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, 2002
---------------
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
--------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization) (IRS Employer
Identification No.)
(MAILING ADDRESS: PO Box 1349, Doylestown, PA 18901.)
Kells Building, 621 Shady Retreat Road, Doylestown, PA 18901
------------------------------------------------------------
(Address of principle executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 345-0919
------------------------------------------------------------------
(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 26,
2002, was 10,954,946 all of one class of $.0005 par value Common Stock.
TABLE OF CONTENTS
Page No.
PART I - Financial information
Item 1. Consolidated Financial Statements 3-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-20
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 20
PART II - Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a
Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
THE QUIGLEY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS March 31, 2002 December 31, 2001
(unaudited)
-------------- ------------------
CURRENT ASSETS:
Cash and cash equivalents $10,751,063 $9,740,840
Accounts receivable (less doubtful accounts of $744,996 and $719,310) 2,056,343 4,425,291
Inventory 5,976,121 6,507,746
Prepaid expenses and other current assets 1,060,155 1,507,462
----------- ----------
TOTAL CURRENT ASSETS 19,843,682 22,181,339
----------- ----------
PROPERTY, PLANT AND EQUIPMENT - net 2,171,338 2,201,309
----------- ----------
OTHER ASSETS:
Patent rights - Less accumulated amortization - 21,940
Excess of cost over net assets acquired - Less accumulated amortization 327,014 327,014
Other assets 27,237 24,193
----------- ----------
TOTAL OTHER ASSETS 354,251 373,147
----------- ----------
TOTAL ASSETS $22,369,271 $24,755,795
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $601,399 $911,813
Accrued royalties and sales commissions 560,922 1,005,594
Accrued advertising 325,174 668,792
Other current liabilities 1,382,269 969,321
----------- ----------
TOTAL CURRENT LIABILITIES 2,869,764 3,555,520
----------- ----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN CONSOLIDATED AFFILIATES
STOCKHOLDERS' EQUITY:
Common stock, $.0005 par value; authorized 50,000,000 shares;
Issued: 15,362,199 and 15,321,206 shares 7,681 7,661
Additional paid-in-capital 28,915,592 28,915,612
Retained earnings 15,764,393 17,465,161
Less: Treasury stock, 4,646,053 shares, at cost (25,188,159) (25,188,159)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 19,499,507 21,200,275
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $22,369,271 $24,755,795
=========== ===========
See accompanying notes to financial statements
3
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31, 2002 March 31, 2001
-------------- --------------
SALES:
Sales $5,774,045 $5,198,537
Co-operative advertising promotions 264,640 493,069
---------- ----------
NET SALES 5,509,405 4,705,468
LICENSING FEES 148,866 -
----------- -----------
TOTAL REVENUE 5,658,271 4,705,468
----------- -----------
COST OF SALES 2,743,585 1,880,649
----------- -----------
GROSS PROFIT 2,914,686 2,824,819
----------- -----------
OPERATING EXPENSES:
Sales and marketing 1,325,228 1,345,322
Administration 2,724,199 1,787,166
Research and development 610,884 247,533
----------- ----------
TOTAL OPERATING EXPENSES 4,660,311 3,380,021
----------- ----------
LOSS FROM OPERATIONS (1,745,625) (555,202)
INTEREST and OTHER INCOME 44,857 152,171
----------- ----------
LOSS BEFORE TAXES (1,700,768) (403,031)
----------- ----------
INCOME TAXES - -
MINORITY INTEREST IN LOSS
OF CONSOLIDATED AFFILIATE - 122
----------- ----------
NET LOSS ($1,700,768) ($402,909)
============ ===========
Per common share:
Basic ($0.16) ($0.04)
=========== ===========
Diluted ($0.16) ($0.04)
=========== ===========
Weighted average common shares outstanding:
Basic 10,681,985 10,675,153
========== ==========
Diluted 10,681,985 10,675,153
========== ==========
See accompanying notes to financial statements
4
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONDENSED)
(Unaudited)
Three Months Ended
March 31, 2002 March 31, 2001
-------------- --------------
NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES $1,064,455 ($1,327,019)
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (54,232) (216,950)
Net cost of assets acquired - (128,493)
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (54,232) (345,443)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Stock for business acquisition - 43,750
Repurchase of Common Stock - (30,131)
---------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES - 13,619
---------- -----------
NET INCREASE/(DECREASE) IN CASH 1,010,223 (1,658,843)
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 9,740,840 11,365,843
----------- -----------
CASH & CASH EQUIVALENTS, END OF PERIOD $10,751,063 $9,707,000
=========== ===========
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 that are being offered to the general public. For the
fiscal periods presented, the Company's proprietary "Cold-Eeze(R)" products
contributed a significant part of the 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 in 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 Unit which is now
Quigley Pharma Inc., a wholly-owned subsidiary of the Company that is under the
direction of its Executive Vice President and chairman of its Medical Advisory
Committee. The formation of the Company's Ethical Pharmaceutical Unit follows
the Patent Office of The United States Commerce Department confirming the
assignment to the Company of a Patent Application for the "Method and
Composition for the Topical Treatment of Diabetic Neuropathy." In September
2001, the Patent Office confirmed the assignment to the Company of a Patent
Application entitled the "Medicinal Composition and Method of Using it" (for
Treatment of Sialorrhea and other Disorders) for a prescription product to
relieve sialorrhea (drooling) in patients suffering from Amyotrophic Lateral
Sclerosis (ALS), otherwise known as Lou Gehrig's Disease. In November 2001, the
Company was assigned a Patent Application entitled "Composition and Method for
Prevention, Reduction and Treatment of Radiation Dermatitis" with the Patent
Office of The United States Commerce Department. The establishment of a
dedicated pharmaceutical subsidiary will enable the Company to diversify into
the prescription drug market and to ensure safe and effective distribution of
these important potential new products currently under development.
