UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended MARCH 31, 2001
--------------
OR
( ) THE TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ______________ to ______________
Commission File Number 01-21617
THE QUIGLEY CORPORATION
-----------------------
(Exact name of registrant as specified in its charter)
Nevada 23-2577138
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
(MAILING ADDRESS: PO Box 1349, Doylestown, PA 18901.)
KELLS BUILDING, 621 SHADY RETREAT ROAD, DOYLESTOWN, PA 18901
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(Address of principle executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 345-0919
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(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's class of
Common Stock, as of the latest practicable date. The number of shares
outstanding of each of the registrant's classes of Common Stock, as of April 30,
2001, was 10,675,153 all of one class of $.0005 par value Common Stock.
TABLE OF CONTENTS
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 3-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-14
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14-15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a
Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
EDGAR Exhibit 27 17
2
THE QUIGLEY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS March 31, 2001 December 31, 2000
(unaudited) -----------------
-----------
CURRENT ASSETS:
Cash and cash equivalents $ 9,707,000 $ 11,365,843
Accounts receivable (less doubtful accounts of $519,477 and $536,297) 2,184,848 4,062,703
Inventory 7,633,318 6,917,889
Prepaid expenses and other current assets 1,366,699 1,123,275
------------ ------------
TOTAL CURRENT ASSETS 20,891,865 23,469,710
------------ ------------
PROPERTY, PLANT AND EQUIPMENT - NET 2,332,313 2,139,727
------------ ------------
OTHER ASSETS:
Patent rights - Less accumulated amortization 87,761 109,702
Excess of cost over net assets acquired 441,203 329,166
Other assets 62,310 7,296
------------ ------------
TOTAL OTHER ASSETS 591,274 446,164
------------ ------------
TOTAL ASSETS $ 23,815,452 $ 26,055,601
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 424,685 $ 763,527
Accrued royalties and sales commissions 1,142,265 1,449,642
Accrued advertising 909,427 1,737,873
Other current liabilities 520,468 896,541
------------ ------------
TOTAL CURRENT LIABILITIES 2,996,845 4,847,583
------------ ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN CONSOLIDATED AFFILIATES 237,204 237,326
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.0005 par value; authorized 50,000,000;
Issued: 15,321,206 and 15,271,206 shares 7,661 7,636
Additional paid-in-capital 28,915,613 28,871,887
Retained earnings 16,846,288 17,249,197
Less: Treasury stock, 4,646,053 and 4,616,053 shares, at cost (25,188,159) (25,158,028)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 20,581,403 20,970,692
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 23,815,452 $ 26,055,601
============ ============
See accompanying notes to financial statements
3
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31, 2001 March 31,2000
-------------- -------------
SALES:
Sales $ 5,198,537 $ 6,614,786
Co-operative advertising promotions 394,663 1,207,900
------------ ------------
NET SALES 4,803,874 $ 5,406,886
------------ ------------
COST OF SALES 1,784,932 2,274,928
------------ ------------
GROSS PROFIT 3,018,942 3,131,958
------------ ------------
OPERATING EXPENSES:
Sales and marketing 1,539,445 5,471,756
Administration 1,787,166 1,522,665
Research and development 247,533 236,134
------------ ------------
TOTAL OPERATING EXPENSES 3,574,144 7,230,555
------------ ------------
LOSS FROM OPERATIONS (555,202) (4,098,597)
INTEREST AND OTHER INCOME 152,171 175,159
------------ ------------
LOSS BEFORE TAXES (403,031) (3,923,438)
------------ ------------
INCOME TAX EXPENSE (BENEFIT) -- --
MINORITY INTEREST IN LOSS
OF CONSOLIDATED AFFILIATE 122 --
------------ ------------
NET LOSS ($ 402,909) ($ 3,923,438)
============ ============
LOSS PER COMMON SHARE:
Basic ($ 0.04) ($ 0.38)
============ ============
Diluted ($ 0.04) ($ 0.38)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 10,675,153 10,349,731
============ ============
Diluted 10,675,153 10,349,731
============ ============
See accompanying notes to financial statements
4
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31, 2001 March 31,2000
-------------- -------------
NET CASH FLOWS USED IN OPERATING ACTIVITIES ($ 1,327,019) ($ 1,807,434)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (216,950) (76,952)
Net cost of assets acquired (128,493) --
------------ ------------
NET CASH FLOWS FROM INVESTING ACTIVITIES (345,443) (76,952)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Stock for business acquisition 43,750 --
Repurchase of Common Stock (30,131) --
------------ ------------
NET CASH FLOWS USED IN FINANCING ACTIVITIES 13,619 --
------------ ------------
NET DECREASE IN CASH (1,658,843) (1,884,386)
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 11,365,843 13,990,475
------------ ------------
CASH & CASH EQUIVALENTS, END OF PERIOD $ 9,707,000 $ 12,106,089
============ ============
See accompanying notes to financial statements
5
THE QUIGLEY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
The Quigley Corporation (the "Company"), organized under the laws of the state
of Nevada, is engaged in the development, manufacturing, and marketing of health
and homeopathic products and which products are being offered to the general
public. For the fiscal periods presented, the Company's proprietary
"Cold-Eeze(R)" products contribute the majority of revenues.
