SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal year ended December 31, 1999
Commission File No. 01-21617
THE QUIGLEY CORPORATION
-----------------------
(Exact name of registrant as specified in its charter)
Nevada 23-2577138
------ ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
(MAILING ADDRESS: PO Box 1349, Doylestown, PA 18901.)
Kells Building, 621 Shady Retreat Road, Doylestown, PA 18901
------------------------------------------------------------
(Address of principle executive offices) (Zip Code)
(215) 345-0919
--------------
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK ($.0005 Par Value) COMMON SHARE PURCHASE RIGHTS
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by the check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-X contained in this form, and no
disclosure will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendments to this Form 10-K.
[X]
As of March 15, 2000, 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 $21,009,954 based upon the closing price of the Common Stock on
that date as reported on the NASDAQ National Market.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Number of shares of each of the Registrant's classes of securities (all of one
class of $.0005 par value Common Stock) outstanding on March 15, 2000:
10,349,731.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in this
Report on Form 10-K:
1. Information set forth in Part III of this report is incorporated by
reference to the Registrant's Proxy Statement for the 2000 Annual Meeting of
Stockholders.
THE EXHIBIT INDEX IS LOCATED ON PAGES 16-17.
Page 1 of 20
<PAGE>
TABLE OF CONTENTS
Part I Page
----
Item 1. Description of Business 3 - 6
2. Description of Properties 6
3. Legal Proceedings 6 - 7
4. Submission of Matters to a Vote by Security Holders 7
Part II
5. Market for the Company's Common Equity and Related
Stockholder Matters 7 - 8
6. Selected Financial Data 9
7. Management's Discussion and Analysis of Results of
Operations and Financial Condition 10 - 13
8. Financial Statements 14
9. Change in and Disagreements with Accountants on
Accounting and Financial Disclosure 15
Part III
10. Directors and Executive Officers of the Registrant 15
11. Executive Compensation 15
12. Security Ownership of Certain Beneficial
Owners and Management 15
13. Certain Relationships and Related Transactions 15
Part IV
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 16 - 20
-2-
<PAGE>
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 2000.
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 primary business is the manufacture and distribution of
the Cold-Eeze(R) and Bodymate(TM) products to the consumer through the
over-the-counter market place. Cold-Eeze(R) is a zinc gluconate glycine lozenge
proven in two double-blind clinical studies to reduce the duration and severity
of the common cold symptoms by nearly half. Cold-Eeze(R) is now an established
product in the health care and cold remedy market. Bodymate(TM) is a dietary
supplement and weight management program competing in the nutrition and weight
management marketplace.
Description of Business Operations
- ----------------------------------
Since its inception, the Company has conducted research and development into
various types of health-related food supplements and homeopathic cold remedies.
Prior to the three months ended December 31, 1996, the Company had minimal
revenues from operations and as a result suffered continued losses due to
research and development and operations expenses. However, the Company's
product line has been developed, and during the year ended December 31, 1997,
significant revenues materialized from its national marketing program and
increased public awareness of the Cold-Eeze(R) lozenge product.
The Company's initial business was the marketing and distribution of a line of
nutritious health supplements (hereinafter "Nutri-Bars"). Beginning in 1995,
the Company minimized its marketing of the Nutri-Bars and focused its efforts
on the development and marketing of the Company's patented Cold-Eeze(R) zinc
gluconate glycine cold relief lozenge product.
Since June 1996, the Company has concentrated its business operations on the
manufacturing, marketing and development of its proprietary Cold-Eeze(R) and
Cold-Eezer Plus cold-remedy lozenge products and on development of various
product extensions. The Company's lozenge products are based upon a proprietary
zinc gluconate glycine formula, which in two double-blind clinical studies has
shown to reduce the duration and severity of the common cold symptoms. The
Quigley Corporation acquired worldwide manufacturing and distribution rights to
this formulation in 1992 and commenced national marketing in 1996. By the end
of 1998, Bodymate(TM), a new product line, was launched to enter the nutrition
and weight management program industry.
-3-
<PAGE>
Products
- --------
Cold-Eeze(R), a zinc gluconate glycine formulation (ZIGG(TM)), is sold in
lozenge, bubble gum and sugar-free tablet forms. In May 1992, the Company
entered into an exclusive agreement for worldwide representation,
manufacturing, marketing and distribution rights to a zinc gluconate glycine
lozenge formulation which was patented in the United States, United Kingdom,
Sweden, France, Italy, Canada, Germany, and pending in Japan. This product is
presently being marketed by the Company and also through independent brokers
and marketers in the United States under the trade names Cold-Eeze(R),
Cold-Eeze(R) Sugar Free, and Cold-Eeze(R) Bubble Gum and in Canada under the
trade name Zigg-Eeze(TM).
In 1996, the Company also acquired an exclusive license to a zinc gluconate use
patent, thereby assuring the Company exclusivity in the manufacturing and
marketing of zinc gluconate glycine lozenge formulated cold relief products.
Under a Food and Drug Administration ("FDA") approved Investigational New Drug
Application, filed by Dartmouth College, a randomized double-blind
placebo-controlled study, conducted at Dartmouth College Health Science,
Hanover, New Hampshire, concluded that the lozenge formulation treatment,
initiated within 48 hours of symptom onset, resulted in a significant reduction
in the total duration of the common cold.
On May 22, 1992, ZINC AND THE COMMON COLD, A CONTROLLED CLINICAL STUDY, was
published in England, in the "Journal of International Medical Research",
Volume 20, Number 3, Pages 234-246. According to this publication, (a)
flavorings used in other Zinc lozenge products (citrate, tartrate, separate,
orotate, picolinate, mannitol or sorbitol) render the Zinc inactive and
unavailable to the patient's nasal passages, mouth and throat, where cold
symptoms have to be treated, (b) this patented pleasant-tasting formulation
delivers approximately 93% of the active Zinc to the mucosal surfaces and (c)
the patient has the same sequence of symptoms as in the absence of treatment,
but goes through the phases at an accelerated rate and with reduced symptom
severity.
On July 15, 1996, results of a new randomized double-blind placebo-controlled
study on the common cold were published, which commenced at the Cleveland
Clinic Foundation on October 3, 1994. The study called "Zinc Gluconate Lozenges
for Treating the Common Cold" was completed and published in the Annals of
Internal Medicine - Vol. 125 No. 2. Using a 13.3mg lozenge (almost half the
strength of the lozenge used in the Dartmouth Study), the result still showed a
42% reduction in the duration of the common cold symptoms.
At the very end of 1998, the first product of the Bodymate(TM) line was
launched in a test market to enter the nutrition and weight management
industry. The unique proprietary delivery system and naturalness of this
product, with the main ingredients of Garcinia Cambogia and chromium, offers
instant satisfaction and gratification to those attempting to lose weight. It
is believed that the ingredients in this product may block an enzyme necessary
for the formation of fats from carbohydrates, and affects the appetite to bring
about a feeling of fullness.
Patents, Trademarks, Royalty and Commission Agreements
- ------------------------------------------------------
The Company currently owns no patents. However, the Company has been granted an
exclusive agreement for worldwide representation, manufacturing, marketing and
distribution rights to a zinc gluconate glycine lozenge formulation, which are
patented as follows:
United States: No. 4 684 528 (August 4, 1987)
No. 4 758 439 (July 19, 1988)
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 an exclusive license for a United States
zinc gluconate use patent number RI 33,465 from the patent holder. This use
patent gives the Company exclusive rights to both the use and formulation
patents on zinc gluconate for reducing the duration and severity of the common
cold symptoms.
-4-
<PAGE>
The Cold-Eeze(R) product is manufactured for the Company by a contract
manufacturer and marketed by the Company in accordance with the terms of a
licensing agreement (between the Company and the developer). The contract is
assignable by the Company with the developer's consent. Throughout the duration
of the agreement the developer is to receive a three percent (3%) royalty on
sales collected, less certain deductions. A separate consulting agreement
between the parties referred to directly above was similarly entered into on
May 4, 1992, whereby the developer is to receive a consulting fee of two
percent (2%) on sales collected, less certain deductions, for consulting
services to the Company with respect to such product.
Pursuant to the License Agreement entered into between the Company and the
patent holder, the Company pays a royalty fee to the patent holder of three
percent (3%) on sales collected, less certain deductions.
During 1997, the Company instituted a trademark for the major components of its
lozenge, ZIGG(TM) (denoting zinc gluconate glycine), to set Cold-Eeze(R) apart
from the imitations proliferating the marketplace.
An agreement between the Company and the founders was entered into on June 1,
1995. The founders, in consideration of the acquisition of the Cold-Eeze(R)
cold therapy product, are to receive a total commission of five percent (5%),
on sales collected, less certain deductions until the termination of said
agreement on May 31, 2005.
Product Distribution and Customers
- ----------------------------------
The Company has several Broker, Distributor and Representative Agreements, both
Nationally and Internationally, which are sales performance-based.
Additionally, prior to 1998, the Company issued incentive common stock purchase
options to its Brokers, Distributors and Representatives.