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 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.
In April 2002, the Company was assigned a Patent Application which was filed
with the Patent Office of the United States Commerce Department for the use of
Cold-Eeze(R) as a prophylactic for cold prevention. The new patent application
follows the results of an adolescent study that found that the use of
Cold-Eeze(R) is effective in preventing a cold, reduces the use of antibiotics
and confirmed that Cold-Eeze(R) reduces the median duration of a cold by four
days.
In the second 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).
6
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 of 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.
In April 2002, the Company announced the statistical results of a retrospective
analysis that suggests that Cold-Eeze(R) is also an effective means of
preventing the common cold. This adolescent study indicated that when taken
daily, Cold-Eeze(R) statistically lessens the number of colds an individual
suffers per year, reducing the median from 1.5 to zero. These findings are the
result of analyzing three years of clinical data at the Heritage School facility
in Provo, Utah. The study also found that the use of Cold-Eeze(R) to treat a
cold statistically reduces the use of antibiotics for respiratory illnesses from
39.3% to 3.0% when Cold-Eeze(R) is administered as a first line treatment
approach to the common cold. Additionally, the study reinforces the original
clinical trials, concluding that Cold-Eeze(R) reduces the median duration of a
cold by four days.
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, 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.
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.
Ethical Pharmaceutical Products
-------------------------------
The establishment of a dedicated pharmaceutical subsidiary will enable the
Company to diversify into the prescription drug market and to ensure safe and
effective distribution of these important potential new products currently under
development.
Quigley Pharma is currently undergoing research and development activity in
compliance with regulatory requirements. The Company is at the initial stages of
what may be a lengthy process to develop these patent applications into
commercial products.
The formation of the Company's Ethical Pharmaceutical Unit follows the Patent
Office of The United States Commerce Department confirming the assignment to the
Company of the following patent applications:
o A Patent Application for the "Method and Composition for the
Topical Treatment of Diabetic Neuropathy."
o In September 2001, the Patent Office confirmed the assignment
to the Company of a Patent Application entitled the "Medicinal
Composition and Method of Using it" (for Treatment of
7
Sialorrhea and other Disorders) for a prescription product to
relieve sialorrhea (drooling) in patients suffering from
Amyotrophic Lateral Sclerosis (ALS), otherwise known as Lou
Gehrig's Disease.
o In November 2001, the Company was assigned a Patent Application
entitled "Composition and Method for Prevention, Reduction and
Treatment of Radiation Dermatitis" with the Patent Office of
The United States Commerce Department.
The pre-clinical development, clinical trials, product manufacturing and
marketing of Quigley Pharma's potential new products are subject to federal and
state regulation in the United States and other countries. Obtaining FDA
regulatory approval for these pharmaceutical products can require substantial
resources and take several years. The length of this process depends on the
type, complexity and novelty of the product and the nature of the disease or
other indications to be treated. If the Company cannot obtain regulatory
approval of these new products in a timely manner, it could have a material
effect on the business and financial condition of the Company.
In April 2002, the Company commenced a Phase II proof of concept study in France
for the diabetic neuropathy treatment. Upon its successful completion, the
Company will apply for approval by the FDA to begin pivotal clinical trials
(Phase III). Because the Company's formulation for relief of diabetes-related
pain is a topical treatment and its ingredients are GRAS listed (Generally
Regarded As Safe) as identified in the Code of Federal Regulations, FDA approval
could potentially be obtained within a one to two-year period.
