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 June 30, 1999
-------------
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 (IRS Employer
of incorporation or organization) Identification No.)
(MAILING ADDRESS: PO Box 1349, Doylestown, PA 18901.)
Landmark Building, 10 South Clinton Street, Doylestown, PA 18901
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(Address of principle executive offices) (Zip Code)
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 July 23,
1999, was 10,641,949 all of one class of $.0005 par value Common Stock. See
Notes to Financial Statements, Commitments and Contingencies.
TABLE OF CONTENTS
Page No.
PART I - Financial information
Item 1. Financial Statements 3-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 13
PART II - Other Information
Item 1. Legal Proceedings 13-14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
EDGAR Exhibit 27 16
2
THE QUIGLEY CORPORATION
BALANCE SHEETS
ASSETS
June 30, December 31,
1999 1998
(unaudited)
------------ ------------
......................................................
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 14,732,955 $ 28,331,765
Accounts receivable, net ............................... 986,293 7,575,366
Inventory .............................................. 7,078,056 6,522,612
Prepaid income taxes ................................... 4,869,913 2,565,321
Prepaid expenses and other current assets .............. 1,436,613 1,635,099
Deferred income taxes .................................. 602,464 397,489
------------ ------------
TOTAL CURRENT ASSETS ................................. 29,706,294 47,027,652
------------ ------------
PROPERTY, PLANT AND EQUIPMENT -
Less accumulated depreciation ....................... 1,052,002 1,041,386
------------ ------------
OTHER ASSETS:
Patent rights - Less accumulated amortization .......... 241,343 285,224
Other assets ........................................... 362,448 256,382
------------ ------------
TOTAL OTHER ASSETS .................................. 603,791 541,606
------------ ------------
TOTAL ASSETS ............................................. $ 31,362,087 $ 48,610,644
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ....................................... $ 264,762 $ 758,033
Accrued royalties and sales commissions ................ 401,535 2,085,446
Accrued advertising .................................... 623,831 561,266
Other current liabilities .............................. 514,733 598,422
------------ ------------
TOTAL CURRENT LIABILITIES ............................ 1,804,861 4,003,167
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value;
authorized 1,000,000; no shares issued ............... -- --
Common stock, $.0005 par value;
authorized 50,000,000;
Issued: 14,670,874 and 14,409,058 shares ............. 7,335 7,205
Additional paid-in capital ............................. 29,023,061 28,207,208
Retained earnings ...................................... 23,690,612 26,649,455
Less: Treasury stock, 4,112,524 and
1,665,022 shares, at cost ............................ (23,163,782) (10,256,391)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ........................... 29,557,226 44,607,477
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............... $ 31,362,087 $ 48,610,644
============ ============
See accompanying notes to financial statements
3
THE QUIGLEY CORPORATION
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30,1998
------------- ------------- ------------- ------------
....................................
NET SALES .............................. $ 2,063,319 $ 1,317,872 $ 8,200,221 $ 8,589,691
------------ ------------ ------------ ------------
COST OF SALES .......................... 662,982 398,342 2,715,632 2,609,637
------------ ------------ ------------ ------------
GROSS PROFIT ........................... 1,400,337 919,530 5,484,589 5,980,054
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing ................ 1,973,149 545,470 7,984,562 2,918,992
Administration ..................... 1,433,517 765,047 2,904,381 1,759,094
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES ............... 3,406,666 1,310,517 10,888,943 4,678,086
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS .......... (2,006,329) (390,987) (5,404,354) 1,301,968
INTEREST and OTHER INCOME .............. 197,102 393,012 553,791 776,996
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE TAXES ............. (1,809,227) 2,025 (4,850,563) 2,078,964
------------ ------------ ------------ ------------
INCOME TAXES EXPENSE (BENEFIT).......... (705,598) 790 (1,891,720) 810,796
------------ ------------ ------------ ------------
NET INCOME (LOSS) ...................... ($ 1,103,629) $ 1,235 ($ 2,958,843) $ 1,268,168
============ ============ ============ ============
Earnings per common share:
Basic........................... ($0.10) $0.00 ($0.25) $0.09
============ ============ ============ ============
Diluted......................... ($0.10) $0.00 ($0.25) $0.08
============ ============ ============ ============
Weighted average common shares outstanding:
Basic............................ 11,453,008 13,516,529 11,866,229 13,421,221
============ ============ ============ ============
Diluted.......................... 11,453,008 15,138,823 11,866,229 15,217,821
============ ============ ============ ============
See accompanying notes to financial statements
4
THE QUIGLEY CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30, 1999 June 30, 1998
------------- -------------
.........................................................
