Document MmR4968MVY1gg5ZE6GRd4vbV

UNITED STATES OF AMERICA Securities and Exchange Commission ATTESTATION I HEREBY ATTEST Attached is a copy of, annual report on Form 10-K, for the fiscalyear ended December 31, 1999, received in this Commission March 20, 2000, under the name The Quigley Corporation, File No. 0-21617, pursuant to (Date) / ILarry Mills Records Officer It is hereby certified that the Associate Executive Director, Office of Filings and Information Services, U.S. Securities and Exchange Commission, Washington, D.C., which Commission was created by the Securities Ex change Act of 1934 (15 U.S.C. 78a et seq.) is official custodian of the records and files of said Commission, and all records and files created or established by the Federal Trade Commission pu rsuant to the provisions ofthe Securities Act of 1933 and transferred to this Commission in accordance with Section 210 of the Securities Exchange Act of 1934, and was such official custodian at the time of executing the above attestation, and that he/she, and persons holding the positions of Deputy Director, Associate Directors, Special Assistant to the Director, Records Officer, and the Branch Chief of Records Management, or any one of them, are authorized to execute the above attestation. ACCESSION NUMBER: 0000868278-00-000001 TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 PERIOD: 19991231 FILING DATE: 20000320 FILER: COMPANY DATA: CONFORMED NAME: QUIGLEY CORP CIK: 0000868278 ASSIGNED SIC: 2060 IRS NUMBER: 232577138 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K ACT: 34 FILE NUMBER: 000-21617 FILM NUMBER: 573900 BUSINESS ADDRESS: STREET1: KELLS BUILDING STREET2: 621 SHADY RETREAT RD CITY: DOYLESTOWN STATE: PA ZIP: 18901 PHONE: 2153450919 MAIL ADDRESS: STREET1: POBOX 1349 STREET2: LANDMARK BLDG, 10 S CLINTON ST CITY: DOYLESTOWN STATE: PA ZIP: 18901 QUIGLEY CORP - 10-K Filing Date: 03/20/00 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 of incorporation or organization) (IRS Employer 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: Disclosure Page I QUIGLEY CORP - 10-K Filing Dale: 03/20/00 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. Disclosure Page 2 QUIGLEY CORP - 10-K THE EXHIBIT INDEX IS LOCATED ON PAGES 16-17. Page 1 of 20 Filins Date: 03/20/00 Disclosure Page 3 QUIGLEY CORP - 10-K Part I TABLE OF CONTENTS Item 1. Description of Business 2. Description of Properties 3. Legal Proceedings 4. Submission of Matters to a Vote by Security Holders Part II 5. Market for the Company's Common Equity and Related Stockholder Matters 6. Selected Financial Data 7. Management's Discussion and" Analysis of Results of Operations and Financial Condition 8. Financial Statements 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure Part III 10. Directors and Executive Officers of the Registrant 11. Executive Compensation 12. Security Ownership of Certain Beneficial Owners and Management 13. Certain Relationships and Related Transactions Part IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K -2- Page 3-6 6 6-7 7 7-8 9 10 - "13 14 15 15 15 15 15 16 - 20 Filing Date: 03/20/00 Disclosure Page 4 QUIGLEY CORP- IO-K Forward-Looking Statements Filing Date: 03/20/00 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. Disclosure Page 5 QUIGLEY CORP- 10-K PART 1 Filing Dale: 03/20/00 Disclosure Page 6 QUIGLEY CORP-IO-K ITEM 1. DESCRIPTION OF BUSINESS Filing Date: 03/20/00 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 Disclosure Page 7 QUIGLEY CORP- 10-K Filing Dale: 03/20/00 Quigley Corporation acquired worldwide manufacturing and distribution rights to this formulation in 1992 and commenced national marketing in 1996. By the end of 1998, Bodymate(TM), a new product line, was launched to enter the nutrition and weight management program industry. -3- Products 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 Disclosure Page 8 OVIGLEY CORP- 10-K Filing Date; 03/20/00 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 s 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- 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 Disclosure Page 9 QUIGLEY CORP- 10-K Filing Date: 03/20/00 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 1993, 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 che 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- 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 Disclosure Page 10 QUIGLEY CORP- IO-K service and support. Employees Filing Dale: 03/20/00 