Health And Wellness Products
----------------------------
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. 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. Darius is
a direct selling organization specializing in proprietary health and wellness
products. The products marketed and sold by Darius are designed to improve the
human condition, in the area of health, immunity, energy, pain and the common
cold.
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 sooth
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.
8
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Consolidated Balance Sheet at March 31, 2002, the Consolidated Statements of
Operations for the three-months periods ended March 31, 2002 and 2001, and the
Consolidated Statements of Cash Flows for the three-months periods ended March
31, 2002 and 2001, 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
flows, for the periods indicated, have been made. Certain prior period amounts
have been reclassified to conform with the 2002 presentation.
All inter-company transactions and balances have been eliminated.
Effective July 1, 2000, the Company acquired a 60 percent ownership position in
Caribbean Pacific Natural Products, Inc., which is accounted for by the purchase
method of accounting and accordingly, the operating results have been included
in the Company's consolidated financial Statements 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 at the
acquisition date principally consisted of a product license and distribution
rights, inventory and fixed assets of $312,915 and $510,000 of working capital
with a contribution to minority interest of $329,166.
In the past the 40 percent ownership position representing the minority interest
has been reflected in the Consolidated Statements of Operations for their
portion of losses, and in the Consolidated Balance Sheet for their ownership
portion of accumulated losses, share of net assets and capital stock at
acquisition date. At March 31, 2002, accumulated losses associated with minority
interest have reduced minority interest to zero on the Balance Sheet, with
excess losses amounting to $130,869 being absorbed in the Consolidated Statement
of Operations in 2002 and 2001, by the Company.
On January 2, 2001, the Company acquired certain assets and assumed certain
liabilities of a privately held company, located in Utah, involved in the direct
marketing and distribution of health and wellness products. This acquisition
required cash payments that approximated $110,000 and 50,000 shares of the
Company's stock issued to the former owners of the net assets acquired. The net
assets acquired at acquisition principally consisted of intangibles, inventory,
accounts receivable, bank balances and fixed assets totaling $536,000 and
liabilities assumed approximating $416,000. Also required are continuous
payments for the use of product formulations; consulting; confidentiality and
non-compete fees that are 12% on net sales collected until $540,000 is paid,
then becoming 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 has been amortized on a
straight-line basis over a period of 15 years. Subsequent to 2001, the account
will only be reduced if the value becomes impaired.
Principles of Accounting
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
9
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 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; and furniture and fixtures - seven
years.
Patent Rights and Intangibles
Patent rights have been amortized on a straight-line basis over the period of
the related licensing agreements, which approximated 67 months. Amortization
costs incurred for the three months periods ended March 31, 2002 and 2001, were
$21,940 for each period. At March 31, 2002, this item was fully amortized.
Prior to January 1, 2002, the excess of cost over net assets acquired has been
subject to amortization on a straight-line basis over a period of 15 years.
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was issued by
the FASB. SFAS No. 142 changed the accounting for goodwill from an amortization
method to an impairment-only approach. Amortization of goodwill, including
goodwill recorded in past business combinations, ceased upon adoption of this
statement. The Company implemented SFAS No. 142 on January 1, 2002.
Following the adoption of Statement 142, the amortization expense, net loss and
earnings per-share of The Quigley Corporation for the three months periods ended
March 31, 2002 and 2001 are as follows:
Three Months Ended March 31
-----------------------------------------------------------------------------------
($,000s, except earnings-per-share amounts) 2002 2001
-----------------------------------------------------------------------------------
Reported net loss $1,700,768 ($402,909)
Add back: Goodwill amortization - 16,458
--------------------------
Adjusted Net Loss $1,700,768 ($386,451)
==========================
Basic and Diluted earnings per share:
Reported net loss ($0.16) ($0.04)
Goodwill amortization - -
--------------------------
Adjusted net loss - Basic ($0.16) ($0.04)
==========================
Adjusted net loss - Diluted ($0.16) ($0.04)
==========================
Subsequent to 2001, excess of cost over net assets will only be reduced if the
value becomes impaired.
Concentration of Risks
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and trade
accounts receivable.
The Company maintains cash and cash equivalents with three major financial
institutions. Since the Company maintains amounts in excess of guarantees
provided by the Federal Depository Insurance Corporation, the Company performs
periodic evaluations of the relative credit standing of these financial
institutions and limits the amount of credit exposure with any one institution.