The Cold-Eeze(R) lozenge products are distributed through numerous independent
and chain drug and discount stores throughout the United States, including the
Walgreen Company, Bindley-Western Drug Company, Revco, Albertsons, CVS,
Rite-Aid, Eckerd Drug Company, Phar-Mor Inc., Wal-Mart, Target, The Kroger
Company, Safeway Inc., SAM'S Club, BJ's Wholesale Club, Costco Wholesale, Drug
Emporium, K-Mart Corporation, and wholesale distributors including McKesson
Drug Company, Bergen Brunswig Drug Company, US Health Distributors, and
AmeriSource.
The Company is not dependent on any single customer as the broad range of
customers includes many large wholesalers, mass merchandisers, and multi-outlet
pharmacy chains, five of which account for a significant percentage of sales
volume. The top five represent 39%, 38% and 68% of sales revenue for the years
ended December 31, 1999, 1998 and 1997, respectively.
Research and Development
- ------------------------
The Company's research and development costs for the years ended December 31,
1999, 1998 and 1997, were $297,650 $256,492, and $79,784, respectively. Future
research and development expenditures are anticipated in order to develop
extensions of the Cold-Eeze(R) product, including potential unrelated new
products in the consumer health care industry, that are primarily supported by
clinical studies, for efficacious long-term products that can be coupled with
possible line extensions derivatives for a family of products.
Regulatory Matters
- ------------------
The business of the Company is subject to federal and state laws and
regulations adopted for the health and safety of users of the Company's
products. The Company's Cold-Eeze(R) product is a homeopathic remedy, which is
subject to regulation by various federal, state and local agencies, including
the FDA and the Homeopathic Pharmacopoeia of the United States. These
regulatory authorities have broad powers, and the Company is subject to
regulatory and legislative changes that can affect the economics of the
industry by requiring changes in operating practices or by influencing the
demand for, and the costs of, providing its products. Management believes that
the Company is in compliance with all such laws, regulations and standards
currently in effect including the Food, Drug and Cosmetics Act of 1938 and the
Homeopathic Pharmacopoeia Regulatory Service. Although it is possible that our
future results of operations could be materially affected by the future costs
of compliance, we believe that the future costs will not have a material
adverse effect on our financial position or on our competitive position.
-5-
<PAGE>
Competition
- -----------
The Company competes with other suppliers of cold remedy, nutrition and weight
management products. These suppliers range widely in size. Some of the
Company's competitors have significantly greater financial, technical or
marketing resources than the Company. Management believes that its Cold-Eeze(R)
product, which has been clinically proven in two double-blind studies to reduce
the severity and duration of the common cold symptoms, offers a significant
advantage over many of its competitors in the over-the-counter cold remedy
market. Bodymate(TM) at this time, has the same competition challenges to gain
acceptance by the consumer. The Company believes that its ability to compete
depends on a number of factors, including price, product quality, availability
and reliability, credit terms, name recognition, delivery time and post-sale
service and support.
Employees
- ---------
At December 31, 1999 the Company had 15 full-time employees, all of whom were
involved in an executive, marketing or administrative capacity. None of the
Company's employees are covered by a collective bargaining agreement or is a
member of a union.
Suppliers
- ---------
The Company currently uses three separate suppliers to produce Cold-Eeze(R) in
lozenge, bubble gum, and sugar-free tablet form. The Cold-Eeze(R) lozenge and
Bodymate(TM) products are manufactured by a third party manufacturer that
produces exclusively for the Company. Should these relationships terminate or
discontinue for any reason, the Company has formulated a contingency plan
necessary in order to prevent such discontinuance from materially affecting the
Company's operations with the exception of bubble gum, which cannot be
duplicated. Any such termination may, however, result in a temporary delay in
production until the replacement facility is able to meet the Company's
production requirements.
Raw materials used in the production of the products are available from
numerous sources. Currently, it is being procured from a single vendor in order
to secure purchasing economies. In a situation where this one vendor is not
able to supply the contract manufacturer with the ingredients, other sources
have been identified.
ITEM 2. DESCRIPTION OF PROPERTY
-----------------------
During November 1999 the Company moved to its new executive office building at
621 Shady Retreat Road, Doylestown. This property, with an area of
approximately 13,000 square feet, was purchased in November 1998 and
refurbished during 1999. The total cost of acquisition and refurbishment to
date has been approximately $1.6 million. The Company occupies warehouse space
in Las Vegas, Nevada. This Nevada location has a three-year lease that expires
in July 2000. 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 $2,129, the
charge being reduced over prior years due to the discontinuance of the New
Britain warehouse lease and the relocation from the leased Landmark Building to
the Company-owned executive offices at Shady Retreat Road. The Company believes
that its existing warehousing facilities are adequate.
ITEM 3. LEGAL PROCEEDINGS
-----------------
Goldblum and Wayne
In March, 1997, the Company was sued by two individuals (Thomas Goldblum and
Alan Wayne) in the Court of Common Pleas of Montgomery County, Pennsylvania.
The complaint alleges that the Plaintiffs became the owners of 500,000 shares
each of the Company's Common Stock in or about 1990, and requests damages in
excess of $100,000 for breach of contract and conversion. During the second
quarter of 1999, the Company was made aware that the Plaintiffs took the
position that the Company's 1990 pre-public 1 for 2.74 reverse split and 1995 1
for 10 reverse split did not apply to the shares claimed by them. The Company
is vigorously defending this lawsuit and has denied any liability to the
Plaintiffs because they did not perform agreed upon services as a condition to
the receipt of the shares from the Company. The Company also believes that the
Plaintiffs' claims are barred by the applicable statutes of limitations, and
that the Plaintiffs' claims are, in any event, limited to claims for
approximately 36,000 shares each. Although the Company believes the Plaintiffs
claim to be without merit, the case is still in the discovery stages and no
prediction can be made as to its outcome.
-6-
<PAGE>
Marjorie Durst
In October 1999, the Company reached a settlement in a lawsuit by an individual
named Marjorie Durst that resolved all matters between the Plaintiff and the
Company. This legal proceeding was previously reported in the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. The
resolution of this dispute is not material to the Company's financial position,
results of operations or liquidity.
In addition to the foregoing litigation, 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
---------------------------------------------------
A Special Meeting of Stockholders of the Company was held on October 15, 1999
with 10,337,820 shares eligible to vote. The presence of a quorum was reached
and the following proposal was approved by the stockholders:
To (a) ratify all actions previously taken by officers, directors and agents of
the Company relating to: (i) the 1 for 2.74 reverse split of shares of its
Common Stock effected by the Company between June 1990 and August 1991 (the
"1990 Reverse Split"), (ii) the 1 for 10 reverse split of shares of its Common
Stock effected by the Company on January 11, 1996 (the "1996 Reverse Split"),
and (iii) the 2 for 1 forward split of shares of its Common Stock effected by
the Company on January 23, 1997 (the "1997 Forward Split"); and (b) approve an
amendment to Article IV of the Company's Articles of Incorporation required to,
among other things, complete and memorialize the 1990 Reverse Split, the 1996
Reverse Split and the 1997 Forward Split.
The votes were cast as follows: For 5,572,850
Against 106,529
Abstentions 54,207
PART II
--------
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
------------------------------------------------------------------
Market Information
- ------------------
The Company's Common Stock, $.0005 par value, is currently traded on the NASDAQ
National Market under the trading symbol "QGLY". The price set forth in the
following table represents the high and low sale prices for the Company's
common stock.
Common Stock
------------
1999 1998
----------- ----------- ------------ --------------
Quarter Ended High Low High Low
March 31 $6.875 $4.906 $16.438 $9.500
June 30 $5.250 $4.688 $13.250 $6.250
September 30 $5.938 $2.906 $9.750 $6.625
December 31 $3.969 $1.563 $7.750 $4.938
-7-
<PAGE>
From July 1997 to May 1998, the Company's securities were traded on the NASDAQ
SmallCap Market. Since May 1998, the Company's securities are traded on the
NASDAQ National Market and consequently stock prices are available daily as
generated by the National Market established quotation system.
Holders
- -------
As of December 31, 1999, there were approximately 368 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
- ---------
The Company has never declared, nor has it paid, any cash dividends on its
Common Stock. At this time the Company intends to retain its earnings to
finance future growth, and as a result does not anticipate paying any cash
dividends on its Common Stock in the immediate future.
Warrants and Options
- --------------------
In addition to the Company's aforesaid outstanding Common Stock, there are, as
of December 31, 1999, issued and outstanding Common Stock Purchase Warrants and
Options which are exercisable at the price-per-share stated and expire on the
date indicated, as follows:
Description Number Exercise Price Expiration Date
----------- -------------- -----------------
CLASS "D" 590,000 $0.500 December 14, 2000
CLASS "E" 1,150,000 $1.750 June 30, 2001
CLASS "F" 225,000 $2.500 November 4, 2001
CLASS "G" 945,000 $10.000 May 5, 2002
Warrants 409,900 $1.750 September 30, 2001
Option Plan 550,500 $9.680 December 1, 2007
Option Plan 409,000 $5.125 April 6, 2009
-8-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The Company changed its fiscal year-end from September 30 to December 31 on
January 2, 1997. The following table sets forth the selected financial data of
the Company for, and at the end of (i) the years ended September 30, 1995 and
1996, (ii) the three months ended December 31, 1996 and (iii) the years ended
December 31, 1997, 1998 and 1999.