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. Disclosure Page 11 QUIGLEY CORP- IO-K ITEM 2. DESCRIPTION OF PROPERTY Filing Dale: 03/20/00 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. Disclosure Page 12 QUIGLEY CORP- IO-K ITEM 3. LEGAL PROCEEDINGS Filing Date: 03/20/00 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 Disclosure Page 13 QUIGLEY CORP- 10-K Filing Date: 03/20/00 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- 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. Disclosure Page 14 QUIGLEY CORP - W-K ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Filing Date: 03/20/00 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 Against Abstentions 5,572,850 106,529 54,207 Disclosure Page 15 QUIGLEY CORP - 10-K PART II Filing Dale: 03/20/00 Disclosure Page 16 QUIGLEY CORP- 10-K ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Filing Date: 03/20/00 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. Disclosure Page 17 QUIGLEY CORP- IO-K Quarter Ended March 31 June 30 September 30 December 31 Common Stock 1999 High Low $6,875 $5,250 $5,938 $3,969 $4,906 $4,688 $2,906 $1,563 1998 High Low $16,438 $13,250 $9,750 $7,750 $9,500 $6,250 $6,625 $4,938 -7- Filing Date: 03/20/00 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" CLASS "E" CLASS "F" CLASS "G" Warrants Option Plan Option Plan 590,000 1,150,000 225,000 945,000 409,900 550,500 409,000 $0,500 $1,750 $2,500 $10,000 $1,750 $9,680 $5,125 December 14, 2000 June 30, 2001 November 4, 2001 May 5, 2002 September 30, 2001 December 1, 2007 April 6, 2009 Disclosure Page 18 QUIGLEY CORP - 10-K -8- Filing Dale: 03/20/00 Disclosure Page 19 QUIGLEY CORP - 10-K ITEM 6. SELECTED FINANCIAL DATA Filing Dale: 03/20/00 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. (Amounts in thousands, except per share data) Year Ended December 31# 1399 Year Ended December 31, 1998 Year Ended December 31, 1997 Three Months Year Ended Year Ended December 31, September 30, 1996 1996 Year Ended September 30, 1995 Statement of Income Data: Net Sales ............................................................ . Gross Profit ...................................................... . Net Income (Loss) ............................................ Basic earnings/(loss) per common share ............................................................... Diluted earnings/(loss) per Weighted average common shares outstanding: Basic ......................................................................... Diluted .................................................................... (5 0.37) $ 36,354 25, 477 6,809 S 0.51 0.46 13,335 14,944 $ 70,173 48, 745 20, 967 - S 1.72 1.43 12,181 14,634 $ 4,092 2,717 1,676 $ 1,050 766 (694) S 0.15 0.12 ($ 0.08) (S 0.08) 11,087 13,611 8,131 8,131 $ 502 390 (153) ($ 0.02) ($ 0.02) 6,723 6,723 Balance Sheet Data: Working capital ........................................ ........................ Total assets ............................................... ........................ Stockholders' equity ............................. As of December 31, 1999 As of December 31, 1998 As of December 31, 1997 As of December 31, 1996 As Of September 30, 1996 As of September 30, 1995 $ 23,621 33,271 S 43,024 48, 611 44,607 $ 41,141 49,847 41,748 $ 5,206 6,950 5,544 $ 911 1,368 1,243 $ 287 437 299 -9- Disclosure Page 20 QUIGLEY CORP- IO-K Filing Date: 03/20/00 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Disclosure Page 21 QUIGLEY CORP - 10-K Filing Date: 03/20/00 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- Disclosure Page 22 QUIGLEY CORP - 10-K Results of Operations Filing Date: 03/20/00 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. Disclosure Page 23 QUIGLEY CORP - 10-K Filing Date: 03/20/00 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- The total assets of the Company at December 31, 1998 and 1997 were $48,610,644 l 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 2.351, 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 Disclosure Page 24 QUIGLEY CORP - 10-K Filing Date: 03/20/00 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 relating to 2000. Additional the remainder of 2000. to advertising costs approximating $5,100,000 advertising costs are expected to be incurred for -12- 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. Disclosure Page 25 QUIGLEY CORP- 10-K Impact of Inflation Filing Date: 03/20/00 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- Disclosure