Darius International Inc., a wholly owned subsidiary of The Quigley Corporation
was formed in January 2000 to introduce new products to the marketplace through
a network of independent distributors. Darius is a direct selling organization
specializing in proprietary health and wellness products, which commenced
shipping product to customers in the third quarter of 2000.
Effective July 1, 2000, The Quigley Corporation acquired a 60% ownership
position of Caribbean Pacific Natural Products, Inc. an Orlando, Florida-based
company. Caribbean Pacific Natural Products, Inc. is a leading developer and
marketer of all-natural sun and skincare products for luxury resorts, theme
parks and spas.
The formation of Darius International Inc., and the majority ownership in
Caribbean Pacific Natural Products, Inc., provide diversification to the Company
in both the method of product distribution and the broader range of products
available to the marketplace.
In January 2001, the Company formed an Ethical Pharmaceutical Division under the
direction of the Company's executive medical director and chairman of its
medical advisory committee. The launch of the Company's Ethical Pharmaceutical
Division follows the Patent Office of The United States Commerce Department
confirming the Company's filing and assignment of a Patent Application for the
"Method and Composition for the Topical Treatment of Diabetic Neuropathy".
Establishing a dedicated pharmaceutical division will enable the Company to
diversify into the prescription drug market and to ensure safe and effective
distribution of this important new product for the relief of diabetes-related
pain.
Cold Remedy 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 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 common cold symptoms.
In two double blind studies Cold-Eeze(R) has been shown to reduce the severity
and duration of common cold symptoms by nearly half. The results of the latest
randomized double-blind placebo-controlled study of the common cold were
published in 1996 in the ANNALS OF INTERNAL MEDICINE - VOL. 125 NO 2. Research
is continuing on this product in order to maximize its full potential use by the
general public.
In the last half of 1998, the Company launched Cold-Eeze(R) in a sugar free
version of the product to benefit diabetics and other consumers concerned with
their sugar intake. Late in the fourth quarter of 1998, the Company launched a
bubble gum version of Cold-Eeze(R).
The business of the Company is subject to federal and state laws and regulations
adopted for the health and safety of users of the Company's products.
Cold-Eeze(R) is a homeopathic remedy that is subject to regulations by various
federal, state and local agencies, including the FDA and the Homeopathic
Pharmacopoeia of the United States.
The Company competes with suppliers varying in range and size in the cold remedy
products arena. Cold-Eeze(R), which has been clinically proven, offers a
significant advantage over other suppliers in the over-the-counter cold remedy
market. The management of the Company believes there should be no future
impediment on the ability to compete in the marketplace now,
6
or in the immediate future, since factors concerning the product, such as price,
product quality, availability, reliability, credit terms, name recognition,
delivery and support are all properly positioned. The Company has several
Broker, Distributor and Representative Agreements, both nationally and
internationally and the product is distributed through numerous independent and
chain drug and discount stores throughout the United States. During 1998, the
Company commenced international sales to Canada and the Peoples' Republic of
China.
The Company continues to use the resources of independent national and
international brokers complementing its own personnel to represent the Company's
over-the-counter products, thereby saving capital and other ongoing expenditures
that would otherwise be incurred.
Health And Wellness Products
----------------------------
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 polynicotinate, 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.