The data presented below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's financial statements and notes thereto appearing elsewhere
herein.
<TABLE>
<CAPTION>
(Amounts in thousands, except Three Months
per share data) Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, September 30, September 30,
1999 1998 1997 1996 1996 1995
------------ ------------ ------------ ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Net Sales ................................... $ 24,820 $ 36,354 $ 70,173 $ 4,092 $ 1,050 $ 502
Gross Profit ................................ 16,941 25,477 48,745 2,717 766 390
Net Income (Loss) ........................... (4,204) 6,809 20,967 1,676 (694) (153)
Basic earnings/(loss) per
common share ............................ ($ 0.37) $ 0.51 $ 1.72 $ 0.15 ($ 0.08) ($ 0.02)
Diluted earnings/(loss) per
common share............................. ($ 0.37) $ 0.46 $ 1.43 $ 0.12 ($ 0.08) ($ 0.02)
Weighted average common
shares outstanding:
Basic ....................................... 11,352 13,335 12,181 11,087 8,131 6,723
Diluted ..................................... 11,352 14,944 14,634 13,611 8,131 6,723
As of As of As of As of As of As of
December 31, December 31, December 31, December 31, September 30, September 30,
1999 1998 1997 1996 1996 1995
------------ ------------ ------------ ----------- ------------- --------------
Balance Sheet Data:
Working capital ............................. $ 23,621 $ 43,024 $ 41,141 $ 5,206 $ 911 $ 287
Total assets ................................ 33,271 48,611 49,847 6,950 1,368 437
Stockholders' equity ........................ 26,216 44,607 41,748 5,544 1,243 299
</TABLE>
-9-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
Overview
- --------
During 1999, the Company continued to manufacture, market and promote its
Cold-Eeze(R) and Bodymate(TM) products through numerous independent and chain
drug and discount stores throughout the United States. In 1998 the Company
commenced selling internationally and is continuously looking for additional
opportunities. Toward the end of 1998 the Company launched Cold-Eeze(R) in both
the sugar-free and bubble gum form along with Bodymate(TM), a weight management
program. The Cold-Eeze(R) sugar-free form is especially beneficial to diabetics
and other consumers concerned with their sugar intake. Currently, Cold-Eeze(R)
is the only zinc gluconate glycine product clinically proven to reduce the
severity and duration of the common cold symptoms, the efficacy of the product
having been established following the publication of a second double-blind
study in July 1996. The Company continued supplying international markets in
1999, with sales to the Peoples Republic of China and Israel. The demand for
the product is seasonal, with the third and fourth quarters of 1999 providing
the largest sales volume, with the first quarter having experienced a longer
than usual selling season.
The 1999 sales revenue was $24,819,942 compared to $36,354,155 and $70,172,563
for 1998 and 1997, respectively. The decrease in sales in 1999 is attributable
to increased competition with the addition of herbal and zinc remedies that
have not been clinically proven to counteract the symptoms of the common cold.
Some unproven zinc products were discontinued in 1999 resulting in clearance
selling at severely discounted prices. This increased activity and incessant
marketing resulted in consumer confusion with the distinction between what
products claim they can achieve and what they have been proven to achieve
becoming unclear. Additionally, during 1999, Cold-Eeze(R) has been subject to
various inaccurate media reports appearing to discredit its proven efficacy. In
common with other markets, 1999 experienced increased consolidation between
retail chains resulting in reduced pipeline inventories and subsequent reorders
of Cold-Eeze(R). The Company increased its advertising effort in order to
clarify and establish Cold-Eeze(R) as a branded cold remedy clinically proven
to significantly reduce the duration and severity of the common cold symptoms.
The Company continues to use the resources of independent national and
international brokers to represent the Company's Cold-Eeze(R) and Bodymate(TM)
products, thereby saving capital and other ongoing expenditures that would
otherwise be incurred.
Manufacturing of the products is currently being carried out at three separate
independent locations, with different manufacturers being used for the
Cold-Eeze(R) bubble gum and sugarfree products and the same manufacturer
producing the Cold-Eeze(R) lozenge and the Bodymate(TM) Nutrition and Weight
Management Program. The lozenge and Bodymate(TM) manufacturer commenced
manufacturing exclusively for the Company in 1997, thereby increasing their
output and the availability of the product and, as a result, eliminating the
occurrence of backorders. All three manufacturing sites have the capacity to
respond quickly to market requirements.
The change in manufacturing availability allowed the Company to commence
selling internationally in 1998. In February 1998, the Company reached an
agreement with GenPharm, Inc., a wholly-owned subsidiary of Merck KGaA of
Germany for exclusive distribution of Cold-Eeze(R) in the Canadian market. In
December 1998, the Company reached an agreement with a Hong Kong-based Chinese
distribution company for the exclusive distribution of Cold-Eeze(R) in the
Peoples Republic of China. This exclusivity is predicated on minimum sales
levels being met each year, that in total must reach at least $52 million over
the 7-year life of the agreement. Future revenues, costs, margins and profits
will continue to be influenced by the Company's ability to maintain its
manufacturing availability and capacity together with its marketing and
distribution capabilities in order to continue to compete on a national and
international level.
-10-
<PAGE>
Results of Operations
- ---------------------
Twelve months ended December 1999 compared with same period 1998
- ----------------------------------------------------------------
For the year ended December 31, 1999, the Company had revenues of $24,819,942
and a net loss of ($4,203,785), compared to revenues of $36,354,155 and net
income of $6,809,526 for the comparable period in 1998. 1999 experienced a slow
down in sales for various reasons. During the course of the year a large number
of zinc products left the market leading to the lowering of prices by these
competitors, resulting in these zinc products catching the attention of the
consumer. Additionally, the marketplace experienced the influx of herbal
remedies and nutritional supplements resulting in consumer confusion. The high
inventory levels that were being held by our customers from previous years,
along with the consolidation of customers, all reduced sales for the year. The
1999 results were adversely affected by the change in the effective tax rate
from 39% to 31% due to the provision of a valuation allowance equaling the
total deferred tax asset.
Cost of Goods Sold, as a percentage of sales in 1999, was 31.7%, up 1.8% from
the 1998 level of 29.9%. The increase in 1999 is attributable to the
contribution to sales made by Bodymate(TM) and the bubble gum form of
Cold-Eeze(R), both of which carry a higher unit cost of goods percentage. The
Cold-Eeze(R) lozenge product continues to be manufactured in an efficient and
cost effective manner, with this making up the majority of the sales activity.
Total operating costs for 1999 were $23,928,313 compared to $15,762,598 for
1998. The main reason for the increase was the necessity to promote the unique,
proven properties of the Cold-Eeze(R) products in light of the influx of
competing new products into the marketplace. This was addressed through
increased radio and television advertising at appropriate times during the
year. During 1999, the Company's major operating expenses of delivery,
salaries, brokerage commissions, promotion, advertising, and legal costs
accounted for approximately $21,368,130 (90%) of the total of $23,928,313.
Total assets of the Company at December 31, 1999 and 1998 were $33,271,056 and
$48,610,644 respectively. Working capital decreased by $19,403,816 to
$23,620,669 at December 31, 1999. The main factors contributing to the
reduction in these two categories were the cash expended in the repurchase of
Company stock to treasury totaling $14,788,193, during the course of the year,
as reflected in total shareholders' equity, together with losses incurred
during the year, offset by the increase in current liabilities.
Twelve months ended December 31, 1998 compared with same period 1997
- --------------------------------------------------------------------
The year ended December 31,1998 produced revenues of $36,354,155 and net income
of $6,809,526 compared to revenues of $70,172,563 and net income of $20,966,862
for the comparable period in 1997. The reasons for the slow down in sales in
1998 included mild weather conditions which are reflected in lower incidence of
consumers' colds combined with the effect of new herbal cold treatments
promulgated through national news media announcements. Additionally, due to
greater output availability at the manufacturing site, product lead-time was
reduced from six or more weeks in 1997 to two weeks in 1998 resulting in the
customer being able to order product closer to their needs.
Cost of Goods Sold, as a percentage of net sales, decreased by 0.6%, down to
29.9% in 1998 from 30.5% in 1997. The reduction in 1998 resulted from
efficiencies implemented by the manufacturer in 1997 that continued to be
beneficial in 1998 and combined with effect of a change in accounting
estimates. These gains were offset by a repackaging charge of approximately
0.5% of net sales, higher cost margins for different product configurations and
international sales.
The year 1998 operating expenses were $15,762,598 compared to $13,798,827 in
the comparable period of 1997. The increase over 1997 is primarily as a result
of advertising and marketing spending to further establish and grow the
product. During 1998, the Company's major operating expenses of delivery,
salaries, brokerage commissions, promotion, advertising, and legal costs
accounted for approximately $13,805,588 (88%) of the total of $15,762,598.
-11-
<PAGE>
The total assets of the Company at December 31, 1998 and 1997 were $48,610,644
and $49,847,090 respectively. Working capital increased by $1,883,938 to
$43,024,485 at December 31, 1998. The significant movements in these categories
represent a slowdown in sales in 1998, the reduction in the components of
current liabilities and changes in funds or paid-in-capital as a result of the
sale or exercise of the Company's Common Stock, options and warrants.