Page 26 QUIGLEY CORP- IO-K ITEM 8 FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS Balance Sheets as of December 31, 1999 and 1998 Statements of Income for the years ended December 31, 1999, 1998 and 1997 Statements of Stockholders' Equity for the years ended December 31, 1999, 1998, and 1997 Statements of Cash Flows for the years ended December 31, 1999, 1998, and 1997 Notes to Financial Statements Responsibility for Financial Statements Report of Independent Accountants -14- Filing Date: 03/20/00 Page F-l F-2 F-3 F-4 to F-5 F-6 to F-15 F-16 F-17 Disclosure Page 27 QUIGLEY CORP - 10-K THE QUIGLEY CORPORATION Filing Dale: 03/20/00 Disclosure Page 28 QUIGLEY CORP - iO-K THE QUIGLEY CORPORATION BALANCE SHEETS ASSETS December 31/ 1999 December 31, 1998 CURRENT ASSETS: Cash and cash equivalents ........................................................... Accounts receivable (less doubtful accounts of $239,065 and $182,079) ................................ Inventory .................................................................................................. Prepaid income taxes ....................................................................... Prepaid expenses and other current assets ................................................................ Deferred income taxes ............... ................................................. TOTAL CURRENT ASSETS ............................................ $13/990,475 6,639,687 6,170,005 2,485,247 1,390,702 30,676,116 $28,331,765 7,575,366 6, 522,612 2,565,321 1,635,099 397,489 47,027,652 PROPERTY, PLANT AND EQUIPMENT - net ................................... 1,943,313 1,041,386 OTHER ASSETS: Patent rights -Lessaccumulated amortization............... Other assets ........................................................................................... TOTALOTHER ASSETS .................................................. 197,463 454,164 651,627 285,224 256,382 541,606 TOTAL ASSETS ........................................................................................... $33,271,056 $48,610,644 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable .......................................................................... Accrued royalties andsales commissions ................... Accrued advertising ............................................................. Accrued freight ................... Other current liabilities .................................................... $ 395,778 $ 758,033 1,722,715 2,085, 446 4,523,901 561,266 104,263 37,082 308,790 561,340 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............................................... (2S,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 See accompanying notes to financial statements F-l Filing Date: 03/20/00 Disclosure Page 29 QUIGLEY CORP - 10-K Filing Date: 03/20/00 THE QUIGLEY CORPORATION STATEMENTS OF INCOME Year Ended December 31, 1999 Year Ended December 31, 1998 Year Ended December 31, 1997 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 ....................................... Administration .................................................... TOTAL OPERATING EXPENSES .......................................... 17,938,002 5,990,311 23,928,313 10, 476, 030 5,286,568 15,762,598 7,741,428 6,057,399 13,798,827 INCOME (LOSS) FROM OPERATIONS ............................. INTEREST INCOME ................................................................ .. (6,987,674) 881,274 9,713,963 1,449,194 34,945,848 292,575 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 ............................................................................. Diluted ........................................................................ 11,351,960 11,351,960 13,334,684 14,944,172 12,181,020 14,633,999 See accompanying notes to financial statements Disclosure Page 30 QUIGLEY CORP - 10-K F-2 Filing Date: 03/20/00 Disclosure Page 31 OUICLEY CORP - 10-K Filing Date: 03/20/00 THE QUIGLEY CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY Common Stock Shares Issued Amount Additional Paid-inCapital Treasury Stock Retained Earnings (Deficit) Stockholders' Subscription Receivable Total Balance January 1, 1997 .... Shares issued for services . Subscription sales ................... Shares for subscription receivable ............................ Warrants issued for contract termination costs Treasury stock ............................ Tax benefits from options, warrants common stock Exercise of options and warrants issued for services................................... Proceeds from options and warrants exercised .......... Met income year ended December 31, 1997 ............ Balance December 31, 1997 .. 12,099, 192 21,054 17,884 (486,862) 1, 653,228 13,304,496 $ 6,049 11 8 $ 7,010,244 212,894 75,998 (S 1, 126, 933) ($ 345,856) $ 5,543, 504 212,905 76,006 345,856 345, 856 609,000 1,145,358 {$ 1,145,358) 11,148,083 609,000 -- 11,148,083 828 6,896 438,501 2,406,473 23,046,551 (1, 145,358) 20,966,862 19,839,929 438,501 2,407,301 20,966,862 - 41,748,018 Treasury stock ............................ Tax benefits from options, warrants common stock Exercise of options and warrants issued for services................................... Proceeds from options and warrants exercised .......... Net income year ended December 31, 1998 ............ Balance December 31, 1996 .. (1,178,160) 617,700 12,744,036 (9, 111,033) 3,512,205 309 7,205 981,785 666, 667 28,207,208 (10,256,391) 6,809,526 26,649,455 (9,111,033) 3,512,205 981,785 666,976 6,809,526 - 44,607,477 Treasury stock............................. Tax benefits from options, warrants common stock Tax valuation allowance Warrants issued for services Proceeds from options and warrants exercised .......... Other .................................................. Net loss year ended December 31, 1999 ............ Balance December 31, 1999 .. (2,816,631) 422,326 10,349,731 S (14,788,193) 697,208 (697,208) 202,975 210 427,289 (30,364) 7,415 (4,203,785) $ 28,807,108 ($25,044,584) $ 22,445,670 (14,788,193) 697,208 (697,208) 202,975 427,499 (30, 364) (4,203,785) $ 26,215,609 Disclosure Page 32 QUIGLEY CORP - 10-K See accompanying notes to financial statements F-3 F-5 Filing Date: 03/20/00 Disclosure Page 33 QUIGLEY CORP - 10-K Filing Date: 03/20/00 THE QUIGLEY CORPORATION STATEMENTS OF CASH FLOWS Year Ended December 31, 1999 Year Ended December 31, 1998 Year Ended December 31, 1997 OPERATING ACTIVITIES: Net income (loss) ................................................................................................... Adjustments to reconcile net income (loss) to net cash provided by operations: Depreciation and amortization .................................................... Expenditures paid with common stock ..................................... Deferred income taxes ......................................................................... (Increase) decrease in assets: Accounts receivable .................................................................. Inventory ............................................................................................ Prepaid expenses and other current assets .... Prepaid income taxes ............................................................... Increase (decrease) in liabilities: Accounts payable ......................................................................... Accrued royalties and sales commissions ............. Accrued advertising .......................................................... Accrued freight ............................................................................ Other current liabilities .................................................. Total adjustments .......................................................... ($ 4,203,785) $ 6,809,526 229,812 202,975 397,489 935,679 352, 607 41,422 80,074 (362,255) (362,731) 3,962,635 67,181 (79,939) 5, 464,949 206,640 981,785 193,756 3,276,207 1,204,145 (621,471) 982,736 (357,587) (2,645,410) 358,510 (431,495) (1,009,923) 2,137,893 $ 20, 966,862 133,323 1,131,025 (171,617) (8,650,749) (7, 426,025) (1,001,045) (3, 117,499) 983,823 4,100,2-11 202,756 464,107 1,379,883 (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 ....................................................................... Other assets ............................................................................................ (1,043,978) (197,782) (998,U7o) (184,086) (121,008) (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 s stock Proceeds from exercises of options and warrants . Proceeds from common stock issued ..................................... Due from attorney's escrow account .................................. Change in stockholders' subscription receivable . Repurchase of common stock ....................................................... 