Darius International, Inc., a wholly owned subsidiary, was formed in January
2000 for the purpose of introducing new products to the marketplace through a
network of independent distributors. Darius is a direct selling organization
specializing in proprietary health and wellness products. The products marketed
and sold by Darius International are designed to improve the human condition, be
it in the area of joint health, immunity, energy, pain, weight loss or the
common cold. The products currently available from Darius are: Bodymate(TM)
Metabolizer, Bodymate(TM) Gluco-Eeze, Ultra-Eeze, Vita-Eeze, Beta-Eeze,
Cold-Eezer(R) Plus, Cold-Eezer(R) Cinnamon Gum, Dermaloe first aid antiseptic,
Pain Goes pain spray, Ardor dietary supplement and a wide array of food
supplements and vitamins.
Sun-care and Skincare Products
------------------------------
Caribbean Pacific Natural Products, Inc., is a leading developer and marketer of
all-natural sun and skincare products for luxury resorts, theme parks and spas.
These products are all-natural, eco-safe, and organic, meaning that the need for
petro-chemical, synthetic, and chemical additives used by most competitors has
been eliminated. All-natural ingredients such as aloe vera, rose hip oil,
squalane, Vitamin E, tea tree oil and other natural oils and extracts are used
instead of many synthetic preservatives, fillers and softeners which may have
side-effects.
Caribbean Pacific currently has three distinct product lines: Virgin Sol, Coral
Sol and Sport Sol and is currently developing a spa line called Sabate and a
dry-grip golf product.
Caribbean Pacific markets a line of natural protectors, or "Sol Cremes" that
provide dual protection against the damaging effects of the sun. This product is
available in differing Sun Protection Factors (SPF). Caribbean Pacific also
markets a sunscreen product called "Karibbean Kidz" especially for children,
again containing all natural ingredients found in nature.
Additionally, Caribbean Pacific markets various products rich in essential
nutrients and vitamins necessary for the skin. Products available in this
category are: Black Pearl Ultra Oil, Diamond Rose Dry Tanning Oil and Emerald
Rose Tanning Oil.
Caribbean Pacific has developed an effective combination of natural ingredients
for moisture that include the Aloe Rose Body Creme, a moisturizing lotion, and
the Tea Tree Burn Relief, which cools the skin to soothe the discomfort
associated with burns, insect bites and itching.
Caribbean Pacific also has the capability to make available customized
merchandise, such as beach bags, beach towels etc., which complement the range
of sun-care and skincare products, which it currently markets.
7
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated Balance Sheet at March 31, 2001, the consolidated Statements of
Operations for the three-month periods ended March 31, 2001 and 2000, and the
consolidated Statements of Cash Flows for the three-month periods ended March
31, 2001 and 2000, have been prepared without audit. In the opinion of
management, all adjustments necessary to present fairly the consolidated
financial position, consolidated results of operations and consolidated cash
flow, for the periods indicated, have been made.
Darius International Inc., a wholly owned subsidiary of The Quigley Corporation,
was formed in January 2000 to implement alternative methods of marketing and
distribution for existing and new product lines.
During July 2000, the Company acquired a 60 percent ownership position of
Caribbean Pacific Natural Products, Inc., a leading developer and marketer of
all-natural sun and skincare products for luxury resorts, theme parks and spas.
This acquisition is accounted for by the purchase method of accounting and
accordingly, the operating results have been included in the Company's
consolidated Statements of Operations from the date of acquisition. This
majority ownership position required a cash investment that approximated
$812,000 and the provision for a $1 million line of credit, secured by
inventory, accounts receivable and all other assets of Caribbean Pacific Natural
Products. The net assets of Caribbean Pacific Natural Products, Inc., at the
acquisition date principally consisted of a product license and distribution
rights with no recorded value, inventory and fixed assets of $312,915 and
$510,000 of working capital with a contribution to minority interest of
$329,166.
The 40 percent ownership position representing the minority interest of
Caribbean Pacific Natural Products, Inc., is reflected in the consolidated
Statements of Operations for their portion of (losses), and the consolidated
Balance Sheet for their ownership portion of accumulated (losses), share of net
assets and capital stock at acquisition date.
On January 2, 2001, the Company acquired certain assets and assumed certain
liabilities of a privately held company involved in the direct marketing and
distribution of health and wellness products. This acquisition required cash
payments that will approximate $242,000 and 50,000 shares of the Company's stock
issued to the former owners of the assets acquired. These cash payments require
an initial payment of $100,000, with the balance to be paid as percent of sales
attained until the total price of $242,000 is accomplished. The net assets
acquired at acquisition principally consisted of intangibles with no recorded
value, inventory and fixed assets of $421,000 and liabilities assumed
approximating $299,000. Also required are continuous payments for the use of
product formulations; consulting; confidentiality and non-compete fees that
total up to 12% on net sales collected until $540,000 is paid, which such fees
become 5% on net sales collected for the continuous applications of these
arrangements. This acquisition is accounted for by the purchase method of
accounting and accordingly, the operating results have been included in the
Company's consolidated Statements of Operations from the date of acquisition.