Additionally, during the course of 1998, the Company repurchased a quantity of
the Company's Common Stock.
Twelve months ended December 31, 1997 compared with same period 1996
- --------------------------------------------------------------------
For 1997, the Company reported revenues of $70,172,563 and net income of
$20,966,862, as compared with revenues of $4,993,496 and net income of $986,392
for the comparable period ended December 31, 1996. This substantial increase in
revenue is primarily attributable to the market acceptance of the Cold-Eeze(R)
lozenge product. The year 1997 saw Cold-Eeze(R) become a formidable force in
the marketplace as a unique remedy to reduce the severity and duration of the
common cold symptoms. This resulted from the release of the results of The
Cleveland Clinic Study in July 1996, a national marketing program that
commenced in the fourth quarter of 1996 together with national exposure in the
media, such as NBC's PrimeTime network national news program and "20/20" on ABC
in January 1997. Sales in the transition quarter ended December 31, 1996 were
$4,091,653.
Cost of Goods Sold, as a percentage of net sales, decreased by 2.35%, down to
30.5% for 1997 from 32.85% for 1996. This decrease in cost of goods is
primarily due to efficiencies resulting from the manufacturer utilizing
improved equipment such as fully automated production lines. In addition, the
higher volume of production brought economies of scale resulting in the lower
purchase cost of raw materials and packaging, thereby, reducing the cost of the
finished product. During 1997, operating expenses increased to $13,798,827 from
$2,155,646 in the comparable period 1996. This was a result of increased costs
associated with a national marketing and advertising program and other variable
costs associated with bringing the sales volume to the level achieved.
During 1997, the Company's major operating expenses of delivery, salaries,
brokerage commissions, promotion, advertising and legal costs accounted for
approximately $12,562,060 (93%) of the $13,798,827 total operating costs
incurred by the Company. Other operating costs for this period maintained their
fixed attributes, in that they did not follow sales volume but maintained a
relative constant dollar value for 1997. During 1996, these expenses amounted
to $1,826,651 (85%) of the total of $2,155,646.
Material Commitments and Significant Agreements
- -----------------------------------------------
As a result of all of the Company's products being manufactured by outside
sources, any capital expenditure expected to be incurred during 2000 is not
anticipated to be material. The Company has agreements in place with these
manufacturers, which insure a reliable source of product for the future. The
facility producing the Cold-Eeze(R) lozenge and the Bodymate product
manufactures exclusively for the Company.
The Company has agreements in place with independent brokers whose function it
is to represent the Company, in a product sales and promotion capacity,
throughout the United States and internationally. The brokers are remunerated
through a commission structure, based on a percentage of sales collected, less
certain deductions.
There are significant royalty and commission agreements between the Company,
patent holders and the developer of the Company's cold-relief products. The
Company has entered into royalty agreements with the patent holders that
require payments of 6% on sales collected, less certain deductions, and with
the founders who share a commission of 5% on sales collected, less certain
deductions. Additionally, the developer of the Cold-Eeze(R) product formulation
receives a consulting fee of 2% on sales collected, less certain deductions.
The agreements with the patent holder and the developer expire on March 5, 2002
and May 4, 2007, respectively and with the founders on May 31, 2005.
The Company has committed to advertising costs approximating $5,100,000
relating to 2000. Additional advertising costs are expected to be incurred for
the remainder of 2000.
-12-
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company had working capital of $23,620,669 and $43,024,485 at December 31,
1999 and 1998, respectively. The decrease in working capital is due, primarily,
to the increase in the components of current liabilities together with the cash
used in the repurchase of Company Common stock during 1999. Total cash balances
at December 31, 1999 were $13,990,475 as compared to $28,331,765 at December
31, 1998.
The Company believes that its increased marketing efforts and increased
national publicity concerning the Cold-Eeze(R) products, the Company's
increased manufacturing availability, newly available products, further growth
in international sales together with its current working capital should provide
an internal source of capital to fund the Company's business operations. In
addition to anticipated funding from operations, the Company may raise capital
through the issuance of equity securities to finance anticipated growth.
Throughout 1999 the Company repurchased a total of 2,816,631 shares at a cost
of $14,788,193.
Management is not aware of any trends, events or uncertainties that have or are
reasonably likely to have a material negative impact upon the Company's (a)
short-term or long-term liquidity, or (b) net sales, revenues or income from
continuing operations. Any challenge to the Company's patent rights could have
a material adverse effect on future liquidity of the Company; however, the
Company is not aware of any condition that would make such an event probable.
The Company has a revolving line of credit with a commercial bank for $10
million to be used for general corporate purposes. This facility is
collateralized by accounts receivable and inventory, and renews in May 2000,
with interest accruing at the Prime Rate, or 225 basis points above the
Eurodollar Rate, each to move with the respective base rate. There were no
borrowings under available lines during the twelve-month periods ended December
31, 1999 or 1998.
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 Compliance
- --------------------
At this time no year 2000 issues have become apparent and management is not
currently aware of any items that would have a material impact on the Company's
results of operations and financial position.
-13-
<PAGE>
ITEM 8 FINANCIAL STATEMENTS
--------------------
INDEX TO FINANCIAL STATEMENTS Page
----
Balance Sheets as of December 31, 1999 and 1998 F-1
Statements of Income for the years ended
December 31, 1999, 1998 and 1997 F-2
Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998, and 1997 F-3
Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997 F-4 to F-5
Notes to Financial Statements F-6 to F-15
Responsibility for Financial Statements F-16
Report of Independent Accountants F-17
-14-
<PAGE>
<TABLE>
<CAPTION>
THE QUIGLEY CORPORATION
BALANCE SHEETS
ASSETS December 31, December 31,
1999 1998
------------ -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ......................... $13,990,475 $28,331,765
Accounts receivable (less doubtful
accounts of $239,065 and $182,079) .............. 6,639,687 7,575,366
Inventory ......................................... 6,170,005 6,522,612
Prepaid income taxes .............................. 2,485,247 2,565,321
Prepaid expenses and
other current assets ........................... 1,390,702 1,635,099
Deferred income taxes ............................ -- 397,489
----------- -----------
TOTAL CURRENT ASSETS ................... 30,676,116 47,027,652
----------- -----------
PROPERTY, PLANT AND EQUIPMENT - net ............... 1,943,313 1,041,386
----------- -----------
OTHER ASSETS:
Patent rights - Less accumulated amortization...... 197,463 285,224
Other assets ...................................... 454,164 256,382
----------- -----------
TOTAL OTHER ASSETS ..................... 651,627 541,606
----------- -----------
TOTAL ASSETS ...................................... $33,271,056 $48,610,644
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................... $ 395,778 $ 758,033
Accrued royalties and sales commissions ........ 1,722,715 2,085,446
Accrued advertising ............................ 4,523,901 561,266
Accrued freight ................................ 104,263 37,082
Other current liabilities ...................... 308,790 561,340
------------ ------------
TOTAL CURRENT LIABILITIES ........... 7,055,447 4,003,167
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.0005 par value; authorized 50,000,000;
Issued 14,831,384 and 14,409,058 shares...... 7,415 7,205
Additional paid-in-capital ..................... 28,807,108 28,207,208
Retained earnings .............................. 22,445,670 26,649,455
Less: Treasury stock, 4,481,653 and
1,665,022 shares, at cost.................... (25,044,584) (10,256,391)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY .......... 26,215,609 44,607,477
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..... $ 33,271,056 $ 48,610,644
============ ============
</TABLE>
See accompanying notes to financial statements
F-1
<PAGE>
<TABLE>
<CAPTION>
THE QUIGLEY CORPORATION
STATEMENTS OF INCOME
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
NET SALES ................................. $ 24,819,942 $36,354,155 $ 70,172,563
------------ ----------- ------------
COST OF SALES ............................. 7,879,303 10,877,594 21,427,888
------------ ----------- ------------
GROSS PROFIT .............................. 16,940,639 25,476,561 48,744,675
------------ ----------- ------------
OPERATING EXPENSES:
Sales and marketing ................. 17,938,002 10,476,030 7,741,428
Administration ...................... 5,990,311 5,286,568 6,057,399
------------ ----------- ------------
TOTAL OPERATING EXPENSES .................. 23,928,313 15,762,598 13,798,827
------------ ----------- ------------
INCOME (LOSS) FROM OPERATIONS ............. (6,987,674) 9,713,963 34,945,848
INTEREST INCOME ........................... 881,274 1,449,194 292,575
------------ ----------- ------------
INCOME (LOSS) BEFORE TAXES ................ (6,106,400) 11,163,157 35,238,423
------------ ----------- ------------
INCOME TAXES EXPENSE (BENEFIT) ............ (1,902,615) 4,353,631 14,271,561
------------ ----------- ------------
NET INCOME (LOSS) ......................... ($ 4,203,785) $ 6,809,526 $ 20,966,862
============ =========== ============
Earnings/(Loss) per common share:
Basic ............................... ($ 0.37) $ 0.51 $ 1.72
============ =========== ============
Diluted ............................. ($ 0.37) $ 0.46 $ 1.43
============ =========== ============
Weighted average common shares outstanding:
Basic ............................... 11,351,960 13,334,684 12,181,020
