:
1. Employee's Duties and Title. The Company hereby employs Employee to
render services to the Company in the capacity of Chief Information Officer
with assigned duties and tasks as specified by the President and Chief
Executive Officer of the Company, including, by way of example only and without
limitation: responsibility for the Company's day-to-day information operations
and affairs, responsibility for all management information systems for Company,
computer programming, and support for all computer hardware and software for
all corporate accounting. Employee's title and job description may be changed
from time to time at the absolute and exclusive discretion of the Company's
President and Chief Executive Officer. The Employee hereby accepts such
employment for the period stated in Paragraph 2, and agrees to devote his full
time and attention and his best talents and expertise to the duties of
employment hereby accepted by him.
2. Term of Employment. The term of Employee's employment under this Agreement
shall commence as of January 1, 1997 ("Commencement Date") and continue until
December 31, 2001, unless sooner terminated pursuant to paragraph 5 of this
Agreement.
3. Compensation. As compensation to the Employee pursuant to services rendered
under this contract, the Company shall pay to Employee and Employee shall
accept the following salary, other compensation, and benefits:
(a) From the Commencement Date through the end of the 1997 calendar year, the
Company shall pay the Employee a base salary at an annual rate, of Eighty
Thousand Dollars ($80,000.00) per year, or such greater amount as the Board of
Directors may from time to time determine.
-23-
<PAGE>
(b) The Employee's annual base salary shall, commencing with the 1998
calendar year, and for each calendar year thereafter during the term of
Employee's employment under this agreement, be increased by an amount as
shall be determined by the Company's Board of directors; provided that
each annual increase shall not be less than twenty percent (20%) of the
previous calendar year's initial base salary.
(c) The Employee shall be entitled to such bonuses and incentive
compensation as may be awarded in the discretion of the Board of
Directors.
(d) The Employee shall receive, at the Company's expense, family coverage
under the Company's health insurance plan, and shall be entitled to
participate in any and all of the Company's present or future employee
benefit plans, including, without limitation, pension and profit sharing
plans, and savings plans, which are generally applicable to the Company's
Employees; provided, however, that (1) the Employee's receipt of such
benefits is pursuant to and determined by the provisions of such plans,
and (2) the Company reserves the right to modify or eliminate and or all
such plans.
(e) In the event of Employee's disability (as defined below), the Company
shall continue to pay Employee his base salary in effect at the time of
such disability during the period of such disability; provided, however,
that in the event that Employee is disabled for a continuous period in
excess of eighteen (18) calendar months, the Company may, at its election,
terminate this agreement, in which event Employee shall be entitled to
receive a lump-sum termination payment of $100,000. The term "disability"
shall mean the total and complete inability of the Employee to perform his
duties under this agreement as certified by an independent physician
selected with the approval of the Company and Employee.
4. Vacation benefits. The Employee shall be entitled to four (4) weeks paid
vacation in each calendar year during the term of his employment hereunder.
5. Termination. Employee's employment under this Agreement shall terminate upon
occurrence of any of the events described in the following subparagraphs (a)
through (e):
(a) In the event of Employee's violation of any of the covenants of this
Agreement, his employment shall automatically and immediately terminate.
No further payments or benefits whatsoever shall be due to the Employee or
any beneficiary under this Agreement as of the date of said violation.
(b) The Company may terminate the employment of the Employee for cause at
any time, in which event neither the Employee nor his beneficiaries or
estate shall be entitled to any further payments hereunder. For purposes
of this Agreement, "cause" shall mean:
-24-
<PAGE>
(i) The misappropriation of funds or property of the Company;
(ii) Any attempt to obtain personal profit from the Company by
actions that are adverse to the interests of the Company;
(iii) Unreasonable neglect or refusal to perform duties assigned to
him; or
(iv) Conviction of a felony.
(c) If the Company is sold, merged, or consolidated, Employee's employment
shall terminate; provided, however, that upon such termination, Employee
shall be entitled to twelve (12) months' severance pay, payable by the
Company in a lump sum within thirty (30) days following such termination
or at the settlement date of the sale, merger, or consolidation, whichever
occurs first. Said severance pay shall be calculated by multiplying
Employee's then-base monthly salary times 12 months.
(d) If the Employee dies during the term of his employment under this
Agreement, his employment shall automatically terminate, and Employee and
his Estate and Beneficiaries shall only be entitled to such benefits, if
any, as are provided under the Company's benefit plans in the event of an
employee's death.
6. Covenant not to Compete. Except as provided in paragraph (B) below:
A. Employee agrees, that during the term of his employment under this Agreement
and for a period of two (2) years thereafter, that:
(1) He shall not associate with, enter into the employ of, or render any
services to any business that competes with Company or a business that
conducts similar business (as defined in subparagraph (d), below) to the
business of Company, within a twenty-five (25) mile radius of the
Company's principal place of business (currently Doylestown,
Pennsylvania).
(2) He shall not solicit, divert, or induce customers or clients of
Company to obtain similar products or services from others, including any
competitor of the Company.