The excess of cost over net assets acquired is being amortized on a
straight-line basis over a period of 15 years.
All inter-company transactions and balances have been eliminated.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and accompanying notes for
the fiscal year ended December 31, 2000, in the Company's Form 10-K.
Revenues for 2000 have been re-classed to reflect the changes required by the
Emerging Issues Task Force ("EITF") that issued EITF No. 00-14, "Accounting for
Coupons, Rebates and Discounts" that addressed accounting for sales incentives.
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.
8
The Company currently uses three separate suppliers to produce Cold-Eeze(R) in
lozenge, bubble gum, and sugar free tablet form. The Bodymate(TM) product and
the Cold-Eeze(R) lozenge are manufactured by a third party manufacturer that
produces exclusively for the Company. The majority of the Company's revenues are
currently generated from the sale of the Cold-Eeze(R) lozenge product. The other
forms are manufactured by third parties that produce a variety of other products
for other customers. Should these relationships terminate or discontinue for any
reason, the Company has formulated a contingency plan in order to prevent such
discontinuance from materially affecting the Company's operations. Any such
termination may, however, result in a temporary delay in production until the
replacement facility is able to meet the Company's production requirements.
Raw material used in the production of the product is available from numerous
sources. Currently, it is being procured from a single vendor in order to secure
purchasing economies. In a situation where this one vendor is not able to supply
the contract manufacturer with the ingredients, other sources have been
identified.
COUPONS, REBATES AND DISCOUNTS
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-14,
"Accounting for Coupons, Rebates and Discounts" that addressed accounting for
sales incentives. The Task Force concluded that in accounting for cash sales
incentives, a manufacturer should recognize the incentive as a reduction of
revenue on the later date of the manufacturer's sale or the date the offer is
made to the public. The reduction of revenues should be measured based on the
estimated amount of incentives to be claimed by the ultimate customers. This
pronouncement was adopted in the first quarter of 2001.
ROYALTIES
The Company includes royalties and founders commissions incurred as cost of
products sold based on agreement terms.
ADVERTISING
Advertising costs are generally expensed within the period to which they relate.
Advertising costs incurred for the three months ended March 31, 2001 and 2000
were $1,032,543 and $6,016,724, respectively. Included in prepaid expenses and
other current assets were $427,550 and $419,000 at March 31, 2001 and 2000,
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 three months ended March 31, 2001 and 2000 were $247,533
and $236,134, respectively. Included in Research and Development are the
expenses incurred as part of the costs related to the application for a pharmacy
drug license in the United Kingdom.
INCOME TAXES
The Company utilizes an asset and liability approach which requires the
recognition of deferred tax assets and liabilities for the future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, the Company
generally considers all expected future events other than enactments of changes
in the tax law or rates. See Note 5 for disclosure related to this Standard.
BUSINESS SEGMENTS AND RELATED INFORMATION
Statement of Financial Accounting Standard ("SFAS") No. 131, "Disclosure about
Segments of an Enterprise and Related Information," requires public companies to
report certain information about operating segments within their financial
statements. See Note 3 for disclosure related to this Standard.
NOTE 3 - SEGMENT INFORMATION
The basis for presenting segment results generally is consistent with overall
Company reporting. The primary difference relates to presentation of
partially-owned operations, which are presented as if owned 100% in the
operating segments. The adjustment to ownership basis is included in Corporate
& Other. In the third quarter of 2000, the Company qualified for the Financial
Accounting Standard Board Statement No. 131, "Disclosure About Segments of an
Enterprise and Related Information" which establishes standards for reporting
information about a company's operating segments.
9
The Company has divided its operations into three reportable segments: The
Quigley Corporation, whose main product is Cold-Eeze(R), a proprietary zinc
gluconate glycine lozenge for the common cold; Darius International, Inc., whose
business is the sale and direct marketing of a range of health and wellness
products and Caribbean Pacific Natural Products, Inc., a leading developer and
marketer of all-natural sun and skin care products for luxury resorts, theme
parks and spas.