Trade accounts receivable potentially subjects the Company to credit risk. The
Company extends credit to its customers based upon an evaluation of the
customer's financial condition and credit history and generally does not require
collateral. The Company has historically incurred minimal credit losses. The
Company's broad range of customers includes many large wholesalers, mass
merchandisers and multi-outlet pharmacy chains, five of which account for 32%
and 19% of sales volume, for the three months periods ended March 31, 2002 and
2001, respectively.
10
The Company currently uses three separate suppliers to produce Cold-Eeze(R) in
lozenge, bubble gum, and sugar-free tablet form. A significant portion of the
Company's revenue is currently generated from the sale of the Cold-Eeze(R)
product. The lozenge form is manufactured by a third party manufacturer that
produces predominantly 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.
Quigley Pharma was formed in 2001 for the purpose of developing prescription
drug products. These new products are based on patent applications that the
Company has acquired. The Company's potential products are currently undergoing
research and testing and will require substantial resources to develop these
applications into commercial products. The successful conclusion of such
research is dependent on regulatory approval and may take several years.
Darius' product for resale is sourced from several suppliers. In the event that
such sources were no longer in a position to supply Darius with product, other
vendors have been identified as reliable alternatives with minimal adverse loss
of business.
Currently, the principal finished products relating to Caribbean Pacific Natural
Products are being manufactured and blended by a single vendor. In the event of
difficulties with the current sources of raw material or finished product, other
suppliers have been identified. However, this could result in a temporary delay
in production.
Long-lived assets
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The statement retains the previously existing accounting
requirements related to the recognition and measurement of the impairment of
long-lived assets to be held and used while expanding the measurement
requirements of long-lived assets to be disposed of by sale to include
discontinued operations. It also expands the previously existing reporting
requirements for discontinued operations to include a component of an entity
that either has been disposed of or is classified as held for sale. The Company
implemented SFAS No. 144 on January 1, 2002. The implementation of SFAS 144 did
not have a material impact on the Company's consolidated financial position or
results of operations.
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
will be recognized in the Statement of Operations.
Revenue Recognition
Sales are recognized at the time ownership is transferred to the customer.
Provisions for estimated product returns are accrued in the period of sale
recognition.
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 fiscal 2001.
In August 2001, the EITF issued EITF No. 01-09, "Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the Vendor's Products" that
codifed and reconciled EITF No. 00-14, 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" and No. 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products." EITF No. 01-09 addresses the accounting for consideration
given by a vendor to a customer. The Task Force concluded that cash
consideration (including a sales incentive) given by a vendor to a customer is
presumed to be a reduction of the selling prices of the vendor's products and,
therefore, should be characterized as a reduction of revenue when
11
recognized in the vendor's income statement. That presumption is overcome and
the consideration should be characterized as a cost incurred if, and to the
extent that, a benefit is or will be received from the recipient of the
consideration that meets both of the following conditions: (1)The vendor
receives, or will receive, an identifiable benefit (goods or services) in return
for the consideration. The identified benefit must be sufficiently separable
from the recipient's purchase of the vendor's products such that the vendor
could have entered into an exchange transaction with a party other than a
purchaser of its products in order to receive that benefit.; (2) The vendor can
reasonably estimate the fair value of the benefit identified. This pronouncement
was adopted in the first quarter of 2002.
Shipping and Handling
In September 2000, the Emerging Issues Task Force ("EITF") reached a final
consensus on issue EITF No. 00-10, "Accounting for Shipping and Handling
Revenues and Costs." The Task Force concluded that amounts billed to customers
related to shipping and handling should be classified as revenue. Further, the
Task Force stated that shipping and handling cost related to this revenue should
either be recorded in costs of goods sold or the Company should disclose where
these costs are recorded and the amount of these costs. The Company adopted this
principle during the fourth quarter of fiscal year 2000.
Stock Compensation
FASB Interpretation, or FIN, No. 44, "Accounting for Certain Transactions
Involving Stock Compensation - An Interpretation of APB Opinion No. 25,"
clarifies the application of APB No. 25 for certain issues. FIN 44 clarifies the
definition of employee for purposes of applying APB No. 25, the criteria for
determining whether a plan qualifies as a non-compensatory plan, the accounting
consequences of various modifications to the terms of a previously fixed option
or award, and the accounting for an exchange of share compensation awards in a
business combination, among others.
Royalties
The Company includes royalties and founders commissions incurred as cost of
products sold based on agreement terms.
Advertising
Advertising costs are expensed within the period to which they relate.