(3) He shall not acquire, any financial interest, other than for full
consideration, in any competitor in a similar business to the business of
Company (including any interest in any publicly-traded entity) that
competes with Company anywhere in the United States.
(4) "Similar business" as used in the foregoing subparagraphs shall
include, but not be limited to, the business of manufacture, distribution
and sale of (a) cold-relief products, (b) allergy-relief products, (c)
health and nutritional supplements, and (d) any other business conducted
by the Company.
-25-
<PAGE>
B. The provisions of paragraphs A (1) - (4) shall not apply if Employee's
employment terminates because of a sale, merger, or consolidation of the
Company.
7. Confidentiality/Secrecy Covenants.
A. During the period of his employment hereunder, and for a period of five (5)
years thereafter, Employee agrees that he shall not:
(1) Use, divulge, or communicate to anyone, either orally, in writing, or
by electronic means, the names and/or addresses of Company's customers or
clients, or the details of any transactions or financial matters of
Company, whether or not such information was available to Employee during
his employment.
(2) Use, divulge or communicate to anyone, either orally, in writing, or
by electronic means, any company trade secrets, patents, formulas,
processes, manufacturing methods, or data supplied or available to him in
connection with his employment.
B. Employee agrees that all trade secrets, formulas, patents, processes,
manufacturing methods, data, documents, equipment, property, customer and
supplier information, financial information, sales and marketing data, and
other information provided to the Employee by the Company, or obtained by the
Employee, in the course of, or in connection with, his employment, are and
shall remain the property of the Company and shall be returned to the Company
by the Employee immediately upon termination of Employee's employment, and no
copies or reproductions thereof in any form shall be retained by Employee.
8. Injunctive Relief. In the event of a breach by Employee of any of the
covenants contained in paragraphs 6 and 7 of this Agreement, Employee agrees
that money damages shall not be an adequate remedy for such breach, and Company
shall, in addition to all other remedies for such breach provided for under
this Agreement or applicable law, have the right to request immediate and
permanent injunctive relief to enjoin and restrain such breach and any
consequences thereof.
9. Company's Proprietary Rights. Employee agrees that all inventions and
products developed by the Employee during the term of his employment under this
Agreement shall be owned by and be the exclusive property of the Company;
excluding, however, any computer software written or developed prior to the
date of this Agreement.
10. Miscellaneous.
(a) This Agreement supersedes any and all prior Agreements or
understandings, oral or written, with respect to the employment of the
Employee with said Company. This Agreement may not be altered or
terminated orally, and shall be
-26-
<PAGE>
(b) modified only by a subsequent written Agreement executed by both the
Employee and the Company. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania.
(c) This Agreement shall be binding upon and shall inure to the benefit of
the Company and its successors and assigns. This Agreement shall be
binding upon and shall inure to the benefit of the Employee, his heirs,
executors and personal representatives, and shall not be assigned by the
Employee and any attempted assignment shall be in violation of this
Agreement and shall be null and void.
(d) Whenever possible, each provisions of this Agreement shall be
interpreted in such a manner as to make all provisions effective and
valid; but, if any provision in this Agreement is held to be invalid,
illegal or unenforceable, such provision will be ineffective without
invalidating the remainder of this Agreement.
(e) All notices, demands or other communications, shall be delivered to
the Company or Employee at the following addresses which may be changed
from time to time by either party within thirty (30) days written notice:
To the Company:
Guy J. Quigley, President/CEO
The Quigley Corporation
10 South Clinton Street
Doylestown, PA 18901
To the Employee:
Eric H. Kaytes
(f) All rights and remedies granted to the Company hereunder shall not be
exclusive, but shall be in addition to all rights and remedies available
to the Company at law or in equity.
(g) Unless otherwise specifically defined within this Agreement, words and
phrases shall be construed and interpreted according to their common usage
and meaning. Headings and titles are for reference purposes only and are
not to be construed as part of this Agreement.
IN WITNESS WHEREOF, the Company, by its authorized representative, and
Employee, have caused this Agreement to be executed and made, all as of the day
and year first written above.
THE QUIGLEY CORPORATION
By: /S/ Guy J. Quigley
------------------
Guy J. Quigley, President
/s/ Eric H. Kaytes
-------------------
Eric H. Kaytes ("Employee")
-27-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
The Quigley Corporation on Form S-8 (File Nos. 333-10059, 333-14687 and
333-26589) of our report dated February 20, 1998, on our audit of the financial
statements of The Quigley Corporation as of December 31, 1997, and for the year
then ended, which report is included in this Annual Report on Form 10-KSB.
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
March 30, 1998
-28-
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
The Board of Directors
The Quigley Corporation
As independent public accountant, I hereby consent to the incorporation of my
report dated February 11, 1998 included in this Form 10-KSB into the Company's
previously filed Registration Statements on Form S-8, File Numbers 333-10059,
333-14687.
/s/ Nachum Blumenfrucht
-----------------------
Nachum Blumenfrucht
Certified Public Accountant
Brooklyn, New York
March 30, 1998
-29-
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