============ =========== ============
Diluted ............................. 11,351,960 14,944,172 14,633,999
============ =========== ============
</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 January 1, 1997 .... 12,099,192 $ 6,049 $ 7,010,244 ($ 1,126,933) ($ 345,856) $ 5,543,504
Shares issued for services . 21,054 11 212,894 212,905
Subscription sales ......... 17,884 8 75,998 76,006
Shares for subscription
receivable ............. 345,856 345,856
Warrants issued for contract
termination costs 609,000 609,000
Treasury stock ............. (486,862) 1,145,358 ($ 1,145,358) --
Tax benefits from options,
warrants & common stock 11,148,083 11,148,083
Exercise of options and
warrants issued for
services................ 438,501 438,501
Proceeds from options and
warrants exercised ..... 1,653,228 828 2,406,473 2,407,301
Net income year ended
December 31, 1997 ...... 20,966,862 20,966,862
----------- ------------ ------------ ------------ ------------ ------------ -----------
Balance December 31, 1997 .. 13,304,496 6,896 23,046,551 (1,145,358) 19,839,929 -- 41,748,018
----------- ------------ ------------ ------------ ------------ ------------ -----------
Treasury stock ............. (1,178,160) (9,111,033) (9,111,033)
Tax benefits from options,
warrants & common stock 3,512,205 3,512,205
Exercise of options and
warrants issued for
services................ 981,785 981,785
Proceeds from options and
warrants exercised ..... 617,700 309 666,667 666,976
Net income year ended
December 31, 1998 ...... 6,809,526 6,809,526
----------- ------------ ------------ ------------ ------------ ------------ -----------
Balance December 31, 1998 .. 12,744,036 7,205 28,207,208 (10,256,391) 26,649,455 -- 44,607,477
----------- ------------ ------------ ------------ ------------ ------------ -----------
Treasury stock ............. (2,816,631) (14,788,193) (14,788,193)
Tax benefits from options,
warrants & common stock 697,208 697,208
Tax valuation allowance (697,208) (697,208)
Warrants issued for services 202,975 202,975
Proceeds from options and
warrants exercised ..... 422,326 210 427,289 427,499
Other ...................... (30,364) (30,364)
Net loss year ended
December 31, 1999 ...... (4,203,785) (4,203,785)
----------- ------------ ------------ ------------ ------------ ------------ -----------
Balance December 31, 1999 .. 10,349,731 $ 7,415 $ 28,807,108 ($25,044,584) $ 22,445,670 -- $ 26,215,609
----------- ------------ ------------ ------------ ------------ ------------ -----------
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
THE QUIGLEY CORPORATION
STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ....................................... ($ 4,203,785) $ 6,809,526 $ 20,966,862
------------ ------------ ------------
Adjustments to reconcile net income (loss) to
net cash provided by operations:
Depreciation and amortization ..................... 229,812 206,640 133,323
Expenditures paid with common stock ............... 202,975 981,785 1,131,025
Deferred income taxes ............................. 397,489 193,756 (171,617)
(Increase) decrease in assets:
Accounts receivable .......................... 935,679 3,276,207 (8,650,749)
Inventory .................................... 352,607 1,204,145 (7,426,025)
Prepaid expenses and other current assets .... 41,422 (621,471) (1,001,045)
Prepaid income taxes ......................... 80,074 982,736 (3,117,499)
Increase (decrease) in liabilities:
Accounts payable ............................. (362,255) (357,587) 983,823
Accrued royalties and sales commissions ...... (362,731) (2,645,410) 4,100,211
Accrued advertising .......................... 3,962,635 358,510 202,756
Accrued freight .............................. 67,181 (431,495) 464,107
Other current liabilities .................... (79,939) (1,009,923) 1,379,883
------------ ------------ ------------
Total adjustments ....................... 5,464,949 2,137,893 (11,971,807)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES ....................................... 1,261,164 8,947,419 8,995,055
------------ ------------ ------------
CASH FLOWS USED IN INVESTING
ACTIVITIES:
Capital expenditures ............................ (1,043,978) (998,075) (121,008)
Other assets .................................... (197,782) (184,086) (68,907)
------------ ------------ ------------
NET CASH FLOWS USED IN INVESTING
ACTIVITIES ....................................... (1,241,760) (1,182,161) (189,915)
------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Tax benefits from stock options, warrants & stock -- 3,512,205 11,148,083
Proceeds from exercises of options and warrants . 427,499 666,976 2,407,301
Proceeds from common stock issued ............... -- -- 76,006
Due from attorney's escrow account .............. -- -- 260,000
Change in stockholders' subscription receivable . -- -- 345,856
Repurchase of common stock ...................... (14,788,193) (9,111,033) --
------------ ------------ ------------
NET CASH FLOWS FROM FINANCING
ACTIVITIES: (14,360,694) (4,931,852) 14,237,246
------------ ------------ ------------
NET INCREASE/(DECREASE) IN CASH ................. (14,341,290) 2,833,406 23,042,386
CASH & CASH EQUIVALENTS,
BEGINNING OF PERIOD ............................. 28,331,765 25,498,359 2,455,973
------------ ------------ ------------
CASH & CASH EQUIVALENTS,
END OF PERIOD ................................... $ 13,990,475 $ 28,331,765 $ 25,498,359
============ ============ ============
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
THE QUIGLEY CORPORATION
STATEMENTS OF CASH FLOWS (continued)
Supplemental disclosure of cash flow information
- ------------------------------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 1998 1997
$ $ $
--------------------------------------
Income taxes paid . -- 283,669 6,650,000
- -------------------------------------------------------------------------------
Non-cash investing and financing:
Capital expenditures -- -- (7,905)
Patent rights -- -- (205,000)
Common stock issued for services performed -- -- 1,358,263
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 on 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, in general, the third and fourth quarters representing the largest sales
volume. In December 1998 the Company launched a nutrition and weight management
program called Bodymate(TM).
Principles of Accounting
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with an initial maturity of
three months or less at the time of purchase to be cash equivalents. Cash
equivalents include cash on hand and monies invested in money market funds. The
carrying amount approximates the fair market value due to the short-term
maturity of these investments.
Inventories
Inventories are stated at the lower of cost or market. The Company uses the
first-in, first-out ("FIFO") method of determining cost for all inventories.
Inventories are primarily comprised of finished goods.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. The Company uses a
combination of straight-line and accelerated methods in computing depreciation
for financial reporting purposes. The annual provision for depreciation has
been computed principally in accordance with the following ranges of estimated
asset lives: building and improvements - twenty years; machinery and equipment
- - five to seven years; computer software - three years; vehicles - five years;
and furniture and fixtures - seven years.
Patent Rights
Patent rights are amortized on a straight-line basis over the period of the
related licensing agreements, which approximate 67 months. Amortization costs
incurred for the years ended December 31, 1999, December 31, 1998, and December
31, 1997 were $87,761, $87,762 and $100,000, respectively. Accumulated
amortization at December 31, 1999, December 31, 1998 and December 31, 1997, is
$292,538, $204,777, and $117,015, respectively.
Concentration of Risks
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and trade
accounts receivable.
The Company maintains cash and cash equivalents with three major financial
institutions. Since the Company maintains amounts in excess of guarantees
provided by the Federal Depository Insurance Corporation, the Company performs
periodic evaluations of the relative credit standing of these financial
institutions and limits the amount of credit exposure with any one institution.
F-6
<PAGE>
Trade accounts receivable potentially subjects the Company to credit risk. The
Company extends credit to its customers based upon an evaluation of the
customer's financial condition and credit history and generally does not
require collateral. The Company has historically incurred minimal credit
losses. The Company's broad range of customers includes many large wholesalers,
mass merchandisers and multi-outlet pharmacy chains, five of which account for
a significant percentage of sales volume, representing 39% for the year ended
December 31, 1999, 38% for the year ended December 31, 1998, and 68% for the
year ended December 31, 1997. During 1999, approximately 94% of the Company's
revenues originated in the United States with the remainder being attributable
to international trade.
The Company currently uses three separate suppliers to produce Cold-Eeze(R) in
lozenge, bubble gum, and sugar-free tablet form. Substantially all of the
Company's revenues are currently generated from the sale of the Cold-Eeze(R)
product. The lozenge form is manufactured by a third party manufacturer that
produces exclusively for the Company. The other forms are manufactured by third
parties that produce a variety of other products for other customers. Should
these relationships terminate or discontinue for any reason, the Company has
formulated a contingency plan in order to prevent such discontinuance from
materially affecting the Company's operations. Any such termination may,
however, result in a temporary delay in production until the replacement
facility is able to meet the Company's production requirements.
Raw material used in the production of the product is available from numerous
sources. Currently, it is being procured from a single vendor in order to
secure purchasing economies. In a situation where this one vendor is not able
to supply the contract manufacturer with the ingredients, other sources have
been identified.
Long-lived assets
The Company reviews its long-lived assets for impairment on an exception basis
whenever events or changes in circumstances indicate that the carrying amount
of the assets may not be recoverable through future cash flows. If it is
determined that an impairment loss has occurred based on the expected cash
flows, a loss is recognized in the income statement.
Revenue Recognition
Sales are recognized at the time a shipment is received by the customer.