NET CASH FLOWS FROM OPERATING ACTIVITIES .................... ($ 1,326,934) $ 2,728,826
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures ..................................... (75,765) (227,588)
Patent rights and other assets ........................... (106,066) (30,359)
------------ ------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES .............. (181,831) (257,947)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Tax benefits from stock options, warrants and Common stock 389,847 3,290,081
Proceeds from exercises of options and warrants .......... 427,499 515,725
Repurchase of Common stock ............................... (12,907,391) (2,902,473)
------------ ------------
NET CASH FLOWS FROM FINANCING ACTIVITIES ................. (12,090,045) 903,333
------------ ------------
NET INCREASE (DECREASE) IN CASH .......................... (13,598,810) 3,374,212
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD ................ 28,331,765 25,498,359
------------ ------------
CASH & CASH EQUIVALENTS, END OF PERIOD ...................... $ 14,732,955 $ 28,872,571
============ ============
See accompanying notes to financial statements
5
THE QUIGLEY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATIONAL AND GENERAL
The Quigley Corporation (the "Company"), organized under the laws of the state
of Nevada, is primarily engaged in the development, manufacturing, and
marketing of health products that include homeopathic cold remedies. The
products developed 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 and profits.
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) and in a different therapeutic area, an
all-natural nutrition and weight management program called Bodymate(TM).
Cold-Eeze(R) products are based upon a proprietary zinc gluconate glycine
formula which, in two double blind studies have 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.
The Company has an exclusive agreement for worldwide representation,
manufacturing, marketing and distribution rights for the zinc gluconate glycine
lozenge formulation, known as "Cold-Eeze(R)", which is patented in the United
States, United Kingdom, Sweden, France, Italy, Canada, Germany, and pending in
Japan. 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.
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. 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 to represent the Company's Cold-Eeze(R) and Bodymate(TM)
products, thereby saving capital and other ongoing expenditures that would
otherwise be incurred.
Different manufacturing sources are used for the production of the Cold-Eeze(R)
bubble gum and sugarfree products and the same manufacturer produces the
Cold-Eeze(R) lozenge and Bodymate(TM) products. In addition, the lozenge and
Bodymate(TM) manufacturer commenced manufacturing exclusively for the Company
in 1997.
The Balance Sheet as at June 30, 1999, the Statements of Income for the three
and six months periods ended June 30, 1999 and 1998, and the Statements of Cash
Flows for the six months periods ended June 30, 1999 and 1998, have been
prepared without audit. In the opinion of management, all adjustments necessary
to present fairly the financial position, results of operations and cash flows,
for the periods indicated, have been made. All adjustments made were of a
normal recurring nature.
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, 1998, in the
Company's Form 10-K.
6
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain prior period amounts have been reclassified to conform with 1999
presentation.
International Licenses
Included in other assets, are amounts that have been capitalized relating to
the Company's development of international licenses. Such amounts are to be
amortized using the straight-line method over the estimated benefit period.
These costs will be expensed should future benefits become 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.
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 is manufactured by a third party manufacturer that
produces exclusively for the Company. Substantially all 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.