Financial information by business segment follows:
--------------------------------------------------------------------------------
OTC Direct
AS OF AND FOR THE THREE Cold Marketing Sun and
MONTHS ENDED MARCH 31, 2001 Remedy Health and Skincare Corporate
Products Wellness Products and Other Total
-----------------------------------------------------------------------------------------------------------------
Net Sales
Customers $ 3,384,577 $ 775,518 $ 643,779 -- $ 4,803,874
Inter-segment (712) 294,202 -- ($ 293,490) --
Segment operating profit (loss) (199,630) (187,584) (184) (15,511) (402,909)
Total Assets $ 24,343,891 $ 1,498,435 $ 1,350,670 ($ 3,377,544) $ 23,815,452
-----------------------------------------------------------------------------------------------------------------
OTC Direct
AS OF AND FOR THE THREE Cold Marketing Sun and
MONTHS ENDED MARCH 31, 2000 Remedy Health and Skincare Corporate
Products Wellness Products and Other Total
-----------------------------------------------------------------------------------------------------------------
Net Sales
Customers $ 5,406,886 -- - -- $ 5,406,886
Inter-segment -- -- - -- --
Segment operating profit (loss) (3,844,844) ($ 78,594) - -- (3,923,438)
Total Assets $ 26,838,914 $ 31,999 - ($ 103,656) $ 26,767,257
NOTE 4 - TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY
Since the inception of the stock buy-back program in January 1998, the Board
subsequently increased the authorization on five occasions, for a total
authorized buy-back of 5,000,000 shares or approximately 38% of the previous
shares outstanding. Such shares are reflected as treasury stock and will be
available for general corporate purposes. From the initiation of the plan,
4,159,191 shares have been repurchased at a cost of $24,042,801 or an average
cost of $5.78 per share. There were 30,000 shares repurchased during the first
three months of 2001.
As a result of the litigation relating to the case against Nutritional Foods
Corporation, in March of 1998, a subsequent order of the Court of Common Pleas
of Bucks County modified the decree of January 23, 1997 to provide for a return
to treasury of 604,928 shares to the Company. As payment for legal services,
118,066 of these shares were reissued with a market value of approximately
$1,145,358. This value, the cost of reacquiring these shares, then became the
value of the net treasury stock ($2.35 per share) represented by 486,862 shares
returned to treasury.
At March 31, 2001, there were 4,042,400 unexercised and vested options and
warrants of the Company's stock available for exercise with an additional 75,000
options awarded which are subject to vesting requirements.
NOTE 5 - INCOME TAXES
Certain exercises of options and warrants, and restricted stock issued for
services that became unrestricted during various periods, resulted in reductions
to taxes currently payable and a corresponding increase to
additional-paid-in-capital totaling $14,660,288 for the years ended December 31,
1999, 1998, and 1997. The tax benefit effect of option and warrant exercises
during 1999, 2000 and 2001 to date was $928,206, 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
10
activities approximate $9.2 million for federal purposes, of which $3.5 million
will expire in 2019, $5.7 million in 2020 and $13.4 million for state purposes,
of which $9.7 million will expire in 2009, $3.7 million in 2010. The three
months periods ended March 31, 2001 and 2000 losses are reflected at 39% for
both the increase in Deferred taxes and the Valuation Allowance. Until profits
become available, the overall effective tax rate for 2001 will be 0% as was
incurred for 2000.
NOTE 6 - EARNINGS PER SHARE
Basic earnings per share ("EPS") excludes dilution and is computed by dividing
income available to Common Stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue Common Stock were
exercised or converted into Common Stock or resulted in the issuance of Common
Stock that then shared in the earnings of the entity. Diluted EPS also utilizes
the treasury stock method that prescribes a theoretical buy-back of shares from
the theoretical proceeds of all options and warrants outstanding during the
period. Since there is a large number of options and warrants outstanding,
fluctuations in the actual market price can have a varying of results for each
period presented. For the periods presented that reflect losses, no effect was
given for options and warrants because the result would be anti-dilutive.