Royalties
The Company includes royalties and founders commissions incurred as cost of
products sold based on agreement terms.
Advertising
Advertising costs are generally expensed within the period to which they
relate. Advertising cost incurred for the year ended December 31, 1999,
December 31, 1998 and December 31, 1997, was $16,132,888, $9,221,225, and
$3,050,210, respectively. Included in prepaid expenses and other current assets
was $448,908 and $998,370 at December 31, 1999 and 1998, respectively, relating
to prepaid advertising and promotion expenses.
Research and Development
Research and development costs are charged to operations in the year incurred.
Expenditures for the years ended December 31, 1999, December 31, 1998 and
December 31, 1997 were $297,650, $256,492 and $79,784, respectively.
Income Taxes
The Company utilizes an asset and liability approach which requires the
recognition of deferred tax assets and liabilities for the future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, the Company
generally considers all expected future events other than enactments of changes
in the tax law or rates. See Note 6 for further discussion.
F-7
<PAGE>
NOTE 2 - CHANGES IN ACCOUNTING ESTIMATES
During 1998, the Company made certain changes in accounting estimates totaling
$1,243,677, after tax, as a result of new information becoming available.
Included in this amount was a provision for contingencies, which was no longer
necessary, and reductions in operating expenses which did not materialize.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Consisted of the following as of: December 31, 1999 December 31, 1998
----------------- -----------------
Land $152,203 $152,203
Buildings and improvements 1,415,771 558,077
Machinery and equipment 321,157 238,129
Computer software 48,638 42,442
Vehicles 207,165 207,165
Furniture and fixtures 113,746 16,686
----------------- -------------------
2,258,680 1,214,702
Less: Accumulated depreciation 315,367 173,316
----------------- -------------------
Property, Plant and Equipment, net $1,943,313 $1,041,386
================= ===================
Depreciation expense for the years ended December 31, 1999, December 31, 1998
and December 31, 1997 was $142,051, $118,878 and $33,323, respectively.
NOTE 4 - PATENT RIGHTS AND RELATED ROYALTY COMMITMENTS
During 1996, the Company entered into a licensing agreement resulting in the
utilization of the zinc gluconate patent. In return for the acquisition of this
license, the Company issued a total of 240,000 shares of common stock to the
patent holder and attorneys during 1996 and 1997. The related intangible asset,
approximating $490,000, has been valued at the fair value of these shares at
the date of the grant. This asset value is being amortized over the remaining
life of the patent which expires in March 2002. The Company is required to pay
a 3% royalty on sales collected, less certain deductions, to the patent holder
throughout the term of this agreement, which also expires in 2002.
The Company also maintains a separate representation and distribution agreement
relating to the development of the zinc gluconate glycine product formulation.
In return for exclusive distribution rights, the Company must pay the developer
a 3% royalty and a 2% consulting fee based on sales collected, less certain
deductions, throughout the term of this agreement, expiring in 2007.
Additionally, a founder's commission totaling 5%, on sales collected, less
certain deductions, is paid to two of the officers whose agreements expire in
2005.
All of the aforementioned individuals receiving royalties and commissions are
also stockholders of the Company. The expenses for the respective periods
relating to such agreements amounted to $2,638,727, $3,784,340, $8,870,828, for
the years ended December 31, 1999, December 31, 1998 and December 31, 1997,
respectively. Amounts accrued for these expenses at December 31, 1999 and
December 31, 1998 were $1,337,193 and $1,592,917, respectively.
NOTE 5- LINE OF CREDIT
The Company has a revolving line of credit with a commercial bank for $10
million to be used for general corporate purposes. This facility is
collateralized by accounts receivable and inventory, and renews in May 2000,
with interest accruing at the Prime Rate, or 225 basis points above the
Eurodollar Rate, each to move with the respective base rate. There were no
borrowings under available lines during the twelve-month period ended December
31, 1999 or 1998.
F-8
<PAGE>
NOTE 6 - INCOME TAXES
The provision (benefit) for income taxes, consists of the following:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 1998 1997
------------ ---------- ------------
Current:
Federal ($1,181,327) $3,537,579 $12,161,445
State - 622,296 2,281,733
------------ ---------- ------------
($1,181,327) 4,159,875 14,443,178
------------ ---------- ------------
Deferred:
Federal (1,285,077) 163,147 (180,601)
State (605,998) 30,609 8,984
------------ ---------- ------------
(1,891,075) 193,756 (171,617)
------------ ---------- ------------
Valuation allowance 1,169,787 - -
------------ ---------- ------------
Total ($1,902,615) $4,353,631 $14,271,561
============ ========== ============
A reconciliation of the statutory federal income tax expense (benefit) to the
effective tax is as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 1998 1997
------------ ---------- ------------
Statutory rate ($2,076,176) $3,907,105 $12,333,448
State taxes net of federal benefit (403,022) 446,526 1,937,029
Permanent differences (593,204) - -
Other - - 1,084
------------ ----------- -----------
(3,072,402) 4,353,631 14,271,561
------------ ----------- -----------
Less valuation allowance 1,169,787 - -
------------ ----------- -----------
Total ($1,902,615) $4,353,631 $14,271,561
============ =========== ===========
The tax effects of the primary "temporary differences" between values recorded
for assets and liabilities for financial reporting purposes and values utilized
for measurement in accordance with tax laws giving rise to the Company's
deferred tax assets are as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 1998 1997
------------ ---------- ------------
Net operating loss carry-forward $1,751,199 - -
Contract termination costs 378,555 $378,554 $234,000
Bad debt expense 54,164 - -
Other 104,648 18,935 357,245
Valuation allowance (2,288,566) - -
------------ ----------- -----------
Total - $397,489 $591,245
============ =========== ===========
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 zero, $3,512,205, and $11,148,083 for the
years ended December 31, 1999, 1998, and 1997 respectively. The tax benefit
effect of option and warrant exercises during 1999 was $697,208, however, this
benefit is being deferred because of a net operating loss carry-forward for tax
purposes ("NOLs") that occurred during the fourth quarter of 1999 from a
cumulative effect of deducting a total value of $42,800,364 attributed to these
options, warrants and unrestricted stock deductions from taxable income during
the tax years 1997 and 1998. The net operating loss carry-forwards arising from
the option, warrant and stock activities approximate $3.5 million for federal
puposes, which will expire in 2019 and $9.7 million for state purposes, which
will expire in 2009. Until sufficient taxable income to offset the temporary
timing differences attributable to operations and the tax deductions
attributable to option, warrant and stock activities are assured, a valuation
allowance equaling the total deferred tax asset is being provided.
F-9
<PAGE>
NOTE 7 - EARNINGS PER SHARE
Basic earnings per share ("EPS") excludes dilution and is computed by dividing
income available to common stockholders by the weighted - average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity. Diluted EPS
also utilizes the treasury stock method which prescribes a theoretical buy back
of shares from the theoretical proceeds of all options and warrants outstanding
during the period. Since there is a large number of options and warrants
outstanding, fluctuations in the actual market price can have a variety of
results for each period presented.
A reconciliation of the applicable numerators and denominators of the income
statement periods presented is as follows (millions, except earnings per share
amounts):
Year Ended Year Ended Year Ended
December 31, 1999 December 31, 1998 December 31, 1997
--------------------------------------------------------------
Loss Shares EPS Income Shares EPS Income Shares EPS
--------------------------------------------------------------
Basic EPS ($ 4.2) 11.4 ($0.37) $6.8 13.3 $0.51 $21.0 12.2 $1.72
Dilutives:
Options and
Warrants -- -- -- -- 1.6 -- -- 2.4 --
----- ----- ------ ----- ----- ----- ----- ----- -----
Diluted EPS ($ 4.2) 11.4 ($0.37) $6.8 14.9 $0.46 $21.0 14.6 $1.43
===== ===== ======= ===== ===== ===== ===== ===== =====
At December 31, 1999, there are 4,279,400 options and warrants outstanding.
Their impact on future diluted earnings per share is dependent on the market
price of the Company's common stock.
NOTE 8 - STOCK COMPENSATION
Stock options for purchase of the Company's common stock have been granted to
both employees and non-employees since the date of the Company's public
inception. Options are exercisable during a period determined by the Company,
but in no event later than ten years from the date granted.
On December 2, 1997, the Company's Board of Directors approved a new Stock
Option Plan ("Plan") which provides 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. Stockholders approved the Plan in 1998. A
total of 409,000 and 550,500 options were granted under this Plan during the
years ended December 31, 1999 and December 31, 1998, respectively.