Advertising expense is made up of media advertising, presented as part of sales
and marketing expense; co-operative advertising, which is accounted for as a
deduction from sales; and free product, which is accounted for as part of cost
of sales. Advertising costs incurred for the three months periods ended March
31, 2002 and 2001 were $750,666 and $1,032,543, respectively. Included in
prepaid expenses and other current assets was $165,000 and $427,550 at March 31,
2002 and 2001, 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 periods ended March 31, 2002 and 2001 were
$610,884 and $247,533, respectively. Principally, the increase of Research and
Development costs in 2002 was due to expenses incurred as part of the product
research costs related to Quigley Pharma. Quigley Pharma is currently involved
in research activity following patent applications that the Company has acquired
and such research and development costs relating to potential products are
expected to increase significantly over time as product research and testing
progresses.
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 further discussion.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America 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, 2001,
in the Company's Form 10-K.
12
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.
The Company has divided its operations into four reportable segments: The
Quigley Corporation (Cold Remedy Products), whose main product is Cold-Eeze(R),
a proprietary zinc gluconate glycine lozenge for the common cold; Darius (Health
and Wellness) whose business is the sale and direct marketing of a range of
health and wellness products; Caribbean Pacific Natural Products, Inc. (Sun-care
and Skincare Products), a leading developer and marketer of all-natural sun-care
and skincare products for luxury resorts, theme parks and spas and Quigley
Pharma (Ethical Pharmaceutical Products), currently involved in research and
development activity to develop patent applications into commercial
pharmaceutical products.
Financial information by business segment follows:
-------------------------------------------------------------------------------------------------------------------------------
As of and for the
three months Cold Sun-care and Ethical
ended March 31, Remedy Health and Skincare Pharmaceutical Corporate and
2002 Products Wellness Products Products Other Total
-------------------------------------------------------------------------------------------------------------------------------
Net Sales
Customers $2,629,923 $2,354,608 $524,874 - - $5,509,405
Inter-segment - - - - - -
Segment operating
profit (loss) (1,527,164) 52,059 28,500 ($311,041) $12,021 (1,745,625)
Total Assets $24,087,541 $1,174,957 $1,044,491 - ($3,937,718) $22,369,271
-------------------------------------------------------------------------------------------------------------------------------
As of and for the
three months Cold Sun-care and Ethical
ended March 31, Remedy Health and Skincare Pharmaceutical Corporate and
2002 Products Wellness Products Products Other Total
-------------------------------------------------------------------------------------------------------------------------------
Net Sales
Customers $3,286,171 $775,518 $643,779 - - $4,705,468
Inter-segment (712) 294,202 - - ($293,490) -
Segment operating
Profit (loss) (318,378) (192,923) (2,018) ($32,626) (9,257) (555,202)
Total Assets $24,343,891 $1,498,435 $1,350,670 - ($3,377,544) $23,815,452
NOTE 4 - TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY
Since the inception of the stock buy-back program in January 1998, the Board has
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.
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.
On April 9, 2002, The Quigley Corporation entered into an agreement with
Forrester Financial LLC, ("Forrester") providing for Forrester to act as a
financial consultant to the Company. The consulting agreement commenced on March
7, 2002 and has a term of twelve months, but may be terminated by the Company in
its sole discretion at any time. As compensation for services to be provided by
Forrester to the Company, the Company granted to Forrester, or its designees,
warrants to purchase up to a total of 1,000,000 shares of the Company's common
stock. The warrants have three distinct exercise prices, they being, 500,000
warrants are exercisable at $6.50 per share, 250,000 warrants are exercisable at
$8.50 per share, and 250,000
13
warrants are exercisable at $11.50 per share. The warrants are exercisable until
the earlier to occur of (i) March 6, 2003 or (ii) the termination of the
Consulting Agreement. In the three months ended March 31, 2002, the Company
recorded an expense of $700,000 relating to the grant.
At March 31, 2002, there were 4,959,000 unexercised and vested options and
warrants of the Company's stock available for exercise.
NOTE 5 - INCOME TAXES
Certain exercises of options and warrants, and restricted stock issued for
services that became unrestricted resulted in reductions to taxes currently
payable and a corresponding increase to additional-paid-in-capital for years
prior to 1999. The tax benefit effect of option and warrant exercises during
2000 and 1999 were $230,998 and $697,208, respectively. However, these benefits
were deferred because of a net operating loss carry-forward for tax purposes
("NOLs") that occurred during the fourth quarter of 1999, resulting 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 $10.4 million for federal
purposes, of which $3.5 million will expire in 2019, $6.9 million in 2020; and
$15.6 million for state purposes, of which $9.7 million will expire in 2009,
$3.3 million in 2010 and $2.6 million in 2011. 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.