A reconciliation of the applicable numerators and denominators of the income
statement periods presented is as follows (millions, except earnings per share
amounts):
Three Months Ended Three Months Ended
March 31, 2001 March 31, 2000
Loss Shares EPS Loss Shares EPS
--------------------------------------------------------
Basic EPS ($ 0.4) 10.7 ($ 0.04) ($ 3.9) 10.3 ($0.38)
Dilutives:
Options/Warrants -- -- -- -- -- --
--------------------------------------------------------
Diluted EPS ($ 0.4) 10.7 ($ 0.04) ($ 3.9) 10.3 ($0.38)
========================================================
NOTE 7 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has sales brokerage and other
arrangements with entities whose major stockholders are also stockholders of The
Quigley Corporation, or are related to major stockholders of the Company.
Commissions and other items paid or payable under such arrangements amounted to
approximately $40,018 and $111,983, respectively, for the three-month periods
ended March 31, 2001 and 2000.
The Company is in the process of acquiring licenses in certain countries through
related party entities. For the three-month periods ended March 31, 2001 and
2000, fees amounting to $68,470 and $44,838, respectively, have been paid to a
related entity to assist with the regulatory aspects of obtaining such licenses.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company maintains certain royalty and founders commission agreements with
the developers, licensors, founders, and consultants for the Cold-Eeze(R)
products. These payments are 13% of sales collected less certain deductions. Of
this percentage, a three percent royalty on sales collected less certain
deductions is payable to the patent holder whose agreement expires in 2002, a
three percent royalty of sales collected less certain deductions is payable to
the developer of the product formulation together with a two percent consulting
fee based on an agreement that expires in 2007. Additionally, a founders'
commission is payable totaling 5% of sales collected less certain deductions,
which is shared by two of the officers whose agreements expire in 2005.
Also required for the acquisition of certain assets of a privately held company
involved in the direct marketing and distribution of health and wellness
products are continuous payments for the use of product formulations;
consulting; confidentiality and non-compete fees that total up to 12% on net
sales collected until $540,000 is paid, which such fees become 5% on net sales
collected for the continuous applications of these arrangements.
The Company has remaining contractual commitments for advertising and other
purchases amounting to approximately $1.8 million.
The Company is subject to legal proceedings and claims noted in Part II, "Other
Information", Item I, 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,
11
that the expected outcome of these matters, individually or in the aggregate,
will not have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, this 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. The Company is
subject to a variety of additional risk factors more fully described in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
OVERVIEW
--------
Revenues for the three months period ended March 31, 2001 were $4,803,874 as
compared to $5,406,886 for the comparable 2000 period. Indications are that
previous overstocking by certain customers has been considerably reduced through
March 31, 2001. The results also reflect the fact that the Company is no longer
in a position to supply product to the allergy market due to the FTC's
contention that the results of the Cold-Eeze(R) cold symptoms studies were
inconclusive regarding allergy symptoms. Darius International, Inc., and
Caribbean Pacific Natural Products, Inc., contributed revenues of $1,419,297 and
zero for the three months periods ended March 31, 2001 and 2000, respectively.
As a result of many zinc products exiting the marketplace during 2000,
Cold-Eeze(R) now has more visibility as the original clinically proven zinc
product on the market, effective in reducing the severity and duration of
symptoms of the common cold. Throughout 2000, the Company has attempted to
counteract the efforts by the media and all other sources to discredit
Cold-Eeze(R).
In conjunction with the foregoing, consumer misconception and the low consumer
use of Cold-Eeze(R), a substantial investment in advertising initiated in 1998
continued until the end of the first quarter of 2000. This investment was
necessary to establish brand awareness for Cold-Eeze(R) and also to promote new
product introductions of Cold-Eeze(R) sugar free, Cold-Eeze(R) bubble gum and
Bodymate(TM).
The advertising program also involved substantial retail support in the product
sell-through to the consumer during the first quarter of 2000. The advertising
cost approximated $1.0 million for the three months ended March 31, 2001 as
compared with approximately $6.0 million for the comparable period in 2000,
substantially contributing to the loss of ($3,923,438) for the three months
ended March 31, 2000. The loss for the three months periods ended March 31, 2001
and 2000 are not tax effected for the potential benefit, which cannot be
reflected until the Company returns to profitability.
The Company continues to use the resources of a contract manufacturer and
independent national and international brokers to represent and complement sales
of the Company's Cold-Eeze(R) products, thereby saving capital and other ongoing
expenditures that would otherwise be incurred.