The Company applies Accounting Principles Board Opinion No. 25 ("APB 25") in
accounting for its grants of options to employees. Under the intrinsic value
method prescribed by APB 25, no compensation expense relating to grants to
employees has been recorded by the Company in periods reported. If compensation
expense for awards made during the years ended December 31, 1999, December 31,
1998 and December 31, 1997, had been determined under the fair value method of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 1998 1997
------------ ------------ ------------
Pro forma net income (loss) ($5,246,735) $5,339,691 $20,194,062
Pro forma earnings (loss)
per share:
Basic ($0.46) $0.40 $1.66
Diluted ($0.46) $0.36 $1.38
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 59.5% for the year ended
December 31, 1999 and 29.0% for the years ended December 31, 1998 and 1997;
expected dividend yield of 1.5%; and risk-free interest rate of 5.1% for the
year ended December 31, 1999; expected dividend yield of 2.5% and risk-free
interest rate of 5.71% for the year ended December 31, 1998, and expected
dividend yield of 2.5% and risk-free interest rate of 6.56% for the year ended
December 31, 1997, based on the expected life of the option. The impact of
applying SFAS No. 123 in this pro forma disclosure is not indicative of the
impact on future years' reported net income as SFAS No. 123 does not apply to
stock options granted prior to the beginning of fiscal year 1996 and additional
stock options awards are anticipated in future years. All options were
immediately vested upon grant.
A summary of the status of the Company's stock options and warrants granted to
both employees and non-employees as of December 31, 1999, 1998, and 1997 and
changes during the years then ended is presented below:
Year Ended December 31, 1999:
<TABLE>
<CAPTION>
Employees Non-Employees Total
----------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(,000) Price (,000) Price (,000) Price
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options/warrants outstanding
at beginning of period 2,560 $4.27 1,790 $4.55 4,350 $4.39
Additions (deductions):
Granted 389 5.125 20 5.125 409 5.125
Exercised 150 - 330 - 480 -
---------------------------------------------------------------------------------
Options/warrants outstanding
at end of period 2,799 $4.59 1,480 $5.14 4,279 $4.78
---------------------------------------------------------------------------------
Options/warrants exercisable
at end of period 2,799 1,480 4,279
==================================================================================
Weighted average fair value
of grants $1.41 $1.41 $1.41
Price range of options/warrants
exercised $0.50 $0.75-$2.50 $0.50-$2.50
Price range of options/warrants
outstanding $0.50-$10.00 $0.50-$10.00 $0.50-$10.00
Price range of options/warrants
exercisable $0.50-$10.00 $0.50-$10.00 $0.50-$10.00
</TABLE>
F-11
<PAGE>
Year Ended December 31, 1998:
<TABLE>
<CAPTION>
Employees Non-Employees Total
----------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(,000) Price (,000) Price (,000) Price
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options/warrants outstanding
at beginning of period 2,030 $2.86 2,388 $3.61 4,418 $3.27
Additions (deductions):
Granted 530 9.68 20 9.68 550 9.68
Exercised - - 618 1.08 618 1.08
---------------------------------------------------------------------------------
Options/warrants outstanding
at end of period 2,560 $4.27 1,790 $4.55 4,350 $4.39
---------------------------------------------------------------------------------
Options/warrants exercisable
at end of period 2,560 1,790 4,350
==================================================================================
Weighted average fair value
of grants $2.67 $2.67 $2.67
Price range of options/warrants
exercised - $0.50-$1.75 $0.50-$1.75
Price range of options/warrants
outstanding $0.50-$10.00 $0.50-$10.00 $0.50-$10.00
Price range of options/warrants
exercisable $0.50-$10.00 $0.50-$10.00 $0.50-$10.00
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
---------------------------------------------------------------------------------
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 $0.50 - $2.50 $0.50-$10.00 $0.50-$10.00
Price range of options/warrants
outstanding $0.50-$10.00 $0.50-$10.00 $0.50-$10.00
Price range of options/warrants
exercisable $0.50-$10.00 $0.50-$10.00 $0.50-$10.00
</TABLE>
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, 1999:
<TABLE>
<CAPTION>
Employees Non-Employees
------------------------------------------------- ------------------------------------------------------
Weighted Weighted
Average Average
Remaining Weighted Remaining Weighted
Range of Number Contractual Average Number Contractual Average
Exercise Prices Outstanding Life Exercise Price Outstanding Life Exercise Price
----------------- --------------- --------------- ----------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
$0.500-$5.125 1,924,000 3.0 $2.22 859,900 1.7 $1.64
$9.680-$10.000 875,500 5.8 $9.81 620,000 2.6 $9.99
--------------- -----------------
2,799,500 1,479,900
=============== =================
</TABLE>
Options outstanding as of December 31, 1999, December 31, 1998 and December 31,
1997, expire from December 14, 2000 through April 6, 2009, depending upon the
date of grant.
In early 1999 the Company implemented a defined contribution plan for its
employees. The Company's contribution to the plan is based on the amount of the
employee plan contributions. The Company's contribution cost to the plan in
1999 was approximately $94,000.
NOTE 9 - STOCKHOLDERS' EQUITY
On September 8, 1998, the Company's Board of Directors declared a dividend
distribution of Common Stock Purchase Rights ("the Rights"), thereby creating a
Stockholder Rights Plan (the "Plan"). The dividend was payable to the
stockholders of record on September 25, 1998. Each Right entitles the
stockholder of record to purchase from the Company that number of common shares
having a combined market value equal to two times the Rights exercise price of
$45. The Rights are not exercisable until the distribution date, which will be
the earlier of a public announcement that a person or group of affiliated or
associated persons has acquired 15% or more of the outstanding common shares,
or the announcement of an intention to make a tender or exchange offer
resulting in the ownership of 15% or more of the outstanding common shares by a
similarly constituted party. The dividend has the effect of giving the
stockholder a 50% discount on the share's current market value for exercising
such right. In the event of a cashless exercise of the Right, and the acquirer
has acquired less than a 50% beneficial ownership of the Company, a stockholder
may exchange one Right for one common share of the Company. The Final
Expiration of the Plan is September 25, 2008.
Since the inception of the stock buy-back program in January 1998, the Board
has subsequently increased the authorization on four occasions, for a total
authorized buy-back of 4,000,000 shares or approximately 30% of the previous
shares outstanding. Such shares are reflected as treasury stock and will be
available for general corporate purposes. From the initiation of the plan,
3,994,791 shares have been repurchased at a cost of $23,899,226 or an average
cost of $5.98 per share.
NOTE 10 - SERVICE CONTRACTS AND RELATED TERMINATION COSTS
In October 1996, the Company entered into a three-year agreement with Sands
Brothers & Co., Ltd. for investment banking services including private
placements. Upon commencement of the contract, Sands received 800,000 warrants
with an exercise price of $1.75 per share contingent upon services to be
provided. During the first quarter of 1997, the Company decided not to pursue a
private placement offering. In order to terminate the agreement with Sands, the
Company issued to Sands 350,000 additional warrants to purchase the Company's
stock at $10 per share. As a result, the Company recorded an expense of
approximately $700,000 in 1997 and $462,000 in 1998.
F-13
<PAGE>
NOTE 11 - SETTLED LITIGATION
During 1992, the Company authorized litigation against Nutritional Foods
Corporation ("NFC") in which the Company sought to cancel the 729,928
restricted shares issued to NFC for international marketing services, as a
result of certain false and misleading representations made by it to the
Company including, but not limited to, NFC's failure to act as the Company's
international sales agent under an agreement between NFC and the Company.
Pursuant to a final decree issued in the Court of Common Pleas of Bucks County,
Pennsylvania dated January 23, 1997, the Company received an order to return to
treasury these outstanding shares. In November of 1997, NFC challenged the
validity of the decree. In March of 1998, a subsequent order of the Court of
Common Pleas of Bucks County modified the decree of January 23, 1997 to provide
for a return to treasury of 604,928 shares to the Company. As payment for legal
services, 118,066 of these shares were reissued with a market value of
approximately $1,145,358. This value, the cost of reacquiring these shares,
then became the value of the net treasury stock ($2.35 per share) represented
by 486,862 shares returned to treasury.
In October 1999, the Company reached a settlement in a lawsuit by an individual
named Marjorie Durst that resolved all matters between the Plaintiff and the
Company. This legal proceeding was previously reported in the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. The
resolution of this dispute is not material to the Company's financial position,
results of operations or liquidity.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Certain operating leases for office and warehouse space maintained by the
Company resulted in rent expense for the years ended December 31, 1999,
December 31, 1998 and December 31, 1997, of $137,015, $153,594 and $92,464,
respectively. The future minimum lease obligations under these operating leases
are $14,901 for 2000.
The Company has committed to advertising costs approximating $5,100,000
relating to 2000. Additional advertising costs are expected to be incurred for
the remainder of 2000.
In March, 1997, the Company was sued by two individuals (Thomas Goldblum and
Alan Wayne) in the court of Common Pleas of Montgomery County, Pennsylvania.
The complaint alleges that the Plaintiffs became the owners of 500,000 shares
each of the Company's Common Stock in or about 1990, and request damages in
excess of $100,000 for breach of contract and conversion. During the second
quarter of 1999, the Company was made aware that the Plaintiffs took the
position that the Company's 1990 pre-public 1 for 2.74 reverse split and 1995 1
for 10 reverse split did not apply to the shares claimed by them. The Company
is vigorously defending this lawsuit and has denied any liability to the
Plaintiffs because they did not perform agreed upon services as a condition to
the receipt of the shares from the Company. The Company also believes that the
Plaintiffs' claims are barred by the applicable statues of limitations, and
that the Plaintiffs' claims are, in any event, limited to claims for
approximately 36,000 each. Although the Company believes the Plaintiffs' claim
to be without merit, the case is still in the discovery stages and no
prediction can be made as to its outcome.