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 are 4,959,000 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, 2002 March 31, 2001
Loss Shares EPS Loss Shares EPS
----------- ----------- ----------- ------------ ----------- --------
Basic EPS ($1.7) 10.7 ($0.16) ($0.4) 10.7 ($0.04)
Dilutives:
Options/Warrants - - - -
-----------------------------------------------------------------------
Diluted EPS ($1.7) 10.7 ($0.16) ($0.4) 10.7 ($0.04)
=======================================================================
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 $33,230 and $40,018 respectively, for the three-months periods
ended March 31, 2002 and 2001.
The Company is in the process of acquiring licenses in certain countries through
related party entities. For the three-months periods ended March 31, 2002 and
2001, fees amounting to $68,250 and $68,470, 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. Up to March 5, 2002, these payments were 13% of sales collected less
certain
14
deductions and thereafter at 10%. Of the 13%, up to March 2002, a three percent
royalty on sales collected less certain deductions was payable to the patent
holder whose agreement expired on March 5, 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 are 5% on net sales
collected for the continuous applications of these arrangements.
On April 9, 2002, The Quigley Corporation entered into an agreement with
Forrester Financial LLC, providing for Forrester to act as a financial
consultant to the Company. The consulting agreement commenced on March 7, 2002
and has a term of twelve months, but may be terminated by the Company in its
sole discretion at any time. As compensation for services to be provided by
Forrester to the Company, the Company granted to Forrester, or its designees,
warrants to purchase up to a total of 1,000,000 shares of the Company's common
stock at three specific exercise prices. The warrants are exercisable until the
earlier to occur of (i) March 6, 2003 or (ii) the termination of the Consulting
Agreement. In the three months ended March 31, 2002, the Company recorded an
expense of $700,000 relating to the grant.
The Company has anticipated commitments for advertising and other purchases
amounting to approximately $1,400,000.
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 September 10,
1999, the record date of the Special Meeting. The District Court of Clark County
held a hearing on this matter on March 19, 2002 and ruled in favor of The
Quigley Corporation. A final order and judgment has not been entered of record
by the Court to date. When a judgment is entered, the defendants will have 30
days to file an appeal with the Nevada Supreme Court. 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.
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 143
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company is required to implement SFAS No.
143 on January 1, 2003. Management does not expect this statement to have a
material impact on the Company's consolidated financial position or results of
operations.
15
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 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 periods ended March 31, 2002 and 2001 were
$5,658,271 and $4,705,468, respectively. Revenue for the three months ended
March 31, 2002 includes an amount of $148,866 for licensing fees from the
settlement of a lawsuit following the filing by The Quigley Corporation of a
patent infringement suit against Gel Tech, LLC, the developer of Zicam(TM), and
Gum Tech International, Inc., its distributor, in November 1999. Under the
agreement, Gum Tech agreed to pay The Quigley Corporation $1,137,500 for a
limited license for Quigley's patent on the use of zinc gluconate for the
treatment of the duration and symptoms of the common cold. Gum Tech was also
required to pay The Quigley Corporation an ongoing royalty of 5.5 percent from
April 1, 2001 through March 5, 2002 on all Zicam cold relief sales receipts. In
addition, Gum Tech guaranteed to pay Quigley a minimum of $500,000 in ongoing
royalties regardless of sales receipts through March 5, 2002, that actually
totaled $557,957 for the period. Legal and other expenses associated with this
lawsuit approximated $700,000.
Net sales of the Cold-Eeze(R) products were reduced in 2002 over the comparable
2001 period by approximately $650,000. Despite the increase in the incidence of
illnesses during the cough/cold season, the consumer demand for the majority of
cold remedies was reduced. Additionally, as the economy remains uncertain, our
customers continue to manage inventory levels thereby impacting the frequency
and value of orders placed.
The Company continues to support Cold-Eeze(R) through ongoing co-operative
advertising with our customers with strong promotional activity at store level
and directly with our consumer at the point of purchase.
Darius International Inc., and Caribbean Pacific Natural Products, Inc.,
contributed combined revenues of $2,879,482 and $1,419,298 for the three months
periods ended March 31, 2002 and 2001, respectively.
The business of Caribbean Pacific Natural Products is being adversely affected
by the downturn in the travel and leisure business and the success of its
product lines is heavily influenced by economic conditions and current travel
events.