The Company currently uses three separate suppliers to produce Cold-Eeze(R) in
lozenge, bubble gum, and sugar free tablet form. Other products of the Company
and its subsidiaries 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 certain products are available from
numerous sources. Currently, certain materials are being procured from a single
source vendor in order to secure purchasing economies. In a situation where one
vendor is not able to supply the contract manufacturer with the ingredients,
other sources have been identified. All manufacturing sites have the capacity to
respond quickly to market requirements.
12
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
------------------------------------------
TIME-BASED AND VOLUME-BASED SALES INCENTIVE OFFERS
In March 2001, the Emerging Issues Task Force reached a final consensus on Issue
No. 00-22, "Accounting for `Points' and Certain Other Time-Based or Volume-Based
Sales Incentive Offers, and Offers for Free Products or Services to be Delivered
in the Future" that addresses, among other issues, the accounting requirements
of a vendor for an offer to a customer to rebate or refund a specified amount of
cash that is redeemable only if the customer completes a specified cumulative
level of revenue transactions or remains a customer for a specified period of
time. This Issue was effective for quarters ending after February 15, 2001. The
adoption of this Issue did not have any impact on the Company's financial
position or results of operations.
RESULTS OF OPERATIONS
---------------------
Three months ended March 31, 2001 compared to three months ended March 31, 2000
-------------------------------------------------------------------------------
For the three months ended March 31, 2001, the Company reported revenues of
$4,803,874 and a net loss of $402,009 as compared to revenues of $5,406,886 and
a net loss of $3,923,438, for the comparable period ended March 31, 2000.
Revenues were adversely affected by the fact that the Company was not in a
position to supply product to the allergy market due to the FTC's contention
that the results of the Cold-Eeze(R) cold symptoms studies were inconclusive
regarding allergy symptoms. As a result of the acquisition of a 60% position in
Caribbean Pacific Natural Products, Inc., effective July 1, 2000 and the
commencement of product shipments from Darius International, Inc., in July 2000,
these two entities contributed $1,419,297 to revenues for the first quarter
ended March 31, 2001, compared to zero in the comparable 2000 period.
Cost of Sales as a percentage of sales before co-operative advertising
promotions for the three months ended March 31, 2001 was 34.3% compared to 34.4%
for the comparable period ended March 31, 2000. The cost of sales in 2000
reflects greater sales activity relating to Cold-Eeze(R) bubble gum and
Cold-Eeze(R) sugar free products when compared to the comparable 2001 period.
Both of these products have a higher cost of sales than the lozenge product.
However, the addition of the Caribbean Pacific Natural Products, Inc. activity
in the quarter, with its associated lower product costs helped to reduce the
overall cost of sales for the quarter ended March 31, 2001, effectively
offsetting the higher costs related to Cold-Eeze(R) bubble gum and sugar free.
For the three months ended March 31, 2001, total operating expenses were
$3,574,144 compared to $7,230,555 for the comparable period ended March 31,
2000. The 2000 expenses reflect the advertising expenditure associated with the
extensive advertising promotions to counter consumer misconception and the low
consumer use of Cold-Eeze(R), which required a substantial investment in
advertising that was initiated in 1998 and continued until the end of the first
quarter of 2000. This investment was necessary to establish brand awareness for
Cold-Eeze(R) and also to promote new product introductions of Cold-Eeze(R) sugar
free, Cold-Eeze(R) bubble gum and Bodymate(TM).
The advertising program also involved substantial retail support in the product
sell-through to the consumer during the first quarter of 2000. The advertising
cost approximated $1.0 million for the three months ended March 31, 2001 as
compared with approximately $6.0 million for the comparable period in 2000,
substantially contributing to the loss of ($3,923,438) for the three months
ended March 31, 2000. The 2001 and 2000 operating costs, respectively, also
reflect operating costs associated with Darius International, Inc., and
Caribbean Pacific Natural Products, Inc., totaling $460,744 and $504,490.
During the three months ended March 31, 2001, the major operating expenses of
delivery, salaries, brokerage commissions, promotion, advertising, and legal
costs accounted for $2,265,542 (63%) of total operating costs. The remaining
items for this period were of a semi-fixed nature in that they do not strictly
follow sales trends. These expense categories for the comparable period in 2000
accounted for $6,089,792 (84%) of total operating costs.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The total assets of the Company at March 31, 2001 and December 31, 2000 were
$23,815,452 and $26,055,601, respectively. Working capital decreased to
$17,895,020 from $18,622,127 during the period. The significant movement within
total assets represents the reduction in accounts receivable of $1,877,855, cash
and cash equivalents decreased by $1,658,843, prepaid expenses and other current
assets increased by $243,424, inventory increased by $715,429. From a working
capital perspective, accounts payable decreased by $338,842 and accrued
royalties and sales commissions decreased over the period
13
by $307,377 while the advertising accrual decreased by $828,446. Total cash
balances at March 31, 2001 were $9,707,000, as compared to $11,365,843 at
December 31, 2000.