In addition to the foregoing litigation, 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 13 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has sales brokerage and other
arrangements with entities whose major stockholders are also stockholders of
The Quigley Corporation, or are related to major stockholders of the Company.
Commissions and other items expensed under such arrangements for the years
ended December 31, 1999, December 31, 1998 and December 31, 1997, were
$370,466, $270,113 and $274,154, respectively. Amounts payable under such
agreements at December 31, 1999 and 1998 were approximately $89,605 and
$70,634, respectively.
The Company is in the process of acquiring licenses in certain countries
through related party entities. During 1999, fees amounting to $110,000 have
been paid to a related entity to obtain such licenses.
F-14
<PAGE>
NOTE 14 - QUARTERLY INFORMATION (UNAUDITED)
Quarter Ended
-----------------------------------------------------
March 31, June 30, September 30, December 31,
-----------------------------------------------------
1999
Net Sales $6,136,902 $2,063,319 $4,103,965 $12,515,756
Gross Profit 4,084,252 1,400,337 2,743,230 8,712,820
Net Income (loss) (1,855,214) (1,103,629) 18,333 (1,263,275)
Basic (loss) per
common share ($0.15) ($0.10) $0.00 ($0.12)
Diluted (loss) per
common share ($0.15) ($0.10) $0.00 ($0.12)
1998
Net Sales $7,271,819 $1,317,872 $10,747,978 $17,016,486
Gross Profit 5,060,523 919,530 7,572,872 11,923,636
Net Income 1,266,933 1,235 3,014,056 2,527,302
Basic earnings per
common share $0.10 $0.00 $0.22 $0.19
Diluted earnings per
common share $0.08 $0.00 $0.20 $0.18
F-15
<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.
PricewaterhouseCoopers LLP, the Company's independent accountants, performed an
audit for the years ended December 31, 1999, 1998 and 1997, in accordance with
generally accepted auditing standards. The independent accountants conducted a
review of internal accounting controls to the extent required by generally
accepted auditing standards and performed such tests and procedures, as they
deem necessary to arrive at an opinion on the fairness of the financial
statements presented herein.
/s/ Guy J. Quigley February 18, 2000
- ------------------ -----------------
Guy J. Quigley, Date
Chairman of the Board
President, Chief Executive Office
/s/ George J. Longo February 18, 2000
- ------------------- -----------------
George J. Longo, Date
Vice President,
Chief Financial Officer
(Principal Financial and Accounting Officer)
F-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders of The Quigley Corporation
In our opinion, the accompanying balance sheets and the related statements of
income, stockholders' equity, and cash flows present fairly, in all material
respects, the financial position of The Quigley Corporation at December 31,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
- -----------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 18, 2000
F-17
<PAGE>
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
On January 29, 1997, the Company engaged the independent accounting firm of
PricewaterhouseCoopers LLP to audit the Company's financial statements for the
calendar year 1997. The replacement of the previous certifying accountant,
Nachum Blumenfrucht, CPA, was made by approval of the Board of Directors of the
Company and with the agreement of Mr. Blumenfrucht. This change was due to the
dramatic expansion of business operations undertaken by the Company since the
close of the prior fiscal year. There were no disagreements with the former
accountant on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope of procedure, nor any reportable event
required to be disclosed.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
-----------------------------------------------
The information required under this item is incorporated by reference to the
Company's Proxy Statement for the 2000 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required under this item is incorporated by reference to the
Company's Proxy Statement for the 2000 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required under this item is incorporated by reference to the
Company's Proxy Statement for the 2000 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required under this item is incorporated by reference to the
Company's Proxy Statement for the 2000 Annual Meeting of Stockholders.
-15-
<PAGE>
PART IV
-------
ITEM 14 EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Articles of Incorporation of the Company (as amended), (incorporated by
reference to Exhibit 3.1 of Form 10-KSB/A dated April 4, 1997)
3.2 By-laws of the Company as currently in effect (incorporated by reference
to Exhibit 3.2 of the Company's Registration Statement on Form 10-KSB/A
filed with the Commission on April 4, 1997 and Exhibit 99.3 of the
Company's Current Report on Form 8-K filed with the Commission on
September 21, 1998)
4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit
4.1 of Form 10-KSB/A dated April 4, 1997)
10.1 1997 Stock Option Plan (incorporated by reference to Exhibit 10.1 of the
Company's Registration Statement on Form S-8 (File No. 333-61313) filed
with the Commission on August 13, 1998)
10.2 Exclusive Representation and Distribution Agreement dated May 4, 1992
between the Company and Godfrey Science and Design, Inc. et al
(incorporated by reference to Exhibit 10.2 Form 10-KSB/A dated April 4,
1997)
10.3 Employment Agreement dated June 1, 1995 between the Company and Guy J.
Quigley (incorporated by reference to Exhibit 10.3 of Form 10-KSB/A dated
April 4, 1997)
10.4 Employment Agreement dated June 1, 1995 between the Company and Charles A.
Phillips (incorporated by reference to Exhibit 10.4 of Form 10-KSB/A dated
April 4, 1997)
10.5 Exclusive Master Broker Wholesale Distributor and Non-Exclusive National
Chain Broker Agreement dated July 22, 1994 between the Company and Russell
Mitchell (incorporated by reference to Exhibit 10.7 of Form 10-KSB/A dated
April 4, 1997)
10.6 Licensing Agreement dated August 24, 1996 between the Company, George A.
Eby III and George Eby Research (incorporated by reference to Exhibit 10.6
of Form 10-KSB/A dated April 4, 1997)
10.8 United States Exclusive Supply Agreement dated March 17, 1997 (Portions of
this exhibit are omitted and were filed separately with the Securities
Exchange Commission pursuant to the Company's application requesting
confidential treatment in accordance with Rule 406 of Regulation C as
promulgated under the Securities Act of 1933, incorporated by reference to
Exhibit 10.5 of Form SB-2 dated September 29, 1997)
10.9 Consulting Agreement dated May 4, 1992 between the Company and Godfrey
Science and Design, Inc. et al. (incorporated by reference to Exhibit 10.5
of Form 10-KSB/A dated April 4, 1997)
10.10 Employment Agreement dated November 5, 1996 between the Company and
George J. Longo (incorporated by reference to Exhibit 10.10 of Form 10-KSB
dated March 30, 1998)
10.11 Employment Agreement dated January 1, 1997 between the Company and Eric
H. Kaytes (incorporated by reference to Exhibit 10.11 of Form 10-KSB dated
March 30, 1998)
-16-
<PAGE>
10.12 Rights Agreement dated September 15, 1998 between the Company and
American Stock Transfer and Trust Company (incorporated by reference to
Exhibit 1 to the Company's Registration Statement on Form 8-A filed with
the Commission on September 18, 1998)
23.1 Consent of PricewaterhouseCoopers LLP, Auditors, dated March 15, 2000
(filed herewith)
27.1 Financial Data Schedule
- --------------------------------------------------------------------------------
(b) Reports on Form 8-K
No reports were filed on Form 8-K in the quarter ended December 31, 1999.
-17-
<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 20, 2000
------------------ --------------
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 20, 2000
- ------------------ President, Chief Executive --------------
Guy J. Quigley Officer and Director
/s/ Charles A. Phillips Executive Vice President, March 20, 2000
- ----------------------- Chief Operating Officer --------------
Charles A. Phillips and Director
/s/ George J. Longo Vice President, Chief Financial March 20, 2000
- ------------------- Officer and Director (Principal --------------
George J. Longo Financial and Accounting Officer)
/s/ Eric H. Kaytes Vice President, March 20, 2000
- ------------------ Chief Information Officer, --------------
Eric H. Kaytes Secretary, Treasurer
and Director
/s/ Jacqueline F. Lewis Director March 20, 2000
- ----------------------- --------------
Jacqueline F. Lewis
/s/ Rounsevelle W. Schaum Director March 20, 2000
- ------------------------- --------------
Rounsevelle W. Schaum
-18-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File Nos. 333-61313, 333-10059, 333-14687 and 333-26589)
and S-3 (File No. 333-31241) of The Quigley Corporation of our report dated
February 18, 2000, relating to the financial statements, which appears in this
Form 10-K.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 15, 2000
-19-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000868278
<NAME> E.H.Kaytes
<MULTIPLIER> 1
<CURRENCY> US.Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<EXCHANGE-RATE> 1
<CASH> 13,990,475
<SECURITIES> 0
<RECEIVABLES> 7,400,179
<ALLOWANCES> 760,492
<INVENTORY> 6,170,005
<CURRENT-ASSETS> 30,676,116
<PP&E> 2,258,680
<DEPRECIATION> 315,367
<TOTAL-ASSETS> 33,271,056
<CURRENT-LIABILITIES> 7,055,447
<BONDS> 0
0
0
<COMMON> 7,415
<OTHER-SE> 26,208,194
<TOTAL-LIABILITY-AND-EQUITY> 33,271,056
<SALES> 24,819,942
<TOTAL-REVENUES> 24,819,942
<CGS> 7,879,303
<TOTAL-COSTS> 30,926,342
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,106,400)
<INCOME-TAX> (1,902,615)
<INCOME-CONTINUING> (4,203,785)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,203,785)
<EPS-BASIC> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