427,499 (14,788,193) 3,512,205 666,976 (9,111,033) 11, 148,083 2,407,301 76,006 260,000 345,856 Disclosure Page 34 QUIGLEY CORP - tO-K Filing Date: 03/20/00 NET CASH FLOWS FROM FINANCING ACTIVITIES: NET INCREASE/(DECREASE) IN CASH ..................... .................. CASH 4 CASH EQUIVALENTS, BEGINNING OF PERIOD ....................................................... CASH S CASH EQUIVALENTS, END OF PERIOD ....................................................................... (14,360,694) (4,931,852) (14, 341,290) 2, 833,406 14,237,246 23,042,386 25,498,359 2,455,973 $ 28,331,765 $ 25,498,359 See accompanying notes to financial statements F-4 THE QUIGLEY CORPORATION STATEMENTS OF CASH FLOWS (continued) Supplemental disclosure of cash flow information Year Ended December 31, 1999 $ Year Ended December 31, 1998 $ Year Ended December 31, 1997 S Income taxes paid 283,669 6,650,000 Non-cash investing and financing: Capital expenditures Patent rights Common stock issued for services performed Treasury stock cost (7,905) (205,000) 1,358,263 (1,145,358) See accompanying notes to financial statements F-5 Disclosure Page 35 QUIGLEY CORP - 10-K Filing Dale: 03/20/00 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 Disclosure Page 36 QUIGLEY CORP- IO-K Filing Date: 03/20/00 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 Disclosure Page 37 QUIGLEY CORP- 10-K Filing Date: 03/20/00 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 Disclosure Page 38 QUIGLEY CORP - 10-K Filing Dale: 03/20/00 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 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 Buildings and improvements Machinery and equipment Computer software Vehicles Furniture and fixtures Less: Accumulated depreciation Property, Plant and Equipment, net $152,203 1,415,771 321,157 48,638 207,165 113,746 2,258,680 315,367 $1,943,313 $152,203 558,077 238,129 42,442 207,165 16, 686 1,214,702 173,316 $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 Disclosure Page 39 QUIGLEY CORP - 10-K Filing Date: 03/20/00 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 NOTE 6 - INCOME TAXES The provision (benefit) for income taxes, consists of the following: Current Federal State Deferred: Federal State Valuation allowance Total Year Ended December 31, 1999 Year Ended December 31 , 1998 Year Ended December 31, 1997 ($1,181,327) " ($1,181,327) $3,537,579 622,296 4,159,875 $12,161,445 2,281,733 14,443, 178 (1,285,077) (605,998) (1,891,075) 1,169,787 ($1,902, 615) 163,147 30,609 193,756 - $4,353,631 (180,601) 8, 984 (171,617) - $14,271,561 A reconciliation of the statutory federal income tax expense i[benefit) to the effective tax is as follows: Year Ended December 31, 1999 Year Ended December 31, 1998 Year Ended December 31, 1997 Statutory rate State taxes net of federal benefit Permanent differences Other Less valuation allowance Total ($2,076,176) (403,022) (593,204) " (3,072,402) 1,169,787 ($1,902,615) $3,907,105 446,526 " 4,353,631 $4,353,631 $12,333,448 1,937,029 1/084 14,271,561 $14,271,561 Disclosure Page 40 QUIGLEY CORF - 10-K Filing Dale: 03/20/00 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 December 31, 1999 Year Ended December 31, 1998 Year Ended December 31, 1997 Net operating loss carry-forward Contract termination costs Bad debt expense Other Valuation allowance $1,751,199 378,555 54,164 104,648 (2,2 88,566) $378,554 18,935 $234,000 357,245 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 $9.7 million for state purposes, which will expire in 2009. Until sufficient taxable income to offset the temporary timing differences attributable to operations and the tax deductions attributable to option, warrant and stock activities are assured, a valuation allowance equaling the total deferred tax asset is being provided. F-9 NOTE 7 - EARNINGS PER SHARE Basic earnings per share ("EPS") excludes dilution and is computed by dividing income available to common stockholders by the weighted - average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS also utilizes the treasury stock method which prescribes a theoretical buy back of shares from the theoretical proceeds of all options and warrants outstanding during the period. Since there is a large number of options and warrants outstanding, fluctuations in the actual market price can have a variety of results for each period presented. A reconciliation of the applicable numerators and denominators of the income statement periods presented is as follows (millions, except earnings per share amounts): Disclosure Page 41 QUIGLEY CORP- 10-K Filing Date: 