Business Segments and Related Information
Statement of Financial Accounting Standard ("SFAS") No. 131, "Disclosure about
Segments of an Enterprise and Related Information," require public companies to
report certain information about operating segments within their financial
statements. The Company had international sales in 1998 and 1999, the resulting
revenues are not considered material. During the remainder of 1999, the Company
expects further international activities that may require additional
disclosures in compliance with the requirements of the Standard.
NOTE 3 - TRANSACTIONS AFFECTING STOCKHOLDERS' EQUITY
In April 1999, the Company's Board of Directors announced an increase to the
stock buy-back program to re-acquire up to 1,000,000 additional shares of the
Company's issued and outstanding common shares. In August 1999, the Board
authorized an additional buy-back of up to 250,000 shares of the Company's
Common Stock. The schedule and amount of shares re-purchased will be based upon
market conditions. Since the inception of the buy-back program in January 1998,
the Board has subsequently increased the authorization on four occasions,
including the most recent one for a total authorized buy-back of 4,000,000
shares or approximately 30% of the previous shares outstanding. Such shares are
reflected as treasury stock and will be available for general corporate
purposes. In the period from January 1, 1999 to July 23, 1999, 2,511,502 shares
have been repurchased at a cost of $13,232,459 or an average cost of $5.27 per
share.
At June 30, 1999, there were 4,469,400 unexercised options and warrants of the
Company's stock. As of the close of business on July 23, 1999, the Company's
records reflect 10,641,949 shares of the Company's Common Stock, par value
$.0005 per share, were outstanding. See Note 7 - Commitments and Contingencies.
7
NOTE 4 - INCOME TAXES
Income taxes include both deferred and currently payable taxes. Deferred income
taxes result from "temporary differences" which consist of a different tax base
for assets and liabilities than their reported amounts in the financial
statements. The deferred tax asset of $602,464 consists of the tax effects for
contract termination costs and miscellaneous items. Certain exercises of
options and warrants during the six months period ended June 30, 1999, resulted
in reductions to taxes currently payable and a corresponding increase to
additional paid-in-capital totaling $389,847.
For the six months ended June 30, 1999 and fiscal year ended December 31, 1998
an effective tax rate of 39% has been provided for both income tax expense and
tax benefits expected to be realized.
NOTE 5 - 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.
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 Six Months Ended Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999 June 30, 1998 June 30, 1998
Income Shares EPS Income Shares EPS Income Shares EPS Income Shares EPS
--------- -------- ---------- -------- -------- --------- --------- -------- ----- --------- -------- -------
Basic EPS ($1.1) 11.5 ($0.10) ($3.0) 11.9 ($0.25) - 13.5 - $1.3 13.4 $0.09
Dilutives:
Options/Warrants - - - - - 1.6 - 1.8
--------- -------- ---------- -------- ------- ---------- --------- ------- ------ --------- -------- -------
Diluted EPS ($1.1) 11.5 ($0.10) ($3.0) 11.9 ($0.25) - 15.1 - $1.3 15.2 $0.08
========= ======== ========== ======== ======= ========== ========= ======= ====== ========= ======== =======
NOTE 6 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has sales brokerage
arrangements with entities whose major shareholders are also shareholders of
The Quigley Corporation, or are related to major shareholders of the Company.
Commissions and other items expensed under such arrangements amounted to
approximately $152,000 and $122,000 respectively, for the six months periods
ended June 30, 1999 and 1998. Management believes these transactions were under
terms no less favorable to the Company than those arranged by other parties.
Amounts payable under such agreements at June 30, 1999 and December 31, 1998
were approximately $12,335 and $70,634 respectively.
The Company is in the process of acquiring licenses in certain countries
through affiliated entities. For the six months period ended June 30, 1999 and
1998, fees have been paid to a related entity to obtain such licenses amounting
to $56,663 and $10,000.
NOTE 7 - 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 of 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 founder's
commission totaling 5% of sales collected less certain deductions, which is
shared by two of the officers whose agreements expire in 2005.