Net income for the three months ended March 31, 2002 was negatively impacted by
the reduction in margin as a result of the higher proportion of Darius sales to
the total consolidated sales as compared to the same period 2001. Operating
expenses were also influenced in 2002 by a $700,000 charge relating to the
granting of 1,000,000 warrants to Forrester Financial, LLC in March 2002 and
research and development expenditures incurred in 2002 by Quigley Pharma for
potential product testing and development.
The Company continues to use the resources of contract manufacturers and
independent national and international brokers to represent and compliment 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.
16
Effect of Recent Accounting Pronouncements
------------------------------------------
Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products
In August 2001, the EITF issued EITF No. 01-09, "Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the Vendor's Products" that
codifed and reconciled EITF No. 00-14, 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" and No. 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products." EITF No. 01-09 addresses the accounting for consideration
given by a vendor to a customer. The Task Force concluded that cash
consideration (including a sales incentive) given by a vendor to a customer is
presumed to be a reduction of the selling prices of the vendor's products and,
therefore, should be characterized as a reduction of revenue when recognized in
the vendor's income statement. That presumption is overcome and the
consideration should be characterized as a cost incurred if, and to the extent
that, a benefit is or will be received from the recipient of the consideration
that meets both of the following conditions: (1) The vendor receives, or will
receive, an identifiable benefit (goods or services) in return for the
consideration. The identified benefit must be sufficiently separable from the
recipient's purchase of the vendor's products such that the vendor could have
entered into an exchange transaction with a party other than a purchaser of its
products in order to receive that benefit; (2) The vendor can reasonably
estimate the fair value of the benefit identified. This pronouncement was
adopted in the first quarter of 2002.
SFAS 143
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company is required to implement SFAS No.
143 on January 1, 2003. Management does not expect this statement to have a
material impact on the Company's consolidated financial position or results of
operations.
Significant Accounting Policies
-------------------------------
As previously described, the Company is engaged in the development,
manufacturing, and marketing of health and homeopathic products that are being
offered to the general public. Due to the nature of the business, it is unlikely
that any accounting policies, that are open to interpretation, could have a
material effect on the Company's results of operations. Certain key accounting
policies that may affect the results of the Company are the timing of revenue
recognition and sales incentives (including coupons, rebates and discounts); the
classifcation of advertising expenses; and the fact that all research and
development expenses are expensed as incurred. Note 1 to the consolidated
financial statements describes the Company's other significant accounting
policies.
Revenue Recognition
Sales are recognized at the time ownership is transferred to the customer.
Provisions for estimated product returns are accrued in the period of sale
recognition.
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 fiscal 2001.
In August 2001, the EITF issued EITF No. 01-09, "Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the Vendor's Products" that
codifed and reconciled EITF No. 00-14, 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" and No. 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products." EITF No. 01-09 addresses the accounting for consideration
given by a vendor to a customer. The Task Force concluded that cash
consideration (including a sales incentive) given by a vendor to a customer is
presumed to be a reduction of the selling prices of the vendor's products and,
therefore, should be characterized as a reduction of revenue when recognized in
the vendor's income statement. That presumption is overcome and the
consideration should be characterized as
17
a cost incurred if, and to the extent that, a benefit is or will be received
from the recipient of the consideration that meets both of the following
conditions: (1) The vendor receives, or will receive, an identifiable benefit
(goods or services) in return for the consideration. The identified benefit must
be sufficiently separable from the recipient's purchase of the vendor's products
such that the vendor could have entered into an exchange transaction with a
party other than a purchaser of its products in order to receive that benefit;
(2) The vendor can reasonably estimate the fair value of the benefit identified.
This pronouncement was adopted in the first quarter of 2002.
Advertising
Advertising costs are expensed within the period to which they relate.
Advertising expense is made up of media advertising, presented as part of sales
and marketing expense; co-operative advertising, which is accounted for as a
deduction from sales; and free product, which is accounted for as part of cost
of sales. Advertising costs incurred for the three months periods ended March
31, 2002 and 2001 were $750,666 and $1,032,543, respectively. Included in
prepaid expenses and other current assets was $165,000 and $427,550 at March 31,
2002 and 2001, 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 periods ended March 31, 2002 and 2001 were
$610,884 and $247,533, respectively. Principally, the increase of Research and
Development costs in 2002 was due to expenses incurred as part of the product
research costs related to Quigley Pharma. Quigley Pharma is currently involved
in research activity following patent applications that the Company has acquired
and such research and development costs relating to potential products are
expected to increase significantly over time as product research and testing
progresses.