The Company believes that its increased marketing efforts and increased national
publicity concerning the Cold-Eeze(R) products, the Company's 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.
Notwithstanding current period negative cash flows from operations, management
believes amounts of cash on hand as well as those current assets readily
convertible to cash will provide adequate liquidity to support future
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.
CAPITAL EXPENDITURES
--------------------
Since the Company's and its subsidiary's products of Darius International, Inc.,
and Caribbean Pacific Natural Products, Inc., are manufactured for the Company
by an outside source, capital expenditures during the remainder of 2001 are not
anticipated to be material.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
TESAURO AND ELEY
In September, 2000, the Company was sued by two individuals (Jason Tesauro and
Elizabeth Eley, both residents of Georgia), on behalf of a "nationwide class" of
"similarly situated individuals," in the Court of Common Pleas of Philadelphia
County, Pennsylvania. The Complaint alleges that the Plaintiffs purchased
certain Cold-Eeze products between August, 1996, and November, 1999, based upon
cable television, radio and internet advertisements which allegedly
misrepresented the qualities and benefits of the Company's products. The
Complaint requests an unspecified amount of damages for violations of
Pennsylvania's consumer protection law, breach of warranty and unjust
enrichment, as well as a judicial determination that the action be maintained as
a class action. In October, 2000, the Company filed Preliminary Objections to
the Complaint seeking dismissal of the action. The Company believes that the
action lacks merit, is not suitable for class action certification and the
Company is vigorously defending this lawsuit. The Company believes that the
plaintiffs' claims are without merit but certain pre-trial motions and discovery
remains incomplete and no prediction can be made as to the outcome of this case.
GOLDBLUM AND WAYNE
A Special Meeting of the Quigley stockholders was held on October 15, 1999, at
which a majority of the shares entitled to vote adopted a Corrective Action
Proposal (initially reported in the Company's Form 10-Q for the quarter ending
June 30, 1999) to ratify actions previously taken by the Company relating to the
1990 1 for 2.74 reverse split, the 1995 1 for 10 reverse split (the "Reverse
Splits") and the 1997 1 for 2 forward split (the "Forward Split"). Pursuant to
the October 15, 1999 Special Meeting, the Company authorized the filing of a
declaratory judgment action in Nevada to determine the effectiveness of the
Corrective Action.
In August 2000, the District Court of Clark County, Nevada, held that it had
jurisdiction to decide the Company's declaratory judgment action filed in April,
2000, against two putative shareholders (Thomas Goldblum and Alan Wayne), in
which the Company seeks a judicial declaration that, based on stockholder
approval of the Corrective Action Proposal, the Reverse Splits and Forward Split
satisfy and/or comply with Nevada law and that the capitalization of Quigley
evidenced by the issued and outstanding shares of common stock and common stock
warrants is as reflected on Quigley's stock transfer ledger on
14
September 10, 1999, the record date of the Special Meeting. This action is in
the early stages of litigation, and no prediction can be made as to the outcome
of this case.
An underlying claim filed by Goldblum and Wayne in the Court of Common Pleas of
Montgomery County, Pennsylvania on March 17, 1996 alleging that the plaintiffs
became owners of 500,000 shares each of the Company's common stock in or about
1990 and requested damages in excess of $100,000 for breach of contract and
conversion. The Company is vigorously defending this lawsuit and has denied any
liability to the plaintiffs. The Company also believes that the plaintiffs'
claims are barred by the applicable statutes of limitations, and that the
plaintiffs are, in any event, limited to claims for approximately 36,000 shares.
The Company continues to believe that the plaintiffs' claims are without merit
but certain pre-trial discovery remains incomplete and no prediction can be made
as to the outcome of this case.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K There were no Current Reports on Form 8-K filed during
the quarter ended March 31, 2001.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE QUIGLEY CORPORATION
By: /s/ George J. Longo
-----------------------------------------
George J. Longo
Vice President, Chief Financial Officer
Date: April 30, 2001