8
As of the close of business on July 23, 1999, the Company's records reflect
10,641,949 shares of the Company's Common Stock, par value $0.0005 per share
(the "Common Stock") were outstanding. In June 1990, on January 11, 1996 and on
January 23, 1997, the Company instituted an exchange of each share of Common
Stock for .365 of a share, .100 of a share and two shares of Common Stock,
respectively, and the number of outstanding shares reflect the cumulative
effect of each of these actions. The Company has recently discovered that there
are certain deficiencies relating to these actions, which raise issues as to
the validity of such actions under Nevada law. Despite these deficiencies, the
Company has continued to regard these actions as having been completed since
the time that each of the respective actions were taken and is currently in the
process of taking corrective actions. If the corrective actions, which are
expected to include obtaining ratification of these actions, including but not
limited to prior actions of shareholders and Boards of Directors, by the
Company's current stockholders and filing a declaratory judgment action in the
State of Nevada, do not validate these actions in accordance with Nevada law,
there will continue to be a question as to the capitalization of the Company
and validity of its outstanding shares.
The Company has remaining contractual commitments for advertising amounting to
approximately $11,900,000.
In September 1998, the Company increased to $10 million its revolving line of
credit facility with Commerce Bank, N.A. for general corporate purposes. This
facility is collateralized by accounts receivable and inventory and renews in
September 1999, with interest at prime or 275 basis points above the
Euro-Dollar Rate. There were no borrowings under this line during the period
ended June 30, 1999 or 1998.
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, 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.
9
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 and six months periods ended June 30, 1999 were
$2,063,319 and $8,200,221 as compared to $1,317,872 and $8,589,691 for the
comparative periods in 1998. 1999 has seen a shift in seasonal buying patterns
of Cold-Eeze(R) to the third and fourth quarters. Shifting to the third and
fourth quarters results in having an ample supply of Cold-Eeze(R) on hand by
the retailers for the cold season, which normally peaks in mid December to mid
January, then drops off dramatically until the end of March. The first half of
1999 has also benefited from the introduction of Bodymate(TM) Nutrition and
Weight Management Program and also the extension to the Company's Cold-Eeze(R)
product line. The second quarter of 1999 has experienced a more prolonged
demand than comparable past periods.
In conjunction with the foregoing change of sales patterns and the low consumer
use of Cold-Eeze(R) (approximately 4% of US household population), a
substantial investment in advertising initiated in 1998 continued during the
first half of 1999. This investment is necessary to establish brand awareness
for Cold-Eeze(R) and also to promote the new product introductions. The
advertising program also involved substantial retail support in the product
sell through to the consumer during the first quarter of 1999. The advertising
cost approximates $7.4 million for the six months ended June 30, 1999 as
compared with $3.0 million for the comparable period in 1998, substantially
contributed to the net loss of ($2,958,843) for the six months ended June 30,
1999 as compared to a profit of $1,268,168 for the six months ended June 30,
1998.
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, the Company launched a bubble
gum version of Cold-Eeze(R) and in a different therapeutic area, an all-natural
nutrition and weight management program called Bodymate(TM). These products
have marginally contributed to the total revenues for the six months ended June
30, 1999.
The Company continues to use the resources of a contract manufacturer and
independent national and international brokers to represent the Company's
Cold-Eeze(R) and Bodymate(TM) products, thereby saving capital and other
ongoing expenditures that would otherwise be incurred.
Different manufacturing sources are used for the production of the Cold-Eeze(R)
bubble gum and sugarfree products with the same manufacturer producing the
Cold-Eeze(R) lozenge and Bodymate(TM) products. In addition, the lozenge and
Bodymate(TM) manufacturer commenced manufacturing exclusively for the Company
in 1997, thereby increasing their output and the availability of the product.
All three manufacturing sites have the capacity to respond quickly to market
requirements.
Manufacturing efficiencies and contract commitments introduced in the first
quarter 1997 continue to result in increased product availability, thereby
ensuring that domestic and future international product demand can be met.