03/20/00 Year Ended Year Ended December 31, 1999 December 31, 1998 Year Ended December 31, 1997 Loss Shares EPS Income Shares EPS Income Shares EPS Basic EPS Dilutives: Options and Warrants Diluted EPS ($ 4.2) 11.4 ($0.37) $6.8 13.3 $0.51 $21.0 12.2 $1.72 ($ 4.2) 11.4 ($0.37) $6.8 1.6 -- -- 2.4 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 December 31, 1999 Year Ended December 31, 1998 Year Ended December 31, 1997 Pro forma net income (loss) ($5,246,735) $5,339, 691 $20,194,062 Pro forma earnings (loss) per share: Basic Diluted ($0.46) ($0.46) $0.40 $0.36 $1.66 $1.38 Disclosure Page 42 QUIGLEY CORP - 10-K F-10 Filing Date: 03/20/00 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 199"7; 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: Employees Shares {,000) Weighted Average Exercise Price Non-Employees Shares (,000) Weighted Average Exercise Price Total Shares (,000) Weighted Average Exercise Price Options/warrants outstanding at beginning of period Additions (deductions): Granted Exercised Options/warrants outstanding at end of period Options/warrants exercisable at end of period Weighted average fair value of grants Price range of options/warrants exercised Price range of options/warrants outstanding Price range of options/warrants exercisable 2,560 389 150 2,799 2,799 $1.41 $0.50 $0.50-$10.0Q $0.50-510.00 $4.27 5.125 $4.59 1,790 20 330 1,480 1,480 $1.41 $0.75-52.50 $0.50-510.00 $0.50-510.00 $4.55 5.125 $5.14 4,350 409 480 4,279 4,279 $1.41 $0.50-52.50 $0.50-S10.00 $0.50-510.00 $4.39 5.125 $4.78 Disclosure Page 43 QUIGLEY CORP - 10-K F-U Filing Date: 03/20/00 Year Ended December 31, 1998: Employees Shares (, 000) Weighted Average Exercise Price Non-Employees Shares (,000) Weighted Average Exercise Price Total Shares (z 000) Weighted Average Exercise Price Options/warrants outstanding at beginning of period Additions (deductions): Granted Exercised Options/warrants outstanding at end of period Options/warrants exercisable at end of period Weighted average fair value of grants Price range of options/warrants exercised Price range of options/warrants outstanding Price range of options/warrants exercisable Year Ended December 31/ 1997: Options/warrants outstanding at beginning of period Additions (deductions) : Granted Exercised Options/warrants outstanding at end of period options/warrants exercisable at end of period 2,030 $2.86 2,388 530 - 2,560 9.68 " S4.27 20 ' 618 1,790 2,560 BKH.aaaasSB 1,790 $2.67 $2.67 $0.50-510.00 $0.50-510.00 SO.50-SI.75 50.50-510.00 SO.50-510.00 $3.61 4,418 $3.27 9.68 1.08 550 9.68 618 1.08 54.55 4,350 54.39 4,350 bbbob tumm.iiDnc.Dii HBSSBBB $2.67 50.50-51.75 50.50-510.00 $0.50-510.00 Employees Shares (,000) Weighted Average Exercise Price 1,820 345 135 $1.39 10.00 1.33 Non-Employees shares (,000) Weighted Average Exercise Price 3,240 675 1,527 51.36 9.82 1.55 2,030 2,030 $2.86 2,388 2,388 53.61 Total Shares (, 000) Weighted Average Exercise Price 5,060 1,020 1,662 SI.37 10.00 1.53 4,418 4,418 $3.27 Weighted average fair value of grants Price range of options/warrants exercised Price range of options/warrants outstanding Price range of options/warrants exercisable $2.24 $0.50 - $2.50 S0.50-S10.00 S0.50-S10.00 $2.24 $0.50-510.00 S0.50-S10.00 S0.50-S10.00 $2.24 50.50-510.00 50.50-S10.00 $0.50-510.00 F-12 Disclosure Page 44 QUIGLEY CORP - 10-K Filing Date: 03/20/00 The following table summarizes information about stock options outstanding and stock options exercisable, as granted to both employees and non-employees, at December 31, 1999: Range of Exercise Prices S0.500-S5.125 S9.680-S10.000 Employees Number Outstanding Weighted Average Remaining Contractual Life 1,924,000 875,500 2,799, 500 3.0 5.8 Weighted Average Exercise Price S2.22 S9.81 Number Outstanding Non-Employees Weighted Average Remaining Contractual Life 859,900 620,000 1,479,900 1.7 2.6 Weighted Average Exercise Price SI.64 S9.99 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 Disclosure Page 45 QUIGLEY CORP - 10-K Filing Dale: 03/20/00 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 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 relating to 2000. Additional the remainder of 2000. to advertising costs approximating $5,100,000 advertising costs are expected to be incurred for 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 Disclosure Page 46 QUIGLEY CORP-W-K Filing Date: 03/20/00 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 NOTE 14 - QUARTERLY INFORMATION (UNAUDITED) Quarter Ended March 31, June 30, September 30, December 31, 1999 Net Sales Gross Profit Net Income (loss) $6,136, 902 4,084,252 (1,855,214) $2,063,319 1,400,337 (1,103,629) $4,103,965 2,743,230 18,333 $12,515,756 8,712,820 (1,263,275) Basic (loss) per common share Diluted (loss) per common share ($0.15) ($0.15) ($0.10) ($0.10) $0.00 $0.00 ($0.12) ($0.12) 1998 Net Sales Gross Profit Net Income $7,271,819 5,060,523 1,266,933 $1,317,872 919,530 1,235 $10,747,978 7,572,872 3,014,056 $17,016,486 11,923,636 2,527,302 Basic earnings per common share Diluted earnings per common share $0.10 $0.08 $0.00 $0.00 $0.22 $0.20 $0.19 $0.18 Disclosure Page 47 QUIGLEY CORP- 10-K F-15 Filing Date: 03/20/00 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 Guy J. Quigley, Chairman of the Board President, Chief Executive Office February 18, 2000 Date /s/ George J. Longo George J. Longo, Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) February 18, 2000 Date F-16 Disclosure Page 48 QUIGLEY CORP- IO-K report of independent accountants Filing Date: 03/20/00 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 Disclosure Page 49 QUIGLEY COUP - 10-K Filing Date: 03/20/00 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. Disclosure Page 50 QUIGLEY CORP- 10-K PART III Filing Dale: 03/20/00 Disclosure Page 51 QUIGLEY CORP - 10-K Filing Dale: 03/20/00 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. Disclosure Page 52 QUIGLEY CORP - IO-K Filing Dale: 03/20/00 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. Disclosure Page 53 QUIGLEY CORP- W-K Filing Dale: 03/20/00 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. Disclosure Page 54 QUIGLEY CORP - 10-K Filing Dale: 03/20/00 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- Disclosure Page 55 QUIGLEY CORP- IO-K PART IV Filing Date: 03/20/00 Disclosure Page 56 QUIGLEY CORP - 10-K ITEM 14 EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K Filing Date: 03/20/00 Disclosure Page 57 QUIGLEY CORP- 10-K Filing Dale: 03/20/00 (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 Disclosure Page 58 i' QUIGLEY CORP - 10-K Filing Date: 03/20/00 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- 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- Disclosure Page 59 QUIGLEY CORP- IO-K Filing Date: 03/20/00 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. Disclosure Page 60 QUIGLEY CORP- 10-K /s/ Guy J. Quigley Guy J. Quigley, Chairman of the Board, President, Chief Executive Officer and Director Filing Dale: 03/20/00 THE QUIGLEY CORPORATION March 20, 2000 Date 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 Is/ Guy J. Quigley Guy J. Quigley Chairman of the Board, President, Chief Executive Officer and Director March 20, 2000 /s/ Charles A. Phillips Charles A. Phillips Executive Vice President, Chief Operating Officer and Director March 20, 2000 /s/ George J. Longo George J. Longo Vice President, Chief Financial Officer and Director (Principal Financial and Accounting Officer) March 20, 2000 /si Eric H. Kaytes Eric H. Kaytes Vice President, Chief Information Officer, Secretary, Treasurer and Director March 20, 2000 Is/ Jacqueline F. Lewis Jacqueline F. Lewis Director March 20, 2000 /s/ Rounsevelle W. Schaum Director Rounsevelle W. Schaum March 20, 2000 -18- Disclosure Page 61 QUIGLEY CORP - 10-K Filing Dale: 03/20/00 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) Disclosure Page 62 QUIGLEY CORF - 10-K Filing Date: 03/20/00 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- Disclosure Page 63 QUIGLEY CORP - IO-K <AR7ZCLE> <CIK> <NAME> <MULTIPLIER> <CURRENCY> 5 0000868278 E.H.Kaytes 1 US.Dollars <PRI0D-7YPE> <FISCAL-YEAR-END> <PERIOD-START> <PRIO0-ENO> <EXCHANGE-RATE> <CASH> <SECURITIES> <RECIVABLES> <ALLOWANCES> <INVNTORY> <CURRENT-ASSETS> <PPE> DEPRECIATION* <TOTAL-ASSETS> <CURRENT-LIABILITIES> <BONDS> <PREFRRED-MANDA70RY> <PREFERRED> <COMMON> <07HER-SE> <TOTAL-LIABILITY-AND-EQUITY> <SALES> <TOTAL-REVENUES> <CGS> <TOTAL-COSTS> <OTHER-EXPENSES> DOSS-PROVISION> <INTEREST-EXPENSE> <INCOME-PRETAX> <INCOME-TAX* <INCOME-CONTINUING> DISCONTINUED* <EXTRAORDX NARY> <CHANGS> <NET-INCOME> <EPS-BASIC> <PS-DILUTED* YEAR Dec-31-1999 Jan-01-1999 Dec-32-1999 1 13,990,475 0 7,400,179 760,492 6,170,005 30,676,116 2,258,680 315,367 33,271,056 7,055,447 0 0 0 7,415 26,208,194 33,271,056 24,819,942 24,819,942 7,879,303 30,926,342 0 0 0 (6,106,400) (1,902,615) (4,203,785) 0 0 0 (4,203,785) (0.37) (0.37) Filing Date: 03/20/00 Disclosure Page 64