18
Results of Operations
---------------------
Three months ended March 31, 2002 compared to three months ended March 31, 2001
-------------------------------------------------------------------------------
For the three months ended March 31, 2002, the Company reported revenues of
$5,658,271 and a net loss of $1,700,768 as compared to revenues of $4,705,468
and a net loss of $402,909, for the comparable period ended March 31, 2001.
Cold-Eeze(R) sales were reduced in 2002 due to reduced consumer demand for cold
remedy products despite increases in the number of cough/cold illnesses.
Additionally, our Cold-Eeze(R) customers appear to be managing their inventory
levels more efficiently resulting in reduced order frequency. Darius continues
to grow with 2002 sales of $2,354,608 compared to the 2001 level of $775,518.
Caribbean Pacific continues to be adversely affected by the "September 11
terrorist attack" and the impact this has had on the travel and leisure
industry.
Cost of Sales as a percentage of sales before co-operative advertising
promotions for the three months ended March 31, 2002 was 47% compared to 36% for
the comparable period ended March 31, 2001. The 2002 results reflect a higher
cost of sales due to the greater proportion of sales represented by Darius in
2002 (40.7% of consolidated 2002 sales as compared to 14.9% of consolidated
2001). The Darius cost of goods is significantly higher relative to Cold-Eeze(R)
and Caribbean Pacific products, thereby increasing the overall percentage.
For the three months ended March 31, 2002, total operating expenses were
$4,660,311 compared to $3,380,021 for the comparable period ended March 31,
2001. The 2002 expenditures reflects a charge of $700,000, using the Black
Scholes model, resulting from an agreement between The Quigley Corporation and
Forrester Financial LLC providing for Forrester to act as a financial consultant
to the Company. As compensation for services to be rendered by Forrester to the
Company, the Company granted to Forrester, or its designees, warrants to
purchase up to 1,000,000 shares of the Company's common stock. Also, the 2002
results include increased research and development costs associated with Quigley
Pharma of approximately $278,000.
Net income for the three months ended March 31, 2002 was negatively impacted by
the reduction in margin as a result of the higher proportion of Darius sales to
the total consolidated sales as compared to the same period 2001. Operating
expenses were also influenced in 2002 by a $700,000 charge relating to the
granting of 1,000,000 warrants to Forrester Financial, LLC in March 2002 and
also the research and development expenditure incurred in 2002 by Quigley Pharma
for potential product testing and development.
During the three months ended March 31, 2002, the major operating expenses of
salaries, brokerage commissions, promotion, media advertising, and legal costs
accounted for $2,930,935 (63%) of total operating costs. These expense
categories for the comparable period in 2001 accounted for $1,676,757 (50%) of
total operating costs. The remaining items for the periods were of a semi-fixed
nature in that they do not strictly follow sales trends.
Liquidity and Capital Resources
-------------------------------
The total assets of the Company at March 31, 2002 and December 31, 2001 were
$22,369,271 and $24,755,795, respectively. Working capital decreased to
$16,973,918 from $18,625,819 during the period. The significant movement within
total assets represents the decrease in accounts receivable of $2,368,948, cash
and cash equivalents increased by $1,010,223, prepaid expenses and other current
assets decreased by $447,307, inventory decreased by $531,625. From a working
capital perspective, accounts payable decreased by $310,414 and accrued
royalties and sales commissions decreased over the period by $444,672 while the
advertising accrual decreased by $343,618. Total cash balances at March 31, 2002
were $10,751,063, as compared to $9,740,840 at December 31, 2001.
The Company believes that its increased marketing efforts and national publicity
concerning the Cold-Eeze(R) products, the Company's manufacturing availability,
newly available products, 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 previous 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.
19
Capital Expenditures
--------------------
Since the Company's products are manufactured by outside sources, capital
expenditures during the remainder of 2002 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
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 September 10,
1999, the record date of the Special Meeting. The District Court of Clark County
held a hearing on this matter on March 19, 2002 and ruled in favor of The
Quigley Corporation. A final order and judgment has not been entered of record
by the Court to date. When a judgment is entered, the defendants will have 30
days to file an appeal with the Nevada Supreme Court. 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
20
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On April 11, 2002, the Registrant filed a Current Report on Form 8-K for the
following event:
The Company reported under:
Item 5. Other Events
On April 9, 2002, the Company signed a Consulting Agreement effective March
7, 2002 with Forrester Financial, LLC, ("Forrester") providing for
Forrester to act as a financial consultant to the Company. The Consulting
Agreement commenced on March 7, 2002 and has a term of 12 months but may be
terminated by the Company, in its sole discretion at any time.
21
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, 2002