Results of Operations
- ---------------------
Three months ended June 30, 1999 compared to three months ended June 30, 1998
- -----------------------------------------------------------------------------
For the three months ended June 30, 1999, the Company reported revenues of
$2,063,319 and a net loss of ($1,103,629) as compared to revenue of $1,317,872
and net income of $1,235 for the comparable period ended June 30, 1998. The
increased sales in the second quarter reflects the introduction of Bodymate(TM)
Nutrition and Weight Management Program and also the extension of the
Cold-Eeze(R) product line to include a bubble gum and sugarfree version. The
Company has also experienced a more prolonged demand for the products beyond
the core cold season because the season was extended by approximately an
additional month.
10
Cost of Sales as a percentage of net sales for the three months ended June 30,
1999 was 32.1% compared to 30.2% for the comparable period ended June 30, 1998.
The increased cost is largely attributable to the higher costs associated with
increasing international sales, changes in the product configuration and sales
mix that now includes Cold-Eeze(R) in the sugarfree and bubble gum form and
Bodymate(TM), which were introduced in the latter part of 1998.
For the three months ended June 30, 1999, total operating expenses were
$3,406,666 compared to $1,310,517 for the comparable period ended June 30,
1998. The operating expenses have remained high primarily due to investing in a
continuing advertising and promotion program to build and expand the
Cold-Eeze(R) brand name long term, along with supporting our two new product
launches of Cold-Eeze(R) Bubble Gum and Bodymate(TM) Nutritional and Weight
Management Program.
During the three months ended June 30, 1999, the major operating expenses of
delivery, salaries, brokerage commissions, promotion, advertising, and legal
costs accounted for $2,671,383 (78%) of total operating costs. The remaining
items for this period remained relatively fixed in that they do not follow
sales trends. These same expense categories for the comparable period in 1998
accounted for $1,127,008 (86%) of total operating costs. As percentage of
sales, the 1999 second quarter operating expenses assume a lower percentage
compared to the same period in 1998 due to the higher 1999 sales.
Six months ended June 30, 1999 compared to six months ended June 30, 1998
- -------------------------------------------------------------------------
For the six months ended June 30, 1999, the Company reported revenues of
$8,200,221 and a net loss of ($2,958,843), as compared to revenue of $8,589,691
and net income of $1,268,168 for the comparable period ended June 30, 1998. The
reduction in sales revenue is primarily the result of the shift in seasonal
wholesale buying patterns of Cold-eeze(R) to the third and fourth quarters.
This shift has been somewhat offset by the introduction of Bodymate(TM)
Nutrition and Weight Management Program and also the extension of the
Cold-Eeze(R) product line to include a bubble gum and sugarfree version and
1999 has seen a more prolonged demand for Cold-Eeze(R) beyond the peak cold
season. Additionally, the cold remedy market has experienced increased activity
during the latter part of 1998 and continuing into 1999 from new herbal cold
treatments promoted by national news media announcements, which has affected
the growth of Cold-Eeze(R) during this period.
Cost of Sales as a percentage of net sales for the six months ended June 30,
1999 was 33.1% compared to 30.4% for the comparable period ended June 30, 1998.
The 1999 period increased cost of sales reflects a different product mix than
that which existed in 1998, due to the introduction of Bodymate(TM), and the
extension of Cold-Eeze(R) to include the bubble gum and sugarfree versions of
the product. These additional lines carry a higher cost of goods percentage
than the lozenge version of the Cold-Eeze(R) product. Also, the increased cost
of goods on the international sales affect the product mix.
For the six months ended June 30, 1999, total operating expenses were
$10,888,943 compared to $4,678,086 for the comparable period ended June 30,
1998. The 1999 operating expenses have remained high, despite reduced sales,
primarily due to a continuing investment in advertising and promotion in order
to build and expand the Cold-Eeze(R) brand name long term. The program also
involved retail support in the product sell through to the consumer during the
first quarter of 1999.
During the six months ended June 30, 1999, the major operating expenses of
delivery, salaries, brokerage commissions, promotion, advertising, and legal
costs accounted for $9,438,989 (87%) of total operating costs. The remaining
items for this period remained relatively fixed in that they do not follow
sales trends. These same expense categories for the comparable period in 1998
accounted for $4,071,712 (87%) of total operating costs. As a percentage of
sales, the 1999 six months operating expenses assume a higher percentage
compared to the same period in 1998 due to the lower 1999 comparable sales
figures and the higher 1999 advertising and promotion costs. The advertising
cost approximates $7.4 million for the six months ended June 30, 1999 as
compared with $3.0 million for the comparable period in 1998 and resulted in a
net loss to the Company of ($2,958,843) for the six months ended June 30, 1999
as compared to a profit of $1,268,168 for the six months ended June 30, 1998.
Liquidity and Capital Resources
- -------------------------------
The total assets of the Company at June 30, 1999 and December 31, 1998 were
$31,362,087 and $48,610,644 respectively. Working capital decreased to
$27,901,433 from $43,024,485 during the period. The significant movement within
total assets represents the reduction in accounts receivable of $6,589,073,
cash and cash equivalents decreasing by $13,598,810, prepaid income taxes
increasing by $2,304,592, prepaid expenses and other current assets decreasing
by $198,486 and inventory increasing by $555,444. From a working capital
perspective, accounts payable, accrued royalties and sales commissions were
11
reduced over the period by $493,271 and $1,683,911 respectively while the
advertising accrual increased by $62,565. Total cash balances at June 30, 1999
were $14,732,955, as compared to $28,331,765 at December 31, 1998.
The management of the Company currently believes that the current liquidity and
continuing revenues, along with related profits generated, for the remainder of
1999, should provide an internal source of capital to fund the Company's
business operations. Additionally, in September 1998 the Company increased its
revolving line of credit with Commerce Bank, N.A.to $10 million to be used for
general corporate purposes. This facility is collateralized by accounts
receivable and inventory, and renews in September 1999, with interest accruing
at the Wall Street Journal prime rate, or 275 basis points above the
Euro-Dollar Rate, each to move with the respective base rate. There were no
borrowings under this line during the six-month period ended June 30, 1999.
In April 1999, the Company's Board of Directors announced an increase to the
stock buy-back program to re-acquire up to 1,000,000 additional shares of the
Company's issued and outstanding common shares. In August 1999, the Board
authorized an additional buy-back of up to 250,000 shares of the Company's
Common Stock. The schedule and amount of shares re-purchased will be based upon
market conditions. Since the inception of the buy-back program in January 1998,
the Board has subsequently increased the authorization on four occasions,
including the most recent one for a total authorized buy-back of 4,000,000
shares or approximately 30% of the previous shares outstanding. Such shares are
reflected as treasury stock and will be available for general corporate
purposes.
Management is not aware of any trends, events or uncertainties that have or are
reasonably likely to have a material negative impact upon the Company's (a)
short term or long term liquidity, (b) net sales or revenues or income from
continuing operations. Any challenge to the Company's patent rights could have
a material adverse effect on future liquidity of the Company. However, the
Company is not aware of any condition that would make such an event probable.
Capital Expenditures
- --------------------
Since the Cold-Eeze(R) and Bodymate(TM) products are manufactured for the
Company by an outside source, capital expenditures during 1999 are not
anticipated to be material. During the remainder of 1999, the Company expects
to incur costs approximating $800,000 in order to complete the establishment of
a Company owned corporate office building.
Year 2000 Compliant
- -------------------
The Year 2000 issue relates to the way the computer systems and programs define
calendar dates; they could fail or make miscalculations due to interpreting a
date including "00" to mean 1900, not 2000. Also, many systems and equipment
that are not typically thought of as "computer-related" (referred to as
"non-IT") contain embedded hardware or software that may have a time element.
The Company began work on the Year 2000 compliance issue in the later part of
1996. The scope of the project includes: ensuring the compliance of all
applications, operating systems and hardware on the Company's computer network;
addressing issues to non-IT embedded software and equipment; and addressing the
compliance of key business partners.
The project has four phases; assessment of the systems and equipment affected
by the Year 2000 issue; definition of strategies to address affected systems
and equipment; remediation of affected systems and equipment; and certification
that each is Year 2000 compliant. To certify that all IT systems (internally
developed, purchased, or licensed) are Year 2000 compliant, each system is
tested using a standard testing methodology which includes regression testing,
millennium testing, millennium leap year testing and cross over year testing.
Certification testing is performed on each system as soon as remediation is
completed.
The most significant category of key business partners is financial
institutions. Their critical functions include safeguarding and management of
investment portfolios, processing of the Company's operating bank accounts,
sales and distribution funds transfers. Other partner categories include
suppliers of communication services, utilities, materials and supplies. Based
on the importance of each relationship, the Company is defining a strategy to
determine compliance.
The target for completion of all phases is the third quarter of 1999. The
Company has completed the assessment and strategy phases for its computer PC
applications, operating systems and hardware.
The majority of the Company's non-IT related systems and equipment are
currently Year 2000 compliant, based primarily on verbal or written
communication with vendors. Compilation of written documentation regarding
compliance is underway and is scheduled to be completed by the third quarter of
1999. With respect to key business partners, the assessment and strategy
12
phases are in the preliminary stages, with the Company in the process of
compiling a compliance list. The Company has and continues to conduct surveys
of all its software and hardware vendors, and testing is underway.
For business partners with whom the Company engages in electronic transfer of
information, sample testing is and will be conducted until full compliance is
achieved.
The Company has investments with financial institutions and could in the future
have loans. The Company may be exposed to credit risk to the extent that
related borrowers are materially adversely impacted by the Year 2000 issue.
The Company has not had an independent review of its Year 2000 risk or
estimates. However, experts have been engaged to assist in developing estimates
and to complete remediation work on specific portions of the project.
Since the inception of the project, the Company has not incurred any material
external cost with respect to the Year 2000 issue. Internal cost and current
estimates based on actual experience to date, project a total expense for the
project of less than $60,000. To date, costs of $40,000 have been incurred. The
remaining internal cost is not expected to exceed beyond the cost of normal
operating expenses. Current year costs are expensed as those costs are
incurred. There has not been a material adverse impact on the Company's
operations or financial condition as a result of IT projects caused by the Year
2000 project.
With respect to contingency plans for critical systems, the Company has long
recognized that there is no viable alternative if these systems are
non-compliant. Certification of these systems as compliant remains on schedule.
For non-IT systems and equipment and key business partners, the Company will
continue to reassess the need for formal contingency plans, based on progress
of the Year 2000 efforts by the Company and third parties.
Although the Company's critical systems are Year 2000 compliant, there is no
guarantee that compliance by third parties whose systems and operation impact
the Company will be completed by the end of 1999. A reasonably possible worst
case scenario might include one or more of the Company's key business partners
being non-compliant. Such an event could result in a material disruption of the
Company's operations. Specifically, the Company could experience an
interruption in its ability to collect and process receipts, broadcast
commercial advertising, safeguard and manage its invested assets and operating
cash accounts, accurately maintain customer information, accurately maintain
accounting records, and/or perform adequate customer service. Should the worst
case scenario occur, it could, depending on its duration, have a material
impact on the Company's results of operations and financial position.
Item 3: Quantitative and Qualitative Disclosure about Market Risk
Not Applicable
Part II. Other Information
--------------------------
Item 1. Legal Proceedings
- -------------------------
Goldblum and Wayne
In March, 1997, the Company was sued by two individuals (Thomas Goldblum and
Alan Wayne) in the Court of Common Pleas of Montgomery County, Pennsylvania.
The complaint alleges that the Plaintiffs became the owners of 500,000 shares
each of the Company's Common Stock in or about 1990, and requests damages in
excess of $100,000 for breach of contract and conversion. During the second
quarter of 1999, the Company was made aware that the Plaintiffs took the
position that the Company's 1990 pre-public 1 for 2.74 reverse split and 1995 1
for 10 reverse split did not apply to the shares claimed by them. The Company
is vigorously defending this lawsuit and has denied any liability to Plaintiffs
because they did not perform agreed upon services as a condition to the receipt
of the shares from the Company. The Company also believes that the Plaintiffs'
claims are barred by the applicable statutes of limitations, and that the
Plaintiffs' claims are, in any event, limited to claims for approximately
36,000 shares each. Although the Company believes the Plaintiffs claim to be
without merit, the case is still in the discovery stages and no prediction can
be made as to its outcome. (See Notes to Financial Statements, Commitments and
Contingencies).
13
Marjorie Durst
In March, 1998, the Company was sued in the Court of Common Pleas of
Philadelphia County by an individual named Marjorie Durst. In May, 1999, the
Company was required to file an answer to the Plaintiff's third amended
complaint (Plaintiff's initial complaint, and two subsequent amended
complaints, were dismissed by the Court on the Company's objections). The third
amended complaint alleges that, among other things, the Company breached
contracts to pay the Plaintiff 10% of the Company's net profits, for an
unspecified period of time, due to introductions the Plaintiff allegedly
provided. In addition, Plaintiff claims that she was wrongly denied the
opportunity to acquire shares of the Company's stock under an option agreement.
The complaint requests damages in an amount in excess of $1,000,000. The
Company believes the Plaintiff's claim to be without merit and has denied any
liability to the Plaintiff because the alleged contracts under which she claims
entitlement to damages were cancelled due to nonperformance by the Plaintiff
and/or superseded by later agreements which the Plaintiff failed to perform.
The case is scheduled to go to trial in the Philadelphia Court of Common Pleas
in the Fall of 1999.
In addition to the foregoing litigation, the Company is subject to legal
proceedings and claims which have arisen in the ordinary course of its
business. Although there can be no assurance as to the ultimate disposition of
these matters, it is the opinion of the Company's management based upon the
information available at this time, that the expected outcome of these matters,
individually or in the aggregate, will not have a material adverse effect on
the financial position, results of operations or cash flows of the Company.
Item 2. Changes in Securities
- -----------------------------
None
Item 3. Defaults Upon Senior Securities
- ---------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
The annual meeting of the Company was held on May 7, 1999 with 12,016,986
shares eligible to vote. The presence of a quorum was reached and the following
proposals were approved by the stockholders:
(i) To elect a Board of Directors to serve for the ensuing year until the
next Annual Meeting of Stockholders and until their respective
successors have been duly elected and qualified.
(ii) To ratify the appointment of PricewaterhouseCoopers LLP as
independent auditors for the year ending December 31, 1999.
For proposals (i), (ii) above, the votes were cast as follows:
------------------------------ ------------------------------------------ ------------ ---------- --------- ------------
Proposal Position For Against Witheld Abstentions
------------------------------ ------------------------------------------ ------------ ---------- --------- ------------
------------------------------ ------------------------------------------ ------------ ---------- --------- ------------
(i) By nominee:
Guy J. Quigley Chairman of the Board, President, CEO 11,424,287 - 205,556 -
Charles A. Phillips Executive Vice President, COO and Director 11,424,387 - 205,456 -
George J. Longo Vice President, CFO and Director 11,424,312 - 205,531 -
Eric H. Kaytes Vice President, CIO and Director 11,424,612 - 205,231 -
Gurney P. Sloan, Esquire Director 11,424,512 - 205,331 -
Jacqueline F. Lewis Director 11,424,512 - 205,331 -
------------------------------ ------------------------------------------ ------------ ---------- --------- ------------
------------------------------ ------------------------------------------ ------------ ---------- --------- ------------
(ii) 11,545,493 53,205 - 31,145
------------------------------ ------------------------------------------ ------------ ---------- --------- ------------
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
June 30, 1999.
14
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: August 13, 1999